G.R. No.

105836 March 7, 1994

SPOUSES GEORGE MORAN and LIBRADA P. MORAN, petitioners,

vs.
THE HON. COURT OF APPEALS and CITYTRUST BANKING CORPORATION, respondents.

Gonzales, Batiller, Bilog & Associates for petitioners.

Agcaoli & Associates for private respondent.

REGALADO, J.:

Petitioner spouses George and Librada Moran are the owners of the Wack-Wack Petron gasoline
station located at Shaw Boulevard, corner Old Wack-Wack Road, Mandaluyong, Metro Manila. They
regularly purchased bulk fuel and other related products from Petrophil Corporation on cash on
delivery (COD) basis. Orders for bulk fuel and other related products were made by telephone and
payments were effected by personal checks upon delivery. 1

Petitioners maintained three joint accounts, namely one current account (No. 37-00066-7) and two
savings accounts, (Nos. 1037002387 and 1037001372) with the Shaw Boulevard branch of Citytrust
Banking Corporation. As a special privilege to the Morans, whom it considered as valued clients, the
bank allowed them to maintain a zero balance in their current account. Transfers from Saving
Account No. 1037002387 to their current account could be made only with their prior authorization,
but they gave written authority to Citytrust to automatically transfer funds from their Savings Account
No. 1037001372 to their Current Account No. 37-00066-7 at any time whenever the funds in their
current account were insufficient to meet withdrawals from said current account. Such arrangement
for automatic transfer of funds was called a pre-authorized transfer (PAT) agreement. 2

The PAT letter-agreement entered into by the parties on March 19, 1982 contained the following
provisions:

xxx xxx xxx

1. The transfer may be effected on the day following the overdrawing of the current
account, but the check/s would be honored if the savings account has sufficient
balance to cover the overdraft.

2. The regular charges on overdraft, and activity fees will be imposed by the Bank.

3. This is merely an accommodation on our part and we have the right, at all times
and for any reason whatsoever, to refuse to effect transfer of funds at our sole and
absolute option and discretion, reserving our right to terminate this arrangement at
any time without written notice to you.

4. You hold CITYTRUST free and harmless for any and all omissions or oversight in
executing this automatic transfer of funds; . . .
3

xxx xxx xxx

On December 12, 1983, petitioners, through Librada Moran, drew a check (Citytrust No. 041960) for
P50,576.00 payable to Petrophil
Corporation. The next day, December 13, 1983, petitioners, again through Librada Moran, issued
4

another check (Citytrust No. 041962) in the amount of P56,090.00 in favor of the same
corporation. The total sum of the two checks was P106,666.00.
5

On December 14, 1983, Petrophil Corporation deposited the two aforementioned checks to its
account with the Pandacan branch of the Philippine National Bank (PNB), the collecting bank. In
turn, PNB, Pandacan branch presented them for clearing with the Philippine Clearing House
Corporation in the afternoon of the same day. The records show that on December 14, 1983,
Current Account No. 37-00066-7 had a zero balance, while Savings Account No. 1037001372
(covered by the PAT) had an available balance of
P26,104.30 and Savings Account No. 1037002387 had an available balance of P43,268.39.
6 7

At about ten o'clock in the morning of the following day, December 15, 1983, petitioner George
Moran went to the bank, as was his regular practice, to personally oversee their daily transactions
with the bank. He deposited in their Savings Account No. 1037002387 the amounts of P10,874.58
and P6,754.25, and he likewise deposited in their Savings Account No. 1037001372 the amounts of
8

P5,900.00, P35,100.00 and 30.00. The amount of P40,000.00 was then transferred by him from
9

Saving Account No. 1037002387 to their current account by means of a pro forma withdrawal form
(a debit memorandum), which was provided by the bank, authorizing the latter to make the
necessary transfer. At the same time, the amount of P66,666.00 was transferred from Savings
Account No. 1037001372 to the same current account through the pre-authorized transfer (PAT)
agreement. 10

Sometime on December 15 or 16, 1983 George Moran was informed by his wife Librada, that
Petrophil refused to deliver their orders on a credit basis because the two checks they had
previously issued were dishonored upon presentment for payment. Apparently, the bank dishonored
the checks due to "insufficiency of funds." The non-delivery of gasoline forced petitioners to
11

temporarily stop business operations, allegedly causing them to suffer loss of earnings. In addition,
Petrophil cancelled their credit accommodation, forcing them to pay for their purchases in
cash. George Moran, furious and upset, demanded an explanation from Raul Diaz, the branch
12

manager. Failing to get a sufficient explanation, he talked to a certain Villareal, a bank officer, who
allegedly told him that Amy Belen Ragodo, the customer service officer, had committed a "grave
error".13

On December 16 or 17, 1983, Diaz went to the Moran residence to get the signatures of the
petitioners on an application for a manager's check so that the dishonored checks could be
redeemed. Diaz then went to Petrophil to personally present the checks in payment for the two
dishonored checks. 14

In a chance meeting around May or June, 1984, George Moran learned from one Constancio
Magno, credit manager of Petrophil, that the latter received from Citytrust, through Diaz, a letter
dated December 16, 1983, notifying them that the two aforementioned checks were "inadvertently
dishonored . . . due to operational error." Said letter was received by Petrophil on January 4, 1984. 15

On July 24, 1984, or a little over six months after the incident, petitioners, through counsel, wrote
Citytrust claiming that the bank's dishonor of the checks caused them besmirched business and
personal reputation, shame and anxiety, hence they were contemplating the filing of the necessary
legal actions unless the bank issued a certification clearing their name and paid them P1,000,000.00
as moral damages. 16
The bank did not act favorably on their demands, hence petitioners filed a complaint for damages on
September 8, 1984, with the Regional Trial Court, Branch 159 at Pasig, Metro Manila, which was
docketed therein as Civil Case No. 51549. In turn, Citytrust filed a counterclaim for damages,
alleging that the case filed against it was unfounded and unjust.

After trial, a decision dated October 9, 1989 was rendered by the trial court dismissing both the
complaint and the counterclaim. On appeal, the Court of Appeals rendered judgment in CA-G.R.
17

CV No. 25009 on October 9, 1989 affirming the decision of the trial court. 18

We start some basic and accepted rules, statutory and doctrinal. A check is a bill of exchange drawn
on a bank payable on demand. Thus, a check is a written order addressed to a bank or persons
19

carrying on the business of banking, by a party having money in their hands, requesting them to pay
on presentment, to a person named therein or to bearer or order, a named sum of money. 20

Fixed savings and current deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loan. In other words, the relationship between the bank and the
21

depositor is that of a debtor and creditor. By virtue of the contract of deposit between the banker
22

and its depositor, the banker agrees to pay checks drawn by the depositor provided that said
depositor has money in the hands of the bank. 23

Hence, where the bank possesses funds of a depositor, it is bound to honor his checks to the extent
of the amount of his deposits. The failure of a bank to pay the check of a merchant or a trader, when
the deposit is sufficient, entitles the drawer to substantial damages without any proof of actual
damages. 24

Conversely, a bank is not liable for its refusal to pay a check on account of insufficient funds,
notwithstanding the fact that a deposit may be made later in the day. Before a bank depositor may
25

maintain a suit to recover a specific amount from his bank, he must first show that he had on deposit
sufficient funds to meet his demand. 26

The present action for damages accordingly hinges on the resolution of the inquiry as to whether or
not petitioners had sufficient funds in their accounts when the bank dishonored the checks in
question. In view of the factual findings of the two lower courts the correctness of which are
challenged by what appear to be plausible, arguments, we feel that the same should properly be
resolved by us. This would necessarily require us to inquire into both the savings and current
accounts of petitioners in relation to the PAT arrangement.

On December 14, 1983, when PNB, Pandacan branch, presented the checks for collection, the
available balance for Savings Account No. 1037001372 was P26,104.30 while Current Account No.
37-00066-7 expectedly had a zero balance. On December 15, 1983, at approximately ten o'clock in
the morning, petitioners, through George Moran, learned that P66,666.00 from Saving Account No.
1037001372 was transferred to their current account. Another P40,000.00 was transferred from
Saving Accounts No. 1037002387 to the current account. Considering that the transfers were by
then sufficient to cover the two checks, it is asserted by petitioners that such fact should have
prevented the dishonor of the checks. It appears, however, that it was not so.

As explained by respondent court in its decision, Gerard E. Rionisto, head of the centralized clearing
unit of Citytrust, detailed on the witness stand the standard clearing procedure adopted by
respondent bank and the Philippine Clearing House Corporation, to wit:.

Q: Let me again re-phase the question. Most of (sic) these two

checks issued by Mrs. Librada Moran under the accounts of the
 plaintiffs with Citytrust Banking Corporation were drawn dated
December 12, 1983 and December 13, 1983(and) these two (2)
checks were made payable to Petrophil Corporation. On record,
Petrophil Corporation presented these two (2) checks for clearing
with PNB Pandacan Branch on December 14, 1983. Now in
accordance with the bank, what would happen with these checks
drawn with (sic) PNB on December 14, 1983?.

A: So these checks will now be presented by PNB with the Philippine

Clearing House on December 14, and then the Philippine Clearing
House will process it until midnight of December 14. Citytrust will
send a clearing representative to the Philippine Clearing House at
around 2:00 o'clock in the morning of December 15 and then get the
checks. The checks will now be processed at the Citytrust Computer
at around 3:00 o'clock in the morning of December 14 (sic)but it will
be processed for balance of Citytrust as of December 14 because for
one, we have not opened on December 15 at 3:00 o'clock. Under the
clearing house rules, we are supposed to process it on the date it
was presented for clearing. (tsn, September 9, 1988, pp. 9-10). 27

Considering the clearing process adopted, as explained in the aforequoted testimony, it is clear that
the available balance on December 14, 1983 was used by the bank in determining whether or not
there was sufficient cash deposited to fund the two checks, although what was stamped on the
dorsal side of the two checks in question was "DAIF/12-15-83," since December 15, 1983 was the
actual date when the checks were processed. As earlier stated, when petitioners' checks were
dishonored due to insufficiency of funds, the available balance of Savings Account No. 1037001372,
which was the subject of the PAT agreement, was not enough to cover either of the two checks. On
December 14, 1983, when PNB, Pandacan branch presented the checks for collection, the available
balance for Savings Account No. 1037001372, to repeat, was only P26,104.30 while Current
Account No. 37-0006-7 had no available balance. It was only on December 15, 1983 at around ten
o'clock in the morning that the necessary funds were deposited, which unfortunately was too late to
prevent the dishonor of the checks.

Petitioners argue that public respondent, by relying heavily on Rionisto's testimony, failed to consider
the fact that the witness himself admitted that he had no personal knowledge surrounding the
dishonor of the two checks in question. Thus, although he knew the standard clearing procedure, it
does not necessarily mean that the same procedure was adopted with regard to the two checks.

We do not agree. Section 3(q), Rule 131 of the Rules of Court provides a disputable presumption in
law that the ordinary course of business has been followed. In the absence of a contrary showing, it
is presumed that the acts in question were in conformity with the usual conduct of business. In the
case at bar, petitioners failed to present countervailing evidence to rebut the presumption that the
checks involved underwent the same regular process for clearing of checks followed by the bank
since 1983.

Petitioner had no reason to complain, for they alone were at fault. A drawer must remember his
responsibilities every time he issues a check. He must personally keep track of his available balance
in the bank and not rely on the bank to notify him of the necessity to fund certain check she
previously issued. A check, as distinguished from an ordinary bill of exchange, is supposed to be
drawn against a previous deposit of funds for it is ordinarily intended for immediately payment. 28
Moreover, between the time of the issuance of said checks on December 12 and 13 and the time of
their presentment on December 14, petitioners had, at the very least, twenty-four hours to replenish
their balance in the bank.

As previously noted, it was only during business hours in the morning of December 15, 1983, that
P66,666.00 was automatically transferred from Savings Account No. 1037001372 to Current
Account No. 37-00066-7, and another P40,000.00 was transferred from Savings Account No.
1037002387 to the same current by a debit memorandum. Petitioners argue that if indeed the
checks were dishonored in the early morning of December 15, 1983, the bank would not have
automatically transferred P66,666.00 to said current account. They theorize that the checks having
already been dishonored, there was no necessity to put into effect the pre-authorized transfer
agreement.

That theory is incorrect. When the transfer from both savings accounts to the current account were
made, they were done in the hope that the checks may be retrieved, thus preventing their dishonor.
Unfortunately, respondent bank did not succeed in effectuating its good intentions. The transfers
were made to preserve its relations with petitioners whom it knew were valued clients, hence it
wanted to prevent the dishonor of their checks, if the same was at all possible. Although not
admitting fault, it tried its best to make sure that the checks would not bounce.

Under similar circumstances, it was held in Whitman vs. First National Bank that a bank performs
29

its full duty where, upon the receipt of a check drawn against an account in which there are
insufficient funds to pay it in full, it endeavors to induce the drawer to make good his account so that
the check can be paid, and failing in this, it protests the check on the following morning and notifies
its correspondent bank by the telegraph of the protest. It cannot, therefore, be held liable to the
payee and holder of the check for not protesting it upon the day when it was received. In fact, the
court added that the bank did more that it was required to do by making an effort to induce the
drawer to deposit sufficient money to make the check good, and by notifying its correspondent of the
dishonor of the check by telegram.

Petitioners maintain that at the time the checks were dishonored, they had already deposited
sufficient funds to cover said checks. To prove their point, petitioners quoted in their petition the
following testimony of said witness Rionisto, to wit:

Q: Now according to you, you would receive the checks from (being
deposited to) the collecting bank which in this particular example was
the Pandacan Branch of PNB which in turn will deliver it to the
Philippine Clearing House and the Philippine Clearing House will
deliver it to your office around 12:00 o'clock of December . . . ?

A: Around 2:00 o'clock of December 15. We sent a clearing

representative.

Q: And the checks will be processed in accordance with the balance

available as of December 14?

A: Yes, sir.

Q: And naturally you will place there "drawn against insufficient funds,
December 14, 1983"?
 A: Yes, sir.

Q: Are you sure about that?

A: Yes, sir . . . (tsn, September 9, 1988, p. 14) 30

Obviously witness Rionisto was merely confused as to the dates (December 14 and 15) because it
did not jibe with his previous testimony, wherein he categorically stated that "the checks will now be
processed as the Citytrust Computer at around 3:00 in the morning of December 14 (sic) but it will
be processed for balance of Citytrust as of December 14 because for one, we have not opened on
December 15 at 3:00 o'clock. Under the clearing house rules, we are supposed to process it on the
date it was presented for
clearing." Analyzing the procedure he had previously explained, and analyzing his testimony in its
31

entirety and not in truncated portions, it would logically and ineluctably appear that he actually meant
December 15, and not December 14.

In the early morning of every business day, prior to banking hours, the various branches of Citytrust
would receive a computer printout called the "rejected transactions" report from the head office. The
report contains, among others, a listing of "checks to be funded." When Citytrust, Shaw Boulevard
branch, received said report in the early morning of December 15, 1983, the two checks involved
were included in the "checks to be funded." That report was used by the bank as its basis in
dishonoring the two checks in question. Petitioner contends that the bank erred when it did so
because on previous occasions, the report was merely used by the bank as a basis for determining
whether or not it was necessary to notify them of the need to deposit certain amounts in their
accounts.

Amy Belen Rogado, a bank employee, testified that she would normally copy the details stated in the
report and transfer in on a "pink slip." These pink slips were then given to George Moran. In turn,
George Moran testified that he would deposit the necessary funds stated in the pink slips. As a
matter of fact, so petitioner asseverated, not a single check written on the notices was ever
dishonored after he had funded said checks with the bank. Thus, petitioner argues, the checks were
not yet dishonored after the bank received the report in the early morning of December 15, 1983.

Said argument does not persuade. If ever petitioners on previous occasions were given notices
every time a check was presented for clearing and payment and there were no adequate funds in
their accounts, these were, at most, mere accommodations on the part of respondent bank. It was
not a requirement or a general banking practice, hence non-compliance therewith could not lay the
bank open to blame or rebuke. Legally, the bank had all the right to dishonor the checks because
there were no sufficient funds to speak of in the first place. If the demand is by check, a drawer must
have to his credit enough to cover the demand. If his credit with the bank is less than the amount on
the face of the check, the bank may lawfully refuse payment. 32

Pursuing this matter further, the bank could also not be faulted for not accepting either of the two
checks. The first check issued was in the amount of P50,576.00, while the second one was for
P56,090.00. Savings Account No. 1307001372 then had a balance of only P26,104.30. This being
the case, Citytrust could not be expected to accept for payment either one of the two checks nor
partially honor one check.

A bank is under no obligation to make part payment on a check, up to only the amount of the
drawer's funds, where the check is drawn for an amount larger than what the drawer has on deposit.
Such a practice of paying checks in part has never existed. Upon partial payment, the check holder
could not be called upon to surrender the check, and the bank would be without a voucher affording
a certain means of showing the payment. The rule is based on commercial convenience, and any
rule that would work such manifest inconvenience should not be recognized. A check is intended not
only to transfer a right to the amount named in it, but to serve the further purpose of affording
evidence for the bank of the payment of such amount when the check is taken up. 33

On the other hand, assuming arguendo that Savings Account No. 1037002387, which is not covered
by a pre-arranged automatic transfer agreement, had enough amount deposited to cover both
checks (which is not so in this case), the bank still had no obligation to honor said checks as there
was then no authority given to it to make the transfer of funds. Where a depositor has two accounts
with a bank, an open account and a savings account, and draws a check upon the open account for
more money than the account contains, the bank may rightfully refuse to pay the check, and is under
no duty to make up the deficiency from the savings account. 34

We are agree with respondent Court of Appeals in its assessment and interpretation of the nature of
the letter of Citytrust to Petrophil, dated December 16, 1983. As aptly and correctly stated by said
court, ". . . the letter is not an admission of liability as it was written merely to maintain the goodwill
and continued patronage of plaintiff-appellants. (This) cannot be characterized as baseless,
considering the totality of the circumstances surrounding its writing." 35

In the present case, the actions taken by the bank after the incident clearly show that there was
neither malice nor bad faith, but rather a clear intent to mollify an obviously agitated client. Raul
Diaz, the branch manager, even went for this purpose to the Moran residence to facilitate their
application for a manager's check. Later, he went to the Petrophil Corporation to personally redeem
the checks. Still later, the letter was sent by respondent bank to Petrophil explaining that the
dishonor of the checks was due to "operational error." However, we reiterate, it would be a mistake
to construe that letter as an admission of guilt on the part of the bank. It knew that it was confronted
with a client who obviously was not willing to admit any fault on his part, although the facts show
otherwise. Thus, respondent bank ran the risk of losing the business of an important and influential
member of the financial community if it did not do anything to assuage the feelings of petitioners.

It will be recalled that the credit standing of the Morans with Petrophil Corporation was involved,
which fact, more than anything, displeased them, to say the least. On demand of petitioners that
their names be cleared, the bank considered it more prudent to send the letter. It never realized that
it would thereafter be used by petitioners as one of the bases of their legal action. It will be noted
that there was no reason for the bank to send the letter to Petrophil Corporation since the latter was
not a client nor was it demanding any explanation. Clearly, therefore, the letter was merely intended
to accommodate the request of the Morans and was part of the series of damage-control measures
taken by the bank to placate petitioners.

Respondent Court of Appeals perceptively observed that "all these somehow pacified plaintiffs-
appellants (herein petitioners) for they did not thereafter take immediate punitive action against the
defendant-appellee (herein private respondent). As pointed out by the court a quo, it took plaintiffs-
appellants about six (6) months after the dishonor of the checks to demand that defendant-appellee
pay them P1,000,000.00 as damages. At that time, plaintiffs-appellants had discovered the letter of
Mr. Diaz attributing the dishonor of their checks to 'operational error'. The attempt to unduly ride on
the letter of Mr. Diaz speaks for itself."
36

On the above premises which irresistibly commend themselves to our acceptance, we find no cogent
and sufficient to award actual, moral, or exemplary damages to petitioners. Although we take judicial
notice of the fact that there is a fiduciary relationship between a bank and its depositors, as well as
the extent of diligence expected of it in handling the accounts entrusted to its care, the bank may
37
not be held responsible for such damages in the absence of fraud, bad faith, malice, or wanton
attitude. 38

WHEREFORE, finding no reversible error in the judgment appealed from, the same is hereby
AFFIRMED, with costs against petitioners.

SO ORDERED.

G.R. No. L-53194 March 14, 1988

PHILIPPINE NATIONAL BANK petitioner,

vs.
HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch XIV, and
FRANCISCO S. GOZON II, respondents.

GANCAYCO, J.:

On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City Branch of the Philippine National Bank, went to the bank
in his car accompanied by his friend Ernesto Santos whom he left in the car while he transacted business in the bank. When Santos saw that
Gozon left his check book he took a check therefrom, filled it up for the amount of P5,000.00, forged the signature of Gozon, and thereafter
he encashed the check in the bank on the same day. The account of Gozon was debited the said amount. Upon receipt of the statement of
account from the bank, Gozon asked that the said amount of P5,000.00 should be returned to his account as his signature on the check was
forged but the bank refused.

Upon complaint of private respondent on February 1, 1974 Ernesto Santos was apprehended by the
police authorities and upon investigation he admitted that he stole the check of Gozon, forged his
signature and encashed the same with the Bank.

Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus interest, damages,
attorney's fees and costs against the bank in the Court of First Instance of Rizal. After the issues
were joined and the trial on the merits ensued, a decision was rendered on February 4, 1980, the
dispositive part of which reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The defendant is

hereby condemned to return to plaintiff the amount of P5,000.00 which it had
unlawfully withheld from the latter, with interest at the legal rate from September 22,
1972 until the amount is fully delivered. The defendant is further condemned to pay
plaintiff the sum of P2,000.00 as attorney's fees and to pay the costs of this suit.

Not satisfied therewith, the bank now filed this petition for review on certiorari in this Court raising the
sole legal issue that —

THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS CHECK

BOOK CONTAINING THE CHECK IN QUESTION INTO THE HANDS OF
ERNESTO SANTOS WAS INDEED THE PROXIMATE CAUSE OF THE LOSS,
THEREBY PRECLUDING HIM FROM SETTING UP THE DEFENSE OF FORGERY
OR WANT 0F AUTHORITY UNDER SECTION 23 OF THE NEGOTIABLE
INSTRUMENTS LAW, ACT NO. 3201

The petition is devoid of merit.

This Court reproduces with approval the disquisition of the court a quo as follows:

A bank is bound to know the signatures of its customers; and if it pays a forged
check, it must be considered as making the payment out of its own funds, and cannot
ordinarily change the amount so paid to the account of the depositor whose name
was forged' (San Carlos Milling Co. vs. Bank of the P.I., 59 Phil. 59).

This rule is absolutely necessary to the circulation of drafts and checks, and is based
upon the presumed negligence of the drawee in failing to meet its obligation to know
the signature of its correspondent. ... There is nothing inequitable in such a rule. If
the paper comes to the drawee in the regular course of business, and he, having the
opportunity ascertaining its character, pronounces it to be valid and pays it, it is not
only a question of payment under mistake, but payment in neglect of duty which the
commercial law places upon him, and the result of his negligence must rest upon him
(12 ALR 1901, citing many cases found in I Agbayani, supra).

Defendant, however, interposed the defense that it exercised diligence in accordance

with the accepted norms of banking practice when it accepted and paid Exhibit "A". It
presented evidence that the check had to pass scrutiny by a signature verifier as well
as an officer of the bank.

A comparison of the signature (Exhibit "A-l") on the forged check (Exhibit "A") with
plaintiffs exemplar signatures (Exhibits "5-N" and "5-B") found in the PNB Form 35-A
would immediately show the negligence of the employees of the defendant bank.
Even a not too careful comparison would immediately arrest one's attention and
direct it to the graceful lines of plaintiffs exemplar signatures found in Exhibits "5-A"
and "5-B". The formation of the first letter "F" in the exemplars, which could be
regarded as artistic, is completely different from the way the same letter is formed in
Exhibit "A-l". That alone should have alerted a more careful and prudent signature
verifier.

The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the
depositor on the check being encashed. It is expected to use reasonable business prudence in
1

accepting and cashing a check presented to it.

In this case the findings of facts of the court a quo are conclusive. The trial court found that a
comparison of the signature on the forged check and the sample signatures of private respondent
show marked differences as the graceful lines in the sample signature which is completely different
from those of the signature on the forged check. Indeed the NBI handwriting expert Estelita Santiago
Agnes whom the trial court considered to be an "unbiased scientific expert" indicated the marked
differences between the signature of private respondent on the sample signatures and the
questioned signature. Notwithstanding the testimony of Col. Fernandez, witness for petitioner,
advancing the opinion that the questioned signature appears to be genuine, the trial court by merely
examining the pictorial report presented by said witness, found a marked difference in the second "c"
in Francisco as written on the questioned signature as compared to the sample signatures, and the
separation between the "s" and the "c" in the questioned signature while they are connected in the
sample signatures. 2

Obviously, petitioner was negligent in encashing said forged check without carefully examining the
signature which shows marked variation from the genuine signature of private respondent.
In reference to the allegation of the petitioner that it is the negligence of private respondent that is
the cause of the loss which he suffered, the trial court held:

The act of plaintiff in leaving his checkbook in the car while he went out for a short
while can not be considered negligence sufficient to excuse the defendant bank from
its own negligence. It should be home in mind that when defendant left his car,
Ernesto Santos, a long time classmate and friend remained in the same. Defendant
could not have been expected to know that the said Ernesto Santos would remove a
check from his checkbook. Defendant had trust in his classmate and friend. He had
no reason to suspect that the latter would breach that trust .

We agree.

Private respondent trustee Ernesto Santos as a classmate and a friend. He brought him along in his
car to the bank and he left his personal belongings in the car. Santos however removed and stole a
check from his cheek book without the knowledge and consent of private respondent. No doubt
private respondent cannot be considered negligent under the circumstances of the case.

WHEREFORE, the petition is DISMISSED for lack of merit with costs against petitioner.

SO ORDERED.

G.R. No. 102383 November 26, 1992

BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
THE HON. COURT OF APPEALS (SEVENTH JUDICIAL), HON. JUDGE REGIONAL TRIAL
COURT OF MAKATI, BRANCH 59, CHINA BANKING CORP., and PHILIPPINE CLEARING
HOUSE CORPORATION, respondents.

GUTIERREZ, JR., J.:

The present petition asks us to set aside the decision and resolution of the Court of Appeals in CA-
G.R. SP No. 24306 which affirmed the earlier decision of the Regional Trial Court of Makati, Branch
59 in Civil Case No. 14911 entitled Bank of the Philippine Islands v. China Banking Corporation and
the Philippine Clearing House Corporation, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered dismissing

petitioner-appellant's (BPI's) appeal and affirming the appealed order of August 26,
1986 (Annex B of BPI's Petition) with modification as follows:

1. Ordering the petitioner-appellant (BPI) to pay respondent-appellee (CBC):

(a) the amount of One Million Two Hundred Six Thousand, Six Hundred Seven
Pesos and Fifty Eight Centavos (P1,206,607.58) with interest at the legal rate of
twelve percent (12%) per annum starting August 26, 1986, the date when the order
of the PCHC Board of Directors was issued until the full amount is finally paid; and

(b) the amount of P150,000.00 representing attorney's fees;

 2. BPI shall also bear 75% or P5,437.50 and CBC, 25% or P1,812.50 of the cost of
the arbitration proceedings amounting to P7,250.00;

3. The ownership of respondent-appellee (CBC) of the other sum of One Million Two
Hundred Six Thousand Six Hundred Seven Pesos and Fifty Eight Centavos
(P1,206,607.58) previously credited to its clearing account on August 12, 1983 per
PCHC Stockholders' Resolution No. 6083 dated April 6, 1983, is hereby confirmed.

4. The PCHC is hereby directed to immediately debit the clearing account of BPI the
sum of One Million Two Hundred Six Thousand Six Hundred Pesos and Fifty Eight
Centavos (P1,206,607.58) together with its interest as decreed in paragraph 1 (a)
herein above stated and credit the same to the clearing account of CBC;

5. The PCHC's counterclaim and cross-claim are dismissed for lack of merit; and

6. With costs against the petitioner-appellant. (Rollo, pp. 161-162)

The controversy in this case arose from the following facts as found by the Arbitration Committee of
respondent Philippine Clearing House Corporation in Arbicom Case No. 83-029 entitled Bank of the
Philippine Island v. China Banking Corporation:

The story underlying this case began in the afternoon of October 9, 1981 with a
phone call to BPI's Money Market Department by a woman who identified herself as
Eligia G. Fernando who had a money market placement as evidenced by a
promissory note with a maturity date of November 11, 1981 and a maturity value of
P2,462,243.19. The caller wanted to preterminate the placement, but Reginaldo
Eustaquio, Dealer Trainee in BPI's Money Market Department, who received the call
and who happened to be alone in the trading room at the time, told her "trading time"
was over for the day, which was a Friday, and suggested that she call again the
following week. The promissory note the caller wanted to preterminate was a roll-
over of an earlier 50-day money market placement that had matured on September
24, 1981.

Later that afternoon, Eustaquio conveyed the request for pretermination to the officer
who before had handled Eligia G. Fernando's account, Penelope Bulan, but
Eustaquio was left to attend to the pretermination process.

The next Monday, October 12, 1981, in the morning, the caller of the previous Friday
followed up with Eustaquio, merely by phone again, on the pretermination of the
placement. Although not familiar with the voice of the real Eligia G. Fernando,
Eustaquio "made certain" that the caller was the real Eligia G. Fernando by
"verifying" that the details the caller gave about the placement tallied with the details
in "the ledger/folder" of the account. Eustaquio knew the real Eligia G. Fernando to
be the Treasurer of Philippine American Life Insurance Company (Philamlife) since
he was handling Philamlife's corporate money market account. But neither Eustaquio
nor Bulan who originally handled Fernando's account, nor anybody else at BPI,
bothered to call up Fernando at her Philamlife office to verify the request for
pretermination.

Informed that the placement would yield less than the maturity value because of its
pretermination, the caller insisted on the pretermination just the same and asked that
two checks be issued for the proceeds, one for P1,800,000.00 and the second for the
balance, and that the checks be delivered to her office at Philamlife.

Eustaquio, thus, proceeded to prepare the "purchase order slip" for the requested
pretermination as required by office procedure, and from his desk, the papers,
following the processing route, passed through the position analyst, securities clerk,
verifier clerk and documentation clerk, before the two cashier's checks, nos. 021759
and 021760 for P1,800,000.00 and P613,215.16, respectively, both payable to Eligia
G. Fernando, covering the preterminated placement, were prepared. The two
cashier's checks, together with the papers consisting of the money market placement
was to be preterminated and the promissory note (No. 35623) to be preterminated,
were sent to Gerlanda E. de Castro and Celestino Sampiton, Jr., Manager and
Administrative Assistant, respectively, in BPI's Treasury Operations Department,
both authorized signatories for BPI, who signed the two checks that very morning.
Having been singed, the checks now went to the dispatcher for delivery.

Later in the same morning, however, the same caller changed the delivery
instructions; instead of the checks being delivered to her office at Philamlife, she
would herself pick up the checks or send her niece, Rosemarie Fernando, to pick
them up. Eustaquio then told her that if it were her niece who was going to get the
checks, her niece would have to being a written authorization from her to pick up the
checks. This telephone conversation ended with the caller's statement that
"definitely" it would be her niece, Rosemarie Fernando, who would pick up the
checks. Thus, Eustaquio had to hurriedly go to the dispatcher, Bernardo Laderas, to
tell him of the new delivery instructions for the checks; in fact, he changed the
delivery instruction on the purchase order slip, writing thereon "Rosemarie Fernando
release only with authority to pick up.

It was, in fact Rosemarie Fernando who got the two checks from the dispatcher, as
shown by the delivery receipt. Actually, as it turned out, the same impersonated both
Eligia G. Fernando and Rosemarie Fernando. Although the checks represented the
termination proceeds of Eligia G. Fernando's placement, not just a roll-over of the
placement, the dispatcher failed to get or to require the surrender of the promissory
note evidencing the placement. There is also no showing that Eligia G. Fernando's
purported signature on the letter requesting the pretermination and the latter
authorizing Rosemarie Fernando to pick up the two checks, both of which letters
were presumably handed to the dispatcher by Rosemarie Fernando, was compared
or verified with Eligia G. Fernando's signature in BPI's file. Such purported signature
has been established to be forged although it has a "close similarity" to the real
signature of Eligia G. Fernando (TSN of January 15, 1985, pp. 24 and 26).

The story's scene now shifted when, in the afternoon of October 13, 1981, a woman
who represented herself to be Eligia G. Fernando applied at CBC's Head Office for
the opening of a current account.

She was accompanied and introduced to Emily Sylianco Cuaso, Cash Supervisor, by
Antonio Concepcion whom Cuaso knew to have opened, earlier that year, an
account upon the introduction of Valentin Co, a long-standing "valued client" of CBC.
What Cuaso indicated in the application form, however, was that the new client was
introduced by Valentin Co, and with her initials on the form signifying her approval,
she referred the application to the New Accounts Section for processing. As finally
proceeds, the application form shows the signature of "Eligia G. Fernando", "her"
date of birth, sex, civil status, nationality, occupation ("business woman"), tax
account number, and initial deposit of P10,000.00. This final approval of the new
current account is indicated on the application form by the initials of Regina G. Dy,
Cashier, who did not interview the new client but affixed her initials on the application
form after reviewing it. The new current account was given the number: 26310-3.

The following day, October 14, 1981, the woman holding herself out as Eligia G.
Fernando deposited the two checks in controversy with Current Account No. 126310-
3. Her endorsement on the two checks was found to conform with the depositor's
specimen signature. CBC's guaranty of prior endorsements and/or lack of
endorsement was then stamped on the two checks, which CBC forthwith sent to
clearing and which BPI cleared on the same day.

Two days after, withdrawals began on Current Account No. 26310-3: On October 16,
1981, by means of Check No. 240005 dated the same day for P1,000,000.00,
payable to "cash", which the woman holding herself out as Eligia G. Fernando
encashed over the counter, and Check No. 240003 dated October 15, 1981 for
P48,500.00, payable to "cash" which was received through clearing from PNB Pasay
Branch; on October 19, 1981, by means of Check No. 240006 dated the same day
for P1,000,000.00, payable to "cash," which the woman identifying herself as Eligia
G. Fernando encashed over the counter; on October 22, 1981, by means of Check
No. 240007 dated the same day for P370,000.00, payable to "cash" which the
woman herself also encashed over the counter; and on November 4, 1981, by
means of Check No. 240001 dated November 3, 1981 for P4,100.00, payable to
"cash," which was received through clearing from Far East Bank.

All these withdrawals were allowed on the basis of the verification of the drawer's
signature with the specimen signature on file and the sufficiency of the funds in the
account. However, the balance shown in the computerized teller terminal when a
withdrawal is serviced at the counter, unlike the ledger or usual statement prepared
at month-end, does not show the account's opening date, the amounts and dates of
deposits and withdrawals. The last withdrawal on November 4, 1981 left Current
Account No. 26310-3 with a balance of only P571.61.

The day of reckoning came on November 11, 1981, the maturity date of Eligia G.
Fernado's money market placement with BPI, when the real Eligia G. Fernando went
to BPI for the roll-over of her placement. She disclaimed having preterminated her
placement on October 12, 1981. She executed an affidavit stating that while she was
the payee of the two checks in controversy, she never received nor endorsed them
and that her purported signature on the back of the checks was not hers but forged.
With her surrender of the original of the promissory note (No. 35623 with maturity
value of P2,462,243.19) evidencing the placement which matured that day, BPI
issued her a new promissory note (No. 40314 with maturity date of December 23,
1981 and maturity value of P2,500.266.77) to evidence a roll-over of the placement.

On November 12, 1981, supported by Eligia G. Fernando's affidavit, BPI returned the
two checks in controversy to CBC for the reason "Payee's endorsement forged". A
ping-pong started when CBC, in turn, returned the checks for reason "Beyond
Clearing Time", and the stoppage of this ping-pong, as we mentioned at the outset,
prompted the filing of this case.
 Investigation of the fraud by the Presidential Security Command led to the filing of
criminal actions for "Estafa Thru Falsification of Commercial Documents" against four
employees of BPI, namely Quirino Victorio, Virgilio Gayon, Bernardo Laderas and
Jorge Atayan, and the woman who impersonated Eligia G. Fernando, Susan Lopez
San Juan. Victorio and Gayon were both bookkeepers in BPI's Money Market
Operations Department, Laderas was a dispatcher in the same department. . . .
(Rollo, pp. 74-79)

The Arbitration Committee ruled in favor of petitioner BPI. The dispositive portion of the decision
reads:

WHEREFORE, we adjudge in favor of the Bank of the Philippine Islands and hereby
order China Banking Corporation to pay the former the amount of P1,206,607.58 with
interest thereon at 12% per annum from August 12, 1983, or the date when PCHC,
pursuant to its procedure for compulsory arbitration of the ping-pong checks under
Stockholders' Resolution No. 6-83 was implemented, up to the date of actual
payment.

Costs of suit in the total amount of P7,250.00 are to be assessed the litigant banks in
the following proportion:

a) Plaintiff BPI —– P1,812.50

b) Defendant China — P5,437.50

Total Assessment — P7,250.00

conformably with PCHC Resolution Nos. 46-83 dated October 25, 1983 and 4-85
dated February 25, 1985.

The PCHC is hereby directed to effect the corresponding entries to the litigant banks'
clearing accounts in accordance with the foregoing decision. (Rollo, pp. 97-98)

However, upon motion for reconsideration filed by respondent CBC, the Board of Directors of the
PCHC reversed the Arbitration Committee's decision in its Order, the dispositive portion of which
reads:

WHEREFORE, the Board hereby reconsiders the Decision of the Arbitration

Committee dated March 24, 1986 in Arbicom Case No. 183-029 and in lieu thereof,
one is rendered modifying the decision so that the Complaint of BPI is dismissed,
and on the Counterclaim of CBC, BPI is sentenced to pay CBC the sum of
P1,206,607.58. In view of the facts, no interest nor attorney's fees are awarded. BPI
shall also bear 75% or P5,437.50 and CBC, 25% or P1,812.50 of the cost of the
Arbitration proceedings amounting to P7,250.00.

The PCHC is hereby directed to debit the clearing account of the BPI the sum of
P1,206,607.58 and credit the same to that of CBC. The cost of Arbitration
proceedings are to be debited from the accounts of the parties in the proportion
above stated. (Rollo, pp. 112-113)
BPI then filed a petition for review of the abovestated order with the Regional Trial Court of Makati.
The trial court dismissed the petition but modified the order as can be gleaned from the dispositive
portion of its decision quoted earlier.

Not satisfied with the trial court's decision petitioner BPI filed with us a petition for review
on certiorari under Rule 45 of the Rules of Court. The case was docketed as G.R. No. 96376.
However, in a Resolution dated February 6, 1991, we referred the case to the Court of Appeals for
proper determination and disposition. The appellate court affirmed the trial court's decision.

Hence, this petition.

In a resolution dated May 20, 1992 we gave due course to the petition:

Petitioner BPI now asseverates:

THE DECISION AND RESOLUTION OF THE RESPONDENT COURT LEAVES

THE UNDESIRABLE RESULT OF RENDERING NUGATORY THE VERY
PURPOSE FOR THE UNIFORM BANKING PRACTICE OF REQUIRING THE
CLEARING GUARANTEE OF COLLECTING BANKS.

II

CONTRARY TO THE RULING OF THE RESPONDENT COURT, THE PROXIMATE

CAUSE FOR THE LOSS OF THE PROCEEDS OF THE TWO CHECKS IN
QUESTION WAS THE NEGLIGENCE OF THE EMPLOYEES OF CBC AND NOT
BPI; CONSEQUENTLY, EVEN UNDER SECTION 23 OF THE NEGOTIABLE
INSTRUMENTS LAW, BPI WAS NOT PRECLUDED FROM RAISING THE
DEFENSE OF FORGERY.

III

THE RESPONDENT COURT COMMITTED REVERSIBLE ERROR IN FAILING TO

APPRECIATE THE FACT THAT CBC HAD THE "LAST CLEAR CHANCE" OF
AVOIDING THE LOSS OCCASIONED BY THE FRAUDULENT ACTS INVOLVED IN
THE INSTANT CASE. (Rollo, p. 24)

The main issues raised in the assignment of errors are: When a bank (in this case CBC) presents
checks for clearing and payment, what is the extent of the bank's warranty of the validity of all prior
endorsements stamped at the back of the checks? In the event that the payee's signature is forged,
may the drawer/drawee bank (in this case BPI) claim reimbursement from the collecting bank [CBC]
which earlier paid the proceeds of the checks after the same checks were cleared by petitioner BPI
through the PCHC?

Anent the first issue, petitioner BPI contends that respondent CBC's clear warranty that "all prior
endorsements and/or lack of endorsements guaranteed" stamped at the back of the checks was an
unrestrictive clearing guaranty that all prior endorsements in the checks are genuine. Under this
premise petitioner BPI asserts that the presenting or collecting bank, respondent CBC, had an
unquestioned liability when it turned out that the payee's signature on the checks were forged. With
these circumstances, petitioner BPI maintains that considerations of relative negligence becomes
totally irrelevant.

In sum, petitioner BPI theorizes that the Negotiable Instruments Law, specifically Section 23 thereof
is not applicable in the light of the absolute liability of the representing or collecting bank as regards
forged endorsements in consonance with the clearing guarantee requirement imposed upon the
presenting or collecting banks "as it is worded today."

Petitioner BPI first returned to CBC the two (2) checks on the ground that "Payee's endorsement
(was) forged" on November 12, 1981. At that time the clearing regulation then in force under PCHC's
Clearing House Rules and Regulations as revised on September 19, 1980 provides:

Items which have been the subject of material alteration or items bearing a forged
endorsement when such endorsement is necessary for negotiation shall be returned
within twenty four (24) hours after discovery of the alteration or the forgery, but in no
event beyond the period prescribed by law for the filing of a legal action by the
returning bank/branch institution or entity against the bank/branch, institution or entity
sending the same. (Section 23)

In the case of Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation (157
SCRA 188 [1988]) the clearing regulation (this is the present clearing regulation) at the time the
parties' dispute occurred was as follows:

Sec. 21. . . . .

Items which have been the subject of material alteration or items bearing forged
endorsement when such endorsement is necessary for negotiation shall be returned
by direct presentation or demand to the Presenting Bank and not through the regular
clearing house facilities within the period prescribed by law for the filing of a legal
action by the returning bank/branch, institution or entity sending the same.

It is to be noted that the above-cited clearing regulations are substantially the same in that it allows a
return of a check "bearing forged endorsement when such endorsement is necessary for
negotiation" even beyond the next regular clearing although not beyond the prescriptive period "for
the filing of a legal action by the returning bank."

Bearing in mind this similarity in the clearing regulation in force at the time the forged checks in the
present case and the Banco de Oro case were dishonored and returned to the presenting or
collecting banks, we can be guided by the principles enunciated in the Banco de Oro case on the
relevance of negligence of the drawee vis-a-vis the forged checks.

The facts in the Banco de Oro case are as follows: Sometime in March, April, May and August 1983
Equitable Banking Corporation through its Visa Card Department drew six (6) crossed Manager's
check with the total amount of Forty Five Thousand Nine Hundred and Eighty Two Pesos and
Twenty Three Centavos (P45,982.23) and payable to certain member establishments of Visa Card.
Later, the checks were deposited with Banco de Oro to the credit of its depositor, a certain Aida
Trencio. Following normal procedures, and after stamping at the back of the checks the
endorsements: "All prior and/or lack of endorsements guaranteed" Banco de Oro sent the checks for
clearing through the PCHC. Accordingly, Equitable Banking Corporation paid the checks; its clearing
amount was debited for the value of the checks and Banco de Oro's clearing account was credited
for the same amount. When Equitable Banking Corporation discovered that the endorsements at the
back of the checks and purporting to be that of the payees were forged it presented the checks
directly to Banco de Oro for reimbursement. Banco de Oro refused to reimburse Equitable Banking
Corporation for the value of the checks. Equitable Banking Corporation then filed a complaint with
the Arbitration Committees of the PCHC. The Arbiter, Atty. Ceasar Querubin, ruled in favor of
Equitable Banking Corporation. The Board of Directors of the PCHC affirmed the Arbiter's decision.
A petition for review of the decision filed by Banco de Oro with the Regional Trial Court of Quezon
City was dismissed. The decision of the PCHC was affirmed in toto.

One of the main issues threshed out in this case centered on the effect of Banco de Oro's
(representing or collecting bank) guarantee of "all prior endorsements and/or lack of endorsements"
at the back of the checks. A corollary issue was the effect of the forged endorsements of the payees
which were late discovered by the Equitable Banking Corporation (drawee bank) resulting in the
latter's claim for reimbursement of the value of checks after it paid the proceeds of the checks.

We agreed with the following disquisition of the Regional Trial Court, to wit:

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

In presenting the checks for clearing and for payment, the defendant made an
express guarantee on the validity of "all prior endorsements." Thus, stamped at the
back of the checks are the defendant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without
such warranty, plaintiff would not have paid on the checks.

No amount of legal jargon can reverse the clear meaning of defendant's warranty. As
the warranty has proven to be false and inaccurate, the defendant is liable for any
damage arising out of the falsity of its representation.

The principle of estoppel, effectively prevents the defendant from denying liability for
any damage sustained by the plaintiff which, relying upon an action or declaration of
the defendant, paid on the checks. The same principle of estoppel effectively
prevents the defendant from denying the existence of the checks. (pp. 10-11,
Decision, pp. 43-44, Rollo) (at pp. 194-195)

We also ruled:

Apropos the matter of forgery in endorsements, this Court has presently succintly
emphasized that the collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior endorsements
considering that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to ascertain the
genuineness of the endorsements. This is laid down in the case of PNB v. National
City Bank. (63 Phil. 1711) In another case, this court held that if the drawee-bank
discovers that the signature of the payee was forged after it has paid the amount of
the check to the holder thereof, it can recover the amount paid from the collecting
bank.

xxx xxx xxx

The point that comes uppermost is whether the drawee bank was negligent in failing
to discover the alteration or the forgery. (Emphasis supplied)
 xxx xxx xxx

The court reproduces with approval the following disquisition of the PCHC in its
decision.

xxx xxx xxx

III. Having Violated Its Warranty On Validity Of All Endorsements, Collecting Bank
Cannot Deny Liability To Those Who Relied On Its Warranty.

xxx xxx xxx

The damage that will result if judgment is not rendered for the plaintiff is irreparable.
The collecting bank has privity with the depositor who is the principal culprit in this
case. The defendant knows the depositor; her address and her history. Depositor is
defendant's client. It has taken a risk on its depositor when it allowed her to collect
on the crossed-checks.

Having accepted the crossed checks from persons other than the payees, the
defendant is guilty of negligence; the risk of wrongful payment has to be assumed by
the defendant. (Emphasis supplied, at pp. 198-202)

As can be gleaned from the decision, one of the main considerations in affirming the PCHC's
decision was the finding that as between the drawee bank (Equitable Bank) and the representing or
collecting bank (Banco de Oro) the latter was negligent and thus responsible for undue payment.

Parenthetically, petitioner BPI's theory that the present clearing guarantee requirement imposed on
the representing or collecting bank under the PCHC rules and regulations is independent of the
Negotiable Instruments Law is not in order.

