Caltex Philippines v CA and Security Bank: CTDs as Negotiable Instruments

NEGOTIABLE INSTRUMENTS
ATTY. F. AMPIL
TRADERS ROYAL BANK v CA

In 1979, Filriters Guaranty Assurance Corporation [Filriters] executed a
Detached Assignment whereby as registered owner, it sold, transferred,
assigned and delivered unto Philippine Underwriters Finance Corporation
[Philfinance] all its rights and title to Central Bank Certificates of Indebtedness
[CBCI] worth 500K each, amounting to an aggregate value of P3.5M.
In Feb 1981, Philfinance, through a Repurchase Agreement, sold, transferred
and delivered one of the CBCIs with a face value of 500K to Traders Royal
Bank [TRB] for the price of P519,361.11.
In April 1981, Philfinance agreed to repurchase the CBCI pursuant to the
agreement. However, it failed to do so when the checks it issued for TRB was
dishonored due to insufficient funds.
Philfinance then executed a Detached Assignment in favor of TRB to enable
the latter to have its title completed and registered. But when TRB presented the
CBCI to the Central Bank for registration, the latter refused to do so. TRB then
filed a case to compel the Central Bank to register the CBCI in its name.
When impleaded in the case, Filriters claimed that the detached assignment
forms were executed by its Senior Vice-President-Comptroller and VicePresident-Treasury without the knowledge and consent of its directors and w/o
written authorization from its Board. As such, Filriters claimed that the
assignment of the CBCI to Philfinance was a personal act of its 2 officers and
not its corporate act. Being so, the assignment was null and void. It also claimed
that the CBCI was not a negotiable instrument and as a certificate of
indebtedness was not payable to bearer but was specifically registered in the
name of Filriters.
The RTC declared the assignment null and void.
The CA ruled that the CBCI was not a negotiable instrument since the
instrument clearly stated that it was payable to Filriters, the registered owner,
whose name was inscribed thereon and that the certificate lacked the words of
negotiability which serve as an expression of consent that the instrument may be
transferred by negotiation. The CA also found that Philfinance acquired the CBCI
from Filriters fictitiously because there was really no consideration or value
received in the transfer. What happened was Philfinance merely borrowed the
CBCI from Filriters, a sister corporation.
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ISSUE: W/N THE CENTRAL BANK CERTIFICATE OF INDEBTEDNESS WAS A

NEGOTIABLE INSTRUMENT?
HELD: NO.
The court held that the subject CBCI was not a negotiable instrument in the
absence of words of negotiability within the meaning of the negotiable instruments
law. The CBCI reads that the Central Bank promises to pay bearer, or if this
Certificate of Indebtedness be registered, to Filriters Guaranty Assurance
Corporation, the registered owner hereof, the principal sum of 500k. A reading of
the CBCI indicates that it is payable to Filriters, and to no one else, thus discounting
TRBs submission that it is a negotiable instrument.
The language of negotiability which characterizes a negotiable paper as a credit
instrument is its freedom to circulate as a substitute for money. Hence, freedom of
negotiability is the touchstone relating to the protection of holders in due course, and
the freedom of negotiability is the foundation for the protection which the law throws
around a holder in due course. This freedom in negotiability is totally absent in a
CBCI as it merely acknowledges to pay a sum of money to a specified person or
entity for a period of time. A certificate of indebtedness then pertains to certificates
for the creation and maintenance of a permanent improvement revolving fund and is
similar to a bond. Being equivalent to a bond, it is properly understood as an
acknowledgement of an obligation to pay a fixed sum of money.
Citing Caltex v CA, the court ruled that the accepted rule is that the negotiability or
non-negotiability of an instrument is determined from the writing, or from the face of
the instrument itself. As it lacked the words of negotiability, the CBCI is nonnegotiable. Thus, the transfer of the instrument from Philfinance to TRB was merely
an assignment, and is not governed by the Negotiable Instruments Law.
Consequently, the title of Filriters over the subject CBCI was upheld over the
claimed interest of TRB.
CALTEX PHILS v CA and Security Bank
Security Bank & Trust Company issued 280 certificates of time deposit [CTDs] in
favor of one Angel dela Cruz who deposited with the bank the aggregate amount
of P1,120,000. Dela Cruz then delivered the CTDs to Caltex in connection with
his purchase of fuel products from the latter.
In March 1982, Dela Cruz informed the Bank manager that he lost all the CTDs.
The manager agreed to replace the 280 CTDs upon execution and submission
of a notarized Affidavit of Loss, as required by bank procedure.
Upon replacement of the allegedly lost CTDs, Dela Cruz obtained a loan of
P875k from Security Bank. He then executed a notarized Deed of Assignment of
Time Deposit, surrendering to the bank full control of the time deposit account,
allowing the latter to apply the said time deposits to the payment of whatever
amounts may be due on the loan upon maturity.
On the other hand, in November 1982, Mr. Aranas, credit manager of Caltex,
presented to Security Bank for verification the CTDs declared lost by Dela Cruz.
Aranas claimed that the same were delivered to Caltex as security for
purchases made. Accordingly, Security Bank rejected Caltexs demand for
payment of the value of the CTDs.
In April 1983, the loan of Dela Cruz with the Security Bank matured and the
latter applied the time deposits in question as payment of the matured loan.
Caltex then filed a complaint demanding payment by the ban of the value of the
CTDs plus accrued interest and compounded interest.
The RTC dismissed the case. CA also dismissed the appeal.
ISSUE:
1. W/N THE SUBJECT CTDs ARE NEGOTIABLE INSTRUMENTS?
2. W/N CALTEX CAN RECOVER THE AMOUNT/VALUE OF THE CTDs?
HELD:
1. YES. A sample text of the CTDs states: This is to certify that bearer has deposited
in this Bank the sum of 4,000 pesos, Philippine Currency, repayable to said
depositor 731 das. After date, upon presentation and surrender of this certificate,
with interest rate of 16% per annum.
Section 1 of the NIL requires, among others, that for an instrument to be
negotiable, it must be payable to order or to bearer [Par.D]. The accepted rule is
that the negotiability or non-negotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. The documents provide that
the amounts deposited shall be repayable to the depositor. The court ruled that the
depositor indicated is actually the bearer. The documents do not say that the
depositor is Angel Dela Cruz and that the amounts deposited are payable only to
him. If it was really the intention of the bank to pay the amount to dela Cruz only,
then it could have so expressed in clear and categorical terms instead of having
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ATTY. F. AMPIL
the word bearer stamped on the space provided for the name of the depositor in
each CTD.
The Security Bank, through its manager, testified that the depositor referred to is
Angel dela Cruz. However, the court ruled that the manager merely declared that
Dela Cruz is the depositor, insofar as the bank is concerned, but obviously other
parties not privy to the transaction between them would not know that the depositor
is not the bearer stated in the CTDs. Hence, the situation would require any party
dealing with the CTDs to go behind the plain import of that is written thereon. This
need for resort to extrinsic evidence is what is sought to be avoided by the
Negotiable Instruments law and calls for application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.
2. NO. Unfortunately for Caltex, although the CTDs are bearer instruments, a valid
negotiation thereof for the purpose and agreement between it and Dela Cruz,
requires both delivery and indorsement.
As stated by Aranas in a letter addressed to the bank, these certificates of
deposit were negotiated to us by Mr. Dela Cruz to guarantee his purchases of fuel
products. This admission is conclusive upon Caltex. Under the doctrine of Estoppel,
and admission is rendered conclusive upon the person making it and cannot be
denied as against the person relying thereon. If it were true that the CTDs were
delivered as payment and not as security, Aranas could have easily said so, instead
of using the words to guarantee.
Under the NIL, an instrument is negotiated when it is transferred from one person
to another in such a manner as to constitute the transferee the holder thereof, and a
holder may be the payee or indorsee of a bill or note, who is in possession of it, or
the bearer thereof. In the present case, however, there was no negotiation in the
sense of a transfer of legal title, in which case deliver would have sufficed. Here, the
delivery of the CTDs was only as security for the purchases of Dela Cruz. Therefore,
Caltex could only have been a holder for value by reason of lien. Accordingly, a
negotiation for such purpose cannot be effected by mere delivery of the instrument
because the terms thereof and the subsequent disposition of such security, in the
event of non-payment of the principal obligation, must be contractually provided for.
ATTY. F. AMPIL
believed Dela Ramas story that the amounts had already been advanced by the
lawyer and given as gifts for the NARIC officials. The SC agreed with the RTC that
I. PINEDA v DELA RAMA

Presumption that a negotiable instrument is issued for a valuable
consideration is only prima facie
Jose Dela Rama was a practicing lawyer who was retained by petitioner Jesus
Pineda in order to make representations with the chairman & gen. manager of
the Natl Rice & Corn Adminn [NARIC] regarding the alleged institution of
criminal charges against Pineda for misappropriation of 11,000 cavans of palay.
The NARIC gen. manager was supposedly an intimate friend of Dela Rama.
Accdg to Dela Rama, Pineda borrowed P9,3000 from him as evidenced by a
promissory note signed by the latter. Dela Rama then sued for collection of the
amount, including P5k in attorneys fees for services in the case of NARIC.
In his defense, Pineda claims he only signed the note because he was made to
believe that Dela Rama had already advanced the amount to bribe the NARIC
officials in order to suspend Pinedas prosecution.
In the course of the case, it was proven that the value of the promissory note
was not the only amount received by Dela Rama, as Pineda had earlier given
him P3k via check to serve as grease money. An air-conditioner bought by
Pinedas son supposedly to give to the NARIC officials also went to Dela Rama
and was never given to the officials. 6 sacks of rice were also proven to be
received by Dela Rama. It was later found out that none of the authorities had
received any of the amounts, and that there were no criminal charges
contemplated to be filed against the petitioner by NARIC to begin with.
The RTC ruled for Pineda, declaring that the P9300 in the note was not received
by Pineda nor given to any party for his benefit. It also ruled that the P3k be
returned to petitioner, subtracting P400 as legal fees for the NARIC case,
considering Dela Rama already received an air-conditioner and 6 sacks of rice.
CA reversed, claiming that Pineda should have known better than to sign a
document or paper w/o being aware of its contents & importance. The CA cited
Sec.24 of the NIL, providing that every negotiable instrument is deemed prima
facie to have been issued for a valuable consideration, and every person whose
signature appears thereon to have become a party thereto for value.
it is unusual for a lawyer to lend money to his client whom he had known only for 3
months with no security for the loan. Moreover, there was evidence presented that
Dela Rama appropriated for himself the air-conditioner and 6 sacks of rice that were
bought by Pineda supposedly to be given to the NARIC officials.
Based on the foregoing, the promissory note was executed for an illegal
consideration. Whether or not the supposed cash advances reached their
destination is of no importance. The consideration for the promissory note to
influence public officers in the performance of their duties is contrary to law and
public policy. Therefore, the note is void ab initio and no cause of action for the
collection cases can arise from it.
Issue: W/N THE PRESUMPTION OF VALUABLE CONSIDERATION APPLIES TO

THE PRESENT CASE?
Held: NO. Although there is a legal presumption that every negotiable instrument
was issued for a valuable consideration, this is only prima facie and may be
rebutted by proof to the contrary. The promissory note reads that This represents
the cash advances made by him in connection with my case for which he is my
attorney-in-law. The provisions of the note support petitioners claim that he
Jen Laygo 2D 05
ATTY. F. AMPIL
3. YES. Aruego claims that the drafts signed by him were not really bills of exchange
but mere pieces of evidence of indebtedness because payments were already made
before acceptance. Under NIL, a bill of exchange is an unconditional order in
II. PHIL. BANK OF COMMERCE v ARUEGO

Definition, rights and liabilities of an Accommodation Party
Jose M. Aruego was the president of the Philippine Education Foundation
Company which published a periodical, World Current Events. The Company
via Aruego obtained a credit accommodation from the Bank of Commerce in
order to facilitate the printing of the periodical. Thus, for every printing, the
printer [Encal Press & Photo-Engraving] collected the cost by drawing a draft
against the bank then sent it to Aruego for acceptance. As added security, the
Bank required Aruego to execute a trust receipt where the latter undertook to
hold in trust for the Bank the periodicals and sell the same with the promise to
turn over the proceeds as payment of all obligations arising from the draft.
The Bank then instituted a case against Aruego for recovery of the total sums
due.
Aruego claimed that when the various bills of exchange were presented to him
for acceptance, the amounts were already paid by the Bank to Encal w/o his
knowledge or consent. He also claims to be an accommodating party only for
Encal and will be liable only in the event that Encal fails to pay the Bank.
The RTC dismissed for lack of cause of action. Upon appeal in the CA, he failed
to file his answer on the last day for pleading, but was excused by the SC.
Issue: 1. W/N ARUEGO ONLY SIGNED AS AN AGENT OF THE PHILIPPINE
EDUCATION FOUNDATION COMPANY?
2. W/N ARUEGO WAS AN ACCOMODATION PARTY?
3. W/N THE DRAFTS WERE REALLY BILLS OF EXCHANGE?
Held:
1. NO. Aruego claims that he signed the bills of exchange only as an agent of the
company where he is president. Sec20 of the NIL provides that for an agent to
avoid liability, he must be duly authorized, indicate that he is only acting as an
agent, and disclose the identity of his principal. An inspection of the drafts shows
Aruego never disclosed that he was signing only as a representative of the
company. He therefore could not have signed as a mere agent.
2. NO.
An accommodation party is one who has signed the instrument as maker,

drawer, indorser, without receiving value therefore and for the purpose of lending
his name to some other person. Such person is liable to a holder for value even if
the latter knew him to be only an accommodation party. In lending his name to the
accommodated party, he in effect acts as a surety for the latter. In the instant case,
Aruego signed as a Drawee/Acceptor. Under the NIL, a drawee is primarily liable
Jen Laygo 2D 05
writing addressed by 1 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. As long as commercial paper
conforms w/ the definition of a bill of exchange, that paper is considered a bill of
exchange. The nature of acceptance is important only in the determination of the kind
of liabilities of the parties involved, but not in the determination of whether a
commercial paper is a bill of exchange or not.
ANNOTATIONS:
An accommodation party is a party to the instrument as maker, drawer.
Acceptor or indorser; he has not received any value therefor and he must sign
for the purpose of lending his name or credit. If, on the other hand, an
indorsement is made as a favor to the indorsee, who requests it, not to secure
payment but to relieve himself from a distasteful situation, the act of the
indorsement ford not make the indorser an accommodation party.
The receipt by the accommodation part of an amount in consideration for
lending his name does not affect his act as an accommodation.
An accommodation party is liable on the instrument under Sec29 of the NIL to a
holder for value, notwithstanding such holder, at the time of taking the
instrument, knew him only to be an accommodation party.
The accommodation party will generally be regarded as a surety for the party
accommodated. Correspondingly, when the accommodated party makes
payment to the holder of the note, he has the right to sue the accommodated
party for reimbursement since the relation between them is in effect that of
principal and sureties.
Should there be more than 1 accommodation party who signs an instrument,
each of them is jointly and severally liable to the creditor. However, if one of the
accommodation parties pays the obligation of the accommodated party in favor
of the creditor, said accommodation party can demand contribution from his
solidary co-maker subject to conditions required by the Civil Code.
A solidary accommodation maker has the right to contribution from his coaccommodation maker, only if he paid in virtue of a judicial demand or the
principal debtor is insolvent.
An absence or lack of consideration is a matter of defense as against any
person not a holder in due course. [Sec.28] Such lack of consideration can be
interposed as a defense against the party accommodated. Appropriately, it has
been held that the defense of want of consideration is available against the
party accommodated.
For an accommodation party to be liable on an instrument, the holder must
have acquired it for value in due course. The accommodation party is liable to
a holder for value as if the contract was not for accommodation and it is not a
valid defense that the accommodation party did not receive any valuable
consideration when he executed the instrument.
III. CLARK v SELLNER
Joint Surety, not Accommodation Party
Sellner, in conjunction with 2 other persons signed a note in favor of Clark,
providing that 6 months after date, for value received, we jointly and severally
promise to pay to the order of Clarkthe sum of 12 thousand pesos. The note
matured but its amount was not paid.
Sellner claims he did not receive in that transaction either the whole or any part
of the amount of the debt, and that he only signed as an accommodation party
and is therefore not liable unless the note is negotiated, which was not done.
Issue:
1.
2.
Held:
1.
2.
W/N SELLNER IS STILL LIABLE ALTHOUGH HE DID NOT RECEIVE ANY

