FIRST DIVISION G.R. No.

167567 September 22, 2010

SAN MIGUEL CORPORATION, Petitioner, vs. BARTOLOME PUZON, JR., Respondent. DECISION DEL CASTILLO, J.: This petition for review assails the December 21, 2004 Decision1 and March 28, 2005 Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No. 83905, which dismissed the petition before it and denied reconsideration, respectively. Factual Antecedents Respondent Bartolome V. Puzon, Jr., (Puzon) owner of Bartenmyk Enterprises, was a dealer of beer products of petitioner San Miguel Corporation (SMC) for Paraaque City. Puzon purchased SMC products on credit. To ensure payment and as a business practice, SMC required him to issue postdated checks equivalent to the value of the products purchased on credit before the same were released to him. Said checks were returned to Puzon when the transactions covered by these checks were paid or settled in full. On December 31, 2000, Puzon purchased products on credit amounting to P11,820,327 for which he issued, and gave to SMC, Bank of the Philippine Islands (BPI) Check Nos. 27904 (for P309,500.00) and 27903 (forP11,510,827.00) to cover the said transaction. On January 23, 2001, Puzon, together with his accountant, visited the SMC Sales Office in Paraaque City to reconcile his account with SMC. During that visit Puzon allegedly requested to see BPI Check No. 17657. However, when he got hold of BPI Check No. 27903 which was attached to a bond paper together with BPI Check No. 17657 he allegedly immediately left the office with his accountant, bringing the checks with them. SMC sent a letter to Puzon on March 6, 2001 demanding the return of the said checks. Puzon ignored the demand hence SMC filed a complaint against him for theft with the City Prosecutors Office of Paraaque City. Rulings of the Prosecutor and the Secretary of Department of Justice (DOJ)

The investigating prosecutor, Elizabeth Yu Guray found that the "relationship between [SMC] and [Puzon] appears to be one of credit or creditor-debtor relationship. The problem lies in the reconciliation of accounts and the non-payment of beer empties which cannot give rise to a criminal prosecution for theft."3 Thus, in her July 31, 2001 Resolution,4 she recommended the dismissal of the case for lack of evidence. SMC appealed. On June 4, 2003, the DOJ issued its resolution5 affirming the prosecutors Resolution dismissing the case. Its motion for reconsideration having been denied in the April 23, 2004 DOJ Resolution,6 SMC filed a petition for certiorari with the CA. Ruling of the Court of Appeals The CA found that the postdated checks were issued by Puzon merely as a security for the payment of his purchases and that these were not intended to be encashed. It thus concluded that SMC did not acquire ownership of the checks as it was duty bound to return the same checks to Puzon after the transactions covering them were settled. The CA agreed with the prosecutor that there was no theft, considering that a person cannot be charged with theft for taking personal property that belongs to himself. It disposed of the appeal as follows: WHEREFORE, finding no grave abuse of discretion committed by public respondent, the instant petition is herebyDISMISSED. The assailed Resolutions of public respondent, dated 04 June 2003 and 23 April 2004, areAFFIRMED. No costs at this instance. SO ORDERED.7 The motion for reconsideration of SMC was denied. Hence, the present petition. Issues Petitioner now raises the following issues: I WHETHER X X X PUZON HAD STOLEN FROM SMC ON JANUARY 23, 2001, AMONG OTHERS BPI CHECK NO. 27903 DATED MARCH 30, 2001 IN THE AMOUNT OF PESOS: ELEVEN MILLION FIVE HUNDRED TEN THOUSAND EIGHT HUNDRED TWENTY SEVEN (Php11,510,827.00) II

WHETHER X X X THE POSTDATED CHECKS ISSUED BY PUZON, PARTICULARLY BPI CHECK NO. 27903 DATED MARCH 30, 2001 IN THE AMOUNT OF PESOS: ELEVEN MILLION FIVE HUNDRED TEN THOUSAND EIGHT HUNDRED TWENTY SEVEN (Php11,510,827.00), WERE ISSUED IN PAYMENT OF HIS BEER PURCHASES OR WERE USED MERELY AS SECURITY TO ENSURE PAYMENT OF PUZONS OBLIGATION. III WHETHER X X X THE PRACTICE OF SMC IN RETURNING THE POSTDATED CHECKS ISSUED IN PAYMENT OF BEER PRODUCTS PURCHASED ON CREDIT SHOULD THE TRANSACTIONS COVERED BY THESE CHECKS [BE] SETTLED ON [THE] MATURITY DATES THEREOF COULD BE LIKENED TO A CONTRACT OF PLEDGE. IV WHETHER X X X SMC HAD ESTABLISHED PROBABLE CAUSE TO JUSTIFY THE INDICTMENT OF PUZON FOR THE CRIME OF THEFT PURSUANT TO ART. 308 OF THE REVISED PENAL CODE.8 Petitioner's Arguments SMC contends that Puzon was positively identified by its employees to have taken the subject postdated checks. It also contends that ownership of the checks was transferred to it because these were issued, not merely as security but were, in payment of Puzons purchases. SMC points out that it has established more than sufficient probable cause to justify the indictment of Puzon for the crime of Theft. Respondents Arguments On the other hand, Puzon contends that SMC raises questions of fact that are beyond the province of an appeal on certiorari. He also insists that there is no probable cause to charge him with theft because the subject checks were issued only as security and he therefore retained ownership of the same. Our Ruling The petition has no merit. Preliminary Matters At the outset we find that as pointed out by Puzon, SMC raises questions of fact. The resolution of the first issue raised by SMC of whether respondent stole the subject check, which calls for the Court to determine whether respondent is guilty of

a felony, first requires that the facts be duly established in the proper forum and in accord with the proper procedure. This issue cannot be resolved based on mere allegations of facts and affidavits. The same is true with the second issue raised by petitioner, to wit: whether the checks issued by Puzon were payments for his purchases or were intended merely as security to ensure payment. These issues cannot be properly resolved in the present petition for review on certiorari which is rooted merely on the resolution of the prosecutor finding no probable cause for the filing of an information for theft. The third issue raised by petitioner, on the other hand, would entail venturing into constitutional matters for a complete resolution. This route is unnecessary in the present case considering that the main matter for resolution here only concerns grave abuse of discretion and the existence of probable cause for theft, which at this point is more properly resolved through another more clear cut route. Probable Cause for Theft "Probable cause is defined as such facts and circumstances that will engender a well-founded belief that a crime has been committed and that the respondent is probably guilty thereof and should be held for trial."9 On the fine points of the determination of probable cause, Reyes v. Pearlbank Securities, Inc.10 comprehensively elaborated that: The determination of [the existence or absence of probable cause] lies within the discretion of the prosecuting officers after conducting a preliminary investigation upon complaint of an offended party. Thus, the decision whether to dismiss a complaint or not is dependent upon the sound discretion of the prosecuting fiscal. He may dismiss the complaint forthwith, if he finds the charge insufficient in form or substance or without any ground. Or he may proceed with the investigation if the complaint in his view is sufficient and in proper form. To emphasize, the determination of probable cause for the filing of information in court is an executive function, one that properly pertains at the first instance to the public prosecutor and, ultimately, to the Secretary of Justice, who may direct the filing of the corresponding information or move for the dismissal of the case. Ultimately, whether or not a complaint will be dismissed is dependent on the sound discretion of the Secretary of Justice. And unless made with grave abuse of discretion, findings of the Secretary of Justice are not subject to review. For this reason, the Court considers it sound judicial policy to refrain from interfering in the conduct of preliminary investigations and to leave the Department of Justice ample latitude of discretion in the determination of what constitutes sufficient evidence to establish probable cause for the prosecution of supposed offenders. Consistent with this policy, courts do not reverse the Secretary of Justice's findings and conclusions on the matter of probable cause except in clear cases of grave abuse of discretion.

In the present case, we are also not sufficiently convinced to deviate from the general rule of non-interference. Indeed the CA did not err in dismissing the petition for certiorari before it, absent grave abuse of discretion on the part of the DOJ Secretary in not finding probable cause against Puzon for theft. The Revised Penal Code provides: Art. 308. Who are liable for theft. - Theft is committed by any person who, with intent to gain but without violence against, or intimidation of persons nor force upon things, shall take personal property of another without the latters consent. xxxx "[T]he essential elements of the crime of theft are the following: (1) that there be a taking of personal property; (2) that said property belongs to another; (3) that the taking be done with intent to gain; (4) that the taking be done without the consent of the owner; and (5) that the taking be accomplished without the use of violence or intimidation against persons or force upon things."11 Considering that the second element is that the thing taken belongs to another, it is relevant to determine whether ownership of the subject check was transferred to petitioner. On this point the Negotiable Instruments Law provides: Sec. 12. Antedated and postdated The instrument is not invalid for the reason only that it is antedated or postdated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. (Underscoring supplied.) Note however that delivery as the term is used in the aforementioned provision means that the party delivering did so for the purpose of giving effect thereto.12 Otherwise, it cannot be said that there has been delivery of the negotiable instrument. Once there is delivery, the person to whom the instrument is delivered gets the title to the instrument completely and irrevocably. If the subject check was given by Puzon to SMC in payment of the obligation, the purpose of giving effect to the instrument is evident thus title to or ownership of the check was transferred upon delivery. However, if the check was not given as payment, there being no intent to give effect to the instrument, then ownership of the check was not transferred to SMC. The evidence of SMC failed to establish that the check was given in payment of the obligation of Puzon. There was no provisional receipt or official receipt issued for the amount of the check. What was issued was a receipt for thedocument, a "POSTDATED CHECK SLIP."13

Furthermore, the petitioner's demand letter sent to respondent states "As per company policies on receivables, all issuances are to be covered by post-dated checks. However, you have deviated from this policy by forcibly taking away the check you have issued to us to cover the December issuance."14 Notably, the term "payment" was not used instead the terms "covered" and "cover" were used. Although the petitioner's witness, Gregorio L. Joven III, states in paragraph 6 of his affidavit that the check was given in payment of the obligation of Puzon, the same is contradicted by his statements in paragraph 4, where he states that "As a standard company operating procedure, all beer purchases by dealers on credit shall be coveredby postdated checks equivalent to the value of the beer products purchased"; in paragraph 9 where he states that "the transaction covered by the said check had not yet been paid for," and in paragraph 8 which clearly shows that partial payment is expected to be made by the return of beer empties, and not by the deposit or encashment of the check.1avvphi1 Clearly the term "cover" was not meant to be used interchangeably with "payment." When taken in conjunction with the counter-affidavit of Puzon where he states that "As the [liquid beer] contents are paid for, SMC return[s] to me the corresponding PDCs or request[s] me to replace them with whatever was the unpaid balance."15 it becomes clear that both parties did not intend for the check to pay for the beer products. The evidence proves that the check was accepted, not as payment, but in accordance with the long-standing policy of SMC to require its dealers to issue postdated checks to cover its receivables. The check was only meant to cover the transaction and in the meantime Puzon was to pay for the transaction by some other means other than the check. This being so, title to the check did not transfer to SMC; it remained with Puzon. The second element of the felony of theft was therefore not established. Petitioner was not able to show that Puzon took a check that belonged to another. Hence, the prosecutor and the DOJ were correct in finding no probable cause for theft. Consequently, the CA did not err in finding no grave abuse of discretion committed by the DOJ in sustaining the dismissal of the case for theft for lack of probable cause. WHEREFORE, the petition is DENIED. The December 21, 2004 Decision and March 28, 2005 Resolution of the Court of Appeals in CA-G.R. SP. No. 83905 are AFFIRMED. SO ORDERED.

SECOND DIVISION MELVA THERESA ALVIAR GONZALES, Petitioner, - versus RIZAL COMMERCIAL BANKING CORPORATION, Respondent. G.R. No. 156294 Present: PUNO, J., Chairperson, SANDOVAL-GUTIERREZ, CORONA, AZCUNA, and GARCIA, JJ. Promulgated: November 29, 2006 x-----------------------------------------------x DECISION GARCIA, J.: An action for a sum of money originating from the Regional Trial Court (RTC) of Makati City, Branch 61, thereat docketed as Civil Case No. 88-1502, was decided in favor of therein plaintiff, now respondent Rizal Commercial Banking Corporation (RCBC). On appeal to the Court of Appeals (CA) in CA-G.R. CV No. 48596, that court, in a decision[1] dated August 30, 2002, affirmed the RTC minus the award of attorneys fees. Upon the instance of herein petitioner Melva Theresa Alviar Gonzales, the case is now before this Court via this petition for review on certiorari, based on the following undisputed facts as unanimously found by the RTC and the CA, which the latter summarized as follows: Gonzales was an employee of Rizal Commercial Banking Corporation (or RCBC) as New Accounts Clerk in the Retail Banking Department at its Head Office. A foreign check in the amount of $7,500 was drawn by Dr. Don Zapanta of the Ade Medical Group with address at 569 Western Avenue, Los Angeles, California, against the drawee bank Wilshire Center Bank, N.A., of Los Angeles, California, U.S.A., and payable to Gonzales mother, defendant Eva Alviar (or Alviar). Alviar then endorsed this check. Since RCBC gives special accommodations to its employees to receive the checks value without awaiting the clearing period, Gonzales presented the foreign check to Olivia Gomez, the

RCBCs Head of Retail Banking. After examining this, Olivia Gomez requested Gonzales to endorse it which she did. Olivia Gomez then acquiesced to the early encashment of the check and signed the check but indicated thereon her authority of up to P17,500.00 only. Afterwards, Olivia Gomez directed Gonzales to present the check to RCBC employee Carlos Ramos and procure his signature. After inspecting the check, Carlos Ramos also signed it with an ok annotation. After getting the said signatures Gonzales presented the check to Rolando Zornosa, Supervisor of the Remittance section of the Foreign Department of the RCBC Head Office, who after scrutinizing the entries and signatures therein authorized its encashment. Gonzales then received its peso equivalent of P155,270.85. RCBC then tried to collect the amount of the check with the drawee bank by the latter through its correspondent bank, the First Interstate Bank of California, on two occasions dishonored the check because of END. IRREG or irregular indorsement. Insisting, RCBC again sent the check to the drawee bank, but this time the check was returned due to account closed. Unable to collect, RCBC demanded from Gonzales the payment of the peso equivalent of the check that she received. Gonzales settled the matter by agreeing that payment be made thru salary deduction. This temporary arrangement for salary deductions was communicated by Gonzales to RCBC through a letter dated November 27, 1987 xxx xxx xxx xxx

The deductions was implemented starting October 1987. On March 7, 1988 RCBC sent a demand letter to Alviar for the payment of her obligation but this fell on deaf ears as RCBC did not receive any response from Alviar. Taking further action to collect, RCBC then conveyed the matter to its counsel and on June 16, 1988, a letter was sent to Gonzales reminding her of her liability as an indorser of the subject check and that for her to avoid litigation she has to fulfill her commitment to settle her obligation as assured in her said letter. On July 1988 Gonzales resigned from RCBC. What had been deducted from her salary was only P12,822.20 covering ten months.

It was against the foregoing factual backdrop that RCBC filed a complaint for a sum of money against Eva Alviar, Melva Theresa Alviar-Gonzales and the latters husband Gino Gonzales. The spouses Gonzales filed an Answer with Counterclaim

praying for the dismissal of the complaint as well as payment of P10,822.20 as actual damages, P20,000.00 as moral damages, P20,000.00 as exemplary damages, and P20,000.00 as attorneys fees and litigation expenses. Defendant Eva Alviar, on the other hand, was declared in default for having filed her Answer out of time. After trial, the RTC, in its three-page decision,[2] held two of the three defendants liable as follows: WHEREFORE, premises above considered and plaintiff having established its case against the defendants as above stated, judgment is hereby rendered for plaintiff and as against defendant EVA. P. ALVIAR as principal debtor and defendants MELVA THERESA ALVIAR GONZLAES as guarantor as follows: 1. To pay plaintiff the amount of P142,648.65 (P155,270.85 less the amount of P12,622.20, as salary deduction of [Gonzales]), representing the outstanding obligation of the defendants with interest of 12% per annum starting February 1987 until fully paid; 2. To pay the amount of P40,000.00 as and for attorneys fees; and to 3. Pay the costs of this suit.

SO ORDERED. On appeal, the CA, except for the award of attorneys fees, affirmed the RTC judgment. Hence, this recourse by the petitioner on her submission that the CA erred XXX IN FINDING [PETITIONER], AN ACCOMMODATION PARTY TO A CHECK SUBSEQUENTLY ENDORSED PARTIALLY, LIABLE TO RCBC AS GUARANTOR; XXX IN FINDING THAT THE SIGNATURE OF GOMEZ, AN RCBC EMPLOYEE, DOES NOT CONSTITUTE AS AN ENDORSEMENT BUT ONLY AN INTER-BANK APPROVAL OF SIGNATURE NECESSARY FOR THE ENCASHMENT OF THE CHECK;

XXX IN NOT FINDING RCBC LIABLE ON THE COUNTERCLAIMS OF [THE PETITIONER]. The recourse is impressed with merit. The dollar-check[3] in question in the amount of $7,500.00 drawn by Don Zapanta of Ade Medical Group (U.S.A.) against a Los Angeles, California bank, Wilshire Center Bank N.A., was dishonored because of End. Irregular, i.e., an irregular endorsement. While the foreign drawee bank did not specifically state which among the four signatures found on the dorsal portion of the check made the check irregularly endorsed, it is absolutely undeniable that only the signature of Olivia Gomez, an RCBC employee, was a qualified endorsement because of the phrase up to P17,500.00 only. There can be no other acceptable explanation for the dishonor of the foreign check than this signature of Olivia Gomez with the phrase up to P17,500.00 only accompanying it. This Court definitely agrees with the petitioner that the foreign drawee bank would not have dishonored the check had it not been for this signature of Gomez with the same phrase written by her. The foreign drawee bank, Wilshire Center Bank N.A., refused to pay the bearer of this dollar-check drawn by Don Zapanta because of the defect introduced by RCBC, through its employee, Olivia Gomez. It is, therefore, a useless piece of paper if returned in that state to its original payee, Eva Alviar. There is no doubt in the mind of the Court that a subsequent party which caused the defect in the instrument cannot have any recourse against any of the prior endorsers in good faith. Eva Alviars and the petitioners liability to subsequent holders of the foreign check is governed by the Negotiable Instruments Law as follows: Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all subsequent holders in due course; (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument indorsement, valid and subsisting; is, at the time of his

And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.

The matters and things mentioned in subdivisions (a), (b) and (c) of Section 65 are the following: (a) That the instrument is genuine and in all respects what it purports to be; (b) (c) That he has a good title to it;

That all prior parties had capacity to contract;

Under Section 66, the warranties for which Alviar and Gonzales are liable as general endorsers in favor of subsequent endorsers extend only to the state of the instrument at the time of their endorsements, specifically, that the instrument is genuine and in all respects what it purports to be; that they have good title thereto; that all prior parties had capacity to contract; and that the instrument, at the time of their endorsements, is valid and subsisting. This provision, however, cannot be used by the party which introduced a defect on the instrument, such as respondent RCBC in this case, which qualifiedly endorsed the same, to hold prior endorsers liable on the instrument because it results in the absurd situation whereby a subsequent party may render an instrument useless and inutile and let innocent parties bear the loss while he himself gets away scot-free. It cannot be overstressed that had it not been for the qualified endorsement (up to P17,500.00 only) of Olivia Gomez, who is the employee of RCBC, there would have been no reason for the dishonor of the check, and full payment by drawee bank therefor would have taken place as a matter of course. Section 66 of the Negotiable Instruments Law which further states that the general endorser additionally engages that, on due presentment, the instrument shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent endorser who may be compelled to pay it, must be read in the light of the rule in equity requiring

that those who come to court should come with clean hands. The holder or subsequent endorser who tries to claim under the instrument which had been dishonored for irregular endorsement must not be the irregular endorser himself who gave cause for the dishonor. Otherwise, a clear injustice results when any subsequent party to the instrument may simply make the instrument defective and later claim from prior endorsers who have no knowledge or participation in causing or introducing said defect to the instrument, which thereby caused its dishonor. Courts in this jurisdiction are not only courts of law but also of equity, and therefore cannot unqualifiedly apply a provision of law so as to cause clear injustice which the framers of the law could not have intended to so deliberately cause. In Carceller v. Court of Appeals,[4] this Court had occasion to stress: Courts of law, being also courts of equity, may not countenance such grossly unfair results without doing violence to its solemn obligation to administer fair and equal justice for all. RCBC, which caused the dishonor of the check upon presentment to the drawee bank, through the qualified endorsement of its employee, Olivia Gomez, cannot hold prior endorsers, Alviar and Gonzales in this case, liable on the instrument. Moreover, it is a well-established principle in law that as between two parties, he who, by his acts, caused the loss shall bear the same. [5] RCBC, in this instance, should therefore bear the loss. Relative to the petitioners counterclaim against RCBC for the amount of P12,822.20 which it admittedly deducted from petitioners salary, the Court must order the return thereof to the petitioner, with legal interest of 12% per annum, notwithstanding the petitioners apparent acquiescence to such an arrangement. It must be noted that petitioner is not any ordinary client or depositor with whom RCBC had this isolated transaction. Petitioner was a rank-and-file employee of RCBC, being a new accounts clerk thereat. It is easy to understand how a vulnerable Gonzales, who is financially dependent upon RCBC, would rather bite the bullet, so to speak, and expectedly opt for salary deduction rather than lose her job and her entire salary altogether. In this sense, we cannot take petitioners apparent acquiescence to the salary deduction as being an entirely free and voluntary act on her part. Additionally, under the obtaining facts and circumstances surrounding the present complaint for collection of sum of money by RCBC against its employee, which may be deemed tantamount to harassment, and the fact that RCBC itself was

the one, acting through its employee, Olivia Gomez, which gave reason for the dishonor of the dollar-check in question, RCBC may likewise be held liable for moral and exemplary damages and attorneys fees by way of damages, in the amount of P20,000.00 for each. WHEREFORE, the assailed CA Decision dated August 30, 2002 is REVERSED and SET ASIDE and the Complaint in this case DISMISSED for lack of merit. Petitioners counterclaim is GRANTED, ordering the respondent RCBC to reimburse petitioner the amount P12,822.20, with legal interest computed from the time of salary deduction up to actual payment, and to pay petitioner the total amount of P60,000.00 as moral and exemplary damages, and attorneys fees. Costs against the respondent. SO ORDERED.

FIRST DIVISION G.R. No. 179952 December 4, 2009

METROPOLITAN BANK AND TRUST COMPANY (formerly ASIANBANK CORPORATION), Petitioner, vs. BA FINANCE CORPORATION and MALAYAN INSURANCE CO., INC., Respondents. DECISION CARPIO MORALES, J.: Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA Finance) a P329,2801 loan to secure which, he mortgaged his car to respondent BA Finance.2 The mortgage contained the following stipulation: The MORTGAGOR covenants and agrees that he/it will cause the property(ies) hereinabove mortgaged to be insured against loss or damage by accident, theft and fire for a period of one year from date hereof with an insurance company or companies acceptable to the MORTGAGEE in an amount not less than the outstanding balance of mortgage obligations and that he/it will make all loss, if any,

under such policy or policies, payable to the MORTGAGEE or its assigns as its interest may appear x x x.3 (emphasis and underscoring supplied) Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co., Inc. (Malayan Insurance)4which issued a policy stipulating that, inter alia, Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear. It is hereby expressly understood that this policy or any renewal thereof, shall not be cancelled without prior notification and conformity by BA FINANCE CORPORATION.5 (emphasis and underscoring supplied) The car was stolen. On Bitangas claim, Malayan Insurance issued a check payable to the order of "B.A. Finance Corporation and Lamberto Bitanga" for P224,500, drawn against China Banking Corporation (China Bank). The check was crossed with the notation "For Deposit Payees Account Only."6 Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his account with the Asianbank Corporation (Asianbank), now merged with herein petitioner Metropolitan Bank and Trust Company (Metrobank). Bitanga subsequently withdrew the entire proceeds of the check. In the meantime, Bitangas loan became past due, but despite demands, he failed to settle it. BA Finance eventually learned of the loss of the car and of Malayan Insurances issuance of a crossed check payable to it and Bitanga, and of Bitangas depositing it in his account at Asianbank and withdrawing the entire proceeds thereof. BA Finance thereupon demanded the payment of the value of the check from Asianbank7 but to no avail, prompting it to file a complaint before the Regional Trial Court (RTC) of Makati for sum of money and damagesagainst Asianbank and Bitanga,8 alleging that, inter alia, it is entitled to the entire proceeds of the check. In its Answer with Counterclaim,9 Asianbank alleged that BA Finance "instituted [the] complaint in bad faith to coerce [it] into paying the whole amount of the CHECK knowing fully well that its rightful claim, if any, is against Malayan [Insurance]."10 Asianbank thereafter filed a cross-claim against Bitanga,11 alleging that he fraudulently induced its personnel to release to him the full amount of the check; and that on being later informed that the entire amount of the check did not belong to Bitanga, it took steps to get in touch with him but he had changed residence without leaving any forwarding address.12 And Asianbank filed a third-party complaint against Malayan Insurance,13 alleging that Malayan Insurance was grossly negligent in issuing the check payable to both

Bitanga and BA Finance and delivering it to Bitanga without the consent of BA Finance.14 Bitanga was declared in default in Asianbanks cross-claim.15 Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy to the contract between BA Finance and Bitanga, and noting the claim of Malayan Insurance that it is its policy to issue checks to both the insured and the financing company, held that Malayan Insurance cannot be faulted for negligence for issuing the check payable to both BA Finance and Bitanga. The trial court, holding that Asianbank was negligent in allowing Bitanga to deposit the check to his account and to withdraw the proceeds thereof, without his co-payee BA Finance having either indorsed it or authorized him to indorse it in its behalf,16 found Asianbank and Bitanga jointly and severally liable to BA Finance following Section 41 of the Negotiable Instruments Law and Associated Bank v. Court of Appeals.17 Thus the trial court disposed: WHEREFORE, premises considered, judgment is hereby rendered ordering defendants Asian Bank Corporation and Lamberto Bitanga: 1) To pay plaintiff jointly and severally the sum of P224,500.00 with interest thereon at the rate of 12% from September 25, 1992 until fully paid; 2) To pay plaintiff the sum of P50,000.00 as exemplary damages; P20,000.00 as actual damages; P30,000.00 as attorneys fee; and 3) To pay the costs of suit. Asianbanks and Bitangas [sic] counterclaims are dismissed. The third party complaint of defendant/third party plaintiff against third-party defendant Malayan Insurance, Co., Inc. is hereby dismissed. Asianbank is ordered to pay Malayan attorneys fee of P50,000.00 and a per appearance fee of P500.00. On the cross-claim of defendant Asianbank, co-defendant Lamberto Bitanga is ordered to pay the former the amounts the latter is ordered to pay the plaintiff in Nos. 1, 2 and 3 above-mentioned. SO ORDERED.18 (emphasis and underscoring supplied) Before the Court of Appeals, Asianbank, in its Appellants Brief, submitted the following issues for consideration:

3.01.1.1 Whether BA Finance has a cause of action against Asianbank. 3.01.1.2 Assuming that BA Finance has a valid cause of action, may it claim from Asianbank more than one-half of the value of the check considering that it is a mere co-payee or joint payee of the check? 3.01.1.3 Whether BA Finance is liable to Asianbank for actual and exemplary damages for wrongfully bringing the case to court. 3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of any sum of money which this Honorable Court may award to BA Finance in this case.19 (underscoring supplied) And it proffered the following arguments: A. BA Finance has no cause of action against Asianbank as it has no legal right and title to the check considering that the check was not delivered to BA Finance. Hence, BA Finance is not a holder thereof under the Negotiable Instruments Law. B. Asianbank, as collecting bank, is not liable to BA Finance as there was no privity of contract between them. C. Asianbank, as collecting bank, is not liable to BA Finance, considering that, as the intermediary between the payee and the drawee Chinabank, it merely acted on the instructions of drawee Chinabank to pay the amount of the check to Bitanga, hence, the consequent damage to BA Finance was due to the negligence of Chinabank. D. Malayans act of issuing and delivering the check solely to Bitanga in violation of the "loss payee" clause in the Policy, is the proximate cause of the alleged damage to BA Finance. E. Assuming Asianbank is liable, BA Finance can claim only his proportionate interest on the check as it is a joint payee thereof. F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust enrichment or solutio indebiti. G. BA Finance is liable to pay Asianbank actual and exemplary damages.20 (underscoring supplied) The appellate court, "summarizing" the errors attributed to the trial court by Asianbank to be "whetherBA Finance has a cause of action against [it] even if the subject check had not been delivered toBA Finance by the issuer itself," held in

the affirmative and accordingly affirmed the trial courts decision but deleted the award ofP20,000 as actual damages.21 Hence, the present Petition for Review on Certiorari22 filed by Metrobank (hereafter petitioner) to which Asianbank was, as earlier stated, merged, faulting the appellate court I. x x x in applying the case of Associated Bank v. Court of Appeals, in the absence of factual similarity and of the legal relationships necessary for the application of the desirable shortcut rule. x x x II. x x x in not finding that x x x the general rule that the payee has no cause of action against the collecting bank absent delivery to him must be applied. III. x x x in finding that all the elements of a cause of action by BA Finance Corporation against Asianbank Corporation are present. IV. x x x in finding that Article 1208 of the Civil Code is not applicable. V. x x x in awarding of exemplary damages even in the absence of moral, temperate, liquidated or compensatory damages and a finding of fact that Asianbank acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. xxxx VII. x x x in dismissing Asianbanks counterclaim and Third Party complaint [against Malayan Insurance].23(italics in the original; underscoring supplied) Petitioner proffers the following arguments against the application of Associated Bank v. CA to the case: x x x [T]he rule established in the Associated Bank case has provided a speedier remedy for the payee to recover from erring collecting banks despite the absence of delivery of the negotiable instrument. However, the application of the rule demands careful consideration of the factual settings and issues raised in the case x x x. One of the relevant circumstances raised in Associated Bank is the existence of forgery or unauthorized indorsement. x x x xxxx In the case at bar, Bitanga is authorized to indorse the check as the drawer names him as one of the payees. Moreover, his signature is not a forgery nor has he or

anyone forged the signature of the representative of BA Finance Corporation. No unauthorized indorsement appears on the check. xxxx Absent the indispensable fact of forgery or unauthorized indorsement, the desirable shortcut rule cannot be applied,24 (underscoring supplied) The petition fails. Section 41 of the Negotiable Instruments Law provides: Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. (emphasis and underscoring supplied) Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the proceeds thereof, despite the absence of authority of Bitangas copayee BA Finance to endorse it on its behalf.25 Denying any irregularity in accepting the check, petitioner maintains that it followed normal banking procedure. The testimony of Imelda Cruz, Asianbanks then accounting head, shows otherwise, however, viz: Q Now, could you be familiar with a particular policy of the bank with respect to checks with joined (sic) payees? A Yes, sir. Q And what would be the particular policy of the bank regarding this transaction? A The bank policy and procedure regarding the joint checks. Once it is deposited to a single account, we are not accepting joint checks for single account, depositing to a single account(sic). Q What happened to the bank employee who allowed this particular transaction to occur? A Once the branch personnel, the bank personnel (sic) accepted it, he is liable. Q What do you mean by the branch personnel being held liable?

A Because since (sic) the bank policy, we are not supposed to accept joint checks to a [single] account, so we mean that personnel would be held liable in the sense that (sic) once it is withdrawn or encashed, it will not be allowed. Q In your experience, have you encountered any bank employee who was subjected to disciplinary action by not following bank policies? A The one that happened in that case, since I really dont know who that personnel is, he is no longer connected with the bank. Q What about in general, do you know of any disciplinary action, Madam witness? A Since theres a negligence on the part of the bank personnel, it will be a ground for his separation [from] the bank.26 (emphasis, italics and underscoring supplied) Admittedly, petitioner dismissed the employee who allowed the deposit of the check in Bitangas account. Petitioners argument that since there was neither forgery, nor unauthorized indorsement because Bitanga was a co-payee in the subject check, the dictum in Associated Bank v. CA does not apply in the present case fails. The payment of an instrument over a missing indorsement is the equivalent of payment on a forged indorsement27 or an unauthorized indorsement in itself in the case of joint payees.28 Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed check, despite the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it bears repeating, carry the indorsement of BA Finance.29 As has been repeatedly emphasized, the banking business is imbued with public interest such that the highest degree of diligence and highest standards of integrity and performance are expected of banks in order to maintain the trust and confidence of the public in general in the banking sector.30 Undoubtedly, BA Finance has a cause of action against petitioner. Is petitioner liable to BA Finance for the full value of the check? Petitioner, at all events, argue that its liability to BA Finance should only be one-half of the amount covered by the check as there is no indication in the check that Bitanga and BA Finance are solidary creditors to thus make them presumptively joint creditors under Articles 1207 and 1208 of the Civil Code which respectively provide:

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestations. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. Art. 1208. If from the law, or the nature or wording of the obligations to which the preceding article refers to the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the debts or credits being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. Petitioners argument is flawed. The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the black-letter law provide definitive justification for petitioners full liability on the value of the check. To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which indorses the check upon presentment with the drawee bank, is an indorser.[31] This is because in indorsing a check to the drawee bank, a collecting bank stamps the back of the check with the phrase "all prior endorsements and/or lack of endorsement guaranteed"32 and, for all intents and purposes, treats the check as a negotiable instrument, hence, assumes the warranty of an indorser.33 Without Asianbanks warranty, the drawee bank (China Bank in this case) would not have paid the value of the subject check. Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of prior indorsements.34 Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is liable in conversion to the non-indorsing payee for the entire amount of the check.35 It bears noting that in petitioners cross-claim against Bitanga, the trial court ordered Bitanga to return to petitioner the entire value of the check P224,500.00 with interest as well as damages and cost of suit. Petitioner never questioned this aspect of the trial courts disposition, yet it now prays for the modification of its liability to BA Finance to only one-half of said amount. To pander to petitioners supplication would certainly amount to unjust enrichment at BA Finances expense. Petitioners remedy which is the reimbursement for the full amount of the check from the perpetrator of the irregularity lies with Bitanga.

Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as these are completely irrelevant. The drawer, Malayan Insurance in this case, issued the check to answer for an underlying contractual obligation (payment of insurance proceeds). The obligation is merely reflected in the instrument and whether the payees would jointly share in the proceeds or not is beside the point. Moreover, granting petitioners appeal for partial liability would run counter to the existing principles on the liabilities of parties on negotiable instruments, particularly on Section 68 of the Negotiable Instruments Law which instructs that joint payees who indorse are deemed to indorse jointly and severally.36 Recall that when the maker dishonors the instrument, the holder thereof can turn to those secondarily liable the indorser for recovery.37And since the law explicitly mandates a solidary liability on the part of the joint payees who indorse the instrument, the holder thereof (assuming the check was further negotiated) can turn to either Bitanga or BA Finance for full recompense. Respecting petitioners challenge to the award by the appellate court of exemplary damages to BA Finance, the same fails. Contrary to petitioners claim that no moral, temperate, liquidated or compensatory damages were awarded by the trial court,38 the RTC did in fact award compensatory or actual damages of P224,500, the value of the check, plus interest thereon. Petitioner argues, however, that assuming arguendo that compensatory damages had been awarded, the same contravened Article 2232 of the Civil Code which provides that in contracts or quasi-contracts, the court may award exemplary damages only if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Since, so petitioner concludes, there was no finding that it acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner,39 it is not liable for exemplary damages. The argument fails. To reiterate, petitioners liability is based not on contract or quasi-contract but on quasi-delictsince there is no pre-existing contractual relation between the parties.40 Article 2231 of the Civil Code, which provides that in quasidelict, exemplary damages may be granted if the defendant acted with gross negligence, thus applies. For "gross negligence" implies a want or absence of or failure to exercise even slight care or diligence, or the entire absence of care,41 evincing a thoughtless disregard of consequences without exerting any effort to avoid them.42 x x x The law allows the grant of exemplary damages to set an example for the public good. The business of a bank is affected with public interest; thus it makes a sworn profession of diligence and meticulousness in giving irreproachable service. For this reason, the bank should guard against in injury attributable to negligence or bad faith on its part. The award of exemplary damages is proper as a warning to [the petitioner] and all concerned not to recklessly disregard their obligation to exercise

the highest and strictest diligence in serving their depositors.43(Italics and underscoring supplied) As for the dismissal by the appellate court of petitioners third-party complaint against Malayan Insurance, the same is well-taken. Petitioner based its third-party complaint on Malayan Insurances alleged gross negligence in issuing the check payable to both BA Finance and Bitanga, despite the stipulation in the mortgage and in the insurance policy that liability for loss shall be payable to BA Finance.44 Malayan Insurance countered, however, that it x x x paid the amount of P224,500 to BA Finance Corporation and Lamberto Bitanga in compliance with the decision in the case of "Lamberto Bitanga versus Malayan Insurance Co., Inc., Civil Case No. 88-2802, RTC-Makati Br. 132, and affirmed on appeal by the Supreme Court [3rd Division], G.R. no. 101964, April 8, 1992 x x x.45 (underscoring supplied) It is noted that Malayan Insurance, which stated that it was a matter of company policy to issue checks in the name of the insured and the financing company, presented a witness to rebut its supposed negligence. 46 Perforce, it thus wrote a crossed check with joint payees so as to serve warning that the check was issued for a definite purpose.47 Petitioner never ever disputed these assertions. The Court takes exception, however, to the appellate courts affirmance of the trial courts grant of legal interest of 12% per annum on the value of the check. For the obligation in this case did not arise out of a loan or forbearance of money, goods or credit. While Article 1980 of the Civil Code provides that: Fixed savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan, said provision does not find application in this case since the nature of the relationship between BA Finance and petitioner is one of agency whereby petitioner, as collecting bank, is to collect for BA Finance the corresponding proceeds from the check.48 Not being a loan or forbearance of money, the interest should be 6% per annum computed from the date of extrajudicial demand on September 25, 1992 until finality of judgment; and 12% per annum from finality of judgment until payment, conformably with Eastern Shipping Lines, Inc. v. Court of Appeals.[49] WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is AFFIRMED with MODIFICATION in that the rate of interest on the judgment obligation of P224,500 should be 6% per annum, computed from the time of extrajudicial demand on September 25, 1992 until its full payment before finality of judgment; thereafter, if the amount adjudged remains unpaid, the interest rate shall be 12% per annum computed from the time the judgment becomes final and executory until fully satisfied.

Costs against petitioner. SO ORDERED.

SECOND DIVISION

G.R. No. 93048 March 3, 1994 BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner, vs. THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC., respondents. Teresita Gandiongco Oledan for petitioner. Acaban & Sabado for private respondent.

NOCON, J.: For our review is the decision of the Court of Appeals in the case entitled "State Investment House, Inc. v. Bataan Cigar & Cigarette Factory Inc.," 1 affirming the decision of the Regional Trial Court 2 in a complaint filed by the State Investment House, Inc. (hereinafter referred to as SIHI) for collection on three unpaid checks issued by Bataan Cigar & Cigarette Factory, Inc. (hereinafter referred to as BCCFI). The foregoing decisions unanimously ruled in favor of SIHI, the private respondent in this case. Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua George (herein after referred to as George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed checks post dated sometime in March 1979 in the total amount of P820,000.00. 3 Relying on the supplier's representation that he would complete delivery within three months from December 5, 1978, petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver in accordance with

their earlier agreement. Again petitioner issued post dated crossed checks in the total amount of P1,100,000.00, payable sometime in September 1979. 4 During these times, George King was simultaneously dealing with private respondent SIHI. On July 19, 1978, he sold at a discount check TCBT 551826 5 bearing an amount of P164,000.00, post dated March 31, 1979, drawn by petitioner, naming George King as payee to SIHI. On December 19 and 26, 1978, he again sold to respondent checks TCBT Nos. 608967 & 608968, 6 both in the amount of P100,000.00, post dated September 15 & 30, 1979 respectively, drawn by petitioner in favor of George King. In as much as George King failed to deliver the bales of tobacco leaf as agreed despite petitioner's demand, BCCFI issued on March 30, 1979, a stop payment order on all checks payable to George King, including check TCBT 551826. Subsequently, stop payment was also ordered on checks TCBT Nos. 608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's failure to deliver the tobacco leaves. Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim being a holder in due course. It further said that the non-inclusion of King Tim Pua George as party defendant is immaterial in this case, since he, as payee, is not an indispensable party. The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a holder in due course, to be able to collect from the drawer, BCCFI. The Negotiable Instruments Law states what constitutes a holder in due course, thus: Sec. 52 A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course. However, when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims, acquired the title as holder in due course. The facts in this present case are on all fours to the case of State Investment House, Inc. (the very respondent in this case) v. Intermediate Appellate Court 7 wherein we made a discourse on the effects of crossing of checks. As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on demand. 8 There are a variety of checks, the more popular of which are the memorandum check, cashier's check, traveler's check and crossed check. Crossed check is one where two parallel lines are drawn across its face or across a corner thereof. It may be crossed generally or specially. A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words "and company" are written or nothing is written at all between the parallel lines. It may be issued so that the presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks," although Article 541 9 of the Code of Commerce refers to such instruments. According to commentators, the negotiability of a check is not affected by its being crossed, whether specially or generally. It may legally be negotiated from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank mentioned between the parallel lines. 10 This is specially true in England where the Negotiable Instrument Law originated. In the Philippine business setting, however, we used to be beset with bouncing checks, forging of checks, and so forth that banks have become quite guarded in encashing checks, particularly those which name a specific payee. Unless one is a valued client, a bank will not even accept second indorsements on checks. In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (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; (c) and the act of crossing the check serves as 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. 11 The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna Wood Industries, Inc. also sold at a discount to SIHI three post dated

crossed checks, issued by Anita Pea Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling that SIHI was not a holder in due course, we then said: The three checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the rightful person, i.e. the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right of recourse is available to petitioner (SIHI) against the drawer of the subject checks, private respondent wife (Anita), considering that petitioner is not the proper party authorized to make presentment of the checks in question. xxx xxx xxx That the subject checks had been issued subject to the condition that private respondents (Anita and her husband) on due date would make the back up deposit for said checks but which condition apparently was not made, thus resulting in the non-consummation of the loan intended to be granted by private respondents to New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due course. 12 It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser's title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, 13 and as such the consensus of authority is to the effect that the holder of the check is not a holder in due course. In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King. Because, really, the checks were issued with the intention that George King would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks. The foregoing does not mean, however, that respondent could not recover from the checks. The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case, George King.

