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GSIS vs CA and SPS. RACHO, 170 SCRA 533, FEBRUARY 23, 1989 FACTS Spouses Racho and Spouses Lagasca executed a deed of mortgage in favour of petitioner-GSIS in connection with two loans granted by the latter for in the sums of P11, 5000 and P3,000 where a parcel of land co-owned by Sps. Racho was given as a security for the said mortgages Sps. Lagasca- executed an instrument denominated as ASSUMPTION OF MORTGAGE under which they obligated themselves to assume the said obligations to the GSIS; they also secure the release of the mortgage covering the portion of the land belonging to Sps. Racho, said undertaking was not fulfilled; GSIS extrajudicially forclosed that mortgage and the caused the mortgaged property to be sold at public auction upon failure of the Sps. Lagasca to comply with the conditions of the mortgage, particularly the payment of the amortization due Sps. Racho more than 2 years after the extrajudicial foreclosure, they filed with the court a petition to declare that the said foreclosure be declared as null and void; they prayed that they be allowed to recover the property from GSIS and/or be ordered the latter to pay them the value of the said land, or they be allowed to repurchase the same; they alleged that they signed the mortgage contracts not as sureties or guarantors for the Lagasca spouses but they merely gave their common property to the said co-owners who were solely benefited by the loans from the GSIS. CFIs Ruling dismissed the petition for lack of merit CA reversed the decision of the CFI; holding the extra-judicial foreclosure was void since Sps. Racho was not notified as required either as to their delinquency in the payment of amortization or as to the subsequent foreclosure of the mortgage by reason of any default in such payment; that the notice should be published in the newspaper, and posted pursuant to Sec 3 of Act 3135 is not the notice to which the mortgagor is entitled upon the application being made for an extrajudicial foreclosure ISSUE: WON the extrajudicial foreclosure is valid. SCs Ruling: Yes. Both parties relied on the provisions of Section 29 of Act No. 2031, otherwise known as the Negotiable Instruments Law, which provide that an accommodation party is one who has signed an instrument as maker, drawer, acceptor of indorser without receiving value therefor, but is held liable on the instrument to a holder for value although the latter knew him to be only an accommodation party. The promissory note hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly not negotiable instruments. These documents do not comply with the fourth requisite to be considered as such under Section 1 of Act No. 2031 because they are neither payable to order nor to bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply; governance shall be afforded, instead, by the provisions of the Civil Code and special laws on mortgages. Factual findings of respondent court are that private respondents signed the documents "only to give their consent to the mortgage as required by GSIS", with the latter having full knowledge that the loans secured thereby were solely for the benefit of the Lagasca spouses. This appears to be duly supported by sufficient evidence on record. Indeed, it would be unusual for the GSIS to arrange for and deduct the monthly amortizations on the loans from the salary as an army officer of Flaviano Lagasca without likewise affecting deductions from the salary of Isabelo Racho who was also an army sergeant. Then there is also the undisputed fact, as already stated, that the Lagasca spouses executed a so-called "Assumption of Mortgage" promising to exclude private respondents and their share of the mortgaged property from liability to the mortgagee. There is no intimation that the former executed such instrument for a consideration, thus confirming that they did so pursuant to their original agreement. So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca spouses would not invalidate the mortgage with respect to private respondents' share in the property. In consenting thereto, even assuming that private respondents may not be assuming personal liability for the debt, their share in the property shall nevertheless secure and respond for the performance of the principal obligation. The parties to the mortgage could not have intended that the same would apply only to the aliquot portion of the Lagasca spouses in the property, otherwise the consent of the private respondents would not have been required.The extrajudicial foreclosure effected by GSIS, We cannot

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agree with the ruling of respondent court that lack of notice to the private respondents of the extrajudicial foreclosure sale impairs the validity thereof.

METROBANK vs. CA AND GOLDEN SAVINGS and LOAN ASSOCIATION, INC., GR NO. 88866, FEBRUARY 18, 1991 FACTS Petitioner Metrobank- is a commercial bank with branches throughout the Philippines and even abroad Eduardo Gomez opened an account with Golden Savings and deposited 38 treasury warrants which were subsequently deposited by Gloria Castillo (cashier of Golden Savings) to their account in Metrobank in Calapan, Mindoro. Metrobank sent the said warrants to their main office for clearing. More than two weeks have passed, Gloria asked several times whether the warrants have been cleared. Metrobank answered that she has to wait. However, exasperated over Glorias repeated inquiries and also as an accommodation for a valued customer, Metrobank allowed Golden Saving to withdraw from the proceeds of the warrants (pending the clearance). First withdrawal was P508.000.00, Second Withdrawal was P 310,000.00 and third withdrawal was P 150,000.00 or a total of P968,000.00. Subsequently, Metrobank was informed by the Bureau of Treasury that 32 of the warrants were dishonoured. Metrobank immediately informed Golden Savings and demanded the refund of the amount previously withdrawn. On the other hand, Golden Savings rejected the demand. ISSUE: WON petitioner exercised due diligence in ascertaining the authenticity of the treasury warrants presented before them before they allowed Golden Savings to withdraw the amount thereof. SC Ruling: NO. Metrobank exhibited extraordinary carelessness. Metrobank was indeed negligent in giving Golden Savings the impression that the treasury warrants had been cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it. Without such assurance, Golden Savings would not have allowed the withdrawals; with such assurance, there was no reason not to allow the withdrawal. Indeed, Golden Savings might even have incurred liability for its refusal to return the money that to all appearances belonged to the depositor, who could therefore withdraw it any time and for any reason he saw fit. By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling more than one and a half million pesos (and this was 1979). There was no reason why it should not have waited until the treasury warrants had been cleared; it would not have lost a single centavo by waiting. Yet, despite the lack of such clearance and notwithstanding that it had not received a single centavo from the proceeds of the treasury warrants, as it now repeatedly stresses it allowed Golden Savings to withdraw not once, not twice, but thrice from the uncleared treasury warrants in the total amount of P968,000.00 On the other hand, the Court finds that Metrobank cannot invoke the conditions printed on the dorsal side of the deposit slips since this conditions clearly show that it was acting only as a collecting agent for Golden Savings and give it the right to "charge back to the depositor's account any amount previously credited, whether or not such item is returned. This will only applies to checks which are unpaid due to insufficiency of funds, forgery, and unauthorized overdraft of any other reason. The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the clearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw the proceeds of the treasury warrants he had deposited Metrobank misled Golden Savings.