Another reason why the petitioner's theory is uncalled for is the fact that the Negotiable Instruments
Law (Act No. 2031) applied to negotiable instruments as defined under section one thereof.
Undeniably, the present case involves checks as defined by and under the coverage of the
Negotiable Instruments Law. To affirm the theory of the petitioner would, therefore, violate the rule
that rules and regulations implementing the law should conform to the law, otherwise the rules and
regulations are null and void. Thus, we held Shell Philippines, Inc. v. Central Bank of the
Philippines (162 SCRA 628 [1988]):

. . . while it is true that under the same law the Central Bank was given the authority
to promulgate rules and regulations to implement the statutory provision in question,
we reiterate the principle that this authority is limited only to carrying into effect what
the law being implemented provides.

In People v. Maceren (79 SCRA 450, 458 and 460), this Court ruled that:

Administrative regulations adopted under legislative authority by a particular

department must be in harmony with the provisions of the law, and should be for the
sole purpose of carrying into effect its general provisions. By such regulations, of
course, the law itself cannot be extended. (U.S. v. Tupasi Molina, supra). An
administrative agency cannot amend an act of Congress (Santos v. Estenzo, 109
Phil. 419, 422; Teoxon v. Members of the Board of Administrators, L-25619, June 30,
 1970, 33 SCRA 585; Manuel v. General Auditing Office, L-28952, December 29,
1971, 42 SCRA 660; Deluao v. Casteel, L-21906, August 29, 1969, 29 SCRA 350).

The rule-making power must be confined to details for regulating the mode or
proceeding to carry into effect the law as it has been enacted. The power cannot be
extended to amending or expanding the statutory requirements or to embrace
matters not covered by the statute. Rules that subvert the statute cannot be
sanctioned. (University of Santo Tomas v. Board of Tax Appeals, 93 Phil. 376,
382, citing 12 C.J. 845-46. as to invalid regulations, see Collector of Internal
Revenue v. Villaflor, 69 Phil. 319; Wise & Co. v. Meer, 78 Phil. 655, 676; Del Mar v.
Phil. Veterans Administration, L-27299, June 27, 1973, 51 SCRA 340, 349).

xxx xxx xxx

. . . The rule or regulation should be within the scope of the statutory authority
granted by the legislature to the administrative agency. (Davis, Administrative Law, p.
194, 197, cited in Victorias Milling Co., Inc. v. Social Security Commission, 114 Phil.
555, 558).

In case of discrepancy between the basic law and a rule or regulation issued to
implement said law the basic law prevails because said rule or regulation cannot go
beyond the terms and provisions of the basic law (People v. Lim 108 Phil. 1091). (at
pp. 633-634)

Section 23 of the Negotiable Instruments Law states:

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

There are two (2) parts of the provision. The first part states the general rule while the second part
states the exception to the general rule. The general rule is to the effect that a forged signature is
"wholly inoperative", and payment made "through or under such signature" is ineffectual or does not
discharge the instrument. The exception to this rule is when the party relying in the forgery is
"precluded from setting up the forgery or want of authority. In this jurisdiction we
recognize negligence of the party invoking forgery as an exception to the general rule. (See Banco
de Oro Savings and Mortgage Bank v. Equitable Banking Corporation supra; Philippine National
Bank v. Quimpo, 158 SCRA 582 [1988]; Philippine National Bank v. Court of Appeals, 25 SCRA 693
[1968]; Republic v. Equitable Banking Corporation, 10 SCRA 8 [1964]; National Bank v. National City
Bank of New York, 63 Phil. 711 [1936]; San Carlos Milling Co. v. Bank of P.I., 59 Phil. 59 [1933]). In
these cases we determined the rights and liabilities of the parties under a forged endorsement by
looking at the legal effects of the relative negligence of the parties thereto.

In the present petition the payee's names in the two (2) subject checks were forged. Following the
general rule, the checks are "wholly inoperative" and of no effect. However, the underlying
circumstances of the case show that the general rule on forgery is not applicable. The issue as to
who between the parties should bear the loss in the payment of the forged checks necessities the
determination of the rights and liabilities of the parties involved in the controversy in relation to the
forged checks.
The records show that petitioner BPI as drawee bank and respondent CBC as representing or
collecting bank were both negligent resulting in the encashment of the forged checks.

The Arbitration Committee in its decision analyzed the negligence of the employees of petitioner BPI
involved in the processing of the pre-termination of Eligia G. Fernando's money market placement
and in the issuance and delivery of the subject checks in this wise:

a) The impostor could have been readily unmasked by a mere telephone call, which
nobody in BPI bothered to make to Eligia G. Fernando, a vice-president of Philamlife
(Annex C, p. 13).

b) It is rather curious, too, that the officer who used to handle Eligia G. Fernando's
account did not do anything about the account's pre-termination (Ibid, p. 13).

c) Again no verification appears to have been made by (sic) Eligia G. Fernando's

purported signature on the letter requesting the pre-termination and the letter
authorizing her niece to pick-up the checks, yet, her signature was in BPI's file
(Ibid., p. 13).

d) Another step that could have foiled the fraud, but which BPI neglected to take, was
requiring before the two checks in controversy were delivered, the surrender of the
promissory note evidencing the money market placement that was supposedly pre-
terminated. (Rollo, p. 13).

The Arbitration Committee, however, belittled petitioner BPI's negligence compared to that of
respondent CBC which it declared as graver and the proximate cause of the loss of the subject
checks to the impostor who impersonated Eligia G. Fernando. Petitioner BPI now insists on the
adoption of the Arbitration Committee's evaluation of the negligence of both parties, to wit:

a) But what about the lapses of BPI's employees who processed the pretermination
of Eligia G. Fernando's placement and issued the checks? We do not think it was a
serious lapse not to confirm the telephone request for pretermination purportedly
made by Eligia G. Fernando, considering that it is common knowledge that business
in the money market is done mostly by telephone. Then, too, the initial request of the
caller was for the two checks representing the pretermination proceeds to be
delivered to "her" office, meaning Eligia G. Fernando's office at Philamlife, this clever
ruse must have put off guard the employee preparing the "purchase order slip",
enough at least for him to do away with having to call Eligia G. Fernando at her
office. (Annex C at p. 17).

b) We also do not think it unusual that Penelope Bulan, who used to handle Eligia G.
Fernando's account, should do nothing about the request for pretermination and
leave it to Eustaquio to process the pretermination. In a bank the of BPI, it would be
quite normal for an officer to take over from another the handling of an account. (Ibid.
p. 17)

c) The failure to verify or compare Eligia G. Fernando's purported signature on the

letter requesting the pretermination and the letter authorizing the pick-up of the
checks in controversy with her signature in BPI's file showed lack of care and
prudence required by the circumstances, although it is doubtful that such comparison
would have disclosed the deception considering the "close similarity" between her
purported signature and her signature in BPI's file. (Ibid., p. 17).
d) A significant lapse was, however, committed when the two checks in controversy
were delivered without requiring the surrender of the promissory note evidencing the
placement that was supposedly preterminated. Although, as we already said, it is
hard to determine whether the failure to require the surrender of the promissory note
was a deliberate act of Laderas, the dispatcher, or simply because the "purchase
order slip" note, (sic) the fact remains that such failure contributed to the
consummation of the fraud. (Ibid., p. 17-18)

The Arbitration Committee Decision's conclusion was expressed thus —

Except for Laderas, not one of the BPI personnel tasked with the
pretermination of Eligia G. Fernando's placement and the issuance of
the pretermination checks colluded in the fraud, although there may
have been lapses of negligence on their part which we shall discuss
later. The secreting out of BPI of Fernando's specimen signature,
which, as admitted by the impostor herself (Exhibit E-2, page 5),
helped her in forging Fernando's signature was no doubt an "inside
job" but done by any of the four employees colluding in the fraud, not
by the personnel directly charged with the custody of Fernando's
records. (Annex C, p. 15)

With respect to the negligence of the CBC employees in the payment of the two (2)
BPI cashier's checks involved in this case, the Arbitration Committee's Decision
made incontrovertible findings undisputed in the statement of facts found in the Court
of Appeals' decision of 8 August 1991, the Regional Trial Court decision of 28
November 1990 and the PCHC Board of Directors' Order of 26 August
1986 (Annexes A, E, D, respectively). These findings point to negligence of the CBC
employees which led to: (a) the opening of the impostor's current account in the
name of Eligia G. Fernando; (b) the deposit of said account of the two (2) checks in
controversy and (c) the withdrawal of their proceeds from said account.

The Arbitration Committee found that —

1. Since the impostor presented only her tax account number as a

means of identification, we feel that Emily Sylianco Cuaso, Cash
Supervisor, approved the opening of her current account in the name
of Eligia G. Fernando on the strength of the introduction of Antonio
Concepcion who had himself opened an account earlier that year.
That Mrs. Cuaso was not comfortable with the introduction of the new
depositor by Concepcion is betrayed by the fact that she made it
appear in the application form that the new depositor was introduced
by Valentin Co a long-standing valued client of CBC who had
introduced Concepcion when he opened his account. We find this
misrepresentation significant because when she reviewed the
application form she assumed that the new client was introduced by
Valentin Co as indicated in the application form (tsn of March 19,
1985, page 13). Thus we find that the impostor was able to open with
CBC's current account in the name of Eligia G. Fernando due to the
negligence, if not misrepresentation, of its Cash Supervisor, (Annex
C, p. 18).
 2. Even with negligence attending the impostor's opening of a current
account, her encashment of the two checks in controversy could still
have been prevented if only the care and diligence demanded by the
circumstances were exercised. On October 14, 1981, just a day after
she opened her account, the impostor deposited the two checks
which had an aggregate value of P2,413,215.16, which was grossly
disproportionate to her initial deposit of P10,000. The very date of
both checks, October 12, 1981, should have tipped off the real
purpose of the opening of the account on October 13, 1981. But what
surely can be characterized only as abandonment of caution was
allowing the withdrawal of the checks' proceeds which started on
October 16, 1981 only two days after the two checks were deposited;
by October 22, 1981, the account had been emptied of the checks'
proceeds. (Annex C, p. 19).

3. We cannot accept CBC's contention that "big withdrawals" are

"usual business" with it. Huge withdrawals might be a matter of
course with an established account but not for a newly opened
account, especially since the supposed check proceeds being
withdrawn were grossly disproportionate to the initial cash deposit.
(Annex C, p. 19).

As intimated earlier, the foregoing findings of fact were not materially disputed either
by the respondent PCHC Board of Directors or by the respondent courts (compare
statement of facts of respondent court as reproduced in pp. 9-11 of this petition).

Having seen the negligence of the employees of both Banks, the relevant question
is: which negligence was graver. The Arbitration Committee's Decision found and
concluded thus —

Since there were lapses by both BPI and CBC, the question is:
whose negligence was the graver and which was the proximate
cause of the loss? Even viewing BPI's lapses in the worst light, it can
be said that while its negligence may have introduced the two checks
in controversy into the commercial stream. CBC's lack of care in
approving the opening with it of the impostor's current account, and
its allowing the withdrawal's of the checks' proceeds, the aggregate
value of which was grossly disproportionate to the initial cash deposit,
so soon after such checks were deposited, caused the "payment" of
the checks. Being closest to the vent of loss, therefore, CBC's
negligence must be held to be proximate cause of the loss. (Annex C,
pp. 19-20) (Rollo, pp. 38-41)

While it is true that the PCHC Board of Directors, and the lower courts did not dispute the findings of
facts of the Arbitration Committee, the PCHC Board of Directors evaluated the negligence of the
parties, to wit:

The Board finds the ruling that the negligence of the employees of CBC is graver
than that of the BPI not warranted by the facts because:

1. The acts and omissions of which BPI employees are guilty are not only negligent
but criminal as found by the decision.
2. The act of BPI's dealer-trainee Eustaquio of disclosing information about the
money market placement of its client over the telephone is a violation, if not of
Republic Act 1405, of Sec. 87 (a) of the General Banking Act which penalizes any
officer-employee or agent of any banking institution who discloses to any
unauthorized person any information relative to the funds or properties in the custody
of the bank belonging to private individual, corporations, or any other entity; and the
bland excuse given by the decision that "business in the money market is done
mostly by the telephone" cannot be accepted nor tolerated for it is an elementary rule
of law that no custom or usage of business can override what a law specifically
provides. (Ang Tek v. CA, 87 Phil. 383).

3. The failure of BPI employees to verify or compare Eligia G. Fernando's purported

signature on the letter requesting for pre-termination and the letter authorizing the
pick-up of the checks in controversy with the signatures on file is not even justified
but admitted in the decision as showing lack of care and prudence required by the
circumstances. The conjectural excuse made in the decision that "it is doubtful that
such comparison would have disclosed the deception" does not give an excuse for
the omission by BPI employees of the act of verifying the signature, a duty which is
the basic requirement of all acts in the bank. From the very first time an employee
enters the services of a bank up to the time he becomes the highest officer thereof,
the cautionary rule is drilled on him to always be sure that when he acts on the basis
of any signature presented before him, the signature is to be verified as genuine and
that if the bank acts on the basis of a forgery of such signature, the bank will be held
liable. There can be no excuse therefore for such an omission on the part of BPI
employees.

4. The decision admits that:

A significant lapse was, however, committed when the two checks in

controversy were delivered without requiring the surrender of the
promissory note evidencing the placement that was supposedly
preterminated.

This omission of the BPI to require the surrender of the promissory notes evidencing
the placement is justified by the decision by saying that Sec. 74 of the Negotiable
Instrument Law is not violated by this omission of the BPI employees because said
provision is intended for the benefit of the person paying (in this case the BPI) so that
since the omission to surrender having been waived by BPI, so the non-surrender
does not invalidate the payment. The fallacy of this argument is that the in this case
is: whether or not such non-surrender is a necessary ingredient in the cause of the
success of the fraud and not whether or not the payment was valid. This excuse may
perhaps be acceptable if the omission did not cause damage to any other person. In
this case, however, it did cause tremendous damage. Moreover, this statement
obviously overlooks the provision in Art. 1240 of the Civil Code requiring the payor
(which in this case is the BPI) to be sure he pays to the right person and as Art. 1242
states, he can claim good faith in paying to the right person only if he pays to the
person possession of the credit (which in this case is the promissory note evidencing
the money market placement). Clearly therefore, the excuse given in the decision for
the non-surrender of this promissory note evidencing the money market placement
cannot be accepted.

xxx xxx xxx

 The decision, however, discusses in detail the negligent acts of the CBC in its lapses
or certain requirements in the opening of the account and in allowing withdrawals
against the deposited checks soon after the deposit thereof. As stated by the
decision however, in computerized banks the history of the account is not shown in
the computer terminal whenever a withdrawal is made.

The Board therefore believes that these withdrawals, without any further showing
that the CBC employees "had actual knowledge of the infirmity or defect, or
knowledge of such facts" (Sec. 56, Negotiable Instruments Law) that their action in
accepting their checks for deposit and allowing the withdrawals against the same
"amounted to bad faith" cannot be considered as basis for holding CBC liable. (Rollo,
pp. 107-111)

Banks handle daily transactions involving millions of pesos. By the very nature of their work the
degree of responsibility, care and trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees. For obvious reasons, the banks are expected
to exercise the highest degree of diligence in the selection and supervision of their employees.

In the present case, there is no question that the banks were negligent in the selection and
supervision of their employees. The Arbitration Committee, the PCHC Board of Directors and the
lower court, however disagree in the evaluation of the degree of negligence of the banks. While the
Arbitration Committee declared the negligence of respondent CBC graver, the PCHC Board of
Directors and the lower courts declared that petitioner BPI's negligence was graver. To the extent
that the degree of negligence is equated to the proximate cause of the loss, we rule that the issue as
to whose negligence is graver is relevant. No matter how many justifications both banks present to
avoid responsibility, they cannot erase the fact that they were both guilty in not exercising
extraordinary diligence in the selection and supervision of their employees. The next issue hinges on
whose negligence was the proximate cause of the payment of the forged checks by an impostor.

Petitioner BPI accuses the Court of Appeals of inconsistency when it affirmed the PCHC's Board of
Directors' Order but in the same breath declared that the negligent acts of the CBC employees
occurred immediately before the actual loss.

In this regard petitioner BPI insists that the doctrine of last clear chance enunciated in the case
of Picart v. Smith (37 Phil. 809 [1918]) should have been applied considering the circumstances of
the case.

In the Picart case, Amado Picart was then riding on his pony over the Carlatan Bridge at San
Fernando, La Union when Frank Smith approached from the opposite direction in a car. As Smith
neared the bridge he saw Picart and blew his horn to give warning of his approach. When he was
already on the bridge Picart gave two more successive blasts as it appeared to him that Picart was
not observing the rule of the road. Picart saw the car coming and heard the warning signals. An
accident then ensued resulting in the death of the horse and physical injuries suffered by Picart
which caused him temporary unconsciousness and required medical attention for several days.
Thereafter, Picart sued Smith for damages.

We ruled:

The question presented for decision is whether or not the defendant in maneuvering
his car in the manner above described was guilty of negligence such as gives rise to
a civil obligation to repair the damage done; and we are of the opinion that he is so
liable. As the defendant started across the bridge, he had the right to assume that
 the horse and rider would pass over to the proper side; but as he moved toward the
center of the bridge it was demonstrated to his eyes that this would not be done; and
he must in a moment have perceived that it was too late for the horse to cross with
safety in front of the moving vehicle. In the nature of things this change of situation
occurred while the automobile was yet some distance away; and from this moment it
was no longer within the power of the plaintiff to escape being run down by going to
a place of greater safety. The control of the situation had then passed entirely to the
defendant; and it was his duty to either to bring his car to an immediate stop or,
seeing that there were no other persons on the bridge, to take the other side and
pass sufficiently far away from the horse to avoid the danger of collision. Instead of
doing this, the defendant ran starlight on until he was almost upon the horse. He
was, we think, deceived into doing this by the fact that the horse had not yet
exhibited fright. But in view of the known nature of horses, there was an appreciable
risk that, if the animal in question was unacquainted with automobiles, he might get
excited and jump under the conditions which here confronted him. When the
defendant exposed the horse and rider to this danger he was, in our opinion,
negligent in the eyes of the law.

The test by which by which to determine the existence of negligence in a particular

case may be stated as follows: Did the defendant in doing the alleged negligent act
use that reasonable care and caution which an ordinarily prudent person would have
used in the same situation? If not, then he is guilty of negligence.

xxx xxx xxx

It goes without saying that the plaintiff himself was not free from fault, for he was
guilty of antecedent negligence in planting himself on the wrong side of the road. But
as we have already stated, the defendant was also negligent; and in such case the
problem always is to discover which agent is immediately and directly responsible. It
will be noted that the negligent acts of the two parties were not contemporaneous,
since the negligence of the defendant succeeded the negligence of the plaintiff by an
appreciable interval. Under these circumstances the law is that the person who has
the last fair chance to avoid the impending harm and fails to do so is chargeable with
the consequences, without reference to the prior negligence of the other party."

Applying these principles, petitioner BPI's reliance on the doctrine of last clear chance to clear it from
liability is not well-taken. CBC had no prior notice of the fraud perpetrated by BPI's employees on
the pretermination of Eligia G. Fernando's money market placement. Moreover, Fernando is not a
depositor of CBC. Hence, a comparison of the signature of Eligia G. Fernando with that of the
impostor Eligia G. Fernando, which respondent CBC did, could not have resulted in the discovery of
the fraud. Hence, unlike in the Picart case herein the defendant, had he used reasonable care and
caution, would have recognized the risk he was taking and would have foreseen harm to the horse
and the plaintiff but did not, respondent CBC had no way to discover the fraud at all. In fact the
records fail to show that respondent CBC had knowledge, actual or implied, of the fraud perpetrated
by the impostor and the employees of BPI.

However, petitioner BPI insists that even if the doctrine of proximate cause is applied, still,
respondent CBC should be held responsible for the payment to the impostor of the two (2) checks. It
argues that the acts and omissions of respondent CBC are the cause "that set into motion
the actual and continuous sequence of events that produced the injury and without which the result
would not have occurred." On the other hand, it assets that its acts and omissions did not end in a
loss. Petitioner BPI anchors its argument on its stance that there was "a gap, a hiatus, an interval
between the issuance and delivery of said checks by petitioner BPI to the impostor and their actual
payment of CBC to the impostor. Petitioner BPI points out that the gap of one (1) day that elapsed
from its issuance and delivery of the checks to the impostor is material on the issue of proximate
cause. At this stage, according to petitioner BPI, there was yet no loss and the impostor could have
decided to desist from completing the same plan and could have held to the checks without
negotiating them.

We are not persuaded.

In the case of Vda. de Bataclan, et al, v. Medina (102 Phil. 181 [1957]), we had occasion to discuss
the doctrine of proximate cause.

Briefly, the facts of this case are as follows:

At about 2:00 o'clock in the morning of September 13, 1952 a bus carrying about eighteen (18)
passengers on its way to Amandeo, Cavite figured in an accident. While the bus was running, one of
the front tires burst and the bus began to zigzag until it fell into a canal on the right side of the road
and turned turtle. Some passengers managed to get out from the overturned bus except for four (4)
passengers, among them, Bataclan. The passengers who got out heard shouts for help from
Bataclan and another passenger Lara who said they could not get out from the bus. After half an
hour, about ten men came, one of them carrying a lighted torch made of bamboo with a wick on one
end fueled with petroleum. These men approached the overturned bus, and almost immediately, a
fierce fire started burning and all but consuming the bus including the four (4) passengers trapped
inside. It turned out that as the bus overturned, gasoline began to leak and escape from the gasoline
tank on the side of the chassis spreading over and permeating the body of the bus and the ground
under and around it. The lighted torch brought by one of the men who answered the call for help set
it on fire. On the same day, the charred bodies of the trapped passengers were removed and
identified. By reason of his death, Juan Bataclan's wife and her children filed a suit for damages
against Maximo Medina, the operator and owner of the bus in the then Court of First Instance of
Cavite. The trial court ruled in favor of the defendant. However, we reversed and set aside the trial
court's decision and said:

There is no question that under the circumstances, the defendant carrier is liable.
The only question is to what degree. The trial court was of the opinion that the
proximate cause of the death of Bataclan was not the overturning of the bus, but
rather the fire that burned the bus, including himself and his co-passengers who were
unable to leave it; that at the time the fire started, Bataclan, though the must have
suffered, physical injuries, perhaps serious, was still alive and so damages were
awarded, not for his death, but for the physical satisfactory definition of promote
cause is found in Volume 38, pages 695-696 of American Jurisprudence, cited by
plaintiffs-appellants in their brief. It is as follows:

. . . that cause, which, in natural and continuous sequence, unbroken

by any efficient intervening cause, produces the injury, and without
which the result would not have occurred. And more
comprehensively, the proximate legal cause in that acting first and
producing the injury, either immediately or by setting other events in
motion, all constituting a natural and continuous chain of events,
each having a close causal connection with its immediate
predecessor, the final event in the chain immediately effecting the
injury as natural and probable result of the cause which first acted,
under such circumstances that the person responsible for the first
 event should, as an ordinarily prudent and intelligent person, have
reasonable ground to expect at the moment of his act or default that
an injury to some person might probably result therefrom.

It may be that ordinarily, when a passenger bus overturns, and pins down a
passenger, merely causing him physical injuries, if through some event, unexpected
and extraordinary, the overturned bus is set on fire, say, by lightning, or if some
highwaymen after looting the vehicle sets it on fire, and the passenger is burned to
death, on might still contend that the proximate cause of his death was the fire and
not the overturning of the vehicle. But in the present case and under the
circumstances obtaining in the same, we do not hesitate to hold that the proximate
cause of the death of Bataclan was the overturning of the bus, this for the reason
that when the vehicle turned not only on its side but completely on its back, the
leaking of the gasoline from the tank was not unnatural or unexpected; that the
coming of the men with a lighted torch was in response to the call for help, made not
only by the passengers, but most probably, by the driver and the conductor
themselves, and that because it was very dark (about 2:30 in the morning), the
rescuers had to carry a light with them; and coming as they did from a rural area
where lanterns and flashlights were not available, they had to use a torch, the most
handy and available; and what was more natural than that said rescuers should
innocently approach the overturned vehicle to extend the aid and effect the rescue
requested from them. In other words, the coming of the men with the torch was to be
expected and was natural sequence of the overturning of the bus, the trapping of
some of its passengers and the call for outside help. (Emphasis Supplied, at pp. 185-
187)

Again, applying the doctrine of proximate cause, petitioner BPI's contention that CBC alone should
bear the loss must fail. The gap of one (1) day between the issuance and delivery of the checks
bearing the impostor's name as payee and the impostor's negotiating the said forged checks by
opening an account and depositing the same with respondent CBC is not controlling. It is
not unnatural or unexpected that after taking the risk of impersonating Eligia G. Fernando with the
connivance of BPI's employees, the impostor would complete her deception by encashing the forged
checks. There is therefore, greater reason to rule that the proximate cause of the payment of the
forged checks by an impostor was due to the negligence of petitioner BPI. This finding,
notwithstanding, we are not inclined to rule that petitioner BPI must solely bear the loss of
P2,413,215.16, the total amount of the two (2) forged checks. Due care on the part of CBC could
have prevented any loss.

The Court cannot ignore the fact that the CBC employees closed their eyes to the suspicious
circumstances of huge over-the-counter withdrawals made immediately after the account was
opened. The opening of the account itself was accompanied by inexplicable acts clearly showing
negligence. And while we do not apply the last clear chance doctrine as controlling in this case, still
the CBC employees had ample opportunity to avoid the harm which befell both CBC and BPI. They
let the opportunity slip by when the ordinary prudence expected of bank employees would have
sufficed to seize it.

Both banks were negligent in the selection and supervision of their employees resulting in the
encashment of the forged checks by an impostor. Both banks were not able to overcome the
presumption of negligence in the selection and supervision of their employees. It was the gross
negligence of the employees of both banks which resulted in the fraud and the subsequent loss.
While it is true that petitioner BPI's negligence may have been the proximate cause of the loss,
respondent CBC's negligence contributed equally to the success of the impostor in encashing the
proceeds of the forged checks. Under these circumstances, we apply Article 2179 of the Civil Code
to the effect that while respondent CBC may recover its losses, such losses are subject to mitigation
by the courts. (See Phoenix Construction Inc. v. Intermediate Appellate Courts, 148 SCRA 353
[1987]).

Considering the comparative negligence of the two (2) banks, we rule that the demands of
substantial justice are satisfied by allocating the loss of P2,413,215.16 and the costs of the
arbitration proceeding in the amount of P7,250.00 and the cost of litigation on a 60-40 ratio.
Conformably with this ruling, no interests and attorney's fees can be awarded to either of the parties.

WHEREFORE, the questioned DECISION and RESOLUTION of the Court of Appeals are
MODIFIED as outlined above. Petitioner Bank of the Philippine Islands shall be responsible for sixty
percent (60%) while respondent China Banking Corporation shall share forty percent (40%) of the
loss of TWO MILLION FOUR HUNDRED THIRTEEN THOUSAND, TWO HUNDRED FIFTEEN
PESOS and SIXTEEN CENTAVOS (2,413,215.16) and the arbitration costs of SEVEN THOUSAND,
TWO HUNDRED FIFTY PESOS (7,250.00). The Philippine Clearing House Corporation is hereby
directed to effect the corresponding entries to the banks' clearing accounts in accordance with this
decision. Costs in the same proportion against the Bank of the Philippine Islands and the China
Banking Corporation.

SO ORDERED

G.R. No. 172652 November 26, 2014

METROPOLITAN BANK AND TRUST COMPANY, Petitioner,

vs.
WILFRED N. CHIOK, Respondent.

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

G.R. No. 175302

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
WILFRED N. CHIOK, Respondent.

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

G.R. No. 175394

GLOBAL BUSINESS BANK, INC., Petitioner,

vs.
WILFRED N. CHIOK, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

The three consolidated petitions herein all assail the Decision of the Court of Appeals in CA-G.R.
1

CV No. 77508 dated May 5, 2006, and the Resolution in the same case dated November 6, 2006.
2
Respondent Wilfred N. Chiok (Chiok) had been engaged in dollar trading for several years. He
usually buys dollars from Gonzalo B. Nuguid (Nuguid) at the exchange rate prevailing on the date of
the sale. Chiok pays Nuguid either in cash or manager’s check, to be picked up by the latter or
deposited in the latter’s bank account. Nuguid delivers the dollars either on the same day or on a
later date as may be agreed upon between them, up to a week later. Chiok and Nuguid had been
dealing in this manner for about six to eight years, with their transactions running into millions of
pesos. For this purpose, Chiok maintained accounts with petitioners Metropolitan Bank and Trust
Company (Metrobank) and Global Business Bank, Inc. (Global Bank), the latter being then referred
to as the Asian Banking Corporation (Asian Bank). Chiok likewise entered into a Bills Purchase Line
Agreement (BPLA) with Asian Bank. Under the BPLA, checks drawn in favor of, or negotiated to,
Chiok may be purchased by Asian Bank. Upon such purchase, Chiok receives a discounted cash
equivalent of the amount of the check earlier than the normal clearing period.

On July 5, 1995, pursuant to the BPLA, Asian Bank "bills purchased" Security Bank & Trust
Company (SBTC) Manager’s Check (MC) No. 037364 in the amount of ₱25,500,000.00 issued in
the name of Chiok, and credited the same amount to the latter’s Savings Account No. 2-007-03-
00201-3.

On the same day, July 5, 1995, Asian Bank issued MC No. 025935 in the amount of ₱7,550,000.00
and MC No. 025939 in the amount of ₱10,905,350.00 to Gonzalo Bernardo, who is the same person
as Gonzalo B. Nuguid. The two Asian Bank manager’s checks, with a total value of ₱18,455,350.00
were issued pursuant toChiok’s instruction and was debited from his account. Likewise upon Chiok’s
application, Metrobank issued Cashier’s Check (CC) No. 003380 in the amount of ₱7,613,000.00 in
the name of Gonzalo Bernardo. The same was debited from Chiok’s Savings Account No. 154-
42504955. The checks bought by Chiok for payee Gonzalo Bernardo are therefore summarized as
follows:

Drawee
Amount (P) Source of fund
Bank/Check No.

Asian Bank MC 7,550,000.00

No. 025935 Chiok’s Asian Bank Savings
Asian Bank MC 10,905,350.00 Account No. 2-007-03-00201-3,
No. 025939 which had been credited with the
(aggregate value value of SBTC MC No. 037364
of (₱25,500,000.00) when the latter was purchased by
Asian Bank MCs: Asian Bank from Chiok pursuant to their BPLA.
18,455,350.00)

Metrobank CC No. 7,613,000.00 Chiok’s Metrobank Savings

003380 Account No. 154-42504955 3

TOTAL 26,068,350.00

Chiok then deposited the three checks (Asian Bank MC Nos. 025935 and 025939, and Metrobank
CC No. 003380), with an aggregate value of ₱26,068,350.00 in Nuguid’s account with Far East Bank
& Trust Company (FEBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands
(BPI). Nuguid was supposed to deliver US$1,022,288.50, the dollar equivalent of the three checks
4

as agreed upon, in the afternoon of the same day. Nuguid, however, failed to do so, prompting Chiok
to request that payment on the three checks be stopped. Chiok was allegedly advised to secure a
court order within the 24-hour clearing period. On the following day, July 6, 1995, Chiok filed a
Complaint for damages with application for ex parte restraining order and/or preliminary injunction
with the Regional Trial Court (RTC) of Quezon City against the spouses Gonzalo and Marinella
Nuguid, and the depositary banks, Asian Bank and Metrobank, represented by their respective
managers, Julius de la Fuente and Alice Rivera. The complaint was docketed as Civil Case No. Q-
95-24299 and was raffled to Branch 96. The complaint was later amended to include the prayer of
5

Chiok to be declared the legal owner of the proceeds of the subject checks and to be allowed to
withdraw the entire proceeds thereof.

On the same day, July 6, 1995, the RTC issued a temporary restraining order (TRO) directing the
spouses Nuguid to refrain from presenting the said checks for payment and the depositary banks
from honoring the sameuntil further orders from the court. 6

Asian Bank refused to honor MC Nos. 025935 and 025939 in deference to the TRO. Metrobank
claimed that when it received the TRO on July 6, 1995, it refused to honor CC No. 003380 and
stopped payment thereon. However, in a letter also dated July 6, 1995, Ms. Jocelyn T. Paz of
FEBTC, Cubao-Araneta Branch informed Metrobank that the TRO was issued a day after the check
was presented for payment. Thus, according to Paz, the transaction was already consummated and
FEBTC had already validly accepted the same. In another letter, FEBTC informed Metrobank that
"the restraining order indicates the name of the payee of the check as GONZALO NUGUID, but the
check isin fact payable to GONZALO BERNARDO. We believe there is a defect in the restraining
order and as such should not bind your bank." Alice Rivera of Metrobank replied to said letters,
7

reiterating Metrobank’s position tocomply with the TRO lest it be cited for contempt by the trial court.
However, as would later be alleged in Metrobank’s Answer before the trial court, Metrobank
eventually acknowledged the check when it became clear that nothing more can be done to retrieve
the proceeds of the check. Metrobank furthermore claimed that since it is the issuer of CC No.
003380, the check is its primary obligation and should not be affected by any prior transaction
between the purchaser (Chiok) and the payee (Nuguid).

In the meantime, FEBTC, as the collecting bank, filed a complaint against Asian Bank before the
Philippine Clearing House Corporation (PCHC) Arbitration Committee for the collection of the value
of Asian Bank MC No. 025935 and 025939, which FEBTC had allegedly allowed Nuguid to withdraw
on July 5, 1995, the same day the checks were deposited. The case was docketed as Arbicom Case
No. 95-082. The PCHC Arbitration Committee later relayed, in a letter dated August 4, 1995, its
refusal to assume jurisdiction over the case on the ground that any step it may take might be
misinterpreted as undermining the jurisdiction of the RTC over the case or a violation of the July 6,
1995 TRO.

On July 25, 1995, the RTC issued an Order directing the issuance of a writ of preliminary prohibitory
injunction:

WHEREFORE, upon filing by the plaintiff of a sufficient bond in the amount of ₱26,068,350.00, to be
executed in favor of the defendants under the condition that the same shall answer for whatever
damages they may sustain by reason of this injunction should the Court ultimately determine that he
was not entitled thereto, let a writ of preliminary prohibitory injunction issue restraining and
preventing during the pendency of the case:

a) Defendant Asian Bank frompaying Manager’s Checks No. 025935 in the amount of
₱7,550,000.00 and No. 025939 in the amount of ₱10,905,350.00; and

b) Defendant Metro Bank frompaying Cashier’s Check No. 003380 in the amount of
₱7,613,000.00.
The application for preliminary mandatory injunctionis hereby denied and the order issued on July 7,
1995 directing defendant Metro Bank (Annapolis, Greenhills Branch) to allow the plaintiff to withdraw
the proceeds of Cashier’s Check No. 003380 in the amount of ₱7,613,000.00 is hereby set aside.

The plaintiff’s urgent motion todeclare defendants Asian Bank and Metro Bank in contempt of court
filed last July 13, 1995 is hereby denied for lack of legal basis.

The writ of preliminary prohibitory injunction and a copy of this order shall be served on the
defendants by Deputy Sheriff Jose Martinez of this Branch. 8

Upon the filing by Chiok of the requisite bond, the Writ was subsequently issued on July 26, 1995.

Before the RTC, Asian Bank pointed out that SBTC returned and issued a Stop Payment Order on
SBTC MC No. 037364 (payable to Chiok in the amount of ₱25,500,000.00) on the basis of an
Affidavit of Loss & Undertaking executed by a certain Helen Tan. Under said Affidavit of Loss &
Undertaking, Tan claims that she purchased SBTC MC No. 037364 from SBTC, but the manager’s
check got lost on that day. Asian Bank argued that Chiok would therefore be liable for the dishonor
of the manager’s check under the terms of the BPLA, which provides for recourse against the seller
(Chiok) of the check when it is dishonored by the drawee (SBTC) for any reason, whether valid or
not.

On October 18, 1995, FEBTC filed a Complaint-in-Intervention in Civil Case No. Q-95-24299. On
February6, 1996, the RTC initially denied FEBTC’s intervention in the case. On Motion for
Reconsideration, however, the RTC, on April 15, 1996, reversed itself and allowed the same.

In the Complaint-in-Intervention, FEBTC claimed that it allowed the immediate withdrawal of the
proceeds of Asian Bank MC Nos. 025935 and 025939 on the ground that, as manager’schecks, they
were the direct obligations of Asian Bank and were accepted in advance by Asian Bank by the mere
issuance thereof. FEBTC presented the checks for payment on July 5, 1995 through the PCHC.
Asian Bank, as admitted in its Answer before the RTC, received the same on that day.
Consequently, Asian Bank was deemed to have confirmed and booked payment of the subject
checks in favor of FEBTC or, at the latest, during the first banking hour of July 6, 1995, when
payment should have been made. FEBTC claimed that Asian Bank exhibited bad faith when, in
anticipation of the TRO, it opted to float the checks until it received the TRO at 12:00 noon of July 6,
1995 to justify the nonpayment thereof.

In their own Answer, the spouses Nuguid claimed that Gonzalo Nuguid had delivered much more
dollars than what was required for the three checks at the time of payment. By way of special
affirmative defense, the spouses Nuguid also claims that since the subject checks had already been
paid to him, Chiok is no longer entitled to an injunction (to hold the payment of the subject checks),
and Civil Case No. Q-95-24299 has already become moot.

On August 29, 2002, the RTC rendered its Decision, the dispositive portion of which states:

WHEREFORE, judgment is rendered:

1. Declaring as permanent the writ of preliminary injunction issued under the Order of July
25, 1995;

2. Ordering Global Business Bank, Inc.to pay the plaintiff [Chiok]:

 a.) The amount of ₱34,691,876.71 (less the attorney’s fees of ₱255,000.00 which
shall remain with Global Business Bank, Inc.), plus interest at the legal rate of
12%/p.a. from September 30, 1999 until fully paid;

b.) The amount of ₱215,000.00, representing the excess amount debited from the
plaintiff’s deposit in his account with Global Business Bank, Inc. on July 7, 1995, plus
interest of 12%/p.a. from July 7, 1995, until fully paid;

c.) Attorney’s fees equivalentof 5% of the total amount due; and

3. Ordering Metropolitan Bank & Trust Companyto pay the plaintiff:

a. The amount of his deposit of ₱7,613,000.00, plus interest of 12%/p.a. from July 5,
1995 until said amount is fully paid; and

b. Attorney’s fees of 5%of the total amount due;

4. Ordering Spouses Gonzalo B. Nuguid and Marinella O. Nuguid liable jointly and severally
with Global Business Bank, Inc. and Metropolitan Bank & Trust Company, Inc. for the
respective attorney’s fees;

5. Dismissing the complaint-in-interventionof BPI for lack of merit;

6. Ordering the defendantsand the intervenorto pay, jointly and severally, the costs of suit. 9

(Emphases supplied.)

The RTC held that Nuguid failed to prove the delivery of dollars to Chiok. According to the RTC,
Nuguid’s claim that Chiok was still liable for seven dishonored China Banking Corporation (CBC)
checks with a total worth of ₱72,984,020.00 is highly doubtful since such claim was not presented as
a counterclaim in the case. Furthermore, the court ruled that the certification of CBC stating the
reasons for the stop payment order "are indicative of Chiok’s non-liability to Nuguid." The RTC
10

further noted that there was a criminal case filed by Chiok against Nuguid on March 29, 1996 for
estafa and other deceit on account of Nuguid’s alleged failure to return the originals of the seven
CBC checks. 11

The RTC went on to rule that manager’s checks and cashier’s checks may be the subject of a Stop
Payment Order from the purchaser on the basis of the payee’s contractual breach. As explanation
for this ruling, the RTC adopted its pronouncements when it issued the July 25, 1995 Order:

Defendant Nuguid’s argument that the injunction could render manager’s and cashier’schecks
unworthy of the faith they should have and could impair their nature as independent undertakings of
the issuing banks is probably an undistinguished simplification. While the argument may be
applicable to such checks in general, it does not adequately address the situation, as here, when
specific manager’s and cashier’s checks are already covered by reciprocal undertakings between
their purchaser and their payee, in which the latter allegedly failed to perform. The agreement herein
was supposedly one in which Nuguid would deliver the equivalent amount in US dollars
($1,022,288.23) "on the same date" that the plaintiff purchased and delivered the manager’s and
cashier’s checks (₱26,068,350.00). Assuming that such a reciprocity was true, the purchaser should
have the legal protection of the injunctive writ (which, after all, the legal departments of the issuing
banks themselves allegedly advised the plaintiff to obtain), since the usual order or instruction to
stop payment available in case of ordinary checks did not avail. This was probably the reason that
Asian Bank has expressly announced in its own comment/opposition of July 14, 1995 that it was not
opposing the application for the prohibitory injunction.

The dedication of such checks pursuantto specific reciprocal undertakings between their purchasers
and payees authorizes rescission by the former to prevent substantial and material damage to
themselves, which authority includes stopping the payment of the checks. According to the RTC,
12

both manager’s and cashier’s checks are still subject to regular clearing under the regulations of the
Bangko Sentral ng Pilipinas. Since manager’s and cashier’s checks are the subject of regular
clearing, they may consequently be refused for cause by the drawee, which refusal is in fact
provided for in the PCHC Rule Book.

The RTC found the argument by BPI that the manager’s and cashier’s checks are pre-cleared
untenable under Section 60 of the New Central Bank Act and Article 1249 of the Civil Code, which
respectively provides:

Section 60. Legal Character. – Checks representing demand deposits do not have legal tender
power and their acceptance in the payment of debts, both public and private, is at the option of the
creditor; Provided, however, that a check which has been cleared and credited to the account of the
creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount
credited to his account.

Art. 1249. The payment of debts inmoney shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency which is legal tender in the Philippines. The
delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of
the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in the abeyance. The
RTC went on to rule that due to the timely service of the TRO and the injunction, the value of the
three checks remained with Global Bank and Metrobank. The RTC concluded that since Nuguid did
13

not have a valid title to the proceeds of the manager’s and cashier’s checks, Chiok is entitled to be
paid back everything he had paid to the drawees for the checks. 14

With respect to Global Bank, the RTC ruled that the entire amount of ₱34,691,876.71 it recovered
from SBTC from the September 15, 1997 PCHC Decision, as reflected in the September 29, 1999
Charge Slip No. 114977, less the sum of ₱225,000.00 awarded by the arbitration committee’s
decision as attorney’s fees, should be paidto Chiok, with interest at 12% per annum from September
30, 1999 until full payment. The RTC likewise ordered Global Bank to pay Chiok the amount of
₱215,390.00, an amount debited from Chiok’s account as payment for outstanding bills purchase. 15

With respect to Metrobank, the RTC ruled that it should pay Chiok ₱7,613,000.00, the amount paid
by Chiok to purchase the CC, plus interest of 12 percent per annum from July 5,1995 until full
payment. The RTC explained this finding as follows:

The same conclusion is true with respect to Metro Bank, with whom the funds amounting to
₱7,613,000.00 for the purchase of CC No. 003380 has remained. According to Chiok, Metro Bank
used such funds in its operations.

In the hearing on May 17, 2001, Lita Salonga Tan was offered as a witness for Metro Bank, but in
lieu ofher testimony, the parties agreed to stipulate on the following as her testimony, to wit:
 1. That Metro Bank paid the amount of CC No. 003280;

2. That the payment on July 12, 1995 was made while the TRO of July 5, 1995 was in force;

3. [That] the payment on July 12, 1995 was on the third clearing of CC No. 003380; and

4. That the PCHC Rule book was the authority on the rules and regulations on the clearing
operations of banks.

The payment to FEBTC by Metro Bank of CC No. 003380 on July 12, 1995 was an open defiance of
the TRO of July 6, 1995. Metro Bank’s Branch Manager Alice Rivera, through her letter of July 10,
1995 to FEBTC as the collecting bank, returned the CC to FEBTC in compliance with the TRO which
was received about 12:10 noon of July 6, 1999. Hence, Metro Bank should not have paid because
the TRO was served within the 24-hour period to clear checks. Moreover, the payment, being made
on third clearing, was unjustified for violating existing regulations, particularly paragraph 1 of the
Clearing House Operating Memo (CHOM), effective September 1, 1984, which prohibited the
reclearing of a check after its first presentation if it was returned for the reason of "stop payment" or
"closed account."

It also seems that Metro Bank paid the CC without first checking whether, in fact, any actual
payment of the 3 checks had been made on July 5, 1995 to the payee when the checks were
deposited in payee’s account with FEBTC on July 5, 1995. The records show no such payment was
ever made to render the TRO of July 6, 1995 or the writ of preliminary injunction applied for moot
and academic.

Jessy A. Degaños – adopted by Metro Bank as its own witness in injunction hearing of July 24, 1995
– stated that the payment of the 3 checks consisted of the accounting entry made at the PCHC
during the presenting process by debiting the respective accounts of the drawees and crediting the
account of collecting bank FEBTC. Yet, as already found hereinabove, such process was reversed
due to the return by the drawees of the checks which they dishonored on account of the TRO.

Also, Degaños, testifying on January 17, 2002 for intervenor BPI, was asked in what form was the
withdrawal of the amounts of the checks made by Nuguid on July 5, 1995, that is, whether:- 1) cash
withdrawal; or 2) credit to Nuguid’s account; or 3) draft issued to Nuguid. His reply was that only the
bank’s branch which serviced the payee’s account could provide the answer. Yet, BPI did not
present any competent personnel from the branch concerned to enlighten the Court on this material
point.

This amount of ₱7,613,000.00, having remained with Metro Bank since the service of the TRO of
July 6, 1995 and the writ of preliminary injunction issued under the Order of July 25, 1998, should be
returned to Chiok with interest of 12%/p.a. from July 7, 1995 until full payment.16

(Citations omitted.)

The RTC likewise denied BPI’s complaint-in-intervention to recover the value of the three checks
from drawees Global Bank and Metrobank for lack of merit. The RTC, after reprimanding Global
Bank and Metrobank for siding with BPI on this issue, held that BPI, as a mere collecting bank of the
payee with a void title to the checks, had no valid claim as to the amounts of such checks. The RTC
explained:
Firstly: BPI, being a collecting bankin relation to the 3 checks, was merely performing collection
services as an agent of Nuguid, the payee. If, as found hereinbefore, Nuguid could not have legal
title to the 3 checks, it follows that BPI could not stake any claim for title better than Nuguid’s own
void title. Consequently, BPI has no right to claim the amounts of the 3 checks from the drawee-
banks.

Secondly: The purpose of the delivery of the 3 checks to BPI – which was not even accompanied by
Nuguid’s endorsement – was solely for deposit in the account of payee Nuguid. Assuming, for the
sake of argument, that BPI as the collecting bank paid the value of the checks – of which fact there
has been no proof whatsoever – BPI was nonetheless, at best, a mere transferee whose title was no
better than the void title of the transferor, payee Nuguid. Under such circumstance, BPI has no legal
basis to demand payment of the amounts of the 3 checks from the draweebanks.

Thirdly: Under Sec. 49, Negotiable Instruments Law, BPI, as transferee without indorsement, was
not considered a holder of the instrument since it was neither a payee nor an indorsee. It would
become so only when and if the indorsement is actually made, and only as of then, but not before, is
the issue whether BPI was a holder in due course or not is determined.

