G.R. No.

L-15380 September 30, 1960

CHAN WAN, plaintiff-appellant,

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

Manuel Domingo for appellant.

C.M. de los Reyes for appellees.

BENGZON, J.:

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

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

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

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

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

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

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

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

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

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

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

For deposit to the account of White House Shoe Supply with the China Banking
Corporation.

and then this:

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

And on the back of Exh. G:

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

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

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

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

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

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

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

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

Considering the deficiency of important details on which a fair adjudication of the parties' right
depends, we think the record should be and is hereby returned, in the interest of justice, to the
court below for additional evidence, and such further proceedings as are not inconsistent with
this opinion. With the understanding that, as defendants did not appeal, their counterclaim must
be and is hereby definitely dismissed. So ordered.
G.R. No. 88866 February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA
CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioner.

Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association,
Inc.

CRUZ, J.:

This case, for all its seeming complexity, turns on a simple question of negligence. The facts,
pruned of all non-essentials, are easily told.

The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the
Philippines and even abroad. Golden Savings and Loan Association was, at the time these events
happened, operating in Calapan, Mindoro, with the other private respondents as its principal
officers.

In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and
deposited over a period of two months 38 treasury warrants with a total value of P1,755,228.37.
They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its
General Manager and countersigned by its Auditor. Six of these were directly payable to Gomez
while the others appeared to have been indorsed by their respective payees, followed by Gomez
as second indorser.1

On various dates between June 25 and July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account
No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the
branch office to the principal office of Metrobank, which forwarded them to the Bureau of
Treasury for special clearing.2

More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times
to ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was
meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over
Gloria's repeated inquiries and also as an accommodation for a "valued client," the petitioner
says it finally decided to allow Golden Savings to withdraw from the proceeds of the
warrants.3
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on
July 13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of
P150,000.00. The total withdrawal was P968.000.00.4

In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own
account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the
apparently cleared warrants. The last withdrawal was made on July 16, 1979.

On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been
dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden
Savings of the amount it had previously withdrawn, to make up the deficit in its account.

The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of
Mindoro.5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed
a motion for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986,
the lower court modified its decision thus:

ACCORDINGLY, judgment is hereby rendered:

1. Dismissing the complaint with costs against the plaintiff;

2. Dissolving and lifting the writ of attachment of the properties of defendant Golden
Savings and Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia
Castillo;

3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the
sum of P1,754,089.00 and to reinstate and credit to such account such amount existing
before the debit was made including the amount of P812,033.37 in favor of defendant
Golden Savings and Loan Association, Inc. and thereafter, to allow defendant Golden
Savings and Loan Association, Inc. to withdraw the amount outstanding thereon before
the debit;

4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc.
attorney's fees and expenses of litigation in the amount of P200,000.00.

5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo
attorney's fees and expenses of litigation in the amount of P100,000.00.

SO ORDERED.

On appeal to the respondent court,6 the decision was affirmed, prompting Metrobank to file this
petition for review on the following grounds:

1. Respondent Court of Appeals erred in disregarding and failing to apply the clear
contractual terms and conditions on the deposit slips allowing Metrobank to charge back
any amount erroneously credited.
 (a) Metrobank's right to charge back is not limited to instances where the checks
or treasury warrants are forged or unauthorized.

(b) Until such time as Metrobank is actually paid, its obligation is that of a mere
collecting agent which cannot be held liable for its failure to collect on the
warrants.

2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank
is made to pay for warrants already dishonored, thereby perpetuating the fraud committed
by Eduardo Gomez.

3. Respondent Court of Appeals erred in not finding that as between Metrobank and
Golden Savings, the latter should bear the loss.

4. Respondent Court of Appeals erred in holding that the treasury warrants involved in
this case are not negotiable instruments.

The petition has no merit.

From the above undisputed facts, it would appear to the Court that Metrobank was indeed
negligent in giving Golden Savings the impression that the treasury warrants had been cleared
and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his
account with it. Without such assurance, Golden Savings would not have allowed the
withdrawals; with such assurance, there was no reason not to allow the withdrawal. Indeed,
Golden Savings might even have incurred liability for its refusal to return the money that to all
appearances belonged to the depositor, who could therefore withdraw it any time and for any
reason he saw fit.

It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited
them to its account with Metrobank. Golden Savings had no clearing facilities of its own. It
relied on Metrobank to determine the validity of the warrants through its own services. The
proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden Savings
itself to withdraw them from its own deposit.7 It was only when Metrobank gave the go-signal
that Gomez was finally allowed by Golden Savings to withdraw them from his own account.

The argument of Metrobank that Golden Savings should have exercised more care in checking
the personal circumstances of Gomez before accepting his deposit does not hold water. It was
Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan; and
moreover, the treasury warrants were subject to clearing, pending which the depositor could not
withdraw its proceeds. There was no question of Gomez's identity or of the genuineness of his
signature as checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly
because of the forgery of the signatures of the drawers, not of Gomez as payee or indorser.
Under the circumstances, it is clear that Golden Savings acted with due care and diligence and
cannot be faulted for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not
trifling — more than one and a half million pesos (and this was 1979). There was no reason why
it should not have waited until the treasury warrants had been cleared; it would not have lost a
single centavo by waiting. Yet, despite the lack of such clearance — and notwithstanding that it
had not received a single centavo from the proceeds of the treasury warrants, as it now
repeatedly stresses — it allowed Golden Savings to withdraw — not once, not twice, but thrice
— from the uncleared treasury warrants in the total amount of P968,000.00

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the
clearance and it also wanted to "accommodate" a valued client. It "presumed" that the warrants
had been cleared simply because of "the lapse of one week."8 For a bank with its long
experience, this explanation is unbelievably naive.

And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the
dorsal side of the deposit slips through which the treasury warrants were deposited by Golden
Savings with its Calapan branch. The conditions read as follows:

Kindly note that in receiving items on deposit, the bank obligates itself only as the
depositor's collecting agent, assuming no responsibility beyond care in selecting
correspondents, and until such time as actual payment shall have come into possession of
this bank, the right is reserved to charge back to the depositor's account any amount
previously credited, whether or not such item is returned. This also applies to checks
drawn on local banks and bankers and their branches as well as on this bank, which are
unpaid due to insufficiency of funds, forgery, unauthorized overdraft or any other reason.
(Emphasis supplied.)

According to Metrobank, the said conditions clearly show that it was acting only as a collecting
agent for Golden Savings and give it the right to "charge back to the depositor's account any
amount previously credited, whether or not such item is returned. This also applies to checks ". .
. which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other
reason." It is claimed that the said conditions are in the nature of contractual stipulations and
became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.

Doubt may be expressed about the binding force of the conditions, considering that they have
apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it
could be argued that the depositor, in signing the deposit slip, does so only to identify himself
and not to agree to the conditions set forth in the given permit at the back of the deposit slip. We
do not have to rule on this matter at this time. At any rate, the Court feels that even if the deposit
slip were considered a contract, the petitioner could still not validly disclaim responsibility
thereunder in the light of the circumstances of this case.

In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to
be suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On
the contrary, Article 1909 of the Civil Code clearly provides that —
 Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which
shall be judged 'with more or less rigor by the courts, according to whether the agency
was or was not for a compensation.

The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was
the clearance given by it that assured Golden Savings it was already safe to allow Gomez to
withdraw the proceeds of the treasury warrants he had deposited Metrobank misled Golden
Savings. There may have been no express clearance, as Metrobank insists (although this is
refuted by Golden Savings) but in any case that clearance could be implied from its allowing
Golden Savings to withdraw from its account not only once or even twice but three times. The
total withdrawal was in excess of its original balance before the treasury warrants were
deposited, which only added to its belief that the treasury warrants had indeed been cleared.

Metrobank's argument that it may recover the disputed amount if the warrants are not paid for
any reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would
have been no need at all for Golden Savings to deposit the treasury warrants with it for clearance.
There would have been no need for it to wait until the warrants had been cleared before paying
the proceeds thereof to Gomez. Such a condition, if interpreted in the way the petitioner
suggests, is not binding for being arbitrary and unconscionable. And it becomes more so in the
case at bar when it is considered that the supposed dishonor of the warrants was not
communicated to Golden Savings before it made its own payment to Gomez.

The belated notification aggravated the petitioner's earlier negligence in giving express or at least
implied clearance to the treasury warrants and allowing payments therefrom to Golden Savings.
But that is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the
signatures of the general manager and the auditor of the drawer corporation, has not been
established.9 This was the finding of the lower courts which we see no reason to disturb. And as
we said in MWSS v. Court of Appeals:10

Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be
established by clear, positive and convincing evidence. This was not done in the present
case.

A no less important consideration is the circumstance that the treasury warrants in question are
not negotiable instruments. Clearly stamped on their face is the word "non-negotiable."
Moreover, and this is of equal significance, it is indicated that they are payable from a particular
fund, to wit, Fund 501.

The following sections of the Negotiable Instruments Law, especially the underscored parts, are
pertinent:

Sec. 1. — Form of negotiable instruments. — An instrument to be negotiable must

conform to the following requirements:

(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.

xxx xxx xxx

Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is

unconditional within the meaning of this Act though coupled with —

(a) An indication of a particular fund out of which reimbursement is to be made or a

particular account to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument judgment.

But an order or promise to pay out of a particular fund is not unconditional.

The indication of Fund 501 as the source of the payment to be made on the treasury warrants
makes the order or promise to pay "not unconditional" and the warrants themselves non-
negotiable. There should be no question that the exception on Section 3 of the Negotiable
Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs.
Auditor General11 where the Court held:

The petitioner argues that he is a holder in good faith and for value of a negotiable
instrument and is entitled to the rights and privileges of a holder in due course, free from
defenses. But this treasury warrant is not within the scope of the negotiable instrument
law. For one thing, the document bearing on its face the words "payable from the
appropriation for food administration, is actually an Order for payment out of "a
particular fund," and is not unconditional and does not fulfill one of the essential
requirements of a negotiable instrument (Sec. 3 last sentence and section [1(b)] of the
Negotiable Instruments Law).

Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed
that they were "genuine and in all respects what they purport to be," in accordance with Section
66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the
non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the
purpose of guaranteeing the genuineness of the warrants but merely to deposit them with
Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped on the
back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed,
Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands,12 but
we feel this case is inapplicable to the present controversy.1âwphi1 That case involved checks
whereas this case involves treasury warrants. Golden Savings never represented that the warrants
were negotiable but signed them only for the purpose of depositing them for clearance. Also, the
fact of forgery was proved in that case but not in the case before us. Finally, the Court found the
Jai Alai Corporation negligent in accepting the checks without question from one Antonio
Ramirez notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not
appear that he was authorized to indorse it. No similar negligence can be imputed to Golden
Savings.

We find the challenged decision to be basically correct. However, we will have to amend it
insofar as it directs the petitioner to credit Golden Savings with the full amount of the treasury
checks deposited to its account.

The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez
was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor.
The amount he has withdrawn must be charged not to Golden Savings but to Metrobank, which
must bear the consequences of its own negligence. But the balance of P586,589.00 should be
debited to Golden Savings, as obviously Gomez can no longer be permitted to withdraw this
amount from his deposit because of the dishonor of the warrants. Gomez has in fact disappeared.
To also credit the balance to Golden Savings would unduly enrich it at the expense of
Metrobank, let alone the fact that it has already been informed of the dishonor of the treasury
warrants.

WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3
of the dispositive portion of the judgment of the lower court shall be reworded as follows:

3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter
allowing defendant Golden Savings & Loan Association, Inc. to withdraw the amount
outstanding thereon, if any, after the debit.

SO ORDERED.
G.R. No. L-40824 February 23, 1989

GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,

vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.

The Government Corporate Counsel for petitioner.

Lorenzo A. Sales for private respondents.

REGALADO , J.:

Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and
Mrs Flaviano Lagasca, executed a deed of mortgage, dated November 13, 1957, in
favor of petitioner Government Service Insurance System (hereinafter referred to as
GSIS) and subsequently, another deed of mortgage, dated April 14, 1958, in connection
with two loans granted by the latter in the sums of P 11,500.00 and P 3,000.00,
respectively. 1 A parcel of land covered by Transfer Certificate of Title No. 38989 of the
Register of Deed of Quezon City, co-owned by said mortgagor spouses, was given as
security under the aforesaid two deeds. 2 They also executed a 'promissory note" which
states in part:

... for value received, we the undersigned ... JOINTLY, SEVERALLY and
SOLIDARILY, promise to pay the GOVERNMENT SERVICE INSURANCE
SYSTEM the sum of . . . (P 11,500.00) Philippine Currency, with interest
at the rate of six (6%) per centum compounded monthly payable in . . .
(120)equal monthly installments of . . . (P 127.65) each. 3

On July 11, 1961, the Lagasca spouses executed an instrument denominated

"Assumption of Mortgage" under which they obligated themselves to assume the
aforesaid obligation to the GSIS and to secure the release of the mortgage covering that
portion of the land belonging to herein private respondents and which was mortgaged to
the GSIS. 4 This undertaking was not fulfilled. 5

Upon failure of the mortgagors to comply with the conditions of the mortgage,
particularly the payment of the amortizations due, GSIS extrajudicially foreclosed the
mortgage and caused the mortgaged property to be sold at public auction on December
3, 1962. 6

More than two years thereafter, or on August 23, 1965, herein private respondents filed
a complaint against the petitioner and the Lagasca spouses in the former Court of
First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their
property and all other documents executed in relation thereto in favor of the
Government Service Insurance System" be declared null and void. It was further prayed
that they be allowed to recover said property, and/or the GSIS be ordered to pay them
the value thereof, and/or they be allowed to repurchase the land. Additionally, they
asked for actual and moral damages and attorney's fees.

In their aforesaid complaint, private respondents alleged that they signed the mortgage
contracts not as sureties or guarantors for the Lagasca spouses but they merely gave
their common property to the said co-owners who were solely benefited by the loans
from the GSIS.

The trial court rendered judgment on February 25, 1968 dismissing the complaint for
failure to establish a cause of action. 8

Said decision was reversed by the respondent Court of Appeals 9 which held that:

... although formally they are co-mortgagors, they are so only for
accomodation (sic) in that the GSIS required their consent to the mortgage
of the entire parcel of land which was covered with only one certificate of
title, with full knowledge that the loans secured thereby were solely for the
benefit of the appellant (sic) spouses who alone applied for the loan.

xxxx

'It is, therefore, clear that as against the GSIS, appellants have a valid
cause for having foreclosed the mortgage without having given sufficient
notice to them as required either as to their delinquency in the payment of
amortization or as to the subsequent foreclosure of the mortgage by
reason of any default in such payment. The notice published in the
newspaper, 'Daily Record (Exh. 12) and posted pursuant to Sec 3 of Act
3135 is not the notice to which the mortgagor is entitled upon the
application being made for an extrajudicial foreclosure. ... 10

On the foregoing findings, the respondent court consequently decreed that-

In view of all the foregoing, the judgment appealed from is hereby

reversed, and another one entered (1) declaring the foreclosure of the
mortgage void insofar as it affects the share of the appellants; (2) directing
the GSIS to reconvey to appellants their share of the mortgaged property,
or the value thereof if already sold to third party, in the sum of P
35,000.00, and (3) ordering the appellees Flaviano Lagasca and Esther
Lagasca to pay the appellants the sum of P 10,00.00 as moral damages,
P 5,000.00 as attorney's fees, and costs. 11

The case is now before us in this petition for review.

In submitting their case to this Court, both parties relied on the provisions of Section 29
of Act No. 2031, otherwise known as the Negotiable Instruments Law, which provide
that an accommodation party is one who has signed an instrument as maker, drawer,
acceptor of indorser without receiving value therefor, but is held liable on the instrument
to a holder for value although the latter knew him to be only an accommodation party.

This approach of both parties appears to be misdirected and their reliance misplaced.
The promissory note hereinbefore quoted, as well as the mortgage deeds subject of this
case, are clearly not negotiable instruments. These documents do not comply with the
fourth requisite to be considered as such under Section 1 of Act No. 2031 because they
are neither payable to order nor to bearer. The note is payable to a specified party, the
GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply;
governance shall be afforded, instead, by the provisions of the Civil Code and special
laws on mortgages.

As earlier indicated, the factual findings of respondent court are that private
respondents signed the documents "only to give their consent to the mortgage as
required by GSIS", with the latter having full knowledge that the loans secured thereby
were solely for the benefit of the Lagasca spouses. 12 This appears to be duly
supported by sufficient evidence on record. Indeed, it would be unusual for the GSIS to
arrange for and deduct the monthly amortizations on the loans from the salary as an
army officer of Flaviano Lagasca without likewise affecting deductions from the salary of
Isabelo Racho who was also an army sergeant. Then there is also the undisputed fact,
as already stated, that the Lagasca spouses executed a so-called "Assumption of
Mortgage" promising to exclude private respondents and their share of the mortgaged
property from liability to the mortgagee. There is no intimation that the former executed
such instrument for a consideration, thus confirming that they did so pursuant to their
original agreement.

The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is
clear that there was no objection in the court below regarding the admissibility of the
testimony and documents that were presented to prove that the private respondents
signed the mortgage papers just to accommodate their co-owners, the Lagasca
spouses. Besides, the introduction of such evidence falls under the exception to said
rule, there being allegations in the complaint of private respondents in the court below
regarding the failure of the mortgage contracts to express the true agreement of the
parties. 14

However, contrary to the holding of the respondent court, it cannot be said that private
respondents are without liability under the aforesaid mortgage contracts. The factual
context of this case is precisely what is contemplated in the last paragraph of Article
2085 of the Civil Code to the effect that third persons who are not parties to the principal
obligation may secure the latter by pledging or mortgaging their own property

So long as valid consent was given, the fact that the loans were solely for the benefit of
the Lagasca spouses would not invalidate the mortgage with respect to private
respondents' share in the property. In consenting thereto, even assuming that private
respondents may not be assuming personal liability for the debt, their share in the
property shall nevertheless secure and respond for the performance of the principal
obligation. The parties to the mortgage could not have intended that the same would
apply only to the aliquot portion of the Lagasca spouses in the property, otherwise the
consent of the private respondents would not have been required.

The supposed requirement of prior demand on the private respondents would not be in
point here since the mortgage contracts created obligations with specific terms for the
compliance thereof. The facts further show that the private respondents expressly
bound themselves as solidary debtors in the promissory note hereinbefore quoted.

Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the
ruling of respondent court that lack of notice to the private respondents of the
extrajudicial foreclosure sale impairs the validity thereof. In Bonnevie, et al. vs. Court of
appeals, et al., 15 the Court ruled that Act No. 3135, as amended, does not require
personal notice on the mortgagor, quoting the requirement on notice in such cases as
follows:

Section 3. Notice shall be given by posting notices of sale for not less than
twenty days in at least three public places of the municipality where the
property is situated, and if such property is worth more than four hundred
pesos, such notice shall also be published once a week for at least three
consecutive weeks in a newspaper of general circulation in the
municipality or city.

There is no showing that the foregoing requirement on notice was not complied with in
the foreclosure sale complained of .

The respondent court, therefore, erred in annulling the mortgage insofar as it affected
the share of private respondents or in directing reconveyance of their property or the
payment of the value thereof Indubitably, whether or not private respondents herein
benefited from the loan, the mortgage and the extrajudicial foreclosure proceedings
were valid.

WHEREFORE, judgment is hereby rendered REVERSING the decision of the

respondent Court of Appeals and REINSTATING the decision of the court a quo in Civil
Case No. Q-9418 thereof.

SO ORDERED.
G.R. No. 16454 September 29, 1921

GEORGE A. KAUFFMAN, plaintiff-appellee,

vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.

Roman J. Lacson for appellant.

Ross and Lawrence for appellee.

STREET, J.:

At the time of the transaction which gave rise to this litigation the plaintiff, George A. Kauffman,
was the president of a domestic corporation engaged chiefly in the exportation of hemp from the
Philippine Islands and known as the Philippine Fiber and Produce Company, of which company
the plaintiff apparently held in his own right nearly the entire issue of capital stock. On February
5, 1918, the board of directors of said company, declared a dividend of P100,000 from its surplus
earnings for the year 1917, of which the plaintiff was entitled to the sum of P98,000. This
amount was accordingly placed to his credit on the books of the company, and so remained until
in October of the same year when an unsuccessful effort was made to transmit the whole, or a
greater part thereof, to the plaintiff in New York City.

In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the
Philippine Fiber and Produce Company, presented himself in the exchange department of the
Philippine National Bank in Manila and requested that a telegraphic transfer of $45,000 should
be made to the plaintiff in New York City, upon account of the Philippine Fiber and Produce
Company. He was informed that the total cost of said transfer, including exchange and cost of
message, would be P90,355.50. Accordingly, Wicks, as treasurer of the Philippine Fiber and
Produce Company, thereupon drew and delivered a check for that amount on the Philippine
National Bank; and the same was accepted by the officer selling the exchange in payment of the
transfer in question. As evidence of this transaction a document was made out and delivered to
Wicks, which is referred to by the bank's assistant cashier as its official receipt. This
memorandum receipt is in the following language:

October 9th, 1918.

CABLE TRANSFER BOUGHT FROM

PHILIPPINE NATIONAL BANK,
Manila, P.I. Stamp P18

Foreign Amount Rate

$45,000. 3/8 % P90,337.50

Payable through Philippine National Bank, New York. To G. A. Kauffman, New York.
Total P90,355.50. Account of Philippine Fiber and Produce Company. Sold to Messrs.
Philippine Fiber and Produce Company, Manila.
 (Sgd.) Y LERMA,
Manager, Foreign Department.

On the same day the Philippine National Bank dispatched to its New York agency a cablegram to
the following effect:

Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000.
(Sgd.) PHILIPPINE NATIONAL BANK, Manila.

Upon receiving this telegraphic message, the bank's representative in New York sent a cable
message in reply suggesting the advisability of withholding this money from Kauffman, in view
of his reluctance to accept certain bills of the Philippine Fiber and Produce Company. The
Philippine National Bank acquiesced in this and on October 11 dispatched to its New York
agency another message to withhold the Kauffman payment as suggested.

Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to
Kauffman in New York, advising him that $45,000 had been placed to his credit in the New
York agency of the Philippine National Bank; and in response to this advice Kauffman presented
himself at the office of the Philippine National Bank in New York City on October 15, 1918, and
demanded the money. By this time, however, the message from the Philippine National Bank of
October 11, directing the withholding of payment had been received in New York, and payment
was therefore refused.

In view of these facts, the plaintiff Kauffman instituted the present action in the Court of First
Instance of the city of Manila to recover said sum, with interest and costs; and judgment having
been there entered favorably to the plaintiff, the defendant appealed.

Among additional facts pertinent to the case we note the circumstance that at the time of the
transaction above-mentioned, the Philippines Fiber and Produce Company did not have on
deposit in the Philippine National Bank money adequate to pay the check for P90,355.50, which
was delivered in payment of the telegraphic order; but the company did have credit to that extent,
or more, for overdraft in current account, and the check in question was charged as an overdraft
against the Philippine Fiber and Produce Company and has remained on the books of the bank as
an interest-bearing item in the account of said company.

It is furthermore noteworthy that no evidence has been introduced tending to show failure of
consideration with respect to the amount paid for said telegraphic order. It is true that in the
defendant's answer it is suggested that the failure of the bank to pay over the amount of this
remittance to the plaintiff in New York City, pursuant to its agreement, was due to a desire to
protect the bank in its relations with the Philippine Fiber and Produce Company, whose credit
was secured at the bank by warehouse receipts on Philippine products; and it is alleged that after
the exchange in question was sold the bank found that it did not have sufficient to warrant
payment of the remittance. In view, however, of the failure of the bank to substantiate these
allegations, or to offer any other proof showing failure of consideration, it must be assumed that
the obligation of the bank was supported by adequate consideration.
In this court the defense is mainly, if not exclusively, based upon the proposition that, inasmuch
as the plaintiff Kauffman was not a party to the contract with the bank for the transmission of
this credit, no right of action can be vested in him for the breach thereof. "In this situation," —
we here quote the words of the appellant's brief, — "if there exists a cause of action against the
defendant, it would not be in favor of the plaintiff who had taken no part at all in the transaction
nor had entered into any contract with the plaintiff, but in favor of the Philippine Fiber and
Produce Company, the party which contracted in its own name with the defendant."

The question thus placed before us is one purely of law; and at the very threshold of the
discussion it can be stated that the provisions of the Negotiable Instruments Law can come into
operation there must be a document in existence of the character described in section 1 of the
Law; and no rights properly speaking arise in respect to said instrument until it is delivered. In
the case before us there was an order, it is true, transmitted by the defendant bank to its New
York branch, for the payment of a specified sum of money to George A. Kauffman. But this
order was not made payable "to order or "to bearer," as required in subsection (d) of that Act;
and inasmuch as it never left the possession of the bank, or its representative in New York City,
there was no delivery in the sense intended in section 16 of the same Law. In this connection it is
unnecessary to point out that the official receipt delivered by the bank to the purchaser of the
telegraphic order, and already set out above, cannot itself be viewed in the light of a negotiable
instrument, although it affords complete proof of the obligation actually assumed by the bank.

Stated in bare simplicity the admitted facts show that the defendant bank for a valuable
consideration paid by the Philippine Fiber and Produce Company agreed on October 9, 1918, to
cause a sum of money to be paid to the plaintiff in New York City; and the question is whether
the plaintiff can maintain an action against the bank for the nonperformance of said undertaking.
In other words, is the lack of privity with the contract on the part of the plaintiff fatal to the
maintenance of an action by him?

