NEGOTIABLE INSTRUMENTS LAW: CASE DIGESTS

I. INTRODUCTION

Tibajia Jr. v. Court of Appeals [G.R. No. 100290. June 4, 1993]

FACTS:
Tibajia spouses delivered to Sheriff the total money judgment in cashier’s check and cash.
Private respondent, Eden Tan, refused to accept the payment made by the Tibajia spouses and
instead insisted that the garnished funds deposited with the cashier of the Regional Trial Court
of Pasig, Metro Manila be withdrawn to satisfy the judgment obligation. Tibajias filed a motion
to lift the writ of execution on the ground that the judgment debt had already been paid. The
motion was denied.

ISSUE:
Whether or not payment by means of cashier’s check is considered payment in legal tender.

RULING:
NO. A check, whether a manager’s check or ordinary check, is not legal tender, and an offer of
a check in payment of a debt is not a valid tender of payment and may be refused receipt by
the obligee or creditor. A check is not legal tender and that a creditor may validly refuse
payment by check, whether it be a manager’s, cashier’s or personal check. The Supreme Court
stressed that, “We are not, by this decision, sanctioning the use of a check for the payment of
obligations over the objection of the creditor.”

Roman Catholic Bishops of Malolos, Inc. vs. Intermediate Appellate Court, 191 SCRA
411

FACTS:
July 7, 1971: A contract over the land was executed between the Roman Catholic Bishop of
Malolos (bishop) as vendor and the through its then president, Mr. Carlos F. Robes, as vendee,
stipulating for a downpayment of P23,930 and the balance of P100,000 plus 12% interest per
annum to be paid within 4 years from execution of the contract. The contract likewise provides
for cancellation, forfeiture of previous payments, and reconveyance of the land in case of failure
to pay within the period. March 12, 1973: private respondent, through its new president, Atty.
Adalia Francisco, addressed a letter 6 to Father Vasquez, parish priest of San Jose Del Monte,
Bulacan, requesting to be furnished with a copy of the subject contract and the supporting
documents. July 17, 1975: after the expiration of the stipulated period for payment, Atty.
Francisco wrote the formal request that her company be allowed to pay the principal amount of
P100,000 in 3 equal installments of 6 months each with the 1st installment and the accrued
interest of P24,000 to be paid immediately upon approval. July 29, 1975: Bishop through its
counsel, Atty. Carmelo Fernandez, formally denied the request but granted a grace period of 5
days from the receipt of the denial to pay the total balance of P124,000. August 4, 1975:
private respondent, through its president, Atty. Francisco, wrote the counsel of the petitioner
requesting an extension of 30 days from to fully settle its account. – denied. RTC: favored
Bishop declaring the down payment as forfeited.

ISSUE:

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Whether there is tender of payment by issuance of a certified check.

HELD:
NO. RTC reinstated. Tender of payment involves a positive and unconditional act by the obligor
of offering legal tender currency as payment to the obligee for the former’s obligation and
demanding that the latter accept the same. Tender of payment cannot be presumed by a mere
inference from surrounding circumstances sheer proof of sufficient available funds to meet
more than the total obligation within the grace period - NOT sufficient. On the contrary, the
respondent court finds itself remiss in overlooking or taking lightly the more important findings
of fact made by the trial court which are entitled to great weight on appeal and should be
accorded full consideration and respect and should not be disturbed unless for strong and
cogent reasons. Certified personal check, which is not legal tender nor the currency stipulated,
and therefore, cannot constitute valid tender of payment. Since a negotiable instrument is only
a substitute for money and not money, the delivery of such an instrument does not, by itself,
operate as payment

George Kaufman vs. PNB, GR No. 16454

FACTS:
Wicks, the treasurer of the Philippine Fiber and Produce Company (PFPC), presented himself in
the exchange department of the Philippine National Bank in Manila and requested that a
telegraphic transfer of $45,000 should be made to Kauffman in New York City, upon account of
the PFPC. Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000.
(Sgd.) PHILIPPINE NATIONAL BANK, Manila. PNB’s representative in New York withheld the
money from Kauffman, in view of his reluctance to accept certain bills of the PFPC. Kauffman
demanded the money but was refused to be paid.

ISSUE:
Whether or not Kauffman has a right of action based on Negotiable Instruments Law.

RULING:
NO. Kauffman has no right of action based on Negotiable Instrument’s Law on the ground that
it can only come into operation if there is a document in existence of the character described in
Section 1 of the said Law, and rights properly speaking arise in respect to said instrument until
it is delivered. In this case, there was an order transmitted by PNB to its New York branch, for
the payment of a specified sum of money to Kauffman. But this order was not made payable “to
order” or “to bearer,” as required in subsection (d) of that Act; and inasmuch as it never left the
possession of the bank, or its representative in New York City, there was no delivery in the
sense intended in Section 16 of the same Law. In this connection it is unnecessary to point out
that the official receipt delivered by the bank to the purchaser of the telegraphic order, and
already set out above, cannot itself be viewed in the light of a negotiable instrument, although
it affords complete proof of the obligation actually assumed by the bank. Kauffman, however,
has remedy based on the Civil Code, particularly on stipulations pour atrui.

II. REQUISITES OF NEGOTIABILITY

Caltex (Phils.) Inc. vs. CA, GR. No. 97753

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FACTS:
Security bank issued Certificates of Time Deposits to Angel dela Cruz. The same were given by
Dela Cruz to Caltex in connection to his purchase of fuel products of the latter. On a later date,
Dela Cruz approached the bank manager, communicated the loss of the certificates and
requested for a reissuance.

Upon compliance with some formal requirements, he was issued replacements. Thereafter, he
secured a loan from the bank where he assigned the certificates as security. Here comes the
petitioner, averred that the certificates were not actually lost but were given as security
for payment for fuel purchases.

The bank demanded some proof of the agreement but the petitioner failed to comply. The
loan matured and the time deposits were terminated and then applied to the payment of the
loan.

Petitioner demands the payment of the certificates but to no avail.

ISSUE:
Whether or not the certificates of time deposits (CTDs) are negotiable instruments?

HELD:
Yes. The Court held that the CTDs are negotiable instruments. The CTDs in question
undoubtedly meet the requirements of the law for negotiability.

The Negotiable Instruments Law provides, an instrument to be negotiable must conform to

certain requirements, hence,

1. It must be in writing and signed by the maker or drawer;

2. Must contain an unconditional promise or order to pay a sum certain in money;
3. Must be payable on demand, or at a fixed or determinable future time;
4. Must be payable to order or to bearer; and
5. Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.

The documents provide that the amounts deposited shall be repayable to the depositor. And
who, according to the document, is the depositor? It is the “bearer.” The documents do not say
that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically
to him. Rather, the amounts are to be repayable to the bearer of the documents or, for
that matter, whosoever may be the bearer at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz
only, it could have with facility so expressed that fact in clear and categorical terms in the
documents, instead of having the word “BEARER” stamped on the space provided for the name
of the depositor in each CTD. On the wordings of the documents, therefore, the amounts
deposited are repayable to whoever may be the bearer thereof.

Thus, petitioner’s aforesaid witness merely declared that Angel de la Cruz is the depositor
“insofar as the bank is concerned,” but obviously other parties not privy to the

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transaction between them would not be in a position to know that the depositor is not
the bearer stated in the CTDs. Hence, the situation would require any party dealing with the
CTDs to go behind the plain import of what is written thereon to unravel the agreement of the
parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is
sought to be avoided by the Negotiable Instruments Law and calls for the application
of the elementary rule that the interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity.

Abubakar vs. Auditor General, 81 Phil. 359

FACTS:
Treasury Warrant A-2867376 was issued in favor of Placide S. Urbanes on 10 December 1941
for P1,000, but is now in the hands of Benjamin Abubakar. The Auditor refused to authorize the
payment of the treasury warrant. Abubakar contends that he is a holder in good faith and for
value and thus, entitled to the rights and privileges of a holder in due course.

ISSUE:
Whether or not Abubakar is a holder in due course.

HELD:
NO. A treasury warrant is not a negotiable instrument; it being an order for payment out of a
“particular fund”, and is not unconditional and does not fulfill one of the essential requirements
of a negotiable instrument. Therefore, a holder of a treasury warrant cannot argue that he is a
holder in good faith and for value of a negotiable instrument and thus entitled to the rights and
privileges of a holder in due course, free from defenses.

Jimenez vs. Bucoy, GR No. L-10221

FACTS:
In the proceedings in the intestate of Luther Young and Pacita Young who died in 1954 and
1952, respectively, Pacifica Jimenez presented for payment 4 promissory notes signed by Pacita
for different amounts totaling P21,000. Acknowledging receipt by Pacita during the Japanese
occupation, in the currency then prevailing, the Administrator manifested willingness to pay
provided adjustment of the sums be made in line with the Ballantyne schedule. The claimant
objected to the adjustment insisting on full payment in accordance with the notes. The court
held that the notes should be paid in the currency prevailing after the war, and thus entitling
Jimemez to recover P21,000 plus P2,000 as attorney’s fees. Hence, the appeal.

ISSUE:
Whether or not the amounts should be paid, peso for peso; or whether a reduction should be
made in accordance with the Ballantyne schedule.

HELD:
If the loan was expressly agreed to be payable only after the war, or after liberation, or became
payable after those dates, no reduction could be effected, and peso-for-peso payment shall be
ordered in Philippine currency. The Ballantyne Conversion Table does not apply where the
monetary obligation, under the contract, was not payable during the Japanese occupation.

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Herein, the debtor undertook to pay “six months after the war,” peso for peso payment is
indicated.

Philippine Education Company, Inc. vs. Soriano, GR No. L-22405

FACTS:
Enrique Montinola sought to purchase from the Manila Post Office ten (10) money orders each
payable to E.P. Montinola. After the postal teller had made out money orders, Montinola offered
to pay for them with a private checks were not generally accepted in payment of money orders,
the teller advised him to see the Chief of the Money Order Division, but instead of doing so,
Montinola managed to leave building with his own check and the ten(10) money orders without
the knowledge of the teller. Upon discovery of the disappearance of the unpaid money orders,
an urgent message was sent to all postmasters, and the following day notice was likewise
served upon all banks, instructing them not to pay anyone of the money orders aforesaid if
presented for payment. The Bank of America received a copy of said notice three days later. It
debited appellant’s account with the same amount and gave it advice thereof by means of a
debit memo.

ISSUE:
Whether or not postal money orders are negotiable instruments.

RULING:
NO. Postal money orders are not negotiable instruments. Our postal statutes were patterned
after statutes in force in the United States. For this reason, ours are generally construed in
accordance with the construction given in the United States to their own postal statutes, in the
absence of any special reason justifying a departure from this policy or practice. The weight of
authority in the United States is that postal money orders are not negotiable instruments, the
reason behind this rule being that, in establishing and operating a postal money order system,
the government is not engaging in commercial transactions but merely exercises a
governmental power for the public [Link] is to be noted in this connection that some of the
restrictions imposed upon money orders by postal laws and regulations are inconsistent with
the character of negotiable instruments. For instance, such laws and regulations usually provide
for not more than one endorsement; payment of money orders may be withheld under a variety
of circumstances.

Metropolitan Bank & Trust Company vs. CA, GR No. 88866

FACTS:
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and Loan
Association and deposited over a period of two months 38 treasury warrants which were drawn
by the Philippine Fish Marketing Authority. Six of these were directly payable to Gomez while
the others have been endorsed by their respective payees, followed by Gomez as second
endorser. All these warrants were subsequently endorsed by Gloria Castillio as cashier of Golden
Savings and deposited to its savings account with Metrobank.. They were then sent for clearing
by Metrobank branch office to its principal office which forwarded them to the Bureau of
Treasury for special clearing. More than two weeks after the deposits, Gloria Castillo went to
Metrobank branch several times to ask whether the warrants had been cleared and she was
told to wait. Meanwhile, Gomez was not allowed to withdraw from his account. Metrobank,

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exasperated over the persistent inquiries of Gloria Castillo about the clearance and also wanting
to accommodate a valued client, allowed Golden Savings to withdraw from the uncleared
treasury warrants. In turn, Golden Saving subsequently allowed Gomez to make withdrawals
from his own account.

ISSUE:
Whether or not treasury warrants are negotiable instruments.

RULING:
No, an instrument to be negotiable must contain an unconditional promise or order to pay a
sum certain in money. An unqualified order or promise to pay is unconditional within the
meaning of the Negotiable Instruments Law though coupled with (a) an indication of a
particular fund out of which reimbursement is to be made or a particular account to be debited
with the amount; or (b) a statement of the transaction which gives rise to the instrument. But
an order or promise to pay out of a particular fund is not unconditional. The indication of Fund
501 as the source of the payment to be made on the treasury warrants makes the order or
promise to pay “not unconditional” and the warrants themselves non-negotiable.

Ponce vs. Court of Appeals, GR No. L-48494

FACTS:
Private respondent Doroteo R. Alegre was engaged as athletic director by petitioner Brent
School, Inc. at a yearly compensation of P20,000.00. The contract fixed a specific term for its
existence, five (5) years, i.e., from July 18, 1971, the date of execution of the agreement, to
July 17, 1976. Subsequent subsidiary agreements dated March 15, 1973, August 28, 1973, and
September 14, 1974 reiterated the same terms and conditions, including the expiry date, as
those contained in the original contract of July 18, 1971.

On April 20,1976, Alegre was given a copy of the report filed by Brent School with the
Department of Labor advising of the termination of his services effective on July 16, 1976. The
stated ground for the termination was "completion of contract, expiration of the definite period
of employment." Although protesting the announced termination stating that his services were
necessary and desirable in the usual business of his employer, and his employment lasted for 5
years - therefore he had acquired the status of regular employee - Alegre accepted the amount
of P3,177.71, and signed a receipt therefor containing the phrase, "in full payment of services
for the period May 16, to July 17, 1976 as full payment of contract.

The Regional Director considered Brent School's report as an application for clearance to
terminate employment (not a report of termination), and accepting the recommendation of the
Labor Conciliator, refused to give such clearance and instead required the reinstatement of
Alegre, as a "permanent employee," to his former position without loss of seniority rights and
with full back wages.

ISSUE:
Whether or not the provisions of the Labor Code, as amended, have anathematized "fixed
period employment" or employment for a term.

RULING:

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Respondent Alegre's contract of employment with Brent School having lawfully terminated with
and by reason of the expiration of the agreed term of period thereof, he is declared not entitled
to reinstatement.

The employment contract between Brent School and Alegre was executed on July 18, 1971, at
a time when the Labor Code of the Philippines (P.D. 442) had not yet been promulgated. At
that time, the validity of term employment was impliedly recognized by the Termination Pay
Law, R.A. 1052, as amended by R.A. 1787. Prior, thereto, it was the Code of Commerce (Article
302) which governed employment without a fixed period, and also implicitly acknowledged the
propriety of employment with a fixed period. The Civil Code of the Philippines, which was
approved on June 18, 1949 and became effective on August 30,1950, itself deals with
obligations with a period. No prohibition against term-or fixed-period employment is contained
in any of its articles or is otherwise deducible therefrom.

It is plain then that when the employment contract was signed between Brent School and
Alegre, it was perfectly legitimate for them to include in it a stipulation fixing the duration
thereof Stipulations for a term were explicitly recognized as valid by this Court.

The status of legitimacy continued to be enjoyed by fixed-period employment contracts under

the Labor Code (PD 442), which went into effect on November 1, 1974. The Code contained
explicit references to fixed period employment, or employment with a fixed or definite period.
Nevertheless, obscuration of the principle of licitness of term employment began to take place
at about this time.

Article 320 originally stated that the "termination of employment of probationary employees and
those employed WITH A FIXED PERIOD shall be subject to such regulations as the Secretary of
Labor may prescribe." Article 321 prescribed the just causes for which an employer could
terminate "an employment without a definite period." And Article 319 undertook to define
"employment without a fixed period" in the following manner: …where the employee has been
engaged to perform activities which are usually necessary or desirable in the usual business or
trade of the employer, except where the employment has been fixed for a specific project or
undertaking the completion or termination of which has been determined at the time of the
engagement of the employee or where the work or service to be performed is seasonal in
nature and the employment is for the duration of the season.

Subsequently, the foregoing articles regarding employment with "a definite period" and
"regular" employment were amended by Presidential Decree No. 850, effective December 16,
1975.
Article 320, dealing with "Probationary and fixed period employment," was altered by
eliminating the reference to persons "employed with a fixed period," and was renumbered
(becoming Article 271).

As it is evident that Article 280 of the Labor Code, under a narrow and literal interpretation, not
only fails to exhaust the gamut of employment contracts to which the lack of a fixed period
would be an anomaly, but would also appear to restrict, without reasonable distinctions, the
right of an employee to freely stipulate with his employer the duration of his engagement, it
logically follows that such a literal interpretation should be eschewed or avoided. The law must
be given a reasonable interpretation, to preclude absurdity in its application. Outlawing the

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whole concept of term employment and subverting to boot the principle of freedom of contract
to remedy the evil of employer's using it as a means to prevent their employees from obtaining
security of tenure is like cutting off the nose to spite the face or, more relevantly, curing a
headache by lopping off the head.

Such interpretation puts the seal on Bibiso upon the effect of the expiry of an agreed period of
employment as still good rule—a rule reaffirmed in the recent case of Escudero vs. Office of the
President (G.R. No. 57822, April 26, 1989) where, in the fairly analogous case of a teacher
being served by her school a notice of termination following the expiration of the last of three
successive fixed-term employment contracts, the Court held:

Reyes (the teacher's) argument is not persuasive. It loses sight of the fact that her employment
was probationary, contractual in nature, and one with a definitive period. At the expiration of
the period stipulated in the contract, her appointment was deemed terminated and the letter
informing her of the non-renewal of her contract is not a condition sine qua non before Reyes
may be deemed to have ceased in the employ of petitioner UST. The notice is a mere reminder
that Reyes' contract of employment was due to expire and that the contract would no longer be
renewed. It is not a letter of termination.

Paraphrasing Escudero, respondent Alegre's employment was terminated upon the expiration of
his last contract with Brent School on July 16, 1976 without the necessity of any notice. The
advance written advice given the Department of Labor with copy to said petitioner was a mere
reminder of the impending expiration of his contract, not a letter of termination, nor an
application for clearance to terminate which needed the approval of the Department of Labor to
make the termination of his services effective. In any case, such clearance should properly have
been given, not denied.

Rehabilitation Finance Corporation vs. CA, 94 Phil 984

FACTS:
Jesus de Anduiza & Quinatana Cano borrowed money from the Agricultural and Industrial Bank
(now RFC), as evidenced by a promissory note dated October 31, 1941. In said note, they
promised to pay the AIB, or order, on or before October 31, 1951, the sum of P13,800.00, with
interest at the rate of 6% p.a.. Said note also recited that payments were to be made in ten
equal annual installments in accordance with the given schedule of amortizations.

Mortgagors Anduiza and Cano failed to pay the yearly amortizations that fell due on October 31,
1942 and 1943. Learning of this, Estelito Madrid (who temporarily lived in the house of Anduiza)
offered to pay and actually paid on October 30, 1944 the full amount of said indebtedness to
AIB/RFC.

July 30, 1948: Madrid instituted the present action asking the court to (a) declare as paid the
P16,425.17 Anduiza owed the AIB/RFC; (b) order AIB/RFC to cancel the mortgage and release
the properties; (c) condemn Anduiza to pay Madrid the P16,425.17 with legal interest, etc.

In answer, AIB/RFC prayed that the complaint be dismissed. The bank argued that in as much
as Madrid’s payment was unauthorized by Anduiza, Madrid’s deposit in the sum of P16,425.17
was null and void in accordance with EO No. 49, series of 1945. Anduiza, on the other hand,

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alleged that when Madrid paid his debt, the same was not yet due and demandable; hence, he
may not be compelled to pay the latter.

RTC dismissed the complaint. On appeal, the CA reversed and directed AIB/RFC to cancel the
mortgage and Anduiza to pay Madrid the P16,425.17. Hence this appeal by certiorari.

AIB/RFC’s Arguments: that payments by Madrid were made against the express will of Anduiza
and over the objection of the Bank, hence not valid; that the obligation in question was not fully
due and demandable at the time of the payments

ISSUE:

WON the debtors were entitled to pay the obligation prior to Oct. 15, 1951 (YES)
• At the outset, it should be noted that the makers of the promissory note quoted above
promised to pay the obligation evidenced thereby "on or before October 31, 1951."
Although the full amount of said obligation was not demandable prior to October 31,
1951, in view of the provision of the note relative to the payment in ten (10) annual
installments, it is clear, therefore, that the makers or debtors were entitled to make a
complete settlement of the obligation at any time before said date

WON payment by third person was valid (YES)

• Madrid was entitled to pay the obligation of Anduiza irrespective of the latter's will or
that of the Bank, and even over the objection of either or both.
• Article 1158 of the Civil Code of Spain, which was in force in the Phils. at the time of the
payments under consideration and of the institution of the present case provides:
"Payment may be made by any person, whether he has an interest in the performance
of the obligation or not, and whether the payment is known and approved by the debtor
or whether he is unaware of it. One who makes a payment for the account of another
may recover from the debtor the amount of the payment, unless it was made against his
express will. In the latter case he can recover from the debtor only in so far as the
payment has been beneficial to him."
• Payments in question were not made against the objection either of Anduiza or of the
Bank. Anduiza impliedly, but clearly, acquiesced in the validity of the payment when he
joined Madrid in appealing the decision of CFI Manila. Also, AIB/RFC issued receipts
acknowledging payment w/out qualification and demanded a signed statement of
Anduiza sanctioning said payments merely as a condition precedent, not to its
acceptance, which had already been made, but to the execution of the deed of
cancellation of the mortgage constituted in favor of said institution.
• This condition was null and void, for the creditor Bank had no other right than to exact
payment. After such payment, the obligation in question, as regards said creditor, and
the latter’s status and rights as such creditor, become automatically extinguished.
Hence: (1) The good or bad faith of the payor is immaterial. The exercise of a right,
vested by law without any qualification, can hardly be legally considered as tainted with
bad faith. (2) The Bank cannot invoke the provision that the payor "may only recover
from the debtor insofar as the payment has been beneficial to him," when made against
his express will. This is a defense that may be availed of by the debtor, not by the Bank,
for it affects solely the rights of the former.

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Philippine Education vs. Soriano, GR No, L-22045

FACTS:
Enrique Montinola sought to purchase from the Manila Post Office ten (10) money orders each
payable to E.P. Montinola. After the postal teller had made out money orders, Montinola offered
to pay for them with a private checks were not generally accepted in payment of money orders,
the teller advised him to see the Chief of the Money Order Division, but instead of doing so,
Montinola managed to leave building with his own check and the ten(10) money orders without
the knowledge of the teller. Upon discovery of the disappearance of the unpaid money orders,
an urgent message was sent to all postmasters, and the following day notice was likewise
served upon all banks, instructing them not to pay anyone of the money orders aforesaid if
presented for payment. The Bank of America received a copy of said notice three days later. It
debited appellant’s account with the same amount and gave it advice thereof by means of a
debit memo.

ISSUE:
Whether or not postal money orders are negotiable instruments.

RULING:
NO. Postal money orders are not negotiable instruments. Our postal statutes were patterned
after statutes in force in the United States. For this reason, ours are generally construed in
accordance with the construction given in the United States to their own postal statutes, in the
absence of any special reason justifying a departure from this policy or practice. The weight of
authority in the United States is that postal money orders are not negotiable instruments, the
reason behind this rule being that, in establishing and operating a postal money order system,
the government is not engaging in commercial transactions but merely exercises a
governmental power for the public [Link] is to be noted in this connection that some of the
restrictions imposed upon money orders by postal laws and regulations are inconsistent with
the character of negotiable instruments. For instance, such laws and regulations usually provide
for not more than one endorsement; payment of money orders may be withheld under a variety
of circumstances.

Ang Tek Lian vs. CA, 87 Phil 383

FACTS:
For having issued a rubber check, Ang Tek Lian was convicted of estafa, in the Court of First
Instance of Manila. CA affirmed the verdict of CFI.

It appears that knowing he had no funds therefore, Ang Tek Lian on Nov. 16, 1946, drew the
check upon the China Banking Corporation for the sum of P4000.00 payable to the order of
Cash. He delivered it to Lee Hua Hong in exchange for money which the latter handed in the
act, alleging that he needed badly the sum of P4000.00 represented by the check but could not
withdraw it from the bank, it being then already closed. On Nov. 18, 1946, the next business
day, the check was presented by Lee Hua Hong to the drawee bank for payment, but it was
dishonored for insufficiency of funds, the balance of the deposit of Ang Tek Lian on both dates
being P335 only. Despite of repeated efforts to notify the petitioner that the check had been
dishonored by the bank, appellant could not be located anywhere until he was summoned in

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view of the complaint for estafa filed in connection therewith, and that the appellant has not
paid as yet the amount of the check or any part thereof.

Ang Tek Lian argued that he shall not be held liable as he did not endorsed the check to Lee
Hua and that when the latter accepted the check without Ang Tek Lian's endorsement, he had
done so fully aware of the risk running thereby and that he Ang Tek Lian cannot be said to
have acted fraudulently.

ISSUE:
Whether estafa had been accomplished.

HELD:
Yes. Estafa is committed by issuing either postdated or ordinary check in payment of an
obligation the offender knowing that at the time he had no funds in the bank, or the funds
deposited by him in the bank were not sufficient to cover the amount of the check, and without
informing the payee of such circumstances (in short done to accomplish the deceit).

Under the Negotiable Instruments Law (Sec. 9 (d)) a check drawn payable to the order of
"cash" is a check payable to bearer, and the bank may pay it to the person presenting it for
payment without the drawer's endorsement, As the word "cash" does not purport to be the
name of any person, hence the instrument is payable to bearer.