PART OF THE AMOUNT OF DEBT?
W/N SELLNER WAS AN ACCOMODATION PARTY?
YES. The liability of the defendant, as one of the signers of the note, is not
dependent on whether he has, or has not, received any part of the amount
of the debt. The defendant is really and expressly one of the joint and
several debtors on the note and as such he is liable under the provisions of
section 60 of NIL.
NO, he is more of a joint surety. It must be noted that by putting his
signature to the note, he lent his name, not to the creditor, but to those who
signed with him placing himself with respect to the creditor in the same
position and with the same liability as the said signers. It should be noted
that the phrase :w/o receiving value therefore in sec29 means w/o receiving
value by virtue of the instrument and does not mean w/o receiving value for
lending his name. If as in the instant case, a sum of money was received by
virtue of the note, it is immaterial, so far as the creditor is concerned,
whether one of the signers has or has not received anything in payment of
the use of his name.
In reality the legal situation of the defendant in this case may be regarded
as that of a joint surety rather than an accommodation party. The defendant,
as a joint surety, may upon the maturity of the note, pay the debt, demand
the collateral security and dispose of it to his benefit, but there is no proof
whatever that this was done. As a joint surety, he may at any time after the
maturity of the note, make payment thus subrogating himself in the place of
Jen Laygo 2D 05
ATTY. F. AMPIL
the creditor with the right to enforce the guaranty against the other signers of
the note for the reimbursement of what he is entitled to recover from them.
As to the plaintiff, he is a holder for value under sec29, for he paid the money
to the signers as the time the note was executed.
The court ruled in favor of Clark, allowing him to collect 12k as value of the
note.
IV. PNB v MAZA
Accommodation Parties are still liable, no defense of lack of consideration
PNB sued Ramon Maza and Francisco Mecenas on 5 promissory notes of 10k
each that the 2 executed on two different dates.
Defendants claim that the promissory notes were sent in blank to them by an
Enrique Echaus with the request that they sign them so that Echaus might
negotiate them with the PNB in case of need. They also claim that they have not
negotiated the notes with the bank nor have they received the value thereof or
delivered them to the bank in payment of any pre-existing debt.
The RTC rendered judgment in favor of the bank and ordered defendants jointly
and severally to pay the amount due.
Issue: W/N MAZA AND MECENAS SHOULD BE HELD LIABLE ON THE
INSTRUMENT?
Held:
YES. The most plausible and reasonable stand for the defendants is that they
are accommodation parties. But as accommodation parties, although the
defendants have signed the instruments w/o receiving value therefor and for the
purpose of lending their names to some other person, they are still liable on the
instruments. The law now is that the accommodation party can claim no benefit as
such, but he is liable according to the face of his undertaking, the same as if he
were himself financially interested in the transaction.
Even though ordinarily, lack of consideration does not create any obligation at
law, for an accommodation maker to be liable, it is not necessary that any
consideration move to him. The consideration which supports the promise of the
accommodation maker is that parted with by the person taking the note and
received by the person accommodated.
It was also noted by the court that when the accommodation parties make
payment to the holder of the notes, they have the right to sue the accommodated
party for reimbursement, since the relation between them is in effect that of
principal and sureties, the accommodation parties being the sureties.
V. SADAYA v SEVILLA
Requisites for direct reimbursement from co-accommodation maker
Victor Sevilla, Oscar Verona and Simeon Sadaya executed, jointly and severally,
in favor of BPI or its order, a promissory note for P15k, payable on demand.
However, the entire amount was received from the bank by Oscar Varona alone.
Sevilla and Sadaya signed the promissory note as co-makers only as a favor to
Varona.
After payments were not made, the bank collected the balance from Sadaya.
Varona failed to reimburse Sadaya despite repeated demands. Thereafter,
Sevilla died and Francisco Sevilla was named administrator of his estate.
Sadaya now filed a creditors claim against Sevillas estate, for the latters share
of the sum Sadaya paid to BPI.
RTC admitted Sadayas claim and directed the administrator to pay the same.
However, it was reversed upon appeal.
Issue: W/N SIMEON SADAYA CAN CLAIM 50% OF THE AMOUNT HE PAID TO
PNB FROM THE ESTATE OF SEVILLA AS HIS CO-ACCOMMODATION MAKER?
Held: NO. As joint and several accommodation makers, Sevilla and Sadayas
individual obligation to the bank is no different from, and no greater and no less than,
that contracted by Oscar Varona. In fact, as between Sadaya and Varona, there was
an implied contract of indemnity and the latter is bound by the obligation to reimburse
the former.
On principle, a solidary accommodation maker who made payment has the
right to contribution, from his co-accommodation maker, in the absence of agreement
to the contrary between them and subject to conditions imposed by law. This right
springs from an implied promise between the accommodation makers to share
equally the burden that may ensue from their having consented to stamp their
signatures on the promissory note. For having lent their signatures to the principal
debtor, they clearly placed themselves in so far as payment made by one may
create liability on the other in the category of mere joint guarantors of the former.
The court also held that as to the requisites of reimbursement from a coaccommodation maker, the NIL is silent and so Article 2073 of the Civil Code applies.
It provides that when 1 of the 2 or more guarantors of the same debt and the same
debtor pays for the obligation, he may seek reimbursement from the other the share
that is proportional to him; if any of the guarantors are insolvent, the others shall bear
his share; and that the provisions are only applicable when payment is made by
virtue of a judicial demand or the debtors insolvency.
The court therefore postulated the following rules:
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ATTY. F. AMPIL
1. A joint & several accommodation maker may demand from the principal debtor
reimbursement for the amount he paid to the payee.
2. A joint several accommodation maker who pays may directly demand
reimbursement from his co-accommodation maker w/o first directing his action
against the principal debtor provided that:
a. Payment is by virtue of judicial demand, or
b. Principal debtor is insolvent
VI. REPUBLIC BANK v EBRADA
Accommodation Party-Indorser is still liable
In Jan 1963, the Treasury of the Philippines issued a check for P1,246.08 to the
order on a Martin Lorenzo and drawn on the Republic Bank. At the back side of
the check bears the signatures of the following in order: [1] Martin Lorenzo, [2]
Ramon Lorenzo, [3] Delia Dominguez, [4] Mauricia Ebrada.
It was stipulated that Dominguez delivered the check to Ebrada for encashment
and Ebrada signed her name at the back when she encashed the check with
Republic Bank in Feb 1963. Upon presentment, the bank encashed the check.
Upon receipt of the cash, Ebrada turned over the amount to Dominguez and the
latter handed the amount to a Justina Tinio.
The bank was later advised by the Bureau of Treasury that the alleged
indorsement of Martin Lorenzo was a forgery since had had died in July 14, 1952.
When the bank sought to recover the amount encashed from Ebrada, she
refused, claiming she was a holder in due course, that the bank was in estoppel or
so negligent as not to be entitled to recover anything from her.
RTC ruled in favor of the bank and ordered Ebrada to pay the encashed amount.
Issue: W/N EBRADA IS LIABLE TO RETURN THE AMOUNT OF THE ENCASHED
CHECK TO REPUBLIC BANK?
Held: YES. As the last indorser of the check, Ebrada was supposed to have warranted
that she has food title to the said check, that the instrument is genuine an in all
respects what it purports to be, and that the instrument at the time of his
indorsement is valid and subsisting. It turned out however that the signature of the
original payee of the check was a forgery. According to Sec23, the signature is
wholly inoperative and any negotiation based on the forged signature is of no effect.
Therefore, only the negotiation of Martin Lorenzo to Ramon Lorenzo is inoperative.
It was held that after the drawee bank has paid the amount of the check to the
holder thereof and discovers that the signature of the payee was forged, the drawee
bank can recover from the holder the money paid to him on a forged instrument
because it is not supposed to be its duty to ascertain whether the signatures of the
payee or indorsers are genuine or not. This is because the indorser is supposed to
warrant to the drawee that the signatures of the payee and previous indorsers are
genuine, warrant not extending only to holders in due course. In the present case,
Ebrada was duty-bound to ascertain whether the check in question was genuine
before presenting it to the bank for payment.
6
ATTY. F. AMPIL
Even considering the fact that she turned over the proceeds to other parties
right after receiving the cash from the bank, and although it may be said that she
acted as an accommodation party in the check, Sec29 of the NIL still provides that
she is liable.
VII. UNITED INDUSTRIES, INC v PALER

There can be no recovery against an accommodation party on a
promissory note vitiated by illegality of cause - agreement not to prosecute
estafa case if accused executed promissory note.
Jose Paler and his wife Purificacion Paler purchased from United General
Industries Inc., one Zenith 23 TV set on installment basis. To secure payment of
the price, the Spouses Paler executed a promissory note for P2,690.00. A
chattel mortgage was also constituted over the TV set.
However, Jose Paler then sold the television set, in violation of the terms and
conditions of the chattel mortgage. A criminal charge for Estafa was then filed
against the spouses. To settle the case, the Spouses once again executed a
promissory note, now together with Jose Dela Rama, in the amount of
P3083.58. Notwithstanding repeated demands, the defendants failed to pay the
amount on the note.
In the RTC, judgment was rendered in favor of United Industries, ordering the
defendants to pay the amount on the note. In their appeal, defendants claim the
obligation arose or was incurred in consideration for the compounding of a
crime.
Issue: W/N PETITIONER MAY COLLECT AN OBLIGATION INCURRED IN
CONSIDERATION FOR THE COMPOUNDING OF A CRIME?
Held: NO. In Arroyo v Berwin, it was held that an agreement to stifle the prosecution
of a crime is manifestly contrary to public policy and due administration of justice
and will not be enforced in a court of law, Under the law and jurisprudence, there
can be no recovery against Jose De La Rama who incidentally appears to have
been an accommodation signer only of the promissory note which is vitiated by
the illegality of the cause.
But it is different with Jose Paler who bought a television set from United
General Industries, did not pay for it and even sold the set w/o written consent of
the mortgagee which accordingly brought about the filing of the Estafa case. He
has an obligation to United Industries independently of the promissory note. For
Paler to escape payment of a just obligation will result in unjust enrichment at
the expense of another and this cannot be allowed.
The court affirmed the judgment of the RTC.
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ATTY. F. AMPIL
right to recover the amount from her sister, Pamintuan, which was the
accommodated party.
II. PEOPLE v MANIEGO

III. ANG TIONG v TING
Lt. Rizalino Ubay was an officer in the AFP and was Disbursing Director in the
Office of the Chief of Finance. As such, he was entrusted with and had custody
and control of public funds. A case for Malversation was filed against him when
he conspired with and accepted personal checks issued by Milagros Pamintuan
then indorsed by her sister Julia Maniego, in exchange for cash belonging to the
government. The checks were subsequently dishonored.
Only Lt. Ubay and Mrs. Maniego were arraigned, Mrs. Pamintuan having fled to
the US. The CFI convicted Lt. Ubay and imposed a fine of 57k. However,
Maniego was acquitted for absence of evidence but also ordered to pay jointly
and severally with Ubay, the amount of 57k to the government.
Lorenzo Ting issued a Phil. Bank of Communications [PBC] check for P4k payable
to cash or bearer, with Felipe Angs signature [an indorsement in blank] at the
back thereof. The instrument was received by plaintiff Ang Tiong who then
presented it to PBC for payment. However, PBC dishonored the check. Ang Tiong
then made written demands on Ting & Ang for payment but was unheeded by the
two.
Ang Tiong then filed a case for collection of the sum and the MTC granted his
petition and ruled against the two defendants. Felipe Ang then appealed to the
CFI which affirmed the MTC. The CA then certified the case to the SC for involving
purely questions of law.
ISSUE: W/N MANIEGO WAS LIABLE AS MERE INDORSER OF THE CHECKS?

