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G.R. No. 125851 July 11, 2006 Allied Banking Corp vs.

CA Lessons Applicable: Liabilities of the Parties (Negotiable Instruments Law) FACTS: January 6, 1981: Allied Bank (Allied) purchased Export Bill of $20,085 from G.G. Sportswear Mfg. Corporation (GGS) o The bill, drawn under a letter of credit covered Men's Valvoline Training Suit that was in transit to West Germany o The export bill was issued by Chekiang First Bank Ltd., Hongkong. o With the purchase of the bill, ALLIED credited GGS the peso equivalent of the bill amounting to P151,474.52 o Nari Gidwani and Alcron International Ltd. (Alcron) executed their respective Letters of Guaranty, holding themselves liable on the export bill if it should be dishonored or retired by the drawee for any reason. o spouses Leon and Leticia de Villa and Nari Gidwani also executed a Continuing Guaranty/Comprehensive Surety (surety), guaranteeing payment of any and all such credit accommodations which ALLIED may extend to GGS When ALLIED negotiated the export bill to Chekiang, payment was refused due to some material discrepancies in the documents submitted by GGS relative to the exportation covered by the letter of credit. ALLIED demanded payment o GGS and Nari Gidwani: signed blank forms of the Letters of Guaranty and the Surety, and the blanks were only filled up by ALLIED after they had affixed their signatures. They also added that the documents did not cover the transaction involving the subject export bill. o spouses de Villa: not aware of the existence of the export bill; they signed blank forms of the surety; and averred that the guaranty was not meant to secure the export bill o Alcron: foreign corporation doing business in the Philippines, its branch in the Philippines is merely a liaison office; neither its liaison office in the Philippines nor its then representative, Hans-Joachim Schloer, had the authority to issue Letters of Guaranty for and in behalf of local entities and persons RTC: in favor of Allied CA: modified holding GGS liable to reimburse Allied, but it exonerated the guarantors from their liabilities under the Letters of Guaranty ISSUE: W/N Gidwani, Alcron and Spouses Villa can be held jointly and severally liable becuase of their capacity as guarantors and surety in the absence of protest on the bill in accordance with Section 152 of the Negotiable Instruments Law? HELD: YES. CA modified. Nari Gidwani, and Spouses Leon and Leticia de Villa are jointly and severally liable together with G.G. Sportswear Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. Section 152 of the Negotiable Instruments Law pertaining to indorsers, relied on by respondents, is not pertinent to this case. o There are well-defined distinctions between the contract of an indorser and that of a guarantor/surety of a commercial paper, which is what is involved in this case. o The contract of indorsement is primarily that of transfer, while the contract of guaranty is that of personal security o The liability of a guarantor/surety is broader than that of an indorser. o Unless the bill is promptly presented for payment at maturity and due notice of dishonor given to the indorser within a reasonable time, he will be discharged from liability thereon. On the other hand, except where required by the

provisions of the contract of suretyship, a demand or notice of default is not required to fix the surety's liability. Therefore, no protest on the export bill is necessary to charge all the respondents jointly and severally liable having affixed their consenting signatures in several documents executed at different times, it is safe to presume that they had full knowledge of its terms and conditions, hence, they are precluded from asserting ignorance of the legal effects of the undertaking they assumed thereunder. G.R. No. 148211 July 25, 2006 Sincere Villanueva vs. Marlyn Nite Lessons Applicable: Liabilities of Parties (Negotiable Instruments Law) FACTS:

Nite loaned from Villanueva P409,000 o as a sceurity he issued an Asian Bank Corporation (ABC) check of P325,500 dated February 8, 1994 o it was consented to be changed to June 8, 1994 check was dishonored due to a material alteration August 24, 1994: Nite while abroad partially paid P235K through her representative Emily P. Abojada The balance of P174K was due on or before December 8, 1994. August 24, 1994: Villanueva filed an action for a sum of money and damages against ABC for the full amount of the dishonored check (despite the loan not being due and Nite away) RTC: favored Villanueva June 30, 1997: Nite went to ABC to withdraw but she was not able to because of the RTC order August 25, 1997: ABC remitted to the sheriff a managers check amounting to P325,500 drawn on Nite's account CA: favored Nite's appeal

ISSUE: W/N ABC should be liable to Villanueva HELD: NO. DENIED

Negotiable Instruments Law o SEC. 185. Check, defined. A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check o SEC. 189. When check operates as an assignment. A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder, unless and until it accepts or certifies the check Rule 3, Sec. 7 of the Rules of Court states:

Sec. 7. Compulsory joinder of indispensable parties. Parties in interest without whom no final determination can be had of an action shall be joined either as plaintiffs or defendants.