If the bank is not sure of the identity or financial insolvency of the bearer and the check is
payable to bearer, it has the right to demand for its protection, the endorsement of the drawer
or some other person known to it. But if the bank is satisfied to the identity of the bearer who
tenders the check, it will pay the instrument without asking for endorsement. In this case, the
bank dishonored the check not because the drawer's endorsement was lacking but because of
insufficient funds.

Caltex (Phils.) Inc. vs. CA, GR. No. 97753

FACTS:
Security bank issued Certificates of Time Deposits to Angel dela Cruz. The same were given by
Dela Cruz to Caltex in connection to his purchase of fuel products of the latter. On a later date,
Dela Cruz approached the bank manager, communicated the loss of the certificates, and
requested for a reissuance. Upon compliance with some formal requirements, he was issued
replacements. Thereafter, he secured a loan from the bank where he assigned the certificates
as security. Here comes the petitioner, averred that the certificates were not actually lost but
were given as security for payment for fuel purchases. The bank demanded some proof of the
agreement, but the petitioner failed to comply. The loan matured and the time deposits were
terminated and then applied to the payment of the loan. Petitioner demands the payment of the
certificates but to no avail.

ISSUE:
Whether or not the certificates of time deposits (CTDs) are negotiable instruments?

HELD:

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YES. The Court held that the CTDs are negotiable instruments. The CTDs in question
undoubtedly meet the requirements of the law for negotiability.

The Negotiable Instruments Law provides, an instrument to be negotiable must conform to

certain requirements, hence,

1. It must be in writing and signed by the maker or drawer;

2. Must contain an unconditional promise or order to pay a sum certain in money;
3. Must be payable on demand, or at a fixed or determinable future time;
4. Must be payable to order or to bearer; and
5. Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
The documents provide that the amounts deposited shall be repayable to the depositor. And
who, according to the document, is the depositor? It is the “bearer.” The documents do not say
that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically
to him. Rather, the amounts are to be repayable to the bearer of the documents or, for
that matter, whosoever may be the bearer at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz
only, it could have with facility so expressed that fact in clear and categorical terms in the
documents, instead of having the word “BEARER” stamped on the space provided for the name
of the depositor in each CTD. On the wordings of the documents, therefore, the amounts
deposited are repayable to whoever may be the bearer thereof.

Thus, petitioner’s aforesaid witness merely declared that Angel de la Cruz is the depositor
“insofar as the bank is concerned,” but obviously other parties not privy to the
transaction between them would not be in a position to know that the depositor is not
the bearer stated in the CTDs. Hence, the situation would require any party dealing with the
CTDs to go behind the plain import of what is written thereon to unravel the agreement
of the parties thereto through facts aliunde. This need for resort to extrinsic evidence is
what is sought to be avoided by the Negotiable Instruments Law and calls for the
application of the elementary rule that the interpretation of obscure words or stipulations in
a contract shall not favor the party who caused the obscurity.

PNB vs. Rodriguez, GR No. 170325

FACTS:
Respondents Spouses Rodriguez maintained savings and demand/checking accounts as well as
demand deposits (Checkings/Current Account) with petitioner PNB. They are also engaged in
the informal lending business of discounting arrangement with Philnabank Employees Savings
and Loan Association (PEMSLA), an association of PNB.

PEMSLA regularly granted loans to its member and Spouses would rediscount the apostate
checks issued to members whenever the association was short of funds. At the same time, the
spouses would replace the postdated checks with their own checks issued in the same name.
PEMSLA’s policy would not approve applications with outstanding debts and in order to subvert
this they created a scheme to obtain additional loans in the names of unknowing members
without their knowledge and consent. PEMSLA checks were then given to spouses for

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rediscounting and were carried out by forging the endorsement of the named payees in the
checks.

Rodriguez checks were deposited directly to PEMSLA without any endorsement from the named
payees. Petitioner found out about the fraudulent acts, and took measures by closing the
current account of PEMSLA. Since PEMSLA checks were dishonored and returned the
respondents incurred losses from the rediscounting transactions. Spouses filed a civil complaint
against PEMSLA and PNB, the court rendering judgment in favor of respondent.

ISSUE:
Whether or not the disputed checks were payable to bearer or order making petitioner liable if
it is of the latter and respondent liable if is it is the former.

RULING:
The checks were payable to order, making petitioner liable for the losses.

As a rule, if the payee is fictitious or not intended to be the true recipient of the proceeds of the
check it is considered as a bearer instrument—according to Sections 8 and 9 of the Negotiable
Instruments Law.

The distinction lies in the manner of their negotiation. An order instrument from the payee or
holder requires endorsement. A bearer instrument does not require endorsement—negotiable
by mere delivery. However, under Section 9 of the same law, a checks is payable to a specified
payee may nevertheless be considered as a bearer instrument if it is payable to the order of a
fictitious or non-existing person, and such fact is known to the person making it so payable.

According to US jurisprudence, an actual, existing and living payee may also be “fictitious” if the
maker of the check did not intend for the payee to receive the check. If such a case happens
then the check is a bearer instrument. In a fictitious-payee situation, the drawee bank is
absolved from liability and the drawer bears the loss.

However, if there is showing of commercial bad faith on the part of the drawee bank, or any
transferee of the check for that matter, will work to strip it of this defense. PNB’s failure to
show that the payees were “fictitious”, the fictitious-payee rule does not apply making the
instrument payable to order. Also, PNB was remiss in its duty as the drawee bank since its
employees were the one who crested the whole fraudulent scheme.

PNB vs. Manila Oil Refining, 43 Phil 445

FACTS:
The manager and the treasurer of the defendant executed and delivered to the complainant
Philippine National Bank a written instrument with a judgment note on demand, PNB brought
an action and filed a motion confessing judgment.

ISSUE:
Whether or not a judgment note or a provision in a promissory note whereby in case the same
is not paid at maturity, the maker authorizes any attorney to and confess judgment thereon for
the principal amount with interest, costs and attorney’s fees, and waives all errors, rights to

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inquisition, and appeal, and all property exemptions. Will it affect the negotiable character of
the instrument?

RULING:
No, a judgment note will not affect the negotiable character of the instrument. However,
judgment note is not valid and effective. Warrants of attorney to confess judgment are void as
against public policy because they enlarge the field for fraud, under these instruments the
promissor bargains away his right a day in court, and the effect of instrument is to strike down
the right of appeal accorded by statute.

Republic Planters Bank vs. CA, GR No. 93073

FACTS:
Defendants Shozo Yamaguchi and Fermin Canlas were President/ Chief Operating Officer and
Treasurer, respectively, of Worldwide Garment Manufacturing, Inc. By virtue of a board
resolution, the defendants were authorized to apply for credit facilities with the petitioner
Republic Planters Bank in the forms of export advances and letters of credit/ trust receipts
accommodations. Petitioner bank issued nine promissory notes, each of which were uniformly
worded and stated: “… I/we jointly and severally promise to pay to the order of the Republic
Planters Bank…” On the right bottom margin of the promissory notes appeared the signature of
the defendants above their printed names with the phrase “and (in) his personal capacity”
typewritten below.

ISSUE:
Is defendant Fermin Canlas solidarily liable with Shozo Yamaguchi on each of the nine
promissory notes?

RULING:
Yes, he is solidarily liable on each of the promissory notes bearing his signature for the
following reasons:
(a) Under the negotiable instruments law, persons who write their names on the face of
promissory notes are makers and are liable as such. By signing the notes, the maker promise to
pay to the order of the payee or any holder according to the tenor thereof.
(b) Where an instrument containing the words “I promise to pay” is signed by two or more
persons they are deemed to be jointly and severally liable thereon. An instrument which begins
with “I”, “We” or “Either of us” promise to pay, when signed by two or more persons, makes
them solidarily liable.

Evangelista vs. Mercator Finance Corp., 148864

FACTS:
On February 16, 1982, the petitioners Spouses Evangelista executed a mortgage in favor of
defendant Mercator Finance Corporation (MFC) for and in consideration of certain loans and/or
other forms of credit accommodation obtained from the mortgagee-defendant MFC to secure
the payment of the same and those others that the mortgagee might extend to the mortgagor,
Embassy Farms Inc. Petitioners, in their capacities and as officers of Embassy Farms Inc. signed
the promissory note and the subsequent Continuing Suretyship Agreement executed to
guarantee the indebtedness of Embassy Farms, and the succeeding promissory notes

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restructuring the loan. Due to their failure to pay the obligation, the properties were foreclosed
and sold. After 10 years, however, petitioners filed a complaint for annulment of titles of the
properties sold.

ISSUE:
If there is an ambiguity in the wording of a promissory note, how should it be interpreted?

RULING:
A reading of the promissory note in question will show that there is no ambiguity even if the
petitioners insist that it does not convey their true intent in executing the document. Assuming
that there is an ambiguity, Section 17 of the Negotiable Instruments Law states: Where the
language of the instrument is ambiguous or there are omissions therein, the following rules of
construction apply: x x x
(g) where an instrument containing the word “I promise to pay” is signed by two or more
persons, they are deemed to be jointly and severally liable thereon.

Ilano vs. Hon. Espanol, GR No. 161756

FACTS:
Victoria J. Ilano filed a complaint for Revocation/Cancellation of Promissory Notes and Bills of
Exchange (Checks) with Damages and Prayer for Preliminary Injunction or Temporary
Restraining Order (TRO) against private respondents. The petitioner alleged, among other
things, that respondents, through deceit, abuse of confidence machination, fraud, falsification,
forgery, defraudation, and bad faith, and with malice, malevolence and selfish intent, succeeded
in inducing her to sign antedated promissory notes and some blank checks, and by taking
undue advantage of her signature on some other blank checks, succeeded in procuring them,
even if there was no consideration for all of these instruments on account of which she suffered
anxiety, tension, sleepless nights, wounded feelings and embarrassment. However, the RTC
dismissed the complaint for failure to allege the ultimate facts-bases of petitioners claim that
her right was violated and that she suffered damages.

The Court of Appeals affirmed the dismissal by Branch 20 of the Regional Trial Court (RTC) of
Cavite at Imus, for lack of cause of action.

For recital of the allegations in the complaint, see photo.

ISSUES:
1. Remedial Law: Whether or not petitioner’s complaint failed to state a cause of action.
2. Commercial Law: Is validity and negotiability of Check No. 0084078, drawn against another
account of petitioner and was dishonored on January 12, 2000 due to Account Closed, affected
by the fact that its date of issue bears only the year 1999?

RULING:
1. While some of the allegations may lack particulars, and are in the form of conclusions of law,
the elements of a cause of action are present. For even if some are not stated with particularity,
petitioner alleged 1) her legal right not to be bound by the instruments which were bereft of
consideration and to which her consent was vitiated; 2) the correlative obligation on the part of
the defendants-respondents to respect said right; and 3) the act of the defendants-respondents

Page 15 of 83
in procuring her signature on the instruments through deceit, abuse of confidence machination,
fraud, falsification, forgery, defraudation, and bad faith, and with malice, malevolence and
selfish intent.

A cause of action has three elements: (1) the legal right of the plaintiff, (2) the correlative
obligation of the defendant, and (3) the act or omission of the defendant in violation of said
legal right. In determining the presence of these elements, inquiry is confined to the four
corners of the complaint including its annexes, they being parts thereof. If these elements are
absent, the complaint becomes vulnerable to a motion to dismiss on the ground of failure to
state a cause of action.

Where the allegations of a complaint are vague, indefinite, or in the form of conclusions, its
dismissal is not proper for the defendant may ask for more particulars.

2. No. Section 6 of the Negotiable Instruments Law provides that the validity and negotiable
character of an instrument are not affected by the fact that:
a. It is not dated; or
b. Does not specify the value given, or that any value had been given therefor; or
c. Does not specify the place where it is drawn or the place where it is payable; or
d. Bears a seal; or
e. Designates a particular kind of current money in which payment is to be made.

NOTES:
A motion for bill of particulars may not call for matters which should form part of the proof of
the complaint upon trial. (Salita vs. Magtolis, 233 SCRA 100 [1994])

As long as the complaint contains these three elements – (1) a right in favor of the plaintiff by
whatever means and under whatever law it arises or is created; (2) an obligation on the part of
the named defendant to respect or not to violate such right; (3) an act or ommission on the
part of such defendant violative of the right of the plaintiff or constituting a breach of the
obligation of the defendant to the plaintiff for which the latter may maintain an action for
recovery of damages – a cause of action exists even though the allegations therein are vague.
(Virata vs. Sandiganbayan, 272 SCRA 661 {1997})

The issue of defective Information, on the ground that it does not conform substantially to the
prescribed form, should be raised in a motion to quash or a motion for a bill of particulars, and
if an accused fails to take this seasonable step he will be deemed to have waived the defect in
the said information.

III. TRANSFER

De La Victoria vs. Burgos, 111190

FACTS:
Raul Sesbreno filed a complaint for damages against Assistant City Fiscal Bienvenido Mabanto
before the RTC of Cebu City. After trial, judgment was rendered ordering Mabanto to pay
Sesbreno P11,000. The decision having become final and executory, the trial court ordered its
execution upon Sesbreno’s motion. The writ of execution was issued despite Mabanto’s

Page 16 of 83
objection. A notice of garnishment was served upon Loreto de la Victoria as City Fiscal of
Mandaue City where Mabanto was then detailed. De la Victoria moved to quash the notice of
garnishment claiming that he was not in possession of any money, funds, etc. belonging to
Mabanto until delivered to him, and as such are still public funds which could not be subject of
garnishment.

ISSUE:
Whether or not the checks subject of garnishment belong to Mabanto or whether they still
belong to the government.

HELD:
Under Section 16 of the Negotiable Instruments Law, every contract on a negotiable instrument
is incomplete and revocable until delivery of the instrument for the purpose of giving effect
thereto. As ordinarily understood, delivery means the transfer of the possession of the
instrument by the maker or drawer with the intent to transfer title to the payee and recognize
him as the holder thereof. Herein, the salary check of a government officer or employee does
not belong to him before it is physically delivered to him. Inasmuch as said checks had not yet
been delivered to Mabanto, they did not belong to him and still had the character of public
funds. As a necessary consequence of being public fund, the checks may not be garnished to
satisfy the judgment.

Development Bank of Rizal vs. Sima Wei, GR No. 85419

FACTS:
Petition for review by certiorari of the decision of the Court of Appeals. In consideration for a
loan extended by petitioner Bank to respondent Sima Wei the latter executed and delivered to
the former a promissory note, engaging to pay the petitioner Bank or order the amount of P
1,820,000.00 on or before June 24, 1983 with the interest at 32% per annum. Sima Wei made
a partial payment on the note, leaving a balance of P 1032,450.02.

November 18, 1983, Sima Wei issued 2 crossed checks payable to petitioner Bank drawn
against China Banking Corporation, one for the amount of P 550,000.00 and the other for
500,000.00. The said checks were allegedly issued in full settlement of the drawer’s account
evidenced by the promissory note.

These 2 checks were not delivered to the petitioner-payee or to any of its authorized
representatives.

1) For reasons not shown, these checks came into possession of respondent Lee Kian Huat,
who deposited the checks without the petitioner-payee’s indorsement to the account of
respondent Plastic Plastic Corporation of the Producer’s Bank, relying on the assurance of
respondent Samson Tung, President of Plastic Corporation, that the transaction was legal and
regular, instructed the cashier of Producer’s Bank to accept the checks for deposit and to credit
the to the account of said Plastic Corporation, in spite the fact that the checks were crossed and
payable to petitioner Bank and core no endorsement of the latter. Hence, Petitioner filed the
complaint as aforestated.

Page 17 of 83
On July 6, 1986, the Development Bank of Rizal filed a complaint for a sum of money against
respondents on 2 causes of action:

1) To enforce payment of the balance of P 1,032,450.02 on a promissory note executed by

respondent Sima Wei on June 1983
2) To enforce payment of 2 checks executed by Sima Wei, payable to petitioner, and drawn
against the China Banking Corporation, to pay the balance due on the promissory note.

Defendants filed their Motions to dismiss alleging that the complaint states no cause of action.
Trial Court granted the motions to dismiss. CA affirmed.

ISSUE:
Whether petitioner Bank has a cause of action against any or all of the defendants, in the
alternative or otherwise.

HELD:
Yes. Notwithstanding the reason below, Drawer Sima Wei is not freed from her liability to the
respondent Bank.

Courts have long recognized the business custom of using printed checks where blanks are
provided for the date of issuance, the name of the payee, the amount payable and the drawer's
signature. All the drawer has to do when he wishes to issue a check is to properly fill up the
blanks and sign it. However, the mere fact that he has done these does not give rise to any
liability on his part, until and unless the check is delivered to the payee or his representative
and for the payee to acquire interest thereto. A negotiable instrument, of which a check is, is
not only a written evidence of a contract right but is also a species of property. Just as a deed
to a piece of land must be delivered in order to convey title to the grantee, so must a
negotiable instrument be delivered to the payee in order to evidence its existence as a binding
contract. and even granting, the delivery of checks in payment of an obligation does not
constitute payment unless they are cashed or their value is impaired through the fault of the
creditor, none of these exceptions were alleged by respondents Sima Wei therefore petitioner
bank has caused of action.

A cause of action is defined as an act or omission of one party in violation of the legal right or
rights of another. The essential elements are:
1) Legal right of the plaintiff,
2) Correlative obligation of the defendant, and
3) An act or omission of the defendant in violation of said legal right.

The normal parties to a check are the drawer, the payee and the drawee bank.

However, insofar as the other respondents are concerned, petitioner Bank has no privity with
them, Since the petitioner Bank never received the checks on which it based its action against
said respondents, it never owned the checks nor did acquire any interest therein. It had no
right or interest in the checks which could have been violated by said respondents.. petitioner
Bank has therefore no cause of action against said respondents, in the alternative or otherwise.

Page 18 of 83
Note.—A check whether a manager's check or ordinary check is not a legal tender and an offer
of a check in payment of a debt is not a valid tender of payment and may be refused receipt by
the obligee or creditor (Roman Catholic Bishop of Malolos lnc. vs. Intermediate Appellate Court,
191 SCRA 411).

Sesbreno vs. CA, GR No. 89252

FACTS:
On 9 February 1981, Raul Sesbreno made a money market placement in the amount of
P300,000 with the Philippine Underwriters Finance Corporation (PhilFinance), with a term of 32
days. PhilFinance issued to Sesbreno the Certificate of Confirmation of Sale of a Delta Motor
Corporation Promissory Note (2731), the Certificate of Securities Delivery Receipt indicating the
sale of the note with notation that said security was in the custody of Pilipinas Bank, and
postdated checks drawn against the Insular Bank of Asia and America for P304,533.33 payable
on 13 March 1981. The checks were dishonored for having been drawn against insufficient
funds. Pilipinas Bank never released the note, nor any instrument related thereto, to Sesbreno.
Sesbreno learned that the security was issued 10 April 1980, maturing on 6 April 1981, has a
face value of P2,300,833.33 with PhilFinance as payee and Delta Motors as maker, and was
stamped “non-negotiable” on its face. As Sesbreno was unable to collect his investment and
interest thereon, he filed an action for damages against Delta Motors and Pilipinas Bank.

ISSUE:
Whether or not non-negotiability of a promissory note prevents its assignment.

HELD:
Only an instrument qualifying as a negotiable instrument under the relevant statute may be
negotiated either by indorsement thereof coupled with delivery, or by delivery alone if it is in
bearer form. A negotiable instrument, instead of being negotiated, may also be assigned or
transferred. The legal consequences of negotiation and assignment of the instrument are
different. A negotiable instrument may not be negotiated but may be assigned or transferred,
absent an express prohibition against assignment or transfer written in the face of the
instrument. Herein, there was no prohibition stipulated.

Consolidated Plywood, Inc. vs. IFC Leasing, GR No. 72593

FACTS:
Consolidated Plywood Industries Inc. (CPII) is a corporation engaged in the logging business. It
had for its program of logging activities for the year 1978 the opening of additional roads, and
simultaneous logging operations along the route of said roads, in its logging concession area at
Baganga, Manay, and Caraga, Davao Oriental.

For this purpose, it needed 2 additional units of tractors. Cognizant of CPII’s need and purpose,
Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm,
Industrial Products Marketing (IPM), a corporation dealing in tractors and other heavy
equipment business, offered to sell to CPII 2 “Used” Allis Crawler Tractors, 1 an HD-21-B and
the other an HD-16-B. After conducting said inspection, IPM assured CPII that the “Used” Allis
Crawler Tractors which were being offered were fit for the job, and gave the corresponding
warranty of 90 days performance of the machines and availability of parts. With said assurance

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and warranty, and relying on the IPM’s skill and judgment, CPII through Henry Wee and
Rodolfo T. Vergara, president and vice-president, respectively, agreed to purchase on
installment said 2 units of “Used” Allis Crawler Tractors. It also paid the down payment of
P210,000.00. On 5 April 1978, IPM issued the sales invoice for the 2 units of tractors. At the
same time, the deed of sale with chattel mortgage with promissory note was executed.

Barely 14 days had elapsed after their delivery when one of the tractors broke down and after
another 9 days, the other tractor likewise broke down. IPM sent to the jobsite its mechanics to
conduct the necessary repairs, but the tractors did not come out to be what they should be
after the repairs were undertaken because the units were no longer serviceable. Because of the
breaking down of the tractors, the road building and simultaneous logging operations of CPII
were delayed and Vergara advised IPM that the payments of the installments as listed in the
promissory note would likewise be delayed until IPM completely fulfills its obligation under its
warranty.

Since the tractors were no longer serviceable, on 7 April 1979, Wee asked IPM to pull out the
units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to
be given to IFC Leasing and the excess, if any, to be divided between IPM and CPII which
offered to bear 1/2 of the reconditioning cost. No response to this letter was received by CPII
and despite several follow-up calls, IPM did nothing with regard to the request, until the
complaint in the case was filed by IFC Leasing against CPII, Wee, and Vergara. The complaint
was filed by IFC Leasing against CPII, et al. for the recovery of the principal sum of
P1,093,789.71, accrued interest of P151,618.86 as of 15 August 1979, accruing interest there
after at the rate of 12% per annum, attorney’s fees of P249,081.71 and costs of suit.

CPII, et al. filed their amended answer praying for the dismissal of the complaint. In a decision
dated 20 April 1981, the trial court rendered judgment, ordering CPII, et al. to pay jointly and
severally in their official and personal capacities

On 17 July 1985, the Intermediate Appellate Court issued the decision affirming in toto the
decision of the trial court.

ISSUE:
Whether the promissory note in question is a negotiable instrument.

HELD:
No. The pertinent portion of the note provides that “”FOR VALUE RECEIVED, I/we jointly and
severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of
P1,093,789.71, Philippine Currency, the said principal sum, to be payable in 24 monthly
installments starting July 15, 1978 and every 15th of the month thereafter until fully paid.”
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note “must be payable to order or bearer,” it cannot be denied that the promissory
note in question is not a negotiable instrument.

The instrument in order to be considered negotiable must contain the so called “words of
negotiability” — i.e., must be payable to “order” or “bearer.” These words serve as an
expression of consent that the instrument may be transferred. This consent is indispensable
since a maker assumes greater risk under a negotiable instrument than under a non- negotiable

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one. Without the words “or order” or “to the order of,” the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any subsequent purchaser thereof
will not enjoy the advantages of being a holder of a negotiable instrument, but will merely “step
into the shoes” of the person designated in the instrument and will thus be open to all defenses
available against the latter.

Therefore, considering that the subject promissory note is not a negotiable instrument, it
follows that IFC Leasing can never be a holder in due course but remains a mere assignee of
the note in question. Thus, CPII may raise against IFC Leasing all defenses available to it as
against IPM. This being so, there was no need for CPII to implead IPM when it was sued by IFC
Leasing because CPII’s defenses apply to both or either of them.

Metropol (Bacolod) Financing vs. Sambok Motors, GR No. L-39641

FACTS:
Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co., Ltd.
Payable in 12 equal monthly installments with interest. It is further provided that in case on
non-payment of any of the installments, the total principal sum then remaining unpaid shall
become due and payable with an additional interest. Sambok Motors co., a sister company of
Ng Sambok Sons negotiated and indorsed the note in favor of Metropol Financing & investment
Corporation. Villaruel defaulted in the payment, upon presentment of the promissory note he
failed to pay the promissory note as demanded, hence Ng Sambok Sons Motors Co., Ltd.
notified Sambok as indorsee that the promissory note has been dishonored and demanded
payment. Sambok failed to pay. Ng Sambok Sons filed a complaint for the collection of sum of
money. During the pendency of the case Villaruel died. Sambok argues that by adding the
words “with recourse” in the indorsement of the note, it becomes a qualified indorser, thus, it
does not warrant that in case that the maker failed to pay upon presentment it will pay the
amount to the holder.

ISSUE:
Whether or not Sambok Motors Co is a qualified indorser, thus it is not liable upon the failure of
payment of the maker.

HELD:
No. A qualified indorserment constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorser’s signature the words “without recourse”
or any words of similar import. Such indorsement relieves the indorser of the general obligation
to pay if the instrument is dishonored but not of the liability arising from warranties on the
instrument as provided by section 65 of NIL. However, Sambok indorsed the note “with
recourse” and even waived the notice of demand, dishonor, protest and presentment.
Recourse means resort to a person who is secondarily liable after the default of the person who
is primarily liable. Sambok by indorsing the note “with recourse” does not make itself a qualified
indorser but a general indorser who is secondarily liable, because by such indorsement, it
agreed that if Villaruel fails to pay the not the holder can go after it. The effect of such
indorsement is that the note was indorsed witout qualification. A person who indorses without
qualification engages that on due presentment, the note shall be accepted or paid, or both as
the case maybe, and that if it be dishonored, he will pay the amount thereof to the holder. The

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words added by Sambok do not limit his liability, but rather confirm his obligation as general
indorser.

