G.R. No.

129910 September 5, 2006

THE INTERNATIONAL CORPORATE BANK, INC., petitioner,

vs.
COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review1 assailing the 9 August 1994 Amended
Decision2 and the 16 July 1997 Resolution3 of the Court of Appeals in CA-G.R.
CV No. 25209.

The Antecedent Facts

The case originated from an action for collection of sum of money filed on 16
March 1982 by the International Corporate Bank, Inc.4 ("petitioner") against
the Philippine National Bank ("respondent"). The case was raffled to the then
Court of First Instance (CFI) of Manila, Branch 6. The complaint was amended
on 19 March 1982. The case was eventually re-raffled to the Regional Trial
Court of Manila, Branch 52 ("trial court").

The Ministry of Education and Culture issued 15 checks5 drawn against

respondent which petitioner accepted for deposit on various dates. The checks
are as follows:

Check Number Date Payee Amount

7-3694621-4 7-20-81 Trade Factors, P 97,500.00
Inc.
7-3694609-6 7-27-81 Romero D. 98,500.50
Palmares
7-3666224-4 8-03-81 Trade Factors, 99,800.00
Inc.
7-3528348-4 8-07-81 Trade Factors, 98,600.00
Inc.
7-3666225-5 8-10-81 Antonio Lisan 98,900.00
7-3688945-6 8-10-81 Antonio Lisan 97,700.00
7-4535674-1 8-21-81 Golden City 95,300.00
Trading
7-4535675-2 8-21-81 Red Arrow Trading 96,400.00
 7-4535699-5 8-24-81 Antonio Lisan 94,200.00
7-4535700-6 8-24-81 Antonio Lisan 95,100.00
7-4697902-2 9-18-81 Ace Enterprises, 96,000.00
Inc.
7-4697925-6 9-18-81 Golden City 93,030.00
Trading
7-4697011-6 10-02-81 Wintrade 90,960.00
Marketing
7-4697909-4 10-02-81 ABC Trading, Inc. 99,300.00
7-4697922-3 10-05-81 Golden 96,630.00
Enterprises

The checks were deposited on the following dates for the following accounts:

Check Number Date Deposited Account Deposited

7-3694621-4 7-23-81 CA 0060 02360 3
7-3694609-6 7-28-81 CA 0060 02360 3
7-3666224-4 8-4-81 CA 0060 02360 3
7-3528348-4 8-11-81 CA 0060 02360 3
7-3666225-5 8-11-81 SA 0061 32331 7
7-3688945-6 8-17-81 CA 0060 30982 5
7-4535674-1 8-26-81 CA 0060 02360 3
7-4535675-2 8-27-81 CA 0060 02360 3
7-4535699-5 8-31-81 CA 0060 30982 5
7-4535700-6 8-24-81 SA 0061 32331 7
7-4697902-2 9-23-81 CA 0060 02360 3
7-4697925-6 9-23-81 CA 0060 30982 5
7-4697011-6 10-7-81 CA 0060 02360 3
7-4697909-4 10-7-81 CA 0060 30982 56

After 24 hours from submission of the checks to respondent for clearing,

petitioner paid the value of the checks and allowed the withdrawals of the
deposits. However, on 14 October 1981, respondent returned all the checks
to petitioner without clearing them on the ground that they were materially
altered. Thus, petitioner instituted an action for collection of sums of money
against respondent to recover the value of the checks.

The Ruling of the Trial Court

The trial court ruled that respondent is expected to use reasonable business
practices in accepting and paying the checks presented to it. Thus, respondent
cannot be faulted for the delay in clearing the checks considering the ingenuity
in which the alterations were effected. The trial court observed that there was
no attempt from petitioner to verify the status of the checks before petitioner
paid the value of the checks or allowed withdrawal of the deposits. According
to the trial court, petitioner, as collecting bank, could have inquired by
telephone from respondent, as drawee bank, about the status of the checks
before paying their value. Since the immediate cause of petitioner’s loss was
the lack of caution of its personnel, the trial court held that petitioner is not
entitled to recover the value of the checks from respondent.

The dispositive portion of the trial court’s Decision reads:

WHEREFORE, judgment is hereby rendered dismissing both the

complaint and the counterclaim. Costs shall, however be assessed
against the plaintiff.

SO ORDERED.7

Petitioner appealed the trial court’s Decision before the Court of Appeals.

The Ruling of the Court of Appeals

In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial
court’s Decision. Applying Section 4(c) of Central Bank Circular No. 580, series
of 1977,9 the Court of Appeals held that checks that have been materially
altered shall be returned within 24 hours after discovery of the alteration.
However, the Court of Appeals ruled that even if the drawee bank returns a
check with material alterations after discovery of the alteration, the return
would not relieve the drawee bank from any liability for its failure to return
the checks within the 24-hour clearing period. The Court of Appeals explained:

Does this mean that, as long as the drawee bank returns a check with
material alteration within 24 hour[s] after discovery of such alteration,
such return would have the effect of relieving the bank of any liability
whatsoever despite its failure to return the check within the 24- hour
clearing house rule?

We do not think so.

Obviously, such bank cannot be held liable for its failure to return the
check in question not later than the next regular clearing. However, this
Court is of the opinion and so holds that it could still be held liable if it
fails to exercise due diligence in verifying the alterations made. In other
words, such bank would still be expected, nay required, to make the
proper verification before the 24-hour regular clearing period lapses, or
 in cases where such lapses may be deemed inevitable, that the required
verification should be made within a reasonable time.

The implication of the rule that a check shall be returned within the 24-
hour clearing period is that if the collecting bank paid the check before
the end of the aforesaid 24-hour clearing period, it would be responsible
therefor such that if the said check is dishonored and returned within
the 24-hour clearing period, the drawee bank cannot be held liable.
Would such an implication apply in the case of materially altered checks
returned within 24 hours after discovery? This Court finds nothing in the
letter of the above-cited C.B. Circular that would justify a negative
answer. Nonetheless, the drawee bank could still be held liable in certain
instances. Even if the return of the check/s in question is done within
24 hours after discovery, if it can be shown that the drawee bank had
been patently negligent in the performance of its verification function,
this Court finds no reason why the said bank should be relieved of
liability.

Although banking practice has it that the presumption of clearance is

conclusive when it comes to the application of the 24-hour clearing
period, the same principle may not be applied to the 24-hour period vis-
a-vis material alterations in the sense that the drawee bank which
returns materially altered checks within 24 hours after discovery would
be conclusively relieved of any liability thereon. This is because there
could well be various intervening events or factors that could affect the
rights and obligations of the parties in cases such as the instant one
including patent negligence on the part of the drawee bank resulting in
an unreasonable delay in detecting the alterations. While it is true that
the pertinent proviso in C.B. Circular No. 580 allows the drawee bank to
return the altered check within the period "provided by law for filing a
legal action", this does not mean that this would entitle or allow the
drawee bank to be grossly negligent and, inspite thereof, avail itself of
the maximum period allowed by the above-cited Circular. The discovery
must be made within a reasonable time taking into consideration the
facts and circumstances of the case. In other words, the aforementioned
C.B. Circular does not provide the drawee bank the license to be grossly
negligent on the one hand nor does it preclude the collecting bank from
raising available defenses even if the check is properly returned within
the 24-hour period after discovery of the material alteration.10

The Court of Appeals rejected the trial court’s opinion that petitioner could
have verified the status of the checks by telephone call since such imposition
is not required under Central Bank rules. The dispositive portion of the 10
October 1991 Decision reads:
 PREMISES CONSIDERED, the decision appealed from is hereby
REVERSED and the defendant-appellee Philippine National Bank is
declared liable for the value of the fifteen checks specified and
enumerated in the decision of the trial court (page 3) in the amount
of P1,447,920.00

SO ORDERED.11

Respondent filed a motion for reconsideration of the 10 October 1991

Decision. In its 9 August 1994 Amended Decision, the Court of Appeals
reversed itself and affirmed the Decision of the trial court dismissing the
complaint.

In reversing itself, the Court of Appeals held that its 10 October 1991 Decision
failed to appreciate that the rule on the return of altered checks within 24
hours from the discovery of the alteration had been duly passed by the Central
Bank and accepted by the members of the banking system. Until the rule is
repealed or amended, the rule has to be applied.

Petitioner moved for the reconsideration of the Amended Decision. In its 16

July 1997 Resolution, the Court of Appeals denied the motion for lack of merit.

Hence, the recourse to this Court.

The Issues

Petitioner raises the following issues in its Memorandum:

1. Whether the checks were materially altered;

2. Whether respondent was negligent in failing to recognize within a

reasonable period the altered checks and in not returning the checks
within the period; and

3. Whether the motion for reconsideration filed by respondent was out

of time thus making the 10 October 1991 Decision final and executory.12

The Ruling of This Court

Filing of the Petition under both Rules 45 and 65

Respondent asserts that the petition should be dismissed outright since

petitioner availed of a wrong mode of appeal. Respondent cites Ybañez v.
Court of Appeals13 where the Court ruled that "a petition cannot be subsumed
simultaneously under Rule 45 and Rule 65 of the Rules of Court, and neither
may petitioners delegate upon the court the task of determining under which
rule the petition should fall."

The remedies of appeal and certiorari are mutually exclusive and not
alternative or successive.14 However, this Court may set aside technicality for
justifiable reasons. The petition before the Court is clearly meritorious.
Further, the petition was filed on time both under Rules 45 and 65. 15 Hence,
in accordance with the liberal spirit which pervades the Rules of Court and in
the interest of justice,16 we will treat the petition as having been filed under
Rule 45.

Alteration of Serial Number Not Material

The alterations in the checks were made on their serial numbers.

Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable
Instruments Law, provide:

SEC. 124. Alteration of instrument; effect of. ― Where a negotiable

instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers.