The only express provision of law that has been cited as bearing directly on this question is the
second paragraph of article 1257 of the Civil Code; and unless the present action can be
maintained under the provision, the plaintiff admittedly has no case. This provision states an
exception to the more general rule expressed in the first paragraph of the same article to the
effect that contracts are productive of effects only between the parties who execute them; and in
harmony with this general rule are numerous decisions of this court (Wolfson vs. Estate of
Martinez, 20 Phil., 340; Ibañez de Aldecoa vs. Hongkong and Shanghai Banking Corporation, 22
Phil., 572, 584; Manila Railroad Co. vs. Compañia Trasatlantica and Atlantic, Gulf and Pacific
Co., 38 Phil., 873, 894.)

The paragraph introducing the exception which we are now to consider is in these words:

Should the contract contain any stipulation in favor of a third person, he may demand its
fulfillment, provided he has given notice of his acceptance to the person bound before the
stipulation has been revoked. (Art. 1257, par. 2, Civ. Code.)

In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate dissertation
upon the history and interpretation of the paragraph above quoted and so complete is the
discussion contained in that opinion that it would be idle for us here to go over the same matter.
Suffice it to say that Justice Trent, speaking for the court in that case, sums up its conclusions
upon the conditions governing the right of the person for whose benefit a contract is made to
maintain an action for the breach thereof in the following words:

So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether
the interest of a third person in a contract is a stipulation pour autrui, or merely an
incidental interest, is to rely upon the intention of the parties as disclosed by their
contract.

If a third person claims an enforcible interest in the contract, the question must be settled
by determining whether the contracting parties desired to tender him such an interest. Did
they deliberately insert terms in their agreement with the avowed purpose of conferring a
favor upon such third person? In resolving this question, of course, the ordinary rules of
construction and interpretation of writings must be observed. (Uy Tam and Uy Yet vs.
Leonard, supra.)

Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it
matters not whether the stipulation is in the nature of a gift or whether there is an obligation
owing from the promise to the third person. That no such obligation exists may in some degree
assist in determining whether the parties intended to benefit a third person, whether they
stipulated for him." (Uy Tam and Uy Yet vs. Leonard, supra.)

In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is
clear enough; for it is undeniable that the bank's promise to cause a definite sum of money to be
paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the
paragraph above quoted; and the circumstances under which that promise was given disclose an
evident intention on the part of the contracting parties that the plaintiff should have the money
upon demand in New York City. The recognition of this unqualified right in the plaintiff to
receive the money implies in our opinion the right in him to maintain an action to recover it; and
indeed if the provision in question were not applicable to the facts now before us, it would be
difficult to conceive of a case arising under it.

It will be noted that under the paragraph cited a third person seeking to enforce compliance with
a stipulation in his favor must signify his acceptance before it has been revoked. In this case the
plaintiff clearly signified his acceptance to the bank by demanding payment; and although the
Philippine National Bank had already directed its New York agency to withhold payment when
this demand was made, the rights of the plaintiff cannot be considered to as there used, must be
understood to imply revocation by the mutual consent of the contracting parties, or at least by
direction of the party purchasing he exchange.

In the course of the argument attention was directed to the case of Legniti vs. Mechanics, etc.
Bank (130 N.E. Rep., 597), decided by the Court of Appeals of the State of New York on March
1, 1921, wherein it is held that, by selling a cable transfer of funds on a foreign country in
ordinary course, a bank incurs a simple contractual obligation, and cannot be considered as
holding the money which was paid for the transfer in the character of a specific trust. Thus, it
was said, "Cable transfers, therefore, mean a method of transmitting money by cable wherein the
seller engages that he has the balance at the point on which the payment is ordered and that on
receipt of the cable directing the transfer his correspondent at such point will make payment to
the beneficiary described in the cable. All these transaction are matters of purchase and sale
create no trust relationship."

As we view it there is nothing in the decision referred to decisive of the question now before us,
wish is merely that of the right of the beneficiary to maintain an action against the bank selling
the transfer.

Upon the considerations already stated, we are of the opinion that the right of action exists, and
the judgment must be affirmed. It is so ordered, with costs against the appellant. Interest will be
computed as prescribed in section 510 of the Code of Civil Procedure.
G.R. No. 75908 October 22, 1999

FEDERICO O. BORROMEO, LOURDES O. BORROMEO and FEDERICO O. BORROMEO, INC., petitioners,

vs.
AMANCIO SUN and the COURT OF APPEALS, respondents.

PURISIMA, J.:

At bar is a Petition for review on Certiorari under Rule 45 of the Revised Rules of Court seeking to set aside the Resolution of the then
Intermediate Appellate Court 1, dated March 13, 1986, in AC-G.R. CV NO. 67988, which reversed its earlier Decision dated February 12,
1985, setting aside the Decision of the former Court of the First Instance of Rizal, Branch X, in Civil Case No. 19466.

The antecedent facts are as follows:

Private respondent Amancio Sun brought before the then Court of the First Instance of Rizal, Branch X, an action against Lourdes O.
Borromeo (in her capacity as corporate secretary), Federico O. Borromeo and Federico O. Borromeo (F.O.B.), Inc., to compel the transfer to
his name in the books of F.O.B., Inc., 23,223 shares of stock registered in the name of Federico O. Borromeo, as evidenced by a Deed of
Assignment dated January 16, 1974.

Private respondent averred 2 that all the shares of stock of F.O.B. Inc. registered in the name of Federico O. Borromeo belong to him, as the
said shares were placed in the name of Federico O. Borromeo "only to give the latter personality and importance in the business world." 3
According to the private respondent, on January 16, 1974 Federico O. Borromeo executed in his favor a Deed of Assignment with respect to
the said 23,223 shares of stock.

On the other hand, petitioner Federico O. Borromeo disclaimed any participation in the execution of the Deed of Assignment, theorizing that
his supposed signature thereon was forged.1âwphi1.nêt

After trial, the lower court of origin came out with a decision declaring the questioned signature on subject Deed of Assignment, dated
January 16, 1974, as the genuine signature of Federico O. Borromeo; ratiocinating thus:

After considering the testimonies of the two expert witnesses for the parties and after a careful and judicious study and
analysis of the questioned signature as compared to the standard signatures, the Court is not in a position to declare
that the questioned signature in Exh. A is a forgery. On the other hand, the Court is of the opinion that the questioned
signature is the real signature of Federico O. Borromeo between the years 1954 to 1957 but definitely is not his
signature in 1974 for by then he has changed his signature. Consequently, to the mind of the Court Exhibit A was
signed by defendant Federico O. Borromeo between the years 1954 to 1957 although the words in the blank were filled
at a much later date. 4

On appeal by petitioners, the Court of Appeals adjudged as forgery the controverted signature of Federico O. Borromeo; disposing as
follows:

WHEREFORE, the judgment of the Court a quo as to the second cause of action dated March 12, 1980 is hereby
reversed and set aside and a new judgment is hereby rendered:

1. Ordering the dismissal of the complaint as to defendant-appellants;

2. Ordering plaintiff-appellee on appellants' counterclaim to pay the latter:

a) P20,000.00 as moral damages;

b) P10,000.00 as exemplary damages;

c) P 10,000.00 as attorney's fees.

3. Ordering plaintiff-appellee to pay the costs. 5

On March 29, 1985, Amancio Sun interposed a motion for reconsideration of the said decision, contending that Segundo Tabayoyong,
petitioners' expert witness, is not a credible witness as found and concluded in the following disposition by this Court in Cesar vs. Sandigan
Bayan 6:

The testimony of Mr. Segundo Tabayoyong on March 5, 1980, part of which is cited on pages 19-23 of the petition,
shows admissions which are summarized by the petitioner as follows:
 He never finished any degree in Criminology. Neither did he obtain any degree in physics or
chemistry. He was a mere trainee in the NBI laboratory. He said he had gone abroad only once-to
Argentina which, according to him is the only one country in the world that gives this degree (?) . .
. "People go there where they obtain this sort of degree (?) where they are authorized to practice
(sic) examination of questioned documents."

His civil service eligibility was second grade (general clerical). His present position had to be "re-
classified" "confidential" in order to qualify him to it. He never passed any Board Examination.

He has never authored any book on the subject on which he claimed to be an "expert." Well, he
did "write" a so-called pamphlet pretentiously called "Fundamentals of Questioned Documents
Examination and Forgery Detection." In that pamphlet, he mentioned some references' — (some)
are Americans and one I think is a British, sir, like in the case of Dr. Wilson Harrison, a British' (he
repeated with emphasis). Many of the "theories" contained in his pamphlet were lifted body and
soul from those references, one of them being Albert Osborn. His pamphlet has neither
quotations nor footnotes, although he was too aware of the crime committed by many an author
called "plagiarism." But that did not deter him, nor bother him in the least.

He has never been a member of any professional organization of experts in his supposed field of
expertise, because he said there is none locally. Neither is he on an international level. 7

Acting an the aforesaid motion for reconsideration, the Court of Appeals reconsidered its decision of February 12, 1985 aforementioned.
Thereafter, the parties agreed to have subject Deed of Assignment examined by the Philippine Constabulary (PC) Crime Laboratory, which
submitted a Report on January 9, 1986, the pertinent portion of which, stated:

1. Comparative examination and analysis of the questioned and the standard signature reveal
significant similarities in the freedom of movement, good quality of lines, skills and individual
handwriting characteristics.

2. By process of interpolation the questioned signature fits in and can be bracketed in time with
the standard signatures written in the years between 1956 to 1959. Microscopic examination of
the ink used in the questioned signature and the standard signature in document dated 30 July
1959 marked Exh. "E" indicate gallotanic ink.

xxx xxx xxx

1. The questioned signature FEDERICO O. BORROMEO marked "Q" appearing in the original
Deed of Assignment dated 16 January 1974 and the submitted standard signatures of Federico
O. Borromeo marked "S-1" to "S-49" inclusive were written BY ONE AND THE SAME PERSON.

2. The questioned signature FEDERICO O. BORROMEO marked "Q" COULD HAVE BEEN
SIGNED IN THE YEARS BETWEEN 1950-1957. 8

After hearing the arguments the lawyers of record advanced on the said "Report" of the PC Crime Laboratory, the Court of Appeals resolved:

xxx xxx xxx

1) to ADMIT the Report dated Jan. 9, 1986 of the PC Crime Laboratory on the Deed of Assignment in evidence, without
prejudice to the parties' assailing the credibility of said Report;

2) to GIVE both parties a non-extendible period of FIVE (5) DAYS from February 27, 1986, within which to file
simultaneous memoranda. 9

On March 13, 1986, the Court of Appeals reversed its decision of February 12, 1985, which affirmed in toto the decision of the trial court of
origin; resolving thus:

WHEREFORE, finding the Motion for Reconsideration meritorious. We hereby set aside our Decision, dated February
12, 1985 and in its stead a new judgment is hereby rendered affirming in toto the decision of the trial Court, dated
March 12, 1980, without pronouncement as to costs.

SO ORDERED. 10

Therefrom, petitioners found their way to this court via the present Petition; theorizing that:
 I

THE RESPONDENT COURT ERRED IN HOLDING THAT WHEN PETITIONER AGREED TO THE SUGGESTION OF
RESPONDENT COURT TO HAVE THE QUESTIONED DOCUMENT EXAMINED BY THE PC CRIME LABORATORY
THEY COULD NO LONGER QUESTION THE COMPETENCY OF THE DOCUMENT.

II

THE COURT OF APPEALS ERRED IN HOLDING THAT THE QUESTIONED DOCUMENT WAS SIGNED IN 1954
BUT WAS DATED IN 1974.

III

THE COURT OF APPEALS ERRED IN HOLDING THAT THE SIGNATURE OF FEDERICO O. BORROMEO IN THE
DEED OF ASSIGNMENT (EXHIBIT "A") IS A GENUINE SIGNATURE CIRCA 1954-1957.

The Petition is barren of merit.

Well-settled is the rule that "factual findings of the Court of Appeals are conclusive on the parties and not reviewable by the Supreme Court
— and they carry even more weight when the Court of Appeals affirms the factual findings of the trial court." 11

In the present case, the trial court found that the signature in question is the genuine signature of Federico O. Borromeo between the years
1954 to 1957 although the words in the blank space of the document in question were written on a much later date. The same conclusion
was arrived at by the Court of Appeals on the basis of the Report of the PC crime Laboratory corroborating the findings of Col. Jose
Fernandez that the signature under controversy is genuine.

It is significant to note that Mr. Tabayoyong, petitioners' expert witness, limited his comparison of the questioned signature with the 1974
standard signature of Federico O. Borromeo. No comparison of the subject signature with the 1950 — 1957 standard signature was ever
made by Mr. Tabayoyong despite his awareness that the expert witness of private respondent, Col. Jose Fernandez, made a comparison of
said signatures and notwithstanding his (Tabayoyong's) access to such signatures as they were all submitted to the lower Court. As correctly
ratiocinated 12 by the Court of origin, the only conceivable reason why Mr. Tabayoyong avoided making such a comparison must have been,
that even to the naked eye the questioned signature affixed to the Deed of Assignment, dated January 16, 1974, is strikingly similar to the
1950 to 1954 standard signature of Federico O. Borromeo, such that if a comparison thereof was made by Mr. Tabayoyong, he would have
found the questioned signature genuine.

That the Deed of Assignment is dated January 16, 1974 while the questioned signature was found to be circa 1954-1957, and not that of
1974, is of no moment. It does not necessarily mean, that the deed is a forgery. Pertinent records reveal that the subject Deed of Assignment
is embodied in a blank form for the assignment of shares with authority to transfer such shares in the books of the corporation. It was clearly
intended to be signed in blank to facilitate the assignment of shares from one person to another at any future time. This is similar to Section
14 of the Negotiable Instruments Law where the blanks may be filled up by the holder, the signing in blank being with the assumed authority
to do so. Indeed, as the shares were registered in the name of Federico O. Borromeo just to give him personality and standing in the
business community, private respondent had to have a counter evidence of ownership of the shares involved. Thus, the execution of the
deed of assignment in blank, to be filled up whenever needed. The same explains the discrepancy between the date of the deed of
assignment and the date when the signature was affixed thereto.

While it is true that the 1974 standard signature of Federico O. Borromeo is to the naked eye dissimilar to his questioned signature circa
1954-1957, which could have been caused by sheer lapse of time, Col. Jose Fernander, respondent's expert witness, found the said
signatures similar to each other after subjecting the same to stereomicroscopic examination and analysis because the intrinsic and natural
characteristics of Federico O. Borromeo's handwriting were present in all the exemplar signatures used by both Segundo Tabayoyong and
Col. Jose Fernandez.

It is therefore beyond cavil that the findings of the Court of origin affirmed by the Court of Appeals on the basis of the corroborative findings of
the Philippine Constabulary Crime Laboratory confirmed the genuineness of the signature of Federico O. Borromeo in the Deed of
Assignment dated January 16, 1974.

Petitioners, however, question the "Report" of the document examiner on the ground that they were not given an opportunity to cross-
examine the Philippine Constabulary document examiner; arguing that they never waived their right to question the compentecy of the
examiner concerned. While the Court finds merit in the contention of petitioners, that they did not actually waive their right to cross-examine
on any aspect of subject Report of the Philippine Constabulary Crime Laboratory, the Court discerns no proper basis for deviating from the
findings of the Court of Appeals on the matter. It is worthy to stress that courts may place whatever weight due on the testimony of an expert
witness. 13 Conformably, in giving credence and probative value to the said "Report" of the Philippine Constabulary Crime Laboratory,
corroborating the findings of the trial Court, the Court of Appeals merely exercised its discretion. There being no grave abuse in the exercise
of such judicial discretion, the findings by the Court of Appeals should not be disturbed on appeal.1âwphi1.nêt

Premises studiedly considered, the Court is of the irresistible conclusion, and so holds, that the respondent Court erred not in affirming the
decision of the Regional Trial Court a quo in Civil Case No. 19466.
WHEREFORE, the Petition is DISMISSED for lack of merit and the assailed Resolution, dated March 13, 1986, AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

G.R. No. 89252 May 24, 1993

RAUL SESBREÑO, petitioner,

vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents.

Salva, Villanueva & Associates for Delta Motors Corporation.

Reyes, Salazar & Associates for Pilipinas Bank.

FELICIANO, J.:

On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the amount of P300,000.00 with the Philippine
Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on 13
March 1981, Philfinance, also on 9 February 1981, issued the following documents to petitioner:

(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors Corporation
Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum;

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to petitioner, with
the notation that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt
("DCR") No. 10805 dated 9 February 1981; and

(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as
payee, Philfinance as drawer, and Insular Bank of Asia and America as drawee, in the total amount of P304,533.33.

On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However, the checks were dishonored for
having been drawn against insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas Bank ("Pilipinas"). It reads
as follows:

PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
 TO Raul Sesbreño

DENOMINATED CUSTODIAN RECEIPT

This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITES FINANCE
CORPORATION, we have in our custody the following securities to you [sic] the extent herein indicated.

SERIAL MAT. FACE ISSUED REGISTERED AMOUNT

NUMBER DATE VALUE BY HOLDER PAYEE

2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33

UNDERWRITERS
FINANCE CORP.

We further certify that these securities may be inspected by you or your duly authorized representative at any time
during regular banking hours.
 Upon your written instructions we shall undertake physical delivery of the above securities fully assigned to you should
this Denominated Custodianship Receipt remain outstanding in your favor thirty (30) days after its maturity.

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On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and handed her a demand
letter informing the bank that his placement with Philfinance in the amount reflected in the DCR No. 10805 had remained unpaid and
outstanding, and that he in effect was asking for the physical delivery of the underlying promissory note. Petitioner then examined the original
of the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a
face value of P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as "maker;" and that
on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of participation in
respect thereof, to petitioner.

Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981,2 again asking private respondent Pilipinas for physical
delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for written
instructions, as has been supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance
did not provide the appropriate instructions; Pilipinas never released DMC PN No. 2731, nor any other instrument in respect thereof, to
petitioner.

Petitioner also made a written demand on 14 July 19813 upon private respondent Delta for the partial satisfaction of DMC PN No. 2731,
explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of P307,933.33. Delta, however, denied any
liability to petitioner on the promissory note, and explained in turn that it had previously agreed with Philfinance to offset its DMC PN No.
2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of Delta.

In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and exchange commission ("SEC")
and the Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC.4

As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for damages with the
Regional Trial Court ("RTC") of Cebu City, Branch 21, against private respondents Delta and Pilipinas.5 The trial court, in a decision dated 5
August 1987, dismissed the complaint and counterclaims for lack of merit and for lack of cause of action, with costs against petitioner.

Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989, the Court of Appeals
denied the appeal and held:6

Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of plaintiff-
appellant, it is Philfinance. As correctly observed by the trial court:

This act of Philfinance in accepting the investment of plaintiff and charging it against DMC PN No.
2731 when its entire face value was already obligated or earmarked for set-off or compensation is
difficult to comprehend and may have been motivated with bad faith. Philfinance, therefore, is
solely and legally obligated to return the investment of plaintiff, together with its earnings, and to
answer all the damages plaintiff has suffered incident thereto. Unfortunately for plaintiff,
Philfinance was not impleaded as one of the defendants in this case at bar; hence, this Court is
without jurisdiction to pronounce judgement against it. (p. 11, Decision)

WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed in toto. Cost
against plaintiff-appellant.

Petitioner moved for reconsideration of the above Decision, without success.

Hence, this Petition for Review on Certiorari.

After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due course to the petition and
required the parties to file their respective memoranda.7

Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent court of Appeals gravely
erred: (i) in concluding that he cannot recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold
private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR No. 10805 issued in favor r
of petitioner, and (iii) in refusing to pierce the veil of corporate entity between Philfinance, and private respondents Delta and Pilipinas,
considering that the three (3) entities belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr.8

There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-vis Delta; secondly, the
relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the relationship of
petitioner and Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court nor the Court of Appeals
acquired jurisdiction over the person of Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship,
except to the extent it necessarily impinges upon or intersects the first and second relationships.

I.

We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory note (DMC PN No.
2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point:

Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-negotiable" as
stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an instrument from one person to another
so as to constitute the transferee the holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a
holder cannot sue on the instrument in his own name and cannot demand or receive payment (Section 51, id.)9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly transferred, in part to him by
assignment and that as a result of such transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of that Note
assigned to him by the payee Philfinance.

Delta, however, disputes petitioner's contention and argues:

 (1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance as manifested by
the word "non-negotiable" stamp across the face of the Note10 and because maker Delta and payee Philfinance
intended that this Note would be offset against the outstanding obligation of Philfinance represented by Philfinance PN
No. 143-A issued to Delta as payee;

(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not against its instructions;
and

(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner took the Note
subject to the defenses available to Delta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No.
143-A.11

We consider Delta's arguments seriatim.

Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from the assignment or transfer of
an instrument whether that be negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant
statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the negotiable instrument is in
bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. The legal consequences of
negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument may,
obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or transfer written in
the face of the instrument:

The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability, but the sole effect
was to exempt the bill from the statutory provisions relative thereto, and a bill, though not negotiable, may be
transferred by assignment; the assignee taking subject to the equities between the original parties.12 (Emphasis
added)

DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-assignable." It contained
no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full:

A
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Philippine Underwriters Finance Corp.

Benavidez St., Makati,
Metro Manila.

Attention: Mr. Alfredo O. Banaria

SVP-Treasurer

GENTLEMEN:

This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note No. 143-A, dated
April 10, 1980, to mature on April 6, 1981.

As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated
April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon co-terminal maturity.

Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.

V
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We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance assigning or transferring all
or part of DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an
explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the Note who
parted with valuable consideration in good faith and without notice of such prohibition. It is not disputed that petitioner was such an assignee
or transferee. Our conclusion on this point is reinforced by the fact that what Philfinance and Delta were doing by their exchange of their
promissory notes was this: Delta invested, by making a money market placement with Philfinance, approximately P4,600,000.00 on 10 April
1980; but promptly, on the same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes:
DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only
P600,000.00 in cash and the two (2) Delta promissory notes.

Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta,
we note that such consent was not necessary for the validity and enforceability of the assignment in favor of petitioner.14 Delta's argument
that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which required its
(Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place is never lightly inferred,15 must be clearly established
by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on every point.16
Nothing of the sort is present in the instant case.

It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an entity engaged in the
business of buying and selling debt instruments and other securities, and more generally, in money market transactions. In Perez v. Court of
Appeals,17 the Court, speaking through Mme. Justice Herrera, made the following important statement:

There is another aspect to this case. What is involved here is a money market transaction. As defined by Lawrence
Smith "the money market is a market dealing in standardized short-term credit instruments (involving large amounts)
where lenders and borrowers do not deal directly with each other but through a middle manor a dealer in the open
market." It involves "commercial papers" which are instruments "evidencing indebtness of any person or entity. . .,
which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without
recourse". The fundamental function of the money market device in its operation is to match and bring together in a
most impersonal manner both the "fund users" and the "fund suppliers." The money market is an "impersonal market",
free from personal considerations. "The market mechanism is intended to provide quick mobility of money and
securities."

The impersonal character of the money market device overlooks the individuals or entities concerned. The issuer of a
commercial paper in the money market necessarily knows in advance that it would be expenditiously transacted and
transferred to any investor/lender without need of notice to said issuer. In practice, no notification is given to the
borrower or issuer of commercial paper of the sale or transfer to the investor.

xxx xxx xxx

There is need to individuate a money market transaction, a relatively novel institution in the Philippine commercial
scene. It has been intended to facilitate the flow and acquisition of capital on an impersonal basis. And as specifically
required by Presidential Decree No. 678, the investing public must be given adequate and effective protection in
availing of the credit of a borrower in the commercial paper market.18 (Citations omitted; emphasis supplied)

We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is
important to note that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no
compensation had as yet taken place and indeed none could have taken place. The essential requirements of compensation are listed in the
Civil Code as follows:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also
of the same quality if the latter has been stated;

(3) That the two debts are due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in
due time to the debtor. (Emphasis supplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10 April
1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that the relevant promissory notes were "to be offsetted (sic) against
[Philfinance] PN No. 143-A upon co-terminal maturity."

As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "co-terminal maturity" date, that
is to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation had taken
place between Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in favor of petitioner,
Philfinance and Delta would have ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by
Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that
petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.

The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, 19 that is, after the
maturity not only of the money market placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In
other words, petitioner notified Delta of his rights as assignee after compensation had taken place by operation of law because the offsetting
instruments had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater that the rights of the
assignor, since the assignee is merely substituted in the place of the assignor 20 and that the assignee acquires his rights subject to the
equities — i.e., the defenses — which the debtor could have set up against the original assignor before notice of the assignment was given
to the debtor. Article 1285 of the Civil Code provides that:

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person,
cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the
compensation of debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to
the same and also later ones until he had knowledge of the assignment. (Emphasis supplied)

Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his creditor shall be released
from the obligation." In Sison v. Yap-Tico,21 the Court explained that:

[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he pay before notice
that his debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has
acquired a title by transfer to demand payment of the debt, to give his debt or notice.22

At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731 had already been
discharged by compensation. Since the assignor Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731,
petitioner, as assignee of Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him.

It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9 February 1981. He could have
notified Delta as soon as his money market placement matured on 13 March 1981 without payment thereof being made by Philfinance; at
that time, compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have notified Delta on 26 March 1981
when petitioner received from Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas
in favor of petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731. Because
petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself notified Delta of the assignment to
petitioner, the Court is compelled to uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance remains
liable to petitioner under the terms of the assignment made by Philfinance to petitioner.