Consequently, any alleged payment by BPI as the collecting bank, through the supposed though
unproved withdrawal of the amounts of the 3 checks by Nuguid upon the deposit of the checks on
July 5, 1995, is not the payment which discharges liability under the 3 checks because BPI is neither
the party primarily liable northe drawee.

Such a payment, if true, is akin to, if it is not, drawing against uncollected deposits (DAUD). In such
a case, BPI was in duty bound to send the 3 checks to the PCHC for clearing pursuant to Section
1603.c.1 of the BSP Manual of Regulations and Sec. 60, R.A. No. 7653. It serves well to note herein
that Global Bank and Metro Bank returned the checks through the PCHC on July 6, 1995, well within
the 24-hour clearing period, in compliance with the TRO of July 6, 1995. Finally: As earlier noted and
discussed, there is no evidence of any prior valid payment by the collecting bank to support its claim
of the amounts of the 3 checks against the defendant banks. (Citation omitted.)
17

The RTC held Global Bank and Metrobank liable for attorney’s fees equivalent to 5% of the total
amountdue them, while the spouses Nuguid were held solidarily liable for said fees.

Defendants Global Bank, Metrobank, and the spouses Nuguid, and intervenor BPI filed separate
notices of appeal, which were approved in the Order dated April 3, 2003. Chiok filed a Motion to
18

Dismiss against the appeal of Global Bank, on the ground that the latter had ceased to operate as a
banking institution.

On May 26, 2004, the Court of Appeals dismissed the appeal of the spouses Nuguid pursuant to
Section 1(e), Rule 50 of the Rules of Court, on account of their failure to file their appellant’s brief. In
the same Resolution, the Court of Appeals denied Chiok’s Motion to Dismiss.

On May 5, 2006, the Court of Appeals rendered the assailed Decision affirming the RTC Decision
with modifications. The fallo of the Decision reads:

WHEREFORE, premises considered, the Decision dated August 29, 2000 of the RTC, Branch 96,
Quezon City is AFFIRMED with the following MODIFICATIONS:

1.) The contract to buy foreign currency in the amount of $1,022,288.50 between plaintiff-
appellee Wilfred N. Chiok and defendant Gonzalo B. Nuguid is hereby rescinded. Corollarily,
 Manager’s Check Nos. 025935 and 025939 and Cashier’s Check No. 003380 are ordered
cancelled.

2.) Global Business Holdings, Inc. is ordered to credit Savings Account No. 2-007-03-00201-
3 with:

a) The amount of ₱25,500,000.00, plus interest at 4% from September 29, 1999 until
withdrawn by plaintiff-appellee;

b) The amount of ₱215,390.00, plus interest at 4% from July 7, 1995 until withdrawn
by plaintiff-appellee.

3.) Metropolitan Bank & Trust Company is ordered to credit Savings Account No. 154-
42504955 the amount of ₱7,613,000.00, with interest at 6% [per annum] from July 12, 1995
until the same is withdrawn;

4.) The Spouses Gonzalo B. Nuguid and Marinella O. Nuguid are ordered to pay attorney’s
fees equivalent to 5% of the total amount due to plaintiff-appellee from both depository
banks, as well as the costs of suit.
19

According to the Court of Appeals, Article 1191 of the Civil Code provides a legal basis of the right of
purchasers of MCs and CCs to make a stop payment order on the ground of the failure of the payee
to perform his obligation to the purchaser. The appellate court ruled that such claim was impliedly
incorporated in Chiok’s complaint. The Court of Appeals held:

By depositing the subject checks to the account of Nuguid, Chiok had already performed his
obligation under the contract, and the subsequent failure of Nuguid to comply with what was
incumbent upon him gave rise to an action for rescission pursuant to Article 1191 of the Civil Code,
which states:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.

xxxx

Although the complaint a quowas entitled "DAMAGES, W/ EX PARTE RESTRAINING

ORDER/INJUNCTION" when the action was really one for rescission and damages, it is an
elementary rule of procedure that what controls or determines the nature of the action is not the
caption of the complaint but the allegations contained therein. And even without the prayer for a
specific remedy, proper relief may nevertheless be granted by the court if the facts alleged in the
complaint and the evidence introduced so warrant.

That Chiok had intended rescission isevident from his prayer to be declared the legal owner of the
proceeds of the subject checks and to be allowed to withdraw the same. Therefore, the argument of
BPI that the obligation on the part of Nuguid to deliver the dollars still subsists is untenable. Article
1385 of the same Code provides that rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price with its interest. The object of
the contract herein to buy foreign currency is the peso-value of the dollars bought but in the form of
negotiable instruments – Manager’s Check/Cashier’s Check. Hence, respecting the negotiation
thereof, and in order to afford complete relief to Chiok, there arose the necessity for the issuance of
the injunction restraining the payment of the subject checks with the end in view of the eventual
return of the proceeds to give effect to Article 1385. In other words, the injunctive relief was
necessary in order not to render ineffectual the judgment in the instant case. We quote with approval
the following disquisition of the trial court, to wit:

xxxx

There is no question about the nature of manager’s and cashier’s checks being as good as cash,
being primary obligations of the issuing bank and accepted in advanceby their mere issuance. But
even as such nature of unconditional commitment to pay on the part of the issuing bank may be
conceded, the Court opines that the injunctive relief cannot be denied to a party who purchased the
manager’s or cashier’s check to stop its payment to the payee in a suit against the payee and the
issuing banks upon a claim that the payee himself had not performed his reciprocal obligation for
which the issuance and delivery of the self-same manager’sor cashier’s check were, in the first
place, made x x x.

It bears stressing that the subject checks would not have been issued were it not for the contract
between Chiok and Nuguid. Therefore, they cannot be disassociated from the contract and given a
distinct and exclusive signification, as the purchase thereof is part and parcel of the series of
transactions necessary to consummate the contract. Taken in this light, it cannot be argued that the
issuing banks are bound to honor only their unconditional undertakings on the subject checks vis-à-
vis the payee thereof regardless of the failed transaction between the purchaser of the checks and
the payee on the ground that the banks were not privy to the said transaction.

Lest it be forgotten, the purchase of the checks was funded by the account of Chiok with the banks.
As such, the banks were equally obligated to treat the account of their depositor with meticulous
care bearing in mind the fiduciary nature of their relationship with the depositor. Surely, the banks
would not allow their depositor to sit idly by and watch the dissipation of his livelihood considering
that the business of foreign currency exchange is a highly volatile undertaking where the probability
of losing or gaining is counted by the ticking of the clock. With the millions of money involved in this
transaction, Chiok could not afford to be complacent and his vigilance for his rights could not have
been more opportune under the circumstances. (Citations omitted.)
20

The Court of Appeals proceeded to sustain the dismissal of BPI’s complaint-in-intervention, which
sought to recover from Global Bank the amounts allegedly paid to Nuguid. The Court of Appeals
pointed out that BPI failed to prove the alleged withdrawal by Nuguid of the proceeds of the two
manager’s checks, as BPI’s representative, Jessy A. Degaños, failed to answer the question on the
form of the alleged withdrawal. Furthermore, BPI failed to prove that it was a holder in due course of
the subject manager’s checks, for two reasons: (1) the checks were not indorsed to it by Nuguid; and
(2) BPI never presented its alleged bills purchase agreement with Nuguid. 21

The Court of Appeals likewise modified the order by the RTC for Global Bank and Metrobank to pay
Chiok. The Court of Appeals held that Chiok’s cause of action against Global Bank is limited to the
proceeds of the two manager’s checks. Hence, Global Bank was ordered to credit Chiok’s Savings
Account No. 2-007-03-00201-3 with the amount of ₱25,500,000.00, the aggregate value of the two
managers’ checks, instead of the entire ₱34,691,876.71 recovered from SBTC from the September
15, 1997 PCHC Decision. The interest was also reduced from 12% per annum to that imposed upon
savings deposits, which was established during the trial as 4% per annum. 22

As regards Metrobank, the appellate court noted that there was no evidence as to the interest rate
imposed upon savings deposits at Metrobank. Metrobank was ordered to credit the amount of
₱7,613,000.00 to Chiok’s Savings Account No. 154-42504955, with interest at 6% per annum. 23

Global Bank and BPI filed separate Motions for Reconsideration of the May 5, 2006 Court of
Appeals’ Decision. On November 6, 2006, the Court of Appeals denied the Motions for
Reconsideration.

Metrobank (G.R. No. 172652), BPI (G.R. No. 175302), and Global Bank (G.R. No. 175394) filed with
this Court separate Petitions for Review on Certiorari. In Resolutions dated February 21, 2007 and
24

March 12, 2007, this Court resolved to consolidate the three petitions. Metrobank submitted the
25

following issues for the consideration of this Court:

(A) WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING

THAT "IT IS LEGALLY POSSIBLE FOR A PURCHASER OF A MANAGER’S CHECK OR
CASHIER’S CHECK TO STOP PAYMENT THEREON THROUGH A COURT ORDER ON
THE GROUND OF THE PAYEE’S ALLEGED BREACH OF CONTRACTUAL OBLIGATION
AMOUNTING TO AN ABSENCE OF CONSIDERATION THEREFOR."

(B) GRANTING ARGUENDO THAT A MANAGER’S CHECK OR CASHIER’S CHECK, "IN

VIEW OF THE PECULIAR CIRCUMSTANCES OF THIS CASE" MAY BE SUBJECT TO A
STOP PAYMENT ORDER BY THE PURCHASER THEREOF THROUGH A COURT
ORDER, WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN
CONCLUDING THAT PETITIONER HEREIN "HAD KNOWLEDGE OF CIRCUMSTANCES
THAT WOULD DEFEAT THE TITLE OF THE PAYEE TO THE CHECKS" WITHOUT,
HOWEVER, CITING ANY SPECIFIC EVIDENCE WHICH WOULD PROVE THE
EXISTENCE OF SUCH KNOWLEDGE. (C) WHETHER OR NOT THE HONORABLE
COURT OF APPEALS ERRED IN SUSTAINING THE TRIAL COURT’S ORDER FOR
PETITIONER HEREIN "TO PAY (TO CHIOK) THE VALUE OF CASHIER’S CHECK NO.
003380 IN THE AMOUNT OF ₱7,613,000.00, WHICH WAS DEBITED AGAINST CHIOK’S
SAVINGS ACCOUNT # 154-42504955 ON THE OBSERVATION THAT THE PAYMENT TO
FEBTC BY METROBANK OF CC NO. 003380ON JULY 12, 1995 WAS AN OPEN
DEFIANCE OF THE TRO OF JULY 6, 1995." 26

BPI, on the other hand, presented the following issues:

I.

Whether or not the Court of Appeals detracted from well-settled concepts and principles in
commercial law regarding the nature, causes, and effects of a manager’s check and cashier’s
checkin ruling that [the] power of the court can be invoked by the purchaser [Chiok] in a proper
action, which the Court su[b]stantially construed as a rescissory action or the power to rescind
obligations under Article 1191 of the Civil Code.

II.

Whether or not the Honorable Court of Appeals erred in ruling that where a purchaser invokes
rescission due to an alleged breach of the payee’s contractual obligation, it is deemed as "peculiar
circumstance" which justifies a stop payment order issued by the purchaser or a temporary
restraining order/injunction from a Court to prevent payment of a Manager’s Check or a Cashier’s
Check.

III.

Whether or not the Honorable Court of Appeals erred in ruling that judicial admissions in the
pleadings of Nuguid, BPI, Asian Bank, Metrobank and even Chiok himself that Nuguid had
withdrawn the proceeds of the checks will not defeat Chiok’s "substantial right" to restrain the
drawee bank from paying BPI, the collecting bank or presenting bank in this case who paid the value
of the Cashier’s/Manager’s Checks to the payee. 27

Finally, Global Bank rely upon the following grounds in its petition with this Court:

A.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT PETITIONER GLOBAL BANK
HAD NO JUSTIFICATION FOR ITS RIGHT OF RECOURSE AGAINST RESPONDENT CHIOK
NOTWITHSTANDING THE CLEAR AND UNMISTAKABLE PROVISIONS OF THE BILLS
PURCHASE AGREEMENT.

B.

THE COURT OF APPEALS GRAVELY ERRED IN MAKING PETITIONER GLOBAL BANK LIABLE
FOR INTEREST OF 4% PER ANNUM DESPITE THE FACT THAT:

1. RESPONDENT DID NOT ASK FOR SUCH RELIEF IN HIS COMPLAINT;

2. RESPONDENT HAD WAIVED HIS RIGHT TO ANY INTEREST; AND

3. THERE IS NO EVIDENCE ON RECORD AS THE BASIS FOR ANY INTEREST. 28

Before delving into the merits of these cases, we shall first dispose of a procedural development
during their pendency with the Court.

Joint Manifestation and Motion allegedly

filed by Metrobank, Global Bank and
respondent Chiok

On May 28, 2013, this Court received a Joint Manifestation and Motion allegedly filed by petitioners
Metrobank, Global Bank, and respondent Chiok, which reads:

PETITIONERS METROPOLITAN BANK & TRUST COMPANY & GLOBAL BUSINESS BANK, INC.,
and RESPONDENT WILFRED N. CHIOK, by their respective counsels, unto this Honorable Court,
respectfully state that after a thorough consideration, the parties herein have decided to forego their
respective claims against each other, including, past, present and/or contingent, in relation to the
above referenced cases.

PRAYER
WHEREFORE, it is respectfully prayed that no further action be taken by this Honorable Court on
the foregoing petitions, that the instant proceedings be declared CLOSED and TERMINATED, and
that an Order be rendered dismissing the above-referenced cases with prejudice.

In the above Joint Manifestation and Motion, respondent Chiok was not represented by his counsel
of record, Cruz Durian Alday and Cruz-Matters, but was assisted by Espiritu Vitales Espiritu Law
Office, with Atty. Cesar D. Vitales as signatory, by way of special appearance and assistance.

On June 19, 2013, this Court issued a Resolution requiring petitioner BPI to comment on the Joint
Manifestation and Motion filed by its copetitioners Metrobank, Global Bank, and respondent Chiok.
The Resolution reads:

Considering the joint manifestation and motion of petitioners Metropolitan Bank and Trust Company
and Global Business Bank, Inc., and respondent, that after a thorough consideration, they have
decided to forego their respective claims against each other, including past, present and/or
contingent, in these cases and praying that the instant proceedings in G.R. Nos. 172652 and 175394
be declared closed and terminated, the Court resolves to require petitioner Bank of the Philippine
Islands to COMMENT thereon within ten (10) days from notice thereof x x x.

On September 12, 2013, respondent Chiok, this time assisted by his counsel of record, Cruz Durian
Alday & Cruz-Matters, filed a Motion for Reconsideration of our Resolution dated June 19, 2013. The
signatory to the Motion for Reconsideration, Atty. Angel Cruz, grossly misread our Resolution
requiring BPI to comment on the Joint Manifestation and Motion, and apparently contemplated that
we are already granting said Motion. Atty. Cruz objected to the Joint Manifestation and Motion,
labeling the same as tainted with fraud. According to Atty. Cruz, Espiritu Vitales and Espiritu’s failure
to give prior notice to him is in violation of Canon 8 of the Code of Professional Responsibility. Atty.
Cruz prays that Metrobank and Global Bank be ordered to submit a document of their settlement
showing the amounts paid to Chiok, and for the June19, 2013 Resolution of this Court be
reconsidered and set aside.

On October 9, 2013, BPI filed its comment to the Joint Manifestation and Motion, opposing the
samefor being an implied procedural shortcut to a Compromise Agreement. It averred that while the
courts encourage parties to amicably settle cases, such settlements are strictly scrutinized by the
courts for approval. BPI also pointed out that the Joint Manifestation and Motion was not supported
by any required appropriate Board Resolution of Metrobank and Global Bank granting the supposed
signatories the authority to enter into a compromise. BPI prayed that the Joint Manifestation and
Motion of Metrobank, Global Bank, and Chiok be denied, and to render a full Decision on the merits
reversing the Decision of the Court of Appeals.

On January 20, 2014, Global Bank filed a Comment to Atty. Cruz’s Motion for Reconsideration on
behalf of Chiok, praying that said Motion be expunged from the records for failure of Atty. Cruz to
indicate the number and date of issue of his MCLE Certificate of Compliance or Certificate of
Exemption for the immediately preceding compliance period.

As far as this Court is concerned, the counsel of record of respondent Chiok is still Cruz Durian
Alday & Cruz-Matters. The requisites of a proper substitution of counsel of record are stated and
settled in jurisprudence:

No substitution of counsel of record is allowed unless the following essential requisites of a valid
substitution of counsel concur: (1) there must be a written request for substitution; (2) it must be filed
with the written consent of the client; (3) it must be with the written consent of the attorney to be
substituted; and (4) in case the consent of the attorney to be substituted cannot be obtained, there
must be at least a proof of notice that the motion for substitution was served on him in the manner
prescribed by the Rules of Court. (Citation omitted.)
29

Therefore, while we should indeed require Atty. Cruz to indicate the number and date of issue of his
MCLE Certificate of Compliance or Certificate of Exemption for the immediately preceding
compliance period, he is justified in pointing out the violation of Canon 8 of the Code of Professional
30

Responsibility, Rule 8.02 of which provides:

Rule 8.02. – A lawyer shall not, directly or indirectly, encroach upon the professional employment of
another lawyer; however, it is the right of any lawyer, without fear or favor, to give proper advice and
assistance to those seeking relief against unfaithful or neglectful counsel.

We should also give weight to the opposition of BPI to the supposed compromise agreement. As
stated above, the consolidated petitions filed by Metrobank, BPI, and Global Bank all assail the
Decision of the Court of Appeals in CA-G.R. CV No. 77508 dated May 5, 2006, and the Resolution
on the same case dated November 6, 2006. BPI itself has a claim against Global Bank, which
appear to be intimately related to issues brought forth in the other consolidated petitions.

Furthermore, the failure of the parties to the Joint Manifestation and Motion to declare with
particularity the terms of their agreement prevents us from approving the same so as to allow it to
attain the effect of res judicata. A judicial compromise is not a mere contract between the parties.
Thus, we have held that:

A compromise agreement intended to resolve a matter already under litigation is a judicial

compromise. Having judicial mandate and entered as its determination of the controversy, such
judicial compromise has the force and effect of a judgment. It transcends its identity as a mere
contract between the parties, as it becomes a judgment that is subject to execution in accordance
with the Rules of Court. Thus, a compromise agreement that has been made and duly approved by
the court attains the effect and authority of res judicata, although no execution may be issued unless
the agreement receives the approval of the court where the litigation is pending and compliance with
the terms of the agreement is decreed. (Citation omitted.)
31

We are therefore constrained to deny the Joint Manifestation and Motion filed with this Court on May
28, 2013 and to hereby decide the consolidated petitions on their merits.

The Court’s ruling on the merits of these

consolidated petitions

Whether or not payment of manager’s

and cashier’s checks are subject to the
condition that the payee thereof should
comply with his obligations to the
purchaser of the checks

The legal effects of a manager’s check and a cashier’s check are the same. A manager’s check, like
a cashier’s check, is an order of the bank to pay, drawn upon itself, committing in effect its total
resources, integrity, and honor behind its issuance. By its peculiar character and general use in
commerce, a manager’s check or a cashier’s check is regarded substantially to be as good as the
money it represents. Thus, the succeeding discussions and jurisprudence on manager’s checks,
32

unless stated otherwise, are applicable to cashier’s checks, and vice versa. The RTC effectively
ruled that payment of manager’s and cashier’s checks are subject to the condition that the payee
thereof complies with his obligations to the purchaser of the checks:
The dedication of such checks pursuant to specific reciprocal undertakings between their purchasers
and payees authorizes rescission by the former to prevent substantial and material damage to
themselves, which authority includes stopping the payment of the checks.

Moreover, it seems to be fallacious to hold that the unconditional payment of manager’s and
cashier’s checks is the rule. To begin with, both manager’sand cashier’s checks are still subject to
regular clearing under the regulations of the Bangko Sentral ng Pilipinas, a fact borne out by the
BSP manual for banks and intermediaries, which provides, among others, in its Section 1603.1, c, as
follows:

xxxx

c. Items for clearing. All checks and documents payable on demand and drawn against a
bank/branch, institution or entity allowed to clear may be exchanged through the Clearing Office
inManila and the Regional Clearing Units in regional clearing centers designated by the Central
Bank x x x.33

The RTC added that since manager’s and cashier’s checks are the subject of regular clearing, they
may consequently be refused for cause by the drawee, which refusal is in fact provided for in
Section 20 of the Rule Book of the PCHC:

Sec. 20 – REGULAR RETURN ITEM PROCEDURE

20.1 Any check/item sent for clearing through the PCHC on which payment should be refused by the
Drawee Bank in accordance with long standing and accepted banking practices, such as but not
limited to the fact that:

(a) it bears the forged or unauthorized signature of the drawer(s); or

(b) it is drawn against a closed account; or

(c) it is drawn against insufficient funds; or

(d) payment thereof has been stopped; or

(e) it is post-dated or stale-dated; and

(f) it is a cashier’s/manager’s/treasurer’s check of the drawee which has been materially

altered;

shall be returned through the PCHC not later than the next regular clearing for local exchanges and
the acceptance of said return by the Sending Bank shall be mandatory.

It goes without saying that under the aforecited clearing rule[,] the enumeration of causes to return
checks is not exclusive but may include other causes which are consistent with long standing and
accepted banking practices. The reason of plaintiffs can well constitute such a justifiable cause to
enjoin payment. 34

The RTC made an error at this point. While indeed, it cannot be said that manager’s and cashier’s
checks are pre-cleared, clearing should not be confused with acceptance. Manager’s and cashier’s
checks are still the subject of clearing to ensure that the same have not been materially altered or
otherwise completely counterfeited. However, manager’s and cashier’s checks are pre-accepted by
the mere issuance thereof by the bank, which is both its drawer and drawee. Thus, while manager’s
and cashier’s checks are still subject to clearing, they cannot be countermanded for being drawn
against a closed account, for being drawn against insufficient funds, or for similar reasons such as a
condition not appearing on the face of the check. Long standing and accepted banking practicesdo
not countenance the countermanding of manager’s and cashier’s checks on the basis of a mere
allegation of failure of the payee to comply with its obligations towards the purchaser. On the
contrary, the accepted banking practice is that such checks are as good as cash. Thus, in New
Pacific Timber & Supply Company, Inc. v. Hon. Seneris, we held:
35

It is a well-known and accepted practice in the business sector that a Cashier's Check is deemed as
cash. Moreover, since the said check had been certified by the drawee bank, by the certification, the
funds represented by the check are transferred from the credit of the maker to that of the payee or
holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with
rights and duties of one in such situation. Where a check is certified by the bank on which it is
drawn, the certification is equivalent to acceptance. Said certification "implies that the check is drawn
upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction,
and that they shall be so applied whenever the check is presented for payment. It is an
understanding that the check is good then, and shall continue good, and this agreement is as
binding on the bank as its notes in circulation, a certificate of deposit payable to the order of the
depositor, or any other obligation it can assume. The object of certifying a check, as regards both
parties, is to enable the holder to use it as money." When the holder procures the check to be
certified, "the check operates as an assignment of a part of the funds to the creditors." Hence, the
exception to the rule enunciated under Section 63 of the Central Bank Act to the effect "that a check
which has been cleared and credited to the account of the creditor shall be equivalent to a delivery
to the creditor in cash in an amount equal to the amount credited to his account" shall apply in this
case. x x x. (Emphases supplied, citations omitted.)

Even more telling is the Court’s pronouncement in Tan v. Court of Appeals, which unequivocally
36

settled the unconditional nature of the credit created by the issuance of manager’s or cashier’s
checks:

A cashier’s check is a primary obligation of the issuing bank and accepted in advanceby its mere
issuance. By its very nature, a cashier’s check is the bank’s order to pay drawn upon itself,
committing in effect its total resources, integrity and honor behind the check. A cashier’s check by its
peculiar character and general use in the commercial world is regarded substantially to be as good
asthe money which it represents. In this case, therefore, PCIB by issuing the check created an
unconditional creditin favor of any collecting bank. (Emphases supplied, citations omitted.)

Furthermore, under the principle of ejusdem generis, where a statute describes things of a particular
class or kind accompanied by words of a generic character, the generic word willusually be limited to
things of a similar nature with those particularly enumerated, unless there be something in the
context of the statute which would repel such inference. Thus, any long standing and accepted
37

banking practice which can be considered as a valid cause to return manager’s or cashier’s checks
should be of a similar nature to the enumerated cause applicable to manager’s or cashier’s checks:
material alteration. As stated above, an example ofa similar cause is the presentation of a counterfeit
check.

Whether or not the purchaser of

manager’s and cashier’s checks has the
right to have the checks cancelled by
filing an action for rescission of its
contract with the payee

The Court of Appeals affirmed the order of the RTC for Global Bank and Metrobank to pay Chiok for
the amounts of the subject manager’s and cashier’s checks. However, since it isclear to the
appellate court that the payment of manager’s and cashier’s checks cannot be considered to be
subject to the condition the payee thereof complies with his obligations to the purchaser of the
checks, the Court of Appeals provided another legal basis for such liability – rescission under Article
1191 of the Civil Code:

WHEREFORE, premises considered, the Decision dated August 29, 2000 of the RTC, Branch 96,
Quezon City is AFFIRMED with the following MODIFICATIONS:

1.) The contract to buy foreign currency in the amount of $1,022,288.50 between plaintiff-appellee
Wilfred N. Chiok and defendant Gonzalo B. Nuguid is hereby rescinded. Corollarily, Manager’s
Check Nos. 025935 and 025939 and Cashier’s Check No. 003380 are ordered cancelled. 38

According to the Court of Appeals, while such rescission was not mentioned in Chiok’s Amended
Complaint, the same was evident from his prayer to be declared the legal owner of the proceeds of
the subject checks and to be allowed to withdraw the same. Since rescission creates the obligation
to return the things which are the object of the contract, together with the fruits, the price and the
interest, injunctive relief was necessary to restrain the payment of the subject checks with the end
39

in view of the return of the proceeds to Chiok.40

Thus, as it was construed by the Court of Appeals, the Amended Complaint of Chiok was in reality
an action for rescission of the contract to buy foreign currency between Chiok and Nuguid. The
Court of Appeals then proceeded to cancel the manager’s and cashier’s checks as a consequence
of the granting of the action for rescission, explaining that "the subject checks would not have been
issued were it not for the contract between Chiok and Nuguid. Therefore, they cannot be
disassociated from the contract and given a distinct and exclusive signification, as the purchase
thereof is part and parcel of the series of transactions necessary to consummate the contract." 41

We disagree with the above ruling.

The right to rescind invoked by the Court of Appeals is provided by Article 1191 of the Civil Code,
which reads:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing,
in accordance with Articles 1385 and 1388 and the Mortgage Law.
The cause of action supplied by the above article, however, is clearly predicated upon the reciprocity
of the obligations of the injured party and the guilty party. Reciprocal obligations are those which
arise from the same cause, and in which each party is a debtor and a creditor of the other, such that
the obligation of one is dependent upon the obligation of the other. They are to be performed
simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of
the other. When Nuguid failed to deliver the agreed amount to Chiok, the latter had a cause of
42

action against Nuguid to ask for the rescission of their contract. On the other hand, Chiok did not
have a cause of action against Metrobank and Global Bank that would allow him to rescind the
contracts of sale of the manager’s or cashier’s checks, which would have resulted in the crediting of
the amounts thereof back to his accounts.

Otherwise stated, the right of rescission under Article 1191 of the Civil Code can only be exercised
43

in accordance with the principle of relativity of contracts under Article 1131 of the same code, which
provides:

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. x x x.

In several cases, this Court has ruled that under the civil law principle of relativity of contracts under
Article 1131, contracts can only bind the parties who entered into it, and it cannot favor or prejudice
a third person, even if he is aware of such contract and has acted with knowledge
thereof. Metrobank and Global Bank are not parties to the contract to buy foreign currency between
44

Chiok and Nuguid. Therefore, they are not bound by such contract and cannot be prejudiced by the
failure of Nuguid to comply with the terms thereof.

Neither could Chiok be validly granted a writ of injunction against Metrobank and Global Bank to
enjoin said banks from honoring the subject manager’s and cashier’s checks. It is elementary that
"(a)n injunction should never issue when an action for damages would adequately compensate the
injuries caused. The very foundation of the jurisdiction to issue the writ of injunction rests in the fact
that the damages caused are irreparable and that damages would not adequately
compensate." Chiok could have and should have proceeded directly against Nuguid to claim
45

damages for breach of contract and to have the very account where he deposited the subject checks
garnished under Section 7(d) and Section 8, Rule 57 of the Rules of Court. Instead, Chiok filed an
46 47

action to enjoin Metrobank and Global Bank from complying with their primary obligation under
checks in which they are liable as both drawer and drawee.

It is undisputed that Chiok personally deposited the subject manager’s and cashier’s checks to
Nuguid’s account. If the intention of Chiok was for Nuguid to be allowed to withdraw the proceeds of
1âwphi1

the checks after clearing, he could have easily deposited personal checks, instead of going through
the trouble of purchasing manager’s and cashier’s checks. Chiok therefore knew, and actually
intended, that Nuguid will be allowed to immediately withdraw the proceeds of the subject checks.
The deposit of the checks which were practically as good as cash was willingly and voluntarily made
by Chiok, without any assurance that Nuguid will comply with his end of the bargain on the same
day. The explanation for such apparently reckless action was admitted by Chiok in the Amended
Complaint itself:

That plaintiff [Chiok] due to the numberof years (five to seven years) of business transactions with
defendant [Nuguid] has reposed utmost trust and confidence on the latterthat their transactions as of
June 1995 reaches millions of pesos. x x x. (Emphases supplied.)
48
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 confidence must bear the loss. Evidently, it was the
49

utmost trust and confidence reposed by Chiok to Nuguid that caused this entire debacle, dragging
three banks into the controversy, and having their resources threatened because of an alleged
default in a contract they were not privy to.

Whether or not the peculiar

circumstances of this case justify the
deviation from the general principles on
causes and effects of manager’s and
cashier’s checks

The Court of Appeals, while admitting that the general principles on the causes and effects of
manager’s and cashier’s checks do not allow the countermanding of such checks on the basis of an
alleged failure of consideration of the payee to the purchaser, nevertheless held that the peculiar
circumstances of this case justify a deviation from said general principles, applying the
aforementioned case of Mesina. The Court of Appeals held:

At the core of the appeal interposed by the intervenor BPI, as well as the depository banks, Global
Bank and Metrobank, is the issue of whether or not it is legally possible for a purchaser of a
Manager’s Check or Cashier’s Check to stop payment thereon through a court order on the ground
of the payee’s alleged breach of contractual obligation amounting to an absence of consideration
therefor.

In view of the peculiar circumstances of this case, and in the interest of substantial justice, We are
constrained to rule in the affirmative.

xxxx

In the case of Mesina v. Intermediate Appellate Court, cited by BPI in its appeal brief, the Supreme
Court had the occasion to rule that general principles on causes and effects of a cashier’s check,
i.e., that it cannot be countermanded in the hands of a holder in due course and that it is a bill of
exchange drawn by the bank against itself, cannot be applied without considering that the bank was
aware of facts (in this case, the cashier’s check was stolen) that would not entitle the payee thereof
to collect on the check and, consequently, the bank has the right to refuse payment when the check
is presented by the payee.

While the factual milieu of the Mesinacase is different from the case at bench, the inference drawn
therein by the High Court is nevertheless applicable. The refusal of Nuguid to deliver the dollar
equivalent of the three checks in the amount of $1,022,288.50 in the afternoon of July 5, 1995
amounted to a failure of consideration that would not entitle Nuguid to collect on the subject checks.

xxxx

Let it be emphasized that in resolving the matter before Us, We do not detract from well-settled
concepts and principles in commercial law regarding the nature, causes and effects of a manager’s
check and cashier’s check. Such checks are primary obligations of the issuing bank and accepted in
advance by the mere issuance thereof. They are a bank’s order to pay drawn upon itself, committing
in effect its total resources, integrity, and honor. By their peculiar character and general use in the
commercial world, they are regarded substantially as good as the money they represent. However,
in view of the peculiar circumstances of the case at bench, We are constrained to set aside the
foregoing concepts and principles in favor of the exercise of the right to rescind a contract upon the
failure of consideration thereof. (Emphases ours, citations omitted.)
50

In deviating from general banking principles and disposing the case on the basis of equity, the courts
a quo should have at least ensured that their dispositions were indeed equitable. This Court
observes that equity was not served in the dispositions below wherein Nuguid, the very person found
to have violated his contract by not delivering his dollar obligation, was absolved from his liability,
leaving the banks who are not parties to the contract to suffer the losses of millions of pesos.

The Court of Appeals’ reliance in the 1986 case of Mesina was likewise inappropriate. In Mesina,
respondent Jose Go purchased from Associated Bank a cashier’s check for ₱800,000.00, payable to
bearer. Jose Go inadvertently left the check on the top desk of the bank manager
51

when he left the bank. The bank manager entrusted the check for safekeeping to a certain bank
official named Albert Uy, who then had a certain Alexander Lim as visitor. Uy left his deskto answer
a phone call and to go to the men’s room. When Uy returned to his desk, Lim was gone. Jose Go
inquired for his check from Uy, but the check was nowhereto be found. At the advice of Uy, Jose Go
accomplished a Stop Payment Order and executed an affidavit of loss. Uy reported the loss to the
police. Petitioner Marcelo Mesina tried to encash the check with Prudential Bank, but the check was
dishonored by Associated Bank by sending it back to Prudential Bank with the words "Payment
Stopped" stamped on it. When the police asked Mesina how he came to possess the check, he said
it was paid to him by Alexander Lim in a "certain transaction"but refused to elucidate further.
Associated Bank filed an action for Interpleader against Jose Go and Mesina to determine which of
them is entitled to the proceeds of the check. It was in the appeal on said interpleader case that this
Court allowed the deviation from the general principles on cashier’s checks on account of the bank’s
awareness of certain facts that would prevent the payee to collect on the check.

There is no arguing that the peculiar circumstances in Mesina indeed called for such deviation on
account of the drawee bank’s awareness of certain relevant facts. There is, however, no comparable
peculiar circumstance in the case at bar that would justify applying the Mesina disposition. In
Mesina, the cashier’s check was stolen while it was in the possession of the drawee bank. In the
case at bar, the manager’s and cashier’s checks were personally deposited by Chiok in the account
of Nuguid. The only knowledge that can be attributed to the drawee banks is whatever was relayed
by Chiok himself when he asked for a Stop Payment Order. Chiok testified on this matter, to wit:

Q: Now, Mr. witness, since according to you the defendant failed to deliver [this] amount of
₱1,023,288.23 what action have you undertaken to protect yourinterest Mr. witness?

A: I immediately call my lawyer, Atty. Espiritu to seek his legal advise in this matter.

Q: Prior to that matter that you soughtthe advise of your lawyer, Atty. Espiritu insofar as the
issuing bank is concerned, namely, Asian Bank, what did you do in order to protect your
interest? A: I immediately call the bank asking them if what is the procedure for stop payment
and the bank told me that you have to secure a court order as soon as possible before the
clearing of these checks. (Emphasis supplied.)
52

Asian Bank, which is now Global Bank, obeyed the TRO and denied the clearing of the manager’s
checks. As such, Global Bank may not be held liable on account of the knowledge of whatever else
Chiok told them when he asked for the procedure to secure a Stop Payment Order. On the other
hand, there was no mention that Metrobank was ever notified of the alleged failure of consideration.
Only Asian Bank was notified of such fact. Furthermore, the mere allegation of breach on the part of
the payee of his personal contract with the purchaser should not be considered a sufficient cause to
immediately nullify such checks, thereby eroding their integrity and honor as being as good as cash.

In view of all the foregoing, we resolve that Chiok’s complaint should be denied insofar as it prayed
for the withdrawal of the proceeds of the subject manager’s and cashier’s checks. Accordingly, the
writ of preliminary prohibitory injunction enjoining Metrobank and Global Bank from honoring the
subject manager’s and cashier’s checks should be lifted.

Since we have ruled that Chiok cannot claim the amounts of the checks from Metrobank and Global
Bank, the issue concerning the setting off of Global Bank’s judgment debt to Chiok with the
outstanding obligations of Chiok is hereby mooted. We furthermore note that Global Bank had not
presented such issue as a counterclaim in the case at bar, preventing us from ruling on the same.
53

BPI’s right to the proceeds of the

manager’s checks from Global Bank

While our ruling in Mesinais inapplicable to the case at bar, a much more relevant case as regards
the effect of a Stop Payment Order upon a manager’s check would be Security Bank and Trust
Company v. Rizal Commercial Banking Corporation, which was decided by this Court in 2009. In
54

said case, SBTC issued a manager’s check for ₱8 million, payable to "CASH," as proceeds of the
loan granted to Guidon Construction and Development Corporation (GCDC). On the same day, the
manager’s check was deposited by Continental Manufacturing Corporation (CMC) in its current
account with Rizal Commercial Banking Corporation (RCBC). RCBC immediately honored the
manager’s check and allowed CMC to withdraw the same. GCDC issued a Stop Payment Order to
SBTC on the next day, claiming that the check was released to a third party by mistake. SBTC
dishonored and returned the manager’s check to RCBC. The check was returned back and forth
between the two banks, resulting in automatic debits and credits in each bank’s clearing balance.
RCBC filed a complaint for damages against SBTC. When the case reached this Court, we held:

At the outset, it must be noted that the questioned check issued by SBTC is not just an ordinary
check but a manager’s check. A manager’s check is one drawn by a bank’s manager upon the bank
itself. It stands on the same footing as a certified check, which is deemed to have been accepted by
the bank that certified it. As the bank’s own check, a manager’s check becomes the primary
obligation of the bank and is accepted in advance by the act of its issuance.

In this case, RCBC, in immediately crediting the amount of ₱8 million to CMC’s account, relied on
the integrity and honor of the check as it is regarded in commercial transactions. Where the
questioned check, which was payable to"Cash," appeared regular on its face, and the bank found
nothing unusual in the transaction, as the drawer usually issued checks in big amounts made
payable to cash, RCBC cannot be faulted in paying the value of the questioned check.

In our considered view, SBTC cannot escape liability by invoking Monetary Board Resolution No.
2202 dated December 21, 1979, prohibiting drawings against uncollected deposits. For we must
point out that the Central Bank at that timeissued a Memorandum dated July 9, 1980, which
interpreted said Monetary Board Resolution No. 2202. In its pertinent portion, saidMemorandum
reads:

MEMORANDUM TO ALL BANKS

July 9, 1980
For the guidance of all concerned, Monetary Board Resolution No. 2202 dated December 31, 1979
prohibiting, as a matter of policy, drawing against uncollected deposit effective July 1, 1980,
uncollected deposits representing manager’s/cashier’s/treasurer’schecks, treasury warrants, postal
money orders and duly funded "on us" checks which may be permitted at the discretion of each
bank, covers drawings against demand deposits as well as withdrawals from savings deposits.

Thus, it is clear from the July 9, 1980 Memorandum that banks were given the discretion to allow
immediate drawings on uncollected deposits of manager’s checks, among others. Consequently,
RCBC, in allowing the immediate withdrawal against the subject manager’s check, only exercised a
prerogative expressly granted to it bythe Monetary Board.

Moreover, neither Monetary Board Resolution No. 2202 nor the July 9, 1980 Memorandum alters the
extraordinary nature of the manager’s check and the relativerights of the parties thereto. SBTC’s
liability as drawer remains the same— by drawing the instrument, it admits the existence of the
payee and his then capacity to indorse; and engages that on due presentment, the instrument will be
accepted, or paid, or both, according to its tenor. (Emphases supplied, citations omitted.)
55

As in SBTC, BPI in the case at bar relied on the integrity and honor of the manager’s and cashier’s
checks asthey are regarded in commercial transactions when it immediately credited their amounts
to Nuguid’s account.

The Court of Appeals, however, sustained the dismissal of BPI’s complaint-in-intervention to recover
the amounts of the manager’s checks from Global Bank on account of BPI’s failure to prove the
supposed withdrawal by Nuguid of the value of the checks:

BPI’s cause of action against Asian Bank (now Global Bank) is derived from the supposed
withdrawal by Nuguid of the proceeds of the two Manager’s Checks it issued and the refusal of
Asian Bank to make good the same. That the admissions in the pleadings to the effect that Nuguid
had withdrawn the said proceeds failed to satisfy the trial court is understandable. Such withdrawal
is anessential fact that, if properly substantiated, would have defeated Chiok’s right toan injunction.
BPI could so easily have presented withdrawal slips or, with Nuguid’s consent, statements of
account orthe passbook itself, which would indubitably show that money actually changed hands at
the crucial period before the issuance of the TRO. But it did not.56

We disagree with this ruling. As provided for in Section 4, Rule 129 of the Rules of Court,
admissions in pleadings are judicial admissions and do not require proof:

Section 4. Judicial admissions. – An admission, verbal or written, made by a party in the course of
the proceedings in the same case, does not require proof. The admission may be contradicted only
by showing that it was made through palpable mistake or that no such admission was made.

Nuguid has admitted that FEBTC (now BPI) has paid him the value of the subject checks. This 57

statement by Nuguid is certainly against his own interest as he can be held liable for said amounts.
Unfortunately, Nuguid allowed his appeal with the Court of Appeals to lapse, without taking steps to
have it reinstated. This course of action, which is highly unlikely if Nuguid had not withdrawn the
value of the manager’s and cashier’s checks deposited into his account, likewise prevents us from
ordering Nuguid to deliver the amounts of the checks to Chiok. Parties who did not appeal will not be
affected by the decision of an appellate court rendered to appealing parties. 58

Another reason given by the Court of Appeals for sustaining the dismissal of BPI’s complaint-in-
intervention was that BPI failed to prove that it was a holder in due course with respect to the
manager’s checks. 59
We agree with the finding of the Court of Appeals that BPI is not a holder in due course with respect
to manager’s checks. Said checks were never indorsed by Nuguid to FEBTC, the predecessor-in-
interest of BPI, for the reason that they were deposited by Chiok directly to Nuguid’s account with
FEBTC. However, inview of our ruling that Nuguid has withdrawn the value of the checks from his
account, BPI has the rights of an equitable assignee for value under Section 49 of the Negotiable
Instruments Law, which provides:

Section 49. Transfer without indorsement; effect of. – Where the holder of an instrument payable to
his order transfers it for value without indorsing it, the transfer vests in the transferee suchtitle as the
transferor had therein, and the transferee acquires in addition, the right to have the indorsement of
the transferor. But for the purpose of determining whether the transferee is a holder in due course,
the negotiation takes effect as of the time when the indorsement is actually made.

As an equitable assignee, BPI acquires the instrument subject to defenses and equities available
among prior parties and, in addition, the right to have the indorsement of Nuguid. Since the checks
60

in question are manager’s checks, the drawer and the drawee thereof are both Global Bank.
Respondent Chiok cannot be considered a prior party as he is not the check’s drawer, drawee,
indorser, payee or indorsee. Global Bank is consequently primarily liable upon the instrument, and
cannot hide behind respondent Chiok’s defenses. As discussed above, manager’s checks are pre-
accepted. By issuing the manager’s check, therefore, Global Bank committed in effect its total
resources, integrity and honor towards its payment. 61

Resultantly, Global Bank should pay BPI the amount of ₱18,455,350.00, representing the aggregate
face value ofMC No. 025935 and MC No. 025939. Since Global Bank was merely following the TRO
and preliminary injunction issued by the RTC, it cannot be held liable for legal interest during the
time said amounts are in its possession. Instead, we are adopting the formulation of the Court of
Appeals that the amounts be treated as savings deposits in Global Bank. The interest rate, however,
should not be fixed at 4% as determined by the Court of Appeals, since said rates have fluctuated
since July 7, 1995, the date Global Bank refused to honor the subject manager’s checks. Thus,
Global Bank should pay BPI interest based on the rates it actually paid its depositors from July 7,
1995 until the finality of this Decision, in accordance with the same compounding rules it applies to
its depositors. The legal rate of6% per annum shall apply after the finality of this Decision. 62

We have to stress that respondent Chiok is not left without recourse. Respondent Chiok’s cause of
action to recover the value of the checks is against Nuguid. Unfortunately, Nuguid allowed his
appeal with the Court of Appeals to lapse, without taking steps tohave it reinstated. As stated above,
parties who did not appeal will not be affected by the decision of the appellate court rendered to
appealing parties. Moreover, since Nuguid was not impleaded as a party to the present
63

consolidated cases, he cannot be bound by our judgment herein. Respondent Chiok should
therefore pursue his remedy against Nuguid in a separate action to recover the amounts of the
checks.

Despite the reversal of the Court of Appeals Decision, the liability of Nuguid therein to respondent
Chiok for attorney’s fees equivalent to 5% of the total amount due remains valid, computed from the
amounts stated in said Decision. This is a consequence of the finality of the Decision of the Court of
Appeals with respect to him.

WHEREFORE, the Court resolves to DENY the Joint Manifestation and Motion filed with this Court
on May 28, 2013.

The petitions in G.R. No. 172652 and G.R. No. 175302 are GRANTED. The Decision of the Court of
Appeals in CA-G.R. CV No. 77508 dated May 5, 2006, and the Resolution on the same case dated
November 6, 2006 are hereby REVERSED AND SET ASIDE, and a new one is issued ordering the
DENIAL of the Amended Complaint in Civil Case No. Q-95-24299 in Branch 96 of the Regional Trial
Court of Quezon City for lack of merit. The Writ of Preliminary Prohibitory Injunction enjoining Asian
Banking Corporation (now Global Business Bank, Inc.) from honoring MC No. 025935 and MC No.
025939, and Metropolitan Bank & Trust Company from honoring CC No. 003380, is hereby LIFTED
and SET ASIDE.

Global Business Bank, Inc. is ORDERED TO PAY the Bank of the Philippine Islands, as successor-
in-interest of Far East Bank & Trust Company, the amount of ₱18,455,350.00, representing the
aggregate face value of MC No. 025935 and MC No. 025939, with interest based on the rates it
actually paid its depositors from July 7, 1995 until the finality of this Decision, in accordance with the
same compounding rules it applies to its depositors.

The petition in G.R. No. 175394 is hereby rendered MOOT.

The liabilities of spouses Gonzalo B. Nuguid and Marinella O. Nuguid under the Decision and
Resolution of the Court of Appeals in CAG.R. CV No. 77508 remain VALID and SUBSISTING,
computed from the amounts adjudged by the Court of Appeals, without prejudice to any further
action that may be filed by Wilfred N. Chiok.

SO ORDERED.

G.R. No. 168842 August 11, 2010

VICENTE GO, Petitioner,

vs.
METROPOLITAN BANK AND TRUST CO., Respondent.

DECISION

NACHURA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing
the Decision1 dated May 27, 2005 and the Resolution2 dated August 31, 2005 of the Court of
Appeals (CA) in CA-G.R. CV No. 63469.

