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

*
1.) CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS
and SECURITY BANK AND TRUST COMPANY, respondents.
Commercial Law; Negotiable Instruments Law; Requisites for an
instrument to become negotiable.Section 1 of Act No. 2031, otherwise
known as the Negotiable Instruments Law, enumerates the requisites for
an instrument to become negotiable, viz: (a) It must be in writing and
signed by the maker or drawer; (b) Must contain an unconditional promise
or order to pay a sum certain in money; (c) Must be payable on demand,
or at a fixed or determinable future time; (d) Must be payable to order or
to bearer; and (e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with reasonable certainty.
Same; Same; Same; The negotiability or non-negotiability of an
instrument is determined from the writing that is from the face of the
instrument itself.On this score, the accepted rule is that the
negotiability or non-negotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. In the construction
of a bill or note, the intention of the parties is to control, if it can be
legally ascertained. While the writing may be read in the light of
surrounding circumstances in order to more perfectly understand the
intent and meaning of the parties, yet as they have constituted the
writing to be the only outward and visible expression of their meaning, no
other words are to be added to it or substituted in its stead. The duty of
the court in such case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what their words express,
but what is the meaning of the words they have used. What the parties
meant must be determined by what they said.
Same; Same; Same; An instrument is negotiated when it is transferred
from one person to another in such a manner as to constitute the
transferee the holder thereof and a holder may be the payee or indorsee
of a bill or note who is in possession of it or the bearer thereof.Under
the Negotiable Instruments Law, an instrument is negotiated when it is
transferred from one person to another in such a manner as to constitute
the transferee the holder thereof, and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof.
In the present case, however, there was no negotiation in the sense of a
transfer of the legal title to the CTDs in favor of petitioner in which
situation, for obvious reasons, mere delivery of the bearer CTDs would
have sufficed. Here, the delivery thereof only as security for the

purchases of Angel de la Cruz (and we even disregard the fact that the
amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a
negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent
disposition of such security, in the event of non-payment of the principal
obligation, must be contractually provided for.
Same; Same; Same; Where the holder has a lien on the instrument arising
from contract, he is deemed a holder for value to the extent of his lien.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien. As such holder of collateral security, he would be a
pledgee but the requirements there-for and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights.
Civil Law; Estoppel; Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it and
cannot be denied or disproved as against the person relying thereon.In
a letter dated November 26, 1982 addressed to respondent Security
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: x x x These
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products (Italics ours.) This admission is
conclusive upon petitioner, its protestations notwithstanding. Under the
doctrine of estoppel, an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or disproved
as against the person relying thereon. A party may not go back on his
own acts and representations to the prejudice of the other party who
relied upon them. In the law of evidence, whenever a party has, by his
own declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing true, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act, or omission,
be permitted to falsify it.
Same; Same; An issue raised for the first time on appeal and not raised
timely in the proceedings in the lower court is barred by estoppel.As
respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the
issue of negligence on the part of respondent bank. An issue raised for
the first time on appeal and not raised timely in the proceedings in the
lower court is barred by estoppel. Questions raised on appeal must be

within the issues framed by the parties and, consequently, issues not
raised in the trial court cannot be raised for the first time on appeal.
Remedial Law; Pre-trial; The determination of issues at a pretrial
conference bars the consideration of other questions on appeal.Pre-trial
is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all
issues of law and fact which they intend to raise at the trial, except such
as may involve privileged or impeaching matters. The determination of
issues at a pre-trial conference bars the consideration of other questions
on appeal.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of
the decision promulgated by respondent court on March 8, 1991 in CAG.R. CV No. 23615 1 affirming with modifications, the earlier decision of
the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the
complaint filed therein by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a quo and
adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial banking
institution, through its Sucat Branch issued 280 certificates of
time deposit (CTDs) in favor of one Angel dela Cruz who
deposited with herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and
Statement of Issues, Original Records, p. 207; Defendant's
Exhibits 1 to 280);
CTD
Dates Serial Nos. Quantity Amount
22
26
2
4
5
5
5
8

Feb.
Feb.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.

82
82
82
82
82
82
82
82

90101
74602
74701
90127
74797
89965
70147
90001

to
to
to
to
to
to
to
to

CTD

90120
74691
74740
90146
94800
89986
90150
90020

20
90
40
20
4
22
4
20

P80,000
360,000
160,000
80,000
16,000
88,000
16,000
80,000

9
Mar.
82
90023
to
9
Mar.
82
89991
to
9
Mar.
82
90251
to

Total
280
===== ========

90050
90000
90272

28
10
22

112,000
40,000
88,000

P1,120,000

2. Angel dela Cruz delivered the said certificates of time (CTDs)

to herein plaintiff in connection with his purchased of fuel
products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr.
Timoteo Tiangco, the Sucat Branch Manger, that he lost all the
certificates of time deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized Affidavit of Loss,
as required by defendant bank's procedure, if he desired
replacement of said lost CTDs (TSN, February 9, 1987, pp. 4850).
4. On March 18, 1982, Angel dela Cruz executed and delivered
to defendant bank the required Affidavit of Loss (Defendant's
Exhibit 281). On the basis of said affidavit of loss, 280
replacement CTDs were issued in favor of said depositor
(Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained
a loan from defendant bank in the amount of Eight Hundred
Seventy Five Thousand Pesos (P875,000.00). On the same date,
said depositor executed a notarized Deed of Assignment of
Time Deposit (Exhibit 562) which stated, among others, that he
(de la Cruz) surrenders to defendant bank "full control of the
indicated time deposits from and after date" of the assignment
and further authorizes said bank to pre-terminate, set-off and
"apply the said time deposits to the payment of whatever
amount or amounts may be due" on the loan upon its maturity
(TSN, February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of
plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat
branch and presented for verification the CTDs declared lost by
Angel dela Cruz alleging that the same were delivered to herein
plaintiff "as security for purchases made with Caltex

Philippines, Inc." by said depositor (TSN, February 9, 1987, pp.

54-68).
7. On November 26, 1982, defendant received a letter
(Defendant's Exhibit 563) from herein plaintiff formally
informing it of its possession of the CTDs in question and of its
decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein
defendant to furnish the former "a copy of the document
evidencing the guarantee agreement with Mr. Angel dela Cruz"
as well as "the details of Mr. Angel dela Cruz" obligation against
which plaintiff proposed to apply the time deposits (Defendant's
Exhibit 564).
9. No copy of the requested documents was furnished herein
defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand
and claim for payment of the value of the CTDs in a letter dated
February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the
defendant bank matured and fell due and on August 5, 1983,
the latter set-off and applied the time deposits in question to
the payment of the matured loan (TSN, February 9, 1987, pp.
130-131).
12. In view of the foregoing, plaintiff filed the instant complaint,
praying that defendant bank be ordered to pay it the aggregate
value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per
annum, moral and exemplary damages as well as attorney's
fees.
After trial, the court a quo rendered its decision dismissing the
instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's
dismissal of the complaint, hence this petition wherein petitioner faults
respondent court in ruling (1) that the subject certificates of deposit are
non-negotiable despite being clearly negotiable instruments; (2) that
petitioner did not become a holder in due course of the said certificates of

deposit; and (3) in disregarding the pertinent provisions of the Code of

Commerce relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to
provide a better understanding of the issues involved in this recourse.
SECURITY
AND
6778
Ayala
Metro
SUCAT
CERTIFICATE
Rate 16%

TRUST
Ave.,
Makati
Manila,
OFFICEP
OF

No.

BANK
COMPANY
90101
Philippines
4,000.00
DEPOSIT

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

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

AUTHORIZED SIGNATURES

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

instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather
boldly in the CTDs issued, it is important to note that after the
word "BEARER" stamped on the space provided supposedly for
the name of the depositor, the words "has deposited" a certain
amount follows. The document further provides that the
amount deposited shall be "repayable to said depositor" on the
period indicated. Therefore, the text of the instrument(s)
themselves manifest with clarity that they are payable, not to

whoever purports to be the "bearer" but only to the specified

person indicated therein, the depositor. In effect, the appellee
bank acknowledges its depositor Angel dela Cruz as the person
who made the deposit and further engages itself to pay said
depositor the amount indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that
the CTDs in question are negotiable instruments. Section 1 Act No. 2031,
otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties' bone of contention is with regard to requisite (d)
set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's
Branch Manager way back in 1982, testified in open court that the
depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per
books of the bank, the depositor referred (sic) in
these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show
that Angel dela Cruz was the one who cause (sic) the
amount.

Atty. Calida:
q And no other person or entity or company, Mr.
Witness?
witness:
a None, your Honor.

xxx xxx xxx

Atty. Calida:
q Mr. Witness, who is the depositor identified in all of
these certificates of time deposit insofar as the bank
is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or nonnegotiability of an instrument is determined from the writing, that is, from
the face of the instrument itself. 9 In the construction of a bill or note, the
intention of the parties is to control, if it can be legally
ascertained. 10 While the writing may be read in the light of surrounding
circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the
only outward and visible expression of their meaning, no other words are
to be added to it or substituted in its stead. The duty of the court in such
case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the
meaning of the words they have used. What the parties meant must be
determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall be
repayable to the depositor. And who, according to the document, is the
depositor? It is the "bearer." The documents do not say that the depositor
is Angel de la Cruz and that the amounts deposited are repayable
specifically to him. Rather, the amounts are to be repayable to the bearer

of the documents or, for that matter, whosoever may be the bearer at the
time of presentment.
If it was really the intention of respondent bank to pay the amount to
Angel de la Cruz only, it could have with facility so expressed that fact in
clear and categorical terms in the documents, instead of having the word
"BEARER" stamped on the space provided for the name of the depositor
in each CTD. On the wordings of the documents, therefore, the amounts
deposited are repayable to whoever may be the bearer thereof. Thus,
petitioner's aforesaid witness merely declared that Angel de la Cruz is the
depositor "insofar as the bank is concerned," but obviously other parties
not privy to the transaction between them would not be in a position to
know that the depositor is not the bearer stated in the CTDs. Hence, the
situation would require any party dealing with the CTDs to go behind the
plain import of what is written thereon to unravel the agreement of the
parties thereto through facts aliunde. This need for resort to extrinsic
evidence is what is sought to be avoided by the Negotiable Instruments
Law and calls for the application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs.
This time, the answer is in the negative. The records reveal that Angel de
la Cruz, whom petitioner chose not to implead in this suit for reasons of
its own, delivered the CTDs amounting to P1,120,000.00 to petitioner
without informing respondent bank thereof at any time. Unfortunately for
petitioner, although the CTDs are bearer instruments, a valid negotiation
thereof for the true purpose and agreement between it and De la Cruz, as
ultimately ascertained, requires both delivery and indorsement. For,
although petitioner seeks to deflect this fact, the CTDs were in reality
delivered to it as a security for De la Cruz' purchases of its fuel products.
Any doubt as to whether the CTDs were delivered as payment for the fuel
products or as a security has been dissipated and resolved in favor of the
latter by petitioner's own authorized and responsible representative
himself.
In a letter dated November 26, 1982 addressed to respondent Security
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products" (Emphasis ours.) 13 This
admission is conclusive upon petitioner, its protestations notwithstanding.
Under the doctrine of estoppel, an admission or representation is

rendered conclusive upon the person making it, and cannot be denied or
disproved as against the person relying thereon. 14 A party may not go
back on his own acts and representations to the prejudice of the other
party who relied upon them. 15 In the law of evidence, whenever a party
has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing true, and to act upon
such belief, he cannot, in any litigation arising out of such declaration,
act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as
security, petitioner's credit manager could have easily said so, instead of
using the words "to guarantee" in the letter aforequoted. Besides, when
respondent bank, as defendant in the court below, moved for a bill of
particularity therein 17 praying, among others, that petitioner, as plaintiff,
be required to aver with sufficient definiteness or particularity (a) the due
date or dates ofpayment of the alleged indebtedness of Angel de la Cruz
to plaintiff and (b) whether or not it issued a receipt showing that the
CTDs were delivered to it by De la Cruz as payment of the latter's alleged
indebtedness to it, plaintiff corporation opposed the motion. 18 Had it
produced the receipt prayed for, it could have proved, if such truly was
the fact, that the CTDs were delivered as payment and not as security.
Having opposed the motion, petitioner now labors under the presumption
that evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty
Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez,
supra, we quote therefrom:
The character of the transaction between the parties
is to be determined by their intention, regardless of
what language was used or what the form of the
transfer was. If it was intended to secure the
payment of money, it must be construed as a pledge;
but if there was some other intention, it is not a
pledge. However, even though a transfer, if regarded
by itself, appears to have been absolute, its object
and character might still be qualified and explained
by contemporaneous writing declaring it to have
been a deposit of the property as collateral security.
It has been said that a transfer of property by the

debtor to a creditor, even if sufficient on its face to

make an absolute conveyance, should be treated as
a pledge if the debt continues in inexistence and is
not discharged by the transfer, and that accordingly
the use of the terms ordinarily importing conveyance
of absolute ownership will not be given that effect in
such a transaction if they are also commonly used in
pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and unambiguous
language or other circumstances excluding an intent
to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof, 21 and a holder
may be the payee or indorsee of a bill or note, who is in possession of it,
or the bearer thereof. 22 In the present case, however, there was no
negotiation in the sense of a transfer of the legal title to the CTDs in favor
of petitioner in which situation, for obvious reasons, mere delivery of the
bearer CTDs would have sufficed. Here, the delivery thereof only as
security for the purchases of Angel de la Cruz (and we even disregard the
fact that the amount involved was not disclosed) could at the most
constitute petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by mere
delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of
the principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien. 23 As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights, 24 which inceptively
provide:
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, . . . may also be pledged. The instrument proving
the right pledged shall be delivered to the creditor, and if
negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if
a description of the thing pledged and the date of the pledge
do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed,
the factual findings of respondent court quoted at the start of this opinion
show that petitioner failed to produce any document evidencing any
contract of pledge or guarantee agreement between it and Angel de la
Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest
in petitioner any right effective against and binding upon respondent
bank. The requirement under Article 2096 aforementioned is not a mere
rule of adjective law prescribing the mode whereby proof may be made of
the date of a pledge contract, but a rule of substantive law prescribing a
condition without which the execution of a pledge contract cannot affect
third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz
in favor of respondent bank was embodied in a public instrument. 27 With
regard to this other mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce
no effect as against third persons, unless it appears in a public
instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement.
Contrarily, petitioner, whether as purchaser, assignee or lien holder of the
CTDs, neither proved the amount of its credit or the extent of its lien nor
the execution of any public instrument which could affect or bind private
respondent. Necessarily, therefore, as between petitioner and respondent
bank, the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the
question of whether or not private respondent observed the requirements
of the law in the case of lost negotiable instruments and the issuance of
replacement certificates therefor, on the ground that petitioner failed to
raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of
alleged negligence of private respondent was not included in the
stipulation of the parties and in the statement of issues submitted by

them to the trial court.

in this case are:

29

The issues agreed upon by them for resolution

1. Whether or not the CTDs as worded are negotiable

instruments.
2. Whether or not defendant could legally apply the amount
covered by the CTDs against the depositor's loan by virtue of
the assignment (Annex "C").
3. Whether or not there was legal compensation or set off
involving the amount covered by the CTDs and the depositor's
outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to
preterminate the CTDs before the maturity date provided
therein.
5. Whether or not plaintiff is entitled to the proceeds of the
CTDs.
6. Whether or not the parties can recover damages, attorney's
fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the
issue of negligence on the part of respondent bank. An issue raised for
the first time on appeal and not raised timely in the proceedings in the
lower court is barred by estoppel. 30 Questions raised on appeal must be
within the issues framed by the parties and, consequently, issues not
raised in the trial court cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to
the disposition of a case are properly raised. Thus, to obviate the element
of surprise, parties are expected to disclose at a pre-trial conference all
issues of law and fact which they intend to raise at the trial, except such
as may involve privileged or impeaching matters. The determination of
issues at a pre-trial conference bars the consideration of other questions
on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed
negligence may be considered encompassed by the issues on its right to
preterminate and receive the proceeds of the CTDs would be tantamount

to saying that petitioner could raise on appeal any issue. We agree with
private respondent that the broad ultimate issue of petitioner's
entitlement to the proceeds of the questioned certificates can be
premised on a multitude of other legal reasons and causes of action, of
which respondent bank's supposed negligence is only one. Hence,
petitioner's submission, if accepted, would render a pre-trial delimitation
of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in
the court below, petitioner still cannot have the odds in its favor. A close
scrutiny of the provisions of the Code of Commerce laying down the rules
to be followed in case of lost instruments payable to bearer, which it
invokes, will reveal that said provisions, even assuming their applicability
to the CTDs in the case at bar, are merely permissive and not mandatory.
The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it
may be, may apply to the judge or court of competent
jurisdiction, asking that the principal, interest or dividends due
or about to become due, be not paid a third person, as well as
in order to prevent the ownership of the instrument that a
duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not
mandatory but discretionary on the part of the "dispossessed owner" to
apply to the judge or court of competent jurisdiction for the issuance of a
duplicate of the lost instrument. Where the provision reads "may," this
word shows that it is not mandatory but discretional. 34 The word "may" is
usually permissive, not mandatory. 35 It is an auxiliary verb indicating
liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to
558 of the Code of Commerce, on which petitioner seeks to anchor
respondent bank's supposed negligence, merely established, on the one
hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on
the other, an option in favor of the party liable thereon who, for some
valid ground, may elect to refuse to issue a replacement of the
instrument. Significantly, none of the provisions cited by petitioner
categorically restricts or prohibits the issuance a duplicate or replacement

instrument sans compliance with the procedure outlined therein, and

none establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is
DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
G.R. No. 88866. February 18, 1991.*
2.) METROPOLITAN BANK & TRUST COMPANY, petitioner, vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION,
INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO,
respondents.
Civil Law; Obligations and Contracts; Agency; The agent is responsible not
only for fraud, but also for negligence, which shall be judged with more or
less rigor by the courts, according to whether the agency was or was not
for a compensation.The negligence of Metro-bank has been sufficiently
established. To repeat for emphasis, it was the clearance given by it that
assured Golden Savings it was already safe to allow Gomez to withdraw
the proceeds of the treasury warrants he had deposited. Metrobank
misled Golden Savings. There may have been no express clearance, as
Metrobank insists (although this is refuted by Golden Savings) but in any
case that clearance could be implied from its allowing Golden Savings to
withdraw from its account not only once or even twice but three times.
The total withdrawal was in excess of its original balance before the
treasury warrants were deposited, which only added to its belief that the
treasury warrants had indeed been cleared.
Mercantile Law; Negotiable Instruments; Requisites of Negotiabil-ity; An
instrument to be negotiable must contain an unconditional promise or
order to pay a sum certain in money.SEC. 3. When promise is
unconditional.An unqualified order or promise to pay is unconditional
within the meaning of this Act though coupled with(a) An indication of a
particular fund out of which reimbursement is to be made or a particular
account to be debited with the amount; or (b) A statement of the
trasaction which gives rise to the instrument. But an order or promise to
pay out of a particular fund is not unconditional. The indication of Fund
501 as the source of the payment to be made on the treasury warrants
makes the order or promise to pay not uncon-ditional and the warrants
themselves non-negotiable. There should be no question that the

exception on Section 3 of the Negotiable Instruments Law is applicable in

the case at bar. [Metropolitan Bank and Trust Company vs. Court of
Appeals, 194 SCRA 169(1991)]
CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question of
negligence. The facts, pruned of all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches
throughout the Philippines and even abroad. Golden Savings and Loan
Association was, at the time these events happened, operating in
Calapan, Mindoro, with the other private respondents as its principal
officers.
In January 1979, a certain Eduardo Gomez opened an account with
Golden Savings and deposited over a period of two months 38 treasury
warrants with a total value of P1,755,228.37. They were all drawn by the
Philippine Fish Marketing Authority and purportedly signed by its General
Manager and countersigned by its Auditor. Six of these were directly
payable to Gomez while the others appeared to have been indorsed by
their respective payees, followed by Gomez as second indorser. 1
On various dates between June 25 and July 16, 1979, all these warrants
were subsequently indorsed by Gloria Castillo as Cashier of Golden
Savings and deposited to its Savings Account No. 2498 in the Metrobank
branch in Calapan, Mindoro. They were then sent for clearing by the
branch office to the principal office of Metrobank, which forwarded them
to the Bureau of Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the
Calapan branch several times to ask whether the warrants had been
cleared. She was told to wait. Accordingly, Gomez was meanwhile not
allowed to withdraw from his account. Later, however, "exasperated" over
Gloria's repeated inquiries and also as an accommodation for a "valued
client," the petitioner says it finally decided to allow Golden Savings to
withdraw
from
the
proceeds
of
the
3
warrants.
The first withdrawal was made on July 9, 1979, in the amount of
P508,000.00, the second on July 13, 1979, in the amount of P310,000.00,
and the third on July 16, 1979, in the amount of P150,000.00. The total
withdrawal was P968.000.00. 4

In turn, Golden Savings subsequently allowed Gomez to make

withdrawals from his own account, eventually collecting the total amount
of P1,167,500.00 from the proceeds of the apparently cleared warrants.
The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the
warrants had been dishonored by the Bureau of Treasury on July 19, 1979,
and demanded the refund by Golden Savings of the amount it had
previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the
Regional Trial Court of Mindoro. 5 After trial, judgment was rendered in
favor of Golden Savings, which, however, filed a motion for
reconsideration even as Metrobank filed its notice of appeal. On
November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of
defendant Golden Savings and Loan Association, Inc. and defendant
Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings
Account No. 2498 of the sum of P1,754,089.00 and to reinstate and
credit to such account such amount existing before the debit was
made including the amount of P812,033.37 in favor of defendant
Golden Savings and Loan Association, Inc. and thereafter, to allow
defendant Golden Savings and Loan Association, Inc. to withdraw the
amount outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and
Loan Association, Inc. attorney's fees and expenses of litigation in
the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo
and Lucia Castillo attorney's fees and expenses of litigation in the
amount of P100,000.00.
SO ORDERED.