II.

We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that Pilipinas became solidarily
liable with Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following words:

Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above securities fully assigned to
you —.23

The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay petitioner the amount of
P307,933.33 nor any assumption of liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR as a
confirmation on the part of Pilipinas that:

(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face value, to mature on 6
April 1981 and payable to the order of Philfinance;

(2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February 1981), holding that
Note on behalf and for the benefit of petitioner, at least to the extent it had been assigned to petitioner by payee
Philfinance;24

(3) petitioner may inspect the Note either "personally or by authorized representative", at any time during regular bank
hours; and

(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or a participation
therein to the extent of P307,933.33) "should this Denominated Custodianship receipt remain outstanding in
[petitioner's] favor thirty (30) days after its maturity."

Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into an obligor under the
terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any other time. We note that both in his complaint and in
his testimony before the trial court, petitioner referred merely to the obligation of private respondent Pilipinas to effect the physical delivery to
him of DMC PN No. 2731.25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented
by a portion of the Note assigned to him by Philfinance, appears to be a new theory constructed only after the trial court had ruled against
him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred. Under article 1207 of the Civil Code,
"there is a solidary liability only when the law or the nature of the obligation requires solidarity," The record here exhibits no express
assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed to us to any law which imposed such
liability upon Pilipinas nor has petitioner argued that the very nature of the custodianship assumed by private respondent Pilipinas
necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas
solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731.

We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under the terms of the DCR. To
the contrary, we find, after prolonged analysis and deliberation, that private respondent Pilipinas had breached its undertaking under the
DCR to petitioner Sesbreño.

We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas as custodian or depositary
bank. The depositor was initially Philfinance; the obligation of the depository was owed, however, to petitioner Sesbreño as beneficiary of the
custodianship or depository agreement. We do not consider that this is a simple case of a stipulation pour autri. The custodianship or
depositary agreement was established as an integral part of the money market transaction entered into by petitioner with Philfinance.
Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the thing
sold would be placed outside the control of the vendor. Indeed, the constituting of the depositary or custodianship agreement was equivalent
to constructive delivery of the Note (to the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship
agreements are designed to facilitate transactions in the money market by providing a basis for confidence on the part of the investors or
placers that the instruments bought by them are effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their
reach, that those instruments will be there available to the placers of funds should they have need of them. The depositary in a contract of
deposit is obliged to return the security or the thing deposited upon demand of the depositor (or, in the presented case, of the beneficiary) of
the contract, even though a term for such return may have been established in the said contract.26 Accordingly, any stipulation in the
contract of deposit or custodianship that runs counter to the fundamental purpose of that agreement or which was not brought to the notice of
and accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-placer.

We believe that the position taken above is supported by considerations of public policy. If there is any party that needs the equalizing
protection of the law in money market transactions, it is the members of the general public whom place their savings in such market for the
purpose of generating interest revenues.27 The custodian bank, if it is not related either in terms of equity ownership or management control
to the borrower of the funds, or the commercial paper dealer, is normally a preferred or traditional banker of such borrower or dealer (here,
Philfinance). The custodian bank would have every incentive to protect the interest of its client the borrower or dealer as against the placer of
funds. The providers of such funds must be safeguarded from the impact of stipulations privately made between the borrowers or dealers
and the custodian banks, and disclosed to fund-providers only after trouble has erupted.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when petitioner first demanded
physical delivery thereof on 2 April 1981. We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet
matured and therefore, compensation or offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of complying with the
demand of the petitioner, Pilipinas purported to require and await the instructions of Philfinance, in obvious contravention of its undertaking
under the DCR to effect physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreño. The ostensible term
written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was not a defense against
petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such term was never brought to the attention of
petitioner Sesbreño at the time the money market placement with Philfinance was made; secondly, such term runs counter to the very
purpose of the custodianship or depositary agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with
the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of
the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981 without payment from Philfinance.

We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by arising out of its breach of
duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully
deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful deprivation
inflicted upon petitioner, is of no moment for present purposes. Prima facie, the damages suffered by petitioner consisted of P304,533.33,
the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal
interest of six percent (6%) per annum containing from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may have vis-a-vis Philfinance.

III.

The third principal contention of petitioner — that Philfinance and private respondents Delta and Pilipinas should be treated as one corporate
entity — need not detain us for long.

In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial court nor by the
respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition before us.

Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate entities.
Petitioner asks us to pierce their separate corporate entities, but has been able only to cite the presence of a common Director — Mr.
Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or another
of the three (3) concededly related companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were
administered and managed for the benefit of one. There is simply not enough evidence of record to justify disregarding the separate
corporate personalities of delta and Pilipinas and to hold them liable for any assumed or undetermined liability of Philfinance to petitioner.28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989
and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed
petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify petitioner for damages in
the amount of P304,533.33, plus legal interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so modified,
the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.
G.R. No. L-1405 July 31, 1948

BENJAMIN ABUBAKAR, petitioner,

vs.
THE AUDITOR GENERAL, respondent.

Viray and Viola Viray for petitioner.

First Assistant Solicitor General Roberto A. Gianzon and Solicitor Manuel Tomacruz for
respondent.

BENGZON, J.:

We are asked to overrule the decision of the Auditor General refusing to authorize the payment
of Treasury warrant No. A-2867376 for P1,000 which was issued in favor of Placido S. Urbanes
on December 10, 1941, but is now in the hands of herein petitioner Benjamin Abubakar.

For his refusal the respondent gave two reasons: first, because the money available for the
redemption of treasury warrants issued before January 2, 1942, is appropriated by Republic Act
No. 80 (Item F-IV-8) and this warrant does not come within the purview of said appropriation;
and second, because on of the requirements of his office had not been complied with, namely,
that it must be shown that the holders of warrants covering payment or replenishment of cash
advances for official expenditures (as this warrant is) received them in payment of definite
government obligations.

Finding the first reason to be sufficiently valid we shall not discuss, nor pass upon the second.

There is no doubt as to the authenticity and date of the treasury warrant. There is no question that
it was regularly indorsed by the payee and is now in the custody of the herein petitioner who is a
private individual. On the other hand, it is admitted that the warrant was originally made payable
to Placido S. Urbanes in his capacity as disbursing officer of the Food Administration for
"additional cash advance for Food Production Campaign in La Union" (Annex A). It is thus
apparent that this is a treasury warrant issued in favor of a public officer or employee and held in
possession by a private individual. Such being the case, the Auditor General can hardly be
blamed for not authorizing its redemption out of an appropriation specifically for "treasury
warrants issued ... in favor of and held in possession by private individuals." (Republic Act No.
80, Item F-IV-8.) This warrant was not issued in favor of a private individual. It was issued in
favor of a government employee.

The distinction is not without a difference. Outstanding treasury warrants issued prior to January
2, 1942, amount to more than four million pesos. The appropriation herein mentioned is only for
P1,750,000. Obviously Congress wished to provide for redemption of one class of warrants —
those issued to private individuals — as distinguished from those issued in favor of government
officials. Basis for the discrimination is not lacking. Probably the Government is not so sure that
those warrants to officials have all been properly used by the latter during the Japanese
occupation or maybe it wants to conduct further inquiries as to the equities of the present holders
thereof.
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument an
dis entitled to the rights and privileges of a holder in due course, free from defenses. But this
treasury warrant is not within the scope of the negotiable instruments law. For one thing, the
document bearing on its face the words "payable from the appropriation for food administration,"
is actually an order for payment out of "a particular fund," and is not unconditional, and does not
fulfill one of the essential requirements of a negotiable instrument. (Section 3 last sentenced and
section 1[b] of the Negotiable Instruments Law.) In the United States, government warrants for
the payment of money are not negotiable instruments nor commercial proper1

Anyway the question here is not whether the Government should eventually pay this warrant, or
is ultimately responsible for it, but whether the Auditor General erred in refusing to permit
payment out of the particular appropriation in Item F-IV-8 of Republic Act No. 80. We think
that he did not. Petition dismissed, with costs.

Paras, Actg. C.J., Feria, Pablo, Perfecto, Briones, and Padilla, JJ., concur.

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

Intestate of Luther Young and Pacita Young, spouses. PACIFICA JIMENEZ, petitioner-
appellee,
vs.
DR. JOSE BUCOY, administrator-appellant.

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

E. A. Beltran for appellant.

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. Primitive 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:

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

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 should 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 for the date of ratification of the Treaty of Peace concluding the Greater East
Asia War. (Arellano vs. 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.
vs. 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 Lam3 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 vs.
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 amount, 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 alleged 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 vs. Javier, 38 Phil., 424; American Express Company vs. Natividad, 46
Phil., 207; San Agustin vs. Barrios, 68 Phil., 475, 480; Toribio vs. Dacasa, 55 Phil., 461.)

Appellant's last assignment of error concerns attorneys fees. He says there was no reason for
making this and 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 new 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."

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.
PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.

Marcial Esposo for plaintiff-appellant.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and Attorney Concepcion Torrijos-Agapinan for
defendants-appellees.

DIZON, J.:

An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by the Philippine Education Co., Inc. against
Mauricio A. Soriano, Enrico Palomar and Rafael Contreras.

On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money orders of P200.00 each payable to E.P.
Montinola withaddress at Lucena, Quezon. After the postal teller had made out money ordersnumbered 124685, 124687-124695, Montinola
offered to pay for them with a private checks were not generally accepted in payment of money orders, the teller advised him to see the Chief
of the Money Order Division, but instead of doing so, Montinola managed to leave building with his own check and the ten(10) money orders
without the knowledge of the teller.

On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, an urgent message was sent to all
postmasters, and the following day notice was likewise served upon all banks, instructing them not to pay anyone of the money orders
aforesaid if presented for payment. The Bank of America received a copy of said notice three days later.

On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by appellant as part of its sales receipts. The
following day it deposited the same with the Bank of America, and one day thereafter the latter cleared it with the Bureau of Posts and
received from the latter its face value of P200.00.

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila Post Office, acting for and in behalf
of his co-appellee, Postmaster Enrico Palomar, notified the Bank of America that money order No. 124688 attached to his letter had been
found to have been irregularly issued and that, in view thereof, the amount it represented had been deducted from the bank's clearing
account. For its part, on August 2 of the same year, the Bank of America debited appellant's account with the same amount and gave it
advice thereof by means of a debit memo.

On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by his office deducting the sum of P200.00
from the clearing account of the Bank of America, but his request was denied. So was appellant's subsequent request that the matter be
referred to the Secretary of Justice for advice. Thereafter, appellant elevated the matter to the Secretary of Public Works and
Communications, but the latter sustained the actions taken by the postal officers.

In connection with the events set forth above, Montinola was charged with theft in the Court of First Instance of Manila (Criminal Case No.
43866) but after trial he was acquitted on the ground of reasonable doubt.

On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila praying for judgment as follows:

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

(a) To countermand the notice given to the Bank of America on September 27, 1961, deducting from the said Bank's
clearing account the sum of P200.00 represented by postal money order No. 124688, or in the alternative indemnify the
plaintiff in the same amount with interest at 8-½% per annum from September 27, 1961, which is the rate of interest
being paid by plaintiff on its overdraft account;

(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and moral damages in the amount
of P1,000.00 or in such amount as will be proved and/or determined by this Honorable Court: exemplary damages in
the amount of P1,000.00, attorney's fees of P1,000.00, and the costs of action.

Plaintiff also prays for such other and further relief as may be deemed just and equitable.

On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12 to 15 of the Record on Appeal, the
above-named court rendered judgment as follows:
 WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand the notice given to the Bank of
America on September 27, 1961, deducting from said Bank's clearing account the sum of P200.00 representing the
amount of postal money order No. 124688, or in the alternative, to indemnify the plaintiff in the said sum of P200.00
with interest thereon at the rate of 8-½% per annum from September 27, 1961 until fully paid; without any
pronouncement as to cost and attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after the parties had resubmitted the same stipulation of facts, the
appealed decision dismissing the complaint, with costs, was rendered.

The first, second and fifth assignments of error discussed in appellant's brief are related to the other and will therefore be discussed jointly.
They raise this main issue: that the postal money order in question is a negotiable instrument; that its nature as such is not in anyway
affected by the letter dated October 26, 1948 signed by the Director of Posts and addressed to all banks with a clearing account with the
Post Office, and that money orders, once issued, create a contractual relationship of debtor and creditor, respectively, between the
government, on the one hand, and the remitters payees or endorses, on the other.

It is not disputed that our postal statutes were patterned after statutes in force in the United States. For this reason, ours are generally
construed in accordance with the construction given in the United States to their own postal statutes, in the absence of any special reason
justifying a departure from this policy or practice. The weight of authority in the United States is that postal money orders are not negotiable
instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule being that, in
establishing and operating a postal money order system, the government is not engaging in commercial transactions but merely exercises a
governmental power for the public benefit.

It is to be noted in this connection that some of the restrictions imposed upon money orders by postal laws and regulations are inconsistent
with the character of negotiable instruments. For instance, such laws and regulations usually provide for not more than one endorsement;
payment of money orders may be withheld under a variety of circumstances (49 C.J. 1153).

Of particular application to the postal money order in question are the conditions laid down in the letter of the Director of Posts of October 26,
1948 (Exhibit 3) to the Bank of America for the redemption of postal money orders received by it from its depositors. Among others, the
condition is imposed that "in cases of adverse claim, the money order or money orders involved will be returned to you (the bank) and the,
corresponding amount will have to be refunded to the Postmaster, Manila, who reserves the right to deduct the value thereof from any
amount due you if such step is deemed necessary." The conditions thus imposed in order to enable the bank to continue enjoying the
facilities theretofore enjoyed by its depositors, were accepted by the Bank of America. The latter is therefore bound by them. That it is so is
clearly referred from the fact that, upon receiving advice that the amount represented by the money order in question had been deducted
from its clearing account with the Manila Post Office, it did not file any protest against such action.

Moreover, not being a party to the understanding existing between the postal officers, on the one hand, and the Bank of America, on the
other, appellant has no right to assail the terms and conditions thereof on the ground that the letter setting forth the terms and conditions
aforesaid is void because it was not issued by a Department Head in accordance with Sec. 79 (B) of the Revised Administrative Code. In
reality, however, said legal provision does not apply to the letter in question because it does not provide for a department regulation but
merely sets down certain conditions upon the privilege granted to the Bank of Amrica to accept and pay postal money orders presented for
payment at the Manila Post Office. Such being the case, it is clear that the Director of Posts had ample authority to issue it pursuant to Sec.
1190 of the Revised Administrative Code.

In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth assignments of error.

WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with costs.

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,

vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

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 respondent bank.

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

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);

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 (CTDs) to herein plaintiff in connection with his purchased 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 Manger, 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).

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 (de la 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 pre-terminate 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"
obligation 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.

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
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR
THOUSAND ONLY, SECURITY BANK 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, nationalizing as follows:

. . . 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 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 reffered to in the CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

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:

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:

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

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as
the bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

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.

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.) 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
particularity 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 Intergrated Realty Corporation, et al. vs. Philippine National Bank, et al. 20 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
inexistence 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:

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. 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:

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 lien holder 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.

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 raised 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:

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.

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.

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. (Emphasis ours.)

xxx xxx xxx

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.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is hereby AFFIRMED.

SO ORDERED.

Narvasa, C.J., Padilla and Nocon, JJ., concur.

G.R. No. L-39815 April 28, 1934

EULALIO BELISARIO, plaintiff-appellant,

vs.
PAZ NATIVIDAD VIUDA DE ZULUETA, defendant-appellee.

Jose V. Claravall for appellant.

Jose C. Zulueta for appellee.

BUTTE, J.:

This is an appeal from a judgment of the Court of First Instance of Nueva Ecija in an action for
the recovery of two tracts of land situated in the barrio of San Francisco, municipality of Lupao,
in said province, and described in certificates of transfer Nos. 3357 and 3358 issued by the
register of deeds of the Povince of Pangasinan (in which the lands were formerly situated) in
favor of the defendant.

It appears from Exhibit A that the plaintiff sold the said lands absolutely and without reservation
to the defendant for the consideration of P37,000, which was duly paid, and the agreement on the
part of the grantee to assume an indebtedness secured by a lien for 4, 500, which was likewise
duly paid. The deed recites that the sale is absolute and in perpetuity and the grantor warrants to
defend the title. The deed bears the date of April 29, 1927.

On the same date the defendant executed and delivered in favor of the plaintiff Exhibit B which,
after reciting that the defendant is the plaintiff an option to repurchase the lands on or before the
end of May, 1931, for the sum of P37,000.

These two instruments are very clear in their terms, were duly signed by both parties in the
presence of two witnesses and acknowledge before a notary public and recorded. we see no
reason whatever for varying the terms thereof.
On the 28th of May, 1931, the plaintiff appeared at the house of the defendant and offered to
exercise his option of repurchase under said Exhibit B by tendering to the defendant a check in
the sum of P37,000, drawn by Rosendo Santiago against his account in the Peoples Bank and
Trust Company. the books of the disclosed that at the time said check was tendered to the
defendant the drawer thereof had on deposit in the said bank subject to check the sum of P5.85.
Even if the check had been good, the defendant was not legally bound to accept it because such a
check does not satisfy the requirements of a legal tender.

Finding no merit in this appeal, the judgment of the court below is affirmed with costs against
the appellant.

Abad Santos, Imperial, Goddard, and Diaz, JJ., concur.

G.R. Nos. L-25836-37 January 31, 1981

THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,

vs.
JOSE M. ARUEGO, defendant-appellant.

FERNANDEZ, J.:

The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the
Court of First Instance of Manila, Branch XIII, in Civil Case No. 42066 denying his
motion to set aside the order declaring him in default, 1 and from the order of said court
in the same case denying his motion to set aside the judgment rendered after he was
declared in default. 2 These two appeals of the defendant were docketed as CA-G.R.
NO. 27734-R and CA-G.R. NO. 27940-R, respectively.

Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of
Appeals to file one consolidated record on appeal of CA-G.R. NO. 27734-R and CA-
G.R. NO. 27940-R. 4

In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division,

certified the consolidated appeal to the Supreme Court on the ground that only
questions of law are involved. 5

On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M.

Aruego Civil Case No. 42066 for the recovery of the total sum of about P35,000.00 with
daily interest thereon from November 17, 1959 until fully paid and commission
equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney's fees
equivalent to 10% of the total amount due and costs. 6 The complaint filed by the
Philippine Bank of Commerce contains twenty-two (22) causes of action referring to
twenty-two (22) transactions entered into by the said Bank and Aruego on different
dates covering the period from August 28, 1950 to March 14, 1951. 7 The sum sought
to be recovered represents the cost of the printing of "World Current Events," a
periodical published by the defendant. To facilitate the payment of the printing the
defendant obtained a credit accommodation from the plaintiff. Thus, for every printing of
the "World Current Events," the printer, Encal Press and Photo Engraving, collected the
cost of printing by drawing a draft against the plaintiff, said draft being sent later to the
defendant for acceptance. As an added security for the payment of the amounts
advanced to Encal Press and Photo-Engraving, the plaintiff bank also required
defendant Aruego to execute a trust receipt in favor of said bank wherein said
defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with
the promise to turn over to the plaintiff the proceeds of the sale of said publication to
answer for the payment of all obligations arising from the draft. 8

Aruego received a copy of the complaint together with the summons on December 2,
1959. 9 On December 14, 1959 defendant filed an urgent motion for extension of time
to plead, and set the hearing on December 16, 1959. 10 At the hearing, the court
denied defendant's motion for extension. Whereupon, the defendant filed a motion to
dismiss the complaint on December 17, 1959 on the ground that the complaint states no
cause of action because:

a) When the various bills of exchange were presented to the defendant as drawee for
acceptance, the amounts thereof had already been paid by the plaintiff to the drawer
(Encal Press and Photo Engraving), without knowledge or consent of the defendant
drawee.

b) In the case of a bill of exchange, like those involved in the case at bar, the defendant
drawee is an accommodating party only for the drawer (Encal Press and Photo-
Engraving) and win be liable in the event that the accommodating party (drawer) fails to
pay its obligation to the plaintiff. 11

The complaint was dismissed in an order dated December 22, 1959, copy of which was
received by the defendant on December 24, 1959. 12

On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7,
1960, acting upon the motion for reconsideration filed by the plaintiff, the trial court set
aside its order dismissing the complaint and set the case for hearing on March 15, 1960
at 8:00 in the morning. 14 A copy of the order setting aside the order of dismissal was
received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon according
to the affidavit of the deputy sheriff of Manila, Mamerto de la Cruz. On the following day,
March 12, 1960, the defendant filed a motion to postpone the trial of the case on the
ground that there having been no answer as yet, the issues had not yet been joined. 15
On the same date, the defendant filed his answer to the complaint interposing the
following defenses: That he signed the document upon which the plaintiff sues in his
capacity as President of the Philippine Education Foundation; that his liability is only
secondary; and that he believed that he was signing only as an accommodation party.
16
On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in
default on the ground that the defendant should have filed his answer on March 11,
1960. He contends that by filing his answer on March 12, 1960, defendant was one day
late. 17 On March 19, 1960 the trial court declared the defendant in default. 18 The
defendant learned of the order declaring him in default on March 21, 1960. On March
22, 1960 the defendant filed a motion to set aside the order of default alleging that
although the order of the court dated March 7, 1960 was received on March 11, 1960 at
5:00 in the afternoon, it could not have been reasonably expected of the defendant to
file his answer on the last day of the reglementary period, March 11, 1960, within office
hours, especially because the order of the court dated March 7, 1960 was brought to
the attention of counsel only in the early hours of March 12, 1960. The defendant also
alleged that he has a good and substantial defense. Attached to the motion are the
affidavits of deputy sheriff Mamerto de la Cruz that he served the order of the court
dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and the
affidavit of the defendant Aruego that he has a good and substantial defense. 19 The
trial court denied the defendant's motion on March 25, 1960. 20 On May 6, 1960, the
trial court rendered judgment sentencing the defendant to pay to the plaintiff the sum of
P35,444.35 representing the total amount of his obligation to the said plaintiff under the
twenty-two (22) causes of action alleged in the complaint as of November 15, 1957 and
the sum of P10,000.00 as attorney's fees. 21

On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25,
1961 denying his motion to set aside the order declaring him in default, an appeal bond
in the amount of P60.00, and his record on appeal. The plaintiff filed his opposition to
the approval of defendant's record on appeal on May 13, 1960. The following day, May
14, 1960, the lower court dismissed defendant's appeal from the order dated March 25,
1960 denying his motion to set aside the order of default. 22 On May 19, 1960, the
defendant filed a motion for reconsideration of the trial court's order dismissing his
appeal. 23 The plaintiff, on May 20, 1960, opposed the defendant's motion for
reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court
reconsidered its previous order dismissing the appeal and approved the defendant's
record on appeal. 25 On May 30, 1960, the defendant received a copy of a notice from
the Clerk of Court dated May 26, 1960, informing the defendant that the record on
appeal filed ed by the defendant was forwarded to the Clerk of Court of Appeals. 26

On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was
declared in default reiterating the same ground previously advanced by him in his
motion for relief from the order of default. 27 Upon opposition of the plaintiff filed on
June 3, 1960, 28 the trial court denied the defendant's motion to set aside the judgment
by default in an order of June 11, 1960. 29 On June 20, 1960, the defendant filed his
notice of appeal from the order of the court denying his motion to set aside the judgment
by default, his appeal bond, and his record on appeal. The defendant's record on appeal
was approved by the trial court on June 25, 1960. 30 Thus, the defendant had two
appeals with the Court of Appeals: (1) Appeal from the order of the lower court denying
his motion to set aside the order of default docketed as CA-G.R. NO. 27734-R; (2)
Appeal from the order denying his motion to set aside the judgment by default docketed
as CA-G.R. NO. 27940-R.

In his brief, the defendant-appellant assigned the following errors:

THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT

WAS IN DEFAULT.

II

THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO

DECLARE DEFENDANT IN DEFAULT ALTHOUGH AT THE TIME
THERE WAS ALREADY ON FILE AN ANSWER BY HIM WITHOUT
FIRST DISPOSING OF SAID ANSWER IN AN APPROPRIATE ACTION.

III

THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION

FOR RELIEF OF ORDER OF DEFAULT AND FROM JUDGMENT BY
DEFAULT AGAINST DEFENDANT. 31

It has been held that to entitle a party to relief from a judgment taken against him
through his mistake, inadvertence, surprise or excusable neglect, he must show to the
court that he has a meritorious defense. 32 In other words, in order to set aside the
order of default, the defendant must not only show that his failure to answer was due to
fraud, accident, mistake or excusable negligence but also that he has a meritorious
defense.

The record discloses that Aruego received a copy of the complaint together with the
summons on December 2, 1960; that on December 17, 1960, the last day for filing his
answer, Aruego filed a motion to dismiss; that on December 22, 1960 the lower court
dismissed the complaint; that on January 23, 1960, the plaintiff filed a motion for
reconsideration and on March 7, 1960, acting upon the motion for reconsideration, the
trial court issued an order setting aside the order of dismissal; that a copy of the order
was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon as
shown in the affidavit of the deputy sheriff; and that on the following day, March 12,
1960, the defendant filed his answer to the complaint.