PHILIPPINE EDUCATION CO., INC. vs MAURICIO SORIANO et. al., GR NO L-22405, JUNE 30, 1971 FACTS Enrique Montinola sought to purchase from the Manila Post Office ten MONEY ORDERS of P200.00 payable to E.P Montinola; he offered to pay for them with PRIVATE CHECKS, however, private checks were

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not accepted in payment of money orders; when the teller advised him to see the Chief of the Money Order Division, Montinola managed to leave the building with the money oders and his check Thereafter, an urgent message was sent to all postmasters about the loss of the 10 money orders. All banks were also ordered not to pay anyone of the money orders if presented for payment. The Bank of America received a copy thereof three days later. Subsequently, appellant received one of the money orders that were missing as part of its sales receipts. It then deposited to the Bank of America which the later cleared it with Bureau of Post and received its face value of P200.00. Appellee Soriano (Chief of the Money Order Division) notified the Bank of America that the money order has been irregularly issued and that, in view thereof, the amount it presented had been deducted from the banks clearing account. Bank of America debited appellants account; it denied the request of the Soriano Montinola was charged for the crime of theft, however, he was acquitted. ISSUE: WON postal money orders are negotiable instruments. SCs Ruling: No. Postal money orders are not negotiable instruments. It is not disputed that 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 (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), 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 benefit. It 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. The conditions thus imposed in order to enable the bank to continue enjoying the facilities theretofore enjoyed by its depositors, were accepted by the Bank of America. The latter is therefore bound by them. That it is so is clearly referred from the fact that, upon receiving advice that the amount represented by the money order in question had been deducted from its clearing account with the Manila Post Office, it did not file any protest against such action.

BATAAN CIGAR AND CIGARETTE COMPANY, INC. vs CA and STATE INVESTMENT HOUSE, INC. GR NO. 93048, MARCH 3, 1994 FACTS Bataan Cigar and Cigarette Company (BCCFI) corporation engaged in manufacturing of cigarettes; it engaged one of its suppliers, George King, to deliver 2,000 bales of tobacco leaf, it issued crossed checks post dated sometime in March 1979 in the amount of P820,000.00; it purchase additional 2,500 bales of tobacco leaves, despite the suppliers failure to deliver in accordance with their earlier agreement, in consideration thereof, it issued another cross checks post dated sometime in September 1979 in the amount of P1,100,000.00. George King undertakes to deliver 2,000 bales of tobacco leaves and additional 2,500 in favour of BCCFI; they simultaneously dealing with SIHI, private respondent in this case, which the former sold at a discount check bearing an amount of P 164,000.00 drawn by BCCFI, naming George King as the payee of SIHI BCCFI issued a stop payment order on all checks payable to George King due to the latters failure to deliver the tobacco leaves previously agreed upon by the parties.

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ISSUE: WON SIHI, a second indorser and a holder of the crossed checks, is a holder in due course to be able to collect from the drawer, BCCFI. SCs Ruling: NO. The Negotiable Instruments Law states what constitutes a holder in due course, thus:
Sec. 52 A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course. However, when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims, acquired the title as holder in due course. Check is defined by law as a bill of exchange drawn on a bank payable on demand. 8 There are a variety of checks, the more popular of which are the memorandum check, cashier's check, traveler's check and crossed check. Crossed check is one where two parallel lines are drawn across its face or across a corner thereof. It may be crossed generally or specially. A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words "and company" are written or nothing is written at all between the parallel lines. It may be issued so that the presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks," although Article 541 9 of the Code of Commerce refers to such instruments. In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account with a bank; (c) and the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser's title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, and as such the consensus of authority is to the effect that the holder of the check is not a holder in due course. In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King. Because, really, the checks were issued with the intention that George King would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks. The foregoing does not mean, however, that respondent could not recover from the checks. The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable. Hence, respondent can collect from the immediate indorser, in this case, George King.

CALTEX PHILIPPINES INC. vs CA and SECURITY BANK AND TRUST AUGUST 10, 1992 FACTS

COMPANY, GR NO. 97753,

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Security Bank and Trust Company a commercial banking institution; it issued 280 certificates of time deposit (CTD) in favour of Angel dela Cruz who deposited to the former the aggregate amount of P1,120,00.00; Angel dela Cruz delivered the said CTDs to Caltex in connection with his purchased fuel; he later informed Security Bank that he lost the CTDs, he was advised to execute an affidavit of loss, as a required by the banks procedure; subsequently he obtained a load from the defendant-bank in the amount of P875,000, he likewise executed a notarized Deed of Assignment of Time Deposit which provided that he surrenders to the bank the FULL COUNTROL of the CTDs from and after due date of the assignment an further authorizes said bank to pre-terminate, set-off and apply the said CTDs to the payment of whatever amount may be due on the loan upon its maturity. CALTEX went to Security Bank and presented for verification the CTDs declared lost by Angel dela Cruz; However, Security Bank pre-terminated the said CTDs; Caltex requested the defendant bank to furnish the document evidencing the guarantee agreement with dela Cruz as well as the details of Mr. Angel dela Cruz obligation against which plaintiff proposed to apply the time deposits. Said request was denied by the bank. Later, the loan of dela Cruz matured and fell due, so Security Bank set-off and applied the time deposits in question to the payment of the matured loan. ISSUE/s: WON the CTDs are non-negotiable. WON Caltex is a holder in due course. SCs Ruling: First Issue: The CTDs are negotiable instruments. xxx Section 1 of Act. 2031, Requsites for an instrument to become negotiable are, (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. xxx The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said. In this case, the documents provide that the amounts deposited shall be repayable to the depositor. In which case, the depositor 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. 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 aligned. 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 favour the party who caused the obscurity.

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Second Issue: No. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. In the law of evidence, whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for. The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide: Art. 2095. Incorporeal rights, evidenced by negotiable instruments . . . may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument.

