G.R. No.

93397 March 3, 1997

TRADERS ROYAL BANK, petitioner,
vs.
COURT OF APPEALS, FILRITERS GUARANTY 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 Central Bank Certificates of Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000)
and having an aggregate value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A") contains an express authorization executed by the transferor intended to complete
the assignment through the registration of the transfer in the name of PhilFinance, which authorization is specifically phrased as
follows: '(Filriters) hereby irrevocably authorized the said issuer (Central Bank) to transfer the said bond/certificates on the books of
its fiscal agent;
5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance . . ., whereby, for and in consideration of the
sum of PESOS: FIVE HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and delivered to petitioner CBCI 4-year,
8th series, Serial No. D891 with a face value of P500,000.00 . . ., which CBCI was among those previously acquired by PhilFinance
from Filriters as averred in paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to repurchase CBCI Serial No. D891 (Annex "C"),
at the stipulated price of PESOS: FIVE HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100 (P519,361.11)
on April 27, 1981;
7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981, when the checks it issued in favor of
petitioner were dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the Petitioner to enable the latter to have its title
completed and registered in the books of the respondent. And by means of said Detachment, Philfinance transferred and assigned all,
its rights and title in the said CBCI (Annex "C") to petitioner and, furthermore, it did thereby "irrevocably authorize the said issuer
(respondent herein) to transfer the said bond/certificate on the books of its fiscal agent." . . .
9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned Detached Assignments (Annexes "B" and
"D"), to the Securities Servicing Department of the respondent, and requested the latter to effect the transfer of the CBCI on its books
and to issue a new certificate in the name of petitioner as absolute owner thereof;
10. Respondent failed and refused to register the transfer as requested, and continues to do so notwithstanding petitioner's valid and
just title over the same and despite repeated demands in writing, the latest of which is hereto attached as Annex "E" and made an
integral part hereof;
11. The express provisions governing the transfer of the CBCI were substantially complied with the petitioner's request for
registration, to wit:
"No transfer thereof shall be valid unless made at said office (where the Certificate has been registered) by the registered owner
hereof, in person or by his attorney duly authorized in writing, and similarly noted hereon, and upon payment of a nominal transfer
fee which may be required, a new Certificate shall be issued to the transferee of the registered holder thereof."
and, without a doubt, the Detached Assignments presented to respondent were sufficient authorizations in writing executed by the
registered owner, Filriters, and its transferee, PhilFinance, as required by the above-quoted provision;
12. Upon such compliance with the aforesaid requirements, the ministerial duties of registering a transfer of ownership over the CBCI
and issuing a new certificate to the transferee devolves upon the respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in its name.
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 Corporation (Filriters), the registered owner of the subject CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
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 who have present or future claim against policies issued by Filriters, Alfredo Banaria, then Senior VicePresident-Treasury of Filriters, without any board resolution, knowledge or consent of the board of directors of Filriters, and without
any clearance or authorization from the Insurance Commissioner, executed a detached assignment purportedly assigning CBCI No.
891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, Vice-President-Treasury of Filriters (both of
whom were holding the same positions in Philfinance), without any consideration or benefit redounding to Filriters and to the grave
prejudice of Filriters, its policy holders and all who have present or future claims against its policies, executed similar detached
assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and inoperative because the assignment is without the knowledge and consent of
directors of Filriters, and 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);
b) The assignment was executed without any knowledge and consent of the board of directors of Filriters;
c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a requirement under the Insurance Code for its
existence as an insurance company and the pursuit of its business operations. The assignment of the CBCI is illegal act in the sense of
malum in se or malum prohibitum, for anyone to make, either as corporate or personal act;
d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited by law, is immoral and against public policy;
e) The assignment of the CBCI has resulted in the capital impairment and in the solvency deficiency of Filriters (and has in fact helped
in placing Filriters under conservatorship), an inevitable result known to the officer who executed assignment.
17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the assignment.
a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is not payable to bearer but is a registered in
the name of Filriters;
b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the registered owner as the absolute owner and
that the value of the registered certificates shall be payable only to the registered owner; a sufficient notice to plaintiff that the
assignments do not give them the registered owner's right as absolute owner of the CBCI's;
c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides that the registered certificates are payable only
to the registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters is not a regular transaction made in the
usual of ordinary course of business;
a) The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by the Insurance Code and its
assignment or transfer is expressly prohibited by law. There was no attempt to get any clearance or authorization from the Insurance
Commissioner;
b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular course of its business;
c) The CBCI involved substantial amount and its assignment clearly constitutes disposition of "all or substantially all" of the assets of
Filriters, which requires the affirmative action of the stockholders (Section 40, Corporation [sic] Code. 7
In its Decision 8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the assignment of CBCI No. D891 in
favor of Philfinance, and the subsequent assignment of the same CBCI by Philfinance in favor of Traders Royal Bank null and void and
of no force and effect. The dispositive portion of the decision reads:
ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters Guaranty Assurance Corporation and against the
plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent assignment of CBCI by PhilFinance in favor
of the plaintiff Traders Royal Bank as null and void and of no force and effect;
(b) Ordering the respondent Central Bank of the Philippines to disregard the said assignment and to pay the value of the proceeds of
the CBCI No. D891 to the Filriters Guaranty Assurance Corporation;

(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty Assurance Corp. The sum of P10,000 as attorney's
fees; and
(d) to pay the costs.
SO ORDERED. 9
The petitioner assailed the decision of the trial court in the Court of Appeals 10, but their appeals likewise failed. The findings of the
fact of the said court are hereby reproduced:
The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a deed of assignment dated November 27,
1971, Filriters transferred CBCI No. D891 to Philippine Underwriters Finance Corporation (Philfinance). Subsequently, Philfinance
transferred CBCI No. D891, 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 on maturity date, it executed a deed of assignment, dated April 27,
1981, conveying to appellant TRB all its right and the title to CBCI No. D891.
Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI No. D891 in its name before the Security
and Servicing Department of the Central Bank (CB). Central Bank, however, refused to effect the transfer and registration in view of
an adverse claim filed by defendant Filriters.
Left with no other recourse, TRB filed a special civil action for mandamus against the Central Bank in the Regional Trial Court of
Manila. The suit, however, was subsequently treated by the lower court as a case of interpleader when CB prayed in its amended
answer that Filriters be impleaded as a respondent and the court adjudge which of them is entitled to the ownership of CBCI No.
D891. Failing to get a favorable judgment. TRB now comes to this Court on appeal. 11
In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and having acquired the said certificate
from Philfinance as a holder in due course, its possession of the same is thus free fro any defect of title of prior parties and from any
defense available to prior parties among themselves, and it may thus, enforce payment of the instrument for the full amount thereof
against all parties liable thereon. 12
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.
Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made without consideration, and did
not conform to Central Bank Circular No. 769, series of 1980, better known as the "Rules and Regulations Governing Central Bank
Certificates of Indebtedness", which provided that any "assignment of registered certificates shall not be valid unless made . . . by the
registered owner thereof in person or by his representative duly authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was inexistent, having acquired the
certificate through simulation. What happened was Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation,
to guarantee its financing operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, 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 Philippines, Inc. vs. Commissioner of Internal Revenue,
165 SCRA 778).
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.
WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters equity and the two corporations have
identical corporate officers, thus demanding the application of the doctrine or piercing the veil of corporate fiction, as to give validity
to the transfer of the CBCI from registered owner to petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as
actual payment to Filriters. Thus, there is no merit to the lower court's ruling that the transfer of the CBCI from Filriters to Philfinance
was null and void for lack of consideration.
Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability within the meaning of the
negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
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
Properly understood, a certificate of indebtedness pertains to certificates for the creation and maintenance of a permanent
improvement revolving fund, is similar to a "bond," (82 Minn. 202). Being equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum of money. It is usually used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:
As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance Corporation, the registered owner hereof." Very
clearly, the instrument is payable only to Filriters, the registered owner, whose name is inscribed thereon. It lacks the words of
negotiability which should have served as an expression of consent that the instrument may be transferred by negotiation. 15
A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY ASSURANCE CORPORATION, and to no
one else, thus, discounting the petitioner's submission that the same is a negotiable instrument, and that it is a holder in due course of
the certificate.
The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom to circulate as a substitute for
money. Hence, freedom of negotiability is the touchtone relating to the protection of holders in due course, and the freedom of
negotiability is the foundation for the protection which the law throws around a holder in due course (11 Am. Jur. 2d, 32). This
freedom in negotiability is totally absent in a certificate indebtedness as it merely to pay a sum of money to a specified person or entity
for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face
of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained.
While the writing may be read in the light of surrounding circumstance in order to more perfectly understand the intent and meaning
of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words
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 parties may have
secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What
the parties meant must be determined by what they said.
Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not governed by the negotiable
instruments law. The pertinent question then is, was the transfer of the CBCI from Filriters to Philfinance and subsequently from
Philfinance to TRB, in accord with existing law, so as to entitle TRB to have the CBCI registered in its name with the Central Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is defective since it acquired the instrument from
Filriters fictitiously. Although the deed of assignment stated that the transfer was for "value received", there was really no
consideration involved. What happened was Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation. Thus,
for lack of any consideration, the assignment made is a complete nullity.
What is more, We find that the transfer made by Filriters to Philfinance did not conform to Central Bank Circular No. 769, series of
1980, otherwise known as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness", under which the note
was issued. Published in the Official Gazette on November 19, 1980, Section 3 thereof provides that any assignment of registered
certificates shall not be valid unless made . . . by the registered owner thereof in person or by his representative duly authorized in
writing.
In the case at bar, Alfredo O. Banaria, 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 at 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 vs. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal
Revenue, 165 SCRA 778).
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
Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent Filriters and Philfinance, though
separate corporate entities on paper, have used their corporate fiction to defraud TRB into purchasing the subject CBCI, which
purchase now is refused registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two companies have the same corporate officers, if the principle of piercing the
veil of corporate entity were to be applied in this case, then TRB's payment to Philfinance for the CBCI purchased by it could just as
well be considered a payment to Filriters, the registered owner of the CBCI as to bar the latter from claiming, as it has, that it never
received any payment for that CBCI sold and that said CBCI was sold without its authority.
xxx xxx xxx

We respectfully submit that, considering that the Court of Appeals has held that the CBCI was merely borrowed by Philfinance from
Filriters, a sister corporation, to guarantee its (Philfinance's) financing operations, if it were to be consistent therewith, on the issued
raised by TRB that there was a piercing a veil of corporate entity, the Court of Appeals should have ruled that such veil of corporate
entity was, in fact, pierced, and the payment by TRB to Philfinance should be construed as payment to Filriters. 17
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 fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or where a
corporation is a mere alter ego or business conduit of a person. 18
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 seemingly separate one, were it not for the
existing corporate fiction. But to do this, the court must be sure that the corporate fiction was misused, to such an extent that
injustice, fraud, or crime was committed upon another, disregarding, thus, his, her, or its rights. It is the protection of the interests of
innocent third persons dealing with the corporate entity which the law aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains, despite the petitioners insistence on the contrary. For one,
other than the allegation that Filriters is 90% owned by Philfinance, and the identity of one shall be maintained as to the other, there
is nothing else which could lead the court under circumstance to disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a juridical personality separate
from its stockholders and from other corporations may be disregarded, 19 in the absence of such grounds, the general rule must
upheld. The fact that Filfinance owns majority shares in Filriters is not by itself a ground to disregard the independent corporate
status of Filriters. In Liddel & Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of
separate corporate personalities.
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 authority to assign the certificate. As it is, there is no
showing to the effect that petitioner had any dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of the
certificate.
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 hereon. After such registration no transfer thereof shall be valid unless
made at said office (where the Certificates has been registered) by the registered owner hereof, in person, or by his attorney, duly
authorized in writing and similarly noted hereon and upon payment of a nominal transfer fee which may be required, a new
Certificate shall be issued to the transferee of the registered owner thereof. The bank or any agency duly authorized by the Bank may
deem and treat the bearer of this Certificate, or if this Certificate is registered as herein authorized, the person in whose name the
same is registered as the absolute owner of this Certificate, for the purpose of receiving payment hereof, or on account hereof, and for
all other purpose whether or not this Certificate shall be overdue.
This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require 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.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules and Regulations Governing
Central Bank Certificates of Indebtedness, Section 3, Article V of which provides 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, Central Bank of the Philippines, and by the
registered owner thereof, in person 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 necessary written authorization from the Board of Directors of Filriters to act
for the latter. As it is, the sale from Filriters to Philfinance was fictitious, and therefore void and inexistent, as there was no
consideration for the same. This is fatal to the petitioner's cause, for then, Philfinance had no title over the subject certificate to
convey the Traders Royal Bank. Nemo potest nisi quod de jure potest no man can do anything except what he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital reserves, which are required by law 24 to be
maintained at a mandated level. This was pointed out by Elias Garcia, Manager-in-Charge of respondent Filriters, in his testimony
given before the court on May 30, 1986.
Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in the face value of P5000,000.00 subject of
this case?
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?
A Yes, sir. This CBCI is an investment of Filriters required by the Insurance Commission as legal reserve of the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are required to put up legal reserves under Section 213 of the Insurance Code equivalent to
40 percent of the premiums receipt and further, the Insurance Commission requires this reserve to be invested preferably 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.
G.R. No. L-35767 June 18, 1976
RAYMUNDO A. CRYSTAL, petitioner,
vs.
COURT OF APPEALS and PELAGIA OCANG, PACITA, TEODULO, FELICISIMO, PABLO, LYDIA, DIOSCORA and
RODRIGO, all surnamed DE GRACIA, respondents.
RESOLUTION
BARREDO, J.:
Motion for reconsideration of the decision of this Court in this case promulgated on February 25, 1975 affirming the decision of the
Court of Appeals in favor of private respondents which held that petitioner's redemption of the property acquired by said respondents
in an execution sale pursuant to a final judgment of the trial court in Civil Case No. R-1666, Court of First Instance of Cebu, was
invalid inasmuch as the check which petitioner had used in paying the redemption price had been either dishonored or had become
state, hence its value was never this upholding in the process the jurisdiction of the trial court to rule on the question of validity of the
redemption in question notwithstanding that by order of that same court, said matter had been made the subject of a separate suit,
Civil as No. 62-T also of the Court of First Instance of Cebu, filed on August 9, 1960.
In his motion for reconsideration, petitioner insists that it was an act in excess of jurisdiction on the part of the trial court in R-1666,
to issue on May 31, 1971 the writ of possession sought by private respondents, thru Pelagia Ocang, in her motion of August 15, 1970,
considering that court had previously pointedly observed in its order of March 24, 1960 that "the question as to whether or not the
redemption allegedly made by Mr. Crystal by paying the amount to Mrs. Pelagia Ocang without using the said P11,200 deposited with
the sheriff is legal and effective" has to be decided in "another proper case" and, furthermore, in its order of June 4, 1960 in the same
case, the same court had more definitely ruled that "the question of ownership of Mr. Raymundo Crystal, the redemptioner, is not a
proper matter to be decided in this case but in another case where the legality or validity of the alleged deed of redemption executed in
favor of Mr. Crystal will be amply raised and threshed out" and, accordingly, in attention to such observations and ruling, petitioner
did file Civil Case No. 62-T, which is still pending trial.
While, as already explained in Our decision, such pose of petitioner has its merits, We deem it in advisable to this point to modify Our
ruling that there is really no issuance of jurisdiction involved here and that it is preferable, under the peculiar circumstances obtaining
in this particular case, that the root of the controversy between the parties be inquired into and (determined in the incident already

taken cognizance of by the trial court in Civil Case No. R-1666 regarding tile light of possession over tile alert in dispute. In this
connection, it is to be noted that even after he had filed Civil Case No. 62-T, in of hat he must have considered as his right a
redemption i of the property sold in execution a judgment in Civil Case No. R-1666, petitioner regained possession of the four (4)
parcels of land in question without the torture of the court, taking the same from Pelagia Ocang who his taken it from him also
extrajudicially that she had legally acquired the same precisely in the same execution and that petitioner redemption as null and void
because the cheek he used to pay the redemption price had been dishonored for lack of sufficient funds. In other words both petitioner
and Ocang, predicating their respective claims to rightful possession on the same sale on execution in the same case, Civil Case No. Rl666, had alternately taken the law in their hands to obtain possession of the lands in question in disregard of the toilet for the
complete satisfaction of that significant of the court in that case. In the light of these peculiar circumstances, it does appear to be more
that since it is the Case in that Civil Case No. R-1666, that rendered the judgment and subsequently ordered the execution from which
the redemption was made, it should to the people to settle the whole controversy among all the interested statistics including even the
judgment leftors 'the heirs of Nicolas Rafols themselves, who, according to the records, have claim of that own relative to the same
redemption, which might just as well be inquired into in said case, rather than in Case No. 62-T in which they are not parties.
Otherwise, stated, in issuing the impugned writ of possession, the court took the bull by the horns, so to speak, thereby overturning its
own previous stand on the matter announced in its orders of March 24 and June 4, 1960 aforementioned. Consequently, We overrule
the argument of jurisdiction or even abuse of discretion raised by petitioner and reiterate what We have said in regard thereto ni Our
decision.
This is not to say that the procedure followed by Ocang and sactioned by the trial court of resorting to the issuance of a writ of
possession is not open to question, since a writ of possession is not always available in all controversies concerning possession of real
estate. But We see no need to resolve that point here. More importantly, what impresses Us in the motion for reconsideration is the
possible injustice that might result from our unqualified reliance in our decision on the finding of the Court of Appeals that the check
for P11,200 paid by petitioner for the redemption in dispute had been dishonored, in the face of the other finding in the same decision
of the Court of Appeals indicating that instead of having been dishonored, the said check had become state, albeit it was being
replaced with new ones from time to time. Surely, for a check to the dishonored upon presentment on the one hand, and to be state
for not being presented at all in time, on the other, are incompatible developments that naturally have variant legal consequences.
Thus, if needed the check in question had been dishonored, then there can be no doubt that petitioner's redemption was null and void.
On the oher hand, if it had only become stale, then it becomes imperative that the circumstances that caused its non-presentment be
determined, for if this was not due to the fault of the petitioner, then it would be unfair to deprive him of the rights he had acquired as
redemptioner, particularly, the value of the check has otherwise been received or realized by the party concerned. From the motion for
reconsideration and its annexes, We gather that petitioner has ready evidence showing that when Pelagia Ocang secured the writ of
possession in question, she had already been paid the full amount of the check in dispute. What is more, there are a number of
circumstances pointed out in said motion, apparaently supported by corresponding evidence, tending to show that a compromise had
already been agreed upon by the parties, although not yet approved by the court, or, at least, that Ocang has made admissions which
indicate that the issue regarding the supposed dishonorign or becomeing state of the repeatedly mentioned check is no longer of any
legal significance and, for that matter, the observations we made in our decision in regard to the duties of the sheriff in the premises
have been rendered academic.
Needless to say, the Supreme Court should not allow any of its decision to become final when it is properly made to appear in a
motion for reconsideration based on relevant facts and circumstances not previously brought to its attention, although demonstrable
from the records, that even if the technical consideration on which it is based is well taken, substantial jusitce might be sacrificed, if
further proceedings are not ordered to be held to verify undeniable facts which might have escaped the eyes of the Court of Appeals.
In the instant case, We took it as proven, per statements of fact in the decision of the Court of Appeals, that the check with which
petitioner redeemed the property in dispute had been dishonored. On that premise and seeing that even if We upheld the technical
point of jurisdiction raised by petitioner, the final outcome of the controversy between the parties would not be different, We
proceeded to decide the merits of the respective substantive claims of the parties. We felt that in view of the findings of fact of the
Court of Appeals, equity demanded that the case be earlier terminated by ignoring not only whatever flaw ther was in the procedure
adopted by the court below but also the seemingly unusual departure by the Court of Appeals from the orthodox rule requiring courts
to confine its scrutiny in certiorari cases only to the specific point of jurisdiction complained of.
Now, however, there is a strong showing in the motion for reconsideration, presmised on no less than other portions of the very
decision of the intermediate court and other apparently credible evidence, that not only was said check not dishonored, although it
became stale, but that repondent Pelagia Ocang had actually been paid already the full value thereof. And in this connection, it is
notable that in the comment of respondents on petitioner's motion for reconsideration, there is no clear and categorical denial of
these important and decisive facts.
One more point. In our decision, We assumed that the findings of fact of the Court of Appeals were the result of an exhaustive
consideration of evidence presented in due course by the parties. It turns out now, that inasmuch as the trial court itself had

previously ruled that the validity of the redemption in controversy should be the subject of a separate action and that, in fact, such
separate action had already been filed by petitioner, it was in this other case that petitioner was present the corresponding
evidencence. Hence, whatever evidence was before the trial court in Case No. R-1666 when it issued the subject writ of possession
could not have been complete, much less incontrovertible.
With these substantial consideration in view, We find no just alternative than to reconsider Our decision in so far as the matter of
validity or invalidity of petitioner's redemption is concerned. It being shown that the pivotal finding of the Court of Appeals regarding
the check in question might actually be belied in a more appropriate proceeding, the foundation of Our own decision has been shaken.
Indeed, We are now convinced that is but fair and just that the trial court should be allowed to receive all relevant and competent
evidence the parties may wish to present relative to the issue of whether or not respondent Pelagia Ocang has already received in one
form or another, directly or indirectly, the full amount of P11,200 as redemption price of the four (4) parcels of land in dispute, as well
as to all other facts which might affect the validity of the redemption here in controversy. Withal, should it be found by the trial court
that the redemption was invalid, because the redemption price has not been fully paid, it should further determine who made the
improvements found on said lands, in order that if it should turn out that they were introduced by petitioner, possession may not be
awarded to respondents unless said improvements are first properly and fully reimbursed to petitioner. It goes without saying that the
proceedings herein contemplated are to be held in Civil Case No. R-1666. Correspondingly, Civil Case No. 62-T and the other case
reviewing the same should be deemed academic.
WHEREFORE, the decision of this Court of February 25, 1975 is hereby reconsidered and modified in line with the foregoing opinion
and this case is remanded to the trial court for further proceedings as therein indicated.

G.R. No. L-222

April 26, 1950
SALVACION F. VDA. DE EDUQUE, ETC., plaintiff-appellee,
vs.
JOSE M. OCAMPO, defendant-appellant.
Alfredo B. Cacnio and Padilla, Carlos and Fernando for appellant.Jose Feria for appellee.Delfin L. Gonzalez for plaintiffintervenor.
MORAN, C.J.:
This is an action to compel acceptance of payment of a mortgage debt.
On February 16, 1935, Dr. Jose Eduque secured two loans from Mariano Ocampo de Leon, Doa Escolastica de los Reyes and Don
Jose M. Ocampo, the first in the amount of P40,000 and the second in the sum of P15,000, both payable within the period of twenty
years, with interest at the rate of 5 per cent per annum. Payment of these two loans was guaranteed by mortgage on real property. In
the mortgage contract it is stipulated that any of the mortgage creditors may receive payment and execute deeds of cancellation of the
mortgage debts.
On December 6, 1943, plaintiff and appellee, as administratrix of the estate of the deceased Dr. Jose Eduque, tendered payment, by
means of cashier's check, of the total amount of the two loans, P55,000, to defendant-appellant Jose M. Ocampo, one of the creditors,
who refused to accept payment. By reason of such refusal, an action was brought and a cashier's check for the total amount of P55,000
deposited in court. After trial, judgment was rendered against defendant compelling him to accept the P55,000 deposited in court, to
issue deeds for cancellation of the mortgage debts, and to pay the expenses of consignation and costs.
Defendant accepted the judgment with respect to the second loan of P15,000 upon the ground that, according to him, in the deed of
mortgage corresponding to that loan it clearly appeared that the loan was payable "durante el termino de 20 aos," and that the only
question remaining between the parties is the interpretation of the first deed of mortgage regarding the first loan of P40,000. and he
asked the court to order "que de la cantidad de P55,000 consignada en este Juzgado, se entregue al demandado la suma de P15,000,
despues de descontar proporcionalmente cualesquiera cantidades por deposito y otros conceptos segun los terminos de la decision
promulgada." The order was issued accordingly and the sum of P15,000 out of the P55,000 deposited in court was delivered to the
defendant.
The present appeal concerns the decision of the lower court regarding the first loan of P40,000, and the principal error assigned by
the appellant is that tender of payment by means of a cashier's check representing Japanese war notes is not valid.
We have already help that Japanese military notes were legal tender during the Japanese occupation. But appellant argues, further,
that the consignation of a cashier's check, which is not legal tender, is not binding upon him. This question, however, has never been
raised in the lower court. Upon the contrary, defendant accepted impliedly the consignation of the cashier's check when he himself
asked the court that out of the money thus consigned he be paid the amount of the second loan of P15,000. It is a rule that " a cashier's
check may constitute a sufficient tender where no objection is made on this ground." (62 C. J., p. 670; see also 40 Amer. Jur., p. 764.)
For all the foregoing, judgment is affirmed with cost against appellant.

Ozaeta, Pablo, Bengzon, Montemayor, and Reyes, JJ., concur.

Separate Opinions
TUASON, J., dissenting:
I am constrained to dissent from the majority decision on the ground on which I rested my dissent in various cases involving the
validity of payments in Japanese military notes.
I maintain that Japanese war notes were not legal tender and could not be made so by military orders. Accordingly, payment in that
currency of pre-war obligation over the protest of the creditor did not operate to discharge the debt except to the extent he was or
could have been benefited by the payment.
G.R. No. L-41764 December 19, 1980
NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., petitioner,
vs.
HON. ALBERTO V. SENERIS, RICARDO A. TONG and EX-OFFICIO SHERIFF HAKIM S. ABDULWAHID,
respondents.
CONCEPCION JR., J.:
A petition for certiorari with preliminary injunction to annul and/or modify the order of the Court of First Instance of Zamboanga
City (Branch ii) dated August 28, 1975 denying petitioner's Ex-Parte Motion for Issuance of Certificate Of Satisfaction Of Judgment.
Herein petitioner is the defendant in a complaint for collection of a sum of money filed by the private respondent. 1 On July 19, 1974, a
compromise judgment was rendered by the respondent Judge in accordance with an amicable settlement entered into by the parties
the terms and conditions of which, are as follows:
(1) That defendant will pay to the plaintiff the amount of Fifty Four Thousand Five Hundred Pesos (P54,500.00) at 6% interest per
annum to be reckoned from August 25, 1972;
(2) That defendant will pay to the plaintiff the amount of Six Thousand Pesos (P6,000.00) as attorney's fees for which P5,000.00 had
been acknowledged received by the plaintiff under Consolidated Bank and Trust Corporation Check No. 16-135022 amounting to
P5,000.00 leaving a balance of One Thousand Pesos (P1,000.00);
(3) That the entire amount of P54,500.00 plus interest, plus the balance of P1,000.00 for attorney's fees will be paid by defendant to
the plaintiff within five months from today, July 19, 1974; and
(4) Failure one the part of the defendant to comply with any of the above-conditions, a writ of execution may be issued by this Court
for the satisfaction of the obligation. 2
For failure of the petitioner to comply with his judgment obligation, the respondent Judge, upon motion of the private respondent,
issued an order for the issuance of a writ of execution on December 21, 1974. Accordingly, writ of execution was issued for the amount
of P63,130.00 pursuant to which, the Ex-Officio Sheriff levied upon the following personal properties of the petitioner, to wit:
(1) Unit American Lathe 24
(1) Unit American Lathe 18 Cracker Wheeler
(1) Unit Rockford Shaper 24
and set the auction sale thereof on January 15, 1975. However, prior to January 15, 1975, petitioner deposited with the Clerk of Court,
Court of First Instance, Zamboanga City, in his capacity as Ex-Officio Sheriff of Zamboanga City, the sum of P63,130.00 for the
payment of the judgment obligation, consisting of the following:
1. P50.000.00 in Cashier's Check No. S-314361 dated January 3, 1975 of the Equitable Banking Corporation; and
2. P13,130.00 incash. 3
In a letter dated January 14, 1975, to the Ex-Officio Sheriff, 4 private respondent through counsel, refused to accept the check as well
as the cash deposit. In the 'same letter, private respondent requested the scheduled auction sale on January 15, 1975 to proceed if the
petitioner cannot produce the cash. However, the scheduled auction sale at 10:00 a.m. on January 15, 1975 was postponed to 3:00
o'clock p.m. of the same day due to further attempts to settle the case. Again, the scheduled auction sale that afternoon did not push
through because of a last ditch attempt to convince the private respondent to accept the check. The auction sale was then postponed
on the following day, January 16, 1975 at 10:00 o'clock a.m. 5 At about 9:15 a.m., on January 16, 1975, a certain Mr. Taedo
representing the petitioner appeared in the office of the Ex-Officio Sheriff and the latter reminded Mr. Taedo that the auction sale
would proceed at 10:00 o'clock. At 10:00 a.m., Mr. Taedo and Mr. Librado, both representing the petitioner requested the Ex-Officio
Sheriff to give them fifteen minutes within which to contract their lawyer which request was granted. After Mr. Taedo and Mr.
Librado failed to return, counsel for private respondent insisted that the sale must proceed and the Ex-Officio Sheriff proceeded with
the auction sale. 6 In the course of the proceedings, Deputy Sheriff Castro sold the levied properties item by item to the private
respondent as the highest bidder in the amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff declared a deficiency of

P13,130.00. 7 Thereafter, on January 16, 1975, the Ex-Officio Sheriff issued a "Sheriff's Certificate of Sale" in favor of the private
respondent, Ricardo Tong, married to Pascuala Tong for the total amount of P50,000.00 only. 8 Subsequently, on January 17, 1975,
petitioner filed an ex-parte motion for issuance of certificate of satisfaction of judgment. This motion was denied by the respondent
Judge in his order dated August 28, 1975. In view thereof, petitioner now questions said order by way of the present petition alleging
in the main that said respondent Judge capriciously and whimsically abused his discretion in not granting the motion for issuance of
certificate of satisfaction of judgment for the following reasons: (1) that there was already a full satisfaction of the judgment before the
auction sale was conducted with the deposit made to the Ex-Officio Sheriff in the amount of P63,000.00 consisting of P50,000.00 in
Cashier's Check and P13,130.00 in cash; and (2) that the auction sale was invalid for lack of proper notice to the petitioner and its
counsel when the Ex-Officio Sheriff postponed the sale from June 15, 1975 to January 16, 1976 contrary to Section 24, Rule 39 of the
Rules of Court. On November 10, 1975, the Court issued a temporary restraining order enjoining the respondent Ex-Officio Sheriff
from delivering the personal properties subject of the petition to Ricardo A. Tong in view of the issuance of the "Sheriff Certificate of
Sale."
We find the petition to be impressed with merit.
The main issue to be resolved in this instance is as to whether or not the private respondent can validly refuse acceptance of the
payment of the judgment obligation made by the petitioner consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash which
it deposited with the Ex-Officio Sheriff before the date of the scheduled auction sale. In upholding private respondent's claim that he
has the right to refuse payment by means of a check, the respondent Judge cited the following:
Section 63 of the Central Bank Act:
Sec. 63. Legal Character. Checks representing deposit money do not have legal tender power and their acceptance in payment of
debts, both public and private, is at the option of the creditor, Provided, however, that a check which has been cleared and credited to
the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his
account.
Article 1249 of the New Civil Code:
Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency,
then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
Likewise, the respondent Judge sustained the contention of the private respondent that he has the right to refuse payment of the
amount of P13,130.00 in cash because the said amount is less than the judgment obligation, citing the following Article of the New
Civil Code:
Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the presentations
in which the obligation consists. Neither may the debtor be required to make partial payment.
However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the
payment of the former without waiting for the liquidation of the latter.
It is to be emphasized in this connection that the check deposited by the petitioner in the amount of P50,000.00 is not an ordinary
check but a Cashier's Check of the Equitable Banking Corporation, a bank of good standing and reputation. As testified to by the ExOfficio Sheriff with whom it has been deposited, it is a certified crossed check. 9 It is a well-known and accepted practice in the
business sector that a Cashier's Check is deemed as cash. Moreover, since the said check had been certified by the drawee bank, by the
certification, the funds represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all
intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation. 10 Where a
check is certified by the bank on which it is drawn, the certification is equivalent to acceptance. 11 Said certification "implies that the
check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall
be so applied whenever the check is presented for payment. It is an understanding that the check is good then, and shall continue
good, and this agreement is as binding on the bank as its notes in circulation, a certificate of deposit payable to the order of the
depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties, is to enable the holder to use
it as money." 12 When the holder procures the check to be certified, "the check operates as an assignment of a part of the funds to the
creditors." 13 Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to the effect "that a check which
has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal
to the amount credited to his account" shall apply in this case. Considering that the whole amount deposited by the petitioner
consisting of Cashier's Check of P50,000.00 and P13,130.00 in cash covers the judgment obligation of P63,000.00 as mentioned in
the writ of execution, then, We see no valid reason for the private respondent to have refused acceptance of the payment of the
obligation in his favor. The auction sale, therefore, was uncalled for. Furthermore, it appears that on January 17, 1975, the Cashier's
Check was even withdrawn by the petitioner and replaced with cash in the corresponding amount of P50,000.00 on January 27, 1975

pursuant to an agreement entered into by the parties at the instance of the respondent Judge. However, the private respondent still
refused to receive the same. Obviously, the private respondent is more interested in the levied properties than in the mere satisfaction
of the judgment obligation. Thus, petitioner's motion for the issuance of a certificate of satisfaction of judgment is clearly meritorious
and the respondent Judge gravely abused his discretion in not granting the same under the circumstances.
In view of the conclusion reached in this instance, We find no more need to discuss the ground relied in the petition.
It is also contended by the private respondent that Appeal and not a special civil action for certiorari is the proper remedy in this case,
and that since the period to appeal from the decision of the respondent Judge has already expired, then, the present petition has been
filed out of time. The contention is untenable. The decision of the respondent Judge in Civil Case No. 250 (166) has long become final
and executory and so, the same is not being questioned herein. The subject of the petition at bar as having been issued in grave abuse
of discretion is the order dated August 28, 1975 of the respondent Judge which was merely issued in execution of the said decision.
Thus, even granting that appeal is open to the petitioner, the same is not an adequate and speedy remedy for the respondent Judge
had already issued a writ of execution. 14
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
1. Declaring as null and void the order of the respondent Judge dated August 28, 1975;
2. Declaring as null and void the auction sale conducted on January 16, 1975 and the certificate of sale issued pursuant thereto;
3. Ordering the private respondent to accept the sum of P63,130.00 under deposit as payment of the judgment obligation in his favor;
4. Ordering the respondent Judge and respondent Ex-Officio Sheriff to release the levied properties to the herein petitioner.
The temporary restraining order issued is hereby made permanent.
Costs against the private respondent.
SO ORDERED.

[G.R. No. 72110. November 16, 1990.]

ROMAN CATHOLIC BISHOP OF MALOLOS, INC., Petitioner, v. INTERMEDIATE APPELLATE COURT, and ROBESFRANCISCO REALTY AND DEVELOPMENT CORPORATION, Respondents.

debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is
legal tender in the Philippines. The Court en banc in the recent case of Philippine Airlines v. Court of Appeals, (Promulgated on
January 30, 1990) G.R. No. L-49188, stated thus: Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment (citing Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code;
Bryan London Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a managers
check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be
refused receipt by the obligee or creditor. Hence, where the tender of payment by the private respondent was not valid for failure to
comply with the requisite payment in legal tender or currency stipulated within the grace period and as such, was validly refused
receipt by the petitioner, the subsequent consignation did not operate to discharge the former from its obligation to the latter.
3. ID.; ID.; OBLIGATIONS ARISING THEREFROM HAVE THE FORCE OF LAW BETWEEN THE CONTRACTING PARTIES. Art.
1159 of the Civil Code of the Philippines provides that "obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith." And unless the stipulations in said contract are contrary to law,
morals, good customs, public order, or public policy, the same are binding as between the parties. (Article 1409, Civil Code, par. 1).
What the private respondent should have done if it was indeed desirous of complying with its obligations would have been to pay the
petitioner within the grace period and obtain a receipt of such payment duly issued by the latter. Thereafter, or, allowing a reasonable
time, the private respondent could have demanded from the petitioner the execution of the necessary documents. In case the
petitioner refused, the private respondent could have had always resorted to judicial action for the legitimate enforcement of its right.
For the failure of the private respondent to undertake this more judicious course of action, it alone shall suffer the consequences.
4. REMEDIAL LAW; APPEAL; FACTUAL FINDINGS OF TRIAL COURT AS A RULE, SHOULD BE ACCORDED FULL
CONSIDERATION AND RESPECT. On the contrary, the respondent court finds itself remiss in overlooking or taking lightly the
more important findings of fact made by the trial court which we have earlier mentioned and which as a rule, are entitled to great
weight on appeal and should be accorded full consideration and respect and should not be disturbed unless for strong and cogent
reasons. (Natividad del Rosario Vda. de Alberto v. Court of Appeals, G.R. 29759, May 18, 1989; Matabuena v. Court of Appeals, G.R.
76542, May 5, 1989).

Antonio P. Barredo and Napoleon M. Malinas for Private Respondent.

5. ID.; SUPREME COURT; INSTANCES WHEN THE COURT HAS TO REVIEW THE EVIDENCE. While the Court is not a trier of
facts, yet, when the findings of fact of the Court of Appeals are at variance with those of the trial court, (Robleza v. Court of Appeals,
G.R. 80364, June 28, 1989) or when the inference of the Court of Appeals from its findings of fact is manifestly mistaken, (Reynolds
Philippine Corporation v. Court of Appeals, G.R. 38187, January 17, 1987) the Court has to review the evidence in order to arrive at
the correct findings based on the record.

SYLLABUS

DECISION

1. CIVIL LAW; CONTRACTS; TENDER OF PAYMENT; CANNOT BE PRESUMED BY MERE INFERENCE FROM SURROUNDING
CIRCUMSTANCES. We agree with the petitioner that a finding that the private respondent had sufficient available funds on or
before the grace period for the payment of its obligation does not constitute proof of tender of payment by the latter for its obligation
within the said period. Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as
payment to the obligee for the formers obligation and demanding that the latter accept the same. Thus, tender of payment cannot be
presumed by a mere inference from surrounding circumstances. At most, sufficiency of available funds is only affirmative of the
capacity or ability of the obligor to fulfill his part of the bargain. But whether or not the obligor avails himself of such funds to settle
his outstanding account remains to be proven by independent and credible evidence. Tender of payment presupposes not only that
the obligor is able, ready, and willing, but more so, in the act of performing his obligation. Ab posse ad actu non vale illatio. "A proof
that an act could have been done is no proof that it was actually done." The respondent court was therefore in error to have concluded
from the sheer proof of sufficient available funds on the part of the private respondent to meet more than the total obligation within
the grace period, the alleged truth of tender of payment. The same is a classic case of non-sequitur.

SARMIENTO, J.:

Rodrigo Law Office for Petitioner.

2. ID.; ID.; ID.; NOT VALIDLY CONSTITUTED BY PAYMENT OF A CERTIFIED PERSONAL CHECK. With regard to the third
issue, granting arguendo that we would rule affirmatively on the two preceding issues, the case of the private respondent still can not
succeed in view of the fact that the latter used a certified personal check which is not legal tender nor the currency stipulated, and
therefore, can not constitute valid tender of payment. The first paragraph of Art. 1249 of the Civil Code provides that "the payment of

This is a petition for review on certiorari which seeks the reversal and setting aside of the decision 1 of the Court of Appeals, 2 the
dispositive portion of which reads:chanrobles law library : red
WHEREFORE, the decision appealed from is hereby reversed and set aside and another one entered for the plaintiff ordering the
defendant-appellee Roman Catholic Bishop of Malolos, Inc. to accept the balance of P124,000.00 being paid by plaintiff-appellant
and thereafter to execute in favor of Robes-Francisco Realty Corporation a registerable Deed of Absolute Sale over 20,655 square
meters portion of that parcel of land situated in San Jose del Monte, Bulacan described in OCT No. 575 (now Transfer Certificates of
Title Nos. T-169493, 169494,169495 and 169496) of the Register of Deeds of Bulacan. In case of refusal of the defendant to execute
the Deed of Final Sale, the clerk of court is directed to execute the said document. Without pronouncement as to damages and
attorneys fees. Costs against the defendant-appellee. 3
The case at bar arose from a complaint filed by the private respondent, then plaintiff, against the petitioner, then defendant, in the
Court of First Instance (now Regional Trial Court) of Bulacan, at Sta. Maria, Bulacan, 4 for specific performance with damages, based
on a contract 5 executed on July 7, 1971.

