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

*
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 nonnegotiability 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.
PETITION for review on certiorari of the decision of the Court of Appeals. Chua, J.
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 236151 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 private respondent bank.
The undisputed background of this case, as found by the
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; Defendants Exhibits 1 to 280);
2. Angel dela Cruz delivered the said certificates of time deposit (CTDs) to herein plaintiff in connection with
his purchase 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 Manager, 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 banks procedure, if he desired replacement of said lost
CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of
Loss (Defendants Exhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in
favor of said depositor (Defendants 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 (dela 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 banks 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 (Defendants 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 obligations against which plaintiff proposed to apply the time deposits (Defendants Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiffs demand and claim for payment of the value of the
CTDs in a letter dated February 7, 1983 (Defendants 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 attorneys 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 courts dismissal of the complaint, hence this
petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are nonnegotiable 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 BANKAND TRUST COMPANY

No. 90101
6778 Ayala Ave., Makati
Metro Manila, Philippines
SUCAT OFFICE
P4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity
FEB. 23, 1984
FEB 22 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY,
SUCAT SECURITY BANK OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor
731 das. 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 SIGNATURES5
Respondent court ruled that the CTDs in question are non-negotiable instruments, rationalizing as follows:
x x x 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 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.
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 Banks
Branch Manager way back in 1982, testified in open court that the depositor referred to in the CTDs is no other
than Mr. Angel dela Cruz.
Atty. Calida: 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: Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic)
the amount.
Atty. Calida: And no other person or entity or company, Mr. Witness?
witness: None, your Honor.7
Atty. Calida: Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as
the bank is concerned?
Witness: Angel dela Cruz is the depositor.8

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from
the writing, that is, from the face of the instrument itself.9 In the construction of a bill or note, the intention of
the parties is to control, if it can be legally ascertained.10 While the writing may be read in the light of
surrounding circumstances in order to more perfectly understand the intent and meaning of the parties, yet as
they have constituted the writing to be the only outward and visible expression of their meaning, no other
words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not
what the parties may have secretly intended as contradistinguished from what their words express, but what is
the meaning of the words they have used. What the parties meant must be determined by what they said.11
Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the
amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor?
It is the bearer. The documents do not say that the depositor is Angel de la Cruz and that the amounts
deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the
documents or, for that matter, whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with
facility so expressed that fact in clear and categorical terms in the documents, instead of having the word
BEARER stamped on the space provided for the name of the depositor in each CTD. On the wordings of the
documents, therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus,
petitioners 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 petitioners 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: 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.)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, petitioners 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 therein17 praying, among
others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a) the due

date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it
issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latters 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 Integrated Realty Corporation, et al. vs. Philippine
National Bank, et al.20 is apropos:
x x x Adverting again to the Courts 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 existence 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.
Petitioners 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, x x x 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 lienholder 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 raise that issue in the lower court.28
On this matter, we uphold respondent courts finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted by them
to the trial court.29 The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against the depositors 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
depositors 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, attorneys 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 petitioners suggestion that respondent banks 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 petitioners 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 banks supposed negligence is
only one. Hence, petitioners 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.
(Emphases ours.)
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 banks supposed negligence, merely established, on the one
hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that he may
obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon who, for some
valid ground, may elect to refuse to issue a replacement of the instrument. Significantly, none of the provisions
cited by petitioner categorically restricts or prohibits the issuance a duplicate or replacement instrument sans
compliance with the procedure outlined therein, and none establishes a mandatory precedent requirement
therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is
hereby AFFIRMED.
SO ORDERED.
Narvasa (C.J., Chairman), Padilla and Nocon, JJ., concur.
Petition denied, decision affirmed with modification.
Note.The instrument in order to be considered negotiable must contain the so-called words of
negotiability___i.e. Must be payable to order or bearer (Salas vs. Court of Appeals, 181 SCRA 296).

G.R. No. 88866. February 18, 1991.*

METROPOLITAN BANK & TRUST COMPANY, petitioner, vs. COURT OF APPEALS, GOLDEN SAVINGS &
LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO,
respondents.
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 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.
PETITION to review the decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.
CRUZ, J.:

This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all nonessentials, 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 Glorias repeated inquiries and also as an
accommodation for a valued client, the petitioner says it finally decided to allow Golden Savings to withdraw
from the proceeds of the warrants.3 The first withdrawal was made on July 9, 1979, in the amount of
P508,000.00, the second on July 13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in
the amount of P150,000.00. The total withdrawal was P968,000.00.4 In turn, Golden Savings subsequently
allowed Gomez to make withdrawals from his own account, eventually collecting the total amount of
P1,167,500.00 from the proceeds of the apparently cleared warrants. The last withdrawal was made on July
16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the
Bureau of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount it had
previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of Mindoro.5 After
trial, judgment was rendered in favor of Golden Savings, which, however, filed a motion for reconsideration
even as Metrobank filed its notice of appeal. On November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and Loan
Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of P1,754,089.00
and to reinstate and credit to such account such amount existing before the debit was made including the
amount of P812,033.37 in favor of defendant Golden Savings and Loan Association, Inc. and thereafter, to
allow defendant Golden Savings and Loan Association, Inc. to withdraw the amount outstanding thereon
before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorneys 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 attorneys 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 fail-ing to apply the clear contractual terms and
conditions on the deposit slips allowing Metrobank to charge back any amount erroneously credited.
(a) Metrobanks 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 courts 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
Gomezs 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 triflingmore 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 clearanceand notwithstanding that it had not received a single centavo from the proceeds of the
treasury warrants, as it now repeatedly stressesit allowed Golden Savings to withdrawnot once, not twice,
but thricefrom 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 depositors 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 depositors 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. (Italics 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 depositors 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.
Metrobanks 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 petitioners 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:
SECTION 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
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.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order
or promise to pay not unconditional and the warrants themselves non-negotiable. There should be no
question that the exception on Section 3 of the Negotiable Instruments Law is applicable in the case at bar.
This conclusion conforms to Abubakar vs. Auditor General11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is entitled to
the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within
the scope of the negotiable instrument law. For one thing, the document bearing on its face the words payable from the appropriation for food administration, is actually an Order for payment out of a particular fund,
and is not unconditional and does not fulfill one of the essential requirements of a negotiable instrument (Sec.
3 last sentence and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were
genuine and in all respects what they purport to be, in accordance with Section 66 of the Negotiable

Instruments Law. The simple reason is that this law is not applicable to the non-negotiable treasury warrants.
The indorsement was made by Gloria Cas-tillo 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. 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.
Narvasa (Chairman), Gancayco, Grio-Aquino and Medialdea, JJ., concur.
Decision affirmed with modification.
Note.It is the duty of the payee to ascertain the holders title to the check or the nature of his possession.
(State Investment House vs. IAC, 175 SCRA 310.)
o0o

No. L-72593. April 30, 1987.*

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.
PETITION for certiorari to review the decision of the Intermediate Appellate Court.

The facts are stated in the opinion of the Court.

Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
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 f or 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 petitionercorporation two (2) "Used" Allis
Crawler Tractors, one (1) an HD-21-B and the other an HD-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 sellerassignor to inspect the jobsite. After conducting said inspection, the sellerassignor assured petitionercorporation 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 sellerassignor'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 sellerassignor, by means of a deed of assignment (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 petitionercorporation's jobsite 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 af ter
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 (Exh, "5").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor sent to the
jobsite its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 6-C," "6-C-1," "6-D," and "6-E"),
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
petitionercorporation 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 petitionercorporation which offered to bear one-half (1/2) of the reconditioning cost (Exh. "7").
No response to this letter, Exhibit "7," was received by the petitioner-corporation 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 (P249,081.71) 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 f ollowing 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 f or reconsideration f iled 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 plaintiffappellant herein upon application by appellant corporation granted financing for the purchase
of the questioned units of Fiat-Allis Crawler Tractors.
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 plaintiffappellee 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. 5055, 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 NONNEGOTIABLE 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 LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE
PROMISSORY NOTE.
V.THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER-ASSIGNOR 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-forma.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90-day 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 seller's skill or judg-ment (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." (Italics 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 sellerassignor's delay and its failure to comply with its warranty, the tractors became totally unserviceable and
useless for the purpose f or 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

Consolidated Plywood Industries, Inc. vs. IFC Leasing and Acceptance Corporation
"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." (Italics 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 a judgment 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)." (Italics 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 f ollows:

"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 (P1,093,789.71), 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. x x x."
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 negotiable must contain the so-called 'words of negotiability'i.e.,
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. x x x.
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 nonnegotiable. 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). (Italics 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 sellerassignor,
Industrial Products Marketing.
This being so, there was no need for the petitioner to implead the seller-assignor when it was sued by the
respondentassignee because the petitioner's defenses apply to both or either of them.
Consolidated Plywood Industries, Inc. vs. IFC Leasing and Acceptance Corporation
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 onedeed 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 seller-assignor, Industrial Products Marketing, and the respondent whereby the
latter would pay the seller-assignor the entire purchase price and the sellerassignor, 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 sellerassignor which is the Industrial Products Marketing; and the assigneefinancing 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:
"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 at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the
title of the person negotiating it
xxx

xxx

xxx

"SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT.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." (Italics 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 find judicial approval here. Where the
goods sold turn out to be defective, 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:
" 'lt 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 buyerMr. & Mrs. General Publicshould 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. . . .
" 'lf this opinion imposes great burdens on finance companies it is a potent argument in favor of a rule which
will 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. x x x."
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 seller-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 seller-assignor 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.
Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.
Decision annulled and set aside.
o0o [Consolidated Plywood lndustries, Inc. vs. IFC Leasing and Acceptance Corporation, 149 SCRA
448(1987)]