Gempesaw vs. CA, GR No. 92244

FACTS:
Natividad Gempesaw issued checks, prepared by her bookkeeper, a total of 82 checks in favor
of several supplies. Most of the checks for amounts in excess of actual obligations as shown in
their corresponding invoices. It was only after the lapse of more than 2 years did she
discovered the fraudulent manipulations of her bookkeeper. It was also learned that the
indorsements of the payee were forged, and the checks were brought to the chief accountant
of Philippine Bank of Commerce (the Drawee Bank, Buendia Branch) who deposited them in the
accounts of Alfredo Romero and Benito Lam. Gempesaw made demand upon the bank to credit
the amount charged due the checks. The bank refused. Hence, the present action.

ISSUE:
Who shall bear the loss resulting from the forged indorsements.

HELD:
As a rule, a drawee bank who has paid a check on which an indorsement has been forged
cannot charge the drawer’s account for the amount of said check. An exception to the rule is
where the drawer is guilty of such negligence which causes the bank to honor such checks.
Gempesaw did not exercise prudence in taking steps that a careful and prudent businessman
would take in circumstances to discover discrepancies in her account. Her negligence was the
proximate cause of her loss, and under Section 23 of the Negotiable Instruments Law, is
precluded from using forgery as a defense. On the other hand, the banking rule banning
acceptance of checks for deposit or cash payment with more than one indorsement unless
cleared by some bank officials does not invalidate the instrument; neither does it invalidate the
negotiation or transfer of said checks. The only kind of indorsement which stops the further
negotiation of an instrument is a restrictive indorsement which prohibits the further negotiation
thereof, pursuant to Section 36 of the Negotiable Instruments Law. In light of any case not
provided for in the Act that is to be governed by the provisions of existing legislation, pursuant
to Section 196 of the Negotiable Instruments Law, the bank may be held liable for damages in
accordance with Article 1170 of the Civil Code. The drawee bank, in its failure to discover the
fraud committed by its employee and in contravention banking rules in allowing a chief
accountant to deposit the checks bearing second indorsements, was adjudged liable to share
the loss with Gempesaw on a 50:50 ratio.

IV. HOLDER IN DUE COURSE

Vicente R. De Ocampo vs. Gatchalian, GR No. L-15126

FACTS:
Sept. 8, 1953 evening: Anita C. Gatchalian was looking for a car for the use of her husband
and the family and Manuel Gonzales who was accompanied by Emil Fajardois (personally known
to Anita) offered her a car. Manuel Gonzales represented to defendant Anita that he was duly
authorized by Ocampo Clinic, the owner of the car, to look for a buyer and negotiate for and
accomplish the sale, but which facts were not known to Ocampo. September 9, 1953; Anita

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requested Manuel to bring the car the day following together with the certificate of registration
of the car so that her husband would be able to see same. Manuel Gonzales told her that unless
there is a showing that the party interested in the purchase is ready, he cannot bring the
certificate of registration. Anita gave him a check which will be shown to the owner as evidence
of buyer's GF in the intention to purchase, it being for safekeeping only of Manuel and to be
returned. For the hospitalization of the wife of Manuel, he paid the check to Ocampo clinic
P441.75 - payment of said fees and expenses and P158.25 -given to Manual as balance. Next
Day: Manual did not appear, so Anita issued a stop payment order. Anita filed with the Office of
the City Fiscal of Manila, a complaint for estafa against Manuel. Appeal Manuel contends that:
the check is not a negotiable instrument, under the facts and circumstances stated in the
stipulation of facts - no delivery (Section 16, Negotiable Instruments Law) because only for
safekeeping (conditional delivery). Ocampo is not a holder in due course. No negotiation prior
to acquiring the check. Check is not a personal check of Manuel. Could have inquired why a
person would use the check of another to pay his own debt, Gatchalian being personally
acquainted with V. R. de Ocampo.

ISSUES:
WON Ocampo is a holder in due course - NO
WON prima facie holder in due course applies - NO

HELD:
NO. Sec. 191 holder - payee or indorsee of a bill or note, who is in possession of it, or the
bearer. Sec. 52 holder in due course - holder who has taken the instrument under the ff
conditions:

1. That it is complete and regular on its face.

2. That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored, it such was the fact.
3. That he took it in good faith and for value.
4. That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

Circumstances: the amount of the check did not correspond exactly with the obligation of
Matilde Gonzales to Dr. V. R. de Ocampo, check had two parallel lines in the upper left hand
corner, which practice means that the check could only be deposited but may not be converted
into cash. It was payee's duty to ascertain from the holder Manuel what the nature of his title
to the check was or the nature of his possession. - failure: guilty of gross neglect and legal
absence of GF. In order to show that the defendant had 'knowledge of such facts that his action
in taking the instrument amounted to BF it is not necessary to prove that the defendant knew
the exact fraud. It is sufficient that the buyer of a note had notice or knowledge that the note
was in some way tainted with fraud.

NO. Sec. 59 every holder is deemed prima facie to be a holder in due course. A possessor of
the instrument is prima facie a holder in due course does not apply because there was a defect
in the title of the holder (Manuel Gonzales) because the instrument is not payable to him or to
bearer. Suspicious circumstance.

State Investment House vs. IAC, GR 7276

Page 23 of 83
FACTS:
New Sikatuna requested for a loan from Spouses Chua. Later, issued post-dated crossed checks
in favor of former. Thereafter, Sikatuna sold checks to SIHI which upon deposit, checks were
dishonored. The trial court decided the case in favor of SIHI.

ISSUE:
Whether or not petitioner may be considered a holder in due course.

HELD:
Jurisprudence provides the following effects of crossing a check:
1. The check may not be encashed but only deposited in the bank
2. The check may be negotiated only once—to one who has an account with a bank
3. The act of crossing the check serves the warning to the holder that the check
has been issued for a definite purpose so that he must inquire if he has received
the check pursuant to that purpose, otherwise, he is not a holder in due course.

The checks in issue were crossed generally and issued payable to New Sikatuna Wood
which could only mean that the drawer has intended the same for deposit only by the
rightful person. Apparently, it was not the payee who presented the same for payment
and therefore, there was no proper presentment and the liability didn't attach to the drawer.
Thus, in the absence of due presentment, the drawer didn't become liable. Consequently,
no right of recourse is available to petitioner against the drawer of the subject checks
considering that the petitioner is the proper party authorized to make presentment of the
checks in question.

Nonetheless, the holder could still collect from New Sikatuna if the latter doesn't have a
valid excuse from refusing payment.

Consolidated Plywood Industries, Inc. vs. IFC Leasing, GR No. L-72593

FACTS:
Consolidated Plywood Industries Inc. (CPII) is a corporation engaged in the logging business. It
had for its program of logging activities for the year 1978 the opening of additional roads, and
simultaneous logging operations along the route of said roads, in its logging concession area at
Baganga, Manay, and Caraga, Davao Oriental.

For this purpose, it needed 2 additional units of tractors. Cognizant of CPII’s need and purpose,
Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm,
Industrial Products Marketing (IPM), a corporation dealing in tractors and other heavy
equipment business, offered to sell to CPII 2 “Used” Allis Crawler Tractors, 1 an HD-21-B and
the other an HD-16-B. After conducting said inspection, IPM assured CPII that the “Used” Allis
Crawler Tractors which were being offered were fit for the job, and gave the corresponding
warranty of 90 days performance of the machines and availability of parts. With said assurance
and warranty, and relying on the IPM’s skill and judgment, CPII through Henry Wee and
Rodolfo T. Vergara, president and vice-president, respectively, agreed to purchase on
installment said 2 units of “Used” Allis Crawler Tractors. It also paid the down payment of

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P210,000.00. On 5 April 1978, IPM issued the sales invoice for the 2 units of tractors. At the
same time, the deed of sale with chattel mortgage with promissory note was executed.

Barely 14 days had elapsed after their delivery when one of the tractors broke down and after
another 9 days, the other tractor likewise broke down. IPM sent to the jobsite its mechanics to
conduct the necessary repairs, but the tractors did not come out to be what they should be
after the repairs were undertaken because the units were no longer serviceable. Because of the
breaking down of the tractors, the road building and simultaneous logging operations of CPII
were delayed and Vergara advised IPM that the payments of the installments as listed in the
promissory note would likewise be delayed until IPM completely fulfills its obligation under its
warranty.

Since the tractors were no longer serviceable, on 7 April 1979, Wee asked IPM to pull out the
units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to
be given to IFC Leasing and the excess, if any, to be divided between IPM and CPII which
offered to bear 1/2 of the reconditioning cost. No response to this letter was received by CPII
and despite several follow-up calls, IPM did nothing with regard to the request, until the
complaint in the case was filed by IFC Leasing against CPII, Wee, and Vergara. The complaint
was filed by IFC Leasing against CPII, et al. for the recovery of the principal sum of
P1,093,789.71, accrued interest of P151,618.86 as of 15 August 1979, accruing interest there
after at the rate of 12% per annum, attorney’s fees of P249,081.71 and costs of suit.

CPII, et al. filed their amended answer praying for the dismissal of the complaint. In a decision
dated 20 April 1981, the trial court rendered judgment, ordering CPII, et al. to pay jointly and
severally in their official and personal capacities.

On 17 July 1985, the Intermediate Appellate Court issued the decision affirming in toto the
decision of the trial court.

ISSUE:
Whether the promissory note in question is a negotiable instrument.

HELD:
No. The pertinent portion of the note provides that “”FOR VALUE RECEIVED, I/we jointly and
severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of
P1,093,789.71, Philippine Currency, the said principal sum, to be payable in 24 monthly
installments starting July 15, 1978 and every 15th of the month thereafter until fully paid.”
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note “must be payable to order or bearer,” it cannot be denied that the promissory
note in question is not a negotiable instrument.

The instrument in order to be considered negotiable must contain the so called “words of
negotiability” — i.e., must be payable to “order” or “bearer.” These words serve as an
expression of consent that the instrument may be transferred. This consent is indispensable
since a maker assumes greater risk under a negotiable instrument than under a non- negotiable
one. Without the words “or order” or “to the order of,” the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any subsequent purchaser thereof
will not enjoy the advantages of being a holder of a negotiable instrument, but will merely “step

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into the shoes” of the person designated in the instrument and will thus be open to all defenses
available against the latter.

Therefore, considering that the subject promissory note is not a negotiable instrument, it
follows that IFC Leasing can never be a holder in due course but remains a mere assignee of
the note in question. Thus, CPII may raise against IFC Leasing all defenses available to it as
against IPM. This being so, there was no need for CPII to implead IPM when it was sued by IFC
Leasing because CPII’s defenses apply to both or either of them.

Juanita Salas vs. CA, GR No. 76788

FACTS:
Petitioner bought a motor vehicle from the Violago Motor Sales Corporation evidenced by a
promissory note. The note was subsequently endorsed to Filinvest Finance & Leasing
Corporation which financed the purchase. Petitioner defaulted in her installments because VMS
delivered a different vehicle to her. Due to her failure to pay Filinvest filed a collection suit.

The trial court ordered petitioner to pay the defendant. They both appealed the decision to the
Court of Appeals. In her appeal, she did not implead VMS as a party to the case because she
already sued VMS for “breach of contract with damages” in another case.

The Court of Appeals modified the decision and ordered the petitioner to pay the defendant
sum of P54,908.30 at 14% per annum. Her motion for reconsideration was denied.

ISSUE:
Whether or not the promissory note is a negotiable instrument which will bar completely all the
available defenses of the petitioner against private respondent. Her defense is that Filinvest
should proceed against VMS because the alleged fraud, bad faith and misrepresentation by VMS
supposedly released her from any liability to Filinvest.

RULING:
The questioned promissory note is a negotiable instrument because it complied with all the
requisites provided for by law:
1. that it is in writing and signed by the maker Juanita Salas;
2. that it contains an unconditional promise to pay the amount of P58,138.20;
3. that it is payable at a fixed or determinable future time which is “P1,614.95 monthly for
36 months due and payable on the 21 st day of each month starting March 21, 1980
thru and inclusive of Feb. 21, 1983;”
4. that it is payable to Violago Motor Sales Corporation, or order and as such,
5. that the drawee is named or indicated with certainty.

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

Filinvest is a holder in due course because it has taken the instrument under the following
conditions:
1. it is complete and regular upon its face;

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 2. it became the holder thereof before it was overdue, and without notice that it had
previously been dishonored;
3. it took the same in good faith and for value; and
4. when it was negotiated to Filinvest, the latter had no notice of any infirmity in the
instrument or defect in the title of VMS Corporation.

As a holder in due course, Filinvest holds the instrument free from any defect of title of prior
parties, and free from defenses available to prior parties among themselves, and may enforce
payment of the instrument for the full amount thereof. This being so, petitioner cannot set up
against respondent the defense of nullity of the contract of sale between her and VMS.

NOTES: The instrument in order to be considered negotiable must contain the so-called “words
of negotiability — i.e., must be payable to “order” or “bearer”. Under Section 8 of the
Negotiable Instruments Law, there are only two ways by which an instrument may be made
payable to order. There must always be a specified person named in the instrument and the bill
or note is to be paid to the person designated in the instrument or to any person to whom he
has indorsed and delivered the same. Without the words “or order or “to the order of”, the
instrument is payable only to the person designated therein and is therefore non-negotiable.
Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a
negotiable instrument, but will merely “step into the shoes” of the person designated in the
instrument and will thus be open to all defenses available against the latter.

The instrument is payable to order where it is drawn payable to the order of a specified person
or to him or his order. (Consolidated Plywood Industries Inc. vs. IFC Leasing and Acceptance
Corporation, 149 SCRA 448)

Stelco Marketing Corporation vs. CA, GR No. 96160

FACTS:
Petitioner STELCO claimed it was a holder in due course and for value of a check that had been
deposited and dishonored. STELCO came into possession of it in some way, and was able,
several years after the dishonor of the check.

ISSUE:
Whether or not STELCO may be considered a holder of the check for value.

RULING:
NO. It is clear from the relevant circumstances that STELCO cannot be deemed a holder of the
check for value. It does not meet two of the essential requisites prescribed by the statute. It did
not become “the holder of it before it was overdue, and without notice that it had been
previously dishonored,” and it did not take the check “in good faith and for value”.

Patrimonio vs. Gutierrez, GR No. 769

FACTS:
The petitioner and the respondent Gutierrez entered into a business venture under the name of
Slam Dunk Corporation, a production outfit that produced mini-concerts and shows related to
basketball.

Page 27 of 83
Patrimonio pre-signed several checks to answer for the expenses of Slam Dunk. Although
signed, these checks had no payee’s name, date or amount. The blank checks were entrusted
to Gutierrez with the specific instruction not to fill them out without previous notification to and
approval by the petitioner.

Without the petitioner’s knowledge and consent, Gutierrez went to Marasigan to secure a loan
in the amount of P200,000.00 on the excuse that the petitioner needed the money for the
construction of his house. In addition to the payment of the principal, Gutierrez assured
Marasigan that he would be paid an interest of 5% per month.

Marasigan acceded to Gutierrez’ request and gave him P200,000.00. Gutierrez simultaneously
delivered to Marasigan one of the blank checks the petitioner pre-signed with Pilipinas Bank
with the blank portions filled out with the words “Cash” “Two Hundred Thousand Pesos Only”,
and the amount of “P200,000.00.”

Marasigan deposited the check but it was dishonored for the reason “ACCOUNT CLOSED.” It
was later revealed that petitioner’s account with the bank had been closed.

Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand
letters to the petitioner asking for the payment of P200,000.00, but his demands likewise went
unheeded. Consequently, he filed a criminal case for violation of B.P. 22 against the petitioner.

RTC— in favor of Marasigan. It found that the petitioner, in issuing the pre-signed blank checks,
had the intention of issuing a negotiable instrument, albeit with specific instructions to Gutierrez
not to negotiate or issue the check without his approval. RTC declared Marasigan as a holder in
due course and accordingly dismissed the petitioner’s complaint for declaration of nullity of the
loan. It ordered the petitioner to pay Marasigan the face value of the check with a right to claim
reimbursement from Gutierrez. CA— affirmed the RTC ruling.

ISSUE:
Whether or not Marasigan is a holder in due course thus may hold Patrimonio liable

HELD:
No. Section 14 of the Negotiable Instruments Law provides for when blanks may be filled. This
provision applies to an incomplete but delivered instrument. Under this rule, if the maker or
drawer delivers a pre-signed blank paper to another person for the purpose of converting it into
a negotiable instrument, that person is deemed to have prima facie authority to fill it up. It
merely requires that the instrument be in the possession of a person other than the drawer or
maker and from such possession, together with the fact that the instrument is wanting in a
material particular, the law presumes agency to fill up the blanks.

In order however that one who is not a holder in due course can enforce the instrument against
a party prior to the instrument’s completion, two requisites must exist: (1) that the blank must
be filled strictly in accordance with the authority given; and (2) it must be filled up within a
reasonable time. If it was proven that the instrument had not been filled up strictly in
accordance with the authority given and within a reasonable time, the maker can set this up as
a personal defense and avoid liability.

Page 28 of 83
Section 52(c) of the NIL states that a holder in due course is one who takes the instrument “in
good faith and for value.” It also provides in Section 52(d) that in order that one may be a
holder in due course, it is necessary that at the time it was negotiated to him he had no notice
of any infirmity in the instrument or defect in the title of the person negotiating it.

Acquisition in good faith means taking without knowledge or notice of equities of any sort which
could beset up against a prior holder of the instrument. It means that he does not have any
knowledge of fact which would render it dishonest for him to take a negotiable paper. The
absence of the defense, when the instrument was taken, is the essential element of good faith.

In order to show that the defendant had “knowledge of such facts that his action in taking the
instrument amounted to bad faith,” it is not necessary to prove that the defendant knew the
exact fraud that was practiced upon the plaintiff by the defendant’s assignor, it being sufficient
to show that the defendant had notice that there was something wrong about his assignor’s
acquisition of title, although he did not have notice of the particular wrong that was committed.
In the present case, Marasigan’s knowledge that the petitioner is not a party or a privy to the
contract of loan, and correspondingly had no obligation or liability to him, renders him
dishonest, hence, in bad faith.

Yet, it does not follow that simply because he is not a holder in due course, Marasigan is
already totally barred from recovery.

Notably, Gutierrez was only authorized to use the check for business expenses; thus, he
exceeded the authority when he used the check to pay the loan he supposedly contracted for
the construction of petitioner’s house. This is a clear violation of the petitioner’s instruction to
use the checks for the expenses of Slam Dunk. It cannot therefore be validly concluded that the
check was completed strictly in accordance with the authority given by the petitioner.

V. LIABILITY OF PARTIES

PNB vs. Bartolome Picornell, 46 Phil. 716 (1922)

FACTS:
Picornell, following instruction of Hyndman, Tavera & Ventura (HTV), bought in bales of
tobacco; that Picornell obtained from the branch of the National Bank in Cebu a sum of of
money to the value of the tobacco, together with his commission, drawn the following bill of
exchange. The invoice and bill of lading were delivered to the National Bank with the
understanding that the bank should not delivered them to HTV except upon payment of the bill;
The invoice and bill of lading was delivered and accepted by HTV who proceeded to the
examination of the tobacco. HTV wrote and cable to Picornell, notifying him that of the tobacco
received, there was a certain portion which was no use and was damaged. After a number of
communication between Picornell and HTV, HTV refuse to pay the bill and instruct the bank to
dispose and sell the tobacco. The Bank sold the tobacco for the amount less of the bill it
advanced. The bank demand payment for the said balance which Picornell and HTV refused to
pay, hence this case.

ISSUE:

Page 29 of 83
Whether Picornell and HTV are liable to reimburse the bank on the bill it advanced to pay for
the Tobacco.

HELD:
Yes, HTV cannot escape liability in view of section 28 of the Negotiable Instruments Law. The
drawee by acceptance becomes liable to the payee or his indorsee, and also to the drawer
himself. But the drawer and acceptor are the immediate parties to the consideration, and if the
acceptance be without consideration, the drawer cannot recover of the acceptor. The payee
holds a different relation; he is a stranger to the transaction between the drawer and the
acceptor, and is, therefore, in a legal sense a remote party. In a suit by him against the
acceptor, the question as to the consideration between the drawer and the acceptor cannot be
inquired into. The payee or holder gives value to the drawer, and if he is ignorant of the
equities between the drawer and the acceptor, he is in the position on a bona fide indorsee.
Hence, it is no defense to a suit against the acceptor of a draft which has been discounted, and
upon which money has been advance by the plaintiff, that the draft was accepted or the
accommodation of the drawer.

As to Bartolome Picornell, he warranted, as drawer of the bill, that it would be accepted upon
proper presentment and paid in due course, and as it was not paid, he became liable to the
payment of its value to the holder thereof, which is the plaintiff bank. The fact that Picornell
was a commission agent of HTV, in the purchase of the tobacco, does not necessarily make him
an agent of the company in its obligations arising from the drawing of the bill by him. His acts
in negotiating the bill constitute a different contract from that made by his having purchased
the tobacco on behalf of HTV. Furthermore, he cannot exempt himself from responsibility by
the fact of his having been a mere agent of this company, because nothing to this effect was
indicated or added to his signature on signing the bill.

Banco Atlantico vs. Auditor General, GR No. L-33549

FACTS:
Boncan was the Finance Officer of the Philippine Embassy in Madrid who on many occasions
negotiated with Banco Atlantico checks, allegedly endorsed to her by the embassy. On these
occasions, the bank allowed the payment of the checks, notwithstanding the fact that the
drawee bank has not yet cleared the checks for collection. This was premised on the
finding that Boncan had special relations with the employees of the bank. And that
upon presentment to the drawee bank, the checks were dishonored due to non-acceptance
allegedly on the ground that the drawer has ordered the
stoppage of payment. This prompted Banco Atlantico to collect from the Philippine
Embassy for the funds released to Boncan but the latter refused. This eventually led to filing
of money claim of the bank with the Auditor General.

ISSUE:
Whether or not Banco Atlantico was a holder in due course.

HELD:
On whether or not Banco Atlantico was a holder in due course, it is not. Following
the decision of the Auditor General in denying the claim of the bank, the checks were

Page 30 of 83
demand notes. It should have been put on guard when Boncan negotiated the checks with
them and subsequently deposited
the same to her account. Even though it were demand notes, she instructed the bank
that the same be not presented for collection till a later date. The fact that the amount was
quite big and it was the payee herself who made the request that the same be not presented
for collection until a fixed date in the future was proof of a glaring infirmity or defect in
the instrument. It loudly proclaims “Take me at your own risk.” It was obvious by
then that the bank had knowledge of the infirmity or defect of the checks. Furthermore,
what it did when it allowed payment before clearing is beyond the normal and ordinary
banking practice especially when the bank involved is a foreign bank and the amounts
involved were large. Boncan wasn't even a client of the bank but was someone who had
special relations with its officers.

In view of the foregoing, the embassy as the drawer of the 3 checks in question
cannot be held liable. It is apparent that the said 3 checks were (fraudulently altered) by
Boncan as to their accounts and therefore wholly inoperative (note: should be “avoided”).

Astro Electronics vs. Roxas, GR No. 136729

FACTS:
Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting P3M w/
interest and secured by 3 promissory notes: December 14, 1981: P600,000.00, December 14,
1981: P400,000.00, and August 27, 1981: P2,000,000.00.

Petitioner Roxas signed twice, as President of Astro and in his personal capacity. Roxas also
signed a Continuing Surety ship Agreement in favor of Philtrust Bank, as President of Astro and
as surety. Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust
the payment of 70% of Astros loan, subject to the condition that upon payment by
Philguanrantee of said amount, it shall be proportionally subrogated to the rights of Philtrust
against Astro.

As a result of Astros failure to pay its loan obligations, despite demands, Philguarantee paid
70% of the guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and
Roxas a complaint for sum of money with the RTC of Makati. Roxas disclaims any liability on the
instruments, alleging, inter alia, that he merely signed the same in blank and the phrases in his
personal capacity and in his official capacity were fraudulently inserted without his knowledge.

ISSUE:
Whether or not Roxas should be jointly and severally liable with Astro.

RULING:
Astros loan with Philtrust Bank is secured by three promissory notes. These promissory notes
are valid and binding against Astro and Roxas. As it appears on the notes, Roxas signed twice:
first, as president of Astro and second, in his personal capacity. In signing his name aside from
being the President of Asro, Roxas became a co-maker of the promissory notes and cannot
escape any liability arising from it. Under the Negotiable Instruments Law, persons who write
their names on the face of promissory notes are makers, promising that they will pay to the
order of the payee or any holder according to its tenor.

Page 31 of 83
Thus, even without the phrase personal capacity, Roxas will still be primarily liable as a joint
and several debtor under the notes considering that his intention to be liable as such is
manifested by the fact that he affixed his signature on each of the promissory notes twice
which necessarily would imply that he is undertaking the obligation in two different capacities,
official and personal.

Philguarantee has all the right to proceed against petitioner, it is subrogated to the rights of
Philtrust to demand for and collect payment from both Roxas and Astro since it already paid the
value of 70% of roxas and Astro Electronics Corp.s loan obligation. In compliance with its
contract of Guarantee in favor of Philtrust.

Affirming the decision of the Regional Trial Court (Branch 147) of Makati, then Metro Manila,
whereby petitioners Peter Roxas and Astro Electronics Corp. (Astro for brevity) were ordered to
pay respondent Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee),
jointly and severally, the amount of P3,621,187.52 with interests and costs.

Travel-on vs. CA, GR No. 56169

FACTS:
Petitioner Travel-On Inc. is a travel agency from which Arturo Miranda procured tickets on
behalf of airline passengers and derived commissions therefrom. Miranda was sued by
petitioner to collect on the six postdated checks he issued which were all dishonored by the
drawee banks. Miranda, however, claimed that he had already fully paid and even overpaid his
obligations and that refunds were in fact due to him. He argued that he had issued the
postdated checks not for the purpose of encashment to pay his indebtedness but for purposes
of accommodation, as he had in the past accorded similar favors to petitioner. Petitioner
however urges that the postdated checks are per se evidence of liability on the part of private
respondent and further argues that even assuming that the checks were for accommodation,
private respondent is still liable thereunder considering that petitioner is a holder for value.

