NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO1

Republic of the Philippines 22 Feb. 82 90101 to 90120 20 P80,000

SUPREME COURT 26 Feb. 82 74602 to 74691 90 360,000
Manila 2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
SECOND DIVISION 5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
G.R. No. 97753 August 10, 1992 9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
CALTEX (PHILIPPINES), INC., petitioner,
vs. Total 280 P1,120,000
COURT OF APPEALS and SECURITY BANK AND TRUST ===== ========
COMPANY, respondents.
2. Angel dela Cruz delivered the said certificates of time (CTDs) to
Bito, Lozada, Ortega & Castillo for petitioners. herein plaintiff in connection with his purchased of fuel products
from the latter (Original Record, p. 208).
Nepomuceno, Hofilea & Guingona for private.
3. Sometime in March 1982, Angel dela Cruz informed Mr.
Timoteo Tiangco, the Sucat Branch Manger, that he lost all the
certificates of time deposit in dispute. Mr. Tiangco advised said
REGALADO, J.: depositor to execute and submit a notarized Affidavit of Loss, as
required by defendant bank's procedure, if he desired replacement
of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
This petition for review on certiorari impugns and seeks the reversal of the decision
promulgated by respondent court on March 8, 1991 in CA-G.R. CV No.
23615 1 affirming with modifications, the earlier decision of the Regional Trial Court 4. On March 18, 1982, Angel dela Cruz executed and delivered to
of Manila, Branch XLII, 2 which dismissed the complaint filed therein by herein defendant bank the required Affidavit of Loss (Defendant's Exhibit
petitioner against respondent bank. 281). On the basis of said affidavit of loss, 280 replacement CTDs
were issued in favor of said depositor (Defendant's Exhibits 282-
561).
The undisputed background of this case, as found by the court a quo and adopted by
respondent court, appears of record:
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a
loan from defendant bank in the amount of Eight Hundred Seventy
1. On various dates, defendant, a commercial banking institution,
Five Thousand Pesos (P875,000.00). On the same date, said
through its Sucat Branch issued 280 certificates of time deposit
depositor executed a notarized Deed of Assignment of Time
(CTDs) in favor of one Angel dela Cruz who deposited with herein
Deposit (Exhibit 562) which stated, among others, that he (de la
defendant the aggregate amount of P1,120,000.00, as follows:
Cruz) surrenders to defendant bank "full control of the indicated
(Joint Partial Stipulation of Facts and Statement of Issues, Original
time deposits from and after date" of the assignment and further
Records, p. 207; Defendant's Exhibits 1 to 280);
authorizes said bank to pre-terminate, set-off and "apply the said
time deposits to the payment of whatever amount or amounts may
CTD CTD be due" on the loan upon its maturity (TSN, February 9, 1987, pp.
Dates Serial Nos. Quantity Amount 60-62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of
plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat
branch and presented for verification the CTDs declared lost by
Angel dela Cruz alleging that the same were delivered to herein
plaintiff "as security for purchases made with Caltex Philippines,
Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's
Exhibit 563) from herein plaintiff formally informing it of its
possession of the CTDs in question and of its decision to pre-
terminate the same.
8. On December 8, 1982, plaintiff was requested by herein
defendant to furnish the former "a copy of the document
evidencing the guarantee agreement with Mr. Angel dela Cruz" as
well as "the details of Mr. Angel dela Cruz" obligation against
which plaintiff proposed to apply the time deposits (Defendant's
Exhibit 564).
9. No copy of the requested documents was furnished herein
defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand
and claim for payment of the value of the CTDs in a letter dated
February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant
bank matured and fell due and on August 5, 1983, the latter set-off
and applied the time deposits in question to the payment of the
matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint,
praying that defendant bank be ordered to pay it the aggregate
value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per
annum, moral and exemplary damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the
instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of
the complaint, hence this petition wherein petitioner faults respondent court in ruling
(1) that the subject certificates of deposit are non-negotiable despite being clearly
negotiable instruments; (2) that petitioner did not become a holder in due course of
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO2
the said certificates of deposit; and (3) in disregarding the pertinent provisions of the
Code of Commerce relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a
better understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited
in this Bank the sum of PESOS: FOUR
THOUSAND ONLY, SECURITY BANK
SUCAT OFFICE P4,000 & 00 CTS Pesos,
Philippine Currency, repayable to said
depositor 731 days. after date, upon presentation
and surrender of this certificate, with interest at
the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments,
nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather
boldly in the CTDs issued, it is important to note that after the
word "BEARER" stamped on the space provided supposedly for
the name of the depositor, the words "has deposited" a certain
amount follows. The document further provides that the amount
deposited shall be "repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s) themselves

manifest with clarity that they are payable, not to whoever purports
to be the "bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank acknowledges its
depositor Angel dela Cruz as the person who made the deposit and
further engages itself to pay said depositor the amount indicated
thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in
question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the
Negotiable Instruments Law, enumerates the requisites for an instrument to become
negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties' bone of contention is with regard to requisite (d) set forth
above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way
back in 1982, testified in open court that the depositor reffered to in the CTDs is no
other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that
per books of the bank, the depositor referred
(sic) in these certificates states that it was Angel
dela Cruz?
witness:
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO3
a Yes, your Honor, and we have the record to
show that Angel dela Cruz was the one who
cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr.
Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in
all of these certificates of time deposit insofar as
the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the instrument
itself. 9 In the construction of a bill or note, the intention of the parties is to control, if
it can be legally ascertained. 10 While the writing may be read in the light of
surrounding circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only
outward and visible expression of their meaning, no other words are to be added to it
or substituted in its stead. The duty of the court in such case is to ascertain, not what
the parties may have secretly intended as contradistinguished from what their words
express, but what is the meaning of the words they have used. What the parties
meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. The
documents provide that the amounts deposited shall be repayable to the depositor.
And who, according to the document, is the depositor? It is the "bearer." The
documents do not say that the depositor is Angel de la Cruz and that the amounts

deposited are repayable specifically to him. Rather, the amounts are to be repayable
to the bearer of the documents or, for that matter, whosoever may be the bearer at the
time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la
Cruz only, it could have with facility so expressed that fact in clear and categorical
terms in the documents, instead of having the word "BEARER" stamped on the
space provided for the name of the depositor in each CTD. On the wordings of the
documents, therefore, the amounts deposited are repayable to whoever may be the
bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la
Cruz is the depositor "insofar as the bank is concerned," but obviously other parties
not privy to the transaction between them would not be in a position to know that the
depositor is not the bearer stated in the CTDs. Hence, the situation would require any
party dealing with the CTDs to go behind the plain import of what is written thereon
to unravel the agreement of the parties thereto through facts aliunde. This need for
resort to extrinsic evidence is what is sought to be avoided by the Negotiable
Instruments Law and calls for the application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time,
the answer is in the negative. The records reveal that Angel de la Cruz, whom
petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs
amounting to P1,120,000.00 to petitioner without informing respondent bank thereof
at any time. Unfortunately for petitioner, although the CTDs are bearer instruments,
a valid negotiation thereof for the true purpose and agreement between it and De la
Cruz, as ultimately ascertained, requires both delivery and indorsement. For,
although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it
as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether
the CTDs were delivered as payment for the fuel products or as a security has been
dissipated and resolved in favor of the latter by petitioner's own authorized and
responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q.
Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were
negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products"
(Emphasis ours.) 13 This admission is conclusive upon petitioner, its protestations
notwithstanding. Under the doctrine of estoppel, an admission or representation is
rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon. 14 A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them. 15 In the law
of evidence, whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe a particular thing true, and to act
upon such belief, he cannot, in any litigation arising out of such declaration, act, or
omission, be permitted to falsify it. 16
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO4
If it were true that the CTDs were delivered as payment and not as security,
petitioner's credit manager could have easily said so, instead of using the words "to
guarantee" in the letter aforequoted. Besides, when respondent bank, as defendant in
the court below, moved for a bill of particularity therein 17 praying, among others,
that petitioner, as plaintiff, be required to aver with sufficient definiteness or
particularity (a) the due date or dates of payment of the alleged indebtedness of
Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that
the CTDs were delivered to it by De la Cruz as payment of the latter's alleged
indebtedness to it, plaintiff corporation opposed the motion. 18Had it produced the
receipt prayed for, it could have proved, if such truly was the fact, that the CTDs
were delivered as payment and not as security. Having opposed the motion,
petitioner now labors under the presumption that evidence willfully suppressed
would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty
Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez,
supra, we quote therefrom:
The character of the transaction between the
parties is to be determined by their intention,
regardless of what language was used or what
the form of the transfer was. If it was intended to
secure the payment of money, it must be
construed as a pledge; but if there was some
other intention, it is not a pledge. However, even
though a transfer, if regarded by itself, appears to
have been absolute, its object and character
might still be qualified and explained by
contemporaneous writing declaring it to have
been a deposit of the property as collateral
security. It has been said that a transfer of
property by the debtor to a creditor, even if
sufficient on its face to make an absolute
conveyance, should be treated as a pledge if the
debt continues in inexistence and is not
discharged by the transfer, and that accordingly
the use of the terms ordinarily importing
conveyance of absolute ownership will not be
given that effect in such a transaction if they are
also commonly used in pledges and mortgages
and therefore do not unqualifiedly indicate a
transfer of absolute ownership, in the absence of

clear and unambiguous language or other
circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under
the Negotiable Instruments Law, an instrument is negotiated when it is transferred
from one person to another in such a manner as to constitute the transferee the holder
thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. 22 In the present case, however, there was no
negotiation in the sense of a transfer of the legal title to the CTDs in favor of
petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs
would have sufficed. Here, the delivery thereof only as security for the purchases of
Angel de la Cruz (and we even disregard the fact that the amount involved was not
disclosed) could at the most constitute petitioner only as a holder for value by reason
of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere
delivery of the instrument since, necessarily, the terms thereof and the subsequent
disposition of such security, in the event of non-payment of the principal obligation,
must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument
arising from contract, he is deemed a holder for value to the extent of his lien. 23 As
such holder of collateral security, he would be a pledgee but the requirements
therefor and the effects thereof, not being provided for by the Negotiable Instruments
Law, shall be governed by the Civil Code provisions on pledge of incorporeal
rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments,
. . . may also be pledged. The instrument proving the right pledged
shall be delivered to the creditor, and if negotiable, must be
indorsed.
Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not
appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual
findings of respondent court quoted at the start of this opinion show that petitioner
failed to produce any document evidencing any contract of pledge or guarantee
agreement between it and Angel de la Cruz. 25 Consequently, the mere delivery of the
CTDs did not legally vest in petitioner any right effective against and binding upon
respondent bank. The requirement under Article 2096 aforementioned is not a mere
rule of adjective law prescribing the mode whereby proof may be made of the date of
a pledge contract, but a rule of substantive law prescribing a condition without which
the execution of a pledge contract cannot affect third persons adversely. 26
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO5
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of
respondent bank was embodied in a public instrument. 27 With regard to this other
mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no
effect as against third persons, unless it appears in a public
instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily,
petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither proved
the amount of its credit or the extent of its lien nor the execution of any public
instrument which could affect or bind private respondent. Necessarily, therefore, as
between petitioner and respondent bank, the latter has definitely the better right over
the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of
whether or not private respondent observed the requirements of the law in the case of
lost negotiable instruments and the issuance of replacement certificates therefor, on
the ground that petitioner failed to raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged
negligence of private respondent was not included in the stipulation of the parties
and in the statement of issues submitted by them to the trial court. 29 The issues
agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount
covered by the CTDs against the depositor's loan by virtue of the
assignment (Annex "C").
3. Whether or not there was legal compensation or set off
involving the amount covered by the CTDs and the depositor's
outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate
the CTDs before the maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees
and litigation expenses from each other.
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO6

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
discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an
auxiliary verb indicating liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the
Code of Commerce, on which petitioner seeks to anchor respondent bank's supposed
negligence, merely established, on the one hand, a right of recourse in favor of a
dispossessed owner or holder of a bearer instrument so that he may obtain a
duplicate of the same, and, on the other, an option in favor of the party liable thereon
who, for some valid ground, may elect to refuse to issue a replacement of the
instrument. Significantly, none of the provisions cited by petitioner categorically
restricts or prohibits the issuance a duplicate or replacement
instrument sans compliance with the procedure outlined therein, and none establishes
a mandatory precedent requirement therefor.

To accept petitioner's suggestion that respondent bank's supposed negligence may be WHEREFORE, on the modified premises above set forth, the petition is
considered encompassed by the issues on its right to preterminate and receive the DENIED and the appealed decision is hereby AFFIRMED.
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 SO ORDERED.
petitioner's entitlement to the proceeds of the questioned certificates can be premised
on a multitude of other legal reasons and causes of action, of which respondent
bank's supposed negligence is only one. Hence, petitioner's submission, if accepted,
would render a pre-trial delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court
below, petitioner still cannot have the odds in its favor. A close scrutiny of the
provisions of the Code of Commerce laying down the rules to be followed in case of
lost instruments payable to bearer, which it invokes, will reveal that said provisions,
even assuming their applicability to the CTDs in the case at bar, are merely
permissive and not mandatory. The very first article cited by petitioner speaks for
itself.

Art 548. The dispossessed owner, no matter for what cause it may
be, may apply to the judge or court of competent jurisdiction,
asking that the principal, interest or dividends due or about to
become due, be not paid a third person, as well as in order to
prevent the ownership of the instrument that a duplicate be issued
him. (Emphasis ours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but
discretionary on the part of the "dispossessed owner" to apply to the judge or court of
competent jurisdiction for the issuance of a duplicate of the lost instrument. Where
the provision reads "may," this word shows that it is not mandatory but

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and
RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
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 for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its program
of logging activities for the year 1978 the opening of additional roads, and
simultaneous logging operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it
needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific
Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (the "seller-assignor"), a corporation dealing in tractors and
other heavy equipment business, offered to sell to petitioner-corporation two (2)
"Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be exposed,
(t.s.n., May 28, 1980, p. 44) and to determine the capability of the "Used" tractors
being offered, petitioner-corporation requested the seller-assignor to inspect the job
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO7
site. After conducting said inspection, the seller-assignor assured petitioner-
corporation that the "Used" Allis Crawler Tractors which were being offered were fit
for the job, and gave the corresponding warranty of ninety (90) days performance of
the machines and availability of parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's skill and
judgment, petitioner-corporation through petitioners Wee and Vergara, president and
vice- president, respectively, agreed to purchase on installment said two (2) units of
"Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten
Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of
tractors (Exh. "3-A"). At the same time, the deed of sale with chattel mortgage with
promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with
promissory note, the seller-assignor, by means of a deed of assignment (E exh. " 1 "),
assigned its rights and interest in the chattel mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used"
tractors to the petitioner-corporation's job site and as agreed, the seller-assignor
stationed its own mechanics to supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the tractors
broke down and after another nine (9) days, the other tractor likewise broke down
(t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor
of the fact that the tractors broke down and requested for the seller-assignor's usual
prompt attention under the warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the
seller-assignor sent to the job site its mechanics to conduct the necessary repairs
(Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "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 petitioner-corporation were delayed and petitioner Vergara
advised the seller-assignor that the payments of the installments as listed in the
promissory note would likewise be delayed until the seller-assignor completely
fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked
the seller-assignor to pull out the units and have them reconditioned, and thereafter to
offer them for sale. The proceeds were to be given to the respondent and the excess,
if any, to be divided between the seller-assignor and petitioner-corporation which
offered to bear one-half (1/2) of the reconditioning cost (E 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
(P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the complaint
and asking the trial court to order the respondent to pay the petitioners damages in an
amount at the sound discretion of the court, Twenty Thousand Pesos (P20,000.00) as
and for attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of
litigation. The petitioners likewise prayed for such other and further relief as would
be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official
and personal capacities the principal sum of ONE MILLION
NINETY THREE THOUSAND SEVEN HUNDRED NINETY
EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of
ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED
EIGHTEEN PESOS & 86/100 (P151,618.,86) as of August 15,
1979 and accruing interest thereafter at the rate of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees
equivalent to ten percent (10%) of the principal and to pay the
costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO8
On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned
therein the following errors:
I
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER
ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE
DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-
APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE
AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged decision
affirming in toto the decision of the trial court. The pertinent portions of the decision
are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of
warranty, We are of the considered opinion that aside from the fact
that no provision of warranty appears or is provided in the Deed of
Sale of the tractors and even admitting that in a contract of sale
unless a contrary intention appears, there is an implied warranty,
the defense of breach of warranty, if there is any, as in this case,
does not lie in favor of the appellants and against the plaintiff-
appellee who is the assignee of the promissory note and a holder of
the same in due course. Warranty lies in this case only between
Industrial Products Marketing and Consolidated Plywood
Industries, Inc. The plaintiff-appellant herein upon application by
appellant corporation granted financing for the purchase 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 plaintiff-appellee is
a financing corporation engaged in financing and receivable
discounting extending credit facilities to consumers and industrial,
commercial or agricultural enterprises by discounting or factoring
commercial papers or accounts receivable duly authorized pursuant
to R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is a
negotiable instrument which was discounted or sold to the IFC
Leasing and Acceptance Corporation for P800,000.00 (Exh. "A")
considering the following. it is in writing and signed by the maker;
it contains an unconditional promise to pay a certain sum of money
payable at a fixed or determinable future time; it is payable to
order (Sec. 1, NIL); the promissory note was negotiated when it
was transferred and delivered by IPM to the appellee and duly
endorsed to the latter (Sec. 30, NIL); it was taken in the conditions
that the note was complete and regular upon its face before the
same was overdue and without notice, that it had been previously
dishonored and that the note is in good faith and for value without
notice of any infirmity or defect in the title of IPM (Sec. 52, NIL);
that IFC Leasing and Acceptance Corporation held the instrument
free from any defect of title of prior parties and free from defenses
available to prior parties among themselves and may enforce
payment of the instrument for the full amount thereof against all
parties liable thereon (Sec. 57, NIL); the appellants engaged that
they would pay the note according to its tenor, and admit the
existence of the payee IPM and its capacity to endorse (Sec. 60,
NIL).
In view of the essential elements found in the questioned
promissory note, We opine that the same is legally and
conclusively enforceable against the defendants-appellants.
WHEREFORE, finding the decision appealed from according to
law and evidence, We find the appeal without merit and thus affirm
the decision in toto. With costs against the appellants. (pp. 50-55,
Rollo)
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO9
The petitioners' motion for reconsideration of the decision of July 17, 1985 was
denied by the Intermediate Appellate Court in its resolution dated October 17, 1985,
a copy of which was received by the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE
INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER
PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A
MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT
AND THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT,
THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL
DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER-
ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT 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- formal.
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.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO10
ART. 1562. In a sale of goods, there is an implied warranty or
condition as to the quality or fitness of the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to
the seller the particular purpose for which the goods are acquired,
and it appears that the buyer relies on the sellers skill or judge
judgment (whether he be the grower or manufacturer or not), there
is an implied warranty that the goods shall be reasonably fit for
such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or
fitness for a particular purpose may be annexed by the usage of
trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any hidden
faults or defects in the thing sold even though he was not aware
thereof.
This provision shall not apply if the contrary has been stipulated,
and the vendor was not aware of the hidden faults or defects in the
thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty against the
petitioner. This liability as a general rule, extends to the corporation to whom it
assigned its rights and interests unless the assignee is a holder in due course of the
promissory note in question, assuming the note is negotiable, in which case the
latter's rights are based on the negotiable instrument and assuming further that the
petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke down, the
petitioner-corporation notified the seller-assignor's sister company, AG & P, about
the breakdown based on the seller-assignor's express 90-day warranty, with which
the latter complied by sending its mechanics. However, due to the seller-assignor's
delay and its failure to comply with its warranty, the tractors became totally
unserviceable and useless for the purpose for which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with
the seller-assignor.

Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation with the payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and
1566, the vendee may elect between withdrawing from the contract
and demanding a proportionate reduction of the price, with
damages in either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the
seller-assignor, necessarily can no longer sue the seller-assignor except by way of
counterclaim if the seller-assignor sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we
held:
In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only
the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was
not correct in law. But the law definitely does not require that the
contracting party who believes itself injured must first file suit and
wait for adjudgement before taking extrajudicial steps to protect
its interest. Otherwise, the party injured by the other's breach will
have to passively sit and watch its damages accumulate during the
pendency of the suit until the final judgment of rescission is
rendered when the law itself requires that he should exercise due
diligence to minimize its own damages (Civil Code, Article
2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question is not a
negotiable instrument.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO11
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to
pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of
ONE MILLION NINETY THREE THOUSAND SEVEN
HUNDRED EIGHTY NINE PESOS & 71/100 only (P
1,093,789.71), Philippine Currency, the said principal sum, to be
payable in 24 monthly installments starting July 15, 1978 and
every 15th of the month thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law
requires that a promissory note "must be payable to order or bearer, " it cannot be
denied that the promissory note in question is not a negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must
contain the so-called 'words of negotiable, must be payable to
'order' or 'bearer'. These words serve as an expression of consent
that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a
negotiable instrument than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. The instrument is
payable to order where it is drawn payable to the order of a
specified person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made
payable to order. There must always be a specified person named
in the instrument. It means that the bill or note is to be paid to the
person designated in the instrument or to any person to whom he
has indorsed and delivered the same. Without the words "or order"
or"to the order of, "the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any
subsequent purchaser thereof will not enjoy the advantages of
being a holder of a negotiable instrument but will merely "step into
the shoes" of the person designated in the instrument and will thus
be open to all defenses available against the latter." (Campos and
Campos, Notes and Selected Cases on Negotiable Instruments
Law, Third Edition, page 38). (Emphasis supplied)

Therefore, considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due course but
remains a mere assignee of the note in question. Thus, the petitioner may raise
against the respondent all defenses available to it as against the seller-assignor
Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the seller-assignor
when it was sued by the respondent-assignee because the petitioner's defenses apply
to both or either of either of them. Actually, the records show that even the
respondent itself admitted to being a mere assignee of the promissory note in
question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what is
being assigned is the Deed of Sale with Chattel
Mortgage with the promissory note which is as
testified to by the witness was indorsed?
(Counsel for Plaintiff nodding his head.) Then
we have no further questions on cross,
COURT:
You confirm his manifestation? You are nodding
your head? Do you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed of
sale is a transaction between two persons; what
is assigned are rights, the rights of the mortgagee
were assigned to the IFC Leasing & Acceptance
Corporation.
COURT:
He puts it in a simple way as one-deed of sale
and chattel mortgage were assigned; . . . you
want to make a distinction, one is an assignment
of mortgage right and the other one is
indorsement of the promissory note. What
counsel for defendants wants is that you stipulate
that it is contained in one single transaction?
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO12
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 seller-assignor, in turn, would assign its
rights to the respondent which acquired the right to collect the price from the buyer,
herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the
Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said
documents evidencing the sale on installment of the tractors were all executed on the
same day by and among the buyer, which is herein petitioner Consolidated Plywood
Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and
the assignee-financing company, which is the respondent. Therefore, the respondent
had actual knowledge of the fact that the seller-assignor's right to collect the
purchase price was not unconditional, and that it was subject to the condition that the
tractors -sold were not defective. The respondent knew that when the tractors turned
out to be defective, it would be subject to the defense of failure of consideration and
cannot recover the purchase price from the petitioners. Even assuming for the sake of
argument that the promissory note is negotiable, the respondent, which took the same
with actual knowledge of the foregoing facts so that its action in taking the
instrument amounted to bad faith, is not a holder in due course. As such, the
respondent is subject to all defenses which the petitioners may raise against the
seller-assignor. Any other interpretation would be most inequitous to the unfortunate
buyer who is not only saddled with two useless tractors but must also face a lawsuit
from the assignee for the entire purchase price and all its incidents without being
able to raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no
knowledge of any fact, which would justify its act of taking the promissory note as
not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.
xxx xxx xxx

SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE.
A holder in due course is a holder who has taken the instrument
under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any
infirmity in the instrument of deffect in the title of the person
negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. To
constitute notice of an infirmity in the instrument or defect in the
title of the person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity or
defect, or knowledge of such facts that his action in taking the
instrument amounts to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is not a
holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note payable to the
seller to cover the purchase price. Many times, in pursuance of a
previous arrangement with the seller, a finance company pays the
full price and the note is indorsed to it, subrogating it to the right to
collect the price from the buyer, with interest. With the increasing
frequency of installment buying in this country, it is most probable
that the tendency of the courts in the United States to protect the
buyer against the finance company will , the finance company will
be subject to the defense of failure of consideration and cannot
recover the purchase price from the buyer. As against the argument
that such a rule would seriously affect "a certain mode of
transacting business adopted throughout the State," a court in one
case stated:
It may be that our holding here will require some
changes in business methods and will impose a
greater burden on the finance companies. We
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO13
think the buyer-Mr. & Mrs. General Public-
should have some protection somewhere along
the line. We believe the finance company is
better able to bear the risk of the dealer's
insolvency than the buyer and in a far better
position to protect his interests against
unscrupulous and insolvent dealers. . . .
If this opinion imposes great burdens on finance
companies it is a potent argument in favor of a
rule which win afford public protection to the
general buying public against unscrupulous
dealers in personal property. . . . (Mutual Finance
Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1
[1953]) (Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law,
Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine
Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real sense,
the finance company was a moving force in the transaction from its very inception
and acted as a party to it. When a finance company actively participates in a
transaction of this type from its inception, it cannot be regarded as a holder in due
course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively participated in the
sale on installment of the subject two Allis Crawler tractors, cannot be regarded as a
holder in due course of said note. It follows that the respondent's rights under the
promissory note involved in this case are subject to all defenses that the petitioners
have against the seller-assignor, Industrial Products Marketing. For Section 58 of the
Negotiable Instruments Law provides that "in the hands of any holder other than a
holder in due course, a negotiable instrument is subject to the same defenses as if it
were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find that
both the trial and respondent appellate court erred in holding the promissory note in
question to be negotiable. Such a ruling does not only violate the law and applicable
jurisprudence, but would result in unjust enrichment on the part of both the assigner-
assignor and respondent assignee at the expense of the petitioner-corporation which
rightfully rescinded an inequitable contract. We note, however, that since the seller-
assignor has not been impleaded herein, there is no obstacle for the respondent to file
a civil Suit and litigate its claims against the seller- assignor in the rather unlikely
possibility that it so desires,
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO14

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.
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO15

securities.[7]
FIRST DIVISION
Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid
[ G.R. No. 166018, June 04, 2014 ] Documentary Stamp Tax (DST) from September to December 1997 and also from
January to December 1998 amounting to P19,572,992.10 and P32,904,437.30,
respectively, broken down as follows:
THE HONGKONG AND SHANGHAI BANKING CORPORATION
LIMITED-PHILIPPINE BRANCHES, PETITIONER, VS. COMMISSIONER
A. September to December 1997
OF INTERNAL REVENUE, RESPONDENT;

[G.R. NO. 167728] September 1997 P 6,981,447.90

October 1997 6,209,316.60
THE HONGKONG AND SHANGHAI BANKING CORPORATION
LIMITED-PHILIPPINE BRANCHES, PETITIONER, VS. COMMISSIONER November 1997 3,978,510.30
OF INTERNAL REVENUE, RESPONDENT.
December 1997 2,403,717.30
DECISION Total P19,572,992.10

LEONARDO-DE CASTRO, J.:

B. January to December 1998
These petitions for review on certiorari[1] assail the Decision[2] and Resolution dated
July 8, 2004 and October 25, 2004, respectively, of the Court of Appeals in CA-G.R.
January 1998 P 3,328,305.60
SP No. 77580, as well as the Decision[3] and Resolution dated September 2, 2004 and
April 4, 2005, respectively, of the Court of Appeals in CA-G.R. SP No. 70814. The February 1998 4,566,924.90
respective Decisions in the said cases similarly reversed and set aside the decisions
March 1998 5,371,797.30
of the Court of Tax Appeals (CTA) in CTA Case Nos. 5951[4] and 6009,
[5]
respectively, and dismissed the petitions of petitioner Hongkong and Shanghai April 1998 4,197,235.50
Banking Corporation Limited-Philippine Branches (HSBC). The corresponding
May 1998 2,519,587.20
Resolutions, on the other hand, denied the respective motions for reconsideration of
the said Decisions. June 1998 2,301,333.00

