1

Salazar vs J.Y Brothers Marketing Corporation establish that petitioner was already discharged from his liability to pay respondent the
G.R. No. 171998 October 20, 2010 amount of P 214,000.00 as payment for the 300 bags of rice. As we said, novation is never
presumed, there must be an express intention to novate. In fact, when the Solid Bank check
Facts: J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation engaged in the business was delivered to respondent, the same was also indorsed by petitioner which shows
of selling sugar, rice and other commodities. On October 15, 1996, Anamer Salazar, a petitioners recognition of the existing obligation to respondent to pay P 214,000.00 subject
freelance sales agent, was approached by Isagani Calleja and Jess Kallos, if she knew a of the replaced Prudential Bank check.
supplier of rice. Answering in the positive, Salazar accompanied the two to J.Y. Bros. As a
consequence, Salazar with Calleja and Kallos procured from J. Y. Bros. 300 cavans of rice
worth P214,000.00. As payment, Salazar negotiated and indorsed to J.Y. Bros. Prudential
Bank Check No. 067481 dated October 15, 1996 issued by Nena Jaucian Timario in the
amount of P214,000.00 with the assurance that the check is good as cash. On that assurance,
J.Y. Bros. parted with 300 cavans of rice to Salazar. However, upon presentment, the check
was dishonored due to closed account. Informed of the dishonor of the check, Calleja, Kallos
and Salazar delivered to J.Y. Bros. a replacement cross Solid Bank Check No. PA365704 dated
October 29, 1996 again issued by Nena Jaucian Timario in the amount of P214,000.00 but
which, just the same, bounced due to insufficient funds. When despite the demand letter
dated February 27, 1997, Salazar failed to settle the amount due J.Y. Bros., the latter charged
Salazar and Timario with the crime of estafa before the Regional Trial Court of Legaspi City,
docketed as Criminal Case No. 7474.

Issue: Whether or not the issuance of the Solid bank crossed check discharged petitioner
from liability.

Held: No. The obligation to pay a sum of money is not novated by an instrument that
expressly recognizes the old, changes only the terms of payment, adds other obligations not
incompatible with the old ones or the new contract merely supplements the old one.

Section 119 of the Negotiable Instrument Law provides, thus:

SECTION 119. Instrument; how discharged. A negotiable instrument is discharged:

(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument is made or
accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of money;
(e) When the principal debtor becomes the holder of the instrument at or after maturity in
his own right.

And, under Article 1231 of the Civil Code, obligations are extinguished:

(6) By novation.

Petitioner’s claim that respondent’s acceptance of the Solid Bank check which replaced the
dishonored Prudential bank check resulted to novation which discharged the latter check is
unmeritorious.

In this case, respondents acceptance of the Solid Bank check, which replaced the dishonored
Prudential Bank check, did not result to novation as there was no express agreement to

FIRST DIVISION
G.R. No. 177438 September 24, 2012
AMADA RESTERIO, Petitioner,
vs.
PEOPLE OF THE PHILIPPINES Respondent.
DECISION
BERSAMIN, J.:
The notice of dishonor required by Batas Pambansa Blg. 22 to be given to the drawer, maker
or issuer of a check should be written. If the service of the written notice of dishonor on the
maker, drawer or issuer of the dishonored check is by registered mail, the proof of service
consists not only in the presentation as evidence of the registry return receipt but also of the
registry receipt together with the authenticating affidavit of the person mailing the notice of
dishonor. Without the authenticating affidavit, the proof of giving the notice of dishonor is
insufficient unless the mailer personally testifies in court on the sending by registered mail.
Antecedents
The petitioner was charged with a violation of Batas Pambansa Blg. 22 in the Municipal Trial
Court in Cities (MTCC) in Mandaue City through the information that alleged as follows:
That on May, 2002, or thereabouts, in the City of Mandaue, Philippines, and within the
jurisdiction of this Honorable Court, the above-named accused, with deliberate intent of
gain, did there and then willfully, unlawfully and feloniously make, draw and issue ChinaBank
Check bearing No. AO141332, dated June 3, 2002, in the amount of P 50,000.00 payable to
the order of Bernardo T. Villadolid to apply on account or for value, the accused fully
knowing well that at the time of the issuance of said check that she does not have sufficient
funds in or credit with the drawee bank for the payment of such check in full upon its
presentment; or the accused having sufficient funds in or credit with the drawee bank when
she make/s or draw/s and issue/s a check but she failed to keep sufficient funds or maintain
a credit to cover the full amount of the check, which check when presented for encashment
was dishonored by the drawee bank for the reason "ACCT. CLOSED" or would have been
dishonored for the same reason had not the drawer, without any valid reason ordered the
bank to stop payment, and despite notice of dishonor and demands for payment, said
accused failed and refused and still fails and refuses to redeem the check or to make
arrangement for payment in full by the drawee of such check within five (5) banking days
after receiving the notice of dishonor, to the damage and prejudice of the aforenamed
private complainant, in the aforestated amount and other claims and charges allowed by civil
law.
2
CONTRARY TO LAW.1
After trial, the MTCC found the petitioner guilty as charged, disposing as follows:
WHEREFORE, decision is hereby rendered finding the accused, AMADA Y. RESTERIO, GUILTY
beyond reasonable doubt for Violation of Batas Pambansa Bilang 22 and sentences her to
pay a fine of FIFTY THOUSAND PESOS (P 50,000.00) and to pay her civil liabilities to the
private complainant in the sum of FIFTY THOUSAND PESOS (P 50,000.00), TEN THOUSAND
PESOS (P 10,000.00) as attorney’s fees and FIVE HUNDRED SEVENTY-FIVE PESOS (P 575.00) as
eimbursement of the filing fees.
SO ORDERED.2
The petitioner appealed, but the RTC affirmed the conviction.3
By petition for review, the petitioner appealed to the CA, stating that: (a) the RTC erred in
affirming the conviction and in not finding instead that the Prosecution did not establish her
guilt beyond reasonable doubt; and (b) the conviction was contrary to existing laws and
jurisprudence, particularly Yu Oh v. Court of Appeals. 4
On December 4, 2006, the CA found the petition to be without merit, and denied the petition
for review.5
Issues
The petitioner assails the affirmance of her conviction by the CA based on the following
grounds, to wit:
THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS AND REVERSIBLE
ERROR AND WITH GRAVE ABUSE OF DISCRETION IN IGNORING THE APPLICABILITY
IN THE PRESENT CASE THE DECISION OF THE SUPREME COURT IN THE CASE OF
ELVIRA YU OH VS. COURT OF APPEALS, G.R. NO. 125297, JUNE 26, 2003.
THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS AND REVERSIBLE
ERROR AND WITH GRAVE ABUSE OF DISCRETION IN NOT FINDING THAT THE
PROSECUTION FAILED TO PROVE ALL THE ESSENTIAL ELEMENTS OF THE CRIME OF
VIOLATION OF BATAS PAMBANSA BILANG 22.
THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS AND REVERSIBLE
ERROR AND WITH GRAVE ABUSE OF DISCRETION IN NOT FINDING THAT NO NOTICE
OF DISHONOR WAS ACTUALLY SENT TO THE PETITIONER.

THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS AND REVERSIBLE
ERROR AND WITH GRAVE ABUSE OF DISCRETION IN NOT FINDING THAT THE
PROSECUTION FAILED TO ESTABLISH THE GUILT OF THE PETITIONER BEYOND
REASONABLE DOUBT.6
The appeal hinges on whether or not all the elements of a violation of Batas Pambansa Blg.
22 were established beyond reasonable doubt.
Ruling
The petition is meritorious.
For a violation of Batas Pambansa Blg. 22, the Prosecution must prove the following essential
elements, namely:
(1) The making, drawing, and issuance of any check to apply for account or for
value;
(2) The knowledge of the maker, drawer, or issuer that at the time of issue there
were no sufficient funds in or credit with the drawee bank for the payment of such
check in full upon its presentment; and
(3) The dishonor of the check by the drawee bank for insufficiency of funds or
credit or the dishonor for the same reason had not the drawer, without any valid
cause, ordered the drawee bank to stop payment.7
The existence of the first element of the violation is not disputed. According to the
petitioner, she was "required to issue a check as a collateral for the obligation," and that "she
was left with no alternative but to borrow the check of her friend xxx and used the said check
as a collateral of her loan."8 During her cross-examination, she stated that she did not own
the check that she drew and issued to complainant Bernardo Villadolid.9
Yet, to avoid criminal liability, the petitioner contends that Batas Pambansa Blg. 22 was
applicable only if the dishonored check was actually owned by her; and that she could not be
held liable because the check was issued as a mere collateral of the loan and not intended to
be deposited.
The petitioner’s contentions do not persuade.
What Batas Pambansa Blg. 22 punished was the mere act of issuing a worthless check. The
law did not look either at the actual ownership of the check or of the account against which it
was made, drawn, or issued, or at the intention of the drawee, maker or issuer. Also, that the
check was not intended to be deposited was really of no consequence to her incurring
3
criminal liability under Batas Pambansa Blg. 22. In Ruiz v. People,10 the Court debunked her
contentions and cogently observed:
In Lozano v. Martinez, this Court ruled that the gravamen of the offense is the act of making
and issuing a worthless check or any check that is dishonored upon its presentment for
payment and putting them in circulation. The law includes all checks drawn against banks.
The law was designed to prohibit and altogether eliminate the deleterious and pernicious
practice of issuing checks with insufficient or no credit or funds therefor. Such practice is
deemed a public nuisance, a crime against public order to be abated. The mere act of issuing
a worthless check, either as a deposit, as a guarantee, or even as an evidence of a pre-
existing debt or as a mode of payment is covered by B.P. 22. It is a crime classified as malum
prohibitum. The law is broad enough to include, within its coverage, the making and issuing
of a check by one who has no account with a bank, or where such account was already closed
when the check was presented for payment. As the Court in Lozano explained:
The effects of the issuance of a worthless check transcends the private interests of the
parties directly involved in the transaction and touches the interests of the community at
large. The mischief it creates is not only a wrong to the payee or holder, but also an injury to
the public. The harmful practice of putting valueless commercial papers in circulation,
multiplied a thousandfold, can very well pollute the channels of trade and commerce, injure
the banking system and eventually hurt the welfare of society and the public interest. As
aptly stated –
The "check flasher" does a great deal more than contract a debt; he shakes the pillars of
business; and to my mind, it is a mistaken charity of judgment to place him in the same
category with the honest man who is unable to pay his debts, and for whom the
constitutional inhibition against "imprisonment for debt, except in cases of fraud" was
intended as a shield and not a sword.
Considering that the law imposes a penal sanction on one who draws and issues a worthless
check against insufficient funds or a closed account in the drawee bank, there is, likewise,
every reason to penalize a person who indulges in the making and issuing of a check on an
account belonging to another with the latter’s consent, which account has been closed or has
no funds or credit with the drawee bank.11 (Bold emphases supplied)
The State likewise proved the existence of the third element. On direct examination,
Villadolid declared that the check had been dishonored upon its presentment to the drawee
bank through the Bank of the Philippine Islands (BPI) as the collecting bank. The return check
memorandum issued by BPI indicated that the account had already been closed.12 The
petitioner did not deny or contradict the fact of dishonor.
The remaining issue is whether or not the second element, that is, the knowledge of the
petitioner as the issuer of the check that at the time of issue there were no sufficient funds in
or credit with the drawee bank for the payment of such check in full upon its presentment,
was existent.

To establish the existence of the second element, the State should present the giving of a
written notice of the dishonor to the drawer, maker or issuer of the dishonored check. The
rationale for this requirement is rendered in Dico v. Court of Appeals,13 to wit:
To hold a person liable under B.P. Blg. 22, the prosecution must not only establish that a
check was issued and that the same was subsequently dishonored, it must further be shown
that accused knew at the time of the issuance of the check that he did not have sufficient
funds or credit with the drawee bank for the payment of such check in full upon its
presentment.
This knowledge of insufficiency of funds or credit at the time of the issuance of the check is
the second element of the offense. Inasmuch as this element involves a state of mind of the
person making, drawing or issuing the check which is difficult to prove, Section 2 of B.P. Blg.
22 creates a prima facie presumption of such knowledge. Said section reads:
SEC. 2. Evidence of knowledge of insufficient funds. – The making, drawing and issuance of a
check payment of which is refused by the drawee because of insufficient funds in or credit
with such bank, when presented within ninety (90) days from the date of the check, shall be
prima facie evidence of knowledge of such insufficiency of funds or credit unless such maker
or drawer
pays the holder thereof the amount due thereon, or makes arrangements for payment in full
by the drawee of such check within five (5) banking days after receiving notice that such
check has not been paid by the drawee.
For this presumption to arise, the prosecution must prove the following: (a) the check is
presented within ninety (90) days from the date of the check; (b) the drawer or maker of the
check receives notice that such check has not been paid by the drawee; and (c) the drawer or
maker of the check fails to pay the holder of the check the amount due thereon, or make
arrangements for payment in full within five (5) banking days after receiving notice that such
check has not been paid by the drawee. In other words, the presumption is brought into
existence only after it is proved that the issuer had received a notice of dishonor and that
within five days from receipt thereof, he failed to pay the amount of the check or to make
arrangements for its payment. The presumption or prima facie evidence as provided in this
section cannot arise, if such notice of nonpayment by the drawee bank is not sent to the
maker or drawer, or if there is no proof as to when such notice was received by the drawer,
since there would simply be no way of reckoning the crucial 5-day period.
A notice of dishonor received by the maker or drawer of the check is thus indispensable
before a conviction can ensue. The notice of dishonor may be sent by the offended party or
the drawee bank. The notice must be in writing. A mere oral notice to pay a dishonored
check will not suffice. The lack of a written notice is fatal for the prosecution.14 (Bold
emphases supplied)
4
The giving of the written notice of dishonor does not only supply the proof for the second
element arising from the presumption of knowledge the law puts up but also affords the
offender due process. The law thereby allows the offender to avoid prosecution if she pays
the holder of the check the amount due thereon, or makes arrangements for the payment in
full of the check by the drawee within five banking days from receipt of the written notice
that the check had not been paid.15 The Court cannot permit a deprivation of the offender of
this statutory right by not giving the proper notice of dishonor. The nature of this opportunity
for the accused to avoid criminal prosecution has been expounded in Lao v. Court of
Appeals:16
It has been observed that the State, under this statute, actually offers the violator ‘a
compromise by allowing him to perform some act which operates to preempt the criminal
action, and if he opts to perform it the action is abated’ xxx In this light, the full payment of
the amount appearing in the check within five banking days from notice of dishonor is a
‘complete defense.’ The absence of a notice of dishonor necessarily deprives an accused an
opportunity to preclude a criminal prosecution. Accordingly, procedural due process clearly
enjoins that a notice of dishonor be actually served on petitioner. Petitioner has a right to
demand – and the basic postulate of fairness require – that the notice of dishonor be actually
sent to and received by her to afford her the opportunity to avert prosecution under B.P.
22."17 (Bold emphases supplied)
To prove that he had sent the written notice of dishonor to the petitioner by registered mail,
Villadolid presented the registry return receipt for the first notice of dishonor dated June 17,
2002 and the registry return receipt for the second notice of dishonor dated July 16, 2002.
However, the petitioner denied receiving the written notices of dishonor.
The mere presentment of the two registry return receipts was not sufficient to establish the
fact that written notices of dishonor had been sent to or served on the petitioner as the
issuer of the check. Considering that the sending of the written notices of dishonor had been
done by registered mail, the registry return receipts by themselves were not proof of the
service on the petitioner without being accompanied by the authenticating affidavit of the
person or persons who had actually mailed the written notices of dishonor, or without the
testimony in court of the mailer or mailers on the fact of mailing. The authentication by
affidavit of the mailer or mailers was necessary in order for the giving of the notices of
dishonor by registered mail to be regarded as clear proof of the giving of the notices of
dishonor to predicate the existence of the second element of the offense. No less would
fulfill the quantum of proof beyond reasonable doubt, for, as the Court said in Ting v. Court
of Appeals:18
Aside from the above testimony, no other reference was made to the demand letter by the
prosecution. As can be noticed from the above exchange, the prosecution alleged that the
demand letter had been sent by mail. To prove mailing, it presented a copy of the demand
letter as well as the registry return receipt. However, no attempt was made to show that the
demand letter was indeed sent through registered mail nor was the signature on the registry
return receipt authenticated or identified. It cannot even be gleaned from the testimony of