WHEREFORE, finding that the court a quo erred in the application of law, the instant petition is hereby GRANTED. The decision of the Regional Trial Court as affirmed by the Court of Appeals is hereby REVERSED. Cost against private respondent. SO ORDERED. Narvasa, C.J., Regalado and Puno, JJ., concur. Padilla, J., took no part.

#Footnotes 1 CA-G.R. CV No. 03032, Justice Jorge R. Coquia, ponente, Justices Josue N. Bellosillo and Venancio D. Aldecoa, Jr., concurring, November 13, 1987. 2 Judge Agusto E. Villarin, presiding, Branch XL, National Capital Region, Manila. 3 Exhibit "1", Folder of Exhibits, p. 11. 4 Exhibit "4", Folder of Exhibits, p. 14. 5 Annex "A", Folder of Exhibits, p. 3. 6 Annexes "B" and "C", Folder of Exhibits, pp. 4-5. 7 G.R. No. 72764, 175 SCRA 310. 8 Sec. 185, Negotiable Instruments Law. 9 Article 541 -- The maker of any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words "and company". 10 CAMPOS AND LOPEZ-CAMPOS, Negotiable Instruments Law, p. 574-575; AGBAYANI, AGUEDO, Commercial Laws of the Philippines, Vol. 1, 1987 Ed., p. 446. 11 Ocampo v. Gatchalian, G.R. No. L-15126, 3 SCRA 603 (1961); Associated Bank v. Court of Appeals, G.R. No. 89802, 208 SCRA 465; SIHI v. IAC, supra.

12 Id. at pp. 316-317. 13 quoted supra. 14 Chan Wan v. Tan Kim and Chen So, L-15380, 109 Phil., 706 (1960); SIHI v. IAC, supra.

FIRST DIVISION G.R. No. 109491 February 28, 2001

ATRIUM MANAGEMENT CORPORATION, petitioner, vs. COURT OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE LEON, RAFAEL DE LEON, JR., AND HI-CEMENT CORPORATION, respondents. ---------------------------------------G.R. No. 121794 February 28, 2001

LOURDES M. DE LEON, petitioner, vs. COURT OF APPEALS, ATRIUM MANAGEMENT CORPORATION, AND HICEMENT CORPORATION,respondents. PARDO, J.: What is before the Court are separate appeals from the decision of the Court of Appeals,1 ruling that Hi-Cement Corporation is not liable for four checks amounting to P2 million issued to E.T. Henry and Co. and discounted to Atrium Management Corporation. On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court, Manila an action for collection of the proceeds of four postdated checks in the total amount of P2 million. Hi-Cement Corporation through its corporate signatories, petitioner Lourdes M. de Leon,2 treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to petitioner Atrium Management Corporation for valuable consideration. Upon presentment for payment, the drawee bank dishonored all four checks for the common reason "payment stopped". Atrium,

thus, instituted this action after its demand for payment of the value of the checks was denied.3 After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and HiCement Corporation to pay petitioner Atrium, jointly and severally, the amount of P2 million corresponding to the value of the four checks, plus interest and attorney's fees.4 On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its decision modifying the decision of the trial court, absolving HiCement Corporation from liability and dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas constituted ultra vires acts; and (3) The subject checks were not issued for valuable consideration.5 At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February 1981, Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering to discount four RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor of E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-Cement the fact that the checks represented payment for petroleum products which E.T. Henry delivered to HiCement. Carlos C. Syquia identified two letters, dated February 6, 1981 and February 9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as treasurer, confirming the issuance of the four checks in favor of E.T. Henry in payment for petroleum products.6 Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was once a secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was familiar with the four RCBC checks as the postdated checks issued by Hi-Cement to E.T. Henry upon instructions of Ms. de Leon. She testified that E.T. Henry offered to give Hi-Cement a loan which the subject checks would secure as collateral.7 On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the dispositive portion of which reads: "WHEREFORE, in view of the foregoing considerations, and plaintiff having proved its cause of action by preponderance of evidence, judgment is hereby rendered ordering all the defendants except defendant Antonio de las Alas to pay plaintiff jointly and severally the amount of TWO MILLION (P2,000,000.00) PESOS with the legal rate of interest from the filling of the complaint until fully paid, plus the sum of TWENTY THOUSAND (P20,000.00) PESOS as and for attorney's fees and the cost of suit."

All other claims are, for lack of merit dismissed. SO ORDERED."8 In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.9 Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarilly liable with Hi-Cement for the amount of the check. Also, that the trial court erred in ruling that Atrium was an ordinary holder, not a holder in due course of the rediscounted checks.10 Hi-Cement on its part submitted that the trial court erred in ruling that even if HiCement did not authorize the issuance of the checks, it could still be held liable for the checks. And assuming that the checks were issued with its authorization, the same was without any consideration, which is a defense against a holder in due course and that the liability shall be borne alone by E.T. Henry.11 On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of the trial court, the dispositive portion of which reads: "Judgement is hereby rendered: (1) dismissing the plaintiff's complaint as against defendants Hi-Cement Corporation and Antonio De las Alas; (2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and severally to pay the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00) with interest at the legal rate from the filling of the complaint until fully paid, plus P20,000.00 for attorney's fees. (3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and severally to pay defendant Hi-Cement Corporation, the sum of P20,000.00 as and for attorney's fees. With cost in this instance against the appellee Atrium Management Corporation and appellant Lourdes Victoria M. de Leon. So ordered."12 Hence, the recourse to this Court.13 The issues raised are the following: In G. R. No. 109491 (Atrium, petitioner):

1. Whether the issuance of the questioned checks was an ultra vires act; 2. Whether Atrium was not a holder in due course and for value; and 3. Whether the Court of Appeals erred in dismissing the case against HiCement and ordering it to pay P20,000.00 as attorney's fees.14 In G. R. No. 121794 (de Leon, petitioner): 1. Whether the Court of Appeals erred in holding petitioner personally liable for the Hi-Cement checks issued to E.T. Henry; 2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course; 3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as signatory of the checks was personally liable for the value of the checks, which were declared to be issued without consideration; 4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement attorney's fees and costs.15 We affirm the decision of the Court of Appeals. We first resolve the issue of whether the issuance of the checks was an ultra vires act. The record reveals that Hi-Cement Corporation issued the four (4) checks to extend financial assistance to E.T. Henry, not as payment of the balance of the P30 million pesos cost of hydro oil delivered by E.T. Henry to Hi-Cement. Why else would petitioner de Leon ask for counterpart checks from E.T. Henry if the checks were in payment for hydro oil delivered by E.T. Henry to Hi-Cement? Hi-Cement, however, maintains that the checks were not issued for consideration and that Lourdes and E.T. Henry engaged in a "kiting operation" to raise funds for E.T. Henry, who admittedly was in need of financial assistance. The Court finds that there was no sufficient evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the corporation and is authorized to sign checks for the corporation. At the time of the issuance of the checks, there were sufficient funds in the bank to cover payment of the amount of P2 million pesos. It is, however, our view that there is basis to rule that the act of issuing the checks was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. "An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power

conferred upon it by law"16 The term "ultra vires" is "distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated."17 The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were personally liable for the checks issued as corporate officers and authorized signatories of the check. "Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: "1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; "2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; "3. He agrees to hold himself personally and solidarily liable with the corporation; or "4. He is made, by a specific provision of law, to personally answer for his corporate action."18 In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the checks were strictly endorsed for deposit only to the payee's account and not to be further negotiated. What is more, the confirmation letter contained a clause that was not true, that is, "that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry". Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held personally liable therefor.1wphi1.nt The next issue is whether or not petitioner Atrium was a holder of the checks in due course. The Negotiable Instruments Law, Section 52 defines a holder in due course, thus: "A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it." In the instant case, the checks were crossed checks and specifically indorsed for deposit to payee's account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only to payee's account, meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in due course. However, it does not follow as a legal proposition that simply because petitioner Atrium was not a holder in due course for having taken the instruments in question with notice that the same was for deposit only to the account of payee E.T. Henry that it was altogether precluded from recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not in due course can not recover on the instrument.19 The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable.20 One such defense is absence or failure of consideration.21 We need not rule on the other issues raised, as they merely follow as a consequence of the foregoing resolutions. WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court of Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMED in toto. No costs. SO ORDERED. Davide, Jr., Puno, Kapunan, and Ynares-Santiago, JJ., concur.

Footnotes:
1

In CA-G. R. CV No. 26686, promulgated on March 17, 1973, Francisco, C., J., ponente, Ramirez and Gutierrez, JJ., concurring.
2

In G. R. No. 121794.

Consolidated Memorandum, G. R. No. 121794, Rollo, pp. 191-226, at pp. 192-193.

4

Original Record, Decision, Judge Edilberto G. Sandoval, presiding, pp. 356362.

5

Petition, Annex "C", in G. R. No. 109491, Rollo, pp. 319-339 and Petition, Annex "A", in G. R. No. 121794,Rollo, pp. 30-49.
6

TSN, September 30, 1985, pp. 6-19. TSN, January 29, 1988, pp. 15-16.

Original Record, Decision, Judge Edilberto G. Sandoval, presiding, pp. 356362.

9

Ibid., Notice of Appeal, Lourdes, p. 366, and Notice of Appeal Hi-Cement, p. 365.
10

CA Rollo, Defendant-Appellant Lourdes M. De Leon's Brief, pp. 10-10N. Ibid., Defendant Appellant's Brief, pp. 23C-23II.

11

12

CA Rollo, Decision, pp. 78-99, Francisco, C., J., ponente, Ramirez and Gutierrez, JJ., concurring.
13

G. R. No. 109491, Petition filed on April 13, 1993, Rollo, pp. 3-18; G. R. No. 121794, Petition filed on October 20, 1995, Rollo, pp. 10-28. On January 31, 2000, we gave due course to the petition. G. R. No. 109491, Rollo, pp. 244245; G. R. No. 121794, Rollo, pp. 152-153.
14

Petition, G. R. No. 1109491, Rollo, pp. 10-16. Petition, G. R. No. 121794, Rollo, p. 16.

15

16

Republic v. Acoje Mining Co., Inc., 117 Phil. 379, 383 [1963]; Corporation Code Sec. 45.
17

Republic v. Acoje Mining Co., Inc., supra, Note 16, at pp. 383-384.

18

FCY Construction Group, Inc. v. Court of Appeals, G. R. No. 123358, February 1, 2000, citing Tramat Mercantile, Inc. v. Court of Appeals, 238 SCRA 14, 18-19 [1994]; Equitable Banking Corporation v. NLRC, 339 Phil. 541, 566 (1997).

19

Chan Wan v. Tan Kim and Chen So, 109 Phil. 706 (1960).

20

State Investment House v. Intermediate Appellate Court, 175 SCRA 310, 317 (1989).
21

Negotiable Instruments Law, Sec. 28.

SECOND DIVISION

[G.R. No. 138074. August 15, 2003]

CELY

YANG, petitioner, vs. HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL INTERNATIONAL BANK, FAR EAST BANK & TRUST CO., EQUITABLE BANKING CORPORATION, PREM CHANDIRAMANI and FERNANDO DAVID, respondents. DECISION

QUISUMBING, J.: For review on certiorari is the decision[1] of the Court of Appeals, dated March 25, 1999, in CA-G.R. CV No. 52398, which affirmed with modification the joint decision of the Regional Trial Court (RTC) of Pasay City, Branch 117, dated July 4, 1995, in Civil Cases Nos. 5479[2] and 5492.[3] The trial court dismissed the complaint against herein respondents Far East Bank & Trust Company (FEBTC), Equitable Banking Corporation (Equitable), and Philippine Commercial International Bank (PCIB) and ruled in favor of respondent Fernando David as to the proceeds of the two cashiers checks, including the earnings thereof pendente lite. Petitioner Cely Yang was ordered to pay David moral damages of P100,000.00 and attorneys fees also in the amount of P100,000.00. The facts of this case are not disputed, to wit: On or before December 22, 1987, petitioner Cely Yang and private respondent Prem Chandiramani entered into an agreement whereby the latter was to give Yang a PCIB managers check in the amount of P4.2 million in exchange for two (2) of Yangs managers checks, each in the amount of P2.087 million, both payable to the order of private respondent Fernando David. Yang and Chandiramani agreed that the difference of P26,000.00 in the exchange would be their profit to be divided equally between them.

Yang and Chandiramani also further agreed that the former would secure from FEBTC a dollar draft in the amount of US$200,000.00, payable to PCIB FCDU Account No. 4195-01165-2, which Chandiramani would exchange for another dollar draft in the same amount to be issued by Hang Seng Bank Ltd. of Hong Kong. Accordingly, on December 22, 1987, Yang procured the following: a) Equitable Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00, dated December 22, 1987, payable to the order of Fernando David; FEBTC Cashiers Check No. 287078, in the amount of P2,087,000.00, dated December 22, 1987, likewise payable to the order of Fernando David; and FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the amount of US$200,000.00, dated December 22, 1987, payable to PCIB FCDU Account No. 4195-01165-2.

b)

c)

At about one oclock in the afternoon of the same day, Yang gave the aforementioned cashiers checks and dollar drafts to her business associate, Albert Liong, to be delivered to Chandiramani by Liongs messenger, Danilo Ranigo. Ranigo was to meet Chandiramani at Philippine Trust Bank, Ayala Avenue, Makati City, Metro Manila where he would turn over Yangs cashiers checks and dollar draft to Chandiramani who, in turn, would deliver to Ranigo a PCIB managers check in the sum of P4.2 million and a Hang Seng Bank dollar draft for US$200,000.00 in exchange. Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two cashiers checks and the dollar draft bought by petitioner. Ranigo reported the alleged loss of the checks and the dollar draft to Liong at half past four in the afternoon of December 22, 1987. Liong, in turn, informed Yang, and the loss was then reported to the police. It transpired, however, that the checks and the dollar draft were not lost, for Chandiramani was able to get hold of said instruments, without delivering the exchange consideration consisting of the PCIB managers check and the Hang Seng Bank dollar draft. At three oclock in the afternoon or some two (2) hours after Chandiramani and Ranigo were to meet in Makati City, Chandiramani delivered to respondent Fernando David at China Banking Corporation branch in San Fernando City, Pampanga, the following: (a) FEBTC Cashiers Check No. 287078, dated December 22, 1987, in the sum of P2.087 million; and (b) Equitable Cashiers Check No. CCPS 14-009467, dated December 22, 1987, also in the amount of P2.087 million. In exchange, Chandiramani got US$360,000.00 from David, which Chandiramani deposited in the savings account of his wife, Pushpa Chandiramani; and his mother,

Rani Reynandas, who held FCDU Account No. 124 with the United Coconut Planters Bank branch in Greenhills, San Juan, Metro Manila. Chandiramani also deposited FEBTC Dollar Draft No. 4771, dated December 22, 1987, drawn upon the Chemical Bank, New York for US$200,000.00 in PCIB FCDU Account No. 419501165-2 on the same date. Meanwhile, Yang requested FEBTC and Equitable to stop payment on the instruments she believed to be lost. Both banks complied with her request, but upon the representation of PCIB, FEBTC subsequently lifted the stop payment order on FEBTC Dollar Draft No. 4771, thus enabling the holder of PCIB FCDU Account No. 4195-01165-2 to receive the amount of US$200,000.00. On December 28, 1987, herein petitioner Yang lodged a Complaint[4] for injunction and damages against Equitable, Chandiramani, and David, with prayer for a temporary restraining order, with the Regional Trial Court of Pasay City. The Complaint was docketed as Civil Case No. 5479. The Complaint was subsequently amended to include a prayer for Equitable to return to Yang the amount of P2.087 million, with interest thereon until fully paid.[5] On January 12, 1988, Yang filed a separate case for injunction and damages, with prayer for a writ of preliminary injunction against FEBTC, PCIB, Chandiramani and David, with the RTC of Pasay City, docketed as Civil Case No. 5492. This complaint was later amended to include a prayer that defendants therein return to Yang the amount of P2.087 million, the value of FEBTC Dollar Draft No. 4771, with interest at 18% annually until fully paid.[6] On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a writ of preliminary injunction in Civil Case No. 5479. A writ of preliminary injunction was subsequently issued in Civil Case No. 5492 also. Meanwhile, herein respondent David moved for dismissal of the cases against him and for reconsideration of the Orders granting the writ of preliminary injunction, but these motions were denied. David then elevated the matter to the Court of Appeals in a special civil action for certiorari docketed as CA-G.R. SP No. 14843, which was dismissed by the appellate court. As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two cases were consolidated. The trial court then conducted pre-trial and trial of the two cases, but the proceedings had to be suspended after a fire gutted the Pasay City Hall and destroyed the records of the courts. After the records were reconstituted, the proceedings resumed and the parties agreed that the money in dispute be invested in Treasury Bills to be awarded in favor of the prevailing side. It was also agreed by the parties to limit the issues at the trial to the following: 1. Who, between David and Yang, is legally entitled to the proceeds of Equitable Banking Corporation (EBC) Cashiers Check No. CCPS 14009467 in the sum of P2,087,000.00 dated December 22, 1987, and Far

East Bank and Trust Company (FEBTC) Cashiers Check No. 287078 in the sum of P2,087,000.00 dated December 22, 1987, together with the earnings derived therefrom pendente lite? 2. Are the defendants FEBTC and PCIB solidarily liable to Yang for having allowed the encashment of FEBTC Dollar Draft No. 4771, in the sum of US$200,000.00 plus interest thereon despite the stop payment order of Cely Yang?[7] On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479 and 5492, to wit: WHEREFORE, the Court renders judgment in favor of defendant Fernando David against the plaintiff Cely Yang and declaring the former entitled to the proceeds of the two (2) cashiers checks, together with the earnings derived therefrom pendente lite; ordering the plaintiff to pay the defendant Fernando David moral damages in the amount of P100,000.00; attorneys fees in the amount of P100,000.00 and to pay the costs. The complaint against Far East Bank and Trust Company (FEBTC), Philippine Commercial International Bank (PCIB) and Equitable Banking Corporation (EBC) is dismissed. The decision is without prejudice to whatever action plaintiff Cely Yang will file against defendant Prem Chandiramani for reimbursement of the amounts received by him from defendant Fernando David. SO ORDERED.[8] In finding for David, the trial court ratiocinated: The evidence shows that defendant David was a holder in due course for the reason that the cashiers checks were complete on their face when they were negotiated to him. They were not yet overdue when he became the holder thereof and he had no notice that said checks were previously dishonored; he took the cashiers checks in good faith and for value. He parted some $200,000.00 for the two (2) cashiers checks which were given to defendant Chandiramani; he had also no notice of any infirmity in the cashiers checks or defect in the title of the drawer. As a matter of fact, he asked the manager of the China Banking Corporation to inquire as to the genuineness of the cashiers checks (tsn, February 5, 1988, p. 21, September 20, 1991, pp. 13-14). Another proof that defendant David is a holder in due course is the fact that the stop payment order on [the] FEBTC cashiers check was lifted upon his inquiry at the head office (tsn, September 20, 1991, pp. 24-25). The apparent reason for lifting the stop payment order was because of the fact that FEBTC realized that the checks were not actually lost but indeed reached the payee defendant David.[9] Yang then moved for reconsideration of the RTC judgment, but the trial court denied her motion in its Order of September 20, 1995.

In the belief that the trial court misunderstood the concept of a holder in due course and misapprehended the factual milieu, Yang seasonably filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 52398. On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this wise: WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and hereby orders the plaintiff-appellant to pay defendant-appellant PCIB the amount of Twenty-Five Thousand Pesos (P25,000.00). SO ORDERED.[10] In affirming the trial courts judgment with respect to herein respondent David, the appellate court found that: In this case, defendant-appellee had taken the necessary precautions to verify, through his bank, China Banking Corporation, the genuineness of whether (sic) the cashiers checks he received from Chandiramani. As no stop payment order was made yet (at) the time of the inquiry, defendant-appellee had no notice of what had transpired earlier between the plaintiff-appellant and Chandiramani. All he knew was that the checks were issued to Chandiramani with whom he was he had (sic) a transaction. Further on, David received the checks in question in due course because Chandiramani, who at the time the checks were delivered to David, was acting as Yangs agent. David had no notice, real or constructive, cogent for him to make further inquiry as to any infirmity in the instrument(s) and defect of title of the holder. To mandate that each holder inquire about every aspect on how the instrument came about will unduly impede commercial transactions, Although negotiable instruments do not constitute legal tender, they often take the place of money as a means of payment. The mere fact that David and Chandiramani knew one another for a long time is not sufficient to establish that they connived with each other to defraud Yang. There was no concrete proof presented by Yang to support her theory.[11] The appellate court awarded P25,000.00 in attorneys fees to PCIB as it found the action filed by Yang against said bank to be clearly unfounded and baseless. Since PCIB was compelled to litigate to protect itself, then it was entitled under Article 2208[12] of the Civil Code to attorneys fees and litigation expenses. Hence, the instant recourse wherein petitioner submits the following issues for resolution:

ab-

WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY PETITIONER; WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI AND FERNANDO DAVID IS LEGITIMATE OR A SCHEME BY BOTH PRIVATE RESPONDENTS TO SWINDLE PETITIONER; WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00 OR JUST A FRACTION OF THE AMOUNT REPRESENTING HIS SHARE OF THE LOOT; WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE ENTITLED TO DAMAGES AND ATTORNEYS FEES.[13]

c-

d-

At the outset, we must stress that this is a petition for review under Rule 45 of the 1997 Rules of Civil Procedure. It is basic that in petitions for review under Rule 45, the jurisdiction of this Court is limited to reviewing questions of law, questions of fact are not entertained absent a showing that the factual findings complained of are totally devoid of support in the record or are glaringly erroneous.[14] Given the facts in the instant case, despite petitioners formulation, we find that the following are the pertinent issues to be resolved: a) b) Whether the Court of Appeals erred in holding herein respondent Fernando David to be a holder in due course; and Whether the appellate court committed a reversible error in awarding damages and attorneys fees to David and PCIB.

On the first issue, petitioner Yang contends that private respondent Fernando David is not a holder in due course of the checks in question. While it is true that he was named the payee thereof, David failed to inquire from Chandiramani about how the latter acquired possession of said checks. Given his failure to do so, it cannot be said that David was unaware of any defect or infirmity in the title of Chandiramani to the checks at the time of their negotiation. Moreover, inasmuch as the checks were crossed, then David should have, pursuant to our ruling in Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA 643, been put on guard that the checks were issued for a definite purpose and accordingly, made inquiries to determine if he received the checks pursuant to that purpose. His failure to do so negates the finding in the proceedings below that he was a holder in due course. Finally, the petitioner argues that there is no showing whatsoever that David gave Chandiramani any consideration of value in exchange for the aforementioned checks.

Private respondent Fernando David counters that the evidence on record shows that when he received the checks, he verified their genuineness with his bank, and only after said verification did he deposit them. David stresses that he had no notice of previous dishonor or any infirmity that would have aroused his suspicions, the instruments being complete and regular upon their face. David stresses that the checks in question were cashiers checks. From the very nature of cashiers checks, it is highly unlikely that he would have suspected that something was amiss. David also stresses negotiable instruments are presumed to have been issued for valuable consideration, and he who alleges otherwise must controvert the presumption with sufficient evidence. The petitioner failed to discharge this burden, according to David. He points out that the checks were delivered to him as the payee, and he took them as holder and payee thereof. Clearly, he concludes, he should be deemed to be their holder in due course. We shall now resolve the first issue. Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption arises only in favor of a person who is a holder as defined in Section 191 of the Negotiable Instruments Law,[15] meaning a payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. In the present case, it is not disputed that David was the payee of the checks in question. The weight of authority sustains the view that a payee may be a holder in due course.[16] Hence, the presumption that he is a prima facie holder in due course applies in his favor. However, said presumption may be rebutted. Hence, what is vital to the resolution of this issue is whether David took possession of the checks under the conditions provided for in Section 52[17] of the Negotiable Instruments Law. All the requisites provided for in Section 52 must concur in Davids case, otherwise he cannot be deemed a holder in due course. We find that the petitioners challenge to Davids status as a holder in due course hinges on two arguments: (1) the lack of proof to show that David tendered any valuable consideration for the disputed checks; and (2) Davids failure to inquire from Chandiramani as to how the latter acquired possession of the checks, thus resulting in Davids intentional ignorance tantamount to bad faith. In sum, petitioner posits that the last two requisites of Section 52 are missing, thereby preventing David from being considered a holder in due course. Unfortunately for the petitioner, her arguments on this score are less than meritorious and far from persuasive. First, with respect to consideration, Section 24[18] of the Negotiable Instruments Law creates a presumption that every party to an instrument acquired the same for a consideration[19] or for value.[20]Thus, the law itself creates a presumption in Davids favor that he gave valuable consideration for the checks in question. In alleging otherwise, the petitioner has the onus to prove that David got hold of the checks absent said consideration. In other words, the petitioner must present convincing evidence to overthrow the presumption. Our scrutiny of the records, however, shows that the petitioner failed to discharge her burden of proof. The petitioners averment

that David did not give valuable consideration when he took possession of the checks is unsupported, devoid of any concrete proof to sustain it. Note that both the trial court and the appellate court found that David did not receive the checks gratis, but instead gave Chandiramani US$360,000.00 as consideration for the said instruments. Factual findings of the Court of Appeals are conclusive on the parties and not reviewable by this Court; they carry great weight when the factual findings of the trial court are affirmed by the appellate court.[21] Second, petitioner fails to point any circumstance which should have put David on inquiry as to the why and wherefore of the possession of the checks by Chandiramani. David was not privy to the transaction between petitioner and Chandiramani. Instead, Chandiramani and David had a separate dealing in which it was precisely Chandiramanis duty to deliver the checks to David as payee. The evidence shows that Chandiramani performed said task to the letter. Petitioner admits that David took the step of asking the manager of his bank to verify from FEBTC and Equitable as to the genuineness of the checks and only accepted the same after being assured that there was nothing wrong with said checks. At that time, David was not aware of any stop payment order. Under these circumstances, David thus had no obligation to ascertain from Chandiramani what the nature of the latters title to the checks was, if any, or the nature of his possession. Thus, we cannot hold him guilty of gross neglect amounting to legal absence of good faith, absent any showing that there was something amiss about Chandiramanis acquisition or possession of the checks. David did not close his eyes deliberately to the nature or the particulars of a fraud allegedly committed by Chandiramani upon the petitioner, absent any knowledge on his part that the action in taking the instruments amounted to bad faith.[22] Belatedly, and we say belatedly since petitioner did not raise this matter in the proceedings below, petitioner now claims that David should have been put on alert as the instruments in question were crossed checks. Pursuant to Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, David should at least have inquired as to whether he was acquiring said checks for the purpose for which they were issued, according to petitioners submission. Petitioners reliance on the Bataan Cigar case, however, is misplaced. The facts in the present case are not on all fours with Bataan Cigar. In the latter case, the crossed checks were negotiated and sold at a discount by the payee, while in the instant case, the payee did not negotiate further the checks in question but promptly deposited them in his bank account. The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of Commerce[23] makes reference to such instruments. Nonetheless, this Court has taken judicial cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited and not converted into cash.[24] The effects of crossing a check, thus, relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the payee named therein. In Bataan

Cigar, the rediscounting of the check by the payee knowingly violated the avowed intention of crossing the check. Thus, in accepting the cross checks and paying cash for them, despite the warning of the crossing, the subsequent holder could not be considered in good faith and thus, not a holder in due course. Our ruling in Bataan Cigar reiterates that in De Ocampo & Co. v. Gatchalian.[25] The factual circumstances in De Ocampo and in Bataan Cigar are not present in this case. For here, there is no dispute that the crossed checks were delivered and duly deposited by David, the payee named therein, in his bank account. In other words, the purpose behind the crossing of the checks was satisfied by the payee. Proceeding to the issue of damages, petitioner merely argues that respondents David and PCIB are not entitled to damages, attorneys fees, and costs of suit as both acted in bad faith towards her, as shown by her version of the facts which gave rise to the instant case. Respondent David counters that he was maliciously and unceremoniously dragged into this suit for reasons which have nothing to do with him at all, but which arose from petitioners failure to receive her share of the profit promised her by Chandiramani. Moreover, in filing this suit which has lasted for over a decade now, the petitioner deprived David of the rightful enjoyment of the two checks, to which he is entitled, under the law, compelled him to hire the services of counsel to vindicate his rights, and subjected him to social humiliation and besmirched reputation, thus harming his standing as a person of good repute in the business community of Pampanga. David thus contends that it is but proper that moral damages, attorneys fees, and costs of suit be awarded him. For its part, respondent PCIB stresses that it was established by both the trial court and the appellate court that it was needlessly dragged into this case. Hence, no error was committed by the appellate court in declaring PCIB entitled to attorneys fees as it was compelled to litigate to protect itself. We have thoroughly perused the records of this case and find no reason to disagree with the finding of the trial court, as affirmed by the appellate court, that: [D]efendant David is entitled to [the] award of moral damages as he has been needlessly and unceremoniously dragged into this case which should have been brought only between the plaintiff and defendant Chandiramani.[26] A careful reading of the findings of facts made by both the trial court and appellate court clearly shows that the petitioner, in including David as a party in these proceedings, is barking up the wrong tree. It is apparent from the factual findings that David had no dealings with the petitioner and was not privy to the agreement of the latter with Chandiramani. Moreover, any loss which the petitioner incurred was apparently due to the acts or omissions of Chandiramani, and hence, her recourse should have been against him and not against David. By needlessly dragging David into this case all because he and Chandiramani knew each other,

the petitioner not only unduly delayed David from obtaining the value of the checks, but also caused him anxiety and injured his business reputation while waiting for its outcome. Recall that under Article 2217[27] of the Civil Code, moral damages include mental anguish, serious anxiety, besmirched reputation, wounded feelings, social humiliation, and similar injury. Hence, we find the award of moral damages to be in order. The appellate court likewise found that like David, PCIB was dragged into this case on unfounded and baseless grounds. Both were thus compelled to litigate to protect their interests, which makes an award of attorneys fees justified under Article 2208 (2)[28] of the Civil Code. Hence, we rule that the award of attorneys fees to David and PCIB was proper. WHEREFORE, the instant petition is DENIED. The assailed decision of the Court of Appeals, dated March 25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED. Costs against the petitioner. SO ORDERED. Bellosillo, (Chairman), Austria-Martinez, and Tinga, JJ., concur. Callejo, Sr., J., on leave.

[1]

Penned by Associate Justice Bernardo P. Abesamis with Associate Justices Jainal D. Rasul and Conchita Carpio Morales (now a member of this Court) concurring. See Rollo, pp. 95-108. The case is entitled Cely Yang v. Equitable Banking Corporation, Prem Chandiramani, and Fernando David. See Rollo, pp. 38-41. Entitled Cely Yang v. Far East Bank & Trust Company, Philippine Commercial and International Bank, Prem Chandiramani, and Fernando David. See Rollo, pp. 42-46. Records, Vol. I, pp. 1-4. Id. at 8. Id. at 141. Rollo, p. 84. CA Rollo, p. 131. Id. at 195-196. Id. at 462. Id. at 456. ART. 2208. In the absence of stipulation, attorneys fees and expenses of litigation, other than judicial costs, cannot be recovered, except:

[2]

[3]

[4] [5] [6] [7] [8] [9]

[10] [11] [12]

When exemplary damages are awarded; When the defendants act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest; In criminal cases of malicious prosecution against the plaintiff; In case of a clearly unfounded civil action or proceeding against the plaintiff; Where the defendant acted in gross and evident bad faith in refusing the plaintiffs plainly valid, just, and demandable claim; In actions for legal support; In actions for the recovery of wages of household helpers, laborers, and skilled workers; In actions for indemnity under workmens compensation and employers liability laws; In a separate civil action to recover civil liability arising from a crime; When at least double judicial costs are awarded; In any other case where the court deems it just and equitable that attorneys fees and expenses of litigation should be recovered. In all cases, the attorneys fees and expenses of litigation must be reasonable.
[13] [14] [15] [16]

Rollo, p. 230. Producers Bank of the Phil. v. Court of Appeals, 417 Phil. 646, 656 (2001). Fossum v. Fernandez Hermanos, 44 Phil. 713, 716 (1923). Merchants National Bank v. Smith, 59 Mont. 280, 196 P. 523, 15 ALR 430; Boston Steel & Iron Co. v. Steur, 183 Mass. 140, 66 NE 646. 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:

[17]

That it is complete and regular upon its face; That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; That he took it in good faith and for value; That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect of the title of the person negotiating it.
[18]

SEC. 24. Presumption of consideration. Every negotiable instrument is deemed prima facie to have been issued for valuable consideration; and every person whose signature appears thereon to have become a party thereto, for value.

[19]

SEC. 25. Value; What constitutes. Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value, and is deemed such whether the instrument is payable on demand or at a future date. SEC. 191. Definitions and meaning of terms. In this Act, unless the context otherwise requires:

[20]

xxx Value means valuable consideration.

[21] [22]

See Fernandez v. Fernandez, 416 Phil. 322, 337 (2001). See Ozark Motor Co. v. Horton, 196 SW 395. See also Davis v. First National Bank, 26 Ariz. 621, 229 P. 391. ART. 541. The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words and company. State Investment House v. IAC, G.R. No. 72764, 13 July 1989, 175 SCRA 310, 315. 13 Phil. 574 (1961). We held that under the following circumstances: (1) the drawer had no account with the payee; (2) the check was crossed; (3) the crossed check was used to pay an obligation which did not correspond to the amount of the check; and (4) the holder did not show or tell the payee why he had the check in his possession and why he was using to pay his personal account, then the payee had the duty to ascertain from the holder what the nature of the latters title to the check was or the nature of his possession. CA Rollo, p. 130. ART. 2217. Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendants wrongful act or omission. See note 12.

[23]

[24]

[25]

[26] [27]

[28]

Republic of the Philippines Supreme Court

Manila

FIRST DIVISION

METROPOLITAN BANK AND TRUST G.R. No. 141408 COMPANY, Petitioner, Present: - versus PUNO, C.J., Chairperson, SANDOVAL-GUTIERREZ, PHILIPPINE BANK OF COMMUNICATIONS, FILIPINAS ORIENT FINANCE CORPORATION, PIPE MASTER CORPORATION and TAN JUAN LIAN, Respondents. CORONA, AZCUNA, and GARCIA, JJ.

x---------------------------------------------x SOLID BANK CORPORATION, Petitioner, G.R. No. 141429

- versus -

FILIPINAS ORIENT FINANCE CORPORATION, PIPE MASTER CORPORATION, TAN JUAN LIAN and/or PHILIPPINE BANK OF COMMUNICATIONS, Respondents.

Promulgated:

October 18, 2007 x---------------------------------------------------------------------------------------- x

DECI SI ON

SANDOVAL-GUTIERREZ, J.:

Sometime in 1978, Pipe Master Corporation (Pipe Master) represented by Yu Kio, its president, applied for check discounting with Filipinas Orient Finance Corporation (Filipinas Orient). The latter approved and granted the same. On July 1, 1978, the Board of Directors of Pipe Master issued a Board Resolution authorizing Yu Kio, in his capacity as president, and/or Tan Juan Lian, in his capacity as vice-president, to execute, indorse, make, sign, deliver or negotiate

instruments, documents and such other papers necessary in connection with any transaction coursed through Filipinas Orient for and in behalf of the corporation. Tan Juan Lian then executed in favor of Filipinas Orient a continuing guaranty that he shall pay at maturity any and all promissory notes, drafts, checks, or other instruments or evidence of indebtedness for which Pipe Master may become liable; that the extent of his liability shall not at any one time exceed the sum of P1,000,000.00; and that in the event of default by Pipe Master, Filipinas Orient may proceed directly against him. On April 9, 1980, under the check discounting agreement between Pipe Master and Filipinas Orient, Yu Kio sold to Filipinas Orient four Metropolitan Bank and Trust Company (Metro Bank) checks amounting to P1,000,000.00. In exchange for the four Metro Bank checks, Filipinas Orient issued to Yu Kio four Philippine Bank of Communications (PBCom) crossed checks totaling P964,303.62, payable to Pipe Master with the statement for payees account only. Upon his receipt of the four PBCom checks, Yu Kio indorsed and deposited in the Metro Bank, in his personal account, three of the checks valued at P721,596.95. As to the remaining check amounting to P242,706.67, he deposited it in the Solid Bank Corporation (Solid Bank), also in his personal account. Eventually, PBCom paid Metro Bank and Solid Bank the amounts of the checks. In turn, Metro Bank and Solid Bank credited the value of the checks to the personal accounts of Yu Kio. Subsequently, when Filipinas Orient presented the four Metro Bank checks equivalent to P1,000,000.00 it received from Yu Kio, they were dishonored by the drawee bank. Pipe Master, the drawer, refused to pay the amounts of the checks, claiming that it never received the proceeds of the PBCom checks as they were delivered and paid to the wrong party, Yu Kio, who was not the named payee. Filipinas Orient then demanded that PBCom restore to its (Filipinas Orients) account the value of the PBCom checks. In turn, PBCom sought reimbursement from Metro Bank and Solid Bank, being the collecting banks, but they refused. Thus, Filipinas Orient filed with the Regional Trial Court (RTC), Branch 39, Manila a complaint for a sum of money against Pipe Master, Tan Juan Lian and/or PBCom.

In their answer to the complaint, Pipe Master and Tan Juan Lian averred that they did not authorize Yu Kio to negotiate and enter into discounting transaction with Filipinas Orient, and even if Yu Kio was so authorized, Pipe Master never received the proceeds of the checks. Consequently, they filed a cross-claim against PBCom for gross negligence for having paid the wrong party. In turn, PBCom, Pipe Master and Tan Juan Lian filed third-party complaints against Metro Bank and Solid Bank. On July 12, 1990, the RTC rendered a Decision against Metro Bank and Solid Bank, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered: 1. Ordering third-party defendant Metro Bank to pay plaintiff the amount of Seven Hundred Twenty One Thousand Five Hundred Ninety Six Pesos and Ninety-Five Centavos (P721,596.95) plus legal interest; 2. Ordering third-party defendant Solid Bank to pay plaintiff the amount of Two Hundred Forty-Two Thousand Seven Hundred Six Pesos and Sixty-Seven Centavos (P242,706.67) plus legal interest; 3. Ordering third-party defendants to pay the costs of suit. SO ORDERED.

