ISSUANCE OF NEGOTIABLE INSTRUMENTS

Dela Victoria vs. Burgos

GR 111190, 27 June 1995
First Division, Bellosillo (J)

Facts: Raul Sesbreno filed a complaint for damages against Assistant City Fiscal Bienvenido Mabanto
before the RTC of Cebu City. After trial, judgment was rendered ordering Mabanto to pay Sesbreno
P11,000. The decision having become final and executory, the trial court ordered its execution upon
Sesbreno’s motion. The writ of execution was issued despite Mabanto’s objection. A notice of
garnishment was served upon Loreto de la Victoria as City Fiscal of Mandaue City where Mabanto was
then detailed. De la Victoria moved to quash the notice of garnishment claiming that he was not in
possession of any money, funds, etc. belonging to Mabanto until delivered to him, and as such are still
public funds which could not be subject of garnishment..

Issue: Whether the checks subject of garnishment belong to Mabanto or whether they still belong to
the government.

Held: Under Section 16 of the Negotiable Instruments Law, every contract on a negotiable instrument
is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As
ordinarily understood, delivery means the transfer of the possession of the instrument by the maker
or drawer with the intent to transfer title to the payee and recognize him as the holder thereof.
Herein, the salary check of a government officer or employee does not belong to him before it is
physically delivered to him. Inasmuch as said checks had not yet been delivered to Mabanto, they did
not belong to him and still had the character of public funds. As a necessary consequence of being
public fund, the checks may not be garnished to satisfy the judgment.

ASTRO ELECTRONICS CORP. & PETER ROXAS v. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE

CORPORATION

G.R. No. 136729 September 23, 2003

Austria-Martinez, J.

Doctrine:

Persons who write their names on the face of promissory notes are makers. Thus, even without the phrase “personal
capacity,” a person who signs on the instrument twice will still be primarily liable as a joint and several debtor.

Facts:

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. In each of these promissory notes, it appears that petitioner Roxas signed
twice, as President of Astro and in his personal capacity. Roxas also signed a Continuing Surety ship Agreement in
favor of Philtrust Bank, as President of Astro and as surety.

Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of 70% of Astro’s

loan, subject to the condition that upon payment by Philguanrantee of said amount, it shall be proportionally

subrogated to the rights of Philtrust against Astro. As a result of Astro’s 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.

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.

The trial court ruled in favor of Philguarantee, stating 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. On appeal, the
Court of Appeals affirmed the RTC decision.

Issue:

Whether or not Roxas should be solidarily liable with Astro for the sum awarded by the RTC

Held:

Yes. In signing his name aside from being the President of Astro, 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. 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.

Moreover, an instrument which begins with “I”, “We”, or “Either of us” promise to pay, when signed by two or more
persons, makes them solidary liable (Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December 21,

1992). 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.

It devolves upon one to overcome the presumptions that private transactions are presumed to be fair and regular and
that a person takes ordinary care of his concerns (Mendoza vs. Court of Appeals, G.R. No. 116710). Bare

allegations, when unsubstantiated by evidence, documentary or otherwise, are not equivalent to proof under our
Rules of Court (Coronel vs. Constantino, G.R. No. 121069, February 7, 2003). Since Roxas failed to prove the truth
of his allegations that the phrases “in his personal capacity” and “in his official capacity” were inserted on the notes
without his knowledge, said presumptions shall prevail over his claims.

DEVELOPMENT BANK OF RIZAL V. SIMA WEI

219 SCRA 736

FACTS:

Sima Wei executed a promissory note in consideration of a loan secured from petitioner
bank. She was able to pay partially for the loan but failed
to pay for the balance. She then issued two checks to pay the unpaid balance but for some
unexplainable reason, the checks were not received
by the bank but ended up in the hands of someone else. The bank
instituted actions against Sima Wei and other people. The trial court dismissed the case and
the CA affirmed this decision.

ISSUE:

Whether or not the contract between the parties was binding

HELD:

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 provides that 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 the negotiable instrument acquires no interest with respect thereto until its
delivery to him. Delivery of an 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.

[G.R. No. 125055. October 30, 1998]

A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner, vs. COURT

OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P.
JAVILLONAR, respondents.

Facts:
A. Francisco Realty granted a loan of P7.5 M to spouses Javillonar, in consideration of which,
the latter executed a promissory note, a real estate mortgage over a certain property, and a
deed of sale of said mortgaged property in favor of A. Francisco.
Upon maturity, Javillonar spouses failed to pay, and as a consequence, A. Francisco
registered the sale of the mortgaged property, for which a new TCT was issued.
A. Francisco demanded possession of the mortgaged realty. Spouses refused to
vacate. Hence, A. Francisco filed a case for possession before the RTC.
The spouses admitted that they owed money in favor of A. Francisco but they also alleged
that it was not their intention to sell the realty as the deed of sale executed by them was
merely an additional security for the payment of their loan. RTC adjudged in favor of A.
Francisco. On appeal, CA reversed RTC decision and dismissed the complaint against the
spouses holding that the deed of sale was void, being in the nature of a pactum
commissorium prohibited by law. Hence, this petition with the SC.