The failure then of the defendant to file his answer on the last day for pleading is
excusable. The order setting aside the dismissal of the complaint was received at 5:00
o'clock in the afternoon. It was therefore impossible for him to have filed his answer on
that same day because the courts then held office only up to 5:00 o'clock in the
afternoon. Moreover, the defendant immediately filed his answer on the following day.
However, while the defendant successfully proved that his failure to answer was due to
excusable negligence, he has failed to show that he has a meritorious defense. The
defendant does not have a good and substantial defense.

Defendant Aruego's defenses consist of the following:

a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a
representative capacity, as the then President of the Philippine Education Foundation
Company, publisher of "World Current Events and Decision Law Journal," printed by
Encal Press and Photo-Engraving, drawer of the said bills of exchange in favor of the
plaintiff bank;

b) The defendant signed these bills of exchange not as principal obligor, but as
accommodation or additional party obligor, to add to the security of said plaintiff bank.
The reason for this statement is that unlike real bills of exchange, where payment of the
face value is advanced to the drawer only upon acceptance of the same by the drawee,
in the case in question, payment for the supposed bills of exchange were made before
acceptance; so that in effect, although these documents are labelled bills of exchange,
legally they are not bills of exchange but mere instruments evidencing indebtedness of
the drawee who received the face value thereof, with the defendant as only additional
security of the same. 33

The first defense of the defendant is that he signed the supposed bills of exchange as
an agent of the Philippine Education Foundation Company where he is president.
Section 20 of the Negotiable Instruments Law provides that "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 filing a
representative character, without disclosing his principal, does not exempt him from
personal liability."

An inspection of the drafts accepted by the defendant shows that nowhere has he
disclosed that he was signing as a representative of the Philippine Education
Foundation Company. 34 He merely signed as follows: "JOSE ARUEGO (Acceptor)
(SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally liable
for the drafts he accepted.

The defendant also contends that he signed the drafts only as an accommodation party
and as such, should be made liable only after a showing that the drawer is incapable of
paying. This contention is also without merit.

An accommodation party is one who has signed the instrument as maker, drawer,
indorser, without receiving value therefor and for the purpose of lending his name to
some other person. Such person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of the taking of the instrument knew him to be
only an accommodation party.35 In lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no part of the
consideration for the instrument but assumes liability to the other parties thereto
because he wants to accommodate another. In the instant case, the defendant signed
as a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is primarily
liable. Thus, if the defendant who is a lawyer, he should not have signed as an
acceptor/drawee. In doing so, he became primarily and personally liable for the drafts.

The defendant also contends that the drafts signed by him were not really bills of
exchange but mere pieces of evidence of indebtedness because payments were made
before acceptance. This is also without merit. Under the Negotiable Instruments Law, a
bill of exchange is an unconditional order in writting addressed by one person to
another, signed by the person giving it, requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future time a sum certain in money to order
or to bearer. 36 As long as a commercial paper conforms with the definition of a bill of
exchange, that paper is considered a bill of exchange. The nature of acceptance is
important only in the determination of the kind of liabilities of the parties involved, but
not in the determination of whether a commercial paper is a bill of exchange or not.

It is evident then that the defendant's appeal can not prosper. To grant the defendant's
prayer will result in a new trial which will serve no purpose and will just waste the time of
the courts as well as of the parties because the defense is nil or ineffective. 37

WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First
Instance of Manila denying the petition for relief from the judgment rendered in said
case is hereby affirmed, without pronouncement as to costs.

SO ORDERED.

G.R. No. L-31025 August 15, 1929

FRANCISCO GUTIERREZ, ET AL., plaintiffs-appellees,

vs.
JUAN CARPIO, defendant-appellant.

Eusebio Orense and Marcelino Aguas for appellant.

Gutierrez David, Dizon & David for appellee.

ROMUALDEZ, J.:

The litigants herein compromised a civil case on July 13, 1928, agreeing that if within one month
from the date thereof the plaintiffs failed to repurchase certain land, its ownership would vest in
the defendant.
The question now raised is whether or not the plaintiffs duly tendered the amount of the
reimbursement agreed upon in the proper form of money to the defendant.

The court below held in the affirmative, but the defendant, appealing from such judgment,
maintains that on August 13, when the plaintiffs tendered it, the stipulated period had already
elapsed; that the tender of reimbursement made by check is insufficient; and that the holding of
the trial court that the land in question is valued at P27,000 is groundless.

When did the stipulated month terminate? This is the first point in controversy, the determination
of which depends upon the kind of month agreed upon by the parties, and on the day from its
should be counted.

As to the kind of month, it is to be noted that, according to the ruling in the case of Guzman vs.
Lichauco (42 Phil., 291), article 7 of the Civil Code had been modified by section 13 of the
Administrative Code, according to which "month" now means the civil or calendar month and
not the regular thirty-day month.

And the civil or calendar month is defined as follows :

The civil or solar month is that which agrees with the Gregorian calendar; and these
months are known by the names of January, February, March, etc. They are composed of
unequal portions of time . . . (Bouvier's Law Dictionary.)

A calendar month is a month as designated in the calendar, without regard to the number
of days it may contain. In commercial transactions it means a month ending on the day in
the succeeding month corresponding to the day in the preceding month from which the
computation began, and if the last month have not so many days, then on the last day of
that month. Daley vs. Anderson, 48 Pac., 839, 840; 7 Wyo., 1; 75 Am. St. Rep., 870
(citing Migotti vs. Colvill, 4 C.P. Div., 233). (1 Words and Phrases, 943.)

Hence, this court held in the case of Villegas vs. Capistrano (9 Phil., 416), that the period of three
months counted from February 13 did not expire on the 12th of the following May.

As to when said month began, said section 13 of the Administrative Code provides as follows:

In computing any fixed period of time, with reference to the performance of an act
required by law or contract to be done at a certain time or within a certain limit of time,
the day of date, or day from which the time is reckoned, is to be excluded and the date of
performance included, unless otherwise provided. (Emphasis ours)

Similar provisions may be found in article 1130 of the Civil Code, and in section 4 of the Code
of Civil Procedure.

There is nothing in the agreement under discussion providing otherwise, and according to the
phrase therein contained, "one month from this date," said date, which was July 13, 1928, is
exactly the date which must be excluded being the "day from which the time is reckoned,"
according to the words of the aforementioned section 13 of the Administrative Code, which we
have italicized above.

Wherefore, that civil month of thirty-one days began on July 14 and terminated with the end of
the thirteenth day of the following August. And as it has been proved without discussion that the
plaintiffs offered to repurchase the land from the defendant on August 13th, it follows that such
offer was made within the period stipulated.

But the defendant alleges that the offer to repurchase made by check was legally insufficient. We
agree that the payment by check does not per se have the effect of such payment. (Section 189,
Act No. 2031, on Negotiable Instruments; article 1170, Civil Code; Bryan, Landon Co. vs.
American Bank, 7 Phil., 255; and Tan Sunco vs. Santos, 9 Phil., 44; 21 R.C.L., 60, 61.) But it
appears from Felipe Gutierrez's testimony that the defendant told him on August 12th that he
would accept the repurchase by check. Felipe Gutierrez is not very explicit about it, but we deem
this to be the drift of his testimony. The defendant must have so understood it, seeing that he
thought it necessary to rebut said detail in his testimony which, notwithstanding the defendant's
denial, we hold to be established by a preponderance of evidence, considering all the
circumstances of the case. The defendant having thus consented to the repurchase by check and
having signified that by reason of such repurchase the plaintiffs could return to their home, said
defendant was in estoppel, and could not, on the following day, refuse to accept such payment by
check, because he induced the plaintiffs to act upon the belief that he had consented to said
manner of payment.

From this it follows that by virtue of the defendant's having consented to that payment by check,
which was neither alleged nor proved to be in any way defective, that offer to repurchase was
legally effective and sufficient to compel the defendant to accept it.

We conclude that the offer to repurchase was made within the stipulated period and in the form
of money accepted by the defendant, from whose refusal to allow the repurchase in such terms
originates the plaintiffs' right of action herein.

The last assignment of error touching the value of the land, cannot be a cause for the reversal of
the judgment appealed from for under the circumstances of the case, it has no bearing on the
decision of the case nor affects the result thereof.

The judgment appealed from is modified, and it is hereby ordered that the plaintiffs may, within
ten days from the date on which this judgment becomes final, repurchase the land, the subject
matter of these proceedings, through the delivery to the defendant at the latter's residence in the
municipality of Santa Rita, Pampanga, of the sum of fourteen thousand six hundred forty three
pesos and forty-three centavos (P14,643.43), Philippine currency (in coin or paper money). The
judgment appealed from is affirmed in all other respects, with costs against the appellant. So
ordered.

G.R. No. L-41764 December 19, 1980

NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., petitioner,
vs.
HON. ALBERTO V. SENERIS, RICARDO A. TONG and EX-OFFICIO SHERIFF
HAKIM S. ABDULWAHID, respondents.

CONCEPCION JR., J.:

A petition for certiorari with preliminary injunction to annul and/or modify the order of the
Court of First Instance of Zamboanga City (Branch ii) dated August 28, 1975 denying
petitioner's Ex-Parte Motion for Issuance of Certificate Of Satisfaction Of Judgment.

Herein petitioner is the defendant in a complaint for collection of a sum of money filed
by the private respondent. 1 On July 19, 1974, a compromise judgment was rendered
by the respondent Judge in accordance with an amicable settlement entered into by the
parties the terms and conditions of which, are as follows:

(1) That defendant will pay to the plaintiff the amount of Fifty Four
Thousand Five Hundred Pesos (P54,500.00) at 6% interest per annum to
be reckoned from August 25, 1972;

(2) That defendant will pay to the plaintiff the amount of Six Thousand
Pesos (P6,000.00) as attorney's fees for which P5,000.00 had been
acknowledged received by the plaintiff under Consolidated Bank and Trust
Corporation Check No. 16-135022 amounting to P5,000.00 leaving a
balance of One Thousand Pesos (P1,000.00);

(3) That the entire amount of P54,500.00 plus interest, plus the balance of
P1,000.00 for attorney's fees will be paid by defendant to the plaintiff
within five months from today, July 19, 1974; and

(4) Failure one the part of the defendant to comply with any of the above-
conditions, a writ of execution may be issued by this Court for the
satisfaction of the obligation. 2

For failure of the petitioner to comply with his judgment obligation, the respondent
Judge, upon motion of the private respondent, issued an order for the issuance of a writ
of execution on December 21, 1974. Accordingly, writ of execution was issued for the
amount of P63,130.00 pursuant to which, the Ex-Officio Sheriff levied upon the following
personal properties of the petitioner, to wit:

(1) Unit American Lathe 24

(1) Unit American Lathe 18 Cracker Wheeler

 (1) Unit Rockford Shaper 24

and set the auction sale thereof on January 15, 1975. However, prior to January 15,
1975, petitioner deposited with the Clerk of Court, Court of First Instance, Zamboanga
City, in his capacity as Ex-Officio Sheriff of Zamboanga City, the sum of P63,130.00 for
the payment of the judgment obligation, consisting of the following:

1. P50.000.00 in Cashier's Check No. S-314361 dated January 3, 1975 of

the Equitable Banking Corporation; and

2. P13,130.00 incash. 3

In a letter dated January 14, 1975, to the Ex-Officio Sheriff, 4 private respondent
through counsel, refused to accept the check as well as the cash deposit. In the 'same
letter, private respondent requested the scheduled auction sale on January 15, 1975 to
proceed if the petitioner cannot produce the cash. However, the scheduled auction sale
at 10:00 a.m. on January 15, 1975 was postponed to 3:00 o'clock p.m. of the same day
due to further attempts to settle the case. Again, the scheduled auction sale that
afternoon did not push through because of a last ditch attempt to convince the private
respondent to accept the check. The auction sale was then postponed on the following
day, January 16, 1975 at 10:00 o'clock a.m. 5 At about 9:15 a.m., on January 16, 1975,
a certain Mr. Tañedo representing the petitioner appeared in the office of the Ex-Officio
Sheriff and the latter reminded Mr. Tañedo that the auction sale would proceed at 10:00
o'clock. At 10:00 a.m., Mr. Tañedo and Mr. Librado, both representing the petitioner
requested the Ex-Officio Sheriff to give them fifteen minutes within which to contract
their lawyer which request was granted. After Mr. Tañedo and Mr. Librado failed to
return, counsel for private respondent insisted that the sale must proceed and the Ex-
Officio Sheriff proceeded with the auction sale. 6 In the course of the proceedings,
Deputy Sheriff Castro sold the levied properties item by item to the private respondent
as the highest bidder in the amount of P50,000.00. As a result thereof, the Ex-Officio
Sheriff declared a deficiency of P13,130.00. 7 Thereafter, on January 16, 1975, the Ex-
Officio Sheriff issued a "Sheriff's Certificate of Sale" in favor of the private respondent,
Ricardo Tong, married to Pascuala Tong for the total amount of P50,000.00 only. 8
Subsequently, on January 17, 1975, petitioner filed an ex-parte motion for issuance of
certificate of satisfaction of judgment. This motion was denied by the respondent Judge
in his order dated August 28, 1975. In view thereof, petitioner now questions said order
by way of the present petition alleging in the main that said respondent Judge
capriciously and whimsically abused his discretion in not granting the motion for
issuance of certificate of satisfaction of judgment for the following reasons: (1) that there
was already a full satisfaction of the judgment before the auction sale was conducted
with the deposit made to the Ex-Officio Sheriff in the amount of P63,000.00 consisting of
P50,000.00 in Cashier's Check and P13,130.00 in cash; and (2) that the auction sale
was invalid for lack of proper notice to the petitioner and its counsel when the Ex-Officio
Sheriff postponed the sale from June 15, 1975 to January 16, 1976 contrary to Section
24, Rule 39 of the Rules of Court. On November 10, 1975, the Court issued a temporary
restraining order enjoining the respondent Ex-Officio Sheriff from delivering the personal
properties subject of the petition to Ricardo A. Tong in view of the issuance of the
"Sheriff Certificate of Sale."

We find the petition to be impressed with merit.

The main issue to be resolved in this instance is as to whether or not the private
respondent can validly refuse acceptance of the payment of the judgment obligation
made by the petitioner consisting of P50,000.00 in Cashier's Check and P13,130.00 in
cash which it deposited with the Ex-Officio Sheriff before the date of the scheduled
auction sale. In upholding private respondent's claim that he has the right to refuse
payment by means of a check, the respondent Judge cited the following:

Section 63 of the Central Bank Act:

Sec. 63. Legal Character. — Checks representing deposit money do not

have legal tender power and their acceptance in payment of debts, both
public and private, is at the option of the creditor, Provided, however, that
a check which has been cleared and credited to the account of the creditor
shall be equivalent to a delivery to the creditor in cash in an amount equal
to the amount credited to his account.

Article 1249 of the New Civil Code:

Art. 1249. — The payment of debts in money shall be made in the

currency stipulated, and if it is not possible to deliver such currency, then
in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or

other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired.

In the meantime, the action derived from the original obligation shall be
held in abeyance.

Likewise, the respondent Judge sustained the contention of the private respondent that
he has the right to refuse payment of the amount of P13,130.00 in cash because the
said amount is less than the judgment obligation, citing the following Article of the New
Civil Code:

Art. 1248. Unless there is an express stipulation to that effect, the creditor
cannot be compelled partially to receive the presentations in which the
obligation consists. Neither may the debtor be required to make partial
payment.
 However, when the debt is in part liquidated and in part unliquidated, the
creditor may demand and the debtor may effect the payment of the former
without waiting for the liquidation of the latter.

It is to be emphasized in this connection that the check deposited by the petitioner in the
amount of P50,000.00 is not an ordinary check but a Cashier's Check of the Equitable
Banking Corporation, a bank of good standing and reputation. As testified to by the Ex-
Officio Sheriff with whom it has been deposited, it is a certified crossed check. 9 It is a
well-known and accepted practice in the business sector that a Cashier's Check is
deemed as cash. Moreover, since the said check had been certified by the drawee
bank, by the certification, the funds represented by the check are transferred from the
credit of the maker to that of the payee or holder, and for all intents and purposes, the
latter becomes the depositor of the drawee bank, with rights and duties of one in such
situation. 10 Where a check is certified by the bank on which it is drawn, the certification
is equivalent to acceptance.11 Said certification "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 understanding that the check is good then, and shall continue good,
and this agreement is as binding on the bank as its notes in 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." 12 When the holder procures the check to be certified, "the check operates as
an assignment of a part of the funds to the creditors." 13 Hence, the exception to the
rule enunciated under Section 63 of the Central Bank Act to the effect "that a check
which has been cleared and credited to the account of the creditor shall be equivalent to
a delivery to the creditor in cash in an amount equal to the amount credited to his
account" shall apply in this case. Considering that the whole amount deposited by the
petitioner consisting of Cashier's Check of P50,000.00 and P13,130.00 in cash covers
the judgment obligation of P63,000.00 as mentioned in the writ of execution, then, We
see no valid reason for the private respondent to have refused acceptance of the
payment of the obligation in his favor. The auction sale, therefore, was uncalled for.
Furthermore, it appears that on January 17, 1975, the Cashier's Check was even
withdrawn by the petitioner and replaced with cash in the corresponding amount of
P50,000.00 on January 27, 1975 pursuant to an agreement entered into by the parties
at the instance of the respondent Judge. However, the private respondent still refused
to receive the same. Obviously, the private respondent is more interested in the levied
properties than in the mere satisfaction of the judgment obligation. Thus, petitioner's
motion for the issuance of a certificate of satisfaction of judgment is clearly meritorious
and the respondent Judge gravely abused his discretion in not granting the same under
the circumstances.

In view of the conclusion reached in this instance, We find no more need to discuss the
ground relied in the petition.

It is also contended by the private respondent that Appeal and not a special civil action
for certiorari is the proper remedy in this case, and that since the period to appeal from
the decision of the respondent Judge has already expired, then, the present petition has
been filed out of time. The contention is untenable. The decision of the respondent
Judge in Civil Case No. 250 (166) has long become final and executory and so, the
same is not being questioned herein. The subject of the petition at bar as having been
issued in grave abuse of discretion is the order dated August 28, 1975 of the
respondent Judge which was merely issued in execution of the said decision. Thus,
even granting that appeal is open to the petitioner, the same is not an adequate and
speedy remedy for the respondent Judge had already issued a writ of execution. 14

WHEREFORE, in view of all the foregoing, judgment is hereby rendered:

1. Declaring as null and void the order of the respondent Judge dated August 28, 1975;

2. Declaring as null and void the auction sale conducted on January 16, 1975 and the
certificate of sale issued pursuant thereto;

3. Ordering the private respondent to accept the sum of P63,130.00 under deposit as
payment of the judgment obligation in his favor;

4. Ordering the respondent Judge and respondent Ex-Officio Sheriff to release the
levied properties to the herein petitioner.

The temporary restraining order issued is hereby made permanent.

Costs against the private respondent.

SO ORDERED.

G.R. No. L-51767 June 29, 1982

LETICIA CO, assisted by her husband MUI YUK KONG, in substitution of

CITADEL INSURANCE & SURETY CO., INC., plaintiff-appellee,
vs.
PHILIPPINE NATIONAL BANK, defendant-appellant.

BARREDO, J:

Direct appeal to this Supreme Court pursuant to Republic Act 5440 from the decision of
the Court of First Instance of Rizal, Branch XXI in its Civil Case No. 23101 entitled
"Citadel Insurance & Surety Co., Inc. vs. Philippine National Bank", the dispositive
portion of which reads:
 WHEREFORE, this Court finds that plaintiff has validly exercised the right
of redemption herein-before discussed and orders the defendant to:

(a) Accept the amount consigned and deposited pursuant to

the Order of this Court on March 11, 1976;

(b) Execute and specifically comply to the effects of the

exercise of the right of redemption so that whatever title is
due to the plaintiff after redemption may properly accrue to
plaintiff;

(c) Deliver and surrender to plaintiff possession over the

property in question.

Considering that this case has been submitted for decision based upon
four (4) limited questions of law and there being no evidence presented
and submitted to support any claim for damages, there is no
pronouncement and award of damages as well as costs.

SO ORDERED. (Pp. 180-181, Record on Appeal.)

It goes without saying that under the Act aforementioned by virtue of which this appeal
is before Us, the issues We are called upon to resolve are only questions of law.

Briefly stated, the undisputed material facts of this case, as may be culled from the
decision of the trial court and elsewhere in the record, are as follows:

On November 10, 1961, the Standard Parts Manufacturing Corporation, hereinafter to

be referred to simply as STANDARD, executed a real estate mortgage in favor of herein
defendant-appellant Philippine National Bank, hereinafter to be referred to simply as
PNB, over properties covered by Transfer Certificates of Title Nos. T-5108 and T-5320,
both situated in Baguio City, as collateral for a loan consideration of P500,000.00. On
February 20, 1963, the same debtor corporation executed an amended real estate
mortgage to include as collateral for the increase of the above loan to P1,000,000.00 a
property located at Pasong Tamo Extension within the Municipality of Makati (then part
of Rizal Province and now of Metro Manila) covered by Transfer Certificate of Title No.
54474. Additionally, on February 20, 1963, the same corporation executed in favor of
PNB a chattel mortgage of its personal properties listed on pages 96 to 108 of the
Record on Appeal. On pages 6-7 of appellant's brief it is stated that as of July 19, 1974,
the "borrowed loan" of STANDARD totalled P4,296,803.56, and that the said obligation
was secured, as aforementioned, by the mortgages on the Baguio and Makati real
estates of STANDARD and the chattel mortgage on its personal properties above
referred to.

When STANDARD failed to pay its obligation, PNB extrajudicially foreclosed the
mortgage on the Baguio properties as well as the chattel mortgage on July 19, 1974,
with PNB as the highest bidder for P1,514,305.00. Subsequently, on August 8, 1974,
PNB also foreclosed the mortgage on the Makati property and purchased the same, as
highest bidder, for P1,363,000.00.

We quote further from appellant's brief:

When Standard Parts failed to pay its obligation, PNB foreclosed the
Baguio properties and chattels on July 19, 1974 with it as the highest
bidder for P1,514,305.00 and the Pasong Tamo property on August 8,
1974 also with it as the highest bidder for P1,363,000.00. Hence, after
foreclosure of the above-mentioned mortgage, the deficiency claim of the
Bank against Standard Parts as of August 8, 1974 amounted to
P1,434,521.07. Subsequently, a Certificate of Sale dated July 19, 1974
was issued by the Sheriff of Baguio City covering TCT Nos. T-5708 and T-
5320 (Annex "C", P.S.F.). A Certificate of Sale dated August 8, 1974
covering TCT No. 54474 was also issued by the Sheriff of Rizal (Annex
"D", P.S.F.) and registered on March 14, 1976 in the Registry of Deeds.
Upon failure of Standard Parts to redeem the foreclosed properties within
the reglementary period, the PNB consolidated titles to the Baguio
properties and TCT Nos. 26080 and 26081 (Annexes "E" and "E-1",
respectively, P.S.F.) were issued by the Register of Deeds of Baguio City
on May 5, 1976 in the name of the Bank. On May 14, 1976, TCT No.
54474 was cancelled and TCT No. S-28133 issued in the name of the
PNB.

Meantime, on March 5, 1976, Citadel wrote PNB a letter (Annex "H",

P.S.F.) stating therein its desire to redeem the property covered by TCT
No. 54474, it being the alleged assignee of the right of redemption of
Standard Parts with respect only to said property. Citadel, however,
offered to redeem the property for only P1,621,970.00. In its reply to said
letter, PNB, in a letter dated March 5, 1976 (Annex "I", P.S.F.), justifiably
refused to accept the tender of payment of Citadel considering that the
amount of P1,621,970.00 was very much lower than the Bank's total
amount of P3,366,546.42 as of March 5, 1976 per the Statement of
Account of Standard Parts (Annex "G", P.S.F.). (Pp. 7-9, Brief of PNB)

To Our mind then, the facts that are decisive herein are the following:

1. The mortgages here in question were constituted way back in 1961 to 1963.

2. The foreclosure sale of the Baguio properties and the chattels took place on July 19,
1974 and that of the Makati estate on August 8, 1974.

3. Citadel Insurance & Surety Co., Inc. (CITADEL, for short) to whom STANDARD had
in the meanwhile (or on February 20, 1976) transferred its rights in the mortgages here
in issue, wrote PNB on March 5, 1976 stating that it was redeeming the Makati property,
offering to pay therefor as redemption price P1,621,970.00. The letter of CITADEL in
this regard reads thus:

CITADEL INSURANCE & SURETY CO., INC.

Suite 202 Sikatuna Bldg., Ayala Ave.
Makati, Rizal
Tel. No. 87-33-07 & 87-34-44

PHILIPPINE NATIONAL BANK

Escolta, Manila

Re: Legal Redemption of Extra-Judicial

Foreclosed Property of Standard
Parts Manufacturing Corporation
Under Act No. 3135, As amended

Gentlemen:

In connection with the above-mentioned property which is

covered by TCT No. 54474 of the Register of Deeds For the
Province of Rizal we wish to inform you that the CITADEL
INSURANCE & SURETY CO., INC., is the Assignee of the
right of redemption, which will expire on March 11, 1976, by
virtue of a "Deed of Assignment and Waiver of Redemption
Rights" dated February 29, 1976, photostat copy of which is
attached to this letter as Annex "A".

As assignee of the aforementioned Right of Redemption, our

Company is now exercising the same by tendering to you
the redemption price computed as follows:

P1,363,000.00 — total bid of the PNB per its letter to the

Sheriff dated August 8, 1974;
 P 258,970.00 — interest at the rate of 1% a month from the
date of auction, August 8, 1974, up to the time of
redemption;

P1,621,970.00 — TOTAL

as evidenced by RCBC Manager's Check No. MC 194188 dated March 4,

1976, which is attached to this letter as Annex "B".