On appeal, the appellate court affirmed in toto the Decision of the trial court. Metro Bank and Solid Bank filed their respective motions for reconsideration but the same were denied. Hence, the instant consolidated petitions for review on certiorari filed by Metro Bank and Solid Bank. The issue for our resolution is whether Metro Bank and Solid Bank, petitioners, are liable to respondent Filipinas Orient for accepting the PBCom crossed checks payable to Pipe Master. Petitioner banks contend that respondents Pipe Master, Tan Juan Lian and/or PBCom should be made liable to respondent Filipinas Orient for the value of the checks. Respondents Pipe Master and Tan Juan Lian counter that although Yu Kio was expressly authorized to indorse Pipe Masters checks, such authority extended

only to acts done in the ordinary course of business, not in his personal capacity. For its part, respondent Filipinas Orient contends that petitioner banks were negligent in allowing Yu Kio to deposit the PBCom checks in his account. Respondent PBCom, as the drawee bank, maintains that it has no liability because in clearing the checks, it relied on the express guarantee made by petitioner banks that the checks were validly indorsed. We find in favor of respondents. A check is defined by law as a bill of exchange drawn on a bank payable on demand.[1] The Negotiable Instruments Law is silent with respect to crossed checks. Nonetheless, this Court has taken judicial cognizance of the practice that a check with two parallel lines on the upper left hand corner means that it could only be deposited and not converted into cash.[2] The crossing of a check with the phrase Payees Account Only is a warning that the check should be deposited in the account of the payee. It is the collecting bank which is bound to scrutinize the check and to know its depositors before it can make the clearing indorsement, all prior indorsements and/or lack of indorsement guaranteed.[3] Here, petitioner banks have the obligation to ensure that the PBCom checks were deposited in accordance with the instructions stated in the checks.[4] The four PBCom checks in question had been crossed and issued for payees account only. This could only mean that the drawer, Filipinas Orient, intended the same for deposit only by the payee, Pipe Master. The effect of crossing a check means that the drawer had intended the check for deposit only by the rightful person, i.e., the payee named therein[5] Pipe Master. As what transpired in this case, petitioner banks accommodated Yu Kio, being a valued client and the president of Pipe Master, and accepted the crossed checks. They stamped at the back thereof that all prior indorsements and/or lack of indorsements are guaranteed. In so doing, they became general endorsers. Under Section 66 of the Negotiable Instruments Law, an endorser warrants that the instrument is genuine and in all respects what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting.

Clearly, petitioner banks, being endorsers, cannot deny liability.

In Associated Bank v. Court of Appeals,[6] we held that the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements and is privy to the depositor who negotiated the check. PBCom, as the drawee bank, cannot be held liable since it mainly relied on the express guarantee made by petitioners, the collecting banks, of all prior indorsements. Evidently, petitioner banks disregarded established banking rules and procedures. They were negligent in accepting the checks and allowing the transaction to push through. In Jai-Alai Corp. of the Phil. v. Bank of the Phil. Islands, [7] we ruled that one who accepts and encashes a check from an individual knowing that the payee is a corporation does so at his peril. Therefore, petitioner banks are liable to respondent Filipinas Orient.

In fine, it must be emphasized that the law imposes on the collecting bank the duty to diligently scrutinize the 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.[8] Since petitioner banks negligence was the direct cause of the misappropriation of the checks, they should bear and answer for respondent Filipinas Orients loss, without prejudice to their filing of an appropriate action against Yu Kio. WHEREFORE, we DENY the petitions. The challenged Decision[9] and Resolution of the Court of Appeals in CA-G.R. CV No. 30702 are AFFIRMED. Costs against petitioners. SO ORDERED.

[1]

Section 185, Act No. 2031, The Negotiable Instruments Law. State Investment House v. Intermediate Appellate Court, G.R. No. 72764, July 13, 1989, 175 SCRA 310. Philippine Commercial International Bank v. Court of Appeals, G.R. No. 121413, January 29, 2001, 350 SCRA 446. Under Section 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. Yang v. Court of Appeals, G.R. No. 138074, August 15, 2003, 409 SCRA 159. G.R. Nos. 107382 and 107612, January 31, 1996, 252 SCRA 620, citing Bank of the Philippine Islands v. Court of Appeals, G.R. No. 102383, November 26, 1992, 216 SCRA 51. No. L-29432, August 6, 1975, 66 SCRA 29. Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corp., No. L-74917, January 20, 1988, 157 SCRA 188. Penned by Associate Justice B.A. Adefuin-de la Cruz and concurred in by Associate Justice Eugenio S. Labitoria (retired) and Associate Justice Presbitero J. Velasco, Jr. (now a member of this Court).

[2]

[3]

[4]

[5]

[6]

[7]

[8]

[9]

FIRST DIVISION HI-CEMENT CORPORATION, Petitioner, G.R. No. 132403

-versus-

INSULAR BANK OF ASIA AND AMERICA (later PHILIPPINE COMMERCIAL INTERNATIONAL BANK and now, EQUITABLE-PCI BANK) Respondent.

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

E.T. HENRY & CO.

and

G.R. No. 132419

SPOUSES ENRIQUE TAN and LILIA TAN, Petitioners, Present:

PUNO, C.J., Chairperson, SANDOVAL-GUTIERREZ, -versusCORONA, AZCUNA and GARCIA, JJ. INSULAR BANK OF ASIA AND AMERICA (later PHILIPPINE COMMERCIAL INTERNATIONAL BANK and now, EQUITABLE-PCI BANK),

Respondent.

Promulgated:

September 28, 2007

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

DECISION CORONA, J.:

At bar are consolidated petitions assailing the decision of the Court of Appeals (CA) dated January 21, 1998 in CA-G.R. CV No. 31600 entitled Insular Bank of Asia and America [now Philippine Commercial International Bank/(PCIB)] v. E.T. Henry & Co., et al.[1]

The antecedent facts follow.

Petitioners Enrique Tan and Lilia Tan (spouses Tan) were the controlling stockholders of E.T. Henry & Co., Inc. (E.T. Henry), a company engaged in the business of processing and distributing bunker fuel.[2] Among E.T. Henry's customers were petitioner Hi-Cement Corporation (Hi-Cement),[3] Riverside Mills

Corporation (Riverside) and Kanebo Cosmetics Philippines, Inc. (Kanebo). For their purchases, these corporations issued postdated checks to E.T. Henry.

Sometime in 1979, respondent Insular Bank of Asia and America (later PCIB and now Equitable PCI-Bank) granted E.T. Henry a credit facility known as Purchase of Short Term Receivables. Through this arrangement, E.T. Henry was able to encash, with pre-deducted interest, the postdated checks of its clients. In other words, E.T. Henry and respondent were into re-discounting of checks.

For every transaction, respondent required E.T. Henry to execute a promissory note and a deed of assignment bearing the conformity of the client to the re-discounting.[4]

From 1979 to 1981, E.T. Henry was able to re-discount its clients' checks (with deeds of assignment) with respondent. However, in February 1981, 20 checks[5] of Hi-Cement (which were crossed and which bore the restriction deposit to payees account only) were dishonored. So were the checks of Riverside and Kanebo.[6]

Respondent filed a complaint for sum of money[7] in the then Court of First Instance of Rizal[8] against E.T. Henry, the spouses Tan, Hi-Cement (including its general manager[9]and its treasurer [10] as signatories of the postdated crossed checks), Riverside and Kanebo.[11]

In its complaint, respondent claimed that, due to the dishonor of the checks, it suffered actual damages equivalent to their value, exclusive of accrued and accruing

interests, charges and penalties such as attorneys fees and expenses of litigation, as follows:

1. Riverside Mills Corporation 2. Kanebo Cosmetics Philippines, Inc. 3. Hi-Cement Corporation

115,312.50

5,811,750.00 10,000,000.00

Respondent also sought to collect from E.T. Henry and the spouses Tan other loan obligations (amounting to P1,661,266.51 and P4,900,805, respectively) as deficiencies resulting from the foreclosure of the real estate mortgage on E.T. Henry's property in Sucat, Paraaque.[12]

Hi-Cement filed its answer alleging, among others, that: (1) its general manager and treasurer were not authorized to issue the postdated crossed checks in E.T. Henry's favor; (2) the deed of assignment purportedly executed by HiCement assigning them to respondent only bore the conformity of its treasurer and (3) respondent was not a holder in due course as it should not have discounted them for being crossed checks.[13]

In their answer (with counterclaim against respondent and cross-claims against Hi-Cement, Riverside and Kanebo),[14] E.T. Henry and the spouses Tan claimed that: (1) the drawers of the postdated checks failed to honor them due to the adverse economic conditions prevailing at the time respondent presented them for payment; (2) the extra-judicial sale of the mortgaged Sucat property was void due to

gross inadequacy of the bid price[15] and (3) their loans were subjected to a usurious interest rate of 21% p.a.

For their part, Riverside and Kanebo sought the dismissal of the case against them, arguing that they were not privy to the re-discounting arrangement between respondent and E.T. Henry.

On June 30, 1989, the trial court rendered a decision which read:

WHEREFORE, in view of the foregoing, and as a consequence of the preponderance of evidence, this Court hereby renders judgment in favor of [respondent] and against [E.T. Henry, spouses Tan, HiCement, Riverside and Kanebo], to wit:

1.

Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo], jointly and severally, to pay [respondent] damages represented by the face value of the postdated checks as follows:

(a) Riverside Mills Corporation (b) Kanebo Cosmetics Philippines, Inc. (c) Hi-Cement Corporation

115,312.50

5,811,750.00 10,000,000.00

plus interests, services, charges and penalties until fully paid;

2.

Ordering [E.T. Henry] and/or [spouses Tan] to pay to [respondent] the sum of P4,900,805.00 plus accrued interests, charges, penalties until fully paid;

3.

Ordering [E.T. Henry and spouses Tan] to pay [respondent] the sum of P1,661,266.51 plus interests, charges, and penalties until fully paid;

4.

Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo] to pay [respondent] [a]ttorneys fees and expenses of litigation in the amount of P200,000.00 and pay the cost of this suit.
[16]

SO ORDERED.[17]

Only

petitioners

appealed

the

decision

to

the

CA

which

affirmed

it in toto. Hence, these petitions.

In G.R. No. 132403, petitioner Hi-Cement disclaims liability for the postdated crossed checks because (1) it did not authorize their issuance; (2) respondent was not a holder in due course and (3) there was no basis for the lower courts holding that it was solidarily liable for the face value of Riversides and Kanebos checks.[18]

In G.R. No. 132419, on the other hand, E.T. Henry and the spouses Tan essentially contend that the lower courts erred in: (1) applying the doctrine of piercing the veil of the corporate entity to make the spouses Tan solidarily liable with E.T. Henry; (2) not ruling on their cross-claims and counterclaims, and (3) not declaring the foreclosure of E.T. Henry's Sucat property as void.[19]

(A) G.R. 132403

As a rule, an appeal by certiorari under Rule 45 of the Rules of Court is limited to review of errors of law.[20] The factual findings of the trial court, specially when affirmed by the appellate court, are generally binding on us unless there was a misapprehension of facts or when the inference drawn from the facts was manifestly mistaken.[21] This case falls within the exception.

AUTHORITY OF HI-CEMENTS GENERAL MANAGER AND TREASURER TO ISSUE THE POSTDATED CROSSED CH ECKS

Both the trial court and the CA concluded that Hi-Cement authorized its general manager and treasurer to issue the subject postdated crossed checks. They both held that Hi-Cement was already estopped from denying such authority since it never objected to the signatories' issuance of all previous checks to E.T. Henry which the latter, in turn, was able to re-discount with respondent.

We agree with the lower courts that both the general manager and treasurer of Hi-Cement were authorized to issue the subjects checks. However,

notwithstanding such fact, respondent could not be considered a holder in due course.

RESPONDENT BANK NOT A HOLDER IN DUE COURSE

The Negotiable Instruments Law (NIL), specifically Section 191,[22] provides:

Holder means the payee or indorsee of a bill or a note, or the person who is in possession of it, or the bearer thereof.

On the other hand, Section 52[23] states:

A holder in due course is a holder who has taken the instrument under the following conditions: (a) it is complete and regular on its face; (b) he became the holder of it before it was overdue, and without notice that it has previously been dishonored, if such was the fact; (c) he took it in good faith and for value and (d) at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Absent any of the elements set forth in Section 52, the holder is not a holder in due course. In the case at bar, the last two requirements were not met.

In Bataan Cigar and Cigarette Factory, Inc. (BCCF) v. CA,[24] we held that the holder of crossed checks was not a holder in due course. There, the drawer (BCCF) issued postdated crossed checks in favor of one of its suppliers (George King) who promised to deliver bales of tobacco leaf but failed. George King, however, sold the checks on discount to State Investment House, Inc. (SIHI) and upon the latters presentment to the drawee bank, BCCF ordered a stop payment. Thereafter, SIHI filed a collection case against it. In ruling that SIHI was not a holder in due course, we explained:

In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (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 checks serves as 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.

Likewise, in Atrium Management Corporation v. CA,[25] where E.T. Henry, HiCement and its treasurer[26] again engaged in a legal scuffle over four postdated crossed checks, we held that Atrium (with which the checks were re-discounted) was not a holder in due course. In that case, E.T. Henry was the payee of four HiCement postdated checks which it endorsed to Atrium. When the latter presented the crossed checks to the drawee bank, Hi-Cement stopped payment.[27] We held that Atrium was not a holder in due course:

In the instant case, the checks were crossed and specifically indorsed for deposit to payees account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only to payees account, meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in due course.

In the case at bar, respondent's claim that it acted in good faith when it accepted and discounted Hi-Cements postdated crossed checks from E.T. Henry (as payee therein) fails to convince us. Good faith becomes inconsequential amidst proof of respondent's grossly negligent conduct in dealing with the subject checks.

Respondent was all too aware that subject checks were crossed and bore restrictions that they were for deposit to payee's account only; hence, they could not be further negotiated to it. The records likewise reveal that respondent completely disregarded a telling sign of irregularity in the re-discounting of the checks when the general manager did not acquiesce to it as only the treasurer's signature appeared on the deed of assignment. As a banking institution, it behooved respondent to act with extraordinary diligence in every transaction.[28] Its business is impressed with public interest, thus, it was not expected to be careless and negligent, specially so where the checks it dealt with were crossed. In Bataan Cigar and Cigarette Factory, Inc.,[29] we ruled:

It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorsers title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faithand as such[,] the consensus of authority is to the effect that the holder of the check is not a holder in due course. (emphasis supplied)

The next query is whether Hi-Cement can still be made liable for the checks. We answer in the negative.

In State Investment House, Inc. (SIHI) v. Intermediate Appellate Court,[30] SIHI re-discounted crossed checks and was declared not a holder in due course. As a result, when it presented the checks for deposit, we deemed that its presentment to the drawee bank was not proper, hence, the liability did not attach to the drawer of the checks. We ruled that:

The three subject checks in the case at bar had been crossed which could only mean that the drawer had intended the same for deposit only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. [31]

Our resolution in the foregoing case was reiterated in Atrium Management Corporation v. CA,[32] where we affirmed the CA ruling that the drawer of the postdated crossed checks was not liable to the holder who was deemed not a holder in due course.

We note, however, that in the two aforementioned cases, we made it clear that the NIL does not absolutely bar a holder who is not a holder in due course from recovering on the checks. In both, we ruled that it may recover from the party who

indorsed/encashed the checks if the latter has no valid excuse for refusing payment. Here, there was no doubt that it was E.T. Henry that re-discounted HiCement's checks and received their value from respondent. Since E.T. Henry had no justification to refuse payment, it should pay respondent.

SOLIDARY LIABILITY OF HICEMENT FOR THE FACE VALUE OF RIVERSIDE'S AND KANEBO'S CHECKS

Hi-Cement could not also be made solidarily liable with Riverside and Kanebo for the face value of their checks. Hi-Cement had nothing to do with the checks of these two corporations. However, although the language of the trial court decision's dispositive portion seemed confusing, a reading of the decision in its entirety reveals that the fallo was for each corporation to be liable solidarily with E.T. Henry and/or the spouses Tan for the respective values of their checks.

Furthermore, solidary liability cannot be presumed but must be established by law or contract. Neither is present here. Articles 1207 and 1208 of the Civil Code provide:

Art. 1207. The concurrence of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the presentation. There is solidary liability only when the obligation expressly so states, or when the obligation requires solidarity. (emphasis supplied)

Art. 1208. If from the law, or the nature of the wording of the obligations to which the preceding article refers to the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules governing the multiplicity of suits.

At any rate, the issue has become moot in view of our ruling that Hi-Cement is not liable for the checks.

(B) G.R. No. 132419

DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY

In their petition, E.T. Henry and the spouses Tan argue that the lower courts erred in applying the piercing the veil of corporate entity doctrine to their case. They claim that both the trial and appellate courts failed to cite the reasons why the doctrine was relevant to them.

We agree with petitioners E.T. Henry and the spouses Tan in this respect.

If any general rule can be laid down, it is that the corporation will be looked upon as a legal entity until sufficient reasons to the contrary appear. [33] It is only when the fiction or notion of legal entity is used to defeat public convenience, justify wrong, perpetuate fraud or defend crime that the law will shred the corporate legal veil and regard it as a mere association of persons.[34] This is referred to as the doctrine of piercing the veil of corporate entity.

After a careful study of the records, we hold that E.T. Henry's corporate veil should not have been pierced at all.

First, the trial court failed to provide a clear ground why the doctrine was used. It merely stated that it agreed with respondents arguments but did not explain why the doctrine was relevant to petitioner E.T. Henry's and the spouses Tans case. On the other hand, the CA held:

It appears that spouses Tan are controlling stockholders of E.T. Henry & Co., Inc. as well as its authorized signatories. The business of the corporation was conducted solely for the benefit of the spouses Tan who colluded with [Hi-Cement] in defrauding [respondent]. As the lower court cited[I]t is a settled law in this and other jurisdictions that when the corporation is a mere alter ego of a person, same being true when the corporation is controlled, and its affairs are so conducted to make it merely an instrumentality, agency or conduit of another.[35]

Similarly, the CA left a gaping hole by failing to provide the basis for its ruling that E.T. Henry and the spouses Tan defrauded respondent. It did not also state what act constituted the fraud. Fraud is an allegation of fact that demands clear and convincing evidence.[36] It is never presumed.[37]

Second, the mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.[38] For this ground to stand in this case, there must be proof that the spouses Tan: (1) had control or complete domination of E.T. Henrys finances and that the latter had no separate existence with respect to the act complained of; (2) used such control to commit fraud or wrong and (3) the control was the proximate cause of the loss or injury complained of by respondent.[39] The records of this case do not show that these elements were present.

INADEQUACY OF THE BID PRICE TO ANNUL FORECLOSURE PROCEEDING

With respect to the allegation that foreclosure was void due to the inadequacy of the bid price, we agree with the CA that the mere inadequacy of the price obtained at the [s]heriffs sale, unless shocking to the conscience, (was) not sufficient to set aside the sale if there (was) no showing that, in the event of a regular sale, a better price (could) be

obtained.[40]

Furthermore, in the absence of any irregularity in the foreclosure proceeding or proof that it was carried out without strict observance of the procedure, we will continue to assume its regularity and strike down any attempt to vitiate it. In this case, E.T. Henry and the spouses Tan made no mention of any anomaly to support the nullification of the foreclosure sale but merely alleged a disparity in the bid price and the propertys fair market value.

COUNTERCLAIMS CLAIMS

AND

CROSS-

Lastly, E.T. Henry and the spouses Tan call this Court's attention to the alleged failure of the lower court to pass upon their counterclaim against respondent or cross-claims against Hi-Cement, Riverside and Kanebo. They ask us now to hold these parties liable on the basis of said claims. We decline to do so.

First, E.T. Henry and the spouses Tan failed to implead Hi-Cement, Riverside and Kanebo as parties in the case at bar. Under Rule 3 of the Rules of Court, every action, including a counterclaim (or a cross-claim), must be prosecuted or defended in the name of the real party in interest.[41] The term defendant may refer to the original defending party, the defendant in a counterclaim, the cross-defendant or the third (fourth, etc.) party defendant.[42] Hence, for this technical lapse, we are constrained not to pass on E.T. Henry's and the spouses Tan's cross-claims.

Second, E.T. Henry and the spouses Tan filed the counterclaim against respondent on the basis of an alleged void foreclosure proceeding on E.T. Henry's Sucat property due to an inadequate bid price. It is no longer necessary to delve into this matter in view of our finding that the mere inadequacy of the bid price on the property did not automatically render the foreclosure sale irregular or void.

Incidentally, the petition in G.R. No. 132419 posed no contest on the lower courts ruling on E.T. Henrys and the spouses Tans solidary liability with Riverside and Kanebo vis-a-vis their checks.[43] To be consistent, however, with our dictum on the separate personality of E.T. Henry and the spouses Tan, the solidarity liability arising from the checks of Riverside and Kanebo shall only be enforced against E.T. Henry.

WHEREFORE, the assailed decision of the Court of Appeals in CA-G.R. CV No. 31600 is hereby AFFIRMED with MODIFICATION. Accordingly, petitioner HiCement Corporation is discharged from any liability. Only petitioner E.T. Henry & Co. is ORDERED to pay respondent Insular Bank of Asia and America (later Philippine Commercial International Bank and now Equitable PCI-Bank) the following:

1.

P10,000,000 representing the value of Hi-Cement's checks it received from respondent plus accrued interests, charges and penalties until fully paid, and

2.

the loans for P1,661,266.51 and P4,900,805 plus accrued interests, charges and penalties until fully paid.

Let the records of this case be remanded to the trial court for the proper computation of E.T. Henry's, Riverside's and Kanebo's liabilities for the checks, attorney's fees and costs of litigation.

Costs against petitioners E.T. Henry and the spouses Enrique and Lilia Tan.

SO ORDERED.

[1]

[2] [3] [4] [5] [6]

[7] [8] [9] [10] [11]

[12]

[13]

Penned by Justice B.A. Adelfuin-de la Cruz (retired) with the concurrence of Justices Alicia Austria-Martinez (now Supreme Court Justice) and Roberto A. Barrios (deceased), Fifteenth Division of the Court of Appeals. Rollo (G.R. No. 132403), pp. 42-45. The spouses Tan and E.T. Henry are the petitioners in G.R. No. 132419. Hi-Cement is the petitioner in G.R. No. 132403. Respondents Comment, rollo (G.R. No. 132403), p. 74. For the total amount of P10 million. Riverside's check was worth P115,312.50 and Kanebo's 19 checks amounted to P5,811,750. With application for a writ of preliminary attachment. Now Regional Trial Court (RTC). Antonio de las Alas. Lourdes Meer de Leon. The complaint also impleaded Philip Tanchi and Edward Lee as signatories of Riverside and Kanebo. E.T. Henry obtained loans (on separate dates) from respondent. The payment of these loans was secured by two real estate mortgages on E.T. Henry's Sucat, Paraaque property which were enforced by respondent after the latter failed to pay the loans. Under the Negotiable Instruments Law, particularly Section 52 thereof, a holder in due course is a holder who has taken the instrument under the following conditions: (a) it is complete and regular on its face; (b) he became the holder of it before it was overdue, and without notice that it has previously been dishonored, if such was the fact; (c) he took it in good faith and for value and (d) at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Under Section 191 of the same law, a holder is the payee or indorsee of a bill or a note, or the person who is in possession of either.
[14]

E.T. Henry filed the counterclaim against respondent to nullify the foreclosure sale and cross-claims against Hi-Cement, Riverside and Kanebo for the value of their dishonored checks.

[15]

E.T. Henry and spouses Tan claimed that the Sucat property was worth P23 million during the foreclosure sale but was awarded to respondent as the highest bidder for only P10 million. [16] Decided by Judge Jainal D. Rasul. Rollo (G.R. No. 132419), pp. 38-A to 42. [17] Rollo (G.R. No. 132419), p. 42. The trial court previously dropped the charges against de las Alas and de Leon on findings that they merely acted in a representative capacity. [18] Rollo (G.R. No. 132403), p. 22. [19] Id. (G.R. No. 132419), p. 23. [20] Usero v. CA, G.R. No. 152115, 26 January 2005, 449 SCRA 352. [21] Casol v. Purefoods Corporation, G.R. No. 166550, 22 September 2005, 470 SCRA 585. [22] Supra at note 13. [23] Id. [24] G.R. No. 93048, 3 March 1994, 230 SCRA 643. [25] The full title of the case was Atrium Management Corporation v. CA, E.T. Henry and Co., Lourdes Victoria M. De Leon, Rafael De Leon and Hi-Cement Corporation. G.R. No. 109491, 28 February 2001, 353 SCRA 23, consolidated with G.R. No. 121794,Lourdes de Leon v. CA and Hi-Cement Corporation. [26] Lourdes Meer de Leon. [27] Hi-Cement stopped payment claiming the checks were issued without its authority. In this case, Hi-Cement's treasurer (de Leon) was found to have been negligent when she signed the confirmation letter (deed of assignment) for the re-discounting of the crossed checks issued in favor of E.T. Henry. According to the Court, she was aware that the checks were strictly indorsed for deposit only to the payee's account and not to be further negotiated. [28] Solidbank Corporation v. Spouses Tan, G.R. No. 167346, 2 April 2007. [29] Supra at note 24. [30] G.R. No. 72764, 13 July 1989, 175 SCRA 310. [31] Id., pp. 316-317. [32] Supra at note 25. [33] Francisco v. Mejia, G.R. No. 141617, 14 August 2001, 362 SCRA 738. [34] Id. [35] Supra at note 1.

[36]

Cathay Pacific Airways, Ltd. v. Sps. Vazquez, 447 Phil. 306 (2003); Maestrado v. CA, 384 Phil. 418 (2000); Loyola v. CA, 383 Phil. 171 (2000). Cathay Pacific Airways, Ltd. v. Sps. Vasquez, supra. Francisco v. Mejia, supra. See also Pabalan v. NLRC, G.R. No. 89879, 20 April 1990, 184 SCRA 495; Traders Royal Bank v. CA, 336 Phil. 15 (1997). Manila Hotel Corp. v. NLRC, 397 Phil. 1 (2000). Supra at note 1. See also Ponce de Leon v. Rehabilitation Finance Corporation, No. L-24571, 18 December 1970, 36 SCRA 289. Rule 3, Section 2. See also Tankiko v. Cezar, 362 Phil. 184 (1999). Rule 3, Section 1. Since Riverside and Kanebo did not appeal the trial courts decision, it is deemed final and executory to them.

[37] [38]

[39] [40]

[41] [42] [43]

SECOND DIVISION

ROBERT DINO, Petitioner,

G.R. No. 170912

Present:

CARPIO, J., Chairperson, - versus BRION, DEL CASTILLO, ABAD, and MARIA LUISA JUDAL-LOOT, joined by her husband VICENTE LOOT, Promulgated: PEREZ, JJ.

Respondents.

April 19, 2010

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

DECISION

CARPIO, J.:

The Case

This is a petition for review[1] of the 16 August 2005 Decision[2] and 30 November 2005 Resolution[3] of the Court of Appeals in CA-G.R. CV No. 57994. The Court of Appeals affirmed the decision of the Regional Trial Court, 7th Judicial Region, Branch 56, Mandaue City (trial court), with the deletion of the award of interest, moral damages, attorneys fees and litigation expenses. The trial court ruled that respondents Maria Luisa Judal-Loot and Vicente Loot are holders in due course of Metrobank Check No. C-MA 142119406 CA and ordered petitioner Robert Dino as drawer, together with co-defendant Fe Lobitana as indorser, to solidarily pay respondents the face value of the check, among others.

The Facts

Sometime in December 1992, a syndicate, one of whose members posed as an owner of several parcels of land situated in Canjulao, Lapu-lapu City, approached petitioner and induced him to lend the group P3,000,000.00 to be secured by a real estate mortgage on the properties. A member of the group, particularly a woman pretending to be a certain Vivencia Ompok Consing, even offered to execute a Deed of Absolute Sale covering the properties, instead of the usual mortgage contract. [4] Enticed and convinced by the syndicates offer, petitioner issued three Metrobank checks totaling P3,000,000.00, one of which is Check No. C-MA-142119406-CA postdated 13 February 1993 in the amount of P1,000,000.00 payable to Vivencia Ompok Consing and/or Fe Lobitana.[5]

Upon scrutinizing the documents involving the properties, petitioner discovered that the documents covered rights over government properties. Realizing he had been deceived, petitioner advised Metrobank to stop payment of his checks. However, only the payment of Check No. C-MA- 142119406-CA was ordered stopped. The other two checks were already encashed by the payees.

Meanwhile, Lobitana negotiated and indorsed Check No. C-MA- 142119406CA to respondents in exchange for cash in the sum of P948,000.00, which respondents borrowed from Metrobank and charged against their credit line. Before respondents accepted the check, they first inquired from the drawee bank, Metrobank, Cebu-Mabolo Branch which is also their depositary bank, if the subject check was sufficiently funded, to which Metrobank answered in the positive. However, when respondents deposited the check with Metrobank, CebuMabolo Branch, the same was dishonored by the drawee bank for reason PAYMENT STOPPED.

Respondents filed a collection suit[6] against petitioner and Lobitana before the trial court. In their Complaint, respondents alleged, among other things, that they are holders in due course and for value of Metrobank Check No. C-MA-142119406-CA and that they had no prior information concerning the transaction between defendants.

In his Answer, petitioner denied respondents allegations that on the face of the subject check, no condition or limitation was imposed and that respondents are holders in due course and for value of the check. For her part, Lobitana denied the allegations in the complaint and basically claimed that the transaction leading to the issuance of the subject check is a sale of a parcel of land by Vivencia Ompok Consing to petitioner and that she was made a payee of the check only to facilitate its discounting.

The trial court ruled in favor of respondents and declared them due course holders of the subject check, since there was no privity between respondents and defendants. The dispositive portion of the 14 March 1996 Decision of the trial court reads:

In summation, this Court rules for the Plaintiff and against the Defendants and hereby orders:

1.)

defendants to pay to Plaintiff, and severally, the amount of P1,000,000.00 representing the face value of subject Metrobank check; to pay to Plaintiff herein, jointly and severally, the sum of P101,748.00 for accrued and paid interest; to pay to Plaintiff, jointly and severally, moral damages in the amount of P100,000.00;

2.) 3.)

4.) 5.)

to pay to Plaintiff, jointly and severally, the sum of P200,000.00 for attorneys fees; and to pay to Plaintiff, jointly and severally, litigation expenses in the sum of P10,000.00 and costs of the suit.

SO ORDERED.[7]

Only petitioner filed an appeal. Lobitana did not appeal the trial courts judgment.

The Ruling of the Court of Appeals

The Court of Appeals affirmed the trial courts finding that respondents are holders in due course of Metrobank Check No. C-MA- 142119406-CA. The Court of Appeals pointed out that petitioners own admission that respondents were never parties to the transaction among petitioner, Lobitana, Concordio Toring, Cecilia Villacarlos, and Consing, proved respondents lack of knowledge of any infirmity in the instrument or defect in the title of the person negotiating it. Moreover, respondents verified from Metrobank whether the check was sufficiently funded before they accepted it. Therefore, respondents must be excluded from the ambit of petitioners stop payment order.

The Court of Appeals modified the trial courts decision by deleting the award of interest, moral damages, attorneys fees and litigation expenses. The Court of Appeals opined that petitioner was only exercising (although incorrectly), what he perceived to be his right to stop the payment of the check which he rediscounted. The Court of Appeals ruled that petitioner acted in good faith in ordering the stoppage of payment of the subject check and thus, he must not be made liable for those amounts.

In its 16 August 2005 Decision, the Court of Appeals affirmed the trial courts decision with modifications, thus:

WHEREFORE, premises considered, finding no reversible error in the decision of the lower court, WE hereby DISMISS the appeal and

AFFIRM the decision of the court a quo with modifications that the award of interest, moral damages, attorneys fees and litigation expenses be deleted.

No pronouncement as to costs.

SO ORDERED.[8]

In its 30 November 2005 Resolution, the Court of Appeals denied petitioners motion for reconsideration.

In denying the petitioners motion for reconsideration, the Court of Appeals noted that petitioner raised the defense that the check is a crossed check for the first time on appeal (particularly in the motion for reconsideration). The Court of Appeals rejected such defense considering that to entertain the same would be offensive to the basic rules of fair play, justice, and due process.

Hence, this petition.

The Issues

Petitioner raises the following issues:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RESPONDENTS WERE HOLDERS IN DUE COURSE. THE FACT THAT METROBANK CHECK NO. 142119406 IS A CROSSED

CHECK CONSTITUTES SUFFICIENT WARNING TO THE RESPONDENTS TO EXERCISE EXTRAORDINARY DILIGENCE TO DETERMINE THE TITLE OF THE INDORSER.

II. THE COURT OF APPEALS ERRED IN DENYING PETITIONERS MOTION FOR RECONSIDERATION UPON THE GROUND THAT THE ARGUMENTS RELIED UPON HAVE ONLY BEEN RAISED FOR THE FIRST TIME. EQUITY DEMANDS THAT THE COURT OF APPEALS SHOULD HAVE MADE AN EXCEPTION TO PREVENT THE COMMISSION OF MANIFEST WRONG AND INJUSTICE UPON THE PETITIONER.[9]

The Ruling of this Court

The petition is meritorious.

Respondents point out that petitioner raised the defense that Metrobank Check No. C-MA-142119406-CA is a crossed check for the first time in his motion for reconsideration before the Court of Appeals. Respondents insist that issues not raised during the trial cannot be raised for the first time on appeal as it would be

offensive to the elementary rules of fair play, justice and due process. Respondents further assert that a change of theory on appeal is improper.

In his Answer, petitioner specifically denied, among others, (1) Paragraph 4 of the Complaint, concerning the allegation that on the face of the subject check, no condition or limitation was imposed, and (2) Paragraph 8 of the Complaint, regarding the allegation that respondents were holders in due course and for value of the subject check. In his Special Affirmative Defenses, petitioner claimed that for want or lack of the prestation, he could validly stop the payment of his check, and that by rediscounting petitioners check, respondents took the risk of what might happen on the check. Essentially, petitioner maintained that respondents are not holders in due course of the subject check, and as such, respondents could not recover any liability on the check from petitioner. Indeed, petitioner did not expressly state in his Answer or raise during the trial that Metrobank Check No. C-MA-142119406-CA is a crossed check. It must be stressed, however, that petitioner consistently argues that respondents are not holders in due course of the subject check, which is one of the possible effects of crossing a check. The act of crossing a check serves as a warning to the holder that the check has been issued for a definite purpose so that the holder thereof must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course.[10] Contrary to respondents view, petitioner never changed his theory, that respondents are not holders in due course of the subject check, as would violate fundamental rules of justice, fair play, and due process. Besides, the subject check was presented and admitted as evidence during the trial and respondents did not and in fact cannot deny that it is a crossed check.

In any event, the Court is clothed with ample authority to entertain issues or matters not raised in the lower courts in the interest of substantial justice. [11] In Casa Filipina Realty v. Office of the President,[12] the Court held:

[T]he trend in modern-day procedure is to accord the courts broad discretionary power such that the appellate court may consider matters bearing on the issues submitted for resolution which the parties failed to raise or which the lower court ignored. Since rules of procedure are mere tools designed to facilitate the attainment of justice, their strict

and rigid application which would result in technicalities that tend to frustrate rather than promote substantial justice, must always be avoided. Technicality should not be allowed to stand in the way of equitably and completely resolving the rights and obligations of the parties.[13]

Having disposed of the procedural issue, the Court shall now proceed to the merits of the case. The main issue is whether respondents are holders in due course of Metrobank Check No. C-MA 142119406 CA as to entitle them to collect the face value of the check from its drawer or petitioner herein.

Section 52 of the Negotiable Instruments Law defines a holder in due course, thus:

A holder in due course is a holder who has taken the instrument under the following conditions:

(a) (b)

That it is complete and regular upon its face; That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact;

(c) (d)

That he took it in good faith and for value; That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

In the case of a crossed check, as in this case, the following principles must additionally be considered: A crossed check (a) may not be encashed but only

deposited in the bank; (b) may be negotiated only once to one who has an account with a bank; and (c) warns the holder that it has been issued for a definite purpose so that the holder thereof must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course.[14]

Based on the foregoing, respondents had the duty to ascertain the indorsers, in this case Lobitanas, title to the check or the nature of her possession. This respondents failed to do. Respondents verification from Metrobank on the funding of the check does not amount to determination of Lobitanas title to the check. Failing in this respect, respondents are guilty of gross negligence amounting to legal absence of good faith,[15] contrary to Section 52(c) of the Negotiable Instruments Law. Hence, respondents are not deemed holders in due course of the subject check.[16]

State Investment House v. Intermediate Appellate Court[17] squarely applies to this case. There, New Sikatuna Wood Industries, Inc. sold at a discount to State Investment House three post-dated crossed checks, issued by Anita Pea Chua naming as payee New Sikatuna Wood Industries, Inc. The Court found State Investment House not a holder in due course of the checks. The Court also expounded on the effect of crossing a check, thus:

Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top portion of the check. The crossing may be special wherein between the two parallel lines is written the name of a bank or a business institution, in which case the drawee should pay only with the intervention of that bank or company, or crossing may be general wherein between two parallel diagonal lines are written the words and Co. or none at all as in the case at bar, in which case the drawee should not encash the same but merely accept the same for deposit.

The effect therefore of crossing a check its presentment for payment. Under Section Instruments Law, presentment for payment to made (a) by the holder, or by some person

relates to the mode of 72 of the Negotiable be sufficient must be authorized to receive

payment on his behalf x x x As to who the holder or authorized person will be depends on the instructions stated on the face of the check.

The three subject checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right of recourse is available to petitioner against the drawer of the subject checks, private respondent wife, considering that petitioner is not the proper party authorized to make presentment of the checks in question.

In this case, there is no question that the payees of the check, Lobitana or Consing, were not the ones who presented the check for payment. Lobitana negotiated and indorsed the check to respondents in exchange for P948,000.00. It was respondents who presented the subject check for payment; however, the check was dishonored for reason PAYMENT STOPPED. In other words, it was not the payee who presented the check for payment; and thus, there was no proper presentment. As a result, liability did not attach to the drawer. Accordingly, no right of recourse is available to respondents against the drawer of the check, petitioner herein, since respondents are not the proper party authorized to make presentment of the subject check.

However, the fact that respondents are not holders in due course does not automatically mean that they cannot recover on the check.[18] The Negotiable Instruments Law does not provide that a holder who is not a holder in due course may not in any case recover on the instrument. The only disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defenses as if

it were non-negotiable.[19] Among such defenses is the absence or failure of consideration,[20] which petitioner sufficiently established in this case. Petitioner issued the subject check supposedly for a loan in favor of Consings group, who turned out to be a syndicate defrauding gullible individuals. Since there is in fact no valid loan to speak of, there is no consideration for the issuance of the check. Consequently, petitioner cannot be obliged to pay the face value of the check.

Respondents can collect from the immediate indorser,[21] in this case Lobitana. Significantly, Lobitana did not appeal the trial courts decision, finding her solidarily liable to pay, among others, the face value of the subject check. Therefore, the trial courts judgment has long become final and executory as to Lobitana.

WHEREFORE, we GRANT the petition. We SET ASIDE the 16 August 2005 Decision and 30 November 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 57994.

SO ORDERED.
[1] [2]

Under Rule 45 of the Rules of Court. Rollo, pp. 24-32. Penned by Associate Justice Enrico A. Lanzanas with Associate Justices Arsenio J. Magpale and Sesinando E. Villon, concurring. [3] Id. at 34-36. [4] Records, p. 22. [5] Id. [6] Docketed as Civil Case No. MAN-1843. [7] Rollo, p. 77. [8] Id. at 31. [9] Id. at 14-15. [10] State Investment House v. Intermediate Appellate Court, G.R. No. 72764, 13 July 1989, 175 SCRA 310, 315. [11] Phil. Commercial & Industrial Bank v. CA, 242 Phil. 497, 503-504 (1988). See also Ortigas, Jr. v. Lufthansa German Airlines, 159-A Phil. 863, 889 (1975). [12] 311 Phil. 170, 181 (1995). [13] Id.

[14]

State Investment House v. Intermediate Appellate Court, supra note 10; Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, G.R. No. 93048, 3 March 1994, 230 SCRA 643, 648. [15] Vicente R. de Ocampo & Co. v. Gatchalian, No. L-15126, 30 November 1961, 3 SCRA 596, 603. [16] State Investment House v. Intermediate Appellate Court, supra note 10. [17] Id. at 316-317. [18] Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, supra note 14 at 649. [19] Id., citing Chan Wan v. Tan Kim and Chen So, 109 Phil. 706 (1960). [20] Section 28, Negotiable Instruments Law. [21] Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, supra.