Issue:

Whether or not the deed of sale executed by the spouses was void, being in the nature of
pactum commissorium.

Held:

Yes. Art. 2088 of the Civil Code provides that the creditor cannot appropriate the things
given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is
void. What is envisioned by this article is a provision in the deed of mortgage providing for
the automatic conveyance of the mortgaged property in case of the failure of the debtor to
pay the loan. A pactum commissorium is a forfeiture clause in a deed of mortgage. The
proscribed stipulation of automatic conveyance must be found in the mortgage deed itself.
In the case at bar, the stipulations in the promissory note provide that, upon failure of
spouses to pay interest, ownership of the property would be automatically transferred to A.
Francisco and the deed of sale in its favor would be registered. These stipulations are in
substance a pactum commissorium. They embody the two elements of pactum
commissorium, to wit:
(1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged
by way of security for the payment of the principal obligation;
(2) that there should be a stipulation for an automatic appropriation by the creditor of the
thing pledged or mortgaged in the event of non-payment of the principal obligation within
the stipulated period.

Republic Planters Bank vs. CA

GR 93073, 21 December 1992
Second Division, Campos Jr. (J)

Facts: Republic Planters Bank issued 9 promissory notes signed by Shozo Yamaguchi (President) and
Fermin Canlas (Treasurer) of Worldwide Garment Manufacturing Inc. Yamaguchi and Canlas were
authorized by the corporation to apply for credit facilities with the bank in form of export advances
and letters of credit or trust receipts accommodations. Three years after, the bank filed an action to
recover the sums of money covered by the promissory notes. Worldwide Garment Manufacturing
changed its name to Pinch Manufacturing Corp. Canlas alleged he was not liable personally for the
corporate acts that he performed, and that the notes were still blank when he signed them.

Issue: Whether the corporate treasurer is liable for the amounts in the promissory notes.

Held: Canlas is a co-maker of the promissory notes, under the law, and cannot escape liability arising
therefrom. Inasmuch as the instrument contained the words “I promise to pay” and is signed by two
or more persons, said persons are deemed to be jointly and severally liable thereon. As the
promissory notes are stereotype ones issued by the bank in printed form with blank spaces filled up as
per agreed terms of the loan, following customary procedures, leaving the debtors to do nothing but
read the terms and conditions therein and to sign as makers or co-makers. Section 14 of the
Negotiable Instruments Law, therefore, does not apply. Canlas is solidarily liable with the corporation
for the amount of the 9 promissory notes.

Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust and CA

Facts:

Samsung Construction maintained a current account with Far East Bank and Trust Bank
(FETBC) in its Bel-Air Makati Branch, with Jong Kyu Lee who is the Project Manager as the sole
signatory and Kyu Yong Lee having the checks in his custody as the company’s accountant. A
certain Roberto Gonzaga presented an FETBC Check on the same branch. The check was
payable to cash and drawn against the account of Samsung Construction amounting to P995,
500.00. The teller and the bank officers were satisfied with the genuineness of the signature in
the check and confirmed the identity of Gonzaga with the assistant accountant of Samsung
Construction who was also familiar and known to them, the latter being present at the bank
premises at that time. In the end, the check was authorized to be encashed. The Project
Manager and the Accountant of the company found out the next day that the last blank check
was missing and that the check was encashed with Jong’s signature being forged. Samsung
Construction demanded reimbursement of the amount encashed and when it was not heeded
immediately, it filed a Complaint against the bank for violation of Sec. 23 of Negotiable
Instruments Law.

In the RTC, it held that Jong’s signature on the check was forged and ordered the bank to pay
company for the amount plus interest. During appeal in CA, this decision was reversed by
stating that even assuming there was forgery, it occurred due to the negligence of Samsung
Construction specifically the accountant for lack of care in keeping the checks. The decision
was appealed to SC, based on the grounds that the CA misapprehended the facts and erred
when it said that the company has been negligent in safekeeping the check.

Issue:
Is bank liable to reimburse the amount encashed through forgery?

Ruling:

Yes, the bank is liable to pay Samsung Construction. Therefore, the decision of CA is set aside.

Under Sec. 23 of Negotiable Instruments Law, forgery is a real or absolute defense by the party
whose signature is forged. 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 especially that Samsung Construction reported the forgery
almost immediately upon discovery. The general rule imputing liability on the drawee who paid
out on the forgery holds in this case.

The circumstances 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. 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. A bank is liable,
irrespective of its good faith, in paying a forged check.