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

DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner, vs. SIMA WEI and/or LEE KIAN HUAT, MARY
CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK OF
THE PHILIPPINES, defendants-respondents.
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.
PETITION for review by certiorari of the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.
CAMPOS, JR., J.:

On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a sum of
money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian Industrial
Plastic Corporation (Plastic Corporation for short) and the Producers Bank of the Philippines, on two causes of
action:
(1) To enforce payment of the balance of P1,032,450.02 on a promissory note executed by respondent Sima
Wei on June 9, 1983; and
(2) To enforce payment of two checks executed by Sima Wei, payable to petitioner, and drawn against the
China Banking Corporation, to pay the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a common ground that
the complaint states no cause of action. The trial court granted the defendants' Motions to Dismiss. The Court
of Appeals affirmed this decision,** to which the petitioner Bank, represented by its Legal Liquidator, filed this
Petition for Review by Certiorari, assigning the following as the alleged errors of the Court of Appeals:1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-PETITIONER HAS NO CAUSE
OF ACTION AGAINST DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3 OF THE REVISED RULES
OF COURT ON ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO HEREIN DEFENDANTSRESPONDENTS.
The antecedents 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. x x x."
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him.3
Delivery of an instrument means transfer of possession, actual or constructive, from one person to another.4
Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the
instrument. Moreover, such delivery must be intended to give effect to the instrument.
The allegations of the petitioner in the original complaint show that the two (2) China Bank checks, numbered
384934 and 384935, were not delivered to the payee, the petitioner herein. Without the delivery of said checks
to petitionerpayee, 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-delicta 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
__________________

5 Ganzon vs. Court of Appeals, 161 SCRA 646 (1988). See also 1 M MORAN COMMENTS ON THE RULES
OF COURT 715 (1957 ed ) citing San Agustin vs. Barrios, 68 Phil. 475 (1939), Toribio vs. Decasa, 55 Phil. 461
(1930), American Express Co. vs. Natividad, 46 Phil. 207 (1924), Agoncillo vs. Javier, 38 Phil. 424 (1918). 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.
Narvasa (C.J., Chairman), Padilla, Regalado and Nocon, JJ., concur.
Judgment affirmed as to the second cause of action and remanded to trial court as to the first cause of action
for trial on the merits.
Note.A check whether a manager's check or ordinary check is not a legal tender and an offer of a check in
payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor
(Roman Catholic Bishop of Malolos lnc. vs. Intermediate Appellate Court, 191 SCRA 411).
o0o [Development Bank of Rizal vs. Sima Wei, 219 SCRA 736(1993)]

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

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.
PETITION for review of the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regala & Cruz for private respondent.
CAMPOS, JR., J.:

From the adverse decision** of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad
Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right of the drawer to recover
from the drawee bank who pays a check with a forged indorsement of the payee, debiting the same against the
drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against the private respondent
Philippine Bank of Communications (respondent drawee Bank) for recovery of the money value of eighty-two
(82) checks charged against the petitioner's account with 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 plaintiffs (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:
"ITHE 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 RECREDIT THE CHECKING ACCOUNT OF 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, both in Caloocan City. Among these groceries are D.G. Shopper's Mart and
D.G. Whole Sale Mart. Petitioner maintains a checking account numbered 13-00038-1 with the Caloocan City
Branch of the respondent drawee Bank. To facilitate payment of debts to her suppliers, petitioner draws checks
against her checking account with the respondent bank as drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows: The checks were prepared and filled up as to all material particulars
by her trusted bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the bookkeeper
prepared the checks, the completed checks were submitted to the petitioner for her signature, together with the
corresponding invoice receipts which indicate the correct obligations due and payable to her suppliers.
Petitioner signed each and every check without bothering to verify the accuracy of the checks against the
corresponding invoices because she reposed full and implicit trust and confidence on her bookkeeper. The
issuance and delivery of the checks to the payees named therein were left to the bookkeeper. Petitioner
admitted that she did not make any verification as to whether or not the checks were actually 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 the correctness of the returned checks, much less check if the payees
actually received the checks in payment for the supplies she received. In the course of her business operations
covering a period of two years, petitioner issued, following her usual practice stated above, a total of eighty-two
(82) checks in favor of several suppliers. These checks were all presented by the indorsees as holders thereof
to, and honored by, the respondent drawee Bank. Respondent drawee Bank correspondingly debited the
amounts thereof against petitioner's checking account numbered 30-00038-1. Most of .the aforementioned
checks were for amounts in excess of her actual obligations to the various payees as shown in their
corresponding invoices. To mention a few:
"x x x (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 P1 1,041.20 (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 P 1,672.47
(Exh. B); (4) in Check No. 620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her
actual obligation was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984 in favor
of Malinta Exchange Mart for P11,107,16 (Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in
Check No. 651863 dated August 11,1984 in favor of Grocer's International Food Corp. in the amount of P1
1,335.60 (Exh. A-66), her obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated
March 17, 1984 in favor of Sophy Products in the amount of P11,648.00 (Exh. A-78), her obligation was only
P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the amount of P11,520.00 in favor of the
Yakult Philippines (Exh. A-73), the latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated
May 24, 1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34), her obligation was
only P504.00 (Exhs. 1-1 and I-2)."2