The property subject matter of the contract consists of a 20,655 sq.m.-portion, out of the 30,655 sq.m. total area, of a parcel of land
covered by Original Certificate of Title No. 575 of the Province of Bulacan, issued and registered in the name of the petitioner which it
sold to the private respondent for and in consideration of P123,930.00.chanrobles virtual lawlibrary
The crux of the instant controversy lies in the compliance or non-compliance by the private respondent with the provision for
payment to the petitioner of the principal balance of P100,000.00 and the accrued interest of P24,000.00 within the grace period.
A chronological narration of the antecedent facts is as follows:chanrob1es virtual 1aw library
On July 7, 1971, the subject contract over the land in question was executed between the petitioner as vendor and the private
respondent through its then president, Mr. Carlos F. Robes, as vendee, stipulating for a downpayment of P23,930.00 and the balance
of P100,000.00 plus 12% interest per annum to be paid within four (4) years from execution of the contract, that is, on or before July
7, 1975. The contract likewise provides for cancellation, forfeiture of previous payments, and reconveyance of the land in question in
case the private respondent would fail to complete payment within the said period.
On March 12, 1973, the private respondent, through its new president, Atty. Adalia Francisco, addressed a letter 6 to Father Vasquez,
parish priest of San Jose Del Monte, Bulacan, requesting to be furnished with a copy of the subject contract and the supporting
documents.
On July 17, 1975, admittedly after the expiration of the stipulated period for payment, the same Atty. Francisco wrote the petitioner a
formal request 7 that her company be allowed to pay the principal amount of P100,000.00 in three (3) equal installments of six (6)
months each with the first installment and the accrued interest of P24,000.00 to be paid immediately upon approval of the said
request.

to write defendant on August 4, 1975 to request an extension of time. Indeed, Atty. Franciscos claim that she made a tender of
payment on August 5, 1975 such alleged act, considered in relation to the circumstances both antecedent and subsequent thereto,
being not in accord with the normal pattern of human conduct is not worthy of credence. 13
The trial court likewise noted the inconsistency in the testimony of Atty. Francisco, president of the private respondent, who earlier
testified that a certain Mila Policarpio accompanied her on August 5, 1975 to the office of the petitioner. Another person, however,
named Aurora Oracion, was presented to testify as the secretary-companion of Atty. Francisco on that same occasion.
Furthermore, the trial court considered as fatal the failure of Atty. Francisco to present in court the certified personal check allegedly
tendered as payment or, at least, its xerox copy, or even bank records thereof. Finally, the trial court found that the private respondent
had insufficient funds available to fulfill the entire obligation considering that the latter, through its president, Atty. Francisco, only
had a savings account deposit of P64,840.00, and although the latter had a money-market placement of P300,000.00, the same was
to mature only after the expiration of the 5-day grace period.
Based on the above considerations, the trial court rendered a decision in favor of the petitioner, the dispositive portion of which
reads:chanrobles virtual lawlibrary
WHEREFORE, finding plaintiff to have failed to make out its case, the court hereby declares the subject contract cancelled and
plaintiffs downpayment of P23,930.00 forfeited in favor of defendant, and hereby dismisses the complaint; and on the counterclaim,
the Court orders plaintiff to pay defendant.
(1) Attorneys fees of P10,000.00;
(2) Litigation expenses of P2,000.00; and

On July 29, 1975, the petitioner, through its counsel, Atty. Carmelo Fernandez, formally denied the said request of the private
respondent, but granted the latter a grace period of five (5) days from the receipt of the denial 8 to pay the total balance of
P124,000.00, otherwise, the provisions of the contract regarding cancellation, forfeiture, and reconveyance would be implemented.

(3) Judicial costs.

On August 4, 1975, the private respondent, through its president, Atty. Francisco, wrote 9 the counsel of the petitioner requesting an
extension of 30 days from said date to fully settle its account. The counsel for the petitioner, Atty. Fernandez, received the said letter
on the same day. Upon consultation with the petitioner in Malolos, Bulacan, Atty. Fernandez, as instructed, wrote the private
respondent a letter 10 dated August 7, 1975 informing the latter of the denial of the request for an extension of the grace period.

Not satisfied with the said decision, the private respondent appealed to the respondent Intermediate Appellate Court (now Court of
Appeals) assigning as reversible errors, among others, the findings of the trial court that the available funds of the private respondent
were insufficient and that the latter did not effect a valid tender of payment and consignation.

Consequently, Atty. Francisco, the private respondents president, wrote a letter 11 dated August 22, 1975, directly addressed to the
petitioner, protesting the alleged refusal of the latter to accept tender of payment purportedly made by the former on August 5, 1975,
the last day of the grace period. In the same letter of August 22, 1975, received on the following day by the petitioner, the private
respondent demanded the execution of a deed of absolute sale over the land in question and after which it would pay its account in
full, otherwise, judicial action would be resorted to.chanrobles.com.ph : virtual law library

SO ORDERED. 14

The respondent court, in reversing the decision of the trial court, essentially relies on the following findings:chanrob1es virtual 1aw
library

From a perusal of the foregoing facts, we find that both the contending parties have conflicting versions on the main question of
tender of payment.

. . . We are convinced from the testimony of Atty. Adalia Francisco and her witnesses that in behalf of the plaintiff-appellant they have
a total available sum of P364,840.00 at her and at the plaintiffs disposal on or before August 4, 1975 to answer for the obligation of
the plaintiff-appellant. It was not correct for the trial court to conclude that the plaintiff-appellant had only about P64,840.00 in
savings deposit on or before August 5, 1975, a sum not enough to pay the outstanding account of P124,000.00. The plaintiff-appellant,
through Atty. Francisco proved and the trial court even acknowledged that Atty. Adalia Francisco had about P300,000.00 in money
market placement. The error of the trial court has in concluding that the money market placement of P300,000.00 was out of reach of
Atty. Francisco. But as testified to by Mr. Catalino Estrella, a representative of the Insular Bank of Asia and America, Atty. Francisco
could withdraw anytime her money market placement and place it at her disposal, thus proving her financial capability of meeting
more than the whole of P124,000.00 then due per contract. This situation, We believe, proves the truth that Atty. Francisco
apprehensive that her request for a 30-day grace period would be denied, she tendered payment on August 4, 1975 which offer
defendant through its representative and counsel refused to receive. . .15 (Emphasis supplied)

The trial court, in its ratiocination, preferred not to give credence to the evidence presented by the private Respondent. According to
the trial court:chanrob1es virtual 1aw library

In other words, the respondent court, finding that the private respondent had sufficient available funds, ipso facto concluded that the
latter had tendered payment. Is such conclusion warranted by the facts proven? The petitioner submits that it is not.cralawnad

. . . What made Atty. Francisco suddenly decide to pay plaintiffs obligation on August 5, 1975, go to defendants office at Malolos, and
there tender her payment, when her request of August 4, 1975 had not yet been acted upon until August 7, 1975? If Atty. Francisco had
decided to pay the obligation and had available funds for the purpose on August 5, 1975, then there would have been no need for her

Hence, this petition. 16

On August 27, 1975, the petitioners counsel, Atty. Fernandez, wrote a reply 12 to the private respondent stating the refusal of his
client to execute the deed of absolute sale due to its (private respondents) failure to pay its full obligation. Moreover, the petitioner
denied that the private respondent had made any tender of payment whatsoever within the grace period. In view of this alleged breach
of contract, the petitioner cancelled the contract and considered all previous payments forfeited and the land as ipso facto reconveyed.

The petitioner presents the following issues for resolution:chanrob1es virtual 1aw library

president, Atty. Francisco, which reads:chanrob1es virtual 1aw library

Q Now, you mentioned, Atty. Francisco, that you wanted the defendant to execute the final deed of sale before you would given (sic)
the personal certified check in payment of your balance, is that correct?

A. Is a finding that private respondent had sufficient available funds on or before the grace period for the payment of its obligation
proof that it (private respondent) did tender of (sic) payment for its said obligation within said period?

A Yes, sir. 22

B. Is it the legal obligation of the petitioner (as vendor) to execute a deed of absolute sale in favor of the private respondent (as
vendee) before the latter has actually paid the complete consideration of the sale where the contract between and executed by the
parties stipulates

Art. 1159 of the Civil Code of the Philippines provides that "obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith." And unless the stipulations in said contract are contrary to law,
morals, good customs, public order, or public policy, the same are binding as between the parties.23

"That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall cause the execution of a Deed
of Absolute Sale in favor of the VENDEE."cralaw virtua1aw library

What the private respondent should have done if it was indeed desirous of complying with its obligations would have been to pay the
petitioner within the grace period and obtain a receipt of such payment duly issued by the latter. Thereafter, or, allowing a reasonable
time, the private respondent could have demanded from the petitioner the execution of the necessary documents. In case the
petitioner refused, the private respondent could have had always resorted to judicial action for the legitimate enforcement of its right.
For the failure of the private respondent to undertake this more judicious course of action, it alone shall suffer the
consequences.chanrobles.com:cralaw:red

x.

C. Is an offer of a check a valid tender of payment of an obligation under a contract which stipulates that the consideration of the sale
is in Philippine Currency? 17
We find the petition impressed with merit.
With respect to the first issue, we agree with the petitioner that a finding that the private respondent had sufficient available funds on
or before the grace period for the payment of its obligation does not constitute proof of tender of payment by the latter for its
obligation within the said period. Tender of payment involves a positive and unconditional act by the obligor of offering legal tender
currency as payment to the obligee for the formers obligation and demanding that the latter accept the same. Thus, tender of
payment cannot be presumed by a mere inference from surrounding circumstances. At most, sufficiency of available funds is only
affirmative of the capacity or ability of the obligor to fulfill his part of the bargain. But whether or not the obligor avails himself of such
funds to settle his outstanding account remains to be proven by independent and credible evidence. Tender of payment presupposes
not only that the obligor is able, ready, and willing, but more so, in the act of performing his obligation. Ab posse ad actu non vale
illatio. "A proof that an act could have been done is no proof that it was actually done."cralaw virtua1aw library
The respondent court was therefore in error to have concluded from the sheer proof of sufficient available funds on the part of the
private respondent to meet more than the total obligation within the grace period, the alleged truth of tender of payment. The same is
a classic case of non-sequitur.chanrobles virtual lawlibrary
On the contrary, the respondent court finds itself remiss in overlooking or taking lightly the more important findings of fact made by
the trial court which we have earlier mentioned and which as a rule, are entitled to great weight on appeal and should be accorded full
consideration and respect and should not be disturbed unless for strong and cogent reasons. 18
While the Court is not a trier of facts, yet, when the findings of fact of the Court of Appeals are at variance with those of the trial court,
19 or when the inference of the Court of Appeals from its findings of fact is manifestly mistaken, 20 the Court has to review the
evidence in order to arrive at the correct findings based on the record.
Apropos the second issue raised, although admittedly the documents for the deed of absolute sale had not been prepared, the subject
contract clearly provides that the full payment by the private respondent is an a priori condition for the execution of the said
documents by the petitioner.
That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall cause the execution of a Deed of
Absolute Sale in favor of the VENDEE. 21
The private respondent is therefore in estoppel to claim otherwise as the latter did in the testimony in cross-examination of its

With regard to the third issue, granting arguendo that we would rule affirmatively on the two preceding issues, the case of the private
respondent still can not succeed in view of the fact that the latter used a certified personal check which is not legal tender nor the
currency stipulated, and therefore, can not constitute valid tender of payment. The first paragraph of Art. 1249 of the Civil Code
provides that "the payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such
currency, then in the currency which is legal tender in the Philippines.
The Court en banc in the recent case of Philippine Airlines v. Court of Appeals, 24 G.R. No. L-49188, stated thus:chanrob1es virtual
1aw library
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself,
operate as payment (citing Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan London Co. v. American Bank, 7 Phil. 255;
Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a managers check or ordinary check, is not legal tender, and an
offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor.
Hence, where the tender of payment by the private respondent was not valid for failure to comply with the requisite payment in legal
tender or currency stipulated within the grace period and as such, was validly refused receipt by the petitioner, the subsequent
consignation did not operate to discharge the former from its obligation to the latter.
In view of the foregoing, the petitioner in the legitimate exercise of its rights pursuant to the subject contract, did validly order
therefore the cancellation of the said contract, the forfeiture of the previous payment, and the reconveyance ipso facto of the land in
question.chanrobles lawlibrary : rednad
WHEREFORE, the petition for review on certiorari is GRANTED and the DECISION of the respondent court promulgated on April
25, 1985 is hereby SET ASIDE and ANNULLED and the DECISION of the trial court dated May 25, 1981 is hereby REINSTATED.
Costs against the private Respondent.
SO ORDERED.
G.R. No. 100290 June 4, 1993
NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and EDEN TAN, respondents.

PADILLA, J.:
Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before this Court assailing the decision * of respondent appellate
court dated 24 April 1991 in CA-G.R. SP No. 24164 denying their petition for certiorari prohibition, and injunction which sought to
annul the order of Judge Eutropio Migrio of the Regional Trial Court, Branch 151, Pasig, Metro Manila in Civil Case No. 54863
entitled "Eden Tan vs. Sps. Norberto and Carmen Tibajia."
Stated briefly, the relevant facts are as follows:
Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan against the Tibajia spouses. A writ of attachment was
issued by the trial court on 17 August 1987 and on 17 September 1987, the Deputy Sheriff filed a return stating that a deposit made by
the Tibajia spouses in the Regional Trial Court of Kalookan City in the amount of Four Hundred Forty Two Thousand Seven Hundred
and Fifty Pesos (P442,750.00) in another case, had been garnished by him. On 10 March 1988, the Regional Trial Court, Branch 151 of
Pasig, Metro Manila rendered its decision in Civil Case No. 54863 in favor of the plaintiff Eden Tan, ordering the Tibajia spouses to
pay her an amount in excess of Three Hundred Thousand Pesos (P300,000.00). On appeal, the Court of Appeals modified the
decision by reducing the award of moral and exemplary damages. The decision having become final, Eden Tan filed the corresponding
motion for execution and thereafter, the garnished funds which by then were on deposit with the cashier of the Regional Trial Court of
Pasig, Metro Manila, were levied upon.
On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total money judgment in the following
form:
Cashier's Check P262,750.00
Cash 135,733.70

Total P398,483.70
Private respondent, Eden Tan, refused to accept the payment made by the Tibajia spouses and instead insisted that the garnished
funds deposited with the cashier of the Regional Trial Court of Pasig, Metro Manila be withdrawn to satisfy the judgment obligation.
On 15 January 1991, defendant spouses (petitioners) filed a motion to lift the writ of execution on the ground that the judgment debt
had already been paid. On 29 January 1991, the motion was denied by the trial court on the ground that payment in cashier's check is
not payment in legal tender and that payment was made by a third party other than the defendant. A motion for reconsideration was
denied on 8 February 1991. Thereafter, the spouses Tibajia filed a petition for certiorari, prohibition and injunction in the Court of
Appeals. The appellate court dismissed the petition on 24 April 1991 holding that payment by cashier's check is not payment in legal
tender as required by Republic Act No. 529. The motion for reconsideration was denied on 27 May 1991.
In this petition for review, the Tibajia spouses raise the following issues:
I WHETHER OR NOT THE BPI CASHIER'S CHECK NO. 014021 IN THE AMOUNT OF P262,750.00 TENDERED BY PETITIONERS
FOR PAYMENT OF THE JUDGMENT DEBT, IS "LEGAL TENDER".
II WHETHER OR NOT THE PRIVATE RESPONDENT MAY VALIDLY REFUSE THE TENDER OF PAYMENT PARTLY IN CHECK
AND PARTLY IN CASH MADE BY PETITIONERS, THRU AURORA VITO AND COUNSEL, FOR THE SATISFACTION OF THE
MONETARY OBLIGATION OF PETITIONERS-SPOUSES. 1
The only issue to be resolved in this case is whether or not payment by means of check (even by cashier's check) is considered
payment in legal tender as required by the Civil Code, Republic Act No. 529, and the Central Bank Act.
It is contended by the petitioners that the check, which was a cashier's check of the Bank of the Philippine Islands, undoubtedly a
bank of good standing and reputation, and which was a crossed check marked "For Payee's Account Only" and payable to private
respondent Eden Tan, is considered legal tender, payment with which operates to discharge their monetary obligation. 2 Petitioners, to
support their contention, cite the case of New Pacific Timber and Supply Co., Inc. v. Seeris 3 where this Court held through Mr.
Justice Hermogenes Concepcion, Jr. that "It is a well-known and accepted practice in the business sector that a cashier's check is
deemed as cash".
The provisions of law applicable to the case at bar are the following:
a. Article 1249 of the Civil Code which provides:
Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency,
then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.;
b. Section 1 of Republic Act No. 529, as amended, which provides:
Sec. 1. Every provision contained in, or made with respect to, any obligation which purports to give the obligee the right to require
payment in gold or in any particular kind of coin or currency other than Philippine currency or in an amount of money of the
Philippines measured thereby, shall be as it is hereby declared against public policy null and void, and of no effect, and no such

provision shall be contained in, or made with respect to, any obligation thereafter incurred. Every obligation heretofore and hereafter
incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged
upon payment in any coin or currency which at the time of payment is legal tender for public and private debts.
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:
Sec. 63. Legal character Checks representing deposit money do not have legal tender power and their acceptance in the payment of
debts, both public and private, is at the option of the creditor: Provided, however, that a check which has been cleared and credited to
the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his
account.
From the aforequoted provisions of law, it is clear that this petition must fail.
In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals 4 and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate
Appellate Court, 5 this Court held that
A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the obligee or creditor.
The ruling in these two (2) cases merely applies the statutory provisions which lay down the rule that a check is not legal tender and
that a creditor may validly refuse payment by check, whether it be a manager's, cashier's or personal check.
Petitioners erroneously rely on one of the dissenting opinions in the Philippine Airlines case 6 to support their cause. The dissenting
opinion however does not in any way support the contention that a check is legal tender but, on the contrary, states that "If the PAL
checks in question had not been encashed by Sheriff Reyes, there would be no payment by PAL and, consequently, no discharge or
satisfaction of its judgment obligation." 7 Moreover, the circumstances in the Philippine Airlines case are quite different from those in
the case at bar for in that case the checks issued by the judgment debtor were made payable to the sheriff, Emilio Z. Reyes, who
encashed the checks but failed to deliver the proceeds of said encashment to the judgment creditor.
In the more recent case of Fortunado vs. Court of Appeals, 8 this Court stressed that, "We are not, by this decision, sanctioning the use
of a check for the payment of obligations over the objection of the creditor."
WHEREFORE, the petition is DENIED. The appealed decision is hereby AFFIRMED, with costs against the petitioners.
SO ORDERED.
G.R. No. 89252 May 24, 1993
RAUL SESBREO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.
FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of P300,000.00 with the Philippine
Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on
13 March 1981, Philfinance, also on 9 February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors Corporation Promissory Note
("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum;
(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to petitioner, with the notation that
the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February
1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as payee,
Philfinance as drawer, and Insular Bank of Asia and America as drawee, in the total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However, the checks were dishonored for
having been drawn against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas Bank ("Pilipinas"). It
reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
February 9, 1981


VALUE DATE
TO Raul Sesbreo
April 6, 1981

MATURITY DATE
NO. 10805
DENOMINATED CUSTODIAN RECEIPT
This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITES FINANCE CORPORATION, we
have in our custody the following securities to you [sic] the extent herein indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you or your duly authorized representative at any time during regular
banking hours.
Upon your written instructions we shall undertake physical delivery of the above securities fully assigned to you should this
Denominated Custodianship Receipt remain outstanding in your favor thirty (30) days after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature) 1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and handed her a
demand letter informing the bank that his placement with Philfinance in the amount reflected in the DCR No. 10805 had remained
unpaid and outstanding, and that he in effect was asking for the physical delivery of the underlying promissory note. Petitioner then
examined the original of the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980; that it would mature on
6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors
Corporation ("Delta") as "maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not
deliver the Note, nor any certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking private respondent Pilipinas for
physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for
written instructions, as has been supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas and Philfinance.
Philfinance did not provide the appropriate instructions; Pilipinas never released DMC PN No. 2731, nor any other instrument in
respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the partial satisfaction of DMC PN No.
2731, explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of P307,933.33. Delta, however,
denied any liability to petitioner on the promissory note, and explained in turn that it had previously agreed with Philfinance to offset
its DMC PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and exchange commission
("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date apparently remains in the custody of
the SEC. 4
As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for damages with the
Regional Trial Court ("RTC") of Cebu City, Branch 21, against private respondents Delta and Pilipinas. 5 The trial court, in a decision
dated 5 August 1987, dismissed the complaint and counterclaims for lack of merit and for lack of cause of action, with costs against
petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989, the Court of
Appeals denied the appeal and held: 6
Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of plaintiff-appellant, it is
Philfinance. As correctly observed by the trial court:
This act of Philfinance in accepting the investment of plaintiff and charging it against DMC PN No. 2731 when its entire face value was
already obligated or earmarked for set-off or compensation is difficult to comprehend and may have been motivated with bad faith.
Philfinance, therefore, is solely and legally obligated to return the investment of plaintiff, together with its earnings, and to answer all
the damages plaintiff has suffered incident thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of the
defendants in this case at bar; hence, this Court is without jurisdiction to pronounce judgement against it. (p. 11, Decision)

WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed in toto. Cost against plaintiffappellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due course to the
petition and required the parties to file their respective memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent court of Appeals
gravely erred: (i) in concluding that he cannot recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in
failing to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR No.
10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil of corporate entity between Philfinance, and private
respondents Delta and Pilipinas, considering that the three (3) entities belong to the "Silverio Group of Companies" under the
leadership of Mr. Ricardo Silverio, Sr. 8
There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-vis Delta;
secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third relationship that is of critical
importance: the relationship of petitioner and Philfinance. However, since Philfinance has not been impleaded in this case, neither
the trial court nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently, not necessary for
present purposes to deal with this third relationship, except to the extent it necessarily impinges upon or intersects the first and
second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory note (DMC PN
No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this
point:
Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-negotiable" as stamped on its face
(Exhibit "6"), negotiation being defined as the transfer of an instrument from one person to another so as to constitute the transferee
the holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his own
name and cannot demand or receive payment (Section 51, id.) 9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly transferred, in part to him
by assignment and that as a result of such transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of
that Note assigned to him by the payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance as manifested by the word "nonnegotiable" stamp across the face of the Note 10 and because maker Delta and payee Philfinance intended that this Note would be
offset against the outstanding obligation of Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not against its instructions; and
(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner took the Note subject to the
defenses available to Delta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A. 11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from the assignment or
transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument
under the relevant statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the
negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or
transferred. The legal consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course,
different. A non-negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express
prohibition against assignment or transfer written in the face of the instrument:
The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability, but the sole effect was to
exempt the bill from the statutory provisions relative thereto, and a bill, though not negotiable, may be transferred by assignment;
the assignee taking subject to the equities between the original parties. 12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-assignable." It
contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full:
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati,

Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note No. 143-A, dated April 10, 1980, to
mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to
be offsetted [sic] against your PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice President 13
We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance assigning or
transferring all or part of DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of
Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or
transferee of the Note who parted with valuable consideration in good faith and without notice of such prohibition. It is not disputed
that petitioner was such an assignee or transferee. Our conclusion on this point is reinforced by the fact that what Philfinance and
Delta were doing by their exchange of their promissory notes was this: Delta invested, by making a money market placement with
Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that
placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10
April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of
Delta, we note that such consent was not necessary for the validity and enforceability of the assignment in favor of petitioner. 14 Delta's
argument that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which
required its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place is never lightly inferred, 15 must be
clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old
obligations on every point. 16 Nothing of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an entity engaged in
the business of buying and selling debt instruments and other securities, and more generally, in money market transactions. In Perez
v. Court of Appeals, 17 the Court, speaking through Mme. Justice Herrera, made the following important statement:
There is another aspect to this case. What is involved here is a money market transaction. As defined by Lawrence Smith "the money
market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do
not deal directly with each other but through a middle manor a dealer in the open market." It involves "commercial papers" which are
instruments "evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold or transferred or in any manner
conveyed to another person or entity, with or without recourse". The fundamental function of the money market device in its
operation is to match and bring together in a most impersonal manner both the "fund users" and the "fund suppliers." The money
market is an "impersonal market", free from personal considerations. "The market mechanism is intended to provide quick
mobility of money and securities."
The impersonal character of the money market device overlooks the individuals or entities concerned. The issuer of a commercial
paper in the money market necessarily knows in advance that it would be expenditiously transacted and transferred to any
investor/lender without need of notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial
paper of the sale or transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively novel institution in the Philippine commercial scene. It has been
intended to facilitate the flow and acquisition of capital on an impersonal basis. And as specifically required by Presidential Decree
No. 678, the investing public must be given adequate and effective protection in availing of the credit of a borrower in the
commercial paper market. 18 (Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143A. It is important to note that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981,
no compensation had as yet taken place and indeed none could have taken place. The essential requirements of compensation are
listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to
the debtor. (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10
April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that the relevant promissory notes were "to be offsetted
(sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "co-terminal maturity"
date, that is to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented
compensation had taken place between Philfinance and Delta, to the extent of P304,533.33, because upon execution of the
assignment in favor of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each other in their own right
to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in
favor of petitioner was a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion
thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, 19 that is, after the
maturity not only of the money market placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143A. In other words, petitioner notified Delta of his rights as assignee after compensation had taken place by operation of law because
the offsetting instruments had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater
that the rights of the assignor, since the assignee is merely substituted in the place of the assignor 20 and that the assignee acquires his
rights subject to the equities i.e., the defenses which the debtor could have set up against the original assignor before notice of
the assignment was given to the debtor. Article 1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up
against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor
at the time he gave his consent, that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of
debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and
also later ones until he had knowledge of the assignment. (Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his creditor shall be
released from the obligation." In Sison v. Yap-Tico, 21 the Court explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he pay before notice that his debt has
been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a title by transfer to
demand payment of the debt, to give his debt or notice. 22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731 had already
been discharged by compensation. Since the assignor Philfinance could not have then compelled payment anew by Delta of DMC PN
No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to
him.
It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9 February 1981. He could
have notified Delta as soon as his money market placement matured on 13 March 1981 without payment thereof being made by
Philfinance; at that time, compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have notified Delta
on 26 March 1981 when petitioner received from Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805 issued by
private respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of
DMC PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself
notified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private
respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment made by Philfinance to
petitioner.
II.
We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that Pilipinas became
solidarily liable with Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following words:
Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above securities fully assigned to you . 23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay petitioner the
amount of P307,933.33 nor any assumption of liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the

DCR as a confirmation on the part of Pilipinas that:

(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face value, to mature on 6 April 1981 and
payable to the order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February 1981), holding that Note on
behalf and for the benefit of petitioner, at least to the extent it had been assigned to petitioner by payee Philfinance; 24
(3) petitioner may inspect the Note either "personally or by authorized representative", at any time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or a participation therein to
the extent of P307,933.33) "should this Denominated Custodianship receipt remain outstanding in [petitioner's] favor thirty (30) days
after its maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into an obligor under
the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any other time. We note that both in his
complaint and in his testimony before the trial court, petitioner referred merely to the obligation of private respondent Pilipinas to
effect the physical delivery to him of DMC PN No. 2731. 25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary
obligation to pay the amount represented by a portion of the Note assigned to him by Philfinance, appears to be a new theory
constructed only after the trial court had ruled against him. The solidary liability that petitioner seeks to impute Pilipinas cannot,
however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature of the
obligation requires solidarity," The record here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of
Pilipinas. Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor has petitioner argued that the
very nature of the custodianship assumed by private respondent Pilipinas necessarily implies solidary liability under the securities,
custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and private
respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under the terms of the
DCR. To the contrary, we find, after prolonged analysis and deliberation, that private respondent Pilipinas had breached its
undertaking under the DCR to petitioner Sesbreo.
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas as custodian or
depositary bank. The depositor was initially Philfinance; the obligation of the depository was owed, however, to petitioner Sesbreo as
beneficiary of the custodianship or depository agreement. We do not consider that this is a simple case of a stipulation pour autri. The
custodianship or depositary agreement was established as an integral part of the money market transaction entered into by petitioner
with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas
in order that the thing sold would be placed outside the control of the vendor. Indeed, the constituting of the depositary or
custodianship agreement was equivalent to constructive delivery of the Note (to the extent it had been sold or assigned to petitioner)
to petitioner. It will be seen that custodianship agreements are designed to facilitate transactions in the money market by providing a
basis for confidence on the part of the investors or placers that the instruments bought by them are effectively taken out of the pocket,
as it were, of the vendors and placed safely beyond their reach, that those instruments will be there available to the placers of funds
should they have need of them. The depositary in a contract of deposit is obliged to return the security or the thing deposited upon
demand of the depositor (or, in the presented case, of the beneficiary) of the contract, even though a term for such return may have
been established in the said contract. 26 Accordingly, any stipulation in the contract of deposit or custodianship that runs counter to
the fundamental purpose of that agreement or which was not brought to the notice of and accepted by the placer-beneficiary, cannot
be enforced as against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public policy. If there is any party that needs the equalizing
protection of the law in money market transactions, it is the members of the general public whom place their savings in such market
for the purpose of generating interest revenues. 27 The custodian bank, if it is not related either in terms of equity ownership or
management control to the borrower of the funds, or the commercial paper dealer, is normally a preferred or traditional banker of
such borrower or dealer (here, Philfinance). The custodian bank would have every incentive to protect the interest of its client the
borrower or dealer as against the placer of funds. The providers of such funds must be safeguarded from the impact of stipulations
privately made between the borrowers or dealers and the custodian banks, and disclosed to fund-providers only after trouble has
erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when petitioner first
demanded physical delivery thereof on 2 April 1981. We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731
had not yet matured and therefore, compensation or offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of
complying with the demand of the petitioner, Pilipinas purported to require and await the instructions of Philfinance, in obvious
contravention of its undertaking under the DCR to effect physical delivery of the Note upon receipt of "written instructions" from
petitioner Sesbreo. The ostensible term written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30]
days after its maturity") was not a defense against petitioner's demand for physical surrender of the Note on at least three grounds:

firstly, such term was never brought to the attention of petitioner Sesbreo at the time the money market placement with Philfinance
was made; secondly, such term runs counter to the very purpose of the custodianship or depositary agreement as an integral part of a
money market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted above. Indeed, in
principle, petitioner became entitled to demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market
placement matured on 13 March 1981 without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by arising out of its
breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and
unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or
unlawful deprivation inflicted upon petitioner, is of no moment for present purposes. Prima facie, the damages suffered by petitioner
consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the
Note by compensation, plus legal interest of six percent (6%) per annum containing from 14 March 1981.
The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may have vis-a-vis
Philfinance.
III.
The third principal contention of petitioner that Philfinance and private respondents Delta and Pilipinas should be treated as one
corporate entity need not detain us for long.
In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial court nor by the
respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate
entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite the presence of a common Director
Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3) companies. Petitioner has neither alleged nor proved that
one or another of the three (3) concededly related companies used the other two (2) as mere alter egos or that the corporate affairs of
the other two (2) were administered and managed for the benefit of one. There is simply not enough evidence of record to justify
disregarding the separate corporate personalities of delta and Pilipinas and to hold them liable for any assumed or undetermined
liability of Philfinance to petitioner. 28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 march
1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had
dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify
petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six percent (6%) per annum counted
from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as
to costs.
SO ORDERED.

G.R. Nos. L-25836-37 January 31, 1981

THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,
vs.
JOSE M. ARUEGO, defendant-appellant.
FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of First Instance of Manila, Branch XIII,
in Civil Case No. 42066 denying his motion to set aside the order declaring him in default, 1 and from the order of said court in the
same case denying his motion to set aside the judgment rendered after he was declared in default. 2 These two appeals of the
defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R, respectively.
Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file one consolidated record on appeal of
CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4
In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the consolidated appeal to the Supreme
Court on the ground that only questions of law are involved. 5
On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case No. 42066 for the recovery of
the total sum of about P35,000.00 with daily interest thereon from November 17, 1959 until fully paid and commission equivalent to
3/8% for every thirty (30) days or fraction thereof plus attorney's fees equivalent to 10% of the total amount due and costs. 6 The
complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of action referring to twenty-two (22)
transactions entered into by the said Bank and Aruego on different dates covering the period from August 28, 1950 to March 14, 1951.

The sum sought to be recovered represents the cost of the printing of "World Current Events," a periodical published by the
defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every
printing of the "World Current Events," the printer, Encal Press and Photo Engraving, collected the cost of printing by drawing a draft
against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts
advanced to Encal Press and Photo-Engraving, the plaintiff bank also required defendant Aruego to execute a trust receipt in favor of
said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn
over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft. 8
Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On December 14, 1959 defendant filed an
urgent motion for extension of time to plead, and set the hearing on December 16, 1959. 10 At the hearing, the court denied
defendant's motion for extension. Whereupon, the defendant filed a motion to dismiss the complaint on December 17, 1959 on the
ground that the complaint states no cause of action because:
a) When the various bills of exchange were presented to the defendant as drawee for acceptance, the amounts thereof had already
been paid by the plaintiff to the drawer (Encal Press and Photo Engraving), without knowledge or consent of the defendant drawee.
b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an accommodating party only for the
drawer (Encal Press and Photo-Engraving) and win be liable in the event that the accommodating party (drawer) fails to pay its
obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22, 1959, copy of which was received by the defendant on December 24,
1959. 12
On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting upon the motion for reconsideration
filed by the plaintiff, the trial court set aside its order dismissing the complaint and set the case for hearing on March 15, 1960 at 8:00
in the morning. 14 A copy of the order setting aside the order of dismissal was received by the defendant on March 11, 1960 at 5:00
o'clock in the afternoon according to the affidavit of the deputy sheriff of Manila, Mamerto de la Cruz. On the following day, March 12,
1960, the defendant filed a motion to postpone the trial of the case on the ground that there having been no answer as yet, the issues
had not yet been joined. 15 On the same date, the defendant filed his answer to the complaint interposing the following defenses: That
he signed the document upon which the plaintiff sues in his capacity as President of the Philippine Education Foundation; that his
liability is only secondary; and that he believed that he was signing only as an accommodation party. 16
On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the ground that the defendant should
have filed his answer on March 11, 1960. He contends that by filing his answer on March 12, 1960, defendant was one day late. 17 On
March 19, 1960 the trial court declared the defendant in default. 18 The defendant learned of the order declaring him in default on
March 21, 1960. On March 22, 1960 the defendant filed a motion to set aside the order of default alleging that although the order of
the court dated March 7, 1960 was received on March 11, 1960 at 5:00 in the afternoon, it could not have been reasonably expected of
the defendant to file his answer on the last day of the reglementary period, March 11, 1960, within office hours, especially because the
order of the court dated March 7, 1960 was brought to the attention of counsel only in the early hours of March 12, 1960. The
defendant also alleged that he has a good and substantial defense. Attached to the motion are the affidavits of deputy sheriff Mamerto
de la Cruz that he served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and the
affidavit of the defendant Aruego that he has a good and substantial defense. 19 The trial court denied the defendant's motion on
March 25, 1960. 20 On May 6, 1960, the trial court rendered judgment sentencing the defendant to pay to the plaintiff the sum of
P35,444.35 representing the total amount of his obligation to the said plaintiff under the twenty-two (22) causes of action alleged in
the complaint as of November 15, 1957 and the sum of P10,000.00 as attorney's fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying his motion to set aside the order
declaring him in default, an appeal bond in the amount of P60.00, and his record on appeal. The plaintiff filed his opposition to the
approval of defendant's record on appeal on May 13, 1960. The following day, May 14, 1960, the lower court dismissed defendant's
appeal from the order dated March 25, 1960 denying his motion to set aside the order of default. 22 On May 19, 1960, the defendant
filed a motion for reconsideration of the trial court's order dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the
defendant's motion for reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court reconsidered its previous
order dismissing the appeal and approved the defendant's record on appeal. 25 On May 30, 1960, the defendant received a copy of a
notice from the Clerk of Court dated May 26, 1960, informing the defendant that the record on appeal filed ed by the defendant was
forwarded to the Clerk of Court of Appeals. 26
On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in default reiterating the same ground
previously advanced by him in his motion for relief from the order of default. 27 Upon opposition of the plaintiff filed on June 3, 1960,
28
the trial court denied the defendant's motion to set aside the judgment by default in an order of June 11, 1960. 29 On June 20, 1960,
the defendant filed his notice of appeal from the order of the court denying his motion to set aside the judgment by default, his appeal
bond, and his record on appeal. The defendant's record on appeal was approved by the trial court on June 25, 1960. 30 Thus, the
defendant had two appeals with the Court of Appeals: (1) Appeal from the order of the lower court denying his motion to set aside the

order of default docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order denying his motion to set aside the judgment by default
docketed as CA-G.R. NO. 27940-R.
In his brief, the defendant-appellant assigned the following errors:
I
THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE DEFENDANT IN DEFAULT ALTHOUGH AT THE
TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN
APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF ORDER OF DEFAULT AND FROM
JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31
It has been held that to entitle a party to relief from a judgment taken against him through his mistake, inadvertence, surprise or
excusable neglect, he must show to the court that he has a meritorious defense. 32 In other words, in order to set aside the order of
default, the defendant must not only show that his failure to answer was due to fraud, accident, mistake or excusable negligence but
also that he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint together with the summons on December 2, 1960; that on
December 17, 1960, the last day for filing his answer, Aruego filed a motion to dismiss; that on December 22, 1960 the lower court
dismissed the complaint; that on January 23, 1960, the plaintiff filed a motion for reconsideration and on March 7, 1960, acting upon
the motion for reconsideration, the trial court issued an order setting aside the order of dismissal; that a copy of the order was
received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon as shown in the affidavit of the deputy sheriff; and that
on the following day, March 12, 1960, the defendant filed his answer to the complaint.
The failure then of the defendant to file his answer on the last day for pleading is excusable. The order setting aside the dismissal of
the complaint was received at 5:00 o'clock in the afternoon. It was therefore impossible for him to have filed his answer on that same
day because the courts then held office only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately filed his answer
on the following day.
However, while the defendant successfully proved that his failure to answer was due to excusable negligence, he has failed to show
that he has a meritorious defense. The defendant does not have a good and substantial defense.
Defendant Aruego's defenses consist of the following:
a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a representative capacity, as the then President
of the Philippine Education Foundation Company, publisher of "World Current Events and Decision Law Journal," printed by Encal
Press and Photo-Engraving, drawer of the said bills of exchange in favor of the plaintiff bank;
b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or additional party obligor, to add to
the security of said plaintiff bank. The reason for this statement is that unlike real bills of exchange, where payment of the face value is
advanced to the drawer only upon acceptance of the same by the drawee, in the case in question, payment for the supposed bills of
exchange were made before acceptance; so that in effect, although these documents are labelled bills of exchange, legally they are not
bills of exchange but mere instruments evidencing indebtedness of the drawee who received the face value thereof, with the defendant
as only additional security of the same. 33
The first defense of the defendant is that he signed the supposed bills of exchange as an agent of the Philippine Education Foundation
Company where he is president. Section 20 of the Negotiable Instruments Law provides that "Where the instrument contains or a
person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not
liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent or as filing a
representative character, without disclosing his principal, does not exempt him from personal liability."
An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a representative of
the Philippine Education Foundation Company. 34 He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO
For failure to disclose his principal, Aruego is personally liable for the drafts he accepted.
The defendant also contends that he signed the drafts only as an accommodation party and as such, should be made liable only after a
showing that the drawer is incapable of paying. This contention is also without merit.
An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for
the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding
such holder, at the time of the taking of the instrument knew him to be only an accommodation party. 35 In lending his name to the
accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated
party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other
parties thereto because he wants to accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the

Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have signed as an
acceptor/drawee. In doing so, he became primarily and personally liable for the drafts.
The defendant also contends that the drafts signed by him were not really bills of exchange but mere pieces of evidence of
indebtedness because payments were made before acceptance. This is also without merit. Under the Negotiable Instruments Law, a
bill of exchange is an unconditional order in writting addressed by one person to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to
bearer. 36 As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange.
The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved, but not in the
determination of whether a commercial paper is a bill of exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will result in a new trial which will serve
no purpose and will just waste the time of the courts as well as of the parties because the defense is nil or ineffective. 37
WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of Manila denying the petition for relief
from the judgment rendered in said case is hereby affirmed, without pronouncement as to costs.
SO ORDERED.
[G.R. No. 96405. June 26, 1996]
BALDOMERO INCIONG, JR., petitioner, vs. COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS,
respondents.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; DOES NOT SPECIFY THAT THE WRITTEN
AGREEMENT BE A PUBLIC INSTRUMENT.- Clearly, the rule does not specify that the written agreement be a public
document. What is required is that the agreement be in writing as the rule is in fact founded on "long experience that
written evidence is so much more certain and accurate than that which rests in fleeting memory only, that it would be
unsafe, when parties have expressed the terms of their contract in writing, to admit weaker evidence to control and vary the
stronger and to show that the parties intended a different contract from that expressed in the writing signed by them"
[FRANCISCO, THE RULES OF COURT OF THE PHILIPPINES, Vol. VII, Part I, 1990 ed., p. 179] Thus, for the parol
evidence rule to apply, a written contract need not be in any particular form, or be signed by both parties. As a general rule,
bills, notes and other instruments of a similar nature are not subject to be varied or contradicted by parol or extrinsic
evidence.
2. CIVIL LAW; OBLIGATIONS; SOLIDARY OR JOINT AND SEVERAL OBLIGATION, DEFINED.- A solidary or joint and
several obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the
whole obligation. [TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV, 1991 ed., p. 217] Section 4, Chapter 3, Title 1,
Book IV of the Civil Code states the law on joint and several obligations. Under Art. 1207 thereof, when there are two or more
debtors in one and the same obligation, the presumption is that the obligation is joint so that each of the debtors is liable
only for the proportionate part of the debt. There is a solidary liability only when the obligation expressly so states, when the
law so provides or when the nature of the obligation so requires. [Sesbreo v. Court of Appeals, G.R. No. 89252, May 24,
1993, 222 SCRA 466, 481.]
3. ID.; GUARANTY; GUARANTOR AS DISTINGUISHED FROM SOLIDARY DEBTOR.- While a guarantor may bind
himself solidarily with the principal debtor, the liability of a guarantor is different from that of a solidary debtor. Thus,
Tolentino explains: "A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary codebtor, and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of
the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of
the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title 1,
Book IV of the Civil Code." [Tolentino, Civil Code of the Philippines, Vol. V, 1992 ed., p. 502]
APPEARANCES OF COUNSEL
Emilio G. Abrogena for petitioner.
Teogenes X. Velez for private respondent.
DECISION
ROMERO, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals affirming that of the Regional Trial Court of Misamis
Oriental, Branch 18,[if !supportFootnotes][1][endif] which disposed of Civil Case No. 10507 for collection of a sum of money and damages, as
follows:
"WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily liable and ordered to pay to the plaintiff Philippine

Bank of Communications, Cagayan de Oro City, the amount of FIFTY THOUSAND PESOS (P50,000.00),with interest thereon from
May 5, 1983 at 16% per annum until fully paid; and 6% per annum on the total amount due, as liquidated damages or penalty from
May 5, 1983 until fully paid; plus 10% of the total amount due for expenses of litigation and attorney's fees; and to pay the costs.
The counterclaim, as well as the cross claim, are dismissed for lack of merit.
SO ORDERED."
Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he signed with Rene C. Naybe and
Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly and severally liable to private respondent Philippine Bank of
Communications, Cagayan de Oro City branch. The promissory note was due on May 5, 1983.
Said due date expired without the promissors having paid their obligation. Consequently, on November 14, 1983 and on June 8, 1984,
private respondent sent petitioner telegrams demanding payment thereof. [if !supportFootnotes][2][endif] On December 11, 1984 private
respondent also sent by registered mail a final letter of demand to Rene C. Naybe. Since both obligors did not respond to the demands
made, private respondent filed on January 24, 1986 a complaint for collection of the sum of P50,000.00 against the three obligors.
On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case. However, on January 9, 1987,
the lower court reconsidered the dismissal order and required the sheriff to serve the summonses. On January 27, 1987, the lower
court dismissed the case against defendant Pantanosas as prayed for by the private respondent herein. Meanwhile, only the summons
addressed to petitioner was served as the sheriff learned that defendant Naybe had gone to Saudi Arabia.
In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend, Rudy Campos, who told him that he
was a partner of Pio Tio, the branch manager of private respondent in Cagayan de Oro City, in the falcata logs operation business.
Campos also intimated to him that Rene C. Naybe was interested in the business and would contribute a chainsaw to the venture. He
added that, although Naybe had no money to buy the equipment Pio Tio had assured Naybe of the approval of a loan he would make
with private respondent. Campos then persuaded petitioner to act as a "co-maker" in the said loan. Petitioner allegedly acceded but
with the understanding that he would only be a co-maker for the loan of P5,000.00.
Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by Campos at his office. He affixed his
signature thereto but in one copy, he indicated that he bound himself only for the amount of P5,000.00. Thus, it was by trickery,
fraud and misrepresentation that he was made liable for the amount of P50,000.00.
In the aforementioned decision of the lower court, it noted that the typewritten figure "P50,000-" clearly appears directly below the
admitted signature of the petitioner in the promissory note.[if !supportFootnotes][3][endif] Hence, the latter's uncorroborated testimony on his
limited liability cannot prevail over the presumed regularity and fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower
court added that it was "rather odd" for petitioner to have indicated in a copy and not in the original, of the promissory note, his
supposed obligation in the amount of P5,000.00 only. Finally, the lower court held that even granting that said limited amount had
actually been agreed upon, the same would have been merely collateral between him and Naybe and, therefore, not binding upon the
private respondent as creditor-bank.
The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor consultant who was supposed to take
due care of his concerns, and that, on the witness stand, Pio Tio denied having participated in the alleged business venture although
he knew for a fact that the falcata logs operation was encouraged by the bank for its export potential.
Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31, 1990, affirmed that of the lower court.
His motion for reconsideration of the said decision having been denied, he filed the instant petition for review on certiorari.
On February 6,1991, the Court denied the petition for failure of petitioner to comply with the Rules of Court and paragraph 2 of
Circular No. 1-88, and to sufficiently show that respondent court had committed any reversible error in its questioned decision. [if !
supportFootnotes][4][endif]
His motion for the reconsideration of the denial of his petition was likewise denied with finality in the Resolution of
April 24, 1991.[if !supportFootnotes][5][endif] Thereafter, petitioner filed a motion for leave to file a second motion for reconsideration which, in
the Resolution of May 27, 1991, the Court denied. In the same Resolution, the Court ordered the entry of judgment in this case. [if !
supportFootnotes][6][endif]

Unfazed, petitioner filed a motion for leave to file a motion for clarification. In the latter motion, he asserted that he had attached
Registry Receipt No. 3268 to page 14 of the petition in compliance with Circular No. 1-88. Thus, on August 7,1991, the Court granted
his prayer that his petition be given due course and reinstated the same. [if !supportFootnotes][7][endif]
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the decision of the lower court, by
Gregorio Pantanosas, Jr., an MTCC judge and petitioner's co-maker in the promissory note. It supports petitioner's allegation that
they were induced to sign the promissory note on the belief that it was only for P5,000.00, adding that it was Campos who caused the
amount of the loan to be increased to P50,000.00.
The affidavit is clearly intended to buttress petitioner's contention in the instant petition that the Court of Appeals should have
declared the promissory note null and void on the following grounds: (a) the promissory note was signed in the office of Judge
Pantanosas, outside the premises of the bank; (b) the loan was incurred for the purpose of buying a second-hand chainsaw which cost

only P5,000.00; (c) even a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or credit committee
which was the practice, at it exceeded P5,000.00; (e) the loan had no collateral; (f) petitioner and Judge Pantanosas were not present
at the time the loan was released in contravention of the bank practice, and (g) notices of default are sent simultaneously and
separately but no notice was validly sent to him.[if !supportFootnotes][8][endif] Finally, petitioner contends that in signing the promissory note,
his consent was vitiated by fraud as, contrary to their agreement that the loan was only for the amount of P5,000. 00, the promissory
note stated the amount of P50,000.00.
The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this Court is not a trier of facts. Having
lost the chance to fully ventilate his factual claims below, petitioner may no longer be accorded the same opportunity in the absence of
grave abuse of discretion on the part of the court below. Had he presented Judge Pantanosas' affidavit before the lower court, it would
have strengthened his claim that the promissory note did not reflect the correct amount of the loan.
Nor is there merit in petitioner's assertion that since the promissory note "is not a public deed with the formalities prescribed by law
but x x x a mere commercial paper which does not bear the signature of x x x attesting witnesses," parol evidence may "overcome" the
contents of the promissory note.[if !supportFootnotes][9][endif] The first paragraph of the parol evidence rule[if !supportFootnotes][10][endif] states:
"When the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can
be, between the parties and their successors-in-interest, no evidence of such terms other than the contents of the written agreement."
Clearly, the rule does not specify that the written agreement be a public document.
What is required is that agreement be in writing as the rule is in fact founded on "long experience that written evidence is so much
more certain and accurate than that which rests in fleeting memory only, that it would be unsafe, when parties have expressed the
terms of their contract in writing, to admit weaker evidence to control and vary the stronger and to show that the parties intended a
different contract from that expressed in the writing signed by them." [if !supportFootnotes][11][endif] Thus, for the parol evidence rule to apply, a
written contract need not be in any particular form, or be signed by both parties. [if !supportFootnotes][12][endif] As a general rule, bills, notes and
other instruments of a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence. [if !supportFootnotes][13][endif]
By alleging fraud in his answer,[if !supportFootnotes][14][endif] petitioner was actually in the right direction towards proving that he and his comakers agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous agreement was the inducing and moving
cause of the written contract, it may be shown by parol evidence. [if !supportFootnotes][15][endif] However, fraud must be established by clear and
convincing evidence, mere preponderance of evidence, not even being adequate. [if !supportFootnotes][16][endif] Petitioner's attempt to prove
fraud must, therefore, fail as it was evidenced only by his own uncorroborated and, expectedly, self-serving testimony.
Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and against Pantanosas, his co-maker,
constituted a release of his obligation, especially because the dismissal of the case against Pantanosas was upon the motion of private
respondent itself. He cites as basis for his argument, Article 2080 of the Civil Code which provides that:
"The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor, they cannot be
subrogated to the rights, mortgages, and preferences of the latter."
It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as a guarantor. This is patent
even from the first sentence of the promissory note which states as follows:
"Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the PHILIPPINE BANK OF
COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY (P50,000. 00)
Pesos, Philippine Currency, together with interest x x x at the rate of SIXTEEN (16) per cent per annum until fully paid."
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to
demand the whole obligation.[if !supportFootnotes][17][endif] On the other hand, Article 2047 of the Civil Code states:
"By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be
observed, In such a case the contract is called a suretyship." (Italics supplied.)
While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from that of a solidary
debtor. Thus, Tolentino explains:
"A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a
solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor, and a fiador in solidum (surety).
The later, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all
the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than
those bestowed upon him in Section 4, Chapter 3, title I, Book IV of the Civil Code." [if !supportFootnotes][18][endif]
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations. Under Art. 1207 thereof, when
there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint so that each of the
debtors is liable only for a proportionate part of the debt. There is a solidarity liability only when the obligation expressly so states,
when the law so provides or when the nature of the obligation so requires. [if !supportFootnotes][19][endif]

Because the promissory note involved in this case expressly states that the three signatories therein are jointly and severally liable,
any one, some or all of them may be proceeded against for the entire obligation. [if !supportFootnotes][20][endif] The choice is left to the solidary
creditor to determine against whom he will enforce collection. [if !supportFootnotes][21][endif] Consequently, the dismissal of the case against
Judge Pontanosas may not be deemed as having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the
court never acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as provided by law.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned decision of the Court of
Appeals is AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 93073 December 21, 1992

REPUBLIC PLANTERS BANK, petitioner,
vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.
CAMPOS, JR., J.:
This is an appeal by way of a Petition for Review on Certiorari from the decision * of the Court of Appeals in CA G.R. CV No. 07302,
entitled "Republic Planters Bank.Plaintiff-Appellee vs. Pinch Manufacturing Corporation, et al., Defendants, and Fermin Canlas,
Defendant-Appellant", which affirmed the decision ** in Civil Case No. 82-5448 except that it completely absolved Fermin Canlas
from liability under the promissory notes and reduced the award for damages and attorney's fees. The RTC decision, rendered on
June 20, 1985, is quoted hereunder:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff Republic Planters Bank, ordering defendant
Pinch Manufacturing Corporation (formerly Worldwide Garment Manufacturing, Inc.) and defendants Shozo Yamaguchi and Fermin
Canlas to pay, jointly and severally, the plaintiff bank the following sums with interest thereon at 16% per annum from the dates
indicated, to wit:
Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interest from January 29, 1981 until fully paid; under
promissory note (Exhibit "B"), the sum of P40,000.00 with interest from November 27, 1980; under the promissory note (Exhibit
"C"), the sum of P166,466.00 which interest from January 29, 1981; under the promissory note (Exhibit "E"), the sum of P86,130.31
with interest from January 29, 1981; under the promissory note (Exhibit "G"), the sum of P12,703.70 with interest from November 27,
1980; under the promissory note (Exhibit "H"), the sum of P281,875.91 with interest from January 29, 1981; and under the
promissory note (Exhibit "I"), the sum of P200,000.00 with interest from January 29, 1981.
Under the promissory note (Exhibit "D") defendants Pinch Manufacturing Corporation (formerly named Worldwide Garment
Manufacturing, Inc.), and Shozo Yamaguchi are ordered to pay jointly and severally, the plaintiff bank the sum of P367,000.00 with
interest of 16% per annum from January 29, 1980 until fully paid
Under the promissory note (Exhibit "F") defendant corporation Pinch (formerly Worldwide) is ordered to pay the plaintiff bank the
sum of P140,000.00 with interest at 16% per annum from November 27, 1980 until fully paid.
Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff the sum of P231,120.81 with interest at 12% per annum
from July 1, 1981, until fully paid and the sum of P331,870.97 with interest from March 28, 1981, until fully paid.
All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum of P100,000.00 as and for reasonable attorney's
fee and the further sum equivalent to 3% per annum of the respective principal sums from the dates above stated as penalty charge
until fully paid, plus one percent (1%) of the principal sums as service charge.
With costs against the defendants.
SO ORDERED. 1
From the above decision only defendant Fermin Canlas appealed to the then Intermediate Court (now the Court Appeals). His
contention was that inasmuch as he signed the promissory notes in his capacity as officer of the defunct Worldwide Garment
Manufacturing, Inc, he should not be held personally liable for such authorized corporate acts that he performed. It is now the
contention of the petitioner Republic Planters Bank that having unconditionally signed the nine (9) promissory notes with Shozo
Yamaguchi, jointly and severally, defendant Fermin Canlas is solidarity liable with Shozo Yamaguchi on each of the nine notes.
We find merit in this appeal.
From the records, these facts are established: Defendant Shozo Yamaguchi and private respondent Fermin Canlas were
President/Chief Operating Officer and Treasurer respectively, of Worldwide Garment Manufacturing, Inc.. By virtue of Board
Resolution No.1 dated August 1, 1979, defendant Shozo Yamaguchi and private respondent Fermin Canlas were authorized to apply
for credit facilities with the petitioner Republic Planters Bank in the forms of export advances and letters of credit/trust receipts

accommodations. Petitioner bank issued nine promissory notes, marked as Exhibits A to I inclusive, each of which were uniformly
worded in the following manner:
___________, after date, for value received, I/we, jointly and severaIly promise to pay to the ORDER of the REPUBLIC PLANTERS
BANK, at its office in Manila, Philippines, the sum of ___________ PESOS(....) Philippine Currency...
On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi and Fermin Canlas above their
printed names with the phrase "and (in) his personal capacity" typewritten below. At the bottom of the promissory notes appeared:
"Please credit proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
These entries were separated from the text of the notes with a bold line which ran horizontally across the pages.
In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment Manufacturing, Inc. was apparently rubber
stamped above the signatures of defendant and private respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporate name to Pinch Manufacturing
Corporation.
On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of money covered among others, by the nine
promissory notes with interest thereon, plus attorney's fees and penalty charges. The complainant was originally brought against
Worldwide Garment Manufacturing, Inc. inter alia, but it was later amended to drop Worldwide Manufacturing, Inc. as defendant
and substitute Pinch Manufacturing Corporation it its place. Defendants Pinch Manufacturing Corporation and Shozo Yamaguchi did
not file an Amended Answer and failed to appear at the scheduled pre-trial conference despite due notice. Only private respondent
Fermin Canlas filed an Amended Answer wherein he, denied having issued the promissory notes in question since according to him,
he was not an officer of Pinch Manufacturing Corporation, but instead of Worldwide Garment Manufacturing, Inc., and that when he
issued said promissory notes in behalf of Worldwide Garment Manufacturing, Inc., the same were in blank, the typewritten entries
not appearing therein prior to the time he affixed his signature.
In the mind of this Court, the only issue material to the resolution of this appeal is whether private respondent Fermin Canlas is
solidarily liable with the other defendants, namely Pinch Manufacturing Corporation and Shozo Yamaguchi, on the nine promissory
notes.
We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes bearing his signature for the
following reasons:
The promissory motes are negotiable instruments and must be governed by the Negotiable Instruments Law. 2
Under the Negotiable lnstruments Law, persons who write their names on the face of promissory notes are makers and are liable as
such. 3 By signing the notes, the maker promises to pay to the order of the payee or any holder 4 according to the tenor thereof. 5 Based
on the above provisions of law, there is no denying that private respondent Fermin Canlas is one of the co-makers of the promissory
notes. As such, he cannot escape liability arising therefrom.
Where an instrument containing the words "I promise to pay" is signed by two or more persons, they are deemed to be jointly and
severally liable thereon. 6 An instrument which begins" with "I" ,We" , or "Either of us" promise to, pay, when signed by two or more
persons, makes them solidarily liable. 7 The fact that the singular pronoun is used indicates that the promise is individual as to each
other; meaning that each of the co-signers is deemed to have made an independent singular promise to pay the notes in full.
In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and certain, without reason for ambiguity,
by the presence of the phrase "joint and several" as describing the unconditional promise to pay to the order of Republic Planters
Bank. A joint and several note is one in which the makers bind themselves both jointly and individually to the payee so that all may be
sued together for its enforcement, or the creditor may select one or more as the object of the suit. 8 A joint and several obligation in
common law corresponds to a civil law solidary obligation; that is, one of several debtors bound in such wise that each is liable for the
entire amount, and not merely for his proportionate share. 9 By making a joint and several promise to pay to the order of Republic
Planters Bank, private respondent Fermin Canlas assumed the solidary liability of a debtor and the payee may choose to enforce the
notes against him alone or jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.
As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures of the makers in the notes will
affect the liability of the makers, We do not find it necessary to resolve and decide, because it is immaterial and will not affect to the
liability of private respondent Fermin Canlas as a joint and several debtor of the notes. With or without the presence of said phrase,
private respondent Fermin Canlas is primarily liable as a co-maker of each of the notes and his liability is that of a solidary debtor.
Finally, the respondent Court made a grave error in holding that an amendment in a corporation's Articles of Incorporation effecting a
change of corporate name, in this case from Worldwide Garment manufacturing Inc to Pinch Manufacturing Corporation
extinguished the personality of the original corporation.
The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is

the same corporation with a different name, and its character is in no respect changed. 10
A change in the corporate name does not make a new corporation, and whether effected by special act or under a general law, has no
affect on the identity of the corporation, or on its property, rights, or liabilities. 11
The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had previously contracted or
incurred. 12
As a general rule, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into
by officers of the corporation, if duly authorized. Inasmuch as such officers acted in their capacity as agent of the old corporation and
the change of name meant only the continuation of the old juridical entity, the corporation bearing the same name is still bound by
the acts of its agents if authorized by the Board. Under the Negotiable Instruments Law, the liability of a person signing as an agent is
specifically provided for as follows:
Sec. 20. Liability of a person signing as agent and so forth. Where the instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal , or in a representative capacity, he is not liable on the instrument if he was duly
authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his
principal, does not exempt him from personal liability.
Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is acting in a representative capacity
or the name of the third party for whom he might have acted as agent, the agent is personally liable to take holder of the instrument
and cannot be permitted to prove that he was merely acting as agent of another and parol or extrinsic evidence is not admissible to
avoid the agent's personal liability. 13
On the private respondent's contention that the promissory notes were delivered to him in blank for his signature, we rule otherwise.
A careful examination of the notes in question shows that they are the stereotype printed form of promissory notes generally used by
commercial banking institutions to be signed by their clients in obtaining loans. Such printed notes are incomplete because there are
blank spaces to be filled up on material particulars such as payee's name, amount of the loan, rate of interest, date of issue and the
maturity date. The terms and conditions of the loan are printed on the note for the borrower-debtor 's perusal. An incomplete
instrument which has been delivered to the borrower for his signature is governed by Section 14 of the Negotiable Instruments Law
which provides, in so far as relevant to this case, thus:
Sec. 14. Blanks: when may be filled. Where the instrument is wanting in any material particular, the person in possesion thereof
has a prima facie authority to complete it by filling up the blanks therein. ... In order, however, that any such instrument when
completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time...
Proof that the notes were signed in blank was only the self-serving testimony of private respondent Fermin Canlas, as determined by
the trial court, so that the trial court ''doubts the defendant (Canlas) signed in blank the promissory notes". We chose to believe the
bank's testimony that the notes were filled up before they were given to private respondent Fermin Canlas and defendant Shozo
Yamaguchi for their signatures as joint and several promissors. For signing the notes above their typewritten names, they bound
themselves as unconditional makers. We take judicial notice of the customary procedure of commercial banks of requiring their
clientele to sign promissory notes prepared by the banks in printed form with blank spaces already filled up as per agreed terms of the
loan, leaving the borrowers-debtors to do nothing but read the terms and conditions therein printed and to sign as makers or comakers. When the notes were given to private respondent Fermin Canlas for his signature, the notes were complete in the sense that
the spaces for the material particular had been filled up by the bank as per agreement. The notes were not incomplete instruments;
neither were they given to private respondent Fermin Canlas in blank as he claims. Thus, Section 14 of the NegotiabIe Instruments
Law is not applicable.
The ruling in case of Reformina vs. Tomol relied upon by the appellate court in reducing the interest rate on the promissory notes
from 16% to 12% per annum does not squarely apply to the instant petition. In the abovecited case, the rate of 12% was applied to
forebearances of money, goods or credit and court judgemets thereon, only in the absence of any stipulation between the parties.
In the case at bar however , it was found by the trial court that the rate of interest is 9% per annum, which interest rate the plaintiff
may at any time without notice, raise within the limits allowed law. And so, as of February 16, 1984 , the plaintiff had fixed the interest
at 16% per annum.
This Court has held that the rates under the Usury Law, as amended by Presidential Decree No. 116, are applicable only to interests by
way of compensation for the use or forebearance of money. Article 2209 of the Civil Code, on the other hand, governs interests by way
of damages. 15 This fine distinction was not taken into consideration by the appellate court, which instead made a general statement
that the interest rate be at 12% per annum.
Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling prescribed by the Usury Law, the
appellate court erred in limiting the interest rates at 12% per annum. Central Bank Circular No. 905, Series of 1982 removed the
Usury Law ceiling on interest rates. 16
In the 1ight of the foregoing analysis and under the plain language of the statute and jurisprudence on the matter, the decision of the

respondent: Court of Appeals absolving private respondent Fermin Canlas is REVERSED and SET ASIDE. Judgement is hereby
rendered declaring private respondent Fermin Canlas jointly and severally liable on all the nine promissory notes with the following
sums and at 16% interest per annum from the dates indicated, to wit:
Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest from January 29, 1981 until fully paid; under
promissory note marked as Exhibit B, the sum of P40,000.00 with interest from November 27, 1980: under the promissory note
denominated as Exhibit C, the amount of P166,466.00 with interest from January 29, 1981; under the promissory note denominated
as Exhibit D, the amount of P367,000.00 with interest from January 29, 1981 until fully paid; under the promissory note marked as
Exhibit E, the amount of P86,130.31 with interest from January 29, 1981; under the promissory note marked as Exhibit F, the sum of
P140,000.00 with interest from November 27, 1980 until fully paid; under the promissory note marked as Exhibit G, the amount of
P12,703.70 with interest from November 27, 1980; the promissory note marked as Exhibit H, the sum of P281,875.91 with interest
from January 29, 1981; and the promissory note marked as Exhibit I, the sum of P200,000.00 with interest on January 29, 1981.
The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide Garment Manufacturing, Inc.) and Shozo
Yamaguchi, for not having appealed from the decision of the trial court, shall be adjudged in accordance with the judgment rendered
by the Court a quo.
With respect to attorney's fees, and penalty and service charges, the private respondent Fermin Canlas is hereby held jointly and
solidarity liable with defendants for the amounts found, by the Court a quo. With costs against private respondent.
SO ORDERED.

G.R. No. L-49494 May 31, 1979

NELIA G. PONCE and VICENTE C. PONCE, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, and JESUSA B. AFABLE, respondents.
Romeo L. Mendoza & Gallardo S. Tongohan for petitioners.
Ramon M. Velayo for private respondent.
MELENCIO-HERRERA, J.:
This is a Petition for Certiorari seeking to set aside the Resolution of the Court of Appeals, dated June 8, 1978, reconsidering its
Decision dated December 17, 1977 and reversing the judgment of the Court of First Instance of Manila in favor of petitioners as well as
the Resolutions, dated July 6, 1978 and November 27, 1978, denying petitioners' Motion for Reconsideration.
The factual background of the case is as follows:
On June 3, 1969, private respondent Jesusa B. Afable, together with Felisa L. Mendoza and Ma. Aurora C. Dio executed a promissory
note in favor of petitioner Nelia G. Ponce in the sum of P814,868.42, Philippine Currency, payable, without interest, on or before July
31, 1969. It was further provided therein that should the indebtedness be not paid at maturity, it shall draw interest at 12% per
annum, without demand; that should it be necessary to bring suit to enforce pay ment of the note, the debtors shall pay a sum
equivalent to 10% of the total amount due for attorney's fees; and, in the event of failure to pay the indebtedness plus interest in
accordance with its terms, the debtors shall execute a first mortgage in favor of the creditor over their properties or of the Carmen
Planas Memorial, Inc.
Upon the failure of the debtors to comply with the terms of the promissory note, petitioners (Nelia G. Ponce and her husband) filed,
on July 27, 1970, a Complaint against them with the Court of First Instance of Manila for the recovery of the principal sum of
P814,868.42, plus interest and damages.
Defendant Ma. Aurora C. Dio's Answer consisted more of a general denial and the contention that she did not borrow any amount
from plaintiffs and that her signature on the promissory note was obtained by plaintiffs on their assurance that the same was for "
formality only."
Defendant Jesusa B. Afable, for her part, asserted in her Answer that the promissory note failed to express the true intent and
agreement of the parties, the true agreement being that the obligation therein mentioned would be assumed and paid entirely by
defendant Felisa L. Mendoza; that she had signed said document only as President of the Carmen Planas Memorial, Inc., and that she
was not to incur any personal obligation as to the payment thereof because the same would be repaid by defendant Mendoza and/or
Carmen Planas Memorial, Inc.
In her Amended Answer, defendant Felisa L. Mendoza admitted the authenticity and due execution of the promissory note, but
averred that it was a recapitulation of a series of transactions between her and the plaintiffs, "with defendant Ma. Aurora C. Dio and
Jesusa B. Afable coming only as accomodation parties." As affirmative defense, defendant Mendoza contended that the promissory
note was the result of usurious transactions, and, as counterclaim, she prayed that plaintiffs be ordered to account for all the interests

paid.
Plaintiffs filed their Answer to defendant Mendoza's counterclaim denying under oath the allegations of usury.
After petitioners had rested, the case was deemed submitted for decision since respondent Afable and her co-debtors had repeatedly
failed to appear before the trial Court for the presentation of their evidence.
On March 9, 1972, the trial Court rendered judgment ordering respondent Afable and her co-debtors, Felisa L. Mendoza and Ma.
Aurora C. Dio , to pay petitioners, jointly and severally, the sum of P814,868.42, plus 12% interest per annum from July 31, 1969
until full payment, and a sum equivalent to 10% of the total amount due as attorney's fees and costs.
From said Decision, by respondent Afable appealed to the Court of Appeals. She argued that the contract under consideration
involved the payment of US dollars and was, therefore, illegal; and that under the in pari delicto rule, since both parties are guilty of
violating the law, neither one can recover. It is to be noted that said defense was not raised in her Answer.
On December 13, 1977, the Court of Appeals* rendered judgment affirming the decision of the trial Court. In a Resolution dated
February 27, 1978, the Court of Appeals,** denied respondent's Motion for Reconsideration. However, in a Resolution dated June 8,
1978, the Court of Appeals acting on the Second Motion for Reconsideration filed by private respondent, set aside the Decision of
December 13, 1977, reversed the judgment of the trial Court and dismissed the Complaint. The Court of Appeals opined that the intent
of the parties was that the promissory note was payable in US dollars, and, therefore, the transaction was illegal with neither party
entitled to recover under the in pari delicto rule.
Their Motions for Reconsideration having been denied in the Resolutions dated July 6, 1978 and November 27, 1978, petitioners filed
the instant Petition raising the following Assignments of Error.
I
THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT THE PROMISSORY NOTE EVIDENCING THE
TRANSACTION OF THE PARTIES IS PAYABLE IN U.S. DOLLARS THEREBY DETERMINING THE INTENT OF THE PARTIES
OUTSIDE OF THEIR PROMISSORY NOTE DESPITE LACK OF SHOWING THAT IT FAILED TO EXPRESS THE TRUE INTENT OR
AGREEMENT OF THE PARTIES AND ITS PAYABILITY IN PHILIPPINE PESOS WHICH IS EXPRESSED, AMONG OTHERS, BY
ITS CLEAR AND PRECISE TERMS.
II
THE RESPONDENT COURT, OF APPEALS ERRED IN HOLDING THAT REPUBLIC ACT 529, OTHERWISE KNOWN ASIAN ACT
TO ASSURE UNIFORM VALUE TO PHILIPPINE COINS AND CURRENCY,' COVERS THE TRANSACTION OF THE PARTIES
HEREIN.
III
THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING THAT PRIVATE RESPONDENT JESUSA B. AFABLE COULD
NOT FAVORABLY AVAIL HERSELF OF THE DEFENSE OF ALLEGED APPLICABILITY OF REPUBLIC ACT 529 AND THE
DOCTRINE OF IN PARI DELICTO AS THESE WERE NOT PLEADED NOR ADOPTED BY HER IN THE TRIAL.
IV
THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING ASSUMING ARGUENDO THAT REPUBLIC ACT 529
COVERS THE PARTIES TRANSACTION, THAT THE Doctrine OF IN PARI DELICTO DOES NOT APPLY AND THE PARTIES
AGREEMENT WAS NOT NULL AND VOID PURSUANT TO THE RULING IN OCTAVIO A. KALALO VS. ALFREDO J. LUZ, NO.27782, JULY 31, 1970.
In the Resolution dated June 8, 1978, the Court of Appeals made the following observations:
We are convinced from the evidence that the amount awarded by the lower Court was indeed owed by the defendants to the plaintiffs.
However, the sole issue raised in this second motion for reconconsideration is not the existence of the obligation itself but the legality
of the subject matter of the contract. If the subject matter is illegal and against public policy, the doctrine of pari delicto applies.
xxx xxx xxx
We are constrained to reverse our December 13, 1977 decision. While it is true that the promissory note does not mention any
obligation to pay in dollars, plaintiff-appellee Ponce himself admitted that there was an agreement that he would be paid in dollars by
the defendants. The promissory note is payable in U.S. donors. The in. tent of the parties prevails over the bare words of the written
contracts.
xxx xxx xxx
The agreement is null and void and of no effect under Republic Act No. 529. Under the doctrine of pari delicto, no recovery can be
made in favor of the plaintiffs for being themselves guilty of violating the law. 1
We are constrained to disagree.
Reproduced hereunder is Section 1 of Republic Act No. 529, which was enacted on June 16, 1950:
Section 1. Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the
Philippines which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or
currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared

against public policy, and null voice and of no effect and no such provision shall be contained in, or made with respect to, any
obligation hereafter incurred. The above prohibition shall not apply to (a) transactions were the funds involved are the proceeds of
loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies
and instrumentalities, and international financial and banking institutions so long as the funds are Identifiable, as having emanated
from the sources enumerated above; (b) transactions affecting high priority economic projects for agricultural industrial and power
development as may be determined by the National Economic Council which are financed by or through foreign funds; (c) forward
exchange transactions entered into between banks or between banks and individuals or juridical persons; (d) import-export and other
international banking financial investment and industrial transactions. With the exception of the cases enumerated in items (a) (b),
(c) and (d) in the foregoing provision, in, which cases the terms of the parties' agreement shag apply, every other domestic obligation
heretofore or hereafter incurred whether or not any such provision as to payment is contained therein or made with- respect
thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and
private debts: Provided, That if the obligation was incurred prior to the enactment of this Act and required payment in a particular
kind of coin or currency other than Philippine currency, it shall be discharge in Philippine currency measured at the prevailing rates of
exchange at the time the obligation was incurred, except in case of a loan made in foreign currency stipulated to be payable in the
currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail All coin and currency,
including Central Bank notes, heretofore and hereafter issued and d by the Government of the Philippines shall be legal tender for all
debts, public and private. (As amended by RA 4100, Section 1, approved June 19, 1964) (Empahsis supplied).
It is to be noted that while an agreement to pay in dollars is declared as null and void and of no effect, what the law specifically
prohibits is payment in currency other than legal tender. It does not defeat a creditor's claim for payment, as it specifically provides
that "every other domestic obligation ... whether or not any such provision as to payment is contained therein or made with respect
thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private
debts." A contrary rule would allow a person to profit or enrich himself inequitably at another's expense.
As the Court of Appeals itself found, the promissory note in question provided on its face for payment of the obligation in Philippine
currency, i.e., P814,868.42. So that, while the agreement between the parties originally involved a dollar transaction and that
petitioners expected to be paid in the amount of US$194,016.29, petitioners are not now insisting on their agreement with respondent
Afable for the payment of the obligation in dollars. On the contrary, they are suing on the basis of the promissory note whereby the
parties have already agreed to convert the dollar loan into Philippine currency at the rate of P4.20 to $1.00. 2 It may likewise be
pointed out that the Promissory Note contains no provision "giving the obligee the right to require payment in a particular kind of
currency other than Philippine currency, " which is what is specifically prohibited by RA No. 529.
At any rate, even if we were to disregard the promissory note providing for the payment of the obligation in Philippine currency and
consider that the intention of the parties was really to provide for payment of the obligation would be made in dollars, petitioners can
still recover the amount of US$194,016.29, which respondent Afable and her co-debtors do not deny having received, in its peso
equivalent. As held in Eastboard Navigation, Ltd. vs. Juan Ysmael & Co. Inc., 102 Phil. 1 (1957), and Arrieta vs. National Rice &
Corn Corp., 3 if there is any agreement to pay an obligation in a currency other than Philippine legal tender, the same is nun and void
as contrary to public policy, pursuant to Republic Act No. 529, and the most that could be demanded is to pay said obligation in
Philippine currency. In other words, what is prohibited by RA No. 529 is the payment of an obligation in dollars, meaning that a
creditor cannot oblige the debtor to pay him in dollars, even if the loan were given in said currency. In such a case, the indemnity to be
allowed should be expressed in Philippine currency on the basis of the current rate of exchange at the time of payment. 4
The foregoing premises considered, we deem it unnecessary to discuss the other errors assigned by petitioners.
WHEREFORE, the Resolutions of the Court of Appeals dated June 8, 1978, July 6, 1978 and November 27, 1978 are hereby set aside,
and judgment is hereby rendered reinstating the Decision of the Court of First Instance of Manila.
No pronouncement as to costs.
SO ORDERED.
G.R. No. L-27782 July 31, 1970
OCTAVIO A. KALALO, plaintiff-appellee,
vs.
ALFREDO J. LUZ, defendant-appellant.
Amelia K. del Rosario for plaintiff-appellee.
Pelaez, Jalandoni & Jamir for defendant-appellant.
ZALDIVAR, J.:
Appeal from the decision, dated, February 10, 1967, of the Court of First Instance of Rizal (Branch V, Quezon City) in its Civil Case No.

