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CTD CTD
Dates Serial Nos. Quantity Amount
Requisites of Negotiability:
22 Feb. 82 90101 to 90120 20 P80,000
#1

26 Feb. 82 74602 to 74691 90 360,000

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

2 Mar. 82 74701 to 74740 40 160,000

4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND
TRUST COMPANY, respondents.
REGALADO, J.:

9 Mar. 82 90251 to 90272 22 88,000

Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said
certificates of time (CTDs) to herein
plaintiff in connection with his

This petition for review on certiorari impugns and seeks

purchased of fuel products from the

the reversal of the decision promulgated by respondent

latter (Original Record, p. 208).

court on March 8, 1991 in CA-G.R. CV No.

23615 1 affirming with modifications, the earlier
decision of the Regional Trial Court of Manila, Branch
XLII, 2 which dismissed the complaint filed therein by
herein petitioner against respondent bank.

3. Sometime in March 1982, Angel dela

Cruz informed Mr. Timoteo Tiangco, the
Sucat Branch Manger, that he lost all the
certificates of time deposit in dispute.
Mr. Tiangco advised said depositor to

The undisputed background of this case, as found by the

execute and submit a notarized Affidavit

court a quo and adopted by respondent court, appears of

of Loss, as required by defendant bank's

record:

procedure, if he desired replacement of

said lost CTDs (TSN, February 9, 1987,
1. On various dates, defendant, a

pp. 48-50).

commercial banking institution, through

its Sucat Branch issued 280 certificates

4. On March 18, 1982, Angel dela Cruz

of time deposit (CTDs) in favor of one

executed and delivered to defendant

Angel dela Cruz who deposited with

bank the required Affidavit of Loss

herein defendant the aggregate amount

(Defendant's Exhibit 281). On the basis

of P1,120,000.00, as follows: (Joint

of said affidavit of loss, 280 replacement

Partial Stipulation of Facts and

CTDs were issued in favor of said

Statement of Issues, Original Records, p.

depositor (Defendant's Exhibits 282-

207; Defendant's Exhibits 1 to 280);

561).

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5. On March 25, 1982, Angel dela Cruz

proposed to apply the time deposits

negotiated and obtained a loan from

(Defendant's Exhibit 564).

defendant bank in the amount of Eight

Hundred Seventy Five Thousand Pesos

9. No copy of the requested documents

(P875,000.00). On the same date, said

was furnished herein defendant.

depositor executed a notarized Deed of

Assignment of Time Deposit (Exhibit
562) which stated, among others, that he
(de la Cruz) surrenders to defendant
bank "full control of the indicated time
deposits from and after date" of the

10. Accordingly, defendant bank

rejected the plaintiff's demand and claim
for payment of the value of the CTDs in
a letter dated February 7, 1983
(Defendant's Exhibit 566).

assignment and further authorizes said

11. In April 1983, the loan of Angel dela

bank to pre-terminate, set-off and "apply

Cruz with the defendant bank matured

the said time deposits to the payment of

and fell due and on August 5, 1983, the

whatever amount or amounts may be

latter set-off and applied the time

due" on the loan upon its maturity (TSN,

deposits in question to the payment of

February 9, 1987, pp. 60-62).

the matured loan (TSN, February 9,

6. Sometime in November, 1982, Mr.

1987, pp. 130-131).

Aranas, Credit Manager of plaintiff

12. In view of the foregoing, plaintiff

Caltex (Phils.) Inc., went to the

filed the instant complaint, praying that

defendant bank's Sucat branch and

defendant bank be ordered to pay it the

presented for verification the CTDs

aggregate value of the certificates of

declared lost by Angel dela Cruz

time deposit of P1,120,000.00 plus

alleging that the same were delivered to

accrued interest and compounded

herein plaintiff "as security for

interest therein at 16% per annum,

purchases made with Caltex Philippines,

moral and exemplary damages as well as

Inc." by said depositor (TSN, February

attorney's fees.

9, 1987, pp. 54-68).

After trial, the court a quo rendered its
7. On November 26, 1982, defendant

decision dismissing the instant

received a letter (Defendant's Exhibit

complaint. 3

563) from herein plaintiff formally

informing it of its possession of the

On appeal, as earlier stated, respondent court affirmed

CTDs in question and of its decision to

the lower court's dismissal of the complaint, hence this

pre-terminate the same.

petition wherein petitioner faults respondent court in

ruling (1) that the subject certificates of deposit are non-

8. On December 8, 1982, plaintiff was

negotiable despite being clearly negotiable instruments;

requested by herein defendant to furnish

(2) that petitioner did not become a holder in due course

the former "a copy of the document

of the said certificates of deposit; and (3) in disregarding

evidencing the guarantee agreement

the pertinent provisions of the Code of Commerce

with Mr. Angel dela Cruz" as well as

relating to lost instruments payable to bearer. 4

"the details of Mr. Angel dela Cruz"

obligation against which plaintiff

The instant petition is bereft of merit.

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A sample text of the certificates of time deposit is

after the word "BEARER" stamped on

reproduced below to provide a better understanding of

the space provided supposedly for the

the issues involved in this recourse.

name of the depositor, the words "has

deposited" a certain amount follows.

SECURITY BANK

The document further provides that the

AND TRUST COMPANY

amount deposited shall be "repayable to

6778 Ayala Ave., Makati No. 90101

said depositor" on the period indicated.

Metro Manila, Philippines

Therefore, the text of the instrument(s)

SUCAT OFFICEP 4,000.00

themselves manifest with clarity that

CERTIFICATE OF DEPOSIT

they are payable, not to whoever

Rate 16%

purports to be the "bearer" but only to

Date of Maturity FEB. 23, 1984

FEB 22, 1982, 19____

the specified person indicated therein,

the depositor. In effect, the appellee
bank acknowledges its depositor Angel

This is to Certify that B

dela Cruz as the person who made the

E A R E R has deposited

deposit and further engages itself to pay

in this Bank the sum

said depositor the amount indicated

of PESOS: FOUR

thereon at the stipulated date. 6

THOUSAND ONLY,
SECURITY BANK
SUCAT OFFICE
P4,000 & 00
CTS Pesos, Philippine
Currency, repayable to

We disagree with these findings and conclusions, and

hereby hold that the CTDs in question are negotiable
instruments. Section 1 Act No. 2031, otherwise known
as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:

said depositor 731

(a) It must be in writing and signed by

days. after date, upon

the maker or drawer;

presentation and
surrender of this

(b) Must contain an unconditional

certificate, with interest

promise or order to pay a sum certain in

at the rate of 16% per

money;

cent per annum.

(c) Must be payable on demand, or at a
(Sgd. Illegible) (Sgd. Illegible)

fixed or determinable future time;

(d) Must be payable to order or to

AUTHORIZED SIGNATURES 5

bearer; and
(e) Where the instrument is addressed to
a drawee, he must be named or

Respondent court ruled that the CTDs in question are

otherwise indicated therein with

non-negotiable instruments, nationalizing as follows:

reasonable certainty.

. . . While it may be true that the word

The CTDs in question undoubtedly meet the

"bearer" appears rather boldly in the

requirements of the law for negotiability. The parties'

CTDs issued, it is important to note that

bone of contention is with regard to requisite (d) set

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forth above. It is noted that Mr. Timoteo P. Tiangco,

a Angel dela Cruz is the

Security Bank's Branch Manager way back in 1982,

depositor. 8

testified in open court that the depositor reffered to in the

xxx xxx xxx

CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

On this score, the accepted rule is that the negotiability

or non-negotiability of an instrument is determined from

Atty. Calida:

the writing, that is, from the face of the instrument

itself. 9 In the construction of a bill or note, the intention

q In other words Mr.

of the parties is to control, if it can be legally

Witness, you are saying

ascertained. 10 While the writing may be read in the light

that per books of the

of surrounding circumstances in order to more perfectly

bank, the depositor

understand the intent and meaning of the parties, yet as

referred (sic) in these

they have constituted the writing to be the only outward

certificates states that it

and visible expression of their meaning, no other words

was Angel dela Cruz?

are to be added to it or substituted in its stead. The duty

of the court in such case is to ascertain, not what the

witness:

parties may have secretly intended as

a Yes, your Honor, and

contradistinguished from what their words express, but

we have the record to

what is the meaning of the words they have used. What

show that Angel dela

the parties meant must be determined by what they

Cruz was the one who

said. 11

cause (sic) the amount.

Contrary to what respondent court held, the CTDs are

negotiable instruments. The documents provide that the

Atty. Calida:

amounts deposited shall be repayable to the depositor.

q And no other person

And who, according to the document, is the depositor? It

or entity or company,

is the "bearer." The documents do not say that the

Mr. Witness?

depositor is Angel de la Cruz and that the amounts

deposited are repayable specifically to him. Rather, the

witness:

amounts are to be repayable to the bearer of the

a None, your Honor. 7
xxx xxx xxx

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

Atty. Calida:

facility so expressed that fact in clear and categorical

q Mr. Witness, who is

terms in the documents, instead of having the word

the depositor identified

"BEARER" stamped on the space provided for the name

in all of these

of the depositor in each CTD. On the wordings of the

certificates of time

documents, therefore, the amounts deposited are

deposit insofar as the

repayable to whoever may be the bearer thereof. Thus,

bank is concerned?

petitioner's aforesaid witness merely declared that Angel

de la Cruz is the depositor "insofar as the bank is

witness:

concerned," but obviously other parties not privy to the

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transaction between them would not be in a position to

deliberately led another to believe a particular thing true,

know that the depositor is not the bearer stated in the

and to act upon such belief, he cannot, in any litigation

CTDs. Hence, the situation would require any party

arising out of such declaration, act, or omission, be

dealing with the CTDs to go behind the plain import of

permitted to falsify it. 16

what is written thereon to unravel the agreement of the

parties thereto through facts aliunde. This need for resort

If it were true that the CTDs were delivered as payment

to extrinsic evidence is what is sought to be avoided by

and not as security, petitioner's credit manager could

the Negotiable Instruments Law and calls for the

have easily said so, instead of using the words "to

application of the elementary rule that the interpretation

guarantee" in the letter aforequoted. Besides, when

of obscure words or stipulations in a contract shall not

respondent bank, as defendant in the court below, moved

favor the party who caused the obscurity. 12

for a bill of particularity therein 17 praying, among

others, that petitioner, as plaintiff, be required to aver

The next query is whether petitioner can rightfully

with sufficient definiteness or particularity (a) the due

recover on the CTDs. This time, the answer is in the

date or dates of payment of the alleged indebtedness of

negative. The records reveal that Angel de la Cruz,

Angel de la Cruz to plaintiff and (b) whether or not it

whom petitioner chose not to implead in this suit for

issued a receipt showing that the CTDs were delivered to

reasons of its own, delivered the CTDs amounting to

it by De la Cruz as payment of the latter's alleged

P1,120,000.00 to petitioner without informing

indebtedness to it, plaintiff corporation opposed the

respondent bank thereof at any time. Unfortunately for

motion. 18 Had it produced the receipt prayed for, it could

petitioner, although the CTDs are bearer instruments, a

have proved, if such truly was the fact, that the CTDs

valid negotiation thereof for the true purpose and

were delivered as payment and not as security. Having

agreement between it and De la Cruz, as ultimately

opposed the motion, petitioner now labors under the

ascertained, requires both delivery and indorsement. For,

presumption that evidence willfully suppressed would be

although petitioner seeks to deflect this fact, the CTDs

adverse if produced. 19

were in reality delivered to it as a security for De la

Cruz' purchases of its fuel products. Any doubt as to

Under the foregoing circumstances, this disquisition

whether the CTDs were delivered as payment for the

in Intergrated Realty Corporation, et al. vs. Philippine

fuel products or as a security has been dissipated and

National Bank, et al. 20 is apropos:

resolved in favor of the latter by petitioner's own

authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to
respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit
Manager, wrote: ". . . These certificates of deposit were
negotiated to us by Mr. Angel dela Cruz to guarantee his
purchases of fuel products" (Emphasis ours.) 13 This
admission is conclusive upon petitioner, its protestations
notwithstanding. Under the doctrine of estoppel, an
admission or representation is rendered conclusive upon
the person making it, and cannot be denied or disproved
as against the person relying thereon. 14 A party may not
go back on his own acts and representations to the
prejudice of the other party who relied upon them. 15 In
the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and

. . . Adverting again to the Court's

pronouncements in Lopez, supra, we
quote therefrom:
The character of the
transaction between the
parties is to be
determined by their
intention, regardless of
what language was used
or what the form of the
transfer was. If it was
intended to secure the
payment of money, it
must be construed as a
pledge; but if there was

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some other intention, it

Petitioner's insistence that the CTDs were negotiated to

is not a pledge.

it begs the question. Under the Negotiable Instruments

However, even though a

Law, an instrument is negotiated when it is transferred

transfer, if regarded by

from one person to another in such a manner as to

itself, appears to have

constitute the transferee the holder thereof, 21 and a

been absolute, its object

holder may be the payee or indorsee of a bill or note,

and character might still

who is in possession of it, or the bearer thereof. 22 In the

be qualified and

present case, however, there was no negotiation in the

explained by

sense of a transfer of the legal title to the CTDs in favor

contemporaneous

of petitioner in which situation, for obvious reasons,

writing declaring it to

mere delivery of the bearer CTDs would have sufficed.

have been a deposit of

Here, the delivery thereof only as security for the

the property as

purchases of Angel de la Cruz (and we even disregard

collateral security. It has

the fact that the amount involved was not disclosed)

been said that a transfer

could at the most constitute petitioner only as a holder

of property by the

for value by reason of his lien. Accordingly, a

debtor to a creditor,

negotiation for such purpose cannot be effected by mere

even if sufficient on its

delivery of the instrument since, necessarily, the terms

face to make an

thereof and the subsequent disposition of such security,

absolute conveyance,

in the event of non-payment of the principal obligation,

should be treated as a

must be contractually provided for.

pledge if the debt

continues in inexistence

The pertinent law on this point is that where the holder

and is not discharged by

has a lien on the instrument arising from contract, he is

the transfer, and that

deemed a holder for value to the extent of his lien. 23 As

accordingly the use of

such holder of collateral security, he would be a pledgee

the terms ordinarily

but the requirements therefor and the effects thereof, not

importing conveyance

being provided for by the Negotiable Instruments Law,

of absolute ownership

shall be governed by the Civil Code provisions on

will not be given that

pledge of incorporeal rights, 24 which inceptively

effect in such a

provide:

transaction if they are

also commonly used in
pledges and mortgages
and therefore do not
unqualifiedly indicate a
transfer of absolute
ownership, in the

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.

absence of clear and

Art. 2096. A pledge shall not take effect

unambiguous language

against third persons if a description of

or other circumstances

the thing pledged and the date of the

excluding an intent to

pledge do not appear in a public

pledge.

instrument.

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Aside from the fact that the CTDs were only delivered

On this matter, we uphold respondent court's finding that

but not indorsed, the factual findings of respondent court

the aspect of alleged negligence of private respondent

quoted at the start of this opinion show that petitioner

was not included in the stipulation of the parties and in

failed to produce any document evidencing any contract

the statement of issues submitted by them to the trial

of pledge or guarantee agreement between it and Angel

court. 29The issues agreed upon by them for resolution in

de la Cruz. 25 Consequently, the mere delivery of the

this case are:

CTDs did not legally vest in petitioner any right

effective against and binding upon respondent bank. The

1. Whether or not the CTDs as worded

requirement under Article 2096 aforementioned is not a

are negotiable instruments.

mere rule of adjective law prescribing the mode whereby

proof may be made of the date of a pledge contract, but a
rule of substantive law prescribing a condition without
which the execution of a pledge contract cannot affect
third persons adversely. 26
On the other hand, the assignment of the CTDs made by
Angel de la Cruz in favor of respondent bank was
embodied in a public instrument. 27 With regard to this
other mode of transfer, the Civil Code specifically
declares:
Art. 1625. An assignment of credit, right
or action shall produce no effect as
against third persons, unless it appears
in a public instrument, or the instrument

2. Whether or not defendant could

legally apply the amount covered by the
CTDs against the depositor's loan by
virtue of the assignment (Annex "C").
3. Whether or not there was legal
compensation or set off involving the
amount covered by the CTDs and the
depositor's outstanding account with
defendant, if any.
4. Whether or not plaintiff could compel
defendant to preterminate the CTDs
before the maturity date provided
therein.

is recorded in the Registry of Property in

5. Whether or not plaintiff is entitled to

case the assignment involves real

the proceeds of the CTDs.

property.
6. Whether or not the parties can recover
Respondent bank duly complied with this statutory

damages, attorney's fees and litigation

requirement. Contrarily, petitioner, whether as purchaser,

expenses from each other.

assignee or lien holder of the CTDs, neither proved the

amount of its credit or the extent of its lien nor the

As respondent court correctly observed, with appropriate

execution of any public instrument which could affect or

citation of some doctrinal authorities, the foregoing

bind private respondent. Necessarily, therefore, as

enumeration does not include the issue of negligence on

between petitioner and respondent bank, the latter has

the part of respondent bank. An issue raised for the first

definitely the better right over the CTDs in question.

time on appeal and not raised timely in the proceedings

in the lower court is barred by estoppel. 30 Questions

Finally, petitioner faults respondent court for refusing to

raised on appeal must be within the issues framed by the

delve into the question of whether or not private

parties and, consequently, issues not raised in the trial

respondent observed the requirements of the law in the

court cannot be raised for the first time on appeal. 31

case of lost negotiable instruments and the issuance of

replacement certificates therefor, on the ground that

Pre-trial is primarily intended to make certain that all

petitioner failed to raised that issue in the lower court. 28

issues necessary to the disposition of a case are properly

raised. Thus, to obviate the element of surprise, parties

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are expected to disclose at a pre-trial conference all

The use of the word "may" in said provision shows that

issues of law and fact which they intend to raise at the

it is not mandatory but discretionary on the part of the

trial, except such as may involve privileged or

"dispossessed owner" to apply to the judge or court of

impeaching matters. The determination of issues at a

competent jurisdiction for the issuance of a duplicate of

pre-trial conference bars the consideration of other

the lost instrument. Where the provision reads "may,"

questions on appeal. 32

this word shows that it is not mandatory but

discretional. 34 The word "may" is usually permissive,

To accept petitioner's suggestion that respondent bank's

not mandatory. 35 It is an auxiliary verb indicating liberty,

supposed negligence may be considered encompassed by

opportunity, permission and possibility. 36

the issues on its right to preterminate and receive the

proceeds of the CTDs would be tantamount to saying

Moreover, as correctly analyzed by private

that petitioner could raise on appeal any issue. We agree

respondent, 37 Articles 548 to 558 of the Code of

with private respondent that the broad ultimate issue of

Commerce, on which petitioner seeks to anchor

petitioner's entitlement to the proceeds of the questioned

respondent bank's supposed negligence, merely

certificates can be premised on a multitude of other legal

established, on the one hand, a right of recourse in favor

reasons and causes of action, of which respondent bank's

of a dispossessed owner or holder of a bearer instrument

supposed negligence is only one. Hence, petitioner's

so that he may obtain a duplicate of the same, and, on

submission, if accepted, would render a pre-trial

the other, an option in favor of the party liable thereon

delimitation of issues a useless exercise.

33

who, for some valid ground, may elect to refuse to issue

a replacement of the instrument. Significantly, none of

Still, even assuming arguendo that said issue of

the provisions cited by petitioner categorically restricts

negligence was raised in the court below, petitioner still

or prohibits the issuance a duplicate or replacement

cannot have the odds in its favor. A close scrutiny of the

instrument sans compliance with the procedure outlined

provisions of the Code of Commerce laying down the

therein, and none establishes a mandatory precedent

rules to be followed in case of lost instruments payable

requirement therefor.

to bearer, which it invokes, will reveal that said

provisions, even assuming their applicability to the

WHEREFORE, on the modified premises above set

CTDs in the case at bar, are merely permissive and not

forth, the petition is DENIED and the appealed decision

mandatory. The very first article cited by petitioner

is hereby AFFIRMED.

speaks for itself.

SO ORDERED.
Art 548. The dispossessed owner, no
matter for what cause it may
be, may apply to the judge or court of
competent jurisdiction, asking that the
principal, interest or dividends due or
about to become due, be not paid a third
person, as well as in order to prevent the
ownership of the instrument that a
duplicate be issued him. (Emphasis
ours.)
xxx xxx xxx

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IFC LEASING AND ACCEPTANCE
CORPORATION, respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the
Rules of Court which assails on questions of law a
decision of the Intermediate Appellate Court in AC-G.R.
CV No. 68609 dated July 17, 1985, as well as its
resolution dated October 17, 1985, denying the motion
for reconsideration.
The antecedent facts culled from the petition are as
follows:
The petitioner is a corporation engaged in the logging
business. It had for its program of logging activities for
the year 1978 the opening of additional roads, and
simultaneous logging operations along the route of said
roads, in its logging concession area at Baganga, Manay,
and Caraga, Davao Oriental. For this purpose, it needed
two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose,
Atlantic Gulf & Pacific Company of Manila, through its
sister company and marketing arm, Industrial Products
Marketing (the "seller-assignor"), a corporation dealing
in tractors and other heavy equipment business, offered
to sell to petitioner-corporation two (2) "Used" Allis
Crawler Tractors, one (1) an HDD-21-B and the other an
HDD-16-B.
In order to ascertain the extent of work to which the
#2

tractors were to be exposed, (t.s.n., May 28, 1980, p. 44)

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

and to determine the capability of the "Used" tractors

being offered, petitioner-corporation requested the sellerassignor to inspect the job site. After conducting said
inspection, the seller-assignor assured petitionercorporation that the "Used" Allis Crawler Tractors which
were being offered were fit for the job, and gave the

G.R. No. 72593 April 30, 1987

corresponding warranty of ninety (90) days performance

of the machines and availability of parts. (t.s.n., May 28,

CONSOLIDATED PLYWOOD INDUSTRIES, INC.,

1980, pp. 59-66).

HENRY WEE, and RODOLFO T.

VERGARA, petitioners,

With said assurance and warranty, and relying on the

vs.

seller-assignor's skill and judgment, petitioner-

NEGO
corporation through petitioners Wee and Vergara,

the installments as listed in the promissory note would

president and vice- president, respectively, agreed to

likewise be delayed until the seller-assignor completely

purchase on installment said two (2) units of "Used"

fulfills its obligation under its warranty (t.s.n, May 28,

Allis Crawler Tractors. It also paid the down payment of

1980, p. 79).

Two Hundred Ten Thousand Pesos (P210,000.00).

Since the tractors were no longer serviceable, on April 7,
On April 5, 1978, the seller-assignor issued the sales

1979, petitioner Wee asked the seller-assignor to pull out

invoice for the two 2) units of tractors (Exh. "3-A"). At

the units and have them reconditioned, and thereafter to

the same time, the deed of sale with chattel mortgage

offer them for sale. The proceeds were to be given to the

with promissory note was executed (Exh. "2").

respondent and the excess, if any, to be divided between

the seller-assignor and petitioner-corporation which

Simultaneously with the execution of the deed of sale

offered to bear one-half (1/2) of the reconditioning cost

with chattel mortgage with promissory note, the seller-

(E exh. " 7 ").

assignor, by means of a deed of assignment (E exh. " 1

"), assigned its rights and interest in the chattel mortgage

No response to this letter, Exhibit "7," was received by

in favor of the respondent.

the petitioner-corporation and despite several follow-up

calls, the seller-assignor did nothing with regard to the

Immediately thereafter, the seller-assignor delivered said

request, until the complaint in this case was filed by the

two (2) units of "Used" tractors to the petitioner-

respondent against the petitioners, the corporation, Wee,

corporation's job site and as agreed, the seller-assignor

and Vergara.

stationed its own mechanics to supervise the operations

of the machines.

The complaint was filed by the respondent against the

petitioners for the recovery of the principal sum of One

Barely fourteen (14) days had elapsed after their delivery

Million Ninety Three Thousand Seven Hundred Eighty

when one of the tractors broke down and after another

Nine Pesos & 71/100 (P1,093,789.71), accrued interest

nine (9) days, the other tractor likewise broke down

of One Hundred Fifty One Thousand Six Hundred

(t.s.n., May 28, 1980, pp. 68-69).

Eighteen Pesos & 86/100 (P151,618.86) as of August 15,

On April 25, 1978, petitioner Rodolfo T. Vergara

formally advised the seller-assignor of the fact that the
tractors broke down and requested for the sellerassignor's usual prompt attention under the warranty (E
exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T.
Vergara, Exhibit "5," the seller-assignor sent to the job
site its mechanics to conduct the necessary repairs (Exhs.
"6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"),
but the tractors did not come out to be what they should
be after the repairs were undertaken because the units
were no longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road
building and simultaneous logging operations of

1979, accruing interest thereafter at the rate of twelve

(12%) percent per annum, attorney's fees of Two
Hundred Forty Nine Thousand Eighty One Pesos &
71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for
the dismissal of the complaint and asking the trial court
to order the respondent to pay the petitioners damages in
an amount at the sound discretion of the court, Twenty
Thousand Pesos (P20,000.00) as and for attorney's fees,
and Five Thousand Pesos (P5,000.00) for expenses of
litigation. The petitioners likewise prayed for such other
and further relief as would be just under the premises.
In a decision dated April 20, 1981, the trial court
rendered the following judgment:

petitioner-corporation were delayed and petitioner

WHEREFORE, judgment is hereby

Vergara advised the seller-assignor that the payments of

rendered:

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1. ordering defendants to pay jointly and

On July 17, 1985, the Intermediate Appellate Court

severally in their official and personal

issued the challenged decision affirming in toto the

capacities the principal sum of ONE

decision of the trial court. The pertinent portions of the

MILLION NINETY THREE

decision are as follows:

THOUSAND SEVEN HUNDRED

NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of
ONE HUNDRED FIFTY ONE
THOUSAND SIX HUNDRED
EIGHTEEN PESOS & 86/100
(P151,618.,86) as of August 15, 1979
and accruing interest thereafter at the
rate of 12% per annum;

xxx xxx xxx

From the evidence presented by the
parties on the issue of warranty, We are
of the considered opinion that aside
from the fact that no provision of
warranty appears or is provided in the
Deed of Sale of the tractors and even
admitting that in a contract of sale

2. ordering defendants to pay jointly and

unless a contrary intention appears, there

severally attorney's fees equivalent to

is an implied warranty, the defense of

ten percent (10%) of the principal and to

breach of warranty, if there is any, as in

pay the costs of the suit.

this case, does not lie in favor of the

appellants and against the plaintiff-

Defendants' counterclaim is disallowed.

appellee who is the assignee of the

(pp. 45-46, Rollo)

promissory note and a holder of the

same in due course. Warranty lies in this

On June 8, 1981, the trial court issued an order denying

case only between Industrial Products

the motion for reconsideration filed by the petitioners.

Marketing and Consolidated Plywood

Thus, the petitioners appealed to the Intermediate

Appellate Court and assigned therein the following
errors:

Industries, Inc. The plaintiff-appellant

herein upon application by appellant
corporation granted financing for the
purchase of the questioned units of Fiat-

Allis Crawler,Tractors.

THAT THE LOWER COURT ERRED IN FINDING

xxx xxx xxx

THAT THE SELLER ATLANTIC GULF AND PACIFIC

COMPANY OF MANILA DID NOT APPROVE
DEFENDANTS-APPELLANTS CLAIM OF
WARRANTY.
II

Holding that breach of warranty if any,

is not a defense available to appellants
either to withdraw from the contract
and/or demand a proportionate reduction
of the price with damages in either case
(Art. 1567, New Civil Code). We now

THAT THE LOWER COURT ERRED IN FINDING

come to the issue as to whether the

THAT PLAINTIFF- APPELLEE IS A HOLDER IN

plaintiff-appellee is a holder in due

DUE COURSE OF THE PROMISSORY NOTE AND

course of the promissory note.

SUED UNDER SAID NOTE AS HOLDER THEREOF

IN DUE COURSE.

To begin with, it is beyond arguments

that the plaintiff-appellee is a financing
corporation engaged in financing and

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receivable discounting extending credit

opine that the same is legally and

facilities to consumers and industrial,

conclusively enforceable against the

commercial or agricultural enterprises

defendants-appellants.

by discounting or factoring commercial

papers or accounts receivable duly

WHEREFORE, finding the decision

authorized pursuant to R.A. 5980

appealed from according to law and

otherwise known as the Financing Act.

evidence, We find the appeal without

merit and thus affirm the decision in

A study of the questioned promissory

toto. With costs against the appellants.

note reveals that it is a negotiable

(pp. 50-55, Rollo)

instrument which was discounted or sold

to the IFC Leasing and Acceptance

The petitioners' motion for reconsideration of the

Corporation for P800,000.00 (Exh. "A")

decision of July 17, 1985 was denied by the Intermediate

considering the following. it is in

Appellate Court in its resolution dated October 17, 1985,

writing and signed by the maker; it

a copy of which was received by the petitioners on

contains an unconditional promise to

October 21, 1985.

pay a certain sum of money payable at a

fixed or determinable future time; it is
payable to order (Sec. 1, NIL); the

Hence, this petition was filed on the following grounds:

I.

promissory note was negotiated when it

was transferred and delivered by IPM to

ON ITS FACE, THE PROMISSORY NOTE IS

the appellee and duly endorsed to the

CLEARLY NOT A NEGOTIABLE INSTRUMENT AS

latter (Sec. 30, NIL); it was taken in the

DEFINED UNDER THE LAW SINCE IT IS NEITHER

conditions that the note was complete

PAYABLE TO ORDER NOR TO BEARER.

and regular upon its face before the

same was overdue and without notice,
that it had been previously dishonored
and that the note is in good faith and for
value without notice of any infirmity or
defect in the title of IPM (Sec. 52, NIL);
that IFC Leasing and Acceptance

II
THE RESPONDENT IS NOT A HOLDER IN DUE
COURSE: AT BEST, IT IS A MERE ASSIGNEE OF
THE SUBJECT PROMISSORY NOTE.
III.