International Bank vs Court of

Appeals (2001)
350 SCRA 446 – Mercantile Law – Negotiable Instruments Law – Rights of the Holder –
What Constitutes a Holder in Due Course – Negligence of the Collecting Bank and the
Drawee Bank
There are three cases consolidated here: G.R. No. 121413 (PCIB vs CA and Ford and
Citibank), G.R. No. 121479 (Ford vs CA and Citibank and PCIB), and G.R. No. 128604
(Ford vs Citibank and PCIB and CA).
G.R. No. 121413/G.R. No. 121479
In October 1977, Ford Philippines drew a Citibank check in the amount of P4,746,114.41 in
favor of the Commissioner of the Internal Revenue (CIR). The check represents Ford’s tax
payment for the third quarter of 1977. On the face of the check was written “Payee’s
account only” which means that the check cannot be encashed and can only be deposited
with the CIR’s savings account (which is with Metrobank). The said check was however
presented to PCIB and PCIB accepted the same. PCIB then indorsed the check for clearing
to Citibank. Citibank cleared the check and paid PCIB P4,746,114.41. CIR later informed
Ford that it never received the tax payment.
An investigation ensued and it was discovered that Ford’s accountant Godofredo Rivera,
when the check was deposited with PCIB, recalled the check since there was allegedly an
error in the computation of the tax to be paid. PCIB, as instructed by Rivera, replaced the
check with two of its manager’s checks.
It was further discovered that Rivera was actually a member of a syndicate and the
manager’s checks were subsequently deposited with the Pacific Banking Corporation by
other members of the syndicate. Thereafter, Rivera and the other members became
fugitives of justice.
G.R. No. 128604
In July 1978 and in April 1979, Ford drew two checks in the amounts of P5,851,706.37 and
P6,311,591.73 respectively. Both checks are again for tax payments. Both checks are for
“Payee’s account only” or for the CIR’s bank savings account only with Metrobank. Again,
these checks never reached the CIR.
In an investigation, it was found that these checks were embezzled by the same syndicate
to which Rivera was a member. It was established that an employee of PCIB, also a
member of the syndicate, created a PCIB account under a fictitious name upon which the
two checks, through high end manipulation, were deposited. PCIB unwittingly endorsed the
checks to Citibank which the latter cleared. Upon clearing, the amount was withdrawn from
the fictitious account by syndicate members.
ISSUE: What are the liabilities of each party?
HELD: G.R. No. 121413/G.R. No. 121479
PCIB is liable for the amount of the check (P4,746,114.41). PCIB, as a collecting bank has
been negligent in verifying the authority of Rivera to negotiate the check. It failed to
ascertain whether or not Rivera can validly recall the check and have them be replaced with
PCIB’s manager’s checks as in fact, Ford has no knowledge and did not authorize such. A
bank (in this case PCIB) which cashes a check drawn upon another bank (in this case
Citibank), 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. Hence, PCIB
is liable for the amount of the embezzled check.
G.R. No. 128604
PCIB and Citibank are liable for the amount of the checks on a 50-50 basis.
As a general rule, a bank is liable for the negligent or tortuous act of its employees within
the course and apparent scope of their employment or authority. Hence, PCIB is liable for
the fraudulent act of its employee who set up the savings account under a fictitious name.
Citibank is likewise liable because it was negligent in the performance of its obligations with
respect to its agreement with Ford. The checks which were drawn against Ford’s account
with Citibank clearly states that they are payable to the CIR only yet Citibank delivered said
payments to PCIB. Citibank however argues that the checks were indorsed by PCIB to
Citibank and that the latter has nothing to do but to pay it. The Supreme Court cited Section
62 of the Negotiable Instruments Law which mandates the Citibank, as an acceptor of the
checks, to engage in paying the checks according to the tenor of the acceptance which is to
deliver the payment to the “payee’s account only”.
But the Supreme Court ruled that in the consolidated cases, that PCIB and Citibank are not
the only negligent parties. Ford is also negligent for failing to examine its passbook in a
timely manner which could have avoided further loss. But this negligence is not the
proximate cause of the loss but is merely contributory. Nevertheless, this mitigates the
liability of PCIB and Citibank hence the rate of interest, with which PCIB and Citibank is to
pay Ford, is lowered from 12% to 6% per annum.

