1. CALTEX (PHILIPPINES), INC., petitioner, vs.

COURT OF APPEALS and SECURITY BANK AND

TRUST COMPANY, respondents
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. 5468).
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)

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

determinable future time;

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

Respondent court ruled that the CTDs in question are nonnegotiable 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:

(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: In other words Mr. Witness, you are saying
that per books of the bank, the depositor referred (sic) in
these certificates states that it was Angel dela Cruz?
witness: Yes, your Honor, and we have the record to show
that Angel dela Cruz was the one who cause (sic) the
amount.
Atty. Calida: And no other person or entity or company, Mr.
Witness?
witness: None, your Honor.

xxx xxx xxx

(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;

Atty. Calida: Mr. Witness, who is the depositor identified in

all of these certificates of time deposit insofar as the bank
is concerned?
witness: Angel dela Cruz is the depositor. 8

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.

supposed negligence is only one. Hence, petitioner's

submission, if accepted, would render a pre-trial delimitation
of issues a useless exercise. 33

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

the CTDs.

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.

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

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.

other heavy equipment business, offered to sell to petitionercorporation two (2) "Used" Allis Crawler Tractors, one (1) an
HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors
were to be exposed, (t.s.n., May 28, 1980, p. 44) and to
determine the capability of the "Used" tractors being offered,
petitioner-corporation requested the seller-assignor to inspect
the job site. After conducting said inspection, the sellerassignor assured petitioner-corporation that the "Used" Allis
Crawler Tractors which were being offered were fit for the job,
and gave the corresponding warranty of ninety (90) days
performance of the machines and availability of parts. (t.s.n.,
May 28, 1980, pp. 59-66).

SO ORDERED.
2. Consolidated Plywood vs. IFC Leasing, 149 SCRA
448
This is a petition for certiorari under Rule 45 of the Rules of
Court which assails on questions of law a decision of the
Intermediate Appellate Court in AC-G.R. CV No. 68609 dated
July 17, 1985, as well as its resolution dated October 17,
1985, denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging
business. It had for its program of logging activities for the
year 1978 the opening of additional roads, and simultaneous
logging operations along the route of said roads, in its
logging concession area at Baganga, Manay, and Caraga,
Davao Oriental. For this purpose, it needed two (2) additional
units of tractors.
Cognizant of petitioner-corporation's need and purpose,
Atlantic Gulf & Pacific Company of Manila, through its sister
company and marketing arm, Industrial Products Marketing
(the "seller-assignor"), a corporation dealing in tractors and

With said assurance and warranty, and relying on the sellerassignor's skill and judgment, petitioner-corporation through
petitioners Wee and Vergara, president and vice- president,
respectively, agreed to purchase on installment said two (2)
units of "Used" Allis Crawler Tractors. It also paid the down
payment of Two Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice
for the two 2) units of tractors (Exh. "3-A"). At the same time,
the deed of sale with chattel mortgage with promissory note
was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with
chattel mortgage with promissory note, the seller-assignor,
by means of a deed of assignment (E exh. " 1 "), assigned its
rights and interest in the chattel mortgage in favor of the
respondent.
Immediately thereafter, the seller-assignor delivered said two
(2) units of "Used" tractors to the petitioner-corporation's job
site and as agreed, the seller-assignor stationed its own
mechanics to supervise the operations of the machines.

Barely fourteen (14) days had elapsed after their delivery

when one of the tractors broke down and after another nine
(9) days, the other tractor likewise broke down (t.s.n., May
28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally
advised the seller-assignor of the fact that the tractors broke
down and requested for the seller-assignor's usual prompt
attention under the warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T.
Vergara, Exhibit "5," the seller-assignor sent to the job site its
mechanics to conduct the necessary repairs (Exhs. "6," "6-A,"
"6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did
not come out to be what they should be after the repairs
were undertaken because the units were no longer
serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road
building and simultaneous logging operations of petitionercorporation were delayed and petitioner Vergara advised the
seller-assignor that the payments of the installments as listed
in the promissory note would likewise be delayed until the
seller-assignor completely fulfills its obligation under its
warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7,
1979, petitioner Wee asked the seller-assignor to pull out the
units and have them reconditioned, and thereafter to offer
them for sale. The proceeds were to be given to the
respondent and the excess, if any, to be divided between the
seller-assignor and petitioner-corporation which offered to
bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the
petitioner-corporation and despite several follow-up calls, the
seller-assignor did nothing with regard to the request, until
the complaint in this case was filed by the respondent
against the petitioners, the corporation, Wee, and Vergara.

The complaint was filed by the respondent against the

petitioners for the recovery of the principal sum of One
Million Ninety Three Thousand Seven Hundred Eighty Nine
Pesos & 71/100 (P1,093,789.71), accrued interest of One
Hundred Fifty One Thousand Six Hundred Eighteen Pesos &
86/100 (P151,618.86) as of August 15, 1979, accruing
interest thereafter at the rate of twelve (12%) percent per
annum, attorney's fees of Two Hundred Forty Nine Thousand
Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the
dismissal of the complaint and asking the trial court to order
the respondent to pay the petitioners damages in an amount
at the sound discretion of the court, Twenty Thousand Pesos
(P20,000.00) as and for attorney's fees, and Five Thousand
Pesos (P5,000.00) for expenses of litigation. The petitioners
likewise prayed for such other and further relief as would be
just under the premises.
In a decision dated April 20, 1981, the trial court rendered
the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in
their official and personal capacities the principal sum
of ONE MILLION NINETY THREE THOUSAND SEVEN
HUNDRED NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of ONE
HUNDRED FIFTY ONE THOUSAND SIX HUNDRED
EIGHTEEN PESOS & 86/100 (P151,618.,86) as of
August 15, 1979 and accruing interest thereafter at
the rate of 12% per annum;
2. ordering defendants to pay jointly and severally
attorney's fees equivalent to ten percent (10%) of the
principal and to pay the costs of the suit.

Defendants' counterclaim is disallowed. (pp. 45-46,

Rollo)
On June 8, 1981, the trial court issued an order denying the
motion for reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate
Court and assigned therein the following errors:
I THAT THE LOWER COURT ERRED IN FINDING THAT THE
SELLER ATLANTIC GULF AND PACIFIC COMPANY OF MANILA
DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF
WARRANTY.
II THAT THE LOWER COURT ERRED IN FINDING THAT
PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE OF THE
PROMISSORY NOTE AND SUED UNDER SAID NOTE AS
HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the
challenged decision affirming in toto the decision of the trial
court. The pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the
issue of warranty, We are of the considered opinion
that aside from the fact that no provision of warranty
appears or is provided in the Deed of Sale of the
tractors and even admitting that in a contract of sale
unless a contrary intention appears, there is an implied
warranty, the defense of breach of warranty, if there is
any, as in this case, does not lie in favor of the
appellants and against the plaintiff-appellee who is the
assignee of the promissory note and a holder of the
same in due course. Warranty lies in this case only
between Industrial Products Marketing and
Consolidated Plywood Industries, Inc. The plaintiffappellant herein upon application by appellant

corporation granted financing for the purchase of the

questioned units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense
available to appellants either to withdraw from the
contract and/or demand a proportionate reduction of
the price with damages in either case (Art. 1567, New
Civil Code). We now come to the issue as to whether
the plaintiff-appellee is a holder in due course of the
promissory note.
To begin with, it is beyond arguments that the plaintiffappellee is a financing corporation engaged in
financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or
agricultural enterprises by discounting or factoring
commercial papers or accounts receivable duly
authorized pursuant to R.A. 5980 otherwise known as
the Financing Act.
A study of the questioned promissory note reveals that
it is a negotiable instrument which was discounted or
sold to the IFC Leasing and Acceptance Corporation for
P800,000.00 (Exh. "A") considering the following. it is
in writing and signed by the maker; it contains an
unconditional promise to pay a certain sum of money
payable at a fixed or determinable future time; it is
payable to order (Sec. 1, NIL); the promissory note was
negotiated when it was transferred and delivered by
IPM to the appellee and duly endorsed to the latter
(Sec. 30, NIL); it was taken in the conditions that the
note was complete and regular upon its face before
the same was overdue and without notice, that it had
been previously dishonored and that the note is in
good faith and for value without notice of any infirmity
or defect in the title of IPM (Sec. 52, NIL); that IFC
Leasing and Acceptance Corporation held the

instrument free from any defect of title of prior parties

and free from defenses available to prior parties
among themselves and may enforce payment of the
instrument for the full amount thereof against all
parties liable thereon (Sec. 57, NIL); the appellants
engaged that they would pay the note according to its
tenor, and admit the existence of the payee IPM and
its capacity to endorse (Sec. 60, NIL).

AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS

MARKETING.

In view of the essential elements found in the

questioned promissory note, We opine that the same is
legally and conclusively enforceable against the
defendants-appellants.

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM

THE SELLER-ASSIGNOR OF THE PROMISSORY NOTE.

WHEREFORE, finding the decision appealed from

according to law and evidence, We find the appeal
without merit and thus affirm the decision in toto. With
costs against the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of
July 17, 1985 was denied by the Intermediate Appellate Court
in its resolution dated October 17, 1985, a copy of which was
received by the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I. ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A
NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW
SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II. THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT
BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT PROMISSORY
NOTE.
III. SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE
INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH
A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST
THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT

IV. THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF

THE PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF
WARRANTY UNDER THE LAW;

V. THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE

SELLER- ASSIGNOR IN FAVOR OF THE RESPONDENT DOES
NOT CHANGE THE NATURE OF THE TRANSACTION FROM
BEING A SALE ON INSTALLMENTS TO A PURE LOAN.
VI. THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED
IN EVIDENCE IN ANY COURT BECAUSE THE REQUISITE
DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON
OR CANCELLED.
The petitioners prayed that judgment be rendered setting
aside the decision dated July 17, 1985, as well as the
resolution dated October 17, 1985 and dismissing the
complaint but granting petitioners' counterclaims before the
court of origin.
On the other hand, the respondent corporation in its
comment to the petition filed on February 20, 1986,
contended that the petition was filed out of time; that the
promissory note is a negotiable instrument and respondent a
holder in due course; that respondent is not liable for any
breach of warranty; and finally, that the promissory note is
admissible in evidence.
The core issue herein is whether or not the promissory note
in question is a negotiable instrument so as to bar

completely all the available defenses of the petitioner against

the respondent-assignee.
Preliminarily, it must be established at the outset that we
consider the instant petition to have been filed on time
because the petitioners' motion for reconsideration actually
raised new issues. It cannot, therefore, be considered proformal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached
its express 90-day warranty because the findings of the trial
court, adopted by the respondent appellate court, that "14
days after delivery, the first tractor broke down and 9 days,
thereafter, the second tractor became inoperable" are
sustained by the records. The petitioner was clearly a victim
of a warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for
warranty against the hidden defects which the thing
sold may have, should they render it unfit for the use
for which it is intended, or should they diminish its
fitness for such use to such an extent that, had the
vendee been aware thereof, he would not have
acquired it or would have given a lower price for it; but
said vendor shall not be answerable for patent defects
or those which may be visible, or for those which are
not visible if the vendee is an expert who, by reason of
his trade or profession, should have known them.
ART. 1562. In a sale of goods, there is an implied
warranty or condition as to the quality or fitness of the
goods, as follows:
(1) Where the buyer, expressly or by implication
makes known to the seller the particular purpose for

which the goods are acquired, and it appears that the

buyer relies on the sellers skill or judge judgment
(whether he be the grower or manufacturer or not),
there is an implied warranty that the goods shall be
reasonably fit for such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the
quality or fitness for a particular purpose may be
annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for
any hidden faults or defects in the thing sold even
though he was not aware thereof.
This provision shall not apply if the contrary has been
stipulated, and the vendor was not aware of the
hidden faults or defects in the thing sold. (Emphasis
supplied).
It is patent then, that the seller-assignor is liable for its
breach of warranty against the petitioner. This liability as a
general rule, extends to the corporation to whom it assigned
its rights and interests unless the assignee is a holder in due
course of the promissory note in question, assuming the note
is negotiable, in which case the latter's rights are based on
the negotiable instrument and assuming further that the
petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the
tractors broke down, the petitioner-corporation notified the
seller-assignor's sister company, AG & P, about the
breakdown based on the seller-assignor's express 90-day
warranty, with which the latter complied by sending its
mechanics. However, due to the seller-assignor's delay and
its failure to comply with its warranty, the tractors became

totally unserviceable and useless for the purpose for which

they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally
rescinded its contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied
in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
The injured party may choose between the fulfillment
and the rescission of the obligation with the payment
of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the
latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564,
1565 and 1566, the vendee may elect between
withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in
either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its
contract with the seller-assignor, necessarily can no longer
sue the seller-assignor except by way of counterclaim if the
seller-assignor sues it because of the rescission.
In the case of the University of the Philippines v. De los
Angeles (35 SCRA 102) we held:
In other words, the party who deems the contract
violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but it
proceeds at its own risk. For it is only the final
judgment of the corresponding court that will

conclusively and finally settle whether the action taken

was or was not correct in law. But the law definitely
does not require that the contracting party who
believes itself injured must first file suit and wait for
adjudgement before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the
other's breach will have to passively sit and watch its
damages accumulate during the pendency of the suit
until the final judgment of rescission is rendered when
the law itself requires that he should exercise due
diligence to minimize its own damages (Civil Code,
Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory
note in question is not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally
promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY
THREE THOUSAND SEVEN HUNDRED EIGHTY
NINE PESOS & 71/100 only (P 1,093,789.71),
Philippine Currency, the said principal sum, to
be payable in 24 monthly installments starting
July 15, 1978 and every 15th of the month
thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable
Instruments Law requires that a promissory note "must be
payable to order or bearer, " it cannot be denied that the
promissory note in question is not a negotiable instrument.
The instrument in order to be considered
negotiablility-i.e. must contain the so-called
'words of negotiable, must be payable to 'order'
or 'bearer'. These words serve as an expression
of consent that the instrument may be
transferred. This consent is indispensable since

a maker assumes greater risk under a

negotiable instrument than under a nonnegotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. The
instrument is payable to order where it is drawn
payable to the order of a specified person or to
him or his order. . . .
xxx xxx xxx
These are the only two ways by which an
instrument may be made payable to order.
There must always be a specified person named
in the instrument. It means that the bill or note
is to be paid to the person designated in the
instrument or to any person to whom he has
indorsed and delivered the same. Without the
words "or order" or"to the order of, "the
instrument is payable only to the person
designated therein and is therefore nonnegotiable. Any subsequent purchaser thereof
will not enjoy the advantages of being a holder
of a negotiable instrument but will merely "step
into the shoes" of the person designated in the
instrument and will thus be open to all defenses
available against the latter." (Campos and
Campos, Notes and Selected Cases on
Negotiable Instruments Law, Third Edition, page
38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not
a negotiable instrument, it follows that the respondent can
never be a holder in due course but remains a mere assignee
of the note in question. Thus, the petitioner may raise

against the respondent all defenses available to it as against

the seller-assignor Industrial Products Marketing.
This being so, there was no need for the petitioner to implied
the seller-assignor when it was sued by the respondentassignee because the petitioner's defenses apply to both or
either of either of them. Actually, the records show that even
the respondent itself admitted to being a mere assignee of
the promissory note in question, to wit:
ATTY. PALACA: Did we get it right from the counsel that
what is being assigned is the Deed of Sale with Chattel
Mortgage with the promissory note which is as testified
to by the witness was indorsed? (Counsel for Plaintiff
nodding his head.) Then we have no further questions
on cross,
COURT: You confirm his manifestation? You are nodding
your head? Do you confirm that?
ATTY. ILAGAN: The Deed of Sale cannot be assigned. A
deed of sale is a transaction between two persons;
what is assigned are rights, the rights of the
mortgagee were assigned to the IFC Leasing &
Acceptance Corporation.
COURT: He puts it in a simple way as one-deed of sale
and chattel mortgage were assigned; . . . you want to
make a distinction, one is an assignment of mortgage
right and the other one is indorsement of the
promissory note. What counsel for defendants wants is
that you stipulate that it is contained in one single
transaction?
ATTY. ILAGAN: We stipulate it is one single transaction.
(pp. 27-29, TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the
promissory note in question is a negotiable instrument, the

respondent cannot be a holder in due course for a more

significant reason.
The evidence presented in the instant case shows that prior
to the sale on installment of the tractors, there was an
arrangement between the seller-assignor, Industrial Products
Marketing, and the respondent whereby the latter would pay
the seller-assignor the entire purchase price and the sellerassignor, in turn, would assign its rights to the respondent
which acquired the right to collect the price from the buyer,
herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage
with Promissory Note, the Deed of Assignment and the
Disclosure of Loan/Credit Transaction shows that said
documents evidencing the sale on installment of the tractors
were all executed on the same day by and among the buyer,
which is herein petitioner Consolidated Plywood Industries,
Inc.; the seller-assignor which is the Industrial Products
Marketing; and the assignee-financing company, which is the
respondent. Therefore, the respondent had actual knowledge
of the fact that the seller-assignor's right to collect the
purchase price was not unconditional, and that it was subject
to the condition that the tractors -sold were not defective.
The respondent knew that when the tractors turned out to be
defective, it would be subject to the defense of failure of
consideration and cannot recover the purchase price from
the petitioners. Even assuming for the sake of argument that
the promissory note is negotiable, the respondent, which
took the same with actual knowledge of the foregoing facts
so that its action in taking the instrument amounted to bad
faith, is not a holder in due course. As such, the respondent is
subject to all defenses which the petitioners may raise
against the seller-assignor. Any other interpretation would be
most inequitous to the unfortunate buyer who is not only
saddled with two useless tractors but must also face a
lawsuit from the assignee for the entire purchase price and
all its incidents without being able to raise valid defenses
available as against the assignor.

Lastly, the respondent failed to present any evidence to

prove that it had no knowledge of any fact, which would
justify its act of taking the promissory note as not amounting
to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law
provide that: negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE
COURSE. A holder in due course is a holder who has
taken the instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no
notice of any infirmity in the instrument of deffect in
the title of the person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT.
To constitute notice of an infirmity in the instrument or
defect in the title of the person negotiating the same,
the person to whom it is negotiated must have had
actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the
instrument amounts to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a
financing company is not a holder in good faith as to the
buyer, to wit:

In installment sales, the buyer usually issues a note

payable to the seller to cover the purchase price. Many
times, in pursuance of a previous arrangement with
the seller, a finance company pays the full price and
the note is indorsed to it, subrogating it to the right to
collect the price from the buyer, with interest. With the
increasing frequency of installment buying in this
country, it is most probable that the tendency of the
courts in the United States to protect the buyer against
the finance company will , the finance company will be
subject to the defense of failure of consideration and
cannot recover the purchase price from the buyer. As
against the argument that such a rule would seriously
affect "a certain mode of transacting business adopted
throughout the State," a court in one case stated:
It may be that our holding here will require some
changes in business methods and will impose a
greater burden on the finance companies. We think the
buyer-Mr. & Mrs. General Public-should have some
protection somewhere along the line. We believe the
finance company is better able to bear the risk of the
dealer's insolvency than the buyer and in a far better
position to protect his interests against unscrupulous
and insolvent dealers. . . .
If this opinion imposes great burdens on finance
companies it is a potent argument in favor of a rule
which win afford public protection to the general
buying public against unscrupulous dealers in personal
property. . . . (Mutual Finance Co. v. Martin, 63 So. 2d
649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes
and Selected Cases on Negotiable Instruments Law,
Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange
Country Machine Works (34 Cal. 2d 766) involving similar
facts, it was held that in a very real sense, the finance
company was a moving force in the transaction from its very

inception and acted as a party to it. When a finance company

actively participates in a transaction of this type from its
inception, it cannot be regarded as a holder in due course of
the note given in the transaction.
In like manner, therefore, even assuming that the subject
promissory note is negotiable, the respondent, a financing
company which actively participated in the sale on
installment of the subject two Allis Crawler tractors, cannot
be regarded as a holder in due course of said note. It follows
that the respondent's rights under the promissory note
involved in this case are subject to all defenses that the
petitioners have against the seller-assignor, Industrial
Products Marketing. For Section 58 of the Negotiable
Instruments Law provides that "in the hands of any holder
other than a holder in due course, a negotiable instrument is
subject to the same defenses as if it were non-negotiable. ...
"
Prescinding from the foregoing and setting aside other
peripheral issues, we find that both the trial and respondent
appellate court erred in holding the promissory note in
question to be negotiable. Such a ruling does not only violate
the law and applicable jurisprudence, but would result in
unjust enrichment on the part of both the assigner- assignor
and respondent assignee at the expense of the petitionercorporation which rightfully rescinded an inequitable
contract. We note, however, that since the seller-assignor has
not been impleaded herein, there is no obstacle for the
respondent to file a civil Suit and litigate its claims against
the seller- assignor in the rather unlikely possibility that it so
desires,
WHEREFORE, in view of the foregoing, the decision of the
respondent appellate court dated July 17, 1985, as well as its
resolution dated October 17, 1986, are hereby ANNULLED
and SET ASIDE. The complaint against the petitioner before
the trial court is DISMISSED. SO ORDERED.

3. Garcia vs. Llamas, 417 SCRA 292

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, seeking to nullify the November 26, 2001 Decision
and the June 26, 2002 Resolution of the Court of Appeals (CA)
in CA-GR CV No. 60521. The 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 x Eduardo 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.
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.

P120,000.00 representing interests already paid by x x x de

Jesus;

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.

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.

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.
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

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.

Ruling of the Court of Appeals

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.
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.
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 coobligor, 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 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 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 the debtor require the consent of the creditor.

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 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 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.

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 can
stand together, each one with its own independent existence.
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 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 is the rule that novation is never presumed.
Consequently, that which arises from a purported change in
the person of the debtor must be clear and express. It is thus
incumbent on 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
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 the novation, such
waiver must be express. It cannot be supposed, without clear
proof, that the present respondent has done away with his
right to exact fulfillment from either of the solidary debtors.
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 collection. Having made
himself jointly and severally liable with De Jesus, petitioner is
therefore liable for the entire obligation.
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,
Quezon City, 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.
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 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 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
bound equally and absolutely with the principal and is
deemed an original promissor and debtor from the beginning.
The liability is immediate and direct.
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 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 a defending party.
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, who is the party seeking to recover upon a
claim, counterclaim or cross-claim; or to obtain a declaratory
relief.

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 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 codefendant 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.
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 rendered
without further evidence, considering the allegations and
admissions of the parties.
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.

-END OF FIRST BATCH-

4. Fransisco vs. Court of Appeals, G.R. 116320,

Nov.29, 1999
Assailed in this petition for review on certiorari is the decision
of the Court of Appeals affirming the decision rendered by
Branch 168 of the Regional Trial Court of Pasig in Civil Case
No. 35231 in favor of private respondents.
The controversy before this Court finds its origins in a Land
Development and Construction Contract which was entered
into on June 23, 1977 by A. Francisco Realty & Development
Corporation (AFRDC), of which petitioner Adalia Francisco
(Francisco) is the president, and private respondent Herby
Commercial & Construction Corporation (HCCC), represented
by its President and General Manager private respondent
Jaime C. Ong (Ong), pursuant to a housing project of AFRDC
at San Jose del Monte, Bulacan, financed by the Government
Service Insurance System (GSIS). Under the contract, HCCC
agreed to undertake the construction of 35 housing units and
the development of 35 hectares of land. The payment of
HCCC for its services was on a turn-key basis, that is, HCCC
was to be paid on the basis of the completed houses and
developed lands delivered to and accepted by AFRDC and
the GSIS. To facilitate payment, AFRDC executed a Deed of
Assignment in favor of HCCC to enable the latter to collect
payments directly from the GSIS. Furthermore, the GSIS and
AFRDC put up an Executive Committee Account with the
Insular Bank of Asia & America (IBAA) in the amount of
P4,000,000.00 from which checks would be issued and cosigned by petitioner Francisco and the GSIS Vice-President
Armando Diaz (Diaz).
On February 10, 1978, HCCC filed a complaint with the
Regional Trial Court of Quezon City against Francisco, AFRDC
and the GSIS for the collection of the unpaid balance under
the Land Development and Construction Contract in the
amount of P515,493.89 for completed and delivered housing
units and land development. However, the parties eventually
arrived at an amicable settlement of their differences, which
was embodied in a Memorandum Agreement executed by
HCCC and AFRDC on July 21, 1978. Under the agreement, the
parties stipulated that HCCC had turned over 83 housing
units which have been accepted and paid for by the GSIS.

The GSIS acknowledged that it still owed HCCC P520,177.50

representing incomplete construction of housing units,
incomplete land development and 5% retention, which
amount will be discharged when the defects and deficiencies
are finally completed by HCCC. It was also provided that
HCCC was indebted to AFRDC in the amount of P180,234.91
which the former agreed would be paid out of the proceeds
from the 40 housing units still to be turned over by HCCC or
from any amount due to HCCC from the GSIS. Consequently,
the trial court dismissed the case upon the filing by the
parties of a joint motion to dismiss.
Sometime in 1979, after an examination of the records of the
GSIS, Ong discovered that Diaz and Francisco had executed
and signed seven checks, of various dates and amounts,
drawn against the IBAA and payable to HCCC for completed
and delivered work under the contract. Ong, however, claims
that these checks were never delivered to HCCC. Upon
inquiry with Diaz, Ong learned that the GSIS gave Francisco
custody of the checks since she promised that she would
deliver the same to HCCC. Instead, Francisco forged the
signature of Ong, without his knowledge or consent, at the
dorsal portion of the said checks to make it appear that HCCC
had indorsed the checks; Francisco then indorsed the checks
for a second time by signing her name at the back of the
checks and deposited the checks in her IBAA savings
account. IBAA credited Franciscos account with the amount
of the checks and the latter withdrew the amount so
credited.
On June 7, 1979, Ong filed complaints with the office of the
city fiscal of Quezon City, charging Francisco with estafa thru
falsification of commercial documents. Francisco denied
having forged Ongs signature on the checks, claiming that
Ong himself indorsed the seven checks in behalf of HCCC and
delivered the same to Francisco in payment of the loans
extended by Francisco to HCCC. According to Francisco, she
agreed to grant HCCC the loans in the total amount of
P585,000.00 and covered by eighteen promissory notes in
order to obviate the risk of the non-completion of the project.
As a means of repayment, Ong allegedly issued a
Certification authorizing Francisco to collect HCCCs
receivables from the GSIS. Assistant City Fiscal Ramon M.