In view of the foregoing, kindly acknowledge the receipt of the redemption

amount and cause the issuance of the corresponding Certificate of
Redemption in favor of our Company.

Thank you.

Very
truly
yours,

(Sgd.)
FRAN
CISC
O S.
CORP
US

P
r
e
s
i
d
e
n
t

Atty.: a/s (Pages 131-133, Record on Appeal)

4. Immediately or on even date PNB rejected the above tender, contending that the
offered price was much lower than P3,366,546.42, 1 as of said date March 5, 1976, which PNB
maintained was the correct redemption price. The following was the reply of PNB:

PHILIPPINE NATIONAL BANK

LEGAL DEPARTMENT

March 5, 1976
 Mr. Francisco S. Corpus
President
Citadel Insurance & Surety Co., Inc.
202 Sikatuna Bldg., Ayala Ave.
Makati, Rizal

Dear Mr. Corpus:

This refers to your letter of March 5, 1976 wherein you expressed your
desire to redeem the property covered by TCT No. 54474 of the Register
of Deeds of Rizal which we acquired from Standard Parts Manufacturing
Corp. in the amount of P1,621,970.00 in the form of RCBC Manager's
Check No. MC 194188 dated March 4, 1976.

We feel that the Legal Department is in no position to decide the

acceptance of your offer because it appears that the amount offered is
less than our total claim. We suggest, therefore, that you see either Vice
President Andres L. Africa or Asst. Vice Pres. Raul Leveriza on Monday
March 8,1976.

Very
truly
yours,
(Sgd.)
ARTEM
IO S.
TIPON
Senior
Supervi
sing
Atty.

(Pp. 133-134, Record on Appeal.)

5. The Certificate of Sale dated August 8, 1974 covering TCT No. 54474 was issued by the Sheriff of
Rizal and registered on March 14, 1976 in the Registry of Deeds. (Page 8, PNB's brief) Notably, however,
according to the decision of the trial court, the certificate of sale was registered on March 11, 1976. (Page
176, Record on Appeal.)

6. On March 11, 1976, CITADEL filed the instant action in the court below with the following prayer:

PRAYER

WHEREFORE, it is respectfully prayed that upon the filing of this complaint this
Honorable Court forthwith issue an order authorizing its Branch Clerk to accept a
Manager's Check in the amount of P1,621,970.00 and deposit the same with the Rizal
Commercial Banking Corporation under a Savings Account in order that the same shall
not remain Idle, and in the name, of defendant PNB, subject to the control and disposition
of this Honorable Court; and after hearing, judgment be rendered;

(a) Ordering defendant to accept the amount so deposited, and/or such amount as may
be found by this Honorable Court to be the lawful redemption price for the particular
property in question;
 (b) Ordering defendant to turn over the title and possession of the property in question to
plaintiff together with its fruits from March 11, 1976 up to the time possession is actually
surrendered to the plaintiff, plus the interests thereon counted from the date of filing of
this complaint;

(c) Ordering defendant to execute such documents and papers that may be necessary for
the transfer of the title and possession of the property in question to plaintiff;

(d) Ordering defendant to pay plaintiff damages in the form of attorney's fees and
expenses of litigation, the amount of which is left to the sound discretion of this
Honorable Court;

(e) Ordering the defendant to pay the costs of suit.

PLAINTIFF FURTHER PRAYS for such other relief as may be found just and equitable in
the premises. (Pp. 6-8, Record on Appeal.)

7. There is no dispute that a manager's check of the Rizal Commercial Banking Corporation No. MC
194188 dated March 4, 1976 and in the amount of P1,621,970.00 (Pp. 14-15, Record on Appeal)
accompanied the complaint and was actually deposited under a savings account with the same bank by
order of the trial court of the same date "in the name of the PNB subject to the control and disposition of
the Court." (p. 20, Record on Appeal.)

In the light of the foregoing facts, the parties stipulated in the partial stipulation facts they submitted to the
trial court that:

B. Limitation of issues

The parties agreed that the issues raised by the pleadings are one of
law, to wit:

1. Whether the redemption period has expired.

2. What is the correct redemption amount required under

the law?

3. Whether there was a valid and effective tender of

payment.

4. Whether the Deed of Assignment is binding and

enforceable against

5. defendant PNB. (P. 151, Record on Appeal)

Timeliness of the redemption

To be sure, We find the opposing postures of the parties on the timeliness of the redemption here in
question a little blurred and confusing. So, rather than to try to extricate Ourselves out of such maze, We
feel it is sufficient to point out that according to the brief of appellant, the foreclosure sale of the subject
property was made on August 8, 1974 (pp. 7-8) and the corresponding certificate of sale was issued by
sheriff on the same day and "registered on March 14, 1976 in the Register of Deeds." (p. 8, Record on
Appeal.) "On May 14, 1976 TCT 54474 was cancelled and TCT No. S-28133 issued in the name of
PNB". (id.) 2
In such ambiguous premises, We have no alternative than to use March 11, 1975 3 as point of reference
regarding the date of the registration of the certificate of sale. Appellant assumes that on this basis the
period of redemption was up to March 10, 1976. Well, the truth of the matter is that this detail is tied up
inextricably to the main question of law that pervades the whole of this controversy.

What is the law applicable to this case as to the period of redemption?

Let us not forget that the mortgage at issue was executed in 1963. True it is that as underscored by
counsel for PNB, STANDARD, the predecessor-in-interest of CITADEL, who signed the deed of mortgage
agreed, and CITADEL is bound by such agreement, "to abide and to be bound by the provisions of the
Charter of the PNB ". Specifically paragraph (g) of said real estate mortgage provides:

(g) The mortgagor hereby waives the right granted him under Section 119 of
Commonwealth Act No. 141, known as the Public Land Act, as amended and agrees to
abide to be bound by the provisions of Act No. 3135 or Act No. 2933, which amended Act
No. 1612, or Republic Act No. 1300, as amended, known as the New Charter." (Page 15,
PNB's Brief.)

Going by the literal terms of this quoted provision, STANDARD/CITADEL stand bound by the same. In
other words, paragraph (g) of the mortgage contract made the provisions of Act No. 3135 or Act 2933,
which amended Act No. 1612, or Republic Act 1300, as amended, known as the new Charter part and
parcel of the mortgage contract. Now, what is the legal import or consequence of such express
incorporation of and submission to Act 3135 and Republic Act 1300 by STANDARD/CITADEL?

Republic Act 1300 entitled "An Act Revising the Charter of the Philippine National Bank" was approved
and made effective on June 16, 1955. It was therefore the law when in 1963 the mortgage here in dispute
was executed. It was the very law that the
above-quoted paragraph (g) of the mortgage contract made reference to. In this connection, evidently
overlooked by counsel for PNB is that Republic Act 1300 does not contemplate extrajudicial procedure.
Clearly indicative of this is Section 20 thereof which provides:

Sec. 20. Right of redemption of property foreclosed. — The mortgagor shall have the
right, within the year after the sale of real estate as a result of the foreclosure of a
mortgage, to redeem the property by paying the amount fixed by the court in the order of
execution, with interest thereon at the rate specified in the mortgage, and all the costs
and other judicial expenses incurred by the Bank by reason of the execution and sale and
for the custody of said property.

Indeed, conventional legal and banking business sense dictates that it must have been because of such
omission that paragraph (g) above had to expressly incorporate Act 3135 which provides for extrajudicial
foreclosure. We cannot, therefore, escape the conclusion that what STANDARD agreed to in respect to
the possible foreclosure of its mortgage was to subject the same to the provisions of Act 3135 should the
PNB opt to utilize said law instead of Republic Act 1300.

On the other hand, Act 3135, as amended by Act 4018, is of 1924 vintage. Its Section 6 very clearly
governs the right of redemption in extrajudicial foreclosures thus:

Sec. 6. In an cases in which an extrajudicial sale is made under the special power
hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or
judgment creditor of said debtor, or any person having a lien on the property subsequent
to the mortgage or deed of trust under which the property is sold, may redeem the same
at any time within the term of one year from and after the date of the sale; and such
redemption shall be governed by the provisions of sections four hundred and sixty-four to
 four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these
are not inconsistent with the provisions of this Act.

Sections four hundred sixty-four to four hundred sixty-six, inclusive, of the Code of Civil Procedure, since
the promulgation of the Rules of Court of 1940, became Sections 29, 30 and 34 of Rule 39. The same
sections were reiterated in the Revised Rules of Court in July 1964.

From all the foregoing, We are of the considered opinion and so hold that STANDARD'S/CITADEL'S
period of redemption was up to March 10, 1976. 4 That CITADEL filed its complaint to compel PNB to
accept its redemption only on March 11, 1976 is of no moment. The unequivocal tender of redemption
was made in the letter of Francisco S. Corpus, its President, of March 5, 1976 accompanied by a
manager's check of the Rizal Commercial Banking Corporation a well known, big and reputable banking
institution, for the amount it believed it should pay as redemption price. PNB rejected it on the sole and
only ground that it considered the amount insufficient. The Court, therefore, holds that the redemption
was made on time, that is, within one year (or even twelve months) from the date appearing as the date
of the registration of the certificate of sale.

How about the amount needed for such redemption?

On this score, PNB insists on p. 9 et. seq. of its brief on the applicability to this case of "Section 25 of
Presidential Decree No. 694, otherwise known as the new PNB Charter" which provides:

Section 25. Right of Redemption of Foreclosed Property — Right of Possession During

Redemption Period — Within one year from the registration of the foreclosure sale of real
estate, the mortgagor shall have the right to redeem the property by paying all claims of
the Bank against him on the date of the sale including all the costs and other expenses
incurred by reason of the foreclosure sale and custody of the property, as well as charges
and accrued interests.

But P.D. 694 took effect only on May 8, 1975. PNB's counsel himself has, as already mentioned above,
taken the position that it was the old PNB Charter, Republic Act 1300, that was expressly made part of
the contract. In other words, it was by virtue of such contractual stipulation and not ex propio vigore that
the provisions of the bank's then current charter bound the mortgagor STANDARD. But prescinding from
possible legal flaw in such pose and that all provisions of the charter are enforceable and must be read
into all mortgages with the PNB as integral parts thereof, in this instant case, the Court finds its hands
inert and shackled in the face of the constitutional proscription against the impairment of contracts. (Sec.
11, Art. IV, New Constitution) Stated otherwise, since the contract of mortgage herein was entered into
under a specific law, Republic Act 1300, even the principle that no law is unamendable nor unrepealable
cannot hold, when the subsequent legislative enactment, P.D. 694, would alter and modify to the
prejudice of any of the parties the terms of the contract under the aegis of the prior law. Indisputably, the
application of P.D. 694 to the mortgage herein involved would violate the Constitution. Hence, it simply
cannot apply.

Stated otherwise, by virtue of the provision of the mortgage contract precisely cited by PNB, namely, its
paragraph (g), quoted earlier, PNB had the contractually acquired option to resort either to its Charter,
Republic Act 1300 or to Act 3135. When it foreclosed the mortgage at issue, it chose Act 3135. That was
an option it freely exercised without the least intervention of appellee. And it was exercised before P.D.
694 came into being. In fact, the foreclosure sales took place in 1974 yet. And so, to make the
redemption subject to a subsequent law would be obviously prejudicial to the party exercising the right to
redeem. Without considering the date the loan was secured and the date of the mortgage contract, and
taking into account only the dates of the foreclosures and auction sales, it is quite obvious that any
change in the law governing redemption that would make it more difficult than under the law at the time of
the sale cannot be given retroactive effect. Under the terms of the mortgage contract, the terms and
conditions under which redemption may be exercised are deemed part and parcel thereof whether the
same be merely conventional or imposed by law. To alter those terms in a manner prejudicial to the
mortgagor or the person redeeming the property as his successor-in-interest after the foreclosures and
sales would definitely come within the constitutional proscription against impairment of the obligations of
contracts.

Having thus come to the ineludible conclusion that Act 3135 and Sections 29 to 32 of Rule 39 of the
Rules of Court rather than P.D. 694 are the laws applicable to the right of redemption invoked by appellee
in this case, 5 it would appear that all that remains for Us to do is to apply the said legal precepts.
Pursuant to Section 30 of Rule 39, "the judgment debtor — (or his successor-in-interest per Section 29,
here Leticia Co,) may redeem the property from the purchaser, (here PNB) at any time within twelve
months after the sale, on paying the purchaser the amount of his purchase, with one per centum per
month interest thereon in addition, up to the time of redemption, together with the amount of any
assessments or taxes which the purchaser may have paid thereon after the purchase, and interest on
such last named amount at the same rate; ..."

In this connection, lest it be argued that CITADEL did not include in its tender the amount of assessments
or taxes PNB might have paid before the redemption, His Honor, We note that the trial judge, has pointed
out that in spite of the requirement in the certificate of sale issued by the sheriff that the purchaser or
highest bidder submits within 30 days immediately preceding the expiration of the period of redemption,
an appropriate statement of the amount of such assessments or taxes, PNB failed to comply with such
requirement, hence it would be unfair to fault CITADEL for the non- inclusion thereof in its tender. PNB
argues, however, that it did furnish CITADEL on March 5, 1976 the required data. We note, however, that
the statement of P3,366,546.42 specified by PNB in its reply of March 5, 1976 is not clear enough to
show the details on taxes and assessments under discussion. In any event, considering that as earlier
pointed out by Us, there could be a possibility that March 5, 1976 should be considered as the last day of
redemption, the explanation of PNB is, at least in equity, unavailing. There was no more time for
CITADEL to have a breakdown of the P3,366,546.42 to find out what items were included therein.
Anyway, this discussion is practically academic because in the manner We are resolving this case, this
point would be of no moment.

Before passing to another aspect of this case, it may not be amiss to mention here that in Moran's
Comments on the Rules of Court (p. 326-327, 1979 ed.), it is stated that where the judgment debtor,
which necessarily includes his successor-in-interest (Section 29, a, Rule 39) validly tenders the necessary
payment for the redemption and the tender is refused, it is not necessary that it be followed by the deposit
of the money in court or elsewhere (Enage vs. Vda. de Escano, 38 Phil. 687) and no interest after such
tender is demandable on the redemption money. (Martinez vs. Campbell, 10 Phil. 626; Fabros vs.
Agustin, 18 Phil. 336).

The jurisprudence cited by PNB are not applicable

Even as We have so far focused Our discussion and resolution of the issues herein on the pertinent
statutory provisions, We have not really closed Our eyes to the jurisprudence cited by PNB in its brief,
four of which are worthy of mention, namely Medina vs. PNB, 56 Phil. 655. Nepomuceno vs. RFC, G.R.
No. L-14877, Nov. 23,1960; Perez vs. PNB, 17 SCRA 833 and DBP vs. Mirang 66 SCRA 141.

The case of Perez, supra, did not involve a redemption in the sense that it is in issue in this case. In fact,
the point involved in the instant case is not even touched in the syllabus thereof in SCRA. This is because
what was fundamentally the problem therein was whether or not it was obligatory on the part of the bank-
mortgagee to foreclose judicially the mortgage inasmuch as the mortgagor died. As the Court said, "the
main issue in this appeal is the application of Section 7, Rule 87 of the Rules of 1940 (now Section 7 of
Rule 68), a reproduction of Section 708 of the Code of Civil Procedure". Hence, anything said therein at
issue may be deemed as obiter. If anything in that opinion is relevant hereto, it is that portion thereof that
justly and equitably holds that from whatever amount should be payable to the mortgagee Bank, should
be deducted "the value of any rents and profits derived by the (said) bank from the property in question".
(at p. 840)
In the Nepomuceno case, supra, what confronted the Court was a question relative to a mortgage with
the Rehabilitation Finance Corporation (RFC for short, now the Development Bank of the Philippines).
The Court found no difficulty in not applying Section 6 of Act 3135 because it found that there is in
Section 31 of the Charter of the RFC a provision basically similar to Section 25 of Presidential Decree
694, now being invoked here by PNB. Naturally, the Court upheld the RFC's contention that the whole
amount of the mortgagor's indebtedness should be paid. But in the instant case, as already discussed
earlier, P.D. 694 came too late.

DBP vs. Mirang supra, follows in principle the Nepomuceno ruling that the special provisions in the
charter of DBP govern in matters of redemption of property acquired by it in a foreclosure sale. So, We
need not elucidate any further on its inapplicability hereto.

It is the earlier case of Medina vs. PNB, supra, that nearly approximates the position PNB is pressing on
Us now, because in a portion of the opinion thereof, Chief Justice Avenceña as correctly underlined by
PNB in its brief, stated:

As we have indicated above, there is no question with regard to the plaintiffs' right, as
successors of the Manila Commercial Company, to repurchase the parcels covered by
the transfer certificates of title Nos. 137 and 139. The question is whether, as the bank
contends and the trial court has held, the redemption should be made by paying to the
bank the entire amount owned to it by the Manila Commercial Company. The appellants
contend that this redemption may be made by only reimbursing the bank what it has paid
for the sale made to it. In this respect we are also of the opinion that the judgment
appealed from is correct. (Page 655)

But this statement needs clarification. Towards the concluding portion of the opinion, he explained that:

It will be remembered that the mortgage contract between the bank and the Manila
Commercial Company was executed on October 30, 1920, before the approval of Act No.
3135 in March, 1924. If, before Act No. 3135 took effect, the Manila Commercial
Company had violated the contract, beyond all doubt the bank would have been able to
sell the mortgaged property, without the necessity of a judicial action, and the sale thus
made would carry the right of repurchase on the part of the debtor through the payment
of the entire amount of the debt.

When the bank's right to foreclose the mortgage of the Manila Commercial Company
accrued, Act No. 3135 was already in force. Of course, this law, being general, did not
affect the charter of the bank, which was a special law. Thus, when the bank, in order to
sell the mortgaged property extrajudicially, resorted to Act No. 3135, it did so merely to
find a proceeding for the sale; but that action cannot be taken to mean a waiver of its
right to demand the payment of the whole debt before the property can be redeemed.
The record contains nothing to show that the bank made this waiver of said right. (Pp
656-657)

There is here an implication that in undertaking the foreclosure therein involved, the PNB relied on Act
3135. This is not quite accurate, for in the opening paragraph of the same opinion, it is stated that:

On October 30, 1920 the Manila Commercial Co. and La Yebana Co. mortgaged four
parcels of land with Torrens titles, described in the complaint, to the Philippine National
Bank, the first and fourth parcels being in the name of the La Yebana Co. and the second
and third in the name of the Manila Commercial Co. The mortgage was given to secure
the payment of P680,000 or for whatever amount the Manila Commercial Co. might be
indebted to the Philippine National Bank. One of the clauses of the mortgage provides
that in case of a violation by the Manila Commercial Co. of any of the conditions of the
 contract the Philippine National Bank may take possession of the mortgaged property
and sell or dispose of it by public or private sale, without first having to file a complaint or
to give any notice, and at such sale, if public, it may acquire for itself all or any of the
parcels of land. (Page 651) (Emphasis supplied)

Thus, it is to Our mind closer to the truth that it was by virtue of such contractual clause, rather than Act
3135, even if the request to the sheriff did mention said Act that PNB foreclosed. In any event, the Court
did take into account that the mortgage at issue in that case was executed before the approval of Act
3135 and observed that without such Act, the right of the bank to full payment would have been
indisputable. This is the same principle of non-impairment of the contracts by subsequent legislative
action We have made reference to above in precluding the applicability hereto of P.D. 694.

On the minor issues

We are not impressed that PNB is really serious in its pose that the tender by manager's check by
CITADEL was inefficacious. For one thing, that obligation was waived when in its letter of rejection, the
bank did not invoke it. (Gregorio Araneta, Inc. vs. De Paterno and Vidal, 91 Phil. 786) More importantly,
this Court has already sanctioned redemption by check. (Javellana vs. Mirasol, 40 Phil. 761)

Neither do We find any substantial weight in PNB's pose that the transfer or conveyance of STANDARD'S
right of redemption to CITADEL and the latter to Leticia Co is not binding on it. In Lichauco vs. Olegario,
et al., 43 Phil. 540, this Court held that "whether or not ... an execution debtor was legally authorized to
sell his right of redemption, is a question already decided by this Court in the affirmative in numerous
decisions on the precepts of Sections 463 and 464 and other sections related thereto, of the Code of Civil
Procedure. " (The mentioned provisions are carried over in Rule 39 of the Revised Rules of Court.) That
the transfers or con. conveyances in question were not registered is of miniscule significance, there being
no showing that PNB was damaged or could be damaged by such omission, When CITADEL made its
tender on May 5, 1976, PNB did not question the personality of CITADEL at all. It is now too late and
purely technical to raise such an innocuous failure to comply with Article 1625 of the Civil Code.

The foregoing discussion inexorably points to the conclusion that the price of redemption of
P1,621,970.00 tendered by CITADEL on March 5, 1976 was the correct amount. Since PNB refused to
allow the redemption thus legally tendered, applying the law strictly, it would stand to lose P1,744,576.42
of what it claims was the total indebtedness or outstanding obligation of CITADEL as of March 11, 1976.

To avoid this loss, PNB invokes, as already stated above, P.D. No. 694, but We have also pointed out
earlier that to apply said decree would result in the impairment of the contractual obligation of CITADEL,
which cannot be allowed under the Constitution.

However, We are persuaded that all such considerations would render the result of this case short of
what appears to be substantial justice in the light of the situation on hand. It strikes Us as rather
unconscionable that by a literal application of the law and perhaps due to a mistake in the amount of the
bid made by PNB, 6 the bank would not get full satisfaction of its credit. Indeed, there would be unjust
enrichment on the part of the debtor- mortgagor in such an eventuality. Our sense of justice cannot permit
such inequitous advantage.

With this point in mind, We deem it fairer and so hold that considering the unique factual milieu of this
case, Articles 22 and 2142 of the Civil Code should be the guideposts of Our decision here. Said articles
provide:

ART. 22. Every person who through an act of performance by another, or any other
means, acquires or comes into possession of something at the expense of the latter
without just or legal ground, shall return the same to him.
 xxx xxx xxx

ART. 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of
quasi-contract to the end that no one shall be unjustly enriched or benefited at the
expense of another.

Although the report of the Code Commission states that:

Another rule is expressed in article 22 which compels the return of a thing acquired
"without just or legal ground." This provision embodies the doctrine that no person should
unjustly enrich himself at the expense of another, which has been one of the mainstays of
every legal system for centuries. It is most needful that this ancient principle be clearly
and specifically consecrated in the proposed Civil Code to the end that in cases not
foreseen by the lawmaker, no one may unjustly benefit himself to the prejudice of
another. The German Civil Code has a similar provision (art. 812).

it may be said that whatever of the principle of unjust enrichment may not be covered by Article 22, Article
2142 makes its enhancement in this jurisdiction most comprehensive

Consequently, it is but just and proper that PNB should be paid the full amount of P3,366,546.42 without
any interest as of March 11, 1976, when it refused a redemption legally and validly tendered. On the other
hand, the amount of P1,621,970.00 tendered by CITADEL on March 5, 1976 and which was deposited in
a savings account, drawing interest apparently less than 12% p.a., in the name of PNB by order of the
trial court should be computed to have earned legal interest or 12% p.a., compounded annually, since
March 11, 1976, provided however that should such amount including the compounded interest at 12%
p.a. so earned be less than P3,366,546.42, petitioner herein should pay PNB such difference, and
provided, on the other hand, that with this arrangement, PNB does not have to account to
CITADEL/LETICIA CO for any of the rentals it had earned from the time it took possession of the
property. In the final analysis, instead of PNB losing P1,744,576.42, under strict technical legal reasoning,
as explained above, applying hereto the principle of unjust enrichment, which We deem in the peculiar
circumstances at this instant case to be the fairest way of resolving this controversy, it would still be paid
by petitioner a certain amount, not to mention what must be quite substantial and considerable, the
rentals the said bank it has earned, which it does not have to account for.

In closing, We may add that in Escano, supra, this Court laid down as a policy that "redemptions are
looked upon with favor, and when an injury is to follow, a liberal construction will be given to our
redemption laws to the end that the property of the debtor may pay as many of the debtor's liabilities",
PNB having foreclosed on the Baguio properties and the chattels of STANDARD for what appears could
have been a fairer price, it is but in consonance with the Escano policy that the redemption herein
involved be allowed on the basis of the injunction against unjust enrichment. 7 We may add here the
observation, taught by common business experience, that when a bank grants a loan, secured by any
collateral, what is of uppermost consideration to such lender is the borrower's capacity to pay according
to the terms stipulated, and not really the acquisition of the collateral, if only to maintain the bank's
liquidity position as conveniently as possible. Acquired assets generally add to liquidity problems of
banks. The foreclosure of the security is a measure of last resort, hence when by the exercise of the right
of redemption, the bank can recover the money it has loaned, nothing could be more proper than to allow
the borrower to retain his property. Of course, peculiar instances are naturally excepted. That is why this
decision cannot be invoked as a precedent for other parties not exactly similarly situated as the appellee
in this case. Should there be any thought that Our resolution of this case is not strictly according to legal
principles, let everyone be reminded that this Court has inherent equity jurisdiction it can always exercise
in settings attended by unusual circumstances to prevent manifest injustice that could result from bare
technical adherence to the letter of the law and unprecise jurisprudence under it.
WHEREFORE, the judgment of the trial court against the Philippine National Bank herein on appeal is
hereby modified and another one is hereby rendered in favor of the said defendant-appellant bank in
accordance with the formula herein above stated, and, accordingly, upon payment by LETICIA CO of the
amount due it pursuant to the above computation, PNB is hereby ordered to transfer the title to the
property in question to LETICIA CO. This payment must be made within ten (10) days from the finality of
this judgment.