ISSUE:
Whether Miranda is liable on the postdated checks he issued even assuming that said checks
were issued for accommodation only.

RULING:
There was no accommodation transaction in the case at bar. In accommodation transactions
recognized by the Negotiable Instruments Law, an accommodating party lends his credit to the
accommodated party, by issuing or indorsing a check which is held by a payee or indorsee as a
holder in due course, who gave full value therefor to the accommodated party. The latter, in
other words, receives or realizes full value which the accommodated party then must repay to
the accommodating party. But the accommodating party is bound on the check to the holder in
due course who is necessarily a third party and is not the accommodated party. In the case at
bar, Travel-On was payee of all six (6) checks, it presented these checks for payment at the
drawee bank but the checks bounced. Travel-On obviously was not an accommodated party; it
realized no value on the checks which bounced. Miranda must be held liable on the checks
involved as petitioner is entitled to the benefit of the statutory presumption that it was a holder
in due course and that the checks were supported by valuable consideration.

Page 32 of 83
**In accommodation transactions recognized by the Negotiable Instruments Law, an
accommodating party lends his credit to the accommodated party, by issuing or indorsing a
check which is held by a payee or indorsee as a holder in due course, who gave full value
therefor to the accommodated party. In the case at bar, Travel-On was the payee of all six (6)
checks, it presented these checks for payment at the drawee bank but the checks bounced.
Travel-On obviously was not an accommodated party; it realized no value on the checks which
bounced.

Ang vs. Associated Bank, GR No. 146511

FACTS:
Respondent Associated Bank (formerly Associated Banking Corporation and now known as
United Overseas Bank Philippines) filed a collection suit against Antonio Ang Eng Liong and
petitioner Tomas Ang for the two (2) promissory notes that they executed as principal debtor
and co-maker, respectively. Respondent Bank alleged that the defendants obtained a loan of
P50,000, evidenced by a promissory note no. 1, and P30,000, evidenced by a promissory note
no. 2. As agreed, the loan would be payable, jointly and severally, on January 31, 1979 and
December 8, 1978, respectively.

Despite repeated demands for payment, the latest of which were on September 13, 1988 and
September 9, 1986, on Antonio Ang Eng Liong and Tomas Ang, respectively, respondent Bank
claimed that the defendants failed and refused to settle their obligation, resulting in a total
indebtedness.

Petitioner interposed the affirmative defenses that: the bank is not the real party in interest as
it is not the holder of the promissory notes, much less a holder for value or a holder in due
course; the bank knew that he did not receive any valuable consideration for affixing his
signatures on the notes but merely lent his name as an accommodation party; he accepted the
promissory notes in blank, with only the printed provisions and the signature of Antonio Ang
Eng Liong appearing therein; it was the bank which completed the notes upon the orders,
instructions, or representations of his co-defendant; and that the promissory notes did not
indicate in what capacity he was intended to be bound.

ISSUE:
Whether the petitioner is liable to the obligation despite being merely a co-maker and
accommodation party.

RULING:
Yes. Notably, Section 29 of the NIL defines an accommodation party as a person “who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor,
and for the purpose of lending his name to some other person.” As gleaned from the text, an
accommodation party is one who meets all the three requisites, viz: (1) he must be a party to
the instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not receive value
therefor; and (3) he must sign for the purpose of lending his name or credit to some other
person. An accommodation party lends his name to enable the accommodated party to obtain
credit or to raise money; he receives no part of the consideration for the instrument but
assumes liability to the other party/ies thereto. The accommodation party is liable on the

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instrument to a holder for value even though the holder, at the time of taking the instrument,
knew him or her to be merely an accommodation party, as if the contract was not for
accommodation.

As petitioner acknowledged it to be, the relation between an accommodation party and the
accommodated party is one of principal and surety – the accommodation party being the
surety. As such, he is deemed an original promisor and debtor from the beginning; he is
considered in law as the same party as the debtor in relation to whatever is adjudged touching
the obligation of the latter since their liabilities are interwoven as to be inseparable. Although a
contract of suretyship is in essence accessory or collateral to a valid principal obligation, the
surety’s liability to the creditor is immediate, primary and absolute; he is directly and equally
bound with the principal. As an equivalent of a regular party to the undertaking, a surety
becomes liable to the debt and duty of the principal obligor even without possessing a direct or
personal interest in the obligations nor does he receive any benefit therefrom.

Consequently, in issuing the two promissory notes, petitioner as accommodating party

warranted to the holder in due course that he would pay the same according to its tenor. It is
no defense to state on his part that he did not receive any value therefor because the phrase
“without receiving value therefor” used in Sec. 29 of the NIL means “without receiving value by
virtue of the instrument” and not as it is apparently supposed to mean, “without receiving
payment for lending his name.” Stated differently, when a third person advances the face value
of the note to the accommodated party at the time of its creation, the consideration for the
note as regards its maker is the money advanced to the accommodated party. It is enough that
value was given for the note at the time of its creation. As in the instant case, a sum of money
was received by virtue of the notes, hence, it is immaterial so far as the bank is concerned
whether one of the signers, particularly petitioner, has or has not received anything in payment
of the use of his name.

Furthermore, since the liability of an accommodation party remains not only primary but also
unconditional to a holder for value, even if the accommodated party receives an extension of
the period for payment without the consent of the accommodation party, the latter is still liable
for the whole obligation and such extension does not release him because as far as a holder for
value is concerned, he is a solidary co-debtor.

Agro Conglomerates, Inc. vs. CA, GR No. 117660

FACTS:
(1) On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels of
land to Wonderland Food Industries, Inc. In their Memorandum of Agreement, the
parties covenanted that the purchase price of Five Million (P5,000,000.00) Pesos would
be settled by the vendee, under the following terms and conditions:

a) One Million (P1,000,000.00) Pesos shall be paid in cash upon the signing of the
agreement;
b) Two Million (P2,000,000.00) Pesos worth of common shares of stock of the Wonderland
Food Industries, Inc.; and
c) The balance of P2,000,000.00 shall be paid in four equal installments, the first
installment falling due, 180 days after the signing of the agreement and every six

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 months thereafter, with an interest rate of 18% per annum, to be advanced by the
vendee upon the signing of the agreement.

(2) Whereas, the parties have agreed to qualify the stipulated terms for the payment of the
said ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS through
loan from the respondent bank Regent Savings & Loan Bank (formerly Summa Savings
& Loan Association), executed as Addendum to the previous Memorandum of
Agreement.

(3) This addendum was not notarized. Consequently, petitioner Mario Soriano signed as
maker several promissory notes, payable to the respondent bank. Thereafter, the bank
released the proceeds of the loan to petitioners.

(4) During that time, the bank was experiencing financial turmoil and was under the
supervision of the Central Bank. Central Bank examiner and liquidator Cordula de Jesus,
endorsed the subject promissory notes to the bank's counsel for collection. The bank
gave petitioners opportunity to settle their account by extending payment due dates.
Mario Soriano manifested his intention to re-structure the loan, yet did not show up nor
submit his formal written request. In their answer, petitioners interposed the defense of
novation and insisted there was a valid substitution of debtor. They alleged that the
addendum specifically states that although the promissory notes were in their names,
Wonderland shall be responsible for the payment thereof.

ISSUE:
WON Agro should be liable because there was no accommodation or surety.

APPLICABLE LAW/S:

• Novation is the extinguishment of an obligation by the substitution or change of the obligation

by a subsequent one which extinguishes or modifies the first, either by changing the object or
principal conditions, or by substituting another in place of the debtor, or by subrogating a third
person in the rights of the creditor. In order that a novation can take place, the concurrence of
the following requisites are indispensable:

1) There must be a previous valid obligation;

2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.

• Sec. 22 of the Civil Code provides:

Every person who through an act of performance by another, or any other means, acquires or
comes into possession of something at the expense of the latter without just or legal ground,
shall return the same to him.

HELD:
(1) There was no novation as there was no previous valid obligation.

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In the instant case, the first requisite for a valid novation is lacking. There was no novation by
“substitution” of debtor because there was no prior obligation which was substituted by a new
contract. It will be noted that the promissory notes, which bound the petitioners to pay, were
executed after the addendum. The addendum modified the contract of sale, not the
stipulations in the promissory notes which pertain to the surety contract. At this instance,
Wonderland apparently assured the payment of future debts to be incurred by the petitioners.
Consequently, only a contract of surety arose. It was wrong for petitioners to presume a
novation had taken place. The well-settled rule is that novation is never presumed, it must be
clearly and unequivocally shown.

(2) Petitioners are liable as accomodation party. In the instant case the original plan was that
the initial payments would be paid in cash. Subsequently, the parties (with the participation of
respondent bank) executed an addendum providing instead, that the petitioners would secure a
loan in the name of Agro Conglomerates Inc. for the total amount of the initial payments, while
the settlement of said loan would be assumed by Wonderland. Thereafter, petitioner Soriano
signed several promissory notes and received the proceeds in behalf of petitioner-company.

By this time, we note a subsidiary contract of suretyship had taken effect since petitioners
signed the promissory notes as maker and accommodation party for the benefit of Wonderland.
Petitioners became liable as accommodation party.

(3) Wonderland is not liable for the loan and was not the substitute debtor of the promissory
notes.

The contract of sale between Wonderland and petitioners did not materialize. But it was
admitted that petitioners received the proceeds of the promissory notes obtained from
respondent bank. Petitioners had no legal or just ground to retain the proceeds of the loan at
the expense of private respondent bank. Neither could petitioners excuse themselves and hold
Wonderland still liable to pay the loan upon the rescission of their sales contract.

If petitioners sustained damages as a result of the rescission, they should have impleaded
Wonderland and asked damages. The non-inclusion of a necessary party does not prevent the
court from proceeding in the action, and the judgment rendered therein shall be without
prejudice to the rights of such necessary party. But respondent appellate court did not err in
holding that petitioners are duty-bound under the law to pay the claims of respondent bank
from whom they had obtained the loan proceeds.

DEFINITIONS:
(1) Accommodation party : person who has signed the instrument as maker, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his name to some
other person and is liable on the instrument to a holder for value, notwithstanding such holder
at the time of taking the instrument knew (the signatory) to be an accommodation party.

He has the right, after paying the holder, to obtain reimbursement from the party
accommodated, since the relation between them has in effect become one of principal and
surety, the accommodation party being the surety.

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(2) Suretyship: relation which exists where one person has undertaken an obligation and
another person is also under the obligation or other duty to the obligee, who is entitled to but
one performance, and as between the two who are bound, one rather than the other should
perform.

The surety's liability to the creditor or promisee of the principal is said to be direct, primary and
absolute; in other words, he is directly and equally bound with the principal. And the creditor
may proceed against any one of the solidary debtors.

Sadaya vs. Sevilla, GR No. L-17845

FACTS:
On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon Sadaya executed, jointly and
severally, in favor of the BPI, or its order, a promissory note for P15,000.00 with interest at 8%
per annum, payable on demand. The P15,000.00 proceeds were received by Oscar Varona
alone. Victor Sevilla and Simeon Sadaya signed the promissory note as co-makers only as a
favor to Oscar Varona. June 15, 1950 the outstanding balance is P4,850.00. No payment
thereafter was made. On Oct 16 1952, the bank collected from Sadaya total of P5,416.12 wit
interest. Varona failed to reimburse Sadaya despite repeated demands.

Victor Sevilla died while Francisco Sevilla was named as the administrator. Sadaya filed a
creditor’s claim for the above sum of P5,746.12, plus attorney’s fees in the sum of P1,500.00.
The administrator resisted the claim upon the averment that the deceased Victor Sevilla “did
not receive any amount as consideration for the promissory note,” but signed it only “as surety
for Oscar Varona. The trial court admitted the claim of Sadaya though it was reversed by the
CA.

ISSUE:
Whether or not Sadaya can claim against the estate of Sevilla as co-accomodation party when
Verona as principal debtor is not yet insolvent.

RULING:
NO. Varona is bound by the obligation to reimburse Sadaya. 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.

The requisites before one accommodation maker can seek reimbursement from a co-
accommodation maker:

─ ART. 2073 of NCC: When there are two or more guarantors of the same debtor and for the
same debt, the one among them who has paid may demand of each of the others the share
which proportionally owes from him. If any of the guarantors should be insolvent, his share
shall be borne by the others, including the payer, in the same proportion.

A joint and several accommodation maker of a negotiable promissory note may demand from
the principal debtor reimbursement for the amount that he paid to the payee. A joint and
several accommodation maker who pays on the said promissory note may directly demand
reimbursement from his co-accommodation maker without first directing his action against the

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principal debtor provided that: (a) he made the payment by virtue of a judicial demand, or -no
judicial demand just voluntarily; and (b) a principal debtor is insolvent. – Varona is not
insolvent.

It was never shown that there was a judicial demand on Sadaya to pay the obligation and also,
it was never proven that Varona was insolvent. Thus, Sadaya cannot proceed against Sevilla for
reimbursement.

Caneda vs. CA, GR No. L-81322

FACTS:
November 8, 1977: Buenaventura Gueson for value received, executed a promissory note for
P18,960 in favor of Gregorio Caneda, Jr. promising to pay a monthly installment of P 790 for 24
months with 14% interest/annum. Gueson executed a chattel mortgage and used a Toyota Jiffy
jeep as a collateral. Expressly stipulated in the promissory note and chattel mortgage that
default in the payment of any installment will make the entire obligation due and demandable.
Promissory note and chattel mortgage was assigned by Gregorio Caneda in favor of Investors
Finance Corporation (FNCB). September 24, 1980: Gueson defaulted in his obligation.
December, 1980: FNCB filed a complaint for replevin and/or sum of money against Gueson and
John Doe. As relief, FNCB prayed for the seizure of the Toyota Jiffy jeep. In the alternative
FNCB also prayed for the payment. Gueson: he did not receive any value for the promissory
note he executed as he merely accommodated the real debtor Gregorio Caneda, Jr.; that as the
accommodated party Caneda, Jr. executed a deed of sale in Gueson's favor covering the Jiffy
jeep subject matter of the chattel mortgage and he also executed a counter deed of sale in
favor of Caneda, Jr.; that with the consent of FNCB, Caneda Jr. executed an "undertaking"
whereby he bound himself to pay and assume the obligation stipulated in the promissory note
and chattel mortgage; that FNCB is not a holder in due course of the promissory note nor an
assignee in good faith. Trial Court: Gueson was merely an accommodation party for the benefit
of Caneda, Jr. "With recourse to Buenaventura Gueson in case of default" found in the
undertaking was inserted only after Caneda and FNCB had already signed the undertaking and
without the knowledge of B. Gueson and that Caneda was in bad faith.

ISSUES:
WON notice was duly served in Caneda Jr.'s office.
WON Caneda Jr. can be held liable even if Gueson is an accommodation party (surety).

HELD:
YES. Received by Boy Reyes (neighbor). The statutory requirements of substituted service must
be followed strictly, faithfully and fully and any substituted service other than that authorized by
statute is considered ineffective (Filmerco Commercial Co., Inc. v. IAC, 149 SCRA 194-196
[1987]). Well-settled is the rule that remanding of a case for the reception of evidence is not
necessary if the Supreme Court could resolve the dispute based on the records before it.
Procedural steps can be dispensed with, which would not anyway affect substantially the merits
of their respective claims.

YES. No novation. CaNeda became a surety as accommodation party. In resume, FNCB can go
against both Caneda, the principal debtor and Gueson as the surety or either of them. But the
lower court erred in dismissing the claim against Gueson. By not appealing the decision of the

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lower court, FNCB merely opted to recover its credit from Caneda and waived its right to
recover from Gueson. "With recourse to Buenaventura Gueson in case of default" is immaterial
insofar as the liability of Caneda is concerned. Merely confirms the fact that Gueson is merely
an accommodation party and will not absolve Caneda, the principal debtor, from payment of
the indebtedness with FNCB.

Ang Tiong vs. Ting, GR No. L-26767

FACTS:
On August 15, 1960 Lorenzo Ting issued Philippine Bank of Communications check K-81618, for
the sum of P4,000, payable to “cash or bearer”. With Felipe Ang’s signature (indorsement in
blank) at the back thereof, the instrument was received by the plaintiff Ang Tiong who
thereafter presented it to the drawee bank for payment. The bank dishonored it. The plaintiff
then made written demands on both Lorenzo Ting and Felipe Ang that they make good the
amount represented by the check. These demands went unheeded; so he filed in the municipal
court of Manila an action for collection of the sum of P4,000, plus P500 attorney’s fees. On
March 6, 1962 the municipal court adjudged for the plaintiff against the two defendants. Only
Felipe Ang appealed to the Court of First Instance of Manila (civil case 50018), which rendered
judgment on July 31, 1962, amended by an order dated August 9, 1962, directing him to pay to
the plaintiff “the sum of P4,000, with interest at the legal rate from the date of the filing of the
complaint, a further sum of P400 as attorney’s fees, and costs.” Felipe Ang then elevated the
case to the Court of Appeals, which certified it to this Court because the issues raised are purely
of law.

ISSUE:
Whether the lower court err in adjudging FELIPE ANG as general indorser.

HELD:
No, nothing in the check in question indicates that the appellant is not a general indorser within
the purview of section 63 of the Negotiable Instruments Law which makes “a person placing his
signature upon an instrument otherwise than as maker, drawer or acceptor” a general indorser,
— “unless he clearly indicates plaintiff appropriate words his intention to be bound in some
other capacity,” which he did not do. And section 66 ordains that “every indorser who indorses
without 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.”

Prudencio vs. CA, GR No. L-34339

FACTS:
Appellants are the owners of a property, which they mortgaged to help secure a loan of
a certain Domingo Prudencio. On a later date, they were approached by their relative who was
the attorney-in-fact of a construction company, which was in dire need of funds for the
completion of a municipal building. After some persuasion, the appellants amended the
mortgage wherein the terms and conditions of the original mortgage was made an

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integral part of the new mortgage. The promissory note covering the “second loan”
was signed by their relative. It was also signed by them, indicating the request that the
check be released by the bank.

After the amendment of the mortgage was executed, a deed of assignment was made by
Toribio, assigning all the payments to the Bureau to the construction company. This
notwithstanding, the Bureau with approval of the bank, conditioned however that they should
be for labor and materials,
made three payments to the company. The last request was denied by the bank, averring that
the account was long overdue, the remaining balance of the contract price should be applied to
the loan.

The company abandoned the work and as consequence, the Bureau rescinded the
contract and assumed the work. Later on, the appellants wrote to the PNB that since
the latter has authorized payments to the company instead of on account of the loan
guaranteed by the mortgage, there was a change in the conditions of the contract without
the knowledge of appellants, which entitled the latter to cancel the mortgage contract.

The trial court held them still liable together with their co-makers. It has also been held that if
the judgment is not satisfied within a period of time, the mortgaged properties would be
foreclosed and sold in public auction.

In their appeal, petitioners contend that as accommodation makers, the nature of their
liability is only that of mere sureties instead of solidary co-debtors such that a material
alteration in the principal contract, effected by the creditor without the knowledge and consent
of the sureties, completely discharges the sureties from all liabilities on the contract of
suretyship.

ISSUE:
Whether or not PNB may be considered as a holder in due course after fraudulent inducement.

HELD:
NO. PNB is not a holder in due course. Not only was PNB an immediate party or in privy to the
promissory note – that is, it had dealt directly with the petitioners knowing fully well that the
latter only signed as accommodation – but petitioners were made to believe and on that belief
entered into the agreement that no other conditions would alter the terms thereof and yet, PNB
altered the same.

There is no question that as accommodation makers, petitioners would be primarily and

unconditionally liable on the promissory note to a holder for value, regardless of whether they
stand as sureties or solidary co-debtors since such distinction would be entirely immaterial and
inconsequential as far as a holder for value is concerned. Consequently, the petitioners
cannot claim to have been released from their obligation simply because at the time of
payment of such obligation was temporarily deferred by the
PNB without their knowledge and consent. There has to be another basis for their claim of
having been freed from their obligation. It has to be determined if PNB was a holder for
value.

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A holder for value is one who meets the requirement of being a holder in due course except the
notice for want of consideration. In the case at bar, PNB may not be considered as a
holder for value. Not only was PNB an immediate party or privy to the promissory
note, knowing fully well that petitioners only signed as accommodation parties, but more
importantly it was the Deed of Assignment which moved the petitioners to sign the
promissory note. Petitioners also relied on the belief that there will be no
alterations to the terms of the agreement. The deed provided that there will no further
conditions which could possibly alter the agreement without the consent of the petitioner
such as the grant of greater priority to obligations other than the payment of the loan.
This notwithstanding, the bank approved the release of payments to the Company
instead of the same to the bank. This was in violation of the deed of assignment
and prejudiced the rights of petitioners. The bank was not in good faith—a requisite
for a holder to be one in due course.

Garcia vs. Llamas, GR No. 154127

FACTS:
A complaint for sum of money was filed by respondent Dionisio Llamas against Petitioner
Romeo Garcia and Eduardo de Jesus alleging that the two borrowed Php 400, 000 from him.
They bound themselves jointly and severally to pay the loan on or before January 23, 1997 with
a 15% interest per month. The loan remained unpaid despite repeated demands by respondent.

Petitioner resisted the complaint alleging that he signed the promissory note merely as an
accommodation party for de Jesus and the latter had already paid the loan by means of a check
and that the issuance of the check and acceptance thereof novated or superseded the note.

The trial court rendered a judgment on the pleadings in favor of the respondent and directed
petitioner to pay jointly and severally respondent the amounts of Php 400, 000 representing the
principal amount plus interest at 15% per month from January 23, 1997 until the same shall
have been fully paid, less the amount of Php 120,000 representing interests already paid.

The Court of Appeals ruled that no novation, express or implied, had taken place when
respondent accepted the check from de Jesus. According to the CA, the check was issued
precisely to pay for the loan that was covered by the promissory note jointly and severally
undertaken by petitioner and de Jesus. Respondent’s acceptance of the check did not serve to
make de Jesus the sole debtor because first, the obligation incurred by him and petitioner was
joint and several; and second, the check which had been intended to extinguish the obligation
bounced upon its presentment.

ISSUES:
(1) Whether or not there was novation of the obligation
(2) Whether or not the defense that petitioner was only an accommodation party had any basis.

HELD:
For novation to take place, the following requisites must concur: (1) There must be a previous
valid obligation; (2) the parties concerned must agree to a new contract; (3) the old contract
must be extinguished; and (4) there must be a valid new contract.

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The parties did not unequivocally declare that the old obligation had been extinguished by the
issuance and the acceptance of the check or that the check would take the place of the note.

(2) By its terms, the note was made payable to a specific person rather than bearer to or
order—a requisite for negotiability. Hence, petitioner cannot avail himself of the NIL’s provisions
on the liabilities and defenses of an accommodation party. Besides, a non-negotiable note is
merely a simple contract in writing and evidence of such intangible rights as may have been
created by the assent of the parties. The promissory note is thus covered by the general
provisions of the Civil Code, not by the NIL.

Even granting that the NIL was applicable, still petitioner would be liable for the note. An
accommodation party is liable for the instrument to a holder for value even if, at the time of its
taking, the latter knew the former to be only an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect, one of principal and surety. It
is a settled rule that a surety is bound equally and absolutely with the principal and is deemed
an original promissory debtor from the beginning. The liability is immediate and direct.

Crisologo-Jose vs. CA, GR NO. 80599

FACTS:
Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not
private respondent who merely signed the check in question in a representative capacity, that
is, as vice-president of said corporation, hence he is not liable thereon under the Negotiable
Instruments Law.

ISSUE:
Whether or not petitioner is not liable on the ground that he is simply acting as an agent of a
corporation.

RULING:
NO. An accommodation party is liable on the instrument to a holder for value, although such
holder at the time of taking the instrument knew him to be only an accommodation party, does
not include nor apply to corporations which are accommodation parties. This is because the
issue or indorsement of negotiable paper by a corporation without consideration and for the
accommodation of another is ultra vires.

Agro-Conglomerates vs. CA, GR NO. 117660

FACTS:
July 17, 1982: Agro Conglomerates, Inc. (Agro) sold 2 parcels of land to Wonderland Food
Industries, Inc (Wonderland) for P 5M under terms and conditions:
a) P 1M Pesos shall be paid in cash upon the signing of the agreement
b) P 2M Pesos worth of common shares of stock of the Wonderland Food Industries, Inc.
c) balance of P2,000,000.00 shall be paid in 4 equal installments, the first installment
falling due, 180 days after the signing of the agreement and every six months
thereafter, with an interest rate of 18% per annum, to be advanced by the vendee
upon the signing of the agreement

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July 19, 1982: Agro, Wonderland and Regent Savings & Loan Bank (Regent) (formerly Summa
Savings & Loan Association) amended the arrangement resulting to a revision - addedum was
not notarized. Agro would secure a loan in the name of Agro Conglomerates Inc. for the total
amount of the initial payments, while the settlement of loan would be assumed by Wonderland.
Mario Soriano (of Agro) signed as maker several promissory notes, payable to Regent in favor
of Wonderland. Subsidiary contract of suretyship had taken effect since Agro signed the
promissory notes as maker and accommodation party for the benefit of Wonderland. Bank
released the proceeds of the loan to Agro who failed to meet their obligations as they fell due.
Bank, experiencing financial turmoil, gave Agro opportunity to settle their account by extending
payment due dates. Mario Soriano manifested his intention to re-structure the loan, yet did not
show up nor submit his formal written request. Regent filed 3 separate complaints before the
RTC for Collection of sums of money. CA affirmed. Trial court: held Agro liable.