Gerona gave credence to Franciscos claims and accordingly,

dismissed the complaints, which dismissal was affirmed by
the Minister of Justice in a resolution issued on June 5, 1981.
The present case was brought by private respondents on
November 19, 1979 against Francisco and IBAA for the
recovery of P370,475.00, representing the total value of the
seven checks, and for damages, attorneys fees, expenses of
litigation and costs. After trial on the merits, the trial court
rendered its decision in favor of private respondents, the
dispositive portion of which provides WHEREFORE, premises considered, judgment is hereby
rendered in favor of the plaintiffs and against the defendants
INSULAR BANK OF ASIA & AMERICA and ATTY. ADALIA
FRANCISCO, to jointly and severally pay the plaintiffs the
amount of P370.475.00 plus interest thereon at the rate of
12% per annum from the date of the filing of the complaint
until the full amount is paid; moral damages to plaintiff Jaime
Ong in the sum of P50,000.00; exemplary damages of
P50,000.00; litigation expenses of P5,000.00; and attorneys
fees of P50,000.00.
With respect to the cross-claim of the defendant IBAA against
its co-defendant Atty. Adalia Francisco, the latter is ordered to
reimburse the former for the sums that the Bank shall pay to
the plaintiff on the forged checks including the interests paid
thereon.
Further, the defendants are ordered to pay the costs.
Based upon the findings of handwriting experts from the
National Bureau of Investigation (NBI), the trial court held
that Francisco had indeed forged the signature of Ong to
make it appear that he had indorsed the checks. Also, the
court ruled that there were no loans extended, reasoning that
it was unbelievable that HCCC was experiencing financial
difficulties so as to compel it to obtain the loans from AFRDC
in view of the fact that the GSIS had issued checks in favor of
HCCC at about the same time that the alleged advances
were made. The trial court stated that it was plausible that
Francisco concealed the fact of issuance of the checks from
private respondents in order to make it appear as if she were

accommodating private respondents, when in truth she was

lending HCCC its own money.
With regards to the Memorandum Agreement entered into
between AFRDC and HCCC in Civil Case No. Q-24628, the
trial court held that the same did not make any mention of
the forged checks since private respondents were as of yet
unaware of their existence, that fact having been effectively
concealed by Francisco, until private respondents acquired
knowledge of Franciscos misdeeds in 1979.
IBAA was held liable to private respondents for having
honored the checks despite such obvious irregularities as the
lack of initials to validate the alterations made on the check,
the absence of the signature of a co-signatory in the
corporate checks of HCCC and the deposit of the checks on a
second indorsement in the savings account of Francisco.
However, the trial court allowed IBAA recourse against
Francisco, who was ordered to reimburse the IBAA for any
sums it shall have to pay to private respondents.
Both Francisco and IBAA appealed the trial courts decision,
but the Court of Appeals dismissed IBAAs appeal for its
failure to file its brief within the 45-day extension granted by
the appellate court. IBAAs motion for reconsideration and
petition for review on certiorari filed with this Court were also
similarly denied. On November 21, 1989, IBAA and HCCC
entered into a Compromise Agreement which was approved
by the trial court, wherein HCCC acknowledged receipt of the
amount of P370,475.00 in full satisfaction of its claims
against IBAA, without prejudice to the right of the latter to
pursue its claims against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial
courts ruling, hence this petition for review on certiorari filed
by petitioner, assigning the following errors to the appealed
decision
1. The respondent Court of Appeals erred in concluding that
private respondents did not owe Petitioner the sum covered
by the Promissory Notes Exh.2-2-A-2-P (FRANCISCO). Such
conclusion was based mainly on conjectures, surmises and
speculation contrary to the unrebutted pleadings and
evidence presented by petitioner.

2. The respondent Court of Appeals erred in holding that

Petitioner falsified the signature of private respondent ONG
on the checks in question without any authority therefor
which is patently contradictory to the unrebutted pleading
and evidence that petitioner was expressly authorized by
respondent HERBY thru ONG to collect all receivables of
HERBY from GSIS to pay the loans extended to them. (Exhibit
3).
3. That respondent Court of Appeals erred in holding that the
seven checks in question were not taken up in the liquidation
and reconciliation of all outstanding account between AFRDC
and HERBY as acknowledged by the parties in Memorandum
Agreement (Exh. 5) is a pure conjecture, surmise and
speculation contrary to the unrebutted evidence presented
by petitioners. It is an inference made which is manifestly
mistaken.
4. The respondent Court of Appeals erred in affirming the
decision of the lower court and dismissing the appeal.
The pivotal issue in this case is whether or not Francisco
forged the signature of Ong on the seven checks. In this
connection, we uphold the lower courts finding that the
subject matter of the present case, specifically the seven
checks, drawn by GSIS and AFRDC, dated between October
to November 1977, in the total amount of P370,475.00 and
payable to HCCC, was not included in the Memorandum
Agreement executed by HCCC and AFRDC in Civil Case No. Q24628. As observed by the trial court, aside from there being
absolutely no mention of the checks in the said agreement,
the amounts represented by said checks could not have been
included in the Memorandum Agreement executed in 1978
because private respondents only discovered Franciscos acts
of forgery in 1979. The lower courts found that Francisco was
able to easily conceal from private respondents even the fact
of the issuance of the checks since she was a co-signatory
thereof. We also note that Francisco had custody of the
checks, as proven by the check vouchers bearing her
uncontested signature, by which she, in effect, acknowledged
having received the checks intended for HCCC. This
contradicts Franciscos claims that the checks were issued to
Ong who delivered them to Francisco already indorsed.

As regards the forgery, we concur with the lower courts

finding that Francisco forged the signature of Ong on the
checks to make it appear as if Ong had indorsed said checks
and that, after indorsing the checks for a second time by
signing her name at the back of the checks, Francisco
deposited said checks in her savings account with IBAA. The
forgery was satisfactorily established in the trial court upon
the strength of the findings of the NBI handwriting expert.
Other than petitioners self-serving denials, there is nothing in
the records to rebut the NBIs findings. Well-entrenched is the
rule that findings of trial courts which are factual in nature,
especially when affirmed by the Court of Appeals, deserve to
be respected and affirmed by the Supreme Court, provided it
is supported by substantial evidence on record, as it is in the
case at bench.
Petitioner claims that she was, in any event, authorized to
sign Ongs name on the checks by virtue of the Certification
executed by Ong in her favor giving her the authority to
collect all the receivables of HCCC from the GSIS, including
the questioned checks. Petitioners alternative defense must
similarly fail. The Negotiable Instruments Law provides that
where any person is under obligation to indorse in a
representative capacity, he may indorse in such terms as to
negative personal liability. An agent, when so signing, should
indicate that he is merely signing in behalf of the principal
and must disclose the name of his principal; otherwise he
shall be held personally liable. Even assuming that Francisco
was authorized by HCCC to sign Ongs name, still, Francisco
did not indorse the instrument in accordance with law.
Instead of signing Ongs name, Francisco should have signed
her own name and expressly indicated that she was signing
as an agent of HCCC. Thus, the Certification cannot be used
by Francisco to validate her act of forgery.
Every person who, contrary to law, wilfully or negligently
causes damage to another, shall indemnify the latter for the
same. Due to her forgery of Ongs signature which enabled
her to deposit the checks in her own account, Francisco
deprived HCCC of the money due it from the GSIS pursuant
to the Land Development and Construction Contract. Thus,
we affirm respondent courts award of compensatory
damages in the amount of P370,475.00, but with a

modification as to the interest rate which shall be six percent

(6%) per annum, to be computed from the date of the filing
of the complaint since the amount of damages was alleged in
the complaint; however, the rate of interest shall be twelve
percent (12%) per annum from the time the judgment in this
case becomes final and executory until its satisfaction and
the basis for the computation of this twelve percent (12%)
rate of interest shall be the amount of P370,475.00. This is in
accordance with the doctrine enunciated in Eastern Shipping
Lines, Inc. vs. Court of Appeals, et al., which was reiterated
in Philippine National Bank vs. Court of Appeals, Philippine
Airlines, Inc. vs. Court of Appeals and in Keng Hua Paper
Products Co., Inc. vs. Court of Appeals, which provides that 1. When an obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance
of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the
court at the rate of six percent (6%) per annum. No interest,
however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially
or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation
of legal interest shall, in any case, be on the amount finally
adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be twelve percent (12%) per annum from such
finality until its satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of credit.
We also sustain the award of exemplary damages in the
amount of P50,000.00. Under Article 2229 of the Civil Code,
exemplary damages are imposed by way of example or
correction for the public good, in addition to the moral,
temperate, liquidated or compensatory damages.
Considering petitioners fraudulent act, we hold that an award
of P50,000.00 would be adequate, fair and reasonable. The
grant of exemplary damages justifies the award of attorneys
fees in the amount of P50,000.00, and the award of
P5,000.00 for litigation expenses.
The appellate courts award of P50,000.00 in moral damages
is warranted. Under Article 2217 of the Civil Code, moral
damages may be granted upon proof of physical suffering,
mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation
and similar injury. Ong testitified that he suffered sleepless
nights, embarrassment, humiliation and anxiety upon
discovering that the checks due his company were forged by
petitioner and that petitioner had filed baseless criminal
complaints against him before the fiscals office of Quezon
City which disrupted HCCCs business operations.
WHEREFORE, we AFFIRM the respondent courts decision
promulgated on June 29, 1992, upholding the February 16,
1988 decision of the trial court in favor of private
respondents, with the modification that the interest upon the
actual damages awarded shall be at six percent (6%) per
annum, which interest rate shall be computed from the time
of the filing of the complaint on November 19, 1979.
However, the interest rate shall be twelve percent (12%) per
annum from the time the judgment in this case becomes final
and executory and until such amount is fully paid. The basis
for computation of the six percent and twelve percent rates
of interest shall be the amount of P370,475.00. No
pronouncement as to costs.

SO ORDERED.
5. San Carlos Milling Co. vs. BPI, 50 Phil 59
Plaintiff corporation, organized under the laws of the Territory
of Hawaii, is authorized to engaged in business in the
Philippine Islands, and maintains its main office in these
Islands in the City of Manila.
The business in the Philippine Islands was in the hands of
Alfred D. Cooper, its agent under general power of attorney
with authority of substitution. The principal employee in the
Manila office was one Joseph L. Wilson, to whom had been
given a general power of attorney but without power of
substitution. In 1926 Cooper, desiring to go on vacation, gave
a general power of attorney to Newland Baldwin and at the
same time revoked the power of Wilson relative to the
dealings with the Bank of the Philippine Islands, one of the
banks in Manila in which plaintiff maintained a deposit.
About a year thereafter Wilson, conspiring together with one
Alfredo Dolores, a messenger-clerk in plaintiff's Manila office,
sent a cable gram in code to the company in Honolulu
requesting a telegraphic transfer to the China Banking
Corporation of Manila of $100,00. The money was transferred
by cable, and upon its receipt the China Banking Corporation,
likewise a bank in which plaintiff maintained a deposit, sent
an exchange contract to plaintiff corporation offering the sum
of P201,000, which was then the current rate of exchange.
On this contract was forged the name of Newland Baldwin
and typed on the body of the contract was a note:lawphil.net
Please send us certified check in our favor when
transfer is received.
A manager's check on the China Banking Corporation for
P201,000 payable to San Carlos Milling Company or order
was receipted for by Dolores. On the same date, September

28, 1927, the manger's check was deposited with the Bank of
the Philippine Islands by the following endorsement:
For deposit only with Bank of the Philippine Islands, to
credit of account of San Carlos Milling Co., Ltd.
By (Sgd.) NEWLAND BALDWIN
For Agent
The endorsement to which the name of Newland Baldwin was
affixed was spurious.
The Bank of the Philippine Islands thereupon credited the
current account of plaintiff in the sum of P201,000 and
passed the cashier's check in the ordinary course of business
through the clearing house, where it was paid by the China
Banking Corporation.
On the same day the cashier of the Bank of the Philippine
Islands received a letter, purporting to be signed by Newland
Baldwin, directing that P200,000 in bills of various
denominations, named in the letter, be packed for shipment
and delivery the next day. The next day, Dolores witnessed
the counting and packing of the money, and shortly
afterwards returned with the check for the sum of P200,000,
purporting to be signed by Newland Baldwin as agent.
Plaintiff had frequently withdrawn currency for shipment to
its mill from the Bank of the Philippine Islands but never in so
large an amount, and according to the record, never under
the sole supervision of Dolores as the representative of
plaintiff.
Before delivering the money, the bank asked Dolores for P1
to cover the cost of packing the money, and he left the bank
and shortly afterwards returned with another check for P1,
purporting to be signed by Newland Baldwin. Whereupon the
money was turned over to Dolores, who took it to plaintiff's

office, where he turned the money over to Wilson and

received as his share, P10,000.
Shortly thereafter the crime was discovered, and upon the
defendant bank refusing to credit plaintiff with the amount
withdrawn by the two forged checks of P200,000 and P1, suit
was brought against the Bank of the Philippine Islands, and
finally on the suggestion of the defendant bank, an amended
complaint was filed by plaintiff against both the Bank of the
Philippine Islands and the China Banking Corporation.
At the trial the China Banking Corporation contended that
they had drawn a check to the credit of the plaintiff
company, that the check had been endorsed for deposit, and
that as the prior endorsement had in law been guaranteed by
the Bank of the Philippine Islands, when they presented the
cashier's check to it for payment, the China Banking
Corporation was absolved even if the endorsement of
Newland Baldwin on the check was a forgery.
The Bank of the Philippine Islands presented many special
defenses, but in the main their contentions were that they
had been guilty of no negligence, that they had dealt with
the accredited representatives of the company in the due
course of business, and that the loss was due to the
dishonesty of plaintiff's employees and the negligence of
plaintiff's general agent.
In plaintiff's Manila office, besides the general agent, Wilson,
and Dolores, most of the time there was employed a woman
stenographer and cashier. The agent did not keep in his
personal possession either the code-book or the blank checks
of either the Bank of the Philippine Islands or the China
Banking Corporation. Baldwin was authorized to draw checks
on either of the depositaries. Wilson could draw checks in the
name of the plaintiff on the China Banking Corporation.
After trial in which much testimony was taken, the trial court
held that the deposit of P201,000 in the Bank of the

Philippine Islands being the result of a forged endorsement,

the relation of depositor and banker did not exist, but the
bank was only a gratuitous bailee; that the Bank of the
Philippine Islands acted in good faith in the ordinary course of
its business, was not guilty of negligence, and therefore
under article 1902 of the Civil Code which should control the
case, plaintiff could not recover; and that as the cause of loss
was the criminal actions of Wilson and Dolores, employees of
plaintiff, and as Newland Baldwin, the agent, had not
exercised adequate supervision over plaintiff's Manila office,
therefore plaintiff was guilty of negligence, which ground
would likewise defeat recovery.
From the decision of the trial court absolving the defendants,
plaintiff brings this appeal and makes nine assignments of
error which we do not deem it necessary to discuss in detail.
There is a mild assertion on the part of the defendant bank
that the disputed signatures of Newland Baldwin were
genuine and that he had been in the habit of signing checks
in blank and turning the checks so signed over to Wilson.
The proof as to the falsity of the questioned signatures of
Baldwin places the matter beyond reasonable doubt, nor is it
believed that Baldwin signed checks in blank and turned
them over to Wilson.
As to the China Banking Corporation, it will be seen that it
drew its check payable to the order of plaintiff and delivered
it to plaintiff's agent who was authorized to receive it. A bank
that cashes a check must know to whom it pays. In
connection with the cashier's check, this duty was therefore
upon the Bank of the Philippine Islands, and the China
Banking Corporation was not bound to inspect and verify all
endorsements of the check, even if some of them were also
those of depositors in that bank. It had a right to rely upon
the endorsement of the Bank of the Philippine Islands when it
gave the latter bank credit for its own cashier's check. Even if
we would treat the China Banking Corporation's cashier's

check the same as the check of a depositor and attempt to

apply the doctrines of the Great Eastern Life Insurance Co.
vs. Hongkong & Shanghai Banking Corporation and National
Bank (43 Phil., 678), and hold the China Banking Corporation
indebted to plaintiff, we would at the same time have to hold
that the Bank of the Philippine Islands was indebted to the
China Banking Corporation in the same amount. As, however,
the money was in fact paid to plaintiff corporation, we must
hold that the China Banking Corporation is indebted neither
to plaintiff nor to the Bank of the Philippine Islands, and the
judgment of the lower court far as it absolves the China
Banking Corporation from responsibility is affirmed.
Returning to the relation between plaintiff and the Bank of
the Philippine Islands, we will now consider the effect of the
deposit of P201,000. It must be noted that this was not a
presenting of the check for cash payment but for deposit
only. It is a matter of general knowledge that most
endorsements for deposit only, are informal. Most are by
means of a rubber stamp. The bank would have been
justified in accepting the check for deposit even with only a
typed endorsement. It accepted the check and duly credited
plaintiff's account with the amount on the face of the check.
Plaintiff was not harmed by the transaction as the only result
was the removal of that sum of money from a bank from
which Wilson could have drawn it out in his own name to a
bank where Wilson would not have authority to draw checks
and where funds could only be drawn out by the check of
Baldwin.
Plaintiff in its letter of December 23, 1928, to the Bank of the
Philippine Islands said in part:
". . . we now leave to demand that you pay over to us
the entire amount of said manager's check of two
hundred one thousand (P201,000) pesos, together with
interest thereon at the agreed rate of 3 per cent per
annum on daily balances of our credit in account
current with your bank to this date. In the event of

your refusal to pay, we shall claim interest at the legal

rate of 6 per cent from and after the date of this
demand inasmuch as we desire to withdraw and make
use of the money." Such language might well be
treated as a ratification of the deposit.
The contention of the bank that it was a gratuitous bailee is
without merit. In the first place, it is absolutely contrary to
what the bank did. It did not take it up as a separate account
but it transferred the credit to plaintiff's current account as a
depositor of that bank. Furthermore, banks are not gratuitous
bailees of the funds deposited with them by their customers.
Banks are run for gain, and they solicit deposits in order that
they can use the money for that very purpose. In this case
the action was neither gratuitous nor was it a bailment.
On the other hand, we cannot agree with the theory of
plaintiff that the Bank of the Philippine Islands was an
intermeddling bank. In the many cases cited by plaintiff
where the bank that cashed the forged endorsement was
held as an intermeddler, in none was the claimant a regular
depositor of the bank, nor in any of the cases cited, was the
endorsement for deposit only. It is therefore clear that the
relation of plaintiff with the Bank of the Philippine Islands in
regard to this item of P201,000 was that of depositor and
banker, creditor and debtor.
We now come to consider the legal effect of payment by the
bank to Dolores of the sum of P201,000, on two checks on
which the name of Baldwin was forged as drawer. As above
stated, the fact that these signatures were forged is beyond
question. It is an elementary principle both of banking and of
the Negotiable Instruments Law that
A bank is bound to know the signatures of its
customers; and if it pays a forged check, it must be
considered as making the payment out of its own
funds, and cannot ordinarily charge the amount so

paid to the account of the depositor whose name was

forged. (7 C.J., 683.)
There is no act of the plaintiff that led the Bank of the
Philippine Islands astray. If it was in fact lulled into a false
sense of security, it was by the effrontery of Dolores, the
messenger to whom it entrusted this large sum of money.
The bank paid out its money because it relied upon the
genuineness of the purported signatures of Baldwin. These,
they never questioned at the time its employees should have
used care. In fact, even today the bank represents that it has
a relief that they are genuine signatures.
The signatures to the check being forged, under section 23 of
the Negotiable Instruments Law they are not a charge
against plaintiff nor are the checks of any value to the
defendant.
It must therefore be held that the proximate cause of loss
was due to the negligence of the Bank of the Philippine
Islands in honoring and cashing the two forged checks.
The judgment absolving the Bank of the Philippine Islands
must therefore be reversed, and a judgment entered in favor
of plaintiff-appellant and against the Bank of the Philippine
Islands, defendant-appellee, for the sum of P200,001, with
legal interest thereon from December 23,1928, until
payment, together with costs in both instances. So ordered.

6. PNB vs. National City Bank, 63 Phil 711

This case was submitted for decision to the court below on
the following stipulation of facts:
1. That plaintiff is a banking corporation organized and
existing under and by virtue of a special act of the

Philippine Legislature, with office as principal place of

business at the Masonic Temple Bldg., Escolta, Manila,
P. I.; that the defendant National City Bank of New York
is a foreign banking corporation with a branch office
duly authorized and licensed to carry and engage in
banking business in the Philippine Islands, with branch
office and place of business in the National City Bank
Bldg., City of Manila, P. I., and that the defendant
Motor Service Company, Inc., is a corporation
organized and existing under and by virtue of the
general corporation law of the Philippine Islands, with
office and principal place of business at 408 Rizal
Avenue, City of Manila, P. I., engaged in the purchase
and sale of automobile spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or
persons negotiated with defendant Motor Service
Company, Inc., the checks marked as Exhibits A and A1, respectively, which are made parts of the
stipulation, in payment for automobile tires purchased
from said defendant's stores, purporting to have been
issued by the "Pangasinan Transportation Co., Inc. by J.
L. Klar, Manager and Treasurer", against the Philippine
National Bank and in favor of the International Auto
Repair Shop, for P144.50 and P215.75; and said checks
were indorsed by said unknown persons in the manner
indicated at the back thereof, the Motor Service Co.,
Inc., believing at the time that the signature of J. L.
Klar, Manager and Treasurer of the Pangasinan
Transportation Co., Inc., on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed
for deposit by the defendant Motor Service Company,
Inc, at the National City Bank of New York and the
former was accordingly credited with the amounts
thereof, or P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were
cleared at the clearing house and the Philippine

National Bank credited the National City Bank of New

York for the amounts thereof, believing at the time that
the signatures of the drawer were genuine, that the
payee is an existing entity and the endorsement at the
back thereof regular and genuine.
5. The Philippine National Bank then found out that the
purported signatures of J. L. Klar, as Manager and
Treasurer of the Pangasinan Transportation Company,
Inc., in said Exhibits A and A-1 were forged when so
informed by the said Company, and it accordingly
demanded from the defendants the reimbursement of
the amounts for which it credited the National City
Bank of New York at the clearing house and for which
the latter credited the Motor Service Co., but the
defendants refused, and continue to refuse, to make
such reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to
have the proceeds of said check deducted from their
deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced
at the trial in the municipal court of Manila and
forming part of the record of the present case, are
admitted by the parties as genuine and are made part
of this stipulation as well as Exhibit H hereto attached
and made a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as
to the defendant National City Bank of New York. a decision
was thereafter rendered giving plaintiff judgment for the total
amount of P360.25, with interest and costs. From this
decision the instant appeal was taken.
Before us is the preliminary question of whether the original
appeal taken by the plaintiff from the decision of the
municipal court of Manila where this case originated, became
perfected because of plaintiff's failure to attach to the record

within 15 days from receipt of notice of said decision, the

certificate of appeal bond required by section 76 of the Code
of Civil Procedure. It is not disputed that both the appeal
docket fee and the appeal cash bond were paid and
deposited within the prescribed time. The issue is whether
the mere failure to file the official receipt showing that such
deposit was made within the said period is a sufficient
ground to dismiss plaintiff's appeal. This question was settled
by our decision in the case of Blanco vs. Bernabe and lawyers
Cooperative Publishing Co. (page 124, ante), and no further
consideration. No error was committed in allowing said
appeal.
We now pass on to consider and determine the main question
presented by this appeal, namely, whether the appellee has
the right to recover from the appellant, under the
circumstances of this case, the value of the checks on which
the signatures of the drawer were forged. The appellant
maintains that the question should be answered in the
negative and in support of its contention appellant advanced
various reasons presently to be examined carefully.
I. It is contended, first of all, that the payment of the checks
in question made by the drawee bank constitutes an
"acceptance", and, consequently, the case should be
governed by the provisions of section 62 of the Negotiable
Instruments Law, which says:
SEC. 62. Liability of acceptor. The acceptor by accepting
the instrument engages that he will pay it according to
the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his
signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to
indorse.