HELD: YES. First of all, the CFI was right in imposing the civil liability even if
Maniego was acquitted based on reasonable doubt. Her liability was established
by evidence proving she was an indorser of several checks drawn by her sister,
which were dishonored after they had been exchanged with cash of public funds.
Maniegos contention that as mere indorser, she is not liable, is untenable.
Under the law , the holder or last indorsee of a negotiable instrument has the right
to enforce payment of the instrument against all parties liable thereon. Among the
parties liable thereon is an indorser of the instrument, i.e., a person placing his
signature upon an instrument otherwise than as maker, drawer or acceptor xxx
unless he clearly indicates by appropriate words his intention to be bound in some
other capacity.
Such an indorser who indorses w/o qualification engages that on due
presentment, the instrument shall be accepted or paid, or both, as the case may
be, 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.
Maniego may also be deemed an accommodation party
in light of the facts. As such, she is still under the law, liable on the instrument to a
holder for value, notwithstanding such holder at the time of taking the instrument
knew her only as an accommodating party. However, she has the right to obtain
reimbursement from the party accommodated after she pays the holder. Since the
relation between the accommodated party and the accommodating party is one of
principal and surety, the accommodation party being the surety, Maniego has the
Jen Laygo 2D 05
ISSUE: W/N FELIPE ANG IS A GENERAL INDORSER WITHIN THE PURVIEW OF

SEC. 63 IN THE NIL?
HELD: YES. Having arisen from a bank check which is indisputably a negotiable
instrument, the present case is governed by the NIL and not Art. 2071 of the Civil Code
on reimbursement by guarantor from principal debtor, as Ang contends.
The SC agreed with the trial court that nothing in the check indicates that the
appellant is not a general indorser within the purview of Sec.63 of the NIL which makes
a person placing his signature upon an instrument otherwise than as maker, drawer or
acceptor, a general indorser unless he clearly indicates by appropriate words his
intention to be bound in some other capacity, which in this case Felipe Ang did not do
so.
Sec. 66 ordains that every indorser who indorses w/o qualification, warrants to all
subsequent holders in due course
a) that the instrument is genuine and in all respects what it purports to be
b) that he has a good title to it
c) that all prior parties have capacity to contract; and
d) that the instrument is at the time of his indorsement valid and subsisting.
In addition, he engages that on due presentment, it shall be accepted or paid, or
both, as the case may be, and that if it be dishonored, he will pay the amount thereof
to the holder.
Even on the assumption that Ang is a mere accommodation party, Sec.29 of the
NIL provides that he is still liable on the instrument to a holder for value. It is not a
valid defense that the accommodation party did not receive any valuable
consideration when he executed the instrument.
For the sake of argument, granting that Felipe Ang stands only a surety for Ting,
as he claims to be, is immaterial to the claim of Ang Tiong because the liability of
appellant remains primary and unconditional as surety.
ATTY. F. AMPIL
Incorporation of PCHC can only connote checks in general use in commercial and
business activities, it cannot be conceived to be limited to negotiable checks only.
The SC also agreed with the lower courts ruling that in presenting the checks
for clearing and for payment, BDO made an express guarantee on the validity of all
prior endorsements. No amount of legal jargon can reverse the clear meaning of
BDOs warranty. As the warranty has proven to be false and inaccurate, BDO is
liable for any damages arising out of the falsity of its representation.
IV. BANCO DE ORO SAVINGS & MORTGAGE BANK v EQUITABLE

Equitable Bank [EBC], through its Visa Card Dept. drew 6 crossed Managers
checks totaling 46k and payable to certain member establishments of Visa Card.
The Checks were deposited with Banco De Oro [as collecting bank] to the credit
of its depositor, a certain Aida Trencio.
Following normal procedures, and after stamping at the back of the checks the
usual indorsements: All prior and/or lack of endorsement guaranteed, BDO
sent the checks for clearing through the Philippine Clearing House Corp.
[PCHC]. Accordingly, EBC [as drawer] paid the checks.
Thereafter, EBC discovered that the indorsements appearing at the back of the
checks were forged and/or unauthorized. EBC then presented the checks
directly to BDO, claiming reimbursement. BDO refused. EBC filed a case for
collection.
The dispute was presented for Arbitration and the Arbiter decided in favor of
EBC, ordering the PCHC to debit the clearing account of BDO then credit the
clearing account of EBC with the 46k. Upon reconsideration, PCHC affirmed.
Petition for review was filed with the QC RTC which affirmed the PCHC ruling.
ISSUE: 1. W/N PCHC HAD JURISDICTION?
2. W/N BDO WAS NEGLIGENT, THUS LIABLE FOR UNDUE PAYMENT?
HELD:
1. YES. BDO argues that the term check should be interpreted as a negotiable
instrument, citing the definition of a check as basically a bill of exchange under
Sec128 of the NIL and that it should be payable to order or to bearer under
Sec.126. Petitioner alleges that with the cancellation of the printed words or to
bearer from the face of the check, it becomes non-negotiable so the PCHC has no
jurisdiction over the case.
The SC ruled that petitioners contention was wrong because the PCHC
makes no distinction as to the character or nature of the checks subject of its
jurisdiction. Where the law does not distinguish, the courts may not distinguish.
Sec.185 of the NIL defines a check and the provisions of Sec61 that the drawer
may insert in the instrument an express stipulation negating or limiting his own
liability to the holder are applicable. The term check as used in the Articles of
Jen Laygo 2D 05
The principle of estoppel effectively prevents BDO from denying liability for
any damage sustained by EBS which, relying upon an action or declaration of the
BDO, paid on the checks. A commercial bank cannot escape the liability of an
endorser of a check, which may turn out to be a forged endorsement. Whenever any
bank treats the signature at the back of the checks as endorsements and thus
logically guarantees the same as endorsement, there can be no doubt said bank has
considered the checks as negotiable.
As to the matter of forgery in indorsements, the collecting bank or last endorser
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 the endorsements. [PNB v NCB]
2. YES. Sec. 66 of the NIL provides the warranty issued by every indorser who
indorses w/o qualification. It was further held in a US case that the drawer owes no
duty of diligence to the collecting bank [one who had accepted an altered check and
had paid over the proceeds to the depositor] except of seasonably discovering the
alteration by a comparison of its returned checks and check stubs or other
equivalent record, and to inform the drawee thereof.
Thus, the SC held that while the drawer generally owes no duty of diligence
to the collecting bank, the law imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it for the purpose of determining their genuineness
and regularity. The collecting bank being primarily engaged in banking holds itself
out to the public as the expert and the law holds it to a high standard of conduct.
And although the subject checks are non-negotiable there responsibility of
petitioner as indorser remains. The SC also agreed with the disquisition of the PCHC
that:
(A) payments made to persons other than the payees are not valid and give
rise to an obligation to return the amounts received, and
(B) having violated its warranty on validity of all endorsements, collecting
bank [BDO] cannot deny liability to those who relied on its warranty.
Finally, the court held that having accepted the crossed checks from
persons other than the payees, the defendant [BDO] is guilty of negligence; the
risk of wrongful payment has to be assumed by BDO.
ATTY. F. AMPIL
2.
3.
4.
V. ASSOCIATED BANK v CA
The Province of Tarlac had an account with PNB where the provincial funds are
deposited. A portion of the provincial funds is allocated to the Concepcion
Emergency Hospital. The allotment checks for the hospital are drawn to the
order of Concepcion Emergency Hospital or the Chief, Concepcion
Emergency Hospital. The checks are released by the Office of the Provincial
Treasurer and received for the hospital by its administrative officer and cashier.
It was then discovered that the hospital did not receive several allotment checks
drawn by the Province. 30 checks amounting to P203k were encashed by one
Fausto Pangilinan, retired administrative officer and cashier of the hospital.
Pangilinan had encashed the checks with Associated Bank acting as collecting
Bank. Pangilinan was able to withdraw the money when the checks were
cleared and paid by PNB as the drawee bank.
Apparently, Pangilinan would forge the signature of Ds. Adena Canlas who was
the chief of the hospital and named as payee of the checks. All the checks bore
the stamp of the Associated Bank which reads All prior endorsements
guaranteed associated bank.
Jesus David, manager of Associated Bank testified that Pangilinan made it
appear that the checks were paid to him for certain projects with the hospital. He
did not find it as irregular that Pangilinan was encashing checks which did not
bear his name as payee. Although Pangilinan is the 1 st cousin of Davids wife, he
denied any preferential treatment.
The provincial treasurer then wrote the manager of PNB to restore the amounts
to the provinces account. PNB then demanded reimbursement from Associated
Bank. As both banks resisted payment, the Province sued PNB, which in turn
impleaded Associated Bank as 3rd party defendant.
RTC ruled in favor of the Province, ordering PNB to pay it the 203k. It then
ordered Associated Bank to pay PNB the 203k. The court dismissed the case
against Adena Canlas for lack of cause of action and over Pangilinan for lack of
jurisdiction over his person. PNB and Associated Bank appealed. CA affirmed.
ISSUE:
1. W/N ASSOCIATED IS LIABLE FOR THE FORGED INDORSEMENTS IT
GUARANTEED?
Jen Laygo 2D 05
W/N PROVINCE OF TARLAC WAS NEGLIGENT & THEREFORE LIABLE?

W/N PNB WAS LIABLE FOR DELAY IN INFORMING ASSOCIATED BANK
OF THE FORGERY?
W/N PNB IS ESTOPPED FOR HAVING ALREADY PAID THE VALUE?
HELD:
1. YES. 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
wrongfully.
The court clarified the difference between forged indorsement in a bearer
instrument and forged indorsement in an order instrument. In bearer instruments,
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. In order instruments, when
the holders indorsement is forged, all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent thereto. An indorser of an order
instrument warrants the genuineness of the instrument. He cannot interpose the
defense that signatures prior to him are forged because this is exactly what he
guaranteed to be true in his indorsement. A collecting bank where a check is deposited
and which indorses the check upon presentment with the drawee bank is such an
indorser. Even if the indorsement on the check deposited by the banks client is forged,
the collecting bank is bound by its indorsement.
The court then clarified the difference between a forged check containing a forged
signature from a forged indorsement. In a forged check where the drawers signature is
forged, the drawer can recover from the drawee bank and the liability chain ends with
the drawee bank who has the responsibility to know the drawers signature. As to a
forged indorsement, such as the present case, the liability chain does not end with the
drawee bank [PNB] because the latter may recover from the collecting bank [in this
case Associated] who took the instrument from the forger. However, the collecting bank
may recover from the forger himself, if available. The collecting bank is liable for these
reasons:
A) Because the indorsement is a forgery, the collecting bank committed a breach
of its warranty.
B)The collecting bank is privy to the depositor who negotiated the check. The
bank knows his address and history and has taken a risk on his deposit. It is in
a better position to detect forgery in the indorsement.
2. YES. The Province of Tarlac was equally negligent and should share the burden of
loss from the checks. The Province permitted Pangilinan to encash the checks
although he was already retired and no longer connected to the hospital. In fact, at
one time the checks were being collected by 2 persons, Pangilinan and Juco, the
new cashier. The province should be liable for part of the amount paid.
3. NO, PNB did not commit negligent delay. Although drawee bank PNB also breached
its duty to pay only according to the terms of the check and cannot escape liability
and should bear part of the loss, PNB can recover from the collecting bank
Associated. The rule is that a delay in informing the collecting bank Associated of the
forgery which deprives it of the opportunity to go after the forger, signifies negligence
10
on the part of the drawee bank [PNB] and will preclude it from claiming
reimbursement. CB Circular 580 applies, providing that checks be returned w/in 24
hrs of discovery of the forgery. The rationale of the rule is to give the collecting
bank adequate opportunity to proceed against the forger. The court ruled that even
if PNB did not return the checks to Associated w/in 24 hours, PNB gave prompt
notice to Associated under the circumstances and the latter was not prejudiced in
going after Pangilinan.
4. NO. PNBS duty was only to verify the genuineness of the drawers signature, and
not the genuineness of the payees indorsement. PNB may still recover although it
had already paid the amounts.
VI. PHIL. COMMERCIAL AND INTERNATIONAL BANK v CA
In 1977, Ford Philippines drew and issued a crossed Citibank Check for
payees account only in favor of the Commissioner of Internal Revenue as
payment of sales taxes. The check was deposited with the PCIBank which then
endorsed it and was cleared by the Central Bank. Upon presentment with
Citibank, the proceeds of the check were paid by Citibank to PCIB. However, the
proceeds were never paid to the BIR. Ford was compelled to make a 2nd
payment to the CIR.
An NBI investigation revealed that a Godofredo Rivera, the General Ledger
Accountant of Ford, recalled the check purportedly because of an error in
computation of the taxes due.
In 1978, the same thing happened when the syndicate of Rivera embezzled the
proceeds of 2 similarly crossed checks issued by Ford to pay for its percentage
taxes. The checks never reached the payee, CIR. It was proven that the Tax
Receipts allegedly received by Ford after payment of the taxes were fake and
spurious. Ford again was required to pay BIR for the second time.
Investigations revealed that a syndicate consisting of Rivera and his assistant
who are employees of Ford, along with a certain Castro who was an employee
of PCIB and other employees of PCIB connived to embezzle the funds.
The RTC held Citibank liable for the value of the 2 checks for 1978 and absolved
PCIB from any liability. Ford and Citibank appealed and the CA affirmed the
decision of the RTC.
ATTY. F. AMPIL
proximate cause of encashing the checks payable to CIR. The degree of Fords
Negligence, if any, could not be characterized as the proximate cause of the injury to
the parties. The court noted that the Board of Directors of Ford did not confirm the
request of Rivera to recall the checks and Riveras instruction to replace the check was
not in the ordinary course of business which could have prompted PCIB to validate the
same.
It also appears that PCIB failed to verify the authority of Rivera to negotiate the
checks. The neglect of the PCIB employees to verify whether his letter requesting
replacement of the checks was duly authorized, showed lack of care and prudence
required in the circumstances. Also, PCIB acted as an agent of the BIR in collecting tax
payments and was therefore bound to consult its principal regarding the unwarranted
instructions given by Rivera, this it failed to do so. Lastly, the check was crossed and
should have served as a warning that it should be deposited only to the account of the
CIR. It was proven in the investigation that the checks were encashed under a fictitious
name of Reynaldo Reyes. It is the duty of the collecting bank PCIB to ascertain that
the check be deposited in payees account only.
Having established that the collecting banks negligence is the proximate cause of
the loss, the SC concluded that PCIB is liable in the amount corresponding to the
proceeds of the Citibank checks.
However, the court also held that although a bank is liable for the wrongful acts of
its officers within the course of their employment, PCIB appears also to be the victim of
the scheme hatched by the syndicate. Therefore, the responsibility for negligence does
not lie on PCIB alone.
The evidence showed that Citibank as drawee bank was likewise negligent in
failing to establish that its payment of Fords checks were madie in due course and
legally in order. As ruled by the CA, Citibank must likewise answer for the damages
because of the contractual relationship it breached with Ford in failing to scrutinize the
checks before paying to PCIB. Citibank had failed to ensure that the amount of the
checks be paid only to its designated payee, the CIR. The fact that the drawee bank
did not discover the irregularity seasonably, constitutes negligence in carrying out the
banks duty to its depositors.
The court ruled that PCIB and Citibank must share the loss on a 50-50 ratio.
ISSUE: W/N FORD CAN RECOVER FROM PCIB [COLLECTING BANK] AND
CITIBANK [DRAWEE BANK] THE VALUE OF THE CHECKS INTENDED AS
PAYMENT TO THE CIR?
HELD: YES. The perpetrators now being fugitives from justice, the court sought to
resolve the question of liability based on the degree of negligence among the parties
concerned.
It appears that although the employees of Ford initiated the transactions
attributable to an organized syndicate, the SC held that their actions were not the
Jen Laygo 2D 05
11
ATTY. F. AMPIL
so that the dishonored checks could be redeemed. Diaz personally went to
Petrophil to present the checks in payment for the dishonored checks.
At a chance meeting with the credit manager of Petrophil on May or June 1983,
George found out that Citytrust sent Petrophil a letter notifying them that the 2
checks were inadvertently dishonored due to operational error.
The Morans then, 6 months after the incident, claimed 1million in moral damages
against Citytrust, which was refused by the latter. Case for damages was then
filed by the spouses Moran. RTC and CA both dismissed.
I. MORAN v CA
George and Librada Moran are the owners of the Wack-Wack Petron gasoline
station at Shaw boulevard. They regularly purchased bulk fuel and other related
products from Petrophil Corporation on cash on delivery basis. Orders were
made by telephone & payments were effected by personal checks upon delivery.
The Morans maintained 2 savings accounts and 1 current account with Citytrust
Banking Corporation Shaw Boulevard Branch.
As an accommodation to a valued client, the bank allowed them to maintain a
zero balance in their current account and pursuant to Pre-Authorized transfer
Agreement [PAT], transfers may be made from one savings account to the
current account when the funds of the latter were insufficient for withdrawals.
On December 12, 1983, Librada drew a check for 50k payable to petrophil. The
next day, Librada again issued another check for 56k for the same corporation.
The 2 checks totaled 106k.
On Dec 14, Petrophil deposited the 2 checks to its account with PNB. PNB then
presented them for clearing with the Philippine Clearing House Corporation in
the afternoon of the same day.
Records show that on Dec14, the Current Account of the Morans had zero
balance while the Savings Account covered by the PAT had a balance of 26k
and the other savings account had 43k.
At 10am on Dec15, George Moran personally oversaw their daily transactions
with the bank, as was his regular practice. He made the necessary deposits and
transfers in the current account so that it would have sufficient funds for the 2
checks. Thereafter, George was informed by Librada that Petrophil refused to
deliver their orders on a credit basis because the 2 checks they issued were
dishonored upon presentment for payment, Apparently, the bank dishonored the
checks for insufficiency of funds. The non-delivery of gasoline forced the Morans
to temporarily stop business operations. In addition, Petrophil cancelled their
credit accommodation, forcing them to pay for their purposes in cash.
On Dec16 or 17, Raul Diaz, branch manager of Citytrust-Shaw, went to the
Moran residence to get their signatures on an application for a managers check
Jen Laygo 2D 05
ISSUE: W/N CITYTRUST BANKING CORPORATION IS LIABLE FOR DAMAGES?

