G.R. No.

93073 December 21, 1992 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.
REPUBLIC PLANTERS BANK, petitioner,
vs.
COURT OF APPEALS and FERMIN CANLAS, respondents. We find merit in this appeal.

CAMPOS, JR., J.: 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
This is an appeal by way of a Petition for Review on Certiorari from the decision * of the Court of
Shozo Yamaguchi and private respondent Fermin Canlas were authorized to apply for credit
Appeals in CA G.R. CV No. 07302, entitled "Republic Planters Bank.Plaintiff-Appellee vs. Pinch
facilities with the petitioner Republic Planters Bank in the forms of export advances and letters of
Manufacturing Corporation, et al., Defendants, and Fermin Canlas, Defendant-Appellant", which
credit/trust receipts accommodations. Petitioner bank issued nine promissory notes, marked as
affirmed the decision ** in Civil Case No. 82-5448 except that it completely absolved Fermin Canlas
Exhibits A to I inclusive, each of which were uniformly worded in the following manner:
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:
___________, 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
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff
Manila, Philippines, the sum of ___________ PESOS(....) Philippine Currency...
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 On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi
thereon at 16% per annum from the dates indicated, to wit: 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:
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 ________ Savings Account ______XX Current Account
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
No. 1372-00257-6
(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 of WORLDWIDE GARMENT MFG. CORP.
January 29, 1981.
These entries were separated from the text of the notes with a bold line which ran horizontally
Under the promissory note (Exhibit "D") defendants Pinch Manufacturing Corporation across the pages.
(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
In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment
of 16% per annum from January 29, 1980 until fully paid
Manufacturing, Inc. was apparently rubber stamped above the signatures of defendant and private
respondent.
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
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporate
from November 27, 1980 until fully paid.
name to Pinch Manufacturing Corporation.

Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff the sum of
On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of money covered
P231,120.81 with interest at 12% per annum from July 1, 1981, until fully paid and the sum
among others, by the nine promissory notes with interest thereon, plus attorney's fees and penalty
of P331,870.97 with interest from March 28, 1981, until fully paid.
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
All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum of substitute Pinch Manufacturing Corporation it its place. Defendants Pinch Manufacturing
P100,000.00 as and for reasonable attorney's fee and the further sum equivalent to 3% per Corporation and Shozo Yamaguchi did not file an Amended Answer and failed to appear at the
annum of the respective principal sums from the dates above stated as penalty charge until scheduled pre-trial conference despite due notice. Only private respondent Fermin Canlas filed an
fully paid, plus one percent (1%) of the principal sums as service charge. 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
With costs against the defendants. SO ORDERED. 1
Worldwide Garment Manufacturing, Inc., the same were in blank, the typewritten entries not
appearing therein prior to the time he affixed his signature.
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

1
In the mind of this Court, the only issue material to the resolution of this appeal is whether private The corporation continues, as before, responsible in its new name for all debts or other liabilities
respondent Fermin Canlas is solidarily liable with the other defendants, namely Pinch Manufacturing which it had previously contracted or incurred.12
Corporation and Shozo Yamaguchi, on the nine promissory notes.
As a general rule, officers or directors under the old corporate name bear no personal liability for
We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes acts done or contracts entered into by officers of the corporation, if duly authorized. Inasmuch as
bearing his signature for the following reasons: 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
The promissory motes are negotiable instruments and must be governed by the Negotiable
liability of a person signing as an agent is specifically provided for as follows:
Instruments Law. 2

Sec. 20. Liability of a person signing as agent and so forth. Where the instrument
Under the Negotiable lnstruments Law, persons who write their names on the face of promissory
contains or a person adds to his signature words indicating that he signs for or on behalf
notes are makers and are liable as such.3 By signing the notes, the maker promises to pay to the
of a principal , or in a representative capacity, he is not liable on the instrument if he was
order of the payee or any holder 4 according to the tenor thereof.5 Based on the above provisions of
duly authorized; but the mere addition of words describing him as an agent, or as filling
law, there is no denying that private respondent Fermin Canlas is one of the co-makers of the
a representative character, without disclosing his principal, does not exempt him from
promissory notes. As such, he cannot escape liability arising therefrom.
personal liability.

Where an instrument containing the words "I promise to pay" is signed by two or more persons, they
Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is
are deemed to be jointly and severally liable thereon. 6 An instrument which begins" with "I" ,We" , or
acting in a representative capacity or the name of the third party for whom he might have acted as
"Either of us" promise to, pay, when signed by two or more persons, makes them solidarily
agent, the agent is personally liable to take holder of the instrument and cannot be permitted to
liable. 7 The fact that the singular pronoun is used indicates that the promise is individual as to each
prove that he was merely acting as agent of another and parol or extrinsic evidence is not
other; meaning that each of the co-signers is deemed to have made an independent singular
admissible to avoid the agent's personal liability. 13
promise to pay the notes in full.

On the private respondent's contention that the promissory notes were delivered to him in blank for
In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and
his signature, we rule otherwise. A careful examination of the notes in question shows that they are
certain, without reason for ambiguity, by the presence of the phrase "joint and several" as describing
the stereotype printed form of promissory notes generally used by commercial banking institutions to
the unconditional promise to pay to the order of Republic Planters Bank. A joint and several note is
be signed by their clients in obtaining loans. Such printed notes are incomplete because there are
one in which the makers bind themselves both jointly and individually to the payee so that all may be
blank spaces to be filled up on material particulars such as payee's name, amount of the loan, rate
sued together for its enforcement, or the creditor may select one or more as the object of the
of interest, date of issue and the maturity date. The terms and conditions of the loan are printed on
suit. 8 A joint and several obligation in common law corresponds to a civil law solidary obligation;
the note for the borrower-debtor 's perusal. An incomplete instrument which has been delivered to
that is, one of several debtors bound in such wise that each is liable for the entire amount, and not
the borrower for his signature is governed by Section 14 of the Negotiable Instruments Law which
merely for his proportionate share. 9 By making a joint and several promise to pay to the order of
provides, in so far as relevant to this case, thus:
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. 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
As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures of
completed may be enforced against any person who became a party thereto prior to its
the makers in the notes will affect the liability of the makers, We do not find it necessary to resolve
completion, it must be filled up strictly in accordance with the authority given and within
and decide, because it is immaterial and will not affect to the liability of private respondent Fermin
a reasonable time...
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. 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
Finally, the respondent Court made a grave error in holding that an amendment in a corporation's
notes were filled up before they were given to private respondent Fermin Canlas and defendant
Articles of Incorporation effecting a change of corporate name, in this case from Worldwide Garment
Shozo Yamaguchi for their signatures as joint and several promissors. For signing the notes above
manufacturing Inc to Pinch Manufacturing Corporation extinguished the personality of the original
their typewritten names, they bound themselves as unconditional makers. We take judicial notice of
corporation.
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
The corporation, upon such change in its name, is in no sense a new corporation, nor the successor loan, leaving the borrowers-debtors to do nothing but read the terms and conditions therein printed
of the original corporation. It is the same corporation with a different name, and its character is in no and to sign as makers or co-makers. When the notes were given to private respondent Fermin
respect changed.10 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.
A change in the corporate name does not make a new corporation, and whether effected by special Thus, Section 14 of the NegotiabIe Instruments Law is not applicable.
act or under a general law, has no affect on the identity of the corporation, or on its property, rights,
or liabilities. 11
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

2
petition. In the abovecited case, the rate of 12% was applied to forebearances of money, goods or G.R. No. 116320 November 29, 1999
credit and court judgemets thereon, only in the absence of any stipulation between the parties.
ADALIA FRANCISCO, petitioner,
In the case at bar however , it was found by the trial court that the rate of interest is 9% per annum, vs.
which interest rate the plaintiff may at any time without notice, raise within the limits allowed law. COURT OF APPEALS, HERBY COMMERCIAL & CONSTRUCTION CORPORATION AND JAIME
And so, as of February 16, 1984 , the plaintiff had fixed the interest at 16% per annum. C. ONG, respondents.

This Court has held that the rates under the Usury Law, as amended by Presidential Decree No. GONZAGA-REYES, J.:
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
Assailed in this petition for review on certiorari is the decision 1 of the Court of Appeals affirming the
distinction was not taken into consideration by the appellate court, which instead made a general
decision 2 rendered by Branch 168 of the Regional Trial Court of Pasig in Civil Case No. 35231 in
statement that the interest rate be at 12% per annum.
favor of private respondents.

Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling
The controversy before this Court finds its origins in a Land Development and Construction Contract
prescribed by the Usury Law, the appellate court erred in limiting the interest rates at 12% per
which was entered into on June 23, 1977 by A. Francisco Realty & Development Corporation
annum. Central Bank Circular No. 905, Series of 1982 removed the Usury Law ceiling on interest
(AFRDC), of which petitioner Adalia Francisco (Francisco) is the president, and private respondent
rates. 16
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
In the 1ight of the foregoing analysis and under the plain language of the statute and jurisprudence Jose del Monte, Bulacan, financed by the Government Service Insurance System (GSIS). Under the
on the matter, the decision of the respondent: Court of Appeals absolving private respondent Fermin contract, HCCC agreed to undertake the construction of 35 housing units and the development of 35
Canlas is REVERSED and SET ASIDE. Judgement is hereby rendered declaring private respondent hectares of land. The payment of HCCC for its services was on a turn-key basis, that is, HCCC was
Fermin Canlas jointly and severally liable on all the nine promissory notes with the following sums to be paid on the basis of the completed houses and developed lands delivered to and accepted by
and at 16% interest per annum from the dates indicated, to wit: 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
Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest from January
the amount of P4,000,000.00 from which checks would be issued and co-signed by petitioner
29, 1981 until fully paid; under promissory note marked as Exhibit B, the sum of P40,000.00 with
Francisco and the GSIS Vice-President Armando Diaz (Diaz).
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 On February 10, 1978, HCCC filed a complaint 3 with the Regional Trial Court of Quezon City
promissory note marked as Exhibit E, the amount of P86,130.31 with interest from January 29, against Francisco, AFRDC and the GSIS for the collection of the unpaid balance under the Land
1981; under the promissory note marked as Exhibit F, the sum of P140,000.00 with interest from Development and Construction Contract in the amount of P515,493.89 for completed and delivered
November 27, 1980 until fully paid; under the promissory note marked as Exhibit G, the amount of housing units and land development. However, the parties eventually arrived at an amicable
P12,703.70 with interest from November 27, 1980; the promissory note marked as Exhibit H, the settlement of their differences, which was embodied in a Memorandum Agreement executed by
sum of P281,875.91 with interest from January 29, 1981; and the promissory note marked as Exhibit HCCC and AFRDC on July 21, 1978. Under the agreement, the parties stipulated that HCCC had
I, the sum of P200,000.00 with interest on January 29, 1981. 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
The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide Garment
defects and deficiencies are finally completed by HCCC. It was also provided that HCCC was
Manufacturing, Inc.) and Shozo Yamaguchi, for not having appealed from the decision of the trial
indebted to AFRDC in the amount of P180,234.91 which the former agreed would be paid out of the
court, shall be adjudged in accordance with the judgment rendered by the Court a quo.
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
With respect to attorney's fees, and penalty and service charges, the private respondent Fermin of a joint motion to dismiss.
Canlas is hereby held jointly and solidarity liable with defendants for the amounts found, by the
Court a quo. With costs against private respondent.
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
SO ORDERED. 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

3
HCCC and delivered the same to Francisco in payment of the loans extended by Francisco to P370,475.00 in full satisfaction of its claims against IBAA, without prejudice to the right of the latter
HCCC. According to Francisco, she agreed to grant HCCC the loans in the total amount of to pursue its claims against Francisco.
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
On June 29, 1992, the Court of Appeals affirmed the trial court's ruling, hence this petition for review
Francisco to collect HCCC's receivables from the GSIS. Assistant City Fiscal Ramon M. Gerona
on certiorari filed by petitioner, assigning the following errors to the appealed decision —
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.
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).
The present case was brought by private respondents on November 19, 1979 against Francisco and
Such conclusion was based mainly on conjectures, surmises and speculation contrary to the
IBAA for the recovery of P370,475.00, representing the total value of the seven checks, and for
unrebutted pleadings and evidence presented by petitioner.
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 —
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
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs
patently contradictory to the unrebutted pleading and evidence that petitioner was expressly
and against the defendants INSULAR BANK OF ASIA & AMERICA and ATTY. ADALIA
authorized by respondent HERBY thru ONG to collect all receivables of HERBY from GSIS
FRANCISCO, to jointly and severally pay the plaintiffs the amount of P370.475.00 plus
to pay the loans extended to them. (Exhibit 3).
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 3. That respondent Court of Appeals erred in holding that the seven checks in question were
P50,000.00. 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
With respect to the cross-claim of the defendant IBAA against its co-defendant Atty. Adalia
petitioners. It is an inference made which is manifestly mistaken.
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.
4. The respondent Court of Appeals erred in affirming the decision of the lower court and
dismissing the appeal. 6
Further, the defendants are ordered to pay the costs.

The pivotal issue in this case is whether or not Francisco forged the signature of Ong on the seven
Based upon the findings of handwriting experts from the National Bureau of Investigation (NBI), the
checks. In this connection, we uphold the lower courts' finding that the subject matter of the present
trial court held that Francisco had indeed forged the signature of Ong to make it appear that he had
case, specifically the seven checks, drawn by GSIS and AFRDC, dated between October to
indorsed the checks. Also, the court ruled that there were no loans extended, reasoning that it was
November 1977, in the total amount of P370,475.00 and payable to HCCC, was not included in the
unbelievable that HCCC was experiencing financial difficulties so as to compel it to obtain the loans
Memorandum Agreement executed by HCCC and AFRDC in Civil Case No. Q-24628. As observed
from AFRDC in view of the fact that the GSIS had issued checks in favor of HCCC at about the
by the trial court, aside from there being absolutely no mention of the checks in the said agreement,
same time that the alleged advances were made. The trial court stated that it was plausible that
the amounts represented by said checks could not have been included in the Memorandum
Francisco concealed the fact of issuance of the checks from private respondents in order to make it
Agreement executed in 1978 because private respondents only discovered Francisco's acts of
appear as if she were accommodating private respondents, when in truth she was lending HCCC its
forgery in 1979. The lower courts found that Francisco was able to easily conceal from private
own money.
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
With regards to the Memorandum Agreement entered into between AFRDC and HCCC in Civil Case uncontested signature, 8 by which she, in effect, acknowledged having received the checks intended
No. Q-24628, the trial court held that the same did not make any mention of the forged checks since for HCCC. This contradicts Francisco's claims that the checks were issued to Ong who delivered
private respondents were as of yet unaware of their existence, that fact having been effectively them to Francisco already indorsed. 9
concealed by Francisco, until private respondents acquired knowledge of Francisco's misdeeds in
1979.
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
IBAA was held liable to private respondents for having honored the checks despite such obvious the checks for a second time by signing her name at the back of the checks, Francisco deposited
irregularities as the lack of initials to validate the alterations made on the check, the absence of the said checks in her savings account with IBAA. The forgery was satisfactorily established in the trial
signature of a co-signatory in the corporate checks of HCCC and the deposit of the checks on a court upon the strength of the findings of the NBI handwriting expert. 10 Other than petitioner's self-
second indorsement in the savings account of Francisco. However, the trial court allowed IBAA serving denials, there is nothing in the records to rebut the NBI's findings. Well-entrenched is the
recourse against Francisco, who was ordered to reimburse the IBAA for any sums it shall have to rule that findings of trial courts which are factual in nature, especially when affirmed by the Court of
pay to private respondents. 5 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.
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. Petitioner claims that she was, in any event, authorized to sign Ong's name on the checks by virtue
IBAA's motion for reconsideration and petition for review on certiorari filed with this Court were also of the Certification executed by Ong in her favor giving her the authority to collect all the receivables
similarly denied. On November 21, 1989, IBAA and HCCC entered into a Compromise Agreement of HCCC from the GSIS, including the questioned checks. 12 Petitioner's alternative defense must
which was approved by the trial court, wherein HCCC acknowledged receipt of the amount of 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

4
liability. 13 An agent, when so signing, should indicate that he is merely signing in behalf of the petitioner had filed baseless criminal complaints against him before the fiscal's office of Quezon City
principal and must disclose the name of his principal; otherwise he shall be held personally which disrupted HCCC's business operations. 23
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,
WHEREFORE, we AFFIRM the respondent court's decision promulgated on June 29, 1992,
Francisco should have signed her own name and expressly indicated that she was signing as an
upholding the February 16, 1988 decision of the trial court in favor of private respondents, with the
agent of HCCC. Thus, the Certification cannot be used by Francisco to validate her act of forgery.
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
Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify November 19, 1979. However, the interest rate shall be twelve percent (12%) per annum from the
the latter for the same. 15 Due to her forgery of Ong's signature which enabled her to deposit the time the judgment in this case becomes final and executory and until such amount is fully paid. The
checks in her own account, Francisco deprived HCCC of the money due it from the GSIS pursuant basis for computation of the six percent and twelve percent rates of interest shall be the amount of
to the Land Development and Construction Contract. Thus, we affirm respondent court's award of P370,475.00. No pronouncement as to costs.
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
SO ORDERED.
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
[G.R. No. L-29432. August 6, 1975.]
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 —
JAI-ALAI CORPORATION OF THE PHILIPPINES, Petitioner, v. BANK OF THE PHILIPPINE
ISLAND, Respondent.
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. Bausa, Ampil & Suarez for Petitioner.
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 Aviado & Aranda for Respondent.
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code. SYNOPSIS

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on Petitioner deposited in its current account with respondent bank several checks with a total face
the amount of damages awarded may be imposed at the discretion of the court at the rate of six value of P8,030.58, all acquired from Antonio J. Ramirez, a regular bettor at the jai-alai games and a
percent (6%) per annum. No interest, however, shall be adjudged on unliquidated claims or sale agent of the Inter-Island Gas Service, Inc., the payee of the checks. The deposits were all
damages except when or until the demand can be established with reasonable certainty. temporarily credited to petitioner’s account in accordance with the clause printed on the bank’s
Accordingly, where the demand is established with reasonable certainty, the interest shall begin to deposit slip. Subsequently, Ramirez resigned and after the checks had been submitted to inter-bank
run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such clearing, the Inter-Island Gas discovered that all the indorsement made on the cheeks purportedly
certainty cannot be so reasonably established at the time the demand is made, the interest shall by its cashiers, as well as the rubber stamp impression thereon reading "Inter-Island Gas Service,
begin to run only from the date the judgment of the court is made (at which time the quantification of Inc.", were forgeries. It informed petitioner, the respondent, the drawers and the drawee banks of
damages may be deemed to have been reasonably ascertained). The actual base for the the said checks and forgeries and filed a criminal complaint against its former employee. In view of
computation of legal interest shall, in any case, be on the amount finally adjudged. these circumstances, the respondent Bank debited the petitioner’s current account and forwarded to
the latter the checks containing the forged indorsements, which petitioner refused to accept. Later,
petitioner drew against its current account a check for P135,000.00. This check was dishonored by
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate respondent as its records showed that petitioner’s balance after netting out the value of the checks
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be twelve with the forged indorsement, was insufficient to cover the value of the check drawn. A complaint was
percent (12%) per annum from such finality until its satisfaction, this interim period being deemed to filed by petitioner with the Court of First Instance of Manila. The same was dismissed by the said
be by then an equivalent to a forbearance of credit. court after due trial, as well as by the Court of Appeals, on appeal. Hence, this petition for review.

We also sustain the award of exemplary damages in the amount of P50,000.00. Under Article 2229 The Supreme Court ruled that respondent acted within legal bounds when it debited petitioner’s
of the Civil Code, exemplary damages are imposed by way of example or correction for the public account; that the payments made by the drawee banks to the respondent on account of the checks
good, in addition to the moral, temperate, liquidated or compensatory damages. Considering with forged indorsements were ineffective; that on account thereof, no creditor-debtor relationship
petitioner's fraudulent act, we hold that an award of P50,000.00 would be adequate, fair and was created between the parties; that petitioner was grossly recreant in accepting the checks in
reasonable. The grant of exemplary damages justifies the award of attorney's fees in the amount of question from Ramirez without making any inquiry as to authority to exchange checks belonging to
P50,000.00, and the award of P5,000.00 for litigation the payee-corporation; and that petitioner, in indorsing the said checks when it deposited them with
expenses. 21 respondent, guaranteed the genuineness of all prior indorsement thereon so that the respondent,
which relied upon its warranty, cannot be held liable for the resulting loss.

The appellate court's award of P50,000.00 in moral damages is warranted. Under Article 2217 of the Judgment affirmed
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

5
 SYLLABUS

DECISION
1. NEGOTIABLE INSTRUMENT; CHECKS; FORGED INDORSEMENTS EFFECT. — A
forged signature in a negotiable instrument makes it 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. CASTRO, J.:

2. ID.; ID.; ID.; NO RELATION OF CREDITOR-DEBTOR BETWEEN THE PARTIES

CREATED EVEN IF DEPOSITARY OR COLLECTING BANK HAD ALREADY This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the
COLLECTED THE PROCEEDS OF THE CHECKS WHEN IT DEBITED PETITIONER’S petitioner) for review of the decision of the Court of Appeals in C.A.-G.R. 34042-R dated June 25,
ACCOUNT; REASON. — Where the indorsement made on the checks were forged prior 1968 in favor of the Bank of the Philippine Islands (hereinafter referred to as the respondent).
to their delivery to depositor, the payments made by the drawee-banks to the collecting
bank on account of the said checks were ineffective. Such being the case, the relationship From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were deposited
of creditor and debtor between the depositor and the depository had not been validly by the petitioner in its current account with the respondent bank. The particulars of these checks are
effected, the checks not having properly and legitimately converted into cash. as follows:chanrob1es virtual 1aw library

3. ID.; ID.; ID.; COLLECTING BANKS HAS DUTY TO REIMBURSE TO DRAWEE-BANKS 1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and payable to the
THE VALUE OF CHECKS CONTAINING FORGED INDORSEMENT; RULING IN THE Inter-Island Gas Service Inc. or order:chanrob1es virtual 1aw library
CASE OF GREAT EASTERN LIFE INSURANCE CO. v. HONGKONG & SHANGHAI
BANK. — In Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678 Date Check Exhibit
(1992), 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 Deposited Number Amount Number
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 to anyone else upon 4/2/59 B-352680 P500.00 18
a forged signature." "It was its duty to know," said the Court, "that (the payee’s)
endorsement was genuine before cashing the check." The depositor must in turn shoulder 4/20/59 A-156907 372.32 19
the loss of the amounts which the respondent, as its collecting agent, had no reimburse to
the drawee-banks. 4/24/59 A-156924 397.82 20

4. ID.; ID.; ACCEPTANCE OF CHECKS INDORSED BY AN AGENT; RULING IN THE 5/4/59 B-364764 250.00 23
CASE OF INSULAR DRUG CO. v. NATIONAL. — In Insular Drug Co. v. National, 58 Phil.
685 (1933), the Court made the pronouncement that." . .The right of an agent to indorse 5/6/59 B-364775 250.00 24
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 2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to the Inter-
authority to indorse checks received in payment. Any person taking checks made payable Island Gas Service, Inc. or bearer:chanrob1es virtual 1aw library
to a corporation which can act by agents, does so at his peril, and must abide by the
consequences if the agent who endorses the same is without authority."cralaw virtua1aw 4/13/59 B-335063 P 2108.70 21
library
4/27/59 B-335072 P2210.94 22
5. ID.; ID.; LIABILITY OF AN INDORSER; NO LOSS TO BE SUFFERED BY A BANK
WHO RELIED ON INDORSER’S WARRANTY. — Under Section 67 of the Negotiable 3. Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and payable to
Instruments Law, "Where a person places his indorsement on an instrument negotiable by the Inter-Island Gas Service, Inc. or bearer:chanrob1es virtual 1aw library
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 5/18/59 VN430188 P940.8025cralaw:red
purports to be." Where the depositor indorsed the checks with forged indorsement when it
deposited them with the collecting bank, the former as an endorser guaranteed the 4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to the
genuineness of all prior indorsement thereon. The collecting bank which relied upon this Inter-Island Gas Service, Inc. order:chanrob1es virtual 1aw library
warranty cannot be held liable for the resulting loss.
5/14/59 1860160 P 500.00 26
6. ID.; ID.; FORGED CHECKS; TRANSFER OF FUNDS FROM DRAWEE TO
COLLECTING BANK; APPLICATION OF ART. 2154 OF THE CIVIL CODE. — The 5/18/59 1860660 P 500.00 27
transfer by the drawee-banks of funds to the collecting bank on account of forged checks
would be ineffectual when made under the mistaken and valid assumption that the All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a sales
indorsement of the payee thereon were genuine. Under Article 2154 of the New Civil agent of the Inter-Island Gas and a regular bettor at jai-alai games, were, upon deposit, temporarily
Code "If something is received when there is no right to demand it and it was unduly credited to the petitioner’s account in accordance with the clause printed on the deposit slips issued
delivered through mistake, the obligation to return it arises," By virtue thereof, there can by the respondent and which reads:jgc:chanrobles.com.ph
be no valid payment of money by drawee-banks to the collecting bank on account of
forged checks. "Any credit allowed the depositor on the books of the Bank for checks or drafts hereby received for
2. deposit, is provisional only, until such time as the proceeds thereof, in current funds or solvent

6
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 Section 23 of the Negotiable Instruments Law (Act 2031) states that 3 —
whether or not the item itself can be returned."cralaw virtua1aw library
"When a signature is forged or made without the authority of the person whose signature it purports
About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and after the to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or
checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered that all the to enforce payment thereof against any party thereto, can be acquired through or under such
indorsements made on the checks purportedly by its cashiers, Santiago Amplayo and Vicenta Mucor signature, unless the party against whom it is sought to enforce such right is precluded from setting
(who were merely authorized to deposit checks issued payable to the said company) as well as the up the forgery or want of authority."cralaw virtua1aw library
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 Since under the foregoing provision, a forged signature in a negotiable instrument is wholly
of the said checks about the forgeries, and filed a criminal complaint against Ramirez with the Office inoperative and no right to discharge it or enforce its payment can be acquired through or under the
of the City Fiscal of Manila. 1 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-
The respondent’s cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas dated banks for clearing, should be liable to the latter for reimbursement, for, as found by the court a quo
August 31, 1959, called up the petitioner’s cashier, Manuel Garcia, and advised the latter that in and by the appellate court, the indorsements on the checks had been forged prior to their delivery to
view of the circumstances he would debit the value of the checks against the petitioner’s account as the petitioner. In legal contemplation, therefore, the payments made by the drawee-banks to the
soon as they were returned by the respective drawee-banks. 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
Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded effected, the checks not having been properly and legitimately converted into cash. 4
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. In Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 5 the Court ruled that it is the
When the drawee-banks returned the checks to the respondent, the latter paid their value which the obligation of the collecting bank to reimburse the drawee-bank the value of the checks subsequently
former in turn paid to the Inter-Island Gas. The respondent, for its part, debited the petitioner’s found to contain the forged indorsement of the payee. The reason is that the bank with which the
current account and forwarded to the latter the checks containing the forged indorsements, which check was deposited has no right to pay the sum stated therein to the forger "or anyone else upon a
the petitioner, however, refused to accept. 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
On October 8, 1959 the petitioner drew against its current account with the respondent a check for which the respondent; as its collecting agent, had to reimburse to the drawee-banks.
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, We do not consider material for the purposes of the case at bar that more than three months had
1959 the current account of the petitioner, after netting out the value of the checks P8,030.58) with elapsed since the proceeds of the checks in question were collected by the Respondent. The record
the forged indorsements, had a balance of only P128,257.65. 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
The petitioner then filed a complaint against the respondent with the Court of First Instance of respondent cannot he expected to know or ascertain the genuineness of all prior indorsements on
Manila, which was however dismissed by the trial court after due trial, and as well by the Court of the said checks. Indeed, having itself indorsed them to the respondent in accordance with the rules
Appeals, on appeal. 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
Hence, the present recourse. every single one of those checks "is genuine and in all respects what it purports to be.."