This contention is without merit. A check is a bill of exchange

payable on demand and only the rules governing bills of
exchange payable on demand are applicable to it, according
to section 185 of the Negotiable Instruments Law. In view of
the fact that acceptance is a step unnecessary, in so far as
bills of exchange payable on demand are concerned (sec.
143), it follows that the provisions relative to "acceptance"
are without application to checks. Acceptance implies, in
effect, subsequent negotiation of the instrument, which is not
true in case of the payment of a check because from the
moment a check is paid it is withdrawn from circulation. The
warranty established by section 62, is in favor of holders of
the instrument after its acceptance. When the drawee bank
cashes or pays a check, the cycle of negotiation is
terminated, and it is illogical thereafter to speak of
subsequent holders who can invoke the warranty provided in
section 62 against the drawee. Moreover, according to
section 191, "acceptance" means "an acceptance completed
by delivery or notification" and this concept is entirely
incompatible with payment, because when payment is made
the check is retained by the bank, and there is no such thing
as delivery or notification to the party receiving the payment.
Checks are not to be accepted, but presented at once for
payment. (1 Bouvier's Law Dictionary, 476.) There can be no
such thing as "acceptance" in the ordinary sense of the term.
A check being payable immediately and on demand, the
bank can fulfill its duty to the depositor only by paying the
amount demanded. The holder has no right to demand from
the bank anything but payment of the check, and the bank
has no right, as against the drawer, to do anything but pay it.
(5 R. C. L., p. 516, par. 38.) A check is not an instrument
which in the ordinary course of business calls for acceptance.
The holder can never claim acceptance as his legal right. He
can present for payment, and only for payment. (1 Morse on
Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice
against the presentation of checks for acceptance, before
they are paid, in which case we have a "certification"

equivalent to "acceptance" according to section 187, which

provides that "where a check is certified by the bank on
which it is drawn, the certification is equivalent to an
acceptance", and it is then that the warranty under section
62 exists. This certification or acceptance consists in the
signification by the drawee of his assent to the order of the
drawer, which must not express that the drawee will perform
his promise by any other means than the payment of money.
(Sec. 132.) When the holder of a check procures it to be
accepted or certified, the drawer and all indorsers are
discharged from liability thereon (sec. 188), and then the
check operates as an assignment of a part of the funds to the
credit of the drawer with the bank. (Sec. 189.) There is
nothing in the nature of the check which intrinsically
precludes its acceptance, in like manner and with like effect
as a bill of exchange or draft may be accepted. The bank
may accept if it chooses; and it is frequently induced by
convenience, by the exigencies of business, or by the desire
to oblige customers, voluntarily to incur the obligation. The
act by which the bank places itself under obligation to pay to
the holder the sum called for by a check must be the
expressed promise or undertaking of the bank signifying its
intent to assume the obligation, or some act from which the
law will imperatively imply such valid promise or
undertaking. The most ordinary form which such an act
assumes is the acceptance by the bank of the check, or, as it
is perhaps more often called, the certifying of the check. (1
Morse on Banks and Banking, pp. 898, 899; 5 R. C. L., p.
520.)
No doubt a bank may by an unequivocal promise in writing
make itself liable in any event to pay the check upon
demand, but this is not an "acceptance" of the check in the
true sense of that term. Although a check does not call for
acceptance, and the holder can present it only for payment,
the certification of checks is a means in constant and
extensive use in the business of banking, and its effects and
consequences are regulated by the law merchant. Checks
drawn upon banks or bankers, thus marked and certified,

enter largely into the commercial and financial transactions

of the country; they pass from hand to hand, in the payment
of debts, the purchase of property, and in the transfer of
balances from one house and one bank to another. In the
great commercial centers, they make up no inconsiderable
portion of the circulation, and thus perform a useful,
valuable, and an almost indispensable office. The purpose of
procuring a check to be certified is to impart strength and
credit to the paper by obtaining an acknowledgment from the
certifying bank that the drawer has funds therein sufficient to
cover the check and securing the engagement of the bank
that the check will be paid upon presentation. A certified
check has a distinctive character as a species of commercial
paper, and performs important functions in banking and
commercial business. When a check is certified, it ceases to
possess the character, or to perform the functions, of a
check, and represents so much money on deposit, payable to
the holder on demand. The check becomes a basis of credit
an easy mode of passing money from hand to hand, and
answers the purposes of money. (5 R. C. L., pp. 516,
517.)lwphi1.nt
All the authorities, both English and American, hold that a
check may be accepted, though acceptance is not usual. By
the law merchant, the certificate of the bank that a check is
good is equivalent to acceptance. It implies that the check is
drawn upon sufficient funds in the hands of the drawee, that
they have been set apart for its satisfaction, and that they
shall be so applied whenever the check is presented for
payment. It is an undertaking that the check is good then,
and shall continue good, and this agreement is as binding on
the bank as its notes of circulation, a certificate of deposit
payable to the order of the depositor, or any other obligation
it can assume. The object of certifying a check, as regards
both parties is to enable the holder to use it as money. The
transferee takes it with the same readiness and sense of
security that he would take the notes of the bank. It is
available also to him for all the purposes of money. Thus it
continues to perform its important functions until in the

course of business it goes back to the bank for redemption,

and is extinguished by payment. It cannot be doubted that
the certifying bank intended these consequences, and it is
liable accordingly. To hold otherwise would render these
important securities only a snare and a delusion. A bank
incurs no greater risk in certifying a check than in giving a
certificate of deposit. In well-regulated banks the practice is
at once to charge the check to the account of the drawer, to
credit it in a certified check account, and, when the check is
paid, to debit that account with the amount. Nothing can be
simpler or safer than this process. (Merchants' Bank vs.
States Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008,
1019.)
Ordinarily the acceptance or certification of a check is
performed and evidenced by some word or mark, usually the
words "good", "certified" or "accepted" written upon the
check by the banker or bank officer. (1 Morse, Banks and
Banking, 915; 1 Bouvier's Law Dictionary, 476.) The bank
virtually says, that check is good; we have the money of the
drawer here ready to pay it. We will pay it now if you will
receive it. The holder says, No, I will not take the money; you
may certify the check and retain the money for me until this
check is presented. The law will not permit a check, when
due, to be thus presented, and the money to be left with the
bank for the accommodation of the holder without
discharging the drawer. The money being due and the check
presented, it is his own fault if the holder declines to receive
the pay, and for his own convenience has the money
appropriated to that check subject to its future presentment
at any time within the statute of limitations. (1 Morse on
Banks and Banking, p. 920.)
The theory of the appellant and of the decisions on which it
relies to support its view is vitiated by the fact that they take
the word "acceptance" in its ordinary meaning and not in the
technical sense in which it is used in the Negotiable
Instruments Law. Appellant says that when payment is made,
such payment amounts to an acceptance, because he who

pays accepts. This is true in common parlance but

"acceptance" in legal contemplation. The word "acceptance"
has a peculiar meaning in the Negotiable Instruments Law,
and, as has been above stated, in the instant case there was
payment but no acceptatance, or what is equivalent to
acceptance, certification.
With few exceptions, the weight of authority is to the effect
that "payment" neither includes nor implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo.
App., 719; 125 S. W., 513), the court asks, if a mere promise
to pay a check is binding on a bank, why should not the
absolute payment of the check have the same effect? In
response, it is submitted that the two things, that is
acceptance and payment, are entirely different. If the
drawee accepts the paper after seeing it, and then permits it
to go into circulation as genuine, on all the principles of
estoppel, he ought to be prevented from setting up forgery to
defeat liability to one who has taken the paper on the faith of
the acceptance, or certification. On the other hand, mere
payment of the paper at the termination of its course does
not act as an estoppel. The attempt to state a general rule
covering both acceptance and payment is responsible for a
large part of the conflicting arguments which have been
advanced by the courts with respect to the rule. (Annotation
at 12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A.
L. R., 1079, 1085), the court said:
We are of the opinion that "payment is not
acceptance". Acceptance, as defined by section 131,
cannot be confounded with payment. . . .
Acceptance, certification, or payment of a check, by
the express language of the statute, discharges the
liability only of the persons named in the statute, to
wit, the drawer and all indorsers, and the contract of

indorsement by the negotiator if the check is

discharged by acceptance, certification, or payment.
But clearly the statute does not say that the contract
of warranty of the negotiator, created by section 65, is
discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R.
764), that payment of a check on a forged or unauthorized
indorsement of the payee's name, and charging the same to
the drawer's account, do not amount to an acceptance so as
to make the bank liable to the payee, is supported by all of
the recent cases in which the question is considered. (Cases
cited, Annotation at 69 A. L. R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged
or unauthorized indorsement is not an acceptance thereof so
as to render the drawee bank liable to the true payee.
(Anderson vs. Tacoma National Bank [1928], 146 Wash., 520;
264 Pac., 8; Annotation at 69 A. L. R., 1077, [1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank
(12 A. L. R., 989, 991, 992), the court said:
The defendant in error contends that the payment of the
check shows acceptance by the bank, urging that there can
be no more definite act by the bank upon which a check has
been drawn, showing acceptance than the payment of the
check. Section 184 of the Negotiable Instruments Act (sec.
202) provides that the provisions of the act applicable to bills
of exchange apply to a check, and section 131 (sec. 149),
that the acceptance of a bill must be in writing signed by the
drawee. Payment is the final act which extinguishes a bill.
Acceptance is a promise to pay in the future and continues
the life of the bill. It was held in the First National Bank vs.
Whitman (94 U. S., 343; 24 L. ed., 229), that payment of a
check upon a forged indorsement did not operate as an
acceptance in favor of the true owner. The contrary was held
in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn.,
380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919), and

Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep.,
751) at a time when the Negotiable Instruments Act was not
in force in those states. The opinion of the Supreme Court of
the United States seems more logical, and the provision of
the Negotiable Instruments Act now require an acceptance to
be in writing. Under this statute the payment of a check on a
forged indorsement, stamping it "paid," and charging it to the
account of the drawer, do not constitute an acceptance of
the check or create a liability of the bank to the true holder
or the payee. (Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92
Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas.
1917D, 1055; Baltimore & O. R. Co. vs. First National Bank,
102 Va., 753; 47 S. E., 837; State Bank of Chicago vs. MidCity Trust & Savings Bank 12 A. L. R., pp. 989, 991, 992.)
Before drawee's acceptance of check there is no privity of
contract between drawee and payee. Drawee's payment of
check on unauthorized indorsement does not constitute
"acceptance" of check. (Sinclair Refining Co. vs. Moultrie
Banking Co., 165 S. E., 860 [1932].)
The great weight of authority is to the effect that the
payment of a check upon a forged or unauthorized
indorsement and the stamping of it "paid" does not
constitute an acceptance. (Dakota Radio Apparatus Co. vs.
First Nat. Bank of Rapid City, 244 N. W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not
acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45,
48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust
Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App.,
625, 636, 637 [1908]), the language of the decision was as
follows:
. . . The plaintiffs say that this acceptance was made
by the very unauthorized payments of which they
complain. This suggestion does not seem forceful to

us. It is the contention which was made before the

Supreme Court of the United States in First National
Bank vs. Whitman (94 U. S., 343), and repudiated by
that court. The language of the opinion in that case is
so apt in the present case that we quote it:
"It is further contended that such an acceptance of a
check as creates a privity between the payee and the
bank is established by the payment of the amount of
this check in the manner described. This argument is
based upon the erroneous assumption that the bank
has paid this check. If this were true, it would have
discharged all of its duty, and there would be an end to
the claim against it. The bank supposed that it had
paid the check, but this was an error. The money it
paid was upon a pretended and not a real indorsement
of the name of the payee. . . . We cannot recognize the
argument that payment of the amount of the check or
sight draft under such circumstances amounts to an
acceptance creating a privity of contract with the real
owner.
"It is difficult to construe a payment as an acceptance
under any circumstances. . . . A banker or individual
may be ready to make actual payment of a check or
draft when presented, while unwilling to make a
promise to pay at a future time. Many, on the other
hand, are more ready to promise to pay than to meet
the promise when required. The difference between
the transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120,
123 [1933]):
It is the rule that payment of a check on unauthorized
or forged indorsement does not operate as an
acceptance of the check so as to authorize an action
by the real owner to recover its amount from the
drawee bank. (Michie on Banks and Banking, vol. 5,

sec. 278, p. 521.) A full list of the authorities

supporting the rule will be found in a footnote to the
foregoing citation. (See also, Federal Land Bank vs.
Collins, 156 Miss., 893; 127 So., 570; 69 A. L. R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L.
R., 1068, 1072-1074), this question was discussed at
considerable length. The court said:
In the light of the first of these statutes, counsel for appellant
is forced to stand upon the narrow ledge that the payment of
the check by the two banks will constitute an acceptance.
The drawee bank simply marked it "paid" and did not write
anything else except the date. The bank first paying the
check, the Commercial National Bank and Trust Company,
simply wrote its name as indorser and passed the check on
to the drawee bank; does this constitute an acceptance? The
precise question has not been presented to this court for
decision. Without reference to authorities in other
jurisdictions it would appear that the drawee bank had never
written its name across the paper and therefore, under the
strict terms of the statute, could not be bound as an
acceptor; in the second place, it does not appear to us to be
illogical and unsound to say that the payment of a check by
the drawee, and the stamping of it "paid", is equivalent to
the same thing as the acceptance of a check; however, there
is a variety of opinions in the various jurisdictions on this
question. Counsel correctly states that the theory upon which
the numerous courts hold that the payment of a check
creates privity between the holder of the check and the
drawee bank is tantamount to a pro tanto assignment of that
part of the funds. It is most easily understood how the
payment of the check, when not authorized to be done by
the drawee bank, might under such circumstances create
liability on the part of the drawee to the drawer. Counsel
cites the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919;
7 L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton
held that the acceptance of a check was necessary in order
to give the holder thereof a right of action thereon against

the bank, and further held in a case similar to this, so far as

this question is concerned, that the acceptance of a check so
as to give a right of action to the payee is inferred from the
retention of the check by the bank and its subsequent charge
of the amount to the drawer, although it was presented by,
and payment made, an unauthorized person. Judge Lurton
cited the case of National Bank of the Republic vs. Millard (10
Wall., 152; 19 L. ed., 897), wherein the Supreme Court of the
United States, not having such a case before it, threw out the
suggestion that, if it was shown that a bank had charged the
check on its books against the drawer and made settlement
with the drawee that the holder could recover on account of
money had and received, invoking the rule of justice and
fairness, it might be said there was an implied promise to the
holder to pay it on demand. (See National Bank of the
Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.)
The Tennessee court then argued that it would be inequitable
and unconscionable for the owner and payee of the check to
be limited to an action against an insolvent drawer and might
thereby lose the debt. They recognized the legal principle
that there is no privity between the drawer bank and the
holder, or payee, of the check, and proceeded to hold that no
particular kind of writing was necessary to constitute an
acceptance and that it became a question of fact, and the
bank became liable when it stamped it "paid" and charged it
to the account of the drawer, and cites, in support of its
opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13 Am.
Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep.,
353); and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep.,
648).
This decision was in 1890, prior to the enactment of
the Negotiable Instruments Law by the State of
Tennessee. However, in this case Judge Snodgrass
points out that the Millard case, supra, was dicta. The
Dodge case, from the Ohio court, held exactly as the
Tennessee court, but subsequently in the case of Elyria
Bank vs. Walker Bin Co. (92 Ohio St., 406; 111 N. E.,
147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the

court held to the contrary, called attention to the fact

that the Dodge case was no longer the law, and
proceeded to announce that, whatever might have
been the law before the passage of the Negotiable
Instrument Act in that state, it was no longer the law;
that the rule announced in the Dodge case had been
"discarded." The court, in the latter case, expressed its
doubts that the courts of Tennessee and Pennsylvania
would adhere to the rule announced in the Pickle case,
quoted supra, in the face of the Negotiable Instrument
Law. Subsequent to the Millard case, the Supreme
Court of the United States, in the case of First National
Bank of Washington vs. Whitman (94 U. S., 343, 347;
24 L. ed., 229), where the bank, without any
knowledge that the indorsement of the payee was
unauthorized, paid the check, and it was contended
that by the payment the privity of contract existing
between the drawer and drawee was imparted to the
payee, said:
"It is further contended that such an acceptance of the
check as creates a privity between the payee and the
bank is established by the payment of the amount of
this check in the manner described. This argument is
based upon the erroneous assumption that the bank
has paid this check. If this were true, it would have
discharged all of its duty, and there would be an end of
the claim against it. The bank supposed that it had
paid the check; but this was an error. The money it
paid was upon a pretended and not a real indorsement
of the name of the payee. The real indorsement of the
payee was as necessary to a valid payment as the real
signature of the drawer; and in law the check remains
unpaid. Its pretended payment did not diminish the
funds of the drawer in the bank, or put money in the
pocket of the person entitled to the payment. The
state of the account was the same after the pretended
payment as it was before.

"We cannot recognize the argument that a payment of

the amount of a check or sight draft under such
circumstances amounts to an acceptance, creating a
privity of contract with the real owner. It is difficult to
construe a payment as an acceptance under any
circumstances. The two things are essentially different.
One is a promise to perform an act, the other an actual
performance. A banker or an individual may be ready
to make actual payment of a check or draft when
presented, while unwilling to make a promise to pay at
a future time. Many, on the other hand, are more
ready to promise to pay than to meet the promise
when required. The difference between the
transactions is essential and inherent."
Counsel for the appellant cite other cases holding that
the stamping of the check "paid" and the charging of
the amount thereof to the drawer constituted an
acceptance, but we are of opinion that none of these
cases cited hold that it is in compliance with the
Negotiable Instruments Act; paying the check and
stamping same is not the equivalent of accepting the
check in writing signed by the drawee. The cases
holding that payment as indicated above constituted
acceptance were rendered prior to the adoption of the
Negotiable Instruments Act in the particular state, and
these decisions are divided into two classes: the one
holding that the check delivered by the drawer to the
holder and presented to the bank or drawee
constitutes an assignment pro tanto; the other holding
that the payment of the check and the charging of
same to the drawee although paid to an unauthorized
person creates privity of contract between the holder
and the drawee bank.
We have already seen that our own court has
repudiated the assignment pro tanto theory, and since
the adoption of the Negotiable Instrument Act by this
state we are compelled to say that payment of a check

is not equivalent to accepting a check in writing and

signing the name of the acceptor thereon. Payment of
the check and the charging of same to the drawer
does not constitute an acceptance. Payment of the
check is the end of the voyage; acceptance of the
check is to fuel the vessel and strengthen it for
continued operation on the commercial sea. What we
have said applies to the holder and not to the drawer
of the check. On this question we conclude that the
general rule is that an action cannot be maintained by
a payee of the check against the bank on which is
draw unless the check has been certified or accepted
by the bank in compliance with the statute, even
though at the time the check is that an action cannot
be maintained by a payee of the drawer of the check
out of which the check is legally payable; and that the
payment of the check by the bank on which it is
drawn, even though paid on the unauthorized
indorsement of the name of the holder (without notice
of the defect by the bank), does not constitute a
certification thereof, neither is it an acceptance
thereof; and without acceptance or certification, as
provided by statute, there is no privity of contract
between the drawee bank and the payee, or holder of
the check. Neither is there an assignment pro tanto of
the funds where the check is not drawn on a particular
fund, or does not show on its face that it is an
assignment of a particular fund. The above rule as
stated seems to have been the rule in the majority of
the states even before the passage of the uniform
Negotiable Instruments Act in the several states.
The decision in the case of First National Bank vs. Bank of
Cottage Grove (59 Or., 388), which appellant cites in its brief
(pp. 12, 13 ) has been expressly overruled by the Supreme
Court of Massachusetts in South Boston Trust Co. vs. Levin
(143 N. E., 816, 817), in the following language:

In First National Bank vs. Bank of Cottage Grove (59

Or., 388; 117 Pac., 293, 296, at page 396), it was said:
"The payment of a bill or check by the drawee
amounts to more than an acceptance. The rule,
holding that such a payment has all the efficacy of an
acceptance, is founded upon the principle that the
greater includes the less." We are unable to agree with
this statement as there is no similarity between
acceptance and payment; payment discharges the
instrument, and no one else is expected to advance
anything on the faith of it; acceptance, contemplates
further circulation, induced by the fact of acceptance.
The rule that the acceptor made certain admissions
which will inure to the benefit of subsequent holders,
has no applicability to payment of the instrument
where subsequent holders can never exist.
II. The old doctrine that a bank was bound to know its
correspondent's signature and that a drawee could not
recover money paid upon a forgery of the drawer's name,
because it was said, the drawee was negligent not to know
the forgery and it must bear the consequence of its
negligence, is fast fading into the misty past, where it
belongs. It was founded in misconception of the fundamental
principles of law and common sense. (2 Morse, Banks and
Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and
held that under no circumstances (except, of course, where
the purchaser of the bill has participated in the fraud upon
the drawee) would the drawee be allowed to recover bank
money paid under a mistake of fact upon a bill of exchange
to which the name of the drawer had been forged. This
doctrine has been freely criticized by the eminent authorities,
as a rule too favorable to the holder, not the most fair, nor
best calculated to effectuate justice between the drawee and
the drawer. (5 R.C.L., p. 556.)

The old rule which was originally announced by Lord

Mansfield in the leading case of Price vs. Neal (3 Burr., 1354),
elicited the following comment from Justice Holmes, then
Chief Justice of the Supreme Court of Massachusetts, in the
case of Dedham National Bank vs. Everett National Bank (177
Mass., 392). "Probably the rule was adopted from an
impression of convenience rather than for any more
academic reason; or perhaps we may say that Lord Mansfield
took the case out of the doctrine as to payments under a
mistake of fact by the assumption that a holder who simply
presents negotiable paper for payment makes no
representation as to the signature, and that the drawee pays
at his peril."
Such was the reaction that followed Lord Mansfield's rule
which Justice Story of the United States Supreme adopted in
the case of Bank of United States vs. Georgia (10 Wheat.,
333), that in B. B. Ford & Co. vs. People's Bank of Orangeburg
(74 S. C., 180), it was held that "an unrestricted indorsement
of a draft and presentation to the drawee is a representation
that the signature of the drawer is genuine", and in Lisbon
First National Bank vs. Wyndmere Bank (15 N. D., 299), it was
also held that "the drawee of a forged check who has paid
the same without detecting the forgery, may upon discovery
of the forgery, recover the money paid from the party who
received the money, even though the latter was a good faith
holder, provided the latter has not been misled or prejudiced
by the drawee's failure to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the
following to say:
In all the cases which hold the drawee absolutely estoppel by
acceptance or payment from denying genuineness of the
drawer's name, the loss is thrown upon him on the ground of
negligence on his part in accepting or paying, until he has
ascertained the bill to be genuine. But the holder has
preceded him in negligence, by himself not ascertaining the
true character of the paper before he received it, or

presented it for acceptance or payment. And although, as a

general rule, the drawee is more likely to know the drawer's
handwriting than a stranger is, if he is in fact deceived as to
its genuineness, we do not perceive that he should suffer
more deeply by mistake than a stranger, who, without
knowing the handwriting, has taken the paper without
previously ascertaining its genuineness. And the mistake of
the drawee should always be allowed to be corrected, unless
the holder, acting upon faith and confidence induced by his
honoring the draft, would be placed in a worse position by
according such privilege to him. This view has been applied
in a well considered case, and is intimidated in another; and
is forcibly presented by Mr. Chitty, who says it is going a
great way to charge the acceptor with knowledge of his
correspondent's handwriting, "unless some bona fide holder
has purchased the paper on the faith of such an act."
Negligence in making payment under a mistake of fact is not
now deemed a bar to recovery of it, and we do not see why
any exception should be made to the principle, which would
apply as well as to release an obligation not consummated by
payment. ( Vol. 2, 6th edition, pp. 1537-1539.)
III. But now the rule is perfectly well settled that in
determining the relative rights of a drawee who, under a
mistake of fact, has paid, and a holder who has received such
payment, upon a check to which the name of the drawer has
been forged, it is only fair to consider the question of
diligence or negligence of the parties in respect thereto.
(Woods and Malone vs. Colony Bank [1902], 56 L. R. A., 929,
932.) The responsibility of the drawee who pays a forged
check, for the genuineness of the drawer's signature, is
absolute only in favor of one who has not, by his own fault or
negligence, contributed to the success of the fraud or to
mislead the drawee. (National Bank of America vs. Bangs,
106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs.
Colony Bank, supra; De Feriet vs. Bank of America, 23 La.
Ann., 310; B. B. Ford & Co. vs. People's Bank of Orangeburg,
74 S. C., 180; 10 L. R. A. [N. S.], 63.) If it appears that the one
to whom payment was made was not an innocent sufferer,

but was guilty of negligence in not doing something, which

plain duty demanded, and which, if it had been done, would
have avoided entailing loss on any one, he is not entitled to
retain the moneys paid through a mistake on the part of the
drawee bank. (First Nat. Bank of Danvers vs. First Nat. Bank
of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; First
Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36
N. W., 289; 3 A. S. R., 294; American Exp. Co. vs. State Nat.
Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B.
B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180;
54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas., 744; 10 L. R. A.
[N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12
S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of
Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L. R.
A., 955.) In other words, to entitle the holder of a forged
check to retain the money obtained he must be able to show
that the whole responsibility of determining the validity of
the signature was upon the drawee, and that the negligence
of such drawee was not lessened by any failure of any
precaution which, from his implied assertion in presenting the
check as a sufficient voucher, the drawee had the right to
believe he had taken. (Ellis vs. Ohio Life Insurance & Trust
Co., 4 Ohio St., 628; Rouvant vs. Bank, 63 Tex., 610; Bank vs.
Ricker, 71 Ill., 429; First National Bank of Danvers vs. First
Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs.
People's Bank of Orangeburg, supra.) The recovery is
permitted in such case, because, although the drawee was
constructively negligent in failing to detect the forgery, yet if
the purchaser had performed his duty, the forgery would in
all probability have been detected and the fraud defeated.
(First National Bank of Lisbon vs. Bank of Wyndmere, 15 N.
D., 209; 10 L. R. A. [N. S.], 49.) In the absence of actual fault
on the part of the drawee, his constructive fault in not
knowing the signature of the drawer and detecting the
forgery will not preclude his recovery from one who took the
check under circumstances of suspicion without proper
precaution, or whose conduct has been such as to mislead
the drawee or induce him to pay the check without the usual
scrutiny or other precautions against mistake or fraud.

(National Bank of America vs. Bangs, supra; First National

Bank vs. Indiana National Bank, 30 N. E., 808-810; Woods
and Malone vs. Colony Bank, supra; First National Bank of
Danvers vs. First Nat. Bank of Salem, 151 Mass., 280.) Where
a loss, which must be borne by one of two parties alike
innocent of forgery, can be traced to the neglect or fault of
either, it is unreasonable that it would be borne by him, even
if innocent of any intentional fraud, through whose means it
has succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass.,
33; First Nat. Bank of Danvers vs. First National Bank of
Salem, supra; B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra.) Again if the indorser is guilty of
negligence in receiving and paying the check or draft, or has
reason to believe that the instrument is not genuine, but fails
to inform the drawee of his suspicions the indorser according
to the reasoning of some courts will be held liable to the
drawee upon his implied warranty that the instrument is
genuine. (B. B. Ford & Co. vs. People's Bank of Orangeburg,
supra; Newberry Sav. Bank vs. Bank of Columbia, 93 S. C.,
294; 38 L. R. A. [N. S], 1200.) Most of the courts now agree
that one who purchases a check or draft is bound to satisfy
himself that the paper is genuine; and that by indorsing it or
presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he has performed his
duty, the drawee, who has, without actual negligence on his
part, paid the forged demand, may recover the money paid
from such negligent purchaser. (Lisbon First National Bank
vs. Wyndmere Bank, supra.) Of course, the drawee must, in
order to recover back the holder, show that he himself was
free from fault. (See also 5 R. C. L., pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account of
its negligence only, the loss has occurred, the drawee may
recover the amount it paid on the forged draft or check.
(Security Commercial & Sav. Bank vs. Southern Trust & C.
Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
But we are aware of no case in which the principle that the
drawee is bound to know the signature of the drawer of a bill

or check which he undertakes to pay has been held to be

decisive in favor of a payee of a forged bill or check to which
he has himself given credit by his indorsement. (Secalso,
Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of
Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat. Bank
vs. Indiana National Bank; 30 N. E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921],
100 Or., 264; 14 A. L. R., 479; 197 Pac., 547), the court
declared: "A holder cannot profit by a mistake which his
negligent disregard of duty has contributed to induce the
drawee to commit. . . . The holder must refund, if by his
negligence he has contributed to the consummation of the
mistake on the part of the drawee by misleading him. . . . If
the only fault attributable to the drawee is the constructive
fault which the law raises from the bald fact that he has
failed to detect the forgery, and if he is not chargeable with
actual fault in addition to such constructive fault, then he is
not precluded from recovery from a holder whose conduct
has been such as to mislead the drawee or induce him to pay
the check or bill of exchange without the usual security
against fraud. The holder must refund to a drawee who is not
guilty of actual fault if the holder was negligent in not making
due inquiry concerning the validity of the check before he
took it, and if the drawee can be said to have been excused
from making inquiry before taking the check because of
having had a right to, presume that the holder had made
such inquiry."
The rule that one who first negotiates forged paper without
taking some precaution to learn whether or not it is genuine
should not be allowed to retain the proceeds of the draft or
check from the drawee, whose sole fault was that he did not
discover the forgery before he paid the draft or check, has
been followed by the later cases. (Security Commercial &
Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal.
App., 734; 241 Pac., 945; Hutcheson Hardware Co. vs.
Planters State Bank [1921], 26 Ga. App., 321; 105 S. E., 854;
[Annotation at 71 A. L. R., 337].)