HELD: NO. A check is a bill of exchange drawn on a bank payable on demand. Fixed
savings and current deposits of money in banks and similar institutions shall be
governed by the provisions on Simple Loan. Where the bank possesses funds of
a depositor, it is bound to honor his checks to the extent of the amount of his
deposits. Failure of a bank to pay the check, when the deposit is sufficient, entitles
the drawer to substantial damages.
Conversely, a bank is NOT liable for its refusal to pay a check on account of
insufficient funds, notwithstanding the fact that a deposit may be made later in the
day. Considering the clearing process of checks, it is clear that the available
balance on Dec14 was used by the bank in determining whether or not there was
sufficient cash to fund the checks, although what was stamped on the dorsal side
of the checks was Dec15 as the actual date when the checks were processed.
This was proper and done in due course of ordinary business, as the additional
funds were deposited at 10am on Dec15, which was unfortunately too late to
prevent their dishonor.
The spouses claim that it was true that the checks were dishonored in the early
morning of Dec15, why would the bank automatically transfer funds from the
savings account to the current account pursuant to the PAT? The court ruled that
the bank only did so, hoping the checks may be retrieved, thus preventing their
dishonor. The transfers were made to preserve its relations with petitioners who
were valued clients. Although not admitting fault, it tried its best to make sure the
checks would not bounce.
Petitioners also claim that on previous occasions, a bank employee would inform
George Moran of the insufficiency of the funds via pink slips containing details in a
report of rejected transactions from the head office. The court however ruled that if
these were mere accommodations of the bank and was not a requirement or a
general banking practice, hence non-compliance thereof could not lay the bank
open to blame or rebuke.
12
Moreover, the letter to Petrophil was not an admission of liability as it was written
only to maintain the goodwill and continued patronage of the Morans. There was
neither malice nor bad faith, but rather a clear intent to mollify and obvious
agitated client.
In conclusion, the court found no cogent and sufficient reason to award actual,
moral or exemplary damages to petitioners. It further ruled that a bank may not
be held responsible for such damages in the absence of fraud, bad faith, malice
or wanton attitude.
ATTY. F. AMPIL
HELD: YES. Sec.4 of the Central Bank Circular No.9 provides that all items cleared at
11am shall be returned not later than 2pm on the same day and all items cleared
at 3pm shall be returned not later than 830am of the following business day,
except for items cleared on Saturday which may be returned not later than 830am
of the following day.
The government maintains that it is not bound by this rule because the treasury is
not a bank and the treasurer has objected to the application of said rule to his
office. The court ruled that this contention is untenable because the treasury is a
member of the Cleearing Office. Furthermore, the opposition of the treasurer to
the 24-hr clearing house rule is not sufficient to exempt the Treasury from the
operation thereof.
II. REPUBLIC v EQUITABLE BANKING CORPORATION

The Republic of the Philippines seeks to recover amounts it paid to Equitable
Banking Corporation and PI Bank for the value of 28 Treasury Warrants
executed on genuine government forms but where the signature of the drawing
office and that of the representative of the Auditor General were forged. The
present case involves 2 different suits filed against PI bank and Equitable.
Corporacion de los padres Dominicos accommodated its former trusted
employee, Jacinto Carranza who asked the Corporacion to cash 24 Treasury
Warrants, alleging it was difficult to do so directly with the government and that
his wife expected a sort of commission for the encashment.
The corporacion acceded, on the condition that the warrants first be deposited
with PI bank and the value be cashed only upon actual payment of the warrants
credited to the account of the Corporacion with PI bank.
The warrants where then deposited, and PI bank presented them for payment
through the Clearing Office of the Central Bank. After being cleared, the
warrants were paid by the Treasurer and accordingly, PI bank credited the value
to the account of the Corporacion, which in tern paid Jacinto Carranza.
Thereafter, the Treasurer returned the warrants to the Central Bank, and
demanded, on the ground that they had been forged, that the value be charged
against the accounts of PI bank and credited back to the demand deposit of the
Treasury. Central Bank then forwarded the demand to PI bank, the latter
opposing the return of the warrants.
On the other hand, the second case involved 4 warrants that were deposited by
3 depositors of Equitable bank. Equitable in due course, cleared said warrants
thru the Clearing Office then collected the corresponding amounts from the
Treasurer and credited said amounts to the accounts of the depositors.
Subsequently, the Treasurer notified Equitable of the alleged defect of said
warrants and demanded reimbursement, but was rejected by the bank,
At any rate, the 28 warrants were cleared and paid by the Treasurer, in view of
which the PI Bank and Equitable bank credited the corresponding amounts to the
respective depositors of the warrants. The treasury had not only been negligent in
clearing its own warrants, but had also, thereby induced the PI Bank and
Equitable Bank to pay the amounts thereof to their depositors, The gross nature of
the negligence becomes more apparent when it is considered that each one of the
24 warrants involved in the PI bank case was for over P5k and hence, beyond the
authority of the auditor of the Treasury, whose signature was forged thereon, to
approve. In other words, the irregularity of the said warrants was apparent of the
face thereof, from the viewpoint of the Treasury.
Also, the Treasury failed to advertise the loss of genuine forms of its warrants.
Neither PI bank nor Equitable was informed of any irregularity in connection with
the warrants, but were only so informed after the warrants had been cleared and
honored. As a consequence, the loss of the amounts is mainly imputable to acts
and omissions of the Treasury, for which PI bank and Equitable cannot be
penalized. It may be held guilty of unreasonable delay in discovering the forgery
and giving notice thereof. Also, as between 2 innocent parties, that whose neglect
or fault was the cause, even if innocent of any intentional fraud, shall bear the
loss.
ISSUE: W/N THE TREASURY OR GOVERNMENT IS LIABLE ON THE FORGED

WARRANTS?
Jen Laygo 2D 05
13
ATTY. F. AMPIL
In this case, the lower court found that a comparison of the signature on the
forged check and the sample signatures of Gozon show marked differences as
the graceful lines in the sample signature was completely different from those on
the forged check. Obviously, PNB was negligent it encashing the forged check w/o
carefully examining the signature showing marked variation from the genuine
signature.
The court also ruled that the act of Gozon in leaving his checkbook in the car
while he went out for a short while cannot be considered negligence sufficient to
excuse PNB from its own negligence.
III. PNB v QUIMPO

Francisco Gozon II was a depositor of PNB Caloocan City Branch. He went to
the bank in his car, accompanied by his friend Ernesto Santos, who he left in the
car while he transacted business in the bank.
When Santos saw that Gozon left his checkbook in the car, he took a check and
filled it up for the amount of 5k, forged the signature of Gozon and encashed the
check in the bank on the same day. The account of Gozon was debited the said
amount. Upon receipt of the Statement of Account from the Bank, Gozon asked
that the 5k be returned to his account as his signature on the check was forged.
The bank refused to do so.
Upon complaint of Gozon, Santos was apprehended by the police and the latter
admitted he stole the check, forged the signature and encashed the same.
Hence, Gozon filed a complaint for recovery of the amount against the bank.
The CFI ruled in favor of Gozon.
The Bank claims it was the act of Gozon in putting his checkbook into the hands
of Santos which was the proximate cause of the loss, thereby precluding him
from setting up the defense or forgery or want of authority under section23 of the
Negotiable Instruments Law.
ISSUE: W/N PNB IS LIABLE FOR THE FORGED CHECK?
HELD: YES. A bank is bound to know the signature of its customer, and if it pays a
forged check, it must be considered as making the payment out of its own funds,
and cannot ordinarily change the amount so paid to the account of the depositor
whose name was forged. The rule is based upon the presumed negligence of
the drawee in failing to meet its obligation to know the signature of its
correspondent. It is not only a question of payment under mistake, but payment
in neglect of duty which the commercial law places upon the bank.
The prime duty of a bank is to ascertain the genuineness of the signature of the
drawer or the depositor on the check being encashed. It is expected to use
reasonable business prudence in accepting and cashing a check presented to it.
Jen Laygo 2D 05
IV. HSBC v PEOPLES BANK & TRUST

On March 8, 1965, PLDT drew a check on HSBC for 14k, with HSBC as the
payee. The check was sent to the payee via mail, but somehow fell in the hands
of a certain Florentino Changco who was able to erase the name of the payee
Bank and instead typed his own name on the check.
Changco previously opened an account with Peoples Bank and Trust Company
and on March16, deposited the altered check in his name.
The check was presented for clearing, wherein Peoples Bank made the following
indorsement: For clearance, clearing office. All prior endorsements and/or lack of
endorsements guaranteed. Peoples Bank and Trust Company. The check was
duly cleared by the HSBC so that peoples bank credited Changco with the amount
of the check.
Beginning March17, Changco began to withdraw from his account and on

March31, he closed his account.
On April12, the check was returned to PLDT when the alteration in the name of
the payee was discovered. On that same date, Peoples bank was notified and
HSBC requested it to refund the sum previously credited. Peoples bank refused.
HSBC filed a case for recovery. The lower court dismissed the case.
HSBC claims that peoples banks indorsement guaranteeing all prior
indorsements carries with it a concomitant guarantee of genuineness and is
therefore liable to HSBC for alteration made in the name of the payee.
On the other hand, Peoples bank relies on the 24hour regulation of the Central
bank that requires after a clearing, that all cleared items must be returned not later
than 3pm of the following business day. And since HSBC only advised Peoples
Bank as to the alteration 27 days after clearing, Peoples bank claims it is now too
late to do so.
ISSUE: W/N HSBC MAY BE HELD LIABLE FOR THE ALTERED CHECK?
HELD: YES. The court ruled that the indorsement stamped by Peoples bank should re
read together with the 24-hour regulation on Clearing house Operations of the
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Central bank. Once that 24hour period is over, the liability on such an
indorsement has ceased. This being so, HSBC has not made out a case for
relief.
HSBC claims that the 24-hour regulation only applies to forged checks and not
to altered checks. The court found this untenable. It held that whatever remedy
HSBC would have lies against the party responsible for changing the name of
the payee. Its failure to call the attention of Peoples Bank to such alteration until
the lapse of 27 days would, in light of the Central Bank regulation, negate
whatever right it might have against the defendant bank.
V. METROPOLITAN BANK v FIRST NATIONAL CITY BANK