But when an instrument has been materially altered and is in the hands
of a holder in due course, not a party to the alteration, he may enforce
payment thereof according to its original tenor.

SEC. 125. What constitutes a material alteration. ― Any alteration which

changes:

(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment;

(d) The number or the relations of the parties;

(e) The medium or currency in which payment is to be made;

or which adds a place of payment where no place of payment is

specified, or any other change or addition which alters the effect of the
instrument in any respect, is a material alteration.
The question on whether an alteration of the serial number of a check is a
material alteration under the Negotiable Instruments Law is already a settled
matter. In Philippine National Bank v. Court of Appeals, this Court ruled that
the alteration on the serial number of a check is not a material alteration.
Thus:

An alteration is said to be material if it alters the effect of the instrument.

It means an unauthorized change in an instrument that purports to
modify in any respect the obligation of a party or an unauthorized
addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party. In other words, a
material alteration is one which changes the items which are required
to be stated under Section 1 of the Negotiable Instrument[s] Law.

Section 1 of the Negotiable Instruments Law provides:

Section 1. ― Form of negotiable instruments. An instrument to be

negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum

certain in money;

(c) Must be payable on demand, or at a fixed or determinable

future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be

named or otherwise indicated therein with reasonable certainty.

In his book entitled "Pandect of Commercial Law and Jurisprudence,"

Justice Jose C. Vitug opines that "an innocent alteration (generally,
changes on items other than those required to be stated under Sec. 1,
N.I.L.) and spoliation (alterations done by a stranger) will not avoid the
instrument, but the holder may enforce it only according to its original
tenor.

xxxx

The case at the bench is unique in the sense that what was altered is
the serial number of the check in question, an item which, it can readily
be observed, is not an essential requisite for negotiability under Section
 1 of the Negotiable Instruments Law. The aforementioned alteration did
not change the relations between the parties. The name of the drawer
and the drawee were not altered. The intended payee was the same.
The sum of money due to the payee remained the same. x x x

xxxx

The check’s serial number is not the sole indication of its origin. As
succinctly found by the Court of Appeals, the name of the government
agency which issued the subject check was prominently printed therein.
The check’s issuer was therefore sufficiently identified, rendering the
referral to the serial number redundant and inconsequential. x x x

xxxx

Petitioner, thus cannot refuse to accept the check in question on the

ground that the serial number was altered, the same being an
immaterial or innocent one.17

Likewise, in the present case the alterations of the serial numbers do not
constitute material alterations on the checks.

Incidentally, we agree with the petitioner’s observation that the check in

the PNB case appears to belong to the same batch of checks as in the present
case. The check in the PNB case was also issued by the Ministry of Education
and Culture. It was also drawn against PNB, respondent in this case. The serial
number of the check in the PNB case is 7-3666-223-3 and it was issued on 7
August 1981.

Timeliness of Filing of Respondent’s Motion for Reconsideration

Respondent filed its motion for reconsideration of the 10 October 1991

Decision on 6 November 1991. Respondent’s motion for reconsideration states
that it received a copy of the 10 October 1991 Decision on 22 October
1991.18 Thus, it appears that the motion for reconsideration was filed on time.
However, the Registry Return Receipt shows that counsel for respondent or
his agent received a copy of the 10 October 1991 Decision on 16 October
1991,19 not on 22 October 1991 as respondent claimed. Hence, the Court of
Appeals is correct when it noted that the motion for reconsideration was filed
late. Despite its late filing, the Court of Appeals resolved to admit the motion
for reconsideration "in the interest of substantial justice."20

There are instances when rules of procedure are relaxed in the interest of
justice. However, in this case, respondent did not proffer any explanation for
the late filing of the motion for reconsideration. Instead, there was a deliberate
attempt to deceive the Court of Appeals by claiming that the copy of the 10
October 1991 Decision was received on 22 October 1991 instead of on 16
October 1991. We find no justification for the posture taken by the Court of
Appeals in admitting the motion for reconsideration. Thus, the late filing of the
motion for reconsideration rendered the 10 October 1991 Decision final and
executory.

The 24-Hour Clearing Time

The Court will not rule on the proper application of Central Bank Circular No.
580 in this case. Since there were no material alterations on the checks,
respondent as drawee bank has no right to dishonor them and return them to
petitioner, the collecting bank.21 Thus, respondent is liable to petitioner for
the value of the checks, with legal interest from the time of filing of the
complaint on 16 March 1982 until full payment.22 Further, considering that
respondent’s motion for reconsideration was filed late, the 10 October 1991
Decision, which held respondent liable for the value of the checks amounting
to P1,447,920, had become final and executory.

WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and the
16 July 1997 Resolution of the Court of Appeals. We rule that respondent
Philippine National Bank is liable to petitioner International Corporate Bank,
Inc. for the value of the checks amounting to P1,447,920, with legal interest
from 16 March 1982 until full payment. Costs against respondent.

SO ORDERED.
BANK OF AMERICA NT & SA, G.R. No. 150228
Petitioner,

Present:

PUNO, C.J., Chairperson,

-versus- CARPIO,
CORONA,
LEONARDO-DE CASTRO, and
BERSAMIN, JJ.

PHILIPPINE RACING CLUB, Promulgated:

Respondent.
July 30, 2009

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

DECISION

LEONARDO-DE CASTRO, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court
from the Decision[1] promulgated on July 16, 2001 by the former Second
Division of the Court of Appeals (CA), in CA-G.R. CV No.
45371 entitled Philippine Racing Club, Inc. v. Bank of America NT & SA,
affirming the Decision[2] dated March 17, 1994 of the Regional Trial Court
(RTC) of Makati, Branch 135 in Civil Case No. 89-5650, in favor of the
respondent. Likewise, the present petition assails the
Resolution[3] promulgated on September 28, 2001, denying the Motion for
Reconsideration of the CA Decision.
 The facts of this case as narrated in the assailed CA Decision are as
follows:

Plaintiff-appellee PRCI is a domestic corporation which

maintains several accounts with different banks in the Metro
Manila area. Among the accounts maintained was Current Account
No. 58891-012 with defendant-appellant BA (Paseo de Roxas
Branch). The authorized joint signatories with respect to said
Current Account were plaintiff-appellees President (Antonia
Reyes) and Vice President for Finance (Gregorio Reyes).

On or about the 2nd week of December 1988, the President

and Vice President of plaintiff-appellee corporation were scheduled
to go out of the country in connection with the corporations
business. In order not to disrupt operations in their absence, they
pre-signed several checks relating to Current Account No. 58891-
012. The intention was to insure continuity of plaintiff-appellees
operations by making available cash/money especially to settle
obligations that might become due. These checks were entrusted
to the accountant with instruction to make use of the same as the
need arose. The internal arrangement was, in the event there was
need to make use of the checks, the accountant would prepare
the corresponding voucher and thereafter complete the entries on
the pre-signed checks.

It turned out that on December 16, 1988, a John Doe

presented to defendant-appellant bank for encashment a couple
of plaintiff-appellee corporations checks (Nos. 401116 and
401117) with the indicated value of P110,000.00 each. It is
admitted that these 2 checks were among those presigned by
plaintiff-appellee corporations authorized signatories.

The two (2) checks had similar entries with similar

infirmities and irregularities. On the space where the name of the
payee should be indicated (Pay To The Order Of) the following 2-
line entries were instead typewritten: on the upper line was the
word CASH while the lower line had the following typewritten
words, viz: ONE HUNDRED TEN THOUSAND PESOS ONLY. Despite
the highly irregular entries on the face of the checks, defendant-
appellant bank, without as much as verifying and/or confirming
the legitimacy of the checks considering the substantial amount
involved and the obvious infirmity/defect of the checks on their
 faces, encashed said checks. A verification process, even by was
of a telephone call to PRCI office, would have taken less than ten
(10) minutes. But this was not done by BA. Investigation
conducted by plaintiff-appellee corporation yielded the fact that
there was no transaction involving PRCI that call for the payment
of P220,000.00 to anyone. The checks appeared to have come
into the hands of an employee of PRCI (one Clarita Mesina who
was subsequently criminally charged for qualified theft) who
eventually completed without authority the entries on the pre-
signed checks. PRCIs demand for defendant-appellant to pay fell
on deaf ears. Hence, the complaint.[4]

After due proceedings, the trial court rendered a Decision in favor of

respondent, the dispositive portion of which reads:

PREMISES CONSIDERED, judgment is hereby rendered in

favor of plaintiff and against the defendant, and the latter is
ordered to pay plaintiff:
(1) The sum of Two Hundred Twenty Thousand
(P220,000.00) Pesos, with legal interest to be computed from date
of the filing of the herein complaint;
(2) The sum of Twenty Thousand (P20,000.00) Pesos by
way of attorneys fees;
(3) The sum of Ten Thousand (P10,000.00) Pesos for
litigation expenses, and
(4) To pay the costs of suit.

SO ORDERED.[5]

Petitioner appealed the aforesaid trial court Decision to the CA which,

however, affirmed said decision in toto in its July 16, 2001
Decision. Petitioners Motion for Reconsideration of the CA Decision was
subsequently denied on September 28, 2001.

Petitioner now comes before this Court arguing that:

I. The Court of Appeals gravely erred in holding that

the proximate cause of respondents loss was petitioners
encashment of the checks.
 A. The Court of Appeals gravely erred in holding that
petitioner was liable for the amount of the checks despite
the fact that petitioner was merely fulfilling its obligation
under law and contract.
B. The Court of Appeals gravely erred in holding that
petitioner had a duty to verify the encashment, despite
the absence of any obligation to do so.
C. The Court of Appeals gravely erred in not applying
Section 14 of the Negotiable Instruments Law, despite its
clear applicability to this case;

II. The Court of Appeals gravely erred in not holding

that the proximate cause of respondents loss was its own
grossly negligent practice of pre-signing checks without
payees and amounts and delivering these pre-signed checks
to its employees (other than their signatories).