January 13, 2011 III- Interpretation of Instruments: Other Rules EQUITABLE BANKING vs INTERMEDIATE APPELLATE COURT, 161 SCRA 518 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.

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ISSUE: WON Equitable Bank is liable to Nell. SCs RULING : NO The Court held that 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 Casala and Casville to perpetuate the fraud against it. The check was not 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 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.

IV Incidents of Stages in the Life of a Negotiable Instrument : Issuance- First Delivery of the Instrument to the Payee DE LA VICTORIA vs HON. BURGOS, G.R No. 111190, JUNE 27, 1995 Facts Raul Sesbreno- filed a complaint for damages against Assistant City Fiscals Beinvenido Mabanto Jr. and Dario Rama Jr. before the RTC of Cebu City; a judgment was rendered in his favour, thus ordering the defendants to pay P11,000 to the plaintiff; when the decision having become final and executor, the trial court ordered its execution. Plaintiff Loreto De La Victoria acting as City Fiscal of Mandaue City was served a NOTICE OF GARNISHMENT where Mabanto Jr. was detailed; he was directed not to disburse, transfer, release, convey to any person except to the deputy sheriff concerned the salary checks or other checks, monies, or cash due or belonging to Mabanto Jr.; he did not comply with the order instead he moved to quash the notice of garnishment arguing that he was not in possession of any money, funds, credit, property or anything of value belonging to Mabanto Jr. except that latters salary; he further claimed that the checks (salary of Mabanto Jr,) were not yet properties of the latter until delievered to him and that it was still belong to the Government, being such, it cannot be subject to a garnishment. Defendant Hon. Burgos as Presiding Judge of RTC, Branch XVII, Cebu City; it denied the petitioners motion; it opined that the checks were already released through the petitioner by the DOJ; that the petitioner as the custodian of the checks was under the obligation to hold them for the judgment creditor; that the court acquires jurisdiction over the plaintiff since he became a forced Intervenor in the case; that there was no sufficient reason for petitioner to hold the checks because they were no longer government funds and presumably delivered to the payee, under the last sentence of Section 16 of NIL. ISSUE: WON the check still in the hands of the maker or its duly authorized representative is owned by the payee BEFORE physical delivery to the latter. SCs RULING: No, there has to be delivery. Garnishment is considered as a species of attachment for reaching credits belonging to the judgment debtor owing to him from a stranger to the litigation. Under Sec. 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

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understood, delivery means the transfer of the possession of the instrument by the maker or drawer with intent to transfer title to the payee and recognize him as the holder thereof. The last paragraph of Section 16 of the NIL which states that, xxx "And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed." , is NOT A CONCLUSIVE PRESUMPTION because of the last portion of the provision says UNTIL THE CONTRARY IS PROVED. The last portion was deleted by the trial court. Proof to the contrary is its own finding that the checks were in the custody of petitioner. Inasmuch as said checks had not yet been delivered to Mabanto, Jr., 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. The rationale behind this doctrine is obvious consideration of public policy. Further, the ruling that the trial court expressed that it was not the duty of the garnishee to inquire or judge for himself whether the issuance of the order of execution, the writ of execution, and the notice of garnishment was justified only expresses the general rule. The Court also established compelling reasons, as exception thereto, which were not taken into account by the trial court, e.g., a defect on the face of the writ or actual knowledge by the garnishee of lack of entitlement on the part of the garnisher. It is worth to note that the ruling referred to the validity of advance execution of judgments, but a careful scrutiny of that case and similar cases reveals that it was applicable to a notice of garnishment as well. In the case at bench, it was incumbent upon petitioner to inquire into the validity of the notice of garnishment as he had actual knowledge of the non-entitlement of private respondent to the checks in question.

V- HOLDERS: Holders in Due Course YANG vs. CA, G.R No. 70145, NOVEMBER 13, 1986 Facts Petitioner Yang and Private Respondent Chandiramani entered in to an agreement whereby they agreed that Chindiramani will give to Yang a PCIB managers check in the amount of P4.2million in exchange of 2 of Yangs managers check each in amount of P2.087 million, both payable to order of private respondent Fernando David; they also agreed that Yang will secure from FEBTC a dollar draft in the amount of US$200,000 payable to PCIB FCDU which Chandiramani would exchange for another dollar draft in the same amount to be issued by Hang Seng Bank of Hong Kong. Yang procured the checks as agreed upon and gave it to her business associate Albert Liong, to be delivered to Chandiramani by Liongs messenger, Danilo Ranigo. Chandiramani did not arrive in the meeting place and Ranigo allegedly lost the two cashiers check. They reported the incident to the authorities. However, said checks were not lost for Chandiramani was able to hold of the said instruments, without delivering the exchange consideration they agreed upon. Chandiramani delivered the checks (acquired from Yang) to respondent Fernando David in exchange of US@360,000 which Chindiramani deposited in the savings account of her wife and mother. Meanwhile, Yang requested FEBTC and Equitable to stop payment on the instruments believed to be lost. Both banks complied with her request. But upon the representation of PCIB, FECTC subsequently lifted the stop payment. Yang she argued that David is not a holder in due course of the checks in question notwithstanding if he was named as the payee thereof since he failed to inquire from Chandiramani about how the latter acquired possession of said checks; that it cannot be said that David was unaware of any defect or infirmity in the title of Chandiramani to the checks at the time of the negotiation; that the checks were crossed, David should have made inquiries to determine the legality of the check David he counters that he verified the genuineness of the checks he received with his bank and only after verifying he deposit the said checks; that he had no notice of the previous dishonour or any infirmity that would have aroused his suspicions, the instruments being complete in its face; that the checks were cashiers check, by its nature it is highly unlikely that he would have suspected that something was amiss; that negotiable instruments are presumed to have been issued for valuable consideration, and he who alleges otherwise must controvert the presumption with sufficient evidence. ISSUE: WON David is a holder in due course.