private complainant as to who sent the demand letter and when the same was sent. In fact,
the prosecution seems to have presumed that the registry return receipt was proof enough
that the demand letter was sent through registered mail and that the same was actually
received by petitioners or their agents.
As adverted to earlier, it is necessary in cases for violation of Batas Pambansa Blg. 22, that
the prosecution prove that the issuer had received a notice of dishonor. It is a general rule
that when service of notice is an issue, the person alleging that the notice was served must
prove the fact of service (58 Am Jur 2d, Notice, § 45). The burden of proving notice rests
upon the party asserting its existence. Now, ordinarily, preponderance of evidence is
sufficient to prove notice. In criminal cases, however, the quantum of proof required is proof
beyond reasonable doubt. Hence, for Batas Pambansa Blg. 22 cases, there should be clear
proof of notice. Moreover, it is a general rule that, when service of a notice is sought to be
made by mail, it should appear that the conditions on which the validity of such service
depends had existence, otherwise the evidence is insufficient to establish the fact of service
(C.J.S., Notice, § 18). In the instant case, the prosecution did not present proof that the
demand letter was sent through registered mail, relying as it did only on the registry return
receipt. In civil cases, service made through registered mail is proved by the registry receipt
issued by the mailing office and an affidavit of the person mailing of facts showing
compliance with Section 7 of Rule 13 (See Section 13, Rule 13, 1997 Rules of Civil Procedure).
If, in addition to the registry receipt, it is required in civil cases that an affidavit of mailing as
proof of service be presented, then with more reason should we hold in criminal cases that a
registry receipt alone is insufficient as proof of mailing. In the instant case, the prosecution
failed to present the testimony, or at least the affidavit, of the person mailing that, indeed,
the demand letter was sent. xxx
Moreover, petitioners, during the pre-trial, denied having received the demand letter (p. 135,
Rollo). Given petitioners’ denial of receipt of the demand letter, it behooved the prosecution
to present proof that the demand letter was indeed sent through registered mail and that
the same was received by petitioners. This, the prosecution miserably failed to do. Instead, it
merely presented the demand letter and registry return receipt as if mere presentation of
the same was equivalent to proof that some sort of mail matter was received by petitioners.
Receipts for registered letters and return receipts do not prove themselves; they must be
properly authenticated in order to serve as proof of receipt of the letters (Central Trust Co. v.
City of Des Moines, 218 NW 580).
Likewise, for notice by mail, it must appear that the same was served on the addressee or a
duly authorized agent of the addressee. In fact, the registry return receipt itself provides that
"[a] registered article must not be delivered to anyone but the addressee, or upon the
addressee’s written order, in which case the authorized agent must write the addressee’s
name on the proper space and then affix legibly his own signature below it." In the case at
bar, no effort was made to show that the demand letter was received by petitioners or their
agent. All that we have on record is an illegible signature on the registry receipt as evidence
that someone received the letter. As to whether this signature is that of one of the
petitioners or of their authorized agent remains a mystery. From the registry receipt alone, it
5
is possible that petitioners or their authorized agent did receive the demand letter.
Possibilities, however, cannot replace proof beyond reasonable doubt. There being
insufficient proof that petitioners received notice that their checks had been dishonored, the
presumption that they knew of the insufficiency of the funds therefor cannot arise.
As we stated in Savage v. Taypin (G.R. No. 134217, May 11, 2000, 311 SCRA 397), "penal
statutes must be strictly construed against the State and liberally in favor of the accused."
Likewise, the prosecution may not rely on the weakness of the evidence for the defense to
make up for its own blunders in prosecuting an offense. Having failed to prove all the
elements of the offense, petitioners may not thus be convicted for violation of Batas
Pambansa Blg. 22. (Bold emphases supplied)1âwphi1
Also, that the wife of Villadolid verbally informed the petitioner that the check had bounced
did not satisfy the requirement of showing that written notices of dishonor had been made
to and received by the petitioner. The verbal notices of dishonor were not effective because
it is already settled that a notice of dishonor must be in writing. 19 The Court definitively ruled
on the specific form of the notice of dishonor in Domagsang v. Court of Appeals:20
Petitioner counters that the lack of a written notice of dishonor is fatal. The Court agrees.
While, indeed, Section 2 of B.P. Blg. 22 does not state that the notice of dishonor be in
writing, taken in conjunction, however, with Section 3 of the law, i.e., "that where there are
no sufficient funds in or credit with such drawee bank, such fact shall always be explicitly
stated in the notice of dishonor or refusal," a mere oral notice or demand to pay would
appear to be insufficient for conviction under the law. The Court is convinced that both the
spirit and letter of the Bouncing Checks Law would require for the act to be punished
thereunder not only that the accused issued a check that is dishonored, but that likewise the
accused has actually been notified in writing of the fact of dishonor. The consistent rule is
that penal statutes have to be construed strictly against the State and liberally in favor of the
accused. (Bold emphases supplied; italics in the original text)
In light of the foregoing, the proof of the guilt of the petitioner for a violation of Batas
Pambansa Blg. 22 for issuing to Villadolid the unfunded Chinabank Check No. LPU-A0141332
in the amount of P 50,000.00 did not satisfy the quantum of proof beyond reasonable doubt.
According to Section 2 of Rule 133, Rules of Court, the accused is entitled to an acquittal,
unless his guilt is shown beyond reasonable doubt, which does not mean such a degree of
proof as, excluding possibility of error, produces absolute certainty; only a moral certainty is
required, or that degree of proof that produces conviction in an unprejudiced mind. This is
the required quantum, firstly, because the accused is presumed to be innocent until the
contrary is proved, and, secondly, because of the inequality of the position in which the
accused finds herself, with the State being arrayed against her with its unlimited command of
means, with counsel usually of authority and capacity, who are regarded as public officers,
"and with an attitude of tranquil majesty often in striking contrast to that of (the accused)
engaged in a perturbed and distracting struggle for liberty if not for life."21
 6

Nonetheless, the civil liability of the petitioner in the principal sum of P 50,000.00, being ISSUES:
admitted, was established. She was further liable for legal interest of 6% per annum on that
1. Whether or not BP 22 applies if the issuer of the check is not the account owner/check
principal sum, reckoned from the filing of the information in the trial court. That rate of
owner.
interest will increase to 12% per annum upon the finality of this decision.
2. Whether or not the issuer of a bouncing check may be convicted without proof that a
WHEREFORE, the Court REVERSES and SETS ASIDE the decision of the Court of Appeals notice of dishonor was sent to her.
promulgated on December 4, 2006, and ACQUITS petitioner AMADA RESTERIO of the
violation of Batas Pambansa Blg. 22 as charged for failure to establish her guilt beyond
reasonable doubt. HELD:
1. Yes, it applies. BP 22 does not make a distinction. The law did not look either at the actual
The Court ORDERS the petitioner to pay to BERNARDO VILLADOLID the amount ownership of the check or of the account against which it was made, drawn, or issued, or at
of P 50,000.00, representing the face value of Chinabank Check No. LPU-A0141332, with legal the intention of the drawee, maker, or issuer. As such, even if Resterio does not own the
interest of 6% per annum from the filing of the information until the finality of this decision, check she issued, the mere fact she issued a worthless check, she can still be prosecuted for
and thereafter 12% per annum until the principal amount ofP 50,000.00 is paid. violation of BP 22. However, as discussed below, her guilt was not proven.
2. No. There must be sufficient proof that a notice of dishonor was sent to the issuer of the
No pronouncement on costs of suit.
check. Further, the notice of dishonor must be in writing. Oral or verbal notice is not
sufficient. The notice must be actually received by none other than the issuer. The reason for
SO ORDERED. this rule is that the law gives her a chance to make good the check. Without such notice, she
is being deprived of that chance. Further, the giving of notice gives rise to the presumption
Amada Resterio vs People of the Philippines that the issuer has knowledge of the insufficiency of funds – an element of the crime under
BP 22. And if despite such knowledge, the issuer refuses or fails to pay the amount of the
check within 5 days from the receipt of the notice of dishonor, the issuer becomes liable for
violation of BP 22.
Facts:
In May 2002, Amada Resterio issued a Chinabank check worth P50k to Bernardo Villadolid.
When the check became due, Bernardo tried to encash the check but it was dishonored
because the account was closed. Thereafter, Bernardo sent two notices of dishonor to
Resterio. The notices were sent via registered mail. Resterio however failed to make good
the said check. Hence, Bernardo filed a case against Resterio for violation of Batas Pambansa
Blg. 22 (BP 22; Anti-Bouncing Checks Law).
During trial, Bernardo presented the registry return receipts as proof that the notices of
dishonor were sent to and received by Resterio.
Resterio was convicted by the trial court and her conviction was affirmed by the Court of
Appeals.
On appeal, Resterio argued that:
1. she is not the owner of the check she issued nor does she own the bank account against
which the check was drawn;
2. she never received a notice of dishonor.

SECOND DIVISION
G.R. No. 182301 January 31, 2011
JAIME ALFEREZ, Petitioner,
vs.
PEOPLE OF THE PHILIPPINES and PINGPING CO, Respondents.
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the
Court of Appeals (CA) Decision1 dated December 13, 2007 and Resolution2 dated March 4,
2008 in CA-G.R. CEB-CR No. 00300.
The facts of the case, as culled from the records, are as follows:
Petitioner Jaime Alferez purchased construction materials from Cebu ABC Sales Commercial.
As payment for the goods, he issued three (3) checks for the total amount of P830,998.40.
However, the checks were dishonored for having been drawn against a closed account.
Petitioner was thus charged with three (3) counts of violation of Batas Pambansa Bilang (B.P.
Blg.) 22 before the Municipal Trial Court in Cities (MTCC), Cebu City. The cases were raffled to
Branch 3 and docketed as Criminal Case Nos. 40985-R to 40987-R.3 During the trial, the
prosecution presented its lone witness, private complainant Pingping Co.4 Thereafter, the
prosecution formally offered the following documentary evidence:
1. BPI Check No. 492089 dated 29 April 1994 in the sum of P78, 889.95;
2. BPI Check No. 492010 dated 22 June 1994 in the sum of P30,745.90;
3. BPI Check No. 492011 dated 22 June 1994 in the sum of P721,362.55;
4. The demand letter dated 7 July 1994 addressed to petitioner;
5. The registry receipt of the Post Office;
6. The face of the Registry Return Receipt;
7. The dorsal side of the Registry Return Receipt;
8. The Returned Check Ticket dated 23 June 1994; and
7
9. The reason for the dishonor.5
Instead of presenting evidence, petitioner filed a Demurrer to Evidence6 on August 8, 2003,
or approximately ten (10) months after the prosecution rested its case. Petitioner averred
that the prosecution failed to show that he received the notice of dishonor or demand letter.
On March 4, 2005, the MTCC issued a resolution7 denying petitioner’s Demurrer to Evidence,
and rendering judgment finding petitioner guilty as charged, the dispositive portion of which
reads:
WHEREFORE, the Court finds the accused guilty beyond reasonable doubt of the crime of
issuing bouncing checks as defined and penalized under Section 1 of Batas Pambansa Blg. 22
and hereby sentences the accused the following:
1. To pay a fine of Php830,998.40 and in case of insolvency to suffer subsidiary
imprisonment;
2. To pay private complainant the total face value of the checks in the amount of
Php830,998.40 plus 1% interest per month beginning from the filing of the complaint.
SO ORDERED.8
Aggrieved, petitioner appealed to the Regional Trial Court (RTC), Branch 21, Cebu City. The
RTC rendered Judgment9 affirming in toto the MTCC decision. Petitioner moved for
reconsideration, but it was denied in an Order10 dated December 16, 2005. In the same
Order, the RTC modified the MTCC resolution by sentencing petitioner to suffer the penalty
of imprisonment for six (6) months for each count of violation of B.P Blg. 22, instead of fine
as originally imposed.
Undaunted, petitioner elevated the matter to the CA via a petition for review under Rule 42
of the Rules of Court. In the assailed Decision, the CA dismissed the petition for lack of merit.
It sustained petitioner’s conviction as the elements of the crime had been sufficiently
established. As to the service on petitioner of the notice of dishonor, the appellate court
pointed out that petitioner did not testify, and that he did not object to the prosecution’s
evidence aimed at proving the fact of receipt of the notice of dishonor. Consequently, the
registry receipt and the return card adequately show the fact of receipt. As to petitioner’s
contention that he was denied his right to present evidence after the denial of his demurrer
to evidence, the CA held that there was no such denial since it was merely the consequence
of the filing of demurrer without leave of court. Finally, as to the imposition of the penalty of
imprisonment instead of fine, the CA found no grave abuse of discretion on the part of the
RTC since it was shown that petitioner acted in bad faith.11
On March 4, 2008, the CA denied petitioner’s motion for reconsideration. Hence, this
petition anchored on the following issues:

Whether the Registry Receipt and Registry Return Receipt alone without presenting the
person who mailed and/or served the demand letter is sufficient notice of dishonor as
required by BP 22.
Whether the filing of the Demurrer of (sic) Evidence without leave and denied by the trial
court is a waiver of the right of the petitioner (the accused before the trial court) to present
his evidence in support and to rebut the evidence of the respondent particularly with respect
to the civil aspect of the case.
On the alternative (if the petitioner is guilty), whether the accused should only be mete[d]
the penalty of fine as imposed by the trial court (MTCC).12
The petition is partly meritorious.
After a careful evaluation of the records of the case, we believe and so hold that the totality
of the evidence presented does not support petitioner’s conviction for violation of B.P. Blg.
22.
Section 1 of B.P. Blg. 22 defines the offense, as follows:13
Section 1. Checks without sufficient funds.—Any person who makes or draws and issues any
check to apply on account or for value, knowing at the time of issue that he does not have
sufficient funds in or credit with the drawee bank for the payment of such check in full upon
its presentment, which check is subsequently dishonored by the drawee bank for
insufficiency of funds or credit or would have been dishonored for the same reason had not
the drawer, without any valid reason, ordered the bank to stop payment, shall be punished
by imprisonment of not less than thirty days but not more than one (1) year or by a fine of
not less than but not more than double the amount of the check which fine shall in no case
exceed Two Hundred Thousand Pesos, or both such fine and imprisonment at the discretion
of the court.
The same penalty shall be imposed upon any person who, having sufficient funds in or credit
with the drawee bank when he makes or draws and issues a check, shall fail to keep
sufficient funds or to maintain a credit to cover the full amount of the check if presented
within a period of ninety (90) days from the date appearing thereon, for which reason it is
dishonored by the drawee bank.
Where the check is drawn by a corporation, company or entity, the person or persons who
actually signed the check in behalf of such drawer shall be liable under this Act.
Accordingly, this Court has held that the elements of the crime are, as follows: (1) the
making, drawing, and issuance of any check to apply on account or for value; (2) the
knowledge of the maker, drawer, or issuer that at the time of issue he does not have
sufficient funds in or credit with the drawee bank for the payment of the check in full upon
8
its presentment; and (3) the subsequent dishonor of the check by the drawee bank for
insufficiency of funds or credit, or dishonor for the same reason had not the drawer, without
any valid cause, ordered the bank to stop payment.14
In this case, the first and third elements of the crime have been adequately established. The
prosecution, however, failed to prove the second element. Because this element involves a
state of mind which is difficult to establish, Section 2 of B.P. Blg. 22 creates a presumption of
knowledge of insufficiency of funds under the following circumstances:15
Sec. 2. Evidence of knowledge of insufficient funds. — The making, drawing, and issuance of
a check payment of which is refused by the drawee because of insufficient funds in or credit
with such bank, when presented within ninety days from the date of the check, shall be
prima facie evidence of knowledge of such insufficiency of funds or credit unless such maker
or drawer pays the holder thereof the amount due thereon, or makes arrangements for
payment in full by the drawee of such check within five (5) banking days after receiving
notice that such check has not been paid by the drawee.
In Suarez v. People,16 which is on all fours with the instant case, two Informations for
violation of B.P. Blg. 22 were filed against petitioner therein. After the prosecution presented
its evidence, petitioner filed a Demurrer to Evidence without leave of court on the ground
that no notice of dishonor had been sent to and received by him. When the case reached this
Court, we acquitted petitioner on reasonable doubt as there was insufficient proof that he
received notice of dishonor. We explained that:
The presumption arises when it is proved that the issuer had received this notice, and that
within five banking days from its receipt, he failed to pay the amount of the check or to make
arrangements for its payment. The full payment of the amount appearing in the check within
five banking days from notice of dishonor is a complete defense. Accordingly, procedural due
process requires that a notice of dishonor be sent to and received by the petitioner to afford
the opportunity to avert prosecution under B.P. Blg. 22.
[I]t is not enough for the prosecution to prove that a notice of dishonor was sent to the
petitioner. It is also incumbent upon the prosecution to show "that the drawer of the check
received the said notice because the fact of service provided for in the law is reckoned from
receipt of such notice of dishonor by the drawee of the check.
A review of the records shows that the prosecution did not prove that the petitioner received
the notice of dishonor. Registry return cards must be authenticated to serve as proof of
receipt of letters sent through registered mail.17
In this case, the prosecution merely presented a copy of the demand letter, together with
the registry receipt and the return card, allegedly sent to petitioner. However, there was no
attempt to authenticate or identify the signature on the registry return card. 18 Receipts for
registered letters and return receipts do not by themselves prove receipt; they must be