Corporation held the instrument free

from any defect of title of prior parties

SINCE THE INSTANT CASE INVOLVES A NON-

and free from defenses available to prior

NEGOTIABLE INSTRUMENT AND THE TRANSFER

parties among themselves and may

OF RIGHTS WAS THROUGH A MERE

enforce payment of the instrument for

ASSIGNMENT, THE PETITIONERS MAY RAISE

the full amount thereof against all

AGAINST THE RESPONDENT ALL DEFENSES

parties liable thereon (Sec. 57, NIL); the

THAT ARE AVAILABLE TO IT AS AGAINST THE

appellants engaged that they would pay

SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS

the note according to its tenor, and admit

MARKETING.

the existence of the payee IPM and its

capacity to endorse (Sec. 60, NIL).
In view of the essential elements found
in the questioned promissory note, We

IV.
THE PETITIONERS ARE NOT LIABLE FOR THE
PAYMENT OF THE PROMISSORY NOTE BECAUSE:

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A) THE SELLER-ASSIGNOR IS GUILTY OF

The petition is impressed with merit.

BREACH OF WARRANTY UNDER THE LAW;

First, there is no question that the seller-assignor
B) IF AT ALL, THE RESPONDENT MAY RECOVER

breached its express 90-day warranty because the

ONLY FROM THE SELLER-ASSIGNOR OF THE

findings of the trial court, adopted by the respondent

PROMISSORY NOTE.

appellate court, that "14 days after delivery, the first

tractor broke down and 9 days, thereafter, the second

V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE
BY THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE

tractor became inoperable" are sustained by the records.

The petitioner was clearly a victim of a warranty not
honored by the maker.
The Civil Code provides that:

OF THE TRANSACTION FROM BEING A SALE ON

INSTALLMENTS TO A PURE LOAN.

ART. 1561. The vendor shall be

responsible for warranty against the

VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED
OR USED IN EVIDENCE IN ANY COURT BECAUSE
THE REQUISITE DOCUMENTARY STAMPS HAVE
NOT BEEN AFFIXED THEREON OR CANCELLED.

hidden defects which the thing sold may

have, should they render it unfit for the
use for which it is intended, or should
they diminish its fitness for such use to
such an extent that, had the vendee been
aware thereof, he would not have

The petitioners prayed that judgment be rendered setting

acquired it or would have given a lower

aside the decision dated July 17, 1985, as well as the

price for it; but said vendor shall not be

resolution dated October 17, 1985 and dismissing the

answerable for patent defects or those

complaint but granting petitioners' counterclaims before

which may be visible, or for those which

the court of origin.

are not visible if the vendee is an expert

who, by reason of his trade or

On the other hand, the respondent corporation in its

profession, should have known them.

comment to the petition filed on February 20, 1986,

contended that the petition was filed out of time; that the

ART. 1562. In a sale of goods, there is

promissory note is a negotiable instrument and

an implied warranty or condition as to

respondent a holder in due course; that respondent is not

the quality or fitness of the goods, as

liable for any breach of warranty; and finally, that the

follows:

promissory note is admissible in evidence.

(1) Where the buyer, expressly or by

The core issue herein is whether or not the promissory

implication makes known to the seller

note in question is a negotiable instrument so as to bar

the particular purpose for which the

completely all the available defenses of the petitioner

goods are acquired, and it appears that

against the respondent-assignee.

the buyer relies on the sellers skill or

judge judgment (whether he be the

Preliminarily, it must be established at the outset that we

grower or manufacturer or not), there is

consider the instant petition to have been filed on time

an implied warranty that the goods shall

because the petitioners' motion for reconsideration

be reasonably fit for such purpose;

actually raised new issues. It cannot, therefore, be

considered pro- formal.

xxx xxx xxx

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ART. 1564. An implied warranty or

ones, in case one of the obligors should

condition as to the quality or fitness for

not comply with what is incumbent upon

a particular purpose may be annexed by

him.

the usage of trade.

The injured party may choose between
xxx xxx xxx

the fulfillment and the rescission of the

obligation with the payment of damages

ART. 1566. The vendor is responsible to

in either case. He may also seek

the vendee for any hidden faults or

rescission, even after he has chosen

defects in the thing sold even though he

fulfillment, if the latter should become

was not aware thereof.

impossible.

This provision shall not apply if the

xxx xxx xxx

contrary has been stipulated, and the

vendor was not aware of the hidden

ART. 1567. In the cases of articles 1561,

faults or defects in the thing sold.

1562, 1564, 1565 and 1566, the vendee

(Emphasis supplied).

may elect between withdrawing from the

contract and demanding a

It is patent then, that the seller-assignor is liable for its

proportionate reduction of the price,

breach of warranty against the petitioner. This liability as

with damages in either case. (Emphasis

a general rule, extends to the corporation to whom it

supplied)

assigned its rights and interests unless the assignee is a

holder in due course of the promissory note in question,

Petitioner, having unilaterally and extrajudicially

assuming the note is negotiable, in which case the latter's

rescinded its contract with the seller-assignor,

rights are based on the negotiable instrument and

necessarily can no longer sue the seller-assignor except

assuming further that the petitioner's defenses may not

by way of counterclaim if the seller-assignor sues it

prevail against it.

because of the rescission.

Secondly, it likewise cannot be denied that as soon as the

In the case of the University of the Philippines v. De los

tractors broke down, the petitioner-corporation notified

Angeles (35 SCRA 102) we held:

the seller-assignor's sister company, AG & P, about the

breakdown based on the seller-assignor's express 90-day

In other words, the party who deems the

warranty, with which the latter complied by sending its

contract violated may consider it

mechanics. However, due to the seller-assignor's delay

resolved or rescinded, and act

and its failure to comply with its warranty, the tractors

accordingly, without previous court

became totally unserviceable and useless for the purpose

action, but it proceeds at its own

for which they were purchased.

risk. For it is only the final judgment of

the corresponding court that will

Thirdly, the petitioner-corporation, thereafter,

conclusively and finally settle whether

unilaterally rescinded its contract with the seller-

the action taken was or was not correct

assignor.

in law. But the law definitely does not

require that the contracting party who

Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind
obligations is implied in reciprocal

believes itself injured must first file suit

and wait for adjudgement before taking
extrajudicial steps to protect its interest.
Otherwise, the party injured by the

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other's breach will have to passively sit

When instrument is payable to order.

and watch its damages accumulate

during the pendency of the suit until the

SEC. 8. WHEN PAYABLE TO ORDER.

final judgment of rescission is rendered

The instrument is payable to order

when the law itself requires that he

where it is drawn payable to the order of

should exercise due diligence to

a specified person or to him or his order.

minimize its own damages (Civil Code,

...

Article 2203). (Emphasis supplied)

Going back to the core issue, we rule that the promissory
note in question is not a negotiable instrument.
The pertinent portion of the note is as follows:

xxx xxx xxx

These are the only two ways by which
an instrument may be made payable to
order. There must always be a specified
person named in the instrument. It

FOR VALUE RECEIVED, I/we jointly

means that the bill or note is to be paid

and severally promise to pay to the

to the person designated in the

INDUSTRIAL PRODUCTS

instrument or to any person to whom he

MARKETING, the sum of ONE

has indorsed and delivered the

MILLION NINETY THREE

same. Without the words "or order"

THOUSAND SEVEN HUNDRED

or"to the order of, "the instrument is

EIGHTY NINE PESOS & 71/100 only

payable only to the person designated

(P 1,093,789.71), Philippine Currency,

therein and is therefore non-negotiable.

the said principal sum, to be payable in

Any subsequent purchaser thereof will

24 monthly installments starting July 15,

not enjoy the advantages of being a

1978 and every 15th of the month

holder of a negotiable instrument but

thereafter until fully paid. ...

will merely "step into the shoes" of the

person designated in the instrument and

Considering that paragraph (d), Section 1 of the

will thus be open to all defenses

Negotiable Instruments Law requires that a promissory

available against the latter." (Campos

note "must be payable to order or bearer, " it cannot be

and Campos, Notes and Selected Cases

denied that the promissory note in question is not a

on Negotiable Instruments Law, Third

negotiable instrument.

Edition, page 38). (Emphasis supplied)

The instrument in order to be considered

Therefore, considering that the subject promissory note

negotiablility-i.e. must contain the so-

is not a negotiable instrument, it follows that the

called 'words of negotiable, must be

respondent can never be a holder in due course but

payable to 'order' or 'bearer'. These

remains a mere assignee of the note in question. Thus,

words serve as an expression of consent

the petitioner may raise against the respondent all

that the instrument may be transferred.

defenses available to it as against the seller-assignor

This consent is indispensable since a

Industrial Products Marketing.

maker assumes greater risk under a

negotiable instrument than under a non-

This being so, there was no need for the petitioner to

negotiable one. ...

implied the seller-assignor when it was sued by the

respondent-assignee because the petitioner's defenses

xxx xxx xxx

apply to both or either of either of them. Actually, the

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records show that even the respondent itself admitted to

were assigned; . . . you

being a mere assignee of the promissory note in

want to make a

question, to wit:

distinction, one is an
assignment of mortgage
ATTY. PALACA:
Did we get it right from
the counsel that what is
being assigned is the
Deed of Sale with
Chattel Mortgage with
the promissory note
which is as testified to
by the witness was

right and the other one

is indorsement of the
promissory note. What
counsel for defendants
wants is that you
stipulate that it is
contained in one single
transaction?
ATTY. ILAGAN:

indorsed? (Counsel for

Plaintiff nodding his

We stipulate it is one

head.) Then we have no

single transaction. (pp.

further questions on

27-29, TSN., February

cross,

13, 1980).

COURT:

Secondly, even conceding for purposes of discussion that

the promissory note in question is a negotiable

You confirm his

instrument, the respondent cannot be a holder in due

manifestation? You are

course for a more significant reason.

nodding your head? Do

you confirm that?

The evidence presented in the instant case shows that

prior to the sale on installment of the tractors, there was

ATTY. ILAGAN:
The Deed of Sale
cannot be assigned. A
deed of sale is a
transaction between two
persons; what is
assigned are rights, the

an arrangement between the seller-assignor, Industrial

Products Marketing, and the respondent whereby the
latter would pay the seller-assignor the entire purchase
price and the seller-assignor, in turn, would assign its
rights to the respondent which acquired the right to
collect the price from the buyer, herein petitioner
Consolidated Plywood Industries, Inc.

rights of the mortgagee

A mere perusal of the Deed of Sale with Chattel

were assigned to the

Mortgage with Promissory Note, the Deed of

IFC Leasing &

Assignment and the Disclosure of Loan/Credit

Acceptance

Transaction shows that said documents evidencing the

Corporation.

sale on installment of the tractors were all executed on

COURT:

the same day by and among the buyer, which is herein

petitioner Consolidated Plywood Industries, Inc.; the

He puts it in a simple

seller-assignor which is the Industrial Products

way as one-deed of sale

Marketing; and the assignee-financing company, which

and chattel mortgage

is the respondent. Therefore, the respondent had actual

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knowledge of the fact that the seller-assignor's right to

the instrument of deffect in the title of

collect the purchase price was not unconditional, and

the person negotiating it

that it was subject to the condition that the tractors -sold

xxx xxx xxx

were not defective. The respondent knew that when the

tractors turned out to be defective, it would be subject to

SEC. 56. WHAT CONSTITUTES

the defense of failure of consideration and cannot

NOTICE OF DEFFECT. To

recover the purchase price from the petitioners. Even

constitute notice of an infirmity in the

assuming for the sake of argument that the promissory

instrument or defect in the title of the

note is negotiable, the respondent, which took the same

person negotiating the same, the person

with actual knowledge of the foregoing facts so that its

to whom it is negotiated must have had

action in taking the instrument amounted to bad faith, is

actual knowledge of the infirmity or

not a holder in due course. As such, the respondent is

defect, or knowledge of such facts that

subject to all defenses which the petitioners may raise

his action in taking the instrument

against the seller-assignor. Any other interpretation

amounts to bad faith. (Emphasis

would be most inequitous to the unfortunate buyer who

supplied)

is not only saddled with two useless tractors but must

also face a lawsuit from the assignee for the entire

We subscribe to the view of Campos and Campos that a

purchase price and all its incidents without being able to

financing company is not a holder in good faith as to the

raise valid defenses available as against the assignor.

buyer, to wit:

Lastly, the respondent failed to present any evidence to

In installment sales, the buyer usually

prove that it had no knowledge of any fact, which would

issues a note payable to the seller to

justify its act of taking the promissory note as not

cover the purchase price. Many times, in

amounting to bad faith.

pursuance of a previous arrangement

Sections 52 and 56 of the Negotiable Instruments Law

provide that: negotiating it.
xxx xxx xxx

with the seller, a finance company pays

the full price and the note is indorsed to
it, subrogating it to the right to collect
the price from the buyer, with interest.
With the increasing frequency of

SEC. 52. WHAT CONSTITUTES A

installment buying in this country, it is

HOLDER IN DUE COURSE. A

most probable that the tendency of the

holder in due course is a holder who has

courts in the United States to protect the

taken the instrument under the following

buyer against the finance company will ,

conditions:

the finance company will be subject to

the defense of failure of consideration

xxx xxx xxx

xxx xxx xxx

and cannot recover the purchase price

from the buyer. As against the argument
that such a rule would seriously affect "a

(c) That he took it in good faith and for

certain mode of transacting business

value

adopted throughout the State," a court in

one case stated:

(d) That the time it was negotiated by

him he had no notice of any infirmity in

It may be that our

holding here will

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require some changes in

this type from its inception, it cannot be regarded as a

business methods and

holder in due course of the note given in the transaction.

will impose a greater

burden on the finance

In like manner, therefore, even assuming that the subject

companies. We think the

promissory note is negotiable, the respondent, a

buyer-Mr. & Mrs.

financing company which actively participated in the

General Public-should

sale on installment of the subject two Allis Crawler

have some protection

tractors, cannot be regarded as a holder in due course of

somewhere along the

said note. It follows that the respondent's rights under the

line. We believe the

promissory note involved in this case are subject to all

finance company is

defenses that the petitioners have against the seller-

better able to bear the

assignor, Industrial Products Marketing. For Section 58

risk of the dealer's

of the Negotiable Instruments Law provides that "in the

insolvency than the

hands of any holder other than a holder in due course, a

buyer and in a far better

negotiable instrument is subject to the same defenses as

position to protect his

if it were non-negotiable. ... "

interests against
unscrupulous and
insolvent dealers. . . .

Prescinding from the foregoing and setting aside other

peripheral issues, we find that both the trial and
respondent appellate court erred in holding the

If this opinion imposes

promissory note in question to be negotiable. Such a

great burdens on

ruling does not only violate the law and applicable

finance companies it is

jurisprudence, but would result in unjust enrichment on

a potent argument in

the part of both the assigner- assignor and respondent

favor of a rule which

assignee at the expense of the petitioner-corporation

win afford public

which rightfully rescinded an inequitable contract. We

protection to the general

note, however, that since the seller-assignor has not been

buying public against

impleaded herein, there is no obstacle for the respondent

unscrupulous dealers in

to file a civil Suit and litigate its claims against the

personal property. . . .

seller- assignor in the rather unlikely possibility that it so

(Mutual Finance Co. v.

desires,

Martin, 63 So. 2d 649,

44 ALR 2d 1 [1953])
(Campos and Campos,
Notes and Selected
Cases on Negotiable
Instruments Law, Third
Edition, p. 128).

WHEREFORE, in view of the foregoing, the decision of

the respondent appellate court dated July 17, 1985, as
well as its resolution dated October 17, 1986, are hereby
ANNULLED and SET ASIDE. The complaint against
the petitioner before the trial court is DISMISSED.
SO ORDERED.

In the case of Commercial Credit Corporation v. Orange

Country Machine Works (34 Cal. 2d 766) involving
similar facts, it was held that in a very real sense, the
finance company was a moving force in the transaction
from its very inception and acted as a party to it. When a
finance company actively participates in a transaction of

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ASSURANCE CORPORATION and CENTRAL
BANK of the PHILIPPINES, respondents.
TORRES, JR., J.:
Assailed in this Petition for Review on Certiorari is the
Decision of the respondent Court of Appeals dated
January 29, 1990, 1 affirming the nullity of the transfer of
Central Bank Certificate of Indebtedness (CBCI) No.
D891, 2 with a face value of P500,000.00, from the
Philippine Underwriters Finance Corporation
(Philfinance) to the petitioner Trader's Royal Bank
(TRB), under a Repurchase Agreement 3 dated February
4, 1981, and a Detached Assignment 4 dated April 27,
1981.
Docketed as Civil Case No. 83-17966 in the Regional
Trial Court of Manila, Branch 32, the action was
originally filed as a Petition for Mandamus 5 under Rule
65 of the Rules of Court, to compel the Central Bank of
the Philippines to register the transfer of the subject
CBCI to petitioner Traders Royal Bank (TRB).
In the said petition, TRB stated that:
3. On November 27, 1979, Filriters
Guaranty Assurance Corporation
(Filriters) executed a "Detached
Assignment" . . ., whereby Filriters, as
registered owner, sold, transferred,
assigned and delivered unto Philippine
Underwriters Finance Corporation
(Philfinance) all its rights and title to

#3

Central Bank Certificates of

Republic of the Philippines
SUPREME COURT
Manila

Indebtedness of PESOS: FIVE

HUNDRED THOUSAND (P500,000)
and having an aggregate value of
PESOS: THREE MILLION FIVE

SECOND DIVISION

HUNDRED THOUSAND
(P3,500,000.00);

G.R. No. 93397 March 3, 1997

4. The aforesaid Detached Assignment
TRADERS ROYAL BANK, petitioner,

(Annex "A") contains an express

vs.

authorization executed by the transferor

COURT OF APPEALS, FILRITERS GUARANTY

intended to complete the assignment

through the registration of the transfer in

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the name of PhilFinance, which

and, furthermore, it did thereby

authorization is specifically phrased as

"irrevocably authorize the said issuer

follows: '(Filriters) hereby irrevocably

(respondent herein) to transfer the said

authorized the said issuer (Central Bank)

bond/certificate on the books of its fiscal

to transfer the said bond/certificates on

agent." . . .

the books of its fiscal agent;

9. Petitioner presented the CBCI (Annex
5. On February 4, 1981, petitioner

"C"), together with the two (2)

entered into a Repurchase Agreement

aforementioned Detached Assignments

with PhilFinance . . ., whereby, for and

(Annexes "B" and "D"), to the Securities

in consideration of the sum of PESOS:

Servicing Department of the respondent,

FIVE HUNDRED THOUSAND

and requested the latter to effect the

(P500,000.00), PhilFinance sold,

transfer of the CBCI on its books and to

transferred and delivered to petitioner

issue a new certificate in the name of

CBCI 4-year, 8th series, Serial No.

petitioner as absolute owner thereof;

D891 with a face value of P500,000.00 .

. ., which CBCI was among those

10. Respondent failed and refused to

previously acquired by PhilFinance

register the transfer as requested, and

from Filriters as averred in paragraph 3

continues to do so notwithstanding

of the Petition;

petitioner's valid and just title over the

same and despite repeated demands in

6. Pursuant to the aforesaid Repurchase

writing, the latest of which is hereto

Agreement (Annex "B"), Philfinance

attached as Annex "E" and made an

agreed to repurchase CBCI Serial No.

integral part hereof;

D891 (Annex "C"), at the stipulated

price of PESOS: FIVE HUNDRED

11. The express provisions governing

NINETEEN THOUSAND THREE

the transfer of the CBCI were

HUNDRED SIXTY-ONE & 11/100

substantially complied with the

(P519,361.11) on April 27, 1981;

petitioner's request for registration, to

wit:

7. PhilFinance failed to repurchase the

CBCI on the agreed date of maturity,

"No transfer thereof

April 27, 1981, when the checks it

shall be valid unless

issued in favor of petitioner were

made at said office

dishonored for insufficient funds;

(where the Certificate

has been registered) by

8. Owing to the default of PhilFinance,

the registered owner

it executed a Detached Assignment in

hereof, in person or by

favor of the Petitioner to enable the

his attorney duly

latter to have its title completed and

authorized in writing,

registered in the books of the

and similarly noted

respondent. And by means of said

hereon, and upon

Detachment, Philfinance transferred and

payment of a nominal

assigned all, its rights and title in the

transfer fee which may

said CBCI (Annex "C") to petitioner

be required, a new

20

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Certificate shall be

who have present or future claim against

issued to the transferee

policies issued by Filriters, Alfredo

of the registered holder

Banaria, then Senior Vice-President-

thereof."

Treasury of Filriters, without any board

resolution, knowledge or consent of the

and, without a doubt, the Detached

board of directors of Filriters, and

Assignments presented to respondent

without any clearance or authorization

were sufficient authorizations in writing

from the Insurance Commissioner,

executed by the registered owner,

executed a detached assignment

Filriters, and its transferee, PhilFinance,

purportedly assigning CBCI No. 891 to

as required by the above-quoted

Philfinance;

provision;
xxx xxx xxx
12. Upon such compliance with the
aforesaid requirements, the ministerial

14. Subsequently, Alberto Fabella,

duties of registering a transfer of

Senior Vice-President-Comptroller are

ownership over the CBCI and issuing a

Pilar Jacobe, Vice-President-Treasury of

new certificate to the transferee

Filriters (both of whom were holding the

devolves upon the respondent;

same positions in Philfinance), without

any consideration or benefit redounding

Upon these assertions, TRB prayed for the registration

to Filriters and to the grave prejudice of

by the Central Bank of the subject CBCI in its name.

Filriters, its policy holders and all who

On December 4, 1984, the Regional Trial Court the case

took cognizance of the defendant Central Bank of the
Philippines' Motion for Admission of Amended Answer
with Counter Claim for Interpleader 6 thereby calling to
fore the respondent Filriters Guaranty Assurance

have present or future claims against its

policies, executed similar detached
assignment forms transferring the CBCI
to plaintiff;
xxx xxx xxx

Corporation (Filriters), the registered owner of the

subject CBCI as respondent.

15. The detached assignment is patently

void and inoperative because the

For its part, Filriters interjected as Special Defenses the

assignment is without the knowledge

following:

and consent of directors of Filriters, and

11. Respondent is the registered owner
of CBCI No. 891;
12. The CBCI constitutes part of the
reserve investment against liabilities
required of respondent as an insurance
company under the Insurance Code;
13. Without any consideration or benefit
whatsoever to Filriters, in violation of
law and the trust fund doctrine and to
the prejudice of policyholders and to all

not duly authorized in writing by the

Board, as requiring by Article V, Section
3 of CB Circular No. 769;
16. The assignment of the CBCI to
Philfinance is a personal act of Alfredo
Banaria and not the corporate act of
Filriters and such null and void;
a) The assignment was executed without
consideration and for that reason, the
assignment is void from the beginning
(Article 1409, Civil Code);

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b) The assignment was executed without

c) CB Circular 769, Series of 1980

any knowledge and consent of the board

(Rules and Regulations Governing

of directors of Filriters;

CBCIs) provides that the registered

certificates are payable only to the

c) The CBCI constitutes reserve

registered owner (Article II, Section 1).

investment of Filriters against liabilities,

which is a requirement under the

18. Plaintiff knew full well that the

Insurance Code for its existence as an

assignment by Philfinance of CBCI No.

insurance company and the pursuit of its

891 by Filriters is not a regular

business operations. The assignment of

transaction made in the usual of ordinary

the CBCI is illegal act in the sense

course of business;

of malum in se or malum prohibitum, for

anyone to make, either as corporate or

a) The CBCI constitutes part of the

personal act;

reserve investments of Filriters against

liabilities requires by the Insurance

d) The transfer of dimunition of reserve

Code and its assignment or transfer is

investments of Filriters is expressly

expressly prohibited by law. There was

prohibited by law, is immoral and

no attempt to get any clearance or

against public policy;

authorization from the Insurance

Commissioner;

e) The assignment of the CBCI has

resulted in the capital impairment and in

b) The assignment by Filriters of the

the solvency deficiency of Filriters (and

CBCI is clearly not a transaction in the

has in fact helped in placing Filriters

usual or regular course of its business;

under conservatorship), an inevitable

result known to the officer who executed

c) The CBCI involved substantial

assignment.

amount and its assignment clearly

constitutes disposition of "all or

17. Plaintiff had acted in bad faith and

substantially all" of the assets of

with knowledge of the illegality and

Filriters, which requires the affirmative

invalidity of the assignment.

action of the stockholders (Section 40,

Corporation [sic] Code. 7

a) The CBCI No. 891 is not a negotiable

instrument and as a certificate of

In its Decision 8 dated April 29, 1988, the Regional Trial

indebtedness is not payable to bearer but

Court of Manila, Branch XXXIII found the assignment

is a registered in the name of Filriters;

of CBCI No. D891 in favor of Philfinance, and the

subsequent assignment of the same CBCI by Philfinance

b) The provision on transfer of the

in favor of Traders Royal Bank null and void and of no

CBCIs provides that the Central Bank

force and effect. The dispositive portion of the decision

shall treat the registered owner as the

reads:

absolute owner and that the value of the

registered certificates shall be payable

ACCORDINGLY, judgment is hereby

only to the registered owner; a sufficient

rendered in favor of the respondent

notice to plaintiff that the assignments

Filriters Guaranty Assurance

do not give them the registered owner's

Corporation and against the plaintiff

right as absolute owner of the CBCI's;

Traders Royal Bank:

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(a) Declaring the assignment of CBCI

conveying to appellant TRB all its right

No. 891 in favor of PhilFinance, and the

and the title to CBCI No. D891.

subsequent assignment of CBCI by

PhilFinance in favor of the plaintiff

Armed with the deed of assignment,

Traders Royal Bank as null and void and

TRB then sought the transfer and

of no force and effect;

registration of CBCI No. D891 in its

name before the Security and Servicing

(b) Ordering the respondent Central

Department of the Central Bank (CB).

Bank of the Philippines to disregard the

Central Bank, however, refused to effect

said assignment and to pay the value of

the transfer and registration in view of

the proceeds of the CBCI No. D891 to

an adverse claim filed by defendant

the Filriters Guaranty Assurance

Filriters.

Corporation;
Left with no other recourse, TRB filed a
(c) Ordering the plaintiff Traders Royal

special civil action

Bank to pay respondent Filriters

for mandamus against the Central Bank

Guaranty Assurance Corp. The sum of

in the Regional Trial Court of Manila.

P10,000 as attorney's fees; and

The suit, however, was subsequently

treated by the lower court as a case of

(d) to pay the costs.

SO ORDERED. 9

interpleader when CB prayed in its

amended answer that Filriters be
impleaded as a respondent and the court

The petitioner assailed the decision of the trial court in

adjudge which of them is entitled to the

the Court of Appeals 10, but their appeals likewise failed.

ownership of CBCI No. D891. Failing to

The findings of the fact of the said court are hereby

get a favorable judgment. TRB now

reproduced:

comes to this Court on appeal. 11

The records reveal that defendant

In the appellate court, petitioner argued that the subject

Filriters is the registered owner of CBCI

CBCI was a negotiable instrument, and having acquired

No. D891. Under a deed of assignment

the said certificate from Philfinance as a holder in due

dated November 27, 1971, Filriters

course, its possession of the same is thus free fro any

transferred CBCI No. D891 to

defect of title of prior parties and from any defense

Philippine Underwriters Finance

available to prior parties among themselves, and it may

Corporation (Philfinance). Subsequently,

thus, enforce payment of the instrument for the full

Philfinance transferred CBCI No. D891,

amount thereof against all parties liable thereon. 12

which was still registered in the name of

Filriters, to appellant Traders Royal
Bank (TRB). The transfer was made
under a repurchase agreement dated
February 4, 1981, granting Philfinance
the right to repurchase the instrument on
or before April 27, 1981. When
Philfinance failed to buy back the note

In ignoring said argument, the appellate court that the

CBCI is not a negotiable instrument, since the
instrument clearly stated that it was payable to Filriters,
the registered owner, whose name was inscribed thereon,
and that the certificate lacked the words of negotiability
which serve as an expression of consent that the
instrument may be transferred by negotiation.

on maturity date, it executed a deed of

assignment, dated April 27, 1981,

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SO ORDERED. 13

Obviously, the assignment of the certificate from

Filriters to Philfinance was fictitious, having made
without consideration, and did not conform to Central

Petitioner's present position rests solely on the argument

Bank Circular No. 769, series of 1980, better known as

that Philfinance owns 90% of Filriters equity and the two

the "Rules and Regulations Governing Central Bank

corporations have identical corporate officers, thus

Certificates of Indebtedness", which provided that any

demanding the application of the doctrine or piercing the

"assignment of registered certificates shall not be valid

veil of corporate fiction, as to give validity to the transfer

unless made . . . by the registered owner thereof in

of the CBCI from registered owner to petitioner

person or by his representative duly authorized in

TRB. 14 This renders the payment by TRB to Philfinance

writing."

of CBCI, as actual payment to Filriters. Thus, there is no

merit to the lower court's ruling that the transfer of the

Petitioner's claimed interest has no basis, since it was

CBCI from Filriters to Philfinance was null and void for

derived from Philfinance whose interest was inexistent,

lack of consideration.

having acquired the certificate through simulation. What

happened was Philfinance merely borrowed CBCI No.