Associated Bank vs Court of

Appeals (1996)
252 SCRA 620 – Mercantile Law – Negotiable Instruments Law – Liabilities of Parties –
Forgery – Collecting Bank vs Drawee Bank
The Province of Tarlac was disbursing funds to Concepcion Emergency Hospital via checks
drawn against its account with the Philippine National Bank (PNB). These checks were
drawn payable to the order of Concepcion Emergency Hospital. Fausto Pangilinan was the
cashier of Concepcion Emergency Hospital in Tarlac until his retirement in 1978. He used to
handle checks issued by the provincial government of Tarlac to the said hospital. However,
after his retirement, the provincial government still delivered checks to him until its discovery
of this irregularity in 1981. By forging the signature of the chief payee of the hospital (Dr.
Adena Canlas), Pangilinan was able to deposit 30 checks amounting to P203k to his
account with the Associated Bank.
When the province of Tarlac discovered this irregularity, it demanded PNB to reimburse the
said amount. PNB in turn demanded Associated Bank to reimburse said amount. PNB
averred that Associated Bank is liable to reimburse because of its indorsement borne on the
face of the checks:
“All prior endorsements guaranteed ASSOCIATED BANK.”

ISSUE: What are the liabilities of each party?

HELD: The checks involved in this case are order instruments.
Liability of Associated Bank
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.
A collecting bank (in this case Associated Bank) where a check is deposited and which
indorses the check upon presentment with the drawee bank (PNB), is such an indorser. So
even if the indorsement on the check deposited by the banks’s client is forged, Associated
Bank is bound by its warranties as an indorser and cannot set up the defense of forgery as
against the PNB.
EXCEPTION: If it can be shown that the drawee bank (PNB) unreasonably delayed in
notifying the collecting bank (Associated Bank) of the fact of the forgery so much so that the
latter can no longer collect reimbursement from the depositor-forger.
Liability of PNB
The bank on which a check is drawn, known as the drawee bank (PNB), is under strict
liability to pay the check to the order of the payee (Provincial Government of Tarlac).
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. 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. The risk of loss must perforce fall on the drawee bank.
EXCEPTION: If the drawee bank (PNB) can prove a failure by the customer/drawer (Tarlac
Province) to exercise ordinary care that substantially contributed to the making of the forged
signature, the drawer is precluded from asserting the forgery.
In sum, by reason of Associated Bank’s indorsement and warranties of prior indorsements
as a party after the forgery, it is liable to refund the amount to PNB. The Province of Tarlac
can ask reimbursement from PNB because the Province is a party prior to the forgery.
Hence, the instrument is inoperative. HOWEVER, it has been proven that the Provincial
Government of Tarlac has been negligent in issuing the checks especially when it continued
to deliver the checks to Pangilinan even when he already retired. Due to this contributory
negligence, PNB is only ordered to pay 50% of the amount or half of P203 K.
BUT THEN AGAIN, since PNB can pass its loss to Associated Bank (by reason of
Associated Bank’s warranties), PNB can ask the 50% reimbursement from Associated
Bank. Associated Bank can ask reimbursement from Pangilinan but unfortunately in this
case, the court did not acquire jurisdiction over him.
WESTMONT BANK V. ONG

373 SCRA 212

FACTS:

Ong was supposed to be the payee of the checks issued by Island Securities. Ong has a current
account with petitioner bank. He opted to
sell his shares of stock through Island Securities. The company in turn issued checks in favor of
Ong but unfortunately, the latter wasn't able to receive any. His signatures were forged by Tamlinco
and the checks were deposited in his own account with petitioner. Ong then sought to collect the
money from the family of Tamlinco first before filing a complaint with the Central Bank. As his efforts
were futile to recover his money, he filed
an action against the petitioner. The trial and appellate court decided in favor of Ong.
ISSUE:

WON petitioner should recognize payment made through check

HELD:

Since the signature of the payee was forged, such signature should be
deemed 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 collect from the collecting bank.

It should be liable for the loss because it is its legal duty to ascertain that
the payee’s endorsement was genuine before cashing the check. As a general rule, a bank or
corporation who has obtained possession of a check with an unauthorized or forged indorsement of the
payee’s signature and who collects the amount of the check other from the drawee, is liable for the
proceeds thereof to the payee or the other owner, notwithstanding that
the amount has been paid to the person from whom the check was obtained.

DOCTRINE OF DESIRABLE SHORT CUT—plaintiff uses one action to reach,

by desirable short cut, the person who ought 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.