HSBC performs, among others, custodial services on behalf of its investor-clients, July 1998 1,586,404.50
corporate and individual, resident or non-resident of the Philippines, with respect to August 1998 1,787,359.50
their passive investments in the Philippines, particularly investments in shares of
stocks in domestic corporations. As a custodian bank, HSBC serves as the September 1998 1,231,828.20
collection/payment agent with respect to dividends and other income derived from its October 1998 1,303,184.40
investor-clients passive investments.[6]
November 1998 2,026,379.70
HSBCs investor-clients maintain Philippine peso and/or foreign currency accounts, December 1998 2,684,097.50
which are managed by HSBC through instructions given through electronic
messages. The said instructions are standard forms known in the banking industry as Total P32,904,437.30
SWIFT, or Society for Worldwide Interbank Financial Telecommunication. In
purchasing shares of stock and other investment in securities, the investor-clients
would send electronic messages from abroad instructing HSBC to debit their local or On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then
foreign currency accounts and to pay the purchase price therefor upon receipt of the Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect that

instructions or advises from abroad on the management of funds located in the
Philippines which do not involve transfer of funds from abroad are not subject to
DST. BIR Ruling No. 132-99 reads:
Date: August 23, 1999
FERRY TOLEDO VICTORINO GONZAGA
& ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
Metro Manila
Attn: Atty. Tomas C. Toledo
Tax Counsel
Gentlemen:
This refers to your letter dated July 26, 1999 requesting on behalf of your clients, the
CITIBANK & STANDARD CHARTERED BANK, for a ruling as to whether or not
the electronic instructions involving the following transactions of residents and non-
residents of the Philippines with respect to their local or foreign currency accounts
are subject to documentary stamp tax under Section 181 of the 1997 Tax Code, viz:
A. Investment purchase transactions:
An overseas client sends instruction to its bank in the Philippines to either:
(i) debit its local or foreign currency account and to pay a named recipient in
the Philippines; or
(ii) receive funds from another bank in the Philippines for deposit into its
account and to pay a named recipient in the Philippines.
The foregoing transactions are carried out under instruction from abroad and [do] not
involve actual fund transfer since the funds are already in the Philippine accounts.
The instructions are in the form of electronic messages (i.e., SWIFT MT 100 or MT
202 and/or MT 521). In both cases, the payment is against the delivery of
investments purchased. The purchase of investments and the payment comprise one
single transaction. DST has already been paid under Section 176 for the investment
purchase.
B. Other transactions:
An overseas client sends an instruction to its bank in the Philippines to
either:
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO16
(i) debit its local or foreign currency account and to pay a named recipient, who
may be another bank, a corporate entity or an individual in the Philippines;
or
(ii) receive funds from another bank in the Philippines for deposit to its account
and to pay a named recipient, who may be another bank, a corporate entity
or an individual in the Philippines.
The above instruction is in the form of an electronic message (i.e., SWIFT MT 100
or MT 202) or tested cable, and may not refer to any particular transaction.
The opening and maintenance by a non-resident of local or foreign currency
accounts with a bank in the Philippines is permitted by the Bangko Sentral ng
Pilipinas, subject to certain conditions.
In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code,
which provides that
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. Upon any
acceptance or payment of any bill of exchange or order for the payment of
money purporting to be drawn in a foreign country but payable in the Philippines,
there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each
Two hundred pesos (P200), or fractional part thereof, of the face value of any such
bill of exchange, or order, or Philippine equivalent of such value, if expressed in
foreign currency. (Underscoring supplied.)
a documentary stamp tax shall be imposed on any bill of exchange or order for
payment purporting to be drawn in a foreign country but payable in the Philippines.
Under the foregoing provision, the documentary stamp tax shall be levied on the
instrument, i.e., a bill of exchange or order for the payment of money, which purports
to draw money from a foreign country but payable in the Philippines. In the instant
case, however, while the payor is residing outside the Philippines, he maintains a
local and foreign currency account in the Philippines from where he will draw the
money intended to pay a named recipient. The instruction or order to pay shall be
made through an electronic message, i.e., SWIFT MT 100 or MT 202 and/or MT
521. Consequently, there is no negotiable instrument to be made, signed or issued by
the payee. In the meantime, such electronic instructions by the non-resident payor
cannot be considered as a transaction per se considering that the same do not involve
any transfer of funds from abroad or from the place where the instruction originates.
Insofar as the local bank is concerned, such instruction could be considered only as a
memorandum and shall be entered as such in its books of accounts. The actual
debiting of the payors account, local or foreign currency account in the Philippines,
is the actual transaction that should be properly entered as such.
Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank
deposit, local or foreign currency account, is not subject to DST, unless the account
so maintained is a current or checking account, in which case, the issuance of the

check or bank drafts is subject to the documentary stamp tax imposed under Section
179 of the 1997 Tax Code. In the instant case, and subject to the physical
impossibility on the part of the payor to be present and prepare and sign an
instrument purporting to pay a certain obligation, the withdrawal and payment shall
be made in cash. In this light, the withdrawal shall not be subject to documentary
stamp tax. The case is parallel to an automatic bank transfer of local funds from a
savings account to a checking account maintained by a depositor in one bank.
Likewise, the receipt of funds from another bank in the Philippines for deposit to the
payees account and thereafter upon instruction of the non-resident depositor-payor,
through an electronic message, the depository bank to debit his account and pay a
named recipient shall not be subject to documentary stamp tax.
It should be noted that the receipt of funds from another local bank in the Philippines
by a local depository bank for the account of its client residing abroad is part of its
regular banking transaction which is not subject to documentary stamp tax. Neither
does the receipt of funds makes the recipient subject to the documentary stamp tax.
The funds are deemed to be part of the deposits of the client once credited to his
account, and which, thereafter can be disposed in the manner he wants. The payor-
clients further instruction to debit his account and pay a named recipient in the
Philippines does not involve transfer of funds from abroad. Likewise, as stated
earlier, such debit of local or foreign currency account in the Philippines is not
subject to the documentary stamp tax under the aforementioned Section 181 of the
Tax Code.
In the light of the foregoing, this Office hereby holds that the instruction made
through an electronic message by non-resident payor-client to debit his local or
foreign currency account maintained in the Philippines and to pay a certain named
recipient also residing in the Philippines is not the transaction contemplated under
Section 181 of the 1997 Tax Code. Such being the case, such electronic instruction
purporting to draw funds from a local account intended to be paid to a named
recipient in the Philippines is not subject to documentary stamp tax imposed under
the foregoing Section.
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation it shall be disclosed that the facts are different, this
ruling shall be considered null and void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue[8]
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an
administrative claim for the refund of the amount of P19,572,992.10 allegedly
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO17
representing erroneously paid DST to the BIR for the period covering September to
December 1997.
Subsequently, on January 31, 2000, HSBC filed another administrative claim for the
refund of the amount of P32,904,437.30 allegedly representing erroneously paid
DST to the BIR for the period covering January to December 1998.
As its claims for refund were not acted upon by the BIR, HSBC subsequently
brought the matter to the CTA as CTA Case Nos. 5951 and 6009, respectively, in
order to suspend the running of the two-year prescriptive period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December
18, 2002 in CTA Case No. 5951 favored HSBC. Respondent Commissioner of
Internal Revenue was ordered to refund or issue a tax credit certificate in favor of
HSBC in the reduced amounts of P30,360,570.75 in CTA Case No. 6009 and
P16,436,395.83 in CTA Case No. 5951, representing erroneously paid DST that have
been sufficiently substantiated with documentary evidence. The CTA ruled that
HSBC is entitled to a tax refund or tax credit because Sections 180 and 181 of the
1997 Tax Code do not apply to electronic message instructions transmitted by
HSBCs non-resident investor-clients:
The instruction made through an electronic message by a non-resident investor-
client, which is to debit his local or foreign currency account in the Philippines and
pay a certain named recipient also residing in the Philippines is not the transaction
contemplated in Section 181 of the Code. In this case, the withdrawal and payment
shall be made in cash. It is parallel to an automatic bank transfer of local funds from
a savings account to a checking account maintained by a depositor in one bank. The
act of debiting the account is not subject to the documentary stamp tax under Section
181. Neither is the transaction subject to the documentary stamp tax under Section
180 of the same Code. These electronic message instructions cannot be considered
negotiable instruments as they lack the feature of negotiability, which, is the ability
to be transferred (Words and Phrases).
These instructions are considered as mere memoranda and entered as such in the
books of account of the local bank, and the actual debiting of the payors local or
foreign currency account in the Philippines is the actual transaction that should be
properly entered as such.[9]
The respective dispositive portions of the Decisions dated May 2, 2002 in CTA Case
No. 6009 and dated December 18, 2002 in CTA Case No. 5951 read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for Review
is PARTIALLY GRANTED. Respondent is

hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in
favor of Petitioner the amount of P30,360,570.75 representing erroneous payment of
documentary stamp tax for the taxable year 1998.[10]
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is hereby partially
granted. Accordingly, respondent is hereby ORDERED to REFUND, or in the
alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in
the reduced amount of P16,436,395.83 representing erroneously paid documentary
stamp tax for the months of September 1997 to December 1997.[11]
However, the Court of Appeals reversed both decisions of the CTA and ruled that the
electronic messages of HSBCs investor-clients are subject to DST. The Court of
Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-clients as regards
their passive investments in the Philippines mainly involving shares of stocks in
domestic corporations. These investor-clients maintain Philippine peso and/or
foreign currency accounts with [HSBC]. Should they desire to purchase shares of
stock and other investments securities in the Philippines, the investor-clients send
their instructions and advises via electronic messages from abroad to [HSBC] in the
form of SWIFT MT 100, MT 202, or MT 521 directing the latter to debit their local
or foreign currency account and to pay the purchase price upon receipt of the
securities (CTA Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant to Section 181 of the
NIRC, [HSBC] was thus required to pay [DST] based on its acceptance of these
electronic messages which, as [HSBC] readily admits in its petition filed before the
[CTA], were essentially orders to pay the purchases of securities made by its client-
investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the [DST] from
[HSBC] considering that the said tax was levied against the acceptances and
payments by [HSBC] of the subject electronic messages/orders for payment. The
issue of whether such electronic messages may be equated as a written document and
thus be subject to tax is beside the point. As We have already stressed, Section 181 of
the law cited earlier imposes the [DST] not on the bill of exchange or order for
payment of money but on the acceptance or payment of the said bill or order. The
acceptance of a bill or order is the signification by the drawee of its assent to the
order of the drawer to pay a given sum of money while payment implies not only the
assent to the said order of the drawer and a recognition of the drawers obligation to
pay such aforesaid sum, but also a compliance with such obligation (Philippine
National Bank vs. Court of Appeals, 25 SCRA 693 [1968]; Prudential Bank vs.
Intermediate Appellate Court, 216 SCRA 257 [1992]).
What is vital to the valid imposition of the [DST] under Section 181 is the existence
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO18
of the requirement of acceptance or payment by the drawee (in this case, [HSBC]) of
the order for payment of money from its investor-clients and that the said order was
drawn from a foreign country and payable in the Philippines. These requisites are
surely present here.
It would serve the parties well to understand the nature of the tax being imposed in
the case at bar. In Philippine Home Assurance Corporation vs. Court of Appeals
(301 SCRA 443 [1999]), the Supreme Court ruled that [DST is] levied on
the exercise by persons of certain privileges conferred by law for the creation,
revision, or termination of specific legal relationships through the execution of
specific instruments, independently of the legal status of the transactions giving rise
thereto. In the same case, the High Court also declared citing Du Pont vs. United
States (300 U.S. 150, 153 [1936])
The tax is not upon the business transacted but is an excise upon the privilege,
opportunity, or facility offered at exchanges for the transaction of the business. It is
an excise upon the facilities used in the transaction of the business separate and apart
from the business itself. x x x.
To reiterate, the subject [DST] was levied on the acceptance and payment made by
[HSBC] pursuant to the order made by its client-investors as embodied in the cited
electronic messages, through which the herein parties privilege and opportunity to
transact business respectively as drawee and drawers was exercised, separate and
apart from the circumstances and conditions related to such acceptance and
subsequent payment of the sum of money authorized by the concerned drawers.
Stated another way, the [DST] was exacted on [HSBCs] exercise of its privilege
under its drawee-drawer relationship with its client-investor through the execution of
a specific instrument which, in the case at bar, is the acceptance of the order for
payment of money. The acceptance of a bill or order for payment may be done in
writing by the drawee in the bill or order itself, or in a separate instrument
(Prudential Bank vs. Intermediate Appellate Court, supra.) Here, [HSBC]s
acceptance of the orders for the payment of money was veritably done in writing in
a separate instrument each time it debited the local or foreign currency accounts of
its client-investors pursuant to the latters instructions and advises sent by electronic
messages to [HSBC]. The [DST] therefore must be paid upon the execution of the
specified instruments or facilities covered by the tax in this case, the acceptance by
[HSBC] of the order for payment of money sent by the client-investors through
electronic messages. x x x.[12]
Hence, these petitions.
HSBC asserts that the Court of Appeals committed grave error when it disregarded
the factual and legal conclusions of the CTA. According to HSBC, in the absence of
abuse or improvident exercise of authority, the CTAs ruling should not have been
disturbed as the CTA is a highly specialized court which performs judicial functions,
particularly for the review of tax cases. HSBC further argues that the Commissioner
of Internal Revenue had already settled the issue on the taxability of electronic

messages involved in these cases in BIR Ruling No. 132-99 and reiterated in BIR
Ruling No. DA-280-2004.[13]
The Commissioner of Internal Revenue, on the other hand, claims that Section 181
of the 1997 Tax Code imposes DST on the acceptance or payment of a bill of
exchange or order for the payment of money. The DST under Section 18 of the 1997
Tax Code is levied on HSBCs exercise of a privilege which is specifically taxed by
law. BIR Ruling No. 132-99 is inconsistent with prevailing law and long standing
administrative practice, respondent is not barred from questioning his own revenue
ruling. Tax refunds like tax exemptions are strictly construed against the taxpayer.[14]
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of the Tax Code is
levied on the acceptance or payment of a bill of exchange purporting to be drawn in
a foreign country but payable in the Philippines and that a bill of exchange is an
unconditional order in writing addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to pay on demand or at
a fixed or determinable future time a sum certain in money to order or to bearer. A
bill of exchange is one of two general forms of negotiable instruments under the
Negotiable Instruments Law.[15]
The Court further agrees with the CTA that the electronic messages of HSBCs
investor-clients containing instructions to debit their respective local or foreign
currency accounts in the Philippines and pay a certain named recipient also residing
in the Philippines is not the transaction contemplated under Section 181 of the Tax
Code as such instructions are parallel to an automatic bank transfer of local funds
from a savings account to a checking account maintained by a depositor in one
bank. The Court favorably adopts the finding of the CTA that the electronic
messages cannot be considered negotiable instruments as they lack the feature of
negotiability, which, is the ability to be transferred and that the said electronic
messages are mere memoranda of the transaction consisting of the actual debiting
of the [investor-client-]payors local or foreign currency account in the Philippines
and entered as such in the books of account of the local bank, HSBC.[16]
More fundamentally, the instructions given through electronic messages that are
subjected to DST in these cases are not negotiable instruments as they do not comply
with the requisites of negotiability under Section 1 of the Negotiable Instruments
Law, which provides:
Sec. 1. Form of negotiable instruments. An instrument to be negotiable must
conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO19
(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 electronic messages are not signed by the investor-clients as supposed drawers
of a bill of exchange; they do not contain an unconditional order to pay a sum certain
in money as the payment is supposed to come from a specific fund or account of the
investor-clients; and, they are not payable to order or bearer but to a specifically
designated third party. Thus, the electronic messages are not bills of exchange. As
there was no bill of exchange or order for the payment drawn abroad and made
payable here in the Philippines, there could have been no acceptance or payment that
will trigger the imposition of the DST under Section 181 of the Tax Code.
Section 181 of the 1997 Tax Code, which governs HSBCs claim for tax refund for
taxable year 1998 subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. Upon
any acceptance or payment of any bill of exchange or order for the payment of
money purporting to be drawn in a foreign country but payable in the
Philippines, there shall be collected a documentary stamp tax of Thirty centavos
(P0.30) on each Two hundred pesos (P200), or fractional part thereof, of the face
value of any such bill of exchange, or order, or the Philippine equivalent of such
value, if expressed in foreign currency. (Emphasis supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs HSBCs claim for tax
refund for DST paid during the period September to December 1997 and subject of
G.R. No. 166018, is worded exactly the same as its counterpart provision in the 1997
Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of 1904,[17] which
provided:
SECTION 117. The acceptor or acceptors of any bill of exchange or order for the
payment of any sum of money drawn or purporting to be drawn in any foreign
country but payable in the Philippine Islands, shall, before paying or accepting
the same, place thereupon a stamp in payment of the tax upon such document in the
same manner as is required in this Act for the stamping of inland bills of exchange or
promissory notes, and no bill of exchange shall be paid nor negotiated until such
stamp shall have been affixed thereto.[18] (Emphasis supplied.)

It then became Section 30(h) of the 1914 Tax Code[19]:
SEC. 30. Stamp tax upon documents and papers. Upon documents, instruments,
and papers, and upon acceptances, assignments, sales, and transfers of the obligation,
right, or property incident thereto documentary taxes for and in respect of the
transaction so had or accomplished shall be paid as hereinafter prescribed, by the
persons making, signing, issuing, accepting, or transferring the same, and at the time
such act is done or transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign country
but payable in the Philippine Islands, on each two hundred pesos, or fractional part
thereof, of the face value of any such bill of exchange or order, or the Philippine
equivalent of such value, if expressed in foreign currency, two centavos[.] (Emphasis
supplied.)
It was implemented by Section 46 in relation to Section 39 of Revenue Regulations
No. 26,[20] as amended:
SEC. 39. A Bill of Exchange is one that denotes checks, drafts, and all other kinds
of orders for the payment of money, payable at sight or on demand, or after a specific
period after sight or from a stated date.
SEC. 46. Bill of Exchange, etc. When any bill of exchange or order for the
payment of money drawn in a foreign country but payable in this country
whether at sight or on demand or after a specified period after sight or from a
stated date, is presented for acceptance or payment, there must be
affixed upon acceptance or payment of documentary stamp equal to P0.02 for each
P200 or fractional part thereof. (Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of 1939,[21] which provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. Upon
any acceptance or payment of any bill of exchange or order for the payment of
money purporting to be drawn in a foreign country but payable in the
Philippines, there shall be collected a documentary stamp tax of four centavos on
each two hundred pesos, or fractional part thereof, of the face value of any such bill
of exchange or order, or the Philippine equivalent of such value, if expressed in
foreign currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code,[22] as amended by Presidential
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO20
Decree Nos. 1457 and 1959, which, as stated earlier, was worded exactly as Section
181 of the current Tax Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and others. Upon
any acceptance or payment of any bill of exchange or order for the payment of
money purporting to be drawn in a foreign country but payable in the
Philippines, there shall be collected a documentary stamp tax of thirty centavos on
each two hundred pesos, or fractional part thereof, of the face value of any such bill
of exchange, or order, or the Philippine equivalent of such value, if expressed in
foreign currency. (Emphasis supplied.)
The pertinent provision of the present Tax Code has therefore remained substantially
the same for the past one hundred years. The identical text and common history of
Section 230 of the 1977 Tax Code, as amended, and the 1997 Tax Code, as amended,
show that the law imposes DST on either (a) the acceptance or (b) the payment of a
foreign bill of exchange or order for the payment of money that was drawn abroad
but payable in the Philippines.
DST is an excise tax on the exercise of a right or privilege to transfer obligations,
rights or properties incident thereto.[23] Under Section 173 of the 1997 Tax Code, the
persons primarily liable for the payment of the DST are those (1) making, (2)
signing, (3) issuing, (4) accepting, or (5) transferring the taxable documents,
instruments or papers.[24]
In general, DST is levied on the exercise by persons of certain privileges conferred
by law for the creation, revision, or termination of specific legal relationships
through the execution of specific instruments. Examples of such privileges, the
exercise of which, as effected through the issuance of particular documents, are
subject to the payment of DST are leases of lands, mortgages, pledges and trusts, and
conveyances of real property.[25]
As stated above, Section 230 of the 1977 Tax Code, as amended, now Section 181 of
the 1997 Tax Code, levies DST on either (a) the acceptance or (b) the payment of a
foreign bill of exchange or order for the payment of money that was drawn abroad
but payable in the Philippines. In other words, it levies DST as an excise tax on the
privilege of the drawee to accept or pay a bill of exchange or order for the payment
of money, which has been drawn abroad but payable in the Philippines, and on the
corresponding privilege of the drawer to have acceptance of or payment for the bill
of exchange or order for the payment of money which it has drawn abroad but
payable in the Philippines.
Acceptance applies only to bills of exchange. [26] Acceptance of a bill of exchange
has a very definite meaning in law.[27] In particular, Section 132 of the Negotiable
Instruments Law provides:
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO21

Sec. 132. Acceptance; how made, by and so forth. The acceptance of a bill [of
exchange[28]] is the signification by the drawee of his assent to the order of the
drawer. The acceptance must be in writing and signed by the drawee. It must not
express that the drawee will perform his promise by any other means than the
payment of money.
Under the law, therefore, what is accepted is a bill of exchange, and the acceptance
of a bill of exchange is both the manifestation of the drawees consent to the
drawers order to pay money and the expression of the drawees promise to pay. It is
the act by which the drawee manifests his consent to comply with the request
contained in the bill of exchange directed to him and it contemplates an engagement
or promise to pay.[29] Once the drawee accepts, he becomes an acceptor.[30] As
acceptor, he engages to pay the bill of exchange according to the tenor of his
acceptance.[31]
acceptance or payment that could have been subjected to DST to speak of.
Indeed, there had been no acceptance of a bill of exchange or order for the payment
of money on the part of HSBC. To reiterate, there was no bill of exchange or order
for the payment drawn abroad and made payable here in the Philippines. Thus, there
was no acceptance as the electronic messages did not constitute the written and
signed manifestation of HSBC to a drawers order to pay money. As HSBC could
not have been an acceptor, then it could not have made any payment of a bill of
exchange or order for the payment of money drawn abroad but payable here in the
Philippines. In other words, HSBC could not have been held liable for DST under
Section 230 of the 1977 Tax Code, as amended, and Section 181 of the 1997 Tax
Code as it is not a person making, signing, issuing, accepting, or, transferring the
taxable instruments under the said provision. Thus, HSBC erroneously paid DST on
the said electronic messages for which it is entitled to a tax refund.

Acceptance is made upon presentment of the bill of exchange, or within 24 hours WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May
after such presentment.[32] Presentment for acceptance is the production or exhibition 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951
of the bill of exchange to the drawee for the purpose of obtaining his acceptance. [33] of the Court of Tax Appeals are REINSTATED.

Presentment for acceptance is necessary only in the instances where the law requires SO ORDERED.
it.[34] In the instances where presentment for acceptance is not necessary, the holder
of the bill of exchange can proceed directly to presentment for payment.

Presentment for payment is the presentation of the instrument to the person primarily
liable for the purpose of demanding and obtaining payment thereof.[35]

Thus, whether it be presentment for acceptance or presentment for payment, the

negotiable instrument has to be produced and shown to the drawee for acceptance or
to the acceptor for payment.

Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of
exchange or orders for the payment of money that have been drawn abroad but
payable in the Philippines) that is subjected to DST under Section 181 of the 1997
Tax Code is done after presentment for acceptance or presentment for payment,
respectively. In other words, the acceptance or payment of the subject bill of
exchange or order for the payment of money is done when there is presentment
either for acceptance or for payment of the bill of exchange or order for the payment
of money.

Applying the above concepts to the matter subjected to DST in these cases, the
electronic messages received by HSBC from its investor-clients abroad instructing
the former to debit the latters local and foreign currency accounts and to pay the
purchase price of shares of stock or investment in securities do not properly qualify
THIRD DIVISION
as either presentment for acceptance or presentment for payment. There being
neither presentment for acceptance nor presentment for payment, then there was no
[ G. R. No. 116320, November 29, 1999 ]
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO22

ADALIA FRANCISCO, PETITIONER, VS. COURT OF APPEALS , HERBY dismissed the case upon the filing by the parties of a joint motion to dismiss.
COMMERCIAL & CONSTRUCTION CORPORATION AND JAIME C.
ONG, RESPONDENTS. Sometime in 1979, after an examination of the records of the GSIS, Ong discovered
that Diaz and Francisco had executed and signed seven checks [4], of various dates
DECISION and amounts, drawn against the IBAA and payable to HCCC for completed and
delivered work under the contract. Ong, however, claims that these checks were
GONZAGA-REYES, J.: never delivered to HCCC. Upon inquiry with Diaz, Ong learned that the GSIS gave
Francisco custody of the checks since she promised that she would deliver the same
to HCCC. Instead, Francisco forged the signature of Ong, without his knowledge or
Assailed in this petition for review on certiorari is the decision [1] of the Court of
consent, at the dorsal portion of the said checks to make it appear that HCCC had
Appeals affirming the decision[2] rendered by Branch 168 of the Regional Trial Court
indorsed the checks; Francisco then indorsed the checks for a second time by signing
of Pasig in Civil Case No. 35231 in favor of private respondents.
her name at the back of the checks and deposited the checks in her IBAA savings
account. IBAA credited Francisco's account with the amount of the checks and the
The controversy before this Court finds its origins in a Land Development and
latter withdrew the amount so credited.
Construction Contract which was entered into on June 23, 1977 by A. Francisco
Realty & Development Corporation (AFRDC), of which petitioner Adalia Francisco
On June 7, 1979, Ong filed complaints with the office of the city fiscal of Quezon
(Francisco) is the president, and private respondent Herby Commercial &
City, charging Francisco with estafa thru falsification of commercial documents.
Construction Corporation (HCCC), represented by its President and General
Francisco denied having forged Ong's signature on the checks, claiming that Ong
Manager private respondent Jaime C. Ong (Ong), pursuant to a housing project of
himself indorsed the seven checks in behalf of HCCC and delivered the same to
AFRDC at San Jose del Monte, Bulacan, financed by the Government Service
Francisco in payment of the loans extended by Francisco to HCCC. According to
Insurance System (GSIS). Under the contract, HCCC agreed to undertake the
Francisco, she agreed to grant HCCC the loans in the total amount of P585,000.00
construction of 35 housing units and the development of 35 hectares of land. The
and covered by eighteen promissory notes in order to obviate the risk of the non-
payment of HCCC for its services was on a turn-key basis, that is, HCCC was to be
completion of the project. As a means of repayment, Ong allegedly issued a
paid on the basis of the completed houses and developed lands delivered to and
Certification authorizing Francisco to collect HCCC's receivables from the GSIS.
accepted by AFRDC and the GSIS. To facilitate payment, AFRDC executed a Deed
Assistant City Fiscal Ramon M. Gerona gave credence to Francisco's claims and
of Assignment in favor of HCCC to enable the latter to collect payments directly
accordingly, dismissed the complaints, which dismissal was affirmed by the Minister
from the GSIS. Furthermore, the GSIS and AFRDC put up an Executive Committee
of Justice in a resolution issued on June 5, 1981.
Account with the Insular Bank of Asia & America (IBAA) in the amount of
P4,000,000.00 from which checks would be issued and co-signed by petitioner
The present case was brought by private respondents on November 19, 1979 against
Francisco and the GSIS Vice-President Armando Diaz (Diaz).
Francisco and IBAA for the recovery of P370,475.00, representing the total value of
the seven checks, and for damages, attorney's fees, expenses of litigation and costs.
On February 10, 1978, HCCC filed a complaint[3] with the Regional Trial Court of
After trial on the merits, the trial court rendered its decision in favor of private
Quezon City against Francisco, AFRDC and the GSIS for the collection of the
respondents, the dispositive portion of which provides -
unpaid balance under the Land Development and Construction Contract in the
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
amount of P515,493.89 for completed and delivered housing units and land
plaintiffs and against the defendants INSULAR BANK OF ASIA & AMERICA and
development. However, the parties eventually arrived at an amicable settlement of
ATTY. ADALIA FRANCISCO, to jointly and severally pay the plaintiffs the amount
their differences, which was embodied in a Memorandum Agreement executed by
of P370.475.00 plus interest thereon at the rate of 12% per annum from the date of
HCCC and AFRDC on July 21, 1978. Under the agreement, the parties stipulated
the filing of the complaint until the full amount is paid; moral damages to plaintiff
that HCCC had turned over 83 housing units which have been accepted and paid for
Jaime Ong in the sum of P50,000.00; exemplary damages of P50,000.00; litigation
by the GSIS. The GSIS acknowledged that it still owed HCCC P520,177.50
expenses of P5,000.00; and attorney's fees of P50,000.00.
representing incomplete construction of housing units, incomplete land development
and 5% retention, which amount will be discharged when the defects and
With respect to the cross-claim of the defendant IBAA against its co-defendant Atty.
deficiencies are finally completed by HCCC. It was also provided that HCCC was
Adalia Francisco, the latter is ordered to reimburse the former for the sums that the
indebted to AFRDC in the amount of P180,234.91 which the former agreed would be
Bank shall pay to the plaintiff on the forged checks including the interests paid
paid out of the proceeds from the 40 housing units still to be turned over by HCCC
thereon.
or from any amount due to HCCC from the GSIS. Consequently, the trial court

Further, the defendants are ordered to pay the costs.
Based upon the findings of handwriting experts from the National Bureau of
Investigation (NBI), the trial court held that Francisco had indeed forged the
signature of Ong to make it appear that he had indorsed the checks. Also, the court
ruled that there were no loans extended, reasoning that it was unbelievable that
HCCC was experiencing financial difficulties so as to compel it to obtain the loans
from AFRDC in view of the fact that the GSIS had issued checks in favor of HCCC
at about the same time that the alleged advances were made. The trial court stated
that it was plausible that Francisco concealed the fact of issuance of the checks from
private respondents in order to make it appear as if she were accommodating private
respondents, when in truth she was lending HCCC its own money.
With regards to the Memorandum Agreement entered into between AFRDC and
HCCC in Civil Case No. Q-24628, the trial court held that the same did not make
any mention of the forged checks since private respondents were as of yet unaware
of their existence, that fact having been effectively concealed by Francisco, until
private respondents acquired knowledge of Francisco's misdeeds in 1979.
IBAA was held liable to private respondents for having honored the checks despite
such obvious irregularities as the lack of initials to validate the alterations made on
the check, the absence of the signature of a co-signatory in the corporate checks of
HCCC and the deposit of the checks on a second indorsement in the savings account
of Francisco. However, the trial court allowed IBAA recourse against Francisco, who
was ordered to reimburse the IBAA for any sums it shall have to pay to private
respondents.[5]
Both Francisco and IBAA appealed the trial court's decision, but the Court of
Appeals dismissed IBAA's appeal for its failure to file its brief within the 45-day
extension granted by the appellate court. IBAA's motion for reconsideration and
petition for review on certiorari filed with this Court were also similarly denied. On
November 21, 1989, IBAA and HCCC entered into a Compromise Agreement which
was approved by the trial court, wherein HCCC acknowledged receipt of the amount
of P370,475.00 in full satisfaction of its claims against IBAA, without prejudice to
the right of the latter to pursue its claims against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial court's ruling, hence this
petition for review on certiorari filed by petitioner, assigning the following errors to
the appealed decision -
1. The respondent Court of Appeals erred in concluding that private
respondents did not owe Petitioner the sum covered by the Promissory
Notes Exh.2-2-A-2-P (FRANCISCO). Such conclusion was based mainly
on conjectures, surmises and speculation contrary to the unrebutted
pleadings and evidence presented by petitioner.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO23
2. The respondent Court of Appeals erred in holding that Petitioner falsified
the signature of private respondent ONG on the checks in question without
any authority therefor which is patently contradictory to the unrebutted
pleading and evidence that petitioner was expressly authorized by
respondent HERBY thru ONG to collect all receivables of HERBY from
GSIS to pay the loans extended to them. (Exhibit 3).
3. That respondent Court of Appeals erred in holding that the seven checks in
question were not taken up in the liquidation and reconciliation of all
outstanding account between AFRDC and HERBY as acknowledged by the
parties in Memorandum Agreement (Exh. 5) is a pure conjecture, surmise
and speculation contrary to the unrebutted evidence presented by
petitioners. It is an inference made which is manifestly mistaken.
4. The respondent Court of Appeals erred in affirming the decision of the
lower court and dismissing the appeal.[6]
The pivotal issue in this case is whether or not Francisco forged the signature of Ong
on the seven checks. In this connection, we uphold the lower courts' finding that the
subject matter of the present case, specifically the seven checks, drawn by GSIS and
AFRDC, dated between October to November 1977, in the total amount of
P370,475.00 and payable to HCCC, was not included in the Memorandum
Agreement executed by HCCC and AFRDC in Civil Case No. Q-24628. As observed
by the trial court, aside from there being absolutely no mention of the checks in the
said agreement, the amounts represented by said checks could not have been
included in the Memorandum Agreement executed in 1978 because private
respondents only discovered Francisco's acts of forgery in 1979. The lower courts
found that Francisco was able to easily conceal from private respondents even the
fact of the issuance of the checks since she was a co-signatory thereof.[7] We also
note that Francisco had custody of the checks, as proven by the check vouchers
bearing her uncontested signature,[8] by which she, in effect, acknowledged having
received the checks intended for HCCC. This contradicts Francisco's claims that the
checks were issued to Ong who delivered them to Francisco already indorsed.[9]
As regards the forgery, we concur with the lower courts' finding that Francisco
forged the signature of Ong on the checks to make it appear as if Ong had indorsed
said checks and that, after indorsing the checks for a second time by signing her
name at the back of the checks, Francisco deposited said checks in her savings
account with IBAA. The forgery was satisfactorily established in the trial court upon
the strength of the findings of the NBI handwriting expert.[10] Other than petitioner's
self-serving denials, there is nothing in the records to rebut the NBI's findings. Well-
entrenched is the rule that findings of trial courts which are factual in nature,
especially when affirmed by the Court of Appeals, deserve to be respected and
affirmed by the Supreme Court, provided it is supported by substantial evidence on
record,[11] as it is in the case at bench.