The Facts

The facts of the case are as follows:

Petitioner filed two separate cases before the Regional Trial Court (RTC) of Cebu. Civil Case No.
CEB-9713 was filed by petitioner against Ma. Teresa Chua (Chua) and Glyndah Tabañag (Tabañag)
for a sum of money with preliminary attachment. Civil Case No. CEB-9866 was filed by petitioner for
a sum of money with damages against herein respondent Metropolitan Bank and Trust Company
(Metrobank) and Chua.3

In both cases, petitioner alleged that he was doing business under the name "Hope Pharmacy"
which sells medicine and other pharmaceutical products in the City of Cebu. Petitioner had in his
employ Chua as his pharmacist and trustee or caretaker of the business; Tabañag, on the other
hand, took care of the receipts and invoices and assisted Chua in making deposits for petitioner’s
accounts in the business operations of Hope Pharmacy.4
In CEB-9713, petitioner claimed that there were unauthorized deposits and encashments made by
Chua and Tabañag in the total amount of One Hundred Nine Thousand Four Hundred Thirty-three
Pesos and Thirty Centavos (₱109,433.30). He questioned particularly the following:

(1) FEBTC Check No. 251111 dated April 29, 1990 in the amount of ₱22,635.00 which was
issued by plaintiff’s [petitioner’s] customer Loy Libron in payment of the stocks purchased
was deposited under Metrobank Savings Account No. 420-920-6 belonging to the defendant
Ma. Teresa Chua;

(2) RCBC Checks Nos. 330958 and 294515, which were in blank but pre-signed by him
(plaintiff [petitioner] Vicente Go) for convenience and intended for payment to plaintiff’s
[petitioner’s] suppliers, were filled up and dated September 22, 1990 and September 7, 1990
in the amount of ₱30,000.00 and ₱50,000.00 respectively, and were deposited with
defendant Chua’s aforestated account with Metrobank;

(3) PBC Check No. 005874, drawn by Elizabeth Enriquez payable to the Hope Pharmacy in
the amount of ₱6,798.30 was encashed by the defendant Glyndah Tabañag;

(4) There were unauthorized deposits and encashments in the total sum of ₱109,433.30; 5

In CEB-9866, petitioner averred that there were thirty-two (32) checks with Hope Pharmacy as
payee, for varying sums, amounting to One Million Four Hundred Ninety-Two Thousand Five
Hundred Ninety-Five Pesos and Six Centavos (₱1,492,595.06), that were not endorsed by him but
were deposited under the personal account of Chua with respondent bank,6 and these are the
following:

CHECK NO. DATE AMOUNT

FEBTC 251166 5-23-90 ₱ 65,214.88

FEBTC 239399 5-08-90 24,917.75

FEBTC 251350 7-24-90 212,326.56

PBC 279887 6-27-90 2,000.00

PBC 162387 1-24-90 6,300.00

PBC 162317 12-22-89 3,300.00

PBC 279881 6-23-90 7,650.00

PBC 009005 7-21-89 3,584.00

PBC 279771 5-14-90 3,600.00

PBC 279726 4-25-90 2,000.00

PBC 168004 3-22-90 2,800.00

PBC 167963 3-07-90 1,700.00

FEBTC 267793 8-20-90 80,085.66

 FEBTC 267761 7-21-90 45,304.63

FEBTC 251252 6-03-90 64,000.00

FEBTC 267798 8-15-90 40,078.67

PBC 367292 8-06-90 2,100.00

PBC 376445 9-26-90 1,125.00

PBC 009056 8-07-89 2,500.00

PBC 376402 9-12-90 12,105.40

BPI 197074 7-17-90 5,240.00

BPI 197051 7-06-90 1,350.00

BPI 204358 9-19-90 5,402.60

BPI 204252 7-31-90 6,715.60

FEBTC 251171 6-27-90 83,175.54

FEBTC 251165 6-28-90 231,936.10

FEBTC 251251 6-30-90 47,087.25

FEBTC 251163 6-21-90 170,600.85

FEBTC 251170 5-23-90 16,440.00

FEBTC 251112 5-31-90 211,592.69

FEBTC 239400 6-15-90 47,664.03

FEBTC 251162 6-22-90 82,697.85

₱1,492,595.067

Petitioner claimed that the said checks were crossed checks payable to Hope Pharmacy only; and
that without the participation and connivance of respondent bank, the checks could not have been
accepted for deposit to any other account, except petitioner’s account.8

Thus, in CEB-9866, petitioner prayed that Chua and respondent bank be ordered, jointly and
severally, to pay the principal amount of ₱1,492,595.06, plus interest at 12% from the dates of the
checks, until the obligation shall have been fully paid; moral damages of Five Hundred Thousand
Pesos (₱500,000.00); exemplary damages of ₱500,000.00; and attorney’s fees and costs in the
amount of ₱500,000.00.9

On February 23, 1995, the RTC rendered a Joint Decision,10 the dispositive portion of which reads:

WHEREFORE, premises considered, the Court hereby renders judgment dismissing plaintiff Vicente
Go’s complaint against the defendant Ma. Teresa Chua and Glyndah Tabañag in Civil Case No.
CEB-9713, as well as plaintiff’s complaint against the same defendant Ma. Teresa Chua in Civil
Case No. CEB-9866.

Plaintiff Vicente Go is moreover sentenced to pay ₱50,000.00 in attorney’s fees and litigation
expenses to the defendants Ma. Teresa Chua and Glyndah Tabañag in Civil Case No. CEB-9713.

Defendant Metrobank in Civil Case No. CEB-9866 is hereby condemned to pay unto plaintiff Vicente
Go/Hope Pharmacy the amount of ₱50,000.00 as moral damages, and attorney’s fees and litigation
expenses in the aggregate sum of ₱25,000.00.

The defendant Metrobank’s crossclaim against its co-defendant Ma. Teresa Chua in Civil Case No.
CEB-9866 is dismissed for lack of merit.

No special pronouncement as to costs in both instances.

SO ORDERED.11

In striking down the complaint of the petitioner against Chua and Tabañag in CEB-9713, the RTC
made the following findings:

(1) FEBTC Check No. 251111, dated April 29, 1990, in the amount of ₱22,635.00 payable to
cash, was drawn by Loy Libron in payment of her purchases of medicines and other drugs
which Ma. Teresa Chua was selling side by side with the medicines and drugs of the Hope
Pharmacy, for which she (Maritess) was granted permission by its owner, Mr. Vicente Chua.
These medicines and drugs from Thailand were Maritess’ sideline, and were segregated
from the stocks of Hope Pharmacy; x x x.

(2) RCBC Check Nos. 294519 and 330958 were checks belonging to plaintiff Vicente Go
payable to cash x x x; these checks were replacements of the sums earlier advanced by Ma.
Teresa Chua, but which were deposited in the account of Vicente Go with RCBC, as shown
by the deposit slips x x x, and confirmed by the statement of account of Vicente Go with
RCBC.

(3) Check No. PCIB 005374 drawn by Elizabeth Enriquez payable to Hope Pharmacy/Cash
in the amount of ₱6,798.30 dated September 6, 1990, was admittedly encashed by the
defendant, Glyndah Tabañag. As per instruction by Vicente Go, Glyndah requested the
drawer to insert the word "Cash," so that she could encash the same with PCIB, to meet the
Hope Pharmacy’s overdraft.

The listings x x x, made by Glyndah Tabañag and Flor Ouano will show that the corresponding
amounts covered thereby were in fact deposited to the account of Mr. Vicente Go with RCBC; the
Bank Statement of Mr. Go x x x, confirms defendants’ claim independently of the deposit slip[s] x x
x.12

The trial court absolved Chua in CEB-9866 because of the finding that the subject checks in CEB-
9866 were payments of petitioner for his loans or borrowings from the parents of Ma. Teresa Chua,
through Ma. Teresa, who was given the total discretion by petitioner to transfer money from the
offices of Hope Pharmacy to pay the advances and other obligations of the drugstore; she was also
given the full discretion where to source the funds to cover the daily overdrafts, even to the extent of
borrowing money with interest from other persons.13
While the trial court exonerated Chua in CEB-9866, it however declared respondent bank liable for
being negligent in allowing the deposit of crossed checks without the proper indorsement.

Petitioner filed an appeal before the CA. On May 27, 2005, the CA rendered a Decision, 14 the fallo of
which reads:

WHEREFORE, except for the award of attorney’s fees and litigation expenses in favor of defendants
Chua and Tabañag which is hereby deleted, the decision of the lower court is hereby AFFIRMED.

SO ORDERED.15

Hence, this petition.

The Issue

Petitioner presented this sole issue for resolution:

The Court of Appeals Erred In Not Holding Metrobank Liable For Allowing The Deposit, Of Crossed
Checks Which Were Issued In Favor Of And Payable To Petitioner And Without Being Indorsed By
The Petitioner, To The Account Of Maria Teresa Chua.16

The Ruling of the Court

A check is a bill of exchange drawn on a bank payable on demand.17 There are different kinds of
checks. In this case, crossed checks are the subject of the controversy. A crossed check is one
where two parallel lines are drawn across its face or across the corner thereof. It may be crossed
generally or specially.18

A check is crossed specially when the name of a particular banker or a company is written between
the parallel lines drawn. It is crossed generally when only the words "and company" are written or
nothing is written at all between the parallel lines, as in this case. It may be issued so that
presentment can be made only by a bank.19

In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of
a check has the following effects: (a) the check may not be encashed but only deposited in the bank;
(b) the check may be

negotiated only once — to one who has an account with a bank; and (c) the act of crossing the
check serves as warning to the holder that the check has been issued for a definite purpose so that
he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder
in due course.20

The Court has taken judicial cognizance of the practice that a check with two parallel lines in the
upper left hand corner means that it could only be deposited and not converted into cash. The effect
of crossing a check,

thus, relates to the mode of payment, meaning that the drawer had intended the check for deposit
only by the rightful person, i.e., the payee named therein.21 The crossing of a check is a warning that
the check should be deposited only in the account of the payee. Thus, it is the duty of the collecting
bank to ascertain that the check be deposited to the payee’s account only.22
In the instant case, there is no dispute that the subject 32 checks with the total amount of
₱1,492,595.06 were crossed checks with petitioner as the named payee. It is the submission of
petitioner that respondent bank should be held accountable for the entire amount of the checks
because it accepted the checks for deposit under Chua’s account despite the fact that the checks
were crossed and that the payee named therein was not Chua.

In its defense, respondent bank countered that petitioner is not entitled to reimbursement of the total
sum of ₱1,492,595.06 from either Maria Teresa Chua or respondent bank because petitioner was
not damaged thereby.23

Respondent bank’s contention is meritorious. Respondent bank should not be held liable for the
entire amount of the checks considering that, as found by the RTC and affirmed by the CA, the
checks were actually given to Chua as payments by petitioner for loans obtained from the parents of
Chua. Furthermore, petitioner’s non-inclusion of Chua and Tabañag in the petition before this Court
is, in effect, an admission by the petitioner that Chua, in representation of her parents, had rightful
claim to the proceeds of the checks, as payments by petitioner for money he borrowed from the
parents of Chua. Therefore, petitioner suffered no pecuniary loss in the deposit of the checks to the
account of Chua. ten.lihpwal

However, we affirm the finding of the RTC that respondent bank was negligent in permitting the
deposit and encashment of the crossed checks without the proper indorsement. An indorsement is
necessary for the proper negotiation of checks specially if the payee named therein or holder thereof
is not the one depositing or encashing it. Knowing fully well that the subject checks were crossed,
that the payee was not the holder and that the checks contained no indorsement, respondent bank
should have taken reasonable steps in order to determine the validity of the representations made
by Chua. Respondent bank was amiss in its duty as an agent of the payee. Prudence dictates that
respondent bank should not have merely relied on the assurances given by Chua. 1avvphi1

Respondent presented Jonathan Davis as its witness in the trial before the RTC. He was the officer-
in-charge and ranked second to the assistant vice president of the bank at the time material to this
case. Davis’ testimony was summarized by the RTC as follows:

Davis also testified that he allowed Ma. Teresa Chua to deposit the checks subject of this litigation
which were payable to Hope Pharmacy. According to him, it was a privilege given to valued
customers on a highly selective case to case basis, for marketing purposes, based on trust and
confidence, because Ma. Teresa [Chua] told him that those checks belonged to her as payment for
the advances she extended to Mr. Go/Hope Pharmacy. x x x

Davis stressed that Metrobank granted the privilege to Ma. Teresa Chua that for every check she
deposited with Metrobank, the same would be credited outright to her account, meaning that she
could immediately make use of the amount credited; this arrangement went on for about three years,
without any complaint from Mr. Go/Hope Pharmacy, and Ma. Teresa Chua made warranty that she
would reimburse Metrobank if Mr. Go complained. He did not however call or inform Mr. Go about
this arrangement, because their bank being a Chinese bank, transactions are based on trust and
confidence, and for him to inform Mr. Vicente Go about it, was tantamount to questioning the
integrity of their client, Ma. Teresa Chua. Besides, this special privilege or arrangement would not
bring any monetary gain to the bank.24

Negligence was committed by respondent bank in accepting for deposit the crossed checks without
indorsement and in not verifying the authenticity of the negotiation of the checks. The law imposes a
duty of extraordinary diligence on the collecting bank to scrutinize checks deposited with it, for the
purpose of determining their genuineness and regularity.25 As a business affected with public interest
and because of the nature of its functions, the banks are under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of the relationship. 26 The
fact that this arrangement had been practiced for three years without Mr. Go/Hope Pharmacy raising
any objection does not detract from the duty of the bank to exercise extraordinary diligence. Thus,
the Decision of the RTC, as affirmed by the CA, holding respondent bank liable for moral damages is
sufficient to remind it of its responsibility to exercise extraordinary diligence in the course of its
business which is imbued with public interest.

WHEREFORE, the Decision dated May 27, 2005 and the Resolution dated August 31, 2005 of the
Court of Appeals in CA-G.R. CV No. 63469 are hereby AFFIRMED.

SO ORDERED.

G.R. No. L-35767 June 18, 1976

RAYMUNDO A. CRYSTAL, petitioner,

vs.
COURT OF APPEALS and PELAGIA OCANG, PACITA, TEODULO, FELICISIMO, PABLO,
LYDIA, DIOSCORA and RODRIGO, all surnamed DE GRACIA, respondents.

RESOLUTION

BARREDO, J.:

Motion for reconsideration of the decision of this Court in this case promulgated on February 25,
1975 affirming the decision of the Court of Appeals in favor of private respondents which held that
petitioner's redemption of the property acquired by said respondents in an execution sale pursuant to
a final judgment of the trial court in Civil Case No. R-1666, Court of First Instance of Cebu, was
invalid inasmuch as the check which petitioner had used in paying the redemption price had been
either dishonored or had become state, hence its value was never this upholding in the process the
jurisdiction of the trial court to rule on the question of validity of the redemption in question
notwithstanding that by order of that same court, said matter had been made the subject of a
separate suit, Civil as No. 62-T also of the Court of First Instance of Cebu, filed on August 9, 1960.

In his motion for reconsideration, petitioner insists that it was an act in excess of jurisdiction on the
part of the trial court in R-1666, to issue on May 31, 1971 the writ of possession sought by private
respondents, thru Pelagia Ocang, in her motion of August 15, 1970, considering that court had
previously pointedly observed in its order of March 24, 1960 that "the question as to whether or not
the redemption allegedly made by Mr. Crystal by paying the amount to Mrs. Pelagia Ocang without
using the said P11,200 deposited with the sheriff is legal and effective" has to be decided in "another
proper case" and, furthermore, in its order of June 4, 1960 in the same case, the same court had
more definitely ruled that "the question of ownership of Mr. Raymundo Crystal, the redemptioner, is
not a proper matter to be decided in this case but in another case where the legality or validity of the
alleged deed of redemption executed in favor of Mr. Crystal will be amply raised and threshed out"
and, accordingly, in attention to such observations and ruling, petitioner did file Civil Case No. 62-T,
which is still pending trial.

While, as already explained in Our decision, such pose of petitioner has its merits, We deem it in
advisable to this point to modify Our ruling that there is really no issuance of jurisdiction involved
here and that it is preferable, under the peculiar circumstances obtaining in this particular case, that
the root of the controversy between the parties be inquired into and (determined in the incident
already taken cognizance of by the trial court in Civil Case No. R-1666 regarding tile light of
possession over tile alert in dispute. In this connection, it is to be noted that even after he had filed
Civil Case No. 62-T, in of hat he must have considered as his right a redemption i of the property
sold in execution a judgment in Civil Case No. R-1666, petitioner regained possession of the four (4)
parcels of land in question without the torture of the court, taking the same from Pelagia Ocang who
his taken it from him also extrajudicially that she had legally acquired the same precisely in the same
execution and that petitioner redemption as null and void because the cheek he used to pay the
redemption price had been dishonored for lack of sufficient funds. In other words both petitioner and
Ocang, predicating their respective claims to rightful possession on the same sale on execution in
the same case, Civil Case No. R-l666, had alternately taken the law in their hands to obtain
possession of the lands in question in disregard of the toilet for the complete satisfaction of that
significant of the court in that case. In the light of these peculiar circumstances, it does appear to be
more that since it is the Case in that Civil Case No. R-1666, that rendered the judgment and
subsequently ordered the execution from which the redemption was made, it should to the people to
settle the whole controversy among all the interested statistics including even the judgment leftors
'the heirs of Nicolas Rafols themselves, who, according to the records, have claim of that own
relative to the same redemption, which might just as well be inquired into in said case, rather than in
Case No. 62-T in which they are not parties. Otherwise, stated, in issuing the impugned writ of
possession, the court took the bull by the horns, so to speak, thereby overturning its own previous
stand on the matter announced in its orders of March 24 and June 4, 1960 aforementioned.
Consequently, We overrule the argument of jurisdiction or even abuse of discretion raised by
petitioner and reiterate what We have said in regard thereto ni Our decision.

This is not to say that the procedure followed by Ocang and sactioned by the trial court of resorting
to the issuance of a writ of possession is not open to question, since a writ of possession is not
always available in all controversies concerning possession of real estate. But We see no need to
resolve that point here. More importantly, what impresses Us in the motion for reconsideration is the
possible injustice that might result from our unqualified reliance in our decision on the finding of the
Court of Appeals that the check for P11,200 paid by petitioner for the redemption in dispute had
been dishonored, in the face of the other finding in the same decision of the Court of Appeals
indicating that instead of having been dishonored, the said check had become state, albeit it was
being replaced with new ones from time to time. Surely, for a check to the dishonored upon
presentment on the one hand, and to be state for not being presented at all in time, on the other, are
incompatible developments that naturally have variant legal consequences. Thus, if needed the
check in question had been dishonored, then there can be no doubt that petitioner's redemption was
null and void. On the oher hand, if it had only become stale, then it becomes imperative that the
circumstances that caused its non-presentment be determined, for if this was not due to the fault of
the petitioner, then it would be unfair to deprive him of the rights he had acquired as redemptioner,
particularly, the value of the check has otherwise been received or realized by the party concerned.
From the motion for reconsideration and its annexes, We gather that petitioner has ready evidence
showing that when Pelagia Ocang secured the writ of possession in question, she had already been
paid the full amount of the check in dispute. What is more, there are a number of circumstances
pointed out in said motion, apparaently supported by corresponding evidence, tending to show that a
compromise had already been agreed upon by the parties, although not yet approved by the court,
or, at least, that Ocang has made admissions which indicate that the issue regarding the supposed
dishonorign or becomeing state of the repeatedly mentioned check is no longer of any legal
significance and, for that matter, the observations we made in our decision in regard to the duties of
the sheriff in the premises have been rendered academic.

Needless to say, the Supreme Court should not allow any of its decision to become final when it is
properly made to appear in a motion for reconsideration based on relevant facts and circumstances
not previously brought to its attention, although demonstrable from the records, that even if the
technical consideration on which it is based is well taken, substantial jusitce might be sacrificed, if
further proceedings are not ordered to be held to verify undeniable facts which might have escaped
the eyes of the Court of Appeals. In the instant case, We took it as proven, per statements of fact in
the decision of the Court of Appeals, that the check with which petitioner redeemed the property in
dispute had been dishonored. On that premise and seeing that even if We upheld the technical point
of jurisdiction raised by petitioner, the final outcome of the controversy between the parties would not
be different, We proceeded to decide the merits of the respective substantive claims of the parties.
We felt that in view of the findings of fact of the Court of Appeals, equity demanded that the case be
earlier terminated by ignoring not only whatever flaw ther was in the procedure adopted by the court
below but also the seemingly unusual departure by the Court of Appeals from the orthodox rule
requiring courts to confine its scrutiny in certiorari cases only to the specific point of jurisdiction
complained of.

Now, however, there is a strong showing in the motion for reconsideration, presmised on no less
than other portions of the very decision of the intermediate court and other apparently credible
evidence, that not only was said check not dishonored, although it became stale, but that repondent
Pelagia Ocang had actually been paid already the full value thereof. And in this connection, it is
notable that in the comment of respondents on petitioner's motion for reconsideration, there is no
clear and categorical denial of these important and decisive facts.

One more point. In our decision, We assumed that the findings of fact of the Court of Appeals were
the result of an exhaustive consideration of evidence presented in due course by the parties. It turns
out now, that inasmuch as the trial court itself had previously ruled that the validity of the redemption
in controversy should be the subject of a separate action and that, in fact, such separate action had
already been filed by petitioner, it was in this other case that petitioner was present the
corresponding evidencence. Hence, whatever evidence was before the trial court in Case No. R-
1666 when it issued the subject writ of possession could not have been complete, much less
incontrovertible.

With these substantial consideration in view, We find no just alternative than to reconsider Our
decision in so far as the matter of validity or invalidity of petitioner's redemption is concerned. It
being shown that the pivotal finding of the Court of Appeals regarding the check in question might
actually be belied in a more appropriate proceeding, the foundation of Our own decision has been
shaken. Indeed, We are now convinced that is but fair and just that the trial court should be allowed
to receive all relevant and competent evidence the parties may wish to present relative to the issue
of whether or not respondent Pelagia Ocang has already received in one form or another, directly or
indirectly, the full amount of P11,200 as redemption price of the four (4) parcels of land in dispute, as
well as to all other facts which might affect the validity of the redemption here in controversy. Withal,
should it be found by the trial court that the redemption was invalid, because the redemption price
has not been fully paid, it should further determine who made the improvements found on said lands,
in order that if it should turn out that they were introduced by petitioner, possession may not be
awarded to respondents unless said improvements are first properly and fully reimbursed to
petitioner. It goes without saying that the proceedings herein contemplated are to be held in Civil
Case No. R-1666. Correspondingly, Civil Case No. 62-T and the other case reviewing the same
should be deemed academic.

WHEREFORE, the decision of this Court of February 25, 1975 is hereby reconsidered and modified
in line with the foregoing opinion and this case is remanded to the trial court for further proceedings
as therein indicated.

G.R. No. 141968 February 12, 2001

THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF THE
PHILIPPINES), petitioner,
vs.
SPS. FRANCIS S. GUECO and MA. LUZ E. GUECO, respondents.

KAPUNAN, J.:

The respondent Gueco Spouses obtained a loan from petitioner International Corporate Bank (now
Union Bank of the Philippines) to purchase a car - a Nissan Sentra 1600 4DR, 1989 Model. In
consideration thereof, the Spouses executed promissory notes which were payable in monthly
installments and chattel mortgage over the car to serve as security for the notes. 1âwphi1.nêt

The Spouses defaulted in payment of installments. Consequently, the Bank filed on August 7, 1995
a civil action docketed as Civil Case No. 658-95 for "Sum of Money with Prayer for a Writ of
Replevin"1 before the Metropolitan Trial Court of Pasay City, Branch 45.2 On August 25, 1995, Dr.
Francis Gueco was served summons and was fetched by the sheriff and representative of the bank
for a meeting in the bank premises. Desi Tomas, the Bank's Assistant Vice President demanded
payment of the amount of P184,000.00 which represents the unpaid balance for the car loan. After
some negotiations and computation, the amount was lowered to P154,000.00, However, as a result
of the non-payment of the reduced amount on that date, the car was detained inside the bank's
compound.

On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative Support, Auto
Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations resulted in the further
reduction of the outstanding loan to P150,000.00.

On August 29, 1995, Dr. Gueco delivered a manager's check in amount of P150,000.00 but the car
was not released because of his refusal to sign the Joint Motion to Dismiss. It is the contention of the
Gueco spouses and their counsel that Dr. Gueco need not sign the motion for joint dismissal
considering that they had not yet filed their Answer. Petitioner, however, insisted that the joint motion
to dismiss is standard operating procedure in their bank to effect a compromise and to preclude
future filing of claims, counterclaims or suits for damages.

After several demand letters and meetings with bank representatives, the respondents Gueco
spouses initiated a civil action for damages before the Metropolitan Trial Court of Quezon City,
Branch 33. The Metropolitan Trial Court dismissed the complaint for lack of merit. 3

On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the Metropolitan
Trial Court was reversed. In its decision, the RTC held that there was a meeting of the minds
between the parties as to the reduction of the amount of indebtedness and the release of the car but
said agreement did not include the signing of the joint motion to dismiss as a condition sine qua
non for the effectivity of the compromise. The court further ordered the bank:

1. to return immediately the subject car to the appellants in good working condition; Appellee
may deposit the Manager's check - the proceeds of which have long been under the control
of the issuing bank in favor of the appellee since its issuance, whereas the funds have long
been paid by appellants to .secure said Manager's Check, over which appellants have no
control;

2. to pay the appellants the sum of P50,000.00 as moral damages; P25,000.00 as exemplary
damages, and P25,000.00 as attorney's fees, and
 3. to pay the cost of suit.

In other respect, the decision of the Metropolitan Trial Court Branch 33 is hereby
AFFIRMED.4

The case was elevated to the Court of Appeals, which on February 17, 2000, issued the assailed
decision, the decretal portion of which reads:

WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED
and the Decision of the Regional Trial Court of Quezon City, Branch 227, in Civil Case No.
Q-97-31176, for lack of any reversible error, is AFFIRMED in toto. Costs against petitioner.

SO ORDERED.5

The Court of Appeals essentially relied on the respect accorded to the finality of the findings of facts
by the lower court and on the latter's finding of the existence of fraud which constitutes the basis for
the award of damages.

The petitioner comes to this Court by way of petition for review on certiorari under Rule 45 of the
Rules of Court, raising the following assigned errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO AGREEMENT

WITH RESPECT TO THE EXECUTION OF THE JOINT MOTION TO DISMISS AS A
CONDITION FOR THE COMPROMISE AGREEMENT.

II

THE COURT OF APPEALS ERRED IN GRANTING MORAL AND EXEMPLARY DAMAGES

AND ATTORNEY'S FEES IN FAVOR OF THE RESPONDENTS.

III

THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER RETURN THE
SUBJECT CAR TO THE RESPONDENTS, WITHOUT MAKING ANY PROVISION FOR THE
ISSUANCE OF THE NEW MANAGER'S/CASHIER'S CHECK BY THE RESPONDENTS IN
FAVOR OF THE PETITIONER IN LIEU OF THE ORIGINAL CASHIER'S CHECK THAT
ALREADY BECAME STALE.6

As to the first issue, we find for the respondents. The issue as to what constitutes the terms of the
oral compromise or any subsequent novation is a question of fact that was resolved by the Regional
Trial Court and the Court of Appeals in favor of respondents. It is well settled that the findings of fact
of the lower court, especially when affirmed by the Court of Appeals, are binding upon this
Court.7 While there are exceptions to this rule,8 the present case does not fall under anyone of them,
the petitioner's claim to the contrary, notwithstanding.

Being an affirmative allegation, petitioner has the burden of evidence to prove his claim that the oral
compromise entered into by the parties on August 28, 1995 included the stipulation that the parties
would jointly file a motion to dismiss. This petitioner failed to do. Notably, even the Metropolitan Trial
Court, while ruling in favor of the petitioner and thereby dismissing the complaint, did not make a
factual finding that the compromise agreement included the condition of the signing of a joint motion
to dismiss.

The Court of Appeals made the factual findings in this wise:

In support of its claim, petitioner presented the testimony of Mr. Jefferson Rivera who related
that respondent Dr. Gueco was aware that the signing of the draft of the Joint Motion to
Dismiss was one of the conditions set by the bank for the acceptance of the reduced amount
of indebtedness and the release of the car. (TSN, October 23, 1996, pp. 17-21, Rollo, pp. 18,
5). Respondents, however, maintained that no such condition was ever discussed during
their meeting of August 28, 1995 (Rollo, p. 32).

The trial court, whose factual findings are entitled to respect since it has the 'opportunity to
directly observe the witnesses and to determine by their demeanor on the stand the
probative value of their testimonies' (People vs. Yadao, et al. 216 SCRA 1, 7 [1992]), failed
to make a categorical finding on the issue. In dismissing the claim of damages of the
respondents, it merely observed that respondents are not entitled to indemnity since it was
their unjustified reluctance to sign of the Joint Motion to Dismiss that delayed the release of
the car. The trial court opined, thus:

'As regards the third issue, plaintiffs' claim for damages is unavailing. First, the
plaintiffs could have avoided the renting of another car and could have avoided this
litigation had he signed the Joint Motion to Dismiss. While it is true that herein
defendant can unilaterally dismiss the case for collection of sum of money with
replevin, it is equally true that there is nothing wrong for the plaintiff to affix his
signature in the Joint Motion to Dismiss, for after all, the dismissal of the case against
him is for his own good and benefit. In fact, the signing of the Joint Motion to Dismiss
gives the plaintiff three (3) advantages. First, he will recover his car. Second, he will
pay his obligation to the bank on its reduced amount of P150,000.00 instead of its
original claim of P184,985.09. And third, the case against him will be dismissed.
Plaintiffs, likewise, are not entitled to the award of moral damages and exemplary
damages as there is no showing that the defendant bank acted fraudulently or in bad
faith.' (Rollo, p. 15)

The Court has noted, however, that the trial court, in its findings of facts, clearly indicated
that the agreement of the parties on August 28, 1995 was merely for the lowering of the
price, hence -

'xxx On August 28, 1995, bank representative Jefferson Rivera and plaintiff entered
into an oral compromise agreement, whereby the original claim of the bank of
P184,985.09 was reduced to P150,000.00 and that upon payment of which, plaintiff
was informed that the subject motor vehicle would be released to him.' (Rollo, p. 12)

The lower court, on the other hand, expressly made a finding that petitioner failed to include
the aforesaid signing of the Joint Motion to Dismiss as part of the agreement. In dismissing
petitioner's claim, the lower court declared, thus:

'If it is true, as the appellees allege, that the signing of the joint motion was a
condition sine qua non for the reduction of the appellants' obligation, it is only
reasonable and logical to assume that the joint motion should have been shown to
Dr. Gueco in the August 28, 1995 meeting. Why Dr. Gueco was not given a copy of
the joint motion that day of August 28, 1995, for his family or legal counsel to see to
 be brought signed, together with the P150,000.00 in manager's check form to be
submitted on the following day on August 29, 1995? (sic) [I]s a question whereby the
answer up to now eludes this Court's comprehension. The appellees would like this
Court to believe that Dr Gueco was informed by Mr. Rivera Rivera of the bank
requirement of signing the joint motion on August 28, 1995 but he did not bother to
show a copy thereof to his family or legal counsel that day August 28, 1995. This part
of the theory of appellee is too complicated for any simple oral agreement. The idea
of a Joint Motion to Dismiss being signed as a condition to the pushing through a
deal surfaced only on August 29, 1995.

'This Court is not convinced by the appellees' posturing. Such claim rests on too
slender a frame, being inconsistent with human experience. Considering the effect of
the signing of the Joint Motion to Dismiss on the appellants' substantive right, it is
more in accord with human experience to expect Dr. Gueco, upon being shown the
Joint Motion to Dismiss, to refuse to pay the Manager's Check and for the bank to
refuse to accept the manager's check. The only logical explanation for this inaction is
that Dr. Gueco was not shown the Joint Motion to Dismiss in the meeting of August
28, 1995, bolstering his claim that its signing was never put into consideration in
reaching a compromise.' xxx.9

We see no reason to reverse.

Anent the issue of award of damages, we find the claim of petitioner meritorious. In finding the
petitioner liable for damages, both .the Regional Trial Court and the Court of Appeals ruled that there
was fraud on the part of the petitioner. The CA thus declared:

The lower court's finding of fraud which became the basis of the award of damages was
likewise sufficiently proven. Fraud under Article 1170 of the Civil Code of the Philippines, as
amended is the 'deliberate and intentional evasion of the normal fulfillment of obligation'
When petitioner refused to release the car despite respondent's tender of payment in the
form of a manager's check, the former intentionally evaded its obligation and thereby
became liable for moral and exemplary damages, as well as attorney's fees.10

We disagree.

Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the voluntary
execution of a wrongful act, or a willful omission, knowing and intending the effects which naturally
and necessarily arise from such act or omission; the fraud referred to in Article 1170 of the Civil
Code is the deliberate and intentional evasion of the normal fulfillment of obligation. 11 We fail to see
how the act of the petitioner bank in requiring the respondent to sign the joint motion to dismiss
could constitute as fraud. True, petitioner may have been remiss in informing Dr. Gueco that the
signing of a joint motion to dismiss is a standard operating procedure of petitioner bank. However,
this can not in anyway have prejudiced Dr. Gueco. The motion to dismiss was in fact also for the
benefit of Dr. Gueco, as the case filed by petitioner against it before the lower court would be
dismissed with prejudice. The whole point of the parties entering into the compromise agreement
was in order that Dr. Gueco would pay his outstanding account and in return petitioner would return
the car and drop the case for money and replevin before the Metropolitan Trial Court. The joint
motion to dismiss was but a natural consequence of the compromise agreement and simply stated
that Dr. Gueco had fully settled his obligation, hence, the dismissal of the case. Petitioner's act of
requiring Dr. Gueco to sign the joint motion to dismiss can not be said to be a deliberate attempt on
the part of petitioner to renege on the compromise agreement of the parties. It should, likewise, be
noted that in cases of breach of contract, moral damages may only be awarded when the breach
was attended by fraud or bad faith.12 The law presumes good faith. Dr. Gueco failed to present an
iota of evidence to overcome this presumption. In fact, the act of petitioner bank in lowering the debt
of Dr. Gueco from P184,000.00 to P150,000.00 is indicative of its good faith and sincere desire to
settle the case. If respondent did suffer any damage, as a result of the withholding of his car by
petitioner, he has only himself to blame. Necessarily, the claim for exemplary damages must fait. In
no way, may the conduct of petitioner be characterized as "wanton, fraudulent, reckless, oppressive
or malevolent."13

We, likewise, find for the petitioner with respect to the third assigned error. In the meeting of August
29, 1995, respondent Dr. Gueco delivered a manager's check representing the reduced amount of
P150,000.00. Said check was given to Mr. Rivera, a representative of respondent bank. However,
since Dr. Gueco refused to sign the joint motion to dismiss, he was made to execute a statement to
the effect that he was withholding the payment of the check.14 Subsequently, in a letter addressed to
Ms. Desi Tomas, vice president of the bank, dated September 4, 1995, Dr. Gueco instructed the
bank to disregard the 'hold order" letter and demanded the immediate release of his car, 15 to which
the former replied that the condition of signing the joint motion to dismiss must be satisfied and that
they had kept the check which could be claimed by Dr. Gueco anytime.16 While there is controversy
as to whether the document evidencing the order to hold payment of the check was formally offered
as evidence by petitioners,17 it appears from the pleadings that said check has not been encashed.

The decision of the Regional Trial Court, which was affirmed in toto by the Court of Appeals, orders
the petitioner:

1. to return immediately the subject car to the appellants in good working condition. Appellee
may deposit the Manager's Check - the proceeds of which have long been under the control
of the issuing bank in favor of the appellee since its issuance, whereas the funds have long
been paid by appellants to secure said Manager's Check over which appellants have no
control.18

Respondents would make us hold that petitioner should return the car or its value and that the latter,
because of its own negligence, should suffer the loss occasioned by the fact that the check had
become stale.19 It is their position that delivery of the manager's check produced the effect of
payment20 and, thus, petitioner was negligent in opting not to deposit or use said check. Rudimentary
sense of justice and fair play would not countenance respondents' position.

A stale check is one which has not been presented for payment within a reasonable time after its
issue. It is valueless and, therefore, should not be paid. Under the negotiable instruments law, an
instrument not payable on demand must be presented for payment on the day it falls due. When the
instrument is payable on demand, presentment must be made within a reasonable time after its
issue. In the case of a bill of exchange, presentment is sufficient if made within a reasonable time
after the last negotiation thereof.21

A check must be presented for payment within a reasonable time after its issue, 22 and in determining
what is a "reasonable time," regard is to be had to the nature of the instrument, the usage of trade or
business with respect to such instruments, and the facts of the particular case. 23 The test is whether
the payee employed such diligence as a prudent man exercises in his own affairs. 24 This is because
the nature and theory behind the use of a check points to its immediate use and payability. In a
case, a check payable on demand which was long overdue by about two and a half (2-1/2) years
was considered a stale check.25 Failure of a payee to encash a check for more than ten (10) years
undoubtedly resulted in the check becoming stale.26 Thus, even a delay of one (1) week27 or two (2)
days,28 under the specific circumstances of the cited cases constituted unreasonable time as a
matter of law.
In the case at bar, however, the check involved is not an ordinary bill of exchange but a manager's
check. A manager's check is one drawn by the bank's manager upon the bank itself. It is similar to a
cashier's check both as to effect and use. A cashier's check is a check of the bank's cashier on his
own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank
itself, and accepted in advance by the act of its issuance.29 It is really the bank's own check and may
be treated as a promissory note with the bank as a maker.30 The check becomes the primary
obligation of the bank which issues it and constitutes its written promise to pay upon demand. The
mere issuance of it is considered an acceptance thereof. If treated as promissory note, the drawer
would be the maker and in which case the holder need not prove presentment for payment or
present the bill to the drawee for acceptance.31

Even assuming that presentment is needed, failure to present for payment within a reasonable time
will result to the discharge of the drawer only to the extent of the loss caused by the delay. 32 Failure
to present on time, thus, does not totally wipe out all liability. In fact, the legal situation amounts to an
acknowledgment of liability in the sum stated in the check. In this case, the Gueco spouses have not
alleged, much less shown that they or the bank which issued the manager's check has suffered
damage or loss caused by the delay or non-presentment. Definitely, the original obligation to pay
certainly has not been erased.

It has been held that, if the check had become stale, it becomes imperative that the circumstances
that caused its non-presentment be determined.33 In the case at bar, there is no doubt that the
petitioner bank held on the check and refused to encash the same because of the controversy
surrounding the signing of the joint motion to dismiss. We see no bad faith or negligence in this
position taken by the Bank. 1âwphi1.nêt

WHEREFORE, premises considered, the petition for review is given due course. The decision of the
Court of Appeals affirming the decision of the Regional Trial Court is SET ASIDE. Respondents are
further ordered to pay the original obligation amounting to P150,000.00 to the petitioner upon
surrender or cancellation of the manager's check in the latter's possession, afterwhich, petitioner is
to return the subject motor vehicle in good working condition.

SO ORDERED.

G.R. No. 141001 May 21, 2009

BANK OF AMERICA, NT & SA, Petitioner,

vs.
ASSOCIATED CITIZENS BANK, BA-FINANCE CORPORATION, MILLER OFFSET PRESS, INC.,
UY KIAT CHUNG, CHING UY SENG, UY CHUNG GUAN SENG, and COURT OF
APPEALS, Respondents.

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

G.R. No. 141018 May 21, 2009

ASSOCIATED CITIZENS BANK (now UNITED OVERSEAS BANK PHILS.), Petitioner,

vs.
BA-FINANCE CORPORATION, MILLER OFFSET PRESS, INC., UY KIAT CHUNG, CHING UY
SENG, UY CHUNG GUAN SENG, and BANK OF AMERICA, NT & SA, Respondents.

DECISION
CARPIO, J.:

The Case

Before the Court are consolidated cases docketed as G.R. No. 141001 and G.R. No. 141018. These
two cases are petitions for review on certiorari1 of the Decision2 dated 26 February 1999 and the
Resolution dated 6 December 1999 of the Court of Appeals in CA-G.R. CV No. 48821. The Court of
Appeals affirmed with modifications the Decision of the Regional Trial Court of Makati, Branch 64
(RTC).

The Antecedent Facts

On 6 October 1978, BA-Finance Corporation (BA-Finance) entered into a transaction with Miller
Offset Press, Inc. (Miller), through the latter’s authorized representatives, i.e., Uy Kiat Chung, Ching
Uy Seng, and Uy Chung Guan Seng. BA-Finance granted Miller a credit line facility through which
the latter could assign or discount its trade receivables with the former. On 20 October 1978, Uy Kiat
Chung, Ching Uy Seng, and Uy Chung Guan Seng executed a Continuing Suretyship Agreement
with BA-Finance whereby they jointly and severally guaranteed the full and prompt payment of any
and all indebtedness which Miller may incur with BA-Finance.

Miller discounted and assigned several trade receivables to BA-Finance by executing Deeds of
Assignment in favor of the latter. In consideration of the assignment, BA-Finance issued four checks
payable to the "Order of Miller Offset Press, Inc." with the notation "For Payee’s Account Only."
These checks were drawn against Bank of America and had the following details: 3

Check
Date Amount
No.

13 February
128274 ₱222,363.33
1981

26 February
129067 252,551.16
1981

132133 20 April 1981 206,450.57

133057 7 May 1981 59,862.72

Total ₱741,227.78

The four checks were deposited by Ching Uy Seng (a.k.a. Robert Ching), then the corporate
secretary of Miller, in Account No. 989 in Associated Citizens Bank (Associated Bank). Account No.
989 is a joint bank account under the names of Ching Uy Seng and Uy Chung Guan Seng.
Associated Bank stamped the checks with the notation "all prior endorsements and/or lack of
endorsements guaranteed," and sent them through clearing. Later, the drawee bank, Bank of
America, honored the checks and paid the proceeds to Associated Bank as the collecting bank.

Miller failed to deliver to BA-Finance the proceeds of the assigned trade receivables. Consequently,
BA-Finance filed a Complaint against Miller for collection of the amount of ₱731,329.63 which BA-
Finance allegedly paid in consideration of the assignment, plus interest at the rate of 16% per
annum and penalty charges.4 Likewise impleaded as party defendants in the collection case were Uy
Kiat Chung, Ching Uy Seng, and Uy Chung Guan Seng.

Miller, Uy Kiat Chung, and Uy Chung Guan Seng filed a Joint Answer (to the BA-Finance’s
Complaint) with Cross-Claim against Ching Uy Seng, wherein they denied that (1) they received the
amount covered by the four Bank of America checks, and (2) they authorized their co-defendant
Ching Uy Seng to transact business with BA-Finance on behalf of Miller. Uy Kiat Chung and Uy
Chung Guan Seng also denied having signed the Continuing Suretyship Agreement with BA-
Finance. In view thereof, BA-Finance filed an Amended Complaint impleading Bank of America as
additional defendant for allegedly allowing encashment and collection of the checks by person or
persons other than the payee named thereon. Ching Uy Seng, on the other hand, did not file his
Answer to the complaint.

Bank of America filed a Third Party Complaint against Associated Bank. In its Answer to the Third
Party Complaint, Associated Bank admitted having received the four checks for deposit in the joint
account of Ching Uy Seng (a.k.a. Robert Ching) and Uy Chung Guan Seng, but alleged that Robert
Ching, being one of the corporate officers of Miller, was duly authorized to act for and on behalf of
Miller.

On 28 September 1994, the RTC rendered a Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered against defendant Bank of
America to pay plaintiff BA Finance Corporation the sum of ₱741,277.78, the value of the four (4)
checks subject matter of this case, with legal interest thereon from the time of the filing of this
complaint until payment is made and attorney’s fees corresponding to 15% of the amount due and to
pay the costs of the suit.

Judgment is likewise rendered ordering the third-party defendant Associated Citizens Bank to
reimburse Bank of America, the defendant third-party plaintiff, of the aforestated amount.

SO ORDERED.5

The Court of Appeals’ Ruling

On appeal, the Court of Appeals rendered judgment,6 affirming with modifications the decision of the
RTC, thus:

WHEREFORE, judgment is hereby rendered, as follows:

(1) Defendant and third-party plaintiff-appellant, Bank of America, NT & SA, is ordered to pay
plaintiff-appellee BA-Finance Corporation the sum of ₱741,277.78, with legal interest
thereon from the time of the filing of the complaint until the whole amount is fully paid;

(2) Third-party defendant-appellant Associated Citizens Bank is likewise ordered to

reimburse Bank of America the aforestated amount;

(3) Defendants Ching Uy Seng and/or Uy Chung Guan Seng are also ordered to pay
Associated Citizens Bank the aforestated amount; and

(4) The award of attorney’s fees is ordered deleted.

SO ORDERED.7

Associated Bank and Bank of America filed their respective Motions for Reconsideration, but these
were denied by the Court of Appeals in its Resolution of 6 December 1999. 8

Hence, these petitions.

The Issue

The issues raised in these consolidated cases may be summarized as follows:

Whether the Court of Appeals erred in rendering judgment finding (1) Bank of America liable to pay
BA-Finance the amount of the four checks; (2) Associated Bank liable to reimburse Bank of America
the amount of the four checks; and (3) Ching Uy Seng and/or Uy Chung Guan Seng liable to pay
Associated Bank the amount of the four checks.

The Court’s Ruling

We find the petitions unmeritorious.

The Court of Appeals did not err in finding Bank of America

liable to pay BA-Finance the amount of the four checks.

Bank of America denies liability for paying the amount of the four checks issued by BA-Finance to
Miller, alleging that it (Bank of America) relied on the stamps made by Associated Bank stating that
"all prior endorsement and/or lack of endorsement guaranteed," through which Associated Bank
assumed the liability of a general endorser under Section 66 of the Negotiable Instruments Law.
Moreover, Bank of America contends that the proximate cause of BA-Finance’s injury, if any, is the
gross negligence of Associated Bank which allowed Ching Uy Seng (Robert Ching) to deposit the
four checks issued to Miller in the personal joint bank account of Ching Uy Seng and Uy Chung
Guan Seng.

We are not convinced.

The bank on which a check is drawn, known as the drawee bank, is under strict liability, based on
the contract between the bank and its customer (drawer), to pay the check only to the payee or the
payee’s order. The drawer’s instructions are reflected on the face and by the terms of the check.
When the drawee bank pays a person other than the payee named on the check, it does not comply
with the terms of the check and violates its duty to charge the drawer’s account only for properly
payable items.9 Thus, we ruled in Philippine National Bank v. Rodriguez10 that a drawee should
charge to the drawer’s accounts only the payables authorized by the latter; otherwise, the drawee
will be violating the instructions of the drawer and shall be liable for the amount charged to the
drawer’s account.

Among the different types of checks issued by a drawer is the crossed check. The Negotiable
Instruments Law is silent with respect to crossed checks, although the Code of Commerce 11 makes
reference to such instruments.12 This Court has taken judicial cognizance of the practice that a check
with two parallel lines in the upper left hand corner means that it could only be deposited and could
not be converted into cash.13 Thus, the effect of crossing a check relates to the mode of payment,
meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the
payee named therein.14 The crossing may be "special" wherein between the two parallel lines is
written the name of a bank or a business institution, in which case the drawee should pay only with
the intervention of that bank or company, or "general" wherein between two parallel diagonal lines
are written the words "and Co." or none at all, in which case the drawee should not encash the same
but merely accept the same for deposit.15 In Bataan Cigar v. Court of Appeals,16 we enumerated the
effects of crossing a check as follows: (a) the check may not be encashed but only deposited in the
bank; (b) the check may be negotiated only once – to one who has an account with a bank; and (c)
the act of crossing the check serves as a warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the check pursuant to that purpose;
otherwise, he is not a holder in due course.17

In this case, the four checks were drawn by BA-Finance and made payable to the "Order of Miller
Offset Press, Inc." The checks were also crossed and issued "For Payee’s Account Only." Clearly,
the drawer intended the check for deposit only by Miller Offset Press, Inc. in the latter’s bank
account. Thus, when a person other than Miller, i.e., Ching Uy Seng, a.k.a. Robert Ching, presented
and deposited the checks in his own personal account (Ching Uy Seng’s joint account with Uy
Chung Guan Seng), and the drawee bank, Bank of America, paid the value of the checks and
charged BA-Finance’s account therefor, the drawee Bank of America is deemed to have violated the
instructions of the drawer, and therefore, is liable for the amount charged to the drawer’s account.

