Table of Contents

CASE #62 Jimenez vs Bucoy 103 Phil. 40 (1958)..........................................................................................3

CASE #63 Inciong vs CA 257 SCRA 578 (1996).............................................................................................8
CASE #64 Elizalde & Co., Inc. vs Biñan Trans. Co., 58 O.G. 5886 (1960).....................................................15
CASE #65 Ponce vs CA 90 SCRA 533 (1979)...............................................................................................16
CASE #66 Kalalo vs Luz 34 SCRA 337 (1970)..............................................................................................23
CASE #67 Equitable Banking Corp. vs IAC 161 SCRA 518 (1988)................................................................39
CASE #68 Caltex Phil. vs CA 212 SCRA 448 (1992).....................................................................................49
CASE #69 National Bank vs Mla Oil Refining Co., 43 Phil. 444 (1922)........................................................66
CASE #70 Traders Insurance vs Dy Eng Biok 104 Phil 806 (1958)...............................................................74
CASE #71 PNB vs Concepcion Mining 5 SCRA 745 (1962)..........................................................................82
CASE #72 PNB vs Zulueta 101 Phil 1071....................................................................................................86
CASE #73 De la Victoria vs Burgos 245 SCRA 374 (1995)...........................................................................97
CASE #74 Astro-Electronics Corp. vs PHILGUARANTEE 411 SCRA 462 (2003)..........................................104
CASE #75 Development Bank of Rizal vs Sim Wei 219 SCRA 736 (1993)..................................................109
CASE #76 Francisco vs CA 319 SCRA 354 (1999)......................................................................................114
CASE #77 Republic Planters Bank vs CA 216 SCRA 738 (1992).................................................................121
CASE #78 Gempesaw vs CA GR No. 92244 (1993)...................................................................................131
CASE #79 Associated Bank vs CA GR No. 107382, and PNB vs CA GR No. 107612 (1996).......................143
CASE #80 BPI vs Case Montessori Internationale 430 SCRA 261 (2004)..................................................156
CASE #81 Samsung Construction Co. Phils. Vs Far East Bank 436 SCRA 402 (2004).................................171
CASE #82 Consolidated Plywood Industries Inc. vs IFC Leasing & Acceptance Corp. GR No. L-72593 (1987)
................................................................................................................................................................ 185
CASE #83 Ang Tek Lian vs CA 87 Phil 383.................................................................................................200
CASE #84 PCI Bank vs CA 350 SCRA 446 (2001).......................................................................................204
CASE #85 Westmont Bank vs Ong 375 SCRA 212 (2002).........................................................................223
CASE #86 Republic Bank vs Ebrada 65 SCRA 680 (1975)..........................................................................231
CASE #87 PNB vs National City Bank 63 Phil. 711 (1936).........................................................................240
CASE #88 BPI Family Bank vs Buenaventura 471 SCRA 431 (1933)..........................................................266
CASE #89 San Carlos Milling vs BPI 59 Phil 59 (1933)..............................................................................276
CASE #90 Samsung Constrauction Co. Phils. Vs Far East Bank 436 SCRA 402 (2004)...............................283
CASE #91 PNB vs Quimpo 158 SCRA 582 (1988)......................................................................................297
CASE #92 Calinog vs PNB 51 OG 4104.....................................................................................................302
CASE #93 PNB vs Manila Oil Refining & By-Products CO. 43 Phil 444......................................................303
CASE #94 Metropolitan Waterworks vs CA 143 SCRA 20 (1986).............................................................313
CASE #95 Metropolitan Bank vs Philippine Bank of Communications 536 SCRA 556 (2007)...................330
CASE #96 Republic Bank vs CA 196 SCRA 100 (1991)...............................................................................335
CASE #97 Manila Lighter Trans. Inc. vs CA 182 SCRA 251 (1990).............................................................342
CASE #98 PNB vs CA 25 SCRA 693 (1968)................................................................................................347
CASE #62 Jimenez vs Bucoy 103 Phil. 40 (1958)

[G.R. No. L-10221. February 28, 1958.]

Intestate of Luther Young and Pacita Young, spouses. PACIFICA

JIMENEZ, Petitioner-Appellee, v. Dr. JOSE BUCOY, administrator-
appellant.

Frank W. Brady and Pablo C. de Guia, Jr. for Appellee.

E. A. Beltran for Appellant.

SYLLABUS

1. OBLIGATIONS AND CONTRACTS; LOANS; PAYMENT OF; APPLICATION OF

THE BALLANTYNE SCALE. — Loans contracted and payable during the
Japanese occupation should be paid according to the Ballantyne schedule.
However, if the loan was expressly agreed to be payable after the war, peso-
for-peso payment shall be ordered in Philippine currency.

2. NEGOTIABLE INSTRUMENTS; PROMISSORY NOTES; WHEN

ACKNOWLEDGMENT BECOMES A PROMISE TO PAY. — An acknowledgment
of a debt becomes a promise to pay by the addition of words implying a
promise of payment, such as, "payable," "payable on a given day," "payable
on demand."

3. PLEADING AND PRACTICE; APPEAL; CHANGE OF THEORY NOT

PERMITTED. — Where a party deliberately adopts a certain theory, and the
case is tried and decided upon that theory in the court below, he will not be
permitted to change his theory on appeal.

4. ATTORNEY’S FEES; REFUSAL TO SATISFY PLAINTIFF’S CLAIM; AS

GROUND FOR AWARD. — The defendant did not deny his indebtedness but
merely pleaded for adjustment of payment under the Ballantyne schedule.
Hence, he could not be held to have "acted in gross and evident bad faith" to
justify the award of attorney’s fees.

DECISION
 BENGZON, J.:

In this intestate of Luther Young and Pacita Young who died in 1954 and
1952 respectively, Pacifica Jimenez presented for payment four promissory
notes signed by Pacita for different amounts totalling twenty-one thousand
pesos (P21,000).

Acknowledging receipt by Pacita during the Japanese occupation, in the

currency then prevailing, the administrator manifested willingness to pay
provided adjustment of the sums be made in line with the Ballantyne
schedule.

The claimant objected to the adjustment insisting on full payment in

accordance with the notes.

Applying doctrines of this Court on the matter, the Hon. Primitivo L.

Gonzales, Judge, held that the notes should be paid in the currency
prevailing after the war, and that consequently plaintiff was entitled to
recover P21,000 plus attorneys fees for the sum of P2,000.

Hence this appeal.

Executed in the month of August 1944, the first promissory note read as
follows:jgc:chanrobles.com.ph

"Received from Miss Pacifica Jimenez the total amount of P10,000) ten
thousand pesos payable six months after the war, without interest."cralaw
virtua1aw library

The other three notes were couched in the same terms, except as to
amounts and dates.

There can be no serious question that the notes were promises to pay "six
months after the war," the amounts mentioned.

But the important question, which obviously compelled the administrator to

appeal, is whether the amounts should be paid, peso for peso, or whether a
reduction should be made in accordance with the well-known Ballantyne
schedule.

This matter of payment of loans contracted during the Japanese occupation

has received our attention in many litigations after the liberation. The gist of
our adjudications, in so far as material here, is that if the loan could be paid
during the Japanese occupation, the Ballantyne schedule should apply with
corresponding reduction of the amount. 1 However, if the loan was expressly
agreed to be payable only after the war or after liberation, or became
payable after those dates, no reduction could be effected, and peso-for-peso
payment shall be ordered in Philippine currency. 2 "The Ballantyne
Conversion Table does not apply where the monetary obligation, under the
contract, was not payable during the Japanese occupation but until after one
year counted from the date of ratification of the Treaty of Peace concluding
the Greater East Asia War." (Arellano v. De Domingo, 101 Phil., 902.)

"When a monetary obligation is contracted during the Japanese occupation,

to be discharged after the war, the payment should be made in Philippine
Currency." (Kare Et. Al. v. Imperial Et. Al., 102 Phil., 173.)

Now then, as in the case before us, the debtor undertook to pay "six months
after the war," peso for peso payment is indicated.

The Ang Lam 3 case cited by appellant is not controlling, because the loan
therein given could have been repaid during the Japanese occupation. Dated
December 26, 1944, it was payable within one year. Payment could
therefore have been made during January 1945. The notes here in question
were payable only after the war.

The appellant administrator calls attention to the fact that the notes
contained no express promise to pay a specified amount. We declare the
point to be without merit. In accordance with doctrines on the matter, the
note herein-above quoted amounted in effect to "a promise to pay ten
thousand pesos six months after the war, without interest." And so of the
other notes.

"An acknowledgment may become a promise by the addition of words by

which a promise of payment is naturally implied, such as, "payable,"
"payable" on a given day, "payable on demand," "paid . . . when called for,."
. . . (10 Corpus Juris Secundum p. 523.) .

"To constitute a good promissory note, no precise words of contract are

necessary, provided they amount, in legal effect, to a promise to pay. In
other words, if over and above the mere acknowledgment of the debt there
may be collected from the words used a promise to pay it, the instrument
may be regarded as a promissory note. 1 Daniel, Neg. Inst. sec. 36 et seq.;
Byles, Bills, 10, 11, and cases cited . . . . "Due A. B. $325, payable on
demand," or, "I acknowledge myself to be indebted to A in $109, to be paid
on demand, for value received," or, "I O. U. $85 to be paid on May 5th," are
held to be promissory notes, significance being given to words of payment
as indicating a promise to pay." 1 Daniel Neg. Inst. see. 39, and cases cited.
(Cowan v. Hallack, (Colo.) 13 Pacific Reporter 700, 703.) .

Another argument of appellant is that as the deceased Luther Young did not
sign these notes, his estate is not liable for the same. This defense,
however, was not interposed in the lower court. There the only issue related
to the amount to be paid, considering that the money had been received in
Japanese money. It is now unfair to put up this new defense, because had it
been raised in the court below, appellees could have proved, what they now
allege, that Pacita contracted the obligation to support and maintain herself,
her son and her husband (then concentrated at Santo Tomas University)
during the hard days of the occupation.

It is now settled practice that on appeal a change of theory is not permitted.

"In order that a question may be raised on appeal, it is essential that it be

within the issues made by the parties in their pleadings. Consequently, when
a party deliberately adopts a certain theory, and the case is tried and
decided upon that theory in the court below, he will not be permitted to
change his theory on appeal because, to permit him to do so, would be
unfair to the adverse party." (Rules of Court by Moran-1957 Ed. Vol. I p. 715
citing Agoncillo v. Javier, 38 Phil., 424; American Express Company v.
Natividad, 46 Phil., 207; San Agustin v. Barrios, 68 Phil., 475, 480; Toribio
v. Dacasa, 55 Phil., 461.)

Appellant’s last assignment of error concerns attorneys fees. He says there

was no reason for making this an exception to the general rule that
attorney’s fees are not recoverable in the absence of stipulation.

Under the new Civil Code, attorney’s fees and expenses of litigation may be
awarded in this case if "defendant acted in gross and evident bad faith in
refusing to satisfy plaintiff’s plainly valid, just and demandable claim" or
"where the court deems it just and equitable that attorney’s fees be
recovered" (Article 2208 Civil Code). These are — if applicable — some of
the exceptions to the general rule that in the absence of stipulation no
attorney’s fees shall be awarded.

The trial court did not explain why it ordered payment of counsel fees.
Needless to say, it is desirable that the decision should state the reason why
such award is made bearing in mind that it must necessarily rest on an
exceptional situation. Unless of course the text of the decision plainly shows
the case to fall into one of the exceptions, for instance "in actions for legal
support," "when exemplary damages are awarded," etc. In the case at bar,
defendant could not obviously be held to have "acted in gross and evident
bad faith." He did not deny the debt, and merely pleaded for adjustment,
invoking decisions he thought to be controlling. If the trial judge considered
it "just and equitable" to require payment of attorney’s fees because the
defense — adjustment under Ballantyne schedule — proved to be untenable
in view of this Court’s applicable rulings, it would be error to uphold his view.
Otherwise, every time a defendant loses, attorney’s fees would follow as a
matter of course. Under the article above cited, even a clearly untenable
defense would be no ground for awarding attorney’s fees unless it amounted
to "gross and evident bad faith."cralaw virtua1aw library

Plaintiff’s attorneys attempt to sustain the award on the ground of

defendant’s refusal to accept her offer, before the suit, to take P5,000 in full
settlement of her claim. We do not think this is tenable, defendant’s attitude
being merely a consequence of his line of defense, which though erroneous
does not amount to "gross and evident bad faith." For one thing, there is a
point raised by defendant, which so far as we are informed, has not been
directly passed upon in this jurisdiction: the notes contained no express
promise to pay a definite amount.

There being no circumstance making it reasonable and just to require

defendant to pay attorney’s fees, the last assignment of error must be
upheld.

Wherefore, in view of the foregoing considerations, the appealed decision is

affirmed, except as to the attorney’s fees which are hereby disapproved. So
ordered.
CASE #63 Inciong vs CA 257 SCRA 578 (1996)

[G.R. No. 96405. June 26, 1996.]

BALDOMERO INCIONG, JR., Petitioner, v. COURT OF APPEALS and

PHILIPPINE BANK OF COMMUNICATIONS, Respondents.

SYLLABUS

1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; DOES NOT SPECIFY

THAT THE WRITTEN AGREEMENT BE A PUBLIC INSTRUMENT. — Clearly, the
rule does not specify that the written agreement be a public document. What
is required is that the agreement be in writing as the rule is in fact founded
on "long experience that written evidence is so much more certain and
accurate than that which rests in fleeting memory only, that it would be
unsafe, when parties have expressed the terms of their contract in writing,
to admit weaker evidence to control and vary the stronger and to show that
the parties intended a different contract from that expressed in the writing
signed by them" [FRANCISCO, THE RULES OF COURT OF THE PHILIPPINES,
Vol. VII, Part I, 1990 ed., p. 179] Thus, for the parol evidence rule to apply,
a written contract need not be in any particular form, or be signed by both
parties. As a general rule, bills, notes and other instruments of a similar
nature are not subject to be varied or contracted by parol or extrinsic
evidence.

2. CIVIL LAW; OBLIGATIONS; SOLIDARY OR JOINT AND SEVERAL

OBLIGATION, DEFINED. — A solidary or joint and several obligation is one in
which each debtor is liable for the entire obligation, and each creditor is
entitled to demand the whole obligation. [TOLENTINO, CIVIL CODE OF THE
PHILIPPINES, Vol. IV, 1991 ed., p. 217] Section 4, Chapter 3, Title I, Book
IV of the Civil Code states the law on joint and several obligations. Under
Art. 1207 thereof, when there are two or more debtors in one and the same
obligation, the presumption is that the obligation is joint so that each of the
debtors is liable only for the proportionate part of the debt. There is a
solidary liability only when the obligation expressly so states, when the law
so provides or when the nature of the obligation so requires. [Sesbreño v.
Court of Appeals, G.R. No. 89252, May 24, 1993, 222 SCRA 466, 481.]

3. ID.; GUARANTY; GUARANTOR AS DISTINGUISHED FROM SOLIDARY

DEBTOR. — While a guarantor may bind himself solidarity with the principal
debtor, the liability of a guarantor is different from that of a solidary debtor.
Thus, Tolentino explains: "A guarantor who binds himself in solidum with the
principal debtor under the provisions of the second paragraph does not
become a solidary co-debtor to all intents and purposes. There is a
difference between a solidary co-debtor, and a fiandor in solidum (surety).
The latter, outside of the liability he assumes to pay the debt before the
property of the principal debtor has been exhausted, retains all the other
rights, actions and benefits which pertain to him by reason of the fiansa;
while a solidary co-debtor has no other rights than those bestowed upon him
in Section 4, Chapter 3, Title I, Book IV of the Civil Code." [[TOLENTINO,
CIVIL CODE OF THE PHILIPPINES, Vol. V, 1992 ed., p. 502]

DECISION

ROMERO, J.:

This is a petition for review on certiorari of the decision of the Court of

Appeals affirming that of the Regional Trial Court of Misamis Oriental, Branch
18, 1 which disposed of Civil Case No. 10507 for collection of a sum of
money and damages, as follows:jgc:chanrobles.com.ph

"WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily

liable and ordered to pay to the plaintiff Philippine Bank of Communications,
Cagayan de Oro City, the amount of FIFTY THOUSAND PESOS (P50,000.00),
with interest thereon from May 5, 1983 at 16% per annum until fully paid;
and 6% per annum on the total amount due, as liquidated damages or
penalty from May 5, 1983 until fully paid; plus 10% of the total amount due
for expenses of litigation and attorney’s fees; and to pay the costs.

The counterclaim, as well as the cross claim, are dismissed for lack of merit.

SO ORDERED."cralaw virtua1aw library

Petitioner’s liability resulted from the promissory note in the amount of

P50,000.00 which he signed with Rene C. Naybe and Gregorio D. Pantanosas
on February 3, 1983, holding themselves jointly and severally liable to
private respondent Philippine Bank of Communications, Cagayan de Oro City
branch. The promissory note was due on May 5, 1983.
Said due date expired without the promissors having paid their obligation.
Consequently, on November 14, 1983 and on June 8, 1984, private
respondent sent petitioner telegrams demanding payment thereof. 2 On
December 11, 1984 private respondent also sent by registered mail a final
letter of demand to Rene C. Naybe. Since both obligors did not respond to
the demands made, private respondent filed on January 24, 1986 a
complaint for collection of the sum of P50,000.00 against the three obligors.

On November 25, 1986, the complaint was dismissed for failure of the
plaintiff to prosecute the case. However, on January 9, 1987, the lower court
reconsidered the dismissal order and required the sheriff to serve the
summonses. On January 27, 1987, the lower court dismissed the case
against defendant Pantanosas as prayed for by the private respondent
herein. Meanwhile, only the summons addressed to petitioner was served as
the sheriff learned that defendant Naybe had gone to Saudi Arabia.

In his answer, petitioner alleged that sometime in January 1983, he was

approached by his friend, Rudy Campos, who told him that he was a partner
of Pio Tio, the branch manager of private respondent in Cagayan de Oro
City, in the falcata logs operation business. Campos also intimated to him
that Rene C. Naybe was interested in the business and would contribute a
chainsaw to the venture. He added that, although Naybe had no money to
buy the equipment, Pio Tio had assured Naybe of the approval of a loan he
would make with private Respondent. Campos then persuaded petitioner to
act as a "co-maker" in the said loan. Petitioner allegedly acceded but with
the understanding that he would only be a co-maker for the loan of
P5,000.00.

Petitioner alleged further that five (5) copies of a blank promissory note
were brought to him by Campos at his office. He affixed his signature
thereto but in one copy, he indicated that he bound himself only for the
amount of P5,000.00. Thus, it was by trickery, fraud and misrepresentation
that he was made liable for the amount of P50,000.00.

In the aforementioned decision of the lower court, it noted that the

typewritten figure" -50,000-" clearly appears directly below the admitted
signature of the petitioner in the promissory note. 3 Hence, the latter’s
uncorroborated testimony on his limited liability cannot prevail over the
presumed regularity and fairness of the transaction, under Sec. 5 (q) of Rule
131. The lower court added that it was "rather odd" for petitioner to have
indicated in a copy and not in the original, of the promissory note, his
supposed obligation in the amount of P5,000.00 only. Finally, the lower court
held that, even granting that said limited amount had actually been agreed
upon, the same would have been merely collateral between him and Naybe
and, therefore, not binding upon the private respondent as creditor-bank.

The lower court also noted that petitioner was a holder of a Bachelor of Laws
degree and a labor consultant who was supposed to take due care of his
concerns, and that, on the witness stand, Pio Tio denied having participated
in the alleged business venture although he knew for a fact that the falcata
logs operation was encouraged by the bank for its export potential.

Petitioner appealed the said decision to the Court of Appeals which, in its
decision of August 31, 1990, affirmed that of the lower court. His motion for
reconsideration of the said decision having been denied, he filed the instant
petition for review on certiorari.

On February 6, 1991, the Court denied the petition for failure of petitioner to
comply with the Rules of Court and paragraph 2 of Circular No. 1-88, and to
sufficiently show that respondent court had committed any reversible error
in its questioned decision. 4 His motion for the reconsideration of the denial
of his petition was likewise denied with finality in the Resolution of April 24,
1991. 5 Thereafter, petitioner filed a motion for leave to file a second motion
for reconsideration which, in the Resolution of May 27, 1991, the Court
denied. In the same Resolution, the Court ordered the entry of judgment in
this case. 6

Unfazed, petitioner filed a motion for leave to file a motion for clarification.
In the latter motion, he asserted that he had attached Registry Receipt No.
3268 to page 14 of the petition in compliance with Circular No. 1-88. Thus,
on August 7, 1991, the Court granted his prayer that his petition be given
due course and reinstated the same. 7

Nonetheless, we fined the petition unmeritorious.

Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or

after the rendition of the decision of the lower court, by Gregorio
Pantanosas, Jr., an MTCC judge and petitioner’s co-maker in the promissory
note. It supports petitioner’s allegation that they were induced to sign the
promissory note no the belief that it was only for P5,000.00, adding that it
was Campos who caused the amount of the loan to be increased to
P50,000.00.

The affidavit is clearly intended to buttress petitioner’s contention in the

instant petition that the Court of Appeals should have declared the
promissory note null and void on the following grounds: (a) the promissory
note was signed in the office of Judge Pantanosas, outside the premises of
the bank; (b) the loan was incurred for the purpose of buying a second-hand
chainsaw which cost only P5,000.00; (c) even a new chainsaw would cost
only P27,500.00; (d) the loan was not approved by the board or credit
committee which was the practice, at it exceeded P5,000.00; (e) the loan
had no collateral; (f) petitioner and Judge Pantanosas were not present at
the time the loan was released in contravention of the bank practice, and (g)
notices of default are sent simultaneously and separately but no notice was
validly sent to him. 8 Finally, petitioner contends that in signing the
promissory note, his consent was vitiated by fraud as, contrary to their
agreement that the loan was only for the amount of P5,000.00, the
promissory note stated the amount of P50,000.00.

The above-stated points are clearly factual. Petitioner is to be reminded of

the basic rule that this Court is not a trier of facts. Having lost the chance to
fully ventilate his factual claims below, petitioner may no longer be accorded
the same opportunity in the abuse of discretion on the part of the court
below. Had he presented Judge Pantanosas’ affidavit before the lower court,
it would have strengthened his claim that the promissory note did not reflect
the correct amount of the loan.

Nor is there merit in petitioner’s assertion that since the promissory note "is
not a public deed with the formalities prescribed by law but . . . a mere
commercial paper which does not bear the signature of . . . attesting
witnesses," parol evidence may "overcome" the contents of the promissory
note. 9 The first paragraph of the parol evidence rule 10
states:jgc:chanrobles.com.ph

"When the terms of an agreement have been reduced to writing, it is

considered as containing all the terms agreed upon and there can be,
between the parties and their successors in interest, no evidence of such
terms other than the content of the written agreement."cralaw virtua1aw
library

Clearly, the rule does not specify that the written agreement be a public
document.

What is required is that agreement be in writing as the rule is in fact

founded on "long experience that written evidence is so much more certain
and accurate than that which rests in fleeting memory only, that it would be
unsafe, when parties have expressed the terms of their contract in writing,
to admit weaker evidence to control and vary the stronger and to show that
the parties intended a different contract from that expressed in the writing
signed by them." 11 Thus, for the parol evidence rule to apply, a written
contract need not by in any particular form, or be signed by both parties. 12
As a general rule, bills, notes and other instruments of a similar nature are
not subject to be varied or contradicted by parol or extrinsic evidence. 13

By alleging fraud in his answer, 14 petitioner was actually in the right

direction towards proving that he and his co-makers agreed to a loan of
P5,000.00 only considering that, where a parol contemporaneous agreement
was the inducing and moving cause of the written contract, it may be shown
by parol evidence. 15 However, fraud must be established by clear and
convincing evidence, mere preponderance of evidence, not even being
adequate. 16 Petitioner’s attempt to prove fraud must, therefore, fail as it
was evidenced only by his own uncorroborated and, expectedly, self-serving
testimony.

Petitioner also argues that the dismissal of the complaint against Naybe, the
principal debtor, and against Pantanosas, his co-maker, constituted a release
of his obligation, especially because the dismissal of the case against
Pantanosas was upon the motion of private respondent itself. He cites as
basis for his argument, Article 2080 of the Civil Code which provides
that:jgc:chanrobles.com.ph

"The guarantors, even though they be solidary, are released from their
obligation whenever by come act of the creditor, they cannot be subrogated
to the rights, mortgages, and preferences of the latter."cralaw virtua1aw
library

It is to be noted, however, that petitioner signed the promissory note as a

solidary co-maker and not as a guarantor. This is patent even from the first
sentence of the promissory note which states as
follows:jgc:chanrobles.com.ph

"Ninety one (91) days after date, for value received, I/we, JOINTLY and
SEVERALLY promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS
as its office in the City of Cagayan de Oro, Philippines the sum of FIFTY
THOUSAND ONLY (P50,000.00) Pesos, Philippine Currency, together with
interest . . . at the rate of SIXTEEN (16) per cent per annum until fully
paid."cralaw virtua1aw library

A solidary or joint and several obligation is one in which each debtor is liable
for the entire obligation, and each creditor is entitled to demand the whole
obligation. 17 On the other hand, Article 2047 of the Civil Code
states:jgc:chanrobles.com.ph

"By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do
so.
If a person binds himself solidarily with the principal debtor, the provisions
of Section 4, Chapter 3, Title I of this Book shall be observed, In such a case
the contract is called a suretyship." (Emphasis supplied.)

While a guarantor may bind himself solidarily with the principal debtor, the
liability of a guarantor is different from that of a solidary debtor. Thus,
Tolentino explains:jgc:chanrobles.com.ph

"A guarantor who binds himself in solidum with the principal debtor under
the provisions of the second paragraph does not become a solidary co-
debtor to all intents and purposes. There is a difference between a solidary
co-debtor, and a fiador in solidum (surety). The later, outside of the liability
he assumes to pay the debt before the property of the principal debtor has
been exhausted, retains all the other rights, actions and benefits which
pertain to him by reason of rights than those bestowed upon him in Section
4, Chapter 3, title I, Book IV of the Civil Code." 18

Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint
and several obligations. Under Art. 1207 thereof, when there are two or
more debtors in one and the same obligation, the presumption is that
obligation is joint so that each of the debtors is liable only for a
proportionate part of the debt. There is a solidarily liability only when he
obligation expressly so states, when the law so provides or when the nature
of the obligation so requires. 19

Because the promissory note involved in this case expressly states that the
three signatories therein are jointly and severally liable, any one, some or all
of them may be proceeded against for the entire obligation. 20 The choice is
left to the solidary creditor to determine against whom he will enforce
collection. 21 Consequently, the dismissal of the case against Judge
Pontanosas may not be deemed as having discharged petitioner from liability
as well. As regards Nayve, suffice it to say that the court never acquired
jurisdiction over him. Petitioner, therefore, may only have recourse against
his co-makers, as provided by law.

WHEREFORE, the instant petition for review on certiorari is here DENIED and
the questioned decision of the Court of Appeals is AFFIRMED. Costs against
petitioner.

SO ORDERED.
CASE #64 Elizalde & Co., Inc. vs Biñan Trans. Co., 58 O.G. 5886 (1960)

Biñan Transportation Company bought two motor vehicles. They signed a promissory note and
tosecure payment, they mortgaged the motor vehicles. The promissory notes were negotiated
and werenot paid. So Elizalde who was holding the promissory note sued. Biñan’s defense was
that thepromissory note was not negotiable because it was mentioned that it was subject to
chattel mortgage.

ISSUE: Whether the note was negotiable.

HELD: Yes. For reference to mortgage to destroy negotiability, the promise to pay must
beburdened with the terms and conditions of the chattel mortgage. Since the reference to the
chattelmortgage did not make the promise to pay burdened with the terms and conditions of
the chattelmortgage, the promissory note was still negotiable.
CASE #65 Ponce vs CA 90 SCRA 533 (1979)

G.R. No. L-49494 May 31, 1979

NELIA G. PONCE and VICENTE C. PONCE, Petitioners, vs. THE

HONORABLE COURT OF APPEALS, and JESUSA B.
AFABLE, Respondents.

Romeo L. Mendoza & Gallardo S. Tongohan for petitioners.chanrobles virtual

law library

Ramon M. Velayo for private respondent.

MELENCIO-HERRERA, J.:

This is a Petition for Certiorari seeking to set aside the Resolution of the
Court of Appeals, dated June 8, 1978, reconsidering its Decision dated
December 17, 1977 and reversing the judgment of the Court of First
Instance of Manila in favor of petitioners as well as the Resolutions, dated
July 6, 1978 and November 27, 1978, denying petitioners' Motion for
Reconsideration.chanroblesvirtualawlibrary chanrobles virtual law library

The factual background of the case is as follows: chanrobles virtual law

library

On June 3, 1969, private respondent Jesusa B. Afable, together with Felisa

L. Mendoza and Ma. Aurora C. Diño executed a promissory note in favor of
petitioner Nelia G. Ponce in the sum of P814,868.42, Philippine Currency,
payable, without interest, on or before July 31, 1969. It was further provided
therein that should the indebtedness be not paid at maturity, it shall draw
interest at 12% per annum, without demand; that should it be necessary to
bring suit to enforce pay ment of the note, the debtors shall pay a sum
equivalent to 10% of the total amount due for attorney's fees; and, in the
event of failure to pay the indebtedness plus interest in accordance with its
terms, the debtors shall execute a first mortgage in favor of the creditor
over their properties or of the Carmen Planas Memorial,
Inc.chanroblesvirtualawlibrary chanrobles virtual law library

Upon the failure of the debtors to comply with the terms of the promissory
note, petitioners (Nelia G. Ponce and her husband) filed, on July 27, 1970, a
Complaint against them with the Court of First Instance of Manila for the
recovery of the principal sum of P814,868.42, plus interest and
damages.chanroblesvirtualawlibrary chanrobles virtual law library

Defendant Ma. Aurora C. Diño's Answer consisted more of a general denial

and the contention that she did not borrow any amount from plaintiffs and
that her signature on the promissory note was obtained by plaintiffs on their
assurance that the same was for " formality only." chanrobles virtual law
library

Defendant Jesusa B. Afable, for her part, asserted in her Answer that the
promissory note failed to express the true intent and agreement of the
parties, the true agreement being that the obligation therein mentioned
would be assumed and paid entirely by defendant Felisa L. Mendoza; that
she had signed said document only as President of the Carmen Planas
Memorial, Inc., and that she was not to incur any personal obligation as to
the payment thereof because the same would be repaid by defendant
Mendoza and/or Carmen Planas Memorial,
Inc.chanroblesvirtualawlibrary chanrobles virtual law library

In her Amended Answer, defendant Felisa L. Mendoza admitted the

authenticity and due execution of the promissory note, but averred that it
was a recapitulation of a series of transactions between her and the
plaintiffs, "with defendant Ma. Aurora C. Diño and Jesusa B. Afable coming
only as accomodation parties." As affirmative defense, defendant Mendoza
contended that the promissory note was the result of usurious transactions,
and, as counterclaim, she prayed that plaintiffs be ordered to account for all
the interests paid.chanroblesvirtualawlibrary chanrobles virtual law library

Plaintiffs filed their Answer to defendant Mendoza's counterclaim denying

under oath the allegations of usury.chanroblesvirtualawlibrary chanrobles
virtual law library

After petitioners had rested, the case was deemed submitted for decision
since respondent Afable and her co-debtors had repeatedly failed to appear
before the trial Court for the presentation of their
evidence.chanroblesvirtualawlibrary chanrobles virtual law library

On March 9, 1972, the trial Court rendered judgment ordering respondent

Afable and her co-debtors, Felisa L. Mendoza and Ma. Aurora C. Diño , to
pay petitioners, jointly and severally, the sum of P814,868.42, plus 12%
interest per annum from July 31, 1969 until full payment, and a sum
equivalent to 10% of the total amount due as attorney's fees and
costs.chanroblesvirtualawlibrary chanrobles virtual law library
From said Decision, by respondent Afable appealed to the Court of Appeals.
She argued that the contract under consideration involved the payment of
US dollars and was, therefore, illegal; and that under the in pari delicto rule,
since both parties are guilty of violating the law, neither one can recover. It
is to be noted that said defense was not raised in her
Answer.chanroblesvirtualawlibrary chanrobles virtual law library

On December 13, 1977, the Court of Appeals* rendered judgment affirming

the decision of the trial Court. In a Resolution dated February 27, 1978, the
Court of Appeals,** denied respondent's Motion for Reconsideration.
However, in a Resolution dated June 8, 1978, the Court of Appeals acting on
the Second Motion for Reconsideration filed by private respondent, set aside
the Decision of December 13, 1977, reversed the judgment of the trial Court
and dismissed the Complaint. The Court of Appeals opined that the intent of
the parties was that the promissory note was payable in US dollars, and,
therefore, the transaction was illegal with neither party entitled to recover
under the in pari delicto rule.chanroblesvirtualawlibrary chanrobles virtual
law library

Their Motions for Reconsideration having been denied in the Resolutions

dated July 6, 1978 and November 27, 1978, petitioners filed the instant
Petition raising the following Assignments of Error.

I chanrobles virtual law library

THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT THE

PROMISSORY NOTE EVIDENCING THE TRANSACTION OF THE PARTIES IS
PAYABLE IN U.S. DOLLARS THEREBY DETERMINING THE INTENT OF THE
PARTIES OUTSIDE OF THEIR PROMISSORY NOTE DESPITE LACK OF
SHOWING THAT IT FAILED TO EXPRESS THE TRUE INTENT OR AGREEMENT
OF THE PARTIES AND ITS PAYABILITY IN PHILIPPINE PESOS WHICH IS
EXPRESSED, AMONG OTHERS, BY ITS CLEAR AND PRECISE
TERMS.chanroblesvirtualawlibrary chanrobles virtual law library

IIchanrobles virtual law library

THE RESPONDENT COURT, OF APPEALS ERRED IN HOLDING THAT REPUBLIC

ACT 529, OTHERWISE KNOWN ASIAN ACT TO ASSURE UNIFORM VALUE TO
PHILIPPINE COINS AND CURRENCY,' COVERS THE TRANSACTION OF THE
PARTIES HEREIN.chanroblesvirtualawlibrary chanrobles virtual law library

IIIchanrobles virtual law library

THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING THAT
PRIVATE RESPONDENT JESUSA B. AFABLE COULD NOT FAVORABLY AVAIL
HERSELF OF THE DEFENSE OF ALLEGED APPLICABILITY OF REPUBLIC ACT
529 AND THE DOCTRINE OF IN PARI DELICTO AS THESE WERE NOT
PLEADED NOR ADOPTED BY HER IN THE
TRIAL.chanroblesvirtualawlibrary chanrobles virtual law library

IV chanrobles virtual law library

THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING ASSUMING

ARGUENDO THAT REPUBLIC ACT 529 COVERS THE PARTIES TRANSACTION,
THAT THE Doctrine OF IN PARI DELICTO DOES NOT APPLY AND THE
PARTIES AGREEMENT WAS NOT NULL AND VOID PURSUANT TO THE RULING
IN OCTAVIO A. KALALO VS. ALFREDO J. LUZ, NO.-27782, JULY 31, 1970.

In the Resolution dated June 8, 1978, the Court of Appeals made the
following observations:

We are convinced from the evidence that the amount awarded by the lower
Court was indeed owed by the defendants to the plaintiffs. However, the sole
issue raised in this second motion for reconconsideration is not the existence
of the obligation itself but the legality of the subject matter of the contract.
If the subject matter is illegal and against public policy, the doctrine of pari
delicto applies.chanroblesvirtualawlibrary chanrobles virtual law library

xxx xxx xxxchanrobles virtual law library

We are constrained to reverse our December 13, 1977 decision. While it is

true that the promissory note does not mention any obligation to pay in
dollars, plaintiff-appellee Ponce himself admitted that there was an
agreement that he would be paid in dollars by the defendants. The
promissory note is payable in U.S. donors. The in. tent of the parties prevails
over the bare words of the written
contracts.chanroblesvirtualawlibrary chanrobles virtual law library

xxx xxx xxxchanrobles virtual law library

The agreement is null and void and of no effect under Republic Act No. 529.
Under the doctrine of pari delicto, no recovery can be made in favor of the
plaintiffs for being themselves guilty of violating the law. 1

We are constrained to disagree.chanroblesvirtualawlibrary chanrobles virtual

law library
Reproduced hereunder is Section 1 of Republic Act No. 529, which was
enacted on June 16, 1950:

Section 1. Every provision contained in, or made with respect to, any
domestic obligation to wit, any obligation contracted in the Philippines which
provision purports to give the obligee the right to require payment in gold or
in a particular kind of coin or currency other than Philippine currency or in
an amount of money of the Philippines measured thereby, be as it is hereby
declared against public policy, and null voice and of no effect and no such
provision shall be contained in, or made with respect to, any obligation
hereafter incurred. The above prohibition shall not apply to (a) transactions
were the funds involved are the proceeds of loans or investments made
directly or indirectly, through bona fide intermediaries or agents, by foreign
governments, their agencies and instrumentalities, and international
financial and banking institutions so long as the funds are Identifiable, as
having emanated from the sources enumerated above; (b) transactions
affecting high priority economic projects for agricultural industrial and power
development as may be determined by the National Economic Council which
are financed by or through foreign funds; (c) forward exchange transactions
entered into between banks or between banks and individuals or juridical
persons; (d) import-export and other international banking financial
investment and industrial transactions. With the exception of the cases
enumerated in items (a) (b), (c) and (d) in the foregoing provision, in, which
cases the terms of the parties' agreement shag apply, every other domestic
obligation heretofore or hereafter incurred whether or not any such provision
as to payment is contained therein or made with- respect thereto, shall be
discharged upon payment in any coin or currency which at the time of
payment is legal tender for public and private debts: Provided, That if the
obligation was incurred prior to the enactment of this Act and required
payment in a particular kind of coin or currency other than Philippine
currency, it shall be discharge in Philippine currency measured at the
prevailing rates of exchange at the time the obligation was incurred, except
in case of a loan made in foreign currency stipulated to be payable in the
currency in which case the rate of exchange prevailing at the time of the
stipulated date of payment shall prevail All coin and currency, including
Central Bank notes, heretofore and hereafter issued and d by the
Government of the Philippines shall be legal tender for all debts, public and
private. (As amended by RA 4100, Section 1, approved June 19, 1964)
(Empahsis supplied).

It is to be noted that while an agreement to pay in dollars is declared as null

and void and of no effect, what the law specifically prohibits is payment in
currency other than legal tender. It does not defeat a creditor's claim for
payment, as it specifically provides that "every other domestic obligation ...
whether or not any such provision as to payment is contained therein or
made with respect thereto, shall be discharged upon payment in any coin or
currency which at the time of payment is legal tender for public and private
debts." A contrary rule would allow a person to profit or enrich himself
inequitably at another's expense.chanroblesvirtualawlibrary chanrobles
virtual law library

As the Court of Appeals itself found, the promissory note in question

provided on its face for payment of the obligation in Philippine
currency, i.e., P814,868.42. So that, while the agreement between the
parties originally involved a dollar transaction and that petitioners expected
to be paid in the amount of US$194,016.29, petitioners are not now insisting
on their agreement with respondent Afable for the payment of the obligation
in dollars. On the contrary, they are suing on the basis of the promissory
note whereby the parties have already agreed to convert the dollar loan into
Philippine currency at the rate of P4.20 to $1.00. 2 It may likewise be
pointed out that the Promissory Note contains no provision "giving the
obligee the right to require payment in a particular kind of currency other
than Philippine currency, " which is what is specifically prohibited by RA No.
529.chanroblesvirtualawlibrary chanrobles virtual law library

At any rate, even if we were to disregard the promissory note providing for
the payment of the obligation in Philippine currency and consider that the
intention of the parties was really to provide for payment of the obligation
would be made in dollars, petitioners can still recover the amount of
US$194,016.29, which respondent Afable and her co-debtors do not deny
having received, in its peso equivalent. As held in Eastboard Navigation, Ltd.
vs. Juan Ysmael & Co. Inc., 102 Phil. 1 (1957), and Arrieta vs. National Rice
& Corn Corp.,  3 if there is any agreement to pay an obligation in a currency
other than Philippine legal tender, the same is nun and void as contrary to
public policy, pursuant to Republic Act No. 529, and the most that could be
demanded is to pay said obligation in Philippine currency. In other words,
what is prohibited by RA No. 529 is the payment of an obligation in dollars,
meaning that a creditor cannot oblige the debtor to pay him in dollars, even
if the loan were given in said currency. In such a case, the indemnity to be
allowed should be expressed in Philippine currency on the basis of the
current rate of exchange at the time of payment. 4chanrobles virtual law
library

The foregoing premises considered, we deem it unnecessary to discuss the

other errors assigned by petitioners.chanroblesvirtualawlibrary chanrobles
virtual law library
WHEREFORE, the Resolutions of the Court of Appeals dated June 8, 1978,
July 6, 1978 and November 27, 1978 are hereby set aside, and judgment is
hereby rendered reinstating the Decision of the Court of First Instance of
Manila.chanroblesvirtualawlibrary chanrobles virtual law library

No pronouncement as to costs.chanroblesvirtualawlibrary chanrobles virtual

law library

SO ORDERED.
CASE #66 Kalalo vs Luz 34 SCRA 337 (1970)

[G.R. No. L-27782. July 31, 1970.]

OCTAVIO A. KALALO, Plaintiff-Appellee, v. ALFREDO J.

LUZ, Defendant-Appellant.

Amelia K. del Rosario for Plaintiff-Appellee.

Pelaez, Jalandoni & Jamir, for Defendant-Appellant.

DECISION

ZALDIVAR, J.:

Appeal from the decision, dated February 10, 1967, of the Court of First
Instance of Rizal (Branch V, Quezon City) in its Civil Case No. Q-6561.

On November 17, 1959, plaintiff-appellee Octavio A. Kalalo (hereinafter

referred to as appellee), a licensed civil engineer doing business under the
firm name of O. A. Kalalo and Associates, entered into an agreement
(Exhibit A) 1 with defendant-appellant Alfredo J. Luz (hereinafter referred to
as appellant), a licensed architect, doing business under firm name of A. J.
Luz and Associates, whereby the former was to render engineering design
services to the latter for fees, as stipulated in the agreement. The services
included design computation and sketches, contract drawing and technical
specifications of all engineering phases of the project designed by O. A.
Kalalo and Associates, bill of quantities and cost estimate, and consultation
and advice during construction relative to the work. The fees agreed upon
were percentages of the architect’s fee, to wit: structural engineering, 12-
1/2%; electrical engineering, 2-1/2 %. The agreement was subsequently
supplemented by a "clarification to letter-proposal" which provided, among
other things, that "the schedule of engineering fees in this agreement does
not cover the following: . . . D. Foundation soil exploration, testing and
evaluation; E. Projects that are principally engineering works such as
industrial plants, . . ." and "O. A. Kalalo and Associates reserve the right to
increase fees on projects which cost less than P100,000 . . ." 2 Pursuant to
said agreement, appellee rendered engineering services to appellant in the
following projects:chanrob1es virtual 1aw library

(a) Fil-American Life Insurance Building at Legaspi City;

(b) Fil-American Life Insurance Building at Iloilo City;

(c) General Milling Corporation Flour Mill at Opon, Cebu;

(d) Menzi Building at Ayala Blvd., Makati, Rizal;

(e) International Rice Research Institute, Research Center, Los Baños,

Laguna;

(f) Aurelia’s Building at Mabini, Ermita, Manila;

(g) Far East Bank’s Office at Fil-American Life Insurance Building at Isaac
Peral, Ermita, Manila;

(h) Arthur Young’s residence at Forbes Park, Makati, Rizal;

(i) L & S Building at Dewey Blvd., Manila; and

(j) Stanvac Refinery Service Building at Limay, Bataan.

On December 11, 1961, appellee sent to appellant a statement of account

(Exhibit "1"), 3 to which was attached an itemized statement of defendant-
appellant’s account (Exh. "1-A"), according to which the total engineering
fee asked by appellee for services rendered amounted to P116,565.00 from
which sum was to be deducted the previous payments made in the amount
of P57,000.00, thus leaving a balance due in the amount of P59,565.00.

On May 18, 1962 appellant sent appellee a resume of fees due to the latter.
Said fees, according to appellant, amounted to P10,861.08 instead of the
amount claimed by the appellee. On June 14, 1962 appellant sent appellee a
cheek for said amount, which appellee refused to accept as full payment of
the balance of the fees due him.

On August 10, 1962, appellee filed a complaint against, appellant, containing

four causes of action. In the first cause of action, appellee alleged that for
services rendered in connection with the different projects therein mentioned
there was due him fees in sums consisting of $28,000 (U.S.) and
P100,204.46, excluding interests, of which sums only P69,323.21 had been
paid, thus leaving unpaid the $28,000.00 and the balance of P30,881.25. In
the second cause of action, appellee claimed P17,000.00 as consequential
and moral damages; in the third cause of action he claimed P55,000.00 as
moral damages, attorney’s fees and expenses of litigation; and in the fourth
cause of action he claimed P25,000.00 as actual damages, and also for
attorney’s fees and expenses of litigation.

In his answer, appellant admitted that appellee rendered engineering

services, as alleged in the first cause of action, but averred that some of
appellee’s services were not in accordance with the agreement and
appellee’s claims were not justified by the services actually rendered, and
that the aggregate amount actually due to appellee was only P80,336.29, of
which P69,475.21 had already been paid, thus leaving a balance of only
P10,861.08. Appellant denied liability for any damage claimed by appellee to
have suffered, as alleged in the second, third and fourth causes of action.
Appellant set up affirmative and special defenses, alleging that appellee had
no cause of action, that appellee was in estoppel because of certain acts,
representations, admissions and/or silence, which led appellant to believe
certain facts to exist and to act upon said facts, that appellee’s claim
regarding the Menzi project was premature because appellant had not yet
been paid for said project, and that appellee’s services were not complete or
were performed in violation of the agreement and/or otherwise
unsatisfactory. Appellant also set up a counterclaim for actual and moral
damages for such amount as the court may deem fair to assess, and for
attorney’s fees of P10,000.00.

Inasmuch as the pleadings showed that the appellee’s right to certain fees
for services rendered was not denied, the only question being the
assessment of the proper fees and the balance due to appellee after
deducting the admitted payments made by appellant, the trial court, upon
agreement of the parties, authorized the case to be heard before a
Commissioner. The Commissioner rendered a report which, in resume,
states that the amount due to appellee was $28,000.00 (U.S.) as his fee in
the International Research Institute Project which was twenty per cent
(20%) of the $140,000.00 that was paid to appellant, and P51,539.91 for
the other projects, less the sum of P69,475.46 which was already paid by
the appellant, The Commissioner also recommended the payment to
appellee of the sum of P5,000.00 as attorney’s fees.

At the hearing on the Report of the Commissioner, the respective counsel of

the parties manifested to the court that they had no objection to the findings
of fact of the Commissioner contained in the Report, and they agreed that
the said Report posed only two legal issues, namely: (1) whether under the
facts stated in the Report, the doctrine of estoppel would apply; and (2)
whether the recommendation in the Report that the payment of the amount
due to the plaintiff in dollars was legally permissible, and if not, at what rate
of exchange it should be paid in pesos. After the parties had submitted their
respective memorandum on said issues, the trial court rendered its decision,
dated February 10, 1967, the dispositive portion of which reads as
follows:jgc:chanrobles.com.ph

"WHEREFORE, judgment is rendered in favor of plaintiff and against the

defendant, by ordering the defendant to pay plaintiff the sum of P51,539.91
and $28,000.00, the latter to be converted into the Philippine currency on
the basis of the current rate of exchange at the time of the payment of this
judgment, as certified to by the Central Bank of the Philippines, from which
shall be deducted the sum of P69,475.46, which the defendant had paid the
plaintiff, and the legal rate of interest thereon from the filing of the
complaint in this case until fully paid for; by ordering the defendant to pay to
plaintiff the further sum of P8,000.00 by way of attorney’s fees which the
Court finds to be reasonable in the premises, with costs against the
defendant. The counterclaim of the defendant is ordered dismissed."cralaw
virtua1aw library

From the decision, this appeal was brought directly to this Court, raising only
questions of law.

During the pendency of this appeal, appellee filed a petition for the issuance
of a writ of attachment under Section 1 (f) of Rule 57 of the Rules of Court
upon the ground that appellant is presently residing in Canada as a
permanent resident thereof. On June 3, 1969, this Court resolved, upon
appellee’s posting a bond of P10,000.00, to issue the writ of attachment,
and ordered the Provincial Sheriff of Rizal to attach the estate, real and
personal, of appellant Alfredo J. Luz within the province, to the value of not
less than P140,000.00.

The appellant made the following assignments of errors:chanrob1es virtual

1aw library

I. The lower court erred in not declaring and holding that plaintiff-appellee’s
letter dated December 11, 1961 (Exhibit "1") and the statement of account
(Exhibit "1-A") therein enclosed, had the effect, cumulatively or
alternatively, of placing plaintiff-appellee in estoppel from thereafter
modifying the representations made in said exhibits, or of making plaintiff-
appellee otherwise bound by said representations, or of being of decisive
weight in determining the true intent of the parties as to the nature and
extent of the engineering services rendered and/or the amount of fees due.

II. The lower court erred in declaring and holding that the balance owing
from defendant-appellant to plaintiff-appellee on the IRRI Project should be
paid on the basis of the rate of exchange of the U.S. dollar to the Philippine
peso at the time of payment of judgment.

III. The lower court erred in not declaring and holding that the aggregate
amount of the balance due from defendant-appellant to plaintiff-appellee is
only P15,792.05.

IV. The lower court erred in awarding attorney’s fees in the sum of
P8,000.00, despite the commissioner’s finding, which plaintiff-appellee has
accepted and has not questioned, that said fee be only P5,000.00; and

V. The lower court erred in not granting defendant-appellant relief on his

counter-claim."cralaw virtua1aw library

1. In support of his first assignment of error appellant argues that in Exhibit

1-A, which is a statement of accounts dated December 11, 1961, sent by
appellee to appellant, appellee specified the various projects for which he
claimed engineering fees, the precise amount due on each particular
engineering service rendered on each of the various projects, and the total
of his claims; that such a statement barred appellee from asserting any
claim contrary to what was stated therein, or from taking any position
different from what he asserted therein with respect to the nature of the
engineering services rendered; and consequently the trial court could not
award fees in excess of what was stated in said statement of accounts.
Appellant argues that for estoppel to apply it is not necessary, contrary to
the ruling of the trial court, that the appellant should have actually relied on
the representation, but that it is sufficient that the representations were
intended to make the defendant act thereon; that assuming arguendo that
Exhibit 1-A did not put appellee in estoppel, the said Exhibit 1-A
nevertheless constituted a formal admission that would be binding on
appellee under the law on evidence, and would not only belie any
inconsistent claim but also would discredit any evidence adduce by appellee
is support of any claim inconsistent with what appears therein; that,
moreover, Exhibit 1-A, being a statement of account, establishes prima facie
the accuracy and correctness of the items stated therein and its correctness
can no longer be impeached except for fraud or mistake; that Exhibit 1-A,
furthermore, constitutes appellee’s own interpretation of the contract
between him and appellant, and hence, is conclusive against him.

On the other hand, appellee admits that Exhibit 1-A itemized the services
rendered by him in the various construction projects of appellant and that
the total engineering fees charged therein was P116,565.00, but maintains
that he was not in estoppel: first, because when he prepared Exhibit 1-A he
was laboring under an innocent mistake, as found by the trial court; second,
because appellant was not ignorant of the services actually rendered by
appellee and the fees due to the latter under the original agreement, Exhibit
A; and third, because appellant did not rely on the data appearing in Exhibit
1-A, nor did he act by reason thereof. Appellee further maintains that he
cannot be bound by Exhibit l-A after it was satisfactorily shown that there
were services not included therein although actually rendered by him to
appellant, and that the fees were not correctly charged because of appellee’s
ignorance of the legal implications of the terms of the agreement, Exhibit
"A."cralaw virtua1aw library

We find merit in the stand of appellee.

The statement of accounts (Exh. 1-A) could not estop appellee, because
appellant did not rely thereon as found by the Commissioner, from whose
Report we read:jgc:chanrobles.com.ph

"While it is true that plaintiff vacillated in his claim, yet, defendant did not in
anyway rely or believe in the different claims asserted by the plaintiff and
instead insisted on a claim that plaintiff was only entitled to P10,861.08 as
per a separate resume of fees he sent to the plaintiff on May 18, 1962 (See
Exhibit 6)." 4

The foregoing finding of the Commissioner, not disputed by appellant, was

adopted by the trial court in its decision. Under article 1431 of the Civil
Code, in order that estoppel may apply the person, to whom representations
have been made and who claims the estoppel in his favor must have relied
or acted on such representations. Said article
provides:jgc:chanrobles.com.ph

"Art. 1431. Through estoppel an admission or representation is rendered

conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon."cralaw virtua1aw library

An essential element of estoppel is that the person invoking it has been

influenced and has relied on the representations or conduct of the person
sought to be estopped, and this element is wanting in the instant case. In
Cristobal v. Gomez, 5 this Court held that no estoppel based on a document
can be invoked by one who has not been mislead by the false statements
contained therein. And in Republic of the Philippines v. Garcia, Et Al., 6 this
Court ruled that there is no estoppel when the statement or action invoked
as its basis did not mislead the adverse party. Estoppel has been
characterized as harsh or odious, and not favored in law. 7 When
misapplied, estoppel becomes a most effective weapon to accomplish an
injustice, inasmuch as it shuts a man’s mouth from speaking the truth and
debars the truth in a particular case. 8 Estoppel cannot be sustained by
mere argument or doubtful inference; it must be clearly proved in all its
essential elements by clear, convincing and satisfactory evidence. 9 No party
should be precluded from making out his case according to its truth unless
by force of some positive principle of law, and, consequently, estoppel in
pains must be applied strictly and should not be enforced unless
substantiated in every particular. 10

The essential elements of estoppel in pais may be considered In relation to

the party sought to be estopped, and in relation to the party invoking the
estoppel in his favor. As related to the party to be estopped, the essential
elements are: (1) conduct amounting to false representation or concealment
of material facts or at least calculated to convey the impression that the
facts are otherwise than, and inconsistent with, those which the party
subsequently attempts to assert; (2) intent, or at least expectation that this
conduct shall be acted upon by, or at least influence, the other party; and
(3) knowledge, actual or constructive, of the real facts. As related to the
party claiming the estoppel, the essential elements are (1) lack of knowledge
and of the means of knowledge of the truth as the facts in question; (2),
reliance, in good faith, upon the conduct or statements of the party to be
estopped; (3) action or inaction based thereon of such character as to
change the position or status of the party claiming the estoppel, to his
injury, detriment or prejudice. 11

The first essential element in relation to the party sought to be estopped

does not obtain in the instant case, for, as appears in the Report of the
Commissioner, appellee testified "that when he wrote Exhibit 1 and prepared
Exhibit 1-A, he had not yet consulted the services of his counsel and it was
only upon advice of counsel that the terms of the contract were interpreted
to him resulting in his subsequent letters to the defendant demanding
payments of his fees pursuant to the contract Exhibit A." 12 This finding of
the Commissioner was adopted by the trial court. 13 It is established,
therefore, that Exhibit 1-A was written by appellee through ignorance or
mistake, Anent this matter, it has been held that if an act, conduct or
misrepresentation of the party sought to be estopped is due to ignorance
founded on innocent mistake, estoppel will not arise. 14 Regarding the
essential elements of estoppel in relation to the party claiming the estoppel,
the first element does not obtain in the instant case, for it cannot be said
that appellant did not know, or at least did not have the means of knowing,
the services rendered, to him by appellee and the fees due thereon as
provided in Exhibit A. The second element is also wanting, for, as adverted
to, appellant did not rely on Exhibit 1-A but consistently denied the accounts
stated therein. Neither does the third element obtain, for appellant did not
act on the basis of the representations in Exhibit 1-A, and there was no
change in his position, to his own injury or prejudice.

Appellant, however, insists that if Exhibit 1-A did not put appellee in
estoppel, it at least constituted an admission binding upon the latter. In this
connection, it cannot be gainsaid that Exhibit 1-A is not a judicial admission.
Statements which are not estoppels nor judicial admissions have no quality
of conclusiveness, and an opponent whose admissions have been offered
against him may offer any evidence which serves as an explanation for his
former assertion of what he now denies as a fact. This may involve the
showing of a mistake. 15 Accordingly, in Oas v. Roa, 16 it was held that
when a party to a suit has made an admission of any fact pertinent to the
issue involved, the admission can be received against him; but such an
admission is not conclusive against him, and he is entitled to present
evidence to overcome the effect of the admission. Appellee did explain, and
the trial court concluded, that Exhibit 1-A was based on either has ignorance
or innocent mistake and he, therefore, is not bound by it.

Appellant further contends that Exhibit 1-A, being a statement of account,

establishes prima facie the accuracy and correctness of the items stated
therein. If prima facie, as contended by appellant, then it is not absolutely
conclusive upon the parties. An account stated may be impeached for fraud,
mistake or error. In American Decisions, Vol. 62, p. 95, cited as authority by
appellant himself we read thus:jgc:chanrobles.com.ph

"An account stated or settled is a mere admission that the account is

correct. It is not an estoppel. The account is still open to impeachment for
mistakes or errors. Its effect is to establish. prima, facie, the accuracy of the
items without other proof; and the party seeking to impeach it is bound to
show affirmatively the mistake or error alleged. The force of the admission
and the strength of the evidence necessary to overcome it will depend upon
the circumstances of the case."cralaw virtua1aw library

In the instant case, it is Our view that the ignorance or mistake that
attended the writing of Exhibit 1-A by appellee was sufficient to overcome
the prima facie evidence of correctness and accuracy of said Exhibit 1-A.

Appellant also urges that Exhibit 1-A constitutes appellee’s own

interpretation of the contract, and is, therefore, conclusive against him.
Although the practical construction of the contract by one party, evidenced
by his words or acts, can be used against him in behalf of the other party,
17 yet, if one of the parties carelessly makes a wrong interpretation of the
words of his contract, or performs more than the contract requires (as
reasonably interpreted independently of his performance), as happened in
the instant case, he should be entitled to a restitutionary remedy, instead of
being bound to continue to his erroneous interpretation or his erroneous
performance, and the other party should not be permitted to profit by such
mistake unless he can establish an estoppel by proving a material change of
position made in good faith. The rule as to practical construction does not
nullify the equitable rules with respect to performance by mistake." 18 In
the instant case, it has been shown that Exhibit 1-A was written through
mistake by appellee and that the latter is not estopped by it. Hence, even if
said Exhibit 1-A be considered as practical construction of the contract by
appellee, he cannot be bound by such erroneous interpretation. It has been
held that if by mistake the parties followed a practice in violation of the
terms of the agreement, the court should not perpetuate the error. 19

2. In support of the second assignment of error, that the lower court erred in
holding that the balance from appellant on the IRRI project should be paid
on the basis of the rate of exchange of the U.S. dollar to the Philippine peso
at the time of payment of the judgment, appellant contends: first, that the
official rate at the time appellant received his architect’s fees for the IRRI
project, and correspondingly his obligation to appellee’s fee on August 25,
1961, was P2.00 to $1.00, and cites in support thereof Section 1612 of the
Revised Administrative Code, Section 48 of Republic Act 265 and Section 6
of Commonwealth Act No. 699; second, that the lower court’s Conclusion
that the rate of exchange to be applied in the conversion of the $28,000.00
is the current rate of exchange at the time the judgment shall be satisfied
was based solely on a mere presumption of the trial court that the defendant
did not convert, there being no showing to that effect, the dollars into
Philippine currency at the official rate, when the legal presumption should be
that the dollars were converted at the official rate of $1.00 to P2.00 because
on August 25, 1961, when the IRRI project became due and payable, foreign
exchange controls were in full force and effect, and partial decontrol was
effected only afterwards, during the Macapagal administration; third, that
the other ground advanced by the lower Court for its ruling, to wit, that
appellant committed a breach of his obligation to turn over to the appellee
the engineering fees received in U.S. dollars for the IRRI project, cannot be
upheld, because there was no such breach, as proven by the fact that
appellee never claimed in Exhibit 1-A that he should be paid in dollars; and
there was no provision in the basic contract (Exh. "A") that he should be
paid in dollars; and, finally, even if there were such provision, it would have
no binding effect under the provision of Republic Act 529; that, moreover, it
cannot really be said that no payment was made on that account., for
appellant had already paid P57,000.00 to appellee, and under Article 125 of
the Civil Code, said payment could he said to have been applied to the fees
due from the IRRI project, this project being the biggest and this debt being
the most onerous.
In refutation of appellant’s argument in support of the second assignment of
error, appellee argues that notwithstanding Republic Act 529, appellant can
be compelled to pay the appellee in dollars in view of the fact that appellant
received his fees in dollars, and appellee’s fee is 20% of appellant’s fees;
and that if said amount is to be converted into Philippine Currency, the rate
of exchange should be that at the time of the execution of the judgment. 20

We have taken note of the fact that on August 25, 1961, the date when
appellant said his obligation to pay appellee’s fees became due, there was
two rates of exchange, to wit: the preferred rate of P2.00 to $1.00, and the
free market rate. It was so provided in Circular No. 121 of the Central Bank
of the Philippines, dated March 2, 1961, amending an earlier Circular No.
117, and in force until January 21, 1962 when it was amended by Circular
No. 133, thus:jgc:chanrobles.com.ph

"1. All foreign exchange receipts shall be surrendered to the Central Bank of
those authorized to deal in foreign exchange as follows:chanrob1es virtual
1aw library

Percentage of Total to be surrendered at

Preferred : Free Market

Rate : Rate

(a) Export Proceeds, U. S. Gov-

ernment Expenditures invisi-

bles other than those specifically

mentioned below 25 75

(b) Foreign Investments. Gold

Proceeds, Tourists and Inward

Remittances of Veterans and

Filipino Citizens; and Perso-

nal Expenses of Diplomatic

Personnel — 100" 21
The amount of $140,000.00 received by appellant for the International Rice
Research Institute project is not within the scope of sub-paragraph (a) of
paragraph No. 1 of Circular No. 121. Appellant has not shown that 25% of
said amount had to be surrendered to the Central Bank at the preferred rate
because it was either export proceeds, or U.S. Government expenditures, or
invisibles not included in sub-paragraph (b). Hence, it cannot be said that
the trial court erred in presuming that appellant converted said amount at
the free market rate. It is hard to believe that a person possessing dollars
would exchange his dollars at the preferred rate of P2.00 to $1.00 when he
is not obligated to do so, rather than at the free market rate which is much
higher. A person is presumed to take ordinary care of his concerns, and that
the ordinary course of business has been followed. 22

Under the agreement, Exhibit A, appellee was entitled to 20% of

$140,000.00, or the amount of $28,000.00. Appellee, however, cannot
oblige the appellant to pay him in dollars, even if appellant himself had
received his fee for the IRRI project in dollars. This payment in dollars is
prohibited by Republic Act 529 which was enacted on June 16, 1950. Said
act provides as follows:jgc:chanrobles.com.ph

"SECTION 1. Every provision contained in, or made with respect to, any
obligation which provision purports to give the obligee the right to require
payment in gold or in a particular kind of coin or currency other than
Philippine currency or in an amount of money of the Philippines measured
thereby, be as it is hereby declared against public policy, and null, void and
of no effect, and no such provision shall be contained in, or made with
respect to, any obligation hereafter incurred. Every obligation heretofore or
hereafter incurred, whether or not any such provision as to payment is
contained therein or made with respect thereto, shall be discharged upon
payment in any coin or currency which at the time of payment is legal
tender for public and private debts; Provided, That, (a) if the obligation was
incurred prior to the enactment of this Act and required payment in a
particular kind of coin or currency other than Philippine currency, it shall be
discharged in Philippine currency measured at the prevailing rate of
exchange at the time the obligation was incurred, (b) except in case of a
loan made in a foreign currency stipulated to be payable in the same
currency in which case the rate of exchange prevailing at the time of the
stipulated date of payment shall prevail. All coin and currency, including
Central Bank notes, heretofore or hereafter issued and declared by the
Government of the Philippines shall be legal tender for all debts, public and
private."cralaw virtua1aw library

Under the above-quoted provision of Republic Act 529, if the obligation was
incurred prior to the enactment of the Act and require payment in a
particular kind of coin or currency other than the Philippine currency the
same shall be discharged in Philippine currency measured at the prevailing
rate of exchange et the time the obligation was incurred. As We have
adverted to, Republic Act 529 was enacted on June 16, 1950. In the case
now before Us the obligation of appellant to pay appellee the 20% of
$140,000.00, or the sum of $28,000.00, accrued on August 25, 1961, or
after the enactment of Republic Act 529. It follows that the provision of
Republic Act 529 which requires payment at the prevailing rate of exchange
when the obligation was incurred cannot be applied. Republic Act 529 does
not provide for the rate of exchange for the payment of obligation incurred
after the enactment of said Act. The logical conclusion, therefore, is that the
rate of exchange should be that prevailing at the time of payment. This view
finds support in the ruling of this Court in the case of Engel v. Velasco & Co.
23 where this Court held that even if the obligation assumed by the
defendant was to pay the plaintiff a sum of money expressed in American
currency, the indemnity to be allowed should be expressed in Philippine
currency at the rate of exchange at the time of judgment rather than at the
rate of exchange prevailing on the date of defendant’s breach. This is also
the ruling of American courts, as follows:jgc:chanrobles.com.ph

"The value in domestic money of a payment made in foreign money is fixed

with respect to the rate of exchange at the time of payment." (70 CJS. p.
228)

"According to the weight of authority the amount of recovery depends upon

the current rate of exchange, and not the par value of the particular money
involved." (48 C.J. 605-606)

"The value in domestic money of a payment made in foreign money is fixed

in reference to the rate of exchange at the time of such payment." (48 C.J.
605)

It is Our considered view, therefore, that appellant should pay the appellee
the equivalent in pesos of the $28,000.00 at the free market rate of
exchange at the time of payment. And so the trial court did not err when it
held that herein appellant should pay appellee $28,000.00 "to be converted
into the Philippine currency on the basis of the current rate of exchange at
the time of payment of this judgment, as certified to by the Central Bank of
the Philippines, . . ." 24

Appellant also contends that the P57,000.00 that he had paid to appellee
should have been applied to the fees due to the latter on the IRRI project
because such debt was the most onerous to appellant. This contention is
untenable. The Commissioner who was authorized by the trial court to
receive evidence in this case, however, reports that the appellee had not
been paid for the account of the $,28,000.00 which represents the fees of
appellee equivalent to 20% of the $140,000.00 that the appellant received
as fee for the IRRI project. This is a finding of fact by the Commissioner
which was adopted by the trial court. The parties in this case have agreed
that they do not question the finding of fact of the Commissioner. Thus, in
the decision appealed from the lower court says:jgc:chanrobles.com.ph

"At the hearing on the Report of the Commissioner on February 15, 1966,
the counsels for both parties manifested to the court that they have no
objection to the findings of facts of the Commissioner in his report; and
agreed that the said report only poses two (2) legal issues, namely: (1)
whether under the facts stated in the Report, the doctrine of estoppel will
apply; and (2) whether the recommendation in the Report that the payment
of amount due to the plaintiff in dollars is permissible under the law, and, if
not at what rate of exchange should it be paid in pesos (Philippine
currency) . . ."25cralaw:red

In the Commissioner’s report, it is specifically recommended that the

appellant be ordered to pay the plaintiff the sum of" $28,000.00 or its
equivalent as the fee of the plaintiff under Exhibit A on the IRRI project." It
is clear from this report of the Commissioner that no payment for the
account of this $28,000.00 had been made. Indeed, It is not shown in the
record that the peso equivalent of the $28,000.00 had been fixed or agreed
upon by the parties at the different times when the appellant had made
partial payments to the appellee.

3. In his third assignment of error, appellant contends that the lower court
erred in not declaring that the aggregate amount due to him to appellee is
only P15,792.05. Appellant questions the propriety or correctness of most of
the items of fees that were found by the Commissioner to be due to appellee
for services rendered. We believe that it is too late for the appellant to
question the propriety or correctness of those items in the present appeal.
The records shows after the Commissioner had submitted his report the
lower court, on February 15, 1966, issued on the following
order:jgc:chanrobles.com.ph

"When this case was called for hearing today on the report of the
Commissioner, the counsels of the parties manifested that they have no
objection to the findings of facts in the report, However, the report poses
only legal issues, namely: (1) whether under the facts stated in the report,
the doctrine of estoppel will apply; and (2) whether the recommendation in
the report that the alleged payment of the defendant be made in dollars is
permissible by law and, if not, in what rate it should be paid in pesos
(Philippine Currency). For the purpose of resolving these issues the parties
prayed that they be allowed to file their respective memoranda which will aid
the court in the determination of said issues." 26

In consonance with the afore-quoted order of the trial court, the appellant
submitted his memorandum which opens with the following
statements:jgc:chanrobles.com.ph

"As previously manifested, this Memorandum shall be confined

to:jgc:chanrobles.com.ph

"(a) the finding in the Commissioner’s Report that defendant’s defense of

estoppel will not lie (pp. 17-18, Report); and

"(b) the recommendation in the Commissioner’s Report that defendant be

ordered to pay plaintiff the sum of ‘$28,000.00 (U.S.) or its equivalent as
the fee of the plaintiff under Exhibit ‘A’ in the IRRI project.’

"More specifically this Memorandum proposes to demonstrate the affirmative

of three legal issues posed, namely:jgc:chanrobles.com.ph

"First: Whether or not plaintiff’s letter dated December 11, 1961 (Exhibit ‘1’)
and/or Statement of Account (Exhibit ‘1-A’) therein enclosed has the effect
of placing plaintiff in estoppel from thereafter modifying the representations
made in said letter and Statement of Account or of making plaintiff
otherwise bound thereby; or of being decisive or great weight in determining
the true intent of the parties as to the amount of the engineering fees owing
from defendant to plaintiff;

"Second: Whether or not defendant can be compelled to pay whatever

balance is owing to plaintiff on the IRRI (International Rice and Research
Institute) project in United States dollars; and

"Third: Whether or not in case the ruling of this Honorable Court be that
defendant cannot be compelled to pay plaintiff in United States dollars, the
dollar-to-peso convertion rate for determining the peso equivalent of
whatever balance is owing to plaintiff in connection with the IRRI project
should be the 2 to 1 official rate and not any other rate." 27

It is clear, therefore, that what was submitted by appellant to the lower

court for resolution did not include the question of correctness or propriety
of the amounts due to appellee in connection with the different projects for
which the appellee had rendered engineering services. Only legal questions,
as above enumerated, were submitted to the trial court for resolution. So
much so, that the lower court in another portion of its decision said, as
follows:jgc:chanrobles.com.ph

"The objections to the Commissioner’s Report embodied in defendant’s

memorandum of objections, dated March 18, 1966, cannot likewise be
entertained by the Court because at the hearing of the Commissioner’s
Report the parties had expressly manifested that they had no objection to
the findings of facts embodied therein."cralaw virtua1aw library

We, therefore, hold that the third assignment of error of the appellant has
no merit.

4. In his fourth assignment of error, appellant questions the award by the

lower court of P8,000.00 for attorney’s fees. Appellant argues that the
Commissioner, in his report, fixed the sum of P5,000.00 as "just and
reasonable" attorney’s fees, to which amount appellee did not interpose any
objection, and by not so objecting he is bound by said finding; and that,
moreover, the lower court gave no reason in its decision for increasing the
amount to P8,000.00.

Appellee contends that while the parties had not objected to the findings of
the Commissioner, the assessment of attorney’s fees is always subject to the
court’s appraisal, and in increasing the recommended fees from P5,000.00
to P8,000.00 the trial court must have taken into consideration certain
circumstances which warrant the award of P8,000.00 for attorney’s fees.

We believe that the trial court committed no error in this connection. Section
12 of Rule 33 of the Rules of Court, on which the fourth assignment of error
is presumably based, provides that when the parties stipulate that a
commissioner’s findings of fact shall be final, only questions of law arising
from the facts mentioned in the report shall thereafter be considered.
Consequently, an agreement by the parties to abide by the findings of fact of
the commissioner is equivalent to an agreement of facts binding upon them
which the court cannot disregard. The question, therefore, is whether or not
the estimate of the reasonable fees stated in the report of the Commissioner
is a finding of fact.

The report of the Commissioner on this matter reads as

follows:jgc:chanrobles.com.ph

"As regards attorney’s fees, under the provisions of Art. 2208, par (II), the
same may be awarded, and considering the number of hearings held in this
case, the nature of the case (taking into account the technical nature of the
case and the voluminous exhibits offered in evidence), as well as the way
the case was handled by counsel, it is believed, subject to the Court’s
appraisal of the matter, that the sum of P5,000.00 is just and reasonable as
attorney’s fees." 28

It is thus seen that the estimate made by the Commissioner was an

expression of belief, or an opinion. An opinion is different from a fact. The
generally recognized distinction between a statement of "fact" and an
expression of "opinion" is that whatever is susceptible of exact knowledge is
a matter of fact, while that not susceptible of exact knowledge is generally
regarded as an expression of opinion. 29 It has also been said that the word
"fact," as employed in the legal sense, includes "those conclusions reached
by the trior from shifting testimony, weighing evidence, and passing on the
credit of the witnesses, and it does not denote those inferences drawn by
the trial court from the facts ascertained and settled by it. 30 In the case at
bar, the estimate made by the Commissioner of the attorney’s fees was an
inference from the facts ascertained by him, and is, therefore, not a finding
of fact. The trial court was, consequently, not bound by that estimate, in
spite of the manifestation of the parties that they had no objection to the
findings of facts of the Commissioner in his report. Moreover, under Section
11 of Rule 33 of the Rules of Court, the court may adopt, modify, or reject
the report of the commissioner, in whole or in part, and hence, it was within
the trial court’s authority to increase the recommended attorney’s fees of
P5,000.00 to P8,000.00. It is a settled rule that the amount of attorney’s
fees is addressed to the sound discretion of the court. 31

It is true, as appellant contends, that the trial court did not state in the
decision the reasons for increasing the attorney’s fees. The trial court,
however, had adopted the report of the Commissioner, and in adopting the
report the trial court is deemed to have adopted the reasons given by the
Commissioner in awarding attorney’s fees, as stated in the above quoted
portion of the report. Based on the reasons stated in the report, the trial
court must have considered that the reasonable attorney’s fees should be
P8,000.00. Considering that the judgment against the appellant would
amount to more than P100,000.00, We believe that the award of P8,000.00
for attorney’s fees is reasonable.

5. In his fifth assignment of error appellant urges that he is entitled to relief

on his counterclaim. In view of what We have stated in connection with the
preceding four assignments of error, We do not consider it necessary to
dwell any further on this assignment of error.

WHEREFORE, the decision appealed from is affirmed, with costs against the
defendant-appellant. It is so ordered.
CASE #67 Equitable Banking Corp. vs IAC 161 SCRA 518 (1988)

[G.R. No. 74451. May 25, 1988.]

EQUITABLE BANKING CORPORATION, Petitioner, v. THE HONORABLE

INTERMEDIATE APPELLATE COURT and THE EDWARD J. NELL
CO., Respondents.

William R. Veto for Petitioner.

Pelaez, Adriano & Gregorio for Respondents.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; INTERPRETATION OF

CONTRACTS; AMBIGUITY IN THE CONTRACT SHALL BE CONSTRUED
AGAINST THE PARTY WHO CAUSED IT. — The subject check was equivocal
and patently ambiguous. By making the check read; "Pay to the EQUITABLE
BANKING CORPORATION Order of A/C OF CASVILLE ENTERPRISES, INC."
the payee ceased to be indicated with reasonable certainty in contravention
of Section 8 of the Negotiable Instruments Law. As worded, it could be
accepted as deposit to the account of the party named after the symbols
"A/C," or payable to the Bank as trustee, or as an agent, for Casville
Enterprises, Inc., with the latter being the ultimate beneficiary. That
ambiguity is to be taken contra proferentem that is, construed against NELL
who caused the ambiguity and could have also avoided it by the exercise of
a little more care. In the last analysis, it was NELL’s own acts, which put it
into the power of Casals and Casville Enterprises to perpetuate the fraud
against it and, consequently, it must bear the loss (Blondeau, Et Al., v.
Nano, Et Al., 61 Phil. 625 [1935], and other cases cited)

DECISION

MELENCIO-HERRERA, J.:
In this Petition for Review on Certiorari petitioner, Equitable Banking
Corporation, prays that the adverse judgment against it rendered by
respondent Appellate Court, 1 dated 4 October 1985, and its majority
Resolution, dated 28 April 1986, denying petitioner’s Motion for
Reconsideration, 2 be annulled and set aside.

The facts pertinent to this Petition, as summarized by the Trial Court and
adopted by reference by Respondent Appellate Court, emanated from the
case entitled "Edward J. Nell Co. v. Liberato V. Casals, Casville Enterprises,
Inc., and Equitable Banking Corporation" of the Court of First Instance of
Rizal (Civil Case No. 25112), and read:jgc:chanrobles.com.ph

"From the evidence submitted by the parties, the Court finds that sometime
in 1975 defendant Liberato Casals went to plaintiff Edward J. Nell Company
and told its senior sales engineer, Amado Claustro that he was interested in
buying one of the plaintiff’s garrett skidders. Plaintiff was a dealer of
machineries, equipment and supplies. Defendant Casals represented himself
as the majority stockholder, president and general manager of Casville
Enterprises, Inc., a firm engaged in the large scale production, procurement
and processing of logs and lumber products, which had a plywood plant in
Sta. Ana, Metro Manila.

"After defendant Casals talked with plaintiff’s sales engineer, he was referred
to plaintiff’s executive vice-president, Apolonio Javier, for negotiation in
connection with the manner of payment. When Javier asked for cash
payment for the skidders, defendant Casals informed him that his
corporation, defendant Casville Enterprises, Inc., had a credit line with
defendant Equitable Banking Corporation. Apparently, impressed with this
assertion, Javier agreed to have the skidders paid by way of a domestic
letter of credit which defendant Casals promised to open in plaintiff’s favor,
in lieu of cash payment. Accordingly, on December 22, 1975, defendant
Casville, through its president, defendant Casville, ordered from plaintiff two
units of garrett skidders . . .

‘The purchase order for the garrett skidders bearing No. 0051 and dated
December 22, 1975 (Exhibit ‘A’) contained the following terms and
conditions:jgc:chanrobles.com.ph

"Two (2) units GARRETT Skidders Model 30A complete or basically described
in the bulletin.

PRICE: F.O.B. dock

Manila P485,000.00/unit
For two (2) units P970,000.00

SHIPMENT: We will inform you the date and name of the vessel as soon as
arranged.