Petitioner claims that she was, in any event, authorized to sign Ong's name on the
checks by virtue of the Certification executed by Ong in her favor giving her the
authority to collect all the receivables of HCCC from the GSIS, including the
questioned checks.[12] Petitioner's alternative defense must similarly fail. The
Negotiable Instruments Law provides that where any person is under obligation to
indorse in a representative capacity, he may indorse in such terms as to negative
personal liability.[13] An agent, when so signing, should indicate that he is merely
signing in behalf of the principal and must disclose the name of his principal;
otherwise he shall be held personally liable.[14] Even assuming that Francisco was
authorized by HCCC to sign Ong's name, still, Francisco did not indorse the
instrument in accordance with law. Instead of signing Ong's name, Francisco should
have signed her own name and expressly indicated that she was signing as an agent
of HCCC. Thus, the Certification cannot be used by Francisco to validate her act of
forgery.
Every person who, contrary to law, wilfully or negligently causes damage to another,
shall indemnify the latter for the same.[15] Due to her forgery of Ong's signature
which enabled her to deposit the checks in her own account, Francisco deprived
HCCC of the money due it from the GSIS pursuant to the Land Development and
Construction Contract. Thus, we affirm respondent court's award of compensatory
damages in the amount of P370,475.00, but with a modification as to the interest rate
which shall be six percent (6%) per annum, to be computed from the date of the
filing of the complaint since the amount of damages was alleged in the complaint;
[16]
however, the rate of interest shall be twelve percent (12%) per annum from the
time the judgment in this case becomes final and executory until its satisfaction and
the basis for the computation of this twelve percent (12%) rate of interest shall be the
amount of P370,475.00. This is in accordance with the doctrine enunciated
in Eastern Shipping Lines, Inc. vs. Court of Appeals, et al.,[17] which was reiterated
in Philippine National Bank vs. Court of Appeals,[18] Philippine Airlines, Inc. vs.
Court of Appeals[19] and in Keng Hua Paper Products Co., Inc. vs. Court of Appeals,
[20]
which provides that -
1. When an obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of six percent (6%) per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO24
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be twelve percent (12%) per
annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
We also sustain the award of exemplary damages in the amount of P50,000.00.
Under Article 2229 of the Civil Code, exemplary damages are imposed by way of
example or correction for the public good, in addition to the moral, temperate,
liquidated or compensatory damages. Considering petitioner's fraudulent act, we
hold that an award of P50,000.00 would be adequate, fair and reasonable. The grant
of exemplary damages justifies the award of attorney's fees in the amount of
P50,000.00, and the award of P5,000.00 for litigation expenses.[21]
The appellate court's award of P50,000.00 in moral damages is warranted. Under
Article 2217 of the Civil Code, moral damages may be granted upon proof of
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation and similar injury.[22] Ong
testitified that he suffered sleepless nights, embarrassment, humiliation and anxiety
upon discovering that the checks due his company were forged by petitioner and that
petitioner had filed baseless criminal complaints against him before the fiscal's office
of Quezon City which disrupted HCCC's business operations.[23]
WHEREFORE, we AFFIRM the respondent court's decision promulgated on June
29, 1992, upholding the February 16, 1988 decision of the trial court in favor of
private respondents, with the modification that the interest upon the actual damages
awarded shall be at six percent (6%) per annum, which interest rate shall be
computed from the time of the filing of the complaint on November 19, 1979.
However, the interest rate shall be twelve percent (12%) per annum from the time the
judgment in this case becomes final and executory and until such amount is fully
paid. The basis for computation of the six percent and twelve percent rates of interest
shall be the amount of P370,475.00. No pronouncement as to costs.
SO ORDERED.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO25

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-37467 December 11, 1933
SAN CARLOS MILLING CO., LTD., plaintiff-appellant,
vs.
BANK OF THE PHILIPPINE ISLANDS and CHINA BANKING
CORPORATION, defendants-appellees.
Gibbs and McDonough and Roman Ozaeta for appellant.
Araneta, De Joya, Zaragosa and Araneta for appellee Bank of the Philippine
Islands.
Marcelo Nubla and Guevara, Francisco and Recto for appellee China Banking
Corporation.
HULL, J.:
Plaintiff corporation, organized under the laws of the Territory of Hawaii, is
authorized to engaged in business in the Philippine Islands, and maintains its main
office in these Islands in the City of Manila.
The business in the Philippine Islands was in the hands of Alfred D. Cooper, its agent
under general power of attorney with authority of substitution. The principal
employee in the Manila office was one Joseph L. Wilson, to whom had been given a
general power of attorney but without power of substitution. In 1926 Cooper,
desiring to go on vacation, gave a general power of attorney to Newland Baldwin
and at the same time revoked the power of Wilson relative to the dealings with the
Bank of the Philippine Islands, one of the banks in Manila in which plaintiff
maintained a deposit.
About a year thereafter Wilson, conspiring together with one Alfredo Dolores, a
messenger-clerk in plaintiff's Manila office, sent a cable gram in code to the
company in Honolulu requesting a telegraphic transfer to the China Banking
Corporation of Manila of $100,00. The money was transferred by cable, and upon its
receipt the China Banking Corporation, likewise a bank in which plaintiff maintained
a deposit, sent an exchange contract to plaintiff corporation offering the sum of
P201,000, which was then the current rate of exchange. On this contract was forged
the name of Newland Baldwin and typed on the body of the contract was a
note:lawphil.net
Please send us certified check in our favor when transfer is received.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO26
A manager's check on the China Banking Corporation for P201,000 payable to San
Carlos Milling Company or order was receipted for by Dolores. On the same date,
September 28, 1927, the manger's check was deposited with the Bank of the
Philippine Islands by the following endorsement:
For deposit only with Bank of the Philippine Islands, to credit of account of
San Carlos Milling Co., Ltd.
By (Sgd.) NEWLAND BALDWIN
For Agent
The endorsement to which the name of Newland Baldwin was affixed was spurious.
The Bank of the Philippine Islands thereupon credited the current account of plaintiff
in the sum of P201,000 and passed the cashier's check in the ordinary course of
business through the clearing house, where it was paid by the China Banking
Corporation.
On the same day the cashier of the Bank of the Philippine Islands received a letter,
purporting to be signed by Newland Baldwin, directing that P200,000 in bills of
various denominations, named in the letter, be packed for shipment and delivery the
next day. The next day, Dolores witnessed the counting and packing of the money,
and shortly afterwards returned with the check for the sum of P200,000, purporting
to be signed by Newland Baldwin as agent.
Plaintiff had frequently withdrawn currency for shipment to its mill from the Bank of
the Philippine Islands but never in so large an amount, and according to the record,
never under the sole supervision of Dolores as the representative of plaintiff.
Before delivering the money, the bank asked Dolores for P1 to cover the cost of
packing the money, and he left the bank and shortly afterwards returned with another
check for P1, purporting to be signed by Newland Baldwin. Whereupon the money
was turned over to Dolores, who took it to plaintiff's office, where he turned the
money over to Wilson and received as his share, P10,000.
Shortly thereafter the crime was discovered, and upon the defendant bank refusing to
credit plaintiff with the amount withdrawn by the two forged checks of P200,000 and
P1, suit was brought against the Bank of the Philippine Islands, and finally on the
suggestion of the defendant bank, an amended complaint was filed by plaintiff
against both the Bank of the Philippine Islands and the China Banking Corporation.
At the trial the China Banking Corporation contended that they had drawn a check to
the credit of the plaintiff company, that the check had been endorsed for deposit, and

that as the prior endorsement had in law been guaranteed by the Bank of the
Philippine Islands, when they presented the cashier's check to it for payment, the
China Banking Corporation was absolved even if the endorsement of Newland
Baldwin on the check was a forgery.
The Bank of the Philippine Islands presented many special defenses, but in the main
their contentions were that they had been guilty of no negligence, that they had dealt
with the accredited representatives of the company in the due course of business, and
that the loss was due to the dishonesty of plaintiff's employees and the negligence of
plaintiff's general agent.
In plaintiff's Manila office, besides the general agent, Wilson, and Dolores, most of
the time there was employed a woman stenographer and cashier. The agent did not
keep in his personal possession either the code-book or the blank checks of either the
Bank of the Philippine Islands or the China Banking Corporation. Baldwin was
authorized to draw checks on either of the depositaries. Wilson could draw checks in
the name of the plaintiff on the China Banking Corporation.
After trial in which much testimony was taken, the trial court held that the deposit of
P201,000 in the Bank of the Philippine Islands being the result of a forged
endorsement, the relation of depositor and banker did not exist, but the bank was
only a gratuitous bailee; that the Bank of the Philippine Islands acted in good faith in
the ordinary course of its business, was not guilty of negligence, and therefore under
article 1902 of the Civil Code which should control the case, plaintiff could not
recover; and that as the cause of loss was the criminal actions of Wilson and Dolores,
employees of plaintiff, and as Newland Baldwin, the agent, had not exercised
adequate supervision over plaintiff's Manila office, therefore plaintiff was guilty of
negligence, which ground would likewise defeat recovery.
From the decision of the trial court absolving the defendants, plaintiff brings this
appeal and makes nine assignments of error which we do not deem it necessary to
discuss in detail.
There is a mild assertion on the part of the defendant bank that the disputed
signatures of Newland Baldwin were genuine and that he had been in the habit of
signing checks in blank and turning the checks so signed over to Wilson.
The proof as to the falsity of the questioned signatures of Baldwin places the matter
beyond reasonable doubt, nor is it believed that Baldwin signed checks in blank and
turned them over to Wilson.
As to the China Banking Corporation, it will be seen that it drew its check payable to
the order of plaintiff and delivered it to plaintiff's agent who was authorized to
receive it. A bank that cashes a check must know to whom it pays. In connection
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO27
with the cashier's check, this duty was therefore upon the Bank of the Philippine
Islands, and the China Banking Corporation was not bound to inspect and verify all
endorsements of the check, even if some of them were also those of depositors in
that bank. It had a right to rely upon the endorsement of the Bank of the Philippine
Islands when it gave the latter bank credit for its own cashier's check. Even if we
would treat the China Banking Corporation's cashier's check the same as the check of
a depositor and attempt to apply the doctrines of the Great Eastern Life Insurance
Co. vs. Hongkong & Shanghai Banking Corporation and National Bank (43 Phil.,
678), and hold the China Banking Corporation indebted to plaintiff, we would at the
same time have to hold that the Bank of the Philippine Islands was indebted to the
China Banking Corporation in the same amount. As, however, the money was in fact
paid to plaintiff corporation, we must hold that the China Banking Corporation is
indebted neither to plaintiff nor to the Bank of the Philippine Islands, and the
judgment of the lower court far as it absolves the China Banking Corporation from
responsibility is affirmed.
Returning to the relation between plaintiff and the Bank of the Philippine Islands, we
will now consider the effect of the deposit of P201,000. It must be noted that this was
not a presenting of the check for cash payment but for deposit only. It is a matter of
general knowledge that most endorsements for deposit only, are informal. Most are
by means of a rubber stamp. The bank would have been justified in accepting the
check for deposit even with only a typed endorsement. It accepted the check and
duly credited plaintiff's account with the amount on the face of the check. Plaintiff
was not harmed by the transaction as the only result was the removal of that sum of
money from a bank from which Wilson could have drawn it out in his own name to a
bank where Wilson would not have authority to draw checks and where funds could
only be drawn out by the check of Baldwin.
Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands said
in part:
". . . we now leave to demand that you pay over to us the entire amount of
said manager's check of two hundred one thousand (P201,000) pesos,
together with interest thereon at the agreed rate of 3 per cent per annum
on daily balances of our credit in account current with your bank to this
date. In the event of your refusal to pay, we shall claim interest at the legal
rate of 6 per cent from and after the date of this demand inasmuch as we
desire to withdraw and make use of the money." Such language might well
be treated as a ratification of the deposit.
The contention of the bank that it was a gratuitous bailee is without merit. In the first
place, it is absolutely contrary to what the bank did. It did not take it up as a separate
account but it transferred the credit to plaintiff's current account as a depositor of that
bank. Furthermore, banks are not gratuitous bailees of the funds deposited with them
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO28

by their customers. Banks are run for gain, and they solicit deposits in order that they
can use the money for that very purpose. In this case the action was neither
gratuitous nor was it a bailment.

On the other hand, we cannot agree with the theory of plaintiff that the Bank of the
Philippine Islands was an intermeddling bank. In the many cases cited by plaintiff
where the bank that cashed the forged endorsement was held as an intermeddler, in
none was the claimant a regular depositor of the bank, nor in any of the cases cited,
was the endorsement for deposit only. It is therefore clear that the relation of plaintiff
with the Bank of the Philippine Islands in regard to this item of P201,000 was that of
depositor and banker, creditor and debtor.

We now come to consider the legal effect of payment by the bank to Dolores of the
sum of P201,000, on two checks on which the name of Baldwin was forged as
drawer. As above stated, the fact that these signatures were forged is beyond
question. It is an elementary principle both of banking and of the Negotiable
Instruments Law that

A bank is bound to know the signatures of its customers; and if it pays a

forged check, it must be considered as making the payment out of its own
funds, and cannot ordinarily charge the amount so paid to the account of the
depositor whose name was forged. (7 C.J., 683.)

There is no act of the plaintiff that led the Bank of the Philippine Islands astray. If it
was in fact lulled into a false sense of security, it was by the effrontery of Dolores,
the messenger to whom it entrusted this large sum of money.

The bank paid out its money because it relied upon the genuineness of the purported
signatures of Baldwin. These, they never questioned at the time its employees should
have used care. In fact, even today the bank represents that it has a relief that they are
genuine signatures.

The signatures to the check being forged, under section 23 of the Negotiable
Instruments Law they are not a charge against plaintiff nor are the checks of any
value to the defendant. Republic of the Philippines
SUPREME COURT
It must therefore be held that the proximate cause of loss was due to the negligence Manila
of the Bank of the Philippine Islands in honoring and cashing the two forged checks.
EN BANC
The judgment absolving the Bank of the Philippine Islands must therefore be
reversed, and a judgment entered in favor of plaintiff-appellant and against the Bank G.R. No. L-43596 October 31, 1936
of the Philippine Islands, defendant-appellee, for the sum of P200,001, with legal
interest thereon from December 23,1928, until payment, together with costs in both
instances. So ordered.

PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
THE NATIONAL CITY BANK OF NEW YORK, and MOTOR SERVICE
COMPANY, INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant.
L. D. Lockwood for appellant.
Camus and Delgado for appellee.
RECTO, J.:
This case was submitted for decision to the court below on the following stipulation
of facts:
1. That plaintiff is a banking corporation organized and existing under and
by virtue of a special act of the Philippine Legislature, with office as
principal place of business at the Masonic Temple Bldg., Escolta, Manila, P.
I.; that the defendant National City Bank of New York is a foreign banking
corporation with a branch office duly authorized and licensed to carry and
engage in banking business in the Philippine Islands, with branch office and
place of business in the National City Bank Bldg., City of Manila, P. I., and
that the defendant Motor Service Company, Inc., is a corporation organized
and existing under and by virtue of the general corporation law of the
Philippine Islands, with office and principal place of business at 408 Rizal
Avenue, City of Manila, P. I., engaged in the purchase and sale of
automobile spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or persons negotiated
with defendant Motor Service Company, Inc., the checks marked as
Exhibits A and A-1, respectively, which are made parts of the stipulation, in
payment for automobile tires purchased from said defendant's stores,
purporting to have been issued by the "Pangasinan Transportation Co., Inc.
by J. L. Klar, Manager and Treasurer", against the Philippine National Bank
and in favor of the International Auto Repair Shop, for P144.50 and
P215.75; and said checks were indorsed by said unknown persons in the
manner indicated at the back thereof, the Motor Service Co., Inc., believing
at the time that the signature of J. L. Klar, Manager and Treasurer of the
Pangasinan Transportation Co., Inc., on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit by the
defendant Motor Service Company, Inc, at the National City Bank of New
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO29
York and the former was accordingly credited with the amounts thereof, or
P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were cleared at the clearing
house and the Philippine National Bank credited the National City Bank of
New York for the amounts thereof, believing at the time that the signatures
of the drawer were genuine, that the payee is an existing entity and the
endorsement at the back thereof regular and genuine.
5. The Philippine National Bank then found out that the purported
signatures of J. L. Klar, as Manager and Treasurer of the Pangasinan
Transportation Company, Inc., in said Exhibits A and A-1 were forged when
so informed by the said Company, and it accordingly demanded from the
defendants the reimbursement of the amounts for which it credited the
National City Bank of New York at the clearing house and for which the
latter credited the Motor Service Co., but the defendants refused, and
continue to refuse, to make such reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of
said check deducted from their deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the
municipal court of Manila and forming part of the record of the present
case, are admitted by the parties as genuine and are made part of this
stipulation as well as Exhibit H hereto attached and made a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to the defendant
National City Bank of New York. a decision was thereafter rendered giving plaintiff
judgment for the total amount of P360.25, with interest and costs. From this decision
the instant appeal was taken.
Before us is the preliminary question of whether the original appeal taken by the
plaintiff from the decision of the municipal court of Manila where this case
originated, became perfected because of plaintiff's failure to attach to the record
within 15 days from receipt of notice of said decision, the certificate of appeal bond
required by section 76 of the Code of Civil Procedure. It is not disputed that both the
appeal docket fee and the appeal cash bond were paid and deposited within the
prescribed time. The issue is whether the mere failure to file the official receipt
showing that such deposit was made within the said period is a sufficient ground to
dismiss plaintiff's appeal. This question was settled by our decision in the case of
Blanco vs. Bernabe and lawyers Cooperative Publishing Co. (page 124, ante), and no
further consideration. No error was committed in allowing said appeal.

We now pass on to consider and determine the main question presented by this
appeal, namely, whether the appellee has the right to recover from the appellant,
under the circumstances of this case, the value of the checks on which the signatures
of the drawer were forged. The appellant maintains that the question should be
answered in the negative and in support of its contention appellant advanced various
reasons presently to be examined carefully.
I. It is contended, first of all, that the payment of the checks in question made by the
drawee bank constitutes an "acceptance", and, consequently, the case should be
governed by the provisions of section 62 of the Negotiable Instruments Law, which
says:
SEC. 62. Liability of acceptor. The acceptor by accepting the instrument
engages that he will pay it according to the tenor of his acceptance; and
admits:
(a) The existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
This contention is without merit. A check is a bill of exchange payable on demand
and only the rules governing bills of exchange payable on demand are applicable to
it, according to section 185 of the Negotiable Instruments Law. In view of the fact
that acceptance is a step unnecessary, in so far as bills of exchange payable on
demand are concerned (sec. 143), it follows that the provisions relative to
"acceptance" are without application to checks. Acceptance implies, in effect,
subsequent negotiation of the instrument, which is not true in case of the payment of
a check because from the moment a check is paid it is withdrawn from circulation.
The warranty established by section 62, is in favor of holders of the instrument after
its acceptance. When the drawee bank cashes or pays a check, the cycle of
negotiation is terminated, and it is illogical thereafter to speak of subsequent holders
who can invoke the warranty provided in section 62 against the drawee. Moreover,
according to section 191, "acceptance" means "an acceptance completed by delivery
or notification" and this concept is entirely incompatible with payment, because
when payment is made the check is retained by the bank, and there is no such thing
as delivery or notification to the party receiving the payment. Checks are not to be
accepted, but presented at once for payment. (1 Bouvier's Law Dictionary, 476.)
There can be no such thing as "acceptance" in the ordinary sense of the term. A
check being payable immediately and on demand, the bank can fulfill its duty to the
depositor only by paying the amount demanded. The holder has no right to demand
from the bank anything but payment of the check, and the bank has no right, as
against the drawer, to do anything but pay it. (5 R. C. L., p. 516, par. 38.) A check is
not an instrument which in the ordinary course of business calls for acceptance. The
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO30
holder can never claim acceptance as his legal right. He can present for payment, and
only for payment. (1 Morse on Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the presentation
of checks for acceptance, before they are paid, in which case we have a
"certification" equivalent to "acceptance" according to section 187, which provides
that "where a check is certified by the bank on which it is drawn, the certification is
equivalent to an acceptance", and it is then that the warranty under section 62 exists.
This certification or acceptance consists in the signification by the drawee of his
assent to the order of the drawer, which must not express that the drawee will
perform his promise by any other means than the payment of money. (Sec. 132.)
When the holder of a check procures it to be accepted or certified, the drawer and all
indorsers are discharged from liability thereon (sec. 188), and then the check
operates as an assignment of a part of the funds to the credit of the drawer with the
bank. (Sec. 189.) There is nothing in the nature of the check which intrinsically
precludes its acceptance, in like manner and with like effect as a bill of exchange or
draft may be accepted. The bank may accept if it chooses; and it is frequently
induced by convenience, by the exigencies of business, or by the desire to oblige
customers, voluntarily to incur the obligation. The act by which the bank places itself
under obligation to pay to the holder the sum called for by a check must be the
expressed promise or undertaking of the bank signifying its intent to assume the
obligation, or some act from which the law will imperatively imply such valid
promise or undertaking. The most ordinary form which such an act assumes is the
acceptance by the bank of the check, or, as it is perhaps more often called, the
certifying of the check. (1 Morse on Banks and Banking, pp. 898, 899; 5 R. C. L., p.
520.)
No doubt a bank may by an unequivocal promise in writing make itself liable in any
event to pay the check upon demand, but this is not an "acceptance" of the check in
the true sense of that term. Although a check does not call for acceptance, and the
holder can present it only for payment, the certification of checks is a means in
constant and extensive use in the business of banking, and its effects and
consequences are regulated by the law merchant. Checks drawn upon banks or
bankers, thus marked and certified, enter largely into the commercial and financial
transactions of the country; they pass from hand to hand, in the payment of debts, the
purchase of property, and in the transfer of balances from one house and one bank to
another. In the great commercial centers, they make up no inconsiderable portion of
the circulation, and thus perform a useful, valuable, and an almost indispensable
office. The purpose of procuring a check to be certified is to impart strength and
credit to the paper by obtaining an acknowledgment from the certifying bank that the
drawer has funds therein sufficient to cover the check and securing the engagement
of the bank that the check will be paid upon presentation. A certified check has a
distinctive character as a species of commercial paper, and performs important
functions in banking and commercial business. When a check is certified, it ceases to
possess the character, or to perform the functions, of a check, and represents so

much money on deposit, payable to the holder on demand. The check becomes a
basis of credit an easy mode of passing money from hand to hand, and answers
the purposes of money. (5 R. C. L., pp. 516, 517.)lwphi1.nt
All the authorities, both English and American, hold that a check may be accepted,
though acceptance is not usual. By the law merchant, the certificate of the bank that a
check is good is equivalent to acceptance. It implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they have been set apart for its
satisfaction, and that they shall be so applied whenever the check is presented for
payment. It is an undertaking that the check is good then, and shall continue good,
and this agreement is as binding on the bank as its notes of circulation, a certificate
of deposit payable to the order of the depositor, or any other obligation it can
assume. The object of certifying a check, as regards both parties is to enable the
holder to use it as money. The transferee takes it with the same readiness and sense
of security that he would take the notes of the bank. It is available also to him for all
the purposes of money. Thus it continues to perform its important functions until in
the course of business it goes back to the bank for redemption, and is extinguished
by payment. It cannot be doubted that the certifying bank intended these
consequences, and it is liable accordingly. To hold otherwise would render these
important securities only a snare and a delusion. A bank incurs no greater risk in
certifying a check than in giving a certificate of deposit. In well-regulated banks the
practice is at once to charge the check to the account of the drawer, to credit it in a
certified check account, and, when the check is paid, to debit that account with the
amount. Nothing can be simpler or safer than this process. (Merchants'
Bank vs. States Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is performed and evidenced by
some word or mark, usually the words "good", "certified" or "accepted" written upon
the check by the banker or bank officer. (1 Morse, Banks and Banking, 915; 1
Bouvier's Law Dictionary, 476.) The bank virtually says, that check is good; we have
the money of the drawer here ready to pay it. We will pay it now if you will receive
it. The holder says, No, I will not take the money; you may certify the check and
retain the money for me until this check is presented. The law will not permit a
check, when due, to be thus presented, and the money to be left with the bank for the
accommodation of the holder without discharging the drawer. The money being due
and the check presented, it is his own fault if the holder declines to receive the pay,
and for his own convenience has the money appropriated to that check subject to its
future presentment at any time within the statute of limitations. (1 Morse on Banks
and Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to support its view
is vitiated by the fact that they take the word "acceptance" in its ordinary meaning
and not in the technical sense in which it is used in the Negotiable Instruments Law.
Appellant says that when payment is made, such payment amounts to an acceptance,
because he who pays accepts. This is true in common parlance but "acceptance" in
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO31
legal contemplation. The word "acceptance" has a peculiar meaning in the
Negotiable Instruments Law, and, as has been above stated, in the instant case there
was payment but no acceptatance, or what is equivalent to acceptance, certification.
With few exceptions, the weight of authority is to the effect that "payment" neither
includes nor implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W.,
513), the court asks, if a mere promise to pay a check is binding on a bank, why
should not the absolute payment of the check have the same effect? In response, it is
submitted that the two things, that is acceptance and payment, are entirely
different. If the drawee accepts the paper after seeing it, and then permits it to go into
circulation as genuine, on all the principles of estoppel, he ought to be prevented
from setting up forgery to defeat liability to one who has taken the paper on the faith
of the acceptance, or certification. On the other hand, mere payment of the paper at
the termination of its course does not act as an estoppel. The attempt to state a
general rule covering both acceptance and payment is responsible for a large part of
the conflicting arguments which have been advanced by the courts with respect to
the rule. (Annotation at 12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the
court said:
We are of the opinion that "payment is not acceptance". Acceptance, as
defined by section 131, cannot be confounded with payment. . . .
Acceptance, certification, or payment of a check, by the express language of
the statute, discharges the liability only of the persons named in the statute,
to wit, the drawer and all indorsers, and the contract of indorsement by the
negotiator if the check is discharged by acceptance, certification, or
payment. But clearly the statute does not say that the contract of warranty of
the negotiator, created by section 65, is discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a
check on a forged or unauthorized indorsement of the payee's name, and charging the
same to the drawer's account, do not amount to an acceptance so as to make the bank
liable to the payee, is supported by all of the recent cases in which the question is
considered. (Cases cited, Annotation at 69 A. L. R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or unauthorized
indorsement is not an acceptance thereof so as to render the drawee bank liable to the
true payee. (Anderson vs. Tacoma National Bank [1928], 146 Wash., 520; 264 Pac.,
8; Annotation at 69 A. L. R., 1077, [1930].)