On the issue of laches, Ong didn't sit on his rights. He immediately sought the intervention of Tamlinco’s
family to collect the sum of money, and later
the Central Bank. Only after exhausting all the measures to settle the issue amicably did he file
the action.
Republic Bank vs Mauricia
Ebrada
65 SCRA 680 – Mercantile Law – Negotiable Instruments Law – Consideration – Forgery –
Liability of Accommodation Party
On January 15, 1963, the Bureau of Treasury issued a back pay check to Martin Lorenzo in
the amount of P1,246.08. The drawee named therein was Republic Bank. The check was
subsequently indorsed to Ramon Lorenzo, then to Delia Dominguez and then to Mauricia
Ebrada. Ebrada encashed the check with the Republic Bank. Republic Bank paid the
amount of the check to Ebrada. Ebrada, upon receiving the cash, gave it to Dominguez;
Dominguez in turn gave the cash to Ramon Lorenzo.
Later, the Bureau of Treasury notified that the check was a forgery because the payee
named therein (Martin Lorenzo) was actually dead 11 years ago before the check was
issued. Republic Bank refunded the amount to the Bureau of Treasury. The bank then
demanded Ebrada to refund them.
ISSUE: Whether or not Republic Bank may recover from Ebrada.
HELD: Yes. Ebrada, being the last indorser, warranted the genuineness of the signatures of
the payee and the previous indorsers. The drawee bank is not duty bound to ascertain
whether or not the signatures of the payee and the indorsers are genuine. 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 (in this case Republic
Bank) who has paid the forged check, without actual negligence on his part, may recover
the money paid from such negligent purchasers.
But Ebrada did not profit from this because she, upon receiving the encashment, gave the
same to Dominguez?
She is still liable because she is considered as an accommodation party – pursuant to
Section 29 of the Negotiable Instruments Law. 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.
Negotiable Instruments Digest: BPI FAMILY BANK v.
EDGARDO BUENAVENTURA et al.
BPI FAMILY BANK v. EDGARDO BUENAVENTURA et al.

[G.R. No. 148196, September 30, 2005] (471 SCRA 431)

FACTS:

A complaint for Reinstatement of Current Account/Release of Money plus Damages

was filed by the Buenaventuras against BPI Family Bank (BPI-FB) in the RTC.
Buenaventura, et al. opened a Current account with the BPI-FB Branch in Caloocan City.
They deposited a check from Amado Franco which was purportedly issued by Eladio Teves
and Joseph Teves. The check was subsequently cleared and the amount of P500, 000.00
was credited to their Current Account.

Petitioners then drew a check amounting to P91, 270.00 which was dishonored
upon presentment for payment for the reason that the account was already closed in spite
of the balance in their current account. They subsequently learned that the Bank of the
Philippine Islands unilaterally freeze their Current account on the ground that the source of
fund was illegal or unauthorized.

BPI-FB refused to reinstate the account even after demand from the petitioners. It
asserted that the freezing of the account was triggered by the forgery claim of FMIC and
the unauthorized fund transfer to Tevesteco. 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) by means of forgery.

ISSUE:

WON BPI-FB is liable for the loss due to its negligence to detect forgery prior to
clearing the check?

HELD:
 YES. 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. 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.

Philippine National Bank vs

Romulo Quimpo
158 SCRA 582 – Mercantile Law – Negotiable Instruments Law – Liabilities of Parties –
Forgery – Liability of the Drawee Bank
In June 1973, Francisco Gozon II went to the Philippine National Bank (Caloocan City)
accompanied by his friend Ernesto Santos. Gozon left Santos in his car and while Gozon
was at the bank, Santos took a check from Gozon’s checkbook. Santos forged Gozon’s
signature and filled out the check with the amount of P5,000.00. Santos was able to encash
the check that day with PNB. Gozon learned of this when his statement arrived. Santos
eventually admitted to forging Gozon’s signature. Gozon then demanded the PNB to refund
him the amount. PNB refused. Judge Romulo Quimpo ruled in favor of Gozon.
ISSUE: Whether or not PNB is liable.
HELD: Yes. 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. PNB failed to meet its obligation to know the signature of its correspondent (Gozon).
Further, it was found by the court that there are glaring differences between Gozon’s
authentic specimen signatures and that of the forged check.
Associated Bank vs Court of
Appeals (1996)
252 SCRA 620 – Mercantile Law – Negotiable Instruments Law – Liabilities of Parties –
Forgery – Collecting Bank vs Drawee Bank
The Province of Tarlac was disbursing funds to Concepcion Emergency Hospital via checks
drawn against its account with the Philippine National Bank (PNB). These checks were
drawn payable to the order of Concepcion Emergency Hospital. Fausto Pangilinan was the
cashier of Concepcion Emergency Hospital in Tarlac until his retirement in 1978. He used to
handle checks issued by the provincial government of Tarlac to the said hospital. However,
after his retirement, the provincial government still delivered checks to him until its discovery
of this irregularity in 1981. By forging the signature of the chief payee of the hospital (Dr.
Adena Canlas), Pangilinan was able to deposit 30 checks amounting to P203k to his
account with the Associated Bank.
When the province of Tarlac discovered this irregularity, it demanded PNB to reimburse the
said amount. PNB in turn demanded Associated Bank to reimburse said amount. PNB
averred that Associated Bank is liable to reimburse because of its indorsement borne on the
face of the checks:
“All prior endorsements guaranteed ASSOCIATED BANK.”

ISSUE: What are the liabilities of each party?