The Court of Appeals did not err in finding Associated

Bank liable to reimburse Bank of America the
amount of the four checks.

A collecting bank where a check is deposited, and which endorses the check upon presentment with
the drawee bank, is an endorser.18 Under Section 66 of the Negotiable Instruments Law, an endorser
warrants "that the instrument is genuine and in all respects what it purports to be; that he has good
title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his
endorsement valid and subsisting." This Court has repeatedly held that in check transactions, the
collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting the check for payment
to the drawee is an assertion that the party making the presentment has done its duty to ascertain
the genuineness of the endorsements.19

When Associated Bank stamped the back of the four checks with the phrase "all prior endorsements
and/or lack of endorsement guaranteed," that bank had for all intents and purposes treated the
checks as negotiable instruments and, accordingly, assumed the warranty of an endorser. Being so,
Associated Bank cannot deny liability on the checks. In Banco de Oro Savings and Mortgage Bank
v. Equitable Banking Corporation,20 we held that:

x x x the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it
for the purpose of determining their genuineness and regularity. The collecting bank being primarily
engaged in banking holds itself out to the public as the expert and the law holds it to a high standard
of conduct. x x x In presenting the checks for clearing and for payment, the defendant [collecting
bank] made an express guarantee on the validity of "all prior endorsements." Thus, stamped at the
back of the checks are the defendant’s clear warranty: ALL PRIOR ENDORSEMENTS AND/OR
LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff [drawee] would not
have paid on the checks. No amount of legal jargon can reverse the clear meaning of defendant’s
warranty. As the warranty has proven to be false and inaccurate, the defendant is liable for any
damage arising out of the falsity of its representation.

Associated Bank was also clearly negligent in disregarding established banking rules and
regulations by allowing the four checks to be presented by, and deposited in the personal bank
account of, a person who was not the payee named in the checks. The checks were issued to the
"Order of Miller Offset Press, Inc.," but were deposited, and paid by Associated Bank, to the
personal joint account of Ching Uy Seng (a.k.a. Robert Ching) and Uy Chung Guan Seng. It could
not have escaped Associated Bank’s attention that the payee of the checks is a corporation while
the person who deposited the checks in his own account is an individual. Verily, when the bank
allowed its client to collect on crossed checks issued in the name of another, the bank is guilty of
negligence.21 As ruled by this Court in Jai-Alai Corporation of the Philippines v. Bank of the Philippine
Islands,22 one who accepts and encashes a check from an individual knowing that the payee is a
corporation does so at his peril. Accordingly, we hold that Associated Bank is liable for the amount of
the four checks and should reimburse the amount of the checks to Bank of America.

The Court of Appeals did not err in finding Ching Uy Seng

and/or Uy Chung Guan Seng liable to pay Associated
Bank the amount of the four checks.

It is well-settled that a person who had not given value for the money paid to him has no right to
retain the money he received.23 This Court, therefore, quotes with approval the ruling of the Court of
Appeals in its decision:

It appearing, however, from the evidence on record that since Ching Uy Seng and/or Uy Chung
Guan Seng received the proceeds of the checks as they were deposited in their personal joint
account with Associated Bank, they should, therefore, be obliged to reimburse Associated Bank for
the amount it has to pay to Bank of America, in line with the rule that no person should be allowed to
unjustly enrich himself at the expense of another.24 1avvphi1

As regards the trial court’s grant of attorney’s fees to BA-Finance, the Court of Appeals found that
there was no sufficient justification therefor; hence, the deletion of the award is proper. An award of
attorney’s fees necessitates a factual, legal, or equitable justification. Without such justification, the
award is a conclusion without a premise, its basis being improperly left to speculation and
conjecture.25

We note that the Decision of the Court of Appeals provides for the amount of ₱741,277.78 as the
sum of the four checks subject of this case.26 This amount should be modified as records show that
the total value of the four checks is ₱741,227.78.27

WHEREFORE, we DENY the petitions. We AFFIRM the Court of Appeals’ Decision dated 26
February 1999 in CA-G.R. CV No. 48821 with the MODIFICATION that Bank of America, NT & SA is
ordered to pay BA-Finance Corporation the amount of ₱741,227.78, with legal interest from the time
of filing of the complaint until the amount is fully paid. Associated Citizens Bank is ordered to
reimburse Bank of America the abovementioned amount. Ching Uy Seng and/or Uy Chung Guan
Seng are also ordered to pay Associated Citizens Bank the abovementioned amount.

SO ORDERED.

G.R. No. 132560 January 30, 2002

WESTMONT BANK (formerly ASSOCIATED BANKING CORP.), petitioner,

vs.
EUGENE ONG, respondent.

DECISION
QUISUMBING, J.:

This is a petition for review of the decision dated January 13, 1998, of the Court of Appeals in CA-
1

G.R. CV No. 28304 ordering the petitioner to pay respondent ₱1,754,787.50 plus twelve percent
(12%) interest per annum computed from October 7, 1977, the date of the first extrajudicial demand,
plus damages.

The facts of this case are undisputed.

Respondent Eugene Ong maintained a current account with petitioner, formerly the Associated
Banking Corporation, but now known as Westmont Bank. Sometime in May 1976, he sold certain
shares of stocks through Island Securities Corporation. To pay Ong, Island Securities purchased two
(2) Pacific Banking Corporation manager’s checks, both dated May 4, 1976, issued in the name of
2

Eugene Ong as payee. Before Ong could get hold of the checks, his friend Paciano Tanlimco got
hold of them, forged Ong’s signature and deposited these with petitioner, where Tanlimco was also a
depositor. Even though Ong’s specimen signature was on file, petitioner accepted and credited both
checks to the account of Tanlimco, without verifying the ‘signature indorsements’ appearing at the
back thereof. Tanlimco then immediately withdrew the money and absconded.

Instead of going straight to the bank to stop or question the payment, Ong first sought the help of
Tanlimco’s family to recover the amount. Later, he reported the incident to the Central Bank, which
like the first effort, unfortunately proved futile.

It was only on October 7, 1977, about five (5) months from discovery of the fraud, did Ong cry foul
and demanded in his complaint that petitioner pay the value of the two checks from the bank on
whose gross negligence he imputed his loss. In his suit, he insisted that he did not "deliver,
negotiate, endorse or transfer to any person or entity" the subject checks issued to him and asserted
that the signatures on the back were spurious. 3

The bank did not present evidence to the contrary, but simply contended that since plaintiff Ong
claimed to have never received the originals of the two (2) checks in question from Island Securities,
much less to have authorized Tanlimco to receive the same, he never acquired ownership of these
checks. Thus, he had no legal personality to sue as he is not a real party in interest. The bank then
filed a demurrer to evidence which was denied.

On February 8, 1989, after trial on the merits, the Regional Trial Court of Manila, Branch 38,
rendered a decision, thus:

IN VIEW OF THE FOREGOING, the court hereby renders judgment for the plaintiff and against the
defendant, and orders the defendant to pay the plaintiff:

1. The sum of P1,754,787.50 representing the total face value of the two checks in question,
exhibits "A" and "B", respectively, with interest thereon at the legal rate of twelve percent
(12%) per annum computed from October 7, 1977 (the date of the first extrajudicial demand)
up to and until the same shall have been paid in full;

2. Moral damages in the amount of P250,000.00;

3. Exemplary or corrective damages in the sum of P100,000.00 by way of example or

correction for the public good;
 4. Attorney’s fees of P50,000.00 and costs of suit.

Defendant’s counterclaims are dismissed for lack of merit.

SO ORDERED. 4

Petitioner elevated the case to the Court of Appeals without success. In its decision, the appellate
court held:

WHEREFORE, in view of the foregoing, the appealed decision is AFFIRMED in toto. 5

Petitioner now comes before this Court on a petition for review, alleging that the Court of Appeals
erred:

... IN AFFIRMING THE TRIAL COURT’S CONCLUSION THAT RESPONDENT HAS A

CAUSE OF ACTION AGAINST THE PETITIONER.

II

... IN AFFIRMING THE TRIAL COURT’S DECISION FINDING PETITIONER LIABLE TO

RESPONDENT AND DECLARING THAT THE LATTER MAY RECOVER DIRECTLY FROM
THE FORMER; AND

III

... IN NOT ADJUDGING RESPONDENT GUILTY OF LACHES AND IN NOT ABSOLVING

PETITIONER FROM LIABILITY.

Essentially the issues in this case are: (1) whether or not respondent Ong has a cause of action
against petitioner Westmont Bank; and (2) whether or not Ong is barred to recover the money from
Westmont Bank due to laches.

Respondent admitted that he was never in actual or physical possession of the two (2) checks of the
Island Securities nor did he authorize Tanlimco or any of the latter’s representative to demand,
accept and receive the same. For this reason, petitioner argues, respondent cannot sue petitioner
because under Section 51 of the Negotiable Instruments Law it is only when a person becomes a
6

holder of a negotiable instrument can he sue in his own name. Conversely, prior to his becoming a
holder, he had no right or cause of action under such negotiable instrument. Petitioner further argues
that since Section 191 of the Negotiable Instruments Law defines a "holder" as the ‘payee or
7

indorsee of a bill or note, who is in possession of it, or the bearer thereof,’ in order to be a holder, it
is a requirement that he be in possession of the instrument or the bearer thereof. Simply stated,
since Ong never had possession of the checks nor did he authorize anybody, he did not become a
holder thereof hence he cannot sue in his own name. 8

Petitioner also cites Article 1249 of the Civil Code explaining that a check, even if it is a manager’s
9

check, is not legal tender. Hence, the creditor cannot be compelled to accept payment thru this
means. It is petitioner’s position that for all intents and purposes, Island Securities has not yet
10

tendered payment to respondent Ong, thus, any action by Ong should be directed towards collecting
the amount from Island Securities. Petitioner claims that Ong’s cause of action against it has not
ripened as of yet. It may be that petitioner would be liable to the drawee bank - - but that is a matter
between petitioner and drawee-bank, Pacific Banking Corporation. 11

For its part, respondent Ong leans on the ruling of the trial court and the Court of Appeals which held
that the suit of Ong against the petitioner bank is a desirable shortcut to reach the party who ought in
any event to be ultimately liable. It likewise cites the ruling of the courts a quo which held that
12

according to the general rule, a bank who has obtained possession of a check upon an unauthorized
or forged indorsement of the payee’s signature and who collects the amount of the check from the
drawee is liable for the proceeds thereof to the payee. The theory of said rule is that the collecting
bank’s possession of such check is wrongful. 13

Respondent also cites Associated Bank vs. Court of Appeals which held that the collecting bank or
14

last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all
prior endorsements. The collecting bank is also made liable because it is privy to the depositor who
negotiated the check. The bank knows him, his address and history because he is a client. Hence, it
is in a better position to detect forgery, fraud or irregularity in the indorsement.15

Anent Article 1249 of the Civil Code, Ong points out that bank checks are specifically governed by
the Negotiable Instruments Law which is a special law and only in the absence of specific provisions
or deficiency in the special law may the Civil Code be invoked. 16

Considering the contentions of the parties and the evidence on record, we find no reversible error in
the assailed decisions of the appellate and trial courts, hence there is no justifiable reason to grant
the petition.

Petitioner’s claim that respondent has no cause of action against the bank is clearly misplaced. As
defined, a cause of action is the act or omission by which a party violates a right of another. The17

essential elements of a cause of action are: (a) a legal right or rights of the plaintiff, (b) a correlative
obligation of the defendant, and (c) an act or omission of the defendant in violation of said legal
right.
18

The complaint filed before the trial court expressly alleged respondent’s right as payee of the
manager’s checks to receive the amount involved, petitioner’s correlative duty as collecting bank to
ensure that the amount gets to the rightful payee or his order, and a breach of that duty because of
a blatant act of negligence on the part of petitioner which violated respondent’s rights. 19

Under Section 23 of the Negotiable Instruments Law:

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

Since the signature of the payee, in the case at bar, was forged to make it appear that he had made
an indorsement in favor of the forger, such signature should be deemed as inoperative and
ineffectual. Petitioner, as the collecting bank, grossly erred in making payment by virtue of said
forged signature. The payee, herein respondent, should therefore be allowed to recover from the
collecting bank.
The collecting bank is liable to the payee and must bear the loss because it is its legal duty to
ascertain that the payee’s endorsement was genuine before cashing the check. As a general rule, a
20

bank or corporation who has obtained possession of a check upon an unauthorized or forged
indorsement of the payee’s signature and who collects the amount of the check from the drawee, is
liable for the proceeds thereof to the payee or other owner, notwithstanding that the amount has
been paid to the person from whom the check was obtained. 21

The theory of the rule is that the possession of the check on the forged or unauthorized indorsement
is wrongful, and when the money had been collected on the check, the bank or other person or
corporation can be held as for moneys had and received, and the proceeds are held for the rightful
owners who may recover them. The position of the bank taking the check on the forged or
unauthorized indorsement is the same as if it had taken the check and collected the money without
indorsement at all and the act of the bank amounts to conversion of the check. 22

Petitioner’s claim that since there was no delivery yet and respondent has never acquired
possession of the checks, respondent’s remedy is with the drawer and not with petitioner bank.
Petitioner relies on the view to the effect that where there is no delivery to the payee and no title
vests in him, he ought not to be allowed to recover on the ground that he lost nothing because he
never became the owner of the check and still retained his claim of debt against the
drawer. However, another view in certain cases holds that even if the absence of delivery is
23

considered, such consideration is not material. The rationale for this view is that in said cases the
plaintiff uses one action to reach, by a desirable short cut, the person who ought in any event to be
ultimately liable as among the innocent persons involved in the transaction. In other words, the
payee ought to be allowed to recover directly from the collecting bank, regardless of whether the
check was delivered to the payee or not. 24

Considering the circumstances in this case, in our view, petitioner could not escape liability for its
negligent acts. Admittedly, respondent Eugene Ong at the time the fraudulent transaction took place
was a depositor of petitioner bank. Banks are engaged in a business impressed with public interest,
and it is their duty to protect in return their many clients and depositors who transact business with
them. They have the obligation to treat their client’s account meticulously and with the highest
25

degree of care, considering the fiduciary nature of their relationship. The diligence required of banks,
therefore, is more than that of a good father of a family. In the present case, petitioner was held to
26

be grossly negligent in performing its duties. As found by the trial court:

xxx (A)t the time the questioned checks were accepted for deposit to Paciano Tanlimco’s account by
defendant bank, defendant bank, admittedly had in its files specimen signatures of plaintiff who
maintained a current account with them (Exhibits "L-1" and "M-1"; testimony of Emmanuel Torio).
Given the substantial face value of the two checks, totalling P1,754,787.50, and the fact that they
were being deposited by a person not the payee, the very least defendant bank should have done,
as any reasonable prudent man would have done, was to verify the genuineness of the
indorsements thereon. The Court cannot help but note that had defendant conducted even the most
cursory comparison with plaintiff’s specimen signatures in its files (Exhibit "L-1" and "M-1") it would
have at once seen that the alleged indorsements were falsified and were not those of the plaintiff-
payee. However, defendant apparently failed to make such a verification or, what is worse did so
but, chose to disregard the obvious dissimilarity of the signatures. The first omission makes it guilty
of gross negligence; the second of bad faith. In either case, defendant is liable to plaintiff for the
proceeds of the checks in question. 27

These findings are binding and conclusive on the appellate and the reviewing courts.
On the second issue, petitioner avers that respondent Ong is barred by laches for failing to assert
his right for recovery from the bank as soon as he discovered the scam. The lapse of five months
before he went to seek relief from the bank, according to petitioner, constitutes laches.

In turn, respondent contends that petitioner presented no evidence to support its claim of laches. On
the contrary, the established facts of the case as found by the trial court and affirmed by the Court of
Appeals are that respondent left no stone unturned to obtain relief from his predicament.

On the matter of delay in reporting the loss, respondent calls attention to the fact that the checks
were issued on May 4, 1976, and on the very next day, May 5, 1976, these were already credited to
the account of Paciano Tanlimco and presented for payment to Pacific Banking Corporation. So
even if the theft of the checks were discovered and reported earlier, respondent argues, it would not
have altered the situation as the encashment of the checks was consummated within twenty four
hours and facilitated by the gross negligence of the petitioner bank. 28

Laches may be defined as the failure or neglect for an unreasonable and unexplained length of time,
to do that which, by exercising due diligence, could or should have been done earlier. It is
negligence or omission to assert a right within a reasonable time, warranting a presumption that the
party entitled thereto has either abandoned or declined to assert it. It concerns itself with whether or
29

not by reason of long inaction or inexcusable neglect, a person claiming a right should be barred
from asserting the same, because to allow him to do so would be unjust to the person against whom
such right is sought to be enforced. 30

In the case at bar, it cannot be said that respondent sat on his rights. He immediately acted after
knowing of the forgery by proceeding to seek help from the Tanlimco family and later the Central
Bank, to remedy the situation and recover his money from the forger, Paciano Tanlimco. Only after
he had exhausted possibilities of settling the matter amicably with the family of Tanlimco and
through the CB, about five months after the unlawful transaction took place, did he resort to making
the demand upon the petitioner and eventually before the court for recovery of the money value of
the two checks. These acts cannot be construed as undue delay in or abandonment of the assertion
of his rights.

Moreover, the claim of petitioner that respondent should be barred by laches is clearly a vain attempt
to deflect responsibility for its negligent act. As explained by the appellate court, it is petitioner which
1âwphi1

had the last clear chance to stop the fraudulent encashment of the subject checks had it exercised
due diligence and followed the proper and regular banking procedures in clearing checks. As we 31

had earlier ruled, the one who had the last clear opportunity to avoid the impending harm but failed
to do so is chargeable with the consequences thereof. 32

WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the Court of
Appeals, sustaining the judgment of the Regional Trial Court of Manila, is AFFIRMED.

Costs against petitioner.

SO ORDERED.

G.R. No. 168274 August 20, 2008

FAR EAST BANK & TRUST COMPANY, petitioner,

vs.
GOLD PALACE JEWELLERY CO., as represented by Judy L. Yang, Julie Yang-Go and Kho Soon
Huat, respondent.
 DECISION

NACHURA, J.:

For the review of the Court through a Rule 45 petition are the following issuances of the Court of Appeals
(CA) in CA-G.R. CV No. 71858: (1) the March 15, 2005 Decision1 which reversed the trial court's ruling,
and (2) the May 26, 2005 Resolution2 which denied the motion for reconsideration of the said CA
decision.

The instant controversy traces its roots to a transaction consummated sometime in June 1998, when a
foreigner, identified as Samuel Tagoe, purchased from the respondent Gold Palace Jewellery Co.'s (Gold
Palace's) store at SM-North EDSA several pieces of jewelry valued at P258,000.00.3 In payment of the
same, he offered Foreign Draft No. M-069670 issued by the United Overseas Bank (Malaysia) BHD
Medan Pasar, Kuala Lumpur Branch (UOB), addressed to the Land Bank of the Philippines, Manila
(LBP), and payable to the respondent company for P380,000.00.4

Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold Palace, inquired
from petitioner Far East Bank & Trust Company's (Far East's) SM North EDSA Branch, its neighbor mall
tenant, the nature of the draft. The teller informed her that the same was similar to a manager's check, but
advised her not to release the pieces of jewelry until the draft had been cleared.5 Following the bank's
advice, Yang issued Cash Invoice No. 16096 to the foreigner, asked him to come back, and informed him
that the pieces of jewelry would be released when the draft had already been cleared.7 Respondent Julie
Yang-Go, the manager of Gold Palace, consequently deposited the draft in the company's account with
the aforementioned Far East branch on June 2, 1998.8

When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, the latter
cleared the same9-UOB's account with LBP was debited,10 and Gold Palace's account with Far East was
credited with the amount stated in the draft.11

The foreigner eventually returned to respondent's store on June 6, 1998 to claim the purchased goods.
After ascertaining that the draft had been cleared, respondent Yang released the pieces of jewelry to
Samuel Tagoe; and because the amount in the draft was more than the value of the goods purchased,
she issued, as his change, Far East Check No. 173088112 for P122,000.00.13 This check was later
presented for encashment and was, in fact, paid by the said bank.14

On June 26, 1998, or after around three weeks, LBP informed Far East that the amount in Foreign Draft
No. M-069670 had been materially altered from P300.00 to P380,000.00 and that it was returning the
same. Attached to its official correspondence were Special Clearing Receipt No. 002593 and the duly
notarized and consul-authenticated affidavit of a corporate officer of the drawer, UOB.15 It is noted at this
point that the material alteration was discovered by UOB after LBP had informed it that its funds were
being depleted following the encashment of the subject draft.16 Intending to debit the amount from
respondent's account, Far East subsequently refunded the P380,000.00 earlier paid by LBP.

Gold Palace, in the meantime, had already utilized portions of the amount. Thus, on July 20, 1998, as the
outstanding balance of its account was already inadequate, Far East was able to debit
only P168,053.36,17 but this was done without a prior written notice to the account holder.18 Far East only
notified by phone the representatives of the respondent company.19

On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or the
difference between the amount in the materially altered draft and the amount debited from the respondent
company's account.20 Because Gold Palace did not heed the demand, Far East consequently instituted
Civil Case No. 99-296 for sum of money and damages before the Regional Trial Court (RTC), Branch 64
of Makati City.21
In their Answer, respondents specifically denied the material allegations in the complaint and interposed
as a defense that the complaint states no cause of action-the subject foreign draft having been cleared
and the respondent not being the party who made the material alteration. Respondents further
counterclaimed for actual damages, moral and exemplary damages, and attorney's fees considering,
among others, that the petitioner had confiscated without basis Gold Palace's balance in its account
resulting in operational loss, and had maliciously imputed to the latter the act of alteration.22

After trial on the merits, the RTC rendered its July 30, 2001 Decision23 in favor of Far East, ordering Gold
Palace to pay the former P211,946.64 as actual damages and P50,000.00 as attorney's fees.24 The trial
court ruled that, on the basis of its warranties as a general indorser, Gold Palace was liable to Far East.25

On appeal, the CA, in the assailed March 15, 2005 Decision,26 reversed the ruling of the trial court and
awarded respondents' counterclaim. It ruled in the main that Far East failed to undergo the proceedings
on the protest of the foreign draft or to notify Gold Palace of the draft's dishonor; thus, Far East could not
charge Gold Palace on its secondary liability as an indorser.27 The appellate court further ruled that the
drawee bank had cleared the check, and its remedy should be against the party responsible for the
alteration. Considering that, in this case, Gold Palace neither altered the draft nor knew of the alteration, it
could not be held liable.28 The dispositive portion of the CA decision reads:

WHEREFORE, premises considered, the appeal is GRANTED; the assailed Decision dated 30
July 2001 of the Regional Trial Court of Makati City, Branch 64 is hereby REVERSED and SET
ASIDE; the Complaint dated January 1999 is DISMISSED; and appellee Far East Bank and Trust
Company is hereby ordered to pay appellant Gold Palace Jewellery Company the amount of
Php168,053.36 for actual damages plus legal interest of 12% per annum from 20 July 1998,
Php50,000.00 for exemplary damages, and Php50,000.00 for attorney's fees. Costs against
appellee Far East Bank and Trust Company.29

The appellate court, in the further challenged May 26, 2005 Resolution,30 denied petitioner's Motion for
Reconsideration,31 which prompted the petitioner to institute before the Court the instant Petition for
Review on Certiorari.32

We deny the petition.

Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting
the instrument, engages that he will pay it according to the tenor of his acceptance.33 This provision
applies with equal force in case the drawee pays a bill without having previously accepted it. His actual
payment of the amount in the check implies not only his assent to the order of the drawer and a
recognition of his corresponding obligation to pay the aforementioned sum, but also, his clear compliance
with that obligation.34 Actual payment by the drawee is greater than his acceptance, which is merely a
promise in writing to pay. The payment of a check includes its acceptance.35

Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft and
forwarded the amount thereof to the collecting bank. The latter then credited to Gold Palace's account the
payment it received. Following the plain language of the law, the drawee, by the said payment,
recognized and complied with its obligation to pay in accordance with the tenor of his acceptance.
The tenor of the acceptance is determined by the terms of the bill as it is when the drawee
accepts.36 Stated simply, LBP was liable on its payment of the check according to the tenor of the check
at the time of payment, which was the raised amount.

Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a due
course holder. We note at this point that Gold Palace was not a participant in the alteration of the draft,
was not negligent, and was a holder in due course-it received the draft complete and regular on its face,
before it became overdue and without notice of any dishonor, in good faith and for value, and absent any
knowledge of any infirmity in the instrument or defect in the title of the person negotiating it.37 Having
relied on the drawee bank's clearance and payment of the draft and not being negligent (it delivered the
purchased jewelry only when the draft was cleared and paid), respondent is amply protected by the said
Section 62. Commercial policy favors the protection of any one who, in due course, changes his position
on the faith of the drawee bank's clearance and payment of a check or draft.38

This construction and application of the law gives effect to the plain language of the NIL39 and is in line
with the sound principle that where one of two innocent parties must suffer a loss, the law will leave the
loss where it finds it.40 It further reasserts the usefulness, stability and currency of negotiable paper
without seriously endangering accepted banking practices. Indeed, banking institutions can readily protect
themselves against liability on altered instruments either by qualifying their acceptance or certification, or
by relying on forgery insurance and special paper which will make alterations obvious.41 This is not to
mention, but we state nevertheless for emphasis, that the drawee bank, in most cases, is in a better
position, compared to the holder, to verify with the drawer the matters stated in the instrument. As we
have observed in this case, were it not for LBP's communication with the drawer that its account in the
Philippines was being depleted after the subject foreign draft had been encashed, then, the alteration
would not have been discovered. What we cannot understand is why LBP, having the most convenient
means to correspond with UOB, did not first verify the amount of the draft before it cleared and paid the
same. Gold Palace, on the other hand, had no facility to ascertain with the drawer, UOB Malaysia, the
true amount in the draft. It was left with no option but to rely on the representations of LBP that the draft
was good.

In arriving at this conclusion, the Court is not closing its eyes to the other view espoused in common law
jurisdictions that a drawee bank, having paid to an innocent holder the amount of an uncertified, altered
check in good faith and without negligence which contributed to the loss, could recover from the person to
whom payment was made as for money paid by mistake.42 However, given the foregoing discussion, we
find no compelling reason to apply the principle to the instant case.

The Court is also aware that under the Uniform Commercial Code in the United States of America, if an
unaccepted draft is presented to a drawee for payment or acceptance and the drawee pays or accepts
the draft, the person obtaining payment or acceptance, at the time of presentment, and a previous
transferor of the draft, at the time of transfer, warrant to the drawee making payment or accepting the
draft in good faith that the draft has not been altered.43 Nonetheless, absent any similar provision in our
law, we cannot extend the same preferential treatment to the paying bank.

Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting
agent, Far East, should not have debited the money paid by the drawee bank from respondent company's
account. When Gold Palace deposited the check with Far East, the latter, under the terms of the deposit
and the provisions of the NIL, became an agent of the former for the collection of the amount in the
draft.44 The subsequent payment by the drawee bank and the collection of the amount by the collecting
bank closed the transaction insofar as the drawee and the holder of the check or his agent are concerned,
converted the check into a mere voucher,45 and, as already discussed, foreclosed the recovery by the
drawee of the amount paid. This closure of the transaction is a matter of course; otherwise, uncertainty in
commercial transactions, delay and annoyance will arise if a bank at some future time will call on the
payee for the return of the money paid to him on the check.46

As the transaction in this case had been closed and the principal-agent relationship between the payee
and the collecting bank had already ceased, the latter in returning the amount to the drawee bank was
already acting on its own and should now be responsible for its own actions. Neither can petitioner be
considered to have acted as the representative of the drawee bank when it debited respondent's account,
because, as already explained, the drawee bank had no right to recover what it paid. Likewise, Far East
cannot invoke the warranty of the payee/depositor who indorsed the instrument for collection to shift the
burden it brought upon itself. This is precisely because the said indorsement is only for purposes of
collection which, under Section 36 of the NIL, is a restrictive indorsement.47 It did not in any way transfer
the title of the instrument to the collecting bank. Far East did not own the draft, it merely presented it for
payment. Considering that the warranties of a general indorser as provided in Section 66 of the NIL are
based upon a transfer of title and are available only to holders in due course,48 these warranties did not
attach to the indorsement for deposit and collection made by Gold Palace to Far East. Without any legal
right to do so, the collecting bank, therefore, could not debit respondent's account for the amount it
refunded to the drawee bank.

The foregoing considered, we affirm the ruling of the appellate court to the extent that Far East could not
debit the account of Gold Palace, and for doing so, it must return what it had erroneously taken. Far
East's remedy under the law is not against Gold Palace but against the drawee-bank or the person
responsible for the alteration. That, however, is another issue which we do not find necessary to discuss
in this case.

However, we delete the exemplary damages awarded by the appellate court. Respondents have not
shown that they are entitled to moral, temperate or compensatory damages.49 Neither was petitioner
impelled by malice or bad faith in debiting the account of the respondent company and in pursuing its
cause.50 On the contrary, petitioner was honestly convinced of the propriety of the debit. We also delete
the award of attorney's fees for, in a plethora of cases, we have ruled that it is not a sound public policy to
place a premium on the right to litigate. No damages can be charged to those who exercise such precious
right in good faith, even if done erroneously.51

WHEREFORE, premises considered, the March 15, 2005 Decision and the May 26, 2005 Resolution of
the Court of Appeals in CA-G.R. CV No. 71858 are AFFIRMED WITH THE MODIFICATION that the
award of exemplary damages and attorney's fees is DELETED.

SO ORDERED.

G.R. No. 133179 March 27, 2008

ALLIED BANKING CORPORATION, Petitioner,

vs.
LIM SIO WAN, METROPOLITAN BANK AND TRUST CO., and PRODUCERS
BANK, Respondents.

DECISION

VELASCO, JR., J.:

To ingratiate themselves to their valued depositors, some banks at times bend over backwards that
they unwittingly expose themselves to great risks.

The Case

This Petition for Review on Certiorari under Rule 45 seeks to reverse the Court of Appeals’ (CA’s)
Decision promulgated on March 18, 19981 in CA-G.R. CV No. 46290 entitled Lim Sio Wan v. Allied
Banking Corporation, et al. The CA Decision modified the Decision dated November 15, 1993 2 of the
Regional Trial Court (RTC), Branch 63 in Makati City rendered in Civil Case No. 6757.

The Facts

The facts as found by the RTC and affirmed by the CA are as follows:

On November 14, 1983, respondent Lim Sio Wan deposited with petitioner Allied Banking
Corporation (Allied) at its Quintin Paredes Branch in Manila a money market placement of PhP
1,152,597.35 for a term of 31 days to mature on December 15, 1983, 3 as evidenced by Provisional
Receipt No. 1356 dated November 14, 1983.4

On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So, an officer of
Allied, and instructed the latter to pre-terminate Lim Sio Wan’s money market placement, to issue a
manager’s check representing the proceeds of the placement, and to give the check to one Deborah
Dee Santos who would pick up the check.5 Lim Sio Wan described the appearance of Santos so that
So could easily identify her.6

Later, Santos arrived at the bank and signed the application form for a manager’s check to be
issued.7 The bank issued Manager’s Check No. 035669 for PhP 1,158,648.49, representing the
proceeds of Lim Sio Wan’s money market placement in the name of Lim Sio Wan, as payee. 8 The
check was cross-checked "For Payee’s Account Only" and given to Santos.9

Thereafter, the manager’s check was deposited in the account of Filipinas Cement Corporation
(FCC) at respondent Metropolitan Bank and Trust Co. (Metrobank),10 with the forged signature of Lim
Sio Wan as indorser.11

Earlier, on September 21, 1983, FCC had deposited a money market placement for PhP 2 million
with respondent Producers Bank. Santos was the money market trader assigned to handle FCC’s
account.12 Such deposit is evidenced by Official Receipt No. 31756813 and a Letter dated September
21, 1983 of Santos addressed to Angie Lazo of FCC, acknowledging receipt of the placement. 14 The
placement matured on October 25, 1983 and was rolled-over until December 5, 1983 as evidenced
by a Letter dated October 25, 1983.15 When the placement matured, FCC demanded the payment of
the proceeds of the placement.16 On December 5, 1983, the same date that So received the phone
call instructing her to pre-terminate Lim Sio Wan’s placement, the manager’s check in the name of
Lim Sio Wan was deposited in the account of FCC, purportedly representing the proceeds of FCC’s
money market placement with Producers Bank.17 In other words, the Allied check was deposited with
Metrobank in the account of FCC as Producers Bank’s payment of its obligation to FCC.

To clear the check and in compliance with the requirements of the Philippine Clearing House
Corporation (PCHC) Rules and Regulations, Metrobank stamped a guaranty on the check, which
reads: "All prior endorsements and/or lack of endorsement guaranteed."18

The check was sent to Allied through the PCHC. Upon the presentment of the check, Allied funded
the check even without checking the authenticity of Lim Sio Wan’s purported indorsement. Thus, the
amount on the face of the check was credited to the account of FCC.19

On December 9, 1983, Lim Sio Wan deposited with Allied a second money market placement to
mature on January 9, 1984.20

On December 14, 1983, upon the maturity date of the first money market placement, Lim Sio Wan
went to Allied to withdraw it.21 She was then informed that the placement had been pre-terminated
upon her instructions. She denied giving any instructions and receiving the proceeds thereof. She
desisted from further complaints when she was assured by the bank’s manager that her money
would be recovered.22

When Lim Sio Wan’s second placement matured on January 9, 1984, So called Lim Sio Wan to ask
for the latter’s instructions on the second placement. Lim Sio Wan instructed So to roll-over the
placement for another 30 days.23 On January 24, 1984, Lim Sio Wan, realizing that the promise that
her money would be recovered would not materialize, sent a demand letter to Allied asking for the
payment of the first placement.24 Allied refused to pay Lim Sio Wan, claiming that the latter had
authorized the pre-termination of the placement and its subsequent release to Santos. 25

Consequently, Lim Sio Wan filed with the RTC a Complaint dated February 13, 1984 26 docketed as
Civil Case No. 6757 against Allied to recover the proceeds of her first money market placement.
Sometime in February 1984, she withdrew her second placement from Allied.

Allied filed a third party complaint27 against Metrobank and Santos. In turn, Metrobank filed a fourth
party complaint28 against FCC. FCC for its part filed a fifth party complaint29 against Producers Bank.
Summonses were duly served upon all the parties except for Santos, who was no longer connected
with Producers Bank.30

On May 15, 1984, or more than six (6) months after funding the check, Allied informed Metrobank
that the signature on the check was forged.31 Thus, Metrobank withheld the amount represented by
the check from FCC. Later on, Metrobank agreed to release the amount to FCC after the latter
executed an Undertaking, promising to indemnify Metrobank in case it was made to reimburse the
amount.32

Lim Sio Wan thereafter filed an amended complaint to include Metrobank as a party-defendant,
along with Allied.33 The RTC admitted the amended complaint despite the opposition of
Metrobank.34 Consequently, Allied’s third party complaint against Metrobank was converted into a
cross-claim and the latter’s fourth party complaint against FCC was converted into a third party
complaint.35

After trial, the RTC issued its Decision, holding as follows:

WHEREFORE, judgment is hereby rendered as follows:

1. Ordering defendant Allied Banking Corporation to pay plaintiff the amount of

P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid;

2. Ordering defendant Allied Bank to pay plaintiff the amount of P100,000.00 by way of moral
damages;

3. Ordering defendant Allied Bank to pay plaintiff the amount of P173,792.20 by way of
attorney’s fees; and,

4. Ordering defendant Allied Bank to pay the costs of suit.

Defendant Allied Bank’s cross-claim against defendant Metrobank is DISMISSED.

Likewise defendant Metrobank’s third-party complaint as against Filipinas Cement Corporation is

DISMISSED.

Filipinas Cement Corporation’s fourth-party complaint against Producer’s Bank is also DISMISSED.

SO ORDERED.36

The Decision of the Court of Appeals

Allied appealed to the CA, which in turn issued the assailed Decision on March 18, 1998, modifying
the RTC Decision, as follows:

WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is

rendered ordering and sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%)
percent and defendant-appellee Metropolitan Bank and Trust Company forty (40%) of the amount of
P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid. The moral
damages, attorney’s fees and costs of suit adjudged shall likewise be paid by defendant-appellant
Allied Banking Corporation and defendant-appellee Metropolitan Bank and Trust Company in the
same proportion of 60-40. Except as thus modified, the decision appealed from is AFFIRMED.

SO ORDERED.37

Hence, Allied filed the instant petition.

The Issues

Allied raises the following issues for our consideration:

The Honorable Court of Appeals erred in holding that Lim Sio Wan did not authorize [Allied] to pre-
terminate the initial placement and to deliver the check to Deborah Santos.

The Honorable Court of Appeals erred in absolving Producers Bank of any liability for the
reimbursement of amount adjudged demandable.

The Honorable Court of Appeals erred in holding [Allied] liable to the extent of 60% of amount
adjudged demandable in clear disregard to the ultimate liability of Metrobank as guarantor of all
endorsement on the check, it being the collecting bank.38

The petition is partly meritorious.

A Question of Fact

Allied questions the finding of both the trial and appellate courts that Allied was not authorized to
release the proceeds of Lim Sio Wan’s money market placement to Santos. Allied clearly raises a
question of fact. When the CA affirms the findings of fact of the RTC, the factual findings of both
courts are binding on this Court.39

We also agree with the CA when it said that it could not disturb the trial court’s findings on the
credibility of witness So inasmuch as it was the trial court that heard the witness and had the
opportunity to observe closely her deportment and manner of testifying. Unless the trial court had
plainly overlooked facts of substance or value, which, if considered, might affect the result of the
case,40 we find it best to defer to the trial court on matters pertaining to credibility of witnesses.

Additionally, this Court has held that the matter of negligence is also a factual question. 41 Thus, the
finding of the RTC, affirmed by the CA, that the respective parties were negligent in the exercise of
their obligations is also conclusive upon this Court.

The Liability of the Parties

As to the liability of the parties, we find that Allied is liable to Lim Sio Wan. Fundamental and familiar
is the doctrine that the relationship between a bank and a client is one of debtor-creditor.

Articles 1953 and 1980 of the Civil Code provide:

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.

Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan.

Thus, we have ruled in a line of cases that a bank deposit is in the nature of a simple loan or
mutuum.42 More succinctly, in Citibank, N.A. (Formerly First National City Bank) v. Sabeniano, this
Court ruled that a money market placement is a simple loan or mutuum.43 Further, we defined a
money market in Cebu International Finance Corporation v. Court of Appeals, as follows:

[A] money market is a market dealing in standardized short-term credit instruments (involving large
amounts) where lenders and borrowers do not deal directly with each other but through a middle
man or dealer in open market. In a money market transaction, the investor is a lender who loans his
money to a borrower through a middleman or dealer.

In the case at bar, the money market transaction between the petitioner and the private respondent
is in the nature of a loan.44

Lim Sio Wan, as creditor of the bank for her money market placement, is entitled to payment upon
her request, or upon maturity of the placement, or until the bank is released from its obligation as
debtor. Until any such event, the obligation of Allied to Lim Sio Wan remains unextinguished.

Art. 1231 of the Civil Code enumerates the instances when obligations are considered extinguished,
thus:

Art. 1231. Obligations are extinguished:

(1) By payment or performance;

(2) By the loss of the thing due;

(3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor;

(5) By compensation;

(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a

resolutory condition, and prescription, are governed elsewhere in this Code. (Emphasis supplied.)

From the factual findings of the trial and appellate courts that Lim Sio Wan did not authorize the
release of her money market placement to Santos and the bank had been negligent in so doing,
there is no question that the obligation of Allied to pay Lim Sio Wan had not been extinguished. Art.
1240 of the Code states that "payment shall be made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person authorized to receive it." As commented
by Arturo Tolentino:

Payment made by the debtor to a wrong party does not extinguish the obligation as to the creditor, if
there is no fault or negligence which can be imputed to the latter. Even when the debtor acted in
utmost good faith and by mistake as to the person of his creditor, or through error induced by the
fraud of a third person, the payment to one who is not in fact his creditor, or authorized to receive
such payment, is void, except as provided in Article 1241. Such payment does not prejudice the
creditor, and accrual of interest is not suspended by it.45 (Emphasis supplied.)

Since there was no effective payment of Lim Sio Wan’s money market placement, the bank still has
an obligation to pay her at six percent (6%) interest from March 16, 1984 until the payment thereof.

We cannot, however, say outright that Allied is solely liable to Lim Sio Wan.

Allied claims that Metrobank is the proximate cause of the loss of Lim Sio Wan’s money. It points out
that Metrobank guaranteed all prior indorsements inscribed on the manager’s check, and without
Metrobank’s guarantee, the present controversy would never have occurred. According to Allied:

Failure on the part of the collecting bank to ensure that the proceeds of the check is paid to the
proper party is, aside from being an efficient intervening cause, also the last negligent act, x x x
contributory to the injury caused in the present case, which thereby leads to the conclusion that it is
the collecting bank, Metrobank that is the proximate cause of the alleged loss of the plaintiff in the
instant case.46

We are not persuaded.

Proximate cause is "that cause, which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury and without which the result would not have
occurred."47 Thus, there is an efficient supervening event if the event breaks the sequence leading
from the cause to the ultimate result. To determine the proximate cause of a controversy, the
question that needs to be asked is: If the event did not happen, would the injury have resulted? If the
answer is NO, then the event is the proximate cause.

In the instant case, Allied avers that even if it had not issued the check payment, the money
represented by the check would still be lost because of Metrobank’s negligence in indorsing the
check without verifying the genuineness of the indorsement thereon.

Section 66 in relation to Sec. 65 of the Negotiable Instruments Law provides:

Section 66. Liability of general indorser.—Every indorser who indorses without qualification, warrants
to all subsequent holders in due course;

a) The matters and things mentioned in subdivisions (a), (b) and (c) of the next preceding
section; and

b) That the instrument is at the time of his indorsement valid and subsisting;
And in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the
case may be according to its tenor, and that if it be dishonored, and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser
who may be compelled to pay it.

Section 65. Warranty where negotiation by delivery, so forth.—Every person negotiating an

instrument by delivery or by a qualified indorsement, warrants:

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

b) That he has a good title of it;

c) That all prior parties had capacity to contract;

d) That he has no knowledge of any fact which would impair the validity of the instrument or
render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of no holder other than
the immediate transferee.

The provisions of subdivision (c) of this section do not apply to persons negotiating public or
corporation securities, other than bills and notes. (Emphasis supplied.)

The warranty "that the instrument is genuine and in all respects what it purports to be" covers all the
defects in the instrument affecting the validity thereof, including a forged indorsement. Thus, the last
indorser will be liable for the amount indicated in the negotiable instrument even if a previous
indorsement was forged. We held in a line of cases that "a collecting bank which indorses a check
bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements,
including the forged indorsement itself, and ultimately should be held liable therefor." 48

However, this general rule is subject to exceptions. One such exception is when the issuance of the
check itself was attended with negligence. Thus, in the cases cited above where the collecting bank
is generally held liable, in two of the cases where the checks were negligently issued, this Court held
the institution issuing the check just as liable as or more liable than the collecting bank.

In isolated cases where the checks were deposited in an account other than that of the payees on
the strength of forged indorsements, we held the collecting bank solely liable for the whole amount of
the checks involved for having indorsed the same. In Republic Bank v. Ebrada, 49 the check was
properly issued by the Bureau of Treasury. While in Banco de Oro Savings and Mortgage Bank
(Banco de Oro) v. Equitable Banking Corporation,50 Banco de Oro admittedly issued the checks in
the name of the correct payees. And in Traders Royal Bank v. Radio Philippines Network, Inc., 51 the
checks were issued at the request of Radio Philippines Network, Inc. from Traders Royal Bank. 1avvphi1

However, in Bank of the Philippine Islands v. Court of Appeals, we said that the drawee bank is
liable for 60% of the amount on the face of the negotiable instrument and the collecting bank is liable
for 40%. We also noted the relative negligence exhibited by two banks, to wit:

Both banks were negligent in the selection and supervision of their employees resulting in the
encashment of the forged checks by an impostor. Both banks were not able to overcome the
presumption of negligence in the selection and supervision of their employees. It was the gross
negligence of the employees of both banks which resulted in the fraud and the subsequent loss.
While it is true that petitioner BPI’s negligence may have been the proximate cause of the loss,
respondent CBC’s negligence contributed equally to the success of the impostor in encashing the
proceeds of the forged checks. Under these circumstances, we apply Article 2179 of the Civil Code
to the effect that while respondent CBC may recover its losses, such losses are subject to mitigation
by the courts. (See Phoenix Construction Inc. v. Intermediate Appellate Courts, 148 SCRA 353
[1987]).

Considering the comparative negligence of the two (2) banks, we rule that the demands of
substantial justice are satisfied by allocating the loss of P2,413,215.16 and the costs of the
arbitration proceeding in the amount of P7,250.00 and the cost of litigation on a 60-40 ratio. 52

Similarly, we ruled in Associated Bank v. Court of Appeals that the issuing institution and the
collecting bank should equally share the liability for the loss of amount represented by the checks
concerned due to the negligence of both parties:

The Court finds as reasonable, the proportionate sharing of fifty percent-fifty percent (50%-50%).
Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person
(Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee
hospital for a period close to three years and in not properly ascertaining why the retired hospital
cashier was collecting checks for the payee hospital in addition to the hospital’s real cashier,
respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the
PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent
(50%) of P203,300.00 from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00.
It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan,
having guaranteed the genuineness of all prior indorsements, including that of the chief of the payee
hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the
genuineness of the payee’s indorsement.53

A reading of the facts of the two immediately preceding cases would reveal that the reason why the
bank or institution which issued the check was held partially liable for the amount of the check was
because of the negligence of these parties which resulted in the issuance of the checks.

In the instant case, the trial court correctly found Allied negligent in issuing the manager’s check and
in transmitting it to Santos without even a written authorization. 54 In fact, Allied did not even ask for
the certificate evidencing the money market placement or call up Lim Sio Wan at her residence or
office to confirm her instructions. Both actions could have prevented the whole fraudulent transaction
from unfolding. Allied’s negligence must be considered as the proximate cause of the resulting loss.

To reiterate, had Allied exercised the diligence due from a financial institution, the check would not
have been issued and no loss of funds would have resulted. In fact, there would have been no
issuance of indorsement had there been no check in the first place.