III. The Court of Appeals gravely erred in affirming the

trial courts award of attorneys fees despite the absence of
any applicable ground under Article 2208 of the Civil Code.

IV. The Court of Appeals gravely erred in not awarding

attorneys fees, moral and exemplary damages, and costs of
suit in favor of petitioner, who clearly deserves them.[6]

From the discussions of both parties in their pleadings, the key issue to
be resolved in the present case is whether the proximate cause of the wrongful
encashment of the checks in question was due to (a) petitioners failure to
make a verification regarding the said checks with the respondent in view of
the misplacement of entries on the face of the checks or (b) the practice of
the respondent of pre-signing blank checks and leaving the same with its
employees.

Petitioner insists that it merely fulfilled its obligation under law and
contract when it encashed the aforesaid checks. Invoking Sections 126[7] and
185[8] of the Negotiable Instruments Law (NIL), petitioner claims that its duty
as a drawee bank to a drawer-client maintaining a checking account with it is
to pay orders for checks bearing the drawer-clients genuine signatures. The
genuine signatures of the clients duly authorized signatories affixed on the
checks signify the order for payment. Thus, pursuant to the said obligation,
the drawee bank has the duty to determine whether the signatures appearing
on the check are the drawer-clients or its duly authorized signatories. If the
signatures are genuine, the bank has the unavoidable legal and contractual
duty to pay. If the signatures are forged and falsified, the drawee bank has
the corollary, but equally unavoidable legal and contractual, duty not to pay.[9]

Furthermore, petitioner maintains that there exists a duty on the drawee

bank to inquire from the drawer before encashing a check only when the check
bears a material alteration. A material alteration is defined in Section 125 of
the NIL to be one which changes the date, the sum payable, the time or place
of payment, the number or relations of the parties, the currency in which
payment is to be made or one which adds a place of payment where no place
of payment is specified, or any other change or addition which alters the effect
of the instrument in any respect. With respect to the checks at issue,
petitioner points out that they do not contain any material alteration. [10] This
is a fact which was affirmed by the trial court itself.[11]

There is no dispute that the signatures appearing on the subject checks

were genuine signatures of the respondents authorized joint signatories;
namely, Antonia Reyes and Gregorio Reyes who were respondents President
and Vice-President for Finance, respectively. Both pre-signed the said checks
since they were both scheduled to go abroad and it was apparently their
practice to leave with the company accountant checks signed in black to
answer for company obligations that might fall due during the signatories
absence. It is likewise admitted that neither of the subject checks contains
any material alteration or erasure.
However, on the blank space of each check reserved for the payee, the
following typewritten words appear: ONE HUNDRED TEN THOUSAND PESOS
ONLY. Above the same is the typewritten word, CASH. On the blank reserved
for the amount, the same amount of One Hundred Ten Thousand Pesos was
indicated with the use of a check writer. The presence of these irregularities
in each check should have alerted the petitioner to be cautious before
proceeding to encash them which it did not do.

It is well-settled that banks are engaged in a business impressed with

public interest, and it is their duty to protect in return their many clients and
depositors who transact business with them. They have the obligation to treat
their clients account meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship.The diligence required of
banks, therefore, is more than that of a good father of a family.[12]

Petitioner asserts that it was not duty-bound to verify with the

respondent since the amount below the typewritten word CASH, expressed in
words, is the very same amount indicated in figures by means of a check
writer on the amount portion of the check. The amount stated in words is,
therefore, a mere reiteration of the amount stated in figures. Petitioner
emphasizes that a reiteration of the amount in words is merely a repetition
and that a repetition is not an alteration which if present and material would
have enjoined it to commence verification with respondent.[13]

We do not agree with petitioners myopic view and carefully crafted

defense. Although not in the strict sense material alterations, the
misplacement of the typewritten entries for the payee and the amount on the
same blank and the repetition of the amount using a check writer were
glaringly obvious irregularities on the face of the check.Clearly, someone
made a mistake in filling up the checks and the repetition of the entries was
possibly an attempt to rectify the mistake. Also, if the check had been filled
up by the person who customarily accomplishes the checks of respondent, it
should have occurred to petitioners employees that it would be unlikely such
mistakes would be made. All these circumstances should have alerted the
bank to the possibility that the holder or the person who is attempting to
encash the checks did not have proper title to the checks or did not have
authority to fill up and encash the same. As noted by the CA, petitioner could
have made a simple phone call to its client to clarify the irregularities and the
loss to respondent due to the encashment of the stolen checks would have
been prevented.

In the case at bar, extraordinary diligence demands that petitioner

should have ascertained from respondent the authenticity of the subject
checks or the accuracy of the entries therein not only because of the presence
of highly irregular entries on the face of the checks but also of the decidedly
unusual circumstances surrounding their encashment. Respondents witness
testified that for checks in amounts greater than Twenty Thousand Pesos
(P20,000.00) it is the companys practice to ensure that the payee is indicated
by name in the check.[14] This was not rebutted by petitioner. Indeed, it is
highly uncommon for a corporation to make out checks payable to CASH for
substantial amounts such as in this case. If each irregular circumstance in this
case were taken singly or isolated, the banks employees might have been
justified in ignoring them. However, the confluence of the irregularities on the
face of the checks and circumstances that depart from the usual banking
practice of respondent should have put petitioners employees on guard that
the checks were possibly not issued by the respondent in due course of its
business. Petitioners subtle sophistry cannot exculpate it from behavior that
fell extremely short of the highest degree of care and diligence required of it
as a banking institution.

Indeed, taking this with the testimony of petitioners operations manager

that in case of an irregularity on the face of the check (such as when blanks
were not properly filled out) the bank may or may not call the client depending
on how busy the bank is on a particular day,[15] we are even more convinced
that petitioners safeguards to protect clients from check fraud are arbitrary
and subjective. Every client should be treated equally by a banking institution
regardless of the amount of his deposits and each client has the right to expect
that every centavo he entrusts to a bank would be handled with the same
degree of care as the accounts of other clients. Perforce, we find that
petitioner plainly failed to adhere to the high standard of diligence expected
of it as a banking institution.

In defense of its cashier/tellers questionable action, petitioner insists

that pursuant to Sections 14[16] and 16[17] of the NIL, it could validly presume,
upon presentation of the checks, that the party who filled up the blanks had
authority and that a valid and intentional delivery to the party presenting the
checks had taken place. Thus, in petitioners view, the sole blame for this
debacle should be shifted to respondent for having its signatories pre-sign and
deliver the subject checks.[18] Petitioner argues that there was indeed delivery
in this case because, following American jurisprudence, the gross negligence
of respondents accountant in safekeeping the subject checks which resulted
in their theft should be treated as a voluntary delivery by the maker who is
estopped from claiming non-delivery of the instrument.[19]

Petitioners contention would have been correct if the subject checks

were correctly and properly filled out by the thief and presented to the bank
in good order. In that instance, there would be nothing to give notice to the
bank of any infirmity in the title of the holder of the checks and it could validly
presume that there was proper delivery to the holder. The bank could not be
faulted if it encashed the checks under those circumstances. However, the
undisputed facts plainly show that there were circumstances that should have
alerted the bank to the likelihood that the checks were not properly delivered
to the person who encashed the same. In all, we see no reason to depart from
the finding in the assailed CA Decision that the subject checks are properly
characterized as incomplete and undelivered instruments thus making Section
15[20] of the NIL applicable in this case.

However, we do agree with petitioner that respondents officers practice

of pre-signing of blank checks should be deemed seriously negligent behavior
and a highly risky means of purportedly ensuring the efficient operation of
businesses. It should have occurred to respondents officers and managers
that the pre-signed blank checks could fall into the wrong hands as they did
in this case where the said checks were stolen from the company accountant
to whom the checks were entrusted.

Nevertheless, even if we assume that both parties were guilty of

negligent acts that led to the loss, petitioner will still emerge as the party
foremost liable in this case. In instances where both parties are at fault, this
Court has consistently applied the doctrine of last clear chance in order to
assign liability.

In Westmont Bank v. Ong,[21] we ruled:

[I]t is petitioner [bank] which had the last clear chance to stop
the fraudulent encashment of the subject checks had it exercised
due diligence and followed the proper and regular banking
procedures in clearing checks. As we had earlier ruled, the one
who had a last clear opportunity to avoid the impending
 harm but failed to do so is chargeable with the
consequences thereof.[22] (emphasis ours)

In the case at bar, petitioner cannot evade responsibility for the loss by
attributing negligence on the part of respondent because, even if we concur
that the latter was indeed negligent in pre-signing blank checks, the former
had the last clear chance to avoid the loss. To reiterate, petitioners own
operations manager admitted that they could have called up the client for
verification or confirmation before honoring the dubious checks. Verily,
petitioner had the final opportunity to avert the injury that befell the
respondent. Failing to make the necessary verification due to the volume of
banking transactions on that particular day is a flimsy and unacceptable
excuse, considering that the 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.[23] Petitioners negligence has
been undoubtedly established and, thus, pursuant to Art. 1170 of the
NCC,[24] it must suffer the consequence of said negligence.

In the interest of fairness, however, we believe it is proper to consider

respondents own negligence to mitigate petitioners liability. Article 2179 of
the Civil Code provides:

Art. 2179. When the plaintiffs own negligence was the immediate
and proximate cause of his injury, he cannot recover damages.
But if his negligence was only contributory, the immediate and
proximate cause of the injury being the defendants lack of due
care, the plaintiff may recover damages, but the courts shall
mitigate the damages to be awarded.