HELD: The checks involved in this case are order instruments.
Liability of Associated Bank
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.
A collecting bank (in this case Associated Bank) where a check is deposited and which
indorses the check upon presentment with the drawee bank (PNB), is such an indorser. So
even if the indorsement on the check deposited by the banks’s client is forged, Associated
Bank is bound by its warranties as an indorser and cannot set up the defense of forgery as
against the PNB.
EXCEPTION: If it can be shown that the drawee bank (PNB) unreasonably delayed in
notifying the collecting bank (Associated Bank) of the fact of the forgery so much so that the
latter can no longer collect reimbursement from the depositor-forger.
Liability of PNB
The bank on which a check is drawn, known as the drawee bank (PNB), is under strict
liability to pay the check to the order of the payee (Provincial Government of Tarlac).
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. 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. The risk of loss must perforce fall on the drawee bank.
EXCEPTION: If the drawee bank (PNB) can prove a failure by the customer/drawer (Tarlac
Province) to exercise ordinary care that substantially contributed to the making of the forged
signature, the drawer is precluded from asserting the forgery.
In sum, by reason of Associated Bank’s indorsement and warranties of prior indorsements
as a party after the forgery, it is liable to refund the amount to PNB. The Province of Tarlac
can ask reimbursement from PNB because the Province is a party prior to the forgery.
Hence, the instrument is inoperative. HOWEVER, it has been proven that the Provincial
Government of Tarlac has been negligent in issuing the checks especially when it continued
to deliver the checks to Pangilinan even when he already retired. Due to this contributory
negligence, PNB is only ordered to pay 50% of the amount or half of P203 K.
BUT THEN AGAIN, since PNB can pass its loss to Associated Bank (by reason of
Associated Bank’s warranties), PNB can ask the 50% reimbursement from Associated
Bank. Associated Bank can ask reimbursement from Pangilinan but unfortunately in this
case, the court did not acquire jurisdiction over him.

Metropolitan Waterworks and

Sewerage System vs Court of
Appeals (July 1986)
143 SCRA 20 – Mercantile Law – Negotiable Instruments Law – Liabilities of Parties –
Forgery – Negligence of Drawer
Metropolitan Waterworks and Sewerage System (MWSS) had an account with PNB. When
it was still called NAWASA, MWSS made a special arrangement with PNB so that it may
have personalized checks to be printed by Mesina Enterprises. These personalized checks
were the ones being used by MWSS in its business transactions.
From March to May 1969, MWSS issued 23 checks to various payees in the aggregate
amount of P320,636.26. During the same months, another set of 23 checks containing the
same check numbers earlier issued were forged. The aggregate amount of the forged
checks amounted to P3,457,903.00. This amount was distributed to the bank accounts of
three persons: Arturo Sison, Antonio Mendoza, and Raul Dizon.
MWSS then demanded PNB to restore the amount of P3,457,903.00. PNB refused. The
trial court ruled in favor of MWSS but the Court of Appeals reversed the trial court’s
decision.
ISSUE: Whether or not PNB should restore the said amount.
HELD: No. MWSS is precluded from setting up the defense of forgery. It has been proven
that MWSS has been negligent in supervising the printing of its personalized checks. It
failed to provide security measures and coordinate the same with PNB. Further, the
signatures in the forged checks appear to be genuine as reported by the National Bureau of
Investigation so much so that the MWSS itself cannot tell the difference between the forged
signature and the genuine one. The records likewise show that MWSS failed to provide
appropriate security measures over its own records thereby laying confidential records open
to unauthorized persons. Even if the twenty-three (23) checks in question are considered
forgeries, considering the MWSS’s gross negligence, it is barred from setting up the
defense of forgery under Section 23 of the Negotiable Instruments Law.
The Supreme Court further emphasized that forgery cannot be presumed. It must be
established by clear, positive, and convincing evidence. This was not done in the present
case.

MBTC v. PBCOM (2007)

FACTS:

Pipe Master Corp (Pipe Master) represented by Yu Kio, its president, applied for check discounting with
Filipinas Orient Finance Corp (Filipinas Orient). The latter approved and granted the same supported by
a Board Resolution

Tan Juan Lian, as vice president, 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.

Under the check discounting agreement between Pipe Master and Filipinas Orient, Yu Kio sold to
Filipinas Orient four MBTC checks amounting to P1,000,000.00. In exchange for the four MBTC checks,
Filipinas Orient issued to Yu Kio four 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 MBTC, 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 Corp (Solid Bank), also in his personal
account. Eventually, PBCom paid MBTC and Solid Bank the amounts of the checks. In turn, MBTC and
Solid Bank credited the value of the checks to the personal accounts of Yu Kio.

Subsequently, when Filipinas Orient presented the four MBTC 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 (Orient’s) account the value of the PBCom
checks. In turn, PBCom sought reimbursement from MBTC and Solid Bank, being the collecting banks,
but they refused. Thus, Filipinas Orient filed with the RTC, a complaint for a sum of money against Pipe
Master, Tan Juan Lian and/or PBCom.