The issues posed by the petitioner in the instant petition may be briefly stated as follows:chanrob1es The petitioner was, moreover, grossly recreant in accepting the checks in question from Ramirez. It
virtual 1aw library 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
(a) Whether the respondent had the right to debit the petitioner’s current account in the amount individual who was admittedly a habitue at its jai-alai games without making any inquiry as to his
corresponding to the total value of the checks in question after more than three months had elapsed authority to exchange checks belonging to the payee-corporation. In Insular Drug Co. v. National 6
from the date their value was credited to the petitioner’s account:(b) Whether the respondent is the Court made the pronouncement that.
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 ". . . The right of an agent to indorse commercial paper is a very responsible power and will not be
had already been paid by the drawee-banks and received in due course by the respondent; and(c) lightly inferred. A salesman with authority to collect money belonging to his principal does not have
On the assumption that the respondent had improperly debited the petitioner’s current account, the implied authority to indorse checks received in payment. Any person taking checks made
whether the latter is entitled to damages. 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)
These three issues interlock and will be resolved jointly.
It must be noted further that three of the checks in question are crossed checks, namely, exhs. 21,
In our opinion, the respondent acted within legal bounds when it debited the petitioner’s account. 25 and 27, which may only be deposited, but not encashed; yet, the petitioner negligently accepted
When the petitioner deposited the checks with the respondent, the nature of the relationship created them for cash. That two of the crossed checks, namely, exhs. 21 and 25, are bearer instruments
at that stage was one of agency, that is, the bank was to collect from the drawees of the checks the would not, in our view, exculpate the petitioner from liability with respect to them. The fact that they
corresponding proceeds. It is true that the respondent had already collected the proceeds of the are bearer checks and at the same time crossed checks should have aroused the petitioner’s
checks when it debited the petitioner’s account, so that following the rule in Gullas v. Philippine suspicion as to the title of Ramirez over them and his authority to cash them (apparently to purchase
National Bank 2 it might be argued that the relationship between the parties had become that of jai-alai tickets from the petitioner), it appearing on their face that a corporate entity — the Inter Island
creditor and debtor as to preclude the respondent from using the petitioner’s funds to make Gas Service, Inc. — was the payee thereof and Ramirez delivered the said checks to the petitioner
payments not authorized by the latter. It is our view nonetheless that no creditor-debtor relationship ostensibly on the strength of the payee’s cashiers’ indorsements.
was created between the parties.
7
At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places his account. These checks were printed for MWSS by its printer, F. Mesina Enterprises, located
indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser," and at 1775 Rizal Extension, Caloocan City.
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
During the months of March, April and May 1969, twenty-three (23) checks were prepared,
when it deposited them with the respondent, the petitioner as an indorser guaranteed the
processed, issued and released by NWSA, all of which were paid and cleared by PNB and
genuineness of all prior indorsements thereon. The respondent which relied upon the petitioner’s
debited by PNB against NWSA Account No. 6, to wit:
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 Check No. Date Payee Amount Date Paid
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.
By PNB
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 1. 59546 8-21-69 Deogracias P 3,187.79 4-2-69
solvent credits shall have been actually received by the Bank," would not materially affect the Estrella
conclusion we have reached. That stipulation prescribes that there must be an actual receipt by the 2. 59548 3-31-69 Natividad 2,848.86 4-23 69
bank of current funds or solvent credits; but as we have earlier indicated the transfer by the drawee- Rosario
banks of funds to the respondent on account of the checks in question was ineffectual because 3. 59547 3-31-69 Pangilinan 195.00 Unreleased
made under the mistaken and valid assumption that the indorsements of the payee thereon were Enterprises
genuine. Under article 2154 of the New Civil Code "If something is received when there is no right to 4. 59549 3-31-69 Natividad 3,239.88 4-23-69
demand it and it was unduly delivered through mistake, the obligation to return it arises." There was, Rosario
therefore, in contemplation of law, no valid payment of money made by the drawee-banks to the 5. 59552 4-1-69 Villarama 987.59 5-6-69
respondent on account of the questioned checks. & Sons
6. 59554 4-1-69 Gascom 6,057.60 4-16 69
ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioner’s cost. 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
G.R. No. L-62943 July 14, 1986 Int. Inc.
10. 59568 4-7-69 Roberto 800.00 4-22-69
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, Marsan
vs. 11. 59570 4-7-69 Paz Andres 200.00 4-22-69
COURT OF APPEALS (Now INTERMEDIATE APPELLATE COURT) and THE PHILIPPINE 12. 59574 4-8-69 Florentino 100,000.00 4-11-69
NATIONAL BANK, respondents. Santos
13. 59578 4-8-69 Mla. Daily 95.00 Unreleased
Bulletin
GUTIERREZ, JR., J.: 14. 59580 4-8-69 Phil. Herald 100.00 5-9-69
15. 59582 4-8-69 Galauran 7,729.09 5-6-69
This petition for review asks us to set aside the October 29, 1982 decision of the respondent Court & Pilar
of Appeals, now Intermediate Appellate Court which reversed the decision of the Court of First 16. 59581 4-8-69 Manila 110.00 5-12 69
Instance of Manila, Branch XL, and dismissed the plaintiff's complaint, the third party complaint, as Chronicle
well as the defendant's counterclaim. 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
The background facts which led to the filing of the instant petition are summarized in the decision of Santiago
the respondent Court of Appeals: 19. 59589 4-10-69 Deogracias 1,257.49 4-16 69
Estrella
Metropolitan Waterworks and Sewerage System (hereinafter referred to as MWSS) is a 20. 59594 4-14-69 Philam Ac- 33.03 4-29 69
government owned and controlled corporation created under Republic Act No. 6234 as the cident Inc.
successor-in- interest of the defunct NWSA. The Philippine National Bank (PNB for short), 21. 59577 4-8-69 Esla 9,429.78 4-29 69
on the other hand, is the depository bank of MWSS and its predecessor-in-interest NWSA. 22. 59601 4-16-69 Justino 20,000.00 4-18-69
Among the several accounts of NWSA with PNB is NWSA Account No. 6, otherwise known Torres
as Account No. 381-777 and which is presently allocated No. 010-500281. The authorized 23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69
signature for said Account No. 6 were those of MWSS treasurer Jose Sanchez, its auditor Inc. --------------------
Pedro Aguilar, and its acting General Manager Victor L. Recio. Their respective specimen P 320,636.26
signatures were submitted by the MWSS to and on file with the PNB. By special During the same months of March, April and May 1969, twenty-three (23) checks bearing
arrangement with the PNB, the MWSS used personalized checks in drawing from this 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
8
No. Issued By PNB PNB also filed a third party complaint against the negotiating banks PBC and PCIB on the
1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69 ground that they failed to ascertain the Identity of the payees and their title to the checks
2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69 which were deposited in the respective new accounts of the payees with them.
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
xxx xxx xxx
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 On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the MWSS.
8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza The dispositive portion of the decision reads:
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
WHEREFORE, on the COMPLAINT by a clear preponderance of evidence and in
11.59570 4-1-69 Arturo Sison 64,550.00 4-28-69
accordance with Section 23 of the Negotiable Instruments Law, the Court hereby renders
12.59574 4-2-69 Arturo Sison 148,610.00 4-29-69
judgment in favor of the plaintiff Metropolitan Waterworks and Sewerage System (MWSS)
13.59578 4-10-69 Antonio 93,950.00 4-29-69
by ordering the defendant Philippine National Bank (PNB) to restore the total sum of THREE
Mendoza
MILLION FOUR HUNDRED FIFTY SEVEN THOUSAND NINE HUNDRED THREE PESOS
14.59580 4-8-69 Arturo Sison 160,000.00 5-2-69
(P3,457,903.00) to plaintiff's Account No. 6, otherwise known as Account No. 010-50030-3,
15.59582 4-10-69 Arturo Sison 155,400.00 5-5-69
with legal interest thereon computed from the date of the filing of the complaint and until as
16.59581 4-8-69 Antonio 176,580.00 5-6-69
restored in the said Account No. 6.
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 On the THIRD PARTY COMPLAINT, the Court, for lack of evidence, hereby renders
19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69 judgment in favor of the third party defendants Philippine Bank of Commerce (PBC) and
20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69 Philippine Commercial and Industrial Bank (PCIB) by dismissing the Third Party Complaint.
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 The counterclaims of the third party defendants are likewise dismissed for lack of evidence.
23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69
--------------- No pronouncement as to costs.
P3,457,903.00
As earlier stated, the respondent court reversed the decision of the Court of First Instance of Manila
The foregoing checks were deposited by the payees Raul Dizon, Arturo Sison and Antonio and rendered judgment in favor of the respondent Philippine National Bank.
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 A motion for reconsideration filed by the petitioner MWSS was denied by the respondent court in a
PBC and PCIB to the defendant PNB, and paid, also in the months of March, April and May resolution dated January 3, 1983.
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.' The petitioner now raises the following assignments of errors for the grant of this petition:

Subsequent investigation however, conducted by the NBI showed that Raul Dizon, Arturo I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS WERE FORGED,
Sison and Antonio Mendoza were all fictitious persons. The respective balances in their THE DRAWEE BANK WAS LIABLE FOR THE LOSS UNDER SECTION 23 OF THE
current account with the PBC and/or PCIB stood as follows: Raul Dizon P3,455.00 as of NEGOTIABLE INSTRUMENTS LAW.
April 30, 1969; Antonio Mendoza P18,182.00 as of May 23, 1969; and Arturo Sison
Pl,398.92 as of June 30, 1969.
II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF PNB IN ACCEPTING
THE SPURIOUS CHECKS DESPITE THE OBVIOUS IRREGULARITY OF TWO SETS OF
On June 11, 1969, NWSA addressed a letter to PNB requesting the immediate restoration to CHECKS BEARING IdENTICAL NUMBER BEING ENCASHED WITHIN DAYS OF EACH
its Account No. 6, of the total sum of P3,457,903.00 corresponding to the total amount of OTHER.
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 III. IN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE MWSS BEING
First Instance of Manila and docketed thereat as Civil Case No. 88950. CLEARLY FORGED, AND THE CHECKS SPURIOUS, SAME ARE INOPERATIVE AS
AGAINST THE ALLEGED DRAWEE.

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 The appellate court applied Section 24 of the Negotiable Instruments Law which provides:
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 Every negotiable instrument is deemed prima facie to have been issued for valuable
proximate cause of the loss. consideration and every person whose signature appears thereon to have become a party
thereto for value.

9
The petitioner submits that the above provision does not apply to the facts of the instant case Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA 238). It
because the questioned checks were not those of the MWSS and neither were they drawn by its must be established by clear, positive, and convincing evidence. This was not done in the present
authorized signatories. The petitioner states that granting that Section 24 of the Negotiable case.
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
The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, et al. (59 Phil. 59)
Report of November 21, 1974; (3) the NBI Chemistry Report No. C-74891; (4) the Memorandum of
and Great Eastern Life Ins., Co. v. Hongkong and Shanghai Bank (43 Phil. 678) relied upon by the
Mr. Juan Dino, 3rd Assistant Auditor of the respondent drawee bank addressed to the Chief Auditor
petitioner are inapplicable in this case because the forgeries in those cases were either clearly
of the petitioner; (5) the admission of the respondent bank's counsel in open court that the National
established or admitted while in the instant case, the allegations of forgery were not clearly
Bureau of Investigation found the signature on the twenty-three (23) checks in question to be
established during trial.
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 Considering the absence of sufficient security in the printing of the checks coupled with the very
rulings of this Court. 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
A bank is bound to know the signatures of its customers; and if it pays a forged check it
forged was unable to ten the difference between the allegedly forged signature and his own genuine
must be considered as making the payment out of its obligation funds, and cannot ordinarily
signature. On the other hand, the MWSS officials admitted that these checks could easily be passed
charge the amount so paid to the account of the depositor whose name was forged.
on as genuine.

xxx xxx xxx

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
The signatures to the checks being forged, under Section 23 of the Negotiable Instruments an instance where even the concerned NWSA officials could not ten the differences between the
Law they are not a charge against plaintiff nor are the checks of any value to the defendant. genuine checks and the alleged forged checks.

It must therefore be held that the proximate cause of loss was due to the negligence of the At about 12:00 o'clock on June 6, 1969, VP Maramag requested me to see him in his office
Bank of the Philippine Islands in honoring and cashing the two forged checks. (San Carlos at the Cashier's Dept. where Messrs. Jose M. Sanchez, treasurer of NAWASA and Romeo
Milling Co. v. Bank of the P. I., 59 Phil. 59) 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.
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 For verification purposes, therefore, the checks were taken from our file. To everybody there
was paid. The Philippine National Bank had no license or authority to pay the money to present namely VIP Maramag, the two abovementioned NAWASA officials, AVP, Buhain,
Maasim or anyone else upon a forged signature. It was its legal duty to know that Malicor's Asst. Cashier Castelo, Asst. Cashier Tejada and Messrs. A. Lopez and L. Lechuga, both
endorsement was genuine before cashing the check. Its remedy is against Maasim to whom C/A bookkeepers, no one was able to point out any difference on the signatures of the
it paid the money. (Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678). 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
We have carefully reviewed the documents cited by the petitioner. There is no express and
comparison, he pointed on the questioned check as bearing his correct signature.
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 xxx xxx xxx
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.
Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the
Likewise, the questioned Documents Report No. 159-1074 dated November 21, 1974 of the
Negotiable Instruments Law which provides that:
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 SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the signature is forged or made
the questioned typewritings. The NBI Chemistry Report No. C-74-891 merely describes the inks and without authority of the person whose signature it purports to be, it is wholly inoperative, and
pens used in writing the alleged forged signatures. 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
It is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to sustain its
forgery or want of authority.
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 because it was guilty of negligence not only before the questioned checks were negotiated but even
two or more different persons. 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

10
provide the needed security measures. That there was gross negligence in the printing of its A: Not all, sir. Because we have to make reservations or allowances for spoilage.
personalized checks is shown by the following uncontroverted facts, to wit:
25. Q: Out of these vouchers printed by you, how many were spoiled and how many were
(1) The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the the excess printed check vouchers?
safekeeping and disposition of excess forms, check vouchers, and safety papers;
A: Approximately four hundred (400) sheets, sir. I cannot determine the proportion of the
(2) The petitioner failed to retrieve from its printer all spoiled check forms; 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.
(3) The petitioner failed to provide any control regarding the paper used in the printing of said
checks; 26. Q: What did you do with these excess check vouchers?

(4) The petitioner failed to furnish the respondent drawee bank with samples of typewriting, cheek A: I keep it under lock and key in my firing cabinet.
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
xxx xxx xxx

(5) The petitioner failed to send a representative to the printing office during the printing of said
28. Q: Were you not instructed by the NAWASA authorities to bum these excess check
checks.
vouchers?

This gross negligence of the petitioner is very evident from the sworn statement dated June 19,
A: No, sir. I was not instructed.
1969 of Faustino Mesina, Jr., the owner of the printing press which printed the petitioner's
personalized checks:
29. Q: What do you intend to do with these excess printed check vouchers?
xxx xxx xxx
A: I intend to use them for future orders from the
7. Q: Do you have any business transaction with the National Waterworks and Sewerage
Authority (NAWASA)? xxx xxx xxx

A: Yes, sir. I have a contract with the NAWASA in printing NAWASA Forms such as 32. Q: In the process of printing the check vouchers ordered by the NAWASA, how many
NAWASA Check sheets were actually spoiled?

xxx xxx xxx A: I cannot approximate, sir. But there are spoilage in the process of printing and
perforating.
15. Q: Were you given any ingtruction by the NAWASA in connection with the printing of
these check vouchers? 33. Q: What did you do with these spoilages?

A: There is none, sir. No instruction whatsoever was given to me. A: Spoiled printed materials are usually thrown out, in the garbage can.

16. Q: Were you not advised as to what kind of paper would be used in the check vouchers? 34. Q: Was there any representative of the NAWASA to supervise the printing or watch the
printing of these check vouchers?
A: Only as per sample, sir.
A: None, sir.
xxx xxx xxx
xxx xxx xxx
20. Q: Where did you buy this Hammermill Safety check paper?
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
A: From Tan Chiong, a paper dealer with store located at Juan Luna, Binondo, Manila. (In
NAWASA?
front of the Metropolitan Bank).

A: Inasmuch as I have an employee who sleeps in the printing shop and at the same time
xxx xxx xxx
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
24. Q: Were all these check vouchers printed by you submitted to NAWASA? following day.
11
 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
The National Bureau of Investigation Report dated November 2, 1970 is even more explicit. Thus—
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
xxx xxx xxx 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."
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 When confronted with this report at the Anti-Fraud Action Section of the National Bureau of
printing of the check vouchers of NAWASA that NAWASA had no representative at the Investigation. Mr. Ongtengco could only state that:
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
A. Generally my order is not to allow anybody to enter my office. Only authorized persons
of this accountable form.
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
Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in authorized by Mr. Pantig. Most of the people entering my office are changing checks as
question was the failure of the petitioner to reconcile the bank statements with its own records. 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.
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 Q. Is Mr. Pantig authorized to allow unauthorized persons to enter your office?
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
A. No, sir.
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 Q. Why are you tolerating Mr. Pantig admitting unauthorized persons in your office?
checks should have been discovered, and further frauds prevented. This negligence was, therefore,
the proximate cause of the failure to discover the fraud. Thus,
A. I do not want to embarrass Mr. Pantig. Most of the people following up checks are
employees of the NAWASA.
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
Q. Was the authority given by the Board of Directors and the approval by the Treasurer for
out the check stub to which the check is usually attached. This stub, if properly kept, will
employees, and other persons to encash their checks carry with it their authority to enter
contain the number of the check, the date of its issue, the name of the payee and the
your office?
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 A. No, sir.
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
xxx xxx xxx
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 Q. From the answers that you have given to us we observed that actually there is laxity and
honor a forged check or prevent it from recovering the amount it may have already paid on poor control on your part with regards to the preparations of check payments inasmuch as
such check, he cannot later complain should the bank refuse to recredit his account with the you allow unauthorized persons to follow up their vouchers inside your office which may
amount of such check. (First Nat. Bank of Richmond v. Richmond Electric Co., 106 Va. 347, leakout confidential informations or your books of account. After being apprised of all the
56 SE 152, 7 LRA, NS 744 [1907]. See also Leather Manufacturers' Bank v. Morgan, 117 shortcomings in your office, as head of the Cashiers' Office of the Treasury Department
US 96, 6 S. Ct. 657 [1886]; Deer Island Fish and Oyster Co. v. First Nat. Bank of Biloxi, 166 what remedial measures do you intend to undertake?
Miss. 162, 146 So. 116 [1933]). Campos and Campos, Notes and Selected Cases on
Negotiable Instruments Law, 1971, pp. 267-268).
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
This failure of the petitioner to reconcile the bank statements with its cancelled checks was noted by follow the instructions to the letter, I will do it but unfortunately the persons who are allowed
the National Bureau of Investigation in its report dated November 2, 1970: 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.
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 xxx xxx xxx

12
 Q. Is it not possible inasmuch as your office is in charge of the posting of check payments in 3. The texture of the paper used and the printing of the checks should be compared with the
your books that leakage of payments to the banks came from your office? sample we have on file with the Cashier's Dept.

A. I am not aware of it but it only takes us a couple of minutes to process the checks. And 4. Checks bearing several indorsements should be given a special attention.
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.
5. Alteration in amount both in figures and words should be carefully examined even if
signed by the drawer.
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
6. Checks issued in substantial amounts particularly by depositors who do not usually issue
(23)cheeks in question was an "inside job". Thus-
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.
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
and your attention is also invited to keep abreast of previous circulars and memo
these checks in question conform with the numbers in current use of NAWASA, aside from
instructions issued to bookkeepers.
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 We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment of
inside can not possibly pinpoint which of NAWASA's various accounts has sufficient balance the checks because the printing of the petitioner's personalized checks was not done under the
to cover all these fraudulent checks. None of these checks, it should be noted, was supervision and control of the Bank. There is no evidence on record indicating that because of this
dishonored for insufficiency of funds. . . 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.
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 Under the circumstances, therefore, the petitioner was in a better position to detect and prevent the
the Negotiable Instruments Law. fraudulent encashment of its checks.

Nonetheless, the petitioner claims that it was the negligence of the respondent Philippine National WHEREFORE, the petition for review on certiorari is hereby DISMISSED for lack of merit. The
Bank that was the proximate cause of the loss. The petitioner relies on our ruling in Philippine decision of the respondent Court of Appeals dated October 29, 1982 is AFFIRMED. No
National Bank v. Court of Appeals (25 SCRA 693) that. pronouncement as to costs.

Thus, by not returning the cheek to the PCIB, by thereby indicating that the PNB had found SO ORDERED.
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.
G.R. No. 92244 February 9, 1993
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 NATIVIDAD GEMPESAW, petitioner,
encashment. In fact, long before the encashment of the twenty-three (23) checks in question, the vs.
respondent Bank had issued constant reminders to all Current Account Bookkeepers informing them THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
of the activities of forgery syndicates. The Memorandum of the Assistant Vice-President and Chief COMMUNICATIONS, respondents.
Accountant of the Philippine National Bank dated February 17, 1966 reads in part:
CAMPOS, JR., J.:
SUBJECT: ACTIVITIES OF FORGERY SYNDICATE
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad
From reliable information we have gathered that personalized checks of current account Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right of the drawer to
depositors are now the target of the forgery syndicate. To protect the interest of the bank, recover from the drawee bank who pays a check with a forged indorsement of the payee, debiting
you are hereby enjoined to be more careful in examining said checks especially those the same against the drawer's account.
coming from the clearing, mails and window transactions. As a reminder please be guided
with the following:
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
1. Signatures of drawers should be properly scrutinized and compared with those we have money value of eighty-two (82) checks charged against the petitioner's account with the respondent
on file. 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
2. The serial numbers of the checks should be compared with the serial numbers registered
Court of Appeals in a decision rendered on February 22, 1990, affirmed the decision of the RTC on
with the Cashier's Dept.

13
two grounds, namely (1) that the plaintiff's (petitioner herein) gross negligence in issuing the checks 00038-1. Most of the aforementioned checks were for amounts in excess of her actual obligations to
was the proximate cause of the loss and (2) assuming that the bank was also negligent, the loss the various payees as shown in their corresponding invoices. To mention a few:
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
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of
following as the alleged errors of the respondent Court:1
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
I 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
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE NEGLIGENCE
P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10, 1984 in favor of Knotberry for
OF THE DRAWER IS THE PROXIMATE CAUSE OF THE RESULTING INJURY TO THE
P11,677.10 (Exh. A-31) her actual obligation was only P677.10 (Exhs. C and C-1); (5) in
DRAWEE BANK, AND THE DRAWER IS PRECLUDED FROM SETTING UP THE
Check No. 651862 dated August 9, 1984 in favor of Malinta Exchange Mart for P11,107.16
FORGERY OR WANT OF AUTHORITY.
(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
II (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
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND RULING for the amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the latter's
THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 23, 1984 in the
OF THE OFFICIALS AND EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34), her obligation was
SIGNATURE OF THE PAYEES AND THE WRONG AND/OR ILLEGAL PAYMENTS MADE only P504.00 (Exhs. I-1 and I-2).2
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. 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
III 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
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE bookkeeper.
RESPONDENT BANK TO RESTORE OR RE-CREDIT THE CHECKING ACCOUNT OF
THE PETITIONER IN THE CALOOCAN CITY BRANCH BY THE VALUE OF THE EIGHTY- All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon,
TWO (82) CHECKS WHICH IS IN THE AMOUNT OF P1,208,606.89 WITH LEGAL Chief Accountant of respondent drawee Bank at the Buendia branch, who, without authority therefor,
INTEREST. 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
From the records, the relevant facts are as follows: (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.
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at 0443-4, under the name of Benito Lam at the Elcaño branch of the respondent drawee Bank.
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 About thirty (30) of the payees whose names were specifically written on the checks testified that
debts to her suppliers, petitioner draws checks against her checking account with the respondent they did not receive nor even see the subject checks and that the indorsements appearing at the
bank as drawee. Her customary practice of issuing checks in payment of her suppliers was as back of the checks were not theirs.
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 The team of auditors from the main office of the respondent drawee Bank which conducted periodic
prepared the checks, the completed checks were submitted to the petitioner for her signature, inspection of the branches' operations failed to discover, check or stop the unauthorized acts of
together with the corresponding invoice receipts which indicate the correct obligations due and Ernest L. Boon. Under the rules of the respondent drawee Bank, only a Branch Manager and no
payable to her suppliers. Petitioner signed each and every check without bothering to verify the other official of the respondent drawee bank, may accept a second indorsement on a check for
accuracy of the checks against the corresponding invoices because she reposed full and implicit deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in question were
trust and confidence on her bookkeeper. The issuance and delivery of the checks to the payees initialed and/or approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and
named therein were left to the bookkeeper. Petitioner admitted that she did not make any verification Elcaño branches accepted the deposits made in the Buendia branch and credited the accounts of
as to whether or not the checks were delivered to their respective payees. Although the respondent Alfredo Y. Romero and Benito Lam in their respective branches.
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 On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her
two years, petitioner issued, following her usual practice stated above, a total of eighty-two (82) account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for having been
checks in favor of several suppliers. These checks were all presented by the indorsees as holders wrongfully charged against her account. Respondent drawee Bank refused to grant petitioner's
thereof to, and honored by, the respondent drawee Bank. Respondent drawee Bank demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial Court.
correspondingly debited the amounts thereof against petitioner's checking account numbered 30-

14
This is not a suit by the party whose signature was forged on a check drawn against the drawee instrument.8 Without the initial delivery of the instrument from the drawer of the check to the payee,
bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine, there can be no valid and binding contract and no liability on the instrument.
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
Petitioner completed the checks by signing them as drawer and thereafter authorized her employee
payees were forged. How and by whom the forgeries were committed are not established on the
Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Instead of issuing the
record, but the respective payees admitted that they did not receive those checks and therefore
checks to the payees as named in the checks, Alicia Galang delivered them to the Chief Accountant
never indorsed the same. The applicable law is the Negotiable Instruments Law 4 (heretofore
of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established
referred to as the NIL). Section 23 of the NIL provides:
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
When a signature is forged or made without the authority of the person whose with the names of Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as
signature it purports to be, it is wholly inoperative, and no right to retain the earlier noted. The second indorsements were all genuine signatures of the alleged holders. All the
instrument, or to give a discharge therefor, or to enforce payment thereof against eighty-two (82) checks bearing the forged indorsements of the payees and the genuine second
any party thereto, can be acquired through or under such signature, unless the party indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia
against whom it is sought to enforce such right is precluded from setting up the branch of respondent drawee Bank to the credit of their respective savings accounts in the Buendia,
forgery or want of authority. 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,
Under the aforecited provision, forgery is a real or absolute defense by the party whose
Caloocan branch.
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, As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot
not even by a holder in due course. Thus, if a person's signature is forged as a maker of a charge the drawer's account for the amount of said check. An exception to this rule is where the
promissory note, he cannot be made to pay because he never made the promise to pay. Or drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a
where a person's signature as a drawer of a check is forged, the drawee bank cannot check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the
charge the amount thereof against the drawer's account because he never gave the bank forged indorsement by mere examination of his cancelled check. This accounts for the rule that
the order to pay. And said section does not refer only to the forged signature of the maker of although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of
a promissory note and of the drawer of a check. It covers also a forged indorsement, i.e., the his own signature, he has no similar duty as to forged indorsements. A different situation arises
forged signature of the payee or indorsee of a note or check. Since under said provision a where the indorsement was forged by an employee or agent of the drawer, or done with the active
forged signature is "wholly inoperative", no one can gain title to the instrument through such participation of the latter. Most of the cases involving forgery by an agent or employee deal with the
forged indorsement. Such an indorsement prevents any subsequent party from acquiring payee's indorsement. The drawer and the payee often time shave business relations of long
any right as against any party whose name appears prior to the forgery. Although rights may standing. The continued occurrence of business transactions of the same nature provides the
exist between and among parties subsequent to the forged indorsement, not one of them opportunity for the agent/employee to commit the fraud after having developed familiarity with the
can acquire rights against parties prior to the forgery. Such forged indorsement cuts off the signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It will
rights of all subsequent parties as against parties prior to the forgery. However, the law then be just a question of time until the fraud is discovered. This is specially true when the agent
makes an exception to these rules where a party is precluded from setting up forgery as a perpetrates a series of forgeries as in the case at bar.
defense.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on
As a matter of practical significance, problems arising from forged indorsements of checks may failure of the depositor to act as a prudent businessman would under the circumstances. In the case
generally be broken into two types of cases: (1) where forgery was accomplished by a person not at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and did not
associated with the drawer — for example a mail robbery; and (2) where the indorsement was even verify the accuracy of amounts of the checks she signed against the invoices attached thereto.
forged by an agent of the drawer. This difference in situations would determine the effect of the Furthermore, although she regularly received her bank statements, she apparently did not carefully
drawer's negligence with respect to forged indorsements. While there is no duty resting on the examine the same nor the check stubs and the returned checks, and did not compare them with the
depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed same invoices. Otherwise, she could have easily discovered the discrepancies between the checks
upon him to look for forgeries of his own name, a depositor is under a duty to set up an accounting and the documents serving as bases for the checks. With such discovery, the subsequent forgeries
system and a business procedure as are reasonably calculated to prevent or render difficult the would not have been accomplished. It was not until two years after the bookkeeper commenced her
forgery of indorsements, particularly by the depositor's own employees. And if the drawer (depositor) fraudulent scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to
learns that a check drawn by him has been paid under a forged indorsement, the drawer is under her account, at which she notified the respondent drawee bank.
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
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of
drawee who has debited his account under a forged indorsement.6 In other words, he is precluded
non-payment. Assuming that even one single complaint had been made, petitioner would have been
from using forgery as a basis for his claim for re-crediting of his account.
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,
In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted sooner or later. Petitioner's failure to make such adequate inquiry constituted negligence which
employee, Alicia Galang, and were given to her for her signature. Her signing the checks made the resulted in the bank's honoring of the subsequent checks with forged indorsements. On the other
negotiable instrument complete. Prior to signing the checks, there was no valid contract yet. 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
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
paying more than she should for the supplies she was actually getting. A depositor may not sit idly
instrument to the payee for the purpose of giving effect thereto.7 The first delivery of the instrument,
by, after knowledge has come to her that her funds seem to be disappearing or that there may be a
complete in form, to the payee who takes it as a holder, is called issuance of the
leak in her business, and refrain from taking the steps that a careful and prudent businessman
15
would take in such circumstances and if taken, would result in stopping the continuance of the In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in
fraudulent scheme. If she fails to take steps, the facts may establish her negligence, and in that express words at the back of the instrument, so that any subsequent party may be forewarned that
event, she would be estopped from recovering from the bank. 9 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
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 Although the holder of a check cannot compel a drawee bank to honor it because there is no privity
checks, check book stubs, and had she compared the sums written as amounts payable in the between them, as far as the drawer-depositor is concerned, such bank may not legally refuse to
eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered that in honor a negotiable bill of exchange or a check drawn against it with more than one indorsement if
some checks, the amounts did not tally with those appearing in the sales invoices. Had she noticed there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee
these discrepancies, she should not have signed those checks, and should have conducted an cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee,
inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant in going he incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a suit
over her current account by taking careful note of the daily reports made by respondent drawee for damages at the instance of the drawer for wrongful dishonor of the bill or check.
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
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by
being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee
reason of her gross negligence. But under Section 196 of the NIL, any case not provided for in the
Bank. The respondent drawee Bank then could have taken immediate steps to prevent further
Act shall be governed by the provisions of existing legislation. Under the laws of quasi-delict, she
commission of such fraud. Thus, petitioner's negligence was the proximate cause of her loss. And
cannot point to the negligence of the respondent drawee Bank in the selection and supervision of its
since it was her negligence which caused the respondent drawee Bank to honor the forged checks
employees as being the cause of the loss because negligence is the proximate cause thereof and
or prevented it from recovering the amount it had already paid on the checks, petitioner cannot now
under Article 2179 of the Civil Code, she may not be awarded damages. However, under Article
complain should the bank refuse to recredit her account with the amount of such checks. 10 Under
1170 of the same Code the respondent drawee Bank may be held liable for damages. The article
Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of
provides —
her account.