On appeal to the respondent court, 6 the decision was affirmed, prompting

Metrobank to file this petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to
apply the clear contractual terms and conditions on the deposit slips
allowing Metrobank to charge back any amount erroneously
credited.
(a) Metrobank's right to charge back is not limited to instances
where the checks or treasury warrants are forged or
unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation
is that of a mere collecting agent which cannot be held liable
for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of
Appeals, Metrobank is made to pay for warrants already dishonored,
thereby perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between
Metrobank and Golden Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury
warrants involved in this case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that
Metrobank was indeed negligent in giving Golden Savings the impression
that the treasury warrants had been cleared and that, consequently, it
was safe to allow Gomez to withdraw the proceeds thereof from his
account with it. Without such assurance, Golden Savings would not have
allowed the withdrawals; with such assurance, there was no reason not to
allow the withdrawal. Indeed, Golden Savings might even have incurred
liability for its refusal to return the money that to all appearances
belonged to the depositor, who could therefore withdraw it any time and
for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that
Golden Savings deposited them to its account with Metrobank. Golden
Savings had no clearing facilities of its own. It relied on Metrobank to
determine the validity of the warrants through its own services. The

proceeds of the warrants were withheld from Gomez until Metrobank

allowed Golden Savings itself to withdraw them from its own deposit. 7 It
was only when Metrobank gave the go-signal that Gomez was finally
allowed by Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised
more care in checking the personal circumstances of Gomez before
accepting his deposit does not hold water. It was Gomez who was
entrusting the warrants, not Golden Savings that was extending him a
loan; and moreover, the treasury warrants were subject to clearing,
pending which the depositor could not withdraw its proceeds. There was
no question of Gomez's identity or of the genuineness of his signature as
checked by Golden Savings. In fact, the treasury warrants were
dishonored allegedly because of the forgery of the signatures of the
drawers, not of Gomez as payee or indorser. Under the circumstances, it
is clear that Golden Savings acted with due care and diligence and cannot
be faulted for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount
involved was not trifling more than one and a half million pesos (and
this was 1979). There was no reason why it should not have waited until
the treasury warrants had been cleared; it would not have lost a single
centavo by waiting. Yet, despite the lack of such clearance and
notwithstanding that it had not received a single centavo from the
proceeds of the treasury warrants, as it now repeatedly stresses it
allowed Golden Savings to withdraw not once, not twice, but thrice
from the uncleared treasury warrants in the total amount of
P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria
Castillo about the clearance and it also wanted to "accommodate" a
valued client. It "presumed" that the warrants had been cleared simply
because of "the lapse of one week." 8 For a bank with its long experience,
this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the
conditions printed on the dorsal side of the deposit slips through which
the treasury warrants were deposited by Golden Savings with its Calapan
branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates
itself only as the depositor's collecting agent, assuming no

responsibility beyond care in selecting correspondents, and until

such time as actual payment shall have come into possession of this
bank, the right is reserved to charge back to the depositor's account
any amount previously credited, whether or not such item is
returned. This also applies to checks drawn on local banks and
bankers and their branches as well as on this bank, which are unpaid
due to insufficiency of funds, forgery, unauthorized overdraft or any
other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was
acting only as a collecting agent for Golden Savings and give it the right
to "charge back to the depositor's account any amount previously
credited, whether or not such item is returned. This also applies to checks
". . . which are unpaid due to insufficiency of funds, forgery, unauthorized
overdraft of any other reason." It is claimed that the said conditions are in
the nature of contractual stipulations and became binding on Golden
Savings when Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions,
considering that they have apparently been imposed by the bank
unilaterally, without the consent of the depositor. Indeed, it could be
argued that the depositor, in signing the deposit slip, does so only to
identify himself and not to agree to the conditions set forth in the given
permit at the back of the deposit slip. We do not have to rule on this
matter at this time. At any rate, the Court feels that even if the deposit
slip were considered a contract, the petitioner could still not validly
disclaim responsibility thereunder in the light of the circumstances of this
case.
In stressing that it was acting only as a collecting agent for Golden
Savings, Metrobank seems to be suggesting that as a mere agent it
cannot be liable to the principal. This is not exactly true. On the contrary,
Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for
negligence, which shall be judged 'with more or less rigor by the
courts, according to whether the agency was or was not for a
compensation.
The negligence of Metrobank has been sufficiently established. To repeat
for emphasis, it was the clearance given by it that assured Golden
Savings it was already safe to allow Gomez to withdraw the proceeds of

the treasury warrants he had deposited Metrobank misled Golden

Savings. There may have been no express clearance, as Metrobank insists
(although this is refuted by Golden Savings) but in any case that
clearance could be implied from its allowing Golden Savings to withdraw
from its account not only once or even twice but three times. The total
withdrawal was in excess of its original balance before the treasury
warrants were deposited, which only added to its belief that the treasury
warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the
warrants are not paid for any reason is not acceptable. Any reason does
not mean no reason at all. Otherwise, there would have been no need at
all for Golden Savings to deposit the treasury warrants with it for
clearance. There would have been no need for it to wait until the warrants
had been cleared before paying the proceeds thereof to Gomez. Such a
condition, if interpreted in the way the petitioner suggests, is not binding
for being arbitrary and unconscionable. And it becomes more so in the
case at bar when it is considered that the supposed dishonor of the
warrants was not communicated to Golden Savings before it made its
own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in
giving express or at least implied clearance to the treasury warrants and
allowing payments therefrom to Golden Savings. But that is not all. On
top of this, the supposed reason for the dishonor, to wit, the forgery of the
signatures of the general manager and the auditor of the drawer
corporation, has not been established. 9 This was the finding of the lower
courts which we see no reason to disturb. And as we said in MWSS v.
Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA
238). It must be established by clear, positive and convincing
evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury
warrants in question are not negotiable instruments. Clearly stamped on
their face is the word "non-negotiable." Moreover, and this is of equal
significance, it is indicated that they are payable from a particular fund, to
wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the
underscored parts, are pertinent:

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

negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable future
time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
xxx

xxx

xxx

Sec. 3. When promise is unconditional. An unqualified order or

promise to pay is unconditional within the meaning of this Act
though coupled with
(a) An indication of a particular fund out of which reimbursement is
to be made or a particular account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument
judgment.
But an order or promise to pay out of a particular fund is not
unconditional.
The indication of Fund 501 as the source of the payment to be made on
the treasury warrants makes the order or promise to pay "not
unconditional" and the warrants themselves non-negotiable. There should
be no question that the exception on Section 3 of the Negotiable
Instruments Law is applicable in the case at bar. This conclusion conforms
to Abubakar vs. Auditor General 11 where the Court held:
The petitioner argues that he is a holder in good faith and for value
of a negotiable instrument and is entitled to the rights and privileges
of a holder in due course, free from defenses. But this treasury
warrant is not within the scope of the negotiable instrument law. For
one thing, the document bearing on its face the words "payable from
the appropriation for food administration, is actually an Order for

payment out of "a particular fund," and is not unconditional and

does not fulfill one of the essential requirements of a negotiable
instrument (Sec. 3 last sentence and section [1(b)] of the Negotiable
Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general,
Golden Savings assumed that they were "genuine and in all respects what
they purport to be," in accordance with Section 66 of the Negotiable
Instruments Law. The simple reason is that this law is not applicable to
the non-negotiable treasury warrants. The indorsement was made by
Gloria Castillo not for the purpose of guaranteeing the genuineness of the
warrants but merely to deposit them with Metrobank for clearing. It was in
fact Metrobank that made the guarantee when it stamped on the back of
the warrants: "All prior indorsement and/or lack of endorsements
guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the
Philippine Islands, 12 but we feel this case is inapplicable to the present
controversy.1wphi1 That case involved checks whereas this case
involves treasury warrants. Golden Savings never represented that the
warrants were negotiable but signed them only for the purpose of
depositing them for clearance. Also, the fact of forgery was proved in that
case but not in the case before us. Finally, the Court found the Jai Alai
Corporation negligent in accepting the checks without question from one
Antonio Ramirez notwithstanding that the payee was the Inter-Island Gas
Services, Inc. and it did not appear that he was authorized to indorse it.
No similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will
have to amend it insofar as it directs the petitioner to credit Golden
Savings with the full amount of the treasury checks deposited to its
account.
The total value of the 32 treasury warrants dishonored was
P1,754,089.00, from which Gomez was allowed to withdraw
P1,167,500.00 before Golden Savings was notified of the dishonor. The
amount he has withdrawn must be charged not to Golden Savings but to
Metrobank, which must bear the consequences of its own negligence. But
the balance of P586,589.00 should be debited to Golden Savings, as
obviously Gomez can no longer be permitted to withdraw this amount
from his deposit because of the dishonor of the warrants. Gomez has in
fact disappeared. To also credit the balance to Golden Savings would

unduly enrich it at the expense of Metrobank, let alone the fact that it has
already been informed of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification
that Paragraph 3 of the dispositive portion of the judgment of the lower
court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00
only and thereafter allowing defendant Golden Savings & Loan
Association, Inc. to withdraw the amount outstanding thereon, if any,
after the debit.
SO ORDERED.
No. L-72593. April 30, 1987.*
3.) CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and
RODOLFO T. VERGARA, petitioners, vs. IFC LEASING AND
ACCEPTANCE CORPORATION, respondent.
Negotiable Instruments Law; Promissory Note must he payable to order or
bearer to be negotiable."The instrument in order to be considered
negotiable must contain the so called 'words of negotiability'-ie., must be
payable to 'order' or 'bearer.' These words serve as an expression of
consent that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risks under a negotiable
instrument than under a non-negotiable one.
Same; Same; When instrument is payable to order.The instrument is
payable to order where it is drawn payable to the order of a specified
person or to him or his order . . . "These are the only two ways by which
an instrument may be made payable to order. There must be always be a
specified person named in the instrument. It means that the bill or note is
to be paid to the person designated in the instrument or to any person to
whom he has indorsed and delivered the same. Without the words 'or
order' or 'to the order of,' the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent
purchaser thereof will not enjoy the advantages of being a holder of a
negotiable instrument, but will merely 'step into the shoes' of the person
designated in the instrument and will thus be open to all defenses
available against the latter."

Same; Same; Effect if promissory note is non-negotiable.Therefore,

considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due
course but remains a mere assignee of the note in question. Thus, the
petitioner may raise against the respondent all defenses available to it as
against the seller-assignor, Industrial Products Marketing. [Consolidated
Plywood lndustries, Inc. vs. IFC Leasing and Acceptance Corporation, 149
SCRA 448(1987)]
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court which
assails on questions of law a decision of the Intermediate Appellate Court
in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution
dated October 17, 1985, denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for
its program of logging activities for the year 1978 the opening of
additional roads, and simultaneous logging operations along the route of
said roads, in its logging concession area at Baganga, Manay, and Caraga,
Davao Oriental. For this purpose, it needed two (2) additional units of
tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf &
Pacific Company of Manila, through its sister company and marketing
arm, Industrial Products Marketing (the "seller-assignor"), a corporation
dealing in tractors and other heavy equipment business, offered to sell to
petitioner-corporation two (2) "Used" Allis Crawler Tractors, one (1) an
HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be
exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability of
the "Used" tractors being offered, petitioner-corporation requested the
seller-assignor to inspect the job site. After conducting said inspection,
the seller-assignor assured petitioner-corporation that the "Used" Allis
Crawler Tractors which were being offered were fit for the job, and gave
the corresponding warranty of ninety (90) days performance of the
machines and availability of parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's
skill and judgment, petitioner-corporation through petitioners Wee and

Vergara, president and vice- president, respectively, agreed to purchase

on installment said two (2) units of "Used" Allis Crawler Tractors. It also
paid the down payment of Two Hundred Ten Thousand Pesos
(P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2)
units of tractors (Exh. "3-A"). At the same time, the deed of sale with
chattel mortgage with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel
mortgage with promissory note, the seller-assignor, by means of a deed
of assignment (E exh. " 1 "), assigned its rights and interest in the chattel
mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of
"Used" tractors to the petitioner-corporation's job site and as agreed, the
seller-assignor stationed its own mechanics to supervise the operations of
the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the
tractors broke down and after another nine (9) days, the other tractor
likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the
seller-assignor of the fact that the tractors broke down and requested for
the seller-assignor's usual prompt attention under the warranty (E exh. " 5
").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit
"5," the seller-assignor sent to the job site its mechanics to conduct the
necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6E"), but the tractors did not come out to be what they should be after the
repairs were undertaken because the units were no longer serviceable (t.
s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were delayed
and petitioner Vergara advised the seller-assignor that the payments of
the installments as listed in the promissory note would likewise be
delayed until the seller-assignor completely fulfills its obligation under its
warranty (t.s.n, May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner

Wee asked the seller-assignor to pull out the units and have them
reconditioned, and thereafter to offer them for sale. The proceeds were to
be given to the respondent and the excess, if any, to be divided between
the seller-assignor and petitioner-corporation which offered to bear onehalf (1/2) of the reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the petitionercorporation and despite several follow-up calls, the seller-assignor did
nothing with regard to the request, until the complaint in this case was
filed by the respondent against the petitioners, the corporation, Wee, and
Vergara.
The complaint was filed by the respondent against the petitioners for the
recovery of the principal sum of One Million Ninety Three Thousand Seven
Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of
One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest thereafter at the
rate of twelve (12%) percent per annum, attorney's fees of Two Hundred
Forty Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs
of suit.
The petitioners filed their amended answer praying for the dismissal of
the complaint and asking the trial court to order the respondent to pay
the petitioners damages in an amount at the sound discretion of the
court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees,
and Five Thousand Pesos (P5,000.00) for expenses of litigation. The
petitioners likewise prayed for such other and further relief as would be
just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following
judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their
official and personal capacities the principal sum of ONE
MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY
EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of
ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN
PESOS & 86/100 (P151,618.,86) as of August 15, 1979 and
accruing interest thereafter at the rate of 12% per annum;

2. ordering defendants to pay jointly and severally attorney's

fees equivalent to ten percent (10%) of the principal and to pay
the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and
assigned therein the following errors:
I
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC
GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE
DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS
A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER
SAID NOTE AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged
decision affirming in toto the decision of the trial court. The pertinent
portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of
warranty, We are of the considered opinion that aside from the
fact that no provision of warranty appears or is provided in the
Deed of Sale of the tractors and even admitting that in a
contract of sale unless a contrary intention appears, there is an
implied warranty, the defense of breach of warranty, if there is
any, as in this case, does not lie in favor of the appellants and
against the plaintiff-appellee who is the assignee of the
promissory note and a holder of the same in due course.
Warranty lies in this case only between Industrial Products
Marketing and Consolidated Plywood Industries, Inc. The
plaintiff-appellant herein upon application by appellant

corporation granted financing for the purchase

questioned units of Fiat-Allis Crawler,Tractors.

of

the

xxx xxx xxx

Holding that breach of warranty if any, is not a defense
available to appellants either to withdraw from the contract
and/or demand a proportionate reduction of the price with
damages in either case (Art. 1567, New Civil Code). We now
come to the issue as to whether the plaintiff-appellee is a
holder in due course of the promissory note.
To begin with, it is beyond arguments that the plaintiff-appellee
is a financing corporation engaged in financing and receivable
discounting extending credit facilities to consumers and
industrial, commercial or agricultural enterprises by discounting
or factoring commercial papers or accounts receivable duly
authorized pursuant to R.A. 5980 otherwise known as the
Financing Act.
A study of the questioned promissory note reveals that it is a
negotiable instrument which was discounted or sold to the IFC
Leasing and Acceptance Corporation for P800,000.00 (Exh. "A")
considering the following. it is in writing and signed by the
maker; it contains an unconditional promise to pay a certain
sum of money payable at a fixed or determinable future time; it
is payable to order (Sec. 1, NIL); the promissory note was
negotiated when it was transferred and delivered by IPM to the
appellee and duly endorsed to the latter (Sec. 30, NIL); it was
taken in the conditions that the note was complete and regular
upon its face before the same was overdue and without notice,
that it had been previously dishonored and that the note is in
good faith and for value without notice of any infirmity or
defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and
Acceptance Corporation held the instrument free from any
defect of title of prior parties and free from defenses available
to prior parties among themselves and may enforce payment of
the instrument for the full amount thereof against all parties
liable thereon (Sec. 57, NIL); the appellants engaged that they
would pay the note according to its tenor, and admit the
existence of the payee IPM and its capacity to endorse (Sec. 60,
NIL).

In view of the essential elements found in the questioned

promissory note, We opine that the same is legally and
conclusively enforceable against the defendants-appellants.
WHEREFORE, finding the decision appealed from according to
law and evidence, We find the appeal without merit and thus
affirm the decision in toto. With costs against the appellants.
(pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985
was denied by the Intermediate Appellate Court in its resolution dated
October 17, 1985, a copy of which was received by the petitioners on
October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE
INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE
TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A
MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT
AND THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT,
THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES
THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR,
INDUSTRIAL PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT
PROMISSORY NOTE BECAUSE:

LIABLE

FOR

THE

PAYMENT

OF

THE

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER

THE LAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLERASSIGNOR OF THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLERASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE
NATURE OF THE TRANSACTION FROM BEING A SALE ON INSTALLMENTS
TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN
ANY COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT
BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the
decision dated July 17, 1985, as well as the resolution dated October 17,
1985 and dismissing the complaint but granting petitioners'
counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to the
petition filed on February 20, 1986, contended that the petition was filed
out of time; that the promissory note is a negotiable instrument and
respondent a holder in due course; that respondent is not liable for any
breach of warranty; and finally, that the promissory note is admissible in
evidence.
The core issue herein is whether or not the promissory note in question is
a negotiable instrument so as to bar completely all the available defenses
of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the
instant petition to have been filed on time because the petitioners'
motion for reconsideration actually raised new issues. It cannot,
therefore, be considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor
broke down and 9 days, thereafter, the second tractor became

inoperable" are sustained by the records. The petitioner was clearly a

victim of a warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty against
the hidden defects which the thing sold may have, should they
render it unfit for the use for which it is intended, or should
they diminish its fitness for such use to such an extent that,
had the vendee been aware thereof, he would not have
acquired it or would have given a lower price for it; but said
vendor shall not be answerable for patent defects or those
which may be visible, or for those which are not visible if the
vendee is an expert who, by reason of his trade or profession,
should have known them.
ART. 1562. In a sale of goods, there is an implied warranty or
condition as to the quality or fitness of the goods, as follows:
(1) Where the buyer, expressly or by implication makes known
to the seller the particular purpose for which the goods are
acquired, and it appears that the buyer relies on the sellers skill
or judge judgment (whether he be the grower or manufacturer
or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or
fitness for a particular purpose may be annexed by the usage
of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any
hidden faults or defects in the thing sold even though he was
not aware thereof.
This provision shall not apply if the contrary has been
stipulated, and the vendor was not aware of the hidden faults
or defects in the thing sold. (Emphasis supplied).

It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the
assignee is a holder in due course of the promissory note in question,
assuming the note is negotiable, in which case the latter's rights are
based on the negotiable instrument and assuming further that the
petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke
down, the petitioner-corporation notified the seller-assignor's sister
company, AG & P, about the breakdown based on the seller-assignor's
express 90-day warranty, with which the latter complied by sending its
mechanics. However, due to the seller-assignor's delay and its failure to
comply with its warranty, the tractors became totally unserviceable and
useless for the purpose for which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its
contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
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.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and
1566, the vendee may elect between withdrawing from the
contract and demanding a proportionate reduction of the price,
with damages in either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract
with the seller-assignor, necessarily can no longer sue the seller-assignor
except by way of counterclaim if the seller-assignor sues it because of the
rescission.

In the case of the University of the Philippines v. De los Angeles (35 SCRA
102) we held:
In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is
only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or
was not correct in law. But the law definitely does not require
that the contracting party who believes itself injured must first
file suit and wait for adjudgement before taking extrajudicial
steps to protect its interest. Otherwise, the party injured by the
other's breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final
judgment of rescission is rendered when the law itself requires
that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question
is not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay
to the INDUSTRIAL PRODUCTS MARKETING, the sum of ONE
MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY
NINE PESOS & 71/100 only (P 1,093,789.71), Philippine
Currency, the said principal sum, to be payable in 24 monthly
installments starting July 15, 1978 and every 15th of the month
thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments
Law requires that a promissory note "must be payable to order or bearer,
" it cannot be denied that the promissory note in question is not a
negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must
contain the so-called 'words of negotiable, must be payable to
'order' or 'bearer'. These words serve as an expression of
consent that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a
negotiable instrument than under a non-negotiable one. ...

xxx xxx xxx

When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. The instrument is payable
to order where it is drawn payable to the order of a specified
person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be
made payable to order. There must always be a specified
person named in the instrument. It means that the bill or note
is to be paid to the person designated in the instrument or to
any person to whom he has indorsed and delivered the
same. Without the words "or order" or"to the order of, "the
instrument is payable only to the person designated therein
and is therefore non-negotiable. Any subsequent purchaser
thereof will not enjoy the advantages of being a holder of a
negotiable instrument but will merely "step into the shoes" of
the person designated in the instrument and will thus be open
to all defenses available against the latter." (Campos and
Campos, Notes and Selected Cases on Negotiable Instruments
Law, Third Edition, page 38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a
negotiable instrument, it follows that the respondent can never be a
holder in due course but remains a mere assignee of the note in question.
Thus, the petitioner may raise against the respondent all defenses
available to it as against the seller-assignor Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the sellerassignor when it was sued by the respondent-assignee because the
petitioner's defenses apply to both or either of either of them. Actually,
the records show that even the respondent itself admitted to being a
mere assignee of the promissory note in question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what is
being assigned is the Deed of Sale with Chattel
Mortgage with the promissory note which is as
testified to by the witness was indorsed? (Counsel for

Plaintiff nodding his head.) Then we have no further

questions on cross,
COURT:
You confirm his manifestation? You are nodding your
head? Do you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed of sale
is a transaction between two persons; what is
assigned are rights, the rights of the mortgagee were
assigned to the IFC Leasing & Acceptance
Corporation.
COURT:
He puts it in a simple way as one-deed of sale and
chattel mortgage were assigned; . . . you want to
make a distinction, one is an assignment of mortgage
right and the other one is indorsement of the
promissory note. What counsel for defendants wants
is that you stipulate that it is contained in one single
transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction. (pp. 27-29,
TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the promissory
note in question is a negotiable instrument, the respondent cannot be a
holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the sellerassignor, Industrial Products Marketing, and the respondent whereby the
latter would pay the seller-assignor the entire purchase price and the
seller-assignor, in turn, would assign its rights to the respondent which
acquired the right to collect the price from the buyer, herein petitioner
Consolidated Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory
Note, the Deed of Assignment and the Disclosure of Loan/Credit
Transaction shows that said documents evidencing the sale on installment
of the tractors were all executed on the same day by and among the
buyer, which is herein petitioner Consolidated Plywood Industries, Inc.;
the seller-assignor which is the Industrial Products Marketing; and the
assignee-financing company, which is the respondent. Therefore, the
respondent had actual knowledge of the fact that the seller-assignor's
right to collect the purchase price was not unconditional, and that it was
subject to the condition that the tractors -sold were not defective. The
respondent knew that when the tractors turned out to be defective, it
would be subject to the defense of failure of consideration and cannot
recover the purchase price from the petitioners. Even assuming for the
sake of argument that the promissory note is negotiable, the respondent,
which took the same with actual knowledge of the foregoing facts so that
its action in taking the instrument amounted to bad faith, is not a holder
in due course. As such, the respondent is subject to all defenses which
the petitioners may raise against the seller-assignor. Any other
interpretation would be most inequitous to the unfortunate buyer who is
not only saddled with two useless tractors but must also face a lawsuit
from the assignee for the entire purchase price and all its incidents
without being able to raise valid defenses available as against the
assignor.
Lastly, the respondent failed to present any evidence to prove that it had
no knowledge of any fact, which would justify its act of taking the
promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that:
negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. A
holder in due course is a holder who has taken the instrument
under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value

(d) That the time it was negotiated by him he had no notice of

any infirmity in the instrument of deffect in the title of the
person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. To
constitute notice of an infirmity in the instrument or defect in
the title of the person negotiating the same, the person to
whom it is negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in
taking the instrument amounts to bad faith. (Emphasis
supplied)
We subscribe to the view of Campos and Campos that a financing
company is not a holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note payable to
the seller to cover the purchase price. Many times, in
pursuance of a previous arrangement with the seller, a finance
company pays the full price and the note is indorsed to it,
subrogating it to the right to collect the price from the buyer,
with interest. With the increasing frequency of installment
buying in this country, it is most probable that the tendency of
the courts in the United States to protect the buyer against the
finance company will , the finance company will be subject to
the defense of failure of consideration and cannot recover the
purchase price from the buyer. As against the argument that
such a rule would seriously affect "a certain mode of
transacting business adopted throughout the State," a court in
one case stated:
It may be that our holding here will require some
changes in business methods and will impose a
greater burden on the finance companies. We think
the buyer-Mr. & Mrs. General Public-should have
some protection somewhere along the line. We
believe the finance company is better able to bear
the risk of the dealer's insolvency than the buyer and
in a far better position to protect his interests against
unscrupulous and insolvent dealers. . . .