Explaining this provision in Lambert v. Heirs of Ray Castillon,[25] the

Court held:

The underlying precept on contributory negligence is that a

plaintiff who is partly responsible for his own injury should not be
entitled to recover damages in full but must bear the
consequences of his own negligence. The defendant must thus be
 held liable only for the damages actually caused by his negligence.
xxx xxx xxx

As we previously stated, respondents practice of signing checks in blank

whenever its authorized bank signatories would travel abroad was a
dangerous policy, especially considering the lack of evidence on record that
respondent had appropriate safeguards or internal controls to prevent the pre-
signed blank checks from falling into the hands of unscrupulous individuals
and being used to commit a fraud against the company. We cannot believe
that there was no other secure and reasonable way to guarantee the non-
disruption of respondents business. As testified to by petitioners expert
witness, other corporations would ordinarily have another set of authorized
bank signatories who would be able to sign checks in the absence of the
preferred signatories.[26] Indeed, if not for the fortunate happenstance that
the thief failed to properly fill up the subject checks, respondent would
expectedly take the blame for the entire loss since the defense of forgery of a
drawers signature(s) would be unavailable to it. Considering that respondent
knowingly took the risk that the pre-signed blank checks might fall into the
hands of wrongdoers, it is but just that respondent shares in the responsibility
for the loss.

We also cannot ignore the fact that the person who stole the pre-signed
checks subject of this case from respondents accountant turned out to be
another employee, purportedly a clerk in respondents accounting
department. As the employer of the thief, respondent supposedly had control
and supervision over its own employee. This gives the Court more reason to
allocate part of the loss to respondent.

Following established jurisprudential precedents,[27] we believe the

allocation of sixty percent (60%) of the actual damages involved in this case
(represented by the amount of the checks with legal interest) to petitioner is
proper under the premises. Respondent should, in light of its contributory
negligence, bear forty percent (40%) of its own loss.

Finally, we find that the awards of attorneys fees and litigation expenses
in favor of respondent are not justified under the circumstances and, thus,
must be deleted. The power of the court to award attorneys fees and litigation
expenses under Article 2208 of the NCC[28] demands factual, legal, and
equitable justification.

An adverse decision does not ipso facto justify an award of attorneys

fees to the winning party.[29] Even when a claimant is compelled to litigate
with third persons or to incur expenses to protect his rights, still attorneys
fees may not be awarded where no sufficient showing of bad faith could be
reflected in a partys persistence in a case other than an erroneous conviction
of the righteousness of his cause.[30]

WHEREFORE, the Decision of the Court of Appeals dated July 16, 2001
and its Resolution dated September 28, 2001 are AFFIRMED with the following
MODIFICATIONS: (a) petitioner Bank of America NT & SA shall pay to
respondent Philippine Racing Club sixty percent (60%) of the sum of Two
Hundred Twenty Thousand Pesos (P220,000.00) with legal interest as
awarded by the trial court and (b) the awards of attorneys fees and litigation
expenses in favor of respondent are deleted.

Proportionate costs.

SO ORDERED.
G.R. No. 154469 December 6, 2006

METROPOLITAN BANK AND TRUST COMPANY, petitioners,

vs.
RENATO D. CABILZO, respondent.

DECISION

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari, filed by petitioner

Metropolitan Bank and Trust Company (Metrobank) seeking to reverse and set
aside the Decision1 of the Court of Appeals dated 8 March 2002 and its
Resolution dated 26 July 2002 affirming the Decision of the Regional Trial
Court (RTC) of Manila, Branch 13 dated 4 September 1998. The dispositive
portion of the Court of Appeals Decision reads:

WHEREFORE, the assailed decision dated September 4, 1998 is

AFFIRMED with modifications (sic) that the awards for exemplary
damages and attorney’s fees are hereby deleted.

Petitioner Metrobank is a banking institution duly organized and existing as

such under Philippine laws.2

Respondent Renato D. Cabilzo (Cabilzo) was one of Metrobank’s clients who

maintained a current account with Metrobank Pasong Tamo Branch.3

On 12 November 1994, Cabilzo issued a Metrobank Check No. 985988,

payable to "CASH" and postdated on 24 November 1994 in the amount of One
Thousand Pesos (P1,000.00). The check was drawn against Cabilzo’s Account
with Metrobank Pasong Tamo Branch under Current Account No. 618044873-
3 and was paid by Cabilzo to a certain Mr. Marquez, as his sales commission.4

Subsequently, the check was presented to Westmont Bank for payment.

Westmont Bank, in turn, indorsed the check to Metrobank for appropriate
clearing. After the entries thereon were examined, including the availability of
funds and the authenticity of the signature of the drawer, Metrobank cleared
the check for encashment in accordance with the Philippine Clearing House
Corporation (PCHC) Rules.

On 16 November 1994, Cabilzo’s representative was at Metrobank Pasong

Tamo Branch to make some transaction when he was asked by a bank
personnel if Cabilzo had issued a check in the amount of P91,000.00 to which
the former replied in the negative. On the afternoon of the same date, Cabilzo
himself called Metrobank to reiterate that he did not issue a check in the
amount of P91,000.00 and requested that the questioned check be returned
to him for verification, to which Metrobank complied.5

Upon receipt of the check, Cabilzo discovered that Metrobank Check No.
985988 which he issued on 12 November 1994 in the amount of P1,000.00
was altered to P91,000.00 and the date 24 November 1994 was changed to
14 November 1994.6

Hence, Cabilzo demanded that Metrobank re-credit the amount of P91,000.00

to his account. Metrobank, however, refused reasoning that it has to refer the
matter first to its Legal Division for appropriate action. Repeated verbal
demands followed but Metrobank still failed to re-credit the amount
of P91,000.00 to Cabilzo’s account.7

On 30 June 1995, Cabilzo, thru counsel, finally sent a letter-demand8 to

Metrobank for the payment of P90,000.00, after deducting the original value
of the check in the amount of P1,000.00. Such written demand
notwithstanding, Metrobank still failed or refused to comply with its obligation.

Consequently, Cabilzo instituted a civil action for damages against Metrobank

before the RTC of Manila, Branch 13. In his Complaint docketed as Civil Case
No. 95-75651, Renato D. Cabilzo v. Metropolitan Bank and Trust
Company,Cabilzo prayed that in addition to his claim for reimbursement,
actual and moral damages plus costs of the suit be awarded in his favor.9

For its part, Metrobank countered that upon the receipt of the said check
through the PCHC on 14 November 1994, it examined the genuineness and
the authenticity of the drawer’s signature appearing thereon and the technical
entries on the check including the amount in figures and in words to determine
if there were alterations, erasures, superimpositions or intercalations thereon,
but none was noted. After verifying the authenticity and propriety of the
aforesaid entries, including the indorsement of the collecting bank located at
the dorsal side of the check which stated that, "all prior indorsements and lack
of indorsement guaranteed," Metrobank cleared the check.10
Anent thereto, Metrobank claimed that as a collecting bank and the last
indorser, Westmont Bank should be held liable for the value of the check.
Westmont Bank indorsed the check as the an unqualified indorser, by virtue
of which it assumed the liability of a general indorser, and thus, among others,
warranted that the instrument is genuine and in all respect what it purports
to be.

In addition, Metrobank, in turn, claimed that Cabilzo was partly responsible in

leaving spaces on the check, which, made the fraudulent insertion of the
amount and figures thereon, possible. On account of his negligence in the
preparation and issuance of the check, which according to Metrobank, was the
proximate cause of the loss, Cabilzo cannot thereafter claim indemnity by
virtue of the doctrine of equitable estoppel.

Thus, Metrobank demanded from Cabilzo, for payment in the amount

of P100,000.00 which represents the cost of litigation and attorney’s fees, for
allegedly bringing a frivolous and baseless suit. 11

On 19 April 1996, Metrobank filed a Third-Party Complaint12 against Westmont

Bank on account of its unqualified indorsement stamped at the dorsal side of
the check which the former relied upon in clearing what turned out to be a
materially altered check.

Subsequently, a Motion to Dismiss13 the Third-Party Complaint was then filed

by Westmont bank because another case involving the same cause of action
was pending before a different court. The said case arose from an action for
reimbursement filed by Metrobank before the Arbitration Committee of the
PCHC against Westmont Bank, and now the subject of a Petition for Review
before the RTC of Manila, Branch 19.

In an Order14 dated 4 February 1997, the trial court granted the Motion to
Dismiss the Third-Party Complaint on the ground of litis pendentia.

On 4 September 1998, the RTC rendered a Decision15 in favor of Cabilzo and

thereby ordered Metrobank to pay the sum of P90,000.00, the amount of the
check. In stressing the fiduciary nature of the relationship between the bank
and its clients and the negligence of the drawee bank in failing to detect an
apparent alteration on the check, the trial court ordered for the payment of
exemplary damages, attorney’s fees and cost of litigation. The dispositive
portion of the Decision reads:

WHEREFORE, judgment is rendered ordering defendant Metropolitan

Bank and Trust Company to pay plaintiff Renato Cabilzo the sum
of P90,000 with legal interest of 6 percent per annum from November
 16, 1994 until payment is made plus P20,000 attorney’s fees,
exemplary damages of P50,000, and costs of the suit.16

Aggrieved, Metrobank appealed the adverse decision to the Court of Appeals

reiterating its previous argument that as the last indorser, Westmont Bank
shall bear the loss occasioned by the fraudulent alteration of the check.
Elaborating, Metrobank maintained that by reason of its unqualified
indorsement, Westmont Bank warranted that the check in question is genuine,
valid and subsisting and that upon presentment the check shall be accepted
according to its tenor.

Even more, Metrobank argued that in clearing the check, it was not remiss in
the performance of its duty as the drawee bank, but rather, it exercised the
highest degree of diligence in accordance with the generally accepted banking
practice. It further insisted that the entries in the check were regular and
authentic and alteration could not be determined even upon close
examination.