ISSUE:
WON Agro should be liable because there was no accomodation or surety

HELD:
YES. CA affirmed.
First, there was no contract of sale that materialized. The original agreement was that
Wonderland would pay cash and Agro would deliver possession of the farmlands. But
this was changed through an addendum, that Agro would instead secure a loan and the
settlement of the same would be shouldered by Wonderland. Contract of surety between
Woodland and petitioner was extinguished by the rescission of the contract of sale of the
farmland. With the rescission, there was confusion in the persons of the principal debtor and
surety. The addendum thereon likewise lost its efficacy. Accommodation party - NOT in this
case because of recission. Person who has signed the instrument as: maker, acceptor, indorser,
without receiving value therefor. For the purpose of lending his name to some other person. Is
liable on the instrument to a holder for value, notwithstanding such holder at the time of taking
the instrument knew (the signatory) to be an accommodation party. Has the right, after paying
the holder, to obtain reimbursement from the party accommodated, since the relation between
them has in effect become one of principal and surety, the accommodation party being the
surety. Suretyship – relation which exists where: 1 person has undertaken an obligation,
another person is also under the obligation or other duty to the obligee, who is entitled to but
one performance. The surety’s liability to the creditor or promisee is directly and equally bound
with the principal and the creditor may proceed against any one of the solidary debtors

Novation - NOT in this case. Extinguishment of an obligation by the substitution or change of

the obligation by a subsequent one which extinguishes or modifies the first, either by changing
the object or principal conditions, or by substituting another in place of the debtor, or by
subrogating a third person in the rights of the creditor. Never presumed and it must be clearly
and unequivocally shown. Requisites:

a) There must be a previous valid obligation - lacking

b) There must be an agreement of the parties concerned to a new contract
c) There must be the extinguishment of the old contract; and
d) There must be the validity of the new contract

Page 43 of 83
Sec. 22 of the Civil Code provides: Every person who through an act of performance by
another, or any other means, acquires or comes into possession of something at the expense of
the latter without just or legal ground, shall return the same to him. Agro had no legal or just
ground to retain the proceeds of the loan at the expense of Wonderland. Neither could Agro
excuse themselves and hold Wonderland still liable to pay the loan upon the rescission of their
sales contract - surety no effect because of the rescission. If Agro sustained damages as a
result of the rescission, they should have impleaded Wonderland and asked damages. The non-
inclusion of a necessary party does not prevent the court from proceeding in the action, and the
judgment rendered therein shall be without prejudice to the rights of such necessary party. But
respondent appellate court did not err in holding that Agro are duty-bound under the law to pay
the claims of Regent from whom they had obtained the loan proceeds

Sadaya vs. Sevilla, GR No. L-17845

FACTS:
On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon Sadaya executed, jointly and
severally, in favor of the BPI, or its order, a promissory note for P15,000.00 with interest at 8%
per annum, payable on demand. The P15,000.00 proceeds were received by Oscar Varona
alone. Victor Sevilla and Simeon Sadaya signed the promissory note as co-makers only as a
favor to Oscar Varona. June 15, 1950 the outstanding balance is P4,850.00. No payment
thereafter was made. On Oct 16 1952, the bank collected from Sadaya total of P5,416.12 wit
interest. Varona failed to reimburse Sadaya despite repeated demands.

Victor Sevilla died while Francisco Sevilla was named as the administrator. Sadaya filed a
creditor’s claim for the above sum of P5,746.12, plus attorney’s fees in the sum of P1,500.00.
The administrator resisted the claim upon the averment that the deceased Victor Sevilla “did
not receive any amount as consideration for the promissory note,” but signed it only “as surety
for Oscar Varona. The trial court admitted the claim of Sadaya though it was reversed by the
CA.

ISSUE:
Whether or not Sadaya can claim against the estate of Sevilla as co-accomodation party when
Verona as principal debtor is not yet insolvent.

RULING:
NO. Varona is bound by the obligation to reimburse Sadaya. 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.

The requisites before one accommodation maker can seek reimbursement from a co-
accommodation maker:

─ ART. 2073 of NCC: When there are two or more guarantors of the same debtor and for the
same debt, the one among them who has paid may demand of each of the others the share
which proportionally owes from him. If any of the guarantors should be insolvent, his share
shall be borne by the others, including the payer, in the same proportion.

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A joint and several accommodation maker of a negotiable promissory note may demand from
the principal debtor reimbursement for the amount that he paid to the payee. A joint and
several accommodation maker who pays on the said promissory note may directly demand
reimbursement from his co-accommodation maker without first directing his action against the
principal debtor provided that: (a) he made the payment by virtue of a judicial demand, or -no
judicial demand just voluntarily; and (b) a principal debtor is insolvent. – Varona is not
insolvent.

It was never shown that there was a judicial demand on Sadaya to pay the obligation and also,
it was never proven that Varona was insolvent. Thus, Sadaya cannot proceed against Sevilla for
reimbursement.

Granada vs. PNB, GR No. L-20745

Petitioners herein seek to review the decision of the Court of Appeals reversing that of the
Court of First Instance of Negros Occidental, and sentencing petitioners to pay the respondent
Philippine National Bank the of P1,982.24 with interest thereon at 5% per annum from August
20, 1940 and 10% on the principal as attorneys' fees; and the sum of P1,349.90 with interest at
5% per annum, from September 20, 1941, and 10% on the principal as attorneys' fees, and
costs.

There is no dispute as to the amounts involved; that they represent the balances they represent
the balances due and unpaid on sugar crop loans applied from and granted by the PNB to
Dolores, Estrella, 1 Feliza, and Corazon, all surnamed Granada; that said loans were personally
received by the petitioners for which the corresponding promissory notes were principally
executed and signed by them, uniformly worded as follows:

On demand after date, for value received, I promise to pay to the order of the Philippine
National Bank at its office in Bacolod or Manila, the sum of (amount in pesos stated), Philippine
currency, with interest at the rate of 5% per annum from date until paid.

In case of judicial execution of this obligation or any part of it, the debtor waives his right under
the provisions of Rule 39, Section 12 of the Rules of Court.

In case it is necessary to collect this note by or through an attorney-at-law, the makers and
indorsers shall pay, 10% of the amount due on the notes as attorney's fee. Demand and
dishonor waived. Holder may accept partial payment reserving his right of recourse against
each and all indorsers.

The only issue raised by petitioners emanated from an amended complaint filed by the attorney
of the PNB branch in Bacolod, Occidental Negros, wherein it was alleged that

defendants Dolores Granada and Estrella Granada, together with their sisters Feliza Granada
and Corazon Granada, who are now dead, as representative of their parents, Cristeta Granada
and Matias Granada, borrowed from and were granted by, the plaintiff ... sugar crop loan .. for
the cultivation and production of sugar canes in hacienda Cristeta.

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that said ... loan ... was released to, and received by, defendants Dolores Granada and Estrella
Granada and their sisters Feliza Granada and Corazon Granada, as representatives of their
parents Cristeta Granada and Matias Granada, as evidenced by promissory notes hereto
attached as Exhibit A, B,C, ... etc., and made integral parts hereof.

Solely on the strength of the phrase "as representatives of their parents, etc." inserted in the
amended complaint, the petitioners contended, and that trial court sustained the contention,
that they are not liable personally as they merely acted as agents of a disclosed principal.

The Court of Appeals, however, reversed the decision of the court a quo after reviewing the
facts and antecedents of the case.

It appears that in the original complaint filed by the plaintiff bank, it was alleged that the
defendants Dolores, Estrella, Feliza, and Corazon, all surnamed Granada, secured sugar crop
loans for the crop year 1940-41 and 1941-42 from the plaintiff and received the money as
evidenced by various promissory notes attached to said original complaint marked as Exhibits
"A" to "F" and "G" to "P" that the balances of said crop loans in the sum of P1,982.24 and
P1,349.90 were not paid; hence, it was prayed that the defendants be sentenced to pay the
same, plus interest and costs.2

A motion to dismiss the complaint was filed by the defendants alleging prescription and that the
signers of the promissory notes have secured and received the amounts of the loans as "mere
representatives of the parents Matias and Cristeta Granada," who were the owners of Hda.
Cristeta, and that the money was used for maintenance and support of the said spouses and
their children Dolores, Estrella, Feliza and Corazon, who were then still single and living with
their parents.

In answer to the motion, plaintiff reiterated that the documents covering that loans were signed
and executed by Dolores Granada, for herself and as attorney-in-fact of Estrella, Feliza and
Corazon, by virtue of a duly notarized power of attorney, and that plaintiff has no documents or
evidence in its possession to hold the spouses Matias and Cristeta Granada liable for the
payment of the accounts. The motion to dismiss was denied.

Thereafter, the defendants filed their answer, again alleging that the promissory notes were
signed by them as mere representatives and administrators of their parents and that the
plaintiff has been informed by Cristeta Granada and her attorney-in-fact, Jose Granada that the
so-called accounts of "Granada Hermanas" were the accounts of the spouses Matias and
Cristeta and could be charged against their properties known as Hda. Cristeta.

Subsequently, the defendants filed another motion calling attention to their defense alleged in
their answer and praying that in view thereof "the plaintiff be given leave of court to amend the
complaint and include as principal party defendants Cristeta Granada, and the defendants be
allowed to file their answer, if they so desire." The motion was granted in an order of the
following tenor, "... por el presente si les concede a ambas partes autorizacion para presentar
los escritos enmendados que deseen presentar dentro del plazo reglamentario."

Accordingly, the plaintiff filed an amended complaint, this time impleading Cristeta Granada,
together with the original defendants, and it was in this amended complaint that for the first

Page 46 of 83
time, the phrase "as representatives of their parents" was inserted. There was no other
amendment in the complaint, and in the prayer, the plaintiff insisted that judgment be rendered
ordering defendants Dolores Granada, Estrella Granada and Cristeta Granada to pay the plaintiff
the amounts claimed in the complaint, and granting such other relief as the court may deem
just and equitable.1awphîl.nèt

In their answer to the amended complaint, defendants Dolores and Estrella Granada
reproduced and reiterated their allegations in their answer to the original complaint.

Cristeta Granada, in his answer under oath, significantly denied that she has given or granted
any authority to Dolores, Estrella, Feliza and Corazon, or to any of them, to borrow money or
secure a loan in her behalf from the bank.

Replying to the answer to the amended complaint of the defendants Dolores and Estrella
Granada, the plaintiff again averred that as alleged in the original complaint, Dolores, Estrella,
Feliza and Corazon were personally, jointly and severally liable to the plaintiff for the payment
of the amount of the loans, as that is what appears in the promissory notes and the borrowers
did not inform the bank when they applied for and secured the loan that they were acting as
agents for and in behalf of their parents, and the filing of the amended complaint joining
Cristeta Granada as a party defendant was in obedience to the order of the court issued upon
motion of the original defendants, and "in order to be relieved of any liability it is incumbent
upon defendants Dolores and Estrella to prove or help the plaintiff prove that they acted as
representatives of their parents."

Thereafter, trial was held and plaintiff presented the promissory notes whose genuineness and
due execution were unquestioned; proof of the receipt of the loans by defendants and the
amounts still unpaid thereon in spite of demands. All this evidence was admitted without
objection on the part of the defendants.

Upon these facts, the Court of Appeals, as already stated, reversed the decision of the court a
quo and rendered judgment in favor of the plaintiff, reasoning thus:

As a general rule, facts alleged in a party's pleading are deemed admissions of that party and
binding upon it. However, that is not an absolute and inflexible rule. Every admission is to be
taken as an entirety of the fact which makes for the one side with the qualifications which limit,
modify or destroy its effect on the other side. The reason for this is that, where part of a
statement of a party is used against him as an admission, the court should consider and weigh
any other portions connected with the statement which tend to neutralize or explain the portion
which is against interest. In other words, while the admission is admissible in evidence, its
probative value is to be determined from the whole statement and others intimately related or
connected therewith as an integrated unit for, as said by the Supreme Court, although acts or
facts admitted do not require proof and cannot be contradicted, however, evidence aliunde can
be presented to show that the admission was made through palpable mistake. (Irlanda vs.
Pitargue, 22 Phil. 383.)

From the pleadings filed by the parties it clearly appears that the cause of action stated in the
original complaint was against Dolores, Estrella, Felisa and Corazon, surnamed Granada, for the

Page 47 of 83
payment of the loans which they obtained from the bank in their individual and personal
capacity, as evidenced by the promissory notes in question.1awphîl.nèt

The foregoing facts called from the pleadings of the parties have persuaded us to believe, and
we so hold, that in filing the amended complaint containing the allegation which has become
the bone of contention on this appeal, the plaintiff had acted through a mistaken belief that the
adverted allegation in the amended complaint did not constitute an amendment of its cause of
action, and this matter was made known to the court and the defendants when in its reply to
the motion to dismiss it stated that it has no document or evidence in its possession to hold the
spouses Matias and Cristeta Granada liable to the payment of the account; and it honestly
relied on the belief that the defendants, Dolores and Estrella, surnamed Granada, had the
necessary evidence to establish the fact. At any rate, guided by the provisions of the rules of
court that "These rules shall be liberally construed in order to promote their object and to assist
the parties in obtaining just, speedy, and inexpensive determination of every action and
proceeding"; the amended complaint may be treated as stating two or more statements of a
claim in a single cause of action, which is permitted under Section 9, Rule 15, or it may be
considered as including several defendants in the alternative against any of which plaintiff may
be entitled to relief, a course of action sanctioned by Section 13, Rule 3. There are cases where
the facts essential to the party's claim or defense are within the knowledge of the adverse
party, as to be unable to state them with certainty. He may, however, know that one out of two
or more sets of facts is true, without knowing which. In such a case, plaintiff is allowed to make
alternative statements of his claim under Section 9, Rule 15. (Everett vs. Asia Banking
Corporation, 59 Phil. 512, 526, cited in 1 Moran 235, 1957 ed.) On the other hand, Section 13
of Rule 3 "gives the plaintiff the right to include alternatively several possible defendants when
he is uncertain against which of them he is entitled to relief, as ... where a defendant may have
been acting either as an agent or a principal." ... And the above provision is applicable,
although the right to relief alleged to exist against one of the defendants may be inconsistent
with the right to relief against the other, as where A is sued as principal and B is joined in the
alternative, if A should be found to have been B's agents. (1 Moran 71, 1957 ed.) The amended
complaint in the instant case may not be a model pleading for an alternative statements of the
claim or against two or more defendants in the alternative; however, judging the said complaint
from a liberal standpoint as ordained by the Rules and considering that in the prayer judgment
is asked against all the defendants, Dolores Granada, Estrella Granada and Cristeta Granada, it
is within the jurisdiction of the court to render such judgment as the facts warrant against all or
some of the defendants for the payment of the amount claimed by the plaintiff.

Taking into account the circumstances of this case, we find no error committed by the Court of
Appeals, both in the assessment of the facts and the application of the law on the matter in
dispute. It is evident that the plaintiff bank, in amending the complaint conformably with the
order of the trial court, never intended to change the cause of action which was embodied in
the original complaint.

WHEREFORE, this petition is hereby dismissed, with costs against the petitioners. So ordered.

VI. DEFENSES

Insular Drug vs. Philippine National Bank, 58 Phil. 684

Page 48 of 83
FACTS:
Foerster was a collector for Insular Drugs. Upon collection of checks for payment to
the company, he deposited the checks in his own personal account. This came to the
knowledge of the company and upon investigation, the salesman committed suicide
thereafter. Insular Drugs filed an action against the bank, to credit to its account the
amount Foerster and his wife took from them. The indorsements took various forms.

HELD:
When a bank accepts the indorsements on checks made out to the company and the
indorsements of the salesman’s wife and clerk, and credits to the personal account of the
salesman and his wife, authorizing them to make withdrawals, the bank makes itself
responsible to the drug company for the amounts represented by the checks, unless it is
pleaded and proved that after the money was withdrawn from the bank, it passed to the drug
company which thus suffered no loss.

Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust
Company, GR No. 129015

FACTS:
Plaintiff Samsung Construction Company Philippines, Inc. (“Samsung Construction”), maintained
a current account with defendant Far East Bank and Trust Company (“FEBTC”). The sole
signatory to Samsung Construction’s account was Jong Kyu Lee (“Jong”), its Project Manager,
while the checks remained in the custody of the company’s accountant, Kyu Yong Lee (“Kyu”).

A certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to the bank. The
check, payable to cash and drawn against Samsung Construction’s current account, was in the
amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00). The bank
teller observed the bank’s policy in encashing checks. Satisfied with the genuineness of the
signature of Jong, the bank authorized the encashment of the check to Gonzaga.

The following day, Kyu, examined the balance of the bank account and discovered that a check
in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had
been encashed. Aware that he had not prepared such a check for Jong’s signature, Kyu perused
the checkbook and found that the last blank check was missing. He reported the matter to
Jong, who then proceeded to the bank. Jong learned of the encashment of the check, and
realized that his signature had been forged. The Bank Manager reputedly told Jong that he
would be reimbursed for the amount of the check.

Samsung Construction, through counsel, demanded that FEBTC credit to it the said amount
with interest. In response, FEBTC said that it was still conducting an investigation on the
matter. Unsatisfied, Samsung Construction filed a Complaint for violation of Section 23 of the
Negotiable Instruments Law, and prayed for the payment of the amount debited as a result of
the questioned check plus interest, and attorney’s fees.

ISSUES:
1. Whether Samsung Construction was precluded from setting up the defense of forgery under
Section 23 of the Negotiable Instruments Law.
2. Whether FEBTC is bound to credit the said amount to Samsung Construction’s Account.

Page 49 of 83
RULING:
1. No, Samsung Construction is not precluded to set up the defense of Forgery.

Section 23 of the Negotiable Instruments Law bars a party from setting up the defense of
forgery if it is guilty of negligence.

Admittedly, the record does not clearly establish what measures Samsung Construction
employed to safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the
checks inside a “safety box,” and no contrary version was presented by FEBTC. The
presumption remains that every person takes ordinary care of his concerns, and that the
ordinary course of business has been followed. Negligence is not presumed, but must be proven
by him who alleges it.

The drawee who has paid upon the forged signature is held to bear the loss, because he has
been negligent in failing to recognize that the handwriting is not that of his customer. But it
follows obviously that if the payee, holder, or presenter of the forged paper has himself been in
default, if he has himself been guilty of a negligence prior to that of the banker, or if by any act
of his own he has at all contributed to induce the banker’s negligence, then he may lose his
right to cast the loss upon the banker. Yet, we are unable to conclude that Samsung
Construction was guilty of negligence in this case.

2. Yes, FEBTC is liable in paying a forged check.

As provided in Sec.23 of the Negotiable Instruments Law, the general rule is that a forged
signature is wholly inoperative, and payment made through or under such signature is
ineffectual or does not discharge the instrument. If payment is made, the drawee cannot
charge it to the drawer’s account. The traditional justification for the result is that the drawee is
in a superior position to detect a forgery because he has the maker’s signature and is expected
to know and compare it.

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

Since the drawer, Samsung Construction, is not precluded by negligence from setting up the
forgery, the general rule should apply. Consequently, if a bank pays a forged check, it must be
considered as paying out of its funds and cannot charge the amount so paid to the account of
the depositor. A bank is liable, irrespective of its good faith, in paying a forged check.

Associated Bank vs. CA, GR No. 107382

FACTS:
The Province of Tarlac maintains a current account with the Philippine National Bank (PNB
Tarlac Branch) where the provincial funds are deposited. Portions of the funds were allocated to
the Concepcion Emergency Hospital. Checks were issued to it and were received by the

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hospital’s administrative officer and cashier (Fausto Pangilinan). Pangilinan, through the help of
Associated Bank but after forging the signature of the hospital’s chief (Adena Canlas), was able
to deposit the checks in his personal account. All the checks bore the stamp “All prior
endorsement guaranteed Associated Bank.” Through post-audit, the province discovered that
the hospital did not receive several allotted checks, and sought the restoration of the debited
amounts from PNB. In turn, PNB demanded reimbursement from Associated Bank. Both banks
resisted payment. Hence, the present action.

ISSUE: Who shall bear the loss resulting from the forged checks.

HELD: PNB is not negligent as it is not required to return the check to the collecting bank within
24 hours as the banks involved are covered by Central Bank Circular 580 and not the rules of
the Philippine Clearing House. Associated Bank, and not PNB, is the one duty-bound to warrant
the instrument as genuine, valid and subsisting at the time of indorsement pursuant to Section
66 of the Negotiable Instruments Law. The stamp guaranteeing prior indorsement is not an
empty rubric; the collecting bank is held accountable for checks deposited by its customers.
However, due to the fact that the Province of Tarlac is equally negligent in permitting
Pangilinan to collect the checks when he was no longer connected with the hospital, it shares
the burden of loss from the checks bearing a forged indorsement. Therefore, the Province can
only recover 50% of the amount from the drawee bank (PNB), and the collecting bank
(Associated Bank) is liable to PNB for 50% of the same amount.

BPI vs. CA, GR No. L-102383

FACTS:
Petitioner’s checks were drawn and deposited to respondent CBC. It was discovered that the
signature of payee was forged.

ISSUE:
Whether or not a drawee bank could claim reimbursement from collecting bank in case of
forgery.

RULING:
YES. Both banks were negligent in the selection and supervision of their employees resulting in
the encashment of the forged checks by an impostor. Both banks were not able to overcome
the presumption of negligence in the selection and supervision of their employees. Considering
the comparative negligence of the two (2) banks, court ruled that the demands of substantial
justice are satisfied by allocating the loss and the costs of the arbitration proceeding and the
cost of litigation on a 60-40 ratio.

PNB vs. Quimpo, GR No. L-53194

FACTS:
Francisco Gozon was a depositor of the Philippine National Bank (PNB Caloocan City branch).
Ernesto Santos, Gozon’s friend, took a check from the latter’s checkbook which was left in the
car, filled it up for the amount of P5,000, forged Gozon’s signature, and encashed it. Gozon
learned about the transaction upon receipt of the bank’s statement of account, and requested
the bank to recredit the amount to his account. The bank refused. Hence, the present action.

Page 51 of 83
ISSUE:
Whether or not the bank shall bear the loss resulting from the forged check.

HELD:
Yes. 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 being encashed or presented to it. Payment in neglect of duty
places upon him the result of such negligence. Still, Gozon’s act in leaving his checkbook in the
car, where his trusted friend remained in, cannot be considered negligence sufficient to excuse
the bank from its own negligence. The bank bears the loss.

Gempesaw vs. CA, GR No. 92244

Associated Bank vs. CA, GR No. 107612

Republic Bank vs. Ebrada, GR No. L-40796

FACTS:
Mauricia Ebrada encashed a back pay check for P1246.08 at Republic Bank (Escolta Branch).
The Bureau of Treasury, which issued the check advised the bank that the alleged indorsement
of the check by one “Martin Lorenzo” was a forgery as the latter has been dead since 14 July
1952; and requested that it be refunded he sum deducted from its account. The bank refunded
the amount to the Bureau and demanded upon Ebrada the sum in question, who refused.
Hence, the present action.

ISSUE:
Whether or not the bank can recover from the last indorser.

HELD:
According to Section 23 of the Negotiable Instruments Law, where the signature on a
negotiable instrument is forged, the negotiation of the check is without force or effect.
However, following the ruling in Beam vs. Farrel (US case), where a check has several
indorsements on it, only the negotiation based on the forged or unauthorized signature which is
inoperative. The last indorser, Ebrada, was duty-bound to ascertain whether the check was
genuine before presenting it to the bank for payment. Her failure to do so makes her liable for
the loss and the Bank may recover from her the money she received for the check. Had she
performed her duty, the forgery would have been detected and fraud defeated. Even if she
turned over the amount to Dominguez immediately after receiving the cash proceeds of the
check, she is liable as an accommodation party under Section 29 of the Negotiable Instruments
Law.

Philippine Commercial and International Bank vs. CA, GR No. 121413

FACTS:
These consolidated petitions involve several fraudulently negotiated checks. The original actions
a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A.
(Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank) [formerly

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Insular Bank of Asia and America], the value of several checks payable to the Commissioner of
Internal Revenue, which were embezzled allegedly by an organized syndicate.

The plaintiff Ford drew and issued its Citibank check in favor of the Commissioner of Internal
Revenue as payment of plaintiff’s percentage or manufacturer’s sales taxes. The aforesaid
check was deposited with the defendant IBAA (now PCIBank) and was subsequently cleared at
the Central Bank. Upon presentment with the defendant Citibank, the proceeds of the check
was paid to IBAA as collecting or depository bank. The proceeds of the same Citibank check of
the plaintiff was never paid to or received by the payee thereof, the Commissioner of Internal
Revenue.

In a letter by the acting CIR, Ford was informed that its check was not paid to the government
or its authorized agent but was encashed by unauthorized persons. An investigation revealed
that Ford’s general ledger accountant had recalled the check purportedly because of an error in
the computation of tax due. With his instruction, PCIBank replaced the check with two of its
own Manager’s Checks which were subsequently deposited with another bank.

ISSUE:
Whether PCIB is liable to reimburse Ford for the payment of the crossed check.

RULING:
Yes. Indeed, the crossing of the check with the phrase “Payee’s Account Only,” is a warning
that the check should be deposited only in the account of the CIR. Thus, it is the duty of the
collecting bank PCIBank to ascertain that the check be deposited in payee’s account only.
Therefore, it is the collecting bank (PCIBank) which is bound to scruninize the check and to
know its depositors before it could make the clearing indorsement “all prior indorsements
and/or lack of indorsement guaranteed”.

The mere fact that the forgery was committed by a drawer-payors confidential employee or
agent, who by virtue of his position had unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does NOT entitle the bank to shift the loss to the
drawer-payor, in the absence of some circumstance raising estoppel against the drawer. This
rule likewise applies to the checks fraudulently negotiated or diverted by the confidential
employees who hold them in their possession.