RTC rendered a Decision against MBTC and Solid Bank.

CA affirmed in toto the Decision of the trial court. Hence, the instant consolidated petitions filed by
MBTC and Solid Bank.

ISSUE: WON Metro Bank and Solid Bank, petitioners, are liable to respondent Filipinas Orient for
accepting the PBCom crossed checks payable to Pipe Master

DECISION: Petitions DENIED. Decision AFFIRMED.

HELD:

 A check is defined by law as a bill of exchange drawn on a bank payable on demand The NIL 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. 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.”
 Here, petitioner banks have the obligation to ensure that the PBCom checks were deposited in
accordance with the instructions stated in the checks. 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 therein – Pipe Master.
 The 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.
 o In Associated Bank v. Court of Appeals, the Court 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. Therefore,
petitioner banks are liable to respondent Filipinas Orient.
 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. 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.

Republic Bank vs Court of

Appeals
196 SCRA 100 – Mercantile Law – Negotiable Instruments Law – Liabilities of Parties –
Forgery – 24 Hour Clearing House Rule
On January 25, 1966, San Miguel Corporation (SMC) issued a P240.00 check in favor of
Roberto Delgado against SMC’s account with the First National City Bank (FNCB). Delgado
fraudulently changed the amount written on the check to P9,240.00. Delgado made a check
deposit with Republic Bank. Republic Bank accepted the check and endorsed it to FNCB by
stamping on the back of the check “all prior and/or lack of indorsement guaranteed“. The
check cleared and FNCB paid Republic Bank P9,240.00.
On April 19, 1966, SMC notified FNCB that the check involved was forged. FNCB refunded
SMC the amount of the check. On May 19, 1966, FNCB informed Republic bank about the
forgery, by then Delgado withdrew his account from Republic Bank. On August 15, 1966,
FNCB demanded Republic Bank to refund the amount of the check.
ISSUE: Whether or not Republic Bank should refund the amount to FNCB.
HELD: No. The 24-hour clearing house rule embodied in Section 4(c) of Central Bank
Circular No. 9, as amended, applies to this case. This rule mandates banks that after a
clearing, all cleared items must be returned not later than 3:00 PM of the following business
day.
It is true that when an endorsement is forged, the collecting bank or last endorser, as a
general rule, bears the loss. But the unqualified endorsement of the collecting bank on the
check should be read together with the 24-hour regulation on clearing house operation.
Thus, when the drawee bank (FNCB) fails to return a forged or altered check to the
collecting bank (Republic Bank) within the 24-hour clearing period, the collecting bank is
absolved from liability.

Manila Lighter Transportation,

Inc. vs Court of Appeals
182 SCRA 251 – Mercantile Law – Negotiable Instruments Law – Liabilities of Parties –
Forgery – Forged Signatures of Indorser
From January 1960 to June 1961, Augusto Perez, collector of the Manila Lighter
Transportation (MLT), collected 49 checks from MLT’s clients. The checks amounted to
P91,153.11. The checks were subsequently indorsed and the signature of Luis Gaskell,
MLT’s general manager, appeared on the checks as indorser. The checks were indorsed to
three persons who deposited the checks with their respective accounts with China Bank.
Gaskell later disowned the signatures as they were actually forged. MLT then demanded
China Bank to refund the aggregate amount of the checks. The trial court ruled that both
MLT and China Bank are negligent hence they should share the loss at 50-50 basis. The
Court of Appeals absolved China Bank of its liabilities.
ISSUE: Whether or not China Bank should refund the checks.
HELD: No. Since MLT was not a client of China 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.
China 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 three depositors.
Natividad Gempesaw vs Court of
Appeals
218 SCRA 682 – Mercantile Law – Negotiable Instruments Law – Liabilities of Parties –
Forgery – Forged Indorsements
Natividad Gempesaw is a businesswoman who entrusted to her bookkeeper, Alicia Galang,
the preparation of checks about to be issued in the course of her business transactions.
From 1984 to 1986, 82 checks amounting to P1,208,606.89, were prepared and were
supposed to be delivered to Gempesaw’s clients as payees named thereon. However,
through Galang, these checks were never delivered to the supposed payees. Instead, the
checks were fraudulently indorsed to Alfredo Romero and Benito Lam.
ISSUE: Whether or not the bank should refund the money lost by reason of the forged
indorsements.
HELD: No. Gempesaw cannot set up the defense of forgery by reason of her negligence.
As a rule, a drawee bank (in this case the Philippine Bank of Communications) who has
paid a check on which an indorsement has been forged cannot charge the drawer’s
(Gempesaw’s) account for the amount of said check. An exception to this rule is where the
drawer is guilty of such negligence which causes the bank to honor such a check or checks.
If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly
discover the forged indorsement by mere examination of his cancelled check. A different
situation arises where the indorsement was forged by an employee or agent of the drawer,
or done with the active participation of the latter.
The negligence of a depositor which will prevent recovery of an unauthorized payment is
based on failure of the depositor to act as a prudent businessman would under the
circumstances. In the case at bar, Gempesaw relied implicitly upon the honesty and loyalty
of Galang, and did not even verify the accuracy of amounts of the checks she signed
against the invoices attached thereto. Furthermore, although she regularly received her
bank statements, she apparently did not carefully examine the same nor the check stubs
and the returned checks, and did not compare them with the same invoices. Otherwise, she
could have easily discovered the discrepancies between the checks and the documents
serving as bases for the checks. With such discovery, the subsequent forgeries would not
have been accomplished. It was not until two years after Galang commenced her fraudulent
scheme that Gempesaw discovered that eighty-two (82) checks were wrongfully charged to
her account, at which she notified the Philippine Bank of Communications.
INTERNATIONAL CORPORATE BANK VS CA (501 SCRA 20)
International Corporate Bank, Inc vs Court of Appeals
501 SCRA 20 [G.R. No. 129910 September 5, 2006]