In a Decision17 dated 8 March 2002, the Court of Appeals affirmed with

modification the Decision of the court a quo, similarly finding Metrobank liable
for the amount of the check, without prejudice, however, to the outcome of
the case between Metrobank and Westmont Bank which was pending before
another tribunal. The decretal portion of the Decision reads:

WHEREFORE, the assailed decision dated September 4, 1998 is

AFFIRMED with the modifications (sic) that the awards for exemplary
damages and attorney’s fees are hereby deleted.18

Similarly ill-fated was Metrobank’s Motion for Reconsideration which was also
denied by the appellate court in its Resolution19 issued on 26 July 2002, for
lack of merit.

Metrobank now poses before this Court this sole issue:

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING

METROBANK, AS DRAWEE BANK, LIABLE FOR THE ALTERATIONS ON
THE SUBJECT CHECK BEARING THE AUTHENTIC SIGNATURE OF THE
DRAWER THEREOF.

We resolve to deny the petition.

An alteration is said to be material if it changes the effect of the instrument.

It means that an unauthorized change in an instrument that purports to
modify in any respect the obligation of a party or an unauthorized addition of
words or numbers or other change to an incomplete instrument relating to the
obligation of a party.20 In other words, a material alteration is one which
changes the items which are required to be stated under Section 1 of the
Negotiable Instruments Law.

Section 1 of the Negotiable Instruments Law provides:

Section 1. Form of negotiable instruments. - An instrument to be

negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain

in money;

(c) Must be payable on demand or at a fixed 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.

Also pertinent is the following provision in the Negotiable Instrument Law

which states:

Section 125. What constitutes material alteration. – Any alteration which

changes:

(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment;

(d) The number or the relation of the parties;

(e) The medium or currency in which payment is to be made;

Or which adds a place of payment where no place of payment is

specified, or any other change or addition which alters the effect of the
instrument in any respect is a material alteration.

In the case at bar, the check was altered so that the amount was increased
from P1,000.00 to P91,000.00 and the date was changed from 24 November
1994 to 14 November 1994. Apparently, since the entries altered were among
those enumerated under Section 1 and 125, namely, the sum of money
payable and the date of the check, the instant controversy therefore squarely
falls within the purview of material alteration.

Now, having laid the premise that the present petition is a case of material
alteration, it is now necessary for us to determine the effect of a materially
altered instrument, as well as the rights and obligations of the parties
thereunder. The following provision of the Negotiable Instrument Law will shed
us some light in threshing out this issue:

Section 124. Alteration of instrument; effect of. – Where a negotiable

instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has
himself made,authorized, and assented to the
alteration and subsequent indorsers.

But when the instrument has been materially altered and is in the hands
of a holder in due course not a party to the alteration, he may enforce
the payment thereof according to its original tenor. (Emphasis ours.)

Indubitably, Cabilzo was not the one who made nor authorized the alteration.
Neither did he assent to the alteration by his express or implied acts. There is
no showing that he failed to exercise such reasonable degree of diligence
required of a prudent man which could have otherwise prevented the loss. As
correctly ruled by the appellate court, Cabilzo was never remiss in the
preparation and issuance of the check, and there were no indicia of evidence
that would prove otherwise. Indeed, Cabilzo placed asterisks before and after
the amount in words and figures in order to forewarn the subsequent holders
that nothing follows before and after the amount indicated other than the one
specified between the asterisks.

The degree of diligence required of a reasonable man in the exercise of his

tasks and the performance of his duties has been faithfully complied with by
Cabilzo. In fact, he was wary enough that he filled with asterisks the spaces
between and after the amounts, not only those stated in words, but also those
in numerical figures, in order to prevent any fraudulent insertion, but
unfortunately, the check was still successfully altered, indorsed by the
collecting bank, and cleared by the drawee bank, and encashed by the
perpetrator of the fraud, to the damage and prejudice of Cabilzo.

Verily, Metrobank cannot lightly impute that Cabilzo was negligent and is
therefore prevented from asserting his rights under the doctrine of equitable
estoppel when the facts on record are bare of evidence to support such
conclusion. The doctrine of equitable estoppel states that when one of the two
innocent persons, each guiltless of any intentional or moral wrong, must suffer
a loss, it must be borne by the one whose erroneous conduct, either by
omission or commission, was the cause of injury.21 Metrobank’s reliance on
this dictum, is misplaced. For one, Metrobank’s representation that it is an
innocent party is flimsy and evidently, misleading. At the same time,
Metrobank cannot asseverate that Cabilzo was negligent and this negligence
was the proximate cause22 of the loss in the absence of even a scintilla proof
to buttress such claim. Negligence is not presumed but must be proven by the
one who alleges it.23

Undoubtedly, Cabilzo was an innocent party in this instant controversy. He

was just an ordinary businessman who, in order to facilitate his business
transactions, entrusted his money with a bank, not knowing that the latter
would yield a substantial amount of his deposit to fraud, for which Cabilzo can
never be faulted.

We never fail to stress the remarkable significance of a banking institution to

commercial transactions, in particular, and to the country’s economy in
general. The banking system is an indispensable institution in the modern
world and plays a vital role in the economic life of every civilized nation.
Whether as mere passive entities for the safekeeping and saving of money or
as active instruments of business and commerce, banks have become an
ubiquitous presence among the people, who have come to regard them with
respect and even gratitude and, most of all, confidence.24

Thus, even the humble wage-earner does not hesitate to entrust his life's
savings to the bank of his choice, knowing that they will be safe in its custody
and will even earn some interest for him. The ordinary person, with equal
faith, usually maintains a modest checking account for security and
convenience in the settling of his monthly bills and the payment of ordinary
expenses. As for a businessman like the respondent, the bank is a trusted and
active associate that can help in the running of his affairs, not only in the form
of loans when needed but more often in the conduct of their day-to-day
transactions like the issuance or encashment of checks.25

In every case, the depositor expects the bank to treat his account with the
utmost fidelity, whether such account consists only of a few hundred pesos or
of millions. The bank must record every single transaction accurately, down
to the last centavo, and as promptly as possible. This has to be done if the
account is to reflect at any given time the amount of money the depositor can
dispose of as he sees fit, confident that the bank will deliver it as and to
whomever he directs.26
The point is that as a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the accounts of
its depositors with meticulous care, always having in mind the fiduciary nature
of their relationship. The appropriate degree of diligence required of a bank
must be a high degree of diligence, if not the utmost diligence.27

In the present case, it is obvious that Metrobank was remiss in that duty and
violated that relationship. As observed by the Court of Appeals, there are
material alterations on the check that are visible to the naked eye. Thus:

x x x The number "1" in the date is clearly imposed on a white figure in

the shape of the number "2". The appellant’s employees who examined
the said check should have likewise been put on guard as to why at the
end of the amount in words, i.e., after the word "ONLY", there are 4
asterisks, while at the beginning of the line or before said phrase, there
is none, even as 4 asterisks have been placed before and after the word
"CASH" in the space for payee. In addition, the 4 asterisks before the
words "ONE THOUSAND PESOS ONLY" have noticeably been erased with
typing correction paper, leaving white marks, over which the word
"NINETY" was superimposed. The same can be said of the numeral "9"
in the amount "91,000", which is superimposed over a whitish mark,
obviously an erasure, in lieu of the asterisk which was deleted to insert
the said figure. The appellant’s employees should have again noticed
why only 2 asterisks were placed before the amount in figures, while 3
asterisks were placed after such amount. The word "NINETY" is also
typed differently and with a lighter ink, when compared with the words
"ONE THOUSAND PESOS ONLY." The letters of the word "NINETY" are
likewise a little bigger when compared with the letters of the words "ONE
THOUSAND PESOS ONLY".28

Surprisingly, however, Metrobank failed to detect the above alterations which

could not escape the attention of even an ordinary person. This negligence
was exacerbated by the fact that, as found by the trial court, the check in
question was examined by the cash custodian whose functions do not include
the examinations of checks indorsed for payment against drawer’s
accounts.29 Obviously, the employee allowed by Metrobank to examine the
check was not verse and competent to handle such duty. These factual
findings of the trial court is conclusive upon this court especially when such
findings was affirmed the appellate court.30

Apropos thereto, we need to reiterate that by the very nature of their work
the degree of responsibility, care and trustworthiness expected of their
employees and officials is far better than those of ordinary clerks and
employees. Banks are expected to exercise the highest degree of diligence in
the selection and supervision of their employees.31

In addition, the bank on which the check is drawn, known as the drawee bank,
is under strict liability to pay to the order of the payee in accordance with the
drawer’s instructions as reflected on the face and by the terms of the check.
Payment made under materially altered instrument is not payment done in
accordance with the instruction of the drawer.

When the drawee bank pays a materially altered check, it violates the terms
of the check, as well as its duty to charge its client’s account only for bona
fide disbursements he had made. Since the drawee bank, in the instant case,
did not pay according to the original tenor of the instrument, as directed by
the drawer, then it has no right to claim reimbursement from the drawer,
much less, the right to deduct the erroneous payment it made from the
drawer’s account which it was expected to treat with utmost fidelity.

Metrobank vigorously asserts that the entries in the check were carefully
examined: The date of the instrument, the amount in words and figures, as
well as the drawer’s signature, which after verification, were found to be
proper and authentic and was thus cleared. We are not persuaded.
Metrobank’s negligence consisted in the omission of that degree of diligence
required of a bank owing to the fiduciary nature of its relationship with its
client. Article 1173 of the Civil Code 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 circumstances of the persons, of the time and of
the place. x x x.