TERMS: By irrevocable domestic letter of credit to be issued in favor of THE

EDWARD J. NELL CO. or ORDER payable in thirty six (36) months and will be
opened within ninety (90) days after date of shipment. First installment will
be due one hundred eighty (180) days after date of shipment. Interest —
14% per annum’ (Exhibit ‘A’)

x       x       x

". . . in a letter dated April 21, 1976, defendants Casals and Casville
requested from plaintiff the delivery of one (1) unit of the skidders, complete
with tools and cables, to Cagayan de Oro, on or before Saturday, April 24,
1976, on board a Lorenzo shipping vessel, with the information that an
irrevocable Domestic Letter of Credit would be opened in plaintiff of favor on
or before June 30, 1976 under the terms and conditions agreed upon
(Exhibit ‘B’)

"On May 3, 1976, in compliance with defendant Casville’s request, plaintiff

shipped to Cagayan de Oro City a Garrett skidder. Plaintiff paid the shipping
cost in the amount of P10,640.00 because of the verbal assurance of
defendant Casville that it would be covered by the letter of credit soon to be
opened.

x       x       x

"On July 16, 1976, defendant Casals handed to plaintiff a check in the
amount of P300,000.00 postdated August 4, 1976, which was followed by
another check of same date. Plaintiff considered these checks either as
partial payment for the skidder that was already delivered to Cagayan de
Oro or as reimbursement for the marginal deposit that plaintiff was
supposed to pay.

"In a letter dated August 3, 1976 (Exhibit ‘C’), defendants Casals and
Casville informed the plaintiff that their application for a letter of credit for
the payment of the Garrett skidders had been approved by the Equitable
Banking Corporation. However, the defendants said that they would need
the sum of P300,000.00 to stand as collateral or marginal deposit in favor of
Equitable Banking Corporation and an additional amount of P100,000.00,
also in favor of Equitable Banking Corporation, to clear the title of the
Estrada property belonging to defendant Casals which had been approved as
security for the trust receipts to be issued by the bank, covering the above-
mentioned equipment.

"Although the marginal deposit was supposed to be produced by defendant

Casville Enterprises, plaintiff agreed to advance the necessary amount in
order to facilitate the transaction. Accordingly, on August 5, 1976, plaintiff
issued a check in the amount of P400,000.00 (Exhibit ‘2’) drawn against the
First National City Bank and made payable to the order of Equitable Banking
Corporation and with the following notation or memorandum:chanrob1es
virtual 1aw library

‘a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance
on Estrada Property to be used as security for trust receipt for opening L/C
of Garrett Skidders in favor of the Edward J. Nell Co.’ Said check together
with the cash disbursement voucher (Exhibit ‘2-A’) containing the
explanation:chanrob1es virtual 1aw library

‘Payment for marginal deposit and other expenses re opening of L/C for
account of Casville Ent.’

A covering letter (Exhibit ‘3’) was also sent and when the three documents
were presented to Severino Santos, executive vice president of defendant
bank, Santos did not accept them because the terms and conditions required
by the bank for the opening of the letter of credit had not yet been agreed
on.

"On August 9, 1976, defendant Casville wrote the bank applying for two
letters of credit to cover its purchase from plaintiff of two Garrett skidders,
under the following terms and conditions:chanrob1es virtual 1aw library

‘a) On sight Letter of Credit for P485,000.00; b) One 36 months Letter of

Credit for P606,000.00; c) P300,000.00 CASH marginal deposit; d) Real
Estate Collateral to secure the Trust Receipts; e) We shall chattel mortgage
the equipments purchased even after payment of the first L/C as additional
security for the balance of the second L/C and f) Other conditions you deem
necessary to protect the interest of the bank.’

"In a letter dated August 11, 1976 (Exhibit ‘D-1’), defendant bank replied
stating that it was ready to open the letters of credit upon defendant’s
compliance of the following terms and conditions:chanrob1es virtual 1aw
library
‘c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure
the Trust Receipts; e) Chattel Mortgage on the equipment; and f) Other
terms and conditions that our bank may impose.’

"Defendant Casville sent a copy of the foregoing letter to the plaintiff

enclosing three postdated checks. In said letter, plaintiff was informed of the
requirements imposed by the defendant bank pointing out that the ‘cash
marginal required under paragraph (c) is 30% of P1,091,000.00 or
P327,300.00 plus another P100,000.00 to clean up the Estrada property or a
total of P427,300.00’ and that the check covering said amount should be
made payable ‘to the Order of EQUITABLE BANKING CORPORATION for the
account of Casville Enterprises Inc.’ Defendant Casville also stated that the
three (3) enclosed postdated checks were intended as replacement of the
checks that were previously issued to plaintiff to secure the sum of
P427,300.00 that plaintiff would advance to defendant bank for the account
of defendant Casville. All the new checks were postdated November 19,
1976 and drawn in the sum of P145,500.00 (Exhibit ‘F’), P181,800.00
(Exhibit ‘G’) and P100,000.00 (Exhibit ‘H’).

"On the same occasion, defendant Casals delivered to plaintiff TCT No.
11891 of the Register of Deeds of Quezon City and TCT No. 50851 of the
Register of Deeds of Rizal covering two pieces of real estate properties.

"Subsequently, Cesar Umali, plaintiff’s credit and collection manager,

accompanied by a representative of defendant Casville, went to see Severino
Santos to find out the status of the credit line being sought by defendant
Casville. Santos assured Umali that the letters of credit would be opened as
soon as the requirements imposed by defendant bank in its letter dated
August 11, 1976 had been complied with by defendant Casville.

‘On August 16, 1976, plaintiff issued a check for P427,300.00, payable to
the ‘order of EQUITABLE BANKING CORPORATION A/C CASVILLE
ENTERPRISES, INC.’ and drawn against the first National City Bank (Exhibit
‘E-1’). The check did not contain the notation found in the previous check
issued by the plaintiff (Exhibit ‘2’) but the substance of said notation was
reproduced in a covering letter dated August 16, 1976 that went with the
check (Exhibit ‘E’). Both the check and the covering letter were sent to
defendant bank through defendant Casals. Plaintiff entrusted the delivery of
the check and the latter to defendant Casals because it believed that no one,
including defendant Casals, could encash the same as it was made payable
to the defendant bank alone. Besides, defendant Casals was known to the
bank as the one following up the application for the letters of credit.
"Upon receiving the check for P427,300.00 entrusted to him by plaintiff
defendant Casals immediately deposited it with the defendant bank and the
bank teller accepted the same for deposit in defendant Casville’s checking
account. After depositing said check, defendant Casville, acting through
defendant Casals, then withdrew all the amount deposited.

‘Meanwhile, upon their presentation for encashment, plaintiff discovered that

the three checks (Exhibits ‘F’, ‘G’ and ‘H’) in the total amount of
P427,300.00, that were issued by defendant Casville as collateral were all
dishonored for having been drawn against a closed account.

"As defendant Casville failed to pay its obligation to defendant bank, the
latter foreclosed the mortgage executed by defendant Casville on the
Estrada property which was sold in a public auction sale to a third party.

‘Plaintiff allowed some time before following up the application for the letters
of credit knowing that it took time to process the same. However, when the
three checks issued to it by defendant Casville were dishonored, plaintiff
became apprehensive and sent Umali on November 29, 1976, to inquire
about the status of the application for the letters of credit. When plaintiff
was informed that no letters of credit were opened by the defendant bank in
its favor and then discovered that defendant Casville had in the meanwhile
withdrawn the entire amount of P427,300.00, without paying its obligation
to the bank plaintiff filed the instant action.

"While the instant case was being tried, defendants Casals and Casville
assigned the garrett skidder to plaintiff which credited in favor of defendants
the amount of P450,000.00, as partial satisfaction of plaintiff’s claim against
them.

"Defendants Casals and Casville hardly disputed their liability to plaintiff. Not
only did they show lack of interest in disputing plaintiff’s claim by not
appearing in most of the hearings, but they also assigned to plaintiff the
garrett skidder which is an action of clear recognition of their liability.

"What is left for the Court to determine, therefore, is only the liability of
defendant bank to plaintiff.

x       x       x

Resolving that issue, the Trial Court rendered judgment, affirmed by

Respondent Court in toto, the pertinent portion of which reads:chanrob1es
virtual 1aw library
 x       x       x

"Defendants Casals and Casville Enterprises and Equitable Banking

Corporation are ordered to pay plaintiff, jointly and severally, the sum of
P427,300.00, representing the amount of plaintiff’s check which defendant
bank erroneously credited to the account of defendant Casville and which
defendants Casal and Casville misappropriated, with 12% interest thereon
from April 5, 1977, until the said sum is fully paid.

"Defendant Equitable Banking Corporation is ordered to pay plaintiff

attorney’s fees in the sum of P25,000.00.

"Proportionate cost against all the defendants.

"SO ORDERED."cralaw virtua1aw library

The crucial issue to resolve is whether or not petitioner Equitable Banking

Corporation (briefly, the Bank) is liable to private respondent Edward J. Nell
Co. (NELL, for short) for the value of the second check issued by NELL,
Exhibit "E-1," which was made payable

"to the order of EQUITABLE BANKING CORPORATION A/C OF CASVILLE

ENTERPRISES INC."cralaw virtua1aw library

and which the Bank teller credited to the account of Casville.

The Trial Court found that the amount of the second check had been
erroneously credited to the Casville account; held the Bank liable for the
mistake of its employees; and ordered the Bank to pay NELL the value of the
check in the sum of P427,300.00, with legal interest. Explained the Trial
Court:jgc:chanrobles.com.ph

"The Court finds that the check in question was payable only to the
defendant bank and to no one else. Although the words ‘A/C OF CASVILLE
ENTERPRISES INC.’ appear on the face of the check after or under the name
of defendant bank, the payee was still the latter. The addition of said words
did not in any way make Casville Enterprises, Inc. the Payee of the
instrument for the words merely indicated for whose account or in
connection with what account the check was issued by the plaintiff.

"Indeed, the bank teller who received it was fully aware that the check was
not negotiable since he stamped thereon the words ‘NON-NEGOTIABLE For
Payee’s Account Only’ and ‘NON-NEGOTIABLE TELLER NO. 4, August 17,
1976 EQUITABLE BANKING CORPORATION.’

"But said teller should have exercised more prudence in the handling of said
check because it was not made out in the usual manner. The addition of the
words ‘A/C OF CASVILLE ENTERPRISES INC.’ should have placed the teller
on guard and he should have clarified the matter with his superiors. Instead
of doing so, however, the teller decided to rely on his own judgment and at
the risk of making a wrong decision, credited the entire amount in the name
of defendant Casville although the latter was not the payee named in the
check. Such mistake was crucial and was, without doubt, the proximate
cause of plaintiff’s defraudation.

x       x       x

Respondent Appellate Court upheld the above conclusions stating in

addition:chanrobles law library

"1) The appellee made the subject check payable to appellant’s order, for
the account of Casville Enterprises, Inc. In the light of the other facts, the
directive was for the appellant bank to apply the value of the check as
payment for the letter of credit which Casville Enterprises, Inc. had
previously applied for in favor of the appellee (Exhibit D-1, p. 5). The
issuance of the subject check was precisely to meet the bank’s prior
requirement of payment before issuing the letter of credit previously applied
for by Casville Enterprises in favor of the appellee;

x       x       x

We disagree.

1) The subject check was equivocal and patently ambiguous. By making the
check read:jgc:chanrobles.com.ph

"Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE

ENTERPRISES, INC."cralaw virtua1aw library

the payee ceased to be indicated with reasonable certainty in contravention

of Section 8 of the Negotiable Instruments Law. 3 As worded, it could be
accepted as deposit to the account of the party named after the symbols
"A/C," or payable to the Bank as trustee, or as an agent, for Casville
Enterprises, Inc., with the latter being the ultimate beneficiary. That
ambiguity is to be taken contra proferentem that is, construed against NELL
who caused the ambiguity and could have also avoided it by the exercise of
a little more care. Thus, Article 1377 of the Civil Code,
provides:jgc:chanrobles.com.ph

"Art. 1377. The interpretation of obscure words or stipulations in a contract

shall not favor the party who caused the obscurity."cralaw virtua1aw library

2) Contrary to the finding of respondent Appellate Court, the subject check

was, initially, not non-negotiable. Neither was it a crossed check. The
rubber-stamping transversally on the face of the subject check of the words
"Non-negotiable for Payee’s Account Only" between two (2) parallel lines,
and "Non-negotiable, Teller No. 4, August 17, 1986," separately boxed, was
made only by the Bank teller in accordance with customary bank practice,
and not by NELL as the drawer of the check, and simply meant that
thereafter the same check could no longer be negotiated.

3) NELL’s own acts and omissions in connection with the drawing, issuance
and delivery of the 16 August 1976 check, Exhibit "E-1," and its implicit trust
in Casals, were the proximate cause of its own defraudation: (a) The original
check of 5 August 1976, Exhibit "2," was payable to the order solely of
"Equitable Banking Corporation." NELL changed the payee in the subject
check, Exhibit "E-1," however, to "Equitable Banking Corporation, A/C of
Casville Enterprises Inc.," upon Casals request. NELL also eliminated both
the cash disbursement voucher accompanying the check which
read:jgc:chanrobles.com.ph

"Payment for marginal deposit and other expenses re opening of L/C for
account of Casville Ent."cralaw virtua1aw library

and the memorandum:jgc:chanrobles.com.ph

"a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance
on Estrada Property to be used as security for trust receipt for opening L/C
of Garrett Skidders in favor of the Edward J. Nell Co."cralaw virtua1aw
library

Evidencing the real nature of the transaction was merely a separate covering
letter, dated 16 August 1976, which Casals, sinisterly enough, suppressed
from the Bank officials and teller.

(b) NELL entrusted the subject check and its covering letter, Exhibit "E," to
Casals who, obviously, had his own antagonistic interests to promote. Thus
it was that Casals did not purposely present the subject check to the
Executive Vice-President of the Bank, who was aware of the negotiations
regarding the Letter of Credit, and who had rejected the previous check,
Exhibit "2," including its three documents because the terms and conditions
required by the Bank for the opening of the Letter of Credit had not yet been
agreed on.

(c) NELL was extremely accommodating to Casals. Thus, to facilitate the

sales transaction, NELL even advanced the marginal deposit for the garrett
skidder. It is, indeed, abnormal for the seller of goods, the price of which is
to be covered by a letter of credit, to advance the marginal deposit for the
same.

(d) NELL had received three (3) postdated checks all dated 16 November,
1976 from Casville to secure the subject check and had accepted the deposit
with it of two (2) titles of real properties as collateral for said postdated
checks. Thus, NELL was erroneously confident that its interests were
sufficiently protected. Never had it suspected that those postdated checks
would be dishonored, nor that the subject check would be utilized by Casals
for a purpose other than for opening the letter of credit.

In the last analysis, it was NELL’s own acts, which put it into the power of
Casals and Casville Enterprises to perpetuate the fraud against it and,
consequently, it must bear the loss (Blondeau, Et Al., v. Nano, Et Al., 61
Phil. 625 [1935]; Sta. Maria v. Hongkong and Shanghai Banking
Corporation, 89 Phil. 780 [1951]; Republic of the Philippines v. Equitable
Banking Corporation, L-15895, January 30, 1964, 10 SCRA 8).

". . . As between two innocent persons, one of whom must suffer the
consequence of a breach of trust, the one who made it possible by his act of
confidence must bear the loss."cralaw virtua1aw library

WHEREFORE, the Petition is granted and the Decision of respondent

Appellate Court, dated 4 October 1985, and its majority Resolution, dated 28
April 1986, denying petitioner’s Motion for Reconsideration, are hereby SET
ASIDE. The Decision of the then Court of First Instance of Rizal, Branch XI,
is modified in that petitioner Equitable Banking Corporation is absolved from
any and all liabilities to the private respondent, Edward J. Nell Company, and
the Amended Complaint against petitioner bank is hereby ordered dismissed.
No costs.

SO ORDERED.
CASE #68 Caltex Phil. vs CA 212 SCRA 448 (1992)

[G.R. No. 97753. August 10, 1992.]

CALTEX (PHILIPPINES), INC., Petitioner, v. COURT OF APPEALS and

SECURITY BANK AND TRUST COMPANY, Respondents.

Bito, Lozada, Ortega & Castillo, for Petitioners.

Nepomuceno, Hofileña & Guingona for private.

SYLLABUS

1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS LAW; REQUIREMENTS

FOR NEGOTIABILITY; CERTIFICATE OF TIME DEPOSIT AS NEGOTIABLE
INSTRUMENT; CASE AT BAR. — Section 1 of Act No. 2031, otherwise known
as the Negotiable Instruments Law, enumerates the requisites for an
instrument to become negotiable, viz:" (a) It must be in writing and signed
by the maker or drawer; (b) Must contain an unconditional promise or order
to pay a sum certain in money; (c) Must be payable on demand, or at a
fixed or determinable future time; (d) Must be payable to order or to bearer;
and (e) Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty." The CTDs in
question undoubtedly meet the requirements of the law for negotiability. The
parties’ bone of contention is with regard to requisite (d) set forth above. It
is noted that Mr. Timoteo P. Tiangco, Security Bank’s Branch Manager way
back in 1982, testified in open court that the depositor referred to in the
CTDs is no other than Mr. Angel de la Cruz. . . . Contrary to what respondent
court held, the CTDs are negotiable instruments. The documents provide
that the amounts deposited shall be repayable to the depositor. And who,
according to the document, is the depositor? It is the "bearer." The
documents do not say that the depositor is Angel de la Cruz and that the
amounts deposited are repayable specifically to him. Rather, the amounts
are to be repayable to the bearer of the documents or, for that matter,
whosoever may be the bearer at the time of presentment.

2. ID.; ID.; DETERMINATION OF NEGOTIABILITY OR NON-NEGOTIABILITY

OF INSTRUMENT; RULES. — On this score, the accepted rule is that the
negotiability or non-negotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. In the construction of
a bill or note, the intention of the parties is to control, if it can be legally
ascertained. While the writing may be read in the light of surrounding
circumstances in order to more perfectly understand the intent and meaning
of the parties, yet as they have constituted the writing to be the only
outward and visible expression of their meaning, no other words are to be
added to it or substituted in its stead. The duty of the court in such case is
to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning
of the words they have used. What the parties meant must be determined
by what they said.

3. ID.; ID.; NEGOTIATION, DEFINED; HOLDER, DEFINED; IN CASE AT BAR,

DELIVERY OF INSTRUMENT CONSTITUTED THE TRANSFEREE A MERE
HOLDER FOR VALUE BY REASON OF HIS LIEN. — Petitioner’s insistence that
the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from
one person to another in such a manner as to constitute the transferee the
holder thereof, and a holder may be the payee or indorsee of a bill or note,
who is in possession of it, or the bearer thereof, In the present case,
however, there was no negotiation in the sense of a transfer of the legal title
to the CTDs in favor of petitioner in which situation, for obvious reasons,
mere delivery of the bearer CTDs would have sufficed. Here, the delivery
thereof only as security for the purchases of Angel de la Cruz (and we even
disregard the fact that the amount involved was not disclosed) could at the
most constitute petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by mere
delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of the
principal obligation, must be contractually provided for. The pertinent law on
this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien.

4. ID.; CODE OF COMMERCE; RULES TO BE FOLLOWED IN CASE OF LOST

INSTRUMENT PAYABLE TO BEARER; MERELY PERMISSIVE AND NOT
MANDATORY. — A close scrutiny of the provisions of the Code of Commerce
laying down the rules to be followed in case of lost instruments payable to
bearer, which it invokes, will reveal that said provisions, even assuming their
applicability to the CTDs in the case at bar, are merely permissive and not
mandatory. The very first article cited by petitioner speaks for itself: "Art.
548. The dispossessed owner, no matter for what cause it may be, may
apply to the judge or court of competent jurisdiction, asking that the
principal, interest or dividends due or about to become due, be not paid a
third person, as well as in order to prevent the ownership of the instrument
that a duplicate be issued him." The use of the word "may" in said provision
shows that it is not mandatory but discretionary on the part of the
"dispossessed owner" to apply to the judge or court of competent jurisdiction
for the issuance of a duplicate of the lost instrument. Where the provision
reads "may," this word shows that it is not mandatory but discretional. The
word "may" is usually permissive, not mandatory. It is an auxiliary verb
indicating liberty, opportunity, permission and possibility.

5. CIVIL LAW; OBLIGATIONS AND CONTRACTS; INTERPRETATION OF

OBSCURE WORDS OR STIPULATIONS IN CONTRACT; SHALL NOT FAVOR
THE PARTY WHO CAUSE THE OBSCURITY; CASE AT BAR. — If it was really
the intention of respondent bank to pay the amount to Angel de la Cruz only,
it could have with facility so expressed that fact in clear and categorical
terms in the documents, instead of having the word "BEARER" stamped on
the space provided for the name of the depositor in each CTD. On the
wordings of the documents, therefore, the amounts deposited are repayable
to whoever may be the bearer thereof. Thus, petitioner’s aforesaid witness
merely declared that Angel de la Cruz is the depositor "insofar as the bank is
concerned," but obviously other parties not privy to the transaction between
them would not be in a position to know that the depositor is not the bearer
stated in the CTDs. Hence, the situation would require any party dealing with
the CTDs to go behind the plain import of what is written thereon to unravel
the agreement of the parties thereto through facts aliunde. This need for
resort to extrinsic evidence is what is sought to be avoided by the Negotiable
Instruments Law and calls for the application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity.

6. ID.; ID.; ESTOPPEL; EFFECTS; CASE AT BAR. — Any doubt as to whether

the CTDs were delivered as payment for the fuel products or as a security
has been dissipated and resolved in favor of the latter by petitioner’s own
authorized and responsible representative himself. In a letter dated
November 26, 1982 addressed to respondent Security Bank, J. Q. Aranas,
Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were
negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel
products" (Emphasis ours.) This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an admission
or representation is rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person relying thereon. A party
may not go back on his own acts and representations to the prejudice of the
other party who relied upon them.

7. ID.; ID.; CHARACTER OF TRANSACTION DETERMINED BY INTENTION OF

THE PARTIES. — This disquisition in Integrated Realty Corporation, Et. Al. v.
Philippine National Bank, Et. Al. is apropos: ". . . Adverting again to the
Court’s pronouncements in Lopez, supra, we quote therefrom: ‘The
character of the transaction between the parties is to be determined by their
intention, regardless of what language was used or what the form of the
transfer was. If it was intended to secure the payment of money, it must be
construed as a pledge; but if there was some other intention, it is not a
pledge. However, even though a transfer, if regarded by itself, appears to
have been absolute, its object and character might still be qualified and
explained by contemporaneous writing declaring it to have been a deposit of
the property as collateral security. It has been said that a transfer of
property by the debtor to a creditor, even if sufficient on its face to make an
absolute conveyance, should be treated as a pledge if the debt continues in
existence and is not discharged by the transfer, and that accordingly the use
of the terms ordinarily importing conveyance of absolute ownership will not
be given that effect in such a transaction if they are also commonly used in
pledges and mortgages and therefore do not unqualifiedly indicate a transfer
of absolute ownership, in the absence of clear and unambiguous language or
other circumstances excluding an intent to pledge.’"

8. ID.; PLEDGE OF INCORPOREAL RIGHTS; REQUISITES; REQUIREMENT

FOR PLEDGE TO TAKE EFFECT AGAINST THIRD PERSONS; NOT OBSERVED
IN CASE AT BAR. — As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights, which inceptively
provide: "Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, . . . may also be pledged. The instrument proving the right
pledged shall be delivered to the creditor, and if negotiable, must be
indorsed." "Art. 2096. A pledge shall not take effect against third persons if
a description of the thing pledged and the date of the pledge do not appear
in a public instrument." Aside from the fact that the CTDs were only
delivered but not indorsed, the factual findings of respondent court quoted
at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement
between it and Angel de la Cruz. Consequently, the mere delivery of the
CTDs did not legally vest in petitioner any right effective against and binding
upon respondent bank. The requirement under Article 2096 aforementioned
is not a mere rule of adjective law prescribing the mode whereby proof may
be made of the date of a pledge contract, but a rule of substantive law
prescribing a condition without which the execution of a pledge contract
cannot affect third persons adversely.

9. ID.; ASSIGNMENT OF INCORPOREAL RIGHTS; REQUIREMENT FOR

ASSIGNMENT TO TAKE EFFECT AGAINST THIRD PERSONS; OBSERVED IN
CASE AT BAR. — The assignment of the CTDs made by Angel de la Cruz in
favor of respondent bank was embodied in a public instrument. With regard
to this other mode of transfer, the Civil Code specifically declares: "Art.
1625. An assignment of credit, right or action shall produce no effect as
against third persons, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case the assignment
involves real property." Respondent bank duly complied with this statutory
requirement Contrarily, Petitioner, whether as purchaser, assignee or
lienholder of the CTDs, neither proved the amount of its credit or the extent
of its lien nor the execution of any public instrument which could affect or
bind private Respondent. Necessarily, therefore, as between petitioner and
respondent bank, the latter has definitely the better right over the CTDs in
question.

10. REMEDIAL LAW; EVIDENCE; BURDEN OF PROOF AND PRESUMPTIONS;

ESTOPPEL IN PAIS; EFFECT. — In the law of evidence, whenever a party
has, by his own declaration, act, or omission, intentionally and deliberately
led another to believe a particular thing true, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act, or omission, be
permitted to falsify it.

11. ID.; ID.; ID.; EVIDENCE WILLFULLY SUPPRESSED WOULD BE ADVERSE

IF PRODUCED; CASE AT BAR. — When respondent bank, as defendant in the
court below, moved for a bill of particulars therein praying, among others,
that petitioner, as plaintiff, be required to aver with sufficient definiteness or
particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued
a receipt showing that the CTDs were delivered to it by De la Cruz as
payment of the latter’s alleged indebtedness to it, plaintiff corporation
opposed the motion. Had it produced the receipt prayed for, it could have
proved, if such truly was the fact, that the CTDs were delivered as payment
and not as security. Having opposed the motion, petitioner now labors under
the presumption that evidence willfully suppressed would be adverse if
produced.

12. ID.; CIVIL PROCEDURE; APPEALS; ISSUES NOT RAISED IN TRIAL

COURT CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL; CASE AT BAR.
— Pre-trial is primarily intended to make certain that all issues necessary to
the disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all issues
of law and fact which they intend to raise at the trial, except such as may
involve privileged or impeaching matters. The determination of issues at a
pre-trial conference bars the consideration of other questions on appeal. To
accept petitioner’s suggestion that respondent bank’s supposed negligence
may be considered encompassed by the issues on its right to preterminate
and receive the proceeds of the CTDs would be tantamount to saying that
petitioner could raise on appeal any issue. We agree with private respondent
that the broad ultimate issue of petitioner’s entitlement to the proceeds of
the questioned certificates can be premised on a multitude of other legal
reasons and causes of action, of which respondent bank’s supposed
negligence is only one. Hence, petitioner’s submission, if accepted, would
render a pre-trial delimitation of issues a useless exercise.

DECISION

REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the
decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV
No. 23615 1 affirming, with modifications, the earlier decision of the
Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint
filed therein by herein petitioner against private respondent bank.

The undisputed background of this case, as found by the court a quo and
adopted by respondent court, appears of record:jgc:chanrobles.com.ph

"1. On various dates, defendant, a commercial banking institution, through

its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of
one Angel dela Cruz who deposited with herein defendant the aggregate
amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and
Statement of Issues, Original Records, p. 207; Defendant’s Exhibits 1 to
280):chanrob1es virtual 1aw library

CTD CTD

Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000

2 Mar. 82 74701 to 74740 40 160,000

4 Mar. 82 90127 to 90146 20 80,000

5 Mar. 82 74797 to 94800 4 16,000

5 Mar. 82 89965 to 89986 22 88,000

5 Mar. 82 70147 to 90150 4 16,000

8 Mar. 82 90001 to 90020 20 80,000

9 Mar. 82 90023 to 90050 28 112,000

9 Mar. 82 89991 to 90000 10 40,000

9 Mar. 82 90251 to 90272 22 88,000

—— —————

Total 280 P1,120,000

=== =======

"2. Angel dela Cruz delivered the said certificates of time deposit (CTDs) to
herein plaintiff in connection with his purchase of fuel products from the
latter (Original Record, p. 208).

"3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco,
the Sucat Branch Manager, that he lost all the certificates of time deposit in
dispute. Mr. Tiangco advised said depositor to execute and submit a
notarized Affidavit of Loss, as required by defendant bank’s procedure, if he
desired replacement of said lost CTDs (TSN, February 9, 1987. pp. 48-
50).cralawnad

"4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant
bank the required Affidavit of Loss (Defendant’s Exhibit 281). On the basis of
said affidavit of loss, 280 replacement CTDs were issued in favor of said
depositor (Defendant’s Exhibits 282-561).

"5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from
defendant bank in the amount of Eight Hundred Seventy Five Thousand
Pesos (P875,000.00). On the same date, said depositor executed a notarized
Deed of Assignment of Time Deposit (Exhibit 562) which stated, among
others, that he (dela Cruz) surrenders to defendant bank `full control of the
indicated time deposits from and after date of the assignment and further
authorizes said bank to pre-terminate, set-off and ‘apply the said time
deposits to the payment of whatever amount or amounts may be due’ on the
loan upon its maturity (TSN, February 9, 1987, pp. 60-62).

"6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff

Caltex (Phils.) Inc. went to the defendant bank’s Sucat branch and
presented for verification the CTDs declared lost by Angel dela Cruz alleging
that the same were delivered to herein plaintiff `as security for purchases
made with Caltex Philippines, Inc.’ by said depositor (TSN, February 9, 1987,
pp. 54-68).

"7. On November 26, 1982, defendant received a letter (Defendant’s Exhibit

563) from herein plaintiff formally informing it of its possession of the CTDs
in question and of its decision to preterminate the same.

"8. On December 8, 1982, plaintiff was requested by herein defendant to

furnish the former ‘a copy of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz’ as well as ‘the details of Mr. Angel dela
Cruz’ obligations against which’ plaintiff proposed to apply the time deposits
(Defendant’s Exhibit 564).

"9. No copy of the requested documents was furnished herein defendant.

"10. Accordingly, defendant bank rejected the plaintiff’s demand and claim
for payment of the value of the CTDs in a letter dated February 7, 1983
(Defendant’s Exhibit 566).

"11. In April 1983, the loan of Angel dela Cruz with the defendant bank
matured and fell due and on August 5, 1983, the latter set-off and applied
the time deposits in question to the payment of the matured loan (TSN,
February 9, 1987, pp. 130-131).

"12. In view of the foregoing, plaintiff filed the instant complaint, praying
that defendant bank be ordered to pay it the aggregate value of the
certificates of time deposit of P1,120,000.00 plus accrued interest and
compounded interest therein at 16% per annum, moral and exemplary
damages as well as attorney’s fees.

"After trial, the court a quo rendered its decision dismissing the instant
complaint." 3

On appeal, as earlier stated, respondent court affirmed the lower court’s

dismissal of the complaint, hence this petition wherein petitioner faults
respondent court in ruling (1) that the subject certificates of deposit are
non-negotiable despite being clearly negotiable instruments; (2) that
petitioner did not become a holder in due course of the said certificates of
deposit; and (3) in disregarding the pertinent provisions of the Code of
Commerce relating to lost instruments payable to bearer. 4

The instant petition is bereft of merit.chanrobles virtual lawlibrary

A sample text of the certificates of time deposit is reproduced below to

provide a better understanding of the issues involved in this recourse.

"SECURITY BANK

AND TRUST COMPANY No. 90101

6778 Ayala Ave., Makati

Metro Manila, Philippines

SUCAT OFFICE P 4.000.00

CERTIFICATE OF DEPOSIT

Rate 16%

Date of Maturity FEB 23, 1984 FEB 22 1982, 19___

This is to Certify that BEARER has deposited in this Bank the sum of PESOS:
FOUR SECURITY BANK THOUSAND ONLY. SUCAT OFFICE P4,000 & 00 CTS
Pesos, Philippine Currency, repayable to said depositor 731 days after date,
upon presentation and surrender of this certificate, with interest at the rate
of 16% per cent per annum.

(Sgd. Illegible (Sgd. Illegible)

_______________________ ______________________

AUTHORIZED SIGNATURES" 5

______________

Respondent court ruled that the CTDs in question are non-negotiable

instruments, rationalizing as follows:jgc:chanrobles.com.ph

". . . While it may be true that the word `bearer’ appears rather boldly in the
CTDs issued, it is important to note that after the word `BEARER’ stamped
on the space provided supposedly for the name of the depositor, the words
`has deposited’ a certain amount follows. The document further provides
that the amount deposited shall be `repayable to said depositor’ on the
period indicated. Therefore, the text of the instrument(s) themselves
manifest with clarity that they are payable, not to whoever purports to be
the `bearer’ but only to the specified person indicated therein, the depositor.
In effect, the appellee bank acknowledges its depositor Angel dela Cruz as
the person who made the deposit and further engages itself to pay said
depositor the amount indicated thereon at the stipulated date." 6

We disagree with these findings and conclusions, and hereby hold that the
CTDs in question are negotiable instruments. Section 1 of Act No. 2031,
otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable,
viz:jgc:chanrobles.com.ph

"(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in

money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or

otherwise indicated therein with reasonable certainty."cralaw virtua1aw
library

The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties’ bone of contention is with regard to requisite (d)
set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank’s
Branch Manager way back in 1982, testified in open court that the depositor
referred to in the CTDs is no other than Mr. Angel de la Cruz.chanrobles
virtual lawlibrary

x       x       x

"Atty. Calida:chanrob1es virtual 1aw library

q In other words Mr. Witness, you are saying that per books of the bank, the
depositor referred (sic) in these certificates states that it was Angel dela
Cruz? witness:chanrob1es virtual 1aw library
a Yes, your Honor, and we have the record to show that Angel dela Cruz was
the one who cause (sic) the amount.

Atty. Calida:chanrob1es virtual 1aw library

q And no other person or entity or company, Mr. Witness?

witness:chanrob1es virtual 1aw library

a None, your Honor." 7

x       x       x

"Atty. Calida:chanrob1es virtual 1aw library

q Mr. Witness, who is the depositor identified in all of these certificates of

time deposit insofar as the bank is concerned?

witness:chanrob1es virtual 1aw library

a Angel dela Cruz is the depositor." 8

x       x       x

On this score, the accepted rule is that the negotiability or non-negotiability

of an instrument is determined from the writing, that is, from the face of the
instrument itself. 9 In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained. 10 While the writing may
be read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its stead.
The duty of the court in such case is to ascertain, not what the parties may
have secretly intended as contradistinguished from what their words
express, but what is the meaning of the words they have used. What the
parties meant must be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable

instruments. The documents provide that the amounts deposited shall be
repayable to the depositor. And who, according to the document, is the
depositor? It is the "bearer." The documents do not say that the depositor is
Angel de la Cruz and that the amounts deposited are repayable specifically
to him. Rather, the amounts are to be repayable to the bearer of the
documents or, for that matter, whosoever may be the bearer at the time of
presentment.

If it was really the intention of respondent bank to pay the amount to Angel
de la Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word "BEARER"
stamped on the space provided for the name of the depositor in each CTD.
On the wordings of the documents, therefore, the amounts deposited are
repayable to whoever may be the bearer thereof. Thus, petitioner’s aforesaid
witness merely declared that Angel de la Cruz is the depositor "insofar as the
bank is concerned," but obviously other parties not privy to the transaction
between them would not be in a position to know that the depositor is not
the bearer stated in the CTDs. Hence, the situation would require any party
dealing with the CTDs to go behind the plain import of what is written
thereon to unravel the agreement of the parties thereto through facts
aliunde. This need for resort to extrinsic evidence is what is sought to be
avoided by the Negotiable Instruments Law and calls for the application of
the elementary rule that the interpretation of obscure words or stipulations
in a contract shall not favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This
time, the answer is in the negative. The records reveal that Angel de la Cruz,
whom petitioner chose not to implead in this suit for reasons of its own,
delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for petitioner,
although the CTDs are bearer instruments, a valid negotiation thereof for the
true purpose and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For, although petitioner
seeks to deflect this fact, the CTDs were in reality delivered to it as a
security for De la Cruz’ purchases of its fuel products. Any doubt as to
whether the CTDs were delivered as payment for the fuel products or as a
security has been dissipated and resolved in favor of the latter by
petitioner’s own authorized and responsible representative himself.cralawnad

In a letter dated November 26, 1982 addressed to respondent Security

Bank, J. Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates
of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his
purchases of fuel products" (Underscoring ours.) 13 This admission is
conclusive upon petitioner, its protestations notwithstanding. Under the
doctrine of estoppel, an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as against the
person relying thereon. 14 A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them. 15
In the law of evidence, whenever a party has, by his own declaration, act, or
omission, intentionally and deliberately led another to believe a particular
thing true, and to act upon such belief, he cannot, in any litigation arising
out of such declaration, act, or omission, be permitted to falsify it. 16

If it were true that the CTDs were delivered as payment and not as security,
petitioner’s credit manager could have easily said so, instead of using the
words "to guarantee" in the letter aforequoted. Besides, when respondent
bank, as defendant in the court below, moved for a bill of particulars therein
17 praying, among others, that petitioner, as plaintiff, be required to aver
with sufficient definiteness or particularity (a) the due date or dates of
payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b)
whether or not it issued a receipt showing that the CTDs were delivered to it
by De la Cruz as payment of the latter’s alleged indebtedness to it, plaintiff
corporation opposed the motion. 18 Had it produced the receipt prayed for,
it could have proved, if such truly was the fact, that the CTDs were delivered
as payment and not as security. Having opposed the motion, petitioner now
labors under the presumption that evidence willfully suppressed would be
adverse if produced. 19

Under the foregoing circumstances, this disquisition in Integrated Realty

Corporation, Et. Al. v. Philippine National Bank, Et. Al. 20 is
apropos:jgc:chanrobles.com.ph

". . . Adverting again to the Court’s pronouncements in Lopez, supra, we

quote therefrom:chanrob1es virtual 1aw library

‘The character of the transaction between the parties is to be determined by

their intention, regardless of what language was used or what the form of
the transfer was. If it was intended to secure the payment of money, it must
be construed as a pledge; but if there was some other intention, it is not a
pledge. However, even though a transfer, if regarded by itself, appears to
have been absolute, its object and character might still be qualified and
explained by contemporaneous writing declaring it to have been a deposit of
the property as collateral security. It has been said that a transfer of
property by the debtor to a creditor, even if sufficient on its face to make an
absolute conveyance, should be treated as a pledge if the debt continues in
existence and is not discharged by the transfer, and that accordingly the use
of the terms ordinarily importing conveyance of absolute ownership will not
be given that effect in such a transaction if they are also commonly used in
pledges and mortgages and therefore do not unqualifiedly indicate a transfer
of absolute ownership, in the absence of clear and unambiguous language or
other circumstances excluding an intent to pledge.’"
Petitioner’s insistence that the CTDs were negotiated to it begs the question.
Under the Negotiable Instruments Law, an instrument is negotiated when it
is transferred from one person to another in such a manner as to constitute
the transferee the holder thereof, 21 and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof, 22
In the present case, however, there was no negotiation in the sense of a
transfer of the legal title to the CTDs in favor of petitioner in which situation,
for obvious reasons, mere delivery of the bearer CTDs would have sufficed.
Here, the delivery thereof only as security for the purchases of Angel de la
Cruz (and we even disregard the fact that the amount involved was not
disclosed) could at the most constitute petitioner only as a holder for value
by reason of his lien. Accordingly, a negotiation for such purpose cannot be
effected by mere delivery of the instrument since, necessarily, the terms
thereof and the subsequent disposition of such security, in the event of non-
payment of the principal obligation, must be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien. 23 As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights, 24 which inceptively
provide:jgc:chanrobles.com.ph

"Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . .

may also be pledged. The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be indorsed."cralaw
virtua1aw library

"Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not appear in
a public instrument."cralaw virtua1aw library

Aside from the fact that the CTDs were only delivered but not indorsed, the
factual findings of respondent court quoted at the start of this opinion show
that petitioner failed to produce any document evidencing any contract of
pledge or guarantee agreement between it and Angel de la Cruz. 25
Consequently, the mere delivery of the CTDs did not legally vest in petitioner
any right effective against and binding upon respondent bank. The
requirement under Article 2096 aforementioned is not a mere rule of
adjective law prescribing the mode whereby proof may be made of the date
of a pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third persons
adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in
favor of respondent bank was embodied in a public instrument. 27 With
regard to this other mode of transfer, the Civil Code specifically
declares:jgc:chanrobles.com.ph

"Art. 1625. An assignment of credit, right or action shall produce no effect as

against third persons, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case the assignment
involves real property."cralaw virtua1aw library

Respondent bank duly complied with this statutory requirement

Contrarily, Petitioner, whether as purchaser, assignee or lienholder of the
CTDs, neither proved the amount of its credit or the extent of its lien nor the
execution of any public instrument which could affect or bind
private Respondent. Necessarily, therefore, as between petitioner and
respondent bank, the latter has definitely the better right over the CTDs in
question.chanrobles.com:cralaw:red

Finally, petitioner faults respondent court for refusing to delve into the
question of whether or not private respondent observed the requirements of
the law in the case of lost negotiable instruments and the issuance of
replacement certificates therefor, on the ground that petitioner failed to raise
that issue in the lower court. 28

On this matter, we uphold respondent court’s finding that the aspect of

alleged negligence of private respondent was not included in the stipulation
of the parties and in the statement of issues submitted by them to the trial
court. 29 The issues agreed upon by them for resolution in this case
are:jgc:chanrobles.com.ph

"1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the
CTDs against the depositor’s loan by virtue of the assignment (Annex ‘C’).

3. Whether or not there was legal compensation or set off involving the
amount covered by the CTDs and the depositor’s outstanding account with
defendant, if any.

4. Whether or not plaintiff could compel defendant to preterminate the CTDs

before the maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney’s fees and
litigation expenses from each other."cralaw virtua1aw library

As respondent court correctly observed, with appropriate citation of some

doctrinal authorities, the foregoing enumeration does not include the issue of
negligence on the part of respondent bank. An issue raised for the first time
on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel. 30 Questions raised on appeal must be within the issues
framed by the parties and, consequently, issues not raised in the trial court
cannot be raised for the first time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all issues
of law and fact which they intend to raise at the trial, except such as may
involve privileged or impeaching matters. The determination of issues at a
pre-trial conference bars the consideration of other questions on appeal. 32

To accept petitioner’s suggestion that respondent bank’s supposed

negligence may be considered encompassed by the issues on its right to
preterminate and receive the proceeds of the CTDs would be tantamount to
saying that petitioner could raise on appeal any issue. We agree with private
respondent that the broad ultimate issue of petitioner’s entitlement to the
proceeds of the questioned certificates can be premised on a multitude of
other legal reasons and causes of action, of which respondent bank’s
supposed negligence is only one. Hence, petitioner’s submission, if accepted,
would render a pre-trial delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the
court below, petitioner still cannot have the odds in its favor. A close
scrutiny of the provisions of the Code of Commerce laying down the rules to
be followed in case of lost instruments payable to bearer, which it invokes,
will reveal that said provisions, even assuming their applicability to the CTDs
in the case at bar, are merely permissive and not mandatory. The very first
article cited by petitioner speaks for itself:jgc:chanrobles.com.ph

"Art. 548. The dispossessed owner, no matter for what cause it may be, may
apply to the judge or court of competent jurisdiction, asking that the
principal, interest or dividends due or about to become due, be not paid a
third person, as well as in order to prevent the ownership of the instrument
that a duplicate be issued him." (Emphases ours.)
 x       x       x

The use of the word "may" in said provision shows that it is not mandatory
but discretionary on the part of the "dispossessed owner" to apply to the
judge or court of competent jurisdiction for the issuance of a duplicate of the
lost instrument. Where the provision reads "may," this word shows that it is
not mandatory but discretional. 34 The word "may" is usually permissive,
not mandatory. 35 It is an auxiliary verb indicating liberty, opportunity,
permission and possibility. 36

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to

558 of the Code of Commerce, on which petitioner seeks to anchor
respondent bank’s supposed negligence, merely established, on the one
hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on
the other, an option in favor of the party liable thereon who, for some valid
ground, may elect to refuse to issue a replacement of the instrument,
Significantly, none of the provisions cited by petitioner categorically restricts
or prohibits the issuance a duplicate or replacement instrument sans
compliance with the procedure outlined therein, and none establishes a
mandatory precedent requirement therefor.chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph

WHEREFORE, on the modified premises above set forth, the petition is

DENIED and the appealed decision is hereby AFFIRMED.

SO ORDERED.
CASE #69 National Bank vs Mla Oil Refining Co., 43 Phil. 444 (1922)

G.R. No. L-18103 June 8, 1922

PHILIPPINE NATIONAL BANK, Plaintiff-Appellee, vs. MANILA OIL

REFINING & BY-PRODUCTS COMPANY, INC., Defendant-Appellant.

Antonio Gonzalez for appellant.

Roman J. Lacson for appellee.
Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs, Mc
Donough and Johnson; Julian Wolfson; Ross and Lawrence; Francis B.
Mahoney, and Jose A. Espiritu, amici curiae.

MALCOLM, J.:

The question of first impression raised in this case concerns the validity in
this jurisdiction of a provision in a promissory note whereby in case the
same is not paid at maturity, the maker authorizes any attorney to appear
and confess judgment thereon for the principal amount, with interest, costs,
and attorney's fees, and waives all errors, rights to inquisition, and appeal,
and all property exceptions.chanroblesvirtualawlibrary chanrobles virtual law
library

On May 8, 1920, the manager and the treasurer of the Manila Oil Refining &
By-Products Company, Inc., executed and delivered to the Philippine
National Bank, a written instrument reading as follows:

RENEWAL.
P61,000.00

MANILA, P.I., May 8, 1920. chanrobles virtual law library

On demand after date we promise to pay to the order of the Philippine

National Bank sixty-one thousand only pesos at Philippine National Bank,
Manila, P.I.chanroblesvirtualawlibrary chanrobles virtual law library

Without defalcation, value received; and to hereby authorize any attorney in

the Philippine Islands, in case this note be not paid at maturity, to appear in
my name and confess judgment for the above sum with interest, cost of suit
and attorney's fees of ten (10) per cent for collection, a release of all errors
and waiver of all rights to inquisition and appeal, and to the benefit of all
laws exempting property, real or personal, from levy or sale. Value received.
No. ____ Due ____

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) VICENTE SOTELO,

Manager.

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) RAFAEL LOPEZ,

Treasurer

The Manila Oil Refining and By-Products Company, Inc. failed to pay the
promissory note on demand. The Philippine National Bank brought action in
the Court of First Instance of Manila, to recover P61,000, the amount of the
note, together with interest and costs. Mr. Elias N. Rector, an attorney
associated with the Philippine National Bank, entered his appearance in
representation of the defendant, and filed a motion confessing judgment.
The defendant, however, in a sworn declaration, objected strongly to the
unsolicited representation of attorney Recto. Later, attorney Antonio
Gonzalez appeared for the defendant and filed a demurrer, and when this
was overruled, presented an answer. The trial judge rendered judgment on
the motion of attorney Recto in the terms of the
complaint.chanroblesvirtualawlibrary chanrobles virtual law library

The foregoing facts, and appellant's three assignments of error, raise

squarely the question which was suggested in the beginning of this opinion.
In view of the importance of the subject to the business community, the
advice of prominent attorneys-at-law with banking connections, was
solicited. These members of the bar responded promptly to the request of
the court, and their memoranda have proved highly useful in the solution of
the question. It is to the credit of the bar that although the sanction of
judgement notes in the Philippines might prove of immediate value to
clients, every one of the attorneys has looked upon the matter in a big way,
with the result that out of their independent investigations has come a
practically unanimous protest against the recognition in this jurisdiction of
judgment notes. 1 chanrobles virtual law library

Neither the Code of Civil Procedure nor any other remedial statute expressly
or tacitly recognizes a confession of judgment commonly called a judgment
note. On the contrary, the provisions of the Code of Civil Procedure, in
relation to constitutional safeguards relating to the right to take a man's
property only after a day in court and after due process of law, contemplate
that all defendants shall have an opportunity to be heard. Further, the
provisions of the Code of Civil Procedure pertaining to counter claims argue
against judgment notes, especially as the Code provides that in case the
defendant or his assignee omits to set up a counterclaim, he cannot
afterwards maintain an action against the plaintiff therefor. (Secs. 95, 96,
97.) At least one provision of the substantive law, namely, that the validity
and fulfillment of contracts cannot be left to the will of one of the contracting
parties (Civil Code, art. 1356), constitutes another indication of fundamental
legal purposes.chanroblesvirtualawlibrary chanrobles virtual law library

The attorney for the appellee contends that the Negotiable Instruments Law
(Act No. 2031) expressly recognizes judgment notes, and that they are
enforcible under the regular procedure. The Negotiable Instruments Law, in
section 5, provides that "The negotiable character of an instrument
otherwise negotiable is not affected by a provision which ". . . ( b)
Authorizes a confession of judgment if the instrument be not paid at
maturity." We do not believe, however, that this provision of law can be
taken to sanction judgments by confession, because it is a portion of a
uniform law which merely provides that, in jurisdiction where judgment
notes are recognized, such clauses shall not affect the negotiable character
of the instrument. Moreover, the same section of the Negotiable
Instruments. Law concludes with these words: "But nothing in this section
shall validate any provision or stipulation otherwise illegal." chanrobles
virtual law library

The court is thus put in the position of having to determine the validity in the
absence of statute of a provision in a note authorizing an attorney to appear
and confess judgment against the maker. This situation, in reality, has its
advantages for it permits us to reach that solution which is best grounded in
the solid principles of the law, and which will best advance the public
interest.chanroblesvirtualawlibrary chanrobles virtual law library

The practice of entering judgments in debt on warrants of attorney is of

ancient origin. In the course of time a warrant of attorney to confess
judgement became a familiar common law security. At common law, there
were two kinds of judgments by confession; the one a judgment by cognovit
actionem, and the other by confession relicta verificatione. A number of
jurisdictions in the United States have accepted the common law view of
judgments by confession, while still other jurisdictions have refused to
sanction them. In some States, statutes have been passed which have either
expressly authorized confession of judgment on warrant of attorney, without
antecedent process, or have forbidden judgments of this character. In the
absence of statute, there is a conflict of authority as to the validity of a
warrant of attorney for the confession of judgement. The weight of opinion is
that, unless authorized by statute, warrants of attorney to confess judgment
are void, as against public policy.chanroblesvirtualawlibrary chanrobles
virtual law library

Possibly the leading case on the subject is First National Bank of Kansas City
vs. White ([1909], 220 Mo., 717; 16 Ann. Cas., 889; 120 S. W., 36; 132
Am. St. Rep., 612). The record in this case discloses that on October 4,
1990, the defendant executed and delivered to the plaintiff an obligation in
which the defendant authorized any attorney-at-law to appear for him in an
action on the note at any time after the note became due in any court of
record in the State of Missouri, or elsewhere, to waive the issuing and
service of process, and to confess judgement in favor of the First National
Bank of Kansas City for the amount that might then be due thereon, with
interest at the rate therein mentioned and the costs of suit, together with an
attorney's fee of 10 per cent and also to waive and release all errors in said
proceedings and judgment, and all proceedings, appeals, or writs of error
thereon. Plaintiff filed a petition in the Circuit Court to which was attached
the above-mentioned instrument. An attorney named Denham appeared
pursuant to the authority given by the note sued on, entered the appearance
of the defendant, and consented that judgement be rendered in favor of the
plaintiff as prayed in the petition. After the Circuit Court had entered a
judgement, the defendants, through counsel, appeared specially and filed a
motion to set it aside. The Supreme Court of Missouri, speaking through Mr.
Justice Graves, in part said:

But going beyond the mere technical question in our preceding paragraph
discussed, we come to a question urged which goes to the very root of this
case, and whilst new and novel in this state, we do not feel that the case
should be disposed of without discussing and passing upon that question.

x x x           x x x           x x xchanrobles virtual law library

And if this instrument be considered as security for a debt, as it was by the

common law, it has never so found recognition in this state. The policy of
our law has been against such hidden securities for debt. Our Recorder's Act
is such that instruments intended as security for debt should find a place in
the public records, and if not, they have often been viewed with suspicion,
and their bona fides often questioned.chanroblesvirtualawlibrary chanrobles
virtual law library

Nor do we thing that the policy of our law is such as to thus place a debtor in
the absolute power of his creditor. The field for fraud is too far enlarged by
such an instrument. Oppression and tyranny would follow the footsteps of
such a diversion in the way of security for debt. Such instruments procured
by duress could shortly be placed in judgment in a foreign court and much
distress result therefrom.chanroblesvirtualawlibrary chanrobles virtual law
library

Again, under the law the right to appeal to this court or some other appellate
court is granted to all persons against whom an adverse judgment is
rendered, and this statutory right is by the instrument stricken down. True it
is that such right is not claimed in this case, but it is a part of the bond and
we hardly know why this pound of flesh has not been demanded. Courts
guard with jealous eye any contract innovations upon their jurisdiction. The
instrument before us, considered in the light of a contract, actually reduces
the courts to mere clerks to enter and record the judgment called for
therein. By our statute (Rev. St. 1899, sec. 645) a party to a written
instrument of this character has the right to show a failure of consideration,
but this right is brushed to the wind by this instrument and the jurisdiction
of the court to hear that controversy is by the whose object is to oust the
jurisdiction of the courts are contrary to public policy and will not be
enforced. Thus it is held that any stipulation between parties to a contract
distinguishing between the different courts of the country is contrary to
public policy. The principle has also been applied to a stipulation in a
contract that a party who breaks it may not be sued, to an agreement
designating a person to be sued for its breach who is nowise liable and
prohibiting action against any but him, to a provision in a lease that the
landlord shall have the right to take immediate judgment against the tenant
in case of a default on his part, without giving the notice and demand for
possession and filing the complaint required by statute, to a by-law of a
benefit association that the decisions of its officers on claim shall be final and
conclusive, and to many other agreements of a similar tendency. In some
courts, any agreement as to the time for suing different from time allowed
by the statute of limitations within which suit shall be brought or the right to
sue be barred is held void.

x x x           x x x           x x xchanrobles virtual law library

We shall not pursue this question further. This contract, in so far as it goes
beyond the usual provisions of a note, is void as against the public policy of
the state, as such public policy is found expressed in our laws and decisions.
Such agreements are iniquitous to the uttermost and should be promptly
condemned by the courts, until such time as they may receive express
statutory recognition, as they have in some states.

x x x           x x x           x x xchanrobles virtual law library

From what has been said, it follows that the Circuit Court never had
jurisdiction of the defendant, and the judgement is reversed.

The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40
L.R.A. [N. S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another well-
considered authority. The notes referred to in the record contained waiver of
presentment and protest, homestead and exemption rights real and
personal, and other rights, and also the following material provision: "And
we do hereby empower and authorize the said A. B. Farquhar Co. Limited, or
agent, or any prothonotary or attorney of any Court of Record to appear for
us and in our name to confess judgement against us and in favor of said A.
B. Farquhar Co., Limited, for the above named sum with costs of suit and
release of all errors and without stay of execution after the maturity of this
note." The Supreme Court of West Virginia, on consideration of the validity
of the judgment note above described, speaking through Mr. Justice Miller,
in part said:

As both sides agree the question presented is one of first impression in this
State. We have no statutes, as has Pennsylvania and many other states,
regulating the subject. In the decision we are called upon to render, we
must have recourse to the rules and principles of the common law, in force
here, and to our statute law, applicable, and to such judicial decisions and
practices in Virginia, in force at the time of the separation, as are properly
binding on us. It is pertinent to remark in this connection, that after nearly
fifty years of judicial history this question, strong evidence, we think, that
such notes, if at all, have never been in very general use in this
commonwealth. And in most states where they are current the use of them
has grown up under statutes authorizing them, and regulating the practice of
employing them in commercial transactions.

x x x           x x x           x x xchanrobles virtual law library

It is contended, however, that the old legal maxim, qui facit per alium, facit
per se, is as applicable here as in other cases. We do not think so. Strong
reasons exist, as we have shown, for denying its application, when holders
of contracts of this character seek the aid of the courts and of their
execution process to enforce them, defendant having had no day in court or
opportunity to be heard. We need not say in this case that a debtor may not,
by proper power of attorney duly executed, authorize another to appear in
court, and by proper endorsement upon the writ waive service of process,
and confess judgement. But we do not wish to be understood as approving
or intending to countenance the practice employing in this state commercial
paper of the character here involved. Such paper has heretofore had little if
any currency here. If the practice is adopted into this state it ought to be,
we think, by act of the Legislature, with all proper safeguards thrown around
it, to prevent fraud and imposition. The policy of our law is, that no man
shall suffer judgment at the hands of our courts without proper process and
a day to be heard. To give currency to such paper by judicial pronouncement
would be to open the door to fraud and imposition, and to subject the people
to wrongs and injuries not heretofore contemplated. This we are unwilling to
do.

A case typical of those authorities which lend support to judgment notes is

First National Bank of Las Cruces vs. Baker ([1919], 180 Pac., 291). The
Supreme Court of New Mexico, in a per curiam decision, in part, said:

In some of the states the judgments upon warrants of attorney are

condemned as being against public policy. (Farquhar and Co. vs. Dahaven,
70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas. [1914 A].
640, and First National Bank of Kansas City vs. White, 220 Mo., 717; 120 S.
W., 36; 132 Am. St. Rep., 612; 16 Ann. Cas., 889, are examples of such
holding.) By just what course of reasoning it can be said by the courts that
such judgments are against public policy we are unable to understand. It
was a practice from time immemorial at common law, and the common law
comes down to us sanctioned as justified by the reason and experience of
English-speaking peoples. If conditions have arisen in this country which
make the application of the common law undesirable, it is for the Legislature
to so announce, and to prohibit the taking of judgments can be declared as
against the public policy of the state. We are aware that the argument
against them is that they enable the unconscionable creditor to take
advantage of the necessities of the poor debtor and cut him off from his
ordinary day in court. On the other hand, it may be said in their favor that it
frequently enables a debtor to obtain money which he could by no possibility
otherwise obtain. It strengthens his credit, and may be most highly
beneficial to him at times. In some of the states there judgments have been
condemned by statute and of course in that case are not
allowed.chanroblesvirtualawlibrary chanrobles virtual law library

Our conclusion in this case is that a warrant of attorney given as security to

a creditor accompanying a promissory note confers a valid power, and
authorizes a confession of judgment in any court of competent jurisdiction in
an action to be brought upon said note; that our cognovit statute does not
cover the same field as that occupied by the common-law practice of taking
judgments upon warrant of attorney, and does not impliedly or otherwise
abrogate such practice; and that the practice of taking judgments upon
warrants of attorney as it was pursued in this case is not against any public
policy of the state, as declared by its laws.
With reference to the conclusiveness of the decisions here mentioned, it may
be said that they are based on the practice of the English-American common
law, and that the doctrines of the common law are binding upon Philippine
courts only in so far as they are founded on sound principles applicable to
local conditions.chanroblesvirtualawlibrary chanrobles virtual law library

Judgments by confession as appeared at common law were considered an

amicable, easy, and cheap way to settle and secure debts. They are a quick
remedy and serve to save the court's time. They also save the time and
money of the litigants and the government the expenses that a long
litigation entails. In one sense, instruments of this character may be
considered as special agreements, with power to enter up judgments on
them, binding the parties to the result as they themselves viewed
it.chanroblesvirtualawlibrary chanrobles virtual law library

On the other hand, are disadvantages to the commercial world which

outweigh the considerations just mentioned. Such warrants of attorney are
void as against public policy, because they enlarge the field for fraud,
because under these instruments the promissor bargains away his right to a
day in court, and because the effect of the instrument is to strike down the
right of appeal accorded by statute. The recognition of such a form of
obligation would bring about a complete reorganization of commercial
customs and practices, with reference to short-term obligations. It can
readily be seen that judgement notes, instead of resulting to the advantage
of commercial life in the Philippines might be the source of abuse and
oppression, and make the courts involuntary parties thereto. If the bank has
a meritorious case, the judgement is ultimately certain in the
courts.chanroblesvirtualawlibrary chanrobles virtual law library

We are of the opinion that warrants of attorney to confess judgment are not
authorized nor contemplated by our law. We are further of the opinion that
provisions in notes authorizing attorneys to appear and confess judgments
against makers should not be recognized in this jurisdiction by implication
and should only be considered as valid when given express legislative
sanction.chanroblesvirtualawlibrary chanrobles virtual law library

The judgment appealed from is set aside, and the case is remanded to the
lower court for further proceedings in accordance with this decision. Without
special finding as to costs in this instance, it is so ordered.
CASE #70 Traders Insurance vs Dy Eng Biok 104 Phil 806 (1958)

[G.R. No. L-9073. November 17, 1958.]

TRADERS INSURANCE & SURETY COMPANY, Plaintiff-Appellant, v. DY

ENG GIOK, PEDRO LOPEZ DEE and PEDRO E. DY-
LIACCO, Defendants-Appellees.

Sycip, Salazar, Atienza, Luna & Caparas for Appellant.

Emigdio V. Arcilla for appellee, Dy Eng Giok.

Cezar Miraflor for appellee Pedro Lopez Dee.

Pascual G. Mier for appellee Pedro E. Dy-Liacco.

SYLLABUS

1. SURETYSHIP; DEBTS COVERED BY GUARANTY; WHEN SURETY LIABLE

FOR DEBTS INCURRED OUTSIDE THE GUARANTEED PERIOD. — In the
absence of express stipulation, a guaranty or suretyship secures only the
debts contracted after the guaranty takes effect (El Vencedor v. Canlas, 44
Phil. 699). To apply the payments made by the principal debtor to the
obligations he contracted prior to the guaranty is, in effect, to make the
surety answer for debts incurred outside of the guaranteed period, and this
can not be done without the express consent of the guarantor.

2. ID.; INCONTESTABILITY OF PAYMENTS MADE BY SURETY; AGREEMENT

VOID AS AGAINST PUBLIC POLICY. — The provision in the indemnity
agreement that any payment made by the surety company on account of the
bond shall be final and incontestable, is void and unenforceable as against
public policy.

3. OBLIGATIONS AND CONTRACTS; ONEROUS OBLIGATIONS; DEBTS

DEEMED ONEROUS. — Debts covered by a guaranty are deemed more
onerous to the debtor than the simple obligations because, in their case, the
debtor may be subjected to action not only by the creditor, but also by the
guarantor, and this even before the guaranteed debt is paid by the
guarantor (Art. 2071, New Civil Code).
4. ID.; APPLICATION OF PAYMENT; PRIORITY OF ONEROUS OBLIGATIONS.
— In the absence of express application by the debtor, or of any receipt
issued by the creditor specifying a particular imputation of the payment
(New Civil Code, Art. 1252), any partial payments made by him should be
imputed or applied to the debts that were guaranteed, since they are
regarded as the more onerous debts from the standpoint of the debtor (New
Civil Code, Art. 1254).

5. ID.; ID.; ONE SINGLE DEBT OF WHICH ONLY A PORTION IS

GUARANTEED; PARTIAL PAYMENTS HOW APPLIED. — Where the debtor
owed the creditor one single debt of which only a portion was guaranteed,
the guarantor had no right to demand that the partial payments made by
the principal debtor should be applied precisely to the portion guaranteed.
The legal rules of imputation of payments presuppose that the debtor owes
several distinct debts of the same nature; and does not distinguish between
portions of the same debt.

6. ID.; ID.; APPLICATION OF PAYMENT BY THE CREDITOR; WHEN VALID

AND LAWFUL. — Where the debtor has not expressly elected any particular
obligation to which the payment should be applied, the application by the
creditor, in order to be valid and lawful, depends: (1) upon his expressing
such application in the corresponding receipt and (2) upon the debtor’s
assent, shown by his acceptance of the receipt without protest. Ultimately,
therefore, the application by a creditor depends upon the debtor’s
acquiescene thereto.

DECISION

REYES, J.B.L., J.:

Appeal interposed against that part of the decision of the Court of First
Instance of Manila (in its civil case No. 20305) absolving Pedro Lopez Dee
and Pedro E. Dy-Liacco from the obligation to reimburse the plaintiff Traders
Insurance and Surety Co.

From the stipulation of facts made by the parties in the court below, it
appears that from 1948 to 1952 the corporation "Destileria Lim Tuaco & Co.,
Inc." had one Dy Eng Giok as its provincial sales agent, with the duty of
turning over the proceeds of his sales to the principal, the distillery
company. As of August 3, 1951, the agent Dy Eng Giok had an outstanding
running account in favor of his principal in the sum of P12,898.61.

On August 4, 1951, a surety bond (Annex A, complaint) was executed by Dy

Eng Giok, as principal, and appellant Traders Insurance and Surety Co., as
solidary guarantor, whereby they bound themselves, jointly and severally, in
the sum of P10,000.00 in favor of the Destilleria Lim Tuaco & Co., Inc.,
under the following terms:chanrob1es virtual 1aw library

‘THE CONDITION OF THIS OBLIGATION IS SUCH THAT: Whereas, the above

bounden principal has entered in to a contract with the aforementioned
Company to act as their provincial sales agent and to receive goods or their
products under the said Principal’s credit account. The proceeds of the sales
are to be turned over to the Company.

WHEREAS, the contract requires the above bounden principal to give a good
and sufficient bond in the above stated sum to secure the full and faithful
fulfillment on its part of said contract; namely, to guarantee the full payment
of the Principal’s obligation not to exceed the above stated sum.

NOW, THEREFORE, if the above bounden principal shall in all respects duly
and fully observe and perform all and singular the aforesaid covenants,
conditions, and agreements to the true intent and meaning thereof, then this
obligation shall be null and void; otherwise, to remain in full force and effect.

LIABILITY of surety on this bond will expire on August 4, 1952 and said bond
will be cancelled TEN DAYS after its expiration, unless surety is notified in
writing of any existing obligations thereunder or otherwise extended by the
surety in writing." (Rec. App., pp. 7-8) (Emphasis supplied)

On the same date, by Eng Giok, as principal, with Pedro Lopez Dee and
Pedro Dy-Liacco, as counterboundsmen, subscribed an indemnity agreement
(Annex B. of the complaint) in favor of appellant Surety Company, whereby,
in consideration of its surety bond (Annex A), the three agreed to be
obligated to the surety company —

"INDEMNITY: — To indemnify the COMPANY for any damages, prejudice,

loss, costs, payments, advances and expenses of whatever kind and nature,
including counsel or attorney’s fees, which the Company may, at any time,
sustain or incur, as a consequence of having executed the abovementioned
bond, its renewals, extensions or substitutions, and said attorney’s fee shall
not be less than (15%) per cent of the amount claimed by the Company in
each action, the same to be due and payable, irrespective of whether the
case is settled judicially or extrajudicially." (Rec. App. pp. 9-10)
From August 4, 1951 to August 3, 1952, agent Dy Eng Giok contracted
obligations in favor of the Destilleria Lim Tuaco & Co., in the total amount of
P41,449.93; and during the same period, he made remittances amounting to
P41,864.49. The distillery company, however, applied said remittances first
to Dy Eng Giok’s outstanding balance prior to August 4, 1951 (before the
suretyship agreement was executed) in the sum of P12,898.61; and the
balance of P28,965.88 to Dy’s obligations between August 4, 1951 and
August 3, 1952. It then demanded payment of the remainder (P12,484.05)
from the agent, and later, from the appellant Surety Company. The latter
paid P10,000.00 (the maximum of its bond) on July 17, 1953, apparently,
without questioning the demand; and then sought reimbursement from Dy
Eng Giok and his counter guarantors, appellees herein. Upon their failure to
pay, it began the present action to enforce collection.

After trial, the Court of First Instance of Manila absolved the counter-
guarantors Pedro Lopez Dee and Pedro Dy-Liacco, on the theory that in so
far as they are concerned, the payments made by Dy Eng Giok from August
4, 1951 to August 3, 1952, in the sum of P41,864.49, should have been
applied to his obligations during that period, which were the ones covered by
the surety bond and the counter-guaranty; and as these obligations only
amounted to P41,449.93, so that the payments exceeded the obligations,
the court concluded that the Surety Company incurred no liability and the
counterbondsmen in turn had nothing to answer for. The trial court,
however, sentenced Dy Eng Giok to repay to the Surety Company P10,000
with interest at 12% per annum, plus P1,500 attorneys’ fee and the costs of
the suit.

Not satisfied with the decision, the Traders Insurance & Surety Company
appealed to this Court on points of law.

We find the decision appealed from to be correct. There are two reasons why
the remittances by Dy Eng Giok in the sum of P41,864.49 should be applied
to the obligation of P41,449.93 contracted by him during the period covered
by the suretyship agreement, Annex A. The first is that, in the absence of
express stipulation, a guaranty or suretyship operates prospectively and not
retroactively; that is to say, it secures only the debts contracted after the
guaranty takes effect (El Vencedor v. Canlas, 44 Phil. 699). This rule is a
consequence of the statutory directive that a guaranty is not presumed, but
must be express, and can not extend to more than what is stipulated. (New
Civil Code, Art. 2055). To apply the payments made by the principal debtor
to the obligations he contracted prior to the guaranty is, in effect, to make
the surety answer for debts incurred outside of the guaranteed period, and
this can not be done without the express consent of the guarantor. Note that
the suretyship agreement, Annex A, did not guarantee the payment of any
outstanding balance due from the principal debtor, Dy Eng Giok; but only
that he would turn over the proceeds of the sales to the "Destileria Lim
Tuaco & Co., Inc.", and this he has done, since his remittances during the
period of the guaranty exceed the value of his sales. There is no evidence
that these remittances did not come from his sales.

A similar situation was dealt with in our decision in the case of Municipality
of Lemery v. Mendoza, 48 Phil. 415, wherein we said (pp. 422-
423):jgc:chanrobles.com.ph

"As we have previously stated Mendoza has paid to the municipality the full
sum of P23,000. In our opinion this discharged the sureties from all further
liability. The circumstance that the sum of P23,000 which Mendoza paid may
have been applied by the municipality to Mendoza’s indebtedness for the
first year of the lease is without significance as against the sureties, since
the sureties were not parties to the contract of lease (Exhibit D) and are
liable only upon the contract of suretyship (Exhibit E), which calls for the
payments of only P23,000 by the principal. It is a just rule of jurisprudence,
recognized in article 1827 of the Civil Code, that the obligation of a surety
must be express and cannot be extended by implication beyond its specified
limits.

We do not overlook the fact that the obligating clause in Exhibit E binds the
sureties in the amount of P46,000, but, as in all bonds, that obligation was
intended as an assurance of the performance of the principal obligation and
when the principal obligation was discharged, the larger obligation expressed
in the contract of suretyship ceased to have any vitality."cralaw virtua1aw
library

The second reason is that, since the obligations of Dy Eng Giok between
August 4, 1951 to August 4, 1952, were guaranteed, while his indebtedness
prior to that period was not secured, then in the absence of express
application by the debtor, or of any receipt issued by the creditor specifying
a particular imputation of the payment (New Civil Code, Art. 1252), any
partial payments made by him should be imputed or applied to the debts
that were guaranteed, since they are regarded as the more onerous debts
from the standpoint of the debtor (New Civil Code, Art. 1254).

"ART. 1254. When the payment cannot be applied in accordance with the
preceding rules, or if application can not be inferred from other
circumstances, the debt which is most onerous to the debtor, among those
due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment shall be
applied to all of them proportionately."cralaw virtua1aw library

Debts covered by a guaranty are deemed more onerous to the debtor than
the simple obligations because, in their case, the debtor may be subjected to
action not only by the creditor, but also by the guarantor, and this even
before the guaranteed debt is paid by the guarantor (Art. 2071, New Civil
Code); hence, the payment of the guaranteed debt liberates the debtor from
liability to the creditor as well as to the guarantor, while payment of the
unsecured obligation only discharges him from possible action by only one
party, the unsecured creditor.

The rule that guaranteed debts are to be deemed more onerous to the
debtor than those not guaranteed, and entitled to priority in the application
of the debtor’s payments, was already recognized in the Roman Law (Ulpian,
fr. ad Sabinum, Digest, Lib. 46, Tit 3, Law 4, in fine), and has passed to us
through the Spanish Civil Code. Manresa in his Commentaries to Art. 1174 of
that Code (8 Manresa, Vol. I, 5th Ed., p. 603) expressly
says:jgc:chanrobles.com.ph

"Atendiendo al gravamen, la deuda garantida es mas onerosa que la

simple."cralaw virtua1aw library

And this is also the rule in Civil law countries, like France (Dalloz,
Jurisprudence Générale Vo. obligation, sec. 2033; Planiol, Traité Elem. (2d
Ed). Vol. 2, No. 454) and Louisiana (Caltex Oil & Gas, Co. v. Smith, 175 La.
678, 144 So. 243; Everett v. Graye, 3 La. App. 136): also Italy (7 Giorgi,
Teoria delle Obbl. p. 167).

It is thus clear that the payment voluntarily made by appellant was improper
since it was not liable under its bond; consequently, it can not demand
reimbursement from the counterbondsmen but only from Dy Eng Giok, who
was anyway benefited pro tanto by the Surety Company’s payment.

The present case is to be clearly distinguished from Hongkong Shanghai

Bank v. Aldanese, 48 Phil., 990, and Commonwealth v. Far Eastern Surety &
Insurance Co., 83 Phil., 305, 46 Off. Gaz. 4879 and similar rulings, wherein
the debtor in each case owned the creditor one single debt of which only a
portion was guaranteed. In those cases, we have ruled that the guarantors
had no right to demand that the partial payments made by the principal
debtor should be applied precisely to the portion guaranteed. The reason is
apparent: the legal rules of imputation of payments presuppose that the
debtor owes several distinct debts of the same nature; and does not
distinguish between portions of the same debt. Hence, where the debtor
only owes one debt, all partial payments must necessarily be applied to that
debt, and the guarantor answers for any unpaid balance, provided it does
not exceed the limits of the guaranty. Any other solution would defeat the
purpose of the security. In the case before us, however, the guaranty
secured the performance by the debtor of his obligation to remit to the
distillery company the proceeds of his sales during the period of the
guaranty (August 4, 1951 to August 4, 1952). This obligation is entirely
distinct and separate from his obligation to remit the proceeds of his sales
during a different period, say before August 4, 1951. The debtor, therefore,
actually owed two distinct debts: for the value of his sales before August 4,
1951 and for the import of the sales between that date and August 4, 1952.
There being two debts, his partial payments had necessarily to be applied (in
the absence of express imputation) first to the obligation that was more
onerous for him, which was the one secured by the guaranty.

It is legally unimportant that the creditor should have applied the payment
to the prior indebtedness. Where the debtor has not expressly elected any
particular obligation to which the payment should be applied, the application
by the creditor, in order to be valid and lawful, depends: (1) upon his
expressing such application in the corresponding receipt and (2) upon the
debtor’s assent, shown by his acceptance of the receipt without protest. This
is the import of paragraph 2 of Art. 1252 of the New Civil
Code:jgc:chanrobles.com.ph

"If the debtor accepts from the creditor a receipt in which an application of
the payment is made, the former cannot complain of the same, unless there
is a cause for invalidating the contract."cralaw virtua1aw library

Ultimately, therefore, the application by a creditor depends upon the debtor

acquiescence thereto. In the present case, as already noted, there is no
evidence that the receipts for payment expressed any imputation, or that
the debtor agreed to the same.

The appellant Surety Company avers that the counterbondsmen can not
question the payment made by it to Destileria Lim Tuaco on the debt of Dy
Eng Giok, because their counterbond or indemnity agreement (Annex B, par.
7) provided that:jgc:chanrobles.com.ph

"INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: Any payment

of disbursement made by the COMPANY on account of the abovementioned
Bond, its renewals, extensions or substitutions, either in the belief that the
Company was obligated to make such payment or in the belief that said
payment was necessary in order to avoid greater losses or obligations for
which the Company might be liable by virtue of the terms of the
abovementioned Bond, its renewals, extensions or substitutions shall be final
and will not be disputed by the undersigned who jointly and severally bind
themselves to indemnify the COMPANY for any and all such payments as
stated in the preceding clauses." (Rec. App., p. 11)

We agree with the appellee that this kind of clauses are void and
unenforceable, as against public policy, "because they enlarge the field for
fraud, because in these instruments the promissor bargains away his right to
a day in court and because the effect of the instrument is to strike down the
right of appeal accorded by the statute." (see National Bank v. Manila Oil
Refining Co., 43 Phil. 467)

Finding no error in the judgment appealed from, the same is affirmed. Costs
against appellant. So ordered.
CASE #71 PNB vs Concepcion Mining 5 SCRA 745 (1962)

[G.R. No. L-16968. July 31, 1962.]

PHILIPPINE NATIONAL BANK, Plaintiff-Appellee, v. CONCEPCION

MINING COMPANY, INC., ET AL., Defendants-Appellants.

Ramon B. de los Reyes for Plaintiff-Appellee.

Demetrio Miraflor, for Defendants-Appellants.

SYLLABUS

1. BILLS, NOTES AND CHECKS; NEGOTIABLE INSTRUMENT; SIGNED BY

TWO OR MORE PERSONS; LIABILITY. — Under Section 17 (g) of the
Negotiable Instrument Law and Art. 1216 of the Civil Code, where the
promissory note was executed jointly and severally by two or more persons,
the payee of the promissory note had the right to hold any one or any two of
the signers of the promissory note responsible for the payment of the
amount of the note.

DECISION

LABRADOR, J.:

Appeal from a judgment or decision of the Court of First Instance of Manila,

Hon. Gustavo Victoriano, presiding, sentencing defendants Concepcion
Mining Company and Jose Sarte to pay jointly and severally to the plaintiff
the amount of P7,197.26 with interest up to September 29, 1959, plus a
daily interest of P1.3698 thereafter up to the time the amount is fully paid,
plus 10% of the amount as attorney’s fees, and costs of this suit.

The present action was instituted by the plaintiff to recover from the
defendants the face of a promissory note the pertinent part of which reads
as follows:jgc:chanrobles.com.ph
"Manila, March 12, 1954

"NINETY DAYS after date, for value received, I promise to pay to the order
of the Philippine National Bank . . .

"In case it is necessary to collect this note by or through an attorney-at-law,

the makers and indorsers shall pay ten per cent (10%) of the amount due
on the note as attorney’s fees, which in no case shall be less than P100.00
exclusive of all costs and fees allowed by law as stipulated in the contract of
real estate mortgage. Demand and Dishonor Waived. Holder may accept
partial payment reserving his right of recourse against each and all
indorsers.

(Purpose — mining industry)

CONCEPCION MINING COMPANY, INC.,

By:chanrob1es virtual 1aw library

(Sgd.) VICENTE LEGARDA

President

(Sgd.) VICENTE LEGARDA

(Sgd.) JOSE S. SARTE

"Please issue check to —

Mr. Jose S. Sarte"

Upon the filing of the complaint the defendants presented their answer in
which they allege that the co-maker of the promissory note Don Vicente L.
Legarda, died on February 24, 1946 and his estate is in the process of
judicial determination in Special Proceedings No. 29060 of the Court of First
Instance of Manila. On the basis of this allegation it is prayed, as a special
defense, that the estate of said deceased Vicente L. Legarda be included as
party-defendant. The court in its decision ruled that the inclusion of said
defendant is unnecessary and immaterial, in accordance with the provisions
of Article 1216 of the new Civil Code and section 17(g) of the Negotiable
Instruments Law.