No costs.

Concepcion, Jr., Guerrero, De Castro and Escolin, JJ., concur.

METROPOLITAN BANK & TRUST

COMPANY, G.R. No.
Petitioner,
166260

Present:

- versus -
QUISUMBING,* J.,

AUSTRIA-MARTINEZ,**

Acting Chairperson,

CHICO-NAZARIO,
THE HONORABLE COURT OF
APPEALS and UNITED OVERSEAS NACHURA, and
BANK (formerly known as WESTMONT
BANK), PERALTA, JJ.
Respondents.
 Promulgated:

February 18, 2009

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

The Court reviews in this Rule 45 petition the November 30, 2004
Decision1[1] of the Court of Appeals (CA) in CA G.R. SP No. 78796. In the said
decision, the appellate court affirmed the dismissal by the trial court of Civil Case
No. 00-595,2[2] a petition for the review of Philippine Clearing House Corporation
(PCHC) Board Resolution No. 08-2000.3[3]

The antecedent facts and proceedings follow.

Check No. 08012663814[4] dated January 13, 1997, payable to cash, and
drawn against the account of Bienvenido C. Tan with petitioner Metropolitan Bank
& Trust Company (Metrobank) was deposited with respondent United Overseas
Bank (UOB). The check was then forwarded for clearing on January 14, 1997
through the PCHC, and, on the same date, Metrobank cleared the check.5[5] In its
January 27, 1997 Letter,6[6] however, Metrobank informed UOB that it was
returning the check on account of material alterationthe date was changed from
January 23, 1997 to January 13, 1997, and the amount was altered from P1,000.00
to P91,000.00.7[7]

Because UOB refused to accept the return and to reimburse Metrobank the
amount it paid on the check, the latter, on July 18, 1997, filed a Complaint8[8]
(Arbicom Case No. 97-093) before the PCHC Arbitration Committee, contending in
the main that UOB had the duty to examine the deposited check for any material
alteration; but since UOB failed to exercise due diligence in determining that the
check had been altered, UOB should bear the loss.9[9] In its Answer with
Counterclaim,10[10] UOB interposed the defenses that it exercised due diligence,
and that Metrobank failed to comply with the 24-hour clearing house rule, and, with
gross negligence, cleared the check.11[11]
 On November 11, 1997, the Arbitration Committee directed Metrobank to
submit the check to the Philippine National Police (PNP) Crime Laboratory for
examination.12[12]

After almost a year or on October 9, 1998, Metrobank moved for the

postponement of the October 12 and 19, 1998 hearings and their resetting to
November 16, 1998, on the ground that the PNP Crime Laboratory document
examination results were not yet available.13[13] On November 14, 1998, however,
Metrobank again moved for the cancellation of the November 16, 1998 hearing and
its resetting on December 10, 1998, on the same ground that the said results were
not yet available for release.14[14]
 In the scheduled December 10, 1998 hearing, Metrobanks counsel failed to
appear.15[15] UOB thus moved for the dismissal of the case, which the Arbitration
Committee granted.16[16]

On March 9, 1999, following its receipt of the Transcript of Stenographic

Notes17[17] of the December 10, 1998 hearing, Metrobank filed a Motion for
Reconsideration18[18] of the dismissal order, attaching thereto a copy of the
Medical Certificate19[19] declaring that its counsel had been afflicted with influenza
during the December 10, 1998 hearing, and a copy of PNP Crime Laboratory
Document Examination Report No. 102-9820[20] stating that the subject check had
been altered.
 As expected, UOB opposed the motion and argued that Metrobank was not
serious in prosecuting the case considering the numerous postponements of hearings
made by its counsel; and that the said counsel was trifling with the processes of the
Arbitration Committee because, upon verification with his secretary, he was not
really sick on December 10, 1998. Further, the examination by the PNP Crime
Laboratory of the check had already been completed on July 6, 1998.21[21]

On February 28, 2000, the Arbitration Committee denied Metrobanks

motion.22[22] Unrelenting, Metrobank filed its Second Motion for
Reconsideration23[23] on March 20, 2000.

On April 14, 2000, the PCHC Board of Directors issued Resolution No. 08-
2000,24[24] denying the second motion for reconsideration. Metrobank again
moved for the reconsideration of this resolution. On May 5, 2000, however, it
received communication from the PCHC Executive Secretary informing it that the
proper remedy following Section 13 of the PCHC Rules of Procedure for Arbitration
(PCHC Rules) was for it to file a notice of appeal with the PCHC and a petition for
review with the Regional Trial Court (RTC) within a non-extendible period of fifteen
(15) days counted from the receipt of the PCHC board resolution.25[25]

Hence, on May 9, 2000, Metrobank filed its Petition for Review (Civil Case
No. 00-595) with the RTC of Makati City. On July 25, 2003, the trial court rendered
its Decision26[26] dismissing the petition. It ruled that it had no jurisdiction over the
petition, the same having been filed out of time. The trial court further ruled that the
Arbitration Committee correctly dismissed the original case on account of
Metrobanks failure to prosecute, and that Metrobanks claim could not be sustained
considering that under prevailing jurisprudence the drawee-bank should bear the loss
if it had mistakenly cleared a forged or an altered check.27[27]

Dissatisfied, Metrobank appealed the case to the CA. In the assailed

November 30, 2004 Decision,28[28] the appellate court affirmed the ruling of the
trial court. The CA ratiocinated, however, that the petition for review before the trial
court was filed on timeits filing was in accordance with the PCHC Rules. The CA
nevertheless ruled that the case was correctly dismissed on account of Metrobanks
lack of interest to prosecute and of its violation of the 24-hour clearing house
rule.29[29]

Undaunted, petitioner instituted the instant petition for review on certiorari

before this Court.

The petition is denied.

The Court notes that, after the PCHC Board of Directors issued Resolution
No. 08-2000 denying petitioners motion for reconsideration, petitioner moved for
reconsideration of that resolution. Following the incorrect advice of the PCHC
Executive Secretary that the proper remedy under Section 13 of the PCHC Rules
was for petitioner to file a notice of appeal with the PCHC and a petition for review
with the RTC, petitioner consequently filed the petition for review with the trial
court.
 This erroneous move of the petitioner was fatal to its cause. The Court has
already explained in Insular Savings Bank v. Far East Bank and Trust
Company,30[30] that the PCHC Rules cannot confer jurisdiction on the RTC to
review arbitral awards, thus

Furthermore, petitioner had several judicial remedies available at its

disposal after the Arbitration Committee denied its Motion for Reconsideration. It
may petition the proper RTC to issue an order vacating the award on the grounds
provided for under Section 24 of the Arbitration Law. Petitioner likewise has the
option to file a petition for review under Rule 43 of the Rules of Court with the
Court of Appeals on questions of fact, of law, or mixed questions of fact and law.
Lastly, petitioner may file a petition for certiorari under Rule 65 of the Rules of
Court on the ground that the Arbitrator Committee acted without or in excess of its
jurisdiction or with grave abuse of discretion amounting to lack or excess of
jurisdiction. Since this case involves acts or omissions of a quasi-judicial agency,
the petition should be filed in and cognizable only by the Court of Appeals.

In this instance, petitioner did not avail of any of the abovementioned

remedies available to it. Instead it filed a petition for review with the RTC where
Civil Case No. 92-145 is pending pursuant to Section 13 of the PCHC Rules to
sustain its action. Clearly, it erred in the procedure it chose for judicial review of
the arbitral award.

Having established that petitioner failed to avail of the abovementioned

remedies, we now discuss the issue of the jurisdiction of the trial court with respect
to the petition for review filed by petitioner.

Jurisdiction is the authority to hear and determine a cause - the right to act
in a case. Jurisdiction over the subject matter is the power to hear and determine
the general class to which the proceedings in question belong. Jurisdiction over the
subject matter is conferred by law and not by the consent or acquiescence of any or
all of the parties or by erroneous belief of the court that it exists.

In the instant case, petitioner and respondent have agreed that the PCHC
Rules would govern in case of controversy. However, since the PCHC Rules came
about only as a result of an agreement between and among member banks of PCHC
 and not by law, it cannot confer jurisdiction to the RTC. Thus, the portion of the
PCHC Rules granting jurisdiction to the RTC to review arbitral awards, only on
questions of law, cannot be given effect.

Consequently, the proper recourse of petitioner from the denial of its motion
for reconsideration by the Arbitration Committee is to file either a motion to vacate
the arbitral award with the RTC, a petition for review with the Court of Appeals
under Rule 43 of the Rules of Court, or a petition for certiorari under Rule 65 of
the Rules of Court. In the case at bar, petitioner filed a petition for review with the
RTC when the same should have been filed with the Court of Appeals under Rule
43 of the Rules of Court. Thus, the RTC of Makati did not err in dismissing the
petition for review for lack of jurisdiction but not on the ground that petitioner
should have filed a separate case from Civil Case No. 92-145 but on the necessity
of filing the correct petition in the proper court. It is immaterial whether petitioner
filed the petition for review in Civil Case No. 92-145 as an appeal of the arbitral
award or whether it filed a separate case in the RTC, considering that the RTC will
only have jurisdiction over an arbitral award in cases of motions to vacate the same.
Otherwise, as elucidated herein, the Court of Appeals retains jurisdiction in
petitions for review or in petitions for certiorari. x x x.31[31]

As in Insular, the trial court, in this case, properly dismissed Civil Case No.
00-595 for lack of jurisdiction, not because the petition had been filed out of time,
but because the court had no jurisdiction over the subject matter of the petition.

We are aware that the Supreme Court has ample authority to go beyond the
pleadings when, in the interest of justice and the promotion of public policy, there is
a need to make its own finding to support its conclusion.32[32] In this case, however,
we find no compelling reason to resolve the other issues raised in the petition.
 WHEREFORE, premises considered, the petition for review on certiorari is
DENIED.

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.

Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.

Eduardo G. Castelo for Sima Wei.

Monsod, Tamargo & Associates for Producers Bank.

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; and

(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.

(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:

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.

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.

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.2

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.

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.

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.5

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.

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.

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.

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.

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.
SO ORDERED.

METROPOLITAN BANK G.R. No. 179952

AND TRUST COMPANY
(formerly ASIANBANK
CORPORATION),
Present:
Petitioner,

PUNO, C.J., Chairperson,

CARPIO MORALES,

LEONARDO-DE CASTRO,

BERSAMIN, and
- versus -
VILLARAMA, JR., JJ.

BA FINANCE
CORPORATION and
MALAYAN INSURANCE CO.,
INC.,

Respondents. Promulgated:

December 4, 2009

x-------------------------------------------------x
 DECISION

CARPIO MORALES, J.:

Lamberto Bitanga (Bitanga) obtained from respondent BA Finance

Corporation (BA Finance) a P329,28033[1] loan to secure which, he mortgaged his
car to respondent BA Finance.34[2] The mortgage contained the following
stipulation:

The MORTGAGOR covenants and agrees that he/it will cause the
property(ies) hereinabove mortgaged to be insured against loss or damage by
accident, theft and fire for a period of one year from date hereof with an
insurance company or companies acceptable to the MORTGAGEE in an amount
not less than the outstanding balance of mortgage obligations and that he/it will
make all loss, if any, under such policy or policies, payable to the
MORTGAGEE or its assigns as its interest may appear x x x.35[3] (emphasis
and underscoring supplied)
 Bitanga thus had the mortgaged car insured by respondent Malayan Insurance
Co., Inc. (Malayan Insurance)36[4] which issued a policy stipulating that, inter alia,

Loss, if any shall be payable to BA FINANCE CORP. as its interest

may appear. It is hereby expressly understood that this policy or any renewal
thereof, shall not be cancelled without prior notification and conformity by BA
FINANCE CORPORATION.37[5] (emphasis and underscoring supplied)

The car was stolen. On Bitangas claim, Malayan Insurance issued a check
payable to the order of B.A. Finance Corporation and Lamberto Bitanga for
P224,500, drawn against China Banking Corporation (China Bank). The check was
crossed with the notation For Deposit Payees Account Only.38[6]

Without the indorsement or authority of his co-payee BA Finance, Bitanga

deposited the check to his account with the Asianbank Corporation (Asianbank), now
merged with herein petitioner Metropolitan Bank and Trust Company (Metrobank).
Bitanga subsequently withdrew the entire proceeds of the check.
 In the meantime, Bitangas loan became past due, but despite demands, he
failed to settle it.

BA Finance eventually learned of the loss of the car and of Malayan Insurances
issuance of a crossed check payable to it and Bitanga, and of Bitangas depositing it
in his account at Asianbank and withdrawing the entire proceeds thereof.

BA Finance thereupon demanded the payment of the value of the check from
Asianbank39[7] but to no avail, prompting it to file a complaint before the Regional
Trial Court (RTC) of Makati for sum of money and damages against Asianbank and
Bitanga,40[8] alleging that, inter alia, it is entitled to the entire proceeds of the check.

In its Answer with Counterclaim,41[9] Asianbank alleged that BA Finance

instituted [the] complaint in bad faith to coerce [it] into paying the whole amount of
the CHECK knowing fully well that its rightful claim, if any, is against Malayan
[Insurance].42[10]

Asianbank thereafter filed a cross-claim against Bitanga,43[11] alleging that

he fraudulently induced its personnel to release to him the full amount of the check;
and that on being later informed that the entire amount of the check did not belong
to Bitanga, it took steps to get in touch with him but he had changed residence without
leaving any forwarding address.44[12]

And Asianbank filed a third-party complaint against Malayan

Insurance,45[13] alleging that Malayan Insurance was grossly negligent in issuing
the check payable to both Bitanga and BA Finance and delivering it to Bitanga
without the consent of BA Finance.46[14]
 Bitanga was declared in default in Asianbanks cross-claim.47[15]

Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy
to the contract between BA Finance and Bitanga, and noting the claim of Malayan
Insurance that it is its policy to issue checks to both the insured and the financing
company, held that Malayan Insurance cannot be faulted for negligence for issuing
the check payable to both BA Finance and Bitanga.

The trial court, holding that Asianbank was negligent in allowing Bitanga to
deposit the check to his account and to withdraw the proceeds thereof, without his
co-payee BA Finance having either indorsed it or authorized him to indorse it in its
behalf,48[16] found Asianbank and Bitanga jointly and severally liable to BA
Finance following Section 41 of the Negotiable Instruments Law and Associated
Bank v. Court of Appeals.49[17]
 Thus the trial court disposed:

WHEREFORE, premises considered, judgment is hereby rendered

ordering defendants Asian Bank Corporation and Lamberto Bitanga:

1) To pay plaintiff jointly and severally the sum of

P224,500.00 with interest thereon at the rate of 12% from
September 25, 1992 until fully paid;
2) To pay plaintiff the sum of P50,000.00 as exemplary
damages; P20,000.00 as actual damages; P30,000.00 as
attorneys fee; and
3) To pay the costs of suit.

Asianbanks and Bitangas [sic] counterclaims are dismissed.

The third party complaint of defendant/third party plaintiff against third-
party defendant Malayan Insurance, Co., Inc. is hereby dismissed. Asianbank is
ordered to pay Malayan attorneys fee of P50,000.00 and a per appearance fee of
P500.00.

On the cross-claim of defendant Asianbank, co-defendant Lamberto

Bitanga is ordered to pay the former the amounts the latter is ordered to
pay the plaintiff in Nos. 1, 2 and 3 above-mentioned.

SO ORDERED.50[18] (emphasis and underscoring supplied)

Before the Court of Appeals, Asianbank, in its Appellants Brief, submitted

the following issues for consideration:

3.01.1.1 Whether BA Finance has a cause of action against

Asianbank.
 3.01.1.2 Assuming that BA Finance has a valid cause of action, may
it claim from Asianbank more than one-half of the value of the check
considering that it is a mere co-payee or joint payee of the check?

3.01.1.3 Whether BA Finance is liable to Asianbank for actual and

exemplary damages for wrongfully bringing the case to court.

3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement

of any sum of money which this Honorable Court may award to BA Finance in
this case.51[19] (underscoring supplied)

And it proffered the following arguments:

A. BA Finance has no cause of action against Asianbank as it has no legal

right and title to the check considering that the check was not delivered to BA
Finance. Hence, BA Finance is not a holder thereof under the Negotiable
Instruments Law.

B. Asianbank, as collecting bank, is not liable to BA Finance as there was

no privity of contract between them.

C. Asianbank, as collecting bank, is not liable to BA Finance, considering

that, as the intermediary between the payee and the drawee Chinabank, it merely
acted on the instructions of drawee Chinabank to pay the amount of the check to
Bitanga, hence, the consequent damage to BA Finance was due to the negligence
of Chinabank.
 D. Malayans act of issuing and delivering the check solely to Bitanga in
violation of the loss payee clause in the Policy, is the proximate cause of the alleged
damage to BA Finance.

E. Assuming Asianbank is liable, BA Finance can claim only his

proportionate interest on the check as it is a joint payee thereof.

F. Bitanga alone is liable for the amount to BA Finance on the ground of

unjust enrichment or solutio indebiti.

G. BA Finance is liable to pay Asianbank actual and exemplary

damages.52[20] (underscoring supplied)

The appellate court, summarizing the errors attributed to the trial court by
Asianbank to be whetherBA Finance has a cause of action against [it] even if the
subject check had not been delivered toBA Finance by the issuer itself, held in the
affirmative and accordingly affirmed the trial courts decision but deleted the award
of P20,000 as actual damages.53[21]

Hence, the present Petition for Review on Certiorari54[22] filed by

Metrobank (hereafter petitioner) to which Asianbank was, as earlier stated, merged,
faulting the appellate court
 I. x x x in applying the case of Associated Bank v. Court of
Appeals, in the absence of factual similarity and of the legal
relationships necessary for the application of the desirable
shortcut rule. x x x
II. x x x in not finding that x x x the general rule that the payee
has no cause of action against the collecting bank absent
delivery to him must be applied.
III. x x x in finding that all the elements of a cause of action by
BA Finance Corporation against Asianbank Corporation are
present.
IV. x x x in finding that Article 1208 of the Civil Code is not
applicable.
V. x x x in awarding of exemplary damages even in the absence
of moral, temperate, liquidated or compensatory damages and
a finding of fact that Asianbank acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner.
xxxx
VII. x x x in dismissing Asianbanks counterclaim and Third Party
complaint [against Malayan Insurance].55[23] (italics in the
original; underscoring supplied)

Petitioner proffers the following arguments against the application of

Associated Bank v. CA to the case:

x x x [T]he rule established in the Associated Bank case has provided a

speedier remedy for the payee to recover from erring collecting banks despite
the absence of delivery of the negotiable instrument. However, the application
of the rule demands careful consideration of the factual settings and issues raised
in the case x x x.

One of the relevant circumstances raised in Associated Bank is the

existence of forgery or unauthorized indorsement. x x x

xxxx
 In the case at bar, Bitanga is authorized to indorse the check as the drawer
names him as one of the payees. Moreover, his signature is not a forgery nor has
he or anyone forged the signature of the representative of BA Finance
Corporation. No unauthorized indorsement appears on the check.

xxxx

Absent the indispensable fact of forgery or unauthorized indorsement,

the desirable shortcut rule cannot be applied,56[24] (underscoring supplied)

The petition fails.

Section 41 of the Negotiable Instruments Law provides:

Where an instrument is payable to the order of two or more payees or

indorsees who are not partners, all must indorse unless the one indorsing has
authority to indorse for the others. (emphasis and underscoring supplied)

Bitanga alone endorsed the crossed check, and petitioner allowed the deposit
and release of the proceeds thereof, despite the absence of authority of Bitangas co-
payee BA Finance to endorse it on its behalf.57[25]
 Denying any irregularity in accepting the check, petitioner maintains that it
followed normal banking procedure. The testimony of Imelda Cruz, Asianbanks then
accounting head, shows otherwise, however, viz:

Q Now, could you be familiar with a particular policy of the bank with
respect to checks with joined (sic) payees?
A Yes, sir.

Q And what would be the particular policy of the bank regarding this
transaction?
A The bank policy and procedure regarding the joint checks.
Once it is deposited to a single account, we are not accepting
joint checks for single account, depositing to a single account
(sic).

Q What happened to the bank employee who allowed this particular

transaction to occur?
A Once the branch personnel, the bank personnel (sic) accepted it, he
is liable.

Q What do you mean by the branch personnel being held liable?

A Because since (sic) the bank policy, we are not supposed to
accept joint checks to a [single] account, so we mean that
personnel would be held liable in the sense that (sic) once it is
withdrawn or encashed, it will not be allowed.

Q In your experience, have you encountered any bank employee who

was subjected to disciplinary action by not following bank policies?
A The one that happened in that case, since I really dont know who
that personnel is, he is no longer connected with the bank.

Q What about in general, do you know of any disciplinary action,

Madam witness?
A Since theres a negligence on the part of the bank personnel, it
will be a ground for his separation [from] the bank.58[26]
(emphasis, italics and underscoring supplied)
Admittedly, petitioner dismissed the employee who allowed the deposit of the check
in Bitangas account.

Petitioners argument that since there was neither forgery, nor unauthorized
indorsement because Bitanga was a co-payee in the subject check, the dictum in
Associated Bank v. CA does not apply in the present case fails. The payment of an
instrument over a missing indorsement is the equivalent of payment on a forged
indorsement59[27] or an unauthorized indorsement in itself in the case of joint
payees.60[28]

Clearly, petitioner, through its employee, was negligent when it allowed the
deposit of the crossed check, despite the lone endorsement of Bitanga, ostensibly
ignoring the fact that the check did not, it bears repeating, carry the indorsement of
BA Finance.61[29]
 As has been repeatedly emphasized, the banking business is imbued with
public interest such that the highest degree of diligence and highest standards of
integrity and performance are expected of banks in order to maintain the trust and
confidence of the public in general in the banking sector.62[30] Undoubtedly, BA
Finance has a cause of action against petitioner.

Is petitioner liable to BA Finance for the full value of the check?

Petitioner, at all events, argue that its liability to BA Finance should only be
one-half of the amount covered by the check as there is no indication in the check
that Bitanga and BA Finance are solidary creditors to thus make them presumptively
joint creditors under Articles 1207 and 1208 of the Civil Code which respectively
provide:

Art. 1207. The concurrence of two or more creditors or of two or more

debtors in one and the same obligation does not imply that each one of the former
has a right to demand, or that each one of the latter is bound to render, entire
compliance with the prestations. There is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation
requires solidarity.

Art. 1208. If from the law, or the nature or wording of the obligations to
which the preceding article refers to the contrary does not appear, the credit or
debt shall be presumed to be divided into as many equal shares as there are
creditors or debtors, the debts or credits being considered distinct from one
another, subject to the Rules of Court governing the multiplicity of suits.
 Petitioners argument is flawed.

The provisions of the Negotiable Instruments Law and underlying

jurisprudential teachings on the black-letter law provide definitive justification for
petitioners full liability on the value of the check.

To be sure, a collecting bank, Asianbank in this case, where a check is

deposited and which indorses the check upon presentment with the drawee bank, is
an indorser.63[31] This is because in indorsing a check to the drawee bank, a collecting
bank stamps the back of the check with the phrase all prior endorsements and/or lack
of endorsement guaranteed64[32] and, for all intents and purposes, treats the check
as a negotiable instrument, hence, assumes the warranty of an indorser.65[33]
Without Asianbanks warranty, the drawee bank (China Bank in this case) would not
have paid the value of the subject check.
 Petitioner, as the collecting bank or last indorser, generally suffers the loss
because it has the duty to ascertain the genuineness of all prior indorsements
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 prior indorsements.66[34]

Accordingly, one who credits the proceeds of a check to the account of the
indorsing payee is liable in conversion to the non-indorsing payee for the entire
amount of the check.67[35]

It bears noting that in petitioners cross-claim against Bitanga, the trial court
ordered Bitanga to return to petitioner the entire value of the check ─ P224,500.00
─ with interest as well as damages and cost of suit. Petitioner never questioned this
aspect of the trial courts disposition, yet it now prays for the modification of its
liability to BA Finance to only one-half of said amount. To pander to petitioners
supplication would certainly amount to unjust enrichment at BA Finances expense.
Petitioners remedywhich is the reimbursement for the full amount of the check from
the perpetrator of the irregularity lies with Bitanga.
 Articles 1207 and 1208 of the Civil Code cannot be applied to the present case
as these are completely irrelevant. The drawer, Malayan Insurance in this case,
issued the check to answer for an underlying contractual obligation (payment of
insurance proceeds). The obligation is merely reflected in the instrument and
whether the payees would jointly share in the proceeds or not is beside the point.

Moreover, granting petitioners appeal for partial liability would run counter
to the existing principles on the liabilities of parties on negotiable instruments,
particularly on Section 68 of the Negotiable Instruments Law which instructs that
joint payees who indorse are deemed to indorse jointly and severally.68[36] Recall
that when the maker dishonors the instrument, the holder thereof can turn to those
secondarily liable the indorser for recovery.69[37] And since the law explicitly
mandates a solidary liability on the part of the joint payees who indorse the
instrument, the holder thereof (assuming the check was further negotiated) can turn
to either Bitanga or BA Finance for full recompense.