Beyond question, Metrobank failed to comply with the degree required by the
nature of its business as provided by law and jurisprudence. If indeed it was
not remiss in its obligation, then it would be inconceivable for it not to detect
an evident alteration considering its vast knowledge and technical expertise
in the intricacies of the banking business. This Court is not completely unaware
of banks’ practices of employing devices and techniques in order to detect
forgeries, insertions, intercalations, superimpositions and alterations in checks
and other negotiable instruments so as to safeguard their authenticity and
negotiability. Metrobank cannot now feign ignorance nor claim diligence;
neither can it point its finger at the collecting bank, in order to evade liability.

Metrobank argues that Westmont Bank, as the collecting bank and the last
indorser, shall bear the loss. Without ruling on the matter between the drawee
bank and the collecting bank, which is already under the jurisdiction of another
tribunal, we find that Metrobank cannot rely on such indorsement, in clearing
the questioned check. The corollary liability of such indorsement, if any, is
separate and independent from the liability of Metrobank to Cabilzo.

The reliance made by Metrobank on Westmont Bank’s indorsement is clearly

inconsistent, if not totally offensive to the dictum that being impressed with
public interest, banks should exercise the highest degree of diligence, if not
utmost diligence in dealing with the accounts of its own clients. It owes the
highest degree fidelity to its clients and should not therefore lightly rely on
the judgment of other banks on occasions where its clients money were
involve, no matter how small or substantial the amount at stake.

Metrobank’s contention that it relied on the strength of collecting bank’s

indorsement may be merely a lame excuse to evade liability, or may be indeed
an actual banking practice. In either case, such act constitutes a deplorable
banking practice and could not be allowed by this Court bearing in mind that
the confidence of public in general is of paramount importance in banking
business.

What is even more deplorable is that, having been informed of the alteration,
Metrobank did not immediately re-credit the amount that was erroneously
debited from Cabilzo’s account but permitted a full blown litigation to push
through, to the prejudice of its client. Anyway, Metrobank is not left with no
recourse for it can still run after the one who made the alteration or with the
collecting bank, which it had already done. It bears repeating that the records
are bare of evidence to prove that Cabilzo was negligent. We find no justifiable
reason therefore why Metrobank did not immediately reimburse his account.
Such ineptness comes within the concept of wanton manner contemplated
under the Civil Code which warrants the imposition of exemplary damages,
"by way of example or correction for the public good," in the words of the law.
It is expected that this ruling will serve as a stern warning in order to deter
the repetition of similar acts of negligence, lest the confidence of the public in
the banking system be further eroded. 32

WHEREFORE, premises considered, the instant Petition is DENIED. The

Decision dated 8 March 2002 and the Resolution dated 26 July 2002 of the
Court of Appeals are AFFIRMED with modification that exemplary damages
in the amount of P50,000.00 be awarded. Costs against the petitioner.

SO ORDERED.
G.R. No. 176697 September 10, 2014

CESAR V. AREZA and LOLITA B. AREZA, Petitioners,

vs.
EXPRESS SAVINGS BANK, INC. and MICHAEL
POTENCIANO, Respondnets.

DECISION

PEREZ, J.:

Before this Court is a Petition for Review on Certiorari under Ruic 45 of the
Rules of Court, which seeks to reverse the Decision1 and Resolution2 dated 29
June 2006 and 12 February 2007 of the Court of Appeals in CAG.R. CV No.
83192. The Court of Appeals affirmed with modification the 22 April 2004
Resolution3 of the Regional Trial Court (RTC) of Calamba, Laguna, Branch 92,
in Civil Case No. B-5886.

The factual antecedents follow.

Petitioners Cesar V. Areza and LolitaB. Areza maintained two bank deposits
with respondent Express Savings Bank’s Biñan branch: 1) Savings Account
No. 004-01-000185-5 and 2) Special Savings Account No. 004-02-000092-3.

They were engaged in the business of "buy and sell" of brand new and second-
hand motor vehicles. On 2 May 2000, they received an order from a certain
Gerry Mambuay (Mambuay) for the purchase of a second-hand Mitsubishi
Pajero and a brand-new Honda CRV.

The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs
Office (PVAO) checks payable to different payees and drawn against the
Philippine Veterans Bank (drawee), each valued at Two Hundred Thousand
Pesos (₱200,000.00) for a total of One Million Eight Hundred Thousand Pesos
(₱1,800,000.00).

About this occasion, petitioners claimed that Michael Potenciano (Potenciano),

the branch manager of respondent Express Savings Bank (the Bank) was
present during the transaction and immediately offered the services of the
Bank for the processing and eventual crediting of the said checks to
petitioners’ account.4 On the other hand,Potenciano countered that he was
prevailed upon to accept the checks by way of accommodation of petitioners
who were valued clients of the Bank.5
On 3 May 2000, petitioners deposited the said checks in their savings account
with the Bank. The Bank, inturn, deposited the checks with its depositary
bank, Equitable-PCI Bank, in Biñan,Laguna. Equitable-PCI Bank presented the
checks to the drawee, the Philippine Veterans Bank, which honored the
checks.

On 6 May 2000, Potenciano informedpetitioners that the checks they

deposited with the Bank werehonored. He allegedly warned petitioners that
the clearing of the checks pertained only to the availability of funds and did
not mean that the checks were not infirmed.6 Thus, the entire amount of
₱1,800,000.00 was credited to petitioners’ savings account. Based on this
information, petitioners released the two cars to the buyer.

Sometime in July 2000, the subjectchecks were returned by PVAO to the

drawee on the ground that the amount on the face of the checks was altered
from the original amount of ₱4,000.00 to ₱200,000.00. The drawee returned
the checks to Equitable-PCI Bank by way of Special Clearing Receipts. In
August 2000, the Bank was informed by Equitable-PCI Bank that the drawee
dishonored the checks onthe ground of material alterations. Equitable-PCI
Bank initially filed a protest with the Philippine Clearing House. In February
2001, the latter ruled in favor of the drawee Philippine Veterans Bank.
Equitable-PCI Bank, in turn, debited the deposit account of the Bank in the
amount of ₱1,800,000.00.

The Bank insisted that they informed petitioners of said development in

August 2000 by furnishing them copies of the documents given by its
depositary bank.7 On the other hand, petitioners maintained that the Bank
never informed them of these developments.

On 9 March 2001, petitioners issued a check in the amount of ₱500,000.00.

Said check was dishonored by the Bank for the reason "Deposit Under Hold."
According topetitioners, the Bank unilaterally and unlawfully put their account
with the Bank on hold. On 22 March 2001, petitioners’ counsel sent a demand
letter asking the Bank to honor their check. The Bank refused to heed their
request and instead, closed the Special Savings Account of the petitioners with
a balance of ₱1,179,659.69 and transferred said amount to their savings
account. The Bank then withdrew the amount of ₱1,800,000.00representing
the returned checks from petitioners’ savings account.

Acting on the alleged arbitrary and groundless dishonoring of their checks and
the unlawful and unilateral withdrawal from their savings account, petitioners
filed a Complaint for Sum of Money with Damages against the Bank and
Potenciano with the RTC of Calamba.
On 15 January 2004, the RTC, through Judge Antonio S. Pozas, ruled in favor
of petitioners. The dispositive portion of the Decision reads:

WHEREFORE, the foregoing considered, the Court orders that judgment be

rendered in favor of plaintiffs and against the defendants jointly and severally
to pay plaintiffs as follows, to wit:

1. ₱1,800,000.00 representing the amount unlawfully withdrawn by the

defendants from the account of plaintiffs;

2. ₱500,000.00 as moral damages; and

3. ₱300,000.00 as attorney’s fees.8

The trial court reduced the issue to whether or not the rights of petitioners
were violated by respondents when the deposits of the former were debited
by respondents without any court order and without their knowledge and
consent. According to the trial court, it is the depositary bank which should
safeguard the right ofthe depositors over their money. Invoking Article 1977
of the Civil Code, the trial court stated that the depositary cannot make use
of the thing deposited without the express permission of the depositor. The
trial court also held that respondents should have observed the 24-hour
clearing house rule that checks should be returned within 24-hours after
discovery of the forgery but in no event beyond the period fixed by law for
filing a legal action. In this case, petitioners deposited the checks in May 2000,
and respondents notified them of the problems on the check three months
later or in August 2000. In sum, the trial court characterized said acts of
respondents as attended with bad faith when they debited the amount of
₱1,800,000.00 from the account of petitioners.

Respondents filed a motion for reconsideration while petitioners filed a motion

for execution from the Decision of the RTC on the ground that respondents’
motion for reconsideration did not conform with Section 5, Rule 16 of the Rules
of Court; hence, it was a mere scrap of paper that did not toll the running of
the period to appeal.

On 22 April 2004, the RTC, through Pairing Judge Romeo C. De Leon granted
the motion for reconsideration, set aside the Pozas Decision, and dismissed
the complaint. The trial court awarded respondents their counterclaim of moral
and exemplary damages of ₱100,000.00 each. The trial court first applied the
principle of liberality when it disregarded the alleged absence of a notice of
hearing in respondents’ motion for reconsideration. On the merits, the trial
court considered the relationship of the Bank and petitioners with respect to
their savings account deposits as a contract of loan with the bank as the debtor
and petitioners as creditors. As such, Article 1977 of the Civil Code prohibiting
the depository from making use of the thing deposited without the express
permission of the depositor is not applicable. Instead, the trial court applied
Article 1980 which provides that fixed, savings and current deposits ofmoney
in banks and similar institutions shall be governed by the provisions governing
simple loan. The trial court then opined thatthe Bank had all the right to set-
off against petitioners’ savings deposits the value of their nine checks that
were returned.