SECOND DIVISION G.R. No. 168842 August 11, 2010

VICENTE GO, Petitioner, vs. METROPOLITAN BANK AND TRUST CO., Respondent. DECISION NACHURA, J.: Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the Decision1dated May 27, 2005 and the Resolution2 dated August 31, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 63469. The Facts The facts of the case are as follows: Petitioner filed two separate cases before the Regional Trial Court (RTC) of Cebu. Civil Case No. CEB-9713 was filed by petitioner against Ma. Teresa Chua (Chua) and Glyndah Tabaag (Tabaag) for a sum of money with preliminary attachment. Civil Case No. CEB-9866 was filed by petitioner for a sum of money with damages against herein respondent Metropolitan Bank and Trust Company (Metrobank) and Chua.3 In both cases, petitioner alleged that he was doing business under the name "Hope Pharmacy" which sells medicine and other pharmaceutical products in the City of

Cebu. Petitioner had in his employ Chua as his pharmacist and trustee or caretaker of the business; Tabaag, on the other hand, took care of the receipts and invoices and assisted Chua in making deposits for petitioners accounts in the business operations of Hope Pharmacy.4 In CEB-9713, petitioner claimed that there were unauthorized deposits and encashments made by Chua and Tabaag in the total amount of One Hundred Nine Thousand Four Hundred Thirty-three Pesos and Thirty Centavos (P109,433.30). He questioned particularly the following: (1) FEBTC Check No. 251111 dated April 29, 1990 in the amount of P22,635.00 which was issued by plaintiffs [petitioners] customer Loy Libron in payment of the stocks purchased was deposited under Metrobank Savings Account No. 420-920-6 belonging to the defendant Ma. Teresa Chua; (2) RCBC Checks Nos. 330958 and 294515, which were in blank but presigned by him (plaintiff [petitioner] Vicente Go) for convenience and intended for payment to plaintiffs [petitioners] suppliers, were filled up and dated September 22, 1990 and September 7, 1990 in the amount of P30,000.00 and P50,000.00 respectively, and were deposited with defendant Chuas aforestated account with Metrobank; (3) PBC Check No. 005874, drawn by Elizabeth Enriquez payable to the Hope Pharmacy in the amount ofP6,798.30 was encashed by the defendant Glyndah Tabaag; (4) There were unauthorized deposits and encashments in the total sum of P109,433.30;5 In CEB-9866, petitioner averred that there were thirty-two (32) checks with Hope Pharmacy as payee, for varying sums, amounting to One Million Four Hundred Ninety-Two Thousand Five Hundred Ninety-Five Pesos and Six Centavos (P1,492,595.06), that were not endorsed by him but were deposited under the personal account of Chua with respondent bank,6 and these are the following: CHECK NO. DATE AMOUNT P 65,214.88 24,917.75 212,326.56 2,000.00 6,300.00

FEBTC 251166 5-23-90 FEBTC 239399 5-08-90 FEBTC 251350 7-24-90 PBC 279887 PBC 162387 6-27-90 1-24-90

PBC 162317 PBC 279881 PBC 009005 PBC 279771 PBC 279726 PBC 168004 PBC 167963

12-22-89 3,300.00 6-23-90 7-21-89 5-14-90 4-25-90 3-22-90 3-07-90 7,650.00 3,584.00 3,600.00 2,000.00 2,800.00 1,700.00 80,085.66 45,304.63 64,000.00 40,078.67 2,100.00 1,125.00 2,500.00 12,105.40 5,240.00 1,350.00 5,402.60 6,715.60 83,175.54 231,936.10 47,087.25 170,600.85 16,440.00 211,592.69 47,664.03 82,697.85 P1,492,595.067

FEBTC 267793 8-20-90 FEBTC 267761 7-21-90 FEBTC 251252 6-03-90 FEBTC 267798 8-15-90 PBC 367292 PBC 376445 PBC 009056 PBC 376402 BPI 197074 BPI 197051 BPI 204358 BPI 204252 8-06-90 9-26-90 8-07-89 9-12-90 7-17-90 7-06-90 9-19-90 7-31-90

FEBTC 251171 6-27-90 FEBTC 251165 6-28-90 FEBTC 251251 6-30-90 FEBTC 251163 6-21-90 FEBTC 251170 5-23-90 FEBTC 251112 5-31-90 FEBTC 239400 6-15-90 FEBTC 251162 6-22-90

Petitioner claimed that the said checks were crossed checks payable to Hope Pharmacy only; and that without the participation and connivance of respondent bank, the checks could not have been accepted for deposit to any other account, except petitioners account.8 Thus, in CEB-9866, petitioner prayed that Chua and respondent bank be ordered, jointly and severally, to pay the principal amount of P1,492,595.06, plus interest at 12% from the dates of the checks, until the obligation shall have been fully paid; moral damages of Five Hundred Thousand Pesos (P500,000.00); exemplary damages ofP500,000.00; and attorneys fees and costs in the amount of P500,000.00.9 On February 23, 1995, the RTC rendered a Joint Decision,10 the dispositive portion of which reads: WHEREFORE, premises considered, the Court hereby renders judgment dismissing plaintiff Vicente Gos complaint against the defendant Ma. Teresa Chua and Glyndah Tabaag in Civil Case No. CEB-9713, as well as plaintiffs complaint against the same defendant Ma. Teresa Chua in Civil Case No. CEB-9866. Plaintiff Vicente Go is moreover sentenced to pay P50,000.00 in attorneys fees and litigation expenses to the defendants Ma. Teresa Chua and Glyndah Tabaag in Civil Case No. CEB-9713. Defendant Metrobank in Civil Case No. CEB-9866 is hereby condemned to pay unto plaintiff Vicente Go/Hope Pharmacy the amount of P50,000.00 as moral damages, and attorneys fees and litigation expenses in the aggregate sum of P25,000.00. The defendant Metrobanks crossclaim against its co-defendant Ma. Teresa Chua in Civil Case No. CEB-9866 is dismissed for lack of merit. No special pronouncement as to costs in both instances. SO ORDERED.11 In striking down the complaint of the petitioner against Chua and Tabaag in CEB9713, the RTC made the following findings: (1) FEBTC Check No. 251111, dated April 29, 1990, in the amount of P22,635.00 payable to cash, was drawn by Loy Libron in payment of her purchases of medicines and other drugs which Ma. Teresa Chua was selling side by side with the medicines and drugs of the Hope Pharmacy, for which she (Maritess) was granted permission by its owner, Mr. Vicente Chua. These medicines and drugs from Thailand were Maritess sideline, and were segregated from the stocks of Hope Pharmacy; x x x.

(2) RCBC Check Nos. 294519 and 330958 were checks belonging to plaintiff Vicente Go payable to cash x x x; these checks were replacements of the sums earlier advanced by Ma. Teresa Chua, but which were deposited in the account of Vicente Go with RCBC, as shown by the deposit slips x x x, and confirmed by the statement of account of Vicente Go with RCBC. (3) Check No. PCIB 005374 drawn by Elizabeth Enriquez payable to Hope Pharmacy/Cash in the amount ofP6,798.30 dated September 6, 1990, was admittedly encashed by the defendant, Glyndah Tabaag. As per instruction by Vicente Go, Glyndah requested the drawer to insert the word "Cash," so that she could encash the same with PCIB, to meet the Hope Pharmacys overdraft. The listings x x x, made by Glyndah Tabaag and Flor Ouano will show that the corresponding amounts covered thereby were in fact deposited to the account of Mr. Vicente Go with RCBC; the Bank Statement of Mr. Go x x x, confirms defendants claim independently of the deposit slip[s] x x x.12 The trial court absolved Chua in CEB-9866 because of the finding that the subject checks in CEB-9866 were payments of petitioner for his loans or borrowings from the parents of Ma. Teresa Chua, through Ma. Teresa, who was given the total discretion by petitioner to transfer money from the offices of Hope Pharmacy to pay the advances and other obligations of the drugstore; she was also given the full discretion where to source the funds to cover the daily overdrafts, even to the extent of borrowing money with interest from other persons.13 While the trial court exonerated Chua in CEB-9866, it however declared respondent bank liable for being negligent in allowing the deposit of crossed checks without the proper indorsement. Petitioner filed an appeal before the CA. On May 27, 2005, the CA rendered a Decision,14 the fallo of which reads: WHEREFORE, except for the award of attorneys fees and litigation expenses in favor of defendants Chua and Tabaag which is hereby deleted, the decision of the lower court is hereby AFFIRMED. SO ORDERED.15 Hence, this petition. The Issue Petitioner presented this sole issue for resolution:

The Court of Appeals Erred In Not Holding Metrobank Liable For Allowing The Deposit, Of Crossed Checks Which Were Issued In Favor Of And Payable To Petitioner And Without Being Indorsed By The Petitioner, To The Account Of Maria Teresa Chua.16 The Ruling of the Court A check is a bill of exchange drawn on a bank payable on demand.17 There are different kinds of checks. In this case, crossed checks are the subject of the controversy. A crossed check is one where two parallel lines are drawn across its face or across the corner thereof. It may be crossed generally or specially.18 A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words "and company" are written or nothing is written at all between the parallel lines, as in this case. It may be issued so that presentment can be made only by a bank.19 In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check has the following effects: (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 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.20 The Court has taken judicial cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited and not converted into cash. The effect of crossing a check, thus, relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the payee named therein.21 The crossing of a check is a warning that the check should be deposited only in the account of the payee. Thus, it is the duty of the collecting bank to ascertain that the check be deposited to the payees account only.22 In the instant case, there is no dispute that the subject 32 checks with the total amount of P1,492,595.06 were crossed checks with petitioner as the named payee. It is the submission of petitioner that respondent bank should be held accountable for the entire amount of the checks because it accepted the checks for deposit under Chuas account despite the fact that the checks were crossed and that the payee named therein was not Chua.

In its defense, respondent bank countered that petitioner is not entitled to reimbursement of the total sum ofP1,492,595.06 from either Maria Teresa Chua or respondent bank because petitioner was not damaged thereby.23 Respondent banks contention is meritorious. Respondent bank should not be held liable for the entire amount of the checks considering that, as found by the RTC and affirmed by the CA, the checks were actually given to Chua as payments by petitioner for loans obtained from the parents of Chua. Furthermore, petitioners noninclusion of Chua and Tabaag in the petition before this Court is, in effect, an admission by the petitioner that Chua, in representation of her parents, had rightful claim to the proceeds of the checks, as payments by petitioner for money he borrowed from the parents of Chua. Therefore, petitioner suffered no pecuniary loss in the deposit of the checks to the account of Chua.ten.lihpwal However, we affirm the finding of the RTC that respondent bank was negligent in permitting the deposit and encashment of the crossed checks without the proper indorsement. An indorsement is necessary for the proper negotiation of checks specially if the payee named therein or holder thereof is not the one depositing or encashing it. Knowing fully well that the subject checks were crossed, that the payee was not the holder and that the checks contained no indorsement, respondent bank should have taken reasonable steps in order to determine the validity of the representations made by Chua. Respondent bank was amiss in its duty as an agent of the payee. Prudence dictates that respondent bank should not have merely relied on the assurances given by Chua.1avvphi1 Respondent presented Jonathan Davis as its witness in the trial before the RTC. He was the officer-in-charge and ranked second to the assistant vice president of the bank at the time material to this case. Davis testimony was summarized by the RTC as follows: Davis also testified that he allowed Ma. Teresa Chua to deposit the checks subject of this litigation which were payable to Hope Pharmacy. According to him, it was a privilege given to valued customers on a highly selective case to case basis, for marketing purposes, based on trust and confidence, because Ma. Teresa [Chua] told him that those checks belonged to her as payment for the advances she extended to Mr. Go/Hope Pharmacy. x x x Davis stressed that Metrobank granted the privilege to Ma. Teresa Chua that for every check she deposited with Metrobank, the same would be credited outright to her account, meaning that she could immediately make use of the amount credited; this arrangement went on for about three years, without any complaint from Mr. Go/Hope Pharmacy, and Ma. Teresa Chua made warranty that she would reimburse Metrobank if Mr. Go complained. He did not however call or inform Mr. Go about this arrangement, because their bank being a Chinese bank, transactions are based on trust and confidence, and for him to inform Mr. Vicente Go about it, was tantamount

to questioning the integrity of their client, Ma. Teresa Chua. Besides, this special privilege or arrangement would not bring any monetary gain to the bank.24 Negligence was committed by respondent bank in accepting for deposit the crossed checks without indorsement and in not verifying the authenticity of the negotiation of the checks. The law imposes a duty of extraordinary diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and regularity.25 As a business affected with public interest and because of the nature of its functions, the banks are under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of the relationship.26 The fact that this arrangement had been practiced for three years without Mr. Go/Hope Pharmacy raising any objection does not detract from the duty of the bank to exercise extraordinary diligence. Thus, the Decision of the RTC, as affirmed by the CA, holding respondent bank liable for moral damages is sufficient to remind it of its responsibility to exercise extraordinary diligence in the course of its business which is imbued with public interest. WHEREFORE, the Decision dated May 27, 2005 and the Resolution dated August 31, 2005 of the Court of Appeals in CA-G.R. CV No. 63469 are hereby AFFIRMED. Footnotes
1

Penned by Associate Justice Vicente L. Yap, with Associate Justices Isaias P. Dicdican and Enrico A. Lanzanas, concurring; CA rollo, pp. 184-195.
2

Id. at 226-228. Id. at 52. Id. Id. at 52-53. Id. at 53. Id. Id. Id. at 54. Penned by Judge Renato C. Dacudao; id. at 68. Id.

10

11

12

Id. at 64-65. Id. at 66. Supra note 1, at 195. Id. Rollo, p. 10. Sec. 185, Negotiable Instruments Law.

13

14

15

16

17

18

Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA 643, 647; citing Associated Bank v. Court of Appeals, G.R. No. 89802, May 7, 1992, 208 SCRA 465; State Investment House v. Intermediate Appellate Court, G.R. No. 72764, 175 SCRA 310; and Vicente B. de Ocampo & Co. v. Gatchalian, 113 Phil. 574 (1961).
19

Id.

20

Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, supra note 18, at 648.
21

Yang v. Court of Appeals, 456 Phil. 378, 381-382 (2003).

22

Philippine Commercial International Bank v. Court of Appeals, 403 Phil. 361, 364 (2001).
23

Rollo, p. 46. CA rollo, p. 64.

24

25

Philippine National Bank v. Rodriguez, G.R. No. 170325, September 26, 2008, 566 SCRA 513, 518; Associated Bank v. Court of Appeals, supra note 18.
26

Philippine Commercial International Bank v. Court of Appeals, supra note 22.

FIRST DIVISION

BANK OF PHILIPPINEISLANDS,

THE Petitioner,

G.R. No. 157833 Present: PUNO, C.J., Chairperson, SANDOVAL-GUTIERREZ, CORONA, AZCUNA, and GARCIA, JJ. Promulgated:

-versus-

GREGORIO C. ROXAS, Respondent. October 15, 2007 x-----------------------------------------------------------------------------------------x DECISION SANDOVAL-GUTIERREZ, J.:

For our resolution is the instant Petition for Review on Certiorari assailing the Decision[1] of the Court of Appeals (Fourth Division) dated February 13, 2003 in CAG.R. CV No. 67980.

The facts of the case, as found by the trial court and affirmed by the Court of Appeals, are:

Gregorio C. Roxas, respondent, is a trader. Sometime in March 1993, he delivered stocks of vegetable oil to spouses Rodrigo and Marissa Cawili. As payment therefor, spouses Cawili issued a personal check in the amount of P348,805.50. However, when respondent tried to encash the check, it was dishonored by the drawee bank. Spouses Cawili then assured him that they would replace the bounced check with a cashiers check from the Bank of the Philippine Islands (BPI), petitioner.

On March 31, 1993, respondent and Rodrigo Cawili went to petitioners branch at Shaw Boulevard, Mandaluyong City where Elma Capistrano, the branch manager, personally attended to them. Upon Elmas instructions, Lita Sagun, the bank teller, prepared BPI Cashiers Check No. 14428 in the amount of P348,805.50, drawn against the account of Marissa Cawili, payable to respondent. Rodrigo then handed the check to respondent in the presence of Elma.

The following day, April 1, 1993, respondent returned to petitioners branch at Shaw Boulevard to encash the cashiers check but it was dishonored. Elma informed him that Marissas account was closed on that date.

Despite respondents insistence, the bank officers refused to encash the check and tried to retrieve it from respondent. He then called his lawyer who advised him to deposit the check in his (respondents) account at Citytrust, Ortigas Avenue. However, the check was dishonored on the ground Account Closed.

On September 23, 1993, respondent filed with the Regional Trial Court, Branch 263, Pasig City a complaint for sum of money against petitioner, docketed as Civil Case No. 63663. Respondent prayed that petitioner be ordered to pay the amount of the check, damages and cost of the suit.

In its answer, petitioner specifically denied the allegations in the complaint, claiming that it issued the check by mistake in good faith; that its dishonor was due to lack of consideration; and that respondents remedy was to sue Rodrigo Cawili who purchased the check. As a counterclaim, petitioner prayed that respondent be ordered to pay attorneys fees and expenses of litigation.

Petitioner filed a third-party complaint against spouses Cawili. They were later declared in default for their failure to file their answer.

After trial, the RTC rendered a Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing premises, this Court hereby renders judgment in favor of herein plaintiff and orders the defendant, Bank of the Philippine Islands, to pay Gerardo C. Roxas: 1) The sum of P348,805.50, the face value of the cashiers check, with legal interest thereon computed from April 1, 1993 until the amount is fully paid; The sum of P50,000.00 for moral damages; The sum of P50,000.00 as exemplary damages to serve as an example for the public good; The sum of P25,000.00 for and as attorneys fees; and the Costs of suit.

2) 3) 4) 5)

As to the third-party complaint, third-party defendants Spouses Rodrigo and Marissa Cawili are hereby ordered to indemnify defendant Bank of the Philippine Islands such amount(s) adjudged and actually paid by it to herein plaintiff Gregorio C. Roxas, including the costs of suit. SO ORDERED.

On appeal, the Court of Appeals, in its Decision, affirmed the trial courts judgment.

Hence, this petition.

Petitioner ascribes to the Court of Appeals the following errors: (1) in finding that respondent is a holder in due course; and (2) in holding that it (petitioner) is liable to respondent for the amount of the cashiers check.

Section 52 of the Negotiable Instruments Law provides: 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:

(a) (b)

That it is complete and regular upon its face; That he became the holder of it before it was overdue and without notice that it had been previously dishonored, if such was the fact; That he took it in good faith and for value; That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of person negotiating it.

(c) (d)

As a general rule, under the above provision, every holder is presumed prima facie to be a holder in due course. One who claims otherwise has the onus probandi to prove that one or more of the conditions required to constitute a holder in due course are lacking. In this case, petitioner contends that the element of value is not present, therefore, respondent could not be a holder in due course.

Petitioners contention lacks merit. Section 25 of the same law states: SEC. 25. Value, what constitutes. Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed as such whether the instrument is payable on demand or at a future time.

In Walker Rubber Corp. v. Nederlandsch Indische & Handelsbank, N.V. and South Sea Surety & Insurance Co., Inc.,[2] this Court ruled that value in general terms may be some right, interest, profit or benefit to the party who makes the contract or some forbearance, detriment, loan, responsibility, etc. on the other side. Here, there is no dispute that respondent received Rodrigo Cawilis cashiers check as payment for the formers vegetable oil. The fact that it was Rodrigo who purchased the cashiers check from petitioner will not affect respondents status as a holder for value since the check was delivered to him as payment for the vegetable oil he sold to spouses Cawili. Verily, the Court of Appeals did not err in concluding that respondent is a holder in due course of the cashiers check.

Furthermore, it bears emphasis that the disputed check is a cashiers check. In International Corporate Bank v. Spouses Gueco,[3] this Court held that a cashiers check is really the banks own check and may be treated as a promissory note with the bank as the maker. The check becomes the primary obligation of the bank which issues it and constitutes a written promise to pay upon demand. In New Pacific Timber & Supply Co. Inc. v. Seeris,[4] this Court took judicial notice of the well-known and accepted practice in the business sector that a cashiers check is deemed as cash. This is because the mere issuance of a cashiers check is considered acceptance thereof.

In view of the above pronouncements, petitioner bank became liable to respondent from the moment it issued the cashiers check. Having been accepted by respondent, subject to no condition whatsoever, petitioner should have paid the same upon presentment by the former.

WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Appeals (Fourth Division) in CA-G.R. CV No. 67980 is AFFIRMED. Costs against petitioner.

SO ORDERED.
[1]

Rollo, pp. 36-44. Penned by Associate Justice Martin S. Villarama, Jr. and concurred in by Associate Justice Godardo A. Jacinto (retired) and Associate Justice Mario L. Guaria. 105 Phil. 934 (1959). 404 Phil. 353 (2001). G.R. No. 41764, December 19, 1980, 101 SCRA 686.

[2] [3] [4]

FIRST DIVISION G.R. No. 136202 January 25, 2007

BANK OF THE PHILIPPINE ISLANDS, Petitioner, vs. COURT OF APPEALS, ANNABELLE A. SALAZAR, and JULIO R. TEMPLONUEVO, Respondents DECISION AZCUNA, J.: This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the Decision1 dated April 3, 1998, and the Resolution2 dated November 9, 1998, of the Court of Appeals in CA-G.R. CV No. 42241. The facts3 are as follows: A.A. Salazar Construction and Engineering Services filed an action for a sum of money with damages against herein petitioner Bank of the Philippine Islands (BPI) on December 5, 1991 before Branch 156 of the Regional Trial Court (RTC) of Pasig City. The complaint was later amended by substituting the name of Annabelle A. Salazar as the real party in interest in place of A.A. Salazar Construction and Engineering Services. Private respondent Salazar prayed for the recovery of the amount of Two Hundred Sixty-Seven Thousand, Seven Hundred Seven Pesos and Seventy Centavos (P267,707.70) debited by petitioner BPI from her account. She likewise prayed for damages and attorneys fees. Petitioner BPI, in its answer, alleged that on August 31, 1991, Julio R. Templonuevo, third-party defendant and herein also a private respondent, demanded from the former payment of the amount of Two Hundred Sixty-Seven Thousand, Six Hundred Ninety-Two Pesos and Fifty Centavos (P267,692.50) representing the aggregate value of three (3) checks, which were allegedly payable to him, but which were deposited with the petitioner bank to private respondent Salazars account (Account No. 0203-1187-67) without his knowledge and corresponding endorsement. Accepting that Templonuevos claim was a valid one, petitioner BPI froze Account No. 0201-0588-48 of A.A. Salazar and Construction and Engineering Services, instead of Account No. 0203-1187-67 where the checks were deposited, since this account was already closed by private respondent Salazar or had an insufficient balance. Private respondent Salazar was advised to settle the matter with Templonuevo but they did not arrive at any settlement. As it appeared that private respondent Salazar was not entitled to the funds represented by the checks which were deposited and accepted for deposit, petitioner BPI decided to debit the amount of P267,707.70 from her Account No. 0201-0588-48 and the sum of P267,692.50 was paid to Templonuevo by means of a cashiers check. The difference between the value of

the checks (P267,692.50) and the amount actually debited from her account (P267,707.70) represented bank charges in connection with the issuance of a cashiers check to Templonuevo. In the answer to the third-party complaint, private respondent Templonuevo admitted the payment to him ofP267,692.50 and argued that said payment was to correct the malicious deposit made by private respondent Salazar to her private account, and that petitioner banks negligence and tolerance regarding the matter was violative of the primary and ordinary rules of banking. He likewise contended that the debiting or taking of the reimbursed amount from the account of private respondent Salazar by petitioner BPI was a matter exclusively between said parties and may be pursuant to banking rules and regulations, but did not in any way affect him. The debiting from another account of private respondent Salazar, considering that her other account was effectively closed, was not his concern. After trial, the RTC rendered a decision, the dispositive portion of which reads thus: WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff [private respondent Salazar] and against the defendant [petitioner BPI] and ordering the latter to pay as follows: 1. The amount of P267,707.70 with 12% interest thereon from September 16, 1991 until the said amount is fully paid; 2. The amount of P30,000.00 as and for actual damages; 3. The amount of P50,000.00 as and for moral damages; 4. The amount of P50,000.00 as and for exemplary damages; 5. The amount of P30,000.00 as and for attorneys fees; and 6. Costs of suit. The counterclaim is hereby ordered DISMISSED for lack of factual basis. The third-party complaint [filed by petitioner] is hereby likewise ordered DISMISSED for lack of merit. Third-party defendants [i.e., private respondent Templonuevos] counterclaim is hereby likewise DISMISSED for lack of factual basis. SO ORDERED.4

On appeal, the Court of Appeals (CA) affirmed the decision of the RTC and held that respondent Salazar was entitled to the proceeds of the three (3) checks notwithstanding the lack of endorsement thereon by the payee. The CA concluded that Salazar and Templonuevo had previously agreed that the checks payable to JRT Construction and Trading5 actually belonged to Salazar and would be deposited to her account, with petitioner acquiescing to the arrangement.6 Petitioner therefore filed this petition on these grounds: I. The Court of Appeals committed reversible error in misinterpreting Section 49 of the Negotiable Instruments Law and Section 3 (r and s) of Rule 131 of the New Rules on Evidence. II. The Court of Appeals committed reversible error in NOT applying the provisions of Articles 22, 1278 and 1290 of the Civil Code in favor of BPI. III. The Court of Appeals committed a reversible error in holding, based on a misapprehension of facts, that the account from which BPI debited the amount of P267,707.70 belonged to a corporation with a separate and distinct personality. IV. The Court of Appeals committed a reversible error in holding, based entirely on speculations, surmises or conjectures, that there was an agreement between SALAZAR and TEMPLONUEVO that checks payable to TEMPLONUEVO may be deposited by SALAZAR to her personal account and that BPI was privy to this agreement. V. The Court of Appeals committed reversible error in holding, based entirely on speculation, surmises or conjectures, that SALAZAR suffered great damage and prejudice and that her business standing was eroded. VI. The Court of Appeals erred in affirming instead of reversing the decision of the lower court against BPI and dismissing SALAZARs complaint.

VII. The Honorable Court erred in affirming the decision of the lower court dismissing the third-party complaint of BPI.7 The issues center on the propriety of the deductions made by petitioner from private respondent Salazars account. Stated otherwise, does a collecting bank, over the objections of its depositor, have the authority to withdraw unilaterally from such depositors account the amount it had previously paid upon certain unendorsed order instruments deposited by the depositor to another account that she later closed? Petitioner argues thus: 1. There is no presumption in law that a check payable to order, when found in the possession of a person who is neither a payee nor the indorsee thereof, has been lawfully transferred for value. Hence, the CA should not have presumed that Salazar was a transferee for value within the contemplation of Section 49 of the Negotiable Instruments Law,8 as the latter applies only to a holder defined under Section 191of the same.9 2. Salazar failed to adduce sufficient evidence to prove that her possession of the three checks was lawful despite her allegations that these checks were deposited pursuant to a prior internal arrangement with Templonuevo and that petitioner was privy to the arrangement. 3. The CA should have applied the Civil Code provisions on legal compensation because in deducting the subject amount from Salazars account, petitioner was merely rectifying the undue payment it made upon the checks and exercising its prerogative to alter or modify an erroneous credit entry in the regular course of its business. 4. The debit of the amount from the account of A.A. Salazar Construction and Engineering Services was proper even though the value of the checks had been originally credited to the personal account of Salazar because A.A. Salazar Construction and Engineering Services, an unincorporated single proprietorship, had no separate and distinct personality from Salazar. 5. Assuming the deduction from Salazars account was improper, the CA should not have dismissed petitioners third-party complaint against Templonuevo because the latter would have the legal duty to return to petitioner the proceeds of the checks which he previously received from it. 6. There was no factual basis for the award of damages to Salazar.

The petition is partly meritorious. First, the issue raised by petitioner requires an inquiry into the factual findings made by the CA. The CAs conclusion that the deductions from the bank account of A.A. Salazar Construction and Engineering Services were improper stemmed from its finding that there was no ineffective payment to Salazar which would call for the exercise of petitioners right to set off against the formers bank deposits. This finding, in turn, was drawn from the pleadings of the parties, the evidence adduced during trial and upon the admissions and stipulations of fact made during the pretrial, most significantly the following: (a) That Salazar previously had in her possession the following checks: (1) Solid Bank Check No. CB766556 dated January 30, 1990 in the amount of P57,712.50; (2) Solid Bank Check No. CB898978 dated July 31, 1990 in the amount of P55,180.00; and, (3) Equitable Banking Corporation Check No. 32380638 dated August 28, 1990 for the amount ofP154,800.00; (b) That these checks which had an aggregate amount of P267,692.50 were payable to the order of JRT Construction and Trading, the name and style under which Templonuevo does business; (c) That despite the lack of endorsement of the designated payee upon such checks, Salazar was able to deposit the checks in her personal savings account with petitioner and encash the same; (d) That petitioner accepted and paid the checks on three (3) separate occasions over a span of eight months in 1990; and (e) That Templonuevo only protested the purportedly unauthorized encashment of the checks after the lapse of one year from the date of the last check.10 Petitioner concedes that when it credited the value of the checks to the account of private respondent Salazar, it made a mistake because it failed to notice the lack of endorsement thereon by the designated payee. The CA, however, did not lend credence to this claim and concluded that petitioners actions were deliberate, in view of its admission that the "mistake" was committed three times on three separate occasions, indicating acquiescence to the internal arrangement between Salazar and Templonuevo. The CA explained thus:

It was quite apparent that the three checks which appellee Salazar deposited were not indorsed. Three times she deposited them to her account and three times the amounts borne by these checks were credited to the same. And in those separate occasions, the bank did not return the checks to her so that she could have them indorsed. Neither did the bank question her as to why she was depositing the checks to her account considering that she was not the payee thereof, thus allowing us to come to the conclusion that defendant-appellant BPI was fully aware that the proceeds of the three checks belong to appellee. For if the bank was not privy to the agreement between Salazar and Templonuevo, it is most unlikely that appellant BPI (or any bank for that matter) would have accepted the checks for deposit on three separate times nary any question. Banks are most finicky over accepting checks for deposit without the corresponding indorsement by their payee. In fact, they hesitate to accept indorsed checks for deposit if the depositor is not one they know very well.11 The CA likewise sustained Salazars position that she received the checks from Templonuevo pursuant to an internal arrangement between them, ratiocinating as follows: If there was indeed no arrangement between Templonuevo and the plaintiff over the three questioned checks, it baffles us why it was only on August 31, 1991 or more than a year after the third and last check was deposited that he demanded for the refund of the total amount of P267,692.50. A prudent man knowing that payment is due him would have demanded payment by his debtor from the moment the same became due and demandable. More so if the sum involved runs in hundreds of thousand of pesos. By and large, every person, at the very moment he learns that he was deprived of a thing which rightfully belongs to him, would have created a big fuss. He would not have waited for a year within which to do so. It is most inconceivable that Templonuevo did not do this.12 Generally, only questions of law may be raised in an appeal by certiorari under Rule 45 of the Rules of Court.13Factual findings of the CA are entitled to great weight and respect, especially when the CA affirms the factual findings of the trial court.14 Such questions on whether certain items of evidence should be accorded probative value or weight, or rejected as feeble or spurious, or whether or not the proofs on one side or the other are clear and convincing and adequate to establish a proposition in issue, are questions of fact. The same holds true for questions on whether or not the body of proofs presented by a party, weighed and analyzed in relation to contrary evidence submitted by the adverse party may be said to be strong, clear and convincing, or whether or not inconsistencies in the body of proofs of a party are of such gravity as to justify refusing to give said proofs weight all these are issues of fact which are not reviewable by the Court.15

This rule, however, is not absolute and admits of certain exceptions, namely: a) when the conclusion is a finding grounded entirely on speculations, surmises, or conjectures; b) when the inference made is manifestly mistaken, absurd, or impossible; c) when there is a grave abuse of discretion; d) when the judgment is based on a misapprehension of facts; e) when the findings of fact are conflicting; f) when the CA, in making its findings, went beyond the issues of the case and the same are contrary to the admissions of both appellant and appellee; g) when the findings of the CA are contrary to those of the trial court; h) when the findings of fact are conclusions without citation of specific evidence on which they are based; i) when the finding of fact of the CA is premised on the supposed absence of evidence but is contradicted by the evidence on record; and j) when the CA manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion.16 In the present case, the records do not support the finding made by the CA and the trial court that a prior arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of the checks. This fact is crucial as Salazars entitlement to the value of the instruments is based on the assumption that she is a transferee within the contemplation of Section 49 of the Negotiable Instruments Law. Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or indorsee delivers a negotiable instrument for value without indorsing it, thus: Transfer without indorsement; effect of- Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. 17 It bears stressing that the above transaction is an equitable assignment and the transferee acquires the instrument subject to defenses and equities available among prior parties. Thus, if the transferor had legal title, the transferee acquires such title and, in addition, the right to have the indorsement of the transferor and also the right, as holder of the legal title, to maintain legal action against the maker or acceptor or other party liable to the transferor. The underlying premise of this provision, however, is that a valid transfer of ownership of the negotiable instrument in question has taken place. Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they are neither payees nor indorsees of such instruments. The weight of authority is that the mere possession of a negotiable instrument does not in itself conclusively establish either the right of the possessor to receive payment, or of the right of one who has made payment to be discharged from liability. Thus, something

more than mere possession by persons who are not payees or indorsers of the instrument is necessary to authorize payment to them in the absence of any other facts from which the authority to receive payment may be inferred.18 The CA and the trial court surmised that the subject checks belonged to private respondent Salazar based on the pre-trial stipulation that Templonuevo incurred a one-year delay in demanding reimbursement for the proceeds of the same. To the Courts mind, however, such period of delay is not of such unreasonable length as to estop Templonuevo from asserting ownership over the checks especially considering that it was readily apparent on the face of the instruments19 that these were crossed checks. In State Investment House v. IAC,20 the Court enumerated the effects of crossing a check, thus: (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 such holder must inquire if the check has been received pursuant to that purpose. Thus, even if the delay in the demand for reimbursement is taken in conjunction with Salazars possession of the checks, it cannot be said that the presumption of ownership in Templonuevos favor as the designated payee therein was sufficiently overcome. This is consistent with the principle that if instruments payable to named payees or to their order have not been indorsed in blank, only such payees or their indorsees can be holders and entitled to receive payment in their own right.21 The presumption under Section 131(s) of the Rules of Court stating that a negotiable instrument was given for a sufficient consideration will not inure to the benefit of Salazar because the term "given" does not pertain merely to a transfer of physical possession of the instrument. The phrase "given or indorsed" in the context of a negotiable instrument refers to the manner in which such instrument may be negotiated. Negotiable instruments are negotiated by "transfer to one person or another in such a manner as to constitute the transferee the holderthereof. If payable to bearer it is negotiated by delivery. If payable to order it is negotiated by the indorsement completed by delivery."22 The present case involves checks payable to order. Not being a payee or indorsee of the checks, private respondent Salazar could not be a holder thereof. It is an exception to the general rule for a payee of an order instrument to transfer the instrument without indorsement. Precisely because the situation is abnormal, it is but fair to the maker and to prior holders to require possessors to prove without the aid of an initial presumption in their favor, that they came into possession by virtue of a legitimate transaction with the last holder.23 Salazar failed to discharge this burden, and the return of the check proceeds to Templonuevo was therefore warranted under the circumstances despite the fact that Templonuevo may not have clearly

demonstrated that he never authorized Salazar to deposit the checks or to encash the same. Noteworthy also is the fact that petitioner stamped on the back of the checks the words: "All prior endorsements and/or lack of endorsements guaranteed," thereby making the assurance that it had ascertained the genuineness of all prior endorsements. Having assumed the liability of a general indorser, petitioners liability to the designated payee cannot be denied. Consequently, petitioner, as the collecting bank, had the right to debit Salazars account for the value of the checks it previously credited in her favor. It is of no moment that the account debited by petitioner was different from the original account to which the proceeds of the check were credited because both admittedly belonged to Salazar, the former being the account of the sole proprietorship which had no separate and distinct personality from her, and the latter being her personal account. The right of set-off was explained in Associated Bank v. Tan:24 A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals on the part of a depositor. The right of a collecting bank to debit a client's account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place "when all the requisites mentioned in Article 1279 are present," as follows: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

While, however, it is conceded that petitioner had the right of set-off over the amount it paid to Templonuevo against the deposit of Salazar, the issue of whether it acted judiciously is an entirely different matter.25 As businesses affected with public interest, and because of the nature of their functions, banks are under obligation to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship.26 In this regard, petitioner was clearly remiss in its duty to private respondent Salazar as its depositor. To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of indorsement thereon, petitioner permitted the encashment of these checks three times on three separate occasions. This negates petitioners claim that it merely made a mistake in crediting the value of the checks to Salazars account and instead bolsters the conclusion of the CA that petitioner recognized Salazars claim of ownership of checks and acted deliberately in paying the same, contrary to ordinary banking policy and practice. It must be emphasized that 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.27The taking and collection of a check without the proper indorsement amount to a conversion of the check by the bank.28 More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of the brewing dispute between Salazar and Templonuevo, petitioner debited the account held in the name of the sole proprietorship of Salazar without even serving due notice upon her. This ran contrary to petitioners assurances to private respondent Salazar that the account would remain untouched, pending the resolution of the controversy between her and Templonuevo.29 In this connection, the CA cited the letter dated September 5, 1991 of Mr. Manuel Ablan, Senior Manager of petitioner banks Pasig/Ortigas branch, to private respondent Salazar informing her that her account had been frozen, thus: From the tenor of the letter of Manuel Ablan, it is safe to conclude that Account No. 0201-0588-48 will remain frozen or untouched until herein [Salazar] has settled matters with Templonuevo. But, in an unexpected move, in less than two weeks (eleven days to be precise) from the time that letter was written, [petitioner] bank issued a cashiers check in the name of Julio R. Templonuevo of the J.R.T. Construction and Trading for the sum ofP267,692.50 (Exhibit "8") and debited said amount from Ms. Arcillas account No. 0201-0588-48 which was supposed to be frozen or controlled. Such a move by BPI is, to Our minds, a clear case of negligence, if not a fraudulent, wanton and reckless disregard of the right of its depositor. The records further bear out the fact that respondent Salazar had issued several checks drawn against the account of A.A. Salazar Construction and Engineering

Services prior to any notice of deduction being served. The CA sustained private respondent Salazars claim of damages in this regard: The act of the bank in freezing and later debiting the amount of P267,692.50 from the account of A.A. Salazar Construction and Engineering Services caused plaintiffappellee great damage and prejudice particularly when she had already issued checks drawn against the said account. As can be expected, the said checks bounced. To prove this, plaintiff-appellee presented as exhibits photocopies of checks dated September 8, 1991, October 28, 1991, and November 14, 1991 (Exhibits "D", "E" and "F" respectively)30 These checks, it must be emphasized, were subsequently dishonored, thereby causing private respondent Salazar undue embarrassment and inflicting damage to her standing in the business community. Under the circumstances, she was clearly not given the opportunity to protect her interest when petitioner unilaterally withdrew the above amount from her account without informing her that it had already done so. For the above reasons, the Court finds no reason to disturb the award of damages granted by the CA against petitioner. This whole incident would have been avoided had petitioner adhered to the standard of diligence expected of one engaged in the banking business. A depositor has the right to recover reasonable moral damages even if the banks negligence may not have been attended with malice and bad faith, if the former suffered mental anguish, serious anxiety, embarrassment and humiliation.31 Moral damages are not meant to enrich a complainant at the expense of defendant. It is only intended to alleviate the moral suffering she has undergone. The award of exemplary damages is justified, on the other hand, when the acts of the bank are attended by malice, bad faith or gross negligence. The award of reasonable attorneys fees is proper where exemplary damages are awarded. It is proper where depositors are compelled to litigate to protect their interest.32 WHEREFORE, the petition is partially GRANTED. The assailed Decision dated April 3, 1998 and Resolution dated April 3, 1998 rendered by the Court of Appeals in CAG.R. CV No. 42241 are MODIFIED insofar as it ordered petitioner Bank of the Philippine Islands to return the amount of Two Hundred Sixty-seven Thousand Seven Hundred and Seven and 70/100 Pesos (P267,707.70) to respondent Annabelle A. Salazar, which portion isREVERSED and SET ASIDE. In all other respects, the same are AFFIRMED. No costs. SO ORDERED.

THIRD DIVISION

FAR EAST BANK & TRUST COMPANY, Petitioner,

G.R. No. 168274 Present:

YNARES-SANTIAGO, J., - versus Chairperson, AUSTRIA-MARTINEZ, CHICO-NAZARIO, NACHURA, and GOLD PALACE JEWELLERY CO., as represented by Judy L. Yang, Julie YangGo and Kho Soon Huat, Respondent. August 20, 2008 REYES, JJ.

Promulgated:

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

DECISION

NACHURA, J.:

For the review of the Court through a Rule 45 petition are the following issuances of the Court of Appeals (CA) in CA-G.R. CV No. 71858: (1) the March 15, 2005 Decision[1] which reversed the trial courts ruling, and (2) the May 26, 2005 Resolution[2] which denied the motion for reconsideration of the said CA decision.