A motion to reconsider this decision was denied and thereupon defendants

presented a petition for relief, asking that the effects of the judgment be
suspended for the reason that the deceased Vicente L. Legarda should have
been included as a party-defendant and his liability should be determined in
pursuance of the provisions of the promissory note. This motion for relief
was also denied, hence defendant appealed to this Court.

Section 17(g) of the Negotiable Instruments Law provides as

follows:jgc:chanrobles.com.ph

"SEC. 17. Construction where instrument is ambiguous. — Where the

language of the instrument is ambiguous or there are omission therein, the
following rules of construction apply:chanrob1es virtual 1aw library

x       x       x

"(g) Where an instrument containing the words ‘I promise to pay’ is signed

by two or more persons, they are deemed to be jointly and severally liable
thereon."cralaw virtua1aw library

And Article 1216 of the Civil Code of the Philippines also provides as
follows:jgc:chanrobles.com.ph

"ART. 1216. The creditor may proceed against any one of the solidary
debtors or some of them simultaneously. The demand made against one of
them shall not be an obstacle to those which may subsequently be directed
against the others, so long as the debt has not been fully collected."cralaw
virtua1aw library

In view of the above quoted provisions, and as the promissory note was
executed jointly and severally by the same parties, namely, Concepcion
Mining Company, Inc. and Vicente L. Legarda and Jose S. Sarte, the payee
of the promissory note had the right to hold any one or any two of the
signers of the promissory note responsible for the payment of the amount of
the note. This judgment of the lower court should be affirmed.

Our attention has been attracted to the discrepancies in the printed record
on appeal. We note, first, that the names of the defendants, who are
evidently the Concepcion Mining Co., Inc. and Jose S. Sarte, do not appear
in the printed record on appeal. The title of the complaint set forth in the
record on appeal does not contain the name of Jose Sarte, when it should,
as two defendants are named in the complaint and the only defense of the
defendants is the non-inclusion of the deceased Vicente L. Legarda as a
defendant in the action. We also note that the copy of the promissory note
which is set forth in the record on appeal does not contain the name of the
third maker Jose S. Sarte. Fortunately, the brief of appellee on page 4 sets
forth said name of Jose S. Sarte as one of the co-makers of the promissory
note. Evidently, there is an attempt to mislead the court into believing that
Jose S. Sarte is not one of the co-makers. The attorney for the defendants is
Atty. Jose S. Sarte himself and he should be held primarily responsible for
the correctness of the record on appeal. We, therefore, order the said Atty.
Jose S. Sarte to explain why in his record on appeal his own name as one of
the defendants does not appear and neither does his name appear as one of
the co-signers of the promissory note in question. So ordered.
CASE #72 PNB vs Zulueta 101 Phil 1071

[G.R. No. L-7271. August 30, 1957.]

PHILIPPINE NATIONAL BANK, Plaintiff-Appellant, v. JOSE C.

ZULUETA, Defendant-Appellee.

Natalio M. Balboa and Ramon B. de los Reyes for Appellant.

Lorenzo F. Miravite for Appellee.

SYLLABUS

1. BANKS AND BANKING; OBLIGATIONS AND CONTRACTS; EXCISE TAX,

REPUBLIC ACT 601; OBLIGATIONS INCURRED BEFORE ITS APPROVAL. — An
obligation which has been incurred before the creation of the 17% tax,
under Republic Act 601, may not be validly burdened with such tax, because
the law imposing it could not be deemed to have impaired obligations
already existing at the time of its approval.

2. BILLS AND NOTES; FOREIGN BILLS OF EXCHANGE. — When a foreign bill

of exchange expressed in foreign money becomes payable here, it is payable
at the rate of exchange in effect on the day it should have been paid not at
the rate of exchange prevailing when action therein is brought or when
judgment is rendered.

DECISION

BENGZON, J.:

In the Manila court of first instance, the Philippine National Bank sued the
defendant upon a letter of credit and a draft for the amount of $14,449.15.
Although willing to pay the equivalent in pesos of the draft, plus bank
charges, the defendant objected to the 17% excise tax imposed by Republic
Act No. 601 which the Bank tried to collect. Both documents, he contended,
had been issued and had matured before the approval of said Act, therefore
the excise tax should not be charged.

After trial, the court rendered judgment exempting defendant from the 17%
excise tax; but ordered him to deliver to plaintiff the sum of P37,622.11 plus
daily interest of P3.9938 on P29,154.55 beginning from January 9, 1953.

The plaintiff appealed, insisting on the right to collect 17% excise or

exchange tax. This is the only issue between the parties now.

For a statement of the facts we may quote from plaintiff’s brief. "On October
26, 1948, Defendant-Appellee applied for a commercial letter of credit with
Plaintiff-Appellant, Philippine National Bank (Manila) and was granted L/C
No. 36171 (Exhibit "B") on November 6, 1948, in favor of Otis Elevator Co.,
260 Eleventh Avenue, New York City, U.S.A., for $14,449.15 for the
purchase of an electric passenger elevator; on May 17, 1949, and under the
said letter of credit (Exhibit "B"), Otis Elevator Co. drew a 90 day sight draft
for $14,449.15 (Exhibit "A") which draft was duly presented to and accepted
by Defendant-Appellee on July 6, 1949. Said acceptance matured on October
4, 1949. Upon Defendant-Appellee’s signing a 90 day trust receipt (Exhibit
"C") on June 3, 1949, Plaintiff-Appellant released to Defendant-Appellee the
covering documents of the shipment. In the meantime, debit advice (Exhibit
"G") was received from Plaintiff-Appellant’s New York Agency to the effect
that it advanced or paid the draft (Exhibit "A") to Otis Elevator Co. on May
17, 1949, and charged Plaintiff-Appellant the sum of $14,467.21
representing the face value of the draft (Exhibit "A") plus $18.06 as 1/8 of
1% commission. After the maturity date (October 4, 1949) Plaintiff-
Appellant presented the draft to Defendant-Appellee for payment but the
latter failed, neglected and refused to pay.

During its special session in January, 1951, Congress passed House Bill No.
1513, now Republic Act No. 601, approved on March 28, 1951, imposing a
17% special excise tax (otherwise known as foreign exchange tax) on the
value in Philippine peso of foreign exchange sold by the Central Bank of the
Philippines or its authorized agents. Plaintiff-appellant, as any other
commercial bank in the Philippines, is an authorized agent of the Central
Bank of the Philippines.

On October 17, 1952, and January 18, 1953, Plaintiff-Appellant sent bills or
statements of collection (Exhibits "D" and "D-1") to Defendant-Appellee but
the latter failed and refused to effect payment thereof. In those statements,
the sum of P4,955.74 was included representing the 17% special excise tax
on the peso value of the draft for US $14,449.15 (Exhibit "A"), . . ."cralaw
virtua1aw library
Defendant’s application for a letter of credit partly read as
follows:jgc:chanrobles.com.ph

"Please arrange by cable for the establishment of an Irrevocable Letter of

Credit on New York in favor of Otis Elevator Co., 260 Eleventh Avenue, New
York City for account of Hon. Jose C. Zulueta for the sum of FOURTEEN
THOUSAND FOUR HUNDRED FORTY-NINE AND 15/100 ($14,449.15)
DOLLARS against drawn at NINE DAYS accompanied by shipping documents
covering of ONE COMPLETE ELECTRIC PASSENGER ELEVATOR . . .

Drafts must be drawn and presented or negotiated not later than May 31,
1949.

IN CONSIDERATION THEREOF, I/we promise and agree to pay you at

maturity in Philippine Currency, the equivalent of the above amount or such
portion thereof as may be drawn or paid upon the faith of said credit,
together with your usual charges, and I/we authorize you and your
respective correspondents to pay or to accept drafts under this
credit, . . ."cralaw virtua1aw library

And the draft issued thereunder (Exhibit A) was negotiable and addressed to
herein defendant as the drawee.

From plaintiff’s statement of its position it is not clear whether recovery is

demanded upon the letter of credit, or upon the draft Exhibit A. Plaintiff
may, undoubtedly, proceed on either cause of action. (See Art. 571 Code of
Commerce; Sec. 51 Negotiable Instruments Law.) .

Had the plaintiff elected to recover on said letter of credit, then it would
meet with the doctrines in Araneta v. Philippine National Bank, 95 Phil., 160,
50 Off. Gaz. (11) 5350), According to the majority opinion in that case,
plaintiff should receive the equivalent in pesos, on May 17, 1949, of what
the New York Agency paid to Otis Elevator, i.e. $14,467.21 (plus bank fees
of course.) According to the minority opinion, the equivalent in pesos of the
same amount of dollars on October 4, 1949. No. 17% tax on both dates. In
converting dollars into pesos, no 17% exchange tax would be imposable,
since it was created only in March 1951. The plaintiff knows the case, for it
was a party to it; and anticipating, in this appeal, the obvious conclusions, it
insists not so much on the letter of credit, as on the bill of exchange Exhibit
A 1 . As stated before, such draft was drawn by Otis Elevator Co. in New
York. It was addressed to defendant as drawee, who is due course accepted
it. There is no question that upon accepting it, defendant became a party
primarily liable 2; and the holder (Philippine National Bank) may sue him,
even if there had been no presentation for payment on the day of maturity.
(Sec. 70 Negotiable Instruments Law.)

Admittedly, defendant’s responsibility is for $14,449.15 due in Manila on

October 4, 1949 (plus bank fees). He is under obligation to deliver such
amount in pesos as were the equivalent of $14,449.15. At what rate of
exchange? The rate prevailing on the day of issuance, day of acceptance,
day of maturity, the day suit is filed, or that prevailing on the day judgment
is rendered requiring him to pay? Herein lies the center of the controversy.
Appellant will win this appeal only if the rate on the last two days above
mentioned is held to be the legal rate.

The document is negotiable and is governed by the Negotiable Instruments

Law. But this statute does not contain any express provision on the
question. We know the draft is a foreign bill of exchange, because, drawn in
New York, it is payable here. (Sec. 129 Negotiable Instruments Law.) We
also know that although the amount payable is expressed in dollars-not
current money here-it is still negotiable, for it may be discharged with pesos
of equivalent amount 3 . The problem arises when we try to determine the
"equivalent amount", because the rate of exchange fluctuates from day to
day.

There are decisions in America to the effect that, "the rate of exchange in
effect at the time the bill should have been paid" controls. (11 C.J.S. p.
264.)

Such decisions agree with the provisions of the Bills of Exchange Act of
England 4 and could be taken as enunciating the correct principle, inasmuch
as our Negotiable Instruments Law, practically copied the American Uniform
Negotiable Instruments Law which in turn was based largely on the Bills of
Exchange Act of England of 1882. In fact we practically followed this rule in
Westminster Bank v. K. Nassoor, 58 Phil. 855.

There is one decision applying the rate of exchange at the time judgment is
entered. (11 C. J. S. p. 264.) 5

This decision however seems not to have taken into account the Bills of
Exchange Act above mentioned. And we have rejected its view in the
Westminster case, supra. Furthermore it related to a bill expressly made
payable in a foreign currency-which is not the case here. And the theory
would probably produce undesirable effects upon commercial documents, for
it would make the amount uncertain, the parties to the bill not being able to
foresee the day judgment would be rendered 6

But, the appellant argues, the defendant had promised to pay $14,419.15 in
dollars; therefore he must be ordered to pay the sum in dollars at current
rates plus 17%.

The argument rests on a wrong premise. Defendant had not promised to pay
in dollars. He agreed to pay the equivalent of 14,419.15 dollars, in Philippine
currency 7

But if we admit that defendant had agreed to pay in dollars, then we have to
apply Republic Act No. 529 and say that his obligation "shall be discharged in
Philippine currency measured at the prevailing rates of exchange at the time
the obligation was incurred."cralaw virtua1aw library

Now then, Zulueta’s obligation having been incurred 8 before the creation of
the 17% tax, it may not be validly burdened with such tax, because the law
imposing it could not be deemed to have impaired obligations already
existing at the time of its approval.

The plaintiff’s theory seems to be that in remitting dollars to its New York
Agency, after it collects from defendant, it has to pay for the said excise tax.
9 The trial judge expressed the belief that such amount had been remitted
before the enactment of Republic Act 601, because considering the practice
of banks of replenishing their agencies abroad with necessary funds, he
deemed it improbable that the Manila Office of the Bank — in two years —
had not reimbursed its New York Agency for the amount advanced on
account of the draft Exhibit A. This belief most probably accorded with
reality; because as early as May 17, 1949 (Exhibit G) the New York Agency
had "charged" the amount of this draft against the account of the Manila
office there, — which means the Agency had reimbursed itself the amount of
the draft out of the funds of the Manila Office then in its possession (in New
York) or coming to its possession afterwards. And it is unbelievable that in
two years the Manila office never had in New York sufficient funds to effect
the reimbursement.

In fact, the statement of account rendered by plaintiff to defendant on

October 17, 1952, (Exhibit D) enumerated these
charges:jgc:chanrobles.com.ph

"To your acceptance amounting to $14,449.15

Plus Remitter’s Commission 18.06

$14,567.21

(Converted at 3/4 % P29,151.43

5% int. 5/17/49-10/19/52-1251 da. 4,995.68

P34,147.11

10% comm. on $14,449.15 P2,911.51

Documentary stamps 8.70

Air Mail 2.00

17% Excise Tax on P29,151.43 4,955.74

Other charges 3.00"

From the above it may be deduced that the amount of the draft had been
remitted or paid to the New York Agency in May 1949, for the reason that
Zulueta is charged with remitter’s commission" and 5% interest on the
amount of the draft (and such commission) beginning from May 17, 1949,
This necessarily implies that in accordance with Exhibit G, the New York
Agency had been reimbursed of the draft’s amount (or such amount was
remitted) on May 17, 1949. 10 Now, in May 1949 no 17% exchange tax was
payable upon such remittance; and the Manila office did not pay it.
Therefore Zulueta should not pay it too.

In view of the foregoing the judgment will be affirmed, with costs against
appellant. So ordered.

Paras, C.J., Padilla, Montemayor and Bautista Angelo, JJ., concur.

Separate Opinions

REYES, A., J., concurring:chanrob1es virtual 1aw library

Plaintiff in this case seeks reimbursement in Philippine currency for the

amount in dollars advanced by it through its New York agency to meet a
draft drawn against defendant and accepted by the latter for a valuable
consideration. Plaintiff’s right to such reimbursement is not questioned.
What is disputed is its pretended right to add to the amount of the draft the
excise tax of 17% which plaintiff would have to pay to the Government if it
were to remit now to New York the necessary amount of dollars that its
agency there had paid on the draft.
I cannot bring myself to believe that it is only now that plaintiff has thought
of sending dollars to New York to replace the amount advanced by its
agency. As intimated in the majority opinion and in consonance with good
banking practice, the necessary remittance must have been effected long
ago, that is, long before the creation of the excise tax on foreign exchange
in March, 1951. Plaintiff, therefore, could not have paid such tax, and not
having done so it has no right to get reimbursement therefor from
defendant.

I do not think that defendant could be legally made to pay more than what
plaintiff had actually advanced for him, aside from commission and other
charges, on the theory that the Philippine peso has depreciated in value with
respect to the American dollar. Legally, it has not. The legal rate of
exchange between the two currencies is still two to one. What happened is
that with the creation of the excise tax in 1951, it would now be more costly
to remit dollars abroad. But why should plaintiff make that remittance now
when, as already stated, it must have already done so long before the
creation of the excise tax on foreign exchange?

Lastly, a debtor cannot be charged with bad faith for refusing to pay that
which he should not pay.

FELIX, J., concurring:chanrob1es virtual 1aw library

The decision rendered in this case, penned by Mr. Justice Cesar Bengzon,
perfectly reflects and delivers the opinion of the majority of this Court and I
subscribe to each and every statement made and argument adduced
therein. This being so, it would seem that any concurring or supporting
opinion is quite superfluous and I would not have taken the task of writing
further in the matter were it not for the fact that in the dissenting opinion it
is stated that:jgc:chanrobles.com.ph

"It cannot be justly contended that if a debtor had borrowed, say $10,000,
the lender should be satisfied with eight or nine thousand. Yet that is what
the majority’s decision actually amounts to."

The writer further says that:jgc:chanrobles.com.ph

"the majority opinion has the merit of giving the bank a costly lesson on the
advantages of not considering political influence in the making and collecting
of its loans; but I am afraid the experience will be too quickly forgotten to
even palliate the sacrifice of fundamental justice to technical considerations."

I, certainly, cannot leave these statements pass unanswered.

To begin with, I right say that if any lesson has been given by the majority
of this Court to the plaintiff bank, it is not in this case but in the case of
Araneta v. The Philippine National Bank (G. R. No. L-4633, May 31, 1954),
cited in the majority decision, where the latter was a party to that case and
a similar doctrine was laid down. Coming now to the bone of contention, I
notice that the dissenting Justice views the matter involved in the
controversy as a loan and submits that the question really at issue can be
boiled down to the proposition of "whether it is the lender or the borrower
who should bear the added cost of the depreciation of the peso in relation to
the dollar."

In this connection, I might say that defendant’s obligation to the plaintiff

would have been settled some years ago were it not for the fact that the
Bank insisted in collecting the special excise tax of 17 per cent on foreign
exchange transactions imposed by Republic Act No. 601 which entered into
effect on March 28, 1951, and was not yet in force at the time the obligation
of the defendant matured on October 4, 1948. And even if we look at the
case as a loan and apply to the transaction the provisions of Article 312,
paragraph 1, of the Code of Commerce, cited by the dissenting Justice, yet
We could not, under the facts and circumstances of the case that cannot be
denied, logically arrive at the same conclusion that he has come to.

And the reason is obvious. In the first place, We have to take into account
that the New York agency of Philippine National Bank and its central office in
Manila are not separate and independent entities. That is why it is the
Philippine National Bank (Manila office) and not the New York agency of said
Bank that is the plaintiff in this case. Consequently, any payment made to
plaintiffs central office in Manila for obligations that any debtor may have
contracted with said New York agency is and has to be considered as a
payment or settlement of said obligations, there being no need to attain this
result that the plaintiff would adjust is accounts with its agency, or transmit
to the latter the amounts received from the debtor.

In the second place, the obligation contracted by the defendant was not to
pay $14,419.15 in dollars, but the equivalent of $14,419.15 dollars, in
Philippine currency. So, when defendant’s obligation matured on October 4,
1949, the defendant had to pay to the Bank not the sum of $14,467.21
representing the face value of the draft Exhibit A, plus $18.06 as 1/8 of 1
per cent commission, but its equivalent in pesos at the time of such
maturity, and had the defendant failed to satisfy then his obligation, he
could be held liable to pay in addition thereof, the corresponding interests
for the period of default and nothing else. And that is precisely what
defendant is willing to pay.
From the foregoing, I hope to have made clear my stand on the matter.

REYES, J.B.L., J., dissenting:chanrob1es virtual 1aw library

As I view it, the question before this Court is whether it is the lender or the
defaulting borrower who should bear the added cost of the depreciation of
the peso in relation to the dollar.

When in 1949 the Philippine National Bank remitted to the Otis Elevator Co.
the $14,449.15 for the account of Zulueta, the Bank, in effect, loaned to
Zulueta said amount on the strength of his express engagement to "pay at
maturity in Philippine Currency, the equivalent of the above amount," which
was a promise to pay such amount in Philippine pesos as could be converted
into $14,449.15. There is no question that Zulueta failed to do so, and has
refused to do so up to the present. In the meantime, in 1951, the
Legislature enacted Rep. Act No. 601, imposing a 17% special excise tax on
foreign exchange transactions, so that thereafter one had to pay 234 pesos
for every $100, instead of P200 as heretofore. Should Zulueta be required to
pay for the dollars at the new rate?

Since Zulueta’s obligation is measured in terms of U.S. dollars that have

increased in value vis-a-vis the peso, Art. 312, par. 1, of the Code of
Commerce, which was the law then in force, must be read into the contract.
It provides:jgc:chanrobles.com.ph

"If the loan consists of money, the debtor shall pay it by returning an
amount equal to that received, in accordance with the legal value which the
money may have at the time of the return, unless the kind of money in
which the payment is to be made has been stipulated, in which case the
change which its value may suffer shall be to the detriment or for the benefit
of the lender." (Italics supplied)

The majority decision, in upholding the contention that Zulueta is not

chargeable with the 17% tax, virtually authorizes just the contrary; and
permits the defaulting borrower to repay an amount in pesos that, in
violation of the law and his engagement, can not be converted into the same
amount of dollars loaned to him. I believe it is contrary to all elemental
justice and good faith to enable a borrower to return to his creditor less than
the amount borrowed, specially taking into account that Zulueta, by his
obdurate refusal to pay a just debt, is a debtor in bad faith who is
responsible for any subsequent damages suffered by his creditor, even if due
to fortuitous event.
Applicable here are the considerations in Hawes v. Woolcock (26 Wis. 629,
635), quoted with approval in Engel v. Mariano Velasco & Co., 47 Phil. 115,
143:jgc:chanrobles.com.ph

"In Hawes v. Woolcock (26 Wis., 629, 635), the court said:chanrob1es
virtual 1aw library

‘Perhaps a strict application of logical reasoning to the question would lead

to the result that the premium should be estimated at the rate when the
note fell due. That was when the money should have been paid, and when
the default in performing the contract occurred. This conclusion would be
supported by the analogy derived from the rule of damages on contracts to
deliver specific articles, fixing the market price at the time when they ought
to have been delivered as the criterion. This rule might sometimes be to the
advantage of the holder of the note, as in the present case. In other cases,
where the premium was less at the time the note became due than at the
time of trial, it would be to his detriment. And in view of these uncertainties
and fluctuations in the rate, upon grounds of policy as well as for its
tendency to do as complete justice between the parties as is possible, we
have come to the conclusion that the true rule in such cases is to give
judgment for such an amount as will, at the time of the judgment, purchase
the amount due on the note in the funds or currency in which it is payable’"

The crucial point is that the Bank’s action is not for damages, but for specific
performance of Zulueta’s obligation. While payable in Philippine pesos, it was
actually one to pay a definite sum in United States dollars, since he
promised to pay an equivalent amount. The failure to specify any fixed
number of pesos, and the omission of any reference to any rate of
exchange, is proof that the parties had in mind the restoration to the Bank
of the value of the dollars it had advanced. In other words, Zulueta engaged
to return to the Bank so many Philippine pesos as could be converted into
$14,449.15; and that is what the Bank now asks him to do. It can not be
justly contended that if a debtor had borrowed, say, ten thousand dollars,
the lender should be satisfied with eight or nine thousand. Yet that is what
the majority’s decision actually amounts to.

I see no point in determining the rate of dollar-peso exchange at the date of

maturity or of the constitution of the obligation, since Zulueta did not
engage to pay any definite amount of pesos, but so many as would be
needed to make up $14,449.15. And as Zulueta is being required to comply
with a specific promise, there is no relevancy in whether or not the main
office of the Bank has or has not remitted the dollars to its American
agency; after all, the two are part of the same institution. Anyway, if the
dollars have not been remitted, the amount that Zulueta is now sentenced to
pay will not permit a remittance of the same number of dollars that the Bank
advanced for his account. If they were heretofore remitted, the funds of the
Bank in Manila have been diminished pro tanto, and they can not be
replenished to their original level in terms of dollars unless Zulueta is
required to pay the exchange tax.

Of course, the majority opinion has the merit of giving the Bank a costly
lesson on the advantages of not considering political influence in the making
and collecting of its loans; but I am afraid the experience will be too quickly
forgotten to even palliate the sacrifice of fundamental justice to technical
considerations.

For the foregoing reasons, I dissent.

Labrador, Concepcion and Endencia, JJ., concur.

CASE #73 De la Victoria vs Burgos 245 SCRA 374 (1995)

[G.R. No. 111190. June 27, 1995.]

LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his

personal capacity as garnishee, Petitioner, v. HON. JOSE BURGOS, Presiding
Judge, RTC, and RAUL H. SESBREÑO, Respondents.

DECISION

BELLOSILLO, J.:

RAUL H. SESBREÑO filed a complaint for damages against Assistant City

Fiscals Bienvenido N. Mabanto, Jr., before the Regional Trial Court of Cebu
City. After trial Judgment was rendered ordering the defendants to pay
P11,000.00 to the plaintiff, private respondent herein. The decision having
become final and executory, on motion of the latter, the trial court ordered
its execution. This order was questioned by the defendants before the Court
of Appeals. However, on 15 January 1992 a writ of execution was issued.

On 4 February 1992 a notice of garnishment was served on petitioner Loreto

D. de la Victoria as City Fiscal of Mandaue City where defendant Mabanto,
Jr., was then detailed. The Notice directed petitioner not to disburse,
transfer, release or convey to any other person except to the deputy sheriff
concerned the salary checks, monies, or cash due or belonging to Mabanto,
Jr., under penalty of law. 1 On 10 March 1992 private respondent filed a
motion before the trial court for examination of the garnishees.

On 25 May 1992 the petition pending before the Court of Appeals was
dismissed. Thus the trial court, finding no more legal obstacle to act on the
motion for examination of the garnishees, directed petitioner on 4 November
1992 to submit his report showing the amount of the garnished salaries of
Mabanto, Jr., within (15) days from receipt 2 taking into consideration the
provisions of Sec. 12, pars. (f) and (i), Rule 39 of the Rules of Court.

On 24 November 1992 private respondent filed a motion to require

petitioner to explain why he should not be cited in contempt of court for
failing to comply with the order of 4 November 1992.

On the other hand, on 19 January 1993 petitioner moved to quash the notice
of garnishment claiming that he was not in possession of any money, funds,
credit, property or anything of value belonging to Mabanto, Jr., until
delivered to him. He further claimed that, as such, they were still public
funds which could not be subject to garnishment.

On 9 March 1993 the trial court denied both motions and ordered petitioner
to immediately comply with its order of 4 November 1992. 3 It opined that
the checks of Mabanto, Jr., had already been released through petitioner by
the Department of Justice duly signed by the officer concerned. Upon service
of the writ of garnishment, petitioner as custodian of the checks was under
obligation to hold them for the judgment creditor. Petitioner became a
virtual party to, or a forced intervenor in, the case and the trial court hereby
acquired jurisdiction to bind him to its orders and processes with a view to
the complete satisfaction of the judgment. Additionally there was no
sufficient reason for petitioner to hold the checks because they were no
longer government funds and presumably delivered to the payee,
conformably with the last sentence of Sec. 16 of the Negotiable Instruments
Law.

With regard to the contempt charge, the trial court was not morally
convinced of petitioner's guilt. For, while his explanation suffered from
procedural infirmities nevertheless he took pains in enlightening the court by
sending a written explanation dated 22 July 1992 requesting for the lifting of
the notice of garnishment on the ground that the notice should have been
sent to the Finance Officer of the Department of Justice. Petitioner insists
that he had no authority to segregate a portion of the salary of Mabanto, Jr..
The explanation however was not submitted to the trial court for action since
the stenographic reporter failed to attach it to the record. 4

On 20 April 1993 the motion for reconsideration was denied. The trial court
explained that it was not the duty of the garnishee to inquire or judge for
himself whether the issuance of the order of execution, writ of execution and
notice of garnishment was justified. His only duty was to turn over the
garnished checks to the trial court which issued the order of execution. 5

Petitioner raises the following relevant issues: (1) whether a check still in
the hands of the maker or its duly authorized representative is owned by the
payee before physical delivery to the latter; and, (2) whether the salary
check of a government official or employee funded with public funds can be
subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned by
Mabanto, Jr., because they were not yet delivered to him, and that petitioner
as garnishee has no legal obligation to hold and deliver them to the trial
court to be applied to Mabanto, Jr.' s judgment debt. The thesis of petitioner
is that the salary checks still formed part of public funds and therefore
beyond the reach of garnishment proceedings.

Petitioner has well argued his case.

Garnishment is considered as a species of attachment for reaching credits

belonging to the Judgment debtor owing to him from a stranger to the
litigation. 6 Emphasis is laid on the phrase "belonging to the judgment
debtor" since it is the focal point in resolving the issues raised.

As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public
funds. He receives his compensation in the form of checks from the
Department of Justice through petitioner as City Fiscal of Mandaue City and
head of office. Under Sec. 16 of the Negotiable Instruments Law, every
contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto. As
ordinarily understood, delivery means the transfer of the possession of the
instrument by the maker or the drawer with intent to transfer title to the
payee and recognize him as the holder thereof. 7

According to the trial court, the checks of Mabanto, Jr., were already
released by the Department of Justice duly signed by the officer concerned
through petitioner and upon service of the writ of garnishment by the sheriff
petitioner was under obligation to hold them for the judgment creditor. It
recognized the role of petitioner as custodian of the checks. At the same
time however it considered the checks as no longer government finds and
presumed delivered to the payee based on the last sentence of Sec. 16 of
the Negotiable Instruments Law which states: "And where the instrument is
no longer in the possession of a party whose signature appears thereon, a
valid and intentional delivery by him is presumed." Yet, the presumption is
not conclusive because the last portion of the provision says "until the
contrary is proved." However this phrase was deleted by the trial court for
no apparent reason. Proof to the contrary is its own finding that the checks
were in the custody of petitioner. Inasmuch as said checks had not yet been
delivered to Mabanto, Jr., they did not belong to him and still had the
character of public funds. In Tiro v. Hontanosas 8 we ruled that -

The salary check of a government officer or employee such a s a teacher

does not belong to him before it is physically delivered to him. Until that
time the check belongs to the government. Accordingly, before there is
actual delivery of the check, the payee has no power over it; he cannot
assign it without the consent of the Government.

As a necessary consequence of being public fund, the checks may not be

garnished to satisfy the judgment. 9 The rationale behind this doctrine is
obvious consideration of public policy. The Court succinctly stated in
Commissioner of Public Highways v. San Diego 10 that -

The functions and public services rendered by the State cannot be allowed to
be paralyzed or disrupted by the diversion of public funds from their
legitimate and specific objects, as appropriated by law.

In denying petitioner's motion for reconsideration, the trial court expressed

the additional ratiocination that it was not the duty of the garnishee to
inquire or judge for himself whether the issuance of the order of execution,
the writ of execution, and the notice of garnishment was justified, citing our
ruling in Philippine Commercial Industrial Bank v. Court of Appeals. 11 Our
precise ruling in that case that "[I]t is not incumbent upon the garnishee to
inquire or to judge for itself whether or not the order for the advance
execution of a judgment is valid." But that is invoking only the general rule.
We have also established therein the compelling reasons, as exceptions
thereto, which were not taken into account by the trial court, e.g., a defect
on the face of the writ or actual knowledge by the garnishee of lack of
entitlement on the part of the garnisher. It is worth to note that the ruling
referred to the validity of advance execution of judgments, but a careful
scrutiny of that case and similar cases reveals that it was applicable to a
notice of garnishment as well. In the case at bench, it was incumbent upon
petitioner to inquire into the validity of the notice of garnishment as he had
actual knowledge of the non-entitlement of private respondent to the checks
in question. Consequently, we find no difficulty concluding that the trial court
exceeded its jurisdiction in issuing the notice of garnishment concerning the
salary checks of Mabanto, Jr., in the possession of petitioner.

WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20

April 1993 of the Regional Trial Court of Cebu City, Br. 17, subject of the
petition are SET ASIDE. The notice of garnishment served on petitioner
dated 3 February 1992 is ordered DISCHARGED.

SO ORDERED.

Davide, Jr., Quiason and Kapunan, JJ., concur.

Separate Opinions
DAVIDE, JR., concurring:nadchanroblesvirtualawlibrary

This Court may take judicial notice of the fact that checks for salaries of
employees of various Departments all over the country are prepared in
Manila not at the end of the payroll period, but days before it to ensure that
they reach the employees concerned not later that the end of the payroll
period. As to the employees in the provinces or cities, the checks are sent
through the heads of the corresponding offices of the Departments. Thus, in
the case of Prosecutors and Assistant Prosecutors of the Department of
Justice, the checks are sent through the Provincial Prosecutors or City
Prosecutors, as the case may be, who shall then deliver the checks to the
payees.

Involved in the instant case are the salary and RATA checks of the Assistant
City Fiscal Bienvenido Mabanto, Jr., who was detailed in the Office of the
City Fiscal (now Prosecutor) of Mandaue City. Conformably with the
aforesaid practice, these checks were sent to Mabanto thru the petitioner
who was then the city Fiscal of Mandaue City.

The ponencia failed to indicate the payroll period covered by the salary
check and the month to which the RATA check corresponds.

I respectfully submit that if these salary and RATA checks corresponded,

respectively, to a payroll period and to a month which had already lapsed at
the time the notice of garnishment was served, the garnishment would be
valid, as the checks would then cease to be property of the Government and
would become property of Mabanto. Upon the expiration of such period and
month, the sums indicated therein were deemed automatically segregated
from the budgetary allocations for the Department of Justice under the
General Appropriations Act.

It must be recalled that the public policy against execution, attachment, or

garnishment is directed to public funds.

Thus, in the case of Director of the Bureau of Commerce and Industry vs.
Concepcion 1 where the core issue was whether or not the salary due from
the Government to a public officer or employee can, by garnishment, be
seized before being paid to him and appropriated to the payment of his
judgment debts, this Court held:nadchanroblesvirtualawlibrary

A rule, which has never been seriously questioned, is that money in the
hands of public officers, although it may be due government employees, is
not liable to the creditors of these employees in the process of garnishment.
One reason is, that the State, by virtue of its sovereignty, may not be sued
in its own courts except by express authorization by the Legislature, and to
subject its officers to garnishment would be to permit indirectly what is
prohibited directly. Another reason is that moneys sought to be garnished,
as long as they remain in the hands of the disbursing officer of the
Government, belong to the latter, although the defendant in garnishment
may be entitled to a specific portion thereof. And still another reason which
covers both of the foregoing is that every consideration of public policy
forbids it.

The United States Supreme Court, in the leading case of Buchanan vs.
Alexander ([1846]), 4 How., 19), in speaking of the right of creditors of
seamen, by process of Attachment, to divert the public money from its
legitimate and appropriate object, said:nadchanroblesvirtualawlibrary

"To state such a principle is to refute it. No government can sanction it. At
all times it would be found embarrassing, and under such circumstances it
might be fatal to the public service. . . . So long as money remains in the
hands of a disbursing officer, it is as much the money of the United States,
as if it had not been drawn from the treasury. Until paid over by the agent of
the government to the person entitled to it, the fund cannot, in any legal
sense, be considered a part of his effects." (See, further, 12 R.C.L., p. 841;
Keene vs. Smith [1904], 44 Ore., 525; Wild vs. Ferguson [1871], 23 La.
Ann., 752; Bank of Tennessee vs. Dibrell [1855], 3 Sneed [Tenn.], 379).
(Emphasis Supplied)

The authorities cited in the ponencia are inapplicable. Garnished or levied on

therein were public funds, to wit: (a) the pump irrigation trust fund
deposited with the Philippine National Bank (PNB) in the Account of the
Irrigation Service Unit in Republic vs. Palacio; 2 (b) the deposits of the
National Media Production Center in Traders Royal Bank vs. Intermediate
Appellate Court; 3 and (c) the deposits of the Bureau of Public Highways
with the PNB under a current account which may be expended only for their
legitimate object as authorized by the corresponding legislative
appropriation in Commissioner of Public Highways vs. Diego. 4

Neither is Tiro vs. Hontanosas 5 squarely in point. The said case involved the
validity of Circular No. 21, series of 1969, issued by the Director of Public
Schools which directed that henceforth no cashier or disbursing officer shall
pay to attorneys-in-fact or other persons who may be authorized under a
power of attorney or other forms of authority to collect the salary of an
employee, except when the persons so designated and authorized is an
immediate member of the family of the employees concerned, and in all
other cases except upon proper authorization of the Assistant Executive
Secretary for legal and Administrative Matters, with the recommendation of
the Financial Assistant." Private respondent Zapra Financing Enterprise,
which had extended loans to public school teachers in Cebu City and
obtained from the latter promissory notes and special powers of attorney
authorizing it to take and collect their salary checks from the Division Office
in Cebu City of the Bureau of Public Schools, sought, inter alia, to nullify the
Circular. It is clear that the teachers had in fact assigned to or waived in
favor of Zafra their future salaries which were still public funds. That
assignment or waiver was contrary to public policy.

I would therefore vote to grant the petition only of the salary and RATA
checks garnished corresponds to an unexpired payroll period and RATA
month, respectively.
CASE #74 Astro-Electronics Corp. vs PHILGUARANTEE 411 SCRA 462 (2003)

G.R. No. 136729. September 23 ,2003]

ASTRO ELECTRONICS CORP. and PETER ROXAS, Petitioner,

vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION, respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Assailed in this petition for review on certiorari under Rule 45 of the Rules of

Court is the decision of the Court of Appeals in CA-G.R. CV No.
41274,1 affirming the decision of the Regional Trial Court (Branch 147) of
Makati, then Metro Manila, whereby petitioners Peter Roxas and Astro
Electronics Corp. (Astro for brevity) were ordered to pay respondent
Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee),
jointly and severally, the amount of P3,621,187.52 with interests and costs.

The antecedent facts are undisputed.

Astro was granted several loans by the Philippine Trust Company (Philtrust)
amounting to P3,000,000.00 with interest and secured by three promissory
notes: PN NO. PFX-254 dated December 14, 1981 for P600,000.00, PN No.
PFX-258 also dated December 14, 1981 for P400,000.00 and PN No. 15477
dated August 27, 1981 for P2,000,000.00. In each of these promissory
notes, it appears that petitioner Roxas signed twice, as President of Astro
and in his personal capacity.2 Roxas also signed a Continuing Surety ship
Agreement in favor of Philtrust Bank, as President of Astro and as
surety.3cräläwvirtualibräry

Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of

Philtrust the payment of 70% of Astros loan,4 subject to the condition that
upon payment by Philguanrantee of said amount, it shall be proportionally
subrogated to the rights of Philtrust against Astro.5cräläwvirtualibräry

As a result of Astros failure to pay its loan obligations, despite demands,

Philguarantee paid 70% of the guaranteed loan to Philtrust. Subsequently,
Philguarantee filed against Astro and Roxas a complaint for sum of money
with the RTC of Makati.
In his Answer, Roxas disclaims any liability on the instruments,
alleging, inter alia, that he merely signed the same in blank and the phrases
in his personal capacity and in his official capacity were fraudulently inserted
without his knowledge.6cräläwvirtualibräry

After trial, the RTC rendered its decision in favor of Philguarantee with the
following dispositive portion:

WHEREFORE, in view of all the foregoing, the Court hereby renders

judgment in favor or (sic) the plaintiff and against the defendants Astro
Electronics Corporation and Peter T. Roxas, ordering the then (sic) to pay,
jointly and severally, the plaintiff the sum of P3,621.187.52 representing the
total obligation of defendants in favor of plaintiff Philguarantee as of
December 31, 1984 with interest at the stipulated rate of 16% per annum
and stipulated penalty charges of 16% per annum computed from January 1,
1985 until the amount is fully paid. With costs.

SO ORDERED.7cräläwvirtualibräry

The trial court observed that if Roxas really intended to sign the instruments
merely in his capacity as President of Astro, then he should have signed only
once in the promissory note.8cräläwvirtualibräry

On appeal, the Court of Appeals affirmed the RTC decision agreeing with the
trial court that Roxas failed to explain satisfactorily why he had to sign twice
in the contract and therefore the presumption that private transactions have
been fair and regular must be sustained.9cräläwvirtualibräry

In the present petition, the principal issue to be resolved is whether or not

Roxas should be jointly and severally liable (solidary) with Astro for the sum
awarded by the RTC.

The answer is in the affirmative.

Astros loan with Philtrust Bank is secured by three promissory notes. These
promissory notes are valid and binding against Astro and Roxas. As it
appears on the notes, Roxas signed twice: first, as president of Astro and
second, in his personal capacity. In signing his name aside from being the
President of Asro, Roxas became a co-maker of the promissory notes and
cannot escape any liability arising from it. Under the Negotiable Instruments
Law, persons who write their names on the face of promissory notes are
makers,10 promising that they will pay to the order of the payee or any
holder according to its tenor. 11 Thus, even without the phrase personal
capacity, Roxas will still be primarily liable as a joint and several debtor
under the notes considering that his intention to be liable as such is
manifested by the fact that he affixed his signature on each of the
promissory notes twice which necessarily would imply that he is undertaking
the obligation in two different capacities, official and personal.

Unnoticed by both the trial court and the Court of Appeals, a closer
examination of the signatures affixed by Roxas on the promissory notes,
Exhibits A-4 and 3-A and B-4 and 4-A readily reveals that portions of his
signatures covered portions of the typewritten words personal capacity
indicating with certainty that the typewritten words were already existing at
the time Roxas affixed his signatures thus demolishing his claim that the
typewritten words were just inserted after he signed the promissory notes. If
what he claims is true, then portions of the typewritten words would have
covered portions of his signatures, and not vice versa.

As to the third promissory note, Exhibit C-4 and 5-A, the copy submitted is
not clear so that this Court could not discern the same observations on the
notes, Exhibits A-4 and 3-A and B-4 and 4-A.

Nevertheless, the following discussions equally apply to all three promissory

notes.

The three promissory notes uniformly provide: FOR VALUE RECEIVED, I/We
jointly, severally and solidarily, promise to pay to PHILTRUST BANK or
order...12 An instrument which begins with I, We, or Either of us promise to
pay, when signed by two or more persons, makes them solidarily
liable.13 Also, the phrase joint and several binds the makers jointly and
individually to the payee so that all may be sued together for its
enforcement, or the creditor may select one or more as the object of the
suit.14 Having signed under such terms, Roxas assumed the solidary liability
of a debtor and Philtrust Bank may choose to enforce the notes against him
alone or jointly with Astro.

Roxas claim that the phrases in his personal capacity and in his official
capacity were inserted on the notes without his knowledge was correctly
disregarded by the RTC and the Court of Appeals. It is not disputed that
Roxas does not deny that he signed the notes twice. As aptly found by both
the trial and appellate court, Roxas did not offer any explanation why he did
so. It devolves upon him to overcome the presumptions that private
transactions are presumed to be fair and regular15 and that a person takes
ordinary care of his concerns.16 Aside from his self-serving allegations, Roxas
failed to prove the truth of such allegations. Thus, said presumptions prevail
over his claims. Bare allegations, when unsubstantiated by evidence,
documentary or otherwise, are not equivalent to proof under our Rules of
Court.17cräläwvirtualibräry

Roxas is the President of Astro and reasonably, a businessman who is

presumed to take ordinary care of his concerns. Absent any countervailing
evidence, it cannot be gainsaid that he will not sign document without first
informing himself of its contents and consequences. Clearly, he knew the
nature of the transactions and documents involved as he not only executed
these notes on two different dates but he also executed, and again, signed
twice, a continuing Surety ship Agreement notarized on July 31, 1981,
wherein he guaranteed, jointly and severally with Astro the repayment of
P3,000,000.00 due to Philtrust. Such continuing suretyship agreement even
re-enforced his solidary liability Philtrust because as a surety, he bound
himself jointly and severally with Astros obligation. 18 Roxas cannot now
avoid liability by hiding under the convenient excuse that he merely signed
the notes in blank and the phrases in personal capacity and in his official
capacity were fraudulently inserted without his knowledge.

Lastly, Philguarantee has all the right to proceed against petitioner, it is

subrogated to the rights of Philtrust to demand for and collect payment from
both Roxas and Astro since it already paid the value of 70% of roxas and
Astro Electronics Corp.s loan obligation. In compliance with its contract of
Guarantee in favor of Philtrust.

Subrogation is the transfer of all the rights of the creditor to a third person,
who substitutes him in all his rights.19 It may either be legal or conventional.
Legal subrogation is that which takes place without agreement but by
operation of law because of certain acts.20 Instances of legal subrogation are
those provided in Article 1302 of the Civil Code. Conventional subrogation,
on the other hand, is that which takes place by agreement of the
parties.21cräläwvirtualibräry

Roxas acquiescence is not necessary for subrogation to take place because

the instant case is one of the legal subrogation that occurs by operation of
law, and without need of the debtors knowledge.22 Further, Philguarantee, as
guarantor, became the transferee of all the rights of Philtrust as against
Roxas and Astro because the guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the
debtor.23cräläwvirtualibräry

WHEREFORE, finding no error with the decision of the Court of Appeals

dated December 10, 1998, the same is hereby AFFIRMED in toto.

SO ORDERED.
CASE #75 Development Bank of Rizal vs Sim Wei 219 SCRA 736 (1993)

G.R. No. 85419 March 9, 1993

DEVELOPMENT BANK OF RIZAL, plaintiff-Petitioner, vs. SIMA WEI

and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN
INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK OF THE
PHILIPPINES, defendants-respondents.

Yngson & Associates for petitioner.chanrobles virtual law library

Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic
Corporation.chanrobles virtual law library

Eduardo G. Castelo for Sima Wei.chanrobles virtual law library

Monsod, Tamargo & Associates for Producers Bank.chanrobles virtual law

library

Rafael S. Santayana for Mary Cheng Uy.

CAMPOS, JR., J.:

On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity)
filed a complaint for a sum of money against respondents Sima Wei and/or
Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian Industrial Plastic
Corporation (Plastic Corporation for short) and the Producers Bank of the
Philippines, on two causes of action:

(1) To enforce payment of the balance of P1,032,450.02 on a promissory

note executed by respondent Sima Wei on June 9, 1983; andchanrobles
virtual law library

(2) To enforce payment of two checks executed by Sima Wei, payable to

petitioner, and drawn against the China Banking Corporation, to pay the
balance due on the promissory note.

Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss
alleging a common ground that the complaint states no cause of action. The
trial court granted the defendants' Motions to Dismiss. The Court of Appeals
affirmed this decision, * to which the petitioner Bank, represented by its
Legal Liquidator, filed this Petition for Review by Certiorari, assigning the
following as the alleged errors of the Court of Appeals: 1

(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-

PETITIONER HAS NO CAUSE OF ACTION AGAINST DEFENDANTS-
RESPONDENTS HEREIN.chanroblesvirtualawlibrarychanrobles virtual law
library

(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3
OF THE REVISED RULES OF COURT ON ALTERNATIVE DEFENDANTS IS NOT
APPLICABLE TO HEREIN DEFENDANTS-RESPONDENTS.

The antecedent facts of this case are as follows:chanrobles virtual law library

In consideration for a loan extended by petitioner Bank to respondent Sima

Wei, the latter executed and delivered to the former a promissory note,
engaging to pay the petitioner Bank or order the amount of P1,820,000.00
on or before June 24, 1983 with interest at 32% per annum. Sima Wei made
partial payments on the note, leaving a balance of P1,032,450.02. On
November 18, 1983, Sima Wei issued two crossed checks payable to
petitioner Bank drawn against China Banking Corporation, bearing
respectively the serial numbers 384934, for the amount of P550,000.00 and
384935, for the amount of P500,000.00. The said checks were allegedly
issued in full settlement of the drawer's account evidenced by the
promissory note. These two checks were not delivered to the petitioner-
payee or to any of its authorized representatives. For reasons not shown,
these checks came into the possession of respondent Lee Kian Huat, who
deposited the checks without the petitioner-payee's indorsement (forged or
otherwise) to the account of respondent Plastic Corporation, at the
Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch
Manager of the Balintawak branch of Producers Bank, relying on the
assurance of respondent Samson Tung, President of Plastic Corporation, that
the transaction was legal and regular, instructed the cashier of Producers
Bank to accept the checks for deposit and to credit them to the account of
said Plastic Corporation, inspite of the fact that the checks were crossed and
payable to petitioner Bank and bore no indorsement of the latter. Hence,
petitioner filed the complaint as
aforestated.chanroblesvirtualawlibrarychanrobles virtual law library

The main issue before Us is whether petitioner Bank has a cause of action
against any or all of the defendants, in the alternative or
otherwise.chanroblesvirtualawlibrarychanrobles virtual law library
A cause of action is defined as an act or omission of one party in violation of
the legal right or rights of another. The essential elements are: (1) legal
right of the plaintiff; (2) correlative obligation of the defendant; and (3) an
act or omission of the defendant in violation of said legal right.  2chanrobles
virtual law library

The normal parties to a check are the drawer, the payee and the drawee
bank. Courts have long recognized the business custom of using printed
checks where blanks are provided for the date of issuance, the name of the
payee, the amount payable and the drawer's signature. All the drawer has to
do when he wishes to issue a check is to properly fill up the blanks and sign
it. However, the mere fact that he has done these does not give rise to any
liability on his part, until and unless the check is delivered to the payee or
his representative. A negotiable instrument, of which a check is, is not only a
written evidence of a contract right but is also a species of property. Just as
a deed to a piece of land must be delivered in order to convey title to the
grantee, so must a negotiable instrument be delivered to the payee in order
to evidence its existence as a binding contract. Section 16 of the Negotiable
Instruments Law, which governs checks, provides in part:

Every contract on a negotiable instrument is incomplete and revocable until

delivery of the instrument for the purpose of giving effect thereto. . . .

Thus, the payee of a negotiable instrument acquires no interest with respect

thereto until its delivery to him. 3 Delivery of an instrument means transfer
of possession, actual or constructive, from one person to another.  4 Without
the initial delivery of the instrument from the drawer to the payee, there can
be no liability on the instrument. Moreover, such delivery must be intended
to give effect to the instrument.chanroblesvirtualawlibrarychanrobles virtual
law library

The allegations of the petitioner in the original complaint show that the two
(2) China Bank checks, numbered 384934 and 384935, were not delivered
to the payee, the petitioner herein. Without the delivery of said checks to
petitioner-payee, the former did not acquire any right or interest therein and
cannot therefore assert any cause of action, founded on said checks,
whether against the drawer Sima Wei or against the Producers Bank or any
of the other respondents.chanroblesvirtualawlibrarychanrobles virtual law
library

In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima

Wei on the promissory note, and the alternative defendants, including Sima
Wei, on the two checks. On appeal from the orders of dismissal of the
Regional Trial Court, petitioner Bank alleged that its cause of action was not
based on collecting the sum of money evidenced by the negotiable
instruments stated but on quasi-delict - a claim for damages on the ground
of fraudulent acts and evident bad faith of the alternative respondents. This
was clearly an attempt by the petitioner Bank to change not only the theory
of its case but the basis of his cause of action. It is well-settled that a party
cannot change his theory on appeal, as this would in effect deprive the other
party of his day in court. 5chanrobles virtual law library

Notwithstanding the above, it does not necessarily follow that the drawer
Sima Wei is freed from liability to petitioner Bank under the loan evidenced
by the promissory note agreed to by her. Her allegation that she has paid
the balance of her loan with the two checks payable to petitioner Bank has
no merit for, as We have earlier explained, these checks were never
delivered to petitioner Bank. And even granting, without admitting, that
there was delivery to petitioner Bank, the delivery of checks in payment of
an obligation does not constitute payment unless they are cashed or their
value is impaired through the fault of the creditor.  6 None of these exceptions
were alleged by respondent Sima Wei.chanroblesvirtualawlibrarychanrobles
virtual law library

Therefore, unless respondent Sima Wei proves that she has been relieved
from liability on the promissory note by some other cause, petitioner Bank
has a right of action against her for the balance due
thereon.chanroblesvirtualawlibrarychanrobles virtual law library

However, insofar as the other respondents are concerned, petitioner Bank

has no privity with them. Since petitioner Bank never received the checks on
which it based its action against said respondents, it never owned them (the
checks) nor did it acquire any interest therein. Thus, anything which the
respondents may have done with respect to said checks could not have
prejudiced petitioner Bank. It had no right or interest in the checks which
could have been violated by said respondents. Petitioner Bank has therefore
no cause of action against said respondents, in the alternative or otherwise.
If at all, it is Sima Wei, the drawer, who would have a cause of action
against her
co-respondents, if the allegations in the complaint are found to be
true.chanroblesvirtualawlibrarychanrobles virtual law library

With respect to the second assignment of error raised by petitioner Bank

regarding the applicability of Section 13, Rule 3 of the Rules of Court, We
find it unnecessary to discuss the same in view of Our finding that the
petitioner Bank did not acquire any right or interest in the checks due to lack
of delivery. It therefore has no cause of action against the respondents, in
the alternative or otherwise.chanroblesvirtualawlibrarychanrobles virtual law
library

In the light of the foregoing, the judgment of the Court of Appeals

dismissing the petitioner's complaint is AFFIRMED insofar as the second
cause of action is concerned. On the first cause of action, the case is
REMANDED to the trial court for a trial on the merits, consistent with this
decision, in order to determine whether respondent Sima Wei is liable to the
Development Bank of Rizal for any amount under the promissory note
allegedly signed by her.chanroblesvirtualawlibrarychanrobles virtual law
library

SO ORDERED.
CASE #76 Francisco vs CA 319 SCRA 354 (1999)

[G.R. No. 116320. November 29, 1999.]

ADALIA FRANCISCO, Petitioner, v. COURT OF APPEALS, HERBY

COMMERCIAL & CONSTRUCTION CORPORATION AND JAIME C.
ONG, Respondents.

DECISION

GONZAGA-REYES, J.:

Assailed in this petition for review on certiorari is the decision 1 of the Court
of Appeals affirming the decision 2 rendered by Branch 168 of the Regional
Trial Court of Pasig in Civil Case No. 35231 in favor of private
respondents.chanrobles virtual lawlibrary

The controversy before this Court finds its origins in a Land Development
and Construction Contract which was entered into on June 23, 1977 by A.
Francisco Realty & Development Corporation (AFRDC), of which petitioner
Adalia Francisco (Francisco) is the president, and private respondent Herby
Commercial & Construction Corporation (HCCC), represented by its President
and General Manager private respondent Jaime C. Ong (Ong), pursuant to a
housing project of AFRDC at San Jose del Monte, Bulacan, financed by the
Government Service Insurance System (GSIS). Under the contract, HCCC
agreed to undertake the construction of 35 housing units and the
development of 35 hectares of land. The payment of HCCC for its services
was on a turn-key basis, that is, HCCC was to be paid on the basis of the
completed houses and developed lands delivered to and accepted by AFRDC
and the GSIS. To facilitate payment, AFRDC executed a Deed of Assignment
in favor of HCCC to enable the latter to collect payments directly from the
GSIS. Furthermore, the GSIS and AFRDC put up an Executive Committee
Account with the Insular Bank of Asia & America (IBAA) in the amount of
P4,000,000.00 from which checks would be issued and co-signed by
petitioner Francisco and the GSIS Vice-President Armando Diaz (Diaz).

On February 10, 1978, HCCC filed a complaint 3 with the Regional Trial
Court of Quezon City against Francisco, AFRDC and the GSIS for the
collection of the unpaid balance under the Land Development and
Construction Contract in the amount of P515,493.89 for completed and
delivered housing units and land development. However, the parties
eventually arrived at an amicable settlement of their differences, which was
embodied in a Memorandum Agreement executed by HCCC and AFRDC on
July 21, 1978. Under the agreement, the parties stipulated that HCCC had
turned over 83 housing units which have been accepted and paid for by the
GSIS. The GSIS acknowledged that it still owed HCCC P520,177.50
representing incomplete construction of housing units, incomplete land
development and 5% retention, which amount will be discharged when the
defects and deficiencies are finally completed by HCCC. It was also provided
that HCCC was indebted to AFRDC in the amount of P180,234.91 which the
former agreed would be paid out of the proceeds from the 40 housing units
still to be turned over by HCCC or from any amount due to HCCC from the
GSIS. Consequently, the trial court dismissed the case upon the filing by the
parties of a joint motion to dismiss.

Sometime in 1979, after an examination of the records of the GSIS, Ong

discovered that Diaz and Francisco had executed and signed seven checks
4 , of various dates and amounts, drawn against the IBAA and payable to
HCCC for completed and delivered work under the contract. Ong, however,
claims that these checks were never delivered to HCCC. Upon inquiry with
Diaz, Ong learned that the GSIS gave Francisco custody of the checks since
she promised that she would deliver the same to HCCC. Instead, Francisco
forged the signature of Ong, without his knowledge or consent, at the dorsal
portion of the said checks to make it appear that HCCC had indorsed the
checks; Francisco then indorsed the checks for a second time by signing her
name at the back of the checks and deposited the checks in her IBAA
savings account. IBAA credited Francisco’s account with the amount of the
checks and the latter withdrew the amount so credited.

On June 7, 1979, Ong filed complaints with the office of the city fiscal of
Quezon City, charging Francisco with estafa thru falsification of commercial
documents. Francisco denied having forged Ong’s signature on the checks,
claiming that Ong himself indorsed the seven checks in behalf of HCCC and
delivered the same to Francisco in payment of the loans extended by
Francisco to HCCC. According to Francisco, she agreed to grant HCCC the
loans in the total amount of P585,000.00 and covered by eighteen
promissory notes in order to obviate the risk of the non-completion of the
project. As a means of repayment, Ong allegedly issued a Certification
authorizing Francisco to collect HCCC’s receivables from the GSIS. Assistant
City Fiscal Ramon M. Gerona gave credence to Francisco’s claims and
accordingly, dismissed the complaints, which dismissal was affirmed by the
Minister of Justice in a resolution issued on June 5, 1981.
The present case was brought by private respondents on November 19,
1979 against Francisco and IBAA for the recovery of P370,475.00,
representing the total value of the seven checks, and for damages,
attorney’s fees, expenses of litigation and costs. After trial on the merits, the
trial court rendered its decision in favor of private respondents, the
dispositive portion of which provides —chanrobles law library : red

WHEREFORE, premises considered, judgment is hereby rendered in favor of

the plaintiff’s and against the defendants INSULAR BANK OF ASIA &
AMERICA and ATTY. ADALIA FRANCISCO, to jointly and severally pay the
plaintiffs the amount of P370,475.00 plus interest thereon at the rate of
12% per annum from the date of the filing of the complaint until the full
amount is paid; moral damages to plaintiff Jaime Ong in the sum of
P50,000.00; exemplary damages of P50,000.00; litigation expenses of
P5,000.00; and attorney’s fees of P50,000.00.

With respect to the cross-claim of the defendant IBAA against its co-
defendant Atty. Adalia Francisco, the latter is ordered to reimburse the
former for the sums that the Bank shall pay to the plaintiff on the forged
checks including the interests paid thereon.

Further, the defendants are ordered to pay the costs.

Based upon the findings of handwriting experts from the National Bureau of
Investigation (NBI), the trial court held that Francisco had indeed forged the
signature of Ong to make it appear that he had indorsed the checks. Also,
the court ruled that there were no loans extended, reasoning that it was
unbelievable that HCCC was experiencing financial difficulties so as to
compel it to obtain the loans from AFRDC in view of the fact that the GSIS
had issued checks in favor of HCCC at about the same time that the alleged
advances were made. The trial court stated that it was plausible that
Francisco concealed the fact of issuance of the checks from private
respondents in order to make it appear as if she were accommodating
private respondents, when in truth she was lending HCCC its own money.

With regards to the Memorandum Agreement entered into between AFRDC

and HCCC in Civil Case No. Q-24628, the trial court held that the same did
not make any mention of the forged checks since private respondents were
as of yet unaware of their existence, that fact having been effectively
concealed by Francisco, until private respondents acquired knowledge of
Francisco’s misdeeds in 1979.

IBAA was held liable to private respondents for having honored the checks
despite such obvious irregularities as the lack of initials to validate the
alterations made on the check, the absence of the signature of a co-
signatory in the corporate checks of HCCC and the deposit of the checks on
a second indorsement in the savings account of Francisco. However, the trial
court allowed IBAA recourse against Francisco, who was ordered to
reimburse the IBAA for any sums it shall have to pay to private respondents.
5

Both Francisco and IBAA appealed the trial court’s decision, but the Court of
Appeals dismissed IBAA’s appeal for its failure to file its brief within the 45-
day extension granted by the appellate court. IBAA’s motion for
reconsideration and petition for review on certiorari filed with this Court were
also similarly denied. On November 21, 1989, IBAA and HCCC entered into a
Compromise Agreement which was approved by the trial court wherein
HCCC acknowledged receipt of the amount of P370,475.00 in full satisfaction
of its claims against IBAA, without prejudice to the right of the latter to
pursue its claims against Francisco.

On June 29, 1992, the Court of Appeals affirmed the trial court’s ruling,
hence this petition for review on certiorari filed by petitioner, assigning the
following errors to the appealed decision —

1. The respondent Court of Appeals erred in concluding that private

respondents did not owe Petitioner the sum covered by the Promissory Notes
Exh. 2-2-A-2-P (FRANCISCO). Such conclusion was based mainly on
conjectures, surmises and speculation contrary to the unrebutted pleadings
and evidence presented by petitioner.

2. The respondent Court of Appeals erred in holding that Petitioner falsified

the signature of private respondent ONG on the checks in question without
any authority therefor which is patently contradictory to the unrebutted
pleading and evidence that petitioner was expressly authorized by
respondent HERBY thru ONG to collect all receivables of HERBY from GSIS to
pay the loans extended to them. (Exhibit 3).

3. That respondent Court of Appeals erred in holding that the seven checks
in question were not taken up in the liquidation and reconciliation of all
outstanding account between AFRDC and HERBY as acknowledged by the
parties in Memorandum Agreement (Exh. 5) is a pure conjecture, surmise
and speculation contrary to the unrebutted evidence presented by
petitioners. It is an inference made which is manifestly mistaken.

4. The respondent Court of Appeals erred in affirming the decision of the

lower court and dismissing the appeal. 6
The pivotal issue in this case is whether or not Francisco forged the
signature of Ong on the seven checks. In this connection, we uphold the
lower courts’ finding that the subject matter of the present case, specifically
the seven checks, drawn by GSIS and AFRDC, dated between October to
November 1977, in the total amount of P370,475.00 and payable to HCCC,
was not included in the Memorandum Agreement executed by HCCC and
AFRDC in Civil Case No. Q-24628. As observed by the trial court, aside from
there being absolutely no mention of the checks in the said agreement, the
amounts represented by said checks could not have been included in the
Memorandum Agreement executed in 1978 because private respondents
only discovered Francisco’s acts of forgery in 1979. The lower courts found
that Francisco was able to easily conceal from private respondents even the
fact of the issuance of the checks since she was a co-signatory thereof. 7 We
also note that Francisco had custody of the checks, as proven by the check
vouchers bearing, her uncontested signature, 8 by which she, in effect,
acknowledged having received the checks intended for HCCC. This
contradicts Francisco’s claims that the checks were issued to Ong who
delivered them to Francisco already indorsed. 9

As regards the forgery, we concur with the lower courts’ finding that
Francisco forged the signature of Ong on the checks to make it appear as if
Ong had indorsed said checks and that, after indorsing the checks for a
second time by signing her name at the back of the checks, Francisco
deposited said checks in her savings account with IBAA. The forgery was
satisfactorily established in the trial court upon the strength of the findings
of the NBI handwriting expert. 10 Other than petitioner’s self-serving
denials, there is nothing in the records to rebut the NBI’s findings. Well-
entrenched is the rule that findings of trial courts which are factual in nature,
especially when affirmed by the Court of Appeals, deserve to be respected
and affirmed by the Supreme Court, provided it is supported by substantial
evidence on record, 11 as it is in the case at bench.

Petitioner claims that she was, in any event, authorized to sign Ong’s name
on the checks by virtue of the Certification executed by Ong in her favor
giving her the authority to collect all the receivables of HCCC from the GSIS,
including the questioned checks. 12 Petitioner’s alternative defense must
similarly fail. The Negotiable Instruments Law provides that where any
person is under obligation to indorse in a representative capacity, he may
indorse in such terms as to negative personal liability. 13 An agent, when so
signing, should indicate that he is merely signing in behalf of the principal
and must disclose the name of his principal; otherwise he shall be held
personally liable. 14 Even assuming that Francisco was authorized by HCCC
to sign Ong’s name, still, Francisco did not indorse the instrument in
accordance with law. Instead of signing Ong’s name, Francisco should have
signed her own name and expressly indicated that she was signing as an
agent of HCCC. Thus, the Certification cannot be used by Francisco to
validate her act of forgery.chanroblesvirtual|awlibrary

Every person who, contrary to law, wilfully or negligently causes damage to

another, shall indemnify the latter for the same. 15 Due to her forgery of
Ong’s signature which enabled her to deposit the checks in her own account,
Francisco deprived HCCC of the money due it from the GSIS pursuant to the
Land Development and Construction Contract. Thus, we affirm respondent
court’s award of compensatory damages in the amount of P370,475.00, but
with a modification as to the interest rate which shall be six percent (6%)
per annum, to be computed from the date of the filing of the complaint since
the amount of damages was alleged in the complaint; 16 however, the rate
of interest shall be twelve percent (12%) per annum from the time the
judgment in this case becomes final and executory until its satisfaction and
the basis for the computation of this twelve percent (12%) rate of interest
shall be the amount of P370,475.00. This is in accordance with the doctrine
enunciated in Eastern Shipping Lines, Inc. v. Court of Appeals, Et Al., 17
which was reiterated in Philippine National Bank v. Court of Appeals, 18
Philippine Airlines, Inc. v. Court of Appeals 19 and in Keng Hua Paper
Products Co., Inc. v. Court of Appeals, 20 which provides that —

1. When an obligation is breached, and it consists in the payment of a sum

of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of six percent (6%) per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be twelve percent (12%) per
annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.

We also sustain the award of exemplary damages in the amount of

P50,000.00. Under Article 2229 of the Civil Code, exemplary damages are
imposed by way of example or correction for the public good, in addition to
the moral, temperate, liquidated or compensatory damages. Considering
petitioner’s fraudulent act, we hold that an award of P50,000.00 would be
adequate, fair and reasonable. The grant of exemplary damages justifies the
award of attorney’s fees in the amount of P50,000.00, and the award of
P5,000.00 for litigation expenses. 21

The appellate court’s award of P50,000.00 in moral damages is warranted.

Under Article 2217 of the Civil Code, moral damages may be granted upon
proof of physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation
and similar injury. 22 Ong testified that he suffered sleepless nights,
embarrassment, humiliation and anxiety upon discovering that the checks
due his company were forged by petitioner and that petitioner had filed
baseless criminal complaints against him before the fiscal’s office of Quezon
City which disrupted HCCC’s business operations. 23

WHEREFORE, we AFFIRM the respondent court’s decision promulgated on

June 29, 1992, upholding the February 16, 1988 decision of the trial court in
favor of private respondents, with the modification that the interest upon the
actual damages awarded shall be at six percent (6%) per annum, which
interest rate shall be computed from the time of the filing of the complaint
on November 19, 1979. However, the interest rate shall be twelve percent
(12%) per annum from the time the judgment in this case becomes final and
executory and until such amount is fully paid. The basis for computation of
the six percent and twelve percent rates of interest shall be the amount of
P370,475.00. No pronouncement as to costs.

SO ORDERED.chanroblesvirtual|awlibrary
CASE #77 Republic Planters Bank vs CA 216 SCRA 738 (1992)

[G.R. No. 93073. December 21, 1992.]

REPUBLIC PLANTERS BANK, Petitioner, v. COURT OF APPEALS and

FERMIN CANLAS, Respondents.

SYLLABUS

1. MERCANTILE LAW; NEGOTIABLE INSTRUMENTS LAW; PROMISSORY

NOTES; CO-MAKER; CANNOT ESCAPE LIABILITY ARISING THEREFROM;
CASE AT BAR. — Under the Negotiable Instruments Law, persons who write
their names on the face of promissory notes are makers and are liable as
such. By signing the notes, the maker promises to pay to the order of the
payee or any holder according to the tenor thereof. Based on the above
provisions of law, there is no denying that private respondent Fermin Canlas
is one of the co-makers of the promissory notes. As such, he cannot escape
liability arising therefrom.

2. ID.; ID.; ID.; LIABILITY THERETO IS SOLIDARY WHERE SINGULAR

PRONOUN ARE USED IN THE INSTRUMENT. — Where an instrument
containing the words "I promise to pay" is signed by two or more persons,
they are deemed to be jointly and severally liable thereon. An instrument
which begins with "I", "We", or "Either of us" promise to pay, when signed
by two or more persons, makes them solidarily liable. The fact that the
singular pronoun is used indicates that the promise is individual as to each
other; meaning that each of the co-signers is deemed to have made an
independent singular promise to pay the notes in full.

3. ID.; ID.; ID.; JOINT AND SEVERAL OBLIGATION, CONSTRUED; CASE AT

BAR. — In the case at bar, the solidary liability of private respondent Fermin
Canlas is made clearer and certain, without reason for ambiguity, by the
presence of the phrase "Joint and several" as describing the unconditional
promise to pay to the order of Republic Planters Bank. A joint and several
note is one in which the makers bind themselves both jointly and individually
to the payee so that all may be sued together for its enforcement, or the
creditor may select one or more as the object of the suit. A joint and several
obligation in common law corresponds to a civil law solidary obligation; that
is, one of several debtors bound in such wise that each is liable for the entire
amount, and not merely for his proportionate share. By making a joint and
several promise to pay to the order of Republic Planters Bank, private
respondent Fermin Canlas assumed the solidary liability of a debtor and the
payee may choose to enforce the notes against him alone or jointly with
Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.

4. ID.; ID.; ID.; LIABILITY THERETO NOT AFFECTED BY CHANGE OF

CORPORATE NAME; REASON. — Finally, the respondent Court made a grave
error in holding that an amendment in a corporation’s Articles of
Incorporation effecting a change of corporate name, in this case from
Worldwide Garment Manufacturing, Inc. to Pinch Manufacturing Corporation,
extinguished the personality of the original corporation. The corporation,
upon such change in its name, is in no sense a new corporation, nor the
successor of the original corporation. It is the same corporation with a
different name, and its character is in no respect changed. A change in the
corporate name does not make a new corporation, and whether effected by
special act or under a general law, has no effect on the identity of the
corporation, or on its property, rights, or liabilities. The corporation
continues, as before, responsible in its new name for all debts or other
liabilities which it had previously contracted or incurred.

5. ID.; ID.; LIABILITY OF AN AGENT TO AN INSTRUMENT IS PERSONAL

WHEN THERE IS FAILURE TO DISCLOSE PRINCIPAL. — As a general rule,
officers or directors under the old corporate name bear no personal liability
for acts done or contracts entered into by officers of the corporation, if duly
authorized. Inasmuch as such officers acted in their capacity as agent of the
old corporation and the change of name meant only the continuation of the
old juridical entity, the corporation bearing the same name is still bound by
the acts of its agents if authorized by the Board. Under the Negotiable
Instruments Law, the liability of a person signing as an agent is specifically
provided for in Section 20 thereof. Where the instrument contains or a
person adds to his signature words indicating that he signs for or on behalf
of a principal, or in a representative capacity, he is not liable on the
instrument if he was duly authorized; but the mere addition of words
describing him as an agent, or as filling a representative character, without
disclosing his principal, does not exempt him from personal liability.

6. ID.; ID.; PROMISSORY NOTES; RULE IN THE CASE OF REFORMINA VS.

TOMOL (139 SCRA 260 [1985]), NOT APPLICABLE TO INSTRUMENTS WITH
STIPULATED INTEREST; CASE AT BAR. — This Court takes note that the
respondent Court, relying on Reformina v. Tomol, lowered the interest rate
on the promissory notes from 16% to 12%. The ruling in the case of
Reformina v. Tomol relied upon by the appellate court in reducing the
interest rate on the promissory notes from 16% to 12% per annum does not
squarely apply to the instant petition. In the abovecited case, the rate of
12% was applied to forebearances of money, goods or credit and court
judgments thereon, only in the absence of any stipulation between the
parties. In the case at bar however, it was found by the trial court that the
rate of interest is 9% per annum, which interest rate the plaintiff may at any
time without notice, raise within the limits allowed by law. And so, as of
February 16, 1984, the plaintiff had fixed the interest at 16% per annum.

7. ID.; USURY LAW; RATE, APPLICABLE ONLY TO INTEREST FOR USE OR

FORBEARANCE OF MONEY; INCREASE IN RATE, NOT SUBJECT TO ANY
CEILING. — This Court has held that the rates under the Usury Law, as
amended by Presidential Decree No. 116, are applicable only to interests by
way of compensation for the use or forebearance of money. Article 2209 of
the Civil Code, on the other hand, governs interests by way of damages.
This fine distinction was not taken into consideration by the appellate court,
which instead made a general statement that the interest rate be at 12%
per annum. Inasmuch as this Court had declared that increases in interest
rates are not subject to any ceiling prescribed by the Usury Law, the
appellate court erred in limiting the interest rate at 12% per annum. Central
Bank Circular No. 905, Series of 1982 removed the Usury Law ceiling on
interest rates.

DECISION

CAMPOS, JR., J.:

This is an appeal by way of a Petition for Review on Certiorari from the

decision * of the Court of Appeals in CA G.R. CV No. 07302, entitled
"Republic Planters Bank, Plaintiff-Appellee v. Pinch Manufacturing
Corporation, Et Al., Defendants and Fermin Canlas, Defendant-Appellant",
which affirmed the decision ** in Civil Case No. 82-5448 except that it
completely absolved Fermin Canlas from liability under the promissory notes
and reduced the award for damages and attorney’s fees. The RTC decision,
rendered on June 20, 1985, is quoted hereunder:jgc:chanrobles.com.ph

"WHEREFORE, premises considered, judgment is hereby rendered in favor of

the plaintiff Republic Planters Bank, ordering defendant Pinch Manufacturing
Corporation (formerly Worldwide Garment Manufacturing, Inc.) and
defendants Shozo Yamaguchi and Fermin Canlas to pay, jointly and
severally, the plaintiff bank the following sums with interest thereon at 16%
per annum from the dates indicated, to wit:chanrob1es virtual 1aw library

Under the promissory note (Exhibit "A"), the sum of P300,000.00 with
interest from January 29, 1981 until fully paid; under promissory note
(Exhibit "B"), the sum of P40,000.00 with interest from November 27, 1980;
under the promissory note (Exhibit "C"), the sum of P166,466.00 with
interest from January 29, 1981; under the promissory note (Exhibit "E"), the
sum of P86,130.31 with interest from January 29, 1981; under the
promissory note (Exhibit "G"), the sum of P12,703.70 with interest from
November 27, 1980; under the promissory note (Exhibit "H"), the sum of
P281,875.91 with interest from January 29, 1981; and under the promissory
note (Exhibit "I"), the sum of P200,000.00 with interest from January 29,
1981.

Under the promissory note (Exhibit "D") defendants Pinch Manufacturing

Corporation (formerly named Worldwide Garment Manufacturing, Inc.) and
Shozo Yamaguchi are ordered to pay, jointly and severally, the plaintiff bank
the sum of P367,000.00 with interest of 16% per annum from January 29,
1981 until fully paid.chanrobles lawlibrary : rednad

Under the promissory note (Exhibit "F"), defendant corporation Pinch

(formerly Worldwide) is ordered to pay the plaintiff bank the sum of
P140,000.00 with interest at 16% per annum from November 27, 1980 until
fully paid.

Defendant Pinch (formerly Worldwide) is hereby ordered to pay the plaintiff

the sum of P231,120.81 with interest at 12% per annum from July 1, 1981,
until fully paid and the sum of P331,870.97 with interest from March 28,
1981, until fully paid.

All the defendants are also ordered to pay, jointly and severally, the plaintiff
the sum of P100,000.00 as and for reasonable attorney’s fee and the further
sum equivalent to 3% per annum of the respective principal sums from the
dates above stated as penalty charge until fully paid, plus one percent (1%)
of the principal sums as service charge.

With costs against the defendants.

SO ORDERED." 1

From the above decision only defendant Fermin Canlas appealed to the then
Intermediate Appellate Court (now the Court of Appeals). His contention was
that inasmuch as he signed the promissory notes in his capacity as officer of
the defunct Worldwide Garment Manufacturing, Inc., he should not be held
personally liable for such authorized corporate acts that he performed. It is
now the contention of the petitioner Republic Planters Bank that having
unconditionally signed the nine (9) promissory notes with Shozo Yamaguchi,
jointly and severally, defendant Fermin Canlas is solidarily liable with Shozo
Yamaguchi on each of the nine notes.

We find merit in this appeal.

From the records, these facts are established: Defendant Shozo Yamaguchi
and private respondent Fermin Canlas were President/Chief Operating
Officer and Treasurer respectively, of Worldwide Garment Manufacturing,
Inc. By virtue of Board Resolution No. 1 dated August 1, 1979, defendant
Shozo Yamaguchi and private respondent Fermin Canlas were authorized to
apply for credit facilities with the petitioner Republic Planters Bank in the
forms of export advances and letters of credit/trust receipts
accommodations. Petitioner bank issued nine promissory notes, marked as
Exhibits A to I inclusive, each of which were uniformly worded in the
following manner:jgc:chanrobles.com.ph

" _____________, after date, for value received, I/we, jointly and severally
promise to pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office
in Manila, Philippines, the sum of __________ PESOS (), Philippine Currency
. . . ."cralaw virtua1aw library

On the right bottom margin of the promissory notes appeared the signatures
of Shozo Yamaguchi and Fermin Canlas above their printed names with the
phrase "and (in) his personal capacity" typewritten below. At the bottom of
the promissory notes appeared: "Please credit proceeds of this note
to:chanrob1es virtual 1aw library

_____ Savings Account _____XX Current Account No. 1372-00257-6 of

WORLDWIDE GARMENT MFG. CORP.

These entries were separated from the text of the notes with a bold line
which ran horizontally across the pages.

In the promissory notes marked as Exhibits C, D and F, the name Worldwide

Garment Manufacturing, Inc. was apparently rubber stamped above the
signatures of defendant and private Respondent.

On December 20, 1982, Worldwide Garment Manufacturing, Inc. voted to

change its corporate name to Pinch Manufacturing
Corporation.chanroblesvirtualawlibrary
On February 5, 1982, petitioner bank filed a complaint for the recovery of
sums of money covered among others, by the nine promissory notes with
interest thereon, plus attorney’s fees and penalty charges. The complaint
was originally brought against Worldwide Garment Manufacturing, Inc. inter
alia, but it was later amended to drop Worldwide Manufacturing, Inc. as
defendant and substitute Pinch Manufacturing Corporation in its place.
Defendants Pinch Manufacturing Corporation and Shozo Yamaguchi did not
file an Amended Answer and failed to appear at the scheduled pre-trial
conference despite due notice. Only private respondent Fermin Canlas filed
an Amended Answer wherein he denied having issued the promissory notes
in question since according to him, he was not an officer of Pinch
Manufacturing Corporation, but instead of Worldwide Garment
Manufacturing, Inc., and that when he issued said promissory notes in behalf
of Worldwide Garment Manufacturing, Inc., the same were in blank, the
typewritten entries not appearing therein prior to the time he affixed his
signature.