On appeal, the Court of Appeals affirmed the ruling of the trial court but
deleted the award of damages. The appellate court made the following
ratiocination:

Any argument as to the notice of hearing has been resolved when the pairing
judge issued the order on February 24, 2004 setting the hearing on March 26,
2004. A perusal of the notice of hearing shows that request was addressed to
the Clerk of Court and plaintiffs’ counsel for hearing to be set on March 26,
2004.

The core issues in this case revolve on whether the appellee bank had the
right to debit the amount of ₱1,800,000.00 from the appellants’ accounts and
whether the bank’s act of debiting was done "without the plaintiffs’
knowledge."

We find that the elements of legal compensation are all present in the case at
bar. Hence, applying the case of the Bank of the Philippine Islands v. Court of
Appeals, the obligors bound principally are at the same time creditors of each
other. Appellee bank stands as a debtor of appellant, a depositor. At the same
time, said bank is the creditor of the appellant with respect to the dishonored
treasury warrant checks which amount were already credited to the account
of appellants. When the appellants had withdrawn the amount of the checks
they deposited and later on said checks were returned, they became indebted
to the appellee bank for the corresponding amount.

It should be noted that [G]erry Mambuay was the appellants’ walkin buyer.
As sellers, appellants oughtto have exercised due diligence in assessing his
credit or personal background. The 24-hour clearing house rule is not the one
that governs in this case since the nine checks were discovered by the drawee
bank to contain material alterations.

Appellants merely allege that they were not informed of any development on
the checks returned. However, this Court believes that the bank and
appellants had opportunities to communicate about the checks considering
that several transactions occurred from the time of alleged return of the
checks to the date of the debit.

However, this Court agrees withappellants that they should not pay moral and
exemplary damages to each of the appellees for lack of basis. The appellants
were not shown to have acted in bad faith.9

Petitioners filed the present petition for review on certiorariraising both

procedural and substantive issues, to wit:

1. Whether or not the Honorable Court of Appeals committed a

reversible error of law and grave abuse of discretion in upholding the
legality and/or propriety of the Motion for Reconsideration filed in
violation of Section 5, Rule 15 ofthe Rules on Civil Procedure;

2. Whether or not the Honorable Court of Appeals committed a grave

abuse of discretion in declaring that the private respondents "had the
right to debit the amount of ₱1,800,000.00 from the appellants’
accounts" and the bank’s act of debiting was done with the plaintiff’s
knowledge.10

Before proceeding to the substantive issue, we first resolve the procedural

issue raised by petitioners.

Sections 5, Rule 15 of the Rules of Court states:

Section 5. Notice of hearing. – The notice of hearing shall be addressed to all

parties concerned, and shall specify the time and date of the hearing which
must not be later than ten (10) days after the filing of the motion.

Petitioners claim that the notice of hearing was addressed to the Clerk of Court
and not to the adverse party as the rules require. Petitioners add that the
hearing on the motion for reconsideration was scheduled beyond 10 days from
the date of filing.

As held in Maturan v. Araula,11 the rule requiring that the notice be addressed
to the adverse party has beensubstantially complied with when a copy of the
motion for reconsideration was furnished to the counsel of the adverse party,
coupled with the fact that the trial court acted on said notice of hearing and,
as prayed for, issued an order12 setting the hearing of the motion on 26 March
2004.
We would reiterate later that there is substantial compliance with the
foregoing Rule if a copy of the said motion for reconsideration was furnished
to the counsel of the adverse party.13

Now to the substantive issues to which procedural imperfection must, in this

case, give way.

The central issue is whether the Bank had the right to debit ₱1,800,000.00
from petitioners’ accounts.

On 6 May 2000, the Bank informed petitioners that the subject checks had
been honored. Thus, the amountof ₱1,800,000.00 was accordingly credited to
petitioners’ accounts, prompting them to release the purchased cars to the
buyer.

Unknown to petitioners, the Bank deposited the checks in its depositary bank,
Equitable-PCI Bank. Three months had passed when the Bank was informed
by its depositary bank that the drawee had dishonored the checks on the
ground of material alterations.

The return of the checks created a chain of debiting of accounts, the last loss
eventually falling upon the savings account of petitioners with respondent
bank. The trial court inits reconsidered decision and the appellate court were
one in declaring that petitioners should bear the loss.

We reverse.

The fact that material alteration caused the eventual dishonor of the checks
issued by PVAO is undisputed. In this case, before the alteration was
discovered, the checks were already cleared by the drawee bank, the
Philippine Veterans Bank. Three months had lapsed before the drawee
dishonored the checks and returned them to Equitable-PCI Bank, the
respondents’ depositary bank. And itwas not until 10 months later when
petitioners’ accounts were debited. A question thus arises: What are the
liabilities of the drawee, the intermediary banks, and the petitioners for the
altered checks?

LIABILITY OF THE DRAWEE

Section 63 of Act No. 2031 orthe Negotiable Instruments Law provides that
the acceptor, by accepting the instrument, engages that he will pay it
according to the tenor of his acceptance. The acceptor is a drawee who accepts
the bill. In Philippine National Bank v. Court of Appeals,14 the payment of the
amount of a check implies not only acceptance but also compliance with the
drawee’s obligation.

In case the negotiable instrument isaltered before acceptance, is the drawee

liable for the original or the altered tenor of acceptance? There are two
divergent intepretations proffered by legal analysts.15 The first view is
supported by the leading case of National City Bank ofChicago v. Bank of the
Republic.16 In said case, a certain Andrew Manning stole a draft and
substituted his name for that of the original payee. He offered it as payment
to a jeweler in exchange for certain jewelry. The jeweler deposited the draft
to the defendant bank which collectedthe equivalent amount from the drawee.
Upon learning of the alteration, the drawee sought to recover from the
defendant bank the amount of the draft, as money paid by mistake. The court
denied recovery on the ground that the drawee by accepting admitted the
existence of the payee and his capacity to endorse.17 Still, in Wells Fargo Bank
& Union Trust Co. v. Bank of Italy,18 the court echoed the court’s interpretation
in National City Bank of Chicago, in this wise:

We think the construction placed upon the section by the Illinois court is
correct and that it was not the legislative intent that the obligation of the
acceptor should be limited to the tenorof the instrument as drawn by the
maker, as was the rule at common law,but that it should be enforceable in
favor of a holder in due course against the acceptor according to its tenor at
the time of its acceptance or certification.

The foregoing opinion and the Illinois decision which it follows give effect to
the literal words of the Negotiable Instruments Law. As stated in the Illinois
case: "The court must take the act as it is written and should give to the words
their natural and common meaning . . . ifthe language of the act conflicts with
statutes or decisions in force before its enactment the courts should not give
the act a strained construction in order to make it harmonize with earlier
statutes or decisions." The wording of the act suggests that a change in the
common law was intended. A careful reading thereof, independent of any
common-law influence, requires that the words "according to the tenor of his
acceptance" be construed as referring to the instrument as it was at the time
it came into the hands of the acceptor for acceptance, for he accepts no other
instrument than the one presented to him — the altered form — and it alone
he engages to pay. This conclusion is in harmony with the law of England and
the continental countries. It makes for the usefulness and currency of
negotiable paper without seriously endangering accepted banking practices,
for banking institutions can readily protect themselves against liability on
altered instruments either by qualifying their acceptance or certification or by
relying on forgery insurance and specialpaper which will make alterations
obvious. All of the arguments advanced against the conclusion herein
announced seem highly technical in the face of the practical facts that the
drawee bank has authenticated an instrument in a certain form, and that
commercial policy favors the protection of anyone who, in due course, changes
his position on the faith of that authentication.19

The second view is that the acceptor/drawee despite the tenor of his
acceptance is liable only to the extent of the bill prior to alteration.20 This view
appears to be in consonance with Section 124 of the Negotiable Instruments
Law which statesthat a material alteration avoids an instrument except as
against an assenting party and subsequent indorsers, but a holder in due
course may enforce payment according to its original tenor. Thus, when the
drawee bank pays a materially altered check, it violates the terms of the
check, as well as its duty tocharge its client’s account only for bona fide
disbursements he had made. If the drawee did not pay according to the
original tenor of the instrument, as directed by the drawer, then it has no right
to claim reimbursement from the drawer, much less, the right to deduct the
erroneous payment it made from the drawer’s account which it was expected
to treat with utmost fidelity.21 The drawee, however, still has recourse to
recover its loss. It may pass the liability back to the collecting bank which is
what the drawee bank exactly did in this case. It debited the account of
Equitable-PCI Bank for the altered amount of the checks.

LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK

A depositary bank is the first bank to take an item even though it is also the
payor bank, unless the item is presented for immediate payment over the
counter.22 It is also the bank to which a check is transferred for deposit in an
account at such bank, evenif the check is physically received and indorsed
first by another bank.23 A collecting bank is defined as any bank handling an
item for collection except the bank on which the check is drawn.24

When petitioners deposited the check with the Bank, they were designating
the latter as the collecting bank. This is in consonance with the rule that a
negotiable instrument, such as a check, whether a manager's check or
ordinary check, is not legal tender. As such, after receiving the deposit, under
its own rules, the Bank shall credit the amount in petitioners’ account or infuse
value thereon only after the drawee bank shall have paid the amount of the
check or the check has been cleared for deposit.25

The Bank and Equitable-PCI Bank are both depositary and collecting banks.