Q-6561.
On November 17, 1959, plaintiff-appellee Octavio A. Kalalo hereinafter referred to as appellee), a licensed civil engineer doing
business under the firm name of O. A. Kalalo and Associates, entered into an agreement (Exhibit A ) 1 with defendant-appellant
Alfredo J . Luz (hereinafter referred to as appellant), a licensed architect, doing business under firm name of A. J. Luz and Associates,
whereby the former was to render engineering design services to the latter for fees, as stipulated in the agreement. The services
included design computation and sketches, contract drawing and technical specifications of all engineering phases of the project
designed by O. A. Kalalo and Associates bill of quantities and cost estimate, and consultation and advice during construction relative
to the work. The fees agreed upon were percentages of the architect's fee, to wit: structural engineering, 12-%; electrical
engineering, 2-%. The agreement was subsequently supplemented by a "clarification to letter-proposal" which provided, among
other things, that "the schedule of engineering fees in this agreement does not cover the following: ... D. Foundation soil exploration,
testing and evaluation; E. Projects that are principally engineering works such as industrial plants, ..." and "O. A. Kalalo and
Associates reserve the right to increase fees on projects ,which cost less than P100,000 ...." 2 Pursuant to said agreement, appellee
rendered engineering services to appellant in the following projects:
(a) Fil-American Life Insurance Building at Legaspi City;
(b) Fil-American Life Insurance Building at Iloilo City;
(c) General Milling Corporation Flour Mill at Opon Cebu;
(d) Menzi Building at Ayala Blvd., Makati, Rizal;
(e) International Rice Research Institute, Research center Los Baos, Laguna;
(f) Aurelia's Building at Mabini, Ermita, Manila;
(g) Far East Bank's Office at Fil-American Life Insurance Building at Isaac Peral Ermita, Manila;
(h) Arthur Young's residence at Forbes Park, Makati, Rizal;
(i) L & S Building at Dewey Blvd., Manila; and
(j) Stanvac Refinery Service Building at Limay, Bataan.
On December 1 1, '1961, appellee sent to appellant a statement of account (Exhibit "1"), 3 to which was attached an itemized statement
of defendant-appellant's account (Exh. "1-A"), according to which the total engineering fee asked by appellee for services rendered
amounted to P116,565.00 from which sum was to be deducted the previous payments made in the amount of P57,000.00, thus
leaving a balance due in the amount of P59,565.00.
On May 18, 1962 appellant sent appellee a resume of fees due to the latter. Said fees, according to appellant. amounted to P10,861.08
instead of the amount claimed by the appellee. On June 14, 1962 appellant sent appellee a check for said amount, which appellee
refused to accept as full payment of the balance of the fees due him.
On August 10, 1962, appellee filed a complaint against appellant, containing four causes of action. In the first cause of action, appellee
alleged that for services rendered in connection with the different projects therein mentioned there was due him fees in sum s
consisting of $28,000 (U.S.) and P100,204.46, excluding interests, of which sums only P69,323.21 had been paid, thus leaving unpaid
the $28,000.00 and the balance of P30,881.25. In the second cause of action, appellee claimed P17,000.00 as consequential and
moral damages; in the third cause of action claimed P55,000.00 as moral damages, attorney's fees and expenses of litigation; and in
the fourth cause of action he claimed P25,000.00 as actual damages, and also for attorney's fees and expenses of litigation.
In his answer, appellant admitted that appellee rendered engineering services, as alleged in the first cause of action, but averred that
some of appellee's services were not in accordance with the agreement and appellee's claims were not justified by the services actually
rendered, and that the aggregate amount actually due to appellee was only P80,336.29, of which P69,475.21 had already been paid,
thus leaving a balance of only P10,861.08. Appellant denied liability for any damage claimed by appellee to have suffered, as alleged in
the second, third and fourth causes of action. Appellant also set up affirmative and special defenses, alleging that appellee had no
cause of action, that appellee was in estoppel because of certain acts, representations, admissions and/or silence, which led appellant
to believe certain facts to exist and to act upon said facts, that appellee's claim regarding the Menzi project was premature because
appellant had not yet been paid for said project, and that appellee's services were not complete or were performed in violation of the
agreement and/or otherwise unsatisfactory. Appellant also set up a counterclaim for actual and moral damages for such amount as
the court may deem fair to assess, and for attorney's fees of P10,000.00.
Inasmuch as the pleadings showed that the appellee's right to certain fees for services rendered was not denied, the only question
being the assessment of the proper fees and the balance due to appellee after deducting the admitted payments made by appellant, the
trial court, upon agreement of the parties, authorized the case to be heard before a Commissioner. The Commissioner rendered a
report which, in resume, states that the amount due to appellee was $28,000.00 (U.S.) as his fee in the International Research
Institute Project which was twenty percent (20%) of the $140,000.00 that was paid to appellant, and P51,539.91 for the other
projects, less the sum of P69,475.46 which was already paid by the appellant. The Commissioner also recommended the payment to
appellee of the sum of P5,000.00 as attorney's fees.
At the hearing on the Report of the Commissioner, the respective counsel of the parties manifested to the court that they had no

objection to the findings of fact of the Commissioner contained in the Report, and they agreed that the said Report posed only two
legal issues, namely: (1) whether under the facts stated in the Report, the doctrine of estoppel would apply; and (2) whether the
recommendation in the Report that the payment of the amount. due to the plaintiff in dollars was legally permissible, and if not, at
what rate of exchange it should be paid in pesos. After the parties had submitted their respective memorandum on said issues, the
trial court rendered its decision dated February 10, 1967, the dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered in favor of plaintiff and against the defendant, by ordering the defendant to pay plaintiff the
sum of P51,539.91 and $28,000.00, the latter to be converted into the Philippine currency on the basis of the current rate of exchange
at the time of the payment of this judgment, as certified to by the Central Bank of the Philippines, from which shall be deducted the
sum of P69,475.46, which the defendant had paid the plaintiff, and the legal rate of interest thereon from the filing of the complaint in
the case until fully paid for; by ordering the defendant to pay to plaintiff the further sum of P8,000.00 by way of attorney's fees which
the Court finds to be reasonable in the premises, with costs against the defendant. The counterclaim of the defendant is ordered
dismissed.
From the decision, this appeal was brought, directly to this Court, raising only questions of law.
During the pendency of this appeal, appellee filed a petition for the issuance of a writ of attachment under Section 1 (f) of Rule 57 of
the Rules of Court upon the ground that appellant is presently residing in Canada as a permanent resident thereof. On June 3, 1969,
this Court resolved, upon appellee's posting a bond of P10,000.00, to issue the writ of attachment, and ordered the Provincial Sheriff
of Rizal to attach the estate, real and personal, of appellant Alfredo J. Luz within the province, to the value of not less than
P140,000.00.
The appellant made the following assignments of errors:
I. The lower court erred in not declaring and holding that plaintiff-appellee's letter dated December 11, 1961 (Exhibit "1") and the
statement of account (Exhibit "1-A") therein enclosed, had the effect, cumulatively or alternatively, of placing plaintiff-appellee in
estoppel from thereafter modifying the representations made in said exhibits, or of making plaintiff-appellee otherwise bound by said
representations, or of being of decisive weight in determining the true intent of the parties as to the nature and extent of the
engineering services rendered and/or the amount of fees due.
II. The lower court erred in declaring and holding that the balance owing from defendant-appellant to plaintiff-appellee on the IRRI
Project should be paid on the basis of the rate of exchange of the U.S. dollar to the Philippine peso at the time of payment of judgment.
.
III. The lower court erred in not declaring and holding that the aggregate amount of the balance due from defendant-appellant to
plaintiff-appellee is only P15,792.05.
IV. The lower court erred in awarding attorney's fees in the sum of P8,000.00, despite the commissioner's finding, which plaintiffappellee has accepted and has not questioned, that said fee be only P5,000.00; and
V. The lower court erred in not granting defendant-appellant relief on his counter-claim.
1. In support of his first assignment of error appellant argues that in Exhibit 1-A, which is a statement of accounts dated December 11,
1961, sent by appellee to appellant, appellee specified the various projects for which he claimed engineering fees, the precise amount
due on each particular engineering service rendered on each of the various projects, and the total of his claims; that such a statement
barred appellee from asserting any claim contrary to what was stated therein, or from taking any position different from what he
asserted therein with respect to the nature of the engineering services rendered; and consequently the trial court could not award fees
in excess of what was stated in said statement of accounts. Appellant argues that for estoppel to apply it is not necessary, contrary to
the ruling of the trial court, that the appellant should have actually relied on the representation, but that it is sufficient that the
representations were intended to make the defendant act there on; that assuming arguendo that Exhibit 1-A did not put appellee in
estoppel, the said Exhibit 1-A nevertheless constituted a formal admission that would be binding on appellee under the law on
evidence, and would not only belie any inconsistent claim but also would discredit any evidence adduced by appellee in support of any
claim inconsistent with what appears therein; that, moreover, Exhibit 1-A, being a statement of account, establishes prima facie the
accuracy and correctness of the items stated therein and its correctness can no longer be impeached except for fraud or mistake; that
Exhibit 1-A furthermore, constitutes appellee's own interpretation of the contract between him and appellant, and hence, is conclusive
against him.
On the other hand, appellee admits that Exhibit 1-A itemized the services rendered by him in the various construction projects of
appellant and that the total engineering fees charged therein was P116,565.00, but maintains that he was not in estoppel: first,
because when he prepared Exhibit 1-A he was laboring under an innocent mistake, as found by the trial court; second, because
appellant was not ignorant of the services actually rendered by appellee and the fees due to the latter under the original agreement,
Exhibit "A."
We find merit in the stand of appellee.
The statement of accounts (Exh. 1-A) could not estop appellee, because appellant did not rely thereon as found by the Commissioner,
from whose Report we read:

While it is true that plaintiff vacillated in his claim, yet, defendant did not in anyway rely or believe in the different claims asserted by
the plaintiff and instead insisted on a claim that plaintiff was only entitled to P10,861.08 as per a separate resume of fees he sent to
the plaintiff on May 18, 1962 (See Exhibit 6). 4
The foregoing finding of the Commissioner, not disputed by appellant, was adopted by the trial court in its decision. Under article
1431 of the Civil Code, in order that estoppel may apply the person, to whom representations have been made and who claims the
estoppel in his favor must have relied or acted on such representations. Said article provides:
Art. 1431. Through 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.
An essential element of estoppel is that the person invoking it has been influenced and has relied on the representations or conduct of
the person sought to be estopped, and this element is wanting in the instant case. In Cristobal vs. Gomez, 5 this Court held that no
estoppel based on a document can be invoked by one who has not been mislead by the false statements contained therein. And in
Republic of the Philippines vs. Garcia, et al., 6 this Court ruled that there is no estoppel when the statement or action invoked as its
basis did not mislead the adverse party-Estoppel has been characterized as harsh or odious and not favored in law. 7 When misapplied,
estoppel becomes a most effective weapon to accomplish an injustice, inasmuch as it shuts a man's mouth from speaking the truth and
debars the truth in a particular case. 8 Estoppel cannot be sustained by mere argument or doubtful inference: it must be clearly proved
in all its essential elements by clear, convincing and satisfactory evidence. 9 No party should be precluded from making out his case
according to its truth unless by force of some positive principle of law, and, consequently, estoppel in pains must be applied strictly
and should not be enforced unless substantiated in every particular. 1 0
The essential elements of estoppel in pais may be considered in relation to the party sought to be estopped, and in relation to the party
invoking the estoppel in his favor. As related to the party to be estopped, the essential elements are: (1) conduct amounting to false
representation or concealment of material facts or at least calculated to convey the impression that the facts are otherwise than, and
inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least expectation that his conduct shall be
acted upon by, or at least influence, the other party; and (3) knowledge, actual or constructive, of the real facts. As related to the party
claiming the estoppel, the essential elements are (1) lack of knowledge and of the means of knowledge of the truth as the facts in
questions; (2) (reliance, in good faith, upon the conduct or statements of the party to be estopped; (3) action or inaction based thereon
of such character as To change the position or status of the party claiming the estoppel, to his injury, detriment or prejudice. 1 1
The first essential element in relation to the party sought to be estopped does not obtain in the instant case, for, as appears in the
Report of the Commissioner, appellee testified "that when he wrote Exhibit 1 and prepared Exhibit 1-A, he had not yet consulted the
services of his counsel and it was only upon advice of counsel that the terms of the contract were interpreted to him resulting in his
subsequent letters to the defendant demanding payments of his fees pursuant to the contract Exhibit A." 1 2 This finding of the
Commissioner was adopted by the trial court. 1 3 It is established , therefore, that Exhibit 1-A was written by appellee through
ignorance or mistake. Anent this matter, it has been held that if an act, conduct or misrepresentation of the party sought to be
estopped is due to ignorance founded on innocent mistake, estoppel will not arise. 1 4 Regarding the essential elements of estoppel in
relation to the party claiming the estoppel, the first element does not obtain in the instant case, for it cannot be said that appellant did
not know, or at least did not have the means of knowing, the services rendered to him by appellee and the fees due thereon as
provided in Exhibit A. The second element is also wanting, for, as adverted to, appellant did not rely on Exhibit 1-A but consistently
denied the accounts stated therein. Neither does the third element obtain, for appellant did not act on the basis of the representations
in Exhibit 1-A, and there was no change in his position, to his own injury or prejudice.
Appellant, however, insists that if Exhibit 1-A did not put appellee in estoppel, it at least constituted an admission binding upon the
latter. In this connection, it cannot be gainsaid that Exhibit 1-A is not a judicial admission. Statements which are not estoppels nor
judicial admissions have no quality of conclusiveness, and an opponent. whose admissions have been offered against him may offer
any evidence which serves as an explanation for his former assertion of what he now denies as a fact. This may involve the showing of
a mistake. Accordingly, in Oas vs. Roa, 1 6 it was held that when a party to a suit has made an admission of any fact pertinent to the
issue involved, the admission can be received against him; but such an admission is not conclusive against him, and he is entitled to
present evidence to overcome the effect of the admission. Appellee did explain, and the trial court concluded, that Exhibit 1-A was
based on either his ignorance or innocent mistake and he, therefore, is not bound by it.
Appellant further contends that Exhibit 1-A being a statement of account, establishes prima facie the accuracy and correctness of the
items stated therein. If prima facie, as contended by appellant, then it is not absolutely conclusive upon the parties. An account stated
may be impeached for fraud, mistake or error. In American Decisions, Vol. 62, p. 95, cited as authority by appellant himself. we read
thus:
An account stated or settled is a mere admission that the account is correct. It is not an estoppel. The account is still open to
impeachment for mistakes or errors. Its effect is to establish, prima facie, the accuracy of the items without other proof; and the party
seeking to impeach it is bound to show affirmatively the mistake or error alleged. The force of the admission and the strength of the
evidence necessary to overcome it will depend upon the circumstances of the case.

In the instant case, it is Our view that the ignorance mistake that attended the writing of Exhibit 1-A by appellee was sufficient to
overcome the prima facie evidence of correctness and accuracy of said Exhibit 1-A.
Appellant also urges that Exhibit 1-A constitutes appellee's own interpretation of the contract, and is, therefore, conclusive against
him. Although the practical construction of the contract by one party, evidenced by his words or acts, can be used against him in
behalf of the other party, 1 7 yet, if one of the parties carelessly makes a wrong interpretation of the words of his contract, or performs
more than the contract requires (as reasonably interpreted independently of his performance), as happened in the instant case, he
should be entitled to a restitutionary remedy, instead of being bound to continue to his erroneous interpretation or his erroneous
performance and "the other party should not be permitted to profit by such mistake unless he can establish an estoppel by proving a
material change of position made in good faith. The rule as to practical construction does not nullify the equitable rules with respect to
performance by mistake." 1 8 In the instant case, it has been shown that Exhibit 1-A was written through mistake by appellee and that
the latter is not estopped by it. Hence, even if said Exhibit 1-A be considered as practical construction of the contract by appellee, he
cannot be bound by such erroneous interpretation. It has been held that if by mistake the parties followed a practice in violation of the
terms of the agreement, the court should not perpetuate the error. 1 9
2. In support of the second assignment of error, that the lower court erred in holding that the balance from appellant on the IRRI
project should be paid on the basis of the rate of exchange of the U.S. dollar to the Philippine peso at the time of payment of the
judgment, appellant contends: first, that the official rate at the time appellant received his architect's fees for the IRRI project, and
correspondingly his obligation to appellee's fee on August 25, 1961, was P2.00 to $1.00, and cites in support thereof Section 1612 of
the Revised Administrative Code, Section 48 of Republic Act 265 and Section 6 of Commonwealth Act No. 699; second, that the lower
court's conclusion that the rate of exchange to be applied in the conversion of the $28,000.00 is the current rate of exchange at the
time the judgment shall be satisfied was based solely on a mere presumption of the trial court that the defendant did not convert,
there being no showing to that effect, the dollars into Philippine currency at the official rate, when the legal presumption should be
that the dollars were converted at the official rate of $1.00 to P2.00 because on August 25, 1961, when the IRRI project became due
and payable, foreign exchange controls were in full force and effect, and partial decontrol was effected only afterwards, during the
Macapagal administration; third, that the other ground advanced by the lower court for its ruling, to wit, that appellant committed a
breach of his obligation to turn over to the appellee the engineering fees received in U.S. dollars for the IRRI project, cannot be
upheld, because there was no such breach, as proven by the fact that appellee never claimed in Exhibit 1-A that he should be paid in
dollars; and there was no provision in the basic contract (Exh. "A") that he should be paid in dollars; and, finally, even if there were
such provision, it would have no binding effect under the provision of Republic Act 529; that, moreover, it cannot really be said that
no payment was made on that account for appellant had already paid P57,000.00 to appellee, and under Article 125 of the Civil Code,
said payment could be said to have been applied to the fees due from the IRRI project, this project being the biggest and this debt
being the most onerous.
In refutation of appellant's argument in support of the second assignment of error, appellee argues that notwithstanding Republic Act
529, appellant can be compelled to pay the appellee in dollars in view of the fact that appellant received his fees in dollars, and
appellee's fee is 20% of appellant's fees; and that if said amount is be converted into Philippine Currency, the rate of exchange should
be that at the time of the execution of the judgment. 2 0
We have taken note of the fact that on August 25, 1961, the date when appellant said his obligation to pay appellee's fees became due,
there was two rates of exchange, to wit: the preferred rate of P2.00 to $1.00, and the free market rate. It was so provided in Circular
No. 121 of the Central Bank of the Philippines, dated March 2, 1961. amending an earlier Circular No. 117, and in force until January
21, 1962 when it was amended by Circular No. 133, thus:
1. All foreign exchange receipts shall be surrendered to the Central Bank of those authorized to deal in foreign exchange as follows:
Percentage of Total to be surrendered at
Preferred: Free Market Rate: Rate:
(a) Export Proceeds, U.S. Government Expenditures invisibles other than those specifically mentioned
below. ................................................ 25 75
(b) Foreign Investments, Gold Proceeds, Tourists and Inward Remittances of Veterans and Filipino Citizens; and Personal Expenses
of Diplomatic Per personnel ................................. 100" 2 1
The amount of $140,000.00 received by appellant foil the International Rice Research Institute project is not within the scope of subparagraph (a) of paragraph No. 1 of Circular No. 121. Appellant has not shown that 25% of said amount had to be surrendered to the
Central Bank at the preferred rate because it was either export proceeds, or U.S. Government expenditures, or invisibles not included
in sub-paragraph (b). Hence, it cannot be said that the trial court erred in presuming that appellant converted said amount at the free
market rate. It is hard to believe that a person possessing dollars would exchange his dollars at the preferred rate of P2.00 to $1.00,
when he is not obligated to do so, rather than at the free market rate which is much higher. A person is presumed to take ordinary care
of his concerns, and that the ordinary course of business has been
followed. 2 2

Under the agreement, Exhibit A, appellee was entitled to 20% of $140,000.00, or the amount of $28,000.00. Appellee, however,
cannot oblige the appellant to pay him in dollars, even if appellant himself had received his fee for the IRRI project in dollars. This
payment in dollars is prohibited by Republic Act 529 which was enacted on June 16, 1950. Said act provides as follows:
SECTION 1. Every provision contained in, or made with respect to, any obligation which provision purports to give the obligee the
right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of
the Philippines measured thereby, be as it is hereby declared against public policy, and null, void and of no effect, and no such
provision shall be contained in, or made with respect to, any obligation hereafter incurred. Every obligation heretofore or here after
incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged
upon payment in any coin or currency which at the time of payment is legal tender for public and private debts: Provided, That, ( a) if
the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than
Philippine currency, it shall be discharged in Philippine currency measured at the prevailing rate of exchange at the time the
obligation was incurred, (b) except in case of a loan made in a foreign currency stipulated to be payable in the same currency in which
case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coin and currency, including Central
Bank notes, heretofore or hereafter issued and declared by the Government of the Philippines shall be legal tender for all debts, public
and private.
Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior to the enactment of the Act and require
payment in a particular kind of coin or currency other than the Philippine currency the same shall be discharged in Philippine
currency measured at the prevailing rate of exchange at the time the obligation was incurred. As We have adverted to, Republic Act
529 was enacted on June 16, 1950. In the case now before Us the obligation of appellant to pay appellee the 20% of $140,000.00, or
the sum of $28,000.00, accrued on August 25, 1961, or after the enactment of Republic Act 529. It follows that the provision of
Republic Act 529 which requires payment at the prevailing rate of exchange when the obligation was incurred cannot be applied.
Republic Act 529 does not provide for the rate of exchange for the payment of obligation incurred after the enactment of said Act. The
logical Conclusion, therefore, is that the rate of exchange should be that prevailing at the time of payment. This view finds support in
the ruling of this Court in the case of Engel vs. Velasco & Co. 2 3 where this Court held that even if the obligation assumed by the
defendant was to pay the plaintiff a sum of money expressed in American currency, the indemnity to be allowed should be expressed
in Philippine currency at the rate of exchange at the time of judgment rather than at the rate of exchange prevailing on the date of
defendant's breach. This is also the ruling of American court as follows:
The value in domestic money of a payment made in foreign money is fixed with respect to the rate of exchange at the time of payment.
(70 CJS p. 228)
According to the weight of authority the amount of recovery depends upon the current rate of exchange, and not the par value of the
particular money involved. (48 C.J. 605-606)
The value in domestic money of a payment made in foreign money is fixed in reference to the rate of exchange at the time of such
payment. (48 C.J. 605)
It is Our considered view, therefore, that appellant should pay the appellee the equivalent in pesos of the $28,000.00 at the free
market rate of exchange at the time of payment. And so the trial court did not err when it held that herein appellant should pay
appellee $28,000.00 "to be converted into the Philippine currency on the basis of the current rate of exchange at the time of payment
of this judgment, as certified to by the Central Bank of the Philippines, ...." 2 4
Appellant also contends that the P57,000.00 that he had paid to appellee should have been applied to the due to the latter on the IRRI
project because such debt was the most onerous to appellant. This contention is untenable. The Commissioner who was authorized by
the trial court to receive evidence in this case, however, reports that the appellee had not been paid for the account of the $28,000.00
which represents the fees of appellee equivalent to 20% of the $140,000.00 that the appellant received as fee for the IRRI project.
This is a finding of fact by the Commissioner which was adopted by the trial court. The parties in this case have agreed that they do
not question the finding of fact of the Commissioner. Thus, in the decision appealed from the lower court says:
At the hearing on the Report of the Commissioner on February 15, 1966, the counsels for both parties manifested to the court that
they have no objection to the findings of facts of the Commissioner in his report; and agreed that the said report only poses two
(2)legal issues, namely: (1) whether under the facts stated in the Report, the doctrine of estoppel will apply; and (2) whether the
recommendation in the Report that the payment of amount due to the plaintiff in dollars is permissible under the law, and, if not, at
what rate of exchange should it be paid in pesos (Philippine currency) .... 2 5
In the Commissioner's report, it is spetifically recommended that the appellant be ordered to pay the plaintiff the sum of "$28,000.
00 or its equivalent as the fee of the plaintiff under Exhibit A on the IRRI project." It is clear from this report of the Commissioner
that no payment for the account of this $28,000.00 had been made. Indeed, it is not shown in the record that the peso equivalent of
the $28,000.00 had been fixed or agreed upon by the parties at the different times when the appellant had made partial payments to
the appellee.
3. In his third assignment of error, appellant contends that the lower court erred in not declaring that the aggregate amount due from

him to appellee is only P15,792.05. Appellant questions the propriety or correctness of most of the items of fees that were found by the
Commissioner to be due to appellee for services rendered. We believe that it is too late for the appellant to question the propriety or
correctness of those items in the present appeal. The record shows that after the Commissioner had submitted his report the lower
court, on February 15, 1966, issued the following order:
When this case was called for hearing today on the report of the Commissioner, the counsels of the parties manifested that they have
no objection to the findings of facts in the report. However, the report poses only legal issues, namely: (1) whether under the facts
stated in the report, the doctrine of estoppel will apply; and (2) whether the recommendation in the report that the alleged payment of
the defendant be made in dollars is permissible by law and, if not, in what rate it should be paid in pesos (Philippine Currency). For
the purpose of resolving these issues the parties prayed that they be allowed to file their respective memoranda which will aid the
court in the determination of said issues. 2 6
In consonance with the afore-quoted order of the trial court, the appellant submitted his memorandum which opens with the
following statements:
As previously manifested, this Memorandum shall be confined to:
(a) the finding in the Commissioner's Report that defendant's defense of estoppel will not lie (pp. 17-18, Report); and
(b) the recommendation in the Commissioner's Report that defendant be ordered to pay plaintiff the sum of '$28,000.00 (U.S.) or its
equivalent as the fee of the plaintiff under Exhibit 'A' in the IRRI project.'
More specifically this Memorandum proposes to demonstrate the affirmative of three legal issues posed, namely:
First: Whether or not plaintiff's letter dated December 11, 1961 (Exhibit 'I') and/or Statement of Account (Exhibit '1-A') therein
enclosed has the effect of placing plaintiff in estoppel from thereafter modifying the representations made in said letter and
Statement of Account or of making plaintiff otherwise bound thereby; or of being decisive or great weight in determining the true
intent of the parties as to the amount of the engineering fees owing from defendant to plaintiff;
Second: Whether or not defendant can be compelled to pay whatever balance is owing to plaintiff on the IRRI (International Rice and
Research Institute) project in United States dollars; and
Third: Whether or not in case the ruling of this Honorable Court be that defendant cannot be compelled to pay plaintiff in United
States dollars, the dollar-to-peso convertion rate for determining the peso equivalent of whatever balance is owing to plaintiff in
connection with the IRRI project should be the 2 to 1 official rate and not any other rate. 2 7
It is clear, therefore, that what was submitted by appellant to the lower court for resolution did not include the question of correctness
or propriety of the amounts due to appellee in connection with the different projects for which the appellee had rendered engineering
services. Only legal questions, as above enumerated, were submitted to the trial court for resolution. So much so, that the lower court
in another portion of its decision said, as follows:
The objections to the Commissioner's Report embodied in defendant's memorandum of objections, dated March 18, 1966, cannot
likewise be entertained by the Court because at the hearing of the Commissioner's Report the parties had expressly manifested that
they had no objection to the findings of facts embodied therein.
We, therefore hold that the third assignment of error of the appellant has no merit.
4. In his fourth assignment of error, appellant questions the award by the lower court of P8,000.00 for attorney's fees. Appellant
argues that the Commissioner, in his report, fixed the sum of P5,000.00 as "just and reasonable" attorney's fees, to which amount
appellee did not interpose any objection, and by not so objecting he is bound by said finding; and that, moreover, the lower court gave
no reason in its decision for increasing the amount to P8,000.00.
Appellee contends that while the parties had not objected to the findings of the Commissioner, the assessment of attorney's fees is
always subject to the court's appraisal, and in increasing the recommended fees from P5,000.00 to P8,000.00 the trial court must
have taken into consideration certain circumstances which warrant the award of P8,000.00 for attorney's fees.
We believe that the trial court committed no error in this connection. Section 12 of Rule 33 of the Rules of Court, on which the fourth
assignment of error is presumably based, provides that when the parties stipulate that a commissioner's findings of fact shall be final,
only questions of law arising from the facts mentioned in the report shall thereafter be considered. Consequently, an agreement by the
parties to abide by the findings of fact of the commissioner is equivalent to an agreement of facts binding upon them which the court
cannot disregard. The question, therefore, is whether or not the estimate of the reasonable fees stated in the report of the
Commissioner is a finding of fact.
The report of the Commissioner on this matter reads as follows:
As regards attorney's fees, under the provisions of Art 2208, par (11), the same may be awarded, and considering the number of
hearings held in this case, the nature of the case (taking into account the technical nature of the case and the voluminous exhibits
offered in evidence), as well as the way the case was handled by counsel, it is believed, subject to the Court's appraisal of the matter,
that the sum of P5,000.00 is just and reasonable as attorney's fees." 2 8
It is thus seen that the estimate made by the Commissioner was an expression of belief, or an opinion. An opinion is different from a
fact. The generally recognized distinction between a statement of "fact" and an expression of "opinion" is that whatever is susceptible

of exact knowledge is a matter of fact, while that not susceptible of exact knowledge is generally regarded as an expression of opinion.
2
9 It has also been said that the word "fact," as employed in the legal sense includes "those conclusions reached by the trior from
shifting testimony, weighing evidence, and passing on the credit of the witnesses, and it does not denote those inferences drawn by the
trial court from the facts ascertained and settled by it. 3 0 In the case at bar, the estimate made by the Commissioner of the attorney's
fees was an inference from the facts ascertained by him, and is, therefore, not a finding of facts. The trial court was, consequently, not
bound by that estimate, in spite of the manifestation of the parties that they had no objection to the findings of facts of the
Commissioner in his report. Moreover, under Section 11 of Rule 33 of the Rules of Court, the court may adopt, modify, or reject the
report of the commissioner, in whole or in part, and hence, it was within the trial court's authority to increase the recommended
attorney's fees of P5,000.00 to P8,000.00. It is a settled rule that the amount of attorney's fees is addressed to the sound discretion of
the court. 3 1
It is true, as appellant contends, that the trial court did not state in the decision the reasons for increasing the attorney's fees. The trial
court, however, had adopted the report of the Commissioner, and in adopting the report the trial court is deemed to have adopted the
reasons given by the Commissioner in awarding attorney's fees, as stated in the above-quoted portion of the report. Based on the
reasons stated in the report, the trial court must have considered that the reasonable attorney's fees should be P8,000.00.
Considering that the judgment against the appellant would amount to more than P100,000.00, We believe that the award of
P8,000.00 for attorney's fees is reasonable.
5. In his fifth assignment of error appellant urges that he is entitled to relief on his counterclaim. In view of what We have stated in
connection with the preceding four assignments of error, We do not consider it necessary to dwell any further on this assignment of
error.
WHEREFORE, the decision appealed from is affirmed, with costs against the defendant-appellant. It is so ordered.
G.R. No. 74917 January 20, 1988
BANCO DE ORO SAVINGS AND MORTGAGE BANK, petitioner,
vs.
EQUITABLE BANKING CORPORATION, PHILIPPINE CLEARING HOUSE CORPORATION, AND REGIONAL TRIAL
COURT OF QUEZON CITY, BRANCH XCII (92), respondents.
GANCAYCO, J.:
This is a petition for review on certiorari of a decision of the Regional Trial Court of Quezon City promulgated on March 24, 1986 in
Civil Case No. Q-46517 entitled Banco de Oro Savings and Mortgage Bank versus Equitable Banking Corporation and the Philippine
Clearing House Corporation after a review of the Decision of the Board of Directors of the Philippine Clearing House Corporation
(PCHC) in the case of Equitable Banking Corporation (EBC) vs. Banco de Oro Savings and Mortgage (BCO), ARBICOM Case No.
84033.
The undisputed facts are as follows:
It appears that some time in March, April, May and August 1983, plaintiff through its Visa Card Department, drew six crossed
Manager's check (Exhibits "A" to "F", and herein referred to as Checks) having an aggregate amount of Forty Five Thousand Nine
Hundred and Eighty Two & 23/100 (P45,982.23) Pesos and payable to certain member establishments of Visa Card. Subsequently,
the Checks were deposited with the defendant to the credit of its depositor, a certain Aida Trencio.
Following normal procedures, and after stamping at the back of the Checks the usual endorsements. All prior and/or lack of
endorsement guaranteed the defendant sent the checks for clearing through the Philippine Clearing House Corporation (PCHC).
Accordingly, plaintiff paid the Checks; its clearing account was debited for the value of the Checks and defendant's clearing account
was credited for the same amount,
Thereafter, plaintiff discovered that the endorsements appearing at the back of the Checks and purporting to be that of the payees
were forged and/or unauthorized or otherwise belong to persons other than the payees.
Pursuant to the PCHC Clearing Rules and Regulations, plaintiff presented the Checks directly to the defendant for the purpose of
claiming reimbursement from the latter. However, defendant refused to accept such direct presentation and to reimburse the plaintiff
for the value of the Checks; hence, this case.
In its Complaint, plaintiff prays for judgment to require the defendant to pay the plaintiff the sum of P45,982.23 with interest at the
rate of 12% per annum from the date of the complaint plus attorney's fees in the amount of P10,000.00 as well as the cost of the suit.
In accordance with Section 38 of the Clearing House Rules and Regulations, the dispute was presented for Arbitration; and Atty.
Ceasar Querubin was designated as the Arbitrator.
After an exhaustive investigation and hearing the Arbiter rendered a decision in favor of the plaintiff and against the defendant
ordering the PCHC to debit the clearing account of the defendant, and to credit the clearing account of the plaintiff of the amount of

P45,982.23 with interest at the rate of 12% per annum from date of the complaint and Attorney's fee in the amount of P5,000.00. No
pronouncement as to cost was made. 1
In a motion for reconsideration filed by the petitioner, the Board of Directors of the PCHC affirmed the decision of the said Arbiter in
this wise:
In view of all the foregoing, the decision of the Arbiter is confirmed; and the Philippine Clearing House Corporation is hereby ordered
to debit the clearing account of the defendant and credit the clearing account of plaintiff the amount of Forty Five Thousand Nine
Hundred Eighty Two & 23/100 (P45,982.23) Pesos with interest at the rate of 12% per annum from date of the complaint, and the
Attorney's fee in the amount of Five Thousand (P5,000.00) Pesos.
Thus, a petition for review was filed with the Regional Trial Court of Quezon City, Branch XCII, wherein in due course a decision was
rendered affirming in toto the decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
1. Did the PCHC have any jurisdiction to give due course to and adjudicate Arbicom Case No. 84033?
2. Were the subject checks non-negotiable and if not, does it fall under the ambit of the power of the PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding controversies of this nature by the PCHC?
4. What law should govern in resolving controversies of this nature?
5. Was the petitioner bank negligent and thus responsible for any undue payment?
Petitioner maintains that the PCHC is not clothed with jurisdiction because the Clearing House Rules and Regulations of PCHC cover
and apply only to checks that are genuinely negotiable. Emphasis is laid on the primary purpose of the PCHC in the Articles of
Incorporation, which states:
To provide, maintain and render an effective, convenient, efficient, economical and relevant exchange and facilitate service limited to
check processing and sorting by way of assisting member banks, entities in clearing checks and other clearing items as defined in
existing and in future Central Bank of the Philippines circulars, memoranda, circular letters, rules and regulations and policies in
pursuance to the provisions of Section 107 of R.A. 265. ...
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks in the Central Bank, in accordance with the provisions of Section 1000 shall serve as a
basis for the clearing of checks, and the settlement of interbank balances ...
Petitioner argues that by law and common sense, the term check should be interpreted as one that fits the articles of incorporation of
the PCHC, the Central Bank and the Clearing House Rules stating that it is a negotiable instrument citing the definition of a "check" as
basically a "bill of exchange" under Section 185 of the NIL and that it should be payable to "order" or to "bearer" under Section 126 of
game law. Petitioner alleges that with the cancellation of the printed words "or bearer from the face of the check, it becomes nonnegotiable so the PCHC has no jurisdiction over the case.
The Regional Trial Court took exception to this stand and conclusion put forth by the herein petitioner as it held:
Petitioner's theory cannot be maintained. As will be noted, the PCHC makes no distinction as to the character or nature of the checks
subject of its jurisdiction. The pertinent provisions quoted in petitioners memorandum simply refer to check(s). Where the law does
not distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813 R, Feb. 5, 1962) the Appellate Court categorically stated that there are four
kinds of checks in this jurisdiction; the regular check; the cashier's check; the traveller's check; and the crossed check. The Court,
further elucidated, that while the Negotiable Instruments Law does not contain any provision on crossed checks, it is coon practice in
commercial and banking operations to issue checks of this character, obviously in accordance with Article 541 of the Code of
Commerce. Attention is likewise called to Section 185 of the Negotiable Instruments Law:
Sec. 185. Check defined. A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the
provisions of this act applicable to a bill of exchange payable on demand apply to a check
and the provisions of Section 61 (supra) that the drawer may insert in the instrument an express stipulation negating or limiting his
own liability to the holder. Consequently, it appears that the use of the term "check" in the Articles of Incorporation of PCHC is to be
perceived as not limited to negotiable checks only, but to checks as is generally known in use in commercial or business transactions.
Anent Petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC Board of Directors that:
In presenting the Checks for clearing and for payment, the defendant made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the back of the checks are the defendant's clear warranty; ALL PRIOR ENDORSEMENTS AND/OR
LACK OF ENDORSEMENTS GUARANTEED. With. out such warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of the falsity of its representation.
The principle of estoppel, effectively prevents the defendant from denying liability for any damage sustained by the plaintiff which,

relying upon an action or declaration of the defendant, paid on the Checks. The same principle of estoppel effectively prevents the
defendant from denying the existence of the Checks. (Pp. 1011 Decision; pp. 4344, Rollo)
We agree.
As provided in the aforecited articles of incorporation of PCHC its operation extend to "clearing checks and other clearing items." No
doubt transactions on non-negotiable checks are within the ambit of its jurisdiction.
In a previous case, this Court had occasion to rule: "Ubi lex non distinguish nec nos distinguere debemos." 2 It was enunciated in Loc
Cham v. Ocampo, 77 Phil. 636 (1946):
The rule, founded on logic is a corollary of the principle that general words and phrases in a statute should ordinarily be accorded
their natural and general significance. In other words, there should be no distinction in the application of a statute where none is
indicated.
There should be no distinction in the application of a statute where none is indicated for courts are not authorized to distinguish
where the law makes no distinction. They should instead administer the law not as they think it ought to be but as they find it and
without regard to consequences. 3
The term check as used in the said Articles of Incorporation of PCHC can only connote checks in general use in commercial and
business activities. It cannot be conceived to be limited to negotiable checks only.
Checks are used between banks and bankers and their customers, and are designed to facilitate banking operations. It is of the essence
to be payable on demand, because the contract between the banker and the customer is that the money is needed on demand. 4
The participation of the two banks, petitioner and private respondent, in the clearing operations of PCHC is a manifestation of their
submission to its jurisdiction. Sec. 3 and 36.6 of the PCHC-CHRR clearing rules and regulations provide:
SEC. 3. AGREEMENT TO THESE RULES. It is the general agreement and understanding that any participant in the Philippine
Clearing House Corporation, MICR clearing operations by the mere fact of their participation, thereby manifests its agreement to
these Rules and Regulations and its subsequent amendments."
Sec 36.6. (ARBITRATION) The fact that a bank participates in the clearing operations of the PCHC shall be deemed its written and
subscribed consent to the binding effect of this arbitration agreement as if it had done so in accordance with section 4 of the Republic
Act No. 876, otherwise known as the Arbitration Law.
Further Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the arbitration of one or more arbitrators any controversy existing between them at the
time of the submission and which may be the subject of an action, or the parties of any contract may in such contract agree to settle by
arbitration a controversy thereafter arising between them. Such submission or contract shall be valid and irrevocable, save upon
grounds as exist at law for the revocation of any contract.
Such submission or contract may include question arising out of valuations, appraisals or other controversies which may be collateral,
incidental, precedent or subsequent to any issue between the parties. ...
Sec. 21 of the same rules, says:
Items which have been the subject of material alteration or items bearing forged endorsement when such endorsement is necessary
for negotiation shall be returned by direct presentation or demand to the Presenting Bank and not through the regular clearing
house facilities within the period prescribed by law for the filing of a legal action by the returning bank/branch, institution or entity
sending the same. (Emphasis supplied)
Viewing these provisions the conclusion is clear that the PCHC Rules and Regulations should not be interpreted to be applicable only
to checks which are negotiable instruments but also to non-negotiable instruments and that the PCHC has jurisdiction over this case
even as the checks subject of this litigation are admittedly non-negotiable.
Moreover, petitioner is estopped from raising the defense of non-negotiability of the checks in question. It stamped its guarantee on
the back of the checks and subsequently presented these checks for clearing and it was on the basis of these endorsements by the
petitioner that the proceeds were credited in its clearing account.
The petitioner by its own acts and representation can not now deny liability because it assumed the liabilities of an endorser by
stamping its guarantee at the back of the checks.
The petitioner having stamped its guarantee of "all prior endorsements and/or lack of endorsements" (Exh. A-2 to F-2) is now
estopped from claiming that the checks under consideration are not negotiable instruments. The checks were accepted for deposit by
the petitioner stamping thereon its guarantee, in order that it can clear the said checks with the respondent bank. By such deliberate
and positive attitude of the petitioner it has for all legal intents and purposes treated the said cheeks as negotiable instruments and
accordingly assumed the warranty of the endorser when it stamped its guarantee of prior endorsements at the back of the checks. It
led the said respondent to believe that it was acting as endorser of the checks and on the strength of this guarantee said respondent
cleared the checks in question and credited the account of the petitioner. Petitioner is now barred from taking an opposite posture by
claiming that the disputed checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs. Court of Appeals 5 a point relevant to the issue when it stated the doctrine of

estoppel is based upon the grounds of public policy, fair dealing, good faith and justice and its purpose is to forbid one to speak
against his own act, representations or commitments to the injury of one to whom they were directed and who reasonably relied
thereon.
A commercial bank cannot escape the liability of an endorser of a check and which may turn out to be a forged endorsement.
Whenever any bank treats the signature at the back of the checks as endorsements and thus logically guarantees the same as such
there can be no doubt said bank has considered the checks as negotiable.
Apropos the matter of forgery in endorsements, this Court has succinctly emphasized that the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain
the genuineness of the endorsements. This is laid down in the case of PNB vs. National City Bank. 6 In another case, this court held
that if the drawee-bank discovers that the signature of the payee was forged after it has paid the amount of the check to the holder
thereof, it can recover the amount paid from the collecting bank. 7
A truism stated by this Court is that "The doctrine of estoppel precludes a party from repudiating an obligation voluntarily assumed
after having accepted benefits therefrom. To countenance such repudiation would be contrary to equity and put premium on fraud or
misrepresentation". 8
We made clear in Our decision in Philippine National Bank vs. The National City Bank of NY & Motor Service Co. that:
Where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the genuineness of the drawers
signature and his capacity to issue the instrument.
If a drawee bank pays a forged check which was previously accepted or certified by the said bank, it can not recover from a holder who
did not participate in the forgery and did not have actual notice thereof.
The payment of a check does not include or imply its acceptance in the sense that this word is used in Section 62 of the Negotiable
Instruments Act. 9
The point that comes uppermost is whether the drawee bank was negligent in failing to discover the alteration or the forgery. Very
akin to the case at bar is one which involves a suit filed by the drawer of checks against the collecting bank and this came about in
Farmers State Bank 10 where it was held:
A cause of action against the (collecting bank) in favor of the appellee (the drawer) accrued as a result of the bank breaching its
implied warranty of the genuineness of the indorsements of the name of the payee by bringing about the presentation of the checks (to
the drawee bank) and collecting the amounts thereof, the right to enforce that cause of action was not destroyed by the circumstance
that another cause of action for the recovery of the amounts paid on the checks would have accrued in favor of the appellee against
another or to others than the bank if when the checks were paid they have been indorsed by the payee. (United States vs. National
Exchange Bank, 214 US, 302, 29 S CT665, 53 L. Ed 1006, 16 Am. Cas. 11 84; Onondaga County Savings Bank vs. United States
(E.C.A.) 64 F 703)
Section 66 of the Negotiable Instruments ordains that:
Every indorser who indorsee without qualification, warrants to all subsequent holders in due course' (a) that the instrument is
genuine and in all respects what it purports to be; (b) that he has good title to it; (c) that all prior parties have capacity to contract; and
(d) that the instrument is at the time of his indorsement valid and subsisting. 11
It has been enunciated in an American case particularly in American Exchange National Bank vs. Yorkville Bank 12 that: "the drawer
owes no duty of diligence to the collecting bank (one who had accepted an altered check and had paid over the proceeds to the
depositor) except of seasonably discovering the alteration by a comparison of its returned checks and check stubs or other equivalent
record, and to inform the drawee thereof." In this case it was further held that:
The real and underlying reasons why negligence of the drawer constitutes no defense to the collecting bank are that there is no privity
between the drawer and the collecting bank (Corn Exchange Bank vs. Nassau Bank, 204 N.Y.S. 80) and the drawer owe to that bank
no duty of vigilance (New York Produce Exchange Bank vs. Twelfth Ward Bank, 204 N.Y.S. 54) and no act of the collecting bank is
induced by any act or representation or admission of the drawer (Seaboard National Bank vs. Bank of America ( supra) and it follows
that negligence on the part of the drawer cannot create any liability from it to the collecting bank, and the drawer thus is neither a
necessary nor a proper party to an action by the drawee bank against such bank. It is quite true that depositors in banks are under the
obligation of examining their passbooks and returned vouchers as a protection against the payment by the depository bank against
forged checks, and negligence in the performance of that obligation may relieve that bank of liability for the repayment of amounts
paid out on forged checks, which but for such negligence it would be bound to repay. A leading case on that subject is Morgan vs.
United States Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871 Amn. Cas. 1914D, 462, L.R.A. 1915D, 74.
Thus We hold that while the drawer generally owes no duty of diligence to the collecting bank, the law imposes a duty of diligence on
the collecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness and regularity. The
collecting bank being primarily engaged in banking holds itself out to the public as the expert and the law holds it to a high standard
of conduct.