Admittedly, the subject CBCI is not a negotiable

D891 from Filriters, a sister corporation, to guarantee its

instrument in the absence of words of negotiability

financing operations.

within the meaning of the negotiable instruments law

(Act 2031).

Said the Court:

The pertinent portions of the subject CBCI read:
In the case at bar, Alfredo O. Banaria,
xxx xxx xxx

who signed the deed of assignment

purportedly for and on behalf of
Filriters, did not have the necessary
written authorization from the Board of
Directors of Filriters to act for the latter.
For lack of such authority, the
assignment did not therefore bind
Filriters and violated as the same time
Central Bank Circular No. 769 which
has the force and effect of a law,
resulting in the nullity of the transfer
(People v. Que Po Lay, 94 Phil. 640; 3M

The Central Bank of the Philippines (the

Bank) for value received, hereby
promises to pay bearer, of if this
Certificate of indebtedness be registered,
to FILRITERS GUARANTY
ASSURANCE CORPORATION, the
registered owner hereof, the principal
sum of FIVE HUNDRED THOUSAND
PESOS.
xxx xxx xxx

Philippines, Inc. vs. Commissioner of

Internal Revenue, 165 SCRA 778).

Properly understood, a certificate of indebtedness

pertains to certificates for the creation and maintenance

In sum, Philfinance acquired no title or

of a permanent improvement revolving fund, is similar

rights under CBCI No. D891 which it

to a "bond," (82 Minn. 202). Being equivalent to a bond,

could assign or transfer to Traders Royal

it is properly understood as acknowledgment of an

Bank and which the latter can register

obligation to pay a fixed sum of money. It is usually

with the Central Bank.

used for the purpose of long term loans.

WHEREFORE, the judgment appealed

The appellate court ruled that the subject CBCI is not a

from is AFFIRMED, with costs against

negotiable instrument, stating that:

plaintiff-appellant.

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As worded, the instrument provides a

writing to be the only outward and

promise "to pay Filriters Guaranty

visible expression of their meaning, no

Assurance Corporation, the registered

other words are to be added to it or

owner hereof." Very clearly, the

substituted in its stead. The duty of the

instrument is payable only to Filriters,

court in such case is to ascertain, not

the registered owner, whose name is

what the parties may have secretly

inscribed thereon. It lacks the words of

intended as contradistinguished from

negotiability which should have served

what their words express, but what is the

as an expression of consent that the

meaning of the words they have used.

instrument may be transferred by

What the parties meant must be

negotiation. 15

determined by what they said.

A reading of the subject CBCI indicates that the same is

Thus, the transfer of the instrument from Philfinance to

payable to FILRITERS GUARANTY ASSURANCE

TRB was merely an assignment, and is not governed by

CORPORATION, and to no one else, thus, discounting

the negotiable instruments law. The pertinent question

the petitioner's submission that the same is a negotiable

then is, was the transfer of the CBCI from Filriters to

instrument, and that it is a holder in due course of the

Philfinance and subsequently from Philfinance to TRB,

certificate.

in accord with existing law, so as to entitle TRB to have

the CBCI registered in its name with the Central Bank?

The language of negotiability which characterize a

negotiable paper as a credit instrument is its freedom to

The following are the appellate court's pronouncements

circulate as a substitute for money. Hence, freedom of

on the matter:

negotiability is the touchtone relating to the protection of

holders in due course, and the freedom of negotiability is

Clearly shown in the record is the fact

the foundation for the protection which the law throws

that Philfinance's title over CBCI No.

around a holder in due course (11 Am. Jur. 2d, 32). This

D891 is defective since it acquired the

freedom in negotiability is totally absent in a certificate

instrument from Filriters fictitiously.

indebtedness as it merely to pay a sum of money to a

Although the deed of assignment stated

specified person or entity for a period of time.

that the transfer was for "value

received", there was really no

As held in Caltex (Philippines), Inc. v. Court of

16

Appeals, :

consideration involved. What happened

was Philfinance merely borrowed CBCI
No. D891 from Filriters, a sister

The accepted rule is that the

corporation. Thus, for lack of any

negotiability or non-negotiability of an

consideration, the assignment made is a

instrument is determined from the

complete nullity.

writing, that is, from the face of the

instrument itself. In the construction of a

What is more, We find that the transfer

bill or note, the intention of the parties is

made by Filriters to Philfinance did not

to control, if it can be legally

conform to Central Bank Circular No.

ascertained. While the writing may be

769, series of 1980, otherwise known as

read in the light of surrounding

the "Rules and Regulations Governing

circumstance in order to more perfectly

Central Bank Certificates of

understand the intent and meaning of the

Indebtedness", under which the note was

parties, yet as they have constituted the

issued. Published in the Official Gazette

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on November 19, 1980, Section 3

be considered a payment to Filriters, the

thereof provides that any assignment of

registered owner of the CBCI as to bar

registered certificates shall not be valid

the latter from claiming, as it has, that it

unless made . . . by the registered owner

never received any payment for that

thereof in person or by his representative

CBCI sold and that said CBCI was sold

duly authorized in writing.

without its authority.

In the case at bar, Alfredo O. Banaria,

xxx xxx xxx

who signed the deed of assignment

purportedly for and on behalf of

We respectfully submit that, considering

Filriters, did not have the necessary

that the Court of Appeals has held that

written authorization from the Board of

the CBCI was merely borrowed by

Directors of Filriters to act for the latter.

Philfinance from Filriters, a sister

For lack of such authority, the

corporation, to guarantee its

assignment did not therefore bind

(Philfinance's) financing operations, if it

Filriters and violated at the same time

were to be consistent therewith, on the

Central Bank Circular No. 769 which

issued raised by TRB that there was a

has the force and effect of a law,

piercing a veil of corporate entity, the

resulting in the nullity of the transfer

Court of Appeals should have ruled that

(People vs. Que Po Lay, 94 Phil. 640;

such veil of corporate entity was, in fact,

3M Philippines, Inc. vs. Commissioner

pierced, and the payment by TRB to

of Internal Revenue, 165 SCRA 778).

Philfinance should be construed as

payment to Filriters. 17

In sum, Philfinance acquired no title or

rights under CBCI No. D891 which it
could assign or transfer to Traders Royal
Bank and which the latter can register
with the Central Bank

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil
of corporate entity, as this merely an equitable remedy,
and may be awarded only in cases when the corporate

Petitioner now argues that the transfer of the subject

fiction is used to defeat public convenience, justify

CBCI to TRB must upheld, as the respondent Filriters

wrong, protect fraud or defend crime or where a

and Philfinance, though separate corporate entities on

corporation is a mere alter ego or business conduit of a

paper, have used their corporate fiction to defraud TRB

person. 18

into purchasing the subject CBCI, which purchase now

is refused registration by the Central Bank.
Says the petitioner;

Peiercing the veil of corporate entity requires the court to

see through the protective shroud which exempts its
stockholders from liabilities that ordinarily, they could
be subject to, or distinguished one corporation from a

Since Philfinance own about 90% of

seemingly separate one, were it not for the existing

Filriters and the two companies have the

corporate fiction. But to do this, the court must be sure

same corporate officers, if the principle

that the corporate fiction was misused, to such an extent

of piercing the veil of corporate entity

that injustice, fraud, or crime was committed upon

were to be applied in this case, then

another, disregarding, thus, his, her, or its rights. It is the

TRB's payment to Philfinance for the

protection of the interests of innocent third persons

CBCI purchased by it could just as well

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dealing with the corporate entity which the law aims to

hereon. After such registration no

protect by this doctrine.

transfer thereof shall be valid unless

made at said office (where the

The corporate separateness between Filriters and

Certificates has been registered) by the

Philfinance remains, despite the petitioners insistence on

registered owner hereof, in person, or by

the contrary. For one, other than the allegation that

his attorney, duly authorized in writing

Filriters is 90% owned by Philfinance, and the identity

and similarly noted hereon and upon

of one shall be maintained as to the other, there is

payment of a nominal transfer fee which

nothing else which could lead the court under

may be required, a new Certificate shall

circumstance to disregard their corporate personalities.

be issued to the transferee of the

registered owner thereof. The bank or

Though it is true that when valid reasons exist, the legal

any agency duly authorized by the Bank

fiction that a corporation is an entity with a juridical

may deem and treat the bearer of this

personality separate from its stockholders and from other

Certificate, or if this Certificate is

corporations may be disregarded, 19 in the absence of

registered as herein authorized, the

such grounds, the general rule must upheld. The fact that

person in whose name the same is

Filfinance owns majority shares in Filriters is not by

registered as the absolute owner of this

itself a ground to disregard the independent corporate

Certificate, for the purpose of receiving

status of Filriters. In Liddel & Co., Inc. vs. Collector of

payment hereof, or on account hereof,

Internal Revenue, 20 the mere ownership by a single

and for all other purpose whether or not

stockholder or by another corporation of all or nearly all

this Certificate shall be overdue.

of the capital stock of a corporation is not of itself a

sufficient reason for disregarding the fiction of separate

This is notice to petitioner to secure from Filriters a

corporate personalities.

written authorization for the transfer or to require

In the case at bar, there is sufficient showing that the

petitioner was not defrauded at all when it acquired the
subject certificate of indebtedness from Philfinance.
On its face the subject certificates states that it is
registered in the name of Filriters. This should have put
the petitioner on notice, and prompted it to inquire from
Filriters as to Philfinance's title over the same or its

Philfinance to submit such an authorization from

Filriters.
Petitioner knew that Philfinance is not registered owner
of the CBCI No. D891. The fact that a non-owner was
disposing of the registered CBCI owned by another
entity was a good reason for petitioner to verify of
inquire as to the title Philfinance to dispose to the CBCI.

authority to assign the certificate. As it is, there is no

Moreover, CBCI No. D891 is governed by CB Circular

showing to the effect that petitioner had any dealings

No. 769, series of 1990 21, known as the Rules and

whatsoever with Filriters, nor did it make inquiries as to

Regulations Governing Central Bank Certificates of

the ownership of the certificate.

Indebtedness, Section 3, Article V of which provides

The terms of the CBCI No. D891 contain a provision on

its TRANSFER. Thus:
TRANSFER. This Certificate shall pass
by delivery unless it is registered in the
owner's name at any office of the Bank
or any agency duly authorized by the
Bank, and such registration is noted

that:
Sec. 3. Assignment of Registered
Certificates. Assignment of registered
certificates shall not be valid unless
made at the office where the same have
been issued and registered or at the
Securities Servicing Department,

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Central Bank of the Philippines, and by

P5000,000.00 subject of

the registered owner thereof, in person

this case?

or by his representative, duly authorized

in writing. For this purpose, the
transferee may be designated as the
representative of the registered owner.
Petitioner, being a commercial bank, cannot feign
ignorance of Central Bank Circular 769, and its
requirements. An entity which deals with corporate
agents within circumstances showing that the agents are
acting in excess of corporate authority, may not hold the
corporation liable. 22 This is only fair, as everyone 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. 23
The transfer made by Filriters to Philfinance did not
conform to the said. Central Bank Circular, which for all
intents, is considered part of the law. As found by the
courts a quo, Alfredo O. Banaria, who had signed the
deed of assignment from Filriters to Philfinance,
purportedly for and in favor of Filriters, did not have the

A Yes, sir.
Q Why do you know
this?
A Well, this was CBCI
of the company sought
to be examined by the
Insurance Commission
sometime in early 1981
and this CBCI No. 891
was among the CBCI's
that were found to be
missing.
Q Let me take you back
further before 1981. Did
you have the knowledge
of this CBCI No. 891
before 1981?

necessary written authorization from the Board of

A Yes, sir. This CBCI is

Directors of Filriters to act for the latter. As it is, the sale

an investment of

from Filriters to Philfinance was fictitious, and therefore

Filriters required by the

void and inexistent, as there was no consideration for the

Insurance Commission

same. This is fatal to the petitioner's cause, for then,

as legal reserve of the

Philfinance had no title over the subject certificate to

company.

convey the Traders Royal Bank.Nemo potest nisi quod

de jure potest no man can do anything except what he

Q Legal reserve for the

can do lawfully.

purpose of what?

Concededly, the subject CBCI was acquired by Filriters

A Well, you see, the

to form part of its legal and capital reserves, which are

Insurance companies

required by law 24 to be maintained at a mandated level.

are required to put up

This was pointed out by Elias Garcia, Manager-in-

legal reserves under

Charge of respondent Filriters, in his testimony given

Section 213 of the

before the court on May 30, 1986.

Insurance Code
equivalent to 40 percent

Q Do you know this

of the premiums receipt

Central Bank Certificate

and further, the

of Indebtedness, in

Insurance Commission

short, CBCI No. D891

requires this reserve to

in the face value of

be invested preferably

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in government securities
or government binds.
This is how this CBCI
came to be purchased
by the company.
It cannot, therefore, be taken out of the said funds,
without violating the requirements of the law. Thus, the
anauthorized use or distribution of the same by a
corporate officer of Filriters cannot bind the said
corporation, not without the approval of its Board of
Directors, and the maintenance of the required reserve
fund.
Consequently, the title of Filriters over the subject
certificate of indebtedness must be upheld over the
claimed interest of Traders Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the
decision appealed from dated January 29, 1990 is hereby
AFFIRMED.
SO ORDERED.

#4
Republic of the Philippines
Supreme Court
Manila
THIRD DIVISION
PHILIPPINE NATIONAL BANK, G.R. No. 170325
Petitioner,
Present:
YNARES-SANTIAGO, J.,

C
hairper
son,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
N
ACHU
RA, an
d
R
EYES,
JJ.

29

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spouses would replace the postdated checks with their
ERLANDO T. RODRIGUEZ Promulgated:
and NORMA RODRIGUEZ,
Respondents. September

own checks issued in the name of the members.

26,

2008
x--------------------------------------

It was PEMSLAs policy not to approve

applications for loans of members with outstanding
debts. To subvert this policy, some PEMSLA officers

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

devised a scheme to obtain additional loans despite their

DECISION

outstanding loan accounts. They took out loans in the

names of unknowing members, without the knowledge

REYES, R.T., J.:

or consent of the latter. The PEMSLA checks issued for

these loans were then given to the spouses for

WHEN the payee of the check is not intended to be the

true recipient of its proceeds, is it payable to order or

rediscounting. The officers carried this out by forging

the indorsement of the named payees in the checks.

bearer? What is the fictitious-payee rule and who is

In return, the spouses issued their personal

liable under it? Is there any exception?

checks (Rodriguez checks) in the name of the members

These questions seek answers in this petition for
review on certiorari of the Amended Decision[1] of the
Court of Appeals (CA) which affirmed with modification

and delivered the checks to an officer of PEMSLA. The

PEMSLA checks, on the other hand, were deposited by
the spouses to their account.

that of the Regional Trial Court (RTC).[2]

Meanwhile,
The Facts

deposited

The facts as borne by the records are as follows:

Respondents-Spouses

Erlando

and

Norma

Rodriguez were clients of petitioner Philippine National

Bank (PNB), Amelia Avenue Branch, Cebu City. They
maintained savings and demand/checking accounts,
namely, PNBig Demand Deposits (Checking/Current

directly

the
by

Rodriguez
PEMSLA

checks
to

its

were
savings

account without any indorsement from the named

payees. This was an irregular procedure made possible
through the facilitation of Edmundo Palermo, Jr.,
treasurer

of

PEMSLA

and

bank

teller

in

the PNB Branch. It appears that this became the usual

practice for the parties.

Account No. 810624-6 under the account name Erlando

For the period November 1998 to February

and/or Norma Rodriguez), and PNBig Demand Deposit

1999, the spouses issued sixty nine (69) checks, in the

(Checking/Current Account No. 810480-4 under the

total amount of P2,345,804.00.These were payable to

account name Erlando T. Rodriguez).

forty seven (47) individual payees who were all

The spouses were engaged in the informal

lending business. In line with their business, they had a
discounting[3] arrangement

members of PEMSLA.[4]
Petitioner PNB eventually found out about these

Philnabank

fraudulent acts. To put a stop to this scheme, PNB closed

Employees Savings and Loan Association (PEMSLA),

the current account of PEMSLA. As a result, the

an association of PNB employees. Naturally, PEMSLA

PEMSLA checks deposited by the spouses were returned

was

or dishonored for the reason Account Closed. The

likewise

client

with

the

of PNB Amelia

Avenue

Branch. The association maintained current and savings

corresponding

accounts with petitioner bank.

deposited as usual to the PEMSLA savings account. The

PEMSLA

regularly

granted

loans

to

its

members. Spouses Rodriguez would rediscount the

postdated checks issued to members whenever the
association was short of funds. As was customary, the

Rodriguez

checks,

however,

were

amounts were duly debited from the Rodriguez

account. Thus, because the PEMSLA checks given as
payment were returned, spouses Rodriguez incurred
losses from the rediscounting transactions.
RTC Disposition

30

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WHEREFORE, in view of the
Alarmed over the unexpected turn of events, the
spouses Rodriguez filed a civil complaint for damages

foregoing, the Court hereby renders

judgment, as follows:

against PEMSLA, the Multi-Purpose Cooperative of

Philnabankers (MCP), and petitioner PNB. They sought
to recover the value of their checks that were deposited
to

the

PEMSLA

savings

to P2,345,804.00. The

account

spouses

amounting

contended

that

because PNB credited the checks to the PEMSLA

account even without indorsements, PNB violated its
contractual obligation to them as depositors. PNB paid
the wrong payees, hence, it should bear the loss.
PNB moved to dismiss the complaint on the ground of
lack of cause of action. PNB argued that the claim for
damages should come from the payees of the checks,
and not from spouses Rodriguez. Since there was no
demand from the said payees, the obligation should be
considered as discharged.
In

an

Order

1. Defendant is hereby ordered to pay

the plaintiffs the total amount
of P2,345,804.00 or reinstate or
restore

the

amount

of P775,337.00 in the PNBig

Demand

Deposit

Checking/Current Account No.

810480-4

of

Erlando

Rodriguez,

and

the

T.

amount

of P1,570,467.00 in the PNBig

Demand

Deposit,

Checking/Current Account No.

810624-6

of

Rodriguez

Erlando

and/or

T.

Norma

Rodriguez, plus legal rate of

dated January

12,

2000,

interest thereon to be computed

from the filing of this complaint

the RTC denied PNBs motion to dismiss.

In its Answer,[5] PNB claimed it is not liable for
the checks which it paid to the PEMSLA account

until fully paid;

2. The defendant PNB is hereby ordered

without any indorsement from the payees. The bank

to

contended

following reasonable amount of

that

spouses

Rodriguez,

the

pay

the

plaintiffs

makers, actually did not intend for the named payees

damages

to receive the proceeds of the checks. Consequently,

taking into consideration the

the payees were considered as fictitious payees as

standing of the plaintiffs being

defined

sugarcane

under

the

Negotiable

Instruments

Law

suffered

by

the

planters,

them

realtors,

(NIL). Being checks made to fictitious payees which are

residential subdivision owners,

bearer instruments, the checks were negotiable by mere

and other businesses:

delivery. PNBs Answer included its cross-claim against

its co-defendants PEMSLA and the MCP, praying that in
the event that judgment is rendered against the bank, the
cross-defendants

should

be

ordered

to

reimburse PNB the amount it shall pay.

spouses

Rodriguez

(plaintiffs). It

damages, unearned
income

in

the

amount
of P4,000,000.00,

After trial, the RTC rendered judgment in favor

of

(a) Consequential

ruled

as a result of their
having

incurred

that PNB (defendant) is liable to return the value of the

great dificulty (sic)

checks. All

especially in the

counterclaims

and

cross-claims

were

dismissed. The dispositive portion of the RTC decision

residential

reads:

subdivision
business,
was

not

which
pushed

31

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through

and

the

more convinced by the strong and

even

credible evidence for the defendant-

threatened to file a

appellant with regard to the plaintiffs-

case

appellees

contractor
against

the

plaintiffs;

PEMSLAs

business

arrangement that the value of the

(b) Moral damages in

the

and

amount

of P1,000,000.00;

rediscounted checks of the plaintiffsappellees

would

be

deposited

in

PEMSLAs account for payment of the

loans it has approved in exchange for

(c) Exemplary damages

in

the

amount

of P500,000.00;
(d) Attorneys fees in the

PEMSLAs checks with the full value of

the said loans. This is the only obvious
explanation as to why all the disputed
sixty-nine (69) checks were in the

amount

possession of PEMSLAs errand boy for

of P150,000.00

presentment

to

the

appellant that

led

to

considering

that

defendantthis

present

this case does not

controversy. It also appears that the

involve

very

teller who accepted the said checks was

complicated issues;

PEMSLAs officer, and that such was a

and for the

regular practice by the parties until the

(e) Costs of suit.

defendant-appellant

discovered

the

scam. The logical conclusion, therefore,

3. Other claims and counterclaims are
hereby dismissed.[6]

is that the checks were never meant to

be paid to order, but instead, to
PEMSLA. We thus find no breach of

CA Disposition
PNB appealed the decision of the trial court to
the CA on the principal ground that the disputed checks
should be considered as payable to bearer and not to
order.

contract on the part of the defendantappellant.

According to plaintiff-appellee
Erlando Rodriguez testimony, PEMSLA
allegedly issued post-dated checks to its

In a Decision[7] dated July 22, 2004, the CA

qualified members who had applied for

reversed and set aside the RTC disposition. The CA

loans. However, because of PEMSLAs

concluded that the checks were obviously meant by the

insufficiency

spouses to be really paid to PEMSLA. The court a

approached the plaintiffs-appellees for

quo declared:

the latter to issue rediscounted checks in

We are not swayed by the

contention of the plaintiffs-appellees

(Spouses Rodriguez) that their cause of
action arose from the alleged breach of
contract

by the

defendant-appellant

(PNB) when it paid the value of the

checks to PEMSLA despite the checks
being payable to order. Rather, we are

of

funds,

PEMSLA

favor of said applicant members. Based

on the investigation of the defendantappellant, meanwhile, this arrangement
allowed the plaintiffs-appellees to make
a profit by issuing rediscounted checks,
while the officers of PEMSLA and other
members would be able to claim their
loans, despite the fact that they were
disqualified

for

one

reason

or

32

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another. They were able to achieve this

rendered by Us AFFIRMING WITH

conspiracy by using other members who

MODIFICATION the assailed decision

had loaned lesser amounts of money or

rendered in Civil Case No. 99-10892, as

[8]

had not applied at all. x x x. (Emphasis

set forth in the immediately next

added)
The CA found that the checks were bearer instruments,

preceding

to

accomplish

this

2004.

money-making
SO ORDERED.[9]

scheme. The payees in the checks were fictitious payees

because they were not the intended payees at all.
The

spouses

Rodriguez

moved

The CA ruled that the checks were payable to

for

reconsideration. They argued, inter alia, that the checks

on their faces were unquestionably payable to order; and
that PNB committed a breach of contract when it paid
the value of the checks to PEMSLA without indorsement
from the payees. They also argued that their cause of
action

is

not

only

against

and

promulgated in this case on 22 July

that spouses Rodriguez and PEMSLA conspired with

other

hereof,

SETTING ASIDE Our original decision

thus they do not require indorsement for negotiation; and

each

paragraph

PEMSLA but

also

against PNB to recover the value of the checks.

order. According to the appellate court, PNB failed to

present sufficient proof to defeat the claim of the spouses
Rodriguez that they really intended the checks to be
received by the specified payees. Thus, PNB is liable for
the value of the checks which it paid to PEMSLA
without indorsements from the named payees. The
award for damages was deemed appropriate in view of
the failure of PNB to treat the Rodriguez account with
the highest degree of care considering the fiduciary

On October 11, 2005, the CA reversed itself via

an Amended Decision, the last paragraph and fallo of

nature of their relationship, which constrained

respondents to seek legal action.

which read:
Hence, the present recourse under Rule 45.
In sum,

we rule that the

Issues

defendant-appellant PNB is liable to the

plaintiffs-appellees Sps. Rodriguez for
the following:
1.

subject checks are payable to order or to bearer and who

Actual damages

in

the

PNB argues anew that when the spouses

of P2,345,804 with

Rodriguez issued the disputed checks, they did not

interest at 6% per

intend

annum

proceeds. Thus, they are bearer instruments that could be

from 14
1999 until

fully paid;
2.

the

amount

of P200,000;
Attorneys fees in
the

for

the

validly negotiated

named
by

payees
mere

to

receive

the

delivery. Further,

testimonial and documentary evidence presented during

Moral damages
in

amount

of P100,000; and
4.

bears the loss?

amount

May

3.

The issues may be compressed to whether the

Costs of suit.

trial amply proved that spouses Rodriguez and the

officers of PEMSLA conspired with each other to
defraud the bank.
Our Ruling
Prefatorily, amendment of decisions is more
acceptable than an erroneous judgment attaining finality
to the prejudice of innocent parties. A court discovering
an erroneous judgment before it becomes final

WHEREFORE, in view of the

may, motu proprio or upon motion of the parties, correct

foregoing premises, judgment is hereby

33

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its judgment with the singular objective of achieving

(a)

When it is expressed to

(b)

be so payable; or
When it is payable to a

justice for the litigants.[10]

However, a word of caution to lower courts, the

person named therein or

CA in Cebu in this particular case, is in order. The Court

does not sanction careless disposition of cases by courts

(c)

bearer; or
When it is payable to the

of justice. The highest degree of diligence must go into

order of a fictitious or non-

the study of every controversy submitted for decision by

existing person, and such

litigants. Every issue and factual detail must be closely

fact is known to the person

scrutinized and analyzed, and all the applicable laws

(d)

judiciously studied, before the promulgation of every

payee does not purport to

judgment by the court. Only in this manner will errors in

be the name of any person;

judgments be avoided.
Now to the core of the petition.

(e)

indorsement

intended to be the true recipient of the proceeds, the

[12]

check is considered as a bearer instrument. A check is

a bill of exchange drawn on a bank payable on demand.
It is either an order or a bearer instrument.Sections 8

and 9 of the NIL states:

SEC.

or
Where the only or last
indorsement

As a rule, when the payee is fictitious or not

[11]

making it so payable; or
When the name of the

8. When

payable

to

where it is drawn payable to the order of

a specified person or to him or his
order. It may be drawn payable to the
order of

blank.

(Underscoring supplied)

The distinction between

bearer

and

order

instruments lies in their manner of negotiation. Under

indorsement from the payee or holder before it may be
validly negotiated. A bearer instrument, on the other
hand, does not require an indorsement to be validly
negotiated. It is negotiable by mere delivery. The
provision reads:
SEC.

A payee who is not maker,

drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees
jointly; or
(e) One or some of several
(f)

in

an

Section 30 of the NIL, an order instrument requires an

order. The instrument is payable to order

(a)

is

payees; or
The holder of an office for

30. What

constitutes

negotiation. An instrument is negotiated

when it is transferred from one person to
another in such manner as to constitute
the transferee the holder thereof. If
payable to bearer, it is negotiated by
delivery; if payable to order, it is
negotiated by the indorsement of the
holder completed by delivery.

the time being.

A check that is payable to a specified payee is an
Where the instrument is payable
to order, the payee must be named or
otherwise

indicated

therein

with

reasonable certainty.

order instrument. However, under Section 9(c) of the

NIL, a check 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

to

person, and such fact is known to the person making it

bearer. The instrument is payable to

so payable. Thus, checks issued to Prinsipe Abante or Si

bearer

Malakas at si Maganda, who are well-known characters

SEC.

9. When

payable

34

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in Philippine mythology, are bearer instruments because

(GSFCBA) amounting to $2,972.50 against the account

the named payees are fictitious and non-existent.

of

We have yet to discuss a broader meaning of the

term fictitious as used in the NIL. It is for this reason
that We look elsewhere for guidance. Court rulings in
the United States are a logical starting point since our
law on negotiable instruments was directly lifted from
the Uniform Negotiable Instruments Law of the United
States.[13]

the

corporation

without

authority

from

the

latter. Martin was also an officer of the GSFCBA but did

not have signing authority. At the back of the checks,
Martin placed the rubber stamp of the GSFCBA and
signed

his

own

name

as

indorsement. He

then

successfully drew the funds from Liberty Insurance

Bank for his own personal profit. When the corporation
filed an action against the bank to recover the amount
of the checks, the claim was denied.