properly authenticated to serve as proof of receipt of the letter, claimed to be a notice of
dishonor.19 To be sure, the presentation of the registry card with an unauthenticated
signature, does not meet the required proof beyond reasonable doubt that petitioner
received such notice. It is not enough for the prosecution to prove that a notice of dishonor
was sent to the drawee of the check. The prosecution must also prove actual receipt of said
notice, because the fact of service provided for in the law is reckoned from receipt of such
notice of dishonor by the drawee of the check.20 The burden of proving notice rests upon the
party asserting its existence. Ordinarily, preponderance of evidence is sufficient to prove
notice. In criminal cases, however, the quantum of proof required is proof beyond
reasonable doubt. Hence, for B.P. Blg. 22 cases, there should be clear proof of
notice.21 Moreover, for notice by mail, it must appear that the same was served on the
addressee or a duly authorized agent of the addressee. From the registry receipt alone, it is
possible that petitioner or his authorized agent did receive the demand letter.22 Possibilities,
however, cannot replace proof beyond reasonable doubt.23 The consistent rule is that penal
statutes have to be construed strictly against the State and liberally in favor of the
accused.24 The absence of a notice of dishonor necessarily deprives the accused an
opportunity to preclude a criminal prosecution.25 As there is insufficient proof that petitioner
received the notice of dishonor, the presumption that he had knowledge of insufficiency of
funds cannot arise.26
This is so even if petitioner did not present his evidence to rebut the documentary evidence
of the prosecution as he had waived his right to present evidence for having filed a demurrer
to evidence without leave of court. We must emphasize that the prosecution has the burden
of proving beyond reasonable doubt each element of the crime as its case will rise or fall on
the strength of its own evidence, never on the weakness or even absence of that of the
defense.27 The failure of the prosecution to prove the receipt by petitioner of the requisite
notice of dishonor and that he was given at least five (5) banking days within which to settle
his account constitutes sufficient ground for his acquittal.28
Nonetheless, petitioner’s acquittal for failure of the prosecution to prove all elements of the
offense beyond reasonable doubt does not include the extinguishment of his civil liability for
the dishonored checks.29 In case of acquittal, the accused may still be adjudged civilly liable.
The extinction of the penal action does not carry with it the extinction of the civil action
where (a) the acquittal is based on reasonable doubt as only preponderance of evidence is
required; (b) the court declares that the liability of the accused is only civil; and (c) the civil
liability of the accused does not arise from or is not based upon the crime of which the
accused was acquitted.30 In a number of similar cases, we have held that an acquittal based
on reasonable doubt does not preclude the award of civil damages.31
In view of the foregoing, we sustain the findings of the trial court, as affirmed by the CA, as to
petitioner’s civil liability.1âwphi1
Finally, in answer to petitioner’s insistence that he should have been allowed by the trial
court to present his evidence on the civil aspect of the case, suffice it to state that when
petitioner filed a demurrer to evidence without leave of court, the whole case was submitted
9
for judgment on the basis of the evidence presented by the prosecution as the accused is
deemed to have waived the right to present evidence. At that juncture, the court is called
upon to decide the case including its civil aspect.32
WHEREFORE, premises considered, the Court of Appeals Decision dated December 13, 2007
and Resolution dated March 4, 2008 in CA-G.R. CEB-CR No. 00300 are MODIFIED. Petitioner
Jaime Alferez is ACQUITTED on reasonable doubt of violation of B.P. Blg. 22. However, the
civil liability imposed on petitioner is AFFIRMED. SO ORDERED.
FACTS:
Jaime Alferez was charged of three counts of violation of BP 22. Ten months after
prosecution rested its case, Alferez files a Demurrer to Evidence without leave of court citing
that the prosecution failed to show that he received the notice of dishonor or demand letter.
The MTC denied his demurrer and was convicted. The RTC and CA also affirmed the MTC's
decision.
In his petition, he sustained his argument that no notice of dishonor was given to him. The
CA maintains that, aside from not testifying because of the consequence of his demurrer he
did not object to the prosecution’s evidence aimed at proving the fact of receipt of the notice
of dishonor, the registry receipt and the return card of the post office.
ISSUE: Whether Aleferez was guilty.
RULING:
The SC acquitted Alferez but was ordered to pay civil liability. The SC did not believe that
Alferez had knowledge of his insufficient funds making him not guilty of the offense. The
registry receipt and the return card did not prove that a notice of dishonor was given to
Alferez. The absence of a notice of dishonor necessarily deprives the accused an opportunity
to preclude a criminal prosecution. As there is insufficient proof that petitioner received the
notice of dishonor, the presumption that he had knowledge of insufficiency of funds cannot
arise.
The CA was correct in saying that because of the demurrer, Alferez cannot testify anymore
but still, the burden is still on the prosecution to prove that a notice of dishonor was issued
against Alferez.
The SC, instead, directed Alferez to pay civil liabilities as it only needs preponderance of
evidence unlike his charge of BP 22, which needs guilt beyond reasonable doubt.
 10

#52 (Discharge of Negotiable Instrument) Issue: Did the respondent’s act of accepting the issued Solid Bank by the petitioner (after

issuing a bounced or dishonored check) discharge the previous check (bounced or

Title: Salazar v. J.Y. Bros. Marketing Corp. (GR No. 171998; October 20, 2010)
dishonored check) and erased any criminal responsibility?
Facts:
Ruling:
>The respondent (J.Y. Bros) is a corporation engaged in the business of selling sugar, rice and

other commodities. >No, respondent’s act of accepting the issued Solid Bank by the petitioner (after issuing a

bounced or dishonored check) did not discharge the previous check (bounced or dishonored
>On October 15, 1996 – the petitioner (Anamer Salazar – freelance sales agent) was
check) and erased any criminal responsibility.
approached by Calleja and Kallos who inquired if she knew a supplier of rice.

>Section 119 of the Negotiable Instrument Law provides, thus:

-The petitioner informed them of a supplier of rice and accompanied them to the respondent

where they (petitioner, Calleja and Kallos) procured 300 cavans of rice in the amount of Php SECTION 119. Instrument; how discharged. – A negotiable instrument is discharged:

214,000.00 from the respondent.

(d) By any other act which will discharge a simple contract for the payment of money;

-The petitioner negotiated and indorsed two checks issued by Nene Jaucian Timario to the
>The Supreme Court ruled that there is no novation when the dishonored Prudential Check
respondent which were dishonored:
was subsequently replaced by Solidbank check.

a. First Check – Prudential Check was dishonored due to closed account.

-It was ruled that there are only two ways which indicate the presence of novation and

b. Second Check (cross check) Solid Bank Check was dishonored due to insufficient funds. thereby produce the effect of extinguishing an obligation by another which substitutes the

same.
>The respondent filed a criminal complaint of estafa against the petitioner.

First, novation must be explicitly stated and declared in unequivocal terms as novation is
>RTC: acquitted the petitioner and ruled that the petitioner is not liable to the indorsed
never presumed. Secondly, the old and the new obligations must be incompatible on every
check.
point.
>CA: reversed the RTC and ruled that the petitioner was liable to the indorsed check.
- The test of incompatibility is whether or not the two obligations can stand together, each

one having its independent existence.

 11

If they cannot, they are incompatible and the latter obligation novates the first.

>In the present case, respondent’s acceptance of the Solid Bank check, which replaced the

dishonored Prudential Bank check, did not result to novation as there was no express

agreement to establish that petitioner was already discharged from his liability to pay

respondent the amount of P214,000.00 as payment for the 300 bags of rice.

- When the Solid Bank check was delivered to respondent, the same was also indorsed by

petitioner which shows petitioner’s recognition of the existing obligation to respondent to

pay P214,000.00 subject of the replaced Prudential Bank check.

- Respondent’s acceptance of the Solid Bank check did not result to any incompatibility, since

the two checks − Prudential and Solid Bank checks − were precisely for the purpose of paying

the amount of P214,000.00, i.e., the credit obtained from the purchase of the 300 bags of

rice from respondent and there was no substantial change in the object or principal condition

of the obligation of petitioner as the indorser of the check to pay the amount of P214,000.00.

It would appear that respondent accepted the Solid Bank check to give petitioner the chance

to pay her obligation.


FIRST DIVISION
G.R. No. 107508 April 25, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, CAPITOL CITY DEVELOPMENT BANK, PHILIPPINE BANK OF
COMMUNICATIONS, and F. ABANTE MARKETING, respondents.
KAPUNAN, J.:p
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the
decision dated April 29, 1992 of respondent Court of Appeals in CA-G.R. CV No. 24776 and its
resolution dated September 16, 1992, denying petitioner Philippine National Bank's motion
for reconsideration of said decision.
The facts of the case are as follows.
A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00
was issued by the Ministry of Education and Culture (now Department of Education, Culture
and Sports [DECS]) payable to F. Abante Marketing. This check was drawn against Philippine
National Bank (herein petitioner).
On August 11, 1981, F. Abante Marketing, a client of Capitol City Development Bank (Capitol),
deposited the questioned check in its savings account with said bank. In turn, Capitol
deposited the same in its account with the Philippine Bank of Communications (PBCom)
which, in turn, sent the check to petitioner for clearing.
Petitioner cleared the check as good and, thereafter, PBCom credited Capitol's account for
the amount stated in the check. However, on October 19, 1981, petitioner returned the
check to PBCom and debited PBCom's account for the amount covered by the check, the
reason being that there was a "material alteration" of the check number.
PBCom, as collecting agent of Capitol, then proceeded to debit the latter's account for the
same amount, and subsequently, sent the check back to petitioner. Petitioner, however,
returned the check to PBCom.
On the other hand, Capitol could not, in turn, debit F. Abante Marketing's account since the
latter had already withdrawn the amount of the check as of October 15, 1981. Capitol sought
clarification from PBCom and demanded the re-crediting of the amount. PBCom followed suit
by requesting an explanation and re-crediting from petitioner.
12
Since the demands of Capitol were not heeded, it filed a civil suit with the Regional Trial
Court of Manila against PBCom which, in turn, filed a third-party complaint against petitioner
for reimbursement/indemnity with respect to the claims of Capitol. Petitioner, on its part,
filed a fourth-party complaint against F. Abante Marketing.
On October 3, 1989; the Regional Trial Court rendered its decision the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered as follows:
1.) On plaintiffs complaint, defendant Philippine Bank of Communications is ordered to re-
credit or reimburse plaintiff Capitol City Development Bank the amount of P97,650.00, plus
interest of 12 percent thereto from October 19, 1981 until the amount is fully paid;
2.) On Philippine Bank of Communications third-party complaint third-party defendant PNB is
ordered to reimburse and indemnify Philippine Bank of Communications for whatever
amount PBCom pays to plaintiff;
3.) On Philippine National Bank's fourth-party complaint, F. Abante Marketing is ordered to
reimburse and indemnify PNB for whatever amount PNB pays to PBCom;
4.) On attorney's fees, Philippine Bank of Communications is ordered to pay Capitol City
Development Bank attorney's fees in the amount of Ten Thousand (P10,000.00) Pesos; but
PBCom is entitled to reimbursement/indemnity from PNB; and Philippine National Bank to
be, in turn reimbursed or indemnified by F. Abante Marketing for the same amount;
5.) The Counterclaims of PBCom and PNB are hereby dismissed;
6.) No pronouncement as to costs.
SO ORDERED. 1
An appeal was interposed before the respondent Court of Appeals which rendered its
decision on April 29, 1992, the decretal portion of which reads:
WHEREFORE, the judgment appealed from is modified by exempting PBCom from
liability to plaintiff-appellee for attorney's fees and ordering PNB to honor the
check for P97,650.00, with interest as declared by the trial court, and pay plaintiff-
appellee attorney's fees of P10,000.00. After the check shall have been honored by
PNB, PBCom shall re-credit plaintiff-appellee's account with it with the amount. No
pronouncement as to costs.
SO ORDERED. 2

A motion for reconsideration of the decision was denied by the respondent Court in its
resolution dated September 16, 1992 for lack of merit. 3
Hence, petitioner filed the instant petition which raises the following issues:
I any other change or addition which alters the effect of the instrument in any
WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS A MATERIAL
ALTERATION UNDER THE NEGOTIABLE INSTRUMENTS LAW.
II
WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE MINISTRY OF EDUCATION CAN
BE GIVEN WEIGHT IN EVIDENCE.
III
WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A. CHECK WITHIN THE
TWENTY FOUR (24) HOUR CLEARING PERIOD MAY RECOVER THE VALUE OF THE CHECK FROM
THE COLLECTING BANK.
IV
WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL PETITIONER PNB MAY BE HELD
LIABLE FOR ATTORNEY'S FEES. 4
We find no merit in the petition.
We shall first deal with the effect of the alteration of the serial number on the negotiability
of the check in question.
Petitioner anchors its position on Section 125 of the Negotiable Instruments Law (ACT No.
2031) 5 which provides:
Sec. 225. What constitutes a material alteration. Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
13
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or
respect, is a material alteration.
Petitioner alleges that there is no hard and fast rule in the interpretation of the aforequoted
provision of the Negotiable Instruments Law. It maintains that under Section 125(f), any
change that alters the effect of the instrument is a material alteration. 6
We do not agree.
An alteration is said to be material if it alters the effect of the
instrument. 7 It means an unauthorized change in an instrument that purports to modify in
any respect the obligation of a party or an unauthorized addition of words or numbers or
other change to an incomplete instrument relating to the obligation of a party. 8In other
words, a material alteration is one which changes the items which are required to be stated
under Section 1 of the Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
Sec. 1. — Form of negotiable instruments. An instrument to be negotiable must
conform to the following requirements:
(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.
In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C. Vitug
opines that "an innocent alteration (generally, changes on items other than those required to
be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid
the instrument, but the holder may enforce it only according to its original tenor." 9