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SCs Ruling: YES Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption arises only in favor of a person who is a holder as defined in Section 191 of the Negotiable Instruments Law, meaning a payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. In the present case, it is not disputed that David was the payee of the checks in question. The weight of authority sustains the view that a payee may be a holder in due course.[16] Hence, the presumption that he is a prima facie holder in due course applies in his favor. However, said presumption may be rebutted. Hence, what is vital to the resolution of this issue is whether David took possession of the checks under the conditions provided for in Section 52 of the Negotiable Instruments Law. All the requisites provided for in Section 52 must concur in Davids case, otherwise he cannot be deemed a holder in due course. With respect to consideration, section 24 of the NIL creates a presumption that every party to an instrument acquired the same for a consideration of for value. Thus, the law itself creates a presumption in Davids favor that he gave valuable consideration for the checks in question. In alleging otherwise, the petitioner has the onus to prove that David got hold of the checks absent said consideration. In other words, the petitioner must present convincing evidence to overthrow the presumption. Our scrutiny of the records, however, shows that the petitioner failed to discharge her burden of proof. Note that both the trial court and the appellate court found that David did not receive the checks gratis, but instead gave Chandiramani US$360,000.00 as consideration for the said instruments. Further, petitioner fails to point any circumstances which should put David on inquiry as to the why and wherefore of the possession of the checks by Chandiramani. David was not privy to the transaction between petitioner and Chandiramani. Instead, Chandiramani and David had a separate dealing in which it was precisely Chandiramanis duty to deliver the checks to David as payee. Petitioner admits that David took the step of asking the manager of his bank to verify from FEBTC and Equitable as to the genuineness of the checks and only accepted the same after being assured that there was nothing wrong with said checks. At that time, David was not aware of any stop payment order. Under these circumstances, David thus had no obligation to ascertain from Chandiramani what the nature of the latters title to the checks was, if any, or the nature of his possession. Thus, we cannot hold him guilty of gross neglect amounting to legal absence of good faith, absent any showing that there was something amiss about Chandiramanis acquisition or possession of the checks. David did not close his eyes deliberately to the nature or the particulars of a fraud allegedly committed by Chandiramani upon the petitioner, absent any knowledge on his part that the action in taking the instruments amounted to bad faith Finally, any loss which the petitioner incurred was apparently due to the acts or omissions of Chandiramani, and hence, her recourse should have been against him and not against David. By needlessly dragging David into this case all because he and Chandiramani knew each other, the petitioner not only unduly delayed David from obtaining the value of the checks, but also caused him anxiety and injured his business reputation while waiting for its outcome. Thus, giving of moral damages is awarded.

MESINA vs. IAC et. al, G.R. No. 70145, NOVEMBER 13, 1986 FACTS Respondent Jose Go- purchased from Associated Bank a cashier check for P800,000, unfortunately he left the check at the top of the desk of the manager when he left the bank Albert Uy bank employee; the check was entrusted to him by the bank manager for safekeeping; a certain Alexander Lim was present when the check was handed to him; Uy had to answer a phone call after which he proceeded to the mens room, when he came back his visitor Lim was already gone When Go inquired about the check from Uy, the check was not in latters folder and nowhere to be found. Go immediately ordered STOP Payment while Uy reported the incident to the police. The check was allegedly stolen by Lim. Thereafter, Associated Bank received the lost check for clearing from Prudential Bank. The check was dishonoured by Associated Bank by sending it back to Prudential with a stamped PAYMENT STOPPED. A second attempt to encash the check, but the same had failed.

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Several days later, Associated Bank received a letter from certain Atty. Lorenzo Navarro demanding payment on the check presented before it for his client. He however refused to reveal the name of his client. Subsequently, Associated Bank received a summons and copy of complaint for damages of a certain Marcelo Mesina, petitioner herein. Mesina filed the case against the bank for dishonouring the check. However, When Cpl. Gimao went to Marcelo Mesina to ask how he came to possess the check, he said it was paid to him by Alexander Lim in a "certain transaction" but refused to elucidate further. He further alleged that since it involves a cashiers check it can be countermanded even in the hands of a holder in due course. ISSUE: WON Mesina can be considered as holder in due course. SCs RULING: Petitioner failed to substantiate his claim that he is a holder in due course and for consideration or value as shown by the established facts of the case. Admittedly, petitioner became the holder of the cashier's check as endorsed by Alexander Lim who stole the check. He refused to say how and why it was passed to him. He had therefore notice of the defect of his title over the check from the start. The holder of a cashier's check who is not a holder in due course cannot enforce such check against the issuing bank which dishonours the same. If a payee of a cashier's check obtained it from the issuing bank by fraud, or if there is some other reason why the payee is not entitled to collect the check, the respondent bank would, of course, have the right to refuse payment of the check when presented by the payee, since respondent bank was aware of the facts surrounding the loss of the check in question. Moreover, there is no similarity in the cases cited by petitioner since respondent bank did not issue the cashier's check in payment of its obligation. Jose Go bought it from respondent bank for purposes of transferring his funds from respondent bank to another bank near his establishment realizing that carrying money in this form is safer than if it were in cash. The check was Jose Go's property when it was misplaced or stolen, hence he stopped its payment. At the outset, respondent bank knew it was Jose Go's check and no one else since Go had not paid or indorsed it to anyone. The bank was therefore liable to nobody on the check but Jose Go. The bank had no intention to issue it to petitioner but only to buyer Jose Go. When payment on it was therefore stopped, respondent bank was not the one who did it but Jose Go, the owner of the check. Respondent bank could not be drawer and drawee for clearly, Jose Go owns the money it represents and he is therefore the drawer and the drawee in the same manner as if he has a current account and he issued a check against it; and from the moment said cashier's check was lost and/or stolen no one outside of Jose Go can be termed a holder in due course because Jose Go had not indorsed it in due course. The check in question suffers from the infirmity of not having been properly negotiated and for value by respondent Jose Go who as already been said is the real owner of said instrument.

VI Defenses Against A Holder MATERIAL ALTERATION PNB vs. CA et. al, G.R. No. 107508, APRIL 25, 1996 FACTS A CHECK was issued by the Ministry of Education and Culture payable to F. Abante Marketing and drawn against petitioner. F. Abante deposited the said check in its savings account with Capitol City Development Bank (Capitol) which the latter deposited the same with the Philippine Bank of Communication (PBCom). PBCom sent the check to petitioner for clearing. Petitioner cleared the check as good. PBCom thereafter credited the amount of P97, 650 to Capitols account. PNB- however returned the check to PBCom and debited PBCom's account for the amount covered by the check, the reason being that there was a "material alteration" of the check number.