The contract of loan was between Villanueva and Nite. No collection suit could prosper without Nite who was an indispensable party

G.R. No. 156207 September 15, 2006 Equitable PCI Bank vs. Rowena Ong Lessons Applicable: Promissory Notes and Checks FACTS: Warliza Sarande deposited in her account at Philippine Commercial International (PCI) Bank a PCI Bank TCBT Check of P225K. December 5 1991: Upon inquiry by Serande at PCI Bank on whether the TCBT Check had been cleared, she received an affirmative answer. Relying on this assurance, she issued 2 checks drawn against the proceeds of TCBT Check. o PCI Bank Check No. 073661 dated 5 December 1991 for P132K which Sarande issued to respondent Rowena Ong owing to a business transaction. On the same day, Ong presented to PCI Bank requesting PCI Bank to convert the proceeds into a manager's check, which the PCI Bank obliged. December 6 1991: Ong deposited PCI Bank Manager's Check in her account with Equitable Banking Corporation December 9 1991: she received a check return-slip informing her that PCI Bank had stopped the payment of the check on the ground of irregular issuance. o Despite several demands made, it was refused o Ong was constrained to file a Complaint for sum of money, damages and attorney's fees against PCI Bank CA affirmed RTC: favored Ong ISSUE: W/N Ong can hold PCI liable HELD: YES. Petition is DENIED. CA affirmed. By admitting it committed an error, clearing the check of Sarande and issuing in favor of Ong not just any check but a manager's check for that matter, PCI Bank's liability is fixed certification = acceptance, o Equitable PCI as drawee bank is bound on the instrument upon certification and it is immaterial to such liability in favor of Ong who is a holder in due course whether the drawer (Warliza Sarande) had funds or not with the Equitable PCI Bank No unjust enrichment SECTION 52. What constitutes a holder in due course. A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. The same law provides further: Sec. 24. Presumption of consideration. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.

Sec. 26. What constitutes holder for value. Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. Sec. 28. Effect of want of consideration. Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. manager's check o an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity and honor behind its issuance o regarded substantially to be as good as the money it represents o same footing as a certified check The object of certifying a check, as regards both parties, is to enable the holder to use it as money. check operates as an assignment of a part of the funds to the creditors Sec. 187. Certification of check; effect of. Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance Section 63 of the Central Bank Act to the effect "that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account Sec. 62. Liability of acceptor. The acceptor by accepting the instruments engages that he will pay it according to the tenor of his acceptance; and admits (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse.


The Case Before the Court is a petition for review assailing the 9 August 1994 Amended Decision and the 16 July 1997 Resolution of the Court of Appeals in CA-G.R. CV No. 25209. The Antecedent Facts The case originated from an action for collection of sum of money filed on 16 March 1982 by the International Corporate Bank, Inc. (petitioner) against the Philippine National Bank (respondent). The case was raffled to the then Court of First Instance (CFI) of Manila, Branch 6. The complaint was amended on 19 March 1982. The case was eventually re-raffled to the Regional Trial Court of Manila, Branch 52 (trial court). The Ministry of Education and Culture issued 15 checks drawn against respondent which petitioner accepted for deposit on various dates. The checks are as follows: Check Number 7-3694621-4 7-3694609-6 7-3666224-4 7-3528348-4 7-3666225-5 7-3688945-6 7-4535674-1 7-4535675-2 7-4535699-5 7-4535700-6 7-4697902-2 7-4697925-6 7-4697011-6 Date 7-20-81 7-27-81 8-03-81 8-07-81 8-10-81 8-10-81 8-21-81 8-21-81 8-24-81 8-24-81 9-18-81 9-18-81 10-02-81 Payee Trade Factors, Inc. Romero Palmares D. Amount P 97,500.00 98,500.50 99,800.00 98,600.00 98,900.00 97,700.00 City 95,300.00 96,400.00 94,200.00 95,100.00 96,000.00 93,030.00 90,960.00