Where a bank, without inquiry or identification of the person

presenting a forged check, purchases it, indorses it,
generally, and presents it to the drawee bank, which pays it,
the latter may recover if its only negligence was its mistake
in having failed to detect the forgery, since its mistake, did
not mislead the purchaser or bring about a change in
position. (Security Commercial & Savings Bank vs. Southern
Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
Also, a drawee could recover from another bank the portion
of the proceeds of a forged check cashed by the latter and
deposited by the forger in the second bank and never
withdrawn, upon the discovery of the forgery three months
later, after the drawee had paid the check and returned the
voucher to the purported drawer, where the purchasing bank
was negligent in taking the check, and was not injured by the
drawee's negligence in discovering and reporting the forgery
as to the amount left on deposit, since it was not a purchaser
for value. (First State Bank & T. Co. vs. First Nat. Bank [1924],
314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could
recover the amount paid on the check, after discovery of the
forgery, from another bank, which put the check into
circulation by cashing it for the one who had forged the
signature of both drawer and payee without making any
inquiry as to who he was although he was a stranger, after
which the check reached, and was paid by, the drawee, after
going through the hands of several intermediate indorsees.
(71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A.
L. R., 1079, 1085), the following statement was made:
We are clearly of opinion, therefore that the warranty of
genuineness, arising upon the act of the Brule National Bank
in putting the check in circulation, was not discharged by
payment of the check by the drawee (First National Bank),
nor was the Brule National Bank deceived or misled to its

prejudice by such payment. The Brule National Bank by its

indorsement and delivery warranted its own identification of
Kost and the genuineness of his signature. The indorsement
of the check by the Brule National Bank was such as to
assign the title to the check to its assignee, the Whitbeck
National Bank, and the amount was credited to the indorser.
The check bore no indication that it was deposited for
collection, and was not in any manner restricted so as to
constitute the indorsee the agent of the indorser, nor did it
prohibit farther negotiation of the instrument, nor did it
appear to be in trust for, or to the use of, any other person,
nor was it conditional. Certainly the Pukwana Bank was
justified in relying upon the warrant of genuineness, which
implied the full identification of Kost, and his signature by the
defendant bank. This view of the statute is in accord with the
decisions of many courts. (First National Bank vs. State Bank,
22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First
National Bank vs. First National Bank, 151 Mass., 280; 21 Am.
St. Rep., 450; 24 N. E., 44; People's Bank vs. Franklin Bank,
88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W.,
716.)"
The appellant leans heavily on the case of Fidelity & Co. vs.
Planenscheck (71 A. L. R., 331), decided in 1929. We have
carefully examined this decision and we do not feel justified
in accepting its conclusions. It is but a restatement of the
long abandoned rule of Neal vs. Price, and it predicated on
the wrong premise that the payment includes acceptance,
and that a bank drawee paying a check drawn on it becomes
ipso facto an acceptor within the meaning of section 62 of
the Negotiable Instruments Act. Moreover in a more recent
decision, that of Louisa National Bank vs. Kentucky National
Bank (39 S. W. [2nd] 497, 501) decided in 1931, the Court of
Appeals of Kentucky held the following:
The appellee, on presentation for payment of $600
check, failed to discover it was a forgery. It was bound
to know the signature of its customer, Armstrong, and
it was derelict in failing to give his signature to the

check sufficient attention and examination to enable it

to discover instantly the forgery. The appellant, when
the check was presented to it by Banfield, failed to
make an inquiry of or about him and did not cause or
have him to be identified. Its act in so paying to him
the check is a degree of negligence on its part
equivalent to positive negligence. It indorsed the
check, and, while such indorsement may not be
regarded within the meaning of the Negotiable
Instrument Law as amounting to a warranty to
appellant of that which it indorsed, it at least
substantially served as a representation to it that it
had exercised ordinary care and had complied with the
rules and customs of prudent banking. Its indorsement
was calculated, if it did not in fact do so, to lull the
drawee bank into indifference as to the drawer's
signature to it when paying the check and charging it
to its customer's account and remitting its proceeds to
appellant's correspondent.
If in such a transaction between the drawee and the
holder of a check both are without fault, no recovery
may be had of the money so paid. (Deposit Bank of
Georgetown vs. Fayette National Bank, supra, and
cases cited.) Or the rule may be more accurately
stated that, where the drawee pays the money, he
cannot recover it back from a holder in good faith, for
value and without fault.
If, on the other hand, the holder acts in bad faith, or is
guilty of culpable negligence, a recovery may be had
by the drawee of such holder. The negligence of the
Bank of Louisa in failing to inquire of and about
Banfield, and to cause or to have him identified before
it parted with its money on the forged check, may be
regarded as the primary and proximate cause of the
loss. Its negligence in this respect reached in its effect
the appellee, and induced incaution on its part. In
comparison of the degrees of the negligence of the

two, it is apparent that of the appellant excels in

culpability. Both appellant and appellee inadvertently
made a mistake, doubtless due to a hurry incident to
business. The first and most grievous one was made
by the appellant , amounting to its disregard of the
duty, it owed itself as well as the duty it owed to the
appellee, and it cannot on account thereof retain as
against the appellee the money which it so received. It
cannot shift the loss to the appellee, for such disregard
of its duty inevitably contributed to induce the
appellee to omit its duty critically to examine the
signature of Armstrong, even if it did not know it
instantly at the time it paid the check. (Farmers' Bank
of Augusta vs. Farmer's Bank of Maysville, supra, and
cases cited.)
IV. The question now is to determine whether the appellant's
negligence in purchasing the checks in question is such as to
give the appellee the right to recover upon said checks, and
on the other hand, whether the drawee bank was not itself
negligent, except for its constructive fault in not knowing the
signature of the drawer and detecting the forgery.
We quote with approval the following conclusions of the court
a quo:
Check Exhibit A bears number 637023-D and is dated
April 6, 1933, whereas check Exhibit A-1 bears number
637020-D and is dated April 7, 1933. Therefore, the
latter check, which is prior in number to the former
check, is however, issued on a later date. This
circumstance must have aroused at least the curiosity
of the Motor Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks
from unknown persons. And not only this; check
Exhibit A is indorsed by a subagent of the agent of the
payee, International Auto Repair Shop. The Motor
Service Co., Inc., made no inquiry whatsoever as to the

extent of the authority of these unknown persons. Our

Supreme Court said once that "any person taking
checks made payable to a corporation, which can act
only by agents, does so at his peril, and must abide by
the consequences if the agent who indorses the same
is without authority" (Insular Drug Co. vs. National
Bank, 58, Phil., 684).
xxx

xxx

xxx

Check Exhibit A-1, aside from having been indorsed by

a supposed agent of the international Auto Repair
Shop is crossed generally. The existence of two parallel
lines transversally drawn on the face of this check was
a warning that the check could only be collected
through a banking institution (Jacobs, Law of Bills of
Exchange, etc., pp., 179, 180; Bills of Exchange Act of
England, secs. 76 and 79). Yet the Motor Service Co.,
Inc., accepted the check in payment for merchandise.
. . . In Exhibit H attached to the stipulation of facts as
an integral part thereof, the Motor Service Co., Inc.,
stated the following:
"The Pangasinan Transportation Co. is a good customer
of this firm and we received checks from them every
month in payment of their account. The two checks in
question seem to be exactly similar to the checks
which we received from the Pangasinan Transportation
Co. every month."
If the failure of the Motor Service Co., Inc., to detect
the forgery of the drawer's signature in the two
checks, may be considered as an omission in good
faith because of the similarity stated in the letter, then
the same consideration applies to the Philippine
National Bank, for the drawer is a customer of both the
Motor Service Co., Inc., and the Philippine National
Bank. (B. of E., pp. 25, 28, 35.)

We are of opinion that the facts of the present case do not

make it one between two equally innocent persons, the
drawee bank and the holder, and that they are governed by
the authorities already cited and also the following:
The point in issue has sometimes been said to be that
of negligence. The drawee who has paid upon the
forged signature is held to bear the loss, because he
has been negligent in failing to recognize that the
handwriting is not that of his customer. But it follows
obviously that if the payee, holder, or presenter of the
forged paper has himself been in default, if he has
himself been guilty of a negligence prior to that of the
banker, or if by any act of his own he has at all
contributed to induce the banker's negligence, then he
may lose his right to cast the loss upon the banker.
The courts have shown a steadily increasing
disposition to extend the application of this rule over
the new conditions of fact which from time to time
arise, until it can now rarely happen that the holder,
payee, or presenter can escape the imputation of
having been in some degree contributory towards the
mistake. Without any actual change in the abstract
doctrines of the law, which are clear, just, and simple
enough, the gradual but sure tendency and effect of
the decisions have been to put as heavy a burden of
responsibility upon the payee as upon the drawee,
contrary to the original custom. . . . (2 Morse on Banks
and Banking, 5th ed., secs. 464 and 466, pp. 82-85
and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R.,
1079, 1088, 1089), the following statement appears in the
concurring opinion:
What, then, should be the rule? The drawee asks to
recover for money had and received. If his claim did
not rest upon a transaction relating to a negotiable
instrument plaintiff could recover as for money paid

under mistake, unless defendant could show some

equitable reason, such as changed condition since,
and relying upon, payment by plaintiff. In the
Wyndmere Case, the North Dakota court holds that
this rule giving right to recover money paid under
mistake should extend to negotiable paper, and it
rejects in its entirety the theory of estoppel and puts a
case of this kind on exactly the same basis as the
ordinary case of payment under mistake. But the great
weight of authority, and that based on the better
reasoning, holds that the exigencies of business
demand a different rule in relation to negotiable paper.
What is that rule? Is it an absolute estoppel against the
drawee in favor of a holder, no matter how negligent
such holder has been? It surely is not. The correct rule
recognizes the fact that, in case of payment without a
prior acceptance or certification, the holder takes the
paper upon the of the prior indorsers and the credit of
the drawer, and not upon the credit of the drawee, in
making payment, has a right to rely upon the
assumption that the payee used due diligence,
especially where such payee negotiated the bill or
check to a holder, thus representing that it had so fully
satisfied itself as to the identity and signature of the
maker that it was willing to warrant as relates thereto
to all subsequent holders. (Uniform Act, secs. 65 and
66.) Such correct rule denies the drawee the right to
recover when the holder was without fault or when
there has been some change of position calling for
equitable relief. When a holder of a bill of exchange
uses all due care in the taking of bill or check and the
drawee thereafter pays same, the transaction is
absolutely closed modern business could not be
done on any other basis. While the correct rule
promotes the fluidity of two recognized mediums of
exchange, those mediums by which the great bulk of
business is carried on, checks and drafts, upon the
other hand it encourages and demands prudent
business methods upon the part of those receiving

such mediums of exchange. (Pennington County Bank

vs. First State Bank, 110 Minn., 263; 26 L. R. A. [N. S.],
849; 136 Am. St. Rep., 496; 125 N. W., 119; First
National Bank vs. State Bank, 22 Neb., 769; 3 Am. St.
Rep., 294; 36 N. W., 289; Bank of Williamson, vs.
McDowell County Bank, 66 W. Va., 545; 36 L. R. A. [N.
S.], 605; 66 S. E., 761; Germania Bank vs. Boutell, 60
Minn., 189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62 N.
W., 327; American Express Co. vs. State National Bank,
27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac., 711;
Farmers' National Bank vs. Farmers' & Traders Bank, L.
R. A., 1915A, 77, and note (159 Ky., 141; 166 S. W.,
986].)
That the defendant bank did not use reasonable
business prudence is clear. It took this check from a
stranger without other identification than that given by
another stranger; its cashier witnessed the mark of
such stranger thus vouching for the identity and
signature of the maker; and it indorsed the check as
"Paid," thus further throwing plaintiff off guard.
Defendant could not but have known, when
negotiating such check and putting it into the channel
through which it would finally be presented to plaintiff
for payment, that plaintiff, if it paid such check, as
defendant was asking it to do, would have to rely
solely upon the apparent faith and credit that
defendant had placed in the drawer. From the very
circumstances of this case plaintiff had to act on the
facts as presented to it by defendant, upon such facts
only.
But appellant argues that it so changed its position,
after payment by plaintiff, that in "equity and good
conscience" plaintiff should not recover it says it did
not pay over any money to the forger until after
plaintiff had paid the check. There would be merit in
such contention if defendant had indorsed the check
for "collection," thus advising plaintiff that it was

relying on plaintiff and not on the drawer. It stands in

court where it would have been if it had done as it
represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932),
the court said:
. . . If the holder has been negligent in paying the
forged paper, or has by his conduct, however innocent,
misled or deceived the drawee to his damage, it would
be unjust for him to be allowed to shield himself from
the results of his own carelessness by asserting that
the drawee was bound in law to know his drawer's
signature.
V. Section 23 of the Negotiable Instruments Act provides that
"when a signature is forged or made without the authority of
the person whose signature it purports to be, is wholly
inoperative, and no right to retain the instrument, or to give
a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or
want of authority.
It not appearing that the appellee bank did not warrant to the
appellant the genuineness of the checks in question, by its
acceptance thereof, nor did it perform any act which would
have induced the appellant to believe in the genuineness of
said instruments before appellant purchased them for value,
it can not be said that the appellee is precluded from setting
up the forgery and, therefore, the appellant is not entitled to
retain the amount of the forged check paid to it by the
appellee.
VI. It has been held by many courts that a drawee of a check,
who is deceived by a forgery of the drawer's signature may
recover the payment back, unless his mistake has placed an
innocent holder of the paper in a worse position than he

would have been in if the discovery of the forgery had been

made on presentation. (5 R. C. L., p. 559; 2 Daniel on
Negotiable Instruments, 1538.) Forgeries often deceived the
eye of the most cautious experts; and when a bank has been
deceived, it is a harsh rule which compels it to suffer
although no one has suffered by its being deceived. (17 A. L.
R. 891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed
recovery, the appellant's position would not become worse
than if the drawee had refused the payment of these checks
upon their presentation. The appellant has lost nothing by
anything which the drawee has done. It had in its hands
some forged worthless papers. It did not purchase or acquire
these papers because of any representation made to it by
the drawee. It purchased them from unknown persons and
under suspicious circumstances. It had no valid title to them,
because the persons from whom it received them did not
have such title. The appellant could not have compelled the
drawee to pay them, and the drawee could have refused
payment had it been able to detect the forgery. By making a
refund, the appellant would only returning what it had
received without any title or right. And when appellant pays
back the money it had received it will be entitled to have
restored to it the forged papers it parted with. There is no
good reason why the accidental payment made by the
appellant should inure to the benefit of the appellant. If there
were injury to the appellant said injury was caused not by the
failure of the appellee to detect the forgery but by the very
negligence of the appellant in purchasing commercial papers
from unknown persons without making inquiry as to their
genuineness.
In the light of the foregoing discussion, we conclude:
1. That where a check is accepted or certified by the
bank on which it is drawn, the bank is estopped to
deny the genuineness of the drawer's signature and
his capacity to issue the instrument;

2. That if a drawee bank pays a forged check which

was previously accepted or certified by the said bank it
cannot recover from a holder who did not participate in
the forgery and did not have actual notice thereof;
3. That the payment of a check does not include or
imply its acceptance in the sense that this word is
used in section 62 of the Negotiable Instruments Law;
4. That in the case of the payment of a forged check,
even without former acceptance, the drawee can not
recover from a holder in due course not chargeable
with any act of negligence or disregard of duty;
5. That to entitle the holder of a forged check to retain
the money obtained thereon, there must be a showing
that the duty to ascertain the genuineness of the
signature rested entirely upon the drawee, and that
the constructive negligence of such drawee in failing
to detect the forgery was not affected by any disregard
of duty on the part of the holder, or by failure of any
precaution which, from his implied assertion in
presenting the check as a sufficient voucher, the
drawee had the right to believe he had taken;
6. That in the absence of actual fault on the part of the
drawee, his constructive fault in not knowing the
signature of the drawer and detecting the forgery will
nor preclude his recovery from one who took the check
under circumstances of suspicion and without proper
precaution, or whose conduct has been such as to
mislead the drawee or induce him to pay the check
without the usual scrutiny or other precautions against
mistake or fraud;

7. That on who purchases a check or draft is bound to

satisfy himself that the paper is genuine, and that by
indorsing it or presenting it for payment or putting it
into circulation before presentation he impliedly
asserts that he performed his duty;
8. That while the foregoing rule, chosen from a welter
of decisions on the issue as the correct one, will not
hinder the circulation of two recognized mediums of
exchange by which the great bulk of business is
carried on, namely, drafts and checks, on the other
hand, it will encourage and demand prudent business
methods on the part of those receiving such mediums
of exchange;
9. That it being a matter of record in the present case,
that the appellee bank in no more chargeable with the
knowledge of the drawer's signature than the
appellant is, as the drawer was as much the customer
of the appellant as of the appellee, the presumption
that a drawee bank is bound to know more than any
indorser the signature of its depositor does not hold;
10. That according to the undisputed facts of the case
the appellant in purchasing the papers in question
from unknown persons without making any inquiry as
to the identity and authority of the said persons
negotiating and indorsing them, acted negligently and
contributed to the appellee's constructive negligence
in failing to detect the forgery;
11. That under the circumstances of the case, if the
appellee bank is allowed to recover, there will be no
change of position as to the injury or prejudice of the
appellant.
Wherefore, the assignments of error are overruled, and the
judgment appealed from must be, as it is hereby, affirmed,
with costs against the appellant. So ordered.

7. PNB vs. Court of Appeals, 25 SCRA 693

The Philippine National Bank hereinafter referred to as the
PNB seeks the review by certiorari of a decision of the
Court of Appeals, which affirmed that of the Court of First
Instance of Manila, dismissing plaintiff's complaint against
the Philippine Commercial and Industrial Bank hereinafter
referred to as the PCIB for the recovery of P57,415.00.
A partial stipulation of facts entered into by the parties and
the decision of the Court of Appeals show that, on about
January 15, 1962, one Augusto Lim deposited in his current
account with the PCIB branch at Padre Faura, Manila, GSIS
Check No. 645915- B, in the sum of P57,415.00, drawn
against the PNB; that, following an established banking
practice in the Philippines, the check was, on the same date,
forwarded, for clearing, through the Central Bank, to the PNB,
which did not return said check the next day, or at any other
time, but retained it and paid its amount to the PCIB, as well
as debited it against the account of the GSIS in the PNB; that,
subsequently, or on January 31, 1962, upon demand from the
GSIS, said sum of P57,415.00 was re-credited to the latter's
account, for the reason that the signatures of its officers on
the check were forged; and that, thereupon, or on February
2, 1962, the PNB demanded from the PCIB the refund of said
sum, which the PCIB refused to do. Hence, the present action
against the PCIB, which was dismissed by the Court of First
Instance of Manila, whose decision was, in turn, affirmed by
the Court of Appeals.
It is not disputed that the signatures of the General Manager
and the Auditor of the GSIS on the check, as drawer thereof,
are forged; that the person named in the check as its payee
was one Mariano D. Pulido, who purportedly indorsed it to
one Manuel Go; that the check purports to have been
indorsed by Manuel Go to Augusto Lim, who, in turn,
deposited it with the PCIB, on January 15, 1962; that,
thereupon, the PCIB stamped the following on the back of the
check: "All prior indorsements and/or Lack of Endorsement

Guaranteed, Philippine Commercial and Industrial Bank,"

Padre Faura Branch, Manila; that, on the same date, the PCIB
sent the check to the PNB, for clearance, through the Central
Bank; and that, over two (2) months before, or on November
13, 1961, the GSIS had notified the PNB, which
acknowledged receipt of the notice, that said check had been
lost, and, accordingly, requested that its payment be
stopped.
In its brief, the PNB maintains that the lower court erred: (1)
in not finding the PCIB guilty of negligence; (2) in not finding
that the indorsements at the back of the check are forged;
(3) in not finding the PCIB liable to the PNB by virtue of the
former's warranty on the back of the check; (4) in not holding
that "clearing" is not "acceptance", in contemplation of the
Negotiable Instruments law; (5) in not finding that, since the
check had not been accepted by the PNB, the latter is
entitled to reimbursement therefor; and (6) in denying the
PNB's right to recover from the PCIB.
The first assignment of error will be discussed later, together
with the last,with which it is interrelated.
As regards the second assignment of error, the PNB argues
that, since the signatures of the drawer are forged, so must
the signatures of the supposed indorsers be; but this
conclusion does not necessarily follow from said premise.
Besides, there is absolutely no evidence, and the PNB has not
even tried to prove that the aforementioned indorsements
are spurious. Again, the PNB refunded the amount of the
check to the GSIS, on account of the forgery in the
signatures, not of the indorsers or supposed indorsers, but of
the officers of the GSIS as drawer of the instrument. In other
words, the question whether or not the indorsements have
been falsified is immaterial to the PNB's liability as a drawee,
or to its right to recover from the PCIB, 1 for, as against the
drawee, the indorsement of an intermediate bank does not
guarantee the signature of the drawer,2 since the forgery of
the indorsement is not the cause of the loss.3

With respect to the warranty on the back of the check, to

which the third assignment of error refers, it should be noted
that the PCIB thereby guaranteed "all prior indorsements,"
not the authenticity of the signatures of the officers of the
GSIS who signed on its behalf, because the GSIS is not an
indorser of the check, but its drawer.4 Said warranty is
irrelevant, therefore, to the PNB's alleged right to recover
from the PCIB. It could have been availed of by a subsequent
indorsee5 or a holder in due course6 subsequent to the PCIB,
but, the PNB is neither.7 Indeed, upon payment by the PNB,
as drawee, the check ceased to be a negotiable instrument,
and became a mere voucher or proof of payment. 8
Referring to the fourth and fifth assignments of error, we
must bear in mind that, in general, "acceptance", in the
sense in which this term is used in the Negotiable
Instruments Law9 is not required for checks, for the same are
payable on demand.10 Indeed, "acceptance" and "payment"
are, within the purview of said Law, essentially different
things, for the former is "a promise to perform an act,"
whereas the latter is the "actual performance" thereof.11 In
the words of the Law,12 "the acceptance of a bill is the
signification by the drawee of his assent to the order of the
drawer," which, in the case of checks, is the payment, on
demand, of a given sum of money. Upon the other hand,
actual payment of the amount of a check implies not only an
assent to said order of the drawer and a recognition of the
drawer's obligation to pay the aforementioned sum, but, also,
a compliance with such obligation.
Let us now consider the first and the last assignments of
error. The PNB maintains that the lower court erred in not
finding that the PCIB had been guilty of negligence in not
discovering that the check was forged. Assuming that there
had been such negligence on the part of the PCIB, it is
undeniable, however, that the PNB has, also, been negligent,
with the particularity that the PNB had been guilty of a
greater degree of negligence, because it had a previous and
formal notice from the GSIS that the check had been lost,

with the request that payment thereof be stopped. Just as

important, if not more important and decisive, is the fact that
the PNB's negligence was the main or proximate cause for
the corresponding loss.
In this connection, it will be recalled that the PCIB did not
cash the check upon its presentation by Augusto Lim; that
the latter had merely deposited it in his current account with
the PCIB; that, on the same day, the PCIB sent it, through the
Central Bank, to the PNB, for clearing; that the PNB did not
return the check to the PCIB the next day or at any other
time; that said failure to return the check to the PCIB implied,
under the current banking practice, that the PNB considered
the check good and would honor it; that, in fact, the PNB
honored the check and paid its amount to the PCIB; and that
only then did the PCIB allow Augusto Lim to draw said
amount from his aforementioned current account.
Thus, by not returning the check to the PCIB, by thereby
indicating that the PNB had found nothing wrong with the
check and would honor the same, and by actually paying its
amount to the PCIB, the PNB induced the latter, not only to
believe that the check was genuine and good in every
respect, but, also, to pay its amount to Augusto Lim. In other
words, the PNB was the primary or proximate cause of the
loss, and, hence, may not recover from the PCIB. 13
It is a well-settled maxim of law and equity that when one of
two (2) innocent persons must suffer by the wrongful act of a
third person, the loss must be borne by the one whose
negligence was the proximate cause of the loss or who put it
into the power of the third person to perpetrate the wrong. 14
Then, again, it has, likewise, been held that, where the
collecting (PCIB) and the drawee (PNB) banks are equally at
fault, the court will leave the parties where it finds them. 15
Lastly, Section 62 of Act No. 2031 provides:

The acceptor by accepting the instrument engages

that he will pay it according to the tenor of his
acceptance; and admits:
(a) The existence of the drawer, the genuineness of his
signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to
indorse.
The prevailing view is that the same rule applies in the case
of a drawee who pays a bill without having previously
accepted it.16
WHEREFORE, the decision appealed from is hereby affirmed,
with costs against the Philippine National Bank. It is so
ordered.

8. Great Eastern Life Ins. Vs. Hongkong & Shanghai

Bank, 43 Phil 679
The plaintiff is an insurance corporation, and the defendants
are banking corporations, and each is duly licensed to do its
respective business in the Philippines Islands.
May 3, 1920, the plaintiff drew its check for P2,000 on the
Hongkong and Shanghai Banking Corporation with whom it
had an account, payable to the order of Lazaro Melicor. E. M.
Maasim fraudulently obtained possession of the check,
forged Melicor's signature, as an endorser, and then
personally endorsed and presented it to the Philippine
National Bank where the amount of the check was placed to
his credit. After having paid the check, and on the next day,
the Philippine national Bank endorsed the check to the
Hongkong and Shanghai Banking Corporation which paid it
and charged the amount of the check to the account of the
plaintiff. In the ordinary course of business, the Hongkong

Shanghai Banking Corporation rendered a bank statement to

the plaintiff showing that the amount of the check was
charged to its account, and no objection was then made to
the statement. About four months after the check was
charged to the account of the plaintiff, it developed that
Lazaro Melicor, to whom the check was made payable, had
never received it, and that his signature, as an endorser, was
forged by Maasim, who presented and deposited it to his
private account in the Philippine National Bank. With this
knowledge , the plaintiff promptly made a demand upon the
Hongkong and Shanghai Banking Corporation that it should
be given credit for the amount of the forged check, which the
bank refused to do, and the plaintiff commenced this action
to recover the P2,000 which was paid on the forged check.
On the petition of the Shanghai Bank, the Philippine National
Bank was made defendant. The Shanghai Bank denies any
liability, but prays that, if a judgment should be rendered
against it, in turn, it should have like judgment against the
Philippine National Bank which denies all liability to either
party.
Upon the issues being joined, a trial was had and judgment
was rendered against the plaintiff and in favor of the
defendants, from which the plaintiff appeals, claiming that
the court erred in dismissing the case, notwithstanding its
finding of fact, and in not rendering a judgment in its favor,
as prayed for in its complaint.
JOHNS, J.:
There is no dispute about any of the findings of fact made by
the trial court, and the plaintiff relies upon them for a
reversal. Among other things, the trial court says:
Who is responsible for the refund to the drawer of the
amount of the check drawn and payable to order,
when its value was collected by a third person by
means of forgery of the signature of the payee? Is it
the drawee or the last indorser, who ignored the
forgery at the time of making the payment, or the
forger?
To lower court found that Melicor's name was forged to the
check. "So that the person to whose order the check was

issued did not receive the money, which was collected by E.