If this opinion imposes great burdens on finance

companies it is a potent argument in favor of a rule
which win afford public protection to the general
buying public against unscrupulous dealers in
personal property. . . . (Mutual Finance Co. v. Martin,
63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and
Campos, Notes and Selected Cases on Negotiable
Instruments Law, Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine
Works (34 Cal. 2d 766) involving similar facts, it was held that in a very
real sense, the finance company was a moving force in the transaction
from its very inception and acted as a party to it. When a finance
company actively participates in a transaction of this type from its
inception, it cannot be regarded as a holder in due course of the note
given in the transaction.
In like manner, therefore, even assuming that the subject promissory note
is negotiable, the respondent, a financing company which actively
participated in the sale on installment of the subject two Allis Crawler
tractors, cannot be regarded as a holder in due course of said note. It
follows that the respondent's rights under the promissory note involved in
this case are subject to all defenses that the petitioners have against the
seller-assignor, Industrial Products Marketing. For Section 58 of the
Negotiable Instruments Law provides that "in the hands of any holder
other than a holder in due course, a negotiable instrument is subject to
the same defenses as if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues,
we find that both the trial and respondent appellate court erred in holding
the promissory note in question to be negotiable. Such a ruling does not
only violate the law and applicable jurisprudence, but would result in
unjust enrichment on the part of both the assigner- assignor and
respondent assignee at the expense of the petitioner-corporation which
rightfully rescinded an inequitable contract. We note, however, that since
the seller-assignor has not been impleaded herein, there is no obstacle for
the respondent to file a civil Suit and litigate its claims against the sellerassignor in the rather unlikely possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent
appellate court dated July 17, 1985, as well as its resolution dated

October 17, 1986, are hereby ANNULLED and SET ASIDE. The complaint
against the petitioner before the trial court is DISMISSED.
SO ORDERED.

No. L-74451. May 25, 1988.*

4.) EQUITABLE BANKING CORPORATION, petitioner, vs. THE
HONORABLE INTERMEDIATE APPELLATE COURT and THE EDWARD
J. NELL CO., respondents.
Commercial Law; Negotiable Instruments Law; Checks; The subject check
was, initially, not non-negotiable; Reason.Contrary to the finding of
respondent Appellate Court, the subject check was, initially, not nonnegotiable. Neither was it a crossed check. The rubber-stamping
transversally on the face of the subject check of the words
Nonnegotiable for Payees Account Only between two (2) parallel lines,
and Non-negotiable, Teller No. 4, August 17, 1986," separately boxed,
was made only by the Bank teller in accordance with customary bank
practice, and not by NELL as the drawer of the check, and simply meant
that thereafter the same check could no longer be negotiated.
Same; Same; Same; The subject check was equivocal and
patentlyambiguous; Reasons; The ambiguity should be construed against
the party who caused the ambiguity.The subject check was equivocal
and patently ambiguous. By making the check read: Pay to the
EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE
ENTERPRISES, INC." the payee ceased to be indicated with reasonable
certainty in contravention of Section 8 of the Negotiable Instruments Law.
As worded, it could be accepted as deposit to the account of the party
named after the symbols A/C," or payable to the Bank as trustee, or as
an agent, for Casville Enterprises, Inc., with the latter being the ultimate
beneficiary. That ambiguity is to be taken contra proferentem that is,
construed against NELL who caused the ambiguity and could have also
avoided it by the exercise of a little more care. Thus, Article 1377 of the
Civil Code, provides: Art. 1377. The interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the
obscurity.

Same; Same; Same; It was NELLs own acts, which put it into the power of
Casals & Casville Enterprises to perpetuate the fraud against it and,
consequently, it must bear the loss.NELL had received three (3)
postdated checks all dated 16 November, 1976 from Casville to secure
the subject check and had accepted the deposit with it of two (2) titles of
real properties as collateral for said postdated checks. Thus, NELL was
erroneously confident that its interests were sufficiently protected. Never
had it suspected that those postdated checks would be dishonored, nor
that the subject check would be utilized by Casals for a purpose other
than for opening the letter of credit. In the last analysis, it was NELLs
own acts, which put it into the power of Casals and Casville Enterprises to
perpetuate the fraud against it and, consequently, it must bear the loss
(Blondeau, et al., vs. Nano, et al., 61 Phil. 625 [1935]; Sta. Maria vs.
Hongkong and Shanghai Banking Corporation, 89 Phil. 780 [1951];
Republic of the Philippines vs. Equitable Banking Corporation, L-15895,
January 30, 1974, 10 SCRA 8). x x x As between two innocent persons,
one of whom must suffer the consequence of a breach of trust, the one
who made it possible by his act of confidence must bear the loss.

MELENCIO-HERRERA, J.:
In this Petition for Review on certiorari petitioner, Equitable Banking
Corporation, prays that the adverse judgment against it rendered by
respondent Appellate Court, 1 dated 4 October 1985, and its majority
Resolution, dated 28 April 1986, denying petitioner's Motion for
Reconsideration, 2 be annulled and set aside.
The facts pertinent to this Petition, as summarized by the Trial Court and
adopted by reference by Respondent Appellate Court, emanated from the
case entitled "Edward J. Nell Co. vs. Liberato V. Casals, Casville
Enterprises, Inc., and Equitable Banking Corporation" of the Court of First
Instance of Rizal (Civil Case No. 25112), and read:
From the evidence submitted by the parties, the Court finds
that sometime in 1975 defendant Liberato Casals went to
plaintiff Edward J. Nell Company and told its senior sales

engineer, Amado Claustro that he was interested in buying one

of the plaintiff's garrett skidders. Plaintiff was a dealer of
machineries, equipment and supplies. Defendant Casals
represented himself as the majority stockholder, president and
general manager of Casville Enterprises, Inc., a firm engaged in
the large scale production, procurement and processing of logs
and lumber products, which had a plywood plant in Sta. Ana,
Metro Manila.
After defendant Casals talked with plaintiff's sales engineer, he
was referred to plaintiffs executive vice-president, Apolonio
Javier, for negotiation in connection with the manner of
payment. When Javier asked for cash payment for the skidders,
defendant Casals informed him that his corporation, defendant
Casville Enterprises, Inc., had a credit line with defendant
Equitable Banking Corporation. Apparently, impressed with this
assertion, Javier agreed to have the skidders paid by way of a
domestic letter of credit which defendant Casals promised to
open in plaintiffs favor, in lieu of cash payment. Accordingly, on
December 22, 1975, defendant Casville, through its president,
defendant Casals, ordered from plaintiff two units of garrett
skidders ...
The purchase order for the garrett skidders bearing No. 0051
and dated December 22, 1975 (Exhibit "A") contained the
following terms and conditions:
Two (2) units GARRETT Skidders Model 30A complete as
basically described in the bulletin
PRICE: F.O.B. dock
Manila P485,000.00/unit
For two (2) units P970,000.00
SHIPMENT: We will inform you the date and name of the vessel
as soon as arranged.
TERMS: By irrevocable domestic letter of credit to be issued in
favor of THE EDWARD J. NELL CO. or ORDER payable in thirty
six (36) months and will be opened within ninety (90) days after
date of shipment. at first installment will be due one hundred

eighty (180) days after date of shipment. Interest-14% per

annum (Exhibit A)
xxx xxx xxx
... in a letter dated April 21, 1976, defendants Casals and
Casville requested from plaintiff the delivery of one (1) unit of
the bidders, complete with tools and cables, to Cagayan de
Oro, on or before Saturday, April 24,1976, on board a Lorenzo
shipping vessel, with the information that an irrevocable
Domestic Letter of Credit would be opened in plaintiff's favor on
or before June 30, 1976 under the terms and conditions agreed
upon (Exhibit "B")
On May 3, 1976, in compliance with defendant Casvile's
recognition request, plaintiff shipped to Cagayan de Oro City a
Garrett skidder. Plaintiff paid the shipping cost in the amount of
P10,640.00 because of the verbal assurance of defendant
Casville that it would be covered by the letter of credit soon to
be opened.
xxx xxx xxx
On July 15, 1976, defendant Casals handed to plaintiff a check
in the amount of P300,000.00 postdated August 4, 1976, which
was followed by another check of same date. Plaintiff
considered these checks either as partial payment for the
skidder that was already delivered to Cagayan de Oro or as
reimbursement for the marginal deposit that plaintiff was
supposed to pay.
In a letter dated August 3, 1976 (Exhibit "C"), defendants
Casville informed the plaintiff that their application for a letter
of credit for the payment of the Garrett skidders had been
approved by the Equitable Banking Corporation. However, the
defendants said that they would need the sum of P300,000.00
to stand as collateral or marginal deposit in favor of Equitable
Banking Corporation and an additional amount of P100,000.00,
also in favor of Equitable Banking Corporation, to clear the title
of the Estrada property belonging to defendant Casals which
had been approved as security for the trust receipts to be
issued by the bank, covering the above-mentioned equipment.

Although the marginal deposit was supposed to be produced by

defendant Casville Enterprises, plaintiff agreed to advance the
necessary amount in order to facilitate the transaction.
Accordingly, on August 5,1976, plaintiff issued a check in the
amount of P400,000.00 (Exhibit "2") drawn against the First
National City Bank and made payable to the order of Equitable
Banking Corporation and with the following notation or
memorandum:
a/c of Casville Enterprises Inc. for Marginal deposit
and payment of balance on Estrada Property to be
used as security for trust receipt for opening L/C of
Garrett Skidders in favor of the Edward J. Nell Co."
Said check together with the cash disbursement
voucher (Exhibit "2-A") containing the explanation:
Payment for marginal deposit and other expenses re
opening of L/C for account of Casville Ent..
A covering letter (Exhibit "3") was also sent and when the three
documents were presented to Severino Santos, executive vice
president of defendant bank, Santos did not accept them
because the terms and conditions required by the bank for the
opening of the letter of credit had not yet been agreed on.
On August 9, 1976, defendant Casville wrote the bank applying
for two letters of credit to cover its purchase from plaintiff of
two Garrett skidders, under the following terms and conditions:
a) On sight Letter of Credit for P485,000.00; b) One 36 months
Letter of Credit for P606,000.00; c) P300,000.00 CASH marginal
deposit1 d) Real Estate Collateral to secure the Trust Receipts;
e) We shall chattel mortgage the equipments purchased even
after payment of the first L/C as additional security for the
balance of the second L/C and f) Other conditions you deem
necessary to protect the interest of the bank."
In a letter dated August 11, 1976 (Exhibit "D-l"), defendant
bank replied stating that it was ready to open the letters of
credit upon defendant's compliance of the following terms and
conditions:

c) 30% cash margin deposit; d) Acceptable Real Estate

Collateral to secure the Trust Receipts; e) Chattel Mortgage on
the equipment; and Ashville f) Other terms and conditions that
our bank may impose.
Defendant Casville sent a copy of the foregoing letter to the
plaintiff enclosing three postdated checks. In said letter,
plaintiff was informed of the requirements imposed by the
defendant bank pointing out that the "cash marginal required
under paragraph (c) is 30% of Pl,091,000.00 or P327,300.00
plus another P100,000.00 to clean up the Estrada property or a
total of P427,300.00" and that the check covering said amount
should be made payable "to the Order of EQUITABLE BANKING
CORPORATION for the account of Casville Enterprises Inc."
Defendant Casville also stated that the three (3) enclosed
postdated checks were intended as replacement of the checks
that were previously issued to plaintiff to secure the sum of
P427,300.00 that plaintiff would advance to defendant bank for
the account of defendant Casville. All the new checks were
postdated November 19, 1976 and drawn in the sum of
Pl45,500.00 (Exhibit "F"), P181,800.00 (Exhibit "G") and
P100,000.00 (Exhibit "H").
On the same occasion, defendant Casals delivered to plaintiff
TCT No. 11891 of the Register of Deeds of Quezon City and TCT
No. 50851 of the Register of Deeds of Rizal covering two pieces
of real estate properties.
Subsequently, Cesar Umali, plaintiffs credit and collection
manager, accompanied by a representative of defendant
Casville, went to see Severino Santos to find out the status of
the credit line being sought by defendant Casville. Santos
assured Umali that the letters of credit would be opened as
soon as the requirements imposed by defendant bank in its
letter dated August 11, 1976 had been complied with by
defendant Casville.
On August 16, 1976, plaintiff issued a check for P427,300.00,
payable to the "order of EQUITABLE BANKING CORPORATION
A/C CASVILLE ENTERPRISES, INC." and drawn against the first
National City Bank (Exhibit "E-l"). The check did not contain the
notation found in the previous check issued by the plaintiff

(Exhibit "2") but the substance of said notation was reproduced

in a covering letter dated August 16,1976 that went with the
check (Exhibit "E").<re||an1w> Both the check and the
covering letter were sent to defendant bank through defendant
Casals. Plaintiff entrusted the delivery of the check and the
latter to defendant Casals because it believed that no one,
including defendant Casals, could encash the same as it was
made payable to the defendant bank alone. Besides, defendant
Casals was known to the bank as the one following up the
application for the letters of credit.
Upon receiving the check for P427,300.00 entrusted to him by
plaintiff defendant Casals immediately deposited it with the
defendant bank and the bank teller accepted the same for
deposit in defendant Casville's checking account. After
depositing said check, defendant Casville, acting through
defendant Casals, then withdrew all the amount deposited.
Meanwhile, upon their presentation for encashment, plaintiff
discovered that the three checks (Exhibits "F, "G" and "H") in
the total amount of P427,300.00, that were issued by
defendant Casville as collateral were all dishonored for having
been drawn against a closed account.
As defendant Casville failed to pay its obligation to defendant
bank, the latter foreclosed the mortgage executed by
defendant Casville on the Estrada property which was sold in a
public auction sale to a third party.
Plaintiff allowed some time before following up the application
for the letters of credit knowing that it took time to process the
same. However, when the three checks issued to it by
defendant Casville were dishonored, plaintiff became
apprehensive and sent Umali on November 29, 1976, to inquire
about the status of the application for the letters of credit.
When plaintiff was informed that no letters of credit were
opened by the defendant bank in its favor and then discovered
that defendant Casville had in the meanwhile withdrawn the
entire amount of P427,300.00, without paying its obligation to
the bank plaintiff filed the instant action.

While the the instant case was being tried, defendants Casals
and Casville assigned the garrett skidder to plaintiff which
credited in favor of defendants the amount of P450,000.00, as
partial satisfaction of plaintiff's claim against them.
Defendants Casals and Casville hardly disputed their liability to
plaintiff. Not only did they show lack of interest in disputing
plaintiff's claim by not appearing in most of the hearings, but
they also assigned to plaintiff the garrett skidder which is an
action of clear recognition of their liability.
What is left for the Court to determine, therefore, is only the
liability of defendant bank to plaintiff.
xxx xxx xxx
Resolving that issue, the Trial Court rendered judgment, affirmed by
Respondent Court in toto, the pertinent portion of which reads:
xxx xxx xxx
Defendants Casals and Casville Enterprises and Equitable
Banking Corporation are ordered to pay plaintiff, jointly and
severally, the sum of P427,300.00, representing the amount of
plaintiff's check which defendant bank erroneously credited to
the account of defendant Casville and which defendants Casal
and Casville misappropriated, with 12% interest thereon from
April 5, 1977, until the said sum is fully paid.
Defendant Equitable Banking Corporation is ordered to pay
plaintiff attorney's fees in the sum of P25,000.00 .
Proportionate cost against all the defendants.
SO ORDERED.
The crucial issue to resolve is whether or not petitioner Equitable Banking
Corporation (briefly, the Bank) is liable to private respondent Edward J.
Nell Co. (NELL, for short) for the value of the second check issued by
NELL, Exhibit "E-l," which was made payable
to the order of EQUITABLE Ashville BANIUNG CORPORATION A/C
OF CASVILLE ENTERPRISES INC.

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

The Trial Court found that the amount of the second check had been
erroneously credited to the Casville account; held the Bank liable for the
mistake of its employees; and ordered the Bank to pay NELL the value of
the check in the sum of P427,300.00, with legal interest. Explained the
Trial Court:
The Court finds that the check in question was payable only to
the defendant bank and to no one else. Although the words
"A/C OF CASVILLE ENTERPRISES INC. "appear on the face of the
check after or under the name of defendant bank, the payee
was still the latter. The addition of said words did not in any
way make Casville Enterprises, Inc. the Payee of the instrument
for the words merely indicated for whose account or in
connection with what account the check was issued by the
plaintiff.
Indeed, the bank teller who received it was fully aware that the
check was not negotiable since he stamped thereon the words
"NON-NEGOTIABLE For Payee's Account Only" and "NONNEGOTIABLE TELLER NO. 4, August 17,1976 EQUITABLE
BANKING CORPORATION.
But said teller should have exercised more prudence in the
handling of Id check because it was not made out in the usual
manner. The addition of the words A/C OF CASVILLE
ENTERPRISES INC." should have placed the teller on guard and
he should have clarified the matter with his superiors. Instead
of doing so, however, the teller decided to rely on his own
judgment and at the risk of making a wrong decision, credited
the entire amount in the name of defendant Casville although
the latter was not the payee named in the check. Such mistake
was crucial and was, without doubt, the proximate cause of
plaintiffs defraudation.
xxx xxx xxx
Respondent Appellate Court upheld the above conclusions stating in
addition:
1) The appellee made the subject check payable to appellant's
order, for the account of Casville Enterprises, Inc. In the light of

the other facts, the directive was for the appellant bank to
apply the value of the check as payment for the letter of credit
which Casville Enterprises, Inc. had previously applied for in
favor of the appellee (Exhibit D-1, p. 5). The issuance of the
subject check was precisely to meet the bank's prior
requirement of payment before issuing the letter of credit
previously applied for by Casville Enterprises in favor of the
appellee;
xxx xxx xxx
We disagree.
1) The subject check was equivocal and patently ambiguous. By making
the check read:
Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF
CASVILLE ENTERPRISES, INC.
the payee ceased to be indicated with reasonable certainty in
contravention of Section 8 of the Negotiable Instruments Law. 3 As
worded, it could be accepted as deposit to the account of the party
named after the symbols "A/C," or payable to the Bank as trustee, or as
an agent, for Casville Enterprises, Inc., with the latter being the ultimate
beneficiary. That ambiguity is to be taken contra proferentem that is,
construed against NELL who caused the ambiguity and could have also
avoided it by the exercise of a little more care. Thus, Article 1377 of the
Civil Code, provides:
Art. 1377. The interpretation of obscure words or stipulations in
a contract shall not favor the party who caused the obscurity.
2) Contrary to the finding of respondent Appellate Court, the subject
check was, initially, not non-negotiable. Neither was it a crossed check.
The rubber-stamping transversall on the face of the subject check of the
words "Non-negotiable for Payee's Account Only" between two (2) parallel
lines, and "Non-negotiable, Teller- No. 4, August 17, 1976," separately
boxed, was made only by the Bank teller in accordance with customary
bank practice, and not by NELL as the drawer of the check, and simply
meant that thereafter the same check could no longer be negotiated.
3) NELL's own acts and omissions in connection with the drawing,
issuance and delivery of the 16 August 1976 check, Exhibit "E-l," and its

implicit trust in Casals, were the proximate cause of its own defraudation:
(a) The original check of 5 August 1976, Exhibit "2," was payable to the
order solely of "Equitable Banking Corporation." NELL changed the payee
in the subject check, Exhibit "E", however, to "Equitable Banking
Corporation, A/C of Casville Enterprises Inc.," upon Casals request. NELL
also eliminated both the cash disbursement voucher accompanying the
check which read:
Payment for marginal deposit and other expense re opening of
L/C for account of Casville Enterprises.
and the memorandum:
a/c of Casville Enterprises Inc. for Marginal deposit and
payment of balance on Estrada Property to be used as security
for trust receipt for opening L/C of Garrett Skidders in favor of
the Edward Ashville J Nell Co.
Evidencing the real nature of the transaction was merely a separate
covering letter, dated 16 August 1976, which Casals, sinisterly enough,
suppressed from the Bank officials and teller.
(b) NELL entrusted the subject check and its covering letter, Exhibit "E,"
to Casals who, obviously, had his own antagonistic interests to promote.
Thus it was that Casals did not purposely present the subject check to the
Executive Vice-President of the Bank, who was aware of the negotiations
regarding the Letter of Credit, and who had rejected the previous check,
Exhibit "2," including its three documents because the terms and
conditions required by the Bank for the opening of the Letter of Credit had
not yet been agreed on.
(c) NELL was extremely accommodating to Casals. Thus, to facilitate the
sales transaction, NELL even advanced the marginal deposit for the
garrett skidder. It is, indeed, abnormal for the seller of goods, the price of
which is to be covered by a letter of credit, to advance the marginal
deposit for the same.
(d) NELL had received three (3) postdated checks all dated 16 November,
1976 from Casvine to secure the subject check and had accepted the
deposit with it of two (2) titles of real properties as collateral for said
postdated checks. Thus, NELL was erroneously confident that its interests
were sufficiently protected. Never had it suspected that those postdated

checks would be dishonored, nor that the subject check would be utilized
by Casals for a purpose other than for opening the letter of credit.
In the last analysis, it was NELL's own acts, which put it into the power of
Casals and Casville Enterprises to perpetuate the fraud against it and,
consequently, it must bear the loss (Blondeau, et al., vs. Nano, et al., 61
Phil. 625 [1935]; Sta. Maria vs. Hongkong and Shanghai Banking
Corporation, 89 Phil. 780 [1951]; Republic of the Philippines vs. Equitable
Banking Corporation, L-15895, January 30,1964, 10 SCRA 8).
... As between two innocent persons, one of whom must suffer
the consequence of a breach of trust, the one who made it
possible by his act of confidence must bear the loss.
WHEREFORE, the Petition is granted and the Decision of respondent
Appellate Court, dated 4 October 1985, and its majority Resolution, dated
28 April 1986, denying petitioner's Motion for Reconsideration, are hereby
SET ASIDE. The Decision of the then Court of First Instance of Rizal,
Branch XI. is modified in that petitioner Equitable Banking Corporation is
absolved from any and all liabilities to the private respondent, Edward J.
Nell Company, and the Amended Complaint against petitioner bank is
hereby ordered dismissed. No costs.
SO ORDERED.