The liability of Allied, however, is concurrent with that of Metrobank as the last indorser of the check.
When Metrobank indorsed the check in compliance with the PCHC Rules and Regulations 55 without
verifying the authenticity of Lim Sio Wan’s indorsement and when it accepted the check despite the
fact that it was cross-checked payable to payee’s account only,56 its negligent and cavalier
indorsement contributed to the easier release of Lim Sio Wan’s money and perpetuation of the fraud.
Given the relative participation of Allied and Metrobank to the instant case, both banks cannot be
adjudged as equally liable. Hence, the 60:40 ratio of the liabilities of Allied and Metrobank, as ruled
by the CA, must be upheld.
FCC, having no participation in the negotiation of the check and in the forgery of Lim Sio Wan’s
indorsement, can raise the real defense of forgery as against both banks. 57

As to Producers Bank, Allied Bank’s argument that Producers Bank must be held liable as employer
of Santos under Art. 2180 of the Civil Code is erroneous. Art. 2180 pertains to the vicarious liability
of an employer for quasi-delicts that an employee has committed. Such provision of law does not
apply to civil liability arising from delict.

One also cannot apply the principle of subsidiary liability in Art. 103 of the Revised Penal Code in the
instant case. Such liability on the part of the employer for the civil aspect of the criminal act of the
employee is based on the conviction of the employee for a crime. Here, there has been no
conviction for any crime.

As to the claim that there was unjust enrichment on the part of Producers Bank, the same is correct.
Allied correctly claims in its petition that Producers Bank should reimburse Allied for whatever
judgment that may be rendered against it pursuant to Art. 22 of the Civil Code, which provides:
"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 cause or legal ground,
shall return the same to him."1avvphi1

The above provision of law was clarified in Reyes v. Lim, where we ruled that "[t]here is unjust
enrichment when a person unjustly retains a benefit to the loss of another, or when a person retains
money or property of another against the fundamental principles of justice, equity and good
conscience."58

In Tamio v. Ticson, we further clarified the principle of unjust enrichment, thus: "Under Article 22 of
the Civil Code, there is unjust enrichment when (1) a person is unjustly benefited, and (2) such
benefit is derived at the expense of or with damages to another." 59

In the instant case, Lim Sio Wan’s money market placement in Allied Bank was pre-terminated and
withdrawn without her consent. Moreover, the proceeds of the placement were deposited in
Producers Bank’s account in Metrobank without any justification. In other words, there is no reason
that the proceeds of Lim Sio Wans’ placement should be deposited in FCC’s account purportedly as
payment for FCC’s money market placement and interest in Producers Bank. With such payment,
lavvphil

Producers Bank’s indebtedness to FCC was extinguished, thereby benefitting the former. Clearly,
Producers Bank was unjustly enriched at the expense of Lim Sio Wan. Based on the facts and
circumstances of the case, Producers Bank should reimburse Allied and Metrobank for the amounts
the two latter banks are ordered to pay Lim Sio Wan.

It cannot be validly claimed that FCC, and not Producers Bank, should be considered as having
been unjustly enriched. It must be remembered that FCC’s money market placement with Producers
Bank was already due and demandable; thus, Producers Bank’s payment thereof was justified. FCC
was entitled to such payment. As earlier stated, the fact that the indorsement on the check was
forged cannot be raised against FCC which was not a part in any stage of the negotiation of the
check. FCC was not unjustly enriched.

From the facts of the instant case, we see that Santos could be the architect of the entire
controversy. Unfortunately, since summons had not been served on Santos, the courts have not
acquired jurisdiction over her.60 We, therefore, cannot ascribe to her liability in the instant case.
Clearly, Producers Bank must be held liable to Allied and Metrobank for the amount of the check
plus 12% interest per annum, moral damages, attorney’s fees, and costs of suit which Allied and
Metrobank are adjudged to pay Lim Sio Wan based on a proportion of 60:40.

WHEREFORE, the petition is PARTLY GRANTED. The March 18, 1998 CA Decision in CA-G.R. CV
No. 46290 and the November 15, 1993 RTC Decision in Civil Case No. 6757 are AFFIRMED with
MODIFICATION.

Thus, the CA Decision is AFFIRMED, the fallo of which is reproduced, as follows:

WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is

rendered ordering and sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%)
percent and defendant-appellee Metropolitan Bank and Trust Company forty (40%) of the amount of
P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid. The moral
damages, attorney’s fees and costs of suit adjudged shall likewise be paid by defendant-appellant
Allied Banking Corporation and defendant-appellee Metropolitan Bank and Trust Company in the
same proportion of 60-40. Except as thus modified, the decision appealed from is AFFIRMED.

SO ORDERED.

Additionally and by way of MODIFICATION, Producers Bank is hereby ordered to pay Allied and
Metrobank the aforementioned amounts. The liabilities of the parties are concurrent and
independent of each other.

SO ORDERED.

G.R. No. 170984 January 30, 2009

SECURITY BANK AND TRUST COMPANY, Petitioner,

vs.
RIZAL COMMERCIAL BANKING CORPORATION, Respondent.

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

G.R. No. 170987 January 30, 2009

RIZAL COMMERCIAL BANKING CORPORATION, Petitioner,

vs.
SECURITY BANK AND TRUST COMPANY, Respondent.

DECISION

QUISUMBING, Acting C.J.:

Before us are opposing parties’ petitions for review of the Decision1 dated March 29, 2005 and
Resolution2 dated December 12, 2005 of the Court of Appeals in CA-G.R. CV No. 67387. The two
petitions are herein consolidated as they stem from the same set of factual circumstances.

The facts, as found by the trial and appellate courts, are as follows:
On January 9, 1981, Security Bank and Trust Company (SBTC) issued a manager’s check for ₱8
million, payable to "CASH," as proceeds of the loan granted to Guidon Construction and
Development Corporation (GCDC). On the same day, the ₱8-million check, along with other checks,
was deposited by Continental Manufacturing Corporation (CMC) in its Current Account No. 0109-
022888 with Rizal Commercial Banking Corporation (RCBC). Immediately, RCBC honored the ₱8-
million check and allowed CMC to withdraw the same.3

On the next banking day, January 12, 1981, GCDC issued a "Stop Payment Order" to SBTC,
claiming that the ₱8-million check was released to a third party by mistake. Consequently, SBTC
dishonored and returned the manager’s check to RCBC. Thereafter, the check was returned back
and forth between the two banks, resulting in automatic debits and credits in each bank’s clearing
balance.4

On February 13, 1981, RCBC filed a complaint5 for damages against SBTC with the then Court of
First Instance of Rizal, Branch XXII. Said case was docketed as Civil Case No. 1081 and later
transferred to the Regional Trial Court (RTC) of Makati City, Branch 143.

Meanwhile, following the rules of the Philippine Clearing House, RCBC and SBTC stopped returning
the checks to each other. By way of a temporary arrangement pending resolution of the case, the
₱8-million check was equally divided between, and credited to, RCBC and SBTC. 6

On May 9, 2000, the RTC of Makati City, Branch 143, rendered a Decision 7 in favor of RCBC. The
dispositive portion of the decision reads:

PREMISES CONSIDERED, the Court renders judgment in favor of plaintiff [RCBC] and finds
defendant SBTC justly liable to [RCBC] and sentences [SBTC] to pay [RCBC] the amount of:

1. PhP4,000,000.00 as and for actual damages;

2. PhP100,000.00 as and for attorney’s fees; and,

3. the costs.

SO ORDERED.8

On appeal, the Court of Appeals affirmed with modification the above Decision, to wit:

WHEREFORE, the appealed Decision is AFFIRMED with MODIFICATION. Appellant Security Bank
and Trust Co. shall pay appellee Rizal Commercial Banking Corporation not only the principal
amount of ₱4,000,000.00 but also interest thereon at (6%) per annum covering appellee’s unearned
income on interest computed from the time of filing of the complaint on February 13, 1981 to the
date of finality of this Decision. For lack of factual and legal basis, the award of attorney’s fees
is DELETED.

SO ORDERED.9

Now for our resolution are the opposing parties’ petitions for review on certiorari of the abovecited
decision. On its part, SBTC alleges the following to support its petition:

I.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN REFUSING TO APPLY THE LAW
BECAUSE, IN ITS OPINION, TO DO SO WOULD "RESULT IN AN INJUSTICE."

II.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT TO DETERMINE

WHETHER OR NOT A BANK IS A HOLDER IN DUE COURSE, ONLY THE NEGOTIABLE
INSTRUMENTS LAW NEED BE APPLIED TO THE EXCLUSION OF CENTRAL BANK RULES AND
REGULATIONS.

III.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO NOTE THAT THE
MANAGER’S CHECK IN QUESTION WAS ACCEPTED FOR DEPOSIT BY THE RCBC AND WAS
NOT ENCASHED BY THE PAYEE.

IV.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO CONSIDER THAT

PRIOR TO THE DEPOSIT OF THE CHECKS WORTH PhP53 MILLION, RCBC WAS HOLDING 43
CHECKS TOTALING ₱49,017,669.66 DRAWN BY CONTINENTAL MANUFACTURING
CORPORATION AGAINST ITS CURRENT ACCOUNT WHEN THE BALANCE OF THAT
ACCOUNT WAS A MERE ₱573.62.

V.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO CONSIDER THAT

THE CHECKS DEPOSITED WITH RCBC THE PROCEEDS OF WHICH WERE IMMEDIATELY
WITHDRAWN TO HONOR THE 43 CHECKS TOTALING ₱49,017,669.66 DRAWN BY
CONTINENTAL MANUFACTURING CORPORATION ON ITS CURRENT ACCOUNT WERE NOT
ALL MANAGER’S CHECK[S] BUT INCLUDED ORDINARY CHECKS IN THE TOTAL AMOUNT OF
PhP15,436,140.81.

VI.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO CONSIDER THAT

EACH OF THE 43 CHECKS DRAWN BY THE CONTINENTAL MANUFACTURING
CORPORATION WERE ALL HONORED BY RCBC ON THE BASIS OF A MIXTURE OF ALL THE
MANAGER’S AND ORDINARY CHECKS DEPOSITED ON THAT DAY OF 9 JANUARY 1981.

VII.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE RCBC IS A
HOLDER IN DUE COURSE.

VIII.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT SBTC WAITED
FOR THREE (3) DAYS TO NOTIFY THE RCBC OF THE STOP PAYMENT ORDER.

IX.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT SBTC SHOULD
HAVE FIRST ACQUIRED PERSONAL KNOWLEDGE OF THE FACTS WHICH GAVE RISE TO
THE REQUEST FOR THE STOP PAYMENT ORDER BEFORE HONORING SUCH REQUEST.

X.

THE HONORABLE COURT OF APPEALS RULED CORRECTLY IN REFUSING TO HOLD SBTC

LIABLE FOR DAMAGE CLAIMS BASED SOLELY ON SPECULATION, CONJECTURE AND
GUESSWORK.

XI.

THE HONORABLE COURT OF APPEALS RULED CORRECTLY IN HOLDING THAT RCBC IS

NOT ENTITLED TO EXEMPLARY DAMAGES.

XII.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING SBTC LIABLE FOR
THE ATTORNEY’S FEES OF RCBC [SIC].10

On RCBC’s part, the following issues are submitted for resolution:

I.

WHETHER OR NOT SBTC IS LIABLE FOR THE MANAGER’S CHECK IT ISSUED.

II.

WHETHER OR NOT RCBC IS ENTITLED TO COMPENSATORY DAMAGES EQUIVALENT TO

THE INTEREST INCOME LOST AS A RESULT OF THE ILLEGAL REFUSAL OF SBTC TO
HONOR ITS OWN MANAGER’S CHECK, AS WELL AS FOR EXEMPLARY DAMAGES AND
ATTORNEY’S FEES.11

Simply stated, we find that in these consolidated petitions, the legal issues for our resolution are: (1)
Is SBTC liable to RCBC for the remaining ₱4 million? and (2) Is SBTC liable to pay for lost interest
income on the remaining ₱4 million, exemplary damages and attorney’s fees?

RCBC avers that the manager’s check issued by SBTC is substantially as good as the money it
represents because by its peculiar character, its issuance has the effect of an advance acceptance.
RCBC claims that it is a holder in due course when it credited the ₱8-million manager’s check to
CMC’s account. Accordingly, RCBC asserts that SBTC’s refusal to honor its obligation justifies
RCBC claim for lost interest income, exemplary damages and attorney’s fees.

On the other hand, SBTC contends that RCBC violated Monetary Board Resolution No. 2202 of the
Central Bank of the Philippines mandating all banks to verify the genuineness and validity of all
checks before allowing drawings of the same. SBTC insists that RCBC should bear the
consequences of allowing CMC to withdraw the amount of the check before it was cleared. 12

We shall rule on the issues seriatim.

At the outset, it must be noted that the questioned check issued by SBTC is not just an ordinary
check but a manager’s check. A manager’s check is one drawn by a bank’s manager upon the bank
itself. It stands on the same footing as a certified check,13 which is deemed to have been accepted
by the bank that certified it.14 As the bank’s own check, a manager’s check becomes the primary
obligation of the bank and is accepted in advance by the act of its issuance. 15

In this case, RCBC, in immediately crediting the amount of ₱8 million to CMC’s account, relied on
the integrity and honor of the check as it is regarded in commercial transactions. Where the
questioned check, which was payable to "Cash," appeared regular on its face, and the bank found
nothing unusual in the transaction, as the drawer usually issued checks in big amounts made
payable to cash, RCBC cannot be faulted in paying the value of the questioned check. 16

In our considered view, SBTC cannot escape liability by invoking Monetary Board Resolution No.
2202 dated December 21, 1979, prohibiting drawings against uncollected deposits. For we must
point out that the Central Bank at that time issued a Memorandum dated July 9, 1980, which
interpreted said Monetary Board Resolution No. 2202. In its pertinent portion, said Memorandum
reads:

"MEMORANDUM TO ALL BANKS

July 9, 1980

For the guidance of all concerned, Monetary Board Resolution No. 2202 dated December 31, 1979
prohibiting, as a matter of policy, drawing against uncollected deposit effective July 1,
1980, uncollected deposits representing manager’s cashier’s/ treasurer’s checks, treasury warrants,
postal money orders and duly funded "on us" checks which may be permitted at the discretion of
each bank, covers drawings against demand deposits as well as withdrawals from savings
deposits."17

Thus, it is clear from the July 9, 1980 Memorandum that banks were given the discretion to allow
immediate drawings on uncollected deposits of manager’s checks, among others. Consequently,
RCBC, in allowing the immediate withdrawal against the subject manager’s check, only exercised a
prerogative expressly granted to it by the Monetary Board.

Moreover, neither Monetary Board Resolution No. 2202 nor the July 9, 1980 Memorandum alters the
extraordinary nature of the manager’s check and the relative rights of the parties thereto. SBTC’s
liability as drawer remains the same − by drawing the instrument, it admits the existence of the
payee and his then capacity to indorse; and engages that on due presentment, the instrument will be
accepted, or paid, or both, according to its tenor.18

Concerning RCBC’s claim for lost interest income on the remaining ₱4 million, this is already
covered by the amount of damages in the form of legal interest of 6%, based on Article 2200 19 and
220920 of the Civil Code of the Philippines, as awarded by the Court of Appeals in its decision.

In addition to the above-mentioned award of compensatory damages, we also find merit in the need
to award exemplary damages in order to set an example for the public good. The banking system
has become an indispensable institution in the modern world and plays a vital role in the economic
life of every civilized society. Whether as mere passive entities for the safe-keeping and saving of
money or as active instruments of business and commerce, banks have attained an ubiquitous
presence among the people, who have come to regard them with respect and even gratitude and,
above all, trust and confidence. In this connection, it is important that banks should guard against
injury attributable to negligence or bad faith on its part. As repeatedly emphasized, since the banking
business is impressed with public interest, the trust and confidence of the public in it is of paramount
importance. Consequently, the highest degree of diligence is expected, and high standards of
integrity and performance are required of it. SBTC having failed in this respect, the award of
exemplary damages to RCBC in the amount of ₱50,000.00 is warranted. 21

Pursuant to current jurisprudence, with the finding of liability for exemplary damages, attorney’s fees
in the amount of ₱25,000.0022 must also be awarded against SBTC and in favor of RCBC.

WHEREFORE, the assailed Decision dated March 29, 2005 and Resolution dated December 12,
2005 of the Court of Appeals in CA-G.R. CV No. 67387 is hereby AFFIRMED with MODIFICATION.
Security Bank and Trust Company is ordered to pay Rizal Commercial Banking Corporation: (1) the
remaining ₱4,000,000.00, with legal interest thereon at six percent (6%) per annum from the time of
filing of the complaint on February 13, 1981 to the date of finality of this Decision; (2) exemplary
damages of ₱50,000.00; and (3) attorney’s fees of ₱25,000.00.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 192413 June 13, 2012

Rizal Commercial Banking Corporation, Petitioner,

vs.
Hi-Tri Development Corporation and Luz R. Bakunawa, Respondents.

DECISION

SERENO, J.:

Before the Court is a Rule 45 Petition for Review on Certiorari filed by petitioner Rizal Commercial
Banking Corporation (RCBC) against respondents Hi-Tri Development Corporation (Hi-Tri) and Luz
R. Bakunawa (Bakunawa). Petitioner seeks to appeal from the 26 November 2009 Decision and 27
May 2010 Resolution of the Court of Appeals (CA), which reversed and set aside the 19 May 2008
1

Decision and 3 November 2008 Order of the Makati City Regional Trial Court (RTC) in Civil Case
No. 06-244. The case before the RTC involved the Complaint for Escheat filed by the Republic of
2

the Philippines (Republic) pursuant to Act No. 3936, as amended by Presidential Decree No. 679
(P.D. 679), against certain deposits, credits, and unclaimed balances held by the branches of
various banks in the Philippines. The trial court declared the amounts, subject of the special
proceedings, escheated to the Republic and ordered them deposited with the Treasurer of the
Philippines (Treasurer) and credited in favor of the Republic. The assailed RTC judgments included
3

an unclaimed balance in the amount of ₱ 1,019,514.29, maintained by RCBC in its Ermita Business
Center branch.

We quote the narration of facts of the CA as follows:

4

x x x Luz [R.] Bakunawa and her husband Manuel, now deceased ("Spouses Bakunawa") are
registered owners of six (6) parcels of land covered by TCT Nos. 324985 and 324986 of the Quezon
City Register of Deeds, and TCT Nos. 103724, 98827, 98828 and 98829 of the Marikina Register of
Deeds. These lots were sequestered by the Presidential Commission on Good Government
[(PCGG)].
Sometime in 1990, a certain Teresita Millan ("Millan"), through her representative, Jerry
Montemayor, offered to buy said lots for "₱ 6,724,085.71", with the promise that she will take care of
clearing whatever preliminary obstacles there may[]be to effect a "completion of the sale". The
Spouses Bakunawa gave to Millan the Owner’s Copies of said TCTs and in turn, Millan made a
down[]payment of "₱ 1,019,514.29" for the intended purchase. However, for one reason or another,
Millan was not able to clear said obstacles. As a result, the Spouses Bakunawa rescinded the sale
and offered to return to Millan her down[]payment of ₱ 1,019,514.29. However, Millan refused to
accept back the ₱ 1,019,514.29 down[]payment. Consequently, the Spouses Bakunawa, through
their company, the Hi-Tri Development Corporation ("Hi-Tri") took out on October 28, 1991, a
Manager’s Check from RCBC-Ermita in the amount of ₱ 1,019,514.29, payable to Millan’s company
Rosmil Realty and Development Corporation ("Rosmil") c/o Teresita Millan and used this as one of
their basis for a complaint against Millan and Montemayor which they filed with the Regional Trial
Court of Quezon City, Branch 99, docketed as Civil Case No. Q-91-10719 [in 1991], praying that:

1. That the defendants Teresita Mil[l]an and Jerry Montemayor may be ordered to return to
plaintiffs spouses the Owners’ Copies of Transfer Certificates of Title Nos. 324985, 324986,
103724, 98827, 98828 and 98829;

2. That the defendant Teresita Mil[l]an be correspondingly ordered to receive the amount of
One Million Nineteen Thousand Five Hundred Fourteen Pesos and Twenty Nine Centavos
(₱ 1,019,514.29);

3. That the defendants be ordered to pay to plaintiffs spouses moral damages in the amount
of ₱ 2,000,000.00; and

4. That the defendants be ordered to pay plaintiffs attorney’s fees in the amount of ₱
50,000.00.

Being part and parcel of said complaint, and consistent with their prayer in Civil Case No. Q-91-
10719 that "Teresita Mil[l]an be correspondingly ordered to receive the amount of One Million
Nineteen Thousand Five Hundred Fourteen Pesos and Twenty Nine [Centavos] ("₱ 1,019,514.29")
["], the Spouses Bakunawa, upon advice of their counsel, retained custody of RCBC Manager’s
Check No. ER 034469 and refrained from canceling or negotiating it.

All throughout the proceedings in Civil Case No. Q-91-10719, especially during negotiations for a
possible settlement of the case, Millan was informed that the Manager’s Check was available for her
withdrawal, she being the payee.

On January 31, 2003, during the pendency of the abovementioned case and without the knowledge
of [Hi-Tri and Spouses Bakunawa], x x x RCBC reported the "₱ 1,019,514.29-credit existing in favor
of Rosmil" to the Bureau of Treasury as among its "unclaimed balances" as of January 31, 2003.
Allegedly, a copy of the Sworn Statement executed by Florentino N. Mendoza, Manager and Head
of RCBC’s Asset Management, Disbursement & Sundry Department ("AMDSD") was posted within
the premises of RCBC-Ermita.

On December 14, 2006, x x x Republic, through the [Office of the Solicitor General (OSG)], filed with
the RTC the action below for Escheat [(Civil Case No. 06-244)].

On April 30, 2008, [Spouses Bakunawa] settled amicably their dispute with Rosmil and Millan.
Instead of only the amount of "₱ 1,019,514.29", [Spouses Bakunawa] agreed to pay Rosmil and
Millan the amount of "₱ 3,000,000.00", [which is] inclusive [of] the amount of ["]₱ 1,019,514.29". But
during negotiations and evidently prior to said settlement, [Manuel Bakunawa, through Hi-Tri]
inquired from RCBC-Ermita the availability of the ₱ 1,019,514.29 under RCBC Manager’s Check No.
ER 034469. [Hi-Tri and Spouses Bakunawa] were however dismayed when they were informed that
the amount was already subject of the escheat proceedings before the RTC.

On April 17, 2008, [Manuel Bakunawa, through Hi-Tri] wrote x x x RCBC, viz:

"We understand that the deposit corresponding to the amount of Php 1,019,514.29 stated in the
Manager’s Check is currently the subject of escheat proceedings pending before Branch 150 of the
Makati Regional Trial Court.

Please note that it was our impression that the deposit would be taken from [Hi-Tri’s] RCBC bank
account once an order to debit is issued upon the payee’s presentation of the Manager’s Check.
Since the payee rejected the negotiated Manager’s Check, presentation of the Manager’s Check
was never made.

Consequently, the deposit that was supposed to be allocated for the payment of the Manager’s
Check was supposed to remain part of the Corporation[’s] RCBC bank account, which, thereafter,
continued to be actively maintained and operated. For this reason, We hereby demand your
confirmation that the amount of Php 1,019,514.29 continues to form part of the funds in the
Corporation’s RCBC bank account, since pay-out of said amount was never ordered. We wish to
point out that if there was any attempt on the part of RCBC to consider the amount indicated in the
Manager’s Check separate from the Corporation’s bank account, RCBC would have issued a
statement to that effect, and repeatedly reminded the Corporation that the deposit would be
considered dormant absent any fund movement. Since the Corporation never received any
statements of account from RCBC to that effect, and more importantly, never received any single
letter from RCBC noting the absence of fund movement and advising the Corporation that the
deposit would be treated as dormant."

On April 28, 2008, [Manuel Bakunawa] sent another letter to x x x RCBC reiterating their position as
above-quoted.

In a letter dated May 19, 2008, x x x RCBC replied and informed [Hi-Tri and Spouses Bakunawa]
that:

"The Bank’s Ermita BC informed Hi-Tri and/or its principals regarding the inclusion of Manager’s
Check No. ER034469 in the escheat proceedings docketed as Civil Case No. 06-244, as well as the
status thereof, between 28 January 2008 and 1 February 2008.

xxx xxx xxx

Contrary to what Hi-Tri hopes for, the funds covered by the Manager’s Check No. ER034469 does
not form part of the Bank’s own account. By simple operation of law, the funds covered by the
manager’s check in issue became a deposit/credit susceptible for inclusion in the escheat case
initiated by the OSG and/or Bureau of Treasury.

xxx xxx xxx

Granting arguendo that the Bank was duty-bound to make good the check, the Bank’s obligation to
do so prescribed as early as October 2001."

(Emphases, citations, and annotations were omitted.)

 The RTC Ruling

The escheat proceedings before the Makati City RTC continued. On 19 May 2008, the trial court
rendered its assailed Decision declaring the deposits, credits, and unclaimed balances subject of
Civil Case No. 06-244 escheated to the Republic. Among those included in the order of forfeiture
was the amount of ₱ 1,019,514.29 held by RCBC as allocated funds intended for the payment of the
Manager’s Check issued in favor of Rosmil. The trial court ordered the deposit of the escheated
balances with the Treasurer and credited in favor of the Republic. Respondents claim that they were
not able to participate in the trial, as they were not informed of the ongoing escheat proceedings.

Consequently, respondents filed an Omnibus Motion dated 11 June 2008, seeking the partial
reconsideration of the RTC Decision insofar as it escheated the fund allocated for the payment of the
Manager’s Check. They asked that they be included as party-defendants or, in the alternative,
allowed to intervene in the case and their motion considered as an answer-in-intervention.
Respondents argued that they had meritorious grounds to ask reconsideration of the Decision or,
alternatively, to seek intervention in the case. They alleged that the deposit was subject of an
ongoing dispute (Civil Case No. Q-91-10719) between them and Rosmil since 1991, and that they
were interested parties to that case.
5

On 3 November 2008, the RTC issued an Order denying the motion of respondents. The trial court
explained that the Republic had proven compliance with the requirements of publication and notice,
which served as notice to all those who may be affected and prejudiced by the Complaint for
Escheat. The RTC also found that the motion failed to point out the findings and conclusions that
were not supported by the law or the evidence presented, as required by Rule 37 of the Rules of
Court. Finally, it ruled that the alternative prayer to intervene was filed out of time.

The CA Ruling

On 26 November 2009, the CA issued its assailed Decision reversing the 19 May 2008 Decision and
3 November 2008 Order of the RTC. According to the appellate court, RCBC failed to prove that the
6

latter had communicated with the purchaser of the Manager’s Check (Hi-Tri and/or Spouses
Bakunawa) or the designated payee (Rosmil) immediately before the bank filed its Sworn Statement
on the dormant accounts held therein. The CA ruled that the bank’s failure to notify respondents
deprived them of an opportunity to intervene in the escheat proceedings and to present evidence to
substantiate their claim, in violation of their right to due process. Furthermore, the CA pronounced
that the Makati City RTC Clerk of Court failed to issue individual notices directed to all persons
claiming interest in the unclaimed balances, as well as to require them to appear after publication
and show cause why the unclaimed balances should not be deposited with the Treasurer of the
Philippines. It explained that the jurisdictional requirement of individual notice by personal service
was distinct from the requirement of notice by publication. Consequently, the CA held that the
Decision and Order of the RTC were void for want of jurisdiction.

Issue

After a perusal of the arguments presented by the parties, we cull the main issues as follows:

I. Whether the Decision and Order of the RTC were void for failure to send separate notices
to respondents by personal service

II. Whether petitioner had the obligation to notify respondents immediately before it filed its
Sworn Statement with the Treasurer
 III. Whether or not the allocated funds may be escheated in favor of the Republic

Discussion

Petitioner bank assails the CA judgments insofar as they ruled that notice by personal service upon
7

respondents is a jurisdictional requirement in escheat proceedings. Petitioner contends that

respondents were not the owners of the unclaimed balances and were thus not entitled to notice
from the RTC Clerk of Court. It hinges its claim on the theory that the funds represented by the
Manager’s Check were deemed transferred to the credit of the payee or holder upon its issuance.

We quote the pertinent provision of Act No. 3936, as amended, on the rule on service of processes,
to wit:

Sec. 3. Whenever the Solicitor General shall be informed of such unclaimed balances, he shall
commence an action or actions in the name of the People of the Republic of the Philippines in the
Court of First Instance of the province or city where the bank, building and loan association or trust
corporation is located, in which shall be joined as parties the bank, building and loan association or
trust corporation and all such creditors or depositors. All or any of such creditors or depositors or
banks, building and loan association or trust corporations may be included in one action. Service of
process in such action or actions shall be made by delivery of a copy of the complaint and summons
to the president, cashier, or managing officer of each defendant bank, building and loan association
or trust corporation and by publication of a copy of such summons in a newspaper of general
circulation, either in English, in Filipino, or in a local dialect, published in the locality where the bank,
building and loan association or trust corporation is situated, if there be any, and in case there is
none, in the City of Manila, at such time as the court may order. Upon the trial, the court must hear
all parties who have appeared therein, and if it be determined that such unclaimed balances in any
defendant bank, building and loan association or trust corporation are unclaimed as hereinbefore
stated, then the court shall render judgment in favor of the Government of the Republic of the
Philippines, declaring that said unclaimed balances have escheated to the Government of the
Republic of the Philippines and commanding said bank, building and loan association or trust
corporation to forthwith deposit the same with the Treasurer of the Philippines to credit of the
Government of the Republic of the Philippines to be used as the National Assembly may direct.

At the time of issuing summons in the action above provided for, the clerk of court shall also issue a
notice signed by him, giving the title and number of said action, and referring to the complaint
therein, and directed to all persons, other than those named as defendants therein, claiming any
interest in any unclaimed balance mentioned in said complaint, and requiring them to appear within
sixty days after the publication or first publication, if there are several, of such summons, and show
cause, if they have any, why the unclaimed balances involved in said action should not be deposited
with the Treasurer of the Philippines as in this Act provided and notifying them that if they do not
appear and show cause, the Government of the Republic of the Philippines will apply to the court for
the relief demanded in the complaint. A copy of said notice shall be attached to, and published with
the copy of, said summons required to be published as above, and at the end of the copy of such
notice so published, there shall be a statement of the date of publication, or first publication, if there
are several, of said summons and notice. Any person interested may appear in said action and
become a party thereto. Upon the publication or the completion of the publication, if there are
several, of the summons and notice, and the service of the summons on the defendant banks,
building and loan associations or trust corporations, the court shall have full and complete
jurisdiction in the Republic of the Philippines over the said unclaimed balances and over the persons
having or claiming any interest in the said unclaimed balances, or any of them, and shall have full
and complete jurisdiction to hear and determine the issues herein, and render the appropriate
judgment thereon. (Emphasis supplied.)
Hence, insofar as banks are concerned, service of processes is made by delivery of a copy of the
complaint and summons upon the president, cashier, or managing officer of the defendant bank. On 8

the other hand, as to depositors or other claimants of the unclaimed balances, service is made by
publication of a copy of the summons in a newspaper of general circulation in the locality where the
institution is situated. A notice about the forthcoming escheat proceedings must also be issued and
9

published, directing and requiring all persons who may claim any interest in the unclaimed balances
to appear before the court and show cause why the dormant accounts should not be deposited with
the Treasurer.

Accordingly, the CA committed reversible error when it ruled that the issuance of individual notices
upon respondents was a jurisdictional requirement, and that failure to effect personal service on
them rendered the Decision and the Order of the RTC void for want of jurisdiction. Escheat
proceedings are actions in rem, whereby an action is brought against the thing itself instead of the
10

person. Thus, an action may be instituted and carried to judgment without personal service upon the
11

depositors or other claimants. Jurisdiction is secured by the power of the court over the
12

res. Consequently, a judgment of escheat is conclusive upon persons notified by advertisement, as

13

publication is considered a general and constructive notice to all persons interested. 14

Nevertheless, we find sufficient grounds to affirm the CA on the exclusion of the funds allocated for
the payment of the Manager’s Check in the escheat proceedings.

Escheat proceedings refer to the judicial process in which the state, by virtue of its sovereignty,
steps in and claims abandoned, left vacant, or unclaimed property, without there being an interested
person having a legal claim thereto. In the case of dormant accounts, the state inquires into the
15

status, custody, and ownership of the unclaimed balance to determine whether the inactivity was
brought about by the fact of death or absence of or abandonment by the depositor. If after the
16

proceedings the property remains without a lawful owner interested to claim it, the property shall be
reverted to the state "to forestall an open invitation to self-service by the first comers." However, if
17

interested parties have come forward and lain claim to the property, the courts shall determine
whether the credit or deposit should pass to the claimants or be forfeited in favor of the state. We 18

emphasize that escheat is not a proceeding to penalize depositors for failing to deposit to or
withdraw from their accounts. It is a proceeding whereby the state compels the surrender to it of
unclaimed deposit balances when there is substantial ground for a belief that they have been
abandoned, forgotten, or without an owner. 19

Act No. 3936, as amended, outlines the proper procedure to be followed by banks and other similar
institutions in filing a sworn statement with the Treasurer concerning dormant accounts:

Sec. 2. Immediately after the taking effect of this Act and within the month of January of every odd
year, all banks, building and loan associations, and trust corporations shall forward to the Treasurer
of the Philippines a statement, under oath, of their respective managing officers, of all credits and
deposits held by them in favor of persons known to be dead, or who have not made further deposits
or withdrawals during the preceding ten years or more, arranged in alphabetical order according to
the names of creditors and depositors, and showing:

(a) The names and last known place of residence or post office addresses of the persons in
whose favor such unclaimed balances stand;

(b) The amount and the date of the outstanding unclaimed balance and whether the same is
in money or in security, and if the latter, the nature of the same;
 (c) The date when the person in whose favor the unclaimed balance stands died, if known,
or the date when he made his last deposit or withdrawal; and

(d) The interest due on such unclaimed balance, if any, and the amount thereof.

A copy of the above sworn statement shall be posted in a conspicuous place in the premises of the
bank, building and loan association, or trust corporation concerned for at least sixty days from the
date of filing thereof: Provided, That immediately before filing the above sworn statement, the bank,
building and loan association, and trust corporation shall communicate with the person in whose
favor the unclaimed balance stands at his last known place of residence or post office address.

It shall be the duty of the Treasurer of the Philippines to inform the Solicitor General from time to
time the existence of unclaimed balances held by banks, building and loan associations, and trust
corporations. (Emphasis supplied.)

As seen in the afore-quoted provision, the law sets a detailed system for notifying depositors of
unclaimed balances. This notification is meant to inform them that their deposit could be escheated if
left unclaimed. Accordingly, before filing a sworn statement, banks and other similar institutions are
under obligation to communicate with owners of dormant accounts. The purpose of this initial notice
is for a bank to determine whether an inactive account has indeed been unclaimed, abandoned,
forgotten, or left without an owner. If the depositor simply does not wish to touch the funds in the
meantime, but still asserts ownership and dominion over the dormant account, then the bank is no
longer obligated to include the account in its sworn statement. It is not the intent of the law to force
20

depositors into unnecessary litigation and defense of their rights, as the state is only interested in
escheating balances that have been abandoned and left without an owner.

In case the bank complies with the provisions of the law and the unclaimed balances are eventually
escheated to the Republic, the bank "shall not thereafter be liable to any person for the same and
any action which may be brought by any person against in any bank xxx for unclaimed balances so
deposited xxx shall be defended by the Solicitor General without cost to such bank." Otherwise,
21

should it fail to comply with the legally outlined procedure to the prejudice of the depositor, the bank
may not raise the defense provided under Section 5 of Act No. 3936, as amended.

Petitioner asserts that the CA committed a reversible error when it required RCBC to send prior
22

notices to respondents about the forthcoming escheat proceedings involving the funds allocated for
the payment of the Manager’s Check. It explains that, pursuant to the law, only those "whose favor
such unclaimed balances stand" are entitled to receive notices. Petitioner argues that, since the
funds represented by the Manager’s Check were deemed transferred to the credit of the payee upon
issuance of the check, the proper party entitled to the notices was the payee – Rosmil – and not
respondents. Petitioner then contends that, in any event, it is not liable for failing to send a separate
notice to the payee, because it did not have the address of Rosmil. Petitioner avers that it was not
under any obligation to record the address of the payee of a Manager’s Check.

In contrast, respondents Hi-Tri and Bakunawa allege that they have a legal interest in the fund
23

allocated for the payment of the Manager’s Check. They reason that, since the funds were part of
the Compromise Agreement between respondents and Rosmil in a separate civil case, the approval
and eventual execution of the agreement effectively reverted the fund to the credit of respondents.
Respondents further posit that their ownership of the funds was evidenced by their continued
custody of the Manager’s Check.

An ordinary check refers to a bill of exchange drawn by a depositor (drawer) on a bank

(drawee), requesting the latter to pay a person named therein (payee) or to the order of the payee
24
or to the bearer, a named sum of money. The issuance of the check does not of itself operate as an
25

assignment of any part of the funds in the bank to the credit of the drawer. Here, the bank becomes
26

liable only after it accepts or certifies the check. After the check is accepted for payment, the bank
27

would then debit the amount to be paid to the holder of the check from the account of the depositor-
drawer.

There are checks of a special type called manager’s or cashier’s checks. These are bills of
exchange drawn by the bank’s manager or cashier, in the name of the bank, against the bank
itself. Typically, a manager’s or a cashier’s check is procured from the bank by allocating a
28

particular amount of funds to be debited from the depositor’s account or by directly paying or
depositing to the bank the value of the check to be drawn. Since the bank issues the check in its
name, with itself as the drawee, the check is deemed accepted in advance. Ordinarily, the check
29

becomes the primary obligation of the issuing bank and constitutes its written promise to pay upon
demand. 30

Nevertheless, the mere issuance of a manager’s check does not ipso facto work as an automatic
transfer of funds to the account of the payee. In case the procurer of the manager’s or cashier’s
check retains custody of the instrument, does not tender it to the intended payee, or fails to make an
effective delivery, we find the following provision on undelivered instruments under the Negotiable
Instruments Law applicable: 31

Sec. 16. Delivery; when effectual; when presumed. – Every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As
between immediate parties and as regards a remote party other than a holder in due course, the
delivery, in order to be effectual, must be made either by or under the authority of the party making,
drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown
to have been conditional, or for a special purpose only, and not for the purpose of transferring the
property in the instrument. But where the instrument is in the hands of a holder in due course, a valid
delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed.
And where the instrument is no longer in the possession of a party whose signature appears
thereon, a valid and intentional delivery by him is presumed until the contrary is proved. (Emphasis
supplied.)

Petitioner acknowledges that the Manager’s Check was procured by respondents, and that the
amount to be paid for the check would be sourced from the deposit account of Hi-Tri. When Rosmil
32

did not accept the Manager’s Check offered by respondents, the latter retained custody of the
instrument instead of cancelling it. As the Manager’s Check neither went to the hands of Rosmil nor
was it further negotiated to other persons, the instrument remained undelivered. Petitioner does not
dispute the fact that respondents retained custody of the instrument.33

Since there was no delivery, presentment of the check to the bank for payment did not occur. An
order to debit the account of respondents was never made. In fact, petitioner confirms that the
Manager’s Check was never negotiated or presented for payment to its Ermita Branch, and that the
allocated fund is still held by the bank. As a result, the assigned fund is deemed to remain part of
34

the account of Hi-Tri, which procured the Manager’s Check. The doctrine that the deposit
represented by a manager’s check automatically passes to the payee is inapplicable, because the
instrument – although accepted in advance – remains undelivered. Hence, respondents should have
been informed that the deposit had been left inactive for more than 10 years, and that it may be
subjected to escheat proceedings if left unclaimed. 1âwphi1

After a careful review of the RTC records, we find that it is no longer necessary to remand the case
for hearing to determine whether the claim of respondents was valid. There was no contention that
they were the procurers of the Manager’s Check. It is undisputed that there was no effective delivery
of the check, rendering the instrument incomplete. In addition, we have already settled that
respondents retained ownership of the funds. As it is obvious from their foregoing actions that they
have not abandoned their claim over the fund, we rule that the allocated deposit, subject of the
Manager’s Check, should be excluded from the escheat proceedings. We reiterate our
pronouncement that the objective of escheat proceedings is state forfeiture of unclaimed balances.
We further note that there is nothing in the records that would show that the OSG appealed the
assailed CA judgments. We take this failure to appeal as an indication of disinterest in pursuing the
escheat proceedings in favor of the Republic.

WHEREFORE the Petition is DENIED. The 26 November 2009 Decision and 27 May 2010
Resolution of the Court of Appeals in CA-G.R. SP No. 107261 are hereby AFFIRMED.

SO ORDERED.

G.R. No. 169334 September 8, 2006

LETICIA G. MIRANDA, petitioner,

vs.
PHILIPPINE DEPOSIT INSURANCE CORPORATION, BANGKO SENTRAL NG PILIPINAS and
PRIME SAVINGS BANK, Respondents.

DECISION

YNARES-SANTIAGO, J.:

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks a reversal of the
Decision1 of the Court of Appeals dated February 23, 2005 in CA-G.R. CV No. 77556 which reversed
and set aside the Decision2 of the Regional Trial Court of Santiago City, Branch 35, in Civil Case No.
35-2844 and the July 7, 2005 Resolution denying petitioner's Motion for Reconsideration. 3

Petitioner Leticia G. Miranda was a depositor of Prime Savings Bank, Santiago City Branch. On
June 3, 1999, she withdrew substantial amounts from her account, but instead of cash she opted to
be issued a crossed cashier's check. She was thus issued cashier's check no. 0000000518 in the
sum of P2,500,000.00 and cashier's check no. 0000000514 in the amount of P3,002,000.00. 4

Petitioner deposited the two checks into her account in another bank on the same day,
however, Bangko Sentral ng Pilipinas (BSP) suspended the clearing privileges of Prime Savings
Bank effective 2:00 p.m. of June 3, 1999. The two checks of petitioner were returned to her unpaid. 5

On June 4, 1999, Prime Savings Bank declared a bank holiday. On January 7, 2000, the BSP
placed Prime Savings Bank under the receivership of the Philippine Deposit Insurance Corporation
(PDIC).6

Petitioner filed a civil action for sum of money in the Regional Trial Court of Santiago City, Isabela to
recover the funds from her unpaid checks against Prime Savings Bank, PDIC and the BSP.
Judgment on the pleadings was rendered on March 1, 2001, the dispositive portion of which reads:

WHEREFORE, judgment is rendered against defendants namely: Philippine Deposit

Insurance Corporation, Bangko Sentral ng Pilipinas and Prime Bank, to pay jointly and
solidarily the amount of P5,502,000.00 to the plaintiff.
 SO ORDERED.7

On appeal, the Court of Appeals reversed the trial court and ruled in favor of the PDIC and BSP,
dismissing the case against them, without prejudice to the right of petitioner to file her claim before
the court designated to adjudicate on claims against Prime Savings Bank. The dispositive portion of
the appellate court's decision dated February 23, 2005 thus reads:

WHEREFORE, the appeal is GRANTED and the decision appealed from is REVERSED and
SET ASIDE and the case is DISMISSED, without prejudice to the right of Miranda to file her
claim before the court designated to adjudicate on claims against Prime Savings Bank.

SO ORDERED.8

Petitioner's motion for reconsideration was denied,9 hence, this petition.

The issues presented by the petitioner before this Court can be summarized as follows: (1) Whether
the two cashier's checks operate as an assignment of funds in the hands of the petitioner; (2)
Whether the claim lodged by the petitioner is a disputed claim under Section 30 of Republic Act
(R.A.) No. 7653, otherwise known as the New Central Bank Act, and therefore, under the jurisdiction
of the liquidation court; and (3) Whether the respondents are solidarily liable to the petitioner.

Petitioner contends that she ceased to be a depositor upon withdrawal of her deposit and the
issuance of the two cashier's checks to her. As a holder in due course of the cashier's checks as
defined under Sections 52 and 191 of the Negotiable Instruments Law, she is an assignee of the
funds of Prime Savings Bank as drawer thereof and entitled to its immediate payment. 10

Petitioner next argues that the present claim is not a disputed claim in contemplation of Section 30 of
the New Central Bank Act. Since disputed claims refer to all claims, whether they be against the
assets of the insolvent bank, for specific performance, breach of contract, or damages, it is manifest
that petitioner's claim cannot fall within the purview of a disputed claim because she is recovering
assigned funds which are segregated monies of Prime Savings Bank.11

Petitioner further states that by the mere issuance of the cashier's check, the funds represented by
the check are transferred from the credit of the maker to that of the payee or holder. Hence,
petitioner alleges that she cannot be placed on the same footing with the ordinary creditors of the
bank because Section 30 of R.A. No. 7653 is for equality among creditors. She avers that she is not
a creditor thus is entitled to the immediate payment of her claim, pursuant to Section 189 of the
Negotiable Instruments Law and existing jurisprudence. She argues that putting her on equal footing
with ordinary creditors, would contravene the provisions of the Negotiable Instruments Law and
would greatly diminish her rights as a holder in due course of said two cashier's checks. 12

Petitioner also argues that respondents PDIC and BSP contrary to Sections 185 and 189 of the
Negotiable Instruments Law have caused damage to the petitioner and should be held solidarily
liable by indemnifying the petitioner for the value of the two cashier's checks. 13

Respondents, on the other hand, state that the mere issuance of the cashier's checks did not
operate as assignment of funds in favor of the petitioner. They argue that even prior to the issuance
of the cashier's checks, the bank was already cash-strapped, which negates petitioner's claim that
there was an assignment of funds in her favor.14 There can be no assignment of funds when there is
no funds to speak of in the first place.
They likewise argue that the cashier's checks issued to petitioner were not certified but crossed,
hence, there was no assignment of funds made by the cashier or manager of respondent Prime
Savings Bank-Santiago City Branch as it had insufficient funds to meet the said checks either in its
cash vault or with respondent BSP to clear the said checks.15

Respondents argue that the instant case involves a disputed claim of sum of money against a closed
financial institution. Sections 30 and 31 of R.A. No. 7653, exclusively vests the authority to assess,
evaluate and determine the condition of any bank with the BSP, while the PDIC has the primary
responsibility of acting as receiver or liquidator of the closed financial institution. 16 Since the
relationship between petitioner and Prime Savings Bank is one of creditor and debtor, petitioner
should file her claim with the liquidation court constituted precisely for purposes of adjudicating
claims against the bank in accordance with the rules on concurrence and preference of credits. 17

Respondent PDIC alleges that it was impleaded in its representative capacity as the
receiver/liquidator of the closed institution, therefore, it has no direct, personal and solidary liability
for the payment of the two cashier's checks. Its involvement came about only because a bank under
receivership or liquidation cannot sue or be sued except through its receiver or liquidator. 18

Respondent BSP also insists that not being a party to the said checks nor for imposing sanctions on
co-respondent Prime Savings Bank, is not liable on the said crossed cashier's checks. 19

Anent the first issue, the two cashier's checks issued by Prime Savings Bank do not constitute an
assignment of funds in the hands of the petitioner as there were no funds to speak of in the first
place. The bank was financially insolvent for sometime, even before the issuance of the checks on
June 3, 1999. As the Court of Appeals correctly ruled, the issuance of the cashier's checks to
petitioner did not constitute an assignment of funds, of which there was practically none at the time
these were issued, as the bank was in dire financial straits for some time. 20

As regards the second issue, the claim lodged by the petitioner qualifies as a disputed claim subject
to the jurisdiction of the liquidation court. Regular courts do not have jurisdiction over actions filed by
claimants against an insolvent bank, unless there is a clear showing that the action taken by the
BSP, through the Monetary Board in the closure of financial institutions was in excess of jurisdiction,
or with grave abuse of discretion.