A review of US jurisprudence yields that an

actual, existing, and living payee may also be fictitious if
the maker of the check did not intend for the payee to in
fact receive the proceeds of the check. This usually
occurs when the maker places a name of an existing
payee on the check for convenience or to cover up an
illegal activity.[14] Thus, a check made expressly payable
to a non-fictitious and existing person is not necessarily
an order instrument. If the payee is not the intended
recipient of the proceeds of the check, the payee is
considered a fictitious payee and the check is a bearer
instrument.
In a fictitious-payee situation, the drawee bank
is absolved from liability and the drawer bears the
loss. When faced with a check payable to a fictitious
payee, it is treated as a bearer instrument that can be
negotiated by delivery. The underlying theory is that one
cannot expect a fictitious payee to negotiate the check by
placing his indorsement thereon. And since the maker
knew this limitation, he must have intended for the
instrument to be negotiated by mere delivery. Thus, in

The US Supreme Court held in Mueller that

when the person making the check so payable did not
intend for the specified payee to have any part in the
transactions, the payee is considered as a fictitious
payee. The check is then considered as a bearer
instrument

to

be

validly

negotiated

by

mere

delivery. Thus, the US Supreme Court held that Liberty

Insurance Bank, as drawee, was authorized to make
payment to the bearer of the check, regardless of
whether prior indorsements were genuine or not.[17]
The more recent Getty Petroleum Corp. v.
American Express Travel Related Services Company,
Inc.[18] upheld the fictitious-payee rule. The rule protects
the depositary bank and assigns the loss to the drawer of
the check who was in a better position to prevent the loss
in the first place. Due care is not even required from the
drawee or depositary bank in accepting and paying the
checks. The effect is that a showing of negligence on the
part of the depositary bank will not defeat the protection
that is derived from this rule.

case of controversy, the drawer of the check will bear the

However, there is a commercial bad faith

loss. This rule is justified for otherwise, it will be most

exception to the fictitious-payee rule. A showing of

convenient for the maker who desires to escape payment

commercial bad faith on the part of the drawee bank,

of the check to always deny the validity of the

or any transferee of the check for that matter, will work

indorsement. This despite the fact that the fictitious

to strip it of this defense. The exception will cause it to

payee was purposely named without any intention that

bear the loss. Commercial bad faith is present if the

the payee should receive the proceeds of the check. [15]

transferee of the check acts dishonestly, and is a party to

The fictitious-payee rule is best illustrated

in Mueller & Martin v. Liberty Insurance Bank.[16] In the
said case, the corporation Mueller & Martin was

the fraudulent scheme. Said the US Supreme Court

in Getty:
Consequently,

transferees

defrauded by George L. Martin, one of its authorized

lapse of wary vigilance, disregard of

signatories. Martin drew seven checks payable to the

suspicious circumstances which might

German Savings Fund Company Building Association

have well induced a prudent banker to

35

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investigate and other permutations of
negligence

are

not

relevant

Verily, the subject checks are presumed order

considerations under Section 3-405 x x

instruments. This is because, as found by both lower

x. Rather, there is a commercial bad

faith

exception

to

UCC

courts, PNB failed to present sufficient evidence to

3-405,

defeat the claim of respondents-spouses that the named

applicable when the transferee acts

dishonestly

where

it

has

payees were the intended recipients of the checks

actual

proceeds. The bank failed to satisfy a requisite condition

knowledge of facts and circumstances

of a fictitious-payee situation that the maker of the check

that amount to bad faith, thus itself

intended for the payee to have no interest in the

becoming a participant in a fraudulent

transaction.

scheme. x x x Such a test finds support

Because of a failure to show that the payees

in the text of the Code, which omits a

were fictitious in its broader sense, the fictitious-payee

standard of care requirement from UCC

rule does not apply. Thus, the checks are to be deemed

3-405 but imposes on all parties an

payable to order. Consequently, the drawee bank bears

obligation to act with honesty in fact. x

the loss.[20]

x x[19] (Emphasis added)

PNB was remiss in its duty as the drawee

Getty also laid the principle that the fictitious-payee rule

extends protection even to non-bank transferees of the

bank. It does not dispute the fact that its teller or tellers
accepted the 69 checks for deposit to the PEMSLA

checks.

account even without any indorsement from the named

In the case under review, the Rodriguez checks
were payable to specified payees. It is unrefuted that the

payees. It bears stressing that order instruments can only

be negotiated with a valid indorsement.

69 checks were payable to specific persons. Likewise, it

A bank that regularly processes checks that are

is uncontroverted that the payees were actual, existing,

and living persons who were members of PEMSLA that
had

rediscounting

arrangement

with

spouses

neither payable to the customer nor duly indorsed by the

payee is apparently grossly negligent in its operations.
[21]

Rodriguez.

This Court has recognized the unique public interest

possessed by the banking industry and the need for the

What remains to be determined is if the payees,
though existing persons, were fictitious in its broader
context.

[22]

For this reason, banks are minded to treat their

customers accounts with utmost care, confidence, and

For the fictitious-payee rule to be available as a

defense, PNB must show that the makers did not intend
for the named payees to be part of the transaction
involving the checks. At most, the banks thesis shows
that the payees did not have knowledge of the existence
of the checks. This lack of knowledge on the part of
the payees, however, was not tantamount to a lack of
intention on the part of respondents-spouses that the
payees

people to have full trust and confidence in their banks.

would

not

receive

the

checks

proceeds. Considering that respondents-spouses were

honesty.[23]
In a checking transaction, the drawee bank has
the duty to verify the genuineness of the signature of the
drawer and to pay the check strictly in accordance
with the drawers instructions, i.e., to the named payee in
the check. It should charge to the drawers accounts only
the payables authorized by the latter. Otherwise, the
drawee will be violating the instructions of the drawer
and it shall be liable for the amount charged to the
drawers account.[24]

transacting with PEMSLA and not the individual payees,

it is understandable that they relied on the information
given by the officers of PEMSLA that the payees would
be receiving the checks.

In the case at bar, respondents-spouses were the

banks depositors. The checks were drawn against
respondents-spouses accounts.PNB, as the drawee bank,

36

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had the responsibility to ascertain the regularity of the

respondents-spouses when the PEMSLA checks they

indorsements, and the genuineness of the signatures on

deposited were returned for the reason Account

the

for

Closed.These PEMSLA checks were the corresponding

deposit. Lastly, PNB was obligated to pay the checks in

payments to the Rodriguez checks. Since they could not

strict

the

encash the PEMSLA checks, respondents-spouses were

drawers. Petitioner miserably failed to discharge this

unable to collect payments for the amounts they had

burden.

advanced.

checks

before

accordance

with

accepting
the

them

instructions

of

The checks were presented to PNB for deposit

A bank that has been remiss in its duty must

by a representative of PEMSLA absent any type of

suffer the consequences of its negligence. Being issued

indorsement, forged or otherwise. The facts clearly show

to named payees, PNB was duty-bound by law and by

that the bank did not pay the checks in strict accordance

banking rules and procedure to require that the checks be

with the instructions of the drawers, respondents-

properly indorsed before accepting them for deposit and

spouses. Instead, it paid the values of the checks not to

payment. In fine, PNB should be held liable for the

the named payees or their order, but to PEMSLA, a third

amounts of the checks.

party to the transaction between the drawers and the

One Last Note

payees.
We note that the RTC failed to thresh out the
Moreover, PNB was negligent in the selection
and supervision of its employees. The trustworthiness of
bank employees is indispensable to maintain the stability
of the banking industry. Thus, banks are enjoined to be
extra vigilant in the management and supervision of their
employees. In Bank of the Philippine Islands v. Court of
Appeals,[25] this Court cautioned thus:

merits of PNBs cross-claim against its co-defendants

PEMSLA and MPC. The records are bereft of any
pleading filed by these two defendants in answer to the
complaint of respondents-spouses and cross-claim
ofPNB. The Rules expressly provide that failure to file
an answer is a ground for a declaration that defendant is
in default.[28] Yet, the RTC failed to sanction the failure

Banks handle daily transactions

of both PEMSLA and MPC to file responsive

involving millions of pesos. By the very

pleadings. Verily, the RTCdismissal of PNBs cross-claim

nature of their work the degree of

has no basis. Thus, this judgment shall be without

responsibility, care and trustworthiness

prejudice to whatever action the bank might take against

expected

its co-defendants in the trial court.

of

their

employees

and

officials is far greater than those of

ordinary clerks

and employees. For

obvious reasons, the banks are expected

to exercise the highest degree of
diligence

in

the

selection

and

supervision of their employees.[26]

PNBs tellers and officers, in violation of banking
rules of procedure, permitted the invalid deposits of
checks to the PEMSLA account. Indeed, when it is the
gross negligence of the bank employees that caused the
loss, the bank should be held liable.[27]
PNBs argument that there is no loss to
compensate since no demand for payment has been
made by the payees must also fail.Damage was caused to

To PNBs credit, it became involved in the controversial

transaction not of its own volition but due to the actions
of some of its employees. Considering that moral
damages must be understood to be in concept of grants,
not punitive or corrective in nature, We resolve to reduce
the award of moral damages to P50,000.00.[29]
WHEREFORE,
Decision

the

is AFFIRMED

appealed
with

Amended
the

MODIFICATION that the award for moral damages is

reduced to P50,000.00, and that this is without prejudice
to whatever civil, criminal, or administrative action PNB
might take against PEMSLA, MPC, and the employees
involved.
SO ORDERED.

37

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VELASCO, JR., J.:
Under consideration is the Motion for Reconsideration
interposed by petitioner Ting Ting Pua Pua) of our
Resolution dated April 18, 2012 effectively affirming the
Decision1 and Resolution2 dated March 31, 2011 and
September 26, 2011, respectively, of the Court of
Appeals CA) In CA- G.R. CV No. 93755, which, in turn,
reversed the Decision of the Regional Trial Court RTC)
of the City of Manila, Branch 29 in Civil Case No. 9783027.
As culled from the adverted R TC Decision, as adopted
for the most part by the CA, the antecedent facts may be
summarized as follows:
The controversy arose from a Complaint for a Sum of
Money3 filed by petitioner Pua against respondentspouses Benito Lo Bun Tiong Benito) and Caroline Siok
Ching Teng Caroline). In the complaint, Pua prayed that,
among other things, respondents, or then defendants, pay
Pua the amount eight million five hundred thousand
pesos (PhP 8,500,000), covered by a check. (Exhibit
"A," for plaintiff)
During trial, petitioner Pua clarified that the PhP
8,500,000 check was given by respondents to pay the
loans they obtained from her under a compounded
interest agreement on various dates in 1988.4 As Pua
narrated, her sister, Lilian Balboa (Lilian), vouched for

Completion and Delivery:

respondents ability to pay so that when respondents

#5
Republic of the Philippines
SUPREME COURT
Manila

approached her, she immediately acceded and lent

money to respondents without requiring any collateral
except post-dated checks bearing the borrowed
amounts.5 In all, respondents issued 176 checks for a

THIRD DIVISION
G.R. No. 198660

October 23, 2013

TING TING PUA, Petitioner,

vs.
SPOUSES BENITO LO BUN TIONG and
CAROLINE SIOK CHING TENG, Respondents.
RESOLUTION

total amount of one million nine hundred seventy-five

thousand pesos (PhP 1,975,000). These checks were
dishonored upon presentment to the drawee bank.7
As a result of the dishonor, petitioner demanded
payment. Respondents, however, pleaded for more time
because of their financial difficulties.8 Petitioner Pua
obliged and simply reminded the respondents of their
indebtedness from time to time.9

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Sometime in September 1996, when their financial

numbered checks19 on the condition that these checks

situation turned better, respondents allegedly called and

will only be used to cover the costs of the business

asked petitioner Pua for the computation of their loan

operations and in no circumstance will the amount of the

10

obligations. Hence, petitioner handed them a

checks exceed PhP 5,000.20

computation dated October 2, 199611 which showed that,

at the agreed 2% compounded interest rate per month,

In March 1996, however, respondent Caroline and Lilian

the amount of the loan payable to petitioner rose to

had a serious disagreement that resulted in the

thirteen million two hundred eighteen thousand five

dissolution of their partnership and the cessation of their

hundred forty-four pesos and 20/100 (PhP

business. In the haste of the dissolution and as a result of

13,218,544.20).12 On receiving the computation, the

their bitter separation, respondent Caroline alleged that

respondents asked petitioner to reduce their indebtedness

she forgot about the five (5) pre-signed checks she left

to PhP 8,500,000.13 Wanting to get paid the soonest

with Lilian.21 It was only when Lilians husband, Vicente

possible time, petitioner Pua agreed to the lowered

Balboa (Vicente), filed a complaint for sum of money in

amount.14

February 1997 against respondents to recover five

million one hundred seventy-five thousand two hundred

Respondents then delivered to petitioner Asiatrust Check

fifty pesos (PhP 5,175,250), covering three of the five

No. BND057750 bearing the reduced amount of PhP

post-dated and pre-signed checks.22

8,500,000 dated March 30, 1997 with the assurance that

the check was good.15 In turn, respondents demanded the

Respondent Caroline categorically denied having

return of the 17 previously dishonored checks. Petitioner,

completed Check No. BND057750 by using a check

however, refused to return the bad checks and advised

writer or typewriter as she had no check writer and she

respondents that she will do so only after the encashment

had always completed checks in her own

of Asiatrust Check No. BND057750.16

handwriting.23 She insisted that petitioner and her sister

completed the check after its delivery.24 Furthermore, she

Like the 17 checks, however, Check No. BND057750

could not have gone to see petitioner Pua with her

was also dishonored when it was presented by petitioner

husband as they had been separated in fact for nearly 10

to the drawee bank. Hence, as claimed by petitioner, she

years.25 As for the 17 checks issued by her in 1988,

decided to file a complaint to collect the money owed

Caroline alleged that they were not intended for Pua but

her by respondents.

were issued for the benefit of other persons.26 Caroline

postulated that the complaint is designed to allow Puas

For the defense, both respondents Caroline and Benito

sister, Lilian, to recover her losses in the foreign

testified along with Rosa Dela Cruz Tuazon (Tuazon),

exchange business she had with Caroline in the 1980s.

who was the OIC-Manager of Asiatrust-Binondo Branch

Respondent Benito corroborated Carolines testimony

in 1997. Respondents categorically denied obtaining a

respecting their almost a decade separation.27 As such, he

loan from petitioner.17 Respondent Caroline, in

could not have had accompanied his wife to see

particular, narrated that, in August 1995, she and

petitioner to persuade the latter to lower down any

petitioners sister, Lilian, forged a partnership that

alleged indebtedness.28 In fact, Benito declared, before

operated a mahjong business. Their agreement was for

the filing of the Complaint, he had never met petitioner

Lilian to serve as the capitalist while respondent

Pua, let alone approached her with his wife to borrow

Caroline was to act as the cashier. Caroline also agreed

money.29He claimed that he was impleaded in the case to

to use her personal checks to pay for the operational

attach his property and force him to enter into an

expenses including the payment of the winners of the

amicable settlement with petitioner.30 Benito pointed out

games.18 As the partners anticipated that Caroline will

that Check No. BND057750 was issued under Asiatrust

not always be in town to prepare these checks, she left

Account No. 5513-0054-9, which is solely under the

with Lilian five (5) pre-signed and consecutively

name of his wife.31

39

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The witness for the respondents, Ms. Tuazon, testified

Aggrieved, respondents went to the CA arguing that the

that respondent Caroline opened Asiatrust Account No.

court a quo erred in finding that they obtained and are

5513-0054-9 in September 1994.32 She claimed that the

liable for a loan from petitioner. To respondents,

average maintaining balance of respondent Caroline was

petitioner has not sufficiently proved the existence of the

PhP 2,000 and the highest amount issued by Caroline

loan that they supposedly acquired from her way back in

from her account was PhP 435,000.33 She maintained

the late 1980s by any written agreement or

that respondent Caroline had always completed her

memorandum.

checks with her own handwriting and not with a check

writer. On October 15, 1996, Carolines checking

By Decision of March 31, 2011, as reiterated in a

account was closed at the instance of the bank due to 69

Resolution dated September 26, 2011, the appellate court

instances of check issuance against insufficient

set aside the RTC Decision holding that Asiatrust Bank

balance.34

Check No. BND057550 was an incomplete delivered

instrument and that petitioner has failed to prove the

After trial, the RTC issued its Decision dated January 31,

existence of respondents indebtedness to her. Hence, the

2006 in favor of petitioner. In holding thus, the RTC

CA added, petitioner does not have a cause of action

stated that the possession by petitioner of the checks

against respondents.37

signed by Caroline, under the Negotiable Instruments

Law, raises the presumption that they were issued and

Hence, petitioner came to this Court via a Petition for

delivered for a valuable consideration. On the other

Review on Certiorari38 alleging grievous reversible error

hand, the court a quo discounted the testimony for the

on the part of the CA in reversing the findings of the

defense completely denying respondents loan obligation

court a quo.

to Pua.35

As adverted to at the outset, the Court, in a Minute

The trial court, however, refused to order respondents to

Resolution dated April 18, 2012, resolved to deny the

pay petitioner the amount of PhP 8,500,000 considering

petition.39

that the agreement to pay interest on the loan was not

expressly stipulated in writing by the parties. The RTC,
instead, ordered respondents to pay the principal amount
of the loan as represented by the 17 checks plus legal
interest from the date of demand. As rectified, 36 the
dispositive portion of RTCs Decision reads:

In this Motion for Reconsideration,40 petitioner pleads

that this Court take a second hard look on the facts and
issues of the present case and affirm the RTCs case
disposition. Petitioner argues, in the main, that the
finding of the appellate court that petitioner has not
established respondents indebtedness to her is not

Defendant-spouses Benito Lo Bun Tiong and Caroline

supported by the evidence on record and is based solely

Siok Ching Teng, are hereby ordered jointly and

on respondents general denial of liability.

solidarily:

Respondents, on the other hand, argued in their

1. To pay plaintiff P1,975,000.00 plus 12%

Comment on the Motion for Reconsideration dated

interest per annum from September 30, 1998,

October 6, 2012 that the CA correctly ruled that

until fully paid;

Asiatrust Check No. BND057550 is an incomplete

instrument which found its way into petitioners hands

2. To pay plaintiff attorneys fees

and that the petitioner failed to prove respondents

of P200,000.00; and

indebtedness to her. Petitioner, so respondents contend,

failed to show to whom the 17 1988 checks were

3. To pay the costs of the suit.

delivered, for what consideration or purpose, and under

whose account said checks were deposited or negotiated.

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Clearly, the issue in the present case is factual in nature

ruling in her favor, the RTC sustained the version of the

as it involves an inquiry into the very existence of the

facts presented by petitioner.

debt supposedly owed by respondents to petitioner.

Respondents, on the other hand, completely deny the
The general rule is that this Court in petitions for review

existence of the debt asserting that they had never

on certiorari only concerns itself with questions of law,

approached petitioner to borrow money in 1988 or in

41

not of fact, the resolution of factual issues being the

42

1996. They hypothesize, instead, that petitioner Pua is

primary function of lower courts. However, several

simply acting at the instance of her sister, Lilian, to file a

exceptions have been laid down by jurisprudence to

false charge against them using a check left to fund a

allow the scrutiny of the factual arguments advanced by

gambling business previously operated by Lilian and

the contending parties, viz: (1) the conclusion is

respondent Caroline. While not saying so in express

grounded on speculations, surmises or conjectures; (2)

terms, the appellate court considered respondents denial

the inference is manifestly mistaken, absurd or

as worthy of belief.

impossible ; (3) there is grave abuse of discretion; (4) the

judgment is based on a misapprehension of facts; (5) the

After another circumspect review of the records of the

findings of fact are conflicting ; (6) there is no citation of

present case, however, this Court is inclined to depart

specific evidence on which the factual findings are

from the findings of the CA.

based; (7) the findings of absence of fact are

contradicted by the presence of evidence on record ; (8)
the findings of the CA are contrary to those of the trial
court ; (9) the CA manifestly overlooked certain relevant
and undisputed facts that, if properly considered, would
justify a different conclusion ; (10) the findings of the
CA are beyond the issues of the case; and (11) such
findings are contrary to the admissions of both
parties.43 At the very least, therefore, the inconsonance
of the findings of the RTC and the CA regarding the
existence of the loan sanctions the recalibration of the
evidence presented by the parties before the trial court.
In the main, petitioner asserts that respondents owed her
a sum of money way back in 1988 for which the latter
gave her several checks. These checks, however, had all
been dishonored and petitioner has not been paid the
amount of the loan plus the agreed interest. In 1996,
respondents approached her to get the computation of
their liability including the 2% compounded interest.
After bargaining to lower the amount of their liability,
respondents supposedly gave her a postdated check

Certainly, in a suit for a recovery of sum of money, as

here, the plaintiff-creditor has the burden of proof to
show that defendant had not paid her the amount of the
contracted loan. However, it has also been long
established that where the plaintiff-creditor possesses
and submits in evidence an instrument showing the
indebtedness, a presumption that the credit has not been
satisfied arises in her favor. Thus, the defendant is, in
appropriate instances, required to overcome the said
presumption and present evidence to prove the fact of
payment so that no judgment will be entered against
him.44
In overruling the trial court, however, the CA opined that
petitioner "failed to establish [the] alleged indebtedness
in writing."45 Consequently, so the CA held, respondents
were under no obligation to prove their defense. Clearly,
the CA had discounted the value of the only hard pieces
of evidence extant in the present casethe checks issued
by respondent Caroline in 1988 and 1996 that were in
the possession of, and presented in court by, petitioner.

bearing the discounted amount of the money they owed

In Pacheco v. Court of Appeals,46 this Court has

to petitioner. Like the 1988 checks, the drawee bank

expressly recognized that a check "constitutes an

likewise dishonored this check. To prove her allegations,

evidence of indebtedness"47 and is a veritable "proof of

petitioner submitted the original copies of the 17 checks

an obligation."48 Hence, it can be used "in lieu of and for

issued by respondent Caroline in 1988 and the check

the same purpose as a promissory note."49 In fact, in the

issued in 1996, Asiatrust Check No. BND057750. In

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seminal case of Lozano v. Martinez,50 We pointed out

were dishonored by the drawee banks because they were

that a check functions more than a promissory note since

"drawn against insufficient funds."56 Further, a close

it not only contains an undertaking to pay an amount of

scrutiny of these return slips will reveal that the checks

money but is an "order addressed to a bank and partakes

were deposited either in petitioners account57 or in the

of a representation that the drawer has funds on deposit

account of her brother, Ricardo Yuloa fact she had

against which the check is drawn, sufficient to ensure

previously testified to explaining that petitioner indorsed

payment upon its presentation to the bank."51 This Court

some checks to her brother to pay for a part of the capital

reiterated this rule in the relatively recent Lim v.

she used in her financing business.58

Mindanao Wines and Liquour Galleria stating that "a

check, the entries of which are in writing, could prove a

As for the Asiatrust check issued by respondent Caroline

loan transaction."52 This very same principle underpins

in 1996 to substitute the compounded value of the 1988

Section 24 of the Negotiable Instruments Law (NIL):

checks, the appellate court likewise sympathized with

respondents version of the story holding that it is

Section 24. Presumption of consideration. Every

buttressed by respondents allegations describing the

negotiable instrument is deemed prima facie to have

same defense made in the two related cases filed against

been issued for a valuable consideration; and every

them by petitioners brother-in-law, Vicente

person whose signature appears thereon to have become

Balboa.1wphi1 These related cases consisted of a

a party for value.

criminal case for violation of BP 2259and a civil case for

collection of sum of money60 involving three (3) of the

Consequently, the 17 original checks, completed and

five (5) consecutively numbered checks she allegedly

delivered to petitioner, are sufficient by themselves to

left with Lilian.61 It should be noted, however, that while

prove the existence of the loan obligation of the

respondents were exculpated from their criminal

respondents to petitioner. Note that respondent Caroline

liability,62 in Sps. Benito Lo Bun Tiong and Caroline

had not denied the genuineness of these

Siok Ching Teng v. Vicente Balboa,63 this Court

53

checks. Instead, respondents argue that they were given

sustained the factual findings of the appellate court in the

to various other persons and petitioner had simply

civil case finding respondents civilly liable to pay the

collected all these 17 checks from them in order to

amount of the checks.

54

damage respondents reputation. This account is not

only incredible; it runs counter to human experience, as

It bears to note that the Decision of the appellate court

enshrined in Sec. 16 of the NIL which provides that

categorically debunked the same defense advanced by

when an instrument is no longer in the possession of the

respondents in the present case primarily because of

person who signed it and it is complete in its terms "a

Carolines admission to the contrary. The Decision of the

valid and intentional delivery by him is presumed until

appellate court found without any reversible error by this

the contrary is proved."

Court reads, thus:

The appellate courts justification in giving credit to

The claim of Caroline Siok Ching Teng that the three (3)

respondents contention that the respondents had

checks were part of the blank checks she issued and

delivered the 17 checks to persons other than petitioner

delivered to Lilian Balboa, wife of plaintiff-appellee, and

lies on the supposed failure of petitioner "to establish for

intended solely for the operational expenses of their

whose accounts [the checks] were deposited and

mahjong business is belied by her admission that she

subsequently dishonored."55 This is clearly contrary to

issued three (3) checks (Exhs. "A", "B" "C") because

the evidence on record. It seems that the appellate court

Vicente showed the listing of their account

overlooked the original copies of the bank return slips

totaling P5,175,250.00 (TSN, November 17, 1997, p.

offered by petitioner in evidence. These return slips

10).64 x x x

show that the 1988 checks issued by respondent Caroline

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Clearly, respondents defense that Caroline left blank

was not reduced to writing. Article 1956 of the Civil

checks with petitioners sister who, it is said, is now

Code, which refers to monetary interest, specifically

determined to recoup her past losses and bring financial

mandates that no interest shall be due unless it has been

ruin to respondents by falsifying the same blank checks,

expressly stipulated in writing.68 Thus, the collection of

had already been thoroughly passed upon and rejected

interest in loans or forbearance of money is allowed only

by this Court. It cannot, therefore, be used to support

when these two conditions concur: (1) there was an

respondents denial of their liability.

express stipulation for the payment of interest; (2) the

agreement for the payment of the interest was reduced in

Respondents other defenses are equally unconvincing.

writing.69 Absent any of these two conditions, the money

They assert that petitioner could not have accepted a

debtor cannot be made liable for interest. Thus,

check worth PhP 8.5 million considering that she should

petitioner is entitled only to the principal amount of the

have known that respondent Caroline had issued several

loan plus the allowable legal interest from the time of the

checks for PhP 25,000 each in favor of Lilian and all of

demand,70 at the rate of 6% per annum.71

them had bounced.65 Needless to state, an act done

contrary to law cannot be sustained to defeat a legal

Respondent Benito cannot escape the joint and solidary

obligation; repeated failure to honor obligations covered

liability to pay the loan on the ground that the obligation

by several negotiable instruments cannot serve to defeat

arose from checks solely issued by his wife. Without any

yet another obligation covered by another instrument.

evidence to the contrary, it is presumed that the proceeds

of the loan redounded to the benefit of their family.

Indeed, it seems that respondent Caroline had displayed

Hence, the conjugal partnership is liable therefor.72 The

a cavalier attitude towards the value, and the obligation

unsupported allegation that respondents were separated

concomitant with the issuance, of a check. As attested to

in fact, standing alone, does not persuade this Court to

by respondents very own witness, respondent Caroline

solely bind respondent Caroline and exempt Benito. As

has a documented history of issuing insufficiently

the head of the family, there is more reason that

66

funded checks for 69 times, at the very least. This fact

respondent Benito should answer for the liability

alone bolsters petitioners allegation that the checks

incurred by his wife presumably in support of their

delivered to her by respondent Caroline were similarly

family.

not funded.
WHEREFORE, the Motion for Reconsideration is
In Magdiwang Realty Corp. v. Manila Banking Corp.,

GRANTED. The Resolution of this Court dated April 18,

We stressed that the quantum of evidence required in

2012 is set aside and a new one entered REVERSING

civil casespreponderance of evidence"is a phrase

and SETTING ASIDE the Decision dated March 31,

which, in the last analysis, means probability to truth. It

2011 and the Resolution dated September 26, 2011 of the

is evidence which is more convincing to the court as

Court of Appeals in CA-G.R. CV No. 93755. The

worthier of belief than that which is offered in

Decision in Civil Case No. 97-83027 of the Regional

opposition thereto."67 Based on the evidence submitted

Trial Court (RTC) of the City of Manila, Branch 29 is

by the parties and the legal presumptions arising

REINSTATED with MODIFICATION.

therefrom, petitioners evidence outweighs that of

respondents. This preponderance of evidence in favor of

Accordingly, respondents Benito Lo Bun Tiong and

Pua requires that a judgment ordering respondents to pay

Caroline Siok Ching Teng are ordered jointly and

their obligation be entered.

solidarily to pay petitioner PhP 1,975,000 plus 6%

interest per annum from April 18, 1997, until fully paid,

As aptly held by the court a quo, however, respondents

and P200,000.00 as attorneys fees.

cannot be obliged to pay the interest of the loan on the

ground that the supposed agreement to pay such interest

43

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#6
FIRST DIVISION
SAN MIGUEL CORPORATION,
Petitioner,

G.R. No

Present:

CORON
CARPIO
VELAS
DEL CA
PEREZ,

- versus -

BARTOLOME PUZON, JR.,

Promulg
Respondent.
Septemb
x------------------------------------------------------------------x
DECISION
DEL CASTILLO, J.:
This petition for review assails the December 21, 2004
Decision[1]and March 28, 2005 Resolution[2]of the Court of
Appeals (CA) in CA-G.R. SP No. 83905, which dismissed the
petition before it and denied reconsideration, respectively.
Factual Antecedents
Respondent Bartolome V. Puzon, Jr., (Puzon) owner of
Bartenmyk Enterprises, was a dealer of beer products of
petitioner

San

Miguel

Corporation

(SMC)

for Paraaque City. Puzon purchased SMC products on

credit. To ensure payment and as a business practice, SMC
required him to issue postdated checks equivalent to the value
of the products purchased on credit before the same were
released to him. Said checks were returned to Puzon when the
transactions covered by these checks were paid or settled in
full.