In the mind of this Court, the only issue material to the resolution of this
appeal is whether private respondent Fermin Canlas is solidarily liable with
the other defendants, namely Pinch Manufacturing Corporation and Shozo
Yamaguchi, on the nine promissory notes.

We hold that private respondent Fermin Canlas is solidarily liable on each of

the promissory notes bearing his signature for the following
reasons:chanrob1es virtual 1aw library

The promissory notes are negotiable instruments and must be governed by

the Negotiable Instruments Law. 2

Under the Negotiable Instruments Law, persons who write their names on
the face of promissory notes are makers and are liable as such. 3 By signing
the notes, the maker promises to pay to the order of the payee or any
holder 4 according to the tenor thereof. 5 Based on the above provisions of
law, there is no denying that private respondent Fermin Canlas is one of the
co-makers of the promissory notes. As such, he cannot escape liability
arising therefrom.

Where an instrument containing the words "I promise to pay" is signed by

two or more persons, they are deemed to be jointly and severally liable
thereon. 6 An instrument which begins with "I", "We", or "Either of us"
promise to pay, when signed by two or more persons, makes them solidarily
liable. 7 The fact that the singular pronoun is used indicates that the promise
is individual as to each other; meaning that each of the co-signers is
deemed to have made an independent singular promise to pay the notes in
full.

In the case at bar, the solidary liability of private respondent Fermin Canlas
is made clearer and certain, without reason for ambiguity, by the presence
of the phrase "Joint and several" as describing the unconditional promise to
pay to the order of Republic Planters Bank. A joint and several note is one in
which the makers bind themselves both jointly and individually to the payee
so that all may be sued together for its enforcement, or the creditor may
select one or more as the object of the suit. 8 A joint and several obligation
in common law corresponds to a civil law solidary obligation; that is, one of
several debtors bound in such wise that each is liable for the entire amount,
and not merely for his proportionate share. 9 By making a joint and several
promise to pay to the order of Republic Planters Bank, private respondent
Fermin Canlas assumed the solidary liability of a debtor and the payee may
choose to enforce the notes against him alone or jointly with Yamaguchi and
Pinch Manufacturing Corporation as solidary debtors.

As to whether the interpolation of the phrase "and (in) his personal capacity"
below the signatures of the makers in the notes will affect the liability of the
makers, We do not find it necessary to resolve and decide, because it is
immaterial and will not affect the liability of private respondent Fermin
Canlas as a joint and several debtor of the notes. With or without the
presence of said phrase, private respondent Fermin Canlas is primarily liable
as a co maker of each of the notes and his liability is that of a solidary
debtor.

Finally, the respondent Court made a grave error in holding that an

amendment in a corporation’s Articles of Incorporation effecting a change of
corporate name, in this case from Worldwide Garment Manufacturing, Inc. to
Pinch Manufacturing Corporation, extinguished the personality of the original
corporation.

The corporation, upon such change in its name, is in no sense a new

corporation, nor the successor of the original corporation. It is the same
corporation with a different name, and its character is in no respect
changed. 10

A change in the corporate name does not make a new corporation, and
whether effected by special act or under a general law, has no effect on the
identity of the corporation, or on its property, rights, or liabilities. 11

The corporation continues, as before, responsible in its new name for all
debts or other liabilities which it had previously contracted or incurred. 12
As a general rule, officers or directors under the old corporate name bear no
personal liability for acts done or contracts entered into by officers of the
corporation, if duly authorized. Inasmuch as such officers acted in their
capacity as agent of the old corporation and the change of name meant only
the continuation of the old juridical entity, the corporation bearing the same
name is still bound by the acts of its agents if authorized by the Board.
Under the Negotiable Instruments Law, the liability of a person signing as an
agent is specifically provided for as follows:chanrobles.com:cralaw:red

SECTION 20. Liability of a person signing as agent and so forth. — Where

the instrument contains or a person adds to his signature words indicating
that he signs for or on behalf of a principal, or in a representative capacity,
he is not liable on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling a representative
character, without disclosing his principal, does not exempt him from
personal liability.

Where the agent signs his name but nowhere in the instrument has he
disclosed the fact that he is acting in a representative capacity or the name
of the third party for whom he might have acted as agent, the agent is
personally liable to the holder of the instrument and cannot be permitted to
prove that he was merely acting as agent of another and parol or extrinsic
evidence is not admissible to avoid the agent’s personal liability. 13

On the private respondent’s contention that the promissory notes were

delivered to him in blank for his signature, we rule otherwise. A careful
examination of the notes in question shows that they are the stereotype
printed form of promissory notes generally used by commercial banking
institutions to be signed by their clients in obtaining loans. Such printed
notes are incomplete because there are blank spaces to be filled up on
material particulars such as payee’s name, amount of the loan, rate of
interest, date of issue and the maturity date. The terms and conditions of
the loan are printed on the note for the borrower-debtor’s perusal. An
incomplete instrument which has been delivered to the borrower for his
signature is governed by Section 14 of the Negotiable Instruments Law
which provides, in so far as relevant to this case, thus:chanrob1es virtual
1aw library

SECTION 14. Blanks; when may be filled. — Where the instrument is

wanting in any material particular, the person in possession thereof has a
prima facie authority to complete it by filling up the blanks therein. . . . In
order, however, that any such instrument when completed may be enforced
against any person who became a party thereto prior to its completion, it
must be filled up strictly in accordance with the authority given and within a
reasonable time. . . .

Proof that the notes were signed in blank was only the self-serving
testimony of private respondent Fermin Canlas, as determined by the trial
court, so that the trial court "doubts that the defendant (Canlas) signed in
blank the promissory notes." We chose to believe the bank’s testimony that
the notes were filled up before they were given to private respondent Fermin
Canlas and defendant Shozo Yamaguchi for their signatures as joint and
several promissors. For signing the notes above their typewritten names,
they bound themselves as unconditional makers. We take judicial notice of
the customary procedure of commercial banks of requiring their clientele to
sign promissory notes prepared by the banks in printed form with blank
spaces already filled up as per agreed terms of the loan, leaving the
borrowers-debtors to do nothing but read the terms and conditions therein
printed and to sign as makers or co-makers. When the notes were given to
private respondent Fermin Canlas for his signature, the notes were complete
in the sense that the spaces for the material particular had been filled up by
the bank as per agreement. The notes were not incomplete instruments;
neither were they given to private respondent Fermin Canlas in blank as he
claims. Thus, Section 14 of the Negotiable Instruments Law is not applicable.

This Court takes note that the respondent Court, relying on Reformina v.
Tomol, 14 lowered the interest rate on the promissory notes from 16% to
12%.

The ruling in the case of Reformina v. Tomol relied upon by the appellate
court in reducing the interest rate on the promissory notes from 16% to
12% per annum does not squarely apply to the instant petition. In the
abovecited case, the rate of 12% was applied to forebearances of money,
goods or credit and court judgments thereon, only in the absence of any
stipulation between the parties.

In the case at bar however, it was found by the trial court that the rate of
interest is 9% per annum, which interest rate the plaintiff may at any time
without notice, raise within the limits allowed by law. And so, as of February
16, 1984, the plaintiff had fixed the interest at 16% per annum.

This Court has held that the rates under the Usury Law, as amended by
Presidential Decree No. 116, are applicable only to interests by way of
compensation for the use or forebearance of money. Article 2209 of the Civil
Code, on the other hand, governs interests by way of damages. 15 This fine
distinction was not taken into consideration by the appellate court, which
instead made a general statement that the interest rate be at 12% per
annum.
Inasmuch as this Court had declared that increases in interest rates are not
subject to any ceiling prescribed by the Usury Law, the appellate court erred
in limiting the interest rate at 12% per annum. Central Bank Circular No.
905, Series of 1982 removed the Usury Law ceiling on interest rates. 16

In the light of the foregoing analysis and under the plain language of the
statute and jurisprudence on the matter, the decision of the respondent
Court of Appeals absolving private respondent Fermin Canlas is REVERSED
and SET ASIDE. Judgment is hereby rendered declaring private respondent
Fermin Canlas jointly and severally liable on all the nine promissory notes
with the following sums and at 16% interest per annum from the dates
indicated, to wit:chanrob1es virtual 1aw library

Under the promissory note marked as Exhibit A, the sum of P300,000.00

with interest from January 29, 1981 until fully paid; under promissory note
marked as Exhibit B, the sum of P40,000.00 with interest from November
27, 1980; under the promissory note denominated as Exhibit C, the amount
of P166,466.00 with interest from January 29, 1981; under the promissory
note denominated as Exhibit D, the amount of P367,000.00 with interest
from January 29, 1981 until fully paid; under the promissory note marked as
Exhibit E, the amount of P86,130.31 with interest from January 29, 1981;
under the promissory note marked as Exhibit F, the sum of P140,000.00
with interest from November 27, 1980 until fully paid; under the promissory
note marked as Exhibit G, the amount of P12,703.70 with interest from
November 27, 1980; the promissory note marked as Exhibit H, the sum of
P281,875.91 with interest from January 29, 1981; and the promissory note
marked as Exhibit I, the sum of P200,000.00 with interest from January 29,
1981.chanrobles law library : red

The liabilities of defendants Pinch Manufacturing Corporation (formerly

Worldwide Garment Manufacturing, Inc.) and Shozo Yamaguchi, for not
having appealed from the decision of the trial court, shall be adjudged in
accordance with the judgment rendered by the Court a quo.

With respect to attorney’s fees, and penalty and service charges, the private
respondent Fermin Canlas is hereby held jointly and solidarily liable with
defendants for the amounts found by the Court a quo. With costs against
private Respondent.

SO ORDERED.
CASE #78 Gempesaw vs CA GR No. 92244 (1993)

G.R. No. 92244 : February 9, 1993

NATIVIDAD GEMPESAW, Petitioner, vs. THE HONORABLE COURT OF

APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, Respondents.

CAMPOS, JR., J.:

From the adverse decision * of the Court of Appeals (CA-G.R. CV No.

16447), petitioner, Natividad Gempesaw, appealed to this Court in a Petition
for Review, on the issue of the right of the drawer to recover from the
drawee bank who pays a check with a forged indorsement of the payee,
debiting the same against the drawer's
account.chanroblesvirtualawlibrarychanrobles virtual law library

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

Ichanrobles virtual law library

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.
 IIchanrobles virtual law library

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.

IIIchanrobles virtual law library

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:chanrobles virtual law
library

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). 2chanrobles virtual law library

Practically, all the checks issued and honored by the respondent drawee
bank were crossed checks. 3Aside 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.chanroblesvirtualawlibrarychanrobles virtual law library
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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library

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
Law 4(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. 6In other words, he is
precluded from using forgery as a basis for his claim for re-crediting of his
account.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library

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. 7The first delivery of the instrument, complete in form, to the payee
who takes it as a holder, is called issuance of the instrument.  8Without 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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law
library

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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles
virtual law library

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. 9chanrobles virtual law library

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. 10Under Section 23 of the NIL, she is now precluded
from using the forgery to prevent the bank's debiting of her
account.chanroblesvirtualawlibrarychanrobles virtual law library
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong &
Shanghai Bank  11is 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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library

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

eitherchanrobles virtual law library

(a) Prohibits further negotiation of the instrument; or

xxx xxx xxx

In this kind of restrictive indorsement, the prohibition to transfer or

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

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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law
library

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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library

SO ORDERED.
CASE #79 Associated Bank vs CA GR No. 107382, and PNB vs CA GR No. 107612
(1996)

G. R. No. 107382/G.R. No. 107612 - January 31, 1996

ASSOCIATED BANK, Petitioner, v. HON. COURT OF APPEALS, PROVINCE

OF TARLAC and PHILIPPINE NATIONAL BANK, Respondents.

xxxxxxxxx

G.R. No. 107612 - January 31, 1996

PHILIPPINE NATIONAL BANK, Petitioner, v. HONORABLE COURT OF

APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK, Respondents.

DECISION

ROMERO, J.:

Where thirty checks bearing forged endorsements are paid, who bears the
loss, the drawer, the drawee bank or the collecting bank?

This is the main issue in these consolidated petitions for review assailing the
decision of the Court of Appeals in "Province of Tarlac v. Philippine National
Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No.
17962). 1

The facts of the case are as follows:

The Province of Tarlac maintains a current account with the Philippine

National Bank (PNB) Tarlac Branch where the provincial funds are deposited.
Checks issued by the Province are signed by the Provincial Treasurer and
countersigned by the Provincial Auditor or the Secretary of the Sangguniang
Bayan.

A portion of the funds of the province is allocated to the Concepcion

Emergency Hospital. 2 The allotment checks for said government hospital are
drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac"
or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac." The
checks are released by the Office of the Provincial Treasurer and received for
the hospital by its administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-
audited by the Provincial Auditor. It was then discovered that the hospital
did not receive several allotment checks drawn by the Province.

On February 19, 1981, the Provincial Treasurer requested the manager of

the PNB to return all of its cleared checks which were issued from 1977 to
1980 in order to verify the regularity of their encashment. After the checks
were examined, the Provincial Treasurer learned that 30 checks amounting
to P203,300.00 were encashed by one Fausto Pangilinan, with the
Associated Bank acting as collecting bank.

It turned out that Fausto Pangilinan, who was the administrative officer and
cashier of payee hospital until his retirement on February 28, 1978, collected
the questioned checks from the office of the Provincial Treasurer. He claimed
to be assisting or helping the hospital follow up the release of the checks and
had official receipts. 3 Pangilinan sought to encash the first check 4 with
Associated Bank. However, the manager of Associated Bank refused and
suggested that Pangilinan deposit the check in his personal savings account
with the same bank. Pangilinan was able to withdraw the money when the
check was cleared and paid by the drawee bank, PNB.

After forging the signature of Dr. Adena Canlas who was chief of the payee
hospital, Pangilinan followed the same procedure for the second check, in
the amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-
eight other checks of various amounts and on various dates. The last check
negotiated by Pangilinan was for f8,000.00 and dated February 10,
1981. 6 All the checks bore the stamp of Associated Bank which reads "All
prior endorsements guaranteed ASSOCIATED BANK."

Jesus David, the manager of Associated Bank testified that Pangilinan made
it appear that the checks were paid to him for certain projects with the
hospital. 7 He did not find as irregular the fact that the checks were not
payable to Pangilinan but to the Concepcion Emergency Hospital. While he
admitted that his wife and Pangilinan's wife are first cousins, the manager
denied having given Pangilinan preferential treatment on this account. 8

On February 26, 1981, the Provincial Treasurer wrote the manager of the
PNB seeking the restoration of the various amounts debited from the current
account of the Province. 9

In turn, the PNB manager demanded reimbursement from the Associated

Bank on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac brought suit against
PNB which, in turn, impleaded Associated Bank as third-party defendant.
The latter then filed a fourth-party complaint against Adena Canlas and
Fausto Pangilinan. 11

After trial on the merits, the lower court rendered its decision on March 21,
1988, disposing as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. On the basic complaint, in favor of plaintiff Province of Tarlac and against

defendant Philippine National Bank (PNB), ordering the latter to pay to the
former, the sum of Two Hundred Three Thousand Three Hundred
(P203,300.00) Pesos with legal interest thereon from March 20, 1981 until
fully paid;

2. On the third-party complaint, in favor of defendant/third-party plaintiff

Philippine National Bank (PNB) and against third-party defendant/fourth-
party plaintiff Associated Bank ordering the latter to reimburse to the former
the amount of Two Hundred Three Thousand Three Hundred (P203,300.00)
Pesos with legal interests thereon from March 20, 1981 until fully paid;.

3. On the fourth-party complaint, the same is hereby ordered dismissed for

lack of cause of action as against fourth-party defendant Adena Canlas and
lack of jurisdiction over the person of fourth-party defendant Fausto
Pangilinan as against the latter.

4. On the counterclaims on the complaint, third-party complaint and fourth-

party complaint, the same are hereby ordered dismissed for lack of merit.

SO ORDERED. 12

PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent

court affirmed the trial court's decision in toto on September 30, 1992.

Hence these consolidated petitions which seek a reversal of respondent

appellate court's decision.

PNB assigned two errors. First, the bank contends that respondent court
erred in exempting the Province of Tarlac from liability when, in fact, the
latter was negligent because it delivered and released the questioned checks
to Fausto Pangilinan who was then already retired as the hospital's cashier
and administrative officer. PNB also maintains its innocence and alleges that
as between two innocent persons, the one whose act was the cause of the
loss, in this case the Province of Tarlac, bears the loss.

Next, PNB asserts that it was error for the court to order it to pay the
province and then seek reimbursement from Associated Bank. According to
petitioner bank, respondent appellate Court should have directed Associated
Bank to pay the adjudged liability directly to the Province of Tarlac to avoid
circuity. 14

Associated Bank, on the other hand, argues that the order of liability should
be totally reversed, with the drawee bank (PNB) solely and ultimately
bearing the loss.

Respondent court allegedly erred in applying Section 23 of the Philippine

Clearing House Rules instead of Central Bank Circular No. 580, which, being
an administrative regulation issued pursuant to law, has the force and effect
of law. 15 The PCHC Rules are merely contractual stipulations among and
between member-banks. As such, they cannot prevail over the aforesaid CB
Circular.

It likewise contends that PNB, the drawee bank, is estopped from asserting
the defense of guarantee of prior indorsements against Associated Bank, the
collecting bank. In stamping the guarantee (for all prior indorsements), it
merely followed a mandatory requirement for clearing and had no choice but
to place the stamp of guarantee; otherwise, there would be no clearing. The
bank will be in a "no-win" situation and will always bear the loss as against
the drawee bank. 16

Associated Bank also claims that since PNB already cleared and paid the
value of the forged checks in question, it is now estopped from asserting the
defense that Associated Bank guaranteed prior indorsements. The drawee
bank allegedly has the primary duty to verify the genuineness of payee's
indorsement before paying the check. 17

While both banks are innocent of the forgery, Associated Bank claims that
PNB was at fault and should solely bear the loss because it cleared and paid
the forged checks.

xxx   xxx   xxx

The case at bench concerns checks payable to the order of Concepcion

Emergency Hospital or its Chief. They were properly issued and bear the
genuine signatures of the drawer, the Province of Tarlac. The infirmity in the
questioned checks lies in the payee's (Concepcion Emergency Hospital)
indorsements which are forgeries. At the time of their indorsement, the
checks were order instruments.

Checks having forged indorsements should be differentiated from forged

checks or checks bearing the forged signature of the drawer.

Section 23 of the Negotiable Instruments Law (NIL) provides:

Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is forged or

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

A forged signature, whether it be that of the drawer or the payee, is wholly

inoperative and no one can gain title to the instrument through it. A person
whose signature to an instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such
instrument. 18 Section 23 does not avoid the instrument but only the forged
signature. 19 Thus, a forged indorsement does not operate as the payee's
indorsement.

The exception to the general rule in Section 23 is where "a party against
whom it is sought to enforce a right is precluded from setting up the forgery
or want of authority." Parties who warrant or admit the genuineness of the
signature in question and those who, by their acts, silence or negligence are
estopped from setting up the defense of forgery, are precluded from using
this defense. Indorsers, persons negotiating by delivery and acceptors are
warrantors of the genuineness of the signatures on the instrument. 20

In bearer instruments, the signature of the payee or holder is unnecessary

to pass title to the instrument. Hence, when the indorsement is a forgery,
only the person whose signature is forged can raise the defense of forgery
against a holder in due course. 21

The checks involved in this case are order instruments, hence, the following
discussion is made with reference to the effects of a forged indorsement on
an instrument payable to order.

Where the instrument is payable to order at the time of the forgery, such as
the checks in this case, the signature of its rightful holder (here, the payee
hospital) is essential to transfer title to the same instrument. When the
holder's indorsement is forged, all parties prior to the forgery may raise the
real defense of forgery against all parties subsequent thereto. 22

An indorser of an order instrument warrants "that the instrument is genuine

and in all respects what it purports to be; that he has a good title to it; that
all prior parties had capacity to contract; and that the instrument is at the
time of his indorsement valid and subsisting." 23 He cannot interpose the
defense that signatures prior to him are forged.

A collecting bank where a check is deposited and which indorses the check
upon presentment with the drawee bank, is such an indorser. So even if the
indorsement on the check deposited by the banks's client is forged, the
collecting bank is bound by his warranties as an indorser and cannot set up
the defense of forgery as against the drawee bank.

The bank on which a check is drawn, known as the drawee bank, is under
strict liability to pay the check to the order of the payee. The drawer's
instructions are reflected on the face and by the terms of the check.
Payment under a forged indorsement is not to the drawer's order. When the
drawee bank pays a person other than the payee, it does not comply with
the terms of the check and violates its duty to charge its customer's (the
drawer) account only for properly payable items. Since the drawee bank did
not pay a holder or other person entitled to receive payment, it has no right
to reimbursement from the drawer. 24 The general rule then is that the
drawee bank may not debit the drawer's account and is not entitled to
indemnification from the drawer. 25 The risk of loss must perforce fall on the
drawee bank.

However, if the drawee bank can prove a failure by the customer/drawer to

exercise ordinary care that substantially contributed to the making of the
forged signature, the drawer is precluded from asserting the forgery.

If at the same time the drawee bank was also negligent to the point of
substantially contributing to the loss, then such loss from the forgery can be
apportioned between the negligent drawer and the negligent bank. 26

In cases involving a forged check, where the drawer's signature is forged,

the drawer can recover from the drawee bank. No drawee bank has a right
to pay a forged check. If it does, it shall have to recredit the amount of the
check to the account of the drawer. The liability chain ends with the drawee
bank whose responsibility it is to know the drawer's signature since the
latter is its customer. 27
In cases involving checks with forged indorsements, such as the present
petition, the chain of liability does not end with the drawee bank. The
drawee bank may not debit the account of the drawer but may generally
pass liability back through the collection chain to the party who took from
the forger and, of course, to the forger himself, if available. 28 In other
words, the drawee bank canseek reimbursement or a return of the amount it
paid from the presentor bank or person. 29 Theoretically, the latter can
demand reimbursement from the person who indorsed the check to it and so
on. The loss falls on the party who took the check from the forger, or on the
forger himself.

In this case, the checks were indorsed by the collecting bank (Associated
Bank) to the drawee bank (PNB). The former will necessarily be liable to the
latter for the checks bearing forged indorsements. If the forgery is that of
the payee's or holder's indorsement, the collecting bank is held liable,
without prejudice to the latter proceeding against the forger.

Since a forged indorsement is inoperative, the collecting bank had no right

to be paid by the drawee bank. The former must necessarily return the
money paid by the latter because it was paid wrongfully. 30

More importantly, by reason of the statutory warranty of a general indorser

in section 66 of the Negotiable Instruments Law, a collecting bank which
indorses a check bearing a forged indorsement and presents it to the drawee
bank guarantees all prior indorsements, including the forged indorsement. It
warrants that the instrument is genuine, and that it is valid and subsisting at
the time of his indorsement. Because the indorsement is a forgery, the
collecting bank commits a breach of this warranty and will be accountable to
the drawee bank. This liability scheme operates without regard to fault on
the part of the collecting/presenting bank. Even if the latter bank was not
negligent, it would still be liable to the drawee bank because of its
indorsement.

The Court has consistently ruled that "the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting
the check for payment to the drawee is an assertion that the party making
the presentment has done its duty to ascertain the genuineness of the
endorsements." 31

The drawee bank is not similarly situated as the collecting bank because the
former makes no warranty as to the genuineness. of any indorsement. 32 The
drawee bank's duty is but to verify the genuineness of the drawer's
signature and not of the indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the
depositor who negotiated the check. The bank knows him, his address and
history because he is a client. It has taken a risk on his deposit. The bank is
also in a better position to detect forgery, fraud or irregularity in the
indorsement.

Hence, the drawee bank can recover the amount paid on the check bearing a
forged indorsement from the collecting bank. However, a drawee bank has
the duty to promptly inform the presentor of the forgery upon discovery. If
the drawee bank delays in informing the presentor of the forgery, thereby
depriving said presentor of the right to recover from the forger, the former is
deemed negligent and can no longer recover from the presentor. 33

Applying these rules to the case at bench, PNB, the drawee bank, cannot
debit the current account of the Province of Tarlac because it paid checks
which bore forged indorsements. However, if the Province of Tarlac as
drawer was negligent to the point of substantially contributing to the loss,
then the drawee bank PNB can charge its account. If both drawee bank-PNB
and drawer-Province of Tarlac were negligent, the loss should be properly
apportioned between them.

The loss incurred by drawee bank-PNB can be passed on to the collecting

bank-Associated Bank which presented and indorsed the checks to it.
Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable.

If PNB negligently delayed in informing Associated Bank of the forgery, thus

depriving the latter of the opportunity to recover from the forger, it forfeits
its right to reimbursement and will be made to bear the loss.

After careful examination of the records, the Court finds that the Province of
Tarlac was equally negligent and should, therefore, share the burden of loss
from the checks bearing a forged indorsement.

The Province of Tarlac permitted Fausto Pangilinan to collect the checks

when the latter, having already retired from government service, was no
longer connected with the hospital. With the exception of the first check
(dated January 17, 1978), all the checks were issued and released after
Pangilinan's retirement on February 28, 1978. After nearly three years, the
Treasurer's office was still releasing the checks to the retired cashier. In
addition, some of the aid allotment checks were released to Pangilinan and
the others to Elizabeth Juco, the new cashier. The fact that there were now
two persons collecting the checks for the hospital is an unmistakable sign of
an irregularity which should have alerted employees in the Treasurer's office
of the fraud being committed. There is also evidence indicating that the
provincial employees were aware of Pangilinan's retirement and consequent
dissociation from the hospital. Jose Meru, the Provincial Treasurer, testified:.

ATTY. MORGA:

Q Now, is it true that for a given month there were two releases of checks,
one went to Mr. Pangilinan and one went to Miss Juco?

JOSE MERU:

A Yes, sir.

Q Will you please tell us how at the time (sic) when the authorized
representative of Concepcion Emergency Hospital is and was supposed to be
Miss Juco?

A Well, as far as my investigation show (sic) the assistant cashier told me

that Pangilinan represented himself as also authorized to help in the release
of these checks and we were apparently misled because they accepted the
representation of Pangilinan that he was helping them in the release of the
checks and besides according to them they were, Pangilinan, like the rest,
was able to present an official receipt to acknowledge these receipts and
according to them since this is a government check and believed that it will
eventually go to the hospital following the standard procedure of negotiating
government checks, they released the checks to Pangilinan aside from Miss
Juco. 34

The failure of the Province of Tarlac to exercise due care contributed to a

significant degree to the loss tantamount to negligence. Hence, the Province
of Tarlac should be liable for part of the total amount paid on the questioned
checks.

The drawee bank PNB also breached its duty to pay only according to the
terms of the check. Hence, it cannot escape liability and should also bear
part of the loss.

As earlier stated, PNB can recover from the collecting bank.

In the case of Associated Bank v. CA, 35 six crossed checks with forged

indorsements were deposited in the forger's account with the collecting bank
and were later paid by four different drawee banks. The Court found the
collecting bank (Associated) to be negligent and held:
The Bank should have first verified his right to endorse the crossed checks,
of which he was not the payee, and to deposit the proceeds of the checks to
his own account. The Bank was by reason of the nature of the checks put
upon notice that they were issued for deposit only to the private
respondent's account. . . .

The situation in the case at bench is analogous to the above case, for it was
not the payee who deposited the checks with the collecting bank. Here, the
checks were all payable to Concepcion Emergency Hospital but it was Fausto
Pangilinan who deposited the checks in his personal savings account.

Although Associated Bank claims that the guarantee stamped on the checks
(All prior and/or lack of endorsements guaranteed) is merely a requirement
forced upon it by clearing house rules, it cannot but remain liable. The stamp
guaranteeing prior indorsements is not an empty rubric which a bank must
fulfill for the sake of convenience. A bank is not required to accept all the
checks negotiated to it. It is within the bank's discretion to receive a check
for no banking institution would consciously or deliberately accept a check
bearing a forged indorsement. When a check is deposited with the collecting
bank, it takes a risk on its depositor. It is only logical that this bank be held
accountable for checks deposited by its customers.

A delay in informing the collecting bank (Associated Bank) of the forgery,

which deprives it of the opportunity to go after the forger, signifies
negligence on the part of the drawee bank (PNB) and will preclude it from
claiming reimbursement.

It is here that Associated Bank's assignment of error concerning C.B.

Circular No. 580 and Section 23 of the Philippine Clearing House Corporation
Rules comes to fore. Under Section 4(c) of CB Circular No. 580, items
bearing a forged endorsement shall be returned within twenty-Sour (24)
hours after discovery of the forgery but in no event beyond the period fixed
or provided by law for filing of a legal action by the returning bank. Section
23 of the PCHC Rules deleted the requirement that items bearing a forged
endorsement should be returned within twenty-four hours. Associated Bank
now argues that the aforementioned Central Bank Circular is applicable.
Since PNB did not return the questioned checks within twenty-four hours,
but several days later, Associated Bank alleges that PNB should be
considered negligent and not entitled to reimbursement of the amount it
paid on the checks.

The Court deems it unnecessary to discuss Associated Bank's assertions that

CB Circular No. 580 is an administrative regulation issued pursuant to law
and as such, must prevail over the PCHC rule. The Central Bank circular was
in force for all banks until June 1980 when the Philippine Clearing House
Corporation (PCHC) was set up and commenced operations. Banks in Metro
Manila were covered by the PCHC while banks located elsewhere still had to
go through Central Bank Clearing. In any event, the twenty-four-hour return
rule was adopted by the PCHC until it was changed in 1982. The contending
banks herein, which are both branches in Tarlac province, are therefore not
covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB
circular was applicable when the forgery of the checks was discovered in
1981.

The rule mandates that the checks be returned within twenty-four hours
after discovery of the forgery but in no event beyond the period fixed by law
for filing a legal action. The rationale of the rule is to give the collecting bank
(which indorsed the check) adequate opportunity to proceed against the
forger. If prompt notice is not given, the collecting bank maybe prejudiced
and lose the opportunity to go after its depositor.

The Court finds that even if PNB did not return the questioned checks to
Associated Bank within twenty-four hours, as mandated by the rule, PNB did
not commit negligent delay. Under the circumstances, PNB gave prompt
notice to Associated Bank and the latter bank was not prejudiced in going
after Fausto Pangilinan. After the Province of Tarlac informed PNB of the
forgeries, PNB necessarily had to inspect the checks and conduct its own
investigation. Thereafter, it requested the Provincial Treasurer's office on
March 31, 1981 to return the checks for verification. The Province of Tarlac
returned the checks only on April 22, 1981. Two days later, Associated Bank
received the checks from PNB. 36

Associated Bank was also furnished a copy of the Province's letter of demand
to PNB dated March 20, 1981, thus giving it notice of the forgeries. At this
time, however, Pangilinan's account with Associated had only P24.63 in
it. 37 Had Associated Bank decided to debit Pangilinan's account, it could not
have recovered the amounts paid on the questioned checks. In addition,
while Associated Bank filed a fourth-party complaint against Fausto
Pangilinan, it did not present evidence against Pangilinan and even
presented him as its rebuttal witness. 38 Hence, Associated Bank was not
prejudiced by PNB's failure to comply with the twenty-four-hour return rule.

Next, Associated Bank contends that PNB is estopped from requiring

reimbursement because the latter paid and cleared the checks. The Court
finds this contention unmeritorious. Even if PNB cleared and paid the checks,
it can still recover from Associated Bank. This is true even if the payee's
Chief Officer who was supposed to have indorsed the checks is also a
customer of the drawee bank. 39 PNB's duty was to verify the genuineness of
the drawer's signature and not the genuineness of payee's indorsement.
Associated Bank, as the collecting bank, is the entity with the duty to verify
the genuineness of the payee's indorsement.

PNB also avers that respondent court erred in adjudging circuitous liability
by directing PNB to return to the Province of Tarlac the amount of the checks
and then directing Associated Bank to reimburse PNB. The Court finds
nothing wrong with the mode of the award. The drawer, Province of Tarlac,
is a clientor customer of the PNB, not of Associated Bank. There is no privity
of contract between the drawer and the collecting bank.

The trial court made PNB and Associated Bank liable with legal interest from
March 20, 1981, the date of extrajudicial demand made by the Province of
Tarlac on PNB. The payments to be made in this case stem from the deposits
of the Province of Tarlac in its current account with the PNB. Bank deposits
are considered under the law as loans. 40 Central Bank Circular No. 416
prescribes a twelve percent (12%) interest per annum for loans,
forebearance of money, goods or credits in the absence of express
stipulation. Normally, current accounts are likewise interest-bearing, by
express contract, thus excluding them from the coverage of CB Circular No.
416. In this case, however, the actual interest rate, if any, for the current
account opened by the Province of Tarlac with PNB was not given in
evidence. Hence, the Court deems it wise to affirm the trial court's use of
the legal interest rate, or six percent (6%) per annum. The interest rate
shall be computed from the date of default, or the date of judicial or
extrajudicial demand. 41 The trial court did not err in granting legal interest
from March 20, 1981, the date of extrajudicial demand.

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

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

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

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

SO ORDERED.
CASE #80 BPI vs Case Montessori Internationale 430 SCRA 261 (2004)

G. R. No. 149454 - May 28, 2004

BANK OF THE PHILIPPINE ISLANDS, Petitioner, vs. CASA

MONTESSORI INTERNATIONALE LEONARDO T. YABUT, Respondents.

x ----------------------------- x

G. R. No. 149507 - May 28, 2004

CASA MONTESSORI INTERNATIONALE, Petitioner, vs. BANK OF THE

PHILIPPINE ISLANDS, Respondent.

DECISION

PANGANIBAN, J.:

By the nature of its functions, a bank is required to take meticulous care of

the deposits of its clients, who have the right to expect high standards of
integrity and performance from it.

Among its obligations in furtherance thereof is knowing the signatures of its

clients. Depositors are not estopped from questioning wrongful withdrawals,
even if they have failed to question those errors in the statements sent by
the bank to them for verification.

The Case

Before us are two Petitions for Review1 under Rule 45 of the Rules of Court,
assailing the March 23, 2001 Decision2 and the August 17, 2001
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 63561. The
decretal portion of the assailed Decision reads as follows:

"WHEREFORE, upon the premises, the decision appealed from

is AFFIRMED with the modification that defendant bank [Bank of the
Philippine Islands (BPI)] is held liable only for one-half of the value of the
forged checks in the amount of P547,115.00 after deductions subject to
REIMBURSEMENT from third party defendant Yabut who is
likewise ORDERED to pay the other half to plaintiff corporation [Casa
Montessori Internationale (CASA)]."4
The assailed Resolution denied all the parties Motions for Reconsideration.

The Facts

The facts of the case are narrated by the CA as follows:

"On November 8, 1982, plaintiff CASA Montessori International 5 opened

Current Account No. 0291-0081-01 with defendant BPI[,] with CASAs
President Ms. Ma. Carina C. Lebron as one of its authorized signatories.

"In 1991, after conducting an investigation, plaintiff discovered that nine (9)
of its checks had been encashed by a certain Sonny D. Santos since 1990 in
the total amount of P782,000.00, on the following dates and amounts:

Check
Date Amount
No.
1. 839700 April 24, 1990 P 43,400.00
2. 839459 Nov. 2, 1990 110,500.00
3. 839609 Oct. 17, 1990 47,723.00
4. 839549 April 7, 1990 90,700.00
5. 839569 Sept. 23, 1990 52,277.00
6. 729149 Mar. 22, 1990 148,000.00
7. 729129 Mar. 16, 1990 51,015.00
8. 839684 Dec. 1, 1990 140,000.00
9. 729034 Mar. 2, 1990 98,985.00

Total -- P 782,600.006

"It turned out that Sonny D. Santos with account at BPIs Greenbelt Branch
[was] a fictitious name used by third party defendant Leonardo T. Yabut who
worked as external auditor of CASA. Third party defendant voluntarily
admitted that he forged the signature of Ms. Lebron and encashed the
checks. "The PNP Crime Laboratory conducted an examination of the nine
(9) checks and concluded that the handwritings thereon compared to the
standard signature of Ms. Lebron were not written by the latter.

"On March 4, 1991, plaintiff filed the herein Complaint for Collection with
Damages against defendant bank praying that the latter be ordered to
reinstate the amount of P782,500.007 in the current and savings accounts of
the plaintiff with interest at 6% per annum.

"On February 16, 1999, the RTC rendered the appealed decision in favor of
the plaintiff."8

Ruling of the Court of Appeals

Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned
the loss between BPI and CASA. The appellate court took into account CASAs
contributory negligence that resulted in the undetected forgery. It then
ordered Leonardo T. Yabut to reimburse BPI half the total amount claimed;
and CASA, the other half. It also disallowed attorneys fees and moral and
exemplary damages.

Hence, these Petitions.9

Issues

In GR No. 149454, Petitioner BPI submits the following issues for our
consideration:

"I. The Honorable Court of Appeals erred in deciding this case NOT in

accord with the applicable decisions of this Honorable Court to the
effect that forgery cannot be presumed; that it must be proved by clear,
positive and convincing evidence; and that the burden of proof lies on the
party alleging the forgery.

"II. The Honorable Court of Appeals erred in deciding this case not in

accord with applicable laws, in particular the Negotiable Instruments Law
(NIL) which precludes CASA, on account of its own negligence, from
asserting its forgery claim against BPI, specially taking into account the
absence of any negligence on the part of BPI."10

In GR No. 149507, Petitioner CASA submits the following issues:

"1. The Honorable Court of Appeals erred when it ruled that there is no
showing that [BPI], although negligent, acted in bad faith x x x thus denying
the prayer for the award of attorneys fees, moral damages and exemplary
damages to [CASA]. The Honorable Court also erred when it did not order
[BPI] to pay interest on the amounts due to [CASA].

"2. The Honorable Court of Appeals erred when it declared that [CASA] was
likewise negligent in the case at bar, thus warranting its conclusion that the
loss in the amount of P547,115.00 be apportioned between [CASA] and
[BPI] x x x."11

These issues can be narrowed down to three. First, was there forgery under

the Negotiable Instruments Law (NIL)? Second, were any of the parties
negligent and therefore precluded from setting up forgery as a
defense? Third, should moral and exemplary damages, attorneys fees, and
interest be awarded?

The Courts Ruling

The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is
partly meritorious.

First Issue:

Forged Signature Wholly Inoperative

Section 23 of the NIL provides:

"Section 23. Forged signature; effect of. -- 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 x x x 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."12

Under this provision, a forged signature is a real 13 or absolute defense,14 and

a person whose signature on a negotiable instrument is forged is deemed to
have never become a party thereto and to have never consented to the
contract that allegedly gave rise to it.15

The counterfeiting of any writing, consisting in the signing of anothers name

with intent to defraud, is forgery.16

In the present case, we hold that there was forgery of the drawers signature
on the check.

First, both the CA17 and the RTC18 found that Respondent Yabut himself had
voluntarily admitted, through an Affidavit, that he had forged the drawers
signature and encashed the checks.19 He never refuted these findings.20 That
he had been coerced into admission was not corroborated by any evidence
on record.21
Second, the appellate and the trial courts also ruled that the PNP Crime
Laboratory, after its examination of the said checks,22 had concluded that
the handwritings thereon -- compared to the standard signature of the
drawer -- were not hers.23 This conclusion was the same as that in the
Report24 that the PNP Crime Laboratory had earlier issued to BPI -- the
drawee bank -- upon the latters request.

Indeed, we respect and affirm the RTCs factual findings, especially when
affirmed by the CA, since these are supported by substantial evidence on
record.25

Voluntary Admission Not Violative of Constitutional Rights

The voluntary admission of Yabut did not violate his constitutional rights (1)
on custodial investigation, and (2) against self-incrimination.

In the first place, he was not under custodial investigation. 26 His Affidavit
was executed in private and before private individuals.27 The mantle of
protection under Section 12 of Article III of the 1987 Constitution 28 covers
only the period "from the time a person is taken into custody for
investigation of his possible participation in the commission of a crime or
from the time he is singled out as a suspect in the commission of a crime
although not yet in custody."29

Therefore, to fall within the ambit of Section 12, quoted above, there must
be an arrest or a deprivation of freedom, with "questions propounded on him
by the police authorities for the purpose of eliciting admissions, confessions,
or any information."30 The said constitutional provision does "not apply to
spontaneous statements made in a voluntary manner"31 whereby an
individual orally admits to authorship of a crime. 32 "What the Constitution
proscribes is the compulsory or coercive disclosure of incriminating facts." 33

Moreover, the right against self-incrimination34 under Section 17 of Article

III35 of the Constitution, which is ordinarily available only in criminal
prosecutions, extends to all other government proceedings -- including civil
actions, legislative investigations,36 and administrative proceedings that
possess a criminal or penal aspect37 -- but not to private investigations done
by private individuals. Even in such government proceedings, this right may
be waived,38 provided the waiver is certain; unequivocal; and intelligently,
understandingly and willingly made.39

If in these government proceedings waiver is allowed, all the more is it so in

private investigations. It is of no moment that no criminal case has yet been
filed against Yabut. The filing thereof is entirely up to the appropriate
authorities or to the private individuals upon whom damage has been
caused. As we shall also explain later, it is not mandatory for CASA -- the
plaintiff below -- to implead Yabut in the civil case before the lower court.

Under these two constitutional provisions, "[t]he Bill of Rights 40 does not
concern itself with the relation between a private individual and another
individual. It governs the relationship between the individual and the
State."41 Moreover, the Bill of Rights "is a charter of liberties for the
individual and a limitation upon the power of the [S]tate." 42 These
rights43 are guaranteed to preclude the slightest coercion by the State that
may lead the accused "to admit something false, not prevent him from freely
and voluntarily telling the truth."44

Yabut is not an accused here. Besides, his mere invocation of the aforesaid
rights "does not automatically entitle him to the constitutional
protection."45 When he freely and voluntarily executed46 his Affidavit, the
State was not even involved. Such Affidavit may therefore be admitted
without violating his constitutional rights while under custodial investigation
and against self-incrimination.

Clear, Positive and Convincing Examination and Evidence

The examination by the PNP, though inconclusive, was nevertheless clear,

positive and convincing.

Forgery "cannot be presumed."47 It must be established by clear, positive

and convincing evidence.48 Under the best evidence rule as applied to
documentary evidence like the checks in question, no secondary or
substitutionary evidence may inceptively be introduced, as the original
writing itself must be produced in court.49 But when, without bad faith on the
part of the offeror, the original checks have already been destroyed or
cannot be produced in court, secondary evidence may be
produced.50 Without bad faith on its part, CASA proved the loss or
destruction of the original checks through the Affidavit of the one person
who knew of that fact51 -- Yabut. He clearly admitted to discarding the paid
checks to cover up his misdeed.52 In such a situation, secondary evidence
like microfilm copies may be introduced in court.

The drawers signatures on the microfilm copies were compared with the
standard signature. PNP Document Examiner II Josefina de la Cruz testified
on cross-examination that two different persons had written
them.53 Although no conclusive report could be issued in the absence of the
original checks,54 she affirmed that her findings were 90 percent
conclusive.55 According to her, even if the microfilm copies were the only
basis of comparison, the differences were evident.56 Besides, the RTC
explained that although the Report was inconclusive, no conclusive report
could have been given by the PNP, anyway, in the absence of the original
checks.57 This explanation is valid; otherwise, no such report can ever be
relied upon in court.

Even with respect to documentary evidence, the best evidence rule applies
only when the contents of a document -- such as the drawers signature on a
check -- is the subject of inquiry.58 As to whether the document has been
actually executed, this rule does not apply; and testimonial as well as any
other secondary evidence is admissible.59 Carina Lebron herself, the drawers
authorized signatory, testified many times that she had never signed those
checks. Her testimonial evidence is admissible; the checks have not been
actually executed. The genuineness of her handwriting is proved, not only
through the courts comparison of the questioned handwritings and
admittedly genuine specimens thereof, 60 but above all by her.

The failure of CASA to produce the original checks neither gives rise to the
presumption of suppression of evidence61 nor creates an unfavorable
inference against it.62 Such failure merely authorizes the introduction of
secondary evidence63 in the form of microfilm copies. Of no consequence is
the fact that CASA did not present the signature card containing the
signatures with which those on the checks were compared. 64 Specimens of
standard signatures are not limited to such a card. Considering that it was
not produced in evidence, other documents that bear the drawers authentic
signature may be resorted to.65 Besides, that card was in the possession of
BPI -- the adverse party.

We have held that without the original document containing the allegedly
forged signature, one cannot make a definitive comparison that would
establish forgery;66 and that a comparison based on a mere reproduction of
the document under controversy cannot produce reliable results. 67 We have
also said, however, that a judge cannot merely rely on a handwriting experts
testimony,68 but should also exercise independent judgment in evaluating
the authenticity of a signature under scrutiny.69 In the present case, both the
RTC and the CA conducted independent examinations of the evidence
presented and arrived at reasonable and similar conclusions. Not only did
they admit secondary evidence; they also appositely considered testimonial
and other documentary evidence in the form of the Affidavit.

The best evidence rule admits of exceptions and, as we have discussed

earlier, the first of these has been met.70 The result of examining a
questioned handwriting, even with the aid of experts and scientific
instruments, may be inconclusive;71 but it is a non sequitur to say that such
result is not clear, positive and convincing. The preponderance of evidence
required in this case has been satisfied.72

Second Issue:

Negligence Attributable to BPI Alone

Having established the forgery of the drawers signature, BPI -- the drawee
-- erred in making payments by virtue thereof. The forged signatures are
wholly inoperative, and CASA -- the drawer whose authorized signatures do
not appear on the negotiable instruments -- cannot be held liable thereon.
Neither is the latter precluded from setting up forgery as a real defense.

Clear Negligence in Allowing Payment Under a Forged Signature

We have repeatedly emphasized that, since the banking business is

impressed with public interest, of paramount importance thereto is the trust
and confidence of the public in general. Consequently, the highest degree of
diligence73 is expected,74 and high standards of integrity and performance
are even required, of it.75 By the nature of its functions, a bank is "under
obligation to treat the accounts of its depositors with meticulous
care,76 always having in mind the fiduciary nature of their relationship." 77

BPI contends that it has a signature verification procedure, in which checks

are honored only when the signatures therein are verified to be the same
with or similar to the specimen signatures on the signature cards.
Nonetheless, it still failed to detect the eight instances of forgery. Its
negligence consisted in the omission of that degree of diligence required 78 of
a bank. It cannot now feign ignorance, for very early on we have already
ruled that a bank is "bound to know the signatures of its customers; and if it
pays a forged check, it must be considered as making the payment out of its
own funds, and cannot ordinarily charge the amount so paid to the account
of the depositor whose name was forged."79 In fact, BPI was the same bank
involved when we issued this ruling seventy years ago.

Neither Waiver nor Estoppel Results from Failure to Report Error in

Bank Statement

The monthly statements issued by BPI to its clients contain a notice worded
as follows: "If no error is reported in ten (10) days, account will be
correct."80 Such notice cannot be considered a waiver, even if CASA failed to
report the error. Neither is it estopped from questioning the mistake after
the lapse of the ten-day period.
This notice is a simple confirmation81 or "circularization" -- in accounting
parlance -- that requests client-depositors to affirm the accuracy of items
recorded by the banks.82 Its purpose is to obtain from the depositors a direct
corroboration of the correctness of their account balances with their
respective banks.83 Internal or external auditors of a bank use it as a basic
audit procedure84 -- the results of which its client-depositors are neither
interested in nor privy to -- to test the details of transactions and balances in
the banks records.85 Evidential matter obtained from independent sources
outside a bank only serves to provide greater assurance of reliability 86 than
that obtained solely within it for purposes of an audit of its own financial
statements, not those of its client-depositors.

Furthermore, there is always the audit risk that errors would not be
detected87 for various reasons. One, materiality is a consideration in audit
planning;88 and two, the information obtained from such a substantive test is
merely presumptive and cannot be the basis of a valid waiver. 89 BPI has no
right to impose a condition unilaterally and thereafter consider failure to
meet such condition a waiver. Neither may CASA renounce a right90 it has
never possessed.91

Every right has subjects -- active and passive. While the active subject is
entitled to demand its enforcement, the passive one is duty-bound to suffer
such enforcement.92

On the one hand, BPI could not have been an active subject, because it
could not have demanded from CASA a response to its notice. Besides, the
notice was a measly request worded as follows: "Please examine x x x and
report x x x."93 CASA, on the other hand, could not have been a passive
subject, either, because it had no obligation to respond. It could -- as it did
-- choose not to respond.

Estoppel precludes individuals from denying or asserting, by their own deed

or representation, anything contrary to that established as the truth, in legal
contemplation.94 Our rules on evidence even make a juris et de
jure presumption95 that whenever one has, by ones own act or omission,
intentionally and deliberately led another to believe a particular thing to be
true and to act upon that belief, one cannot -- in any litigation arising from
such act or omission -- be permitted to falsify that supposed truth. 96

In the instant case, CASA never made any deed or representation that
misled BPI. The formers omission, if any, may only be deemed an innocent
mistake oblivious to the procedures and consequences of periodic audits.
Since its conduct was due to such ignorance founded upon an innocent
mistake, estoppel will not arise.97 A person who has no knowledge of or
consent to a transaction may not be estopped by it.98 "Estoppel cannot be
sustained by mere argument or doubtful inference x x x."99 CASA is not
barred from questioning BPIs error even after the lapse of the period given
in the notice.

Loss Borne by Proximate Source of Negligence

For allowing payment100 on the checks to a wrongful and fictitious payee, BPI
-- the drawee bank -- becomes liable to its depositor-drawer. Since the
encashing bank is one of its branches,101 BPI can easily go after it and hold it
liable for reimbursement.102 It "may not debit the drawers account103 and is
not entitled to indemnification from the drawer." 104 In both law and equity,
when one of two innocent persons "must suffer by the wrongful act of a third
person, the loss must be borne by the one whose negligence was the
proximate cause of the loss or who put it into the power of the third person
to perpetrate the wrong."105

Proximate cause is determined by the facts of the case. 106 "It is that cause
which, in natural and continuous sequence, unbroken by any efficient
intervening cause, produces the injury, and without which the result would
not have occurred."107

Pursuant to its prime duty to ascertain well the genuineness of the

signatures of its client-depositors on checks being encashed, BPI is
"expected to use reasonable business prudence." 108 In the performance of
that obligation, it is bound by its internal banking rules and regulations that
form part of the contract it enters into with its depositors. 109

Unfortunately, it failed in that regard. First, Yabut was able to open a bank

account in one of its branches without privity;110 that is, without the proper
verification of his corresponding identification papers. Second, BPI was
unable to discover early on not only this irregularity, but also the marked
differences in the signatures on the checks and those on the signature
card. Third, despite the examination procedures it conducted, the Central
Verification Unit111 of the bank even passed off these evidently different
signatures as genuine. Without exercising the required prudence on its part,
BPI accepted and encashed the eight checks presented to it. As a result, it
proximately contributed to the fraud and should be held primarily liable 112 for
the "negligence of its officers or agents when acting within the course and
scope of their employment."113 It must bear the loss.

CASA Not Negligent in Its Financial Affairs

In this jurisdiction, the negligence of the party invoking forgery is recognized
as an exception114 to the general rule that a forged signature is wholly
inoperative.115 Contrary to BPIs claim, however, we do not find CASA
negligent in handling its financial affairs. CASA, we stress, is not precluded
from setting up forgery as a real defense.

Role of Independent Auditor

The major purpose of an independent audit is to investigate and determine

objectively if the financial statements submitted for audit by a corporation
have been prepared in accordance with the appropriate financial reporting
practices116 of private entities. The relationship that arises therefrom is both
legal and moral.117 It begins with the execution of the engagement
letter118 that embodies the terms and conditions of the audit and ends with
the fulfilled expectation of the auditors ethical119 and competent performance
in all aspects of the audit.120

The financial statements are representations of the client; but it is the

auditor who has the responsibility for the accuracy in the recording of data
that underlies their preparation, their form of presentation, and the
opinion121 expressed therein.122 The auditor does not assume the role of
employee or of management in the clients conduct of operations 123 and is
never under the control or supervision124 of the client.

Yabut was an independent auditor125 hired by CASA. He handled its monthly

bank reconciliations and had access to all relevant documents and
checkbooks.126 In him was reposed the clients127 trust and confidence128 that
he would perform precisely those functions and apply the appropriate
procedures in accordance with generally accepted auditing standards. 129 Yet
he did not meet these expectations. Nothing could be more horrible to a
client than to discover later on that the person tasked to detect fraud was
the same one who perpetrated it.

Cash Balances Open to Manipulation

It is a non sequitur to say that the person who receives the monthly bank
statements, together with the cancelled checks and other debit/credit
memoranda, shall examine the contents and give notice of any discrepancies
within a reasonable time. Awareness is not equipollent with discernment.

Besides, in the internal accounting control system prudently installed by

CASA,130 it was Yabut who should examine those documents in order to
prepare the bank reconciliations.131 He owned his working papers,132 and his
output consisted of his opinion as well as the clients financial statements and
accompanying notes thereto. CASA had every right to rely solely upon his
output -- based on the terms of the audit engagement -- and could thus be
unwittingly duped into believing that everything was in order. Besides,
"[g]ood faith is always presumed and it is the burden of the party claiming
otherwise to adduce clear and convincing evidence to the contrary." 133

Moreover, there was a time gap between the period covered by the bank
statement and the date of its actual receipt. Lebron personally received the
December 1990 bank statement only in January 1991134 -- when she was
also informed of the forgery for the first time, after which she immediately
requested a "stop payment order." She cannot be faulted for the late
detection of the forged December check. After all, the bank account with BPI
was not personal but corporate, and she could not be expected to monitor
closely all its finances. A preschool teacher charged with molding the minds
of the youth cannot be burdened with the intricacies or complexities of
corporate existence.

There is also a cutoff period such that checks issued during a given month,
but not presented for payment within that period, will not be reflected
therein.135 An experienced auditor with intent to defraud can easily conceal
any devious scheme from a client unwary of the accounting processes
involved by manipulating the cash balances on record -- especially when
bank transactions are numerous, large and frequent. CASA could only be
blamed, if at all, for its unintelligent choice in the selection and appointment
of an auditor -- a fault that is not tantamount to negligence.

Negligence is not presumed, but proven by whoever alleges it. 136 Its mere
existence "is not sufficient without proof that it, and no other cause," 137 has
given rise to damages.138 In addition, this fault is common to, if not
prevalent among, small and medium-sized business entities, thus leading
the Professional Regulation Commission (PRC), through the Board of
Accountancy (BOA), to require today not only accreditation for the practice
of public accountancy,139 but also the registration of firms in the practice
thereof. In fact, among the attachments now required upon registration are
the code of good governance140 and a sworn statement on adequate and
effective training.141

The missing checks were certainly reported by the bookkeeper 142 to the
accountant143 -- her immediate supervisor -- and by the latter to the auditor.
However, both the accountant and the auditor, for reasons known only to
them, assured the bookkeeper that there were no irregularities.

The bookkeeper144 who had exclusive custody of the checkbooks 145 did not

have to go directly to CASAs president or to BPI. Although she rightfully
reported the matter, neither an investigation was conducted nor a resolution
of it was arrived at, precisely because the person at the top of the helm was
the culprit. The vouchers, invoices and check stubs in support of all check
disbursements could be concealed or fabricated -- even in collusion -- and
management would still have no way to verify its cash accountabilities.

Clearly then, Yabut was able to perpetrate the wrongful act through no fault
of CASA. If auditors may be held liable for breach of contract and
negligence,146 with all the more reason may they be charged with the
perpetration of fraud upon an unsuspecting client. CASA had the discretion
to pursue BPI alone under the NIL, by reason of expediency or munificence
or both. Money paid under a mistake may rightfully be recovered, 147 and
under such terms as the injured party may choose.

Third Issue:

Award of Monetary Claims

Moral Damages Denied

We deny CASAs claim for moral damages.

In the absence of a wrongful act or omission,148 or of fraud or bad

faith,149 moral damages cannot be awarded.150 The adverse result of an
action does not per se make the action wrongful, or the party liable for it.
One may err, but error alone is not a ground for granting such
damages.151 While no proof of pecuniary loss is necessary therefor -- with
the amount to be awarded left to the courts discretion152 -- the claimant
must nonetheless satisfactorily prove the existence of its factual basis 153 and
causal relation154 to the claimants act or omission.155

Regrettably, in this case CASA was unable to identify the particular instance
-- enumerated in the Civil Code -- upon which its claim for moral damages is
predicated.156 Neither bad faith nor negligence so gross that it amounts to
malice157 can be imputed to BPI. Bad faith, under the law, "does not simply
connote bad judgment or negligence;158 it imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of a known
duty through some motive or interest or ill will that partakes of the nature of
fraud."159

As a general rule, a corporation -- being an artificial person without feelings,

emotions and senses, and having existence only in legal contemplation -- is
not entitled to moral damages,160 because it cannot experience physical
suffering and mental anguish.161 However, for breach of the fiduciary duty
required of a bank, a corporate client may claim such damages when its
good reputation is besmirched by such breach, and social humiliation results
therefrom.162 CASA was unable to prove that BPI had debased the good
reputation of,163 and consequently caused incalculable embarrassment to,
the former. CASAs mere allegation or supposition thereof, without any
sufficient evidence on record,164 is not enough.

Exemplary Damages Also Denied

We also deny CASAs claim for exemplary damages.

Imposed by way of correction165 for the public good,166 exemplary damages

cannot be recovered as a matter of right.167 As we have said earlier, there is
no bad faith on the part of BPI for paying the checks of CASA upon forged
signatures. Therefore, the former cannot be said to have acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner. 168 The latter, having
no right to moral damages, cannot demand exemplary damages. 169

Attorneys Fees Granted

Although it is a sound policy not to set a premium on the right to

litigate,170 we find that CASA is entitled to reasonable attorneys fees based
on "factual, legal, and equitable justification."171

When the act or omission of the defendant has compelled the plaintiff to
incur expenses to protect the latters interest, 172 or where the court deems it
just and equitable,173 attorneys fees may be recovered. In the present case,
BPI persistently denied the claim of CASA under the NIL to recredit the
latters account for the value of the forged checks. This denial constrained
CASA to incur expenses and exert effort for more than ten years in order to
protect its corporate interest in its bank account. Besides, we have already
cautioned BPI on a similar act of negligence it had committed seventy years
ago, but it has remained unrelenting. Therefore, the Court deems it just and
equitable to grant ten percent (10%)174 of the total value adjudged to CASA
as attorneys fees.

Interest Allowed

For the failure of BPI to pay CASA upon demand and for compelling the
latter to resort to the courts to obtain payment, legal interest may be
adjudicated at the discretion of the Court, the same to run from the
filing175 of the Complaint.176 Since a court judgment is not a loan or a
forbearance of recovery, the legal interest shall be at six percent (6%) per
annum.177 "If the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of x x x legal interest,
which is six percent per annum."178 The actual base for its computation shall
be "on the amount finally adjudged,"179 compounded180 annually to make up
for the cost of money181 already lost to CASA.

Moreover, the failure of the CA to award interest does not prevent us from
granting it upon damages awarded for breach of contract. 182 Because BPI
evidently breached its contract of deposit with CASA, we award interest in
addition to the total amount adjudged. Under Section 196 of the NIL, any
case not provided for shall be "governed by the provisions of existing
legislation or, in default thereof, by the rules of the law
merchant."183 Damages are not provided for in the NIL. Thus, we resort to
the Code of Commerce and the Civil Code. Under Article 2 of the Code of
Commerce, acts of commerce shall be governed by its provisions and, "in
their absence, by the usages of commerce generally observed in each place;
and in the absence of both rules, by those of the civil law." 184 This law being
silent, we look at Article 18 of the Civil Code, which states: "In matters
which are governed by the Code of Commerce and special laws, their
deficiency shall be supplied" by its provisions. A perusal of these three
statutes unmistakably shows that the award of interest under our civil law is
justified.

WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in

GR No. 149507 PARTLY GRANTED. The assailed Decision of the Court of
Appeals is AFFIRMED with modification: BPI is held liable for P547,115, the
total value of the forged checks less the amount already recovered by CASA
from Leonardo T. Yabut, plus interest at the legal rate of six percent
(6%) per annum -- compounded annually, from the filing of the complaint
until paid in full; and attorneys fees of ten percent (10%) thereof, subject to
reimbursement from Respondent Yabut for the entire amount, excepting
attorneys fees. Let a copy of this Decision be furnished the Board of
Accountancy of the Professional Regulation Commission for such action as it
may deem appropriate against Respondent Yabut. No costs.

SO ORDERED.
CASE #81 Samsung Construction Co. Phils. Vs Far East Bank 436 SCRA 402 (2004)

[G.R. NO. 129015 : August 13, 2004]

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES,

INC., Petitioner, v. FAR EAST BANK AND TRUST COMPANY AND COURT
OF APPEALS, Respondents.

DECISION

TINGA, J.:

Called to fore in the present petition is a classic textbook question - if a bank

pays out on a forged check, is it liable to reimburse the drawer from whose
account the funds were paid out? The Court of Appeals, in reversing a trial
court decision adverse to the bank, invoked tenuous reasoning to acquit the
bank of liability. We reverse, applying time-honored principles of law.

The salient facts follow.

Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung

Construction"), while based in Biñan, Laguna, maintained a current
account with defendant Far East Bank and Trust Company1 ("FEBTC") at the
latter's Bel-Air, Makati branch.2 The sole signatory to Samsung
Construction's account was Jong Kyu Lee ("Jong"), its Project
Manager,3 while the checks remained in the custody of the company's
accountant, Kyu Yong Lee ("Kyu").4

On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC

Check No. 432100 to the bank's branch in Bel-Air, Makati. The check,
payable to cash and drawn against Samsung Construction's current account,
was in the amount of Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the
balance of Samsung Construction's account. After ascertaining there were
enough funds to cover the check,5 she compared the signature appearing on
the check with the specimen signature of Jong as contained in the specimen
signature card with the bank. After comparing the two signatures, Justiani
was satisfied as to the authenticity of the signature appearing on the check.
She then asked Gonzaga to submit proof of his identity, and the latter
presented three (3) identification cards.6
At the same time, Justiani forwarded the check to the branch Senior
Assistant Cashier Gemma Velez, as it was bank policy that two bank branch
officers approve checks exceeding One Hundred Thousand Pesos, for
payment or encashment. Velez likewise counterchecked the signature on the
check as against that on the signature card. He too concluded that the check
was indeed signed by Jong. Velez then forwarded the check and signature
card to Shirley Syfu, another bank officer, for approval. Syfu then noticed
that Jose Sempio III ("Sempio"), the assistant accountant of Samsung
Construction, was also in the bank. Sempio was well-known to Syfu and the
other bank officers, he being the assistant accountant of Samsung
Construction. Syfu showed the check to Sempio, who vouched for the
genuineness of Jong's signature. Confirming the identity of Gonzaga, Sempio
said that the check was for the purchase of equipment for Samsung
Construction. Satisfied with the genuineness of the signature of Jong, Syfu
authorized the bank's encashment of the check to Gonzaga.

The following day, the accountant of Samsung Construction, Kyu, examined

the balance of the bank account and discovered that a check in the amount
of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00)
had been encashed. Aware that he had not prepared such a check for Jong's
signature, Kyu perused the checkbook and found that the last blank check
was missing.7 He reported the matter to Jong, who then proceeded to the
bank. Jong learned of the encashment of the check, and realized that his
signature had been forged. The Bank Manager reputedly told Jong that he
would be reimbursed for the amount of the check.8 Jong proceeded to the
police station and consulted with his lawyers.9 Subsequently, a criminal case
for qualified theft was filed against Sempio before the Laguna court. 10

In a letter dated 6 May 1992, Samsung Construction, through counsel,

demanded that FEBTC credit to it the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00), with interest.11 In response,
FEBTC said that it was still conducting an investigation on the matter.
Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for
violation of Section 23 of the Negotiable Instruments Law, and prayed for
the payment of the amount debited as a result of the questioned check plus
interest, and attorney's fees.12 The case was docketed as Civil Case No. 92-
61506 before the Regional Trial Court ("RTC") of Manila, Branch 9. 13

During the trial, both sides presented their respective expert witnesses to
testify on the claim that Jong's signature was forged. Samsung Corporation,
which had referred the check for investigation to the NBI, presented Senior
NBI Document Examiner Roda B. Flores. She testified that based on her
examination, she concluded that Jong's signature had been forged on the
check. On the other hand, FEBTC, which had sought the assistance of the
Philippine National Police (PNP), 14 presented Rosario C. Perez, a document
examiner from the PNP Crime Laboratory. She testified that her findings
showed that Jong's signature on the check was genuine. 15

Confronted with conflicting expert testimony, the RTC chose to believe the
findings of the NBI expert. In a Decision dated 25 April 1994, the RTC held
that Jong's signature on the check was forged and accordingly directed the
bank to pay or credit back to Samsung Construction's account the amount of
Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00),
together with interest tolled from the time the complaint was filed, and
attorney's fees in the amount of Fifteen Thousand Pesos (P15,000.00).

FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the

Special Fourteenth Division of the Court of Appeals rendered
a Decision,16 reversing the RTC Decision and absolving FEBTC from any
liability. The Court of Appeals held that the contradictory findings of the NBI
and the PNP created doubt as to whether there was forgery. 17 Moreover, the
appellate court also held that assuming there was forgery, it occurred due to
the negligence of Samsung Construction, imputing blame on the accountant
Kyu for lack of care and prudence in keeping the checks, which if observed
would have prevented Sempio from gaining access thereto. 18 The Court of
Appeals invoked the ruling in PNB v. National City Bank of New York 19 that,
if a loss, which must be borne by one or two innocent persons, can be traced
to the neglect or fault of either, such loss would be borne by the negligent
party, even if innocent of intentional fraud.20

Samsung Construction now argues that the Court of Appeals had seriously
misapprehended the facts when it overturned the RTC's finding of forgery. It
also contends that the appellate court erred in finding that it had been
negligent in safekeeping the check, and in applying the equity principle
enunciated in PNB v. National City Bank of New York.

Since the trial court and the Court of Appeals arrived at contrary findings on
questions of fact, the Court is obliged to examine the record to draw out the
correct conclusions. Upon examination of the record, and based on the
applicable laws and jurisprudence, we reverse the Court of Appeals.

Section 23 of the Negotiable Instruments Law states:

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. (Emphasis supplied)cralawlibrary

The general rule is to the effect that a forged signature is "wholly

inoperative," and payment made "through or under such signature" is
ineffectual or does not discharge the instrument.21 If payment is made, the
drawee cannot charge it to the drawer's account. The traditional justification
for the result is that the drawee is in a superior position to detect a forgery
because he has the maker's signature and is expected to know and compare
it.22 The rule has a healthy cautionary effect on banks by encouraging care in
the comparison of the signatures against those on the signature cards they
have on file. Moreover, the very opportunity of the drawee to insure and to
distribute the cost among its customers who use checks makes the drawee
an ideal party to spread the risk to insurance. 23

Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

When a person deposits money in a general account in a bank, against which

he has the privilege of drawing checks in the ordinary course of business,
the relationship between the bank and the depositor is that of debtor and
creditor. So far as the legal relationship between the two is concerned, the
situation is the same as though the bank had borrowed money from the
depositor, agreeing to repay it on demand, or had bought goods from the
depositor, agreeing to pay for them on demand. The bank owes the
depositor money in the same sense that any debtor owes money to his
creditor. Added to this, in the case of bank and depositor, there is, of course,
the bank's obligation to pay checks drawn by the depositor in proper form
and presented in due course. When the bank receives the deposit, it
impliedly agrees to pay only upon the depositor's order. When the bank pays
a check, on which the depositor's signature is a forgery, it has failed to
comply with its contract in this respect. Therefore, the bank is held liable.

The fact that the forgery is a clever one is immaterial. The forged signature
may so closely resemble the genuine as to defy detection by the depositor
himself. And yet, if a bank pays the check, it is paying out its own money
and not the depositor's.

The forgery may be committed by a trusted employee or confidential agent.

The bank still must bear the loss. Even in a case where the forged check was
drawn by the depositor's partner, the loss was placed upon the bank. The
case referred to is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In
this case, the plaintiff brought suit against the defendant bank for money
which had been deposited to the plaintiff's credit and which the bank had
paid out on checks bearing forgeries of the plaintiff's signature.
 xxx

It was held that the bank was liable. It was further held that the fact that
the plaintiff waited eight or nine months after discovering the forgery, before
notifying the bank, did not, as a matter of law, constitute a ratification of the
payment, so as to preclude the plaintiff from holding the bank liable. xxx

This rule of liability can be stated briefly in these words: "A bank is bound to
know its depositors' signature." The rule is variously expressed in the many
decisions in which the question has been considered. But they all sum up to
the proposition that a bank must know the signatures of those whose
general deposits it carries.24

By no means is the principle rendered obsolete with the advent of modern

commercial transactions. Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments and Other Related
Commercial Paper wrote, thus:

The deposit contract between a payor bank and its customer determines
who can draw against the customer's account by specifying whose signature
is necessary on checks that are chargeable against the customer's account.
Therefore, a check drawn against the account of an individual customer that
is signed by someone other than the customer, and without authority from
her, is not properly payable and is not chargeable to the customer's account,
inasmuch as any "unauthorized signature on an instrument is ineffective" as
the signature of the person whose name is signed.25

Under Section 23 of the Negotiable Instruments Law, forgery is a real or

absolute defense by the party whose signature is forged. 26 On the premise
that Jong's signature was indeed forged, FEBTC is liable for the loss since it
authorized the discharge of the forged check. Such liability attaches even if
the bank exerts due diligence and care in preventing such faulty discharge.
Forgeries often deceive the eye of the most cautious experts; and when a
bank has been so deceived, it is a harsh rule which compels it to suffer
although no one has suffered by its being deceived. 27 The forgery may be so
near like the genuine as to defy detection by the depositor himself, and yet
the bank is liable to the depositor if it pays the check. 28

Thus, the first matter of inquiry is into whether the check was indeed forged.
A document formally presented is presumed to be genuine until it is proved
to be fraudulent. In a forgery trial, this presumption must be overcome but
this can only be done by convincing testimony and effective illustrations. 29

In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the
alleged forgery in view of the conflicting conclusions made by handwriting
experts from the NBI and the PNP, both agencies of the government.

xxx

These contradictory findings create doubt on whether there was indeed a

forgery. In the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550,
the Supreme Court held that forgery cannot be presumed; it must be proved
by clear, positive and convincing evidence.

This reasoning is pure sophistry. Any litigator worth his or her salt would
never allow an opponent's expert witness to stand uncontradicted, thus the
spectacle of competing expert witnesses is not unusual. The trier of fact will
have to decide which version to believe, and explain why or why not such
version is more credible than the other. Reliance therefore cannot be placed
merely on the fact that there are colliding opinions of two experts, both
clothed with the presumption of official duty, in order to draw a conclusion,
especially one which is extremely crucial. Doing so is tantamount to a
jurisprudential cop-out.

Much is expected from the Court of Appeals as it occupies the penultimate

tier in the judicial hierarchy. This Court has long deferred to the appellate
court as to its findings of fact in the understanding that it has the
appropriate skill and competence to plough through the minutiae that
scatters the factual field. In failing to thoroughly evaluate the evidence
before it, and relying instead on presumptions haphazardly drawn, the Court
of Appeals was sadly remiss. Of course, courts, like humans, are fallible, and
not every error deserves a stern rebuke. Yet, the appellate court's error in
this case warrants special attention, as it is absurd and even dangerous as a
precedent. If this rationale were adopted as a governing standard by every
court in the land, barely any actionable claim would prosper, defeated as it
would be by the mere invocation of the existence of a contrary "expert"
opinion.

On the other hand, the RTC did adjudge the testimony of the NBI expert as
more credible than that of the PNP, and explained its reason behind the
conclusion:

After subjecting the evidence of both parties to a crucible of analysis, the

court arrived at the conclusion that the testimony of the NBI document
examiner is more credible because the testimony of the PNP Crime
Laboratory Services document examiner reveals that there are a lot of
differences in the questioned signature as compared to the standard
specimen signature. Furthermore, as testified to by Ms. Rhoda Flores, NBI
expert, the manner of execution of the standard signatures used reveals that
it is a free rapid continuous execution or stroke as shown by the tampering
terminal stroke of the signatures whereas the questioned signature is a
hesitating slow drawn execution stroke. Clearly, the person who executed
the questioned signature was hesitant when the signature was made. 30

During the testimony of PNP expert Rosario Perez, the RTC bluntly noted
that "apparently, there [are] differences on that questioned signature and
the standard signatures."31 This Court, in examining the signatures, makes a
similar finding. The PNP expert excused the noted "differences" by asserting
that they were mere "variations," which are normal deviations found in
writing.32 Yet the RTC, which had the opportunity to examine the relevant
documents and to personally observe the expert witness, clearly disbelieved
the PNP expert. The Court similarly finds the testimony of the PNP expert as
unconvincing. During the trial, she was confronted several times with
apparent differences between strokes in the questioned signature and the
genuine samples. Each time, she would just blandly assert that these
differences were just "variations,"33 as if the mere conjuration of the word
would sufficiently disquiet whatever doubts about the deviations. Such
conclusion, standing alone, would be of little or no value unless supported by
sufficiently cogent reasons which might amount almost to a demonstration. 34

The most telling difference between the questioned and genuine signatures
examined by the PNP is in the final upward stroke in the signature, or "the
point to the short stroke of the terminal in the capital letter 'L,' " as referred
to by the PNP examiner who had marked it in her comparison chart as "point
no. 6." To the plain eye, such upward final stroke consists of a vertical line
which forms a ninety degree (90' ) angle with the previous stroke. Of the
twenty one (21) other genuine samples examined by the PNP, at least nine
(9) ended with an upward stroke.35 However, unlike the questioned
signature, the upward strokes of eight (8) of these signatures are looped,
while the upward stroke of the seventh36 forms a severe forty-five degree
(45' ) with the previous stroke. The difference is glaring, and indeed, the
PNP examiner was confronted with the inconsistency in point no. 6.

Q: Now, in this questioned document point no. 6, the "s" stroke is directly
upwards.

A: Yes, sir.

Q: Now, can you look at all these standard signature (sic) were (sic) point 6
is repeated or the last stroke "s" is pointing directly upwards?
chanroblesvirtualawlibrary
A: There is none in the standard signature, sir.37

Again, the PNP examiner downplayed the uniqueness of the final stroke in
the questioned signature as a mere variation,38 the same excuse she
proffered for the other marked differences noted by the Court and the
counsel for petitioner.39

There is no reason to doubt why the RTC gave credence to the testimony of
the NBI examiner, and not the PNP expert's. The NBI expert, Rhoda Flores,
clearly qualifies as an expert witness. A document examiner for fifteen
years, she had been promoted to the rank of Senior Document Examiner
with the NBI, and had held that rank for twelve years prior to her testimony.
She had placed among the top five examinees in the Competitive Seminar in
Question Document Examination, conducted by the NBI Academy, which
qualified her as a document examiner.40 She had trained with the Royal
Hongkong Police Laboratory and is a member of the International
Association for Identification.41 As of the time she testified, she had
examined more than fifty to fifty-five thousand questioned documents, on an
average of fifteen to twenty documents a day.42 In comparison, PNP
document examiner Perez admitted to having examined only around five
hundred documents as of her testimony.43

In analyzing the signatures, NBI Examiner Flores utilized the scientific

comparative examination method consisting of analysis, recognition,
comparison and evaluation of the writing habits with the use of instruments
such as a magnifying lense, a stereoscopic microscope, and varied lighting
substances. She also prepared enlarged photographs of the signatures in
order to facilitate the necessary comparisons.44 She compared the
questioned signature as against ten (10) other sample signatures of Jong.
Five of these signatures were executed on checks previously issued by Jong,
while the other five contained in business letters Jong had signed. 45 The NBI
found that there were significant differences in the handwriting
characteristics existing between the questioned and the sample signatures,
as to manner of execution, link/connecting strokes, proportion
characteristics, and other identifying details.46

The RTC was sufficiently convinced by the NBI examiner's testimony, and
explained her reasons in its Decisions. While the Court of Appeals disagreed
and upheld the findings of the PNP, it failed to convincingly demonstrate why
such findings were more credible than those of the NBI expert. As a
throwaway, the assailed Decision noted that the PNP, not the NBI, had the
opportunity to examine the specimen signature card signed by Jong, which
was relied upon by the employees of FEBTC in authenticating Jong's
signature. The distinction is irrelevant in establishing forgery. Forgery can be
established comparing the contested signatures as against those of any
sample signature duly established as that of the persons whose signature
was forged.

FEBTC lays undue emphasis on the fact that the PNP examiner did compare
the questioned signature against the bank signature cards. The crucial fact
in question is whether or not the check was forged, not whether the
bank could have detected the forgery. The latter issue becomes
relevant only if there is need to weigh the comparative negligence
between the bank and the party whose signature was forged.

At the same time, the Court of Appeals failed to assess the effect of Jong's
testimony that the signature on the check was not his. 47 The assertion may
seem self-serving at first blush, yet it cannot be ignored that Jong was in the
best position to know whether or not the signature on the check was his.
While his claim should not be taken at face value, any averments he would
have on the matter, if adjudged as truthful, deserve primacy in
consideration. Jong's testimony is supported by the findings of the NBI
examiner. They are also backed by factual circumstances that support the
conclusion that the assailed check was indeed forged. Judicial notice can be
taken that is highly unusual in practice for a business establishment to draw
a check for close to a million pesos and make it payable to cash or bearer,
and not to order. Jong immediately reported the forgery upon its discovery.
He filed the appropriate criminal charges against Sempio, the putative
forger.48

Now for determination is whether Samsung Construction was precluded from

setting up the defense of forgery under Section 23 of the Negotiable
Instruments Law. The Court of Appeals concluded that Samsung
Construction was negligent, and invoked the doctrines that "where a loss
must be borne by one of two innocent person, can be traced to the neglect
or fault of either, it is reasonable that it would be borne by him, even if
innocent of any intentional fraud, through whose means it has
succeeded49 or who put into the power of the third person to perpetuate the
wrong."50 Applying these rules, the Court of Appeals determined that it was
the negligence of Samsung Construction that allowed the encashment of the
forged check.

In the case at bar, the forgery appears to have been made possible through
the acts of one Jose Sempio III, an assistant accountant employed by the
plaintiff Samsung [Construction] Co. Philippines, Inc. who supposedly stole
the blank check and who presumably is responsible for its encashment
through a forged signature of Jong Kyu Lee. Sempio was assistant to the
Korean accountant who was in possession of the blank checks and who
through negligence, enabled Sempio to have access to the same. Had the
Korean accountant been more careful and prudent in keeping the blank
checks Sempio would not have had the chance to steal a page thereof and to
effect the forgery. Besides, Sempio was an employee who appears to have
had dealings with the defendant Bank in behalf of the plaintiff corporation
and on the date the check was encashed, he was there to certify that it was
a genuine check issued to purchase equipment for the company. 51

We recognize that Section 23 of the Negotiable Instruments Law bars a

party from setting up the defense of forgery if it is guilty of negligence. 52 Yet,
we are unable to conclude that Samsung Construction was guilty of
negligence in this case. The appellate court failed to explain precisely how
the Korean accountant was negligent or how more care and prudence on his
part would have prevented the forgery. We cannot sustain this "tar and
feathering" resorted to without any basis.