The instant controversy traces its roots to a transaction consummated sometime in June 1998, when a foreigner, identified as Samuel Tagoe, purchased from the respondent Gold Palace Jewellery Co.s (Gold Palaces) store at SM-North EDSA several pieces of jewelry valued at P258,000.00.[3] In payment of the same, he offered Foreign Draft No. M-069670 issued by the United Overseas Bank (Malaysia) BHD Medan Pasar, Kuala Lumpur Branch (UOB), addressed to the Land Bank of the Philippines, Manila (LBP), and payable to the respondent company for P380,000.00.[4]

Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold Palace, inquired from petitioner Far East Bank & Trust Companys (Far Easts) SM North EDSA Branch, its neighbor mall tenant, the nature of the draft. The teller informed her that the same was similar to a managers check, but advised her not to release the pieces of jewelry until the draft had been cleared.[5] Following the banks advice, Yang issued Cash Invoice No. 1609[6] to the foreigner, asked him to come back, and informed him that the pieces of jewelry would be released when the draft had already been cleared.[7] Respondent Julie Yang-Go, the manager of Gold Palace, consequently deposited the draft in the companys account with the aforementioned Far East branch on June 2, 1998.[8]

When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, the latter cleared the same[9]UOBs account with LBP was debited,[10] and GoldPalaces account with Far East was credited with the amount stated in the draft.[11]

The foreigner eventually returned to respondents store on June 6, 1998 to claim the purchased goods. After ascertaining that the draft had been cleared, respondent Yang released the pieces of jewelry to Samuel Tagoe; and because the amount in the draft was more than the value of the goods purchased, she issued, as his change, Far East Check No. 1730881[12] forP122,000.00.[13] This check was later presented for encashment and was, in fact, paid by the said bank.[14]

On June 26, 1998, or after around three weeks, LBP informed Far East that the amount in Foreign Draft No. M-069670 had been materially altered from P300.00 to P380,000.00 and that it was returning the same. Attached to its official correspondence were Special Clearing Receipt No. 002593 and the duly notarized and consul-authenticated affidavit of a corporate officer of the drawer, UOB. [15] It is noted at this point that the material alteration was discovered by UOB after LBP had informed it that its funds were being depleted following the encashment of the subject draft.[16] Intending to debit the amount from respondents account, Far East subsequently refunded the P380,000.00 earlier paid by LBP.

Gold Palace, in the meantime, had already utilized portions of the amount. Thus, on July 20, 1998, as the outstanding balance of its account was already inadequate, Far East was able to debit only P168,053.36,[17] but this was done without a prior written notice to the account holder.[18] Far East only notified by phone the representatives of the respondent company.[19]

On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or the difference between the amount in the materially altered draft and the amount debited from the respondent companys account. [20] Because Gold Palace did not heed the demand, Far East consequently instituted Civil Case No. 99-296 for sum of money and damages before the Regional Trial Court (RTC), Branch 64 of Makati City.[21]

In their Answer, respondents specifically denied the material allegations in the complaint and interposed as a defense that the complaint states no cause of action the subject foreign draft having been cleared and the respondent not being the

party who made the material alteration. Respondents further counterclaimed for actual damages, moral and exemplary damages, and attorneys fees considering, among others, that the petitioner had confiscated without basis Gold Palaces balance in its account resulting in operational loss, and had maliciously imputed to the latter the act of alteration.[22]

After trial on the merits, the RTC rendered its July 30, 2001 Decision [23] in favor of Far East, ordering Gold Palace to pay the former P211,946.64 as actual damages and P50,000.00 as attorneys fees.[24] The trial court ruled that, on the basis of its warranties as a general indorser, Gold Palace was liable to Far East.[25]

On appeal, the CA, in the assailed March 15, 2005 Decision,[26] reversed the ruling of the trial court and awarded respondents counterclaim. It ruled in the main that Far East failed to undergo the proceedings on the protest of the foreign draft or to notify Gold Palace of the drafts dishonor; thus, Far East could not charge Gold Palace on its secondary liability as an indorser.[27] The appellate court further ruled that the drawee bank had cleared the check, and its remedy should be against the party responsible for the alteration. Considering that, in this case, Gold Palace neither altered the draft nor knew of the alteration, it could not be held liable.[28] The dispositive portion of the CA decision reads:

WHEREFORE, premises considered, the appeal is GRANTED; the assailed Decision dated 30 July 2001 of the Regional Trial Court of Makati City, Branch 64 is hereby REVERSED and SET ASIDE; the Complaint dated January 1999 is DISMISSED; and appellee Far East Bank and Trust Company is hereby ordered to pay appellant Gold Palace Jewellery Company the amount of Php168,053.36 for actual damages plus legal interest of 12% per annum from 20 July 1998, Php50,000.00 for exemplary damages, and Php50,000.00 for attorneys fees. Costs against appellee Far East Bank and Trust Company.[29]

The appellate court, in the further challenged May 26, 2005 Resolution, denied petitioners Motion for Reconsideration,[31] which prompted the petitioner to institute before the Court the instant Petition for Review on Certiorari.[32]
[30]

We deny the petition.

Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance.[33] This provision applies with equal force in case the drawee pays a bill without having previously accepted it. His actual payment of the amount in the check implies not only his assent to the order of the drawer and a recognition of his corresponding obligation to pay the aforementioned sum, but also, his clear compliance with that obligation.[34] Actual payment by the drawee is greater than his acceptance, which is merely a promise in writing to pay. The payment of a check includes its acceptance.[35]

Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft and forwarded the amount thereof to the collecting bank. The latter then credited to GoldPalaces account the payment it received. Following the plain language of the law, the drawee, by the said payment, recognized and complied with its obligation to pay in accordance with thetenor of his acceptance. The tenor of the acceptance is determined by the terms of the bill as it is when the drawee accepts.[36] Stated simply, LBP was liable on its payment of the check according to the tenor of the check at the time of payment, which was the raised amount.

Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a due course holder. We note at this point that Gold Palace was not a participant in the alteration of the draft, was not negligent, and was a holder in due courseit received the draft complete and regular on its face, before it became overdue and without notice of any dishonor, in good faith and for value, and absent any knowledge of any infirmity in the instrument or defect in the title of the person negotiating it.[37] Having relied on the drawee banks clearance and payment of the draft and not being negligent (it delivered the purchased jewelry only when the

draft was cleared and paid), respondent is amply protected by the said Section 62. Commercial policy favors the protection of any one who, in due course, changes his position on the faith of the drawee banks clearance and payment of a check or draft.
[38]

This construction and application of the law gives effect to the plain language of the NIL[39] and is in line with the sound principle that where one of two innocent parties must suffer a loss, the law will leave the loss where it finds it.[40] It further reasserts the usefulness, stability and currency of negotiable paper without seriously endangering accepted banking practices. Indeed, banking institutions can readily protect themselves against liability on altered instruments either by qualifying their acceptance or certification, or by relying on forgery insurance and special paper which will make alterations obvious.[41] This is not to mention, but we state nevertheless for emphasis, that the drawee bank, in most cases, is in a better position, compared to the holder, to verify with the drawer the matters stated in the instrument. As we have observed in this case, were it not for LBPs communication with the drawer that its account in thePhilippines was being depleted after the subject foreign draft had been encashed, then, the alteration would not have been discovered. What we cannot understand is why LBP, having the most convenient means to correspond with UOB, did not first verify the amount of the draft before it cleared and paid the same. Gold Palace, on the other hand, had no facility to ascertain with the drawer, UOB Malaysia, the true amount in the draft. It was left with no option but to rely on the representations of LBP that the draft was good.

In arriving at this conclusion, the Court is not closing its eyes to the other view espoused in common law jurisdictions that a drawee bank, having paid to an innocent holder the amount of an uncertified, altered check in good faith and without negligence which contributed to the loss, could recover from the person to whom payment was made as for money paid by mistake.[42] However, given the foregoing discussion, we find no compelling reason to apply the principle to the instant case.

The Court is also aware that under the Uniform Commercial Code in the United States of America, if an unaccepted draft is presented to a drawee for payment or acceptance and the drawee pays or accepts the draft, the person obtaining payment or acceptance, at the time of presentment, and a previous transferor of the draft, at the time of transfer, warrant to the drawee making payment

or accepting the draft in good faith that the draft has not been altered. [43] Nonetheless, absent any similar provision in our law, we cannot extend the same preferential treatment to the paying bank.

Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting agent, Far East, should not have debited the money paid by the drawee bank from respondent companys account. When Gold Palace deposited the check with Far East, the latter, under the terms of the deposit and the provisions of the NIL, became an agent of the former for the collection of the amount in the draft.[44] The subsequent payment by the drawee bank and the collection of the amount by the collecting bank closed the transaction insofar as the drawee and the holder of the check or his agent are concerned, converted the check into a mere voucher,[45] and, as already discussed, foreclosed the recovery by the drawee of the amount paid. This closure of the transaction is a matter of course; otherwise, uncertainty in commercial transactions, delay and annoyance will arise if a bank at some future time will call on the payee for the return of the money paid to him on the check.[46]

As the transaction in this case had been closed and the principal-agent relationship between the payee and the collecting bank had already ceased, the latter in returning the amount to the drawee bank was already acting on its own and should now be responsible for its own actions. Neither can petitioner be considered to have acted as the representative of the drawee bank when it debited respondents account, because, as already explained, the drawee bank had no right to recover what it paid. Likewise, Far East cannot invoke the warranty of the payee/depositor who indorsed the instrument for collection to shift the burden it brought upon itself. This is precisely because the said indorsement is only for purposes of collection which, under Section 36 of the NIL, is a restrictive indorsement.[47] It did not in any way transfer the title of the instrument to the collecting bank. Far East did not own the draft, it merely presented it for payment. Considering that the warranties of a general indorser as provided in Section 66 of the NIL are based upon a transfer of title and are available only to holders in due course,[48]these warranties did not attach to the indorsement for deposit and collection made by Gold Palace to Far East. Without any legal right to do so, the collecting bank, therefore, could not debit respondents account for the amount it refunded to the drawee bank.

The foregoing considered, we affirm the ruling of the appellate court to the extent that Far East could not debit the account of Gold Palace, and for doing so, it must return what it had erroneously taken. Far Easts remedy under the law is not against Gold Palace but against the drawee-bank or the person responsible for the alteration. That, however, is another issue which we do not find necessary to discuss in this case.

However, we delete the exemplary damages awarded by the appellate court. Respondents have not shown that they are entitled to moral, temperate or compensatory damages.[49]Neither was petitioner impelled by malice or bad faith in debiting the account of the respondent company and in pursuing its cause. [50] On the contrary, petitioner was honestly convinced of the propriety of the debit. We also delete the award of attorneys fees for, in a plethora of cases, we have ruled that it is not a sound public policy to place a premium on the right to litigate. No damages can be charged to those who exercise such precious right in good faith, even if done erroneously.[51]

WHEREFORE, premises considered, the March 15, 2005 Decision and the May 26, 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 71858 are AFFIRMED WITH THE MODIFICATION that the award of exemplary damages and attorneys fees is DELETED.

SO ORDERED.
[1]

Penned by Associate Justice Celia C. Librea-Leagogo, with Associate Justices Andres B. Reyes, Jr. and Lucas P. Bersamin, concurring; CA rollo, pp. 78126. [2] Id. at 203-205. [3] TSN, December 6, 2000, pp. 8-10. [4] Records, p. 121. [5] TSN, December 6, 2000, pp. 9-10. [6] Records, p. 161. [7] TSN, December 6, 2000, p. 10. [8] Records, pp. 121, 162. [9] TSN, October 6, 1999, pp. 21-22, 36. [10] TSN, February 23, 2000, p. 8. [11] TSN, October 6, 1999, p. 22.

[12] [13]

Records, p. 159. TSN, December 6, 2000, pp. 13-14. [14] Id. [15] Records, pp. 124-127. [16] TSN, February 23, 2000, pp. 8-10. [17] Id. at 13; TSN, October 6, 1999, pp. 28-30. [18] TSN, May, 10, 2000, pp. 17-19. [19] Id. at 9-10. [20] Records, p. 14. [21] Id. at 1-6. [22] Id. at 33-34. [23] Id. at 191-198. [24] Id. at 198. The dispositive portion of the RTC decision reads: WHEREFORE, in view of the foregoing, judgment is rendered against defendant Gold Palace Jewellery Co., to pay plaintiff Far East Bank and Trust Co., the following: a. The sum of P211,946.64, representing actual damages plus legal interest thereon from 26 June 1998, until the same is fully paid; b. P50,000.00 as attorneys fees; and c. Costs of suit. SO ORDERED. [25] Id. at 194-196. [26] Supra note 1. [27] CA rollo, pp. 106-112. [28] Id. at 112-116. [29] Id. at 123. [30] Supra note 2. [31] CA rollo, pp. 127-142. [32] Rollo, pp. 3-26. [33] Section 62 of the NIL, which, in full, reads: SECTION 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. [34] Philippine National Bank v. Court of Appeals, 134 Phil. 829, 833-835 (1968). [35] Kansas Bankers Surety Company v. Ford County State Bank, 184 Kan. 529, 534; 338 P.2d 309, 313 (1959).
[36]

Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., 214 Cal. 156, 163; 4 P.2d 781, 784 (1931); citing Prof. Brannan in his work on Negotiable

Instruments Law (4th Ed.) at page 567; Kansas Bankers Surety Company v. Ford County State Bank, supra.
[37]

Section 52 of the NIL reads: SECTION 52. What constitutes a holder in due course.A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. See Vicente R. de Ocampo & Co. v. Gatchalian, No. L-15126, November 30, 1961, 3 SCRA 596, in which the Court acknowledged the fact of negotiation of an instrument by an agent of the drawer to the payee. [38] Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36, at 165-166; see Aetna Casualty & Surety Co. v. Corpus Christi National Bank, 186 S.W.2d 840, 841-842 (1944); The National Park Bank of New York v. The Seaboard Bank, 69 Sickels 28, 114 N.Y. 28, 20 N.E. 632 (1889); Seaboard Surety Company v. First National City Bank of New York, 15 Misc.2d 816, 180 N.Y.S.2d 156 (1958). [39] Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36, at 165. [40] National City Bank of Chicago v. National Bank of the Republic of Chicago, 300 Ill. 103, 108; 132 N.E. 832, 833 (1921). [41] Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36. [42] Central National Bank v. F.W. Drosten Jewelry Co., 203 Mo.App. 646, 220 S.W. 511 (1920); Interstate Trust Co., et al. v. United States National Bank, 67 Colo. 6, 185 P. 260, 10 A.L.R. 705 (1919); National Park Bank of New York v. Eldred Bank, 90 Hun 285, 70 N.Y.St.Rep. 497, 35 N.Y.S. 752 (1895); Third National Bank of St. Louis v. Thomas Allen, 59 Mo. 310, 1875 WL 7732 (Mo.) (1875); The Marine National Bank v. The National City Bank, 10 Alb. L.J. 360, 59 N.Y. 67, 17 Am. Rep. 305 (1874); Espy v. Bank ofCincinnati, 85 U.S. 604, 18 Wall 604, 21 L. Ed. 947 (1874); Redington, et al. v. Woods, et al., 45 Cal. 406, 13 Am. Rep. 190 (1873).
[43] [44]

UCC 3-417 (a) on presentment warranties. Jai-Alai Corporation v. Bank of the Philippine Islands, No. L29432, August 6, 1975, 66 SCRA 29, 34. [45] Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36, at 164; Kansas Bankers Surety Company v. Ford County State Bank, supra note 35, at 536. [46] Citizens National Bank v. First National Bank, 347 So.2d 964, 968 (1977).
[47]

Section 36 of the NIL reads:

SECTION 36. When indorsement restrictive.An indorsement is restrictive which either: (a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive. (Italics supplied.)
[48]

Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36; Kansas Bankers Surety Company v. Ford County State Bank, supra note 35, at 535. [49] Civil Code, Art. 2234. [50] ABS-CBN Broadcasting Corporation v. Court of Appeals, 361 Phil. 499, 531 (1999). [51] Republic v. Lorenzo Shipping Corp., G.R. No. 153563, February 7, 2005, 450 SCRA 550, 558; Pajuyo v. Court of Appeals, G.R. No. 146364, June 3, 2004, 430 SCRA 492, 524; Alonso v. Cebu Country Club, Inc., 426 Phil. 61, 88 (2002); Orosa v. Court of Appeals, 386 Phil. 94, 105 (2000); J Marketing Corporation v. Sia, Jr., 349 Phil. 513, 517 (1998).

SECOND DIVISION G.R. No. 129015 August 13, 2004

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

DECISION

TINGA, J.:

Called to fore in the present petition is a classic textbook question if a bank pays out on a forged check, is it liable to reimburse the drawer from whose account the funds were paid out? The Court of Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous reasoning to acquit the bank of liability. We reverse, applying time-honored principles of law. The salient facts follow. Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung Construction"), while based in Bian, Laguna, maintained a current account with defendant Far East Bank and Trust Company1 ("FEBTC") at the latters Bel-Air, Makati branch.2 The sole signatory to Samsung Constructions account was Jong Kyu Lee ("Jong"), its Project Manager,3 while the checks remained in the custody of the companys accountant, Kyu Yong Lee ("Kyu").4 On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to the banks branch in Bel-Air, Makati. The check, payable to cash and drawn against Samsung Constructions current account, was in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of Samsung Constructions account. After ascertaining there were enough funds to cover the check,5 she compared the signature appearing on the check with the specimen signature of Jong as contained in the specimen signature card with the bank. After comparing the two signatures, Justiani was satisfied as to the authenticity of the signature appearing on the check. She then asked Gonzaga to submit proof of his identity, and the latter presented three (3) identification cards.6 At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma Velez, as it was bank policy that two bank branch officers approve checks exceeding One Hundred Thousand Pesos, for payment or encashment. Velez likewise counterchecked the signature on the check as against that on the signature card. He too concluded that the check was indeed signed by Jong. Velez then forwarded the check and signature card to Shirley Syfu, another bank officer, for approval. Syfu then noticed that Jose Sempio III ("Sempio"), the assistant accountant of Samsung Construction, was also in the bank. Sempio was well-known to Syfu and the other bank officers, he being the assistant accountant of Samsung Construction. Syfu showed the check to Sempio, who vouched for the genuineness of Jongs signature. Confirming the identity of Gonzaga, Sempio said that the check was for the purchase of equipment for Samsung Construction. Satisfied with the genuineness of the signature of Jong, Syfu authorized the banks encashment of the check to Gonzaga. The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank account and discovered that a check in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been

encashed. Aware that he had not prepared such a check for Jongs signature, Kyu perused the checkbook and found that the last blank check was missing.7 He reported the matter to Jong, who then proceeded to the bank. Jong learned of the encashment of the check, and realized that his signature had been forged. The Bank Manager reputedly told Jong that he would be reimbursed for the amount of the check.8 Jong proceeded to the police station and consulted with his lawyers.9 Subsequently, a criminal case for qualified theft was filed against Sempio before the Laguna court.10 In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC credit to it the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), with interest.11 In response, FEBTC said that it was still conducting an investigation on the matter. Unsatisfied, Samsung Construction filed aComplaint on 10 June 1992 for violation of Section 23 of the Negotiable Instruments Law, and prayed for the payment of the amount debited as a result of the questioned check plus interest, and attorneys fees.12 The case was docketed as Civil Case No. 92-61506 before the Regional Trial Court ("RTC") of Manila, Branch 9.13 During the trial, both sides presented their respective expert witnesses to testify on the claim that Jongs signature was forged. Samsung Corporation, which had referred the check for investigation to the NBI, presented Senior NBI Document Examiner Roda B. Flores. She testified that based on her examination, she concluded that Jongs signature had been forged on the check. On the other hand, FEBTC, which had sought the assistance of the Philippine National Police (PNP),14 presented Rosario C. Perez, a document examiner from the PNP Crime Laboratory. She testified that her findings showed that Jongs signature on the check was genuine.15 Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI expert. In a Decisiondated 25 April 1994, the RTC held that Jongs signature on the check was forged and accordingly directed the bank to pay or credit back to Samsung Constructions account the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together with interest tolled from the time the complaint was filed, and attorneys fees in the amount of Fifteen Thousand Pesos (P15,000.00). FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth Division of the Court of Appeals rendered a Decision,16 reversing the RTC Decision and absolving FEBTC from any liability. The Court of Appeals held that the contradictory findings of the NBI and the PNP created doubt as to whether there was forgery.17 Moreover, the appellate court also held that assuming there was forgery, it occurred due to the negligence of Samsung Construction, imputing blame on the accountant Kyu for lack of care and prudence in keeping the checks, which if observed would have prevented Sempio from gaining access thereto.18 The Court of

Appeals invoked the ruling in PNB v. National City Bank of New York19 that, if a loss, which must be borne by one or two innocent persons, can be traced to the neglect or fault of either, such loss would be borne by the negligent party, even if innocent of intentional fraud.20 Samsung Construction now argues that the Court of Appeals had seriously misapprehended the facts when it overturned the RTCs finding of forgery. It also contends that the appellate court erred in finding that it had been negligent in safekeeping the check, and in applying the equity principle enunciated in PNB v. National City Bank of New York. Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the Court is obliged to examine the record to draw out the correct conclusions. Upon examination of the record, and based on the applicable laws and jurisprudence, we reverse the Court of Appeals. Section 23 of the Negotiable Instruments Law states: When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. (Emphasis supplied) The general rule is to the effect that a forged signature is "wholly inoperative," and payment made "through or under such signature" is ineffectual or does not discharge the instrument.21 If payment is made, the drawee cannot charge it to the drawers account. The traditional justification for the result is that the drawee is in a superior position to detect a forgery because he has the makers signature and is expected to know and compare it.22 The rule has a healthy cautionary effect on banks by encouraging care in the comparison of the signatures against those on the signature cards they have on file. Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers who use checks makes the drawee an ideal party to spread the risk to insurance.23 Brady, in his treatise The Law of Forged and Altered Checks, elucidates: When a person deposits money in a general account in a bank, against which he has the privilege of drawing checks in the ordinary course of business, the relationship between the bank and the depositor is that of debtor and creditor. So far as the legal relationship between the two is concerned, the situation is the same as though the bank had borrowed money from the depositor, agreeing to repay it on demand, or had bought goods from the depositor,

agreeing to pay for them on demand. The bank owes the depositor money in the same sense that any debtor owes money to his creditor. Added to this, in the case of bank and depositor, there is, of course, the banks obligation to pay checks drawn by the depositor in proper form and presented in due course. When the bank receives the deposit, it impliedly agrees to pay only upon the depositors order. When the bank pays a check, on which the depositors signature is a forgery, it has failed to comply with its contract in this respect. Therefore, the bank is held liable. The fact that the forgery is a clever one is immaterial. The forged signature may so closely resemble the genuine as to defy detection by the depositor himself. And yet, if a bank pays the check, it is paying out its own money and not the depositors. The forgery may be committed by a trusted employee or confidential agent. The bank still must bear the loss. Even in a case where the forged check was drawn by the depositors partner, the loss was placed upon the bank. The case referred to is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff brought suit against the defendant bank for money which had been deposited to the plaintiffs credit and which the bank had paid out on checks bearing forgeries of the plaintiffs signature. xxx It was held that the bank was liable. It was further held that the fact that the plaintiff waited eight or nine months after discovering the forgery, before notifying the bank, did not, as a matter of law, constitute a ratification of the payment, so as to preclude the plaintiff from holding the bank liable. xxx This rule of liability can be stated briefly in these words: "A bank is bound to know its depositors signature." The rule is variously expressed in the many decisions in which the question has been considered. But they all sum up to the proposition that a bank must know the signatures of those whose general deposits it carries.24 By no means is the principle rendered obsolete with the advent of modern commercial transactions. Contemporary texts still affirm this well-entrenched standard. Nickles, in his book Negotiable Instruments and Other Related Commercial Paper wrote, thus: The deposit contract between a payor bank and its customer determines who can draw against the customers account by specifying whose signature is necessary on checks that are chargeable against the customers account. Therefore, a check drawn against the account of an individual customer that is signed by someone other than the customer, and without authority from

her, is not properly payable and is not chargeable to the customers account, inasmuch as any "unauthorized signature on an instrument is ineffective" as the signature of the person whose name is signed.25 Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party whose signature is forged.26 On the premise that Jongs signature was indeed forged, FEBTC is liable for the loss since it authorized the discharge of the forged check. Such liability attaches even if the bank exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye of the most cautious experts; and when a bank has been so deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived.27 The forgery may be so near like the genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays the check.28 Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this presumption must be overcome but this can only be done by convincing testimony and effective illustrations.29 In ruling that forgery was not duly proven, the Court of Appeals held: [There] is ground to doubt the findings of the trial court sustaining the alleged forgery in view of the conflicting conclusions made by handwriting experts from the NBI and the PNP, both agencies of the government. xxx These contradictory findings create doubt on whether there was indeed a forgery. In the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, the Supreme Court held that forgery cannot be presumed; it must be proved by clear, positive and convincing evidence. This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponents expert witness to stand uncontradicted, thus the spectacle of competing expert witnesses is not unusual. The trier of fact will have to decide which version to believe, and explain why or why not such version is more credible than the other. Reliance therefore cannot be placed merely on the fact that there are colliding opinions of two experts, both clothed with the presumption of official duty, in order to draw a conclusion, especially one which is extremely crucial. Doing so is tantamount to a jurisprudential cop-out. Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial hierarchy. This Court has long deferred to the appellate court as to its findings of fact in the understanding that it has the appropriate skill and competence to plough through the minutiae that scatters the factual field. In failing to thoroughly

evaluate the evidence before it, and relying instead on presumptions haphazardly drawn, the Court of Appeals was sadly remiss. Of course, courts, like humans, are fallible, and not every error deserves a stern rebuke. Yet, the appellate courts error in this case warrants special attention, as it is absurd and even dangerous as a precedent. If this rationale were adopted as a governing standard by every court in the land, barely any actionable claim would prosper, defeated as it would be by the mere invocation of the existence of a contrary "expert" opinion. On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that of the PNP, and explained its reason behind the conclusion: After subjecting the evidence of both parties to a crucible of analysis, the court arrived at the conclusion that the testimony of the NBI document examiner is more credible because the testimony of the PNP Crime Laboratory Services document examiner reveals that there are a lot of differences in the questioned signature as compared to the standard specimen signature. Furthermore, as testified to by Ms. Rhoda Flores, NBI expert, the manner of execution of the standard signatures used reveals that it is a free rapid continuous execution or stroke as shown by the tampering terminal stroke of the signatures whereas the questioned signature is a hesitating slow drawn execution stroke. Clearly, the person who executed the questioned signature was hesitant when the signature was made.30 During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that "apparently, there [are] differences on that questioned signature and the standard signatures."31 This Court, in examining the signatures, makes a similar finding. The PNP expert excused the noted "differences" by asserting that they were mere "variations," which are normal deviations found in writing.32 Yet the RTC, which had the opportunity to examine the relevant documents and to personally observe the expert witness, clearly disbelieved the PNP expert. The Court similarly finds the testimony of the PNP expert as unconvincing. During the trial, she was confronted several times with apparent differences between strokes in the questioned signature and the genuine samples. Each time, she would just blandly assert that these differences were just "variations,"33 as if the mere conjuration of the word would sufficiently disquiet whatever doubts about the deviations. Such conclusion, standing alone, would be of little or no value unless supported by sufficiently cogent reasons which might amount almost to a demonstration.34 The most telling difference between the questioned and genuine signatures examined by the PNP is in the final upward stroke in the signature, or "the point to the short stroke of the terminal in the capital letter L," as referred to by the PNP examiner who had marked it in her comparison chart as "point no. 6." To the plain eye, such upward final stroke consists of a vertical line which forms a ninety degree (90) angle with the previous stroke. Of the twenty one (21) other genuine samples examined by the PNP, at least nine (9) ended with an upward stroke.35However,

unlike the questioned signature, the upward strokes of eight (8) of these signatures are looped, while the upward stroke of the seventh36 forms a severe forty-five degree (45) with the previous stroke. The difference is glaring, and indeed, the PNP examiner was confronted with the inconsistency in point no. 6. Q: Now, in this questioned document point no. 6, the "s" stroke is directly upwards. A: Yes, sir. Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or the last stroke "s" is pointing directly upwards? A: There is none in the standard signature, sir.37 Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature as a mere variation,38 the same excuse she proffered for the other marked differences noted by the Court and the counsel for petitioner.39 There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and not the PNP experts. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A document examiner for fifteen years, she had been promoted to the rank of Senior Document Examiner with the NBI, and had held that rank for twelve years prior to her testimony. She had placed among the top five examinees in the Competitive Seminar in Question Document Examination, conducted by the NBI Academy, which qualified her as a document examiner.40She had trained with the Royal Hongkong Police Laboratory and is a member of the International Association for Identification.41 As of the time she testified, she had examined more than fifty to fifty-five thousand questioned documents, on an average of fifteen to twenty documents a day.42 In comparison, PNP document examiner Perez admitted to having examined only around five hundred documents as of her testimony.43 In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination method consisting of analysis, recognition, comparison and evaluation of the writing habits with the use of instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting substances. She also prepared enlarged photographs of the signatures in order to facilitate the necessary comparisons.44 She compared the questioned signature as against ten (10) other sample signatures of Jong. Five of these signatures were executed on checks previously issued by Jong, while the other five contained in business letters Jong had signed.45 The NBI found that there were significant differences in the handwriting characteristics existing between the questioned and the sample signatures, as to manner of execution, link/connecting strokes, proportion characteristics, and other identifying details.46

The RTC was sufficiently convinced by the NBI examiners testimony, and explained her reasons in its Decisions. While the Court of Appeals disagreed and upheld the findings of the PNP, it failed to convincingly demonstrate why such findings were more credible than those of the NBI expert. As a throwaway, the assailed Decision noted that the PNP, not the NBI, had the opportunity to examine the specimen signature card signed by Jong, which was relied upon by the employees of FEBTC in authenticating Jongs signature. The distinction is irrelevant in establishing forgery. Forgery can be established comparing the contested signatures as against those of any sample signature duly established as that of the persons whose signature was forged. FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned signature against the bank signature cards. The crucial fact in question is whether or not the check was forged, not whether the bank could have detected the forgery. The latter issue becomes relevant only if there is need to weigh the comparative negligence between the bank and the party whose signature was forged. At the same time, the Court of Appeals failed to assess the effect of Jongs testimony that the signature on the check was not his.47 The assertion may seem self-serving at first blush, yet it cannot be ignored that Jong was in the best position to know whether or not the signature on the check was his. While his claim should not be taken at face value, any averments he would have on the matter, if adjudged as truthful, deserve primacy in consideration. Jongs testimony is supported by the findings of the NBI examiner. They are also backed by factual circumstances that support the conclusion that the assailed check was indeed forged. Judicial notice can be taken that is highly unusual in practice for a business establishment to draw a check for close to a million pesos and make it payable to cash or bearer, and not to order. Jong immediately reported the forgery upon its discovery. He filed the appropriate criminal charges against Sempio, the putative forger.48 Now for determination is whether Samsung Construction was precluded from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law. The Court of Appeals concluded that Samsung Construction was negligent, and invoked the doctrines that "where a loss must be borne by one of two innocent person, can be traced to the neglect or fault of either, it is reasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded49 or who put into the power of the third person to perpetuate the wrong."50 Applying these rules, the Court of Appeals determined that it was the negligence of Samsung Construction that allowed the encashment of the forged check. In the case at bar, the forgery appears to have been made possible through the acts of one Jose Sempio III, an assistant accountant employed by the plaintiff Samsung [Construction] Co. Philippines, Inc. who supposedly stole

the blank check and who presumably is responsible for its encashment through a forged signature of Jong Kyu Lee. Sempio was assistant to the Korean accountant who was in possession of the blank checks and who through negligence, enabled Sempio to have access to the same. Had the Korean accountant been more careful and prudent in keeping the blank checks Sempio would not have had the chance to steal a page thereof and to effect the forgery. Besides, Sempio was an employee who appears to have had dealings with the defendant Bank in behalf of the plaintiff corporation and on the date the check was encashed, he was there to certify that it was a genuine check issued to purchase equipment for the company.51 We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the defense of forgery if it is guilty of negligence.52 Yet, we are unable to conclude that Samsung Construction was guilty of negligence in this case. The appellate court failed to explain precisely how the Korean accountant was negligent or how more care and prudence on his part would have prevented the forgery. We cannot sustain this "tar and feathering" resorted to without any basis. The bare fact that the forgery was committed by an employee of the party whose signature was forged cannot necessarily imply that such partys negligence was the cause for the forgery. Employers do not possess the preternatural gift of cognition as to the evil that may lurk within the hearts and minds of their employees. The Courts pronouncement in PCI Bank v. Court of Appeals53 applies in this case, to wit: [T]he mere fact that the forgery was committed by a drawer-payors confidential employee or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer.54 Admittedly, the record does not clearly establish what measures Samsung Construction employed to safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the checks inside a "safety box,"55 and no contrary version was presented by FEBTC. However, such testimony cannot prove that the checks were indeed kept in a safety box, as Jongs testimony on that point is hearsay, since Kyu, and not Jong, would have the personal knowledge as to how the checks were kept. Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on Samsung Constructions part. The presumption remains that every person takes ordinary care of his concerns,56 and that the ordinary course of business has been followed.57 Negligence is not presumed, but must be proven by him who alleges it.58 While the complaint was lodged at the instance of Samsung Construction, the matter it had to prove was the claim it had alleged - whether the

check was forged. It cannot be required as well to prove that it was not negligent, because the legal presumption remains that ordinary care was employed. Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung Construction was negligent. While the payee, as in this case, may not have the personal knowledge as to the standard procedures observed by the drawer, it well has the means of disputing the presumption of regularity. Proving a negative fact may be "a difficult office,"59 but necessarily so, as it seeks to overcome a presumption in law. FEBTC was unable to dispute the presumption of ordinary care exercised by Samsung Construction, hence we cannot agree with the Court of Appeals finding of negligence. The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there was no negligence on the part of the bank in its acceptance and payment of the forged check. However, the degree of diligence exercised by the bank would be irrelevant if the drawer is not precluded from setting up the defense of forgery under Section 23 by his own negligence. The rule of equity enunciated in PNB v. National City Bank of New York, 60 as relied upon by the Court of Appeals, deserves careful examination. 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.61 (Emphasis supplied) Quite palpably, the general rule remains that the drawee who has paid upon the forged signature bears the loss. The exception to this rule arises only when negligence can be traced on the part of the drawer whose signature was forged, and the need arises to weigh the comparative negligence between the drawer and the drawee to determine who should bear the burden of loss. The Court finds no basis to conclude that Samsung Construction was negligent in the safekeeping of its checks. For one, the settled rule is that the mere fact that the depositor leaves his check book lying around does not constitute such negligence as will free the bank from liability to him, where a clerk of the depositor or other persons, taking advantage of the opportunity, abstract some of the check blanks, forges the depositors signature and collect on the checks from the bank.62 And for another, in point of fact Samsung Construction was not negligent at all since it reported the forgery almost immediately upon discovery.63

It is also worth noting that the forged signatures in PNB v. National City Bank of New York were not of the drawer, but of indorsers. The same circumstance attends PNB v. Court of Appeals,64 which was also cited by the Court of Appeals. It is accepted that a forged signature of the drawer differs in treatment than a forged signature of the indorser. The justification for the distinction between forgery of the signature of the drawer and forgery of an indorsement is that the drawee is in a position to verify the drawers signature by comparison with one in his hands, but has ordinarily no opportunity to verify an indorsement.65 Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a forgery of the drawers signature or a forged indorsement. But the bank may, as a general rule, recover back the money which it has paid on a check bearing a forged indorsement, whereas it has not this right to the same extent with reference to a check bearing a forgery of the drawers signature.66 The general rule imputing liability on the drawee who paid out on the forgery holds in this case. Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check, we might as well comment on the banks performance of its duty. It might be so that the bank complied with its own internal rules prior to paying out on the questionable check. Yet, there are several troubling circumstances that lead us to believe that the bank itself was remiss in its duty. The fact that the check was made out in the amount of nearly one million pesos is unusual enough to require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms this through its own internal procedures. Checks below twenty-five thousand pesos require only the approval of the teller; those between twenty-five thousand to one hundred thousand pesos necessitate the approval of one bank officer; and should the amount exceed one hundred thousand pesos, the concurrence of two bank officers is required.67 In this case, not only did the amount in the check nearly total one million pesos, it was also payable to cash. That latter circumstance should have aroused the suspicion of the bank, as it is not ordinary business practice for a check for such large amount to be made payable to cash or to bearer, instead of to the order of a specified person.68 Moreover, the check was presented for payment by one Roberto Gonzaga, who was not designated as the payee of the check, and who did not carry with him any written proof that he was authorized by Samsung Construction to encash the check. Gonzaga, a stranger to FEBTC, was not even an employee of Samsung Construction.69 These circumstances are already suspicious if taken independently, much more so if they are evaluated in concurrence. Given the

shadiness attending Gonzagas presentment of the check, it was not sufficient for FEBTC to have merely complied with its internal procedures, but mandatory that all earnest efforts be undertaken to ensure the validity of the check, and of the authority of Gonzaga to collect payment therefor. According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact Jong over the phone to verify the check.70 She added that calling the issuer or drawer of the check to verify the same was not part of the standard procedure of the bank, but an "extra effort."71 Even assuming that such personal verification is tantamount to extraordinary diligence, it cannot be denied that FEBTC still paid out the check despite the absence of any proof of verification from the drawer. Instead, the bank seems to have relied heavily on the say-so of Sempio, who was present at the bank at the time the check was presented. FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with the bank in behalf of Samsung Construction. It was even claimed that everytime FEBTC would contact Jong about problems with his account, Jong would hand the phone over to Sempio.72 However, the only proof of such allegations is the testimony of Gemma Velez, who also testified that she did not know Sempio personally,73 and had met Sempio for the first time only on the day the check was encashed.74 In fact, Velez had to inquire with the other officers of the bank as to whether Sempio was actually known to the employees of the bank.75 Obviously, Velez had no personal knowledge as to the past relationship between FEBTC and Sempio, and any averments of her to that effect should be deemed hearsay evidence. Interestingly, FEBTC did not present as a witness any other employee of their Bel-Air branch, including those who supposedly had transacted with Sempio before. Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of Samsung Construction, the irregular circumstances attending the presentment of the forged check should have put the bank on the highest degree of alert. The Court recently emphasized that the highest degree of care and diligence is required of banks. Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositors who transact business with them. They have the obligation to treat their clients account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family.76 Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from Jong personally that the signature in the questionable check was his.

Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may still recover from the bank as long as he or she is not precluded from setting up the defense of forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce the payment of a check can arise out of a forged signature. Since the drawer, Samsung Construction, is not precluded by negligence from setting up the forgery, the general rule should apply. Consequently, if a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor.77 A bank is liable, irrespective of its good faith, in paying a forged check.78 WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November 1996 is REVERSED, and the Decision of the Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against respondent. SO ORDERED. Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

Footnotes
1

Later acquired by or merged with the Bank of the Philippine Islands. Rollo, p. 35. Ibid. Id. at 28. Ibid. Ibid. Rollo, p. 35. See TSN dated 25 June 1993, p. 10. Id. at 9. See TSN dated 15 June 1993, p. 26. Ibid.

10

11

12

Act No. 2031. Presided by Judge E.G. Sandoval, now Justice of the Sandiganbayan. TSN dated 8 October 1993, p. 8. Rollo, p. 24.

13

14

15

16

Penned by Justice S. Montoya, concurred in by Justices G. Jacinto and A. Tuquero.

17

Rollo, p. 38. Ibid. 63 Phil 711 (1936). Rollo, p. 38.

18

19

20

21

Bank of Philippine Islands v. Court of Appeals,, G.R. No. 102383, 26 November 1992, 216 SCRA 51, 65.
22

Farnsworth, E.A., Negotiable Instruments: Cases and Materials, 2nd ed. (1959), at 173.
23

Id. at 174.

24

Brady, J.E., The Law of Forged and Altered Checks (1925), at 6-7. Case citations omitted.
25

Nickles, S.H., Negotiable Instruments and Other Related Commercial Paper, 2nd ed. (1993), at 415.
26

Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 689.
27

Philippine National Bank v. National City Bank of New York, 63 Phil. 711, 743-744 (1936); citing 17 A. L. R., 891; 5 R. C. L., 559.
28

Brady, H.J., Brady on Bank Checks, 3rd ed. (1962), at 475; citing Hardy v. Chesapeake Bank (1879) 51Md. 562, 34 Am. Rep. 325.
29

Osborn, A., Questioned Document Problems, 2nd ed. (1946), at 181-182. Rollo, p. 31.

30

31

TSN dated 8 October 1993, p. 15. Id. at 15 and 19. See TSN dated 8 October 1993, pp. 15, 17, 19, 34, 36 and 38.

32

33

34

Venuto v. Lizzo, 148 App. Div. 164, 132 N.Y. Supp. 1066 (1911), as cited in A. Osborn, supra, note 29.
35

Defendants Exhibits Nos. "S-1," "S-7," "S-8," "S-9," "S-10," "S-12," "S-14," "S-15," and "S-16."
36

Defendants Exhibit No. "S-9." TSN dated 8 October 1993, p. 35. Id. at 19 and 36. Supra, note 26. TSN dated 27 April 1993, p. 5. Id. at 7. Id. at 7-8. TSN dated 8 October 1993, p. 4. TSN dated 27 April 1993, pp. 18-19. Id. at 14. Per NBI Questioned Documents Report No. 244-492, Plaintiffs Exhibit "D." See TSN dated 25 January 1993, p. 7. See note 10.