G.R. No. 85419. March 9, 1993.*

5.) DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner, vs. SIMA
WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG,
ASIAN INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK
OF THE PHILIPPINES, defendants-respondents.
Remedial Law; Action; Definition and essential elements of a cause of
action.A cause of action is defined as an act or omission of one party in
violation of the legal right or rights of another. The essential elements
are: (1) legal right of the plaintiff; (2) correlative obligation of the
defendant; and (3) an act or omission of the defendant in violation of said
legal right.
Commercial Law; Negotiable Instruments Law; A negotiable instrument of
which a check is, is not only a written evidence of a contract right but is
also a species of property.Courts have long recognized the business

custom of using printed checks where blanks are provided for the date of
issuance, the name of the payee, the amount payable and the drawer's
signature. All the drawer has to do when he wishes to issue a check is to
properly fill up the blanks and sign it. However, the mere fact that he has
done these does not give rise to any liability on his part, until and unless
the check is delivered to the payee or his representative. A negotiable
instrument, of which a check is, is not only a written evidence of a
contract right but is also a species of property. Just as a deed to a piece of
land must be delivered in order to convey title to the grantee, so must a
negotiable instrument be delivered to the payee in order to evidence its
existence as a binding contract.
Same; Same; Same; The payee of a negotiable instrument acquires no
interest with respect thereto until its delivery to him.Thus, the payee of
a negotiable instrument acquires no interest with respect thereto until its
delivery to him. Delivery of an instrument means transfer of possession,
actual or constructive, from one person to another. Without the initial
delivery of the instrument from the drawer to the payee, there can be no
liability on the instrument. Moreover, such delivery must be intended to
give effect to the instrument.
Same; Same; Same; Same; The delivery of checks in payment of an
obligation does not constitute payment unless they are cashed or their
value is impaired through the fault of the creditor.Notwithstanding the
above, it does not necessarily follow that the drawer Sima Wei is freed
from liability to petitioner Bank under the loan evidenced by the
promissory note agreed to by her. Her allegation that she has paid the
balance of her loan with the two checks payable to petitioner Bank has no
merit for, as We have earlier explained, these checks were never
delivered to petitioner Bank. And even granting, without admitting, that
there was delivery to petitioner Bank, the delivery of checks in payment
of an obligation does not constitute payment unless they are cashed or
their value is impaired through the fault of the creditor. None of these
exceptions were alleged by respondent Sima Wei.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for
brevity) filed a complaint for a sum of money against respondents Sima
Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian Industrial
Plastic Corporation (Plastic Corporation for short) and the Producers Bank
of the Philippines, on two causes of action:

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

promissory note executed by respondent Sima Wei on June 9,
1983; and
(2) To enforce payment of two checks executed by Sima Wei,
payable to petitioner, and drawn against the China Banking
Corporation, to pay the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to
Dismiss alleging a common ground that the complaint states no cause of
action. The trial court granted the defendants' Motions to Dismiss. The
Court of Appeals affirmed this decision, * to which the petitioner Bank,
represented by its Legal Liquidator, filed this Petition for Review
by Certiorari, assigning the following as the alleged errors of the Court of
Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE
PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION AGAINST
DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION
13, RULE 3 OF THE REVISED RULES OF COURT ON ALTERNATIVE
DEFENDANTS IS NOT APPLICABLE TO HEREIN DEFENDANTSRESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent
Sima Wei, the latter executed and delivered to the former a promissory
note, engaging to pay the petitioner Bank or order the amount of
P1,820,000.00 on or before June 24, 1983 with interest at 32% per
annum. Sima Wei made partial payments on the note, leaving a balance
of P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed
checks payable to petitioner Bank drawn against China Banking
Corporation, bearing respectively the serial numbers 384934, for the
amount of P550,000.00 and 384935, for the amount of P500,000.00. The
said checks were allegedly issued in full settlement of the drawer's
account evidenced by the promissory note. These two checks were not
delivered to the petitioner-payee or to any of its authorized
representatives. For reasons not shown, these checks came into the
possession of respondent Lee Kian Huat, who deposited the checks
without the petitioner-payee's indorsement (forged or otherwise) to the

account of respondent Plastic Corporation, at the Balintawak branch,

Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the
Balintawak branch of Producers Bank, relying on the assurance of
respondent Samson Tung, President of Plastic Corporation, that the
transaction was legal and regular, instructed the cashier of Producers
Bank to accept the checks for deposit and to credit them to the account
of said Plastic Corporation, inspite of the fact that the checks were
crossed and payable to petitioner Bank and bore no indorsement of the
latter. Hence, petitioner filed the complaint as aforestated.
The main issue before Us is whether petitioner Bank has a cause of action
against any or all of the defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation
of the legal right or rights of another. The essential elements are: (1) legal
right of the plaintiff; (2) correlative obligation of the defendant; and (3) an
act or omission of the defendant in violation of said legal right. 2
The normal parties to a check are the drawer, the payee and the drawee
bank. Courts have long recognized the business custom of using printed
checks where blanks are provided for the date of issuance, the name of
the payee, the amount payable and the drawer's signature. All the drawer
has to do when he wishes to issue a check is to properly fill up the blanks
and sign it. However, the mere fact that he has done these does not give
rise to any liability on his part, until and unless the check is delivered to
the payee or his representative. A negotiable instrument, of which a
check is, is not only a written evidence of a contract right but is also a
species of property. Just as a deed to a piece of land must be delivered in
order to convey title to the grantee, so must a negotiable instrument be
delivered to the payee in order to evidence its existence as a binding
contract. Section 16 of the Negotiable Instruments Law, which governs
checks, provides in part:
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of
giving effect thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with
respect thereto until its delivery to him. 3Delivery of an instrument means
transfer of possession, actual or constructive, from one person to
another. 4 Without the initial delivery of the instrument from the drawer to

the payee, there can be no liability on the instrument. Moreover, such

delivery must be intended to give effect to the instrument.
The allegations of the petitioner in the original complaint show that the
two (2) China Bank checks, numbered 384934 and 384935, were not
delivered to the payee, the petitioner herein. Without the delivery of said
checks to petitioner-payee, the former did not acquire any right or
interest therein and cannot therefore assert any cause of action, founded
on said checks, whether against the drawer Sima Wei or against the
Producers Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent
Sima Wei on the promissory note, and the alternative defendants,
including Sima Wei, on the two checks. On appeal from the orders of
dismissal of the Regional Trial Court, petitioner Bank alleged that its cause
of action was not based on collecting the sum of money evidenced by the
negotiable instruments stated but on quasi-delict a claim for damages
on the ground of fraudulent acts and evident bad faith of the alternative
respondents. This was clearly an attempt by the petitioner Bank to
change not only the theory of its case but the basis of his cause of action.
It is well-settled that a party cannot change his theory on appeal, as this
would in effect deprive the other party of his day in court. 5
Notwithstanding the above, it does not necessarily follow that the drawer
Sima Wei is freed from liability to petitioner Bank under the loan
evidenced by the promissory note agreed to by her. Her allegation that
she has paid the balance of her loan with the two checks payable to
petitioner Bank has no merit for, as We have earlier explained, these
checks were never delivered to petitioner Bank. And even granting,
without admitting, that there was delivery to petitioner Bank, the delivery
of checks in payment of an obligation does not constitute payment unless
they are cashed or their value is impaired through the fault of the
creditor. 6 None of these exceptions were alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved
from liability on the promissory note by some other cause, petitioner Bank
has a right of action against her for the balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank
has no privity with them. Since petitioner Bank never received the checks
on which it based its action against said respondents, it never owned
them (the checks) nor did it acquire any interest therein. Thus, anything

which the respondents may have done with respect to said checks could
not have prejudiced petitioner Bank. It had no right or interest in the
checks which could have been violated by said respondents. Petitioner
Bank has therefore no cause of action against said respondents, in the
alternative or otherwise. If at all, it is Sima Wei, the drawer, who would
have
a
cause
of
action
against
her
co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank
regarding the applicability of Section 13, Rule 3 of the Rules of Court, We
find it unnecessary to discuss the same in view of Our finding that the
petitioner Bank did not acquire any right or interest in the checks due to
lack of delivery. It therefore has no cause of action against the
respondents, in the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals
dismissing the petitioner's complaint is AFFIRMED insofar as the second
cause of action is concerned. On the first cause of action, the case is
REMANDED to the trial court for a trial on the merits, consistent with this
decision, in order to determine whether respondent Sima Wei is liable to
the Development Bank of Rizal for any amount under the promissory note
allegedly signed by her.
SO ORDERED.

G.R. No. 92244. February 9, 1993.*

6.) NATIVIDAD GEMPESAW, petitioner, vs. THE HONORABLE COURT
OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS,
respondents.
Negotiable Instruments Law; Checks; Forged Indorsements; Effect of
drawer's negligence.As a matter of practical significance, problems
arising from forged indorsements of checks may generally be broken into
two types of cases: (1) where forgery was accomplished by a person not
associated with the drawerfor example a mail robbery; and (2) where
the indorsement was forged by an agent of the drawer. This difference in
situations would determine the effect of the drawer's negligence with
respect to forged indorsements. While there is no duty resting on the
depositor to look for forged indorsements on his cancelled checks in

contrast to a duty imposed upon him to look for forgeries of his own
name, a depositor is under a duty to set up an accounting system and a
business procedure as are reasonably calculated to prevent or render
difficult the forgery of indorsements, particularly by the depositor's own
employees. And if the drawer (depositor) learns that a check drawn by
him has been paid under a forged indorsement, the drawer is under duty
promptly to report such fact to the drawee bank. For his negligence or
failure either to discover or to report promptly the fact of such forgery to
the drawee, the drawer loses his right against the drawee who has
debited his account under the forged indorsement. In other words, he is
precluded from using forgery as a basis for his claim for recrediting of his
account.
Same; Same; Same; Same.As a rule, a drawee bank who has paid a
check on which an indorsement has been forged cannot charge the
drawer's account for the amount of said check. An exception to this rule is
where the drawer is guilty of such negligence which causes the bank to
honor such a check or checks. If a check is stolen from the payee, it is
quite obvious that the drawer cannot possibly discover the forged
indorsement by mere examination of his cancelled check. This accounts
for the rule that although a depositor owes a duty to his drawee bank to
examine his cancelled checks for forgery of his own signature, he has no
similar duty as to forged indorsements. A different situation arises where
the indorsement was forged by an employee or a ent of the drawer, or
done with the active participation of the latter. Most of the cases involving
forgery by an agent or employee deal with the payee's indorsement. The
drawer and the payee oftentimes have business relations of long
standing. The continued occurrence of business transactions of the same
nature provides the opportunity for the agent/employee to commit the
fraud after having developed familiarity with the signatures of the parties.
However, sooner or later, some leak will show on the drawer's books. It
will then be just a question of time until the fraud is discovered. This is
specially true when the agent perpetrates a series of forgeries as in the
case at bar. The negligence of a depositor which will prevent recovery of
an unauthorized payment is based on failure of the depositor to act as a
prudent businessman would under the circumstances.
Same; Same; No legal obligation on drawee not to honor crossed checks.
Petitioner argues that respondent drawee Bank should not have
honored the checks because they were crossed checks. Issuing a crossed
check imposes no legal obligation on the drawee not to honor such a
check. It is more of a warning to the holder that the check cannot be

presented to the drawee bank for payment in cash. Instead, the check
can only be deposited with the payee's bank which in turn must present it
for payment against the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot be presented for
payment but it can only be deposited and the drawee bank may only pay
to another bank in the payee's or indorser's account.
Banks and Banking; Contractual relation between depositor as obligee
and drawee bank as obligor; Violation of rule on non-acceptance of
second indorsements without approval of branch manager.There is no
question that there is a contractual relation between petitioner as
depositor (obligee) and the respondents drawee bank as the obligor. In
the performance of its obligation, the drawee bank is bound by its internal
banking rules and regulations which form part of any contract it enters
into with any of its depositors. When it violated its internal rules that
second endorsements are not to be accepted without the approval of its
branch managers and it did accept the same upon the mere approval of
Boon, a chief accountant, it contravened the tenor of its obligation at the
very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover
the irregularity with respect to the acceptance of checks with second
indorsement for deposit even without the approval of the branch manager
despite periodic inspection conducted by a team of auditors from the
main office constitutes negligence on the part of the bank in carrying out
its obligations to its depositors. Article 1173 provides"The fault or
negligence of the obligor consists in the omission of that diligence which
is required by the nature of the obligation and correspondents with the
circumstance of the persons, of the time and of the place. x x x." We hold
that banking business is so impressed with public interest where the trust
and confidence of the public in general is of paramount importance such
that the appropriate standard of diligence must be a high degree of
diligence, if not the utmost diligence. Surely, respondent drawee Bank
cannot claim it exercised such a degree of diligence that is required of it.
There is no way We can allow it now to escape liability for such
negligence. Its liability as obligor is not merely vicarious but primary
wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No.
16447), petitioner, Natividad Gempesaw, appealed to this Court in a

Petition for Review, on the issue of the right of the drawer to recover from
the drawee bank who pays a check with a forged indorsement of the
payee, debiting the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint
against the private respondent Philippine Bank of Communications
(respondent drawee Bank) for recovery of the money value of eighty-two
(82) checks charged against the petitioner's account with the respondent
drawee Bank on the ground that the payees' indorsements were
forgeries. The Regional Trial Court, Branch CXXVIII of Caloocan City, which
tried the case, rendered a decision on November 17, 1987 dismissing the
complaint as well as the respondent drawee Bank's counterclaim. On
appeal, the Court of Appeals in a decision rendered on February 22, 1990,
affirmed the decision of the RTC on two grounds, namely (1) that the
plaintiff's (petitioner herein) gross negligence in issuing the checks was
the proximate cause of the loss and (2) assuming that the bank was also
negligent, the loss must nevertheless be borne by the party whose
negligence was the proximate cause of the loss. On March 5, 1990, the
petitioner filed this petition under Rule 45 of the Rules of Court setting
forth the following as the alleged errors of the respondent Court: 1
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT
THE NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE
OF THE RESULTING INJURY TO THE DRAWEE BANK, AND THE
DRAWER IS PRECLUDED FROM SETTING UP THE FORGERY OR
WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
FINDING AND RULING THAT IT IS THE GROSS AND INEXCUSABLE
NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND
EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE
SIGNATURE OF THE PAYEES AND THE WRONG AND/OR ILLEGAL
PAYMENTS MADE TO PERSONS, OTHER THAN TO THE INTENDED
PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND
PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER WHOSE
SAVING (SIC) ACCOUNT WAS DEBITED.
III

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT

ORDERING THE RESPONDENT BANK TO RESTORE OR RE-CREDIT
THE CHECKING ACCOUNT OF THE PETITIONER IN THE
CALOOCAN CITY BRANCH BY THE VALUE OF THE EIGHTY-TWO
(82) CHECKS WHICH IS IN THE AMOUNT OF P1,208,606.89 WITH
LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four
grocery stores located at Rizal Avenue Extension and at Second Avenue,
Caloocan City. Among these groceries are D.G. Shopper's Mart and D.G.
Whole Sale Mart. Petitioner maintains a checking account numbered 1300038-1 with the Caloocan City Branch of the respondent drawee Bank.
To facilitate payment of debts to her suppliers, petitioner draws checks
against her checking account with the respondent bank as drawee. Her
customary practice of issuing checks in payment of her suppliers was as
follows: the checks were prepared and filled up as to all material
particulars by her trusted bookkeeper, Alicia Galang, an employee for
more than eight (8) years. After the bookkeeper prepared the checks, the
completed checks were submitted to the petitioner for her signature,
together with the corresponding invoice receipts which indicate the
correct obligations due and payable to her suppliers. Petitioner signed
each and every check without bothering to verify the accuracy of the
checks against the corresponding invoices because she reposed full and
implicit trust and confidence on her bookkeeper. The issuance and
delivery of the checks to the payees named therein were left to the
bookkeeper. Petitioner admitted that she did not make any verification as
to whether or not the checks were delivered to their respective payees.
Although the respondent drawee Bank notified her of all checks presented
to and paid by the bank, petitioner did not verify he correctness of the
returned checks, much less check if the payees actually received the
checks in payment for the supplies she received. In the course of her
business operations covering a period of two years, petitioner issued,
following her usual practice stated above, a total of eighty-two (82)
checks in favor of several suppliers. These checks were all presented by
the indorsees as holders thereof to, and honored by, the respondent
drawee Bank. Respondent drawee Bank correspondingly debited the
amounts thereof against petitioner's checking account numbered 3000038-1. Most of the aforementioned checks were for amounts in excess

of her actual obligations to the various payees as shown in their

corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount
of P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's
actual obligation to said payee was only P895.33 (Exh. A-83);
(2) in Check No. 652282 issued on September 18, 1984 in favor
of Senson Enterprises in the amount of P11,041.20 (Exh. A-67)
appellant's actual obligation to said payee was only P1,041.20
(Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the
amount of P11,672.47 in favor of Marchem (Exh. A-61)
appellant's obligation was only P1,672.47 (Exh. B); (4) in Check
No. 620450 dated May 10, 1984 in favor of Knotberry for
P11,677.10 (Exh. A-31) her actual obligation was only P677.10
(Exhs. C and C-1); (5) in Check No. 651862 dated August 9,
1984 in favor of Malinta Exchange Mart for P11,107.16 (Exh. A62), her obligation was only P1,107.16 (Exh. D-2); (6) in Check
No. 651863 dated August 11, 1984 in favor of Grocer's
International Food Corp. in the amount of P11,335.60 (Exh. A66), her obligation was only P1,335.60 (Exh. E and E-1); (7) in
Check No. 589019 dated March 17, 1984 in favor of Sophy
Products in the amount of P11,648.00 (Exh. A-78), her
obligation was only P648.00 (Exh. G); (8) in Check No. 589028
dated March 10, 1984 for the amount of P11,520.00 in favor of
the Yakult Philippines (Exh. A-73), the latter's invoice was only
P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 23, 1984
in the amount of P11,504.00 in favor of Monde Denmark Biscuit
(Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and I2). 2
Practically, all the checks issued and honored by the respondent drawee
bank were crossed checks. 3 Aside from the daily notice given to the
petitioner by the respondent drawee Bank, the latter also furnished her
with a monthly statement of her transactions, attaching thereto all the
cancelled checks she had issued and which were debited against her
current account. It was only after the lapse of more two (2) years that
petitioner found out about the fraudulent manipulations of her
bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were
brought to Ernest L. Boon, Chief Accountant of respondent drawee Bank
at the Buendia branch, who, without authority therefor, accepted them all

for deposit at the Buendia branch to the credit and/or in the accounts of
Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend
of Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks
were deposited in Savings Account No. 00844-5 of Alfredo Y. Romero at
the respondent drawee Bank's Buendia branch, and four (4) checks in his
Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks
were deposited in Account No. 0443-4, under the name of Benito Lam at
the Elcao branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on
the checks testified that they did not receive nor even see the subject
checks and that the indorsements appearing at the back of the checks
were not theirs.
The team of auditors from the main office of the respondent drawee Bank
which conducted periodic inspection of the branches' operations failed to
discover, check or stop the unauthorized acts of Ernest L. Boon. Under the
rules of the respondent drawee Bank, only a Branch Manager and no
other official of the respondent drawee bank, may accept a second
indorsement on a check for deposit. In the case at bar, all the deposit
slips of the eighty-two (82) checks in question were initialed and/or
approved for deposit by Ernest L. Boon. The Branch Managers of the
Ongpin and Elcao branches accepted the deposits made in the Buendia
branch and credited the accounts of Alfredo Y. Romero and Benito Lam in
their respective branches.
On November 7, 1984, petitioner made a written demand on respondent
drawee Bank to credit her account with the money value of the eightytwo (82) checks totalling P1,208.606.89 for having been wrongfully
charged against her account. Respondent drawee Bank refused to grant
petitioner's demand. On January 23, 1985, petitioner filed the complaint
with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check
drawn against the drawee bank. The payees are not parties to the case.
Rather, it is the drawer, whose signature is genuine, who instituted this
action to recover from the drawee bank the money value of eighty-two
(82) checks paid out by the drawee bank to holders of those checks
where the indorsements of the payees were forged. How and by whom
the forgeries were committed are not established on the record, but the
respective payees admitted that they did not receive those checks and
therefore never indorsed the same. The applicable law is the Negotiable

Instruments Law 4(heretofore referred to as the NIL). Section 23 of the NIL

provides:
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense
by the party whose signature is forged. A party whose signature to
an instrument was forged was never a party and never gave his
consent to the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot be held
liable thereon by anyone, not even by a holder in due course. Thus,
if a person's signature is forged as a maker of a promissory note, he
cannot be made to pay because he never made the promise to pay.
Or where a person's signature as a drawer of a check is forged, the
drawee bank cannot charge the amount thereof against the drawer's
account because he never gave the bank the order to pay. And said
section does not refer only to the forged signature of the maker of a
promissory note and of the drawer of a check. It covers also a forged
indorsement, i.e., the forged signature of the payee or indorsee of a
note or check. Since under said provision a forged signature is
"wholly inoperative", no one can gain title to the instrument through
such forged indorsement. Such an indorsement prevents any
subsequent party from acquiring any right as against any party
whose name appears prior to the forgery. Although rights may exist
between and among parties subsequent to the forged indorsement,
not one of them can acquire rights against parties prior to the
forgery. Such forged indorsement cuts off the rights of all
subsequent parties as against parties prior to the forgery. However,
the law makes an exception to these rules where a party is
precluded from setting up forgery as a defense.
As a matter of practical significance, problems arising from forged
indorsements of checks may generally be broken into two types of cases:
(1) where forgery was accomplished by a person not associated with the
drawer for example a mail robbery; and (2) where the indorsement was
forged by an agent of the drawer. This difference in situations would

determine the effect of the drawer's negligence with respect to forged

indorsements. While there is no duty resting on the depositor to look for
forged indorsements on his cancelled checks in contrast to a duty
imposed upon him to look for forgeries of his own name, a depositor is
under a duty to set up an accounting system and a business procedure as
are reasonably calculated to prevent or render difficult the forgery of
indorsements, particularly by the depositor's own employees. And if the
drawer (depositor) learns that a check drawn by him has been paid under
a forged indorsement, the drawer is under duty promptly to report such
fact to the drawee bank. 5 For his negligence or failure either to discover
or to report promptly the fact of such forgery to the drawee, the drawer
loses his right against the drawee who has debited his account under a
forged indorsement. 6 In other words, he is precluded from using forgery
as a basis for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and
completed by her trusted employee, Alicia Galang, and were given to her
for her signature. Her signing the checks made the negotiable instrument
complete. Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument to the payee for the purpose of giving
effect thereto. 7 The first delivery of the instrument, complete in form, to
the payee who takes it as a holder, is called issuance of the
instrument. 8 Without the initial delivery of the instrument from the
drawer of the check to the payee, there can be no valid and binding
contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter
authorized her employee Alicia Galang to deliver the eighty-two (82)
checks to their respective payees. Instead of issuing the checks to the
payees as named in the checks, Alicia Galang delivered them to the Chief
Accountant of the Buendia branch of the respondent drawee Bank, a
certain Ernest L. Boon. It was established that the signatures of the
payees as first indorsers were forged. The record fails to show the identity
of the party who made the forged signatures. The checks were then
indorsed for the second time with the names of Alfredo Y. Romero and
Benito Lam, and were deposited in the latter's accounts as earlier noted.
The second indorsements were all genuine signatures of the alleged
holders. All the eighty-two (82) checks bearing the forged indorsements
of the payees and the genuine second indorsements of Alfredo Y. Romero
and Benito Lam were accepted for deposit at the Buendia branch of

