Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 76788 January 22, 1990

JUANITA SALAS, petitioner,

vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING CORPORATION, respondents.

Arsenio C. Villalon, Jr. for petitioner.

Labaguis, Loyola, Angara & Associates for private respondent.

FERNAN, C.J.:

Assailed in this petition for review on certiorari is the decision of the Court of Appeals in C.A.-G.R.
CV No. 00757 entitled "Filinvest Finance & Leasing Corporation v. Salas", which modified the
decision of the Regional Trial Court of San Fernando, Pampanga in Civil Case No. 5915, a collection
suit between the same parties.

Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred to as petitioner)
bought a motor vehicle from the Violago Motor Sales Corporation (VMS for brevity) for P58,138.20
as evidenced by a promissory note. This note was subsequently endorsed to Filinvest Finance &
Leasing Corporation (hereinafter referred to as private respondent) which financed the purchase.

Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to a discrepancy in the
engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice,
certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle
figured in an accident on 9 May 1980.

This failure to pay prompted private respondent to initiate Civil Case No. 5915 for a sum of money
against petitioner before the Regional Trial Court of San Fernando, Pampanga.

In its decision dated September 10, 1982, the trial court held, thus:

WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering the
defendant to pay the plaintiff the sum of P28,414.40 with interest thereon at the rate of 14%
from October 2, 1980 until the said sum is fully paid; and the further amount of P1,000.00 as
attorney's fees.

The counterclaim of defendant is dismissed.

With costs against defendant. 1

Both petitioner and private respondent appealed the aforesaid decision to the Court of Appeals.

Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle
to petitioner, the latter prayed for a reversal of the trial court's decision so that she may be absolved
from the obligation under the contract.

On October 27, 1986, the Court of Appeals rendered its assailed decision, the pertinent portion of
which is quoted hereunder:

The allegations, statements, or admissions contained in a pleading are conclusive as against

the pleader. A party cannot subsequently take a position contradictory of, or inconsistent with
his pleadings (Cunanan vs. Amparo, 80 Phil. 227). Admissions made by the parties in the
pleadings, or in the course of the trial or other proceedings, do not require proof and cannot
be contradicted unless previously shown to have been made through palpable mistake (Sec.
2, Rule 129, Revised Rules of Court; Sta. Ana vs. Maliwat, L-23023, Aug. 31, 1968, 24
SCRA 1018).

When an action or defense is founded upon a written instrument, copied in or attached to the
corresponding pleading as provided in the preceding section, the genuineness and due
 execution of the instrument shall be deemed admitted unless the adverse party, under oath,
specifically denied them, and sets forth what he claims to be the facts (Sec. 8, Rule 8,
Revised Rules of Court; Hibbered vs. Rohde and McMillian, 32 Phil. 476).

A perusal of the evidence shows that the amount of P58,138.20 stated in the promissory
note is the amount assumed by the plaintiff in financing the purchase of defendant's motor
vehicle from the Violago Motor Sales Corp., the monthly amortization of winch is Pl,614.95
for 36 months. Considering that the defendant was able to pay twice (as admitted by the
plaintiff, defendant's account became delinquent only beginning May, 1980) or in the total
sum of P3,229.90, she is therefore liable to pay the remaining balance of P54,908.30 at
l4% per annum from October 2, 1980 until full payment.

WHEREFORE, considering the foregoing, the appealed decision is hereby modified ordering
the defendant to pay the plaintiff the sum of P54,908.30 at 14% per annum from October 2,
1980 until full payment. The decision is AFFIRMED in all other respects. With costs to
defendant. 2

Petitioner's motion for reconsideration was denied; hence, the present recourse.

In the petition before us, petitioner assigns twelve (12) errors which focus on the alleged fraud, bad
faith and misrepresentation of Violago Motor Sales Corporation in the conduct of its business and
which fraud, bad faith and misrepresentation supposedly released petitioner from any liability to
private respondent who should instead proceed against VMS. 3

Petitioner argues that in the light of the provision of the law on sales by description 4 which she
alleges is applicable here, no contract ever existed between her and VMS and therefore none had
been assigned in favor of private respondent.

She contends that it is not necessary, as opined by the appellate court, to implead VMS as a party to
the case before it can be made to answer for damages because VMS was earlier sued by her for
"breach of contract with damages" before the Regional Trial Court of Olongapo City, Branch LXXII,
docketed as Civil Case No. 2916-0. She cites as authority the decision therein where the court
originally ordered petitioner to pay the remaining balance of the motor vehicle installments in the
amount of P31,644.30 representing the difference between the agreed consideration of P49,000.00
as shown in the sales invoice and petitioner's initial downpayment of P17,855.70 allegedly
evidenced by a receipt. Said decision was however reversed later on, with the same court ordering
defendant VMS instead to return to petitioner the sum of P17,855.70. Parenthetically, said decision
is still pending consideration by the First Civil Case Division of the Court of Appeals, upon an appeal
by VMS, docketed as AC-G.R. No. 02922. 5

Private respondent in its comment, prays for the dismissal of the petition and counters that the
issues raised and the allegations adduced therein are a mere rehash of those presented and already
passed upon in the court below, and that the judgment in the "breach of contract" suit cannot be
invoked as an authority as the same is still pending determination in the appellate court.

We see no cogent reason to disturb the challenged decision.

The pivotal issue in this case is whether the promissory note in question is a negotiable instrument
which will bar completely all the available defenses of the petitioner against private respondent.

Petitioner's liability on the promissory note, the due execution and genuineness of which she never
denied under oath is, under the foregoing factual milieu, as inevitable as it is clearly established.

The records reveal that involved herein is not a simple case of assignment of credit as petitioner
would have it appear, where the assignee merely steps into the shoes of, is open to all defenses
available against and can enforce payment only to the same extent as, the assignor-vendor.

Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and Acceptance
Corp., 6 this Court had the occasion to clearly distinguish between a negotiable and a non-negotiable
instrument.

Among others, the instrument in order to be considered negotiable must contain the so-called "words
of negotiability — i.e., must be payable to "order" or "bearer"". Under Section 8 of the Negotiable
Instruments Law, there are only two ways by which an instrument may be made payable to order.
There must always be a specified person named in the instrument and the bill or note is to be paid to
the person designated in the instrument or to any person to whom he has indorsed and delivered the
same. Without the words "or order or "to the order of", the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy
the advantages of being a holder of a negotiable instrument, but will merely "step into the shoes" of
the person designated in the instrument and will thus be open to all defenses available against the
latter. Such being the situation in the above-cited case, it was held that therein private respondent is
not a holder in due course but a mere assignee against whom all defenses available to the assignor
may be raised. 7

In the case at bar, however, the situation is different. Indubitably, the basis of private respondent's
claim against petitioner is a promissory note which bears all the earmarks of negotiability.

The pertinent portion of the note reads:

PROMISSORY NOTE
(MONTHLY)

P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980

For value received, I/We jointly and severally, promise to pay Violago Motor Sales
Corporation or order, at its office in San Fernando, Pampanga, the sum of FIFTY EIGHT
THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine
currency, which amount includes interest at 14% per annum based on the diminishing
balance, the said principal sum, to be payable, without need of notice or demand, in
installments of the amounts following and at the dates hereinafter set forth, to
wit: P1,614.95 monthly for "36" months due and payable on the 21st day of each month
starting March 21, 1980 thru and inclusive of February 21, 1983. P_________ monthly for
______ months due and payable on the ______ day of each month starting _____198__
thru and inclusive of _____, 198________ provided that interest at 14% per annum shall be
added on each unpaid installment from maturity hereof until fully paid.

xxx xxx xxx

Maker; Co-Maker:

(SIGNED) JUANITA SALAS _________________

Address:

____________________ ____________________

WITNESSES

SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE

TAN # TAN #

PAY TO THE ORDER OF

FILINVEST FINANCE AND LEASING CORPORATION

VIOLAGO MOTOR SALES CORPORATION

BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8

A careful study of the questioned promissory note shows that it is a negotiable instrument, having
complied with the requisites under the law as follows: [a] it is in writing and signed by the maker
Juanita Salas; [b] it contains an unconditional promise to pay the amount of P58,138.20; [c] it is
payable at a fixed or determinable future time which is "P1,614.95 monthly for 36 months due and
payable on the 21 st day of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983;"
[d] it is payable to Violago Motor Sales Corporation, or order and as such, [e] the drawee is named
or indicated with certainty. 9

It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest
Finance and Leasing Corporation 10 and it is an indorsement of the entire instrument. 11

Under the circumstances, there appears to be no question that Filinvest is a holder in due course,
having taken the instrument under the following conditions: [a] it is complete and regular upon its
face; [b] it became the holder thereof before it was overdue, and without notice that it had previously
been dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to
Filinvest, the latter had no notice of any infirmity in the instrument or defect in the title of VMS
Corporation. 12
Accordingly, respondent corporation holds the instrument free from any defect of title of prior parties,
and free from defenses available to prior parties among themselves, and may enforce payment of
the instrument for the full amount thereof. 13 This being so, petitioner cannot set up against
respondent the defense of nullity of the contract of sale between her and VMS.

Even assuming for the sake of argument that there is an iota of truth in petitioner's allegation that
there was in fact deception made upon her in that the vehicle she purchased was different from that
actually delivered to her, this matter cannot be passed upon in the case before us, where the VMS
was never impleaded as a party.

Whatever issue is raised or claim presented against VMS must be resolved in the "breach of
contract" case.

Hence, we reach a similar opinion as did respondent court when it held:

We can only extend our sympathies to the defendant (herein petitioner) in this unfortunate
incident. Indeed, there is nothing We can do as far as the Violago Motor Sales Corporation is
concerned since it is not a party in this case. To even discuss the issue as to whether or not
the Violago Motor Sales Corporation is liable in the transaction in question would amount, to
denial of due process, hence, improper and unconstitutional. She should have impleaded
Violago Motor Sales.14

IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs against
petitioner.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Cortés, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,

vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the
earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint
filed therein by herein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by respondent
court, appears of record:
1. On various dates, defendant, a commercial banking institution, through its Sucat
Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz
who deposited with herein defendant the aggregate amount of P1,120,000.00, as
follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records,
p. 207; Defendant's Exhibits 1 to 280);

CTD CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in
connection with his purchased of fuel products from the latter (Original Record, p.
208).

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the
Sucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr.
Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss,
as required by defendant bank's procedure, if he desired replacement of said lost
CTDs (TSN, February 9, 1987, pp. 48-50).

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank
the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit
of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's
Exhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from
defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos
(P875,000.00). On the same date, said depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la
Cruz) surrenders to defendant bank "full control of the indicated time deposits from
and after date" of the assignment and further authorizes said bank to pre-terminate,
set-off and "apply the said time deposits to the payment of whatever amount or
amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-
62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex

(Phils.) Inc., went to the defendant bank's Sucat branch and presented for verification
the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to
herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said
depositor (TSN, February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from
herein plaintiff formally informing it of its possession of the CTDs in question and of
its decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the

former "a copy of the document evidencing the guarantee agreement with Mr. Angel
dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which
plaintiff proposed to apply the time deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim for
payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's
Exhibit 566).
 11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and
fell due and on August 5, 1983, the latter set-off and applied the time deposits in
question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint, praying that
defendant bank be ordered to pay it the aggregate value of the certificates of time
deposit of P1,120,000.00 plus accrued interest and compounded interest therein at
16% per annum, moral and exemplary damages as well as attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint,
hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates
of deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not
become a holder in due course of the said certificates of deposit; and (3) in disregarding the
pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.

SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%

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

This is to Certify that B E A R E R has deposited in this Bank the sum

of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT
OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to
said depositor 731 days. after date, upon presentation and surrender
of this certificate, with interest at the rate of 16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as
follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs
issued, it is important to note that after the word "BEARER" stamped on the space
provided supposedly for the name of the depositor, the words "has deposited" a
certain amount follows. The document further provides that the amount deposited
shall be "repayable to said depositor" on the period indicated. Therefore, the text of
the instrument(s) themselves manifest with clarity that they are payable, not to
whoever purports to be the "bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel
dela Cruz as the person who made the deposit and further engages itself to pay said
depositor the amount indicated thereon at the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments
Law, enumerates the requisites for an instrument to become negotiable, viz:

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

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

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

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

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

indicated therein with reasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties'
bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P.
Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the
depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the
bank, the depositor referred (sic) in these certificates states that it
was Angel dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel dela
Cruz was the one who cause (sic) the amount.