In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991,
992), the court said:
The defendant in error contends that the payment of the check shows acceptance by
the bank, urging that there can be no more definite act by the bank upon which a
check has been drawn, showing acceptance than the payment of the check. Section
184 of the Negotiable Instruments Act (sec. 202) provides that the provisions of the
act applicable to bills of exchange apply to a check, and section 131 (sec. 149), that
the acceptance of a bill must be in writing signed by the drawee. Payment is the final
act which extinguishes a bill. Acceptance is a promise to pay in the future and
continues the life of the bill. It was held in the First National Bank vs. Whitman (94
U. S., 343; 24 L. ed., 229), that payment of a check upon a forged indorsement did
not operate as an acceptance in favor of the true owner. The contrary was held in
Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7 L.R.A., 93; 17 Am.
St. Rep., 900; 12 S. W., 919), and Seventh National Bank vs. Cook (73 Pa., 483; 13
Am. Rep., 751) at a time when the Negotiable Instruments Act was not in force in
those states. The opinion of the Supreme Court of the United States seems more
logical, and the provision of the Negotiable Instruments Act now require an
acceptance to be in writing. Under this statute the payment of a check on a forged
indorsement, stamping it "paid," and charging it to the account of the drawer, do not
constitute an acceptance of the check or create a liability of the bank to the true
holder or the payee. (Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92 Ohio St., 406; L.
R. A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D, 1055; Baltimore & O. R.
Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837; State Bank of
Chicago vs. Mid-City Trust & Savings Bank 12 A. L. R., pp. 989, 991, 992.)
Before drawee's acceptance of check there is no privity of contract between drawee
and payee. Drawee's payment of check on unauthorized indorsement does not
constitute "acceptance" of check. (Sinclair Refining Co. vs. Moultrie Banking Co.,
165 S. E., 860 [1932].)
The great weight of authority is to the effect that the payment of a check upon a
forged or unauthorized indorsement and the stamping of it "paid" does not constitute
an acceptance. (Dakota Radio Apparatus Co. vs. First Nat. Bank of Rapid City, 244
N. W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not acceptance. (South Boston
Trust Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N. E., 816; Blocker, Shepard
Co. vs. Granite Trust Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637
[1908]), the language of the decision was as follows:
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO32
. . . The plaintiffs say that this acceptance was made by the very
unauthorized payments of which they complain. This suggestion does not
seem forceful to us. It is the contention which was made before the
Supreme Court of the United States in First National Bank vs. Whitman (94
U. S., 343), and repudiated by that court. The language of the opinion in
that case is so apt in the present case that we quote it:
"It is further contended that such an acceptance of a check as creates a
privity between the payee and the bank is established by the payment of the
amount of this check in the manner described. This argument is based upon
the erroneous assumption that the bank has paid this check. If this were true,
it would have discharged all of its duty, and there would be an end to the
claim against it. The bank supposed that it had paid the check, but this was
an error. The money it paid was upon a pretended and not a real
indorsement of the name of the payee. . . . We cannot recognize the
argument that payment of the amount of the check or sight draft under such
circumstances amounts to an acceptance creating a privity of contract with
the real owner.
"It is difficult to construe a payment as an acceptance under any
circumstances. . . . A banker or individual may be ready to make actual
payment of a check or draft when presented, while unwilling to make a
promise to pay at a future time. Many, on the other hand, are more ready to
promise to pay than to meet the promise when required. The difference
between the transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):
It is the rule that payment of a check on unauthorized or forged indorsement
does not operate as an acceptance of the check so as to authorize an action
by the real owner to recover its amount from the drawee bank. (Michie on
Banks and Banking, vol. 5, sec. 278, p. 521.) A full list of the authorities
supporting the rule will be found in a footnote to the foregoing citation.
(See also, Federal Land Bank vs. Collins, 156 Miss., 893; 127 So., 570; 69
A. L. R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074),
this question was discussed at considerable length. The court said:
In the light of the first of these statutes, counsel for appellant is forced to stand upon
the narrow ledge that the payment of the check by the two banks will constitute an
acceptance. The drawee bank simply marked it "paid" and did not write anything else
except the date. The bank first paying the check, the Commercial National Bank and
Trust Company, simply wrote its name as indorser and passed the check on to the

drawee bank; does this constitute an acceptance? The precise question has not been
presented to this court for decision. Without reference to authorities in other
jurisdictions it would appear that the drawee bank had never written its name across
the paper and therefore, under the strict terms of the statute, could not be bound as an
acceptor; in the second place, it does not appear to us to be illogical and unsound to
say that the payment of a check by the drawee, and the stamping of it "paid", is
equivalent to the same thing as the acceptance of a check; however, there is a variety
of opinions in the various jurisdictions on this question. Counsel correctly states that
the theory upon which the numerous courts hold that the payment of a check creates
privity between the holder of the check and the drawee bank is tantamount to a pro
tanto assignment of that part of the funds. It is most easily understood how the
payment of the check, when not authorized to be done by the drawee bank, might
under such circumstances create liability on the part of the drawee to the drawer.
Counsel cites the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919; 7 L. R. A.,
93; 17 Am. St. Rep., 900), wherein Judge Lurton held that the acceptance of a check
was necessary in order to give the holder thereof a right of action thereon against the
bank, and further held in a case similar to this, so far as this question is concerned,
that the acceptance of a check so as to give a right of action to the payee is inferred
from the retention of the check by the bank and its subsequent charge of the amount
to the drawer, although it was presented by, and payment made, an unauthorized
person. Judge Lurton cited the case of National Bank of the Republic vs. Millard (10
Wall., 152; 19 L. ed., 897), wherein the Supreme Court of the United States, not
having such a case before it, threw out the suggestion that, if it was shown that a
bank had charged the check on its books against the drawer and made settlement
with the drawee that the holder could recover on account of money had and received,
invoking the rule of justice and fairness, it might be said there was an implied
promise to the holder to pay it on demand. (See National Bank of the
Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court
then argued that it would be inequitable and unconscionable for the owner and payee
of the check to be limited to an action against an insolvent drawer and might thereby
lose the debt. They recognized the legal principle that there is no privity between the
drawer bank and the holder, or payee, of the check, and proceeded to hold that no
particular kind of writing was necessary to constitute an acceptance and that it
became a question of fact, and the bank became liable when it stamped it "paid" and
charged it to the account of the drawer, and cites, in support of its opinion, Seventh
National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751); Saylor vs. Bushong (100
Pa., 23; 45 Am. Rep., 353); and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the Negotiable
Instruments Law by the State of Tennessee. However, in this case Judge
Snodgrass points out that the Millard case, supra, was dicta. The Dodge
case, from the Ohio court, held exactly as the Tennessee court, but
subsequently in the case of Elyria Bank vs. Walker Bin Co. (92 Ohio St.,
406; 111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the
court held to the contrary, called attention to the fact that the Dodge case
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO33
was no longer the law, and proceeded to announce that, whatever might
have been the law before the passage of the Negotiable Instrument Act in
that state, it was no longer the law; that the rule announced in the Dodge
case had been "discarded." The court, in the latter case, expressed its doubts
that the courts of Tennessee and Pennsylvania would adhere to the rule
announced in the Pickle case, quoted supra, in the face of the Negotiable
Instrument Law. Subsequent to the Millard case, the Supreme Court of the
United States, in the case of First National Bank of
Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where the
bank, without any knowledge that the indorsement of the payee was
unauthorized, paid the check, and it was contended that by the payment the
privity of contract existing between the drawer and drawee was imparted to
the payee, said:
"It is further contended that such an acceptance of the check as creates a
privity between the payee and the bank is established by the payment of the
amount of this check in the manner described. This argument is based upon
the erroneous assumption that the bank has paid this check. If this were true,
it would have discharged all of its duty, and there would be an end of the
claim against it. The bank supposed that it had paid the check; but this was
an error. The money it paid was upon a pretended and not a real
indorsement of the name of the payee. The real indorsement of the payee
was as necessary to a valid payment as the real signature of the drawer; and
in law the check remains unpaid. Its pretended payment did not diminish the
funds of the drawer in the bank, or put money in the pocket of the person
entitled to the payment. The state of the account was the same after the
pretended payment as it was before.
"We cannot recognize the argument that a payment of the amount of a check
or sight draft under such circumstances amounts to an acceptance, creating
a privity of contract with the real owner. It is difficult to construe a payment
as an acceptance under any circumstances. The two things are essentially
different. One is a promise to perform an act, the other an actual
performance. A banker or an individual may be ready to make actual
payment of a check or draft when presented, while unwilling to make a
promise to pay at a future time. Many, on the other hand, are more ready to
promise to pay than to meet the promise when required. The difference
between the transactions is essential and inherent."
Counsel for the appellant cite other cases holding that the stamping of the
check "paid" and the charging of the amount thereof to the drawer
constituted an acceptance, but we are of opinion that none of these cases
cited hold that it is in compliance with the Negotiable Instruments Act;
paying the check and stamping same is not the equivalent of accepting the
check in writing signed by the drawee. The cases holding that payment as

indicated above constituted acceptance were rendered prior to the adoption
of the Negotiable Instruments Act in the particular state, and these decisions
are divided into two classes: the one holding that the check delivered by the
drawer to the holder and presented to the bank or drawee constitutes an
assignment pro tanto; the other holding that the payment of the check and
the charging of same to the drawee although paid to an unauthorized person
creates privity of contract between the holder and the drawee bank.
We have already seen that our own court has repudiated the assignment pro
tanto theory, and since the adoption of the Negotiable Instrument Act by
this state we are compelled to say that payment of a check is not equivalent
to accepting a check in writing and signing the name of the acceptor
thereon. Payment of the check and the charging of same to the drawer does
not constitute an acceptance. Payment of the check is the end of the voyage;
acceptance of the check is to fuel the vessel and strengthen it for continued
operation on the commercial sea. What we have said applies to the holder
and not to the drawer of the check. On this question we conclude that the
general rule is that an action cannot be maintained by a payee of the check
against the bank on which is draw unless the check has been certified or
accepted by the bank in compliance with the statute, even though at the time
the check is that an action cannot be maintained by a payee of the drawer of
the check out of which the check is legally payable; and that the payment of
the check by the bank on which it is drawn, even though paid on the
unauthorized indorsement of the name of the holder (without notice of the
defect by the bank), does not constitute a certification thereof, neither is it
an acceptance thereof; and without acceptance or certification, as provided
by statute, there is no privity of contract between the drawee bank and the
payee, or holder of the check. Neither is there an assignment pro tanto of
the funds where the check is not drawn on a particular fund, or does not
show on its face that it is an assignment of a particular fund. The above rule
as stated seems to have been the rule in the majority of the states even
before the passage of the uniform Negotiable Instruments Act in the several
states.
The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or.,
388), which appellant cites in its brief (pp. 12, 13 ) has been expressly overruled by
the Supreme Court of Massachusetts in South Boston Trust Co. vs. Levin (143 N. E.,
816, 817), in the following language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac.,
293, 296, at page 396), it was said: "The payment of a bill or check by the
drawee amounts to more than an acceptance. The rule, holding that such a
payment has all the efficacy of an acceptance, is founded upon the principle
that the greater includes the less." We are unable to agree with this
statement as there is no similarity between acceptance and payment;
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO34
payment discharges the instrument, and no one else is expected to advance
anything on the faith of it; acceptance, contemplates further circulation,
induced by the fact of acceptance. The rule that the acceptor made certain
admissions which will inure to the benefit of subsequent holders, has no
applicability to payment of the instrument where subsequent holders can
never exist.
II. The old doctrine that a bank was bound to know its correspondent's signature and
that a drawee could not recover money paid upon a forgery of the drawer's name,
because it was said, the drawee was negligent not to know the forgery and it must
bear the consequence of its negligence, is fast fading into the misty past, where it
belongs. It was founded in misconception of the fundamental principles of law and
common sense. (2 Morse, Banks and Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under no
circumstances (except, of course, where the purchaser of the bill has participated in
the fraud upon the drawee) would the drawee be allowed to recover bank money paid
under a mistake of fact upon a bill of exchange to which the name of the drawer had
been forged. This doctrine has been freely criticized by the eminent authorities, as a
rule too favorable to the holder, not the most fair, nor best calculated to effectuate
justice between the drawee and the drawer. (5 R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the leading case
of Price vs. Neal (3 Burr., 1354), elicited the following comment from Justice
Holmes, then Chief Justice of the Supreme Court of Massachusetts, in the case of
Dedham National Bank vs. Everett National Bank (177 Mass., 392). "Probably the
rule was adopted from an impression of convenience rather than for any more
academic reason; or perhaps we may say that Lord Mansfield took the case out of the
doctrine as to payments under a mistake of fact by the assumption that a holder who
simply presents negotiable paper for payment makes no representation as to the
signature, and that the drawee pays at his peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of the
United States Supreme adopted in the case of Bank of United States vs. Georgia (10
Wheat., 333), that in B. B. Ford & Co. vs. People's Bank of Orangeburg (74 S. C.,
180), it was held that "an unrestricted indorsement of a draft and presentation to the
drawee is a representation that the signature of the drawer is genuine", and in Lisbon
First National Bank vs. Wyndmere Bank (15 N. D., 299), it was also held that "the
drawee of a forged check who has paid the same without detecting the forgery, may
upon discovery of the forgery, recover the money paid from the party who received
the money, even though the latter was a good faith holder, provided the latter has not
been misled or prejudiced by the drawee's failure to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:

In all the cases which hold the drawee absolutely estoppel by acceptance or payment
from denying genuineness of the drawer's name, the loss is thrown upon him on the
ground of negligence on his part in accepting or paying, until he has ascertained the
bill to be genuine. But the holder has preceded him in negligence, by himself not
ascertaining the true character of the paper before he received it, or presented it for
acceptance or payment. And although, as a general rule, the drawee is more likely to
know the drawer's handwriting than a stranger is, if he is in fact deceived as to its
genuineness, we do not perceive that he should suffer more deeply by mistake than a
stranger, who, without knowing the handwriting, has taken the paper without
previously ascertaining its genuineness. And the mistake of the drawee should
always be allowed to be corrected, unless the holder, acting upon faith and
confidence induced by his honoring the draft, would be placed in a worse position by
according such privilege to him. This view has been applied in a well considered
case, and is intimidated in another; and is forcibly presented by Mr. Chitty, who says
it is going a great way to charge the acceptor with knowledge of his correspondent's
handwriting, "unless some bona fide holder has purchased the paper on the faith of
such an act." Negligence in making payment under a mistake of fact is not now
deemed a bar to recovery of it, and we do not see why any exception should be made
to the principle, which would apply as well as to release an obligation not
consummated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.)
III. But now the rule is perfectly well settled that in determining the relative rights of
a drawee who, under a mistake of fact, has paid, and a holder who has received such
payment, upon a check to which the name of the drawer has been forged, it is only
fair to consider the question of diligence or negligence of the parties in respect
thereto. (Woods and Malone vs. Colony Bank [1902], 56 L. R. A., 929, 932.) The
responsibility of the drawee who pays a forged check, for the genuineness of the
drawer's signature, is absolute only in favor of one who has not, by his own fault or
negligence, contributed to the success of the fraud or to mislead the drawee.
(National Bank of America vs. Bangs, 106 Mass., 441; 8 Am. Rep., 349; Woods and
Malone vs. Colony Bank, supra; De Feriet vs. Bank of America, 23 La. Ann., 310; B.
B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 10 L. R. A. [N. S.],
63.) If it appears that the one to whom payment was made was not an innocent
sufferer, but was guilty of negligence in not doing something, which plain duty
demanded, and which, if it had been done, would have avoided entailing loss on any
one, he is not entitled to retain the moneys paid through a mistake on the part of the
drawee bank. (First Nat. Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass.,
280; 24 N. E., 44; 21 A. S. R., 450; First Nat. Bank of Orleans vs. State Bank of
Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294; American Exp. Co. vs. State Nat.
Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford &
Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R., 986;
7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn.
299; 12 S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of
Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In other
words, to entitle the holder of a forged check to retain the money obtained he must
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO35
be able to show that the whole responsibility of determining the validity of the
signature was upon the drawee, and that the negligence of such drawee was not
lessened by any failure of any precaution which, from his implied assertion in
presenting the check as a sufficient voucher, the drawee had the right to believe he
had taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628;
Rouvant vs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429; First National Bank of
Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs. People's
Bank of Orangeburg, supra.) The recovery is permitted in such case, because,
although the drawee was constructively negligent in failing to detect the forgery, yet
if the purchaser had performed his duty, the forgery would in all probability have
been detected and the fraud defeated. (First National Bank of Lisbon vs. Bank of
Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.) In the absence of actual fault on
the part of the drawee, his constructive fault in not knowing the signature of the
drawer and detecting the forgery will not preclude his recovery from one who took
the check under circumstances of suspicion without proper precaution, or whose
conduct has been such as to mislead the drawee or induce him to pay the check
without the usual scrutiny or other precautions against mistake or fraud. (National
Bank of America vs. Bangs, supra; First National Bank vs. Indiana National Bank,
30 N. E., 808-810; Woods and Malone vs. Colony Bank, supra; First National Bank
of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280.) Where a loss, which must
be borne by one of two parties alike innocent of forgery, can be traced to the neglect
or fault of either, it is unreasonable that it would be borne by him, even if innocent of
any intentional fraud, through whose means it has succeeded. (Gloucester
Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First National
Bank of Salem, supra; B. B. Ford & Co. vs. People's Bank of Orangeburg, supra.)
Again if the indorser is guilty of negligence in receiving and paying the check or
draft, or has reason to believe that the instrument is not genuine, but fails to inform
the drawee of his suspicions the indorser according to the reasoning of some courts
will be held liable to the drawee upon his implied warranty that the instrument is
genuine. (B. B. Ford & Co. vs. People's Bank of Orangeburg, supra; Newberry Sav.
Bank vs. Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the
courts now agree that one who purchases a check or draft is bound to satisfy himself
that the paper is genuine; and that by indorsing it or presenting it for payment or
putting it into circulation before presentation he impliedly asserts that he has
performed his duty, the drawee, who has, without actual negligence on his part, paid
the forged demand, may recover the money paid from such negligent purchaser.
(Lisbon First National Bank vs. Wyndmere Bank, supra.) Of course, the drawee
must, in order to recover back the holder, show that he himself was free from fault.
(See also 5 R. C. L., pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account of its negligence only, the
loss has occurred, the drawee may recover the amount it paid on the forged draft or
check. (Security Commercial & Sav. Bank vs. Southern Trust & C. Bank [1925], 74
Cal. App., 734; 241 Pac., 945.)

But we are aware of no case in which the principle that the drawee is bound to know
the signature of the drawer of a bill or check which he undertakes to pay has been
held to be decisive in favor of a payee of a forged bill or check to which he has
himself given credit by his indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann.,
458; Canal Bank vs. Bank of Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat.
Bank vs. Indiana National Bank; 30 N. E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R.,
479; 197 Pac., 547), the court declared: "A holder cannot profit by a mistake which
his negligent disregard of duty has contributed to induce the drawee to commit. . . .
The holder must refund, if by his negligence he has contributed to the consummation
of the mistake on the part of the drawee by misleading him. . . . If the only fault
attributable to the drawee is the constructive fault which the law raises from the bald
fact that he has failed to detect the forgery, and if he is not chargeable with actual
fault in addition to such constructive fault, then he is not precluded from recovery
from a holder whose conduct has been such as to mislead the drawee or induce him
to pay the check or bill of exchange without the usual security against fraud. The
holder must refund to a drawee who is not guilty of actual fault if the holder was
negligent in not making due inquiry concerning the validity of the check before he
took it, and if the drawee can be said to have been excused from making inquiry
before taking the check because of having had a right to, presume that the holder had
made such inquiry."
The rule that one who first negotiates forged paper without taking some precaution to
learn whether or not it is genuine should not be allowed to retain the proceeds of the
draft or check from the drawee, whose sole fault was that he did not discover the
forgery before he paid the draft or check, has been followed by the later cases.
(Security Commercial & Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal.
App., 734; 241 Pac., 945; Hutcheson Hardware Co. vs. Planters State Bank [1921],
26 Ga. App., 321; 105 S. E., 854; [Annotation at 71 A. L. R., 337].)
Where a bank, without inquiry or identification of the person presenting a forged
check, purchases it, indorses it, generally, and presents it to the drawee bank, which
pays it, the latter may recover if its only negligence was its mistake in having failed
to detect the forgery, since its mistake, did not mislead the purchaser or bring about a
change in position. (Security Commercial & Savings Bank vs. Southern Trust & C.
Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
Also, a drawee could recover from another bank the portion of the proceeds of a
forged check cashed by the latter and deposited by the forger in the second bank and
never withdrawn, upon the discovery of the forgery three months later, after the
drawee had paid the check and returned the voucher to the purported drawer, where
the purchasing bank was negligent in taking the check, and was not injured by the
drawee's negligence in discovering and reporting the forgery as to the amount left on
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO36
deposit, since it was not a purchaser for value. (First State Bank & T. Co. vs. First
Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the amount paid
on the check, after discovery of the forgery, from another bank, which put the check
into circulation by cashing it for the one who had forged the signature of both drawer
and payee without making any inquiry as to who he was although he was a stranger,
after which the check reached, and was paid by, the drawee, after going through the
hands of several intermediate indorsees. (71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the
following statement was made:
We are clearly of opinion, therefore that the warranty of genuineness, arising upon
the act of the Brule National Bank in putting the check in circulation, was not
discharged by payment of the check by the drawee (First National Bank), nor was the
Brule National Bank deceived or misled to its prejudice by such payment. The Brule
National Bank by its indorsement and delivery warranted its own identification of
Kost and the genuineness of his signature. The indorsement of the check by the Brule
National Bank was such as to assign the title to the check to its assignee, the
Whitbeck National Bank, and the amount was credited to the indorser. The check
bore no indication that it was deposited for collection, and was not in any manner
restricted so as to constitute the indorsee the agent of the indorser, nor did it prohibit
farther negotiation of the instrument, nor did it appear to be in trust for, or to the use
of, any other person, nor was it conditional. Certainly the Pukwana Bank was
justified in relying upon the warrant of genuineness, which implied the full
identification of Kost, and his signature by the defendant bank. This view of the
statute is in accord with the decisions of many courts. (First National Bank vs. State
Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First National Bank vs. First
National Bank, 151 Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44; People's
Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S.
W., 716.)"
The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L.
R., 331), decided in 1929. We have carefully examined this decision and we do not
feel justified in accepting its conclusions. It is but a restatement of the long
abandoned rule of Neal vs. Price, and it predicated on the wrong premise that the
payment includes acceptance, and that a bank drawee paying a check drawn on it
becomes ipso facto an acceptor within the meaning of section 62 of the Negotiable
Instruments Act. Moreover in a more recent decision, that of Louisa National
Bank vs. Kentucky National Bank (39 S. W. [2nd] 497, 501) decided in 1931, the
Court of Appeals of Kentucky held the following:

The appellee, on presentation for payment of $600 check, failed to discover
it was a forgery. It was bound to know the signature of its customer,
Armstrong, and it was derelict in failing to give his signature to the check
sufficient attention and examination to enable it to discover instantly the
forgery. The appellant, when the check was presented to it by Banfield,
failed to make an inquiry of or about him and did not cause or have him to
be identified. Its act in so paying to him the check is a degree of negligence
on its part equivalent to positive negligence. It indorsed the check, and,
while such indorsement may not be regarded within the meaning of the
Negotiable Instrument Law as amounting to a warranty to appellant of that
which it indorsed, it at least substantially served as a representation to it that
it had exercised ordinary care and had complied with the rules and customs
of prudent banking. Its indorsement was calculated, if it did not in fact do
so, to lull the drawee bank into indifference as to the drawer's signature to it
when paying the check and charging it to its customer's account and
remitting its proceeds to appellant's correspondent.
If in such a transaction between the drawee and the holder of a check both
are without fault, no recovery may be had of the money so paid. (Deposit
Bank of Georgetown vs. Fayette National Bank, supra, and cases cited.) Or
the rule may be more accurately stated that, where the drawee pays the
money, he cannot recover it back from a holder in good faith, for value and
without fault.
If, on the other hand, the holder acts in bad faith, or is guilty of culpable
negligence, a recovery may be had by the drawee of such holder. The
negligence of the Bank of Louisa in failing to inquire of and about Banfield,
and to cause or to have him identified before it parted with its money on the
forged check, may be regarded as the primary and proximate cause of the
loss. Its negligence in this respect reached in its effect the appellee, and
induced incaution on its part. In comparison of the degrees of the
negligence of the two, it is apparent that of the appellant excels in
culpability. Both appellant and appellee inadvertently made a mistake,
doubtless due to a hurry incident to business. The first and most grievous
one was made by the appellant , amounting to its disregard of the duty, it
owed itself as well as the duty it owed to the appellee, and it cannot on
account thereof retain as against the appellee the money which it so
received. It cannot shift the loss to the appellee, for such disregard of its
duty inevitably contributed to induce the appellee to omit its duty critically
to examine the signature of Armstrong, even if it did not know it instantly at
the time it paid the check. (Farmers' Bank of Augusta vs. Farmer's Bank of
Maysville, supra, and cases cited.)
IV. The question now is to determine whether the appellant's negligence in
purchasing the checks in question is such as to give the appellee the right to recover
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO37
upon said checks, and on the other hand, whether the drawee bank was not itself
negligent, except for its constructive fault in not knowing the signature of the drawer
and detecting the forgery.
We quote with approval the following conclusions of the court a quo:
Check Exhibit A bears number 637023-D and is dated April 6, 1933,
whereas check Exhibit A-1 bears number 637020-D and is dated April 7,
1933. Therefore, the latter check, which is prior in number to the former
check, is however, issued on a later date. This circumstance must have
aroused at least the curiosity of the Motor Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks from unknown
persons. And not only this; check Exhibit A is indorsed by a subagent of the
agent of the payee, International Auto Repair Shop. The Motor Service Co.,
Inc., made no inquiry whatsoever as to the extent of the authority of these
unknown persons. Our Supreme Court said once that "any person taking
checks made payable to a corporation, which can act only by agents, does
so at his peril, and must abide by the consequences if the agent who
indorses the same is without authority" (Insular Drug Co. vs. National Bank,
58, Phil., 684).
xxx xxx xxx
Check Exhibit A-1, aside from having been indorsed by a supposed agent of
the international Auto Repair Shop is crossed generally. The existence of
two parallel lines transversally drawn on the face of this check was a
warning that the check could only be collected through a banking institution
(Jacobs, Law of Bills of Exchange, etc., pp., 179, 180; Bills of Exchange
Act of England, secs. 76 and 79). Yet the Motor Service Co., Inc., accepted
the check in payment for merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral part
thereof, the Motor Service Co., Inc., stated the following:
"The Pangasinan Transportation Co. is a good customer of this firm and we
received checks from them every month in payment of their account. The
two checks in question seem to be exactly similar to the checks which we
received from the Pangasinan Transportation Co. every month."
If the failure of the Motor Service Co., Inc., to detect the forgery of the
drawer's signature in the two checks, may be considered as an omission in
good faith because of the similarity stated in the letter, then the same
consideration applies to the Philippine National Bank, for the drawer is a

customer of both the Motor Service Co., Inc., and the Philippine National
Bank. (B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do not make it one between two
equally innocent persons, the drawee bank and the holder, and that they are governed
by the authorities already cited and also the following:
The point in issue has sometimes been said to be that of negligence. The
drawee who has paid upon the forged signature is held to bear the loss,
because he has been negligent in failing to recognize that the handwriting is
not that of his customer. But it follows obviously that if the payee, holder, or
presenter of the forged paper has himself been in default, if he has himself
been guilty of a negligence prior to that of the banker, or if by any act of his
own he has at all contributed to induce the banker's negligence, then he may
lose his right to cast the loss upon the banker. The courts have shown a
steadily increasing disposition to extend the application of this rule over the
new conditions of fact which from time to time arise, until it can now rarely
happen that the holder, payee, or presenter can escape the imputation of
having been in some degree contributory towards the mistake. Without any
actual change in the abstract doctrines of the law, which are clear, just, and
simple enough, the gradual but sure tendency and effect of the decisions
have been to put as heavy a burden of responsibility upon the payee as upon
the drawee, contrary to the original custom. . . . (2 Morse on Banks and
Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the
following statement appears in the concurring opinion:
What, then, should be the rule? The drawee asks to recover for money had
and received. If his claim did not rest upon a transaction relating to a
negotiable instrument plaintiff could recover as for money paid under
mistake, unless defendant could show some equitable reason, such as
changed condition since, and relying upon, payment by plaintiff. In the
Wyndmere Case, the North Dakota court holds that this rule giving right to
recover money paid under mistake should extend to negotiable paper, and it
rejects in its entirety the theory of estoppel and puts a case of this kind on
exactly the same basis as the ordinary case of payment under mistake. But
the great weight of authority, and that based on the better reasoning, holds
that the exigencies of business demand a different rule in relation to
negotiable paper. What is that rule? Is it an absolute estoppel against the
drawee in favor of a holder, no matter how negligent such holder has been?
It surely is not. The correct rule recognizes the fact that, in case of payment
without a prior acceptance or certification, the holder takes the paper upon
the of the prior indorsers and the credit of the drawer, and not upon the
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO38
credit of the drawee, in making payment, has a right to rely upon the
assumption that the payee used due diligence, especially where such payee
negotiated the bill or check to a holder, thus representing that it had so fully
satisfied itself as to the identity and signature of the maker that it was
willing to warrant as relates thereto to all subsequent holders. (Uniform Act,
secs. 65 and 66.) Such correct rule denies the drawee the right to recover
when the holder was without fault or when there has been some change of
position calling for equitable relief. When a holder of a bill of exchange
uses all due care in the taking of bill or check and the drawee thereafter
pays same, the transaction is absolutely closed modern business could
not be done on any other basis. While the correct rule promotes the fluidity
of two recognized mediums of exchange, those mediums by which the great
bulk of business is carried on, checks and drafts, upon the other hand it
encourages and demands prudent business methods upon the part of those
receiving such mediums of exchange. (Pennington County Bank vs. First
State Bank, 110 Minn., 263; 26 L. R. A. [N. S.], 849; 136 Am. St. Rep., 496;
125 N. W., 119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St.
Rep., 294; 36 N. W., 289; Bank of Williamson, vs. McDowell County Bank,
66 W. Va., 545; 36 L. R. A. [N. S.], 605; 66 S. E., 761; Germania
Bank vs. Boutell, 60 Minn., 189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62
N. W., 327; American Express Co. vs. State National Bank, 27 Okla., 824;
33 L. R. A. [N. S.], 188; 113 Pac., 711; Farmers' National Bank vs. Farmers'
& Traders Bank, L. R. A., 1915A, 77, and note (159 Ky., 141; 166 S. W.,
986].)
That the defendant bank did not use reasonable business prudence is
clear. It took this check from a stranger without other identification than that
given by another stranger; its cashier witnessed the mark of such stranger
thus vouching for the identity and signature of the maker; and it indorsed
the check as "Paid," thus further throwing plaintiff off guard. Defendant
could not but have known, when negotiating such check and putting it into
the channel through which it would finally be presented to plaintiff for
payment, that plaintiff, if it paid such check, as defendant was asking it to
do, would have to rely solely upon the apparent faith and credit that
defendant had placed in the drawer. From the very circumstances of this
case plaintiff had to act on the facts as presented to it by defendant, upon
such facts only.
But appellant argues that it so changed its position, after payment by
plaintiff, that in "equity and good conscience" plaintiff should not recover
it says it did not pay over any money to the forger until after plaintiff had
paid the check. There would be merit in such contention if defendant had
indorsed the check for "collection," thus advising plaintiff that it was
relying on plaintiff and not on the drawer. It stands in court where it would
have been if it had done as it represented.