Joaquin Cunanan & Company drew a check for P50 against First National City
Bank [FNCB] payable to Manila Polo Club.
Thereafter, the check was altered to P50k payable to Cash and was deposited to
Metro Bank by a certain Salvador Sales. Earlier that day, Sales had opened a
current account with Metro Bank, depositing P500 in cash. Metro bank
immediately sent the check to the clearing house of the Central Bank with the
following words stamped at the back of the check: Metropolitan Bank and Trust
Company Cleared (illegible) office All prior endorsements and/or lack of
endorsements Guaranteed.
The check was cleared the same day and FNCB paid Metro bank the amount of
50k through the clearing house, while Sales was credited with the said amount.
The day after he opened his account, Sales withdrew P480; 2 days after he
made another withdrawal of 32k and 3 days after withdrew 18k and closed his
account with Metro Bank.
9 days later, FNCB returned the cancelled check to Joaquin Cunanan and
Company together with the bank monthly statement. On the same day, the
company informed FNCB that the check had been altered.
FNCB then wrote Metro bank asking for reimbursement of the amount paid. The
latter refused to do so and a case for recovery was filed by FNCB.
ISSUE: WHICH BANK IS LIABLE FOR THE PAYMENT OF THE ALTERED CHECK,
DRAWEE BANK [FNCB] OR COLLECTING BANK [METRO BANK]?
HELD: FNCB, the drawee bank is liable for payment of the altered check. Metro Bank
invokes the 24-hr regulation of the Central Bank Clearing house which provides
that all defective checks must be returned by the drawee bank within 24hours to
the collecting bank. On the other hand, FNCB relies on the guarantee of all
previous indorsements made by Metro Bank which allegedly misled FNCB into
believing that the check was regular and the payees indorsements genuine.
Jen Laygo 2D 05
ATTY. F. AMPIL
In this case, the check was not returned to Metro bank in accordance with the 24hr clearing house period. Failure of FNCB to call the attention of MetroBank to the
alteration of the check until lapse of 9 days, negates whatever right it might have
had against metro bank in light of the regulation. Its remedy lies not against Metro
bank but against the party responsible for changing the name of the payee and
the amount on the check. The court also ruled that the indorsement must be read
together with the 24hr regulation, that once the period is over, the liability on such
an indorsement has ceased.
Moreover, before MetroBank allowed the last withdrawal of 18k by Sales, it
withheld payment and first verified the regularity and genuineness of the check
deposit for FNCB precisely because of the fast movement of the account. Only
upon being assured that the same is not unusual did Metro bank allow the
withdrawal of the balance.
VI. REPUBLIC BANK v CA
On Jan25, 1966, San Miguel Corporation [SMC] drew a check for P240 with the
FNCB in favor of J. Roberto Delgado, a stockholder. After the check was delivered
to Delgado, the amount on its face was fraudulently and w/o authority of the
drawer, altered by increasing it to P9,240. The check was indorsed and deposited
by Delgado in his account with Republic Bank on March14.
Republic accepted the check for deposit w/o ascertaining it genuineness and
regularity. Republic endorsed the check and presented it to FNCB for payment
through the Central bank Clearing House. Believing the check was genuine and
relying on the guaranty and endorsement of Republic, FNCB paid Republic the
amount of the check on March15.
On April19, SMC notified FNCB of the alteration and FNCB recredited the amount
to SMC. On May 19, FNCB informed Republic of the alteration, but by then
Delgado had already withdrawn his account from republic.
FNCB demanded that Republic refund the amount paid on the basis of the latters
indorsement and guaranty. Republic refused, claiming there was delay in giving it
notice of the alteration, that it was not guilty of negligence, and that it was SMCs
fault in drawing the check in such a way as to permit the insertion of numerals
increasing the amount. RTC ruled in favor of FNCB and CA affirmed.
ISSUE: W/N REPUBLIC, AS COLLECTING BANK, IS PROTECTED BY THE 24HR
CLEARING HOUSE RULE FROM LIABILITY TO REFUND THE AMOUNT PAID
BY FNCB AS DRAWEE OF THE SMC DIVIDEND CHECK?
HELD: NO. The 24hour clearing house rule is a valid rule applicable to commercial
banks. While it is true that when an endorsement is forged, the collecting bank or
last endorser as a general rule bears the loss, but the unqualified endorsement of
the collecting bank on the check should be read together with the 24hour rule.
Thus, when the drawee bank fails to return a forged or altered check to the
15
collecting bank within the 24hour clearing period, the collecting bank is absolved
from liability.
Every bank that issues checks for the use of its customers should know whether
or not the drawers signature thereon is genuine, whether there are sufficient
funds, and it should be able to detect alterations, erasures or intercalations
thereon, for these instruments are prepared, printed and issued by itself, it has
control of the drawers account aid it is supposed to be familiar with the drawers
signature. It should possess appropriate detecting devices for uncovering
forgeries and/or alterations on these instruments. Unless an alteration is
attributable to the fault or negligence of the drawer himself, such as when he
leaves spaces on the check which would allow the fraudulent insertion of
additional numerals in the amount appearing thereon, the remedy of the drawee
bank for payment is against the party responsible for the forgery or alteration,
otherwise, it bears the loss. It may not charge the amount so paid to the account
of the drawer, if the latter was free from blame, nor recover it from the collecting
bank if the latter made payment after proper clearance from the drawee.
VII. BPI v CA
On October 9, 1981, a phone call was made to BPIs Money Market Department
by a woman who identified herself as Eligia Fernando who had a money market
placement as evidenced by a promissory note with a value of 2.4million.
The caller sought to pre-terminate the placement but Reginaldo Estaquio, a
Trainee in BPI, told her that trading time was over and suggested she call the
following week. Estaquio advised Penelope Bulan who handled Fernandos
account, but Estaquio was left to attend the pretermination process.
The next Monday, the caller once again followed up the pretermination with
Estaquio. Although not familiar with the voice of Fernando, Estaquio made
certain that the caller was really Fernando by verifying that details the caller
gave about the placement, which tallied with the details in the ledger/folder of
the account. But neither Estaquio nor Bulan who originally handled Fernandos
account, nor any body else in BPI bothered to call up Fernando at her Philamlife
office to verify the request.
The caller asked that 2 checks be issued for the proceeds of the pretermination,
one for 1.8 million and the second for the balance, and that the checks be
delivered to her Philamlife office.
Later in the same morning, however, the same caller changed the delivery
instructions and said her niece, Rosemarie Fernando, would pick up the checks.
Estaquio informed her that a written authorization was needed.
A Rosemarie Fernando signed the delivery receipt but the dispatcher failed to
require the surrender of the promissory note evidencing the placement. There
was also no showing that Eligia Fernandos purported signature on the letter
requesting the pretermination and the letter authorizing Rosemarie Fernando to
pick up the 2 checks, was compared or verified with Eligia Fernandos real
signature in BPIs file. Such purported signature has been established to be
forged although it has a close similarity to the real signature of Fernando.
Jen Laygo 2D 05
ATTY. F. AMPIL
Thereafter, a woman who represented herself to be Eligia Fernando, applied at
China Banking Corporations [CBC] head office for the opening of a current
account. She was introduced to Emily Cuaso, Cash Supervisor, by Antonio
Concepcion whom Cuaso knew to have opened an account upon the introduction
of Valentin Co, a long-standing valued client of CBC. What Cuaso indicated on the
application form, however was that the new client was introduced by Valentin Co.
The current account was approved by Regina Dy, cashier, who did not interview
the new client but affixed her initials on the application form after reviewing it.
The following day, the woman purporting to be Eligia Fernando deposited the 2
checks from BPI to the current account with CBC. CBC endorsed the checks,
which it sent for clearing and which BPI cleared on the same day.
2 days after, withdrawals began on the current account, the last of which was 19
days after the opening of the account., or on November 4.
The day of reckoning came when the maturity date of Fernandos money market
placement with BPI came and the real Fernando went to BPI for the rollover of her
placement. She denied having preterminated her placement and BPI issued her a
new promissory note to evidence a roll-over of the placement.
BPI returned the 2 checks to CBC for the reason Payees endorsement forged. A
ping-pong then started when CNC returned the checks for the reason Beyond
Clearing Time.
Cases of Estafa thru falsification of Commercial Documents against 4 employees
of BPI and Susan Lopez San Juan, the impersonator, were filed.
Upon submission for Arbitration, the committee ruled in favor of BPI. Upon motion
for reconsideration, the Board of Directors of PCHC reversed and ruled that BPI
should bear the loss. BPI then filed this petition for review.
ISSUE: AS BETWEEN BPI AND CBC, WHO IS LIABLE FOR THE CHECKS?
HELD: Both are liable, as both banks were negligent.
BPI contends that CBCs clear warranty was an unrestrictive clearing guaranty that
all prior indorsements in the checks are genuine. BPI theorizes that Sec23 of the NIL is
not applicable in light of the absolute liability of the collecting bank as regards forged
endorsements. The court held that the general rule is that a forged signature is wholly
inoperative and payment made through such signature is ineffectual or does not
discharge the instrument. The exception to the rule is when the party relying on the
forgery is precluded from setting up the forgery or want of authority. In this jurisdiction,
we recognize negligence of the party invoking forgery as an exception to the general
rule. The records show that BPI and CBC were both negligent, resulting in the
encashment of the forged checks.
First, BPI should have at least verified with the real Eligia Fernando, vice-president
of Philamlife, the transaction even by mere telephone call. Second, BPI failed to verify
16
the signature of Fernando on the letter requesting the pre-termination and the letter
authorizing her niece to pick-up the checks. Lastly, BPI neglected to require the
surrender of the promissory note evidencing the money market placement before the
2 checks were delivered.
On the other hand, the impostor was able to open with CBC a current account in
the name of Eligia Fernando due to the negligence of Emily Cuaso, its cash
supervisor. Cuaso even misrepresented in the application form as to who introduced
the new depositor, making it appear the introduction was made by Valentin Co
instead of Antonio Concepcion. This clearly shows that Cuaso was uncomfortable
with the introduction made. Second, the depositor of CBC deposited 2 checks with an
aggregate value of 2.4million, which was grossly disproportionate to her initial deposit
of 10k in cash. Moreover, withdrawal of the checks proceeds began on oct16, only 2
days after the checks were deposited, and by Oct22, the account had been emptied
of the checks proceeds. Lastly, CBCs contention that big withdrawals are usual
business cannot be accepted, especially since the supposed check proceeds were
grossly disproportionate to the initial cash deposit.
BPI insists that the doctrine of LAST CLEAR CHANCE enunciated in Picart v
Smith should be applied, and on the basis thereof, CBC should be made liable.
However, the court ruled against such contention, stating that CBC had no prior
notice of the fraud perpetrated by BPIs employees. In the same manner, BPI insists
that even if the doctrine of PROXIMATE CAUSE is applied, CBC should still be held
liable. It argues that the acts and omissions of CBC are the cause that set into motion
the actual and continuous sequence of events that produced the injury and without
which the result would not have occurred. BPI claims that there was a gap of 1 day
between the issuance and delivery of the checks, and at this stage, there was yet no
loss and the impostor could have decided to desist from completing the same plan,
and therefore, the acts and omissions of BPI did not end in a loss.
However the court ruled that BPIs contentions are untenable. It was natural and
expected for one who took the risk of impersonating a person and conniving with
bank employees, to encash the check to complete her deception. There is therefore
greater reason to rule that the proximate cause of the payment of the checks by an
impostor was due to the negligence of BPI, however it must not bear the loss solely.
Due care on the part of CBC could have prevented any loss.
The court finally ruled that both banks were negligent in the selection and
supervision of their employees resulting in the encashment of the checks.
Considering the comparative negligence of the 2 banks, the SC ruled that the 2.4
million loss and the costs of arbitration should be shouldered by the 2 banks on a 6040 ratio. BPI would shoulder 60% while CBC would shoulder 40%.
Jen Laygo 2D 05
ATTY. F. AMPIL
VIII. PHIL. BANK OF COMMERCE v CA

Rommels Marketing Corporation, represented by its Pres. and GM, Romeo
Lipana, seeks to recover from PBC the sum of 300k representing various deposits
made in its current account with said bank which were not credited to its account.
It appears that RMC funds were entrusted in the form of cash to Lipanas
secretary, Irene Yabut, for the purpose of depositing said funds to RMCs current
account with PBC. However, Yabut deposited them in the account of her husband
Bienvenido Cotas, who maintained an account with the same bank.
Irene Yabut would accomplish 2 copies of a deposit slip, an original and a
duplicate. The original would show the name of her husband as depositor and his
current account number. On the duplicate copy was written the account number of
her husband but the name of the accountholder was left blank.
PBCs teller, Azucena Mabayad, would then validate and stamp both copies. The
2nd copy was kept by Irene Yabut allegedly for record purposes. After validation,
Yabut would then fill up the name of RMC in the blank space and change the
account number to that of RMC. This went on for more than a year.
Upon discovery of the loss of funds, RMC demanded PBC to credit its account but
was refused by the bank. RTC found PBC negligent and was affirmed by the CA.
ISSUE: WHAT IS THE PROXIMATE CAUSE OF THE LOSS OF 300K PBCS
NEGLIGENCE OR RMCS NEGLIGENCE?
HELD: PBCS Negligence was the proximate cause. Negligence is the omission to do
something which a reasonable man, guided by considerations which ordinarily regulate
the conduct of human affairs, would do, or the doing of something which a prudent or
reasonable man would not do. According to Picart v Smith, the test is whether the
defendant used reasonable care and caution which an ordinarily prudent person would
have used in the same situation. On the other hand, proximate cause us 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.
Applying such, it appears that the banks teller, Ms. Azucena Mabayad, was negligent
in validating, officially stamping and signing all the deposit slips prepared and
17
presented by Ms. Yabut, despite the glaring fact that the duplicate copy was not
completely accomplished, contrary to the procedures of the bank. Negligence here
lies not only on the part of Ms. Mabayad but also on the part of the bank itself in its
lackadaisical selection and supervision of Ms. Mabayad. Furthermore, under the
doctrine of last clear chance which provides that where both parties are negligent,
but the negligent act of one came later in time, or when it is impossible to determine
whose fault or negligence should be attributed to the incident, the one who had the
last clear opportunity to avoid the impending harm and failed to do so is chargeable
with the consequences thereof. It cannot be denied that the petitioner bank, thru its
teller, had the last clear opportunity to avert the injury incurred by its client. However,
RMC was likewise negligent in not checking its monthly statements of account. Had it
done so, the company would have been alerted to the series of frauds committed by
its secretary. The court therefore ruled that PBC should bear 60% of the damage
while RMC will bear 40% of the damage.
IX. MANILA LIGHTER TRANSPORTATION v CA
For over a period of 18 months, from Jan29 1960 until June22 1961, Augusto
Perez collected from different clients of Manila Lighter Transportation Inc. [MLTI]
some 49 checks with a total value of P91k. The endorsement of the payee MLTI,
by its GM Luis Gaskell, appears on the checks, which were later on proved to
have been forged. The checks as thus were negotiated by Wilfredo Lagamon,
accountant of MLTI and relative of Luis Gaskell, with Cao pek and Co., and
electronic store whose treasurer is Ko Lit.
Most of the checks were deposited by Ko Lit in his account with China Banking
Corporation. 3 checks were deposited to an account of Cao Pek & Co while one
check was deposited to the account of Lu Siu Po, manager of Cao Pek & Co. At
present, all these accounts have no more balances.
Until July 21, 1961, MLTI had no idea what was happening because it sent one
of its clients whose check was collected by Augusto Perez, a demand letter.
MLTI then made initial demand against China Banking Corporation [CBC] for the
refund of the amount of the checks but was refused.
RTC found both parties equally negligent, MLTI for allowing a state of affairs in
which its employees could appropriate the checks and falsify the indorsement of
its manager, and CBC for not detecting the falsification. CA dismissed and CBC
was freed from any liability to MLTI.
ATTY. F. AMPIL
Wherefore, the petition for review was denied.
X. WESTMONT BANK v ONG