44

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property that belongs to himself. It disposed of the appeal as
On December 31, 2000, Puzon purchased products on credit

follows:

amounting to P11,820,327 for which he issued, and gave to

SMC, Bank of the Philippine Islands (BPI) Check Nos. 27904
(for P309,500.00) and 27903 (for P11,510,827.00) to cover

WHEREFORE, finding no grave abuse of

discretion committed by public respondent,
the

the said transaction.

instant

petition

is

hereby DISMISSED. The

On January 23, 2001, Puzon, together with his accountant,
visited the SMC Sales Office in Paraaque City to reconcile his
account with SMC.During that visit Puzon allegedly

assailed

Resolutions of public respondent, dated 04

June

2003

and

23

April

2004,

are AFFIRMED. No costs at this instance.

requested to see BPI Check No. 17657. However, when he

SO ORDERED.[7]

got hold of BPI Check No. 27903 which was attached to a

bond paper together with BPI Check No. 17657 he allegedly
immediately left the office with his accountant, bringing the

The motion for reconsideration of SMC was denied. Hence,

the present petition.

checks with them.

Issues

SMC sent a letter to Puzon on March 6, 2001 demanding the

return of the said checks. Puzon ignored the demand hence
SMC filed a complaint against him for theft with the City
Prosecutors Office of Paraaque City.
Rulings of the Prosecutor and the Secretary of Department

Petitioner now raises the following issues:

I
WHETHER X X X PUZON HAD
STOLEN FROM SMC ON JANUARY 23,
2001, AMONG OTHERS BPI CHECK

of Justice (DOJ)

NO. 27903 DATED MARCH 30, 2001 IN

The investigating prosecutor, Elizabeth Yu Guray
found that the relationship between [SMC] and [Puzon]
appears to be one of credit or creditor-debtor relationship. The
problem lies in the reconciliation of accounts and the non-

THE AMOUNT OF PESOS: ELEVEN

MILLION

FIVE

THOUSAND

HUNDRED

EIGHT

TEN

HUNDRED

TWENTY SEVEN (Php11,510,827.00)

payment of beer empties which cannot give rise to a criminal

prosecution for theft.[3] Thus, in her July 31, 2001 Resolution,
[4]

she recommended the dismissal of

II
WHETHER X X X THE POSTDATED
CHECKS

the case for lack of evidence. SMC appealed.

ISSUED

BY

PUZON,

PARTICULARLY BPI CHECK NO. 27903

On

June

4,

2003,

the

DOJ

issued

its

resolution[5]affirming the prosecutors Resolution dismissing

the case. Its motion for reconsideration having been denied in
the April 23, 2004 DOJ Resolution,[6]SMC filed a petition
for certiorari with the CA.
Ruling of the Court of Appeals
The CA found that the postdated checks were issued by Puzon
merely as a security for the payment of his purchases and that
these were not intended to be encashed. It thus concluded that
SMC did not acquire ownership of the checks as it was duty
bound to return the same checks to Puzon after the
transactions covering them were settled. The CA agreed with
the prosecutor that there was no theft, considering that a
person cannot be charged with theft for taking personal

DATED MARCH 30, 2001 IN THE

AMOUNT
MILLION

OF PESOS:
FIVE

THOUSAND

ELEVEN

HUNDRED

EIGHT

TEN

HUNDRED

TWENTY SEVEN (Php11,510,827.00),

WERE ISSUED IN PAYMENT OF HIS
BEER PURCHASES OR WERE USED
MERELY AS SECURITY TO ENSURE
PAYMENT OF PUZONS OBLIGATION.
III
WHETHER X X X THE PRACTICE OF
SMC

IN

RETURNING

THE

POSTDATED CHECKS ISSUED IN

PAYMENT

OF

BEER

PRODUCTS

45

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PURCHASED ON CREDIT SHOULD

security to ensure payment. These issues cannot be properly

THE TRANSACTIONS COVERED BY

resolved in the present petition for review on certiorariwhich

THESE CHECKS [BE] SETTLED ON

is rooted merely on the resolution of the prosecutor finding no

[THE] MATURITY DATES THEREOF

probable cause for the filing of an information for theft.

COULD

BE

LIKENED

TO

CONTRACT OF PLEDGE.
WHETHER

IV
X X

entail venturing into constitutional matters for a complete

resolution. This route is unnecessary in the present case
SMC

HAD

ESTABLISHED PROBABLE CAUSE TO

JUSTIFY

THE

The third issue raised by petitioner, on the other hand, would

INDICTMENT

OF

PUZON FOR THE CRIME OF THEFT

considering that the main matter for resolution here only

concerns grave abuse of discretion and the existence of
probable cause for theft, which at this point is more properly
resolved through another more clear cut route.

PURSUANT TO ART. 308 OF THE

REVISED PENAL CODE.[8]

Probable Cause for Theft

Probable cause is defined as such facts and circumstances that

Petitioner's Arguments

will engender a well-founded belief that a crime has been

SMC contends that Puzon was positively identified by its

employees to have taken the subject postdated checks. It also
contends that ownership of the checks was transferred to it
because these were issued, not merely as security but were, in

committed and that the respondent is probably guilty thereof

and should be held for trial. [9] On the fine points of the
determination of probable cause, Reyes v. Pearlbank
Securities, Inc.[10] comprehensively elaborated that:

payment of Puzons purchases. SMC points out that it has

The determination of [the existence or

established more than sufficient probable cause to justify the

absence of probable cause] lies within the

indictment of Puzon for the crime of Theft.

discretion of the prosecuting officers after

Respondents Arguments

conducting a preliminary investigation upon

complaint of an offended party. Thus, the

On the other hand, Puzon contends that SMC raises questions

of fact that are beyond the province of an appeal
on certiorari. He also insists that there is no probable cause to
charge him with theft because the subject checks were issued
only as security and he therefore retained ownership of the
same.

decision whether to dismiss a complaint or

not is dependent upon the sound discretion
of the prosecuting fiscal. He may dismiss
the complaint forthwith, if he finds the
charge insufficient in form or substance or
without any ground. Or he may proceed

Our Ruling
The petition has no merit.

with the investigation if the complaint in his

view is sufficient and in proper form. To
emphasize, the determination of probable

Preliminary Matters

cause for the filing of information in court is

At the outset we find that as pointed out by Puzon, SMC

an executive function, one that properly

raises questions of fact. The resolution of the first issue raised

pertains at the first instance to the public

by SMC of whether respondent stole the subject check, which

prosecutor and, ultimately, to the Secretary

calls for the Court to determine whether respondent is guilty of

of Justice, who may direct the filing of the

a felony, first requires that the facts be duly established in the

corresponding information or move for the

proper forum and in accord with the proper procedure. This

dismissal of the case. Ultimately, whether or

issue cannot be resolved based on mere allegations of facts

not a complaint will be dismissed is

and affidavits. The same is true with the second issue raised

dependent on the sound discretion of the

by petitioner, to wit: whether the checks issued by Puzon were

Secretary of Justice. And unless made with

payments for his purchases or were intended merely as

grave abuse of discretion, findings of the

46

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Secretary of Justice are not subject to

petitioner. On this point the Negotiable Instruments Law

review.

provides:

For this reason, the Court considers it sound

Sec. 12. Antedated and postdated The

judicial policy to refrain from interfering in

instrument is not invalid for the reason only

the conduct of preliminary investigations

that it is antedated or postdated, provided

and to leave the Department of Justice

this is not done for an illegal or fraudulent

ample

the

purpose. The person to whom an instrument

determination of what constitutes sufficient

so dated is delivered acquires the title

evidence to establish probable cause for the

thereto as of the date of delivery.

prosecution

(Underscoring supplied.)

latitude

of

of

discretion

supposed

in

offenders.

Consistent with this policy, courts do not

reverse the Secretary of Justice's findings

Note however that delivery as the term is used in the

and conclusions on the matter of probable

aforementioned provision means that the party delivering did

cause except in clear cases of grave abuse of

so for the purpose of giving effect thereto.[12] Otherwise, it

discretion.

cannot be said that there has been delivery of the negotiable

instrument. Once there is delivery, the person to whom the

In the present case, we are also not sufficiently convinced to

instrument is delivered gets the title to the instrument

deviate from the general rule of non-interference. Indeed the

completely and irrevocably.

CA did not err in dismissing the petition for certiorari before

it, absent grave abuse of discretion on the part of the DOJ
Secretary in not finding probable cause against Puzon for
theft.

If the subject check was given by Puzon to SMC in payment

of the obligation, the purpose of giving effect to the instrument
is evident thus title to or ownership of the check was
transferred upon delivery. However, if the check was not

The Revised Penal Code provides:

Art. 308. Who are liable for theft. - Theft is
committed by any person who, with intent

given as payment, there being no intent to give effect to the

instrument, then ownership of the check was not transferred to
SMC.

to gain but without violence against, or

The evidence of SMC failed to establish that the check was

intimidation of persons nor force upon

given in payment of the obligation of Puzon. There was no

things, shall take personal property of

provisional receipt or official receipt issued for the amount of

another without the latters consent.

the

xxxx

check. What

was

issued

was

receipt

for

[13]

the document, a POSTDATED CHECK SLIP.

Furthermore, the petitioner's demand letter sent to respondent

[T]he essential elements of the crime of theft are the

states As per company policies on receivables, all issuances

following: (1) that there be a taking of personal property; (2)

are to be covered by post-dated checks. However, you have

that said property belongs to another; (3) that the taking be

deviated from this policy by forcibly taking away the check

done with intent to gain; (4) that the taking be done without

you have issued to us to cover the December issuance.

the consent of the owner; and (5) that the taking be

[14]

accomplished without the use of violence or intimidation

covered and cover were used.

against persons or force upon things.[11]

Notably, the term payment was not used instead the terms

Although the petitioner's witness, Gregorio L. Joven III, states

Considering that the second element is that the thing

in paragraph 6 of his affidavit that the check was given in

taken belongs to another, it is relevant to determine whether

payment of the obligation of Puzon, the same is contradicted

ownership of the subject check was transferred to

by his statements in paragraph 4, where he states that As a

standard company operating procedure, all beer purchases by

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dealers on credit shall be covered by postdated checks
equivalent to the value of the beer products purchased; in
paragraph 9 where he states that the transaction covered by
the said check had not yet been paid for, and in paragraph 8
which clearly shows that partial payment is expected to be
made by the return of beer empties, and not by the deposit or
encashment of the check. Clearly the term cover was not
meant to be used interchangeably with payment.
When taken in conjunction with the counter-affidavit of Puzon
where he states that As the [liquid beer] contents are paid for,
SMC return[s] to me the corresponding PDCs or request[s]
me to replace them with whatever was the unpaid balance.
[15]

it becomes clear that both parties did not intend for the

check to pay for the beer products. The evidence proves that
the check was accepted, not as payment, but in accordance
with the long-standing policy of SMC to require its dealers to
issue postdated checks to cover its receivables. The check was
only meant to cover the transaction and in the meantime
Puzon was to pay for the transaction by some other means
other than the check. This being so, title to the check did not
transfer to SMC; it remained with Puzon. The second element
of the felony of theft was therefore not established. Petitioner
was not able to show that Puzon took a check that belonged to
another. Hence, the prosecutor and the DOJ were correct in
finding no probable cause for theft.
Consequently, the CA did not err in finding no grave abuse of
discretion committed by the DOJ in sustaining the dismissal of
#7

the case for theft for lack of probable cause.

Republic of the Philippines

WHEREFORE, the petition is DENIED. The December

SUPREME COURT

21, 2004 Decision and March 28, 2005 Resolution of the

Court

of

Appeals

in

CA-G.R.

SP.

No.

Manila

83905

are AFFIRMED.
SO ORDERED.

SECOND DIVISION
G.R. No. 107382/G.R. No. 107612

January 31,

1996
ASSOCIATED BANK, petitioner,
vs.
HON. COURT OF APPEALS, PROVINCE OF
TARLAC and PHILIPPINE NATIONAL
BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx

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G.R. No. 107612

January 31, 1996

cleared checks which were issued from 1977 to 1980 in

order to verify the regularity of their encashment. After

PHILIPPINE NATIONAL BANK, petitioner,

the checks were examined, the Provincial Treasurer

vs.

learned that 30 checks amounting to P203,300.00 were

HONORABLE COURT OF APPEALS, PROVINCE

encashed by one Fausto Pangilinan, with the Associated

OF TARLAC, and ASSOCIATED

Bank acting as collecting bank.

BANK, respondents.
It turned out that Fausto Pangilinan, who was the
DECISION
ROMERO, J.:

administrative officer and cashier of payee hospital until

his retirement on February 28, 1978, collected the
questioned checks from the office of the Provincial

Where thirty checks bearing forged endorsements are

Treasurer. He claimed to be assisting or helping the

paid, who bears the loss, the drawer, the drawee bank or

hospital follow up the release of the checks and had

the collecting bank?

official receipts. 3Pangilinan sought to encash the first

check 4 with Associated Bank. However, the manager of

This is the main issue in these consolidated petitions for

Associated Bank refused and suggested that Pangilinan

review assailing the decision of the Court of Appeals in

deposit the check in his personal savings account with

"Province of Tarlac v. Philippine National Bank v.

the same bank. Pangilinan was able to withdraw the

Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R.

money when the check was cleared and paid by the

No. CV No. 17962). 1

drawee bank, PNB.

The facts of the case are as follows:

After forging the signature of Dr. Adena Canlas who was

chief of the payee hospital, Pangilinan followed the same

The Province of Tarlac maintains a current account with

the Philippine National Bank (PNB) Tarlac Branch
where the provincial funds are deposited. Checks issued
by the Province are signed by the Provincial Treasurer
and countersigned by the Provincial Auditor or the
Secretary of the Sangguniang Bayan.
A portion of the funds of the province is allocated to the
Concepcion Emergency Hospital. 2 The allotment checks
for said government hospital are drawn to the order of
"Concepcion Emergency Hospital, Concepcion, Tarlac"
or "The Chief, Concepcion Emergency Hospital,
Concepcion, Tarlac." The checks are released by the
Office of the Provincial Treasurer and received for the
hospital by its administrative officer and cashier.
In January 1981, the books of account of the Provincial
Treasurer were post-audited by the Provincial Auditor. It
was then discovered that the hospital did not receive
several allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer

procedure for the second check, in the amount of

P5,000.00 and dated April 20, 1978, 5 as well as for
twenty-eight other checks of various amounts and on
various dates. The last check negotiated by Pangilinan
was for f8,000.00 and dated February 10, 1981. 6 All the
checks bore the stamp of Associated Bank which reads
"All prior endorsements guaranteed ASSOCIATED
BANK."
Jesus David, the manager of Associated Bank testified
that Pangilinan made it appear that the checks were paid
to him for certain projects with the hospital. 7 He did not
find as irregular the fact that the checks were not payable
to Pangilinan but to the Concepcion Emergency
Hospital. While he admitted that his wife and
Pangilinan's wife are first cousins, the manager denied
having given Pangilinan preferential treatment on this
account. 8
On February 26, 1981, the Provincial Treasurer wrote
the manager of the PNB seeking the restoration of the

requested the manager of the PNB to return all of its

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various amounts debited from the current account of the

same are hereby ordered dismissed for lack of

Province. 9

merit.

In turn, the PNB manager demanded reimbursement

SO ORDERED. 12

from the Associated Bank on May 15, 1981. 10

PNB and Associated Bank appealed to the Court of
As both banks resisted payment, the Province of Tarlac

Appeals. 13 Respondent court affirmed the trial court's

brought suit against PNB which, in turn, impleaded

decision in toto on September 30, 1992.

Associated Bank as third-party defendant. The latter then

filed a fourth-party complaint against Adena Canlas and

Hence these consolidated petitions which seek a reversal

Fausto Pangilinan. 11

of respondent appellate court's decision.

After trial on the merits, the lower court rendered its

PNB assigned two errors. First, the bank contends that

decision on March 21, 1988, disposing as follows:

respondent court erred in exempting the Province of

Tarlac from liability when, in fact, the latter was

WHEREFORE, in view of the foregoing,

negligent because it delivered and released the

judgment is hereby rendered:

questioned checks to Fausto Pangilinan who was then

already retired as the hospital's cashier and

1. On the basic complaint, in favor of plaintiff

administrative officer. PNB also maintains its innocence

Province of Tarlac and against defendant

and alleges that as between two innocent persons, the

Philippine National Bank (PNB), ordering the

one whose act was the cause of the loss, in this case the

latter to pay to the former, the sum of Two

Province of Tarlac, bears the loss.

Hundred Three Thousand Three Hundred

(P203,300.00) Pesos with legal interest thereon

Next, PNB asserts that it was error for the court to order

from March 20, 1981 until fully paid;

it to pay the province and then seek reimbursement from

Associated Bank. According to petitioner bank,

2. On the third-party complaint, in favor of

respondent appellate Court should have directed

defendant/third-party plaintiff Philippine

Associated Bank to pay the adjudged liability directly to

National Bank (PNB) and against third-party

the Province of Tarlac to avoid circuity. 14

defendant/fourth-party plaintiff Associated Bank

ordering the latter to reimburse to the former the

Associated Bank, on the other hand, argues that the order

amount of Two Hundred Three Thousand Three

of liability should be totally reversed, with the drawee

Hundred (P203,300.00) Pesos with legal

bank (PNB) solely and ultimately bearing the loss.

interests thereon from March 20, 1981 until fully

paid;.

Respondent court allegedly erred in applying Section 23

of the Philippine Clearing House Rules instead of

3. On the fourth-party complaint, the same is

Central Bank Circular No. 580, which, being an

hereby ordered dismissed for lack of cause of

administrative regulation issued pursuant to law, has the

action as against fourth-party defendant Adena

force and effect of law. 15 The PCHC Rules are merely

Canlas and lack of jurisdiction over the person

contractual stipulations among and between member-

of fourth-party defendant Fausto Pangilinan as

banks. As such, they cannot prevail over the aforesaid

against the latter.

CB Circular.

4. On the counterclaims on the complaint, third-

It likewise contends that PNB, the drawee bank, is

party complaint and fourth-party complaint, the

estopped from asserting the defense of guarantee of prior

indorsements against Associated Bank, the collecting

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bank. In stamping the guarantee (for all prior

against whom it is sought to enforce such right is

indorsements), it merely followed a mandatory

precluded from setting up the forgery or want of

requirement for clearing and had no choice but to place

authority.

the stamp of guarantee; otherwise, there would be no

clearing. The bank will be in a "no-win" situation and

A forged signature, whether it be that of the drawer or

will always bear the loss as against the drawee bank. 16

the payee, is wholly inoperative and no one can gain title

to the instrument through it. A person whose signature to

Associated Bank also claims that since PNB already

an instrument was forged was never a party and never

cleared and paid the value of the forged checks in

consented to the contract which allegedly gave rise to

question, it is now estopped from asserting the defense

such instrument. 18 Section 23 does not avoid the

that Associated Bank guaranteed prior indorsements. The

instrument but only the forged signature. 19 Thus, a

drawee bank allegedly has the primary duty to verify the

forged indorsement does not operate as the payee's

genuineness of payee's indorsement before paying the

indorsement.

check. 17
The exception to the general rule in Section 23 is where
While both banks are innocent of the forgery, Associated

"a party against whom it is sought to enforce a right is

Bank claims that PNB was at fault and should solely

precluded from setting up the forgery or want of

bear the loss because it cleared and paid the forged

authority." Parties who warrant or admit the genuineness

checks.

of the signature in question and those who, by their acts,

silence or negligence are estopped from setting up the
xxx

xxx

xxx

The case at bench concerns checks payable to the order

of Concepcion Emergency Hospital or its Chief. They
were properly issued and bear the genuine signatures of

defense of forgery, are precluded from using this

defense. Indorsers, persons negotiating by delivery and
acceptors are warrantors of the genuineness of the
signatures on the instrument. 20

the drawer, the Province of Tarlac. The infirmity in the

In bearer instruments, the signature of the payee or

questioned checks lies in the payee's (Concepcion

holder is unnecessary to pass title to the instrument.

Emergency Hospital) indorsements which are forgeries.

Hence, when the indorsement is a forgery, only the

At the time of their indorsement, the checks were order

person whose signature is forged can raise the defense of

instruments.

forgery against a holder in due course. 21

Checks having forged indorsements should be

The checks involved in this case are order instruments,

differentiated from forged checks or checks bearing the

hence, the following discussion is made with reference

forged signature of the drawer.

to the effects of a forged indorsement on an instrument

Section 23 of the Negotiable Instruments Law (NIL)

provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF.
When a signature is forged or made without
authority of the person whose signature it
purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof

payable to order.
Where the instrument is payable to order at the time of
the forgery, such as the checks in this case, the signature
of its rightful holder (here, the payee hospital) is
essential to transfer title to the same instrument. When
the holder's indorsement is forged, all parties prior to the
forgery may raise the real defense of forgery against all
parties subsequent thereto. 22

against any party thereto, can be acquired

An indorser of an order instrument warrants "that the

through or under such signature unless the party

instrument is genuine and in all respects what it purports

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to be; that he has a good title to it; that all prior parties

check. If it does, it shall have to recredit the amount of

had capacity to contract; and that the instrument is at the

the check to the account of the drawer. The liability

time of his indorsement valid and subsisting." 23 He

chain ends with the drawee bank whose responsibility it

cannot interpose the defense that signatures prior to him

is to know the drawer's signature since the latter is its

are forged.

customer. 27

A collecting bank where a check is deposited and which

In cases involving checks with forged indorsements,

indorses the check upon presentment with the drawee

such as the present petition, the chain of liability does

bank, is such an indorser. So even if the indorsement on

not end with the drawee bank. The drawee bank may not

the check deposited by the banks's client is forged, the

debit the account of the drawer but may generally pass

collecting bank is bound by his warranties as an indorser

liability back through the collection chain to the party

and cannot set up the defense of forgery as against the

who took from the forger and, of course, to the forger

drawee bank.

himself, if available. 28 In other words, the drawee bank

canseek reimbursement or a return of the amount it paid

The bank on which a check is drawn, known as the

from the presentor bank or person. 29 Theoretically, the

drawee bank, is under strict liability to pay the check to

latter can demand reimbursement from the person who

the order of the payee. The drawer's instructions are

indorsed the check to it and so on. The loss falls on the

reflected on the face and by the terms of the check.

party who took the check from the forger, or on the

Payment under a forged indorsement is not to the

forger himself.

drawer's order. When the drawee bank pays a person

other than the payee, it does not comply with the terms

In this case, the checks were indorsed by the collecting

of the check and violates its duty to charge its customer's

bank (Associated Bank) to the drawee bank (PNB). The

(the drawer) account only for properly payable items.

former will necessarily be liable to the latter for the

Since the drawee bank did not pay a holder or other

checks bearing forged indorsements. If the forgery is that

person entitled to receive payment, it has no right to

of the payee's or holder's indorsement, the collecting

reimbursement from the drawer.

24

The general rule then

is that the drawee bank may not debit the drawer's

bank is held liable, without prejudice to the latter

proceeding against the forger.

account and is not entitled to indemnification from the

drawer. 25 The risk of loss must perforce fall on the

Since a forged indorsement is inoperative, the collecting

drawee bank.

bank had no right to be paid by the drawee bank. The

former must necessarily return the money paid by the

However, if the drawee bank can prove a failure by the

latter because it was paid wrongfully. 30

customer/drawer to exercise ordinary care that

substantially contributed to the making of the forged

More importantly, by reason of the statutory warranty of

signature, the drawer is precluded from asserting the

a general indorser in section 66 of the Negotiable

forgery.

Instruments Law, a collecting bank which indorses a

check bearing a forged indorsement and presents it to the

If at the same time the drawee bank was also negligent to

drawee bank guarantees all prior indorsements, including

the point of substantially contributing to the loss, then

the forged indorsement. It warrants that the instrument is

such loss from the forgery can be apportioned between

genuine, and that it is valid and subsisting at the time of

the negligent drawer and the negligent bank. 26

his indorsement. Because the indorsement is a forgery,

the collecting bank commits a breach of this warranty

In cases involving a forged check, where the drawer's

and will be accountable to the drawee bank. This liability

signature is forged, the drawer can recover from the

scheme operates without regard to fault on the part of the

drawee bank. No drawee bank has a right to pay a forged

collecting/presenting bank. Even if the latter bank was

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not negligent, it would still be liable to the drawee bank

The loss incurred by drawee bank-PNB can be passed on

because of its indorsement.

to the collecting bank-Associated Bank which presented

and indorsed the checks to it. Associated Bank can, in

The Court has consistently ruled that "the collecting

turn, hold the forger, Fausto Pangilinan, liable.

bank or last endorser generally suffers the loss because it

has the duty to ascertain the genuineness of all prior

If PNB negligently delayed in informing Associated

endorsements considering that the act of presenting the

Bank of the forgery, thus depriving the latter of the

check for payment to the drawee is an assertion that the

opportunity to recover from the forger, it forfeits its right

party making the presentment has done its duty to

to reimbursement and will be made to bear the loss.

ascertain the genuineness of the endorsements." 31

After careful examination of the records, the Court finds
The drawee bank is not similarly situated as the

that the Province of Tarlac was equally negligent and

collecting bank because the former makes no warranty

should, therefore, share the burden of loss from the

as to the genuineness. of any indorsement.

32

The drawee

checks bearing a forged indorsement.

bank's duty is but to verify the genuineness of the

drawer's signature and not of the indorsement because

The Province of Tarlac permitted Fausto Pangilinan to

the drawer is its client.

collect the checks when the latter, having already retired

from government service, was no longer connected with

Moreover, the collecting bank is made liable because it

the hospital. With the exception of the first check (dated

is privy to the depositor who negotiated the check. The

January 17, 1978), all the checks were issued and

bank knows him, his address and history because he is a

released after Pangilinan's retirement on February 28,

client. It has taken a risk on his deposit. The bank is also

1978. After nearly three years, the Treasurer's office was

in a better position to detect forgery, fraud or irregularity

still releasing the checks to the retired cashier. In

in the indorsement.

addition, some of the aid allotment checks were released

to Pangilinan and the others to Elizabeth Juco, the new

Hence, the drawee bank can recover the amount paid on

cashier. The fact that there were now two persons

the check bearing a forged indorsement from the

collecting the checks for the hospital is an unmistakable

collecting bank. However, a drawee bank has the duty to

sign of an irregularity which should have alerted

promptly inform the presentor of the forgery upon

employees in the Treasurer's office of the fraud being

discovery. If the drawee bank delays in informing the

committed. There is also evidence indicating that the

presentor of the forgery, thereby depriving said presentor

provincial employees were aware of Pangilinan's

of the right to recover from the forger, the former is

retirement and consequent dissociation from the hospital.

deemed negligent and can no longer recover from the

Jose Meru, the Provincial Treasurer, testified:.

presentor.

33

ATTY. MORGA:
Applying these rules to the case at bench, PNB, the
drawee bank, cannot debit the current account of the

Q Now, is it true that for a given month there

Province of Tarlac because it paid checks which bore

were two releases of checks, one went to Mr.

forged indorsements. However, if the Province of Tarlac

Pangilinan and one went to Miss Juco?

as drawer was negligent to the point of substantially

contributing to the loss, then the drawee bank PNB can
charge its account. If both drawee bank-PNB and
drawer-Province of Tarlac were negligent, the loss
should be properly apportioned between them.

JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic)
when the authorized representative of

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Concepcion Emergency Hospital is and was

The situation in the case at bench is analogous to the

supposed to be Miss Juco?

above case, for it was not the payee who deposited the
checks with the collecting bank. Here, the checks were

A Well, as far as my investigation show (sic) the

all payable to Concepcion Emergency Hospital but it

assistant cashier told me that Pangilinan

was Fausto Pangilinan who deposited the checks in his

represented himself as also authorized to help in

personal savings account.

the release of these checks and we were

apparently misled because they accepted the

Although Associated Bank claims that the guarantee

representation of Pangilinan that he was helping

stamped on the checks (All prior and/or lack of

them in the release of the checks and besides

endorsements guaranteed) is merely a requirement

according to them they were, Pangilinan, like the

forced upon it by clearing house rules, it cannot but

rest, was able to present an official receipt to

remain liable. The stamp guaranteeing prior

acknowledge these receipts and according to

indorsements is not an empty rubric which a bank must

them since this is a government check and

fulfill for the sake of convenience. A bank is not required

believed that it will eventually go to the hospital

to accept all the checks negotiated to it. It is within the

following the standard procedure of negotiating

bank's discretion to receive a check for no banking

government checks, they released the checks to

institution would consciously or deliberately accept a

Pangilinan aside from Miss Juco.34

check bearing a forged indorsement. When a check is

deposited with the collecting bank, it takes a risk on its

The failure of the Province of Tarlac to exercise due care

depositor. It is only logical that this bank be held

contributed to a significant degree to the loss tantamount

accountable for checks deposited by its customers.

to negligence. Hence, the Province of Tarlac should be

liable for part of the total amount paid on the questioned

A delay in informing the collecting bank (Associated

checks.

Bank) of the forgery, which deprives it of the

opportunity to go after the forger, signifies negligence on

The drawee bank PNB also breached its duty to pay only

the part of the drawee bank (PNB) and will preclude it

according to the terms of the check. Hence, it cannot

from claiming reimbursement.

escape liability and should also bear part of the loss.

It is here that Associated Bank's assignment of error
As earlier stated, PNB can recover from the collecting

concerning C.B. Circular No. 580 and Section 23 of the

bank.