Atty. Calida:

q And no other person or entity or company, Mr. Witness?

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these

certificates of time deposit insofar as the bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself.9 In the construction of a bill
or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing
may be read in the light of surrounding circumstances in order to more perfectly understand the
intent and meaning of the parties, yet as they have constituted the writing to be the only outward and
visible expression of their meaning, no other words are to be added to it or substituted in its stead.
The duty of the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documents
provide that the amounts deposited shall be repayable to the depositor. And who, according to the
document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel
de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts
are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer
at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could
have with facility so expressed that fact in clear and categorical terms in the documents, instead of
having the word "BEARER" stamped on the space provided for the name of the depositor in each
CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to
whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel
de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to
the transaction between them would not be in a position to know that the depositor is not the bearer
stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind
the plain import of what is written thereon to unravel the agreement of the parties thereto through
facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the
Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation
of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in
the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this
suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are
bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and
De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although
petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la
Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment
for the fuel products or as a security has been dissipated and resolved in favor of the latter by
petitioner's own authorized and responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr.,
Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel
dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is
conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an
admission or representation is rendered conclusive upon the person making it, and cannot be denied
or disproved as against the person relying thereon. 14 A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them. 15 In the law of evidence,
whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation
arising out of such declaration, act, or omission, be permitted to falsify it. 16

If it were true that the CTDs were delivered as payment and not as security, petitioner's credit
manager could have easily said so, instead of using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of
particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with
sufficient definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that
the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it,
plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have
proved, if such truly was the fact, that the CTDs were delivered as payment and not as security.
Having opposed the motion, petitioner now labors under the presumption that evidence willfully
suppressed would be adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al. 20 is apropos:

. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote

therefrom:

The character of the transaction between the parties is to be

determined by their intention, regardless of what language was used
or what the form of the transfer was. If it was intended to secure the
payment of money, it must be construed as a pledge; but if there was
some other intention, it is not a pledge. However, even though a
transfer, if regarded by itself, appears to have been absolute, its
object and character might still be qualified and explained by
contemporaneous writing declaring it to have been a deposit of the
property as collateral security. It has been said that a transfer of
property by the debtor to a creditor, even if sufficient on its face to
make an absolute conveyance, should be treated as a pledge if the
debt continues in inexistence and is not discharged by the transfer,
and that accordingly the use of the terms ordinarily importing
conveyance of absolute ownership will not be given that effect in such
a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and unambiguous
language or other circumstances excluding an intent to pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from one person to another in
such a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case,
however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of
petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have
sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we
even disregard the fact that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of the principal obligation, must
be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral
security, he would be a pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be

pledged. The instrument proving the right pledged shall be delivered to the creditor,
and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of the
thing pledged and the date of the pledge do not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de la
Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right
effective against and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be
made of the date of a pledge contract, but a rule of substantive law prescribing a condition without
which the execution of a pledge contract cannot affect third persons adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent
bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil
Code specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as against
third persons, unless it appears in a public instrument, or the instrument is recorded
in the Registry of Property in case the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent
of its lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better
right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether or not
private respondent observed the requirements of the law in the case of lost negotiable instruments
and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised
that issue in the lower court. 28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted
by them to the trial court. 29 The issues agreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDs
against the depositor's loan by virtue of the assignment (Annex "C").

3. Whether or not there was legal compensation or set off involving the amount
covered by the CTDs and the depositor's outstanding account with defendant, if any.

4. Whether or not plaintiff could compel defendant to preterminate the CTDs before
the maturity date provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and litigation
expenses from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties
and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case
are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a
pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as
may involve privileged or impeaching matters. The determination of issues at a pre-trial conference
bars the consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would
be tantamount to saying that petitioner could raise on appeal any issue. We agree with private
respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned
certificates can be premised on a multitude of other legal reasons and causes of action, of which
respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted,
would render a pre-trial delimitation of issues a useless exercise. 33

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

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

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on the
part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the
issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that
it is not mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an
auxiliary verb indicating liberty, opportunity, permission and possibility. 36

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely
established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in
favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically
restricts or prohibits the issuance a duplicate or replacement instrument sans compliance with the
procedure outlined therein, and none establishes a mandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed
decision is hereby AFFIRMED.

SO ORDERED.

Narvasa, C.J., Padilla and Nocon, JJ., concur

SECOND DIVISION

[G.R. No. 136729. September 23 ,2003]

ASTRO ELECTRONICS CORP. and PETER ROXAS, petitioner,
vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION, respondent.

DECISION
AUSTRIA-MARTINEZ, J.:

Assailed in this petition for review on certiorari under Rule 45 of the Rules
of Court is the decision of the Court of Appeals in CA-G.R. CV No.
41274, affirming the decision of the Regional Trial Court (Branch 147) of
[1]

Makati, then Metro Manila, whereby petitioners Peter Roxas and Astro
Electronics Corp. (Astro for brevity) were ordered to pay respondent Philippine
Export and Foreign Loan Guarantee Corporation (Philguarantee), jointly and
severally, the amount of P3,621,187.52 with interests and costs.
The antecedent facts are undisputed.
Astro was granted several loans by the Philippine Trust Company
(Philtrust) amounting to P3,000,000.00 with interest and secured by three
promissory notes: PN NO. PFX-254 dated December 14, 1981 for
P600,000.00, PN No. PFX-258 also dated December 14, 1981 for
P400,000.00 and PN No. 15477 dated August 27, 1981 for P2,000,000.00. In
each of these promissory notes, it appears that petitioner Roxas signed twice,
as President of Astro and in his personal capacity. Roxas also signed a
[2]

Continuing Surety ship Agreement in favor of Philtrust Bank, as President of

Astro and as surety. [3]

Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor

of Philtrust the payment of 70% of Astros loan, subject to the condition that
[4]

upon payment by Philguanrantee of said amount, it shall be proportionally

subrogated to the rights of Philtrust against Astro. [5]

As a result of Astros failure to pay its loan obligations, despite demands,

Philguarantee paid 70% of the guaranteed loan to Philtrust. Subsequently,
Philguarantee filed against Astro and Roxas a complaint for sum of money
with the RTC of Makati.
In his Answer, Roxas disclaims any liability on the instruments,
alleging, inter alia, that he merely signed the same in blank and the phrases in
his personal capacity and in his official capacity were fraudulently inserted
without his knowledge. [6]

After trial, the RTC rendered its decision in favor of Philguarantee with the
following dispositive portion:

WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in
favor or (sic) the plaintiff and against the defendants Astro Electronics Corporation
and Peter T. Roxas, ordering the then (sic) to pay, jointly and severally, the plaintiff
the sum of P3,621.187.52 representing the total obligation of defendants in favor of
plaintiff Philguarantee as of December 31, 1984 with interest at the stipulated rate of
16% per annum and stipulated penalty charges of 16% per annum computed from
January 1, 1985 until the amount is fully paid. With costs.

SO ORDERED. [7]

The trial court observed that if Roxas really intended to sign the
instruments merely in his capacity as President of Astro, then he should have
signed only once in the promissory note. [8]
 On appeal, the Court of Appeals affirmed the RTC decision agreeing with
the trial court that Roxas failed to explain satisfactorily why he had to sign
twice in the contract and therefore the presumption that private transactions
have been fair and regular must be sustained. [9]

In the present petition, the principal issue to be resolved is whether or not

Roxas should be jointly and severally liable (solidary) with Astro for the sum
awarded by the RTC.
The answer is in the affirmative.
Astros loan with Philtrust Bank is secured by three promissory
notes. These promissory notes are valid and binding against Astro and
Roxas. As it appears on the notes, Roxas signed twice: first, as president of
Astro and second, in his personal capacity. In signing his name aside from
being the President of Asro, Roxas became a co-maker of the promissory
notes and cannot escape any liability arising from it. Under the Negotiable
Instruments Law, persons who write their names on the face of promissory
notes are makers, promising that they will pay to the order of the payee or
[10]

any holder according to its tenor. Thus, even without the phrase personal
[11]

capacity, Roxas will still be primarily liable as a joint and several debtor under
the notes considering that his intention to be liable as such is manifested by
the fact that he affixed his signature on each of the promissory notes twice
which necessarily would imply that he is undertaking the obligation in two
different capacities, official and personal.
Unnoticed by both the trial court and the Court of Appeals, a closer
examination of the signatures affixed by Roxas on the promissory notes,
Exhibits A-4 and 3-A and B-4 and 4-A readily reveals that portions of his
signatures covered portions of the typewritten words personal capacity
indicating with certainty that the typewritten words were already existing at the
time Roxas affixed his signatures thus demolishing his claim that the
typewritten words were just inserted after he signed the promissory notes. If
what he claims is true, then portions of the typewritten words would have
covered portions of his signatures, and not vice versa.
As to the third promissory note, Exhibit C-4 and 5-A, the copy submitted is
not clear so that this Court could not discern the same observations on the
notes, Exhibits A-4 and 3-A and B-4 and 4-A.
Nevertheless, the following discussions equally apply to all three
promissory notes.
The three promissory notes uniformly provide: FOR VALUE RECEIVED,
I/We jointly, severally and solidarily, promise to pay to PHILTRUST BANK or
order... An instrument which begins with I, We, or Either of us promise to
[12]

pay, when signed by two or more persons, makes them solidarily

liable. Also, the phrase joint and several binds the makers jointly and
[13]

individually to the payee so that all may be sued together for its enforcement,
or the creditor may select one or more as the object of the suit. Having[14]

signed under such terms, Roxas assumed the solidary liability of a debtor and
Philtrust Bank may choose to enforce the notes against him alone or jointly
with Astro.
Roxas claim that the phrases in his personal capacity and in his official
capacity were inserted on the notes without his knowledge was correctly
disregarded by the RTC and the Court of Appeals. It is not disputed that
Roxas does not deny that he signed the notes twice. As aptly found by both
the trial and appellate court, Roxas did not offer any explanation why he did
so. It devolves upon him to overcome the presumptions that private
transactions are presumed to be fair and regular and that a person takes
[15]

ordinary care of his concerns. Aside from his self-serving allegations, Roxas
[16]

failed to prove the truth of such allegations. Thus, said presumptions prevail
over his claims. Bare allegations, when unsubstantiated by evidence,
documentary or otherwise, are not equivalent to proof under our Rules of
Court.[17]

Roxas is the President of Astro and reasonably, a businessman who is

presumed to take ordinary care of his concerns. Absent any countervailing
evidence, it cannot be gainsaid that he will not sign document without first
informing himself of its contents and consequences. Clearly, he knew the
nature of the transactions and documents involved as he not only executed
these notes on two different dates but he also executed, and again, signed
twice, a continuing Surety ship Agreement notarized on July 31, 1981,
wherein he guaranteed, jointly and severally with Astro the repayment of
P3,000,000.00 due to Philtrust. Such continuing suretyship agreement even
re-enforced his solidary liability Philtrust because as a surety, he bound
himself jointly and severally with Astros obligation. Roxas cannot now avoid
[18]

liability by hiding under the convenient excuse that he merely signed the notes
in blank and the phrases in personal capacity and in his official capacity were
fraudulently inserted without his knowledge.
Lastly, Philguarantee has all the right to proceed against petitioner, it is
subrogated to the rights of Philtrust to demand for and collect payment from
both Roxas and Astro since it already paid the value of 70% of roxas and
Astro Electronics Corp.s loan obligation. In compliance with its contract of
Guarantee in favor of Philtrust.
Subrogation is the transfer of all the rights of the creditor to a third person,
who substitutes him in all his rights. It may either be legal or
[19]

conventional. Legal subrogation is that which takes place without agreement

but by operation of law because of certain acts. Instances of legal
[20]

subrogation are those provided in Article 1302 of the Civil Code. Conventional
subrogation, on the other hand, is that which takes place by agreement of the
parties. [21]

Roxas acquiescence is not necessary for subrogation to take place

because the instant case is one of the legal subrogation that occurs by
operation of law, and without need of the debtors knowledge. Further, [22]

Philguarantee, as guarantor, became the transferee of all the rights of

Philtrust as against Roxas and Astro because the guarantor who pays is
subrogated by virtue thereof to all the rights which the creditor had against the
debtor. [23]

WHEREFORE, finding no error with the decision of the Court of Appeals

dated December 10, 1998, the same is hereby AFFIRMED in toto.
SO ORDERED.
Bellosillo, (Chairman), Callejo, Sr., and Tinga, JJ., concur.
Quisumbing, J., in the result.