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PBCom, as collecting agent of Capitol, then proceeded to debit the latter's account for the same amount, and subsequently, sent the check back to petitioner. Petitioner, however, returned the check to PBCom. On the other hand, Capitol could not, in turn, debit F. Abante Marketing's account since the latter had already withdrawn the amount of the check as of October 15, 1981. Capitol sought clarification from PBCom and demanded the re-crediting of the amount. PBCom followed suit by requesting an explanation and re-crediting from petitioner. PNB- anchors its position invoking Section 125 of the NIL alleging that there is no hard and fast rule in the interpretation of the said provision, especially paragraph (f) thereof, that any change that alters the effect of the instrument is a material alteration. ISSUE: WON AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS A MATERIAL ALTERATION UNDER THE NEGOTIABLE INSTRUMENTS LAW. SCs RULING: Petitioners contention is devoid of merit.

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. The case at bench is unique in the sense that what was altered is the serial number of the check in question, an item which, it can readily be observed, is not an essential requisite for negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the relations between the parties. The name of the drawer and the drawee were not altered. The intended payee was the same. The sum of money due to the payee remained the same. Petitioner's arguments fail to convince. The check's serial number is not the sole indication of its origin.. As succinctly found by the Court of Appeals, the name of the government agency which issued the subject check was prominently printed therein. The check's issuer was therefore sufficiently identified, rendering the referral to the serial number redundant and inconsequential. Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was altered, the same being an immaterial or innocent one. The one who signed the certification was not presented before the trial court to prove that the said document was really the document he prepared and that the signature below the said document is his own signature. Neither did petitioner present an eyewitness to the execution of the questioned document who could possibly identify it. Absent this proof, we cannot rule on the authenticity of the contents of the certification. Moreover, as we previously emphasized, there was no material alteration on the check, the change of its serial number not being substantial to its negotiability. Anent the third issue whether or not the drawee bank may still recover the value of the check from the collecting bank even if it failed to return the check within the twenty-four (24) hour clearing period because the check was tampered suffice it to state that since there is no material alteration in the check, petitioner has no right to dishonor it and return it to PBCom, the same being in all respects negotiable.

ABSENCE OR FAILURE OF CONSIDERATION STATE INVESTMENT HOUSE vs. IAC et. al, G.R. No. 72764, JUY 13, 1989 FACTS New Sikatuna Woods Industries, Inc. requested for a loan from private respondent Spouses Chua, the latter agreed and the wife, Anita Chua, issued three crossed check payable to New Sikatuna all postdated on December 22, 1980; the drawee banks are China Banking Corporation, International Corporate Bank and Metropolitan Bank and Trust Co.; the total value of the three postdated checks amounted to P 299, 450. 00.

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Subsequently, New Sikatuna entered to an agreement with State Investment, herein petitioner, whereby for and consideration of the sum of P 1, 047,402.91 under a deed of sale, New Sikatuna assigned and discounted with the petitioner 11 postdated checks including the three crossed checks previously issued by the Chuas. When petitioner deposited the checks issued by the Chuas, all of it were dishonoured by the drawee banks by reason of insufficient funds, stop payment and account close. Petitioner alleged that despite demands from the Chuas to make good of the said checks, the latter failed to pay the same. ISSUE: WON petitioner is a holder in due course as to entitle it to proceed against private respondents for the amount stated in the dishonoured checks. SCs RULING: NO. Section 52(c) of the Negotiable Instruments Law defines a holder in due course as one who takes the instrument "in good faith and for value". On the other hand, Section 52(d) provides that in order that one may be a holder in due course, it is necessary that "at the time the instrument was negotiated to him he had no notice of any x x x defect in the title of the person negotiating it." However, under Section 59 every holder is deemed prima facie to be a holder in due course. Petitioner submits that at the time of the negotiation and endorsement of the checks in question by New Sikatuna Wood Industries, it had no knowledge of the transaction and/or arrangement made between the latter and private respondents. The three subject checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right of recourse is available to petitioner against the drawer of the subject checks, private respondent wife, considering that petitioner is not the proper party authorized to make presentment of the checks in question. Yet it does not follow as a legal proposition that simply because petitioner was not a holder in due course as found by the appellate court for having taken the instruments in question with notice that the same is for deposit only to the account of payee named in the subject checks, petitioner could not recover on the checks. The Negotiable Instruments Law does not provide that a holder who is not a holder in due course may not in any case recover on the instrument for in the case at bar, petitioner may recover from the New Sikatuna Wood Industries, Inc. if the latter has no valid excuse for refusing payment. The only disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. That the subject checks had been issued subject to the condition that private respondents on due date would make the back up deposit for said checks but which condition apparently was not made, thus resulting in the non-consummation of the loan intended to be granted by private respondents to New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due course. EFFECTS OF CROSSING A CHECK - : the check may not be encashed but only deposited in the bank; the check may be negotiated only once to one who has an account with a bank; and the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise he is not a holder in due course

FORGERY and WANT OF AUTHORITY GEMPESAW vs. PNB, 218 SCRA 682 Petitioner Natividad Gempesaw- owns and operates four grocery stores; maintains a checking account with the Caloocan City Branch of the private respondent Philippine Bank of Communications; to facilitate payment of debts to her suppliers, petitioner draws checks against her checking account with the respondent ban; her customary practice of issuing checks in payment of her suppliers was as follows:

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The checks were prepared and filled up as to all material particulars by her trusted bookkeeper. The completed checks were submitted to the petitioner for her signature, together with the corresponding invoice receipts which indicate the correct obligations due and payable to her suppliers. Petitioner signed each and every check without bothering to verify the accuracy of the checks. The issuance and delivery of the checks to the payees named therein were left to the bookkeeper. Petitioner admitted that she did not make any verification as to whether or not the checks were actually delivered to their respective payees. Although the respondent drawee Bank notified her of all checks presented to and paid by the bank, petitioner did not verify the correctness of the returned checks, much less check if the payees actually received the checks in payment for the supplies she received. In the course of her business operations covering a period of two years, petitioner issued, following her usual practice stated above, a total of eighty-two (82) checks in favor of several suppliers. All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest Boon, Chief Accountant of respondent drawee Bank at the Buendia branch, who, without authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Romero and Benito Lam. About thirty (30) of the payees whose names were specifically written on the checks testified that they did not receive nor even see the subject checks and that the indorsements appearing at the back of the checks were not theirs. Petitioner made a written demand on respondent drawee Bank to credit her account with the money value of the eighty-two (82) checks totalling P1,208,606.89 for having been wrongfully charged against her account. Respondent drawee Bank refused to grant petitioner's demand. As a result, petitioner filed the complaint with the Regional Trial Court. ISSUE: WON petitioner can still recover the amount debited from her account. SCs RULING: NO Section 23 of the NIL provides: "When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority." Under the aforecited provision, forgery is a real or absolute defense by the party whose signature is forged. A party whose signature to an instrument was forged was never a party and never gave his consent to the contract which gave rise to the instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by anyone, not even by a holder in due course. Thus, if a person's signature is forged as a maker of a promissory note, he cannot be made to pay because he never made the promise to pay. Or where a person's signature as a drawer of a check is forged, the drawee bank cannot charge the amount thereof against the drawer's account because he never gave the bank the order to pay. And said section does not refer only to the forged signature of the maker of a promissory note and of the drawer of a check. It covers also a forged indorsement, i.e., the forged signature of the payee or indorsee of a note or check. Since under said provision a forged signature is "wholly inoperative", no one can gain title to the instrument through such forged indorsement. Such an indorsement prevents any subsequent party from acquiring any right as against any party whose name appears prior to the forgery. Although rights may exist between and among parties subsequent to the forged indorsement, not one of them can acquire rights against parties prior to the forgery. Such forged indorsement cuts off the rights of all subsequent parties as against parties prior to the forgery. However, the law makes an exception to these rules where a party is precluded from setting up forgery as a defense. As a matter of practical significance, problems arising from forged indorsements of checks may generally be broken into two types of cases: (1) where forgery was accomplished by a person not associated with the drawer - for example a mail robbery; and (2) where the indorsement was forged by an agent of the drawer. This difference in situations would determine the effect of the drawer's negligence with respect to forged indorsements. While there is no duty resting on the depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed upon him to look for forgeries of his own name, a depositor

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is under a duty to set up an accounting system and a business procedure as are reasonably calculated to prevent or render difficult the forgery of indorsements, particularly by the depositor's own employees. And if the drawer (depositor) learns that a check drawn by him has been paid under a forged indorsement, the drawer is under duty promptly to report such fact to the drawee bank. For his negligence or failure either to discover or to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee who has debited his account under the forged indorsement. In other words, he is precluded from using forgery as a basis for his claim for recrediting of his account. As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer's account for the amount of said check. An exception to this rule is where the drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the forged indorsement by mere examination of his cancelled check. This accounts for the rule that although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of his own signature, he has no similar duty as to forged indorsements. A different situation arises where the indorsement was forged by an employee or agent of the drawer, or done with the active participation of the latter. Most of the cases involving forgery by an agent or employee deal with the payee's indorsement. The drawer and the payee oftentimes have business relations of long standing. The continued occurrence of business transactions of the same nature provides the opportunity for the agent/employee to commit the fraud after having developed familiarity with the signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It will then be just a question of time until the fraud is discovered. This is specially true when the agent perpetrates a series of forgeries as in the case at bar. One thing is clear from the records - that the petitioner failed to examine her records with reasonable diligence whether before she signed the checks or after receiving her bank statements. Had the petitioner examined her records more carefully, particularly the invoice receipts, cancelled checks, check book stubs, and had she compared the sums written as amounts payable in the eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered that in some checks, the amounts did not tally with those appearing in the sales invoices. Had she noticed these discrepancies, she should not have signed those checks, and should have conducted an inquiry as to the reason for the irregular entries. Likewise, had petitioner been more vigilant in going over her current account by taking careful note of the daily reports made by respondent drawee Bank on her issued checks, or at least made random scrutiny of her cancelled checks returned by respondent drawee Bank at the close of each month, she could have easily discovered the fraud being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee Bank. The respondent drawee Bank then could have taken immediate steps to prevent further commission of such fraud. Thus, petitioner's negligence was the proximate cause of her loss. And since it was her negligence which caused the respondent drawee Bank to honor the forged checks or prevented it from recovering the amount it had already paid on the checks, petitioner cannot now complain should the bank refuse to recredit her account with the amount of such checks. Under Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of her account.

BPI vs. CASA MONTESSORI, 430 SCRA 261 FACTS Casa Montessori had a current account with BPI with its President Carina Lebron as one of its authorized signatories; after conducting an investigation, Casa discovered that nine of its checks had been encashed by a certain SONNY SANTOS since 1990 with the total amount of P 782,000.00; it alleged that Santos forged the signature of Lebron and that the transaction that he entered into was illegal since the they did not authorized the latter to do so; they now demanded reimbursement of the funds illegally taken from their account Third party Leonardo Yabut worked as external auditor of Casa; he voluntarily admitted that he forged the signature of Ms. Lebron and encashed the checks ISSUE: WON there was forgery under the NIL. WON any parties negligent and therefore precluded from setting up forgery as a defense. WON damages including attorneys fee is to be awarded.