respondent drawee Bank to the credit of their respective savings

accounts in the Buendia, Ongpin and Elcao branches of the same bank.
The total amount of P1,208,606.89, represented by eighty-two (82)
checks, were credited and paid out by respondent drawee Bank to Alfredo
Y. Romero and Benito Lam, and debited against petitioner's checking
account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement
has been forged cannot charge the drawer's account for the amount of
said check. An exception to this rule is where the drawer is guilty of such
negligence which causes the bank to honor such a check or checks. If a
check is stolen from the payee, it is quite obvious that the drawer cannot
possibly discover the forged indorsement by mere examination of his
cancelled check. This accounts for the rule that although a depositor owes
a duty to his drawee bank to examine his cancelled checks for forgery of
his own signature, he has no similar duty as to forged indorsements. A
different situation arises where the indorsement was forged by an
employee or agent of the drawer, or done with the active participation of
the latter. Most of the cases involving forgery by an agent or employee
deal with the payee's indorsement. The drawer and the payee often time
shave business relations of long standing. The continued occurrence of
business transactions of the same nature provides the opportunity for the
agent/employee to commit the fraud after having developed familiarity
with the signatures of the parties. However, sooner or later, some leak
will show on the drawer's books. It will then be just a question of time
until the fraud is discovered. This is specially true when the agent
perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an
unauthorized payment is based on failure of the depositor to act as a
prudent businessman would under the circumstances. In the case at bar,
the petitioner relied implicitly upon the honesty and loyalty of her
bookkeeper, and did not even verify the accuracy of amounts of the
checks she signed against the invoices attached thereto. Furthermore,
although she regularly received her bank statements, she apparently did
not carefully examine the same nor the check stubs and the returned
checks, and did not compare them with the same invoices. Otherwise,
she could have easily discovered the discrepancies between the checks
and the documents serving as bases for the checks. With such discovery,
the subsequent forgeries would not have been accomplished. It was not
until two years after the bookkeeper commenced her fraudulent scheme

that petitioner discovered that eighty-two (82) checks were wrongfully

charged to her account, at which she notified the respondent drawee
bank.
It is highly improbable that in a period of two years, not one of Petitioner's
suppliers complained of non-payment. Assuming that even one single
complaint had been made, petitioner would have been duty-bound, as far
as the respondent drawee Bank was concerned, to make an adequate
investigation on the matter. Had this been done, the discrepancies would
have been discovered, sooner or later. Petitioner's failure to make such
adequate inquiry constituted negligence which resulted in the bank's
honoring of the subsequent checks with forged indorsements. On the
other hand, since the record mentions nothing about such a complaint,
the possibility exists that the checks in question covered inexistent sales.
But even in such a case, considering the length of a period of two (2)
years, it is hard to believe that petitioner did not know or realize that she
was paying more than she should for the supplies she was actually
getting. A depositor may not sit idly by, after knowledge has come to her
that her funds seem to be disappearing or that there may be a leak in her
business, and refrain from taking the steps that a careful and prudent
businessman would take in such circumstances and if taken, would result
in stopping the continuance of the fraudulent scheme. If she fails to take
steps, the facts may establish her negligence, and in that event, she
would be estopped from recovering from the bank. 9
One thing is clear from the records that the petitioner failed to examine
her records with reasonable diligence whether before she signed the
checks or after receiving her bank statements. Had the petitioner
examined her records more carefully, particularly the invoice receipts,
cancelled checks, check book stubs, and had she compared the sums
written as amounts payable in the eighty-two (82) checks with the
pertinent sales invoices, she would have easily discovered that in some
checks, the amounts did not tally with those appearing in the sales
invoices. Had she noticed these discrepancies, she should not have
signed those checks, and should have conducted an inquiry as to the
reason for the irregular entries. Likewise had petitioner been more vigilant
in going over her current account by taking careful note of the daily
reports made by respondent drawee Bank in her issued checks, or at least
made random scrutiny of cancelled checks returned by respondent
drawee Bank at the close of each month, she could have easily
discovered the fraud being perpetrated by Alicia Galang, and could have

reported the matter to the respondent drawee Bank. The respondent

drawee Bank then could have taken immediate steps to prevent further
commission of such fraud. Thus, petitioner's negligence was the
proximate cause of her loss. And since it was her negligence which
caused the respondent drawee Bank to honor the forged checks or
prevented it from recovering the amount it had already paid on the
checks, petitioner cannot now complain should the bank refuse to recredit
her account with the amount of such checks. 10 Under Section 23 of the
NIL, she is now precluded from using the forgery to prevent the bank's
debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong
& Shanghai Bank 11 is not applicable to the case at bar because in said
case, the check was fraudulently taken and the signature of the payee
was forged not by an agent or employee of the drawer. The drawer was
not found to be negligent in the handling of its business affairs and the
theft of the check by a total stranger was not attributable to negligence of
the drawer; neither was the forging of the payee's indorsement due to the
drawer's negligence. Since the drawer was not negligent, the drawee was
duty-bound to restore to the drawer's account the amount theretofore
paid under the check with a forged payee's indorsement because the
drawee did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored
the checks because they were crossed checks. Issuing a crossed check
imposes no legal obligation on the drawee not to honor such a check. It is
more of a warning to the holder that the check cannot be presented to
the drawee bank for payment in cash. Instead, the check can only be
deposited with the payee's bank which in turn must present it for
payment against the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot be presented for
payment but it can only be deposited and the drawee bank may only pay
to another bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank
from having checks with more than one indorsement. The banking rule
banning acceptance of checks for deposit or cash payment with more
than one indorsement unless cleared by some bank officials does not
invalidate the instrument; neither does it invalidate the negotiation or
transfer of the said check. In effect, this rule destroys the negotiability of
bills/checks by limiting their negotiation by indorsement of only the
payee. Under the NIL, the only kind of indorsement which stops the

further negotiation of an instrument is a restrictive indorsement which

prohibits the further negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is
restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or
negotiate must be written in express words at the back of the instrument,
so that any subsequent party may be forewarned that ceases to be
negotiable. However, the restrictive indorsee acquires the right to receive
payment and bring any action thereon as any indorser, but he can no
longer transfer his rights as such indorsee where the form of the
indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it
because there is no privity between them, as far as the drawer-depositor
is concerned, such bank may not legally refuse to honor a negotiable bill
of exchange or a check drawn against it with more than one indorsement
if there is nothing irregular with the bill or check and the drawer has
sufficient funds. The drawee cannot be compelled to accept or pay the
check by the drawer or any holder because as a drawee, he incurs no
liability on the check unless he accepts it. But the drawee will make itself
liable to a suit for damages at the instance of the drawer for wrongful
dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the
defense of forgery by reason of her gross negligence. But under Section
196 of the NIL, any case not provided for in the Act shall be governed by
the provisions of existing legislation. Under the laws of quasi-delict, she
cannot point to the negligence of the respondent drawee Bank in the
selection and supervision of its employees as being the cause of the loss
because negligence is the proximate cause thereof and under Article
2179 of the Civil Code, she may not be awarded damages. However,
under Article 1170 of the same Code the respondent drawee Bank may be
held liable for damages. The article provides
Those who in the performance of their obligations are guilty of
fraud, negligence or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.

There is no question that there is a contractual relation between

petitioner as depositor (obligee) and the respondent drawee bank as the
obligor. In the performance of its obligation, the drawee bank is bound by
its internal banking rules and regulations which form part of any contract
it enters into with any of its depositors. When it violated its internal rules
that second endorsements are not to be accepted without the approval of
its branch managers and it did accept the same upon the mere approval
of Boon, a chief accountant, it contravened the tenor of its obligation at
the very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover
the irregularity with respect to the acceptance of checks with second
indorsement for deposit even without the approval of the branch manager
despite periodic inspection conducted by a team of auditors from the
main office constitutes negligence on the part of the bank in carrying out
its obligations to its depositors. Article 1173 provides
The fault or negligence of the obligor consists in the omission of
that diligence which is required by the nature of the obligation
and corresponds with the circumstance of the persons, of the
time and of the place. . . .
We hold that banking business is so impressed with public interest where
the trust and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence must be a
high degree of diligence, if not the utmost diligence. Surely, respondent
drawee Bank cannot claim it exercised such a degree of diligence that is
required of it. There is no way We can allow it now to escape liability for
such negligence. Its liability as obligor is not merely vicarious but primary
wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share
the loss with the petitioner on a fifty-fifty ratio in accordance with Article
172 which provides:
Responsibility arising from negligence in the performance of
every kind of obligation is also demandable, but such liability
may be regulated by the courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is
being made clear that the decision to hold the drawee bank liable is

based on law and substantial justice and not on mere equity. And
although the case was brought before the court not on breach of
contractual obligations, the courts are not precluded from applying to the
circumstances of the case the laws pertinent thereto. Thus, the fact that
petitioner's negligence was found to be the proximate cause of her loss
does not preclude her from recovering damages. The reason why the
decision dealt on a discussion on proximate cause is due to the error
pointed out by petitioner as allegedly committed by the respondent court.
And in breaches of contract under Article 1173, due diligence on the part
of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the
trial court for the reception of evidence to determine the exact amount of
loss suffered by the petitioner, considering that she partly benefited from
the issuance of the questioned checks since the obligation for which she
issued them were apparently extinguished, such that only the excess
amount over and above the total of these actual obligations must be
considered as loss of which one half must be paid by respondent drawee
bank to herein petitioner.
SO ORDERED.

G.R. No. 93073. December 21, 1992.*

7.) REPUBLIC PLANTERS BANK, petitioner, vs. COURT OF APPEALS
and FERMIN CANLAS, respondents.
Commercial Law; Negotiable Instruments Law; Under the Negotiable
Instruments Law, persons who write their names on the face of
promissory notes are makers and are liable as such.Under the
Negotiable Instruments Law, persons who write their names on the face
of promissory notes are makers and are liable as such. By signing the
notes, the maker promises to pay to the order of the payee or any holder
according to the tenor thereof. Based on the above provisions of law,
there is no denying that private respondent Fermin Canlas is one of the
co-makers of the promissory notes. As such, he cannot escape liability
arising therefrom.
Same; Same; Same; An instrument which begins with I ,WE or Either
of us promise to pay, when signed by two or more persons, makes them
solidarily liable.Where an instrument containing the words I promise to

pay is signed by two or more persons, they are deemed to be jointly and
severally liable thereon. An instrument which begins with I, We, or
Either of us promise to pay, when signed by two or more persons,
makes them solidarily liable. The fact that the singular pronoun is used
indicates that the promise is individual as to each other; meaning that
each of the co-signers is deemed to have made an independent singular
promise to pay the notes in full.
Same; Same; Same; Same; A joint and several note is one in which the
makers bind themselves both jointly and individually to the payee so that
all may be sued together for its enforcement or the creditor may select
one or more as the object of the suit.In the case at bar, the solidary
liability of private respondent Fermin Canlas is made clearer and certain,
without reason for ambiguity, by the presence of the phrase joint and
several as describing the unconditional promise to pay to the order of
Republic Planters Bank. A joint and several note is one in which the
makers bind themselves both jointly and individually to the payee so that
all may be sued together for its enforcement, or the creditor may select
one or more as the object of the suit. A joint and several obligation in
common law corresponds to a civil law solidary obligation; that is, one of
several debtors bound in such wise that each is liable for the entire
amount, and not merely for his proportionate share.
Corporation Law; The corporation, upon such change in its name, is in no
sense a new corporation, nor the successor of the original corporation.
The corporation, upon such change in its name, is in no sense a new
corporation, nor the successor of the original corporation. It is the same
corporation with a different name, and its character is in no respect
changed.
Same; Same; A change in the corporate name does not make a new
corporation and whether affected by special act or under a general law
has no effect on the identity of the corporation or on its property, rights or
liabilities.A change in the corporate name does not make a new
corporation, and whether effected by special act or under a general law,
has no effect on the identity of the corporation, or on its property, rights,
or liabilities.
Same; Same; Same; The corporation continues as before responsible in
its new name for all debts or other liabilities which it had previously
contracted or incurred.The corporation continues, as before, responsible

in its new name for all debts or other liabilities which it had previously
contracted or incurred.
Same; Same; Same; Same; Generally, officers or directors under the old
corporate name bear no personal liability for acts done or contracts
entered into by officers of the corporation if duly authorized.As a
general rule, officers or directors under the old corporate name bear no
personal liability for acts done or contracts entered into by officers of the
corporation, if duly authorized. Inasmuch as such officers acted in their
capacity as agent of the old corporation and the change of name meant
only the continuation of the old juridical entity, the corporation bearing
the same name is still bound by the acts of its agents if authorized by the
Board.
Usury Law; Interest; The rates under the Usury Law, as amended by
Presidential Decree No. 116, are applicable only to interests by way of
compensation for the use or forbearance of money.This Courthas held
that the rates under the Usury Law, as amended by Presidential Decree
No. 116, are applicable only to interests by way of compensation for the
use or forbearance of money. Article 2209 of the Civil Code, on the other
hand, governs interests by way of damages. This fine distinction was not
taken into consideration by the appellate court, which instead made a
general statement that the interest rate be at 12% per annum.
Same; Same; Same; Central Bank Circular No. 905, Series of 1982
removed the Usury Law ceiling on interest rates.Inasmuch as this Court
had declared that increases in interest rates are not subject to any ceiling
prescribed by the Usury Law, the appellate court erred in limiting the
interest rate at 12% per annum. Central Bank Circular No. 905, Series of
1982 removed the Usury Law ceiling on interest rates.
CAMPOS, JR., J.:
This is an appeal by way of a Petition for Review on Certiorari from the
decision * of the Court of Appeals in CA G.R. CV No. 07302, entitled
"Republic Planters Bank.Plaintiff-Appellee vs. Pinch Manufacturing
Corporation, et al., Defendants, and Fermin Canlas, Defendant-Appellant",
which affirmed the decision ** in Civil Case No. 82-5448 except that it
completely absolved Fermin Canlas from liability under the promissory
notes and reduced the award for damages and attorney's fees. The RTC
decision, rendered on June 20, 1985, is quoted hereunder:

WHEREFORE, premises considered, judgment is hereby

rendered in favor of the plaintiff Republic Planters Bank,
ordering defendant Pinch Manufacturing Corporation (formerly
Worldwide Garment Manufacturing, Inc.) and defendants Shozo
Yamaguchi and Fermin Canlas to pay, jointly and severally, the
plaintiff bank the following sums with interest thereon at 16%
per annum from the dates indicated, to wit:
Under the promissory note (Exhibit "A"), the sum of
P300,000.00 with interest from January 29, 1981 until fully
paid; under promissory note (Exhibit "B"), the sum of
P40,000.00 with interest from November 27, 1980; under the
promissory note (Exhibit "C"), the sum of P166,466.00 which
interest from January 29, 1981; under the promissory note
(Exhibit "E"), the sum of P86,130.31 with interest from January
29, 1981; under the promissory note (Exhibit "G"), the sum of
P12,703.70 with interest from November 27, 1980; under the
promissory note (Exhibit "H"), the sum of P281,875.91 with
interest from January 29, 1981; and under the promissory note
(Exhibit "I"), the sum of P200,000.00 with interest from January
29, 1981.
Under the promissory note (Exhibit "D") defendants Pinch
Manufacturing Corporation (formerly named Worldwide
Garment Manufacturing, Inc.), and Shozo Yamaguchi are
ordered to pay jointly and severally, the plaintiff bank the sum
of P367,000.00 with interest of 16% per annum from January
29, 1980 until fully paid
Under the promissory note (Exhibit "F") defendant corporation
Pinch (formerly Worldwide) is ordered to pay the plaintiff bank
the sum of P140,000.00 with interest at 16% per annum from
November 27, 1980 until fully paid.
Defendant Pinch (formely Worldwide) is hereby ordered to pay
the plaintiff the sum of P231,120.81 with interest at 12% per
annum from July 1, 1981, until fully paid and the sum of
P331,870.97 with interest from March 28, 1981, until fully paid.
All the defendants are also ordered to pay, jointly and severally,
the plaintiff the sum of P100,000.00 as and for reasonable
attorney's fee and the further sum equivalent to 3% per annum

of the respective principal sums from the dates above stated as

penalty charge until fully paid, plus one percent (1%) of the
principal sums as service charge.
With costs against the defendants.
SO ORDERED.

From the above decision only defendant Fermin Canlas appealed to the
then Intermediate Court (now the Court Appeals). His contention was that
inasmuch as he signed the promissory notes in his capacity as officer of
the defunct Worldwide Garment Manufacturing, Inc, he should not be held
personally liable for such authorized corporate acts that he performed. It
is now the contention of the petitioner Republic Planters Bank that having
unconditionally signed the nine (9) promissory notes with Shozo
Yamaguchi, jointly and severally, defendant Fermin Canlas is solidarity
liable with Shozo Yamaguchi on each of the nine notes.
We find merit in this appeal.
From the records, these facts are established: Defendant Shozo
Yamaguchi and private respondent Fermin Canlas were President/Chief
Operating Officer and Treasurer respectively, of Worldwide Garment
Manufacturing, Inc.. By virtue of Board Resolution No.1 dated August 1,
1979, defendant Shozo Yamaguchi and private respondent Fermin Canlas
were authorized to apply for credit facilities with the petitioner Republic
Planters Bank in the forms of export advances and letters of credit/trust
receipts accommodations. Petitioner bank issued nine promissory notes,
marked as Exhibits A to I inclusive, each of which were uniformly worded
in the following manner:
___________, after date, for value received, I/we, jointly and
severaIly promise to pay to the ORDER of the REPUBLIC
PLANTERS BANK, at its office in Manila, Philippines, the sum of
___________ PESOS(....) Philippine Currency...
On the right bottom margin of the promissory notes appeared the
signatures of Shozo Yamaguchi and Fermin Canlas above their printed
names with the phrase "and (in) his personal capacity" typewritten below.
At the bottom of the promissory notes appeared: "Please credit proceeds
of this note to:
________ Savings Account ______XX Current Account

No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
These entries were separated from the text of the notes with a bold line
which ran horizontally across the pages.
In the promissory notes marked as Exhibits C, D and F, the name
Worldwide Garment Manufacturing, Inc. was apparently rubber stamped
above the signatures of defendant and private respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to
change its corporate name to Pinch Manufacturing Corporation.
On February 5, 1982, petitioner bank filed a complaint for the recovery of
sums of money covered among others, by the nine promissory notes with
interest thereon, plus attorney's fees and penalty charges. The
complainant was originally brought against Worldwide Garment
Manufacturing, Inc. inter alia, but it was later amended to drop Worldwide
Manufacturing, Inc. as defendant and substitute Pinch Manufacturing
Corporation it its place. Defendants Pinch Manufacturing Corporation and
Shozo Yamaguchi did not file an Amended Answer and failed to appear at
the scheduled pre-trial conference despite due notice. Only private
respondent Fermin Canlas filed an Amended Answer wherein he, denied
having issued the promissory notes in question since according to him, he
was not an officer of Pinch Manufacturing Corporation, but instead of
Worldwide Garment Manufacturing, Inc., and that when he issued said
promissory notes in behalf of Worldwide Garment Manufacturing, Inc., the
same were in blank, the typewritten entries not appearing therein prior to
the time he affixed his signature.
In the mind of this Court, the only issue material to the resolution of this
appeal is whether private respondent Fermin Canlas is solidarily liable
with the other defendants, namely Pinch Manufacturing Corporation and
Shozo Yamaguchi, on the nine promissory notes.
We hold that private respondent Fermin Canlas is solidarily liable on each
of the promissory notes bearing his signature for the following reasons:
The promissory motes are negotiable instruments and must be governed
by the Negotiable Instruments Law. 2

Under the Negotiable lnstruments Law, persons who write their names on
the face of promissory notes are makers and are liable as such. 3 By
signing the notes, the maker promises to pay to the order of the payee or
any holder4 according to the tenor thereof. 5 Based on the above
provisions of law, there is no denying that private respondent Fermin
Canlas is one of the co-makers of the promissory notes. As such, he
cannot escape liability arising therefrom.
Where an instrument containing the words "I promise to pay" is signed by
two or more persons, they are deemed to be jointly and severally liable
thereon. 6 An instrument which begins" with "I" ,We" , or "Either of us"
promise to, pay, when signed by two or more persons, makes them
solidarily liable. 7 The fact that the singular pronoun is used indicates that
the promise is individual as to each other; meaning that each of the cosigners is deemed to have made an independent singular promise to pay
the notes in full.
In the case at bar, the solidary liability of private respondent Fermin
Canlas is made clearer and certain, without reason for ambiguity, by the
presence of the phrase "joint and several" as describing the unconditional
promise to pay to the order of Republic Planters Bank. A joint and several
note is one in which the makers bind themselves both jointly and
individually to the payee so that all may be sued together for its
enforcement, or the creditor may select one or more as the object of the
suit. 8 A joint and several obligation in common law corresponds to a civil
law solidary obligation; that is, one of several debtors bound in such wise
that each is liable for the entire amount, and not merely for his
proportionate share. 9 By making a joint and several promise to pay to the
order of Republic Planters Bank, private respondent Fermin Canlas
assumed the solidary liability of a debtor and the payee may choose to
enforce the notes against him alone or jointly with Yamaguchi and Pinch
Manufacturing Corporation as solidary debtors.
As to whether the interpolation of the phrase "and (in) his personal
capacity" below the signatures of the makers in the notes will affect the
liability of the makers, We do not find it necessary to resolve and decide,
because it is immaterial and will not affect to the liability of private
respondent Fermin Canlas as a joint and several debtor of the notes. With
or without the presence of said phrase, private respondent Fermin Canlas
is primarily liable as a co-maker of each of the notes and his liability is
that of a solidary debtor.