The bare fact that the forgery was committed by an employee of the party
whose signature was forged cannot necessarily imply that such party's
negligence was the cause for the forgery. Employers do not possess the
preternatural gift of cognition as to the evil that may lurk within the hearts
and minds of their employees. The Court's pronouncement in PCI Bank v.
Court of Appeals 53 applies in this case, to wit:

[T]he mere fact that the forgery was committed by a drawer-payor's

confidential employee or agent, who by virtue of his position had unusual
facilities for perpetrating the fraud and imposing the forged paper upon the
bank, does not entitle the bank to shift the loss to the drawer-payor, in the
absence of some circumstance raising estoppel against the drawer. 54

Admittedly, the record does not clearly establish what measures Samsung
Construction employed to safeguard its blank checks. Jong did testify that
his accountant, Kyu, kept the checks inside a "safety box," 55 and no contrary
version was presented by FEBTC. However, such testimony cannot prove
that the checks were indeed kept in a safety box, as Jong's testimony on
that point is hearsay, since Kyu, and not Jong, would have the personal
knowledge as to how the checks were kept.

Still, in the absence of evidence to the contrary, we can conclude that there
was no negligence on Samsung Construction's part. The presumption
remains that every person takes ordinary care of his concerns, 56 and that the
ordinary course of business has been followed. 57 Negligence is not presumed,
but must be proven by him who alleges it.58 While the complaint was lodged
at the instance of Samsung Construction, the matter it had to prove was the
claim it had alleged - whether the check was forged. It cannot be required as
well to prove that it was not negligent, because the legal presumption
remains that ordinary care was employed.

Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact
that Samsung Construction was negligent. While the payee, as in this case,
may not have the personal knowledge as to the standard procedures
observed by the drawer, it well has the means of disputing the presumption
of regularity. Proving a negative fact may be "a difficult office," 59 but
necessarily so, as it seeks to overcome a presumption in law. FEBTC was
unable to dispute the presumption of ordinary care exercised by Samsung
Construction, hence we cannot agree with the Court of Appeals' finding of
negligence.

The assailed Decision replicated the extensive efforts which FEBTC devoted

to establish that there was no negligence on the part of the bank in its
acceptance and payment of the forged check. However, the degree of
diligence exercised by the bank would be irrelevant if the drawer is not
precluded from setting up the defense of forgery under Section 23 by his
own negligence. The rule of equity enunciated in PNB v. National City Bank
of New York, 60 as relied upon by the Court of Appeals, deserves careful
examination.

The point in issue has sometimes been said to be that of negligence. The

drawee who has paid upon the forged signature is held to bear the
loss, because he has been negligent in failing to recognize that the
handwriting is not that of his customer. But it follows obviously that if
the payee, holder, or presenter of the forged paper has himself been in
default, if he has himself been guilty of a negligence prior to that of the
banker, or if by any act of his own he has at all contributed to induce the
banker's negligence, then he may lose his right to cast the loss upon the
banker.61 (Emphasis supplied)cralawlibrary

Quite palpably, the general rule remains that the drawee who has paid upon
the forged signature bears the loss. The exception to this rule arises only
when negligence can be traced on the part of the drawer whose signature
was forged, and the need arises to weigh the comparative negligence
between the drawer and the drawee to determine who should bear the
burden of loss. The Court finds no basis to conclude that Samsung
Construction was negligent in the safekeeping of its checks. For one, the
settled rule is that the mere fact that the depositor leaves his check book
lying around does not constitute such negligence as will free the bank from
liability to him, where a clerk of the depositor or other persons, taking
advantage of the opportunity, abstract some of the check blanks, forges the
depositor's signature and collect on the checks from the bank. 62 And for
another, in point of fact Samsung Construction was not negligent at all since
it reported the forgery almost immediately upon discovery. 63

It is also worth noting that the forged signatures in PNB v. National City
Bank of New York were not of the drawer, but of indorsers. The same
circumstance attends PNB v. Court of Appeals, 64 which was also cited by the
Court of Appeals. It is accepted that a forged signature of the drawer differs
in treatment than a forged signature of the indorser.

The justification for the distinction between forgery of the signature of the
drawer and forgery of an indorsement is that the drawee is in a position to
verify the drawer's signature by comparison with one in his hands, but has
ordinarily no opportunity to verify an indorsement. 65

Thus, a drawee bank is generally liable to its depositor in paying a check

which bears either a forgery of the drawer's signature or a forged
indorsement. But the bank may, as a general rule, recover back the money
which it has paid on a check bearing a forged indorsement, whereas it has
not this right to the same extent with reference to a check bearing a forgery
of the drawer's signature.66

The general rule imputing liability on the drawee who paid out on the forgery
holds in this case.

Since FEBTC puts into issue the degree of care it exercised before paying out
on the forged check, we might as well comment on the bank's performance
of its duty. It might be so that the bank complied with its own internal rules
prior to paying out on the questionable check. Yet, there are several
troubling circumstances that lead us to believe that the bank itself was
remiss in its duty.

The fact that the check was made out in the amount of nearly one million
pesos is unusual enough to require a higher degree of caution on the part of
the bank. Indeed, FEBTC confirms this through its own internal procedures.
Checks below twenty-five thousand pesos require only the approval of the
teller; those between twenty-five thousand to one hundred thousand pesos
necessitate the approval of one bank officer; and should the amount exceed
one hundred thousand pesos, the concurrence of two bank officers is
required.67

In this case, not only did the amount in the check nearly total one million
pesos, it was also payable to cash. That latter circumstance should have
aroused the suspicion of the bank, as it is not ordinary business practice for
a check for such large amount to be made payable to cash or to bearer,
instead of to the order of a specified person.68 Moreover, the check was
presented for payment by one Roberto Gonzaga, who was not designated as
the payee of the check, and who did not carry with him any written proof
that he was authorized by Samsung Construction to encash the check.
Gonzaga, a stranger to FEBTC, was not even an employee of Samsung
Construction.69 These circumstances are already suspicious if taken
independently, much more so if they are evaluated in concurrence. Given
the shadiness attending Gonzaga's presentment of the check, it was not
sufficient for FEBTC to have merely complied with its internal procedures,
but mandatory that all earnest efforts be undertaken to ensure the validity
of the check, and of the authority of Gonzaga to collect payment therefor.

According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried,
but failed, to contact Jong over the phone to verify the check. 70 She added
that calling the issuer or drawer of the check to verify the same was not part
of the standard procedure of the bank, but an "extra effort." 71 Even
assuming that such personal verification is tantamount to extraordinary
diligence, it cannot be denied that FEBTC still paid out the check despite the
absence of any proof of verification from the drawer. Instead, the bank
seems to have relied heavily on the say-so of Sempio, who was present at
the bank at the time the check was presented.

FEBTC alleges that Sempio was well-known to the bank officers, as he had
regularly transacted with the bank in behalf of Samsung Construction. It was
even claimed that everytime FEBTC would contact Jong about problems with
his account, Jong would hand the phone over to Sempio. 72 However, the only
proof of such allegations is the testimony of Gemma Velez, who also testified
that she did not know Sempio personally,73 and had met Sempio for the first
time only on the day the check was encashed.74 In fact, Velez had to inquire
with the other officers of the bank as to whether Sempio was actually known
to the employees of the bank.75 Obviously, Velez had no personal knowledge
as to the past relationship between FEBTC and Sempio, and any averments
of her to that effect should be deemed hearsay evidence. Interestingly,
FEBTC did not present as a witness any other employee of their Bel-Air
branch, including those who supposedly had transacted with Sempio before.

Even assuming that FEBTC had a standing habit of dealing with Sempio,
acting in behalf of Samsung Construction, the irregular circumstances
attending the presentment of the forged check should have put the bank on
the highest degree of alert. The Court recently emphasized that the highest
degree of care and diligence is required of banks.

Banks are engaged in a business impressed with public interest, and it is

their duty to protect in return their many clients and depositors who transact
business with them. They have the obligation to treat their client's account
meticulously and with the highest degree of care, considering the fiduciary
nature of their relationship. The diligence required of banks, therefore, is
more than that of a good father of a family.76

Given the circumstances, extraordinary diligence dictates that FEBTC should

have ascertained from Jong personally that the signature in the questionable
check was his.

Still, even if the bank performed with utmost diligence, the drawer whose
signature was forged may still recover from the bank as long as he or she is
not precluded from setting up the defense of forgery. After all, Section 23 of
the Negotiable Instruments Law plainly states that no right to enforce the
payment of a check can arise out of a forged signature. Since the drawer,
Samsung Construction, is not precluded by negligence from setting up the
forgery, the general rule should apply. Consequently, if a bank pays a forged
check, it must be considered as paying out of its funds and cannot charge
the amount so paid to the account of the depositor. 77 A bank is liable,
irrespective of its good faith, in paying a forged check. 78

WHEREFORE, the Petition is GRANTED. The Decision of the Court of

Appeals dated 28 November 1996 is REVERSED, and the Decision of the
Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is
REINSTATED. Costs against respondent.

SO ORDERED.
CASE #82 Consolidated Plywood Industries Inc. vs IFC Leasing & Acceptance Corp. GR
No. L-72593 (1987)

[G.R. No. 72593. April 30, 1987.]

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and

RODOLFO T. VERGARA, Petitioners, v. IFC LEASING AND
ACCEPTANCE CORPORATION, Respondent.

Carpio, Villaraza & Cruz Law Offices, for Petitioners.

Europa, Dacanay & Tolentino for Respondent.

DECISION

GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which

assails on questions of law a decision of the Intermediate Appellate Court in
AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution dated
October 17, 1985, denying the motion for reconsideration.

The antecedent facts culled from the petition are as follows:chanrob1es

virtual 1aw library

The petitioner is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional
roads, and simultaneous logging operations along the route of said roads, in
its logging concession area at Baganga, Manay, and Caraga, Davao Oriental.
For this purpose, it needed two (2) additional units of tractors.

Cognizant of petitioner-corporation’s need and purpose, Atlantic Gulf &

Pacific Company of Manila, through its sister company and marketing arm,
Industrial Products Marketing (the "seller-assignor"), a corporation dealing in
tractors and other heavy equipment business, offered to sell to petitioner-
corporation two (2) "Used" Allis Crawler Tractors, one (1) an HD-21-B and
the other an HD-16-B.
In order to ascertain the extent of work to which the tractors were to be
exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability of the
"Used" tractors being offered, petitioner-corporation requested the seller-
assignor to inspect the jobsite. After conducting said inspection, the seller-
assignor assured petitioner-corporation that the "Used" Allis Crawler Tractors
which were being offered were fit for the job, and gave the corresponding
warranty of ninety (90) days performance of the machines and availability of
parts. (t.s.n., May 28, 1980, pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor’s skill
and judgment, petitioner-corporation through petitioners Wee and Vergara,
president and vice-president, respectively, agreed to purchase on
installment said two (2) units of "Used" Allis Crawler Tractors. It also paid
the down payment of Two Hundred Ten Thousand Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two (2)
units of tractors (Exh. "3-A"). At the same time, the deed of sale with chattel
mortgage with promissory note was executed (Exh. "2").

Simultaneously with the execution of the deed of sale with chattel mortgage
with promissory note, the seller-assignor, by means of a deed of assignment
(Exh. "1"), assigned its rights and interest in the chattel mortgage in favor of
the Respondent.

Immediately thereafter, the seller-assignor delivered said two (2) units of

"Used" tractors to the petitioner-corporation’s jobsite and as agreed, the
seller-assignor stationed its own mechanics to supervise the operations of
the machines.

Barely fourteen (14) days had elapsed after their delivery when one of the
tractors broke down and after another nine (9) days, the other tractor
likewise broke down (t.s.n., May 28, 1980, pp. 68-69).

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-
assignor of the fact that the tractors broke down and requested for the
seller-assignor’s usual prompt attention under the warranty (Exh. "5").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit

"5," the seller-assignor sent to the jobsite its mechanics to conduct the
necessary repairs (Exhs. "6," "6-A," "6-B," "6-C," "6-C-1," "6-D," and "6-E"),
but the tractors did not come out to be what they should be after the repairs
were undertaken because the units were no longer serviceable (t.s.n., May
28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were delayed and
petitioner Vergara advised the seller-assignor that the payments of the
installments as listed in the promissory note would likewise be delayed until
the seller-assignor completely fulfills its obligation under its warranty (t.s.n,
May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner

Wee asked the seller-assignor to pull out the units and have them
reconditioned, and thereafter to offer them for sale. The proceeds were to be
given to the respondent and the excess, if any, to be divided between the
seller-assignor and petitioner-corporation which offered to bear one-half
(1/2) of the reconditioning cost (Exh. "7").

No response to this letter, Exhibit "7," was received by the petitioner-

corporation and despite several follow-up calls, the seller-assignor did
nothing with regard to the request, until the complaint in this case was filed
by the respondent against the petitioners, the corporation, Wee, and
Vergara.

The complaint was filed by the respondent against the petitioners for the
recovery of the principal sum of One Million Ninety Three Thousand Seven
Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of
One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest there after at the
rate of twelve (12%) percent per annum, attorney’s fees of Two Hundred
Forty Nine Thousand Eighty One Pesos & 71/100 (P249,081.71) and costs of
suit.

The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the
petitioners damages in an amount at the sound discretion of the court,
Twenty Thousand Pesos (P20,000.00) as and for attorney’s fees, and Five
Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners
likewise prayed for such other and further relief as would be just under the
premises.

In a decision dated April 20, 1981, the trial court rendered the following
judgment:jgc:chanrobles.com.ph

"WHEREFORE, judgment is hereby rendered:chanrob1es virtual 1aw library

1. ordering defendants to pay jointly and severally in their official and

personal capacities the principal sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE
THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.86) as of
August 15, 1979 and accruing interest thereafter at the rate of 12% per
annum;

"2) ordering defendants to pay jointly and severally attorney’s fees

equivalent to ten percent (10%) of the principal and to pay the costs of the
suit.

"Defendants’ counterclaim is disallowed." (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and

assigned therein the following errors:chanrob1es virtual 1aw library

THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC
GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-
APPELLANTS CLAIM OF WARRANTY.

II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-APPELLEE IS

A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER
SAID NOTE AS HOLDER THEREOF IN DUE COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged
decision affirming in toto the decision of the trial court. The pertinent
portions of the decision are as follows:chanrob1es virtual 1aw library

x       x       x

"From the evidence presented by the parties on the issue of warranty, We

are of the considered opinion that aside from the fact that no provision of
warranty appears or is provided in the Deed of Sale of the tractors and even
admitting that in a contract of sale unless a contrary intention appears, there
is an implied warranty, the defense of breach of warranty, if there is any, as
in this case, does not lie in favor of the appellants and against the plaintiff-
appellee who is the assignee of the promissory note and a holder of the
same in due course. Warranty lies in this case only between Industrial
Products Marketing and Consolidated Plywood Industries, Inc. The plaintiff-
appellant herein upon application by appellant corporation granted financing
for the purchase of the questioned units of Fiat-Allis Crawler Tractors.

x       x       x

"Holding that breach of warranty if any, is not a defense available to

appellants either to withdraw from the contract and/or demand a
proportionate reduction of the price with damages in either case (Art. 1567,
New Civil Code). We now come to the issue as to whether the plaintiff-
appellee is a holder in due course of the promissory note.

"To begin with, it is beyond arguments that the plaintiff-appellee is a

financing corporation engaged in financing and receivable discounting
extending credit facilities to consumers and industrial, commercial or
agricultural enterprises by discounting or factoring commercial papers or
accounts receivable duly authorized pursuant to R.A. 5980 otherwise known
as the Financing Act.

"A study of the questioned promissory note reveals that it is a negotiable

instrument which was discounted or sold to the IFC Leasing and Acceptance
Corporation for P800,000.00 (Exh. "A") considering the following: it is in
writing and signed by the maker; it contains an unconditional promise to pay
a certain sum of money payable at a fixed or determinable future time; it is
payable to order (Sec. 1, NIL); the promissory note was negotiated when it
was transferred and delivered by IPM to the appellee and duly endorsed to
the latter (Sec. 30, NIL); it was taken in the conditions that the note was
complete and regular upon its face before the same was overdue and
without notice, that it had been previously dishonored and that the note is in
good faith and for value without notice of any infirmity or defect in the title
of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held 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 against all parties
liable thereon (Sec. 57, NIL); the appellants engaged that they would pay
the note according to its tenor, and admit the existence of the payee IPM
and its capacity to endorse (Sec. 60, NIL).

"In view of the essential elements found in the questioned promissory note,
We opine that the same is legally and conclusively enforceable against the
defendants-appellants.

"WHEREFORE, finding the decision appealed from according to law and

evidence, We find the appeal without merit and thus affirm the decision in
toto. With costs against the appellants." (pp. 50-55, Rollo)

The petitioners’ motion for reconsideration of the decision of July 17, 1985
was denied by the Intermediate Appellate Court in its resolution dated
October 17, 1985, a copy of which was received by the petitioners on
October 21, 1985.

Hence, this petition was filed on the following grounds:chanrob1es virtual

1aw library

I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE

INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE
TO ORDER NOR TO BEARER.

II.

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A

MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT

AND THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE
PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT
ARE AVAILABLE TO IT AS AGAINST THE SELLER-ASSIGNOR, INDUSTRIAL
PRODUCTS MARKETING.

IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE

PROMISSORY NOTE BECAUSE:chanrob1es virtual 1aw library

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER

THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-
ASSIGNOR OF THE PROMISSORY NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER-ASSIGNOR

IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE
TRANSACTION FROM BEING A SALE ON INSTALLMENTS TO A PURE LOAN.

VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN

ANY COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT
BEEN AFFIXED THEREON OR CANCELLED.

The petitioners prayed that judgment be rendered setting aside the decision
dated July 17, 1985, as well as the resolution dated October 17, 1985 and
dismissing the complaint but granting petitioners’ counterclaims before the
court of origin.

On the other hand, the respondent corporation in its comment to the petition
filed on February 20, 1986, contended that the petition was filed out of time;
that the promissory note is a negotiable instrument and respondent a holder
in due course; that respondent is not liable for any breach of warranty; and
finally, that the promissory note is admissible in evidence.

The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of
the petitioner against the respondent-assignee.

Preliminarily, it must be established at the outset that we consider the

instant petition to have been filed on time because the petitioners’ motion
for reconsideration actually raised new issues. It cannot, therefore, be
considered pro-forma.

The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-
day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor
broke down and 9 days, thereafter, the second tractor became inoperable"
are sustained by the records. The petitioner was clearly a victim of a
warranty not honored by the maker.

The Civil Code provides that:jgc:chanrobles.com.ph

"ART. 1561. The vendor shall be responsible for warranty against the hidden
defects which the thing sold may have, should they render it unfit for the
use for which it is intended, or should they diminish its fitness for such use
to such an extent that, had the vendee been aware thereof, he would not
have acquired it or would have given a lower price for it; but said vendor
shall not be answerable for patent defects or those which may be visible, or
for those which are not visible if the vendee is an expert who, by reason of
his trade or profession, should have known them.

"ART. 1562. In a sale of goods, there is an implied warranty or condition as

to the quality or fitness of the goods, as follows:jgc:chanrobles.com.ph

"(1) Where the buyer, expressly or by implication, makes known to the seller
the particular purpose for which the goods are acquired, and it appears that
the buyer relies on the seller’s skill or judgment (whether he be the grower
or manufacturer or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;

x       x       x

"ART. 1564. An implied warranty or condition as to the quality or fitness for

a particular purpose may be annexed by the.

x       x       x

"ART. 1566. The vendor is responsible to the vendee for any hidden faults or
defects in the thing sold even though he was not aware thereof.

"This provision shall not apply if the contrary has been stipulated, and the
vendor was not aware of the hidden faults or defects in the thing sold."
(Emphasis supplied).

It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the assignee
is a holder in due course of the promissory note in question, assuming the
note is negotiable, in which case the latter’s rights are based on the
negotiable instrument and assuming further that the petitioner’s defenses
may not prevail against it.

Secondly, it likewise cannot be denied that as soon as the tractors broke

down, the petitioner-corporation notified the seller-assignor’s sister
company, AG & P, about the breakdown based on the seller-assignor’s
express 90-day warranty, with which the latter complied by sending its
mechanics. However, due to the seller-assignor’s delay and its failure to
comply with its warranty, the tractors became totally unserviceable and
useless for the purpose for which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its

contract with the seller-assignor.

Articles 1191 and 1567 of the Civil Code provide that:jgc:chanrobles.com.ph

"ART. 1191. The power to rescind obligations is implied in reciprocal ones, in

case one of the obligors should not comply with what is incumbent upon
him.

"The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

x       x       x

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the
vendee may elect between withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in either case."
(Emphasis supplied)

Petitioner, having unilaterally and extrajudicially rescinded its contract with

the seller-assignor, necessarily can no longer sue the seller-assignor except
by way of counterclaim if the seller-assignor sues it because of the
rescission.

In the case of the University of the Philippines v. De los Angeles (35 SCRA
102) we held:jgc:chanrobles.com.ph

"In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous court action,
but it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the
action taken was or was not correct in law. But the law definitely does not
require that the contracting party who believes itself injured must first file
suit and wait for a judgment before taking extrajudicial steps to protect its
interest. Otherwise, the party injured by the other’s breach will have to
passively sit and watch its damages accumulate during the pendency of the
suit until the final judgment of rescission is rendered when the law itself
requires that he should exercise due diligence to minimize its own damages
(Civil Code, Article 2203)." (Emphasis supplied)

Going back to the core issue, we rule that the promissory note in question is
not a negotiable instrument.

The pertinent portion of the note is as follows:jgc:chanrobles.com.ph

"FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY
THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only
(P1,093,789.71), Philippine Currency, the said principal sum, to be payable
in 24 monthly installments starting July 15, 1978 and every 15th of the
month thereafter until fully paid. . . . ."cralaw virtua1aw library

Considering that paragraph (d), Section 1 of the Negotiable Instruments Law

requires that a promissory note "must be payable to order or bearer," it
cannot be denied that the promissory note in question is not a negotiable
instrument.

"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’.
These words serve as an expression of consent that the instrument may be
transferred. This consent is indispensable since a maker assumes greater
risk under a negotiable instrument than under a non-negotiable one. . . . .

x       x       x

"When instrument is payable to order. —

"SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order

where it is drawn payable to the order of a specified person or to him or his
order . . .

x       x       x
"These are the only two ways by which an instrument may be made payable
to order. There must always be a specified person named in the instrument.
It means that 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." (Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law, Third Edition, page 38).
(Emphasis supplied)

Therefore, considering that the subject promissory note is not a negotiable

instrument, it follows that the respondent can never be a holder in due
course but remains a mere assignee of the note in question. Thus, the
petitioner may raise against the respondent all defenses available to it as
against the seller-assignor, Industrial Products Marketing.

This being so, there was no need for the petitioner to implead the seller-
assignor when it was sued by the respondent-assignee because the
petitioner’s defenses apply to both or either of them.

Actually, the records show that even the respondent itself admitted to being
a mere assignee of the promissory note in question, to
wit:jgc:chanrobles.com.ph

"ATTY. PALACA:jgc:chanrobles.com.ph

"Did we get it right from the counsel that what is being assigned is the Deed
of Sale with Chattel Mortgage with the promissory note which is as testified
to by the witness was indorsed? (Counsel for Plaintiff nodding his head.)
Then we have no further questions on cross.

"COURT:jgc:chanrobles.com.ph

"You confirm his manifestation? You are nodding your head? Do you confirm
that?

"ATTY. ILAGAN:jgc:chanrobles.com.ph

"The Deed of Sale cannot be assigned. A deed of sale is a transaction

between two persons; what is assigned are rights, the rights of the
mortgagee were assigned to the IFC Leasing & Acceptance Corporation.

"COURT:jgc:chanrobles.com.ph

"He puts it in a simple way, — as one — deed of sale and chattel mortgage
were assigned; .. you want to make a distinction, one is an assignment of
mortgage right and the other one is indorsement of the promissory note.
What counsel for defendants wants is that you stipulate that it is contained
in one single transaction?

"ATTY. ILAGAN:jgc:chanrobles.com.ph

"We stipulate it is one single transaction." (pp. 27-29, TSN., February 13,
1980).

Secondly, even conceding for purposes of discussion that the promissory

note in question is a negotiable instrument, the respondent cannot be a
holder in due course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-
assignor, Industrial Products Marketing, and the respondent whereby the
latter would pay the seller-assignor the entire purchase price and the seller-
assignor, in turn, would assign its rights to the respondent which acquired
the right to collect the price from the buyer, herein petitioner Consolidated
Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory
Note, the Deed of Assignment and the Disclosure of Loan/Credit Transaction
shows that said documents evidencing the sale on installment of the tractors
were all executed on the same day by and among the buyer, which is herein
petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is
the Industrial Products Marketing; and the assignee-financing company,
which is the Respondent. Therefore, the respondent had actual knowledge of
the fact that the seller-assignor’s right to collect the purchase price was not
unconditional, and that it was subject to the condition that the tractors sold
were not defective. The respondent knew that when the tractors turned out
to be defective, it would be subject to the defense of failure of consideration
and cannot recover the purchase price from the petitioners. Even assuming
for the sake of argument that the promissory note is negotiable, the
respondent, which took the same with actual knowledge of the foregoing
facts so that its action in taking the instrument amounted to bad faith, is not
a holder in due course. As such, the respondent is subject to all defenses
which the petitioners may raise against the seller-assignor. Any other
interpretation would be most inequitous to the unfortunate buyer who is not
only saddled with two useless tractors but must also face a lawsuit from the
assignee for the entire purchase price and all its incidents without being able
to raise valid defenses available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no
knowledge of any fact, which would justify its act of taking the promissory
note as not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide

that:jgc:chanrobles.com.ph

"SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in

due course is a holder who has taken the instrument under the following
conditions:chanrob1es virtual 1aw library

x       x       x

"(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.

x       x       x

"SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT. — To constitute notice

of an infirmity in the instrument or defect in the title of the person
negotiating the same the person to whom it is negotiated must have had
actual knowledge of the infirmity or defect, or knowledge of such facts that
his action in taking the instrument amounts to bad faith." (Emphasis
supplied)

We subscribe to the view of Campos and Campos that a financing company

is not a holder in good faith as to the buyer, to wit:jgc:chanrobles.com.ph

"In installment sales, the buyer usually issues a note payable to the seller to
cover the purchase price. Many times, in pursuance of a previous
arrangement with the seller, a finance company pays the full price and the
note is indorsed to it, subrogating it to the right to collect the price from the
buyer, with interest. With the increasing frequency of installment buying in
this country, it is most probable that the tendency of the courts in the United
States to protect the buyer against the finance company will find judicial
approval here. Where the goods sold turn out to be defective, the finance
company will be subject to the defense of failure of consideration and cannot
recover the purchase price from the buyer. As against the argument that
such a rule would seriously affect ‘a certain mode of transacting business
adopted throughout the State,’ a court in one case
stated:jgc:chanrobles.com.ph

"‘It may be that our holding here will require some changes in business
methods and will impose a greater burden on the finance companies. We
think the buyer — Mr. & Mrs. General Public — should have some protection
somewhere along the line. We believe the finance company is better able to
bear the risk of the dealer’s insolvency than the buyer and in a far better
position to protect his interests against unscrupulous and insolvent
dealers . . . .

"‘If this opinion imposes great burdens on finance companies it is a potent

argument in favor of a rule which will afford public protection to the general
buying public against unscrupulous dealers in personal property..’ (Mutual
Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953])" Campos and
Campos, Notes and Selected Cases on Negotiable Instruments Law, Third
Edition, p. 128).’"

In the case of Commercial Credit Corporation v. Orange Country Machine

Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real
sense, the finance company was a moving force in the transaction from its
very inception and acted as a party to it. When a finance company actively
participates in a transaction of this type from its inception, it cannot be
regarded as a holder in due course of the note given in the transaction.

In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively participated
in the sale on installment of the subject two Allis Crawler tractors, cannot be
regarded as a holder in due course of said note. It follows that the
respondent’s rights under the promissory note involved in this case are
subject to all defenses that the petitioners have against the seller-assignor,
Industrial Products Marketing For Section 58 of the Negotiable Instruments
Law provides that "in the hands of any holder other than a holder in due
course, a negotiable instrument is subject to the same defenses as if it were
non-negotiable. . . . ."cralaw virtua1aw library

Prescinding from the foregoing and setting aside other peripheral issues, we
find that both the trial and respondent appellate court erred in holding the
promissory note in question to be negotiable. Such a ruling does not only
violate the law and applicable jurisprudence, but would result in unjust
enrichment on the part of both the seller-assignor and respondent assignee
at the expense of the petitioner-corporation which rightfully rescinded an
inequitable contract. We note, however, that since the seller-assignor has
not been impleaded herein, there is no obstacle for the respondent to file a
civil suit and litigate its claims against the seller-assignor in the rather
unlikely possibility that it so desires.

WHEREFORE, in view of the foregoing, the decision of the respondent

appellate court dated July 17, 1985, as well as its resolution dated October
17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against the
petitioner before the trial court is DISMISSED.

SO ORDERED.
CASE #83 Ang Tek Lian vs CA 87 Phil 383

[G.R. No. L-2516. September 25, 1950.]

ANG TEK LIAN, Petitioner, v. THE COURT OF APPEALS, Respondent.

Laurel, Sabido, Almario & Laurel, for Petitioner.

Solicitor General Felix Bautista Angelo and Solicitor Manuel

Tomacruz, for Respondent.

SYLLABUS

1. CRIMINAL LAW; ESTAFA" ; ISSUING CHECK WITH INSUFFICIENT BANK

DEPOSIT TO COVER THE SAME. — One who issues a check payable to cash
to accomplish deceit and knows that at the time had no sufficient deposit
with the bank to cover the amount of the check and without informing the
payee of such circumstances, is guilty of estafa as provided by article 315,
paragraph (d), subsection 2 of the Revised Penal Code.

2. NEGOTIABLE INSTRUMENTS; CHECK DRAWN PAYABLE TO THE ORDER OF

"CASH" ; INDORSEMENT. — A check payable to the order of "cash to the
person presenting it for payment without the drawer’s indorsement.

DECISION

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 Exhibit 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 the 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 bank 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."cralaw virtua1aw
library

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 v.
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:jgc:chanrobles.com.ph

". . . 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 v.

National City Bank of New York (1933), 146 Misc., 732; 262 N. Y. S., 839;
Cleary v. Da Beck Plate Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831;
Massachusetts Bonding & Insurance Co. v. Pittsburgh Pipe & Supply Co.
(Tex. Civ. App., 1939), 135 S. W. (2d), 818. See also H. Cook & Son v.
Moody (1916), 17 Ga. App., 465; 87 S. E., 713."cralaw virtua1aw library

"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 the 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 failing 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 the 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.
CASE #84 PCI Bank vs CA 350 SCRA 446 (2001)

[G.R. No. 121413. January 29, 2001.]

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly

INSULAR BANK OF ASIA AND AMERICA), Petitioner, v. COURT OF
APPEALS and FORD PHILIPPINES, INC. and CITIBANK,
N.A., Respondents.

[G.R. No. 121479. January 29, 2001.]

FORD PHILIPPINES, INC., petitioner-plaintiff, v. COURT OF APPEALS

and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, Respondents.

[G.R. No. 128604. January 29, 2001.]

FORD PHILIPPINES, INC., Petitioner, v. CITIBANK, N.A., PHILIPPINE

COMMERCIAL INTERNATIONAL BANK and THE COURT OF
APPEALS, Respondents.

DECISION

QUISUMBING, J.:

These consolidated petitions involve several fraudulently negotiated checks.

The original actions a quo were instituted by Ford Philippines to recover from
the drawee bank CITIBANK, N.A. (Citibank) and collecting bank Philippine
Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and
America], the value of several checks payable to the Commissioner of
Internal Revenue, which were embezzled allegedly by an organized
syndicate.chanrob1es virtua1 1aw 1ibrary

G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27,
1995 Decision 1 of the Court of Appeals in CA-G.R CV No. 25017, entitled
"Ford Philippines, Inc. v. Citibank N.A. and Insular Bank of Asia and America
(now Philippine Commercial International Bank), and the August 8, 1995
Resolution, 2 ordering the collecting bank Philippine Commercial
International Bank to pay the amount of Citibank Check No. SN-04867.

In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996
Decision 3 of the Court of Appeals and its March 5, 1997 Resolution 4 in CA-
G.R. No. 28430 entitled "Ford Philippines, Inc. v. Citibank N.A. and Philippine
Commercial International Bank," affirming in toto the judgment of the trial
court holding the defendant drawee bank Citibank N.A., solely liable to pay
the amount of P12,163,298.10 as damages for the misapplied proceeds of
the plaintiff’s Citibank Check Numbers SN-10597 and 16508.

I. GR Nos. 121413 and 121479

The stipulated facts submitted by the parties as accepted by the Court of

Appeals as follows:jgc:chanrobles.com.ph

"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check
No. SN-04867 in the amount of P4,746,114.41, in favor of the Commissioner
of Internal Revenue as payment of plaintiff’s percentage or manufacturer’s
sales taxes for the third quarter of 1977.

The aforesaid check was deposited with the defendant IBAA (now PCIBank)
and was subsequently cleared at the Central Bank. Upon presentment with
the defendant Citibank, the proceeds of the check was paid to IBAA as
collecting or depository bank.

The proceeds of the same Citibank check of the plaintiff was never paid to or
received by the payee thereof, the Commissioner of Internal Revenue.

As a consequence, upon demand of the Bureau and/or Commissioner of

Internal Revenue, the plaintiff was compelled to make a second payment to
the Bureau of Internal Revenue of its percentage/manufacturers’ sales taxes
for the third quarter of 1977 and that said second payment of plaintiff in the
amount of P4,746,114.41 was duly received by the Bureau of Internal
Revenue.

It is further admitted by defendant Citibank that during the time of the

transactions in question, plaintiff had been maintaining a checking account
with defendant Citibank; that Citibank Check No. SN-04867 which was
drawn and issued by the plaintiff in favor of the Commissioner of Internal
Revenue was a crossed check in that, on its face were two parallel lines and
written in between said lines was the phrase "Payee’s Account Only" ; and
that defendant Citibank paid the full face value of the check in the amount of
P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff’s percentage
tax for the last quarter of 1977, the Bureau of Internal Revenue issued
Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating
therein in Muntinlupa, Metro Manila, as the authorized agent bank of
Metrobank, Alabang Branch to receive the tax payment of the plaintiff.

On December 19, 1977, plaintiff’s Citibank Check No. SN-04867, together

with the Revenue Tax Receipt No. 18747002, was deposited with defendant
IBAA, through its Ermita Branch. The latter accepted the check and sent it to
the Central Clearing House for clearing on the same day, with the
indorsement at the back "all prior indorsements and/or lack of indorsements
guaranteed." Thereafter, defendant IBAA presented the check for payment
to defendant Citibank on same date, December 19, 1977, and the latter paid
the face value of the check in the amount of P4,746,114.41. Consequently,
the amount of P4,746,114.41 was debited in plaintiff’s account with the
defendant Citibank and the check was returned to the plaintiff.

Upon verification, plaintiff discovered that its Citibank Check No. SN-04867
in the amount of P4,746,114.41 was not paid to the Commissioner of
Internal Revenue. Hence, in separate letters dated October 26, 1979,
addressed to the defendants, the plaintiff notified the latter that in case it
will be re-assessed by the BIR for the payment of the taxes covered by the
said checks, then plaintiff shall hold the defendants liable for reimbursement
of the face value of the same. Both defendants denied liability and refused to
pay.

In a letter dated February 28, 1980 by the Acting Commissioner of Internal

Revenue addressed to the plaintiff — supposed to be Exhibit "D", the latter
was officially informed, among others, that its check in the amount of
P4,746,114.41 was not paid to the government or its authorized agent and
instead encashed by unauthorized persons, hence, plaintiff has to pay the
said amount within fifteen days from receipt of the letter. Upon advice of the
plaintiff’s lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal
Revenue, the amount of P4,746,114.41, representing payment of plaintiff’s
percentage tax for the third quarter of 1977.

As a consequence of defendant’s refusal to reimburse plaintiff of the

payment it had made for the second time to the BIR of its percentage taxes,
plaintiff filed on January 20, 1983 its original complaint before this Court.

On December 24, 1985, defendant IBAA was merged with the Philippine
Commercial International Bank (PCI Bank) with the latter as the surviving
entity.
Defendant Citibank maintains that; the payment it made of plaintiff’s
Citibank Check No. SN-04867 in the amount of P4,746,114.41 "was in due
course" ; it merely relied on the clearing stamp of the depository/collecting
bank, the defendant IBAA that "all prior indorsements and/or lack of
indorsements guaranteed" ; and the proximate cause of plaintiff’s injury is
the gross negligence of defendant IBAA in indorsing the plaintiff’s Citibank
check in question.

It is admitted that on December 19, 1977 when the proceeds of plaintiff’s

Citibank Check No. SN-04867 was paid to defendant IBAA as collecting
bank, plaintiff was maintaining a checking account with defendant Citibank."
5

Although it was not among the stipulated facts, an investigation by the

National Bureau of Investigation (NBI) revealed that Citibank Check No. SN-
04867 was recalled by Godofredo Rivera, the General Ledger Accountant of
Ford. He purportedly needed to hold back the check because there was an
error in the computation of the tax due to the Bureau of Internal Revenue
(BIR). With Rivera’s instruction, PCIBank replaced the check with two of its
own Manager’s Checks (MCs). Alleged members of a syndicate later
deposited the two MCs with the Pacific Banking Corporation.

Ford, with leave of court, filed a third-party complaint before the trial court
impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as third
party defendants. But the court dismissed the complaint against PBC for lack
of cause of action. The court likewise dismissed the third-party complaint
against Godofredo Rivera because he could not be served with summons as
the NBI declared him as a "fugitive from justice" .

On June 15, 1989, the trial court rendered its decision, as

follows:jgc:chanrobles.com.ph

"Premises considered, judgment is hereby rendered as follows:chanrob1es

virtual 1aw library

1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and
severally, to pay the plaintiff the amount of P4,746,114.41 representing the
face value of plaintiff’s Citibank Check No. SN-04867, with interest thereon
at the legal rate starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid, plus costs;

2. On defendant Citibank’s cross-claim: ordering the cross-defendant IBAA

(now PCI BANK) to reimburse defendant Citibank for whatever amount the
latter has paid or may pay to the plaintiff in accordance with the next
preceding paragraph;

3. The counterclaims asserted by the defendants against the plaintiff, as well

as that asserted by the cross-defendant against the cross-claimant are
dismissed, for lack of merits; and

4. With costs against the defendants.

SO ORDERED." 6

Not satisfied with the said decision, both defendants, Citibank and PCIBank,
elevated their respective petitions for review on certiorari to the Court of
Appeals. On March 27, 1995, the appellate court issued its judgment as
follows:jgc:chanrobles.com.ph

"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed

decision with modifications.

The court hereby renders judgment:chanrob1es virtual 1aw library

1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant

Citibank N.A. is concerned;

2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the
amount of P4,746,114.41 representing the face value of plaintiff’s Citibank
Check No. SN-04867, with interest thereon at the legal rate starting January
20, 1983. the date when the original complaint was filed until the amount is
fully paid;

3. Dismissing the counterclaims asserted by the defendants against the

plaintiff as well as that asserted by the cross-defendant against the cross-
claimant, for lack of merits.

Costs against the defendant IBAA (now PCI Bank).

IT IS SO ORDERED." 7

PCIBank moved to reconsider the above-quoted decision of the Court of

Appeals, while Ford filed a "Motion for Partial Reconsideration." Both motions
were denied for lack of merit.

Separately, PCIBank and Ford filed before this Court, petitions for review
by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and
resolution of the Twelfth Division of the Court of Appeals contending that it
merely acted on the instruction of Ford and such cause of action had already
prescribed.

PCIBank sets forth the following issues for consideration:chanrob1es virtual

1aw library

I. Did the respondent court err when, after finding that the petitioner acted
on the check drawn by respondent Ford on the said respondent’s
instructions, it nevertheless found the petitioner liable to the said respondent
for the full amount of the said check.

II. Did the respondent court err when it did not find prescription in favor of
the petitioner. 8

In a counter move, Ford filed its petition docketed as G.R. No. 121479,
questioning the same decision and resolution of the Court of Appeals, and
praying for the reinstatement in toto of the decision of the trial court which
found both PCIBank and Citibank jointly and severally liable for the loss.

In G.R. No. 121479, appellant Ford presents the following propositions for
consideration:chanrob1es virtual 1aw library

I. Respondent Citibank is liable to petitioner Ford considering

that:chanrob1es virtual 1aw library

1. As drawee bank, respondent Citibank owes to petitioner Ford, as the

drawer of the subject check and a depositor of respondent Citibank, an
absolute and contractual duty to pay the proceeds of the subject check only
to the payee thereof, the Commissioner of Internal Revenue.

2. Respondent Citibank failed to observe its duty as banker with respect to

the subject check, which was crossed and payable to "Payee’s Account
Only."cralaw virtua1aw library

3. Respondent Citibank raises an issue for the first time on appeal; thus the
same should not be considered by the Honorable Court.

4. As correctly held by the trial court, there is no evidence of gross

negligence on the part of petitioner Ford. 9

II. PCIBank is liable to petitioner Ford considering that:chanrob1es virtual

1aw library
1. There were no instructions from petitioner Ford to deliver the proceeds of
the subject check to a person other than the payee named therein, the
Commissioner of the Bureau of Internal Revenue; thus, PCIBank’s only
obligation is to deliver the proceeds to the Commissioner of the Bureau of
Internal Revenue. 10

2. PCIBank which affixed its indorsement on the subject check ("All prior
indorsement and/or lack of indorsement guaranteed"), is liable as collecting
bank. 11

3. PCIBank is barred from raising issues of fact in the instant proceedings.

12

4. Petitioner Ford’s cause of action had not prescribed. 13

II. G.R. No. 128604

The same syndicate apparently embezzled the proceeds of checks intended,

this time, to settle Ford’s percentage taxes appertaining to the second
quarter of 1978 and the first quarter of 1979.

The facts as narrated by the Court of Appeals are as follows:chanrob1es

virtual 1aw library

Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of
P5,851,706.37 representing the percentage tax due for the second quarter
of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue
Tax Receipt No. 28645385 was issued for the said purpose.

On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the
amount of P6,311,591.73, representing the payment of percentage tax for
the first quarter of 1979 and payable to the Commissioner of Internal
Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued for
the said purpose.chanrob1es virtua1 1aw 1ibrary

Both checks were "crossed checks" and contain two diagonal lines on its
upper left corner between which were written the words "payable to the
payee’s account only."cralaw virtua1aw library

The checks never reached the payee, CIR. Thus, in a letter dated February
28, 1980, the BIR, Region 4-B, demanded for the said tax payments the
corresponding periods above-mentioned.
As far as the BIR is concerned, the said two BIR Revenue Tax Receipts were
considered "fake and spurious." This anomaly was confirmed by the NBI
upon the initiative of the BIR. The findings forced Ford to pay the BIR anew,
while an action was filed against Citibank and PCIBank for the recovery of
the amount of Citibank Check Numbers SN-10597 and 16508.

The Regional Trial Court of Makati, Branch 57, which tied the case, made its
findings on the modus operandi of the syndicate, as
follows:jgc:chanrobles.com.ph

"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its
General Ledger Accountant. As such, he prepared the plaintiff’s check
marked Ex.’A’ [Citibank Check No. SN-10597] for payment to the BIR.
Instead, however, of delivering the same to the payee, he passed on the
check to a co-conspirator named Remberto Castro who was a pro-manager
of the San Andres Branch of PCIB. * In connivance with one Winston Dulay,
Castro himself subsequently opened a Checking Account in the name of a
fictitious person denominated as ‘Reynaldo Reyes’ in the Meralco Branch of
PCIBank where Dulay works as Assistant Manager.

After an initial deposit of P100.00 to validate the account, Castro deposited a

worthless Bank of America Check in exactly the same amount as the first
FORD check (Exh. "A", P5,851,706.37) while this worthless check was
coursed through PCIB’s main office enroute to the Central Bank for clearing,
replaced this worthless check with FORD’s Exhibit ‘A’ and accordingly
tampered the accompanying documents to cover the replacement. As a
result, Exhibit ‘A’ was cleared by defendant CITIBANK, and the fictitious
deposit account of ‘Reynaldo Reyes’ was credited at the PCIB Meralco Branch
with the total amount of the FORD check Exhibit ‘A’. The same method was
again utilized by the syndicate in profiting from Exh.’B’ [Citibank Check No.
SN-16508] which was subsequently pilfered by Alexis Marindo, Rivera’s
Assistant at FORD.

From this ‘Reynaldo Reyes’ account, Castro drew various checks distributing
the shares of the other participating conspirators namely (1) CRISANTO
BERNABE, the mastermind who formulated the method for the
embezzlement; (2) RODOLFO R. DE LEON a customs broker who negotiated
the initial contact between Bernabe, FORD’s Godofredo Rivera and PCIB’s
Remberto Castro; (3) JUAN CASTILLO who assisted de Leon in the initial
arrangements; (4) GODOFREDO RIVERA, FORD’s accountant who passed on
the first check (Exhibit "A") to Castro; (5) REMBERTO CASTRO, PCIB’s pro-
manager at San Andres who performed the switching of checks in the
clearing process and opened the fictitious Reynaldo Reyes account at the
PCIB Meralco Branch; (6) WINSTON DULAY, PCIB’s Assistant Manager at its
Meralco Branch, who assisted Castro in switching the checks in the clearing
process and facilitated the opening of the fictitious Reynaldo Reyes’ bank
account; (7) ALEXIS MARINDO, Rivera’s Assistant at FORD, who gave the
second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection
Agent who provided the fake and spurious revenue tax receipts to make it
appear that the BIR had received FORD’s tax payments.

Several other persons and entities were utilized by the syndicate as conduits
in the disbursements of the proceeds of the two checks, but like the
aforementioned participants in the conspiracy, have not been impleaded in
the present case. The manner by which the said funds were distributed
among them are traceable from the record of checks drawn against the
original "Reynaldo Reyes" account and indubitably identify the parties who
illegally benefited therefrom and readily indicate in what amounts they did
so." 14

On December 9, 1988, Regional Trial Court of Makati, Branch 57, held

drawee-bank Citibank liable for the value of the two checks while absolving
PCIBank from any liability, disposing as follows:jgc:chanrobles.com.ph

"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK

to reimburse plaintiff FORD the total amount of P12,163,298.10 prayed for
in its complaint, with 6% interest thereon from date of first written demand
until full payment, plus P300,000.00 attorney’s fees and expenses of
litigation, and to pay the defendant, PCIB (on its counterclaim to crossclaim)
the sum of P300,000.00 as attorney’s fees and costs of litigation, and pay
the costs.

SO ORDERED." 15

Both Ford and Citibank appealed to the Court of Appeals which affirmed, in
toto, the decision of the trial court. Hence, this petition.

Petitioner Ford prays that judgment be rendered setting aside the portion of
the Court of Appeals decision and its resolution dated March 5, 1997, with
respect to the dismissal of the complaint against PCIBank and holding
Citibank solely responsible for the proceeds of Citibank Check Numbers SN-
10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.

Ford avers that the Court of Appeals erred in dismissing the complaint
against defendant PCIBank considering that:chanrob1es virtual 1aw library

I. Defendant PCIBank was clearly negligent when it failed to exercise the

diligence required to be exercised by it as a banking institution.
II. Defendant PCIBank clearly failed to observe the diligence required in the
selection and supervision of its officers and employees.

III. Defendant PCIBank was, due to its negligence, clearly liable for the loss
or damage resulting to the plaintiff Ford as a consequence of the substitution
of the check consistent with Section 5 of Central Bank Circular No. 580
series of 1977.

IV. Assuming arguendo that defendant PCIBank did not accept, endorse or
negotiate in due course the subject checks, it is liable, under Article 2154 of
the Civil Code, to return the money which it admits having received, and
which was credited to it in its Central Bank account. 16

The main issue presented for our consideration by these petitions could be
simplified as follows: Has petitioner Ford the right to recover from the
collecting bank (PCIBank) and the drawee bank (Citibank) the value of the
checks intended as payment to the Commissioner of Internal Revenue? Or
has Ford’s cause of action already prescribed?

Note that in these cases, the checks were drawn against the drawee bank,
but the title of the person negotiating the same was allegedly defective
because the instrument was obtained by fraud and unlawful means, and the
proceeds of the checks were not remitted to the payee. It was established
that instead of paying the checks to the CIR, for the settlement of the
appropriate quarterly percentage taxes of Ford, the checks were diverted
and encashed for the eventual distribution among the members of the
syndicate. As to the unlawful negotiation of the check the applicable law is
Section 55 of the Negotiable Instruments Law (NIL), which
provides:jgc:chanrobles.com.ph

"When title defective — The title of a person who negotiates an instrument is

defective within the meaning of this Act when he obtained the instrument, or
any signature thereto, by fraud, duress, or force and fear, or other unlawful
means, or for an illegal consideration, or when he negotiates it in breach of
faith or under such circumstances as amount to a fraud."cralaw virtua1aw
library

Pursuant to this provision, it is vital to show that the negotiation is made by

the perpetrator in breach of faith amounting to fraud. The person negotiating
the checks must have gone beyond the authority given by his principal. If
the principal could prove that there was no negligence in the performance of
his duties, he may set up the personal defense to escape liability and
recover from other parties who, through their own negligence, allowed the
commission of the crime.

In this case, we note that the direct perpetrators of the offense, namely the
embezzlers belonging to a syndicate, are now fugitives from justice. They
have, even if temporarily, escaped liability for the embezzlement of millions
of pesos. We are thus left only with the task of determining who of the
present parties before us must bear the burden of loss of these millions. It
all boils down to the question of liability based on the degree of negligence
among the parties concerned.

Foremost, we must resolve whether the injured party, Ford, is guilty of the
"imputed contributory negligence" that would defeat its claim for
reimbursement, bearing in mind that its employees, Godofredo Rivera and
Alexis Marindo, were among the members of the syndicate.

Citibank points out that, Ford allowed its very own employee, Godofredo
Rivera, to negotiate the checks to his co-conspirators, instead of delivering
them to the designated authorized collecting bank (Metrobank-Alabang) of
the payee, CIR. Citibank bewails the fact that Ford was remiss in the
supervision and control of its own employees, inasmuch as it only discovered
the syndicate’s activities through the information given by the payee of the
checks after an unreasonable period of time.

PCIBank also blames Ford of negligence when it allegedly authorized

Godofredo Rivera to divert the proceeds of Citibank Check No. SN-04867,
instead of using it to pay the BIR. As to the subsequent run-around of funds
of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the
proximate cause of the damage to Ford lies in its own officers and
employees who carried out the fraudulent schemes and the transactions.
These circumstances were not checked by other officers of the company,
including its comptroller or internal auditor. PCIBank contends that the
inaction of Ford despite the enormity of the amount involved was a sheer
negligence and stated that, as between two innocent persons, one of whom
must suffer the consequences of a breach of trust, the one who made it
possible, by his act of negligence, must bear the loss.

For its part, Ford denies any negligence in the performance of its duties. It
avers that there was no evidence presented before the trial court showing
lack of diligence on the part of Ford. And, citing the case of Gempesaw v.
Court of Appeals, 17 Ford argues that even if there was a finding therein
that the drawer was negligent, the drawee bank was still ordered to pay
damages.

Furthermore, Ford contends that Godofredo Rivera was not authorized to

make any representation in its behalf, specifically, to divert the proceeds of
the checks. It adds that Citibank raised the issue of imputed negligence
against Ford for the first time on appeal. Thus, it should not be considered
by this Court.

On this point, jurisprudence regarding the imputed negligence of employer in

a master-servant relationship is instructive. Since a master may be held for
his servant’s wrongful act, the law imputes to the master the act of the
servant, and if that act is negligent or wrongful and proximately results in
injury to a third person, the negligence or wrongful conduct is the negligence
or wrongful conduct of the master, for which he is liable. 18 The general rule
is that if the master is injured by the negligence of a third person and by the
concurring contributory negligence of his own servant or agent, the latter’s
negligence is imputed to his superior and will defeat the superior’s action
against the third person, assuming, of course that the contributory
negligence was the proximate cause of the injury of which complaint is
made. 19

Accordingly, we need to determine whether or not the action of Godofredo

Rivera, Ford’s General Ledger Accountant, and/or Alexis Marindo, his
assistant, was the proximate cause of the loss or damage. As defined,
proximate cause is that which, in the natural and continuous sequence,
unbroken by any efficient, intervening cause produces the injury, and
without which the result would not have occurred. 20

It appears that although the employees of Ford initiated the transactions

attributable to an organized syndicate, in our view, their actions were not
the proximate cause of encashing the checks payable to the CIR. The degree
of Ford’s negligence, if any, could not be characterized as the proximate
cause of the injury to the parties.

The Board of Directors of Ford, we note, did not confirm the request of
Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera’s instruction
to replace the said check with PCIBank’s Manager’s Check was not in the
ordinary course of business which could have prompted PCIBank to validate
the same.

As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was

established that these checks were made payable to the CIR Both were
crossed checks. These checks were apparently turned around by Ford’s
employees, who were acting on their own personal capacity.

Given these circumstances, the mere fact that the forgery was committed by
a drawer-payor’s confidential employee or agent, who by virtue of his
position had unusual facilities for perpetrating the fraud and imposing the
forged paper upon the bank, does not entitle the bank to shift the loss to the
drawer-payor, in the absence of some circumstance raising estoppel against
the drawer. 21 This rule likewise applies to the checks fraudulently
negotiated or diverted by the confidential employees who hold them in their
possession.

With respect to the negligence of PCIBank in the payment of the three

checks involved, separately, the trial courts found variations between the
negotiation of Citibank Check No. SN-04867 and the misapplication of total
proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize,
separately, PCIBank’s share of negligence when the syndicate achieved its
ultimate agenda of stealing the proceeds of these checks.

G.R. Nos. 121413 and 121479

Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita
Branch. It was coursed through the ordinary banking transaction, sent to
Central Clearing with the indorsement at the back "all prior indorsements
and/or lack of indorsements guaranteed," and was presented to Citibank for
payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR,
prepared two of its Manager’s checks and enabled the syndicate to encash
the same.chanrob1es virtua1 1aw 1ibrary

On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate

the checks. The neglect of PCIBank employees to verify whether his letter
requesting for the replacement of the Citibank Check No. SN-04867 was duly
authorized, showed lack of care and prudence required in the circumstances.

Furthermore, it was admitted that PCIBank is authorized to collect the

payment of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is
duty bound to consult its principal regarding the unwarranted instructions
given by the payor or its agent. As aptly stated by the trial court, to
wit:jgc:chanrobles.com.ph

". . . Since the questioned crossed check was deposited with IBAA [now
PCIBank], which claimed to be a depository/collecting bank of the BIR, it has
the responsibility to make sure that the check in question is deposited in
Payee’s account only.

x       x       x

As agent of the BIR (the payee of the check), defendant IBAA should receive
instructions only from its principal BIR and not from any other person
especially so when that person is not known to the defendant. It is very
imprudent on the part of the defendant IBAA to just rely on the alleged
telephone call of one (Godofredo Rivera and in his signature to the
authenticity of such signature considering that the plaintiff is not a client of
the defendant IBAA."cralaw virtua1aw library

It is a well-settled rule that the relationship between the payee or holder of

commercial paper and the bank to which it is sent for collection is, in the
absence of an agreement to the contrary, that of principal and agent. 22 A
bank which receives such paper for collection is the agent of the payee or
holder. 23

Even considering arguendo, that the diversion of the amount of a check

payable to the collecting bank in behalf of the designated payee may be
allowed, still such diversion must be properly authorized by the payor.
Otherwise stated, the diversion can be justified only by proof of authority
from the drawer, or that the drawer has clothed his agent with apparent
authority to receive the proceeds of such check.

Citibank further argues that PCI Bank’s clearing stamp appearing at the back
of the questioned checks stating that ALL PRIOR INDORSEMENTS AND/OR
LACK OF INDORSEMENTS GUARANTEED should render PCIBank liable
because it made it pass through the clearing house and therefore Citibank
had no other option but to pay it. Thus, Citibank asserts that the proximate
cause of Ford’s injury is the gross negligence of PCIBank. Since the
questioned crossed check was deposited with PCIBank, which claimed to be
a depository/collecting bank of the BIR, it had the responsibility to make
sure that the check in question is deposited in Payee’s account only.

Indeed, the crossing of the check with the phrase "Payee’s Account Only," is
a warning that the check should be deposited only in the account of the CIR
Thus, it is the duty of the collecting bank PCIBank to ascertain that the
check be deposited in payee’s account only. Therefore, it is the collecting
bank (PCIBank) which is bound to scrutinize the check and to know its
depositors before it could make the clearing indorsement "all prior
indorsements and/or lack of indorsement guaranteed" .

In Banco de Oro Savings and Mortgage Bank v. Equitable Banking

Corporation, 24 we ruled:jgc:chanrobles.com.ph

"Anent petitioner’s liability on said instruments, this court is in full accord

with the ruling of the PCHC’s board of Directors that:chanrob1es virtual 1aw
library
‘In presenting the checks for clearing and for payment, the defendant made
an express guarantee on the validity of "all prior endorsements." Thus,
stamped at the back of the checks are the defendant’s clear warranty: ALL
PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED.
Without such warranty, plaintiff would not have paid on the checks.’

No amount of legal jargon can reverse the clear meaning of defendant’s

warranty. As the warranty has proven to be false and inaccurate, the
defendant is liable for any damage arising out of the falsity of its
representation." 25chanrob1es virtua1 1aw 1ibrary

Lastly, banking business requires that the one who first cashes and
negotiates the check must take some precautions to learn whether or not it
is genuine. And if the one cashing the check through indifference or other
circumstance assists the forger in committing the fraud, he should not be
permitted to retain the proceeds of the check from the drawee whose sole
fault was that it did not discover the forgery or the defect in the title of the
person negotiating the instrument before paying the check. For this reason,
a bank which cashes a check drawn upon another bank, without requiring
proof as to the identity of persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against the drawee when the
proceeds of the checks were afterwards diverted to the hands of a third
party. In such cases the drawee bank has a right to believe that the cashing
bank (or the collecting bank) had, by the usual proper investigation, satisfied
itself of the authenticity of the negotiation of the checks. Thus, one who
encashed a check which had been forged or diverted and in turn received
payment thereon from the drawee, is guilty of negligence which proximately
contributed to the success of the fraud practiced on the drawee bank. The
latter may recover from the holder the money paid on the check. 26

Having established that the collecting bank’s negligence is the proximate

cause of the loss, we conclude that PCIBank is liable in the amount
corresponding to the proceeds of Citibank Check No. SN-04867.

G.R. No. 128604

The trial court and the Court of Appeals found that PCIBank had no official
act in the ordinary course of business that would attribute to it the case of
the embezzlement of Citibank Check Numbers SN-10597 and 16508,
because PCIBank did not actually receive nor hold the two Ford checks at all.
The trial court held, thus:jgc:chanrobles.com.ph

"Neither is there any proof that defendant PCIBank contributed any official
or conscious participation in the process of the embezzlement. This Court is
convinced that the switching operation (involving the checks while in transit
for "clearing") were the clandestine or hidden actuations performed by the
members of the syndicate in their own personal, covert and private capacity
and done without the knowledge of the defendant PCIBank . . . ." 27

In this case, there was no evidence presented confirming the conscious

participation of PCIBank in the embezzlement. As a general rule, however, a
banking corporation is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their
employment. 28 A bank will be held liable for the negligence of its officers or
agents when acting within the course and scope of their employment. It may
be liable for the tortuous acts of its officers even as regards that species of
tort of which malice is an essential element. In this case, we find a situation
where the PCIBank appears also to be the victim of the scheme hatched by a
syndicate in which its own management employees had
participated:chanrob1es virtual 1aw library

The pro-manager of San Andres Branch of PCIBank, Remberto Castro,

received Citibank Check Numbers SN 10597 and 16508. He passed the
checks to a co-conspirator, an Assistant Manager of PCIBank’s Meralco
Branch, who helped Castro open a Checking account of a fictitious person
named "Reynaldo Reyes." Castro deposited a worthless Bank of America
Check in exactly the same amount of Ford checks. The syndicate tampered
with the checks and succeeded in replacing the worthless checks and the
eventual encashment of Citibank Check Nos. SN 10597 and 16508. The
PCIBank Pro-manager, Castro, and his co-conspirator Assistant Manager
apparently performed their activities using facilities in their official capacity
or authority but for their personal and private gain or benefit.

A bank holding out its officers and agents as worthy of confidence will not be
permitted to profit by the frauds these officers or agents were enabled to
perpetrate in the apparent course of their employment; nor will it be
permitted to shirk its responsibility for such frauds, even though no benefit
may accrue to the bank therefrom. For the general rule is that a bank is
liable for the fraudulent acts or representations of an officer or agent acting
within the course and apparent scope of his employment or authority. 29
And if an officer or employee of a bank, in his official capacity, receives
money to satisfy an evidence of indebtedness lodged with his bank for
collection, the bank is liable for his misappropriation of such sum. 30

Moreover, as correctly pointed out by Ford, Section 5 31 of Central Bank

Circular No. 580, Series of 1977 provides that any theft affecting items in
transit for clearing, shall be for the account of sending bank, which in this
case is PCIBank.

But in this case, responsibility for negligence does not lie on PCIBank’s
shoulders alone.

The evidence on record shows that Citibank as drawee bank was likewise
negligent in the performance of its duties. Citibank failed to establish that its
payment of Ford’s checks were made in due course and legally in order. In
its defense, Citibank claims the genuineness and due execution of said
checks, considering that Citibank (1) has no knowledge of any infirmity in
the issuance of the checks in question (2) coupled by the fact that said
checks were sufficiently funded and (3) the endorsement of the Payee or
lack thereof was guaranteed by PCIBank (formerly IBAA), thus, it has the
obligation to honor and pay the same.

For its part, Ford contends that Citibank as the drawee bank owes to Ford an
absolute and contractual duty to pay the proceeds of the subject check only
to the payee thereof, the CIR. Citing Section 62 32 of the Negotiable
Instruments Law, Ford argues that by accepting the instrument, the
acceptor which is Citibank engages that it will pay according to the tenor of
its acceptance, and that it will pay only to the payee, (the CIR), considering
the fact that here the check was crossed with annotation "Payees Account
Only."cralaw virtua1aw library

As ruled by the Court of Appeals, Citibank must likewise answer for the
damages incurred by Ford on Citibank Checks Numbers SN 10597 and
16508, because of the contractual relationship existing between the two.
Citibank, as the drawee bank breached its contractual obligation with Ford
and such degree of culpability contributed to the damage caused to the
latter. On this score, we agree with the respondent court’s ruling.

Citibank should have scrutinized Citibank Check Numbers SN 10597 and

16508 before paying the amount of the proceeds thereof to the collecting
bank of the BIR. One thing is clear from the record: the clearing stamps at
the back of Citibank Check Nos. SN 10597 and 16508 do not .bear any
initials. Citibank failed to notice and verify the absence of the clearing
stamps. Had this been duly examined, the switching of the worthless checks
to Citibank Check Nos. 10597 and 16508 would have been discovered in
time. For this reason, Citibank had indeed failed to perform what was
incumbent upon it, which is to ensure that the amount of the checks should
be paid only to its designated payee. The fact that the drawee bank did not
discover the irregularity seasonably, in our view, constitutes negligence in
carrying out the bank’s duty to its depositors. The point is that as a business
affected with public interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their
relationship. 33

Thus, invoking the doctrine of comparative negligence, we are of the view

that both PCIBank and Citibank failed in their respective obligations and both
were negligent in the selection and supervision of their employees resulting
in the encashment of Citibank Check Nos. SN 10597 and 16508. Thus, we
are constrained to hold them equally liable for the loss of the proceeds of
said checks issued by Ford in favor of the CIR.

Time and again, we have stressed 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 very high, if not the highest, degree of diligence. 34 A bank’s
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. 35

Banks handle daily transactions involving millions of pesos. 36 By the very

nature of their work the degree of responsibility, care and trustworthiness
expected of their employees and officials is far greater than those of
ordinary clerks and employees. 37 Banks are expected to exercise the
highest degree of diligence in the selection and supervision of their
employees. 38

On the issue of prescription, PCIBank claims that the action of Ford had
prescribed because of its inability to seek judicial relief seasonably,
considering that the alleged negligent act took place prior to December 19,
1977 but the relief was sought only in 1983, or seven years thereafter.

The statute of limitations begins to run when the bank gives the depositor
notice of the payment, which is ordinarily when the check is returned to the
alleged drawer as a voucher with a statement of his account, 39 and an
action upon a check is ordinarily governed by the statutory period applicable
to instruments in writing. 40

Our laws on the matter provide that the action upon a written contract must
be brought within ten years from the time the right of action accrues. 41
Hence, the reckoning time for the prescriptive period begins when the
instrument was issued and the corresponding check was returned by the
bank to its depositor (normally a month thereafter). Applying the same rule,
the cause of action for the recovery of the proceeds of Citibank Check No.
SN 04867 would normally be a month after December 19, 1977, when
Citibank paid the face value of the check in the amount of P4,746,114.41.
Since the original complaint for the cause of action was filed on January 20,
1983, barely six years had lapsed. Thus, we conclude that Ford’s cause of
action to recover the amount of Citibank Check No. SN 04867 was
seasonably filed within the period provided by law.

Finally, we also find that Ford is not completely blameless in its failure to
detect the fraud. Failure on the part of the depositor to examine its
passbook, statements of account, and cancelled checks and to give notice
within a reasonable time (or as required by statute) of any discrepancy
which it may in the exercise of due care and diligence find therein, serves to
mitigate the banks’ liability by reducing the award of interest from twelve
percent (12%) to six percent (6%) per annum. As provided in Article 1172
of the Civil Code of the Philippines, 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. In
quasi-delicts, the contributory negligence of the plaintiff shall reduce the
damages that he may recover. 42chanrob1es virtua1 1aw 1ibrary

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in

CA-G.R. CV No. 25017. are AFFIRMED. PCIBank known formerly as Insular
Bank of Asia and America, is declared solely responsible for the loss of the
proceeds of Citibank Check No. SN 04867 in the amount P4,746,114.41,
which shall be paid together with six percent (6%) interest thereon to Ford
Philippines Inc. from the date when the original complaint was filed until said
amount is fully paid.

However, the Decision and Resolution of the Court of Appeals in CA- G.R.
No. 28430 are MODIFIED as follows: PCIBank and Citibank are adjudged
liable for and must share the loss, (concerning the proceeds of Citibank
Check Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-
fifty ratio, and each bank is ORDERED to pay Ford Philippines Inc.
P6,081,649.05, with six percent (6%) interest thereon, from the date the
complaint was filed until full payment of said amount.

Costs against Philippine Commercial International Bank and Citibank, N.A.

SO ORDERED.
CASE #85 Westmont Bank vs Ong 375 SCRA 212 (2002)

[G.R. No. 132560. January 30, 2002.]

WESTMONT BANK (formerly ASSOCIATED BANKING

CORP.), Petitioner, v. EUGENE ONG, Respondent.

DECISION

QUISUMBING, J.:

This is a petition for review of the decision 1 dated January 13, 1998, of the
Court of Appeals in CA-G.R. CV No. 28304 ordering the petitioner to pay
respondent P1,754,787.50 plus twelve percent (12%) interest per annum
computed from October 7, 1977, the date of the first extrajudicial demand,
plus damages.chanrob1es virtua1 1aw 1ibrary

The facts of this case are undisputed.

Respondent Eugene Ong maintained a current account with petitioner,

formerly the Associated Banking Corporation, but now known as Westmont
Bank. Sometime in May 1976, he sold certain shares of stocks through
Island Securities Corporation. To pay Ong, Island Securities purchased two
(2) Pacific Banking Corporation manager’s checks, 2 both dated May 4,
1976, issued in the name of Eugene Ong as payee. Before Ong could get
hold of the checks, his friend Faciano Tanlimco got hold of them, forged
Ong’s signature and deposited these with petitioner, where Tanlimco was
also a depositor. Even though Ong’s specimen signature was on file,
petitioner accepted and credited both checks to the account of Tanlimco,
without verifying the ‘signature indorsements’ appearing at the back thereof.
Tanlimco then immediately withdrew the money and absconded.

Instead of going straight to the bank to stop or question the payment, Ong
first sought the help of Tanlimco’s family to recover the amount. Later, he
reported the incident to the Central Bank, which like the first effort,
unfortunately proved futile.

It was only on October 7, 1977, about five (5) months from discovery of the
fraud, did Ong cry foul and demanded in his complaint that petitioner pay
the value of the two checks from the bank on whose gross negligence he
imputed his loss. In his suit, he insisted that he did not "deliver, negotiate,
endorse or transfer to any person or entity" the subject checks issued to him
and asserted that the signatures on the back were spurious. 3

The bank did not present evidence to the contrary, but simply contended
that since plaintiff Ong claimed to have never received the originals of the
two (2) checks in question from Island Securities, much less to have
authorized Tanlimco to receive the same, he never acquired ownership of
these checks. Thus, he had no legal personality to sue as he is not a real
party in interest. The bank then filed a demurrer to evidence which was
denied.

On February 8, 1989, after trial on the merits, the Regional Trial Court of
Manila, Branch 38, rendered a decision, thus:chanrob1es virtual 1aw library

IN VIEW OF THE FOREGOING, the court hereby renders judgment for the
plaintiff and against the defendant, and orders the defendant to pay the
plaintiff:chanrob1es virtual 1aw library

1. The sum of P1,754,787.50 representing the total face value of the two
checks in question, exhibits "A" and "B", respectively, with interest thereon
at the legal rate of twelve percent (12%) per annum computed from October
7, 1977 (the date of the first extrajudicial demand) up to and until the same
shall have been paid in full;

2. Moral damages in the amount of P250,000.00;

3. Exemplary or corrective damages in the sum of P100,000.00 by way of

example or correction for the public good;

4. Attorney’s fees of P30,000.00 and costs of suit.

Defendant’s counterclaims are dismissed for lack of merit.

SO ORDERED. 4

Petitioner elevated the case to the Court of Appeals without success. In its
decision, the appellate court held:chanrob1es virtual 1aw library

WHEREFORE, in view of the foregoing, the appealed decision is AFFIRMED in

toto. 5
Petitioner now comes before this Court on a petition for review, alleging that
the Court of Appeals erred:chanrob1es virtual 1aw library

... IN AFFIRMING THE TRIAL COURT’S CONCLUSION THAT RESPONDENT

HAS A CAUSE OF ACTION AGAINST THE PETITIONER.

II

... IN AFFIRMING THE TRIAL COURT’S DECISION FINDING PETITIONER

LIABLE TO RESPONDENT AND DECLARING THAT THE LATTER MAY RECOVER
DIRECTLY FROM THE FORMER; AND

III

... IN NOT ADJUDGING RESPONDENT GUILTY OF LACHES AND IN NOT

ABSOLVING PETITIONER FROM LIABILITY.

Essentially the issues in this case are: (1) whether or not respondent Ong
has a cause of action against petitioner Westmont Bank; and (2) whether or
not Ong is barred to recover the money from Westmont Bank due to laches.

Respondent admitted that he was never in actual or physical possession of

the two (2) checks of the Island Securities nor did he authorize Tanlimco or
any of the latter’s representative to demand, accept and receive the same.
For this reason, petitioner argues, respondent cannot sue petitioner because
under Section 51 of the Negotiable Instruments Law 6 it is only when a
person becomes a holder of a negotiable instrument can he sue in his own
name. Conversely, prior to his becoming a holder, he had no right or cause
of action under such negotiable instrument. Petitioner further argues that
since Section 191 7 of the Negotiable Instruments Law defines a "holder" as
the ‘payee or indorsee of a bill or note, who is in possession of it, or the
bearer thereof,’ in order to be a holder, it is a requirement that he be in
possession of the instrument or the bearer thereof. Simply stated, since Ong
never had possession of the checks nor did he authorize anybody, he did not
become a holder thereof hence he cannot sue in his own name. 8

Petitioner also cites Article 1249 9 of the Civil Code explaining that a check,
even if it is a manager’s check, is not legal tender. Hence, the creditor
cannot be compelled to accept payment thru this means. 10 It is petitioner’s
position that for all intents and purposes, Island Securities has not yet
tendered payment to respondent Ong, thus, any action by Ong should be
directed towards collecting the amount from Island Securities. Petitioner
claims that Ong’s cause of action against it has not ripened as of yet. It may
be that petitioner would be liable to the drawee bank — but that is a matter
between petitioner and drawee-bank, Pacific Banking Corporation. 11

For its part, respondent Ong leans on the ruling of the trial court and the
Court of Appeals which held that the suit of Ong against the petitioner bank
is a desirable shortcut to reach the party who ought in any event to be
ultimately liable. 12 It likewise cites the ruling of the courts a quo which held
that according to the general rule, a bank who has obtained possession of a
check upon an unauthorized or forged indorsement of the payee’s signature
and who collects the amount of the check from the drawee is liable for the
proceeds thereof to the payee. The theory of said rule is that the collecting
bank’s possession of such check is wrongful. 13

Respondent also cites Associated Bank v. Court of Appeals 14 which held

that the collecting bank or last endorser generally suffers the loss because it
has the duty to ascertain the genuineness of all prior endorsements. The
collecting bank is also made liable because it is privy to the depositor who
negotiated the check. The bank knows him, his address and history because
he is a client. Hence, it is in a better position to detect forgery, fraud or
irregularity in the indorsement. 15

Anent Article 1249 of the Civil Code, Ong points out that bank checks are
specifically governed by the Negotiable Instruments Law which is a special
law and only in the absence of specific provisions or deficiency in the special
law may the Civil Code be invoked. 16

Considering the contentions of the parties and the evidence on record, we

find no reversible error in the assailed decisions of the appellate and trial
courts, hence there is no justifiable reason to grant the petition.

Petitioner’s claim that respondent has no cause of action against the bank is
clearly misplaced. As defined, a cause of action is the act or omission by
which a party violates a right of another. 17 The essential elements of a
cause of action are: (a) a legal right or rights of the plaintiff, (b) a
correlative obligation of the defendant, and (c) an act or omission of the
defendant in violation of said legal right. 18

The complaint filed before the trial court expressly alleged respondent’s right
as payee of the manager’s checks to receive the amount involved,
petitioner’s correlative duty as collecting bank to ensure that the amount
gets to the rightful payee or his order, and a breach of that duty because of
a blatant act of negligence on the part of petitioner which violated
respondent’s rights. 19

Under Section 23 of the Negotiable Instruments Law:chanrob1es virtual 1aw

library

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.

Since the signature of the payee, in the case at bar, was forged to make it
appear that he had made an endorsement in favor of the forger, such
signature should be deemed as inoperative and ineffectual. Petitioner, as the
collecting bank, grossly erred in making payment by virtue of said forged
signature. The payee, herein respondent, should therefore be allowed to
recover from the collecting bank.

The collecting bank is liable to the payee and must bear the loss because it
is its legal duty to ascertain that the payee’s endorsement was genuine
before cashing the check. 20 As a general rule, a bank or corporation who
has obtained possession of a check upon an unauthorized or forged
indorsement of the payee’s signature and who collects the amount of the
check from the drawee, is liable for the proceeds thereof to the payee or
other owner, notwithstanding that the amount has been paid to the person
from whom the check was obtained. 21

The theory of the rule is that the possession of the check on the forged or
unauthorized indorsement is wrongful, and when the money had been
collected on the check, the bank or other person or corporation can be held
as for moneys had and received, and the proceeds are held for the rightful
owners who may recover them. The position of the bank taking the check on
the forged or unauthorized indorsement is the same as if it had taken the
check and collected the money without indorsement at all and the act of the
bank amounts to conversion of the check. 22

Petitioner’s claim that since there was no delivery yet and respondent has
never acquired possession of the checks, respondent’s remedy is with the
drawer and not with petitioner bank. Petitioner relies on the view to the
effect that where there is no delivery to the payee and no title vests in him,
he ought not to be allowed to recover on the ground that he lost nothing
because he never became the owner of the check and still retained his claim
of debt against the drawer. 23 However, another view in certain cases holds
that even if the absence of delivery is considered, such consideration is not
material. The rationale for this view is that in said cases the plaintiff uses
one action to reach, by a desirable short cut, the person who ought in any
event to be ultimately liable as among the innocent persons involved in the
transaction. In other words, the payee ought to be allowed to recover
directly from the collecting bank, regardless of whether the check was
delivered to the payee or not. 24

Considering the circumstances in this case, in our view, petitioner could not
escape liability for its negligent acts. Admittedly, respondent Eugene Ong at
the time the fraudulent transaction took place was a depositor of petitioner
bank. Banks are engaged in a business impressed with public interest, and it
is their duty to protect in return their many clients and depositors who
transact business with them. 25 They have the obligation to treat their
client’s account meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship. The diligence required
of banks, therefore, is more than that of a good father of a family. 26 In the
present case, petitioner was held to be grossly negligent in performing its
duties. As found by the trial court:chanrob1es virtual 1aw library

. . . (A)t the time the questioned checks were accepted for deposit to
Paciano Tanlimco’s account by defendant bank, defendant bank, admittedly
had in its files specimen signatures of plaintiff who maintained a current
account with them (Exhibits "L-1" and "M-1" ; testimony of Emmanuel
Torio). Given the substantial face value of the two checks, totalling
P1,754,787.50, and the fact that they were being deposited by a person not
the payee, the very least defendant bank should have done, as any
reasonable prudent man would have done, was to verify the genuineness of
the indorsements thereon. The Court cannot help but note that had
defendant conducted even the most cursory comparison with plaintiff’s
specimen signatures in its files (Exhibit "L-1" and "M-1") it would have at
once seen that the alleged indorsements were falsified and were not those of
the plaintiff-payee. However, defendant apparently failed to make such a
verification or, what is worse did so but, chose to disregard the obvious
dissimilarity of the signatures. The first omission makes it guilty of gross
negligence; the second of bad faith. In either case, defendant is liable to
plaintiff for the proceeds of the checks in question. 27

These findings are binding and conclusive on the appellate and the reviewing
courts.

On the second issue, petitioner avers that respondent Ong is barred by

laches for failing to assert his right for recovery from the bank as soon as he
discovered the scam. The lapse of five months before he went to seek relief,
from the bank, according to petitioner, constitutes laches.

In turn, respondent contends that petitioner presented no evidence to

support its claim of laches. On the contrary, the established facts of the case
as found by the trial court and affirmed by the Court of Appeals are that
respondent left no stone unturned to obtain relief from his predicament.