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SCs RULING First Issue: Yes, there was forgery Section 23 of the NIL provides: Section 23. Forged signature; effect of. -- When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right x x x to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. Under this provision, a forged signature is a real[or absolute defense, and a person whose signature on a negotiable instrument is forged is deemed to have never become a party thereto and to have never consented to the contract that allegedly gave rise to it. The counterfeiting of any writing, consisting in the signing of anothers name with intent to defraud, is forgery. In the present case, we hold that there was forgery of the drawers signature on the check. First, both the CA and the RTC found that Respondent Yabut himself had voluntarily admitted, through an Affidavit, that he had forged the drawers signature and encashed the checks. He never refuted these findings. That he had been coerced into admission was not corroborated by any evidence on record. Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory, after its examination of the said checks, had concluded that the handwritings thereon -- compared to the standard signature of the drawer -- were not hers. This conclusion was the same as that in the Report that the PNP Crime Laboratory had earlier issued to BPI -- the drawee bank -- upon the latters request. The voluntary admission of Yabut did not violate his constitutional rights (1) on custodial investigation, and (2) against self-incrimination. In the first place, he was not under custodial investigation. His Affidavit was executed in private and before private individuals. The mantle of protection under Section 12 of Article III of the 1987 Constitution[28] covers only the period from the time a person is taken into custody for investigation of his possible participation in the commission of a crime or from the time he is singled out as a suspect in the commission of a crime although not yet in custody. Therefore, to fall within the ambit of Section 12, quoted above, there must be an arrest or a deprivation of freedom, with questions propounded on him by the police authorities for the purpose of eliciting admissions, confessions, or any information Moreover, the right against self-incrimination under Section 17 of Article IIIof the Constitution, which is ordinarily available only in criminal prosecutions, extends to all other government proceedings -- including civil actions, legislative investigations,[36] and administrative proceedings that possess a criminal or penal aspect -- but not to private investigations done by private individuals. Second Issue: Negligence is attributable to BPI alone, We have repeatedly emphasized that, since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are even required, of it. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. . Its negligence consisted in the omission of that degree of diligence required of a bank. It cannot now feign ignorance, for very early on we have already ruled that a bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged.In fact, BPI was the same bank involved when we issued this ruling seventy years ago. Estoppel precludes individuals from denying or asserting, by their own deed or representation, anything contrary to that established as the truth, in legal contemplation. Our rules on evidence even make a juris et de jure presumption[95] that whenever one has, by ones own act or omission, intentionally and deliberately led another to believe a particular thing to be true and to act upon that belief, one cannot -- in any litigation arising from such act or omission -- be permitted to falsify that supposed truth.

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In the instant case, CASA never made any deed or representation that misled BPI. The formers omission, if any, may only be deemed an innocent mistake oblivious to the procedures and consequences of periodic audits. Since its conduct was due to such ignorance founded upon an innocent mistake, estoppel will not arise.A person who has no knowledge of or consent to a transaction may not be estopped by it. Estoppel cannot be sustained by mere argument or doubtful inference x x x. CASA is not barred from questioning BPIs error even after the lapse of the period given in the notice. Role of Independent Auditor The major purpose of an independent audit is to investigate and determine objectively if the financial statements submitted for audit by a corporation have been prepared in accordance with the appropriate financial reporting practices of private entities. The relationship that arises therefrom is both legal and moral. It begins with the execution of the engagement letter that embodies the terms and conditions of the audit and ends with the fulfilled expectation of the auditors ethical and competent performance in all aspects of the audit. The financial statements are representations of the client; but it is the auditor who has the responsibility for the accuracy in the recording of data that underlies their preparation, their form of presentation, and the opinion expressed therein. The auditor does not assume the role of employee or of management in the clients conduct of operations and is never under the control or supervision of the client. Yabut was an independent auditor hired by CASA. He handled its monthly bank reconciliations and had access to all relevant documents and checkbooks. In him was reposed the clients[ trust and confidence that he would perform precisely those functions and apply the appropriate procedures in accordance with generally accepted auditing standards. Yet he did not meet these expectations. Nothing could be more horrible to a client than to discover later on that the person tasked to detect fraud was the same one who perpetrated it.

Third Issue: No Moral and Exemplary Damages to be awarded only Attorneys Fee. In the absence of a wrongful act or omission, or of fraud or bad faith, moral damages cannot be awarded. The adverse result of an action does not per se make the action wrongful, or the party liable for it. One may err, but error alone is not a ground for granting such damages. While no proof of pecuniary loss is necessary therefore -- with the amount to be awarded left to the courts discretion-- the claimant must nonetheless satisfactorily prove the existence of its factual basis and causal relation to the claimants act or omission. Imposed by way of correction for the public good, exemplary damages cannot be recovered as a matter of right. As we have said earlier, there is no bad faith on the part of BPI for paying the checks of CASA upon forged signatures. Therefore, the former cannot be said to have acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. The latter, having no right to moral damages, cannot demand exemplary damages Although it is a sound policy not to set a premium on the right to litigate, we find that CASA is entitled to reasonable attorneys fees based on factual, legal, and equitable justification.

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PNB vs. HON. QUIMPO, G.R No. L-53194, MARCH 14, 1988 FACTS Private respondent Francisco Gozon II depositor from PNB; he went to the bank accompanied by his friend, Ernesto Santos, who was left inside the formers car with his check book; he filed a complaint against petitioner for the recovery of P5,000, plus interest, damages and attorneys fees for the negligence of the latter to determine the genuineness of the signature on the check stolen by Santos Ernesto Santos while Gozon was away, he took a check from the latters check book, filled it up for the amount of P5,000 and forged the signature of his friend, he was able to encash the check in the bank on the same day, it was debited from Gozons account; however, he admitted the allegations against him PNB- argued that the bank is absolved from any liability since the proximate cause of the loss is attributable to Gozon since he left his check book inside his car together with his friend Santos ISSUE: WON the act of Gozon is the proximate cause of the loss. SCs RULING: NO. A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily change the amount so paid to the account of the depositor whose name was forged. The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the depositor on the check being encashed. It is expected to use reasonable business prudence in accepting and cashing a check presented to it. In this case the findings of facts of the court a quo are conclusive. The trial court found that a comparison of the signature on the forged check and the sample signatures of private respondent show marked differences as the graceful lines in the sample signature which is completely different from those of the signature on the forged check. Indeed the NBI handwriting expert Estelita Santiago Agnes whom the trial court considered to be an "unbiased scientific expert" indicated the marked differences between the signature of private respondent on the sample signatures and the questioned signature. Obviously, petitioner was negligent in encashing said forged check without carefully examining the signature which shows marked variation from the genuine signature of private respondent. Private respondent trustee Ernesto Santos as a classmate and a friend. He brought him along in his car to the bank and he left his personal belongings in the car. Santos however removed and stole a check from his cheek book without the knowledge and consent of private respondent. No doubt private respondent cannot be considered negligent under the circumstances of the case.