In this case, there was no evidence presented confirming the conscious participation of PCIBank
in the embezzlement. As a general rule, however, a banking corporation is liable for the
wrongful or tortuous acts and declarations of its officers or agents within the course and scope
of their employment. A bank will be held liable for the negligence of its officers or agents when
acting within the course and scope of their employment. It may be liable for the tortuous acts
of its officers even as regards that species of tort of which malice is an essential element. In
this case, we find a situation where the PCIBank appears also to be the victim of the scheme
hatched by a syndicate in which its own management employees had participated.

A bank holding out its officers and agents as worthy of confidence will not be permitted to profit
by the frauds these officers or agents were enabled to perpetrate in the apparent course of
their employment; nor will it be permitted to shirk its responsibility for such frauds, even though
no benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the

Page 53 of 83
fraudulent acts or representations of an officer or agent acting within the course and apparent
scope of his employment or authority. And if an officer or employee of a bank, in his official
capacity, receives money to satisfy an evidence of indebtedness lodged with his bank for
collection, the bank is liable for his misappropriation of such sum.

Lastly, banking business requires that the one who first cashes and negotiates the check must
take some precautions to learn whether or not it is genuine. And if the one cashing the check
through indifference or other circumstance assists the forger in committing the fraud, he should
not be permitted to retain the proceeds of the check from the drawee whose sole fault was that
it did not discover the forgery or the defect in the title of the person negotiating the instrument
before paying the check. For this reason, a bank which cashes a check drawn upon another
bank, without requiring proof as to the identity of persons presenting it, or making inquiries
with regard to them, cannot hold the proceeds against the drawee when the proceeds of the
checks were afterwards diverted to the hands of a third party. In such cases the drawee bank
has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who
encashed a check which had been forged or diverted and in turn received payment thereon
from the drawee, is guilty of negligence which proximately contributed to the success of the
fraud practiced on the drawee bank. The latter may recover from the holder the money paid on
the check.

Traders Royal Bank vs. Radio Philippines Network, Inc., 390 SCRA 608

FACTS:
RPN, IBC and BBC were all assessed for tax by the BIR. To pay the assessed taxes,
they bought manager’s checks from petitioner bank. None of these checks were paid to
the BIR. They were found to have been deposited in the account of a third person in
Security Bank. As the taxes remained unpaid, the BIR issued a levy, distraint and garnishment
against the three networks. An action was filed wherein it was decided that the
networks should be reimbursed for the amounts of the checks by petitioner bank and the latter
in turn, must be reimbursed by Security Bank. In the appellate court, it was held that
Traders Bank should be the only bank liable.

HELD:
Petitioner ought to have known that where a check is drawn payable to the order of one person
and is presented for payment by another and purports upon its face to have been duly indorsed
by the payee of the check, it is the primary duty of the petitioner to know that the check
was duly indorsed by the original payee, and it pays the amount of the check to the third
person, who has forged the signature of the payee, the loss falls upon the petitioner who
cashed the check. Its only remedy is against the person
to whom it paid the money.

It should be further noted that one of the checks was a crossed check. The crossing of the
check should have put petitioner on guard; it was duty-bound to ascertain the
indorser’s title to the check or the nature of his possession.

Jai-Alai Corp. of the Phils. vs. BPI, GR No. L-29432

Page 54 of 83
FACTS:
Petitioner acquired 10 checks from a certain Antonio Ramirez. The said checks were deposited
by the petitioner to the respondent bank. The Respondent bank temporarily credited the said
checks to the account of the petitioner. After 3 months, the checks were found out to be
forged. The respondent bank debited the account of the petitioner. The petitioner filed a
collection of sums of money against the respondent. The CFI and the CA dismissed the said
complaint, hence this case.

ISSUE:
Whether the respondent is liable to return the amount debited from the account of the
Petitioner.

HELD:
No, the respondent acted within legal bounds when it debited the petitioner’s account. When
the petitioner deposited the checks with the respondent, the nature of the relationship created
at that stage was one of agency, that is, the bank was to collect from the drawees of the
checks the corresponding proceeds. It is true that the respondent had already collected the
proceeds of the checks when it debited the petitioner’s account. Section 23 of the Negotiable
Instruments Law states that “When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any party
thereto, can be acquired through or under such signature, unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of authority.”

The International Corporate Bank, Inc. vs. CA, GR No. 129910

FACTS:
The Ministry of Education and Culture issued 15 checks drawn against Philippine National Bank
(PNB). Petitioner International Corporate Bank, Inc. (ICB) accepted the checks for deposit on
various dates.

After 24 hours from submission of the checks to PNB for clearing, ICB paid the value of the
checks and allowed the withdrawals of the deposits. However, on 14 October 1981, PNB
returned all the checks to petitioner without clearing them because the serial number of the
checks were materially altered. Thus, ICB instituted an action for collection of sums of money
against PNB to recover the value of the checks.

RTC Ruling: ICB is not entitled to recover the value of the checks from PNB because the ICB
failed to inquire on the status of the checks before paying their value. PNB cannot be faulted for
the delay in clearing the checks considering the ingenuity in which the alterations were
effected.

CA Ruling on its 10 October 1991 Decision: It reversed the trial court’s decision. Applying
Section 4(c) of Central Bank Circular No. 580, series of 1977, it held that checks that have been
materially altered shall be returned within 24 hours after discovery of the alteration. However, it
ruled that even if the drawee bank returns a check with material alterations after discovery of
the alteration, the return would not relieve the drawee bank from any liability for its failure to
return the checks within the 24-hour clearing period.

Page 55 of 83
Respondent filed a Motion for Reconsideration on 6 November 1991 but the Registry Return
Receipt shows that counsel for respondent or his agent received a copy of the 10 October 1991
Decision on 16 October 1991. The motion was filed late.

Despite its late filing, the Court of Appeals resolved to admit the motion for reconsideration “in
the interest of substantial justice.” In its 9 August 1994 Amended Decision, the Court of Appeals
reversed itself and affirmed the Decision of the trial court dismissing the complaint. The CA held
that its 10 October 1991 Decision failed to appreciate that the rule on the return of altered
checks within 24 hours from the discovery of the alteration had been duly passed by the Central
Bank and accepted by the members of the banking system. Until the rule is repealed or
amended, the rule has to be applied.

In its 16 July 1997 Resolution, the Court of Appeals denied the Motion for Reconsideration of
ICB for lack of merit so the latter filed the petition before the Supreme Court under both Rules
45 and 65.

ISSUES:
1. Whether or not the checks were materially altered.
2. Whether or not the motion for reconsideration filed by respondent was out of time thus
making the 10 October 1991 Decision final and executory.
3. Whether or not the filing of the petition under both Rules 45 and 65 is proper.

RULING:
1. An alteration on the serial number of a check is not a material alteration. The Court held that
since there were no material alterations on the checks, respondent Philippine National Bank is
liable to petitioner International Corporate Bank, Inc. for the value of the checks amounting to
P1,447,920, with legal interest from 16 March 1982 until full payment.

In Philippine National Bank v. Court of Appeals, it already ruled that the alteration on the serial
number of a check is not a material alteration. Thus, an alteration is said to be material if it
alters the effect of the instrument. It means an unauthorized change in an instrument that
purports to modify in any respect the obligation of a party or an unauthorized addition of words
or numbers or other change to an incomplete instrument relating to the obligation of a party. In
other words, a material alteration is one which changes the items which are required to be
stated under Section 1 of the Negotiable Instruments Law.

2. With regard to the timeliness of filing of respondent’s Motion for Reconsideration, the Court
reiterated that there are instances when rules of procedure are relaxed in the interest of justice.
However, in this case, PNB did not proffer any explanation for the late filing of the motion for
reconsideration. Instead, there was a deliberate attempt to deceive the Court of Appeals by
claiming that the copy of the 10 October 1991 Decision was received on 22 October 1991
instead of on 16 October 1991. The Court of Appeals admission of the motion for
reconsideration is not justified. Thus, the late filing of the motion for reconsideration rendered
the 10 October 1991 Decision final and executory.

3. The remedies of appeal and certiorari are mutually exclusive and not alternative or
successive. However, the Court found the petition to be meritorious so it resolved the issue and

Page 56 of 83
set aside technicality for this justifiable reason. Additionally, the petition was filed on time both
under Rules 45 and 65. Hence, in accordance with the liberal spirit which pervades the Rules of
Court and in the interest of justice, it treated the petition as having been filed under Rule 45.

NOTES:
Petitioners may not delegate upon the court the task of determining under which rule should
the petition should fall; A petition cannot be subsumed simultaneously under Rule 45 and Rule
65 of the Rules of Court, and neither may petitioners delegate upon the court the task of
determining under which rule the petition should fall– Respondent asserts that the petition
should be dismissed outright since petitioner availed of a wrong mode of appeal. Respondent
cites Ybañez v. Court of Appeals where the Court ruled that “a petition cannot be subsumed
simultaneously under Rule 45 and Rule 65 of the Rules of Court, and neither may petitioners
delegate upon the court the task of determining under which rule the petition should fall.”

Areza vs. Express Savings Bank, Inc., GR No. 176697

FACTS:
Petitioners Cesar V. Areza and LolitaB. Areza maintained two bank deposits with respondent
Express Savings Bank’s Biñan branch. They were engaged in the business of “buy and sell” of
brand new and second-hand motor vehicles. They received an order from a certain Gerry
Mambuay for the purchase of a second-hand Mitsubishi Pajero and a brand-new Honda CRV.

The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs Office (PVAO)
checks payable to different payees and drawn against the Philippine Veterans Bank (drawee),
each valued at Two Hundred Thousand Pesos (₱200,000.00) for a total of One Million Eight
Hundred Thousand Pesos (₱1,800,000.00).

Petitioners deposited the said checks in their savings account with Express Savings Bank which,
in turn, deposited the checks with its depositary bank, Equitable-PCI Bank. Equitable-PCI Bank
presented the checks to the drawee, the Philippine Veterans Bank, which honored the checks.
Petitioners were informed that the checks they deposited with Express Savings were honored.
The entire amount of ₱1,800,000.00 was credited to petitioners’ savings account. Petitioners
then released the two cars to the buyer.

Two months later, the subject checks were returned by PVAO to the drawee on the ground that
the amount on the face of the checks was altered from the original amount of ₱4,000.00 to
₱200,000.00. The drawee returned the checks to Equitable-PCI Bank by way of Special Clearing
Receipts. Equitable-PCI Bank, in turn, debited the deposit account of Express Savings in the
amount of ₱1,800,000.00.

Express Savings then closed the Special Savings Account of the petitioners with a balance of
₱1,179,659.69 and transferred said amount to their savings account. Express Savings then
withdrew the amount of ₱1,800,000.00 representing the returned checks from petitioners’
savings account.

ISSUE:

Page 57 of 83
Whether Express Savings had the right to debit the amount of ₱1,800,000.00 from the
petitioners’ accounts and whether the bank’s act of debiting was done without the petitioners’
knowledge.

RULING:
Section 63 of Act No. 2031 or the Negotiable Instruments Law provides that the acceptor, by
accepting the instrument, engages that he will pay it according to the tenor of his acceptance.
The acceptor is a drawee who accepts the bill.

In case the negotiable instrument is altered before acceptance, is the drawee liable for the
original or the altered tenor of acceptance? The acceptor/drawee despite the tenor of his
acceptance is liable only to the extent of the bill prior to alteration. This view appears to be in
consonance with Section 124 of the Negotiable Instruments Law which states that a material
alteration avoids an instrument except as against an assenting party and subsequent indorsers,
but a holder in due course may enforce payment according to its original tenor. Thus, when the
drawee bank pays a materially altered check, it violates the terms of the check, as well as its
duty to charge its client’s account only for bona fide disbursements he had made. If the drawee
did not pay according to the original tenor of the instrument, as directed by the drawer, then it
has no right to claim reimbursement from the drawer, much less, the right to deduct the
erroneous payment it made from the drawer’s account which it was expected to treat with
utmost fidelity. The drawee, however, still has recourse to recover its loss. It may pass the
liability back to the collecting bank which is what the drawee bank exactly did in this case. It
debited the account of Equitable-PCI Bank for the altered amount of the checks.

When petitioners deposited the check with Express Savings Bank, they were designating the
latter as the collecting bank. A collecting bank is defined as any bank handling an item for
collection except the bank on which the check is drawn. After receiving the deposit, under its
own rules, Express Savings shall credit the amount in petitioners’ account or infuse value
thereon only after the drawee bank shall have paid the amount of the check or the check has
been cleared for deposit.

Express Savings and Equitable-PCI Bank are both depositary and collecting banks. A
depositary/collecting bank where a check is deposited, and which endorses the check upon
presentment with the drawee bank, is an endorser. Under Section 66 of the Negotiable
Instruments Law, an endorser warrants “that the instrument is genuine and in all respects what
it purports to be; that he has good title to it; that all prior parties had capacity to contract; and
that the instrument is at the time of his endorsement valid and subsisting.” It has been
repeatedly held that in check transactions, the depositary/collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to ascertain the genuineness
of the endorsements.

If any of the warranties made by the depositary/collecting bank turns out to be false, then the
drawee bank may recover from it up to the amount of the check.

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

Page 58 of 83
primarily engaged in banking holds itself out to the public as the expert and the law holds it to
a high standard of conduct. As collecting banks, Express Savings and Equitable-PCI Bank are
both liable for the amount of the materially altered checks. Since Equitable-PCI Bank is not a
party to this case and Express Savings allowed its account with Equitable PCI Bank to be
debited, it has the option to seek recourse against the latter in another forum.

Metropolitan Bank and Trust Company vs. Cabilzo, GR No. 154469

FACTS:
Cabilzo issued a Metrobank Check payable to “CASH” and postdated on November 24, 1994 in
the amount of P1,000.00. The check was drawn against Cabilzo’s account with Metrobank and
was paid by Cabilzo to a certain Mr. Marquez, as his sales commission.

Subsequently, the check was presented to Westmont Bank for payment. Westmont Bank, in
turn, indorsed the check to Metrobank for appropriate clearing. After the entries thereon were
examined, including the availability of funds and the authenticity of the signature of the drawer,
Metrobank cleared the check for encashment in accordance with the Philippine Clearing House
Corporation (PCHC) Rules.

Cabilzo discovered that Metrobank Check No. 985988 which he issued on 12 November 1994 in
the amount of P1,000.00 was altered to P91,000.00 and the date 24 November 1994 was
changed to 14 November 1994. Cabilzo demanded that Metrobank re-credit the amount of
P91,000.00 to his account. Third-Party Complaint was then filed by Westmont bank because
another case involving the same cause of action was pending before a different court.

The trial court granted the Motion to Dismiss the Third-Party Complaint on the ground of litis
pendentia. On 4 September 1998, the RTC rendered a Decision in favor of Cabilzo and thereby
ordered Metrobank to pay the sum of P90,000.00, the amount of the check. The Court of
Appeals affirmed the RTC’s decision. Hence this petition.

ISSUE:
Whether or not Metrobank is liable for the alterations on the subject check bearing the forged
signature of the drawer.

RULING:
Yes. An alteration is said to be material if it changes the effect of the instrument. It means that
an unauthorized change in an instrument that purports to modify in any respect the obligation
of a party or an unauthorized addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party. In other words, a material alteration is one
which changes the items which are required to be stated under Section 1 of the Negotiable
Instruments Law. In the present case, it is obvious that Metrobank was remiss in that duty and
violated that relationship. As observed by the Court of Appeals, there are material alterations on
the check that are visible to the naked eye.

Surprisingly, however, Metrobank failed to detect the above alterations which could not escape
the attention of even an ordinary person. This negligence was exacerbated by the fact that, as
found by the trial court, the check in question was examined by the cash custodian whose
functions do not include the examinations of checks indorsed for payment against drawer’s

Page 59 of 83
accounts. Obviously, the employee allowed by Metrobank to examine the check was not verse
and competent to handle such duty. WHEREFORE, the instant Petition is DENIED.

Bank of America vs. Philippine Racing Club, GR No. 150228

FACTS:
The President and Vice President of Philippine Racing Club Inc. went abroad for the
corporation’s business. In order not to disrupt operations in their absence, they pre-signed
several checks to have available cash to settle obligations that might become due. The checks
were entrusted to the accountant. A certain John Doe presented to the bank for encashment a
couple of checks.

These two (2) checks were among those pre-signed. The checks had similar infirmities and
irregularities. Despite said irregularities, the bank did not verify and confirm the legitimacy of
the checks but immediately encashed them.

An investigation yielded that there was no transaction involving the payment out of the subject
checks. It had been found out, however, that one Clarita Mesina completed without authority
the entries on the pre-signed checks.

ISSUE:
Whether the proximate cause of the wrongful encashment was due to (a) the bank’s failure to
make a verification or (b) the pre-signing of blank checks and leaving the same with its
employees.

RULING:
The bank insists that pursuant to Sections 14 and 16 of the NIL, it could validly presume, upon
presentation of the checks, that the party who filled up the blanks had authority and that a
valid and intentional delivery to the party presenting the checks had taken place.

It argues that there was delivery because the gross negligence of the accountant in safekeeping
the checks should be treated as a voluntary delivery by the maker who is estopped from
claiming non-delivery of the instrument.

The contention would have been correct if the subject checks were correctly and properly filled
out by the thief and presented to the bank in good order. In that instance, there would be
nothing to give notice to the bank of any infirmity in the title of the holder of the checks and it
could validly presume that there was proper delivery to the holder.

The bank could not be faulted if it encashed the checks under those circumstances. In all, the
subject checks are properly characterized as incomplete and undelivered instruments making
Section 15 of the NIL applicable.

The practice of pre-signing of blank checks is a seriously negligent behavior and a highly risky
means of ensuring the efficient operation of businesses. It should be foreseen that the pre-
signed blank checks could fall into the wrong hands.

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Following established jurisprudence, the allocation of sixty percent (60%) of the actual
damages involved in this case to the bank is proper. The corporation also bears forty percent
(40%) of the loss.

Patrimonio vs. Gutierrez, GR No. 187769

FACTS:
The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a business
venture under the name of Slam Dunk Corporation (Slum Dunk). Petitioner was a decorated
professional basketball player while Gutierrez was a well-known sports columnist. Petitioner pre-
signed several checks to answer for the expenses of Slam Dunk.

Although signed, these checks had no payee’s name, date or amount. The blank checks were
entrusted to Gutierrez with the specific instruction not to fill them out without previous
notification to and approval by the petitioner.

Without the petitioner’s knowledge and consent, Gutierrez went to Marasigan to secure a loan.
Marasigan acceded to Gutierrez’ request and gave him P200,000.00 from one of the blank
checks the petitioner pre-signed with the blank portions filled out. Marasigan deposited the
check but it was dishonored for the reason “ACCOUNT CLOSED.” It was later revealed that
petitioner’s account with the bank had been closed.

Marasigan sought recovery from Gutierrez, to no avail. He sent demand letters to the petitioner
asking for the payment of P200,000.00, but his demands likewise went unheeded.
Consequently, he filed a criminal case for violation of B.P. 22 against the petitioner.

ISSUE:
Whether respondent Gutierrez has completely filled out the subject check strictly under the
authority given by the petitioner.

RULING:
Gutierrez has exceeded the authority to fill up the blanks and use the check. Petitioner gave
Gutierrez pre-signed checks to be used in their business provided that he could only use them
upon his approval.

While Gutierrez had a prima facie authority to complete the check, such does not extend to its
use once the check is completed. The law used the term “prima facie” to underscore that the
authority is a presumption juris tantum only; hence, subject to subject to contrary proof. Thus,
evidence that the authority granted has been exceeded may be presented by the maker in
order to avoid liability under the instrument. In the present case, no evidence is on record that
Gutierrez ever secured prior approval from the petitioner to fill up the blank or to use the check.

Notably, Gutierrez was only authorized to use the check for business expenses; thus, he
exceeded the authority when he used the check to pay the loan he supposedly contracted for
the construction of petitioner’s house. This is a clear violation of the petitioner’s instruction to
use the checks for the expenses of Slam Dunk. It cannot therefore be validly concluded that the
check was completed strictly in accordance with the authority given by the petitioner.

Page 61 of 83
Engr. Jose £. Cayanan vs. North Star International Travel, Inc., GR No. 172954

FACTS:
North Star International Travel Incorporated (North Star) is a corporation engaged in the travel
agency business while petitioner is the owner/general manager of JEAC International
Management and Contractor Services, a recruitment agency. On March 17, 1994, Virginia
Balagtas, the General Manager of North Star, in accommodation and upon the instruction of its
client, petitioner herein, sent the amount of US$60,000 to View Sea Ventures Ltd., in Nigeria
from her personal account in Citibank Makati. On March 29, 1994, Virginia again sent
US$40,000 to View Sea Ventures by telegraphic transfer, with US$15,000 coming from
petitioner. Likewise, on various dates, North Star extended credit to petitioner for the airplane
tickets of his clients, with the total amount of such indebtedness under the credit extensions
eventually reaching P510,035.47. To cover payment of the foregoing obligations, petitioner
issued five checks to North Star. When presented for payment, the checks in the amount of
P1,500,000 and P35,000 were dishonored for insufficiency of funds while the other three checks
were dishonored because of a stop payment order from petitioner. North Star, through its
counsel, wrote petitioner on September 14, 1994 informing him that the checks he issued had
been dishonored. North Star demanded payment, but petitioner failed to settle his obligations.
Hence, North Star instituted Criminal Case Nos. 166549-53 charging petitioner with violation of
Batas Pambansa Blg. 22, or the Bouncing Checks Law before the Metropolitan Trial Court
(MeTC) of Makati City.

ISSUE:
Whether or not the checks were issued for a valuable consideration entitling respondent to
damages.

HELD:
Yes. We have held that upon issuance of a check, in the absence of evidence to the contrary, it
is presumed that the same was issued for valuable consideration which may consist either in
some right, interest, profit or benefit accruing to the party who makes the contract, or some
forbearance, detriment, loss or some responsibility, to act, or labor, or service given, suffered or
undertaken by the other side. Under the Negotiable Instruments Law , it is presumed that every
party to an instrument acquires the same for a consideration or for value. As petitioner alleged
that there was no consideration for the issuance of the subject checks, it devolved upon him to
present convincing evidence to overthrow the presumption and prove that the checks were in
fact issued without valuable consideration. Sadly, however, petitioner has not presented any
credible evidence to rebut the presumption, as well as North Stars assertion, that the checks
were issued as payment for the US$85,000 petitioner owed.

Petitioner claims that North Star did not give any valuable consideration for the checks since the
US$85,000 was taken from the personal dollar account of Virginia and not the corporate funds
of North Star. The contention, however, deserves scant consideration. The subject checks,
bearing petitioners signature, speak for themselves. The fact that petitioner himself specifically
named North Star as the payee of the checks is an admission of his liability to North Star and
not to Virginia Balagtas, who as manager merely facilitated the transfer of funds. Indeed, it is
highly inconceivable that an experienced businessman like petitioner would issue various checks
in sizeable amounts to a payee if these are without consideration. Moreover, we note that
Virginia Balagtas averred in her Affidavit that North Star caused the payment of the US$60,000

Page 62 of 83
and US$25,000 to View Sea Ventures to accommodate petitioner, which statement petitioner
failed to refute. In addition, petitioner did not question the Statement of Account No. 8639
dated August 31, 1994 issued by North Star which contained itemized amounts including the
US$60,000 and US$25,000 sent through telegraphic transfer to View Sea Ventures per his
instruction. Thus, the inevitable conclusion is that when petitioner issued the subject checks to
North Star as payee, he did so to settle his obligation with North Star for the US$85,000. And
since the only payment petitioner made to North Star was in the amount of P220,000.00, which
was applied to interest due, his liability is not extinguished. Having failed to fully settle his
obligation under the checks, the appellate court was correct in holding petitioner liable to pay
the value of the five checks he issued in favor of North Star.

VII. ENFORCEMENT OF LIABILITY

Far East Realty Investment, Inc. vs. CA, GR No. L-36549

FACTS:
On September 13, 1960, the private respondents, because of business needs, applied for an
accommodation loan in the amount of Php4,500.00 with petitioner Far East Realty Investment
Inc. They promised to pay jointly and severally, in one month time and delivered to petitioner a
check dated September 13, 1960, for P4,500.00, drawn by Dy Hian Tat, and signed by them at
the back. They assured the petitioner that they would redeem the said check by paying in cash
the said amount after a month from September 13, 1960, or that the said check could be
presented for payment on or after a month from the date indicated on the check.

The accommodation loan was extended to the respondents, however, on March 5, 1964, when
the check was presented for payment to the the China Banking Corporation, said check
bounced because the current account of the drawer had already been closed. Demand for
payment failed so the petitioner filed an action for the collection and payment of P4,500.00
representing the face value of the unpaid and dishonored check.

ISSUE:
Whether or not presentment for payment and notice of dishonor of the questioned check were
made within reasonable time.

RULING:
The Court ruled that, in this case, presentment and notice of dishonor were not made within a
reasonable time. The check was issued on September 13, 1960, but was presented to the
drawee bank only on March 5, 1964, and dishonored on the same date. After dishonor by the
drawee bank, a formal notice of dishonor was made by the petitioner through a letter dated
April 27, 1968. The petitioner failed to exercise prudence and diligence on what he ought to do
as required by law. Likewise, it failed to show any justification for the unreasonable delay.

Reasonable time” has been defined as so much time as is necessary under the circumstances
for a reasonable prudent and diligent man to do, conveniently, what the contract or duty
requires should be done, having a regard for the rights, and possibility of loss, if any, to the
other party (Citizens’ Bank Bldg. v. L & E. Wertheirmer 189 S.W. 361, 362, 126 Ark, 38, Ann.
Cas. 1917 E, 520).