Trade Factors, Inc. Trade Factors, Inc. Antonio Lisan Antonio Lisan Golden Trading Antonio Lisan Antonio Lisan Ace Inc. Golden Trading Wintrade Marketing Enterprises, City

Red Arrow Trading

Check Number 7-3694621-4 7-4697909-4 7-4697922-3

Date 7-20-81 10-02-81 10-05-81

Payee Trade Factors, Inc. ABC Trading, Inc. Golden Enterprises

Amount P 97,500.00 99,300.00 96,630.00

The checks were deposited on the following dates for the following accounts: Check Number 7-3694621-4 7-3694609-6 7-3666224-4 7-3528348-4 7-3666225-5 7-3688945-6 7-4535674-1 7-4535675-2 7-4535699-5 7-4535700-6 7-4697902-2 7-4697925-6 7-4697011-6 7-4697909-4 Date Deposited 7-23-81 7-28-81 8-4-81 8-11-81 8-11-81 8-17-81 8-26-81 8-27-81 8-31-81 8-24-81 9-23-81 9-23-81 10-7-81 10-7-81 Account Deposited CA 0060 02360 3 CA 0060 02360 3 CA 0060 02360 3 CA 0060 02360 3 SA 0061 32331 7 CA 0060 30982 5 CA 0060 02360 3 CA 0060 02360 3 CA 0060 30982 5 SA 0061 32331 7 CA 0060 02360 3 CA 0060 30982 5 CA 0060 02360 3 CA 0060 30982 5

After 24 hours from submission of the checks to respondent for clearing, petitioner paid the value of the checks and allowed the withdrawals of the deposits. However, on 14 October 1981, respondent returned all the checks to petitioner without clearing them on the ground that they were materially altered. Thus, petitioner instituted an action for collection of sums of money against respondent to recover the value of the checks. The Ruling of the Trial Court The trial court ruled that respondent is expected to use reasonable business practices in accepting and paying the checks presented to it. Thus, respondent cannot be faulted for the delay in clearing the checks considering the ingenuity in which the alterations were effected. The trial court observed that there was no attempt from petitioner to verify the status of the checks before petitioner paid the value of the checks or allowed withdrawal of the deposits. According to the trial court, petitioner, as collecting bank, could have inquired by telephone from respondent, as drawee bank, about the status of the checks before paying their value. Since the immediate cause of petitioners loss was the lack of caution of its personnel, the trial court held that petitioner is not entitled to recover the value of the checks from respondent. The dispositive portion of the trial courts Decision reads: WHEREFORE, judgment is hereby rendered dismissing both the complaint and the counterclaim. Costs shall, however be assessed against the plaintiff. SO ORDERED.