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

amendment in a corporation's Articles of Incorporation effecting a change
of corporate name, in this case from Worldwide Garment manufacturing
Inc to Pinch Manufacturing Corporation extinguished the personality of
the original corporation.
The corporation, upon such change in its name, is in no sense a new
corporation, nor the successor of the original corporation. It is the same
corporation with a different name, and its character is in no respect
changed.10
A change in the corporate name does not make a new corporation, and
whether effected by special act or under a general law, has no affect on
the identity of the corporation, or on its property, rights, or liabilities. 11
The corporation continues, as before, responsible in its new name for all
debts or other liabilities which it had previously contracted or incurred. 12
As a general rule, officers or directors under the old corporate name bear
no personal liability for acts done or contracts entered into by officers of
the corporation, if duly authorized. Inasmuch as such officers acted in
their capacity as agent of the old corporation and the change of name
meant only the continuation of the old juridical entity, the corporation
bearing the same name is still bound by the acts of its agents if
authorized by the Board. Under the Negotiable Instruments Law, the
liability of a person signing as an agent is specifically provided for as
follows:
Sec. 20. Liability of a person signing as agent and so forth.
Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf of a
principal , or in a representative capacity, he is not liable on the
instrument if he was duly authorized; but the mere addition of
words describing him as an agent, or as filling a representative
character, without disclosing his principal, does not exempt him
from personal liability.
Where the agent signs his name but nowhere in the instrument has he
disclosed the fact that he is acting in a representative capacity or the
name of the third party for whom he might have acted as agent, the
agent is personally liable to take holder of the instrument and cannot be
permitted to prove that he was merely acting as agent of another and

parol or extrinsic evidence is not admissible to avoid the agent's personal

liability. 13
On the private respondent's contention that the promissory notes were
delivered to him in blank for his signature, we rule otherwise. A careful
examination of the notes in question shows that they are the stereotype
printed form of promissory notes generally used by commercial banking
institutions to be signed by their clients in obtaining loans. Such printed
notes are incomplete because there are blank spaces to be filled up on
material particulars such as payee's name, amount of the loan, rate of
interest, date of issue and the maturity date. The terms and conditions of
the loan are printed on the note for the borrower-debtor 's perusal. An
incomplete instrument which has been delivered to the borrower for his
signature is governed by Section 14 of the Negotiable Instruments Law
which provides, in so far as relevant to this case, thus:
Sec. 14. Blanks: when may be filled. Where the instrument is
wanting in any material particular, the person in possesion
thereof has a prima facie authority to complete it by filling up
the blanks therein. ... In order, however, that any such
instrument when completed may be enforced against any
person who became a party thereto prior to its completion, it
must be filled up strictly in accordance with the authority given
and within a reasonable time...
Proof that the notes were signed in blank was only the self-serving
testimony of private respondent Fermin Canlas, as determined by the trial
court, so that the trial court ''doubts the defendant (Canlas) signed in
blank the promissory notes". We chose to believe the bank's testimony
that the notes were filled up before they were given to private respondent
Fermin Canlas and defendant Shozo Yamaguchi for their signatures as
joint and several promissors. For signing the notes above their
typewritten names, they bound themselves as unconditional makers. We
take judicial notice of the customary procedure of commercial banks of
requiring their clientele to sign promissory notes prepared by the banks in
printed form with blank spaces already filled up as per agreed terms of
the loan, leaving the borrowers-debtors to do nothing but read the terms
and conditions therein printed and to sign as makers or co-makers. When
the notes were given to private respondent Fermin Canlas for his
signature, the notes were complete in the sense that the spaces for the
material particular had been filled up by the bank as per agreement. The
notes were not incomplete instruments; neither were they given to

private respondent Fermin Canlas in blank as he claims. Thus, Section 14

of the NegotiabIe Instruments Law is not applicable.
The ruling in case of Reformina vs. Tomol relied upon by the appellate
court in reducing the interest rate on the promissory notes from 16% to
12% per annum does not squarely apply to the instant petition. In the
abovecited case, the rate of 12% was applied to forebearances of money,
goods or credit and court judgemets thereon, only in the absence of any
stipulation between the parties.
In the case at bar however , it was found by the trial court that the rate of
interest is 9% per annum, which interest rate the plaintiff may at any time
without notice, raise within the limits allowed law. And so, as of February
16, 1984 , the plaintiff had fixed the interest at 16% per annum.
This Court has held that the rates under the Usury Law, as amended by
Presidential Decree No. 116, are applicable only to interests by way of
compensation for the use or forebearance of money. Article 2209 of the
Civil Code, on the other hand, governs interests by way of
damages. 15 This fine distinction was not taken into consideration by the
appellate court, which instead made a general statement that the interest
rate be at 12% per annum.
Inasmuch as this Court had declared that increases in interest rates are
not subject to any ceiling prescribed by the Usury Law, the appellate
court erred in limiting the interest rates at 12% per annum. Central Bank
Circular No. 905, Series of 1982 removed the Usury Law ceiling on
interest rates. 16
In the 1ight of the foregoing analysis and under the plain language of the
statute and jurisprudence on the matter, the decision of the respondent:
Court of Appeals absolving private respondent Fermin Canlas is
REVERSED and SET ASIDE. Judgement is hereby rendered declaring
private respondent Fermin Canlas jointly and severally liable on all the
nine promissory notes with the following sums and at 16% interest per
annum from the dates indicated, to wit:
Under the promissory note marked as exhibit A, the sum of P300,000.00
with interest from January 29, 1981 until fully paid; under promissory note
marked as Exhibit B, the sum of P40,000.00 with interest from November
27, 1980: under the promissory note denominated as Exhibit C, the
amount of P166,466.00 with interest from January 29, 1981; under the

promissory note denominated as Exhibit D, the amount of P367,000.00

with interest from January 29, 1981 until fully paid; under the promissory
note marked as Exhibit E, the amount of P86,130.31 with interest from
January 29, 1981; under the promissory note marked as Exhibit F, the
sum of P140,000.00 with interest from November 27, 1980 until fully
paid; under the promissory note marked as Exhibit G, the amount of
P12,703.70 with interest from November 27, 1980; the promissory note
marked as Exhibit H, the sum of P281,875.91 with interest from January
29, 1981; and the promissory note marked as Exhibit I, the sum of
P200,000.00 with interest on January 29, 1981.
The liabilities of defendants Pinch Manufacturing Corporation (formerly
Worldwide Garment Manufacturing, Inc.) and Shozo Yamaguchi, for not
having appealed from the decision of the trial court, shall be adjudged in
accordance with the judgment rendered by the Court a quo.
With respect to attorney's fees, and penalty and service charges, the
private respondent Fermin Canlas is hereby held jointly and solidarity
liable with defendants for the amounts found, by the Court a quo. With
costs against private respondent.
SO ORDERED.
Nos. L-25836-37. January 31, 1981.*
8.) THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee, vs.
JOSE M. ARUEGO, defendant-appellant.
Remedial Law; Civil Procedure; Defaults; Requirements for setting aside
an order of default.It has been held that to entitle a party to relief from
a judgment taken against him through his mistake, inadvertence, surprise
or excusable neglect, he must show to the court that he has a meritorious
defense. In other words, in order to set aside the order of default, the
defendant must not only show that his failure to answer was due to fraud,
accident, mistake or excusable negligence but also that he has a
meritorious defense.
Same; Same; Pleadings; Failure of defendant to file an answer on the last
day for pleading, excusable; Reason.The failure then of the defendant
to file his answer on the last day for pleading is excusable. The order
setting aside the dismissal of the complaint was received at 5:00 oclock
in the afternoon. It was therefore impossible for him to have filed his
answer on that same day because the courts then held office only up to

5:00 oclock in the afternoon. Moreover, the defendant immediately filed

his answer on the following day.
Same; Appeals; New Trial; New trial not to be granted if it will serve no
purpose, and defense is ineffective.It is evident then that the
defendants appeal can not prosper. To grant the defendants prayer will
result in a new trial which will serve no purpose and will just waste the
time of the courts as well as of the parties because the defense is nil or
ineffective.
Mercantile Law; Negotiable Instruments; Bills of Exchange; A party who
signs a bill of exchange as an agent, but failed to disclose his principal
becomes personally liable for the drafts he accepted.An inspection of
the drafts accepted by the defendant shows that nowhere has he
disclosed that he was signing as a representative of the Philippine
Education Foundation Company. He merely signed as follows. JOSE
ARUEGO (Acceptor) (SGD) JOSE ARUEGO. For failure to disclose his
principal, Aruego is personally liable for the drafts he accepted.
Same; Same; Same; Accommodation party; Liability of an accommodation
party.In lending his name to be accommodated party, the
accommodation party is in effect a surety for the latter. He lends his
name to enable the accommodated party to obtain credit or to raise
money. He receives no part of the consideration for the instrument but
assumes liability to the other parties thereto because he wants to
accommodate another.
Same; Same; Same; Liability of an acceptor or drawee is primary; A party,
a lawyer, who intends to be secondarily liable should not have signed as
an acceptor or drawee.In the instant case, the defendant signed as a
drawee/acceptor. Under the Negotiable Instruments Law, a drawee is
primarily liable. Thus, if the defendant who is a lawyer, really intended to
be secondarily liable only, he should not have signed as an
acceptor/drawee. In doing so, he became primarily and personally liable
for the drafts.
Same; Same; Same; A commercial paper which conforms under the
definition of a bill of exchange is a bill of exchange; Acceptance;
Nature of acceptance is important only in the determination of liability of
the parties, hut not to determine whether a commercial paper is a bill of
exchange or not.Under the Negotiable Instruments Law, a bill of

exchange is an unconditional order in writing addressed by one person to

another, signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a
sum certain in money to order or to bearer. As long as a commercial
paper conforms with the definition of a bill of exchange, that paper is
considered a bill of exchange. The nature of acceptance is important only
in the determination of the kind of liabilities of the parties involved, but
not in the determination of whether a commercial paper is a bill of
exchange or not.
FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the
order of the Court of First Instance of Manila, Branch XIII, in Civil Case No.
42066 denying his motion to set aside the order declaring him in
default, 1and from the order of said court in the same case denying his
motion to set aside the judgment rendered after he was declared in
default. 2 These two appeals of the defendant were docketed as CA-G.R.
NO. 27734-R and CA-G.R. NO. 27940-R, respectively.
Upon motion of the defendant on July 25, 1960, 3 he was allowed by the
Court of Appeals to file one consolidated record on appeal of CA-G.R. NO.
27734-R and CA-G.R. NO. 27940-R. 4
In a resolution promulgated on March 1, 1966, the Court of Appeals, First
Division, certified the consolidated appeal to the Supreme Court on the
ground that only questions of law are involved. 5
On December 1, 1959, the Philippine Bank of Commerce instituted
against Jose M. Aruego Civil Case No. 42066 for the recovery of the total
sum of about P35,000.00 with daily interest thereon from November 17,
1959 until fully paid and commission equivalent to 3/8% for every thirty
(30) days or fraction thereof plus attorney's fees equivalent to 10% of the
total amount due and costs. 6 The complaint filed by the Philippine Bank
of Commerce contains twenty-two (22) causes of action referring to
twenty-two (22) transactions entered into by the said Bank and Aruego on
different dates covering the period from August 28, 1950 to March 14,
1951. 7 The sum sought to be recovered represents the cost of the
printing of "World Current Events," a periodical published by the
defendant. To facilitate the payment of the printing the defendant
obtained a credit accommodation from the plaintiff. Thus, for every
printing of the "World Current Events," the printer, Encal Press and Photo

Engraving, collected the cost of printing by drawing a draft against the

plaintiff, said draft being sent later to the defendant for acceptance. As an
added security for the payment of the amounts advanced to Encal Press
and Photo-Engraving, the plaintiff bank also required defendant Aruego to
execute a trust receipt in favor of said bank wherein said defendant
undertook to hold in trust for plaintiff the periodicals and to sell the same
with the promise to turn over to the plaintiff the proceeds of the sale of
said publication to answer for the payment of all obligations arising from
the draft. 8
Aruego received a copy of the complaint together with the summons on
December 2, 1959. 9 On December 14, 1959 defendant filed an urgent
motion for extension of time to plead, and set the hearing on December
16, 1959. 10 At the hearing, the court denied defendant's motion for
extension. Whereupon, the defendant filed a motion to dismiss the
complaint on December 17, 1959 on the ground that the complaint states
no cause of action because:
a) When the various bills of exchange were presented to the defendant as
drawee for acceptance, the amounts thereof had already been paid by
the plaintiff to the drawer (Encal Press and Photo Engraving), without
knowledge or consent of the defendant drawee.
b) In the case of a bill of exchange, like those involved in the case at bar,
the defendant drawee is an accommodating party only for the drawer
(Encal Press and Photo-Engraving) and win be liable in the event that the
accommodating party (drawer) fails to pay its obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22, 1959, copy
of which was received by the defendant on December 24, 1959. 12
On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On
March 7, 1960, acting upon the motion for reconsideration filed by the
plaintiff, the trial court set aside its order dismissing the complaint and
set the case for hearing on March 15, 1960 at 8:00 in the morning. 14 A
copy of the order setting aside the order of dismissal was received by the
defendant on March 11, 1960 at 5:00 o'clock in the afternoon according to
the affidavit of the deputy sheriff of Manila, Mamerto de la Cruz. On the
following day, March 12, 1960, the defendant filed a motion to postpone
the trial of the case on the ground that there having been no answer as
yet, the issues had not yet been joined. 15 On the same date, the
defendant filed his answer to the complaint interposing the following

defenses: That he signed the document upon which the plaintiff sues in
his capacity as President of the Philippine Education Foundation; that his
liability is only secondary; and that he believed that he was signing only
as an accommodation party. 16
On March 15, 1960, the plaintiff filed an ex parte motion to declare the
defendant in default on the ground that the defendant should have filed
his answer on March 11, 1960. He contends that by filing his answer on
March 12, 1960, defendant was one day late. 17 On March 19, 1960 the
trial court declared the defendant in default. 18 The defendant learned of
the order declaring him in default on March 21, 1960. On March 22, 1960
the defendant filed a motion to set aside the order of default alleging that
although the order of the court dated March 7, 1960 was received on
March 11, 1960 at 5:00 in the afternoon, it could not have been
reasonably expected of the defendant to file his answer on the last day of
the reglementary period, March 11, 1960, within office hours, especially
because the order of the court dated March 7, 1960 was brought to the
attention of counsel only in the early hours of March 12, 1960. The
defendant also alleged that he has a good and substantial defense.
Attached to the motion are the affidavits of deputy sheriff Mamerto de la
Cruz that he served the order of the court dated March 7, 1960 on March
11, 1960, at 5:00 o'clock in the afternoon and the affidavit of the
defendant Aruego that he has a good and substantial defense. 19 The trial
court denied the defendant's motion on March 25, 1960. 20 On May 6,
1960, the trial court rendered judgment sentencing the defendant to pay
to the plaintiff the sum of P35,444.35 representing the total amount of his
obligation to the said plaintiff under the twenty-two (22) causes of action
alleged in the complaint as of November 15, 1957 and the sum of
P10,000.00 as attorney's fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the order
dated March 25, 1961 denying his motion to set aside the order declaring
him in default, an appeal bond in the amount of P60.00, and his record on
appeal. The plaintiff filed his opposition to the approval of defendant's
record on appeal on May 13, 1960. The following day, May 14, 1960, the
lower court dismissed defendant's appeal from the order dated March 25,
1960 denying his motion to set aside the order of default. 22 On May 19,
1960, the defendant filed a motion for reconsideration of the trial court's
order dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the
defendant's motion for reconsideration of the order dismissing
appeal. 24 On May 21, 1960, the trial court reconsidered its previous order

dismissing the appeal and approved the defendant's record on

appeal. 25 On May 30, 1960, the defendant received a copy of a notice
from the Clerk of Court dated May 26, 1960, informing the defendant that
the record on appeal filed ed by the defendant was forwarded to the Clerk
of Court of Appeals. 26
On June 1, 1960 Aruego filed a motion to set aside the judgment rendered
after he was declared in default reiterating the same ground previously
advanced by him in his motion for relief from the order of default. 27 Upon
opposition of the plaintiff filed on June 3, 1960, 28 the trial court denied
the defendant's motion to set aside the judgment by default in an order of
June 11, 1960. 29 On June 20, 1960, the defendant filed his notice of
appeal from the order of the court denying his motion to set aside the
judgment by default, his appeal bond, and his record on appeal. The
defendant's record on appeal was approved by the trial court on June 25,
1960. 30 Thus, the defendant had two appeals with the Court of Appeals:
(1) Appeal from the order of the lower court denying his motion to set
aside the order of default docketed as CA-G.R. NO. 27734-R; (2) Appeal
from the order denying his motion to set aside the judgment by default
docketed as CA-G.R. NO. 27940-R.
In his brief, the defendant-appellant assigned the following errors:
I
THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT
WAS IN DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO
DECLARE DEFENDANT IN DEFAULT ALTHOUGH AT THE TIME
THERE WAS ALREADY ON FILE AN ANSWER BY HIM WITHOUT
FIRST DISPOSING OF SAID ANSWER IN AN APPROPRIATE
ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION
FOR RELIEF OF ORDER OF DEFAULT AND FROM JUDGMENT BY
DEFAULT AGAINST DEFENDANT. 31

It has been held that to entitle a party to relief from a judgment taken
against him through his mistake, inadvertence, surprise or excusable
neglect, he must show to the court that he has a meritorious
defense. 32 In other words, in order to set aside the order of default, the
defendant must not only show that his failure to answer was due to fraud,
accident, mistake or excusable negligence but also that he has a
meritorious defense.
The record discloses that Aruego received a copy of the complaint
together with the summons on December 2, 1960; that on December 17,
1960, the last day for filing his answer, Aruego filed a motion to dismiss;
that on December 22, 1960 the lower court dismissed the complaint; that
on January 23, 1960, the plaintiff filed a motion for reconsideration and on
March 7, 1960, acting upon the motion for reconsideration, the trial court
issued an order setting aside the order of dismissal; that a copy of the
order was received by the defendant on March 11, 1960 at 5:00 o'clock in
the afternoon as shown in the affidavit of the deputy sheriff; and that on
the following day, March 12, 1960, the defendant filed his answer to the
complaint.
The failure then of the defendant to file his answer on the last day for
pleading is excusable. The order setting aside the dismissal of the
complaint was received at 5:00 o'clock in the afternoon. It was therefore
impossible for him to have filed his answer on that same day because the
courts then held office only up to 5:00 o'clock in the afternoon. Moreover,
the defendant immediately filed his answer on the following day.
However, while the defendant successfully proved that his failure to
answer was due to excusable negligence, he has failed to show that he
has a meritorious defense. The defendant does not have a good and
substantial defense.
Defendant Aruego's defenses consist of the following:
a) The defendant signed the bills of exchange referred to in the plaintiff's
complaint in a representative capacity, as the then President of the
Philippine Education Foundation Company, publisher of "World Current
Events and Decision Law Journal," printed by Encal Press and PhotoEngraving, drawer of the said bills of exchange in favor of the plaintiff
bank;

b) The defendant signed these bills of exchange not as principal obligor,

but as accommodation or additional party obligor, to add to the security
of said plaintiff bank. The reason for this statement is that unlike real bills
of exchange, where payment of the face value is advanced to the drawer
only upon acceptance of the same by the drawee, in the case in question,
payment for the supposed bills of exchange were made before
acceptance; so that in effect, although these documents are labelled bills
of exchange, legally they are not bills of exchange but mere instruments
evidencing indebtedness of the drawee who received the face value
thereof, with the defendant as only additional security of the same. 33
The first defense of the defendant is that he signed the supposed bills of
exchange as an agent of the Philippine Education Foundation Company
where he is president. Section 20 of the Negotiable Instruments Law
provides that "Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf of a principal or
in a representative capacity, he is not liable on the instrument if he was
duly authorized; but the mere addition of words describing him as an
agent or as filing a representative character, without disclosing his
principal, does not exempt him from personal liability."
An inspection of the drafts accepted by the defendant shows that
nowhere has he disclosed that he was signing as a representative of the
Philippine Education Foundation Company. 34 He merely signed as follows:
"JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his
principal, Aruego is personally liable for the drafts he accepted.
The defendant also contends that he signed the drafts only as an
accommodation party and as such, should be made liable only after a
showing that the drawer is incapable of paying. This contention is also
without merit.
An accommodation party is one who has signed the instrument as maker,
drawer, indorser, without receiving value therefor and for the purpose of
lending his name to some other person. Such person is liable on the
instrument to a holder for value, notwithstanding such holder, at the time
of the taking of the instrument knew him to be only an accommodation
party. 35 In lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter. He lends his
name to enable the accommodated party to obtain credit or to raise
money. He receives no part of the consideration for the instrument but
assumes liability to the other parties thereto because he wants to

accommodate another. In the instant case, the defendant signed as a

drawee/acceptor. Under the Negotiable Instrument Law, a drawee is
primarily liable. Thus, if the defendant who is a lawyer, he should not
have signed as an acceptor/drawee. In doing so, he became primarily and
personally liable for the drafts.
The defendant also contends that the drafts signed by him were not really
bills of exchange but mere pieces of evidence of indebtedness because
payments were made before acceptance. This is also without merit. Under
the Negotiable Instruments Law, a bill of exchange is an unconditional
order in writting addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum certain in money
to order or to bearer. 36 As long as a commercial paper conforms with the
definition of a bill of exchange, that paper is considered a bill of
exchange. The nature of acceptance is important only in the
determination of the kind of liabilities of the parties involved, but not in
the determination of whether a commercial paper is a bill of exchange or
not.
It is evident then that the defendant's appeal can not prosper. To grant
the defendant's prayer will result in a new trial which will serve no
purpose and will just waste the time of the courts as well as of the parties
because the defense is nil or ineffective. 37
WHEREFORE, the order appealed from in Civil Case No. 42066 of the
Court of First Instance of Manila denying the petition for relief from the
judgment rendered in said case is hereby affirmed, without
pronouncement as to costs.
SO ORDERED.

No. L-62943. July 14, 1986.*

9.) METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM,
petitioner, vs. COURT OF APPEALS (Now INTERMEDIATE
APPELLATE COURT) and THE PHILIPPINE NATIONAL BANK,
respondents.
Negotiable Instruments Law; Evidence; There is no clear evidence in this
case that the signatures on the checks are forgeries. The NBI reports

indicate that the anomalous encashment of the checks were an inside

job or due to negligence of MWSS.We have carefully reviewed the
documents cited by the petitioner. There is no express and categorical
finding in these documents that the twenty-three (23) questioned checks
were indeed signed by persons other than the authorized MWSS
signatories. On the contrary, the findings of the National Bureau of
Investigation in its Report dated November 2, 1970 show that the MWSS
fraud was an inside job and that the petitioners delay in the
reconciliation of bank statements and the laxity and loose records control
in the printing of its personalized checks facilitated the fraud. Likewise,
the questioned Documents Report No, 159-1074 dated November 21,
1974 of the National Bureau of Investigation does not declare or prove
that the signatures appearing on the questioned checks are forgeries. The
report merely mentions the alleged differences in the typeface,
checkwriting, and printing characteristics appearing in the standard or
submitted models and the questioned typewritings. The NBI Chemistry
Report No. C-74-891 merely describes the inks and pens used in writing
the alleged forged signatures. It is clear that these three (3) NBI Reports
relied upon by the petitioner are inadequate to sustain its allegations of
forgery. These reports did not touch on the inherent qualities of the
signatures which are indispensable in the determination of the existence
of forgery. There must be conclusive findings that there is a variance in
the inherent characteristics of the signatures and that they were written
by two or more different persons.
Same; Same; MWSS officials admitted that the checks in question can be
easily passed on as genuine.Considering the absence of sufficient
security in the printing of the checks coupled with the very close
similarities between the genuine signatures and the alleged forgeries, the
twenty-three (23) checks in question could have been presented to the
petitioners signatories without their knowing that they were bogus
checks. Indeed, the cashier of the petitioner whose signatures were
allegedly forged was unable to tell the difference between the allegedly
forged signature and his own genuine signature. On the other hand, the
MWSS officials admitted that these checks could easily be passed on as
genuine. The memorandum of Mr. A. T. Tolentino, Assistant Chief
Accountant of the drawee Philippine National Bank to Mr. E. Villatuya,
Executive Vice-President of the petitioner dated June 9, 1969 cites an
instance where even the concerned NWSA officials could not tell the
differences between the genuine checks and the alleged forged checks.