M. Maasim," and then says:
Now then, the National Bank should not be held
responsible for the payment of made to Maasim in
good faith of the amount of the check, because the
indorsement of Maasim is unquestionable and his
signature perfectly genuine, and the bank was not
obliged to identify the signature of the former indorser.
Neither could the Hongkong and Shanghai Banking
Corporation be held responsible in making payment in
good faith to the National Bank, because the latter is a
holder in due course of the check in question. In other
words, the two defendant banks can not be held civilly
responsible for the consequences of the falsification or
forgery of the signature of Lazaro Melicor, the National
Bank having had no notice of said forgery in making
payment to Maasim, nor the Hongkong bank in making
payment to National Bank. Neither bank incurred in
any responsibility arising from that crime, nor was
either of the said banks by subsequent acts, guilty of
negligence or fault.
This was fundamental error.
Plaintiff's check was drawn on Shanghai Bank payable to the
order of Melicor. In other words, the plaintiff authorized and
directed the Shanghai Bank to pay Melicor, or his order,
P2,000. It did not authorize or direct the bank to pay the
check to any other person than Melicor, or his order, and the
testimony is undisputed that Melicor never did part with his
title or endorse the check, and never received any of its
proceeds. Neither is the plaintiff estopped or bound by the
banks statement, which was made to it by the Shanghai
Bank. This is not a case where the plaintiff's own signature
was forged to one of it checks. In such a case, the plaintiff
would have known of the forgery, and it would have been its
duty to have promptly notified the bank of any forged
signature, and any failure on its part would have released
bank from any liability. That is not this case. Here, the forgery
was that of Melicor, who was the payee of the check, and the
legal presumption is that the bank would not honor the check
without the genuine endorsement of Melicor. In other words,

when the plaintiff received it banks statement, it had a right

to assume that Melicor had personally endorsed the check,
and that, otherwise, the bank would not have paid it.
Section 23 of Act No. 2031, known as the Negotiable
Instruments Law, says:
When a signature is forged or made without the
authority of the person whose signature it purports to
be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto,
can be acquired through or under such signature,
unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or
want of authority.
That section is square in point.
The money was on deposit in the Shanghai Bank, and it had
no legal right to pay it out to anyone except the plaintiff or its
order. Here, the plaintiff ordered the Shanghai Bank to pay
the P2,000 to Melicor, and the money was actually paid to
Maasim and was never paid to Melicor, and he never paid to
Melicor, and he never personally endorsed the check, or
authorized any one to endorse it for him, and the alleged
endorsement was a forgery. Hence, upon the undisputed
facts, it must follow that the Shanghai Bank has no defense
to this action.
It is admitted that the Philippine National Bank cashed the
check upon a forged signature, and placed the money to the
credit of Maasim, who was a forger. That the Philippine
National Bank then endorsed the check and forwarded it to
the Shanghai Bank by whom it was paid. The Philippine
National Bank had no license or authority to pay the money
to Maasim or anyone else upon a forge signature. It was its
legal duty to know that Melicor's endorsment was genuine
before cashing the check. Its remedy is against Maasim to
whom it paid the money.
The judgment of the lower court is reversed, and one will be
entered here in favor of the plaintiff and against the
Hongkong and Shanghai Banking Corporation for the P2,000,
with interest thereon from November 8, 1920 at the rate of 6

per cent per annum, and the costs of this action, and a
corresponding judgment will be entered in favor of the
Hongkong Shanghai Banking Corporation against the
Philippine National Bank for the same amount, together with
the amount of its costs in this action. So ordered.
9. Gempesaw vs. Court of Appeals, G.R. No. 92244,
Feb. 9, 1993
From the adverse decision * of the Court of Appeals (CA-G.R.
CV No. 16447), petitioner, Natividad Gempesaw, appealed to
this Court in a Petition for Review, on the issue of the right of
the drawer to recover from the drawee bank who pays a
check with a forged indorsement of the payee, debiting the
same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a
Complaint against the private respondent Philippine Bank of
Communications (respondent drawee Bank) for recovery of
the money value of eighty-two (82) checks charged against
the petitioner's account with the respondent drawee Bank on
the ground that the payees' indorsements were forgeries.
The Regional Trial Court, Branch CXXVIII of Caloocan City,
which tried the case, rendered a decision on November 17,
1987 dismissing the complaint as well as the respondent
drawee Bank's counterclaim. On appeal, the Court of Appeals
in a decision rendered on February 22, 1990, affirmed the
decision of the RTC on two grounds, namely (1) that the
plaintiff's (petitioner herein) gross negligence in issuing the
checks was the proximate cause of the loss and (2) assuming
that the bank was also negligent, the loss must nevertheless
be borne by the party whose negligence was the proximate
cause of the loss. On March 5, 1990, the petitioner filed this
petition under Rule 45 of the Rules of Court setting forth the
following as the alleged errors of the respondent Court: 1
I. THE RESPONDENT COURT OF APPEALS ERRED IN
RULING THAT THE NEGLIGENCE OF THE DRAWER IS

THE PROXIMATE CAUSE OF THE RESULTING INJURY TO

THE DRAWEE BANK, AND THE DRAWER IS PRECLUDED
FROM SETTING UP THE FORGERY OR WANT OF
AUTHORITY.
II. THE RESPONDENT COURT OF APPEALS ALSO ERRED
IN NOT FINDING AND RULING THAT IT IS THE GROSS
AND INEXCUSABLE NEGLIGENCE AND FRAUDULENT
ACTS OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF
THE PAYEES AND THE WRONG AND/OR ILLEGAL
PAYMENTS MADE TO PERSONS, OTHER THAN TO THE
INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE
DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO
PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS
DEBITED.
III. THE RESPONDENT COURT OF APPEALS ALSO ERRED
IN NOT ORDERING THE RESPONDENT BANK TO
RESTORE OR RE-CREDIT THE CHECKING ACCOUNT OF
THE PETITIONER IN THE CALOOCAN CITY BRANCH BY
THE VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH
IS IN THE AMOUNT OF P1,208,606.89 WITH LEGAL
INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and
operates four grocery stores located at Rizal Avenue
Extension and at Second Avenue, Caloocan City. Among
these groceries are D.G. Shopper's Mart and D.G. Whole Sale
Mart. Petitioner maintains a checking account numbered 1300038-1 with the Caloocan City Branch of the respondent
drawee Bank. To facilitate payment of debts to her suppliers,
petitioner draws checks against her checking account with
the respondent bank as drawee. Her customary practice of
issuing checks in payment of her suppliers was as follows:
the checks were prepared and filled up as to all material
particulars by her trusted bookkeeper, Alicia Galang, an

employee for more than eight (8) years. After the bookkeeper
prepared the checks, the completed checks were submitted
to the petitioner for her signature, together with the
corresponding invoice receipts which indicate the correct
obligations due and payable to her suppliers. Petitioner
signed each and every check without bothering to verify the
accuracy of the checks against the corresponding invoices
because she reposed full and implicit trust and confidence on
her bookkeeper. The issuance and delivery of the checks to
the payees named therein were left to the bookkeeper.
Petitioner admitted that she did not make any verification as
to whether or not the checks were delivered to their
respective payees. Although the respondent drawee Bank
notified her of all checks presented to and paid by the bank,
petitioner did not verify he correctness of the returned
checks, much less check if the payees actually received the
checks in payment for the supplies she received. In the
course of her business operations covering a period of two
years, petitioner issued, following her usual practice stated
above, a total of eighty-two (82) checks in favor of several
suppliers. These checks were all presented by the indorsees
as holders thereof to, and honored by, the respondent
drawee Bank. Respondent drawee Bank correspondingly
debited the amounts thereof against petitioner's checking
account numbered 30-00038-1. Most of the aforementioned
checks were for amounts in excess of her actual obligations
to the various payees as shown in their corresponding
invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the
amount of P11,895.23 in favor of Kawsek Inc. (Exh. A60), appellant's actual obligation to said payee was
only P895.33 (Exh. A-83); (2) in Check No. 652282
issued on September 18, 1984 in favor of Senson
Enterprises in the amount of P11,041.20 (Exh. A-67)
appellant's actual obligation to said payee was only
P1,041.20 (Exh. 7); (3) in Check No. 589092 dated
April 7, 1984 for the amount of P11,672.47 in favor of
Marchem (Exh. A-61) appellant's obligation was only

P1,672.47 (Exh. B); (4) in Check No. 620450 dated May

10, 1984 in favor of Knotberry for P11,677.10 (Exh. A31) her actual obligation was only P677.10 (Exhs. C
and C-1); (5) in Check No. 651862 dated August 9,
1984 in favor of Malinta Exchange Mart for P11,107.16
(Exh. A-62), her obligation was only P1,107.16 (Exh. D2); (6) in Check No. 651863 dated August 11, 1984 in
favor of Grocer's International Food Corp. in the
amount of P11,335.60 (Exh. A-66), her obligation was
only P1,335.60 (Exh. E and E-1); (7) in Check No.
589019 dated March 17, 1984 in favor of Sophy
Products in the amount of P11,648.00 (Exh. A-78), her
obligation was only P648.00 (Exh. G); (8) in Check No.
589028 dated March 10, 1984 for the amount of
P11,520.00 in favor of the Yakult Philippines (Exh. A73), the latter's invoice was only P520.00 (Exh. H-2);
(9) in Check No. 62033 dated May 23, 1984 in the
amount of P11,504.00 in favor of Monde Denmark
Biscuit (Exh. A-34), her obligation was only P504.00
(Exhs. I-1 and I-2). 2
Practically, all the checks issued and honored by the
respondent drawee bank were crossed checks. 3 Aside from
the daily notice given to the petitioner by the respondent
drawee Bank, the latter also furnished her with a monthly
statement of her transactions, attaching thereto all the
cancelled checks she had issued and which were debited
against her current account. It was only after the lapse of
more two (2) years that petitioner found out about the
fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the
payees were brought to Ernest L. Boon, Chief Accountant of
respondent drawee Bank at the Buendia branch, who,
without authority therefor, accepted them all for deposit at
the Buendia branch to the credit and/or in the accounts of
Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very
close friend of Alfredo Y. Romero. Sixty-three (63) out of the
eighty-two (82) checks were deposited in Savings Account

No. 00844-5 of Alfredo Y. Romero at the respondent drawee

Bank's Buendia branch, and four (4) checks in his Savings
Account No. 32-81-9 at its Ongpin branch. The rest of the
checks were deposited in Account No. 0443-4, under the
name of Benito Lam at the Elcao branch of the respondent
drawee Bank.
About thirty (30) of the payees whose names were
specifically written on the checks testified that they did not
receive nor even see the subject checks and that the
indorsements appearing at the back of the checks were not
theirs.
The team of auditors from the main office of the respondent
drawee Bank which conducted periodic inspection of the
branches' operations failed to discover, check or stop the
unauthorized acts of Ernest L. Boon. Under the rules of the
respondent drawee Bank, only a Branch Manager and no
other official of the respondent drawee bank, may accept a
second indorsement on a check for deposit. In the case at
bar, all the deposit slips of the eighty-two (82) checks in
question were initialed and/or approved for deposit by Ernest
L. Boon. The Branch Managers of the Ongpin and Elcao
branches accepted the deposits made in the Buendia branch
and credited the accounts of Alfredo Y. Romero and Benito
Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on
respondent drawee Bank to credit her account with the
money value of the eighty-two (82) checks totalling
P1,208.606.89 for having been wrongfully charged against
her account. Respondent drawee Bank refused to grant
petitioner's demand. On January 23, 1985, petitioner filed the
complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on
a check drawn against the drawee bank. The payees are not
parties to the case. Rather, it is the drawer, whose signature
is genuine, who instituted this action to recover from the

drawee bank the money value of eighty-two (82) checks paid

out by the drawee bank to holders of those checks where the
indorsements of the payees were forged. How and by whom
the forgeries were committed are not established on the
record, but the respective payees admitted that they did not
receive those checks and therefore never indorsed the same.
The applicable law is the Negotiable Instruments Law 4
(heretofore referred to as the NIL). Section 23 of the NIL
provides:
When a signature is forged or made without the
authority of the person whose signature it purports to
be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto,
can be acquired through or under such signature,
unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or
want of authority.
Under the aforecited provision, forgery is a real or
absolute defense by the party whose signature is
forged. A party whose signature to an instrument was
forged was never a party and never gave his consent
to the contract which gave rise to the instrument.
Since his signature does not appear in the instrument,
he cannot be held liable thereon by anyone, not even
by a holder in due course. Thus, if a person's signature
is forged as a maker of a promissory note, he cannot
be made to pay because he never made the promise
to pay. Or where a person's signature as a drawer of a
check is forged, the drawee bank cannot charge the
amount thereof against the drawer's account because
he never gave the bank the order to pay. And said
section does not refer only to the forged signature of
the maker of a promissory note and of the drawer of a
check. It covers also a forged indorsement, i.e., the
forged signature of the payee or indorsee of a note or
check. Since under said provision a forged signature is

"wholly inoperative", no one can gain title to the

instrument through such forged indorsement. Such an
indorsement prevents any subsequent party from
acquiring any right as against any party whose name
appears prior to the forgery. Although rights may exist
between and among parties subsequent to the forged
indorsement, not one of them can acquire rights
against parties prior to the forgery. Such forged
indorsement cuts off the rights of all subsequent
parties as against parties prior to the forgery. However,
the law makes an exception to these rules where a
party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising from
forged indorsements of checks may generally be broken into
two types of cases: (1) where forgery was accomplished by a
person not associated with the drawer for example a mail
robbery; and (2) where the indorsement was forged by an
agent of the drawer. This difference in situations would
determine the effect of the drawer's negligence with respect
to forged indorsements. While there is no duty resting on the
depositor to look for forged indorsements on his cancelled
checks in contrast to a duty imposed upon him to look for
forgeries of his own name, a depositor is under a duty to set
up an accounting system and a business procedure as are
reasonably calculated to prevent or render difficult the
forgery of indorsements, particularly by the depositor's own
employees. And if the drawer (depositor) learns that a check
drawn by him has been paid under a forged indorsement, the
drawer is under duty promptly to report such fact to the
drawee bank. 5 For his negligence or failure either to discover
or to report promptly the fact of such forgery to the drawee,
the drawer loses his right against the drawee who has
debited his account under a forged indorsement. 6 In other
words, he is precluded from using forgery as a basis for his
claim for re-crediting of his account.

In the case at bar, petitioner admitted that the checks were

filled up and completed by her trusted employee, Alicia
Galang, and were given to her for her signature. Her signing
the checks made the negotiable instrument complete. Prior
to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument to the payee for
the purpose of giving effect thereto. 7 The first delivery of the
instrument, complete in form, to the payee who takes it as a
holder, is called issuance of the instrument. 8 Without the
initial delivery of the instrument from the drawer of the check
to the payee, there can be no valid and binding contract and
no liability on the instrument.
Petitioner completed the checks by signing them as drawer
and thereafter authorized her employee Alicia Galang to
deliver the eighty-two (82) checks to their respective payees.
Instead of issuing the checks to the payees as named in the
checks, Alicia Galang delivered them to the Chief Accountant
of the Buendia branch of the respondent drawee Bank, a
certain Ernest L. Boon. It was established that the signatures
of the payees as first indorsers were forged. The record fails
to show the identity of the party who made the forged
signatures. The checks were then indorsed for the second
time with the names of Alfredo Y. Romero and Benito Lam,
and were deposited in the latter's accounts as earlier noted.
The second indorsements were all genuine signatures of the
alleged holders. All the eighty-two (82) checks bearing the
forged indorsements of the payees and the genuine second
indorsements of Alfredo Y. Romero and Benito Lam were
accepted for deposit at the Buendia branch of respondent
drawee Bank to the credit of their respective savings
accounts in the Buendia, Ongpin and Elcao branches of the
same bank. The total amount of P1,208,606.89, represented
by eighty-two (82) checks, were credited and paid out by
respondent drawee Bank to Alfredo Y. Romero and Benito
Lam, and debited against petitioner's checking account No.
13-00038-1, Caloocan branch.

As a rule, a drawee bank who has paid a check on which an

indorsement has been forged cannot charge the drawer's
account for the amount of said check. An exception to this
rule is where the drawer is guilty of such negligence which
causes the bank to honor such a check or checks. If a check
is stolen from the payee, it is quite obvious that the drawer
cannot possibly discover the forged indorsement by mere
examination of his cancelled check. This accounts for the rule
that although a depositor owes a duty to his drawee bank to
examine his cancelled checks for forgery of his own
signature, he has no similar duty as to forged indorsements.
A different situation arises where the indorsement was forged
by an employee or agent of the drawer, or done with the
active participation of the latter. Most of the cases involving
forgery by an agent or employee deal with the payee's
indorsement. The drawer and the payee often time shave
business relations of long standing. The continued
occurrence of business transactions of the same nature
provides the opportunity for the agent/employee to commit
the fraud after having developed familiarity with the
signatures of the parties. However, sooner or later, some leak
will show on the drawer's books. It will then be just a
question of time until the fraud is discovered. This is specially
true when the agent perpetrates a series of forgeries as in
the case at bar.
The negligence of a depositor which will prevent recovery of
an unauthorized payment is based on failure of the depositor
to act as a prudent businessman would under the
circumstances. In the case at bar, the petitioner relied
implicitly upon the honesty and loyalty of her bookkeeper,
and did not even verify the accuracy of amounts of the
checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank
statements, she apparently did not carefully examine the
same nor the check stubs and the returned checks, and did
not compare them with the same invoices. Otherwise, she
could have easily discovered the discrepancies between the
checks and the documents serving as bases for the checks.

With such discovery, the subsequent forgeries would not

have been accomplished. It was not until two years after the
bookkeeper commenced her fraudulent scheme that
petitioner discovered that eighty-two (82) checks were
wrongfully charged to her account, at which she notified the
respondent drawee bank.
It is highly improbable that in a period of two years, not one
of Petitioner's suppliers complained of non-payment.
Assuming that even one single complaint had been made,
petitioner would have been duty-bound, as far as the
respondent drawee Bank was concerned, to make an
adequate investigation on the matter. Had this been done,
the discrepancies would have been discovered, sooner or
later. Petitioner's failure to make such adequate inquiry
constituted negligence which resulted in the bank's honoring
of the subsequent checks with forged indorsements. On the
other hand, since the record mentions nothing about such a
complaint, the possibility exists that the checks in question
covered inexistent sales. But even in such a case,
considering the length of a period of two (2) years, it is hard
to believe that petitioner did not know or realize that she was
paying more than she should for the supplies she was
actually getting. A depositor may not sit idly by, after
knowledge has come to her that her funds seem to be
disappearing or that there may be a leak in her business, and
refrain from taking the steps that a careful and prudent
businessman would take in such circumstances and if taken,
would result in stopping the continuance of the fraudulent
scheme. If she fails to take steps, the facts may establish her
negligence, and in that event, she would be estopped from
recovering from the bank. 9
One thing is clear from the records that the petitioner
failed to examine her records with reasonable diligence
whether before she signed the checks or after receiving her
bank statements. Had the petitioner examined her records
more carefully, particularly the invoice receipts, cancelled
checks, check book stubs, and had she compared the sums

written as amounts payable in the eighty-two (82) checks

with the pertinent sales invoices, she would have easily
discovered that in some checks, the amounts did not tally
with those appearing in the sales invoices. Had she noticed
these discrepancies, she should not have signed those
checks, and should have conducted an inquiry as to the
reason for the irregular entries. Likewise had petitioner been
more vigilant in going over her current account by taking
careful note of the daily reports made by respondent drawee
Bank in her issued checks, or at least made random scrutiny
of cancelled checks returned by respondent drawee Bank at
the close of each month, she could have easily discovered
the fraud being perpetrated by Alicia Galang, and could have
reported the matter to the respondent drawee Bank. The
respondent drawee Bank then could have taken immediate
steps to prevent further commission of such fraud. Thus,
petitioner's negligence was the proximate cause of her loss.
And since it was her negligence which caused the respondent
drawee Bank to honor the forged checks or prevented it from
recovering the amount it had already paid on the checks,
petitioner cannot now complain should the bank refuse to
recredit her account with the amount of such checks. 10
Under Section 23 of the NIL, she is now precluded from using
the forgery to prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co.
vs. Hongkong & Shanghai Bank 11 is not applicable to the
case at bar because in said case, the check was fraudulently
taken and the signature of the payee was forged not by an
agent or employee of the drawer. The drawer was not found
to be negligent in the handling of its business affairs and the
theft of the check by a total stranger was not attributable to
negligence of the drawer; neither was the forging of the
payee's indorsement due to the drawer's negligence. Since
the drawer was not negligent, the drawee was duty-bound to
restore to the drawer's account the amount theretofore paid
under the check with a forged payee's indorsement because
the drawee did not pay as ordered by the drawer.

Petitioner argues that respondent drawee Bank should not

have honored the checks because they were crossed checks.
Issuing a crossed check imposes no legal obligation on the
drawee not to honor such a check. It is more of a warning to
the holder that the check cannot be presented to the drawee
bank for payment in cash. Instead, the check can only be
deposited with the payee's bank which in turn must present it
for payment against the drawee bank in the course of normal
banking transactions between banks. The crossed check
cannot be presented for payment but it can only be
deposited and the drawee bank may only pay to another
bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the
drawee bank from having checks with more than one
indorsement. The banking rule banning acceptance of checks
for deposit or cash payment with more than one indorsement
unless cleared by some bank officials does not invalidate the
instrument; neither does it invalidate the negotiation or
transfer of the said check. In effect, this rule destroys the
negotiability of bills/checks by limiting their negotiation by
indorsement of only the payee. Under the NIL, the only kind
of indorsement which stops the further negotiation of an
instrument is a restrictive indorsement which prohibits the
further negotiation thereof.
Sec. 36. When indorsement restrictive. An
indorsement is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to
transfer or negotiate must be written in express words at the
back of the instrument, so that any subsequent party may be
forewarned that ceases to be negotiable. However, the
restrictive indorsee acquires the right to receive payment
and bring any action thereon as any indorser, but he can no

longer transfer his rights as such indorsee where the form of

the indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank
to honor it because there is no privity between them, as far
as the drawer-depositor is concerned, such bank may not
legally refuse to honor a negotiable bill of exchange or a
check drawn against it with more than one indorsement if
there is nothing irregular with the bill or check and the
drawer has sufficient funds. The drawee cannot be compelled
to accept or pay the check by the drawer or any holder
because as a drawee, he incurs no liability on the check
unless he accepts it. But the drawee will make itself liable to
a suit for damages at the instance of the drawer for wrongful
dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded
from raising the defense of forgery by reason of her gross
negligence. But under Section 196 of the NIL, any case not
provided for in the Act shall be governed by the provisions of
existing legislation. Under the laws of quasi-delict, she
cannot point to the negligence of the respondent drawee
Bank in the selection and supervision of its employees as
being the cause of the loss because negligence is the
proximate cause thereof and under Article 2179 of the Civil
Code, she may not be awarded damages. However, under
Article 1170 of the same Code the respondent drawee Bank
may be held liable for damages. The article provides
Those who in the performance of their obligations are
guilty of fraud, negligence or delay, and those who in
any manner contravene the tenor thereof, are liable
for damages.
There is no question that there is a contractual relation
between petitioner as depositor (obligee) and the respondent
drawee bank as the obligor. In the performance of its
obligation, the drawee bank is bound by its internal banking
rules and regulations which form part of any contract it

enters into with any of its depositors. When it violated its

internal rules that second endorsements are not to be
accepted without the approval of its branch managers and it
did accept the same upon the mere approval of Boon, a chief
accountant, it contravened the tenor of its obligation at the
very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did
not discover the irregularity with respect to the acceptance of
checks with second indorsement for deposit even without the
approval of the branch manager despite periodic inspection
conducted by a team of auditors from the main office
constitutes negligence on the part of the bank in carrying out
its obligations to its depositors. Article 1173 provides
The fault or negligence of the obligor consists in the
omission of that diligence which is required by the
nature of the obligation and corresponds with the
circumstance of the persons, of the time and of the
place. . . .
We hold that banking business is so impressed with public
interest where the trust and confidence of the public in
general is of paramount importance such that the
appropriate standard of diligence must be a high degree of
diligence, if not the utmost diligence. Surely, respondent
drawee Bank cannot claim it exercised such a degree of
diligence that is required of it. There is no way We can allow
it now to escape liability for such negligence. Its liability as
obligor is not merely vicarious but primary wherein the
defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged
liable to share the loss with the petitioner on a fifty-fifty ratio
in accordance with Article 172 which provides:
Responsibility arising from negligence in the
performance of every kind of obligation is also

demandable, but such liability may be regulated by

the courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied
upon, it is being made clear that the decision to hold the
drawee bank liable is based on law and substantial justice
and not on mere equity. And although the case was brought
before the court not on breach of contractual obligations, the
courts are not precluded from applying to the circumstances
of the case the laws pertinent thereto. Thus, the fact that
petitioner's negligence was found to be the proximate cause
of her loss does not preclude her from recovering damages.
The reason why the decision dealt on a discussion on
proximate cause is due to the error pointed out by petitioner
as allegedly committed by the respondent court. And in
breaches of contract under Article 1173, due diligence on the
part of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered
REMANDED to the trial court for the reception of evidence to
determine the exact amount of loss suffered by the
petitioner, considering that she partly benefited from the
issuance of the questioned checks since the obligation for
which she issued them were apparently extinguished, such
that only the excess amount over and above the total of
these actual obligations must be considered as loss of which
one half must be paid by respondent drawee bank to herein
petitioner.
SO ORDERED.

10.
Associated Bank vs. Court of
Appeals, G.R. No. 89802, May 7, 1992
The sole issue raised in this case is whether or not the
private respondent has a cause of action against the
petitioners for their encashment and payment to another
person of certain crossed checks issued in her favor.