Eugene Ong maintained a current account with Westmont Bank [WB]. Sometime
in May1976, he sold certain shares of stocks through Island Securities
Corporation and in payment thereof, Island Securities purchased 2 Pacific
Banking Corporation Managers Checks in the name of Ong.
But before Ong could get a hold of the checks, his friend Paciano Tanlimco got
hold of them, forged Ongs signature and deposited these with WB where
Tanlimco was a depositor. Even though Ongs specimen signature was on file, WB
accepted and credited both checks to the account of Tanlimco, without verifying
the signature indorsements at the back thereof. Tanlimco immediately withdrew
the money and absconded.
Ong then sought the help of Tanlimcos family instead of going straight to the bank
to stop or question the payment. Later, he reported the incident to the Central
Bank which like his first effort. Proved futile.
It was only 5months after the discovery of the fraud did Ong demand in his
complaint that WB pay the value of the 2 checks. WB simply contended that since
Ong claimed to have never received the originals of the 2 checks, he never
acquired ownership of these checks. Thus, he had no legal personality to sue as
he is a real party in interest. The bank then filed a demurrer to evidence which
was denied. The RTC judged in favor of Ong while CA affirmed the RTC in toto.
ISSUE: W/N CHINA BANK WAS NEGLIGENT AND SHOULD BE LIABLE?
ISSUE:
1. W/N Ong has a cause of action against Westmont Bank
2. W/N Ong is barred to recover the money from Westmont due to Laches?
HELD: NO. The issues raised are factual. The main issue of MLTIs negligence had
already been determined by the Trial Court against MLTI and affirmed by the CA.
Since the petitioner was not a client of CBC, the latter had no way of ascertaining the
authenticity of its indorsements on the checks which were deposited in the accounts
of the depositors in said bank. CBC was not negligent, because, in accordance with
banking practice, it caused the checks to pass through the clearing house before it
allowed their proceeds to be withdrawn by the depositors.
HELD:
1. YES, Ong has a cause of action against Westmont Bank. The complaint filed
expressly alleged Ongs 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 the petitioner.
Jen Laygo 2D 05
18
Sec23 of the NIL applies since the signature of the payee was forged to make
it appear that he made an indorsement in favor of the forger. Such signature
should be deemed inoperative and ineffectual. WB grossly erred in making
payment by virtue of said forged signature. 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. In this case, WB
was grossly negligent in performing its duties and must bear the loss.
2. NO. Laches may be defined as the failure or neglect for an unreasonable
length of time, to do that which should have been done earlier. In the case at
bar, it cannot be said that Ong slept on his rights, He immediately acted after
discovery of the forgery by seeking the help of Tanlimcos family and later the
Central Bank. Only after he exhausted possibilities of settling the matter
amicably did he resort to making the demand upon the petitioner. It is WB who
had the last clear chance to stop the fraudulent encashment had it exercised
due diligence and followed proper banking procedures in clearing checks.
XI. TAN v CA
Ramon Tan was a trader-businessman and community leader in Puerto
Princesa. He maintained since 1976 a Current Account with RCBC Binondo
Branch. To avoid carrying cash, he secured a Cashiers Check in the amount of
30k from PCIB while en route to Manila.
He deposited the check in his Binondo account. However, Tan used the wrong
deposit slip and on the same day, RCBC erroneously sent the check to the
Central Bank which was returned for having been mis-sent or misrouted. The
next day, RCBC debited the amount covered by the cashiers check from Tans
account. RCBC did not inform Tan of its action, which the latter claims he
learned only 42 days after.
Petitioner then issued 2 personal checks. The first was for 5k payable to Go Lac
and was presented 30days after Tans deposit of the cashiers check. The 2 nd
check was for 6k payable to MS Development Trading Corporation and was
returned twice, 9 days from deposit of the check and 22 days after the cashiers
check was deposited, both for insufficiency of funds.
Tan then filed a complaint for damages against RCBC for humiliation and loss of
face in the business sector due to the bounced checks.
RTC ruled in favor of petitioner while CA reversed.
ISSUE: W/N RCBC IS LIABLE FOR DAMAGES?
HELD: YES. RCBC cannot exculpate itself from liability by claiming that its depositor
impliedly instructed the bank to clear his check with the Central bank by filling a
local check deposit slip. Such posture is untenable. First, why would RCBC
follow a patently erroneous act born of ignorance or inattention, and second,
bank transactions pass through a succession of bank personnel whose duty is to
check and countercheck transactions for possible errors. In this case, the teller
should not have accepted the local deposit slip the very moment it was
Jen Laygo 2D 05
ATTY. F. AMPIL
presented to her. Depositors do not pretend to be master of bank technicalities
and repose trust in the bank personnels master of banking.
In this case, RCBC had been remiss in its duty and obligation to its client. The 2
dishonored checks issued by Tan were presented for payment more than 45days
from the day the cashiers check was deposited, which gave RCBC ample time to
have the cashiers check cleared if it corrected the mis-sending upon return from
the Central bank, using the correct slip this time so it can be cleared properly.
Instead, RCBC promptly debited 30k against the petitioners account and left it at
that. Moreover, the case at bar involves a cashiers check which is a primary
obligation of the issuing bank and accepted in advance by its mere issuance. A
cashiers check is regarded substantially to be as good as the money which it
represents.
The court held that Tan had a right to recover moral damages even if the banks
negligence may not have been attended with malice and bad faith. The court
modified moral damages from 700k to 100k and deleted the exemplary damages
of 200k, ruling on 50k for attorneys fees.
XII. ASSOCIATED BANK v CA
Melissas RTW was engaged in the business of ready to wear apparel which it
manufactured for different companies. When Merle Reyes, proprietress of
Melissas RTW, went to such companies to collect on what she thought were
unpaid accounts, she was informed of the issuance of crossed checks. Further
inquiry revealed that said checks were deposited with the Associated bank and
subsequently paid to Rafael Sayson.
Merle Reyes then sued for the recovery of the total value of the checks plus
damages. RTC ruled in favor of Reyes while CA affirmed.
ISSUE: W/N ASSOCIATED BANK IS LIABLE FOR DAMAGES?
HELD: YES. Under accepted banking practice, crossing a check is done by writing 2
parallel lines diagonally on the left top portion of the checks. In State Investment
House v IAC, the court held that the effects of crossing a check are: [1] that the
check may not be encashed but only deposited on the bank, [2] that the check may
be negotiated only one, to one who has an account with a bank, and [3] that the act
of crossing the check serves as a warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose.
The 6 checks in the case at bar had been crossed and issued for payees account
only. This could only signify that the drawers had intended the same for deposit
only by the person indicated, Melissas RTW.
The checks were accepted for deposit by Associated Bank for the account of Rafael
Sayson although they were crossed checks and the payee was Melissas RTW. The
bank stamped thereon its guarantee that all prior indorsements and/or lack of
indorsements were guaranteed. By such deliberate acts, the Bank had for all legal
intents treated the said checks as negotiable instruments, and assumed the
warranty of the indorser. When the Bank paid the checks so endorsed
19
notwithstanding that title had not passed to the endorser, it did so at its peril and
became liable to the payee for the value of the checks.
Furthermore, Associated Banks claim that it was Merle Reyes husband, Eddie
Reyes who endorsed the checks, the court held that assuming that Eddie Reyes
did endorse the crossed checks, the Bank would still be liable because he was not
authorized to make the endorsements. It was the responsibility of the Bank to
inquire as to the authority of Rafael Sayson to deposit crossed checks payable to
Melissas RTW upon prior endorsement by Eddie Reyes. The Bank was by reason
of the nature of the checks, put on notice that they were issued for deposit only to
the private respondents account. Its failure to inquire into Saysons authority was a
breach of duty it owed to Merle Reyes. The court also held that it is permissible
that the payee of illegally encashed checks be allowed to recover directly from the
bank responsible for the encashment, regardless of whether or not the checks
were actually delivered to the payee. The court therefore ruled that Merle Reyes
had a valid cause of action against Associated Bank and that the latter is liable to
her for unauthorized encashment of the subject checks.
I. KENG HUA PAPER PRODUCTS v CA & SEA-LAND SERVICE INC.
Shipper: Ho Kee Waste Paper; Consignee: Keng Hua Paper Products, Co., Inc.
Carrier: Sea-Land Service Inc.
Conflict is between Consignee and Carrier regarding Bill of Lading
Sea-Land Service Inc is a foreign shipping company licensed to do business in

the Philippines. It received at its Hong Kong Terminal a sealed container of 76
bales of unsorted waste paper for shipment to Keng Hua Paper Products, Co.
in Manila. A Bill of Lading was issued to Sea-Land to cover the shipment.
The shipment was discharged at the Manila International Container Port and
corresponding Notices of Arrival were transmitted to Keng Hua but the latter
failed to discharge the shipment from the container during the free time period
or grace period. Hence, the shipment remained inside Sea-Lands container
from the moment the free time period expired until the time when the shipment
was unloaded from the container, totaling a period of 481 days.
During the period, Demurrage charges of P67,340 accrued and letters

demanding payment for such were sent by Sea-Land to Keng Hua. When
unheeded, Sea-Land commenced a civil action for collection and damages.
Keng Hua claims that it purchased 50 tons of waste paper from the shipper in
Hong Kong, Ho Kee Waste Paper, as shown by a Letter Of Credit issued by
Equitable Banking Corporation, with partial shipment permitted. Likewise, the
Letter of Credit stated that the remaining balance of shipment was only 10 metric
tons. It then maintained that if it was to accept the shipment, the company would
be violating Central Bank rules and regulations and Custom and Tariff laws.
Keng Hua also averred that the cause of action should be against the shipper
[Ho Kee] which contracted Sea-Lands services and not against Keng Hua, who
already notified the foreign shipping company of the wrong shipment via letter.
RTC found Keng Hua liable for demurrage. CA affirmed.

ISSUE: W/N KENG HUA IS BOUND BY THE BILL OF LADING?
Jen Laygo 2D 05
ATTY. F. AMPIL
HELD: YES, petitioner Keng Hua is liable for demurrage. A Bill of Lading serves 2
functions: [1] as a receipt for the goods shipped, and [2] as a contract by which 3
parties, namely the SHIPPER, the CARRIER and the CONSIGNEE undertake
specific responsibilities & assume stipulated obligations. A bill of lading delivered
& accepted constitutes the contract of carriage even though not signed, because
the acceptance of a paper containing the terms of a proposed contract generally
constitutes an acceptance of the contract & all its terms and conditions of which
the acceptor has actual or constructive notice. The acceptance of a bill of lading
by the shipper and consignee, with full knowledge of its contents, gives rise to the
presumption that the same was a perfected and binding contract.
In this case, both lower courts held that the bill of lading was a valid and
perfected contract between shipper Ho Kee, the consignee Keng Hua and the
carrier Sea-Land. Sec17 of the bill of lading provided that the shipper and the
consignee were liable for the payment of demurrage charges for the failure to
discharge the containerized shipment beyond the grace period allowed by tariff
rules. Applying said stipulation, both lower courts found Keng Hua liable.
Keng Hua admits it received the bill of lading immediately after the arrival of the
shipment. However, it took 6 months for petitioner to notify Sea-Land that it could not
accept the shipment. Keng Huas inaction for such a long period conveys the clear
inference that it accepted the terms and conditions of the bill of lading. Its contention
that the Notice of Refused or On Hand Freight it received from Sea-Land,
acknowledging that petitioner declined to accept the shipment, supported its claims,
was rejected, for the letter merely proved petitioners refusal to pick up the cargo and
not its rejection of the bill of lading. Since it was sent by Sea-Land to Keng Hua 4
months after the latter received the bill of lading, it only highlighted petitioners
prolonged failure to object to the bill of lading.
As to Keng Huas claim that it could not receive the shipment on the pretext of
violating customs, tariff and central bank laws, the court held that mere apprehension
of violating said laws, without clear demonstration that taking delivery of the shipment
has become legally impossible, cannot defeat petitioners contractual obligation and
liability under the bill of lading. Since the issue of whether petitioner accepted the bill of
lading was raised for the first time only in its memorandum before the SC, the court
cannot now entertain the issue raised for the fist time on appeal.
Due to its prolonged failure to receive and discharge the cargo, Keng Hua violated
the terms of the Bill of Lading and is thus liable for demurrage. Demurrage is merely an
allowance or compensation for delay or detention of a vessel and is the true measure
of damages in all cases of mere detention, for that allowance has reference to the
ships expenses, wear and tear, and common employment. The contention that there
was discrepancy in the amount of demurrage charges demanded does not negate
petitioners liability, since the different amounts was due to the different dates of the
demand letters sent to petitioner. Naturally, the longer the cargo remained unclaimed,
the higher the demurrage.
In a letter of credit, there are also 3 distinct and independent contracts: [1] the
contract of sale between buyer and seller, [2] the contract of the buyer with the issuing
bank, and [3] the letter of credit proper in which the bank promises to pay the seller
20
pursuant to the terms and conditions stated therein. A transaction involving the
purchase of goods may also require, apart from the letter of credit, a contract of
transportation especially when the buyer and seller are not in the same locale. Any
discrepancy between the amount of the goods described in the commercial invoice of
the contract of sale and the amount allowed in the letter of credit will not affect the
validity of the contract of carriage as embodied in the bill of lading. The bank cannot
be expected to look beyond the documents presented to it, and neither can the
carrier be expected to go beyond the representations of the shipper in the bill of
lading. Petitioners remedy in case of over-shipment lies against the seller/shipper,
not against the carrier. The case involving an obligation not arising from a loan or
forebearance, the applicable interest rate is 6% per annum. Since the bill of lading
did not specify the amount of demurrage, the total amount demanded cannot be
deemed to have been established with reasonable certainty until the trial court
rendered judgment. Hence, the legal interest of 6% from the date of the trial courts
decision, with the rate of 12% on the total then outstanding from the time judgment
becomes final and executory until its satisfaction, shall be paid by petitioner.
II. BANK OF AMERICA v CA & INTER-RESIN INDUSTRIAL CORPORATION
Correspondent/Advising Bank: Bank of America; Beneficiary/Seller: Inter-Resin
Issuing Bank: Bank of Ayudhya; Buyer: General Chemicals.
Conflict is between Correspondent Bank and Seller regarding fraudulent Letter of Credit
Bank of America [BA], NT & SA, Manila, received by registered mail an