On the matter of delay in reporting the loss, respondent calls attention to

the fact that the checks were issued on May 4, 1976, and on the very next
day, May 5, 1976, these were already credited to the account of Paciano
Tanlimco and presented for payment to Pacific Banking Corporation. So even
if the theft of the checks were discovered and reported earlier, respondent
argues, it would not have altered the situation as the encashment of the
checks was consummated within twenty four hours and facilitated by the
gross negligence of the petitioner bank. 28

Laches may be defined as the failure or neglect for an unreasonable and

unexplained length of time, to do that which, by exercising due diligence,
could or should have been done earlier. It is negligence or omission to assert
a right within a reasonable time, warranting a presumption that the party
entitled thereto has either abandoned or declined to assert it. 29 It concerns
itself with whether or not by reason of long inaction or inexcusable neglect, a
person claiming a right should be barred from asserting the same, because
to allow him to do so would be unjust to the person against whom such right
is sought to be enforced. 30

In the case at bar, it cannot be said that respondent sat on his rights. He
immediately acted after knowing of the forgery by proceeding to seek help
from the Tanlimco family and later the Central Bank, to remedy the situation
and recover his money from the forger, Paciano Tanlimco. Only after he had
exhausted possibilities of settling the matter amicably with the family of
Tanlimco and through the CB, about five months after the unlawful
transaction took place, did he resort to making the demand upon the
petitioner and eventually before the court for recovery of the money value of
the two checks. These acts cannot be construed as undue delay in or
abandonment of the assertion of his rights.

Moreover, the claim of petitioner that respondent should be barred by laches

is clearly a vain attempt to deflect responsibility for its negligent act. As
explained by the appellate court, it is petitioner which had the last clear
chance to stop the fraudulent encashment of the subject checks had it
exercised due diligence and followed the proper and regular banking
procedures in clearing checks. 31 As we had earlier ruled, the one who had
the last clear opportunity to avoid the impending harm but failed to do so is
chargeable with the consequences thereof. 32

WHEREFORE, the instant petition is DENIED for lack of merit. The assailed
decision of the Court of Appeals, sustaining the judgment of the Regional
Trial Court of Manila, is AFFIRMED.chanrob1es virtua1 1aw 1ibrary

Costs against petitioner.

SO ORDERED.
CASE #86 Republic Bank vs Ebrada 65 SCRA 680 (1975)

[G.R. No. L-40796. July 31, 1975.]

REPUBLIC BANK, Plaintiff-Appellee, v. MAURICIA T.

EBRADA, Defendant-Appellant.

Sabino de Leon, Jr. for Plaintiff-Appellee.

Julio Baldonado, for Defendant-Appellant.

SYNOPSIS

A check with a face value of P1,246.08 was issued to one Martin Lorenzo
who turned out to have been dead almost eleven years before it was issued.
It was encashed by Mauricia Ebrada at the Republic Bank’s main office at the
Escolta. Informing the Bank that the payee’s (Lorenzo) indorsement on the
reverse side of the check was a forgery, the Bureau of Treasury requested
the Bank to refund the amount. The Bank sued Mauricia Ebrada before the
city court when she refused to return the money. The court ruled for the
Bank, so the case was elevated to the Court of First Instance which likewise
rendered an adverse decision against Mauricia Ebrada. An appeal was filed.

The Supreme Court upheld the lower court. Although Mauricia Ebrada was
not the author of the forgery, as the last indorser of the check, she
warranted good title to it. The negotiation from Martin Lorenzo, the original
payee, to Ramon Lorenzo is of no effect but the negotiation from Ramon
Lorenzo to Adelaida Dominguez and from her to Mauricia Ebrada who did not
know of the forgery is valid and enforceable. The bank can recover from her
the money paid on the forged check.

Judgment affirmed.

SYLLABUS

1. NEGOTIABLE INSTRUMENT; CHECK; FORGED INDORSEMENT; EFFECT. —

Where the signature on a negotiable instrument is forged, the negotiation of
the check is without force of effect. But the existence of the forged signature
therein will not render void all the other negotiations of the check with
 respect to the other parties whose signatures are genuine. It is only the
negotiation predicated on the forged indorsement that should be declared
inoperative.

2. ID.; ID.; ID.; DRAWEE BANK SUFFERED THE LOSS BUT RECOVERY FROM
THE ONE WHO ENCASHED THE CHECK AVAILABLE. — Where after the
drawee bank has paid the amount of the check to the holder thereof, it was
discovered that the signature of the payee was forged, the bank can still
recover from the one who encashed the check. In the case of Great Eastern
Life Insurance Company v. Hongkong and Shanghai Banking Corporation, 43
Phil. 678, it was held "where a check is drawn payable to the order of one
person and is presented to a bank by another and purports upon its face to
have been duly indorsed by the payee of the check, it is the duty of the bank
to know that the check was duly indorsed by the original payee, and where
the Bank pays the amount of the check to a third person, who has forged
the signature of the payee, the loss falls upon the bank who cashed the
check, and its only remedy is against the person to whom it paid the
money."cralaw virtua1aw library

3. ID.; ID.; ID.; DRAWEE BANK NOT DUTY BOUND TO ASCERTAIN

GENUINESS OF SIGNATURES OF PAYEE OR INDORSERS. — It is not
supposed to be the duty of a drawee bank to ascertain whether the
signatures of the payee or indorsers are genuine or not. This is because the
indorser is supposed to warrant to the drawee that the signatures of the
payee and previous indorsers are genuine, warranty not extending only to
holders in due course.

4. ID.; ID.; ID.; PURCHASER OF CHECK OR DRAFT BOUND TO ASCERTAIN

GENUINENESS OF INSTRUMENT. — One who purchases a check or draft is
bound to satisfy himself that the paper is genuine and that by indorsing it or
presenting it for payment or putting it into circulation before presentation he
impliedly asserts that he has performed his duty, and the drawee who has
paid the forged check, without actual negligence on his part, may recover
the money paid from such negligent purchaser. In such cases the recovery is
permitted because although the drawee was in a way negligent in failing to
detect the forgery, yet if the encasher of the check had performed his duty,
the forgery would in all probability, have been detected and the fraud
defeated.

5. ID.; ID.; ID.; LIABILITY OF ACCOMMODATION PARTY. — Although the

one to whom the Bank paid the check was not proven to be the author of the
supposed forgery, as last indorser of the check, she has warranted that she
has good title to it even if in fact she did not have it because the payee of
the check was already dead eleven years before the check was issued. The
 fact that immediately after receiving the cash proceeds of the check in
question from the drawee bank she immediately turned over said amount to
another party, who in turn handed the amount to somebody else on the
same date would not exempt her from liability because by doing so, she
acted as an accommodation party in the check for which she is also liable
under Section 29 of the Negotiable Instrument Law.

DECISION

MARTIN, J.:

Appeal on a question of law of the decision of the Court of First Instance of

Manila, Branch XXIII in Civil Case No. 69288, entitled "Republic Bank v.
Mauricia T. Ebrada."cralaw virtua1aw library

On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed

Back Pay Check No. 508060 dated January 15, 1963 for P1,246.08 at the
main office of the plaintiff Republic Bank at Escolta, Manila. The check was
issued by the Bureau of Treasury. 1 Plaintiff Bank was later advised by the
said bureau that the alleged indorsement on the reverse side of the
aforesaid check by the payee, "Martin Lorenzo" was a forgery 2 since the
latter had allegedly died as of July 14, 1952. 3 Plaintiff Bank was then
requested by the Bureau of Treasury to refund the amount of P1,246.08. 4
To recover what it had refunded to the Bureau of Treasury, plaintiff Bank
made verbal and formal demands upon defendant Ebrada to account for the
sum of P1,246.08, but said defendant refused to do so. So plaintiff Bank
sued defendant Ebrada before the City Court of Manila.

On July 11, 1966, defendant Ebrada filed her answer denying the material
allegations of the complaint and as affirmative defenses alleged that she was
a holder in due course of the check in question, or at the very least, has
acquired her rights from a holder in due course and therefore entitled to the
proceeds thereof. She also alleged that the plaintiff Bank has no cause of
action against her; that it is in estoppel, or so negligent as not to be entitled
to recover anything from her. 5

About the same day, July 11, 1966 defendant Ebrada filed a Third-Party
complaint against Adelaida Dominguez who, in turn, filed on September 14,
1966 a Fourth-Party complaint against Justina Tinio.

On March 21, 1967, the City Court of Manila rendered judgment for the
plaintiff Bank against defendant Ebrada; for Third-Party plaintiff against
Third-Party defendant, Adelaida Dominguez, and for Fourth-Party plaintiff
against Fourth-Party defendant, Justina Tinio.

From the judgment of the City Court, defendant Ebrada took an appeal to
the Court of First Instance of Manila where the parties submitted a partial
stipulation of facts as follows:jgc:chanrobles.com.ph

"COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party
defendant and Fourth-Party plaintiff and unto this Honorable Court most
respectfully submit the following:chanrob1es virtual 1aw library

PARTIAL STIPULATION OF FACTS

1. That they admit their respective capacities to sue and be sued;

2. That on January 15, 1963 the Treasury of the Philippines issued its Check
No. BP-508060, payable to the order of one MARTIN LORENZO, in the sum
of P1,246.08, and drawn on the Republic Bank, plaintiff herein, which check
will be marked as Exhibit "A" for the plaintiff;

3. That the back side of aforementioned check hears the following

signatures, in this order:chanrob1es virtual 1aw library

1) MARTIN LORENZO:chanrob1es virtual 1aw library

2) RAMON R. LORENZO;

3) DELIA DOMINGUEZ; and

4) MAURICIA T. EBRADA;

4. That the aforementioned check was delivered to the defendant MAURICIA

T. EBRADA by the Third-Party defendant and Fourth-Party plaintiff ADELAIDA
DOMINGUEZ, for the purpose of encashment;

5. That the signature of defendant MAURICIA T. EBRADA was affixed on said

check on February 27, 1963 when she encashed it with the plaintiff Bank;

6. That immediately after defendant MAURICIA T. EBRADA received the cash

proceeds of said check in the sum of P1,246.08 from the plaintiff Bank, she
immediately turned over the said amount to the third-party defendant and
fourth-party plaintiff ADELAIDA DOMINGUEZ, who in turn handed the said
amount to the fourth-party defendant JUSTINA TINIO on the same date, as
evidenced by the receipt signed by her which will be marked as Exhibit "1-
Dominguez" ; and

7. That the parties hereto reserve the right to present evidence on any other
fact not covered by the foregoing stipulations.

Manila, Philippines, June 6, 1969."cralaw virtua1aw library

Based on the foregoing stipulation of facts and the documentary evidence

presented, the trial court rendered a decision, the dispositive portion of
which reads as follows:jgc:chanrobles.com.ph

"WHEREFORE, the Court renders judgment ordering the defendant Mauricia

T. Ebrada to pay the plaintiff the amount of ONE THOUSAND TWO FORTY-
SIX 08/100 (P1,246.08), with interest as the legal rate from the filing of the
complaint on June 16, 1966, until fully paid, plus the costs in both instances
against Mauricia T. Ebrada.

The right of Mauricia T. Ebrada to file whatever claim she may have against
Adelaida Dominguez in connection with this case is hereby reserved. The
right of the estate of Dominguez to file the fourth-party complaint against
Justina Tinio is also reserved.

SO ORDERED."cralaw virtua1aw library

In her appeal, Defendant-Appellant presses that the lower court

erred:jgc:chanrobles.com.ph

"IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE VALUE OF
THE SUBJECT CHECK AFTER FINDING THAT THE DRAWER ISSUED THE
SUBJECT CHECK TO A PERSON ALREADY DECEASED FOR 11-1/2 YEARS AND
THAT THE APPELLANT DID NOT BENEFIT FROM ENCASHING SAID
CHECK."cralaw virtua1aw library

From the stipulation of facts it is admitted that the check in question was
delivered to defendant-appellant by Adelaida Dominguez for the purpose of
encashment and that her signature was affixed on said check when she
cashed it with the plaintiff Bank. Likewise it is admitted that defendant-
appellant was the last indorser of the said check. As such indorser, she was
supposed to have warranted that she has good title to said check; for under
Section 5 of the Negotiable Instruments Law: 6

"Every person negotiating an instrument by delivery or by qualified

indorsement, warrants:chanrob1es virtual 1aw library
(a) That the instrument is genuine and in all respects what it purports to be.

(b) That she has good title to it."cralaw virtua1aw library

x       x       x

and under Section 65 of the same Act:jgc:chanrobles.com.ph

"Every indorser who indorses without qualification warrants to all subsequent

holders in due course:chanrob1es virtual 1aw library

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the
next preceding sections;

(b) That the instrument is at the time of his indorsement valid and
subsisting."cralaw virtua1aw library

It turned out, however, that the signature of the original payee of the check,
Martin Lorenzo was a forgery because he was already dead 7 almost 11
years before the check in question was issued by the Bureau of Treasury.
Under Section 23 of the Negotiable Instruments Law (Act
2031):jgc:chanrobles.com.ph

"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 instruments, or to give a discharge 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."cralaw virtua1aw library

It is clear from the provision that where the signature on a negotiable

instrument if forged, the negotiation of the check is without force or effect.
But does this mean that the existence of one forged signature therein will
render void all the other negotiations of the check with respect to the other
parties whose signature are genuine?

In the case of Beam v. Farrel, 135 Iowa 670, 113 N.W. 590, where a check
has several indorsements on it, it was held that it is only the negotiation
based on the forged or unauthorized signature which is inoperative. Applying
this principle to the case before Us, it can be safely concluded that it is only
the negotiation predicated on the forged indorsement that should be
declared inoperative. This means that the negotiation of the check in
question from Martin Lorenzo, the original payee, to Ramon R. Lorenzo, the
second indorser, should be declared of no effect, but the negotiation of the
aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez, the third
indorser, and from Adelaida Dominguez to the defendant-appellant who did
not know of the forgery, should be considered valid and enforceable, barring
any claim of forgery.

What happens then, if, after the drawee bank has paid the amount of the
check to the holder thereof, it was discovered that the signature of the
payee was forged? Can the drawee bank recover from the one who encashed
the check?

In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held
that the drawee of a check can recover from the holder the money paid to
him on a forged instrument. It is not supposed to be its duty to ascertain
whether the signatures of the payee or indorsers are genuine or not. This is
because the indorser is supposed to warrant to the drawee that the
signatures of the payee and previous indorsers are genuine, warranty not
extending only to holders in due course. One who purchases a check or draft
is bound to satisfy himself that the paper is genuine and that by indorsing it
or presenting it for payment or putting it into circulation before presentation
he impliedly asserts that he has performed his duty and the drawee who has
paid the forged check, without actual negligence on his part, may recover
the money paid from such negligent purchasers. In such cases the recovery
is permitted because although the drawee was in a way negligent in failing
to detect the forgery, yet if the encasher of the check had performed his
duty, the forgery would in all probability, have been detected and the fraud
defeated. The reason for allowing the drawee bank to recover from the
encasher is:jgc:chanrobles.com.ph

"Every one with even the least experience in business knows that no
business man would accept a check in exchange for money or goods unless
he is satisfied that the check is genuine. He accepts it only because he has
proof that it is genuine, or because he has sufficient confidence in the
honesty and financial responsibility of the person who vouches for it. If he is
deceived he has suffered a loss of his cash or goods through his own
mistake. His own credulity or recklessness, or misplaced confidence was the
sole cause of the loss. Why should he be permitted to shift the loss due to
his own fault in assuming the risk, upon the drawee, simply because of the
accidental circumstance that the drawee afterwards failed to detect the
forgery when the check was presented?" 8

Similarly, in the case before Us, the defendant-appellant, upon receiving the
check in question from Adelaida Dominguez, was duty-bound to ascertain
whether the check in question was genuine before presenting it to plaintiff
Bank for payment. Her failure to do so makes her liable for the loss and the
plaintiff Bank may recover from her the money she received for the check.
As reasoned out above, had she performed the duty of ascertaining the
genuineness of the check, in all probability the forgery would have been
detected and the fraud defeated.

In our jurisdiction We have a case of similar import. 9 The Great Eastern Life
Insurance Company drew its check for P2000.00 on the Hongkong and
Shanghai Banking Corporation payable to the order of Lazaro Melicor. A
certain E. M. Maasin fraudulently obtained the check and forged the
signature of Melicor, as an indorser, and then personally indorsed and
presented the check to the Philippine National Bank where the amount of the
check was placed to his (Maasin’s) credit. On the next day, the Philippine
National Bank indorsed the check to the Hongkong and Shanghai Banking
Corporation which paid it and charged the amount of the check to the
insurance company. The Court held that the Hongkong and Shanghai
Banking Corporation was liable to the insurance company for the amount of
the check and that the Philippine National Bank was in turn liable to the
Hongkong and Shanghai Banking Corporation. Said the
Court:jgc:chanrobles.com.ph

"Where a check is drawn payable to the order of one person and is

presented to a bank by another and purports upon its face to have been duly
indorsed by the payee of the check, it is the duty of the bank to know that
the check was duly indorsed by the original payee, and where the Bank pays
the amount of the check to a third person, who has forged the signature of
the payee, the loss falls upon the bank who cashed the check, and its only
remedy is against the person to whom it paid the money."cralaw virtua1aw
library

With the foregoing doctrine We are to concede that the plaintiff Bank should
suffer the loss when it paid the amount of the check in question to
defendant-appellant, but it has the remedy to recover from the latter the
amount it paid to her. Although the defendant-appellant to whom the
plaintiff Bank paid the check was not proven to be the author of the
supposed forgery, yet as last indorser of the check, she has warranted that
she has good title to it 10 even if in fact she did not have it because the
payee of the check was already dead 11 years before the check was issued.
The fact that immediately after receiving the cash proceeds of the check in
question in the amount of P1,246.08 from the plaintiff Bank, Defendant-
Appellant immediately turned over said amount to Adelaida Dominguez
(Third-Party defendant and the Fourth-Party plaintiff) who in turn handed
the amount to Justina Tinio on the same date would not exempt her from
liability because by doing so, she acted as an accommodation party in the
check for which she is also liable under Section 29 of the Negotiable
Instruments Law (Act 231), thus:jgc:chanrobles.com.ph

"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."cralaw virtua1aw library

IN VIEW OF THE FOREGOING, the judgment appealed from is hereby

affirmed in toto with costs against defendant-appellant.

SO ORDERED.
CASE #87 PNB vs National City Bank 63 Phil. 711 (1936)

[G.R. No. 43596. October 31, 1936. ]

PHILIPPINE NATIONAL BANK, Plaintiff-Appellee, v. THE NATIONAL

CITY BANK OF NEW YORK, and MOTOR SERVICE COMPANY,
INC., Defendants. MOTOR SERVICE COMPANY, INC., Appellant.

L.D. Lockwood for Appellant.

Camus & Delgado for Appellee.

SYLLABUS

1. BANKS AND BANKING; ACCEPTANCE OR CERTIFICATION OF CHECKS;

ESTOPPEL. — Where a check is accepted or certified by the bank on which it
is drawn, the bank is estopped to deny the genuineness of the drawer’s
signature and his capacity to issue the instrument.

2. ID; PAYMENT OF FORGED CHECK. — If a drawee bank pays a forged

check which was previously accepted or certified by the said bank it cannot
recover from a holder who did not participate in the forgery and did not have
actual notice thereof.

3. ID; ID. — The payment of a check does not include or imply its
acceptance in the sense that this word is used in section 62 of the
Negotiable Instruments Act.

4. ID.; ID. — In the case of the payment of a forged check, even without
former acceptance, the drawee can not recover from a holder in due course
not chargeable with any act of negligence or disregard of duty.

5. ID.; ID. — To entitle the holder of a forged check to retain the money
obtained thereon, there must be a showing that the duty to ascertain the
genuineness of the signature rested entirely upon the drawee, and that the
constructive negligence of such drawee in failing to detect the forgery was
not affected by any disregard of duty on the part of the holder, or by failure
of any precaution which, from his implied assertion in presenting the check
as a sufficient voucher, the drawee had the right to believe he had taken.

6. ID.; ID. — In the absence of actual fault on the part of the drawee, his
constructive fault in not knowing the signature of the drawer and detecting
the forgery will not preclude his recovery from one who took the check
under circumstances of suspicion and without proper precaution, or whose
conduct has been such as to mislead the drawee or induce him to pay the
check without the usual scrutiny or other precautions against mistake or
fraud.

7. ID.; ID. — One who purchases a check or draft is bound to satisfy himself
that the paper is genuine, and that by indorsing it or presenting it for
payment or putting it into circulation before presentation he impliedly
asserts that he performed his duty.

8. ID.; ID. — While the foregoing rule, chosen from a welter of decisions on
the issue as the correct one, will not hinder the circulation of two recognized
mediums of exchange by which the great bulk of business is carried on,
namely, drafts and checks, on the other hand, it will encourage and demand
prudent business methods on the part of those receiving such mediums of
exchange.

9. ID.; ID. — It being a matter of record in the present case, that the
appellee bank is no more chargeable with the knowledge of the drawer’s
signature than the appellant is, as the drawer was as much the customer of
the appellant as of the appellee, the presumption that a drawee bank is
bound to know more than any indorser the signature of its depositor does
not hold.

10. ID.; ID. — According to the undisputed facts of the case the appellant in
purchasing the papers in question from unknown persons without making
any inquiry as to the identity and authority of the said persons negotiating
and indorsing them, acted negligently and contributed to the appellee’s
constructive negligence in failing to detect the forgery.

11. ID.; ID. — Under the circumstances of the case, if the appellee bank is
allowed to recover, there will be no change of position as to the injury or
prejudice of the appellant.

DECISION

RECTO, J.:
This case was submitted for decision to the court below on the following
stipulation of facts:jgc:chanrobles.com.ph

"1. That plaintiff is a banking corporation organized and existing under and
by virtue of a special act of the Philippine Legislature, with office as principal
place of business at the Masonic Temple Bldg., Escolta, Manila, P.I.; that the
defendant National City Bank of New York is a foreign banking corporation
with a branch office duly authorized and licensed to carry and engage in
banking business in the Philippine Islands, with branch office and place of
business in the National City Bank Bldg., City of Manila, P.I., and that the
defendant Motor Service Company, Inc., is a corporation organized and
existing under and by virtue of the general corporation law of the Philippine
Islands, with office and principal place of business at 408 Rizal Avenue, City
of Manila, P.I., engaged in the purchase and sale of automobile spare parts
and accessories.

"2. That on April 7 and 9, 1933, an unknown person or persons negotiated

with defendant Motor Service Company, Inc., the checks marked as Exhibits
A and A-1, respectively, which are made parts of the stipulation, in payment
for automobile tires purchased from said defendant’s stores, purporting to
have been issued by the ’Pangasinan Transportation Co., Inc. by J.L. Klar,
Manager and Treasurer’, against the Philippine National Bank and in favor of
the International Auto Repair Shop, for P144.50 and P215.75; and said
checks were indorsed by said unknown persons in the manner indicated at
the back thereof, the Motor Service Co., Inc., believing at the time that the
signatures of J.L. Klar, Manager and Treasurer of the Pangasinan
Transportation Co., Inc., on both checks were genuine.

"3. The checks Exhibits A and A-1 were then indorsed for deposit by the
defendant Motor Service Company, Inc. at the National City Bank of New
York and the former was accordingly credited with the amounts thereof, or
P144.50 and P215.75.

"4. On April 8 and 10, 1933, the said checks were cleared at the clearing
house and the Philippine National Bank credited the National City Bank of
New York for the amounts thereof, believing at the time that the signatures
of the drawer were genuine, that the payee is an existing entity and the
endorsements at the bank thereof regular and genuine.

"5. The Philippine National Bank then found out that the purported
signatures of J.L. Klar, as Manager and Treasurer of the Pangasinan
Transportation Company, Inc., in said Exhibits A and A-1 were forged when
so informed by the said Company, and it accordingly demanded from the
defendants the reimbursement of the amounts for which it credited the
National City Bank of New York at the clearing house and for which the latter
credited the Motor Service Co., but the defendants refused, and continue to
refuse, to make such reimbursements.

"6. The Pangasinan Transportation Co., Inc., objected to have the proceeds
of said check deducted from their deposit.

"7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the

municipal court of Manila and forming part of the record of the present case,
are admitted by the parties as genuine and are made part of this stipulation
as well as Exhibit H hereto attached and made a part hereof."cralaw
virtua1aw library

Upon plaintiff’s motion, the case was dismissed before trial as to the
defendant National City Bank of New York. A decision was thereafter
rendered giving plaintiff judgment for the total amount of P360.25, with
interest and costs. From this decision the instant appeal was taken.

Before us is the preliminary question of whether the original appeal taken by

the plaintiff from the decision of the municipal court of Manila where this
case originated, became perfected because of plaintiff’s failure to attach to
the record within 15 days from receipt of notice of said decision, the
certificate of appeal bond required by section 76 of the Code of Civil
Procedure. It is not disputed that both the appeal docket fee and the appeal
cash bond were paid and deposited within the prescribed time. The issue is
whether the mere failure to file the official receipt showing that such deposit
was made within the said period is a sufficient ground to dismiss plaintiff’s
appeal. This question was settled by our decision in the case of Blanco v.
Bernabe and Lawyers Cooperative Publishing Co. (page 124, ante), and
needs no further consideration. No error was committed in allowing said
appeal.

We now pass on to consider and determine the main question presented by

this appeal, namely, whether the appellee has the right to recover from the
appellant, under the circumstances of this case, the value of the checks on
which the signatures of the drawer were forged. The appellant maintains
that the question should be answered in the negative and in support of its
contention appellant advanced various reasons presently to be examined
carefully.

I. It is contended, first of all, that the payment of the checks in question

made by the drawee bank constitutes an "acceptance", and, consequently,
the case should be governed by the provisions of section 62 of the
Negotiable Instruments Law, which says:jgc:chanrobles.com.ph
"SEC. 62. Liability of acceptor. — The acceptor by accepting the instrument
engages that he will pay it according to the tenor of his acceptance; and
admits:jgc:chanrobles.com.ph

"(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and

"(b) The existence of the payee and his then capacity to indorse."cralaw
virtua1aw library

This contention is without merit. A check is a bill of exchange payable on

demand and only the rules governing bills of exchange payable on demand
are applicable to it, according to section 185 of the Negotiable Instruments
Law. In view of the fact that acceptance is a step unnecessary in so far as
bills of exchange payable on demand are concerned (sec. 143), it follows
that the provisions relative to "acceptance" are without application to
checks. Acceptance implies, in effect, subsequent negotiation of the
instrument, which is not true in case of the payment of a check because
from the moment a check is paid it is withdrawn from circulation. The
warranty established by section 62, is in favor of holders of the instrument
after its acceptance. When the drawee bank cashes or pays a check, the
cycle of negotiation is terminated, and it is illogical thereafter to speak of
subsequent holders who can invoke the warranty provided in section 62
against the drawee. Moreover, according to section 191, "acceptance"
means "an acceptance completed by delivery or notification" and this
concept is entirely incompatible with payment, because when payment is
made the check is retained by the bank, and there is no such thing as
delivery or notification to the party receiving the payment. (1 Bouvier’s Law
Dictionary, 476.) There can be no such thing as "acceptance" in the ordinary
sense of the term. A check being payable immediately and on demand, the
bank can fulfill its duty to the depositor only by paying the amount
demanded. The holder has no right to demand from the bank anything but
payment of the check, and the bank has no right, as against the drawer, to
do anything but pay it. (5 R.C.L., p. 516, par. 38.) A check is not an
instrument which in the ordinary course of business calls for acceptance. The
holder can never claim acceptance as his legal right. He can present for
payment, and only for payment. (1 Morse on Banks and Banking, 6th ed.,
pp. 898, 899.)

There is, however, nothing in the law or in business practice against the
presentation of checks for acceptance, before they are paid, in which case
we have a "certification" equivalent to "acceptance" according to section
187, which provides that "where a check is certified by the bank on which it
is drawn, the certification is equivalent to an acceptance", and it is then that
the warranty under section 62 exists. This certification or acceptance
consists in the signification by the drawee of his assent to the order of the
drawer, which must not express that the drawee will perform his promise by
any other means than the payment of money. (Sec. 132.) When the holder
of a check procures it to be accepted or certified, the drawer will perform his
promise by any other means than the payment of money. (Sec. 132.) When
the holder of a check procedures it to be accepted or certified, the drawer
and all indorsers are discharged from liability thereon (sec. 188), and then
the check operates as an assignment of a part of the funds to the credit of
the drawer with the bank. (Sec. 189.) There is nothing in the nature of the
check which intrinsically precludes its acceptance, in like manner and with
like effect as a bill of exchange or draft may be accepted. The bank may
accept if it chooses; and it is frequently induced by convenience, by the
exigencies of business, or by the desire to oblige customers, voluntarily to
incur the obligation. The act by which the bank places itself under obligation
to pay to the holder the sum called for by a check must be the expressed
promise or undertaking of the bank signifying its intent to assume the
obligation, or some act from which the law will imperatively imply such valid
promise or undertaking. The most ordinary form which such an act assumes
is the acceptance by the bank of the check, or, as it is perhaps more often
called, the certifying of the check. (1 Morse on Banks and Banking, pp. 898,
899; 5 R.C.L., p. 520.) .

No doubt a bank may by an unequivocal promise in writing make itself liable

in any event to pay the check upon demand, but this is not an "acceptance"
of the check in the true sense of that term. Although a check does not call
for acceptance, and the holder can present it only for payment, the
certification of checks is a means in constant and extensive use in the
business of banking, and its effects and consequences are regulated by the
law merchant. Checks drawn upon banks or bankers, thus marked and
certified, enter largely into the commercial and financial transactions of the
country; they pass from hand to hand, in the payment of debts, the
purchase of property, and in the transfer of balances from one house and
one bank to another. In the great commercial centers, they make up no
inconsiderable portion of the circulation, and thus perform a useful, valuable,
and an almost indispensable office. The purpose of procuring a check to be
certified is to impart strength and credit to the paper by obtaining an
acknowledgment from the certifying bank that the drawer has funds therein
sufficient to cover the check, and securing the engagement of the bank that
the check will be paid upon presentation. A certified check has a distinctive
character as a species of commercial paper, and performs important
functions in banking and commercial business. When a check is certified, it
ceases to possess the character, or to perform the functions, of a check, and
represents so much money on deposit, payable to the holder on demand.
The check becomes a basis of credit — an easy mode of passing money from
hand to hand, and answers the purposes of money. (5 R.C.L., pp. 516, 517.)

All the authorities, both English and American, hold that a check may be
accepted, though acceptance is not usual. By the law merchant, the
certificate of the bank that a check is good is equivalent to acceptance. It
implies that the check is drawn upon sufficient funds in the hands of the
drawee, that they have been set apart for its satisfaction, and that they shall
be so applied whenever the check is presented for payment. It is an
undertaking that the check is good then, and shall continue good, and this
agreement is as binding on the bank as its notes of circulation, a certificate
of deposit payable to the order of the depositor, or any other obligation it
can assume. The object of certifying a check, as regards both parties is to
enable the holder to use it as money. The transferee takes it with the same
readiness and sense of security that he would take the notes of the bank. It
is available also to him for all the purposes of money. Thus it continues to
perform its important functions until the course of business it goes back to
the bank for redemption, and is extinguished by payment. It cannot be
doubted that the certifying bank intended these consequences, and it is
liable accordingly. To hold otherwise would render these important securities
only a snare and a delusion. A bank incurs no greater risk in certifying a
check than in giving a certificate of deposit. In well-regulated banks the
practice is at once to charge the check to the account of the drawer, to
credit it in a certified check account, and, when the check is paid, to debit
that account with the amount. Nothing can be simpler or safer than this
process. (Merchants’ Bank v. States Bank, 10 Wall., 604, at p. 647; 19 Law.
ed., 1008, 1019.)

Ordinarily the acceptance or certification of a check is performed and

evidenced by some word or mark, usually the words "good", "certified" or
"accepted" written upon the check by the banker or bank officer. (1 Morse,
Banks and Banking, 915; 1 Bouvier’s Law Dictionary, 476.) The bank
virtually says, that check is good; we have the money of the drawer here
ready to pay it. We will pay it now if you will receive it. The holder says, No,
I will not take the money; you may certify the check and retain the money
for me until this check is presented. The law will not permit a check, when
due, to be thus presented, and the money to be left with the bank for the
accommodation of the holder without discharging the drawer. The money
being due and the check presented, it is his own fault if the holder declines
to receive the pay, and for his own convenience has the money appropriated
to that check subject to its future presentment at any time within the statute
of limitations. (1 Morse on Banks and Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to support
its view is vitiated by the fact that they take the word "acceptance" in its
ordinary meaning and not in the technical sense in which it is used in the
Negotiable Instruments Law. Appellant says that when payment is made,
such payment amounts to an acceptance, because he who pays accepts.
This is true in common parlance, but it is not "acceptance" in legal
contemplation. The word "acceptance" has a peculiar meaning in the
Negotiable Instruments Law, and, as has been above stated, in the instant
case there was payment but no acceptance, or what is equivalent to
acceptance, certification.

With few exceptions, the weight of authority is to the effect that "payment"
neither includes nor implies "acceptance."

In National Bank v. First National Bank ([1910], 141 Mo. App., 719; 125 S.
W., 513), the court asks, if a mere promise to pay a check is binding on a
bank, why should not the absolute payment of the check have the same
effect? In response, it is submitted that the two things, — that is acceptance
and payment, — are entirely different. If the drawee accepts the paper after
seeing it, and then permits it to go into circulation as genuine, on all the
principles of estoppel, he ought to be prevented from setting up forgery to
defeat liability to one who has taken the paper on the faith of the
acceptance, or certification. On the other hand, mere payment of the paper
at the termination of its course does not act as an estoppel. The attempt to
state a general rule covering both acceptance and payment is responsible for
a large part of the conflicting arguments which have been advanced by the
courts with respect to the rule. (Annotation at 12 A.L.R., 1090 [1921].)

In First National Bank v. Brule National Bank ([1917], 12 A.L.R., 1079,

1085), the court said:jgc:chanrobles.com.ph

"We are of the opinion that ’payment is not acceptance’. Acceptance, as

defined by section 131, cannot be confounded with payment. . . .

"Acceptance, certification, or payment of a check, by the express language

of the statute, discharges the liability only of the persons named in the
statute, to wit, the drawer and all indorsers, and the contract of indorsement
by the negotiator of the check is discharged by acceptance, certification, or
payment. But clearly the statute does not says that the contract of warranty
of the negotiator, created by section 65, is discharged by these acts."cralaw
virtua1aw library

The rule supported by the majority of the cases (14 A.L.R., 764), that
payment of a check on a forged or unauthorized indorsement of the payee’s
name, and charging the same to the drawer’s account, do not amount to an
acceptance so as to make the bank liable to the payee, is supported by all of
the recent cases in which the question is considered. (Cases cited,
Annotation at 69 A.L.R., 1076, 1077, [1930].)

Merely stamping a check "Paid" upon its payment on a forged or

unauthorized indorsement is not an acceptance thereof so as to render the
drawee bank liable to the true payee. (Anderson v. Tacoma National Bank
[1928], 146 Wash., 520; 264 Pac., 8; Annotation at 69 A.L.R., 1077
[1930].)

In State Bank of Chicago v. Mid-City Trust & Savings Bank (12 A.L.R., 989,
991, 992), the court said:jgc:chanrobles.com.ph

"The defendant in error contends that the payment of the check shows
acceptance by the bank, urging that there can be no more definite act by the
bank upon which a check has been drawn, showing acceptance, than the
payment of the check. Section 184 of the Negotiable Instruments Act (sec.
202) provides that the provisions of the act applicable to bills of exchange
apply to a check, and section 131 (sec. 149), that the acceptance of a bill
must be in writing signed by the drawee. Payment is the final act which
extinguishes a bill. Acceptance is a promise to pay in the future and
continues the life of the bill. It was held in First National Bank v. Whitman
(94 U.S., 343; 24 L. ed., 229), that payment of a check upon a forged
indorsement did not operate as an acceptance in favor of the true owner.
The contrary was held in Pickle v. Muse (Fickle v. People’s Nat. Bank, 88
Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S.W., 919), and Seventh
National Bank v. Cook (73 Pa., 483; 13 Am. Rep., 751) at a time when the
Negotiable Instruments Act was not in force in those states. The opinion of
the Supreme Court of the United States seems more logical, and the
provisions of the Negotiable Instruments Act now require an acceptance to
be in writing. Under this statute the payment of a check on a forged
indorsement, stamping it ’paid,’ and charging it to the account of the
drawer, do not constitute an acceptance of the check or create a liability of
the bank to the true holder or the payee. (Elyria Sav. & Bkg. Co. v. Walker
Bin Co., 92 Ohio St., 406; L.R.A., 1916D, 433; 111 N.E., 147; Ann. Cas.
1917D, 1055; Baltimore & O.R. Co. v. First National Bank, 102 Va., 753; 47
S.E., 837; State Bank of Chicago v. Mid-City Trust & Savings Bank, 12
A.L.R., pp. 989, 991, 992.)"

Before drawee’s acceptance of check there is no privity of contract between

drawee and payee. Drawee’s payment of check on unauthorized indorsement
does not constitute "acceptance" of check. (Sinclair Refining Co. v. Moultrie
Banking Co., 165 S.E., 860 [1932].)
The great weight of authority is to the effect that the payment of a check
upon a forged or unauthorized indorsement and the stamping of it "paid"
does not constitute an acceptance. (Dakota Radio Apparatus Co. v. First Nat.
Bank of Rapid City, 244 N.W., 351, 352 [1932].)

Payment of the check, cashing it on presentment is not acceptance. (South

Boston Trust Co. v. Levin, 249 Mass., 45, 48, 49; 143 N.E., 816; Blocker,
Shepard Co. v. Granite Trust Company, 187 Me., 53,54 [1933].)

In Rauch v. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637
[1908]), the language of the decision was as follows:jgc:chanrobles.com.ph

". . . The plaintiffs say that this acceptance was made by the very
unauthorized payments of which they complain. This suggestion does not
seem forceful to us. It is the contention which was made before the
Supreme Court of the United States in First National Bank v. Whitman (94
U.S., 343), and repudiated by that court. The language of the opinion in that
case is so apt in the present case that we quote it:jgc:chanrobles.com.ph

"‘It is further contended that such an acceptance of a check as creates a

privity between the payee and the bank is established by the payment of the
amount of this check in the manner described. This argument is based upon
the erroneous assumption that the bank has paid this check. If this were
true, it would have discharged all of its duty, and there would be an end to
the claim against it. The bank supposed that it had paid was upon a
pretended and not a real indorsement of the name of the payee. . . . We
cannot recognize the argument that payment of the amount of the check or
sight draft under such circumstances amounts to an acceptance creating a
privity of contract with the real owner.

"‘It is difficult to construe a payment as an acceptance under any

circumstances. . . . A banker or individual may be ready to make actual
payment of a check or draft when presented, while unwilling to make a
promise to pay at a future time. Many, on the other hand, are more ready to
promise to pay than to meet the promise when required. The difference
between the transactions is essential and inherent.’"

And in Wharf v. Seattle National Bank (24 Pac. [2d]), 120, 123
[1993]):jgc:chanrobles.com.ph

"It is the rule that payment of a check on unauthorized or forged

indorsement does not operate as an acceptance of the check so as to
authorize an action by the real owner to recover its amount from the drawee
bank. (Michie on Banks and Banking, vol. 5, sec. 278, p. 521.) A full list of
the authorities supporting the rule will be found in a footnote to the
foregoing citation." (See also, Federal Land Bank v. Collins, 156 Miss., 893;
127 So., 570; 69 A.L.R., 1068.)

In a very recent case, Federal Land Bank v. Collins (69 A.L.R., 1068, 1072-
1074), this question was discussed at considerable length. The court
said:jgc:chanrobles.com.ph

"In the light of the first of these statutes, counsel for appellant is forced to
stand upon the narrow ledge that the payment of the check by the two
banks will constitute an acceptance. The drawee bank simply marked it ’paid’
and did not write anything else except the date. The bank first paying the
check, the Commercial National Bank and Trust Company, simply wrote its
name as indorser and passed the check on to the drawee bank; does this
constitute an acceptance? The precise question has not been presented to
this court for decision. Without reference to authorities in other jurisdictions
it would appear that the drawee bank had never written its name across the
paper and therefore, under the strict terms of the statute, could not be
bound as an acceptor; in the second place, it does not appear to us to be
illogical and unsound to say that the payment of a check by the drawee, and
the stamping of it ’paid’, is equivalent to the same thing as the acceptance
of a check; however, there is a variety of opinions in the various jurisdictions
on this question. Counsel correctly states that the theory upon which the
numerous courts hold that the payment of a check creates privity between
the holder of the check and the drawee bank is tantamount to a pro tanto
assignment of that part of the funds. It is most easily understood how the
payment of the check, when not authorized to be done by the drawee bank,
might under such circumstances create liability on the part of the drawee to
the drawer. Counsel cites the case of Pickle v. Muse (88 Tenn., 380; 12
S.W., 919; 7 L.R.A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held
that the acceptance of a check was necessary in order to give the holder
thereof a right of action thereon against the bank, and further held in a case
similar to this, so far as this question is concerned, that the acceptance of a
check so as to give a right of action to the payee is inferred from the
retention of the check by the bank and its subsequent charge of the amount
of the drawer, although it was presented by, and payment made to, an
unauthorized person. Judge Lurton cited the case of National Bank of the
Republic v. Millard (10 Wall., 152; 19 L. ed., 897), wherein the Supreme
Court of the United States, not having such a case before it, threw out the
suggestion that, if it was shown that a bank had charged the check on its
books against the drawer and made settlement with the drawee that the
holder could recover on account of money had and received, invoking the
rule of justice and fairness, it might be said there was an implied promise to
the holder to pay it on demand. (See National Bank of the Republic v.
Millard, 10 Wall. [77 U.S. ], 152; 19 L. ed., 899.) The Tennessee court then
argued that it would be inequitable and unconscionable for the owner and
payee of the check to be limited to an action against an insolvent drawer
and might thereby lose the debt. They recognized the legal principle that
there is no privity between the drawer bank and the holder, or payee, of the
check, and proceeded to hold that no particular kind of writing was
necessary to constitute an acceptance and that it became a question of fact,
and the bank became liable when it stamped it ’paid’ and charged it to the
account of the drawer, and cites, in support of its opinion, Seventh National
Bank v. Cook (73 Pa., 483; 13 Am. Rep., 353); and Dodge v. Bank (20 Ohio
St., 234; 5 Am. Rep., 648).

"This decision was in 1890, prior to the enactment of the Negotiable

Instruments Law by the State of Tennessee. However, in this case Judge
Snodgrass points out that the Millard case, supra, was dicta. The Dodge
case, from the Ohio court, held exactly as the Tennessee court, but
subsequently in the case of Elyria Bank v. Walker Bin Co. (92 Ohio St., 406;
111 N.E., 147; L.R.A. 1916D, 433; Ann. Cas. 1917D, 1055), the court held
to the contrary, called attention to the fact that the Dodge case was no
longer the law, and proceeded to announce that, whatever might have been
the law before the passage of the Negotiable Instruments Act in that state, it
was no longer the law; that the rule announced in the Dodge case had been
’discarded.’ The court, in the latter case, expressed its doubts that the courts
of Tennessee and Pennysylvania would adhere to the rule announced in the
Pickle case, quoted supra, in the face of the Negotiable Instruments Law.
Subsequent to the Millard case, the Supreme Court of the United States, in
the case of First National Bank of Washington v. Whitman (94 U.S., 343;
347; 24 L. ed., 229), where the bank, without any knowledge that the
indorsement of the payee was unauthorized, paid the check, and it was
contended that by the payment the privity of contract existing between the
drawer and drawee was imparted to the payee, said:jgc:chanrobles.com.ph

"‘It is further contended that such an acceptance of the check as creates a

privity between the payee and the bank is established by the payment of the
amount of this check in the manner described. This argument is based upon
the erroneous assumption that the bank has paid this check. If this were
true, it would have discharged all of its duty, and there would be an end of
the claim against it. The bank supposed that it had paid the check; but this
was an error. The money it paid was upon a pretended and not a real
indorsement of the name of the payee. The real indorsement of the payee
was as necessary to a valid payment as the real signature of the drawer;
and in law the check remains unpaid. Its pretended payment did not
diminish the funds of the drawer in the bank, or put money in the pocket of
the person entitled to the payment. The state of the account was the same
after the pretended payment as it was before.

"‘We cannot recognize the argument that a payment of the amount of a

check or sight draft under such circumstances amounts to an acceptance,
creating a privity of contract with the real owner. It is difficult to construe a
payment as an acceptance under any circumstances. The two things are
essentially different. One is a promise to perform an act, the other an actual
performance. A banker or an individual may be ready to make actual
payment of a check or draft when presented, while unwilling to make a
promise to pay at a future time. Many, on the other hand, are more ready to
promise to pay than to meet the promise when required. The difference
between the transactions is essential and inherent.’

"Counsel for appellant cite other cases holding that the stamping of the
check ’paid’ and the charging of the amount thereof to the drawer
constituted an acceptance, but we are of opinion that none of these cases
cited hold that it is in compliance with the Negotiable Instruments Act;
paying the check and stamping same is not the equivalent of accepting the
check in writing signed by the drawee. The cases holding that payment as
indicated above constituted acceptance were rendered prior to the adoption
of the Negotiable Instruments Act in the particular state, and these decisions
are divided into two classes; the one holding that the check delivered by the
drawer to the holder and presented to the bank or drawee constitutes an
assignment pro tanto; the other holding that the payment of the check and
the charging of same to the drawee although paid to an unauthorized person
creates privity of contract between the holder and the drawee bank.

"We have already seen that our own court has repudiated the assignment
pro tanto theory, and since the adoption of the Negotiable Instruments Act
by this state we are compelled to say that payment of a check is not
equivalent to accepting a check in writing and signing the name of the
acceptor thereon. Payment of the check and the charging of same to the
drawer does not constitute an acceptance. Payment of the check is the end
of the voyage; acceptance of the check is to fuel the vessel and strengthen it
for continued operation on the commercial sea. What we have said applies to
the holder and not to the drawer of the check. On this question we conclude
that the general rule is that an action cannot be maintained by a payee of
the check against the bank on which it is drawn, unless the check has been
certified or accepted by the bank in compliance with the statute, even
though at the time the check is that an action cannot be maintained by a
payee of the drawer of the check out of which the check is legally payable;
and that the payment of the check by the bank on which it is drawn, even
though paid on the unauthorized indorsement of the name of the holder
(without notice of the defect by the bank), does not constitute a certification
thereof, neither is it an acceptance thereof; and without acceptance or
certification, as provided by statute, there is no privity of contract between
the drawee bank and the payee, or holder of the check. Neither is there an
assignment pro tanto of the funds where the check is not drawn or a
particular fund, or does not show on its face that it is an assignment of a
particular fund. The above rule as stated seems to have been the rule in the
majority of the states even before the passage of the uniform Negotiable
Instruments Act in the several states."cralaw virtua1aw library

The decision in the case of First National Bank v. Bank of Cottage Grove (59
Or., 388), which appellant cites in its brief (pp. 12, 13) has been expressly
overruled by the Supreme Court of Massachusetts in South Boston Trust Co.
v. Levin (143 N.E., 816, 817), in the following
language:jgc:chanrobles.com.ph

"In First National Bank v. Bank of Cottage Grove (59 Or., 388; 117 Pac.,
293, 296, at page 396), it was said: ’The payment of a bill or check by the
drawee amounts to more than an acceptance. The rule, holding that such a
payment has all the efficacy of an acceptance, is founded upon the principle
that the greater includes the less.’ We are unable to agree with this
statement as there is no similarity between acceptance and payment;
payment discharges the instrument, and no one else is expected to advance
anything on the faith of it; acceptance contemplates further circulation,
induced by the fact of acceptance. The rule that the acceptor makes certain
admissions which will inure to the benefit of subsequent holders, has no
applicability to payment of the instrument where subsequent holders can
never exist."cralaw virtua1aw library

II. The old doctrine that a bank was bound to know its correspondent’s
signature and that a drawee could not recover money paid upon a forgery of
the drawer’s name, because, it was said, the drawee was negligent not to
know for forgery and it must bear the consequence of its negligence, is fact
fading into the misty past, where it belongs. It was founded in misconception
of the fundamental principles of law and common sense. (2 Morse, Banks
and Banking, p. 1031.)

Some of the cases carried the rule to its furthest limit and held that under no
circumstances (except, of course, where the purchaser of the bill has
participated in the fraud upon the drawee) would the drawee be allowed to
recover bank money paid under a mistake of fact upon a bill of exchange to
which the name of the drawer had been forged. This doctrine has been freely
criticized by eminent authorities, as a rule too favorable to the holder, not
the most fair, nor best calculated to effectuate justice between the drawee
and the drawer. (5 R.C.L., p. 556.)

The old rule which was originally announced by Lord Mansfield in the leading
case of Price v. Neal (3 Burr., 1354), elicited the following comment from
Justice Holmes, then Chief Justice of the Supreme Court of Massachusetts, in
the case of Dedham National Bank v. Everett National Bank (177 Mass.,
392). "Probably the rule was adopted from an impression of convenience
rather than for any more academic reason; or perhaps we may say that Lord
Mansfield took the case out of the doctrine as to payments under a mistake
of fact by the assumption that a holder who simply presents negotiable
paper for payment makes no representation as to the signature, and that
the drawee pays at his peril."cralaw virtua1aw library

Such was the reaction that followed Lord Mansfield’s rule which Justice Story
of the United States Supreme Court adopted in the case of Bank of United
States v. Georgia (10 Wheat., 333), that in B.B. Ford & Co. v. People’s Bank
of Orangeburg (74 S.C., 180), it was held that "an unrestricted indorsement
of a draft and presentation to the drawee is a representation that the
signature of the drawer is genuine", and in Lisbon First National Bank v.
Wyndmere Bank (15 N.D., 299), it was also held that "the drawee of a
forged check who has paid the same without detecting the forgery, may
upon discovery of the forgery, recover the money paid from the party who
received the money, even though the latter was a good faith holder,
provided the latter has not been misled or prejudiced by the drawee’s failure
to detect the forgery."cralaw virtua1aw library

Daniel, in his treatise on Negotiable Instruments, has the following to

say:jgc:chanrobles.com.ph

"In all the cases which hold the drawee absolutely estopped by acceptance
or payment from denying genuineness of the drawer’s name, the loss in
thrown upon him on the ground of negligence on his part in accepting or
paying, until he has ascertained the bill to be genuine. But the holder has
preceded him in negligence, by himself not ascertaining the true character of
the paper before he receive it, or presented it for acceptance or payment.
And although, as a general rule, the drawee is more likely to know the
drawer’s handwriting than a stranger is, if he is in fact deceived as to its
genuineness, we do not perceive that he should suffer more deeply by a
mistake than a stranger, who, without knowing the handwriting, has taken
the paper without previously ascertaining its genuineness. And the mistake
of the drawee should always be allowed to be corrected, unless the holder,
acting upon faith and confidence induced by his honoring the draft, would be
placed in a worse position by according such privilege to him. This view has
been applied in a well considered case, and is intimated in another; and is
forcibly presented by Mr. Chitty, who says it is going a great way to charge
the acceptor with knowledge of his correspondent’s handwriting, ’unless
some bona fide holder has purchased the paper on the faith of such an act.’
Negligence in making payment under a mistake of fact is not now deemed a
bar to recovery of it, and we do not see why any exception should be made
to the principle, which would apply as well to release an obligation not
consummated by payment." (Vol. 2, 6th edition, pp. 1537-1539.)

III. But now the rule is perfectly well settled that in determining the relative
rights of a drawee who, under a mistake of fact, has paid, and a holder who
has received such payment, upon a check to which the name of the drawer
has been forged, it is only fair to consider the question of diligence or
negligence of the parties in respect thereto. (Woods and Malone v. Colony
Bank [1902], 56 L.R.A., 929, 932.) The responsibility of the drawer’s
signature, is absolute only in favor of one who has not, by his own fault or
negligence, contributed to the success of the fraud or to mislead the drawee.
(National Bank of America v. Bangs, 106 Mass., 441; 8 Am. Rep., 349;
Woods and Malone v. Colony Bank, supra; De Feriet v. Bank of America, 23
La. Ann., 310; B.B. Ford & Co. v. People’s Bank of Orangeburg, 74 S.C.,
180; 10 L.R.A. [N.S. ], 63.) If it appears that the one to whom payment was
made was not an innocent sufferer, but was guilty of negligence in not an
innocent sufferer, but was guilty of negligence in not doing something, which
plain duty demanded, and which, if it had been done, would have avoided
entailing loss of any one, he is not entitled to retain the moneys paid
through a mistake on the part of the drawee bank. (First Nat. Bank of
Danvers v. First Nat. Bank of Salem, 151 Mass., 280; 24 N.E., 44; 21
A.S.R., 450; First Nat. Bank of Orleans v. State Bank of Alma, 22 Neb., 769;
36 N.W., 289; 3 A.S.R., 294; American Exp. Co. v. State Nat. Bank, 27
Okla., 824; 113 Pac., 711; 33 L.R.A. [N.S. ], 188; B.B. Ford & Co. v.
People’s Bank of Orangeburg, 74 S.C., 180; 54 S.E., 204; 114 A.S.R., 986;
7 Ann. Cas., 744; 10 L.R.A. [N.S. ], 63; People’s Bank v. Franklin Bank, 88
Tenn., 299; 12 S.W., 716; 17 A.S.R., 884; 6 L.R.A., 724; Canadian Bank of
Commerce v. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L.R.A., 955.) In
other words, to entitle the holder of a forged check to retain the money
obtained thereon, he must be able to show that the whole responsibility of
determining the validity of the signature was upon the drawee, and that the
negligence of such drawee was not lessened by any failure of any precaution
which, from his implied assertion in presenting the check as a sufficient
voucher, the drawee had the right to believe he had taken. (Ellis v. Ohio Life
Insurance & Trust Co., 4 Ohio St., 628; Rouvant v. Bank, 63 Tex., 610;
Bank v. Ricker, 71 Ill., 429; First National Bank of Danvers v. First Nat. Bank
of Salem, 24 N.E., 44, 45; B.B. Ford & Co. v. People’s Bank of Orangeburg,
supra.) The recovery is permitted in such case, because, although the
drawee was constructively negligent in failing to detect the forgery, yet if the
purchaser had performed his duty, the forgery would in all probability have
been detected and the fraud defeated. (First National Bank of Lisbon v. Bank
of Wyndmere, 15 N.D., 209; 10 L.R.A. [N.S. ], 49.) In the absence of actual
fault on the part of the drawee, his constructive fault in not knowing the
signature of the drawer and detecting the forgery will not preclude his
recovery from one who took the check under circumstances of suspicion
without proper precaution, or whose conduct has been such as to mislead
the drawee or induce him to pay the check without the usual scrutiny or
other precautions against mistake or fraud. (National Bank of America v.
Bangs, supra; First National Bank v. Indiana National Bank, 30 N.E., 808-
810; Woods and Malone v. Colony Bank, supra; First National Bank of
Danvers v. First Nat. Bank of Salem, 151 Mass., 280.) Where a loss, which
must be borne by one of two parties alike innocent of forgery, can be traced
to the neglect or fault of either, it is reasonable that it would be borne by
him, even if innocent of any intentional fraud, through whose means it has
succeeded. (Gloucester Bank v. Salem Bank, 17 Mass., 33; First Nat. Bank
of Danvers v. First National Bank of Salem, supra; B.B. Ford & Co. v.
People’s Bank of Orangeburg, supra.) Again if the indorser is guilty of
negligence in receiving and paying the check or draft, or has reason to
believe that the instrument is not genuine, but fails to inform the drawee of
his suspicions the indorser according to the reasoning of some courts will be
held liable to the drawee upon his implied warranty that the instrument is
genuine. (B.B. Ford & Co. v. People’s Bank of Orangeburg, supra; Newberry
Sav. Bank v. Bank of Columbia, 93 S.C., 294; 38 L.R.A. [N.S. ], 1200.) Most
of the courts now agree that one who purchases a check or draft is bound to
satisfy himself that the paper is genuine; and that by indorsing it or
presenting it for payment or putting it into circulation before presentation he
impliedly asserts that he has performed his duty, the drawee, who has,
without actual negligence on his part, paid the forged demand, may recover
the money paid from such negligent purchaser. (Lisbon First National Bank
v. Wyndmere Bank, supra.) Of course, the drawee must, in order to recover
back the holder, show that he himself was free from fault. (See also R.C.L.,
pp. 556-558.)

So, if a collecting bank is alone culpable, and, on account of its negligence

only, the loss has occurred, the drawee may recover the amount it paid on
the forged draft or check. (Security Commercial & Sav. Bank v. Southern
Trust & C. Bank [1925], 74 Cal. App., 734;241 Pac., 945.)

But we are aware of no case in which the principle that the drawee is bound
to know the signature of the drawer of a bill or check which he undertakes to
pay has been held to be decisive in favor of a payee of a forged bill or check
to which he has himself given credit by his indorsement. (Secalso, Mckleroy
v. Bank, 14 La. Ann., 458; Canal Bank v. Bank of Albany, 1 Hill., 287;
Rouvant v. Bank, supra; First Nat. Bank v. Indiana National Bank, 30 N.E.,
808-810.)

In First Nat. Bank v. United States National Bank ([1921], 100 Or., 264; 14
A.L.R., 479; 197 Pac., 547), the court declared: "A holder cannot profit by a
mistake which his negligent disregard of duty has contributed to induce the
drawee to commit. . . . The holder must refund, if by his negligence he has
contributed to the consummation of the mistake on the part of the drawee
by misleading him. . . . If the only fault attributable to the drawee is the
constructive fault which the law raises from the bald fact that he has failed
to detect the forgery, and if he is not chargeable with actual fault in addition
to such constructive fault, then he is not precluded from recovery from a
holder whose conduct has been such as to mislead the drawee or induce him
to pay the check or bill of exchange without the usual security against fraud.
The holder must refund to a drawee who is not guilty of actual fault if the
holder was negligent in not making due inquiry concerning the validity of the
check before he took it, and if the drawee can be said to have been excused
from making inquiry before taking the check because of having had a right
to presume that the holder had made such inquiry."cralaw virtua1aw library

The rule that one who first negotiates forged paper without taking some
precaution to learn whether or not it is genuine should not be allowed to
retain the proceeds of the draft or check from the drawee, whose sole fault
was that he did not discover the forgery before he paid the draft or check,
has been followed by the later cases. (Security Commercial & Savings Bank
v. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945;
Hutcheson Hardware Co. v. Planters State Bank [1921], 26 Ga. App., 321;
105 S.E., 854; [Annotation at 71 A.L.R., 337].) .

Where a bank, without inquiry or identification of the person presenting a

forged check, purchases it, indorses it generally, and presents it to the
drawee bank, which pays it, the latter may recover if its only negligence was
it mistake in having failed to detect the forgery, since its mistake did not
mislead the purchaser or bring about a change in position. (Security
Commercial & Savings Bank v. Southern Trust & C. Bank [1925], 74 Cal.
App., 734; 241 Pac., 945.) Also, a drawee bank could recover from another
bank the portion of the proceeds of a forged check cashed by the latter and
deposited by the forger in the second bank and never withdrawn, upon the
discovery of the forgery three months later, after the drawee had paid the
check and returned the voucher to the purported drawer, where the
purchasing bank was negligent in taking the check, and was not injured by
the drawee’s negligence in discovering and reporting the forgery as to the
amount left on deposit, since it was not a purchaser for value. (First State
Bank & T. Co. v. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the
amount paid on the check, after discovery of the forgery, from another
bank, which put the check into circulation by cashing it for the one who had
forged the signature of both drawer and payee, without making any inquiry
as to who he was, although he was a stranger, after which the check
reached, and was paid by, the drawee, after going through the hands of
several intermediate indorsees. (71 A.L.R., p. 340.) .

In First National Bank v. Brule National Bank ([1917], 12 A.L.R., 1079,

1085), the following statement was made:jgc:chanrobles.com.ph

"We are clearly of opinion, therefore, that the warranty of gunuineness,

arising upon the act of the Brule National Bank in putting the check in
circulation, was not discharged by payment of the check by the drawee (First
National Bank), nor was the Brule National Bank deceived or misled to its
prejudice by such payment. The Brule National Bank by its indorsement and
delivery warranted its own identification of Kost and the genuineness of his
signature. The indorsement of the check by the Brule National Bank was
such as to assign the title to the check to its assignee, the Whitbeck National
Bank, and the amount was credited to the indorser. The check bore no
indication that it was deposited for collection, and was not in any manner
restricted so as to constitute the indorsee the agent of the indorser, nor did
it prohibit further negotiation of the instrument, nor did it appear to be in
trust for, or to the use of, any other person, nor was it conditional. Certainly
the Pukwana Bank was justified in relying upon the warrant of genuineness,
which implied the full identification of Kost, and his signature by the
defendant bank. This view of the statute is in accord with the decisions of
many courts. (First National Bank v. State Bank, 22 Neb., 769; 3 Am. St.
Rep., 294; 36 N.W., 289; First National Bank v. First National Bank, 151
Mass., 280; 21 Am. St. Rep. 450; 24 N.E., 44; People’s Bank v. Franklin
Bank, 88 Tenn., 299;6 L.R.A., 727; 17 Am. St. Rep., 884;12 S.W., 716.)"

The appellant leans heavily on the case of Fidelity & Co. v. Planenscheck (71
A.L.R., 331), decided in 1929. We have carefully examined this decision and
we do not feel justified in accepting its conclusions. It is but a restatement of
the long abandoned rule of Neal v. Price, and it is predicated on the wrong
premise that payment includes acceptance, and that a bank drawee paying a
check drawn on it becomes ipso facto an acceptor within the meaning of
section 62 of the Negotiable Instruments Act. Moreover in a more recent
decision, that of Louisa National Bank v. Kentucky National Bank (39 S.W.
[2nd], 497, 501) decided in 1931, the Court of Appeals of Kentucky held the
following:jgc:chanrobles.com.ph
"The appellee, on presentation for payment of the $600 check, failed to
discover it was a forgery. It was bound to know the signature of its
customer, Armstrong, and it was derelict in failing to give his signature to
the check sufficient attention and examination to enable it to discover
instantly the forgery. The appellant, when the check was presented to it by
Banfield, failed to make any inquiry of or about him and did not cause or
have him to be identified. Its act in so paying to him the check is a degree of
negligence on its part equivalent to positive negligence. It indorsed the
check, and, while such indorsement may not be regarded within the
meaning of the Negotiable Instrument Law as amounting to a warranty to
appellant of that which it indorsed, it at least substantially served as a
representation to it that it had exercised ordinary care and had complied
with the rules and customs of prudent banking. Its indorsement was
calculated, if it did not in fact do so, to lull the drawee bank into indifference
as to the drawer’s signature to it when paying the check and charging it to
its customer’s account and remitting its proceeds to appellant’s
correspondent.

"If in such a transaction between the drawee and the holder of a check both
are without fault, no recovery may be had of the money so paid. (Deposit
Bank of George town v. Fayette National Bank, supra, and cases cited.) Or
the rule may be more accurately state that, where the drawee pays the
money, he cannot stated that, where the drawee pays the money, he cannot
recover it back from a holder in good faith, for value and without fault.

"If, on the other hand, the holder acts in bad faith, or is guilty of culpable
negligence, a recovery may be had by the drawee of such holder. The
negligence of the Bank of Louisa in failing to inquire of and about Banfield,
and to cause or to have him identified before it parted with its money on the
forged check, may be regarded as the primary and proximate cause of the
loss. Its negligence in this respect reached in its effect the appellee, and
induced incaution on its part. In comparison of the degrees of the negligence
of the two, it is apparent that of the appellant excels in culpability. Both
appellant and appellee inadvertently made a mistake, doubtless due to a
hurry incident to business. The first and most grievous one was made by the
appellant, amounting to its disregard of the duty, it owed itself as well as the
duty it owed to the appellee, and it cannot on account thereof retain as
against the appellee the money which it so received. It cannot shift the loss
to the appellee, for such disregard of its duty inevitably contributed to
induce the appellee to omit its duty critically to examine the signature of
Armstrong, even if it did not know it instantly at the time it paid the check.
(Farmers’ Bank of Augusta v. Farmers’ Bank of Maysville, supra, and cases
cited.)"
IV. The question now is to determine whether the appellant’s negligence in
purchasing the checks in question is such as to give the appellee the right to
recover upon said checks, and on the other hand, whether the drawee bank
was not itself negligent, except for its constructive fault in now knowing the
signature of the drawer and detecting the forgery.

We quote with approval the following conclusions of the court a

quo:jgc:chanrobles.com.ph

"Check Exhibit A bears number 637023-D and is dated April 6, 1933,

whereas check Exhibit A-1 bears number 637020-D and is dated April 7,
1933. Therefore, the later check, which is prior in number to the former
check, is however, issued on a later date. This circumstance must have
aroused at least the curiosity of the Motor Service Co., Inc.

"The Motor Service Co., Inc., accepted the two checks from unknown
persons. And not only this; check Exhibit A is indorsed by a subagent of the
agent of the payee, International Auto Repair Shop. The Motor Service Co.,
Inc., made no inquiry whatsoever as to the extent of the authority of these
unknown persons. Our Supreme Court said once that ’any person taking
checks made payable to a corporation, which can act only by agents, does
so at his peril, and must abide by the consequences if the agent who
indorses the same is without authority’ (Insular Drug Co. v. National Bank,
58 Phil., 684).

x       x       x

"Check Exhibit A-1, aside from having been indorsed by a supposed agent of
the International Auto Repair Shop is crossed generally. The existence of two
parallel lines transversally drawn on the face of this check was a warning
that the check could only be collected through a banking institution (Jacobs,
Law of Bills of Exchange, etc., pp., 179, 180; Bills of Exchange Act of
England, secs. 76 and 79). Yet the Motor Service Co., Inc., accepted the
check in payment for merchandise.

". . . In Exhibit H attached to the stipulation of facts as an integral part

thereof, the Motor Service Co., Inc., stated the
following:jgc:chanrobles.com.ph

"‘The Pangasinan Transportation Co. is a good customer of this firm and we

received checks from them every month in payment of their account. The
two checks in question seem to be exactly similar to the checks which we
received from the Pangasinan Transportation Co. every month.’
"If the failure of the Motor Service Co., Inc., to detect the forgery of the
drawer’s signature in the two checks, may be considered as an omission in
good faith because of the similarity stated in the letter, then the same
consideration applies to the Philippine National Bank, for the drawer is a
customer of both the Motor Service Co., Inc., and the Philippine National
Bank." (B. of E., pp. 25, 28, 35.)

We are of opinion that the facts of the present case do not make it one
between two equally innocent persons, the drawee bank and the holder, and
that they are governed by the authorities already cited and also the
following:jgc:chanrobles.com.ph

"The point in issue has sometimes been said to be that of negligence. The
drawee who has paid upon the forged signature is held to bear the loss,
because he has been negligent in failing to recognize that the handwriting is
not that of his customer. But it follows obviously that if the payee, holder, or
presenter of the forged paper has himself been in default, if he has himself
been guilty of a negligence prior to that of the banker, or if by any act of his
own he has at all contributed to induce the banker’s negligence, then he
may loss his right to cast the loss upon banker. The courts have shown a
steadily increasing disposition to extend the application of this rule over the
new conditions of fact which from time to time arise, until it can now rarely
happen that the holder, payee, or presenter can escape the imputation of
having been in some degree contributory towards the mistake. Without any
actual change in the abstract doctrines of the law, which are clear, just, and
simple enough, the gradual but sure tendency and effect of the decisions
have been to put as heavy a burden of responsibility upon the payee as
upon the drawee, contrary to the original custom. . . ." (2 Morse on Banks
and Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86,87.) .

In First National Bank, v. Brule National Bank (12 A.L.R., 1079, 1088, 1089),
the following statement appears in the concurring
opinion:jgc:chanrobles.com.ph

"What, then, should be the rule? The drawee asks to recover for money had
and received. If his claim did not rest upon a transaction relating to a
negotiable instrument plaintiff could recover as for money paid under
mistake, unless defendant could show some equitable reason, such as
changed condition since, and relying upon, payment by plaintiff. In the
Wyndmere Case, the North Dakota court holds that this rule giving right to
recover money paid under mistake should extend to negotiable paper, and it
rejects in its entirely the theory of estoppel and puts a case of this kind on
exactly the same basis as the ordinary case of payment under mistake. But
the great weight of authority, and that based on the better reasoning, holds
that the exigencies of business demand a different rule in relation to
negotiable paper. What is that rule? Is it an absolute estoppel against the
drawee in favor of a holder, no matter how negligent such holder has been?
It surely is not. The correct rule recognizes the fact that, in case of payment
without a prior acceptance or certification, the holder takes the paper upon
the credit of the prior indorsers and the credit of the drawer, and not upon
the credit of the drawee; that the drawee, in making payment, has a right to
rely upon the assumption that the payee used due diligence, especially
where such payee negotiated the bill or check to a holder, thus representing
that it had so fully satisfied itself as to the identity and signature of the
maker than it was willing to warrant as relates thereto to all subsequent
holders. (Uniform Act, secs. 65 and 66.) Such correct rule denies the drawee
the right to recover when the holder was without fault or when there has
been some change of position calling for equitable relief. When a holder of a
bill of exchange uses all due care in the taking of bill or check and the
drawee thereafter pays same, the transaction is absolutely closed — modern
business could not be done on any other basis. While the correct rule
promotes the fluidity of two recognized mediums of exchange, those
mediums by which the great bulk of business is carried on, checks and
drafts, upon the other hand it encourages and demands prudent business
methods upon the part of those receiving such mediums of exchange.
(Pennington County Bank v. First State Bank, 110 Minn., 263;26 L.R.A. [N.S.
], 849;136 Am. St. Rep., 496;125 N.W., 119; First National Bank v. State
Bank, 22 Neb., 769; 3 Am. St. Rep., 294;36 N.W., 289; Bank of Williamson,
v. McDowell County Bank, 66 W. Va., 545;36 L.R.A. [N.S. ], 605;66 S.E.,
761; Germania Bank v. Boutell, 60 Minn., 189;27 L.R.A., 635;51 Am. St.
Rep., 519;62 N.W., 327; American Express Co. v. State National Bank, 27
Okla., 834;33 L.R.A. [N.S. ], 188;113 Pac., 711; Farmers’ National Bank v.
Farmers’ & Traders Bank, L.R.A., 1915A, 77, and note [159 Ky., 141;166
S.W., 986].)

"That the defendant bank did not use reasonable business prudence is clear.
It took this check from a stranger without other identification than that given
by another stranger; its cashier witnessed the mark of such stranger thus
vouching for the identity and signature of the marker; and it indorsed the
check as ’Paid,’ thus further throwing plaintiff off guard. Defendant could not
but have known, when negotiating such check and putting it into the channel
through which it would finally be presented to plaintiff for payment, that
plaintiff, if it paid such check, as defendant was asking it to do, would have
to rely solely upon the apparent faith and credit that defendant had placed in
the drawer. From the very circumstances of this case plaintiff had to act on
the facts as presented to it by defendant, and upon such facts only.
"But appellant argues that it so changed its position, after payment by
plaintiff, that in ’equity and good conscience’ plaintiff should not recover — it
says it did not pay over any money to the forger until after plaintiff had paid
the check. There would be merit in such contention if defendant had
indorsed the check for ’collection,’ thus advising plaintiff that it was relying
on plaintiff and not on the drawer. It stands in court where it would have
been if it had done as it represented."cralaw virtua1aw library

In Woods and Malone v. Colony Bank (56 L.R.A., 929, 932), the court
said:jgc:chanrobles.com.ph

". . . If the holder has been negligent in paying the forged paper, or has by
his conduct, however innocent, misled or deceived the drawee to his
damage, it would be unjust for him to be allowed to shield himself from the
results of his own carelessness by asserting that the drawee was bound in
law to know his drawer’s signature."cralaw virtua1aw library

V. Section 23 of the Negotiable Instruments Act provides that "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."cralaw virtua1aw library

It not appearing that the appellee bank did not warrant to the appellant the
genuineness of the checks in question, by its acceptance thereof, nor did it
perform any act which would have induced the appellant to believe in the
genuineness of said instruments before appellant purchased them for value,
it can not be said that the appellee is precluded from setting up the forgery
and, therefore, the appellant is not entitled to retain the amount of the
forged check paid to it by the appellee.

VI. It has been held by many courts that a drawee of a check, who is
deceived by a forgery of the drawer’s signature may recover the payment
back, unless his mistake has placed an innocent holder of the paper in a
worse position than he would have been in if the discover of the forgery had
been made on presentation. (5 R.C.L., p. 559;2 Daniel on Negotiable
Instruments, 1538.) Forgeries often deceived the eye of the most cautions
experts; and when a bank has been so deceived, it is a harsh rule which
compels it to suffer although no one has suffered by its being deceived. (17
A.L.R., 891;5 R.C.L., 559.)

In the instant case should the drawee bank be allowed recovery, the
appellant’s position would not become worse than if the drawee had refused
the payment of these checks upon their presentation. The appellant has lost
nothing by anything which the drawee has done. It had in its hands some
forged worthless papers. It did not purchase or acquire these papers
because of any representation made to it by the drawee. It purchased them
from unknown persons and under suspicious circumstances. It had no valid
title to them, because the persons from whom it received them did not have
such title. The appellant could not have compelled the drawee to pay them,
and the drawee could have refused payment had it been able to detect the
forgery. By making a refund, the appellant would only be returning what it
had received without any title or right. And when appellant pays back the
money it has received it will be entitled to have restored to it the forged
papers it parted with. There is no good reason why the accidental payment
made by the appellee should inure to the benefit of the appellant. If there
were injury to the appellant said injury was caused not by the failure of the
appellee to detect the forgery but by the very negligence of the appellant in
purchasing commercial papers from unknown persons without making
inquiry as to their genuineness.

In the light of the foregoing discussion, we conclude:chanrob1es virtual 1aw

library

1. That where a check is accepted or certified by the bank on which it is

drawn, the bank is estopped to deny the genuineness of the drawer’s
signature and his capacity to issue the instrument;

2. That if a drawee bank pays a forged check which was previously accepted
or certified by the said bank it cannot recover from a holder who did not
participate in the forgery and did not have actual notice thereof;

3. That the payment of a check does not include or imply its acceptance in
the sense that this word is used in section 62 of the Negotiable Instruments
Law;

4. That in the case of the payment of a forged check, even without former
acceptance, the drawee can not recover from a holder in due course not
chargeable with any act of negligence or disregard of duty;

5. That to entitle the holder of a forged check to retain the money obtained
thereon, there must be a showing that the duty to ascertain the genuineness
of the signature rested entirely upon the drawee, and that the constructive
negligence of such drawee in failing to detect the forgery was not affected by
any disregard of duty on the part of the holder, or by failure of any
precaution which, from his implied assertion in presenting the check as a
sufficient voucher, the drawee had the right to believe he had taken;

6. That in the absence of actual fault on the part of the drawee, his
constructive fault in not knowing the signature of the drawer and detecting
the forgery will not preclude his recovery from one who took the check
under circumstances of suspicion and without proper precaution, or whose
conduct has been such as to mislead the drawee or induce him to pay the
check without the usual scrutiny or other precautions against mistake or
fraud;

7. That one who purchases a check or draft is bound to satisfy himself that
the paper is genuine, and that by indorsing it or presenting it for payment or
putting it into circulation before presentation he impliedly asserts that he
performed his duty;

8. That while the foregoing rule, chosen from a welter of decisions on the
issue as the correct one, will not hinder the circulation of two recognized
mediums of exchange by which the great bulk of business is carried on,
namely, drafts and checks, on the other hand, it will encourage and demand
prudent business methods on the part of those receiving such mediums of
exchange;

9. That it being a matter of record in the present case, that the appellee
bank is no more chargeable with the knowledge of the drawer’s signature
than the appellant is, as the drawer was as much the customer of the
appellant as of the appellee, the presumption that a drawee bank is bound
to know more than any indorser the signature nature of its depositor does
not hold;

10. That according to the undisputed facts of the case the appellant in
purchasing the papers in question from unknown persons without making
any inquiry as to the identity and authority of the said persons negotiating
and indorsing them, acted negligently and contributed to the appellee’s
constructive negligence in failing to detect the forgery;

11. That under the circumstances of the case, if the appellee bank is allowed
to recover, there will be no change of position as to the injury or prejudice of
the appellant. Wherefore, the assignments of error are overruled, and the
judgment appealed from must be, as it is hereby, affirmed, with costs
against the appellant. So ordered.
CASE #88 BPI Family Bank vs Buenaventura 471 SCRA 431 (1933)

[G.R. NO. 148196. September 30, 2005]

BPI FAMILY BANK, Petitioners, v. EDGARDO BUENAVENTURA, MYRNA

LIZARDO and YOLANDA TICA, Respondent.

[G.R. NO. 148259]

EDGARDO BUENAVENTURA, MYRNA LIZARDO and YOLANDA

TICA, Petitioners, v. BPI FAMILY BANK, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before us are two consolidated Petitions for Review on Certiorari under Rule

45 of the Rules of Court assailing the Decision1 of the Court of Appeals (CA)
dated November 27, 2000 in CA-G.R. CV No. 53962, which affirmed with
modification the Decision dated August 11, 1995 of the Regional Trial Court,
Branch 25, Manila (Manila RTC); and the CA Resolution dated May 3, 2001,
which denied the parties' separate motions for reconsideration.

The factual background of the case is as follows:

On May 23, 1990, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica
(Buenaventura, et al.), all officers of the International Baptist Church and
International Baptist Academy in Malabon, Metro Manila, filed a complaint for
"Reinstatement of Current Account/Release of Money plus Damages" against
BPI Family Bank (BPI-FB) before the Manila RTC, docketed as Civil Case No.
90-53154.2

They alleged that: on August 30, 1989, they accepted from Amado Franco
BPI-FB Check No. 129004 dated August 29, 1989 in the amount
of P500,000.00, jointly issued by Eladio Teves and Joseph Teves; 3 they
opened Current Account No. 807-065314-0 with the BPI-FB Branch at
Bonifacio Market, Edsa, Caloocan City and deposited the check as initial
deposit; the check was subsequently cleared and the amount was credited to
their Current
Account; on September 3, 1989, they drew a check in the amount
of P10,171.50 and pursuant to normal banking procedure the check was
honored and debited from their Current Account, leaving a balance
of P490,328.50; on September 4, 1989, they drew another check in the
amount of P46,189.60; instead of debiting the said amount against their
Current

Account, it was debited, without their knowledge and consent, against their
Savings Account No. 08-95332-5 with the same branch; on September 9,
1989, they drew a check for P91,270.00 which, upon presentment for
payment, was dishonored for the reason "account closed," in spite of the
balance in the Current Account of P490,328.50; they thereafter learned from
BPI-FB that their Current Account had been frozen upon instruction of
Severino P. Coronacion, Vice-President of BPI-FB on the ground that the
source of fund was illegal or unauthorized; they demanded the
reinstatement of the account, but BPI-FB refused.