In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:
. . . If the holder has been negligent in paying the forged paper, or has by his
conduct, however innocent, misled or deceived the drawee to his damage, it
would be unjust for him to be allowed to shield himself from the results of
his own carelessness by asserting that the drawee was bound in law to know
his drawer's signature.
V. Section 23 of the Negotiable Instruments Act provides that "when a signature is
forged or made without the authority of the person whose signature it purports to be,
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.
It not appearing that the appellee bank did not warrant to the appellant the
genuineness of the checks in question, by its acceptance thereof, nor did it perform
any act which would have induced the appellant to believe in the genuineness of said
instruments before appellant purchased them for value, it can not be said that the
appellee is precluded from setting up the forgery and, therefore, the appellant is not
entitled to retain the amount of the forged check paid to it by the appellee.
VI. It has been held by many courts that a drawee of a check, who is deceived by a
forgery of the drawer's signature may recover the payment back, unless his mistake
has placed an innocent holder of the paper in a worse position than he would have
been in if the discovery of the forgery had been made on presentation. (5 R. C. L., p.
559; 2 Daniel on Negotiable Instruments, 1538.) Forgeries often deceived the eye of
the most cautious experts; and when a bank has been deceived, it is a harsh rule
which compels it to suffer although no one has suffered by its being deceived. (17 A.
L. R. 891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed recovery, the appellant's
position would not become worse than if the drawee had refused the payment of
these checks upon their presentation. The appellant has lost nothing by anything
which the drawee has done. It had in its hands some forged worthless papers. It did
not purchase or acquire these papers because of any representation made to it by the
drawee. It purchased them from unknown persons and under suspicious
circumstances. It had no valid title to them, because the persons from whom it
received them did not have such title. The appellant could not have compelled the
drawee to pay them, and the drawee could have refused payment had it been able to
detect the forgery. By making a refund, the appellant would only returning what it
had received without any title or right. And when appellant pays back the money it
had received it will be entitled to have restored to it the forged papers it parted with.
There is no good reason why the accidental payment made by the appellant should
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO39
inure to the benefit of the appellant. If there were injury to the appellant said injury
was caused not by the failure of the appellee to detect the forgery but by the very
negligence of the appellant in purchasing commercial papers from unknown persons
without making inquiry as to their genuineness.
In the light of the foregoing discussion, we conclude:
1. That where a check is accepted or certified by the bank on which it is
drawn, the bank is estopped to deny the genuineness of the drawer's
signature and his capacity to issue the instrument;
2. That if a drawee bank pays a forged check which was previously
accepted or certified by the said bank it cannot recover from a holder who
did not participate in the forgery and did not have actual notice thereof;
3. That the payment of a check does not include or imply its acceptance in
the sense that this word is used in section 62 of the Negotiable Instruments
Law;
4. That in the case of the payment of a forged check, even without former
acceptance, the drawee can not recover from a holder in due course not
chargeable with any act of negligence or disregard of duty;
5. That to entitle the holder of a forged check to retain the money obtained
thereon, there must be a showing that the duty to ascertain the genuineness
of the signature rested entirely upon the drawee, and that the constructive
negligence of such drawee in failing to detect the forgery was not affected
by any disregard of duty on the part of the holder, or by failure of any
precaution which, from his implied assertion in presenting the check as a
sufficient voucher, the drawee had the right to believe he had taken;
6. That in the absence of actual fault on the part of the drawee, his
constructive fault in not knowing the signature of the drawer and detecting
the forgery will nor preclude his recovery from one who took the check
under circumstances of suspicion and without proper precaution, or whose
conduct has been such as to mislead the drawee or induce him to pay the
check without the usual scrutiny or other precautions against mistake or
fraud;
7. That on who purchases a check or draft is bound to satisfy himself that
the paper is genuine, and that by indorsing it or presenting it for payment or
putting it into circulation before presentation he impliedly asserts that he
performed his duty;
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO40

8. That while the foregoing rule, chosen from a welter of decisions on the
issue as the correct one, will not hinder the circulation of two recognized
mediums of exchange by which the great bulk of business is carried on,
namely, drafts and checks, on the other hand, it will encourage and demand
prudent business methods on the part of those receiving such mediums of
exchange;

9. That it being a matter of record in the present case, that the appellee bank
in no more chargeable with the knowledge of the drawer's signature than the
appellant is, as the drawer was as much the customer of the appellant as of
the appellee, the presumption that a drawee bank is bound to know more
than any indorser the signature of its depositor does not hold;

10. That according to the undisputed facts of the case the appellant in
purchasing the papers in question from unknown persons without making
any inquiry as to the identity and authority of the said persons negotiating
and indorsing them, acted negligently and contributed to the appellee's
constructive negligence in failing to detect the forgery;

11. That under the circumstances of the case, if the appellee bank is allowed
to recover, there will be no change of position as to the injury or prejudice
of the appellant.

Wherefore, the assignments of error are overruled, and the judgment appealed from
must be, as it is hereby, affirmed, with costs against the appellant. So ordered.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-26001 October 29, 1968


PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND
INDUSTRIAL BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.
San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J.:
The Philippine National Bank hereinafter referred to as the PNB seeks the
review by certiorari of a decision of the Court of Appeals, which affirmed that of the
Court of First Instance of Manila, dismissing plaintiff's complaint against the
Philippine Commercial and Industrial Bank hereinafter referred to as the PCIB
for the recovery of P57,415.00.
A partial stipulation of facts entered into by the parties and the decision of the Court
of Appeals show that, on about January 15, 1962, one Augusto Lim deposited in his
current account with the PCIB branch at Padre Faura, Manila, GSIS Check No.
645915- B, in the sum of P57,415.00, drawn against the PNB; that, following an
established banking practice in the Philippines, the check was, on the same date,
forwarded, for clearing, through the Central Bank, to the PNB, which did not return
said check the next day, or at any other time, but retained it and paid its amount to
the PCIB, as well as debited it against the account of the GSIS in the PNB; that,
subsequently, or on January 31, 1962, upon demand from the GSIS, said sum of
P57,415.00 was re-credited to the latter's account, for the reason that the signatures
of its officers on the check were forged; and that, thereupon, or on February 2, 1962,
the PNB demanded from the PCIB the refund of said sum, which the PCIB refused
to do. Hence, the present action against the PCIB, which was dismissed by the Court
of First Instance of Manila, whose decision was, in turn, affirmed by the Court of
Appeals.
It is not disputed that the signatures of the General Manager and the Auditor of the
GSIS on the check, as drawer thereof, are forged; that the person named in the check
as its payee was one Mariano D. Pulido, who purportedly indorsed it to one Manuel
Go; that the check purports to have been indorsed by Manuel Go to Augusto Lim,
who, in turn, deposited it with the PCIB, on January 15, 1962; that, thereupon, the
PCIB stamped the following on the back of the check: "All prior indorsements
and/or Lack of Endorsement Guaranteed, Philippine Commercial and Industrial
Bank," Padre Faura Branch, Manila; that, on the same date, the PCIB sent the check
to the PNB, for clearance, through the Central Bank; and that, over two (2) months
before, or on November 13, 1961, the GSIS had notified the PNB, which
acknowledged receipt of the notice, that said check had been lost, and, accordingly,
requested that its payment be stopped.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO41
In its brief, the PNB maintains that the lower court erred: (1) in not finding the PCIB
guilty of negligence; (2) in not finding that the indorsements at the back of the check
are forged; (3) in not finding the PCIB liable to the PNB by virtue of the former's
warranty on the back of the check; (4) in not holding that "clearing" is not
"acceptance", in contemplation of the Negotiable Instruments law; (5) in not finding
that, since the check had not been accepted by the PNB, the latter is entitled to
reimbursement therefor; and (6) in denying the PNB's right to recover from the
PCIB.
The first assignment of error will be discussed later, together with the last,with which
it is interrelated.
As regards the second assignment of error, the PNB argues that, since the signatures
of the drawer are forged, so must the signatures of the supposed indorsers be; but this
conclusion does not necessarily follow from said premise. Besides, there is
absolutely no evidence, and the PNB has not even tried to prove that the
aforementioned indorsements are spurious. Again, the PNB refunded the amount of
the check to the GSIS, on account of the forgery in the signatures, not of the
indorsers or supposed indorsers, but of the officers of the GSIS as drawer of the
instrument. In other words, the question whether or not the indorsements have been
falsified is immaterial to the PNB's liability as a drawee, or to its right to recover
from the PCIB,1 for, as against the drawee, the indorsement of an intermediate bank
does not guarantee the signature of the drawer,2 since the forgery of the indorsement
is not the cause of the loss.3
With respect to the warranty on the back of the check, to which the third assignment
of error refers, it should be noted that the PCIB thereby guaranteed "all
prior indorsements," not the authenticity of the signatures of the officers of the GSIS
who signed on its behalf, because the GSIS is not an indorser of the check, but its
drawer.4Said warranty is irrelevant, therefore, to the PNB's alleged right to recover
from the PCIB. It could have been availed of by a subsequent indorsee5 or a holder in
due course6 subsequent to the PCIB, but, the PNB is neither.7Indeed, upon payment
by the PNB, as drawee, the check ceased to be a negotiable instrument, and became
a mere voucher or proof of payment.8
Referring to the fourth and fifth assignments of error, we must bear in mind that, in
general, "acceptance", in the sense in which this term is used in the Negotiable
Instruments Law9 is not required for checks, for the same are payable on
demand.10 Indeed, "acceptance" and "payment" are, within the purview of said Law,
essentially different things, for the former is "a promise to perform an act," whereas
the latter is the "actual performance" thereof.11 In the words of the Law,12 "the
acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer," which, in the case of checks, is the payment, on demand, of a given sum of
money. Upon the other hand, actual payment of the amount of a check implies not
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO42

only an assent to said order of the drawer and a recognition of the drawer's obligation (a) The existence of the drawer, the genuineness of his signature, and his
to pay the aforementioned sum, but, also, a compliance with such obligation. capacity and authority to draw the instrument; and

Let us now consider the first and the last assignments of error. The PNB maintains (b) The existence of the payee and his then capacity to indorse.
that the lower court erred in not finding that the PCIB had been guilty of negligence
in not discovering that the check was forged. Assuming that there had been such The prevailing view is that the same rule applies in the case of a drawee who pays a
negligence on the part of the PCIB, it is undeniable, however, that the PNB has, also, bill without having previously accepted it.16
been negligent, with the particularity that the PNB had been guilty of a greater
degree of negligence, because it had a previous and formal notice from the GSIS that WHEREFORE, the decision appealed from is hereby affirmed, with costs against the
the check had been lost, with the request that payment thereof be stopped. Just as Philippine National Bank. It is so ordered.
important, if not more important and decisive, is the fact that the PNB's negligence
was the main or proximate cause for the corresponding loss.

In this connection, it will be recalled that the PCIB did not cash the check upon its
presentation by Augusto Lim; that the latter had merely deposited it in his current
account with the PCIB; that, on the same day, the PCIB sent it, through the Central
Bank, to the PNB, for clearing; that the PNB did not return the check to the PCIB the
next day or at any other time; that said failure to return the check to the PCIB
implied, under the current banking practice, that the PNB considered the check good
and would honor it; that, in fact, the PNB honored the check and paid its amount to
the PCIB; and that only then did the PCIB allow Augusto Lim to draw said amount
from his aforementioned current account.

Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had
found nothing wrong with the check and would honor the same, and by actually
paying its amount to the PCIB, the PNB induced the latter, not only to believe that
the check was genuine and good in every respect, but, also, to pay its amount to
Augusto Lim. In other words, the PNB was the primary or proximate cause of the
loss, and, hence, may not recover from the PCIB.13

It is a well-settled maxim of law and equity that when one of two (2) innocent
persons must suffer by the wrongful act of a third person, the loss must be borne by
the one whose negligence was the proximate cause of the loss or who put it into the
power of the third person to perpetrate the wrong. 14

Then, again, it has, likewise, been held that, where the collecting (PCIB) and the Republic of the Philippines
drawee (PNB) banks are equally at fault, the court will leave the parties where it SUPREME COURT
finds them.15 Manila

Lastly, Section 62 of Act No. 2031 provides: EN BANC

The acceptor by accepting the instrument engages that he will pay it G.R. No. L-18657 August 23, 1922
according to the tenor of his acceptance; and admits:

THE GREAT EASTERN LIFE INSURANCE CO., plaintiff-appellant,
vs.
HONGKONG & SHANGHAI BANKING CORPORATION and PHILIPPINE
NATIONAL BANK, defendants-appellees.
Camus and Delgado for appellant.
Fisher and DeWitt and A. M. Opisso for Hongkong and Shanghai Bank.
Roman J. Lacson for Philippine National Bank.
STATEMENT
The plaintiff is an insurance corporation, and the defendants are banking
corporations, and each is duly licensed to do its respective business in the Philippines
Islands.
May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and Shanghai
Banking Corporation with whom it had an account, payable to the order of Lazaro
Melicor. E. M. Maasim fraudulently obtained possession of the check, forged
Melicor's signature, as an endorser, and then personally endorsed and presented it to
the Philippine National Bank where the amount of the check was placed to his credit.
After having paid the check, and on the next day, the Philippine national Bank
endorsed the check to the Hongkong and Shanghai Banking Corporation which paid
it and charged the amount of the check to the account of the plaintiff. In the ordinary
course of business, the Hongkong Shanghai Banking Corporation rendered a bank
statement to the plaintiff showing that the amount of the check was charged to its
account, and no objection was then made to the statement. About four months after
the check was charged to the account of the plaintiff, it developed that Lazaro
Melicor, to whom the check was made payable, had never received it, and that his
signature, as an endorser, was forged by Maasim, who presented and deposited it to
his private account in the Philippine National Bank. With this knowledge , the
plaintiff promptly made a demand upon the Hongkong and Shanghai Banking
Corporation that it should be given credit for the amount of the forged check, which
the bank refused to do, and the plaintiff commenced this action to recover the P2,000
which was paid on the forged check. On the petition of the Shanghai Bank, the
Philippine National Bank was made defendant. The Shanghai Bank denies any
liability, but prays that, if a judgment should be rendered against it, in turn, it should
have like judgment against the Philippine National Bank which denies all liability to
either party.
Upon the issues being joined, a trial was had and judgment was rendered against the
plaintiff and in favor of the defendants, from which the plaintiff appeals, claiming
that the court erred in dismissing the case, notwithstanding its finding of fact, and in
not rendering a judgment in its favor, as prayed for in its complaint.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO43
JOHNS, J.:
There is no dispute about any of the findings of fact made by the trial court, and the
plaintiff relies upon them for a reversal. Among other things, the trial court says:
Who is responsible for the refund to the drawer of the amount of the check
drawn and payable to order, when its value was collected by a third person
by means of forgery of the signature of the payee? Is it the drawee or the
last indorser, who ignored the forgery at the time of making the payment, or
the forger?
To lower court found that Melicor's name was forged to the check. "So that the
person to whose order the check was issued did not receive the money, which was
collected by E. M. Maasim," and then says:
Now then, the National Bank should not be held responsible for the
payment of made to Maasim in good faith of the amount of the check,
because the indorsement of Maasim is unquestionable and his signature
perfectly genuine, and the bank was not obliged to identify the signature of
the former indorser. Neither could the Hongkong and Shanghai Banking
Corporation be held responsible in making payment in good faith to the
National Bank, because the latter is a holder in due course of the check in
question. In other words, the two defendant banks can not be held civilly
responsible for the consequences of the falsification or forgery of the
signature of Lazaro Melicor, the National Bank having had no notice of said
forgery in making payment to Maasim, nor the Hongkong bank in making
payment to National Bank. Neither bank incurred in any responsibility
arising from that crime, nor was either of the said banks by subsequent acts,
guilty of negligence or fault.
This was fundamental error.
Plaintiff's check was drawn on Shanghai Bank payable to the order of Melicor. In
other words, the plaintiff authorized and directed the Shanghai Bank to pay Melicor,
or his order, P2,000. It did not authorize or direct the bank to pay the check to any
other person than Melicor, or his order, and the testimony is undisputed that Melicor
never did part with his title or endorse the check, and never received any of its
proceeds. Neither is the plaintiff estopped or bound by the banks statement, which
was made to it by the Shanghai Bank. This is not a case where the plaintiff's own
signature was forged to one of it checks. In such a case, the plaintiff would have
known of the forgery, and it would have been its duty to have promptly notified the
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO44

bank of any forged signature, and any failure on its part would have released bank
from any liability. That is not this case. Here, the forgery was that of Melicor, who
was the payee of the check, and the legal presumption is that the bank would not
honor the check without the genuine endorsement of Melicor. In other words, when
the plaintiff received it banks statement, it had a right to assume that Melicor had
personally endorsed the check, and that, otherwise, the bank would not have paid it.

Section 23 of Act No. 2031, known as the Negotiable Instruments Law, says:

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.

That section is square in point.

The money was on deposit in the Shanghai Bank, and it had no legal right to pay it
out to anyone except the plaintiff or its order. Here, the plaintiff ordered the Shanghai
Bank to pay the P2,000 to Melicor, and the money was actually paid to Maasim and
was never paid to Melicor, and he never paid to Melicor, and he never personally
endorsed the check, or authorized any one to endorse it for him, and the alleged
endorsement was a forgery. Hence, upon the undisputed facts, it must follow that the
Shanghai Bank has no defense to this action.

It is admitted that the Philippine National Bank cashed the check upon a forged
signature, and placed the money to the credit of Maasim, who was a forger. That the
Philippine National Bank then endorsed the check and forwarded it to the Shanghai
Bank by whom it was paid. The Philippine National Bank had no license or authority
to pay the money to Maasim or anyone else upon a forge signature. It was its legal
duty to know that Melicor's endorsment was genuine before cashing the check. Its
remedy is against Maasim to whom it paid the money.

The judgment of the lower court is reversed, and one will be entered here in favor of
the plaintiff and against the Hongkong and Shanghai Banking Corporation for the Republic of the Philippines
P2,000, with interest thereon from November 8, 1920 at the rate of 6 per cent per SUPREME COURT
annum, and the costs of this action, and a corresponding judgment will be entered in Manila
favor of the Hongkong Shanghai Banking Corporation against the Philippine
National Bank for the same amount, together with the amount of its costs in this
action. So ordered. SECOND DIVISION

G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447),
petitioner, Natividad Gempesaw, appealed to this Court in a Petition for Review, on
the issue of the right of the drawer to recover from the drawee bank who pays a
check with a forged indorsement of the payee, debiting the same against the drawer's
account.
The records show that on January 23, 1985, petitioner filed a Complaint against the
private respondent Philippine Bank of Communications (respondent drawee Bank)
for recovery of the money value of eighty-two (82) checks charged against the
petitioner's account with the respondent drawee Bank on the ground that the payees'
indorsements were forgeries. The Regional Trial Court, Branch CXXVIII of
Caloocan City, which tried the case, rendered a decision on November 17, 1987
dismissing the complaint as well as the respondent drawee Bank's counterclaim. On
appeal, the Court of Appeals in a decision rendered on February 22, 1990, affirmed
the decision of the RTC on two grounds, namely (1) that the plaintiff's (petitioner
herein) gross negligence in issuing the checks was the proximate cause of the loss
and (2) assuming that the bank was also negligent, the loss must nevertheless be
borne by the party whose negligence was the proximate cause of the loss. On March
5, 1990, the petitioner filed this petition under Rule 45 of the Rules of Court setting
forth the following as the alleged errors of the respondent Court: 1
I each and every check without bothering to verify the accuracy of the checks against
THE RESPONDENT COURT OF APPEALS ERRED IN
RULING THAT THE NEGLIGENCE OF THE DRAWER IS THE
PROXIMATE CAUSE OF THE RESULTING INJURY TO THE
DRAWEE BANK, AND THE DRAWER IS PRECLUDED FROM
SETTING UP THE FORGERY OR WANT OF AUTHORITY.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO45
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN
NOT FINDING AND RULING THAT IT IS THE GROSS AND
INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS
OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF
THE PAYEES AND THE WRONG AND/OR ILLEGAL
PAYMENTS MADE TO PERSONS, OTHER THAN TO THE
INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE
DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO
PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS
DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN
NOT ORDERING THE RESPONDENT BANK TO RESTORE
OR RE-CREDIT THE CHECKING ACCOUNT OF THE
PETITIONER IN THE CALOOCAN CITY BRANCH BY THE
VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN
THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores
located at Rizal Avenue Extension and at Second Avenue, Caloocan City. Among
these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner
maintains a checking account numbered 13-00038-1 with the Caloocan City Branch
of the respondent drawee Bank. To facilitate payment of debts to her suppliers,
petitioner draws checks against her checking account with the respondent bank as
drawee. Her customary practice of issuing checks in payment of her suppliers was as
follows: the checks were prepared and filled up as to all material particulars by her
trusted bookkeeper, Alicia Galang, an employee for more than eight (8) years. After
the bookkeeper prepared the checks, the completed checks were submitted to the
petitioner for her signature, together with the corresponding invoice receipts which
indicate the correct obligations due and payable to her suppliers. Petitioner signed
the corresponding invoices because she reposed full and implicit trust and confidence
on her bookkeeper. The issuance and delivery of the checks to the payees named
therein were left to the bookkeeper. Petitioner admitted that she did not make any
verification as to whether or not the checks were delivered to their respective payees.
Although the respondent drawee Bank notified her of all checks presented to and
paid by the bank, petitioner did not verify he correctness of the returned checks,

much less check if the payees actually received the checks in payment for the
supplies she received. In the course of her business operations covering a period of
two years, petitioner issued, following her usual practice stated above, a total of
eighty-two (82) checks in favor of several suppliers. These checks were all presented
by the indorsees as holders thereof to, and honored by, the respondent drawee Bank.
Respondent drawee Bank correspondingly debited the amounts thereof against
petitioner's checking account numbered 30-00038-1. Most of the aforementioned
checks were for amounts in excess of her actual obligations to the various payees as
shown in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of
P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual
obligation to said payee was only P895.33 (Exh. A-83); (2) in
Check No. 652282 issued on September 18, 1984 in favor of
Senson Enterprises in the amount of P11,041.20 (Exh. A-67)
appellant's actual obligation to said payee was only P1,041.20
(Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the
amount of P11,672.47 in favor of Marchem (Exh. A-61) appellant's
obligation was only P1,672.47 (Exh. B); (4) in Check No. 620450
dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-
31) her actual obligation was only P677.10 (Exhs. C and C-1); (5)
in Check No. 651862 dated August 9, 1984 in favor of Malinta
Exchange Mart for P11,107.16 (Exh. A-62), her obligation was
only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August
11, 1984 in favor of Grocer's International Food Corp. in the
amount of P11,335.60 (Exh. A-66), her obligation was only
P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated March
17, 1984 in favor of Sophy Products in the amount of P11,648.00
(Exh. A-78), her obligation was only P648.00 (Exh. G); (8) in
Check No. 589028 dated March 10, 1984 for the amount of
P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the
latter's invoice was only P520.00 (Exh. H-2); (9) in Check No.
62033 dated May 23, 1984 in the amount of P11,504.00 in favor of
Monde Denmark Biscuit (Exh. A-34), her obligation was only
P504.00 (Exhs. I-1 and I-2). 2
Practically, all the checks issued and honored by the respondent drawee bank were
crossed checks. 3 Aside from the daily notice given to the petitioner by the
respondent drawee Bank, the latter also furnished her with a monthly statement of
her transactions, attaching thereto all the cancelled checks she had issued and which
were debited against her current account. It was only after the lapse of more two (2)
years that petitioner found out about the fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to
Ernest L. Boon, Chief Accountant of respondent drawee Bank at the Buendia branch,
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO46
who, without authority therefor, accepted them all for deposit at the Buendia branch
to the credit and/or in the accounts of Alfredo Y. Romero and Benito Lam. Ernest L.
Boon was a very close friend of Alfredo Y. Romero. Sixty-three (63) out of the
eighty-two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo
Y. Romero at the respondent drawee Bank's Buendia branch, and four (4) checks in
his Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks were
deposited in Account No. 0443-4, under the name of Benito Lam at the Elcao
branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks
testified that they did not receive nor even see the subject checks and that the
indorsements appearing at the back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which
conducted periodic inspection of the branches' operations failed to discover, check or
stop the unauthorized acts of Ernest L. Boon. Under the rules of the respondent
drawee Bank, only a Branch Manager and no other official of the respondent drawee
bank, may accept a second indorsement on a check for deposit. In the case at bar, all
the deposit slips of the eighty-two (82) checks in question were initialed and/or
approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and
Elcao branches accepted the deposits made in the Buendia branch and credited the
accounts of Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee
Bank to credit her account with the money value of the eighty-two (82) checks
totalling P1,208.606.89 for having been wrongfully charged against her account.
Respondent drawee Bank refused to grant petitioner's demand. On January 23, 1985,
petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against
the drawee bank. The payees are not parties to the case. Rather, it is the drawer,
whose signature is genuine, who instituted this action to recover from the drawee
bank the money value of eighty-two (82) checks paid out by the drawee bank to
holders of those checks where the indorsements of the payees were forged. How and
by whom the forgeries were committed are not established on the record, but the
respective payees admitted that they did not receive those checks and therefore never
indorsed the same. The applicable law is the Negotiable Instruments
Law 4 (heretofore referred to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto,
can be acquired through or under such signature, unless the party

against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the
party whose signature is forged. A party whose signature to an instrument
was forged was never a party and never gave his consent to the contract
which gave rise to the instrument. Since his signature does not appear in the
instrument, he cannot be held liable thereon by anyone, not even by a holder
in due course. Thus, if a person's signature is forged as a maker of a
promissory note, he cannot be made to pay because he never made the
promise to pay. Or where a person's signature as a drawer of a check is
forged, the drawee bank cannot charge the amount thereof against the
drawer's account because he never gave the bank the order to pay. And said
section does not refer only to the forged signature of the maker of a
promissory note and of the drawer of a check. It covers also a forged
indorsement, i.e., the forged signature of the payee or indorsee of a note or
check. Since under said provision a forged signature is "wholly
inoperative", no one can gain title to the instrument through such forged
indorsement. Such an indorsement prevents any subsequent party from
acquiring any right as against any party whose name appears prior to the
forgery. Although rights may exist between and among parties subsequent
to the forged indorsement, not one of them can acquire rights against parties
prior to the forgery. Such forged indorsement cuts off the rights of all
subsequent parties as against parties prior to the forgery. However, the law
makes an exception to these rules where a party is precluded from setting up
forgery as a defense.
As a matter of practical significance, problems arising from forged indorsements of
checks may generally be broken into two types of cases: (1) where forgery was
accomplished by a person not associated with the drawer for example a mail
robbery; and (2) where the indorsement was forged by an agent of the drawer. This
difference in situations would determine the effect of the drawer's negligence with
respect to forged indorsements. While there is no duty resting on the depositor to
look for forged indorsements on his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a depositor is under a duty to set up
an accounting system and a business procedure as are reasonably calculated to
prevent or render difficult the forgery of indorsements, particularly by the depositor's
own employees. And if the drawer (depositor) learns that a check drawn by him has
been paid under a forged indorsement, the drawer is under duty promptly to report
such fact to the drawee bank. 5 For his negligence or failure either to discover or to
report promptly the fact of such forgery to the drawee, the drawer loses his right
against the drawee who has debited his account under a forged indorsement. 6 In
other words, he is precluded from using forgery as a basis for his claim for re-
crediting of his account.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO47
In the case at bar, petitioner admitted that the checks were filled up and completed by
her trusted employee, Alicia Galang, and were given to her for her signature. Her
signing the checks made the negotiable instrument complete. Prior to signing the
checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery
of the instrument to the payee for the purpose of giving effect thereto. 7 The first
delivery of the instrument, complete in form, to the payee who takes it as a holder, is
called issuance of the instrument. 8 Without the initial delivery of the instrument from
the drawer of the check to the payee, there can be no valid and binding contract and
no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized
her employee Alicia Galang to deliver the eighty-two (82) checks to their respective
payees. Instead of issuing the checks to the payees as named in the checks, Alicia
Galang delivered them to the Chief Accountant of the Buendia branch of the
respondent drawee Bank, a certain Ernest L. Boon. It was established that the
signatures of the payees as first indorsers were forged. The record fails to show the
identity of the party who made the forged signatures. The checks were then indorsed
for the second time with the names of Alfredo Y. Romero and Benito Lam, and were
deposited in the latter's accounts as earlier noted. The second indorsements were all
genuine signatures of the alleged holders. All the eighty-two (82) checks bearing the
forged indorsements of the payees and the genuine second indorsements of Alfredo
Y. Romero and Benito Lam were accepted for deposit at the Buendia branch of
respondent drawee Bank to the credit of their respective savings accounts in the
Buendia, Ongpin and Elcao branches of the same bank. The total amount of
P1,208,606.89, represented by eighty-two (82) checks, were credited and paid out by
respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against
petitioner's checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been
forged cannot charge the drawer's account for the amount of said check. An
exception to this rule is where the drawer is guilty of such negligence which causes
the bank to honor such a check or checks. If a check is stolen from the payee, it is
quite obvious that the drawer cannot possibly discover the forged indorsement by
mere examination of his cancelled check. This accounts for the rule that although a
depositor owes a duty to his drawee bank to examine his cancelled checks for
forgery of his own signature, he has no similar duty as to forged indorsements. A
different situation arises where the indorsement was forged by an employee or agent
of the drawer, or done with the active participation of the latter. Most of the cases
involving forgery by an agent or employee deal with the payee's indorsement. The
drawer and the payee often time shave business relations of long standing. The
continued occurrence of business transactions of the same nature provides the
opportunity for the agent/employee to commit the fraud after having developed
familiarity with the signatures of the parties. However, sooner or later, some leak will

show on the drawer's books. It will then be just a question of time until the fraud is
discovered. This is specially true when the agent perpetrates a series of forgeries as
in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized
payment is based on failure of the depositor to act as a prudent businessman would
under the circumstances. In the case at bar, the petitioner relied implicitly upon the
honesty and loyalty of her bookkeeper, and did not even verify the accuracy of
amounts of the checks she signed against the invoices attached thereto. Furthermore,
although she regularly received her bank statements, she apparently did not carefully
examine the same nor the check stubs and the returned checks, and did not compare
them with the same invoices. Otherwise, she could have easily discovered the
discrepancies between the checks and the documents serving as bases for the checks.
With such discovery, the subsequent forgeries would not have been accomplished. It
was not until two years after the bookkeeper commenced her fraudulent scheme that
petitioner discovered that eighty-two (82) checks were wrongfully charged to her
account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers
complained of non-payment. Assuming that even one single complaint had been
made, petitioner would have been duty-bound, as far as the respondent drawee Bank
was concerned, to make an adequate investigation on the matter. Had this been done,
the discrepancies would have been discovered, sooner or later. Petitioner's failure to
make such adequate inquiry constituted negligence which resulted in the bank's
honoring of the subsequent checks with forged indorsements. On the other hand,
since the record mentions nothing about such a complaint, the possibility exists that
the checks in question covered inexistent sales. But even in such a case, considering
the length of a period of two (2) years, it is hard to believe that petitioner did not
know or realize that she was paying more than she should for the supplies she was
actually getting. A depositor may not sit idly by, after knowledge has come to her
that her funds seem to be disappearing or that there may be a leak in her business,
and refrain from taking the steps that a careful and prudent businessman would take
in such circumstances and if taken, would result in stopping the continuance of the
fraudulent scheme. If she fails to take steps, the facts may establish her negligence,
and in that event, she would be estopped from recovering from the bank. 9
One thing is clear from the records that the petitioner failed to examine her
records with reasonable diligence whether before she signed the checks or after
receiving her bank statements. Had the petitioner examined her records more
carefully, particularly the invoice receipts, cancelled checks, check book stubs, and
had she compared the sums written as amounts payable in the eighty-two (82) checks
with the pertinent sales invoices, she would have easily discovered that in some
checks, the amounts did not tally with those appearing in the sales invoices. Had she
noticed these discrepancies, she should not have signed those checks, and should
have conducted an inquiry as to the reason for the irregular entries. Likewise had
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO48
petitioner been more vigilant in going over her current account by taking careful note
of the daily reports made by respondent drawee Bank in her issued checks, or at least
made random scrutiny of cancelled checks returned by respondent drawee Bank at
the close of each month, she could have easily discovered the fraud being perpetrated
by Alicia Galang, and could have reported the matter to the respondent drawee Bank.
The respondent drawee Bank then could have taken immediate steps to prevent
further commission of such fraud. Thus, petitioner's negligence was the proximate
cause of her loss. And since it was her negligence which caused the respondent
drawee Bank to honor the forged checks or prevented it from recovering the amount
it had already paid on the checks, petitioner cannot now complain should the bank
refuse to recredit her account with the amount of such checks. 10 Under Section 23 of
the NIL, she is now precluded from using the forgery to prevent the bank's debiting
of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong &
Shanghai Bank 11 is not applicable to the case at bar because in said case, the check
was fraudulently taken and the signature of the payee was forged not by an agent or
employee of the drawer. The drawer was not found to be negligent in the handling of
its business affairs and the theft of the check by a total stranger was not attributable
to negligence of the drawer; neither was the forging of the payee's indorsement due
to the drawer's negligence. Since the drawer was not negligent, the drawee was duty-
bound to restore to the drawer's account the amount theretofore paid under the check
with a forged payee's indorsement because the drawee did not pay as ordered by the
drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks
because they were crossed checks. Issuing a crossed check imposes no legal
obligation on the drawee not to honor such a check. It is more of a warning to the
holder that the check cannot be presented to the drawee bank for payment in cash.
Instead, the check can only be deposited with the payee's bank which in turn must
present it for payment against the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot be presented for payment but
it can only be deposited and the drawee bank may only pay to another bank in the
payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having
checks with more than one indorsement. The banking rule banning acceptance of
checks for deposit or cash payment with more than one indorsement unless cleared
by some bank officials does not invalidate the instrument; neither does it invalidate
the negotiation or transfer of the said check. In effect, this rule destroys the
negotiability of bills/checks by limiting their negotiation by indorsement of only the
payee. Under the NIL, the only kind of indorsement which stops the further
negotiation of an instrument is a restrictive indorsement which prohibits the further
negotiation thereof.