Reproduced hereunder are some examples of material and immaterial alterations:
A. Material Alterations:
(1) Substituting the words "or bearer" for "order."
(2) Writing "protest waived" above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: "Iron County Bank, Crystal Falls, Mich. Aug. 5,
1901. Pay to G.L. or order $9 fifty cents CTR" The insertion of the figure 5 before the figure 9,
the instrument being otherwise unchanged.
(5) Adding the words "with interest" with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for payment is thereby curtailed
or extended.
(7) An instrument was payable "First Nat'l Bank" the plaintiff added the word "Marion."
(8) Plaintiff, without consent of the defendant, struck out the name of the defendant as
payee and inserted the name of the maker of the original note.
(9) Striking out the name of the payee and substituting that of the person who actually
discounted the note.
(10) Substituting the address of the maker for the name of a co-maker. 10
B. Immaterial Alterations:
(1) Changing "I promise to pay" to "We promise to pay", where there are two makers.
(2) Adding the word "annual" after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of actual delivery where the makers of a note gave it with the date in
blank, "July ____."
(5) An alteration of the marginal figures of a note where the sum stated in words in the body
remained unchanged.
14
(6) The insertion of the legal rate of interest where the note had a provision for "interest at
_______ per cent."
(7) A printed form of promissory note had on the margin the printed words, "Extended to
________." The holder on or after maturity wrote in the blank space the words "May 1,
1913," as a reference memorandum of a promise made by him to the principal maker at the
time the words were written to extend the time of payment.
(8) Where there was a blank for the place of payment, filling in the blank with the place
desired.
(9) Adding to an indorsee's name the abbreviation "Cash" when it had been agreed that the
draft should be discounted by the trust company of which the indorsee was cashier.
(10) The indorsement of a note by a stranger after its delivery to the payee at the time the
note was negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the principal maker, without the
consent of a surety co-maker. 11
The case at bench is unique in the sense that what was altered is the serial number of the
check in question, an item which, it can readily be observed, is not an essential requisite for
negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned
alteration did not change the relations between the parties. The name of the drawer and the
drawee were not altered. The intended payee was the same. The sum of money due to the
payee remained the same. Despite these findings, however, petitioner insists, that:
It is an accepted concept, besides being a negotiable instrument itself, that a TCAA
check by its very nature is the medium of exchange of governments (sic)
instrumentalities of agencies. And as (a) safety measure, every government office
o(r) agency (is) assigned TCAA checks bearing different number series.
A concrete example is that of the disbursements of the Ministry of Education and
Culture. It is issued by the Bureau of Treasury sizeable bundles of checks in booklet
form with serial numbers different from other government office or agency. Now,
for fictitious payee to succeed in its malicious intentions to defraud the
government, all it need do is to get hold of a TCAA Check and have the serial
numbers of portion (sic) thereof changed or altered to make it appear that the
same was issued by the MEG.
Otherwise, stated, it is through the serial numbers that (a) TCAA Check is
determined to have been issued by a particular office or agency of the
government. 12

Petitioner's arguments fail to convince. The check's serial number is not the sole indication of
its origin.. As succinctly found by the Court of Appeals, the name of the government agency
which issued the subject check was prominently printed therein. The check's issuer was
therefore sufficiently identified, rendering the referral to the serial number redundant and
inconsequential. Thus, we quote with favor the findings of the respondent court:
If the purpose of the serial number is merely to identify the issuing government
office or agency, its alteration in this case had no material effect whatsoever on the
integrity of the check. The identity of the issuing government office or agency was
not changed thereby and the amount of the check was not charged against the
account of another government office or agency which had no liability under the
check. The owner and issuer of the check is boldly and clearly printed on its face,
second line from the top: "MINISTRY OF EDUCATION AND CULTURE," and below the
name of the payee are the rubber-stamped words: "Ministry of Educ. &
Culture." These words are not alleged to have been falsely or fraudulently
intercalated into the check. The ownership of the check is established without the
necessity of recourse to the serial number. Neither there any proof that the amount
of the check was erroneously charged against the account of a government office
or agency other than the Ministry of Education and Culture. Hence, the alteration
in the number of the check did not affect or change the liability of the Ministry of
Education and Culture under the check and, therefore, is immaterial. The
genuineness of the amount and the signatures therein of then Deputy Minister of
Education Hermenegildo C. Dumlao and of the resident Auditor, Penomio C.
Alvarez are not challenged. Neither is the authenticity of the different codes
appearing therein questioned . . . 13 (Emphasis ours.)
Petitioner, thus cannot refuse to accept the check in question on the ground that the serial
number was altered, the same being an immaterial or innocent one.
We now go to the second issue. It is petitioner's submission that the certification issued by
Minrado C. Batonghinog, Cashier III of the MEC clearly shows that the check was altered. Said
certification reads:
TO WHOM IT MAY CONCERN:
This is to certify that according to the records of this Office, TCAA PNB Check Mo. SN7-
3666223-3 dated August 7, 1981 drawn in favor of F. Abante Marketing in the amount of
NINETY (S)EVEN THOUSAND SIX HUNDRED FIFTY PESOS ONLY (P97,650.00) was not issued by
this Office nor released to the payee concerned. The series number of said check was not
included among those requisition by this Office from the Bureau of Treasury.
(SGD.) MINRADO C. BATONGHINOG
15
Petitioner claims that even if the author of the certification issued by the Ministry of
Education and Culture (MEG) was not presented, still the best evidence of the material
alteration would be the disputed check itself and the serial number thereon. Petitioner thus
assails the refusal of respondent court to give weight to the certification because the author
thereof was not presented to identify it and to be cross-examined thereon. 15
We agree with the respondent court.
The one who signed the certification was not presented before the trial court to prove that
the said document was really the document he prepared and that the signature below the
said document is his own signature. Neither did petitioner present an eyewitness to the
execution of the questioned document who could possibly identify it. 16 Absent this proof, we
cannot rule on the authenticity of the contents of the certification. Moreover, as we
previously emphasized, there was no material alteration on the check, the change of its serial
number not being substantial to its negotiability.
Anent the third issue — whether or not the drawee bank may still recover the value of the
check from the collecting bank even if it failed to return the check within the twenty-four
(24) hour clearing period because the check was tampered — suffice it to state that since
there is no material alteration in the check, petitioner has no right to dishonor it and return it
to PBCom, the same being in all respects negotiable.
However, the amount of P10,000.00 as attorney's fees is hereby deleted. In their respective
decisions, the trial court and the Court of Appeals failed to explicitly state the rationale for
the said award. The trial court merely ruled as follows:
With respect to Capitol's claim for damages consisting of alleged loss of
opportunity, this Court finds that Capitol failed to adequately substantiate its claim.
What Capitol had presented was a self-serving, unsubstantiated and speculative
computation of what it allegedly could have earned or realized were it not for the
debit made by PBCom which was triggered by the return and debit made by PNB.
However, this Court finds that it would be fair and reasonable to impose interest at
12% per annum on the principal amount of the check computed from October 19,
1981 (the date PBCom debited Capitol's account) until the amount is fully paid and
reasonable attorney's fees. 17 (Emphasis ours.)
And contrary to the Court of Appeal's resolution, petitioner unambiguously questioned
before it the award of attorney's fees, assigning the latter as one of the errors committed by
the trial court. 18
The foregoing is in conformity with the guiding principles laid down in a long line of cases and
reiterated recently in Consolidated Bank & Trust Corporation (Solidbank) v. Court of
Appeals: 19

The award of attorney's fees lies within the discretion of the court and depends
upon the circumstances of each case. However, the discretion of the court to
award attorney's fees under Article 2208 of the Civil Code of the Philippines
demands factual, legal and equitable justification, without which the award is a
conclusion without a premise and improperly left to speculation and conjecture. It
becomes a violation of the proscription against the imposition of a penalty on the
right to litigate (Universal Shipping Lines, Inc. v. Intermediate Appellate Court, 188
SCRA 170 [1990]). The reason for the award must be stated in the text of the
court's decision. If it is stated only in the dispositive portion of the decision, the
same shall be disallowed. As to the award of attorney's fees being an exception
rather than the rule, it is necessary for the court to make findings of fact and law
that would bring the case within the exception and justify the grant of the award
(Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176
SCRA 539 [176 SCRA 539]).
WHEREFORE, premises considered, except for the deletion of the award of attorney's fees,
the decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.
PHILIPPINE NATIONAL BANK VS. COURT OF APPEALS
GR. NO. 107508 April 25, 1996
FACTS:
Ministry of Education Culture issued a check payable to Abante Marketing and drawn against
Philippine National Bank (PNB). Abante Marketing, deposited the questioned check in its
savings account with Capitol City Development Bank (CAPITOL). In turn, Capitol deposited the
same in its account with the Philippine Bank of Communications (PBCom) which, in turn, sent
the check to PNB for clearing. PNB cleared the check as good and thereafter, PBCom credited
Capitol's account for the amount stated in the check. However, PNB returned the check to
PBCom and debited PBCom's account for the amount covered by the check, the reason being
that there was a "material alteration" of the check number. PBCom, as collecting agent of
Capitol, then proceeded to debit the latter's account for the same amount, and
subsequently, sent the check back to petitioner. PNB, however, returned the check to
PBCom. On the other hand, Capitol could not in turn, debit Abante Marketing's account since
the latter had already withdrawn the amount of the check. Capitol sought clarification from
PBCom and demanded the re-crediting of the amount. PBCom followed suit by requesting an
explanation and re-crediting from PNB. Since the demands of Capitol were not heeded, it
filed a civil suit against PBCom which in turn, filed a third-party complaint against PNB for
reimbursement/indemnity with respect to the claims of Capitol. PNB, on its part, filed a
fourth-party complaint against Abante Marketing.
16
The Trial Court rendered its decision, ordering PBCom to re-credit or reimburse; PNB to
reimburse and indemnify PBCom for whatever amount PBCom pays to Capitol; Abante
Marketing to reimburse and indemnify PNB for whatever amount PNB pays to PBCom. The
court dismissed the counterclaims of PBCom and PNB. The appellate court modified the
appealed judgment by ordering PNB to honor the check. After the check shall have been
honored by PNB, the court ordered PBCom to re-credit Capitol's account with it the amount.
PNB filed the petition for review on certiorari averring that under Section 125 of the NIL, any
change that alters the effect of the instrument is a material alteration.
ISSUE:
WON an alteration of the serial number of a check is a material alteration under the NIL.
HELD:
NO, alteration of a serial number of a check is not a material alteration contemplated under
Sec. 125 of the NIL. An alteration is said to be material if it alters the effect of the instrument.
It means an unauthorized change in an instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party. In other words, a material
alteration is one which changes the items which are required to be stated under Section 1 of
the Negotiable Instruments Law.
In the present case what was altered is the serial number of the check in question, an item
which is not an essential requisite for negotiability under Section 1 of the Negotiable
Instruments Law. The aforementioned alteration did not change the relations between the
parties. The name of the drawer and the drawee were not altered. The intended payee was
the same. The sum of money due to the payee remained the same. The check's serial number
is not the sole indication of its origin. The name of the government agency which issued the
subject check was prominently printed therein. The check's issuer was therefore
insufficiently identified, rendering the referral to the serial number redundant and
inconsequential.

THIRD DIVISION
G.R. No. 129910 September 5, 2006
THE INTERNATIONAL CORPORATE BANK, INC., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review1 assailing the 9 August 1994 Amended Decision2 and
the 16 July 1997 Resolution3 of the Court of Appeals in CA-G.R. CV No. 25209.
The Antecedent Facts
The case originated from an action for collection of sum of money filed on 16 March 1982 by
the International Corporate Bank, Inc.4 ("petitioner") against the Philippine National Bank
("respondent"). The case was raffled to the then Court of First Instance (CFI) of Manila,
Branch 6. The complaint was amended on 19 March 1982. The case was eventually re-raffled
to the Regional Trial Court of Manila, Branch 52 ("trial court").
The Ministry of Education and Culture issued 15 checks5 drawn against respondent which
petitioner accepted for deposit on various dates. The checks are as follows:
The checks were deposited on the following dates for the following accounts:
After 24 hours from submission of the checks to respondent for clearing, petitioner paid the
value of the checks and allowed the withdrawals of the deposits. However, on 14 October
1981, respondent returned all the checks to petitioner without clearing them on the ground
that they were materially altered. Thus, petitioner instituted an action for collection of sums
of money against respondent to recover the value of the checks.
The Ruling of the Trial Court
The trial court ruled that respondent is expected to use reasonable business practices in
accepting and paying the checks presented to it. Thus, respondent cannot be faulted for the
delay in clearing the checks considering the ingenuity in which the alterations were effected.
The trial court observed that there was no attempt from petitioner to verify the status of the
checks before petitioner paid the value of the checks or allowed withdrawal of the deposits.
17
According to the trial court, petitioner, as collecting bank, could have inquired by telephone
from respondent, as drawee bank, about the status of the checks before paying their value.
Since the immediate cause of petitioner’s loss was the lack of caution of its personnel, the
trial court held that petitioner is not entitled to recover the value of the checks from
respondent.
The dispositive portion of the trial court’s Decision reads:
WHEREFORE, judgment is hereby rendered dismissing both the complaint and the
counterclaim. Costs shall, however be assessed against the plaintiff.
SO ORDERED.7
Petitioner appealed the trial court’s Decision before the Court of Appeals.
The Ruling of the Court of Appeals
In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial court’s Decision.
Applying Section 4(c) of Central Bank Circular No. 580, series of 1977,9 the Court of Appeals
held that checks that have been materially altered shall be returned within 24 hours after
discovery of the alteration. However, the Court of Appeals ruled that even if the drawee bank
returns a check with material alterations after discovery of the alteration, the return would
not relieve the drawee bank from any liability for its failure to return the checks within the
24-hour clearing period. The Court of Appeals explained:
Does this mean that, as long as the drawee bank returns a check with material
alteration within 24 hour[s] after discovery of such alteration, such return would
have the effect of relieving the bank of any liability whatsoever despite its failure to
return the check within the 24- hour clearing house rule?
We do not think so.
Obviously, such bank cannot be held liable for its failure to return the check in
question not later than the next regular clearing. However, this Court is of the
opinion and so holds that it could still be held liable if it fails to exercise due
diligence in verifying the alterations made. In other words, such bank would still be
expected, nay required, to make the proper verification before the 24-hour regular
clearing period lapses, or in cases where such lapses may be deemed inevitable,
that the required verification should be made within a reasonable time.
The implication of the rule that a check shall be returned within the 24-hour
clearing period is that if the collecting bank paid the check before the end of the
aforesaid 24-hour clearing period, it would be responsible therefor such that if the

said check is dishonored and returned within the 24-hour clearing period, the
drawee bank cannot be held liable. Would such an implication apply in the case of
materially altered checks returned within 24 hours after discovery? This Court finds
nothing in the letter of the above-cited C.B. Circular that would justify a negative
answer. Nonetheless, the drawee bank could still be held liable in certain instances.
Even if the return of the check/s in question is done within 24 hours after
discovery, if it can be shown that the drawee bank had been patently negligent in
the performance of its verification function, this Court finds no reason why the said
bank should be relieved of liability.
Although banking practice has it that the presumption of clearance is conclusive
when it comes to the application of the 24-hour clearing period, the same principle
may not be applied to the 24-hour period vis-a-vis material alterations in the sense
that the drawee bank which returns materially altered checks within 24 hours after
discovery would be conclusively relieved of any liability thereon. This is because
there could well be various intervening events or factors that could affect the rights
and obligations of the parties in cases such as the instant one including patent
negligence on the part of the drawee bank resulting in an unreasonable delay in
detecting the alterations. While it is true that the pertinent proviso in C.B. Circular
No. 580 allows the drawee bank to return the altered check within the period
"provided by law for filing a legal action", this does not mean that this would entitle
or allow the drawee bank to be grossly negligent and, inspite thereof, avail itself of
the maximum period allowed by the above-cited Circular. The discovery must be
made within a reasonable time taking into consideration the facts and
circumstances of the case. In other words, the aforementioned C.B. Circular does
not provide the drawee bank the license to be grossly negligent on the one hand
nor does it preclude the collecting bank from raising available defenses even if the
check is properly returned within the 24-hour period after discovery of the material
alteration.10
The Court of Appeals rejected the trial court’s opinion that petitioner could have verified the
status of the checks by telephone call since such imposition is not required under Central
Bank rules. The dispositive portion of the 10 October 1991 Decision reads:
PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and the
defendant-appellee Philippine National Bank is declared liable for the value of the
fifteen checks specified and enumerated in the decision of the trial court (page 3)
in the amount of P1,447,920.00
SO ORDERED.11
Respondent filed a motion for reconsideration of the 10 October 1991 Decision. In its 9
August 1994 Amended Decision, the Court of Appeals reversed itself and affirmed the
Decision of the trial court dismissing the complaint.
18
In reversing itself, the Court of Appeals held that its 10 October 1991 Decision failed to
appreciate that the rule on the return of altered checks within 24 hours from the discovery of
the alteration had been duly passed by the Central Bank and accepted by the members of the
banking system. Until the rule is repealed or amended, the rule has to be applied.
Petitioner moved for the reconsideration of the Amended Decision. In its 16 July 1997
Resolution, the Court of Appeals denied the motion for lack of merit.
Hence, the recourse to this Court.
The Issues
Petitioner raises the following issues in its Memorandum:
1. Whether the checks were materially altered;
2. Whether respondent was negligent in failing to recognize within a reasonable
period the altered checks and in not returning the checks within the period; and
3. Whether the motion for reconsideration filed by respondent was out of time
thus making the 10 October 1991 Decision final and executory.12
The Ruling of This Court
Filing of the Petition under both Rules 45 and 65
Respondent asserts that the petition should be dismissed outright since petitioner availed of
a wrong mode of appeal. Respondent cites Ybañez v. Court of Appeals13 where the Court
ruled that "a petition cannot be subsumed simultaneously under Rule 45 and Rule 65 of the
Rules of Court, and neither may petitioners delegate upon the court the task of determining
under which rule the petition should fall."
The remedies of appeal and certiorari are mutually exclusive and not alternative or
successive.14 However, this Court may set aside technicality for justifiable reasons. The
petition before the Court is clearly meritorious. Further, the petition was filed on time both
under Rules 45 and 65.15 Hence, in accordance with the liberal spirit which pervades the
Rules of Court and in the interest of justice,16 we will treat the petition as having been filed
under Rule 45.
Alteration of Serial Number Not Material
The alterations in the checks were made on their serial numbers.

Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable Instruments Law,
provide:
SEC. 124. Alteration of instrument; effect of. ― Where a negotiable instrument is
materially altered without the assent of all parties liable thereon, it is avoided,
except as against a party who has himself made, authorized, or assented to the
alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder
in due course, not a party to the alteration, he may enforce payment thereof
according to its original tenor.
SEC. 125. What constitutes a material alteration. ― Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
or which adds a place of payment where no place of payment is specified, or any
other change or addition which alters the effect of the instrument in any respect, is
a material alteration.
The question on whether an alteration of the serial number of a check is a material alteration
under the Negotiable Instruments Law is already a settled matter. In Philippine National Bank
v. Court of Appeals, this Court ruled that the alteration on the serial number of a check is not
a material alteration. Thus:
An alteration is said to be material if it alters the effect of the instrument. It means
an unauthorized change in an instrument that purports to modify in any respect
the obligation of a party or an unauthorized addition of words or numbers or other
change to an incomplete instrument relating to the obligation of a party. In other
words, a material alteration is one which changes the items which are required to
be stated under Section 1 of the Negotiable Instrument[s] Law.
Likewise, in the present case the alterations of the serial numbers do not constitute material
alterations on the checks.
Section 1 of the Negotiable Instruments Law provides:
19
Section 1. ― Form of negotiable instruments. An instrument to be negotiable must
conform to the following requirements:
(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.
In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C.
Vitug opines that "an innocent alteration (generally, changes on items other than
those required to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by
a stranger) will not avoid the instrument, but the holder may enforce it only
according to its original tenor.
The case at the bench is unique in the sense that what was altered is the serial
number of the check in question, an item which, it can readily be observed, is not
an essential requisite for negotiability under Section 1 of the Negotiable
Instruments Law. The aforementioned alteration did not change the relations
between the parties. The name of the drawer and the drawee were not altered.
The intended payee was the same. The sum of money due to the payee remained
the same. x x x
The check’s serial number is not the sole indication of its origin. As succinctly found
by the Court of Appeals, the name of the government agency which issued the
subject check was prominently printed therein. The check’s issuer was therefore
sufficiently identified, rendering the referral to the serial number redundant and
inconsequential. x x x
Petitioner, thus cannot refuse to accept the check in question on the ground that
the serial number was altered, the same being an immaterial or innocent one.17

Incidentally, we agree with the petitioner’s observation that the check in the PNB case
appears to belong to the same batch of checks as in the present case. The check in
the PNB case was also issued by the Ministry of Education and Culture. It was also drawn
against PNB, respondent in this case. The serial number of the check in the PNB case is 7-
3666-223-3 and it was issued on 7 August 1981.
Timeliness of Filing of Respondent’s Motion for Reconsideration
Respondent filed its motion for reconsideration of the 10 October 1991 Decision on 6
November 1991. Respondent’s motion for reconsideration states that it received a copy of
the 10 October 1991 Decision on 22 October 1991.18 Thus, it appears that the motion for
reconsideration was filed on time. However, the Registry Return Receipt shows that counsel
for respondent or his agent received a copy of the 10 October 1991 Decision on 16 October
1991,19 not on 22 October 1991 as respondent claimed. Hence, the Court of Appeals is
correct when it noted that the motion for reconsideration was filed late. Despite its late
filing, the Court of Appeals resolved to admit the motion for reconsideration "in the interest
of substantial justice."20
There are instances when rules of procedure are relaxed in the interest of justice. However,
in this case, respondent did not proffer any explanation for the late filing of the motion for
reconsideration. Instead, there was a deliberate attempt to deceive the Court of Appeals by
claiming that the copy of the 10 October 1991 Decision was received on 22 October 1991
instead of on 16 October 1991. We find no justification for the posture taken by the Court of
Appeals in admitting the motion for reconsideration. Thus, the late filing of the motion for
reconsideration rendered the 10 October 1991 Decision final and executory.
The 24-Hour Clearing Time
The Court will not rule on the proper application of Central Bank Circular No. 580 in this case.
Since there were no material alterations on the checks, respondent as drawee bank has no
right to dishonor them and return them to petitioner, the collecting bank.21 Thus, respondent
is liable to petitioner for the value of the checks, with legal interest from the time of filing of
the complaint on 16 March 1982 until full payment.22 Further, considering that respondent’s
motion for reconsideration was filed late, the 10 October 1991 Decision, which held
respondent liable for the value of the checks amounting to P1,447,920, had become final and
executory.
WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and the 16 July 1997
Resolution of the Court of Appeals. We rule that respondent Philippine National Bank is liable
to petitioner International Corporate Bank, Inc. for the value of the checks amounting
to P1,447,920, with legal interest from 16 March 1982 until full payment. Costs against
respondent.
SO ORDERED.
20
Facts: The Ministry of Education and Culture issued 15 checks drawn against respondent
which petitioner accepted for deposit on various dates. After 24 hours from submission of
the checks to respondent for clearing, petitioner paid the value of the checks and allowed
the withdrawals of the deposits. However, on 14 October 1981, respondent returned all the
checks to petitioner without clearing them on the ground that they were materially altered.
Thus, petitioner instituted an action for collection of sums of money against respondent to
recover the value of the checks.
Issue: Whether the alterations in the serial numbers of the check is a material alteration.
Held: No. Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable
Instruments Law, provide:
SEC. 124. Alteration of instrument; effect of. ― Where a negotiable instrument is materially
altered without the assent of all parties liable thereon, it is avoided, except as against a party
who has himself made, authorized, or assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due
course, not a party to the alteration, he may enforce payment thereof according to its
original tenor.
SEC. 125. What constitutes a material alteration. ― Any alteration which changes: (a) The
date; (b) The sum payable, either for principal or interest; (c) The time or place of payment;
(d) The number or the relations of the parties; (e) The medium or currency in which payment
is to be made; or which adds a place of payment where no place of payment is specified, or
any other change or addition which alters the effect of the instrument in any respect, is a
material alteration.
An alteration is said to be material if it alters the effect of the instrument. It means an
unauthorized change in an instrument that purports to modify in any respect the obligation
of a party or an unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party. In other words, a material
alteration is one which changes the items which are required to be stated under Section 1 of
the Negotiable Instruments Law.
The case at the bench is unique in the sense that what was altered is the serial number of the
check in question, an item which, it can readily be observed, is not an essential requisite for
negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned
alteration did not change the relations between the parties. The name of the drawer and the
drawee were not altered. The intended payee was the same. The sum of money due to the
payee remained the same.

FIRST DIVISION
G.R. No. 154469 December 6, 2006
METROPOLITAN BANK AND TRUST COMPANY, petitioners,
vs.
RENATO D. CABILZO, respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari, filed by petitioner Metropolitan Bank
and Trust Company (Metrobank) seeking to reverse and set aside the Decision1 of the Court
of Appeals dated 8 March 2002 and its Resolution dated 26 July 2002 affirming the Decision
of the Regional Trial Court (RTC) of Manila, Branch 13 dated 4 September 1998. The
dispositive portion of the Court of Appeals Decision reads:
WHEREFORE, the assailed decision dated September 4, 1998 is AFFIRMED with
modifications (sic) that the awards for exemplary damages and attorney’s fees are
hereby deleted.
Petitioner Metrobank is a banking institution duly organized and existing as such under
Philippine laws.2
Respondent Renato D. Cabilzo (Cabilzo) was one of Metrobank’s clients who maintained a
current account with Metrobank Pasong Tamo Branch.3
On 12 November 1994, Cabilzo issued a Metrobank Check No. 985988, payable to "CASH"
and postdated on 24 November 1994 in the amount of One Thousand Pesos (P1,000.00). The
check was drawn against Cabilzo’s Account with Metrobank Pasong Tamo Branch under
Current Account No. 618044873-3 and was paid by Cabilzo to a certain Mr. Marquez, as his
sales commission.4
Subsequently, the check was presented to Westmont Bank for payment. Westmont Bank, in
turn, indorsed the check to Metrobank for appropriate clearing. After the entries thereon
were examined, including the availability of funds and the authenticity of the signature of the
drawer, Metrobank cleared the check for encashment in accordance with the Philippine
Clearing House Corporation (PCHC) Rules.
On 16 November 1994, Cabilzo’s representative was at Metrobank Pasong Tamo Branch to
make some transaction when he was asked by a bank personnel if Cabilzo had issued a check
in the amount of P91,000.00 to which the former replied in the negative. On the afternoon of
21
the same date, Cabilzo himself called Metrobank to reiterate that he did not issue a check in
the amount of P91,000.00 and requested that the questioned check be returned to him for
verification, to which Metrobank complied.5
Upon receipt of the check, Cabilzo discovered that Metrobank Check No. 985988 which he
issued on 12 November 1994 in the amount of P1,000.00 was altered to P91,000.00 and the
date 24 November 1994 was changed to 14 November 1994.6
Hence, Cabilzo demanded that Metrobank re-credit the amount of P91,000.00 to his
account. Metrobank, however, refused reasoning that it has to refer the matter first to its
Legal Division for appropriate action. Repeated verbal demands followed but Metrobank still
failed to re-credit the amount of P91,000.00 to Cabilzo’s account.7
On 30 June 1995, Cabilzo, thru counsel, finally sent a letter-demand8 to Metrobank for the
payment of P90,000.00, after deducting the original value of the check in the amount
of P1,000.00. Such written demand notwithstanding, Metrobank still failed or refused to
comply with its obligation.
Consequently, Cabilzo instituted a civil action for damages against Metrobank before the RTC
of Manila, Branch 13. In his Complaint docketed as Civil Case No. 95-75651, Renato D. Cabilzo
v. Metropolitan Bank and Trust Company, Cabilzo prayed that in addition to his claim for
reimbursement, actual and moral damages plus costs of the suit be awarded in his favor.9
For its part, Metrobank countered that upon the receipt of the said check through the PCHC
on 14 November 1994, it examined the genuineness and the authenticity of the drawer’s
signature appearing thereon and the technical entries on the check including the amount in
figures and in words to determine if there were alterations, erasures, superimpositions or
intercalations thereon, but none was noted. After verifying the authenticity and propriety of
the aforesaid entries, including the indorsement of the collecting bank located at the dorsal
side of the check which stated that, "all prior indorsements and lack of indorsement
guaranteed," Metrobank cleared the check.10
Anent thereto, Metrobank claimed that as a collecting bank and the last indorser, Westmont
Bank should be held liable for the value of the check. Westmont Bank indorsed the check as
the an unqualified indorser, by virtue of which it assumed the liability of a general indorser,
and thus, among others, warranted that the instrument is genuine and in all respect what it
purports to be.
In addition, Metrobank, in turn, claimed that Cabilzo was partly responsible in leaving spaces
on the check, which, made the fraudulent insertion of the amount and figures thereon,
possible. On account of his negligence in the preparation and issuance of the check, which
according to Metrobank, was the proximate cause of the loss, Cabilzo cannot thereafter
claim indemnity by virtue of the doctrine of equitable estoppel.

Thus, Metrobank demanded from Cabilzo, for payment in the amount of P100,000.00 which
represents the cost of litigation and attorney’s fees, for allegedly bringing a frivolous and
baseless suit. 11
On 19 April 1996, Metrobank filed a Third-Party Complaint12 against Westmont Bank on
account of its unqualified indorsement stamped at the dorsal side of the check which the
former relied upon in clearing what turned out to be a materially altered check.
Subsequently, a Motion to Dismiss13 the Third-Party Complaint was then filed by Westmont
bank because another case involving the same cause of action was pending before a different
court. The said case arose from an action for reimbursement filed by Metrobank before the
Arbitration Committee of the PCHC against Westmont Bank, and now the subject of a
Petition for Review before the RTC of Manila, Branch 19.
In an Order14 dated 4 February 1997, the trial court granted the Motion to Dismiss the Third-
Party Complaint on the ground of litis pendentia.
On 4 September 1998, the RTC rendered a Decision15 in favor of Cabilzo and thereby ordered
Metrobank to pay the sum of P90,000.00, the amount of the check. In stressing the fiduciary
nature of the relationship between the bank and its clients and the negligence of the drawee
bank in failing to detect an apparent alteration on the check, the trial court ordered for the
payment of exemplary damages, attorney’s fees and cost of litigation. The dispositive portion
of the Decision reads:
WHEREFORE, judgment is rendered ordering defendant Metropolitan Bank and
Trust Company to pay plaintiff Renato Cabilzo the sum of P90,000 with legal
interest of 6 percent per annum from November 16, 1994 until payment is made
plus P20,000 attorney’s fees, exemplary damages of P50,000, and costs of the
suit.16
Aggrieved, Metrobank appealed the adverse decision to the Court of Appeals reiterating its
previous argument that as the last indorser, Westmont Bank shall bear the loss occasioned
by the fraudulent alteration of the check. Elaborating, Metrobank maintained that by reason
of its unqualified indorsement, Westmont Bank warranted that the check in question is
genuine, valid and subsisting and that upon presentment the check shall be accepted
according to its tenor.
Even more, Metrobank argued that in clearing the check, it was not remiss in the
performance of its duty as the drawee bank, but rather, it exercised the highest degree of
diligence in accordance with the generally accepted banking practice. It further insisted that
the entries in the check were regular and authentic and alteration could not be determined
even upon close examination.
22
In a Decision17 dated 8 March 2002, the Court of Appeals affirmed with modification the
Decision of the court a quo, similarly finding Metrobank liable for the amount of the check,
without prejudice, however, to the outcome of the case between Metrobank and Westmont
Bank which was pending before another tribunal. The decretal portion of the Decision reads:
WHEREFORE, the assailed decision dated September 4, 1998 is AFFIRMED with the
modifications (sic) that the awards for exemplary damages and attorney’s fees are
hereby deleted.18
Similarly ill-fated was Metrobank’s Motion for Reconsideration which was also denied by the
appellate court in its Resolution19 issued on 26 July 2002, for lack of merit.
Metrobank now poses before this Court this sole issue:
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING METROBANK,
AS DRAWEE BANK, LIABLE FOR THE ALTERATIONS ON THE SUBJECT CHECK BEARING
THE AUTHENTIC SIGNATURE OF THE DRAWER THEREOF.
We resolve to deny the petition.
An alteration is said to be material if it changes the effect of the instrument. It means that an
unauthorized change in an instrument that purports to modify in any respect the obligation
of a party or an unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party.20 In other words, a material
alteration is one which changes the items which are required to be stated under Section 1 of
the Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
Section 1. Form of negotiable instruments. - An instrument to be negotiable must
conform to the following requirements:
(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 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.