FORGERY OF DRAWERS SIGNATURE SAMSUNG CONSTRUCTION vs. FAR EAST BANK AND TRUST CO., G.R. No. 129015, AUGUST 13, 2004 Facts Samsung Construction maintained a current account with the respondent bank Jong Kyu Lee Project manager; he is the sole signatory to the petitioners account but the check remained in the custody of companys accountant, Kyu Yong Lee; his signature was allegedly forged Roberto Gonzaga presented a check before the respondent bank, payable to cash and drawn against Samsung Constructions current account, was in the amount of P 999,500.00

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The bank teller Cleofe Justiani, confirmed that Samsungs account were enough to cover the funds in the check. Before the check was encash, Justiani forwarded the check to Cashier Gemma Velez for authentication of Jongs signature. Velez likewise counterchecked the signature on the check as against that on the signature card. He too concluded that the check was indeed signed by Jong. Velez then forwarded the check and signature card to Shirley Syfu, another bank officer, for approval. Syfu then noticed that Jose Sempio III ("Sempio"), the assistant accountant of Samsung Construction, was also in the bank. Sempio was well-known to Syfu and the other bank officers, he being the assistant accountant of Samsung Construction. Syfu showed the check to Sempio, who vouched for the genuineness of Jongs signature. Confirming the identity of Gonzaga, Sempio said that the check was for the purchase of equipment for Samsung Construction. Satisfied with the genuineness of the signature of Jong, Syfu authorized the banks encashment of the check to Gonzaga. When Jong learned about the transaction, he realized that his signature had been forged. Petitioner now demanded to credit the amount taken from their account with the respondent bank. RTC in favor of the petitioner; held that Jongs signature on the check was forged and accordingly directed the bank to pay or credit back to Samsung Constructions account CA reversed the RTCs decision; held that assuming there was forgery, it occurred due to the negligence of Samsung Construction, imputing blame on the accountant Kyu for lack of care and prudence in keeping the checks, which if observed would have prevented Sempio from gaining access thereto; it invoked the ruling in PNB v. National City Bank of New York that, if a loss, which must be borne by one or two innocent persons, can be traced to the neglect or fault of either, such loss would be borne by the negligent party, even if innocent of intentional fraud ISSUE: WON Jongs signature had been forged, assuming that it was forged will a bank that pays out on a forged check is liable to reimburse the drawer from whose account the funds were paid out. SCs RULING First Issue: YES,Jongs signature had been forged. A document formally presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this presumption must be overcome but this can only be done by convincing testimony and effective illustrations. There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and not the PNP experts. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A document examiner for fifteen years, she had been promoted to the rank of Senior Document Examiner with the NBI, and had held that rank for twelve years prior to her testimony. FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned signature against the bank signature cards. The crucial fact in question is whether or not the check was forged, not whether the bank could have detected the forgery. The latter issue becomes relevant only if there is need to weigh the comparative negligence between the bank and the party whose signature was forged. At the same time, the Court of Appeals failed to assess the effect of Jongs testimony that the signature on the check was not his.47 The assertion may seem self-serving at first blush, yet it cannot be ignored that Jong was in the best position to know whether or not the signature on the check was his. While his claim should not be taken at face value, any averments he would have on the matter, if adjudged as truthful, deserve primacy in consideration. Jongs testimony is supported by the findings of the NBI examiner. They are also backed by factual circumstances that support the conclusion that the assailed check was indeed forged. Second Issue: Yes, the bank is liable to reimburse the drawer for it pays out a forged check. Section 23 of the Negotiable Instruments Law states: When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. The general rule is to the effect that a forged signature is "wholly inoperative," and payment made "through or under such signature" is ineffectual or does not discharge the instrument. If payment is made,

PECAs Digest-Negotiable Instruments Law

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the drawee cannot charge it to the drawers account. The traditional justification for the result is that the drawee is in a superior position to detect a forgery because he has the makers signature and is expected to know and compare it. The rule has a healthy cautionary effect on banks by encouraging care in the comparison of the signatures against those on the signature cards they have on file. Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers who use checks makes the drawee an ideal party to spread the risk to insurance. According to Brady in his treatie THE LAW OF FORGED AND ALTERED CHECKS, he elucidates that: When a person deposits money in a general account in a bank, against which he has the privilege of drawing checks in the ordinary course of business, the relationship between the bank and the depositor is that of debtor and creditor. So far as the legal relationship between the two is concerned, the situation is the same as though the bank had borrowed money from the depositor, agreeing to repay it on demand, or had bought goods from the depositor, agreeing to pay for them on demand. The bank owes the depositor money in the same sense that any debtor owes money to his creditor. Added to this, in the case of bank and depositor, there is, of course, the banks obligation to pay checks drawn by the depositor in proper form and presented in due course. When the bank receives the deposit, it impliedly agrees to pay only upon the depositors order. When the bank pays a check, on which the depositors signature is a forgery, it has failed to comply with its contract in this respect. Therefore, the bank is held liable. The fact that the forgery is a clever one is immaterial. The forged signature may so closely resemble the genuine as to defy detection by the depositor himself. And yet, if a bank pays the check, it is paying out its own money and not the depositors. x x x -------------------Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party whose signature is forged. On the premise that Jongs signature was indeed forged, FEBTC is liable for the loss since it authorized the discharge of the forged check. Such liability attaches even if the bank exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye of the most cautious experts; and when a bank has been so deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived.27The forgery may be so near like the genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays the check. Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this presumption must be overcome but this can only be done by convincing testimony and effective illustrations. Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on Samsung Constructions part. The presumption remains that every person takes ordinary care of his concerns, and that the ordinary course of business has been followed. Negligence is not presumed, but must be proven by him who alleges it. While the complaint was lodged at the instance of Samsung Construction, the matter it had to prove was the claim it had alleged - whether the check was forged. It cannot be required as well to prove that it was not negligent, because the legal presumption remains that ordinary care was employed. Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung Construction was negligent. While the payee, as in this case, may not have the personal knowledge as to the standard procedures observed by the drawer, it well has the means of disputing the presumption of regularity. Proving a negative fact may be "a difficult office, but necessarily so, as it seeks to overcome a presumption in law. FEBTC was unable to dispute the presumption of ordinary care exercised by Samsung Construction, hence we cannot agree with the Court of Appeals finding of negligence.

PECAs Digest-Negotiable Instruments Law