Those who in the performance of their obligations are guilty of fraud, negligence or delay,
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank  11 is
and those who in any manner contravene the tenor thereof, are liable for damages.
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 There is no question that there is a contractual relation between petitioner as depositor (obligee) and
stranger was not attributable to negligence of the drawer; neither was the forging of the payee's the respondent drawee bank as the obligor. In the performance of its obligation, the drawee bank is
indorsement due to the drawer's negligence. Since the drawer was not negligent, the drawee was bound by its internal banking rules and regulations which form part of any contract it enters into with
duty-bound to restore to the drawer's account the amount theretofore paid under the check with a any of its depositors. When it violated its internal rules that second endorsements are not to be
forged payee's indorsement because the drawee did not pay as ordered by the drawer. 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.
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 Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect
drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank to the acceptance of checks with second indorsement for deposit even without the approval of the
which in turn must present it for payment against the drawee bank in the course of normal banking branch manager despite periodic inspection conducted by a team of auditors from the main office
transactions between banks. The crossed check cannot be presented for payment but it can only be constitutes negligence on the part of the bank in carrying out its obligations to its depositors. Article
deposited and the drawee bank may only pay to another bank in the payee's or indorser's account. 1173 provides —

Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with The fault or negligence of the obligor consists in the omission of that diligence which is
more than one indorsement. The banking rule banning acceptance of checks for deposit or cash required by the nature of the obligation and corresponds with the circumstance of the
payment with more than one indorsement unless cleared by some bank officials does not invalidate persons, of the time and of the place. . . .
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
We hold that banking business is so impressed with public interest where the trust and confidence of
payee. Under the NIL, the only kind of indorsement which stops the further negotiation of an
the public in general is of paramount importance such that the appropriate standard of diligence
instrument is a restrictive indorsement which prohibits the further negotiation thereof.
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
Sec. 36. When indorsement restrictive. — An indorsement is restrictive which either 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.
(a) Prohibits further negotiation of the instrument; or

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

16
 Responsibility arising from negligence in the performance of every kind of obligation is also The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac
demandable, but such liability may be regulated by the courts according to the Branch where the provincial funds are deposited. Checks issued by the Province are signed by the
circumstances. Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the
Sangguniang Bayan.
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 A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The
equity. And although the case was brought before the court not on breach of contractual obligations, allotment checks for said government hospital are drawn to the order of "Concepcion Emergency
the courts are not precluded from applying to the circumstances of the case the laws pertinent Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac."
thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause of her loss The checks are released by the Office of the Provincial Treasurer and received for the hospital by its
does not preclude her from recovering damages. The reason why the decision dealt on a discussion administrative officer and cashier.
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
In January 1981, the books of account of the Provincial Treasurer were post-audited by the
defendant is not a defense.
Provincial Auditor. It was then discovered that the hospital did not receive several allotment checks
drawn by the Province.
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
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its
that she partly benefited from the issuance of the questioned checks since the obligation for which
cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their
she issued them were apparently extinguished, such that only the excess amount over and above
encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks
the total of these actual obligations must be considered as loss of which one half must be paid by
amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank
respondent drawee bank to herein petitioner.
acting as collecting bank.

SO ORDERED.
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
G.R. No. 107382/G.R. No. 107612             January 31, 1996
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.
ASSOCIATED BANK, petitioner,
vs.
After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL
followed the same procedure for the second check, in the amount of P5,000.00 and dated April 20,
BANK, respondents.
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
xxxxxxxxxxxxxxxxxxxxx bore the stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED
BANK."
G.R. No. 107612             January 31, 1996
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
PHILIPPINE NATIONAL BANK, petitioner, that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he
vs. admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED Pangilinan preferential treatment on this account. 8
BANK, respondents.

On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the
DECISION restoration of the various amounts debited from the current account of the Province. 9

ROMERO, J.: In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10

Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn,
drawee bank or the collecting bank? impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint
against Adena Canlas and Fausto Pangilinan. 11
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, After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as
et. al." (CA-G.R. No. CV No. 17962). 1 follows:

The facts of the case are as follows: WHEREFORE, in view of the foregoing, judgment is hereby rendered:

17
 1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant indorsements. The drawee bank allegedly has the primary duty to verify the genuineness of payee's
Philippine National Bank (PNB), ordering the latter to pay to the former, the sum of Two indorsement before paying the check. 17
Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon
from March 20, 1981 until fully paid;
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.
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
xxx       xxx       xxx
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;. 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)
3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause
indorsements which are forgeries. At the time of their indorsement, the checks were order
of action as against fourth-party defendant Adena Canlas and lack of jurisdiction over the
instruments.
person of fourth-party defendant Fausto Pangilinan as against the latter.

Checks having forged indorsements should be differentiated from forged checks or checks bearing
4. On the counterclaims on the complaint, third-party complaint and fourth-party
the forged signature of the drawer.
complaint, the same are hereby ordered dismissed for lack of merit.

Section 23 of the Negotiable Instruments Law (NIL) provides:

SO ORDERED. 12

Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a signature is forged or made
PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court affirmed the trial
without authority of the person whose signature it purports to be, it is wholly inoperative,
court's decision in toto on September 30, 1992.
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
Hence these consolidated petitions which seek a reversal of respondent appellate court's decision. the party against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
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 A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one
released the questioned checks to Fausto Pangilinan who was then already retired as the hospital's can gain title to the instrument through it. A person whose signature to an instrument was forged
cashier and administrative officer. PNB also maintains its innocence and alleges that as between was never a party and never consented to the contract which allegedly gave rise to such
two innocent persons, the one whose act was the cause of the loss, in this case the Province of instrument. 18 Section 23 does not avoid the instrument but only the forged signature. 19 Thus, a
Tarlac, bears the loss. forged indorsement does not operate as the payee's indorsement.

Next, PNB asserts that it was error for the court to order it to pay the province and then seek The exception to the general rule in Section 23 is where "a party against whom it is sought to
reimbursement from Associated Bank. According to petitioner bank, respondent appellate Court enforce a right is precluded from setting up the forgery or want of authority." Parties who warrant or
should have directed Associated Bank to pay the adjudged liability directly to the Province of Tarlac admit the genuineness of the signature in question and those who, by their acts, silence or
to avoid circuity. 14 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
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.
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
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules
can raise the defense of forgery against a holder in due course. 21
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. 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.
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 Where the instrument is payable to order at the time of the forgery, such as the checks in this case,
guarantee (for all prior indorsements), it merely followed a mandatory requirement for clearing and the signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same
had no choice but to place the stamp of guarantee; otherwise, there would be no clearing. The bank instrument. When the holder's indorsement is forged, all parties prior to the forgery may raise the
will be in a "no-win" situation and will always bear the loss as against the drawee bank. 16 real defense of forgery against all parties subsequent thereto. 22

Associated Bank also claims that since PNB already cleared and paid the value of the forged checks An indorser of an order instrument warrants "that the instrument is genuine and in all respects what
in question, it is now estopped from asserting the defense that Associated Bank guaranteed prior it purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that

18
the instrument is at the time of his indorsement valid and subsisting." 23 He cannot interpose the regard to fault on the part of the collecting/presenting bank. Even if the latter bank was not negligent,
defense that signatures prior to him are forged. it would still be liable to the drawee bank because of its indorsement.

A collecting bank where a check is deposited and which indorses the check upon presentment with The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss
the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the because it has the duty to ascertain the genuineness of all prior endorsements considering that the
banks's client is forged, the collecting bank is bound by his warranties as an indorser and cannot set act of presenting the check for payment to the drawee is an assertion that the party making the
up the defense of forgery as against the drawee bank. presentment has done its duty to ascertain the genuineness of the endorsements." 31

The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the The drawee bank is not similarly situated as the collecting bank because the former makes no
check to the order of the payee. The drawer's instructions are reflected on the face and by the terms warranty as to the genuineness. of any indorsement. 32 The drawee bank's duty is but to verify the
of the check. Payment under a forged indorsement is not to the drawer's order. When the drawee genuineness of the drawer's signature and not of the indorsement because the drawer is its client.
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
Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the
the drawee bank did not pay a holder or other person entitled to receive payment, it has no right to
check. The bank knows him, his address and history because he is a client. It has taken a risk on his
reimbursement from the drawer. 24 The general rule then is that the drawee bank may not debit the
deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the
drawer's account and is not entitled to indemnification from the drawer. 25 The risk of loss must
indorsement.
perforce fall on the drawee bank.

Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement
However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care
from the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of
that substantially contributed to the making of the forged signature, the drawer is precluded from
the forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery,
asserting 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
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
Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account
negligent bank. 26
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
In cases involving a forged check, where the drawer's signature is forged, the drawer can recover the drawee bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of
from the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to Tarlac were negligent, the loss should be properly apportioned between them.
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
The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank
customer. 27
which presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto
Pangilinan, liable.
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
If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of
drawer but may generally pass liability back through the collection chain to the party who took from
the opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to
the forger and, of course, to the forger himself, if available. 28 In other words, the drawee bank
bear the loss.
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 After careful examination of the records, the Court finds that the Province of Tarlac was equally
himself. negligent and should, therefore, share the burden of loss from the checks bearing a forged
indorsement.
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. The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having
If the forgery is that of the payee's or holder's indorsement, the collecting bank is held liable, without already retired from government service, was no longer connected with the hospital. With the
prejudice to the latter proceeding against the forger. 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
Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee
released to Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that there were
bank. The former must necessarily return the money paid by the latter because it was paid
now two persons collecting the checks for the hospital is an unmistakable sign of an irregularity
wrongfully. 30
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
More importantly, by reason of the statutory warranty of a general indorser in section 66 of the consequent dissociation from the hospital. Jose Meru, the Provincial Treasurer, testified:.
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
ATTY. MORGA:
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

19
 Q Now, is it true that for a given month there were two releases of checks, one went to Mr. It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section
Pangilinan and one went to Miss Juco? 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
JOSE MERU:
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
A Yes, sir. 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
Q Will you please tell us how at the time (sic) when the authorized representative of paid on the checks.
Concepcion Emergency Hospital is and was supposed to be Miss Juco?

The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580
A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan is an administrative regulation issued pursuant to law and as such, must prevail over the PCHC rule.
represented himself as also authorized to help in the release of these checks and we were The Central Bank circular was in force for all banks until June 1980 when the Philippine Clearing
apparently misled because they accepted the representation of Pangilinan that he was House Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were
helping them in the release of the checks and besides according to them they were, covered by the PCHC while banks located elsewhere still had to go through Central Bank Clearing.
Pangilinan, like the rest, was able to present an official receipt to acknowledge these In any event, the twenty-four-hour return rule was adopted by the PCHC until it was changed in
receipts and according to them since this is a government check and believed that it will 1982. The contending banks herein, which are both branches in Tarlac province, are therefore not
eventually go to the hospital following the standard procedure of negotiating government covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB circular was applicable
checks, they released the checks to Pangilinan aside from Miss Juco.34 when the forgery of the checks was discovered in 1981.

The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the The rule mandates that the checks be returned within twenty-four hours after discovery of the
loss tantamount to negligence. Hence, the Province of Tarlac should be liable for part of the total forgery but in no event beyond the period fixed by law for filing a legal action. The rationale of the
amount paid on the questioned checks. 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
The drawee bank PNB also breached its duty to pay only according to the terms of the check. opportunity to go after its depositor.
Hence, it cannot escape liability and should also bear part of the loss.
The Court finds that even if PNB did not return the questioned checks to Associated Bank within
As earlier stated, PNB can recover from the collecting bank. 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
In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were necessarily had to inspect the checks and conduct its own investigation. Thereafter, it requested the
deposited in the forger's account with the collecting bank and were later paid by four different Provincial Treasurer's office on March 31, 1981 to return the checks for verification. The Province of
drawee banks. The Court found the collecting bank (Associated) to be negligent and held: Tarlac returned the checks only on April 22, 1981. Two days later, Associated Bank received the
checks from PNB. 36
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 Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March
Bank was by reason of the nature of the checks put upon notice that they were issued for 20, 1981, thus giving it notice of the forgeries. At this time, however, Pangilinan's account with
deposit only to the private respondent's account. . . . 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
The situation in the case at bench is analogous to the above case, for it was not the payee who Bank filed a fourth-party complaint against Fausto Pangilinan, it did not present evidence against
deposited the checks with the collecting bank. Here, the checks were all payable to Concepcion Pangilinan and even presented him as its rebuttal witness. 38 Hence, Associated Bank was not
Emergency Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings prejudiced by PNB's failure to comply with the twenty-four-hour return rule.
account.
Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the
Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of latter paid and cleared the checks. The Court finds this contention unmeritorious. Even if PNB
endorsements guaranteed) is merely a requirement forced upon it by clearing house rules, it cannot cleared and paid the checks, it can still recover from Associated Bank. This is true even if the
but remain liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank payee's Chief Officer who was supposed to have indorsed the checks is also a customer of the
must fulfill for the sake of convenience. A bank is not required to accept all the checks negotiated to drawee bank. 39 PNB's duty was to verify the genuineness of the drawer's signature and not the
it. It is within the bank's discretion to receive a check for no banking institution would consciously or genuineness of payee's indorsement. Associated Bank, as the collecting bank, is the entity with the
deliberately accept a check bearing a forged indorsement. When a check is deposited with the duty to verify the genuineness of the payee's indorsement.
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. 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
A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the PNB. The Court finds nothing wrong with the mode of the award. The drawer, Province of Tarlac, is
opportunity to go after the forger, signifies negligence on the part of the drawee bank (PNB) and will a clientor customer of the PNB, not of Associated Bank. There is no privity of contract between the
preclude it from claiming reimbursement. drawer and the collecting bank.

20
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
G.R. No. 121413        January 29, 2001
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 PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND
March 20, 1981, the date of extrajudicial demand. AMERICA), petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.
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 G.R. No. 121479        January 29, 2001
PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent
(50%) of P203,300.00 from PNB.
FORD PHILIPPINES, INC., petitioner-plaintiff,
vs.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL
It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, BANK, respondents.
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. G.R. No. 128604        January 29, 2001
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 FORD PHILIPPINES, INC., petitioner,
interest from March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent vs.
(50%) of P203,300.00 to the Philippine National Bank, likewise, with legal interest from March 20, CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF
1981 until payment is made. APPEALS, respondents.

SO ORDERED. 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 Decision 1 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 Decision 3 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

21
P12,163,298.10 as damages for the misapplied proceeds of the plaintiff's Citibanl Check Numbers reimbursement of the face value of the same. Both defendants denied liability and refused
SN-10597 and 16508. to pay.

I. G.R. Nos. 121413 and 121479 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
The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:
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.
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 Upon advice of the plaintiff's lawyers, plaintiff on March 11, 1982, paid to the Bureau of
in the amount of P4,746,114.41, in favor of the Commissioner of Internal Revenue as Internal Revenue, the amount of P4,746,114.41, representing payment of plaintiff's
payment of plaintiff;s percentage or manufacturer's sales taxes for the third quarter of percentage tax for the third quarter of 1977.
1977.
As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made
The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was for the second time to the BIR of its percentage taxes, plaintiff filed on January 20, 1983
subsequently cleared at the Central Bank. Upon presentment with the defendant Citibank, its original complaint before this Court.
the proceeds of the check was paid to IBAA as collecting or depository bank.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial
The proceeds of the same Citibank check of the plaintiff was never paid to or received by International Bank (PCI Bank) with the latter as the surviving entity.
the payee thereof, the Commissioner of Internal Revenue.
Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal SN-04867 in the amount of P4,746,114.41 "was in due course"; it merely relied on the
Revenue, the plaintiff was compelled to make a second payment to the Bureau of Internal clearing stamp of the depository/collecting bank, the defendant IBAA that "all prior
Revenue of its percentage/manufacturers' sales taxes for the third quarter of 1977 and indorsements and/or lack of indorsements guaranteed"; and the proximate cause of
that said second payment of plaintiff in the amount of P4,746,114.41 was duly received by plaintiff's injury is the gross negligence of defendant IBAA in indorsing the plaintiff's
the Bureau of Internal Revenue. Citibank check in question.

It is further admitted by defendant Citibank that during the time of the transactions in It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check
question, plaintiff had been maintaining a checking account with defendant Citibank; that No. SN-048867 was paid to defendant IBAA as collecting bank, plaintiff was maintaining a
Citibank Check No. SN-04867 which was drawn and issued by the plaintiff in favor of the checking account with defendant Citibank."5
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";
Although it was not among the stipulated facts, an investigation by the National Bureau of
and that defendant Citibank paid the full face value of the check in the amount of
Investigation (NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera,
P4,746,114.41 to the defendant IBAA.
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
It has been duly established that for the payment of plaintiff's percentage tax for the last Rivera's instruction, PCIBank replaced the check with two of its own Manager's Checks (MCs).
quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax Receipt No. Alleged members of a syndicate later deposited the two MCs with the Pacific Banking Corporation.
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
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific
plaintiff.
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
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the third-party complaint against Godofredo Rivera because he could not be served with summons as
Revenue Tax Receipt No. 18747002, was deposited with defendant IBAA, through its the NBI declared him as a "fugitive from justice".
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
On June 15, 1989, the trial court rendered its decision, as follows:
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 "Premises considered, judgment is hereby rendered as follows:
P4,746,114.41 was debited in plaintiff's account with the defendant Citibank and the check
was returned to the plaintiff.
"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
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting
of P4,746,114.41 was not paid to the Commissioner of Internal Revenue. Hence, in January 20, 1983, the date when the original complaint was filed until the amount is
separate letters dated October 26, 1979, addressed to the defendants, the plaintiff notified fully paid, plus costs;
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

22
 "2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI II. Did the respondent court err when it did not find prescription in favor of the petitioner. 8
Bank) to reimburse defendant Citibank for whatever amount the latter has paid or may
pay to the plaintiff in accordance with next preceding paragraph;
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
"3. The counterclaims asserted by the defendants against the plaintiff, as well as that decision of the trial court which found both PCIBank and Citibank jointly and severally liable for the
asserted by the cross-defendant against the cross-claimant are dismissed, for lack of loss.
merits; and
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
"4. With costs against the defendants.
I. Respondent Citibank is liable to petitioner Ford considering that:
SO ORDERED."6
1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the
Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their subject check and a depositor of respondent Citibank, an absolute and contractual
respective petitions for review on certiorari to the Courts of Appeals. On March 27, 1995, the duty to pay the proceeds of the subject check only to the payee thereof, the
appellate court issued its judgment as follows: Commissioner of Internal Revenue.

"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with 2. Respondent Citibank failed to observe its duty as banker with respect to the subject
modifications. check, which was crossed and payable to "Payee's Account Only."

The court hereby renderes judgment: 3. Respondent Citibank raises an issue for the first time on appeal; thus the same
should not be considered by the Honorable Court.
1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank
N.A. is concerned; 4. As correctly held by the trial court, there is no evidence of gross negligence on the
part of petitioner Ford.9
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, II. PCI Bank is liable to petitioner Ford considering that:
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;
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
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as the Bureau of Internal Revenue; thus, PCIBank's only obligation is to deliver the
well as that asserted by the cross-defendant against the cross-claimant, for lack of proceeds to the Commissioner of the Bureau of Internal Revenue. 10
merits.
2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement
Costs against the defendant IBAA (now PCI Bank). and/or lack of indorsement guaranteed"), is liable as collecting bank. 11

IT IS SO ORDERED."7 3. PCIBank is barred from raising issues of fact in the instant proceedings. 12

PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a 4. Petitioner Ford's cause of action had not prescribed. 13
"Motion for Partial Reconsideration." Both motions were denied for lack of merit.
II. G.R. No. 128604
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule
45.
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.
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
The facts as narrated by the Court of Appeals are as follows:
casue of action had already prescribed.

Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37
PCIBank sets forth the following issues for consideration:
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.
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
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of
petitioner liable to the said respondent for the full amount of the said check.
P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and payable
23
to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was said funds were distributed among them are traceable from the record of checks drawn
issued for the said purpose. 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
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." 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:
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. "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
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and
P300,000.00 attorney's fees and expenses litigation, and to pay the defendant, PCIB (on
spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced
its counterclaim to crossclaim) the sum of P300,000.00 as attorney's fees and costs of
Ford to pay the BIR a new, while an action was filed against Citibank and PCIBank for the recovery
litigation, and pay the costs.
of the amount of Citibank Check Numbers SN-10597 and 16508.

SO ORDERED."15
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus
operandi of the syndicate, as follows:
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the
trial court. Hence, this petition.
"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 Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals
the payee, he passed on the check to a co-conspirator named Remberto Castro who was decision and its resolution dated March 5, 1997, with respect to the dismissal of the complaint
a pro-manager of the San Andres Branch of PCIB.* In connivance with one Winston against PCIBank and holding Citibank solely responsible for the proceeds of Citibank Check
Dulay, Castro himself subsequently opened a Checking Account in the name of a fictitious Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
person denominated as 'Reynaldo reyes' in the Meralco Branch of PCIBank where Dulay
works as Assistant Manager.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank
considering that:
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",
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence
P5,851,706.37) while this worthless check was coursed through PCIB's main office
required to be exercised by it as a banking insitution.
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 II. Defendant PCIBank clearly failed to observe the diligence required in the selection and
fictitious deposit account of 'Reynaldo Reyes' was credited at the PCIB Meralco Branch supervision of its officers and employees.
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
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage
subsequently pilfered by Alexis Marindo, Rivera's Assistant at FORD.
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.
From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres
of the other participating conspirators namely (1) CRISANTO BERNABE, the mastermind
IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due
who formulated the method for the embezzlement; (2) RODOLFO R. DE LEON a customs
course the subject checks, it is liable, under Article 2154 of the Civil Code, to return the
broker who negotiated the initial contact between Bernabe, FORD's Godofredo Rivera and
money which it admits having received, and which was credited to it its Central bank
PCIB's Remberto Castro; (3) JUAN VASTILLO who assisted de Leon in the initial
account.16
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 The main issue presented for our consideration by these petitions could be simplified as follows:
fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6) WINSTON DULAY, Has petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank
PCIB's Assistant Manager at its Meralco Branch, who assisted Castro in switching the (Citibank) the value of the checks intended as payment to the Commissioner of Internal Revenue?
checks in the clearing process and facilitated the opening of the fictitious Reynaldo Reyes' Or has Ford's cause of action already prescribed?
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 Note that in these cases, the checks were drawn against the drawee bank, but the title of the person
FORD's tax payments. 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
Several other persons and entities were utilized by the syndicate as conduits in the percentage taxes of Ford, the checks were diverted and encashed for the eventual distribution
disbursements of the proceeds of the two checks, but like the aforementioned participants among the mmbers of the syndicate. As to the unlawful negotiation of the check the applicable law is
in the conspiracy, have not been impleaded in the present case. The manner by which the Section 55 of the Negotiable Instruments Law (NIL), which provides:

24
 "When title defective -- The title of a person who negotiates an instrument is defective person, asuming, of course that the contributory negligence was the proximate cause of the injury
within the meaning of this Act when he obtained the instrument, or any signature thereto, of which complaint is made.19
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
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General
fraud."
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,
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in breach unbroken by any efficient, intervening cause produces the injury and without the result would not
of faith amounting to fraud. The person negotiating the checks must have gone beyond the authority have occurred.20
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
It appears that although the employees of Ford initiated the transactions attributable to an organized
who. Though their own negligence, alowed the commission of the crime.
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
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to cause of the injury to the parties.
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
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall
present parties before us must bear the burden of loss of these millions. It all boils down to
Citibank Check No. SN-04867. Rivera's instruction to replace the said check with PCIBank's
thequestion of liability based on the degree of negligence among the parties concerned.
Manager's Check was not in theordinary course of business which could have prompted PCIBank to
validate the same.
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,
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these
Godofredo Rivera and Alexis Marindo, were among the members of the syndicate.
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.
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
Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's
bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in the
confidential employee or agent, who by virtue of his position had unusual facilities for perpertrating
supervision and control of its own employees, inasmuch as it only discovered the syndicate's
the fraud and imposing the forged paper upon the bank, does notentitle the bank toshift the loss to
activities through the information given by the payee of the checks after an unreasonable period of
the drawer-payor, in the absence of some circumstance raising estoppel against the drawer. 21 This
time.
rule likewise applies to the checks fraudulently negotiated or diverted by the confidential employees
who hold them in their possession.
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
With respect to the negligence of PCIBank in the payment of the three checks involved, separately,
run-around of unds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the
the trial courts found variations between the negotiation of Citibank Check No. SN-04867 and the
proximate cause of the damge to Ford lies in its own officers and employees who carried out the
misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize,
fradulent schemes and the transactions. These circumstances were not checked by other officers of
separately, PCIBank's share of negligence when the syndicate achieved its ultimate agenda of
the company including its comptroller or internal auditor. PCIBank contends that the inaction of Ford
stealing the proceeds of these checks.
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. G.R. Nos. 121413 and 121479

For its part, Ford denies any negligence in the performance of its duties. It avers that there was no Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed
evidence presented before the trial court showing lack of diligence on the part of Ford. And, citing through the ordinary banking transaction, sent to Central Clearing with the indorsement at the back
the case of Gempesaw vs. Court of Appeals,17 Ford argues that even if there was a finding therein "all prior indorsements and/or lack of indorsements guaranteed," and was presented to Citibank for
that the drawer was negligent, the drawee bank was still ordered to pay damages. 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.
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 On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect
imputed negligence against Ford for the first time on appeal. Thus, it should not be considered by of PCIBank employees to verify whether his letter requesting for the replacement of the Citibank
this Court. Check No. SN-04867 was duly authorized, showed lack of care and prudence required in the
circumstances.
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 Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in
to the master the act of the servant, and if that act is negligent or wrongful and proximately results in behalf of the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal regarding the
injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct of unwarranted instructions given by the payor or its agent. As aptly stated by the trial court, to wit:
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

25
 "xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which Lastly, banking business requires that the one who first cashes and negotiates the check must take
claimed to be a depository/collecting bank of BIR, it has the responsibility to make sure that some percautions to learn whether or not it is genuine. And if the one cashing the check through
the check in question is deposited in Payee's account only. 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
xxx      xxx      xxx
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,
As agent of the BIR (the payee of the check), defendant IBAA should receive instructions cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards
only from its principal BIR and not from any other person especially so when that person is diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the
not known to the defendant. It is very imprudent on the part of the defendant IBAA to just cashing bank (or the collecting bank) had, by the usual proper investigation, satisfied itself of the
rely on the alleged telephone call of the one Godofredo Rivera and in his signature authenticity of the negotiation of the checks. Thus, one who encashed a check which had been
considering that the plaintiff is not a client of the defendant IBAA." 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
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 Having established that the collecting bank's negligence is the proximate cause of the loss, we
holder.23 conclude that PCIBank is liable in the amount corresponding to the proceeds of Citibank Check No.
SN-04867.
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 G.R. No. 128604
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
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course
proceeds of such check.
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.
Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned The trial court held, thus:
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
"Neither is there any proof that defendant PCIBank contributed any official or conscious
therefore Citibank had no other option but to pay it. Thus, Citibank had no other option but to pay it.
participation in the process of the embezzlement. This Court is convinced that the
Thus, Citibank assets that the proximate cause of Ford's injury is the gross negligence of PCIBank.
switching operation (involving the checks while in transit for "clearing") were the
Since the questione dcrossed check was deposited with PCIBank, which claimed to be a
clandestine or hidden actuations performed by the members of the syndicate in their own
depository/collecting bank of the BIR, it had the responsibility to make sure that the check in
personl, covert and private capacity and done without the knowledge of the defendant
questions is deposited in Payee's account only.
PCIBank…"27

Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the
In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in
check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank
the embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or
PCIBank to ascertain that the check be deposited in payee's account only. Therefore, it is the
tortuous acts and declarations of its officers or agents within the course and scope of their
collecting bank (PCIBank) which is bound to scruninize the check and to know its depositors before
employment.28 A bank will be held liable for the negligence of its officers or agents when acting
it could make the clearing indorsement "all prior indorsements and/or lack of indorsement
within the course and scope of their employment. It may be liable for the tortuous acts of its officers
guaranteed".
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
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,24 we ruled: which its own management employees had particiapted.