37

38

39

40

41

42

43

44

45

46

47

48

49

Rollo, p. 38, citing PNB v. National City Bank of New York, 63 Phil. 711, 733 (1936), which in turn cites Gloucester Bank v. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First National Bank of Salem, 151 Mass., 280; and B.B. Ford & Co. v. Peoples Bank of Orangeburg, 74 S.C., 180.
50

Ibid., citing PNB v. CA, 134 Phil. 829, 834 (1968), which in turn cites Blondeau v. Nano, 61 Phil. 625, 631, 632.

51

Rollo, p. 38.

52

MWSS v. Court of Appeals, G.R. No. L-62943, 14 July 1986, 143 SCRA 20, 31.
53

G.R. Nos. 121413, 121479 and 128604, 29 January 2001, 350 SCRA 446. Ibid at 465. TSN dated 25 January 1993, pp. 19, 31. See Section 3(d), Rule 131, Rules of Court. See Section 3(q), Rule 131, Rules of Court.

54

55

56

57

58

Taylor v. Manila Electric Railroad, 16 Phil. 8, 28 (1910), citing Scaevola, Jurisprudencia del Codigo Civil, vol. 6, 551, 552.
59

US v. Tria, 17 Phil. 303, 307 (1910). 63 Phil. 711 (1936).

60

61

Id. at 740; citing 2 Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.
62

Brady, J.E., The Law of Forged and Altered Checks, supra, note 24, at 2427; citing MacIntosh v. Bank, 123 Mass. 393; East St. Louis Cotton Oil Co. v. Bank of Steele, Mo., 205 S.W. Rep. 96.
63

"For his failure or negligence 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 the forged indorsement." Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 690;citing American jurisprudence. "A bank may escape liability where the depositors negligence consists of failure to properly examine his bank statements and cancelled checks and failure to notify the bank of forgery within a reasonable time." H. Bailey, supra, note 28, at 477. But see note 24.
64

G.R. No. L-26001, 29 October 1968, 25 SCRA 693. Farnsworth, E.A., supra note 22, at 173. Brady, J.E., supra, note 24, at 5. See TSN dated 12 July 1993, p. 8.

65

66

67

68

"When the instrument is payable to order the payee must be named or otherwise indicated therein with reasonable certainty." Sec. 8, Act No. 2031 (Negotiable Instruments Law). Worthy of note is the fact that a check payable to bearer is more likely to be forged than one that is payable to order. The unofficial essence of bearer check is that anyone who possesses or holds it can indorse or receive payment for it which implies that payment is not limited to a particular person. See Nickles, S.H., Matheson, J.H., and Adams, E.S., Modern Commercial Paper: The New Law of Negotiable Instruments and Related Commercial Paper (1994), at 61.
69

See TSN dated 26 July 1993, p. 18. See TSN dated 12 July 1993, p. 11. Ibid. Id. at 17. Id. at 18. TSN dated 26 July 1993, p. 3. Id. at 6.

70

71

72

73

74

75

76

Westmont Bank v. Ong, G.R. No. 132560, 30 January 2002, 375 SCRA 212, 220-221.
77

Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, 10 October 2002, 390 SCRA 608, 614.
78

Bailey, H.J., supra, note 28 at 474.

SECOND DIVISION G.R. No. 139130 November 27, 2002

RAMON K. ILUSORIO, petitioner, vs. HON. COURT OF APPEALS, and THE MANILA BANKING CORPORATION, respondents. DECISION

QUISUMBING, J.: This petition for review seeks to reverse the decision1 promulgated on January 28, 1999 by the Court of Appeals in CA-G.R. CV No. 47942, affirming the decision of the then Court of First Instance of Rizal, Branch XV (now the Regional Trial Court of Makati, Branch 138) dismissing Civil Case No. 43907, for damages. The facts as summarized by the Court of Appeals are as follows: Petitioner is a prominent businessman who, at the time material to this case, was the Managing Director of Multinational Investment Bancorporation and the Chairman and/or President of several other corporations. He was a depositor in good standing of respondent bank, the Manila Banking Corporation, under current Checking Account No. 06-09037-0. As he was then running about 20 corporations, and was going out of the country a number of times, petitioner entrusted to his secretary, Katherine2 E. Eugenio, his credit cards and his checkbook with blank checks. It was also Eugenio who verified and reconciled the statements of said checking account.3 Between the dates September 5, 1980 and January 23, 1981, Eugenio was able to encash and deposit to her personal account about seventeen (17) checks drawn against the account of the petitioner at the respondent bank, with an aggregate amount of P119,634.34. Petitioner did not bother to check his statement of account until a business partner apprised him that he saw Eugenio use his credit cards. Petitioner fired Eugenio immediately, and instituted a criminal action against her for estafa thru falsification before the Office of the Provincial Fiscal of Rizal. Private respondent, through an affidavit executed by its employee, Mr. Dante Razon, also lodged a complaint for estafa thru falsification of commercial documents against Eugenio on the basis of petitioners statement that his signatures in the checks were forged.4 Mr. Razons affidavit states: That I have examined and scrutinized the following checks in accordance with prescribed verification procedures with utmost care and diligence by comparing the signatures affixed thereat against the specimen signatures of Mr. Ramon K. Ilusorio which we have on file at our said office on such dates, xxx That the aforementioned checks were among those issued by Manilabank in favor of its client MR. RAMON K. ILUSORIO, That the same were personally encashed by KATHERINE E. ESTEBAN, an executive secretary of MR. RAMON K. ILUSORIO in said Investment Corporation; That I have met and known her as KATHERINE E. ESTEBAN the attending verifier when she personally encashed the above-mentioned checks at our said office;

That MR. RAMON K. ILUSORIO executed an affidavit expressly disowning his signature appearing on the checks further alleged to have not authorized the issuance and encashment of the same.5 Petitioner then requested the respondent bank to credit back and restore to its account the value of the checks which were wrongfully encashed but respondent bank refused. Hence, petitioner filed the instant case.6 At the trial, petitioner testified on his own behalf, attesting to the truth of the circumstances as narrated above, and how he discovered the alleged forgeries. Several employees of Manila Bank were also called to the witness stand as hostile witnesses. They testified that it is the banks standard operating procedure that whenever a check is presented for encashment or clearing, the signature on the check is first verified against the specimen signature cards on file with the bank. Manila Bank also sought the expertise of the National Bureau of Investigation (NBI) in determining the genuineness of the signatures appearing on the checks. However, in a letter dated March 25, 1987, the NBI informed the trial court that they could not conduct the desired examination for the reason that the standard specimens submitted were not sufficient for purposes of rendering a definitive opinion. The NBI then suggested that petitioner be asked to submit seven (7) or more additional standard signatures executed before or about, and immediately after the dates of the questioned checks. Petitioner, however, failed to comply with this request. After evaluating the evidence on both sides, the court a quo rendered judgment on May 12, 1994 with the following dispositive portion: WHEREFORE, finding no sufficient basis for plaintiff's cause herein against defendant bank, in the light of the foregoing considerations and established facts, this case would have to be, as it is hereby DISMISSED. Defendants counterclaim is likewise DISMISSED for lack of sufficient basis. SO ORDERED.7 Aggrieved, petitioner elevated the case to the Court of Appeals by way of a petition for review but without success. The appellate court held that petitioners own negligence was the proximate cause of his loss. The appellate court disposed as follows: WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the appellant. SO ORDERED.8

Before us, petitioner ascribes the following errors to the Court of Appeals: A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT BANK IS ESTOPPED FROM RAISING THE DEFENSE THAT THERE WAS NO FORGERY OF THE SIGNATURES OF THE PETITIONER IN THE CHECK BECAUSE THE RESPONDENT FILED A CRIMINAL COMPLAINT FOR ESTAFA THRU FALSIFICATION OF COMMERCIAL DOCUMENTS AGAINST KATHERINE EUGENIO USING THE AFFIDAVIT OF PETITIONER STATING THAT HIS SIGNATURES WERE FORGED AS PART OF THE AFFIDAVIT-COMPLAINT.9 B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23, NEGOTIABLE INSTRUMENTS LAW.10 C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN OF PROOF IS WITH THE RESPONDENT BANK TO PROVE THE DUE DILIGENCE TO PREVENT DAMAGE, TO THE PETITIONER, AND THAT IT WAS NOT NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS EMPLOYEES.11 D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT BANK SHOULD BEAR THE LOSS, AND SHOULD BE MADE TO PAY PETITIONER, WITH RECOURSE AGAINST KATHERINE EUGENIO ESTEBAN.12 Essentially the issues in this case are: (1) whether or not petitioner has a cause of action against private respondent; and (2) whether or not private respondent, in filing an estafa case against petitioners secretary, is barred from raising the defense that the fact of forgery was not established. Petitioner contends that Manila Bank is liable for damages for its negligence in failing to detect the discrepant checks. He adds that as a general rule a bank which has obtained possession of a check upon an unauthorized or forged endorsement of the payees signature and which collects the amount of the check from the drawee is liable for the proceeds thereof to the payee. Petitioner invokes the doctrine of estoppel, saying that having itself instituted a forgery case against Eugenio, Manila Bank is now estopped from asserting that the fact of forgery was never proven. For its part, Manila Bank contends that respondent appellate court did not depart from the accepted and usual course of judicial proceedings, hence there is no reason for the reversal of its ruling. Manila Bank additionally points out that Section 2313 of the Negotiable Instruments Law is inapplicable, considering that the fact of forgery was never proven. Lastly, the bank negates petitioners claim of estoppel.14 On the first issue, we find that petitioner has no cause of action against Manila Bank. To be entitled to damages, petitioner has the burden of proving negligence on the part of the bank for failure to detect the discrepancy in the signatures on the checks. It is incumbent upon petitioner to establish the fact of forgery, i.e., by submitting his

specimen signatures and comparing them with those on the questioned checks. Curiously though, petitioner failed to submit additional specimen signatures as requested by the National Bureau of Investigation from which to draw a conclusive finding regarding forgery. The Court of Appeals found that petitioner, by his own inaction, was precluded from setting up forgery. Said the appellate court: We cannot fault the court a quo for such declaration, considering that the plaintiffs evidence on the alleged forgery is not convincing enough. The burden to prove forgery was upon the plaintiff, which burden he failed to discharge. Aside from his own testimony, the appellant presented no other evidence to prove the fact of forgery. He did not even submit his own specimen signatures, taken on or about the date of the questioned checks, for examination and comparison with those of the subject checks. On the other hand, the appellee presented specimen signature cards of the appellant, taken at various years, namely, in 1976, 1979 and 1981 (Exhibits "1", "2", "3" and "7"), showing variances in the appellants unquestioned signatures. The evidence further shows that the appellee, as soon as it was informed by the appellant about his questioned signatures, sought to borrow the questioned checks from the appellant for purposes of analysis and examination (Exhibit "9"), but the same was denied by the appellant. It was also the former which sought the assistance of the NBI for an expert analysis of the signatures on the questioned checks, but the same was unsuccessful for lack of sufficient specimen signatures.15 Moreover, petitioners contention that Manila Bank was remiss in the exercise of its duty as drawee lacks factual basis. Consistently, the CA and the RTC found that Manila Bank employees exercised due diligence in cashing the checks. The banks employees in the present case did not have a hint as to Eugenios modus operandi because she was a regular customer of the bank, having been designated by petitioner himself to transact in his behalf. According to the appellate court, the employees of the bank exercised due diligence in the performance of their duties. Thus, it found that: The evidence on both sides indicates that TMBCs employees exercised due diligence before encashing the checks. Its verifiers first verified the drawers signatures thereon as against his specimen signature cards, and when in doubt, the verifier went further, such as by referring to a more experienced verifier for further verification. In some instances the verifier made a confirmation by calling the depositor by phone. It is only after taking such precautionary measures that the subject checks were given to the teller for payment. Of course it is possible that the verifiers of TMBC might have made a mistake in failing to detect any forgery -- if indeed there was. However, a mistake is not equivalent to negligence if they were honest mistakes. In the instant case, we believe and so hold that if there were mistakes, the same were not deliberate, since the bank took all the precautions.16

As borne by the records, it was petitioner, not the bank, who was negligent. Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man would do.17 In the present case, it appears that petitioner accorded his secretary unusual degree of trust and unrestricted access to his credit cards, passbooks, check books, bank statements, including custody and possession of cancelled checks and reconciliation of accounts. Said the Court of Appeals on this matter: Moreover, the appellant had introduced his secretary to the bank for purposes of reconciliation of his account, through a letter dated July 14, 1980 (Exhibit "8"). Thus, the said secretary became a familiar figure in the bank. What is worse, whenever the bank verifiers call the office of the appellant, it is the same secretary who answers and confirms the checks. The trouble is, the appellant had put so much trust and confidence in the said secretary, by entrusting not only his credit cards with her but also his checkbook with blank checks. He also entrusted to her the verification and reconciliation of his account. Further adding to his injury was the fact that while the bank was sending him the monthly Statements of Accounts, he was not personally checking the same. His testimony did not indicate that he was out of the country during the period covered by the checks. Thus, he had all the opportunities to verify his account as well as the cancelled checks issued thereunder -- month after month. But he did not, until his partner asked him whether he had entrusted his credit card to his secretary because the said partner had seen her use the same. It was only then that he was minded to verify the records of his account. 18 The abovecited findings are binding upon the reviewing court. We stress the rule that the factual findings of a trial court, especially when affirmed by the appellate court, are binding upon us19 and entitled to utmost respect20 and even finality. We find no palpable error that would warrant a reversal of the appellate courts assessment of facts anchored upon the evidence on record. Petitioners failure to examine his bank statements appears as the proximate cause of his own damage. Proximate cause is that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred.21 In the instant case, the bank was not shown to be remiss in its duty of sending monthly bank statements to petitioner so that any error or discrepancy in the entries therein could be brought to the banks attention at the earliest opportunity. But, petitioner failed to examine these bank statements not because he was prevented by some cause in not doing so, but because he did not pay sufficient attention to the matter. Had he done so, he could have been alerted to any anomaly committed against him. In other words, petitioner had sufficient opportunity to prevent or detect any misappropriation by his secretary had he only reviewed the status of his accounts based on the bank statements sent

to him regularly. In view of Article 2179 of the New Civil Code,22 when the plaintiffs own negligence was the immediate and proximate cause of his injury, no recovery could be had for damages. Petitioner further contends that under Section 23 of the Negotiable Instruments Law a forged check is inoperative, and that Manila Bank had no authority to pay the forged checks. True, it is a rule that when a signature is forged or made without the authority of the person whose signature it purports to be, the check is wholly inoperative. No right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party, can be acquired through or under such signature. However, the rule does provide for an exception, namely: "unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority." In the instant case, it is the exception that applies. In our view, petitioner is precluded from setting up the forgery, assuming there is forgery, due to his own negligence in entrusting to his secretary his credit cards and checkbook including the verification of his statements of account. Petitioners reliance on Associated Bank vs. Court of Appeals23 and Philippine Bank of Commerce vs. CA24 to buttress his contention that respondent Manila Bank as the collecting or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements is misplaced. In the cited cases, the fact of forgery was not in issue. In the present case, the fact of forgery was not established with certainty. In those cited cases, the collecting banks were held to be negligent for failing to observe precautionary measures to detect the forgery. In the case before us, both courts below uniformly found that Manila Banks personnel diligently performed their duties, having compared the signature in the checks from the specimen signatures on record and satisfied themselves that it was petitioners. On the second issue, the fact that Manila Bank had filed a case for estafa against Eugenio would not estop it from asserting the fact that forgery has not been clearly established. Petitioner cannot hold private respondent in estoppel for the latter is not the actual party to the criminal action. In a criminal action, the State is the plaintiff, for the commission of a felony is an offense against the State.25 Thus, under Section 2, Rule 110 of the Rules of Court the complaint or information filed in court is required to be brought in the name of the "People of the Philippines." 26 Further, as petitioner himself stated in his petition, respondent bank filed the estafa case against Eugenio on the basis of petitioners own affidavit,27 but without admitting that he had any personal knowledge of the alleged forgery. It is, therefore, easy to understand that the filing of the estafa case by respondent bank was a last ditch effort to salvage its ties with the petitioner as a valuable client, by bolstering the estafa case which he filed against his secretary. All told, we find no reversible error that can be ascribed to the Court of Appeals.

WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the Court of Appeals dated January 28, 1999 in CA-G.R. CV No. 47942, is AFFIRMED. Costs against petitioner. SO ORDERED. Bellosillo, Acting C.J., (Chairman), Mendoza, Austria-Martinez, and Callejo, Sr., JJ., concur.

Footnotes

Rollo, pp. 26-30. Also spelled as "Catherine" in some parts of the record. Rollo, p. 26. TSN, October 6, 1983, p. 58. Rollo, pp. 108-109. Id. at 27. Ibid. Id. at 30. Id. at 10. Id. at 14. Id. at 15. Id. at 17.

10

11

12

13

Sec. 23. Forged signature, effect of. When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right 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.
14

Rollo, p. 49. Id. at 28. Id. at 29.

15

16

17

Bank of the Philippine Islands vs. Court of Appeals, 326 SCRA 641, 657 (2000).
18

Supra, note 16. Lorenzana vs. People, 353 SCRA 396, 403 (2001). Ong vs. CA, 272 SCRA 725, 730 (1997). Supra, note 17 at 659.

19

20

21

22

Art. 2179. When the plaintiff's own negligence was the immediate and proximate cause of his injury, he cannot recover damages.
23

252 SCRA 620, 633 (1996). 269 SCRA 695, 703-710 (1997). Binay vs. Sandiganbayan, 316 SCRA 65, 100 (1999).

24

25

26

SEC. 2. The complaint or information. The complaint or information shall be in writing, in the name of the People of the Philippines and against all persons who appear to be responsible for the offense involved.
27

Rollo, p. 9.

SECOND DIVISION G.R. No. 107382/G.R. No. 107612 January 31, 1996

ASSOCIATED BANK, petitioner, vs. HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL BANK, respondents. xxxxxxxxxxxxxxxxxxxxx G.R. No. 107612 January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner, vs. HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK, respondents. DECISION ROMERO, J.: Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee bank or the collecting bank? This is the main issue in these consolidated petitions for review assailing the decision of the Court of Appeals in "Province of Tarlac v. Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No. 17962). 1 The facts of the case are as follows: The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the provincial funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the Sangguniang Bayan. A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The allotment checks for said government hospital are drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac." The checks are released by the Office of the Provincial Treasurer and received for the hospital by its administrative officer and cashier. In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial Auditor. It was then discovered that the hospital did not receive several allotment checks drawn by the Province. On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared checks which were issued from 1977 to 1980 in order to

verify the regularity of their encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank acting as collecting bank. It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital until his retirement on February 28, 1978, collected the questioned checks from the office of the Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the checks and had official receipts. 3Pangilinan sought to encash the first check 4 with Associated Bank. However, the manager of Associated Bank refused and suggested that Pangilinan deposit the check in his personal savings account with the same bank. Pangilinan was able to withdraw the money when the check was cleared and paid by the drawee bank, PNB. After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same procedure for the second check, in the amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-eight other checks of various amounts and on various dates. The last check negotiated by Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED BANK." Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks were paid to him for certain projects with the hospital. 7 He did not find as irregular the fact that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given Pangilinan preferential treatment on this account. 8 On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of the various amounts debited from the current account of the Province. 9 In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10 As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn, impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan. 11 After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows: WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine National Bank (PNB), ordering the latter to pay to the former, the sum of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon from March 20, 1981 until fully paid; 2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National Bank (PNB) and against third-party defendant/fourth-party plaintiff Associated Bank ordering the latter to reimburse to the former the amount of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully paid;. 3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action as against fourth-party defendant Adena Canlas and lack of jurisdiction over the person of fourth-party defendant Fausto Pangilinan as against the latter. 4. On the counterclaims on the complaint, third-party complaint and fourthparty complaint, the same are hereby ordered dismissed for lack of merit. SO ORDERED. 12 PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court affirmed the trial court's decision in toto on September 30, 1992. Hence these consolidated petitions which seek a reversal of respondent appellate court's decision. PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province of Tarlac from liability when, in fact, the latter was negligent because it delivered and released the questioned checks to Fausto Pangilinan who was then already retired as the hospital's cashier and administrative officer. PNB also maintains its innocence and alleges that as between two innocent persons, the one whose act was the cause of the loss, in this case the Province of Tarlac, bears the loss. Next, PNB asserts that it was error for the court to order it to pay the province and then seek reimbursement from Associated Bank. According to petitioner bank, respondent appellate Court should have directed Associated Bank to pay the adjudged liability directly to the Province of Tarlac to avoid circuity. 14 Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the drawee bank (PNB) solely and ultimately bearing the loss.

Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead of Central Bank Circular No. 580, which, being an administrative regulation issued pursuant to law, has the force and effect of law. 15 The PCHC Rules are merely contractual stipulations among and between member-banks. As such, they cannot prevail over the aforesaid CB Circular. It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of prior indorsements against Associated Bank, the collecting bank. In stamping the guarantee (for all prior indorsements), it merely followed a mandatory requirement for clearing and had no choice but to place the stamp of guarantee; otherwise, there would be no clearing. The bank will be in a "no-win" situation and will always bear the loss as against the drawee bank. 16 Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in question, it is now estopped from asserting the defense that Associated Bank guaranteed prior indorsements. The drawee bank allegedly has the primary duty to verify the genuineness of payee's indorsement before paying the check. 17 While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should solely bear the loss because it cleared and paid the forged checks. xxx xxx xxx

The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were properly issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the payee's (Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their indorsement, the checks were order instruments. Checks having forged indorsements should be differentiated from forged checks or checks bearing the forged signature of the drawer. Section 23 of the Negotiable Instruments Law (NIL) provides: Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is forged or made without 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.

A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to the instrument through it. A person whose signature to an instrument was forged was never a party and never consented to the contract which allegedly gave rise to such instrument. 18 Section 23 does not avoid the instrument but only the forged signature. 19 Thus, a forged indorsement does not operate as the payee's indorsement. The exception to the general rule in Section 23 is where "a party against whom it is sought to enforce a right is precluded from setting up the forgery or want of authority." Parties who warrant or admit the genuineness of the signature in question and those who, by their acts, silence or negligence are estopped from setting up the defense of forgery, are precluded from using this defense. Indorsers, persons negotiating by delivery and acceptors are warrantors of the genuineness of the signatures on the instrument. 20 In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument. Hence, when the indorsement is a forgery, only the person whose signature is forged can raise the defense of forgery against a holder in due course. 21 The checks involved in this case are order instruments, hence, the following discussion is made with reference to the effects of a forged indorsement on an instrument payable to order. Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same instrument. When the holder's indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. 22 An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting." 23 He cannot interpose the defense that signatures prior to him are forged. 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's 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. The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of the payee. The drawer's instructions are reflected on the face and by the terms of the check. Payment under a forged

indorsement is not to the drawer's order. When the drawee bank pays a person other than the payee, it does not comply with the terms of the check and violates its duty to charge its customer's (the drawer) account only for properly payable items. Since the drawee bank did not pay a holder or other person entitled to receive payment, it has no right to reimbursement from the drawer. 24 The general rule then is that the drawee bank may not debit the drawer's account and is not entitled to indemnification from the drawer. 25 The risk of loss must perforce fall on the drawee bank. However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially contributed to the making of the forged signature, the drawer is precluded from asserting the forgery. If at the same time the drawee bank was also negligent to the point of substantially contributing to the loss, then such loss from the forgery can be apportioned between the negligent drawer and the negligent bank. 26 In cases involving a forged check, where the drawer's signature is forged, the drawer can recover from the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to recredit the amount of the check to the account of the drawer. The liability chain ends with the drawee bank whose responsibility it is to know the drawer's signature since the latter is its customer. 27 In cases involving checks with forged indorsements, such as the present petition, the chain of liability does not end with the drawee bank. The drawee bank may not debit the account of the drawer but may generally pass liability back through the collection chain to the party who took from the forger and, of course, to the forger himself, if available. 28 In other words, the drawee bank canseek reimbursement or a return of the amount it paid from the presentor bank or person. 29 Theoretically, the latter can demand reimbursement from the person who indorsed the check to it and so on. The loss falls on the party who took the check from the forger, or on the forger himself. In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank (PNB). The former will necessarily be liable to the latter for the checks bearing forged indorsements. If the forgery is that of the payee's or holder's indorsement, the collecting bank is held liable, without prejudice to the latter proceeding against the forger. Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The former must necessarily return the money paid by the latter because it was paid wrongfully. 30 More importantly, by reason of the statutory warranty of a general indorser in section 66 of the Negotiable Instruments Law, 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. It warrants that the instrument is genuine, and that it is valid and subsisting at the time of his indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this warranty and will be accountable to the drawee bank. This liability scheme operates without regard to fault on the part of the collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable to the drawee bank because of its indorsement. The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements." 31 The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness. of any indorsement. 32 The drawee bank's duty is but to verify the genuineness of the drawer's signature and not of the indorsement because the drawer is its client. Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the indorsement. Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of the forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery, thereby depriving said presentor of the right to recover from the forger, the former is deemed negligent and can no longer recover from the presentor.33 Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of the Province of Tarlac because it paid checks which bore forged indorsements. However, if the Province of Tarlac as drawer was negligent to the point of substantially contributing to the loss, then the drawee bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac were negligent, the loss should be properly apportioned between them. The loss incurred by drawee bank-PNB can be passed on to the collecting bankAssociated Bank which presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable.

If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to bear the loss. After careful examination of the records, the Court finds that the Province of Tarlac was equally negligent and should, therefore, share the burden of loss from the checks bearing a forged indorsement. The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already retired from government service, was no longer connected with the hospital. With the exception of the first check (dated January 17, 1978), all the checks were issued and released after Pangilinan's retirement on February 28, 1978. After nearly three years, the Treasurer's office was still releasing the checks to the retired cashier. In addition, some of the aid allotment checks were released to Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that there were now two persons collecting the checks for the hospital is an unmistakable sign of an irregularity which should have alerted employees in the Treasurer's office of the fraud being committed. There is also evidence indicating that the provincial employees were aware of Pangilinan's retirement and consequent dissociation from the hospital. Jose Meru, the Provincial Treasurer, testified:. ATTY. MORGA: Q Now, is it true that for a given month there were two releases of checks, one went to Mr. Pangilinan and one went to Miss Juco? JOSE MERU: A Yes, sir. Q Will you please tell us how at the time (sic) when the authorized representative of Concepcion Emergency Hospital is and was supposed to be Miss Juco? A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan represented himself as also authorized to help in the release of these checks and we were apparently misled because they accepted the representation of Pangilinan that he was helping them in the release of the checks and besides according to them they were, Pangilinan, like the rest, was able to present an official receipt to acknowledge these receipts and according to them since this is a government check and believed that it will eventually go to the hospital following the standard procedure of negotiating government checks, they released the checks to Pangilinan aside from Miss Juco.34

The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss tantamount to negligence. Hence, the Province of Tarlac should be liable for part of the total amount paid on the questioned checks. The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it cannot escape liability and should also bear part of the loss. As earlier stated, PNB can recover from the collecting bank. In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were deposited in the forger's account with the collecting bank and were later paid by four different drawee banks. The Court found the collecting bank (Associated) to be negligent and held: 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. . . . The situation in the case at bench is analogous to the above case, for it was not the payee who deposited the checks with the collecting bank. Here, the checks were all payable to Concepcion Emergency Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings account. Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of endorsements guaranteed) is merely a requirement forced upon it by clearing house rules, it cannot but remain liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank must fulfill for the sake of convenience. A bank is not required to accept all the checks negotiated to it. It is within the bank's discretion to receive a check for no banking institution would consciously or deliberately accept a check bearing a forged indorsement. When a check is deposited with the collecting bank, it takes a risk on its depositor. It is only logical that this bank be held accountable for checks deposited by its customers. A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the opportunity to go after the forger, signifies negligence on the part of the drawee bank (PNB) and will preclude it from claiming reimbursement. It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section 23 of the Philippine Clearing House Corporation Rules comes to fore. Under Section 4(c) of CB Circular No. 580, items bearing a forged endorsement shall be returned within twenty-Sour (24) hours after discovery of the forgery but in no event beyond the period fixed or provided by law for filing of a legal action by the returning bank. Section 23 of the PCHC Rules deleted the requirement

that items bearing a forged endorsement should be returned within twenty-four hours. Associated Bank now argues that the aforementioned Central Bank Circular is applicable. Since PNB did not return the questioned checks within twenty-four hours, but several days later, Associated Bank alleges that PNB should be considered negligent and not entitled to reimbursement of the amount it paid on the checks. The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is an administrative regulation issued pursuant to law and as such, must prevail over the PCHC rule. The Central Bank circular was in force for all banks until June 1980 when the Philippine Clearing House Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were covered by the PCHC while banks located elsewhere still had to go through Central Bank Clearing. In any event, the twenty-four-hour return rule was adopted by the PCHC until it was changed in 1982. The contending banks herein, which are both branches in Tarlac province, are therefore not covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB circular was applicable when the forgery of the checks was discovered in 1981. The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery but in no event beyond the period fixed by law for filing a legal action. The rationale of the rule is to give the collecting bank (which indorsed the check) adequate opportunity to proceed against the forger. If prompt notice is not given, the collecting bank maybe prejudiced and lose the opportunity to go after its depositor. The Court finds that even if PNB did not return the questioned checks to Associated Bank within twenty-four hours, as mandated by the rule, PNB did not commit negligent delay. Under the circumstances, PNB gave prompt notice to Associated Bank and the latter bank was not prejudiced in going after Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB necessarily had to inspect the checks and conduct its own investigation. Thereafter, it requested the Provincial Treasurer's office on March 31, 1981 to return the checks for verification. The Province of Tarlac returned the checks only on April 22, 1981. Two days later, Associated Bank received the checks from PNB. 36 Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March 20, 1981, thus giving it notice of the forgeries. At this time, however, Pangilinan's account with Associated had only P24.63 in it.37 Had Associated Bank decided to debit Pangilinan's account, it could not have recovered the amounts paid on the questioned checks. In addition, while Associated Bank filed a fourth-party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and even presented him as its rebuttal witness. 38 Hence, Associated Bank was not prejudiced by PNB's failure to comply with the twenty-fourhour return rule.

Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter paid and cleared the checks. The Court finds this contention unmeritorious. Even if PNB cleared and paid the checks, it can still recover from Associated Bank. This is true even if the payee's Chief Officer who was supposed to have indorsed the checks is also a customer of the drawee bank. 39 PNB's duty was to verify the genuineness of the drawer's signature and not the genuineness of payee's indorsement. Associated Bank, as the collecting bank, is the entity with the duty to verify the genuineness of the payee's indorsement. PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to the Province of Tarlac the amount of the checks and then directing Associated Bank to reimburse PNB. The Court finds nothing wrong with the mode of the award. The drawer, Province of Tarlac, is a clientor customer of the PNB, not of Associated Bank. There is no privity of contract between the drawer and the collecting bank. The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of extrajudicial demand made by the Province of Tarlac on PNB. The payments to be made in this case stem from the deposits of the Province of Tarlac in its current account with the PNB. Bank deposits are considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a twelve percent (12%) interest per annum for loans, forebearance of money, goods or credits in the absence of express stipulation. Normally, current accounts are likewise interestbearing, by express contract, thus excluding them from the coverage of CB Circular No. 416. In this case, however, the actual interest rate, if any, for the current account opened by the Province of Tarlac with PNB was not given in evidence. Hence, the Court deems it wise to affirm the trial court's use of the legal interest rate, or six percent (6%) per annum. The interest rate shall be computed from the date of default, or the date of judicial or extrajudicial demand. 41 The trial court did not err in granting legal interest from March 20, 1981, the date of extrajudicial demand. The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a period close to three years and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition to the hospital's real cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB. The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas.

Associated Bank was also remiss in its duty to ascertain the genuineness of the payee's indorsement. IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY GRANTED. The petition for review filed by the Associated Bank (G.R. No. 107382) is hereby DENIED. The decision of the trial court is MODIFIED. The Philippine National Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal interest from March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent (50%) of P203,300.00 to the Philippine National Bank, likewise, with legal interest from March 20, 1981 until payment is made. SO ORDERED. Regalado, Puno and Mendoza, JJ., concur.

Footnotes
1

Penned by Justice Asaali S. Isnani, with Associate Justices Arturo S. Buena and Ricardo P. Galvez, concurring, dated September 30, 1992. Rollo, p. 22.
2

Provincial aid was given irregularly. Hospital staff would often call the provincial treasurer's office to inquire whether there was an allotment check for the hospital. The hospital's administrative officer and cashier would then go to the provincial treasurer's office to pick up the check. Checks received by the hospital are deposited in the account of the National Treasury with the PNB. All income of the hospital in excess of the amount which the National Government has directed it to raise, is excess income. The latter is given back to the hospital after a supplemental budget is prepared. When the latter is approved, an advice of allotment is made. Then the hospital requests a cash disbursement ceiling. When approved, this is brought to the Ministry of Health. The regional office of said Ministry then prepares a check for the hospital. The check will be deposited in the hospital's current account at the PNB. (Culled from the testimony of Dr. Adena Canlas, TSN, October 17, 1983, pp. 8-11; December 6, 1983, pp. 43-44.)
3

TSN, March 13, 1984, pp. 51-60. Check No. 530863 K, dated January 17, 1978 for P10,000.00. Check No. 526788 K.

Check No. 391351 L. TSN, July 10, 1985, pp. 14-15. TSN, July 10, 1985, p. 20-21, 34-35; September 24, 1985.

Exhibit FF for Province of Tarlac. On March 20, 1981, the Province of Tarlac reiterated its request in another letter to PNB. Associated Bank was allegedly furnished with a copy of this letter. (Records, pp. 246-247) PNB requested the Province to return the checks in a letter dated March 31, 1981. The checks were returned to PNB on April 22, 1981. (Exhibit GG) On April 24, 1981, PNB gave the checks to Associated Bank. (Exhibit 5) Associated Bank returned the checks to PNB on April 28, 1981, along with a letter stating its refusal to return the money paid by PNB. (Exhibit 6)
10

Exhibit "MM" for Province of Tarlac.

11

Civil Case No. 6227, "Province of Tarlac v. Philippine National Bank; Philippine National Bank v. Associated Bank; Associated Bank v. Fausto Pangilinan and Adena G. Canlas," Regional Trial Court Branch 64, Tarlac, Tarlac.
12

Penned by Judge Arturo U. Barias, Jr., Rollo, pp. 391-392. CA-G.R. CV No. 17962. Petition, pp. 6-7; Rollo, pp. 13-14, G.R. No. 107612.

13

14

15

Citing Antique Sawmills, Inc. v. Zayco, 17 SCRA 316, et al., Petition, p. 9, Rollo, p. 10.
16

Associated Bank's Petition, p. 13. Id., at 12.

17

18

J. CAMPOS & M. LOPEZ-CAMPOS, NEGOTIABLE INSTRUMENTS LAW, 227-230 (4th ed., 1990).
19

I A. AGBAYANI, COMMENTARIES AND JURISPRUDENCE ON THE COMMERCIAL LAWS OF THE PHILIPPINES 198 (1989 ed.).
20

Id., at 199.

21

J. VITUG, PANDECT OF COMMERCIAL LAW AND JURISPRUDENCE 5153 (Rev. ed., 1990).

22

Id. Section 66, Negotiable Instruments Law.

23

24

S. NICKLES, NEGOTIABLE INSTRUMENTS AND OTHER RELATED COMMERCIAL PAPER 416 (2nd ed., 1993).
25

Great Eastern Life Insurance Co. v. Hongkong and Shanghai Banking Corp., 43 Phil. 678; Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation G.R. No. L-74917, January 20, 1988, 157 SCRA 188; CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283, citing La Fayette v. Merchants Bank, 73 Ark 561; Wills v. Barney, 22 Cal 240; Wellington National Bank v. Robbins, 71 Kan 748.
26

R. JORDAN & W. WARREN, NEGOTIABLE INSTRUMENTS AND LETTERS OF CREDIT 216 (1992).
27

Id. Id., at 216-235; VITUG, op. cit. note 21 at 53.

28

29

Banco de Oro v. Equitable Banking Corp., supra; Great Eastern Life Insurance Co. v. HSBC, supra.
30

Article 2154 of the Civil Code provides: "If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises." Banco de Oro v. Equitable Banking Corp., supra.
31

Bank of the Phil. Islands v. CA, G.R. No. 102383, November 26, 1992, 216 SCRA 51, 63 citing Banco de Oro v. Equitable Banking Corp., supra; Great Eastern Life Insurance Co. v. HSBC, supra.
32

CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283 citing Inter-state Trust Co. v. U.S. National Bank, 185 Pac. 260; Hongkong and Shanghai Banking Corp. v. People's Bank and Trust Co., supra.
33

JORDAN & WARREN, op. cit. note 26 at 217; CAMPOS & LOPEZCAMPOS, op. cit. note 18 at 283.
34

TSN, June 19, 1984, pp. 10-11. G.R. No. 89802, May 7, 1992, 208 SCRA 465. See footnote 9.

35

36

37

Exhibit "3-G" for Associated Bank. TSN, January 8, 1987. San Carlos Milling Co. Ltd. v. BPI, 59 Phil. 59.

38

39

40

Article 1980 of the Civil Code reads: Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.
41

Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, July 12, 1994, 234 SCRA 78.