Facts: The Ministry of Education and Culture issued 15 checks drawn against respondent which petitioner accepted
for deposit on various dates. After 24 hours from submission of the checks to respondent for clearing, petitioner paid
the value of the checks and allowed the withdrawals of the deposits. However, on 14 October 1981, respondent
returned all the checks to petitioner without clearing them on the ground that they were materially altered. Thus,
petitioner instituted an action for collection of sums of money against respondent to recover the value of the checks.

Issue: Whether the alterations in the serial numbers of the check is a material alteration.

Held: No. Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable Instruments Law, provide:

SEC. 124. Alteration of instrument; effect of. ― Where a negotiable instrument is materially altered without the
assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or
assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the
hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to its
original tenor.

SEC. 125. What constitutes a material alteration. ― Any alteration which changes: (a) The date; (b) The sum
payable, either for principal or interest; (c) The time or place of payment; (d) The number or the relations of the
parties; (e) The medium or currency in which payment is to be made; or which adds a place of payment where no
place of payment is specified, or any other change or addition which alters the effect of the instrument in any
respect, is a material alteration.

An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in an
instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or
numbers or other change to an incomplete instrument relating to the obligation of a party. In other words, a material
alteration is one which changes the items which are required to be stated under Section 1 of the Negotiable
Instruments Law.

The case at the bench is unique in the sense that what was altered is the serial number of the check in question, an
item which, it can readily be observed, is not an essential requisite for negotiability under Section 1 of the
Negotiable Instruments Law. The aforementioned alteration did not change the relations between the parties. The
name of the drawer and the drawee were not altered. The intended payee was the same. The sum of money due to
the payee remained the same.
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PNB V. CA- Material Alteration

256 SCRA 491

FACTS:

DECS issued a check in favor of Abante Marketing containing a specific serial number, drawn
against PNB. The check was deposited by Abante in
its account with Capitol and the latter consequently deposited the same
with its account with PBCOM which later deposited it with petitioner for
clearing. The check was thereafter cleared. However, on a relevant date,
petitioner PNB returned the check on account that there had been a material alteration on
it. Subsequent debits were made but Capitol cannot debit the account of Abante any longer for the
latter had withdrawn all the money already from the account. This prompted Capitol to seek
reclarification from PBCOM and demanded the recrediting of its account. PBCOM followed suit by
doing the same against PNB. Demands unheeded,
it filed an action against PBCOM and the latter filed a third-party complaint against petitioner.

ISSUE:

Whether or not such alteration should adversely affect the negotiability of the instrument

HELD:

An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized
change in the instrument that purports to modify
in any respect the obligation of a party or an unauthorized addition of words or numbers or other
change to an incomplete instrument relating to
the obligation of the party. In other words, a material alteration is one which changes the items
which are required to be stated under Section 1 of the NIL.

In this case, the alleged material alteration was the alteration of the serial
number of the check in issue—which is not an essential element of a negotiable instrument under
Section 1. PNB alleges that the alteration was
material since it is an accepted concept that a TCAA check by its very
nature is the medium of exchange of governments, instrumentalities and
agencies. As a safety measure, every government office or agency is assigned checks bearing
different serial numbers.

But this contention has to fail. The check’s serial number is not the sole indicia of its origin. The name
of the government agency issuing the check is clearly stated therein. Thus, the check’s drawer is
sufficiently identified, rendering redundant the referral to its serial number.

Therefore, there being no material alteration in the check committed, PNB could not return the check to
PBCOM. It should pay the same.