Philippine Clearing House Corporation Rules comes to

In the case of Associated Bank v. CA, 35 six crossed

checks with forged indorsements were deposited in the
forger's account with the collecting bank and were later
paid by four different drawee banks. The Court found the
collecting bank (Associated) to be negligent and held:

fore. Under Section 4(c) of CB Circular No. 580, items

bearing a forged endorsement shall be returned within
twenty-Sour (24) hours after discovery of the forgery but
in no event beyond the period fixed or provided by law
for filing of a legal action by the returning bank. Section
23 of the PCHC Rules deleted the requirement that items

The Bank should have first verified his right to

bearing a forged endorsement should be returned within

endorse the crossed checks, of which he was not

twenty-four hours. Associated Bank now argues that the

the payee, and to deposit the proceeds of the

aforementioned Central Bank Circular is applicable.

checks to his own account. The Bank was by

Since PNB did not return the questioned checks within

reason of the nature of the checks put upon

twenty-four hours, but several days later, Associated

notice that they were issued for deposit only to

Bank alleges that PNB should be considered negligent

the private respondent's account. . . .

and not entitled to reimbursement of the amount it paid

on the checks.

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The Court deems it unnecessary to discuss Associated

P24.63 in it. 37Had Associated Bank decided to debit

Bank's assertions that CB Circular No. 580 is an

Pangilinan's account, it could not have recovered the

administrative regulation issued pursuant to law and as

amounts paid on the questioned checks. In addition,

such, must prevail over the PCHC rule. The Central

while Associated Bank filed a fourth-party complaint

Bank circular was in force for all banks until June 1980

against Fausto Pangilinan, it did not present evidence

when the Philippine Clearing House Corporation

against Pangilinan and even presented him as its rebuttal

(PCHC) was set up and commenced operations. Banks in

witness. 38 Hence, Associated Bank was not prejudiced

Metro Manila were covered by the PCHC while banks

by PNB's failure to comply with the twenty-four-hour

located elsewhere still had to go through Central Bank

return rule.

Clearing. In any event, the twenty-four-hour return rule

was adopted by the PCHC until it was changed in 1982.

Next, Associated Bank contends that PNB is estopped

The contending banks herein, which are both branches in

from requiring reimbursement because the latter paid

Tarlac province, are therefore not covered by PCHC

and cleared the checks. The Court finds this contention

Rules but by CB Circular No. 580. Clearly then, the CB

unmeritorious. Even if PNB cleared and paid the checks,

circular was applicable when the forgery of the checks

it can still recover from Associated Bank. This is true

was discovered in 1981.

even if the payee's Chief Officer who was supposed to

have indorsed the checks is also a customer of the

The rule mandates that the checks be returned within

drawee bank. 39 PNB's duty was to verify the

twenty-four hours after discovery of the forgery but in

genuineness of the drawer's signature and not the

no event beyond the period fixed by law for filing a legal

genuineness of payee's indorsement. Associated Bank, as

action. The rationale of the rule is to give the collecting

the collecting bank, is the entity with the duty to verify

bank (which indorsed the check) adequate opportunity to

the genuineness of the payee's indorsement.

proceed against the forger. If prompt notice is not given,

the collecting bank maybe prejudiced and lose the

PNB also avers that respondent court erred in adjudging

opportunity to go after its depositor.

circuitous liability by directing PNB to return to the

Province of Tarlac the amount of the checks and then

The Court finds that even if PNB did not return the

directing Associated Bank to reimburse PNB. The Court

questioned checks to Associated Bank within twenty-

finds nothing wrong with the mode of the award. The

four hours, as mandated by the rule, PNB did not

drawer, Province of Tarlac, is a clientor customer of the

commit negligent delay. Under the circumstances, PNB

PNB, not of Associated Bank. There is no privity of

gave prompt notice to Associated Bank and the latter

contract between the drawer and the collecting bank.

bank was not prejudiced in going after Fausto

Pangilinan. After the Province of Tarlac informed PNB

The trial court made PNB and Associated Bank liable

of the forgeries, PNB necessarily had to inspect the

with legal interest from March 20, 1981, the date of

checks and conduct its own investigation. Thereafter, it

extrajudicial demand made by the Province of Tarlac on

requested the Provincial Treasurer's office on March 31,

PNB. The payments to be made in this case stem from

1981 to return the checks for verification. The Province

the deposits of the Province of Tarlac in its current

of Tarlac returned the checks only on April 22, 1981.

account with the PNB. Bank deposits are considered

Two days later, Associated Bank received the checks

under the law as loans. 40 Central Bank Circular No. 416

from PNB. 36

prescribes a twelve percent (12%) interest per annum for

loans, forebearance of money, goods or credits in the

Associated Bank was also furnished a copy of the

absence of express stipulation. Normally, current

Province's letter of demand to PNB dated March 20,

accounts are likewise interest-bearing, by express

1981, thus giving it notice of the forgeries. At this time,

contract, thus excluding them from the coverage of CB

however, Pangilinan's account with Associated had only

Circular No. 416. In this case, however, the actual

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interest rate, if any, for the current account opened by the

National Bank, likewise, with legal interest from March

Province of Tarlac with PNB was not given in evidence.

20, 1981 until payment is made.

Hence, the Court deems it wise to affirm the trial court's

use of the legal interest rate, or six percent (6%) per

SO ORDERED.

annum. The interest rate shall be computed from the date

of default, or the date of judicial or extrajudicial
demand. 41 The trial court did not err in granting legal
interest from March 20, 1981, the date of extrajudicial
demand.
The Court finds as reasonable, the proportionate sharing
of fifty percent - fifty percent (50%-50%). Due to the
negligence of the Province of Tarlac in releasing the
checks to an unauthorized person (Fausto Pangilinan), in
allowing the retired hospital cashier to receive the
checks for the payee hospital for a period close to three
years and in not properly ascertaining why the retired
hospital cashier was collecting checks for the payee
hospital in addition to the hospital's real cashier,
respondent Province contributed to the loss amounting to
P203,300.00 and shall be liable to the PNB for fifty
(50%) percent thereof. In effect, the Province of Tarlac
can only recover fifty percent (50%) of P203,300.00
from PNB.
The collecting bank, Associated Bank, shall be liable to
PNB for fifty (50%) percent of P203,300.00. It is liable
on its warranties as indorser of the checks which were
deposited by Fausto Pangilinan, having guaranteed the
genuineness of all prior indorsements, including that of
the chief of the payee hospital, Dr. Adena Canlas.

#8
Republic of the Philippines
SUPREME COURT
Manila

Associated Bank was also remiss in its duty to ascertain

the genuineness of the payee's indorsement.

SECOND DIVISION

1981 until the payment thereof. Associated Bank shall

ALLIED BANKING G.R. No. 133179

CORPORATION,
Petitioner, Present:
QUISUMBING, J., Chairperson,
- versus - CARPIO MORALES,
TINGA,
VELASCO, JR., and
CHICO-NAZARIO,* JJ.
LIM SIO WAN, METROPOLITAN
BANK AND TRUST CO., and Promulgated:
PRODUCERS BANK,
Respondents. March 27, 2008
x-------------------------------------------------------------------

pay fifty percent (50%) of P203,300.00 to the Philippine

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

IN VIEW OF THE FOREGOING, the petition for

review filed by the Philippine National Bank (G.R. No.
107612) is hereby PARTIALLY GRANTED. The
petition for review filed by the Associated Bank (G.R.
No. 107382) is hereby DENIED. The decision of the
trial court is MODIFIED. The Philippine National Bank
shall pay fifty percent (50%) of P203,300.00 to the
Province of Tarlac, with legal interest from March 20,

DECISION

56

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(Metrobank),[10] with the forged signature of Lim Sio
VELASCO, JR., J.:
To ingratiate

Wan as indorser.[11]
themselves

to

their

valued

depositors, some banks at times bend over backwards

that they unwittingly expose themselves to great risks.
The Case

Earlier, on September 21, 1983, FCC had deposited a

money market placement for PhP 2 million with
respondent Producers Bank.Santos was the money
market trader assigned to handle FCCs account. [12] Such

This Petition for Review on Certiorari under

Rule 45 seeks to reverse the Court of Appeals (CAs)
[1]

Decision promulgated onMarch 18, 1998 in CA-G.R.

CV No. 46290 entitled Lim Sio Wan v. Allied Banking
Corporation, et al. The CA Decision modified the
Decision dated November 15, 1993[2] of the Regional
Trial Court (RTC), Branch 63 in Makati City rendered in
Civil Case No. 6757.

deposit

is

evidenced

317568[13] and

by

Letter

Official

Receipt

No.

dated September

21,

1983 of Santos addressed to Angie Lazo of FCC,

acknowledging

receipt

of

the

placement. [14] The

placement matured on October 25, 1983 and was rolledover until December 5, 1983 as evidenced by a Letter
dated October 25, 1983.[15] When the placement matured,
FCC demanded the payment of the proceeds of the

The Facts

placement.[16] On December 5, 1983, the same date that

The facts as found by the RTC and affirmed by the CA
are as follows:

So received the phone call instructing her to preterminate Lim Sio Wans placement, the managers check

On November 14, 1983, respondent Lim Sio Wan

in the name of Lim Sio Wan was deposited in the

deposited with petitioner Allied Banking Corporation

account of FCC, purportedly representing the proceeds

(Allied) at its Quintin Paredes Branch in Manila a money

of FCCs money market placement with Producers Bank.

market placement of PhP 1,152,597.35 for a term of 31

[17]

[3]

In other words, the Allied check was deposited with

days to mature on December 15, 1983, as evidenced by

Metrobank in the account of FCC as Producers Banks

Provisional Receipt No. 1356 dated November 14, 1983.

payment of its obligation to FCC.

[4]

To clear the check and in compliance with the

On December 5, 1983, a person claiming to be Lim Sio

requirements

Wan called up Cristina So, an officer of Allied, and

Corporation (PCHC) Rules and Regulations, Metrobank

instructed the latter to pre-terminate Lim Sio Wans

stamped a guaranty on the check, which reads: All prior

money market placement, to issue a managers check

endorsements and/or lack of endorsement guaranteed. [18]

representing the proceeds of the placement, and to give

the check to one Deborah Dee Santos who would pick
[5]

up the check. Lim Sio Wan described the appearance

of Santos so that So could easily identify her.[6]

the

Philippine

Clearing

House

The check was sent to Allied through the PCHC. Upon

the presentment of the check, Allied funded the check
even without checking the authenticity of Lim Sio Wans
purported indorsement. Thus, the amount on the face of

Later, Santos arrived at the bank and signed the

application form for a managers check to be issued.
[7]

of

The bank issued Managers Check No. 035669 for PhP

1,158,648.49, representing the proceeds of Lim Sio

the check was credited to the account of FCC.[19]

On December 9, 1983, Lim Sio Wan deposited with
Allied a second money market placement to mature
on January 9, 1984.[20]

Wans money market placement in the name of Lim Sio

Wan, as payee.[8] The check was cross-checked For

On December 14, 1983, upon the maturity date of the

first money market placement, Lim Sio Wan went to

Payees Account Only and given to Santos.[9]

Allied to withdraw it.[21]She was then informed that the

Thereafter, the managers check was deposited in the
account of Filipinas Cement Corporation (FCC) at
respondent

Metropolitan

Bank

and

Trust

Co.

placement

had

been

pre-terminated

upon

her

instructions. She denied giving any instructions and

receiving the proceeds thereof. She desisted from further

57

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complaints when she was assured by the banks manager

After trial, the RTC issued its Decision, holding as

that her money would be recovered.[22]

follows:

When Lim Sio Wans second placement matured

WHEREFORE, judgment is hereby

on January 9, 1984, So called Lim Sio Wan to ask for the

rendered as follows:

latters instructions on the second placement. Lim Sio

Wan instructed So to roll-over the placement for another
30 days.[23] On January 24, 1984, Lim Sio Wan, realizing
that the promise that her money would be recovered
would not materialize, sent a demand letter to Allied

1. Ordering defendant Allied Banking

Corporation to pay plaintiff the amount
of P1,158,648.49 plus 12% interest per
annum from March 16, 1984 until fully

Allied

paid;
2. Ordering defendant Allied Bank to

refused to pay Lim Sio Wan, claiming that the latter had

pay plaintiff the amount of P100,000.00

authorized the pre-termination of the placement and its

by way of moral damages;

3. Ordering defendant Allied Bank to

asking for the payment of the first placement.

[24]

subsequent release to Santos.[25]

pay plaintiff the amount of P173,792.20

Consequently, Lim Sio Wan filed with the RTC a
Complaint dated February 13, 1984[26] docketed as Civil

by way of attorneys fees; and,

4. Ordering defendant Allied Bank to

Case No. 6757 against Allied to recover the proceeds of

pay the costs of suit.

her first money market placement. Sometime in

February 1984, she withdrew her second placement from
Allied.

Defendant Allied Banks cross-claim

against

defendant

Metrobank

is

DISMISSED.

Allied filed a third party complaint [27] against Metrobank

and Santos. In turn, Metrobank filed a fourth party
complaint

[28]

against FCC. FCC for its part filed a fifth

Likewise defendant Metrobanks thirdparty complaint as against Filipinas

Cement Corporation is DISMISSED.

party complaint[29] against Producers Bank. Summonses

were duly served upon all the parties except for Santos,
who was no longer connected with Producers Bank.[30]

Filipinas Cement Corporations fourthparty complaint against Producers Bank

is also DISMISSED.

On May 15, 1984, or more than six (6) months after

funding the check, Allied informed Metrobank that the

SO ORDERED.[36]

signature on the check was forged. [31] Thus, Metrobank

withheld the amount represented by the check from

The Decision of the Court of Appeals

FCC. Later on, Metrobank agreed to release the amount

to FCC after the latter executed an Undertaking,
promising to indemnify Metrobank in case it was made

Lim Sio Wan thereafter filed an amended

complaint to include Metrobank as a party-defendant,
along with Allied.[33] The RTC admitted the amended
[34]

despite

the

assailed Decision on March 18, 1998, modifying the

RTC Decision, as follows:

to reimburse the amount.[32]

complaint

Allied appealed to the CA, which in turn issued the

opposition

of

Metrobank.

Consequently, Allieds third party complaint against

Metrobank was converted into a cross-claim and the

latters fourth party complaint against FCC was converted
into a third party complaint.[35]

WHEREFORE, premises considered,

the

decision

MODIFIED.

appealed
Judgment

from
is

is

rendered

ordering and sentencing defendantappellant Allied Banking Corporation to

pay sixty (60%) percent and defendantappellee Metropolitan Bank and Trust
Company forty (40%) of the amount of
P1,158,648.49 plus 12% interest per
annum from March 16, 1984 until fully

58

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paid. The moral damages, attorneys fees

We also agree with the CA when it said that it could not

and costs of suit adjudged shall likewise

disturb the trial courts findings on the credibility of

be paid by defendant-appellant Allied

witness So inasmuch as it was the trial court that heard

Banking Corporation and defendant-

the witness and had the opportunity to observe closely

appellee Metropolitan Bank and Trust

her deportment and manner of testifying. Unless the trial

Company in the same proportion of 60-

court had plainly overlooked facts of substance or value,

40. Except as thus modified, the

which, if considered, might affect the result of the case,

decision appealed from is AFFIRMED.

[40]

SO ORDERED.[37]

pertaining to credibility of witnesses.

Additionally, this Court has held that the matter of

we find it best to defer to the trial court on matters

negligence is also a factual question.[41] Thus, the finding

Hence, Allied filed the instant petition.
The Issues
Allied raises the following issues for our consideration:

of the RTC, affirmed by the CA, that the respective

parties were negligent in the exercise of their obligations
is also conclusive upon this Court.
The Liability of the Parties

The Honorable Court of Appeals

erred in holding that Lim Sio Wan did
not authorize [Allied] to pre-terminate
the initial placement and to deliver the

As to the liability of the parties, we find that Allied is

liable to Lim Sio Wan. Fundamental and familiar is the
doctrine that the relationship between a bank and a client
is one of debtor-creditor.

check to Deborah Santos.

Articles 1953 and 1980 of the Civil Code provide:
The Honorable Court of Appeals
Art. 1953. A person who receives a loan

erred in absolving Producers Bank of

of money or any other fungible thing

any liability for the reimbursement of

acquires the ownership thereof, and is

amount adjudged demandable.

bound to pay to the creditor an equal

The Honorable Court of Appeals

amount of the same kind and quality.

erred in holding [Allied] liable to the

Art. 1980. Fixed, savings, and current

extent of 60% of amount adjudged

deposits of money in banks and similar

demandable in clear disregard to the

institutions shall be governed by the

ultimate liability of Metrobank as

provisions concerning simple loan.

guarantor of all endorsement on the

check, it being the collecting bank.[38]

Thus, we have ruled in a line of cases that a bank

The petition is partly meritorious.

deposit is in the nature of a simple loan or mutuum.

[42]

A Question of Fact

More succinctly, inCitibank, N.A. (Formerly First

National City Bank) v. Sabeniano, this Court ruled that a

Allied questions the finding of both the trial and

money market placement is a simple loan or mutuum.

appellate courts that Allied was not authorized to release

[43]

the proceeds of Lim Sio Wans money market placement

International

to Santos. Allied clearly raises a question of fact. When

Appeals, as follows:

the CA affirms the findings of fact of the RTC, the

factual findings of both courts are binding on this Court.
[39]

Further, we defined a money market in Cebu

Finance

Corporation

v.

Court

of

[A] money market is a market dealing in

standardized short-term
credit instruments

(involving

large

amounts) where lenders and borrowers

59

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do not deal directly with each other but

that the obligation of Allied to pay Lim Sio Wan had not

through a middle man or dealer in open

been extinguished. Art. 1240 of the Code states that

market. In a money market transaction,

payment shall be made to the person in whose favor the

the investor is a lender who loans his

obligation has been constituted, or his successor in

money

interest, or any person authorized to receive it. As

to

borrower

through

middleman or dealer.

commented by Arturo Tolentino:

In the case at bar, the money

market

transaction

the

a wrong party does not extinguish the

petitioner and the private respondent is

obligation as to the creditor, if there is

in the nature of a loan.

between

Payment made by the debtor to

[44]

no fault or negligence which can be

imputed to the latter. Even when the

Lim Sio Wan, as creditor of the bank for her

debtor acted in utmost good faith and by

money market placement, is entitled to payment upon

mistake as to the person of his creditor,

her request, or upon maturity of the placement, or until

or through error induced by the fraud of

the bank is released from its obligation as debtor. Until

a third person, the payment to one who

any such event, the obligation of Allied to Lim Sio Wan

is not in fact his creditor, or authorized

remains unextinguished.

to receive such payment, is void, except

Art. 1231 of the Civil Code enumerates the

instances when obligations are considered extinguished,

as provided in Article 1241. Such

payment

does

not

prejudice

the

creditor, and accrual of interest is not

thus:

suspended by it.[45](Emphasis supplied.)

Art. 1231. Obligations are extinguished:
(1)

Since there was no effective payment of Lim Sio Wans

money market placement, the bank still has an obligation

By payment or

to pay her at six percent (6%) interest from March 16,

performance;
(2)

By the loss of the

thing due;
(3)

By the condonation

or remission of the debt;

(4)
By the confusion or
merger of the rights of creditor
and debtor;
(5)
(6)

1984 until the payment thereof.

We cannot, however, say outright that Allied is solely
liable to Lim Sio Wan.
Allied claims that Metrobank is the proximate cause of
the loss of Lim Sio Wans money. It points out that

By compensation;
By novation.

Other causes of extinguishment

of obligations, such as annulment,

Metrobank guaranteed all prior indorsements inscribed

on the managers check, and without Metrobanks
guarantee, the present controversy would never have
occurred. According to Allied:

rescission, fulfillment of a resolutory

Failure on the part of the collecting bank

condition,

and

are

to ensure that the proceeds of the check

governed

elsewhere

this

is paid to the proper party is, aside from

prescription,
in

Code. (Emphasis supplied.)

being an efficient intervening cause, also

the last negligent act, x x x contributory

From the factual findings of the trial and

to the injury caused in the present case,

appellate courts that Lim Sio Wan did not authorize the

which thereby leads to the conclusion

release of her money market placement to Santos and the

that it is the collecting bank, Metrobank

bank had been negligent in so doing, there is no question

60

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that is the proximate cause of the alleged

holder, or to any subsequent indorser

loss of the plaintiff in the instant case.[46]

who may be compelled to pay it.

Section

We are not persuaded.

65. Warranty

where

negotiation by delivery, so forth.Every

Proximate cause is that cause, which, in natural and

person negotiating an instrument by

continuous

delivery or by a qualified indorsement,

sequence,

unbroken

by any efficient

intervening cause, produces the injury and without

warrants:

which the result would not have occurred. [47] Thus, there

a)

is an efficient supervening event if the event breaks the

is genuine and in all

sequence leading from the cause to the ultimate

result. To

determine

the

proximate

cause

of

respects

controversy, the question that needs to be asked is: If the

the answer is NO, then the event is the proximate cause.
In the instant case, Allied avers that even if it had not

purports to be;
That he has a good

c)

title of it;
That all prior parties

d)

had capacity to contract;

That he has no
which would impair the

check would still be lost because of Metrobanks

validity

negligence in indorsing the check without verifying the

the

valueless.

Section 66 in relation to Sec. 65 of the

Negotiable Instruments Law provides:

But when the negotiation is by

delivery only, the warranty extends in

of

general

indorser.Every indorser who indorses

favor of no holder other than the

immediate transferee.

without qualification, warrants to all

subsequent holders in due course;
The

of

instrument or render it

genuineness of the indorsement thereon.

a)

it

knowledge of any fact

issued the check payment, the money represented by the

66. Liability

what

b)

event did not happen, would the injury have resulted? If

Section

That the instrument

matters

The provisions of subdivision

(c) of this section do not apply to

and

persons

negotiating

public

or

things mentioned in

corporation securities, other than bills

subdivisions (a), (b)

and notes. (Emphasis supplied.)

and (c) of the next

preceding section; and
b)

That the instrument is

at

the

time

of

his

indorsement valid and

The warranty that the instrument is genuine and in all

respects what it purports to be covers all the defects in
the instrument affecting the validity thereof, including a
forged indorsement. Thus, the last indorser will be liable
for the amount indicated in the negotiable instrument

subsisting;

even if a previous indorsement was forged. We held in a

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

line of cases that a collecting bank which indorses a

check bearing a forged indorsement and presents it to the
drawee bank guarantees all prior indorsements, including
the forged indorsement itself, and ultimately should be
held liable therefor.[48]

proceedings on dishonor be duly taken,

he will pay the amount thereof to the

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However, this general rule is subject to exceptions. One

losses, such losses are subject to

such exception is when the issuance of the check itself

mitigation by the courts. (See Phoenix

was attended with negligence. Thus, in the cases cited

Construction

above where the collecting bank is generally held liable,

Appellate

in two of the cases where the checks were negligently

[1987]).

issued, this Court held the institution issuing the check

just as liable as or more liable than the collecting bank.

Inc.

v.

Intermediate

Courts,

148

SCRA 353

the

comparative

Considering

negligence of the two (2) banks, we rule

In isolated cases where the checks were deposited in an

that the demands of substantial justice

account other than that of the payees on the strength of

are satisfied by allocating the loss of

forged indorsements, we held the collecting bank solely

P2,413,215.16 and the costs of the

liable for the whole amount of the checks involved for

arbitration proceeding in the amount of

having indorsed the same. In Republic Bank v. Ebrada,

P7,250.00 and the cost of litigation on a

[49]

60-40 ratio.[52]

the check was properly issued by the Bureau of

Treasury. While in Banco de Oro Savings and Mortgage

Bank (Banco de Oro) v. Equitable Banking Corporation,

Similarly, we ruled in Associated Bank v. Court of

[50]

Banco de Oro admittedly issued the checks in the

Appeals that the issuing institution and the collecting

name of the correct payees. And inTraders Royal Bank

bank should equally share the liability for the loss of

v. Radio Philippines Network, Inc.,

[51]

the checks were

issued at the request of Radio Philippines Network, Inc.

from Traders Royal Bank.
However, in Bank of the Philippine Islands v. Court of
Appeals, we said that the drawee bank is liable for 60%
of the amount on the face of the negotiable instrument
and the collecting bank is liable for 40%. We also noted
the relative negligence exhibited by two banks, to wit:

amount represented by the checks concerned due to the

negligence of both parties:
The Court finds as reasonable, the
proportionate sharing of fifty percentfifty percent (50%-50%). Due to the
negligence of the Province of Tarlac in
releasing the checks to an unauthorized

Both banks were negligent in

person (Fausto Pangilinan), in allowing

the selection and supervision of their

the retired hospital cashier to receive the

employees resulting in the encashment

checks for the payee hospital for a

of the forged checks by an impostor.

period close to three years and in not

Both banks were not able to overcome

properly ascertaining why the retired

the presumption of negligence in the

hospital cashier was collecting checks

selection

for the payee hospital in addition to the

and

supervision

of

their

employees. It was the gross negligence

hospitals

real

of the employees of both banks which

Province

contributed

resulted in the fraud and the subsequent

amounting to P203,300.00 and shall be

loss. While it is true that petitioner BPIs

liable to the PNB for fifty (50%) percent

negligence may have been the proximate

thereof.

cause of the loss, respondent CBCs

the Province of Tarlac can only recover

negligence contributed equally to the

fifty percent (50%) of P203,300.00 from

success of the impostor in encashing the

PNB.

proceeds of the forged checks. Under

these circumstances, we apply Article
2179 of the Civil Code to the effect that

cashier,

In

to

respondent
the

loss

effect,

The collecting bank, Associated

Bank, shall be liable to PNB for fifty
(50%) percent of P203,300.00. It is

while respondent CBC may recover its

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liable on its warranties as indorser of the

liabilities of Allied and Metrobank, as ruled by the CA,

checks which were deposited by Fausto

must be upheld.

Pangilinan,

having

guaranteed

the

FCC, having no participation in the negotiation of the

genuineness of all prior indorsements,

check and in the forgery of Lim Sio Wans indorsement,

including that of the chief of the payee

can raise the real defense of forgery as against both

hospital, Dr. Adena Canlas. Associated

banks.[57]

Bank was also remiss in its duty to

As to Producers Bank, Allied Banks argument

ascertain the genuineness of the payees

that Producers Bank must be held liable as employer

indorsement.[53]

of Santos under Art. 2180 of the Civil Code is erroneous.

A reading of the facts of the two immediately preceding
cases would reveal that the reason why the bank or
institution which issued the check was held partially
liable for the amount of the check was because of the

Art. 2180 pertains to the vicarious liability of an

employer for quasi-delicts that an employee has
committed. Such provision of law does not apply to civil
liability arising from delict.

negligence of these parties which resulted in the issuance

One also cannot apply the principle of subsidiary

of the checks.
In the instant case, the trial court correctly found Allied

liability in Art. 103 of the Revised Penal Code in the

negligent in issuing the managers check and in

instant case. Such liability on the part of the employer

transmitting

written

for the civil aspect of the criminal act of the employee is

authorization.[54] In fact, Allied did not even ask for the

based on the conviction of the employee for a crime.

certificate evidencing the money market placement or

Here, there has been no conviction for any crime.

it

to Santos without

even

call up Lim Sio Wan at her residence or office to confirm

her instructions. Both actions could have prevented the
whole fraudulent transaction from unfolding. Allieds
negligence must be considered as the proximate cause of
the resulting loss.

As to the claim that there was unjust enrichment

on the part of Producers Bank, the same is correct. Allied
correctly claims in its petition that Producers Bank
should reimburse Allied for whatever judgment that may
be rendered against it pursuant to Art. 22 of the Civil

To reiterate, had Allied exercised the diligence due from

Code, which provides: Every person who through an act

a financial institution, the check would not have been

of performance by another, or any other means, acquires

issued and no loss of funds would have resulted. In fact,

or comes into possession of something at the expense of

there would have been no issuance of indorsement had

the latter without just cause or legal ground, shall return

there been no check in the first place.

the same to him.

The liability of Allied, however, is concurrent with that

of Metrobank as the last indorser of the check. When
Metrobank indorsed the check in compliance with the
PCHC Rules and Regulations[55] without verifying the
authenticity of Lim Sio Wans indorsement and when it
accepted the check despite the fact that it was crosschecked payable to payees account only,[56] its negligent

The above provision of law was clarified

in Reyes v. Lim, where we ruled that [t]here is unjust
enrichment when a person unjustly retains a benefit to
the loss of another, or when a person retains money or
property of another against the fundamental principles of
justice, equity and good conscience.[58]

and cavalier indorsement contributed to the easier

In Tamio v. Ticson, we further clarified the

release of Lim Sio Wans money and perpetuation of the

principle of unjust enrichment, thus: Under Article 22 of

fraud. Given the relative participation of Allied and

the Civil Code, there is unjust enrichment when (1) a

Metrobank to the instant case, both banks cannot be

person is unjustly benefited, and (2) such benefit is

adjudged as equally liable. Hence, the 60:40 ratio of the

derived at the expense of or with damages to another.[59]

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In the instant case, Lim Sio Wans money market
Thus,

placement in Allied Bank was pre-terminated and

withdrawn without her consent. Moreover, the proceeds

the

CA

Decision

is AFFIRMED,

the fallo of which is reproduced, as follows:

of the placement were deposited in Producers Banks

WHEREFORE, premises considered,

account in Metrobank without any justification. In other

the

words, there is no reason that the proceeds of Lim Sio

decision

MODIFIED.