FIRST DIVISION

[G.R. No. 154127. December 8, 2003]

ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS, respondent.

DECISION
PANGANIBAN, J.:

Novation cannot be presumed. It must be clearly shown either by the

express assent of the parties or by the complete incompatibility between the
old and the new agreements. Petitioner herein fails to show either requirement
convincingly; hence, the summary judgment holding him liable as a joint
and solidary debtor stands.

The Case

Before us is a Petition for Review under Rule 45 of the Rules of Court,

[1]

seeking to nullify the November 26, 2001 Decision and the June 26,
[2]

2002 Resolution of the Court of Appeals (CA) in CA-GR CV No. 60521. The
[3]

appellate court disposed as follows:

UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed
from, insofar as it pertains to [Petitioner] Romeo Garcia, must be, as it hereby
is, AFFIRMED, subject to the modification that the award for attorneys fees and cost
of suit is DELETED. The portion of the judgment that pertains to x x x Eduardo de
Jesus is SET ASIDE and VACATED. Accordingly, the case against x x xEduardo de
Jesus is REMANDED to the court of origin for purposes of
receiving ex parte [Respondent] Dionisio Llamas evidence against x x x Eduardo de
Jesus.[4]

The challenged Resolution, on the other hand, denied petitioners Motion

for Reconsideration.

The Antecedents

The antecedents of the case are narrated by the CA as follows:

This case started out as a complaint for sum of money and damages
by x x x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and
Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the complaint alleged that
on 23 December 1996[,] [petitioner and de Jesus] borrowed P400,000.00 from
[respondent]; that, on the same day, [they] executed a promissory note wherein they
bound themselves jointly and severally to pay the loan on or before 23 January 1997
with a 5% interest per month; that the loan has long been overdue and, despite
repeated demands, [petitioner and de Jesus] have failed and refused to pay it; and that,
by reason of the[ir] unjustified refusal, [respondent] was compelled to engage the
services of counsel to whom he agreed to pay 25% of the sum to be recovered from
[petitioner and de Jesus], plus P2,000.00 for every appearance in court. Annexed to
the complaint were the promissory note above-mentioned and a demand letter,
dated 02 May 1997, by [respondent] addressed to [petitioner and de Jesus].

Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed
no liability under the promissory note because he signed it merely as an
accommodation party for x x x de Jesus; and, alternatively, that he is relieved from
any liability arising from the note inasmuch as the loan had been paid by x x x de
Jesus by means of a check dated 17 April 1997; and that, in any event, the issuance of
the check and [respondents] acceptance thereof novated or superseded the note.

[Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder asserting that

the loan remained unpaid for the reason that the check issued by x x x de Jesus
bounced, and that [Petitioner] Garcias answer was not even accompanied by a
certificate of non-forum shopping. Annexed to the reply were the face of the check
and the reverse side thereof.

For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of
the supposed P400,000.00 loan, he received only P360,000.00, the P40,000.00 having
been advance interest thereon for two months, that is, for January and February 1997;
that[,] in fact[,] he paid the sum of P120,000.00 by way of interests; that this was
made when [respondents] daughter, one Nits Llamas-Quijencio, received from the
Central Police District Command at Bicutan, Taguig, Metro Manila (where x x x de
Jesus worked), the sum of P40,000.00, representing the peso equivalent of his
accumulated leave credits, another P40,000.00 as advance interest, and still
another P40,000.00 as interest for the months of March and April 1997; that he had
difficulty in paying the loan and had asked [respondent] for an extension of time; that
[respondent] acted in bad faith in instituting the case, [respondent] having agreed to
accept the benefits he (de Jesus) would receive for his retirement, but [respondent]
nonetheless filed the instant case while his retirement was being processed; and that,
in defense of his rights, he agreed to pay his counsel P20,000.00 [as] attorneys fees,
plus P1,000.00 for every court appearance.

During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did
they file any pre-trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his
counsel even manifested that he would no [longer] present evidence. Given this
development, the trial court gave [respondent] permission to present his
evidence ex parte against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial
court directed [respondent] to file a motion for judgment on the pleadings, and for
[Petitioner] Garcia to file his comment or opposition thereto.

Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to

allow him to present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a
[M]anifestation submitting his defense to a judgment on the pleadings. Subsequently,
[respondent] filed a [M]anifestation/[M]otion to submit the case for judgement on the
pleadings, withdrawing in the process his previous motion. Thereunder, he asserted
that [petitioners and de Jesus] solidary liability under the promissory note cannot be
any clearer, and that the check issued by de Jesus did not discharge the loan since the
check bounced. [5]

On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch
222) disposed of the case as follows:

WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in

favor of [respondent] and against [petitioner and De Jesus], who are hereby ordered to
pay, jointly and severally, the [respondent] the following sums, to wit:

1) P400,000.00 representing the principal amount plus 5% interest thereon per month
from January 23, 1997 until the same shall have been fully paid, less the amount
of P120,000.00 representing interests already paid by x x x de Jesus;

2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for each day of
[c]ourt appearance, and;
3) Cost of this suit.
[6]

Ruling of the Court of Appeals

The CA ruled that the trial court had erred when it rendered a judgment on
the pleadings against De Jesus. According to the appellate court, his Answer
raised genuinely contentious issues. Moreover, he was still required to
present his evidence ex parte. Thus, respondent was not ipso facto entitled to
the RTC judgment, even though De Jesus had been declared in default. The
case against the latter was therefore remanded by the CA to the trial court for
the ex parte reception of the formers evidence.
As to petitioner, the CA treated his case as a summary judgment, because
his Answer had failed to raise even a single genuine issue regarding any
material fact.
The appellate court ruled that no novation -- express or implied -- had
taken place when respondent accepted the check from De Jesus. According
to the CA, the check was issued precisely to pay for the loan that was covered
by the promissory note jointly and severally undertaken by petitioner and De
Jesus. Respondents acceptance of the check did not serve to make De Jesus
the sole debtor because, first, the obligation incurred by him and petitioner
was joint and several; and, second, the check -- which had been intended to
extinguish the obligation -- bounced upon its presentment.
Hence, this Petition. [7]

Issues

Petitioner submits the following issues for our consideration:

I

Whether or not the Honorable Court of Appeals gravely erred in not holding
that novation applies in the instant case as x x x Eduardo de Jesus had expressly
assumed sole and exclusive liability for the loan obligation he obtained from
x x x Respondent Dionisio Llamas, as clearly evidenced by:

a) Issuance by x x x de Jesus of a check in payment of the full amount of

the loan of P400,000.00 in favor of Respondent Llamas, although
the check subsequently bounced[;]

b) Acceptance of the check by the x x x respondent x x x which resulted

in [the] substitution by x x x de Jesus or [the superseding of] the
promissory note;

c) x x x de Jesus having paid interests on the loan in the total amount

of P120,000.00;

d) The fact that Respondent Llamas agreed to the proposal of x x x de

Jesus that due to financial difficulties, he be given an extension of
time to pay his loan obligation and that his retirement benefits
from the Philippine National Police will answer for said
obligation.

II
Whether or not the Honorable Court of Appeals seriously erred in not holding that the
defense of petitioner that he was merely an accommodation party, despite the fact that
the promissory note provided for a joint and solidary liability, should have been given
weight and credence considering that subsequent events showed that the principal
obligor was in truth and in fact x x x de Jesus, as evidenced by the foregoing
circumstances showing his assumption of sole liability over the loan obligation.

III

Whether or not judgment on the pleadings or summary judgment was properly availed
of by Respondent Llamas, despite the fact that there are genuine issues of fact, which
the Honorable Court of Appeals itself admitted in its Decision, which call for the
presentation of evidence in a full-blown trial. [8]

Simply put, the issues are the following: 1) whether there was novation of
the obligation; 2) whether the defense that petitioner was only an
accommodation party had any basis; and 3) whether the judgment against
him -- be it a judgment on the pleadings or a summary judgment -- was
proper.

The Courts Ruling

The Petition has no merit.

First Issue:
Novation

Petitioner seeks to extricate himself from his obligation as joint

and solidary debtor by insisting that novation took place, either through the
substitution of De Jesus as sole debtor or the replacement of the promissory
note by the check. Alternatively, the former argues that the original obligation
was extinguished when the latter, who was his co-obligor, paid the loan with
the check.
The fallacy of the second (alternative) argument is all too apparent. The
check could not have extinguished the obligation, because it bounced upon
presentment. By law, the delivery of a check produces the effect of payment
[9]

only when it is encashed.

We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects
or principal obligations, by substituting a new debtor in place of the old one, or
by subrogating a third person to the rights of the creditor. Article 1293 of the
[10]

Civil Code defines novation as follows:

Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the
latter, but not without the consent of the creditor. Payment by the new debtor gives
him rights mentioned in articles 1236 and 1237.

In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the
change does not come from -- and may even be made without the knowledge
of -- the debtor, since it consists of a third persons assumption of the
obligation. As such, it logically requires the consent of the third person and the
creditor. In delegacion, the debtor offers, and the creditor accepts, a third
person who consents to the substitution and assumes the obligation; thus, the
consent of these three persons are necessary. Both modes of substitution by
[11]

the debtor require the consent of the creditor. [12]

Novation may also be extinctive or modificatory. It is extinctive when an

old obligation is terminated by the creation of a new one that takes the place
of the former. It is merely modificatory when the old obligation subsists to the
extent that it remains compatible with the amendatory agreement. Whether [13]

extinctive or modificatory, novation is made either by changing the object or

the principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person to the rights
of the creditor, an act known as subjective or
personal novation. For novation to take place, the following requisites must
[14]

concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract. [15]

Novation may also be express or implied. It is express when the new

obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with the old
one on every point. The test of incompatibility is whether the two obligations
[16]

can stand together, each one with its own independent existence. [17]

Applying the foregoing to the instant case, we hold that no novation took
place.
The parties did not unequivocally declare that the old obligation had been
extinguished by the issuance and the acceptance of the check, or that the
check would take the place of the note. There is no incompatibility between
the promissory note and the check. As the CA correctly observed, the check
had been issued precisely to answer for the obligation. On the one hand, the
note evidences the loan obligation; and on the other, the check answers for
it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioners view, also
constitutes novation -- change the terms and conditions of the
[18]

obligation. Such payment was already provided for in the promissory note
and, like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioners argument that the obligation
was novated by the substitution of debtors. In order to change the person of
the debtor, the old one must be expressly released from the obligation, and
the third person or new debtor must assume the formers place in the
relation. Well-settled
[19]
is the rule that novation is never
presumed. Consequently, that which arises from a purported change in the
[20]

person of the debtor must be clear and express. It is thus incumbent on

[21]

petitioner to show clearly and unequivocally that novation has indeed taken
place.
In the present case, petitioner has not shown that he was expressly
released from the obligation, that a third person was substituted in his place,
or that the joint and solidary obligation was cancelled and substituted by the
solitary undertaking of De Jesus. The CA aptly held:

x x x. Plaintiffs acceptance of the bum check did not result in substitution by de Jesus
either, the nature of the obligation being solidary due to the fact that the promissory
note expressly declared that the liability of appellants thereunder is joint and
[solidary.] Reason: under the law, a creditor may demand payment or performance
from one of the solidary debtors or some or all of them simultaneously, and payment
made by one of them extinguishes the obligation. It therefore follows that in case the
creditor fails to collect from one of the solidary debtors, he may still proceed against
the other or others. x x x [22]

Moreover, it must be noted that for novation to be valid and legal, the law
requires that the creditor expressly consent to the substitution of a new
debtor. Since novation implies a waiver of the right the creditor had before
[23]

the novation, such waiver must be express. It cannot be supposed, without

[24]

clear proof, that the present respondent has done away with his right to exact
fulfillment from either of the solidary debtors. [25]

More important, De Jesus was not a third person to the obligation. From
the beginning, he was a joint and solidary obligor of the P400,000 loan; thus,
he can be released from it only upon its extinguishment. Respondents
acceptance of his check did not change the person of the debtor, because a
joint and solidary obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to
demand the satisfaction of the whole obligation from any or all of the
debtors. It is up to the former to determine against whom to enforce
[26]

collection. Having made himself jointly and severally liable with De Jesus,
[27]

petitioner is therefore liable for the entire obligation.