Page 63 of 83
NOTES:
Where an instrument is payable on demand, presentment must be made within a reasonable
time after issue; Reasonable time depends upon the peculiar facts and circumstances in each
case. – Where the instrument is not payable on demand, presentment must be made on the
day it falls due. Where it is payable on demand, presentment must be made within a reasonable
time after issue, except that in the case of a bill of exchange, presentment for payment will be
sufficient if made within a reasonable time after the last negotiation thereof. (Section 71,
Negotiable Instruments Law).

Notice may be given as soon as the instrument is dishonored; and unless delay is excused must
be given within the time fixed by the law (Section 102, Negotiable Instruments Law).

No hard and fast demarcation line can be drawn between what may be considered as a
reasonable or an unreasonable time, because “reasonable time” depends upon the peculiar
facts and circumstances in each case (Tolentino, Commentaries and Jurisprudence on
Commercial Laws of the Philippines, Vol. I, Eighth Edition, p. 327).

Wong vs. CA, GR No. 117857

FACTS:
Petitioner Wong was an agent of Limtong Press. Inc. (LPI), a manufacturer of calendars. LPI
would print sample calendars, then give them to agents to present to customers. The agents
would get the purchase orders of customers and forward them to LPI. After printing the
calendars, LPI would ship the calendars directly to the customers.

Thereafter, the agents would come around to collect the payments. Petitioner, however, had a
history of unremitted collections, which he duly acknowledged in a confirmation receipt he co-
signed with his wife. Hence, petitioner’s customers were required to issue postdated checks
before LPI would accept their purchase orders.

In early December 1985, Wong issued six (6) postdated checks totaling P18,025.00, all dated
December 30, 1985 and drawn payable to the order of LPI. These checks were initially intended
to guarantee the calendar orders of customers who failed to issue post-dated checks.

However, following company policy, LPI refused to accept the checks as guarantees. Instead,
the parties agreed to apply the checks to the payment of petitioner’s unremitted collections for
1984 amounting to P18,077.07. LPI waived the P52.07 difference. Before the maturity of the
checks, petitioner prevailed upon LPI not to deposit the checks and promised to replace them
within 30 days. However, petitioner reneged on his promise.

Hence, on June 5, 1986, LPI deposited the checks with Rizal Commercial Banking Corporation
(RCBC). The checks were returned for the reason “account closed.” The dishonor of the checks
was evidenced by the RCBC return slip.

On June 20, 1986, complainant through counsel notified the petitioner of the dishonor.
Petitioner failed to make arrangements for payment within five (5) banking days.

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On November 6, 1987, petitioner was charged with three (3) counts of violation of B.P. Blg. 224
under three separate Informations for the three checks amounting to P5,500.00, P3,375.00,
and P6,410.00.

Petitioner was similarly charged in Criminal Case No. 12057 for ABC Check No. 660143463 in
the amount of P3,375.00, and in Criminal Case No. 12058 for ABC Check No. 660143464 for
P6,410.00. Both cases were raffled to the same trial court. The version of the defense is that
petitioner issued the six (6) checks to guarantee the 1985 calendar bookings of his customers.
According to petitioner, he issued the checks not as payment for any obligation, but to
guarantee the orders of his customers. Petitioner appealed his conviction to the Court of
Appeals.

On October 28, 1994, it affirmed the trial court’s decision in toto. Hence, the present petition.

ISSUE:
Whether or not the prosecution was able to establish beyond reasonable doubt all the elements
of the offense penalized under B.P. Blg. 22.

RULING:
Yes. As to the second element, B.P. Blg. 22 creates a presumption juris tantum that the second
element prima facie exists when the first and third elements of the offense are present. Thus,
the maker’s knowledge is presumed from the dishonor of the check for insufficiency of funds.

Petitioner contends that the first element does not exist because the checks were not issued to
apply for account or for value. He attempts to distinguish his situation from the usual “cut-and-
dried” B.P. 22 case by claiming that the checks were issued as guarantee and the obligations
they were supposed to guarantee were already paid.

This flawed argument has no factual basis, the RTC and CA having both ruled that the checks
were in payment for unremitted collections, and not as guarantee. Likewise, the argument has
no legal basis, for what B.P. Blg. 22 punishes is the issuance of a bouncing check and not the
purpose for which it was issued nor the terms and conditions relating to its issuance. As to the
second element, B.P. Blg. 22 creates a presumption juris tantum that the second element prima
facie exists when the first and third elements of the offense are present. Thus, the maker’s
knowledge is presumed from the dishonor of the check for insufficiency of funds.

An essential element of the offense is “knowledge” on the part of the maker or drawer of the
check of the insufficiency of his funds in or credit with the bank to cover the check upon its
presentment. Since this involves a state of mind difficult to establish, the statute itself creates a
prima facie presumption of such knowledge where payment of the check “is refused by the
drawee because of insufficient funds in or credit with such bank when presented within ninety
(90) days from the date of the check.”

To mitigate the harshness of the law in its application, the statute provides that such
presumption shall not arise if within five (5) banking days from receipt of the notice of dishonor,
the maker or drawer makes arrangements for payment of the check by the bank or pays the
holder the amount of the check.

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The clear import of the law is to establish a prima facie presumption of knowledge of such
insufficiency of funds under the following conditions (1) presentment within 90 days from date
of the check, and (2) the dishonor of the check and failure of the maker to make arrangements
for payment in full within 5 banking days after notice thereof.

That the check must be deposited within ninety (90) days is simply one of the conditions for the
prima facie presumption of knowledge of lack of funds to arise. It is not an element of the
offense.

International Corporate Bank vs. Spouses Gueco, GR No. 141968

FACTS:
The respondent Gueco Spouses obtained a loan from petitioner (now UnionBank) to purchase a
car. Hence, the Spouses executed promissory notes which were payable in monthly installments
and chattel mortgage over the car to serve as security for the notes.

The Spouses defaulted in payment. The Bank, therefore, filed a civil action for "Sum of Money
with Prayer for a Writ of Replevin" before the MTC. The car was detained inside the Bank’s
compound.

Dr. Gueco delivered a manager's check in amount of P150,000.00 but the car was not released
because of his refusal to sign the Joint Motion to Dismiss for they had not yet filed their
Answer. The Bank insisted that the joint motion to dismiss is standard operating procedure in
their bank to effect a compromise and to preclude future filing of claims, counterclaims or suits
for damages.

After several demand letters and meetings with bank representatives, the spouses initiated a
civil action for damages. The RTC held that there was a meeting of the minds between the
parties as to the reduction of the amount of indebtedness and the release of the car but said
agreement did not include the signing of the joint motion to dismiss as a condition sine qua non
for the effectivity of the compromise.

ISSUE:
(1) Whether or not there was an agreement with respect to the execution of the joint motion to
dismiss as a condition for the compromise agreement; and (2) Whether or not the spouses are
entitled for damages arising from fraud.

RULING:
(1) No. Being an affirmative allegation, petitioner has the burden of evidence to prove his claim
that the oral compromise entered into by the parties included the stipulation that the parties
would jointly file a motion to dismiss. This petitioner failed to do. Notably, even the
Metropolitan Trial Court, while ruling in favor of the petitioner and thereby dismissing the
complaint, did not make a factual finding that the compromise agreement included the
condition of the signing of a joint motion to dismiss.

(2) No. The Court failed to see how the act of the petitioner bank in requiring the respondent to
sign the joint motion to dismiss could constitute as fraud.

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Fraud has been defined as the deliberate intention to cause damage or prejudice. Petitioner
may have been remiss in informing Dr. Gueco that the signing of a joint motion to dismiss is a
standard operating procedure of petitioner bank. However, this cannot in any way have
prejudiced Dr. Gueco.

The whole point of the parties entering into the compromise agreement was in order that Dr.
Gueco would pay his outstanding account and in return petitioner would return the car and
drop the case for money and replevin before the Metropolitan Trial Court. The joint motion to
dismiss was but a natural consequence of the compromise agreement and simply stated that
Dr. Gueco had fully settled his obligation, hence, the dismissal of the case.

Hence, petitioner's act of requiring Dr. Gueco to sign the joint motion to dismiss cannot be said
to be a deliberate attempt on the part of petitioner to renege on the compromise agreement of
the parties.

Far East Realty Investment vs. Court of Appeals, GR No. L-36549

Nyco Sales Corporation vs. BA Finance Corporation, GR No. 71694

FACTS:
Petitioner Nyco Sales Corporation whose president and general manager is Rufino Yao, is
engaged in the business of selling construction materials with principal office in Davao City.
Sometime in 1978, the brothers Santiago and Renato Fernandez, both acting in behalf of
Sanshell Corporation, approached Rufino Yao for credit accommodation. They requested Nyco,
thru Yao, to grant Sanshell discounting privileges which Nyco had with BA Finance Corporation.
Yao apparently acquiesced, hence on or about November 15, 1978, the Fernandezes went to
Yao for the purpose of discounting Sanshell's post-dated check which was a BPI-Davao Branch
Check No. 499648 dated February 17, 1979 for the amount of P60,000.00. The said check was
payable to Nyco. Following the discounting process agreed upon, Nyco, thru Yao, endorsed the
check in favor of BA Finance. Thereafter, BA Finance issued a check payable to Nyco which
endorsed it in favor of Sanshell. Sanshell then made use of and/or negotiated the check.
Accompanying the exchange of checks was a Deed of Assignment executed by Nyco in favor of
BA Finance with the conformity of Sanshell. Nyco was represented by Rufino Yao, while
Sanshell was represented by the Fernandez brothers. The BPI check, however, was dishonored
by the drawee bank upon presentment for payment. BA Finance immediately reported the
matter to the Fernandezes who thereupon issued a substitute check dated February 19,1979 for
the same amount in favor of BA Finance. It was a Security Bank and Trust Company check
bearing the number 183157, which was again dishonored when it was presented for payment.
Despite repeated demands, Nyco and the Fernandezes failed to settle the obligation with BA
Finance, thus prompting the latter to institute an action in court.

ISSUE:
Whether or not the assignor is liable to its assignee for its dishonored checks.

HELD:
Yes. An assignment of credit is the process of transferring the right of the assignor to the
assignee, who would then be allowed to proceed against the debtor. It may be done either
gratuitously or generously, in which case, the assignment has an effect similar to that of a sale.

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According to Article 1628 of the Civil Code, the assignor-vendor warrants both the credit itself
(its existence and legality) and the person of the debtor (his solvency), if so stipulated, as in the
case at bar. Consequently, if there be any breach of the above warranties, the assignor-vendor
should beheld answerable therefore. There is no question then that the assignor-vendor is
indeed liable for the invalidity of whatever he has signed to the assignee-vendee. It fails to
realize that for as long as the credit remains outstanding, it shall continue to be liable to BA
Finance as its assignor. The dishonor of an assigned check simply stresses its liability and the
failure to give a notice of dishonor will not discharge it from such liability. This is because the
cause of action stems from the breach of the warranties embodied in the Deed of Assignment,
and not from the dishonoring of the check alone.

State Investment House, Inc. vs. CA, GR No. 101163

FACTS:
Nora Moulic issued to Corazon Victoriano, as security for pieces of jewellery to be sold on
commission, two postdated checks in the amount of fifty thousand each. Thereafter, Victoriano
negotiated the checks to State Investment House, Inc. When Moulic failed to sell the jewellry,
she returned it to Victoriano before the maturity of the checks. However, the checks cannot be
retrieved as they have been negotiated. Before the maturity date Moulic withdrew her funds
from the bank contesting that she incurred no obligation on the checks because the jewellery
was never sold and the checks are negotiated without her knowledge and consent. Upon
presentment of for payment, the checks were dishonoured for insufficiency of funds.

ISSUES:
1. Whether or not State Investment House inc. was a holder of the check in due course
2. Whether or not Moulic can set up against the petitioner the defense that there was failure or
absence of consideration

HELD:
Yes, Section 52 of the NIL provides what constitutes a holder in due course. The evidence
shows that: on the faces of the post dated checks were complete and regular; that State
Investment House Inc. bought the checks from Victoriano before the due dates; that it was
taken in good faith and for value; and there was no knowledge with regard that the checks
were issued as security and not for value. A prima facie presumption exists that a holder of a
negotiable instrument is a holder in due course. Moulic failed to prove the contrary.
No, Moulic can only invoke this defense against the petitioner if it was a privy to the purpose for
which they were issued and therefore is not a holder in due course.

No, Section 119 of NIL provides how an instruments be discharged. Moulic can only invoke
paragraphs c and d as possible grounds for the discharge of the instruments. Since Moulic failed
to get back the possession of the checks as provided by paragraph c, intentional cancellation of
instrument is impossible. As provided by paragraph d, the acts which will discharge a simple
contract of payment of money will discharge the instrument. Correlating Article 1231 of the Civil
Code which enumerates the modes of extinguishing obligation, none of those modes outlined
therein is applicable in the instant case. Thus, Moulic may not unilaterally discharge herself from
her liability by mere expediency of withdrawing her funds from the drawee bank. She is thus
liable as she has no legal basis to excuse herself from liability on her check to a holder in due

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course. Moreover, the fact that the petitioner failed to give notice of dishonor is of no moment.
The need for such notice is not absolute; there are exceptions provided by Sec 114 of NIL.

VIII. DISCHARGE

Equitable Banking Corp. vs. IAC, GR No. L-74451

FACTS:
Nell Company issued a check to help Casals and Casville Enterprises obtain a letter of credit
from Equitable Banking in connection with equipment, a garrett skidder, which Casals
and Casville were buying from Nell. Nell indicated the payee as follows “EQUITABLE
BANKING CORPORATION A/C CASVILLE ENTERPRISES INC.” Casals deposited the check with
the bank and the bank teller accepted the same and in accordance with customary bank
practice, stamped in the check the words “non-negotiable”. The amount was withdrawn
after the deposit. This prompted Nell to file a case against the bank, Casals and
Casville. While the instant case was being tried, Casals and Casville assigned the
garrett skidder to plaintiff which credited in favor of defendants the amount of P450,000, as
partial satisfaction of its claim against them.

HELD:
Equitable is not liable to Nell. Nell should bear the loss as it was through its own acts, which
put it into the power of Casals and Casville Enterprises to perpetuate the fraud against it. The
check wasn’t initially non-negotiable. Neither was it cross-checked. The rubber-stamping
transversally on the face of the check was only made the bank teller in accordance with
customary bank practice, and not by Nell as the drawer of the check, and simply meant
that thereafter the same check could no longer be negotiated. The payee was not indicated
with reasonable certainty in contravention of Section 8. As worded, it could be accepted as
deposit to the account of the party named therein after the symbols of A/C, or payable to the
bank as trustee, or as an agent, for Casville with the latter being the ultimate
beneficiary.

IX. CHECKS

Papa vs. A.U. Valencia, G.R. No. 105188

Republic of the Philippines vs. Philippine National Bank, GR No. L-16106

Equitable PCI Bank vs. Ong, GR No. 156207

Security Bank vs. RCBC, GR No. 170987

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Villanueva vs. Nite, GR No. 148211

Associated Bank vs. CA, GR No. 89802

FACTS:
Merle Reyes is the owner of "Melissa's RTW" ready-to-wear garments. She deals with customers
such as Robinson's Department Store, Payless Department Store, Rempson Department Store,
and the Corona Bazaar. These companies issued in payment of their respective accounts
crossed checks payable to Melissa's RTW in the amounts and on the dates indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January 19, 1982
Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981

Reyes was unaware of the issuance of the checks until she went to the companies for collection
and was informed thereof. She soon found out that it was deposited with Associated Bank and
subsequently paid to one of the bank's trusted depositors, Rafael Sayson, the check being
indorsed by Eddie Reyes. Reyes sued in the RTC for the recovery of the checks plus damages.
CA affirmed. RTC: favored Reyes

ISSUE:
WON Reyes has the right for recovery of the cross checks

HELD:
YES. Petition DENIED.
Under accepted banking practice, crossing a check is done by writing two parallel lines
diagonally on the left top portion of the checks. The crossing is special where the name of a
bank or a business institution is written between the two parallel lines, which means that the
drawee should pay only with the intervention of that company. The crossing is general where
the words written between the two parallel lines are "and Co." or "for payee's account only," as
in the case at bar. This means that the drawee bank should not encash the check but merely
accept it for deposit. The effects therefore of crossing a check relate to the mode of its
presentment for payment. Under Sec. 72 of the Negotiable Instruments Law, presentment for
payment, to be sufficient, must be made by the holder or by some person authorized to receive
payment on his behalf. Who the holder or authorized person is depends on the instruction
stated on the face of the check. The 6 checks had been crossed and issued "for payee's account
only. Signify that the drawers had intended the same for deposit only by the person indicated,
to wit, Melissa's RTW. The position of the bank taking the check on the forged or unauthorized
indorsement is the same as if it had taken the check and collected without indorsement at all.
The act of the bank amounts to conversion of the check. The Bank should have first verified his
right to endorse the crossed checks, of which he was not the payee, and to deposit the

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proceeds of the checks to his own account. Its failure to inquire into Sayson's authority was a
breach of a duty it owed to Reyes. There is no substantial difference between an actual forging
of a name to a check as an endorsement by a person not authorized to make the signature and
the affixing of a name to a check as an endorsement by a person not authorized to endorse it.
Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank would still be
liable to the private respondent because he was not authorized to make the endorsements.
Before presenting the checks for clearing and for payment, the Bank had stamped on the back
thereof the words: "All prior endorsements and/or lack of endorsements guaranteed," and thus
made the assurance that it had ascertained the genuineness of all prior endorsements. The
Bank stamped thereon its guarantee that "all prior endorsements and/or lack of endorsements
(were) guaranteed."

Bataan Cigar and Cigarette Factory, Inc. vs. CA, GR No. 93048

FACTS:
Bataan Cigar & Cigarette Factory, Inc. (BCCFI), engaged with King Tim Pua George, to deliver
2,000 bales of tobacco leaf. BCCFI issued post dated crossed checks in exchange. Trusting
King's words, BCCFI issued another post-dated cross check for another purchase of tobacco
leaves. During these time, King was dealing with State Investment House Inc.. On two separate
occasions King sold the post-dated cross checks to SIHI, that was drawn by BCCFI in favor of
King. Because King failed to deliver the leaves, BCFI issued a stop payment to all the checks,
including those sold to SIHI. The RTC held that SIHI had a valid claim of being a holder in due
course and to collect the checks issued by BCCFI.

ISSUE:
Whether SIHI is a holder in due course.

RULING:
The SC held that SIHI is not a holder in due course thus granting the petition of BCCFI. The
purpose of cross checks is to avoid those bouncing or encashing of forged checks. Cross checks
have the following effects: it cannot be encashed but only deposited in a bank; it can only be
negotiated on its respective bank once; it serves as a warning to the holder that it has been
issued for a definite purpose thus making SIHI not a holder in due course.

Still, SIHI can collect from the immediate indorser, in this case, George King.

Natividad Gempesaw vs. The Honorable Court of Appeals, GR No. 92244

State Investment House vs. CA, GR No. 72764

FACTS:
New Sikatuna Wood Industries, Inc. (NSWI) secured a loan from respondent Anita Chua in the
form of crossed checks. NWSI negotiated the checks to petitioner. The checks were dishonored.

ISSUE:
Whether or not petitioner may be considered a holder in due course.

RULING:

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NO. Petitioner’s failure to inquire from the holder, party defendant NWSI, the purpose for which
the three checks were cross despite the warning of the crossing, prevents him from being
considered in good faith and thus he is not a holder in due course. Being not a holder in due
course, plaintiff is subject to personal defenses, such as lack of consideration between
appellants and New Sikatuna Wood Industries.

People of the Philippines vs. Hon. Nitafan, GR No. 75954

Failing in his argument that B.P. 22, otherwise known as the "Bouncing Check Law", is
unconstitutional, 1 private respondent now argues that the check he issued, a memorandum
check, is in the nature of a promissory note, hence, outside the purview of the statute. Here,
his argument must also fail.

The facts are simple. Private respondent K.T. Lim was charged before respondent court with
violation of B.P. 22 in an Information alleging ––

That on . . . January 10, 1985, in the City of Manila . . . the said accused did then and there
wilfully, unlawfully and feloniously make or draw and issue to Fatima Cortez Sasaki . . .
Philippine Trust Company Check No. 117383 dated February 9, 1985 . . . in the amount of
P143,000.00, . . . well knowing that at the time of issue he . . . did not have sufficient funds in
or credit with the drawee bank . . . which check . . . was subsequently dishonored by the
drawee bank for insufficiency of funds, and despite receipt of notice of such dishonor, said
accused failed to pay said Fatima Cortez Sasaki the amount of said check or to make
arrangement for full payment of the same within five (5) banking days after receiving said
notice. 2

On 18 July 1986, private respondent moved to quash the Information of the ground that the
facts charged did not constitute a felony as B.P. 22 was unconstitutional and that the check he
issued was a memorandum check which was in the nature of a promissory note, perforce, civil
in nature. On 1 September 1986, respondent judge, ruling that B.P. 22 on which the
Information was based was unconstitutional, issued the questioned Order quashing the
Information. Hence, this petition for review on certiorari filed by the Solicitor General in behalf
of the government.

Since the constitutionality of the "Bouncing Check Law" has already been sustained by this
Court in Lozano v. Martinez 3 and the seven (7) other cases decided jointly with it, 4 the
remaining issue, as aptly stated by private respondent in his Memorandum, is whether a
memorandum check issued postdated in partial payment of a pre-existing obligation is within
the coverage of B.P. 22.

Citing U.S. v. Isham, 5 private respondent contends that although a memorandum check may
not differ in form and appearance from an ordinary check, such a check is given by the drawer
to the payee more in the nature of memorandum of indebtedness and, should be sued upon in
a civil action.

We are not persuaded.

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A memorandum check is in the form of an ordinary check, with the word "memorandum",
"memo" or "mem" written across its face, signifying that the maker or drawer engages to pay
the bona fide holder absolutely, without any condition concerning its presentment. 6 Such a
check is an evidence of debt against the drawer, and although may not be intended to be
presented, 7 has the same effect as an ordinary check, 8 and if passed to the third person, will
be valid in his hands like any other check. 9

From the above definition, it is clear that a memorandum check, which is in the form of an
ordinary check, is still drawn on a bank and should therefore be distinguished from a
promissory note, which is but a mere promise to pay. If private respondent seeks to equate
memorandum check with promissory note, as he does to skirt the provisions of B.P. 22, he
could very well have issued a promissory note, and this would be have exempted him form the
coverage of the law. In the business community a promissory note, certainly, has less impact
and persuadability than a check.

Verily, a memorandum check comes within the meaning of Sec. 185 of the Negotiable
Instruments Law which defines a check as "a bill of exchange drawn on a bank payable on
demand." A check is also defined as " [a] written order or request to a bank or persons carrying
on the business of banking, by a party having money in their hands, desiring them to pay, on
presentment, to a person therein named or bearer, or to such person or order, a named sum of
money," citing 2 Dan. Neg. Inst. 528; Blair v. Wilson, 28 Gratt. (Va.) 170; Deener v. Brown, 1
MacArth. (D.C.) 350; In re Brown, 2 Sto. 502, Fed. Cas. No. 1,985. See Chapman v. White, 6
N.Y. 412, 57 Am. Dec 464. 10 Another definition of check is that is "[a] draft drawn upon a
bank and payable on demand, signed by the maker or drawer, containing an unconditional
promise to pay a sum certain in money to the order of the payee," citing State v. Perrigoue, 81
Wash, 2d 640, 503 p. 2d 1063, 1066. 11

A memorandum check must therefore fall within the ambit of B.P. 22 which does not distinguish
but merely provides that "[a]ny person who makes or draws and issues any check knowing at
the time of issue that he does not have sufficient funds in or credit with the drawee bank . . .
which check is subsequently dishonored . . . shall be punished by imprisonment . . ." (Emphasis
supplied ). 12 Ubi lex no distinguit nec nos distinguere debemus.

But even if We retrace the enactment of the "Bouncing Check Law" to determine the
parameters of the concept of "check", We can easily glean that the members of the then
Batasang Pambansa intended it to be comprehensive as to include all checks drawn against
banks. This was particularly the ratiocination of Mar. Estelito P. Mendoza, co-sponsor of Cabinet
Bill No. 9 which later became B.P. 22, when in response to the interpellation of Mr. Januario T.
Seño, Mr. Mendoza explained that the draft or order must be addressed to a bank or
depository, 13 and accepted the proposed amendment of Messrs. Antonio P. Roman and Arturo
M. Tolentino that the words "draft or order", and certain terms which technically meant
promissory notes, wherever they were found in the text of the bill, should be deleted since the
bill was mainly directed against the pernicious practice of issuing checks with insufficient or no
funds, and not to drafts which were not drawn against banks. 14

A memorandum check, upon presentment, is generally accepted by the bank. Hence it does not
matter whether the check issued is in the nature of a memorandum as evidence of
indebtedness or whether it was issued is partial fulfillment of a pre-existing obligation, for what

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the law punishes is the issuance itself of a bouncing check 15 and not the purpose for which it
was issuance. The mere act of issuing a worthless check, whether as a deposit, as a guarantee,
or even as an evidence of a pre-existing debt, is malum prohibitum. 16

We are not unaware that a memorandum check may carry with it the understanding that it is
not be presented at the bank but will be redeemed by the maker himself when the loan fall
due. This understanding may be manifested by writing across the check "Memorandum",
"Memo" or "Mem." However, with the promulgation of B.P. 22, such understanding or private
arrangement may no longer prevail to exempt it from penal sanction imposed by the law. To
require that the agreement surrounding the issuance of check be first looked into and thereafter
exempt such issuance from the punitive provision of B.P. 22 on the basis of such agreement or
understanding would frustrate the very purpose for which the law was enacted — to stem the
proliferation of unfunded checks. After having effectively reduced the incidence of worthless
checks changing hands, the country will once again experience the limitless circulation of
bouncing checks in the guise of memorandum checks if such checks will be considered exempt
from the operation of B.P. 22. It is common practice in commercial transactions to require
debtors to issue checks on which creditors must rely as guarantee of payment. To determine
the reasons for which checks are issued, or the terms and conditions for their issuance, will
greatly erode the faith the public responses in the stability and commercial value of checks as
currency substitutes, and bring about havoc in trade and in banking communities. 17

WHEREFORE, the petition is GRANTED and the Order of respondent Judge of 1 September 1986
is SET ASIDE. Consequently, respondent Judge, or whoever presides over the Regional Trial
Court of Manila, Branch 52, is hereby directed forthwith to proceed with the hearing of the case
until terminated.