Irrevocable Letter of Credit purportedly issued by Bank of Ayudhya, Samyaek
Branch, for the account of General Chemicals, Ltd. of Thailand in the amount of
US$2.782M to cover the sale of plastic ropes and agricultural files with the
Bank of America as Advising Bank and Inter-Resin as Beneficiary.
BA informed Inter-Resin of the LC and transmitted the letter of credit. Inter-Resin
then sought to confirm the LC with Bank of America but the latter did not, an
employee of the Bank explaining that there was no need for confirmation
because the LC would not have been transmitted if it were not genuine.
Inter-Resin then sought to make a partial availment under the LC by submitting
invoices to BA covering shipment of 24k bales of polyethylene rope to General
Chemicals valued at $1.3M, the corresponding packing list, export declaration
and bill of lading. After being satisfied that Inter-Resins docs conformed with the
conditions in LC, BA issued in favor of Inter-resin a cashiers check for P10.2M,
equivalent to the draft for $1.3M. BA then wrote Bank of Ayudhya advising the
latter of the availment under the LC, seeking reimbursement therefor.
A 2nd availment was then sought by Inter-resin when it presented the same
documents to BA evidencing the 2nd shipment of goods. Immediately upon
receipt of telefax from Bank of Ayudhya declaring the LC fraudulent, BA stopped
processing Inter-resins documents. It then sought assistance from the NBI. The
latter discovered that the vans exported by Inter-Resin did not contain ropes but
plastic strips, wrappers, rags and waste materials. Inter-Resins President
Francisco Trajano and Executive VP Barcelina Tio were thereafter charged with
Estafa for falsification of commercial documents, but was later dismissed.
Jen Laygo 2D 05
ATTY. F. AMPIL
BA then sued Inter-Resin for recovery of the P10.2M paid on the 1 st availment on
the LC. Inter-Resin claimed it was entitled to retain the amount, moreover, to claim
the balance for the 2nd shipment. RTC ruled for Inter-Resin because BA made
assurances to it when the latter confirmed the LC, that BA was negligent in not
using modern means of communication to verify the LC w/ Bank of Ayudhya, &
that BA failed to prove Inter-Resins participation in the fraud, as the case for
Estafa was dismissed. CA affirmed.
ISSUE: W/N BA WARRANTED THE GENUINENESS AND AUTHENTICITY OF THE
LC AND WHETHER IT ACTED MERELY AS AN ADVISING OR CONFIRMING
BANK?
HELD: BA was merely an ADVISING BANK, and not a confirming bank, and so it may
recover. What characterizes letters of credit, as distinguished from other accessory
contracts, is the engagement of the issuing bank to pay the seller once the draft and
the required shipping documents are presented to it. In turn, this arrangement
assures the seller of prompt payment, independent of any breach in the main sales
contract. By this so-called INDEPENDENT PRINCIPLE, the bank determines
compliance with the LC only by examining the shipping documents presented; it is
precluded from determining whether the main contract is actually accomplished or
not. There would be at least 3 parties: [1] the buyer who procures the LC and obliges
himself to reimburse the issuing bank upon receipt of the documents of title, [2] the
bank issuing the LC which undertakes to pay the seller upon receipt of the draft and
proper documents of titles and to surrender the documents to the buyer upon
reimbursement, and [3] the seller who in compliance with the contract of sale ships
the goods to the buyer and delivers the documents of title and draft to the issuing
bank to recover payment. The number of parties may also be increased. Thus, the
services of an advising [notifying] bank may be utilized to convey to the seller the
existence of the credit; or a confirming bank which will lend credence to the LC
issued by a lesser known issuing bank; or of a paying bank which undertakes to
encash the drafts drawn by the exporter. Further, instead of going to the place of the
issuing bank to claim payment, the buyer may approach another bank, termed the
negotiating bank to have the draft discounted.
In the case at bar, BA was only an advising bank, and not a confiming bank. This
is evident in the LC itself, the petitioner banks letter of advice, its request for
payment of advising fee and the admission of Inter-Resin that it has paid the same.
That BA asked Inter-resin to submit documents required by the LC and eventually
has paid the P10.2M proceeds thereof did not make it a confirming bank. The fact,
too, that the draft required by the LC is to be drawn under the account of General
Chemicals as buyer only means that the same had to be presented to Bank of
Ayudhya as the issuing bank for payment.
Moreover, BAs letter expressly stated that the enclosure is solely an advise of
credit opened by the above-mentioned correspondent and conveys no engagement
by us. As an advising or notifying bank, BA did not incur any obligation more than
just notifying Inter-Resin of the LC. The statement by the employee of BA as to the
genuineness of the LC did not novate the LC and BAs letter of advise. Inter-Resin
itself cannot claim to be free from fault. It would have been strange if it did not, prior
21
to the LC, enter into a contract or negotiate at the very least, with General
Chemicals. In the ordinary course of business, the perfection of contract precedes
the issuance of an LC.
Bringing the LC to the attention of the seller is the primordial obligation of an
advising bank. BA was not obliged to used advanced modes of business
communications to verify the LC under Art18 of the Uniform Customs and Practice
for Documents of Credit [UCP] which provides that banks assume no liability for
the consequences arising out of delay or loss in transit of any messages, letters or
documents of for delay, mutilation or other errors arising in the transmission of any
telecommunication. As advising bank, BA is bound to check only the apparent
authenticity of the LC, which it did.
BA may recover the P10.2M from Inter-Resin to which it had merely a
discounting arrangement where BA acted independently as a negotiating bank,
thus saving Inter-resin from the hardship of presenting documents directly to the
Bank Of Ayudhya. As a negotiating bank, BA has a right of recourse against issuer
bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft,
continues to assume a contingent liability thereon.
III. RELIANCE COMMODITIES v DAEWOO INDUSTRIAL
ATTY. F. AMPIL
allocation for the year. Because of Reliances failure to open the LC, Daewoo was
compelled to sell the goods to another buyer at a lower price, to cut losses and
expenses Daewoo had begun to incur.
Reliance then demanded from Daewoo the amount representing the value of the
short delivery of 135.655 metric tons under the 1 st shipment. When unheeded, it
filed an action for damages, with Daewoo filing a counterclaim for damages due to
breach of contract when Reliance failed to open the LC under the 2nd contract.
RTC ruled the 3rd contract did not extinguish Daewoos obligation for the short
delivery and must pay Reliance. The latter was in turn liable for breach and must
therefore pay Daewoo. CA affirmed.
ISSUE: W/N FAILURE OF AN IMPORTER [RELIANCE] TO OPEN AN LC ON THE

DATE AGREED UPON MAKES HIM LIABLE TO THE EXPORTER [DAEWOO]
FOR DAMAGES?
Buyer/Consignee: Reliance Commodities; Seller/Shipper: Daewoo Industrial

Supposed Issuing Bank: China Banking Corporation
Conflict regarding Failure to Open Letter of Credit as Breach of Contract
Reliance Commodities, Inc. and Daewoo Industrial Co., Ltd. entered into a
contract of sale wherein the latter undertook to ship and deliver to the former
2,000 metric tons of foundry pig iron for the price of US$404k. Daewoo then
shipped fro Korea the goods on board the M/S Aurelio III under a Bill of Lading
for carriage to and delivery in Manila to its consignee, Reliance. The shipment
was fully paid for. Upon arrival in Manila, the cargo was found to be short of
135.655 metric tons.
Another contract was entered into between the same parties for the purchase of
another 2,000 metric tons of iron. Daewoo acknowledged the previous short
shipment in the 2nd contract and bound itself to reduce the price by $1-$2 per
metric ton for succeeding orders. This undertaking was made part of the 2nd
contract. However, that contract was not consummated and was later
superseded by still a 3rd contract. The 3rd contract stipulated that payment would
be by an Irrevocable at Sight Letter of Credit in favor of Daewoo.
Thereafter, Reliance filed with China Banking Corporation an application for an
LC in favor of Daewoo covering the amount of US$380k. The application was
endorsed to Iron and Steel Authority [ISA] but it was denied. Reliance was
instead asked to submit purchase orders from end-users equivalent to 2,000
metric tons to support its LC application, but because the goods covered fell
short of the contracted tonnage [only 900 metric tons], Daewoo rejected the
proposed LC and Reliance withdrew its application.
Subsequently, Daewoo learned of the failure of Reliance to open the LC due to
the fact that earlier, Reliance had already exceeded its foreign exchange
Jen Laygo 2D 05
HELD: YES, failure of buyer seasonably to furnish an agreed LC is a breach of the

contract between buyer and seller.
A letter of Credit is one of the modes of payment set out in Sec8 of Central
Bank Circular 1389, by which commercial banks sell foreign exchange to service
payments for, ex. Commodity imports. The primary purpose of the LC is to
substitute for, and therefore support, the agreement of the buyer/importer to pay
money under a contract or other arrangement. It creates in the seller/exporter a
secure expectation of payment.
A letter of credit transaction may thus be seen to be a composite of at least 2
distinct but intertwined relationships, each relationship being concretized in a
contract: [1] Between the buyer and he seller, [2] Between the Buyer and the
Issuing Bank under an Application and Agreement or the Reimbursement
Agreement, and [3] between the Issuing bank and the Beneficiary/Seller.
The present case relates to the 1st contractual relation. Examining the 3rd
contract, the court held that under the instrument, the opening of an LC upon
application of Reliance was not a condition precedent for the birth of the obligation
of Reliance to purchase the goods from Daewoo because there had already been
a meeting of the minds in respect to the subject matter of the contract, the price
therefore and other principal provisions, resulting to a perfected contract. The
opening of the LC was an obligation of Reliance and was a condition for
enforcement of the reciprocal obligation of Daewoo to ship the SM. Failure to
open the LC did not prevent the birth of the contract neither did it extinguish such
contract.
22
The Central Bank has established the requirements for opening a letter of
credit as: [1] the duly accomplished LC application, [2] firm offer/pro forma
invoice containing information on the specific quantity, unit cost, description and
total cost of the commodity, [3] permits and clearances from the appropriate
govt agencies in case of regulated commodities, and [4] duly accomplished
Import Entry Declaration form as basis for duties. Further, the LC is to be
opened on or before date of shipment with max validity of 1year and only 1 LC is
to be opened for each transaction.
For having exceeded its foreign exchange allocation even before it entered
into the 3rd contract with Daewoo, and for having failed to secure end-users
purchase orders equivalent to 2,000 metric tons, Reliance can hold only itself
responsible.
The court then ruled that failure of buyer to seasonably furnish the agreed
LC is a breach of the contract between buyer and seller. Where the buyer fails to
open an LC as stipulated, the seller or exporter is entitled to claim damages for
breach. Damages for failure to open a commercial credit may, in appropriate
cases, include loss of profit which seller would reasonably have made had the
transaction been carried out.
IV. JOHANNES SHUBACK & Sons Philippine Trading v CA & Philippine SJ
In 1981, Philippine SJ Industrial Trading, represented by Ramon San Jose Jr.,

contacted Schuback & Sons through the Philippine Consulate General in
Hamburg, West Germany because it wanted to purchase MAN bus spare parts
from Germany. Schuback & Sons then communicated with its trading partner
Schuback-Hamburg, regarding the spare parts San Jose wanted to order.
On Oct16, San Jose submitted to Schuback&sons a list of the parts to be
purchased, w/ specific part numbers and description. Upon receipt of quotations,
Schuback sent to SJ a letter enclosing its offer on the items listed by the latter.
On Dec4, he informed Schuback that he preferred genuine replacement parts
and requested to be given a 15% discount on all items. On Dec17, Schuback
submitted its formal offer containing the item number, quantity, part number,
description, unit price and total to San Jose.
On Dec24, San Jose informed Schuback of his desire to avail of the prices of the
parts at the time, and enclosed its purchase order containing the item number,
part number and description, also promising to submit the quantity per unit it
wanted to order at a later date or on Dec28 or 29. On Dec29, San Jose
personally submitted the quantities he wanted to Mr. Dieter Reichert, General
Manager of Schuback, at the latters residence. The quantities promised were
written in ink by San Jose in the same PO previously submitted. At the bottom of
the PO was a note that the PO will include a 3% discount and shall serve as the
initial purchase order.
Schuback immediately ordered the items needed, in order to enable San Jose to
avail of the old prices. Schuback-Hamburg in turn ordered the items from NDK, a
supplier of MAN spare parts in West Germany. Schuback-Hamburg sent
Jen Laygo 2D 05
ATTY. F. AMPIL
Schuback&Sons a proforma invoice to be used by San Jose in applying for a
Letter of Credit. Said invoice required that the LC be opened in favor of SchubackHamburg. Thereafter, Schuback&Sons reminded San Jose to open the LC to
avoid delay in shipment and payment of interest. San Jose replied, mentioning the
difficulty he was encountering in securing the required dollar allocations and
applying for the letter of credit, procuring a loan and looking for a partner-financier,
and of finding ways to proceed with the orders.
In the meantime, Schuback-Hamburg received invoices from NDK for partial

deliveries of the goods. Shuback-Hamburg paid NDK for the spare parts.
Once again, Schuback&Sons reminded San Jose to open the LC and advised that
the case may be endorsed to its lawyers. In reply, San Jose claimed he did not
make any valid PO and that there was no definite contract between the. Shuback
then sent a rejoinder explaining that there was a valid PO and suggesting that San
Jose either proceed with the order and open the LC or cancel the order and pay
the CANCELLATION FEE of 30% FOB value.
Schuback-Hamburg then issued a Statement of Account to Schuback&Sons,

enclosing a debit note charging the latter 30% cancellation fee, storage and
interest charges in the total amount of DM51,917.81. The amount was charged to
Schuback&Sons account with Shuback-Hamburg. The latter then filed a
complaint for recovery of damages, unearned profits and interest.
RTC ruled in favor of Schuback&Sons, holding there was a perfected contract, but
CA reversed saying there was no perfection of contract as there was no meeting
of the minds as to the price between the last week of Dec1981 and the first week
of Jan1982.
ISSUE: W/N CONTRACT OF SALE WAS PERFECTED BETWEEN PARTIES?
HELD: YES, there was a perfected contract. A contract of sale is perfected at the
moment there is a meeting of the minds upon the thing which is the object of the
contract and upon the price. Art1319 of the CC states that Consent is manifested
by the meeting of the offer and acceptance upon the thing and the cause which
are to constitute the contract. The offer must be certain and the acceptance
absolute. A qualified acceptance constitutes a counter offer.
The facts in the present case indicate that consent on both sides has been
manifested. The offer was made by petitioner on Dec17 and on Dec24, private
respondent informed the former of his desire to avail of the prices of the parts at
the time and simultaneously enclosed its purchase order. At this stage, a meeting
of the minds between vendor and vendee has occurred. Although said PO did not
contain the quantity he wanted to order, private respondent made good his
promise to communicate the same on Dec29. At this juncture, it is noted that San
Jose was already in the process of executing the agreement previously reached
between parties. Moreover, the annotation made by San Jose on the PO was
another indication of acceptance by the vendee.
In the same manner, the court held that failure to open the irrevocable letter of
credit w/o recourse in favor of Schuback-Hamburg did not prevent the perfection
of the contract between the parties, for the opening of a letter of credit is not to be
deemed a suspensive condition. The facts herein do not show that petitioner
23
ATTY. F. AMPIL
reserved title to the goods until private respondent opened an LC. The opening
of an LC in favor of vendor is only a mode of payment. It is not among the
essential requirements of a contract of sale, the absence of which prevents
perfection.
To adopt the CAs ruling that the contract of sale was dependent on the
opening of the LC is untenable from a pragmatic view because then San Jose
would not be able to avail of the old prices open to him only for a limited time. It
would have been impossible for private respondent to avail of the old prices
since the perfection of the contract would arise much later, or after the end of the
year or when he finally opens the LC.
V. FEATI BANK [Now CityTrust Banking Corp.] v CA & Bernardo Villaluz