[28] [29]

Second Issue:
Accommodation Party

Petitioner avers that he signed the promissory note merely as an

accommodation party; and that, as such, he was released as obligor when
respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable
instrument. The note reads:

PROMISSORY NOTE

P400,000.00

RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED

THOUSAND PESOS, Philippine Currency payable on or before January 23, 1997 at
No. 144 K-10 St. Kamias, QuezonCity, with interest at the rate of 5% per month or
fraction thereof.

It is understood that our liability under this loan is jointly and severally [sic].

Done at Quezon City, Metro Manila this 23rd day of December, 1996. [30]

By its terms, the note was made payable to a specific person rather than
to bearer or to order -- a requisite for negotiability under Act 2031, the
[31]
Negotiable Instruments Law (NIL).Hence, petitioner cannot avail himself of
the NILs provisions on the liabilities and defenses of an accommodation
party. Besides, a non-negotiable note is merely a simple contract in writing
and is evidence of such intangible rights as may have been created by the
assent of the parties. The promissory note is thus covered by the general
[32]

provisions of the Civil Code, not by the NIL.

Even granting arguendo that the NIL was applicable, still, petitioner would
be liable for the promissory note. Under Article 29 of Act 2031, an
accommodation party is liable for the instrument to a holder for value even if,
at the time of its taking, the latter knew the former to be only an
accommodation party. The relation between an accommodation party and the
party accommodated is, in effect, one of principal and surety -- the
accommodation party being the surety. It is a settled rule that a surety is
[33]

bound equally and absolutely with the principal and is deemed an

original promissor and debtor from the beginning. The liability is immediate
and direct. [34]

Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings

The next issue illustrates the usual confusion between a judgment on the
pleadings and a summary judgment. Under Section 3 of Rule 35 of the Rules
of Court, a summary judgment may be rendered after a summary hearing if
the pleadings, supporting affidavits, depositions and admissions on file show
that (1) except as to the amount of damages, there is no genuine issue
regarding any material fact; and (2) the moving party is entitled to a judgment
as a matter of law.
A summary judgment is a procedural device designed for the prompt
disposition of actions in which the pleadings raise only a legal, not a genuine,
issue regarding any material fact. Consequently, facts are asserted in the
[35]

complaint regarding which there is yet no admission, disavowal or

qualification; or specific denials or affirmative defenses are set forth in the
answer, but the issues are fictitious as shown by the pleadings, depositions or
admissions. A summary judgment may be applied for by either a claimant or
[36]

a defending party. [37]

On the other hand, under Section 1 of Rule 34 of the Rules of Court, a

judgment on the pleadings is proper when an answer fails to render an issue
or otherwise admits the material allegations of the adverse partys
pleading. The essential question is whether there are issues generated by the
pleadings. A judgment on the pleadings may be sought only by a claimant,
[38]

who is the party seeking to recover upon a claim, counterclaim or cross-claim;

or to obtain a declaratory relief. [39]

Apropos thereto, it must be stressed that the trial courts judgment against
petitioner was correctly treated by the appellate court as a summary
judgment, rather than as a judgment on the pleadings. His
Answer apparently raised several issues -- that he signed the promissory
[40]

note allegedly as a mere accommodation party, and that the obligation was
extinguished by either payment or novation. However, these are not factual
issues requiring trial. We quote with approval the CAs observations:
Although Garcias [A]nswer tendered some issues, by way of affirmative defenses, the
documents submitted by [respondent] nevertheless clearly showed that the issues so
tendered were not valid issues. Firstly, Garcias claim that he was merely an
accommodation party is belied by the promissory note that he signed. Nothing in the
note indicates that he was only an accommodation party as he claimed to be.Quite the
contrary, the promissory note bears the statement: It is understood that our liability
under this loan is jointly and severally [sic]. Secondly, his claim that his co-defendant
de Jesus already paid the loan by means of a check collapses in view of the dishonor
thereof as shown at the dorsal side of said check.[41]

From the records, it also appears that petitioner himself moved to submit
the case for judgment on the basis of the pleadings and documents. In a
written Manifestation, he stated that judgment on the pleadings may now be
[42]

rendered without further evidence, considering the allegations and admissions

of the parties.[43]

In view of the foregoing, the CA correctly considered as a summary

judgment that which the trial court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna,
JJ., concur.

SECOND DIVISION

[G.R. No. 129015. August 13, 2004]

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES,

INC., petitioner, vs. FAR EAST BANK AND TRUST COMPANY
AND COURT OF APPEALS, respondents.

DECISION
TINGA, J.:

Called to fore in the present petition is a classic textbook question if a

bank pays out on a forged check, is it liable to reimburse the drawer from
whose account the funds were paid out? The Court of Appeals, in reversing a
trial court decision adverse to the bank, invoked tenuous reasoning to acquit
the bank of liability. We reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. (Samsung
Construction), while based in Bian, Laguna, maintained a current account with
defendant Far East Bank and Trust Company (FEBTC) at the latters Bel-
[1]

Air, Makati branch. The sole signatory to Samsung Constructions account

[2]

was Jong Kyu Lee (Jong), its Project Manager, while the checks remained in
[3]

the custody of the companys accountant, Kyu Yong Lee (Kyu). [4]
 On 19 March 1992, a certain Roberto Gonzaga presented for payment
FEBTC Check No. 432100 to the banks branch in Bel-Air, Makati. The check,
payable to cash and drawn against Samsung Constructions current account,
was in the amount of Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the
balance of Samsung Constructions account. After ascertaining there were
enough funds to cover the check, she compared the signature appearing on
[5]

the check with the specimen signature of Jong as contained in the specimen
signature card with the bank. After comparing the two signatures, Justiani was
satisfied as to the authenticity of the signature appearing on the check. She
then asked Gonzaga to submit proof of his identity, and the latter presented
three (3) identification cards.
[6]

At the same time, Justiani forwarded the check to the branch Senior
Assistant Cashier Gemma Velez, as it was bank policy that two bank branch
officers approve checks exceeding One Hundred Thousand Pesos, for
payment or encashment. Velez likewise counterchecked the signature on the
check as against that on the signature card. He too concluded that the check
was indeed signed by Jong. Velez then forwarded the check and signature
card to Shirley Syfu, another bank officer, for approval. Syfu then noticed that
Jose Sempio III (Sempio), the assistant accountant of Samsung Construction,
was also in the bank. Sempio was well-known to Syfu and the other bank
officers, he being the assistant accountant of Samsung Construction. Syfu
showed the check to Sempio, who vouched for the genuineness of Jongs
signature. Confirming the identity of Gonzaga, Sempio said that the check
was for the purchase of equipment for Samsung Construction. Satisfied with
the genuineness of the signature of Jong, Syfu authorized the banks
encashment of the check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu,
examined the balance of the bank account and discovered that a check in the
amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00) had been encashed. Aware that he had not prepared such a
check for Jongs signature, Kyu perused the checkbook and found that the last
blank check was missing. He reported the matter to Jong, who then
[7]

proceeded to the bank. Jong learned of the encashment of the check, and
realized that his signature had been forged.The Bank Manager reputedly told
Jong that he would be reimbursed for the amount of the check. Jong [8]

proceeded to the police station and consulted with his

lawyers. Subsequently, a criminal case for qualified theft was filed against
[9]

Sempio before the Laguna court. [10]

In a letter dated 6 May 1992, Samsung Construction, through counsel,

demanded that FEBTC credit to it the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00), with interest. In response,
[11]

FEBTC said that it was still conducting an investigation on the matter.

Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for
violation of Section 23 of the Negotiable Instruments Law, and prayed for the
payment of the amount debited as a result of the questioned check plus
interest, and attorneys fees. The case was docketed as Civil Case No. 92-
[12]

61506 before the Regional Trial Court (RTC) of Manila, Branch 9. [13]

During the trial, both sides presented their respective expert witnesses to
testify on the claim that Jongs signature was forged. Samsung Corporation,
which had referred the check for investigation to the NBI, presented Senior
NBI Document Examiner Roda B. Flores. She testified that based on her
examination, she concluded that Jongs signature had been forged on the
check. On the other hand, FEBTC, which had sought the assistance of the
Philippine National Police (PNP), presented Rosario C. Perez, a document
[14]

examiner from the PNP Crime Laboratory. She testified that her findings
showed that Jongs signature on the check was genuine. [15]

Confronted with conflicting expert testimony, the RTC chose to believe the
findings of the NBI expert. In a Decision dated 25 April 1994, the RTC held
that Jongs signature on the check was forged and accordingly directed the
bank to pay or credit back to Samsung Constructions account the amount of
Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00),
together with interest tolled from the time the complaint was filed, and
attorneys fees in the amount of Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996,
the Special Fourteenth Division of the Court of Appeals rendered
a Decision, reversing the RTC Decisionand absolving FEBTC from any
[16]

liability. The Court of Appeals held that the contradictory findings of the NBI
and the PNP created doubt as to whether there was forgery. Moreover, the
[17]

appellate court also held that assuming there was forgery, it occurred due to
the negligence of Samsung Construction, imputing blame on the accountant
Kyu for lack of care and prudence in keeping the checks, which if observed
would have prevented Sempio from gaining access thereto. The Court of [18]

Appeals invoked the ruling in PNB v. National City Bank of New York that, if a [19]

loss, which must be borne by one or two innocent persons, can be traced to
the neglect or fault of either, such loss would be borne by the negligent party,
even if innocent of intentional fraud. [20]

Samsung Construction now argues that the Court of Appeals had

seriously misapprehended the facts when it overturned the RTCs finding of
forgery. It also contends that the appellate court erred in finding that it had
been negligent in safekeeping the check, and in applying the equity principle
enunciated in PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings
on questions of fact, the Court is obliged to examine the record to draw out
the correct conclusions. Upon examination of the record, and based on the
applicable laws and jurisprudence, we reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:

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

The general rule is to the effect that a forged signature is wholly

inoperative, and payment made through or under such signature is ineffectual
or does not discharge the instrument. If payment is made, the drawee cannot
[21]

charge it to the drawers account. The traditional justification for the result is
that the drawee is in a superior position to detect a forgery because he has
the makers signature and is expected to know and compare it. The rule has
[22]

a healthy cautionary effect on banks by encouraging care in the comparison of

the signatures against those on the signature cards they have on file.
Moreover, the very opportunity of the drawee to insure and to distribute the
cost among its customers who use checks makes the drawee an ideal party to
spread the risk to insurance. [23]
 Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

When a person deposits money in a general account in a bank, against which he has
the privilege of drawing checks in the ordinary course of business, the relationship
between the bank and the depositor is that of debtor and creditor. So far as the legal
relationship between the two is concerned, the situation is the same as though the
bank had borrowed money from the depositor, agreeing to repay it on demand, or had
bought goods from the depositor, agreeing to pay for them on demand. The bank owes
the depositor money in the same sense that any debtor owes money to his
creditor. Added to this, in the case of bank and depositor, there is, of course, the banks
obligation to pay checks drawn by the depositor in proper form and presented in due
course. When the bank receives the deposit, it impliedly agrees to pay only upon the
depositors order. When the bank pays a check, on which the depositors signature is a
forgery, it has failed to comply with its contract in this respect. Therefore, the bank is
held liable.