The private respondent is engaged in the business of readyto-wear garments under the firm name "Melissa's RTW." She
deals with, among other customers, Robinson's Department
Store, Payless Department Store, Rempson Department
Store, and the Corona Bazaar.
These companies issued in payment of their respective
accounts crossed checks payable to Melissa's RTW in the
amounts and on the dates indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January 19, 1982
Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981
When she went to these companies to collect on what she
thought were still unpaid accounts, she was informed of the
issuance of the above-listed crossed checks. Further inquiry
revealed that the said checks had been deposited with the
Associated Bank (hereinafter, "the Bank") and subsequently
paid by it to one Rafael Sayson, one of its "trusted
depositors," in the words of its branch manager and copetitioner, Conrado Cruz, Sayson had not been authorized by
the private respondent to deposit and encash the said
checks.
The private respondent sued the petitioners in the Regional
Trial Court of Quezon City for recovery of the total value of
the checks plus damages. After trial, judgment was rendered
requiring them to pay the private respondent the total value
of the subject checks in the amount of P15,805.00 plus 12%
interest, P50,000.00 actual damages, P25,000.00 exemplary
damages, P5,000.00 attorney's fees, and the costs of the
suit. 1
The petitioners appealed to the respondent court, reiterating
their argument that the private respondent had no cause of
action against them and should have proceeded instead
against the companies that issued the checks. In disposing of
this contention, the Court of Appeals 2 said:
The cause of action of the appellee in the case at bar arose
from the illegal, anomalous and irregular acts of the

appellants in violating common banking practices to the

damage and prejudice of the appellees, in allowing to be
deposited and encashed as well as paying to improper
parties without the knowledge, consent, authority or
endorsement of the appellee which totalled P15,805.00, the
six (6) checks in dispute which were "crossed checks" or "for
payee's account only," the appellee being the payee.
The three (3) elements of a cause of action are present in the
case at bar, namely: (1) a right in favor of the plaintiff by
whatever means and under whatever law it arises or is
created; (2) an obligation on the part of the named
defendant to respect or not to violate such right; and (3) an
act or omission on the part of such defendant violative of the
right of the plaintiff or constituting a breach thereof.
(Republic Planters Bank vs. Intermediate Appellate Court, 131
SCRA 631).
And such cause of action has been proved by evidence of
great weight. The contents of the said checks issued by the
customers of the appellee had not been questioned. There is
no dispute that the same are crossed checks or for payee's
account only, which is Melissa's RTW. The appellee had
clearly shown that she had never authorized anyone to
deposit the said checks nor to encash the same; that the
appellants had allowed all said checks to be deposited,
cleared and paid to one Rafael Sayson in violation of the
instructions in the said crossed checks that the same were
for payee's account only; and that the appellee maintained a
savings account with the Prudential Bank, Cubao Branch,
Quezon City which never cleared the said checks and the
appellee had been damaged by such encashment of the
same.
We affirm.
Under accepted banking practice, crossing a check is done by
writing two parallel lines diagonally on the left top portion of
the checks. The crossing is special where the name of a bank
or a business institution is written between the two parallel
lines, which means that the drawee should pay only with the
intervention of that company. 3 The crossing is general where
the words written between the two parallel lines are "and

Co." or "for payee's account only," as in the case at bar. This

means that the drawee bank should not encash the check
but merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared that
"the effects of crossing a check are: (1) that the check may
not be encashed but only deposited in the bank; (2) that the
check may be negotiated only once to one who has an
account with a bank; and (3) that the act of crossing the
check serves as a warning to the holder that the check has
been issued for a definite purpose so that he must inquire if
he has received the check pursuant to that purpose."
The effects therefore of crossing a check relate to the mode
of its presentment for payment. Under Sec. 72 of the
Negotiable Instruments Law, presentment for payment, to be
sufficient, must be made by the holder or by some person
authorized to receive payment on his behalf. Who the holder
or authorized person is depends on the instruction stated on
the face of the check.
The six checks in the case at bar had been crossed and
issued "for payee's account only." This could only signify that
the drawers had intended the same for deposit only by the
person indicated, to wit, Melissa's RTW.
The petitioners argue that the cause of action for violation of
the common instruction found on the face of the checks
exclusively belongs to the issuers thereof and not to the
payee. Moreover, having acted in good faith as they merely
facilitated the encashment of the checks, they cannot be
made liable to the private respondent.
The subject checks were accepted for deposit by the Bank for
the account of Rafael Sayson although they were crossed
checks and the payee was not Sayson but Melissa's RTW. The
Bank stamped thereon its guarantee that "all prior
endorsements and/or lack of endorsements (were)
guaranteed." By such deliberate and positive act, the Bank
had for all legal intents and purposes treated the said checks
as negotiable instruments and, accordingly, assumed the
warranty of the endorser.
The weight of authority is to the effect that "the possession
of check on a forged or unauthorized indorsement is

wrongful, and when the money is collected on the check, the

bank can be held 'for moneys had and received." 6 The
proceeds are held for the rightful owner of the payment and
may be recovered by him. The position of the bank taking the
check on the forged or unauthorized indorsement is the same
as if it had taken the check and collected without
indorsement at all. The act of the bank amounts to
conversion of the check. 7
It is not disputed that the proceeds of the subject checks
belonged to the private respondent. As she had not at any
time authorized Rafael Sayson to endorse or encash them,
there was conversion of the funds by the Bank.
When the Bank paid the checks so endorsed notwithstanding
that title had not passed to the endorser, it did so at its peril
and became liable to the payee for the value of the checks.
This liability attached whether or not the Bank was aware of
the unauthorized endorsement. 8
The petitioners were negligent when they permitted the
encashment of the checks by Sayson. The Bank should have
first verified his right to endorse the crossed checks, of which
he was not the payee, and to deposit the proceeds of the
checks to his own account. The Bank was by reason of the
nature of the checks put upon notice that they were issued
for deposit only to the private respondent's account. Its
failure to inquire into Sayson's authority was a breach of a
duty it owed to the private respondent.
As the Court stressed in Banco de Oro Savings and Mortgage
Bank vs. Equitable Banking Corp., 9 "the law imposes a duty
of diligence on the collecting bank to scrutinize checks
deposited with it, for the purpose of determining their
genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the public as
the expert on this field, and the law thus holds it to a high
standard of conduct."
The petitioners insist that the private respondent has no
cause of action against them because they have no privity of
contract with her. They also argue that it was Eddie Reyes,
the private respondent's own husband, who endorsed the
checks.

Assuming that Eddie Reyes did endorse the crossed checks,

we hold that the Bank would still be liable to the private
respondent because he was not authorized to make the
endorsements. And even if the endorsements were forged, as
alleged, the Bank would still be liable to the private
respondent for not verifying the endorser's authority. There is
no substantial difference between an actual forging of a
name to a check as an endorsement by a person not
authorized to make the signature and the affixing of a name
to a check as an endorsement by a person not authorized to
endorse it. 10
The Bank does not deny collecting the money on the
endorsement. It was its responsibility to inquire as to the
authority of Rafael Sayson to deposit crossed checks payable
to Melissa's RTW upon a prior endorsement by Eddie Reyes.
The failure of the Bank to make this inquiry was a breach of
duty that made it liable to the private respondent for the
amount of the checks.
There being no evidence that the crossed checks were
actually received by the private respondent, she would have
a right of action against the drawer companies, which in turn
could go against their respective drawee banks, which in turn
could sue the herein petitioner as collecting bank. In a similar
situation, it was held that, to simplify proceedings, the payee
of the illegally encashed checks should be allowed to recover
directly from the bank responsible for such encashment
regardless of whether or not the checks were actually
delivered to the payee. 11 We approve such direct action in
the case at bar.
It is worth repeating that before presenting the checks for
clearing and for payment, the Bank had stamped on the back
thereof the words: "All prior endorsements and/or lack of
endorsements guaranteed," and thus made the assurance
that it had ascertained the genuineness of all prior
endorsements.
We find that the respondent court committed no reversible
error in holding that the private respondent had a valid cause
of action against the petitioners and that the latter are
indeed liable to her for their unauthorized encashment of the

subject checks. We also agree with the reduction of the

award of the exemplary damages for lack of sufficient
evidence to support them.
WHEREFORE, the petition is DENIED, with costs against the
petitioner. It is so ordered.

11.
Travel-On vs. Court of Appeals, G.R.
56169, June 26, 1992
Petitioner Travel-On. Inc. ("Travel-On") is a travel agency
selling airline tickets on commission basis for and in behalf of
different airline companies. Private respondent Arturo S.
Miranda had a revolving credit line with petitioner. He
procured tickets from petitioner on behalf of airline
passengers and derived commissions therefrom.
On 14 June 1972, Travel-On filed suit before the Court of First
Instance ("CFI") of Manila to collect on six (6) checks issued
by private respondent with a total face amount of
P115,000.00. The complaint, with a prayer for the issuance of
a writ of preliminary attachment and attorney's fees, averred
that from 5 August 1969 to 16 January 1970, petitioner sold
and delivered various airline tickets to respondent at a total
price of P278,201.57; that to settle said account, private
respondent paid various amounts in cash and in kind, and
thereafter issued six (6) postdated checks amounting to
P115,000.00 which were all dishonored by the drawee banks.
Travel-On further alleged that in March 1972, private
respondent made another payment of P10,000.00 reducing
his indebtedness to P105,000.00. The writ of attachment was
granted by the court a quo.
In his answer, private respondent admitted having had
transactions with Travel-On during the period stipulated in
the complaint. Private respondent, however, claimed that he
had already fully paid and even overpaid his obligations and
that refunds were in fact due to him. He argued that he had
issued the postdated checks for purposes of accommodation,
as he had in the past accorded similar favors to petitioner.
During the proceedings, private respondent contested
several tickets alleged to have been erroneously debited to
his account. He claimed reimbursement of his alleged over
payments, plus litigation expenses, and exemplary and moral
damages by reason of the allegedly improper attachment of
his properties.
In support of his theory that the checks were issued for
accommodation, private respondent testified that he bad

issued the checks in the name of Travel-On in order that its

General Manager, Elita Montilla, could show to Travel-On's
Board of Directors that the accounts receivable of the
company were still good. He further stated that Elita Montilla
tried to encash the same, but that these were dishonored
and were subsequently returned to him after the
accommodation purpose had been attained.
Travel-On's witness, Elita Montilla, on the other hand
explained that the "accommodation" extended to Travel-On
by private respondent related to situations where one or
more of its passengers needed money in Hongkong, and
upon request of Travel-On respondent would contact his
friends in Hongkong to advance Hongkong money to the
passenger. The passenger then paid Travel-On upon his
return to Manila and which payment would be credited by
Travel-On to respondent's running account with it.
In its decision dated 31 January 1975, the court a quo
ordered Travel-On to pay private respondent the amount of
P8,894.91 representing net overpayments by private
respondent, moral damages of P10,000.00 for the wrongful
issuance of the writ of attachment and for the filing of this
case, P5,000.00 for attorney's fees and the costs of the suit.
The trial court ruled that private respondent's indebtedness
to petitioner was not satisfactorily established and that the
postdated checks were issued not for the purpose of
encashment to pay his indebtedness but to accommodate
the General Manager of Travel-On to enable her to show to
the Board of Directors that Travel-On was financially stable.
Petitioner filed a motion for reconsideration that was,
however, denied by the trial court, which in fact then
increased the award of moral damages to P50,000.00.
On appeal, the Court of Appeals affirmed the decision of the
trial court, but reduced the award of moral damages to
P20,000.00, with interest at the legal rate from the date of
the filing of the Answer on 28 August 1972.
Petitioner moved for reconsideration of the Court of Appeal's'
decision, without success.

In the instant Petition for Review, it is urged that the

postdated checks are per se evidence of liability on the part
of private respondent. Petitioner further argues that even
assuming that the checks were for accommodation, private
respondent is still liable thereunder considering that
petitioner is a holder for value.
Both the trial and appellate courts had rejected the checks as
evidence of indebtedness on the ground that the various
statements of account prepared by petitioner did not show
that Private respondent had an outstanding balance of
P115,000.00 which is the total amount of the checks he
issued. It was pointed out that while the various exhibits of
petitioner showed various accountabilities of private
respondent, they did not satisfactorily establish the amount
of the outstanding indebtedness of private respondent. The
appellate court made much of the fact that the figures
representing private respondent's unpaid accounts found in
the "Schedule of Outstanding Account" dated 31 January
1970 did not tally with the figures found in the statement
which showed private respondent's transactions with
petitioner for the years 1969 and 1970; that there was no
satisfactory explanation as to why the total outstanding
amount of P278,432.74 was still used as basis in the
accounting of 7 April 1972 considering that according to the
table of transactions for the year 1969 and 1970, the total
unpaid account of private respondent amounted to
P239,794.57.
We have, however, examined the record and it shows that
the 7 April 1972 Statement of Account had simply not been
updated; that if we use as basis the figure as of 31 January
1970 which is P278,432.74 and from it deduct P38,638.17
which represents some of the payments subsequently made
by private respondent, the figure P239,794.57 will be
obtained.

Also, the fact alone that the various statements of account

had variances in figures, simply did not mean that private
respondent had no more financial obligations to petitioner. It
must be stressed that private respondent's account with
petitioner was a running or open one, which explains the
varying figures in each of the statements rendered as of a
given date.
The appellate court erred in considering only the statements
of account in determining whether private respondent was
indebted to petitioner under the checks. By doing so, it failed
to give due importance to the most telling piece of evidence
of private respondent's indebtedness the checks
themselves which he had issued.
Contrary to the view held by the Court of Appeals, this Court
finds that the checks are the all important evidence of
petitioner's case; that these checks clearly established
private respondent's indebtedness to petitioner; that private
respondent was liable thereunder.
It is important to stress that a check which is regular on its
face is deemed prima facie to have been issued for a
valuable consideration and every person whose signature
appears thereon is deemed to have become a party thereto
for value. 1 Thus, the mere introduction of the instrument
sued on in evidence prima facie entitles the plaintiff to
recovery. Further, the rule is quite settled that a negotiable
instrument is presumed to have been given or indorsed for a
sufficient consideration unless otherwise contradicted and
overcome by other competent evidence. 2
In the case at bar, the Court of Appeals, contrary to these
established rules, placed the burden of proving the existence
of valuable consideration upon petitioner. This cannot be
countenanced; it was up to private respondent to show that
he had indeed issued the checks without sufficient
consideration. The Court considers that Private respondent
was unable to rebut satisfactorily this legal presumption. It
must also be noted that those checks were issued
immediately after a letter demanding payment had been
sent to private respondent by petitioner Travel-On.

The fact that all the checks issued by private respondent to

petitioner were presented for payment by the latter would
lead to no other conclusion than that these checks were
intended for encashment. There is nothing in the checks
themselves (or in any other document for that matter) that
states otherwise.
We are unable to accept the Court of Appeals' conclusion that
the checks here involved were issued for "accommodation"
and that accordingly private respondent maker of those
checks was not liable thereon to petitioner payee of those
checks.
In the first place, while the Negotiable Instruments Law does
refer to accommodation transactions, no such transaction
was here shown. Section 29 of the Negotiable Instruments
Law provides as follows:
Sec. 29. Liability of accommodation party. An
accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and
for the purpose of lending his name to some
other person. Such a person is liable on the
instrument to a holder for value,
notwithstanding such holder, at the time of
taking the instrument, knew him to be only an
accommodation party.
In accommodation transactions recognized by the
Negotiable Instruments Law, an accommodating party
lends his credit to the accommodated party, by issuing
or indorsing a check which is held by a payee or
indorsee as a holder in due course, who gave full value
therefor to the accommodated party. The latter, in
other words, receives or realizes full value which the
accommodated party then must repay to the
accommodating party, unless of course the
accommodating party intended to make a donation to
the accommodated party. But the accommodating
party is bound on the check to the holder in due
course who is necessarily a third party and is not the
accommodated party. Having issued or indorsed the
check, the accommodating party has warranted to the

holder in due course that he will pay the same

according to its tenor. 3
In the case at bar, Travel-On was payee of all six (6) checks,
it presented these checks for payment at the drawee bank
but the checks bounced. Travel-On obviously was not an
accommodated party; it realized no value on the checks
which bounced.
Travel-On was entitled to the benefit of the statutory
presumption that it was a holder in due course, 4 that the
checks were supported by valuable consideration. 5 Private
respondent maker of the checks did not successfully rebut
these presumptions. The only evidence aliunde that private
respondent offered was his own self-serving uncorroborated
testimony. He claimed that he had issued the checks to
Travel-On as payee to "accommodate" its General Manager
who allegedly wished to show those checks to the Board of
Directors of Travel-On to "prove" that Travel-On's account
receivables were somehow "still good." It will be seen that
this claim was in fact a claim that the checks were merely
simulated, that private respondent did not intend to bind
himself thereon. Only evidence of the clearest and most
convincing kind will suffice for that purpose; 6 no such
evidence was submitted by private respondent. The latter's
explanation was denied by Travel-On's General Manager; that
explanation, in any case, appears merely contrived and quite
hollow to us. Upon the other hand, the "accommodation" or
assistance extended to Travel-On's passengers abroad as
testified by petitioner's General Manager involved, not the
accommodation transactions recognized by the NIL, but
rather the circumvention of then existing foreign exchange
regulations by passengers booked by Travel-On, which
incidentally involved receipt of full consideration by private
respondent.
Thus, we believe and so hold that private respondent must
be held liable on the six (6) checks here involved. Those
checks in themselves constituted evidence of indebtedness
of private respondent, evidence not successfully overturned
or rebutted by private respondent.
Since the checks constitute the best evidence of private
respondent's liability to petitioner Travel-On, the amount of

such liability is the face amount of the checks, reduced only

by the P10,000.00 which Travel-On admitted in its complaint
to have been paid by private respondent sometime in March
1992.
The award of moral damages to Private respondent must be
set aside, for the reason that Petitioner's application for the
writ of attachment rested on sufficient basis and no bad faith
was shown on the part of Travel-On. If anyone was in bad
faith, it was private respondent who issued bad checks and
then pretended to have "accommodated" petitioner's
General Manager by assisting her in a supposed scheme to
deceive petitioner's Board of Directors and to misrepresent
Travel-On's financial condition.
ACCORDINGLY, the Court Resolved to GRANT due course to
the Petition for Review on Certiorari and to REVERSE and SET
ASIDE the Decision dated 22 October 1980 and the
Resolution of 23 January 1981 of the Court of Appeals, as well
as the Decision dated 31 January 1975 of the trial court, and
to enter a new decision requiring private respondent Arturo
S. Miranda to pay to petitioner Travel-On the amount of
P105,000.00 with legal interest thereon from 14 June 1972,
plus ten percent (10%) of the total amount due as attorney's
fees. Costs against Private respondent.

12.

G.R. No. L-8844 December 16, 1914

FERNANDO MAULINI, ET AL., vs. ANTONIO G. SERRANO

This is an appeal from a judgment of the Court of First
Instance of the city of Manila in favor of the plaintiff for the
sum of P3,000, with interest thereon at the rate of
1 per cent month from September 5, 1912, together with
the costs.
The action was brought by the plaintiff upon the contract of
indorsement alleged to have been made in his favor by the
defendant upon the following promissory note:
3,000. Due 5th of September, 1912.
We jointly and severally agree to pay to the order of
Don Antonio G. Serrano on or before the 5th day of
September, 1912, the sum of three thousand pesos
(P3,000) for value received for commercial operations.
Notice and protest renounced. If the sum herein
mentioned is not completely paid on the 5th day of
September, 1912, this instrument will draw interest at
the rate of 1 per cent per month from the date when
due until the date of its complete payment. The
makers hereof agree to pay the additional sum of P500
as attorney's fees in case of failure to pay the note.
Manila, June 5, 1912.
(Sgd.) For Padern, Moreno & Co., by F. Moreno,
member of the firm. For Jose Padern, by F. Moreno.
Angel Gimenez.
The note was indorsed on the back as follows:
Pay note to the order of Don Fernando Maulini, value
received. Manila, June 5, 1912. (Sgd.) A.G. Serrano.

The first question for resolution on this appeal is whether or

not, under the Negotiable Instruments Law, an indorser of a
negotiable promissory note may, in an action brought by his
indorsee, show, by parol evidence, that the indorsement was
wholly without consideration and that, in making it, the
indorser acted as agent for the indorsee, as a mere vehicle of
transfer of the naked title from the maker to the indorsee, for
which he received no consideration whatever.
The learned trial court, although it received parol evidence
on the subject provisionally, held, on the final decision of the
case, that such evidence was not admissible to alter, very,
modify or contradict the terms of the contract of
indorsement, and, therefore, refused to consider the
evidence thus provisionally received, which tended to show
that, by verbal agreement between the indorser and the
indorsee, the indorser, in making the indorsement, was
acting as agent for the indorsee, as a mere vehicle for the
transference of naked title, and that his indorsement was
wholly without consideration. The court also held that it was
immaterial whether there was a consideration for the transfer
or not, as the indorser, under the evidence offered, was an
accommodation indorser.
We are of the opinion that the trial court erred in both
findings.1awphil.net
In the first place, the consideration of a negotiable
promissory note, or of any of the contracts connected
therewith, like that of any other written instrument, is,
between the immediate parties to the contract, open to
attack, under proper circumstances, for the purpose of
showing an absolute lack or failure of consideration.
It seems, according to the parol evidence provisionally
admitted on the trial, that the defendant was a broker doing
business in the city of Manila and that part of his business
consisted in looking up and ascertaining persons who had
money to loan as well as those who desired to borrow money

and, acting as a mediary, negotiate a loan between the two.

He had done much business with the plaintiff and the
borrower, as well as with many other people in the city of
Manila, prior to the matter which is the basis of this action,
and was well known to the parties interested. According to
his custom in transactions of this kind, and the arrangement
made in this particular case, the broker obtained
compensation for his services of the borrower, the lender
paying nothing therefor. Sometimes this was a certain per
cent of the sum loaned; at other times it was a part of the
interest which the borrower was to pay, the latter paying 1
per cent and the broker per cent. According to the method
usually followed in these transactions, and the procedure in
this particular case, the broker delivered the money
personally to the borrower, took note in his own name and
immediately transferred it by indorsement to the lender. In
the case at bar this was done at the special request of the
indorsee and simply as a favor to him, the latter stating to
the broker that he did not wish his name to appear on the
books of the borrowing company as a lender of money and
that he desired that the broker take the note in his own
name, immediately transferring to him title thereto by
indorsement. This was done, the note being at once
transferred to the lender.
According to the evidence referred to, there never was a
moment when Serrano was the real owner of the note. It was
always the note of the indorsee, Maulini, he having furnished
the money which was the consideration for the note directly
to the maker and being the only person who had the slightest
interest therein, Serrano, the broker, acting solely as an
agent, a vehicle by which the naked title to the note passed
fro the borrower to the lender. The only payment that the
broker received was for his services in negotiating the loan.
He was paid absolutely nothing for becoming responsible as
an indorser on the paper, nor did the indorsee lose, pay or
forego anything, or alter his position thereby.

Nor was the defendant an accommodation indorser. The

learned trial court quoted that provision of the Negotiable
Instruments Law which defines an accommodation party as
"one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and
for the purpose of lending his name to some other person.
Such a person is liable on the instrument to a holder for
value, notwithstanding such holder at the time of taking the
instrument knew the same to be only an accommodation
party." (Act No. 2031, sec. 29.)
We are of the opinion that the trial court misunderstood this
definition. The accommodation to which reference is made in
the section quoted is not one to the person who takes the
note that is, the payee or indorsee, but one to the maker
or indorser of the note. It is true that in the case at bar it was
an accommodation to the plaintiff, in a popular sense, to
have the defendant indorse the note; but it was not the
accommodation described in the law, but, rather, a mere
favor to him and one which in no way bound Serrano. In
cases of accommodation indorsement the indorser makes the
indorsement for the accommodation of the maker. Such an
indorsement is generally for the purpose of better securing
the payment of the note that is, he lend his name to the
maker, not to the holder. Putting it in another way: An
accommodation note is one to which the accommodation
party has put his name, without consideration, for the
purpose of accommodating some other party who is to use it
and is expected to pay it. The credit given to the
accommodation part is sufficient consideration to bind the
accommodation maker. Where, however, an indorsement is
made as a favor to the indorsee, who requests it, not the
better to secure payment, but to relieve himself from a
distasteful situation, and where the only consideration for
such indorsement passes from the indorser to the indorsee,
the situation does not present one creating an
accommodation indorsement, nor one where there is a
consideration sufficient to sustain an action on the
indorsement.

The prohibition in section 285 of the Code of Civil Procedure

does not apply to a case like the one before us. The purpose
of that prohibition is to prevent alternation, change,
modification or contradiction of the terms of a written
instrument, admittedly existing, by the use of parol evidence,
except in the cases specifically named in the section. The
case at bar is not one where the evidence offered varies,
alters, modifies or contradicts the terms of the contract of
indorsement admittedly existing. The evidence was not
offered for that purpose. The purpose was to show that no
contract of indorsement ever existed; that the minds of the
parties never met on the terms of such contract; that they
never mutually agreed to enter into such a contract; and that
there never existed a consideration upon which such an
agreement could be founded. The evidence was not offered
to vary, alter, modify, or contradict the terms of an
agreement which it is admitted existed between the parties,
but to deny that there ever existed any agreement whatever;
to wipe out all apparent relations between the parties, and
not to vary, alter or contradict the terms of a relation
admittedly existing; in other words, the purpose of the parol
evidence was to demonstrate, not that the indorser did not
intend to make the particular indorsement which he did
make; not that he did not intend to make the indorsement in
the terms made; but, rather, to deny the reality of any
indorsement; that a relation of any kind whatever was
created or existed between him and the indorsee by reason
of the writing on the back of the instrument; that no
consideration ever passed to sustain an indorsement of any
kind whatsoever.
The contention has some of the appearances of a case in
which an indorser seeks prove forgery. Where an indorser
claims that his name was forged, it is clear that parol
evidence is admissible to prove that fact, and, if he proves it,
it is a complete defense, the fact being that the indorser
never made any such contract, that no such relation ever
existed between him and the indorsee, and that there was no
consideration whatever to sustain such a contract. In the

case before us we have a condition somewhat similar. While

the indorser does not claim that his name was forged, he
does claim that it was obtained from him in a manner which,
between the parties themselves, renders, the contract as
completely inoperative as if it had been forged.
Parol evidence was admissible for the purpose
named.1awphil.net
There is no contradiction of the evidence offered by the
defense and received provisionally by the court. Accepting it
as true the judgment must be reversed.
The judgment appealed from is reversed and the complaint
dismissed on the merits; no special finding as to costs.

13.
1967

G.R. No. L-17845

April 27,

INTESTATE ESTATE OF VICTOR SEVILLA. SIMEON

SADAYA vs. FRANCISCO SEVILLA
On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon
Sadaya executed, jointly and severally, in favor of the Bank
of the Philippine Islands, or its order, a promissory note for
P15,000.00 with interest at 8% per annum, payable on
demand. The entire, amount of P15,000.00, proceeds of the
promissory note, was received from the bank by Oscar
Varona alone. Victor Sevilla and Simeon Sadaya signed the
promissory note as co-makers only as a favor to Oscar
Varona. Payments were made on account. As of June 15,
1950, the outstanding balance stood P4,850.00. No payment
thereafter made.
On October 6, 1952, the bank collected from Sadaya the
foregoing balance which, together with interest, totalled
P5,416.12. Varona failed to reimburse Sadaya despite
repeated demands.