Same; Where a depositor is using its own personalized checks, its failure
to provide adequate security measures to prevent forgeries of its checks
constitutes gross negligence and bars it from setting up the defense of
forgery.The records show that at the time the twenty-three (23) checks
were prepared, negotiated, and encashed, the petitioner was using its
own personalized checks, instead of the official PNB Commercial blank
checks. In the exercise of this special privilege, however, the petitioner
failed to provide the needed security measures. That there was gross
negligence in the printing of its personalized checks is shown by the
following uncontroverted facts, to wit: (1) The petitioner failed to give its
printer, Mesina Enterprises, specific instructions relative to the
safekeeping and disposition of excess forms, check vouchers, and safety
papers; (2) The petitioner failed to retrieve from its printer all spoiled
check forms; (3) The petitioner failed to provide any control regarding the
paper used in the printing of said checks; x xxx.
Same; Failure of depositor to make prompt reconciliation of the monthly
bank statements furnished by the bank constitutes negligence for which
the bank cannot be blamed in case depositors checks are forged.It is
accepted banking procedure for the depository bank to furnish its
depositors bank statements and debt and credit memos through the mail.
The records show that the petitioner requested the respondent drawee
bank to discontinue the practice of mailing the bank statements, but
instead to deliver the same to a certain Mr. Emiliano Zaporteza. For
reasons known only to Mr. Zaporteza however, he was unreasonably
delayed in taking prompt deliveries of the said bank statements and
credit and debit memos. As a consequence, Mr. Zaporteza failed to
reconcile the bank statements with the petitioners records. If Mr.
Zaporteza had not been remiss in his duty of taking the bank statements
and reconciling them with the petitioners records, the fraudulent
encashments of the first checks should have been discovered, and further
frauds prevented. This negligence was, therefore, the proximate cause of
the failure to discover the fraud.
Same; Depository bank cannot be blamed for not detecting fraudulent
encashment of checks where depositor uses its own personalized checks.
We cannot fault the respondent drawee Bank for not having detected
the fraudulent encashment of the checks because the printing of the
petitioners personalized checks was not done under the supervision and
control of the Bank. There is no evidence on record indicating that
because of this private printing, the petitioner furnished the respondent

Bank with samples of checks, pens, and inks or took other precautionary
measures with the PNB to safeguard its interests. Under the
circumstances, therefore, the petitioner was in a better position to detect
and prevent the fraudulent encashment of its checks.
GUTIERREZ, JR., J.:
This petition for review asks us to set aside the October 29, 1982 decision
of the respondent Court of Appeals, now Intermediate Appellate Court
which reversed the decision of the Court of First Instance of Manila,
Branch XL, and dismissed the plaintiff's complaint, the third party
complaint, as well as the defendant's counterclaim.
The background facts which led to the filing of the instant petition are
summarized in the decision of the respondent Court of Appeals:
Metropolitan Waterworks and Sewerage System (hereinafter
referred to as MWSS) is a government owned and controlled
corporation created under Republic Act No. 6234 as the
successor-in- interest of the defunct NWSA. The Philippine
National Bank (PNB for short), on the other hand, is the
depository bank of MWSS and its predecessor-in-interest NWSA.
Among the several accounts of NWSA with PNB is NWSA
Account No. 6, otherwise known as Account No. 381-777 and
which is presently allocated No. 010-500281. The authorized
signature for said Account No. 6 were those of MWSS treasurer
Jose Sanchez, its auditor Pedro Aguilar, and its acting General
Manager Victor L. Recio. Their respective specimen signatures
were submitted by the MWSS to and on file with the PNB. By
special arrangement with the PNB, the MWSS used personalized
checks in drawing from this account. These checks were printed
for MWSS by its printer, F. Mesina Enterprises, located at 1775
Rizal Extension, Caloocan City.
During the months of March, April and May 1969, twenty-three
(23) checks were prepared, processed, issued and released by
NWSA, all of which were paid and cleared by PNB and debited
by PNB against NWSA Account No. 6, to wit:
Check No. Date Payee Amount Date Paid
By PNB

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

Estrella
2. 59548 3-31-69 Natividad 2,848.86 4-23 69
Rosario
3. 59547 3-31-69 Pangilinan 195.00 Unreleased
Enterprises
4. 59549 3-31-69 Natividad 3,239.88 4-23-69
Rosario
5. 59552 4-1-69 Villarama 987.59 5-6-69
& Sons
6. 59554 4-1-69 Gascom 6,057.60 4-16 69
Engineering
7. 59558 4-2-69 The Evening 112.00 Unreleased
News
8. 59544 3-27-69 Progressive 18,391.20 4-18 69
Const.
9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69
Int. Inc.
10. 59568 4-7-69 Roberto 800.00 4-22-69
Marsan
11. 59570 4-7-69 Paz Andres 200.00 4-22-69
12. 59574 4-8-69 Florentino 100,000.00 4-11-69
Santos
13. 59578 4-8-69 Mla. Daily 95.00 Unreleased

Bulletin
14. 59580 4-8-69 Phil. Herald 100.00 5-9-69
15. 59582 4-8-69 Galauran 7,729.09 5-6-69
& Pilar
16. 59581 4-8-69 Manila 110.00 5-12 69
Chronicle
17. 59588 4-8-69 Treago 21,583.00 4-11 69
Tunnel
18. 59587 4-8-69 Delfin 120,000.00 4-11-69
Santiago
19. 59589 4-10-69 Deogracias 1,257.49 4-16 69
Estrella
20. 59594 4-14-69 Philam Ac- 33.03 4-29 69
cident Inc.
21. 59577 4-8-69 Esla 9,429.78 4-29 69
22. 59601 4-16-69 Justino 20,000.00 4-18-69
Torres
23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69
Inc. -------------------P 320,636.26
During the same months of March, April and May 1969, twentythree (23) checks bearing the same numbers as the
aforementioned NWSA checks were likewise paid and cleared
by PNB and debited against NWSA Account No. 6, to wit:
Check Date Payee Amount Date Paid

No. Issued By PNB

1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69
2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69
3. 59547 3-14-69 Arturo Sison 56,903.00 4-11-69
4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69
5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-69
6. 59544 3-26-69 Arturo Sison 98,450.00 4-17-69
7. 59558 3-28-69 Arturo Sison 114,840.00 4-21-69
8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza
9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69
10.59568 4-2-69 Arturo Sison 134,940.00 4- 5-69
11.59570 4-1-69 Arturo Sison 64,550.00 4-28-69
12.59574 4-2-69 Arturo Sison 148,610.00 4-29-69
13.59578
Mendoza

4-10-69

Antonio

93,950.00

14.59580 4-8-69 Arturo Sison 160,000.00 5-2-69

15.59582 4-10-69 Arturo Sison 155,400.00 5-5-69
16.59581 4-8-69 Antonio 176,580.00 5-6-69
Mendoza
17.59588 4-16-69 Arturo Sison 176,000.00 5-8-69
18.59587 4-16-69 Arturo Sison 300,000.00 5-12-69
19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69
20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69
21.59577 4-14-69 Antonio 260,000.00 5-16-69

4-29-69

Mendoza
22.59601 4-18-69 Arturo Sison 400,000.00 5-19-69
23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69
--------------P3,457,903.00
The foregoing checks were deposited by the payees Raul Dizon,
Arturo Sison and Antonio Mendoza in their respective current
accounts with the Philippine Commercial and Industrial Bank
(PCIB) and Philippine Bank of Commerce (PBC) in the months of
March, April and May 1969. Thru the Central Bank Clearing,
these checks were presented for payment by PBC and PCIB to
the defendant PNB, and paid, also in the months of March, April
and May 1969. At the time of their presentation to PNB these
checks bear the standard indorsement which reads 'all prior
indorsement and/or lack of endorsement guaranteed.'
Subsequent investigation however, conducted by the NBI
showed that Raul Dizon, Arturo Sison and Antonio Mendoza
were all fictitious persons. The respective balances in their
current account with the PBC and/or PCIB stood as follows: Raul
Dizon P3,455.00 as of April 30, 1969; Antonio Mendoza
P18,182.00 as of May 23, 1969; and Arturo Sison Pl,398.92 as
of June 30, 1969.
On June 11, 1969, NWSA addressed a letter to PNB requesting
the immediate restoration to its Account No. 6, of the total sum
of P3,457,903.00 corresponding to the total amount of these
twenty-three (23) checks claimed by NWSA to be forged and/or
spurious checks. "In view of the refusal of PNB to credit back to
Account No. 6 the said total sum of P3,457,903.00 MWSS filed
the instant complaint on November 10, 1972 before the Court
of First Instance of Manila and docketed thereat as Civil Case
No. 88950.
In its answer, PNB contended among others, that the checks in
question were regular on its face in all respects, including the
genuineness of the signatures of authorized NWSA signing
officers and there was nothing on its face that could have

aroused any suspicion as to its genuineness and due execution

and; that NWSA was guilty of negligence which was the
proximate cause of the loss.
PNB also filed a third party complaint against the negotiating
banks PBC and PCIB on the ground that they failed to ascertain
the Identity of the payees and their title to the checks which
were deposited in the respective new accounts of the payees
with them.
xxx xxx xxx
On February 6, 1976, the Court of First Instance of Manila rendered
judgment in favor of the MWSS. The dispositive portion of the decision
reads:
WHEREFORE, on the COMPLAINT by a clear preponderance of
evidence and in accordance with Section 23 of the Negotiable
Instruments Law, the Court hereby renders judgment in favor of
the plaintiff Metropolitan Waterworks and Sewerage System
(MWSS) by ordering the defendant Philippine National Bank
(PNB) to restore the total sum of THREE MILLION FOUR
HUNDRED FIFTY SEVEN THOUSAND NINE HUNDRED THREE
PESOS (P3,457,903.00) to plaintiff's Account No. 6, otherwise
known as Account No. 010-50030-3, with legal interest thereon
computed from the date of the filing of the complaint and until
as restored in the said Account No. 6.
On the THIRD PARTY COMPLAINT, the Court, for lack of
evidence, hereby renders judgment in favor of the third party
defendants Philippine Bank of Commerce (PBC) and Philippine
Commercial and Industrial Bank (PCIB) by dismissing the Third
Party Complaint.
The counterclaims of the third party defendants are likewise
dismissed for lack of evidence.
No pronouncement as to costs.
As earlier stated, the respondent court reversed the decision of the Court
of First Instance of Manila and rendered judgment in favor of the
respondent Philippine National Bank.

A motion for reconsideration filed by the petitioner MWSS was denied by

the respondent court in a resolution dated January 3, 1983.
The petitioner now raises the following assignments of errors for the grant
of this petition:
I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS
WERE FORGED, THE DRAWEE BANK WAS LIABLE FOR THE LOSS
UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW.
II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF
PNB IN ACCEPTING THE SPURIOUS CHECKS DESPITE THE
OBVIOUS IRREGULARITY OF TWO SETS OF CHECKS BEARING
IdENTICAL NUMBER BEING ENCASHED WITHIN DAYS OF EACH
OTHER.
III. IN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE
MWSS BEING CLEARLY FORGED, AND THE CHECKS SPURIOUS,
SAME ARE INOPERATIVE AS AGAINST THE ALLEGED DRAWEE.
The appellate court applied Section 24 of the Negotiable Instruments Law
which provides:
Every negotiable instrument is deemed prima facie to have
been issued for valuable consideration and every person whose
signature appears thereon to have become a party thereto for
value.
The petitioner submits that the above provision does not apply to the
facts of the instant case because the questioned checks were not those of
the MWSS and neither were they drawn by its authorized signatories. The
petitioner states that granting that Section 24 of the Negotiable
Instruments Law is applicable, the same creates only a prima facie
presumption which was overcome by the following documents, to wit: (1)
the NBI Report of November 2, 1970; (2) the NBI Report of November 21,
1974; (3) the NBI Chemistry Report No. C-74891; (4) the Memorandum of
Mr. Juan Dino, 3rd Assistant Auditor of the respondent drawee bank
addressed to the Chief Auditor of the petitioner; (5) the admission of the
respondent bank's counsel in open court that the National Bureau of
Investigation found the signature on the twenty-three (23) checks in
question to be forgeries; and (6) the admission of the respondent bank's
witness, Mr. Faustino Mesina, Jr. that the checks in question were not
printed by his printing press. The petitioner contends that since the

signatures of the checks were forgeries, the respondent drawee bank

must bear the loss under the rulings of this Court.
A bank is bound to know the signatures of its customers; and if
it pays a forged check it must be considered as making the
payment out of its obligation funds, and cannot ordinarily
charge the amount so paid to the account of the depositor
whose name was forged.
xxx xxx xxx
The signatures to the checks being forged, under Section 23 of
the Negotiable Instruments Law they are not a charge against
plaintiff nor are the checks of any value to the defendant.
It must therefore be held that the proximate cause of loss was
due to the negligence of the Bank of the Philippine Islands in
honoring and cashing the two forged checks. (San Carlos Milling
Co. v. Bank of the P. I., 59 Phil. 59)
It is admitted that the Philippine National Bank cashed the
check upon a forged signature, and placed the money to the
credit of Maasim, who was the forger. That the Philippine
National Bank then endorsed the chock and forwarded it to the
Shanghai Bank by whom it was paid. The Philippine National
Bank had no license or authority to pay the money to Maasim
or anyone else upon a forged signature. It was its legal duty to
know that Malicor's endorsement was genuine before cashing
the check. Its remedy is against Maasim to whom it paid the
money. (Great Eastern Life Ins. Co. v. Hongkong & Shanghai
Bank, 43 Phil. 678).
We have carefully reviewed the documents cited by the petitioner. There
is no express and categorical finding in these documents that the twentythree (23) questioned checks were indeed signed by persons other than
the authorized MWSS signatories. On the contrary, the findings of the
National Bureau of Investigation in its Report dated November 2, 1970
show that the MWSS fraud was an "inside job" and that the petitioner's
delay in the reconciliation of bank statements and the laxity and loose
records control in the printing of its personalized checks facilitated the
fraud. Likewise, the questioned Documents Report No. 159-1074 dated
November 21, 1974 of the National Bureau of Investigation does not

declare or prove that the signatures appearing on the questioned checks

are forgeries. The report merely mentions the alleged differences in the
type face, checkwriting, and printing characteristics appearing in the
standard or submitted models and the questioned typewritings. The NBI
Chemistry Report No. C-74-891 merely describes the inks and pens used
in writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the petitioner
are inadequate to sustain its allegations of forgery. These reports did not
touch on the inherent qualities of the signatures which are indispensable
in the determination of the existence of forgery. There must be conclusive
findings that there is a variance in the inherent characteristics of the
signatures and that they were written by two or more different persons.
Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate
Court, et al, 139 SCRA 238). It must be established by clear, positive, and
convincing evidence. This was not done in the present case.
The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands,
et al. (59 Phil. 59) and Great Eastern Life Ins., Co. v. Hongkong and
Shanghai Bank (43 Phil. 678) relied upon by the petitioner are
inapplicable in this case because the forgeries in those cases were either
clearly established or admitted while in the instant case, the allegations
of forgery were not clearly established during trial.
Considering the absence of sufficient security in the printing of the checks
coupled with the very close similarities between the genuine signatures
and the alleged forgeries, the twenty-three (23) checks in question could
have been presented to the petitioner's signatories without their knowing
that they were bogus checks. Indeed, the cashier of the petitioner whose
signatures were allegedly forged was unable to ten the difference
between the allegedly forged signature and his own genuine signature.
On the other hand, the MWSS officials admitted that these checks could
easily be passed on as genuine.
The memorandum of Mr. A. T. Tolentino, no, Assistant Chief Accountant of
the drawee Philippine National Bank to Mr. E. Villatuya, Executive VicePresident of the petitioner dated June 9, 1969 cites an instance where
even the concerned NWSA officials could not ten the differences between
the genuine checks and the alleged forged checks.

At about 12:00 o'clock on June 6, 1969, VP Maramag requested

me to see him in his office at the Cashier's Dept. where Messrs.
Jose M. Sanchez, treasurer of NAWASA and Romeo Oliva of the
same office were present. Upon my arrival I observed the
NAWASA officials questioning the issue of the NAWASA checks
appearing in their own list, xerox copy attached.
For verification purposes, therefore, the checks were taken from
our file. To everybody there present namely VIP Maramag, the
two abovementioned NAWASA officials, AVP, Buhain, Asst.
Cashier Castelo, Asst. Cashier Tejada and Messrs. A. Lopez and
L. Lechuga, both C/A bookkeepers, no one was able to point out
any difference on the signatures of the NAWASA officials
appearing on the checks compared to their official signatures
on file. In fact 3 checks, one of those under question, were
presented to the NAWASA treasurer for verification but he could
not point out which was his genuine signature. After intent
comparison, he pointed on the questioned check as bearing his
correct signature.
xxx xxx xxx
Moreover, the petitioner is barred from setting up the defense of forgery
under Section 23 of the Negotiable Instruments Law which provides that:
SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the signature
is forged or made without authority of the person whose
signature it purports to be, it is wholly inoperative, and no right
to retain the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto can be
acquired through or under such signature unless the party
against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority.
because it was guilty of negligence not only before the questioned checks
were negotiated but even after the same had already been negotiated.
(See Republic v. Equitable Banking Corporation, 10 SCRA 8) The records
show that at the time the twenty-three (23) checks were prepared,
negotiated, and encashed, the petitioner was using its own personalized
checks, instead of the official PNB Commercial blank checks. In the
exercise of this special privilege, however, the petitioner failed to provide
the needed security measures. That there was gross negligence in the

printing of its personalized

uncontroverted facts, to wit:

checks

is

shown

by

the

following

(1) The petitioner failed to give its printer, Mesina Enterprises, specific
instructions relative to the safekeeping and disposition of excess forms,
check vouchers, and safety papers;
(2) The petitioner failed to retrieve from its printer all spoiled check
forms;
(3) The petitioner failed to provide any control regarding the paper used
in the printing of said checks;
(4) The petitioner failed to furnish the respondent drawee bank with
samples of typewriting, cheek writing, and print used by its printer in the
printing of its checks and of the inks and pens used in signing the same;
and
(5) The petitioner failed to send a representative to the printing office
during the printing of said checks.
This gross negligence of the petitioner is very evident from the sworn
statement dated June 19, 1969 of Faustino Mesina, Jr., the owner of the
printing press which printed the petitioner's personalized checks:
xxx xxx xxx
7. Q: Do you have any business transaction with the
National Waterworks and Sewerage Authority
(NAWASA)?
A: Yes, sir. I have a contract with the NAWASA in
printing NAWASA Forms such as NAWASA Check
xxx xxx xxx
15. Q: Were you given any ingtruction by the
NAWASA in connection with the printing of these
check vouchers?
A: There is none, sir. No instruction whatsoever was
given to me.

16. Q: Were you not advised as to what kind of paper

would be used in the check vouchers?
A: Only as per sample, sir.
xxx xxx xxx
20. Q: Where did you buy this Hammermill Safety
check paper?
A: From Tan Chiong, a paper dealer with store located
at Juan Luna, Binondo, Manila. (In front of the
Metropolitan Bank).
xxx xxx xxx
24. Q: Were all these check vouchers printed by you
submitted to NAWASA?
A: Not all, sir. Because we have to make reservations
or allowances for spoilage.
25. Q: Out of these vouchers printed by you, how
many were spoiled and how many were the excess
printed check vouchers?
A: Approximately four hundred (400) sheets, sir. I
cannot determine the proportion of the excess and
spoiled because the final act of perforating these
check vouchers has not yet been done and spoilage
can only be determined after this final act of printing.
26. Q: What did you do with these excess check
vouchers?
A: I keep it under lock and key in my firing cabinet.
xxx xxx xxx
28. Q: Were you not instructed by the NAWASA
authorities to bum these excess check vouchers?
A: No, sir. I was not instructed.

29. Q: What do you intend to do with these excess

printed check vouchers?
A: I intend to use them for future orders from the
xxx xxx xxx
32. Q: In the process of printing the check vouchers
ordered by the NAWASA, how many sheets were
actually spoiled?
A: I cannot approximate, sir. But there are spoilage in
the process of printing and perforating.
33. Q: What did you do with these spoilages?
A: Spoiled printed materials are usually thrown out, in
the garbage can.
34. Q: Was there any representative of the NAWASA
to supervise the printing or watch the printing of
these check vouchers?
A: None, sir.
xxx xxx xxx
39. Q: During the period of printing after the days
work, what measures do you undertake to safeguard
the mold and other paraphernalia used in the printing
of these particular orders of NAWASA?
A: Inasmuch as I have an employee who sleeps in the
printing shop and at the same time do the guarding,
we just leave the mold attached to the machine and
the other finished or unfinished work check vouchers
are left in the rack so that the work could be
continued the following day.
The National Bureau of Investigation Report dated November 2, 1970 is
even more explicit. Thus
xxx xxx xxx

60. We observed also that there is some laxity and

loose control in the printing of NAWASA cheeks. We
gathered from MESINA ENTERPRISES, the printing
firm that undertook the printing of the check
vouchers of NAWASA that NAWASA had no
representative at the printing press during the
process of the printing and no particular security
measure instructions adopted to safeguard the
interest of the government in connection with
printing of this accountable form.
Another factor which facilitated the fraudulent encashment of the twentythree (23) checks in question was the failure of the petitioner to reconcile
the bank statements with its own records.
It is accepted banking procedure for the depository bank to furnish its
depositors bank statements and debt and credit memos through the mail.
The records show that the petitioner requested the respondent drawee
bank to discontinue the practice of mailing the bank statements, but
instead to deliver the same to a certain Mr. Emiliano Zaporteza. For
reasons known only to Mr. Zaporteza however, he was unreasonably
delayed in taking prompt deliveries of the said bank statements and
credit and debit memos. As a consequence, Mr. Zaporteza failed to
reconcile the bank statements with the petitioner's records. If Mr.
Zaporteza had not been remiss in his duty of taking the bank statements
and reconciling them with the petitioner's records, the fraudulent
encashments of the first checks should have been discovered, and further
frauds prevented. This negligence was, therefore, the proximate cause of
the failure to discover the fraud. Thus,
When a person opens a checking account with a bank, he is
given blank checks which he may fill out and use whenever he
wishes. Each time he issues a check, he should also fill out the
check stub to which the check is usually attached. This stub, if
properly kept, will contain the number of the check, the date of
its issue, the name of the payee and the amount thereof. The
drawer would therefore have a complete record of the checks
he issues. It is the custom of banks to send to its depositors a
monthly statement of the status of their accounts, together
with all the cancelled checks which have been cashed by their
respective holders. If the depositor has filled out his check
stubs properly, a comparison between them and the cancelled

checks will reveal any forged check not taken from his
checkbook. It is the duty of a depositor to carefully examine the
bank's statement, his cancelled checks, his check stubs and
other pertinent records within a reasonable time, and to report
any errors without unreasonable delay. If his negligence should
cause the bank to honor a forged check or prevent it from
recovering the amount it may have already paid on such check,
he cannot later complain should the bank refuse to recredit his
account with the amount of such check. (First Nat. Bank of
Richmond v. Richmond Electric Co., 106 Va. 347, 56 SE 152, 7
LRA, NS 744 [1907]. See also Leather Manufacturers' Bank v.
Morgan, 117 US 96, 6 S. Ct. 657 [1886]; Deer Island Fish and
Oyster Co. v. First Nat. Bank of Biloxi, 166 Miss. 162, 146 So.
116 [1933]). Campos and Campos, Notes and Selected Cases
on Negotiable Instruments Law, 1971, pp. 267-268).
This failure of the petitioner to reconcile the bank statements with its
cancelled checks was noted by the National Bureau of Investigation in its
report dated November 2, 1970:
58. One factor which facilitate this fraud was the delay in the
reconciliation of bank (PNB) statements with the NAWASA bank
accounts. x x x. Had the NAWASA representative come to the
PNB early for the statements and had the bank been advised
promptly of the reported bogus check, the negotiation of
practically all of the remaining checks on May, 1969, totalling
P2,224,736.00 could have been prevented.
The records likewise show that the petitioner failed to provide appropriate
security measures over its own records thereby laying confidential
records open to unauthorized persons. The petitioner's own Fact Finding
Committee, in its report submitted to their General manager underscored
this laxity of records control. It observed that the "office of Mr. Ongtengco
(Cashier No. VI of the Treasury Department at the NAWASA) is quite open
to any person known to him or his staff members and that the check
writer is merely on top of his table."
When confronted with this report at the Anti-Fraud Action Section of the
National Bureau of Investigation. Mr. Ongtengco could only state that:
A. Generally my order is not to allow anybody to
enter my office. Only authorized persons are allowed

to enter my office. There are some cases, however,

where some persons enter my office because they
are following up their checks. Maybe, these persons
may have been authorized by Mr. Pantig. Most of the
people entering my office are changing checks as
allowed by the Resolution of the Board of Directors of
the NAWASA and the Treasurer. The check writer was
never placed on my table. There is a place for the
check write which is also under lock and key.
Q. Is Mr. Pantig authorized to allow unauthorized
persons to enter your office?
A. No, sir.
Q. Why are you tolerating Mr. Pantig admitting
unauthorized persons in your office?
A. I do not want to embarrass Mr. Pantig. Most of the
people following up checks are employees of the
NAWASA.
Q. Was the authority given by the Board of Directors
and the approval by the Treasurer for employees, and
other persons to encash their checks carry with it
their authority to enter your office?
A. No, sir.
xxx xxx xxx
Q. From the answers that you have given to us we
observed that actually there is laxity and poor control
on your part with regards to the preparations of
check payments inasmuch as you allow unauthorized
persons to follow up their vouchers inside your office
which may leakout confidential informations or your
books of account. After being apprised of all the
shortcomings in your office, as head of the Cashiers'
Office of the Treasury Department what remedial
measures do you intend to undertake?