Wans placement should be deposited in FCCs account

appealed
Judgment

from
is

is

rendered

ordering and sentencing defendant-

purportedly as payment for FCCs money market

appellant Allied Banking Corporation to

placement and interest in Producers Bank. With such

pay sixty (60%) percent and defendant-

payment, Producers Banks indebtedness to FCC was

appellee Metropolitan Bank and Trust

extinguished, thereby benefitting the former. Clearly,

Company forty (40%) of the amount of

Producers Bank was unjustly enriched at the expense of

P1,158,648.49 plus 12% interest per

Lim Sio Wan. Based on the facts and circumstances of

annum from March 16, 1984 until fully

the case, Producers Bank should reimburse Allied and

paid. The moral damages, attorneys fees

Metrobank for the amounts the two latter banks are

and costs of suit adjudged shall likewise

ordered to pay Lim Sio Wan.

be paid by defendant-appellant Allied

It cannot be validly claimed that FCC, and not

Banking Corporation and defendant-

Producers Bank, should be considered as having been

appellee Metropolitan Bank and Trust

unjustly enriched. It must be remembered that FCCs

Company in the same proportion of 60-

money market placement with Producers Bank was

40. Except as thus modified, the

already due and demandable; thus, Producers Banks

decision appealed from is AFFIRMED.

payment thereof was justified. FCC was entitled to such

SO ORDERED.

payment. As earlier stated, the fact that the indorsement

on the check was forged cannot be raised against FCC

Additionally

which was not a part in any stage of the negotiation of the

and

by

way

of MODIFICATION, Producers Bank is hereby ordered

check. FCC was not unjustly enriched.

to pay Allied and Metrobank the aforementioned

From the facts of the instant case, we see
that Santos could

be

the

architect

of

the

entire

amounts. The liabilities of the parties are concurrent and

independent of each other.

controversy. Unfortunately, since summons had not been

served on Santos, the courts have not acquired

SO ORDERED.

jurisdiction over her.[60] We, therefore, cannot ascribe to

her liability in the instant case.
Clearly, Producers Bank must be held liable to
Allied and Metrobank for the amount of the check plus
12% interest per annum, moral damages, attorneys fees,
and costs of suit which Allied and Metrobank are
adjudged to pay Lim Sio Wan based on a proportion of
60:40.
WHEREFORE,

the

petition

is PARTLY

GRANTED. The March 18, 1998 CA Decision in CAG.R. CV No. 46290 and the November 15, 1993 RTC
Decision

in

Civil

Case

No.

#9

6757

are AFFIRMED with MODIFICATION.

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Republic of the Philippines

there were enough funds to cover the check, 5 she

SUPREME COURT

compared the signature appearing on the check with the

Manila

specimen signature of Jong as contained in the specimen

signature card with the bank. After comparing the two

SECOND DIVISION
G.R. No. 129015

August 13, 2004

SAMSUNG CONSTRUCTION COMPANY

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

signatures, Justiani was satisfied as to the authenticity of

the signature appearing on the check. She then asked
Gonzaga to submit proof of his identity, and the latter
presented three (3) identification cards.6
At the same time, Justiani forwarded the check to the
branch Senior Assistant Cashier Gemma Velez, as it was
bank policy that two bank branch officers approve
checks exceeding One Hundred Thousand Pesos, for
payment or encashment. Velez likewise counterchecked
the signature on the check as against that on the

TINGA, J.:

signature card. He too concluded that the check was

indeed signed by Jong. Velez then forwarded the check

Called to fore in the present petition is a classic textbook

question if a bank pays out on a forged check, is it
liable to reimburse the drawer from whose account the
funds were paid out? The Court of Appeals, in reversing
a trial court decision adverse to the bank, invoked
tenuous reasoning to acquit the bank of liability. We
reverse, applying time-honored principles of law.
The salient facts follow.

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 wellknown 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

Plaintiff Samsung Construction Company Philippines,

purchase of equipment for Samsung Construction.

Inc. ("Samsung Construction"), while based in Bian,

Satisfied with the genuineness of the signature of Jong,

Laguna, maintained a current account with defendant Far

Syfu authorized the banks encashment of the check to

East Bank and Trust Company1 ("FEBTC") at the latters

Gonzaga.

Bel-Air, Makati branch.2 The sole signatory to Samsung

Constructions account was Jong Kyu Lee ("Jong"), its
Project Manager,3 while the checks remained in the
custody of the companys accountant, Kyu Yong Lee
("Kyu").4

The following day, the accountant of Samsung

Construction, Kyu, examined the balance of the bank
account and discovered that a check in the amount of
Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00) had been encashed. Aware that he

On 19 March 1992, a certain Roberto Gonzaga presented

had not prepared such a check for Jongs signature, Kyu

for payment FEBTC Check No. 432100 to the banks

perused the checkbook and found that the last blank

branch in Bel-Air, Makati. The check, payable to cash

check was missing.7 He reported the matter to Jong, who

and drawn against Samsung Constructions current

then proceeded to the bank. Jong learned of the

account, was in the amount of Nine Hundred Ninety

encashment of the check, and realized that his signature

Nine Thousand Five Hundred Pesos (P999,500.00). The

had been forged. The Bank Manager reputedly told Jong

bank teller, Cleofe Justiani, first checked the balance of

that he would be reimbursed for the amount of the

Samsung Constructions account. After ascertaining

check.8 Jong proceeded to the police station and

consulted with his lawyers.9 Subsequently, a criminal

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case for qualified theft was filed against Sempio before

The Court of Appeals held that the contradictory

the Laguna court.10

findings of the NBI and the PNP created doubt as to

whether there was forgery.17 Moreover, the appellate

In a letter dated 6 May 1992, Samsung Construction,

court also held that assuming there was forgery, it

through counsel, demanded that FEBTC credit to it the

occurred due to the negligence of Samsung

amount of Nine Hundred Ninety Nine Thousand Five

Construction, imputing blame on the accountant Kyu for

11

Hundred Pesos (P999,500.00), with interest. In

lack of care and prudence in keeping the checks, which

response, FEBTC said that it was still conducting an

if observed would have prevented Sempio from gaining

investigation on the matter. Unsatisfied, Samsung

access thereto.18 The Court of Appeals invoked the ruling

Construction filed aComplaint on 10 June 1992 for

in PNB v. National City Bank of New York19 that, if a

violation of Section 23 of the Negotiable Instruments

loss, which must be borne by one or two innocent

Law, and prayed for the payment of the amount debited

persons, can be traced to the neglect or fault of either,

as a result of the questioned check plus interest, and

such loss would be borne by the negligent party, even if

12

attorneys fees. The case was docketed as Civil Case

innocent of intentional fraud.20

No. 92-61506 before the Regional Trial Court ("RTC")

of Manila, Branch 9.13

Samsung Construction now argues that the Court of

Appeals had seriously misapprehended the facts when it

During the trial, both sides presented their respective

overturned the RTCs finding of forgery. It also contends

expert witnesses to testify on the claim that Jongs

that the appellate court erred in finding that it had been

signature was forged. Samsung Corporation, which had

negligent in safekeeping the check, and in applying the

referred the check for investigation to the NBI, presented

equity principle enunciated in PNB v. National City

Senior NBI Document Examiner Roda B. Flores. She

Bank of New York.

testified that based on her examination, she concluded

that Jongs signature had been forged on the check. On

Since the trial court and the Court of Appeals arrived at

the other hand, FEBTC, which had sought the assistance

contrary findings on questions of fact, the Court is

14

of the Philippine National Police (PNP), presented

obliged to examine the record to draw out the correct

Rosario C. Perez, a document examiner from the PNP

conclusions. Upon examination of the record, and based

Crime Laboratory. She testified that her findings showed

on the applicable laws and jurisprudence, we reverse the

that Jongs signature on the check was genuine.

15

Confronted with conflicting expert testimony, the RTC

Court of Appeals.
Section 23 of the Negotiable Instruments Law states:

chose to believe the findings of the NBI expert. In

a Decisiondated 25 April 1994, the RTC held that Jongs

When a signature is forged or made without the

signature on the check was forged and accordingly

authority of the person whose signature it

directed the bank to pay or credit back to Samsung

purports to be, it is wholly inoperative, and no

Constructions account the amount of Nine Hundred

right to retain the instrument, or to give a

Ninety Nine Thousand Five Hundred Pesos

discharge therefor, or to enforce payment thereof

(P999,500.00), together with interest tolled from the

against any party thereto, can be acquired

time the complaint was filed, and attorneys fees in the

through or under such signature, unless the

amount of Fifteen Thousand Pesos (P15,000.00).

party against whom it is sought to enforce such

right is precluded from setting up the forgery or

FEBTC timely appealed to the Court of Appeals. On 28

want of authority. (Emphasis supplied)

November 1996, the Special Fourteenth Division of the

Court of Appeals rendered a Decision,16 reversing the

The general rule is to the effect that a forged signature is

RTC Decision and absolving FEBTC from any liability.

"wholly inoperative," and payment made "through or

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under such signature" is ineffectual or does not discharge

check, it is paying out its own money and not the

the instrument.21 If payment is made, the drawee cannot

depositors.

charge it to the drawers account. The traditional

justification for the result is that the drawee is in a

The forgery may be committed by a trusted

superior position to detect a forgery because he has the

employee or confidential agent. The bank still

makers signature and is expected to know and compare

must bear the loss. Even in a case where the

it.22 The rule has a healthy cautionary effect on banks by

forged check was drawn by the depositors

encouraging care in the comparison of the signatures

partner, the loss was placed upon the bank. The

against those on the signature cards they have on file.

case referred to is Robinson v. Security Bank,

Moreover, the very opportunity of the drawee to insure

Ark., 216 S. W. Rep. 717. In this case, the

and to distribute the cost among its customers who use

plaintiff brought suit against the defendant bank

checks makes the drawee an ideal party to spread the

for money which had been deposited to the

risk to insurance.23

plaintiffs credit and which the bank had paid

out on checks bearing forgeries of the plaintiffs

Brady, in his treatise The Law of Forged and Altered

signature.

Checks, elucidates:
xxx
When a person deposits money in a general
account in a bank, against which he has the

It was held that the bank was liable. It was

privilege of drawing checks in the ordinary

further held that the fact that the plaintiff waited

course of business, the relationship between the

eight or nine months after discovering the

bank and the depositor is that of debtor and

forgery, before notifying the bank, did not, as a

creditor. So far as the legal relationship between

matter of law, constitute a ratification of the

the two is concerned, the situation is the same as

payment, so as to preclude the plaintiff from

though the bank had borrowed money from the

holding the bank liable. xxx

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

This rule of liability can be stated briefly in

these words: "A bank is bound to know its
depositors signature." The rule is variously
expressed in the many decisions in which the
question has been considered. But they all sum
up to the proposition that a bank must know the
signatures of those whose general deposits it
carries.24

the deposit, it impliedly agrees to pay only upon

By no means is the principle rendered obsolete with the

the depositors order. When the bank pays a

advent of modern commercial transactions.

check, on which the depositors signature is a

Contemporary texts still affirm this well-entrenched

forgery, it has failed to comply with its contract

standard. Nickles, in his book Negotiable Instruments

in this respect. Therefore, the bank is held liable.

and Other Related Commercial Paper wrote, thus:

The fact that the forgery is a clever one is

The deposit contract between a payor bank and

immaterial. The forged signature may so closely

its customer determines who can draw against

resemble the genuine as to defy detection by the

the customers account by specifying whose

depositor himself. And yet, if a bank pays the

signature is necessary on checks that are

chargeable against the customers account.

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Therefore, a check drawn against the account of

cannot be presumed; it must be proved by clear,

an individual customer that is signed by

positive and convincing evidence.

someone other than the customer, and without

authority from her, is not properly payable and is

This reasoning is pure sophistry. Any litigator worth his

not chargeable to the customers account,

or her salt would never allow an opponents expert

inasmuch as any "unauthorized signature on an

witness to stand uncontradicted, thus the spectacle of

instrument is ineffective" as the signature of the

competing expert witnesses is not unusual. The trier of

person whose name is signed.25

fact will have to decide which version to believe, and

explain why or why not such version is more credible

Under Section 23 of the Negotiable Instruments Law,

than the other. Reliance therefore cannot be placed

forgery is a real or absolute defense by the party whose

merely on the fact that there are colliding opinions of

signature is forged.26 On the premise that Jongs

two experts, both clothed with the presumption of

signature was indeed forged, FEBTC is liable for the loss

official duty, in order to draw a conclusion, especially

since it authorized the discharge of the forged check.

one which is extremely crucial. Doing so is tantamount

Such liability attaches even if the bank exerts due

to a jurisprudential cop-out.

diligence and care in preventing such faulty discharge.

Forgeries often deceive the eye of the most cautious

Much is expected from the Court of Appeals as it

experts; and when a bank has been so deceived, it is a

occupies the penultimate tier in the judicial hierarchy.

harsh rule which compels it to suffer although no one has

This Court has long deferred to the appellate court as to

suffered by its being deceived.27 The forgery may be so

its findings of fact in the understanding that it has the

near like the genuine as to defy detection by the

appropriate skill and competence to plough through

depositor himself, and yet the bank is liable to the

the minutiae that scatters the factual field. In failing to

depositor if it pays the check.28

thoroughly evaluate the evidence before it, and relying

instead on presumptions haphazardly drawn, the Court

Thus, the first matter of inquiry is into whether the check

of Appeals was sadly remiss. Of course, courts, like

was indeed forged. A document formally presented is

humans, are fallible, and not every error deserves a stern

presumed to be genuine until it is proved to be

rebuke. Yet, the appellate courts error in this case

fraudulent. In a forgery trial, this presumption must be

warrants special attention, as it is absurd and even

overcome but this can only be done by convincing

dangerous as a precedent. If this rationale were adopted

testimony and effective illustrations.29

as a governing standard by every court in the land,

barely any actionable claim would prosper, defeated as it

In ruling that forgery was not duly proven, the Court of

would be by the mere invocation of the existence of a

Appeals held:

contrary "expert" opinion.

[There] is ground to doubt the findings of the

On the other hand, the RTC did adjudge the testimony of

trial court sustaining the alleged forgery in view

the NBI expert as more credible than that of the PNP,

of the conflicting conclusions made by

and explained its reason behind the conclusion:

handwriting experts from the NBI and the PNP,

both agencies of the government.

After subjecting the evidence of both parties to a

crucible of analysis, the court arrived at the

xxx
These contradictory findings create doubt on
whether there was indeed a forgery. In the case
of Tenio-Obsequio v. Court of Appeals, 230
SCRA 550, the Supreme Court held that forgery

conclusion that the testimony of the NBI

document examiner is more credible because the
testimony of the PNP Crime Laboratory Services
document examiner reveals that there are a lot of
differences in the questioned signature as

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compared to the standard specimen signature.

signature, the upward strokes of eight (8) of these

Furthermore, as testified to by Ms. Rhoda

signatures are looped, while the upward stroke of the

Flores, NBI expert, the manner of execution of

seventh36 forms a severe forty-five degree (45) with the

the standard signatures used reveals that it is a

previous stroke. The difference is glaring, and indeed,

free rapid continuous execution or stroke as

the PNP examiner was confronted with the inconsistency

shown by the tampering terminal stroke of the

in point no. 6.

signatures whereas the questioned signature is a

hesitating slow drawn execution stroke. Clearly,

Q: Now, in this questioned document point no.

the person who executed the questioned

6, the "s" stroke is directly upwards.

signature was hesitant when the signature was

made.30
During the testimony of PNP expert Rosario Perez, the
RTC bluntly noted that "apparently, there [are]
differences on that questioned signature and the standard
signatures."31 This Court, in examining the signatures,

A: Yes, sir.
Q: Now, can you look at all these standard
signature (sic) were (sic) point 6 is repeated or
the last stroke "s" is pointing directly upwards?
A: There is none in the standard signature, sir.37

makes a similar finding. The PNP expert excused the

noted "differences" by asserting that they were mere

Again, the PNP examiner downplayed the uniqueness of

"variations," which are normal deviations found in

the final stroke in the questioned signature as a mere

writing.32 Yet the RTC, which had the opportunity to

variation,38 the same excuse she proffered for the other

examine the relevant documents and to personally

marked differences noted by the Court and the counsel

observe the expert witness, clearly disbelieved the PNP

for petitioner.39

expert. The Court similarly finds the testimony of the

PNP expert as unconvincing. During the trial, she was
confronted several times with apparent differences
between strokes in the questioned signature and the
genuine samples. Each time, she would just blandly
assert that these differences were just "variations," 33 as if
the mere conjuration of the word would sufficiently
disquiet whatever doubts about the deviations. Such
conclusion, standing alone, would be of little or no value
unless supported by sufficiently cogent reasons which
might amount almost to a demonstration.34

There is no reason to doubt why the RTC gave credence

to the testimony of the NBI examiner, and not the PNP
experts. The NBI expert, Rhoda Flores, clearly qualifies
as an expert witness. A document examiner for fifteen
years, she had been promoted to the rank of Senior
Document Examiner with the NBI, and had held that
rank for twelve years prior to her testimony. She had
placed among the top five examinees in the Competitive
Seminar in Question Document Examination, conducted
by the NBI Academy, which qualified her as a document
examiner.40She had trained with the Royal Hongkong

The most telling difference between the questioned and

Police Laboratory and is a member of the International

genuine signatures examined by the PNP is in the final

Association for Identification.41 As of the time she

upward stroke in the signature, or "the point to the short

testified, she had examined more than fifty to fifty-five

stroke of the terminal in the capital letter L," as

thousand questioned documents, on an average of fifteen

referred to by the PNP examiner who had marked it in

to twenty documents a day.42 In comparison, PNP

her comparison chart as "point no. 6." To the plain eye,

document examiner Perez admitted to having examined

such upward final stroke consists of a vertical line which

only around five hundred documents as of her

forms a ninety degree (90) angle with the previous

testimony.43

stroke. Of the twenty one (21) other genuine samples

examined by the PNP, at least nine (9) ended with an
upward stroke.35 However, unlike the questioned

In analyzing the signatures, NBI Examiner Flores

utilized the scientific comparative examination method

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consisting of analysis, recognition, comparison and

the check was his. While his claim should not be taken at

evaluation of the writing habits with the use of

face value, any averments he would have on the matter,

instruments such as a magnifying lense, a stereoscopic

if adjudged as truthful, deserve primacy in consideration.

microscope, and varied lighting substances. She also

Jongs testimony is supported by the findings of the NBI

prepared enlarged photographs of the signatures in order

examiner. They are also backed by factual circumstances

to facilitate the necessary comparisons. 44 She compared

that support the conclusion that the assailed check was

the questioned signature as against ten (10) other sample

indeed forged. Judicial notice can be taken that is highly

signatures of Jong. Five of these signatures were

unusual in practice for a business establishment to draw

executed on checks previously issued by Jong, while the

a check for close to a million pesos and make it payable

other five contained in business letters Jong had

to cash or bearer, and not to order. Jong immediately

signed.45 The NBI found that there were significant

reported the forgery upon its discovery. He filed the

differences in the handwriting characteristics existing

appropriate criminal charges against Sempio, the

between the questioned and the sample signatures, as to

putative forger.48

manner of execution, link/connecting strokes, proportion

characteristics, and other identifying details. 46

Now for determination is whether Samsung Construction

was precluded from setting up the defense of forgery

The RTC was sufficiently convinced by the NBI

under Section 23 of the Negotiable Instruments Law.

examiners testimony, and explained her reasons in

The Court of Appeals concluded that Samsung

its Decisions. While the Court of Appeals disagreed and

Construction was negligent, and invoked the doctrines

upheld the findings of the PNP, it failed to convincingly

that "where a loss must be borne by one of two innocent

demonstrate why such findings were more credible than

person, can be traced to the neglect or fault of either, it is

those of the NBI expert. As a throwaway, the

reasonable that it would be borne by him, even if

assailed Decision noted that the PNP, not the NBI, had

innocent of any intentional fraud, through whose means

the opportunity to examine the specimen signature card

it has succeeded49 or who put into the power of the third

signed by Jong, which was relied upon by the employees

person to perpetuate the wrong."50 Applying these rules,

of FEBTC in authenticating Jongs signature. The

the Court of Appeals determined that it was the

distinction is irrelevant in establishing forgery. Forgery

negligence of Samsung Construction that allowed the

can be established comparing the contested signatures as

encashment of the forged check.

against those of any sample signature duly established as

that of the persons whose signature was forged.

In the case at bar, the forgery appears to have

been made possible through the acts of one Jose

FEBTC lays undue emphasis on the fact that the PNP

Sempio III, an assistant accountant employed by

examiner did compare the questioned signature against

the plaintiff Samsung [Construction] Co.

the bank signature cards. The crucial fact in question is

Philippines, Inc. who supposedly stole the blank

whether or not the check was forged, not whether the

check and who presumably is responsible for its

bank could have detected the forgery. The latter issue

encashment through a forged signature of Jong

becomes relevant only if there is need to weigh the

Kyu Lee. Sempio was assistant to the Korean

comparative negligence between the bank and the

accountant who was in possession of the blank

party whose signature was forged.

checks and who through negligence, enabled

Sempio to have access to the same. Had the

At the same time, the Court of Appeals failed to assess

Korean accountant been more careful and

the effect of Jongs testimony that the signature on the

prudent in keeping the blank checks Sempio

47

check was not his. The assertion may seem self-serving

would not have had the chance to steal a page

at first blush, yet it cannot be ignored that Jong was in

thereof and to effect the forgery. Besides,

the best position to know whether or not the signature on

Sempio was an employee who appears to have

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had dealings with the defendant Bank in behalf

Still, in the absence of evidence to the contrary, we can

of the plaintiff corporation and on the date the

conclude that there was no negligence on Samsung

check was encashed, he was there to certify that

Constructions part. The presumption remains that every

it was a genuine check issued to purchase

person takes ordinary care of his concerns,56 and that the

equipment for the company.51

ordinary course of business has been

followed.57 Negligence is not presumed, but must be

We recognize that Section 23 of the Negotiable

proven by him who alleges it.58 While the complaint was

Instruments Law bars a party from setting up the defense

lodged at the instance of Samsung Construction, the

52

of forgery if it is guilty of negligence. Yet, we are

matter it had to prove was the claim it had alleged -

unable to conclude that Samsung Construction was

whether the check was forged. It cannot be required as

guilty of negligence in this case. The appellate court

well to prove that it was not negligent, because the legal

failed to explain precisely how the Korean accountant

presumption remains that ordinary care was employed.

was negligent or how more care and prudence on his part

would have prevented the forgery. We cannot sustain this

Thus, it was incumbent upon FEBTC, in defense, to

"tar and feathering" resorted to without any basis.

prove the negative fact that Samsung Construction was

negligent. While the payee, as in this case, may not have

The bare fact that the forgery was committed by an

the personal knowledge as to the standard procedures

employee of the party whose signature was forged

observed by the drawer, it well has the means of

cannot necessarily imply that such partys negligence

disputing the presumption of regularity. Proving a

was the cause for the forgery. Employers do not possess

negative fact may be "a difficult office,"59 but necessarily

the preternatural gift of cognition as to the evil that may

so, as it seeks to overcome a presumption in law. FEBTC

lurk within the hearts and minds of their employees. The

was unable to dispute the presumption of ordinary care

Courts pronouncement in PCI Bank v. Court of

exercised by Samsung Construction, hence we cannot

53

Appeals applies in this case, to wit:

agree with the Court of Appeals finding of negligence.

[T]he mere fact that the forgery was committed

The assailed Decision replicated the extensive efforts

by a drawer-payors confidential employee or

which FEBTC devoted to establish that there was no

agent, who by virtue of his position had unusual

negligence on the part of the bank in its acceptance and

facilities for perpetrating the fraud and imposing

payment of the forged check. However, the degree of

the forged paper upon the bank, does not entitle

diligence exercised by the bank would be irrelevant if

the bank to shift the loss to the drawer-payor, in

the drawer is not precluded from setting up the defense

the absence of some circumstance raising

of forgery under Section 23 by his own negligence. The

estoppel against the drawer.54

rule of equity enunciated in PNB v. National City Bank

Admittedly, the record does not clearly establish what

measures Samsung Construction employed to safeguard
its blank checks. Jong did testify that his accountant,
55

of New York, 60 as relied upon by the Court of Appeals,

deserves careful examination.
The point in issue has sometimes been said to be

Kyu, kept the checks inside a "safety box," and no

that of negligence. The drawee who has paid

contrary version was presented by FEBTC. However,

upon the forged signature is held to bear the

such testimony cannot prove that the checks were indeed

loss, because he has been negligent in failing

kept in a safety box, as Jongs testimony on that point is

to recognize that the handwriting is not that

hearsay, since Kyu, and not Jong, would have the

of his customer. But it follows obviously that if

personal knowledge as to how the checks were kept.

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

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of the banker, or if by any act of his own he has

rule, recover back the money which it has paid

at all contributed to induce the banker's

on a check bearing a forged indorsement,

negligence, then he may lose his right to cast the

whereas it has not this right to the same extent

61

loss upon the banker. (Emphasis supplied)

with reference to a check bearing a forgery of

the drawers signature.66

Quite palpably, the general rule remains that the drawee

who has paid upon the forged signature bears the loss.

The general rule imputing liability on the drawee who

The exception to this rule arises only when negligence

paid out on the forgery holds in this case.

can be traced on the part of the drawer whose signature

was forged, and the need arises to weigh the comparative

Since FEBTC puts into issue the degree of care it

negligence between the drawer and the drawee to

exercised before paying out on the forged check, we

determine who should bear the burden of loss. The Court

might as well comment on the banks performance of its

finds no basis to conclude that Samsung Construction

duty. It might be so that the bank complied with its own

was negligent in the safekeeping of its checks. For one,

internal rules prior to paying out on the questionable

the settled rule is that the mere fact that the depositor

check. Yet, there are several troubling circumstances that

leaves his check book lying around does not constitute

lead us to believe that the bank itself was remiss in its

such negligence as will free the bank from liability to

duty.

him, where a clerk of the depositor or other persons,

taking advantage of the opportunity, abstract some of the
check blanks, forges the depositors signature and collect
on the checks from the bank.62 And for another, in point
of fact Samsung Construction was not negligent at all
since it reported the forgery almost immediately upon
discovery.63

The fact that the check was made out in the amount of
nearly one million pesos is unusual enough to require a
higher degree of caution on the part of the bank. Indeed,
FEBTC confirms this through its own internal
procedures. Checks below twenty-five thousand pesos
require only the approval of the teller; those between
twenty-five thousand to one hundred thousand pesos

It is also worth noting that the forged signatures in PNB

necessitate the approval of one bank officer; and should

v. National City Bank of New York were not of the

the amount exceed one hundred thousand pesos, the

drawer, but of indorsers. The same circumstance

concurrence of two bank officers is required. 67

attends PNB v. Court of Appeals,64 which was also cited

by the Court of Appeals. It is accepted that a forged
signature of the drawer differs in treatment than a forged
signature of the indorser.

In this case, not only did the amount in the check nearly
total one million pesos, it was also payable to cash. That
latter circumstance should have aroused the suspicion of
the bank, as it is not ordinary business practice for a

The justification for the distinction between

check for such large amount to be made payable to cash

forgery of the signature of the drawer and

or to bearer, instead of to the order of a specified

forgery of an indorsement is that the drawee is in

person.68Moreover, the check was presented for payment

a position to verify the drawers signature by

by one Roberto Gonzaga, who was not designated as the

comparison with one in his hands, but has

payee of the check, and who did not carry with him any

ordinarily no opportunity to verify an

written proof that he was authorized by Samsung

indorsement.65

Construction to encash the check. Gonzaga, a stranger to

FEBTC, was not even an employee of Samsung

Thus, a drawee bank is generally liable to its

Construction.69 These circumstances are already

depositor in paying a check which bears either a

suspicious if taken independently, much more so if they

forgery of the drawers signature or a forged

are evaluated in concurrence. Given the shadiness

indorsement. But the bank may, as a general

attending Gonzagas presentment of the check, it was not

72

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sufficient for FEBTC to have merely complied with its

Banks are engaged in a business impressed with

internal procedures, but mandatory that all earnest efforts

public interest, and it is their duty to protect in

be undertaken to ensure the validity of the check, and of

return their many clients and depositors who

the authority of Gonzaga to collect payment therefor.

transact business with them. They have the

obligation to treat their clients account

According to FEBTC Senior Assistant Cashier Gemma

meticulously and with the highest degree of

Velez, the bank tried, but failed, to contact Jong over the

care, considering the fiduciary nature of their

phone to verify the check.70 She added that calling the

relationship. The diligence required of banks,

issuer or drawer of the check to verify the same was not

therefore, is more than that of a good father of a

part of the standard procedure of the bank, but an "extra

family.76

71

effort." Even assuming that such personal verification

is tantamount to extraordinary diligence, it cannot be

Given the circumstances, extraordinary diligence

denied that FEBTC still paid out the check despite the

dictates that FEBTC should have ascertained from Jong

absence of any proof of verification from the drawer.

personally that the signature in the questionable check

Instead, the bank seems to have relied heavily on the

was his.

say-so of Sempio, who was present at the bank at the

Still, even if the bank performed with utmost diligence,

time the check was presented.

the drawer whose signature was forged may still recover

FEBTC alleges that Sempio was well-known to the bank

from the bank as long as he or she is not precluded from

officers, as he had regularly transacted with the bank in

setting up the defense of forgery. After all, Section 23 of

behalf of Samsung Construction. It was even claimed

the Negotiable Instruments Law plainly states that no

that everytime FEBTC would contact Jong about

right to enforce the payment of a check can arise out of a

problems with his account, Jong would hand the phone

forged signature. Since the drawer, Samsung

over to Sempio.72 However, the only proof of such

Construction, is not precluded by negligence from

allegations is the testimony of Gemma Velez, who also

setting up the forgery, the general rule should apply.