The fact that the forgery is a clever one is immaterial. The forged signature may so
closely resemble the genuine as to defy detection by the depositor himself. And yet, if
a bank pays the check, it is paying out its own money and not the depositors.

The forgery may be committed by a trusted employee or confidential agent. The bank
still must bear the loss. Even in a case where the forged check was drawn by the
depositors partner, the loss was placed upon the bank. The case referred to is
Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff
brought suit against the defendant bank for money which had been deposited to the
plaintiffs credit and which the bank had paid out on checks bearing forgeries of the
plaintiffs signature.

xxx

It was held that the bank was liable. It was further held that the fact that the plaintiff
waited eight or nine months after discovering the forgery, before notifying the bank,
did not, as a matter of law, constitute a ratification of the payment, so as to preclude
the plaintiff from holding the bank liable. xxx

This rule of liability can be stated briefly in these words: A bank is bound to know its
depositors signature. The rule is variously expressed in the many decisions in which
the question has been considered. But they all sum up to the proposition that a bank
must know the signatures of those whose general deposits it carries. [24]

By no means is the principle rendered obsolete with the advent of modern

commercial transactions. Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments and Other Related
Commercial Paper wrote, thus:

The deposit contract between a payor bank and its customer determines who can draw
against the customers account by specifying whose signature is necessary on checks
that are chargeable against the customers account. Therefore, a check drawn against
the account of an individual customer that is signed by someone other than the
customer, and without authority from her, is not properly payable and is not
chargeable to the customers account, inasmuch as any unauthorized signature on an
instrument is ineffective as the signature of the person whose name is signed. [25]

Under Section 23 of the Negotiable Instruments Law, forgery is a real or

absolute defense by the party whose signature is forged. On the premise
[26]

that Jongs signature was indeed forged, FEBTC is liable for the loss since it
authorized the discharge of the forged check. Such liability attaches even if
the bank exerts due diligence and care in preventing such faulty
discharge. Forgeries often deceive the eye of the most cautious experts; and
when a bank has been so deceived, it is a harsh rule which compels it to
suffer although no one has suffered by its being deceived. The forgery may
[27]

be so near like the genuine as to defy detection by the depositor himself, and
yet the bank is liable to the depositor if it pays the check. [28]

Thus, the first matter of inquiry is into whether the check was indeed
forged. A document formally presented is presumed to be genuine until it is
proved to be fraudulent. In a forgery trial, this presumption must be overcome
but this can only be done by convincing testimony and effective illustrations. [29]

In ruling that forgery was not duly proven, the Court of Appeals held:

[There] is ground to doubt the findings of the trial court sustaining the alleged forgery
in view of the conflicting conclusions made by handwriting experts from the NBI and
the PNP, both agencies of the government.

xxx

These contradictory findings create doubt on whether there was indeed a forgery. In
the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, the Supreme Court
held that forgery cannot be presumed; it must be proved by clear, positive and
convincing evidence.

This reasoning is pure sophistry. Any litigator worth his or her salt would
never allow an opponents expert witness to stand uncontradicted, thus the
spectacle of competing expert witnesses is not unusual. The trier of fact will
have to decide which version to believe, and explain why or why not such
version is more credible than the other. Reliance therefore cannot be placed
merely on the fact that there are colliding opinions of two experts, both clothed
with the presumption of official duty, in order to draw a conclusion, especially
one which is extremely crucial. Doing so is tantamount to a jurisprudential
cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate
tier in the judicial hierarchy. This Court has long deferred to the appellate
court as to its findings of fact in the understanding that it has the appropriate
skill and competence to plough through the minutiae that scatters the factual
field. In failing to thoroughly evaluate the evidence before it, and relying
instead on presumptions haphazardly drawn, the Court of Appeals was sadly
remiss. Of course, courts, like humans, are fallible, and not every error
deserves a stern rebuke. Yet, the appellate courts error in this case warrants
special attention, as it is absurd and even dangerous as a precedent. If this
rationale were adopted as a governing standard by every court in the land,
barely any actionable claim would prosper, defeated as it would be by the
mere invocation of the existence of a contrary expert opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert
as more credible than that of the PNP, and explained its reason behind the
conclusion:

After subjecting the evidence of both parties to a crucible of analysis, the court arrived
at the conclusion that the testimony of the NBI document examiner
is more credible because the testimony of the PNPCrime
Laboratory Services document examiner reveals that there are a lot of differences in
the questioned signature as compared to the standard specimen signature.
Furthermore, as testified to by Ms. Rhoda Flores, NBI expert, the manner of execution
of the standard signatures used reveals that it is a free rapid continuous execution or
stroke as shown by the tampering terminal stroke of the signatures whereas the
questioned signature is a hesitating slow drawn execution stroke. Clearly, the person
who executed the questioned signature was hesitant when the signature was made. [30]

During the testimony of PNP expert Rosario Perez, the RTC bluntly noted
that apparently, there [are] differences on that questioned signature and the
standard signatures. This Court, in examining the signatures, makes a
[31]

similar finding. The PNP expert excused the noted differences by asserting
that they were mere variations, which are normal deviations found in
writing. Yet the RTC, which had the opportunity to examine the relevant
[32]

documents and to personally observe the expert witness, clearly disbelieved

the PNP expert. The Court similarly finds the testimony of the PNP expert as
unconvincing. During the trial, she was confronted several times with apparent
differences between strokes in the questioned signature and the genuine
samples. Each time, she would just blandly assert that these differences were
just variations, as if the mere conjuration of the word would sufficiently
[33]

disquiet whatever doubts about the deviations. Such conclusion, standing

alone, would be of little or no value unless supported by sufficiently cogent
reasons which might amount almost to a demonstration. [34]

The most telling difference between the questioned and genuine

signatures examined by the PNP is in the final upward stroke in the signature,
or the point to the short stroke of the terminal in the capital letter L, as referred
to by the PNP examiner who had marked it in her comparison chart as point
no. 6. To the plain eye, such upward final stroke consists of a vertical line
which forms a ninety degree (90) angle with the previous stroke. Of the twenty
one (21) other genuine samples examined by the PNP, at least nine (9) ended
with an upward stroke. However, unlike the questioned signature, the upward
[35]

strokes of eight (8) of these signatures are looped, while the upward stroke of
the seventh forms a severe forty-five degree (45) with the previous
[36]

stroke. The difference is glaring, and indeed, the PNP examiner was
confronted with the inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the s stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated
or the last stroke s is pointing directly upwards?
A: There is none in the standard signature, sir.[37]

Again, the PNP examiner downplayed the uniqueness of the final stroke in
the questioned signature as a mere variation, the same excuse she proffered
[38]

for the other marked differences noted by the Court and the counsel for
petitioner. [39]

There is no reason to doubt why the RTC gave credence to the testimony
of the NBI examiner, and not the PNP experts. The NBI expert, Rhoda Flores,
clearly qualifies as an expert witness. A document examiner for fifteen years,
she had been promoted to the rank of Senior Document Examiner with the
NBI, and had held that rank for twelve years prior to her testimony. She had
placed among the top five examinees in the Competitive Seminar in Question
Document Examination, conducted by the NBI Academy, which qualified her
as a document examiner. She had trained with the Royal Hongkong Police
[40]

Laboratory and is a member of the International Association for

Identification. As of the time she testified, she had examined more than fifty
[41]

to fifty-five thousand questioned documents, on an average of fifteen to twenty

documents a day. In comparison, PNP document examiner Perez admitted
[42]

to having examined only around five hundred documents as of her

testimony.[43]

In analyzing the signatures, NBI Examiner Flores utilized the scientific

comparative examination method consisting of analysis, recognition,
comparison and evaluation of the writing habits with the use of instruments
such as a magnifying lense, a stereoscopic microscope, and varied lighting
substances. She also prepared enlarged photographs of the signatures in
order to facilitate the necessary comparisons. She compared the questioned
[44]

signature as against ten (10) other sample signatures of Jong. Five of these
signatures were executed on checks previously issued by Jong, while the
other five contained in business letters Jong had signed. The NBI found that
[45]

there were significant differences in the handwriting characteristics existing

between the questioned and the sample signatures, as to manner of
execution, link/connecting strokes, proportion characteristics, and other
identifying details.
[46]

The RTC was sufficiently convinced by the NBI examiners testimony, and
explained her reasons in its Decisions. While the Court of Appeals disagreed
and upheld the findings of the PNP, it failed to convincingly demonstrate why
such findings were more credible than those of the NBI expert. As a
throwaway, the assailed Decision noted that the PNP, not the NBI, had the
opportunity to examine the specimen signature card signed by Jong, which
was relied upon by the employees of FEBTC in authenticating Jongs
signature. The distinction is irrelevant in establishing forgery. Forgery can be
established comparing the contested signatures as against those of any
sample signature duly established as that of the persons whose signature was
forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did
compare the questioned signature against the bank signature cards. The
crucial fact in question is whether or not the check was forged, not
whether the bank could have detected the forgery. The latter issue
becomes relevant only if there is need to weigh the comparative
negligence between the bank and the party whose signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jongs
testimony that the signature on the check was not his. The assertion may
[47]

seem self-serving at first blush, yet it cannot be ignored that Jong was in the
best position to know whether or not the signature on the check was
his. While his claim should not be taken at face value, any averments he
would have on the matter, if adjudged as truthful, deserve primacy in
consideration. Jongs testimony is supported by the findings of the NBI
examiner. They are also backed by factual circumstances that support the
conclusion that the assailed check was indeed forged. Judicial notice can be
taken that is highly unusual in practice for a business establishment to draw a
check for close to a million pesos and make it payable to cash or bearer, and
not to order. Jong immediately reported the forgery upon its discovery. He
filed the appropriate criminal charges against Sempio, the putative forger. [48]

Now for determination is whether Samsung Construction was precluded

from setting up the defense of forgery under Section 23 of the Negotiable
Instruments Law. The Court of Appeals concluded that Samsung Construction
was negligent, and invoked the doctrines that where a loss must be borne by
one of two innocent person, can be traced to the neglect or fault of either, it is
reasonable that it would be borne by him, even if innocent of any intentional
fraud, through whose means it has succeeded or who put into the power of
[49]
the third person to perpetuate the wrong. Applying these rules, the Court of
[50]

Appeals determined that it was the negligence of Samsung Construction that

allowed the encashment of the forged check.

In the case at bar, the forgery appears to have been made possible through the acts of
one Jose Sempio III, an assistant accountant employed by the plaintiff Samsung
[Construction] Co. Philippines, Inc. who supposedly stole the blank check and who
presumably is responsible for its encashment through a forged signature of Jong Kyu
Lee. Sempio was assistant to the Korean accountant who was in possession of the
blank checks and who through negligence, enabled Sempio to have access to the
same. Had the Korean accountant been more careful and prudent in keeping the blank
checks Sempio would not have had the chance to steal a page thereof and to effect the
forgery. Besides, Sempio was an employee who appears to have had dealings with the
defendant Bank in behalf of the plaintiff corporation and on the date the check was
encashed, he was there to certify that it was a genuine check issued to purchase
equipment for the company. [51]

We recognize that Section 23 of the Negotiable Instruments Law bars a

party from setting up the defense of forgery if it is guilty of negligence. Yet, [52]

we are unable to conclude that Samsung Construction was guilty of

negligence in this case. The appellate court failed to explain precisely how the
Korean accountant was negligent or how more care and prudence on his part
would have prevented the forgery. We cannot sustain this tar and feathering
resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party
whose signature was forged cannot necessarily imply that such partys
negligence was the cause for the forgery. Employers do not possess the
preternatural gift of cognition as to the evil that may lurk within the hearts and
minds of their employees. The Courts pronouncement in PCI Bank v. Court of
Appeals applies in this case, to wit:
[53]

[T]he mere fact that the forgery was committed by a drawer-payors confidential
employee or agent, who by virtue of his position had unusual facilities for perpetrating
the fraud and imposing the forged paper upon the bank, does not entitle the bank to
shift the loss to the drawer-payor, in the absence of some circumstance raising
estoppel against the drawer.[54]