A. Time and again the Treasurer has been calling our

attention not to allow interested persons to hand
carry their voucher checks and we are trying our best
and if I can do it to follow the instructions to the
letter, I will do it but unfortunately the persons who
are allowed to enter my office are my co-employees
and persons who have connections with our higher
ups and I can not possibly antagonize them. Rest
assured that even though that everybody will get
hurt, I win do my best not to allow unauthorized
persons to enter my office.
xxx xxx xxx
Q. Is it not possible inasmuch as your office is in
charge of the posting of check payments in your
books that leakage of payments to the banks came
from your office?
A. I am not aware of it but it only takes us a couple of
minutes to process the checks. And there are cases
wherein every information about the checks may be
obtained from the Accounting Department, Auditing
Department, or the Office of the General Manager.
Relying on the foregoing statement of Mr. Ongtengco, the National Bureau
of Investigation concluded in its Report dated November 2, 1970 that the
fraudulent encashment of the twenty-three (23)cheeks in question was an
"inside job". ThusWe have all the reasons to believe that this fraudulent act was
an inside job or one pulled with inside connivance at NAWASA.
As pointed earlier in this report, the serial numbers of these
checks in question conform with the numbers in current use of
NAWASA, aside from the fact that these fraudulent checks were
found to be of the same kind and design as that of NAWASA's
own checks. While knowledge as to such facts may be obtained
through the possession of a NAWASA check of current issue, an
outsider without information from the inside can not possibly
pinpoint which of NAWASA's various accounts has sufficient
balance to cover all these fraudulent checks. None of these

checks, it should be noted, was dishonored for insufficiency of

funds. . .
Even if the twenty-three (23) checks in question are considered forgeries,
considering the petitioner's gross negligence, it is barred from setting up
the defense of forgery under Section 23 of the Negotiable Instruments
Law.
Nonetheless, the petitioner claims that it was the negligence of the
respondent Philippine National Bank that was the proximate cause of the
loss. The petitioner relies on our ruling in Philippine National Bank v.
Court of Appeals(25 SCRA 693) that.
Thus, by not returning the cheek to the PCIB, by thereby
indicating that the PNB had found nothing wrong with the check
and would honor the same, and by actually paying its amount
to the PCIB, the PNB induced the latter, not only to believe that
the check was genuine and good in every respect, but, also, to
pay its amount to Augusto Lim. In other words, the PNB was the
primary or proximate cause of the loss, and, hence, may not
recover from the PCIB.
The argument has no merit. The records show that the respondent
drawee bank, had taken the necessary measures in the detection of
forged checks and the prevention of their fraudulent encashment. In fact,
long before the encashment of the twenty-three (23) checks in question,
the respondent Bank had issued constant reminders to all Current
Account Bookkeepers informing them of the activities of forgery
syndicates. The Memorandum of the Assistant Vice-President and Chief
Accountant of the Philippine National Bank dated February 17, 1966 reads
in part:
SUBJECT: ACTIVITIES OF FORGERY SYNDICATE
From reliable information we have gathered that personalized
checks of current account depositors are now the target of the
forgery syndicate. To protect the interest of the bank, you are
hereby enjoined to be more careful in examining said checks
especially those coming from the clearing, mails and window
transactions. As a reminder please be guided with the
following:

1. Signatures of drawers should be properly scrutinized and

compared with those we have on file.
2. The serial numbers of the checks should be compared with
the serial numbers registered with the Cashier's Dept.
3. The texture of the paper used and the printing of the checks
should be compared with the sample we have on file with the
Cashier's Dept.
4. Checks bearing several indorsements should be given a
special attention.
5. Alteration in amount both in figures and words should be
carefully examined even if signed by the drawer.
6. Checks issued in substantial amounts particularly by
depositors who do not usually issue checks in big amounts
should be brought to the attention of the drawer by telephone
or any fastest means of communication for purposes of
confirmation.
and your attention is also invited to keep abreast of previous
circulars and memo instructions issued to bookkeepers.
We cannot fault the respondent drawee Bank for not having detected the
fraudulent encashment of the checks because the printing of the
petitioner's personalized checks was not done under the supervision and
control of the Bank. There is no evidence on record indicating that
because of this private printing the petitioner furnished the respondent
Bank with samples of checks, pens, and inks or took other precautionary
measures with the PNB to safeguard its interests.
Under the circumstances, therefore, the petitioner was in a better position
to detect and prevent the fraudulent encashment of its checks.
WHEREFORE, the petition for review on certiorari is hereby DISMISSED for
lack of merit. The decision of the respondent Court of Appeals dated
October 29, 1982 is AFFIRMED. No pronouncement as to costs.
SO ORDERED.

G.R. No. 139130. November 27, 2002.*

10.) RAMON K. ILUSORIO, petitioner, vs. HON. COURT OF
APPEALS, and THE MANILA BANKING CORPORATION, respondents.
Civil Law; Damages; Negligence; To be entitled to damages, petitioner has
the burden of proving negligence on the part of the bank for failure to
detect the discrepancy in the signatures on the checks.On the first
issue, we find that petitioner has no cause of action against Manila Bank.
To be entitled to damages, petitioner has the burden of proving
negligence on the part of the bank for failure to detect the discrepancy in
the signatures on the checks. It is incumbent upon petitioner to establish
the fact of forgery, i.e., by submitting his specimen signatures and
comparing them with those on the questioned checks. Curiously though,
petitioner failed to submit additional specimen signatures as requested by
the National Bureau of Investigation from which to draw a conclusive
finding regarding forgery. The Court of Appeals found that petitioner, by
his own inaction, was precluded from setting up forgery.
Same; Same; Same; Negligence is the omission to do something which a
reasonable man, guided by those considerations which ordinarily regulate
the conduct of human affairs would do, or the doing of something which a
prudent and reasonable man would do.As borne by the records, it was
petitioner, not the bank, who was negligent. Negligence is the omission to
do something which a reasonable man, guided by those considerations
which ordinarily regulate the conduct of human affairs, would do, or the
doing of something which a prudent and reasonable man would do.In the
present case, it appears that petitioner accorded his secretary unusual
degree of trust and unrestricted access to his credit cards, passbooks,
check books, bank statements, including custody and possession of
cancelled checks and reconciliation of accounts.
Same; Same; Same; Petitioners failure to examine his bank statements
appears as the proximate cause of his own damage; Proximate Cause
Defined.Petitioners failure to examine his bank statements appears as
the proximate cause of his own damage. 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. In the instant case, the bank was not shown to
statements to petitioner so that any error or discrepancy in the entries
therein could be brought to the banks attention at the earliest
opportunity. But, petitioner failed to examine these bank statements not
because he was prevented by some cause in not doing so, but because
he did not pay sufficient attention to the matter. Had he done so, he could
have been alerted to any anomaly committed against him.
Same; Criminal Law; Forgery; When a signature is forged or made without
the authority of the person whose signature it purports to be, the check is
wholly inoperative unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of authority.
True, it is a rule that when a signature is forged or made without the
authority of the person whose signature it purports to be, the check is
wholly inoperative. No right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party, can
be acquired through or under such signature. However, the rule does
provide for an exception, namely: unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or
want of authority. In the instant case, it is the exception that applies. In
our view, petitioner is precluded from setting up the forgery, assuming
there is forgery, due to his own negligence in entrusting to his secretary
his credit cards and checkbook including the verification of his statements
of account.
Same; Estoppel; Petitioner cannot hold private respondent in estoppel for
the latter is not the actual party to the criminal action.On the second
issue, the fact that Manila Bank had filed a case for estafa against
Eugenio would not estop it from asserting the fact that forgery has not
been clearly established. Petitioner cannot hold private respondent in
estoppel for the latter is not the actual party to the criminal action. In a
criminal action, the State is the plaintiff, for the commission of a felony is
an offense against the State. Thus, under Section 2, Rule 110 of the Rules
of Court the complaint or information filed in court is required to be
brought in the name of the People of the Philippines.
QUISUMBING, J.:
This petition for review seeks to reverse the decision [1] promulgated on
January 28, 1999 by the Court of Appeals in CA-G.R. CV No. 47942,
affirming the decision of the then Court of First Instance of Rizal, Branch

XV (now the Regional Trial Court of Makati, Branch 138) dismissing Civil
Case No. 43907, for damages.
The facts as summarized by the Court of Appeals are as follows:
Petitioner is a prominent businessman who, at the time material to this
case, was the Managing Director of Multinational Investment
Bancorporation and the Chairman and/or President of several other
corporations. He was a depositor in good standing of respondent bank,
the Manila Banking Corporation, under current Checking Account No. 0609037-0. As he was then running about 20 corporations, and was going
out of the country a number of times, petitioner entrusted to his
secretary, Katherine[2] E. Eugenio, his credit cards and his checkbook with
blank checks. It was also Eugenio who verified and reconciled the
statements of said checking account. [3]
Between the dates September 5, 1980 and January 23, 1981, Eugenio
was able to encash and deposit to her personal account about seventeen
(17) checks drawn against the account of the petitioner at the respondent
bank, with an aggregate amount of P119,634.34. Petitioner did not bother
to check his statement of account until a business partner apprised him
that he saw Eugenio use his credit cards. Petitioner fired Eugenio
immediately, and instituted a criminal action against her for estafa thru
falsification before the Office of the Provincial Fiscal of Rizal. Private
respondent, through an affidavit executed by its employee, Mr. Dante
Razon, also lodged a complaint for estafa thru falsification of commercial
documents against Eugenio on the basis of petitioners statement that his
signatures in the checks were forged.[4] Mr. Razons affidavit states:
That I have examined and scrutinized the following checks in accordance
with prescribed verification procedures with utmost care and diligence by
comparing the signatures affixed thereat against the specimen signatures
of Mr. Ramon K. Ilusorio which we have on file at our said office on such
dates,
xxx
That the aforementioned checks were among those issued by Manilabank
in favor of its client MR. RAMON K. ILUSORIO,
That the same were personally encashed by KATHERINE E. ESTEBAN, an
executive secretary of MR. RAMON K. ILUSORIO in said Investment
Corporation;

That I have met and known her as KATHERINE E. ESTEBAN the attending
verifier when she personally encashed the above-mentioned checks at
our said office;
That MR. RAMON K. ILUSORIO executed an affidavit expressly disowning
his signature appearing on the checks further alleged to have not
authorized the issuance and encashment of the same. [5]
Petitioner then requested the respondent bank to credit back and
restore to its account the value of the checks which were wrongfully
encashed but respondent bank refused. Hence, petitioner filed the instant
case.[6]
At the trial, petitioner testified on his own behalf, attesting to the truth
of the circumstances as narrated above, and how he discovered the
alleged forgeries. Several employees of Manila Bank were also called to
the witness stand as hostile witnesses. They testified that it is the banks
standard operating procedure that whenever a check is presented for
encashment or clearing, the signature on the check is first verified
against the specimen signature cards on file with the bank.
Manila Bank also sought the expertise of the National Bureau of
Investigation (NBI) in determining the genuineness of the signatures
appearing on the checks. However, in a letter dated March 25, 1987, the
NBI informed the trial court that they could not conduct the desired
examination for the reason that the standard specimens submitted were
not sufficient for purposes of rendering a definitive opinion. The NBI then
suggested that petitioner be asked to submit seven (7) or more additional
standard signatures executed before or about, and immediately after the
dates of the questioned checks. Petitioner, however, failed to comply with
this request.
After evaluating the evidence on both sides, the court a quo rendered
judgment on May 12, 1994 with the following dispositive portion:
WHEREFORE, finding no sufficient basis for plaintiff's cause herein against
defendant bank, in the light of the foregoing considerations and
established facts, this case would have to be, as it is hereby DISMISSED.
Defendants counterclaim is likewise DISMISSED for lack of sufficient basis.
SO ORDERED.[7]

Aggrieved, petitioner elevated the case to the Court of Appeals by way

of a petition for review but without success. The appellate court held that
petitioners own negligence was the proximate cause of his loss. The
appellate court disposed as follows:
WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the
appellant.
SO ORDERED.[8]
Before us, petitioner ascribes the following errors to the Court of
Appeals:
A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
RESPONDENT BANK IS ESTOPPED FROM RAISING THE DEFENSE
THAT THERE WAS NO FORGERY OF THE SIGNATURES OF THE
PETITIONER IN THE CHECK BECAUSE THE RESPONDENT FILED A
CRIMINAL COMPLAINT FOR ESTAFA THRU FALSIFICATION OF
COMMERCIAL DOCUMENTS AGAINST KATHERINE EUGENIO USING
THE AFFIDAVIT OF PETITIONER STATING THAT HIS SIGNATURES
WERE FORGED AS PART OF THE AFFIDAVIT-COMPLAINT.[9]
B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23,
NEGOTIABLE INSTRUMENTS LAW.[10]
C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN
OF PROOF IS WITH THE RESPONDENT BANK TO PROVE THE DUE
DILIGENCE TO PREVENT DAMAGE, TO THE PETITIONER, AND THAT
IT WAS NOT NEGLIGENT IN THE SELECTION AND SUPERVISION OF
ITS EMPLOYEES.[11]
D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT BANK SHOULD BEAR THE LOSS, AND SHOULD BE
MADE TO PAY PETITIONER, WITH RECOURSE AGAINST KATHERINE
EUGENIO ESTEBAN.[12]
Essentially the issues in this case are: (1) whether or not petitioner has
a cause of action against private respondent; and (2) whether or not
private respondent, in filing an estafa case against petitioners secretary,
is barred from raising the defense that the fact of forgery was not
established.

Petitioner contends that Manila Bank is liable for damages for its
negligence in failing to detect the discrepant checks. He adds that as a
general rule a bank which has obtained possession of a check upon an
unauthorized or forged endorsement of the payees signature and which
collects the amount of the check from the drawee is liable for the
proceeds thereof to the payee. Petitioner invokes the doctrine of estoppel,
saying that having itself instituted a forgery case against Eugenio, Manila
Bank is now estopped from asserting that the fact of forgery was never
proven.
For its part, Manila Bank contends that respondent appellate court did
not depart from the accepted and usual course of judicial proceedings,
hence there is no reason for the reversal of its ruling. Manila Bank
additionally points out that Section 23 [13] of the Negotiable Instruments
Law is inapplicable, considering that the fact of forgery was never proven.
Lastly, the bank negates petitioners claim of estoppel. [14]
On the first issue, we find that petitioner has no cause of action
against Manila Bank. To be entitled to damages, petitioner has the burden
of proving negligence on the part of the bank for failure to detect the
discrepancy in the signatures on the checks. It is incumbent upon
petitioner to establish the fact of forgery, i.e., by submitting his specimen
signatures and comparing them with those on the questioned
checks. Curiously though, petitioner failed to submit additional specimen
signatures as requested by the National Bureau of Investigation from
which to draw a conclusive finding regarding forgery. The Court of Appeals
found that petitioner, by his own inaction, was precluded from setting up
forgery. Said the appellate court:
We cannot fault the court a quo for such declaration, considering that the
plaintiffs evidence on the alleged forgery is not convincing enough. The
burden to prove forgery was upon the plaintiff, which burden he failed to
discharge. Aside from his own testimony, the appellant presented no
other evidence to prove the fact of forgery. He did not even submit his
own specimen signatures, taken on or about the date of the questioned
checks, for examination and comparison with those of the subject
checks. On the other hand, the appellee presented specimen signature
cards of the appellant, taken at various years, namely, in 1976, 1979 and
1981 (Exhibits 1, 2, 3 and 7), showing variances in the appellants
unquestioned signatures.The evidence further shows that the appellee, as
soon as it was informed by the appellant about his questioned signatures,
sought to borrow the questioned checks from the appellant for purposes

of analysis and examination (Exhibit 9), but the same was denied by the
appellant. It was also the former which sought the assistance of the NBI
for an expert analysis of the signatures on the questioned checks, but the
same was unsuccessful for lack of sufficient specimen signatures. [15]
Moreover, petitioners contention that Manila Bank was remiss in the
exercise of its duty as drawee lacks factual basis. Consistently, the CA
and the RTC found that Manila Bank employees exercised due diligence in
cashing the checks. The banks employees in the present case did not
have a hint as to Eugenios modus operandi because she was a regular
customer of the bank, having been designated by petitioner himself to
transact in his behalf. According to the appellate court, the employees of
the bank exercised due diligence in the performance of their duties. Thus,
it found that:
The evidence on both sides indicates that TMBCs employees exercised
due diligence before encashing the checks. Its verifiers first verified the
drawers signatures thereon as against his specimen signature cards, and
when in doubt, the verifier went further, such as by referring to a more
experienced verifier for further verification. In some instances the verifier
made a confirmation by calling the depositor by phone. It is only after
taking such precautionary measures that the subject checks were given
to the teller for payment.
Of course it is possible that the verifiers of TMBC might have made a
mistake in failing to detect any forgery -- if indeed there was. However, a
mistake is not equivalent to negligence if they were honest mistakes. In
the instant case, we believe and so hold that if there were mistakes, the
same were not deliberate, since the bank took all the precautions. [16]
As borne by the records, it was petitioner, not the bank, who was
negligent. Negligence is the omission to do something which a reasonable
man, guided by those considerations which ordinarily regulate the
conduct of human affairs, would do, or the doing of something which a
prudent and reasonable man would do. [17] In the present case, it appears
that petitioner accorded his secretary unusual degree of trust and
unrestricted access to his credit cards, passbooks, check books, bank
statements, including custody and possession of cancelled checks and
reconciliation of accounts. Said the Court of Appeals on this matter:
Moreover, the appellant had introduced his secretary to the bank for
purposes of reconciliation of his account, through a letter dated July 14,

1980 (Exhibit 8). Thus, the said secretary became a familiar figure in the
bank. What is worse, whenever the bank verifiers call the office of the
appellant, it is the same secretary who answers and confirms the checks.
The trouble is, the appellant had put so much trust and confidence in the
said secretary, by entrusting not only his credit cards with her but also his
checkbook with blank checks. He also entrusted to her the verification
and reconciliation of his account. Further adding to his injury was the fact
that while the bank was sending him the monthly Statements of
Accounts, he was not personally checking the same. His testimony did not
indicate that he was out of the country during the period covered by the
checks. Thus, he had all the opportunities to verify his account as well as
the cancelled checks issued thereunder -- month after month. But he did
not, until his partner asked him whether he had entrusted his credit card
to his secretary because the said partner had seen her use the same. It
was only then that he was minded to verify the records of his account. [18]
The abovecited findings are binding upon the reviewing court. We
stress the rule that the factual findings of a trial court, especially when
affirmed by the appellate court, are binding upon us [19] and entitled to
utmost respect[20] and even finality. We find no palpable error that would
warrant a reversal of the appellate courts assessment of facts anchored
upon the evidence on record.
Petitioners failure to examine his bank statements appears as the
proximate cause of his own damage. 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.[21] In the instant case, the bank was not shown
to be remiss in its duty of sending monthly bank statements to petitioner
so that any error or discrepancy in the entries therein could be brought to
the banks attention at the earliest opportunity. But, petitioner failed to
examine these bank statements not because he was prevented by some
cause in not doing so, but because he did not pay sufficient attention to
the matter. Had he done so, he could have been alerted to any anomaly
committed against him. In other words, petitioner had sufficient
opportunity to prevent or detect any misappropriation by his secretary
had he only reviewed the status of his accounts based on the bank
statements sent to him regularly. In view of Article 2179 of the New Civil
Code,[22] when the plaintiffs own negligence was the immediate and
proximate cause of his injury, no recovery could be had for damages.

Petitioner further contends that under Section 23 of the Negotiable

Instruments Law a forged check is inoperative, and that Manila Bank had
no authority to pay the forged checks.True, it is a rule that when a
signature is forged or made without the authority of the person whose
signature it purports to be, the check is wholly inoperative. No right to
retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party, can be acquired through or under
such signature. However, the rule does provide for an exception,
namely: unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of
authority. In the instant case, it is the exception that applies. In our
view, petitioner is precluded from setting up the forgery, assuming there
is forgery, due to his own negligence in entrusting to his secretary his
credit cards and checkbook including the verification of his statements of
account.
Petitioners
reliance
on Associated Bank
vs.
Court
of
Appeals[23] and Philippine Bank of Commerce vs. CA[24] to buttress his
contention that respondent Manila Bank as the collecting or last endorser
generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements is misplaced. In the cited cases,
the fact of forgery was not in issue.In the present case, the fact of forgery
was not established with certainty. In those cited cases, the collecting
banks were held to be negligent for failing to observe precautionary
measures to detect the forgery. In the case before us, both courts below
uniformly found that Manila Banks personnel diligently performed their
duties, having compared the signature in the checks from the specimen
signatures on record and satisfied themselves that it was petitioners.
On the second issue, the fact that Manila Bank had filed a case
for estafa against Eugenio would not estop it from asserting the fact that
forgery has not been clearly established.Petitioner cannot hold private
respondent in estoppel for the latter is not the actual party to the criminal
action. In a criminal action, the State is the plaintiff, for the commission of
a felony is an offense against the State. [25] Thus, under Section 2, Rule
110 of the Rules of Court the complaint or information filed in court is
required to be brought in the name of the People of the Philippines. [26]
Further, as petitioner himself stated in his petition, respondent bank
filed the estafa case against Eugenio on the basis of petitioners own
affidavit,[27] but without admitting that he had any personal knowledge of
the alleged forgery. It is, therefore, easy to understand that the filing of

the estafa case by respondent bank was a last ditch effort to salvage its
ties with the petitioner as a valuable client, by bolstering the estafa case
which he filed against his secretary.
All told, we find no reversible error that can be ascribed to the Court of
Appeals.
WHEREFORE, the instant petition is DENIED for lack of merit. The
assailed decision of the Court of Appeals dated January 28, 1999 in CAG.R. CV No. 47942, is AFFIRMED.
Costs against petitioner.
SO ORDERED.