Also pertinent is the following provision in the Negotiable Instrument Law which states:
Section 125. What constitutes material alteration. – Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relation of the parties;
(e) The medium or currency in which payment is to be made;
Or which adds a place of payment where no place of payment is specified, or any
other change or addition which alters the effect of the instrument in any respect is
a material alteration.
In the case at bar, the check was altered so that the amount was increased from P1,000.00
to P91,000.00 and the date was changed from 24 November 1994 to 14 November 1994.
Apparently, since the entries altered were among those enumerated under Section 1 and
125, namely, the sum of money payable and the date of the check, the instant controversy
therefore squarely falls within the purview of material alteration.
Now, having laid the premise that the present petition is a case of material alteration, it is
now necessary for us to determine the effect of a materially altered instrument, as well as
the rights and obligations of the parties thereunder. The following provision of the
Negotiable Instrument Law will shed us some light in threshing out this issue:
Section 124. Alteration of instrument; effect of. – Where a negotiable instrument is
materially altered without the assent of all parties liable thereon, it is avoided,
except as against a party who has himself made,authorized, and assented to the
alteration and subsequent indorsers.
But when the instrument has been materially altered and is in the hands of a
holder in due course not a party to the alteration, he may enforce the payment
thereof according to its original tenor. (Emphasis ours.)
Indubitably, Cabilzo was not the one who made nor authorized the alteration. Neither did he
assent to the alteration by his express or implied acts. There is no showing that he failed to
exercise such reasonable degree of diligence required of a prudent man which could have
otherwise prevented the loss. As correctly ruled by the appellate court, Cabilzo was never
remiss in the preparation and issuance of the check, and there were no indicia of evidence
23
that would prove otherwise. Indeed, Cabilzo placed asterisks before and after the amount in
words and figures in order to forewarn the subsequent holders that nothing follows before
and after the amount indicated other than the one specified between the asterisks.
The degree of diligence required of a reasonable man in the exercise of his tasks and the
performance of his duties has been faithfully complied with by Cabilzo. In fact, he was wary
enough that he filled with asterisks the spaces between and after the amounts, not only
those stated in words, but also those in numerical figures, in order to prevent any fraudulent
insertion, but unfortunately, the check was still successfully altered, indorsed by the
collecting bank, and cleared by the drawee bank, and encashed by the perpetrator of the
fraud, to the damage and prejudice of Cabilzo.
Verily, Metrobank cannot lightly impute that Cabilzo was negligent and is therefore
prevented from asserting his rights under the doctrine of equitable estoppel when the facts
on record are bare of evidence to support such conclusion. The doctrine of equitable
estoppel states that when one of the two innocent persons, each guiltless of any intentional
or moral wrong, must suffer a loss, it must be borne by the one whose erroneous conduct,
either by omission or commission, was the cause of injury.21 Metrobank’s reliance on
this dictum, is misplaced. For one, Metrobank’s representation that it is an innocent party is
flimsy and evidently, misleading. At the same time, Metrobank cannot asseverate that
Cabilzo was negligent and this negligence was the proximate cause22 of the loss in the
absence of even a scintilla proof to buttress such claim. Negligence is not presumed but must
be proven by the one who alleges it.23
Undoubtedly, Cabilzo was an innocent party in this instant controversy. He was just an
ordinary businessman who, in order to facilitate his business transactions, entrusted his
money with a bank, not knowing that the latter would yield a substantial amount of his
deposit to fraud, for which Cabilzo can never be faulted.
We never fail to stress the remarkable significance of a banking institution to commercial
transactions, in particular, and to the country’s economy in general. The banking system is an
indispensable institution in the modern world and plays a vital role in the economic life of
every civilized nation. Whether as mere passive entities for the safekeeping and saving of
money or as active instruments of business and commerce, banks have become an
ubiquitous presence among the people, who have come to regard them with respect and
even gratitude and, most of all, confidence.24
Thus, even the humble wage-earner does not hesitate to entrust his life's savings to the bank
of his choice, knowing that they will be safe in its custody and will even earn some interest
for him. The ordinary person, with equal faith, usually maintains a modest checking account
for security and convenience in the settling of his monthly bills and the payment of ordinary
expenses. As for a businessman like the respondent, the bank is a trusted and active
associate that can help in the running of his affairs, not only in the form of loans when
needed but more often in the conduct of their day-to-day transactions like the issuance or
encashment of checks.25

In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must
record every single transaction accurately, down to the last centavo, and as promptly as
possible. This has to be done if the account is to reflect at any given time the amount of
money the depositor can dispose of as he sees fit, confident that the bank will deliver it as
and to whomever he directs.26
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. The appropriate degree
of diligence required of a bank must be a high degree of diligence, if not the utmost
diligence.27
In the present case, it is obvious that Metrobank was remiss in that duty and violated that
relationship. As observed by the Court of Appeals, there are material alterations on the check
that are visible to the naked eye. Thus:
x x x The number "1" in the date is clearly imposed on a white figure in the shape of
the number "2". The appellant’s employees who examined the said check should
have likewise been put on guard as to why at the end of the amount in words, i.e.,
after the word "ONLY", there are 4 asterisks, while at the beginning of the line or
before said phrase, there is none, even as 4 asterisks have been placed before and
after the word "CASH" in the space for payee. In addition, the 4 asterisks before the
words "ONE THOUSAND PESOS ONLY" have noticeably been erased with typing
correction paper, leaving white marks, over which the word "NINETY" was
superimposed. The same can be said of the numeral "9" in the amount "91,000",
which is superimposed over a whitish mark, obviously an erasure, in lieu of the
asterisk which was deleted to insert the said figure. The appellant’s employees
should have again noticed why only 2 asterisks were placed before the amount in
figures, while 3 asterisks were placed after such amount. The word "NINETY" is also
typed differently and with a lighter ink, when compared with the words "ONE
THOUSAND PESOS ONLY." The letters of the word "NINETY" are likewise a little
bigger when compared with the letters of the words "ONE THOUSAND PESOS
ONLY".28
Surprisingly, however, Metrobank failed to detect the above alterations which could not
escape the attention of even an ordinary person. This negligence was exacerbated by the fact
that, as found by the trial court, the check in question was examined by the cash custodian
whose functions do not include the examinations of checks indorsed for payment against
drawer’s accounts.29 Obviously, the employee allowed by Metrobank to examine the check
was not verse and competent to handle such duty. These factual findings of the trial court is
conclusive upon this court especially when such findings was affirmed the appellate court.30
Apropos thereto, we need to reiterate that by the very nature of their work the degree of
responsibility, care and trustworthiness expected of their employees and officials is far better
24
than those of ordinary clerks and employees. Banks are expected to exercise the highest
degree of diligence in the selection and supervision of their employees.31
In addition, the bank on which the check is drawn, known as the drawee bank, is under strict
liability to pay to the order of the payee in accordance with the drawer’s instructions as
reflected on the face and by the terms of the check. Payment made under materially altered
instrument is not payment done in accordance with the instruction of the drawer.
When the drawee bank pays a materially altered check, it violates the terms of the check, as
well as its duty to charge its client’s account only for bona fide disbursements he had made.
Since the drawee bank, in the instant case, did not pay according to the original tenor of the
instrument, as directed by the drawer, then it has no right to claim reimbursement from the
drawer, much less, the right to deduct the erroneous payment it made from the drawer’s
account which it was expected to treat with utmost fidelity.
Metrobank vigorously asserts that the entries in the check were carefully examined: The date
of the instrument, the amount in words and figures, as well as the drawer’s signature, which
after verification, were found to be proper and authentic and was thus cleared. We are not
persuaded. Metrobank’s negligence consisted in the omission of that degree of diligence
required of a bank owing to the fiduciary nature of its relationship with its client. Article 1173
of the Civil Code 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
circumstances of the persons, of the time and of the place. x x x.
Beyond question, Metrobank failed to comply with the degree required by the nature of its
business as provided by law and jurisprudence. If indeed it was not remiss in its obligation,
then it would be inconceivable for it not to detect an evident alteration considering its vast
knowledge and technical expertise in the intricacies of the banking business. This Court is not
completely unaware of banks’ practices of employing devices and techniques in order to
detect forgeries, insertions, intercalations, superimpositions and alterations in checks and
other negotiable instruments so as to safeguard their authenticity and negotiability.
Metrobank cannot now feign ignorance nor claim diligence; neither can it point its finger at
the collecting bank, in order to evade liability.
Metrobank argues that Westmont Bank, as the collecting bank and the last indorser, shall
bear the loss. Without ruling on the matter between the drawee bank and the collecting
bank, which is already under the jurisdiction of another tribunal, we find that Metrobank
cannot rely on such indorsement, in clearing the questioned check. The corollary liability of
such indorsement, if any, is separate and independent from the liability of Metrobank to
Cabilzo.

The reliance made by Metrobank on Westmont Bank’s indorsement is clearly inconsistent, if
not totally offensive to the dictum that being impressed with public interest, banks should
exercise the highest degree of diligence, if not utmost diligence in dealing with the accounts
of its own clients. It owes the highest degree fidelity to its clients and should not therefore
lightly rely on the judgment of other banks on occasions where its clients money were
involve, no matter how small or substantial the amount at stake.
Metrobank’s contention that it relied on the strength of collecting bank’s indorsement may
be merely a lame excuse to evade liability, or may be indeed an actual banking practice. In
either case, such act constitutes a deplorable banking practice and could not be allowed by
this Court bearing in mind that the confidence of public in general is of paramount
importance in banking business.
What is even more deplorable is that, having been informed of the alteration, Metrobank did
not immediately re-credit the amount that was erroneously debited from Cabilzo’s account
but permitted a full blown litigation to push through, to the prejudice of its client. Anyway,
Metrobank is not left with no recourse for it can still run after the one who made the
alteration or with the collecting bank, which it had already done. It bears repeating that the
records are bare of evidence to prove that Cabilzo was negligent. We find no justifiable
reason therefore why Metrobank did not immediately reimburse his account. Such ineptness
comes within the concept of wanton manner contemplated under the Civil Code which
warrants the imposition of exemplary damages, "by way of example or correction for the
public good," in the words of the law. It is expected that this ruling will serve as a stern
warning in order to deter the repetition of similar acts of negligence, lest the confidence of
the public in the banking system be further eroded. 32
WHEREFORE, premises considered, the instant Petition is DENIED. The Decision dated 8
March 2002 and the Resolution dated 26 July 2002 of the Court of Appeals
are AFFIRMED with modification that exemplary damages in the amount of P50,000.00 be
awarded. Costs against the petitioner.
SO ORDERED.
Lessons Applicable: Discharge of instrument and persons secondarily liable (Negotiable
Instruments Law)
FACTS:
 November 12,1994: Renato D. Cabilzo (Cabilzo) issued a Metrobank Check payable to
"CASH" and postdated on November 24, 1994 in the amount of P1,000 drawn against
his Metrobank account to Mr. Marquez, as his sales commission
 check was presented to Westmont Bank for payment who indorsed it to Metrobank for
appropriate clearing
25
 After the entries thereon were examined, including the availability of funds and the
authenticity of the signature of the drawer, Metrobank cleared the check for
encashment in accordance with the Philippine Clearing House Corporation (PCHC) Rules
 November 16, 1994: Cabilzo’s representative was at Metrobank when he was asked by
a bank personnel if Cabilzo had issued a check in the amount of P91K to which he
replied in negative
 That afternoon: Cabilzo called Metrobank to reiterate that he did not issue the check
 He later discovered that the check of P1K was altered to P91K and date was changed
from Nov 24 to Nov 14.
 Cabilzo demanded that Metrobank re-credit the amount of P91,000.00 to his account
 June 30, 1995: Through counsel sent a letter-demand for the amount of P90K
 CA affirmed RTC: Favored Cablizo
ISSUE: W/N Cablizo can recover from Metrobank
HELD:
YES. CA Affirmed
 material alteration
 changes the items which are required to be stated under Section 1 of the Negotiable
Instruments Law
 Section 1. Form of negotiable instruments. - An instrument to be negotiable must
conform to the following requirements:
(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 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.
 changes the effect of the instrument
 Section 125. What constitutes material alteration. – Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relation of the parties;
(e) The medium or currency in which payment is to be made;
Or which adds a place of payment where no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect is a material
alteration.
 In the case at bar, the check was altered so that the amount was increased
from P1,000.00 to P91,000.00 and the date was changed from 24 November 1994 to 14
November 1994.
 Section 124. Alteration of instrument; effect of. – Where a negotiable instrument is
materially altered without the assent of all parties liable thereon, it is avoided, except
as against a party who has himself made, authorized,and assented to the
alteration and subsequent indorsers.
 26

But when the instrument has been materially altered and is in the hands of a holder in
due course not a party to the alteration, he may enforce the payment thereof according
to its original tenor.
 Cabilzo was not the one who made nor authorized the alteration. Neither did he assent
to the alteration by his express or implied acts
 There is no showing that he failed to exercise such reasonable degree of diligence
required of a prudent man which could have otherwise prevented the loss.
 bank must be a high degree of diligence, if not the utmost diligence
 Surprisingly, however, Metrobank failed to detect the above alterations which could
not escape the attention of even an ordinary person
 "NINETY" is also typed differently and with a lighter ink
 only 2 asterisks were placed before the amount in figures, while 3 asterisks were placed
after such amount
 "NINETY" are likewise a little bigger when compared with the letters of the words "ONE
THOUSAND PESOS ONLY"
 When the drawee bank pays a materially altered check, it violates the terms of the
check, as well as its duty to charge its client’s account only for bona fide disbursements
he had made.
 The corollary liability of Westmont Ban's indorsement, if any, is separate and
independent from the liability of Metrobank to Cabilzo.

IRST DIVISION
G.R. No. 150228 July 30, 2009
BANK OF AMERICA NT & SA, Petitioner,
vs.
PHILIPPINE RACING CLUB, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court from the
Decision1 promulgated on July 16, 2001 by the former Second Division of the Court of
Appeals (CA), in CA-G.R. CV No. 45371 entitled "Philippine Racing Club, Inc. v. Bank of
America NT & SA," affirming the Decision2 dated March 17, 1994 of the Regional Trial Court
(RTC) of Makati, Branch 135 in Civil Case No. 89-5650, in favor of the respondent. Likewise,
the present petition assails the Resolution3 promulgated on September 28, 2001, denying the
Motion for Reconsideration of the CA Decision.
The facts of this case as narrated in the assailed CA Decision are as follows:
Plaintiff-appellee PRCI is a domestic corporation which maintains several accounts with
different banks in the Metro Manila area. Among the accounts maintained was Current
Account No. 58891-012 with defendant-appellant BA (Paseo de Roxas Branch). The
authorized joint signatories with respect to said Current Account were plaintiff-appellee’s
President (Antonia Reyes) and Vice President for Finance (Gregorio Reyes).
On or about the 2nd week of December 1988, the President and Vice President of plaintiff-
appellee corporation were scheduled to go out of the country in connection with the
corporation’s business. In order not to disrupt operations in their absence, they pre-signed
several checks relating to Current Account No. 58891-012. The intention was to insure
continuity of plaintiff-appellee’s operations by making available cash/money especially to
settle obligations that might become due. These checks were entrusted to the accountant
with instruction to make use of the same as the need arose. The internal arrangement was,
in the event there was need to make use of the checks, the accountant would prepare the
corresponding voucher and thereafter complete the entries on the pre-signed checks.
It turned out that on December 16, 1988, a John Doe presented to defendant-appellant bank
for encashment a couple of plaintiff-appellee corporation’s checks (Nos. 401116 and 401117)
with the indicated value of P110,000.00 each. It is admitted that these 2 checks were among
those presigned by plaintiff-appellee corporation’s authorized signatories.
27
The two (2) checks had similar entries with similar infirmities and irregularities. On the space
where the name of the payee should be indicated (Pay To The Order Of) the following 2-line
entries were instead typewritten: on the upper line was the word "CASH" while the lower
line had the following typewritten words, viz: "ONE HUNDRED TEN THOUSAND PESOS ONLY."
Despite the highly irregular entries on the face of the checks, defendant-appellant bank,
without as much as verifying and/or confirming the legitimacy of the checks considering the
substantial amount involved and the obvious infirmity/defect of the checks on their faces,
encashed said checks. A verification process, even by was of a telephone call to PRCI office,
would have taken less than ten (10) minutes. But this was not done by BA. Investigation
conducted by plaintiff-appellee corporation yielded the fact that there was no transaction
involving PRCI that call for the payment of P220,000.00 to anyone. The checks appeared to
have come into the hands of an employee of PRCI (one Clarita Mesina who was subsequently
criminally charged for qualified theft) who eventually completed without authority the
entries on the pre-signed checks. PRCI’s demand for defendant-appellant to pay fell on deaf
ears. Hence, the complaint.4
After due proceedings, the trial court rendered a Decision in favor of respondent, the
dispositive portion of which reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of plaintiff and against the
defendant, and the latter is ordered to pay plaintiff:
(1) The sum of Two Hundred Twenty Thousand (P220,000.00) Pesos, with legal
interest to be computed from date of the filing of the herein complaint;
(2) The sum of Twenty Thousand (P20,000.00) Pesos by way of attorney’s fees;
(3) The sum of Ten Thousand (P10,000.00) Pesos for litigation expenses, and
(4) To pay the costs of suit.
SO ORDERED.5
Petitioner appealed the aforesaid trial court Decision to the CA which, however, affirmed
said decision in toto in its July 16, 2001 Decision. Petitioner’s Motion for Reconsideration of
the CA Decision was subsequently denied on September 28, 2001.
Petitioner now comes before this Court arguing that:
I. The Court of Appeals gravely erred in holding that the proximate cause of respondent’s loss
was petitioner’s encashment of the checks.