"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check
the PCHC's Board of Directors that: 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
'In presenting the checks for clearing and for payment, the defendant made an express amount of Ford checks. The syndicate tampered with the checks and succeeded in replacing the
guarantee on the validity of "all prior endorsements." Thus, stamped at the back of the worthless checks and the eventual encashment of Citibank Check Nos. SN 10597 and 16508. The
checks are the defedant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager apparently performed
OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have their activities using facilities in their official capacity or authority but for their personal and private
paid on the checks.' gain or benefit.

No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by
warranty has proven to be false and inaccurate, the defendant is liable for any damage the frauds these officers or agents were enabled to perpetrate in the apparent course of their
arising out of the falsity of its representation."25 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

26
employment or authority.29 And if an officer or employee of a bank, in his official capacity, receives Banks handle daily transactions involving millions of pesos. 36 By the very nature of their work the
money to satisfy an evidence of indebetedness lodged with his bank for collection, the bank is liable degree of responsibility, care and trustworthiness expected of their employees and officials is far
for his misappropriation of such sum.30 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
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 On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its
bank, which in this case is PCIBank. 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.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.
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
The evidence on record shows that Citibank as drawee bank was likewise negligent in the
his account,39 and an action upon a check is ordinarily governed by the statutory period applicable to
performance of its duties. Citibank failed to establish that its payment of Ford's checjs were made in
instruments in writing.40
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 Our laws on the matter provide that the action upon a written contract must be brought within ten
endorsement of the Payee or lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has year from the time the right of action accrues.41 hence, the reckoning time for the prescriptive period
the obligation to honor and pay the same. 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
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and
December 19, 1977, when Citibank paid the face value of the check in the amount of
contractual duty to pay the proceeds of the subject check only to the payee thereof, the CIR. Citing
P4,746,114.41. Since the original complaint for the cause of action was filed on January 20, 1984,
Section 6232 of the Negotiable Instruments Law, Ford argues that by accepting the instrument, the
barely six years had lapsed. Thus, we conclude that Ford's cause of action to recover the amount of
acceptro which is Citibank engages that it will pay according to the tenor of its acceptance, and that
Citibank Check No. SN 04867 was seasonably filed within the period provided by law.
it will pay only to the payee, (the CIR), considering the fact that here the check was crossed with
annotation "Payees Account Only."
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
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford
to give notice within a reasonable time (or as required by statute) of any discrepancy which it may in
on Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship existing
the exercise of due care and diligence find therein, serves to mitigate the banks' liability by reducing
between the two. Citibank, as the drawee bank breached its contractual obligation with Ford and
the award of interest from twelve percent (12%) to six percent (6%) per annum. As provided in
such degree of culpability contributed to the damage caused to the latter. On this score, we agree
Article 1172 of the Civil Code of the Philippines, respondibility arising from negligence in the
with the respondent court's ruling.
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
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the plaintiff shall reduce the damages that he may recover.42
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
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No.
initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been duly
25017 are AFFIRMED. PCIBank, know formerly as Insular Bank of Asia and America, id declared
examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508 would
solely responsible for the loss of the proceeds of Citibank Check No SN 04867 in the amount
have been discovered in time. For this reason, Citibank had indeed failed to perform what was
P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to Ford
incumbent upon it, which is to ensure that the amount of the checks should be paid only to its
Philippines Inc. from the date when the original complaint was filed until said amount is fully paid.
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 However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430
obligation to treat the accounts of its depositors with meticulous care, always having in mind the are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and must share the loss,
fiduciary nature of their relationship. 33 (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
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and
payment of said amount.1âwphi1.nêt
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 Costs against Philippine Commercial International Bank and Citibank N.A.
checks issued by Ford in favor of the CIR.
SO ORDERED.
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

27
 The Facts

The facts of the case are narrated by the CA as follows:

"On November 8, 1982, plaintiff CASA Montessori International 5 opened Current Account
No. 0291-0081-01 with defendant BPI[,] with CASA’s 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
₱782,000.00, on the following dates and amounts:

‘Check
G.R. No. 149454             May 28, 2004 Date Amount
No.

BANK OF THE PHILIPPINE ISLANDS, petitioner, 1. 839700 April 24, 1990 ₱ 43,400.00

vs.
2. 839459 Nov. 2, 1990 110,500.00
CASA MONTESSORI INTERNATIONALE LEONARDO T. YABUT, respondents.
3. 839609 Oct. 17, 1990 47,723.00
x ----------------------------- x
4. 839549 April 7, 1990 90,700.00

G.R. No. 149507             May 28, 2004 Sept. 23,

5. 839569 52,277.00
1990
CASA MONTESSORI INTERNATIONALE, petitioner, 6. 729149 Mar. 22, 1990 148,000.00
vs.
BANK OF THE PHILIPPINE ISLANDS, respondent. 7. 729129 Mar. 16, 1990 51,015.00

8. 839684 Dec. 1, 1990 140,000.00

DECISION
9. 729034 Mar. 2, 1990 98,985.00
PANGANIBAN, J.:

Total -- ₱ 782,600.006
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.
"It turned out that ‘Sonny D. Santos’ with account at BPI’s Greenbelt Branch [was] a
Among its obligations in furtherance thereof is knowing the signatures of its clients. Depositors are fictitious name used by third party defendant Leonardo T. Yabut who worked as external
not estopped from questioning wrongful withdrawals, even if they have failed to question those auditor of CASA. Third party defendant voluntarily admitted that he forged the signature of
errors in the statements sent by the bank to them for verification. 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.
The Case

"On March 4, 1991, plaintiff filed the herein Complaint for Collection with Damages against
Before us are two Petitions for Review1 under Rule 45 of the Rules of Court, assailing the March 23, defendant bank praying that the latter be ordered to reinstate the amount of
2001 Decision2 and the August 17, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. ₱782,500.007 in the current and savings accounts of the plaintiff with interest at 6% per
63561. The decretal portion of the assailed Decision reads as follows: annum.

"WHEREFORE, upon the premises, the decision appealed from is AFFIRMED with the "On February 16, 1999, the RTC rendered the appealed decision in favor of the plaintiff." 8
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 ₱547,115.00 after deductions
subject to REIMBURSEMENT from third party defendant Yabut who is Ruling of the Court of Appeals
likewise ORDERED to pay the other half to plaintiff corporation [Casa Montessori
Internationale (CASA)]."4 Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the loss between BPI
and CASA. The appellate court took into account CASA’s contributory negligence that resulted in
The assailed Resolution denied all the parties’ Motions for Reconsideration. the undetected forgery. It then ordered Leonardo T. Yabut to reimburse BPI half the total amount

28
claimed; and CASA, the other half. It also disallowed attorney’s fees and moral and exemplary Under this provision, a forged signature is a real13 or absolute defense,14 and a person whose
damages. signature on a negotiable instrument is forged is deemed to have never become a party thereto and
to have never consented to the contract that allegedly gave rise to it.15
Hence, these Petitions.9
The counterfeiting of any writing, consisting in the signing of another’s name with intent to defraud,
is forgery.16
Issues

In the present case, we hold that there was forgery of the drawer’s signature on the check.
In GR No. 149454, Petitioner BPI submits the following issues for our consideration:

First, both the CA17 and the RTC18 found that Respondent Yabut himself had voluntarily admitted,
"I. The Honorable Court of Appeals erred in deciding this case NOT in accord with the
through an Affidavit, that he had forged the drawer’s signature and encashed the checks. 19 He never
applicable decisions of this Honorable Court to the effect that forgery cannot be
refuted these findings.20 That he had been coerced into admission was not corroborated by any
presumed; that it must be proved by clear, positive and convincing evidence; and that the
evidence on record.21
burden of proof lies on the party alleging the forgery.

Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory, after its
"II. The Honorable Court of Appeals erred in deciding this case not in accord with
examination of the said checks,22 had concluded that the handwritings thereon -- compared to the
applicable laws, in particular the Negotiable Instruments Law (NIL) which precludes
standard signature of the drawer -- were not hers.23 This conclusion was the same as that in the
CASA, on account of its own negligence, from asserting its forgery claim against BPI,
Report24 that the PNP Crime Laboratory had earlier issued to BPI -- the drawee bank -- upon the
specially taking into account the absence of any negligence on the part of BPI."10
latter’s request.

In GR No. 149507, Petitioner CASA submits the following issues:

Indeed, we respect and affirm the RTC’s factual findings, especially when affirmed by the CA, since
these are supported by substantial evidence on record.25
"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
Voluntary Admission Not Violative of Constitutional Rights
attorney’s 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].
The voluntary admission of Yabut did not violate his constitutional rights (1) on custodial
investigation, and (2) against self-incrimination.
"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
₱547,115.00 be ‘apportioned between [CASA] and [BPI] x x x.’"11 In the first place, he was not under custodial investigation. 26 His Affidavit was executed in private
and before private individuals.27 The mantle of protection under Section 12 of Article III of the 1987
Constitution28 covers only the period "from the time a person is taken into custody for investigation of
These issues can be narrowed down to three. First, was there forgery under the Negotiable
his possible participation in the commission of a crime or from the time he is singled out as a
Instruments Law (NIL)? Second, were any of the parties negligent and therefore precluded from
suspect in the commission of a crime although not yet in custody."29
setting up forgery as a defense? Third, should moral and exemplary damages, attorney’s fees, and
interest be awarded?
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
The Court’s Ruling
of eliciting admissions, confessions, or any information."30 The said constitutional provision does "not
apply to spontaneous statements made in a voluntary manner"31 whereby an individual orally admits
The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is partly meritorious. to authorship of a crime.32 "What the Constitution proscribes is the compulsory or coercive
disclosure of incriminating facts." 33
First Issue:
Moreover, the right against self-incrimination 34 under Section 17 of Article III35 of the Constitution,
which is ordinarily available only in criminal prosecutions, extends to all other government
Forged Signature Wholly Inoperative proceedings -- including civil actions, legislative investigations, 36 and administrative proceedings that
possess a criminal or penal aspect 37 -- but not to private investigations done by private individuals.
Section 23 of the NIL provides: Even in such government proceedings, this right may be waived,38 provided the waiver is certain;
unequivocal; and intelligently, understandingly and willingly made. 39
"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 If in these government proceedings waiver is allowed, all the more is it so in private investigations. It
right x x x to enforce payment thereof against any party thereto, can be acquired through is of no moment that no criminal case has yet been filed against Yabut. The filing thereof is entirely
or under such signature, unless the party against whom it is sought to enforce such right up to the appropriate authorities or to the private individuals upon whom damage has been caused.
is precluded from setting up the forgery or want of authority." 12 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.

29
Under these two constitutional provisions, "[t]he Bill of Rights 40 does not concern itself with the a mere reproduction of the document under controversy cannot produce reliable results. 67 We have
relation between a private individual and another individual. It governs the relationship between the also said, however, that a judge cannot merely rely on a handwriting expert’s testimony, 68 but should
individual and the State."41 Moreover, the Bill of Rights "is a charter of liberties for the individual and also exercise independent judgment in evaluating the authenticity of a signature under scrutiny. 69 In
a limitation upon the power of the [S]tate."42 These rights43 are guaranteed to preclude the slightest the present case, both the RTC and the CA conducted independent examinations of the evidence
coercion by the State that may lead the accused "to admit something false, not prevent him from presented and arrived at reasonable and similar conclusions. Not only did they admit secondary
freely and voluntarily telling the truth." 44 evidence; they also appositely considered testimonial and other documentary evidence in the form
of the Affidavit.
Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights "does not
automatically entitle him to the constitutional protection."45 When he freely and voluntarily The best evidence rule admits of exceptions and, as we have discussed earlier, the first of these has
executed46 his Affidavit, the State was not even involved. Such Affidavit may therefore be admitted been met.70 The result of examining a questioned handwriting, even with the aid of experts and
without violating his constitutional rights while under custodial investigation and against self- scientific instruments, may be inconclusive;71 but it is a non sequitur to say that such result is not
incrimination. clear, positive and convincing. The preponderance of evidence required in this case has been
satisfied.72
Clear, Positive and Convincing Examination and Evidence
Second Issue:
The examination by the PNP, though inconclusive, was nevertheless clear, positive and convincing.
Negligence Attributable to BPI Alone
47
Forgery "cannot be presumed."  It must be established by clear, positive and convincing
evidence.48 Under the best evidence rule as applied to documentary evidence like the checks in Having established the forgery of the drawer’s signature, BPI -- the drawee -- erred in making
question, no secondary or substitutionary evidence may inceptively be introduced, as the original payments by virtue thereof. The forged signatures are wholly inoperative, and CASA -- the drawer
writing itself must be produced in court.49 But when, without bad faith on the part of the offeror, the whose authorized signatures do not appear on the negotiable instruments -- cannot be held liable
original checks have already been destroyed or cannot be produced in court, secondary evidence thereon. Neither is the latter precluded from setting up forgery as a real defense.
may be produced.50 Without bad faith on its part, CASA proved the loss or destruction of the original
checks through the Affidavit of the one person who knew of that fact51 -- Yabut. He clearly admitted
Clear Negligence in Allowing Payment Under a Forged Signature
to discarding the paid checks to cover up his misdeed. 52 In such a situation, secondary evidence like
microfilm copies may be introduced in court.
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 drawer’s signatures on the microfilm copies were compared with the standard signature. PNP
the highest degree of diligence73 is expected,74 and high standards of integrity and performance are
Document Examiner II Josefina de la Cruz testified on cross-examination that two different persons
even required, of it.75 By the nature of its functions, a bank is "under obligation to treat the accounts
had written them.53 Although no conclusive report could be issued in the absence of the original
of its depositors with meticulous care,76 always having in mind the fiduciary nature of their
checks,54 she affirmed that her findings were 90 percent conclusive.55 According to her, even if the
relationship."77
microfilm copies were the only basis of comparison, the differences were evident. 56 Besides, the
RTC explained that although the Report was inconclusive, no conclusive report could have been
given by the PNP, anyway, in the absence of the original checks.57 This explanation is valid; BPI contends that it has a signature verification procedure, in which checks are honored only when
otherwise, no such report can ever be relied upon in court. 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 required78 of a bank. It cannot now feign
Even with respect to documentary evidence, the best evidence rule applies only when the contents
ignorance, for very early on we have already ruled that a bank is "bound to know the signatures of
of a document -- such as the drawer’s signature on a check -- is the subject of inquiry. 58 As to
its customers; and if it pays a forged check, it must be considered as making the payment out of its
whether the document has been actually executed, this rule does not apply; and testimonial as well
own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose
as any other secondary evidence is admissible.59 Carina Lebron herself, the drawer’s authorized
name was forged."79 In fact, BPI was the same bank involved when we issued this ruling seventy
signatory, testified many times that she had never signed those checks. Her testimonial evidence is
years ago.
admissible; the checks have not been actually executed. The genuineness of her handwriting is
proved, not only through the court’s comparison of the questioned handwritings and admittedly
genuine specimens thereof,60 but above all by her. Neither Waiver nor Estoppel Results from Failure to Report Error in Bank Statement

The failure of CASA to produce the original checks neither gives rise to the presumption of The monthly statements issued by BPI to its clients contain a notice worded as follows: "If no error is
suppression of evidence61 nor creates an unfavorable inference against it.62 Such failure merely reported in ten (10) days, account will be correct."80 Such notice cannot be considered a waiver,
authorizes the introduction of secondary evidence63 in the form of microfilm copies. Of no even if CASA failed to report the error. Neither is it estopped from questioning the mistake after the
consequence is the fact that CASA did not present the signature card containing the signatures with lapse of the ten-day period.
which those on the checks were compared. 64 Specimens of standard signatures are not limited to
such a card. Considering that it was not produced in evidence, other documents that bear the
This notice is a simple confirmation81 or "circularization" -- in accounting parlance -- that requests
drawer’s authentic signature may be resorted to.65 Besides, that card was in the possession of BPI --
client-depositors to affirm the accuracy of items recorded by the banks. 82 Its purpose is to obtain
the adverse party.
from the depositors a direct corroboration of the correctness of their account balances with their
respective banks.83 Internal or external auditors of a bank use it as a basic audit procedure84 -- the
We have held that without the original document containing the allegedly forged signature, one results of which its client-depositors are neither interested in nor privy to -- to test the details of
cannot make a definitive comparison that would establish forgery; 66 and that a comparison based on transactions and balances in the bank’s records.85 Evidential matter obtained from independent

30
sources outside a bank only serves to provide greater assurance of reliability86 than that obtained differences in the signatures on the checks and those on the signature card. Third, despite the
solely within it for purposes of an audit of its own financial statements, not those of its client- examination procedures it conducted, the Central Verification Unit111 of the bank even passed off
depositors. 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 liable112 for the "negligence of its officers or agents when
Furthermore, there is always the audit risk that errors would not be detected87 for various
acting within the course and scope of their employment." 113 It must bear the loss.
reasons. One, materiality is a consideration in audit planning; 88 and two, the information obtained
from such a substantive test is merely presumptive and cannot be the basis of a valid waiver.89 BPI
has no right to impose a condition unilaterally and thereafter consider failure to meet such condition CASA Not Negligent in Its Financial Affairs
a waiver. Neither may CASA renounce a right 90 it has never possessed.91
In this jurisdiction, the negligence of the party invoking forgery is recognized as an exception 114 to
Every right has subjects -- active and passive. While the active subject is entitled to demand its the general rule that a forged signature is wholly inoperative. 115 Contrary to BPI’s claim, however, we
enforcement, the passive one is duty-bound to suffer such enforcement. 92 do not find CASA negligent in handling its financial affairs. CASA, we stress, is not precluded from
setting up forgery as a real defense.
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: Role of Independent Auditor
"Please examine x x x and report x x x."93 CASA, on the other hand, could not have been a passive
subject, either, because it had no obligation to respond. It could -- as it did -- choose not to respond.
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
Estoppel precludes individuals from denying or asserting, by their own deed or representation, appropriate financial reporting practices116 of private entities. The relationship that arises therefrom is
anything contrary to that established as the truth, in legal contemplation.94 Our rules on evidence both legal and moral.117 It begins with the execution of the engagement letter118 that embodies the
even make a juris et de jure presumption95 that whenever one has, by one’s own act or omission, terms and conditions of the audit and ends with the fulfilled expectation of the auditor’s ethical 119 and
intentionally and deliberately led another to believe a particular thing to be true and to act upon that competent performance in all aspects of the audit. 120
belief, one cannot -- in any litigation arising from such act or omission -- be permitted to falsify that
supposed truth.96
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
In the instant case, CASA never made any deed or representation that misled BPI. The former’s presentation, and the opinion121 expressed therein.122 The auditor does not assume the role of
omission, if any, may only be deemed an innocent mistake oblivious to the procedures and employee or of management in the client’s conduct of operations123 and is never under the control or
consequences of periodic audits. Since its conduct was due to such ignorance founded upon an supervision124 of the client.
innocent mistake, estoppel will not arise.97 A person who has no knowledge of or consent to a
transaction may not be estopped by it.98 "Estoppel cannot be sustained by mere argument or
Yabut was an independent auditor125 hired by CASA. He handled its monthly bank reconciliations
doubtful inference x x x."99 CASA is not barred from questioning BPI’s error even after the lapse of
and had access to all relevant documents and checkbooks.126 In him was reposed the client’s127 trust
the period given in the notice.
and confidence128 that he would perform precisely those functions and apply the appropriate
procedures in accordance with generally accepted auditing standards. 129 Yet he did not meet these
Loss Borne by Proximate Source of Negligence 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.
For allowing payment100 on the checks to a wrongful and fictitious payee, BPI -- the drawee bank --
becomes liable to its depositor-drawer. Since the encashing bank is one of its branches, 101 BPI can Cash Balances Open to Manipulation
easily go after it and hold it liable for reimbursement.102 It "may not debit the drawer’s account 103 and
is not entitled to indemnification from the drawer."104 In both law and equity, when one of two
It is a non sequitur to say that the person who receives the monthly bank statements, together with
innocent persons "must suffer by the wrongful act of a third person, the loss must be borne by the
the cancelled checks and other debit/credit memoranda, shall examine the contents and give notice
one whose negligence was the proximate cause of the loss or who put it into the power of the third
of any discrepancies within a reasonable time. Awareness is not equipollent with discernment.
person to perpetrate the wrong."105

Besides, in the internal accounting control system prudently installed by CASA, 130 it was Yabut who
Proximate cause is determined by the facts of the case.106 "It is that cause which, in natural and
should examine those documents in order to prepare the bank reconciliations. 131 He owned his
continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without
working papers,132 and his output consisted of his opinion as well as the client’s financial statements
which the result would not have occurred." 107
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
Pursuant to its prime duty to ascertain well the genuineness of the signatures of its client-depositors everything was in order. Besides, "[g]ood faith is always presumed and it is the burden of the party
on checks being encashed, BPI is "expected to use reasonable business prudence." 108 In the claiming otherwise to adduce clear and convincing evidence to the contrary." 133
performance of that obligation, it is bound by its internal banking rules and regulations that form part
of the contract it enters into with its depositors.109
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
Unfortunately, it failed in that regard. First, Yabut was able to open a bank account in one of its 1991134 -- when she was also informed of the forgery for the first time, after which she immediately
branches without privity;110 that is, without the proper verification of his corresponding identification requested a "stop payment order." She cannot be faulted for the late detection of the forged
papers. Second, BPI was unable to discover early on not only this irregularity, but also the marked December check. After all, the bank account with BPI was not personal but corporate, and she could

31
not be expected to monitor closely all its finances. A preschool teacher charged with molding the moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or
minds of the youth cannot be burdened with the intricacies or complexities of corporate existence. interest or ill will that partakes of the nature of fraud." 159

There is also a cutoff period such that checks issued during a given month, but not presented for As a general rule, a corporation -- being an artificial person without feelings, emotions and senses,
payment within that period, will not be reflected therein. 135 An experienced auditor with intent to and having existence only in legal contemplation -- is not entitled to moral damages, 160 because it
defraud can easily conceal any devious scheme from a client unwary of the accounting processes cannot experience physical suffering and mental anguish. 161 However, for breach of the fiduciary
involved by manipulating the cash balances on record -- especially when bank transactions are duty required of a bank, a corporate client may claim such damages when its good reputation is
numerous, large and frequent. CASA could only be blamed, if at all, for its unintelligent choice in the besmirched by such breach, and social humiliation results therefrom.162 CASA was unable to prove
selection and appointment of an auditor -- a fault that is not tantamount to negligence. that BPI had debased the good reputation of,163 and consequently caused incalculable
embarrassment to, the former. CASA’s mere allegation or supposition thereof, without any sufficient
evidence on record,164 is not enough.
Negligence is not presumed, but proven by whoever alleges it.136 Its mere existence "is not sufficient
without proof that it, and no other cause," 137 has given rise to damages.138 In addition, this fault is
common to, if not prevalent among, small and medium-sized business entities, thus leading the Exemplary Damages Also Denied
Professional Regulation Commission (PRC), through the Board of Accountancy (BOA), to require
today not only accreditation for the practice of public accountancy,139 but also the registration of firms
We also deny CASA’s claim for exemplary damages.
in the practice thereof. In fact, among the attachments now required upon registration are the code
of good governance140 and a sworn statement on adequate and effective training.141
Imposed by way of correction165 for the public good,166 exemplary damages cannot be recovered as
142 143 a matter of right.167 As we have said earlier, there is no bad faith on the part of BPI for paying the
The missing checks were certainly reported by the bookkeeper  to the accountant  -- her
checks of CASA upon forged signatures. Therefore, the former cannot be said to have acted in a
immediate supervisor -- and by the latter to the auditor. However, both the accountant and the
wanton, fraudulent, reckless, oppressive or malevolent manner.168 The latter, having no right to
auditor, for reasons known only to them, assured the bookkeeper that there were no irregularities.
moral damages, cannot demand exemplary damages. 169

The bookkeeper 144 who had exclusive custody of the checkbooks145 did not have to go directly to
Attorney’s Fees Granted
CASA’s 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 Although it is a sound policy not to set a premium on the right to litigate, 170 we find that CASA is
be concealed or fabricated -- even in collusion -- and management would still have no way to verify entitled to reasonable attorney’s fees based on "factual, legal, and equitable justification." 171
its cash accountabilities.
When the act or omission of the defendant has compelled the plaintiff to incur expenses to protect
Clearly then, Yabut was able to perpetrate the wrongful act through no fault of CASA. If auditors the latter’s interest,172 or where the court deems it just and equitable,173 attorney’s fees may be
may be held liable for breach of contract and negligence, 146 with all the more reason may they be recovered. In the present case, BPI persistently denied the claim of CASA under the NIL to recredit
charged with the perpetration of fraud upon an unsuspecting client. CASA had the discretion to the latter’s account for the value of the forged checks. This denial constrained CASA to incur
pursue BPI alone under the NIL, by reason of expediency or munificence or both. Money paid under expenses and exert effort for more than ten years in order to protect its corporate interest in its bank
a mistake may rightfully be recovered, 147 and under such terms as the injured party may choose. account. Besides, we have already cautioned BPI on a similar act of negligence it had committed
seventy years ago, but it has remained unrelenting. Therefore, the Court deems it just and equitable
to grant ten percent (10%)174 of the total value adjudged to CASA as attorney’s fees.
Third Issue:

Interest Allowed
Award of Monetary Claims

For the failure of BPI to pay CASA upon demand and for compelling the latter to resort to the courts
Moral Damages Denied
to obtain payment, legal interest may be adjudicated at the discretion of the Court, the same to run
from the filing175 of the Complaint.176 Since a court judgment is not a loan or a forbearance of
We deny CASA’s claim for moral damages. recovery, the legal interest shall be at six percent (6%) per annum.177 "If the obligation consists in the
payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being
no stipulation to the contrary, shall be the payment of x x x legal interest, which is six percent per
In the absence of a wrongful act or omission,148 or of fraud or bad faith,149 moral damages cannot be
annum."178 The actual base for its computation shall be "on the amount finally
awarded.150 The adverse result of an action does not per se make the action wrongful, or the party
adjudged,"179 compounded180 annually to make up for the cost of money 181 already lost to CASA.
liable for it. One may err, but error alone is not a ground for granting such damages. 151 While no
proof of pecuniary loss is necessary therefor -- with the amount to be awarded left to the court’s
discretion152 -- the claimant must nonetheless satisfactorily prove the existence of its factual Moreover, the failure of the CA to award interest does not prevent us from granting it upon damages
basis153 and causal relation154 to the claimant’s act or omission. 155 awarded for breach of contract.182 Because BPI evidently breached its contract of deposit with
CASA, we award interest in addition to the total amount adjudged. Under Section 196 of the NIL,
any case not provided for shall be "governed by the provisions of existing legislation or, in default
Regrettably, in this case CASA was unable to identify the particular instance -- enumerated in the
thereof, by the rules of the law merchant." 183 Damages are not provided for in the NIL. Thus, we
Civil Code -- upon which its claim for moral damages is predicated. 156 Neither bad faith nor
resort to the Code of Commerce and the Civil Code. Under Article 2 of the Code of Commerce, acts
negligence so gross that it amounts to malice157 can be imputed to BPI. Bad faith, under the law,
of commerce shall be governed by its provisions and, "in their absence, by the usages of commerce
"does not simply connote bad judgment or negligence; 158 it imports a dishonest purpose or some
generally observed in each place; and in the absence of both rules, by those of the civil law."184 This

32
law being silent, we look at Article 18 of the Civil Code, which states: "In matters which are governed approval. Syfu then noticed that Jose Sempio III ("Sempio"), the assistant accountant of Samsung
by the Code of Commerce and special laws, their deficiency shall be supplied" by its provisions. A Construction, was also in the bank. Sempio was well-known to Syfu and the other bank officers, he
perusal of these three statutes unmistakably shows that the award of interest under our civil law is being the assistant accountant of Samsung Construction. Syfu showed the check to Sempio, who
justified. 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
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in GR No.
Gonzaga.
149507 PARTLY GRANTED. The assailed Decision of the Court of Appeals is AFFIRMED with
modification: BPI is held liable for ₱547,115, 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 The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank
(6%) per annum -- compounded annually, from the filing of the complaint until paid in full; and account and discovered that a check in the amount of Nine Hundred Ninety Nine Thousand Five
attorney’s fees of ten percent (10%) thereof, subject to reimbursement from Respondent Yabut for Hundred Pesos (P999,500.00) had been encashed. Aware that he had not prepared such a check
the entire amount, excepting attorney’s fees. Let a copy of this Decision be furnished the Board of for Jong’s signature, Kyu perused the checkbook and found that the last blank check was
Accountancy of the Professional Regulation Commission for such action as it may deem appropriate missing.7 He reported the matter to Jong, who then proceeded to the bank. Jong learned of the
against Respondent Yabut. No costs. 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
SO ORDERED.
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
G.R. No. 129015             August 13, 2004 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
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner, the questioned check plus interest, and attorney’s fees.12 The case was docketed as Civil Case No.
vs. 92-61506 before the Regional Trial Court ("RTC") of Manila, Branch 9.13
FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, respondents.