Respecting petitioners challenge to the award by the appellate court of

exemplary damages to BA Finance, the same fails. Contrary to petitioners claim that
no moral, temperate, liquidated or compensatory damages were awarded by the trial
court,70[38] the RTC did in fact award compensatory or actual damages of
P224,500, the value of the check, plus interest thereon.

Petitioner argues, however, that assuming arguendo that compensatory

damages had been awarded, the same contravened Article 2232 of the Civil Code
which provides that in contracts or quasi-contracts, the court may award exemplary
damages only if the defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner. Since, so petitioner concludes, there was no finding that it acted
in a wanton, fraudulent, reckless, oppressive, or malevolent manner,71[39] it is not
liable for exemplary damages.

The argument fails. To reiterate, petitioners liability is based not on contract

or quasi-contract but on quasi-delict since there is no pre-existing contractual
relation between the parties.72[40] Article 2231 of the Civil Code, which provides
that in quasi-delict, exemplary damages may be granted if the defendant acted with
gross negligence, thus applies. For gross negligence implies a want or absence of or
failure to exercise even slight care or diligence, or the entire absence of care,73[41]
evincing a thoughtless disregard of consequences without exerting any effort to
avoid them.74[42]

x x x The law allows the grant of exemplary damages to set an example

for the public good. The business of a bank is affected with public interest; thus
it makes a sworn profession of diligence and meticulousness in giving
irreproachable service. For this reason, the bank should guard against in injury
attributable to negligence or bad faith on its part. The award of exemplary
damages is proper as a warning to [the petitioner] and all concerned not to
recklessly disregard their obligation to exercise the highest and strictest
diligence in serving their depositors.75[43] (Italics and underscoring supplied)

As for the dismissal by the appellate court of petitioners third-party complaint

against Malayan Insurance, the same is well-taken. Petitioner based its third-party
complaint on Malayan Insurances alleged gross negligence in issuing the check
payable to both BA Finance and Bitanga, despite the stipulation in the mortgage and
in the insurance policy that liability for loss shall be payable to BA Finance.76[44]
Malayan Insurance countered, however, that it

x x x paid the amount of P224,500 to BA Finance Corporation and Lamberto

Bitanga in compliance with the decision in the case of Lamberto Bitanga versus
Malayan Insurance Co., Inc., Civil Case No. 88-2802, RTC-Makati Br. 132, and
 affirmed on appeal by the Supreme Court [3rd Division], G.R. no. 101964, April
8, 1992 x x x.77[45] (underscoring supplied)

It is noted that Malayan Insurance, which stated that it was a matter of

company policy to issue checks in the name of the insured and the financing
company, presented a witness to rebut its supposed negligence. 78[46] Perforce, it
thus wrote a crossed check with joint payees so as to serve warning that the check
was issued for a definite purpose.79[47] Petitioner never ever disputed these
assertions.

The Court takes exception, however, to the appellate courts affirmance of the
trial courts grant of legal interest of 12% per annum on the value of the check. For
the obligation in this case did not arise out of a loan or forbearance of money, goods
or credit. While Article 1980 of the Civil Code provides that:

Fixed savings, and current deposits of money in banks and similar

institutions shall be governed by the provisions concerning simple loan,
said provision does not find application in this case since the nature of the
relationship between BA Finance and petitioner is one of agency whereby petitioner,
as collecting bank, is to collect for BA Finance the corresponding proceeds from the
check.80[48] Not being a loan or forbearance of money, the interest should be 6%
per annum computed from the date of extrajudicial demand on September 25, 1992
until finality of judgment; and 12% per annum from finality of judgment until
payment, conformably with Eastern Shipping Lines, Inc. v. Court of Appeals.81[49]

WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is
AFFIRMED with MODIFICATION in that the rate of interest on the judgment
obligation of P224,500 should be 6% per annum, computed from the time of
extrajudicial demand on September 25, 1992 until its full payment before finality of
judgment; thereafter, if the amount adjudged remains unpaid, the interest rate shall
be 12% per annum computed from the time the judgment becomes final and
executory until fully satisfied.

Costs against petitioner.

 SO ORDERED.

G.R. No. L-40796 July 31, 1975

REPUBLIC BANK, plaintiff-appellee,

vs.
MAURICIA T. EBRADA, defendant-appellant.

Sabino de Leon, Jr. for plaintiff-appellee.

Julio Baldonado for defendant-appellant.

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 vs. Mauricia T. Ebrada."

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
forgery2 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:

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:

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 bears the following signatures, in this order:

1) MARTIN LORENZO;

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.

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:

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 at 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.

In her appeal, defendant-appellant presses that the lower court erred:

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 11-½
YEARS AND THAT THE APPELLANT DID NOT BENEFIT FROM ENCASHING SAID CHECK.

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 65 of the Negotiable Instruments Law:6

Every person negotiating an instrument by delivery or by qualified indorsement, warrants:

(a) That the instrument is genuine and in all respects what it purports to be.

(b) That she has good title to it.

xxx xxx xxx

and under Section 65 of the same Act:

 Every indorser who indorses without qualification warrants to all subsequent holders in due course:

(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.

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 action 23 of the Negotiable Instruments Law (Act
2031):

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.

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 vs. 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 affect, 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:

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 cheek 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:

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.
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 title 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 2031),
thus: .An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party.

IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs against defendant-appellant.

SO ORDERED.

G.R. No. 93073 December 21, 1992

REPUBLIC PLANTERS BANK, petitioner,

vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.

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 vs. 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:

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:

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 which 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, 1980 until fully paid

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 (formely 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 Court (now the Court 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 solidarity 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:

___________, after date, for value received, I/we, jointly and severaIly promise to pay to the ORDER of the REPUBLIC
PLANTERS BANK, at its office in Manila, Philippines, the sum of ___________ PESOS(....) Philippine Currency...

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:

________ 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. noted to change its corporate name to Pinch Manufacturing Corporation.

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 complainant 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 it 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:

The promissory motes are negotiable instruments and must be governed by the Negotiable Instruments Law. 2

Under the Negotiable lnstruments 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 to 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 affect
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:

Sec. 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 take 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:

Sec. 14. Blanks: when may be filled. — Where the instrument is wanting in any material particular, the person in
possesion 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 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 NegotiabIe Instruments Law is not applicable.
The ruling in case of Reformina vs. 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 judgemets 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 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 rates at 12% per annum. Central Bank Circular No. 905, Series of 1982 removed the Usury Law ceiling on
interest rates. 16

In the 1ight 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. Judgement 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:

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 on January 29, 1981.

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 solidarity
liable with defendants for the amounts found, by the Court a quo. With costs against private respondent.

G.R. No. 116320 November 29, 1999

ADALIA FRANCISCO, petitioner,

vs.
COURT OF APPEALS, HERBY COMMERCIAL & CONSTRUCTION CORPORATION AND JAIME C. ONG, respondents.

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.

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 —

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs 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.

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. vs. Court of Appeals, et al., 17 which was reiterated in Philippine National Bank vs.
Court of Appeals, 18 Philippine Airlines, Inc. vs. Court of Appeals 19 and in Keng Hua Paper Products Co., Inc. vs. 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 testitified 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.

JAI-ALAI CORPORATION OF THE

PHILIPPINES, Petitioner, v. BANK OF
THE PHILIPPINE ISLAND,
Respondent.

CASTRO, J.:

This is a petition by the Jai-Alai

Corporation of the Philippines (hereinafter
referred to as the petitioner) for review of
the decision of the Court of Appeals in
C.A.-G.R. 34042-R dated June 25, 1968 in
favor of the Bank of the Philippine Islands
(hereinafter referred to as the respondent).

From April 2, 1959 to May 18, 1959, ten

checks with a total face value of
P8,030.58 were deposited by the petitioner
in its current account with the respondent
bank. The particulars of these checks are
as follows:

1. Drawn by the Delta Engineering

Service upon the Pacific Banking
Corporation and payable to the Inter-
Island Gas Service Inc. or order:

Date Check Exhibit

Deposited Number Amount Number

4/2/59 B-352680 P500.00 18

4/20/59 A-156907 372.32 19

4/24/59 A-156924 397.82 20

5/4/59 B-364764 250.00 23

5/6/59 B-364775 250.00 24

2. Drawn by the Enrique Cortiz & Co.

upon the Pacific Banking Corporation and
payable to the Inter-Island Gas Service,
Inc. or bearer:

4/13/59 B-335063 P 2108.70 21

4/27/59 B-335072 P2210.94 22

3. Drawn by the Luzon Tinsmith &

Company upon the China Banking
Corporation and payable to the Inter-
Island Gas Service, Inc. or bearer:

5/18/59 VN430188 P940.80 25

4. Drawn by the Roxas Manufacturing,

Inc. upon the Philippine National Bank
and payable to the Inter-Island Gas
Service, Inc. order:

5/14/59 1860160 P 500.00 26

5/18/59 1860660 P 500.00 27

All the foregoing checks, which were
acquired by the petitioner from one
Antonio J. Ramirez, a sales agent of the
Inter-Island Gas and a regular bettor at jai-
alai games, were, upon deposit,
temporarily credited to the petitioner's
account in accordance with the clause
printed on the deposit slips issued by the
respondent and which reads:

"Any credit allowed the depositor on the

books of the Bank for checks or drafts
hereby received for deposit, is provisional
only, until such time as the proceeds
thereof, in current funds or solvent credits,
shall have been actually received by the
Bank and the latter reserves to itself the
right to charge back the item to the
account of its depositor, at any time before
that event, regardless of whether or not the
item itself can be returned."

About the latter part of July 1959, after

Ramirez had resigned from the Inter-
Island Gas and after the checks had been
submitted to inter-bank clearing, the Inter-
Island Gas discovered that all the
indorsements made on the checks
purportedly by its cashiers, Santiago
Amplayo and Vicenta Mucor (who were
merely authorized to deposit checks issued
payable to the said company) as well as
the rubber stamp impression thereon
reading "Inter-Island Gas Service, Inc.,"
were forgeries. In due time, the Inter-
Island Gas advised the petitioner, the
respondent, the drawers and the drawee-
banks of the said checks about the
forgeries, and filed a criminal complaint
against Ramirez with the Office of the
City Fiscal of Manila. 1

The respondent's cashier, Ramon Sarthou,

upon receipt of the latter of Inter-Island
Gas dated August 31, 1959, called up the
petitioner's cashier, Manuel Garcia, and
advised the latter that in view of the
circumstances he would debit the value of
the checks against the petitioner's account
as soon as they were returned by the
respective drawee-banks.

Meanwhile, the drawers of the checks,

having been notified of the forgeries,
demanded reimbursement to their
respective accounts from the drawee-
banks, which in turn demanded from the
respondent, as collecting bank, the return
of the amounts they had paid on account
thereof. When the drawee-banks returned
the checks to the respondent, the latter
paid their value which the former in turn
paid to the Inter-Island Gas. The
respondent, for its part, debited the
petitioner's current account and forwarded
to the latter the checks containing the
forged indorsements, which the petitioner,
however, refused to accept.

On October 8, 1959 the petitioner drew

against its current account with the
respondent a check for P135,000 payable
to the order of the Mariano Olondriz y
Cia. in payment of certain shares of stock.
The check was, however, dishonored by
the respondent as its records showed that
as of October 8, 1959 the current account
of the petitioner, after netting out the value
of the checks P8,030.58) with the forged
indorsements, had a balance of only
P128,257.65.

The petitioner then filed a complaint

against the respondent with the Court of
First Instance of Manila, which was
however dismissed by the trial court after
due trial, and as well by the Court of
Appeals, on appeal.

Hence, the present recourse.

The issues posed by the petitioner in the

instant petition may be briefly stated as
follows:

(a) Whether the respondent had the right

to debit the petitioner's current account in
the amount corresponding to the total
value of the checks in question after more
than three months had elapsed from the
date their value was credited to the
petitioner's account:(b) Whether the
respondent is estopped from claiming that
the amount of P8,030.58, representing the
total value of the checks with the forged
indorsements, had not been properly
credited to the petitioner's account, since
the same had already been paid by the
drawee-banks and received in due course
by the respondent; and(c) On the
assumption that the respondent had
improperly debited the petitioner's current
account, whether the latter is entitled to
damages.

These three issues interlock and will be

resolved jointly.

In our opinion, the respondent acted

within legal bounds when it debited the
petitioner's account. When the petitioner
deposited the checks with the respondent,
the nature of the relationship created at
that stage was one of agency, that is, the
bank was to collect from the drawees of
the checks the corresponding proceeds. It
is true that the respondent had already
collected the proceeds of the checks when
it debited the petitioner's account, so that
following the rule in Gullas vs. Philippine
National Bank 2 it might be argued that
the relationship between the parties had
become that of creditor and debtor as to
preclude the respondent from using the
petitioner's funds to make payments not
authorized by the latter. It is our view
nonetheless that no creditor-debtor
relationship was created between the
parties.

Section 23 of the Negotiable Instruments

Law (Act 2031) states that 3 —

"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 under the foregoing provision, a

forged signature in a negotiable
instrument is wholly inoperative and no
right to discharge it or enforce its payment
can be acquired through or under the
forged signature except against a party
who cannot invoke the forgery, it stands to
reason, upon the facts of record, that the
respondent, as a collecting bank which
indorsed the checks to the drawee-banks
for clearing, should be liable to the latter
for reimbursement, for, as found by the
court a quo and by the appellate court, the
indorsements on the checks had been
forged prior to their delivery to the
petitioner. In legal contemplation,
therefore, the payments made by the
drawee-banks to the respondent on
account of the said checks were
ineffective; and, such being the case, the
relationship of creditor and debtor
between the petitioner and the respondent
had not been validly effected, the checks
not having been properly and legitimately
converted into cash. 4

In Great Eastern Life Ins. Co. vs.

Hongkong & Shanghai Bank, 5 the Court
ruled that it is the obligation of the
collecting bank to reimburse the drawee-
bank the value of the checks subsequently
found to contain the forged indorsement of
the payee. The reason is that the bank with
which the check was deposited has no
right to pay the sum stated therein to the
forger "or anyone else upon a forged
signature." "It was its duty to know," said
the Court, "that [the payee's] endorsement
was genuine before cashing the check."
The petitioner must in turn shoulder the
loss of the amounts which the respondent;
as its collecting agent, had to reimburse to
the drawee-banks.

We do not consider material for the

purposes of the case at bar that more than
three months had elapsed since the
proceeds of the checks in question were
collected by the respondent. The record
shows that the respondent had acted
promptly after being informed that the
indorsements on the checks were forged.
Moreover, having received the checks
merely for collection and deposit, the
respondent cannot he expected to know or
ascertain the genuineness of all prior
indorsements on the said checks. Indeed,
having itself indorsed them to the
respondent in accordance with the rules
and practices of commercial banks, of
which the Court takes due cognizance, the
petitioner is deemed to have given the
warranty prescribed in Section 66 of the
Negotiable Instruments Law that every
single one of those checks "is genuine and
in all respects what it purports to be.".

The petitioner was, moreover, grossly

recreant in accepting the checks in
question from Ramirez. It could not have
escaped the attention of the petitioner that
the payee of all the checks was a
corporation — the Inter-Island Gas
Service, Inc. Yet, the petitioner cashed
these checks to a mere individual who was
admittedly a habitue at its jai-alai games
without making any inquiry as to his
authority to exchange checks belonging to
the payee-corporation. In Insular Drug Co.
vs. National 6 the Court made the
pronouncement that.

". . . The right of an agent to indorse

commercial paper is a very responsible
power and will not be lightly inferred. A
salesman with authority to collect money
belonging to his principal does not have
the implied authority to indorse checks
received in payment. 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."
(underscoring supplied)

It must be noted further that three of the

checks in question are crossed checks,
namely, exhs. 21, 25 and 27, which may
only be deposited, but not encashed; yet,
the petitioner negligently accepted them
for cash. That two of the crossed checks,
namely, exhs. 21 and 25, are bearer
instruments would not, in our view,
exculpate the petitioner from liability with
respect to them. The fact that they are
bearer checks and at the same time
crossed checks should have aroused the
petitioner's suspicion as to the title of
Ramirez over them and his authority to
cash them (apparently to purchase jai-alai
tickets from the petitioner), it appearing
on their face that a corporate entity — the
Inter Island Gas Service, Inc. — was the
payee thereof and Ramirez delivered the
said checks to the petitioner ostensibly on
the strength of the payee's cashiers'
indorsements.

At all events, under Section 67 of the

Negotiable Instruments Law, "Where a
person places his indorsement on an
instrument negotiable by delivery he
incurs all the liability of an indorser," and
under Section 66 of the same statute a
general indorser warrants that the
instrument "is genuine and in all respects
what it purports to be." Considering that
the petitioner indorsed the said checks
when it deposited them with the
respondent, the petitioner as an indorser
guaranteed the genuineness of all prior
indorsements thereon. The respondent
which relied upon the petitioner's warranty
should not be held liable for the resulting
loss. This conclusion applied similarly to
exh. 22 which is an uncrossed bearer
instrument, for under Section 65 of the
Negotiable Instrument Law. "Every
person negotiating an instrument by
delivery . . . warrants (a) That the
instrument is genuine and in all respects
what it purports to be." Under that same
section this warranty "extends in favor of
no holder other than the immediate
transferee," which, in the case at bar,
would be the respondent.

The provision in the deposit slip issued by

the respondent which stipulates that it
"reserves to itself the right to charge back
the item to the account of its depositor," at
any time before "current funds or solvent
credits shall have been actually received
by the Bank," would not materially affect
the conclusion we have reached. That
stipulation prescribes that there must be an
actual receipt by the bank of current funds
or solvent credits; but as we have earlier
indicated the transfer by the drawee-banks
of funds to the respondent on account of
the checks in question was ineffectual
because made under the mistaken and
valid assumption that the indorsements of
the payee thereon were genuine. Under
article 2154 of the New Civil Code "If
something is received when there is no
right to demand it and it was unduly
delivered through mistake, the obligation
to return it arises." There was, therefore,
in contemplation of law, no valid payment
of money made by the drawee-banks to
the respondent on account of the
questioned checks.

ACCORDINGLY, the judgment of the

Court of Appeals is affirmed, at
petitioner's cost.

Makasiar, Esguerra, Muñoz Palma and

Martin, JJ., concur.

Teehankee, J., is on leave.

Endnotes:
1. The City Fiscal dropped the charges on
the ground that the Inter-Island Gas which
was later reimbursed by the drawee-banks,
was no longer qualified to be regarded as
an offended party which could properly
file a complaint against Ramirez because
it had not suffered any damage at all.

2. 62 Phil. 519 (1935).

3. A bank check is a negotiable instrument

and is governed by the Negotiable
Instruments Law (Ang Tiong vs. Ting, 22
SCRA 713).

4. The collecting hank may certainly set

up as defense the so-called "24-hour
clearing house rule" of the Central Bank.
This rule is not, however, invoked here.
See Hongkong & Shanghai Banking Corp.
vs. People's Bank & Trust Co., 35 SCRA
141.

5. 43 Phil. 678 (1922).

 6. 58 Phil. 685 (1933).

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

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,

vs.
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.

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:

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:

Check No. Date Payee Amount Date Paid

By PNB

1. 59546 8-21-69 Deogracias P 3,187.79 4-2-69

Estrella

2. 59548 3-31-69 Natividad 2,848.86 4-23 69

Rosario

3. 59547 3-31-69 Pangilinan 195.00 Unreleased

Enterprises

4. 59549 3-31-69 Natividad 3,239.88 4-23-69

Rosario

5. 59552 4-1-69 Villarama 987.59 5-6-69

& Sons

6. 59554 4-1-69 Gascom 6,057.60 4-16 69

Engineering

7. 59558 4-2-69 The Evening 112.00 Unreleased

News

8. 59544 3-27-69 Progressive 18,391.20 4-18 69

Const.

9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69

Int. Inc.

10. 59568 4-7-69 Roberto 800.00 4-22-69

Marsan

11. 59570 4-7-69 Paz Andres 200.00 4-22-69

12. 59574 4-8-69 Florentino 100,000.00 4-11-69

Santos

13. 59578 4-8-69 Mla. Daily 95.00 Unreleased

Bulletin

14. 59580 4-8-69 Phil. Herald 100.00 5-9-69

15. 59582 4-8-69 Galauran 7,729.09 5-6-69

& Pilar

16. 59581 4-8-69 Manila 110.00 5-12 69

Chronicle

17. 59588 4-8-69 Treago 21,583.00 4-11 69

Tunnel

18. 59587 4-8-69 Delfin 120,000.00 4-11-69

Santiago
19. 59589 4-10-69 Deogracias 1,257.49 4-16 69

Estrella

20. 59594 4-14-69 Philam Ac- 33.03 4-29 69

cident Inc.

21. 59577 4-8-69 Esla 9,429.78 4-29 69

22. 59601 4-16-69 Justino 20,000.00 4-18-69

Torres

23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69

Inc. --------------------

P 320,636.26

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:

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 4-11-69

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 38,490.00 4-22-69 Mendoza

9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69

10.59568 4-2-69 Arturo Sison 134,940.00 4- 5-69

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 93,950.00 4-29-69

Mendoza

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 176,580.00 5-6-69

Mendoza

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 260,000.00 5-16-69

Mendoza

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
Pl,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.

xxx xxx xxx

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:

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.

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:

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:

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.

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-74891; (4) the
Memorandum of Mr. Juan Dino, 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 obligation funds, and cannot ordinarily charge the amount so paid to the account of the depositor
whose name was forged.

xxx xxx xxx

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 chock 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 type face, 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 ten the difference between the allegedly forged signature and his own genuine signature. On the other hand, the MWSS officials admitted
that these checks could easily be passed on as genuine.

The memorandum of Mr. A. T. Tolentino, no, 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 ten 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.

xxx xxx xxx

Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law which provides
that:

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

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

(1) The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the safekeeping and disposition of excess
forms, check vouchers, and safety papers;

(2) The petitioner failed to retrieve from its printer all spoiled check forms;

(3) The petitioner failed to provide any control regarding the paper used in the printing of said checks;
(4) The petitioner failed to furnish the respondent drawee bank with samples of typewriting, cheek writing, and print used by its printer in the
printing of its checks and of the inks and pens used in signing the same; and

(5) The petitioner failed to send a representative to the printing office during the printing of said checks.

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:

xxx xxx xxx

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

xxx xxx xxx

15. Q: Were you given any ingtruction 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.

xxx xxx xxx

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).

xxx xxx xxx

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 firing cabinet.

xxx xxx xxx

28. Q: Were you not instructed by the NAWASA authorities to bum 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

xxx xxx xxx

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.

xxx xxx xxx

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.

The National Bureau of Investigation Report dated November 2, 1970 is even more explicit. Thus—

xxx xxx xxx

60. We observed also that there is some laxity and loose control in the printing of NAWASA
cheeks. 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.

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:

58. One factor which facilitate this fraud was the delay in the reconciliation of bank (PNB) statements with the
NAWASA bank accounts. x x x. 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.

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."

When confronted with this report at the Anti-Fraud Action Section of the National Bureau of Investigation. Mr. Ongtengco could only state
that:

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 check write 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.

xxx xxx xxx

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 win do
my best not to allow unauthorized persons to enter my office.

xxx xxx xxx

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.
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)cheeks 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. . .

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 cheek 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.

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:

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:

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.

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.
Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.

Paras * , J., took no part.

G.R. No. 92244 February 9, 1993

NATIVIDAD GEMPESAW, petitioner,

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

L.B. Camins for petitioner.

Angara, Abello, Concepcion, Regals & Cruz for private respondent

CAMPOS, JR., J.:

From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad Gempesaw, appealed to this Court in a
Petition for Review, on the issue of the right of the drawer to recover from the drawee bank who pays a check with a forged indorsement of
the payee, debiting the same against the drawer's account.

The records show that on January 23, 1985, petitioner filed a Complaint against the private respondent Philippine Bank of Communications
(respondent drawee Bank) for recovery of the money value of eighty-two (82) checks charged against the petitioner's account with the
respondent drawee Bank on the ground that the payees' indorsements were forgeries. The Regional Trial Court, Branch CXXVIII of Caloocan
City, which tried the case, rendered a decision on November 17, 1987 dismissing the complaint as well as the respondent drawee Bank's
counterclaim. On appeal, the Court of Appeals in a decision rendered on February 22, 1990, affirmed the decision of the RTC on two
grounds, namely (1) that the plaintiff's (petitioner herein) gross negligence in issuing the checks was the proximate cause of the loss and (2)
assuming that the bank was also negligent, the loss must nevertheless be borne by the party whose negligence was the proximate cause of
the loss. On March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules of Court setting forth the following as the alleged
errors of the respondent Court:1

THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE NEGLIGENCE OF THE DRAWER IS
THE PROXIMATE CAUSE OF THE RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY.

II

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND RULING THAT IT IS THE GROSS
AND INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND THE WRONG AND/OR ILLEGAL
PAYMENTS MADE TO PERSONS, OTHER THAN TO THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS
THE DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC) ACCOUNT
WAS DEBITED.

III

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE RESPONDENT BANK TO
RESTORE OR RE-CREDIT THE CHECKING ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY BRANCH
BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF P1,208,606.89 WITH LEGAL
INTEREST.