Sec. 36. When indorsement restrictive. An indorsement is
restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must
be written in express words at the back of the instrument, so that any subsequent
party may be forewarned that ceases to be negotiable. However, the restrictive
indorsee acquires the right to receive payment and bring any action thereon as any
indorser, but he can no longer transfer his rights as such indorsee where the form of
the indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because
there is no privity between them, as far as the drawer-depositor is concerned, such
bank may not legally refuse to honor a negotiable bill of exchange or a check drawn
against it with more than one indorsement if there is nothing irregular with the bill or
check and the drawer has sufficient funds. The drawee cannot be compelled to accept
or pay the check by the drawer or any holder because as a drawee, he incurs no
liability on the check unless he accepts it. But the drawee will make itself liable to a
suit for damages at the instance of the drawer for wrongful dishonor of the bill or
check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense
of forgery by reason of her gross negligence. But under Section 196 of the NIL, any
case not provided for in the Act shall be governed by the provisions of existing
legislation. Under the laws of quasi-delict, she cannot point to the negligence of the
respondent drawee Bank in the selection and supervision of its employees as being
the cause of the loss because negligence is the proximate cause thereof and under
Article 2179 of the Civil Code, she may not be awarded damages. However, under
Article 1170 of the same Code the respondent drawee Bank may be held liable for
damages. The article provides
Those who in the performance of their obligations are guilty of
fraud, negligence or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as
depositor (obligee) and the respondent drawee bank as the obligor. In the
performance of its obligation, the drawee bank is bound by its internal banking rules
and regulations which form part of any contract it enters into with any of its
depositors. When it violated its internal rules that second endorsements are not to be
accepted without the approval of its branch managers and it did accept the same
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO49
upon the mere approval of Boon, a chief accountant, it contravened the tenor of its
obligation at the very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the
irregularity with respect to the acceptance of checks with second indorsement for
deposit even without the approval of the branch manager despite periodic inspection
conducted by a team of auditors from the main office constitutes negligence on the
part of the bank in carrying out its obligations to its depositors. Article 1173 provides
The fault or negligence of the obligor consists in the omission of
that diligence which is required by the nature of the obligation and
corresponds with the circumstance of the persons, of the time and
of the place. . . .
We hold that banking business is so impressed with public interest where the trust
and confidence of the public in general is of paramount importance such that the
appropriate standard of diligence must be a high degree of diligence, if not the
utmost diligence. Surely, respondent drawee Bank cannot claim it exercised such a
degree of diligence that is required of it. There is no way We can allow it now to
escape liability for such negligence. Its liability as obligor is not merely vicarious but
primary wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss
with the petitioner on a fifty-fifty ratio in accordance with Article 172 which
provides:
Responsibility arising from negligence in the performance of every
kind of obligation is also demandable, but such liability may be
regulated by the courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made
clear that the decision to hold the drawee bank liable is based on law and substantial
justice and not on mere equity. And although the case was brought before the court
not on breach of contractual obligations, the courts are not precluded from applying
to the circumstances of the case the laws pertinent thereto. Thus, the fact that
petitioner's negligence was found to be the proximate cause of her loss does not
preclude her from recovering damages. The reason why the decision dealt on a
discussion on proximate cause is due to the error pointed out by petitioner as
allegedly committed by the respondent court. And in breaches of contract under
Article 1173, due diligence on the part of the defendant is not a defense.
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO50

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.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 89802 May 7, 1992
ASSOCIATED BANK and CONRADO CRUZ, petitioners,
vs.
HON. COURT OF APPEALS, and MERLE V. REYES, doing business under
the name and style "Melissa's RTW," respondents.
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law Offices for petitioners.
Roberto B. Lugue for private respondent.
CRUZ, J.:
The sole issue raised in this case is whether or not the private respondent has a cause
of action against the petitioners for their encashment and payment to another person
of certain crossed checks issued in her favor.
The private respondent is engaged in the business of ready-to-wear garments under
the firm name "Melissa's RTW." She deals with, among other customers, Robinson's
Department Store, Payless Department Store, Rempson Department Store, and the
Corona Bazaar.
These companies issued in payment of their respective accounts crossed checks
payable to Melissa's RTW in the amounts and on the dates indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January 19, 1982
Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981
When she went to these companies to collect on what she thought were still unpaid
accounts, she was informed of the issuance of the above-listed crossed checks.
Further inquiry revealed that the said checks had been deposited with the Associated
Bank (hereinafter, "the Bank") and subsequently paid by it to one Rafael Sayson, one
of its "trusted depositors," in the words of its branch manager and co-petitioner,
Conrado Cruz, Sayson had not been authorized by the private respondent to deposit
and encash the said checks.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO51
The private respondent sued the petitioners in the Regional Trial Court of Quezon
City for recovery of the total value of the checks plus damages. After trial, judgment
was rendered requiring them to pay the private respondent the total value of the
subject checks in the amount of P15,805.00 plus 12% interest, P50,000.00 actual
damages, P25,000.00 exemplary damages, P5,000.00 attorney's fees, and the costs of
the suit. 1
The petitioners appealed to the respondent court, reiterating their argument that the
private respondent had no cause of action against them and should have proceeded
instead against the companies that issued the checks. In disposing of this contention,
the Court of Appeals 2 said:
The cause of action of the appellee in the case at bar arose from the
illegal, anomalous and irregular acts of the appellants in violating
common banking practices to the damage and prejudice of the
appellees, in allowing to be deposited and encashed as well as
paying to improper parties without the knowledge, consent,
authority or endorsement of the appellee which totalled
P15,805.00, the six (6) checks in dispute which were "crossed
checks" or "for payee's account only," the appellee being the
payee.
The three (3) elements of a cause of action are present in the case
at bar, namely: (1) a right in favor of the plaintiff by whatever
means and under whatever law it arises or is created; (2) an
obligation on the part of the named defendant to respect or not to
violate such right; and (3) an act or omission on the part of such
defendant violative of the right of the plaintiff or constituting a
breach thereof. (Republic Planters Bank vs. Intermediate Appellate
Court, 131 SCRA 631).
And such cause of action has been proved by evidence of great
weight. The contents of the said checks issued by the customers of
the appellee had not been questioned. There is no dispute that the
same are crossed checks or for payee's account only, which is
Melissa's RTW. The appellee had clearly shown that she had never
authorized anyone to deposit the said checks nor to encash the
same; that the appellants had allowed all said checks to be
deposited, cleared and paid to one Rafael Sayson in violation of the
instructions in the said crossed checks that the same were for
payee's account only; and that the appellee maintained a savings
account with the Prudential Bank, Cubao Branch, Quezon City
which never cleared the said checks and the appellee had been
damaged by such encashment of the same.

We affirm.
Under accepted banking practice, crossing a check is done by writing two parallel
lines diagonally on the left top portion of the checks. The crossing is special where
the name of a bank or a business institution is written between the two parallel lines,
which means that the drawee should pay only with the intervention of that
company. 3 The crossing is general where the words written between the two parallel
lines are "and Co." or "for payee's account only," as in the case at bar. This means
that the drawee bank should not encash the check but merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared that "the effects of crossing
a check are: (1) that the check may not be encashed but only deposited in the bank;
(2) that the check may be negotiated only once to one who has an account with a
bank; and (3) that the act of crossing the check serves as a warning to the holder that
the check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose."
The effects therefore of crossing a check relate to the mode of its presentment for
payment. Under Sec. 72 of the Negotiable Instruments Law, presentment for
payment, to be sufficient, must be made by the holder or by some person authorized
to receive payment on his behalf. Who the holder or authorized person is depends on
the instruction stated on the face of the check.
The six checks in the case at bar had been crossed and issued "for payee's account
only." This could only signify that the drawers had intended the same for deposit
only by the person indicated, to wit, Melissa's RTW.
The petitioners argue that the cause of action for violation of the common instruction
found on the face of the checks exclusively belongs to the issuers thereof and not to
the payee. Moreover, having acted in good faith as they merely facilitated the
encashment of the checks, they cannot be made liable to the private respondent.
The subject checks were accepted for deposit by the Bank for the account of Rafael
Sayson although they were crossed checks and the payee was not Sayson but
Melissa's RTW. The Bank stamped thereon its guarantee that "all prior endorsements
and/or lack of endorsements (were) guaranteed." By such deliberate and positive act,
the Bank had for all legal intents and purposes treated the said checks as negotiable
instruments and, accordingly, assumed the warranty of the endorser.
The weight of authority is to the effect that "the possession of check on a forged or
unauthorized indorsement is wrongful, and when the money is collected on the
check, the bank can be held 'for moneys had and received." 6The proceeds are held
for the rightful owner of the payment and may be recovered by him. The position of
the bank taking the check on the forged or unauthorized indorsement is the same as if
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO52
it had taken the check and collected without indorsement at all. The act of the bank
amounts to conversion of the check. 7
It is not disputed that the proceeds of the subject checks belonged to the private
respondent. As she had not at any time authorized Rafael Sayson to endorse or
encash them, there was conversion of the funds by the Bank.
When the Bank paid the checks so endorsed notwithstanding that title had not passed
to the endorser, it did so at its peril and became liable to the payee for the value of
the checks. This liability attached whether or not the Bank was aware of the
unauthorized endorsement. 8
The petitioners were negligent when they permitted the encashment of the checks by
Sayson. The Bank should have first verified his right to endorse the crossed checks,
of which he was not the payee, and to deposit the proceeds of the checks to his own
account. The Bank was by reason of the nature of the checks put upon notice that
they were issued for deposit only to the private respondent's account. Its failure to
inquire into Sayson's authority was a breach of a duty it owed to the private
respondent.
As the Court stressed in Banco de Oro Savings and Mortgage Bank vs. Equitable
Banking Corp., 9 "the law imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of determining their genuineness
and regularity. The collecting bank, being primarily engaged in banking, holds itself
out to the public as the expert on this field, and the law thus holds it to a high
standard of conduct."
The petitioners insist that the private respondent has no cause of action against them
because they have no privity of contract with her. They also argue that it was Eddie
Reyes, the private respondent's own husband, who endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank
would still be liable to the private respondent because he was not authorized to make
the endorsements. And even if the endorsements were forged, as alleged, the Bank
would still be liable to the private respondent for not verifying the endorser's
authority. There is no substantial difference between an actual forging of a name to a
check as an endorsement by a person not authorized to make the signature and the
affixing of a name to a check as an endorsement by a person not authorized to
endorse it. 10
The Bank does not deny collecting the money on the endorsement. It was its
responsibility to inquire as to the authority of Rafael Sayson to deposit crossed
checks payable to Melissa's RTW upon a prior endorsement by Eddie Reyes. The
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO53

failure of the Bank to make this inquiry was a breach of duty that made it liable to
the private respondent for the amount of the checks.

There being no evidence that the crossed checks were actually received by the
private respondent, she would have a right of action against the drawer companies,
which in turn could go against their respective drawee banks, which in turn could sue
the herein petitioner as collecting bank. In a similar situation, it was held that, to
simplify proceedings, the payee of the illegally encashed checks should be allowed
to recover directly from the bank responsible for such encashment regardless of
whether or not the checks were actually delivered to the payee. 11We approve such
direct action in the case at bar.

It is worth repeating that before presenting the checks for clearing and for payment,
the Bank had stamped on the back thereof the words: "All prior endorsements and/or
lack of endorsements guaranteed," and thus made the assurance that it had
ascertained the genuineness of all prior endorsements.

We find that the respondent court committed no reversible error in holding that the
private respondent had a valid cause of action against the petitioners and that the
latter are indeed liable to her for their unauthorized encashment of the subject
checks. We also agree with the reduction of the award of the exemplary damages for
lack of sufficient evidence to support them.

WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so

ordered.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-56169 June 26, 1992


TRAVEL-ON, INC., petitioner,
vs.
COURT OF APPEALS and ARTURO S. MIRANDA, respondents.
RESOLUTION
FELICIANO, J.:
Petitioner Travel-On. Inc. ("Travel-On") is a travel agency selling airline tickets on
commission basis for and in behalf of different airline companies. Private respondent
Arturo S. Miranda had a revolving credit line with petitioner. He procured tickets
from petitioner on behalf of airline passengers and derived commissions therefrom.
On 14 June 1972, Travel-On filed suit before the Court of First Instance ("CFI") of
Manila to collect on six (6) checks issued by private respondent with a total face
amount of P115,000.00. The complaint, with a prayer for the issuance of a writ of
preliminary attachment and attorney's fees, averred that from 5 August 1969 to 16
January 1970, petitioner sold and delivered various airline tickets to respondent at a
total price of P278,201.57; that to settle said account, private respondent paid various
amounts in cash and in kind, and thereafter issued six (6) postdated checks
amounting to P115,000.00 which were all dishonored by the drawee banks. Travel-
On further alleged that in March 1972, private respondent made another payment of
P10,000.00 reducing his indebtedness to P105,000.00. The writ of attachment was
granted by the court a quo.
In his answer, private respondent admitted having had transactions with Travel-On
during the period stipulated in the complaint. Private respondent, however, claimed
that he had already fully paid and even overpaid his obligations and that refunds
were in fact due to him. He argued that he had issued the postdated checks for
purposes of accommodation, as he had in the past accorded similar favors to
petitioner. During the proceedings, private respondent contested several tickets
alleged to have been erroneously debited to his account. He claimed reimbursement
of his alleged over payments, plus litigation expenses, and exemplary and moral
damages by reason of the allegedly improper attachment of his properties.
In support of his theory that the checks were issued for accommodation, private
respondent testified that he bad issued the checks in the name of Travel-On in order
that its General Manager, Elita Montilla, could show to Travel-On's Board of
Directors that the accounts receivable of the company were still good. He further
stated that Elita Montilla tried to encash the same, but that these were dishonored and
were subsequently returned to him after the accommodation purpose had been
attained.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO54
Travel-On's witness, Elita Montilla, on the other hand explained that the
"accommodation" extended to Travel-On by private respondent related to situations
where one or more of its passengers needed money in Hongkong, and upon request
of Travel-On respondent would contact his friends in Hongkong to advance
Hongkong money to the passenger. The passenger then paid Travel-On upon his
return to Manila and which payment would be credited by Travel-On to respondent's
running account with it.
In its decision dated 31 January 1975, the court a quo ordered Travel-On to pay
private respondent the amount of P8,894.91 representing net overpayments by
private respondent, moral damages of P10,000.00 for the wrongful issuance of the
writ of attachment and for the filing of this case, P5,000.00 for attorney's fees and the
costs of the suit.
The trial court ruled that private respondent's indebtedness to petitioner was not
satisfactorily established and that the postdated checks were issued not for the
purpose of encashment to pay his indebtedness but to accommodate the General
Manager of Travel-On to enable her to show to the Board of Directors that Travel-On
was financially stable.
Petitioner filed a motion for reconsideration that was, however, denied by the trial
court, which in fact then increased the award of moral damages to P50,000.00.
On appeal, the Court of Appeals affirmed the decision of the trial court, but reduced
the award of moral damages to P20,000.00, with interest at the legal rate from the
date of the filing of the Answer on 28 August 1972.
Petitioner moved for reconsideration of the Court of Appeal's' decision, without
success.
In the instant Petition for Review, it is urged that the postdated checks are per
se evidence of liability on the part of private respondent. Petitioner further argues
that even assuming that the checks were for accommodation, private respondent is
still liable thereunder considering that petitioner is a holder for value.
Both the trial and appellate courts had rejected the checks as evidence of
indebtedness on the ground that the various statements of account prepared by
petitioner did not show that Private respondent had an outstanding balance of
P115,000.00 which is the total amount of the checks he issued. It was pointed out
that while the various exhibits of petitioner showed various accountabilities of
private respondent, they did not satisfactorily establish the amount of the outstanding
indebtedness of private respondent. The appellate court made much of the fact that
the figures representing private respondent's unpaid accounts found in the "Schedule
of Outstanding Account" dated 31 January 1970 did not tally with the figures found

in the statement which showed private respondent's transactions with petitioner for
the years 1969 and 1970; that there was no satisfactory explanation as to why the
total outstanding amount of P278,432.74 was still used as basis in the accounting of
7 April 1972 considering that according to the table of transactions for the year 1969
and 1970, the total unpaid account of private respondent amounted to P239,794.57.
We have, however, examined the record and it shows that the 7 April 1972 Statement
of Account had simply not been updated; that if we use as basis the figure as of 31
January 1970 which is P278,432.74 and from it deduct P38,638.17 which represents
some of the payments subsequently made by private respondent, the figure
P239,794.57 will be obtained.
Also, the fact alone that the various statements of account had variances in figures,
simply did not mean that private respondent had no more financial obligations to
petitioner. It must be stressed that private respondent's account with petitioner was
a running or open one, which explains the varying figures in each of the statements
rendered as of a given date.
The appellate court erred in considering only the statements of account in
determining whether private respondent was indebted to petitioner under the checks.
By doing so, it failed to give due importance to the most telling piece of evidence of
private respondent's indebtedness the checks themselves which he had issued.
Contrary to the view held by the Court of Appeals, this Court finds that the checks
are the all important evidence of petitioner's case; that these checks clearly
established private respondent's indebtedness to petitioner; that private respondent
was liable thereunder.
It is important to stress that a check which is regular on its face is deemed prima
facie to have been issued for a valuable consideration and every person whose
signature appears thereon is deemed to have become a party thereto for value. 1 Thus,
the mere introduction of the instrument sued on in evidence prima facie entitles the
plaintiff to recovery. Further, the rule is quite settled that a negotiable instrument is
presumed to have been given or indorsed for a sufficient consideration unless
otherwise contradicted and overcome by other competent evidence. 2
In the case at bar, the Court of Appeals, contrary to these established rules, placed the
burden of proving the existence of valuable consideration upon petitioner. This
cannot be countenanced; it was up to private respondent to show that he had indeed
issued the checks without sufficient consideration. The Court considers that Private
respondent was unable to rebut satisfactorily this legal presumption. It must also be
noted that those checks were issued immediately after a letter demanding payment
had been sent to private respondent by petitioner Travel-On.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO55
The fact that all the checks issued by private respondent to petitioner were presented
for payment by the latter would lead to no other conclusion than that these checks
were intended for encashment. There is nothing in the checks themselves (or in any
other document for that matter) that states otherwise.
We are unable to accept the Court of Appeals' conclusion that the checks here
involved were issued for "accommodation" and that accordingly private respondent
maker of those checks was not liable thereon to petitioner payee of those checks.
In the first place, while the Negotiable Instruments Law does refer to
accommodation transactions, no such transaction was here shown. Section 29 of the
Negotiable Instruments Law provides as follows:
Sec. 29. Liability of accommodation party. An accommodation
party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value, notwithstanding such
holder, at the time of taking the instrument, knew him to be only an
accommodation party.
In accommodation transactions recognized by the Negotiable Instruments
Law, an accommodating party lends his credit to the accommodated party,
by issuing or indorsing a check which is held by a payee or indorsee as a
holder in due course, who gave full value therefor to the accommodated
party. The latter, in other words, receives or realizes full value which the
accommodated party then must repay to the accommodating party, unless of
course the accommodating party intended to make a donation to the
accommodated party. But the accommodating party is bound on the check
to the holder in due course who is necessarily a third party and is not the
accommodated party. Having issued or indorsed the check, the
accommodating party has warranted to the holder in due course that he will
pay the same according to its tenor. 3
In the case at bar, Travel-On was payee of all six (6) checks, it presented these
checks for payment at the drawee bank but the checks bounced. Travel-On obviously
was not an accommodated party; it realized no value on the checks which bounced.
Travel-On was entitled to the benefit of the statutory presumption that it was a holder
in due course, 4 that the checks were supported by valuable consideration. 5 Private
respondent maker of the checks did not successfully rebut these presumptions. The
only evidence aliunde that private respondent offered was his own self-serving
uncorroborated testimony. He claimed that he had issued the checks to Travel-On as
payee to "accommodate" its General Manager who allegedly wished to show those
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO56

checks to the Board of Directors of Travel-On to "prove" that Travel-On's account

receivables were somehow "still good." It will be seen that this claim was in fact a
claim that the checks were merely simulated, that private respondent did not intend
to bind himself thereon. Only evidence of the clearest and most convincing kind will
suffice for that purpose; 6 no such evidence was submitted by private respondent. The
latter's explanation was denied by Travel-On's General Manager; that explanation, in
any case, appears merely contrived and quite hollow to us. Upon the other hand, the
"accommodation" or assistance extended to Travel-On's passengers abroad as
testified by petitioner's General Manager involved, not the accommodation
transactions recognized by the NIL, but rather the circumvention of then existing
foreign exchange regulations by passengers booked by Travel-On, which incidentally
involved receipt of full consideration by private respondent.

Thus, we believe and so hold that private respondent must be held liable on the six
(6) checks here involved. Those checks in themselves constituted evidence of
indebtedness of private respondent, evidence not successfully overturned or rebutted
by private respondent.

Since the checks constitute the best evidence of private respondent's liability to
petitioner Travel-On, the amount of such liability is the face amount of the checks,
reduced only by the P10,000.00 which Travel-On admitted in its complaint to have
been paid by private respondent sometime in March 1992.

The award of moral damages to Private respondent must be set aside, for the reason
that Petitioner's application for the writ of attachment rested on sufficient basis and
no bad faith was shown on the part of Travel-On. If anyone was in bad faith, it was
private respondent who issued bad checks and then pretended to have
"accommodated" petitioner's General Manager by assisting her in a supposed scheme
to deceive petitioner's Board of Directors and to misrepresent Travel-On's financial
condition.

ACCORDINGLY, the Court Resolved to GRANT due course to the Petition for
Review on Certiorari and to REVERSE and SET ASIDE the Decision dated 22 Republic of the Philippines
October 1980 and the Resolution of 23 January 1981 of the Court of Appeals, as well SUPREME COURT
as the Decision dated 31 January 1975 of the trial court, and to enter a new decision Manila
requiring private respondent Arturo S. Miranda to pay to petitioner Travel-On the
amount of P105,000.00 with legal interest thereon from 14 June 1972, plus ten EN BANC
percent (10%) of the total amount due as attorney's fees. Costs against Private
respondent. G.R. No. L-8844 December 16, 1914

FERNANDO MAULINI, ET AL., plaintiffs-appellees,

vs.
ANTONIO G. SERRANO, defendant-appellant.

R. M. Calvo for appellant.
Jose Arnaiz for appellees.
MORELAND, J.:
This is an appeal from a judgment of the Court of First Instance of the city of Manila
in favor of the plaintiff for the sum of P3,000, with interest thereon at the rate of
1 per cent month from September 5, 1912, together with the costs.
The action was brought by the plaintiff upon the contract of indorsement alleged to
have been made in his favor by the defendant upon the following promissory note:
3,000. Due 5th of September, 1912.
We jointly and severally agree to pay to the order of Don Antonio G.
Serrano on or before the 5th day of September, 1912, the sum of three
thousand pesos (P3,000) for value received for commercial operations.
Notice and protest renounced. If the sum herein mentioned is not
completely paid on the 5th day of September, 1912, this instrument will
draw interest at the rate of 1 per cent per month from the date when due
until the date of its complete payment. The makers hereof agree to pay the
additional sum of P500 as attorney's fees in case of failure to pay the note.
Manila, June 5, 1912.
(Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the firm. For
Jose Padern, by F. Moreno. Angel Gimenez.
The note was indorsed on the back as follows:
Pay note to the order of Don Fernando Maulini, value received. Manila,
June 5, 1912. (Sgd.) A.G. Serrano.
The first question for resolution on this appeal is whether or not, under the
Negotiable Instruments Law, an indorser of a negotiable promissory note may, in an
action brought by his indorsee, show, by parol evidence, that the indorsement was
wholly without consideration and that, in making it, the indorser acted as agent for
the indorsee, as a mere vehicle of transfer of the naked title from the maker to the
indorsee, for which he received no consideration whatever.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO57
The learned trial court, although it received parol evidence on the subject
provisionally, held, on the final decision of the case, that such evidence was not
admissible to alter, very, modify or contradict the terms of the contract of
indorsement, and, therefore, refused to consider the evidence thus provisionally
received, which tended to show that, by verbal agreement between the indorser and
the indorsee, the indorser, in making the indorsement, was acting as agent for the
indorsee, as a mere vehicle for the transference of naked title, and that his
indorsement was wholly without consideration. The court also held that it was
immaterial whether there was a consideration for the transfer or not, as the indorser,
under the evidence offered, was an accommodation indorser.
We are of the opinion that the trial court erred in both findings.1awphil.net
In the first place, the consideration of a negotiable promissory note, or of any of the
contracts connected therewith, like that of any other written instrument, is, between
the immediate parties to the contract, open to attack, under proper circumstances, for
the purpose of showing an absolute lack or failure of consideration.
It seems, according to the parol evidence provisionally admitted on the trial, that the
defendant was a broker doing business in the city of Manila and that part of his
business consisted in looking up and ascertaining persons who had money to loan as
well as those who desired to borrow money and, acting as a mediary, negotiate a loan
between the two. He had done much business with the plaintiff and the borrower, as
well as with many other people in the city of Manila, prior to the matter which is the
basis of this action, and was well known to the parties interested. According to his
custom in transactions of this kind, and the arrangement made in this particular case,
the broker obtained compensation for his services of the borrower, the lender paying
nothing therefor. Sometimes this was a certain per cent of the sum loaned; at other
times it was a part of the interest which the borrower was to pay, the latter paying 1
per cent and the broker per cent. According to the method usually followed in
these transactions, and the procedure in this particular case, the broker delivered the
money personally to the borrower, took note in his own name and immediately
transferred it by indorsement to the lender. In the case at bar this was done at the
special request of the indorsee and simply as a favor to him, the latter stating to the
broker that he did not wish his name to appear on the books of the borrowing
company as a lender of money and that he desired that the broker take the note in his
own name, immediately transferring to him title thereto by indorsement. This was
done, the note being at once transferred to the lender.
According to the evidence referred to, there never was a moment when Serrano was
the real owner of the note. It was always the note of the indorsee, Maulini, he having
furnished the money which was the consideration for the note directly to the maker
and being the only person who had the slightest interest therein, Serrano, the broker,
acting solely as an agent, a vehicle by which the naked title to the note passed fro the

borrower to the lender. The only payment that the broker received was for his
services in negotiating the loan. He was paid absolutely nothing for becoming
responsible as an indorser on the paper, nor did the indorsee lose, pay or forego
anything, or alter his position thereby.
Nor was the defendant an accommodation indorser. The learned trial court quoted
that provision of the Negotiable Instruments Law which defines an accommodation
party as "one who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name to some
other person. Such a person is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument knew the same to be
only an accommodation party." (Act No. 2031, sec. 29.)
We are of the opinion that the trial court misunderstood this definition. The
accommodation to which reference is made in the section quoted is not one to the
person who takes the note that is, the payee or indorsee, but one to the maker or
indorser of the note. It is true that in the case at bar it was an accommodation to the
plaintiff, in a popular sense, to have the defendant indorse the note; but it was not the
accommodation described in the law, but, rather, a mere favor to him and one which
in no way bound Serrano. In cases of accommodation indorsement the indorser
makes the indorsement for the accommodation of the maker. Such an indorsement is
generally for the purpose of better securing the payment of the note that is, he
lend his name to the maker, not to the holder. Putting it in another way: An
accommodation note is one to which the accommodation party has put his name,
without consideration, for the purpose of accommodating some other party who is to
use it and is expected to pay it. The credit given to the accommodation part is
sufficient consideration to bind the accommodation maker. Where, however, an
indorsement is made as a favor to the indorsee, who requests it, not the better to
secure payment, but to relieve himself from a distasteful situation, and where the
only consideration for such indorsement passes from the indorser to the indorsee, the
situation does not present one creating an accommodation indorsement, nor one
where there is a consideration sufficient to sustain an action on the indorsement.
The prohibition in section 285 of the Code of Civil Procedure does not apply to a
case like the one before us. The purpose of that prohibition is to prevent alternation,
change, modification or contradiction of the terms of a written instrument,
admittedly existing, by the use of parol evidence, except in the cases specifically
named in the section. The case at bar is not one where the evidence offered varies,
alters, modifies or contradicts the terms of the contract of indorsement admittedly
existing. The evidence was not offered for that purpose. The purpose was to show
that no contract of indorsement ever existed; that the minds of the parties never met
on the terms of such contract; that they never mutually agreed to enter into such a
contract; and that there never existed a consideration upon which such an agreement
could be founded. The evidence was not offered to vary, alter, modify, or contradict
the terms of an agreement which it is admitted existed between the parties, but
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO58
to deny that there ever existed any agreement whatever; to wipe out all apparent
relations between the parties, and not to vary, alter or contradict the terms of a
relation admittedly existing; in other words, the purpose of the parol evidence was to
demonstrate, not that the indorser did not intend to make the particular indorsement
which he did make; not that he did not intend to make the indorsement in the terms
made; but, rather, to deny the reality of any indorsement; that a relation of any kind
whatever was created or existed between him and the indorsee by reason of the
writing on the back of the instrument; that no consideration ever passed to sustain an
indorsement of any kind whatsoever.
The contention has some of the appearances of a case in which an indorser seeks
prove forgery. Where an indorser claims that his name was forged, it is clear that
parol evidence is admissible to prove that fact, and, if he proves it, it is a complete
defense, the fact being that the indorser never made any such contract, that no such
relation ever existed between him and the indorsee, and that there was no
consideration whatever to sustain such a contract. In the case before us we have a
condition somewhat similar. While the indorser does not claim that his name was
forged, he does claim that it was obtained from him in a manner which, between the
parties themselves, renders, the contract as completely inoperative as if it had been
forged.
Parol evidence was admissible for the purpose named.1awphil.net
There is no contradiction of the evidence offered by the defense and received
provisionally by the court. Accepting it as true the judgment must be reversed.
The judgment appealed from is reversed and the complaint dismissed on the merits;
no special finding as to costs.
Arellano, C.J., Johnson and Trent, JJ., concur.
Separate Opinions
TORRES, J., concurring:
Act No. 2031, known as the Negotiable Instruments Law, which governs the present
case, establishes various kinds of indorsements by means of which the liability of the
indorser is in some manner limited, distinguishing it from that of the regular or
general indorser, and among those kinds is that of the qualified indorsement which,
pursuant to section 38 of the same Act, constitutes the indorser a mere assignor of the
title to the instrument, and may be made by adding to the indorser's signature the
words "without recourse" or any words of similar import.