During the trial, both sides presented their respective expert witnesses to testify on the claim that
TINGA, J.: 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
Called to fore in the present petition is a classic textbook question – if a bank pays out on a forged her examination, she concluded that Jong’s signature had been forged on the check. On the other
check, is it liable to reimburse the drawer from whose account the funds were paid out? The Court of hand, FEBTC, which had sought the assistance of the Philippine National Police (PNP), 14 presented
Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous reasoning to acquit Rosario C. Perez, a document examiner from the PNP Crime Laboratory. She testified that her
the bank of liability. We reverse, applying time-honored principles of law. findings showed that Jong’s signature on the check was genuine.15

The salient facts follow. 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
Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung Construction"), while based in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together
Biñan, Laguna, maintained a current account with defendant Far East Bank and Trust with interest tolled from the time the complaint was filed, and attorney’s fees in the amount of Fifteen
Company1 ("FEBTC") at the latter’s Bel-Air, Makati branch. 2 The sole signatory to Samsung Thousand Pesos (P15,000.00).
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
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
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to FEBTC from any liability. The Court of Appeals held that the contradictory findings of the NBI and
the bank’s branch in Bel-Air, Makati. The check, payable to cash and drawn against Samsung the PNP created doubt as to whether there was forgery.17 Moreover, the appellate court also held
Construction’s current account, was in the amount of Nine Hundred Ninety Nine Thousand Five that assuming there was forgery, it occurred due to the negligence of Samsung Construction,
Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of imputing blame on the accountant Kyu for lack of care and prudence in keeping the checks, which if
Samsung Construction’s account. After ascertaining there were enough funds to cover the observed would have prevented Sempio from gaining access thereto. 18 The Court of Appeals
check,5 she compared the signature appearing on the check with the specimen signature of Jong as invoked the ruling in PNB v. National City Bank of New York19 that, if a loss, which must be borne by
contained in the specimen signature card with the bank. After comparing the two signatures, Justiani one or two innocent persons, can be traced to the neglect or fault of either, such loss would be
was satisfied as to the authenticity of the signature appearing on the check. She then asked borne by the negligent party, even if innocent of intentional fraud.20
Gonzaga to submit proof of his identity, and the latter presented three (3) identification cards. 6

Samsung Construction now argues that the Court of Appeals had seriously misapprehended the
At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma facts when it overturned the RTC’s finding of forgery. It also contends that the appellate court erred
Velez, as it was bank policy that two bank branch officers approve checks exceeding One Hundred in finding that it had been negligent in safekeeping the check, and in applying the equity principle
Thousand Pesos, for payment or encashment. Velez likewise counterchecked the signature on the enunciated in PNB v. National City Bank of New York.
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

33
Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the This rule of liability can be stated briefly in these words: "A bank is bound to know its
Court is obliged to examine the record to draw out the correct conclusions. Upon examination of the depositors’ signature." The rule is variously expressed in the many decisions in which the
record, and based on the applicable laws and jurisprudence, we reverse the Court of Appeals. 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
Section 23 of the Negotiable Instruments Law states:
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
When a signature is forged or made without the authority of the person whose signature it
Instruments and Other Related Commercial Paper wrote, thus:
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 The deposit contract between a payor bank and its customer determines who can draw
to enforce such right is precluded from setting up the forgery or want of authority. against the customer’s account by specifying whose signature is necessary on checks
(Emphasis supplied) 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
The general rule is to the effect that a forged signature is "wholly inoperative," and payment made
account, inasmuch as any "unauthorized signature on an instrument is ineffective" as the
"through or under such signature" is ineffectual or does not discharge the instrument. 21 If payment is
signature of the person whose name is signed.25
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 Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the
encouraging care in the comparison of the signatures against those on the signature cards they party whose signature is forged. 26 On the premise that Jong’s signature was indeed forged, FEBTC
have on file. Moreover, the very opportunity of the drawee to insure and to distribute the cost among is liable for the loss since it authorized the discharge of the forged check. Such liability attaches
its customers who use checks makes the drawee an ideal party to spread the risk to insurance. 23 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
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
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
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
Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally
the bank and the depositor is that of debtor and creditor. So far as the legal relationship
presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this
between the two is concerned, the situation is the same as though the bank had borrowed
presumption must be overcome but this can only be done by convincing testimony and effective
money from the depositor, agreeing to repay it on demand, or had bought goods from the
illustrations.29
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 In ruling that forgery was not duly proven, the Court of Appeals held:
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
[There] is ground to doubt the findings of the trial court sustaining the alleged forgery in
check, on which the depositor’s signature is a forgery, it has failed to comply with its
view of the conflicting conclusions made by handwriting experts from the NBI and the
contract in this respect. Therefore, the bank is held liable.
PNP, both agencies of the government.

The fact that the forgery is a clever one is immaterial. The forged signature may so closely
xxx
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.
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
The forgery may be committed by a trusted employee or confidential agent. The bank still
forgery cannot be presumed; it must be proved by clear, positive and convincing
must bear the loss. Even in a case where the forged check was drawn by the depositor’s
evidence.
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 This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponent’s
bank had paid out on checks bearing forgeries of the plaintiff’s signature. 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
xxx
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
It was held that the bank was liable. It was further held that the fact that the plaintiff waited jurisprudential cop-out.
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
Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial
holding the bank liable. xxx
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

34
scatters the factual field. In failing to thoroughly evaluate the evidence before it, and relying instead Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature
on presumptions haphazardly drawn, the Court of Appeals was sadly remiss. Of course, courts, like as a mere variation,38 the same excuse she proffered for the other marked differences noted by the
humans, are fallible, and not every error deserves a stern rebuke. Yet, the appellate court’s error in Court and the counsel for petitioner. 39
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
There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and
claim would prosper, defeated as it would be by the mere invocation of the existence of a contrary
not the PNP expert’s. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A
"expert" opinion.
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
On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that placed among the top five examinees in the Competitive Seminar in Question Document
of the PNP, and explained its reason behind the conclusion: 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-
After subjecting the evidence of both parties to a crucible of analysis, the court arrived at
five thousand questioned documents, on an average of fifteen to twenty documents a day. 42 In
the conclusion that the testimony of the NBI document examiner is more credible because
comparison, PNP document examiner Perez admitted to having examined only around five hundred
the testimony of the PNP Crime Laboratory Services document examiner reveals that
documents as of her testimony.43
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 In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination
continuous execution or stroke as shown by the tampering terminal stroke of the method consisting of analysis, recognition, comparison and evaluation of the writing habits with the
signatures whereas the questioned signature is a hesitating slow drawn execution stroke. use of instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting
Clearly, the person who executed the questioned signature was hesitant when the substances. She also prepared enlarged photographs of the signatures in order to facilitate the
signature was made.30 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
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that "apparently, there
significant differences in the handwriting characteristics existing between the questioned and the
[are] differences on that questioned signature and the standard signatures."31 This Court, in
sample signatures, as to manner of execution, link/connecting strokes, proportion characteristics,
examining the signatures, makes a similar finding. The PNP expert excused the noted "differences"
and other identifying details. 46
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 The RTC was sufficiently convinced by the NBI examiner’s testimony, and explained her reasons in
PNP expert as unconvincing. During the trial, she was confronted several times with apparent its Decisions. While the Court of Appeals disagreed and upheld the findings of the PNP, it failed to
differences between strokes in the questioned signature and the genuine samples. Each time, she convincingly demonstrate why such findings were more credible than those of the NBI expert. As a
would just blandly assert that these differences were just "variations," 33 as if the mere conjuration of throwaway, the assailed Decision noted that the PNP, not the NBI, had the opportunity to examine
the word would sufficiently disquiet whatever doubts about the deviations. Such conclusion, standing the specimen signature card signed by Jong, which was relied upon by the employees of FEBTC in
alone, would be of little or no value unless supported by sufficiently cogent reasons which might authenticating Jong’s signature. The distinction is irrelevant in establishing forgery. Forgery can be
amount almost to a demonstration.34 established comparing the contested signatures as against those of any sample signature duly
established as that of the persons whose signature was forged.
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 FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned
capital letter ‘L,’" as referred to by the PNP examiner who had marked it in her comparison chart as signature against the bank signature cards. The crucial fact in question is whether or not the
"point no. 6." To the plain eye, such upward final stroke consists of a vertical line which forms a check was forged, not whether the bank could have detected the forgery. The latter issue
ninety degree (90º) angle with the previous stroke. Of the twenty one (21) other genuine samples becomes relevant only if there is need to weigh the comparative negligence between the
examined by the PNP, at least nine (9) ended with an upward stroke.35 However, unlike the bank and the party whose signature was forged.
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
At the same time, the Court of Appeals failed to assess the effect of Jong’s testimony that the
difference is glaring, and indeed, the PNP examiner was confronted with the inconsistency in point
signature on the check was not his.47 The assertion may seem self-serving at first blush, yet it cannot
no. 6.
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,
Q: Now, in this questioned document point no. 6, the "s" stroke is directly upwards. 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
A: Yes, sir.
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
Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or discovery. He filed the appropriate criminal charges against Sempio, the putative forger. 48
the last stroke "s" is pointing directly upwards?
Now for determination is whether Samsung Construction was precluded from setting up the defense
A: There is none in the standard signature, sir.37 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
35
succeeded49 or who put into the power of the third person to perpetuate the wrong."50 Applying these The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there
rules, the Court of Appeals determined that it was the negligence of Samsung Construction that was no negligence on the part of the bank in its acceptance and payment of the forged check.
allowed the encashment 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
In the case at bar, the forgery appears to have been made possible through the acts of
Appeals, deserves careful examination.
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. The point in issue has sometimes been said to be that of negligence. The drawee who
Sempio was assistant to the Korean accountant who was in possession of the blank has paid upon the forged signature is held to bear the loss, because he has been
checks and who through negligence, enabled Sempio to have access to the same. Had negligent in failing to recognize that the handwriting is not that of his customer. But
the Korean accountant been more careful and prudent in keeping the blank checks it follows obviously that if the payee, holder, or presenter of the forged paper has himself
Sempio would not have had the chance to steal a page thereof and to effect the forgery. been in default, if he has himself been guilty of a negligence prior to that of the banker, or
Besides, Sempio was an employee who appears to have had dealings with the defendant if by any act of his own he has at all contributed to induce the banker's negligence, then
Bank in behalf of the plaintiff corporation and on the date the check was encashed, he he may lose his right to cast the loss upon the banker.61 (Emphasis supplied)
was there to certify that it was a genuine check issued to purchase equipment for the
company.51
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
We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the the drawer whose signature was forged, and the need arises to weigh the comparative negligence
defense of forgery if it is guilty of negligence.52 Yet, we are unable to conclude that Samsung between the drawer and the drawee to determine who should bear the burden of loss. The Court
Construction was guilty of negligence in this case. The appellate court failed to explain precisely finds no basis to conclude that Samsung Construction was negligent in the safekeeping of its
how the Korean accountant was negligent or how more care and prudence on his part would have checks. For one, the settled rule is that the mere fact that the depositor leaves his check book lying
prevented the forgery. We cannot sustain this "tar and feathering" resorted to without any basis. 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,
The bare fact that the forgery was committed by an employee of the party whose signature was
in point of fact Samsung Construction was not negligent at all since it reported the forgery almost
forged cannot necessarily imply that such party’s negligence was the cause for the forgery.
immediately upon discovery.63
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: 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
[T]he mere fact that the forgery was committed by a drawer-payor’s confidential employee
treatment than a forged signature of the indorser.
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 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
Admittedly, the record does not clearly establish what measures Samsung Construction employed to
an indorsement.65
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, Thus, a drawee bank is generally liable to its depositor in paying a check which bears
since Kyu, and not Jong, would have the personal knowledge as to how the checks were kept. 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
Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on
bearing a forgery of the drawer’s signature.66
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 The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
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
Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check,
legal presumption remains that ordinary care was employed.
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
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung several troubling circumstances that lead us to believe that the bank itself was remiss in its duty.
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
The fact that the check was made out in the amount of nearly one million pesos is unusual enough
presumption of regularity. Proving a negative fact may be "a difficult office," 59 but necessarily so, as it
to require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms this through
seeks to overcome a presumption in law. FEBTC was unable to dispute the presumption of ordinary
its own internal procedures. Checks below twenty-five thousand pesos require only the approval of
care exercised by Samsung Construction, hence we cannot agree with the Court of Appeals’ finding
the teller; those between twenty-five thousand to one hundred thousand pesos necessitate the
of negligence.
approval of one bank officer; and should the amount exceed one hundred thousand pesos, the
concurrence of two bank officers is required.67

36
In this case, not only did the amount in the check nearly total one million pesos, it was also payable WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November
to cash. That latter circumstance should have aroused the suspicion of the bank, as it is not ordinary 1996 is REVERSED, and the Decision of the Regional Trial Court of Manila, Branch 9, dated 25
business practice for a check for such large amount to be made payable to cash or to bearer, April 1994 is REINSTATED. Costs against respondent.
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
SO ORDERED.
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. G.R. No. L-2861             February 26, 1951

FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with ENRIQUE P. MONTINOLA, plaintiff-appellant,
the bank in behalf of Samsung Construction. It was even claimed that everytime FEBTC would vs.
contact Jong about problems with his account, Jong would hand the phone over to THE PHILIPPINE NATIONAL BANK, ET AL., defendants-appellees.
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 MONTEMAYOR, J.:
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 In August, 1947, Enrique P. Montinola filed a complaint in the Court of First Instance of Manila
her to that effect should be deemed hearsay evidence. Interestingly, FEBTC did not present as a against the Philippine National Bank and the Provincial Treasurer of Misamis Oriental to collect the
witness any other employee of their Bel-Air branch, including those who supposedly had transacted sum of P100,000, the amount of Check No. 1382 issued on May 2, 1942 by the Provincial Treasurer
with Sempio before. of Misamis Oriental to Mariano V. Ramos and supposedly indorsed to Montinola. After hearing, the
court rendered a decision dismissing the complaint with costs against plaintiff-appellant. Montinola
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of has appealed from that decision directly to this Court inasmuch as the amount in controversy
Samsung Construction, the irregular circumstances attending the presentment of the forged check exceeds P50,000.
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. There is no dispute as to the following facts. In April and May, 1942, Ubaldo D. Laya was the
Provincial Treasurer of Misamis Oriental. As such Provincial Treasurer he was ex officio agent of
Banks are engaged in a business impressed with public interest, and it is their duty to the Philippine National Bank branch in the province. Mariano V. Ramos worked under him as
protect in return their many clients and depositors who transact business with them. They assistant agent in the bank branch aforementioned. In April of that year 1942, the currency being
have the obligation to treat their client’s account meticulously and with the highest degree used in Mindanao, particularly Misamis Oriental and Lanao which had not yet been occupied by the
of care, considering the fiduciary nature of their relationship. The diligence required of Japanese invading forces, was the emergency currency which had been issued since January, 1942
banks, therefore, is more than that of a good father of a family.76 by the Mindanao Emergency Currency Board by authority of the late President Quezon.

Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from About April 26, 1942, thru the recommendation of Provincial Treasurer Laya, his assistant agent M.
Jong personally that the signature in the questionable check was his. V. Ramos was inducted into the United States Armed Forces in the Far East (USAFFE) as
disbursing officer of an army division. As such disbursing officer, M. V. Ramos on April 30, 1942,
went to the neighboring Province Lanao to procure a cash advance in the amount of P800,000 for
Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may the use of the USAFFE in Cagayan de Misamis. Pedro Encarnacion, Provincial Treasurer of Lanao
still recover from the bank as long as he or she is not precluded from setting up the defense of did not have that amount in cash. So, he gave Ramos P300,000 in emergency notes and a check
forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce for P500,000. On May 2, 1942 Ramos went to the office of Provincial Treasurer Laya at Misamis
the payment of a check can arise out of a forged signature. Since the drawer, Samsung Oriental to encash the check for P500,000 which he had received from the Provincial Treasurer of
Construction, is not precluded by negligence from setting up the forgery, the general rule should Lanao. Laya did not have enough cash to cover the check so he gave Ramos P400,000 in
apply. Consequently, if a bank pays a forged check, it must be considered as paying out of its funds emergency notes and a check No. 1382 for P100,000 drawn on the Philippine National Bank.
and cannot charge the amount so paid to the account of the depositor.77 A bank is liable, irrespective According to Laya he had previously deposited P500,000 emergency notes in the Philippine
of its good faith, in paying a forged check.78 National Bank branch in Cebu and he expected to have the check issued by him cashed in Cebu
against said deposit.

37
Ramos had no opportunity to cash the check because in the evening of the same day the check was The indorsement or writing described by M. V. Ramos which had been written by him at the back of
issued to him, the Japanese forces entered the capital of Misamis Oriental, and on June 10, 1942, the check, Exhibit A, does not now appear at the back of said check. What appears thereon is the
the USAFFE forces to which he was attached surrendered. Ramos was made a prisoner of war until indosement testified to by Montinola and described by the trial court as reproduced above. Before
February 12, 1943, after which, he was released and he resumed his status as a civilian. going into a discussion of the merits of the version given by Ramos and Montinola as to the
indorsement or writing at the back of the check, it is well to give a further description of it as we shall
later.
About the last days of December, 1944 or the first days of January, 1945, M. V. Ramos allegedly
indorsed this check No. 1382 to Enrique P. Montinola. The circumstances and conditions under
which the negotiation or transfer was made are in controversy. When Montinola filed his complaint in 1947 he stated therein that the check had been lost, and so in
lieu thereof he filed a supposed photostic copy. However, at the trial, he presented the check itself
and had its face marked Exhibit A and the back thereof Exhibit A-1. But the check is badly mutilated,
According to Montinola's version, sometime in June, 1944, Ramos, needing money with which to
bottled, torn and partly burned, and its condition can best be appreciated by seeing it. Roughly, it
buy foodstuffs and medicine, offered to sell him the check; to be sure that it was genuine and
may be stated that looking at the face of the check (Exhibit A) we see that the left third portion of the
negotiable, Montinola, accompanied by his agents and by Ramos himself, went to see President
paper has been cut off perpendicularly and severed from the remaining 2/3 portion; a triangular
Carmona of the Philippine National Bank in Manila about said check; that after examining it
portion of the upper right hand corner of said remaining 2/3 portion has been similarly cut off and
President Carmona told him that it was negotiable but that he should not let the Japanese catch him
severed, and to keep and attach this triangular portion and the rectangular ¹/3 portion to the rest of
with it because possession of the same would indicate that he was still waiting for the return of the
the document, the entire check is pasted on both sides with cellophane; the edges of the severed
Americans to the Philippines; that he and Ramos finally agreed to the sale of the check for P850,000
portions as well as of the remaining major portion, where cut bear traces of burning and searing;
Japanese military notes, payable in installments; that of this amount, P450,000 was paid to Ramos
there is a big blot with indelible ink about the right middle portion, which seems to have penetrated
in Japanese military notes in five installments, and the balance of P400,000 was paid in kind,
to the back of the check (Exhibit A-1), which back bears a larger smear right under the blot, but not
namely, four bottles of sulphatia sole, each bottle containing 1,000 tablets, and each tablet valued at
black and sharp as the blot itself; finally, all this tearing, burning, blotting and smearing and pasting
P100; that upon payment of the full price, M. V. Ramos duly indorsed the check to him. This
of the check renders it difficult if not impossible to read some of the words and figures on the check.
indorsement which now appears on the back of the document is described in detail by trial court as
follows:
In explanation of the mutilation of the check Montinola told the court that several months after
indorsing and delivering the check to him, Ramos demanded the return of the check to him,
The endorsement now appearing at the back of the check (see Exhibit A-1) may be
threatening Montinola with bodily harm, even death by himself or his guerrilla forces if he did not
described as follows: The woods, "pay to the order of" — in rubber stamp and in violet
return said check, and that in order to justify the non-delivery of the document and to discourage
color are placed about one inch from the top. This is followed by the words "Enrique P.
Ramos from getting it back, he (Montinola) had to resort to the mutilation of the document.
Montinola" in typewriting which is approximately 5/8 an inch below the stamped words
"pay to the order of". Below "Enrique P. Montinola", in typewriting are words and figures
also in typewriting, "517 Isabel Street" and about ¹/8 of an inch therefrom, the edges of the As to what was really written at the back of the check which Montinola claims to be a full
check appear to have been burned, but there are words stamped apparently in rubber indorsement of the check, we agree with trial court that the original writing of Ramos on the back of
stamp which, according to Montinola, are a facsimile of the signature of Ramos. There is a the check was to the effect that he was assigning only P30,000 of the value of the document and
signature which apparently reads "M. V. Ramos" also in green ink but made in that he was instructing the bank to deposit to his credit the balance. This writing was in some
handwriting." mysterious way obliterated, and in its place was placed the present indorsement appearing thereon.
Said present indorsement occupies a good portion of the back of the check. It has already been
described in detail. As to how said present indorsement came to be written, the circumstances
To the above description we may add that the name of M. V. Ramos is hand printed in green ink,
surrounding its preparation, the supposed participation of M. V. Ramos in it and the writing originally
under the signature. According to Montinola, he asked Ramos to hand print it because Ramos'
appearing on the reverse side of the check, Exhibit A-1, we quote with approval what the trial court
signature was not clear.
presided over by Judge Conrado V. Sanchez, in its well-prepared decision, says on these points:

Ramos in his turn told the court that the agreement between himself and Montinola regarding the
The allegedly indorsement: "Pay to the order of Enrique P. Montinola the amount of
transfer of the check was that he was selling only P30,000 of the check and for this reason, at the
P30,000 only. The balance to be deposited to the credit of M. V. Ramos", signed by M. V.
back of the document he wrote in longhand the following:
Ramos-according to the latter-does not now appear at the back of the check. A different
indorsement, as aforesaid, now appears.
Pay to the order of Enrique P. Montinola P30,000 only. The balance to be deposited in the
Philippine National Bank to the credit of M. V. Ramos.
Had Montinola really paid in full the sum of P850,000 in Japanese Military Notes as
consideration for the check? The following observations are in point:
Ramos further said that in exchange for this assignment of P30,000 Montinola would pay him
P90,000 in Japanese military notes but that Montinola gave him only two checks of P20,000 and
(a) According to plaintiff's witness Gregorio A. Cortado, the oval line in violet, enclosing
P25,000, leaving a balance unpaid of P45,000. In this he was corroborated by Atty. Simeon Ramos
"P." of the words "Enrique P. Montinola" and the line in the form of cane handle crossing
Jr. who told the court that the agreement between Ramos and Montinola was that the latter, for the
the word "street" in the words and figures "517 Isabel Street" in the endorsement Exhibit
sale to him of P30,000 of the check, was to pay Ramos P90,000 in Japanese military notes; that
A-1 "unusual" to him, and that as far as he could remember this writing did not appear on
when the first check for P20,000 was issued by Montinola, he (Simeon) prepared a document
the instrument and he had no knowledge as to how it happened to be there. Obviously
evidencing said payment of P20,000; that when the second check for P25,000 was issued by
Cortado had no recollection as to how such marks ever were stamped at the back of the
Montinola, he (Simeon) prepared another document with two copies, one for Montinola and the
check.
other for Ramos, both signed by Montinola and M. V. Ramos, evidencing said payment, with the
understanding that the balance of P45,000 would be paid in a few days.
(b) Again Cortado, speaking of the endorsement as it now appears at the back of the
check (Exh. A-1) stated that Ramos typewrote these words outside of the premises of