Admittedly, the record does not clearly establish what measures Samsung
Construction employed to safeguard its blank checks. Jong did testify that his
accountant, Kyu, kept the checks inside a safety box, and no contrary
[55]

version was presented by FEBTC. However, such testimony cannot prove that
the checks were indeed kept in a safety box, as Jongs testimony on that point
is hearsay, since Kyu, and not Jong, would have the personal knowledge as
to how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that
there was no negligence on Samsung Constructions part. The presumption
remains that every person takes ordinary care of his concerns, and that the
[56]

ordinary course of business has been followed. Negligence is not presumed,

[57]

but must be proven by him who alleges it. While the complaint was lodged at
[58]

the instance of Samsung Construction, the matter it had to prove was the
claim it had alleged - whether the check was forged. It cannot be required as
well to prove that it was not negligent, because the legal presumption remains
that ordinary care was employed.
 Thus, it was incumbent upon FEBTC, in defense, to prove the negative
fact that Samsung Construction was negligent. While the payee, as in this
case, may not have the personal knowledge as to the standard procedures
observed by the drawer, it well has the means of disputing the presumption of
regularity. Proving a negative fact may be a difficult office, but necessarily
[59]

so, as it seeks to overcome a presumption in law. FEBTC was unable to

dispute the presumption of ordinary care exercised by Samsung Construction,
hence we cannot agree with the Court of Appeals finding of negligence.
The assailed Decision replicated the extensive efforts which FEBTC
devoted to establish that there was no negligence on the part of the bank in its
acceptance and payment of the forged check. However, the degree of
diligence exercised by the bank would be irrelevant if the drawer is not
precluded from setting up the defense of forgery under Section 23 by his own
negligence. The rule of equity enunciated in PNB v. National City Bank of New
York, as relied upon by the Court of Appeals, deserves careful examination.
[60]

The point in issue has sometimes been said to be that of negligence. The drawee who
has paid upon the forged signature is held to bear the loss, because he has been
negligent in failing to recognize that the handwriting is not that of his
customer. But it follows obviously that if the payee, holder, or presenter of the forged
paper has himself been in default, if he has himself been guilty of a negligence prior
to that of the banker, or if by any act of his own he has at all contributed to induce the
banker's negligence, then he may lose his right to cast the loss upon the
banker. (Emphasis supplied)
[61]

Quite palpably, the general rule remains that the drawee who has paid
upon the forged signature bears the loss. The exception to this rule arises
only when negligence can be traced on the part of the drawer whose
signature was forged, and the need arises to weigh the comparative
negligence between the drawer and the drawee to determine who should bear
the burden of loss. The Court finds no basis to conclude that Samsung
Construction was negligent in the safekeeping of its checks. For one, the
settled rule is that the mere fact that the depositor leaves his check book lying
around does not constitute such negligence as will free the bank from liability
to him, where a clerk of the depositor or other persons, taking advantage of
the opportunity, abstract some of the check blanks, forges the depositors
signature and collect on the checks from the bank. And for another, in point
[62]

of fact Samsung Construction was not negligent at all since it reported the
forgery almost immediately upon discovery. [63]

It is also worth noting that the forged signatures in PNB v. National City
Bank of New York were not of the drawer, but of indorsers. The same
circumstance attends PNB v. Court of Appeals, which was also cited by the
[64]

Court of Appeals. It is accepted that a forged signature of the drawer differs in

treatment than a forged signature of the indorser.

The justification for the distinction between forgery of the signature of the drawer and
forgery of an indorsement is that the drawee is in a position to verify the drawers
signature by comparison with one in his hands, but has ordinarily no opportunity to
verify an indorsement. [65]

Thus, a drawee bank is generally liable to its depositor in paying a check which bears
either a forgery of the drawers signature or a forged indorsement. But the bank may,
as a general rule, recover back the money which it has paid on a check bearing a
forged indorsement, whereas it has not this right to the same extent with reference to a
check bearing a forgery of the drawers signature. [66]
 The general rule imputing liability on the drawee who paid out on the
forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying
out on the forged check, we might as well comment on the banks performance
of its duty. It might be so that the bank complied with its own internal rules
prior to paying out on the questionable check. Yet, there are several troubling
circumstances that lead us to believe that the bank itself was remiss in its
duty.
The fact that the check was made out in the amount of nearly one million
pesos is unusual enough to require a higher degree of caution on the part of
the bank. Indeed, FEBTC confirms this through its own internal
procedures. Checks below twenty-five thousand pesos require only the
approval of the teller; those between twenty-five thousand to one hundred
thousand pesos necessitate the approval of one bank officer; and should the
amount exceed one hundred thousand pesos, the concurrence of two bank
officers is required.
[67]

In this case, not only did the amount in the check nearly total one million
pesos, it was also payable to cash. That latter circumstance should have
aroused the suspicion of the bank, as it is not ordinary business practice for a
check for such large amount to be made payable to cash or to bearer, instead
of to the order of a specified person. Moreover, the check was presented for
[68]

payment by one Roberto Gonzaga, who was not designated as the payee of
the check, and who did not carry with him any written proof that he was
authorized by Samsung Construction to encash the check. Gonzaga, a
stranger to FEBTC, was not even an employee of Samsung
Construction. These circumstances are already suspicious if taken
[69]

independently, much more so if they are evaluated in concurrence. Given the

shadiness attending Gonzagas presentment of the check, it was not sufficient
for FEBTC to have merely complied with its internal procedures, but
mandatory that all earnest efforts be undertaken to ensure the validity of the
check, and of the authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank
tried, but failed, to contact Jong over the phone to verify the check. She [70]

added that calling the issuer or drawer of the check to verify the same was not
part of the standard procedure of the bank, but an extra effort. Even [71]

assuming that such personal verification is tantamount to extraordinary

diligence, it cannot be denied that FEBTC still paid out the check despite the
absence of any proof of verification from the drawer. Instead, the bank seems
to have relied heavily on the say-so of Sempio, who was present at the bank
at the time the check was presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he
had regularly transacted with the bank in behalf of Samsung Construction. It
was even claimed that everytime FEBTC would contact Jong about problems
with his account, Jong would hand the phone over to Sempio. However, the
[72]

only proof of such allegations is the testimony of Gemma Velez, who also
testified that she did not know Sempio personally, and had met Sempio for
[73]

the first time only on the day the check was encashed. In fact, Velez had to
[74]

inquire with the other officers of the bank as to whether Sempio was actually
known to the employees of the bank. Obviously, Velez had no personal
[75]

knowledge as to the past relationship between FEBTC and Sempio, and any
averments of her to that effect should be deemed hearsay
evidence. Interestingly, FEBTC did not present as a witness any other
employee of their Bel-Air branch, including those who supposedly had
transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio,
acting in behalf of Samsung Construction, the irregular circumstances
attending the presentment of the forged check should have put the bank on
the highest degree of alert. The Court recently emphasized that the highest
degree of care and diligence is required of banks.

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.
[76]

Given the circumstances, extraordinary diligence dictates that FEBTC

should have ascertained from Jong personally that the signature in the
questionable check was his.
Still, even if the bank performed with utmost diligence, the drawer whose
signature was forged may still recover from the bank as long as he or she is
not precluded from setting up the defense of forgery. After all, Section 23 of
the Negotiable Instruments Law plainly states that no right to enforce the
payment of a check can arise out of a forged signature. Since the drawer,
Samsung Construction, is not precluded by negligence from setting up the
forgery, the general rule should apply. Consequently, if a bank pays a forged
check, it must be considered as paying out of its funds and cannot charge the
amount so paid to the account of the depositor. A bank is liable, irrespective
[77]

of its good faith, in paying a forged check. [78]

WHEREFORE, the Petition is GRANTED. The Decision of the Court of

Appeals dated 28 November 1996 is REVERSED, and the Decision of the
Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is
REINSTATED. Costs against respondent.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario,
JJ., concur.

FIRST DIVISION

[G.R. No. 149454. May 28, 2004]

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. CASA

MONTESSORI INTERNATIONALE and LEONARDO T.
YABUT, respondents.

[G.R. No. 149507. May 28, 2004]

CASA MONTESSORI INTERNATIONALE, petitioner, vs. BANK OF THE

PHILIPPINE ISLANDS, respondent.
 DECISION
PANGANIBAN, J.:

By the nature of its functions, a bank is required to take meticulous care of

the deposits of its clients, who have the right to expect high standards of
integrity and performance from it.Among its obligations in furtherance thereof
is knowing the signatures of its clients. Depositors are not estopped from
questioning wrongful withdrawals, even if they have failed to question those
errors in the statements sent by the bank to them for verification.

The Case

Before us are two Petitions for Review under Rule 45 of the Rules of
[1]

Court, assailing the March 23, 2001 Decision and the August 17,
[2]

2001 Resolution of the Court of Appeals (CA) in CA-GR CV No. 63561. The
[3]

decretal portion of the assailed Decision reads as follows:

WHEREFORE, upon the premises, the decision appealed from is AFFIRMED with
the modification that defendant bank [Bank of the Philippine Islands (BPI)] is held
liable only for one-half of the value of the forged checks in the amount
of P547,115.00 after deductions subject to REIMBURSEMENT from third party
defendant Yabut who is likewise ORDERED to pay the other half to plaintiff
corporation [Casa Montessori Internationale (CASA)]. [4]

The assailed Resolution denied all the parties Motions for

Reconsideration.

The Facts

The facts of the case are narrated by the CA as follows:

On November 8, 1982, plaintiff CASA Montessori International opened Current

[5]

Account No. 0291-0081-01 with defendant BPI[,] with CASAs President Ms. Ma.
Carina C. Lebron as one of its authorized signatories.

In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its
checks had been encashed by a certain Sonny D. Santos since 1990 in the total amount
of P782,000.00, on the following dates and amounts:

Check No. Date Amount

1. 839700 April 24, 1990 P 43,400.00

2. 839459 Nov. 2, 1990 110,500.00

3. 839609 Oct. 17, 1990 47,723.00

4. 839549 April 7, 1990 90,700.00

5. 839569 Sept. 23, 1990 52,277.00

6. 729149 Mar. 22, 1990 148,000.00

7. 729129 Mar. 16, 1990 51,015.00

 8. 839684 Dec. 1, 1990 140,000.00

9. 729034 Mar. 2, 1990 98,985.00

Total -- P 782,600.00 [6]

It turned out that Sonny D. Santos with account at BPIs Greenbelt Branch
[was] a fictitious name used by third party defendant Leonardo T. Yabut who
worked as external auditor of CASA.Third party defendant voluntarily admitted
that he forged the signature of Ms. Lebron and encashed the checks.
The PNP Crime Laboratory conducted an examination of the nine (9)
checks and concluded that the handwritings thereon compared to the
standard signature of Ms. Lebron were not written by the latter.
On March 4, 1991, plaintiff filed the herein Complaint for Collection with
Damages against defendant bank praying that the latter be ordered to
reinstate the amount of P782,500.00 in the current and savings accounts of
[7]

the plaintiff with interest at 6% per annum.

On February 16, 1999, the RTC rendered the appealed decision in favor of
the plaintiff.
[8]

Ruling of the Court of Appeals

Modifying the Decision of the Regional Trial Court (RTC), the CA

apportioned the loss between BPI and CASA. The appellate court took into
account CASAs contributory negligence that resulted in the undetected
forgery. It then ordered Leonardo T. Yabut to reimburse BPI half the total
amount claimed; and CASA, the other half. It also disallowed attorneys fees
and moral and exemplary damages.
Hence, these Petitions. [9]

Issues

In GR No. 149454, Petitioner BPI submits the following issues for our
consideration:

I. The Honorable Court of Appeals erred in deciding this case NOT in accord with
the applicable decisions of this Honorable Court to the effect that forgery cannot be
presumed; that it must be proved by clear, positive and convincing evidence; and that
the burden of proof lies on the party alleging the forgery.

II. The Honorable Court of Appeals erred in deciding this case not in accord with
applicable laws, in particular the Negotiable Instruments Law (NIL) which precludes
CASA, on account of its own negligence, from asserting its forgery claim against BPI,
specially taking into account the absence of any negligence on the part of BPI.
[10]

In GR No. 149507, Petitioner CASA submits the following issues:

1. The Honorable Court of Appeals erred when it ruled that there is no showing that
[BPI], although negligent, acted in bad faith x x x thus denying the prayer for the
award of attorneys fees, moral damages and exemplary damages to [CASA]. The
Honorable Court also erred when it did not order [BPI] to pay interest on the amounts
due to [CASA].