And although the subject checks are non-negotiable the responsibility of petitioner as indorser thereof remains.
To countenance a repudiation by the petitioner of its obligation would be contrary to equity and would deal a negative blow to the
whole banking system of this country.
The court reproduces with approval the following disquisition of the PCHC in its decision
II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received
Nothing is more clear than that neither the defendant's depositor nor the defendant is entitled to receive payment payable for the
Checks. As the checks are not payable to defendant's depositor, payments to persons other than payees named therein, their
successor-in-interest or any person authorized to receive payment are not valid. Article 1240, New Civil Code of the Philippines
unequivocably provides that:
"Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successo-in-interest, or any
person authorized to receive it. "
Considering that neither the defendant's depositor nor the defendant is entitled to receive payments for the Checks, payments to any
of them give rise to an obligation to return the amounts received. Section 2154 of the New Civil Code mandates that:
Article 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation
to return it arises.
It is contended that plaintiff should be held responsible for issuing the Checks notwithstanding that the underlying transactions were
fictitious This contention has no basis in our jurisprudence.
The nullity of the underlying transactions does not diminish, but in fact strengthens, plaintiffs right to recover from the defendant.
Such nullity clearly emphasizes the obligation of the payees to return the proceeds of the Checks. If a failure of consideration is
sufficient to warrant a finding that a payee is not entitled to payment or must return payment already made, with more reason the
defendant, who is neither the payee nor the person authorized by the payee, should be compelled to surrender the proceeds of the
Checks received by it. Defendant does not have any title to the Checks; neither can it claim any derivative title to them.
III. Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
liability To Those Who Relied
On Its Warranty
In presenting the Checks for clearing and for payment, the defendant made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the bank of the checks are the defendant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR
LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of the falsity of its representation.
The principle of estoppel effectively prevents the defendant from denying liability for any damages sustained by the plaintiff which,
relying upon an action or declaration of the defendant, paid on the Checks. The same principle of estoppel effectively prevents the
defendant from denying the existence of the Checks.
Whether the Checks have been issued for valuable considerations or not is of no serious moment to this case. These Checks have been
made the subject of contracts of endorsement wherein the defendant made expressed warranties to induce payment by the drawer of
the Checks; and the defendant cannot now refuse liability for breach of warranty as a consequence of such forged endorsements. The
defendant has falsely warranted in favor of plaintiff the validity of all endorsements and the genuineness of the cheeks in all respects
what they purport to be.
The damage that will result if judgment is not rendered for the plaintiff is irreparable. The collecting bank has privity with the
depositor who is the principal culprit in this case. The defendant knows the depositor; her address and her history, Depositor is
defendant's client. It has taken a risk on its depositor when it allowed her to collect on the crossed-checks.
Having accepted the crossed checks from persons other than the payees, the defendant is guilty of negligence; the risk of wrongful
payment has to be assumed by the defendant.
On the matter of the award of the interest and attorney's fees, the Board of Directors finds no reason to reverse the decision of the
Arbiter. The defendant's failure to reimburse the plaintiff has constrained the plaintiff to regular the services of counsel in order to
protect its interest notwithstanding that plaintiffs claim is plainly valid just and demandable. In addition, defendant's clear obligation
is to reimburse plaintiff upon direct presentation of the checks; and it is undenied that up to this time the defendant has failed to
make such reimbursement.
WHEREFORE, the petition is DISMISSED for lack of merit without pronouncement as to costs. The decision of the respondent court

of 24 March 1986 and its order of 3 June 1986 are hereby declared to be immediately executory.
SO ORDERED.

G.R. No. L-16968

July 31, 1962
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
CONCEPCION MINING COMPANY, INC., ET AL., defendants-appellants.
Ramon B. de los Reyes for plaintiff-appellee.Demetrio Miraflor for defendants-appellants.
LABRADOR, J.:
Appeal from a judgment or decision of the Court of First Instance of Manila, Hon. Gustavo Victoriano, presiding, sentencing
defendants Concepcion Mining Company and Jose Sarte to pay jointly and severally to the plaintiff the amount of P7,197.26 with
interest up to September 29, 1959, plus a daily interest of P1.3698 thereafter up to the time the amount is fully paid, plus 10% of the
amount as attorney's fees, and costs of this suit.
The present action was instituted by the plaintiff to recover from the defendants the face of a promissory note the pertinent part of
which reads as follows:
Manila, March 12, 1954
NINETY DAYS after date, for value received, I promise to pay to the order of the Philippine National Bank . . . .
In case it is necessary to collect this note by or through an attorney-at-law, the makers and indorsers shall pay ten percent (10%) of
the amount due on the note as attorney's fees, which in no case shall be less than P100.00 exclusive of all costs and fees allowed by
law as stipulated in the contract of real estate mortgage. Demand and Dishonor Waived. Holder may accept partial payment reserving
his right of recourse again each and all indorsers.
(Purpose mining industry)
CONCEPCION MINING COMPANY, INC.,
By:
(Sgd.) VICENTE LEGARDA
President
(Sgd.) VICENTE LEGARDA
(Sgd.) JOSE S SARTE
"Please issue check to
Mr. Jose S. Sarte"
Upon the filing of the complaint the defendants presented their answer in which they allege that the co-maker the promissory note
Don Vicente L. Legarda died on February 24, 1946 and his estate is in the process of judicial determination in Special Proceedings No.
29060 of the Court of First Instance of Manila. On the basis of this allegation it is prayed, as a special defense, that the estate of said
deceased Vicente L. Legarda be included as party-defendant. The court in its decision ruled that the inclusion of said defendant is
unnecessary and immaterial, in accordance with the provisions of Article 1216 of the Deny Civil Code and section 17 (g) of the
Negotiable Instruments Law.
A motion to reconsider this decision was denied and thereupon defendants presented a petition for relief, asking that the effects of the
judgment be suspended for the reason that the deceased Vicente L. Legarda should have been included as a party-defendant and his
liability should be determined in pursuance of the provisions of the promissory note. This motion for relief was also denied, hence
defendant appealed to this Court.
Section 17 (g) of the Negotiable Instruments Law provides as follows:
SEC. 17. Construction where instrument is ambiguous. Where the language of the instrument is ambiguous or there are omissions
therein, the following rules of construction apply:
xxx
xxx
xxx
(g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and
severally liable thereon.
And Article 1216 of the Civil Code of the Philippines also provides as follows:
ART. 1216. The creditor may proceed against any one of the solidary debtors or some of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may subsequently be directed against the others so long as the debt has not
been fully collected.
In view of the above quoted provisions, and as the promissory note was executed jointly and severally by the same parties, namely,
Concepcion Mining Company, Inc. and Vicente L. Legarda and Jose S. Sarte, the payee of the promissory note had the right to hold

any one or any two of the signers of the promissory note responsible for the payment of the amount of the note. This judgment of the
lower court should be affirmed.
Our attention has been attracted to the discrepancies in the printed record on appeal. We note, first, that the names of the defendants,
who are evidently the Concepcion Mining Co., Inc. and Jose S. Sarte, do not appear in the printed record on appeal. The title of the
complaint set forth in the record on appeal does not contain the name of Jose Sarte, when it should, as two defendants are named in
the complaint and the only defense of the defendants is the non-inclusion of the deceased Vicente L. Legarda as a defendant in the
action. We also note that the copy of the promissory note which is set forth in the record on appeal does not contain the name of the
third maker Jose S. Sarte. Fortunately, the brief of appellee on page 4 sets forth said name of Jose S. Sarte as one of the co-maker of
the promissory note. Evidently, there is an attempt to mislead the court into believing that Jose S. Sarte is no one of the co-makers.
The attorney for the defendants Atty. Jose S. Sarte himself and he should be held primarily responsible for the correctness of the
record on appeal. We, therefore, order the said Atty. Jose S. Sarte to explain why in his record on appeal his own name as one of the
defendants does not appear and neither does his name appear as one of the co-signers of the promissory note in question. So ordered.
G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his personal capacity as garnishee, petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and RAUL H. SESBREO, respondents.
BELLOSILLO, J.:
RAUL H. SESBREO filed a complaint for damages against Assistant City Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama,
Jr., before the Regional Trial Court of Cebu City. After trial judgment was rendered ordering the defendants to pay P11,000.00 to the
plaintiff, private respondent herein. The decision having become final and executory, on motion of the latter, the trial court ordered
its execution. This order was questioned by the defendants before the Court of Appeals. However, on 15 January 1992 a writ of
execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner Loreto D. de la Victoria as City Fiscal of Mandaue City where
defendant Mabanto, Jr., was then detailed. The notice directed petitioner not to disburse, transfer, release or convey to any other
person except to the deputy sheriff concerned the salary checks or other checks, monies, or cash due or belonging to Mabanto, Jr.,
under penalty of law. 1 On 10 March 1992 private respondent filed a motion before the trial court for examination of the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was dismissed. Thus the trial court, finding no more legal obstacle
to act on the motion for examination of the garnishees, directed petitioner on 4 November 1992 to submit his report showing the
amount of the garnished salaries of Mabanto, Jr., within fifteen (15) days from receipt 2 taking into consideration the provisions of
Sec. 12, pars. (f) and (i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require petitioner to explain why he should not be cited in contempt of
court for failing to comply with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the notice of garnishment claiming that he was not in possession of
any money, funds, credit, property or anything of value belonging to Mabanto, Jr., except his salary and RATA checks, but that said
checks were not yet properties of Mabanto, Jr., until delivered to him. He further claimed that, as such, they were still public funds
which could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered petitioner to immediately comply with its order of 4 November
1992. 3 It opined that the checks of Mabanto, Jr., had already been released through petitioner by the Department of Justice duly
signed by the officer concerned. Upon service of the writ of garnishment, petitioner as custodian of the checks was under obligation to
hold them for the judgment creditor. Petitioner became a virtual party to, or a forced intervenor in, the case and the trial court thereby
acquired jurisdiction to bind him to its orders and processes with a view to the complete satisfaction of the judgment. Additionally,
there was no sufficient reason for petitioner to hold the checks because they were no longer government funds and presumably
delivered to the payee, conformably with the last sentence of Sec. 16 of the Negotiable Instruments Law.
With regard to the contempt charge, the trial court was not morally convinced of petitioner's guilt. For, while his explanation suffered
from procedural infirmities nevertheless he took pains in enlightening the court by sending a written explanation dated 22 July 1992
requesting for the lifting of the notice of garnishment on the ground that the notice should have been sent to the Finance Officer of the
Department of Justice. Petitioner insists that he had no authority to segregate a portion of the salary of Mabanto, Jr. The explanation
however was not submitted to the trial court for action since the stenographic reporter failed to attach it to the record. 4
On 20 April 1993 the motion for reconsideration was denied. The trial court explained that it was not the duty of the garnishee to
inquire or judge for himself whether the issuance of the order of execution, writ of execution and notice of garnishment was justified.
His only duty was to turn over the garnished checks to the trial court which issued the order of execution. 5
Petitioner raises the following relevant issues: (1) whether a check still in the hands of the maker or its duly authorized representative

is owned by the payee before physical delivery to the latter: and, (2) whether the salary check of a government official or employee
funded with public funds can be subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned by Mabanto, Jr., because they were not yet delivered to him,
and that petitioner as garnishee has no legal obligation to hold and deliver them to the trial court to be applied to Mabanto, Jr.'s
judgment debt. The thesis of petitioner is that the salary checks still formed part of public funds and therefore beyond the reach of
garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching credits belonging to the judgment debtor owing to him from a
stranger to the litigation. 6 Emphasis is laid on the phrase "belonging to the judgment debtor" since it is the focal point in resolving the
issues raised.
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives his compensation in the form of checks
from the Department of Justice through petitioner as City Fiscal of Mandaue City and head of office. Under Sec. 16 of the Negotiable
Instruments Law, every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the
purpose of giving effect thereto. As ordinarily understood, delivery means the transfer of the possession of the instrument by the
maker or drawer with intent to transfer title to the payee and recognize him as the holder thereof. 7
According to the trial court, the checks of Mabanto, Jr., were already released by the Department of Justice duly signed by the officer
concerned through petitioner and upon service of the writ of garnishment by the sheriff petitioner was under obligation to hold them
for the judgment creditor. It recognized the role of petitioner as custodian of the checks. At the same time however it considered the
checks as no longer government funds and presumed delivered to the payee based on the last sentence of Sec. 16 of the Negotiable
Instruments Law which states: "And where the instrument is no longer in the possession of a party whose signature appears thereon,
a valid and intentional delivery by him is presumed." Yet, the presumption is not conclusive because the last portion of the provision
says "until the contrary is proved." However this phrase was deleted by the trial court for no apparent reason. Proof to the contrary is
its own finding that the checks were in the custody of petitioner. Inasmuch as said checks had not yet been delivered to Mabanto, Jr.,
they did not belong to him and still had the character of public funds. In Tiro v. Hontanosas 8 we ruled that
The salary check of a government officer or employee such as a teacher does not belong to him before it is physically delivered to him.
Until that time the check belongs to the government. Accordingly, before there is actual delivery of the check, the payee has no power
over it; he cannot assign it without the consent of the Government.
As a necessary consequence of being public fund, the checks may not be garnished to satisfy the judgment. 9 The rationale behind this
doctrine is obvious consideration of public policy. The Court succinctly stated in Commissioner of Public Highways v. San Diego 10
that
The functions and public services rendered by the State cannot be allowed to be paralyzed or disrupted by the diversion of public
funds from their legitimate and specific objects, as appropriated by law.
In denying petitioner's motion for reconsideration, the trial court expressed the additional ratiocination that it was not the duty of the
garnishee to inquire or judge for himself whether the issuance of the order of execution, the writ of execution, and the notice of
garnishment was justified, citing our ruling in Philippine Commercial Industrial Bank v. Court of Appeals. 11 Our precise ruling in
that case was that "[I]t is not incumbent upon the garnishee to inquire or to judge for itself whether or not the order for the advance
execution of a judgment is valid." But that is invoking only the general rule. We have also established therein the compelling reasons,
as exceptions thereto, which were not taken into account by the trial court, e.g., a defect on the face of the writ or actual knowledge by
the garnishee of lack of entitlement on the part of the garnisher. It is worth to note that the ruling referred to the validity of advance
execution of judgments, but a careful scrutiny of that case and similar cases reveals that it was applicable to a notice of garnishment as
well. In the case at bench, it was incumbent upon petitioner to inquire into the validity of the notice of garnishment as he had actual
knowledge of the non-entitlement of private respondent to the checks in question. Consequently, we find no difficulty concluding that
the trial court exceeded its jurisdiction in issuing the notice of garnishment concerning the salary checks of Mabanto, Jr., in the
possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20 April 1993 of the Regional Trial Court of Cebu City, Br.
17, subject of the petition are SET ASIDE. The notice of garnishment served on petitioner dated 3 February 1992 is ordered
DISCHARGED.
SO ORDERED.
G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC

CORPORATION and PRODUCERS BANK OF THE PHILIPPINES, defendants-respondents.

Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a sum of money against
respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian Industrial Plastic Corporation (Plastic
Corporation for short) and the Producers Bank of the Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02 on a promissory note executed by respondent Sima Wei on June 9, 1983; and
(2) To enforce payment of two checks executed by Sima Wei, payable to petitioner, and drawn against the China Banking Corporation,
to pay the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a common ground that the complaint states no
cause of action. The trial court granted the defendants' Motions to Dismiss. The Court of Appeals affirmed this decision, * to which the
petitioner Bank, represented by its Legal Liquidator, filed this Petition for Review by Certiorari, assigning the following as the alleged
errors of the Court of Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION AGAINST
DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3 OF THE REVISED RULES OF COURT ON
ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO HEREIN DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed and delivered to the former a
promissory note, engaging to pay the petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest
at 32% per annum. Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima
Wei issued two crossed checks payable to petitioner Bank drawn against China Banking Corporation, bearing respectively the serial
numbers 384934, for the amount of P550,000.00 and 384935, for the amount of P500,000.00. The said checks were allegedly issued
in full settlement of the drawer's account evidenced by the promissory note. These two checks were not delivered to the petitionerpayee or to any of its authorized representatives. For reasons not shown, these checks came into the possession of respondent Lee
Kian Huat, who deposited the checks without the petitioner-payee's indorsement (forged or otherwise) to the account of respondent
Plastic Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the Balintawak
branch of Producers Bank, relying on the assurance of respondent Samson Tung, President of Plastic Corporation, that the transaction
was legal and regular, instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the account of
said Plastic Corporation, inspite of the fact that the checks were crossed and payable to petitioner Bank and bore no indorsement of
the latter. Hence, petitioner filed the complaint as aforestated.
The main issue before Us is whether petitioner Bank has a cause of action against any or all of the defendants, in the alternative or
otherwise.
A cause of action is defined as an act or omission of one party in violation of the legal right or rights of another. The essential elements
are: (1) legal right of the plaintiff; (2) correlative obligation of the defendant; and (3) an act or omission of the defendant in violation
of said legal right. 2
The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long recognized the business custom of
using printed checks where blanks are provided for the date of issuance, the name of the payee, the amount payable and the drawer's
signature. All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and sign it. However, the mere fact
that he has done these does not give rise to any liability on his part, until and unless the check is delivered to the payee or his
representative. A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is also a species of
property. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so must a negotiable instrument be
delivered to the payee in order to evidence its existence as a binding contract. Section 16 of the Negotiable Instruments Law, which
governs checks, provides in part:
Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect
thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. 3 Delivery of an
instrument means transfer of possession, actual or constructive, from one person to another. 4 Without the initial delivery of the
instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended to

give effect to the instrument.

The allegations of the petitioner in the original complaint show that the two (2) China Bank checks, numbered 384934 and 384935,
were not delivered to the payee, the petitioner herein. Without the delivery of said checks to petitioner-payee, the former did not
acquire any right or interest therein and cannot therefore assert any cause of action, founded on said checks, whether against the
drawer Sima Wei or against the Producers Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory note, and the alternative
defendants, including Sima Wei, on the two checks. On appeal from the orders of dismissal of the Regional Trial Court, petitioner
Bank alleged that its cause of action was not based on collecting the sum of money evidenced by the negotiable instruments stated but
on quasi-delict a claim for damages on the ground of fraudulent acts and evident bad faith of the alternative respondents. This was
clearly an attempt by the petitioner Bank to change not only the theory of its case but the basis of his cause of action. It is well-settled
that a party cannot change his theory on appeal, as this would in effect deprive the other party of his day in court. 5
Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed from liability to petitioner Bank under the
loan evidenced by the promissory note agreed to by her. Her allegation that she has paid the balance of her loan with the two checks
payable to petitioner Bank has no merit for, as We have earlier explained, these checks were never delivered to petitioner Bank. And
even granting, without admitting, that there was delivery to petitioner Bank, the delivery of checks in payment of an obligation does
not constitute payment unless they are cashed or their value is impaired through the fault of the creditor. 6 None of these exceptions
were alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from liability on the promissory note by some other cause,
petitioner Bank has a right of action against her for the balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with them. Since petitioner Bank never
received the checks on which it based its action against said respondents, it never owned them (the checks) nor did it acquire any
interest therein. Thus, anything which the respondents may have done with respect to said checks could not have prejudiced
petitioner Bank. It had no right or interest in the checks which could have been violated by said respondents. Petitioner Bank has
therefore no cause of action against said respondents, in the alternative or otherwise. If at all, it is Sima Wei, the drawer, who would
have a cause of action against her
co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank regarding the applicability of Section 13, Rule 3 of the Rules
of Court, We find it unnecessary to discuss the same in view of Our finding that the petitioner Bank did not acquire any right or
interest in the checks due to lack of delivery. It therefore has no cause of action against the respondents, in the alternative or
otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's complaint is AFFIRMED insofar as the
second cause of action is concerned. On the first cause of action, the case is REMANDED to the trial court for a trial on the merits,
consistent with this decision, in order to determine whether respondent Sima Wei is liable to the Development Bank of Rizal for any
amount under the promissory note allegedly signed by her.
SO ORDERED.

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent 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.
The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of time deposit
(CTDs) in favor of one Angel dela Cruz who deposited with herein defendant the aggregate amount of P1,120,000.00, as follows:
(Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);
CTD CTD

Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
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
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 purchased of fuel products
from the latter (Original Record, p. 208).
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 execute and submit a notarized Affidavit of Loss, as required by
defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of Loss (Defendant's Exhibit
281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the amount of Eight Hundred Seventy
Five Thousand Pesos (P875,000.00). On the same date, said 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 assignment and further authorizes said bank to pre-terminate, set-off and "apply the said time
deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 6062).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat
branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to herein
plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff formally informing it of its
possession of the CTDs in question and of its decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of the document evidencing the
guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which plaintiff
proposed to apply the time deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
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).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter set-off
and applied the time deposits in question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it the aggregate value
of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest therein at 16% per annum, moral
and exemplary damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this petition wherein
petitioner faults respondent court in ruling (1) that the subject certificates of deposit are non-negotiable despite being clearly
negotiable instruments; (2) that petitioner did not become a holder in due course of the said certificates of deposit; and (3) in
disregarding the pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues involved in this
recourse.
SECURITY BANK

AND TRUST COMPANY6778 Ayala Ave., Makati No. 90101

Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT
OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date, upon presentation and
surrender of this certificate, with interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important to note that after the word
"BEARER" stamped on the space provided supposedly for the name of the depositor, the words "has deposited" a certain amount
follows. The document further provides that the amount deposited shall be "repayable to said depositor" on the period indicated.
Therefore, the text of the instrument(s) themselves manifest with clarity that they are payable, not to whoever purports to be the
"bearer" but only to the specified person indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor
Angel dela Cruz as the person who made the deposit and further engages itself to pay said depositor the amount indicated thereon at
the stipulated date. 6
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:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to
requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in
open court that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in these certificates states that it
was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is,
9
from the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be legally
ascertained. 10 While the writing may be read in the light of surrounding circumstances in order to more perfectly understand the
intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their
meaning, no other words 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
parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they
have used. What the parties meant must be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the amounts deposited
shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not
say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to
be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility so expressed
that fact in clear and categorical terms in the documents, instead of having the word "BEARER" stamped on the space provided for
the name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to whoever
may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the
bank is concerned," but obviously other parties not privy to the transaction between them would not be in a position to know that the
depositor is not the bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the
plain import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for resort to
extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary
rule that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The records reveal
that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to
P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs
are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality
delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment
for the fuel products or as a security has been dissipated and 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 deliberately led another to
believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission,
be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily said so,
instead of using the words "to guarantee" in the letter aforequoted. Besides, when respondent bank, as defendant in the court below,
moved for a bill of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b)
whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged
indebtedness to it, plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have proved, if such
truly was the fact, that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now labors
under the presumption that evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National Bank, et al. 20
is apropos:
. . . 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
some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object
and character might still be qualified and explained by contemporaneous writing declaring it to have been a deposit of the property as
collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an
absolute conveyance, should be treated as a pledge if the debt continues in inexistence and is not discharged by the transfer, and that
accordingly the use of the terms ordinarily importing conveyance of absolute ownership will not be given that effect in such a
transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, 21 and
a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case, however,
there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious
reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel

de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as
a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the
principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for
23
value to the extent of his lien. As such holder of collateral security, he would be a pledgee but the requirements therefor and the
effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of
incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right pledged
shall be delivered to the creditor, and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not
appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of
this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between
it and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and
binding upon respondent bank. The requirement under Article 2096 aforementioned is not a 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 is recorded in the Registry of Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lien holder
of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could
affect or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the
better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private respondent observed the
requirements of the law in the case of lost negotiable instruments and the issuance of replacement certificates therefor, on the ground
that petitioner failed to raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was not included in
the stipulation of the parties and in the statement of issues submitted by them to the trial court. 29 The issues agreed upon by them for
resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
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.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing enumeration does not
include the issue of negligence on the part of respondent bank. An issue raised for the first time on appeal and not raised timely in the
proceedings in the lower court is barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties
and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. Thus, to obviate
the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact which they intend to raise at
the trial, except such as may involve privileged or impeaching matters. The determination of issues at a pre-trial conference bars the
consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by the issues on its
right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that petitioner could raise on appeal any
issue. We agree with private respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned
certificates can be premised on a multitude of other legal reasons and causes of action, of which respondent bank's supposed
negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot have the odds in its

favor. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be followed in case of lost instruments
payable to bearer, which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar,
are merely permissive and not mandatory. The very first article cited by petitioner speaks for itself.
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
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the "dispossessed owner"
to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision
reads "may," this word shows that it is not mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is
an auxiliary verb indicating liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce, on which petitioner seeks to
anchor respondent bank's supposed negligence, merely established, on the one hand, a right of recourse in favor of a dispossessed
owner or holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in favor of the party
liable thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly, none of the
provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or replacement instrument sans compliance
with the procedure outlined therein, and none establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC
CORPORATION and PRODUCERS BANK OF THE PHILIPPINES, defendants-respondents.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a sum of money against
respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian Industrial Plastic Corporation (Plastic
Corporation for short) and the Producers Bank of the Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02 on a promissory note executed by respondent Sima Wei on June 9, 1983; and
(2) To enforce payment of two checks executed by Sima Wei, payable to petitioner, and drawn against the China Banking Corporation,
to pay the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a common ground that the complaint states no
cause of action. The trial court granted the defendants' Motions to Dismiss. The Court of Appeals affirmed this decision, * to which the
petitioner Bank, represented by its Legal Liquidator, filed this Petition for Review by Certiorari, assigning the following as the alleged
errors of the Court of Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION AGAINST
DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3 OF THE REVISED RULES OF COURT ON
ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO HEREIN DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed and delivered to the former a
promissory note, engaging to pay the petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest
at 32% per annum. Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima
Wei issued two crossed checks payable to petitioner Bank drawn against China Banking Corporation, bearing respectively the serial
numbers 384934, for the amount of P550,000.00 and 384935, for the amount of P500,000.00. The said checks were allegedly issued
in full settlement of the drawer's account evidenced by the promissory note. These two checks were not delivered to the petitionerpayee or to any of its authorized representatives. For reasons not shown, these checks came into the possession of respondent Lee
Kian Huat, who deposited the checks without the petitioner-payee's indorsement (forged or otherwise) to the account of respondent

Plastic Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the Balintawak
branch of Producers Bank, relying on the assurance of respondent Samson Tung, President of Plastic Corporation, that the transaction
was legal and regular, instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the account of
said Plastic Corporation, inspite of the fact that the checks were crossed and payable to petitioner Bank and bore no indorsement of
the latter. Hence, petitioner filed the complaint as aforestated.
The main issue before Us is whether petitioner Bank has a cause of action against any or all of the defendants, in the alternative or
otherwise.
A cause of action is defined as an act or omission of one party in violation of the legal right or rights of another. The essential elements
are: (1) legal right of the plaintiff; (2) correlative obligation of the defendant; and (3) an act or omission of the defendant in violation
of said legal right. 2
The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long recognized the business custom of
using printed checks where blanks are provided for the date of issuance, the name of the payee, the amount payable and the drawer's
signature. All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and sign it. However, the mere fact
that he has done these does not give rise to any liability on his part, until and unless the check is delivered to the payee or his
representative. A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is also a species of
property. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so must a negotiable instrument be
delivered to the payee in order to evidence its existence as a binding contract. Section 16 of the Negotiable Instruments Law, which
governs checks, provides in part:
Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect
thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. 3 Delivery of an
instrument means transfer of possession, actual or constructive, from one person to another. 4 Without the initial delivery of the
instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended to
give effect to the instrument.
The allegations of the petitioner in the original complaint show that the two (2) China Bank checks, numbered 384934 and 384935,
were not delivered to the payee, the petitioner herein. Without the delivery of said checks to petitioner-payee, the former did not
acquire any right or interest therein and cannot therefore assert any cause of action, founded on said checks, whether against the
drawer Sima Wei or against the Producers Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory note, and the alternative
defendants, including Sima Wei, on the two checks. On appeal from the orders of dismissal of the Regional Trial Court, petitioner
Bank alleged that its cause of action was not based on collecting the sum of money evidenced by the negotiable instruments stated but
on quasi-delict a claim for damages on the ground of fraudulent acts and evident bad faith of the alternative respondents. This was
clearly an attempt by the petitioner Bank to change not only the theory of its case but the basis of his cause of action. It is well-settled
that a party cannot change his theory on appeal, as this would in effect deprive the other party of his day in court. 5
Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed from liability to petitioner Bank under the
loan evidenced by the promissory note agreed to by her. Her allegation that she has paid the balance of her loan with the two checks
payable to petitioner Bank has no merit for, as We have earlier explained, these checks were never delivered to petitioner Bank. And
even granting, without admitting, that there was delivery to petitioner Bank, the delivery of checks in payment of an obligation does
not constitute payment unless they are cashed or their value is impaired through the fault of the creditor. 6 None of these exceptions
were alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from liability on the promissory note by some other cause,
petitioner Bank has a right of action against her for the balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with them. Since petitioner Bank never
received the checks on which it based its action against said respondents, it never owned them (the checks) nor did it acquire any
interest therein. Thus, anything which the respondents may have done with respect to said checks could not have prejudiced
petitioner Bank. It had no right or interest in the checks which could have been violated by said respondents. Petitioner Bank has
therefore no cause of action against said respondents, in the alternative or otherwise. If at all, it is Sima Wei, the drawer, who would
have a cause of action against her
co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank regarding the applicability of Section 13, Rule 3 of the Rules
of Court, We find it unnecessary to discuss the same in view of Our finding that the petitioner Bank did not acquire any right or
interest in the checks due to lack of delivery. It therefore has no cause of action against the respondents, in the alternative or
otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's complaint is AFFIRMED insofar as the

second cause of action is concerned. On the first cause of action, the case is REMANDED to the trial court for a trial on the merits,
consistent with this decision, in order to determine whether respondent Sima Wei is liable to the Development Bank of Rizal for any
amount under the promissory note allegedly signed by her.
SO ORDERED.
G.R. No. L-40796 July 31, 1975
REPUBLIC BANK, plaintiff-appellee,
vs.
MAURICIA T. EBRADA, defendant-appellant.
Sabino de Leon, Jr. for plaintiff-appellee.
Julio Baldonado for defendant-appellant.
MARTIN, J.:
Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch XXIII in Civil Case No. 69288, entitled
"Republic Bank vs. Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No. 508060 dated January 15, 1963 for
P1,246.08 at the main office of the plaintiff Republic Bank at Escolta, Manila. The check was issued by the Bureau of Treasury. 1
Plaintiff Bank was later advised by the said bureau that the alleged indorsement on the reverse side of the aforesaid check by the
payee, "Martin Lorenzo" was a forgery 2 since the latter had allegedly died as of July 14, 1952. 3 Plaintiff Bank was then requested by
the Bureau of Treasury to refund the amount of P1,246.08. 4 To recover what it had refunded to the Bureau of Treasury, plaintiff Bank
made verbal and formal demands upon defendant Ebrada to account for the sum of P1,246.08, but said defendant refused to do so. So
plaintiff Bank sued defendant Ebrada before the City Court of Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the complaint and as affirmative defenses
alleged that she was a holder in due course of the check in question, or at the very least, has acquired her rights from a holder in due
course and therefore entitled to the proceeds thereof. She also alleged that the plaintiff Bank has no cause of action against her; that it
is in estoppel, or so negligent as not to be entitled to recover anything from her. 5
About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against Adelaida Dominguez who, in turn, filed on
September 14, 1966 a Fourth-Party complaint against Justina Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against defendant Ebrada; for Third-Party
plaintiff against Third-Party defendant, Adelaida Dominguez, and for Fourth-Party plaintiff against Fourth-Party defendant, Justina
Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First Instance of Manila where the parties
submitted a partial stipulation of facts as follows:
COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party defendant and Fourth-Party plaintiff and unto this
Honorable Court most respectfully submit the following:
PARTIAL STIPULATION OF FACTS
1. That they admit their respective capacities to sue and be sued;
2. That on January 15, 1963 the Treasury of the Philippines issued its Check No. BP-508060, payable to the order of one MARTIN
LORENZO, in the sum of P1,246.08, and drawn on the Republic Bank, plaintiff herein, which check will be marked as Exhibit "A" for
the plaintiff;
3. That the back side of aforementioned check bears the following signatures, in this order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;
4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by the Third-Party defendant and FourthParty plaintiff ADELAIDA DOMINGUEZ, for the purpose of encashment;
5. That the signature of defendant MAURICIA T. EBRADA was affixed on said check on February 27, 1963 when she encashed it with
the plaintiff Bank;
6. That immediately after defendant MAURICIA T. EBRADA received the cash proceeds of said check in the sum of P1,246.08 from
the plaintiff Bank, she immediately turned over the said amount to the third-party defendant and fourth-party plaintiff ADELAIDA
DOMINGUEZ, who in turn handed the said amount to the fourth-party defendant JUSTINA TINIO on the same date, as evidenced by
the receipt signed by her which will be marked as Exhibit "1-Dominguez"; and

7. That the parties hereto reserve the right to present evidence on any other fact not covered by the foregoing stipulations,
Manila, Philippines, June 6, 1969.
Based on the foregoing stipulation of facts and the documentary evidence presented, the trial court rendered a decision, the
dispositive portion of which reads as follows:
WHEREFORE, the Court renders judgment ordering the defendant Mauricia T. Ebrada to pay the plaintiff the amount of ONE
THOUSAND TWO FORTY-SIX 08/100 (P1,246.08), with interest at the legal rate from the filing of the complaint on June 16, 1966,
until fully paid, plus the costs in both instances against Mauricia T. Ebrada.
The right of Mauricia T. Ebrada to file whatever claim she may have against Adelaida Dominguez in connection with this case is
hereby reserved. The right of the estate of Dominguez to file the fourth-party complaint against Justina Tinio is also reserved.
SO ORDERED.
In her appeal, defendant-appellant presses that the lower court erred:
IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE VALUE OF THE SUBJECT CHECK AFTER FINDING THAT
THE DRAWER ISSUED THE SUBJECT CHECK TO A PERSON ALREADY DECEASED FOR 11- YEARS AND THAT THE
APPELLANT DID NOT BENEFIT FROM ENCASHING SAID CHECK.
From the stipulation of facts it is admitted that the check in question was delivered to defendant-appellant by Adelaida Dominguez for
the purpose of encashment and that her signature was affixed on said check when she cashed it with the plaintiff Bank. Likewise it is
admitted that defendant-appellant was the last indorser of the said check. As such indorser, she was supposed to have warranted that
she has good title to said check; for under Section 65 of the Negotiable Instruments Law: 6
Every person negotiating an instrument by delivery or by qualified indorsement, warrants:
(a) That the instrument is genuine and in all respects what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding sections;
(b) That the instrument is at the time of his indorsement valid and subsisting.
It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a forgery because he was already
dead 7 almost 11 years before the check in question was issued by the Bureau of Treasury. Under action 23 of the Negotiable
Instruments Law (Act 2031):
When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and
no right to retain the instruments, or to give a discharge thereof against any party thereto, can be acquired through or under such
signature unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of
authority.
It is clear from the provision that where the signature on a negotiable instrument if forged, the negotiation of the check is without
force or effect. But does this mean that the existence of one forged signature therein will render void all the other negotiations of the
check with respect to the other parties whose signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several indorsements on it, it was held that it is only
the negotiation based on the forged or unauthorized signature which is inoperative. Applying this principle to the case before Us, it
can be safely concluded that it is only the negotiation predicated on the forged indorsement that should be declared inoperative. This
means that the negotiation of the check in question from Martin Lorenzo, the original payee, to Ramon R. Lorenzo, the second
indorser, should be declared of no affect, but the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez,
the third indorser, and from Adelaida Dominguez to the defendant-appellant who did not know of the forgery, should be considered
valid and enforceable, barring any claim of forgery.
What happens then, if, after the drawee bank has paid the amount of the check to the holder thereof, it was discovered that the
signature of the payee was forged? Can the drawee bank recover from the one who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a check can recover from the holder the
money paid to him on a forged instrument. It is not supposed to be its duty to ascertain whether the signatures of the payee or
indorsers are genuine or not. This is because the indorser is supposed to warrant to the drawee that the signatures of the payee and
previous indorsers are genuine, warranty not extending only to holders in due course. One who purchases a check or draft is bound to
satisfy himself that the paper is genuine and that by indorsing it or presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he has performed his duty and the drawee who has paid the forged check, without actual
negligence on his part, may recover the money paid from such negligent purchasers. In such cases the recovery is permitted because
although the drawee was in a way negligent in failing to detect the forgery, yet if the encasher of the check had performed his duty, the
forgery would in all probability, have been detected and the fraud defeated. The reason for allowing the drawee bank to recover from

the encasher is:

Every one with even the least experience in business knows that no business man would accept a check in exchange for money or
goods unless he is satisfied that the check is genuine. He accepts it only because he has proof that it is genuine, or because he has
sufficient confidence in the honesty and financial responsibility of the person who vouches for it. If he is deceived he has suffered a
loss of his cash or goods through his own mistake. His own credulity or recklessness, or misplaced confidence was the sole cause of the
loss. Why should he be permitted to shift the loss due to his own fault in assuming the risk, upon the drawee, simply because of the
accidental circumstance that the drawee afterwards failed to detect the forgery when the check was presented? 8
Similarly, in the case before Us, the defendant-appellant, upon receiving the check in question from Adelaida Dominguez, was dutybound to ascertain whether the check in question was genuine before presenting it to plaintiff Bank for payment. Her failure to do so
makes her liable for the loss and the plaintiff Bank may recover from her the money she received for the check. As reasoned out above,
had she performed the duty of ascertaining the genuineness of the check, in all probability the forgery would have been detected and
the fraud defeated.
In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance Company drew its check for P2000.00 on the
Hongkong and Shanghai Banking Corporation payable to the order of Lazaro Melicor. A certain E. M. Maasin fraudulently obtained
the check and forged the signature of Melicor, as an indorser, and then personally indorsed and presented the check to the Philippine
National Bank where the amount of the check was placed to his (Maasin's) credit. On the next day, the Philippine National Bank
indorsed the cheek to the Hongkong and Shanghai Banking Corporation which paid it and charged the amount of the check to the
insurance company. The Court held that the Hongkong and Shanghai Banking Corporation was liable to the insurance company for
the amount of the check and that the Philippine National Bank was in turn liable to the Hongkong and Shanghai Banking
Corporation. Said the Court:
Where a check is drawn payable to the order of one person and is presented to a bank by another and purports upon its face to have
been duly indorsed by the payee of the check, it is the duty of the bank to know that the check was duly indorsed by the original payee,
and where the bank pays the amount of the check to a third person, who has forged the signature of the payee, the loss falls upon the
bank who cashed the check, and its only remedy is against the person to whom it paid the money.
With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss when it paid the amount of the check in
question to defendant-appellant, but it has the remedy to recover from the latter the amount it paid to her. Although the defendantappellant to whom the plaintiff Bank paid the check was not proven to be the author of the supposed forgery, yet as last indorser of the
check, she has warranted that she has good title to it 10 even if in fact she did not have it because the payee of the check was already
dead 11 years before the check was issued. The fact that immediately after receiving title cash proceeds of the check in question in the
amount of P1,246.08 from the plaintiff Bank, defendant-appellant immediately turned over said amount to Adelaida Dominguez
(Third-Party defendant and the Fourth-Party plaintiff) who in turn handed the amount to Justina Tinio on the same date would not
exempt her from liability because by doing so, she acted as an accommodation party in the check for which she is also liable under
Section 29 of the Negotiable Instruments Law (Act 2031), thus: .An accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person.
Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew
him to be only an accommodation party.
IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs against defendant-appellant.
SO ORDERED.
G.R. No. 93073
December 21, 1992
REPUBLIC PLANTERS BANK, petitioner,
vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.
DECISION
CAMPOS, JR., J.:
This is an appeal by way of a Petition for Review on Certiorari from the decision * of the Court of Appeals in CA G.R. CV No. 07302,
entitled Republic Planters Bank. Plaintiff-Appellee vs. Pinch Manufacturing Corporation, et al., Defendants, and Fermin Canlas,
Defendant-Appellant, which affirmed the decision ** in Civil Case No. 82-5448 except that it completely absolved Fermin Canlas
from liability under the promissory notes and reduced the award for damages and attorneys fees. The RTC decision, rendered on
June 20, 1985, is quoted hereunder:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff Republic Planters Bank, ordering defendant
Pinch Manufacturing Corporation (formerly Worldwide Garment Manufacturing, Inc.) and defendants Shozo Yamaguchi and Fermin
Canlas to pay, jointly and severally, the plaintiff bank the following sums with interest thereon at 16% per annum from the dates

indicated, to wit:
Under the promissory note (Exhibit A), the sum of P300,000.00 with interest from January 29, 1981 until fully paid; under
promissory note (Exhibit B), the sum of P40,000.00 with interest from November 27, 1980; under the promissory note (Exhibit
C), the sum of P166,466.00 which interest from January 29, 1981; under the promissory note (Exhibit E), the sum of P86,130.31
with interest from January 29, 1981; under the promissory note (Exhibit G), the sum of P12,703.70 with interest from November 27,
1980; under the promissory note (Exhibit H), the sum of P281,875.91 with interest from January 29, 1981; and under the
promissory note (Exhibit I), the sum of P200,000.00 with interest from January 29, 1981.
Under the promissory note (Exhibit D) defendants Pinch Manufacturing Corporation (formerly named Worldwide Garment
Manufacturing, Inc.), and Shozo Yamaguchi are ordered to pay jointly and severally, the plaintiff bank the sum of P367,000.00 with
interest of 16% per annum from January 29, 1980 until fully paid
Under the promissory note (Exhibit F) defendant corporation Pinch (formerly Worldwide) is ordered to pay the plaintiff bank the
sum of P140,000.00 with interest at 16% per annum from November 27, 1980 until fully paid.
Defendant Pinch (formerly Worldwide) is hereby ordered to pay the plaintiff the sum of P231,120.81 with interest at 12% per annum
from July 1, 1981, until fully paid and the sum of P331,870.97 with interest from March 28, 1981, until fully paid.
All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum of P100,000.00 as and for reasonable attorneys
fee and the further sum equivalent to 3% per annum of the respective principal sums from the dates above stated as penalty charge
until fully paid, plus one percent (1%) of the principal sums as service charge.
With costs against the defendants.
SO ORDERED. 1
From the above decision only defendant Fermin Canlas appealed to the then Intermediate Court (now the Court Appeals). His
contention was that inasmuch as he signed the promissory notes in his capacity as officer of the defunct Worldwide Garment
Manufacturing, Inc, he should not be held personally liable for such authorized corporate acts that he performed. It is now the
contention of the petitioner Republic Planters Bank that having unconditionally signed the nine (9) promissory notes with Shozo
Yamaguchi, jointly and severally, defendant Fermin Canlas is solidarity liable with Shozo Yamaguchi on each of the nine notes.
We find merit in this appeal.
From the records, these facts are established: Defendant Shozo Yamaguchi and private respondent Fermin Canlas were
President/Chief Operating Officer and Treasurer respectively, of Worldwide Garment Manufacturing, Inc.. By virtue of Board
Resolution No. 1 dated August 1, 1979, defendant Shozo Yamaguchi and private respondent Fermin Canlas were authorized to apply
for credit facilities with the petitioner Republic Planters Bank in the forms of export advances and letters of credit/trust receipts
accommodations. Petitioner bank issued nine promissory notes, marked as Exhibits A to I inclusive, each of which were uniformly
worded in the following manner:
___________, after date, for value received, I/we, jointly and severally promise to pay to the ORDER of the REPUBLIC PLANTERS
BANK, at its office in Manila, Philippines, the sum of ___________ PESOS(.) Philippine Currency
On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi and Fermin Canlas above their
printed names with the phrase and (in) his personal capacity typewritten below. At the bottom of the promissory notes appeared:
Please credit proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
These entries were separated from the text of the notes with a bold line which ran horizontally across the pages.
In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment Manufacturing, Inc. was apparently rubber
stamped above the signatures of defendant and private respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporate name to Pinch Manufacturing
Corporation.
On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of money covered among others, by the nine
promissory notes with interest thereon, plus attorneys fees and penalty charges. The complainant was originally brought against
Worldwide Garment Manufacturing, Inc. inter alia, but it was later amended to drop Worldwide Manufacturing, Inc. as defendant
and substitute Pinch Manufacturing Corporation it its place. Defendants Pinch Manufacturing Corporation and Shozo Yamaguchi did
not file an Amended Answer and failed to appear at the scheduled pre-trial conference despite due notice. Only private respondent
Fermin Canlas filed an Amended Answer wherein he, denied having issued the promissory notes in question since according to him,
he was not an officer of Pinch Manufacturing Corporation, but instead of Worldwide Garment Manufacturing, Inc., and that when he
issued said promissory notes in behalf of Worldwide Garment Manufacturing, Inc., the same were in blank, the typewritten entries
not appearing therein prior to the time he affixed his signature.
In the mind of this Court, the only issue material to the resolution of this appeal is whether private respondent Fermin Canlas is

solidarily liable with the other defendants, namely Pinch Manufacturing Corporation and Shozo Yamaguchi, on the nine promissory
notes.
We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes bearing his signature for the
following reasons:
The promissory notes are negotiable instruments and must be governed by the Negotiable Instruments Law. 2
Under the Negotiable lnstruments Law, persons who write their names on the face of promissory notes are makers and are liable as
such. 3 By signing the notes, the maker promises to pay to the order of the payee or any holder 4 according to the tenor
thereof. 5 Based on the above provisions of law, there is no denying that private respondent Fermin Canlas is one of the co-makers of
the promissory notes. As such, he cannot escape liability arising therefrom.
Where an instrument containing the words I promise to pay is signed by two or more persons, they are deemed to be jointly and
severally liable thereon. 6 An instrument which begins with I ,We , or Either of us promise to, pay, when signed by two or more
persons, makes them solidarily liable. 7 The fact that the singular pronoun is used indicates that the promise is individual as to each
other; meaning that each of the co-signers is deemed to have made an independent singular promise to pay the notes in full.
In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and certain, without reason for ambiguity,
by the presence of the phrase joint and several as describing the unconditional promise to pay to the order of Republic Planters
Bank. A joint and several note is one in which the makers bind themselves both jointly and individually to the payee so that all may be
sued together for its enforcement, or the creditor may select one or more as the object of the suit. 8 A joint and several obligation in
common law corresponds to a civil law solidary obligation; that is, one of several debtors bound in such wise that each is liable for the
entire amount, and not merely for his proportionate share. 9 By making a joint and several promise to pay to the order of Republic
Planters Bank, private respondent Fermin Canlas assumed the solidary liability of a debtor and the payee may choose to enforce the
notes against him alone or jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.
As to whether the interpolation of the phrase and (in) his personal capacity below the signatures of the makers in the notes will
affect the liability of the makers, We do not find it necessary to resolve and decide, because it is immaterial and will not affect to the
liability of private respondent Fermin Canlas as a joint and several debtor of the notes. With or without the presence of said phrase,
private respondent Fermin Canlas is primarily liable as a co-maker of each of the notes and his liability is that of a solidary debtor.
Finally, the respondent Court made a grave error in holding that an amendment in a corporations Articles of Incorporation effecting a
change of corporate name, in this case from Worldwide Garment Manufacturing, Inc. to Pinch Manufacturing Corporation
extinguished the personality of the original corporation.
The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is
the same corporation with a different name, and its character is in no respect changed. 10
A change in the corporate name does not make a new corporation, and whether effected by special act or under a general law, has no
affect on the identity of the corporation, or on its property, rights, or liabilities. 11
The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had previously contracted or
incurred. 12
As a general rule, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into
by officers of the corporation, if duly authorized. Inasmuch as such officers acted in their capacity as agent of the old corporation and
the change of name meant only the continuation of the old juridical entity, the corporation bearing the same name is still bound by
the acts of its agents if authorized by the Board. Under the Negotiable Instruments Law, the liability of a person signing as an agent is
specifically provided for as follows:
Sec. 20. Liability of a person signing as agent and so forth. Where the instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal , or in a representative capacity, he is not liable on the instrument if he was duly
authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his
principal, does not exempt him from personal liability.
Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is acting in a representative capacity
or the name of the third party for whom he might have acted as agent, the agent is personally liable to take holder of the instrument
and cannot be permitted to prove that he was merely acting as agent of another and parol or extrinsic evidence is not admissible to
avoid the agents personal liability. 13
On the private respondents contention that the promissory notes were delivered to him in blank for his signature, we rule otherwise.
A careful examination of the notes in question shows that they are the stereotype printed form of promissory notes generally used by
commercial banking institutions to be signed by their clients in obtaining loans. Such printed notes are incomplete because there are
blank spaces to be filled up on material particulars such as payees name, amount of the loan, rate of interest, date of issue and the
maturity date. The terms and conditions of the loan are printed on the note for the borrower-debtor s perusal. An incomplete
instrument which has been delivered to the borrower for his signature is governed by Section 14 of the Negotiable Instruments Law
which provides, in so far as relevant to this case, thus:

Sec. 14. Blanks: when may be filled. Where the instrument is wanting in any material particular, the person in possession thereof
has a prima facie authority to complete it by filling up the blanks therein. In order, however, that any such instrument when
completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time
Proof that the notes were signed in blank was only the self-serving testimony of private respondent Fermin Canlas, as determined by
the trial court, so that the trial court doubts the defendant (Canlas) signed in blank the promissory notes. We chose to believe the
banks testimony that the notes were filled up before they were given to private respondent Fermin Canlas and defendant Shozo
Yamaguchi for their signatures as joint and several promissors. For signing the notes above their typewritten names, they bound
themselves as unconditional makers. We take judicial notice of the customary procedure of commercial banks of requiring their
clientele to sign promissory notes prepared by the banks in printed form with blank spaces already filled up as per agreed terms of the
loan, leaving the borrowers-debtors to do nothing but read the terms and conditions therein printed and to sign as makers or comakers. When the notes were given to private respondent Fermin Canlas for his signature, the notes were complete in the sense that
the spaces for the material particular had been filled up by the bank as per agreement. The notes were not incomplete instruments;
neither were they given to private respondent Fermin Canlas in blank as he claims. Thus, Section 14 of the Negotiable Instruments
Law is not applicable.
The ruling in case of Reformina vs. Tomol relied upon by the appellate court in reducing the interest rate on the promissory notes
from 16% to 12% per annum does not squarely apply to the instant petition. In the abovecited case, the rate of 12% was applied to
forebearances of money, goods or credit and court judgments thereon, only in the absence of any stipulation between the parties.
In the case at bar however , it was found by the trial court that the rate of interest is 9% per annum, which interest rate the plaintiff
may at any time without notice, raise within the limits allowed law. And so, as of February 16, 1984 , the plaintiff had fixed the interest
at 16% per annum.
This Court has held that the rates under the Usury Law, as amended by Presidential Decree No. 116, are applicable only to interests by
way of compensation for the use or forebearance of money. Article 2209 of the Civil Code, on the other hand, governs interests by way
of damages. 15 This fine distinction was not taken into consideration by the appellate court, which instead made a general statement
that the interest rate be at 12% per annum.
Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling prescribed by the Usury Law, the
appellate court erred in limiting the interest rates at 12% per annum. Central Bank Circular No. 905, Series of 1982 removed the
Usury Law ceiling on interest rates. 16
In the light of the foregoing analysis and under the plain language of the statute and jurisprudence on the matter, the decision of the
respondent: Court of Appeals absolving private respondent Fermin Canlas is REVERSED and SET ASIDE. Judgment is hereby
rendered declaring private respondent Fermin Canlas jointly and severally liable on all the nine promissory notes with the following
sums and at 16% interest per annum from the dates indicated, to wit:
Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest from January 29, 1981 until fully paid; under
promissory note marked as Exhibit B, the sum of P40,000.00 with interest from November 27, 1980: under the promissory note
denominated as Exhibit C, the amount of P166,466.00 with interest from January 29, 1981; under the promissory note denominated
as Exhibit D, the amount of P367,000.00 with interest from January 29, 1981 until fully paid; under the promissory note marked as
Exhibit E, the amount of P86,130.31 with interest from January 29, 1981; under the promissory note marked as Exhibit F, the sum of
P140,000.00 with interest from November 27, 1980 until fully paid; under the promissory note marked as Exhibit G, the amount of
P12,703.70 with interest from November 27, 1980; the promissory note marked as Exhibit H, the sum of P281,875.91 with interest
from January 29, 1981; and the promissory note marked as Exhibit I, the sum of P200,000.00 with interest on January 29, 1981.
The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide Garment Manufacturing, Inc.) and Shozo
Yamaguchi, for not having appealed from the decision of the trial court, shall be adjudged in accordance with the judgment rendered
by the Court a quo.
With respect to attorneys fees, and penalty and service charges, the private respondent Fermin Canlas is hereby held jointly and
solidarity liable with defendants for the amounts found, by the Court a quo. With costs against private respondent.
SO ORDERED.
[G. R. No. 116320. November 29, 1999]
ADALIA FRANCISCO, petitioner, vs. COURT OF APPEALS , HERBY COMMERCIAL & CONSTRUCTION
CORPORATION AND JAIME C. ONG, respondents.
DECISION
GONZAGA_REYES, J.:
Assailed in this petition for review on certiorari is the decision[if !supportFootnotes][1][endif] of the Court of Appeals affirming the
decision[if !supportFootnotes][2][endif] rendered by Branch 168 of the Regional Trial Court of Pasig in Civil Case No. 35231 in favor of private

respondents.
The controversy before this Court finds its origins in a Land Development and Construction Contract which was entered into
on June 23, 1977 by A. Francisco Realty & Development Corporation (AFRDC), of which petitioner Adalia Francisco (Francisco) is the
president, and private respondent Herby Commercial & Construction Corporation (HCCC), represented by its President and General
Manager private respondent Jaime C. Ong (Ong), pursuant to a housing project of AFRDC at San Jose del Monte, Bulacan, financed
by the Government Service Insurance System (GSIS). Under the contract, HCCC agreed to undertake the construction of 35 housing
units and the development of 35 hectares of land. The payment of HCCC for its services was on a turn-key basis, that is, HCCC was to
be paid on the basis of the completed houses and developed lands delivered to and accepted by AFRDC and the GSIS. To facilitate
payment, AFRDC executed a Deed of Assignment in favor of HCCC to enable the latter to collect payments directly from the GSIS.
Furthermore, the GSIS and AFRDC put up an Executive Committee Account with the Insular Bank of Asia & America (IBAA) in the
amount of P4,000,000.00 from which checks would be issued and co-signed by petitioner Francisco and the GSIS Vice-President
Armando Diaz (Diaz).
On February 10, 1978, HCCC filed a complaint [if !supportFootnotes][3][endif] with the Regional Trial Court of Quezon City against
Francisco, AFRDC and the GSIS for the collection of the unpaid balance under the Land Development and Construction Contract in
the amount of P515,493.89 for completed and delivered housing units and land development. However, the parties eventually arrived
at an amicable settlement of their differences, which was embodied in a Memorandum Agreement executed by HCCC and AFRDC on
July 21, 1978. Under the agreement, the parties stipulated that HCCC had turned over 83 housing units which have been accepted and
paid for by the GSIS. The GSIS acknowledged that it still owed HCCC P520,177.50 representing incomplete construction of housing
units, incomplete land development and 5% retention, which amount will be discharged when the defects and deficiencies are finally
completed by HCCC. It was also provided that HCCC was indebted to AFRDC in the amount of P180,234.91 which the former agreed
would be paid out of the proceeds from the 40 housing units still to be turned over by HCCC or from any amount due to HCCC from
the GSIS. Consequently, the trial court dismissed the case upon the filing by the parties of a joint motion to dismiss.
Sometime in 1979, after an examination of the records of the GSIS, Ong discovered that Diaz and Francisco had executed
and signed seven checks[if !supportFootnotes][4][endif], of various dates and amounts, drawn against the IBAA and payable to HCCC for
completed and delivered work under the contract. Ong, however, claims that these checks were never delivered to HCCC. Upon
inquiry with Diaz, Ong learned that the GSIS gave Francisco custody of the checks since she promised that she would deliver the same
to HCCC. Instead, Francisco forged the signature of Ong, without his knowledge or consent, at the dorsal portion of the said checks to
make it appear that HCCC had indorsed the checks; Francisco then indorsed the checks for a second time by signing her name at the
back of the checks and deposited the checks in her IBAA savings account. IBAA credited Franciscos account with the amount of the
checks and the latter withdrew the amount so credited.
On June 7, 1979, Ong filed complaints with the office of the city fiscal of Quezon City, charging Francisco with estafa thru
falsification of commercial documents. Francisco denied having forged Ongs signature on the checks, claiming that Ong himself
indorsed the seven checks in behalf of HCCC and delivered the same to Francisco in payment of the loans extended by Francisco to
HCCC. According to Francisco, she agreed to grant HCCC the loans in the total amount of P585,000.00 and covered by eighteen
promissory notes in order to obviate the risk of the non-completion of the project. As a means of repayment, Ong allegedly issued a
Certification authorizing Francisco to collect HCCCs receivables from the GSIS. Assistant City Fiscal Ramon M. Gerona gave credence
to Franciscos claims and accordingly, dismissed the complaints, which dismissal was affirmed by the Minister of Justice in a
resolution issued on June 5, 1981.
The present case was brought by private respondents on November 19, 1979 against Francisco and IBAA for the recovery of
P370,475.00, representing the total value of the seven checks, and for damages, attorneys fees, expenses of litigation and costs. After
trial on the merits, the trial court rendered its decision in favor of private respondents, the dispositive portion of which provides WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against the defendants INSULAR
BANK OF ASIA & AMERICA and ATTY. ADALIA FRANCISCO, to jointly and severally pay the plaintiffs the amount of P370.475.00
plus interest thereon at the rate of 12% per annum from the date of the filing of the complaint until the full amount is paid; moral
damages to plaintiff Jaime Ong in the sum of P50,000.00; exemplary damages of P50,000.00; litigation expenses of P5,000.00; and
attorneys fees of P50,000.00.
With respect to the cross-claim of the defendant IBAA against its co-defendant Atty. Adalia Francisco, the latter is ordered to
reimburse the former for the sums that the Bank shall pay to the plaintiff on the forged checks including the interests paid thereon.
Further, the defendants are ordered to pay the costs.
Based upon the findings of handwriting experts from the National Bureau of Investigation (NBI), the trial court held that
Francisco had indeed forged the signature of Ong to make it appear that he had indorsed the checks. Also, the court ruled that there
were no loans extended, reasoning that it was unbelievable that HCCC was experiencing financial difficulties so as to compel it to
obtain the loans from AFRDC in view of the fact that the GSIS had issued checks in favor of HCCC at about the same time that the
alleged advances were made. The trial court stated that it was plausible that Francisco concealed the fact of issuance of the checks

from private respondents in order to make it appear as if she were accommodating private respondents, when in truth she was lending
HCCC its own money.
With regards to the Memorandum Agreement entered into between AFRDC and HCCC in Civil Case No. Q-24628, the trial
court held that the same did not make any mention of the forged checks since private respondents were as of yet unaware of their
existence, that fact having been effectively concealed by Francisco, until private respondents acquired knowledge of Franciscos
misdeeds in 1979.
IBAA was held liable to private respondents for having honored the checks despite such obvious irregularities as the lack of
initials to validate the alterations made on the check, the absence of the signature of a co-signatory in the corporate checks of HCCC
and the deposit of the checks on a second indorsement in the savings account of Francisco. However, the trial court allowed IBAA
recourse against Francisco, who was ordered to reimburse the IBAA for any sums it shall have to pay to private respondents. [if !
supportFootnotes][5][endif]

Both Francisco and IBAA appealed the trial courts decision, but the Court of Appeals dismissed IBAAs appeal for its failure
to file its brief within the 45-day extension granted by the appellate court. IBAAs motion for reconsideration and petition for review
on certiorari filed with this Court were also similarly denied. On November 21, 1989, IBAA and HCCC entered into a Compromise
Agreement which was approved by the trial court, wherein HCCC acknowledged receipt of the amount of P370,475.00 in full
satisfaction of its claims against IBAA, without prejudice to the right of the latter to pursue its claims against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial courts ruling, hence this petition for review on certiorari filed by
petitioner, assigning the following errors to the appealed decision
1. The respondent Court of Appeals erred in concluding that private respondents did not owe Petitioner the sum covered by the
Promissory Notes Exh.2-2-A-2-P (FRANCISCO). Such conclusion was based mainly on conjectures, surmises and speculation
contrary to the unrebutted pleadings and evidence presented by petitioner.
2. The respondent Court of Appeals erred in holding that Petitioner falsified the signature of private respondent ONG on the checks in
question without any authority therefor which is patently contradictory to the unrebutted pleading and evidence that petitioner was
expressly authorized by respondent HERBY thru ONG to collect all receivables of HERBY from GSIS to pay the loans extended to
them. (Exhibit 3).
3. That respondent Court of Appeals erred in holding that the seven checks in question were not taken up in the liquidation and
reconciliation of all outstanding account between AFRDC and HERBY as acknowledged by the parties in Memorandum Agreement
(Exh. 5) is a pure conjecture, surmise and speculation contrary to the unrebutted evidence presented by petitioners. It is an inference
made which is manifestly mistaken.
4. The respondent Court of Appeals erred in affirming the decision of the lower court and dismissing the appeal. [if !supportFootnotes][6][endif]
The pivotal issue in this case is whether or not Francisco forged the signature of Ong on the seven checks. In this connection,
we uphold the lower courts finding that the subject matter of the present case, specifically the seven checks, drawn by GSIS and
AFRDC, dated between October to November 1977, in the total amount of P370,475.00 and payable to HCCC, was not included in the
Memorandum Agreement executed by HCCC and AFRDC in Civil Case No. Q-24628. As observed by the trial court, aside from there
being absolutely no mention of the checks in the said agreement, the amounts represented by said checks could not have been
included in the Memorandum Agreement executed in 1978 because private respondents only discovered Franciscos acts of forgery in
1979. The lower courts found that Francisco was able to easily conceal from private respondents even the fact of the issuance of the
checks since she was a co-signatory thereof. [if !supportFootnotes][7][endif] We also note that Francisco had custody of the checks, as proven by the
check vouchers bearing her uncontested signature, [if !supportFootnotes][8][endif] by which she, in effect, acknowledged having received the
checks intended for HCCC. This contradicts Franciscos claims that the checks were issued to Ong who delivered them to Francisco
already indorsed.[if !supportFootnotes][9][endif]
As regards the forgery, we concur with the lower courts finding that Francisco forged the signature of Ong on the checks to
make it appear as if Ong had indorsed said checks and that, after indorsing the checks for a second time by signing her name at the
back of the checks, Francisco deposited said checks in her savings account with IBAA. The forgery was satisfactorily established in the
trial court upon the strength of the findings of the NBI handwriting expert. [if !supportFootnotes][10][endif] Other than petitioners self-serving
denials, there is nothing in the records to rebut the NBIs findings. Well-entrenched is the rule that findings of trial courts which are
factual in nature, especially when affirmed by the Court of Appeals, deserve to be respected and affirmed by the Supreme Court,
provided it is supported by substantial evidence on record, [if !supportFootnotes][11][endif] as it is in the case at bench.
Petitioner claims that she was, in any event, authorized to sign Ongs name on the checks by virtue of the Certification
executed by Ong in her favor giving her the authority to collect all the receivables of HCCC from the GSIS, including the questioned
[if !supportFootnotes][12][endif]
checks.
Petitioners alternative defense must similarly fail. The Negotiable Instruments Law provides that where
any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. [if !
supportFootnotes][13][endif]
An agent, when so signing, should indicate that he is merely signing in behalf of the principal and must disclose the
name of his principal; otherwise he shall be held personally liable. [if !supportFootnotes][14][endif] Even assuming that Francisco was authorized by

HCCC to sign Ongs name, still, Francisco did not indorse the instrument in accordance with law. Instead of signing Ongs name,
Francisco should have signed her own name and expressly indicated that she was signing as an agent of HCCC. Thus, the Certification
cannot be used by Francisco to validate her act of forgery.
Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same. [if
!supportFootnotes][15][endif]
Due to her forgery of Ongs signature which enabled her to deposit the checks in her own account, Francisco
deprived HCCC of the money due it from the GSIS pursuant to the Land Development and Construction Contract. Thus, we affirm
respondent courts award of compensatory damages in the amount of P370,475.00, but with a modification as to the interest rate
which shall be six percent (6%) per annum, to be computed from the date of the filing of the complaint since the amount of damages
was alleged in the complaint; [if !supportFootnotes][16][endif] however, the rate of interest shall be twelve percent (12%) per annum from the time
the judgment in this case becomes final and executory until its satisfaction and the basis for the computation of this twelve percent
(12%) rate of interest shall be the amount of P370,475.00. This is in accordance with the doctrine enunciated in Eastern Shipping
Lines, Inc. vs. Court of Appeals, et al.,[if !supportFootnotes][17][endif] which was reiterated in Philippine National Bank vs. Court of Appeals,[if !
supportFootnotes][18][endif]
Philippine Airlines, Inc. vs. Court of Appeals [if !supportFootnotes][19][endif]and in Keng Hua Paper Products Co., Inc. vs. Court
of Appeals,[if !supportFootnotes][20][endif] which provides that 1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of six percent (6%) per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification
of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be twelve percent (12%) per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.
We also sustain the award of exemplary damages in the amount of P50,000.00. Under Article 2229 of the Civil Code,
exemplary damages are imposed by way of example or correction for the public good, in addition to the moral, temperate, liquidated
or compensatory damages. Considering petitioners fraudulent act, we hold that an award of P50,000.00 would be adequate, fair and
reasonable. The grant of exemplary damages justifies the award of attorneys fees in the amount of P50,000.00, and the award of
P5,000.00 for litigation expenses.[if !supportFootnotes][21][endif]
The appellate courts award of P50,000.00 in moral damages is warranted. Under Article 2217 of the Civil Code, moral
damages may be granted upon proof of physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation and similar injury. [if !supportFootnotes][22][endif] Ong testitified that he suffered sleepless nights,
embarrassment, humiliation and anxiety upon discovering that the checks due his company were forged by petitioner and that
petitioner had filed baseless criminal complaints against him before the fiscals office of Quezon City which disrupted HCCCs business
operations.[if !supportFootnotes][23][endif]
WHEREFORE, we AFFIRM the respondent courts decision promulgated on June 29, 1992, upholding the February 16, 1988
decision of the trial court in favor of private respondents, with the modification that the interest upon the actual damages awarded
shall be at six percent (6%) per annum, which interest rate shall be computed from the time of the filing of the complaint on
November 19, 1979. However, the interest rate shall be twelve percent (12%) per annum from the time the judgment in this case
becomes final and executory and until such amount is fully paid. The basis for computation of the six percent and twelve percent rates
of interest shall be the amount of P370,475.00. No pronouncement as to costs.
SO ORDERED.

G.R. No. 121413

January 29, 2001
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND AMERICA),
petitioner,
vs.

COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.
G.R. No. 121479
January 29, 2001
FORD PHILIPPINES, INC., petitioner-plaintiff,
vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondents.
G.R. No. 128604
January 29, 2001
FORD PHILIPPINES, INC., petitioner,
vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A. (Citibank) and
collecting bank, Philippine Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and America], the value of
several checks payable to the Commissioner of Internal Revenue, which were embezzled allegedly by an organized
syndicate.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision 1 of the Court of Appeals in CA-G.R. CV No.
25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now Philipppine Commercial
International Bank), and the August 8, 1995 Resolution,2 ordering the collecting bank, Philippine Commercial International Bank, to
pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision 3 of the Court of Appeals and its March 5, 1997
Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial International Bank,"
affirming in toto the judgment of the trial court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the amount of
P12,163,298.10 as damages for the misapplied proceeds of the plaintiff's Citibanl Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of P4,746,114.41, in favor of
the Commissioner of Internal Revenue as payment of plaintiff;s percentage or manufacturer's sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was subsequently cleared at the Central Bank. Upon
presentment with the defendant Citibank, the proceeds of the check was paid to IBAA as collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof, the Commissioner of
Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff was compelled to make a
second payment to the Bureau of Internal Revenue of its percentage/manufacturers' sales taxes for the third quarter of 1977 and that
said second payment of plaintiff in the amount of P4,746,114.41 was duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had been maintaining a
checking account with defendant Citibank; that Citibank Check No. SN-04867 which was drawn and issued by the plaintiff in favor of
the Commissioner of Internal Revenue was a crossed check in that, on its face were two parallel lines and written in between said lines
was the phrase "Payee's Account Only"; and that defendant Citibank paid the full face value of the check in the amount of
P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of 1977, the Bureau of Internal
Revenue issued Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating therein in Muntinlupa, Metro Manila, as the
authorized agent bank of Metrobanl, Alabang branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue Tax Receipt No. 18747002, was deposited
with defendant IBAA, through its Ermita Branch. The latter accepted the check and sent it to the Central Clearing House for clearing
on the samd day, with the indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed." Thereafter,
defendant IBAA presented the check for payment to defendant Citibank on same date, December 19, 1977, and the latter paid the face
value of the check in the amount of P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiff's account with
the defendant Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41 was not paid to the
Commissioner of Internal Revenue. Hence, in separate letters dated October 26, 1979, addressed to the defendants, the plaintiff
notified the latter that in case it will be re-assessed by the BIR for the payment of the taxes covered by the said checks, then plaintiff
shall hold the defendants liable for reimbursement of the face value of the same. Both defendants denied liability and refused to pay.

In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the plaintiff - supposed to be
Exhibit "D", the latter was officially informed, among others, that its check in the amount of P4, 746,114.41 was not paid to the
government or its authorized agent and instead encashed by unauthorized persons, hence, plaintiff has to pay the said amount within
fifteen days from receipt of the letter. Upon advice of the plaintiff's lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal
Revenue, the amount of P4,746,114.41, representing payment of plaintiff's percentage tax for the third quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the second time to the BIR of its
percentage taxes, plaintiff filed on January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank (PCI Bank) with the latter as
the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-04867 in the amount of P4,746,114.41
"was in due course"; it merely relied on the clearing stamp of the depository/collecting bank, the defendant IBAA that "all prior
indorsements and/or lack of indorsements guaranteed"; and the proximate cause of plaintiff's injury is the gross negligence of
defendant IBAA in indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN-048867 was paid to defendant IBAA
as collecting bank, plaintiff was maintaining a checking account with defendant Citibank." 5
Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation (NBI) revealed that Citibank
Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He purportedly needed to hold back
the check because there was an error in the computation of the tax due to the Bureau of Internal Revenue (BIR). With Rivera's
instruction, PCIBank replaced the check with two of its own Manager's Checks (MCs). Alleged members of a syndicate later deposited
the two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking Corporation (PBC) and
Godofredo Rivera, as third party defendants. But the court dismissed the complaint against PBC for lack of cause of action. The course
likewise dismissed the third-party complaint against Godofredo Rivera because he could not be served with summons as the NBI
declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the plaintiff the amount of P4,746,114.41
representing the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20,
1983, the date when the original complaint was filed until the amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to reimburse defendant Citibank for
whatever amount the latter has paid or may pay to the plaintiff in accordance with next preceding paragraph;
"3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the cross-defendant against the
cross-claimant are dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective petitions for review on
certiorari to the Courts of Appeals. On March 27, 1995, the appellate court issued its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41 representing the face value of
plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that asserted by the cross-defendant against
the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a "Motion for Partial
Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of the Court of Appeals
contending that it merely acted on the instruction of Ford and such casue of action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by respondent Ford on the said

respondent's instructions, it nevertheless found the petitioner liable to the said respondent for the full amount of the said check.
II. Did the respondent court err when it did not find prescription in favor of the petitioner. 8
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and resolution of the Court of
Appeals, and praying for the reinstatement in toto of the decision of the trial court which found both PCIBank and Citibank jointly
and severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:
1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check and a depositor of respondent
Citibank, an absolute and contractual duty to pay the proceeds of the subject check only to the payee thereof, the Commissioner of
Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which was crossed and payable to
"Payee's Account Only."
3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner Ford. 9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a person other than the payee named
therein, the Commissioner of the Bureau of Internal Revenue; thus, PCIBank's only obligation is to deliver the proceeds to the
Commissioner of the Bureau of Internal Revenue.10
2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement and/or lack of indorsement guaranteed"), is
liable as collecting bank.11
3. PCIBank is barred from raising issues of fact in the instant proceedings. 12
4. Petitioner Ford's cause of action had not prescribed. 13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle Ford's percentage taxes appertaining
to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing the percentage tax due for the
second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for
the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73, representing the payment of
percentage tax for the first quarter of 1979 and payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt
No. A-1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal lines on its upper corner between, which were written the words "payable
to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B, demanded for the said tax
payments the corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and spurious". This anomaly was
confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR a new, while an action was filed against
Citibank and PCIBank for the recovery of the amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus operandi of the syndicate, as
follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As such, he prepared the
plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-10597] for payment to the BIR. Instead, however, fo delivering the same of the
payee, he passed on the check to a co-conspirator named Remberto Castro who was a pro-manager of the San Andres Branch of
PCIB.* In connivance with one Winston Dulay, Castro himself subsequently opened a Checking Account in the name of a fictitious
person denominated as 'Reynaldo reyes' in the Meralco Branch of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America Check in exactly the same
amount as the first FORD check (Exh. "A", P5,851,706.37) while this worthless check was coursed through PCIB's main office enroute
to the Central Bank for clearing, replaced this worthless check with FORD's Exhibit 'A' and accordingly tampered the accompanying
documents to cover the replacement. As a result, Exhibit 'A' was cleared by defendant CITIBANK, and the fictitious deposit account of
'Reynaldo Reyes' was credited at the PCIB Meralco Branch with the total amount of the FORD check Exhibit 'A'. The same method
was again utilized by the syndicate in profiting from Exh. 'B' [Citibank Check No. SN-16508] which was subsequently pilfered by
Alexis Marindo, Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the other participating conspirators namely

(1) CRISANTO BERNABE, the mastermind who formulated the method for the embezzlement; (2) RODOLFO R. DE LEON a customs
broker who negotiated the initial contact between Bernabe, FORD's Godofredo Rivera and PCIB's Remberto Castro; (3) JUAN
VASTILLO who assisted de Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORD's accountant who passed on the first
check (Exhibit "A") to Castro; (5) REMERTO CASTRO, PCIB's pro-manager at San Andres who performed the switching of checks in
the clearing process and opened the fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's
Assistant Manager at its Meralco Branch, who assisted Castro in switching the checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS MARINDO, Rivera's Assistant at FORD, who gave the second
check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and spurious revenue tax receipts
to make it appear that the BIR had received FORD's tax payments.
Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the proceeds of the two checks,
but like the aforementioned participants in the conspiracy, have not been impleaded in the present case. The manner by which the
said funds were distributed among them are traceable from the record of checks drawn against the original "Reynaldo Reyes" account
and indubitably identify the parties who illegally benefited therefrom and readily indicate in what amounts they did so." 14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for the value of the two checks
while adsolving PCIBank from any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD the total amount of
P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of first written demand until full payment, plus
P300,000.00 attorney's fees and expenses litigation, and to pay the defendant, PCIB (on its counterclaim to crossclaim) the sum of
P300,000.00 as attorney's fees and costs of litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its resolution dated
March 5, 1997, with respect to the dismissal of the complaint against PCIBank and holding Citibank solely responsible for the
proceeds of Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be exercised by it as a banking
insitution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection and supervision of its officers and employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to the plaintiff Ford as a consequence
of the substitution of the check consistent with Section 5 of Central Bank Circular No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due course the subject checks, it is liable, under
Article 2154 of the Civil Code, to return the money which it admits having received, and which was credited to it its Central bank
account.16
The main issue presented for our consideration by these petitions could be simplified as follows: Has petitioner Ford the right to
recover from the collecting bank (PCIBank) and the drawee bank (Citibank) the value of the checks intended as payment to the
Commissioner of Internal Revenue? Or has Ford's cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of the person negotiating the same was allegedly
defective because the instrument was obtained by fraud and unlawful means, and the proceeds of the checks were not remitted to the
payee. It was established that instead of paying the checks to the CIR, for the settlement of the approprite quarterly percentage taxes
of Ford, the checks were diverted and encashed for the eventual distribution among the mmbers of the syndicate. As to the unlawful
negotiation of the check the applicable law is Section 55 of the Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who negotiates an instrument is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto, by fraud, duress, or fore and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith or under such circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in breach of faith amounting to fraud. The
person negotiating the checks must have gone beyond the authority given by his principal. If the principal could prove that there was
no negligence in the performance of his duties, he may set up the personal defense to escape liability and recover from other parties
who. Though their own negligence, alowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a syndicate, are now fugitives
from justice. They have, even if temporarily, escaped liability for the embezzlement of millions of pesos. We are thus left only with the
task of determining who of the present parties before us must bear the burden of loss of these millions. It all boils down to thequestion
of liability based on the degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory negligence" that would defeat its
claim for reimbursement, bearing ing mind that its employees, Godofredo Rivera and Alexis Marindo, were among the members of

the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to his co-conspirators, instead
of delivering them to the designated authorized collecting bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that
Ford was remiss in the supervision and control of its own employees, inasmuch as it only discovered the syndicate's activities through
the information given by the payee of the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the proceeds of Citibank Check No.
SN-04867, instead of using it to pay the BIR. As to the subsequent run-around of unds of Citibank Check Nos. SN-10597 and 16508,
PCIBank claims that the proximate cause of the damge to Ford lies in its own officers and employees who carried out the fradulent
schemes and the transactions. These circumstances were not checked by other officers of the company including its comptroller or
internal auditor. PCIBank contends that the inaction of Ford despite the enormity of the amount involved was a sheer negligence and
stated that, as between two innocent persons, one of whom must suffer the consequences of a breach of trust, the one who made it
possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence presented before the trial
court showing lack of diligence on the part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford argues that even if
there was a finding therein that the drawer was negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in its behalf, specifically, to divert
the proceeds of the checks. It adds that Citibank raised the issue of imputed negligence against Ford for the first time on appeal. Thus,
it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship is instructive. Since a
master may be held for his servant's wrongful act, the law imputes to the master the act of the servant, and if that act is negligent or
wrongful and proximately results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct
of the master, for which he is liable.18 The general rule is that if the master is injured by the negligence of a third person and by the
concuring contributory negligence of his own servant or agent, the latter's negligence is imputed to his superior and will defeat the
superior's action against the third person, asuming, of course that the contributory negligence was the proximate cause of the
injury of which complaint is made.19
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General Ledger Accountant, and/or Alexis
Marindo, his assistant, was the proximate cause of the loss or damage. AS defined, proximate cause is that which, in the natural and
continuous sequence, unbroken by any efficient, intervening cause produces the injury and without the result would not have
occurred.20
It appears that although the employees of Ford initiated the transactions attributable to an organized syndicate, in our view, their
actions were not the proximate cause of encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could not be
characterized as the proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank Check No. SN-04867.
Rivera's instruction to replace the said check with PCIBank's Manager's Check was not in theordinary course of business which could
have prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks were made payable to the
CIR. Both were crossed checks. These checks were apparently turned around by Ford's emploees, who were acting on their own
personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's confidential employee or agent, who by
virtue of his position had unusual facilities for perpertrating the fraud and imposing the forged paper upon the bank, does notentitle
the bank toshift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer. 21 This rule
likewise applies to the checks fraudulently negotiated or diverted by the confidential employees who hold them in their possession.
With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial courts found variations
between the negotiation of Citibank Check No. SN-04867 and the misapplication of total proceeds of Checks SN-10597 and 16508.
Therefore, we have to scrutinize, separately, PCIBank's share of negligence when the syndicate achieved its ultimate agenda of stealing
the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through the ordinary banking
transaction, sent to Central Clearing with the indorsement at the back "all prior indorsements and/or lack of indorsements
guaranteed," and was presented to Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared
two of its Manager's checks and enabled the syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of PCIBank employees to verify
whether his letter requesting for the replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack of care and
prudence required in the circumstances.

Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As an agent of BIR,
PCIBank is duty bound to consult its principal regarding the unwarranted instructions given by the payor or its agent. As aptly stated
by the trial court, to wit:
"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a depository/collecting bank
of BIR, it has the responsibility to make sure that the check in question is deposited in Payee's account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its principal BIR and not from any
other person especially so when that person is not known to the defendant. It is very imprudent on the part of the defendant IBAA to
just rely on the alleged telephone call of the one Godofredo Rivera and in his signature considering that the plaintiff is not a client of
the defendant IBAA."
It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which it is sent for
collection is, in the absence of an argreement to the contrary, that of principal and agent. 22 A bank which receives such paper for
collection is the agent of the payee or holder.23
Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in behalf of the designated
payee may be allowed, still such diversion must be properly authorized by the payor. Otherwise stated, the diversion can be justified
only by proof of authority from the drawer, or that the drawer has clothed his agent with apparent authority to receive the proceeds of
such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned checks stating that ALL PRIOR
INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED should render PCIBank liable because it made it pass through
the clearing house and therefore Citibank had no other option but to pay it. Thus, Citibank had no other option but to pay it. Thus,
Citibank assets that the proximate cause of Ford's injury is the gross negligence of PCIBank. Since the questione dcrossed check was
deposited with PCIBank, which claimed to be a depository/collecting bank of the BIR, it had the responsibility to make sure that the
check in questions is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the check should be deposited only in the
account of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the check be deposited in payee's account only.
Therefore, it is the collecting bank (PCIBank) which is bound to scruninize the check and to know its depositors before it could make
the clearing indorsement "all prior indorsements and/or lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, 24 we ruled:
"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC's Board of Directors that:
'In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the back of the checks are the defedant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR
LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of the falsity of its representation." 25
Lastly, banking business requires that the one who first cashes and negotiates the check must take some percautions to learn whether
or not it is genuine. And if the one cashing the check through indifference or othe circumstance assists the forger in committing the
fraud, he should not be permitted to retain the proceeds of the check from the drawee whose sole fault was that it did not discover the
forgery or the defect in the title of the person negotiating the instrument before paying the check. For this reason, a bank which cashes
a check drawn upon another bank, without requiring proof as to the identity of persons presenting it, or making inquiries with regard
to them, cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards diverted to the hands of a
third party. In such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed a check which had been
forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence which proximately contributed to the
success of the fraud practiced on the drawee bank. The latter may recover from the holder the money paid on the check. 26
Having established that the collecting bank's negligence is the proximate cause of the loss, we conclude that PCIBank is liable in the
amount corresponding to the proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of business that would attribute
to it the case of the embezzlement of Citibank Check Numbers SN-10597 and 16508, because PCIBank did not actually receive nor
hold the two Ford checks at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the process of the
embezzlement. This Court is convinced that the switching operation (involving the checks while in transit for "clearing") were the
clandestine or hidden actuations performed by the members of the syndicate in their own personl, covert and private capacity and
done without the knowledge of the defendant PCIBank"27

In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in the embezzlement. As a general
rule, however, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the
course and scope of their employment. 28 A bank will be held liable for the negligence of its officers or agents when acting within the
course and scope of their employment. It may be liable for the tortuous acts of its officers even as regards that species of tort of which
malice is an essential element. In this case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched
by a syndicate in which its own management employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN-10597 and 16508. He
passed the checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco Branch, who helped Castro open a Checking
account of a fictitious person named "Reynaldo Reyes." Castro deposited a worthless Bank of America Check in exactly the same
amount of Ford checks. The syndicate tampered with the checks and succeeded in replacing the worthless checks and the eventual
encashment of Citibank Check Nos. SN 10597 and 16508. The PCIBank Ptro-manager, Castro, and his co-conspirator Assistant
Manager apparently performed their activities using facilities in their official capacity or authority but for their personal and private
gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these officers or agents
were enabled to perpetrate in the apparent course of their employment; nor will t be permitted to shirk its responsibility for such
frauds, even though no benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the fraudulent acts or
representations of an officer or agent acting within the course and apparent scope of his employment or authority. 29 And if an officer
or employee of a bank, in his official capacity, receives money to satisfy an evidence of indebetedness lodged with his bank for
collection, the bank is liable for his misappropriation of such sum. 30
Moreover, as correctly pointed out by Ford, Section 5 31 of Central Bank Circular No. 580, Series of 1977 provides that any theft
affecting items in transit for clearing, shall be for the account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of its duties. Citibank failed to
establish that its payment of Ford's checjs were made in due course and legally in order. In its defense, Citibank claims the
genuineness and due execution of said checks, considering that Citibank (1) has no knowledge of any informity in the issuance of the
checks in question (2) coupled by the fact that said checks were sufficiently funded and (3) the endorsement of the Payee or lack
thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty to pay the proceeds of the
subject check only to the payee thereof, the CIR. Citing Section 62 32 of the Negotiable Instruments Law, Ford argues that by accepting
the instrument, the acceptro which is Citibank engages that it will pay according to the tenor of its acceptance, and that it will pay only
to the payee, (the CIR), considering the fact that here the check was crossed with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank Checks Numbers SN
10597 and 16508, because of the contractual relationship existing between the two. Citibank, as the drawee bank breached its
contractual obligation with Ford and such degree of culpability contributed to the damage caused to the latter. On this score, we agree
with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the proceeds thereof to
the collecting bank of the BIR. One thing is clear from the record: the clearing stamps at the back of Citibank Check Nos. SN 10597
and 16508 do not bear any initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been duly
examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508 would have been discovered in time. For
this reason, Citibank had indeed failed to perform what was incumbent upon it, which is to ensure that the amount of the checks
should be paid only to its designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in our view,
consitutes negligence in carrying out the bank's duty to its depositors. The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank failed in their respective
obligations and both were negligent in the selection and supervision of their employees resulting in the encashment of Citibank Check
Nos. SN 10597 AND 16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of said checks issued by
Ford in favor of the CIR.
Time and again, we have stressed that banking business is so impressed with public interest where the trust and confidence of the
public in general is of paramount umportance such that the appropriate standard of diligence must be very high, if not the highest,
degree of diligence.34 A bank's liability as obligor is not merely vicarious but primary, wherein the defense of exercise of due diligence
in the selection and supervision of its employees is of no moment. 35
Banks handle daily transactions involving millions of pesos.36 By the very nature of their work the degree of responsibility, care and
trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. 37 Banks are

expected to exercise the highest degree of diligence in the selection and supervision of their employees. 38
On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability to seek judicial relief
seasonably, considering that the alleged negligent act took place prior to December 19, 1977 but the relief was sought only in 1983, or
seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily when the check is
returned to the alleged drawer as a voucher with a statement of his account, 39 and an action upon a check is ordinarily governed by the
statutory period applicable to instruments in writing.40
Our laws on the matter provide that the action upon a written contract must be brought within ten year from the time the right of
action accrues.41 hence, the reckoning time for the prescriptive period begins when the instrument was issued and the corresponding
check was returned by the bank to its depositor (normally a month thereafter). Applying the same rule, the cause of action for the
recovery of the proceeds of Citibank Check No. SN 04867 would normally be a month after December 19, 1977, when Citibank paid
the face value of the check in the amount of P4,746,114.41. Since the original complaint for the cause of action was filed on January
20, 1984, barely six years had lapsed. Thus, we conclude that Ford's cause of action to recover the amount of Citibank Check No. SN
04867 was seasonably filed within the period provided by law.
Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure on the part of the depositor to
examine its passbook, statements of account, and cancelled checks and to give notice within a reasonable time (or as required by
statute) of any discrepancy which it may in the exercise of due care and diligence find therein, serves to mitigate the banks' liability by
reducing the award of interest from twelve percent (12%) to six percent (6%) per annum. As provided in Article 1172 of the Civil Code
of the Philippines, respondibility arising from negligence in the performance of every kind of obligation is also demandable, but such
liability may be regulated by the courts, according to the circumstances. In quasi-delicts, the contributory negligence of the plaintiff
shall reduce the damages that he may recover.42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017 are AFFIRMED. PCIBank,
know formerly as Insular Bank of Asia and America, id declared solely responsible for the loss of the proceeds of Citibank Check No
SN 04867 in the amount P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to Ford Philippines Inc.
from the date when the original complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as follows: PCIBank and
Citibank are adjudged liable for and must share the loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and 16508
totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to pay Ford Philippines Inc. P6,081,649.05, with six
percent (6%) interest thereon, from the date the complaint was filed until full payment of said amount.1wphi1.nt
Costs against Philippine Commercial International Bank and Citibank N.A.
SO ORDERED.

G.R. No. 107382/G.R. No. 107612

January 31, 1996
ASSOCIATED BANK, petitioner,
vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612
January 31, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee bank or the collecting bank?
This is the main issue in these consolidated petitions for review assailing the decision of the Court of Appeals in "Province of Tarlac v.

Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No. 17962). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the provincial
funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and countersigned by the Provincial Auditor
or the Secretary of the Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The allotment checks for said government
hospital are drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency
Hospital, Concepcion, Tarlac." The checks are released by the Office of the Provincial Treasurer and received for the hospital by its
administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial Auditor. It was then discovered
that the hospital did not receive several allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared checks which were issued
from 1977 to 1980 in order to verify the regularity of their encashment. After the checks were examined, the Provincial Treasurer
learned that 30 checks amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank acting as
collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital until his retirement on February
28, 1978, collected the questioned checks from the office of the Provincial Treasurer. He claimed to be assisting or helping the hospital
follow up the release of the checks and had official receipts. 3 Pangilinan sought to encash the first check 4 with Associated Bank.
However, the manager of Associated Bank refused and suggested that Pangilinan deposit the check in his personal savings account
with the same bank. Pangilinan was able to withdraw the money when the check was cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same procedure for the
second check, in the amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-eight other checks of various amounts and
on various dates. The last check negotiated by Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the checks bore the
stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED BANK."
Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks were paid to him for certain
projects with the hospital. 7 He did not find as irregular the fact that the checks were not payable to Pangilinan but to the Concepcion
Emergency Hospital. While he admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given
Pangilinan preferential treatment on this account. 8
On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of the various amounts debited
from the current account of the Province. 9
In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn, impleaded Associated Bank as thirdparty defendant. The latter then filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan. 11
After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine National Bank (PNB), ordering the
latter to pay to the former, the sum of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon
from March 20, 1981 until fully paid;
2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National Bank (PNB) and against third-party
defendant/fourth-party plaintiff Associated Bank ordering the latter to reimburse to the former the amount of Two Hundred Three
Thousand Three Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully paid;.
3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action as against fourth-party defendant
Adena Canlas and lack of jurisdiction over the person of fourth-party defendant Fausto Pangilinan as against the latter.
4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint, the same are hereby ordered dismissed
for lack of merit.
SO ORDERED. 12
PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court affirmed the trial court's decision in toto on
September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent appellate court's decision.
PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province of Tarlac from liability
when, in fact, the latter was negligent because it delivered and released the questioned checks to Fausto Pangilinan who was then
already retired as the hospital's cashier and administrative officer. PNB also maintains its innocence and alleges that as between two
innocent persons, the one whose act was the cause of the loss, in this case the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the province and then seek reimbursement from Associated Bank.

According to petitioner bank, respondent appellate Court should have directed Associated Bank to pay the adjudged liability directly
to the Province of Tarlac to avoid circuity. 14
Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the drawee bank (PNB) solely
and ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead of Central Bank Circular No.
580, which, being an administrative regulation issued pursuant to law, has the force and effect of law. 15 The PCHC Rules are merely
contractual stipulations among and between member-banks. As such, they cannot prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of prior indorsements against
Associated Bank, the collecting bank. In stamping the guarantee (for all prior indorsements), it merely followed a mandatory
requirement for clearing and had no choice but to place the stamp of guarantee; otherwise, there would be no clearing. The bank will
be in a "no-win" situation and will always bear the loss as against the drawee bank. 16
Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in question, it is now estopped
from asserting the defense that Associated Bank guaranteed prior indorsements. The drawee bank allegedly has the primary duty to
verify the genuineness of payee's indorsement before paying the check. 17
While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should solely bear the loss because it
cleared and paid the forged checks.
xxx
xxx
xxx
The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were properly issued and
bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the payee's
(Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their indorsement, the checks were order
instruments.
Checks having forged indorsements should be differentiated from forged checks or checks bearing the forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is forged or made without authority of the person whose signature
it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under such signature unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority.
A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to the instrument
through it. A person whose signature to an instrument was forged was never a party and never consented to the contract which
allegedly gave rise to such instrument. 18 Section 23 does not avoid the instrument but only the forged signature. 19 Thus, a forged
indorsement does not operate as the payee's indorsement.
The exception to the general rule in Section 23 is where "a party against whom it is sought to enforce a right is precluded from setting
up the forgery or want of authority." Parties who warrant or admit the genuineness of the signature in question and those who, by
their acts, silence or negligence are estopped from setting up the defense of forgery, are precluded from using this defense. Indorsers,
persons negotiating by delivery and acceptors are warrantors of the genuineness of the signatures on the instrument. 20
In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument. Hence, when the
indorsement is a forgery, only the person whose signature is forged can raise the defense of forgery against a holder in due course. 21
The checks involved in this case are order instruments, hence, the following discussion is made with reference to the effects of a
forged indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the signature of its rightful holder
(here, the payee hospital) is essential to transfer title to the same instrument. When the holder's indorsement is forged, all parties
prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. 22
An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has a
good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and
subsisting." 23 He cannot interpose the defense that signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an
indorser. So even if the indorsement on the check deposited by the banks's client is forged, the collecting bank is bound by his
warranties as an indorser and cannot set up the defense of forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of the payee. The
drawer's instructions are reflected on the face and by the terms of the check. Payment under a forged indorsement is not to the
drawer's order. When the drawee bank pays a person other than the payee, it does not comply with the terms of the check and violates
its duty to charge its customer's (the drawer) account only for properly payable items. Since the drawee bank did not pay a holder or
other person entitled to receive payment, it has no right to reimbursement from the drawer. 24 The general rule then is that the drawee
bank may not debit the drawer's account and is not entitled to indemnification from the drawer. 25 The risk of loss must perforce fall

on the drawee bank.

However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially contributed to the
making of the forged signature, the drawer is precluded from asserting the forgery.
If at the same time the drawee bank was also negligent to the point of substantially contributing to the loss, then such loss from the
forgery can be apportioned between the negligent drawer and the negligent bank. 26
In cases involving a forged check, where the drawer's signature is forged, the drawer can recover from the drawee bank. No drawee
bank has a right to pay a forged check. If it does, it shall have to recredit the amount of the check to the account of the drawer. The
liability chain ends with the drawee bank whose responsibility it is to know the drawer's signature since the latter is its customer. 27
In cases involving checks with forged indorsements, such as the present petition, the chain of liability does not end with the drawee
bank. The drawee bank may not debit the account of the drawer but may generally pass liability back through the collection chain to
the party who took from the forger and, of course, to the forger himself, if available. 28 In other words, the drawee bank canseek
reimbursement or a return of the amount it paid from the presentor bank or person. 29 Theoretically, the latter can demand
reimbursement from the person who indorsed the check to it and so on. The loss falls on the party who took the check from the forger,
or on the forger himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank (PNB). The former will necessarily
be liable to the latter for the checks bearing forged indorsements. If the forgery is that of the payee's or holder's indorsement, the
collecting bank is held liable, without prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The former must
necessarily return the money paid by the latter because it was paid wrongfully. 30
More importantly, by reason of the statutory warranty of a general indorser in section 66 of the Negotiable Instruments Law, a
collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior
indorsements, including the forged indorsement. It warrants that the instrument is genuine, and that it is valid and subsisting at the
time of his indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this warranty and will be
accountable to the drawee bank. This liability scheme operates without regard to fault on the part of the collecting/presenting bank.
Even if the latter bank was not negligent, it would still be liable to the drawee bank because of its indorsement.
The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss because it has the duty to
ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements." 31
The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness. of any
indorsement. 32 The drawee bank's duty is but to verify the genuineness of the drawer's signature and not of the indorsement because
the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him, his
address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect forgery,
fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting bank. However, a
drawee bank has the duty to promptly inform the presentor of the forgery upon discovery. If the drawee bank delays in informing the
presentor of the forgery, thereby depriving said presentor of the right to recover from the forger, the former is deemed negligent and
can no longer recover from the presentor. 33
Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of the Province of Tarlac because it
paid checks which bore forged indorsements. However, if the Province of Tarlac as drawer was negligent to the point of substantially
contributing to the loss, then the drawee bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac
were negligent, the loss should be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which presented and indorsed the
checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the opportunity to recover from
the forger, it forfeits its right to reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that the Province of Tarlac was equally negligent and should, therefore, share
the burden of loss from the checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already retired from government
service, was no longer connected with the hospital. With the exception of the first check (dated January 17, 1978), all the checks were
issued and released after Pangilinan's retirement on February 28, 1978. After nearly three years, the Treasurer's office was still
releasing the checks to the retired cashier. In addition, some of the aid allotment checks were released to Pangilinan and the others to
Elizabeth Juco, the new cashier. The fact that there were now two persons collecting the checks for the hospital is an unmistakable
sign of an irregularity which should have alerted employees in the Treasurer's office of the fraud being committed. There is also

evidence indicating that the provincial employees were aware of Pangilinan's retirement and consequent dissociation from the
hospital. Jose Meru, the Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of checks, one went to Mr. Pangilinan and one went to Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized representative of Concepcion Emergency Hospital is and was
supposed to be Miss Juco?
A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan represented himself as also authorized to
help in the release of these checks and we were apparently misled because they accepted the representation of Pangilinan that he was
helping them in the release of the checks and besides according to them they were, Pangilinan, like the rest, was able to present an
official receipt to acknowledge these receipts and according to them since this is a government check and believed that it will
eventually go to the hospital following the standard procedure of negotiating government checks, they released the checks to
Pangilinan aside from Miss Juco.34
The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss tantamount to negligence.
Hence, the Province of Tarlac should be liable for part of the total amount paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it cannot escape liability and
should also bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were deposited in the forger's account with the
collecting bank and were later paid by four different drawee banks. The Court found the collecting bank (Associated) to be negligent
and held:
The Bank should have first verified his right to endorse the crossed checks, of which he was not the payee, and to deposit the proceeds
of the checks to his own account. The Bank was by reason of the nature of the checks put upon notice that they were issued for deposit
only to the private respondent's account. . . .
The situation in the case at bench is analogous to the above case, for it was not the payee who deposited the checks with the collecting
bank. Here, the checks were all payable to Concepcion Emergency Hospital but it was Fausto Pangilinan who deposited the checks in
his personal savings account.
Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of endorsements guaranteed) is
merely a requirement forced upon it by clearing house rules, it cannot but remain liable. The stamp guaranteeing prior indorsements
is not an empty rubric which a bank must fulfill for the sake of convenience. A bank is not required to accept all the checks negotiated
to it. It is within the bank's discretion to receive a check for no banking institution would consciously or deliberately accept a check
bearing a forged indorsement. When a check is deposited with the collecting bank, it takes a risk on its depositor. It is only logical that
this bank be held accountable for checks deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the opportunity to go after the forger,
signifies negligence on the part of the drawee bank (PNB) and will preclude it from claiming reimbursement.
It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section 23 of the Philippine Clearing
House Corporation Rules comes to fore. Under Section 4(c) of CB Circular No. 580, items bearing a forged endorsement shall be
returned within twenty-Sour (24) hours after discovery of the forgery but in no event beyond the period fixed or provided by law for
filing of a legal action by the returning bank. Section 23 of the PCHC Rules deleted the requirement that items bearing a forged
endorsement should be returned within twenty-four hours. Associated Bank now argues that the aforementioned Central Bank
Circular is applicable. Since PNB did not return the questioned checks within twenty-four hours, but several days later, Associated
Bank alleges that PNB should be considered negligent and not entitled to reimbursement of the amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is an administrative regulation
issued pursuant to law and as such, must prevail over the PCHC rule. The Central Bank circular was in force for all banks until June
1980 when the Philippine Clearing House Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were
covered by the PCHC while banks located elsewhere still had to go through Central Bank Clearing. In any event, the twenty-four-hour
return rule was adopted by the PCHC until it was changed in 1982. The contending banks herein, which are both branches in Tarlac
province, are therefore not covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB circular was applicable when the
forgery of the checks was discovered in 1981.
The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery but in no event beyond the
period fixed by law for filing a legal action. The rationale of the rule is to give the collecting bank (which indorsed the check) adequate
opportunity to proceed against the forger. If prompt notice is not given, the collecting bank maybe prejudiced and lose the
opportunity to go after its depositor.

The Court finds that even if PNB did not return the questioned checks to Associated Bank within twenty-four hours, as mandated by
the rule, PNB did not commit negligent delay. Under the circumstances, PNB gave prompt notice to Associated Bank and the latter
bank was not prejudiced in going after Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB necessarily
had to inspect the checks and conduct its own investigation. Thereafter, it requested the Provincial Treasurer's office on March 31,
1981 to return the checks for verification. The Province of Tarlac returned the checks only on April 22, 1981. Two days later,
Associated Bank received the checks from PNB. 36
Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March 20, 1981, thus giving it notice of the
forgeries. At this time, however, Pangilinan's account with Associated had only P24.63 in it. 37 Had Associated Bank decided to debit
Pangilinan's account, it could not have recovered the amounts paid on the questioned checks. In addition, while Associated Bank filed
a fourth-party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and even presented him as its
rebuttal witness. 38 Hence, Associated Bank was not prejudiced by PNB's failure to comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter paid and cleared the checks.
The Court finds this contention unmeritorious. Even if PNB cleared and paid the checks, it can still recover from Associated Bank.
This is true even if the payee's Chief Officer who was supposed to have indorsed the checks is also a customer of the drawee bank. 39
PNB's duty was to verify the genuineness of the drawer's signature and not the genuineness of payee's indorsement. Associated Bank,
as the collecting bank, is the entity with the duty to verify the genuineness of the payee's indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to the Province of Tarlac the
amount of the checks and then directing Associated Bank to reimburse PNB. The Court finds nothing wrong with the mode of the
award. The drawer, Province of Tarlac, is a clientor customer of the PNB, not of Associated Bank. There is no privity of contract
between the drawer and the collecting bank.
The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of extrajudicial demand made
by the Province of Tarlac on PNB. The payments to be made in this case stem from the deposits of the Province of Tarlac in its current
account with the PNB. Bank deposits are considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a twelve
percent (12%) interest per annum for loans, forebearance of money, goods or credits in the absence of express stipulation. Normally,
current accounts are likewise interest-bearing, by express contract, thus excluding them from the coverage of CB Circular No. 416. In
this case, however, the actual interest rate, if any, for the current account opened by the Province of Tarlac with PNB was not given in
evidence. Hence, the Court deems it wise to affirm the trial court's use of the legal interest rate, or six percent (6%) per annum. The
interest rate shall be computed from the date of default, or the date of judicial or extrajudicial demand. 41 The trial court did not err in
granting legal interest from March 20, 1981, the date of extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due to the negligence of the
Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to
receive the checks for the payee hospital for a period close to three years and in not properly ascertaining why the retired hospital
cashier was collecting checks for the payee hospital in addition to the hospital's real cashier, respondent Province contributed to the
loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only
recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as
indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements,
including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the
genuineness of the payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No. 107612) is hereby
PARTIALLY GRANTED. The petition for review filed by the Associated Bank (G.R. No. 107382) is hereby DENIED. The decision of
the trial court is MODIFIED. The Philippine National Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac,
with legal interest from March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent (50%) of P203,300.00 to
the Philippine National Bank, likewise, with legal interest from March 20, 1981 until payment is made.
SO ORDERED.
G.R. No. L-53194 March 14, 1988
PHILIPPINE NATIONAL BANK petitioner,
vs.
HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch XIV, and FRANCISCO S.
GOZON II, respondents.
GANCAYCO, J.:

On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City Branch of the Philippine National Bank, went to the
bank in his car accompanied by his friend Ernesto Santos whom he left in the car while he transacted business in the bank. When
Santos saw that Gozon left his check book he took a check therefrom, filled it up for the amount of P5,000.00, forged the signature of
Gozon, and thereafter he encashed the check in the bank on the same day. The account of Gozon was debited the said amount. Upon
receipt of the statement of account from the bank, Gozon asked that the said amount of P5,000.00 should be returned to his account
as his signature on the check was forged but the bank refused.
Upon complaint of private respondent on February 1, 1974 Ernesto Santos was apprehended by the police authorities and upon
investigation he admitted that he stole the check of Gozon, forged his signature and encashed the same with the Bank.
Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus interest, damages, attorney's fees and costs against
the bank in the Court of First Instance of Rizal. After the issues were joined and the trial on the merits ensued, a decision was
rendered on February 4, 1980, the dispositive part of which reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The defendant is hereby condemned to return to plaintiff the
amount of P5,000.00 which it had unlawfully withheld from the latter, with interest at the legal rate from September 22, 1972 until
the amount is fully delivered. The defendant is further condemned to pay plaintiff the sum of P2,000.00 as attorney's fees and to pay
the costs of this suit.
Not satisfied therewith, the bank now filed this petition for review on certiorari in this Court raising the sole legal issue that
THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS CHECK BOOK CONTAINING THE CHECK IN QUESTION
INTO THE HANDS OF ERNESTO SANTOS WAS INDEED THE PROXIMATE CAUSE OF THE LOSS, THEREBY PRECLUDING
HIM FROM SETTING UP THE DEFENSE OF FORGERY OR WANT 0F AUTHORITY UNDER SECTION 23 OF THE NEGOTIABLE
INSTRUMENTS LAW, ACT NO. 3201
The petition is devoid of merit.
This Court reproduces with approval the disquisition of the court a quo as follows:
A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment
out of its own funds, and cannot ordinarily change the amount so paid to the account of the depositor whose name was forged' (San
Carlos Milling Co. vs. Bank of the P.I., 59 Phil. 59).
This rule is absolutely necessary to the circulation of drafts and checks, and is based upon the presumed negligence of the drawee in
failing to meet its obligation to know the signature of its correspondent. ... There is nothing inequitable in such a rule. If the paper
comes to the drawee in the regular course of business, and he, having the opportunity ascertaining its character, pronounces it to be
valid and pays it, it is not only a question of payment under mistake, but payment in neglect of duty which the commercial law places
upon him, and the result of his negligence must rest upon him (12 ALR 1901, citing many cases found in I Agbayani, supra).
Defendant, however, interposed the defense that it exercised diligence in accordance with the accepted norms of banking practice
when it accepted and paid Exhibit "A". It presented evidence that the check had to pass scrutiny by a signature verifier as well as an
officer of the bank.
A comparison of the signature (Exhibit "A-l") on the forged check (Exhibit "A") with plaintiffs exemplar signatures (Exhibits "5-N"
and "5-B") found in the PNB Form 35-A would immediately show the negligence of the employees of the defendant bank. Even a not
too careful comparison would immediately arrest one's attention and direct it to the graceful lines of plaintiffs exemplar signatures
found in Exhibits "5-A" and "5-B". The formation of the first letter "F" in the exemplars, which could be regarded as artistic, is
completely different from the way the same letter is formed in Exhibit "A-l". That alone should have alerted a more careful and
prudent signature verifier.
The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the depositor on the check being encashed. 1
It is expected to use reasonable business prudence in accepting and cashing a check presented to it.
In this case the findings of facts of the court a quo are conclusive. The trial court found that a comparison of the signature on the
forged check and the sample signatures of private respondent show marked differences as the graceful lines in the sample signature
which is completely different from those of the signature on the forged check. Indeed the NBI handwriting expert Estelita Santiago
Agnes whom the trial court considered to be an "unbiased scientific expert" indicated the marked differences between the signature of
private respondent on the sample signatures and the questioned signature. Notwithstanding the testimony of Col. Fernandez, witness
for petitioner, advancing the opinion that the questioned signature appears to be genuine, the trial court by merely examining the
pictorial report presented by said witness, found a marked difference in the second "c" in Francisco as written on the questioned
signature as compared to the sample signatures, and the separation between the "s" and the "c" in the questioned signature while they
are connected in the sample signatures. 2
Obviously, petitioner was negligent in encashing said forged check without carefully examining the signature which shows marked
variation from the genuine signature of private respondent.
In reference to the allegation of the petitioner that it is the negligence of private respondent that is the cause of the loss which he
suffered, the trial court held:

The act of plaintiff in leaving his checkbook in the car while he went out for a short while can not be considered negligence sufficient
to excuse the defendant bank from its own negligence. It should be home in mind that when defendant left his car, Ernesto Santos, a
long time classmate and friend remained in the same. Defendant could not have been expected to know that the said Ernesto Santos
would remove a check from his checkbook. Defendant had trust in his classmate and friend. He had no reason to suspect that the
latter would breach that trust .
We agree.
Private respondent trustee Ernesto Santos as a classmate and a friend. He brought him along in his car to the bank and he left his
personal belongings in the car. Santos however removed and stole a check from his cheek book without the knowledge and consent of
private respondent. No doubt private respondent cannot be considered negligent under the circumstances of the case.
WHEREFORE, the petition is DISMISSED for lack of merit with costs against petitioner.
SO ORDERED.
G.R. No. L-54526 August 25, 1986
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,
vs.
THE COURT OF APPEALS and THE CITY OF DAGUPAN, respondents.
Miguel T. Caguioa, Ireneo B. Orlino and Manuel D. Victorio for respondent City of Dagupan.
FERIA, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals which affirmed the decision of the then Court of First
Instance of Pangasinan. The lower court had declared respondent City of Dagupan the lawful owner of the Dagupan Waterworks
System and held that the National Waterworks and Sewerage Authority, now petitioner Metropolitan Waterworks and Sewerage
System, was a possessor in bad faith and hence not entitled to indemnity for the useful improvements it had introduced.
Before proceeding further, it may be necessary to invite attention to the common error of joining the court (be it a Regional Trial
Court, the Intermediate Appellate Court, or the Sandiganbayan) as a party respondent in an appeal by certiorari to this Court under
Rule 45 of the Rules of Court. The only parties in an appeal by certiorari are the appellant as petitioner and the appellee as
respondent. (Cf. Elks Club vs. Rovira, 80 Phil. 272) The court which rendered the judgment appealed from is not a party in said
appeal. It is in the special civil action of certiorari under Section 5 of Rule 65 of the Rules of Court where the court or judge is required
to be joined as party defendant or respondent. The joinder of the Intermediate Appellate Court or the Sandiganbayan as party
respondent in an appeal by certiorari is necessary in cases where the petitioner-appellant claims that said court acted without or in
excess of its jurisdiction or with grave abuse of discretion. An example of this is a case where the petitioner-appellant claims that the
Intermediate Appellate Court or the Sandiganbayan acted with grave abuse of discretion in making its findings of fact, thus justifying
the review by this court of said findings of fact. (See the exceptions to the rule of conclusiveness of the findings of fact of the
Intermediate Appellate Court or the Sandiganbayan in the case of Sacay vs. Sandiganbayan, G.R. Nos. 66497-98, July 10, 1986.) In
such a case, the petition for review on certiorari under Rule 45 of the Rules of Court is at the same time a petition for certiorari under
Rule 65, and the joinder of the Intermediate Appellate Court or the Sandiganbayan becomes necessary. (Cf. Lianga Lumber Company
vs. Lianga Timber Co., Inc., March 31, 1977, 76 SCRA 197).
The City of Dagupan (hereinafter referred to as the CITY) filed a complaint against the former National Waterworks and Sewerage
Authority (hereinafter referred to as the NAWASA), now the Metropolitan Waterworks and Sewerage System (hereinafter referred to
as MWSS), for recovery of the ownership and possession of the Dagupan Waterworks System. NAWASA interposed as one of its
special defenses R.A. 1383 which vested upon it the ownership, possession and control of all waterworks systems throughout the
Philippines and as one of its counterclaims the reimbursement of the expenses it had incurred for necessary and useful improvements
amounting to P255,000.00. Judgment was rendered by the trial court in favor of the CITY on the basis of a stipulation of facts. The
trial court found NAWASA to be a possessor in bad faith and hence not entitled to the reimbursement claimed by it. NAWASA
appealed to the then Court of Appeals and argued in its lone assignment of error that the CITY should have been held liable for the
amortization of the balance of the loan secured by NAWASA for the improvement of the Dagupan Waterworks System. The appellate
court affirmed the judgment of the trial court and ruled as follows:
However, as already found above, these useful expenses were made in utter bad faith for they were instituted after the complaint was
filed and after numerous Supreme Court decisions were promulgated declaring unconstitutional the taking by NAWASA of the
patrimonial waterworks systems of cities, municipalities and provinces without just compensation.
Under Article 546 of the New Civil Code cited by the appellant, it is clear that a builder or a possessor in bad faith is not entitled to
indemnity for any useful improvement on the premises. (Santos vs. Mojica, L-25450, Jan. 31, 1969). In fact, he is not entitled to any
right regarding the useful expenses (II Paras (1971) 387). He shall not have any right whatsoever. Consequently, the owner shall be

entitled to all of the useful improvements without any obligation on his part (Jurado, Civil Law Reviewer (1974) 223).
Petitioner-Appellant MWSS, successor-in-interest of the NAWASA, appealed to this Court raising the sole issue of whether or not it
has the right to remove all the useful improvements introduced by NAWASA to the Dagupan Waterworks System, notwithstanding
the fact that NAWASA was found to be a possessor in bad faith. In support of its claim for removal of said useful improvements,
MWSS argues that the pertinent laws on the subject, particularly Articles 546, 547 and 549 of the Civil Code of the Philippines, do not
definitely settle the question of whether a possessor in bad faith has the right to remove useful improvements. To bolster its claim
MWSS further cites the decisions in the cases of Mindanao Academy, Inc. vs. Yap (13 SCRA 190) and Carbonell vs. Court of Appeals
(69 SCRA 99).
The CITY in its brief questions the raising of the issue of the removal of useful improvements for the first time in this Court, inasmuch
as it was not raised in the trial court, much less assigned as an error before the then Court of Appeals. The CITY further argues that
petitioner, as a possessor in bad faith, has absolutely no right to the useful improvements; that the rulings in the cases cited by
petitioner are not applicable to the case at bar; that even assuming that petitioner has the right to remove the useful improvements,
such improvements were not actually identified, and hence a rehearing would be required which is improper at this stage of the
proceedings; and finally, that such improvements, even if they could be identified, could not be separated without causing substantial
injury or damage to the Dagupan Waterworks System.
The procedural objection of the CITY is technically correct. NAWASA should have alleged its additional counterclaim in the
alternative-for the reimbursement of the expenses it had incurred for necessary and useful improvements or for the removal of all the
useful improvements it had introduced.
Petitioner, however, argues that although such issue of removal was never pleaded as a counterclaim nevertheless it was joined with
the implied consent of the CITY, because the latter never filed a counter-manifestation or objection to petitioner's manifestation
wherein it stated that the improvements were separable from the system, and quotes the first part of Sec. 5 of Rule 10 of the Rules of
Court to support its contention. Said provision reads as follows:
SEC. 5. Amendment to conform to or authorize presentation of evidence.-When issues not raised by the pleadings are tried by express
or implied consent of the parties, they shall be treated in all respects, as if they had been raised in the pleadings. Such amendment of
the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of
any party at any time, even after judgment; but failure so to amend does not affect the result of the trial of these issues. ...
This argument is untenable because the above-quoted provision is premised on the fact that evidence had been introduced on an issue
not raised by the pleadings without any objection thereto being raised by the adverse party. In the case at bar, no evidence whatsoever
had been introduced by petitioner on the issue of removability of the improvements and the case was decided on a stipulation of facts.
Consequently, the pleadings could not be deemed amended to conform to the evidence.
However, We shall overlook this procedural defect and rule on the main issue raised in this appeal, to wit: Does a possessor in bad
faith have the right to remove useful improvements? The answer is clearly in the negative. Recognized authorities on the subject are
agreed on this point. *
Article 449 of the Civil Code of the Philippines provides that "he who builds, plants or sows in bad faith on the land of another, loses
what is built, planted or sown without right to indemnity." As a builder in bad faith, NAWASA lost whatever useful improvements it
had made without right to indemnity (Santos vs. Mojica, Jan. 31, 1969, 26 SCRA 703).
Moreover, under Article 546 of said code, only a possessor in good faith shall be refunded for useful expenses with the right of
retention until reimbursed; and under Article 547 thereof, only a possessor in good faith may remove useful improvements if this can
be done without damage to the principal thing and if the person who recovers the possession does not exercise the option of
reimbursing the useful expenses. The right given a possessor in bad faith is to remove improvements applies only to improvements for
pure luxury or mere pleasure, provided the thing suffers no injury thereby and the lawful possessor does not prefer to retain them by
paying the value they have at the time he enters into possession (Article 549, Id.).
The decision in the case of Mindanao Academy, Inc. vs. Yap (13 SCRA 190) cited by petitioner does not support its stand. On the
contrary, this Court ruled in said case that "if the defendant constructed a new building, as he alleges, he cannot recover its value
because the construction was done after the filing of the action for annulment, thus rendering him a builder in bad faith who is denied
by law any right of reimbursement." What this Court allowed appellant Yap to remove were the equipment, books, furniture and
fixtures brought in by him, because they were outside of the scope of the judgment and may be retained by him.
Neither may the decision in the case of Carbonell vs. Court of Appeals (69 SCRA 99), also cited by petitioner, be invoked to modify
the clear provisions of the Civil Code of the Philippines that a possessor in bad faith is not entitled to reimbursement of useful
expenses or to removal of useful improvements.
In said case, both the trial court and the Court of Appeals found that respondents Infantes were possessors in good faith. On appeal,
the First Division of this Court reversed the decision of the Court of Appeals and declared petitioner Carbonell to have the superior
right to the land in question. On the question of whether or not respondents Infantes were possessors in good faith four Members
ruled that they were not, but as a matter of equity allowed them to remove the useful improvements they had introduced on the land.