38
Montinola, that is, a nearby house. Montinola, on the other hand, testified that Ramos it was partially burned, partially blotted, badly mutilated, discolored and pasted with
typewrote the words "Enrique P. Montinola 517 Isabel Street", in his own house. Speaking cellophane. What is worse is that Montinola's excuse as to how it was lost, that it was
of the rubber stamp used at the back of the check and which produced the words "pay to mixed up with household effects is not plausible, considering the fact that it involves his
the order of", Cortado stated that when he (Cortado), Atadero, Montinola and Ramos life savings, and that before the alleged loss, he took extreme pains and precautions to
returned in group to the house of Montinola, the rubber stamp was already in the house of save the check from the possible ravages of the war, had it photographed, registered said
Montinola, and it was on the table of the upper floor of the house, together with the stamp check with the General Auditing Office and he knew that Ramos, since liberation, was hot
pad used to stamp the same. Montinola, on the other hand, testified that Ramos carried in after the possession of that check.
his pocket the said rubber stamp as well as the ink pad, and stamped it in his house.
(d) It seems that Montinola was not so sure as to what he had testified to in reference to
The unusually big space occupied by the indorsement on the back of the check and the the consideration he paid for the check. In court he testified that he paid P450,000 in cash
discrepancies in the versions of Montinola and his witness Cortado just noted, create from June to December 1944, and P400,000 worth of sulphatiazole in January 1945 to
doubts as to whether or not really Ramos made the indorsement as it now appears at the complete the alleged consideration of P850,000. When Montinola testified this way in
back of Exhibit A. One thing difficult to understand is why Ramos should go into the court, obviously he overlooked a letter he wrote to the provincial treasurer of Cagayan,
laborious task of placing the rubber stamp "Pay to the order of" and afterwards move to Oriental Misamis, dated May 1, 1947, Exhibit 3 the record. In that letter Exhibit 3,
the typewriter and write the words "Enrique P. Montinola" "and "517 Isabel Street", and Montinola told Provincial Treasurer Elizalde of Misamis Oriental that "Ramos endorsed it
finally sign his name too far below the main indorsement. (referring to check) to me for goods in kind, medicine, etc., received by him for the use of
the guerrillas." In said letter Exhibit 3, Montinola did not mention the cash that he paid for
the check.
(c) Another circumstances which bears heavily upon the claim of plaintiff Montinola that he
acquired the full value of the check and paid the full consideration therefor is the present
condition of said check. It is now so unclean and discolored; it is pasted in cellophane, From the foregoing the court concludes that plaintiff Montinola came into the possession
bottled with ink on both sides torn three parts, and with portions thereof burned-all done of the check in question about the end of December 1944 by reason of the fact that M. V.
by plaintiff, the alleged owner thereof. Ramos sold to him P30,000 of the face value thereof in consideration of the sum of
P90,000 Japanese money, of which only one-half or P45,000 (in Japanese money) was
actually paid by said plaintiff to Ramos. (R. on A., pp. 31-33; Brief of Appellee, pp. 14-20.)
The acts done by the very plaintiff on a document so important and valuable to him, and
which according to him involves his life savings, approximate intentional cancellation. The
only reason advanced by plaintiff as to why tore check, burned the torn edges and bottled At the beginning of this decision, we stated that as Provincial Treasurer of Misamis Oriental, Ubaldo
out the registration at the back, is found in the following: That Ramos came to his house, D. Laya was ex officio agent of the Philippine National Bank branch in that province. On the face of
armed with a revolver, threatened his life and demanded from him the return of the check; the check (Exh. A) we now find the words in parenthesis "Agent, Phil. National Bank" under the
that when he informed Ramos that he did not have it in the house, but in some deposit signature of Laya, purportedly showing that he issued the check as agent of the Philippine National
outside thereof and that Ramos promised to return the next day; that the same night he Bank. It this is true, then the bank is not only drawee but also a drawer of the check, and Montinola
tore the check into three parts, burned the sides with a parrafin candle to show traces of evidently is trying to hold the Philippine National Bank liable in that capacity of drawer, because as
burning; and that upon the return of Ramos the next day he showed the two parts of the drawee alone, inasmuch as the bank has not yet accepted or certified the check, it may yet avoid
check, the triangle on the right upper part and the torn piece on the left part, and upon payment.
seeing the condition thereof Ramos did not bother to get the check back. He also said that
he placed the blots in indelible ink to prevent Ramos — if he would be forced to surrender
Laya, testifying in court, stated that he issued the check only as Provincial Treasurer, and that the
the middle part of the check — from seeing that it was registered in the General Auditing
words in parenthesis "Agent, Phil. National Bank" now appearing under his signature did not appear
Office.
on the check when he issued the same. In this he was corroborated by the payee M. V. Ramos who
equally assured the court that when he received the check and then delivered it to Montinola, those
Conceding at the moment these facts to be true, the question is: Why should Montinola be words did not appear under the signature of Ubaldo D. Laya. We again quote with approval the
afraid of Ramos? Montinola claims that Ramos went there about April, 1945, that is, pertinent portion of the trial court's decision:
during liberation. If he believed he was standing by his rights, he could have very well
sought police protection or transferred to some place where Ramos could not bother him.
The question is reduced to whether or not the words, "Agent, Phil. National Bank" were
And then, really Ramos did not have anything more to do with this check for the reason
added after Laya had issued the check. In a straightforward manner and without
that Montinola had obtained in full the amount thereof, there could not be any reason why
vacillation Laya positively testified that the check Exhibit A was issued by him in his
Ramos should have threatened Montinola as stated by the latter. Under the
capacity as Provincial Treasurer of Misamis Oriental and that the words "Agent, Phil.
circumstances, the most logical conclusion is that Ramos wanted the check at all costs
National Bank" which now appear on the check Exhibit A were not typewritten below his
because Montinola did not acquire the check to such an extent that it borders on
signature when he signed the said check and delivered the same to Ramos. Laya assured
intentional cancellation thereof (see Sections 119-123 Negotiable Instruments Law) there
the court that there could not be any mistake as to this. For, according to Laya, when he
is room to believe that Montinola did not have so much investments in that check as to
issued check in his capacity as agent of the Misamis Oriental agency of the Philippine
adopted an "what do I care?" attitude.
National Bank the said check must be countersigned by the cashier of the said agency —
not by the provincial auditor. He also testified that the said check was issued by him in his
And there is the circumstance of the alleged loss of the check. At the time of the filing of capacity as provincial treasurer of Misamis Oriental and that is why the same was
the complaint the check was allegedly lost, so much so that a photostatic copy thereof countersigned by Provincial Auditor Flores. The Provincial Auditor at that time had no
was merely attached to the complaint (see paragraph 7 of the complaint). Yet, during the connection in any capacity with the Misamis Oriental agency of the Philippine National
trial the original check Exhibit A was produced in court. Bank. Plaintiff Montinola on the other hand testified that when he received the check
Exhibit A it already bore the words "Agent, Phil. National Bank" below the signature of
Laya and the printed words "Provincial Treasurer".
But a comparison between the photostatic copy and the original check reveals
discrepancies between the two. The condition of the check as it was produced is such that
39
 After considering the testimony of the one and the other, the court finds that the countersignature not of the Bank cashier of the Provincial Auditor, the addition of the words "Agent,
preponderance of the evidence supports Laya's testimony. In the first place, his testimony Phil. National Bank" could not change the status and responsibility of the bank. It is therefore more
was corroborated by the payee M. V. Ramos. But what renders more probable the logical to believe and to find that the addition of those words was made after the check had been
testimony of Laya and Ramos is the fact that the money for which the check was issued transferred by Ramos to Montinola. Moreover, there are other facts and circumstances involved in
was expressly for the use of the USAFFE of which Ramos was then disbursing officer, so the case which support this view. Referring to the mimeographed record on appeal filed by the
much so that upon the delivery of the P400,000 in emergency notes and the P100,000 plaintiff-appellant, we find that in transcribing and copying the check, particularly the face of it
check to Ramos, Laya credited his depository accounts as provincial treasurer with the (Exhibit A) in the complaint, the words "Agent, Phil. National Bank" now appearing on the face of the
corresponding credit entry. In the normal course of events the check could not have been check under the signature of the Provincial Treasurer, is missing. Unless the plaintiff in making this
issued by the bank, and this is borne by the fact that the signature of Laya was copy or transcription in the complaint committed a serious omission which is decisive as far as the
countersigned by the provincial auditor, not the bank cashier. And then, too there is the bank is concerned, the inference is, that at the time the complaint was filed, said phrase did not
circumstance that this check was issued by the provincial treasurer of Lanao to Ramos appear on the face of the check. That probably was the reason why the bank in its motion to dismiss
who requisitioned the said funds in his capacity as disbursing officer of the USAFFE. The dated September 2, 1947, contended that if the check in question had been issued by the provincial
check, Exhibit A is not what we may term in business parlance, "certified check" or treasurer in his capacity as agent of the Philippine National Bank, said treasurer would have placed
"cashier's check." below his signature the words "Agent of the Philippine National Bank". The plaintiff because of the
alleged loss of the check, allegedly attached to the complaint a photostatic copy of said check and
marked it as Annex A. But in transcribing and copying said Annex A in his complaint, the phrase
Besides, at the time the check was issued, Laya already knew that Cebu and Manila were
"Agent, Phil. National Bank" does not appear under the signature of the provincial treasurer. We
already occupied. He could not have therefore issued the check-as a bank employee-
tried to verify this discrepancy by going over the original records of the Court of First Instance so as
payable at the central office of the Philippine National Bank.
to compare the copy of Annex A in the complaint, with the original Annex A, the photostatic copy,
but said original Annex A appears to be missing from the record. How it disappeared is not
Upon the foregoing circumstances the court concludes that the words "Agent, Phil. explained. Of course, now we have in the list of exhibit a photostatic copy marked Annex A and
National Bank' below the signature of Ubaldo D. Laya and the printed words "Provincial Exhibit B, but according to the manifestation of counsel for the plaintiff dated October 15, 1948, said
Treasurer" were added in the check after the same was issued by the Provincial Treasurer photostatic copy now marked Annex A and Exhibit B was submitted on October 15, 1948, in
of Misamis Oriental. compliance with the verbal order of the trial court. It is therefore evident that the Annex A now
available is not the same original Annex A attached to the complaint in 1947.
From all the foregoing, we may safely conclude as we do that the words "Agent, Phil. National Bank"
now appearing on the face of the check (Exh. A) were added or placed in the instrument after it was There is one other circumstance, important and worth nothing. If Annex A also marked Exhibit B is
issued by Provincial Treasurer Laya to M. V. Ramos. There is no reason known to us why Provincial the photostatic copy of the original check No. 1382 particularly the face thereof (Exhibit A), then said
Treasurer Laya should issue the check (Exh. A) as agent of the Philippine National Bank. Said photostatic copy should be a faithful and accurate reproduction of the check, particularly of the
check for P100,000 was issued to complete the payment of the other check for P500,000 issued by phrase "Agent, Phil. National Bank" now appearing under the signature of the Provincial Treasurer
the Provincial Treasurer of Lanao to Ramos, as part of the advance funds for the USAFFE in on the face of the original check (Exhibit A). But a minute examination of and comparison between
Cagayan de Misamis. The balance of P400,000 in cash was paid to Ramos by Laya from the funds, Annex A, the photostatic copy also marked Exhibit B and the face of the check, Exhibit A, especially
not of the bank but of the Provincial Treasury. Said USAFFE were being financed not by the Bank with the aid of a handlens, show notable differences and discrepancies. For instance, on Exhibit A,
but by the Government and, presumably, one of the reasons for the issuance of the emergency the letter A of the word "Agent" is toward the right of the tail of the beginning letter of the signature of
notes in Mindanao was for this purpose. As already stated, according to Provincial Treasurer Laya, Ubaldo D. Laya; this same letter "A" however in Exhibit B is directly under said tail.
upon receiving a relatively considerable amount of these emergency notes for his office, he
deposited P500,000 of said currency in the Philippine National Bank branch in Cebu, and that in
The letter "N" of the word "National" on Exhibit A is underneath the space between "Provincial" and
issuing the check (Exh. A), he expected to have it cashed at said Cebu bank branch against his
"Treasurer"; but the same letter "N" is directly under the letter "I" of the word "Provincial" in Exhibit B.
deposit of P500,000.

The first letter "a" of the word "National" is under "T" of the word "Treasurer" in Exhibit A; but the
The logical conclusion, therefore, is that the check was issued by Laya only as Provincial Treasurer
same letter "a" in Exhibit "B" is just below the space between the words "Provincial" and "Treasurer".
and as an official of the Government which was under obligation to provide the USAFFE with
advance funds, and not by the Philippine National Bank which has no such obligation. The very
Annex C, made part of plaintiff's complaint, and later introduced in evidence for him as Exhibit E The letter "k" of the word "Bank" in Exhibit A is after the green perpendicular border line near the
states that Laya issued the check "in his capacity as Provincial Treasurer of Misamis Oriental", lower right hand corner of the edge of the check (Exh. A); this same letter "k" however, on Exhibit B
obviously, not as agent of the Bank. is on the very border line itself or even before said border line.

Now, did M. V. Ramos add or place those words below the signature of Laya before transferring the The closing parenthesis ")" on Exhibit A is a little far from the perpendicular green border line and
check to Montinola? Let us bear in mind that Ramos before his induction into the USAFFE had been appears to be double instead of one single line; this same ")" on Exhibit B appears in a single line
working as assistant of Treasurer Laya as ex-officio agent of the Misamis Oriental branch of the and is relatively nearer to the border line.
Philippine National Bank. Naturally, Ramos must have known the procedure followed there as to the
issuance of checks, namely, that when a check is issued by the Provincial Treasurer as such, it is
There are other notable discrepancies between the check Annex A and the photostatic copy, Exhibit
countersigned by the Provincial Auditor as was done on the check (Exhibit A), but that if the
B, as regards the relative position of the phrase "Agent, Phil. National Bank", with the title Provincial
Provincial Treasurer issues a check as agent of the Philippine National Bank, the check is
Treasurer, giving ground to the doubt that Exhibit B is a photostatic copy of the check (Exhibit A).
countersigned not by the Provincial Auditor who has nothing to do with the bank, but by the bank
cashier, which was not done in this case. It is not likely, therefore, that Ramos had made the
insertion of the words "Agent, Phil. National Bank" after he received the check, because he should We then have the following facts. Exhibit A was issued by Laya in his capacity as Provincial
have realized that following the practice already described, the check having been issued by Laya Treasurer of Misamis Oriental as drawer on the Philippine National Bank as drawee. Ramos sold
as Provincial Treasurer, and not as agent of the bank, and since the check bears the P30,000 of the check to Enrique P. Montinola for P90,000 Japanese military notes, of which only

40
P45,000 was paid by Montinola. The writing made by Ramos at the back of the check was an It is also respectfully prayed that this Honorable Court refer the check, Exhibit A, to the
instruction to the bank to pay P30,000 to Montinola and to deposit the balance to his (Ramos) credit. City Fiscal's Office for appropriate criminal action against the plaintiff-appellant if the facts
This writing was obliterated and in its place we now have the supposed indorsement appearing on so warrant.
the back of the check (Exh. A-1).
Subsequently, in a petition signed by plaintiff-appellant Enrique P. Montinola dated February 27,
At the time of the transfer of this check (Exh. A) to Montinola about the last days of December, 1944, 1950, he asked this Court to allow him to withdraw the original check (Exh. A) for him to keep,
or the first days of January, 1945, the check which, being a negotiable instrument, was payable on expressing his willingness to submit it to the court whenever needed for examination and
demand, was long overdue by about 2 ½ years. It may therefore be considered, even then, a stable verification. The bank on March 2, 1950 opposed the said petition on the ground that inasmuch as
check. Of course, Montinola claims that about June, 1944 when Ramos supposedly approached him the appellant's cause of action in this case is based on the said check, it is absolutely necessary for
for the purpose of negotiating the check, he (Montinola) consulted President Carmona of the the court to examine the original in order to see the actual alterations supposedly made thereon, and
Philippine National Bank who assured him that the check was good and negotiable. However, that should this Court grant the prayer contained in the bank's brief that the check be later referred
President Carmona on the witness stand flatly denied Montinola's claim and assured the court that to the city fiscal for appropriate action, said check may no longer be available if the appellant is
the first time that he saw Montinola was after the Philippine National Bank, of which he was allowed to withdraw said document. In view of said opposition this Court resolution of March 6,
President, reopened, after liberation, around August or September, 1945, and that when shown the 1950, denied said petition for withdrawal.
check he told Montinola that it was stale. M. V. Ramos also told the court that it is not true that he
ever went with Montinola to see President Carmona about the check in 1944.
Acting upon the petition contained in the bank's brief already mentioned, once the decision becomes
final, let the Clerk of Court transmit to the city fiscal the check (Exh. A) together with all pertinent
On the basis of the facts above related there are several reasons why the complaint of Montinola papers and documents in this case, for any action he may deem proper in the premises.
cannot prosper. The insertion of the words "Agent, Phil. National Bank" which converts the bank
from a mere drawee to a drawer and therefore changes its liability, constitutes a material alteration
of the instrument without the consent of the parties liable thereon, and so discharges the instrument.
(Section 124 of the Negotiable Instruments Law). The check was not legally negotiated within the
meaning of the Negotiable Instruments Law. Section 32 of the same law provides that "the G.R. No. 108052 July 24, 1996
indorsement must be an indorsement of the entire instrument. An indorsement which purports to
transfer to the indorsee a part only of the amount payable, . . . (as in this case) does not operate as
PHILIPPINE NATIONAL BANK, petitioner,
a negotiation of the instrument." Montinola may therefore not be regarded as an indorsee. At most
vs.
he may be regarded as a mere assignee of the P30,000 sold to him by Ramos, in which case, as
THE COURT OF APPEALS and RAMON LAPEZ,1 doing business under the name and
such assignee, he is subject to all defenses available to the drawer Provincial Treasurer of Misamis
style SAPPHIRE SHIPPING, respondents.
Oriental and against Ramos. Neither can Montinola be considered as a holder in due course
because section 52 of said law defines a holder in due course as a holder who has taken the
instrument under certain conditions, one of which is that he became the holder before it was PANGANIBAN, J.:p
overdue. When Montinola received the check, it was long overdue. And, Montinola is not even a
holder because section 191 of the same law defines holder as the payee or indorsee of a bill or note
and Montinola is not a payee. Neither is he an indorsee for as already stated, at most he can be Does a local bank, while acting as local correspondent bank, have the right to intercept funds being
considered only as assignee. Neither could it be said that he took it in good faith. As already stated, coursed through it by its foreign counterpart for transmittal and deposit to the account of an
he has not paid the full amount of P90,000 for which Ramos sold him P30,000 of the value of the individual with another local bank, and apply the said funds to certain obligations owed to it by the
check. In the second place, as was stated by the trial court in its decision, Montinola speculated on said individual?
the check and took a chance on its being paid after the war. Montinola must have known that at the
time the check was issued in May, 1942, the money circulating in Mindanao and the Visayas was Assailed in this petition is the Decision of respondent Court of Appeals 2 in CA-G.R. CV No. 27926
only the emergency notes and that the check was intended to be payable in that currency. Also, he rendered on June 16, 1992 affirming the decision of the Regional Trial Court, Branch 107 of Quezon
should have known that a check for such a large amount of P100,000 could not have been issued to City, the dispositive portion of which read: 3
Ramos in his private capacity but rather in his capacity as disbursing officer of the USAFFE, and
that at the time that Ramos sold a part of the check to him, Ramos was no longer connected with
the USAFFE but already a civilian who needed the money only for himself and his family. WHEREFORE, judgment is hereby rendered:

As already stated, as a mere assignee Montinola is subject to all the defenses available against 1) In the main complaint, ordering the defendant (herein petitioner PNB) to pay the plaintiff
assignor Ramos. And, Ramos had he retained the check may not now collect its value because it (private respondent herein) the sum of US$2,627.11 or its equivalent in Philippine
had been issued to him as disbursing officer. As observed by the trial court, the check was issued to currency with interest at the legal rate from January 13, 1987, the date of judicial demand;
M. V. Ramos not as a person but M. V. Ramos as the disbursing officer of the USAFFE. Therefore,
he had no right to indorse it personally to plaintiff. It was negotiated in breach of trust, hence he 2) The plaintiff's supplemental complaint is hereby dismissed (sic);
transferred nothing to the plaintiff.
3) The defendant's counterclaims are likewise dismissed.
In view of all the foregoing, finding no reversible error in the decision appealed from, the same is
hereby affirmed with costs.
The Facts

In the prayer for relief contained at the end of the brief for the Philippine National Bank dated
September 27, 1949, we find this prayer: The factual antecedents as quoted by the respondent Court are reproduced hereinbelow, the same
being undisputed by the parties: 4

41
 The body of the decision reads: In order that compensation may prosper, it is necessary:

After a close scrutiny and analysis of the pleadings as well as the evidence of both parties, (1) That each one of the obligors be bound principally, and that he be at the same time a
the Court makes the following conclusions: principal creditor of the other;

(a) The defendant applied/appropriated the amounts of $2,627.11 and P34,340.38 (2) That both debts consists in a sum of money, or if the things due are consumable, they be
from remittances of the plaintiff's principals (sic) abroad. These were admitted by the of the same kind, and also of the same quality if the latter has been stated;
defendant, subject to the affirmative defense of compensation for what is owing to it
on the principle of solution (sic) indebiti.
(3) That the two debts be due;

(b) The first remittance was made by the NCB of Jeddah for the benefit of the
(4) That they be liquidated and demandable;
plaintiff, to the credited to his account at Citibank, Greenhills Branch; the second
was from Libya, and was intended to be deposited at the plaintiff's account with the
defendant, No. 830-2410; (5) That over neither of them there by any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
(c) The plaintiff made a written demand upon the defendant for remittance of the
equivalent of $2,627.11 by means of a letter dated December 4, 1986 (Exh. D). This In the case of the $2,627.11, requisites Nos. 2 through 5 are apparently present, for both
was answered by the defendant on December 22, 1986 (Exh. 13), inviting the debts consist in a sum of money, are both due, liquidated and demandable, and over neither
plaintiff to come for a conference; of them is there a retention or controversy commenced by third persons and communicated in
due time to the debtor. The question, however, is, where both of the obligors bound
principally, and was each one of them a debtor and creditor of the other at the same time?
(d) There were indeed two instances in the past, one in November 1980 and the
other in January 1981 when the plaintiff's account No. 830-2410 was doubly
credited with the equivalents of $5,679.23 and $5,885.38, respectively, which Analyzing now the relationship between the parties, it appears that:
amounted to an aggregate amount of P87,380.44. The defendant's evidence on this
point (Exhs. 1 thru 11, 14 and 15; see also Annexes C and E to defendant's
(a) With respect to the plaintiff's being a depositor of the defendant bank, they are creditor and
Answer), were never refuted nor impugned by the plaintiff. He claims, however, that
debtor respectively (Guingona, et.al. vs. City Fiscal, et. al., 128 SCRA 577);
plaintiff's claim has prescribed.

(b) As to the relationship created by the telexed fund transfers from abroad: A contract
(e) Defendant PNB made a demand upon the plaintiff for refund of the double or
between a foreign bank and local bank asking the latter to pay an amount to a beneficiary is a
duplicated credits erroneously made on plaintiff's account, by means of a letter (Exh.
stipulation pour autrui. (Bank of America NT & SA vs. IAC, 145 SCRA 419).
12) dated October 23, 1986 or 5 years and 11 months from November 1980, and 5
years and 9 months from January 1981. Such letter was answered by the plaintiff on
December 2, 1986 (Annex C, Complaint). This plaintiff's letter was likewise replied A stipulation pour autrui is a stipulation in favor of a third person (Florentino vs. Encarnacion,
to by the defendant through Exh. 13; 79 SCRA 193; Bonifacio Brothers vs. Mora, 20 SCRA 261; Uy Tam vs. Leonard, 30 Phils.
475).
(f) The deduction of P34,340.58 was made by the defendant not without the
knowledge and consent of the plaintiff, who was issued a receipt No. 857576 dated Thus between the defendant bank (as the local correspondent of the National Commercial
February 18, 1987 (Exh. E) by the defendant. Bank of Jeddah) and the plaintiff as beneficiary, there is created an implied trust pursuant to
Art. 1453 of the Civil Code, quoted as follows:
There is no question that the two erroneous double payments made to plaintiff's
accounts in 1980 and 1981 created an extra-contractual obligation on the part of the When the property is conveyed to a person in reliance upon his declared intention to
plaintiff in favor of the defendant, under the principle of solutio indebiti, as follows: hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the
person whose benefit is contemplated (sic).
If something is received when there is no right to demand it, and it was unduly
delivered through (sic) mistake, the obligation to return it arises. (Article 2154, (c) By the principle of solutio indebiti (Art. 2154, Civil Code), the plaintiff who unduly, received
Civil Code of the Phil.) something (sic) by mistake (i.e., the 2 double credits, although he had no right to demand it),
became obligated to the defendant to return what he unduly received. Thus, there was created
between them a relationship of obligor and obligee, or of debtor and creditor under a quasi-
Two issues were raised before the trial court, namely, first, whether the herein petitioner was legally
contract.
justified in making the compensation or set-off against the two remittances coursed through it in
favor of private respondent to recover on the double credits it erroneously made in 1980 and 1981,
based on the principle solutio indebiti, and second, whether or not petitioner's claim is barred by the In view of the foregoing, the Court is of the opinion that the parties are not both principally
statute of limitations. The trial court's ratiocination, as quoted by the appellate Court, follows:5 bound with respect to the $2,627.11 from Jeddah; neither are they at the same time principal
creditor of the other. Therefore, as matters stand, the parties' obligations are not subject to
compensation or set off under Art. 1279 of the Civil Code, for the reason that the defendant is
Article 1279 of the Civil Code provides:
not a principal debtor nor is the plaintiff a principal creditor insofar as the amount of $2,627.11

42
is concerned. They are debtor and creditor only with respect to the double payments; but are 2410 (per par. 1, page 2, Memorandum for the plaintiff). Such being the case, the Court
trustee-beneficiary as to the fund transfer of $2,627.11. believes that insofar as the amount of P34,340.38 is concerned, all the requirements of Art.
1279 of the Civil Code are present, and the said amount may properly be the subject of
compensation or set-off. And since all the requisites of Art. 1279 of the Civil Code are present
Only the plaintiff is principally bound as a debtor of the defendant to the extent of the double
(insofar as the amount of P34,392.38 is concerned), compensation takes place by operation of
credits. On the other hand, the defendant was an implied trustee, who was obliged to deliver
law (Art. 1286, Ibid.), albeit only partial with respect to plaintiff's indebtedness of P7,380.44.
to the Citibank for the benefit of the plaintiff the sum of $2,627.11.

Now, on the question of prescription, the Court believes that Art. 1149 as cited by the plaintiff
Thus while it may be concluded that the plaintiff owes the defendant the equivalent of the
is not applicable in this case. Rather, the applicable law is Art. 1145, which fixes the
sums of $5,179.23 and $5,885.38 erroneously doubly credited to his account, the defendant's
prescriptive period for actions upon a quasi contract (such as solution indebiti) at six years.
actuation in intercepting the amount of $2,627.11 supposed to be remitted to another bank is
not only improper; it will also erode the trust and confidence of the international banking
community in the banking system of the country, something we can ill afford at this time when In the dispositive portion of its decision, the trial court ruled that the herein petitioner was
we need to attract and invite deposits of foreign currencies. obligated to pay private respondent the amount of US$2,627.11 or its peso equivalent, with
interest at the legal rate. The court dismissed all other claims and counterclaims.
It would have been different has the telex advice from NCB of Jeddah been for deposit of
$2,627.11 to plaintiff's account No. 830-2410 with the defendant bank. However, the On appeal to the respondent Court, petitioner bank continued to insist that it validly retained
defendant alleged this for the first time in its Memorandum (Pls. see par. 16, p. 6 of the US$2,627.11 in payment of the private respondent's indebtedness by way of
defendant's Memorandum). There was neither any allegation thereof in its pleadings, nor was compensation or set-off, as provided under Art. 1279 of the Civil Code.
there any evidence to prove such fact. On the contrary, the defendant admitted that the telex
advice was for credit of the amount of $2,627.11 to plaintiff's account with Citibank, Greenhills,
The respondent Court of Appeals rejected such argument, saying:
San Juan, Metro-Manila (Pls. see par. of defendant's Answer with Compulsary Counterclaim,
in relation to plaintiff's Complaint). Hence, it is submitted that the set-off or compensation of
$2,627.11 against the double payments to plaintiff's account is not in accordance with law. The telegraphic money transfer was sent by the IBN, plaintiff's principal in Jeddah, Saudi
Arabia, thru the National Commercial Bank of Jeddah, Saudi Arabia (NCB, for short), for
the credit/account of plaintiff with the Citibank, Greenhills Branch, San Juan, Metro Manila,
On this point, the Court finds the plaintiff's theory of agency to be untenable. For one thing,
coursed thru the PNB's head office, the NCB's corresponden(t) bank in the Philippines.
there was no express contract of agency. On the other hand, were we to infer that there was
an implied agency, the same would not be between the plaintiff and defendant, but rather,
between the National Commercial Bank of Jeddah as principal on the one hand, and the The credit account, or simply account means that the amount stated in the telegraphic
defendant as agent on the other. Thus, in case of violation of the agency, the cause of action money transfer is to be credited in the account of plaintiff with the Citibank, and, in that
would accrue to the NCB and not to the plaintiff. sense, presupposes a creditor-debtor relationship between the plaintiff, as creditor and
the Citibank, as debtor. Withal the telegraphic money transfer, no such creditor-debtor
relationship could have been created between the plaintiff and defendant.
The P34,340.38 subject of the supplemental complaint is quite another thing. The plaintiff's
Exh. "E", which is a receipt issued to the plaintiff by the defendant for the amount of
P34,340.00 in "full settlement of accounts receivables with RICB Fund Transfer Department, The telegraphic money transfer, or simply telegraphic transfer(,) was purchased by the
PNB-Escolta base on Legal Department Memo dated February 28, 1987" seems to uphold the IBN from the NCB in Saudi Arabia, and since the PNB is the NCB's corresponden(t) bank
defendant's theory that the said amount was voluntarily delivered by the plaintiff to the in the Philippines, there is created between the two banks a sort of communication
defendant as alleged in the last paragraph of defendant's memorandum. The same is in exchange for the corresponden(t) bank to transmit and/or remit and/or pay the value of the
accordance with the defendant's answer, as follows: telegraphic transfer in accordance with the dictate of the correspondence exchange.
Some such responsibility of the corresponden(t) bank is akin to section 7 of the Rules and
Regulations Implementing E.O. 857, as amended by E.O. 925, ". . . to take charge of the
The retention and application of the amount of P34,340.58 was done in a manner
prompt payment" of the telegraphic transfer, that is, by transmitting the telegraphic money
consonant with basic due process considering that plaintiff was not only furnished
transfer to the Citibank so that the amount can be promptly credited to the account of the
documented proof of the cause but was also given the opportunity to con(tro)vert such
plaintiff with the said bank. That is all that the PNB can do under the remittance
proof .
arrangement that it has with the NCB. With its responsibility as defined as well as by the
nature of its banking business and the responsibility attached to it, and through which the
Moreover, plaintiff, through counsel, communicated his unequivocal and unconditional industry, trade and commerce of all countries and communities are carried on, the PNB's
consent to the retention and application of the amount in question. (Pls. see paragraphs liability as corresponden(t) bank continues until it has completely (sic) performed and
8-9, defendant's Answer with Compulsary Counterclaim to Plaintiff's Supplemental discharged it(s) obligation thereunder." (emphasis ours)
Complaint).
Hence, the respondent Court affirmed the trial court's holding in toto.
This conclusion is borne by the fact that the receipt is in the hands of the plaintiff, indicating
that such receipt was handed over to the plaintiff when he "paid" or allowed the deduction
Dissatisfied, petitioner bank comes before this Court seeking a review of the assailed
from the amount of $28,392.38 from Libya.
Decision.