If the defendant, Antonio G. Serrano, intervened, as he alleged and tried to prove that
he did at the trial, only as a broker or agent between the lender and plaintiff, Maulini,
and the makers of the promissory note, Padern, Moreno & Co. and Angel Gimenez,
in order to afford an opportunity to the former to invest the amount of the note in
such manner that it might bring him interest, the defendant could have qualified the
indorsement in question by adding to his signature the words "without recourse" or
any others such as would have made known in what capacity he intervened in that
transaction. As the defendant did not do so ad as he signed the indorsement in favor
of the plaintiff Maulini for value received from the latter, his liability, according to
section 66 of the Act aforecited, is that of a regular or general indorser, who, this
same section provides, engages that if the instrument be dishonored, and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to
the holder, or to any subsequent indorser who may be compelled to pay it. And the
evidence which the defendant presented, tending to show what were the conditions to
which the defendant presented, tending to show what were the conditions to which
he obligated himself and in what capacity he intervened in making that indorsement
and that this latter was absolutely without consideration, should not have been
admitted so that he might elude the aforesaid obligation, or, if admitted, should not
be taken into account, because as a regular indorser he warranted, pursuant to the
said section 66, that the instrument was genuine and in all respects what it purported
to be, that he had a good title to it, and that it was at the time of his indorsement valid
and subsisting. He cannot, therefore, by means of any evidence, and much less of
such as consists of his own testimony, and as such interested party, alter, modify,
contradict or annul, as he virtually claimed and claims to be entitled to do, what in
writing and with a full and perfect knowledge of the meaning and import of the
words contained in the indorsement, he set forth therein over his signature.
Section 63 of the Act above cited says that a person placing his signature upon an
instrument otherwise than as maker, drawer, or acceptor is deemed to be an indorser,
unless he clearly indicates by appropriate words his contention to be bound indicates
by appropriate words his intention to be bound in some other capacity. This provision
of the law clearly indicates that in every negotiable instrument it is absolutely
necessary to specify the capacity in which the person intervenes who is mentioned
therein or takes part in its negotiation, because only by so doing can it be determined
what liabilities arise from that intervention and from whom, how and when they
must be exacted. And if, in the vent of a failure to express the capacity in which the
person who signed the negotiable instrument intended to be bound, he should be
deemed to be an indorser, when the very words of the instrument expressly and
conclusively show that such he is, as occurs in the present case, and when the
indorsement contains no restriction, modification, condition or qualification
whatever, there cannot be attributed to him, without violating the provisions of the
said Act, any other intention than that of being bound in the capacity in which he
appears in the instrument itself, nor can evidence be admitted or, if already admitted,
taken into consideration, for the purpose of proving such other intention, for the
simple reason that if the law has already fixed ad determined the capacity in which it
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO59
must be considered that the person who signed the negotiable instrument intervened
and the intention of his being bound in a definite capacity, for no other purpose,
undoubtedly, than that there shall be no evidence given in the matter, when the
capacity appears in the instrument itself and the intention is determined by the very
same capacity, as occurs in this case, the admission of evidence in reference thereto
is entirely unnecessary, useless, and contrary to the purposes of the law, which is
clear and precise in its provisions and admits of no subterfuges or evasions for
escaping obligations contracted upon the basis of credit, with evident and sure
detriment to those who intervened or took part in the negotiation of the instrument.
However, it is held in the majority opinion, for the purpose of sustaining the
premises that the proofs presented by the defendant could have been admitted
without violating the provisions of section 285 of the Code of Civil Procedure, that
the evidence was not offered to vary, alter, modify, or contradict the terms of an
agreement which it is admitted existed between the parties, but to deny that there
ever existed any agreement whatever; to wipe out all apparent relations between the
parties, and not to vary, alter or contradict the terms of a relation admittedly existing;
in other words, the purpose of the parol evidence was to demonstrate, not that the
indorser did not intend to make the particular indorsement in the terms made, but
rather to deny the reality of any indorsement; to deny that a relation of any kind
whatsoever was created or existed between him and the indorsee by reason of the
writing on the back of the instrument; to deny that any consideration ever passed to
sustain an indorsement of any kind whatsoever. It is stated in the same decision that
the contention has some of the appearances of a case in which an indorser seeks to
prove forgery.
First of all, we do not see that there exists any appearance or similarity whatever
between the case at bar and one where forgery is sought to be proved. The defendant
did not, either civilly or criminally, impugn the indorsement as being false. He
admitted its existence, as stated in the majority opinion itself, and did not disown his
signature written in the indorsement. His denial to the effect that the indorsement
was wholly without consideration, aside from the fact that it is i contradiction to the
statements that he over his signature made in the instrument, does not allow the
supposition that the instrument was forged.
The meaning which the majority opinion apparently wishes to convey, in calling
attention to the difference between what, as it says, was the purpose of the evidence
presented by the defendant and what was sought to be proved thereby, is that the
defendant does not endeavor to contradict or alter the terms of the agreement, which
is contained in the instrument and is admitted to exist between the parties; but to
deny the existence of such an agreement between them, that is, the existence of any
indorsement at all, and that any consideration ever passed to sustain the said
indorsement, or, in other words, that the defendant acknowledged the indorsement as
regards the form in which it appears to have been drawn up, but not with respect to
its essence, that is, to the truth of the particular facts set forth in the indorsement. It

cannot be denied that the practical result evidence is other than to contradict, modify,
alter or even to annul the terms of the agreement contained in the indorsement: so
that, in reality, the distinction does not exist that is mentioned as a ground of the
decision of the majority of the court in support of the opinion that the evidence in
question might have been admitted, without violating the provisions of the
aforementioned section 285 of the Code of Civil Procedure. This section is based
upon the same principle which is taken into account in the Negotiable Instruments
Law to write into it such positive and definite provisions which purport, without
possibility of discussion or doubt, the uselessness of taking evidence when the
capacity of the person who intervened in a negotiable instrument or his intention of
being bound in a particular way appears in the instrument itself or has been fixed by
statute, if it is not shown that he did so in some other capacity than that of maker,
drawer or acceptor.
But aside from what the Code of Civil Procedure prescribes with respect to this
matter, as the present case is governed by the Negotiable Instruments Law, we must
abide by its provisions.
Section 24 of this Act, No. 2031, says that every negotiable instrument is
deemed prima facie to have been issued for a valuable consideration; and every
person whose signature appears thereon, to have become a party thereto for value. If
the Act establishes this presumption for the case where there might be doubt with
respect to the existence of a valuable consideration, in order to avoid the taking of
evidence in the matter, when the consideration appears from the instrument itself by
the expression of the value, the introduction of evidence is entirely unnecessary and
improper.
According to section 25 of the same Act, value is any consideration sufficient to
support a simple contract, and so broad is the scope the law gives to the meaning of
"value" in this kind of instruments that it considers as such a prior of preexistent
debt, whether the instrument be payable on demand or at some future date.
Section 26 provides that where value has at any time been given for the instrument,
the holder is deemed a holder for value, both in respect to the maker and to the
defendant indorser, it is immaterial whether he did so directly to the person who
appears in the promissory note as the maker or whether he delivered the sum to the
defendant in order that this latter might in turn deliver it to the maker.
The defendant being the holder of the instrument, he is also unquestionably the
holder in due course. In the first place, in order to avoid doubts with respect to this
matter which might require the introduction of evidence, the Act before mentioned
has provided, in section 59, that every holder is deemed prima facie to be a holder in
due course, and such is the weight it gives to this presumption and to the
consequences derived therefrom, that it imposes upon the holder the burden to prove
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO60
that he or some person under whom he claims acquired the title in due course, only
when it is shown that the title of any person who has negotiated the instrument was
defective. This rule, however, pursuant to the said section, does not apply in favor of
a party who became bound on the instrument prior to the acquisition of such
defective title, in which case the defendant Serrano is not included, because, in the
first place, he was not bound on the instrument prior to the acquisition of the title by
the plaintiff, but it was the maker of the promissory note who was bound on the
instrument executed in favor of the defendant or indorser prior to the acquisition of
the title by the plaintiff; and, in the second place, it does not appear, nor was it
proved, as will be seen hereinafter, that the title in question was defective.
According to section 52 of the same Act, the plaintiff is the holder in due course of
the instrument in question, that is, of the promissory note containing the obligation
compliance with which is demanded of him by the defendant, because he took the
instrument under the condition: (a) That it was complete and regular upon its face;
(b) that he became the holder of it before it was overdue, and without notice that it
had been previously dishonored; (c) that he took it in good faith and for value; and
(d) that at the time it was negotiated to him he had no notice of any deficiency in the
instrument or defect in the title of the person negotiating it.
Pursuant to section 56 of the said Act, to constitute notice of a deficiency in the
instrument or defect in the title of the person negotiating the same, the person to
whom it is transferred must have had actual knowledge of the deficiency or defect, or
knowledge of such facts that his action in taking the instrument amounted to bad
faith.
In the present case it cannot be said, for it is not proven, that the plaintiff, upon
accepting the instrument from the defendant, had actual knowledge of any deficiency
or defect in the same, for the simple reason that it contains no deficiency or defect.
Its terms are very clear and positive. There is nothing ambiguous, concealed, or
which might give rise to any doubt whatever with respect to its terms or to the
agreement made by the parties. Furthermore, as stated in the majority opinion, the
defendant did not intend to make the particular indorsement which he did make in
the terms, form and manner in which it was made, nor did he intend to change or
alter the terms of the agreement which is admitted to have existed between the
parties. All of which indicates that, neither as regards the plaintiff nor as regards the
defendant, was there any deficiency or defect in the title or in the instrument, and
that the plaintiff, upon taking or receiving the instrument from the defendant, had no
knowledge of any fact from which bad faith on his part might be implied. Besides,
no evidence was produced of the existence of any such bad faith, nor of the
knowledge of any deficiency or defect.
Moreover, section 55 of Act No. 2031 provides that the title of a person who
negotiates an instrument is defective within the meaning of this Act when he

obtained the instrument, or any signature thereto, by fraud, duress, or force and fear,
or other unlawful means, or for an illegal consideration, or when he negotiates it in
breach of faith, or under such circumstances as amount to a fraud. As no evidence
was taken on these points, the only ones that may be proven as regards negotiable
instruments, the defendant must be deemed to be the holder of the instrument in due
course, pursuant to the provisions of the aforecited section 59, and he cannot be
required to prove that he or his predecessor in interest acquired the title as such
holder in due course.
Now then, according to section 28 of the same Act, as against the holder of the
instrument in due course absence or failure of consideration is not a matter of
defense; and, pursuant to section 57, a holder in due course holds 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. And the next section, No. 58
prescribes 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 nonnegotiable.
So it could not be clearer than that, pursuant to the provisions of the Negotiable
Instrument Law, which governs the case at bar, as the plaintiff is the holder in due
course of the instrument in question, no proof whatever from the defendant could be
admitted, nor if admitted should be taken into account, bearing on the lack of
consideration in the indorsement, as alleged by him, and for the purpose of denying
the existence of any indorsement and that any relation whatever was created or
existed between him and the indorsee; likewise, that no defense of any kind could
have been admitted from the defendant in respect to the said instrument, and, finally,
that the defendant is obligated to pay the sum mentioned in the said indorsement, it
being immaterial whether or not he be deemed to be an accommodation party in the
instrument, in order that compliance with the said obligation may be required of him
in his capacity of indorser.
Basing our conclusions on the foregoing grounds, and regretting to dissent from the
opinion of the majority of our colleagues, we believe that the judgment appealed
from should be affirmed, with the costs against the appellant.
Araullo, J., dissents.
#Separate Opinions
TORRES, J., concurring:
Act No. 2031, known as the Negotiable Instruments Law, which governs the present
case, establishes various kinds of indorsements by means of which the liability of the
indorser is in some manner limited, distinguishing it from that of the regular or
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO61
general indorser, and among those kinds is that of the qualified indorsement which,
pursuant to section 38 of the same Act, constitutes the indorser a mere assignor of the
title to the instrument, and may be made by adding to the indorser's signature the
words "without recourse" or any words of similar import.
If the defendant, Antonio G. Serrano, intervened, as he alleged and tried to prove that
he did at the trial, only as a broker or agent between the lender and plaintiff, Maulini,
and the makers of the promissory note, Padern, Moreno & Co. and Angel Gimenez,
in order to afford an opportunity to the former to invest the amount of the note in
such manner that it might bring him interest, the defendant could have qualified the
indorsement in question by adding to his signature the words "without recourse" or
any others such as would have made known in what capacity he intervened in that
transaction. As the defendant did not do so ad as he signed the indorsement in favor
of the plaintiff Maulini for value received from the latter, his liability, according to
section 66 of the Act aforecited, is that of a regular or general indorser, who, this
same section provides, engages that if the instrument be dishonored, and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to
the holder, or to any subsequent indorser who may be compelled to pay it. And the
evidence which the defendant presented, tending to show what were the conditions to
which the defendant presented, tending to show what were the conditions to which
he obligated himself and in what capacity he intervened in making that indorsement
and that this latter was absolutely without consideration, should not have been
admitted so that he might elude the aforesaid obligation, or, if admitted, should not
be taken into account, because as a regular indorser he warranted, pursuant to the
said section 66, that the instrument was genuine and in all respects what it purported
to be, that he had a good title to it, and that it was at the time of his indorsement valid
and subsisting. He cannot, therefore, by means of any evidence, and much less of
such as consists of his own testimony, and as such interested party, alter, modify,
contradict or annul, as he virtually claimed and claims to be entitled to do, what in
writing and with a full and perfect knowledge of the meaning and import of the
words contained in the indorsement, he set forth therein over his signature.
Section 63 of the Act above cited says that a person placing his signature upon an
instrument otherwise than as maker, drawer, or acceptor is deemed to be an indorser,
unless he clearly indicates by appropriate words his contention to be bound indicates
by appropriate words his intention to be bound in some other capacity. This provision
of the law clearly indicates that in every negotiable instrument it is absolutely
necessary to specify the capacity in which the person intervenes who is mentioned
therein or takes part in its negotiation, because only by so doing can it be determined
what liabilities arise from that intervention and from whom, how and when they
must be exacted. And if, in the vent of a failure to express the capacity in which the
person who signed the negotiable instrument intended to be bound, he should be
deemed to be an indorser, when the very words of the instrument expressly and
conclusively show that such he is, as occurs in the present case, and when the
indorsement contains no restriction, modification, condition or qualification

whatever, there cannot be attributed to him, without violating the provisions of the
said Act, any other intention than that of being bound in the capacity in which he
appears in the instrument itself, nor can evidence be admitted or, if already admitted,
taken into consideration, for the purpose of proving such other intention, for the
simple reason that if the law has already fixed ad determined the capacity in which it
must be considered that the person who signed the negotiable instrument intervened
and the intention of his being bound in a definite capacity, for no other purpose,
undoubtedly, than that there shall be no evidence given in the matter, when the
capacity appears in the instrument itself and the intention is determined by the very
same capacity, as occurs in this case, the admission of evidence in reference thereto
is entirely unnecessary, useless, and contrary to the purposes of the law, which is
clear and precise in its provisions and admits of no subterfuges or evasions for
escaping obligations contracted upon the basis of credit, with evident and sure
detriment to those who intervened or took part in the negotiation of the instrument.
However, it is held in the majority opinion, for the purpose of sustaining the
premises that the proofs presented by the defendant could have been admitted
without violating the provisions of section 285 of the Code of Civil Procedure, that
the evidence was not offered to vary, alter, modify, or contradict the terms of an
agreement which it is admitted existed between the parties, but to deny that there
ever existed any agreement whatever; to wipe out all apparent relations between the
parties, and not to vary, alter or contradict the terms of a relation admittedly existing;
in other words, the purpose of the parol evidence was to demonstrate, not that the
indorser did not intend to make the particular indorsement in the terms made, but
rather to deny the reality of any indorsement; to deny that a relation of any kind
whatsoever was created or existed between him and the indorsee by reason of the
writing on the back of the instrument; to deny that any consideration ever passed to
sustain an indorsement of any kind whatsoever. It is stated in the same decision that
the contention has some of the appearances of a case in which an indorser seeks to
prove forgery.
First of all, we do not see that there exists any appearance or similarity whatever
between the case at bar and one where forgery is sought to be proved. The defendant
did not, either civilly or criminally, impugn the indorsement as being false. He
admitted its existence, as stated in the majority opinion itself, and did not disown his
signature written in the indorsement. His denial to the effect that the indorsement
was wholly without consideration, aside from the fact that it is i contradiction to the
statements that he over his signature made in the instrument, does not allow the
supposition that the instrument was forged.
The meaning which the majority opinion apparently wishes to convey, in calling
attention to the difference between what, as it says, was the purpose of the evidence
presented by the defendant and what was sought to be proved thereby, is that the
defendant does not endeavor to contradict or alter the terms of the agreement, which
is contained in the instrument and is admitted to exist between the parties; but to
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO62
deny the existence of such an agreement between them, that is, the existence of any
indorsement at all, and that any consideration ever passed to sustain the said
indorsement, or, in other words, that the defendant acknowledged the indorsement as
regards the form in which it appears to have been drawn up, but not with respect to
its essence, that is, to the truth of the particular facts set forth in the indorsement. It
cannot be denied that the practical result evidence is other than to contradict, modify,
alter or even to annul the terms of the agreement contained in the indorsement: so
that, in reality, the distinction does not exist that is mentioned as a ground of the
decision of the majority of the court in support of the opinion that the evidence in
question might have been admitted, without violating the provisions of the
aforementioned section 285 of the Code of Civil Procedure. This section is based
upon the same principle which is taken into account in the Negotiable Instruments
Law to write into it such positive and definite provisions which purport, without
possibility of discussion or doubt, the uselessness of taking evidence when the
capacity of the person who intervened in a negotiable instrument or his intention of
being bound in a particular way appears in the instrument itself or has been fixed by
statute, if it is not shown that he did so in some other capacity than that of maker,
drawer or acceptor.
But aside from what the Code of Civil Procedure prescribes with respect to this
matter, as the present case is governed by the Negotiable Instruments Law, we must
abide by its provisions.
Section 24 of this Act, No. 2031, says that every negotiable instrument is
deemed prima facie to have been issued for a valuable consideration; and every
person whose signature appears thereon, to have become a party thereto for value. If
the Act establishes this presumption for the case where there might be doubt with
respect to the existence of a valuable consideration, in order to avoid the taking of
evidence in the matter, when the consideration appears from the instrument itself by
the expression of the value, the introduction of evidence is entirely unnecessary and
improper.
According to section 25 of the same Act, value is any consideration sufficient to
support a simple contract, and so broad is the scope the law gives to the meaning of
"value" in this kind of instruments that it considers as such a prior of preexistent
debt, whether the instrument be payable on demand or at some future date.
Section 26 provides that where value has at any time been given for the instrument,
the holder is deemed a holder for value, both in respect to the maker and to the
defendant indorser, it is immaterial whether he did so directly to the person who
appears in the promissory note as the maker or whether he delivered the sum to the
defendant in order that this latter might in turn deliver it to the maker.

The defendant being the holder of the instrument, he is also unquestionably the
holder in due course. In the first place, in order to avoid doubts with respect to this
matter which might require the introduction of evidence, the Act before mentioned
has provided, in section 59, that every holder is deemed prima facie to be a holder in
due course, and such is the weight it gives to this presumption and to the
consequences derived therefrom, that it imposes upon the holder the burden to prove
that he or some person under whom he claims acquired the title in due course, only
when it is shown that the title of any person who has negotiated the instrument was
defective. This rule, however, pursuant to the said section, does not apply in favor of
a party who became bound on the instrument prior to the acquisition of such
defective title, in which case the defendant Serrano is not included, because, in the
first place, he was not bound on the instrument prior to the acquisition of the title by
the plaintiff, but it was the maker of the promissory note who was bound on the
instrument executed in favor of the defendant or indorser prior to the acquisition of
the title by the plaintiff; and, in the second place, it does not appear, nor was it
proved, as will be seen hereinafter, that the title in question was defective.
According to section 52 of the same Act, the plaintiff is the holder in due course of
the instrument in question, that is, of the promissory note containing the obligation
compliance with which is demanded of him by the defendant, because he took the
instrument under the condition: (a) That it was complete and regular upon its face;
(b) that he became the holder of it before it was overdue, and without notice that it
had been previously dishonored; (c) that he took it in good faith and for value; and
(d) that at the time it was negotiated to him he had no notice of any deficiency in the
instrument or defect in the title of the person negotiating it.
Pursuant to section 56 of the said Act, to constitute notice of a deficiency in the
instrument or defect in the title of the person negotiating the same, the person to
whom it is transferred must have had actual knowledge of the deficiency or defect, or
knowledge of such facts that his action in taking the instrument amounted to bad
faith.
In the present case it cannot be said, for it is not proven, that the plaintiff, upon
accepting the instrument from the defendant, had actual knowledge of any deficiency
or defect in the same, for the simple reason that it contains no deficiency or defect.
Its terms are very clear and positive. There is nothing ambiguous, concealed, or
which might give rise to any doubt whatever with respect to its terms or to the
agreement made by the parties. Furthermore, as stated in the majority opinion, the
defendant did not intend to make the particular indorsement which he did make in
the terms, form and manner in which it was made, nor did he intend to change or
alter the terms of the agreement which is admitted to have existed between the
parties. All of which indicates that, neither as regards the plaintiff nor as regards the
defendant, was there any deficiency or defect in the title or in the instrument, and
that the plaintiff, upon taking or receiving the instrument from the defendant, had no
knowledge of any fact from which bad faith on his part might be implied. Besides,
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO63
no evidence was produced of the existence of any such bad faith, nor of the
knowledge of any deficiency or defect.
Moreover, section 55 of Act No. 2031 provides that the title of a person who
negotiates an instrument is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto, by fraud, duress, or force and fear,
or other unlawful means, or for an illegal consideration, or when he negotiates it in
breach of faith, or under such circumstances as amount to a fraud. As no evidence
was taken on these points, the only ones that may be proven as regards negotiable
instruments, the defendant must be deemed to be the holder of the instrument in due
course, pursuant to the provisions of the aforecited section 59, and he cannot be
required to prove that he or his predecessor in interest acquired the title as such
holder in due course.
Now then, according to section 28 of the same Act, as against the holder of the
instrument in due course absence or failure of consideration is not a matter of
defense; and, pursuant to section 57, a holder in due course holds 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. And the next section, No. 58
prescribes 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 nonnegotiable.
So it could not be clearer than that, pursuant to the provisions of the Negotiable
Instrument Law, which governs the case at bar, as the plaintiff is the holder in due
course of the instrument in question, no proof whatever from the defendant could be
admitted, nor if admitted should be taken into account, bearing on the lack of
consideration in the indorsement, as alleged by him, and for the purpose of denying
the existence of any indorsement and that any relation whatever was created or
existed between him and the indorsee; likewise, that no defense of any kind could
have been admitted from the defendant in respect to the said instrument, and, finally,
that the defendant is obligated to pay the sum mentioned in the said indorsement, it
being immaterial whether or not he be deemed to be an accommodation party in the
instrument, in order that compliance with the said obligation may be required of him
in his capacity of indorser.
Basing our conclusions on the foregoing grounds, and regretting to dissent from the
opinion of the majority of our colleagues, we believe that the judgment appealed
from should be affirmed, with the costs against the appellant.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO64

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-17845 April 27, 1967
INTESTATE ESTATE OF VICTOR SEVILLA. SIMEON SADAYA, petitioner,
vs.
FRANCISCO SEVILLA, respondent.
Belen Law Offices for petitioner.
Poblador, Cruz & Nazareno for respondent.
SANCHEZ, J.:
On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon Sadaya executed,
jointly and severally, in favor of the Bank of the Philippine Islands, or its order, a
promissory note for P15,000.00 with interest at 8% per annum, payable on demand.
The entire, amount of P15,000.00, proceeds of the promissory note, was received
from the bank by Oscar Varona alone. Victor Sevilla and Simeon Sadaya signed the
promissory note as co-makers only as a favor to Oscar Varona. Payments were made
on account. As of June 15, 1950, the outstanding balance stood P4,850.00. No
payment thereafter made.
On October 6, 1952, the bank collected from Sadaya the foregoing balance which,
together with interest, totalled P5,416.12. Varona failed to reimburse Sadaya despite
repeated demands.
Victor Sevilla died. Intestate estate proceedings were started in the Court of First
Instance of Rizal, Special Proceeding No. 1518. Francisco Sevilla was named
administrator.
In Special Proceeding No. 1518, Sadaya filed a creditor's claim for the above sum of
P5,746.12, plus attorneys fees in the sum of P1,500.00. The administrator resisted
the claim upon the averment that the deceased Victor Sevilla "did not receive any
amount as consideration for the promissory note," but signed it only "as surety for
Oscar Varona".
On June 5, 1957, the trial court issued an order admitting the claim of Simeon
Sadaya in the amount of P5,746.12, and directing the administrator to pay the same
from any available funds belonging to the estate of the deceased Victor Sevilla.
The motion to reconsider having been overruled, the administrator appealed. 1 The
Court of Appeals, in a decision promulgated on July, 15, 1960, voted to set aside the
order appealed from and to disapprove and disallow "appellee's claim of P5,746.12
against the intestate estate."
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO65
The case is now before this Court on certiorari to review the judgment of the Court
of Appeals.
Sadaya's brief here seeks reversal of the appellate court's decision and prays that his
claim "in the amount of 50% of P5,746.12, or P2,873.06, against the intestate estate
of the deceased Victor Sevilla," be approved.
1. That Victor Sevilla and Simeon Sadaya were joint and several accommodation
makers of the 15,000.00-peso promissory note in favor of the Bank of the Philippine
Islands, need not be essayed. As such accommodation the makers, the individual
obligation of each of them to the bank is no different from, and no greater and no less
than, that contract by Oscar Varona. For, while these two did not receive value on the
promissory note, they executed the same with, and for the purpose of lending their
names to, Oscar Varona. Their liability to the bank upon the explicit terms of the
promissory note is joint and several.2 Better yet, the bank could have pursued its
right to collect the unpaid balance against either Sevilla or Sadaya. And the fact is
that one of the last two, Simeon Sadaya, paid that balance.
2. It is beyond debate that Simeon Sadaya could have sought reimbursement of the
total amount paid from Oscar Varona. This is but right and just. Varona received full
value of the promissory note.3 Sadaya received nothing therefrom. He paid the bank
because he was a joint and several obligor. The least that can be said is that, as
between Varona and Sadaya, there is an implied contract of indemnity. And Varona is
bound by the obligation to reimburse Sadaya. 4
3. The common creditor, the Bank of the Philippine Islands, now out of the way, we
first look into the relations inter se amongst the three consigners of the promissory
note. Their relations vis-a-vis the Bank, we repeat, is that of joint and several
obligors. But can the same thing be said about the relations of the three consigners,
in respect to each other?
Surely enough, as amongst the three, the obligation of Varona and Sevilla to Sadaya
who paid can not be joint and several. For, indeed, had payment been made by Oscar
Varona, instead of Simeon Sadaya, Varona could not have had reason to seek
reimbursement from either Sevilla or Sadaya, or both. After all, the proceeds of the
loan went to Varona and the other two received nothing therefrom.
4. On principle, a solidary accommodation maker who made payment has the
right to contribution, from his co-accommodation maker, in the absence of
agreement to the contrary between them, and subject to conditions imposed by law.
This right springs from an implied promise between the accommodation makers to
share equally the burdens that may ensue from their having consented to stamp their
signatures on the promissory note.5 For having lent their signatures to the principal
debtor, they clearly placed themselves in so far as payment made by one may

create liability on the other in the category of mere joint grantors of the
former.6 This is as it should be. Not one of them benefited by the promissory note.
They stand on the same footing. In misfortune, their burdens should be equally
spread.
Manresa, commenting on Article 1844 of the Civil Code of Spain,7 which is
substantially reproduced in Article 20738 of our Civil Code, on this point stated:
Otros, como Pothier, entienden que, si bien el principio es evidente
enestricto concepto juridico, se han extremado sus consecuencias hasta el
punto de que estas son contrarias, no solo a la logica, sino tambien a
la equidad, que debe ser el alma del Derecho, como ha dicho Laurent.
Esa accion sostienen no nace de la fianza, pues, en efecto, el hecho de
afianzar una misma deuda no crea ningun vinculo juridico, ni ninguna razon
de obligar entre los fiadores, sino que trae, por el contrario, su origen de una
acto posterior, cual es el pago de toda la deuda realizado por uno de ellos,
y la equdad, no permite que los denias fiadores, que igualmente estaban
estaban obligos a dicho pago, se aprovenchen de ese acto en perjuico del
que lo realozo.
Lo cierto es que esa accion concedida al fiador nace, si, del hecho del
pago, pero es consecuencia del beneficio o del derecho de division, como
tenemos ya dicho. En efecto, por virtud de esta todos los cofiadores vienen
obligados a contribuir al pago de parte que a cada uno corresponde. De ese
obligacion, contraida por todos ellos, se libran los que no han pagado por
consecuencia del acto realizado por el que pago, y si bien este no hizo mas
que cumplir el deber que el contracto de fianza le imponia de responder de
todo el debito cuando no limito su obligacion a parte alguna del
mismo, dicho acto redunda en beneficio de los otros cofiadores los cuales
se aprovechan de el para quedar desligados de todo compromiso con el
acreedor.9
5. And now, to the requisites before one accommodation maker can seek
reimbursement from a co-accommodation maker.
By Article 18 of the Civil Code in matters not covered by the special laws, "their
deficiency shall be supplied by the provisions of this Code". Nothing extant in the
Negotiable Instruments Law would define the right of one accommodation maker to
seek reimbursement from another. Perforce, we must go to the Civil
Code.1wph1.t
Because Sevilla and Sadaya, in themselves, are but co-guarantors of Varona, their
case comes within the ambit of Article 2073 of the Civil Code which reads:
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO66
ART. 2073. When there are two or more guarantors of the same debtor and
for the same debt, the one among them who has paid may demand of each
of the others the share which is proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be borne by the
others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the payment
has been made in virtue of a judicial demand or unless the principal debtor
is insolvent.10
As Mr. Justice Street puts it: "[T]hat article deals with the situation which arises
when one surety has paid the debt to the creditor and is seeking contribution from his
cosureties."11
Not that the requirements in paragraph 3, Article 2073, just quoted, are devoid of
cogent reason. Says Manresa:12
c) Requisitos para el ejercicio del derecho de reintegro o de reembolso
derivado de la corresponsabilidad de los cofiadores.
La tercera de las prescripciones que comprende el articulo se refiere a los
requisitos que deben concurrir para que pueda tener lugar lo dispuesto en el
mismo. Ese derecho que concede al fiador para reintegrarse directamente de
los fiadores de lo que pago por ellos en vez de dirigir su reclamacion contra
el deudor, es un beneficio otorgado por la ley solo ell dos casos
determinados, cuya justificacion resulta evidenciada desde luego; y esa
limitacion este debidamente aconsejada por una razon de prudencia que no
puede desconocerse, cual es la de evitar que por la mera voluntad de uno de
los cofiadores pueda hacerse surgir la accion de reintegro contra los demas
en prejuicio de los mismos.
El perjuicio que con tal motivo puede inferirse a los cofiadores es bien
notorio, pues teniendo en primer termino el fiador que paga por el deudor el
derecho de indemnizacion contra este, sancionado por el art. 1,838, es de
todo punto indudable que ejercitando esta accion pueden quedar libres de
toda responsabilidad los demas cofiadores si, a consecuencia de ella,
indemniza el fiado a aquel en los terminos establecidos en el expresado
articulo. Por el contrario de prescindir de dicho derecho el fiador,
reclamando de los confiadores en primer lugar el oportuno reintegro,
estos en tendrian mas remedio que satisfacer sus ductares respectivas,
repitiendo despues por ellas contra el deudor con la imposicion de las
molestias y gastos consiguientes.
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO67