2. The Honorable Court of Appeals erred when it declared that [CASA] was likewise
negligent in the case at bar, thus warranting its conclusion that the loss in the amount
of P547,115.00 be apportioned between [CASA] and [BPI] x x x. [11]

These issues can be narrowed down to three. First, was there forgery
under the Negotiable Instruments Law (NIL)? Second, were any of the parties
negligent and therefore precluded from setting up forgery as a defense? Third,
should moral and exemplary damages, attorneys fees, and interest be
awarded?

The Courts Ruling

The Petition in GR No. 149454 has no merit, while that in GR No. 149507
is partly meritorious.

First Issue:
Forged Signature Wholly Inoperative

Section 23 of the NIL provides:

Section 23. Forged signature; effect of. -- When a signature is forged or made without
the authority of the person whose signature it purports to be, it is wholly inoperative,
and no right x x x to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party against whom it is sought
to enforce such right is precluded from setting up the forgery or want of authority. [12]

Under this provision, a forged signature is a real or absolute [13]

defense, and a person whose signature on a negotiable instrument is forged

[14]

is deemed to have never become a party thereto and to have never

consented to the contract that allegedly gave rise to it. [15]

The counterfeiting of any writing, consisting in the signing of anothers

name with intent to defraud, is forgery. [16]

In the present case, we hold that there was forgery of the drawers
signature on the check.
First, both the CA and the RTC found that Respondent Yabut himself
[17] [18]

had voluntarily admitted, through an Affidavit, that he had forged the drawers
signature and encashed the checks. He never refuted these findings. That
[19] [20]

he had been coerced into admission was not corroborated by any evidence on
record. [21]

Second, the appellate and the trial courts also ruled that the PNP Crime
Laboratory, after its examination of the said checks, had concluded that the
[22]

handwritings thereon -- compared to the standard signature of the drawer --

were not hers. This conclusion was the same as that in the Report that the
[23] [24]

PNP Crime Laboratory had earlier issued to BPI -- the drawee bank -- upon
the latters request.
Indeed, we respect and affirm the RTCs factual findings, especially when
affirmed by the CA, since these are supported by substantial evidence on
record. [25]
Voluntary Admission Not
Violative of Constitutional Rights

The voluntary admission of Yabut did not violate his constitutional rights
(1) on custodial investigation, and (2) against self-incrimination.
In the first place, he was not under custodial investigation. His Affidavit [26]

was executed in private and before private individuals. The mantle of [27]

protection under Section 12 of Article III of the 1987 Constitution covers only [28]

the period from the time a person is taken into custody for investigation of his
possible participation in the commission of a crime or from the time he is
singled out as a suspect in the commission of a crime although not yet in
custody. [29]

Therefore, to fall within the ambit of Section 12, quoted above, there must
be an arrest or a deprivation of freedom, with questions propounded on him
by the police authorities for the purpose of eliciting admissions, confessions,
or any information. The said constitutional provision does not apply to
[30]

spontaneous statements made in a voluntary manner whereby an individual

[31]

orally admits to authorship of a crime. What the Constitution proscribes is the

[32]

compulsory or coercive disclosure of incriminating facts. [33]

Moreover, the right against self-incrimination under Section 17 of Article

[34]

III of the Constitution, which is ordinarily available only in criminal

[35]

prosecutions, extends to all other government proceedings -- including civil

actions, legislative investigations, and administrative proceedings that
[36]

possess a criminal or penal aspect -- but not to private investigations done

[37]

by private individuals. Even in such government proceedings, this right may

be waived, provided the waiver is certain; unequivocal; and intelligently,
[38]

understandingly and willingly made. [39]

If in these government proceedings waiver is allowed, all the more is it so

in private investigations. It is of no moment that no criminal case has yet been
filed against Yabut. The filing thereof is entirely up to the appropriate
authorities or to the private individuals upon whom damage has been
caused. As we shall also explain later, it is not mandatory for CASA -- the
plaintiff below -- to implead Yabut in the civil case before the lower court.
Under these two constitutional provisions, [t]he Bill of Rights does not [40]

concern itself with the relation between a private individual and another
individual. It governs the relationship between the individual and the
State. Moreover, the Bill of Rights is a charter of liberties for the individual
[41]

and a limitation upon the power of the [S]tate. These rights are guaranteed
[42] [43]

to preclude the slightest coercion by the State that may lead the accused to
admit something false, not prevent him from freely and voluntarily telling the
truth. [44]

Yabut is not an accused here. Besides, his mere invocation of the

aforesaid rights does not automatically entitle him to the constitutional
protection. When he freely and voluntarily executed his Affidavit, the State
[45] [46]

was not even involved. Such Affidavit may therefore be admitted without
violating his constitutional rights while under custodial investigation and
against self-incrimination.

Clear, Positive and Convincing

Examination and Evidence
 The examination by the PNP, though inconclusive, was nevertheless
clear, positive and convincing.
Forgery cannot be presumed. It must be established by clear, positive
[47]

and convincing evidence. Under the best evidence rule as applied to

[48]

documentary evidence like the checks in question, no secondary or

substitutionary evidence may inceptively be introduced, as the original writing
itself must be produced in court. But when, without bad faith on the part of
[49]

the offeror, the original checks have already been destroyed or cannot be
produced in court, secondary evidence may be produced. Without bad faith [50]

on its part, CASA proved the loss or destruction of the original checks through
the Affidavit of the one person who knew of that fact -- Yabut. He clearly [51]

admitted to discarding the paid checks to cover up his misdeed. In such a [52]

situation, secondary evidence like microfilm copies may be introduced in

court.
The drawers signatures on the microfilm copies were compared with the
standard signature. PNP Document Examiner II Josefina de la Cruz testified
on cross-examination that two different persons had written them. Although [53]

no conclusive report could be issued in the absence of the original

checks, she
[54]
affirmed that her findings were 90 percent
conclusive. According to her, even if the microfilm copies were the only basis
[55]

of comparison, the differences were evident. Besides, the RTC explained [56]

that although the Report was inconclusive, no conclusive report could have
been given by the PNP, anyway, in the absence of the original checks. This [57]

explanation is valid; otherwise, no such report can ever be relied upon in

court.
Even with respect to documentary evidence, the best evidence rule
applies only when the contents of a document -- such as the drawers
signature on a check -- is the subject of inquiry. As to whether the document [58]

has been actually executed, this rule does not apply; and testimonial as well
as any other secondary evidence is admissible. Carina Lebron herself, the [59]

drawers authorized signatory, testified many times that she had never signed
those checks. Her testimonial evidence is admissible; the checks have not
been actually executed. The genuineness of her handwriting is proved, not
only through the courts comparison of the questioned handwritings and
admittedly genuine specimens thereof, but above all by her. [60]

The failure of CASA to produce the original checks neither gives rise to the
presumption of suppression of evidence nor creates an unfavorable [61]

inference against it. Such failure merely authorizes the introduction of

[62]

secondary evidence in the form of microfilm copies. Of no consequence is

[63]

the fact that CASA did not present the signature card containing the
signatures with which those on the checks were compared. Specimens of [64]

standard signatures are not limited to such a card. Considering that it was not
produced in evidence, other documents that bear the drawers authentic
signature may be resorted to. Besides, that card was in the possession of
[65]

BPI -- the adverse party.

We have held that without the original document containing the allegedly
forged signature, one cannot make a definitive comparison that would
establish forgery; and that a comparison based on a mere reproduction of
[66]

the document under controversy cannot produce reliable results. We have [67]

also said, however, that a judge cannot merely rely on a handwriting experts
testimony, but should also exercise independent judgment in evaluating the
[68]

authenticity of a signature under scrutiny. In the present case, both the RTC
[69]

and the CA conducted independent examinations of the evidence presented

and arrived at reasonable and similar conclusions. Not only did they admit
secondary evidence; they also appositely considered testimonial and other
documentary evidence in the form of the Affidavit.
The best evidence rule admits of exceptions and, as we have discussed
earlier, the first of these has been met. The result of examining a questioned
[70]

handwriting, even with the aid of experts and scientific instruments, may be
inconclusive; but it is a non sequitur to say that such result is not clear,
[71]

positive and convincing. The preponderance of evidence required in this case

has been satisfied. [72]

Second Issue:
Negligence Attributable to BPI Alone

Having established the forgery of the drawers signature, BPI -- the drawee --
erred in making payments by virtue thereof. The forged signatures are wholly
inoperative, and CASA -- the drawer whose authorized signatures do not
appear on the negotiable instruments -- cannot be held liable thereon. Neither
is the latter precluded from setting up forgery as a real defense.

Clear Negligence
in Allowing Payment
Under a Forged Signature

We have repeatedly emphasized that, since the banking business is

impressed with public interest, of paramount importance thereto is the trust
and confidence of the public in general.Consequently, the highest degree of
diligence is expected, and high standards of integrity and performance are
[73] [74]

even required, of it. By the nature of its functions, a bank is under obligation
[75]

to treat the accounts of its depositors with meticulous care, always having in
[76]

mind the fiduciary nature of their relationship. [77]

BPI contends that it has a signature verification procedure, in which

checks are honored only when the signatures therein are verified to be the
same with or similar to the specimen signatures on the signature
cards. Nonetheless, it still failed to detect the eight instances of forgery. Its
negligence consisted in the omission of that degree of diligence required of a
[78]

bank.It cannot now feign ignorance, for very early on we have already ruled
that a bank is bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of its own
funds, and cannot ordinarily charge the amount so paid to the account of the
depositor whose name was forged. In fact, BPI was the same bank involved
[79]

when we issued this ruling seventy years ago.

Neither Waiver nor Estoppel

Results from Failure to
Report Error in Bank Statement

The monthly statements issued by BPI to its clients contain a notice

worded as follows: If no error is reported in ten (10) days, account will be
correct. Such notice cannot be considered a waiver, even if CASA failed to
[80]
report the error. Neither is it estopped from questioning the mistake after the
lapse of the ten-day period.
This notice is a simple confirmation or circularization -- in accounting
[81]

parlance -- that requests client-depositors to affirm the accuracy of items

recorded by the banks. Its purpose is to obtain from the depositors a direct
[82]

corroboration of the correctness of their account balances with their respective

banks. Internal or external auditors of a bank use it as a basic audit
[83]

procedure -- the results of which its client-depositors are neither interested in

[84]

nor privy to -- to test the details of transactions and balances in the banks
records. Evidential matter obtained from independent sources outside a
[85]

bank only serves to provide greater assurance of reliability than that [86]

obtained solely within it for purposes of an audit of its own financial

statements, not those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be
detected for various reasons. One, materiality is a consideration in audit
[87]

planning; and two, the information obtained from such a substantive test is
[88]

merely presumptive and cannot be the basis of a valid waiver. BPI has no [89]

right to impose a condition unilaterally and thereafter consider failure to meet

such condition a waiver. Neither may CASA renounce a right it has never [90]

possessed. [91]

Every right has subjects -- active and passive. While the active subject is
entitled to demand its enforcement, the passive one is duty-bound to suffer
such enforcement. [92]

On the one hand, BPI could not have been an active subject, because it
could not have demanded from CASA a response to its notice. Besides, the
notice was a measly request worded as follows: Please examine x x x and
report x x x. CASA, on the other hand, could not have been a passive
[93]

subject, either, because it had no obligation to respond. It could -- as it did --

choose not to respond.
Estoppel precludes individuals from denying or asserting, by their own
deed or representation, anything contrary to that established as the truth, in
legal contemplation. Our rules on evidence even make a juris et de
[94]

jure presumption that whenever one has, by ones own act or omission,
[95]

intentionally and deliberately led another to believe a particular thing to be true

and to act upon that belief, one cannot -- in any litigation arising from such act
or omission -- be permitted to falsify that supposed truth. [96]

In the instant case, CASA never made any deed or representation that
misled BPI. The formers omission, if any, may only be deemed an innocent
mistake oblivious to the procedures and consequences of periodic
audits. Since its conduct was due to such ignorance founded upon an
innocent mistake, estoppel will not arise. A person who has no knowledge of
[97]

or consent to a transaction may not be estopped by it. Estoppel cannot be [98]

sustained by mere argument or doubtful inference x x x. CASA is not barred [99]

from questioning BPIs error even after the lapse of the period given in the
notice.