A. The Court of Appeals gravely erred in holding that petitioner was liable for the
amount of the checks despite the fact that petitioner was merely fulfilling its
obligation under law and contract.
B. The Court of Appeals gravely erred in holding that petitioner had a duty to verify
the encashment, despite the absence of any obligation to do so.
C. The Court of Appeals gravely erred in not applying Section 14 of the Negotiable
Instruments Law, despite its clear applicability to this case;
II. The Court of Appeals gravely erred in not holding that the proximate cause of
respondent’s loss was its own grossly negligent practice of pre-signing checks without payees
and amounts and delivering these pre-signed checks to its employees (other than their
signatories).
III. The Court of Appeals gravely erred in affirming the trial court’s award of attorney’s fees
despite the absence of any applicable ground under Article 2208 of the Civil Code.
IV. The Court of Appeals gravely erred in not awarding attorney’s fees, moral and exemplary
damages, and costs of suit in favor of petitioner, who clearly deserves them.6
From the discussions of both parties in their pleadings, the key issue to be resolved in the
present case is whether the proximate cause of the wrongful encashment of the checks in
question was due to (a) petitioner’s failure to make a verification regarding the said checks
with the respondent in view of the misplacement of entries on the face of the checks or (b)
the practice of the respondent of pre-signing blank checks and leaving the same with its
employees.
Petitioner insists that it merely fulfilled its obligation under law and contract when it
encashed the aforesaid checks. Invoking Sections 1267 and 1858 of the Negotiable
Instruments Law (NIL), petitioner claims that its duty as a drawee bank to a drawer-client
maintaining a checking account with it is to pay orders for checks bearing the drawer-client’s
genuine signatures. The genuine signatures of the client’s duly authorized signatories affixed
on the checks signify the order for payment. Thus, pursuant to the said obligation, the
drawee bank has the duty to determine whether the signatures appearing on the check are
the drawer-client’s or its duly authorized signatories. If the signatures are genuine, the bank
has the unavoidable legal and contractual duty to pay. If the signatures are forged and
falsified, the drawee bank has the corollary, but equally unavoidable legal and contractual,
duty not to pay.9
Furthermore, petitioner maintains that there exists a duty on the drawee bank to inquire
from the drawer before encashing a check only when the check bears a material alteration. A
material alteration is defined in Section 125 of the NIL to be one which changes the date, the
sum payable, the time or place of payment, the number or relations of the parties, the
28
currency in which payment is to be made or one which adds a place of payment where no
place of payment is specified, or any other change or addition which alters the effect of the
instrument in any respect. With respect to the checks at issue, petitioner points out that they
do not contain any material alteration.10 This is a fact which was affirmed by the trial court
itself.11
There is no dispute that the signatures appearing on the subject checks were genuine
signatures of the respondent’s authorized joint signatories; namely, Antonia Reyes and
Gregorio Reyes who were respondent’s President and Vice-President for Finance,
respectively. Both pre-signed the said checks since they were both scheduled to go abroad
and it was apparently their practice to leave with the company accountant checks signed in
black to answer for company obligations that might fall due during the signatories’ absence.
It is likewise admitted that neither of the subject checks contains any material alteration or
erasure.
However, on the blank space of each check reserved for the payee, the following typewritten
words appear: "ONE HUNDRED TEN THOUSAND PESOS ONLY." Above the same is the
typewritten word, "CASH." On the blank reserved for the amount, the same amount of One
Hundred Ten Thousand Pesos was indicated with the use of a check writer. The presence of
these irregularities in each check should have alerted the petitioner to be cautious before
proceeding to encash them which it did not do.
It is well-settled that banks are engaged in a business impressed with public interest, and it is
their duty to protect in return their many clients and depositors who transact business with
them. They have the obligation to treat their client’s account meticulously and with the
highest degree of care, considering the fiduciary nature of their relationship. The diligence
required of banks, therefore, is more than that of a good father of a family.12
Petitioner asserts that it was not duty-bound to verify with the respondent since the amount
below the typewritten word "CASH," expressed in words, is the very same amount indicated
in figures by means of a check writer on the amount portion of the check. The amount stated
in words is, therefore, a mere reiteration of the amount stated in figures. Petitioner
emphasizes that a reiteration of the amount in words is merely a repetition and that a
repetition is not an alteration which if present and material would have enjoined it to
commence verification with respondent.13
We do not agree with petitioner’s myopic view and carefully crafted defense. Although not in
the strict sense "material alterations," the misplacement of the typewritten entries for the
payee and the amount on the same blank and the repetition of the amount using a check
writer were glaringly obvious irregularities on the face of the check. Clearly, someone made a
mistake in filling up the checks and the repetition of the entries was possibly an attempt to
rectify the mistake. Also, if the check had been filled up by the person who customarily
accomplishes the checks of respondent, it should have occurred to petitioner’s employees
that it would be unlikely such mistakes would be made. All these circumstances should have
alerted the bank to the possibility that the holder or the person who is attempting to encash

the checks did not have proper title to the checks or did not have authority to fill up and
encash the same. As noted by the CA, petitioner could have made a simple phone call to its
client to clarify the irregularities and the loss to respondent due to the encashment of the
stolen checks would have been prevented.
In the case at bar, extraordinary diligence demands that petitioner should have ascertained
from respondent the authenticity of the subject checks or the accuracy of the entries therein
not only because of the presence of highly irregular entries on the face of the checks but also
of the decidedly unusual circumstances surrounding their encashment. Respondent’s witness
testified that for checks in amounts greater than Twenty Thousand Pesos (P20,000.00) it is
the company’s practice to ensure that the payee is indicated by name in the check.14 This was
not rebutted by petitioner. Indeed, it is highly uncommon for a corporation to make out
checks payable to "CASH" for substantial amounts such as in this case. If each irregular
circumstance in this case were taken singly or isolated, the bank’s employees might have
been justified in ignoring them. However, the confluence of the irregularities on the face of
the checks and circumstances that depart from the usual banking practice of respondent
should have put petitioner’s employees on guard that the checks were possibly not issued by
the respondent in due course of its business. Petitioner’s subtle sophistry cannot exculpate it
from behavior that fell extremely short of the highest degree of care and diligence required
of it as a banking institution.
Indeed, taking this with the testimony of petitioner’s operations manager that in case of an
irregularity on the face of the check (such as when blanks were not properly filled out) the
bank may or may not call the client depending on how busy the bank is on a particular
day,15 we are even more convinced that petitioner’s safeguards to protect clients from check
fraud are arbitrary and subjective. Every client should be treated equally by a banking
institution regardless of the amount of his deposits and each client has the right to expect
that every centavo he entrusts to a bank would be handled with the same degree of care as
the accounts of other clients. Perforce, we find that petitioner plainly failed to adhere to the
high standard of diligence expected of it as a banking institution.
In defense of its cashier/teller’s questionable action, petitioner insists that pursuant to
Sections 1416 and 1617 of the NIL, it could validly presume, upon presentation of the checks,
that the party who filled up the blanks had authority and that a valid and intentional delivery
to the party presenting the checks had taken place. Thus, in petitioner’s view, the sole blame
for this debacle should be shifted to respondent for having its signatories pre-sign and deliver
the subject checks.18 Petitioner argues that there was indeed delivery in this case because,
following American jurisprudence, the gross negligence of respondent’s accountant in
safekeeping the subject checks which resulted in their theft should be treated as a voluntary
delivery by the maker who is estopped from claiming non-delivery of the instrument.19
Petitioner’s contention would have been correct if the subject checks were correctly and
properly filled out by the thief and presented to the bank in good order. In that instance,
there would be nothing to give notice to the bank of any infirmity in the title of the holder of
the checks and it could validly presume that there was proper delivery to the holder. The
29
bank could not be faulted if it encashed the checks under those circumstances. However, the
undisputed facts plainly show that there were circumstances that should have alerted the
bank to the likelihood that the checks were not properly delivered to the person who
encashed the same. In all, we see no reason to depart from the finding in the assailed CA
Decision that the subject checks are properly characterized as incomplete and undelivered
instruments thus making Section 1520 of the NIL applicable in this case.
However, we do agree with petitioner that respondent’s officers’ practice of pre-signing of
blank checks should be deemed seriously negligent behavior and a highly risky means of
purportedly ensuring the efficient operation of businesses. It should have occurred to
respondent’s officers and managers that the pre-signed blank checks could fall into the
wrong hands as they did in this case where the said checks were stolen from the company
accountant to whom the checks were entrusted.
Nevertheless, even if we assume that both parties were guilty of negligent acts that led to
the loss, petitioner will still emerge as the party foremost liable in this case. In instances
where both parties are at fault, this Court has consistently applied the doctrine of last clear
chance in order to assign liability.
In Westmont Bank v. Ong,21 we ruled:
…[I]t is petitioner [bank] which had the last clear chance to stop the fraudulent encashment
of the subject checks had it exercised due diligence and followed the proper and regular
banking procedures in clearing checks. As we had earlier ruled, the one who had a last clear
opportunity to avoid the impending harm but failed to do so is chargeable with the
consequences thereof.22 (emphasis ours)
In the case at bar, petitioner cannot evade responsibility for the loss by attributing
negligence on the part of respondent because, even if we concur that the latter was indeed
negligent in pre-signing blank checks, the former had the last clear chance to avoid the loss.
To reiterate, petitioner’s own operations manager admitted that they could have called up
the client for verification or confirmation before honoring the dubious checks. Verily,
petitioner had the final opportunity to avert the injury that befell the respondent. Failing to
make the necessary verification due to the volume of banking transactions on that particular
day is a flimsy and unacceptable excuse, considering that the "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."23 Petitioner’s negligence has been
undoubtedly established and, thus, pursuant to Art. 1170 of the NCC,24 it must suffer the
consequence of said negligence.
In the interest of fairness, however, we believe it is proper to consider respondent’s own
negligence to mitigate petitioner’s liability. Article 2179 of the Civil Code provides:

Art. 2179. When the plaintiff’s own negligence was the immediate and proximate cause of
his injury, he cannot recover damages. But if his negligence was only contributory, the
immediate and proximate cause of the injury being the defendant’s lack of due care, the
plaintiff may recover damages, but the courts shall mitigate the damages to be
awarded.1avvph!1
Explaining this provision in Lambert v. Heirs of Ray Castillon,25 the Court held:
The underlying precept on contributory negligence is that a plaintiff who is partly responsible
for his own injury should not be entitled to recover damages in full but must bear the
consequences of his own negligence. The defendant must thus be held liable only for the
damages actually caused by his negligence. xxx xxx xxx
As we previously stated, respondent’s practice of signing checks in blank whenever its
authorized bank signatories would travel abroad was a dangerous policy, especially
considering the lack of evidence on record that respondent had appropriate safeguards or
internal controls to prevent the pre-signed blank checks from falling into the hands of
unscrupulous individuals and being used to commit a fraud against the company. We cannot
believe that there was no other secure and reasonable way to guarantee the non-disruption
of respondent’s business. As testified to by petitioner’s expert witness, other corporations
would ordinarily have another set of authorized bank signatories who would be able to sign
checks in the absence of the preferred signatories.26Indeed, if not for the fortunate
happenstance that the thief failed to properly fill up the subject checks, respondent would
expectedly take the blame for the entire loss since the defense of forgery of a drawer’s
signature(s) would be unavailable to it. Considering that respondent knowingly took the risk
that the pre-signed blank checks might fall into the hands of wrongdoers, it is but just that
respondent shares in the responsibility for the loss.
We also cannot ignore the fact that the person who stole the pre-signed checks subject of
this case from respondent’s accountant turned out to be another employee, purportedly a
clerk in respondent’s accounting department. As the employer of the "thief," respondent
supposedly had control and supervision over its own employee. This gives the Court more
reason to allocate part of the loss to respondent.
Following established jurisprudential precedents,27 we believe the allocation of sixty percent
(60%) of the actual damages involved in this case (represented by the amount of the checks
with legal interest) to petitioner is proper under the premises. Respondent should, in light of
its contributory negligence, bear forty percent (40%) of its own loss.
Finally, we find that the awards of attorney’s fees and litigation expenses in favor of
respondent are not justified under the circumstances and, thus, must be deleted. The power
of the court to award attorney’s fees and litigation expenses under Article 2208 of the
NCC28 demands factual, legal, and equitable justification.
30
An adverse decision does not ipso facto justify an award of attorney’s fees to the winning
party.29 Even when a claimant is compelled to litigate with third persons or to incur expenses
to protect his rights, still attorney’s fees may not be awarded where no sufficient showing of
bad faith could be reflected in a party’s persistence in a case other than an erroneous
conviction of the righteousness of his cause.30
WHEREFORE, the Decision of the Court of Appeals dated July 16, 2001 and its Resolution
dated September 28, 2001 are AFFIRMED with the following MODIFICATIONS: (a) petitioner
Bank of America NT & SA shall pay to respondent Philippine Racing Club sixty percent (60%)
of the sum of Two Hundred Twenty Thousand Pesos (P220,000.00) with legal interest as
awarded by the trial court and (b) the awards of attorney’s fees and litigation expenses in
favor of respondent are deleted.
Proportionate costs.
SO ORDERED.
Facts:
1. Plaintiff PRCI is a domestic corporation which maintains a current account with petitioner
Bank of America. Its authorized signatories are the company President and Vice-President. By
virtue of a travel abroad for these officers, they pre-signed checks to accommodate any
expenses that may come up while they were abroad for a business trip. The said pre-signed
checks were left for safekeeping by PRCs accounting officer. Unfortunately, the two (2) of
said checks came into the hands of one of its employees who managed to encash it with
petitioner bank. The said check was filled in with the use of a check-writer, wherein in the
blank for the 'Payee', the amount in words was written, with the word 'Cash' written above
it.
2. Clearly there was an irregularity with the filling up of the blank checks as both showed
similar infirmities and irregularities and yet, the petitioner bank did not try to verify with the
corporation and proceeded to encash the checks.
3. PRC filed an action for damages against the bank. The lower court awarded actual and
exemplary damages. On appeal, the CA affirmed the lower court's decision and held that the
bank was negligent. Hence this appeal. Petitioner contends that it was merely doing its
obligation under the law and contract in encashing the checks, since the signatures in the
checks are genuine.
Issue: Whether or not the petitioner can be held liable for negligence and thus should pay
damages to PRC
 31

Ruling:

Both parties are held to be at fault but the bank has the last clear chance to prevent the
fraudulent encashment hence it is the one foremost liable .

1. There was no dispute that the signatures in the checks are genuine but the presence of
irregularities on the face of the check should have alerted the bank to exercise caution
before encashing them. It is well-settled that banks are in the business impressed with public
interest that they are duty bound to protect their clients and their deposits at all times.
They must treat the accounts of these clients with meticulousness and a highest degree of
care considering the fiduciary nature of their relationship. The diligence required of banks
are more than that of a good father of a family.

2. The PRC officers' practice of pre-signing checks is a seriously negligent and highly risky
behavior which makes them also contributor to the loss. It's own negligence must therefore
mitigate the petitioner's liability. Moreover, the person who stole the checks is also an
employee of the plaintiff, a cleck in its accounting department at that. As the employer, PRC
supposedly should have control and supervision over its own employees.