Spouses Moran vs. CA, GR No. 105836

FACTS:
M who regularly purchased bulk fuel from P maintained 3 joint accounts with Citytrust Bank,
namely: Current Account No. 1 (CA1), Savings Account No. 1 (SA1), and Savings Account No. 2
(SA2). M had a pre-authorized transfer (PAT) agreement with Citytrust wherein the former have
written authority to the latter to automatically transfer funds from their SA1 to their CA1 at any
time whenever the funds in their current account were insufficient to meet withdrawals from
said current account. On December 12, 1983, M drew a check for P50, 576.00 payable to P. On
December 13, 1983, M issued another check in the amount of P56, 090.00 in favor of the same.
On December 14, 1983, P deposited the 2 aforementioned check to its account with the PNB. In
turn, PNB presented them for clearing and the record shows that on December 14, 1983, the
accounts has insufficient funds (CA1 had a zero balance, while SA1 [covered by PAT] had an
available balance of P26, 104.30 and SA2 had an available balance of P43, 268.39). Hence the
checks were dishonoured. On December 15, 1983 at 10:00 AM, M went to the bank as was his
regular practice and deposited in their SA2 the amounts of P10, 874.58 and P6, 754.25, and he
deposited likewise in the SA1 the amounts of P5, 900.00, P35, 100.00 and 30.00. The amount
of P40,000.00 was then transferred by him from SA2 to their CA1. At the same time, the
amount of P66,666.00 was transferred from SA1 to the same current account through PAT
agreement. Sometime on December 15 or 16, 1983 M was informed that that P refused to
deliver their orders on a credit basis because the two checks they had previously issued were
dishonored upon presentment for payment due to “insufficiency of funds.” The non-delivery of

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orders forced petitioners to stop business operations, allegedly causing them to suffer loss of
earnings. On December 16 or 17, 1983, P got the signature of M on an application for a
manager’s check so that the dishonoured checks could be redeemed and presented the checks
in payment for the two dishonoured checks. On July 24, 1984, claimed P1,000,000.00 for moral
damages.

ISSUE:
WON the bank is liable for damages for its refusal to pay a check on account of insufficient
funds considering the fact that a deposit may be made later in the day.

HELD:
No, Petitioners had no sufficient funds in their accounts when the bank dishonoured the checks
in question. First, a check is a bill of exchange drawn on a bank payable on demand. Thus, a
check is a written order addressed to a bank or persons carrying on the business of banking, by
a party having money in their hands, requesting them to pay on presentment, to a person
named therein or to bearer or order, a named sum of money. Second, the relationship between
the bank and the depositor is that of a debtor and creditor. By virtue of the contract of deposit
between the banker and its depositor, the banker agrees to pay checks drawn by the depositor
provided that said depositor has money in the hands of the bank. Thirdly, where the bank
possesses funds of the depositor, it is bound to honor his checks to the extent of the amount
deposits. The failure of a bank to pay the check of a merchant or a trader, when the deposit is
sufficient, entitles the drawer to substantial damages without any proof of actual 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. Before a bank depositor
may maintain a suit to recover a specific amount form his bank, he must first show that he had
on deposit sufficient funds to meet demand. Considering the clearing process adopted, it is
clear that the available balance on December 14, 1983 was used by the bank in determining
whether or not there was sufficient cash deposited to fund the two checks. When M’s checks
were dishonored due to insufficiency of funds, the available balance of SA1 which was the
subject of the PAT agreement was not enough to cover either of the two checks. On December
14, 1983, when PNB presented the checks for collection, the available balance for SA1 was only
P26, 104.30 while CA1had no available balance. It was only on December 15, 1983 at around
10:00 AM that the necessary funds were deposited, which unfortunately was too late to prevent
the dishonour of the checks.

HSBC vs. Catalan, GR Nos. 159590 & 159591

FACTS:
Frederick Arthur Thomson drew 5 checks payable to Catalan in the total amount of HK$3.2
million. Catalan presented these checks to HSBC [Bank]. The checks were dishonored for
having insufficient funds. Thomson demanded that the checks be made good because he, in
fact, had sufficient funds. Catalan knowing that Thomson had communicated with the Bank,
asked HSBCBank to clear the checks and pay her the said amount. HSBC did not heed her.
Thomson died but Catalan was not paid yet. The account was transferred to HSBC [Trustee].
Catalan then requested Trustee to pay her. They still refused and even asked her to submit
back to them the original checks for verification. Catalan and her lawyer went to Hongkong on
their own expense to personally submit the checks. They still were not honored, leading Catalan
to file a suit against HSBC to collect her HK$3.2M

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ISSUES:
Whether or not HSBC Bank and Trustee are liable to pay damages to Catalan on the ground of
Abuse of right under Article 19 of the Civil Code.

ARGUMENTS:
Petitioner: HSBC claims that they are a foreign corporation not doing business in the Philippines
thus the courts do not have jurisdiction over them. Moreover, there is no cause of action
because it was not alleged in the there was abuse of right.

Respondent: Catalan claims that although HSBC has the right to examine the checks, they did
so in bad faith because they required her to submit all sorts of documents and yet even upon
showing that the checks were good, the Bank still refused to release the money to her. There
was abuse of right on the part of the Bank. HOLDING & RATIO DECIDENDI THERE IS CAUSE
OF ACTION, IT NEED NOT BE EXPRESSLY STATED, THE FACTS SUFFICIENTLY DESCRIBE THAT
THERE WAS AN ABUSEOF RIGHT.

APPLICATION:
Article 19 of the Civil Code speaks of the fundamental principle of law and human conduct that
a person "must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith." It sets the standards
which may be observed not only in the exercise of one’s rights but also in the performance of
one’s duties.

When a right is exercised in a manner which does not conform with the norms enshrinedin
Article 19 and results in damage to another, a legal wrong is thereby committed for which the
wrongdoer must be held responsible. But a right, though by itself legal because recognized or
granted by law as such, may nevertheless become the source of some illegality. A person
should be protected only when he acts in the legitimate exercise of his right, that is, when he
acts with prudence and in good faith; but not when he acts with negligence or abuse. There is
an abuse of right when it is exercised for the only purpose of prejudicing or injuring another.
The exercise of a right must be in accordance with the purpose for which it was established,
and must not be excessive or unduly harsh; there must be no intention to injure another. Thus,
in order to be liable under the abuse of rights principle, three elements must concur, to wit: (a)
that there is a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent
of prejudicing or injuring another. HSBANK is being sued for unwarranted failure to pay the
checks notwithstanding the repeated assurance of the drawer Thomson as to the authenticity of
the check sand frequent directives to pay the value thereof to Catalan. Her allegations in the
complaint that the gross inaction of HSBANK on Thomson’s instructions, as well as its evident
failure to inform Catalan of the reason for its continued inaction and non-payment of the
checks, smack of insouciance on its part, are sufficient statements of clear abuse of right for
which it may be held liable to Catalan for any damages she incurred resulting therefore.
HSBANK’s actions or lack thereof, prevented Catalan from seeking further redress with
Thomson for the recovery of her claim while the latter was alive.

DECISION OF THE COURT:

The Decision of the Court of Appeals, dated August 14, 2003, in CA-G.R. SP No. 75757
dismissing the petition for certiorari of the Hongkong and Shanghai Banking Corporation Limited

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is AFFIRMED. The petition in G.R. No. 159591 is GRANTED. The Decision of the Court of
Appeals, dated August 14, 2003, in CA-G.R. SP No. 75756 dismissing the petition for certiorari
ofthe HSBC International Trustee Limited is REVERSED and SET ASIDE. The Regional Trial
Court, Branch 44, Bacolod City is declared without jurisdiction to take cognizance of Civil Case
No. 01-11372 against the HSBC International Trustee Limited, and all its orders and issuances
with respect to the latter are hereby ANNULLED and SET ASIDE. The said Regional Trial Court is
hereby ORDERED to DESIST from maintaining further proceedings against the HSBC
International Trustee Limited in the case aforestated.

BPI vs. CA, GR No. 112392

FACTS:
September 3, 1987: Bejanmin Napiza deposited in Foreign Currency Deposit Unit (FCDU)
Savings Account which he maintained in BPI a Continental Bank Manager's Check dated August
17, 1984, payable to "cash" $2,500.00. Check belonged to Henry who went to the office of
Napiza and requested him to deposit the check in his dollar account by way of accommodation
and for the purpose of clearing the same. Napiza acceded, and agreed to deliver to Chan a
signed blank withdrawal slip, with the understanding that as soon as the check is cleared, both
of them would go to the bank to withdraw. October 23, 1984: Using the blank withdrawal slip
given by Napiza to Chan, Ruben Gayon, Jr. was able to withdraw. The withdrawal slip shows
that the amount was payable to Ramon A. de Guzman and Agnes C. de Guzman and was duly
initialed by the branch assistant manager, Teresita Lindo. November 20, 1984: BPI received
communication from the Wells Fargo Bank International of New York that check deposited by
Napiza was a counterfeit check because it was "not of the type or style of checks issued by
Continental Bank International." Mr. Ariel Reyes, manager of BPI, instructed one of its
employees, Benjamin D. Napiza IV, who is Napiza's son, to inform his father that the check
bounced. Reyes himself sent a telegram to Napiza regarding the dishonor of the check. Napiza's
son told Reyes that: check been assigned "for encashment" to Ramon A. de Guzman and/or
Agnes C. de Guzman after it shall have been cleared upon instruction of Chan. His father
immediately tried to contact Chan but Chan was out of town. Napiza's son undertook to return
the amount of $2,500.00 to BPI. August 12, 1986: BPI filed a complaint against Napiza for the
return of $2,500.00 or the prevailing peso equivalent plus legal interest, attorney's fees, and
litigation and/or costs of suit. Napiza: admitting that he indeed signed a "blank" withdrawal slip
with the understanding that the amount deposited would be withdrawn only after the check in
question has been cleared. However, without his knowledge, it was withdrawn through collusion
with one of BPI's employees. BPI aslo filed a motion for admission of a third party complaint
against Chan. He alleged that "thru strategem and/or manipulation," Chan was able to withdraw
the amount of $2,500.00 even without Napiza's passbook. November 4, 1991: Lower Court
dismissed the complaint. Having admitted that it committed a "mistake" in not waiting for the
clearance of the check before authorizing the withdrawal of its value or proceeds, BPI should
suffer the resultant loss. CA: Affirmed the lower courts decision. BPI committed "clears gross
negligence" in allowing Ruben Gayon, Jr. to withdraw the money without presenting BPI's
passbook and, before the check was cleared and in crediting the amount indicated therein in
Napiza's account. BPI claims that Napiza, having affixed his signature at the dorsal side of the
check, should be liable in accordance to Sec. 66 of the Negotiable Instrument Law.

Sec. 66. Liability of general indorser. — Every indorser who indorses without qualification,
warrants to all subsequent holders in due course — (a) The matters and things mentioned in

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subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is at
the time of his indorsement, valid and subsisting. And, in addition, he engages that on due
presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor,
and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to
pay it.

Sec. 65, on the other hand, provides for the following warranties of a person negotiating an
instrument by delivery or by qualified indorsement: (a) that the instrument is genuine and in all
respects what it purports to be; (b) that he has a good title to it, and (c) that all prior parties
had capacity to contract.

ISSUE:
WON Napiza can be held liable as an indorser or accommodation party.

HELD
NO. Ordinarily Napiza may be held liable as an indorser of the check or even as an
accommodation party. However, to hold Napiza liable for the amount of the check he deposited
by the strict application of the law and without considering the attending circumstances in the
case would result in an injustice and in the erosion of the public trust in the banking system.
The interest of justice thus demands looking into the events that led to the encashment of the
check. Under the Philippine foreign currency deposit system, two requisites must be presented
to petitioner bank by the person withdrawing an amount: (a) a duly filled-up withdrawal slip,
and Napiza signed a blank deposit slip. BUT withdrawal slip itself indicates a special instruction
that the amount is payable to "Ramon A. de Guzman &/or Agnes C. de Guzman." (b) the
depositor's passbook. In depositing the check in his name, Napiza did not become the outright
owner of the amount stated therein. By depositing the check with BPI, he was, in a way, merely
designating BPI as the collecting bank. This is in consonance with the rule that a negotiable
instrument, such as a check, whether a manager's check or ordinary check, is not legal tender.
Negligence is the omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of
something which a prudent and reasonable man would do. While it is true that Napiza's having
signed a blank withdrawal slip set in motion the events that resulted in the withdrawal and
encashment of the counterfeit check, the negligence of BPI's personnel was the proximate
cause of the loss that petitioner sustained. Proximate cause, which is determined by a mixed
consideration of logic, common sense, policy and precedent, is "that cause, which, in natural
and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and
without which the result would not have occurred." The proximate cause = disregard of its own
rules and the clearing requirement in the banking system.

Metropolitan Bank and Trust Co. vs. Junnel’s Marketing Corp., GR No. 235511

FACTS:
Respondent Junnel's Marketing Corporation (JMC) is a domestic corporation engaged in the
business of selling wines and liquors. It has a current account with Metrobank from which it
draws checks to pay its different suppliers. Among JMC's suppliers are Jardine Wines and Spirits
(Jardine) and Premiere Wines (Premiere).

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ANOMALY discovered by JMC involving eleven (11) checks (subject checks) it had issued to the
orders of Jardine and Premiere on various dates between October 1998 to May 1999. CHARGED
against JMC's current account but were, for some reason, not covered by any official receipt
from Jardine or Premiere. The subject checks, which are all crossed checks and amounting to
P1,481,292.00 in total. Seven checks to Jardine. Four checks to Premiere. All checks deposited
with Bankcom, Dau branch, under Account No. 0015-32987-7. Neither Jardine nor Premiere
owns Bankcom Account No. 0015-32987-7.

Meanwhile, on 30 April 2000, respondent Purificacion Delizo (Delizo), a former accountant of

JMC, confessed that, during her time as an accountant for JMC, she stole several company
checks drawn against JMC's current account. She professed that the said checks were never
given to the named payees but were forwarded by her to one Lita Bituin (Bituin). Delizo further
admitted that she, Bituin and an unknown bank manager colluded to cause the deposit and
encashing of the stolen checks and shared in the proceeds thereof.

JMC surmised that the subject checks are among the checks purportedly stolen by Delizo.

RTC. JMC collected sum of money[8] against Delizo, Bankcom and Metrobank. Alleged "tortious
and felonious" scheme of Delizo and the "negligent and unlawful acts" of Bankcom and
Metrobank.

RTC ruled that Bankcom and Metrobank are liable based on a 2/3-1/3 ratio. CA agreed but said
Metrobank's liability is based on failure to ascertain that only four (4) out of the 11 subject
checks were stamped by Bankcom with the express guarantees "ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENT GUARANTEED" and "NON--NEGOTIABLE" as required by
Section 17 of the PCHC Rules and Regulations.

ISSUES:
1. What is the sequence of payment between a drawee bank and a collecting bank in case
of payment and deposit of money in a collecting bank under an account not belonging
to the proper payee or indorsee?
2. Is Metrobank liable to JMC?
3. Does Section 17 of the PCHC Rules and Regulations and its relupon the concomitant
guarantees of Bankcom when it paid the subject checks a valid defense on the part of
Metrobank?
4. Is Bankcom liable to Metrobank?
5. Is it valid defense for Bankcom to say that the checks were never deposited?
6. Does it affect Bankcom's liability that only 4/11 checks were stamped with "ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENT GUARANTEED"?
7. If liable to Metrobank, does Bankcom have any recourse or does the liability stop in the
collecting bank?
8. Does the comparative liability (the 60-40 liability rule) apply here?

HELD:
The consolidated appeals must be DENIED as neither Metrobank nor Bankcom are entitled to
absolution. HOWEVER, the Supreme Court modified the manner by which Metrobank and
Bankcom are held liable. Instead of holding both Metrobank and Bankcom liable to JMC in
accordance with a fixed ratio, FOUND that the two banks should have been ordered sequentially

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liable for the entire amount of the subject checks pursuant to the seminal case of Bank of
America v. Associated Citizens Bank.

THEREFORE, the Court held (1) Metrobank liable to return to JMC the entire amount of the
subject checks plus interest and (2) Bankcom liable to reimburse Metrobank the same amount
plus interest.

[1]: Both Bank of America and the present case involved crossed checks payable to the order of
a specified payee that were deposited in a collecting bank under an account not belonging to
the payee or his indorsee but which, upon presentment, were subsequently honored by the
drawee bank.

Bank of America held that, in cases involving the unauthorized payment of valid checks, the
drawee bank becomes liable to the drawer for the amount of the checks but the drawee bank,
in turn, can seek reimbursement from the collecting bank. The rationale of this rule on
sequence of recovery lies in the very basis and nature of the liability of a drawee bank and a
collecting bank in said cases. The liability of the drawee bank is based on its contract with the
drawer and its duty to charge to the latter's accounts only those payables authorized by him. A
drawee bank is under strict liability to pay the check only to the payee or to the payee's order.
When the drawee bank pays a person other than the payee named in the check, it does not
comply with the terms of the check and violates its duty to charge the drawer's account only for
properly payable items.(BDO Unibank v. Lao[22])

On the other hand, the liability of the collecting bank is anchored on its guarantees as the last
endorser of the check. Under Section 66 of the Negotiable Instruments Law, an endorser
warrants "that the instrument is genuine and in all respects what it purports to be; that he has
good title to it; that all prior parties had capacity to contract; and that the instrument is at the
time of his endorsement valid and subsisting."

It has been repeatedly held that in check transactions, the collecting bank generally suffers the
loss because it has the duty to ascertain the genuineness of all prior endorsements considering
that the act of presenting the check for payment to the drawee is an assertion that the party
making the presentment has done its duty to ascertain the genuineness of the endorsements. If
any of the warranties made by the collecting bank turns out to be false, then the drawee bank
may recover from it up to the amount of the check.

[2]: Metrobank is Liable to JMC.

Metrobank, as drawee bank, is liable to return to JMC the amount of the subject checks.

A drawee bank is contractually obligated to follow the explicit instructions of its drawer-clients
when paying checks issued by them.[23] The drawer's instructions -- including the designation
of the payee or to whom the check should be paid -- are reflected on the face and by the terms
thereof.[24] When a drawee bank pays a person other than the payee named on the check, it
essentially commits a breach of its obligation and renders the payment it made
unauthorized.[25] In such cases and under normal circumstances, the drawee bank may be
held liable to the drawer for the amount charged against the latter's account.[26]

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Such liability is a strict liability.[27] This means that once an unauthorized payment on a check
has been made, the resulting liability of the drawee bank to the drawer for such payment
attaches even if the former had acted merely upon the guarantees of a collecting bank.[28]
Indeed, it is only when the unauthorized payment of a check had been caused or was attended
by the fault or negligence of the drawer himself can the drawee bank be excused, whether
wholly or partially, from being held liable to the drawer for the said payment.[29]

In the present case, it is apparent that Metrobank had breached JMC's instructions when it paid
the value of the subject checks to Bankcom for the benefit of a certain Account No. 0015-
32987-7. The payment to Account No. 0015-32987-7 was unauthorized as it was established
that the said account does not belong to Jardine or Premiere, the payees of the subject checks,
or to their indorsees. In addition, causal or concurring negligence on the part of JMC had not
been proven. Under such circumstances, Metrobank is clearly liable to return to JMC the amount
of the subject checks.

[3]: No, Metrobank's insistence that it should be absolved for it merely complied with Section 17
of the PCHC Rules and Regulations and thereby only relied upon the concomitant guarantees of
Bankcom when it paid the subject checks, cannot stand insofar as JMC is concerned. The bank
on which a check is drawn, known as the drawee bank, is under strict liability, based on the
contract between the bank and its customer (drawer), to pay the check only to the payee or the
payee's order.

Accordingly, we find Metrobank liable to return to JMC the amount of the subject checks.

[4]: Bankcom is Liable to Metrobank

While Metrobank's reliance upon the guarantees of Bankcom does not excuse it from being
liable to JMC, such reliance ENABLES Metrobank to seek reimbursement from Bankcom -- the
collecting bank.

A collecting or presenting bank-i.e., the bank that receives a check for deposit and that
presents the same to the drawee bank for payment-is an indorser of such check.[31] When a
collecting bank presents a check to the drawee bank for payment, the former thereby assumes
the same warranties assumed by an indorser of a negotiable instrument pursuant to Section 66
of the Negotiable Instruments Law. These warranties are: (1) that the instrument is genuine
and in all respects what it purports to be; (2) that the indorser has good title to it; (3) that all
prior parties had capacity to contract; and (4) that the instrument is, at the time of the
indorsement, valid and subsisting.[32] If any of the foregoing warranties turns out to be false, a
collecting hank becomes liable to the drawee bank for payments made under such false
warranty.

Here, it is clear that Bankcom had assumed the warranties of an indorser when it forwarded the
subject checks to PCHC for presentment to Metrobank. By such presentment, Bankcom
effectively guaranteed to Metrobank that the subject checks had been deposited with it to an
account that has good title to the same. This guaranty, however, is a complete falsity because
the subject checks were, in truth, deposited to an account that neither belongs to the payees of
the subject checks nor to their indorsees. Hence, as the subject checks were paid under

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Bankcom's false guaranty, the latter-as collecting bank-stands liable to return the value of such
checks to Metrobank.

[5]: No, Bankcom's assertion that it should be absolved as the subject checks were allegedly
never deposited with it must fail. Such allegation is readily disproved by the fact that the
subject checks all contained, at their dorsal side, a stamp bearing Bankcom's tracer/ID
band.[33] Under the PCHC Rules and Regulations, the stamped tracer/ID band of Bankcom
signifies that the checks had been deposited with it and that Bankcom indorsed the said checks
and sent them to PCHC.[34]

[6]: No, the liability of Bankcom to be affected by the fact that only four (4) out of the eleven
(11) subject checks were actually stamped with the guarantees "ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENT GUARANTEED" and "NON-NEGOTIABLE" as required under
Section 17 of the PCHC Rules and Regulations. The stamping of such guarantees is not
necessary to fix the liability of Bankcom as an indorser for all the subject checks.

To begin with, jurisprudence has it that a collecting bank's mere act of presenting a check for
payment to the drawee bank is itself an assertion, on the part of the former, that it had done its
duty to ascertain the validity of prior indorsements. (Banco De Oro v. Equitable Banking
Corporation[36])

More than such pronouncement, however, Section 17 of the PCHC Rules and Regulations
expressly provides that checks "cleared through the PCHC" that do not bear the mentioned
guarantees shall nonetheless "be deemed guaranteed by the [collecting bank] as to all prior
endorsements and/or lack of endorsement" such that "no drawee bank shall return any [check]
received by it through clearing by reason only of the absence or lack of such guarantee ... as
long as there is evidence appearing on the [check] itself that the same had been deposited with
the [collecting bank] x x x."

In the present case, all the subject checks have been transmitted by Bankcom to the PCHC for
clearing and presentment to Metrobank. As earlier adverted to, all of the said checks also bear
the PCHC machine sprayed tracer/ID band of Bankcom. These are enough to fix the liability of
Bankcom as an indorser of the subject checks even sans the stamp.

[7]: The sequence of recovery in cases of unauthorized payment of checks, however, does not
ordinarily stop with the collecting bank. In the event that it is made to reimburse the drawee
bank, the collecting bank can seek similar reimbursement from the very persons who caused
the checks to be deposited and received the unauthorized payments.[37] Such persons are the
ones ultimately liable for the unauthorized payments and their liability rests on their absolute
lack of valid title to the checks that they were able to encash.

[8]: No, the doctrine of comparative negligence (the 60-40 liability rule) does not apply here.

Instead of applying the rule on the sequence of recovery to the case at bench, the RTC and the
CA held both Metrobank and Bankcom liable to JMC in accordance with a fixed ratio. In so
doing, the RTC and the CA seemingly relied on the doctrine of comparative negligence[38] as
applied in the cases of Bank of the Philippine Islands v. Court of Appeals[39] and Allied Banking

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Corporation v. Lio Sim Wan.[40] In both cases, the Court held the drawee bank and collecting
bank liable for the wrongful encashment of checks under a 60% and 40% ratio.

It must be emphasized, however, that the factual contexts of Bank of the Philippine Islands and
Allied Banking Corporation are starkly different from the instant case. BPI involved a cashier's
check issued via a fake phone call request and the collecting bank was duped into opening a
fake account. Allied Banking involved a manager's check issued against via a fake phone call
and the collecting bank deposited the money into a wrong account despite forgery.

A glaring peculiarity in the cases of Bank of the Philippine Islands and Allied Banking
Corporation is that the drawee bank-which is essentially also the drawer in the scenario-is not
only guilty of wrongfully paying a check but also of negligence in issuing such check. Indeed,
this is the very reason why the drawee bank in the two cases were adjudged co-liable with the
collecting bank under a fixed ratio and the former was not allowed to claim reimbursement from
the latter.[41] The drawee bank cannot claim that its participation in the wrongful payment of a
check was merely limited to its reliance on the guarantees of the collecting bank. In other
words, the drawee bank was held liable in its own right because it was the one that negligently
issued the checks in the first place.

Associated Bank vs. CA, GR No. 107381

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