Loss Borne by
Proximate Source
of Negligence
 For allowing payment on the checks to a wrongful and fictitious payee,
[100]

BPI -- the drawee bank -- becomes liable to its depositor-drawer. Since the
encashing bank is one of its branches, BPI can easily go after it and hold it
[101]

liable for reimbursement. It may not debit the drawers account and is not
[102] [103]

entitled to indemnification from the drawer. In both law and equity, when one [104]

of two innocent persons must suffer by the wrongful act of a third person, the
loss must be borne by the one whose negligence was the proximate cause of
the loss or who put it into the power of the third person to perpetrate the
wrong. [105]

Proximate cause is determined by the facts of the case. It is that cause [106]

which, in natural and continuous sequence, unbroken by any efficient

intervening cause, produces the injury, and without which the result would not
have occurred. [107]

Pursuant to its prime duty to ascertain well the genuineness of the

signatures of its client-depositors on checks being encashed, BPI is expected
to use reasonable business prudence. In the performance of that obligation,[108]

it is bound by its internal banking rules and regulations that form part of the
contract it enters into with its depositors. [109]

Unfortunately, it failed in that regard. First, Yabut was able to open a bank
account in one of its branches without privity; that is, without the proper [110]

verification of his corresponding identification papers. Second, BPI was

unable to discover early on not only this irregularity, but also the marked
differences in the signatures on the checks and those on the signature
card.Third, despite the examination procedures it conducted, the Central
Verification Unit of the bank even passed off these evidently different
[111]

signatures as genuine. Without exercising the required prudence on its part,

BPI accepted and encashed the eight checks presented to it. As a result, it
proximately contributed to the fraud and should be held primarily liable for [112]

the negligence of its officers or agents when acting within the course and
scope of their employment. It must bear the loss. [113]

CASA Not Negligent

in Its Financial Affairs

In this jurisdiction, the negligence of the party invoking forgery is

recognized as an exception to the general rule that a forged signature is
[114]

wholly inoperative. Contrary to BPIs claim, however, we do not find CASA

[115]

negligent in handling its financial affairs. CASA, we stress, is not precluded

from setting up forgery as a real defense.

Role of Independent Auditor

The major purpose of an independent audit is to investigate and determine

objectively if the financial statements submitted for audit by a corporation have
been prepared in accordance with the appropriate financial reporting
practices of private entities. The relationship that arises therefrom is both
[116]

legal and moral. It begins with the execution of the engagement letter that
[117] [118]

embodies the terms and conditions of the audit and ends with the fulfilled
expectation of the auditors ethical and competent performance in all aspects
[119]

of the audit. [120]

 The financial statements are representations of the client; but it is the
auditor who has the responsibility for the accuracy in the recording of data that
underlies their preparation, their form of presentation, and the
opinion expressed therein. The auditor does not assume the role of
[121] [122]

employee or of management in the clients conduct of operations and is [123]

never under the control or supervision of the client.

[124]

Yabut was an independent auditor hired by CASA. He handled its

[125]

monthly bank reconciliations and had access to all relevant documents and
checkbooks. In him was reposed the clients trust and confidence that he
[126] [127] [128]

would perform precisely those functions and apply the appropriate procedures
in accordance with generally accepted auditing standards. Yet he did not [129]

meet these expectations. Nothing could be more horrible to a client than to

discover later on that the person tasked to detect fraud was the same one
who perpetrated it.

Cash Balances
Open to Manipulation

It is a non sequitur to say that the person who receives the monthly bank
statements, together with the cancelled checks and other debit/credit
memoranda, shall examine the contents and give notice of any discrepancies
within a reasonable time. Awareness is not equipollent with discernment.
Besides, in the internal accounting control system prudently installed by
CASA, it was Yabut who should examine those documents in order to
[130]

prepare the bank reconciliations. He owned his working papers, and his
[131] [132]

output consisted of his opinion as well as the clients financial statements and
accompanying notes thereto. CASA had every right to rely solely upon his
output -- based on the terms of the audit engagement -- and could thus be
unwittingly duped into believing that everything was in order. Besides, [g]ood
faith is always presumed and it is the burden of the party claiming otherwise to
adduce clear and convincing evidence to the contrary. [133]

Moreover, there was a time gap between the period covered by the bank
statement and the date of its actual receipt. Lebron personally received the
December 1990 bank statement only in January 1991 -- when she was also [134]

informed of the forgery for the first time, after which she immediately
requested a stop payment order. She cannot be faulted for the late detection
of the forged December check. After all, the bank account with BPI was not
personal but corporate, and she could not be expected to monitor closely all
its finances. A preschool teacher charged with molding the minds of the youth
cannot be burdened with the intricacies or complexities of corporate
existence.
There is also a cutoff period such that checks issued during a given
month, but not presented for payment within that period, will not be reflected
therein. An experienced auditor with intent to defraud can easily conceal any
[135]

devious scheme from a client unwary of the accounting processes involved by

manipulating the cash balances on record -- especially when bank
transactions are numerous, large and frequent. CASA could only be blamed, if
at all, for its unintelligent choice in the selection and appointment of an auditor
-- a fault that is not tantamount to negligence.
Negligence is not presumed, but proven by whoever alleges it. Its mere [136]

existence is not sufficient without proof that it, and no other cause, has given [137]

rise to damages. In addition, this fault is common to, if not prevalent among,
[138]
small and medium-sized business entities, thus leading the Professional
Regulation Commission (PRC), through the Board of Accountancy (BOA), to
require today not only accreditation for the practice of public
accountancy, but also the registration of firms in the practice thereof. In fact,
[139]

among the attachments now required upon registration are the code of good
governance and a sworn statement on adequate and effective training.
[140] [141]

The missing checks were certainly reported by the bookkeeper to the [142]

accountant -- her immediate supervisor -- and by the latter to the

[143]

auditor. However, both the accountant and the auditor, for reasons known
only to them, assured the bookkeeper that there were no irregularities.
The bookkeeper who had exclusive custody of the checkbooks did not
[144] [145]

have to go directly to CASAs president or to BPI. Although she rightfully

reported the matter, neither an investigation was conducted nor a resolution of
it was arrived at, precisely because the person at the top of the helm was the
culprit. The vouchers, invoices and check stubs in support of all check
disbursements could be concealed or fabricated -- even in collusion -- and
management would still have no way to verify its cash accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no
fault of CASA. If auditors may be held liable for breach of contract and
negligence, with all the more reason may they be charged with the
[146]

perpetration of fraud upon an unsuspecting client. CASA had the discretion to

pursue BPI alone under the NIL, by reason of expediency or munificence or
both. Money paid under a mistake may rightfully be recovered, and under [147]

such terms as the injured party may choose.

Third Issue:
Award of Monetary Claims

Moral Damages Denied

We deny CASAs claim for moral damages.

In the absence of a wrongful act or omission, or of fraud or bad [148]

faith, moral damages cannot be awarded. The adverse result of an action

[149] [150]

does not per se make the action wrongful, or the party liable for it. One may
err, but error alone is not a ground for granting such damages. While no [151]

proof of pecuniary loss is necessary therefor -- with the amount to be awarded

left to the courts discretion -- the claimant must nonetheless satisfactorily
[152]

prove the existence of its factual basis and causal relation to the claimants
[153] [154]

act or omission. [155]

Regrettably, in this case CASA was unable to identify the particular

instance -- enumerated in the Civil Code -- upon which its claim for moral
damages is predicated. Neither bad faith nor negligence so gross that it
[156]

amounts to malice can be imputed to BPI. Bad faith, under the law, does not
[157]

simply connote bad judgment or negligence; it imports a dishonest purpose [158]

or some moral obliquity and conscious doing of a wrong, a breach of a known

duty through some motive or interest or ill will that partakes of the nature of
fraud. [159]

As a general rule, a corporation -- being an artificial person without

feelings, emotions and senses, and having existence only in legal
contemplation -- is not entitled to moral damages, because it cannot [160]
experience physical suffering and mental anguish. However, for breach of [161]

the fiduciary duty required of a bank, a corporate client may claim such
damages when its good reputation is besmirched by such breach, and social
humiliation results therefrom. CASA was unable to prove that BPI had
[162]

debased the good reputation of, and consequently caused incalculable

[163]

embarrassment to, the former. CASAs mere allegation or supposition thereof,

without any sufficient evidence on record, is not enough. [164]

Exemplary Damages Also Denied

We also deny CASAs claim for exemplary damages.

Imposed by way of correction for the public good, exemplary damages
[165] [166]

cannot be recovered as a matter of right. As we have said earlier, there is [167]

no bad faith on the part of BPI for paying the checks of CASA upon forged
signatures. Therefore, the former cannot be said to have acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner. The latter, having no [168]

right to moral damages, cannot demand exemplary damages. [169]

Attorneys Fees Granted

Although it is a sound policy not to set a premium on the right to

litigate, we find that CASA is entitled to reasonable attorneys fees based on
[170]

factual, legal, and equitable justification. [171]

When the act or omission of the defendant has compelled the plaintiff to
incur expenses to protect the latters interest, or where the court deems it [172]

just and equitable, attorneys fees may be recovered. In the present case,
[173]

BPI persistently denied the claim of CASA under the NIL to recredit the latters
account for the value of the forged checks. This denial constrained CASA to
incur expenses and exert effort for more than ten years in order to protect its
corporate interest in its bank account. Besides, we have already cautioned
BPI on a similar act of negligence it had committed seventy years ago, but it
has remained unrelenting. Therefore, the Court deems it just and equitable to
grant ten percent (10%) of the total value adjudged to CASA as attorneys
[174]

fees.

Interest Allowed

For the failure of BPI to pay CASA upon demand and for compelling the
latter to resort to the courts to obtain payment, legal interest may be
adjudicated at the discretion of the Court, the same to run from the filing of [175]

the Complaint. Since a court judgment is not a loan or a forbearance of

[176]

recovery, the legal interest shall be at six percent (6%) per annum. If the [177]

obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of x x x legal interest, which is six percent per
annum. The actual base for its computation shall be on the amount finally
[178]

adjudged, compounded annually to make up for the cost of

[179] [180]

money already lost to CASA.

[181]

Moreover, the failure of the CA to award interest does not prevent us from
granting it upon damages awarded for breach of contract. Because BPI [182]
evidently breached its contract of deposit with CASA, we award interest in
addition to the total amount adjudged. Under Section 196 of the NIL, any case
not provided for shall be governed by the provisions of existing legislation or,
in default thereof, by the rules of the law merchant. Damages are not
[183]

provided for in the NIL. Thus, we resort to the Code of Commerce and the
Civil Code. Under Article 2 of the Code of Commerce, acts of commerce shall
be governed by its provisions and, in their absence, by the usages of
commerce generally observed in each place; and in the absence of both rules,
by those of the civil law. This law being silent, we look at Article 18 of the
[184]

Civil Code, which states: In matters which are governed by the Code of
Commerce and special laws, their deficiency shall be supplied by its
provisions. A perusal of these three statutes unmistakably shows that the
award of interest under our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that
in GR No. 149507 PARTLY GRANTED. The assailed Decision of the Court of
Appeals is AFFIRMED with modification: BPI is held liable for P547,115, the
total value of the forged checks less the amount already recovered by CASA
from Leonardo T. Yabut, plus interest at the legal rate of six percent (6%) per
annum -- compounded annually, from the filing of the complaint until paid in
full; and attorneys fees of ten percent (10%) thereof, subject to reimbursement
from Respondent Yabut for the entire amount, excepting attorneys fees. Let a
copy of this Decision be furnished the Board of Accountancy of the
Professional Regulation Commission for such action as it may deem
appropriate against Respondent Yabut. No costs.
SO ORDERED.
Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
Davide, Jr., C.J., (Chairman), on official leave