No es aventurado asegurar que si el fiador que paga pudiera libremente

utilizar uno u otro de dichos derechos, el de indemnizacion por el deudor y
el del reintegro por los cofiadores, indudablemente optaria siempre y en
todo caso por el segundo, puesto que mucha mas garantias de solvencia y
mucha mas seguridad del cobro ha de encontrar en los fiadores que en el
deudor; y en la practica quedaria reducido el primero a la indemnizacion
por el deudor a los confiadores que hubieran hecho el reintegro, obligando a
estos, sin excepcion alguna, a soportar siempre los gastos y las molestias
que anteriormente homos indicado. Y para evitar estos perjuicios, la ley no
ha podido menos de reducir el ejercicio de ese derecho a los casos en que
absolutamente sea indispensable.13

6. All of the foregoing postulate the following rules: (1) A joint and several
accommodation maker of a negotiable promissory note may demand from the
principal debtor reimbursement for the amount that he paid to the payee; and (2) a
joint and several accommodation maker who pays on the said promissory note may
directly demand reimbursement from his co-accommodation maker without first
directing his action against the principal debtor provided that (a) he made the
payment by virtue of a judicial demand, or (b) a principal debtor is insolvent.

The Court of Appeals found that Sadaya's payment to the bank "was made
voluntarily and without any judicial demand," and that "there is an absolute absence
of evidence showing that Varona is insolvent". This combination of fact and lack of
fact epitomizes the fatal distance between payment by Sadaya and Sadaya's right to
demand of Sevilla "the share which is proportionately owing from him."

For the reasons given, the judgment of the Court of Appeals under review is hereby
affirmed. No costs. So ordered.

SECOND DIVISION

[ G.R. No. 187769, June 04, 2014 ]

ALVIN PATRIMONIO, PETITIONER, VS. NAPOLEON GUTIERREZ AND

OCTAVIO MARASIGAN III, RESPONDENTS.

DECISION

BRION, J.:
Assailed in this petition for review on certiorari[1] under Rule 45 of the Revised
Rules of Court is the decision[2] dated September 24, 2008 and the resolution[3] dated
April 30, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 82301. The
appellate court affirmed the decision of the Regional Trial Court (RTC) of Quezon
City, Branch 77, dismissing the complaint for declaration of nullity of loan filed by
petitioner Alvin Patrimonio and ordering him to pay respondent Octavio 1arasigan
III (Marasigan) the sum of P200,000.00.
The Factual Background
The facts of the case, as shown by the records, are briefly summarized below.
The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a
business venture under the name of Slam Dunk Corporation (Slum Dunk), a
production outfit that produced mini-concerts and shows related to basketball.
Petitioner was already then a decorated professional basketball player while
Gutierrez was a well-known sports columnist.
In the course of their business, the petitioner pre-signed several checks to answer for
the expenses of Slam Dunk. Although signed, these checks had no payees name,
date or amount. The blank checks were entrusted to Gutierrez with the specific
instruction not to fill them out without previous notification to and approval by the
petitioner. According to petitioner, the arrangement was made so that he could verify
the validity of the payment and make the proper arrangements to fund the account.
In the middle of 1993, without the petitioners knowledge and consent, Gutierrez
went to Marasigan (the petitioners former teammate), to secure a loan in the amount
of P200,000.00 on the excuse that the petitioner needed the money for the
construction of his house. In addition to the payment of the principal, Gutierrez
assured Marasigan that he would be paid an interest of 5% per month from March to
May 1994.
After much contemplation and taking into account his relationship with the petitioner
and Gutierrez, Marasigan acceded to Gutierrez request and gave him P200,000.00
sometime in February 1994. Gutierrez simultaneously delivered to Marasigan one of
the blank checks the petitioner pre-signed with Pilipinas Bank, Greenhills Branch,
Check No. 21001764 with the blank portions filled out with the words Cash Two
Hundred Thousand Pesos Only, and the amount of P200,000.00. The upper right
portion of the check corresponding to the date was also filled out with the
words May 23, 1994 but the petitioner contended that the same was not written by
Gutierrez.
On May 24, 1994, Marasigan deposited the check but it was dishonored for the
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO68
reason ACCOUNT CLOSED. It was later revealed that petitioners account with
the bank had been closed since May 28, 1993.
Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several
demand letters to the petitioner asking for the payment of P200,000.00, but his
demands likewise went unheeded. Consequently, he filed a criminal case for
violation of B.P. 22 against the petitioner, docketed as Criminal Case No. 42816.
On September 10, 1997, the petitioner filed before the Regional Trial Court (RTC) a
Complaint for Declaration of Nullity of Loan and Recovery of Damages against
Gutierrez and co-respondent Marasigan. He completely denied authorizing the loan
or the checks negotiation, and asserted that he was not privy to the parties loan
agreement.
Only Marasigan filed his answer to the complaint. In the RTCs order dated
December 22, 1997, Gutierrez was declared in default.
The Ruling of the RTC
The RTC ruled on February 3, 2003 in favor of Marasigan.[4] It found that the
petitioner, in issuing the pre-signed blank checks, had the intention of issuing a
negotiable instrument, albeit with specific instructions to Gutierrez not to negotiate
or issue the check without his approval. While under Section 14 of the Negotiable
Instruments Law Gutierrez had the prima facie authority to complete the checks by
filling up the blanks therein, the RTC ruled that he deliberately violated petitioners
specific instructions and took advantage of the trust reposed in him by the latter.
Nonetheless, the RTC declared Marasigan as a holder in due course and accordingly
dismissed the petitioners complaint for declaration of nullity of the loan. It ordered
the petitioner to pay Marasigan the face value of the check with a right to claim
reimbursement from Gutierrez.
The petitioner elevated the case to the Court of Appeals (CA), insisting that
Marasigan is not a holder in due course. He contended that when Marasigan received
the check, he knew that the same was without a date, and hence, incomplete. He also
alleged that the loan was actually between Marasigan and Gutierrez with his check
being used only as a security.
The Ruling of the CA
On September 24, 2008, the CA affirmed the RTC ruling, although premised on
different factual findings. After careful analysis, the CA agreed with the petitioner
that Marasigan is not a holder in due course as he did not receive the check in good
faith.

The CA also concluded that the check had been strictly filled out by Gutierrez in
accordance with the petitioners authority. It held that the loan may not be nullified
since it is grounded on an obligation arising from law and ruled that the petitioner is
still liable to pay Marasigan the sum of P200,000.00.
After the CA denied the subsequent motion for reconsideration that followed, the
petitioner filed the present petition for review on certiorari under Rule 45 of the
Revised Rules of Court.
The Petition
The petitioner argues that: (1) there was no loan between him and Marasigan since
he never authorized the borrowing of money nor the checks negotiation to the latter;
(2) under Article 1878 of the Civil Code, a special power of attorney is necessary for
an individual to make a loan or borrow money in behalf of another; (3) the loan
transaction was between Gutierrez and Marasigan, with his check being used only as
a security; (4) the check had not been completely and strictly filled out in accordance
with his authority since the condition that the subject check can only be used
provided there is prior approval from him, was not complied with; (5) even if the
check was strictly filled up as instructed by the petitioner, Marasigan is still not
entitled to claim the checks value as he was not a holder in due course; and (6) by
reason of the bad faith in the dealings between the respondents, he is entitled to
claim for damages.
The Issues
Reduced to its basics, the case presents to us the following issues:
1. Whether the contract of loan in the amount of P200,000.00 granted by
respondent Marasigan to petitioner, through respondent Gutierrez, may be
nullified for being void;
2. Whether there is basis to hold the petitioner liable for the payment of the
P200,000.00 loan;
3. Whether respondent Gutierrez has completely filled out the subject check
strictly under the authority given by the petitioner; and
4. Whether Marasigan is a holder in due course.
The Courts Ruling
The petition is impressed with merit.
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO69
We note at the outset that the issues raised in this petition are essentially factual in
nature. The main point of inquiry of whether the contract of loan may be nullified,
hinges on the very existence of the contract of loan a question that, as presented, is
essentially, one of fact. Whether the petitioner authorized the borrowing; whether
Gutierrez completely filled out the subject check strictly under the petitioners
authority; and whether Marasigan is a holder in due course are also questions of fact,
that, as a general rule, are beyond the scope of a Rule 45 petition.
The rule that questions of fact are not the proper subject of an appeal
by certiorari, as a petition for review under Rule 45 is limited only to questions of
law, is not an absolute rule that admits of no exceptions. One notable exception is
when the findings of fact of both the trial court and the CA are conflicting, making
their review necessary.[5] In the present case, the tribunals below arrived at two
conflicting factual findings, albeit with the same conclusion, i.e., dismissal of the
complaint for nullity of the loan. Accordingly, we will examine the parties evidence
presented.
I. Liability Under the Contract of Loan
The petitioner seeks to nullify the contract of loan on the ground that he never
authorized the borrowing of money. He points to Article 1878, paragraph 7 of the
Civil Code, which explicitly requires a written authority when the loan is contracted
through an agent. The petitioner contends that absent such authority in writing, he
should not be held liable for the face value of the check because he was not a party
or privy to the agreement.
Contracts of Agency May be Oral Unless
The Law Requires a Specific Form
Article 1868 of the Civil Code defines a contract of agency as a contract whereby a
person "binds himself to render some service or to do something in representation or
on behalf of another, with the consent or authority of the latter." Agency may be
express, or implied from the acts of the principal, from his silence or lack of action,
or his failure to repudiate the agency, knowing that another person is acting on his
behalf without authority.
As a general rule, a contract of agency may be oral.[6] However, it must be written
when the law requires a specific form, for example, in a sale of a piece of land or
any interest therein through an agent.
Article 1878 paragraph 7 of the Civil Code expressly requires a special power of
authority before an agent can loan or borrow money in behalf of the principal, to wit:
Art. 1878. Special powers of attorney are necessary in the following cases:

xxxx
(7) To loan or borrow money, unless the latter act be urgent and indispensable for
the preservation of the things which are under administration. (emphasis supplied)
Article 1878 does not state that the authority be in writing. As long as the mandate is
express, such authority may be either oral or written. We unequivocably declared
in Lim Pin v. Liao Tian, et al.,[7] that the requirement under Article 1878 of the Civil
Code refers to the nature of the authorization and not to its form. Be that as it may,
the authority must be duly established by competent and convincing evidence other
than the self serving assertion of the party claiming that such authority was verbally
given, thus:
The requirements of a special power of attorney in Article 1878 of the Civil
Code and of a special authority in Rule 138 of the Rules of Court refer to the
nature of the authorization and not its form. The requirements are met if there is a
clear mandate from the principal specifically authorizing the performance of the act.
As early as 1906, this Court in Strong v. Gutierrez-Repide (6 Phil. 680) stated
that such a mandate may be either oral or written, the one vital thing being that
it shall be express. And more recently, We stated that, if the special authority is not
written, then it must be duly established by evidence:
x x x the Rules require, for attorneys to compromise the litigation of their clients, a
special authority. And while the same does not state that the special authority be in
writing the Court has every reason to expect that, if not in writing, the same be
duly established by evidence other than the self-serving assertion of counsel
himself that such authority was verbally given him. (Home Insurance Company
vs. United States lines Company, et al., 21 SCRA 863; 866: Vicente vs. Geraldez, 52
SCRA 210; 225). (emphasis supplied).
The Contract of Loan Entered Into by Gutierrez in Behalf
of the Petitioner Should be Nullified for Being Void;
Petitioner is Not Bound by the Contract of Loan.
A review of the records reveals that Gutierrez did not have any authority to borrow
money in behalf of the petitioner. Records do not show that the petitioner executed
any special power of attorney (SPA) in favor of Gutierrez. In fact, the petitioners
testimony confirmed that he never authorized Gutierrez (or anyone for that matter),
whether verbally or in writing, to borrow money in his behalf, nor was he aware of
any such transaction:
ALVIN PATRIMONIO (witness)
ATTY. DE VERA: Did you give Nap Gutierrez any Special Power of Attorney in
writing authorizing him to borrow using your money?
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO70
WITNESS: No, sir. (T.S.N., Alvin Patrimonio, Nov. 11, 1999, p. 105)[8]
xxxx
Marasigan however submits that the petitioners acts of pre-signing the blank checks
and releasing them to Gutierrez suffice to establish that the petitioner had authorized
Gutierrez to fill them out and contract the loan in his behalf.
Marasigans submission fails to persuade us.
In the absence of any authorization, Gutierrez could not enter into a contract of loan
in behalf of the petitioner. As held in Yasuma v. Heirs of De Villa,[9] involving a loan
contracted by de Villa secured by real estate mortgages in the name of East
Cordillera Mining Corporation, in the absence of an SPA conferring authority on de
Villa, there is no basis to hold the corporation liable, to wit:
The power to borrow money is one of those cases where corporate officers as agents
of the corporation need a special power of attorney. In the case at bar, no special
power of attorney conferring authority on de Villa was ever presented. x x x
There was no showing that respondent corporation ever authorized de Villa to obtain
the loans on its behalf.
xxxx
Therefore, on the first issue, the loan was personal to de Villa. There was no
basis to hold the corporation liable since there was no authority, express,
implied or apparent, given to de Villa to borrow money from petitioner. Neither
was there any subsequent ratification of his act.
xxxx
The liability arising from the loan was the sole indebtedness of de Villa (or of his
estate after his death). (citations omitted; emphasis supplied).
This principle was also reiterated in the case of Gozun v. Mercado,[10] where this
court held:
Petitioner submits that his following testimony suffices to establish that respondent
had authorized Lilian to obtain a loan from him.
xxxx
Petitioners testimony failed to categorically state, however, whether the loan was
made on behalf of respondent or of his wife. While petitioner claims that Lilian was
authorized by respondent, the statement of account marked as Exhibit "A" states that

the amount was received by Lilian "in behalf of Mrs. Annie Mercado.
It bears noting that Lilian signed in the receipt in her name alone, without indicating
therein that she was acting for and in behalf of respondent. She thus bound herself
in her personal capacity and not as an agent of respondent or anyone for that
matter.
It is a general rule in the law of agency that, in order to bind the principal by a
mortgage on real property executed by an agent, it must upon its face purport
to be made, signed and sealed in the name of the principal, otherwise, it will
bind the agent only. It is not enough merely that the agent was in fact
authorized to make the mortgage, if he has not acted in the name of the
principal. x x x (emphasis supplied).
In the absence of any showing of any agency relations or special authority to act for
and in behalf of the petitioner, the loan agreement Gutierrez entered into with
Marasigan is null and void. Thus, the petitioner is not bound by the parties loan
agreement.
Furthermore, that the petitioner entrusted the blank pre-signed checks to Gutierrez is
not legally sufficient because the authority to enter into a loan can never be
presumed. The contract of agency and the special fiduciary relationship inherent in
this contract must exist as a matter of fact. The person alleging it has the burden of
proof to show, not only the fact of agency, but also its nature and extent.[11] As we
held in People v. Yabut:[12]
Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or Geminiano
Yabut, Jr., in Caloocan City cannot, contrary to the holding of the respondent Judges,
be licitly taken as delivery of the checks to the complainant Alicia P. Andan at
Caloocan City to fix the venue there. He did not take delivery of the checks as
holder, i.e., as "payee" or "indorsee." And there appears to be no contract of agency
between Yambao and Andan so as to bind the latter for the acts of the former. Alicia
P. Andan declared in that sworn testimony before the investigating fiscal that
Yambao is but her "messenger" or "part-time employee." There was no special
fiduciary relationship that permeated their dealings. For a contract of agency to
exist, the consent of both parties is essential, the principal consents that the
other party, the agent, shall act on his behalf, and the agent consents so to act. It
must exist as a fact. The law makes no presumption thereof. The person alleging
it has the burden of proof to show, not only the fact of its existence, but also its
nature and extent. This is more imperative when it is considered that the
transaction dealt with involves checks, which are not legal tender, and the
creditor may validly refuse the same as payment of obligation. (at p. 630).
(emphasis supplied)
The records show that Marasigan merely relied on the words of Gutierrez without
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO71
securing a copy of the SPA in favor of the latter and without verifying from the
petitioner whether he had authorized the borrowing of money or release of the check.
He was thus bound by the risk accompanying his trust on the mere assurances of
Gutierrez.
No Contract of Loan Was Perfected Between
Marasigan And Petitioner, as The Latters
Consent Was Not Obtained.
Another significant point that the lower courts failed to consider is that a contract of
loan, like any other contract, is subject to the rules governing the requisites and
validity of contracts in general.[13] Article 1318 of the Civil Code[14] enumerates the
essential requisites for a valid contract, namely:
1. consent of the contracting parties;
2. object certain which is the subject matter of the contract; and
3. cause of the obligation which is established.
In this case, the petitioner denied liability on the ground that the contract lacked the
essential element of consent. We agree with the petitioner. As we explained above,
Gutierrez did not have the petitioners written/verbal authority to enter into a contract
of loan. While there may be a meeting of the minds between Gutierrez and
Marasigan, such agreement cannot bind the petitioner whose consent was not
obtained and who was not privy to the loan agreement. Hence, only Gutierrez is
bound by the contract of loan.
True, the petitioner had issued several pre-signed checks to Gutierrez, one of which
fell into the hands of Marasigan. This act, however, does not constitute sufficient
authority to borrow money in his behalf and neither should it be construed as
petitioners grant of consent to the parties loan agreement. Without any evidence to
prove Gutierrez authority, the petitioners signature in the check cannot be taken,
even remotely, as sufficient authorization, much less, consent to the contract of loan.
Without the consent given by one party in a purported contract, such contract could
not have been perfected; there simply was no contract to speak of.[15]
With the loan issue out of the way, we now proceed to determine whether the
petitioner can be made liable under the check he signed.
II. Liability Under the Instrument
The answer is supplied by the applicable statutory provision found in
Section 14 of the Negotiable Instruments Law (NIL) which states:
Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any
material particular, the person in possession thereof has a prima facie authority to
complete it by filling up the blanks therein. And a signature on a blank paper

delivered by the person making the signature in order that the paper may be
converted into a negotiable instrument operates as a prima facie authority to fill it up
as such for any amount. In order, however, that any such instrument when completed
may be enforced against any person who became a party thereto prior to its
completion, it must be filled up strictly in accordance with the authority given
and within a reasonable time. But if any such instrument, after completion,
is negotiated to a holder in due course, it is valid and effectual for all purposes in
his hands, and he may enforce it as if it had been filled up strictly in accordance with
the authority given and within a reasonable time.
This provision applies to an incomplete but delivered instrument. Under this rule, if
the maker or drawer delivers a pre-signed blank paper to another person for the
purpose of converting it into a negotiable instrument, that person is deemed to
have prima facie authority to fill it up. It merely requires that the instrument be in the
possession of a person other than the drawer or maker and from such possession,
together with the fact that the instrument is wanting in a material particular, the law
presumes agency to fill up the blanks.[16]
In order however that one who is not a holder in due course can enforce the
instrument against a party prior to the instruments completion, two requisites must
exist: (1) that the blank must be filled strictly in accordance with the authority given;
and (2) it must be filled up within a reasonable time. If it was proven that the
instrument had not been filled up strictly in accordance with the authority given and
within a reasonable time, the maker can set this up as a personal defense and avoid
liability. However, if the holder is a holder in due course, there is a conclusive
presumption that authority to fill it up had been given and that the same was not in
excess of authority.[17]
In the present case, the petitioner contends that there is no legal basis to hold him
liable both under the contract and loan and under the check because: first, the subject
check was not completely filled out strictly under the authority he has given
and second, Marasigan was not a holder in due course.
Marasigan is Not a Holder in Due Course
The Negotiable Instruments Law (NIL) defines a holder in due course, thus:
Sec. 52 A holder in due course is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it
had been previously dishonored, if such was the fact;
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO72
(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. (emphasis
supplied)
Section 52(c) of the NIL states that a holder in due course is one who takes the
instrument in good faith and for value. It also provides in Section 52(d) that in
order that one may be a holder in due course, it is necessary 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.
Acquisition in good faith means taking without knowledge or notice of equities of
any sort which could be set up against a prior holder of the instrument. [18] It means
that he does not have any knowledge of fact which would render it dishonest for him
to take a negotiable paper. The absence of the defense, when the instrument was
taken, is the essential element of good faith.[19]
As held in De Ocampo v. Gatchalian:[20]
In order to show that the defendant had knowledge of such facts that his action in
taking the instrument amounted to bad faith, it is not necessary to prove that the
defendant knew the exact fraud that was practiced upon the plaintiff by the
defendant's assignor, it being sufficient to show that the defendant had notice
that there was something wrong about his assignor's acquisition of title,
although he did not have notice of the particular wrong that was committed.
It is sufficient that the buyer of a note had notice or knowledge that the note was in
some way tainted with fraud. It is not necessary that he should know the
particulars or even the nature of the fraud, since all that is required is knowledge
of such facts that his action in taking the note amounted bad faith.
The term bad faith does not necessarily involve furtive motives, but means bad
faith in a commercial sense. The manner in which the defendants conducted their
Liberty Loan department provided an easy way for thieves to dispose of their
plunder. It was a case of no questions asked. Although gross negligence does not
of itself constitute bad faith, it is evidence from which bad faith may be inferred. The
circumstances thrust the duty upon the defendants to make further inquiries and they
had no right to shut their eyes deliberately to obvious facts. (emphasis supplied).
In the present case, Marasigans knowledge that the petitioner is not a party or a
privy to the contract of loan, and correspondingly had no obligation or liability to
him, renders him dishonest, hence, in bad faith. The following exchange is
significant on this point:

WITNESS: AMBET NABUS
Q: Now, I refer to the second call after your birthday. Tell us what you
talked about?
A: Since I celebrated my birthday in that place where Nap and I live together
with the other crew, there were several visitors that included Danny
Espiritu. So a week after my birthday, Bong Marasigan called me up
again and he was fuming mad. Nagmumura na siya. Hinahanap niya si
hinahanap niya si Nap, dahil pinagtataguan na siya at sinabi na niya na
kailangan I-settle na niya yung utang ni Nap, dahil
xxxx
WITNESS:Yes. Sinabi niya sa akin na kailangan ayusin na bago pa mauwi sa kung
saan ang tsekeng tumalbog (He told me that we have to fix it up before
it) mauwi pa kung saan
xxxx
Q: What was your reply, if any?
A: I actually asked him. Kanino ba ang tseke na sinasabi mo? (Whose check
is it that you are referring to or talking about?)
Q: What was his answer?
A: It was Alvins check.
Q: What was your reply, if any?
A: I told him do you know that it is not really Alvin who borrowed
money from you or what you want to appear
xxxx
Q: What was his reply?
A: Yes, it was Nap, pero tseke pa rin ni Alvin ang hawak ko at si Alvin
ang maiipit dito. (T.S.N., Ambet Nabus, July 27, 2000; pp.65-71;
emphasis supplied)[21]
Since he knew that the underlying obligation was not actually for the petitioner, the
rule that a possessor of the instrument is prima facie a holder in due course is
inapplicable. As correctly noted by the CA, his inaction and failure to verify, despite
knowledge of that the petitioner was not a party to the loan, may be construed as
gross negligence amounting to bad faith.
Yet, it does not follow that simply because he is not a holder in due course,
Marasigan is already totally barred from recovery. The NIL does not provide that a
holder who is not a holder in due course may not in any case recover on the
instrument.[22] The only disadvantage of a holder who is not in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable. [23] Among
such defenses is the filling up blank not within the authority.
On this point, the petitioner argues that the subject check was not filled up strictly on
the basis of the authority he gave. He points to his instruction not to use the check
without his prior approval and argues that the check was filled up in violation of said
NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO73
instruction.
Check Was Not Completed Strictly Under
The Authority Given by The Petitioner
Our own examination of the records tells us that Gutierrez has exceeded the authority
to fill up the blanks and use the check. To repeat, petitioner gave Gutierrez pre-
signed checks to be used in their business provided that he could only use them upon
his approval. His instruction could not be any clearer as Gutierrez authority was
limited to the use of the checks for the operation of their business, and on the
condition that the petitioners prior approval be first secured.
While under the law, Gutierrez had a prima facie authority to complete the check,
such prima facie authority does not extend to its use (i.e., subsequent transfer or
negotiation) once the check is completed. In other words, only the authority to
complete the check is presumed. Further, the law used the term "prima facie" to
underscore the fact that the authority which the law accords to a holder is a
presumption juris tantum only; hence, subject to subject to contrary proof. Thus,
evidence that there was no authority or that the authority granted has been exceeded
may be presented by the maker in order to avoid liability under the instrument.
In the present case, no evidence is on record that Gutierrez ever secured prior
approval from the petitioner to fill up the blank or to use the check. In his testimony,
petitioner asserted that he never authorized nor approved the filling up of the blank
checks, thus:
ATTY. DE Did you authorize anyone including Nap Gutierrez to write the date,
VERA: May 23, 1994? WITNESS: No, sir.
Q: Did you authorize anyone including Nap Gutierrez to put the word
cash? In the check?
A: No, sir.
Q: Did you authorize anyone including Nap Gutierrez to write the
figure P200,000 in this check?
A: No, sir.
Q: And lastly, did you authorize anyone including Nap Gutierrez to
write the words P200,000 only xx in this check?
A: No, sir. (T.S.N., Alvin Patrimonio, November 11, 1999).[24]
Notably, Gutierrez was only authorized to use the check for business expenses; thus,
he exceeded the authority when he used the check to pay the loan he supposedly
contracted for the construction of petitioner's house. This is a clear violation of the
petitioner's instruction to use the checks for the expenses of Slam Dunk. It cannot
therefore be validly concluded that the check was completed strictly in accordance
with the authority given by the petitioner.
 NEGOTIABLE INSTRUMENTS REVIEW LIPAT, AIKO74

Considering that Marasigan is not a holder in due course, the petitioner can validly
set up the personal defense that the blanks were not filled up in accordance with the
authority he gave. Consequently, Marasigan has no right to enforce payment against
the petitioner and the latter cannot be obliged to pay the face value of the check.

WHEREFORE, in view of the foregoing, judgment is hereby

rendered GRANTING the petitioner Alvin Patrimonio's petition for review
on certiorari. The appealed Decision dated September 24, 2008 and the Resolution
dated April 30, 2009 of the Court of Appeals are consequently ANNULLED AND
SET ASIDE. Costs against the respondents.

SO ORDERED.