Petitioner appealed the trial courts Decision before the Court of Appeals. The Ruling of the Court of Appeals In its 10 October 1991 Decision, the Court of Appeals reversed the trial courts Decision. Applying Section 4(c) of Central Bank Circular No. 580, series of 1977, the Court of Appeals held that checks that have been materially altered shall be returned within 24 hours after discovery of the alteration. However, the Court of Appeals ruled that even if the drawee bank returns a check with material alterations after discovery of the alteration, the return would not relieve the drawee bank from any liability for its failure to return the checks within the 24-hour clearing period. The Court of Appeals explained: Does this mean that, as long as the drawee bank returns a check with material alteration within 24 hour[s] after discovery of such alteration, such return would have the effect of relieving the bank of any liability whatsoever despite its failure to return the check within the 24- hour clearing house rule? We do not think so. Obviously, such bank cannot be held liable for its failure to return the check in question not later than the next regular clearing. However, this Court is of the opinion and so holds that it could still be held liable if it fails to exercise due diligence in verifying the alterations made. In other words, such bank would still be expected, nay required, to make the proper verification before the 24hour regular clearing period lapses, or in cases where such lapses may be deemed inevitable, that the required verification should be made within a reasonable time. The implication of the rule that a check shall be returned within the 24hour clearing period is that if the collecting bank paid the check before the end of the aforesaid 24-hour clearing period, it would be responsible therefor such that if the said check is dishonored and returned within the 24-hour clearing period, the drawee bank cannot be held liable. Would such an implication apply in the case of materially altered checks returned within 24 hours after discovery? This Court finds nothing in the letter of the above-cited C.B. Circular that would justify a negative answer. Nonetheless, the drawee bank could still be held liable in certain instances. Even if the return of the check/s in question is done within 24 hours after discovery, if it can be shown that the drawee bank had been patently negligent in the performance of its verification function, this Court finds no reason why the said bank should be relieved of liability. Although banking practice has it that the presumption of clearance is conclusive when it comes to the application of the 24-hour clearing period, the same principle may not be applied to the 24-hour period vis-a-vis material alterations in the sense that the drawee bank which returns materially altered checks within 24 hours after discovery would be conclusively relieved of any liability thereon. This is because there could well be various intervening events or factors that could affect the rights and obligations of the parties in cases such as the instant one including patent negligence on the part of the drawee bank resulting in an unreasonable delay in detecting the alterations. While it is true that the pertinent proviso in C.B. Circular No. 580 allows the drawee bank to return the altered check within the period provided by law for filing a legal action, this does not mean that this would entitle or allow the drawee bank to be grossly negligent and, inspite thereof, avail itself of the maximum period allowed by the above-cited Circular. The discovery must be made within a reasonable time taking into consideration the facts and circumstances of the case. In other words, the aforementioned C.B. Circular does not provide the drawee bank the license to be grossly negligent on the one hand nor does it preclude the collecting bank from raising available defenses even if the check is

properly returned within the 24-hour period after discovery of the material alteration. The Court of Appeals rejected the trial courts opinion that petitioner could have verified the status of the checks by telephone call since such imposition is not required under Central Bank rules. The dispositive portion of the 10 October 1991 Decision reads: PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and the defendant-appellee Philippine National Bank is declared liable for the value of the fifteen checks specified and enumerated in the decision of the trial court (page 3) in the amount of P1,447,920.00 SO ORDERED. Respondent filed a motion for reconsideration of the 10 October 1991 Decision. In its 9 August 1994 Amended Decision, the Court of Appeals reversed itself and affirmed the Decision of the trial court dismissing the complaint. In reversing itself, the Court of Appeals held that its 10 October 1991 Decision failed to appreciate that the rule on the return of altered checks within 24 hours from the discovery of the alteration had been duly passed by the Central Bank and accepted by the members of the banking system. Until the rule is repealed or amended, the rule has to be applied. Petitioner moved for the reconsideration of the Amended Decision. In its 16 July 1997 Resolution, the Court of Appeals denied the motion for lack of merit. Hence, the recourse to this Court. The Issues Petitioner raises the following issues in its Memorandum: 1. Whether the checks were materially altered;

2. Whether respondent was negligent in failing to recognize within a reasonable period the altered checks and in not returning the checks within the period; and 3. Whether the motion for reconsideration filed by respondent was out of time thus making the 10 October 1991 Decision final and executory. The Ruling of This Court Filing of the Petition under both Rules 45 and 65 Respondent asserts that the petition should be dismissed outright since petitioner availed of a wrong mode of appeal. Respondent cites Ybaez v. Court of Appeals where the Court ruled that a petition cannot be subsumed simultaneously under Rule 45 and Rule 65 of the Rules of Court, and neither may petitioners delegate upon the court the task of determining under which rule the petition should fall. The remedies of appeal and certiorari are mutually exclusive and not alternative or successive. However, this Court may set aside technicality for justifiable reasons. The petition before the Court is clearly meritorious. Further, the petition was filed on time both under Rules 45 and 65. Hence, in accordance with the liberal spirit which pervades the Rules of Court and in the interest of justice, we will treat the petition as having been filed under Rule 45. Alteration of Serial Number Not Material