SECOND DIVISION [G.R. No. 132560. January 30, 2002] WESTMONT BANK (formerly ASSOCIATED BANKING CORP.),petitioner, vs. EUGENE ONG, respondent. DECISION QUISUMBING, J.: This is a petition for review of the decision[1] dated January 13, 1998, of the Court of Appeals in CA-G.R. CV No. 28304 ordering the petitioner to pay respondent P1,754,787.50 plus twelve percent (12%) interest per annum computed from October 7, 1977, the date of the first extrajudicial demand, plus damages. The facts of this case are undisputed. Respondent Eugene Ong maintained a current account with petitioner, formerly the Associated Banking Corporation, but now known as Westmont Bank. Sometime in May 1976, he sold certain shares of stocks through Island Securities Corporation. To pay Ong, Island Securities purchased two (2) Pacific Banking Corporation managers checks,[2] both dated May 4, 1976, issued in the name of Eugene Ong as payee. Before Ong could get hold of the checks, his friend Paciano Tanlimco got hold of them, forged Ongs signature and deposited these with petitioner, where Tanlimco was also a depositor. Even though Ongs specimen signature was on file, petitioner accepted and credited both checks to the account of Tanlimco, without

verifying the signature indorsements appearing at the back thereof. Tanlimco then immediately withdrew the money and absconded. Instead of going straight to the bank to stop or question the payment, Ong first sought the help of Tanlimcos family to recover the amount. Later, he reported the incident to the Central Bank, which like the first effort, unfortunately proved futile. It was only on October 7, 1977, about five (5) months from discovery of the fraud, did Ong cry foul and demanded in his complaint that petitioner pay the value of the two checks from the bank on whose gross negligence he imputed his loss. In his suit, he insisted that he did not deliver, negotiate, endorse or transfer to any person or entity the subject checks issued to him and asserted that the signatures on the back were spurious.[3] The bank did not present evidence to the contrary, but simply contended that since plaintiff Ong claimed to have never received the originals of the two (2) checks in question from Island Securities, much less to have authorized Tanlimco to receive the same, he never acquired ownership of these checks. Thus, he had no legal personality to sue as he is not a real party in interest. The bank then filed a demurrer to evidence which was denied. On February 8, 1989, after trial on the merits, the Regional Trial Court of Manila, Branch 38, rendered a decision, thus: IN VIEW OF THE FOREGOING, the court hereby renders judgment for the plaintiff and against the defendant, and orders the defendant to pay the plaintiff: 1. The sum of P1,754,787.50 representing the total face value of the two checks in question, exhibits A and B, respectively, with interest thereon at the legal rate of twelve percent (12%) per annum computed from October 7, 1977 (the date of the first extrajudicial demand) up to and until the same shall have been paid in full; 2. Moral damages in the amount of P250,000.00; 3. Exemplary or corrective damages in the sum of P100,000.00 by way of example or correction for the public good; 4. Attorneys fees of P50,000.00 and costs of suit. Defendants counterclaims are dismissed for lack of merit. SO ORDERED.[4] Petitioner elevated the case to the Court of Appeals without success. In its decision, the appellate court held:

WHEREFORE, in view of the foregoing, the appealed decision is AFFIRMED in toto. [5] Petitioner now comes before this Court on a petition for review, alleging that the Court of Appeals erred: I ... IN AFFIRMING THE TRIAL COURTS CONCLUSION THAT RESPONDENT HAS A CAUSE OF ACTION AGAINST THE PETITIONER. II ... IN AFFIRMING THE TRIAL COURTS DECISION FINDING PETITIONER LIABLE TO RESPONDENT AND DECLARING THAT THE LATTER MAY RECOVER DIRECTLY FROM THE FORMER; AND III ... IN NOT ADJUDGING RESPONDENT GUILTY OF LACHES AND IN NOT ABSOLVING PETITIONER FROM LIABILITY. Essentially the issues in this case are: (1) whether or not respondent Ong has a cause of action against petitioner Westmont Bank; and (2) whether or not Ong is barred to recover the money from Westmont Bank due to laches. Respondent admitted that he was never in actual or physical possession of the two (2) checks of the Island Securities nor did he authorize Tanlimco or any of the latters representative to demand, accept and receive the same. For this reason, petitioner argues, respondent cannot sue petitioner because under Section 51 of the Negotiable Instruments Law[6] it is only when a person becomes a holder of a negotiable instrument can he sue in his own name. Conversely, prior to his becoming a holder, he had no right or cause of action under such negotiable instrument. Petitioner further argues that since Section 191[7] of the Negotiable Instruments Law defines a holder as the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof, in order to be a holder, it is a requirement that he be in possession of the instrument or the bearer thereof. Simply stated, since Ong never had possession of the checks nor did he authorize anybody, he did not become a holder thereof hence he cannot sue in his own name.[8] Petitioner also cites Article 1249[9] of the Civil Code explaining that a check, even if it is a managers check, is not legal tender. Hence, the creditor cannot be compelled to accept payment thru this means.[10] It is petitioners position that for all intents and purposes, Island Securities has not yet tendered payment to respondent Ong, thus, any action by Ong should be directed towards collecting the amount from

Island Securities. Petitioner claims that Ongs cause of action against it has not ripened as of yet. It may be that petitioner would be liable to the drawee bank - - but that is a matter between petitioner and drawee-bank, Pacific Banking Corporation. [11] For its part, respondent Ong leans on the ruling of the trial court and the Court of Appeals which held that the suit of Ong against the petitioner bank is a desirable shortcut to reach the party who ought in any event to be ultimately liable.[12] It likewise cites the ruling of the courts a quo which held that according to the general rule, a bank who has obtained possession of a check upon an unauthorized or forged indorsement of the payees signature and who collects the amount of the check from the drawee is liable for the proceeds thereof to the payee. The theory of said rule is that the collecting banks possession of such check is wrongful.[13] Respondent also cites Associated Bank vs. Court of Appeals[14]which held that the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements. The collecting bank is also made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because he is a client. Hence, it is in a better position to detect forgery, fraud or irregularity in the indorsement.[15] Anent Article 1249 of the Civil Code, Ong points out that bank checks are specifically governed by the Negotiable Instruments Law which is a special law and only in the absence of specific provisions or deficiency in the special law may the Civil Code be invoked.[16] Considering the contentions of the parties and the evidence on record, we find no reversible error in the assailed decisions of the appellate and trial courts, hence there is no justifiable reason to grant the petition. Petitioners claim that respondent has no cause of action against the bank is clearly misplaced. As defined, a cause of action is the act or omission by which a party violates a right of another.[17] The essential elements of a cause of action are: (a) a legal right or rights of the plaintiff, (b) a correlative obligation of the defendant, and (c) an act or omission of the defendant in violation of said legal right.[18] The complaint filed before the trial court expressly alleged respondents right as payee of the managers checks to receive the amount involved, petitioners correlative duty as collecting bank to ensure that the amount gets to the rightful payee or his order, and a breach of that duty because of a blatant act of negligence on the part of petitioner which violated respondents rights.[19] Under Section 23 of the Negotiable Instruments Law:

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. Since the signature of the payee, in the case at bar, was forged to make it appear that he had made an indorsement in favor of the forger, such signature should be deemed as inoperative and ineffectual. Petitioner, as the collecting bank, grossly erred in making payment by virtue of said forged signature. The payee, herein respondent, should therefore be allowed to recover from the collecting bank. The collecting bank is liable to the payee and must bear the loss because it is its legal duty to ascertain that the payees endorsement was genuine before cashing the check.[20] As a general rule, a bank or corporation who has obtained possession of a check upon an unauthorized or forged indorsement of the payees signature and who collects the amount of the check from the drawee, is liable for the proceeds thereof to the payee or other owner, notwithstanding that the amount has been paid to the person from whom the check was obtained.[21] The theory of the rule is that the possession of the check on the forged or unauthorized indorsement is wrongful, and when the money had been collected on the check, the bank or other person or corporation can be held as for moneys had and received, and the proceeds are held for the rightful owners who may recover them. 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 the money without indorsement at all and the act of the bank amounts to conversion of the check.[22] Petitioners claim that since there was no delivery yet and respondent has never acquired possession of the checks, respondents remedy is with the drawer and not with petitioner bank. Petitioner relies on the view to the effect that where there is no delivery to the payee and no title vests in him, he ought not to be allowed to recover on the ground that he lost nothing because he never became the owner of the check and still retained his claim of debt against the drawer.[23] However, another view in certain cases holds that even if the absence of delivery is considered, such consideration is not material. The rationale for this view is that in said cases the plaintiff uses one action to reach, by a desirable short cut, the person who ought in any event to be ultimately liable as among the innocent persons involved in the transaction. In other words, the payee ought to be allowed to recover directly from the collecting bank, regardless of whether the check was delivered to the payee or not.[24]

Considering the circumstances in this case, in our view, petitioner could not escape liability for its negligent acts. Admittedly, respondent Eugene Ong at the time the fraudulent transaction took place was a depositor of petitioner bank. Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositors who transact business with them.[25] They have the obligation to treat their clients account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family.[26] In the present case, petitioner was held to be grossly negligent in performing its duties. As found by the trial court: xxx (A)t the time the questioned checks were accepted for deposit to Paciano Tanlimcos account by defendant bank, defendant bank, admittedly had in its files specimen signatures of plaintiff who maintained a current account with them (Exhibits L-1 and M-1; testimony of Emmanuel Torio). Given the substantial face value of the two checks, totalling P1,754,787.50, and the fact that they were being deposited by a person not the payee, the very least defendant bank should have done, as any reasonable prudent man would have done, was to verify the genuineness of the indorsements thereon. The Court cannot help but note that had defendant conducted even the most cursory comparison with plaintiffs specimen signatures in its files (Exhibit L-1 and M-1) it would have at once seen that the alleged indorsements were falsified and were not those of the plaintiff-payee. However, defendant apparently failed to make such a verification or, what is worse did so but, chose to disregard the obvious dissimilarity of the signatures. The first omission makes it guilty of gross negligence; the second of bad faith. In either case, defendant is liable to plaintiff for the proceeds of the checks in question.[27] These findings are binding and conclusive on the appellate and the reviewing courts. On the second issue, petitioner avers that respondent Ong is barred by laches for failing to assert his right for recovery from the bank as soon as he discovered the scam. The lapse of five months before he went to seek relief from the bank, according to petitioner, constitutes laches. In turn, respondent contends that petitioner presented no evidence to support its claim of laches. On the contrary, the established facts of the case as found by the trial court and affirmed by the Court of Appeals are that respondent left no stone unturned to obtain relief from his predicament. On the matter of delay in reporting the loss, respondent calls attention to the fact that the checks were issued on May 4, 1976, and on the very next day, May 5, 1976, these were already credited to the account of Paciano Tanlimco and presented for payment to Pacific Banking Corporation. So even if the theft of the checks were discovered and reported earlier, respondent argues, it would not have altered the

situation as the encashment of the checks was consummated within twenty four hours and facilitated by the gross negligence of the petitioner bank.[28] Laches may be defined as the failure or neglect for an unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or should have been done earlier. It is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled thereto has either abandoned or declined to assert it.[29] It concerns itself with whether or not by reason of long inaction or inexcusable neglect, a person claiming a right should be barred from asserting the same, because to allow him to do so would be unjust to the person against whom such right is sought to be enforced.[30] In the case at bar, it cannot be said that respondent sat on his rights. He immediately acted after knowing of the forgery by proceeding to seek help from the Tanlimco family and later the Central Bank, to remedy the situation and recover his money from the forger, Paciano Tanlimco. Only after he had exhausted possibilities of settling the matter amicably with the family of Tanlimco and through the CB, about five months after the unlawful transaction took place, did he resort to making the demand upon the petitioner and eventually before the court for recovery of the money value of the two checks. These acts cannot be construed as undue delay in or abandonment of the assertion of his rights. Moreover, the claim of petitioner that respondent should be barred by laches is clearly a vain attempt to deflect responsibility for its negligent act. As explained by the appellate court, it is petitioner which had the last clear chance to stop the fraudulent encashment of the subject checks had it exercised due diligence and followed the proper and regular banking procedures in clearing checks.[31] As we had earlier ruled, the one who had the last clear opportunity to avoid the impending harm but failed to do so is chargeable with the consequences thereof.[32] WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the Court of Appeals, sustaining the judgment of the Regional Trial Court of Manila, is AFFIRMED. Costs against petitioner. SO ORDERED. Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

[1] Rollo, pp. 32-39.

[2] No. NI-141439 for P880,850.00 (Exh. A) and No. 141476 for P873,937.50 (Exh. B), RTC Records, pp. 9-10. [3] Supra, note 1 at 34-35. [4] CA Rollo, pp. 99-100. [5] Supra, note 1 at 38. [6] Sec. 51. Right of holder to sue payment. - The holder of a negotiable instrument may sue thereon in his own name; and payment to him in due course discharges the instrument. [7] Sec. 191. Definitions and meaning of terms. In this Act, unless the contract otherwise requires: xxx Holder means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof; xxx [8] Supra, note 1 at 24-25. [9] Art. 1249. xxx The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. [10] Supra, note 1 at 25. [11] Id. at 26. [12] Id. at 47-48. [13] Id. at 48. [14] G.R. No. 107382, 252 SCRA 620, 633 (1996). [15] Supra, note 1 at 48.

[16] Supra, note 1 at 49-50 citing Art. 18. Civil Code of the Philippines. In matters which are governed by the Code of Commerce and special laws, their deficiency shall be supplied by the provisions of this Code. [17] Sec. 2, Rule 2, 1997 Rules of Court. [18] R.J. Francisco, Civil Procedure 86 (First Edition 2001) Vol. I, citing Ma-ao Sugar Central Co. vs. Barrios, G.R. No. L-1539, 79 Phil. 666, 667 (1947). [19] RTC Records, pp. 5-6. [20] A. F. Agbayani, Commercial Laws of the Philippines 200 (Vol. I 1987) citing Great Eastern Life Ins. Co. vs. 43 Phil 678, 682-683 (1922). Hongkong & Shanghai Bank, G.R. No. 18657, [21] Agbayani, op. cit. 201 citing 21 A.L.R. 1068. [22] Agbayani, op. cit. 202 citing 31 A.L.R. 1070; U.S. Portland Co. vs. U.S. Nat. Bank; L.R.A. 1917-A, 145, 146.; 21 A.L.R. 1072; 31 A.L.R. 1071. [23] Agbayani, op. cit. 207 citing 31 Mich. L. Rev. 819. [24] Agbayani, op. cit. 206-207 citing 31 A.L.R. 1021-2; Brannan, 7th ed., 453. [25] Citytrust Banking Corp. vs. Intermediate Appellate Court,G.R. No. 84281, 232 SCRA 559, 563 (1994). [26] Bank of the Philippine Islands vs. Court of Appeals, G.R. No. 112392, 326 SCRA 641, 657 (2000), Philippine Bank of Commerce vs. Court of Appeals, G.R. No. 97626, 269 SCRA 695, 708-709 (1997). [27] Supra, note 2 at 251-252. [28] Supra, note 1 at 50-52. [29] Felizardo et. al. vs. Fernandez, G.R. No. 137509, August 15, 2001, p. 8, citing Heirs of Pedro Lopez vs. De Castro, G.R. No. 112905, 324 SCRA 591, 614-615 (2000), Catholic Bishop of Balanga vs. Court of Appeals, G.R. No. 112519, 332 Phil. 206, 218-219 (1996), 264 SCRA 181, 192-194 (1996). [30] Felizardo vs. Fernandez, id. citing Heirs of Teodoro Dela Cruz vs. Court of Appeals, G.R. No. 117384, 298 SCRA 172, 182 (1998), Pablate vs. Echarri, Jr., G.R. No. L- 24357, 37 SCRA 518, 521-522 (1971). [31] Supra, note 1 at 51-52.

[32] Philippine Bank of Commerce vs. CA, G.R. No. 97626, 269 SCRA 695, 707-708 (1997).

THIRD DIVISION G.R. No. 138510 October 10, 2002

TRADERS ROYAL BANK, petitioner, vs. RADIO PHILIPPINES NETWORK, INC., INTERCONTINENTAL BROADCASTING CORPORATION and BANAHAW BROADCASTING CORPORATION, through the BOARD OF ADMINISTRATORS, and SECURITY BANK AND TRUST COMPANY, respondents. DECISION CORONA, J.: Petitioner seeks the review and prays for the reversal of the Decision1 of April 30, 1999 of Court of Appeals in CA-G.R. CV No. 54656, the dispositive portion of which reads: 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. SO ORDERED.2 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. 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 30652 30650 30796 Amount P4,155.835.00 3,949,406.12 1,685,475.75

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. 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. 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 non-negotiable 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: "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. 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.

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. Puno, (Chairman), Panganiban, and Morales, JJ., concur. Sandoval-Gutierrez, J., no part.

Footnotes

Penned by Associate Justice Angelina Sandoval-Gutierrez and concurred in by Associate Justices Romeo A. Brawner and Martin S. Villarama, Jr. (Ninth Division).
2

Rollo, p. 74. Rollo, pp. 63-65. Rollo, p. 54. Section 23, Negotiable Instruments Law.

Great Eastern Life Insurance vs. Hongkong & Shanghai Banking Corporation, 43 Phil. 678 (1922).

Bataan Cigar and Cigarette Factory, Inc. vs. CA, 230 SCRA 643 (1994). Insular Drug Co. vs. National, 58 Phil. 685 (1933). PNB vs. CA, 315 SCRA 309 (1999). Rollo, pp. 69-73. Cervantes vs. CA, 304 SCRA 25 (1999). Barons Marketing Corporation vs. CA, 286 SCRA 96 (1998).

10

11

12

SECOND DIVISION [G.R. No. 133179, March 27, 2008] ALLIED BANKING CORPORATION, PETITIONER, VS. LIM SIO WAN, METROPOLITAN BANK AND TRUST CO., AND PRODUCERS BANK, RESPONDENTS. DECISION VELASCO JR., J.: To ingratiate themselves to their valued depositors, some banks at times bend over backwards that they unwittingly expose themselves to great risks. The Case This Petition for Review on Certiorari under Rule 45 seeks to reverse the Court of Appeals' (CA's) Decision promulgated on March 18, 1998[1] in CA-G.R. CV No. 46290 entitled Lim Sio Wan v. Allied Banking Corporation, et al. The CA Decision modified the Decision dated November 15, 1993[2] of the Regional Trial Court (RTC), Branch 63 in Makati City rendered in Civil Case No. 6757. The Facts The facts as found by the RTC and affirmed by the CA are as follows: On November 14, 1983, respondent Lim Sio Wan deposited with petitioner Allied Banking Corporation (Allied) at its Quintin Paredes Branch in Manila a money

market placement of PhP 1,152,597.35 for a term of 31 days to mature on December 15, 1983,[3] as evidenced by Provisional Receipt No. 1356 dated November 14, 1983.[4] On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So, an officer of Allied, and instructed the latter to pre-terminate Lim Sio Wan's money market placement, to issue a manager's check representing the proceeds of the placement, and to give the check to one Deborah Dee Santos who would pick up the check.[5] Lim Sio Wan described the appearance of Santos so that So could easily identify her.[6] Later, Santos arrived at the bank and signed the application form for a manager's check to be issued.[7] The bank issued Manager's Check No. 035669 for PhP 1,158,648.49, representing the proceeds of Lim Sio Wan's money market placement in the name of Lim Sio Wan, as payee.[8] The check was cross-checked "For Payee's Account Only" and given to Santos.[9] Thereafter, the manager's check was deposited in the account of Filipinas Cement Corporation (FCC) at respondent Metropolitan Bank and Trust Co. (Metrobank), [10] with the forged signature of Lim Sio Wan as indorser.[11] Earlier, on September 21, 1983, FCC had deposited a money market placement for PhP 2 million with respondent Producers Bank. Santos was the money market trader assigned to handle FCC's account.[12] Such deposit is evidenced by Official Receipt No. 317568[13] and a Letter dated September 21, 1983 of Santos addressed to Angie Lazo of FCC, acknowledging receipt of the placement.[14] The placement matured on October 25, 1983 and was rolled-over until December 5, 1983 as evidenced by a Letter dated October 25, 1983.[15] When the placement matured, FCC demanded the payment of the proceeds of the placement.[16] On December 5, 1983, the same date that So received the phone call instructing her to pre-terminate Lim Sio Wan's placement, the manager's check in the name of Lim Sio Wan was deposited in the account of FCC, purportedly representing the proceeds of FCC's money market placement with Producers Bank.[17] In other words, the Allied check was deposited with Metrobank in the account of FCC as Producers Bank's payment of its obligation to FCC. To clear the check and in compliance with the requirements of the Philippine Clearing House Corporation (PCHC) Rules and Regulations, Metrobank stamped a guaranty on the check, which reads: "All prior endorsements and/or lack of endorsement guaranteed."[18] The check was sent to Allied through the PCHC. Upon the presentment of the check, Allied funded the check even without checking the authenticity of Lim Sio Wan's purported indorsement. Thus, the amount on the face of the check was credited to the account of FCC.[19]

On December 9, 1983, Lim Sio Wan deposited with Allied a second money market placement to mature on January 9, 1984.[20] On December 14, 1983, upon the maturity date of the first money market placement, Lim Sio Wan went to Allied to withdraw it.[21] She was then informed that the placement had been pre-terminated upon her instructions. She denied giving any instructions and receiving the proceeds thereof. She desisted from further complaints when she was assured by the bank's manager that her money would be recovered.[22] When Lim Sio Wan's second placement matured on January 9, 1984, So called Lim Sio Wan to ask for the latter's instructions on the second placement. Lim Sio Wan instructed So to roll-over the placement for another 30 days.[23] On January 24, 1984, Lim Sio Wan, realizing that the promise that her money would be recovered would not materialize, sent a demand letter to Allied asking for the payment of the first placement.[24] Allied refused to pay Lim Sio Wan, claiming that the latter had authorized the pre-termination of the placement and its subsequent release to Santos.[25] Consequently, Lim Sio Wan filed with the RTC a Complaint dated February 13, 1984[26] docketed as Civil Case No. 6757 against Allied to recover the proceeds of her first money market placement. Sometime in February 1984, she withdrew her second placement from Allied. Allied filed a third party complaint[27] against Metrobank and Santos. In turn, Metrobank filed a fourth party complaint[28] against FCC. FCC for its part filed a fifth party complaint[29] against Producers Bank. Summonses were duly served upon all the parties except for Santos, who was no longer connected with Producers Bank.[30] On May 15, 1984, or more than six (6) months after funding the check, Allied informed Metrobank that the signature on the check was forged.[31] Thus, Metrobank withheld the amount represented by the check from FCC. Later on, Metrobank agreed to release the amount to FCC after the latter executed an Undertaking, promising to indemnify Metrobank in case it was made to reimburse the amount.[32] Lim Sio Wan thereafter filed an amended complaint to include Metrobank as a partydefendant, along with Allied.[33] The RTC admitted the amended complaint despite the opposition of Metrobank.[34] Consequently, Allied's third party complaint against Metrobank was converted into a cross-claim and the latter's fourth party complaint against FCC was converted into a third party complaint.[35] After trial, the RTC issued its Decision, holding as follows: WHEREFORE, judgment is hereby rendered as follows:

1. Ordering defendant Allied Banking Corporation to pay plaintiff the amount of P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid; 2. Ordering defendant Allied Bank to pay plaintiff the amount of P100,000.00 by way of moral damages; 3. Ordering defendant Allied Bank to pay plaintiff the amount of P173,792.20 by way of attorney's fees; and, 4. Ordering defendant Allied Bank to pay the costs of suit. Defendant Allied Bank's cross-claim against defendant Metrobank is DISMISSED. Likewise defendant Metrobank's third-party complaint as against Filipinas Cement Corporation is DISMISSED. Filipinas Cement Corporation's fourth-party complaint against Producer's Bank is also DISMISSED. SO ORDERED.[36] The Decision of the Court of Appeals Allied appealed to the CA, which in turn issued the assailed Decision on March 18, 1998, modifying the RTC Decision, as follows: WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is rendered ordering and sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%) percent and defendant-appellee Metropolitan Bank and Trust Company forty (40%) of the amount of P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid. The moral damages, attorney's fees and costs of suit adjudged shall likewise be paid by defendant-appellant Allied Banking Corporation and defendant-appellee Metropolitan Bank and Trust Company in the same proportion of 60-40. Except as thus modified, the decision appealed from is AFFIRMED. SO ORDERED.[37] Hence, Allied filed the instant petition. The Issues Allied raises the following issues for our consideration: The Honorable Court of Appeals erred in holding that Lim Sio Wan did not authorize [Allied] to pre-terminate the initial placement and to deliver the check to Deborah Santos.

The Honorable Court of Appeals erred in absolving Producers Bank of any liability for the reimbursement of amount adjudged demandable. The Honorable Court of Appeals erred in holding [Allied] liable to the extent of 60% of amount adjudged demandable in clear disregard to the ultimate liability of Metrobank as guarantor of all endorsement on the check, it being the collecting bank.[38] The petition is partly meritorious. A Question of Fact Allied questions the finding of both the trial and appellate courts that Allied was not authorized to release the proceeds of Lim Sio Wan's money market placement to Santos. Allied clearly raises a question of fact. When the CA affirms the findings of fact of the RTC, the factual findings of both courts are binding on this Court.[39] We also agree with the CA when it said that it could not disturb the trial court's findings on the credibility of witness So inasmuch as it was the trial court that heard the witness and had the opportunity to observe closely her deportment and manner of testifying. Unless the trial court had plainly overlooked facts of substance or value, which, if considered, might affect the result of the case,[40] we find it best to defer to the trial court on matters pertaining to credibility of witnesses. Additionally, this Court has held that the matter of negligence is also a factual question.[41] Thus, the finding of the RTC, affirmed by the CA, that the respective parties were negligent in the exercise of their obligations is also conclusive upon this Court. The Liability of the Parties As to the liability of the parties, we find that Allied is liable to Lim Sio Wan. Fundamental and familiar is the doctrine that the relationship between a bank and a client is one of debtor-creditor. Articles 1953 and 1980 of the Civil Code provide: Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. Thus, we have ruled in a line of cases that a bank deposit is in the nature of a simple loan or mutuum.[42] More succinctly, in Citibank, N.A. (Formerly First National City Bank) v. Sabeniano, this Court ruled that a money market placement is a simple

loan or mutuum.[43] Further, we defined a money market in Cebu International Finance Corporation v. Court of Appeals, as follows: [A] money market is a market dealing in standardized short-term creditinstruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle man or dealer in open market. In a money market transaction, the investor is a lender who loans his money to a borrower through a middleman or dealer. In the case at bar, the money market transaction between the petitioner and the private respondent is in the nature of a loan.[44] Lim Sio Wan, as creditor of the bank for her money market placement, is entitled to payment upon her request, or upon maturity of the placement, or until the bank is released from its obligation as debtor. Until any such event, the obligation of Allied to Lim Sio Wan remains unextinguished. Art. 1231 of the Civil Code enumerates the instances when obligations are considered extinguished, thus: Art. 1231. Obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code. (Emphasis supplied.) From the factual findings of the trial and appellate courts that Lim Sio Wan did not authorize the release of her money market placement to Santos and the bank had been negligent in so doing, there is no question that the obligation of Allied to pay Lim Sio Wan had not been extinguished. Art. 1240 of the Code states that "payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it." As commented by Arturo Tolentino: Payment made by the debtor to a wrong party does not extinguish the obligation as to the creditor, if there is no fault or negligence which can be imputed to the latter. Even when the debtor acted in utmost good faith and by mistake as to the person of his creditor, or through error induced by the fraud of a third person, the payment to

one who is not in fact his creditor, or authorized to receive such payment, is void, except as provided in Article 1241. Such payment does not prejudice the creditor, and accrual of interest is not suspended by it.[45](Emphasis supplied.) Since there was no effective payment of Lim Sio Wan's money market placement, the bank still has an obligation to pay her at six percent (6%) interest from March 16, 1984 until the payment thereof. We cannot, however, say outright that Allied is solely liable to Lim Sio Wan. Allied claims that Metrobank is the proximate cause of the loss of Lim Sio Wan's money. It points out that Metrobank guaranteed all prior indorsements inscribed on the manager's check, and without Metrobank's guarantee, the present controversy would never have occurred. According to Allied: Failure on the part of the collecting bank to ensure that the proceeds of the check is paid to the proper party is, aside from being an efficient intervening cause, also the last negligent act, x x x contributory to the injury caused in the present case, which thereby leads to the conclusion that it is the collecting bank, Metrobank that is the proximate cause of the alleged loss of the plaintiff in the instant case.[46] We are not persuaded. Proximate cause is "that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury and without which the result would not have occurred."[47] Thus, there is an efficient supervening event if the event breaks the sequence leading from the cause to the ultimate result. To determine the proximate cause of a controversy, the question that needs to be asked is: If the event did not happen, would the injury have resulted? If the answer is NO, then the event is the proximate cause. In the instant case, Allied avers that even if it had not issued the check payment, the money represented by the check would still be lost because of Metrobank's negligence in indorsing the check without verifying the genuineness of the indorsement thereon. Section 66 in relation to Sec. 65 of the Negotiable Instruments Law provides: Section 66. Liability of general indorser.--Every indorser who indorses without qualification, warrants to all subsequent holders in due course; a) The matters and things mentioned in subdivisions (a), (b) and (c) of the next preceding section; and b) That the instrument is at the time of his indorsement valid and subsisting; And in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to

the holder, or to any subsequent indorser who may be compelled to pay it. Section 65. Warranty where negotiation by delivery, so forth.--Every person negotiating an instrument by delivery or by a qualified indorsement, warrants: a) That the instrument is genuine and in all respects what it purports to be; b) That he has a good title of it; c) That all prior parties had capacity to contract; d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to persons negotiating public or corporation securities, other than bills and notes. (Emphasis supplied.) The warranty "that the instrument is genuine and in all respects what it purports to be" covers all the defects in the instrument affecting the validity thereof, including a forged indorsement. Thus, the last indorser will be liable for the amount indicated in the negotiable instrument even if a previous indorsement was forged. We held in a line of cases that "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."[48] However, this general rule is subject to exceptions. One such exception is when the issuance of the check itself was attended with negligence. Thus, in the cases cited above where the collecting bank is generally held liable, in two of the cases where the checks were negligently issued, this Court held the institution issuing the check just as liable as or more liable than the collecting bank. In isolated cases where the checks were deposited in an account other than that of the payees on the strength of forged indorsements, we held the collecting bank solely liable for the whole amount of the checks involved for having indorsed the same. InRepublic Bank v. Ebrada,[49] the check was properly issued by the Bureau of Treasury. While in Banco de Oro Savings and Mortgage Bank (Banco de Oro) v. Equitable Banking Corporation,[50] Banco de Oro admittedly issued the checks in the name of the correct payees. And in Traders Royal Bank v. Radio Philippines Network, Inc.,[51] the checks were issued at the request of Radio Philippines Network, Inc. from Traders Royal Bank. However, in Bank of the Philippine Islands v. Court of Appeals, we said that the

drawee bank is liable for 60% of the amount on the face of the negotiable instrument and the collecting bank is liable for 40%. We also noted the relative negligence exhibited by two banks, to wit: Both banks were negligent in the selection and supervision of their employees resulting in the encashment of the forged checks by an impostor. Both banks were not able to overcome the presumption of negligence in the selection and supervision of their employees. It was the gross negligence of the employees of both banks which resulted in the fraud and the subsequent loss. While it is true that petitioner BPI's negligence may have been the proximate cause of the loss, respondent CBC's negligence contributed equally to the success of the impostor in encashing the proceeds of the forged checks. Under these circumstances, we apply Article 2179 of the Civil Code to the effect that while respondent CBC may recover its losses, such losses are subject to mitigation by the courts. (See Phoenix Construction Inc. v. Intermediate Appellate Courts, 148 SCRA 353 [1987]). Considering the comparative negligence of the two (2) banks, we rule that the demands of substantial justice are satisfied by allocating the loss of P2,413,215.16 and the costs of the arbitration proceeding in the amount of P7,250.00 and the cost of litigation on a 60-40 ratio.[52] Similarly, we ruled in Associated Bank v. Court of Appeals that the issuing institution and the collecting bank should equally share the liability for the loss of amount represented by the checks concerned due to the negligence of both parties: The Court finds as reasonable, the proportionate sharing of fifty percent-fifty percent (50%-50%). Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a period close to three years and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition to the hospital's real cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB. The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the payee's indorsement.[53] A reading of the facts of the two immediately preceding cases would reveal that the reason why the bank or institution which issued the check was held partially liable for the amount of the check was because of the negligence of these parties which resulted in the issuance of the checks. In the instant case, the trial court correctly found Allied negligent in issuing the manager's check and in transmitting it to Santos without even a written

authorization.[54] In fact, Allied did not even ask for the certificate evidencing the money market placement or call up Lim Sio Wan at her residence or office to confirm her instructions. Both actions could have prevented the whole fraudulent transaction from unfolding. Allied's negligence must be considered as the proximate cause of the resulting loss. To reiterate, had Allied exercised the diligence due from a financial institution, the check would not have been issued and no loss of funds would have resulted. In fact, there would have been no issuance of indorsement had there been no check in the first place. The liability of Allied, however, is concurrent with that of Metrobank as the last indorser of the check. When Metrobank indorsed the check in compliance with the PCHC Rules and Regulations[55] without verifying the authenticity of Lim Sio Wan's indorsement and when it accepted the check despite the fact that it was crosschecked payable to payee's account only,[56] its negligent and cavalier indorsement contributed to the easier release of Lim Sio Wan's money and perpetuation of the fraud. Given the relative participation of Allied and Metrobank to the instant case, both banks cannot be adjudged as equally liable. Hence, the 60:40 ratio of the liabilities of Allied and Metrobank, as ruled by the CA, must be upheld. FCC, having no participation in the negotiation of the check and in the forgery of Lim Sio Wan's indorsement, can raise the real defense of forgery as against both banks.
[57]

As to Producers Bank, Allied Bank's argument that Producers Bank must be held liable as employer of Santos under Art. 2180 of the Civil Code is erroneous. Art. 2180 pertains to the vicarious liability of an employer for quasi-delicts that an employee has committed. Such provision of law does not apply to civil liability arising from delict. One also cannot apply the principle of subsidiary liability in Art. 103 of the Revised Penal Code in the instant case. Such liability on the part of the employer for the civil aspect of the criminal act of the employee is based on the conviction of the employee for a crime. Here, there has been no conviction for any crime. As to the claim that there was unjust enrichment on the part of Producers Bank, the same is correct. Allied correctly claims in its petition that Producers Bank should reimburse Allied for whatever judgment that may be rendered against it pursuant to Art. 22 of the Civil Code, which provides: "Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just cause or legal ground, shall return the same to him." The above provision of law was clarified in Reyes v. Lim, where we ruled that

"[t]here is unjust enrichment when a person unjustly retains a benefit to the loss of another, or when a person retains money or property of another against the fundamental principles of justice, equity and good conscience."[58] In Tamio v. Ticson, we further clarified the principle of unjust enrichment, thus: "Under Article 22 of the Civil Code, there is unjust enrichment when (1) a person is unjustly benefited, and (2) such benefit is derived at the expense of or with damages to another."[59] In the instant case, Lim Sio Wan's money market placement in Allied Bank was preterminated and withdrawn without her consent. Moreover, the proceeds of the placement were deposited in Producers Bank's account in Metrobank without any justification. In other words, there is no reason that the proceeds of Lim Sio Wans' placement should be deposited in FCC's account purportedly as payment for FCC's money market placement and interest in Producers Bank. With such payment, Producers Bank's indebtedness to FCC was extinguished, thereby benefitting the former. Clearly, Producers Bank was unjustly enriched at the expense of Lim Sio Wan. Based on the facts and circumstances of the case, Producers Bank should reimburse Allied and Metrobank for the amounts the two latter banks are ordered to pay Lim Sio Wan. It cannot be validly claimed that FCC, and not Producers Bank, should be considered as having been unjustly enriched. It must be remembered that FCC's money market placement with Producers Bank was already due and demandable; thus, Producers Bank's payment thereof was justified. FCC was entitled to such payment. As earlier stated, the fact that the indorsement on the check was forged cannot be raised against FCC which was not a part in any stage of the negotiation of the check. FCC was not unjustly enriched. From the facts of the instant case, we see that Santos could be the architect of the entire controversy. Unfortunately, since summons had not been served on Santos, the courts have not acquired jurisdiction over her.[60] We, therefore, cannot ascribe to her liability in the instant case. Clearly, Producers Bank must be held liable to Allied and Metrobank for the amount of the check plus 12% interest per annum, moral damages, attorney's fees, and costs of suit which Allied and Metrobank are adjudged to pay Lim Sio Wan based on a proportion of 60:40. WHEREFORE, the petition is PARTLY GRANTED. The March 18, 1998 CA Decision in CA-G.R. CV No. 46290 and the November 15, 1993 RTC Decision in Civil Case No. 6757 are AFFIRMED with MODIFICATION. Thus, the CA Decision is AFFIRMED, the fallo of which is reproduced, as follows:

WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is rendered ordering and sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%) percent and defendant-appellee Metropolitan Bank and Trust Company forty (40%) of the amount of P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid. The moral damages, attorney's fees and costs of suit adjudged shall likewise be paid by defendant-appellant Allied Banking Corporation and defendant-appellee Metropolitan Bank and Trust Company in the same proportion of 60-40. Except as thus modified, the decision appealed from is AFFIRMED. SO ORDERED. Additionally and by way of MODIFICATION, Producers Bank is hereby ordered to pay Allied and Metrobank the aforementioned amounts. The liabilities of the parties are concurrent and independent of each other. SO ORDERED. Quisumbing, (Chairperson), Carpio Morales, Tinga, and Chico-Nazario, JJ., concur.

* Additional member as per Special Order No. 494 dated March 3, 2008.
[1]

Rollo, pp. 52-72. Penned by Associate Justice Eduardo G. Montenegro (Chairperson) and concurred in by Associate Justices Salvador J. Valdez, Jr. and Rodrigo V. Cosico.
[2]

Id. at 73-81. Records, p. 1294. TSN, February 27, 1991, p. 5. Exhibit "A," Exhibits Folder, p. 3. Records, pp. 1294-1295. TSN, February 27, 1991, pp. 5-6. Id. at 1295. Id. at 1296. Id. at 1297. Exhibit "K," "3-Allied," Exhibits Folder. Records, p. 1164. TSN, December 12, 1986, p. 30.

[3]

[4]

[5]

[6]

[7]

[8]

[9]

[10]

[11]

Id. at 1165a. Id. at 1237. Id. at 171. Id. at 169. Id. at 172. Id. at 1306. TSN, August 3, 1992, p. 4. Id. at 1308. Exhibit "3-B," Exhibits Folder, p. 1. Records, pp. 1308-1309. TSN, August 3, 1992, pp. 6-7. Id. at 1169. TSN, December 12, 1986, p. 41. Id. at 1165. Id. at 33. Id. at 1170. Id. at 43. Id. at 1300. TSN, February 27, 1991, p. 11. Exhibit "F," Exhibits Folder, p. 7. Records, p. 1171a. TSN, December 12, 1986, p. 46. Id. at 1-6. Id. at 16-25. Id. at 121-139 Id. at 146-172. Id. at 40. Rollo, p. 216. Id. at 217. Records, pp. 262-269.

[12]

[13]

[14]

[15]

[16]

[17]

[18]

[19]

[20]

[21]

[22]

[23]

[24]

[25]

[26]

[27]

[28]

[29]

[30]

[31]

[32]

[33]

[34]

Id. at 293. Id. at 295-296. Supra note 2, at 80-81. Supra note 1, at 71. Rollo, pp. 28-29. Uy v. Court of Appeals, G.R. No. 109197, 21 June 2001, 359 SCRA 262, 269. Rollo, pp. 60-61.

[35]

[36]

[37]

[38]

[39]

[40]

[41]

Pacific Airways v. Tonda, G.R. No. 138478, November 26, 2002, 392 SCRA 625, 629.
[42]

Integrated Realty Corp. v. Philippine National Bank, No. L-60705, June 28, 1989, 174 SCRA 295, 309; Serrano v. Central Bank of the Philippines, No. L-30511, February 14, 1980, 96 SCRA 96, 102; and Central Bank of the Philippines v. Morfe, No. L-38427, March 12, 1975, 63 SCRA 114, 119.
[43]

G.R. No. 156132, October 12, 2006, 504 SCRA 378, 466. G.R. No. 123031, October 12, 1999, 316 SCRA 488, 497.

[44]

[45]

4 A.M. Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines 285 (1995).
[46]

Rollo, p. 41. A.B. Decano, Notes on Torts and Damages 43 (1996).

[47]

[48]

Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, October 10, 2002, 390 SCRA 608, 617; Associated Bank v. Court of Appeals, G.R. No. 107382, January 31, 1996, 252 SCRA 620, 633; Bank of the Philippine Islands v. Court of Appeals, G.R. No. 102383, November 26, 1992, 216 SCRA 51, 63; Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation, G.R. No. 74917, January 20, 1988, 157 SCRA 188, 198; Republic Bank v. Ebrada, No. L40796, July 31, 1975, 65 SCRA 680, 687-688.
[49]

Supra. Supra.

[50]

[51]

Supra. Supra note 48, at 77. Supra note 48, at 640. Rollo, pp. 79-80. Sec. 17 of the PCHC Rules and Regulations provides:

[52]

[53]

[54]

[55]

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). Checks to which said guarantee has not been affixed shall, nevertheless, be deemed guaranteed by the Presenting Bank as to all prior endorsement and/or lack of endorsement.
[56]

Associated Bank v. Court of Appeals, G.R. No. 89802, May 7, 1992, 208 SCRA 465, 469.
[57]

Negotiable Instruments Law, Sec. 23. G.R. No. 134241, August 11, 2003, 408 SCRA 560, 570. G.R. No. 154895, November 18, 2004, 443 SCRA 44, 53. Supra note 30.

[58]

[59]

[60]

FIRST DIVISION

BANK OF AMERICA NT & SA, Petitioner,

G.R. No. 150228

Present:

PUNO, C.J., Chairperson, -versusCARPIO, CORONA, LEONARDO-DE CASTRO, and BERSAMIN, JJ.

PHILIPPINE RACING CLUB, Respondent.

Promulgated:

July 30, 2009 x-----------------------------------------------------------------------------------------x

DECISION LEONARDO-DE CASTRO, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court from the Decision[1] promulgated on July 16, 2001 by the former Second Division of the Court of Appeals (CA), in CA-G.R. CV No. 45371 entitled Philippine Racing Club, Inc. v. Bank of America NT & SA, affirming the Decision[2] dated March 17, 1994 of the Regional Trial Court (RTC) of Makati, Branch 135 in Civil Case No. 895650, in favor of the respondent. Likewise, the present petition assails the Resolution[3] promulgated on September 28, 2001, denying the Motion for Reconsideration of the CA Decision.

The facts of this case as narrated in the assailed CA Decision are as follows:

Plaintiff-appellee PRCI is a domestic corporation which maintains several accounts with different banks in the Metro Manila area. Among the accounts maintained was Current Account No. 58891-012 with defendant-appellant BA (Paseo de Roxas Branch). The authorized joint signatories with respect to said Current Account were plaintiff-appellees President (Antonia Reyes) and Vice President for Finance (Gregorio Reyes). On or about the 2nd week of December 1988, the President and Vice President of plaintiff-appellee corporation were scheduled to go out of the country in connection with the corporations business. In order not to disrupt operations in their absence, they pre-signed several checks relating to Current Account No. 58891-012. The intention was to insure continuity of plaintiff-appellees operations by making available cash/money especially to settle obligations that might become due. These checks were entrusted to the accountant with instruction to make use of the same as the need arose. The internal arrangement was, in the event there was need to make use of the checks, the accountant would prepare the corresponding voucher and thereafter complete the entries on the pre-signed checks. It turned out that on December 16, 1988, a John Doe presented to defendant-appellant bank for encashment a couple of plaintiffappellee corporations checks (Nos. 401116 and 401117) with the indicated value of P110,000.00 each. It is admitted that these 2 checks were among those presigned by plaintiff-appellee corporations authorized signatories. The two (2) checks had similar entries with similar infirmities and irregularities. On the space where the name of the payee should be indicated (Pay To The Order Of) the following 2-line entries were instead typewritten: on the upper line was the word CASH while the lower line had the following typewritten words, viz: ONE HUNDRED TEN THOUSAND PESOS ONLY. Despite the highly irregular entries on the face of the checks, defendant-appellant bank, without as much as verifying and/or confirming the legitimacy of the checks considering the substantial amount involved and the obvious infirmity/defect of the checks on their faces, encashed said checks. A verification process, even by was of a telephone call to PRCI office, would have taken less

than ten (10) minutes. But this was not done by BA. Investigation conducted by plaintiff-appellee corporation yielded the fact that there was no transaction involving PRCI that call for the payment of P220,000.00 to anyone. The checks appeared to have come into the hands of an employee of PRCI (one Clarita Mesina who was subsequently criminally charged for qualified theft) who eventually completed without authority the entries on the pre-signed checks. PRCIs demand for defendant-appellant to pay fell on deaf ears. Hence, the complaint.[4] After due proceedings, the trial court rendered a Decision in favor of respondent, the dispositive portion of which reads:

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

SO ORDERED.[5]

Petitioner appealed the aforesaid trial court Decision to the CA which, however, affirmed said decision in toto in its July 16, 2001 Decision. Petitioners Motion for Reconsideration of the CA Decision was subsequently denied on September 28, 2001.