From the records, the relevant facts are as follows:

Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at Rizal Avenue Extension and at Second
Avenue, Caloocan City. Among these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account
numbered 13-00038-1 with the Caloocan City Branch of the respondent drawee Bank. To facilitate payment of debts to her suppliers,
petitioner draws checks against her checking account with the respondent bank as drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows: the checks were prepared and filled up as to all material particulars by her trusted bookkeeper,
Alicia Galang, an employee for more than eight (8) years. After the bookkeeper prepared the checks, the completed checks were submitted
to the petitioner for her signature, together with the corresponding invoice receipts which indicate the correct obligations due and payable to
her suppliers. Petitioner signed each and every check without bothering to verify the accuracy of the checks against the corresponding
invoices because she reposed full and implicit trust and confidence on her bookkeeper. The issuance and delivery of the checks to the
payees named therein were left to the bookkeeper. Petitioner admitted that she did not make any verification as to whether or not the checks
were delivered to their respective payees. Although the respondent drawee Bank notified her of all checks presented to and paid by the
bank, petitioner did not verify he correctness of the returned checks, much less check if the payees actually received the checks in payment
for the supplies she received. In the course of her business operations covering a period of two years, petitioner issued, following her usual
practice stated above, a total of eighty-two (82) checks in favor of several suppliers. These checks were all presented by the indorsees as
holders thereof to, and honored by, the respondent drawee Bank. Respondent drawee Bank correspondingly debited the amounts thereof
against petitioner's checking account numbered 30-00038-1. Most of the aforementioned checks were for amounts in excess of her actual
obligations to the various payees as shown in their corresponding invoices. To mention a few:

. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of Kawsek Inc. (Exh. A-60),
appellant's actual obligation to said payee was only P895.33 (Exh. A-83); (2) in Check No. 652282 issued on
September 18, 1984 in favor of Senson Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's actual
obligation to said payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the amount of
P11,672.47 in favor of Marchem (Exh. A-61) appellant's obligation was only P1,672.47 (Exh. B); (4) in Check No.
620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation was only P677.10
(Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984 in favor of Malinta Exchange Mart for P11,107.16
(Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor of
Grocer's International Food Corp. in the amount of P11,335.60 (Exh. A-66), her obligation was only P1,335.60 (Exh. E
and E-1); (7) in Check No. 589019 dated March 17, 1984 in favor of Sophy Products in the amount of P11,648.00 (Exh.
A-78), her obligation was only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the amount of
P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the latter's invoice was only P520.00 (Exh. H-2); (9) in Check
No. 62033 dated May 23, 1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34), her
obligation was only P504.00 (Exhs. I-1 and I-2).2

Practically, all the checks issued and honored by the respondent drawee bank were crossed checks.3 Aside from the daily notice given to
the petitioner by the respondent drawee Bank, the latter also furnished her with a monthly statement of her transactions, attaching thereto all
the cancelled checks she had issued and which were debited against her current account. It was only after the lapse of more two (2) years
that petitioner found out about the fraudulent manipulations of her bookkeeper.

All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon, Chief Accountant of respondent drawee
Bank at the Buendia branch, who, without authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in the
accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three (63) out of the
eighty-two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's Buendia
branch, and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks were deposited in Account No.
0443-4, under the name of Benito Lam at the Elcaño branch of the respondent drawee Bank.

About thirty (30) of the payees whose names were specifically written on the checks testified that they did not receive nor even see the
subject checks and that the indorsements appearing at the back of the checks were not theirs.

The team of auditors from the main office of the respondent drawee Bank which conducted periodic inspection of the branches' operations
failed to discover, check or stop the unauthorized acts of Ernest L. Boon. Under the rules of the respondent drawee Bank, only a Branch
Manager and no other official of the respondent drawee bank, may accept a second indorsement on a check for deposit. In the case at bar,
all the deposit slips of the eighty-two (82) checks in question were initialed and/or approved for deposit by Ernest L. Boon. The Branch
Managers of the Ongpin and Elcaño branches accepted the deposits made in the Buendia branch and credited the accounts of Alfredo Y.
Romero and Benito Lam in their respective branches.

On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her account with the money value of the
eighty-two (82) checks totalling P1,208.606.89 for having been wrongfully charged against her account. Respondent drawee Bank refused to
grant petitioner's demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial Court.

This is not a suit by the party whose signature was forged on a check drawn against the drawee bank. The payees are not parties to the
case. Rather, it is the drawer, whose signature is genuine, who instituted this action to recover from the drawee bank the money value of
eighty-two (82) checks paid out by the drawee bank to holders of those checks where the indorsements of the payees were forged. How and
by whom the forgeries were committed are not established on the record, but the respective payees admitted that they did not receive those
checks and therefore never indorsed the same. The applicable law is the Negotiable Instruments Law4 (heretofore referred to as the NIL).
Section 23 of the NIL provides:

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

Under the aforecited provision, forgery is a real or absolute defense by the party whose signature is forged. A party whose
signature to an instrument was forged was never a party and never gave his consent to the contract which gave rise to the
instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by anyone, not even by a
 holder in due course. Thus, if a person's signature is forged as a maker of a promissory note, he cannot be made to pay because
he never made the promise to pay. Or where a person's signature as a drawer of a check is forged, the drawee bank cannot
charge the amount thereof against the drawer's account because he never gave the bank the order to pay. And said section does
not refer only to the forged signature of the maker of a promissory note and of the drawer of a check. It covers also a forged
indorsement, i.e., the forged signature of the payee or indorsee of a note or check. Since under said provision a forged signature
is "wholly inoperative", no one can gain title to the instrument through such forged indorsement. Such an indorsement prevents
any subsequent party from acquiring any right as against any party whose name appears prior to the forgery. Although rights may
exist between and among parties subsequent to the forged indorsement, not one of them can acquire rights against parties prior
to the forgery. Such forged indorsement cuts off the rights of all subsequent parties as against parties prior to the forgery.
However, the law makes an exception to these rules where a party is precluded from setting up forgery as a defense.

As a matter of practical significance, problems arising from forged indorsements of checks may generally be broken into two types of cases:
(1) where forgery was accomplished by a person not associated with the drawer — for example a mail robbery; and (2) where the
indorsement was forged by an agent of the drawer. This difference in situations would determine the effect of the drawer's negligence with
respect to forged indorsements. While there is no duty resting on the depositor to look for forged indorsements on his cancelled checks in
contrast to a duty imposed upon him to look for forgeries of his own name, a depositor is under a duty to set up an accounting system and a
business procedure as are reasonably calculated to prevent or render difficult the forgery of indorsements, particularly by the depositor's own
employees. And if the drawer (depositor) learns that a check drawn by him has been paid under a forged indorsement, the drawer is under
duty promptly to report such fact to the drawee bank.5 For his negligence or failure either to discover or to report promptly the fact of such
forgery to the drawee, the drawer loses his right against the drawee who has debited his account under a forged indorsement.6 In other
words, he is precluded from using forgery as a basis for his claim for re-crediting of his account.

In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted employee, Alicia Galang, and were given
to her for her signature. Her signing the checks made the negotiable instrument complete. Prior to signing the checks, there was no valid
contract yet.

Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument to the payee for the purpose of giving
effect thereto.7 The first delivery of the instrument, complete in form, to the payee who takes it as a holder, is called issuance of the
instrument.8 Without the initial delivery of the instrument from the drawer of the check to the payee, there can be no valid and binding
contract and no liability on the instrument.

Petitioner completed the checks by signing them as drawer and thereafter authorized her employee Alicia Galang to deliver the eighty-two
(82) checks to their respective payees. Instead of issuing the checks to the payees as named in the checks, Alicia Galang delivered them to
the Chief Accountant of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established that the signatures
of the payees as first indorsers were forged. The record fails to show the identity of the party who made the forged signatures. The checks
were then indorsed for the second time with the names of Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as
earlier noted. The second indorsements were all genuine signatures of the alleged holders. All the eighty-two (82) checks bearing the forged
indorsements of the payees and the genuine second indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit at the
Buendia branch of respondent drawee Bank to the credit of their respective savings accounts in the Buendia, Ongpin and Elcaño branches of
the same bank. The total amount of P1,208,606.89, represented by eighty-two (82) checks, were credited and paid out by respondent
drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against petitioner's checking account No. 13-00038-1, Caloocan branch.

As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer's account for the
amount of said check. An exception to this rule is where the drawer is guilty of such negligence which causes the bank to honor such a check
or checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the forged indorsement by mere
examination of his cancelled check. This accounts for the rule that although a depositor owes a duty to his drawee bank to examine his
cancelled checks for forgery of his own signature, he has no similar duty as to forged indorsements. A different situation arises where the
indorsement was forged by an employee or agent of the drawer, or done with the active participation of the latter. Most of the cases involving
forgery by an agent or employee deal with the payee's indorsement. The drawer and the payee often time shave business relations of long
standing. The continued occurrence of business transactions of the same nature provides the opportunity for the agent/employee to commit
the fraud after having developed familiarity with the signatures of the parties. However, sooner or later, some leak will show on the drawer's
books. It will then be just a question of time until the fraud is discovered. This is specially true when the agent perpetrates a series of
forgeries as in the case at bar.

The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the depositor to act as a prudent
businessman would under the circumstances. In the case at bar, the petitioner relied implicitly upon the honesty and loyalty of her
bookkeeper, and did not even verify the accuracy of amounts of the checks she signed against the invoices attached thereto. Furthermore,
although she regularly received her bank statements, she apparently did not carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the same invoices. Otherwise, she could have easily discovered the discrepancies between
the checks and the documents serving as bases for the checks. With such discovery, the subsequent forgeries would not have been
accomplished. It was not until two years after the bookkeeper commenced her fraudulent scheme that petitioner discovered that eighty-two
(82) checks were wrongfully charged to her account, at which she notified the respondent drawee bank.

It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of non-payment. Assuming that even one
single complaint had been made, petitioner would have been duty-bound, as far as the respondent drawee Bank was concerned, to make an
adequate investigation on the matter. Had this been done, the discrepancies would have been discovered, sooner or later. Petitioner's failure
to make such adequate inquiry constituted negligence which resulted in the bank's honoring of the subsequent checks with forged
indorsements. On the other hand, since the record mentions nothing about such a complaint, the possibility exists that the checks in question
covered inexistent sales. But even in such a case, considering the length of a period of two (2) years, it is hard to believe that petitioner did
not know or realize that she was paying more than she should for the supplies she was actually getting. A depositor may not sit idly by, after
knowledge has come to her that her funds seem to be disappearing or that there may be a leak in her business, and refrain from taking the
steps that a careful and prudent businessman would take in such circumstances and if taken, would result in stopping the continuance of the
fraudulent scheme. If she fails to take steps, the facts may establish her negligence, and in that event, she would be estopped from
recovering from the bank.9

One thing is clear from the records — that the petitioner failed to examine her records with reasonable diligence whether before she signed
the checks or after receiving her bank statements. Had the petitioner examined her records more carefully, particularly the invoice receipts,
cancelled checks, check book stubs, and had she compared the sums written as amounts payable in the eighty-two (82) checks with the
pertinent sales invoices, she would have easily discovered that in some checks, the amounts did not tally with those appearing in the sales
invoices. Had she noticed these discrepancies, she should not have signed those checks, and should have conducted an inquiry as to the
reason for the irregular entries. Likewise had petitioner been more vigilant in going over her current account by taking careful note of the daily
reports made by respondent drawee Bank in her issued checks, or at least made random scrutiny of cancelled checks returned by
respondent drawee Bank at the close of each month, she could have easily discovered the fraud being perpetrated by Alicia Galang, and
could have reported the matter to the respondent drawee Bank. The respondent drawee Bank then could have taken immediate steps to
prevent further commission of such fraud. Thus, petitioner's negligence was the proximate cause of her loss. And since it was her negligence
which caused the respondent drawee Bank to honor the forged checks or prevented it from recovering the amount it had already paid on the
checks, petitioner cannot now complain should the bank refuse to recredit her account with the amount of such checks. 10 Under Section 23
of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of her account.

The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank 11 is not applicable to the case at bar because
in said case, the check was fraudulently taken and the signature of the payee was forged not by an agent or employee of the drawer. The
drawer was not found to be negligent in the handling of its business affairs and the theft of the check by a total stranger was not attributable
to negligence of the drawer; neither was the forging of the payee's indorsement due to the drawer's negligence. Since the drawer was not
negligent, the drawee was duty-bound to restore to the drawer's account the amount theretofore paid under the check with a forged payee's
indorsement because the drawee did not pay as ordered by the drawer.

Petitioner argues that respondent drawee Bank should not have honored the checks because they were crossed checks. Issuing a crossed
check imposes no legal obligation on the drawee not to honor such a check. It is more of a warning to the holder that the check cannot be
presented to the drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank which in turn must
present it for payment against the drawee bank in the course of normal banking transactions between banks. The crossed check cannot be
presented for payment but it can only be deposited and the drawee bank may only pay to another bank in the payee's or indorser's account.

Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with more than one indorsement. The banking
rule banning acceptance of checks for deposit or cash payment with more than one indorsement unless cleared by some bank officials does
not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this rule destroys the
negotiability of bills/checks by limiting their negotiation by indorsement of only the payee. Under the NIL, the only kind of indorsement which
stops the further negotiation of an instrument is a restrictive indorsement which prohibits the further negotiation thereof.

Sec. 36. When indorsement restrictive. — An indorsement is restrictive which either

(a) Prohibits further negotiation of the instrument; or

xxx xxx xxx

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

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

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

Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any
manner contravene the tenor thereof, are liable for damages.

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

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

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

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

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

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

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

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

SO ORDERED.

G.R. No. 107382/G.R. No. 107612 January 31, 1996

ASSOCIATED BANK, petitioner,

vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL
BANK, respondents.

xxxxxxxxxxxxxxxxxxxxx

G.R. No. 107612 January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner,

vs.
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.

G.R. No. 121413 January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK

OF ASIA AND AMERICA), petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A.,
respondents.

G.R. No. 121479 January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,

vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, respondents.
G.R. No. 128604 January 29, 2001

FORD PHILIPPINES, INC., petitioner,

vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and
COURT OF APPEALS, respondents.

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.1âwphi1.nêt

G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision1 of
the Court of Appeals in CA-G.R. CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank,
N.A. and Insular Bank of Asia and America (now Philipppine 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 Decision3 of the
Court of Appeals and its March 5, 1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford
Philippines, Inc. vs. 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 Citibanl Check Numbers SN-10597 and 16508.

I. G.R. Nos. 121413 and 121479

The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:

"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 degendant 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 Metrobanl, 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 samd 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-048867 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 course 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:

"Premises considered, judgment is hereby rendered as follows:

"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 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 Courts of Appeals. On March 27, 1995, the
appellate court issued its judgment as follows:

"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision
with modifications.

The court hereby renderes judgment:

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

PCI Bank 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 casue of action had already prescribed.

PCIBank sets forth the following issues for consideration:

 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:

I. Respondent Citibank is liable to petitioner Ford considering that:

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."

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. PCI Bank is liable to petitioner Ford considering that:

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 sysndicate 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:

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.

Both checks were "crossed checks" and contain two diagonal lines on its upper corner between,
which were written the words "payable to the payee's account only."

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 concernced, 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 a new, 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 tried the case, made its findings on the
modus operandi of the syndicate, as follows:

"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, fo delivering the same
of 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 sahres
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 VASTILLO 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) REMERTO 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 adsolving PCIBank from any liability, disposing as
follows:

"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 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:

I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence
required to be exercised by it as a banking insitution.

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 arguedo that defedant 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 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 approprite
quarterly percentage taxes of Ford, the checks were diverted and encashed for the eventual
distribution among the mmbers 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:

"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 fore 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."

Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator 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. Though their own negligence, alowed 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 thequestion 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 ing 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 unds of Citibank Check Nos. SN-10597 and 16508, PCIBank
claims that the proximate cause of the damge to Ford lies in its own officers and employees who
carried out the fradulent 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 vs. 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 the 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 concuring 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, asuming, 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 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 theordinary 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 emploees, 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
perpertrating the fraud and imposing the forged paper upon the bank, does notentitle the bank
toshift 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.

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:

"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank],
which claimed to be a depository/collecting bank of BIR, it has the responsibility to make
sure that the check in question is deposited in Payee's account only.

xxx xxx xxx

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 the one Godofredo Rivera and in his signature
considering that the plaintiff is not a client of the defendant IBAA."

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 argreement 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
GURANTEED 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 had no other option but
to pay it. Thus, Citibank assets that the proximate cause of Ford's injury is the gross negligence
of PCIBank. Since the questione dcrossed 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 questions 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 scruninize 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 vs. Equitable Banking Corporation,24 we ruled:

"Anent petitioner's liability on said instruments, this court is in full accord with the ruling
of the PCHC's Board of Directors that:
 '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 defedant'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."25

Lastly, banking business requires that the one who first cashes and negotiates the check must
take some percautions to learn whether or not it is genuine. And if the one cashing the check
through indifference or othe 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:

"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
personl, 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 particiapation 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 particiapted.

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 Ptro-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 t 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 indebetedness 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 531 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 checjs 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 informity 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 PCI Bank
(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 6232 of the Negotiable Instruments Law, Ford argues that by accepting the
instrument, the acceptro 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."
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, consitutes 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 umportance 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
year 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,
1984, 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 thet 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, respondibility 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.42

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV
No. 25017 are AFFIRMED. PCIBank, know formerly as Insular Bank of Asia and America, id
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.1âwphi1.nêt

Costs against Philippine Commercial International Bank and Citibank N.A.

SO ORDERED.

[G.R. No. 149454. May 28, 2004]

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. CASA MONTESSORI
INTERNATIONALE and LEONARDO T. YABUT, respondents.

[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 Review82[1] under Rule 45 of the Rules of Court, assailing the
March 23, 2001 Decision83[2] and the August 17, 2001 Resolution84[3] 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)].85[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 International86[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 No. Date Amount

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 782,600.0087[6]

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 P782,500.0088[7] 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.89[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.90[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.91[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.92[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.93[12]
Under this provision, a forged signature is a real94[13] or absolute defense,95[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.96[15]

The counterfeiting of any writing, consisting in the signing of anothers name with intent to
defraud, is forgery.97[16]

In the present case, we hold that there was forgery of the drawers signature on the check.

First, both the CA98[17] and the RTC99[18] found that Respondent Yabut himself had voluntarily
admitted, through an Affidavit, that he had forged the drawers signature and encashed the
checks.100[19] He never refuted these findings.101[20] That he had been coerced into admission was
not corroborated by any evidence on record.102[21]
Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory, after its
examination of the said checks,103[22] had concluded that the handwritings thereon -- compared to
the standard signature of the drawer -- were not hers.104[23] This conclusion was the same as that
in the Report105[24] 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.106[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.107[26] His Affidavit was executed in
private and before private individuals.108[27] The mantle of protection under Section 12 of Article
III of the 1987 Constitution109[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.110[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.111[30] The said constitutional
provision does not apply to spontaneous statements made in a voluntary manner112[31] whereby
an individual orally admits to authorship of a crime.113[32] What the Constitution proscribes is the
compulsory or coercive disclosure of incriminating facts.114[33]

Moreover, the right against self-incrimination115[34] under Section 17 of Article III116[35] of the
Constitution, which is ordinarily available only in criminal prosecutions, extends to all other
government proceedings -- including civil actions, legislative investigations,117[36] and
administrative proceedings that possess a criminal or penal aspect118[37] -- but not to private
investigations done by private individuals. Even in such government proceedings, this right may
be waived,119[38] provided the waiver is certain; unequivocal; and intelligently, understandingly
and willingly made.120[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 Rights121[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.122[41] Moreover, the Bill of Rights is a charter of liberties
for the individual and a limitation upon the power of the [S]tate.123[42] These rights124[43] 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.125[44]

Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights does not
automatically entitle him to the constitutional protection.126[45] When he freely and voluntarily
executed127[46] 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.128[47] It must be established by clear, positive and convincing

evidence.129[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.130[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.131[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
fact132[51] -- Yabut. He clearly admitted to discarding the paid checks to cover up his
misdeed.133[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.134[53] Although no conclusive report could be issued in the absence of
the original checks,135[54] she affirmed that her findings were 90 percent conclusive.136[55]
According to her, even if the microfilm copies were the only basis of comparison, the differences
were evident.137[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.138[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.139[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.140[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,141[60] but above all by her.
The failure of CASA to produce the original checks neither gives rise to the presumption of
suppression of evidence142[61] nor creates an unfavorable inference against it.143[62] Such failure
merely authorizes the introduction of secondary evidence144[63] 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.145[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.146[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;147[66] and that a comparison
based on a mere reproduction of the document under controversy cannot produce reliable
results.148[67] We have also said, however, that a judge cannot merely rely on a handwriting
experts testimony,149[68] but should also exercise independent judgment in evaluating the
authenticity of a signature under scrutiny.150[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.151[70] The result of examining a questioned handwriting, even with the aid of
experts and scientific instruments, may be inconclusive;152[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.153[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 diligence154[73] is expected,155[74] and high standards of
integrity and performance are even required, of it.156[75] By the nature of its functions, a bank is
under obligation to treat the accounts of its depositors with meticulous care,157[76] always having
in mind the fiduciary nature of their relationship.158[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 required159[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.160[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.161[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 confirmation162[81] or circularization -- in accounting parlance -- that

requests client-depositors to affirm the accuracy of items recorded by the banks.163[82] Its purpose
is to obtain from the depositors a direct corroboration of the correctness of their account balances
with their respective banks.164[83] Internal or external auditors of a bank use it as a basic audit
procedure165[84] -- 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.166[85] Evidential matter
obtained from independent sources outside a bank only serves to provide greater assurance of
reliability167[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 detected168[87] for various
reasons. One, materiality is a consideration in audit planning;169[88] and two, the information
obtained from such a substantive test is merely presumptive and cannot be the basis of a valid
waiver.170[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 right171[90] it has never
possessed.172[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.173[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.174[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.175[94] Our rules on
evidence even make a juris et de jure presumption176[95] 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.177[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.178[97] A person who has no knowledge of or consent to a
transaction may not be estopped by it.179[98] Estoppel cannot be sustained by mere argument or
doubtful inference x x x.180[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 payment181[100] 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,182[101] BPI can easily go after it and hold it liable for reimbursement.183[102] It may not
debit the drawers account184[103] and is not entitled to indemnification from the drawer.185[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.186[105]
Proximate cause is determined by the facts of the case.187[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.188[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.189[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.190[109]

Unfortunately, it failed in that regard. First, Yabut was able to open a bank account in one of its
branches without privity;191[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 Unit192[111] 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 liable193[112] for the
negligence of its officers or agents when acting within the course and scope of their
employment.194[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

exception195[114] to the general rule that a forged signature is wholly inoperative.196[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 practices197[116] of private entities. The relationship that arises
therefrom is both legal and moral.198[117] It begins with the execution of the engagement
letter199[118] that embodies the terms and conditions of the audit and ends with the fulfilled
expectation of the auditors ethical200[119] and competent performance in all aspects of the
audit.201[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 opinion202[121] expressed therein.203[122] The auditor does not assume the
role of employee or of management in the clients conduct of operations204[123] and is never under
the control or supervision205[124] of the client.

Yabut was an independent auditor206[125] hired by CASA. He handled its monthly bank
reconciliations and had access to all relevant documents and checkbooks.207[126] In him was
reposed the clients208[127] trust and confidence209[128] that he would perform precisely those
functions and apply the appropriate procedures in accordance with generally accepted auditing
standards.210[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,211[130] it was
Yabut who should examine those documents in order to prepare the bank reconciliations.212[131]
He owned his working papers,213[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.214[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 1991215[134] -- 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.216[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.217[136] Its mere existence is not
sufficient without proof that it, and no other cause,218[137] has given rise to damages.219[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,220[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 governance221[140] and a sworn
statement on adequate and effective training.222[141]

The missing checks were certainly reported by the bookkeeper223[142] to the accountant224[143] --
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 bookkeeper225[144] who had exclusive custody of the checkbooks226[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,227[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,228[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,229[148] or of fraud or bad faith,230[149] moral damages
cannot be awarded.231[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.232[151] While no proof of pecuniary loss is necessary therefor -- with the amount to be
awarded left to the courts discretion233[152] -- the claimant must nonetheless satisfactorily prove
the existence of its factual basis234[153] and causal relation235[154] to the claimants act or
omission.236[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.237[156] Neither bad faith
nor negligence so gross that it amounts to malice238[157] can be imputed to BPI. Bad faith, under
the law, does not simply connote bad judgment or negligence;239[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.240[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,241[160] because it cannot experience physical suffering and mental anguish.242[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.243[162] CASA was unable to prove that BPI had debased the good reputation of,244[163]
and consequently caused incalculable embarrassment to, the former. CASAs mere allegation or
supposition thereof, without any sufficient evidence on record,245[164] is not enough.

Exemplary Damages Also Denied

We also deny CASAs claim for exemplary damages.

Imposed by way of correction246[165] for the public good,247[166] exemplary damages cannot be
recovered as a matter of right.248[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.249[168] The
latter, having no right to moral damages, cannot demand exemplary damages.250[169]

Attorneys Fees Granted

Although it is a sound policy not to set a premium on the right to litigate,251[170] we find that
CASA is entitled to reasonable attorneys fees based on factual, legal, and equitable
justification.252[171]

When the act or omission of the defendant has compelled the plaintiff to incur expenses to
protect the latters interest,253[172] or where the court deems it just and equitable,254[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%)255[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 filing256[175] of the Complaint.257[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.258[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.259[178] The actual base for its computation shall be
on the amount finally adjudged,260[179] compounded261[180] annually to make up for the cost of
money262[181] 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.263[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.264[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.265[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.

G.R. No. 129015 August 13, 2004

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner,

vs.
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 York19
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)
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 (90º) 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 (45º) 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?

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
Appeals53 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)

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.