At any rate, the plaintiff in his Memorandum, stated that the subsequent fund transfer from
The Issue
Brega Petroleum Marketing Company of Libya (from where the P34,340.38 was deducted)
was intended for credit and deposit in plaintiff's account at the defendant's Bank CA No. 830-

43
Petitioner's arguments revolve around one single issue: 6

WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE RESPONDENT

LEGALLY BOUND (UNDER THE PRINCIPLE OF SOLUTIO INDEBITI) TO RETURN TO PNB
THE SUM OF US$2,627.11, IT ERRED IN NOT RULING THAT LEGAL COMPENSATION
HAS TAKEN PLACE WHEN PNB WAS ORDERED BY THE TRIAL COURT TO RETURN TO
PRIVATE RESPONDENT THE SAME AMOUNT. SUCH COURSE OF ACTION IS IN
CONSONANCE WITH SPEEDY AND SUBSTANTIAL JUSTICE, AND WOULD PREVENT
THE UNNECESSARY FILING OF A SUBSEQUENT SUIT BY PNB FOR THE COLLECTION
OF THE SAME AMOUNT FROM PRIVATE RESPONDENT.

The Court's Ruling

We note that in framing the issue in the manner aforecited, the petitioner implicity admits the
G.R. No. L-34539 July 14, 1986
correctness of the respondent Court's affirmance of the trial court's ruling finding herein petitioner
liable to private respondent for the sum of US$2,627.11 or its peso equivalent. And it could not have
done otherwise. After a careful scrutiny of both the decision of the trial court and that of the appellate EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners,
court, we find no reversible error whatsoever in either ruling, and see no need to add to the vs.
extensive discussions already made regarding the non-existence of all the requisites for legal THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL BANK, RAMON C.
compensation to take place. CONCEPCION and MANUEL M. TAMAYO, partners of the defunct partnership Concepcion &
Tamayo Construction Company, JOSE TORIBIO, Atty-in-Fact of Concepcion & Tamayo
Construction Company, and THE DISTRICT ENGINEER, Puerto Princesa,
But petitioner has adopted a novel theory, contending that since respondent Court found that private
Palawan, respondents.
respondent is "an obligor of PNB and the latter, as aforesaid, has become an obligor of private
respondent (resulting in legal compensation), the (h)onorable respondent court should have ordered
private respondent to pay PNB what the latter is bound by the trial court's decision to return the GUTIERREZ, JR., J.:
former."7
This is a petition for review seeking to annul and set aside the decision of the Court of Appeals, now
By this simplistic approach, petitioner in effect seeks to render nugatory the decisions of the trial the Intermediate Appellate Court, affirming the order of the trial court which dismissed the
court and the appellate Court, and have this Court validate its original misdeed, thereby making a petitioners' complaint for cancellation of their real estate mortgage and held them jointly and
mockery of the entire judicial process of this country. What the petitioner bank is effectively saying is severally liable with the principal debtors on a promissory note which they signed as accommodation
that since the respondent Court of Appeals ruled that petitioner bank could not do a shortcut and makers.
simply intercept funds being coursed through it, for transmittal to another bank, and eventually to be
deposited to the account of an individual who happens to owe some amount of money to the
petitioner, and because respondent Court order petitioner bank to return intercepted amount to said The factual background of this case is stated in the decision of the appellate court:
individual, who in turn was found by the appellate Court to be indebted to petitioner bank,
THEREFORE, there must now be legal compensation of the amounts each owes the other, and Appellants are the registered owners of a parcel of land located in Sampaloc, Manila, and
hence, there is no need for petitioner bank to actually return the amount, and finally, that petitioner covered by T.C.T. 35161 of the Register of Deeds of Manila. On October 7, 1954, this
bank ends up in exactly the same position as when it first took the improper and unwarranted property was mortgaged by the appellants to the Philippine National Bank, hereinafter called
shortcut by intercepting the said money transfer, notwithstanding the assailed Decision saying that PNB, to guarantee a loan of P1,000.00 extended to one Domingo Prudencio.
this could not be done!
Sometime in 1955, the Concepcion & Tamayo Construction Company, hereinafter called
We see in this petition a clever ploy to use this Court to validate or legalize an improper act of the Company, had a pending contract with the Bureau of Public Works, hereinafter called the
petitioner bank, with the not impossible intention of using this case as a precedent for similar acts of Bureau, for the construction of the municipal building in Puerto Princess, Palawan, in the
interception in the future. This piratical attitude of the nation's premier bank deserves a warning that amount of P36,800.00 and, as said Company needed funds for said construction, Jose
it should not abuse the justice system in its collection efforts, particularly since we are aware that if Toribio, appellants' relative, and attorney-in-fact of the Company, approached the appellants
the petitioner bank had been in good faith, it could have easily disposed of this controversy in ten asking them to mortgage their property to secure the loan of P10,000.00 which the
minutes flat by means of an exchange of checks with private respondent for the same amount. The Company was negotiating with the PNB.
litigation could have ended there, but it did not. Instead, this plainly unmeritorious case had to clog
our docket and take up the valuable time of this Court.
After some persuasion appellants signed on December 23, 1955 the 'Amendment of Real
Estate Mortgage', mortgaging their said property to the PNB to guaranty the loan of
WHEREFORE, the instant petition is herewith DENIED for being plainly unmeritorious, and the P10,000.00 extended to the Company. The terms and conditions of the original mortgage for
assailed Decision is AFFIRMED in toto. Costs against petitioner. Pl,000.00 were made integral part of the new mortgage for P10,000.00 and both documents
were registered with the Register of Deeds of Manila. The promissory note covering the loan
SO ORDERED. of P10,000.00 dated December 29, 1955, maturing on April 27, 1956, was signed by Jose
Toribio, as attorney-in-fact of the Company, and by the appellants. Appellants also signed
the portion of the promissory note indicating that they are requesting the PNB to issue the
Check covering the loan to the Company. On the same date (December 23, 1955) that the
44
 'Amendment of Real Estate' was executed, Jose Toribio, in the same capacity as attorney- THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT HEREIN
in- fact of the Company, executed also the 'Deed of Assignment' assigning all payments to PETITIONERS WERE SOLIDARY CO-DEBTORS INSTEAD OF SURETIES:
be made by the Bureau to the Company on account of the contract for the construction of
the Puerto Princesa building in favor of the PNB.
II. Second Assignment of Error.

This assignment of credit to the contrary notwithstanding, the Bureau; with approval, of the
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS
PNB, conditioned, however that they should be for labor and materials, made three
WERE NOT RELEASED FROM THEIR OBLIGATION TO THE RESPONDENT PNB,
payments to the Company on account of the contract price totalling P11,234.40. The
WHEN THE PNB, WITHOUT THE KNOWLEDGE AND CONSENT OF PETITIONERS,
Bureau's last request for P5,000.00 on June 20, 1956, however, was denied by the PNB for
CHANGED THE TENOR AND CONDITION OF THE ASSIGNMENT OF PAYMENTS MADE
the reason that since the loan was already overdue as of April 28, 1956, the remaining
BY THE PRINCIPAL DEBTOR; CONCEPCION & TAMAYO CONSTRUCTION COMPANY;
balance of the contract price should be applied to the loan.
AND RELEASED TO SUCH PRINCIPAL DEBTOR PAYMENTS FROM THE BUREAU OF
PUBLIC WORKS WHICH WERE MORE THAN ENOUGH TO WIPE OUT THE
The Company abandoned the work, as a consequence of which on June 30, 1956, the INDEBTEDNESS TO THE PNB.
Bureau rescinded the construction contract and assumed the work of completing the
building. On November 14, 1958, appellants wrote the PNB contending that since the PNB
The petitioners contend that as accommodation makers, the nature of their liability is only that of
authorized payments to the Company instead of on account of the loan guaranteed by the
mere sureties instead of solidary co-debtors such that "a material alteration in the principal contract,
mortgage there was a change in the conditions of the contract without the knowledge of
effected by the creditor without the knowledge and consent of the sureties, completely discharges
appellants, which entitled the latter to a cancellation of their mortgage contract.
the sureties from all liability on the contract of suretyship. " They state that when respondent PNB
did not apply the initial and subsequent payments to the petitioners' debt as provided for in the deed
Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27, of assignment, they were released from their obligation as sureties and, therefore, the real estate
1959 this action against the PNB, the Company, the latter's attorney-in-fact Jose Toribio, mortgage executed by them should have been cancelled.
and the District Engineer of Puerto Princesa, Palawan, seeking the cancellation of their real
estate mortgage. The complaint was amended to exclude the Company as defendant, it
Section 29 of the Negotiable Instrument Law provides:
having been shown that its life as a partnership had already expired and, in lieu thereof,
Ramon Concepcion and Manuel M. Tamayo, partners of the defunct Company, were
impleaded in their private capacity as defendants. Liability of accommodation party. —An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for
the purpose of lending his name to some other person. Such a person is liable on the
After hearing, the trial court rendered judgment, denying the prayer in the complaint that the
instrument to a holder for value, notwithstanding such holder at the time of taking the
petitioners be absolved from their obligation under the mortgage contract and that the said mortgage
instrument knew him to be only an accommodation party.
be released or cancelled. The petitioners were ordered to pay jointly and severally with their co-
makers Ramon C. Concepcion and Manuel M. Tamayo the sum of P11,900.19 with interest at the
rate of 6% per annum from the date of the filing of the complaint on June 27, 1959 until fully paid In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held that "... in
and Pl,000.00 attorney's fees. lending his name to the accommodated party, the accommodation party is in effect a surety. ... . "
However, unlike in a contract of suretyship, the liability of the accommodation party remains not only
primary but also unconditional to a holder for value such that even if the accommodated party
The decision also provided that if the judgment was not satisfied within 90 days from its receipt, the
receives an extension of the period for payment without the consent of the accommodation party,
mortgaged properties together with all the improvements thereon belonging to the petitioners would
the latter is still liable for the whole obligation and such extension does not release him because as
be sold at public auction and applied to the judgment debt.
far as a holder for value is concerned, he is a solidary co- debtor.

The Court of Appeals affirmed the trial court's decision in toto stating that, as accommodation
Expounding on the nature of the liability of an accommodation petition party under the aforequoted
makers, the petitioners' liability is that of solidary co-makers and that since "the amounts released to
section, we ruled in Ang Tiong v. Ting (22 SCRA 713, 716):
the construction company were used therein and, therefore, were spent for the successful
accomplishment of the work constructed for, the authorization made by the Philippine National Bank
of partial payments to the construction company which was also one of the solidary debtors cannot 3. That the appellant, again assuming him to be an accommodation indorser, may obtain
constitute a valid defense on the part of the other solidary debtors. Moreover, those who rendered security from the maker to protect himself against the danger of insolvency of the latter,
services and furnished materials in the construction are preferred creditors and have a lien on the cannot in any manner affect his liability to the appellee, as the said remedy is a matter of
price of the contract." The appellate court further held that PNB had no obligation whatsoever to concern exclusively between accommodation indorser and accommodated party. So that
notify the petitioners of its authorizing the three payments in the total amount of Pll,234.00 in favor of the appellant stands only as a surety in relation to the maker, granting this to be true for the
the Company because aside from the fact that the petitioners were not parties to the deed of sake of argument, is immaterial to the claim of the appellee, and does not a whit diminish
assignment, there was no stipulation in said deed making it obligatory on the part of the PNB to nor defeat the rights of the latter who is a holder for value. The liability of the appellant
notify the petitioners everytime it authorizes payment to the Company. It ruled that the petitioners remains primary and unconditional. To sanction the appellant's theory is to give unwarranted
cannot ask to be released from the real estate mortgage. legal recognition to the patent absurdity of a situation where an indorser, when sued on an
instrument by a holder in due course and for value, can escape liability on his indorsement
by the convenient expedient of interposing the defense that he is a mere accommodation
In this petition, the petitioners raise the following issues which they present in the form of errors:
indorser.

I. First Assignment of Error.

There is, therefore, no question that as accommodation makers, petitioners would be primarily and
unconditionally liable on the promissory note to a holder for value, regardless of whether they stand

45
as sureties or solidary co-debtors since such distinction would be entirely immaterial and Under the terms of the above Deed, it is clear that there are no further conditions which could
inconsequential as far as a holder for value is concerned. Consequently, the petitioners cannot claim possibly alter the agreement without the consent of the petitioners such as the grant of greater
to have been released from their obligation simply because the time of payment of such obligation priority to obligations other than the payment of the loan due to the PNB and part of which loan was
was temporarily deferred by PNB without their knowledge and consent. There has to be another guaranteed by the petitioners in the amount of P10,000.00.
basis for their claim of having been freed from their obligation. The question which should be
resolved in this instant petition, therefore, is whether or not PNB can be considered a holder for
This, notwithstanding, PNB approved the Bureau's release of three payments directly to the
value under Section 29 of the Negotiable Instruments Law such that the petitioners must be
Company instead of paying the same to the Bank. This approval was in violation of the Deed of
necessarily barred from setting up the defense of want of consideration or some other personal
Assignment and without any notice to the petitioners who stood to lose their property once the
defenses which may be set up against a party who is not a holder in due course.
promissory note falls due without the same having been paid because the PNB, in effect, waived
payments of the first three releases. From the foregoing circumstances, PNB can not be regarded
A holder for value under Section 29 of the Negotiable Instruments Law is one who must meet all the as having acted in good faith which is also one of the requisites of a holder in due course under
requirements of a holder in due course under Section 52 of the same law except notice of want of Section 52 of the Negotiable Instruments Law. The PNB knew that the promissory note which it took
consideration. (Agbayani, Commercial Laws of the Philippines, 1964, p. 208). If he does not qualify from the accommodation makers was signed by the latter because of full reliance on the Deed of
as a holder in due course then he holds the instrument subject to the same defenses as if it were Assignment, which, PNB had no intention to comply with strictly. Worse, the third payment to the
non-negotiable (Section 58, Negotiable Instruments Law). Company in the amount of P4,293.60 was approved by PNB although the promissory note was
almost a month overdue, an act which is clearly detrimental to the petitioners.
In the case at bar, can PNB, the payee of the promissory note be considered a holder in due
course? We, therefore, hold that respondent PNB is not a holder in due course. Thus, the petitioners can
validly set up their personal defense of release from the real estate mortgage against PNB. The
latter, in authorizing the third payment to the Company after the promissory note became due, in
Petitioners contend that the payee PNB is an immediate party and, therefore, is not a holder in due
effect, extended the term of the payment of the note without the consent of the accommodation
course and stands on no better footing than a mere assignee.
makers who stand as sureties to the accommodated party and to all other parties who are not
holders in due course or who do not derive their right from the same, including PNB.
In those cases where a payee was considered a holder in due course, such payee either acquired
the note from another holder or has not directly dealt with the maker thereof. As was held in the
It may be argued that the Prudencios could have mortgaged their property even without the
case of Bank of Commerce and Savings v. Randell (186 NorthWestern Reporter 71):
promissory note. The records show, however, that they would not have mortgaged the lot were it not
for the sake of the Company whose attorney-in-fact was their relative. The spouses did not need the
We conclude, therefore, that a payee who receives a negotiable promissory note, in good money for themselves.
faith, for value, before maturity, and without any notice of any infirmity, from a holder, not the
maker. to whom it was negotiated as a completed instrument, is a holder in due course
The attorney-in-fact tried twice to convince the Prudencios to mortgage their property in order to
within the purview of a Negotiable Instruments law, so as to preclude the defense of fraud
secure a loan in favor of the Company but the Prudencios refused. It was only when the deed of
and failure of consideration between the maker and the holder to whom the instrument, was
assignment was shown to the spouses that they consented to the mortgage and signed the
delivered.
promissory note in the Bank's favor.

Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on rehearing and
Article 2085 of the Civil Code enumerates the requisites of a valid mortgage contract. Petitioners do
quoting Daniel on Negotiable Instruments, it was held:
not dispute the validity of the mortgage. They only want to have it cancelled because the Bank
violated the deed of assignment and extended the period of time of payment of the promissory note
It is a general principle of the law merchant that, as between the immediate parties to a without the petitioners' consent and to the latter's detriment.
negotiable instrument-the parties between whom there is a privity-the consideration may be
inquired into; and as to them the only superiority of a bill or note over other unsealed
The mortgage cannot be separated from the promissory note for it is the latter which is the basis of
evidence of debt is that it prima facie imports a consideration.
determining whether the mortgage should be foreclosed or cancelled. Without the promissory note
which determines the amount of indebtedness there would have been no basis for the mortgage.
Although as a general rule, a payee may be considered a holder in due course we think that such a
rule cannot apply with respect to the respondent PNB. Not only was PNB an immediate party or in
True, if the Bank had not been the assignee, then the petition petitioners would be obliged to pay the
privy to the promissory note, that is, it had dealt directly with the petitioners knowing fully well that
Bank as their creditor on the promissory note, irrespective of whether or not the deed of assignment
the latter only signed as accommodation makers but more important, it was the Deed of Assignment
had been violated. However, the assignee and the creditor in this case are one and the same—the
executed by the Construction Company in favor of PNB which principally moved the petitioners to
Bank itself. When the Bank violated the deed of assignment, it prejudiced itself because its very
sign the promissory note also in favor of PNB. Petitioners were made to believe and on that belief
violation was the reason why it was not paid on time in its capacity as creditor in the promissory
entered into the agreement that no other conditions would alter the terms thereof and yet, PNB
note. It would be unfair to make the petitioners now answer for the debt or to foreclose on their
altered the same. The Deed of Assignment specifically provided that Jose F. Toribio, on behalf of
property.
the Company, "have assigned, transferred and conveyed and by these presents, do assign, transfer
and convey unto the said Philippine National Bank, its successors and assigns all payments to be
received from the Bureau of Public Works on account of contract for the construction of the Puerto Neither can PNB justify its acts on the ground that the Bureau of Public Works approved the deed of
Princesa Municipal Building in Palawan, involving the total amount of P 36,000.00" and that "This assignment with the condition that the wages of laborers and materials needed in the construction
assignment shall be irrevocable and subject to the terms and conditions of the promissory note and work must take precedence over the payment of the promissory note. In the first place, PNB did not
or any other kind of documents which the Philippine National Bank have required or may require the need the approval of the Bureau. But even if it did, it should have informed the petitioners about the
assignor to execute to evidence the above-mentioned obligation." amendment of the deed of assignment. Secondly, the wages and materials have already been paid.

46
That issue is academic. What is in dispute is who should bear the loss in this case. As between the In support of his theory that the checks were issued for accommodation, private respondent testified
petitioners and the Bank, the law and the equities of the case favor the petitioners, And thirdly, the that he bad issued the checks in the name of Travel-On in order that its General Manager, Elita
wages and materials constitute a lien only on the constructed building but do not enjoy preference Montilla, could show to Travel-On's Board of Directors that the accounts receivable of the company
over the loan unless there is a liquidation proceeding such as in insolvency or settlement of estate. were still good. He further stated that Elita Montilla tried to encash the same, but that these were
(See Philippine Savings Bank v. Lantin, 124 SCRA 476). There were remedies available at the time dishonored and were subsequently returned to him after the accommodation purpose had been
if the laborers and the creditors had not been paid. The fact is, they have been paid. Hence, when attained.
the PNB accepted the condition imposed by the Bureau without the knowledge or consent of the
petitioners, it amended the deed of assignment which, as stated earlier, was the principal reason
Travel-On's witness, Elita Montilla, on the other hand explained that the "accommodation" extended
why the petitioners consented to become accommodation makers.
to Travel-On by private respondent related to situations where one or more of its passengers
needed money in Hongkong, and upon request of Travel-On respondent would contact his friends in
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals affirming the Hongkong to advance Hongkong money to the passenger. The passenger then paid Travel-On upon
decision of the trial court is hereby REVERSED and SET ASIDE and a new one entered absolving his return to Manila and which payment would be credited by Travel-On to respondent's running
the petitioners from liability on the promissory note and under the mortgage contract. The Philippine account with it.
National Bank is ordered to release the real estate mortgage constituted on the property of the
petitioners and to pay the amount of THREE THOUSAND PESOS (P3,000.00) as attorney's fees.
In its decision dated 31 January 1975, the court a quo ordered Travel-On to pay private respondent
the amount of P8,894.91 representing net overpayments by private respondent, moral damages of
SO ORDERED. P10,000.00 for the wrongful issuance of the writ of attachment and for the filing of this case,
P5,000.00 for attorney's fees and the costs of the suit.

The trial court ruled that private respondent's indebtedness to petitioner was not satisfactorily
established and that the postdated checks were issued not for the purpose of encashment to pay his
G.R. No. L-56169 June 26, 1992
indebtedness but to accommodate the General Manager of Travel-On to enable her to show to the
Board of Directors that Travel-On was financially stable.
TRAVEL-ON, INC., petitioner,
vs.
Petitioner filed a motion for reconsideration that was, however, denied by the trial court, which in fact
COURT OF APPEALS and ARTURO S. MIRANDA, respondents.
then increased the award of moral damages to P50,000.00.

RESOLUTION
On appeal, the Court of Appeals affirmed the decision of the trial court, but reduced the award of
moral damages to P20,000.00, with interest at the legal rate from the date of the filing of the Answer
FELICIANO, J.: on 28 August 1972.

Petitioner Travel-On. Inc. ("Travel-On") is a travel agency selling airline tickets on commission basis Petitioner moved for reconsideration of the Court of Appeal's' decision, without success.
for and in behalf of different airline companies. Private respondent Arturo S. Miranda had a revolving
credit line with petitioner. He procured tickets from petitioner on behalf of airline passengers and
In the instant Petition for Review, it is urged that the postdated checks are per se evidence of
derived commissions therefrom.
liability on the part of private respondent. Petitioner further argues that even assuming that the
checks were for accommodation, private respondent is still liable thereunder considering that
On 14 June 1972, Travel-On filed suit before the Court of First Instance ("CFI") of Manila to collect petitioner is a holder for value.
on six (6) checks issued by private respondent with a total face amount of P115,000.00. The
complaint, with a prayer for the issuance of a writ of preliminary attachment and attorney's fees,
Both the trial and appellate courts had rejected the checks as evidence of indebtedness on the
averred that from 5 August 1969 to 16 January 1970, petitioner sold and delivered various airline
ground that the various statements of account prepared by petitioner did not show that Private
tickets to respondent at a total price of P278,201.57; that to settle said account, private respondent
respondent had an outstanding balance of P115,000.00 which is the total amount of the checks he
paid various amounts in cash and in kind, and thereafter issued six (6) postdated checks amounting
issued. It was pointed out that while the various exhibits of petitioner showed various
to P115,000.00 which were all dishonored by the drawee banks. Travel-On further alleged that in
accountabilities of private respondent, they did not satisfactorily establish the amount of the
March 1972, private respondent made another payment of P10,000.00 reducing his indebtedness to
outstanding indebtedness of private respondent. The appellate court made much of the fact that the
P105,000.00. The writ of attachment was granted by the court a quo.
figures representing private respondent's unpaid accounts found in the "Schedule of Outstanding
Account" dated 31 January 1970 did not tally with the figures found in the statement which showed
In his answer, private respondent admitted having had transactions with Travel-On during the period private respondent's transactions with petitioner for the years 1969 and 1970; that there was no
stipulated in the complaint. Private respondent, however, claimed that he had already fully paid and satisfactory explanation as to why the total outstanding amount of P278,432.74 was still used as
even overpaid his obligations and that refunds were in fact due to him. He argued that he had issued basis in the accounting of 7 April 1972 considering that according to the table of transactions for the
the postdated checks for purposes of accommodation, as he had in the past accorded similar favors year 1969 and 1970, the total unpaid account of private respondent amounted to P239,794.57.
to petitioner. During the proceedings, private respondent contested several tickets alleged to have
been erroneously debited to his account. He claimed reimbursement of his alleged over payments,
We have, however, examined the record and it shows that the 7 April 1972 Statement of Account
plus litigation expenses, and exemplary and moral damages by reason of the allegedly improper
had simply not been updated; that if we use as basis the figure as of 31 January 1970 which is
attachment of his properties.
P278,432.74 and from it deduct P38,638.17 which represents some of the payments subsequently
made by private respondent, the figure — P239,794.57 will be obtained.

47
Also, the fact alone that the various statements of account had variances in figures, simply did not accommodating party has warranted to the holder in due course that he will pay the same
mean that private respondent had no more financial obligations to petitioner. It must be stressed that according to its tenor. 3
private respondent's account with petitioner was a running or open one, which explains the varying
figures in each of the statements rendered as of a given date.
In the case at bar, Travel-On was payee of all six (6) checks, it presented these checks for payment
at the drawee bank but the checks bounced. Travel-On obviously was not an accommodated party;
The appellate court erred in considering only the statements of account in determining whether it realized no value on the checks which bounced.
private respondent was indebted to petitioner under the checks. By doing so, it failed to give due
importance to the most telling piece of evidence of private respondent's indebtedness — the checks
Travel-On was entitled to the benefit of the statutory presumption that it was a holder in due
themselves which he had issued.
course, 4 that the checks were supported by valuable consideration. 5 Private respondent maker of
the checks did not successfully rebut these presumptions. The only evidence aliunde that private
Contrary to the view held by the Court of Appeals, this Court finds that the checks are the all respondent offered was his own self-serving uncorroborated testimony. He claimed that he had
important evidence of petitioner's case; that these checks clearly established private respondent's issued the checks to Travel-On as payee to "accommodate" its General Manager who allegedly
indebtedness to petitioner; that private respondent was liable thereunder. wished to show those checks to the Board of Directors of Travel-On to "prove" that Travel-On's
account receivables were somehow "still good." It will be seen that this claim was in fact a claim that
the checks were merely simulated, that private respondent did not intend to bind himself thereon.
It is important to stress that a check which is regular on its face is deemed prima facie to have been
Only evidence of the clearest and most convincing kind will suffice for that purpose; 6 no such
issued for a valuable consideration and every person whose signature appears thereon is deemed
evidence was submitted by private respondent. The latter's explanation was denied by Travel-On's
to have become a party thereto for value. 1 Thus, the mere introduction of the instrument sued on in
General Manager; that explanation, in any case, appears merely contrived and quite hollow to us.
evidence prima facie entitles the plaintiff to recovery. Further, the rule is quite settled that a
Upon the other hand, the "accommodation" or assistance extended to Travel-On's passengers
negotiable instrument is presumed to have been given or indorsed for a sufficient consideration
abroad as testified by petitioner's General Manager involved, not the accommodation transactions
unless otherwise contradicted and overcome by other competent evidence. 2
recognized by the NIL, but rather the circumvention of then existing foreign exchange regulations by
passengers booked by Travel-On, which incidentally involved receipt of full consideration by private
In the case at bar, the Court of Appeals, contrary to these established rules, placed the burden of respondent.
proving the existence of valuable consideration upon petitioner. This cannot be countenanced; it
was up to private respondent to show that he had indeed issued the checks without sufficient
Thus, we believe and so hold that private respondent must be held liable on the six (6) checks here
consideration. The Court considers that Private respondent was unable to rebut satisfactorily this
involved. Those checks in themselves constituted evidence of indebtedness of private respondent,
legal presumption. It must also be noted that those checks were issued immediately after a letter
evidence not successfully overturned or rebutted by private respondent.
demanding payment had been sent to private respondent by petitioner Travel-On.

Since the checks constitute the best evidence of private respondent's liability to petitioner Travel-On,
The fact that all the checks issued by private respondent to petitioner were presented for payment
the amount of such liability is the face amount of the checks, reduced only by the P10,000.00 which
by the latter would lead to no other conclusion than that these checks were intended for
Travel-On admitted in its complaint to have been paid by private respondent sometime in March
encashment. There is nothing in the checks themselves (or in any other document for that matter)
1992.
that states otherwise.

The award of moral damages to Private respondent must be set aside, for the reason that
We are unable to accept the Court of Appeals' conclusion that the checks here involved were issued
Petitioner's application for the writ of attachment rested on sufficient basis and no bad faith was
for "accommodation" and that accordingly private respondent maker of those checks was not liable
shown on the part of Travel-On. If anyone was in bad faith, it was private respondent who issued
thereon to petitioner payee of those checks.
bad checks and then pretended to have "accommodated" petitioner's General Manager by assisting
her in a supposed scheme to deceive petitioner's Board of Directors and to misrepresent Travel-
In the first place, while the Negotiable Instruments Law does refer to accommodation transactions, On's financial condition.
no such transaction was here shown. Section 29 of the Negotiable Instruments Law provides as
follows:
ACCORDINGLY, the Court Resolved to GRANT due course to the Petition for Review
on Certiorari and to REVERSE and SET ASIDE the Decision dated 22 October 1980 and the
Sec. 29. Liability of accommodation party. — An accommodation party is one who has Resolution of 23 January 1981 of the Court of Appeals, as well as the Decision dated 31 January
signed the instrument as maker, drawer, acceptor, or indorser, without receiving value 1975 of the trial court, and to enter a new decision requiring private respondent Arturo S. Miranda to
therefor, and for the purpose of lending his name to some other person. Such a person pay to petitioner Travel-On the amount of P105,000.00 with legal interest thereon from 14 June
is liable on the instrument to a holder for value, notwithstanding such holder, at the time 1972, plus ten percent (10%) of the total amount due as attorney's fees. Costs against Private
of taking the instrument, knew him to be only an accommodation party. respondent.