Petitioner now comes before this Court arguing that:

I.

The Court of Appeals gravely erred in holding that the proximate cause of respondents loss was petitioners encashment of the checks.

A.

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

B.

C.

II.

The Court of Appeals gravely erred in not holding that the proximate cause of respondents loss was its own grossly negligent practice of pre-signing checks without payees and amounts and delivering these pre-signed checks to its employees (other than their signatories).

III.

The Court of Appeals gravely erred in affirming the trial courts award of attorneys fees despite the absence of any applicable ground under Article 2208 of the Civil Code.

IV.

The Court of Appeals gravely erred in not awarding attorneys fees, moral and exemplary damages, and costs of suit in favor of petitioner, who clearly deserves them.[6]

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

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

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

There is no dispute that the signatures appearing on the subject checks were genuine signatures of the respondents authorized joint signatories; namely, Antonia Reyes and Gregorio Reyes who were respondents President and Vice-President for Finance, respectively. Both pre-signed the said checks since they were both scheduled to go abroad and it was apparently their practice to leave with the

company accountant checks signed in black to answer for company obligations that might fall due during the signatories absence. It is likewise admitted that neither of the subject checks contains any material alteration or erasure.

However, on the blank space of each check reserved for the payee, the following typewritten words appear: ONE HUNDRED TEN THOUSAND PESOS ONLY. Above the same is the typewritten word, CASH. On the blank reserved for the amount, the same amount of One Hundred Ten Thousand Pesos was indicated with the use of a check writer. The presence of these irregularities in each check should have alerted the petitioner to be cautious before proceeding to encash them which it did not do.

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

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

We do not agree with petitioners myopic view and carefully crafted defense. Although not in the strict sense material alterations, the misplacement of the typewritten entries for the payee and the amount on the same blank and the repetition of the amount using a check writer were glaringly obvious irregularities on the face of the check. Clearly, someone made a mistake in filling up the checks and the repetition of the entries was possibly an attempt to rectify the mistake. Also, if

the check had been filled up by the person who customarily accomplishes the checks of respondent, it should have occurred to petitioners employees that it would be unlikely such mistakes would be made. All these circumstances should have alerted the bank to the possibility that the holder or the person who is attempting to encash the checks did not have proper title to the checks or did not have authority to fill up and encash the same. As noted by the CA, petitioner could have made a simple phone call to its client to clarify the irregularities and the loss to respondent due to the encashment of the stolen checks would have been prevented.

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

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

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

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

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

Nevertheless, even if we assume that both parties were guilty of negligent acts that led to the loss, petitioner will still emerge as the party foremost liable in this

case. In instances where both parties are at fault, this Court has consistently applied the doctrine of last clear chance in order to assign liability.

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

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

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

In the interest of fairness, however, we believe it is proper to consider respondents own negligence to mitigate petitioners liability. Article 2179 of the Civil Code provides:

Art. 2179. When the plaintiffs own negligence was the immediate and proximate cause of his injury, he cannot recover

damages. But if his negligence was only contributory, the immediate and proximate cause of the injury being the defendants lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded.

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

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

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

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

own employee. This gives the Court more reason to allocate part of the loss to respondent.

Following established jurisprudential precedents,[27] we believe the allocation of sixty percent (60%) of the actual damages involved in this case (represented by the amount of the checks with legal interest) to petitioner is proper under the premises. Respondent should, in light of its contributory negligence, bear forty percent (40%) of its own loss.

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

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

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

Proportionate costs.

SO ORDERED.

[1] [2]

Rollo, pp. 80-87. Id. at 122-126. [3] Id. at 89. [4] Id. at 81-82. [5] Id. at 126. [6] Id. at 55-56. [7] Sec. 126. Bill of exchange defined. A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. [8] Sec. 185. Check defined. A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this act applicable to a bill of exchange payable on demand apply to a check.
[9]

Rollo, pp. 296-297. Id. at 298. [11] Id. at 125. [12] Samsung Construction Company Philippines, Inc. v. Far East Bank and Trust Company, Inc., G.R. No. 129015, August 13, 2004, 436 SCRA 402, 421. [13] Id. at 299. [14] TSN, testimony of Carlos H. Reyes, October 1, 1991, p. 3. [15] TSN, testimony of Rose Acuban, August 20, 1991, pp. 8-9. [16] Sec. 14. Blanks, when may be filled. Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. [17] Sec. 16, Delivery; when effectual; when presumed. Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties, and as regards a remote party other than a holder in due course, the delivery in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing as the case may be; and in such case the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder of a due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears
[10]

thereon, a valid and intentional delivery by him is presumed until the contrary is proved. [18] Rollo, p. 304. [19] Id. at 306. [20] Sec. 15. Incomplete instrument not delivered. Where an incomplete instrument has not been delivered it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. [21] G.R. No. 132560, January 30, 2002, 375 SCRA 212. [22] Id. at 223, citing Philippine Bank of Commerce v. CA, G.R. No. 97626, 269 SCRA 695, 707-708. [23] Gempesaw v. CA, G.R. No. 92244, February 9, 1993, 218 SCRA 682, 697. [24] Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. [25] G.R. No. 160709, February 23, 2005, 452 SCRA 285, 293. [26] TSN, testimony of Gerardo Martin, a certified public accountant/auditor from Sycip Gorres & Velayo, February 25, 1992, p. 6. [27] Philippine Bank of Commerce v. Court of Appeals, G.R. No. 97626, March 14, 1997, 269 SCRA 695; Consolidated Bank and Trust Corporation v. Court of Appeals, G.R. No. 138569, September 11, 2003, 410 SCRA 562. [28] Art. 2208. In the absence of stipulation, attorneys fees and expenses of litigation, other than judicial costs, cannot be recovered, except: (1) When exemplary damages are awarded; (2) When the defendants act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest; (3) In criminal cases of malicious prosecution against the plaintiff; (4) In case of a clearly unfounded civil action or proceeding against the plaintiff; (5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs plainly valid, just and demandable claim; (6) In actions for legal support; (7) In actions for the recovery of wages of household helpers, laborers and skilled workers; (8) In actions for indemnity under workmens compensation and employers liability laws; (9) In a separate civil action to recover civil liability arising from a crime; (10) When at least double judicial costs are awarded; (11) In any other case where the court deems it just and equitable that attorneys fees and expenses of litigation should be recovered. In all cases, the attorneys fees and expenses of litigation must be reasonable.

[29]

J Marketing Corp. v. Sia, Jr., G.R. No. 127823, January 29, 1998, 285 SCRA 580, 584. [30] Felsan Realty & Development Corporation v. Commonwealth of Australia, G.R. No. 169656, October 11, 2007, 535 SCRA 618, 632.

SECOND DIVISION G.R. No. 121413 January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND AMERICA),petitioner, vs. COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents. G.R. No. 121479 January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff, vs. COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK,respondents. G.R. No. 128604 January 29, 2001

FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF APPEALS, respondents. QUISUMBING, J.: 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 CA-G.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 reassessed 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 crossclaimant 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." 3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be considered by the Honorable Court. 4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner Ford.9 II. PCI Bank is liable to petitioner Ford considering that: 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 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. On April 20, 1979, Ford drew another Citibank Check No. SN-16508 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. 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." 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 above-mentioned. 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. 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. 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 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. 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 On December 9, 1988, Regional Trial Court of Makati, Branch 57, held draweebank, 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 SN-10597 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 co-conspirators, 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. SN10597 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. SN-04867. 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. SN-04867 and the misapplication of total proceeds of Checks SN-10597 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 coconspirator, 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 531 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 CAG.R. CV No. 25017 areAFFIRMED. 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 ORDEREDto 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. Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.

Footnotes
1 Penned by Justice B.A. Adefuin-de la Cruz and concurred in by Justices Jesus M. Elbinias and Lourdes K. Tayao-Jaguros, rollo, G.R. No. 121413, pp. 27-42.

2 Rollo, G.R. No. 121413, pp. 44-45

3 Penned by Justice Jose C. de la Rama and concurred in by Justices Emeterio C. Cui and Eduardo G. Montenegro, rollo, G.R. No. 128604, pp. 45-60

4 Rollo, G.R. No. 128604, pp. 42-43

5 Supra, see note 1, pp. 32-34 (All citations omitted).

6 Rollo, G.R. No. 121413, pp. 131-132.

7 Id. at 41-42

8 Id. at 18

9 Rollo, G.R. No. 121479, pp. 162-163

10 Id. at 181.

11 Id. at 186.

12 Id. at 188

13 Id. at 192

14 Supra, see note 3, pp. 47-49

15 Id. at 46

16 Id. at 24-25

17 218 SCRA 682 (1993)

18 Am Jur 2d, Volume 58, Negligence, Section 458

19 Am Jur 2d, Volume 58, Negligence Section 464.

20 Vda. De Bataclan, et al. vs. Medina, 102 Phil. 181, 186 (1957)

21 Am Jur 2d, Volume 10, Banks Section 604 (1963 Edition)

22 Id. at Section 697.

23 Ibid.

24 157 SCRA 188 (1988)

25 Id. at 194.

26 Supra note 20 at Section 611

27 Rollo, G.R. No. 128604, pp. 56-57.

28 Supra note 20 at Section 110

29 Id, at Sec. 111

30 Id. at Sec. 113

31 Sec. 5 Loss of Clearing Items. - Any loss or damage arising from theft, pilferage, or other causes affecting items intransit shall be for the account of the sending bank/branch, institution or entity concerned.

32 Sec. 62, Negotiable Instrumentys Law.

33 Simex International (Manila) Inc. vs. Court of Apeals, 183 SCRA 360, 367 (1990)

34 Supra, see note 17, at p. 697.

35 Ibid.

36 BPI vs. Court of Appeals, 216 SCRA 51, 71 (1992)

37 Ibid.

38 Ibid.

39 Supra note 20 at Section 605

40 Ibid.

41 CIVIL CODE, Art. 1144

42 CIVIL CODE, Art 2214.

FIRST DIVISION

G.R. No. 107508 April 25, 1996 PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, CAPITOL CITY DEVELOPMENT BANK, PHILIPPINE BANK OF COMMUNICATIONS, and F. ABANTE MARKETING, respondents.

KAPUNAN, J.:p This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision dated April 29, 1992 of respondent Court of Appeals in CAG.R. CV No. 24776 and its resolution dated September 16, 1992, denying petitioner Philippine National Bank's motion for reconsideration of said decision. The facts of the case are as follows. A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00 was issued by the Ministry of Education and Culture (now Department of Education, Culture and Sports [DECS]) payable to F. Abante Marketing. This check was drawn against Philippine National Bank (herein petitioner). On August 11, 1981, F. Abante Marketing, a client of Capitol City Development Bank (Capitol), deposited the questioned check in its savings account with said bank. In turn, Capitol deposited the same in its account with the Philippine Bank of Communications (PBCom) which, in turn, sent the check to petitioner for clearing. Petitioner cleared the check as good and, thereafter, PBCom credited Capitol's account for the amount stated in the check. However, on October 19, 1981, petitioner returned the check to PBCom and debited PBCom's account for the amount covered by the check, the reason being that there was a "material alteration" of the check number. PBCom, as collecting agent of Capitol, then proceeded to debit the latter's account for the same amount, and subsequently, sent the check back to petitioner. Petitioner, however, returned the check to PBCom. On the other hand, Capitol could not, in turn, debit F. Abante Marketing's account since the latter had already withdrawn the amount of the check as of October 15, 1981. Capitol sought clarification from PBCom and demanded the re-crediting of the amount. PBCom followed suit by requesting an explanation and re-crediting from petitioner. Since the demands of Capitol were not heeded, it filed a civil suit with the Regional Trial Court of Manila against PBCom which, in turn, filed a third-party complaint against petitioner for reimbursement/indemnity with respect to the claims of Capitol. Petitioner, on its part, filed a fourth-party complaint against F. Abante Marketing. On October 3, 1989; the Regional Trial Court rendered its decision the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered as follows:

1.) On plaintiffs complaint, defendant Philippine Bank of Communications is ordered to re-credit or reimburse plaintiff Capitol City Development Bank the amount of P97,650.00, plus interest of 12 percent thereto from October 19, 1981 until the amount is fully paid; 2.) On Philippine Bank of Communications third-party complaint thirdparty defendant PNB is ordered to reimburse and indemnify Philippine Bank of Communications for whatever amount PBCom pays to plaintiff; 3.) On Philippine National Bank's fourth-party complaint, F. Abante Marketing is ordered to reimburse and indemnify PNB for whatever amount PNB pays to PBCom; 4.) On attorney's fees, Philippine Bank of Communications is ordered to pay Capitol City Development Bank attorney's fees in the amount of Ten Thousand (P10,000.00) Pesos; but PBCom is entitled to reimbursement/indemnity from PNB; and Philippine National Bank to be, in turn reimbursed or indemnified by F. Abante Marketing for the same amount; 5.) The Counterclaims of PBCom and PNB are hereby dismissed; 6.) No pronouncement as to costs. SO ORDERED. 1 An appeal was interposed before the respondent Court of Appeals which rendered its decision on April 29, 1992, the decretal portion of which reads: WHEREFORE, the judgment appealed from is modified by exempting PBCom from liability to plaintiff-appellee for attorney's fees and ordering PNB to honor the check for P97,650.00, with interest as declared by the trial court, and pay plaintiff-appellee attorney's fees of P10,000.00. After the check shall have been honored by PNB, PBCom shall re-credit plaintiff-appellee's account with it with the amount. No pronouncement as to costs. SO ORDERED. 2 A motion for reconsideration of the decision was denied by the respondent Court in its resolution dated September 16, 1992 for lack of merit. 3 Hence, petitioner filed the instant petition which raises the following issues: I

WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS A MATERIAL ALTERATION UNDER THE NEGOTIABLE INSTRUMENTS LAW. II WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE MINISTRY OF EDUCATION CAN BE GIVEN WEIGHT IN EVIDENCE. III WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A. CHECK WITHIN THE TWENTY FOUR (24) HOUR CLEARING PERIOD MAY RECOVER THE VALUE OF THE CHECK FROM THE COLLECTING BANK. IV WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL PETITIONER PNB MAY BE HELD LIABLE FOR ATTORNEY'S FEES. 4 We find no merit in the petition. We shall first deal with the effect of the alteration of the serial number on the negotiability of the check in question. Petitioner anchors its position on Section 125 of the Negotiable Instruments Law (ACT No. 2031) 5 which provides: Sec. 225. What constitutes a material alteration. Any alteration which changes: (a) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment; (d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; (f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration.

Petitioner alleges that there is no hard and fast rule in the interpretation of the aforequoted provision of the Negotiable Instruments Law. It maintains that under Section 125(f), any change that alters the effect of the instrument is a material alteration. 6 We do not agree. An alteration is said to be material if it alters the effect of the instrument. 7 It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. 8 In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the Negotiable Instruments Law. Section 1 of the Negotiable Instruments Law provides: Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C. Vitug opines that "an innocent alteration (generally, changes on items other than those required to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder may enforce it only according to its original tenor." 9 Reproduced hereunder are some examples of material and immaterial alterations: A. Material Alterations: (1) Substituting the words "or bearer" for "order." (2) Writing "protest waived" above blank indorsements.

(3) A change in the date from which interest is to run. (4) A check was originally drawn as follows: "Iron County Bank, Crystal Falls, Mich. Aug. 5, 1901. Pay to G.L. or order $9 fifty cents CTR" The insertion of the figure 5 before the figure 9, the instrument being otherwise unchanged. (5) Adding the words "with interest" with or without a fixed rate. (6) An alteration in the maturity of a note, whether the time for payment is thereby curtailed or extended. (7) An instrument was payable "First Nat'l Bank" the plaintiff added the word "Marion." (8) Plaintiff, without consent of the defendant, struck out the name of the defendant as payee and inserted the name of the maker of the original note. (9) Striking out the name of the payee and substituting that of the person who actually discounted the note. (10) Substituting the address of the maker for the name of a comaker. 10 B. Immaterial Alterations: (1) Changing "I promise to pay" to "We promise to pay", where there are two makers. (2) Adding the word "annual" after the interest clause. (3) Adding the date of maturity as a marginal notation. (4) Filling in the date of actual delivery where the makers of a note gave it with the date in blank, "July ____." (5) An alteration of the marginal figures of a note where the sum stated in words in the body remained unchanged. (6) The insertion of the legal rate of interest where the note had a provision for "interest at _______ per cent." (7) A printed form of promissory note had on the margin the printed words, "Extended to ________." The holder on or after maturity wrote

in the blank space the words "May 1, 1913," as a reference memorandum of a promise made by him to the principal maker at the time the words were written to extend the time of payment. (8) Where there was a blank for the place of payment, filling in the blank with the place desired. (9) Adding to an indorsee's name the abbreviation "Cash" when it had been agreed that the draft should be discounted by the trust company of which the indorsee was cashier. (10) The indorsement of a note by a stranger after its delivery to the payee at the time the note was negotiated to the plaintiff. (11) An extension of time given by the holder of a note to the principal maker, without the consent of a surety co-maker. 11 The case at bench is unique in the sense that what was altered is the serial number of the check in question, an item which, it can readily be observed, is not an essential requisite for negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the relations between the parties. The name of the drawer and the drawee were not altered. The intended payee was the same. The sum of money due to the payee remained the same. Despite these findings, however, petitioner insists, that: xxx xxx xxx It is an accepted concept, besides being a negotiable instrument itself, that a TCAA check by its very nature is the medium of exchange of governments (sic) instrumentalities of agencies. And as (a) safety measure, every government office o(r) agency (is) assigned TCAA checks bearing different number series. A concrete example is that of the disbursements of the Ministry of Education and Culture. It is issued by the Bureau of Treasury sizeable bundles of checks in booklet form with serial numbers different from other government office or agency. Now, for fictitious payee to succeed in its malicious intentions to defraud the government, all it need do is to get hold of a TCAA Check and have the serial numbers of portion (sic) thereof changed or altered to make it appear that the same was issued by the MEG. Otherwise, stated, it is through the serial numbers that (a) TCAA Check is determined to have been issued by a particular office or agency of the government. 12

xxx xxx xxx Petitioner's arguments fail to convince. The check's serial number is not the sole indication of its origin.. As succinctly found by the Court of Appeals, the name of the government agency which issued the subject check was prominently printed therein. The check's issuer was therefore sufficiently identified, rendering the referral to the serial number redundant and inconsequential. Thus, we quote with favor the findings of the respondent court: xxx xxx xxx If the purpose of the serial number is merely to identify the issuing government office or agency, its alteration in this case had no material effect whatsoever on the integrity of the check. The identity of the issuing government office or agency was not changed thereby and the amount of the check was not charged against the account of another government office or agency which had no liability under the check. The owner and issuer of the check is boldly and clearly printed on its face, second line from the top: "MINISTRY OF EDUCATION AND CULTURE," and below the name of the payee are the rubberstamped words: "Ministry of Educ. & Culture." These words are not alleged to have been falsely or fraudulently intercalated into the check. The ownership of the check is established without the necessity of recourse to the serial number. Neither there any proof that the amount of the check was erroneously charged against the account of a government office or agency other than the Ministry of Education and Culture. Hence, the alteration in the number of the check did not affect or change the liability of the Ministry of Education and Culture under the check and, therefore, is immaterial. The genuineness of the amount and the signatures therein of then Deputy Minister of Education Hermenegildo C. Dumlao and of the resident Auditor, Penomio C. Alvarez are not challenged. Neither is the authenticity of the different codes appearing therein questioned . . . 13 (Emphasis ours.) Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was altered, the same being an immaterial or innocent one. We now go to the second issue. It is petitioner's submission that the certification issued by Minrado C. Batonghinog, Cashier III of the MEC clearly shows that the check was altered. Said certification reads:

July 22, 1985 TO WHOM IT MAY CONCERN:

This is to certify that according to the records of this Office, TCAA PNB Check Mo. SN7-3666223-3 dated August 7, 1981 drawn in favor of F. Abante Marketing in the amount of NINETY (S)EVEN THOUSAND SIX HUNDRED FIFTY PESOS ONLY (P97,650.00) was not issued by this Office nor released to the payee concerned. The series number of said check was not included among those requisition by this Office from the Bureau of Treasury. Very truly yours, (SGD.) MINRADO C. BATONGHINOG Cashi er III 14 Petitioner claims that even if the author of the certification issued by the Ministry of Education and Culture (MEG) was not presented, still the best evidence of the material alteration would be the disputed check itself and the serial number thereon. Petitioner thus assails the refusal of respondent court to give weight to the certification because the author thereof was not presented to identify it and to be cross-examined thereon. 15 We agree with the respondent court. The one who signed the certification was not presented before the trial court to prove that the said document was really the document he prepared and that the signature below the said document is his own signature. Neither did petitioner present an eyewitness to the execution of the questioned document who could possibly identify it. 16 Absent this proof, we cannot rule on the authenticity of the contents of the certification. Moreover, as we previously emphasized, there was no material alteration on the check, the change of its serial number not being substantial to its negotiability. Anent the third issue whether or not the drawee bank may still recover the value of the check from the collecting bank even if it failed to return the check within the twenty-four (24) hour clearing period because the check was tampered suffice it to state that since there is no material alteration in the check, petitioner has no right to dishonor it and return it to PBCom, the same being in all respects negotiable. However, the amount of P10,000.00 as attorney's fees is hereby deleted. In their respective decisions, the trial court and the Court of Appeals failed to explicitly state the rationale for the said award. The trial court merely ruled as follows:

With respect to Capitol's claim for damages consisting of alleged loss of opportunity, this Court finds that Capitol failed to adequately substantiate its claim. What Capitol had presented was a self-serving, unsubstantiated and speculative computation of what it allegedly could have earned or realized were it not for the debit made by PBCom which was triggered by the return and debit made by PNB. However, this Court finds that it would be fair and reasonable to impose interest at 12% per annum on the principal amount of the check computed from October 19, 1981 (the date PBCom debited Capitol's account) until the amount is fully paid and reasonable attorney's fees. 17(Emphasis ours.) And contrary to the Court of Appeal's resolution, petitioner unambiguously questioned before it the award of attorney's fees, assigning the latter as one of the errors committed by the trial court. 18 The foregoing is in conformity with the guiding principles laid down in a long line of cases and reiterated recently inConsolidated Bank & Trust Corporation (Solidbank) v. Court of Appeals: 19 The award of attorney's fees lies within the discretion of the court and depends upon the circumstances of each case. However, the discretion of the court to award attorney's fees under Article 2208 of the Civil Code of the Philippines demands factual, legal and equitable justification, without which the award is a conclusion without a premise and improperly left to speculation and conjecture. It becomes a violation of the proscription against the imposition of a penalty on the right to litigate (Universal Shipping Lines, Inc. v. Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for the award must be stated in the text of the court's decision. If it is stated only in the dispositive portion of the decision, the same shall be disallowed. As to the award of attorney's fees being an exception rather than the rule, it is necessary for the court to make findings of fact and law that would bring the case within the exception and justify the grant of the award (Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [176 SCRA 539]). WHEREFORE, premises considered, except for the deletion of the award of attorney's fees, the decision of the Court of Appeals is hereby AFFIRMED. SO ORDERED. Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur. Footnotes

1 CA Rollo, p. 28. 2 Rollo, pp. 21-28. 3 Id., at 30-31. 4 Id., at 10-11. 5 The Negotiable Instruments Law of the Philippines was patterned after the draft approved by the Commissioner on Uniform State Laws in the United States. (Agbayani, Commentaries and Jurisprudence on the COMMERCIAL LAWS OF THE PHILIPPINES, Vol. 1, p. 99-100.) 6 Rollo, p. 11. 7 Agbayani, Commentaries and Jurisprudence on the COMMERCIAL LAWS OF THE PHILIPPINES, Vol. 1, 1992 ed., p. 403. 8 Nickles, Negotiable Instruments and other related Commercial Paper, 1993 2nd ed., p. 168. 9 Vitug, Pandect of Commercial Law and Jurisprudence, 1990 ed., p. 55. 10 Agbayani, Commentaries & Jurisprudence on the COMMERCIAL LAWS OF THE PHILIPPINES, Vol. 1, 1992 ed., pp. 403-404. 11 Id., at 404-405. 12 Rollo, p. 78. 13 Rollo, pp. 21-28. 14 Rollo, p. 26. 15 Ibid. 16 R.J. Francisco, Evidence, 1993 ed., p. 505. The due execution of a document could be proved through the testimony of (1) the person who executed it; (2) the person before whom its execution was acknowledged; or (3) any person who was present and saw it executed and delivered, or who, after its execution and delivery, saw it and recognized the signatures, or by a person to whom the parties to the instrument had previously confessed the execution thereof . . .

17 CA Rollo, Decision of RTC, p. 5. 18 CA Rollo, Brief of Appellant PNB, pp. 15-16. 19 246 SCRA 193 (1995); See also, Toyota Shaw, Inc. v. CA, 244 SCRA 320 (1995).

THIRD DIVISION G.R. No. 129910 September 5, 2006

THE INTERNATIONAL CORPORATE BANK, INC., petitioner, vs. COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents. DECISION CARPIO, J.: The Case Before the Court is a petition for review1 assailing the 9 August 1994 Amended Decision2 and the 16 July 1997 Resolution3 of the Court of Appeals in CA-G.R. CV No. 25209. The Antecedent Facts The case originated from an action for collection of sum of money filed on 16 March 1982 by the International Corporate Bank, Inc.4 ("petitioner") against the Philippine National Bank ("respondent"). The case was raffled to the then Court of First Instance (CFI) of Manila, Branch 6. The complaint was amended on 19 March 1982. The case was eventually re-raffled to the Regional Trial Court of Manila, Branch 52 ("trial court"). The Ministry of Education and Culture issued 15 checks5 drawn against respondent which petitioner accepted for deposit on various dates. The checks are as follows: Check Number 7-3694621-4 7-3694609-6 7-3666224-4 7-3528348-4 7-3666225-5 7-3688945-6 7-4535674-1 7-4535675-2 7-4535699-5 7-4535700-6 7-4697902-2 7-4697925-6 Date 7-20-81 7-27-81 8-03-81 8-07-81 8-10-81 8-10-81 8-21-81 8-21-81 8-24-81 8-24-81 9-18-81 9-18-81 Payee Trade Factors, Inc. Romero D. Palmares Trade Factors, Inc. Trade Factors, Inc. Antonio Lisan Antonio Lisan Golden City Trading Red Arrow Trading Antonio Lisan Antonio Lisan Ace Enterprises, Inc. Golden City Trading Amount P 97,500.00 98,500.50 99,800.00 98,600.00 98,900.00 97,700.00 95,300.00 96,400.00 94,200.00 95,100.00 96,000.00 93,030.00

7-4697011-6 7-4697909-4 7-4697922-3

10-02-81 10-02-81 10-05-81

Wintrade Marketing ABC Trading, Inc. Golden Enterprises

90,960.00 99,300.00 96,630.00

The checks were deposited on the following dates for the following accounts: Check Number 7-3694621-4 7-3694609-6 7-3666224-4 7-3528348-4 7-3666225-5 7-3688945-6 7-4535674-1 7-4535675-2 7-4535699-5 7-4535700-6 7-4697902-2 7-4697925-6 7-4697011-6 7-4697909-4 Date Deposited 7-23-81 7-28-81 8-4-81 8-11-81 8-11-81 8-17-81 8-26-81 8-27-81 8-31-81 8-24-81 9-23-81 9-23-81 10-7-81 10-7-81 Account Deposited CA 0060 02360 3 CA 0060 02360 3 CA 0060 02360 3 CA 0060 02360 3 SA 0061 32331 7 CA 0060 30982 5 CA 0060 02360 3 CA 0060 02360 3 CA 0060 30982 5 SA 0061 32331 7 CA 0060 02360 3 CA 0060 30982 5 CA 0060 02360 3 CA 0060 30982 56

After 24 hours from submission of the checks to respondent for clearing, petitioner paid the value of the checks and allowed the withdrawals of the deposits. However, on 14 October 1981, respondent returned all the checks to petitioner without clearing them on the ground that they were materially altered. Thus, petitioner instituted an action for collection of sums of money against respondent to recover the value of the checks. The Ruling of the Trial Court The trial court ruled that respondent is expected to use reasonable business practices in accepting and paying the checks presented to it. Thus, respondent cannot be faulted for the delay in clearing the checks considering the ingenuity in which the alterations were effected. The trial court observed that there was no attempt from petitioner to verify the status of the checks before petitioner paid the value of the checks or allowed withdrawal of the deposits. According to the trial court, petitioner, as collecting bank, could have inquired by telephone from respondent, as drawee bank, about the status of the checks before paying their value. Since the immediate cause of petitioners loss was the lack of caution of its personnel, the trial court held that petitioner is not entitled to recover the value of the checks from respondent. The dispositive portion of the trial courts Decision reads: WHEREFORE, judgment is hereby rendered dismissing both the complaint and the counterclaim. Costs shall, however be assessed against the plaintiff. SO ORDERED.7 Petitioner appealed the trial courts Decision before the Court of Appeals. The Ruling of the Court of Appeals In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial courts Decision. Applying Section 4(c) of Central Bank Circular No. 580, series of 1977,9 the Court of Appeals held that checks that have been materially altered shall be returned within 24 hours after discovery of the alteration. However, the Court of Appeals ruled that even if the drawee bank returns a check with material alterations after discovery of the

alteration, the return would not relieve the drawee bank from any liability for its failure to return the checks within the 24-hour clearing period. The Court of Appeals explained: Does this mean that, as long as the drawee bank returns a check with material alteration within 24 hour[s] after discovery of such alteration, such return would have the effect of relieving the bank of any liability whatsoever despite its failure to return the check within the 24- hour clearing house rule? We do not think so. Obviously, such bank cannot be held liable for its failure to return the check in question not later than the next regular clearing. However, this Court is of the opinion and so holds that it could still be held liable if it fails to exercise due diligence in verifying the alterations made. In other words, such bank would still be expected, nay required, to make the proper verification before the 24-hour regular clearing period lapses, or in cases where such lapses may be deemed inevitable, that the required verification should be made within a reasonable time. The implication of the rule that a check shall be returned within the 24-hour clearing period is that if the collecting bank paid the check before the end of the aforesaid 24-hour clearing period, it would be responsible therefor such that if the said check is dishonored and returned within the 24-hour clearing period, the drawee bank cannot be held liable. Would such an implication apply in the case of materially altered checks returned within 24 hours after discovery? This Court finds nothing in the letter of the above-cited C.B. Circular that would justify a negative answer. Nonetheless, the drawee bank could still be held liable in certain instances. Even if the return of the check/s in question is done within 24 hours after discovery, if it can be shown that the drawee bank had been patently negligent in the performance of its verification function, this Court finds no reason why the said bank should be relieved of liability. Although banking practice has it that the presumption of clearance is conclusive when it comes to the application of the 24-hour clearing period, the same principle may not be applied to the 24-hour period vis-a-vis material alterations in the sense that the drawee bank which returns materially altered checks within 24 hours after discovery would be conclusively relieved of any liability thereon. This is because there could well be various intervening events or factors that could affect the rights and obligations of the parties in cases such as the instant one including patent negligence on the part of the drawee bank resulting in an unreasonable delay in detecting the alterations. While it is true that the pertinent proviso in C.B. Circular No. 580 allows the drawee bank to return the altered check within the period "provided by law for filing a legal action", this does not mean that this would entitle or allow the drawee bank to be grossly negligent and, inspite thereof, avail itself of the maximum period allowed by the above-cited Circular. The discovery must be made within a reasonable time taking into consideration the facts and circumstances of the case. In other words, the aforementioned C.B. Circular does not provide the drawee bank the license to be grossly negligent on the one hand nor does it preclude the collecting bank from raising available defenses even if the check is properly returned within the 24-hour period after discovery of the material alteration.10 The Court of Appeals rejected the trial courts opinion that petitioner could have verified the status of the checks by telephone call since such imposition is not required under Central Bank rules. The dispositive portion of the 10 October 1991 Decision reads: PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and the defendantappellee Philippine National Bank is declared liable for the value of the fifteen checks specified and enumerated in the decision of the trial court (page 3) in the amount of P1,447,920.00 SO ORDERED.11 Respondent filed a motion for reconsideration of the 10 October 1991 Decision. In its 9 August 1994 Amended Decision, the Court of Appeals reversed itself and affirmed the Decision of the trial court dismissing the

complaint. In reversing itself, the Court of Appeals held that its 10 October 1991 Decision failed to appreciate that the rule on the return of altered checks within 24 hours from the discovery of the alteration had been duly passed by the Central Bank and accepted by the members of the banking system. Until the rule is repealed or amended, the rule has to be applied. Petitioner moved for the reconsideration of the Amended Decision. In its 16 July 1997 Resolution, the Court of Appeals denied the motion for lack of merit. Hence, the recourse to this Court. The Issues Petitioner raises the following issues in its Memorandum: 1. Whether the checks were materially altered; 2. Whether respondent was negligent in failing to recognize within a reasonable period the altered checks and in not returning the checks within the period; and 3. Whether the motion for reconsideration filed by respondent was out of time thus making the 10 October 1991 Decision final and executory.12 The Ruling of This Court Filing of the Petition under both Rules 45 and 65 Respondent asserts that the petition should be dismissed outright since petitioner availed of a wrong mode of appeal. Respondent cites Ybaez v. Court of Appeals13 where the Court ruled that "a petition cannot be subsumed simultaneously under Rule 45 and Rule 65 of the Rules of Court, and neither may petitioners delegate upon the court the task of determining under which rule the petition should fall." The remedies of appeal and certiorari are mutually exclusive and not alternative or successive.14 However, this Court may set aside technicality for justifiable reasons. The petition before the Court is clearly meritorious. Further, the petition was filed on time both under Rules 45 and 65.15 Hence, in accordance with the liberal spirit which pervades the Rules of Court and in the interest of justice,16we will treat the petition as having been filed under Rule 45. Alteration of Serial Number Not Material The alterations in the checks were made on their serial numbers. Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable Instruments Law, provide: SEC. 124. Alteration of instrument; effect of. Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to its original tenor.

SEC. 125. What constitutes a material alteration. Any alteration which changes: (a) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment; (d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. The question on whether an alteration of the serial number of a check is a material alteration under the Negotiable Instruments Law is already a settled matter. In Philippine National Bank v. Court of Appeals, this Court ruled that the alteration on the serial number of a check is not a material alteration. Thus: An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the Negotiable Instrument[s] Law. Section 1 of the Negotiable Instruments Law provides: Section 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C. Vitug opines that "an innocent alteration (generally, changes on items other than those required to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder may enforce it only according to its original tenor. xxxx The case at the bench is unique in the sense that what was altered is the serial number of the check in question, an item which, it can readily be observed, is not an essential requisite for negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the relations between the parties. The name of the drawer and the drawee were not altered. The intended

payee was the same. The sum of money due to the payee remained the same. x x x xxxx The checks serial number is not the sole indication of its origin. As succinctly found by the Court of Appeals, the name of the government agency which issued the subject check was prominently printed therein. The checks issuer was therefore sufficiently identified, rendering the referral to the serial number redundant and inconsequential. x x x xxxx Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was altered, the same being an immaterial or innocent one.17 Likewise, in the present case the alterations of the serial numbers do not constitute material alterations on the checks. Incidentally, we agree with the petitioners observation that the check in the PNB case appears to belong to the same batch of checks as in the present case. The check in the PNB case was also issued by the Ministry of Education and Culture. It was also drawn against PNB, respondent in this case. The serial number of the check in the PNB case is 7-3666-223-3 and it was issued on 7 August 1981. Timeliness of Filing of Respondents Motion for Reconsideration Respondent filed its motion for reconsideration of the 10 October 1991 Decision on 6 November 1991. Respondents motion for reconsideration states that it received a copy of the 10 October 1991 Decision on 22 October 1991.18 Thus, it appears that the motion for reconsideration was filed on time. However, the Registry Return Receipt shows that counsel for respondent or his agent received a copy of the 10 October 1991 Decision on 16 October 1991,19 not on 22 October 1991 as respondent claimed. Hence, the Court of Appeals is correct when it noted that the motion for reconsideration was filed late. Despite its late filing, the Court of Appeals resolved to admit the motion for reconsideration "in the interest of substantial justice."20 There are instances when rules of procedure are relaxed in the interest of justice. However, in this case, respondent did not proffer any explanation for the late filing of the motion for reconsideration. Instead, there was a deliberate attempt to deceive the Court of Appeals by claiming that the copy of the 10 October 1991 Decision was received on 22 October 1991 instead of on 16 October 1991. We find no justification for the posture taken by the Court of Appeals in admitting the motion for reconsideration. Thus, the late filing of the motion for reconsideration rendered the 10 October 1991 Decision final and executory. The 24-Hour Clearing Time The Court will not rule on the proper application of Central Bank Circular No. 580 in this case. Since there were no material alterations on the checks, respondent as drawee bank has no right to dishonor them and return them to petitioner, the collecting bank.21 Thus, respondent is liable to petitioner for the value of the checks, with legal interest from the time of filing of the complaint on 16 March 1982 until full payment.22 Further, considering that respondents motion for reconsideration was filed late, the 10 October 1991 Decision, which held respondent liable for the value of the checks amounting to P1,447,920, had become final and executory. WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and the 16 July 1997 Resolution of the Court of Appeals. We rule that respondent Philippine National Bank is liable to petitioner International Corporate Bank, Inc. for the value of the checks amounting to P1,447,920, with legal interest from 16 March 1982 until full payment. Costs against respondent.

SO ORDERED. Quisumbing, Chairperson, Carpio-Morales, Tinga, Velasco, Jr., J.J., concur.

Footnotes Petitioner denonimated the petition as filed under both Rule 45 and Rule 65 of the 1997 Rules of Civil Procedure.
1

Penned by Associate Justice Serafin V.C. Guingona with Associate Justices Jorge S. Imperial and Justo P. Torres, Jr., concurring. Rollo, pp. 25-34.
2

Penned by Associate Justice Jorge S. Imperial with Associate Justices Ramon U. Mabutas, Jr. and Hilarion L. Aquino, concurring. Rollo, p. 23.
3 4

Now the Union Bank of the Philippines.

The first 14 checks were the subject of the complaint while the last check was included in the amended complaint.
5 6

The deposit slip of Check No. 7-4697922-3 was not presented before the trial court. Rollo, p. 295.

Penned by Associate Justice Serafin V.C. Guingona with Associate Justices Luis A. Javellana and Jorge S. Imperial, concurring. Rollo, pp. 47-58.
8 9

Section 4(c) provides: SECTION 4. Clearing Procedures. xxxx (c) Procedure for Returned Items Items which should be returned for any reason whatsoever shall be presented not later than the next regular clearing for local exchanges. Out-of-town exchanges shall be returned within the period specified in the Memorandum to Authorized Agent Banks announcing the opening of clearing facilities in each of the authorized regional clearing centers. x x x Items which have been the subject of a material alteration or items bearing a forged endorsement when such endorsement is necessary for negotiation shall be returned within twenty-four (24) hours after discovery of the alteration or the forgery but in no event beyond the period fixed or provided by law for filing of a legal action by the returning bank/branch, institution or entity against the bank/branch, institution or entity sending the same. xxxx

10

Rollo, pp. 53-54.

11

Id. at 58. Id. at 251-252. 323 Phil. 643 (1996). Ligon v. CA, 355 Phil. 503 (1998). Nuez v. GSIS Family Bank, G.R. No. 163988, 17 November 2005, 475 SCRA 305. Id. 326 Phil. 504 (1996), 511-516. CA rollo, p. 86. Id. at 73. Id. at 90. PNB v. CA, supra note 17. Article 2209, Civil Code.

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