The alterations in the checks were made on their serial numbers. Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable Instruments Law, provide: SEC. 124. Alteration of instrument; effect of. Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to its original tenor. SEC. 125. changes: (a) (b) (c) (d) (e) What constitutes a material alteration. Any alteration which

The date; The sum payable, either for principal or interest; The time or place of payment; The number or the relations of the parties; The medium or currency in which payment is to be made;

or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. The question on whether an alteration of the serial number of a check is a material alteration under the Negotiable Instruments Law is already a settled matter. In Philippine National Bank v. Court of Appeals, this Court ruled that the alteration on the serial number of a check is not a material alteration. Thus: An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the Negotiable Instrument[s] Law. Section 1 of the Negotiable Instruments Law provides: Section 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

In his book entitled Pandect of Commercial Law and Jurisprudence, Justice Jose C. Vitug opines that an innocent alteration (generally, changes on items other than those required to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder may enforce it only according to its original tenor. xxxx The case at the bench is unique in the sense that what was altered is the serial number of the check in question, an item which, it can readily be observed, is not an essential requisite for negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the relations between the parties. The name of the drawer and the drawee were not altered. The intended payee was the same. The sum of money due to the payee remained the same. x x x xxxx The checks serial number is not the sole indication of its origin. As succinctly found by the Court of Appeals, the name of the government agency which issued the subject check was prominently printed therein. The checks issuer was therefore sufficiently identified, rendering the referral to the serial number redundant and inconsequential. x x x xxxx Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was altered, the same being an immaterial or innocent one. Likewise, in the present case the alterations of the serial numbers do not constitute material alterations on the checks. Incidentally, we agree with the petitioners observation that the check in the PNB case appears to belong to the same batch of checks as in the present case. The check in the PNB case was also issued by the Ministry of Education and Culture. It was also drawn against PNB, respondent in this case. The serial number of the check in the PNB case is 7-3666-223-3 and it was issued on 7 August 1981. Timeliness of Filing of Respondents Motion for Reconsideration Respondent filed its motion for reconsideration of the 10 October 1991 Decision on 6 November 1991. Respondents motion for reconsideration states that it received a copy of the 10 October 1991 Decision on 22 October 1991. Thus, it appears that the motion for reconsideration was filed on time. However, the Registry Return Receipt shows that counsel for respondent or his agent received a copy of the 10 October 1991 Decision on 16 October 1991, not on 22 October 1991 as respondent claimed. Hence, the Court of Appeals is correct when it noted that the motion for reconsideration was filed late. Despite its late filing, the Court of Appeals resolved to admit the motion for reconsideration in the interest of substantial justice. There are instances when rules of procedure are relaxed in the interest of justice. However, in this case, respondent did not proffer any explanation for the late filing of the motion for reconsideration. Instead, there was a deliberate attempt to deceive the Court of Appeals by claiming that the copy of the 10 October 1991 Decision was received on 22 October 1991 instead of on 16 October 1991. We find no justification for the posture taken by the Court of Appeals in admitting the motion for reconsideration. Thus, the late filing of the motion for reconsideration rendered the 10 October 1991 Decision final and executory. The 24-Hour Clearing Time

The Court will not rule on the proper application of Central Bank Circular No. 580 in this case. Since there were no material alterations on the checks, respondent as drawee bank has no right to dishonor them and return them to petitioner, the collecting bank. Thus, respondent is liable to petitioner for the value of the checks, with legal interest from the time of filing of the complaint on 16 March 1982 until full payment. Further, considering that respondents motion for reconsideration was filed late, the 10 October 1991 Decision, which held respondent liable for the value of the checks amounting to P1,447,920, had become final and executory. WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and the 16 July 1997 Resolution of the Court of Appeals. We rule that respondent Philippine National Bank is liable to petitioner International Corporate Bank, Inc. for the value of the checks amounting to P1,447,920, with legal interest from 16 March 1982 until full payment. Costs against respondent. SO ORDERED.