The power and authority of the Monetary Board to close banks and liquidate them thereafter when
public interest so requires is an exercise of the police power of the State. Police power, however, is
subject to judicial inquiry. It may not be exercised arbitrarily or unreasonably and could be set aside
if it is either capricious, discriminatory, whimsical, arbitrary, unjust, or is tantamount to a denial of
due process and equal protection clauses of the Constitution.21

"Disputed claims" refer to all claims, whether they be against the assets of the insolvent bank, for
specific performance, breach of contract, damages, or whatever.22 Petitioner's claim which involved
the payment of the two cashier's checks that were not honored by Prime Savings Bank due to its
closure falls within the ambit of a claim against the assets of the insolvent bank. The issuance of the
cashier's checks by Prime Savings Bank to the petitioner created a debtor/creditor relationship
between them. This disputed claim should therefore be lodged in the liquidation proceedings by the
petitioner as creditor, since the closure of Prime Savings Bank has rendered all claims subsisting at
that time moot which can best be threshed out by the liquidation court and not the regular courts.

It is well-settled in both law and jurisprudence that the Central Monetary Authority, through the
Monetary Board, is vested with exclusive authority to assess, evaluate and determine the condition
of any bank, and finding such condition to be one of insolvency, or that its continuance in business
would involve a probable loss to its depositors or creditors, forbid bank or non-bank financial
institution to do business in the Philippines; and shall designate an official of the BSP or other
competent person as receiver to immediately take charge of its assets and liabilities. 23

In Central Bank of the Philippines v. De la Cruz,24 we held that the actions of the Monetary Board in
proceedings on insolvency are explicitly declared by law to be "final and executory." They may not
be set aside, or restrained, or enjoined by the courts, except upon "convincing proof that the action is
plainly arbitrary and made in bad faith.

Hence, as clearly laid down in Ong v. Court of Appeals,25 the rationale behind judicial liquidation is
intended to prevent multiplicity of actions against the insolvent bank. It is a pragmatic arrangement
designed to establish due process and orderliness in the liquidation of the bank, to obviate the
proliferation of litigations and to avoid injustice and arbitrariness. The lawmaking body contemplated
that for convenience, only one court, if possible, should pass upon the claims against the insolvent
bank and that the liquidation court should assist the Superintendent of Banks and regulate his
operations.

Regarding the third issue, it is only Prime Savings Bank that is liable to pay for the amount of the two
cashier's checks. Solidary liability cannot attach to the BSP, in its capacity as government regulator
of banks, and the PDIC as statutory receiver under R.A. No. 7653, because they are the principal
government agencies mandated by law to determine the financial viability of banks and quasi-banks,
and facilitate receivership and liquidation of closed financial institutions, upon a factual determination
of the latter's insolvency.

As correctly pointed out by the Court of Appeals, the BSP should not be held liable on the crossed
cashier's checks for it was not a party to the issuance of the same; nor can it be held liable for
imposing the sanctions on Prime Savings Bank which indirectly affected Miranda, since it is
mandated under Sec. 37 of R.A. No. 7653 to act accordingly.26 The BSP, through the Monetary
Board was well within its discretion to exercise this power granted by law to issue a resolution
suspending the interbank clearing privileges of Prime Savings Bank, having made a factual
determination that the bank had deficient cash reserves deposited before the BSP. There is no
showing that the BSP abused this discretionary power conferred upon it by law.

In addition, co-respondent PDIC was impleaded as a party-litigant only in its representative capacity
as the receiver/liquidator of Prime Savings Bank. Both BSP and PDIC cannot therefore be held
directly and solidarily liable for the payment of the two cashier's checks. Sole liability rests with Prime
Savings Bank.

In the absence of fraud, the purchase of a cashier's check, like the purchase of a draft on a
correspondent bank, creates the relation of creditor and debtor, not that of principal and agent, with
the result that the purchaser or holder thereof is not entitled to a preference over general creditors in
the assets of the bank issuing the check, when it fails before payment of the check. However, in a
situation involving the element of fraud, where a cashier's check is purchased from a bank at
a time when it is insolvent, as its officers know or are bound to know by the exercise of
reasonable diligence, it has been held that the purchase is entitled to a preference in the
assets of the bank on its liquidation before the check is paid.27

As correctly found by the Court of Appeals:

Prime Savings as a bank did not collapse overnight but was hemorrhaging and in financial
extremis for some time, a fact which could not have gone unnoticed by the bank officers.
 They could not have issued in good faith checks for the total sum of P5,502,000.00 knowing
that the bank's coffers could not meet this.28

Clearly, there was fraud or the intent to deceive when the two cashier's checks dated June 3, 1999
were issued by Prime Savings Bank to the petitioner.

In the distribution of assets of Prime Savings Bank, Section 31 of the New Central Bank Act which
provides that "[i]n case of liquidation of a bank or quasi-bank, after payment of the cost of
proceedings, including reasonable expenses and fees of the receiver to be allowed by the court, the
receiver shall pay the debts of such institution, under order of the court, in accordance with the rules
on concurrence and preference of credit as provided in the Civil Code," should apply.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated February 23,
2005 and the Resolution dated July 7, 2005, in CA-G.R. CV No. 77556, are AFFIRMED with
the MODIFICATION that petitioner Leticia G. Miranda is entitled to a preference in the assets of
Prime Savings Bank in its liquidation for the amounts of P3,002,000.00 and P2,500,000.00,
respectively stated in Cashier's Check No. 0000000514 and 0000000518 dated June 3, 1999 in the
proceedings before the liquidation court designated to adjudicate on all claims against Prime
Savings Bank, in accordance with the rules on concurrence and preference of credits as provided in
the Civil Code.

SO ORDERED.

G.R. No. 227005, June 19, 2017

BDO UNIBANK, INC., Petitioner, v. ENGR. SELWYN LAO, DOING BUSINESS

UNDER THE NAME AND STYLE "SELWYN F. LAO CONSTRUCTION" AND "WING
AN CONSTRUCTION AND DEVELOPMENT CORPORATION" AND INTERNATIONAL
EXCHANGE BANK (NOW UNION BANK OF THE PHILIPPINES), Respondents.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari seeking to reverse and set aside the October
14, 2015 Decision1 and the September 5, 2016 Resolution2 of the Court of Appeals (CA)
in CA-G.R. CV No. 100351, which affirmed, with modification, the July 9, 2012
Decision3 of the Regional Trial Court, Branch 55, Manila (RTC) in Civil Case No. 99-
93068, a case for collection of sum of money.

The Antecedents

On March 9, 1999, respondent Engineer Selwyn S. Lao (Lao) filed before the RTC a
complaint for collection of sum of money against Equitable Banking Corporation, now
petitioner Banco de Oro Unibank (BDO), Everlink Pacific Ventures, Inc. (Everlink), and
Wu Hsieh a.k.a. George Wu (Wu).

In his complaint, Lao alleged that he was doing business under the name and style of
"Selwyn Lao Construction"; that he was a majority stockholder of Wing An Construction
and Development Corporation (Wing An); that he entered into a transaction with
Everlink, through its authorized representative Wu, under which, Everlink would supply
him with "HCG sanitary wares"; and that for the down payment, he issued two (2)
Equitable crossed checks payable to Everlink: Check No. 0127-2422494 and Check No.
0127-242250,5 in the amounts of P273,300.00 and P336,500.00, respectively.

Lao further averred that when the checks were encashed, he contacted Everlink for the
immediate delivery of the sanitary wares, but the latter failed to perform its obligation.
Later, Lao learned that the checks were deposited in two different bank accounts at
respondent International Exchange Bank, now respondent Union Bank of the Philippines
(Union Bank). He was later informed that the two bank accounts belonged to Wu and a
company named New Wave Plastic (New Wave), represented by a certain Willy
Antiporda (Antiporda). Consequently, Lao was prompted to file a complaint against
Everlink and Wu for their failure to comply with their obligation and against BDO for
allowing the encashment of the two (2) checks. He later withdrew his complaint against
Everlink as the corporation had ceased existing.

In its answer, BDO asserted that it had no obligation to ascertain the owner of the
account!s to which the checks were deposited because the instruction to deposit the
said checks to the payee's account only was directed to the payee and the collecting
bank, which in this case was Union Bank; that as the drawee bank, its obligations
consist in examining the genuineness of the signatures appearing on the checks, and
paying the same if there were sufficient funds in the account under which the checks
were drawn; and that the subject checks were properly negotiated and paid in
accordance with the instruction of Lao in crossing them as they were deposited to the
account of the payee Everlink with Union Bank, which then presented them for payment
with BDO.

On August 24, 2001, Lao filed an Amended Complaint, wherein he impleaded Union
Bank as additional defendant for allowing the deposit of the crossed checks in two bank
accounts other than the payee's, in violation of its obligation to deposit the same only
to the payee's account.

In its answer, Union Bank argued that Check No. 0127-242249 was deposited in the
account of Everlink; that Check No. 0127-242250 was validly negotiated by Everlink to
New Wave; that Check No. 0127-242250 was presented for payment to BDO, and the
proceeds thereof were credited to New Wave's account; that it was under no obligation
to deposit the checks only in the account of Everlink because there was nothing on the
checks which would indicate such restriction; and that a crossed check continues to be
negotiable, the only limitation being that it should be presented for payment by a bank.

During trial, BDO presented as its witnesses Elizabeth P. Tinimbang (Tinimbang) and
Atty. Carlos Buenaventura (Atty. Buenaventura).

Tinimbang testified that Everlink was the payee of the two (2) crossed checks issued by
their client, Wing An; that the checks were deposited with Union Bank, which presented
them to BDO for payment. She further narrated that after the checks were cleared and
that the drawer's signatures on the checks were determined to be genuine, that there
was sufficient fund to cover the amounts of the checks, and that there was no order to
stop payment, the checks were paid by BDO. Tinimbang continued that sometime in
July 1998, BDO received a letter from Wing An stating that the amounts of the checks
were not credited to Everlink's account. This prompted BDO to write a letter to Union
Bank demanding the latter to refund the amounts of the checks. In a letter-reply, Union
Bank claimed that the checks were deposited in the account of Everlink.

Atty. Buenaventura claimed that BDO gave credence to Union Bank's representation
that the checks were indeed credited to the account of Everlink. He stated that BDO's
only obligations under the circumstances were to ascertain the genuineness of the
checks, to determine if the account was sufficiently funded and to credit the proceeds
to the collecting bank. On cross-examination, Atty. Buenaventura clarified that Union
Bank endorsed the crossed checks as could be seen on the dorsal portion of the subject
checks. According to him, such endorsement meant that the lack of prior endorsement
was guaranteed by Union Bank.

For its part, Union Bank presented as its witness Jojina Lourdes C. Vega (Vega), its
Branch Business Manager. Vega testified that the transaction history of Everlink's
account with Union Bank and the notation at the back of the check indicating Everlink's
Account No. (005030000925) revealed that the proceeds of Check No. 0127-242249
were duly credited to Everlink's account on September 22, 1997. As regards Check No.
0127-242250, Vega clarified that the proceeds of the same were credited to New
Wave's account. She explained that New Wave was a valued client of Union Bank. As a
form of accommodation extended to valued clients, Union Bank would request the
signing of a second endorsement agreement because the payee was not the same as
the account holder. In this case, Antiporda executed a Deed of Undertaking (Second
Endorsed Checks) wherein he assumed the responsibilities for the correctness,
genuineness, and validity of the subject checks.

The RTC Ruling

In its Decision, dated July 9, 2012, the RTC absolved BDO from any liability, but
ordered Union Bank to pay Lao the amount of P336,500.00, representing the value of
Check No. 0127-242250; P50,000.00 as moral damages; P100,000.00 as exemplary
damages; and P50,000.00 as attorney's fees.

The RTC observed that there was nothing irregular with the transaction of Check No.
0127-242249 because the same was deposited in Everlink's account with Union Bank.
It, however, found that Check No. 0127-242250 was irregularly deposited and
encashed because it was not issued for the account of Everlink, the payee, but for the
account of New Wave. The trial court noted further that Check No. 0127-242250 was
not even endorsed by Everlink to New Wave. Thus, it opined that Union Bank was
negligent in allowing the deposit and encashment of the said check without proper
endorsement. The RTC wrote that considering that the subject check was a crossed
check, Union Bank failed to take reasonable steps in order to determine the validity of
the representations made by Antiporda. In the end, it adjudged that BDO could not be
held liable because of Union Bank's warranty when it stamped on the check that "all
prior endorsement and/or lack of endorsement guaranteed." The dispositive portion of
the decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in FAVOR of the

plaintiff Engr. Selwyn F. Lao and AGAINST the defendant International Exchange Bank
(now Union Bank) ordering the latter to pay the former the following: chanRoblesvirtualLawlibrary
 1. The amount of Three Hundred Thirty Six Thousand Five Hundred
Pesos (P336,500.00) representing the Equitable Bank Check No.
0127-242250;

2. The amount of Fifty Thousand Pesos (P50,000.00) representing

moral damages;

3. The amount of One Hundred Thousand Pesos (P100,000.00)

representing exemplary damages; and,

4. The amount of Fifty Thousand Pesos (P50,000.00) as attorney's

fees.

The Complaints against defendants Equitable Banking Corporation (now Banco de Oro)
and Wu Shu Chien a.k.a. George Wu are hereby ordered DISMISSED.

Costs against the defendant International and Exchange Bank (now Union Bank).

SO ORDERED.6
Aggrieved, Union Bank elevated an appeal to the CA.7

The CA Ruling

In its assailed Decision, dated October 14, 2015, the CA affirmed, with modification, the
ruling of the RTC. It ordered BDO to pay Lao the amount of P336,500.00, with legal
interest from the time of filing of the complaint until its full satisfaction. The appellate
court further directed Union Bank to reimburse BDO the aforementioned amount. It
concurred with the RTC that Union Bank was liable because of its negligence and its
guarantee on the validity of all prior endorsements or lack of it.

With regard to BDO's liability, the CA explained that it violated its duty to charge to the
drawer's account only those authorized by the latter when it paid the value of Check
No. 0127-242250. Thus, it held that BDO was liable for the amount charged to the
drawer's account. The fallo reads: chanRoblesvirtualLawlibrary

FOR THESE REASONS, the appeal is PARTLY GRANTED. The July 9, 2012 Decision of
the Regional Trial Court of Manila, Branch 55
is AFFIRMED with MODIFICATIONS that Equitable Bank is ordered to pay Selwyn Lao
the amount corresponding to Check No. 0127-242250, i.e., P336,500.00, with legal
interest from the time of filing of the complaint until the amount is fully paid.
International Exchange Bank (now Union Bank of the Philippines) is ordered to
reimburse Equitable Bank the abovementioned amount. The award of damages and
attorney's fees is DELETED. The rest of the Decision stands.

SO ORDERED.8
On November 5, 2012, BDO filed its Motion for Partial Reconsideration. It argued that
neither Lao nor Union Bank appealed the dismissal of the complaint against it, thus, the
RTC decision had already attained finality as far as it was concerned. It also prayed that
Lao should be allowed to recover directly from Union Bank.

In its assailed Resolution, dated September 6, 2016, the CA denied BDO's Motion for
Partial Reconsideration. It ratiocinated that in Bank of America, NT & SA v. Associated
Citizens Bank,9 (Bank of America) the drawee bank was adjudged liable for the amount
charged to the drawer's account, while the collecting bank was ordered to reimburse
the drawee bank whatever amount the latter was made to pay.

Hence, this petition anchored on the following: chanRoblesvirtualLawlibrary

GROUNDS

I.

ISSUES NOT RAISED BY THE PARTIES ON APPEAL CANNOT BE REVIEWED NOR

RULED UPON BY THE APPELLATE COURT.

II.

A COLLECTING BANK ASSUMES RESPONSIBILITY FOR A CROSSED CHECK AS A

GENERAL ENDORSER IN ACCORDANCE WITH SECTION 66 OF THE NEGOTIABLE
INSTRUMENTS LAW.

III.

THE PARTY WHICH DID NOT EXERCISE THE REQUIRED DILIGENCE IS THE
CAUSE OF THE LOSS AND BEARS THE DAMAGES.10
BDO argued that the CA's order for it to pay Lao was erroneous as the RTC had already
adjudged with finality that it was not liable. It posited that the appellate court could not
resolve issues not raised on appeal by both parties thereto. BDO pointed out that it was
not a party in the appeal before the CA. It further stressed that neither Lao nor Union
Bank assailed the RTC decision with respect to the dismissal of the complaint against it
during the appeal before the CA, and even on motion for reconsideration before the
RTC. Thus, for failure to appeal therefrom, the RTC decision had already attained
finality as to BDO.

BDO further averred that Union Bank, as the collecting bank and last endorser, must
suffer the loss because it had the duty to ascertain the genuineness of all prior
endorsement. It asserted that as the drawee bank, it could not be held liable because it
merely relied on Union Bank's express guarantee. It added that the proximate cause of
the loss suffered by Lao was the negligence of Union Bank when it allowed the deposit
of the crossed check intended for Everlink to New Wave's account.

In his Comment,11 dated January 26, 2017, Lao asserted that the CA did not commit
any error when it resolved the issue on the liability of BDO even if it was not raised on
appeal. He was of the view that the said issue was inextricably intertwined with the
principal issue. Lao stated that the CA correctly adjudged BDO liable, without prejudice
to its right to seek reimbursement from Union Bank, as it was the correct sequence in
the enforcement of payment in cases where the collecting bank allowed a crossed check
to be deposited in the account of a person other than the payee.

Union Bank did not file any comment on BDO's petition.

The Court's Ruling

The petition is meritorious.

Ordinarily, this Court would have concurred with the CA as regards the applicability
of Bank of America. There is, however, a peculiar circumstance which would prevent the
application of Bank of America in the present case.

Sequence of Recovery in cases of unauthorized payment of checks

The Court agrees with the appellate court that in cases of unauthorized payment of
checks to a person other than the payee named therein, the drawee bank may be held
liable to the drawer. The drawee bank, in turn, may seek reimbursement from the
collecting bank for the amount of the check. This rule on the sequence of recovery in
case of unauthorized check transactions had already been deeply embedded
injurisprudence.12

The liability of the drawee bank is based on its contract with the drawer and its duty to
charge to the latter's accounts only those payables authorized by him. A drawee bank is
under strict liability to pay the check only to the payee or to the payee's order. When
the drawee bank pays a person other than the payee named in the check, it does not
comply with the terms of the check and violates its duty to charge the drawer's account
only for properly payable items.13

On the other hand, the liability of the collecting bank is anchored on its guarantees as
the last endorser of the check. Under Section 66 of the Negotiable Instruments Law, an
endorser warrants "that the instrument is genuine and in all respects what it purports
to be; that he has good title to it; that all prior parties had capacity to contract; and
that the instrument is at the time of his endorsement valid and subsisting."

It has been repeatedly held that in check transactions, the collecting bank generally
suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for payment to the
drawee is an assertion that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. If any of the warranties made by the
collecting bank turns out to be false, then the drawee bank may recover from it up to
the amount of the check.14

In the present case, BDO paid the value of Check No. 0127-242250 to Union Bank,
which, in turn, credited the amount to New Wave's account. The payment by BDO was
in violation of Lao's instruction because the same was not issued in favor of Everlink,
the payee named in the check. It must be pointed out that the subject check was not
even endorsed by Everlink to New Wave. Clearly, BDO violated its duty to charge to
Lao's account only those payables authorized by him.

Nevertheless, even with such clear violation by BDO of its duty, the loss would have
ultimately pertained to Union Bank. By stamping at the back of the subject check the
phrase "all prior endorsements and/or lack of it guaranteed," Union Bank had, for all
intents and purposes treated the check as a negotiable instrument and, accordingly,
assumed the warranty of an endorser. Without such warranty, BDO would not have
paid the proceeds of the check. Thus, Union Bank cannot now deny liability after the
aforesaid warranty turned out to be false.15

Union Bank was clearly negligent when it allowed the check to be presented by, and
deposited in the account of New Wave, despite knowledge that it was not the payee
named therein. Further, it could not have escaped its attention that the subject checks
were crossed checks.

A crossed check is one where two parallel lines are drawn across its face or across the
comer thereof. A check may be crossed generally or specially. A check is crossed
especially when the name of a particular banker or company is written between the
parallel lines drawn. It is crossed generally when only the words "and company" are
written at all between the parallellines.16

Jurisprudence dictates that the effects of crossing a check are: (1) that the check may
not be encashed but only deposited in the bank; (2) that the check may be negotiated
only once - to one who has an account with a bank; and (3) that the act of crossing the
check serves as a warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check pursuant to that
purpose.17 The effects of crossing a check, thus, relate to the mode of payment,
meaning that the drawer had intended the check for deposit only by the rightful person,
i.e., the payee named therein.18

It is undisputed that Check No. 0127-242250 had been crossed generally as nothing
was written between the parallel lines appearing on the face of the instrument. This
indicated that Lao, the drawer, had intended the same for deposit only to the account
of Everlink, the payee named therein. Despite this clear intention, however, Union Bank
negligently allowed the deposit of the proceeds of the said check in the account of New
Wave.

Generally, BDO must be ordered to pay Lao the value of the subject check; whereas,
Union Bank would be ordered to reimburse BDO the amount of the check. The aforesaid
sequence of recovery, however, is not applicable in the present case due to the
presence of certain factual peculiarities.

Simplification of the proceedings for Recovery

Although the rule on the sequence of recovery has been deeply engrained in
jurisprudence, there may be exceptional circumstances which would justify its
simplification. Stated differently, the aggrieved party may be allowed to recover directly
from the person which caused the loss when circumstances warrant. In Associated
Bank v. Court of Appeals (Associated Bank),19 the person who suffered the loss as a
result of the unauthorized encashment of crossed checks was allowed to recover the
loss directly from the negligent bank despite the latter's contention of lack of privity of
contract. The Court said:chanRoblesvirtualLawlibrary

There being no evidence that the crossed checks were actually received by the private
respondent, she would have a right of action against the drawer companies, which in
turn could go against their respective drawee banks, which in turn could sue the herein
petitioner as collecting bank. In a similar situation, it was held that, to simplify
proceedings, the payee of the illegally encashed checks should be allowed to recover
directly from the bank responsible for such encashment regardless of whether or not
the checks were actually delivered to the payee. We approve such direct action in the
case at bar.20
A peculiar circumstance in Associated Bank is the fact that the drawer companies,
which should have been directly liable to the aggrieved payee, were not impleaded as
parties in the suit. In this regard, it is a fundamental principle in this jurisdiction that a
person cannot be prejudiced by a ruling rendered in an action or proceeding in which he
has not been made a party. This principle conforms to the constitutional guarantee of
due process of law.21 To the mind of the Court, this principle was a foremost underlying
consideration for allowing the direct recovery by the payee from the negligent collecting
bank.

Finality of the RTC decision with respect to BDO justifies the simplification of the
proceedings for recovery.

BDO argues that the appellate court erred in ordering it to pay the amount of the
subject check to Lao because it was no longer a party in the case, not being impleaded
in the appeal, and that the issue as regards its liability had already been settled with
finality by the RTC.

The Court agrees.

It has been held that it is not the caption of the pleading, but the allegations therein
that are controlling. The non-inclusion of a party in the title of the pleading is not fatal
to the case, provided there is a statement in the body indicating that such non-included
person is a party to the case.22

BDO was not impleaded as a party in Union Bank's appeal before the CA. This is evident
from the title of the case before the CA, and the respective briefs of Union Bank and
Lao, which mentioned only Lao and Union Bank as parties thereto. Moreover, in their
respective briefs before the appellate court, neither Lao23 nor Union Bank24 made any
statement or raised any issue on BDO's liability and its inclusion as a party in the
appeal.

Consequently, because of Lao and Union Bank's failure to appeal the July 9, 2012
Decision of the RTC with respect to BDO's lack of liability, said decision became final as
to the latter.

The finality of the July 9, 2012 RTC Decision as to BDO, which absolved it from any
liability, necessarily means that it could not be prejudiced or adversely affected by the
decision rendered in the appeal. It is elementary in this jurisdiction that a person
cannot be bound by a decision wherein it was not a party.25 A contrary finding would
violate BDO's constitutional right to due process. Needless to state, the appellate court
erred in ordering BDO to pay the amount of the subject check because the latter was
not made a party in the appeal, and the issue as to its liability or lack thereof, was not
raised on appeal.

From the foregoing, the Court is of the considered view that the pronouncements made
in Associated Bank as regards the simplification of the recovery proceedings are
applicable in the present case. The factual milieu of this case are substantially similar
with that of Associated Bank, i.e., a crossed check was presented and deposited,
without authority, in the account of a person other than the payee named therein; the
collecting bank endorsed the crossed check and warrant the validity of all prior
endorsements and/or lack of it; the warranty turned out to be false; and, a party to the
check transaction, which would otherwise be held liable to the party aggrieved, was not
made a party in the proceedings in court.

To summarize, Lao, the drawer of the subject check, has a right of action against BDO
for its failure to comply with its duty as the drawee bank. BDO, in turn, would have a
right of action against Union Bank because of the falsity of its warranties as the
collecting bank. Considering, however, that BDO was not made a party in the appeal, it
could no longer be held liable to Lao. Thus, following Associated Bank, the proceedings
for recovery must be simplified and Lao should be allowed to recover directly from
Union Bank.

WHEREFORE, the petition is GRANTED. The October 14, 2015 Decision and the
September 5, 2016 Resolution of the Court of Appeals in CA-G.R. CV No. 100351 are
hereby REVERSED and SET ASIDE insofar as it ordered petitioner BDO Unibank, Inc.
to pay Selwyn Lao the amount of Check No. 0127-242250. The rest of the decision
is AFFIRMED.

The amount shall earn interest at the rate of twelve percent (12%) per annum from
August 24,2001, the date of judicial demand, to June 30,2013. From July 1, 2013, the
rate shall be six percent (6%) per annum until full satisfaction.

SO ORDERED.

G.R. No. 211564, November 20, 2017

BENJAMIN EVANGELISTA, Petitioner, v. SCREENEX,1 INC., REPRESENTED BY

ALEXANDER G, YU, Respondent.

DECISION

SERENO, C.J.:

This is a Petition2 for Review on Certiorari seeking to set aside the Decision3 and
Resolution4 rendered by the Court of Appeals (CA) Manila, Fifth Division, in CA-G.R. SP
No. 110680.

ANTECEDENT FACTS

The facts as summarized by the CA are as follows:

Sometime in 1991, [Evangelista] obtained a loan from respondent Screenex, Inc. which
issued two (2) checks to [Evangelista]. The first check was UCPB Check No. 275345 for
P1,000,000 and the other one is China Banking Corporation Check No. BDO 8159110
for P500,000. There were also vouchers of Screenex that were signed by the accused
evidencing that he received the 2 checks in acceptance of the loan granted to him.
As security for the payment of the loan, [Evangelista] gave two (2) open dated checks:
UCPB Check Nos. 616656 and 616657, both pay to the order of Screenex, Inc. From
the time the checks were issued by [Evangelista], they were held in safe keeping
together with the other documents and papers of the company by Philip Gotuaco, Sr.,
father-in�-law of respondent Alexander Yu, until the former's death on 19 November
2004.

Before the checks were deposited, there was a personal demand from the family for
[Evangelista] to settle the loan and likewise a demand letter sent by the family lawyer.5

On 25 August 2005, petitioner was charged with violation of Batas Pambansa (BP) Blg.
22 in Criminal Case Nos. 343615-16 filed with the Metropolitan Trial Court (MeTC) of
Makati City, Branch 61.6 The Information reads:

That sometime in 1991, in the City of Makati, Metro Manila, Philippines, a place within
the jurisdiction of this Honorable Court, the above-named accused, did then and there,
willfully, unlawfully and feloniously make out, draw, and issue to SCREENEX INC.,
herein represented by ALEXANDER G. YU, to apply on account or for value the checks
described below:

� Check No. Date Amount

United Coconut AGR 616656 12-22-04 P1,000,000.00
Planters Bank AGR 616657 12-22-04 500,000.00

said accused well knowing that at the time of issue thereof, said accused did not have
sufficient funds in or credit with the drawee bank for the payment in full of the face
amount of such check upon its presentment which check when presented for payment
within ninety (90) days from the date thereof, was subsequently dishonored by the
drawee bank for the reason "ACCOUNT CLOSED" and despite receipt of notice of such
dishonor, the said accused failed to pay said payee the face amount of said checks or to
make arrangement for full payment thereof within five (5) banking days after receiving
notice.

CONTRARY TO LAW.7

Petitioner pleaded not guilty when arraigned, and trial proceeded.8

THE RULING OF THE MeTC

The MeTC found that the prosecution had indeed proved the first two elements of cases
involving violation of BP 22: i.e. the accused makes, draws or issues any check to apply
to account or for value, and the check is subsequently dishonored by the drawee bank
for insufficiency of funds or credit; or the check would have been dishonored for the
same reason had not the drawer, without any valid reason, ordered the bank to stop
payment. The trial court pointed out, though, that the prosecution failed to prove the
third element; i.e. at the time of the issuance of the check to the payee, the latter did
not have sufficient funds in, or credit with, the drawee bank for payment of the check in
full upon its presentment.9 In the instant case, the court held that while prosecution
witness Alexander G. Yu declared that the lawyer had sent a demand letter to
Evangelista, Yu failed to prove that the letter had actually been received by addressee.
Because there was no way to determine when the five-day period should start to toll,
there was a failure to establish prima facie evidence of knowledge of the insufficiency of
funds on the part of Evangelista.10 Hence, the court acquitted him of the criminal
charges.

Ruling on the civil aspect of the cases, the court held that while Evangelista admitted to
having issued and delivered the checks to Gotuaco and to having fully paid the amounts
indicated therein, no evidence of payment was presented.11 It further held that the
creditor's possession of the instrument of credit was sufficient evidence that the debt
claimed had not yet been paid.12 In the end, Evangelista was declared liable for the
corresponding civil obligation.13

The dispositive portion of the Decision14 reads:

WHEREFORE, judgment is rendered acquitting the accused BENJAMIN EVANGELISTA for

failure of the prosecution to establish all the elements constituting the offense of
Violation of B.P. 22 for two (2) counts. However, accused is hereby ordered to pay his
civil obligation to the private complainant in the total amount of ONE MILLION FIVE
HUNDRED THOUSAND PESOS (P1,500,000) plus twelve (12%) percent interest per
annum from the date of the filing of the two sets of Information until fully paid and to
pay the costs of suit.

SO ORDERED.15

THE RULING OF THE RTC

Evangelista filed a timely Notice of Appeal16 and raised two errors of the MeTC before
the Regional Trial Court (RTC) of Makati City, Branch 147. Docketed therein as Criminal
Case Nos. 08-1723 and 08-1724, the appeal posed the following issues: (1) the lower
court erred in not appreciating the fact that the prosecution failed to prove the civil
liability of Evangelista to private complainant; and (2) any civil liability attributable to
Evangelista had been extinguished and/or was barred by prescription.17

After the parties submitted their respective Memoranda,18 the RTC ruled that the checks
should be taken as evidence of Evangelista's indebtedness to Gotuaco, such that even if
the criminal aspect of the charge had not been established, the obligation
subsisted.19 Also, the alleged payment by Evangelista was an affirmative defense that
he had the burden of proving, but that he failed to discharge.20 With respect to the
defense of prescription, the RTC ruled in this wise:

As to the defense of prescription, the same cannot be successfully invoked in this

appeal. The 10-year prescriptive period of the action under Art. 1144 of the New Civil
Code is computed from the time the right of action accrues. The terms and conditions
of the loan obligation have not been shown, as only the checks evidence the same. It
has not been shown when the loan obligation was to mature such that there is no basis
to show or from which to infer, when the cause of action (non-payment of the loan)
which would give the obligee the right to seek redress for the non-payment of the
obligation, accrued. In other words, the reckoning point of prescription has not been
established.

Prosecution witness Alexander G. Yu was not competent to state that the loan was
contracted in 1991 as in fact, Yu admitted that it was a few months before his father-
in-law (Philip Gotuaco) died when the latter told him about accused's failure to pay his
obligation. That was a few months before November 19, 2004, date of death of his
father-in-law.

At any rate, the right of action in this case is not upon a written contract, for which
reason, Art. 1144, New Civil Code, on prescription does not apply.21

In a Decision22 dated 18 December 2008, the RTC dismissed the appeal and affirmed
the MeTC decision in toto.23 The Motion for Reconsideration24 was likewise denied in an
Order25 dated 19 August 2009.

THE RULING OF THE CA

Evangelista filed a petition for review26 before the CA insisting that the lower court erred
in finding him liable to pay the sum with interest at 12% per annum from the date of
filing until full payment. He further alleged that witness Yu was not competent to testify
on the loan transaction; that the insertion of the date on the checks without the
knowledge of the accused was an alteration that avoided the checks; and that the
obligation had been extinguished by prescription.27

Screenex, Inc., represented by Yu, filed its Comment.28 Yu claimed that he had testified
on the basis of his personal dealings with his father-in� law, whom Evangelista dealt
with in obtaining the loan. He further claimed that during the trial, petitioner never
raised the competence of the witness as an issue.29 Moreover, Yu argued that
prescription set in from the accrual of the obligation; hence, while the loan was
transacted in 1991, the demand was made in February 2005, which was within the 10-
year prescriptive period.30 Yu also argued that while Evangelista claimed under oath
that the loan had been paid in 1992, he was not able to present any proof of
payment.31 Meanwhile, Yu insisted that the material alteration invoked by Evangelista
was unavailing, since the checks were undated; hence, nothing had been
altered.32 Finally, Yu argued that Evangelista should not be allowed to invoke
prescription, which he was raising for the first time on appeal, and for which no
evidence was adduced in the court of origin.33

The CA denied the petition.34 It held that (1) the reckoning time for the prescriptive
period began when the instrument was issued and the corresponding check returned by
the bank to its depositor;35 (2) the issue of prescription was raised for the first time on
appeal with the RTC;36 (3) the writing of the date on the check cannot be considered as
an alteration, as the checks were undated, so there was nothing to change to begin
with;37 (4) the loan obligation was never denied by petitioner, who claimed that it was
settled in 1992, but failed to show any proof of payment.38 Quoting the MeTC Decision,
the CA declared:

[t]he mere possession of a document evidencing an obligation by the person in whose

favor it was executed, merely raises a presumption of nonpayment which may be
overcome by proof of payment, or by satisfactory explanation of the fact that the
instrument is found in the hands of the original creditor not inconsistent with the fact of
payment.39

The dispositive portion reads:

WHEREFORE, premises considered, the petition is DENIED. The assailed August 19,
2009 Order of the Regional Trial Court, Branch 147, Makati City, denying petitioner's
Motion for Reconsideration of the Court's December 18, 2008 Decision in Crim. Case
Nos. 08-1723 and 08-1724 are AFFIRMED.

SO ORDERED.40

Petitioner filed a Motion for Reconsideration,41 which was similarly denied in a

Resolution42 dated 27 February 2014.

Hence, this Petition,43 in which petitioner contends that the lower court erred in
ordering the accused to pay his alleged civil obligation to private complainant. In
particular, he argues that the court did not consider the prosecution's failure to prove
his civil liability to respondent, and that any civil liability there might have been was
already extinguished and/or barred by prescription.44

Meanwhile, respondent filed its Comment,45 arguing that the date of prescription was
reckoned from the date of the check, 22 December 2004. So when the complaint was
filed on 25 August 2005, it was supposedly well within the prescriptive period of ten
(10) years under Article 1144 of the New Civil Code.46

OUR RULING

With petitioner's acquittal of the criminal charges for violation of BP 22, the only issue
to be resolved in this petition is whether the CA committed a reversible error in holding
that petitioner is still liable for the total amount of P1.5 million indicated in the two
checks.

We rule in favor of petitioner.

A check is discharged by any other act which will discharge a simple contract for the
payment of money.

In BP 22 cases, the action for the corresponding civil obligation is deemed instituted
with the criminal action.47 The criminal action for violation of BP 22 necessarily includes
the corresponding civil action, and no reservation to file such civil action separately
shall be allowed or recognized.48

The rationale for this rule has been elucidated in this wise:

Generally, no filing fees are required for criminal cases, but because of the inclusion of
the civil action in complaints for violation of B.P. 22, the Rules require the payment of
docket fees upon the filing of the complaint. This rule was enacted to help declog court
dockets which are filled with B.P. 22 cases as creditors actually use the courts as
collectors. Because ordinarily no filing fee is charged in criminal cases for actual
damages, the payee uses the intimidating effect of a criminal charge to collect his
credit gratis and sometimes, upon being paid, the trial court is not even informed
thereof. The inclusion of the civil action in the criminal case is expected to significantly
lower the number of cases filed before the courts for collection based on dishonored
checks. It is also expected to expedite the disposition of these cases. Instead of
instituting two separate cases, one for criminal and another for civil, only a single suit
shall be filed and tried. It should be stressed that the policy laid down by the Rules is to
discourage the separate filing of the civil action. The Rules even prohibit the reservation
of a separate civil action, which means that one can no longer file a separate civil case
after the criminal complaint is filed in court. The only instance when separate
proceedings are allowed is when the civil action is filed ahead of the criminal case. Even
then, the Rules encourage the consolidation of the civil and criminal cases. We have
previously observed that a separate civil action for the purpose of recovering the
amount of the dishonored checks would only prove to be costly, burdensome and time-
consuming for both parties and would further delay the final disposition of the case.
This multiplicity of suits must be avoided.49 (Citations omitted)

This notwithstanding, the civil action deemed instituted with the criminal action is
treated as an "independent civil liability based on contract."50

By definition, a check is a bill of exchange drawn on a bank 'payable on demand.51 It is

a negotiable instrument - written and signed by a drawer containing an unconditional
order to pay on demand a sum certain in money.52 It is an undertaking that the drawer
will pay the amount indicated thereon. Section 119 of the NIL, however, states that a
negotiable instrument like a check may be discharged by any other act which will
discharge a simple contract for the payment of money, to wit:

Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged:

(a) By payment in due course by or on behalf of the principal debtor;

(b) By payment in due course by the party accommodated, where the instrument is
made or accepted for his accommodation;

(c) By the intentional cancellation thereof by the holder;

(d) By any other act which will discharge a simple contract for the payment of
money;

(e) When the principal debtor becomes the holder of the instrument at or after maturity
in his own right. (Emphasis supplied)

A check therefore is subject to prescription of actions upon a written contract. Article

1144 of the Civil Code provides:
Article 1144. The following actions must be brought within ten years from the time the
right of action accrues:

1) Upon a written contract;

2) Upon an obligation created by law;
3) Upon a judgment. (Emphasis supplied)

Barring any extrajudicial or judicial demand that may toll the 10-year prescription
period and any evidence which may indicate any other time when the obligation to pay
is due, the cause of action based on a check is reckoned from the date indicated on the
check.

If the check is undated, however, as in the present petition, the cause of action is
reckoned from the date of the issuance of the check. This is so because regardless of
the omission of the date indicated on the check, Section 1753 of the Negotiable
Instruments Law instructs that an undated check is presumed dated as of the time of
its issuance.

While the space for the date on a check may also be filled, it must, however, be filled
up strictly in accordance with the authority given and within a reasonable
time.54 Assuming that Yu had authority to insert the dates in the checks, the fact that
he did so after a lapse of more than 10 years from their issuance certainly cannot
qualify as changes made within a reasonable time.

Given the foregoing, the cause of action on the checks has become stale, hence, time-
barred. No written extrajudicial or judicial demand was shown to have been made
within 10 years which could have tolled the period. Prescription has indeed set in.

Prescription allows the court to dismiss the case motu proprio.

We therefore have no other recourse but to grant the instant petition on the ground of
prescription. Even if that defense was belatedly raised before the RTC for the first time
on appeal from the ruling of the MeTC, we nonetheless dismiss the complaint, seeking
to enforce the civil liability of Evangelista based on the undated checks, by applying
Section 1 of Rule 9 of the Rules of Court, to wit:

Section 1. Defenses and objections not pleaded. - Defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived. However, when it
appears from the pleadings or the evidence on record that the court has no jurisdiction
over the subject matter, that there is another action pending between the same parties
for the same cause, or that the action is barred by a prior judgment or by statute of
limitations, the court shall dismiss the claim.

While it was on appeal before the RTC that petitioner invoked the defense of
prescription, we find that the pleadings and the evidence on record indubitably establish
that the action to hold petitioner liable for the two checks has already prescribed.

The delivery of the check produces the effect of payment when through the fault of the
creditor they have been impaired

It is a settled rule that the creditor's possession of the evidence of debt is proof that the
debt has not been discharged by payment.55 It is likewise an established tenet that a
negotiable instrument is only a substitute for money and not money, and the delivery of
such an instrument does not, by itself, operate as payment.56 Thus, in BPI v. Spouses
Royeca,57 we ruled that despite the lapse of three years from the time the checks were
issued, the obligation still subsisted and was merely suspended until the payment by
commercial document could actually be realized.58

However, payment is deemed effected and the obligation for which the check was given
as conditional payment is treated discharged, if a period of 10 years or more has
elapsed from the date indicated on the check until the date of encashment or
presentment for payment. The failure to encash the checks within a reasonable time
after issue, or more than 1 0 years in this instance, not only results in the checks
becoming stale but also in the obligation to pay being deemed fulfilled by operation of
law.

Art. 1249 of the Civil Code specifically provides that checks should be presented for
payment within a reasonable period after their issuance, to wit:

Art. 1249. The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is legal
tender in the Philippines.

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

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

In the meantime, the action derived from the original obligation shall be held in the
abeyance. (Emphasis supplied)

This rule is similarly stated in the Negotiable Instruments Law as follows:

Sec. 186. Within what time a check must be presented. � A check must be presented
for payment within a reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the loss caused by the
delay. (Emphasis supplied)

These provisions were the very same ones we cited when we discharged a check by
reason of the creditor's unreasonable or unexplained delay in encashing it. In Papa v.
Valencia,59 the respondents supposedly paid the petitioner the purchase price of the lots
in cash and in check. The latter disputed this claim and argued that he had never
encashed the checks, and that he could no longer recall the transaction that happened
10 years earlier. This Court ruled:
Granting that petitioner had never encashed the check, his failure to do so for more
than ten (10) years undoubtedly resulted in the impairment of the check through his
unreasonable and unexplained delay.

While it is true that the delivery of a check produces the effect of payment only when it
is cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is
prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a
check implies an undertaking of due diligence in presenting it for payment,
and if he from whom it is received sustains loss by want of such diligence, it
will be held to operate as actual payment of the debt or obligation for which it
was given. It has, likewise, been held that if no presentment is made at all, the
drawer cannot be held liable irrespective of loss or injury unless presentment is
otherwise excused. This is in harmony with Article 1249 of the Civil Code under which
payment by way of check or other negotiable instrument is conditioned on its being
cashed, except when through the fault of the creditor, the instrument is impaired. The
payee of a check would be a creditor under this provision and if its no-payment is
caused by his negligence, payment will be deemed effected and the obligation for which
the check was given as conditional payment will be discharged.60 (Citations omitted and
emphasis supplied)

Similarly in this case, we find that the delivery of the checks, despite the subsequent
failure to encash them within a period of 10 years or more, had the effect of payment.
Petitioner is considered discharged from his obligation to pay and can no longer be
pronounced civilly liable for the amounts indicated thereon.

WHEREFORE, the instant Petition is GRANTED. The Decision dated 1 October 2013
and Resolution dated 27 February 2014 in CA-G.R. SP No. 110680 are SET ASIDE. The
Complaint against petitioner is hereby DISMISSED.

SO ORDERED.

G.R. No. 235565, June 20, 2018

BANK OF COMMERCE, Petitioner, v. JUNNEL'S MARKETING CORPORATION,

PURIFICACION DELIZO, AND METROPOLITAN BANK AND TRUST
COMPANY, Respondents.

DECISION

VELASCO JR., J.:

At bench are two appeals1 assailing the Decision2 dated 22 March 2017 and
Resolution3 dated 19 October 2017 of the Court of Appeals (CA) in CA-G.R. CV No.
102462. The first appeal was filed by the Metropolitan Bank and Trust Company
(Metrobank), while the second by the Bank of Commerce (Bankcom).

The facts are as follows:

Respondent Junnel's Marketing Corporation (JMC) is a domestic corporation engaged in

the business of selling wines and liquors. It has a current account with Metrobank4 from
which it draws checks to pay its different suppliers. Among JMC's suppliers are Jardine
Wines and Spirits (Jardine) and Premiere Wines (Premiere).

In 2000, during an audit of its financial records,5 JMC discovered an anomaly involving
eleven (11) checks (subject checks) it had issued to the orders of Jardine and Premiere
on various dates between October 1998 to May 1999. As it was, the subject checks had
already been charged against JMC's current account but were, for some reason, not
covered by any official receipt from Jardine or Premiere. The subject checks, which are
all crossed checks and amounting to P1,481,292.00 in total, are as follows:

Checks Payable to the Order of Jardine:

1. Check No. 3010048953 - issued on 11 October 1998 in the amount of

P181,440.00

2. Check No. 3010048955 - issued on 24 October 1998 in the amount of

P195,840.00

3. Check No. 3010069098 - issued on 18 May 1999 in the amount of P58,164.56

4. Check No. 3010069099 - issued on 18 May 1999 in the amount of P44,651.52

5. Check No. 3010049551 - issued on 25 May 1999 in the amount of P103,680.00

6. Check No. 3010049550 - issued on 30 May 1999 in the amount of P103,680.00

7. Check No. 3010048954 - issued on 29 December 1998 in the amount of

P195,840.00

Checks Payable to the Order of Premiere:

1. Check No. 3010049149 - issued on 9 December 1998 in the amount of

P136,220.00

2. Check No. 3010049148 - issued on 16 December 1998 in the amount of

P136,220.00

3. Check No. 3010049410 - issued on 18 April 1999 in the amount of P189,336.00.

4. Check No. 3010049150 - issued on 27 November 1998 in the amount of

P136,220.00

Examination of the dorsal portion of the subject checks revealed that all had been
deposited with Bankcom, Dau branch, under Account No. 0015-32987-7.6 Upon
inquiring with Jardine and Premiere, however, JMC was able to confirm that neither of
the said suppliers owns Bankcom Account No. 0015-32987-7.

Meanwhile, on 30 April 2000, respondent Purificacion Delizo (Delizo), a former

accountant of JMC, executed a handwritten letter7 addressed to one Nelvia Yusi,
President of JMC. In the said letter, Delizo confessed that, during her time as an
accountant for JMC, she stole several company checks drawn against JMC's current
account. She professed that the said checks were never given to the named payees but
were forwarded by her to one Lita Bituin (Bituin). Delizo further admitted that she,
Bituin and an unknown bank manager colluded to cause the deposit and encashing of
the stolen checks and shared in the proceeds thereof.

JMC surmised that the subject checks are among the checks purportedly stolen by
Delizo.

On 28 January 2002, JMC filed before the Regional Trial Court (RTC) of Pasay City a
complaint for sum of money8 against Delizo, Bankcom and Metrobank. The complaint
was raffled to Branch 115 and was docketed as Civil Case No. 02-0193.