Seller/Shipper: Bernardo Villaluz; Consignee: Hanmi Trade Development Ltd.
Issuing Bank: Security Pacific National Bank of LA;
Correspondent Bank: FEATI Bank and Trust Company
Conflict between Seller/Shipper and Correspondent Bank as to Non-Payment of LC due to
insufficiency of documents presented by Seller.
Bernardo Villaluz agreed to sell to Axel Christiansen 2,000 cubic meters of

Lauan Logs at $27 per cubic meter FOB. After inspecting the logs, Christiansen
issued a purchase order. On the arrangements made and upon instructions of
the Hanmi Trade Development Ltd., de Santa Ana, California as Consignee, the
Security Pacific National Bank of Los Angeles, California issued an Irrevocable
Letter of Credit available at sight in favor of Villaluz for the sum of $54k as the
total purchase price of the logs.
The LC was mailed to Feati Bank and Trust Company with the instruction that
the latter shall forward the enclosed LC to the beneficiary. The LC provided that
the draft to be drawn is on Security Pacific National bank and that it be
accompanied with [1] Signed Commercial Invoice in 4 copies, [2] Tally sheets in
quadruplicate, [3] 2/3 Original Clean on Board Ocean Bills of Lading with
Consignee and Parties to be advised by Hans Axel Christiansen, and [4]
Certification from Christiansen, Ship and Merchandise Broker, stating that the
logs have been approved prior to shipping in accordance with the terms and
conditions of the corresponding Purchase Order. Also incorporated in the LC is
the Uniform Customs and Practice for Documentary Credits.
The logs were then loaded on the vessel Zenlin Glory chartered by
Christiansen. The logs were inspected by customs inspectors and
Jen Laygo 2D 05
representatives from the Bureau of Forestry before its loading, and certified to be
in good condition and exportability. After loading, the Chief Mate Shao Shu Wang
issued a mate receipt of the cargo stating its good condition. However,
Christiansen refused to issue the certification required, despite several requests
by Villaluz. Because of the absence of the certification by Christiansen, Feati
refused to advance payment on the LC. The LC then lapsed w/o private
respondent receiving any certification from Christiansen. The matter was then
brought before the Central Bank, which ruled that the certification of the lumber
inspectors of the Bureau of Forestry shall be considered final for purposes of
negotiating documents. It also issued a Memorandum/Regulation prohibiting such
conditions of certification in any LC.
Meanwhile, the logs arrived at Korea and were received by consignee Hanmi
Trade Development Company, to whom Christiansen sold the logs for $37.50 per
cubic meter or a net profit of $10 per cubic meter. Hanmi on the other hand sold
the logs to Taisung Lumber Company at Korea.
Since the demands by Villaluz proved futile, an action for Mandamus and Specific
performance was filed against Christiansen and the Feati Bank, praying that
Christiansen be ordered to issue the certification and upon issuance, or if the
court should find it unnecessary, that Feati be ordered to accept negotiation of the
LC and make payment thereon to Villaluz.
While the case was pending, Christiansen absconded and left the Philippines w/o
informing the court and his counsel. Villaluz then amended the complaint to make
Feati solidarily liable with Christiansen. RTC ruled in favor of Villaluz and held both
Christiansen and Feati solidarily liable. CA affirmed.
ISSUE: W/N A CORRESPONDENT BANK IS TO BE HELD LIABLE UNDER THE LC

DESPITE NON-COMPLIANCE BY THE BENEFICIARY WITH THE TERMS
THEREOF?
HELD: NO, being a mere notifying bank, Feati cannot be held liable, absent any
definitive proof that it has confirmed the LC or has actually negotiated with the
private respondent, the refusal by the petitioner to accept the tender of private
respondent is justified.
It is a settled rule in commercial transactions involving LCs that the
documents tendered must strictly conform to the terms of the LC. The tender of
documents by the beneficiary must include all documents required by the letter. A
correspondent bank which departs from what has been stipulated in the LC, as
when it accepts a faulty tender, acts on its own risks and it may not thereafter be
able to recover from the buyer or the issuing bank, as the case may be, the
money thus paid to the beneficiary. This is the RULE OF STRICT COMPLIANCE.
Moreover, Art7 and 8 of the UPC provide that the bank may only negotiate,
accept or pay if the documents tendered to it are on their face in accordance with
the terms and conditions of the documentary credit. And since a correspondent
bank, like Feati, principally deals only with documents, the absence of any
document required in the LC justifies the refusal by the correspondent bank to
24
negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond
the documents. It merely has to rely on the completeness of the documents
tendered by the beneficiary.
The court also held that an irrevocable credit is not synonymous with a
confirmed credit. A credit may be an irrevocable credit and at the same time a
confirmed credit or vice-versa. An irrevocable credit refers to the duration of the
LC, meaning that the issuing bank may not w/o consent of the beneficiary [seller]
and the applicant [buyer] revoke his undertaking under the letter. The issuing
bank does not reserve the right to revoke the credit. On the other hand, a
confirmed LC pertains to the kind of obligation assumed by the correspondent
bank. In this case, the correspondent bank gives an absolute assurance to the
beneficiary that it will undertake the issuing banks obligation as its own
according to the terms & conditions of the credit. Hence, the mere fact that an
LC is irrevocable does not necessarily imply that the correspondent bank
accepting the instructions of the issuing bank has also confirmed the LC. In
commercial transactions involving LCs, the functions assumed by a
correspondent bank are classified according to the obligations taken up by it.
The correspondent bank may be called a notifying bank, a negotiating bank or a
confirming bank.
In this case, the letter merely provided that Feati forward the enclosed
original credit to beneficiary. It is indubitable that petitioner is only a NOTIFYING
bank, hence its responsibility was solely to notify and transmit the documentary
credit to beneficiary. The notifying bank may suggest to the seller its willingness
to negotiate, but this fact alone does not imply that the notifying bank promises
to accept the draft drawn under the LC. A notifying bank is not privy to the
contract of sale between buyer and seller, its relationship is only with the issuing
bank and not with the beneficiary. It follows therefore that when Feati refused to
negotiate with Villaluz, the latter has no cause of action against petitioner for the
enforcement of his rights under the letter. In order that Feati may be held liable
under the letter, there should be proof that petitioner confirmed the LC.
Villaluz relies on the P75k loan extended by Feati to him, claiming that this
was an act of confirmation as the loan was granted in anticipation of the LC. The
court held that the loan was only an isolated transaction independent of the
documentary credit for which the LC was intended merely to serve as collateral.
At most, when petitioner extended the loan, it was acting as a negotiating bank,
but even then, a negotiating bank has no contractual relationship with the seller.
The mere opening of an LC does not involve a specific appropriation of a
sum of money in favor of the beneficiary. It only signifies that the beneficiary may
be able to draw funds upon the LC up to the designated amount specified in the
letter. It does not convey the notion that a particular sum of money has been
specifically reserved or has been held in trust.
As a mere notifying bank, not only does the petitioner not have any
contractual relationship with the buyer, it has also nothing to do with the contract
between the issuing bank and the buyer regarding the issuance of the LC. The
concept of guarantee vis--vis the concept of an irrevocable credit are
Jen Laygo 2D 05
ATTY. F. AMPIL
inconsistent with each other. In contracts of guarantee, the guarantors obligation
is merely collateral and arises only upon default of person primarily liable. On the
other hand, in an irrevocable credit, the bank undertakes a primary obligation. The
relationship between the issuing bank and the correspondent bank is more of an
agency. As an agent of the issuing bank, it has only to follow instructions of the
latter and to it alone is it obligated and not to the buyer with whom it has no
contractual relationship.
Finally, even if it be assumed that Feati was a confirming bank, the petitioner
cannot be forced to pay the amount under the LC because there was a failure of
the part of the private respondent to comply with the terms of the LC.
The Central Bank memorandum prohibiting the 4 th condition of certification
under the LC cannot retroact to the case at bar for the resolution did not exist at
the time the LC was issued.
25
ATTY. F. AMPIL
The Lower Court initially dismissed but then ruled in favor of IBAA upon
reconsideration.
Vintolas claim their acquittal in the Estafa case bars filing of the civil action which
is deemed instituted with the criminal action.
ISSUE: W/N THE VINTOLAS ARE LIABLE
I. VINTOLA v INSULAR BANK OF ASIA AND AMERICA [IBAA]
Spouses Tirso and Loreta Vintola were doing business under the name and style
Dax Kin International, engaged in the manufacture of raw sea shells into
finished products.
They applied for and were granted a domestic letter of credit by the IBAA in the
amount of P40k. The LC authorized the bank to negotiate for their account,
drafts drawn by their supplier, one Stalin Tan, on Dax Kin International for the
purchase of puka and olive seashells.
In consideration thereof, the Vintolas jointly and severally agreed to pay the
bank at maturity the equivalent of the aforementioned amount or such portion
thereof as may be drawn or paid upon the faith of the credit together with the
usual charges.
On the same day, they received from Stalin Tan the shells worth 40k and the
Vintolas executed a Trust Receipt agreement with IBAA. Under the TR, the
Vintolas agreed to hold the goods in trust for IBAA as the latters property with
liberty to sell the same for its account, and in case of sale, to turn over the
proceeds as soon as received to IBAA.
When the spouses defaulted, IBAA demanded payment but the Vintolas, who
were unable to dispose of the shells, responded by offering to return the goods.
IBAA refused and charged the spouses with Estafa for having misappropriated,
misapplied and converted for their own personal use and bnefit the aforesaid
goods.
The lower court acquitted the Vintolas, ruling that the remedy of the bank was
civil and not criminal in nature. Shortly thereafter, IBAA instituted a civil action to
recover the value of the goods.
Jen Laygo 2D 05
HELD: YES. A letter of credit trust receipt arrangement is endowed with its own
distinctive features and characteristics. Under that set-up, a bank extends a loan
covered by the LC, with the TR as a security for the loan. In other words, the
transaction involves a loan feature represented by the LC and a security feature
which is in the covering TR.
A trust receipt is therefore a security arrangement, pursuant to which a bank
acquires a security interest in the goods. it secures an indebtedness and there
can be no such thing as security interest that secures no obligation.
Contrary to the allegation of the Vintolas, IBAA did not become the real owner
of the goods. It was merely the holder of a security title for the advances it had
made to the Vintolas. The goods the Vintolas had purchased through IBAA
financing remain the formers property and they hold it at their own risk. The trust
receipt arrangement did not convert IBAA into an investor, the latter remained a
lender and a creditor.
Since the IBAA is not the factual owner of the goods, the Vintolas cannot
justifiably claim that because they have surrendered the goods to IBAA and
subsequently deposited them in the custody of the court, they are absolutely
relieved of the obligation to pay their loan because of their inability to dispose of
the goods. The fact that they were unable to sell the seashells does not affect
IBAAs right to recover the advances it had made under the LC.
It follows that the acquittal of the Vintolas in the Estafa case is no bar to the
institution of a civil action for collected. The decision of the acquittal expressly
provided that the remedy of the Bank is civil and not criminal in nature. The
Vintolas are liable ex contractu for breach of the Letter of Credit. Their civil liability
does not arise ex delicto which is deemed instituted with the criminal action. The
civil action is therefore distinct and independent from any criminal proceedings
and may proceed regardless of the result of the latter.
26

Caltex Philippines v CA and Security Bank: CTDs as Negotiable Instruments

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Caltex Philippines v CA and Security Bank: CTDs as Negotiable Instruments

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NEGOTIABLE INSTRUMENTS

TRADERS ROYAL BANK v CA

ISSUE: W/N THE CENTRAL BANK CERTIFICATE OF INDEBTEDNESS WAS A

I. PINEDA v DELA RAMA

Issue: W/N THE PRESUMPTION OF VALUABLE CONSIDERATION APPLIES TO

II. PHIL. BANK OF COMMERCE v ARUEGO

An accommodation party is one who has signed the instrument as maker,

W/N SELLNER IS STILL LIABLE ALTHOUGH HE DID NOT RECEIVE ANY

VII. UNITED INDUSTRIES, INC v PALER

II. PEOPLE v MANIEGO

ISSUE: W/N MANIEGO WAS LIABLE AS MERE INDORSER OF THE CHECKS?

ISSUE: W/N FELIPE ANG IS A GENERAL INDORSER WITHIN THE PURVIEW OF

IV. BANCO DE ORO SAVINGS & MORTGAGE BANK v EQUITABLE

W/N PROVINCE OF TARLAC WAS NEGLIGENT & THEREFORE LIABLE?

ISSUE: W/N CITYTRUST BANKING CORPORATION IS LIABLE FOR DAMAGES?

II. REPUBLIC v EQUITABLE BANKING CORPORATION

ISSUE: W/N THE TREASURY OR GOVERNMENT IS LIABLE ON THE FORGED

III. PNB v QUIMPO

IV. HSBC v PEOPLES BANK & TRUST

Beginning March17, Changco began to withdraw from his account and on

V. METROPOLITAN BANK v FIRST NATIONAL CITY BANK

VIII. PHIL. BANK OF COMMERCE v CA

X. WESTMONT BANK v ONG

ISSUE: W/N CHINA BANK WAS NEGLIGENT AND SHOULD BE LIABLE?

Sea-Land Service Inc is a foreign shipping company licensed to do business in

During the period, Demurrage charges of P67,340 accrued and letters

RTC found Keng Hua liable for demurrage. CA affirmed.

Bank of America [BA], NT & SA, Manila, received by registered mail an

ISSUE: W/N FAILURE OF AN IMPORTER [RELIANCE] TO OPEN AN LC ON THE

Buyer/Consignee: Reliance Commodities; Seller/Shipper: Daewoo Industrial

HELD: YES, failure of buyer seasonably to furnish an agreed LC is a breach of the

In 1981, Philippine SJ Industrial Trading, represented by Ramon San Jose Jr.,

In the meantime, Schuback-Hamburg received invoices from NDK for partial

Schuback-Hamburg then issued a Statement of Account to Schuback&Sons,

V. FEATI BANK [Now CityTrust Banking Corp.] v CA & Bernardo Villaluz

Bernardo Villaluz agreed to sell to Axel Christiansen 2,000 cubic meters of

ISSUE: W/N A CORRESPONDENT BANK IS TO BE HELD LIABLE UNDER THE LC

ISSUE: W/N THE VINTOLAS ARE LIABLE

I. VINTOLA v INSULAR BANK OF ASIA AND AMERICA [IBAA]

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