A depositary/collecting bank where a check is deposited, and which endorses

the check upon presentment with the drawee bank, is an endorser. Under
Section 66 of the Negotiable Instruments Law, an endorser warrants "that the
instrument is genuine and in all respects what it purports to be; that he has
good title to it; that all prior parties had capacity to contract; and that the
instrument is at the time of his endorsement valid and subsisting." It has been
repeatedly held that in check transactions, the depositary/collecting bank or
last endorser generally suffers the loss because it has the duty to ascertain
the genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party
making the presentment has done its duty to ascertain the genuineness of the
endorsements.26 If any of the warranties made by the depositary/collecting
bank turns out to be false, then the drawee bank may recover from it up to
the amount of the check.27

The law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it for the purpose of determining their genuineness and
regularity. The collecting bank being primarily engaged in banking holds itself
out to the public as the expert and the law holds it to a high standard of
conduct.28

As collecting banks, the Bank and Equitable-PCI Bank are both liable for the
amount of the materially altered checks. Since Equitable-PCI Bank is not a
party to this case and the Bank allowed its account with EquitablePCI Bank to
be debited, it has the option toseek recourse against the latter in another
forum.

24-HOUR CLEARING RULE

Petitioners faulted the drawee bank for not following the 24-hour clearing
period because it was only in August 2000 that the drawee bank notified
Equitable-PCI that there were material alterations in the checks.

We do not subscribe to the position taken by petitioners that the drawee bank
was at fault because it did not follow the 24-hour clearing period which
provides that when a drawee bank fails to return a forged or altered check to
the collecting bank within the 24-hour clearing period, the collecting bank is
absolved from liability.

Section 21 of the Philippine Clearing House Rules and Regulations provides:

Sec. 21. Special Return Items Beyond The Reglementary Clearing Period.-
Items which have been the subject of material alteration or items bearing
forged endorsement when such endorsement is necessary for negotiation shall
be returned by direct presentation or demand to the Presenting Bank and not
through the regular clearing house facilities within the period prescribed by
law for the filing of a legal action by the returning bank/branch, institution or
entity sending the same.
Antonio Viray, in his book Handbook on Bank Deposits, elucidated:

It is clear that the so-called "24-hour" rule has been modified. In the case of
Hongkong & Shanghai vs. People’s Bank reiterated in Metropolitan Bank and
Trust Co. vs. FNCB, the Supreme Court strictly enforced the 24-hour rule
under which the drawee bank forever loses the right to claim against
presenting/collecting bank if the check is not returned at the next clearing day
orwithin 24 hours. Apparently, the commercial banks felt strict enforcement
of the 24-hour rule is too harsh and therefore made representations and
obtained modification of the rule, which modification is now incorporated in
the Manual of Regulations. Since the same commercial banks controlled the
Philippine Clearing House Corporation, incorporating the amended rule in the
PCHC Rules naturally followed.

As the rule now stands, the 24-hour rule is still in force, that is, any check
which should be refused by the drawee bank in accordance with long standing
and accepted banking practices shall be returned through the PCHC/local
clearing office, as the case may be, not later than the next regular clearing
(24-hour). The modification, however, is that items which have been the
subject of material alteration or bearing forged endorsement may be returned
even beyond 24 hours so long that the same is returned within the prescriptive
period fixed by law. The consensus among lawyers is that the
prescriptiveperiod is ten (10)years because a check or the endorsement
thereon is a written contract. Moreover, the item need not be returned through
the clearing house but by direct presentation to the presenting bank.29

In short, the 24-hour clearing ruledoes not apply to altered checks.

LIABILITY OF PETITIONERS

The 2008 case of Far East Bank & Trust Company v. Gold Palace Jewellery
Co.30 is in point. A foreigner purchased several pieces of jewelry from Gold
Palace Jewellery using a United Overseas Bank (Malaysia) issued draft
addressed to the Land Bank of the Philippines (LBP). Gold Palace Jewellery
deposited the draft in the company’s account with Far East Bank. Far East
Bank presented the draft for clearing to LBP. The latter cleared the same and
Gold Palace Jewellery’s account was credited with the amount stated in the
draft. Consequently, Gold Palace Jewellery released the pieces of jewelries to
the foreigner. Three weeks later, LBP informed Far East Bank that the amount
in the foreign draft had been materially altered from ₱300,000.00 to
₱380,000.00. LBP returnedthe check to Far East Bank. Far East Bank refunded
LBP the ₱380,000.00 paid by LBP. Far East Bank initially debited ₱168,053.36
from Gold Palace Jewellery’s account and demanded the payment of the
difference between the amount in the altered draft and the amount debited
from Gold Palace Jewellery.

However, for the reasons already discussed above, our pronouncement in the
Far East Bank and Trust Companycase that "the drawee is liable on its
payment of the check according to the tenor of the check at the time of
payment, which was the raised amount"31 is inapplicable to the factual milieu
obtaining herein.

We only adopt said decision in so far as it adjudged liability on the part of the
collecting bank, thus:

Thus, considering that, in this case, Gold Palace is protected by Section 62 of

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

As the transaction in this case had been closed and the principalagent
relationship between the payee and the collecting bank had already ceased,
the latter in returning the amount to the drawee bank was already acting on
its own and should now be responsible for its own actions. x x x Likewise, Far
East cannot invoke the warranty of the payee/depositor who indorsed the
instrument for collection to shift the burden it brought upon itself. This is
precisely because the said indorsement is only for purposes of collection
which, under Section 36 of the NIL, is a restrictive indorsement. It did not in
any way transfer the title of the instrument to the collecting bank. Far East
did not own the draft, it merely presented it for payment. Considering that the
warranties of a general indorser as provided in Section 66 of the NIL are based
upon a transfer of title and are available only to holders in due course, these
warranties did not attach to the indorsement for deposit and collection made
by Gold Palace to Far East. Without any legal right to do so, the collecting
bank, therefore, could not debit respondent's account for the amount it
refunded to the drawee bank.
The foregoing considered, we affirm the ruling of the appellate court to the
extent that Far East could not debit the account of Gold Palace, and for doing
so, it must return what it had erroneously taken.32

Applying the foregoing ratiocination, the Bank cannot debit the savings
account of petitioners. A depositary/collecting bank may resist or defend
against a claim for breach of warranty if the drawer, the payee, or either the
drawee bank or depositary bank was negligent and such negligence
substantially contributed tothe loss from alteration. In the instant case, no
negligence can be attributed to petitioners. We lend credence to their claim
that at the time of the sales transaction, the Bank’s branch manager was
present and even offered the Bank’s services for the processing and eventual
crediting of the checks. True to the branch manager’s words, the checks were
cleared three days later when deposited by petitioners and the entire amount
ofthe checks was credited to their savings account.

ON LEGAL COMPENSATION

Petitioners insist that the Bank cannotbe considered a creditor of the

petitioners because it should have made a claim of the amount of
₱1,800,000.00 from Equitable-PCI Bank, its own depositary bank and the
collecting bank in this case and not from them.

The Bank cannot set-off the amount it paid to Equitable-PCI Bank with
petitioners’ savings account. Under Art. 1278 of the New Civil Code,
compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. And the requisites for legal compensation
are:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be
at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if
the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

 (5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor.

It is well-settled that the relationship of the depositors and the Bank or similar
institution is that of creditor-debtor. Article 1980 of the New Civil Code
provides that fixed, savings and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple
loans. The bank is the debtorand the depositor is the creditor. The depositor
lends the bank money and the bank agrees to pay the depositor on demand.
The savings deposit agreement between the bank and the depositor is the
contract that determines the rights and obligations of the parties.33

But as previously discussed, petitioners are not liable for the deposit of the
altered checks. The Bank, asthe depositary and collecting bank ultimately
bears the loss. Thus, there being no indebtedness to the Bank on the part of
petitioners, legal compensation cannot take place. DAMAGES

The Bank incurred a delay in informing petitioners of the checks’ dishonor.

The Bank was informed of the dishonor by Equitable-PCI Bank as early as
August 2000 but it was only on 7 March 2001 when the Bank informed
petitioners that it will debit from their account the altered amount. This delay
is tantamount to negligence on the part of the collecting bank which would
entitle petitioners to an award for damages under Article 1170 of the New Civil
Code which reads:

Art. 1170. 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.

The damages in the form of actual or compensatory damages represent the

amount debited by the Bank from petitioners’ account.

We delete the award of moral damages. Contrary to the lower court’s finding,
there was no showing that the Bank acted fraudulently or in bad faith. It may
have been remiss in its duty to diligently protect the account of its depositors
but its honest but mistaken belief that petitioners’ account should be debited
is not tantamount to bad faith. We also delete the award of attorney’s fees for
it is not a sound public policy to place a premium on the right to litigate. No
damages can becharged to those who exercise such precious right in good
faith, even if done erroneously.34

To recap, the drawee bank, Philippine Veterans Bank in this case, is only liable
to the extent of the check prior to alteration.1âwphi1 Since Philippine Veterans
Bank paid the altered amount of the check, it may pass the liability back as it
did, to Equitable-PCI Bank,the collecting bank. The collecting banks,
Equitable-PCI Bank and the Bank, are ultimately liable for the amount of the
materially altered check. It cannot further pass the liability back to the
petitioners absent any showing in the negligence on the part of the petitioners
which substantially contributed to the loss from alteration.

Based on the foregoing, we affirm the Pozasdecision only insofar as it ordered

respondents to jointly and severally pay petitioners ₱1,800,000.00,
representing the amount withdrawn from the latter’s account. We do not
conform with said ruling regarding the finding of bad faith on the part of
respondents, as well as its failure toobserve the 24-hour clearing rule.

WHEREFORE, the petition is GRANTED. The Decision and Resolution dated 29

June 2006 and 12 February 2007 respectively of the Court of Appeals in CA-
G.R. CV No. 83192 are REVERSED and SET ASIDE. The 15 January 2004
Decision of the Regional Trial Court of Calamba City, Branch 92 in Civil Case
No. B-5886 rendered by Judge Antonio S. Pozas is REINSTATEDonly insofar
as it ordered respondents to jointly and severally pay petitioners
₱1,800,000.00 representing the amount withdrawn from the latter’s account.
The award of moral damages and attorney’s fees are DELETED.

SO ORDERED.