On June 20, 1990, BPI-FB filed a motion to dismiss on the ground of litis
pendentia, alleging that there is a pending case for recovery of sum of
money arising from the BPI-FB Check No. 129004 dated August 29, 1989
before the Regional Trial Court (RTC), Branch 146, Makati4 and
Buenaventura is one of the defendants therein.5 Buenaventura, et
al. opposed the motion to dismiss on the ground that there is no identity of
parties, rights asserted and reliefs prayed between the two cases.6

On October 10, 1990, the Manila RTC denied the motion to dismiss, ruling
that there can be no res judicata between the two cases since the parties
are different and the causes of action are not the same.7

On December 10, 1990, BPI-FB filed its answer alleging that: the check
received by Buenaventura, et al. from Amado Franco was drawn by Eladio
Teves and Joseph Teves against the Current Account of the Tevesteco
Arrastre Stevedoring Co., Inc. (Tevesteco); the funds in the said Tevesteco
account allegedly consisted mainly of funds in the amount
of P80,000,000.00 transferred to it from another account belonging to the
First Metro Investment Corporation (FMIC); such transfer of funds was
effected on the basis of an Authority to Debit bearing the signatures of
certain officers of FMIC; upon its investigation, BPI-FB found that the
signatures in the Authority to Debit were forged; before this, however,
Tevesteco had already issued several checks against its Current Account,
one of which is the BPI-FB Check No. 129004 received by Buenaventura, et
al. from Amado Franco, after a series of indorsements; it has the right to
consider the Current Account of Buenaventura, et al., which is funded from
BPI-FB Check No. 129004, as closed and to refuse any further withdrawal
from the same; assuming that the forgery claim of FMIC is untrue and
incorrect, it is the right of the BPI-FB, as a matter of protecting its interests,
to freeze their account or to hold it in suspense and not to allow any
withdrawals therefrom in the meantime that the issue of forgery remains
unsettled; FMIC has instituted another civil action, presently pending appeal,
against BPI-FB and several other defendants for the recovery of
the P80,000,000.00 transferred from the former's account to Tevesteco's
account.8

Following trial on the merits, on August 11, 1995, the Manila RTC rendered
its decision, finding that: BPI-FB had no right to unilaterally freeze the
deposits of Buenaventura, et al. since the latter had no participation in any
fraud that may have attended the prior fund transfers from FMIC to
Tevesteco; as holders in good faith and for value of the BPI-FB Check No.
129004, their rights to the sum embodied in the said check should have
been respected; BPI-FB's unilateral action of freezing the Current Account
amounted to an unlawful confiscation of their property without due process.
The dispositive portion of the RTC decision reads as follows:

WHEREFORE, in view of the foregoing judgment is rendered in favor of the

plaintiff and against the defendant bank and the latter is ordered as follows:

1. To pay the plaintiff the sum of P490,328.50 representing the balance of

the plaintiff's deposit under Account No. 807-065-313-0 which was
unlawfully frozen by the bank and finally debited against said account with
legal rate of interest from date of closure;

2. To pay the sum of P200,000.00 as moral damages;

3. To pay the amount of P200,000.00 as exemplary damages to serve as an

example and lesson to serve as a deterrent for similar action which the bank
may take against its depositors in the future;

4. To pay the sum of P50,000.00 as attorney's fees.

SO ORDERED.9

Dissatisfied, BPI-FB appealed to the CA. It alleged that: the case should
have been dismissed for lack of cause of action because it is the
International Baptist Academy which is the owner of the funds deposited
with BPI-FB and therefore the real party-in-interest, although the account is
in the name of Buenaventura, et al.; the RTC should not have ordered the
payment of the balance of the Current Account of Buenaventura, et
al. because the latter were interested only in the reinstatement of their
Current Account; the provisions of the Negotiable Instruments Law should
not have been applied by the RTC to support its position that
Buenaventura, et al. are the owners of the funds in their Current Account;
BPI-FB is entitled to freeze the account of Buenaventura, et al. and to
disallow any withdrawals therefrom as a measure to protect its interest; BPI-
FB, not Buenaventura, et al., is entitled to damages.

On November 27, 2000, the CA affirmed the decision of the Manila RTC,
holding that BPI-FB did not act in accordance with law. 10 It ruled that the
relationship between the bank and the depositor is that of debtor and
creditor and, as such, BPI-FB could not lawfully refuse to make payments on
the checks drawn and issued by Buenaventura, et al., provided only that
there are funds available in the latter's deposit. It further declared that BPI-
FB is not justified in freezing the amounts deposited by Buenaventura, et
al. for suspicion of being "illegal" or "unauthorized" as a result of the claimed
fraud perpetuated against FMIC because: (a) it has not been sufficiently
shown that the funds in the account of Buenaventura, et al. were derived
exclusively from the alleged P80,000,000.00 unlawfully transferred from the
funds of FMIC or that the deposit under the name of Tevesteco consisted
exclusively of the said P80,000,000.00 debited from FMIC's account; and (b)
there is no clear proof of any involvement of Buenaventura, et al., the
International Baptist Church or International Baptist Academy in the alleged
irregularities attending the fund transfer from FMIC to Tevesteco.

The CA also found unmeritorious BPI-FB's claim that Buenaventura, et

al. have no cause of action since the International Baptist Academy is the
real party-in-interest. It held that since it is undisputed that it is the Current
Account of Buenaventura, et al. which was frozen and closed by BPI-FB, then
the former are the parties-in-interest in the reopening of the said account. It
found no error in the Manila RTC's order that BPI-FB pay the amount
of P490,328.50 plus interest directly to Buenaventura, et al. since the
reinstatement of the Current Account would mean the same thing as the
payment of the balance; Buenaventura, et al. would necessarily have the
right to withdraw their deposit if and when they see it fit. Furthermore, the
CA held that the RTC's disposition falls under the general prayer of
Buenaventura, et al. for such other reliefs as may be just and equitable
under the attendant circumstances.

With regard to award of damages, the CA sustained the award of moral

damages and attorney's fees, holding that BPI-FB's actuations were
established to have caused Buenaventura, et al. to incur the distrust of their
Baptist brethren, besides suffering mental anguish, serious anxiety,
wounded feelings, and moral shock but found no basis for the award of
exemplary damages of P200,000.00 for lack of showing that BPI-FB was not
animated by any wanton, fraudulent, reckless, oppressive or malevolent
intent.

Both parties filed separate motions for reconsideration. Buenaventura, et

al. sought reconsideration of the deletion of the award of exemplary
damages.11 On the other hand, BPI-FB reiterated its argument that the
International Baptist Academy is the real party-in-interest. It also assailed
the findings and conclusions of the CA.12

On May 3, 2001, the CA denied both motions for reconsideration. 13

Hence, the present two consolidated petitions for review on certiorari.

In G.R No. 148196, BPI-FB ascribes six errors upon the CA, to wit:

I. The Honorable Court of Appeals committed a reversible error in holding

that the respondents are the real parties-in-interest in this case contrary to
the admissions of respondents themselves that it is the International Baptist
Academy who is the owner of the funds in question and hence it is and out
to be the real party in interest in this case.

II. The Honorable Court of Appeals committed a grave abuse of discretion in

not dismissing respondent's complaint for lack of cause of action.

III. The Honorable Court of Appeals committed a reversible error in NOT

holding, based on a misapprehension of facts that BPI-FB is entitled to
freeze respondents' account and to disallow any withdrawal therefrom as a
measure to protect its interest.

IV. The Honorable Court of Appeals committed a reversible error in holding,

based on a misapprehension of facts, that it has not been sufficiently shown
that the funds in deposit with BPI-FB under the name of the respondents
were derived exclusively from the alleged 80 million pesos unlawfully
transferred from the funds of FMIC or that the deposit under the name of
Tevesteco consisted exclusively of the said 80 million pesos debited from
FMIC's account.

V. The Honorable Court of Appeals committed a grave abuse of discretion in

NOT upholding the position of BPI-FB on the freezing of respondents' current
account when it held that there was no clear proof of any involvement by the
respondents with the alleged irregularities attending the fund transfer from
FMIC to Tevesteco.
VI. The Honorable Court of Appeals committed a grave abuse of discretion,
in holding, in effect, that there is nothing wrong with the Lower Court's order
directing BPI-FB to pay to respondents directly the balance of their account
plus interest although their prayer in their complaint was only to reinstate
their current account.14

Anent the first and second grounds, BPI-FB maintains that the complaint
should have been dismissed for lack of cause of action because
Buenaventura et al. admit that the International Baptist Academy is the
owner of the funds in question and therefore the real party-in-interest to
prosecute the action.

On the third ground, BPI-FB asserts that it has the right to consider the
account of Buenaventura, et al. as frozen and to refuse any withdrawals

from the same because of the forgery claim of FMIC. Assuming the forgery
claim of FMIC is true and correct, the amount transferred from FMIC's
account to Tevesteco's account is the money of BPI-FB under the principle
that a bank is deemed to have disbursed its own funds. It submits that as an
original owner who is restored in possession of stolen property, it has a
better right over such property than a mere transferee no matter how
innocent the latter may be.

Concerning the fourth ground, BPI-FB submits that ample proof was
presented by it that the deposit under the name of Tevesteco consisted
exclusively of the P80,000,000.00 debited from FMIC's account and the
funds in deposit with BPI-FB under the name of Buenaventura, et al. were
derived exclusively from the P80,000,000.00 unlawfully transferred from the
funds of FMIC.

With regard to the fifth ground, BPI-FB concedes that there is no clear proof
of any involvement by Buenaventura, et al. in the alleged irregularities
attending the fund transfer from FMIC to Tevesteco. It insists, however, that
the freezing of the account was triggered by the forgery claim of FMIC and
the unauthorized fund transfer to Tevesteco based on the principle that a
bank is deemed to have disbursed its own funds, and not its depositors,
where the authority for such disbursement is a forgery and null and void. It
had the right to set up its ownership of the money as against that of
Buenaventura, et al. and to refuse to return the same to them.

As to the sixth ground, BPI-FB points out that Buenaventura, et al. originally

prayed in the alternative for the reinstatement of their Current Account or
for payment of the balance remaining in said account but they subsequently
chose to delete that portion praying for the payment of the balance of their
account. It submits that Buenaventura, et al. deliberately did this to sidestep
the other pending case filed against the suspected perpetrators of the fraud,
including Amado Franco and Buenaventura, before RTC, Branch 146, Makati.

In G.R. No. 148259, Buenaventura, et al. anchor their petition on a sole

ground, to wit:

The Honorable Court of Appeals has decided the case in a way not in accord
with law and applicable jurisprudence in the deletion of the award of
exemplary damages granted by the court a quo.15

They submit that BPI-FB acted in a wanton, reckless, oppressive and

malevolent manner in freezing, and subsequently closing, their account
without prior notification. They insist that BPI-FB failed in its obligation, as
an entity engaged in business affected with public interest, to treat the
accounts of its depositors with meticulous care, having in mind the fiduciary
nature of their relationship. Moreover, as if to compound its reckless
conduct, BPI-FB declared itself the owner of the money which the depositors
have placed in its care, freezing and later closing the depositors' account, all
before due notice and without first giving the latter the opportunity to
properly present their side or at least sufficient time to direct their course of
action, like refraining from issuing any check, to eventually save themselves
from any embarrassment and/or possible criminal prosecution for estafa or
violation of Batas Pambansa Blg. 22.

We rule in favor of Buenaventura, et al.

It is elementary that it is only in the name of a real party-in-interest that a

civil suit may be prosecuted. Under Section 2, Rule 3 of the Rules of Civil
Procedure, a real party-in-interest is the party who stands to be benefited or
injured by the judgment in the suit, or the party entitled to the avails of the
suit. "Interest" within the meaning of the rule means material interest, an
interest in issue and to be affected by the decree, as distinguished from
mere interest in the question involved, or a mere incidental interest. 16 One
having no right or interest to protect cannot invoke the jurisdiction of the
court as a party plaintiff in an action.17 To qualify a person to be a real party-
in-interest in whose name an action must be prosecuted, he must appear to
be the present real owner of the right sought to be enforced. 18 Since a
contract may be violated only by the parties thereto as against each other,
in an action upon that contract, the real parties-in-interest, either as plaintiff
or as defendant, must be parties to the said contract.19

In the present case, Buenaventura, et al. are the real parties-in-interest.

They are the parties who contracted with BPI-FB with regard to the Current
Account. While the funds were used for purposes of the International Baptist
Church and the International Baptist Academy, it must be noted that the
Current Account is in the name of Buenaventura, et al. They are the
signatories of the check which was dishonored by BPI-FB upon presentment
and the ones who will be held accountable for the nonpayment or dishonor
of any check they issued. Thus, they are the real parties-in-interest to
enforce the terms of the contract of deposit with BPI-FB.

Furthermore, BPI-FB has no unilateral right to freeze the current account of

Buenaventura, et al. based on the suspicion that the funds in the latter's
account are illegal or unauthorized having been sourced from the

unlawful transfer of funds from the account of FMIC to Tevesteco and

disallow any withdrawal therefrom to allegedly protect its interest.

Needless to stress, the contract between a bank and its depositor is

governed by the provisions of the Civil Code on simple loan. 20 Thus, there is
a debtor-creditor relationship between a bank and its depositor. The bank is
the debtor and the depositor is the creditor. The depositor lends the bank
money and the bank agrees to pay the depositor on demand. The savings or
current deposit agreement between the bank and the depositor is the
contract that determines the rights and obligations of the parties.

Every bank that issues checks for the use of its customers should know
whether or not the drawer's signature thereon is genuine, whether there are
sufficient funds in the drawers account to cover checks issued, and it should
be able to detect alterations, erasures, superimpositions or intercalations
thereon, for these instruments are prepared, printed and issued by itself, it
has control of the drawer's account, and it is supposed to be familiar with
the drawer's signature. It should possess appropriate detecting devices for
uncovering forgeries and/or alterations on these instruments. Unless a
forgery or alteration is attributable to the fault or negligence of the drawer
himself, the remedy of the drawee bank that negligently clears a forged
and/or altered check for payment is against the party responsible for the
forgery or alteration, otherwise, it bears the loss.21

There is nothing inequitable in such a rule for if in the regular course of

business the check comes to the drawee bank which, having the opportunity
to ascertain its character, pronounces it to be valid and pays it, as in this
case, it is not only a question of payment under mistake, but payment in
neglect of duty which the commercial law places upon it, and the result of its
negligence must rest upon it.22
Having been negligent in detecting the forgery prior to clearing the check,
BPI-FB should bear the loss and can't shift the blame to Buenaventura, et
al. having failed to show any participation on their part in the forgery. BPI-
FB fails to point any circumstance which should have put Buenaventura, et
al. on inquiry as to the why and wherefore of the possession of the check by
Amado Franco. Buenaventura, et al. were not privies to any transaction
involving FMIC, Tevesteco or Franco. They thus had no obligation to
ascertain from Franco what the nature of the latter's title to the checks was,
if any, or the nature of his possession. They cannot be guilty of gross neglect
amounting to legal absence of good faith, absent any showing that there was
something amiss about Franco's acquisition or possession of the check,
which was payable to bearer.23

Thus, the fact that the funds in deposit with BPI-FB under the name of
Buenaventura, et al. were allegedly derived exclusively from the
alleged P80,000,000.00 unlawfully transferred from the funds of FMIC or
that the deposit under the name of Tevesteco consisted allegedly exclusively
of the said P80,000,000.00 debited from FMIC's account is immaterial. These
circumstances cannot be used against a party not privy to the forgery.

There is no merit to the claim that the CA erred in affirming the RTC's order
directing BPI-FB to pay the balance of their account plus interest although
the prayer was only to reinstate their Current Account. The complaint does
contain a general prayer "for such other relief as may be just and equitable
in the premises." And this general prayer is broad enough "to justify
extension of a remedy different from or together with the specific remedy
sought."24 Indeed, a court may grant relief to a party, even if the party
awarded did not pray for it in his pleadings.25

As to the prayer of Buenaventura, et al. for exemplary damages, the Court

finds that the CA erred in deleting the award of exemplary damages. The law
allows the grant of exemplary damages to set an example for the public
good.26 The business of a bank is affected with public interest; thus, it makes
a sworn profession of diligence and meticulousness in giving irreproachable
service.27 For this reason, the bank should guard against injury attributable
to negligence or bad faith on its part.28 The award of exemplary damages is
proper as a warning to BPI-FB and all concerned not to recklessly disregard
their obligation to exercise the highest and strictest diligence in serving their
depositors. However, the award should be in a reduced amount
of P50,000.00 since exemplary damages are imposed not to enrich one party
or impoverish another but to serve as a deterrent against or as a negative
incentive to curb socially deleterious actions. 29
In summation, the Court reminds BPI-FB that the banking sector must at all
times maintain a high level of meticulousness, always having in mind the
fiduciary nature of its relationship with its depositors. 30 This fiduciary
relationship means that the bank's obligation to observe "high standards of
integrity and performance" is deemed written into every deposit agreement
between a bank and its depositor. Failure to comply with this standard shall
render a bank liable to its depositors for damages.

WHEREFORE, the petition in G.R. No. 148196 is DENIED and the petition in

G.R. No. 148259 is GRANTED. The assailed Decision dated November 27,
2000 and Resolution dated May 3, 2001 of the Court of Appeals in CA-G.R.
CV No. 53962, which affirmed with modification the Decision rendered by
the Regional Trial Court, Branch 25, Manila, dated August 11, 1995 in Civil
Case No. 90-53154, are hereby AFFIRMED with the modification that BPI
Family Bank is directed to pay Buenaventura, et al. the amount
of P50,000.00 as exemplary damages. Costs against BPI Family Bank.

SO ORDERED.
CASE #89 San Carlos Milling vs BPI 59 Phil 59 (1933)

[G.R. No. 37467. December 11, 1933.]

SAN CARLOS MILLING CO., LTD., Plaintiff-Appellant, v. BANK OF THE

PHILIPPINES ISLANDS and CHINA BANKING
CORPORATION, Defendants-Appellees.

Gibbs & McDonough and Roman Ozaeta for Appellant.

Araneta, De Joya, Zaragoza & Araneta for appellee Bank of the

Philippine Islands.

Marcelo Nubla and Guevara, Francisco & Recto for appellee China
Banking Corporation.

SYLLABUS

1. BANKS AND BANKING; PAYMENT OF FORGED CHECKS. — It is an

elementary principle of banking that "A bank is bound to know the
signatures of its customers; and if it pays a forged check, it must be
considered as making the payment out of its own funds, and cannot
ordinarily charge the amount so paid to the account of the depositor whose
name was forges." (7. C. J., 683.) There is no act of the plaintiff that led the
Bank of the Philippine Islands astray. If it was in fact lulled into a false sense
of security, it was by the effrontery of D, the messenger to whom it
entrusted the large sum of money in question.

2. ID.; ID.; PROXIMATE CAUSE OF LOSS. — The signatures of the checks in

question being forged, under section 23 of the Negotiable Instruments Law
they are not a charge against plaintiff nor are the checks of any value to the
defendant. The proximate cause of loss was due to the negligence of the
Bank of the Philippine Islands in honoring and cashing the two forged
checks.

3. ID.; DEPOSITOR AND BANKER; CREDITOR AND DEBTOR. — It is very

clear that the relation of plaintiff with the Bank of the Philippine Islands in
regard to the checks in question, was that of depositor and banker, creditor
and debtor. The contention of the bank that it was a gratuitous bailee is
without merit, and absolutely contrary to what the bank did. It did not take
it up as a separate account but it transferred the credit to plaintiff’s current
 account as a depositor of the bank. Banks are not gratuitous bailees of the
funds deposited with them by their customers.

4. ID.; ID.; ID. — As the money in question was in fact paid to the plaintiff
corporation the China Banking Corporation was indebted neither to the
plaintiff nor to the Bank of the Philippine Islands and consequently was
properly absolved from any responsibility.

DECISION

HULL, J.:

Plaintiff corporation, organized under the laws of the Territory of Hawaii, is

authorized to engage in business in the Philippine Islands, and maintains its
main office in their Islands in the City of Manila.

The business of the Philippine Islands was in the hands of Alfred D. Cooper,
its agent under general power of attorney with authority of substitution. The
principal employee in the Manila office was one Joseph L. Wilson, to whom
had been given a general power of attorney but without power of
substitution. In 1926 Cooper, desiring to go on vacation, gave a general
power of attorney to Newland Baldwin and at the same time revoked the
power of Wilson relative to the dealings with the Bank of the Philippine
Islands, one of the banks in Manila in which plaintiff maintained a deposit.

About a year thereafter Wilson, conspiring together with one Alfredo

Dolores, a messenger-clerk in plaintiff’s Manila office, sent a cablegram in
code to the company in Honolulu requesting a telegraphic transfer to the
China Banking Corporation of Manila of $100,000. The money was
transferred by cable, and upon its receipt the China Banking Corporation,
likewise a bank in which plaintiff maintained a deposit, sent an exchange
contract to plaintiff corporation offering the sum of P201,000, which was
then the current rate of exchange. On this contract was forged the name of
Newland Baldwin and typed on the body of the contract was a
note:jgc:chanrobles.com.ph

"Please sent us certified check in our favor when transfer in received."cralaw

virtua1aw library

A manager’s check on the China Banking Corporation for P201,000 payable

to San Carlos Milling Company or order was receipted for by Dolores. On the
same date, September 28, 1927, the manager’s check was deposited with
the Bank of the Philippine Islands by the following
endorsement:jgc:chanrobles.com.ph

"For deposit only with Bank of the Philippine Islands, to credit of account of
San Carlos Milling Co., Ltd.

"By (Sgd.) NEWLAND BALDWIN

"For Agent"

The endorsement to which the name of the Newland Baldwin was affixed
was spurious.

The Bank of the Philippine Islands thereupon credited the current account of
plaintiff in the sum of P201,000 and passed the cashier’s check in the
ordinary course of business through the clearing house, where it was paid by
the China Banking Corporation.

On the same day the cashier of the Bank of the Philippine Islands received a
letter, purporting to be signed by Newland Baldwin, directing that P200,000
in bills of various denominations, named in the letter, be packed for
shipment and delivery the next day. The next day, Dolores witnessed the
counting and packing of the money, and shortly afterwards returned with the
check for the sum of P200,000, purporting to be signed by Newland Baldwin
as agent.

Plaintiff had frequently withdrawn currency for shipment to its mill from the
Bank of the Philippine Islands but never in so large an amount, and
according to the record, never under the sole supervision of Dolores as the
representative of plaintiff.

Before delivering the money, the bank asked Dolores for P1 to cover the cost
of packing the money, and he left the bank and shortly afterwards returned
with another check for P1, purporting to be signed by Newland Baldwin.
Whereupon the money was turned over to Dolores, who took it to plaintiff’s
office, where he turned the money over to Wilson and received as his share,
P10,000.

Shortly thereafter the crime was discovered, and upon the defendant bank
refusing to credit plaintiff with the amount withdrawn by the two forged
checks of P200,000 and P1, suit was brought against the Bank of the
Philippine Islands, and finally on the suggestion of the defendant bank, an
amended complaint was filed by plaintiff against both the Bank of the
Philippine Islands and the China Banking Corporation.

At the trial the China Banking Corporation contended that they had drawn a
check to the credit of the plaintiff company, that the check had been
endorsed for deposit, and that as the prior endorsement had in law been
guaranteed by the Bank of the Philippine Islands, when they presented the
cashier’s check to it for payment, the China Banking Corporation was
absolved even if the endorsement of Newland Baldwin on the check was a
forgery.

The Bank of the Philippine Islands presented many special defenses, but in
the main their contentions were that they had been guilty of no negligence,
that they had dealt with the accredited representatives of the company in
the due course of business, and that the loss was due to the dishonesty of
plaintiff’s employees and the negligence of plaintiff’s general agent.

In plaintiff’s Manila office, besides the general agent, Wilson, and Dolores,
most of the time there was employed a woman stenographer and cashier.
The agent did not keep in his personal possession either the code-book or
the blank checks of either the Bank of the Philippine Islands or the China
Banking Corporation. Baldwin was authorized to draw checks on either of the
depositories. Wilson could draw checks in the name of the plaintiff on the
China Banking Corporation.

After trial in which much testimony was taken, the trial court held that the
deposit of P201,000 in the Bank of the Philippine Islands being the result of
a forged endorsement, the relation of depositor and banker did not exist, but
the bank was only a gratuitous bailee; that the Bank of the Philippine Islands
acted in good faith in the ordinary course of its business, was not guilty of
negligence, and therefore under article 1902 of the Civil Code which should
control the case, plaintiff could not recover; and that as the cause of loss
was the criminal actions of Wilson and Dolores, employees of plaintiff, and
as Newland Baldwin, the agent, had not exercised adequate supervision over
plaintiff’s Manila office, therefore plaintiff was guilty of negligence, which
ground would likewise defect recovery.

From the decision of the trial court absolving the defendants, plaintiff brings
this appeal and makes nine assignments of error which we do not deem it
necessary to discuss it detail.

There is a mild assertion on the part of the defendant bank that the disputed
signatures on Newland Baldwin were genuine and that he had been in the
habit of signing checks in blank and turning the checks so signed over to
Wilson.
The proof as to the falsity of the questioned signatures of Baldwin places the
matter beyond reasonable doubt, nor is it believed that Baldwin signed
checks in blank and turned them over to Wilson.

As to the China Banking Corporation, it will be seen that it drew its check
payable to the order of plaintiff and delivered it to plaintiff’s agent who was
authorized to receive it. A bank that cashes a check must know to whom it
pays. In connection with the cashier’s check, this duty was therefore upon
the Bank of the Philippine Islands, and the China Banking Corporation was
not bound to inspect and verify all endorsements of the check, even if some
of them were also those of depositors in the bank. It had a right to rely upon
the endorsement of the Bank of the Philippine Islands when it gave the latter
bank credit for its own cashier’s check. Even if we would treat the China
Banking Corporation’s cashier’s check the same as the check of a depositor
and attempt to apply the doctrines of the great Eastern Life Insurance Co. v.
Hongkong & Shanghai Banking Corporation and National Bank (43 Phil.,
678), and hold the China Banking Corporation indebted to plaintiff, we would
at the same time have to hold that the Bank of the Philippine Islands was
indebted to the China Banking Corporation in the same amount. As,
however, the money was in fact paid to plaintiff corporation, we must hold
that the China Banking Corporation is indebted neither to plaintiff not to the
Bank of the Philippine Islands, and the judgment of the lower court so far as
it absolved the China Banking Corporation from responsibility is affirmed.

Returning to the relation between plaintiff and the Bank of the Philippine
Islands, we will now consider the effect of the deposit of P201,000. It must
be noted that this was not a presenting of the check for cash payment but
for deposit only. It is a matter of general knowledge that most
endorsements for deposit only, are informal. Most are by means of a rubber
stamp. The bank would have been justified in accepting the check for
deposit even with only a typed endorsement. It accepted the check and duly
credited plaintiff’s account with the amount on the face of the check. Plaintiff
was not harmed by the transaction as the only result was the removal of
that sum of money from a bank from which Wilson could have drawn it out
in his own name to a bank where Wilson would not have authority to draw
checks and where funds could only be drawn out by the check of Baldwin.

Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine
Islands said in part:jgc:chanrobles.com.ph

". . . we now beg leave to demand that you pay over to us the entire amount
of said manager’s check of two hundred one thousand (P201,000) pesos,
together with interest thereon at the agreed rate of 3 1/2 per cent per
annum on daily balanced of our credit in account current with your bank to
this date. In the even of your refusal to pay, we shall claim interest at the
legal rate of 6 per cent from and after the date of this demand inasmuch as
we desire to withdraw and make use of the money." Such language might
well be treated as a ratification of the deposit.

The contention of the bank that it was a gratuitous bailee is without merit.
In the first place, it is absolutely contrary to what the bank did. It did not
take it up as a separate account but it transferred the credit to plaintiff’s
current account as a depositor of that bank. Furthermore, banks are not
gratuitous bailees of the funds deposited with them by their customers.
Banks are run for gain, and they solicit deposits in order that they can use
the money for that very purpose. In this case the action was neither
gratuitous nor was it a bailment.

On the other hand, we cannot agree with the theory of plaintiff that the Bank
of the Philippine Islands was an intermeddling bank. In the many cases cited
by plaintiff where the bank that cashed the forged endorsement was held as
an intermeddler, in none was the claimant a regular depositor of the bank,
nor in any of the cases cited, was the endorsement for deposit only. It is
therefore clear that the relation of plaintiff with the Bank of the Philippine
Islands in regard to this item of P201,000 was that of depositor and banker,
creditor and debtor.

We now come to consider the legal effect of payment by the bank of the
Dolores of the sum of P200,001, on two checks on which the name of
Baldwin was forged as drawer. As above stated, the fact that these
signatures were forged is beyond question. It is an elementary principle both
of banking and of the Negotiable Instruments Law that —

"A bank is bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of its own
funds, and cannot ordinarily charge the amount so paid to the account of the
depositor whose name was forged." (7 C. J., 683.)

There is no act of the plaintiff that led the Bank of the Philippine Islands
astray. If it was in fact lulled into a false sense of security, it was by the
effrontery of Dolores, the messenger to whom it entrusted this large sum of
money.

The bank paid out its money because it relied upon the genuineness of the
purported signatures of Baldwin. These, they never questioned at the time
its employees should have used care. In fact, even today the bank
represents that it has a belief that they are genuine signatures.
The signatures to the checks being forged, under section 23 of the
Negotiable Instruments Law they are not a charge against plaintiff nor are
the checks of any value to the defendant.

It must therefore be held that the proximate cause of loss was due to the
negligence of the Bank of the Philippine Islands in honoring and cashing the
two forged checks.

The judgment absolving the Bank of the Philippine Islands must therefore be
reversed, and a judgment entered in favor of plaintiff- appellant and against
the Bank of the Philippine Islands, defendant- appellee, for the sum of
P200,001, with legal interest thereon from December 23, 1928, until
payment, together with costs in both instances. So ordered.
CASE #90 Samsung Constrauction Co. Phils. Vs Far East Bank 436 SCRA 402 (2004)

[G.R. NO. 129015 : August 13, 2004]

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES,

INC., Petitioner, v. FAR EAST BANK AND TRUST COMPANY AND COURT
OF APPEALS, Respondents.

DECISION

TINGA, J.:

Called to fore in the present petition is a classic textbook question - if a bank

pays out on a forged check, is it liable to reimburse the drawer from whose
account the funds were paid out? The Court of Appeals, in reversing a trial
court decision adverse to the bank, invoked tenuous reasoning to acquit the
bank of liability. We reverse, applying time-honored principles of law.

The salient facts follow.

Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung

Construction"), while based in Biñan, Laguna, maintained a current
account with defendant Far East Bank and Trust Company1 ("FEBTC") at the
latter's Bel-Air, Makati branch.2 The sole signatory to Samsung
Construction's account was Jong Kyu Lee ("Jong"), its Project
Manager,3 while the checks remained in the custody of the company's
accountant, Kyu Yong Lee ("Kyu").4

On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC

Check No. 432100 to the bank's branch in Bel-Air, Makati. The check,
payable to cash and drawn against Samsung Construction's current account,
was in the amount of Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the
balance of Samsung Construction's account. After ascertaining there were
enough funds to cover the check,5 she compared the signature appearing on
the check with the specimen signature of Jong as contained in the specimen
signature card with the bank. After comparing the two signatures, Justiani
was satisfied as to the authenticity of the signature appearing on the check.
She then asked Gonzaga to submit proof of his identity, and the latter
presented three (3) identification cards.6
At the same time, Justiani forwarded the check to the branch Senior
Assistant Cashier Gemma Velez, as it was bank policy that two bank branch
officers approve checks exceeding One Hundred Thousand Pesos, for
payment or encashment. Velez likewise counterchecked the signature on the
check as against that on the signature card. He too concluded that the check
was indeed signed by Jong. Velez then forwarded the check and signature
card to Shirley Syfu, another bank officer, for approval. Syfu then noticed
that Jose Sempio III ("Sempio"), the assistant accountant of Samsung
Construction, was also in the bank. Sempio was well-known to Syfu and the
other bank officers, he being the assistant accountant of Samsung
Construction. Syfu showed the check to Sempio, who vouched for the
genuineness of Jong's signature. Confirming the identity of Gonzaga, Sempio
said that the check was for the purchase of equipment for Samsung
Construction. Satisfied with the genuineness of the signature of Jong, Syfu
authorized the bank's encashment of the check to Gonzaga.

The following day, the accountant of Samsung Construction, Kyu, examined

the balance of the bank account and discovered that a check in the amount
of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00)
had been encashed. Aware that he had not prepared such a check for Jong's
signature, Kyu perused the checkbook and found that the last blank check
was missing.7 He reported the matter to Jong, who then proceeded to the
bank. Jong learned of the encashment of the check, and realized that his
signature had been forged. The Bank Manager reputedly told Jong that he
would be reimbursed for the amount of the check.8 Jong proceeded to the
police station and consulted with his lawyers.9 Subsequently, a criminal case
for qualified theft was filed against Sempio before the Laguna court. 10

In a letter dated 6 May 1992, Samsung Construction, through counsel,

demanded that FEBTC credit to it the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00), with interest.11 In response,
FEBTC said that it was still conducting an investigation on the matter.
Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for
violation of Section 23 of the Negotiable Instruments Law, and prayed for
the payment of the amount debited as a result of the questioned check plus
interest, and attorney's fees.12 The case was docketed as Civil Case No. 92-
61506 before the Regional Trial Court ("RTC") of Manila, Branch 9. 13

During the trial, both sides presented their respective expert witnesses to
testify on the claim that Jong's signature was forged. Samsung Corporation,
which had referred the check for investigation to the NBI, presented Senior
NBI Document Examiner Roda B. Flores. She testified that based on her
examination, she concluded that Jong's signature had been forged on the
check. On the other hand, FEBTC, which had sought the assistance of the
Philippine National Police (PNP), 14 presented Rosario C. Perez, a document
examiner from the PNP Crime Laboratory. She testified that her findings
showed that Jong's signature on the check was genuine. 15

Confronted with conflicting expert testimony, the RTC chose to believe the
findings of the NBI expert. In a Decision dated 25 April 1994, the RTC held
that Jong's signature on the check was forged and accordingly directed the
bank to pay or credit back to Samsung Construction's account the amount of
Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00),
together with interest tolled from the time the complaint was filed, and
attorney's fees in the amount of Fifteen Thousand Pesos (P15,000.00).

FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the

Special Fourteenth Division of the Court of Appeals rendered
a Decision,16 reversing the RTC Decision and absolving FEBTC from any
liability. The Court of Appeals held that the contradictory findings of the NBI
and the PNP created doubt as to whether there was forgery. 17 Moreover, the
appellate court also held that assuming there was forgery, it occurred due to
the negligence of Samsung Construction, imputing blame on the accountant
Kyu for lack of care and prudence in keeping the checks, which if observed
would have prevented Sempio from gaining access thereto. 18 The Court of
Appeals invoked the ruling in PNB v. National City Bank of New York 19 that,
if a loss, which must be borne by one or two innocent persons, can be traced
to the neglect or fault of either, such loss would be borne by the negligent
party, even if innocent of intentional fraud.20

Samsung Construction now argues that the Court of Appeals had seriously
misapprehended the facts when it overturned the RTC's finding of forgery. It
also contends that the appellate court erred in finding that it had been
negligent in safekeeping the check, and in applying the equity principle
enunciated in PNB v. National City Bank of New York.

Since the trial court and the Court of Appeals arrived at contrary findings on
questions of fact, the Court is obliged to examine the record to draw out the
correct conclusions. Upon examination of the record, and based on the
applicable laws and jurisprudence, we reverse the Court of Appeals.

Section 23 of the Negotiable Instruments Law states:

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. (Emphasis supplied)cralawlibrary

The general rule is to the effect that a forged signature is "wholly

inoperative," and payment made "through or under such signature" is
ineffectual or does not discharge the instrument.21 If payment is made, the
drawee cannot charge it to the drawer's account. The traditional justification
for the result is that the drawee is in a superior position to detect a forgery
because he has the maker's signature and is expected to know and compare
it.22 The rule has a healthy cautionary effect on banks by encouraging care in
the comparison of the signatures against those on the signature cards they
have on file. Moreover, the very opportunity of the drawee to insure and to
distribute the cost among its customers who use checks makes the drawee
an ideal party to spread the risk to insurance. 23

Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

When a person deposits money in a general account in a bank, against which

he has the privilege of drawing checks in the ordinary course of business,
the relationship between the bank and the depositor is that of debtor and
creditor. So far as the legal relationship between the two is concerned, the
situation is the same as though the bank had borrowed money from the
depositor, agreeing to repay it on demand, or had bought goods from the
depositor, agreeing to pay for them on demand. The bank owes the
depositor money in the same sense that any debtor owes money to his
creditor. Added to this, in the case of bank and depositor, there is, of course,
the bank's obligation to pay checks drawn by the depositor in proper form
and presented in due course. When the bank receives the deposit, it
impliedly agrees to pay only upon the depositor's order. When the bank pays
a check, on which the depositor's signature is a forgery, it has failed to
comply with its contract in this respect. Therefore, the bank is held liable.

The fact that the forgery is a clever one is immaterial. The forged signature
may so closely resemble the genuine as to defy detection by the depositor
himself. And yet, if a bank pays the check, it is paying out its own money
and not the depositor's.

The forgery may be committed by a trusted employee or confidential agent.

The bank still must bear the loss. Even in a case where the forged check was
drawn by the depositor's partner, the loss was placed upon the bank. The
case referred to is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In
this case, the plaintiff brought suit against the defendant bank for money
which had been deposited to the plaintiff's credit and which the bank had
paid out on checks bearing forgeries of the plaintiff's signature.
 xxx

It was held that the bank was liable. It was further held that the fact that
the plaintiff waited eight or nine months after discovering the forgery, before
notifying the bank, did not, as a matter of law, constitute a ratification of the
payment, so as to preclude the plaintiff from holding the bank liable. xxx

This rule of liability can be stated briefly in these words: "A bank is bound to
know its depositors' signature." The rule is variously expressed in the many
decisions in which the question has been considered. But they all sum up to
the proposition that a bank must know the signatures of those whose
general deposits it carries.24

By no means is the principle rendered obsolete with the advent of modern

commercial transactions. Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments and Other Related
Commercial Paper wrote, thus:

The deposit contract between a payor bank and its customer determines
who can draw against the customer's account by specifying whose signature
is necessary on checks that are chargeable against the customer's account.
Therefore, a check drawn against the account of an individual customer that
is signed by someone other than the customer, and without authority from
her, is not properly payable and is not chargeable to the customer's account,
inasmuch as any "unauthorized signature on an instrument is ineffective" as
the signature of the person whose name is signed.25

Under Section 23 of the Negotiable Instruments Law, forgery is a real or

absolute defense by the party whose signature is forged. 26 On the premise
that Jong's signature was indeed forged, FEBTC is liable for the loss since it
authorized the discharge of the forged check. Such liability attaches even if
the bank exerts due diligence and care in preventing such faulty discharge.
Forgeries often deceive the eye of the most cautious experts; and when a
bank has been so deceived, it is a harsh rule which compels it to suffer
although no one has suffered by its being deceived. 27 The forgery may be so
near like the genuine as to defy detection by the depositor himself, and yet
the bank is liable to the depositor if it pays the check. 28

Thus, the first matter of inquiry is into whether the check was indeed forged.
A document formally presented is presumed to be genuine until it is proved
to be fraudulent. In a forgery trial, this presumption must be overcome but
this can only be done by convincing testimony and effective illustrations. 29

In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the
alleged forgery in view of the conflicting conclusions made by handwriting
experts from the NBI and the PNP, both agencies of the government.

xxx

These contradictory findings create doubt on whether there was indeed a

forgery. In the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550,
the Supreme Court held that forgery cannot be presumed; it must be proved
by clear, positive and convincing evidence.

This reasoning is pure sophistry. Any litigator worth his or her salt would
never allow an opponent's expert witness to stand uncontradicted, thus the
spectacle of competing expert witnesses is not unusual. The trier of fact will
have to decide which version to believe, and explain why or why not such
version is more credible than the other. Reliance therefore cannot be placed
merely on the fact that there are colliding opinions of two experts, both
clothed with the presumption of official duty, in order to draw a conclusion,
especially one which is extremely crucial. Doing so is tantamount to a
jurisprudential cop-out.

Much is expected from the Court of Appeals as it occupies the penultimate

tier in the judicial hierarchy. This Court has long deferred to the appellate
court as to its findings of fact in the understanding that it has the
appropriate skill and competence to plough through the minutiae that
scatters the factual field. In failing to thoroughly evaluate the evidence
before it, and relying instead on presumptions haphazardly drawn, the Court
of Appeals was sadly remiss. Of course, courts, like humans, are fallible, and
not every error deserves a stern rebuke. Yet, the appellate court's error in
this case warrants special attention, as it is absurd and even dangerous as a
precedent. If this rationale were adopted as a governing standard by every
court in the land, barely any actionable claim would prosper, defeated as it
would be by the mere invocation of the existence of a contrary "expert"
opinion.

On the other hand, the RTC did adjudge the testimony of the NBI expert as
more credible than that of the PNP, and explained its reason behind the
conclusion:

After subjecting the evidence of both parties to a crucible of analysis, the

court arrived at the conclusion that the testimony of the NBI document
examiner is more credible because the testimony of the PNP Crime
Laboratory Services document examiner reveals that there are a lot of
differences in the questioned signature as compared to the standard
specimen signature. Furthermore, as testified to by Ms. Rhoda Flores, NBI
expert, the manner of execution of the standard signatures used reveals that
it is a free rapid continuous execution or stroke as shown by the tampering
terminal stroke of the signatures whereas the questioned signature is a
hesitating slow drawn execution stroke. Clearly, the person who executed
the questioned signature was hesitant when the signature was made. 30

During the testimony of PNP expert Rosario Perez, the RTC bluntly noted
that "apparently, there [are] differences on that questioned signature and
the standard signatures."31 This Court, in examining the signatures, makes a
similar finding. The PNP expert excused the noted "differences" by asserting
that they were mere "variations," which are normal deviations found in
writing.32 Yet the RTC, which had the opportunity to examine the relevant
documents and to personally observe the expert witness, clearly disbelieved
the PNP expert. The Court similarly finds the testimony of the PNP expert as
unconvincing. During the trial, she was confronted several times with
apparent differences between strokes in the questioned signature and the
genuine samples. Each time, she would just blandly assert that these
differences were just "variations,"33 as if the mere conjuration of the word
would sufficiently disquiet whatever doubts about the deviations. Such
conclusion, standing alone, would be of little or no value unless supported by
sufficiently cogent reasons which might amount almost to a demonstration. 34

The most telling difference between the questioned and genuine signatures
examined by the PNP is in the final upward stroke in the signature, or "the
point to the short stroke of the terminal in the capital letter 'L,' " as referred
to by the PNP examiner who had marked it in her comparison chart as "point
no. 6." To the plain eye, such upward final stroke consists of a vertical line
which forms a ninety degree (90' ) angle with the previous stroke. Of the
twenty one (21) other genuine samples examined by the PNP, at least nine
(9) ended with an upward stroke.35 However, unlike the questioned
signature, the upward strokes of eight (8) of these signatures are looped,
while the upward stroke of the seventh36 forms a severe forty-five degree
(45' ) with the previous stroke. The difference is glaring, and indeed, the
PNP examiner was confronted with the inconsistency in point no. 6.

Q: Now, in this questioned document point no. 6, the "s" stroke is directly
upwards.

A: Yes, sir.

Q: Now, can you look at all these standard signature (sic) were (sic) point 6
is repeated or the last stroke "s" is pointing directly upwards?
chanroblesvirtualawlibrary
A: There is none in the standard signature, sir.37

Again, the PNP examiner downplayed the uniqueness of the final stroke in
the questioned signature as a mere variation,38 the same excuse she
proffered for the other marked differences noted by the Court and the
counsel for petitioner.39

There is no reason to doubt why the RTC gave credence to the testimony of
the NBI examiner, and not the PNP expert's. The NBI expert, Rhoda Flores,
clearly qualifies as an expert witness. A document examiner for fifteen
years, she had been promoted to the rank of Senior Document Examiner
with the NBI, and had held that rank for twelve years prior to her testimony.
She had placed among the top five examinees in the Competitive Seminar in
Question Document Examination, conducted by the NBI Academy, which
qualified her as a document examiner.40 She had trained with the Royal
Hongkong Police Laboratory and is a member of the International
Association for Identification.41 As of the time she testified, she had
examined more than fifty to fifty-five thousand questioned documents, on an
average of fifteen to twenty documents a day.42 In comparison, PNP
document examiner Perez admitted to having examined only around five
hundred documents as of her testimony.43

In analyzing the signatures, NBI Examiner Flores utilized the scientific

comparative examination method consisting of analysis, recognition,
comparison and evaluation of the writing habits with the use of instruments
such as a magnifying lense, a stereoscopic microscope, and varied lighting
substances. She also prepared enlarged photographs of the signatures in
order to facilitate the necessary comparisons.44 She compared the
questioned signature as against ten (10) other sample signatures of Jong.
Five of these signatures were executed on checks previously issued by Jong,
while the other five contained in business letters Jong had signed. 45 The NBI
found that there were significant differences in the handwriting
characteristics existing between the questioned and the sample signatures,
as to manner of execution, link/connecting strokes, proportion
characteristics, and other identifying details.46

The RTC was sufficiently convinced by the NBI examiner's testimony, and
explained her reasons in its Decisions. While the Court of Appeals disagreed
and upheld the findings of the PNP, it failed to convincingly demonstrate why
such findings were more credible than those of the NBI expert. As a
throwaway, the assailed Decision noted that the PNP, not the NBI, had the
opportunity to examine the specimen signature card signed by Jong, which
was relied upon by the employees of FEBTC in authenticating Jong's
signature. The distinction is irrelevant in establishing forgery. Forgery can be
established comparing the contested signatures as against those of any
sample signature duly established as that of the persons whose signature
was forged.

FEBTC lays undue emphasis on the fact that the PNP examiner did compare
the questioned signature against the bank signature cards. The crucial fact
in question is whether or not the check was forged, not whether the
bank could have detected the forgery. The latter issue becomes
relevant only if there is need to weigh the comparative negligence
between the bank and the party whose signature was forged.

At the same time, the Court of Appeals failed to assess the effect of Jong's
testimony that the signature on the check was not his. 47 The assertion may
seem self-serving at first blush, yet it cannot be ignored that Jong was in the
best position to know whether or not the signature on the check was his.
While his claim should not be taken at face value, any averments he would
have on the matter, if adjudged as truthful, deserve primacy in
consideration. Jong's testimony is supported by the findings of the NBI
examiner. They are also backed by factual circumstances that support the
conclusion that the assailed check was indeed forged. Judicial notice can be
taken that is highly unusual in practice for a business establishment to draw
a check for close to a million pesos and make it payable to cash or bearer,
and not to order. Jong immediately reported the forgery upon its discovery.
He filed the appropriate criminal charges against Sempio, the putative
forger.48

Now for determination is whether Samsung Construction was precluded from

setting up the defense of forgery under Section 23 of the Negotiable
Instruments Law. The Court of Appeals concluded that Samsung
Construction was negligent, and invoked the doctrines that "where a loss
must be borne by one of two innocent person, can be traced to the neglect
or fault of either, it is reasonable that it would be borne by him, even if
innocent of any intentional fraud, through whose means it has
succeeded49 or who put into the power of the third person to perpetuate the
wrong."50 Applying these rules, the Court of Appeals determined that it was
the negligence of Samsung Construction that allowed the encashment of the
forged check.

In the case at bar, the forgery appears to have been made possible through
the acts of one Jose Sempio III, an assistant accountant employed by the
plaintiff Samsung [Construction] Co. Philippines, Inc. who supposedly stole
the blank check and who presumably is responsible for its encashment
through a forged signature of Jong Kyu Lee. Sempio was assistant to the
Korean accountant who was in possession of the blank checks and who
through negligence, enabled Sempio to have access to the same. Had the
Korean accountant been more careful and prudent in keeping the blank
checks Sempio would not have had the chance to steal a page thereof and to
effect the forgery. Besides, Sempio was an employee who appears to have
had dealings with the defendant Bank in behalf of the plaintiff corporation
and on the date the check was encashed, he was there to certify that it was
a genuine check issued to purchase equipment for the company. 51

We recognize that Section 23 of the Negotiable Instruments Law bars a

party from setting up the defense of forgery if it is guilty of negligence. 52 Yet,
we are unable to conclude that Samsung Construction was guilty of
negligence in this case. The appellate court failed to explain precisely how
the Korean accountant was negligent or how more care and prudence on his
part would have prevented the forgery. We cannot sustain this "tar and
feathering" resorted to without any basis.

The bare fact that the forgery was committed by an employee of the party
whose signature was forged cannot necessarily imply that such party's
negligence was the cause for the forgery. Employers do not possess the
preternatural gift of cognition as to the evil that may lurk within the hearts
and minds of their employees. The Court's pronouncement in PCI Bank v.
Court of Appeals 53 applies in this case, to wit:

[T]he mere fact that the forgery was committed by a drawer-payor's

confidential employee or agent, who by virtue of his position had unusual
facilities for perpetrating the fraud and imposing the forged paper upon the
bank, does not entitle the bank to shift the loss to the drawer-payor, in the
absence of some circumstance raising estoppel against the drawer. 54

Admittedly, the record does not clearly establish what measures Samsung
Construction employed to safeguard its blank checks. Jong did testify that
his accountant, Kyu, kept the checks inside a "safety box," 55 and no contrary
version was presented by FEBTC. However, such testimony cannot prove
that the checks were indeed kept in a safety box, as Jong's testimony on
that point is hearsay, since Kyu, and not Jong, would have the personal
knowledge as to how the checks were kept.

Still, in the absence of evidence to the contrary, we can conclude that there
was no negligence on Samsung Construction's part. The presumption
remains that every person takes ordinary care of his concerns, 56 and that the
ordinary course of business has been followed. 57 Negligence is not presumed,
but must be proven by him who alleges it.58 While the complaint was lodged
at the instance of Samsung Construction, the matter it had to prove was the
claim it had alleged - whether the check was forged. It cannot be required as
well to prove that it was not negligent, because the legal presumption
remains that ordinary care was employed.

Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact
that Samsung Construction was negligent. While the payee, as in this case,
may not have the personal knowledge as to the standard procedures
observed by the drawer, it well has the means of disputing the presumption
of regularity. Proving a negative fact may be "a difficult office," 59 but
necessarily so, as it seeks to overcome a presumption in law. FEBTC was
unable to dispute the presumption of ordinary care exercised by Samsung
Construction, hence we cannot agree with the Court of Appeals' finding of
negligence.

The assailed Decision replicated the extensive efforts which FEBTC devoted

to establish that there was no negligence on the part of the bank in its
acceptance and payment of the forged check. However, the degree of
diligence exercised by the bank would be irrelevant if the drawer is not
precluded from setting up the defense of forgery under Section 23 by his
own negligence. The rule of equity enunciated in PNB v. National City Bank
of New York, 60 as relied upon by the Court of Appeals, deserves careful
examination.

The point in issue has sometimes been said to be that of negligence. The

drawee who has paid upon the forged signature is held to bear the
loss, because he has been negligent in failing to recognize that the
handwriting is not that of his customer. But it follows obviously that if
the payee, holder, or presenter of the forged paper has himself been in
default, if he has himself been guilty of a negligence prior to that of the
banker, or if by any act of his own he has at all contributed to induce the
banker's negligence, then he may lose his right to cast the loss upon the
banker.61 (Emphasis supplied)cralawlibrary

Quite palpably, the general rule remains that the drawee who has paid upon
the forged signature bears the loss. The exception to this rule arises only
when negligence can be traced on the part of the drawer whose signature
was forged, and the need arises to weigh the comparative negligence
between the drawer and the drawee to determine who should bear the
burden of loss. The Court finds no basis to conclude that Samsung
Construction was negligent in the safekeeping of its checks. For one, the
settled rule is that the mere fact that the depositor leaves his check book
lying around does not constitute such negligence as will free the bank from
liability to him, where a clerk of the depositor or other persons, taking
advantage of the opportunity, abstract some of the check blanks, forges the
depositor's signature and collect on the checks from the bank. 62 And for
another, in point of fact Samsung Construction was not negligent at all since
it reported the forgery almost immediately upon discovery. 63

It is also worth noting that the forged signatures in PNB v. National City
Bank of New York were not of the drawer, but of indorsers. The same
circumstance attends PNB v. Court of Appeals, 64 which was also cited by the
Court of Appeals. It is accepted that a forged signature of the drawer differs
in treatment than a forged signature of the indorser.

The justification for the distinction between forgery of the signature of the
drawer and forgery of an indorsement is that the drawee is in a position to
verify the drawer's signature by comparison with one in his hands, but has
ordinarily no opportunity to verify an indorsement. 65

Thus, a drawee bank is generally liable to its depositor in paying a check

which bears either a forgery of the drawer's signature or a forged
indorsement. But the bank may, as a general rule, recover back the money
which it has paid on a check bearing a forged indorsement, whereas it has
not this right to the same extent with reference to a check bearing a forgery
of the drawer's signature.66

The general rule imputing liability on the drawee who paid out on the forgery
holds in this case.

Since FEBTC puts into issue the degree of care it exercised before paying out
on the forged check, we might as well comment on the bank's performance
of its duty. It might be so that the bank complied with its own internal rules
prior to paying out on the questionable check. Yet, there are several
troubling circumstances that lead us to believe that the bank itself was
remiss in its duty.

The fact that the check was made out in the amount of nearly one million
pesos is unusual enough to require a higher degree of caution on the part of
the bank. Indeed, FEBTC confirms this through its own internal procedures.
Checks below twenty-five thousand pesos require only the approval of the
teller; those between twenty-five thousand to one hundred thousand pesos
necessitate the approval of one bank officer; and should the amount exceed
one hundred thousand pesos, the concurrence of two bank officers is
required.67

In this case, not only did the amount in the check nearly total one million
pesos, it was also payable to cash. That latter circumstance should have
aroused the suspicion of the bank, as it is not ordinary business practice for
a check for such large amount to be made payable to cash or to bearer,
instead of to the order of a specified person.68 Moreover, the check was
presented for payment by one Roberto Gonzaga, who was not designated as
the payee of the check, and who did not carry with him any written proof
that he was authorized by Samsung Construction to encash the check.
Gonzaga, a stranger to FEBTC, was not even an employee of Samsung
Construction.69 These circumstances are already suspicious if taken
independently, much more so if they are evaluated in concurrence. Given
the shadiness attending Gonzaga's presentment of the check, it was not
sufficient for FEBTC to have merely complied with its internal procedures,
but mandatory that all earnest efforts be undertaken to ensure the validity
of the check, and of the authority of Gonzaga to collect payment therefor.

According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried,
but failed, to contact Jong over the phone to verify the check. 70 She added
that calling the issuer or drawer of the check to verify the same was not part
of the standard procedure of the bank, but an "extra effort." 71 Even
assuming that such personal verification is tantamount to extraordinary
diligence, it cannot be denied that FEBTC still paid out the check despite the
absence of any proof of verification from the drawer. Instead, the bank
seems to have relied heavily on the say-so of Sempio, who was present at
the bank at the time the check was presented.

FEBTC alleges that Sempio was well-known to the bank officers, as he had
regularly transacted with the bank in behalf of Samsung Construction. It was
even claimed that everytime FEBTC would contact Jong about problems with
his account, Jong would hand the phone over to Sempio. 72 However, the only
proof of such allegations is the testimony of Gemma Velez, who also testified
that she did not know Sempio personally,73 and had met Sempio for the first
time only on the day the check was encashed.74 In fact, Velez had to inquire
with the other officers of the bank as to whether Sempio was actually known
to the employees of the bank.75 Obviously, Velez had no personal knowledge
as to the past relationship between FEBTC and Sempio, and any averments
of her to that effect should be deemed hearsay evidence. Interestingly,
FEBTC did not present as a witness any other employee of their Bel-Air
branch, including those who supposedly had transacted with Sempio before.

Even assuming that FEBTC had a standing habit of dealing with Sempio,
acting in behalf of Samsung Construction, the irregular circumstances
attending the presentment of the forged check should have put the bank on
the highest degree of alert. The Court recently emphasized that the highest
degree of care and diligence is required of banks.

Banks are engaged in a business impressed with public interest, and it is

their duty to protect in return their many clients and depositors who transact
business with them. They have the obligation to treat their client's account
meticulously and with the highest degree of care, considering the fiduciary
nature of their relationship. The diligence required of banks, therefore, is
more than that of a good father of a family.76

Given the circumstances, extraordinary diligence dictates that FEBTC should

have ascertained from Jong personally that the signature in the questionable
check was his.

Still, even if the bank performed with utmost diligence, the drawer whose
signature was forged may still recover from the bank as long as he or she is
not precluded from setting up the defense of forgery. After all, Section 23 of
the Negotiable Instruments Law plainly states that no right to enforce the
payment of a check can arise out of a forged signature. Since the drawer,
Samsung Construction, is not precluded by negligence from setting up the
forgery, the general rule should apply. Consequently, if a bank pays a forged
check, it must be considered as paying out of its funds and cannot charge
the amount so paid to the account of the depositor. 77 A bank is liable,
irrespective of its good faith, in paying a forged check. 78

WHEREFORE, the Petition is GRANTED. The Decision of the Court of

Appeals dated 28 November 1996 is REVERSED, and the Decision of the
Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is
REINSTATED. Costs against respondent.

SO ORDERED.
CASE #91 PNB vs Quimpo 158 SCRA 582 (1988)

[G.R. No. L-53194. March 14, 1988.]

PHILIPPINE NATIONAL BANK, Petitioner, v. HON. ROMULO S.

QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch
XIV, and FRANCISCO S. GOZON II, Respondents.

SYLLABUS

1. MERCANTILE LAW; NEGOTIABLE INSTRUMENTS; CHECKS; BANK’S PRIME

DUTY IS TO ASCERTAIN GENUINENESS OF SIGNATURE OF DRAWER OR
DEPOSITOR. — The prime duty of a bank is to ascertain the genuineness of
the signature of the drawer or the depositor on the check being encashed. It
is expected to use reasonable business prudence in accepting and cashing a
check presented to it.

2. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACTS OF THE TRIAL COURT,

CONCLUSIVE. — In this case the findings of facts of the court a quo are
conclusive. The trial court found that a comparison of the signature on the
forged check and the sample signatures of private respondent show marked
differences as the graceful lines in the sample signature which is completely
different from those of the signature on the forged check. Indeed the NBI
handwriting expert Estelita Santiago Agnes whom the trial court considered
to be an "unbiased scientific expert" indicated the marked differences
between the signature of private respondent on the sample signatures and
the questioned signature. Notwithstanding the testimony of Col. Fernandez,
witness for petitioner, advancing the opinion that the questioned signature
appears to be genuine, the trial court by merely examining the pictorial
report presented by said witness, found a marked difference in the second
"c" in Francisco as written on the questioned signature as compared to the
sample signatures, and the separation between the "s" and the "c" in the
questioned signature while they are connected in the sample signatures.
Obviously, petitioner was negligent in encashing said forged check without
carefully examining the signature which shows marked variation from the
genuine signature of private Respondent.

3. MERCANTILE LAW; NEGOTIABLE INSTRUMENTS; CHECKS; NEGLIGENCE

ON THE PART OF THE DRAWER TO ABSOLVE BANK FROM LIABILITY ON
FORGED CHECK, ABSENT. — In reference to the allegation of the petitioner
that it is the negligence of private respondent that is the cause of the loss
which he suffered, the trial court held otherwise. Private respondent trusted
Ernesto Santos as a classmate and a friend. He brought him along in his car
to the bank and he left his personal belongings in the car. Santos however
removed and stole a check from his check book without the knowledge and
consent of private Respondent. No doubt private respondent cannot be
considered negligent under the circumstances of the case.

DECISION

GANCAYCO, J.:

On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan
City Branch of the Philippine National Bank, went to the bank in his car
accompanied by his friend Ernesto Santos whom he left in the car while he
transacted business in the bank. When Santos saw that Gozon left his check
book he took a check therefrom, filled it up for the amount of P5,000.00,
forged the signature of Gozon, and thereafter he encashed the check in the
bank on the same day. The account of Gozon was debited the said amount.
Upon receipt of the statement of account from the bank, Gozon asked that
the said amount of P5,000.00 should be returned to his account as his
signature on the check was forged but the bank refused.

Upon complaint of private respondent on February 1, 1974 Ernesto Santos

was apprehended by the police authorities and upon investigation he
admitted that he stole the check of Gozon, forged his signature and
encashed the same with the Bank.

Hence Gozon filed the complaint for recovery of the amount of P5,000.00,
plus interest, damages, attorney’s fees and costs against the bank in the
Court of First Instance of Rizal. After the issues were joined and the trial on
the merits ensued, a decision was rendered on February 4, 1980, the
dispositive part of which reads as follows:jgc:chanrobles.com.ph

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The

defendant is hereby condemned to return to plaintiff the amount of
P5,000.00 which it had unlawfully withheld from the latter, with interest at
the legal rate from September 22, 1972 until the amount is fully delivered.
The defendant is further condemned to pay plaintiff the sum of P2,000.00 as
attorney’s fees and to pay the costs of this suit."cralaw virtua1aw library

Not satisfied therewith, the bank now filed this petition for review
on certiorari in this Court raising the sole legal issue that —

"THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS

CHECKBOOK CONTAINING THE CHECK IN QUESTION INTO THE HANDS OF
ERNESTO SANTOS WAS INDEED THE PROXIMATE CAUSE OF THE LOSS,
THEREBY PRECLUDING HIM FROM SETTING UP THE DEFENSE OF FORGERY
OR WANT OF AUTHORITY UNDER SECTION 23 OF THE NEGOTIABLE
INSTRUMENTS LAW, ACT NO. 3201"

The petition is devoid of merit.

This Court reproduces with approval the disquisition of the court a quo as
follows:jgc:chanrobles.com.ph

"A bank is bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of its own
funds, and cannot ordinarily change the amount so paid to the account of
the depositor whose name was forged’ (San Carlos Milling Co. v. Bank of the
P.I., 59 Phil. 59).

This rule is absolutely necessary to the circulation of drafts and checks, and
is based upon the presumed negligence of the drawee in failing to meet its
obligation to know the signature of its correspondent. . . . There is nothing
inequitable in such a rule. If the paper comes to the drawee in the regular
course of business, and he, having the opportunity ascertaining its
character, pronounces it to be valid and pays it, it is not only a question of
payment under mistake, but payment in neglect of duty which the
commercial law places upon him, and the result of his negligence must rest
upon him’ (12 ALR, 1901, citing many cases found in I Agbayani, supra).

Defendant, however, interposed the defense that it exercised diligence in

accordance with the accepted norms of banking practice when it accepted
and paid Exhibit ‘A’. It presented evidence that the check had to pass
scrutiny by a signature verifier as well as an officer of the bank.

A comparison of the signature (Exhibit ‘A-1’) on the forged check (Exhibit

‘A’) with plaintiff’s exemplar signatures (Exhibits ‘5-A’ and ‘5-B)found in the
PNB Form 35-A would immediately show the negligence of the employees of
the defendant bank. Even a not too careful comparison would immediately
arrest one’s attention and direct it to the graceful lines of plaintiff s exemplar
signatures found in Exhibits ‘5-A’ and ‘5-B’. The formation of the first letter
‘F’ in the exemplars, which could be regarded as artistic, is completely
different from the way the same letter is formed in Exhibit ‘A-1’. That alone
should have alerted a more careful and prudent signature verifier."cralaw
virtua1aw library

The prime duty of a bank is to ascertain the genuineness of the signature of

the drawer or the depositor on the check being encashed. 1 It is expected to
use reasonable business prudence in accepting and cashing a check
presented to it.

In this case the findings of facts of the court a quo are conclusive. The trial
court found that a comparison of the signature on the forged check and the
sample signatures of private respondent show marked differences as the
graceful lines in the sample signature which is completely different from
those of the signature on the forged check. Indeed the NBI handwriting
expert Estelita Santiago Agnes whom the trial court considered to be an
"unbiased scientific expert" indicated the marked differences between the
signature of private respondent on the sample signatures and the questioned
signature. Notwithstanding the testimony of Col. Fernandez, witness for
petitioner, advancing the opinion that the questioned signature appears to
be genuine, the trial court by merely examining the pictorial report
presented by said witness, found a marked difference in the second "c" in
Francisco as written on the questioned signature as compared to the sample
signatures, and the separation between the "s" and the "c" in the questioned
signature while they are connected in the sample signatures. 2

Obviously, petitioner was negligent in encashing said forged check without

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

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

private respondent that is the cause of the loss which he suffered, the trial
court held:jgc:chanrobles.com.ph

"The act of plaintiff in leaving his checkbook in the car while he went out for
a short while can not be considered negligence sufficient to excuse the
defendant bank from its own negligence. It should be borne in mind that
when defendant left his car, Ernesto Santos, a long time classmate and
friend remained in the same. Defendant could not have been expected to
know that the said Ernesto Santos would remove a check from his
checkbook. Defendant had trust in his classmate and friend. He had no
reason to suspect that the latter would breach that trust."cralaw virtua1aw
library
We agree.

Private respondent trustee Ernesto Santos as a classmate and a friend. He

brought him along in his car to the bank and he left his personal belongings
in the car. Santos however removed and stole a check from his check book
without the knowledge and consent of private Respondent. No doubt private
respondent cannot be considered negligent under the circumstances of the
case.

WHEREFORE, the petition is DISMISSED for lack of merit with costs against
petitioner.

SO ORDERED.
CASE #92 Calinog vs PNB 51 OG 4104
CASE #93 PNB vs Manila Oil Refining & By-Products CO. 43 Phil 444

[G.R. No. L-18103. June 8, 1922. ]

PHILIPPINE NATIONAL BANK, Plaintiff-Appellee, v. MANILA OIL

REFINING & BY-PRODUCTS COMPANY, INC., Defendant-Appellant.

Antonio Gonzalez for Appellant.

Roman J. Lacson for Appellee.

Hartigan & Welch; Fisher & DeWitt; Perkins & Kincaid; Gibbs,
McDonough & Johnson; Julian Wolfson; Ross & Lawrence; Francis B.
Mahoney, and Jose A. Espiritu, amici curiae.

SYLLABUS

1. JUDGMENTS; JUDGMENTS BY CONFESSION; ORIGIN. — The practice of

entering judgments in debt on warrants of attorney is ancient origin.

2. ID.; ID.; COMMON LAW PRACTICE. — In the course of time a warrant of

attorney to confess judgment became a familiar common law security.

3. ID.; ID.; KINDS. — At common law, there were two kinds of judgments
by confession; the one a judgment by cognovit actionem, and the other by
confession relicta verificatione.

4. ID.; ID.; ADVANTAGES. — Judgments by confession as appeared at

common law were considered an amicable, easy, and cheap way settle and
secure debts.

5. ID.; ID.; DISADVANTAGES. — The recognition of such a form of obligation

would bring about a complete reorganization of commercial customs and
practices, with reference to short-term obligations. Instead of resulting to
the advantage of commercial life in the Philippines, judgment notes might be
the source of abuse and oppression, and make the involuntary parties
thereto.

6. ID.; ID.; VALIDITY OF; IN THE UNITED STATES. — A number of

jurisdictions in the United States have accepted the common law view of
judgment by confession, while still other jurisdictions have refused to
sanction them.

7. ID.; ID.; ID.; ID. — In the absence of statute, there is a conflict of

authority as to the validity of a warrant of attorney for the confession of
judgment. The weight of opinion is that unless authorized by statute,
warrants of attorney to confess judgment are void, as against public policy.

8. ID.; ID.; ID.; IN THE PHILIPPINE ISLANDS; STATUTORY PROVISIONS. —

Neither the Code of Civil Procedure nor any other remedial statute expressly
or tacitly recognizes a confession of judgment commonly called a judgment
note.

9. ID.; ID.; ID.; ID.; ID.; RIGHT TO A DAY IN COURT. — The provisions of
the Code of Civil Procedure, in relation to constitutional safeguards relating
to the right to take a man’s property only after a day in court and after due
process of law, contemplate that all defendants shall have opportunity to be
heard.

10. ID.; ID.; ID.; ID.; ID.; COUNTERCLAIMS. — The provisions of the Code
of Civil Procedure pertaining to counterclaims argue against judgment notes,
especially as the Code provides that in case the defendant or his assignee
omits to set up a counterclaim, he cannot afterwards maintain an action
against the plaintiff therefor.

11. ID.; ID.; ID.; ID.; ID.; ARTICLE 1256, CIVIL CODE. — At least one
provision of the substantive law, namely, that the validity and fulfillment of
contracts cannot be left to the will of one of the contracting parties (Civil
Code, art. 1256), constitutes another indication of fundamental legal
purpose.

12. ID.; ID.; ID.; ID.; ID.; NEGOTIABLE INSTRUMENTS LAW (ACT No.
2031), SECTION 5 (b) OF negotiable Instrument otherwise negotiable is not
affected by a provision which authorizes a confession of judgment if the
instrument be not paid at maturity, cannot be taken to sanction judgments
by confession.

13. ID.; ID.; ID.; ID. — Warrants of attorney to confess judgment are void
as against public policy, because they enlarge the field for fraud, because
under these instruments the promissor bargains away his right to a day in
court, and because the effect of the instrument is to strike down the right of
appeal accorded by statute.

14. ID.; ID.; ID.; ID. — Warrants of attorney to confess judgment are not
authorized nor contemplated by our law.
15. BILLS AND NOTES; JUDGMENT NOTE, VALIDITY OF. — In the absence of
express legislative sanction, provisions in notes authorizing attorneys to
appear and confess judgments against makers should not be recognized in
this jurisdiction by implication.

16. ID.; ID. — A provision in a promissory note whereby in case the same is
not paid at maturity, the maker authorizes any attorney to appear and
confess judgment thereon for the principal amount, with interest, costs, and
attorney’s fees, and waives all errors, rights to inquisition, and appeal, and
all property exemptions, is not valid in this jurisdiction.

DECISION

MALCOLM, J.:

The question of first impression raised in this case concerns the validity in
this jurisdiction of a provision in a promissory note whereby in case the
same is not paid at maturity, the maker authorizes any attorney to appear
and confess judgment thereon for the principal amount, with interest, costs,
and attorney’s fees, and waives all errors, rights to inquisition, and appeal,
and all property exemptions.

On May 8, 1920, the manager and the treasurer of the Manila Oil Refining &
By-Products Company, Inc,. executed and delivered to the Philippine
National Bank, a written instrument reading as
follows:jgc:chanrobles.com.ph

"RENEWAL.

"P61,000.00

"MANILA, P.I., May 8, 1920.

"On demand after date we promise to pay to the order of the Philippine
National Bank sixty-one thousand only pesos at Philippine National Bank,
Manila, P.I.

"Without defalcation, value received; and do hereby authorize any attorney

in the Philippine Islands, in case this note be not paid at maturity, to appear
in my name and confess judgment for the above sum with interest, cost of
suit and attorney’s fees of ten (10) per cent for collection, a release of all
errors and waiver of all rights to inquisition and appeal, and to the benefit of
all laws exempting property, real or personal, from levy or sale. Value
received. No. —— Due ——

"MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) "VICENTE SOTELO,

"Manager.

"MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) "RAFAEL LOPEZ.

"Treasurer."cralaw virtua1aw library

The Manila Oil Refining & By-Products Company, Inc. failed to pay the
promissory note on demand. The Philippine National Bank brought action in
the Court of First Instance of Manila, to recover P61,000, the amount of the
note, together with interest and costs. Mr. Elias N. Recto, an attorney
associated with the Philippine National Bank, entered his appearance in
representation of the defendant, and filed a motion confessing judgment.
The defendant, however, in a sworn declaration, objected strongly to the
unsolicited representation of attorney Rect. Later, attorney Antonio Gonzalez
appeared for the defendant and filed a demurrer, and when this was
overruled, presented an answer. The trial judge rendered judgment on the
motion of attorney Recto in the terms of the complaint.

The foregoing facts, and appellant’s three assignments of error, raise

squarely the question which was suggested in the beginning of this opinion.
In view of the importance of the subject to the business community, the
advice of prominent attorneys-at-law with banking connections, was
solicited. These members of the bar responded promptly to the request of
the court, and their memoranda have proved highly useful in the solution of
the question. It is to the credit of the bar that although the sanction of
judgment notes in the Philippines might prove of immediate value to clients,
every one of the attorneys has looked upon the matter in a big way, with the
result that out of their independent investigations has come a practically
unanimous protest against the recognition in this jurisdiction of judgment
notes. 1

Neither the Code of Civil Procedure nor any other remedial statute expressly
or tacitly recognizes a confession of judgment commonly called a judgment
note. On the contrary, the provisions of the Code of Civil Procedure, in a
relation to constitutional safeguards relating to the right to take a man’s
property only after a day in court and after due process of law, contemplate
that all defendants shall have an opportunity to be heard. Further, the
provisions of the Code of Civil Procedure pertaining to counterclaims argue
against judgment notes, especially as the Code provides that in case the
defendant or his assignee omits to set up a counterclaim, he cannot
afterwards maintain an action against the plaintiff therefor. (Secs. 95, 96,
97.) At least one provision of the substantive law, namely, that the validity
and fulfillment of contracts cannot be left to the will of one of the contracting
parties (Civil Code, art. 1256), constitutes another indication of fundamental
legal purpose.

The attorney for the appellee contends that the Negotiable Instruments Law
(Act No. 2031) expressly recognized judgment notes, and that they are
enforcible under the regular procedure. The Negotiable Instruments Law, in
section 5, provides that "The negotiable character of an instrument
otherwise negotiable is not affected by a provision which." . . (b) Authorizes
confession of judgment if the instrument be not paid at maturity.’ We do not
believe, however, that this provision of law can be taken to sanction
judgments by confession, because it is a portion of a uniform law which
merely provides that, in jurisdictions where judgments notes are recognized,
such clauses shall not affect the negotiable character of the instrument.
Moreover, the same section of the Negotiable Instruments Law concludes
with these words: "But nothing in this section shall validate any provision or
stipulation otherwise illegal."cralaw virtua1aw library

The court is thus put in the position of having to determine the validity in the
absence of statute of a provision in a note authorizing an attorney to appear
and confess judgment against the maker. This situation, in reality, has its
advantages for it permits us to reach that solution which is best grounded in
the solid principles of the law, and which will best advance the public
interest.

The practice of entering judgments in debt on warrants of attorney is of

ancient origin. In the course of time a warrant of attorney to confess
judgment became a familiar common law security. At common law, there
were two kinds of judgments by confession; the one a judgment by cognovit
actionem, and the other by confession relicta verificatione. A number of
jurisdictions in the United States have accepted the common law view of
judgments by confession, while still other jurisdictions have refused to
sanction them. In some States, statutes have been passed which have either
expressly authorized confession of judgment on warrant of attorney, without
antecedent process, or have forbidden judgments of this character. In the
absence of statute, there is a conflict of authority as to the validity of a
warrant of attorney for the confession of judgment. The weight of opinion is
that, unless authorized by statute, warrants of attorney to confess judgment
are void, as against public policy.

Possibly the leading case on the subject is First National Bank of Kansas City
v. White [(1909], 220 Mo., 717; 16 Ann. Cas., 889; 120 S. W., 36; 132 Am.
St. Rep., 612). The record in this case discloses that on October 4, 1900, the
defendant executed and delivered to the plaintiff an obligation in which the
defendant authorized any attorney-at-law to appear for him in an action on
the note at any time after the note became due in any court of record in the
State of Missouri, or elsewhere, to waive the issuing and service of process,
and to confess judgment in favor of the First National Bank of Kansas City
for the amount that might then be due thereon, with interest at the rate
therein mentioned and the costs of suit, together with an attorney’s fee of
10 per cent and also to waive and release all errors in said proceedings and
judgment, and all proceedings, appeals, or writs of error thereon. Plaintiff
filed a petition in the Circuit Court to which was attached the above-
mentioned instrument. An attorney named Denham appeared pursuant to
the authority given by the note sued on, entered the appearance of the
defendant, and consented that judgment be rendered in favor of the plaintiff
as prayed in the petition. After the Circuit Court had entered a judgment,
the defendant, through counsel, appeared specially and filed a motion to set
it aside. The Supreme Court of Missouri, speaking through Mr. Justice
Graves, in part said:jgc:chanrobles.com.ph

"But going beyond the mere technical question in our preceding paragraph
discussed, we come to a question urged which goes to the very root of this
case, and whilst new and novel in this state, we do not fell that the cause
should be disposed of without discussing and passing upon that question.

x       x       x

"And if this instrument be considered as a security for a debt, as it was by

the common law, it has never so found recognition in this state. The policy
of our law has been against such hidden securities for debt. Our Recorder’s
Act is such that instruments intended as security for debt should find a place
in the public records, and if not, they have often been viewed with suspicion,
and their bona fides often questioned.

"Nor do we think that the policy of our law is such as to thus place a debtor
in the absolute power of his creditor. The field for fraud is too far enlarged
by such an instrument. Oppression and tyranny would follow the footsteps of
such a diversion in the way of security for debt. Such instruments procured
by duress could shortly be placed in judgment in a foreign court and much
distress result therefrom.

"Again, under the law the right to appeal to this court or some other
appellate court is granted to all persons against whom an adverse judgment
is rendered, and this statutory right is by the instrument stricken down. True
it is that such right is not claimed in this case, but it is a part of the bond
and we hardly know why this pound of flesh has not been demanded. Courts
guard with jealous eye any contract innovations upon their jurisdiction. The
instrument before us, considered in the light of a contract, actually reduces
the courts to mere clerks to enter and record the judgment called for
therein. By our statute (Rev. St. 1899, sec. 645) a party to a written
instrument of this character has the right to show a failure of consideration,
but this right is brushed to the wind by this instrument and the jurisdiction
of the court to hear that controversy is by the contract divested. In 9 Cyc.,
510, it is said: ’Agreements whose object is to oust the jurisdiction of the
courts are contrary to public policy and will not be enforced. Thus it is held
that any stipulation between parties to a contract distinguishing between the
different courts of the country is contrary to public policy. The principle has
also been applied to a stipulation in a contract that a party who breaks it
may not be sued, to an agreement designating a person to be sued for its
breach who is nowise liable and prohibiting action against any but him, to a
provision in a lease that the landlord shall have the right to take immediate
judgment against the tenant in case of a default on his part, without giving
the notice and demand for possession and filing the complaint required by
stature, to a by-law of a benefit association that the decisions of its officers
on a claim shall be final and conclusive, and to many other agreements of a
similar tendency. In some courts, any agreement as to the time for suing
different from the time allowed by the statute of limitations within which suit
shall be brought or the right to sue be barred is held void.’

x       x       x

"We shall not pursue this question further. This contract, in so far as it goes
beyond the usual provisions of a note, is void as against the public policy of
the state, as such public policy is found expressed in our laws and decisions.
Such agreements are iniquitous to the uttermost and should be promptly
condemned by the courts, until such time as they may receive express
statutory recognition, as they have in some states.

x       x       x
"From what has been said, it follows that the Circuit Court never had
jurisdiction of the defendant, and the judgment is reversed."cralaw
virtua1aw library

The case of Farquhar & Co. v. Dehaven ([1912], 70 W. Va., 738; 40 L. R. A.