Justice Teehankee (now Chief Justice) concurred on the same premise as the dissenting opinion of Justice Munoz Palma that both the
conflicting buyers of the real property in question, namely petitioner Carbonell as the first buyer and respondents Infantes as the
second buyer, may be deemed purchasers in good faith at the respective dates of their purchase. Justice Munoz Palma dissented on
the ground that since both purchasers were undoubtedly in good faith, respondents Infantes' prior registration of the sale in good
faith entitled them to the ownership of the land. Inasmuch as only four Members concurred in ruling that respondents Infantes were
possessors in bad faith and two Members ruled that they were possessors in good faith said decision does not establish a precedent.
Moreover, the equitable consideration present in said case are not present in the case at bar.
WHEREFORE, the decision of the appellate court is affirmed with costs against petitioner.
SO ORDERED.
G.R. No. 107569 November 8, 1994
PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO FERNANDEZ, respondents.
Vidad, Corpus & Associates for petitioner.
Remedios Jayme-Fernandez for privaate respondents.
PUNO, J.:
Petitioner bank seeks the review of the decision, dated October 15, 1992, of the Court of Appeals 1 in CA G.R. CV No. 27195, the
dispositive portion of which reads as follows:
WHEREFORE, the judgment appealed from is hereby SET ASIDE and a new one is entered ordering defendant-appellee PNB to reapply the interest rate of 12% per annum to plaintiffs-appellants' (referring to herein private respondents) indebtedness and to
accordingly take the appropriate charges from plaintiffs-appellants' (private respondents') payment of P81,000.00 made on
December 26, 1985. Any balance on the indebtedness should, likewise, be charged interest at the rate of 12% per annum.
SO ORDERED.
The parties do not dispute the facts as laid down by respondent court in its impugned decision, viz.:
On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise, obtained a loan under the Cottage Industry
Guaranty Loan Fund (CIGLF) from the Philippine National Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos, as
evidenced by a Credit Agreement. Under the Promissory Note covering the loan, the loan was to be amortized over a period of three
(3) years to end on March 29, 1985, at twelve (12%) percent interest annually.
To secure the loan, (private respondents) executed a Real Estate Mortgage over a 1.5542-hectare parcel of unregistered agricultural
land located at Cambang-ug, Toledo City, which was appraised by the PNB at P1,062.52 and given a loan value of P531.26 by the
Bank. In addition, (private respondents) executed a Chattel Mortgage over a thermo plastic-forming machine, which had an appraisal
value of P8,800 and a loan value of P4,400.00.
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever
policy it may adopt in the future; Provided, that the interest rate on this accommodation shall be correspondingly decreased in the
event that the applicable maximum interest is reduced by law or by the Monetary Board. In either case, the adjustment in the interest
rate agreed upon shall take effect on the effectivity date of the increase or decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice, beyond the stipulated rate of
12% but only "within the limits allowed by law."
The Real Estate Mortgage contract likewise provided that
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as well as the interest on
the amount which may have been advanced by the MORTGAGE, in accordance with the provision hereof, shall be subject during the
life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe
for its debtors.
On February 17, 1983, (private respondents) were granted an additional NACIDA loan of Fifty Thousand (P50,000.00) Pesos by the
PNB, for which (private respondents) executed another Promissory Note, which was to mature on April 1, 1985. Other than the date of
maturity, the second promissory note contained the same terms and stipulations as the previous note. The parties likewise executed a
new Credit Agreement, changing the amount of the loan from P50,000.00 to P100,000.00, but otherwise preserving the stipulations
contained in the original agreement.
As additional security for the loan, (private respondents) constituted another real estate mortgage over 2 parcels of registered land,
with a combined area of 311 square meters, located at Guadalupe, Cebu City. The land, upon which several buildings are standing, was
appraised by the PNB to have a value of P40,000.00 and a loan value of P28,000.00.

In a letter dated August 1, 1984, the PNB informed (private respondents) "that the interest rate of your CIGLF loan account with us is
now 25% per annum plus a penalty of 6% per annum on past dues." The PNB further increased this interest rate to 30% on October
15, 1984; and to 42% on October 25, 1984.
The records show that as of December 1985, (private respondents) had an outstanding principal account of P81,000.00 of which
P18,523.14 was credited to the principal, P57,488.89 to the interest, and the rest to penalty and other charges. Thus, as of said date,
the unpaid principal obligation of (private respondent) amounted to P62,830.32.
Thereafter, (private respondents) exerted efforts to get the PNB to re-adopt the 12% interest and to condone the present interest and
penalties due; but to no avail. 2 (Citations omitted.)
On December 15, 1987, private respondents filed a suit for specific performance against petitioner PNB and the NACIDA. It was
docketed as Civil Case No. CEB-5610, and raffled to the Regional Trial Court, 7th Judicial Region, Cebu City, Br. 7. 3 Private
respondents prayed the trial court to order:
1. The PNB and NACIDA to issue in (private respondents') favor, a release of mortgage;
2. The PNB to pay pecuniary consequential damages for the destruction of (private respondents') enterprise;
3. The PNB to pay moral and exemplary damages as well as the costs of suit; and
4. Granting (private respondents') such other relief as may be found just and equitable in the premises. 4
On February 26, 1990, the trial court dismissed private respondents' complaint in Civil Case No. CEB-5610. On October 15, 1992, the
Court of Appeals reversed the dismissal with respect to petitioner bank, and disallowed the increases in interest rates.
Petitioner bank now contends that "respondent Court of Appeals committed grave error when it ruled (1) that the increase in interest
rates are unauthorized; (2) that the Credit Agreement and the Promissory Notes are not the law between the parties; (3) that CB
Circular No. 773 and CB Circular
No. 905 are not applicable; and (4) that private respondents are not estopped from questioning the increase of rate interest made by
petitioner." 5
The petition is bereft of merit.
In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause contained in their credit agreement
which provides, as follows:
The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it
may adopt in the future and provided, that, the interest rate on this accommodation shall be correspondingly decreased in the event
that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest
rate agreed upon shall take effect on the effectivity date of the increase or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.)
No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest
agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board;
Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon
shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided
further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in
the maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary Board to prescribe the maximum rates of interest for loans
and certain forbearances. Pursuant to such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982,
Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby amended to read as
follows:
Sec. 1303. Interest and Other Charges. The rate of interest, including commissions, premiums, fees and other charges, on any loan,
or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent
adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust,
upward or downward, the interest previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law
and circular did not authorize either party to unilaterally raise the interest rate without the other's consent.
It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties.
If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under duress or by a
person of unsound mind. 6
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the

proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be
mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to unilaterally
upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right to
assent to an important modification in their agreement, and would negate the element of mutuality in contracts. In Philippine
National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held
. . . The unilateral action of the PNB in increasing the interest rate on the private respondent's loan violated the mutuality of contracts
ordained in Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force or law between the parties, there must be mutuality between the
parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void . . . . Hence, even assuming that
the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion,
where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to
take it or leave it" . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse
and imposition. (Citation omitted.)
Private respondents are not also estopped from assailing the unilateral increases in interest rate made by petitioner bank. No one
receiving a proposal to change a contract to which he is a party, is obliged to answer the proposal, and his silence per se cannot be
construed as an acceptance. 7 In the case at bench, the circumstances do not show that private respondents implicitly agreed to the
proposed increases in interest rate which by any standard were too sudden and too stiff.
IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision of the Court of Appeals in CA-G.R. CV No.
27195, dated October 15, 1992, is AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. L-50373 February 15, 1990
MANILA LIGHTER TRANSPORTATION, INC., petitioner,
vs.
COURT OF APPEALS AND CHINA BANKING CORPORATION, respondents.
Sergio L. Guadiz and Jose Diokno & Associates for petitioner.
Sycip, Salazar, Hernandez & Gatmaitan for private respondent.
GRIO-AQUINO, J.:
A complaint for recovery of the value of forty-nine (49) checks with alleged forged/unauthorized indorsements of the payee of which
26 were paid to the petitioner or order and twenty-three (23) to petitioner or bearer, was filed by herein petitioner against private
respondent China Banking Corporation on May 22, 1962. The complaint alleged that the checks were issued by customers of the
petitioner in payment of brokerage/lighterage services and were all delivered, without petitioner's knowledge, to its collector, Augusto
Perez. Upon forged indorsements of the petitioner's general manager, the checks found their way into the accounts of third persons in
the respondent bank and the proceeds were later withdrawn, to the damage of the petitioner who sought reimbursement or
restoration by said bank of the value of the checks.
Respondent Bank denied liability for the petitioner's loss which was due to its own negligence. It alleged that petitioner is estopped
from denying its collector's authority to receive the checks from the drawers/customers; that petitioner failed to give defendant Bank
and the drawee Banks notice of the alleged forged or unauthorized indorsements within a reasonable time; and that its loss was
occasioned by its own failure to observe the proper degree of diligence in the supervision of its employees, particularly its collector,
Augusta Perez.
Upon leave of court, respondent Bank filed a third-party complaint against Cao Pek & Co. and Ko Lit who had deposited the checks in
question in their respective accounts with the former and had thereafter withdrawn the proceeds thereof.
The trial court, in its decision dated January 22, 1972, made the following findings of facts:
... . Over a period of eighteen months, from January 29, 1960 (Exh. B) to June 22, 1961 (Exh. B-11), Augusto Perez collected from
different clients of plaintiff company some 49 checks (Exhs. A to E-2) with a total value of P91,153.11. The endorsement of the payee,
plaintiff Manila Lighter Transportation, Inc., by its general manager, Luis Gaskell appear on the checks. The latter disclaimed such

signatures and presented a handwriting expert who gave the opinion that the signatures "L. Gaskell" on the indorsement were indeed
forgeries. The checks as thus endorsed were negotiated by Wilfredo Lagamon, accountant of the plaintiff company and relative of Luis
Gaskell with Cao Pek and Co., an electronic store, whose treasurer is Ko Lit. Most of the checks, with a total amount of P90,500.24,
were deposited by Ko Lit in his account with defendant bank (Exh. 4). Three checks with a total amount of P1,115.05 were deposited in
the account of Cao Pek & Co. while one check for P2,735.19 was deposited in the accounts of Lu Siu Po, manager of Cao Pek & Co.
These accounts have no more balances at present.
As late as July 21, 1961, plaintiff apparently did not know what was happening because on that date it sent S. Quintos Transportation,
Inc., one of its clients whose checks were collected by Augusto Perez, the following letter:
"Upon a detailed examination of our records, we found out that various jobs undertaking (sic) by us in your behalf in 1960 and 1961
are still pending payment as of this date.
We are sending you herewith our statement covering these jobs which amount to P23,520.30 and would request you to kindly confirm
its correctness at your earliest."
It may be assumed that similar letters were sent to other clients of plaintiff in a similar situation, namely: Go Fay and Co., for
P12,568.77; Peter Paul Phil. Corp. for P36,967.80; Central Azucarera Don Pedro for P11,190.14; and Helena Cigar Co. for P4,296.90.
"Another client, Cia. Gral. de Tabacos de Filipinas, had also paid plaintiff four checks in the total amount of P3,453.53 all drawn
against Hongkong and Shanghai Banking Corp. (Exhs. 2-a to 2-d). Upon complaint of the drawer after the anomalies were discovered
(Exhs. 2-F, 2) defendant bank refunded the amount to drawee bank (Exh. 3) and the amount is not included in the complaint,
although defendant bank has entered a counterclaim for the amount against plaintiff.
Plaintiff made its initial demand against defendant bank for the refund of the amount of the checks on September 9, 1961 (Exh T).
There were some attempts made to negotiate an amicable settlement, but nothing came of it."
On May 30, 1962, the defendant Bank filed a third-party complaint against Cao Pek and Co. and Ko Lit. Cao Pek and Co., in turn, filed
a cross-claim against Ko Lit. (pp. 38-40, Rollo.)
The lower court found both parties equally negligent, the plaintiff (herein petitioner), for allowing a state of affairs in which its
employees could appropriate the checks and falsify the indorsement thereon of its manager with impunity, and the defendant (private
respondent herein), for not detecting the falsification made by the plaintiffs employees when the checks were presented to it.
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendant China Banking Corporation to pay plaintiff Manila Lighter Transportation, Inc., an amount equal to 50% of the
total amount of the checks Exhibits A to E-2;
2. Ordering plaintiff to pay defendant 50% of the amount of the Tabacalera checks Exhibits 2-A to 2-D;
3. Ordering third-party defendant Ko Lit to pay P90,500.24 and third-party defendant Cao Pek & Co. to pay Pl,215.05, both to China
Banking Corporation;
4. Ordering China Banking Corporation to pay plaintiff 50% of any amount it may recover from Ko Lit and Cao Pek & Co.
The parties shall bear their own costs and attorney's fees. (p. 40, Rollo.)
Both petitioner and private respondent appealed to the Court of Appeals, contending that the other should be entirely liable. Ko Lit
and Cao Pek also appealed but their appeal was dismissed for failure to pay the docket fee and to file the record on appeal.
On January 18, 1979, the Court of Appeals rendered judgment, the dispositive portion of which states:
WHEREFORE, the judgment appealed from is hereby modified such that the complaint is dismissed and the defendant-appellant is
freed from any liability to the plaintiff-appellant. The counterclaim of P3,453.53 is granted with interests from the date the amended
counterclaim was filed. The third-party defendants are adjudged directly liable to the plaintiff-appellant for the checks they
respectively indorsed. No costs. (p. 49, Rollo.)
Petitioner filed a motion for reconsideration of the decision but it was denied, hence, this petition for review, alleging that the Court of
Appeals erred:
1. in finding that the petitioner was negligent;
2. in holding that said negligence constituted sufficient ground to preclude it from alleging forgery or want of authority;
3. in not ruling that the proximate cause for the loss was the respondent Bank's failure in its duty to ascertain the genuineness of the
signatures appearing in the checks;
4. in not ruling that the respondent Bank should have been held entirely liable for the loss; and
5. in not condemning respondent Bank to pay petitioner damages, attorney's fees, expenses and costs.
The instant petition for review must necessarily fail. The issues raised therein are factual. The main issue of petitioner's negligence
had already been determined by the trial court against petitioner and affirmed by the Court of Appeals after examining the evidence in
the records.
Since the petitioner was not a client of respondent Bank, i.e., did not maintain an account in said Bank, the latter had no way of
ascertaining the authenticity of its indorsements on the checks which were deposited in the accounts of the third-party defendants in

said Bank. Respondent Bank was not negligent because, in accordance with banking practice, it caused the checks to pass through the
clearing house before it allowed their proceeds to be withdrawn by the depositors (third-party defendants in the lower court). (p. 117,
Rollo.)
The Supreme Court decides appeals which only involve questions of law. It is not the function of the Supreme Court to analyze or
weigh the evidence all over again, its jurisdiction being limited to resolving errors of law that might have been committed by the lower
court. (Dihiansan vs. Court of Appeals, 153 SCRA 712; Francisco vs. Mandi, 152 SCRA 711; Director of Lands vs. Funtilar 142 SCRA
57).
WHEREFORE, the petition for review is denied for lack of merit. Costs against the petitioner.
SO ORDERED.
G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad Gempesaw, appealed to this Court
in a Petition for Review, on the issue of the right of the drawer to recover from the drawee bank who pays a check with a forged
indorsement of the payee, debiting the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against the private respondent Philippine Bank of
Communications (respondent drawee Bank) for recovery of the money value of eighty-two (82) checks charged against the petitioner's
account with the respondent drawee Bank on the ground that the payees' indorsements were forgeries. The Regional Trial Court,
Branch CXXVIII of Caloocan City, which tried the case, rendered a decision on November 17, 1987 dismissing the complaint as well as
the respondent drawee Bank's counterclaim. On appeal, the Court of Appeals in a decision rendered on February 22, 1990, affirmed
the decision of the RTC on two grounds, namely (1) that the plaintiff's (petitioner herein) gross negligence in issuing the checks was
the proximate cause of the loss and (2) assuming that the bank was also negligent, the loss must nevertheless be borne by the party
whose negligence was the proximate cause of the loss. On March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules
of Court setting forth the following as the alleged errors of the respondent Court: 1
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE NEGLIGENCE OF THE DRAWER IS THE PROXIMATE
CAUSE OF THE RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS PRECLUDED FROM SETTING UP THE
FORGERY OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND RULING THAT IT IS THE GROSS AND
INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE RESPONDENT BANK
IN FORGING THE SIGNATURE OF THE PAYEES AND THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS,
OTHER THAN TO THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE CAUSE OF THE
DAMAGE TO PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE RESPONDENT BANK TO RESTORE OR RECREDIT THE CHECKING ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY BRANCH BY THE VALUE OF THE
EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at Rizal Avenue Extension and at
Second Avenue, Caloocan City. Among these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a
checking account numbered 13-00038-1 with the Caloocan City Branch of the respondent drawee Bank. To facilitate payment of debts
to her suppliers, petitioner draws checks against her checking account with the respondent bank as drawee. Her customary practice of
issuing checks in payment of her suppliers was as follows: the checks were prepared and filled up as to all material particulars by her
trusted bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the bookkeeper prepared the checks, the
completed checks were submitted to the petitioner for her signature, together with the corresponding invoice receipts which indicate
the correct obligations due and payable to her suppliers. Petitioner signed each and every check without bothering to verify the

accuracy of the checks against the corresponding invoices because she reposed full and implicit trust and confidence on her
bookkeeper. The issuance and delivery of the checks to the payees named therein were left to the bookkeeper. Petitioner admitted that
she did not make any verification as to whether or not the checks were delivered to their respective payees. Although the respondent
drawee Bank notified her of all checks presented to and paid by the bank, petitioner did not verify he correctness of the returned
checks, much less check if the payees actually received the checks in payment for the supplies she received. In the course of her
business operations covering a period of two years, petitioner issued, following her usual practice stated above, a total of eighty-two
(82) checks in favor of several suppliers. These checks were all presented by the indorsees as holders thereof to, and honored by, the
respondent drawee Bank. Respondent drawee Bank correspondingly debited the amounts thereof against petitioner's checking
account numbered 30-00038-1. Most of the aforementioned checks were for amounts in excess of her actual obligations to the various
payees as shown in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual
obligation to said payee was only P895.33 (Exh. A-83); (2) in Check No. 652282 issued on September 18, 1984 in favor of Senson
Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in
Check No. 589092 dated April 7, 1984 for the amount of P11,672.47 in favor of Marchem (Exh. A-61) appellant's obligation was only
P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation
was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984 in favor of Malinta Exchange Mart for P11,107.16
(Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor of Grocer's
International Food Corp. in the amount of P11,335.60 (Exh. A-66), her obligation was only P1,335.60 (Exh. E and E-1); (7) in Check
No. 589019 dated March 17, 1984 in favor of Sophy Products in the amount of P11,648.00 (Exh. A-78), her obligation was only
P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the amount of P11,520.00 in favor of the Yakult Philippines
(Exh. A-73), the latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 23, 1984 in the amount of
P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and I-2). 2
Practically, all the checks issued and honored by the respondent drawee bank were crossed checks. 3 Aside from the daily notice given
to the petitioner by the respondent drawee Bank, the latter also furnished her with a monthly statement of her transactions, attaching
thereto all the cancelled checks she had issued and which were debited against her current account. It was only after the lapse of more
two (2) years that petitioner found out about the fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon, Chief Accountant of respondent
drawee Bank at the Buendia branch, who, without authority therefor, accepted them all for deposit at the Buendia branch to the credit
and/or in the accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three
(63) out of the eighty-two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo Y. Romero at the respondent drawee
Bank's Buendia branch, and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks were
deposited in Account No. 0443-4, under the name of Benito Lam at the Elcao branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified that they did not receive nor even see the
subject checks and that the indorsements appearing at the back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted periodic inspection of the branches'
operations failed to discover, check or stop the unauthorized acts of Ernest L. Boon. Under the rules of the respondent drawee Bank,
only a Branch Manager and no other official of the respondent drawee bank, may accept a second indorsement on a check for deposit.
In the case at bar, all the deposit slips of the eighty-two (82) checks in question were initialed and/or approved for deposit by Ernest
L. Boon. The Branch Managers of the Ongpin and Elcao branches accepted the deposits made in the Buendia branch and credited
the accounts of Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her account with the money value of
the eighty-two (82) checks totalling P1,208.606.89 for having been wrongfully charged against her account. Respondent drawee Bank
refused to grant petitioner's demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee bank. The payees are not parties to the
case. Rather, it is the drawer, whose signature is genuine, who instituted this action to recover from the drawee bank the money value
of eighty-two (82) checks paid out by the drawee bank to holders of those checks where the indorsements of the payees were forged.
How and by whom the forgeries were committed are not established on the record, but the respective payees admitted that they did
not receive those checks and therefore never indorsed the same. The applicable law is the Negotiable Instruments Law 4 (heretofore
referred to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and
no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting
up the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party whose signature is forged. A party whose signature to

an instrument was forged was never a party and never gave his consent to the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot be held liable thereon by anyone, not even by a holder in due course. Thus, if a
person's signature is forged as a maker of a promissory note, he cannot be made to pay because he never made the promise to pay. Or
where a person's signature as a drawer of a check is forged, the drawee bank cannot charge the amount thereof against the drawer's
account because he never gave the bank the order to pay. And said section does not refer only to the forged signature of the maker of a
promissory note and of the drawer of a check. It covers also a forged indorsement, i.e., the forged signature of the payee or indorsee of
a note or check. Since under said provision a forged signature is "wholly inoperative", no one can gain title to the instrument through
such forged indorsement. Such an indorsement prevents any subsequent party from acquiring any right as against any party whose
name appears prior to the forgery. Although rights may exist between and among parties subsequent to the forged indorsement, not
one of them can acquire rights against parties prior to the forgery. Such forged indorsement cuts off the rights of all subsequent
parties as against parties prior to the forgery. However, the law makes an exception to these rules where a party is precluded from
setting up forgery as a defense.
As a matter of practical significance, problems arising from forged indorsements of checks may generally be broken into two types of
cases: (1) where forgery was accomplished by a person not associated with the drawer for example a mail robbery; and (2) where
the indorsement was forged by an agent of the drawer. This difference in situations would determine the effect of the drawer's
negligence with respect to forged indorsements. While there is no duty resting on the depositor to look for forged indorsements on his
cancelled checks in contrast to a duty imposed upon him to look for forgeries of his own name, a depositor is under a duty to set up an
accounting system and a business procedure as are reasonably calculated to prevent or render difficult the forgery of indorsements,
particularly by the depositor's own employees. And if the drawer (depositor) learns that a check drawn by him has been paid under a
forged indorsement, the drawer is under duty promptly to report such fact to the drawee bank. 5 For his negligence or failure either to
discover or to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee who has debited his
account under a forged indorsement. 6 In other words, he is precluded from using forgery as a basis for his claim for re-crediting of his
account.
In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted employee, Alicia Galang, and were
given to her for her signature. Her signing the checks made the negotiable instrument complete. Prior to signing the checks, there was
no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument to the payee for the purpose of
giving effect thereto. 7 The first delivery of the instrument, complete in form, to the payee who takes it as a holder, is called issuance of
the instrument. 8 Without the initial delivery of the instrument from the drawer of the check to the payee, there can be no valid and
binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized her employee Alicia Galang to deliver the eightytwo (82) checks to their respective payees. Instead of issuing the checks to the payees as named in the checks, Alicia Galang delivered
them to the Chief Accountant of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established that
the signatures of the payees as first indorsers were forged. The record fails to show the identity of the party who made the forged
signatures. The checks were then indorsed for the second time with the names of Alfredo Y. Romero and Benito Lam, and were
deposited in the latter's accounts as earlier noted. The second indorsements were all genuine signatures of the alleged holders. All the
eighty-two (82) checks bearing the forged indorsements of the payees and the genuine second indorsements of Alfredo Y. Romero and
Benito Lam were accepted for deposit at the Buendia branch of respondent drawee Bank to the credit of their respective savings
accounts in the Buendia, Ongpin and Elcao branches of the same bank. The total amount of P1,208,606.89, represented by eightytwo (82) checks, were credited and paid out by respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against
petitioner's checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer's account for the
amount of said check. An exception to this rule is where the drawer is guilty of such negligence which causes the bank to honor such a
check or checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the forged
indorsement by mere examination of his cancelled check. This accounts for the rule that although a depositor owes a duty to his
drawer's account the amount theretofore paid under the check with a forged payee's indorsement
because the drawee did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks because they were crossed checks. Issuing a
crossed check imposes no legal obligation on the drawee not to honor such a check. It is more of a warning to the holder that the check
cannot be presented to the drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank which in
turn must present it for payment against the drawee bank in the course of normal banking transactions between banks. The crossed
check cannot be presented for payment but it can only be deposited and the drawee bank may only pay to another bank in the payee's
or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with more than one indorsement. The

drawee bank to examine his cancelled checks for forgery of his own signature, he has no similar duty as to forged indorsements. A
different situation arises where the indorsement was forged by an employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an agent or employee deal with the payee's indorsement. The drawer
and the payee often time shave business relations of long standing. The continued occurrence of business transactions of the same
nature provides the opportunity for the agent/employee to commit the fraud after having developed familiarity with the signatures of
the parties. However, sooner or later, some leak will show on the drawer's books. It will then be just a question of time until the fraud
is discovered. This is specially true when the agent perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the depositor to act as a
prudent businessman would under the circumstances. In the case at bar, the petitioner relied implicitly upon the honesty and loyalty
of her bookkeeper, and did not even verify the accuracy of amounts of the checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank statements, she apparently did not carefully examine the same nor the check
stubs and the returned checks, and did not compare them with the same invoices. Otherwise, she could have easily discovered the
discrepancies between the checks and the documents serving as bases for the checks. With such discovery, the subsequent forgeries
would not have been accomplished. It was not until two years after the bookkeeper commenced her fraudulent scheme that petitioner
discovered that eighty-two (82) checks were wrongfully charged to her account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of non-payment. Assuming that even
one single complaint had been made, petitioner would have been duty-bound, as far as the respondent drawee Bank was concerned, to
make an adequate investigation on the matter. Had this been done, the discrepancies would have been discovered, sooner or later.
Petitioner's failure to make such adequate inquiry constituted negligence which resulted in the bank's honoring of the subsequent
checks with forged indorsements. On the other hand, since the record mentions nothing about such a complaint, the possibility exists
that the checks in question covered inexistent sales. But even in such a case, considering the length of a period of two (2) years, it is
hard to believe that petitioner did not know or realize that she was paying more than she should for the supplies she was actually
getting. A depositor may not sit idly by, after knowledge has come to her that her funds seem to be disappearing or that there may be a
leak in her business, and refrain from taking the steps that a careful and prudent businessman would take in such circumstances and
if taken, would result in stopping the continuance of the fraudulent scheme. If she fails to take steps, the facts may establish her
negligence, and in that event, she would be estopped from recovering from the bank. 9
One thing is clear from the records that the petitioner failed to examine her records with reasonable diligence whether before she
signed the checks or after receiving her bank statements. Had the petitioner examined her records more carefully, particularly the
invoice receipts, cancelled checks, check book stubs, and had she compared the sums written as amounts payable in the eighty-two
(82) checks with the pertinent sales invoices, she would have easily discovered that in some checks, the amounts did not tally with
those appearing in the sales invoices. Had she noticed these discrepancies, she should not have signed those checks, and should have
conducted an inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant in going over her current
account by taking careful note of the daily reports made by respondent drawee Bank in her issued checks, or at least made random
scrutiny of cancelled checks returned by respondent drawee Bank at the close of each month, she could have easily discovered the
fraud being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee Bank. The respondent drawee
Bank then could have taken immediate steps to prevent further commission of such fraud. Thus, petitioner's negligence was the
proximate cause of her loss. And since it was her negligence which caused the respondent drawee Bank to honor the forged checks or
prevented it from recovering the amount it had already paid on the checks, petitioner cannot now complain should the bank refuse to
recredit her account with the amount of such checks. 10 Under Section 23 of the NIL, she is now precluded from using the forgery to
prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank 11 is not applicable to the case at bar
because in said case, the check was fraudulently taken and the signature of the payee was forged not by an agent or employee of the
drawer. The drawer was not found to be negligent in the handling of its business affairs and the theft of the check by a total stranger
was not attributable to negligence of the drawer; neither was the forging of the payee's indorsement due to the drawer's negligence.
Since the drawer was not negligent, the drawee was duty-bound to restore to the
banking rule banning acceptance of checks for deposit or cash payment with more than one indorsement unless cleared by some bank
officials does not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this rule
destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the payee. Under the NIL, the only kind
of indorsement which stops the further negotiation of an instrument is a restrictive indorsement which prohibits the further
negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx

In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in express words at the back of the
instrument, so that any subsequent party may be forewarned that ceases to be negotiable. However, the restrictive indorsee acquires
the right to receive payment and bring any action thereon as any indorser, but he can no longer transfer his rights as such indorsee
where the form of the indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because there is no privity between them, as far as the
drawer-depositor is concerned, such bank may not legally refuse to honor a negotiable bill of exchange or a check drawn against it
with more than one indorsement if there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee
cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee, he incurs no liability on the check
unless he accepts it. But the drawee will make itself liable to a suit for damages at the instance of the drawer for wrongful dishonor of
the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by reason of her gross negligence. But
under Section 196 of the NIL, any case not provided for in the Act shall be governed by the provisions of existing legislation. Under the
laws of quasi-delict, she cannot point to the negligence of the respondent drawee Bank in the selection and supervision of its
employees as being the cause of the loss because negligence is the proximate cause thereof and under Article 2179 of the Civil Code,
she may not be awarded damages. However, under Article 1170 of the same Code the respondent drawee Bank may be held liable for
damages. The article provides
Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene
the tenor thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as depositor (obligee) and the respondent drawee bank as
the obligor. In the performance of its obligation, the drawee bank is bound by its internal banking rules and regulations which form
part of any contract it enters into with any of its depositors. When it violated its internal rules that second endorsements are not to be
accepted without the approval of its branch managers and it did accept the same upon the mere approval of Boon, a chief accountant,
it contravened the tenor of its obligation at the very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect to the acceptance of checks with
second indorsement for deposit even without the approval of the branch manager despite periodic inspection conducted by a team of
auditors from the main office constitutes negligence on the part of the bank in carrying out its obligations to its depositors. Article
1173 provides
The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and
corresponds with the circumstance of the persons, of the time and of the place. . . .
We hold that banking business is so impressed with public interest where the trust and confidence of the public in general is of
paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost diligence.
Surely, respondent drawee Bank cannot claim it exercised such a degree of diligence that is required of it. There is no way We can
allow it now to escape liability for such negligence. Its liability as obligor is not merely vicarious but primary wherein the defense of
exercise of due diligence in the selection and supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the petitioner on a fifty-fifty ratio in
accordance with Article 172 which provides:
Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be
regulated by the courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the decision to hold the drawee bank
liable is based on law and substantial justice and not on mere equity. And although the case was brought before the court not on
breach of contractual obligations, the courts are not precluded from applying to the circumstances of the case the laws pertinent
thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause of her loss does not preclude her from
recovering damages. The reason why the decision dealt on a discussion on proximate cause is due to the error pointed out by
petitioner as allegedly committed by the respondent court. And in breaches of contract under Article 1173, due diligence on the part of
the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the reception of evidence to determine the
exact amount of loss suffered by the petitioner, considering that she partly benefited from the issuance of the questioned checks since
the obligation for which she issued them were apparently extinguished, such that only the excess amount over and above the total of
these actual obligations must be considered as loss of which one half must be paid by respondent drawee bank to herein petitioner.
SO ORDERED.
G.R. No. L-26001
October 29, 1968
PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J.:
The Philippine National Bank hereinafter referred to as the PNB seeks the review by certiorari of a decision of the Court of
Appeals, which affirmed that of the Court of First Instance of Manila, dismissing plaintiff's complaint against the Philippine
Commercial and Industrial Bank hereinafter referred to as the PCIB for the recovery of P57,415.00.
A partial stipulation of facts entered into by the parties and the decision of the Court of Appeals show that, on about January 15, 1962,
one Augusto Lim deposited in his current account with the PCIB branch at Padre Faura, Manila, GSIS Check No. 645915- B, in the
sum of P57,415.00, drawn against the PNB; that, following an established banking practice in the Philippines, the check was, on the
same date, forwarded, for clearing, through the Central Bank, to the PNB, which did not return said check the next day, or at any other
time, but retained it and paid its amount to the PCIB, as well as debited it against the account of the GSIS in the PNB; that,
subsequently, or on January 31, 1962, upon demand from the GSIS, said sum of P57,415.00 was re-credited to the latter's account, for
the reason that the signatures of its officers on the check were forged; and that, thereupon, or on February 2, 1962, the PNB
demanded from the PCIB the refund of said sum, which the PCIB refused to do. Hence, the present action against the PCIB, which
was dismissed by the Court of First Instance of Manila, whose decision was, in turn, affirmed by the Court of Appeals.
It is not disputed that the signatures of the General Manager and the Auditor of the GSIS on the check, as drawer thereof, are forged;
that the person named in the check as its payee was one Mariano D. Pulido, who purportedly indorsed it to one Manuel Go; that the
check purports to have been indorsed by Manuel Go to Augusto Lim, who, in turn, deposited it with the PCIB, on January 15, 1962;
that, thereupon, the PCIB stamped the following on the back of the check: "All prior indorsements and/or Lack of Endorsement
Guaranteed, Philippine Commercial and Industrial Bank," Padre Faura Branch, Manila; that, on the same date, the PCIB sent the
check to the PNB, for clearance, through the Central Bank; and that, over two (2) months before, or on November 13, 1961, the GSIS
had notified the PNB, which acknowledged receipt of the notice, that said check had been lost, and, accordingly, requested that its
payment be stopped.
In its brief, the PNB maintains that the lower court erred: (1) in not finding the PCIB guilty of negligence; (2) in not finding that the
indorsements at the back of the check are forged; (3) in not finding the PCIB liable to the PNB by virtue of the former's warranty on
the back of the check; (4) in not holding that "clearing" is not "acceptance", in contemplation of the Negotiable Instruments law; (5) in
not finding that, since the check had not been accepted by the PNB, the latter is entitled to reimbursement therefor; and (6) in
denying the PNB's right to recover from the PCIB.
The first assignment of error will be discussed later, together with the last,with which it is interrelated.
As regards the second assignment of error, the PNB argues that, since the signatures of the drawer are forged, so must the signatures
of the supposed indorsers be; but this conclusion does not necessarily follow from said premise. Besides, there is absolutely no
evidence, and the PNB has not even tried to prove that the aforementioned indorsements are spurious. Again, the PNB refunded the
amount of the check to the GSIS, on account of the forgery in the signatures, not of the indorsers or supposed indorsers, but of the
officers of the GSIS as drawer of the instrument. In other words, the question whether or not the indorsements have been falsified is
immaterial to the PNB's liability as a drawee, or to its right to recover from the PCIB, 1 for, as against the drawee, the indorsement of
an intermediate bank does not guarantee the signature of the drawer, 2 since the forgery of the indorsement is not the cause of the
loss.3
With respect to the warranty on the back of the check, to which the third assignment of error refers, it should be noted that the PCIB
thereby guaranteed "all prior indorsements," not the authenticity of the signatures of the officers of the GSIS who signed on its behalf,
because the GSIS is not an indorser of the check, but its drawer. 4 Said warranty is irrelevant, therefore, to the PNB's alleged right to
recover from the PCIB. It could have been availed of by a subsequent indorsee 5 or a holder in due course6 subsequent to the PCIB, but,
the PNB is neither.7 Indeed, upon payment by the PNB, as drawee, the check ceased to be a negotiable instrument, and became a mere
voucher or proof of payment.8
Referring to the fourth and fifth assignments of error, we must bear in mind that, in general, "acceptance", in the sense in which this
term is used in the Negotiable Instruments Law 9 is not required for checks, for the same are payable on demand. 10 Indeed,
"acceptance" and "payment" are, within the purview of said Law, essentially different things, for the former is "a promise to perform
an act," whereas the latter is the "actual performance" thereof.11 In the words of the Law,12 "the acceptance of a bill is the signification
by the drawee of his assent to the order of the drawer," which, in the case of checks, is the payment, on demand, of a given sum of
money. Upon the other hand, actual payment of the amount of a check implies not only an assent to said order of the drawer and a
recognition of the drawer's obligation to pay the aforementioned sum, but, also, a compliance with such obligation.
Let us now consider the first and the last assignments of error. The PNB maintains that the lower court erred in not finding that the
PCIB had been guilty of negligence in not discovering that the check was forged. Assuming that there had been such negligence on the
part of the PCIB, it is undeniable, however, that the PNB has, also, been negligent, with the particularity that the PNB had been guilty

of a greater degree of negligence, because it had a previous and formal notice from the GSIS that the check had been lost, with the
request that payment thereof be stopped. Just as important, if not more important and decisive, is the fact that the PNB's negligence
was the main or proximate cause for the corresponding loss.
In this connection, it will be recalled that the PCIB did not cash the check upon its presentation by Augusto Lim; that the latter had
merely deposited it in his current account with the PCIB; that, on the same day, the PCIB sent it, through the Central Bank, to the
PNB, for clearing; that the PNB did not return the check to the PCIB the next day or at any other time; that said failure to return the
check to the PCIB implied, under the current banking practice, that the PNB considered the check good and would honor it; that, in
fact, the PNB honored the check and paid its amount to the PCIB; and that only then did the PCIB allow Augusto Lim to draw said
amount from his aforementioned current account.
Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had found nothing wrong with the check and would
honor the same, and by actually paying its amount to the PCIB, the PNB induced the latter, not only to believe that the check was
genuine and good in every respect, but, also, to pay its amount to Augusto Lim. In other words, the PNB was the primary or proximate
cause of the loss, and, hence, may not recover from the PCIB. 13

It is a well-settled maxim of law and equity that when one of two (2) innocent persons must suffer by the wrongful act of a third
person, the loss must be borne by the one whose negligence was the proximate cause of the loss or who put it into the power of the
third person to perpetrate the wrong.14
Then, again, it has, likewise, been held that, where the collecting (PCIB) and the drawee (PNB) banks are equally at fault, the court
will leave the parties where it finds them.15
Lastly, Section 62 of Act No. 2031 provides:
The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
The prevailing view is that the same rule applies in the case of a drawee who pays a bill without having previously accepted it. 16
WHEREFORE, the decision appealed from is hereby affirmed, with costs against the Philippine National Bank. It is so ordered.