In accommodation transactions recognized by the Negotiable Instruments Law, an

accommodating party lends his credit to the accommodated party, by issuing or indorsing a
check which is held by a payee or indorsee as a holder in due course, who gave full value
therefor to the accommodated party. The latter, in other words, receives or realizes full value
which the accommodated party then must repay to the accommodating party, unless of course
the accommodating party intended to make a donation to the accommodated party. But the
accommodating party is bound on the check to the holder in due course who is necessarily a
third party and is not the accommodated party. Having issued or indorsed the check, the

48
 On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels of land to
Wonderland Food Industries, Inc. In their Memorandum of Agreement, 3 the parties covenanted that
the purchase price of Five Million (P5,000,000.00) Pesos would be settled by the vendee, under the
following terms and conditions: (1) One Million (P1,000,000.00) Pesos shall be paid in cash upon
the signing of the agreement; (2) Two Million (P2,000,000.00) Pesos worth of common shares of
stock of the Wonderland Food Industries, Inc.; and (3) The balance of P2,000,000.00 shall be paid
in four equal installments, the first installment falling due, 180 days after the signing of the
agreement and every six months thereafter, with an interest rate of 18% per annum, to be advanced
G.R. No. 117660               December 18, 2000
by the vendee upon the signing of the agreement.

AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, On July 19, 1982, the vendor, the vendee, and the respondent bank Regent Savings & Loan Bank
vs. (formerly Summa Savings & Loan Association), executed an Addendum 4 to the previous
THE HON. COURT OF APPEALS and REGENT SAVINGS and LOAN BANK, INC., respondents. Memorandum of Agreement. The new arrangement pertained to the revision of settlement of the
initial payments of P1,000,000.00 and prepaid interest of P360,000.00 (18% of P2,000,000.00) as
DECISION follows:

QUISUMBING, J.: Whereas, the parties have agreed to qualify the stipulated terms for the payment of the said ONE
MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS.
This is a petition for review challenging the decision 1 dated October 17, 1994 of the Court of Appeals
in CA-G.R. No. 32933, which affirmed in toto the judgment of the Manila Regional Trial Court, WHEREFORE, in consideration of the mutual covenant and agreement of the parties, they do
Branch 27, in consolidated Cases Nos. 86-37374, 86-37388, 86-37543. further covenant and agree as follows:

This petition springs from three complaints for sums of money filed by respondent bank against 1. That the VENDEE instead of paying the amount of ONE MILLION THREE HUNDRED
herein petitioners. In the decision of the Court of Appeals, petitioners were ordered to pay SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby authorizes the VENDOR to
respondent bank, as follows: obtain a loan from Summa Savings and Loan Association with office address at
Valenzuela, Metro Manila, being represented herein by its President, Mr. Jaime Cariño
and referred to hereafter as Financier; in the amount of ONE MILLION THREE
Wherefore, judgment is hereby rendered in favor of plaintiff and against defendants, as follows: HUNDRED SIXTY THOUSAND (P1,360,000.00)PESOS, plus interest thereon at such
rate as the VENDEE and the Financier may agree, which amount shall cover the ONE
1) In Civil Case No. 86-37374, defendants [petitioners, herein] are ordered jointly and MILLION (P1,000,000.00) PESOS cash which was agreed to be paid upon signing of the
severally, to pay to plaintiff the amount of P78,212.29, together with interest and service Memorandum of Agreement, plus 18% interest on the balance of two million pesos
charge thereon, at the rates of 14% and 3% per annum, respectively, computed from stipulated upon in Item No. 1(c) of the said agreement; provided however, that said loan
November 10, 1982, until fully paid, plus stipulated penalty on unpaid principal at the rate shall be made for and in the name of the VENDOR.
of 6% per annum, computed from November 10, 1982, plus 15% as liquidated damage
plus 10% of the total amount due, as attorney’s fees, plus costs; 2. The VENDEE also agrees that the full amount of ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to the VENDOR; however,
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the amount of the VENDEE hereby undertakes to pay the full amount of the said loan to the Financier on
P632,911.39, together with interest and service charge thereon at the rate of 14% and 3% such terms and conditions agreed upon by the Financier and the VENDOR, it being
per annum, respectively, computed from January 15, 1983, until fully paid, plus stipulated understood that while the loan will be secured from and in the name of the VENDOR, the
penalty on unpaid principal at the rate of 6% per annum, computed from January 15, VENDEE will be the one liable to pay the entire proceeds thereof including interest and
1983, plus liquidated damages equivalent to 15% of the total amount due, plus attorney’s other charges.5
fees equivalent to 10% of the total amount due, plus costs; and
This addendum was not notarized.
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the first cause of
action, the amount of P510,000.00, together with interest and service charge thereon, at Consequently, petitioner Mario Soriano signed as maker several promissory notes, 6 payable to the
the rates of 14% and 2% per annum, respectively, computed from March 13, 1983, until respondent bank. Thereafter, the bank released the proceeds of the loan to petitioners. However,
fully paid, plus a penalty of 6% per annum, based on the outstanding principal of the loan, petitioners failed to meet their obligations as they fell due. During that time, the bank was
computed from March 13, 1983, until fully paid; and on the second cause of action, the experiencing financial turmoil and was under the supervision of the Central Bank. Central Bank
amount of P494,936.71, together with interest and service charge thereon at the rates of examiner and liquidator Cordula de Jesus, endorsed the subject promissory notes to the bank’s
14% and 2%, per annum, respectively, computed from March 30, 1983, until fully paid, counsel for collection. The bank gave petitioners opportunity to settle their account by extending
plus a penalty charge of 6% per annum, based on the unpaid principal, computed from payment due dates. Mario Soriano manifested his intention to re-structure the loan, yet did not show
March 30, 1983, until fully paid, plus (on both causes of action) an amount equal to 15% up nor submit his formal written request.
of the total amounts due, as liquidated damages, plus attorney’s fees equal to 10% of the
total amounts due, plus costs.2
Respondent bank filed three separate complaints before the Regional Trial Court of Manila for
Collection of Sums of money. The corresponding case histories are illustrated in the table below:
Based on the records, the following are the factual antecedents.

49
 By this time, we note a subsidiary contract of suretyship had taken effect since petitioners signed the
Date Amount Payment Payment promissory notes as maker and accommodation party for the benefit of Wonderland. Petitioners
of Due Extension became liable as accommodation party. An accommodation party is a person who has signed the
Loan Date Dates instrument as maker, acceptor, or indorser, without receiving value therefor, and for the purpose of
lending his name to some other person and is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument knew (the signatory) to be an
Civil Case 86-37374 P 78,212.29 Nov. 10, 1982 Feb. 8, 1983
accommodation party.8 He has the right, after paying the holder, to obtain reimbursement from the
August 12, 1982 May 9, 1983
party accommodated, since the relation between them has in effect become one of principal and
Aug. 7, 1983
surety, the accommodation party being the surety.9 Suretyship is defined as the relation which exists
where one person has undertaken an obligation and another person is also under the obligation or
Civil Case 86-37388 P 632,911.39 Jan. 15, 1983 May 16, 1983 other duty to the obligee, who is entitled to but one performance, and as between the two who are
July 19, 1982 Aug. 14, 1983 bound, one rather than the other should perform.10 The surety’s liability to the creditor or promisee of
the principal is said to be direct, primary and absolute; in other words, he is directly and equally
bound with the principal.11 And the creditor may proceed against any one of the solidary debtors.12
Civil Case 86-37543 P 510,000.00 March 13, 1983 June 11, 1983
September 14, 1982 P 494,936.71 March 30, 1983 Sept. 9, 1983
October 1, 1982 June 28, 1983 We do not give credence to petitioners’ assertion that, as provided by the addendum, their obligation
Sept. 26, 1983 to pay the promissory notes was novated by "substitution" of a new debtor, Wonderland. Contrary to
petitioners’ contention, the attendant facts herein do not make a case of novation.

In their answer, petitioners interposed the defense of novation and insisted there was a valid Novation is the extinguishment of an obligation by the substitution or change of the obligation by a
substitution of debtor. They alleged that the addendum specifically states that although the subsequent one which extinguishes or modifies the first, either by changing the object or principal
promissory notes were in their names, Wonderland shall be responsible for the payment thereof. conditions, or by substituting another in place of the debtor, or by subrogating a third person in the
rights of the creditor.13 In order that a novation can take place, the concurrence of the following
requisites14 are indispensable:
The trial court held that petitioners are liable, to wit:

1) There must be a previous valid obligation;

The evidences, however, disclose that Wonderland did not comply with its obligation under said
‘Addendum’ (Exh. ‘S’) as the agreement to turn over the farmland to it, did not materialize (57 tsn,
May 29, 1990), and there was, actually no sale of the land (58 tsn, ibid). Hence, Wonderland is not 2) There must be an agreement of the parties concerned to a new contract;
answerable. And since the loans obtained under the four promissory notes (Exhs. ‘A’, ‘C’, ‘G’, and
‘E’) have not been paid, despite opportunities given by plaintiff to defendants to make payments, it
3) There must be the extinguishment of the old contract; and
stands to reason that defendants are liable to pay their obligations thereunder to plaintiff. In fact,
defendants failed to file a third-party complaint against Wonderland, which shows the weakness of
its stand that Wonderland is answerable to make said payments.7 4) There must be the validity of the new contract.

Petitioners appealed to the Court of Appeals. The trial court’s decision was affirmed by the appellate In the instant case, the first requisite for a valid novation is lacking. There was no novation by
court. "substitution" of debtor because there was no prior obligation which was substituted by a new
contract. It will be noted that the promissory notes, which bound the petitioners to pay, were
executed after the addendum. The addendum modified the contract of sale, not the stipulations in
Hence, this recourse, wherein petitioners raise the sole issue of:
the promissory notes which pertain to the surety contract. At this instance, Wonderland apparently
assured the payment of future debts to be incurred by the petitioners. Consequently, only a contract
WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE ADDENDUM, of surety arose. It was wrong for petitioners to presume a novation had taken place. The well-settled
SIGNED BY THE PETITIONERS, RESPONDENT BANK AND WONDERLAND INC., rule is that novation is never presumed, 15 it must be clearly and unequivocally shown. 16
CONSTITUTES A NOVATION OF THE CONTRACT BY SUBSTITUTION OF DEBTOR, WHICH
EXEMPTS THE PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY NOTES.
As it turned out, the contract of surety between Wonderland and the petitioners was extinguished by
the rescission of the contract of sale of the farmland. With the rescission, there was confusion or
Revealed by the facts on record, the conflict among the parties started from a contract of sale of a merger in the persons of the principal obligor and the surety, namely the petitioners herein. The
farmland between petitioners and Wonderland Food Industries, Inc. As found by the trial court, no addendum which was dependent thereon likewise lost its efficacy.
such sale materialized.
It is true that the basic and fundamental rule in the interpretation of contract is that, if the terms
A contract of sale is a reciprocal transaction. The obligation or promise of each party is the cause or thereof are clear and leave no doubt as to the intention of the contracting parties, the literal meaning
consideration for the obligation or promise by the other. The vendee is obliged to pay the price, shall control. However, in order to judge the intention of the parties, their contemporaneous and
while the vendor must deliver actual possession of the land. In the instant case the original plan was subsequent acts should be considered.17
that the initial payments would be paid in cash. Subsequently, the parties (with the participation of
respondent bank) executed an addendum providing instead, that the petitioners would secure a loan
The contract of sale between Wonderland and petitioners did not materialize. But it was admitted
in the name of Agro Conglomerates Inc. for the total amount of the initial payments, while the
that petitioners received the proceeds of the promissory notes obtained from respondent bank.
settlement of said loan would be assumed by Wonderland. Thereafter, petitioner Soriano signed
several promissory notes and received the proceeds in behalf of petitioner-company.

50
Sec. 22 of the Civil Code provides: 1994 for P18,743.00; BPI Check No. 1112646 dated June 26, 1994 for P25,000.00; and Equitable
PCI Bank Check No. 021491B dated June 20, 1994 for P168,000.00.
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 Subsequently, Ybañez sent a letter dated June 10, 1994 addressed to Lim. In the letter Ybañez
return the same to him. asked Lim to cancel all the checks issued by her in Saban’s favor and to "extend another partial
payment" for the lot in his (Ybañez’s) favor. 6
Petitioners had no legal or just ground to retain the proceeds of the loan at the expense of private
respondent. Neither could petitioners excuse themselves and hold Wonderland still liable to pay the After the four checks in his favor were dishonored upon presentment, Saban filed a Complaint for
loan upon the rescission of their sales contract. If petitioners sustained damages as a result of the collection of sum of money and damages against Ybañez and Lim with the Regional Trial Court
rescission, they should have impleaded Wonderland and asked damages. The non-inclusion of a (RTC) of Cebu City on August 3, 1994. 7 The case was assigned to Branch 20 of the RTC.
necessary party does not prevent the court from proceeding in the action, and the judgment
rendered therein shall be without prejudice to the rights of such necessary party. 18 But respondent
In his Complaint, Saban alleged that Lim and the Spouses Lim agreed to purchase the lot
appellate court did not err in holding that petitioners are duty-bound under the law to pay the claims
for P600,000.00, i.e., with a mark-up of Four Hundred Thousand Pesos (P400,000.00) from the
of respondent bank from whom they had obtained the loan proceeds.
price set by Ybañez. Of the total purchase price of P600,000.00, P200,000.00 went to
Ybañez, P50,000.00 allegedly went to Lim’s agent, and P113,257.00 was given to Saban to cover
WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of the Court of taxes and other expenses incidental to the sale. Lim also issued four (4) postdated checks 8 in favor
Appeals dated October 17, 1994 is AFFIRMED. Costs against petitioners. of Saban for the remaining P236,743.00.9

SO ORDERED. Saban alleged that Ybañez told Lim that he (Saban) was not entitled to any commission for the sale
since he concealed the actual selling price of the lot from Ybañez and because he was not a
licensed real estate broker. Ybañez was able to convince Lim to cancel all four checks.

Saban further averred that Ybañez and Lim connived to deprive him of his sales commission by
withholding payment of the first three checks. He also claimed that Lim failed to make good the
fourth check which was dishonored because the account against which it was drawn was closed.
G.R. No. 163720             December 16, 2004
In his Answer, Ybañez claimed that Saban was not entitled to any commission because he
GENEVIEVE LIM, petitioner, concealed the actual selling price from him and because he was not a licensed real estate broker.
vs.
FLORENCIO SABAN, respondents.
Lim, for her part, argued that she was not privy to the agreement between Ybañez and Saban, and
that she issued stop payment orders for the three checks because Ybañez requested her to pay the
TINGA, J.: purchase price directly to him, instead of coursing it through Saban. She also alleged that she
agreed with Ybañez that the purchase price of the lot was only P200,000.00.
Before the Court is a Petition for Review on Certiorari assailing the Decision1 dated October 27,
2003 of the Court of Appeals, Seventh Division, in CA-G.R. V No. 60392. 2 Ybañez died during the pendency of the case before the RTC. Upon motion of his counsel, the trial
court dismissed the case only against him without any objection from the other parties. 10
The late Eduardo Ybañez (Ybañez), the owner of a 1,000-square meter lot in Cebu City (the "lot"),
entered into an Agreement and Authority to Negotiate and Sell (Agency Agreement) with respondent On May 14, 1997, the RTC rendered its Decision11 dismissing Saban’s complaint, declaring the four
Florencio Saban (Saban) on February 8, 1994. Under the Agency Agreement, Ybañez authorized (4) checks issued by Lim as stale and non-negotiable, and absolving Lim from any liability towards
Saban to look for a buyer of the lot for Two Hundred Thousand Pesos (P200,000.00) and to mark up Saban.
the selling price to include the amounts needed for payment of taxes, transfer of title and other
expenses incident to the sale, as well as Saban’s commission for the sale.3
Saban appealed the trial court’s Decision to the Court of Appeals.

Through Saban’s efforts, Ybañez and his wife were able to sell the lot to the petitioner Genevieve
On October 27, 2003, the appellate court promulgated its Decision12 reversing the trial court’s ruling.
Lim (Lim) and the spouses Benjamin and Lourdes Lim (the Spouses Lim) on March 10, 1994. The
It held that Saban was entitled to his commission amounting to P236,743.00.13
price of the lot as indicated in the Deed of Absolute Sale is Two Hundred Thousand Pesos
(P200,000.00).4 It appears, however, that the vendees agreed to purchase the lot at the price of Six
Hundred Thousand Pesos (P600,000.00), inclusive of taxes and other incidental expenses of the The Court of Appeals ruled that Ybañez’s revocation of his contract of agency with Saban was
sale. After the sale, Lim remitted to Saban the amounts of One Hundred Thirteen Thousand Two invalid because the agency was coupled with an interest and Ybañez effected the revocation in bad
Hundred Fifty Seven Pesos (P113,257.00) for payment of taxes due on the transaction as well as faith in order to deprive Saban of his commission and to keep the profits for himself. 14
Fifty Thousand Pesos (P50,000.00) as broker’s commission.5 Lim also issued in the name of Saban
four postdated checks in the aggregate amount of Two Hundred Thirty Six Thousand Seven
The appellate court found that Ybañez and Lim connived to deprive Saban of his commission. It
Hundred Forty Three Pesos (P236,743.00). These checks were Bank of the Philippine Islands (BPI)
declared that Lim is liable to pay Saban the amount of the purchase price of the lot corresponding to
Check No. 1112645 dated June 12, 1994 for P25,000.00; BPI Check No. 1112647 dated June 19,
his commission because she issued the four checks knowing that the total amount thereof
corresponded to Saban’s commission for the sale, as the agent of Ybañez. The appellate court
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further ruled that, in issuing the checks in payment of Saban’s commission, Lim acted as an to terminate the contract of agency to the prejudice of the broker when he had already reaped the
accommodation party. She signed the checks as drawer, without receiving value therefor, for the benefits of the broker’s efforts.
purpose of lending her name to a third person. As such, she is liable to pay Saban as the holder for
value of the checks.15
In Infante v. Cunanan, et al.,25 the Court upheld the right of the brokers to their commissions
although the seller revoked their authority to act in his behalf after they had found a buyer for his
Lim filed a Motion for Reconsideration of the appellate court’s Decision, but her Motion was denied properties and negotiated the sale directly with the buyer whom he met through the brokers’ efforts.
by the Court of Appeals in a Resolution dated May 6, 2004.16 The Court ruled that the seller’s withdrawal in bad faith of the brokers’ authority cannot unjustly
deprive the brokers of their commissions as the seller’s duly constituted agents.
Not satisfied with the decision of the Court of Appeals, Lim filed the present petition.
The pronouncements of the Court in the aforecited cases are applicable to the present case,
especially considering that Saban had completely performed his obligations under his contract of
Lim argues that the appellate court ignored the fact that after paying her agent and remitting to
agency with Ybañez by finding a suitable buyer to preparing the Deed of Absolute Sale between
Saban the amounts due for taxes and transfer of title, she paid the balance of the purchase price
Ybañez and Lim and her co-vendees. Moreover, the contract of agency very clearly states that
directly to Ybañez.17
Saban is entitled to the excess of the mark-up of the price of the lot after deducting Ybañez’s share
of P200,000.00 and the taxes and other incidental expenses of the sale.
She further contends that she is not liable for Ybañez’s debt to Saban under the Agency Agreement
as she is not privy thereto, and that Saban has no one but himself to blame for consenting to the
However, the Court does not agree with the appellate court’s pronouncement that Saban’s agency
dismissal of the case against Ybañez and not moving for his substitution by his heirs. 18
was one coupled with an interest. Under Article 1927 of the Civil Code, an agency cannot be
revoked if a bilateral contract depends upon it, or if it is the means of fulfilling an obligation already
Lim also assails the findings of the appellate court that she issued the checks as an accommodation contracted, or if a partner is appointed manager of a partnership in the contract of partnership and
party for Ybañez and that she connived with the latter to deprive Saban of his commission. 19 his removal from the management is unjustifiable. Stated differently, an agency is deemed as one
coupled with an interest where it is established for the mutual benefit of the principal and of the
agent, or for the interest of the principal and of third persons, and it cannot be revoked by the
Lim prays that should she be found liable to pay Saban the amount of his commission, she should principal so long as the interest of the agent or of a third person subsists. In an agency coupled with
only be held liable to the extent of one-third (1/3) of the amount, since she had two co-vendees (the an interest, the agent’s interest must be in the subject matter of the power conferred and not merely
Spouses Lim) who should share such liability.20 an interest in the exercise of the power because it entitles him to compensation. When an agent’s
interest is confined to earning his agreed compensation, the agency is not one coupled with an
In his Comment, Saban maintains that Lim agreed to purchase the lot for P600,000.00, which interest, since an agent’s interest in obtaining his compensation as such agent is an ordinary
consisted of the P200,000.00 which would be paid to Ybañez, the P50,000.00 due to her broker, incident of the agency relationship.26
the P113,257.00 earmarked for taxes and other expenses incidental to the sale and Saban’s
commission as broker for Ybañez. According to Saban, Lim assumed the obligation to pay him his Saban’s entitlement to his commission having been settled, the Court must now determine whether
commission. He insists that Lim and Ybañez connived to unjustly deprive him of his commission Lim is the proper party against whom Saban should address his claim.
from the negotiation of the sale.21

Saban’s right to receive compensation for negotiating as broker for Ybañez arises from the Agency
The issues for the Court’s resolution are whether Saban is entitled to receive his commission from Agreement between them. Lim is not a party to the contract. However, the record reveals that she
the sale; and, assuming that Saban is entitled thereto, whether it is Lim who is liable to pay Saban had knowledge of the fact that Ybañez set the price of the lot at P200,000.00 and that
his sales commission. the P600,000.00—the price agreed upon by her and Saban—was more than the amount set by
Ybañez because it included the amount for payment of taxes and for Saban’s commission as broker
The Court gives due course to the petition, but agrees with the result reached by the Court of for Ybañez.
Appeals.
According to the trial court, Lim made the following payments for the lot: P113,257.00 for
The Court affirms the appellate court’s finding that the agency was not revoked since Ybañez taxes, P50,000.00 for her broker, and P400.000.00 directly to Ybañez, or a total of Five Hundred
requested that Lim make stop payment orders for the checks payable to Saban only after the Sixty Three Thousand Two Hundred Fifty Seven Pesos (P563,257.00).27 Lim, on the other hand,
consummation of the sale on March 10, 1994. At that time, Saban had already performed his claims that on March 10, 1994, the date of execution of the Deed of Absolute Sale, she paid directly
obligation as Ybañez’s agent when, through his (Saban’s) efforts, Ybañez executed the Deed of to Ybañez the amount of One Hundred Thousand Pesos (P100,000.00) only, and gave to
Absolute Sale of the lot with Lim and the Spouses Lim. Saban P113,257.00 for payment of taxes and P50,000.00 as his commission,28 and One Hundred
Thirty Thousand Pesos (P130,000.00) on June 28, 1994,29 or a total of Three Hundred Ninety Three
Thousand Two Hundred Fifty Seven Pesos (P393,257.00). Ybañez, for his part, acknowledged that
To deprive Saban of his commission subsequent to the sale which was consummated through his Lim and her co-vendees paid him P400,000.00 which he said was the full amount for the sale of the
efforts would be a breach of his contract of agency with Ybañez which expressly states that Saban lot.30 It thus appears that he received P100,000.00 on March 10, 1994, acknowledged receipt
would be entitled to any excess in the purchase price after deducting the P200,000.00 due to (through Saban) of the P113,257.00 earmarked for taxes and P50,000.00 for commission, and
Ybañez and the transfer taxes and other incidental expenses of the sale.22 received the balance of P130,000.00 on June 28, 1994. Thus, a total of P230,000.00 went directly to
Ybañez. Apparently, although the amount actually paid by Lim was P393,257.00, Ybañez rounded
In Macondray & Co. v. Sellner,23 the Court recognized the right of a broker to his commission for off the amount to P400,000.00 and waived the difference.
finding a suitable buyer for the seller’s property even though the seller himself consummated the
sale with the buyer.24 The Court held that it would be in the height of injustice to permit the principal Lim’s act of issuing the four checks amounting to P236,743.00 in Saban’s favor belies her claim that
she and her co-vendees did not agree to purchase the lot at P600,000.00. If she did not agree

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thereto, there would be no reason for her to issue those checks which is the balance of P600,000.00 As gleaned from the text of Section 29 of the Negotiable Instruments Law, the accommodation party
less the amounts of P200,000.00 (due to Ybañez), P50,000.00 (commission), and the P113,257.00 is one who meets all these three requisites, viz: (1) he signed the instrument as maker, drawer,
(taxes). The only logical conclusion is that Lim changed her mind about agreeing to purchase the lot acceptor, or indorser; (2) he did not receive value for the signature; and (3) he signed for the
at P600,000.00 after talking to Ybañez and ultimately realizing that Saban’s commission is even purpose of lending his name to some other person. In the case at bar, while Lim signed as drawer of
more than what Ybañez received as his share of the purchase price as vendor. Obviously, this the checks she did not satisfy the two other remaining requisites.
change of mind resulted to the prejudice of Saban whose efforts led to the completion of the sale
between the latter, and Lim and her co-vendees. This the Court cannot countenance.
The absence of the second requisite becomes pellucid when it is noted at the outset that Lim issued
the checks in question on account of her transaction, along with the other purchasers, with Ybañez
The ruling of the Court in Infante v. Cunanan, et al., cited earlier, is enlightening for the facts therein which was a sale and, therefore, a reciprocal contract. Specifically, she drew the checks in payment
are similar to the circumstances of the present case. In that case, Consejo Infante asked Jose of the balance of the purchase price of the lot subject of the transaction. And she had to pay the
Cunanan and Juan Mijares to find a buyer for her two lots and the house built thereon for Thirty agreed purchase price in consideration for the sale of the lot to her and her co-vendees. In other
Thousand Pesos (P30,000.00) . She promised to pay them five percent (5%) of the purchase price words, the amounts covered by the checks form part of the cause or consideration from Ybañez’s
plus whatever overprice they may obtain for the property. Cunanan and Mijares offered the end, as vendor, while the lot represented the cause or consideration on the side of Lim, as
properties to Pio Noche who in turn expressed willingness to purchase the properties. Cunanan and vendee.35 Ergo, Lim received value for her signature on the checks.
Mijares thereafter introduced Noche to Infante. However, the latter told Cunanan and Mijares that
she was no longer interested in selling the property and asked them to sign a document stating that
Neither is there any indication that Lim issued the checks for the purpose of enabling Ybañez, or any
their written authority to act as her agents for the sale of the properties was already cancelled.
other person for that matter, to obtain credit or to raise money, thereby totally debunking the
Subsequently, Infante sold the properties directly to Noche for Thirty One Thousand Pesos
presence of the third requisite of an accommodation party.
(P31,000.00). The Court upheld the right of Cunanan and Mijares to their commission, explaining
that—
WHEREFORE, in view of the foregoing, the petition is DISMISSED.
…[Infante] had changed her mind even if respondent had found a buyer who was willing
to close the deal, is a matter that would not give rise to a legal consequence if [Cunanan SO ORDERED.
and Mijares] agreed to call off the transaction in deference to the request of [Infante]. But
the situation varies if one of the parties takes advantage of the benevolence of the other
and acts in a manner that would promote his own selfish interest. This act is unfair as
would amount to bad faith. This act cannot be sanctioned without according the party
prejudiced the reward which is due him. This is the situation in which [Cunanan and
Mijares] were placed by [Infante]. [Infante] took advantage of the services rendered by
[Cunanan and Mijares], but believing that she could evade payment of their commission,
she made use of a ruse by inducing them to sign the deed of cancellation….This act of
subversion cannot be sanctioned and cannot serve as basis for [Infante] to escape
payment of the commission agreed upon.31

The appellate court therefore had sufficient basis for concluding that Ybañez and Lim connived to
deprive Saban of his commission by dealing with each other directly and reducing the purchase
price of the lot and leaving nothing to compensate Saban for his efforts.

Considering the circumstances surrounding the case, and the undisputed fact that Lim had not yet
paid the balance of P200,000.00 of the purchase price of P600,000.00, it is just and proper for her to
pay Saban the balance of P200,000.00.

Furthermore, since Ybañez received a total of P230,000.00 from Lim, or an excess of P30,000.00
from his asking price of P200,000.00, Saban may claim such excess from Ybañez’s estate, if that
remedy is still available,32 in view of the trial court’s dismissal of Saban’s complaint as against
Ybañez, with Saban’s express consent, due to the latter’s demise on November 11, 1994. 33

The appellate court however erred in ruling that Lim is liable on the checks because she issued
them as an accommodation party. Section 29 of the Negotiable Instruments Law defines an
accommodation party as a person "who has signed the negotiable instrument as maker, drawer,
acceptor or indorser, without receiving value therefor, for the purpose of lending his name to some
other person." The accommodation party is liable on the instrument to a holder for value even
though the holder at the time of taking the instrument knew him or her to be merely an
accommodation party. The accommodation party may of course seek reimbursement from the party
accommodated.34

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