[N. S. ], 956; 75 S. E., 65; Ann. Cas. [1914--A], is another well-considered
authority. The notes referred to in the record contained waiver of
presentment and protest, homestead and exemption rights real and
personal, and other rights, and also the following material provision:" ’And
we do hereby empower and authorize the said A. B. Farquhar Co. Limited, or
agent, or any prothonotary or attorney of any Court of Record to appear for
us and in our name to confess judgment against us and in favor of said A. B.
Farquhar Co., Limited, for the above named sum with costs of suit and
release of all errors and without stay of execution after the maturity of this
note." ’The Supreme Court of West Virginia, on consideration of validity of
the judgment note above described, speaking through Mr. Justice Miller, in
part said:jgc:chanrobles.com.ph

"As both sides agree the question presented is one of first impression in this
State. We have no Statute, as has Pennsylvania and many other states,
regulating the subject. In the decision we are called upon to render, we
must law, in force here, and to our statute law, applicable, and to such
judicial decisions and practices in Virginia, in force at the time of the
separation, as are properly binding on us. It is pertinent to remark in this
connection, that after nearly fifty years of judicial history in this State no
case has been brought here involving this question, strong evidence, we
think, that such notes, if at all, have never been in very general use in this
commonwealth. And in most states where they are current the use of them
has grown up under statutes authorizing them, and regulating the practice of
employing them in commercial transactions.

x       x       x

"It is contended, however, that the old legal maxim, qui facit per alium, facit
per se, is as applicable here as in other cases. We do not think so. Strong
reasons exist, as we have shown, for denying its application, when holders
of contracts of this character seek the aid of the courts and of their
execution process them, defendant having had no day in court or
opportunity to be heard. We need not say in this case that a debtor may not,
by proper power of attorney duly executed, authorize another to appear in
court, and by proper endorsement upon the writ waive service of process,
and confess judgment. But we do not wish to be understood as approving or
intending to countenance the practice of employing in this state commercial
paper of the character here involved. Such paper has heretofore had little if
any currency here. If the practice is adopted into this state it ought to be,
we think, by act of the Legislature, with all proper safeguards thrown around
it, to prevent fraud and imposition. The policy of our law is, that no man
shall suffer judgment at the hands of our courts without proper process and
a day to be heard. To give currency to such paper by judicial pronouncement
would be to open the door to fraud and imposition, and subject the people to
wrongs and injuries not heretofore contemplated. This we are unwilling to
do."cralaw virtua1aw library

A case typical of those authorities which lend support to judgment notes is

First National Bank of Las Cruces v. Baker ([1919], 180 Pac., 291). The
Supreme Court of New Mexico, in a per curiam decision, in part,
said:jgc:chanrobles.com.ph

"In some of the states the judgments upon warrants of attorney are
condemned as being against public policy. (Farquhar & Co. v. Dehaven, 70
W. Va., 738; 75 S. E., 65; 40 L. R. A. [N. S. ], 956; Ann. Cas. [1914 A],
640, and First National Bank of Kansas City v. White, 220 Mo., 717; 120 S.
W., 35; 132 Am. St. Rep., 612; 16 Ann. Cas., 889, are examples of such
holding.) By just what course of reasoning it can be said by the courts that
such judgments are against public policy we are unable to understand. It
was a practice from time immemorial at common law, and the common law
comes down to us sanctioned as justified by the reason and experience of
English-speaking people. If conditions have arisen in this country which
make the application of the common law undesirable, it is for the Legislature
to so announce, and to prohibit the taking of judgments of this kind. Until
the Legislature has spoken along that line, we know of no theory upon which
such judgments can be declared as against the public policy of the state. We
are aware that the argument against them is that they enable the
unconscionable credit to take advantage of the necessities of the poor debtor
and cut him off from his ordinary day in court. On the other hand, it may be
said in their favor that it frequently enables a debtor to obtain money which
he could by no possibility otherwise obtain. It strengthens his credit, and
may be most highly beneficial to him at times. In some of the states these
judgments have been condemned by statute and of course in that case are
not allowed.

"Our conclusion in this case is that a warrant of attorney given as security to

a creditor accompanying a promissory note confers a valid power, and
authorizes a confession of judgments in any court of competent jurisdiction
in an action to be brought upon said note; that our cognovit statute does not
cover the same field as that occupied by the common-law practice of taking
judgments upon warrant of attorney, and does not impliedly or otherwise
abrogate such practice; and that the practice of taking judgments upon
warrant of attorney, and does not impliedly or otherwise abrogate such
practice; and that the practice of taking judgments upon warrants of
attorney as it was pursued in this case is not against any public policy of the
state, as declared by its laws."cralaw virtua1aw library

With reference to the conclusiveness of the decision here mentioned, it may

be said that they are based on the practice of the English-American common
law, and that the doctrines of the common law are binding upon Philippine
courts only in so far as they are founded on sound principles applicable to
local conditions.

Judgments by confession as appeared at common law were considered an

amicable, easy, and cheap way to settle and secure debts. They are quick
remedy serve to save the court’s time. Time also save time and money of
the litigants and the government the expenses that a long litigation entails.
In one sense, instruments of this character may be considered as special
agreements, with power to enter up judgments on them, binding the parties
to the result as they themselves viewed it.

On the other hand, are disadvantages to the commercial world which

outweigh the considerations just mentioned. Such warrants of attorney are
void as against public policy, because they enlarge the field for fraud,
because under these instruments the promissor bargains away his right to a
day in court, and because the effect of the instrument is to strike down the
right of appeal accorded by statute. The recognition of such form of
obligation would bring about a complete reorganization of commercial
customs and practices, with reference to short-term obligations. It can
readily be seen that judgment notes, instead of resulting to the advantage of
commercial life the Philippines might be the source of abuse and oppression,
and make the courts involuntary parties thereto. If the bank has a
meritorious case, the judgment is ultimately certain in the courts.

We are of the opinion that warrants of attorney to confess judgment are not
authorized nor contemplated by our law. We are further of the opinion that
provisions in notes authorizing attorneys to appear and confess judgments
against makers should not be recognized in this jurisdiction by implication
and should only be considered as valid when given express legislative
sanction.

The judgment appealed from is set aside, and the case is remanded to the
lower court for further proceedings in accordance with this decision. Without
special finding as to costs in this instance, it is so ordered.
CASE #94 Metropolitan Waterworks vs CA 143 SCRA 20 (1986)

[G.R. No. L-62943. July 14, 1986.]

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, Petitioner,

v. COURT OF APPEALS (Now INTERMEDIATE APPELLATE COURT) and
THE PHILIPPINE NATIONAL BANK, Respondents.

Juan J. Diaz and Cesar T. Basa for respondent PNB.

San Juan, Africa, Gonzales & San Agustin Law Offices for respondent
PCIB.

DECISION

GUTIERREZ, JR., J.:

This petition for review asks us to set aside the October 29, 1982 decision of
the respondent Court of Appeals, now Intermediate Appellate Court which
reversed the decision of the Court of First Instance of Manila, Branch XL, and
dismissed the plaintiff’s complaint, the third party complaint, as well as the
defendant’s counterclaim.

The background facts which led to the filing of the instant petition are
summarized in the decision of the respondent Court of
Appeals:jgc:chanrobles.com.ph

"Metropolitan Waterworks and Sewerage System (hereinafter referred to as

MWSS) is a government owned and controlled corporation created under
Republic Act No. 6234 as the successor-in-interest of the defunct NWSA. The
Philippine National Bank (PNB for short), on the other hand, is the depository
bank of MWSS and its predecessor-in-interest NWSA. Among the several
accounts of NWSA with PNB is NWSA Account No. 6, otherwise known as
Account No. 381-777 and which is presently allocated No. 010-500281. The
authorized signature for said Account No. 6 were those of MWSS treasurer
Jose Sanchez, its auditor Pedro Aguilar, and its acting General Manager
Victor L. Recio. Their respective specimen signatures were submitted by the
MWSS to and on file with the PNB. By special arrangement with the PNB, the
MWSS used personalized checks in drawing from this account. These checks
were printed for MWSS by its printer, F. Mesina Enterprises, located at 1775
Rizal Extension, Caloocan City.

"During the months of March, April and May 1969, twenty-three (23) checks
were prepared, processed, issued and released by NWSA, all of which were
paid and cleared by PNB and debited by PNB against NWSA Account No. 6,
to wit:jgc:chanrobles.com.ph

"Check No. Date Payee Amount Date Paid

By PNB

1. 59546 8-21-69 Deogracias Estrella P3,187.79 4-2-69

2. 59548 3-31-69 Natividad Rosario 2,848.86 4-23-69

3. 59547 3-31-69 Pangilinan Enterprises 195.00 Unreleased

4. 59549 3-31-69 Natividad Rosario 3,239.88 4-23-69

5. 59552 4-1-69 Villarama & Sons 987.59 5-6-69

6. 59554 4-1-69 Gascom Engineering 6,057.60 4-16-69

7. 59558 4-2-69 The Evening News 112.00 Unreleased

8. 59544 3-27-69 Progressive Const. 18,391.20 4-18-69

9. 59564 4-2-69 Ind. Insp. Int. Inc. 594.06 4-18-69

10. 59568 4-7-69 Roberto Marsan 800.00 4-22-69

11. 59570 4-7-69 Paz Andres 200.00 4-22-69

12. 59574 4-8-69 Florentino Santos 100,000.00 4-11-69

13. 59578 4-8-69 Mla. Daily Bulletin 95.00 Unreleased

14. 59580 4-8-69 Phil. Herald 100.00 5-9-69

15. 59582 4-8-69 Galauran & Pilar 7,729.09 5-6-69

16. 59581 4-8-69 Manila Chronicle 110.00 5-12-69

17. 59588 4-8-69 Treago Tunnel 21,583.00 4-11-69

18. 59587 4-8-69 Delfin Santiago 120,000.00 4-11-69

19. 59589 4-10-69 Deogracias Estrella 1,257.49 4-16-69

20. 59594 4-14-69 Philam Accident Inc. 33.03 4-29-69

21. 59577 4-8-69 Esla 9,429.78 4-29-69

22. 59601 4-16-69 Justino Torres 20,000.00 4-18-69

23. 59595 4-14-69 Neris Phil. Inc. 4,274.00 5-20-69

————

P320,636.26"

"During the same months of March, April and May 1969, twenty-three (23)
checks bearing the same numbers as the aforementioned NWSA checks were
likewise paid and cleared by PNB and debited against NWSA Account No. 6,
to wit:jgc:chanrobles.com.ph

"Check Date Payee Amount Date Paid

No. Issued By PNB

1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69

2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69

3. 59547 3-14-69 Arturo Sison 56,903.00 4-1169

4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69

5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-69

6. 59544 3-26-69 Arturo Sison 98,450.00 4-17-69

7. 59558 3-28-69 Arturo Sison 114,840.00 4-21-69

8. 59544 3-16-69 Antonio Mendoza 38,490.00 4-22-69

9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69

10. 59568 4-2-69 Arturo Sison 134,940.00 4-25-69

11. 59570 4-1-69 Arturo Sison 64,550.00 4-28-69

12. 59574 4-2-69 Arturo Sison 148,610.00 4-29-69

13. 59578 4-10-69 Antonio Mendoza 93,950.00 4-29-69

14. 59580 4-8-69 Arturo Sison 160,000.00 5-2-69

15. 59582 4-10-69 Arturo Sison 155,400.00 5-5-69

16. 59581 4-8-69 Antonio Mendoza 176,580.00 5-6-69

17. 59588 4-16-69 Arturo Sison 176,000.00 5-8-69

18. 59587 4-16-69 Arturo Sison 300,000.00 5-12-69

19. 59589 4-18-69 Arturo Sison 122,000.00 5-14-69

20. 59594 4-18-69 Arturo Sison 280,000.00 5-15-69

21. 59577 4-14-69 Antonio Mendoza 260,000.00 5-16-69

22. 59601 4-18-69 Arturo Sison 400,000.00 5-19-69

23. 59595 4-28-69 Arturo Sison 190,800.00 5-21-69

————

P3,457,903.00

"The foregoing checks were deposited by the payees Raul Dizon, Arturo
Sison and Antonio Mendoza in their respective current accounts with the
Philippine Commercial and Industrial Bank (PCIB) and Philippine Bank of
Commerce (PBC) in the months of March, April and May 1969. Thru the
Central Bank Clearing, these checks were presented for payment by PBC and
PCIB to the defendant PNB, and paid, also in the months of March, April and
May 1969. At the time of their presentation to PNB these checks bear the
standard indorsement which reads ‘all prior indorsement and/or lack of
endorsement guaranteed.’

"Subsequent investigation however, conducted by the NBI showed that Raul

Dizon, Arturo Sison and Antonio Mendoza were all fictitious persons. The
respective balances in their current account with the PBC and/or PCIB stood
as follows: Raul Dizon P3,455.00 as of April 30, 1969; Antonio Mendoza
P18,182.00 as of May 23, 1969; and Arturo Sison P1,398.92 as of June 30,
1969.

"On June 11, 1969, NWSA addressed a letter to PNB requesting the
immediate restoration to its Account No. 6, of the total sum of
P3,457,903.00 corresponding to the total amount of these twenty-three (23)
checks claimed by NWSA to be forged and/or spurious checks.

"In view of the refusal of PNB to credit back to Account No. 6 the said total
sum of P3,457,903.00 MWSS filed the instant complaint on November 10,
1972 before the Court of First Instance of Manila and docketed thereat as
Civil Case No. 88950.

"In its answer, PNB contended among others, that the checks in question
were regular on its face in all respects, including the genuineness of the
signatures of authorized NWSA signing officers and there was nothing on its
face that could have aroused any suspicion as to its genuineness and due
execution and; that NWSA was guilty of negligence which was the proximate
cause of the loss.

"PNB also filed a third party complaint against the negotiating banks PBC
and PCIB on the ground that they failed to ascertain the identity of the
payees and their title to the checks which were deposited in the respective
new accounts of the payees with them."cralaw virtua1aw library

x       x       x

On February 6, 1976, the Court of First Instance of Manila rendered

judgment in favor of the MWSS. The dispositive portion of the decision
reads:jgc:chanrobles.com.ph

"WHEREFORE, on the COMPLAINT by a clear preponderance of evidence and

in accordance with Section 23 of the Negotiable Instruments Law, the Court
hereby renders judgment in favor of the plaintiff Metropolitan Waterworks
and Sewerage System (MWSS) by ordering the defendant Philippine National
Bank (PNB) to restore the total sum of THREE MILLION FOUR HUNDRED
FIFTY SEVEN THOUSAND NINE HUNDRED THREE PESOS (P3,457,903.00) to
plaintiff’s Account No. 6, otherwise known as Account No. 010-50030-3, with
legal interest thereon computed from the date of the filing of the complaint
and until as restored in the said Account No. 6.
"On the THIRD PARTY COMPLAINT, the Court, for lack of evidence, hereby
renders judgment in favor of the third party defendants Philippine Bank of
Commerce (PBC) and Philippine Commercial and Industrial Bank (PCIB) by
dismissing the Third Party Complaint.

"The counterclaims of the third party defendants are likewise dismissed for
lack of evidence.

"No pronouncement as to costs."cralaw virtua1aw library

As earlier stated, the respondent court reversed the decision of the Court of
First Instance of Manila and rendered judgment in favor of the respondent
Philippine National Bank.

A motion for reconsideration filed by the petitioner MWSS was denied by the
respondent court in a resolution dated January 3, 1983.

The petitioner now raises the following assignments of errors for the grant of
this petition:chanrob1es virtual 1aw library

I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS WERE

FORGED, THE DRAWEE BANK WAS LIABLE FOR THE LOSS UNDER SECTION
23 OF THE NEGOTIABLE INSTRUMENTS LAW.

II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF PNB IN

ACCEPTING THE SPURIOUS CHECKS DESPITE THE OBVIOUS IRREGULARITY
OF TWO SETS OF CHECKS BEARING IDENTICAL NUMBER BEING ENCASHED
WITHIN DAYS OF EACH OTHER.

III IN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE MWSS BEING
CLEARLY FORGED, AND THE CHECKS SPURIOUS, SAME ARE INOPERATIVE
AS AGAINST THE ALLEGED DRAWEE.

The appellate court applied Section 24 of the Negotiable Instruments Law

which provides:jgc:chanrobles.com.ph

"Every negotiable instrument is deemed prima facie to have been issued for
valuable consideration and every person whose signature appears thereon to
have become a party thereto for value."cralaw virtua1aw library

The petitioner submits that the above provision does not apply to the facts
of the instant case because the questioned checks were not those of the
MWSS and neither were they drawn by its authorized signatories. The
petitioner states that granting that Section 24 of the Negotiable Instruments
Law is applicable, the same creates only a prima facie presumption which
was overcome by the following documents, to wit: (1) the NBI Report of
November 2, 1970; (2) the NBI Report of November 21, 1974; (3) the NBI
Chemistry Report No. C-74-891; (4) the Memorandum of Mr. Juan Diño, 3rd
Assistant Auditor of the respondent drawee bank addressed to the Chief
Auditor of the petitioner; (5) the admission of the respondent bank’s counsel
in open court that the National Bureau of Investigation found the signature
on the twenty-three (23) checks in question to be forgeries; and (6) the
admission of the respondent bank’s witness, Mr. Faustino Mesina, Jr. that
the checks in question were not printed by his printing press. The petitioner
contends that since the signatures of the checks were forgeries, the
respondent drawee bank must bear the loss under the rulings of this Court.

"A bank is bound to know the signatures of its customers; and if it pays a
forged check it must be considered as making the payment out of its own
funds, and cannot ordinarily charge the amount so paid to the account of the
depositor whose name was forged."cralaw virtua1aw library

x       x       x

"The signatures to the checks being forged, under Section 23 of the

Negotiable Instruments Law they are not a charge against plaintiff nor are
the checks of any value to the defendant.

"It must therefore be held that the proximate cause of loss was due to the
negligence of the Bank of the Philippine Islands in honoring and cashing the
two forged checks." (San Carlos Milling Co. v. Bank of the P.I., 59 Phil. 59)

"It is admitted that the Philippine National Bank cashed the check upon a
forged signature, and placed the money to the credit of Maasim, who was
the forger. That the Philippine National Bank then endorsed the check and
forwarded it to the Shanghai Bank by whom it was paid. The Philippine
National Bank had no license or authority to pay the money to Maasim or
anyone else upon a forged signature. It was its legal duty to know that
Malicor’s endorsement was genuine before cashing the check. Its remedy is
against Maasim to whom it paid the money." (Great Eastern Life Ins. Co. v.
Hongkong & Shanghai Bank, 43 Phil. 678)

We have carefully reviewed the documents cited by the petitioner. There is

no express and categorical finding in these documents that the twenty-three
(23) questioned checks were indeed signed by persons other than the
authorized MWSS signatories. On the contrary, the findings of the National
Bureau of Investigation in its Report dated November 2, 1970 show that the
MWSS fraud was an "inside job" and that the petitioner’s delay in the
reconciliation of bank statements and the laxity and loose records control in
the printing of its personalized checks facilitated the fraud. Likewise, the
questioned Documents Report No. 159-1074 dated November 21, 1974 of
the National Bureau of Investigation does not declare or prove that the
signatures appearing on the questioned checks are forgeries. The report
merely mentions the alleged differences in the typeface, checkwriting, and
printing characteristics appearing in the standard or submitted models and
the questioned typewritings. The NBI Chemistry Report No. C-74-891 merely
describes the inks and pens used in writing the alleged forged signatures.

It is clear that these three (3) NBI Reports relied upon by the petitioner are
inadequate to sustain its allegations of forgery. These reports did not touch
on the inherent qualities of the signatures which are indispensable in the
determination of the existence of forgery. There must be conclusive findings
that there is a variance in the inherent characteristics of the signatures and
that they were written by two or more different persons.

Forgery cannot be presumed (Siasat, Et. Al. v. Intermediate Appellate Court,

et al, 139 SCRA 238). It must be established by clear, positive, and
convincing evidence. This was not done in the present case.

The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, Et.
Al. (59 Phil. 59) and Great Eastern Life Ins., Co. v. Hongkong and Shanghai
Bank (43 Phil. 678) relied upon by the petitioner are inapplicable in this case
because the forgeries in those cases were either clearly established or
admitted while in the instant case, the allegations of forgery were not clearly
established during trial.

Considering the absence of sufficient security in the printing of the checks

coupled with the very close similarities between the genuine signatures and
the alleged forgeries, the twenty-three (23) checks in question could have
been presented to the petitioner’s signatories without their knowing that
they were bogus checks. Indeed, the cashier of the petitioner whose
signatures were allegedly forged was unable to tell the difference between
the allegedly forged signature and his own genuine signature. On the other
hand, the MWSS officials admitted that these checks could easily be passed
on as genuine.

The memorandum of Mr. A. T. Tolentino, Assistant Chief Accountant of the

drawee Philippine National Bank to Mr. E. Villatuya, Executive Vice-President
of the petitioner dated June 9, 1969 cites an instance where even the
concerned NWSA officials could not tell the differences between the genuine
checks and the alleged forged checks.

"At about 12:00 o’clock on June 6, 1969, VP Maramag requested me to see

him in his office at the Cashier’s Dept. where Messrs. Jose M. Sanchez,
treasurer of NAWASA and Romeo Oliva of the same office were present.
Upon my arrival I observed the NAWASA officials questioning the issue of
the NAWASA checks appearing in their own list, xerox copy attached.

"For verification purposes, therefore, the checks were taken from our file. To
everybody there present namely VIP Maramag, the two abovementioned
NAWASA officials, AVP, Buhain, Asst. Cashier Castelo, Asst. Cashier Tejada
and Messrs. A. Lopez and L. Lechuga, both C/A bookkeepers, no one was
able to point out any difference on the signatures of the NAWASA officials
appearing on the checks compared to their official signatures on file. In fact
3 checks, one of those under question, were presented to the NAWASA
treasurer for verification but he could not point out which was his genuine
signature. After intent comparison, he pointed on the questioned check as
bearing his correct signature."cralaw virtua1aw library

x       x       x

Moreover, the petitioner is barred from setting up the defense of forgery

under Section 23 of the Negotiable Instruments Law which provides
that:jgc:chanrobles.com.ph

"SEC. 23. FORGED SIGNATURE; EFFECT OF . — When the signature is

forged or made without authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to retain the instrument, or to
give a discharge therefor, or to enforce payment thereof against any party
thereto can be acquired through or under such signature unless the party
against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority."cralaw virtua1aw library

because it was guilty of negligence not only before the questioned checks
were negotiated but even after the same had already been negotiated. (See
Republic v. Equitable Banking Corporation, 10 SCRA 8)

The records show that at the time the twenty-three (23) checks were
prepared, negotiated, and encashed, the petitioner was using its own
personalized checks, instead of the official PNB Commercial blank checks. In
the exercise of this special privilege, however, the petitioner failed to provide
the needed security measures. That there was gross negligence in the
printing of its personalized checks is shown by the following uncontroverted
facts, to wit:chanrob1es virtual 1aw library

(1) The petitioner failed to give its printer, Mesina Enterprises, specific
instructions relative to the safekeeping and disposition of excess forms,
check vouchers, and safety papers;

(2) The petitioner failed to retrieve from its printer all spoiled check forms;

(3) The petitioner failed to provide any control regarding the paper used in
the printing of said checks;

(4) The petitioner failed to furnish the respondent drawee bank with samples
of typewriting, check writing, and print used by its printer in the printing of
its checks and of the inks and pens used in signing the same; and

(5) The petitioner failed to send a representative to the printing office during
the printing of said checks.

This gross negligence of the petitioner is very evident from the sworn
statement dated June 19, 1969 of Faustino Mesina, Jr., the owner of the
printing press which printed the petitioner’s personalized checks:chanrob1es
virtual 1aw library

x       x       x

"7. Q: Do you have any business transaction with the National Waterworks
and Sewerage Authority (NAWASA)?

A: Yes, sir. I have a contract with the NAWASA in printing NAWASA Forms
such as NAWASA Check Vouchers and Office Forms.

x       x       x

"15. Q: Were you given any instruction by the NAWASA in connection with
the printing of these check vouchers?

A: There is none, sir. No instruction whatsoever was given to me.

"16. Q: Were you not advised as to what kind of paper would be used in the
check vouchers?

A: Only as per sample, sir.

 x       x       x

"20. Q: Where did you buy this Hammermill Safety check paper?

A: From Tan Chiong, a paper dealer with store located at Juan Luna,
Binondo, Manila. (In front of the Metropolitan Bank).

x       x       x

"24. Q: Were all these check vouchers printed by you submitted to

NAWASA?

A: Not all, sir, Because we have to make reservations or allowances for

spoilage.

"25. Q: Out of these vouchers printed by you, how many were spoiled and
how many were the excess printed check vouchers?

A: Approximately four hundred (400) sheets, sir. I cannot determine the

proportion of the excess and spoiled because the final act of perforating
these check vouchers has not yet been done and spoilage can only be
determined after this final act of printing.

"26. Q: What did you do with these excess check vouchers?

A: I keep it under lock and key in my filing cabinet.

x       x       x

"28. Q: Were you not instructed by the NAWASA authorities to burn these
excess check vouchers?

A: No, sir. I was not instructed.

"29. Q: What do you intend to do with these excess printed check vouchers?

A: I intend to use them for future orders from the NAWASA.

x       x       x
"32. Q: In the process of printing the check vouchers ordered by the
NAWASA, how many sheets were actually spoiled?

A: I cannot approximate, sir. But there are spoilage in the process of

printing and perforating.

"33. Q: What did you do with these spoilages?

A: Spoiled printed materials are usually thrown out, in the garbage can.

"34. Q: Was there any representative of the NAWASA to supervise the

printing or watch the printing of these check vouchers?

A: None, sir.

x       x       x

"39. Q: During the period of printing after the days work, what measures do
you undertake to safeguard the mold and other paraphernalia used in the
printing of these particular orders of NAWASA?

A: Inasmuch as I have an employee who sleeps in the printing shop and at

the same time do the guarding, we just leave the mold attached to the
machine and the other finished or unfinished work check vouchers are left in
the rack so that the work could be continued the following day."cralaw
virtua1aw library

The National Bureau of Investigation Report dated November 2, 1970 is

even more explicit. Thus —

x       x       x

"60. We observed also that there is some laxity and loose control in the
printing of NAWASA checks. We gathered from MESINA ENTERPRISES, the
printing firm that undertook the printing of the check vouchers of NAWASA
that NAWASA had no representative at the printing press during the process
of the printing and no particular security measure instructions adopted to
safeguard the interest of the government in connection with printing of this
accountable form."cralaw virtua1aw library

Another factor which facilitated the fraudulent encashment of the twenty-

three (23) checks in question was the failure of the petitioner to reconcile
the bank statements with its own records.

It is accepted banking procedure for the depository bank to furnish its

depositors bank statements and debt and credit memos through the mail.
The records show that the petitioner requested the respondent drawee bank
to discontinue the practice of mailing the bank statements, but instead to
deliver the same to a certain Mr. Emiliano Zaporteza. For reasons known
only to Mr. Zaporteza however, he was unreasonably delayed in taking
prompt deliveries of the said bank statements and credit and debit memos.
As a consequence, Mr. Zaporteza failed to reconcile the bank statements
with the petitioner’s records. If Mr. Zaporteza had not been remiss in his
duty of taking the bank statements and reconciling them with the
petitioner’s records, the fraudulent encashments of the first checks should
have been discovered, and further frauds prevented. This negligence was,
therefore, the proximate cause of the failure to discover the fraud. Thus,

"When a person opens a checking account with a bank, he is given blank

checks which he may fill out and use whenever he wishes. Each time he
issues a check, he should also fill out the check stub to which the check is
usually attached. This stub, if properly kept, will contain the number of the
check, the date of its issue, the name of the payee and the amount thereof.
The drawer would therefore have a complete record of the checks he issues.
It is the custom of banks to send to its depositors a monthly statement of
the status of their accounts, together with all the cancelled checks which
have been cashed by their respective holders. If the depositor has filled out
his check stubs properly, a comparison between them and the cancelled
checks will reveal any forged check not taken from his checkbook. It is the
duty of a depositor to carefully examine the bank’s statement, his cancelled
checks, his check stubs and other pertinent records within a reasonable
time, and to report any errors without unreasonable delay. If his negligence
should cause the bank to honor a forged check or prevent it from recovering
the amount it may have already paid on such check, he cannot later
complain should the bank refuse to recredit his account with the amount of
such check. (First Nat. Bank of Richmond v. Richmond Electric Co., 106 Va.
347, 56 SE 152, 7 LRA, NS 744 [1907]. See also Leather Manufacturers’
Bank v. Morgan, 117 US 96, 6 S. Ct. 657 [1886]; Deer Island Fish and
Oyster Co. v. First Nat. Bank of Biloxi, 166 Miss. 162, 146 So. 116 [1933]).
Campos and Campos, Notes and Selected Cases on Negotiable Instruments
Law, 1971, pp. 267-268).

This failure of the petitioner to reconcile the bank statements with its
cancelled checks was noted by the National Bureau of Investigation in its
report dated November 2, 1970:jgc:chanrobles.com.ph
"58. One factor which facilitate this fraud was the delay in the reconciliation
of bank (PNB) statements with the NAWASA bank accounts. . . . Had the
NAWASA representative come to the PNB early for the statements and had
the bank been advised promptly of the reported bogus check, the
negotiation of practically all of the remaining checks on May, 1969, totalling
P2,224,736.00 could have been prevented."cralaw virtua1aw library

The records likewise show that the petitioner failed to provide appropriate
security measures over its own records thereby laying confidential records
open to unauthorized persons. The petitioner’s own Fact Finding Committee,
in its report submitted to their General Manager underscored this laxity of
records control. It observed that the "office of Mr. Ongtengco (Cashier No. VI
of the Treasury Department at the NAWASA) is quite open to any person
known to him or his staff members and that the check writer is merely on
top of his table."cralaw virtua1aw library

When confronted with this report at the Anti-Fraud Action Section of the
National Bureau of Investigation, Mr. Ongtengco could only state
that:jgc:chanrobles.com.ph

"A. Generally my order is not to allow anybody to enter my office. Only

authorized persons are allowed to enter my office. There are some cases,
however, where some persons enter my office because they are following up
their checks. Maybe, these persons may have been authorized by Mr. Pantig.
Most of the people entering my office are changing checks as allowed by the
Resolution of the Board of Directors of the NAWASA and the Treasurer. The
check writer was never placed on my table. There is a place for the
checkwriter which is also under lock and key.

"Q. Is Mr. Pantig authorized to allow unauthorized persons to enter your

office?

"A. No, sir.

"Q. Why are you tolerating Mr. Pantig admitting unauthorized persons in
your office?

"A. I do not want to embarrass Mr. Pantig. Most of the people following up
checks are employees of the NAWASA.

"Q. Was the authority given by the Board of Directors and the approval by
the Treasurer for employees, and other persons to encash their checks carry
with it their authority to enter your office?
"A. No, sir.

x       x       x

"Q. From the answers that you have given to us we observed that actually
there is laxity and poor control on your part with regards to the preparations
of check payments inasmuch as you allow unauthorized persons to follow up
their vouchers inside your office which may leakout confidential informations
or your books of account. After being apprised of all the shortcomings in
your office, as head of the Cashiers’ Office of the Treasury Department what
remedial measures do you intend to undertake?

"A. Time and again the Treasurer has been calling our attention not to allow
interested persons to hand carry their voucher checks and we are trying our
best and if I can do it to follow the instructions to the letter, I will do it but
unfortunately the persons who are allowed to enter my office are my co-
employees and persons who have connections with our higher ups and I can
not possibly antagonize them. Rest assured that even though that everybody
will get hurt, I will do my best not to allow unauthorized persons to enter my
office.

x       x       x

"Q. Is it not possible inasmuch as your office is in charge of the posting of

check payments in your books that leakage of payments to the banks came
from your office?

"A. I am not aware of it but it only takes us a couple of minutes to process

the checks. And there are cases wherein every information about the checks
may be obtained from the Accounting Department, Auditing Department, or
the Office of the General Manager."cralaw virtua1aw library

Relying on the foregoing statement of Mr. Ongtengco, the National Bureau of

Investigation concluded in its Report dated November 2, 1970 that the
fraudulent encashment of the twenty-three (23) checks in question was an
"inside job." Thus —

"We have all the reasons to believe that this fraudulent act was an inside job
or one pulled with inside connivance at NAWASA. As pointed earlier in this
report, the serial numbers of these checks in question conform with the
numbers in current use of NAWASA, aside from the fact that these
fraudulent checks were found to be of the same kind and design as that of
NAWASA’s own checks. While knowledge as to such facts may be obtained
through the possession of a NAWASA check of current issue, an outsider
without information from the inside can not possibly pinpoint which of
NAWASA’s various accounts has sufficient balance to cover all these
fraudulent checks. None of these checks, it should be noted, was dishonored
for insufficiency of funds."cralaw virtua1aw library

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

Nonetheless, the petitioner claims that it was the negligence of the

respondent Philippine National Bank that was the proximate cause of the
loss. The petitioner relies on our ruling in Philippine National Bank v. Court
of Appeals (25. SCRA 693) that.

"Thus, by not returning the check to the PCIB, by thereby indicating that the
PNB had found nothing wrong with the check and would honor the same,
and by actually paying its amount to the PCIB, the PNB induced the latter,
not only to believe that the check was genuine and good in every respect,
but, also, to pay its amount to Augusto Lim. In other words, the PNB was
the primary or proximate cause of the loss, and, hence, may not recover
from the PCIB."cralaw virtua1aw library

The argument has no merit. The records show that the respondent drawee
bank, had taken the necessary measures in the detection of forged checks
and the prevention of their fraudulent encashment. In fact, long before the
encashment of the twenty-three (23) checks in question, the respondent
Bank had issued constant reminders to all Current Account Bookkeepers
informing them of the activities of forgery syndicates. The Memorandum of
the Assistant Vice-President and Chief Accountant of the Philippine National
Bank dated February 17, 1966 reads in part:jgc:chanrobles.com.ph

"SUBJECT: ACTIVITIES OF FORGERY SYNDICATE.

"From reliable information we have gathered that personalized checks of

current account depositors are now the target of the forgery syndicate. To
protect the interest of the bank, you are hereby enjoined to be more careful
in examining said checks especially those coming from the clearing, mails
and window transactions. As a reminder please be guided with the
following:jgc:chanrobles.com.ph

"1. Signatures of drawers should be properly scrutinized and compared with

those we have on file.

"2. `The serial numbers of the checks should be compared with the serial
numbers registered with the Cashier’s Dept.

"3. The texture of the paper used and the printing of the checks should be
compared with the sample we have on file with the Cashier’s Dept.

"4. Checks bearing several indorsements should be given a special attention.

"5. Alteration in amount both in figures and words should be carefully

examined even if signed by the drawer.

"6. Checks issued in substantial amounts particularly by depositors who do

not usually issue checks in big amounts should be brought to the attention of
the drawer by telephone or any fastest means of communication for
purposes of confirmation.

and your attention is also invited to keep abreast of previous circulars and
memo instructions issued to bookkeepers."cralaw virtua1aw library

We cannot fault the respondent drawee Bank for not having detected the
fraudulent encashment of the checks because the printing of the petitioner’s
personalized checks was not done under the supervision and control of the
Bank. There is no evidence on record indicating that because of this private
printing, the petitioner furnished the respondent Bank with samples of
checks, pens, and inks or took other precautionary measures with the PNB
to safeguard its interests.

Under the circumstances, therefore, the petitioner was in a better position to

detect and prevent the fraudulent encashment of its checks.

WHEREFORE, the petition for review on certiorari is hereby DISMISSED for

lack of merit. The decision of the respondent Court of Appeals dated October
29, 1982 is AFFIRMED. No pronouncement as to costs.

SO ORDERED.
CASE #95 Metropolitan Bank vs Philippine Bank of Communications 536 SCRA 556
(2007)

[G.R. NO. 141408 : October 18, 2007]

METROPOLITAN BANK AND TRUST

COMPANY, Petitioner, v. PHILIPPINE BANK OF COMMUNICATIONS,
FILIPINAS ORIENT FINANCE CORPORATION, PIPE MASTER
CORPORATION and TAN JUAN LIAN, Respondents.

[G.R. NO. 141429 : October 18, 2007]

SOLID BANK CORPORATION, Petitioner, v. FILIPINAS ORIENT

FINANCE CORPORATION, PIPE MASTER CORPORATION, TAN JUAN
LIAN and/or PHILIPPINE BANK OF COMMUNICATIONS, Respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:

Sometime in 1978, Pipe Master Corporation (Pipe Master) represented by Yu

Kio, its president, applied for check discounting with Filipinas Orient Finance
Corporation (Filipinas Orient). The latter approved and granted the same.

On July 1, 1978, the Board of Directors of Pipe Master issued a Board

Resolution authorizing Yu Kio, in his capacity as president, and/or Tan Juan
Lian, in his capacity as vice-president, to execute, indorse, make, sign,
deliver or negotiate instruments, documents and such other papers
necessary in connection with any transaction coursed through Filipinas
Orient for and in behalf of the corporation.

Tan Juan Lian then executed in favor of Filipinas Orient a continuing

guaranty that he shall pay at maturity any and all promissory notes, drafts,
checks, or other instruments or evidence of indebtedness for which Pipe
Master may become liable; that the extent of his liability shall not at any one
time exceed the sum of P1,000,000.00; and that in the event of default by
Pipe Master, Filipinas Orient may proceed directly against him.

On April 9, 1980, under the check discounting agreement between Pipe

Master and Filipinas Orient, Yu Kio sold to Filipinas Orient four Metropolitan
Bank and Trust Company (Metro Bank) checks amounting to P1,000,000.00.
In exchange for the four Metro Bank checks, Filipinas Orient issued to Yu Kio
four Philippine Bank of Communications (PBCom) crossed checks
totaling P964,303.62, payable to Pipe Master with the statement "for payee's
account only."

Upon his receipt of the four PBCom checks, Yu Kio indorsed and deposited in
the Metro Bank, in his personal account, three of the checks valued
at P721,596.95. As to the remaining check amounting to P242,706.67, he
deposited it in the Solid Bank Corporation (Solid Bank), also in his personal
account. Eventually, PBCom paid Metro Bank and Solid Bank the amounts of
the checks. In turn, Metro Bank and Solid Bank credited the value of the
checks to the personal accounts of Yu Kio.

Subsequently, when Filipinas Orient presented the four Metro Bank checks
equivalent to P1,000,000.00 it received from Yu Kio, they were dishonored
by the drawee bank. Pipe Master, the drawer, refused to pay the amounts of
the checks, claiming that it never received the proceeds of the PBCom
checks as they were delivered and paid to the wrong party, Yu Kio, who was
not the named payee.

Filipinas Orient then demanded that PBCom restore to its (Filipinas Orient's)
account the value of the PBCom checks. In turn, PBCom sought
reimbursement from Metro Bank and Solid Bank, being the collecting banks,
but they refused. Thus, Filipinas Orient filed with the Regional Trial Court
(RTC), Branch 39, Manila a complaint for a sum of money against Pipe
Master, Tan Juan Lian and/or PBCom.

In their answer to the complaint, Pipe Master and Tan Juan Lian averred that
they did not authorize Yu Kio to negotiate and enter into discounting
transaction with Filipinas Orient, and even if Yu Kio was so authorized, Pipe
Master never received the proceeds of the checks. Consequently, they filed a
cross-claim against PBCom for gross negligence for having paid the wrong
party. In turn, PBCom, Pipe Master and Tan Juan Lian filed third-party
complaints against Metro Bank and Solid Bank.

On July 12, 1990, the RTC rendered a Decision against Metro Bank and Solid
Bank, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered:

1. Ordering third-party defendant Metro Bank to pay plaintiff the amount of

Seven Hundred Twenty One Thousand Five Hundred Ninety Six Pesos and
Ninety-Five Centavos (P721,596.95) plus legal interest;
2. Ordering third-party defendant Solid Bank to pay plaintiff the amount of
Two Hundred Forty-Two Thousand Seven Hundred Six Pesos and Sixty-
Seven Centavos (P242,706.67) plus legal interest;

3. Ordering third-party defendants to pay the costs of suit.

SO ORDERED.

On appeal, the appellate court affirmed in toto the Decision of the trial court.
Metro Bank and Solid Bank filed their respective motions for reconsideration
but the same were denied.

Hence, the instant consolidated Petitions for Review on Certiorari filed by

Metro Bank and Solid Bank.

The issue for our resolution is whether Metro Bank and Solid Bank,
petitioners, are liable to respondent Filipinas Orient for accepting the PBCom
crossed checks payable to Pipe Master.

Petitioner banks contend that respondents Pipe Master, Tan Juan Lian and/or
PBCom should be made liable to respondent Filipinas Orient for the value of
the checks.

Respondents Pipe Master and Tan Juan Lian counter that although Yu Kio
was expressly authorized to indorse Pipe Master's checks, such authority
extended only to acts done in the ordinary course of business, not in his
personal capacity. For its part, respondent Filipinas Orient contends that
petitioner banks were negligent in allowing Yu Kio to deposit the PBCom
checks in his account. Respondent PBCom, as the drawee bank, maintains
that it has no liability because in clearing the checks, it relied on the express
guarantee made by petitioner banks that the checks were validly indorsed.

We find in favor of respondents.

A check is defined by law as a bill of exchange drawn on a bank payable on

demand.1 The Negotiable Instruments Law is silent with respect to crossed
checks. Nonetheless, this Court has taken judicial cognizance of the practice
that a check with two parallel lines on the upper left hand corner means that
it could only be deposited and not converted into cash. 2 The crossing of a
check with the phrase "Payee's Account Only" is a warning that the check
should be deposited in the account of the payee. It is the collecting bank
which is bound to scrutinize the check and to know its depositors before it
can make the clearing indorsement, "all prior indorsements and/or lack of
indorsement guaranteed."3
Here, petitioner banks have the obligation to ensure that the PBCom checks
were deposited in accordance with the instructions stated in the checks. 4 The
four PBCom checks in question had been crossed and issued "for payee's
account only." This could only mean that the drawer, Filipinas Orient,
intended the same for deposit only by the payee, Pipe Master. The effect of
crossing a check means that the drawer had intended the check for deposit
only by the rightful person, i.e., the payee named therein5 - Pipe Master.

As what transpired in this case, petitioner banks accommodated Yu Kio,

being a valued client and the president of Pipe Master, and accepted the
crossed checks. They stamped at the back thereof that "all prior
indorsements and/or lack of indorsements are guaranteed." In so doing,
they became general endorsers. Under Section 66 of the Negotiable
Instruments Law, an endorser warrants "that the instrument is genuine and
in all respects what it purports to be; that he has a good title to it; that all
prior parties had capacity to contract; and that the instrument is at the time
of his indorsement valid and subsisting."

Clearly, petitioner banks, being endorsers, cannot deny liability.

In Associated Bank v. Court of Appeals,6 we held that the collecting bank or

last endorser generally suffers the loss because it has the duty to ascertain
the genuineness of all prior indorsements and is privy to the depositor who
negotiated the check.

PBCom, as the drawee bank, cannot be held liable since it mainly relied on
the express guarantee made by petitioners, the collecting banks, of all prior
indorsements.

Evidently, petitioner banks disregarded established banking rules and

procedures. They were negligent in accepting the checks and allowing the
transaction to push through. In Jai-Alai Corp. of the Phil. v. Bank of the Phil.
Islands,7 we ruled that one who accepts and encashes a check from an
individual knowing that the payee is a corporation does so at his peril.
Therefore, petitioner banks are liable to respondent Filipinas
Orient.ςηαñrοblεš  Î½Î¹r†υαl  lαω  lιbrαrÿ

In fine, it must be emphasized that the law imposes on the collecting bank
the duty to diligently scrutinize the checks deposited with it for the purpose
of determining their genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the public as the expert on
this field, and the law thus holds it to a high standard of conduct. 8 Since
petitioner banks' negligence was the direct cause of the misappropriation of
the checks, they should bear and answer for respondent Filipinas Orient's
loss, without prejudice to their filing of an appropriate action against Yu Kio.

WHEREFORE, we DENY the petitions. The challenged Decision 9 and

Resolution of the Court of Appeals in CA-G.R. CV No. 30702 are AFFIRMED.
Costs against petitioners.

SO ORDERED.
CASE #96 Republic Bank vs CA 196 SCRA 100 (1991)

[G.R. No. 42725. April 22, 1991.]

REPUBLIC BANK, Petitioner, v. COURT OF APPEALS and FIRST

NATIONAL CITY BANK, Respondents.

Lourdes C. Dorado for Petitioner.

Siguion Reyna, Montecillo & Ongsiako for private respondent

Citibank.

SYLLABUS

1. COMMERCIAL LAW; BANKING LAWS; 24-HOUR CLEARING HOUSE RULE

APPLIES TO COMMERCIAL BANKS; FAILURE OF DRAWEE BANK TO COMPLY
WITH RULE ABSOLVES COLLECTING BANKS. — The 24-hour clearing house
rule is a valid rule applicable to commercial banks (Republic v. Equitable
Banking Corporation, 10 SCRA 8 [1964]; Metropolitan Bank & Trust Co. v.
First National City Bank, 118 SCRA 537). It is true that when an
endorsement is forged, the collecting bank or last endorser, as a general
rule, bears the loss (Banco de Oro Savings & Mortgage Bank v. Equitable
Banking Corp., 157 SCRA 188). But the unqualified endorsement of the
collecting bank on the check should be read together with the 24-hour
regulation on clearing house operation (Metropolitan Bank & Trust Co. v.
First National City Bank, supra). Thus, when the drawee bank fails to return
a forged or altered check to the collecting bank within the 24-hour clearing
period, the collecting bank is absolved from liability. The following decisions
of this Court are also relevant and persuasive.

2. ID.; ID.; ID.; ID.; REMEDY OF DRAWEE BANK IS AGAINST PARTY

RESPONSIBLE FOR FORGERY OR ALTERATION. — Every bank that issues
checks for the use of its customers should know whether or not the drawer’s
signature thereon is genuine, whether there are sufficient funds in the
drawer’s account to cover checks issued, and it should be able to detect
alterations, erasures, superimpositions or intercalations thereon, for these
instruments are prepared, printed and issued by itself, it has control of the
drawer’s account, and it is supposed to be familiar with the drawer’s
signature. It should possess appropriate detecting devices for uncovering
forgeries and/or alterations on these instruments. Unless an alteration is
attributable to the fault or negligence of the drawer himself, such as when
he leaves spaces on the check which would allow the fraudulent insertion of
additional numerals in the amount appearing thereon, the remedy of the
drawee bank that negligently clears a forge and/or altered check for
payment is against the party responsible for the forgery or alteration
(Hongkong & Shanghai Banking Corp. v. People’s Bank & Trust Co., 35 SCRA
140), otherwise, it bears the loss. It may not charge the amount so paid to
the account of the drawer, if the latter was free from blame, nor recover it
from the collecting bank if the latter made payment after proper clearance
from the drawee.

DECISION

GRIÑO-AQUINO, J.:

On January 25, 1966, San Miguel Corporation (SMC for short), drew a
dividend Check No. 108854 for P240, Philippine currency, on its account in
the respondent First National City Bank ("FNCB" for brevity) in favor of J.
Roberto C. Delgado, a stockholder. After the check had been delivered to
Delgado, the amount on its face was fraudulently and without authority of
the drawer, SMC, altered by increasing it from P240 to P9,240. The check
was indorsed and deposited on March 14, 1966 by Delgado in his account
with the petitioner Republic Bank (hereafter "Republic").

Republic accepted the check for deposit without ascertaining its genuineness
and regularity. Later, Republic endorsed the check to FNCB by stamping on
the back of the check "all prior and/or lack of indorsement guaranteed" and
presented it to FNCB for payment through the Central Bank Clearing House.
Believing the check was genuine, and relying on the guaranty and
endorsement of Republic appearing on the back of the check, FNCB paid
P9,240 to Republic through the Central Bank Clearing House on March 15,
1966.

On April 19, 1966, SMC notified FNCB of the material alteration in the
amount of the check in question. FNCB lost no time in recrediting P9,240 to
SMC. On May 19, 1966, FNCB informed Republic in writing of the alteration
and the forgery of the endorsement of J. Roberto C. Delgado. By then,
Delgado had already withdrawn his account from Republic.
On August 15, 1966, FNCB demanded that Republic refund the P9,240 on
the basis of the latter’s endorsement and guaranty. Republic refused,
claiming there was delay in giving it notice of the alteration; that it was not
guilty of negligence; that it was the drawer’s (SMC’s) fault in drawing the
check in such a way as to permit the insertion of numerals increasing the
amount; that FNCB, as drawee, was absolved of any liability to the drawer
(SMC), thus, FNCB had no right of recourse against Republic.

On April 8, 1968, the trial court rendered judgment ordering Republic to pay
P9,240 to FNCB with 6% interest per annum from February 27, 1967 until
fully paid, plus P2,000 for attorney’s fees and costs of the suit. The Court of
Appeals affirmed that decision, but modified the award of attorney’s fees by
reducing it to P1,000 without pronouncement as to costs (CA-G.R. No.
41691-R, December 22, 1975).chanrobles virtual lawlibrary

In this petition for review, the lone issue is whether Republic, as the
collecting bank, is protected, by the 24-hour clearing house rule, found in CB
Circular No. 9, as amended, from liability to refund the amount paid by
FNCB, as drawee of the SMC dividend check.

The petition for review is meritorious and must be granted.

The 24-hour clearing house rule embodied in Section 4(c) of Central Bank
Circular No. 9, as amended, provides:jgc:chanrobles.com.ph

"Items which should be returned for any reason whatsoever shall be

returned directly to the bank, institution or entity from which the item was
received. For this purpose, the Receipt for Returned Checks (Cash Form No.
9) should be used. The original and duplicate copies of said Receipt shall be
given to the Bank, institution or entity which returned the items and the
triplicate copy should be retained by the bank, institution or entity whose
demand is being returned. At the following clearing, the original of the
Receipt for Returned Checks shall be presented through the Clearing Office
as a demand against the bank, institution or entity whose item has been
returned. Nothing in this section shall prevent the returned items from being
settled by direct reimbursement to the bank, institution or entity returning
the items. All items cleared at 11:00 o’clock A.M. shall be returned not later
than 2:00 o’clock P.M. on the same day and all items cleared at 3:00 o’clock
P.M. shall be returned not later than 8:30 A.M. of the following business day
except for items cleared on Saturday which may be returned not later than
8:30 A.M. of the following day."cralaw virtua1aw library

The 24-hour clearing house rule is a valid rule applicable to commercial

banks (Republic v. Equitable Banking Corporation, 10 SCRA 8 [1964];
Metropolitan Bank & Trust Co. v. First National City Bank, 118 SCRA 537).

It is true that when an endorsement is forged, the collecting bank or last

endorser, as a general rule, bears the loss (Banco de Oro Savings &
Mortgage Bank v. Equitable Banking Corp., 167 SCRA 188). But the
unqualified endorsement of the collecting bank on the check should be read
together with the 24-hour regulation on clearing house operation
(Metropolitan Bank & Trust Co. v. First National City Bank, supra). Thus,
when the drawee bank fails to return a forged or altered check to the
collecting bank within the 24-hour clearing period, the collecting bank is
absolved from liability. The following decisions of this Court are also relevant
and persuasive:chanrob1es virtual 1aw library

In Hongkong & Shanghai Banking Corp. v. People’s Bank & Trust Co. (35
SCRA 140), a check for P14,608.05 was drawn by the Philippine Long
Distance Telephone Company on the Hongkong & Shanghai Banking
Corporation payable to the same bank. It was mailed to the payee but fell
into the hands of a certain Florentino Changco who erased the name of the
payee, typed his own name, and thereafter deposited the altered check in
his account in the People’s Bank & Trust Co. which presented it to the
drawee bank with the following indorsement:chanrobles law library

"For clearance, clearing office. All prior endorsements and or lack of

endorsements guaranteed. People’s Bank and Trust Company."cralaw
virtua1aw library

The check was cleared by the drawee bank (Hongkong & Shanghai Bank),
whereupon the People’s Bank credited Changco with the amount of the
check. Changco thereafter withdrew the contents of his bank account. A
month later, when the check was returned to PLDT, the alteration was
discovered. The Hongkong & Shanghai Bank sued to recover from the
People’s Bank the sum of P14,608.05. The complaint was dismissed.
Affirming the decision of the trial court, this Court
held:jgc:chanrobles.com.ph

"The entire case of plaintiff is based on the indorsement that has been
heretofore copied — namely, a guarantee of all prior indorsement, made by
People’s Bank and since such an indorsement carries with it a concomitant
guarantee of genuineness, the People’s Bank is liable to the Hongkong
Shanghai Bank for alteration made in the name of payee. On the other hand,
the People’s Bank relies on the ‘24-hour’ regulation of the Central Bank that
requires after a clearing, that all cleared items must be returned not later
than 3:00 P.M. of the following business day. And since the Hongkong
Shanghai Bank only advised the People’s Bank as to the alteration on April
12, 1965 or 27 days after clearing, the People’s Bank claims that it is now
too late to do so. This regulation of the Central Bank as to 24 hours is
challenged by Plaintiff Bank as being merely part of an ingenious device to
facilitate banking transactions. Be that what it may — as both Plaintiff as
well as Defendant Banks are part of our banking system and both are
subject to regulations of the Central Bank — they are both bound by such
regulations. . . . But Plaintiff Bank insists that Defendant Bank is liable on its
indorsement during clearing house operations. The indorsement, itself, is
very clear when it begins with the words `For clearance, clearing office . . .’
In other words, such an indorsement must be read together with the 24-
hour regulation on clearing House Operations of the Central Bank. Once that
24-hour period is over, the liability on such an indorsement has ceased. This
being so, Plaintiff Bank has not made out a case for relief."cralaw virtua1aw
library

"x       x       x

"Moreover, in one of the very cases relied upon by plaintiff, as appellant,

mention is made of a principle on which defendant Bank could have acted
without incurring the liability now sought to be imposed by plaintiff. Thus: ‘It
is a settled rule that a person who presents for payment checks such as are
here involved guarantees the genuineness of the check, and the drawee
bank need concern itself with nothing but the genuineness of the signature,
and the state of the account with it of the drawee.’ (Interstate Trust Co. v.
United States National Bank, 185 Pac. 260 [1919]). If at all, then, whatever
remedy the plaintiff has would lie not against defendant Bank but as against
the party responsible for changing the name of the payee. Its failure to call
the attention of defendant Bank as to such alteration until after the lapse of
27 days would, in the light of the above Central Bank circular, negate
whatever right it might have had against defendant Bank. . . ." (35 SCRA
140, 142-143; 145-146.)

In Metropolitan Bank & Trust Co. v. First National City Bank, Et. Al. (118
SCRA 537, 542) a check for P50, drawn by Joaquin Cunanan and Company
on its account at FNCB and payable to Manila Polo Club, was altered by
changing the amount to P50,000 and the payee was changed to "Cash." It
was deposited by a certain Salvador Sales in his current account in the
Metropolitan Bank which sent it to the clearing house. The check was cleared
the same day by FNCB which paid the amount of P50,000 to Metro Bank.
Sales immediately withdrew the whole amount and closed his account. Nine
(9) days later, the alteration was discovered and FNCB sought to recover
from Metro Bank what it had paid. The trial court and the Court of Appeals
rendered judgment for FNCB but this Court reversed it. We
ruled:jgc:chanrobles.com.ph
"The validity of the 24-hour clearing house regulation has been upheld by
this Court in Republic v. Equitable Banking Corporation, 10 SCRA 8 (1964).
As held therein, since both parties are part of our banking system, and both
are subject to the regulations of the Central Bank, they are bound by the 24-
hour clearing house rule of the Central Bank.chanrobles.com.ph : virtual law
library

"In this case, the check was not returned to Metro Bank in accordance with
the 24-hour clearing house period, but was cleared by FNCB. Failure of
FNCB, therefore, to call the attention of Metro Bank to the alteration of the
check in question until after the lapse of nine days, negates whatever right it
might have had against Metro Bank in the light of the said Central Bank
Circular. Its remedy lies not against Metro Bank, but against the party
responsible for changing the name of the payee (Hongkong & Shanghai
Banking Corp. v. People’s Bank & Trust Co., 35 SCRA 140) and the amount
on the face of the check." (p. 542.)

Every bank that issues checks for the use of its customers should know
whether or not the drawer’s signature thereon is genuine, whether there are
sufficient funds in the drawers account to cover checks issued, and it should
be able to detect alterations, erasures, superimpositions or intercalations
thereon, for these instruments are prepared, printed and issued by itself, it
has control of the drawer’s account, and it is supposed to be familiar with
the drawer’s signature. It should possess appropriate detecting devices for
uncovering forgeries and/or alterations on these instruments. Unless an
alteration is attributable to the fault or negligence of the drawer himself,
such as when he leaves spaces on the check which would allow the
fraudulent insertion of additional numerals in the amount appearing thereon,
the remedy of the drawee bank that negligently clears a forged and/or
altered check for payment is against the party responsible for the forgery or
alteration (Hongkong & Shanghai Banking Corp. v. People’s Bank & Trust
Co., 35 SCRA 140), otherwise, it bears the loss. It may not charge the
amount so paid to the account of the drawer, if the latter was free from
blame, nor recover it from the collecting bank if the latter made payment
after proper clearance from the drawee. As this Court pointed out in
Philippine National Bank v. Quimpo, Et Al., 158 SCRA 582,
584:jgc:chanrobles.com.ph

"There is nothing inequitable in such a rule for if in the regular course of

business the check comes to the drawee bank which, having the opportunity
to ascertain its character, pronounces it to be valid and pays it, it is not only
a question of payment under mistake, but payment in neglect of duty which
the commercial law places upon it, and the result of its negligence must rest
upon it."cralaw virtua1aw library

The Court of Appeals erred in laying upon Republic, instead of on FNCB the
drawee bank, the burden of loss for the payment of the altered SMC check,
the fraudulent character of which FNCB failed to detect and warn Republic
about, within the 24-hour clearing house rule. The Court of Appeals departed
from the ruling of this Court in an earlier PNB case,
that:jgc:chanrobles.com.ph

"Where a loss, which must be borne by one of two parties alike innocent of
forgery, can be traced to the neglect or fault of either, it is reasonable that it
would be borne by him, even if innocent of any intentional fraud, through
whose means it has succeeded. (Phil. National Bank v. National City Bank of
New York, 63 Phil. 711, 733.)"

WHEREFORE, the petition for review is granted. The decision of the Court of
Appeals is hereby reversed and set aside, and another is entered absolving
the petitioner Republic Bank from liability to refund to the First National City
Bank the sum of P9,240, which the latter paid on the check in question. No
costs.

SO ORDERED.
CASE #97 Manila Lighter Trans. Inc. vs CA 182 SCRA 251 (1990)

[G.R. No. L-50373. February 15, 1990.]

MANILA LIGHTER TRANSPORTATION, INC., Petitioner, v. COURT OF

APPEALS AND CHINA BANKING CORPORATION, Respondents.

Sergio L. Guadiz and Jose Diokno & Associates for Petitioner.

Sycip, Salazar, Hernandez & Gatmaitan for Private Respondent.

SYLLABUS

1. REMEDIAL LAW; APPEAL; SUPREME COURT DECIDES ONLY ISSUES

INVOLVING QUESTIONS OF LAW. — The instant petition for review must
necessarily fail. The issues raised therein are factual. The main issue of
petitioner’s negligence had already been determined by the trial court
against petitioner and affirmed by the Court of Appeals after examining the
evidence in the records. The Supreme Court decides appeals which only
involve questions of law. It is not the function of the Supreme Court to
analyze or weigh the evidence all over again, its jurisdiction being limited to
resolving errors of law that might have been committed by the lower court.
(Dihiansan v. Court of Appeals, 153 SCRA 712; Francisco v. Mandi, 152
SCRA 711; Director of Lands v. Funtilar, 142 SCRA 57).

DECISION

GRIÑO-AQUINO, J.:

A complaint for recovery of the value of forty-nine (49) checks with alleged
forged/unauthorized indorsements of the payee of which 26 were paid to the
petitioner or order and twenty-three (23) to petitioner or bearer, was filed
by herein petitioner against private respondent China Banking Corporation
on May 22, 1962. The complaint alleged that the checks were issued by
customers of the petitioner in payment of brokerage/lighterage services and
were all delivered, without petitioner’s knowledge, to its collector, Augusto
Perez. Upon forged indorsements of the petitioner’s general manager, the
checks found their way into the accounts of third persons in the respondent
bank and the proceeds were later withdrawn, to the damage of the
petitioner who sought reimbursement or restoration by said bank of the
value of the checks.

Respondent Bank denied liability for the petitioner’s loss which was due to its
own negligence. It alleged that petitioner is estopped from denying its
collector’s authority to receive the checks from the drawers/customers; that
petitioner failed to give defendant Bank and the drawee Banks notice of the
alleged forged or unauthorized indorsements within a reasonable time; and
that its loss was occasioned by its own failure to observe the proper degree
of diligence in the supervision of its employees, particularly its collector,
Augusto Perez.

Upon leave of court, respondent Bank filed a third-party complaint against

Cao Pek & Co. and Ko Lit who had deposited the checks in question in their
respective accounts with the former and had thereafter withdrawn the
proceeds thereof.

The trial court, in its decision dated January 22, 1972, made the following
findings of facts:chanrobles law library

". . . Over a period of eighteen months, from January 29, 1960 (Exh. B) to
June 22, 1961 (Exh. B-11), Augusto Perez collected from different clients of
plaintiff company some 49 checks (Exhs. A to E-2) with a total value of
P91,153.11. The endorsement of the payee, plaintiff Manila Lighter
Transportation, Inc., by its general manager, Luis Gaskell, appear on the
checks. The latter disclaimed such signatures and presented a handwriting
expert who gave the opinion that the signatures "L. Gaskell" on the
indorsement were indeed forgeries. The checks as thus endorsed were
negotiated by Wilfredo Lagamon, accountant of the plaintiff company and
relative of Luis Gaskell, with Cao Pek and Co., an electronic store, whose
treasurer is Ko Lit. Most of the checks, with a total amount of P90,500.24,
were deposited by Ko Lit in his account with defendant bank (Exh. 4). Three
checks with a total amount of P1,115.05 were deposited in the account of
Cao Pek & Co. while one check for P2,735.19 was deposited in the accounts
of Lu Siu Po, manager of Cao Pek & Co. These accounts have no more
balances at present.

"As late as July 21, 1961, plaintiff apparently did not know what was
happening because on that date it sent S. Quintos Transportation, Inc., one
of its clients whose checks were collected by Augusto Perez, the following
letter:chanrob1es virtual 1aw library
‘Upon a detailed examination of our records, we found out that various jobs
undertaking (sic) by us in your behalf in 1960 and 1961 are still pending
payment as of this date.

‘We are sending you herewith our statement covering these jobs which
amount to P23,520.30 and would request you to kindly confirm its
correctness at your earliest.’

"It may be assumed that similar letters were sent to other clients of plaintiff
in a similar situation, namely: Go Fay and Co., for P12,568.77; Peter Paul
Phil. Corp. for P36,967.80; Central Azucarera Don Pedro for P11,190.14; and
Helena Cigar Co. for P4,296.90.

‘Another client, Cia. Gral. de Tabacos de Filipinas, had also paid plaintiff four
checks in the total amount of P3,453.53 all drawn against Hongkong and
Shanghai Banking Corp. (Exhs. 2-a to 2-d). Upon complaint of the drawer
after the anomalies were discovered (Exhs. 2-F, 2) defendant bank refunded
the amount to drawee bank (Exh. 3) and the amount is not included in the
complaint, although defendant bank has entered a counterclaim for the
amount against plaintiff.

‘Plaintiff made its initial demand against defendant bank for the refund of the
amount of the checks on September 9, 1961 (Exh. T). There were some
attempts made to negotiate an amicable settlement, but nothing came of it.’

"On May 30, 1962, the defendant Bank filed a third-party complaint against
Cao Pek and Co. and Ko Lit. Cao Pek and Co., in turn, filed a crossclaim
against Ko Lit." (pp. 38-40, Rollo.)

The lower court found both parties equally negligent, the plaintiff (herein
petitioner), for allowing a state of affairs in which its employees could
appropriate the checks and falsify the indorsement thereon of its manager
with impunity, and the defendant (private respondent herein), for not
detecting the falsification made by the plaintiff’s employees when the checks
were presented to it.

The dispositive portion of the trial court’s decision

reads:jgc:chanrobles.com.ph

"WHEREFORE, judgment is hereby rendered:jgc:chanrobles.com.ph

"1. Ordering defendant China Banking Corporation to pay plaintiff Manila

Lighter Transportation, Inc., an amount equal to 50% of the total amount of
the checks Exhibits A to E-2;

"2. Ordering plaintiff to pay defendant 50% of the amount of the Tabacalera
checks Exhibits 2-A to 2-D;

"3. Ordering third-party defendant Ko Lit to pay P90,500.24 and third-party

defendant Cao Pek & Co. to pay P1,215.05, both to China Banking
Corporation;

"4. Ordering China Banking Corporation to pay plaintiff 50% of any amount
it may recover from Ko Lit and Cao Pek & Co.

"The parties shall bear their own costs and attorney’s fees." (p. 40, Rollo.)

Both petitioner and private respondent appealed to the Court of Appeals,

contending that the other should be entirely liable. Ko Lit and Cao Pek also
appealed but their appeal was dismissed for failure to pay the docket fee and
to file the record on appeal.

On January 18, 1979, the Court of Appeals rendered judgment, the

dispositive portion of which states:chanrob1es virtual 1aw library

WHEREFORE, the judgment appealed from is hereby modified such that the
complaint is dismissed and the defendant-appellant is freed from any liability
to the plaintiff-appellant. The counterclaim of P3,453.53 is granted with
interests from the date the amended counterclaim was filed. The third-party
defendants are adjudged directly liable to the plaintiff-appellant for the
checks they respectively indorsed. No costs." (p. 49, Rollo.)

Petitioner filed a motion for reconsideration of the decision but it was denied,
hence, this petition for review, alleging that the Court of Appeals
erred:chanrobles.com:cralaw:red

1. in finding that the petitioner was negligent;

2. in holding that said negligence constituted sufficient ground to preclude it

from alleging forgery or want of authority;

3. in not ruling that the proximate cause for the loss was the respondent
Bank’s failure in its duty to ascertain the genuineness of the signatures
appearing in the checks;

4. in not ruling that the respondent Bank should have been held entirely
liable for the loss; and
5. in not condemning respondent Bank to pay petitioner damages, attorney’s
fees, expenses and costs.

The instant petition for review must necessarily fail. The issues raised
therein are factual. The main issue of petitioner’s negligence had already
been determined by the trial court against petitioner and affirmed by the
Court of Appeals after examining the evidence in the records.

Since the petitioner was not a client of respondent Bank, i.e., did not
maintain an account in said Bank, the latter had no way of ascertaining the
authenticity of its indorsements on the checks which were deposited in the
accounts of the third-party defendants in said Bank. Respondent Bank was
not negligent because, in accordance with banking practice, it caused the
checks to pass through the clearing house before it allowed their proceeds to
be withdrawn by the depositors (third-party defendants in the lower court).
(p. 117, Rollo.)cralawnad

The Supreme Court decides appeals which only involve questions of law. It is
not the function of the Supreme Court to analyze or weigh the evidence all
over again, its jurisdiction being limited to resolving errors of law that might
have been committed by the lower court. (Dihiansan v. Court of Appeals,
153 SCRA 712; Francisco v. Mandi, 152 SCRA 711; Director of Lands v.
Funtilar, 142 SCRA 57).

WHEREFORE, the petition for review is denied for lack of merit. Costs against
the petitioner.

SO ORDERED.
CASE #98 PNB vs CA 25 SCRA 693 (1968)

[G.R. No. L-26001. October 29, 1968.]

PHILIPPINE NATIONAL BANK, Petitioner, v. THE COURT OF APPEALS

and PHILIPPINE COMMERCIAL AND INDUSTRIAL
BANK, Respondents.

Tomas Besa, Jose B. Galang and Juan C. Jimenez for Petitioner.

San Juan, Africa & Benedicto for Respondents.

SYLLABUS

1. MERCANTILE LAW; NEGOTIABLE INSTRUMENTS LAW; CHECKS;

INDORSEMENTS; FORGERY; LIABILITY OF DRAWEE THEREON. — The
question whether or not the indorsements have been falsified is immaterial
to the PNB’s liability as a drawee, or to its right to recover from the PCIB,
for, as against the drawee, the indorsement of an intermediate bank does
not guarantee the signature of the drawer, since the forgery of the
indorsement is not the cause of the loss.

2. ID.; ID.; ID.; WARRANTY; NO RIGHT OF RECOVERY THEREUNDER BY

PNB. — With respect to the warranty on the back of the check, it should be
noted that the PCIB thereby guaranteed "all prior indorsements", not the
authenticity of the signatures of the officers of the GSIS who signed on its
behalf, because the GSIS is not an indorser of the check, but its drawer.
Said warranty is irrelevant, therefore, to the PNB’s alleged right to recover
from the PCIB. It could have been availed of by a subsequent indorsee or a
holder in due course subsequent to the PCIB, but, the PNB is neither.
Indeed, upon payment by the PNB, as drawee, the check ceased to be a
negotiable instrument, and became a mere voucher or proof of payment.

3. ID.; ID.; ID.; ACCEPTANCE AND PAYMENT DISTINGUISHED. — The

acceptance of a bill is the signification by the drawee of his assent to the
order of the drawer, which in the case of checks, is the payment on demand,
of a given sum of money. Upon the other hand, actual payment of the
amount of a check implies not only an assent to said order of the drawer and
a recognition of the drawee’s obligation to pay the aforementioned sum, but,
also, a compliance with such obligation.

4. ID.; ID.; ID.; PAYMENT OF A FORGED CHECK; RECOVERY OF PAYMENT;

LIABILITY OF PROXIMATE CAUSE OF THE LOSS; CASE AT BAR. — The PCIB
did not cash the check upon its presentation by Augusto Lim; the latter had
merely deposited it in his current account with the PCIB; on the same day,
the PCIB sent it, through the Central Bank, to the PNB for clearing; the PNB
did not return the check to the PCIB the next day or at any other time; said
failure to return the check to the PCIB induced, under the current banking
practice, that the PNB considered the check good and would honor it; in fact,
the PNB honored the check and paid its amount to the PCIB; and only then
did the PCIB allow Augusto Lim to draw said amount from his
aforementioned current account. Thus, by not returning to the check to the
PCIB, by thereby indicating that the PNB had found nothing wrong with the
check and would honor the same, and by actually paying its amount to the
PCIB, the PNB induced the latter, not only to believe that the check was
genuine and good in every respect, but, also, to pay its amount to Augusto
Lim. In other words, the PNB was the primary or proximate cause of the
loss, and, hence, may not recover from the PCIB.

5. ID.; ID.; ID.; ID.; ID.; SETTLED RULE. — It is a well-settled maxim of law
and equity that when one of two innocent persons must suffer by the
wrongful act of a third person, the loss must be borne by the one whose
negligence was the proximate cause of the loss or who put it into the power
of the third person to perpetrate the wrong.

DECISION

CONCEPCION, J.:

The Philippine National Bank — hereinafter referred to as the PNB — seeks

the review by certiorari of a decision of the Court of Appeals, which affirmed
that of the Court of First Instance of Manila, dismissing plaintiff’s complaint
against the Philippine Commercial and Industrial Bank — hereinafter referred
to as the PCIB — for the recovery of P57,415.00.

A partial stipulation of facts entered into by the parties and the decision of
the Court of Appeals show that, on or about January 15, 1962, one Augusto
Lim deposited in his current account with the PCIB branch at Padre Faura,
Manila, GSIS Check No. 645915-B, in the sum of P57,415.00, drawn against
the PNB; that, following an established banking practice in the Philippines,
the check was, on the same date, forwarded, for clearing, through the
Central Bank, to the PNB, which did not return said check the next day, or at
any other time, but retained, and paid its amount to the PCIB as well as
debited it against account of the GSIS in the PNB; that, subsequently, or on
January 31, 1962, upon demand from the GSIS, said sum of P57,415.00 was
re-credited to the latter’s account, for the reason that the signatures of its
officers on the check were forged; and that, thereupon, or on February 2,
1962, the PNB demanded from PCIB the refund of said sum, which the PCIB
refused to do. Hence, the present action against the PCIB, which was
dismissed the Court of First Instance of Manila, whose decision was, in turn,
affirmed by the Court of Appeals.

It is not disputed that the signatures of the General Manager and the Auditor
of the GSIS on the check, as drawer thereof, are forged; that the person
named in the check as its payee was Mariano D. Pulido, who purportedly
indorsed it to one Manuel Go; that the check purports to have been indorsed
by Manuel Go to Augusto Lim, who, in turn, deposited it with the PCIB, on
January 15, 1962; that thereupon, the PCIB stamped following on the back
of the check: "All prior indorsements/or Lack of Endorsement Guaranteed,
Philippine Commercial Industrial Bank," Padre Faura Branch, Manila; that, on
the same date, the PCIB sent the check to the PNB, for clearance, through
the Central Bank; and that, over two (2) months before, or on November 13,
1961, the GSIS had notified the PNB, which acknowledged receipt of the
notice, that said check had been lost, and, accordingly, requested that its
payment be stopped.

In its brief, the PNB maintains that the lower court erred: (1) in not finding
the PCIB guilty of negligence; (2) in not finding that the indorsements at the
back of the check are forged; (3) in not finding the PCIB liable to the PNB by
virtue of the former’s warranty on the back of the check; (4) in not holding
that "clearing" is not "acceptance", in contemplation of the Negotiable
Instruments Law; (5) in not finding that, since the check had not been
accepted by the PNB, the latter is entitled reimbursement therefor; and (6)
in denying the PNB’s right to recover from the PCIB.

The first assignment of error will be discussed later, together with the last,
with which it is interrelated.

As regards the second assignment of error, the PNB argues that, since the
signatures of the drawer are forged, so must the signatures of the supposed
indorsers be; but this conclusion does not necessarily follow from said
premise. Besides, there is absolutely no evidence, and the PNB has not even
tried to prove that the aforementioned indorsements are spurious. Again,
the PNB refunded the amount of the check to the GSIS, on account of the
forgery in the signatures, not of the indorsers or supposed indorsers, but of
the officers of the GSIS as drawer of the instrument. In other words, the
question whether or not the indorsements have been falsified is immaterial
to the PNB’s liability as a drawee, or to its right to recover from the PCIB 1 ,
for, as against the drawee, the indorsement of an intermediate bank does
not guarantee the signature of the drawer 2 , since the forgery of the
indorsement is not the cause of the loss. 3

With respect to the warranty on the back of the check, to which the third
assignment of error refers, it should be noted that the PCIB thereby
guaranteed "all prior indorsements", not the authenticity of the signatures of
the officers of the GSIS who signed on its behalf, because the GSIS is not an
indorser of the check, but its drawer. 4 Said warranty is irrelevant,
therefore, to the PNB’s alleged right to recover from the PCIB. It could have
been availed of by a subsequent indorsee 5 or a holder in due course 6
subsequent to the PCIB, but, the PNB is neither. 7 Indeed, upon payment by
the PNB, as drawee, the, check ceased to be a negotiable instrument, and
became a mere voucher or proof of payment. 8

Referring to the fourth and fifth assignments of error, we must bear in mind
that, in general, "acceptance", in the sense in which this term is used in the
Negotiable Instruments Law 9 is not required for checks, for the same are
payable on demand. 10 Indeed, "acceptance" and "payment" are, within the
purview of said Law, essentially different things, for the former is "a promise
to perform an act," whereas the latter is the "actual performance" thereof.
11 In the words of the law, 12 "the acceptance of a bill is the signification by
the drawee of his assent to the order of the drawer," which, in the case of
checks, is the payment, on demand, of a given sum of money. Upon the
other hand, actual payment of the amount of a check implies not only an
assent to said order of the drawer and a recognition of the drawee’s
obligation to pay the aforementioned sum, but, also, a compliance with such
obligation.

Let us now consider the first and the last assignments of error. The PNB
maintains that the lower court erred in not finding that the PCIB had been
guilty of negligence in not discovering that the check was forged. Assuming
that there had been such negligence on the part of the PCIB, it is
undeniable, however, that the PNB has, also, been negligent, with the
particularity that the PNB had been guilty of a greater degree of negligence,
because it had a previous and formal notice from the GSIS that the check
had been lost, with the request that payment thereof be stopped. Just as
important, if not more important and decisive, is the fact that the PNB’s
negligence was the main or proximate cause for the corresponding loss.
In this connection, it will be recalled that the PCIB did not cash the check
upon its presentation by Augusto Lim; that the latter had merely deposited it
in his current account with the PCIB; that, on the same day, the PCIB sent
it, through the Central Bank, to the PNB, for clearing; that the PNB did not
return the check to the PCIB the next day or at any other time; that said
failure to return the check to the PCIB implied, under the current banking
practice, that the PNB considered the check good and would honor it; that,
in fact, the PNB honored the check and paid its amount to the PCIB; and
that only then did the PCIB allow Augusto Lim to draw said amount from his
aforementioned current account.

Thus, by not returning the check to the PCIB, by thereby indicating that the
PNB had found nothing wrong with the check and would honor the same,
and by actually paying its amount to the PCIB, the PNB induced the latter,
not only to believe that the check was genuine and good in every respect,
but, also, to pay its amount to Augusto Lim. In other words, the PNB was
the primary or proximate cause of the loss, and, hence, may not recover
from the PCIB. 13

It is a well-settled maxim of law and equity that when one of two (2)
innocent persons must suffer by the wrongful act of a third person, the loss
must be borne by the one whose negligence was the proximate cause of the
loss or who put it into the power of the third person to perpetrate the wrong.
14

Then, again, it has, likewise, been held that, where the collecting (PCIB) and
the drawee (PNB) banks are equally at fault, the court will leave the parties
where it finds them. 15

Lastly, Section 62 of Act No. 2031 provides:jgc:chanrobles.com.ph

"The acceptor by accepting the instrument engages that he will pay it

according to the tenor of his acceptance; and admits:jgc:chanrobles.com.ph

"(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and

"(b) The existence of the payee and his then capacity to indorse."cralaw
virtua1aw library

The prevailing view is that the same rule applies in the case of a drawee who
pays a bill without having previously accepted it. 16
WHEREFORE, the decision appealed from is hereby affirmed, with costs
against the Philippine National Bank. It is so ordered.