Practically, all the checks issued and honored by the respondent drawee Bank were crossed checks.3 Aside
from the daily notice given to the petitioner by the respondent drawee Bank, the latter also furnished her with a
monthly statement of her bank 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 than 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 Elcano 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 periodical
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 Elcano branches accepted the deposits made in the Buendia
branch and credited the accounts of Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her account
with the money value of the eighty-two (82) checks totalling P 1,208,606.89 for having been wrongfully charged
against her account. Respondent drawee Bank refused to grant petitioner's demand. On January 23, 1985,
petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee bank. The
payees are not parties to the case. Rather, it is the drawer, whose signature is genuine, who instituted this
action to recover from the drawee bank the money value of eighty-two (82) checks paid out by the drawee
bank to holders of those checks where the indorsements of the payees were forged. How and by whom the
forgeries were committed are not established on the record, but the respective payees admitted that they did
not receive those checks and therefore never indorsed the same. The applicable law is the Negotiable
Instruments Law4 (heretofore referred to as the NIL). Section 23 of the NIL provides:
"When a signature is forged or made without the authority of the person whose signature it purports to be, it is
wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under such signature, unless the party against
whom it is sought to enforce such right is precluded from setting up the forgery or want of authority."
Under the aforecited provision, forgery is a real or absolute defense by the party whose signature is forged. A
party whose signature to an instrument was forged was never a party and never gave his consent to the
contract which gave rise to the instrument. Since his signature does not appear in the instrument, he cannot be
held liable thereon by anyone, not even by a holder in due course. Thus, if a person's signature is forged as a
maker of a promissory note, he cannot be made to pay because he never made the promise to pay. Or where
a person's signature as a drawer of a check is forged, the drawee bank cannot charge the amount thereof

against the drawer's account because he never gave the bank the order to pay. And said section does not refer
only to the forged signature of the maker of a promissory note and of the drawer of a check. It covers also a
forged indorsement, i.e., the forged signature of the payee or indorsee of a note or check. Since under said
provision a forged signature is "wholly inoperative", no one can gain title to the instrument through such forged
indorsement. Such an indorsement prevents any subsequent party from acquiring any right as against any
party whose name appears prior to the forgery. Although rights may exist between and among parties
subsequent to the forged indorsement, not one of them can acquire rights against parties prior to the forgery.
Such forged indorsement cuts off the rights of all subsequent parties as against parties prior to the forgery.
However, the law makes an exception to these rules where a party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising from forged indorsements of checks may generally be
broken into two types of cases: (1) where forgery was accomplished by a person not associated with the
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 drawer 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 the forged indorsement.6 In other words, he is precluded from using forgery as a
basis for his claim for recrediting 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 later 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 Elcano branches of the same bank. The total amount of Savings Bank, 252 Mich. 163, 233 N.W. 185
(1930); C.E. Erickson Co. vs. lowa Nat. Bank, 211 lowa 495, 230 N.W. 342 (1930). 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 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. 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 the 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 sales 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 time 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 nonpayment. 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 much 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 such 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 recordsthat 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
on her issued checks, or at least made random scrutiny of her 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 on her account.
The doctrine in the case of Great Eastern Life Insurance Co. us. Hongkong & Shanghai Bank11 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 X X x."
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 it 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 her 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. 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.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the petitioner on a
fifty-fifty ratio in accordance with Article 1172 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.
Narvasa (C.J., Chairman), Feliciano, Regalado and Nocon, JJ., concur.
Case remanded to trial court for reception of evidence.
Note.Respondent bank is not guilty of negligence for it had no way of ascertaining the authenticity of the
endorsements in the checks, and because it caused the checks to pass through the clearing house, before
allowing withdrawal of the proceeds thereof (Manila Lighter Transportation, Inc. vs. Court of Appeals, 182
SCRA 251).
o0o

699 [Gempesaw vs. Court of Appeals, 218 SCRA 682(1993)]