Victor Sevilla died. Intestate estate proceedings were started

in the Court of First Instance of Rizal, Special Proceeding No.
1518. Francisco Sevilla was named administrator.
In Special Proceeding No. 1518, Sadaya filed a creditor's
claim for the above sum of P5,746.12, plus attorneys fees in
the sum of P1,500.00. The administrator resisted the claim
upon the averment that the deceased Victor Sevilla "did not
receive any amount as consideration for the promissory
note," but signed it only "as surety for Oscar Varona".
On June 5, 1957, the trial court issued an order admitting the
claim of Simeon Sadaya in the amount of P5,746.12, and
directing the administrator to pay the same from any
available funds belonging to the estate of the deceased
Victor Sevilla.
The motion to reconsider having been overruled, the
administrator appealed.1 The Court of Appeals, in a decision
promulgated on July, 15, 1960, voted to set aside the order
appealed from and to disapprove and disallow "appellee's
claim of P5,746.12 against the intestate estate."
The case is now before this Court on certiorari to review the
judgment of the Court of Appeals.
Sadaya's brief here seeks reversal of the appellate court's
decision and prays that his claim "in the amount of 50% of
P5,746.12, or P2,873.06, against the intestate estate of the
deceased Victor Sevilla," be approved.
1. That Victor Sevilla and Simeon Sadaya were joint and
several accommodation makers of the 15,000.00-peso
promissory note in favor of the Bank of the Philippine Islands,
need not be essayed. As such accommodation the makers,
the individual obligation of each of them to the bank is no
different from, and no greater and no less than, that contract
by Oscar Varona. For, while these two did not receive value
on the promissory note, they executed the same with, and for
the purpose of lending their names to, Oscar Varona. Their
liability to the bank upon the explicit terms of the promissory
note is joint and several.2 Better yet, the bank could have
pursued its right to collect the unpaid balance against either
Sevilla or Sadaya. And the fact is that one of the last two,
Simeon Sadaya, paid that balance.

2. It is beyond debate that Simeon Sadaya could have sought

reimbursement of the total amount paid from Oscar Varona.
This is but right and just. Varona received full value of the
promissory note.3 Sadaya received nothing therefrom. He
paid the bank because he was a joint and several obligor. The
least that can be said is that, as between Varona and Sadaya,
there is an implied contract of indemnity. And Varona is
bound by the obligation to reimburse Sadaya. 4
3. The common creditor, the Bank of the Philippine Islands,
now out of the way, we first look into the relations inter se
amongst the three consigners of the promissory note. Their
relations vis-a-vis the Bank, we repeat, is that of joint and
several obligors. But can the same thing be said about the
relations of the three consigners, in respect to each other?
Surely enough, as amongst the three, the obligation of
Varona and Sevilla to Sadaya who paid can not be joint and
several. For, indeed, had payment been made by Oscar
Varona, instead of Simeon Sadaya, Varona could not have
had reason to seek reimbursement from either Sevilla or
Sadaya, or both. After all, the proceeds of the loan went to
Varona and the other two received nothing therefrom.
4. On principle, a solidary accommodation maker who
made payment has the right to contribution, from his coaccommodation maker, in the absence of agreement to the
contrary between them, and subject to conditions imposed
by law. This right springs from an implied promise between
the accommodation makers to share equally the burdens that
may ensue from their having consented to stamp their
signatures on the promissory note.5 For having lent their
signatures to the principal debtor, they clearly placed
themselves in so far as payment made by one may create
liability on the other in the category of mere joint grantors
of the former.6 This is as it should be. Not one of them
benefited by the promissory note. They stand on the same
footing. In misfortune, their burdens should be equally
spread.
Manresa, commenting on Article 1844 of the Civil Code of
Spain,7 which is substantially reproduced in Article 2073 8 of
our Civil Code, on this point stated:

Otros, como Pothier, entienden que, si bien el principio

es evidente enestricto concepto juridico, se han
extremado sus consecuencias hasta el punto de que
estas son contrarias, no solo a la logica, sino tambien
a la equidad, que debe ser el alma del Derecho, como
ha dicho Laurent.
Esa accion sostienen no nace de la fianza, pues,
en efecto, el hecho de afianzar una misma deuda no
crea ningun vinculo juridico, ni ninguna razon de
obligar entre los fiadores, sino que trae, por el
contrario, su origen de una acto posterior, cual es el
pago de toda la deuda realizado por uno de ellos, y la
equdad, no permite que los denias fiadores, que
igualmente estaban estaban obligos a dicho pago, se
aprovenchen de ese acto en perjuico del que lo
realozo.
Lo cierto es que esa accion concedida al fiador nace,
si, del hecho del pago, pero es consecuencia del
beneficio o del derecho de division, como tenemos ya
dicho. En efecto, por virtud de esta todos los
cofiadores vienen obligados a contribuir al pago de
parte que a cada uno corresponde. De ese obligacion,
contraida por todos ellos, se libran los que no han
pagado por consecuencia del acto realizado por el que
pago, y si bien este no hizo mas que cumplir el deber
que el contracto de fianza le imponia de responder de
todo el debito cuando no limito su obligacion a parte
alguna del mismo, dicho acto redunda en beneficio de
los otros cofiadores los cuales se aprovechan de el
para quedar desligados de todo compromiso con el
acreedor.9
5. And now, to the requisites before one accommodation
maker can seek reimbursement from a co-accommodation
maker.
By Article 18 of the Civil Code in matters not covered by the
special laws, "their deficiency shall be supplied by the
provisions of this Code". Nothing extant in the Negotiable
Instruments Law would define the right of one
accommodation maker to seek reimbursement from another.
Perforce, we must go to the Civil Code.1wph1.t

Because Sevilla and Sadaya, in themselves, are but coguarantors of Varona, their case comes within the ambit of
Article 2073 of the Civil Code which reads:
ART. 2073. When there are two or more guarantors of
the same debtor and for the same debt, the one
among them who has paid may demand of each of the
others the share which is proportionally owing from
him.
If any of the guarantors should be insolvent, his share
shall be borne by the others, including the payer, in
the same proportion.
The provisions of this article shall not be applicable,
unless the payment has been made in virtue of a
judicial demand or unless the principal debtor is
insolvent.10
As Mr. Justice Street puts it: "[T]hat article deals with the
situation which arises when one surety has paid the debt to
the creditor and is seeking contribution from his
cosureties."11
Not that the requirements in paragraph 3, Article 2073, just
quoted, are devoid of cogent reason. Says Manresa: 12
c) Requisitos para el ejercicio del derecho de reintegro
o de reembolso derivado de la corresponsabilidad de
los cofiadores.
La tercera de las prescripciones que comprende el
articulo se refiere a los requisitos que deben concurrir
para que pueda tener lugar lo dispuesto en el mismo.
Ese derecho que concede al fiador para reintegrarse
directamente de los fiadores de lo que pago por ellos
en vez de dirigir su reclamacion contra el deudor, es
un beneficio otorgado por la ley solo ell dos casos
determinados, cuya justificacion resulta evidenciada
desde luego; y esa limitacion este debidamente
aconsejada por una razon de prudencia que no puede
desconocerse, cual es la de evitar que por la mera
voluntad de uno de los cofiadores pueda hacerse
surgir la accion de reintegro contra los demas en
prejuicio de los mismos.

El perjuicio que con tal motivo puede inferirse a los

cofiadores es bien notorio, pues teniendo en primer
termino el fiador que paga por el deudor el derecho de
indemnizacion contra este, sancionado por el art.
1,838, es de todo punto indudable que ejercitando
esta accion pueden quedar libres de toda
responsabilidad los demas cofiadores si, a
consecuencia de ella, indemniza el fiado a aquel en los
terminos establecidos en el expresado articulo. Por el
contrario de prescindir de dicho derecho el fiador,
reclamando de los confiadores en primer lugar el
oportuno reintegro, estos en tendrian mas remedio
que satisfacer sus ductares respectivas, repitiendo
despues por ellas contra el deudor con la imposicion
de las molestias y gastos consiguientes.
No es aventurado asegurar que si el fiador que paga
pudiera libremente utilizar uno u otro de dichos
derechos, el de indemnizacion por el deudor y el del
reintegro por los cofiadores, indudablemente optaria
siempre y en todo caso por el segundo, puesto que
mucha mas garantias de solvencia y mucha mas
seguridad del cobro ha de encontrar en los fiadores
que en el deudor; y en la practica quedaria reducido el
primero a la indemnizacion por el deudor a los
confiadores que hubieran hecho el reintegro, obligando
a estos, sin excepcion alguna, a soportar siempre los
gastos y las molestias que anteriormente homos
indicado. Y para evitar estos perjuicios, la ley no ha
podido menos de reducir el ejercicio de ese derecho a
los casos en que absolutamente sea indispensable. 13
6. All of the foregoing postulate the following rules: (1) A joint
and several accommodation maker of a negotiable
promissory note may demand from the principal debtor
reimbursement for the amount that he paid to the payee;
and (2) a joint and several accommodation maker who pays
on the said promissory note may directly demand
reimbursement from his co-accommodation maker without
first directing his action against the principal debtor provided
that (a) he made the payment by virtue of a judicial demand,
or (b) a principal debtor is insolvent.

The Court of Appeals found that Sadaya's payment to the

bank "was made voluntarily and without any judicial
demand," and that "there is an absolute absence of evidence
showing that Varona is insolvent". This combination of fact
and lack of fact epitomizes the fatal distance between
payment by Sadaya and Sadaya's right to demand of Sevilla
"the share which is proportionately owing from him."
For the reasons given, the judgment of the Court of Appeals
under review is hereby affirmed. No costs. So ordered.

14.
446

PCIB vs. Court of Appeals, 350 SCRA

These consolidated petitions involve several fraudulently

negotiated checks.
The original actions a quo were instituted by Ford Philippines
to recover from the drawee bank, CITIBANK, N.A. (Citibank)
and collecting bank, Philippine Commercial International
Bank (PCIBank) [formerly Insular Bank of Asia and America],
the value of several checks payable to the Commissioner of
Internal Revenue, which were embezzled allegedly by an
organized syndicate.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of
the March 27, 1995 Decision1 of the Court of Appeals in CAG.R. CV No. 25017, entitled "Ford Philippines, Inc. vs.
Citibank, N.A. and Insular Bank of Asia and America (now
Philipppine Commercial International Bank), and the August
8, 1995 Resolution,2 ordering the collecting bank, Philippine
Commercial International Bank, to pay the amount of
Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the
October 15, 1996 Decision3 of the Court of Appeals and its
March 5, 1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford
Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial
International Bank," affirming in toto the judgment of the trial
court holding the defendant drawee bank, Citibank, N.A.,
solely liable to pay the amount of P12,163,298.10 as
damages for the misapplied proceeds of the plaintiff's
Citibanl Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by
the Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and
issued its Citibank Check No. SN-04867 in the amount
of P4,746,114.41, in favor of the Commissioner of
Internal Revenue as payment of plaintiff;s percentage
or manufacturer's sales taxes for the third quarter of
1977.

The aforesaid check was deposited with the degendant

IBAA (now PCIBank) and was subsequently cleared at
the Central Bank. Upon presentment with the
defendant Citibank, the proceeds of the check was
paid to IBAA as collecting or depository bank.
The proceeds of the same Citibank check of the
plaintiff was never paid to or received by the payee
thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or
Commissioner of Internal Revenue, the plaintiff was
compelled to make a second payment to the Bureau of
Internal Revenue of its percentage/manufacturers'
sales taxes for the third quarter of 1977 and that said
second payment of plaintiff in the amount of
P4,746,114.41 was duly received by the Bureau of
Internal Revenue.
It is further admitted by defendant Citibank that during
the time of the transactions in question, plaintiff had
been maintaining a checking account with defendant
Citibank; that Citibank Check No. SN-04867 which was
drawn and issued by the plaintiff in favor of the
Commissioner of Internal Revenue was a crossed
check in that, on its face were two parallel lines and
written in between said lines was the phrase "Payee's
Account Only"; and that defendant Citibank paid the
full face value of the check in the amount of
P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of
plaintiff's percentage tax for the last quarter of 1977,
the Bureau of Internal Revenue issued Revenue Tax
Receipt No. 18747002, dated October 20, 1977,
designating therein in Muntinlupa, Metro Manila, as the
authorized agent bank of Metrobanl, Alabang branch to
receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No.
SN-04867, together with the Revenue Tax Receipt No.
18747002, was deposited with defendant IBAA,
through its Ermita Branch. The latter accepted the
check and sent it to the Central Clearing House for

clearing on the samd day, with the indorsement at the

back "all prior indorsements and/or lack of
indorsements guaranteed." Thereafter, defendant IBAA
presented the check for payment to defendant
Citibank on same date, December 19, 1977, and the
latter paid the face value of the check in the amount of
P4,746,114.41. Consequently, the amount of
P4,746,114.41 was debited in plaintiff's account with
the defendant Citibank and the check was returned to
the plaintiff.
Upon verification, plaintiff discovered that its Citibank
Check No. SN-04867 in the amount of P4,746,114.41
was not paid to the Commissioner of Internal Revenue.
Hence, in separate letters dated October 26, 1979,
addressed to the defendants, the plaintiff notified the
latter that in case it will be re-assessed by the BIR for
the payment of the taxes covered by the said checks,
then plaintiff shall hold the defendants liable for
reimbursement of the face value of the same. Both
defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting
Commissioner of Internal Revenue addressed to the
plaintiff - supposed to be Exhibit "D", the latter was
officially informed, among others, that its check in the
amount of P4, 746,114.41 was not paid to the
government or its authorized agent and instead
encashed by unauthorized persons, hence, plaintiff has
to pay the said amount within fifteen days from receipt
of the letter. Upon advice of the plaintiff's lawyers,
plaintiff on March 11, 1982, paid to the Bureau of
Internal Revenue, the amount of P4,746,114.41,
representing payment of plaintiff's percentage tax for
the third quarter of 1977.
As a consequence of defendant's refusal to reimburse
plaintiff of the payment it had made for the second
time to the BIR of its percentage taxes, plaintiff filed
on January 20, 1983 its original complaint before this
Court.

On December 24, 1985, defendant IBAA was merged

with the Philippine Commercial International Bank (PCI
Bank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it
made of plaintiff's Citibank Check No. SN-04867 in the
amount of P4,746,114.41 "was in due course"; it
merely relied on the clearing stamp of the
depository/collecting bank, the defendant IBAA that
"all prior indorsements and/or lack of indorsements
guaranteed"; and the proximate cause of plaintiff's
injury is the gross negligence of defendant IBAA in
indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the
proceeds of plaintiff's Citibank Check No. SN-048867
was paid to defendant IBAA as collecting bank, plaintiff
was maintaining a checking account with defendant
Citibank."5
Although it was not among the stipulated facts, an
investigation by the National Bureau of Investigation (NBI)
revealed that Citibank Check No. SN-04867 was recalled by
Godofredo Rivera, the General Ledger Accountant of Ford. He
purportedly needed to hold back the check because there
was an error in the computation of the tax due to the Bureau
of Internal Revenue (BIR). With Rivera's instruction, PCIBank
replaced the check with two of its own Manager's Checks
(MCs). Alleged members of a syndicate later deposited the
two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before
the trial court impleading Pacific Banking Corporation (PBC)
and Godofredo Rivera, as third party defendants. But the
court dismissed the complaint against PBC for lack of cause
of action. The course likewise dismissed the third-party
complaint against Godofredo Rivera because he could not be
served with summons as the NBI declared him as a "fugitive
from justice".
On June 15, 1989, the trial court rendered its decision, as
follows:
"Premises considered, judgment is hereby rendered as
follows:

"1. Ordering the defendants Citibank and IBAA

(now PCI Bank), jointly and severally, to pay the
plaintiff the amount of P4,746,114.41
representing the face value of plaintiff's Citibank
Check No. SN-04867, with interest thereon at
the legal rate starting January 20, 1983, the
date when the original complaint was filed until
the amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim:
ordering the cross-defendant IBAA (now PCI
Bank) to reimburse defendant Citibank for
whatever amount the latter has paid or may pay
to the plaintiff in accordance with next
preceding paragraph;
"3. The counterclaims asserted by the
defendants against the plaintiff, as well as that
asserted by the cross-defendant against the
cross-claimant are dismissed, for lack of merits;
and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants,
Citibank and PCIBank, elevated their respective petitions for
review on certiorari to the Courts of Appeals. On March 27,
1995, the appellate court issued its judgment as follows:
"WHEREFORE, in view of the foregoing, the court
AFFIRMS the appealed decision with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No.
49287 insofar as defendant Citibank N.A. is
concerned;

2. Ordering the defendant IBAA now PCI Bank

to pay the plaintiff the amount of P4,746,114.41
representing the face value of plaintiff's Citibank
Check No. SN-04867, with interest thereon at
the legal rate starting January 20, 1983, the
date when the original complaint was filed until
the amount is fully paid;
3. Dismissing the counterclaims asserted by the
defendants against the plaintiff as well as that
asserted by the cross-defendant against the
cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI
Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of
the Court of Appeals, while Ford filed a "Motion for Partial
Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions
for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the
decision and resolution of the Twelfth Division of the Court of
Appeals contending that it merely acted on the instruction of
Ford and such casue of action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that
the petitioner acted on the check drawn by respondent
Ford on the said respondent's instructions, it
nevertheless found the petitioner liable to the said
respondent for the full amount of the said check.
II. Did the respondent court err when it did not find
prescription in favor of the petitioner. 8
In a counter move, Ford filed its petition docketed as G.R. No.
121479, questioning the same decision and resolution of the
Court of Appeals, and praying for the reinstatement in toto of
the decision of the trial court which found both PCIBank and
Citibank jointly and severally liable for the loss.

In G.R. No. 121479, appellant Ford presents the following

propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford
considering that:
1. As drawee bank, respondent Citibank owes to
petitioner Ford, as the drawer of the subject
check and a depositor of respondent Citibank,
an absolute and contractual duty to pay the
proceeds of the subject check only to the payee
thereof, the Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty
as banker with respect to the subject check,
which was crossed and payable to "Payee's
Account Only."

II. G.R. No. 128604

The same sysndicate apparently embezzled the proceeds of
checks intended, this time, to settle Ford's percentage taxes
appertaining to the second quarter of 1978 and the first
quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in
the amount of P5,851,706.37 representing the percentage
tax due for the second quarter of 1978 payable to the
Commissioner of Internal Revenue. A BIR Revenue Tax
Receipt No. 28645385 was issued for the said purpose.

3. Respondent Citibank raises an issue for the

first time on appeal; thus the same should not
be considered by the Honorable Court.

On April 20, 1979, Ford drew another Citibank Check No. SN16508 in the amount of P6,311,591.73, representing the
payment of percentage tax for the first quarter of 1979 and
payable to the Commissioner of Internal Revenue. Again a
BIR Revenue Tax Receipt No. A-1697160 was issued for the
said purpose.

4. As correctly held by the trial court, there is no

evidence of gross negligence on the part of
petitioner Ford.9

Both checks were "crossed checks" and contain two diagonal

lines on its upper corner between, which were written the
words "payable to the payee's account only."

II. PCI Bank is liable to petitioner Ford considering that:

The checks never reached the payee, CIR. Thus, in a letter

dated February 28, 1980, the BIR, Region 4-B, demanded for
the said tax payments the corresponding periods abovementioned.

1. There were no instructions from petitioner

Ford to deliver the proceeds of the subject check
to a person other than the payee named
therein, the Commissioner of the Bureau of
Internal Revenue; thus, PCIBank's only
obligation is to deliver the proceeds to the
Commissioner of the Bureau of Internal
Revenue.10
2. PCIBank which affixed its indorsement on the
subject check ("All prior indorsement and/or lack
of indorsement guaranteed"), is liable as
collecting bank.11
3. PCIBank is barred from raising issues of fact
in the instant proceedings.12
4. Petitioner Ford's cause of action had not
prescribed.13

As far as the BIR is concernced, the said two BIR Revenue Tax
Receipts were considered "fake and spurious". This anomaly
was confirmed by the NBI upon the initiative of the BIR. The
findings forced Ford to pay the BIR a new, while an action
was filed against Citibank and PCIBank for the recovery of the
amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the
case, made its findings on the modus operandi of the
syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the
plaintiff FORD as its General Ledger Accountant. As
such, he prepared the plaintiff's check marked Ex. 'A'
[Citibank Check No. Sn-10597] for payment to the BIR.

Instead, however, fo delivering the same of the payee,

he passed on the check to a co-conspirator named
Remberto Castro who was a pro-manager of the San
Andres Branch of PCIB.* In connivance with one
Winston Dulay, Castro himself subsequently opened a
Checking Account in the name of a fictitious person
denominated as 'Reynaldo reyes' in the Meralco
Branch of PCIBank where Dulay works as Assistant
Manager.

Manager at its Meralco Branch, who assisted Castro in

switching the checks in the clearing process and
facilitated the opening of the fictitious Reynaldo Reyes'
bank account; (7) ALEXIS MARINDO, Rivera's Assistant
at FORD, who gave the second check (Exh. "B") to
Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent
who provided the fake and spurious revenue tax
receipts to make it appear that the BIR had received
FORD's tax payments.

After an initial deposit of P100.00 to validate the

account, Castro deposited a worthless Bank of America
Check in exactly the same amount as the first FORD
check (Exh. "A", P5,851,706.37) while this worthless
check was coursed through PCIB's main office enroute
to the Central Bank for clearing, replaced this
worthless check with FORD's Exhibit 'A' and
accordingly tampered the accompanying documents to
cover the replacement. As a result, Exhibit 'A' was
cleared by defendant CITIBANK, and the fictitious
deposit account of 'Reynaldo Reyes' was credited at
the PCIB Meralco Branch with the total amount of the
FORD check Exhibit 'A'. The same method was again
utilized by the syndicate in profiting from Exh. 'B'
[Citibank Check No. SN-16508] which was
subsequently pilfered by Alexis Marindo, Rivera's
Assistant at FORD.

Several other persons and entities were utilized by the

syndicate as conduits in the disbursements of the
proceeds of the two checks, but like the
aforementioned participants in the conspiracy, have
not been impleaded in the present case. The manner
by which the said funds were distributed among them
are traceable from the record of checks drawn against
the original "Reynaldo Reyes" account and indubitably
identify the parties who illegally benefited therefrom
and readily indicate in what amounts they did so." 14

From this 'Reynaldo Reyes' account, Castro drew

various checks distributing the sahres of the other
participating conspirators namely (1) CRISANTO
BERNABE, the mastermind who formulated the method
for the embezzlement; (2) RODOLFO R. DE LEON a
customs broker who negotiated the initial contact
between Bernabe, FORD's Godofredo Rivera and PCIB's
Remberto Castro; (3) JUAN VASTILLO who assisted de
Leon in the initial arrangements; (4) GODOFREDO
RIVERA, FORD's accountant who passed on the first
check (Exhibit "A") to Castro; (5) REMERTO CASTRO,
PCIB's pro-manager at San Andres who performed the
switching of checks in the clearing process and opened
the fictitious Reynaldo Reyes account at the PCIB
Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant

On December 9, 1988, Regional Trial Court of Makati, Branch

57, held drawee-bank, Citibank, liable for the value of the two
checks while adsolving PCIBank from any liability, disposing
as follows:
"WHEREFORE, judgment is hereby rendered
sentencing defendant CITIBANK to reimburse plaintiff
FORD the total amount of P12,163,298.10 prayed for
in its complaint, with 6% interest thereon from date of
first written demand until full payment, plus
P300,000.00 attorney's fees and expenses litigation,
and to pay the defendant, PCIB (on its counterclaim to
crossclaim) the sum of P300,000.00 as attorney's fees
and costs of litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals
which affirmed, in toto, the decision of the trial court. Hence,
this petition.
Petitioner Ford prays that judgment be rendered setting aside
the portion of the Court of Appeals decision and its resolution
dated March 5, 1997, with respect to the dismissal of the

complaint against PCIBank and holding Citibank solely

responsible for the proceeds of Citibank Check Numbers SN10597 and 16508 for P5,851,706.73 and P6,311,591.73
respectively.
Ford avers that the Court of Appeals erred in dismissing the
complaint against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it
failed to exercise the diligence required to be exercised
by it as a banking insitution.
II. Defendant PCIBank clearly failed to observe the
diligence required in the selection and supervision of
its officers and employees.
III. Defendant PCIBank was, due to its negligence,
clearly liable for the loss or damage resulting to the
plaintiff Ford as a consequence of the substitution of
the check consistent with Section 5 of Central Bank
Circular No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not
accept, endorse or negotiate in due course the subject
checks, it is liable, under Article 2154 of the Civil Code,
to return the money which it admits having received,
and which was credited to it its Central bank account. 16
The main issue presented for our consideration by these
petitions could be simplified as follows: Has petitioner Ford
the right to recover from the collecting bank (PCIBank) and
the drawee bank (Citibank) the value of the checks intended
as payment to the Commissioner of Internal Revenue? Or has
Ford's cause of action already prescribed?

Note that in these cases, the checks were drawn against the
drawee bank, but the title of the person negotiating the same
was allegedly defective because the instrument was obtained
by fraud and unlawful means, and the proceeds of the checks
were not remitted to the payee. It was established that
instead of paying the checks to the CIR, for the settlement of
the approprite quarterly percentage taxes of Ford, the checks
were diverted and encashed for the eventual distribution
among the mmbers of the syndicate. As to the unlawful
negotiation of the check the applicable law is Section 55 of
the Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who
negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument,
or any signature thereto, by fraud, duress, or fore and
fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of
faith or under such circumstances as amount to a
fraud."
Pursuant to this provision, it is vital to show that the
negotiation is made by the perpetator in breach of faith
amounting to fraud. The person negotiating the checks must
have gone beyond the authority given by his principal. If the
principal could prove that there was no negligence in the
performance of his duties, he may set up the personal
defense to escape liability and recover from other parties
who. Though their own negligence, alowed the commission of
the crime.
In this case, we note that the direct perpetrators of the
offense, namely the embezzlers belonging to a syndicate, are
now fugitives from justice. They have, even if temporarily,
escaped liability for the embezzlement of millions of pesos.
We are thus left only with the task of determining who of the
present parties before us must bear the burden of loss of
these millions. It all boils down to thequestion of liability
based on the degree of negligence among the parties
concerned.
Foremost, we must resolve whether the injured party, Ford, is
guilty of the "imputed contributory negligence" that would
defeat its claim for reimbursement, bearing ing mind that its

employees, Godofredo Rivera and Alexis Marindo, were

among the members of the syndicate.
Citibank points out that Ford allowed its very own employee,
Godofredo Rivera, to negotiate the checks to his coconspirators, instead of delivering them to the designated
authorized collecting bank (Metrobank-Alabang) of the payee,
CIR. Citibank bewails the fact that Ford was remiss in the
supervision and control of its own employees, inasmuch as it
only discovered the syndicate's activities through the
information given by the payee of the checks after an
unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly
authorized Godofredo Rivera to divert the proceeds of
Citibank Check No. SN-04867, instead of using it to pay the
BIR. As to the subsequent run-around of unds of Citibank
Check Nos. SN-10597 and 16508, PCIBank claims that the
proximate cause of the damge to Ford lies in its own officers
and employees who carried out the fradulent schemes and
the transactions. These circumstances were not checked by
other officers of the company including its comptroller or
internal auditor. PCIBank contends that the inaction of Ford
despite the enormity of the amount involved was a sheer
negligence and stated that, as between two innocent
persons, one of whom must suffer the consequences of a
breach of trust, the one who made it possible, by his act of
negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of
its duties. It avers that there was no evidence presented
before the trial court showing lack of diligence on the part of
Ford. And, citing the case of Gempesaw vs. Court of
Appeals,17 Ford argues that even if there was a finding
therein that the drawer was negligent, the drawee bank was
still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not
authorized to make any representation in its behalf,
specifically, to divert the proceeds of the checks. It adds that
Citibank raised the issue of imputed negligence against Ford
for the first time on appeal. Thus, it should not be considered
by this Court.