In its complaint, JMC alleged that the wrongful conversion of the subject checks was
caused by a combination of the "tortious and felonious" scheme of Delizo and the
"negligent and unlawful acts" of Bankcom and Metrobank, to wit:9

1. Delizo, by her own admission, stole the company checks of JMC. Among these
checks, as confirmed by JMC's audit, are the subject checks.

2. After stealing the subject checks, Delizo and her accomplices, Bituin and an
unknown bank manager, caused the subject checks to be deposited in Bankcom,
Dau branch, under Account No. 0015-32987-7. Bankcom, on the other hand,
negligently accepted the subject checks for deposit under the said account
despite the fact that they are crossed checks payable to the orders of Jardine
and Premiere and neither of them owns the concerned account.

3. Thereafter, Bankcom presented the subject checks for payment to Metrobank

which, also in negligence, decided to honor the said checks even though
Bankcom Account No. 0015-32987-7 belongs to neither Jardine nor Premiere.

On the basis of the foregoing averments, JMC prayed that Delizo, Bankcom and
Metrobank be held solidarily liable in its favor for the amount of the subject checks.

Delizo, Bankcom and Metrobank filed their individual answers denying

liability.10 Incorporated in Metrobank's answer, moreover, is a cross-claim against
Bankcom and Delizo wherein Metrobank asks for the right to be reimbursed in the
event it is ordered liable in favor of JMC.11

On 28 May 2013, the RTC rendered a decision12 holding both Bankcom and Metrobank
liable to JMC-on a 2/3 to 1/3 ratio, respectively-for the amount of subject checks plus
interest as well as attorney's fees, but absolving Delizo from any liability.13 The trial
court, in the same decision, also dismissed Metrobank's cross-claim against Bankcom.
The dispositive portion of the decision reads:14
WHEREFORE, judgment is rendered against defendants [Bankcom] and [Metrobank] for
the total value of the 11 checks. [Bankcom] and Metrobank are adjudged solidarily
liable to pay [JMC] at the ratios of 2/3 and 1/3, respectively:

1. The actual loss of P 1,481,292 including 6% legal interest from the filing of the
complaint;
2. Plus 12% interest on the principal of P 1,481,292 including 6% interest on the
principal, from the date this Decision becomes final and executory;

3. The attorney's fees of 15% of the total of number one and two above;

4. Costs against [Bankcom] and Metrobank.

Metrobank's cross-claim against [Bankcom] is DISMISSED, both being negligent.

SO ORDERED.
The RTC's decision was hinged on the following findings:15

1. The subject checks were complete and not forged. They were, however, stolen
by unknown malefactors and were wrongfully encashed due to the negligence of
Bankcom and Metrobank.

2. Delizo's complicity in the acquisition and negotiation of the subject checks was
not proven. No direct evidence linking Delizo to the deeds was presented.
Moreover, Delizo's supposed handwritten confession must be discredited for
being made under duress, intimidation and threat. It was established during trial
that Delizo was only forced by Yusi to confess about the missing checks and to
execute the handwritten confession. Hence, Delizo must be absolved from any
liability.

3. The involvement of Bankcom and Metrobank on the wrongful encashment of the

subject checks, however, were clearly established:
a. Bankcom accepted the subject checks for deposit under Account No.
0015-32987-7, endorsed them and sent them for clearance with the
Philippine Clearing House Corporation (PCHC). Bankcom did all these
despite the fact that the subject checks were ll crossed checks and that
Account No. 0015-32987-7 neither belongs to Jardine nor Premiere-the
payees named in the subject checks. In this regard, Bankcom was clearly
negligent.

b. Metrobank, on the other hand, is also negligent for its failure to scrutinize
the subject checks before clearing and honoring them. Had Metrobank
done so, it would have noticed that Bankcom's ID band stamped at the
back of the subject checks did not contain any initials and are, therefore,
defective. In this regard, Metrobank was remiss in its duty to ensure that
the subject checks are paid only to the named payees.

In view of the comparative negligence of Bankcom and Metrobank, they should

be held liable to JMC, on a 2/3 to 1/3 ratio, respectively, for the amount of
subject checks plus interest.

Bankcom and Metrobank filed their respective appeals with the CA.
On 22 March 2017, the CA rendered its decision16 affirming, albeit with modification, the
decision of the RTC. The disposition of the decision reads:17
WHEREFORE, the Decision dated 28 May 2013 of the [RTC] in Civil Case NO. 02-0193 is
AFFIRMED with MODIFICATION in that: (a) the award of attorney's fees is DELETED;
and (b) [Bankcom] and [Metrobank] are ordered to pay interest at the rate of 12% per
annum on the principal of P 1,481,292 including 6% interest on the principal, from the
date of the Decision (28 May 2013) until June 2013 and 6% per annum from 1 July
2013 until full satisfaction. The Decision is affirmed in all other respects.

SO ORDERED.
The CA agreed with the RTC that Bankcom and Metrobank should be held liable to JMC,
on a 2/3 to 1/3 ratio, respectively, for the amount of subject checks. The appellate
court, however, differed with the trial court with respect to the basis of Metrobank's
liability. According to the CA, Metrobank's negligence consisted, not in its inability to
notice that Bankcom's ID band does not contain any initials, but in its failure to
ascertain that only four (4) out of the 11 subject checks were stamped by Bankcom
with the express guarantees "ALL PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENT GUARANTEED" and "NON�-NEGOTIABLE" as required by Section 17
of the PCHC Rules and Regulations.18

The CA also sustained the ruling of the RTC anent the absolution of Delizo and the
dismissal of Metrobank's cross-claim.

Finally, the CA modified the rate of interest due on the amount of the subject checks
that was fixed by the RTC and also deleted the RTC's award of attorney's fees in favor
of JMC.19

Bankcom and Metrobank filed their motions for reconsideration, but the CA remained
steadfast. Hence the present consolidated appeals.

Both Metrobank and Bankcom pray for absolution but they differ in the arguments they
raise in support of their prayer:20

1. Metrobank posits that it should be absolved because it had exercised absolute

diligence in verifying the genuineness of the subject checks. Metrobank argues
that the RTC erred in holding it negligent on its failure to ascertain that only four
(4) out of the 11 subject checks were stamped with Bankcom's express
guarantees. Metrobank claims that while Section 17 of the PCHC Rules and
Regulations does require all checks cleared through the PCHC to contain the
collecting bank's express guarantees, the same provision precludes it, as a
drawee bank, to return any checks presented to it for payment just because the
same does not contain such express guarantees "for as long as there is evidence
appearing on the cheque itself that the same had been deposited with the
[collecting] [b]ank e.g., PCHC machine sprayed tracer/ID band." In this regard,
Metrobank points out that all the subject checks had been stamped in their
dorsal portion with PCHC's tracer ID for Bankcom.

Metrobank submits that, under the circumstances, it should be Bankcom-as the

last indorser of the subject checks-that should bear the loss and be held solely
liable to JMC.
 2. Bankcom, on the other hand, argues that it should be absolved because it was
never a party to the wrongful encashment of the subject checks. It claims that
Account No. 0015-32987-7 does not exist in its system and, therefore, denies
that the subject checks were ever deposited with it.

Bankcom proffers the view that it is JMC that should bear the loss of the subject
checks. Bankcom argues that it was JMC's faulty accounting procedures which
led to the subject checks being stolen and misappropriated.

Our Ruling

The consolidated appeals must be denied as neither Metrobank nor Bankcom are
entitled to absolution.

Be that as it may, there is a need to modify the decision of the CA and the RTC with
respect to the manner by which Metrobank and Bankcom are held liable under the
circumstances. Instead of holding both Metrobank and Bankcom liable to JMC in
accordance with a fixed ratio, we find that the two banks should have been
ordered sequentially liable for the entire amount of the subject checks pursuant to the
seminal case of Bank of America v. Associated Citizens Bank.21

Accordingly, we rule: (1) Metrobank liable to return to JMC the entire amount of the
subject checks plus interest and (2) Bankcom liable to reimburse Metrobank the same
amount plus interest.

The Rule on Sequence of Recovery in Cases of Unauthorized Payment of

Checks; The Case of Bank of America

The instant case involves the unauthorized payment of valid checks, i.e., the payment
of checks to persons other than the payee named therein or his order. The subject
checks herein are considered valid because they are complete and bear genuine
signatures.

Bank of America is the leading jurisprudence that illustrates the respective liabilities of
a collecting bank and a drawee bank in cases of unauthorized payment of valid checks.
Notably, the facts of Bank America are parallel to the facts of the present case.
Both Bank of America and the present case involved crossed checks payable to the
order of a specified payee that were deposited in a collecting bank under an
account not belonging to the payee or his indorsee but which, upon presentment,
were subsequently honored by the drawee bank, thus:

1. Bank of America involved four (4) crossed checks drawn against the Bank of
America (the drawee bank) and made payable to the order of a Miller Offset
Press, Inc. (the designated payee). These checks were then deposited to the
Associated Citizens Bank (the collecting bank) under a joint bank account of one
Ching Uy Seng and a certain Uy Chung Guan Seng (an account that does not
belong to the payee or its indorsee). The checks were then presented to the
Bank of America, which honored it, resulting to loss on the part of BA Finance
Corporation (the drawer.)
 2. The instant case involves eleven (11) crossed checks that were drawn against
Metrobank (the drawee bank) and made payable to the orders of Jardine and
Premiere (the designated payees). These checks were deposited with Bankcom
(the collecting bank) under Account No. 0015-32987-7 (an account that does not
belong to either payee or their indorsees). The checks were then presented to
Metrobank, which honored it, resulting to loss on the part of JMC (the drawer.)

Bank of America held that, in cases involving the unauthorized payment of valid
checks, the drawee bank becomes liable to the drawer for the amount of the
checks but the drawee bank, in turn, can seek reimbursement from the
collecting bank. The rationale of this rule on sequence of recovery lies in the very
basis and nature of the liability of a drawee bank and a collecting bank in said cases. As
the recent case of BDO Unibank v. Lao22 explains:
The liability of the drawee bank is based on its contract with the drawer and its duty to
charge to the latter's accounts only those payables authorized by him. A drawee bank is
under strict liability to pay the check only to the payee or to the payee's order. When
the drawee bank pays a person other than the payee named in the check, it does not
comply with the terms of the check and violates its duty to charge the drawer's account
only for properly payable items.

On the other hand, the liability of the collecting bank is anchored on its guarantees as
the last endorser of the check. Under Section 66 of the Negotiable Instruments Law, an
endorser warrants "that the instrument is genuine and in all respects what it purports
to be; that he has good title to it; that all prior parties had capacity to contract; and
that the instrument is at the time of his endorsement valid and subsisting."

It has been repeatedly held that in check transactions, the collecting bank generally
suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for payment to the
drawee is an assertion that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. If any of the warranties made by the
collecting bank turns out to be false, then the drawee bank may recover from it up to
the amount of the check. (Citations omitted).
This rule should have been applied to the case at bench.

Metrobank is Liable to JMC

Metrobank, as drawee bank, is liable to return to JMC the amount of the subject checks.

A drawee bank is contractually obligated to follow the explicit instructions of its drawer-
clients when paying checks issued by them.23 The drawer's instructions-including the
designation of the payee or to whom the check should be paid-are reflected on the face
and by the terms thereof.24 When a drawee bank pays a person other than the payee
named on the check, it essentially commits a breach of its obligation and renders the
payment it made unauthorized.25 In such cases and under normal circumstances, the
drawee bank may be held liable to the drawer for the amount charged against the
latter's account.26

The liability of the drawee bank to the drawer in cases of unauthorized payment of
checks has been regarded in jurispn1dence to be strict by nature.27 This means that
once an unauthorized payment on a check has been made, the resulting liability of the
drawee bank to the drawer for such payment attaches even if the former had acted
merely upon the guarantees of a collecting bank.28 Indeed, it is only when
the unauthorized payment of a check had been caused or was attended by the fault or
negligence of the drawer himself can the drawee bank be excused, whether wholly or
partially, from being held liable to the drawer for the said payment.29

In the present case, it is apparent that Metrobank had breached JMC's instructions
when it paid the value of the subject checks to Bankcom for the benefit of a certain
Account No. 0015-32987-7. The payment to Account No. 0015-32987-7 was
unauthorized as it was established that the said account does not belong to Jardine or
Premiere, the payees of the subject checks, or to their indorsees. In addition, causal or
concurring negligence on the part of JMC had not been proven. Under such
circumstances, Metrobank is clearly liable to return to JMC the amount of the subject
checks.

Metrobank's insistence that it should be absolved for it merely complied with Section 17
of the PCHC Rules and Regulations and thereby only relied upon the concomitant
guarantees of Bankcom when it paid the subject checks, cannot stand insofar as JMC is
concerned. In Bank of America, we rejected a similar argument interposed by a drawee
bank (Bank of America) precisely on the ground of the latter's strict liability to its
drawer (BA-Finance) viz:30
Bank of America denies liability for paying the amount of the four checks issued by BA-
Finance to Miller, alleging that it (Bank of America) relied on the stamps made by
Associated Bank stating that all prior endorsement and/or lack of
endorsement guaranteed, through which Associated Bank assumed the liability
of a general endorser under Section 66 of the Negotiable Instruments Law.
Moreover, Bank of America contends that the proximate cause of BA-Finances
injury, if any, is the gross negligence of Associated Bank which allowed Ching Uy Seng
(Robert Ching) to deposit the four checks issued to Miller in the personal joint bank
account of Ching Uy Seng and Uy Chung Guan Seng.

We are not convinced.

The bank on which a check is drawn, known as the drawee bank, is under
strict liability, based on the contract between the bank and its customer
(drawer), to pay the check only to the payee or the payee's order. x x x.

xxxx

In this case, the four checks were drawn by BA-Finance and made payable to the Order
of Miller Offset Press, Inc. The checks were also crossed and issued For Payee's Account
Only. Clearly, the drawer intended the check for deposit only by Miller Offset Press, Inc.
in the latter's bank account. Thus, when a person other than Miller, i.e., Ching Uy
Seng, a.k.a. Robert Ching, presented and deposited the checks in his own
personal account (Ching Uy Sengs joint account with Uy Chung Guan Seng),
and the drawee bank, Bank of America, paid the value of the checks and
charged BA-Finances account therefor, the drawee Bank of America is deemed
to have violated the instructions of the drawer, and therefore, is liable for the
amount charged to the drawer's account (Citations omitted. Emphasis supplied).
Accordingly, we find Metrobank liable to return to JMC the amount of the subject
checks.

Bankcom is Liable to Metrobank

While Metrobank's reliance upon the guarantees of Bankcom does not excuse it from
being liable to JMC, such reliance does enable Metrobank to seek reimbursement from
Bankcom-the collecting bank.

A collecting or presenting bank-i.e., the bank that receives a check for deposit and that
presents the same to the drawee bank for payment-is an indorser of such
check.31 When a collecting bank presents a check to the drawee bank for payment, the
former thereby assumes the same warranties assumed by an indorser of a negotiable
instrument pursuant to Section 66 of the Negotiable Instruments Law. These warranties
are: (1) that the instrument is genuine and in all respects what it purports to be; (2)
that the indorser has good title to it; (3) that all prior parties had capacity to contract;
and (4) that the instrument is, at the time of the indorsement, valid and subsisting.32 If
any of the foregoing warranties turns out to be false, a collecting hank becomes liable
to the drawee bank for payments made under such false warranty.

Here, it is clear that Bankcom had assumed the warranties of an indorser when it
forwarded the subject checks to PCHC for presentment to Metrobank. By such
presentment, Bankcom effectively guaranteed to Metrobank that the subject checks had
been deposited with it to an account that has good title to the same. This guaranty,
however, is a complete falsity because the subject checks were, in truth, deposited to
an account that neither belongs to the payees of the subject checks nor to their
indorsees. Hence, as the subject checks were paid under Bankcom's false guaranty, the
latter-as collecting bank-stands liable to return the value of such checks to Metrobank.

Bankcom's assertion that it should be absolved as the subject checks were allegedly
never deposited with it must fail. Such allegation is readily disproved by the fact that
the subject checks all contained, at their dorsal side, a stamp bearing Bankcom's
tracer/ID band.33 Under the PCHC Rules and Regulations, the stamped tracer/ID band
of Bankcom signifies that the checks had been deposited with it and that Bankcom
indorsed the said checks and sent them to PCHC.34 As observed by the RTC:35
Record shows that the pieces of evidence presented by [JMC], particularly the 11
subject checks were endorsed and were allowed to be encashed by [Bankcom], as
indicated in the dorsal portion of the checks where [PCHC] machine's tracer, or the ID
band of [Bankcom] was stamped. And this stamped tracer ID band of [Bankcom]
signifies that [Bankcom] certified that the checks were deposited to [Bankcom] and
[Bankcom] endorsed these checks and sent them to PCHC.
Neither do we find the liability of Bankcom to be affected by the fact that only four (4)
out of the eleven (11) subject checks were actually stamped with the guarantees "ALL
PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENT GUARANTEED" and "NON-
NEGOTIABLE" as required under Section 17 of the PCHC Rules and Regulations. The
stamping of such guarantees is not necessary to fix the liability of Bankcom as an
indorser for all the subject checks.

To begin with, jurisprudence has it that a collecting bank's mere act of presenting a
check for payment to the drawee bank is itself an assertion, on the part of the former,
that it had done its duty to ascertain the validity of prior indorsements. Hence, in Banco
De Oro v. Equitable Banking Corporation,36 we stated:
Apropos the matter of forgery in endorsements, this Court has presently succinctly
emphasized that the collecting bank or last endorser generally suffers the loss because
it has the duty to ascertain the genuineness of all prior endorsements considering
that the act of presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to ascertain the
genuineness of the endorsements. This is laid down in the case of PNB v. National
City Bank. (Citations omitted. Emphasis supplied).
More than such pronouncement, however, Section 17 of the PCHC Rules and
Regulations expressly provides that checks "cleared through the PCHC" that do not bear
the mentioned guarantees shall nonetheless "be deemed guaranteed by the [collecting
bank] as to all prior endorsements and/or lack of endorsement" such that "no drawee
bank shall return any [check] received by it through clearing by reason only of the
absence or lack of such guarantee ... as long as there is evidence appearing on the
[check] itself that the same had been deposited with the [collecting bank] x x x." The
full provision reads:
Sec. 17. Bank Guarantee. All checks cleared through the PCHC shall bear the guarantee
affixed thereto by the Presenting Bank/Branch which shall read as follows:

Cleared thru the Philippine Clearing House Corporation all prior endorsements and/or
lack of endorsement guaranteed NAME OF BANK/BRANCH BRSTN (Date of
Clearing). Checks to which said guarantee has not been affixed shall,
nevertheless, be deemed guaranteed by the Presenting Bank as to all prior
endorsement and/or lack of endorsement.

No drawee bank shall return any cheque received by it through clearing by

reason only of the absence or lack of such guarantee stamped at the back of
said cheque, for as long as there is evidence appearing on the cheque itself
that the same had been deposited with the Presenting Bank, e.g. PCHC
machine sprayed tracer/ID band. (Emphasis supplied)
In the present case, all the subject checks have been transmitted by Bankcom to the
PCHC for clearing and presentment to Metrobank. As earlier adverted to, all of the said
checks also bear the PCHC machine sprayed tracer/ID band of Bankcom. Such
circumstances, pursuant to prevailing banking practices as laid out under the PCHC
Rules and Regulations, are enough to fix the liability of Bankcom as an indorser of the
subject checks even sans the stamp "ALL PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENT GUARANTEED" and "NON-�NEGOTIABLE." As the stamping of such
guarantees are not required before the warranties of an indorser could attach against
Bankcom, we find the latter liable to reimburse Metrobank the value of all the subject
checks.

Recourse of Bankcom

The sequence of recovery in cases of unauthorized payment of checks, however, does

not ordinarily stop with the collecting bank. In the event that it is made to reimburse
the drawee bank, the collecting bank can seek similar reimbursement from the very
persons who caused the checks to be deposited and received the unauthorized
payments.37 Such persons are the ones ultimately liable for the unauthorized payments
and their liability rests on their absolute lack of valid title to the checks that they were
able to encash.

Verily, Bankcom ought to have a right of recourse against the persons that caused the
anomalous deposit of the subject checks and received payments therefor.
Unfortunately-as none of such persons were impleaded in the case before us-no
pronouncement as to this matter can be made in favor of Bankcom.

At this juncture, we express our concurrence to the absolution of Delizo. The RTC and
the CA were uniform in their finding that the participation of Delizo-as the supposed
thief of the subject checks-had not been established in this case. We reviewed the
evidence on hand and saw no cogent reason to deviate from this factual finding.

Doctrine of Comparative Negligence Does Not Apply to the Instant Case

Instead of applying the rule on the sequence of recovery to the case at bench, the RTC
and the CA held both Metrobank and Bankcom liable to JMC in accordance with a fixed
ratio. In so doing, the RTC and the CA seemingly relied on the doctrine of comparative
negligence38 as applied in the cases of Bank of the Philippine Islands v. Court of
Appeals39 and Allied Banking Corporation v. Lio Sim Wan.40 In both cases, the Court
held the drawee bank and collecting bank liable for the wrongful encashment of checks
under a 60% and 40% ratio.

It must be emphasized, however, that the factual contexts of Bank of the Philippine
Islands and Allied Banking Corporation are starkly different from the instant case:
1. Bank of the Philippine Islands involved two (2) cashier's checks issued by the
Bank of the Philippine Islands (BPI) in favor of a certain Eligia Fernando (Eligia). The
checks are supposed to represent the proceeds of a pre-terminated money market
placement of Eligia with BPI. BPI issued the checks upon the mere phone request of a
person who introduced herself as Eligia. The checks were subsequently deposited with
the China Banking Corporation (CBC) under an account that was opened by a person
who identified herself as Eligia. This person thereafter encashed the checks.

It was later established, however, that Eligia never requested the pre-termination of
her money market placement nor opened an account with the CBC. It was an impostor
who did so.

2. Allied Banking Corporation, on the other hand, involved a manager's check issued
by the Allied Banking Corporation (ABC) in favor of a certain Lim Sio Wan (Lim). The
check is supposed to represent the proceeds of a pre-terminated money market
placement of Lim with ABC. ABC issued the checks upon the mere phone request of a
person who introduced herself as Lim. The checks, now bearing an indorsement of Lim,
were then deposited with the Metrobank under the account of a certain Filipinas Cement
Corporation. The checks were eventually encashed.

It was later established, however, that Lim never requested the pre-termination of his
money market placement and that his indorsement in the check was forged.
A glaring peculiarity in the cases of Bank of the Philippine Islands and Allied Banking
Corporation is that the drawee bank-which is essentially also the drawer in the
scenario-is not only guilty of wrongfully paying a check but also of negligence
in issuing such check. Indeed, this is the very reason why the drawee bank in the
two cases were adjudged co-liable with the collecting bank under a fixed ratio and the
former was not allowed to claim reimbursement from the latter.41 The drawee bank
cannot claim that its participation in the wrongful payment of a check was merely
limited to its reliance on the guarantees of the collecting bank. In other words, the
drawee bank was held liable in its own right because it was the one that negligently
issued the checks in the first place.

That, however, is clearly not the situation in the case at bench. Here, no negligence
similar to that committed by the drawee banks in Bank of the Philippine
Islands and Allied Banking Corporation-whether in type or in magnitude-can be
attributed to Metrobank. Metrobank, though guilty of the unauthorized check payments,
only acted upon the guarantees deemed made by Bankcom under prevailing banking
practices. While Metrobank's reliance upon the guarantees of Bankcom did not excuse it
from being answerable to JMC, such reliance does enable Metrobank to seek
reimbursement from Bankcom on the ground of the breach in the latter's warranties as
a collecting bank. Under such circumstances, we cannot deny Metrobank's right to seek
reimbursement from Bankcom.

Hence, given the differences in the factual milieu between this case on one hand arid
the cases of Bank of the Philippine Islands and Allied Banking Corporation on the other,
we find that the doctrine of comparative negligence cannot be applied so as to
apportion the respective liabilities of Metrobank and Bankcom. The liabilities of
Metrobank and Bankcom, as already discussed in length, must be governed by the rule
on sequential recovery pursuant to Bank of America.

Interests

As a final matter, we also saw it fit to impose legal interest upon the respective
principal liabilities of Metrobank and Bankcom.

In Nacar v. Gallery Frames,42 wlaid out the following guidelines for the imposition and
computation of legal interests:
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern
Shipping Lines are accordingly modified to embody BSP� MB Circular No. 799, as
follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi�contracts,

delicts or quasi-delicts is breached, the contravener can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:

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

a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence of stipulation, the
 rate of interest shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the provisions
of Article 1169 of the Civil Code.

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

money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand
is established with reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or extrajudicially
(Art. 1169, Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance
of credit.

And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall continue
to be implemented applying the rate of interest fixed therein. (Citations
omitted. Emphasis supplied).

Applying the foregoing guidelines to the case at bench, we fix the legal interests due
against Metrobank and Bankcom thusly:

1. The liability of Metrobank to JMC consists in returning the amount it charged

against JMC's current account. Current accounts, like all bank deposits, are
considered under the law as loans.43 Normally, current accounts are interest-
bearing by express contract. However, the actual interest rate, if any, for the
current account opened by JMC with Metrobank was not given in evidence.44

Under these circumstances, we find it proper to subject Metrobank's principal

liability to JMC to a legal interest of 6% per annum from 28 January 2002 until
full satisfaction.45 The date 28 January 2002 is the date when JMC filed its
complaint with the RTC.

2. The liability of Bankcom to Metrobank, on the other hand, consists in returning

the amount it was paid by Metrobank. This stems from a breach by Bankcom of
its warranties as a collecting bank.

Accordingly, we find it proper to subject Bankcom's principal liability to

 Metrobank to a legal interest of 6% per annum from 5 March 2003 until full
satisfaction.46 The date 5 March 2003 is the date when Metrobank filed its
answer with cross-claim against Bankcom.

WHEREFORE, the consolidated appeals are DENIED. The Decision dated 22 March
2017 and Resolution dated 19 October 2017 of the Court of Appeals (CA) in CA-G.R. CV
No. 102462 are herein MODIFIED with respect to the individual liabilities of the
Metropolitan Bank and Trust Company and the Bank of Commerce, as follows:

1. The Metropolitan Bank and Trust Company is adjudged liable to pay respondent
Junnel's Marketing Corporation the following:
a. The principal amount of P 1,481,292.00, and

b. Interest on the said principal at the rate of 6% per annum from 28

January 2002 until full satisfaction.

2. The Bank of Commerce is adjudged liable to pay the Metropolitan Bank and Trust
Company the following:
a. The principal amount of P 1,481,292.00, and

b. Interest on the said principal at the rate of 6% per annum from 5 March
2003 until full satisfaction.

Other findings and pronouncements of the Court of Appeals in its Decision dated 22
March 2017 and Resolution dated 19 October 2017 in CA-G.R. CV No. 102462 that are
not contrary to this Decision are AFFIRMED.

Costs against the Metropolitan Bank and Trust Company and the Bank of Commerce.

SO ORDERED.

G.R. No. 199455, June 27, 2018

FEDERAL EXPRESS CORPORATION, Petitioner, v. LUWALHATI R. ANTONINO AND

ELIZA BETTINA RICASA ANTONINO, Respondents.

DECISION

LEONEN, J.:

The duty of common carriers to observe extraordinary diligence in shipping goods does
not terminate until delivery to the consignee or to the specific person authorized to
receive the shipped goods. Failure to deliver to the person authorized to receive the
goods is tantamount to loss of the goods, thereby engendering the common carrier's
liability for loss. Ambiguities in contracts of carriage, which are contracts of adhesion,
must be interpreted against the common carrier that prepared these contracts.
This resolves a Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of
Civil Procedure praying that the assailed Court of Appeals August 31, 2011
Decision2 and November 21, 2011 Resolution3 in CA-G.R. CV No. 91216 be reversed
and set aside and that Luwalhati R. Antonino (Luwalhati) and Eliza Bettina Ricasa
Antonino (Eliza) be held liable on Federal Express Corporation's (FedEx) counterclaim.

The assailed Court of Appeals August 31, 2011 Decision denied the appeal filed by
FedEx and affirmed the May 8, 2008 Decision4 of Branch 217, Regional Trial Court,
Quezon City, awarding moral and exemplary damages, and attorney's fees to Luwalhati
and Eliza.5 In its assailed November 21, 2011 Resolution, the Court of Appeals denied
FedEx's Motion for Reconsideration.6

Eliza was the owner of Unit 22-A (the Unit) in Allegro Condominium, located at 62 West
62nd St., New York, United States.7 In November 2003, monthly common charges on
the Unit became due. These charges were for the period of July 2003 to November
2003, and were for a total amount of US$9,742.81.8

On December 15, 2003, Luwalhati and Eliza were in the Philippines. As the monthly
common charges on the Unit had become due, they decided to send several Citibank
checks to Veronica Z. Sison (Sison), who was based in New York. Citibank checks
allegedly amounting to US$17,726.18 for the payment of monthly charges and
US$11,619.35 for the payment of real estate taxes were sent by Luwalhati through
FedEx with Account No. x2546-4948-1 and Tracking No. 8442 4588 4268. The package
was addressed to Sison who was tasked to deliver the checks payable to Maxwell-
Kates, Inc. and to the New York County Department of Finance. Sison allegedly did not
receive the package, resulting in the non-payment of Luwalhati and Eliza's obligations
and the foreclosure of the Unit.9

Upon learning that the checks were sent on December 15, 2003, Sison contacted FedEx
on February 9, 2004 to inquire about the non-delivery. She was informed that the
package was delivered to her neighbor but there was no signed receipt.10

On March 14, 2004, Luwalhati and Eliza, through their counsel, sent a demand letter to
FedEx for payment of damages due to the non-delivery of the package, but FedEx
refused to heed their demand.11 Hence, on April 5, 2004, they filed their Complaint12 for
damages.

FedEx claimed that Luwalhati and Eliza "ha[d] no cause of action against it because
[they] failed to comply with a condition precedent, that of filing a written notice of claim
within the 45 calendar days from the acceptance of the shipment."13 It added that it
was absolved of liability as Luwalhati and Eliza shipped prohibited items and
misdeclared these items as "documents."14 It pointed to conditions under its Air Waybill
prohibiting the "transportation of money (including but not limited to coins or
negotiable instruments equivalent to cash such as endorsed stocks and bonds)."15

In its May 8, 2008 Decision,16 the Regional Trial Court ruled for Luwalhati and Eliza,
awarding them moral and exemplary damages, and attorney's fees.17

The Regional Trial Court found that Luwalhati failed to accurately declare the contents
of the package as "checks."18 However, it ruled that a check is not legal tender or a
"negotiable instrument equivalent to cash," as prohibited by the Air Waybill.19 It
explained that common carriers are presumed to be at fault whenever goods are
lost.20 Luwalhati testified on the non-delivery of the package. FedEx, on the other hand,
claimed that the shipment was released without the signature of the actual recipient, as
authorized by the shipper or recipient. However, it failed to show that this authorization
was made; thus, it was still liable for the loss of the package.21

On non-compliance with a condition precedent, it ruled that under the Air Waybill, the
prescriptive period for filing an action was "within two (2) years from the date of
delivery of the shipment or from the date on which the shipment should have been
delivered."22 Luwalhati and Eliza's demand letter made on March 11, 2004 was within
the two (2)-year period sanctioned by the Air Waybill.23 The trial court also noted that
they were given a "run-around" by FedEx employees, and thus, were deemed to have
complied with the filing of the formal claim.24

The dispositive portion of the Regional Trial Court May 8, 2008 Decision read:

WHEREFORE, judgment is hereby rendered in favor of plaintiffs Luwalhati R. Antonino

and Eliza Bettina Ricasa Antonino ordering the following:

1) The amount of P200,000.00 by way of moral damages;

2) The amount of P100,000.00 by way of exemplary damages; and
[3]) The amount of P150,000.00 as and for attorney's fees. Costs against defendant.

The counterclaim is ordered dismissed.

SO ORDERED.25

In its assailed August 31, 2011 Decision,26 the Court of Appeals affirmed the ruling of
the Regional Trial Court.27 According to it, by accepting the package despite its
supposed defect, FedEx was deemed to have acquiesced to the transaction. Thus, it
must deliver the package in good condition and could not subsequently deny liability for
loss.28 The Court of Appeals sustained the Regional Trial Court's conclusion that checks
are not legal tender, and thus, not covered by the Air Waybill's prohibition.29 It further
noted that an Air Waybill is a contract of adhesion and should be construed against the
party that drafted it.30

The dispositive portion of the Court of Appeals August 31, 2011 Decision read:

WHEREFORE, premises considered, the present appeal is hereby DENIED. The assailed
May 08, 2008 Decision of the Regional Trial Court, Branch 217, Quezon City in Civil
case No. Q-04-52325 is AFFIRMED. Costs against the herein appellant.

SO ORDERED.31

Following the Court of Appeals' denial32 of its Motion for Reconsideration, FedEx filed the
present Petition.
For resolution of this Court is the sole issue of whether or not petitioner Federal Express
Corporation may be held liable for damages on account of its failure to deliver the
checks shipped by respondents Luwalhati R. Antonino and Eliza Bettina Ricasa Antonino
to the consignee Veronica Sison.

Petitioner disclaims liability because of respondents' failure to comply with a condition

precedent, that is, the filing of a written notice of a claim for non-delivery or
misdelivery within 45 days from acceptance of the shipment.33 The Regional Trial Court
found the condition precedent to have been substantially complied with and attributed
respondents' non�compliance to FedEx for giving them a run-around.34 This Court
affirms this finding.

A provision in a contract of carriage requiring the filing of a formal claim within a

specified period is a valid stipulation. Jurisprudence maintains that compliance with this
provision is a legitimate condition precedent to an action for damages arising from loss
of the shipment:

More particularly, where the contract of shipment contains a reasonable requirement of

giving notice of loss of or injury to the goods, the giving of such notice is a condition
precedent to the action for loss or injury or the right to enforce the carrier's liability.
Such requirement is not an empty formalism. The fundamental reason or purpose of
such a stipulation is not to relieve the carrier from just liability, but reasonably to
inform it that the shipment has been damaged and that it is charged with liability
therefor, and to give it an opportunity to examine the nature and extent of the injury.
This protects the carrier by affording it an opportunity to make an investigation of a
claim while the matter is fresh and easily investigated so as to safeguard itself from
false and fraudulent claims.35 (Citation omitted)

Petitioner's Air Waybill stipulates the following on filing of claims:

Claims for Loss, Damage, or Delay. All claims must be made in writing and within strict
time limits. See any applicable tariff, our service guide or our standard conditions for
carriage for details.

The right to damages against us shall be extinguished unless an action is brought within
two (2) years from the date of delivery of the shipment or from the date on which the
shipment should have been delivered.

Within forty-five (45) days after notification of the claim, it must be documented by
sending to us [all the] relevant information about it.36

For their claim to prosper, respondents must, thus, surpass two (2) hurdles: first, the
filing of their formal claim within 45 days; and second, the subsequent filing of the
action within two (2) years.

There is no dispute on respondents' compliance with the second period as their

Complaint was filed on April 5, 2004.37
In appraising respondents' compliance with the first condition, this Court is guided by
settled standards in jurisprudence.

In Philippine Airlines, Inc. v. Court of Appeals,38 Philippine Airlines alleged that shipper
Gilda Mejia (Mejia) failed to file a formal claim within the period stated in the Air
Waybill.39 This Court ruled that there was substantial compliance with the period
because of the zealous efforts demonstrated by Mejia in following up her claim.40 These
efforts coupled with Philippine Airlines' "tossing around the claim and leaving it
unresolved for an indefinite period of time" led this Court to deem the requisite period
satisfied.41 This is pursuant to Article 1186 of the New Civil Code which provides that
"[t]he condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment":42

Considering the abovementioned incident and private respondent Mejia's own zealous
efforts in following up the claim, it was clearly not her fault that the letter of demand
for damages could only be filed, after months of exasperating follow-up of the claim, on
August 13, 1990. If there was any failure at all to file the formal claim within the
prescriptive period contemplated in the air waybill, this was largely because of PAL's
own doing, the consequences of which cannot, in all fairness, be attributed to private
respondent.

Even if the claim for damages was conditioned on the timely filing of a formal claim,
'under Article 1186 of the Civil Code that condition was deemed fulfilled, considering
that the collective action of PAL's personnel in tossing around the claim and leaving it
unresolved for an indefinite period of time was tantamount to "voluntarily preventing its
fulfillment." On grounds of equity, the filing of the baggage freight claim, which
sufficiently informed PAL of the damage sustained by private respondent's cargo,
constituted substantial compliance with the requirement in the contract for the filing of
a formal claim.43 (Citations omitted)

Here, the Court of Appeals detailed the efforts made by respondent Luwalhati and
consignee Sison. It also noted petitioner's ambiguous and evasive responses,
nonchalant handling of respondents' concerns, and how these bogged down
respondents' actions and impaired their compliance with the required 45-day period:

Anent the issues concerning lack of cause of action and their so-called "run-around"
matter, We uphold the lower court's finding that the herein appellees complied with the
requirement for the immediate filing of a formal claim for damages as required in the
Air Waybill or, at least, We find that there was substantial compliance therewith.
Luwalhati testified that the addressee, Veronica Z. Sison promptly traced the
whereabouts of the said package, but to no avail. Her testimony narrated what
happened thereafter, thus:

". . .
"COURT: All right. She was informed that it was lost. What steps did you take to find out
or to recover back this package?
�
"ATTY. ALENTAJAN:
"Q What did you do to Fedex?
". . .
� �
WITNESS: First, I asked the secretary here to call Fedex Manila and they said, the record
show that it was sent to New York, Your Honor.
�
". . .
ATTY. ALENTAJAN:
"Q After calling Fedex, what did Fedex do?
� �
"A None, sir. They washed their hands because according to them it is New York
because they have sent it. Their records show that New York received it, Sir.
� �
"Q New York Fedex?
� �
"A Yes, Sir.
� �
"Q Now what else did you do after that?
� �
"A And then I asked my friend Mrs. Veronica Sison to trace it, Sir.
� �
". . . �
� �
"Q What did she report to you?
� �
"A She reported to me that first, she checked with the Fedex and the first answer
was they were going to trace it. The second answer was that, it was delivered to
 the lady, her neighbor and the neighbor completely denied it and as they show a
signature that is not my signature, so the next time she called again, another
person answered. She called to say that the neighbor did not receive and the
person on the other line I think she got his name, said that, it is because it is
December and we usually do that just leave it and then they cut the line and so I
asked my friend to issue a sworn statement in the form of affidavit and have it
notarized in the Philippine Embassy or Consulate, Sir. That is what she did.
� �
"Q On your part here in the Philippines after doing that, after instructing Veronica
Sison, what else did you do because of this violation?
� �
"A I think the next step was to issue a demand letter because any way I do not want
to go to Court, it is so hard, Sir."

The foregoing event show Luwalhati's own ardent campaign in following up the claim.
To the Court's mind, it is beyond her control why the demand letter for damages was
only sent subsequent to her infuriating follow-ups regarding the whereabouts of the
said package. We can surmise that if there was any omission at all to file the said claim
within the prescriptive period provided for under the Air Waybill it was mostly due to
herein appellant's own behavior, the outcome thereof cannot, by any chance, be
imputed to the herein appellees.44 (Grammatical errors in the original)

Petitioner has been unable to persuasively refute Luwalhati's recollection of the efforts
that she and Sison exerted, and of the responses it gave them. It instead insists that
the 45-day period stated in its Air Waybill is sacrosanct. This Court is unable to bring
itself to sustaining petitioner's appeal to a convenient reprieve. It is one with the
Regional Trial Court and the Court of Appeals in stressing that respondents' inability to
expediently file a formal claim can only be attributed to petitioner hampering its
fulfillment. Thus, respondents must be deemed to have substantially complied with the
requisite 45-day period for filing a formal claim.

II

The Civil Code mandates common carriers to observe extraordinary diligence in caring
for the goods they are transporting:

Article 1733. Common carriers, from the nature of their business and for reasons of
public policy, are bound to observe extraordinary diligence in the vigilance over the
goods and for the safety of the passengers transported by them, according to all the
circumstances of each case.

"Extraordinary diligence is that extreme measure of care and caution which persons of
unusual prudence and circumspection use for securing and preserving their own
property or rights."45 Consistent with the mandate of extraordinary diligence, the Civil
Code stipulates that in case of loss or damage to goods, common carriers are presumed
to be negligent or at fault,46 except in the following instances:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act or competent public authority.47

In all other cases, common carriers must prove that they exercised extraordinary
diligence in the performance of their duties, if they are to be absolved of liability.48

The responsibility of common carriers to exercise extraordinary diligence lasts from the
time the goods are unconditionally placed in their possession until they are delivered
"to the consignee, or to the person who has a right to receive them."49 Thus, part of the
extraordinary responsibility of common carriers is the duty to ensure that shipments
are received by none but "the person who has a right to receive them."50 Common
carriers must ascertain the identity of the recipient. Failing to deliver shipment to the
designated recipient amounts to a failure to deliver. The shipment shall then be
considered lost, and liability for this loss ensues.

Petitioner is unable to prove that it exercised extraordinary diligence in ensuring

delivery of the package to its designated consignee. It claims to have made a delivery
but it even admits that it was not to the designated consignee. It asserts instead that it
was authorized to release the package without the signature of the designated recipient
and that the neighbor of the consignee, one identified only as "LGAA 385507," received
it.51 This fails to impress.

The assertion that receipt was made by "LGAA 385507" amounts to little, if any, value
in proving petitioner's successful discharge of its duty. "LGAA 385507" is nothing but an
alphanumeric code that outside of petitioner's personnel and internal systems signifies
nothing. This code does not represent a definite, readily identifiable person, contrary to
how commonly accepted identifiers, such as numbers attached to official, public, or
professional identifications like social security numbers and professional license
numbers, function. Reliance on this code is tantamount to reliance on nothing more
than petitioner's bare, self-serving allegations. Certainly, this cannot satisfy the
requisite of extraordinary diligence consummated through delivery to none but "the
person who has a right to receive"52 the package.

Given the circumstances in this case, the more reasonable conclusion is that the
package was not delivered. The package shipped by respondents should then be
considered lost, thereby engendering the liability of a common carrier for this loss.
Petitioner cannot but be liable for this loss. It failed to ensure that the package was
delivered to the named consignee. It admitted to delivering to a mere neighbor. Even
as it claimed this, it failed to identify that neighbor.

III

Petitioner further asserts that respondents violated the terms of the Air Waybill by
shipping checks. It adds that this violation exempts it from liability.53

This is untenable.

Petitioner's International Air Waybill states:

Items Not Acceptable for Transportation. We do not accept transportation of

money (including but not limited to coins or negotiable instruments equivalent to cash
such as endorsed stocks and bonds). We exclude all liability for shipments of such items
accepted by mistake. Other items may be accepted for carriage only to limited
destinations or under restricted conditions. We reserve the right to reject packages
based upon these limitations or for reasons of safety or security. You may consult our
Service Guide, Standard Conditions of Carriage, or any applicable tariff for specific
details.54 (Emphasis in the original)

The prohibition has a singular object: money. What follows the phrase "transportation
of money" is a phrase enclosed in parentheses, and commencing with the words
"including but not limited to." The additional phrase, enclosed as it is in parentheses, is
not the object of the prohibition, but merely a postscript to the word "money."
Moreover, its introductory words "including but not limited to" signify that the items
that follow are illustrative examples; they are not qualifiers that are integral to or
inseverable from "money." Despite the utterance of the enclosed phrase, the singular
prohibition remains: money.

Money is "what is generally acceptable in exchange for goods."55 It can take many
forms, most commonly as coins and banknotes. Despite its myriad forms, its key
element is its general acceptability.56 Laws usually define what can be considered as a
generally acceptable medium of exchange.57 In the Philippines, Republic Act No. 7653,
otherwise known as The New Central Bank Act, defines "legal tender" as follows:

All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the
Government of the Republic of the Philippines and shall be legal tender in the
Philippines for all debts, both public and private: Provided, however, That, unless
otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not
exceeding Fifty pesos (P50.00) for denomination of Twenty-five centavos and above,
and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten
centavos or less.58

It is settled in jurisprudence that checks, being only negotiable instruments, are only
substitutes for money and are not legal tender; more so when the check has a named
payee and is not payable to bearer. In Philippine Airlines, Inc. v. Court of Appeals,59 this
Court ruled that the payment of a check to the sheriff did not satisfy the judgment debt
as checks are not considered legal tender. This has been maintained in other cases
decided by this Court. In Cebu International Finance Corporation v. Court of
Appeals,60 this Court held that the debts paid in a money market transaction through
the use of a check is not a valid tender of payment as a check is not legal tender in the
Philippines. Further, in Bank of the Philippine Islands v. Court of Appeals,61 this Court
held that "a check, whether a manager's check or ordinary check, is not legal tender."62

The Air Waybill's prohibition mentions "negotiable instruments" only in the course of
making an example. Thus, they are not prohibited items themselves. Moreover, the
illustrative example does not even pertain to negotiable instruments per se but to
"negotiable instruments equivalent to cash."63

The checks involved here are payable to specific payees, Maxwell�-Kates, Inc. and
the New York County Department of Finance.64 Thus, they are order instruments. They
are not payable to their bearer, i.e., bearer instruments. Order instruments differ from
bearer instruments in their manner of negotiation:

Under Section 30 of the [Negotiable Instruments Law], an order instrument requires an

indorsement from the payee or holder before it may be validly negotiated. A bearer
instrument, on the other hand, does not require an indorsement to be validly
negotiated.65

There is no question that checks, whether payable to order or to bearer, so long as they
comply with the requirements under Section 1 of the Negotiable Instruments Law, are
negotiable instruments.66 The more relevant consideration is whether checks with a
specified payee are negotiable instruments equivalent to cash, as contemplated in the
example added to the Air Waybill's prohibition.

This Court thinks not. An order instrument, which has to be endorsed by the payee
before it may be negotiated,67 cannot be a negotiable instrument equivalent to cash. It
is worth emphasizing that the instruments given as further examples under the Air
Waybill must be endorsed to be considered equivalent to cash:68

Items Not Acceptable for Transportation. We do not accept transportation of

money (including but not limited to coins or negotiable instruments equivalent to cash
such as endorsed stocks and bonds). ... (Emphasis in the original)69

What this Court's protracted discussion reveals is that petitioner's Air Waybill lends
itself to a great deal of confusion. The clarity of its terms leaves much to be desired.
This lack of clarity can only militate against petitioner's cause.

The contract between petitioner and respondents is a contract of adhesion; it was

prepared solely by petitioner for respondents to conform to.70 Although not
automatically void, any ambiguity in a contract of adhesion is construed strictly against
the party that prepared it.71 Accordingly, the prohibition against transporting money
must be restrictively construed against petitioner and liberally for respondents. Viewed
through this lens, with greater reason should respondents be exculpated from liability
for shipping documents or instruments, which are reasonably understood as not being
money, and for being unable to declare them as such.
Ultimately, in shipping checks, respondents were not violating petitioner's Air Waybill.
From this, it follows that they committed no breach of warranty that would absolve
petitioner of liability.

WHEREFORE, the Petition for Review on Certiorari is DENIED. The assailed August 31,
2011 Decision and November 21, 2011 Resolution of the Court of Appeals in CA-G.R.
CV No. 91216 are AFFIRMED.

SO ORDERED.