73

testified that she did not know Sempio personally, and

Consequently, if a bank pays a forged check, it must be

had met Sempio for the first time only on the day the

considered as paying out of its funds and cannot charge

check was encashed.74 In fact, Velez had to inquire with

the amount so paid to the account of the depositor.77 A

the other officers of the bank as to whether Sempio was

bank is liable, irrespective of its good faith, in paying a

actually known to the employees of the

forged check.78

bank.75 Obviously, Velez had no personal knowledge as

to the past relationship between FEBTC and Sempio,

WHEREFORE, the Petition is GRANTED.

and any averments of her to that effect should be deemed

The Decision of the Court of Appeals dated 28

hearsay evidence. Interestingly, FEBTC did not present

November 1996 is REVERSED, and the Decision of the

as a witness any other employee of their Bel-Air branch,

Regional Trial Court of Manila, Branch 9, dated 25 April

including those who supposedly had transacted with

1994 is REINSTATED. Costs against respondent.

Sempio before.

SO ORDERED.

Even assuming that FEBTC had a standing habit of

dealing with Sempio, acting in behalf of Samsung
Construction, the irregular circumstances attending the
presentment of the forged check should have put the
bank on the highest degree of alert. The Court recently
emphasized that the highest degree of care and diligence
is required of banks.

#10
Republic of the Philippines
Supreme Court
Manila

73

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number of fraudulently obtained and encashed Managers
SECOND DIVISION

checks to 34, in the total amount of Eleven Million Nine

PHILIPPINE COMMERCIAL INTERNATIONAL

BANK,
Petitioner,

- versus -

ANTONIO B. BALMACEDA and ROLANDO N.

RAMOS,

Hundred Thirty Seven Thousand One Hundred Fifty

G.R. No. 158143
Pesos (P11,937,150.00). The RTC granted this motion.
Present:
Since Balmaceda did not file an Answer, he was declared
in default.
VELASCO,
JR., On the other hand, Ramos filed an Answer
BRION,
denying any knowledge of Balmacedas scheme.
Acting Chairperson,
According to Ramos, he is a reputable businessman
PEREZ,
SERENO, and
engaged in the business of buying and selling fighting
REYES,
cocks, and Balmaceda was one of his clients. Ramos
Promulgated:
admitted receiving money from Balmaceda as payment
for the
September
21,fighting
2011 cocks that he sold to Balmaceda, but

Respondents.

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

maintained that he had no knowledge of the source of

Balmacedas money.

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

THE RTC DECISION

DECISION

On September 22, 2000, the RTC issued a decision in

favor of PCIB, with the following dispositive portion:

BRION, J.:

WHEREFORE,

premises

considered, judgment is hereby rendered

Before us is a petition for review on certiorari,
[1]

filed by the Philippine Commercial International

in favor of the plaintiff and against the

defendants as follows:

Bank[2] (Bank or PCIB), to reverse and set aside the

decision[3] dated April 29, 2003 of the Court of Appeals
(CA) in CA-G.R. CV No. 69955. The CA overturned the
September 22, 2000 decision of the Regional Trial Court
(RTC) of Makati City, Branch 148, in Civil Case No. 933181, which held respondent Rolando Ramos liable to
PCIB for the amount of P895,000.00.

1. Ordering defendant Antonio

Balmaceda

against Antonio Balmaceda, the Branch Manager of its

Sta. Cruz, Manila branch. In its complaint, PCIB alleged
that between 1991 and 1993, Balmaceda, by taking
his

position

as

the

amount

at the legal rate from [the] date of his

misappropriation of the said amount
until full restitution shall have been
made[.]

recovery of sum of money with damages before the RTC

of

pay

of P11,042,150.00 with interest thereon

FACTUAL ANTECEDENTS
On September 10, 1993, PCIB filed an action for

advantage

to

branch

manager,

2. Ordering defendant Rolando

Ramos

to

pay

the

amount

of P895,000.00 with interest at the legal

rate from the date of misappropriation of
the said amount until full restitution
shall have been made[.]

fraudulently obtained and encashed 31 Managers checks

3. Ordering the defendants to

in the total amount of Ten Million Seven Hundred

pay plaintiff moral damages in the sum

Eighty Two Thousand One Hundred Fifty Pesos

of P500,000.00 and attorneys fees in the

(P10,782,150.00).

amount of ten (10%) percent of the total

On February 28, 1994, PCIB moved to be allowed to file

an amended complaint to implead Rolando Ramos as
one of the recipients of a portion of the proceeds from

misappropriated amounts sought to be

recovered.
4. Plus costs of suit.

Balmacedas alleged fraud. PCIB also increased the

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SO ORDERED.[4]

According to the CA, the mere fact that Balmaceda

made Ramos the payee in some of the Managers checks

From the evidence presented, the RTC found

does not suffice to prove that Ramos was complicit in

that Balmaceda, by taking undue advantage of his

Balmacedas fraudulent scheme. It observed that other

position and authority as branch manager of the Sta.

persons were also named as payees in the checks that

Cruz, Manila branch of PCIB, successfully obtained and

Balmaceda acquired and encashed, and PCIB only chose

misappropriated the banks funds by falsifying several

to go after Ramos. With PCIBs failure to prove Ramos

commercial documents. He accomplished this by

actual participation in Balmacedas fraud, no legal and

claiming that he had been instructed by one of the Banks

factual basis exists to hold him liable.

corporate clients to purchase Managers checks on its

behalf, with the value of the checks to be debited from
the clients corporate bank account. First, he would

The CA also found that PCIB acted illegally in

freezing and debiting P251,910.96 from Ramos bank
account. The CA thus decreed:

instruct the Bank staff to prepare the application forms

for the purchase of Managers checks, payable to several
persons. Then, he would forge the signature of the clients
authorized representative on these forms and sign the
forms as PCIBs approving officer. Finally, he would
have an authorized officer of PCIB issue the Managers
checks.

Balmaceda

would

subsequently

ask

his

WHEREFORE, the appeal is granted.

The Decision of the trial court rendered
on September 22, 2000[,] insofar as
appellant Ramos is concerned, is SET
ASIDE, and the complaint below against
him is DISMISSED.

subordinates to release the Managers checks to him,

Appellee is hereby ordered to release the

claiming that the client had requested that he deliver the

amount of P251,910.96 to appellant

checks.[5] After receiving the Managers checks, he

Ramos plus interest at [the] legal rate

encashed them by forging the signatures of the payees on

computed from September 30, 1993

the checks.

until appellee shall have fully complied

In ruling that Ramos acted in collusion with

therewith.

Balmaceda, the RTC noted that although the Managers

Appellee is likewise ordered to pay

checks payable to Ramos were crossed checks,

appellant Ramos the following:

Balmaceda was still able to encash the checks. [6] After

Balmaceda encashed three of these Managers checks, he
deposited most of the money into Ramos account. [7] The
RTC concluded that from the P11,937,150.00 that
Balmaceda misappropriated from PCIB, P895,000.00
actually went to Ramos. Since the RTC disbelieved
Ramos allegation that the sum of money deposited into
his Savings Account (PCIB, Pasig branch) were

a)

P50,000.00

as

moral damages
b)
P50,000.00

as

exemplary damages, and

c)
P20,000.00

as

attorneys fees.
No costs.
SO ORDERED.[9]

proceeds from the sale of fighting cocks, it held Ramos

liable to pay PCIB the amount of P895,000.00.
THE COURT OF APPEALS DECISION
On appeal, the CA dismissed the complaint against

THE PETITION
In the present petition, PCIB avers that:

Ramos, holding that no sufficient evidence existed to

I
THE APPELLATE COURT ERRED IN

prove that Ramos colluded with Balmaceda in the latters

HOLDING THAT THERE IS NO

fraudulent manipulations.

[8]

EVIDENCE

TO

HOLD

THAT

RESPONDENT RAMOS ACTED IN

75

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COMPLICITY WITH RESPONDENT

are conflicting. When the exception applies, we are

BALMACEDA

given latitude to review the evidence on record to decide

the case with finality.[12]

II

Ramos

THE APPELLATE COURT ERRED IN

particip

ORDERING THE PETITIONER TO

RELEASE

THE

ation in

AMOUNT

Balmac

OF P251,910.96 TO RESPONDENT

edas

RAMOS AND TO PAY THE LATTER

MORAL

AND

DAMAGES

scheme

EXEMPLARY

AND

not

ATTORNEYS

proven

FEES[10]
PCIB contends that the circumstantial evidence
shows that Ramos had knowledge of, and acted in
complicity with Balmaceda in, the perpetuation of the
fraud. Ramos explanation that he is a businessman and
that he received the Managers checks as payment for the
fighting cocks he sold to Balmaceda is unconvincing,
given the large sum of money involved. While Ramos
presented evidence that he is a reputable businessman,
this evidence does not explain why the Managers checks

From the testimonial and documentary evidence

presented, we find it beyond question that Balmaceda,
by taking advantage of his position as branch manager of
PCIBs Sta. Cruz, Manila branch, was able to apply for
and obtain Managers checks drawn against the bank
account of one of PCIBs clients. The unsettled question
is whether Ramos, who received a portion of the money
that Balmaceda took from PCIB, should also be held
liable for the return of this money to the Bank.

were made payable to him in the first place.

PCIB insists that it presented sufficient evidence

PCIB maintains that it had the right to freeze and

debit the amount of P251,910.96 from Ramos bank
account,

even

without

his

consent,

since

legal

compensation had taken place between them by

operation of law. PCIB debited Ramos bank account,
believing in good faith that Ramos was not entitled to
the proceeds of the Managers checks and was actually

to establish that Ramos colluded with Balmaceda in the

scheme to fraudulently secure Managers checks and to
misappropriate their proceeds. Since Ramos defense
anchored on mere denial of any participation in
Balmacedas wrongdoing is an intrinsically weak
defense, it was error for the CA to exonerate Ramos
from any liability.

privy to the fraud perpetrated by Balmaceda. PCIB

In civil cases, the party carrying the burden of

cannot thus be held liable for moral and exemplary

proof must establish his case by a preponderance of

damages.

evidence, or evidence which, to the court, is more

OUR RULING

We partly grant the petition.

At the outset, we observe that the petition raises
mainly questions of fact whose resolution requires the
re-examination of the evidence on record. As a general
rule, petitions for review on certiorari only involve
questions of law.[11] By way of exception, however, we
can delve into evidence and the factual circumstance of
the case when the findings of fact in the tribunals below
(in this case between those of the CA and of the RTC)

worthy of belief than the evidence offered in opposition.

[13]

This Court, in Encinas v. National Bookstore, Inc.,

[14]

defined preponderance of evidence in the following

manner:
"Preponderance of evidence" is the
weight,

credit,

and

value

of

the

aggregate evidence on either side and is

usually considered to be synonymous
with the term "greater weight of the
evidence" or "greater weight of the
credible evidence." Preponderance of

76

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evidence is a phrase which, in the last

checks yet PCIB never alleged them to be liable, nor did

analysis, means probability of the truth.

the Bank adduce any other evidence pointing to Ramos

It is evidence which is more convincing

participation that would justify his separate treatment

to the court as worthy of belief than that

from the others. Also, while Ramos is Balmacedas

which is offered in opposition thereto.

The party, whether the plaintiff or the defendant,

brother-in-law, their relationship is not sufficient, by

who asserts the affirmative of an issue has the onus to

itself, to render Ramos liable, absent concrete proof of

his actual participation in the fraudulent scheme.

prove his assertion in order to obtain a favorable

judgment, subject to the overriding rule that the burden
to prove his cause of action never leaves the plaintiff.
For the defendant, an affirmative defense is one that is
not merely a denial of an essential ingredient in the
plaintiff's cause of action, but one which, if established,
will constitute an "avoidance" of the claim. [15]
Thus, PCIB, as plaintiff, had to prove, by
preponderance of evidence, its positive assertion that
Ramos conspired with Balmaceda in perpetrating the
latters scheme to defraud the Bank. In PCIBs estimation,
it successfully accomplished this through the submission
of the following evidence:

Moreover, the evidence on record clearly shows

that Balmaceda acted on his own when he applied for the
Managers checks against the bank account of one of
PCIBs clients, as well as when he encashed the
fraudulently acquired Managers checks.
Mrs. Elizabeth Costes, the Area Manager of
PCIB at the time of the relevant events, testified that
Balmaceda committed all the acts necessary to obtain the
unauthorized Managers checks from filling up the
application form by forging the signature of the clients
representative, to forging the signatures of the payees in
order to encash the checks. As Mrs. Costes stated in her
testimony:

[1] Exhibits A, D, PPPP, QQQQ, and

RRRR and their submarkings,
the application forms for MCs,
show that [these MCs were
applied for in favor of Ramos;]

Q: I

am

going

into

[these] particular instances where you

said that Mr. Balmaceda [has] been
making unauthorized withdrawals from
particular account of a client or a client

[2] Exhibits K, N, SSSS, TTTT, and

UUUU and their submarkings
prove that the MCs were issued
in favor of x x x Ramos[; and]
[3] [T]estimonies of the witness for
[PCIB].[16]

of yours at Sta. Cruz branch. Would you

tell us how he effected his unauthorized
withdrawals?
A: He

prevailed

upon

the

domestic remittance clerk to prepare the

application of a Managers check which
[has] been debited to a clients account.

We cannot accept these submitted pieces of

evidence as sufficient to satisfy the burden of proof that
PCIB carries as plaintiff.
On its face, all that PCIBs evidence proves is
that Balmaceda used Ramos name as a payee when he
filled up the application forms for the Managers checks.
But, as the CA correctly observed, the mere fact that

This particular Managers check will be

payable to a certain individual thru his
account as the instruction of the client.
Q: What was your findings in so
far as the particular alleged instruction
of a client is concerned?
A: We found out that he
forged the signature of the client.

Balmaceda made Ramos the payee on some of the

Managers checks is not enough basis to conclude that
Ramos was complicit in Balmacedas fraud; a number of

Q: On

that

particular

application?
A: Yes sir.

other people were made payees on the other Managers

77

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Q: Showing
applications

for

to

you

several

Managers

Check

A: Yes sir. This is an authority

that the check [has] been encashed.

previously attached as Annexes A, B, C,

D and E[] of the complaint. Could you
please tell us where is that particular
alleged signature of a client applying for
the Managers check which you claimed

Q: In other words this check

issued

to

Rolando

nonetheless he allowed to encash by

granting it.
Could you please show us?

xxxx

ATTY.

this application form as you stated Mrs.

witness, do you know what happened to

dated

December 26, 1991 is a cross check but

to have been forged by Mr. Balmaceda?

A: Here sir.

Q: After the accomplishment of

Ramos

PACES:

Witness

pointing to an initial of the defendant

Antonio Balmaceda, the notation cross
check.

the application form?

A: Before that application form

A: And this is his signature.

xxxx

is processed it goes to several stages.

Here for example this was signed

Q: How

about

the

check

supposed to be by the client and his

corresponding to Exhibit E-2 which is

signature representing that, he certified

an application for P125,000.00 for a

the signature based on their records to

certain Rolando Ramos. Do you have

be authentic.

the check?
A: Yes sir.

Q: When you said he to whom

ATTY.

PACES:

Witness

are you referring to?

A: Mr. Balmaceda. And at the

producing a check dated December 19,

same

1991

time

he

approved

the

transaction.

amount

of P125,000.00

payable to certain Rolando Ramos.

xxxx

Q: Do

the

you

Q: Can you tell us whether the

know

if

the

corresponding checks applied for in the

same modus operandi was ad[o]pted by

Mr. Balmaceda in so far as he is
concerned?
A: Yes sir he is also the right

application forms were issued?

A: Yes sir.

signer
Q: Could you please show us
where these checks are now, the one

and

cancellation
[17]

he
of

authorized
the

cross

the

check.

(emphasis ours)

applied for in Exhibit A which is in the

amount of P150,000.00, where is the
corresponding check?
A: Rolando
Ramos

Q: These
dated

December 26, 1991 and one of the

signatories with higher authority, this is
Mr. Balmacedas signature.
Q: In other words he is likewise
approving signatory to the Managers
check?

xxxx
particular

checks

[Mrs.] witness in your findings, do you

know if Mr. Balmaceda [has] again any
participation in these checks?
A: He is also the right signer
and approved officer and he was
authorized to debit on file.
xxxx

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Q: And do you know if these
Q: Did my client ever call up

particular checks marked as Exhibit G-2

to

triple

FFF

were

the bank concerning this amount?

A: Yes he is not going to call

subsequently

encashed?
A: Yes sir.

PCIBank Sta. Cruz branch because his

account is maintained at Pasig.

Q: Were you able to find out

Q: So Mr. Balmaceda was the

who encashed?
A: Mr. Balmaceda himself and

one who just remitted or transmitted

besides he approved the encashment

the amount that you claimed [was

because of the signature that he

sent] to the account of my client?

A: Yes.[20] (emphases ours)

allowed the encashment of the check.

xxxx
Q: Do

know

if

this

its rebuttal witness to prove that Ramos encashed a

having

in

fact

Managers check forP480,000.00, could only testify that

withdraw of received the proceeds of

the money was deposited into Ramos PCIB bank

[these] particular checks, the payee?

A: No sir.

account. She could not attest that Ramos himself

particular

you

Even Mrs. Rodelia Nario, presented by PCIB as

person

presented the Managers check for deposit in his bank

account.[21] These testimonies clearly dispute PCIBs

Q: It was all Mr. Balmaceda

dealing with you?
A: Yes sir.

theory that Ramos was instrumental in the encashment

of the Managers checks.

Q: In other words it would be

We also find no reason to doubt Ramos claim

possible that Mr. Balmaceda himself

that Balmaceda deposited these large sums of money

gotten the proceeds of the checks by

into his bank account as payment for the fighting cocks

forging the payees signature?

A: Yes sir.[18] (emphases ours)

that Balmaceda purchased from him. Ramos presented

two witnesses Vicente Cosculluela and Crispin Gadapan

Mrs. Nilda Laforteza, the Commercial Account

Officer of PCIBs Sta. Cruz, Manila branch at the time
the events of this case occurred, confirmed Mrs. Costes

who testified that Ramos previously engaged in the

business of buying and selling fighting cocks, and that
Balmaceda was one of Ramos biggest clients.

testimony by stating that it was Balmaceda who forged

Quoting from the RTC decision, PCIB stresses that

Ramos signature on the Managers checks where

Ramos own witness and business partner, Cosculluela,

Ramos was the payee, so as to encash the amounts

testified that the biggest net profit he and Ramos earned

indicated on the checks.[19] Mrs. Laforteza also testified

from a single transaction with Balmaceda amounted to

that

Sta.

no more than P100,000.00, for the sale of approximately

checks

45 fighting cocks.[22] In PCIBs view, this testimony

since Balmaceda was the one who deposited the

directly contradicts Ramos assertion that he received

checks into Ramos bank account. As revealed during

approximatelyP400,000.00 from his biggest transaction

Mrs. Lafortezas cross-examination:

with Balmaceda. To PCIB, the testimony also renders

Ramos

never

Cruz, Manila branch

Q: Mrs.

went
to

to

the

encash

Laforteza,

PCIB,
the

these

checks that were applied for by Mr.

Balmaceda, did you ever see my client
go to the bank to encash these checks?
A: No it is Balmaceda who is
depositing in his behalf.

questionable Ramos assertion that Balmaceda deposited

large amounts of money into his bank account as
payment for the fighting cocks.
On this point, we find that PCIB misunderstood
Cosculluelas testimony. A review of the testimony shows
that

Cosculluela

specifically

referred

to

the net

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profit that they earned from the sale of the fighting

bank account of one of the banks clients, without

cocks;[23] PCIB apparently did not take into account the

providing the necessary Authority to Debit from the

capital, transportation and other expenses that are

client.[26] PCIB also admitted that these Managers checks

components of these transactions. Obviously, in sales

were subsequently released to Balmaceda, and not to the

transactions, the buyer has to pay not only for the value

clients representative, based solely on Balmacedas word

of the thing sold, but also for the shipping costs and

that the client had tasked him to deliver these checks. [27]

other incidental costs that accompany the acquisition of

the thing sold. Thus, while the biggest net profit that
Ramos and Cosculluela earned in a single transaction
amounted to no more thanP100,000.00,[24] the inclusion
of the actual acquisition costs of the fighting cocks, the
transportation expenses (i.e., airplane tickets from
Bacolod or Zamboanga to Manila) and other attendant

Despite Balmacedas gross violations of bank

procedures mainly in the processing of the applications
for Managers checks and in the releasing of the
Managers checks Balmacedas co-employees not only
turned a blind eye to his actions, but actually complied
with his instructions. In this way, PCIBs own employees
were unwitting accomplices in Balmacedas fraud.

expenses could account for the P400,000.00 that

Another telling indicator of PCIBs negligence is

Balmaceda deposited into Ramos bank account.

the fact that it allowed Balmaceda to encash the

Given that PCIB failed to establish Ramos
participation in Balmacedas scheme, it was not even
necessary for Ramos to provide an explanation for the
money he received from Balmaceda. Even if the
evidence adduced by the plaintiff appears stronger than
that presented by the defendant, a judgment cannot be
entered in the plaintiffs favor if his evidence still does
not suffice to sustain his cause of action; [25] to reiterate, a
preponderance of evidence as defined must be
established to achieve this result.

Managers checks that were plainly crossed checks. A

crossed check is one where two parallel lines are drawn
across its face or across its corner.[28] Based on
jurisprudence, the crossing of a check has the following
effects: (a) the check may not be encashed but only
deposited in the bank; (b) the check may be negotiated
only once to the one who has an account with the bank;
and (c) the act of crossing the check serves as a warning
to the holder that the check has been issued for a definite
purpose and he must inquire if he received the check

PCIB

pursuant to this purpose; otherwise, he is not a holder in

itself at

due course.[29] In other words, the crossing of a check is a

fault as

warning that the check should be deposited only in the

employ

account of the payee. When a check is crossed, it is the

er

duty of the collecting bank to ascertain that the check

In considering this case, one point that cannot be

disregarded is the significant role that PCIB played

which contributed to the perpetration of the fraud. We
cannot ignore that Balmaceda managed to carry out his
fraudulent scheme primarily because other PCIB

is only deposited to the payees account.[30] In complete

disregard of

this

duty, PCIBs

systems

allowed

Balmaceda to encash 26 Managers checks which were

all crossed checks, or checks payable to the payees
account only.

employees failed to carry out their assigned tasks flaws

The General Banking Law of 2000[31] requires of

imputable to PCIB itself as the employer.

banks
Ms. Analiza Vega, an accounting clerk, teller and
domestic remittance clerk working at the PCIB, Sta.
Cruz, Manila branch at the time of the incident, testified
that Balmaceda broke the Banks protocol when he
ordered the Banks employees to fill up the application

the

highest

standards

of

integrity

and

performance. The banking business is impressed with

public interest. Of paramount importance is the trust and
confidence of the public in general in the banking
industry. Consequently, the diligence required of banks
is more than that of a Roman pater familias or a good

forms for the Managers checks, to be debited from the

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father of a family.[32]The highest degree of diligence is

instead it must be shown that a party

expected.[33]

was unjustly enriched in the sense that

While we appreciate that Balmaceda took

advantage of his authority and position as the branch

the term unjustly could mean illegally or

unlawfully.

manager to commit these acts, this circumstance cannot

Moreover, to substantiate a claim for

be used to excuse the manner the Bank through its

unjust enrichment, the claimant must

employees handled its clients bank accounts and thereby

unequivocally prove that another

ignored established bank procedures at the branch

party knowingly received something

managers mere order. This lapse is made all the more

of value to which he was not

glaring

his modus

entitled and that the state of affairs

operandi 33 more times in a period of over one year by

are such that it would be unjust for

the Banks own estimation. With this kind of record,

the person to keep the benefit. Unjust

blame must be imputed on the Bank itself and its

enrichment is a term used to depict

systems, not solely on the weakness or lapses of

result or effect of failure to make

individual employees.

remuneration of or for property or

by

Balmacedas

repetition

of

benefits received under circumstances

Princip
le

that give rise to legal or equitable

of

obligation to account for them; to be

unjust

entitled to remuneration, one must

enrich

confer

ment

benefit

by

mistake,

fraud,

coercion, or request. Unjust enrichment

not

is not itself a theory of reconvey. Rather,

applica

it is a prerequisite for the enforcement of

ble

the doctrine of restitution.[35] (emphasis

PCIB maintains that even if Ramos did not

ours)

collude with Balmaceda, it still has the right to recover

the amounts unjustly received by Ramos pursuant to the
principle

of

unjust

enrichment.

This

principle is

embodied in Article 22 of the Civil Code which

provides:

Ramos cannot be held liable to PCIB on account of

unjust enrichment simply because he received payments
out of money secured by fraud from PCIB. To hold
Ramos accountable, it is necessary to prove that he

Article 22. Every person who through an

received the money from Balmaceda, knowing that he

act of performance by another, or any

(Ramos) was not entitled to it. PCIB must also prove that

other means, acquires or comes into

Ramos, at the time that he received the money from

possession of something at the expense

Balmaceda, knew that the money was acquired through

of the latter without just or legal ground,

fraud. Knowledge of the fraud is the link between

shall return the same to him.

Ramos and PCIB that would obligate Ramos to return

the money based on the principle of unjust enrichment.

To have a cause of action based on unjust

enrichment,

we

explained

in University

Philippines v. Philab Industries, Inc.[34]that:

of

the

However, as the evidence on record indicates,

Ramos accepted the deposits that Balmaceda made
directly into his bank account, believing that these

Unjust enrichment claims do not lie

deposits were payments for the fighting cocks that

simply because one party benefits from

Balmaceda had purchased. Significantly, PCIB has not

the efforts or obligations of others, but

presented any evidence proving that Ramos participated

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in, or that he even knew of, the fraudulent sources of

relationship existed between Ramos and PCIB as the

Balmacedas funds.

depositor and the depositary bank, respectively, the

award of moral damages depends on the applicability of

PCIB

Article 2220 of the Civil Code, which provides:

illegall
y froze

Article 2220. Willful injury to property

and

may be a legal ground for awarding

debited

moral damages if the court should find

Ramos

that, under the circumstances, such

assets

damages are justly due. The same rule

applies to breaches of contract where

We also find that PCIB acted illegally in

the defendant acted fraudulently or in

freezing and debiting Ramos bank account. In BPI

bad faith. [emphasis ours]

Family Bank v. Franco,[36] we cautioned against the

unilateral freezing of bank accounts by banks, noting

Bad faith does not simply connote bad judgment or

that:

negligence; it imports a dishonest purpose or some moral

More importantly, [BPI Family
Bank] does not have a unilateral right to

obliquity and conscious commission of a wrong; it

partakes of the nature of fraud.[39]

freeze the accounts of Franco based on

As the facts of this case bear out, PCIB did not

its mere suspicion that the funds therein

were proceeds of the multi-million peso
scam Franco was allegedly involved in.
To grant [BPI Family Bank], or any
bank for that matter, the right to take
whatever action it pleases on deposits
which it supposes are derived from
shady transactions, would open the
floodgates of public distrust in the

act out of malice or bad faith when it froze Ramos bank

account

and

subsequently

debited

the

amount

of P251,910.96 therefrom. While PCIB may have acted

hastily and without regard to its primary duty to treat the
accounts of its depositors with meticulous care and
utmost fidelity,[40] we find that its actions were propelled
more by the need to protect itself, and not out of
malevolence or ill will. One may err, but error alone is
not a ground for granting moral damages.[41]

banking industry.[37]

We

also

disallow

the

award

of

exemplary

We see no legal merit in PCIBs claim that legal

damages. Article 2234 of the Civil Code requires a party

compensation took place between it and Ramos, thereby

to first prove that he is entitled to moral, temperate or

warranting the automatic deduction from Ramos bank

compensatory damages before he can be awarded

account. For legal compensation to take place,

exemplary damages. Since no reason exists to award

two persons, in their own right, must first be creditors

moral damages, so too can there be no reason to award

[38]

and debtors of each other.

While PCIB, as the

depositary bank, is Ramos debtor in the amount of his

deposits, Ramos is not PCIBs debtor under the evidence
the PCIB adduced. PCIB thus had no basis, in fact or in
law, to automatically debit from Ramos bank account.

exemplary damages.
We deem it just and equitable, however, to uphold the
award of attorneys fees in Ramos favor. Taking into
consideration the time and efforts involved that went into
this case, we increase the award of attorneys fees
from P20,000.00 to P75,000.00.

On the award of damages

WHEREFORE, the petition is PARTIALLY
Although PCIBs act of freezing and debiting
Ramos account is unlawful, we cannot hold PCIB liable
for moral and exemplary damages. Since a contractual

GRANTED. We AFFIRM the decision of the Court of

Appeals dated April 29, 2003 in CA-G.R. CV No. 69955
with the MODIFICATION that the award of moral and

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exemplary damages in favor of Rolando N. Ramos
is DELETED, while the award of attorneys fees
is INCREASED to P75,000.00. Costs

against

SO ORDERED.

the

Philippine Commercial International Bank.

83