On this point, jurisprudence regarding the imputed

negligence of employer in a master-servant relationship is
instructive. Since a master may be held for his servant's
wrongful act, the law imputes to the master the act of the
servant, and if that act is negligent or wrongful and
proximately results in injury to a third person, the negligence
or wrongful conduct is the negligence or wrongful conduct of
the master, for which he is liable.18 The general rule is that if
the master is injured by the negligence of a third person and
by the concuring contributory negligence of his own servant
or agent, the latter's negligence is imputed to his superior
and will defeat the superior's action against the third person,
asuming, of course that the contributory negligence was the
proximate cause of the injury of which complaint is made.19
Accordingly, we need to determine whether or not the action
of Godofredo Rivera, Ford's General Ledger Accountant,
and/or Alexis Marindo, his assistant, was the proximate cause
of the loss or damage. AS defined, proximate cause is that
which, in the natural and continuous sequence, unbroken by
any efficient, intervening cause produces the injury and
without the result would not have occurred. 20
It appears that although the employees of Ford initiated the
transactions attributable to an organized syndicate, in our
view, their actions were not the proximate cause of
encashing the checks payable to the CIR. The degree of
Ford's negligence, if any, could not be characterized as the
proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the
request of Godofredo Rivera to recall Citibank Check No. SN04867. Rivera's instruction to replace the said check with
PCIBank's Manager's Check was not in theordinary course of
business which could have prompted PCIBank to validate the
same.
As to the preparation of Citibank Checks Nos. SN-10597 and
16508, it was established that these checks were made
payable to the CIR. Both were crossed checks. These checks
were apparently turned around by Ford's emploees, who were
acting on their own personal capacity.

Given these circumstances, the mere fact that the forgery

was committed by a drawer-payor's confidential employee or
agent, who by virtue of his position had unusual facilities for
perpertrating the fraud and imposing the forged paper upon
the bank, does notentitle the bank toshift the loss to the
drawer-payor, in the absence of some circumstance raising
estoppel against the drawer.21 This rule likewise applies to
the checks fraudulently negotiated or diverted by the
confidential employees who hold them in their possession.
With respect to the negligence of PCIBank in the payment of
the three checks involved, separately, the trial courts found
variations between the negotiation of Citibank Check No. SN04867 and the misapplication of total proceeds of Checks SN10597 and 16508. Therefore, we have to scrutinize,
separately, PCIBank's share of negligence when the
syndicate achieved its ultimate agenda of stealing the
proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank
through its Ermita Branch. It was coursed through the
ordinary banking transaction, sent to Central Clearing with
the indorsement at the back "all prior indorsements and/or
lack of indorsements guaranteed," and was presented to
Citibank for payment. Thereafter PCIBank, instead of
remitting the proceeds to the CIR, prepared two of its
Manager's checks and enabled the syndicate to encash the
same.
On record, PCIBank failed to verify the authority of Mr. Rivera
to negotiate the checks. The neglect of PCIBank employees
to verify whether his letter requesting for the replacement of
the Citibank Check No. SN-04867 was duly authorized,
showed lack of care and prudence required in the
circumstances.
Furthermore, it was admitted that PCIBank is authorized to
collect the payment of taxpayers in behalf of the BIR. As an
agent of BIR, PCIBank is duty bound to consult its principal
regarding the unwarranted instructions given by the payor or
its agent. As aptly stated by the trial court, to wit:

"xxx. Since the questioned crossed check was

deposited with IBAA [now PCIBank], which claimed to
be a depository/collecting bank of BIR, it has the
responsibility to make sure that the check in question
is deposited in Payee's account only.
xxx

xxx

xxx

As agent of the BIR (the payee of the check),

defendant IBAA should receive instructions only from
its principal BIR and not from any other person
especially so when that person is not known to the
defendant. It is very imprudent on the part of the
defendant IBAA to just rely on the alleged telephone
call of the one Godofredo Rivera and in his signature
considering that the plaintiff is not a client of the
defendant IBAA."
It is a well-settled rule that the relationship between the
payee or holder of commercial paper and the bank to which it
is sent for collection is, in the absence of an argreement to
the contrary, that of principal and agent.22 A bank which
receives such paper for collection is the agent of the payee
or holder.23
Even considering arguendo, that the diversion of the amount
of a check payable to the collecting bank in behalf of the
designated payee may be allowed, still such diversion must
be properly authorized by the payor. Otherwise stated, the
diversion can be justified only by proof of authority from the
drawer, or that the drawer has clothed his agent with
apparent authority to receive the proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp
appearing at the back of the questioned checks stating that
ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS
GURANTEED should render PCIBank liable because it made it
pass through the clearing house and therefore Citibank had
no other option but to pay it. Thus, Citibank had no other
option but to pay it. Thus, Citibank assets that the proximate
cause of Ford's injury is the gross negligence of PCIBank.
Since the questione dcrossed check was deposited with
PCIBank, which claimed to be a depository/collecting bank of

the BIR, it had the responsibility to make sure that the check
in questions is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's
Account Only," is a warning that the check should be
deposited only in the account of the CIR. Thus, it is the duty
of the collecting bank PCIBank to ascertain that the check be
deposited in payee's account only. Therefore, it is the
collecting bank (PCIBank) which is bound to scruninize the
check and to know its depositors before it could make the
clearing indorsement "all prior indorsements and/or lack of
indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable
Banking Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this
court is in full accord with the ruling of the PCHC's
Board of Directors that:
'In presenting the checks for clearing and for payment,
the defendant made an express guarantee on the
validity of "all prior endorsements." Thus, stamped at
the back of the checks are the defedant's clear
warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK
OF ENDORSEMENTS GUARANTEED. Without such
warranty, plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear
meaning of defendant's warranty. As the warranty has
proven to be false and inaccurate, the defendant is
liable for any damage arising out of the falsity of its
representation."25
Lastly, banking business requires that the one who first
cashes and negotiates the check must take some percautions
to learn whether or not it is genuine. And if the one cashing
the check through indifference or othe circumstance assists
the forger in committing the fraud, he should not be
permitted to retain the proceeds of the check from the
drawee whose sole fault was that it did not discover the
forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank
which cashes a check drawn upon another bank, without
requiring proof as to the identity of persons presenting it, or

making inquiries with regard to them, cannot hold the

proceeds against the drawee when the proceeds of the
checks were afterwards diverted to the hands of a third party.
In such cases the drawee bank has a right to believe that the
cashing bank (or the collecting bank) had, by the usual
proper investigation, satisfied itself of the authenticity of the
negotiation of the checks. Thus, one who encashed a check
which had been forged or diverted and in turn received
payment thereon from the drawee, is guilty of negligence
which proximately contributed to the success of the fraud
practiced on the drawee bank. The latter may recover from
the holder the money paid on the check. 26
Having established that the collecting bank's negligence is
the proximate cause of the loss, we conclude that PCIBank is
liable in the amount corresponding to the proceeds of
Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank
had no official act in the ordinary course of business that
would attribute to it the case of the embezzlement of
Citibank Check Numbers SN-10597 and 16508, because
PCIBank did not actually receive nor hold the two Ford checks
at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank
contributed any official or conscious participation in
the process of the embezzlement. This Court is
convinced that the switching operation (involving the
checks while in transit for "clearing") were the
clandestine or hidden actuations performed by the
members of the syndicate in their own personl, covert
and private capacity and done without the knowledge
of the defendant PCIBank"27
In this case, there was no evidence presented confirming the
conscious particiapation of PCIBank in the embezzlement. As
a general rule, however, a banking corporation is liable for
the wrongful or tortuous acts and declarations of its officers
or agents within the course and scope of their employment. 28
A bank will be held liable for the negligence of its officers or
agents when acting within the course and scope of their

employment. It may be liable for the tortuous acts of its

officers even as regards that species of tort of which malice
is an essential element. In this case, we find a situation
where the PCIBank appears also to be the victim of the
scheme hatched by a syndicate in which its own
management employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto
Castro, received Citibank Check Numbers SN-10597 and
16508. He passed the checks to a co-conspirator, an
Assistant Manager of PCIBank's Meralco Branch, who helped
Castro open a Checking account of a fictitious person named
"Reynaldo Reyes." Castro deposited a worthless Bank of
America Check in exactly the same amount of Ford checks.
The syndicate tampered with the checks and succeeded in
replacing the worthless checks and the eventual encashment
of Citibank Check Nos. SN 10597 and 16508. The PCIBank
Ptro-manager, Castro, and his co-conspirator Assistant
Manager apparently performed their activities using facilities
in their official capacity or authority but for their personal
and private gain or benefit.
A bank holding out its officers and agents as worthy of
confidence will not be permitted to profit by the frauds these
officers or agents were enabled to perpetrate in the apparent
course of their employment; nor will t be permitted to shirk
its responsibility for such frauds, even though no benefit may
accrue to the bank therefrom. For the general rule is that a
bank is liable for the fraudulent acts or representations of an
officer or agent acting within the course and apparent scope
of his employment or authority.29 And if an officer or
employee of a bank, in his official capacity, receives money
to satisfy an evidence of indebetedness lodged with his bank
for collection, the bank is liable for his misappropriation of
such sum.30
Moreover, as correctly pointed out by Ford, Section 5 31 of
Central Bank Circular No. 580, Series of 1977 provides that
any theft affecting items in transit for clearing, shall be for
the account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on
PCIBank's shoulders alone.

The evidence on record shows that Citibank as drawee bank

was likewise negligent in the performance of its duties.
Citibank failed to establish that its payment of Ford's checjs
were made in due course and legally in order. In its defense,
Citibank claims the genuineness and due execution of said
checks, considering that Citibank (1) has no knowledge of
any informity in the issuance of the checks in question (2)
coupled by the fact that said checks were sufficiently funded
and (3) the endorsement of the Payee or lack thereof was
guaranteed by PCI Bank (formerly IBAA), thus, it has the
obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank
owes to Ford an absolute and contractual duty to pay the
proceeds of the subject check only to the payee thereof, the
CIR. Citing Section 6232 of the Negotiable Instruments Law,
Ford argues that by accepting the instrument, the acceptro
which is Citibank engages that it will pay according to the
tenor of its acceptance, and that it will pay only to the payee,
(the CIR), considering the fact that here the check was
crossed with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise
answer for the damages incurred by Ford on Citibank Checks
Numbers SN 10597 and 16508, because of the contractual
relationship existing between the two. Citibank, as the
drawee bank breached its contractual obligation with Ford
and such degree of culpability contributed to the damage
caused to the latter. On this score, we agree with the
respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN
10597 and 16508 before paying the amount of the proceeds
thereof to the collecting bank of the BIR. One thing is clear
from the record: the clearing stamps at the back of Citibank
Check Nos. SN 10597 and 16508 do not bear any initials.
Citibank failed to notice and verify the absence of the
clearing stamps. Had this been duly examined, the switching
of the worthless checks to Citibank Check Nos. 10597 and
16508 would have been discovered in time. For this reason,
Citibank had indeed failed to perform what was incumbent
upon it, which is to ensure that the amount of the checks
should be paid only to its designated payee. The fact that the

drawee bank did not discover the irregularity seasonably, in

our view, consitutes negligence in carrying out the bank's
duty to its depositors. The point is that as a business affected
with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts
of its depositors with meticulous care, always having in mind
the fiduciary nature of their relationship. 33
Thus, invoking the doctrine of comparative negligence, we
are of the view that both PCIBank and Citibank failed in their
respective obligations and both were negligent in the
selection and supervision of their employees resulting in the
encashment of Citibank Check Nos. SN 10597 AND 16508.
Thus, we are constrained to hold them equally liable for the
loss of the proceeds of said checks issued by Ford in favor of
the CIR.
Time and again, we have stressed that banking business is so
impressed with public interest where the trust and
confidence of the public in general is of paramount
umportance such that the appropriate standard of diligence
must be very high, if not the highest, degree of diligence. 34 A
bank's liability as obligor is not merely vicarious but primary,
wherein the defense of exercise of due diligence in the
selection and supervision of its employees is of no moment. 35
Banks handle daily transactions involving millions of pesos. 36
By the very nature of their work the degree of responsibility,
care and trustworthiness expected of their employees and
officials is far greater than those of ordinary clerks and
employees.37 Banks are expected to exercise the highest
degree of diligence in the selection and supervision of their
employees.38
On the issue of prescription, PCIBank claims that the action of
Ford had prescribed because of its inability to seek judicial
relief seasonably, considering that the alleged negligent act
took place prior to December 19, 1977 but the relief was
sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives
the depositor notice of the payment, which is ordinarily when
the check is returned to the alleged drawer as a voucher with
a statement of his account,39 and an action upon a check is

ordinarily governed by the statutory period applicable to

instruments in writing.40
Our laws on the matter provide that the action upon a written
contract must be brought within ten year from the time the
right of action accrues.41 hence, the reckoning time for the
prescriptive period begins when the instrument was issued
and the corresponding check was returned by the bank to its
depositor (normally a month thereafter). Applying the same
rule, the cause of action for the recovery of the proceeds of
Citibank Check No. SN 04867 would normally be a month
after December 19, 1977, when Citibank paid the face value
of the check in the amount of P4,746,114.41. Since the
original complaint for the cause of action was filed on January
20, 1984, barely six years had lapsed. Thus, we conclude that
Ford's cause of action to recover the amount of Citibank
Check No. SN 04867 was seasonably filed within the period
provided by law.
Finally, we also find thet Ford is not completely blameless in
its failure to detect the fraud. Failure on the part of the
depositor to examine its passbook, statements of account,
and cancelled checks and to give notice within a reasonable
time (or as required by statute) of any discrepancy which it
may in the exercise of due care and diligence find therein,
serves to mitigate the banks' liability by reducing the award
of interest from twelve percent (12%) to six percent (6%) per
annum. As provided in Article 1172 of the Civil Code of the
Philippines, respondibility arising from negligence in the
performance of every kind of obligation is also demandable,
but such liability may be regulated by the courts, according
to the circumstances. In quasi-delicts, the contributory
negligence of the plaintiff shall reduce the damages that he
may recover.42
WHEREFORE, the assailed Decision and Resolution of the
Court of Appeals in CA-G.R. CV No. 25017 are AFFIRMED.
PCIBank, know formerly as Insular Bank of Asia and America,
id declared solely responsible for the loss of the proceeds of
Citibank Check No SN 04867 in the amount P4,746,114.41,
which shall be paid together with six percent (6%) interest
thereon to Ford Philippines Inc. from the date when the
original complaint was filed until said amount is fully paid.

However, the Decision and Resolution of the Court of Appeals

in CA-G.R. No. 28430 are MODIFIED as follows: PCIBank and
Citibank are adjudged liable for and must share the loss,
(concerning the proceeds of Citibank Check Numbers SN
10597 and 16508 totalling P12,163,298.10) on a fifty-fifty
ratio, and each bank is ORDERED to pay Ford Philippines Inc.
P6,081,649.05, with six percent (6%) interest thereon, from
the date the complaint was filed until full payment of said
amount.1wphi1.nt
Costs against Philippine Commercial International Bank and
Citibank N.A. SO ORDERED.
15.
Traders Royal Bank vs. Radio Phil.,
390 SCRA 608
Petitioner seeks the review and prays for the reversal of the
Decision[1] of April 30, 1999 of Court of Appeals in CA-G.R.
CV No. 54656, the dispositive portion of which reads:

On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs

comptroller, sent a letter to the BIR requesting settlement of
plaintiffs tax obligations.
The BIR granted the request and accordingly, on June 26,
1986, plaintiffs purchased from defendant Traders Royal Bank
(TRB) three (3) managers checks to be used as payment for
their tax liabilities, to wit:
Check Number Amount
30652 P4,155.835.00
30650 3,949,406.12

WHEREFORE, the appealed decision is AFFIRMED with

modification in the sense that appellant SBTC is hereby
absolved from any liability. Appellant TRB is solely liable to
the appellees for the damages and costs of suit specified in
the dispositive portion of the appealed decision. Costs
against appellant TRB.

30796 1,685,475.75

SO ORDERED.[2]

Sometime in September, 1988, the BIR again assessed

plaintiffs for their tax liabilities for the years 1979-82. It was
then they discovered that the three (3) managers checks
(Nos. 30652, 30650 and 30796) intended as payment for
their taxes were never delivered nor paid to the BIR by Mrs.
Vera. Instead, the checks were presented for payment by
unknown persons to defendant Security Bank and Trust
Company (SBTC), Taytay Branch as shown by the banks
routing symbol transit number (BRSTN 01140027) or clearing
code stamped on the reverse sides of the checks.

As found by the Court of Appeals, the antecedent facts of the

case are as follows:
On April 15, 1985, the Bureau of Internal Revenue (BIR)
assessed plaintiffs Radio Philippines Network (RPN),
Intercontinental Broadcasting Corporation (IBC), and
Banahaw Broadcasting Corporation (BBC) of their tax
obligations for the taxable years 1978 to 1983.

Defendant TRB, through Aida Nuez, TRB Branch Manager at

Broadcast City Branch, turned over the checks to Mrs. Vera
who was supposed to deliver the same to the BIR in payment
of plaintiffs taxes.

Meanwhile, for failure of the plaintiffs to settle their

obligations, the BIR issued warrants of levy, distraint and
garnishment against them. Thus, they were constrained to
enter into a compromise and paid BIR P18,962,225.25 in
settlement of their unpaid deficiency taxes.
Thereafter, plaintiffs sent letters to both defendants,
demanding that the amounts covered by the checks be
reimbursed or credited to their account. The defendants
refused, hence, the instant suit.[3]
On February 17, 1985, the trial court rendered its decision,
thus:
WHEREFORE, in view of the foregoing considerations,
judgment is hereby rendered in favor of the plaintiffs and
against the defendants by :
a) Condemning the defendant Traders Royal Bank to pay
actual damages in the sum of Nine Million Seven Hundred
Ninety Thousand and Seven Hundred Sixteen Pesos and
Eighty-Seven Centavos (P9,790,716.87) broken down as
follows:
1) To plaintiff RPN-9 - P4,155,835.00
2) To Plaintiff IBC-13 - P3,949,406.12
3) To Plaintiff BBC-2 - P1,685,475.72
plus interest at the legal rate from the filing of this case in
court.

b) Condemning the defendant Security Bank and Trust

Company, being collecting bank, to reimburse the defendant
Traders Royal Bank, all the amounts which the latter would
pay to the aforenamed plaintiffs;
c) Condemning both defendants to pay to each of the
plaintiffs the sum of Three Hundred Thousand (P300,000.00)
Pesos as exemplary damages and attorneys fees equivalent
to twenty-five percent of the total amount recovered; and
d) Costs of suit.
SO ORDERED.[4]
Defendants Traders Royal Bank and Security Bank and Trust
Company, Inc. both appealed the trial courts decision to the
Court of Appeals. However, as quoted in the beginning
hereof, the appellate court absolved defendant SBTC from
any liability and held TRB solely liable to respondent
networks for damages and costs of suit.
In the instant petition for review on certiorari of the Court of
Appeals decision, petitioner TRB assigns the following errors:
(a) the Honorable Court of Appeals manifestly overlooked
facts which would justify the conclusion that negligence on
the part of RPN, IBC and BBC bars them from recovering
anything from TRB, (b) the Honorable Court of Appeals
plainly erred and misapprehended the facts in relieving SBTC
of its liability to TRB as collecting bank and indorser by
overturning the trial courts factual finding that SBTC did
endorse the three (3) managers checks subject of the instant
case, and (c) the Honorable Court of Appeals plainly

misapplied the law in affirming the award of exemplary

damages in favor of RPN, IBC and BBC.
In reply, respondents RPN, IBC, and BBC assert that TRBs
petition raises questions of fact in violation of Rule 45 of the
1997 Revised Rules on Civil Procedure which restricts
petitions for review on certiorari of the decisions of the Court
of Appeals on pure questions of law. RPN, IBC and BBC
maintain that the issue of whether or not respondent
networks had been negligent were already passed upon both
by the trial and appellate courts, and that the factual findings
of both courts are binding and conclusive upon this Court.
Likewise, respondent SBTC denies liability on the ground that
it had no participation in the negotiation of the checks,
emphasizing that the BRSTN imprints at the back of the
checks cannot be considered as proof that respondent SBTC
accepted the disputed checks and presented them to
Philippine Clearing House Corporation for clearing.
Setting aside the factual ramifications of the instant case, the
threshold issue now is whether or not TRB should be held
solely liable when it paid the amount of the checks in
question to a person other than the payee indicated on the
face of the check, the Bureau of Internal Revenue.
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.[5] 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.

In the instant case, the 3 checks were payable to the BIR. It

was established, however, that said checks were never
delivered or paid to the payee BIR but were in fact presented
for payment by some unknown persons who, in order to
receive payment therefor, forged the name of the payee.
Despite this fraud, petitioner TRB paid the 3 checks in the
total amount of P9,790,716.87.
Petitioner ought to have known that, where a check is drawn
payable to the order of one person and is presented for
payment by another and purports upon its face to have been
duly indorsed by the payee of the check, it is the primary
duty of petitioner to know that the check was duly indorsed
by the original payee and, where it pays the amount of the
check to a third person who has forged the signature of the
payee, the loss falls upon petitioner who cashed the check.
Its only remedy is against the person to whom it paid the
money.[6]
It should be noted further that one of the subject checks was
crossed. The crossing of one of the subject checks should
have put petitioner on guard; it was duty-bound to ascertain
the indorsers title to the check or the nature of his
possession. Petitioner should have known the effects of a
crossed check: (a) the check may not be encashed but only
deposited in the bank; (b) the check may be negotiated only
once to one who has an account with a bank and (c) the act
of crossing the check serves as a warning to the holder that
the check has been issued for a definite purpose so that he
must inquire if he has received the check pursuant to that
purpose, otherwise, he is not a holder in due course.[7]
By encashing in favor of unknown persons checks which were
on their face payable to the BIR, a government agency which
can only act only through its agents, petitioner did so at its
peril and must suffer the consequences of the unauthorized

or wrongful endorsement.[8] In this light, petitioner TRB

cannot exculpate itself from liability by claiming that
respondent networks were themselves negligent.
A bank is engaged in a business impressed with public
interest and it is its duty to protect its many clients and
depositors who transact business with it. It is under the
obligation to treat the accounts of the depositors and clients
with meticulous care, whether such accounts consist only of
a few hundreds or millions of pesos.[9]
Petitioner argues that respondent SBTC, as the collecting
bank and indorser, should be held responsible instead for the
amount of the checks.
The Court of Appeals addressed exactly the same issue and
made the following findings and conclusions:
As to the alleged liability of appellant SBTC, a close
examination of the records constrains us to deviate from the
lower courts finding that SBTC, as a collecting bank, should
similarly bear the loss.
A collecting bank where a check is deposited and which
indorses the check upon presentment with the drawee bank,
is such an indorser. So even if the indorsement on the check
deposited by the banks client is forged, the collecting bank is
bound by his warranties as an indorser and cannot set up the
defense of forgery as against the drawee bank.
To hold appellant SBTC liable, it is necessary to determine
whether it is a party to the disputed transactions.

Section 3 of the Negotiable Instruments Law reads:

SECTION 63. When person deemed indorser. - A person
placing his signature upon an instrument otherwise than as
maker, drawer, or acceptor, is deemed to be an indorser
unless he clearly indicates by appropriate words his intention
to be bound in some other capacity.
Upon the other hand, the Philippine Clearing House
Corporation (PCHC) rules provide:
Sec. 17.- BANK GUARANTEE. All checks cleared through the
PCHC shall bear the guarantee affixed thereto by the
Presenting Bank/Branch which shall read as follows:
Cleared thru the Philippine Clearing House Corporation. All
prior endorsements and/or lack of endorsement guaranteed.
NAME OF BANK/BRANCH BRSTN (Date of clearing).
Here, not one of the disputed checks bears the requisite
endorsement of appellant SBTC. What appears to be a
guarantee stamped at the back of the checks is that of the
Philippine National Bank, Buendia Branch, thereby indicating
that it was the latter Bank which received the same.
It was likewise established during the trial that whenever
appellant SBTC receives a check for deposit, its practice is to
stamp on its face the words, non-negotiable. Lana
Echevarrias testimony is relevant:
ATTY. ROMANO: Could you tell us briefly the procedure you
follow in receiving checks?

A: First of all, I verify the check itself, the place, the date, the
amount in words and everything. And then, if all these things
are in order and verified in the data sheet I stamp my nonnegotiable stamp at the face of the check.
Unfortunately, the words non-negotiable do not appear on
the face of either of the three (3) disputed checks.
Moreover, the aggregate amount of the checks is not
reflected in the clearing documents of appellant SBTC.
Section 19 of the Rules of the PCHC states:

The foregoing circumstances taken altogether create a

serious doubt on whether the disputed checks passed
through the hands of appellant SBTC.[10]
We subscribe to the foregoing findings and conclusions of the
Court of Appeals.
A collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees
all prior indorsements, including the forged indorsement
itself, and ultimately should be held liable therefor. However,
it is doubtful if the subject checks were ever presented to
and accepted by SBTC so as to hold it liable as a collecting
bank, as held by the Court of Appeals.

Section 19 Regular Item Procedure:

Each clearing participant, through its authorized
representatives, shall deliver to the PCHC fully qualified MICR
checks grouped in 200 or less items to a batch and supported
by an add-list, a batch control slip, and a delivery statement.
It bears stressing that through the add-list, the PCHC can
countercheck and determine which checks have been
presented on a particular day by a particular bank for
processing and clearing. In this case, however, the add-list
submitted by appellant SBTC together with the checks it
presented for clearing on August 3, 1987 does not show that
Check No. 306502 in the sum of P3,949,406.12 was among
those that passed for clearing with the PCHC on that date.
The same is true with Check No. 30652 with a face amount of
P4,155,835.00 presented for clearing on August 11, 1987 and
Check No. 30796 with a face amount of P1,685,475.75.

Since TRB did not pay the rightful holder or other person or
entity entitled to receive payment, it has no right to
reimbursement. Petitioner TRB was remiss in its duty and
obligation, and must therefore suffer the consequences of its
own negligence and disregard of established banking rules
and procedures.
We agree with petitioner, however, that it should not be
made to pay exemplary damages to RPN, IBC and BBC
because its wrongful act was not done in bad faith, and it did
not act in a wanton, fraudulent, reckless or malevolent
manner.[11]
We find the award of attorneys fees, 25% of P10 million, to
be manifestly exorbitant.[12] Considering the nature and
extent of the services rendered by respondent networks
counsel, however, the Court deems it appropriate to award
the amount of P100,000 as attorneys fees.

WHEREFORE, the appealed decision is MODIFIED by deleting

the award of exemplary damages. Further, respondent
networks are granted the amount of P100,000 as attorneys
fees. In all other respects, the Court of Appeals decision is
hereby AFFIRMED.

SO ORDERED.