3. The court held that the petitioner is liable for 60% of the total amount of damages while
PRC should shoulder 40% of the said amount.
 32

FIRST DIVISION instructing HSBC to debit their local or foreign currency accounts and to pay the purchase
price therefor upon receipt of the securities.7
G.R. No. 166018 June 4, 2014
Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE Documentary Stamp Tax (DST) from September to December 1997 and also from January to
BRANCHES, Petitioner, December 1998 amounting to P19,572,992.10 and P32,904,437.30, respectively, broken
vs. down as follows:
COMMISSIONER OF INTERNAL REVENUE, Respondent;
A. September to December 1997
x-----------------------x
B. January to December 1998
G.R. No. 167728
On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner,
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect that instructions or advises from
BRANCHES, Petitioner, abroad on the management of funds located in the Philippines which do not involve transfer
vs. of funds from abroad are not subject to DST. BIR Ruling No. 132-99 reads:
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Date: August 23, 1999
DECISION
FERRY TOLEDO VICTORINO GONZAGA
LEONARDO-DE CASTRO, J.: & ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
These petitions for review on certiorari1 assail the Decision2 and Resolution dated July 8,
Metro Manila
2004 and October 25, 2004, respectively, of the Court of Appeals in CA-G.R. SP No. 77580, as
well as the Decision3 and Resolution dated September 2, 2004 and April 4, 2005, respectively,
of the Court of Appeals in CA-G.R. SP No. 70814. The respective Decisions in the said cases Attn: Atty. Tomas C. Toledo
similarly reversed and set aside the decisions of the Court of Tax Appeals (CTA) in CTA Case Tax Counsel
Nos. 59514 and 6009,5 respectively, and dismissed the petitions of petitioner Hongkong and
Shanghai Banking Corporation Limited-Philippine Branches (HSBC). The corresponding Gentlemen:
Resolutions, on the other hand, denied the respective motions for reconsideration of the said
Decisions. This refers to your letter dated July 26, 1999 requesting on behalf of your clients, the
CITIBANK & STANDARD CHARTERED BANK, for a ruling as to whether or not the electronic
HSBC performs, among others, custodial services on behalf of its investor-clients, corporate instructions involving the following transactions of residents and non-residents of the
and individual, resident or non-resident of the Philippines, with respect to their passive Philippines with respect to their local or foreign currency accounts are subject to
investments in the Philippines, particularly investments in shares of stocks in domestic documentary stamp tax under Section 181 of the 1997 Tax Code, viz:
corporations. As a custodian bank, HSBC serves as the collection/payment agent with respect
to dividends and other income derived from its investor-clients’ passive investments.6 A. Investment purchase transactions:

HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are An overseas client sends instruction to its bank in the Philippines to either:
managed by HSBC through instructions given through electronic messages. The said
instructions are standard forms known in the banking industry as SWIFT, or "Society for
(i) debit its local or foreign currency account and to pay a named recipient in the
Worldwide Interbank Financial Telecommunication." In purchasing shares of stock and other
Philippines; or
investment in securities, the investor-clients would send electronic messages from abroad

(ii) receive funds from another bank in the Philippines for deposit into its account
and to pay a named recipient in the Philippines."
The foregoing transactions are carried out under instruction from abroad and [do] not
involve actual fund transfer since the funds are already in the Philippine accounts. The
instructions are in the form of electronic messages (i.e., SWIFT MT100 or MT 202 and/or MT
521). In both cases, the payment is against the delivery of investments purchased. The
purchase of investments and the payment comprise one single transaction. DST has already
been paid under Section 176 for the investment purchase.
B. Other transactions:
An overseas client sends an instruction to its bank in the Philippines to either:
(i) debit its local or foreign currency account and to pay a named recipient, who
may be another bank, a corporate entity or an individual in the Philippines; or
(ii) receive funds from another bank in the Philippines for deposit to its account and
to pay a named recipient, who may be another bank, a corporate entity or an
individual in the Philippines."
The above instruction is in the form of an electronic message (i.e., SWIFT MT 100 or MT 202)
or tested cable, and may not refer to any particular transaction.
The opening and maintenance by a non-resident of local or foreign currency accounts with a
bank in the Philippines is permitted by the Bangko Sentral ng Pilipinas, subject to certain
conditions.
In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code, which
provides that –
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.– Upon any
acceptance or payment of any bill of exchange or order for the payment of money purporting
to be drawn in a foreign country but payable in the Philippines, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (P200), or
fractional part thereof, of the face value of any such bill of exchange, or order, or Philippine
equivalent of such value, if expressed in foreign currency. (Underscoring supplied.)
a documentary stamp tax shall be imposed on any bill of exchange or order for payment
purporting to be drawn in a foreign country but payable in the Philippines.
Under the foregoing provision, the documentary stamp tax shall be levied on the instrument,
i.e., a bill of exchange or order for the payment of money, which purports to draw money
33
from a foreign country but payable in the Philippines. In the instant case, however, while the
payor is residing outside the Philippines, he maintains a local and foreign currency account in
the Philippines from where he will draw the money intended to pay a named recipient. The
instruction or order to pay shall be made through an electronic message, i.e., SWIFT MT 100
or MT 202 and/or MT 521. Consequently, there is no negotiable instrument to be made,
signed or issued by the payee. In the meantime, such electronic instructions by the non-
resident payor cannot be considered as a transaction per se considering that the same do not
involve any transfer of funds from abroad or from the place where the instruction originates.
Insofar as the local bank is concerned, such instruction could be considered only as a
memorandum and shall be entered as such in its books of accounts. The actual debiting of
the payor’s account, local or foreign currency account in the Philippines, is the actual
transaction that should be properly entered as such.
Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank deposit,
local or foreign currency account, is not subject to DST, unless the account so maintained is a
current or checking account, in which case, the issuance of the check or bank drafts is subject
to the documentary stamp tax imposed under Section 179 of the 1997 Tax Code. In the
instant case, and subject to the physical impossibility on the part of the payor to be present
and prepare and sign an instrument purporting to pay a certain obligation, the withdrawal
and payment shall be made in cash. In this light, the withdrawal shall not be subject to
documentary stamp tax. The case is parallel to an automatic bank transfer of local funds from
a savings account to a checking account maintained by a depositor in one bank.
Likewise, the receipt of funds from another bank in the Philippines for deposit to the payee’s
account and thereafter upon instruction of the non-resident depositor-payor, through an
electronic message, the depository bank to debit his account and pay a named recipient shall
not be subject to documentary stamp tax.
It should be noted that the receipt of funds from another local bank in the Philippines by a
local depository bank for the account of its client residing abroad is part of its regular banking
transaction which is not subject to documentary stamp tax. Neither does the receipt of funds
makes the recipient subject to the documentary stamp tax. The funds are deemed to be part
of the deposits of the client once credited to his account, and which, thereafter can be
disposed in the manner he wants. The payor-client’s further instruction to debit his account
and pay a named recipient in the Philippines does not involve transfer of funds from abroad.
Likewise, as stated earlier, such debit of local or foreign currency account in the Philippines is
not subject to the documentary stamp tax under the aforementioned Section 181 of the Tax
Code.
In the light of the foregoing, this Office hereby holds that the instruction made through an
electronic message by non-resident payor-client to debit his local or foreign currency account
maintained in the Philippines and to pay a certain named recipient also residing in the
Philippines is not the transaction contemplated under Section 181 of the 1997 Tax Code.
Such being the case, such electronic instruction purporting to draw funds from a local

account intended to be paid to a named recipient in the Philippines is not subject to
documentary stamp tax imposed under the foregoing Section.
This ruling is being issued on the basis of the foregoing facts as represented. However, if
upon investigation it shall be disclosed that the facts are different, this ruling shall be
considered null and void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an administrative claim
for the refund of the amount of P19,572,992.10 allegedly representing erroneously paid DST
to the BIR for the period covering September to December 1997.
Subsequently, on January 31, 2000, HSBC filed another administrative claim for the refund of
the amount of P32,904,437.30 allegedly representing erroneously paid DST to the BIR for the
period covering January to December 1998.
As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the
matter to the CTA as CTA Case Nos. 5951 and 6009, respectively, in order to suspend the
running of the two-year prescriptive period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in
CTA Case No. 5951 favored HSBC. Respondent Commissioner of Internal Revenue was
ordered to refund or issue a tax credit certificate in favor of HSBC in the reduced amounts
of P30,360,570.75 in CTA Case No. 6009 and P16,436,395.83 in CTA Case No. 5951,
representing erroneously paid DST that have been sufficiently substantiated with
documentary evidence. The CTA ruled that HSBC is entitled to a tax refund or tax credit
because Sections 180 and 181 of the 1997 Tax Code do not apply to electronic message
instructions transmitted by HSBC’s non-resident investor-clients:
The instruction made through an electronic message by a nonresident investor-client, which
is to debit his local or foreign currency account in the Philippines and pay a certain named
recipient also residing in the Philippines is not the transaction contemplated in Section 181 of
the Code. In this case, the withdrawal and payment shall be made in cash. It is parallel to an
automatic bank transfer of local funds from a savings account to a checking account
maintained by a depositor in one bank. The act of debiting the account is not subject to the
documentary stamp tax under Section 181. Neither is the transaction subject to the
documentary stamp tax under Section 180 of the same Code. These electronic message
instructions cannot be considered negotiable instruments as they lack the feature of
negotiability, which, is the ability to be transferred (Words and Phrases).
34
These instructions are considered as mere memoranda and entered as such in the books of
account of the local bank, and the actual debiting of the payor’s local or foreign currency
account in the Philippines is the actual transaction that should be properly entered as such.9
The respective dispositive portions of the Decisions dated May 2, 2002 in CTA Case No. 6009
and dated December 18, 2002 in CTA Case No. 5951 read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in
favor of Petitioner the amount of P30,360,570.75 representing erroneous payment of
documentary stamp tax for the taxable year 1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is hereby partially granted.
Accordingly, respondent is hereby ORDERED to REFUND, or in the alternative, ISSUE A TAX
CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of P16,436,395.83
representing erroneously paid documentary stamp tax for the months of September 1997 to
December 1997.11
However, the Court of Appeals reversed both decisions of the CTA and ruled that the
electronic messages of HSBC’s investor-clients are subject to DST. The Court of Appeals
explained:
At bar, [HSBC] performs custodial services in behalf of its investor-clients as regards their
passive investments in the Philippines mainly involving shares of stocks in domestic
corporations. These investor-clients maintain Philippine peso and/or foreign currency
accounts with [HSBC]. Should they desire to purchase shares of stock and other investments
securities in the Philippines, the investor-clients send their instructions and advises via
electronic messages from abroad to [HSBC] in the form of SWIFT MT 100, MT 202, or MT 521
directing the latter to debit their local or foreign currency account and to pay the purchase
price upon receipt of the securities (CTA Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant to
Section 181 of the NIRC, [HSBC] was thus required to pay [DST] based on its acceptance of
these electronic messages – which, as [HSBC] readily admits in its petition filed before the
[CTA], were essentially orders to pay the purchases of securities made by its client-investors
(Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the [DST] from [HSBC]
considering that the said tax was levied against the acceptances and payments by [HSBC] of
the subject electronic messages/orders for payment. The issue of whether such electronic
messages may be equated as a written document and thus be subject to tax is beside the
point. As We have already stressed, Section 181 of the law cited earlier imposes the [DST]

not on the bill of exchange or order for payment of money but on the acceptance or payment
of the said bill or order. The acceptance of a bill or order is the signification by the drawee of
its assent to the order of the drawer to pay a given sum of money while payment implies not
only the assent to the said order of the drawer and a recognition of the drawer’s obligation
to pay such aforesaid sum, but also a compliance with such obligation (Philippine National
Bank vs. Court of Appeals, 25 SCRA 693 [1968]; Prudential Bank vs. Intermediate Appellate
Court, 216 SCRA 257 [1992]). What is vital to the valid imposition of the [DST] under Section
181 is the existence of the requirement of acceptance or payment by the drawee (in this
case, [HSBC]) of the order for payment of money from its investor-clients and that the said
order was drawn from a foreign country and payable in the Philippines. These requisites are
surely present here.
It would serve the parties well to understand the nature of the tax being imposed in the case
at bar. In Philippine Home Assurance Corporation vs. Court of Appeals (301 SCRA 443 [1999]),
the Supreme Court ruled that [DST is] levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of specific legal relationships
through the execution of specific instruments, independently of the legal status of the
transactions giving rise thereto. In the same case, the High Court also declared – citing Du
Pont vs. United States (300 U.S. 150, 153 [1936])
The tax is not upon the business transacted but is an excise upon the privilege, opportunity,
or facility offered at exchanges for the transaction of the business. It is an excise upon the
facilities used in the transaction of the business separate and apart from the business itself. x
x x.
To reiterate, the subject [DST] was levied on the acceptance and payment made by [HSBC]
pursuant to the order made by its client-investors as embodied in the cited electronic
messages, through which the herein parties’ privilege and opportunity to transact business
respectively as drawee and drawers was exercised, separate and apart from the
circumstances and conditions related to such acceptance and subsequent payment of the
sum of money authorized by the concerned drawers. Stated another way, the [DST] was
exacted on [HSBC’s] exercise of its privilege under its drawee-drawer relationship with its
client-investor through the execution of a specific instrument which, in the case at bar, is the
acceptance of the order for payment of money. The acceptance of a bill or order for payment
may be done in writing by the drawee in the bill or order itself, or in a separate instrument
(Prudential Bank vs. Intermediate Appellate Court, supra.)Here, [HSBC]’s acceptance of the
orders for the payment of money was veritably ‘done in writing in a separate instrument’
each time it debited the local or foreign currency accounts of its client-investors pursuant to
the latter’s instructions and advises sent by electronic messages to [HSBC]. The [DST]
therefore must be paid upon the execution of the specified instruments or facilities covered
by the tax – in this case, the acceptance by [HSBC] of the order for payment of money sent by
the client-investors through electronic messages. x x x.12
Hence, these petitions.
35
HSBC asserts that the Court of Appeals committed grave error when it disregarded the
factual and legal conclusions of the CTA. According to HSBC, in the absence of abuse or
improvident exercise of authority, the CTA’s ruling should not have been disturbed as the
CTA is a highly specialized court which performs judicial functions, particularly for the review
of tax cases. HSBC further argues that the Commissioner of Internal Revenue had already
settled the issue on the taxability of electronic messages involved in these cases in BIR Ruling
No. 132-99 and reiterated in BIR Ruling No. DA-280-2004.13
The Commissioner of Internal Revenue, on the other hand, claims that Section 181 of the
1997 Tax Code imposes DST on the acceptance or payment of a bill of exchange or order for
the payment of money. The DST under Section 18 of the 1997 Tax Code is levied on HSBC’s
exercise of a privilege which is specifically taxed by law. BIR Ruling No. 132-99 is inconsistent
with prevailing law and long standing administrative practice, respondent is not barred from
questioning his own revenue ruling. Tax refunds like tax exemptions are strictly construed
against the taxpayer.14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on
the acceptance or payment of "a bill of exchange purporting to be drawn in a foreign country
but payable in the Philippines" and that "a bill of exchange is an unconditional order in
writing 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." A bill of exchange is one of two general forms of
negotiable instruments under the Negotiable Instruments Law.15
The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients
containing instructions to debit their respective local or foreign currency accounts in the
Philippines and pay a certain named recipient also residing in the Philippines is not the
transaction contemplated under Section 181 of the Tax Code as such instructions are
"parallel to an automatic bank transfer of local funds from a savings account to a checking
account maintained by a depositor in one bank." The Court favorably adopts the finding of
the CTA that the electronic messages "cannot be considered negotiable instruments as they
lack the feature of negotiability, which, is the ability to be transferred" and that the said
electronic messages are "mere memoranda" of the transaction consisting of the "actual
debiting of the [investor-client-payor’s] local or foreign currency account in the Philippines"
and "entered as such in the books of account of the local bank," HSBC.16
More fundamentally, the instructions given through electronic messages that are subjected
to DST in these cases are not negotiable instruments as they do not comply with the
requisites of negotiability under Section 1 of the Negotiable Instruments Law, which
provides:
Sec. 1. Form of negotiable instruments.– An instrument to be negotiable must conform to
the following requirements:

(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 electronic messages are not signed by the investor-clients as supposed drawers of a bill
of exchange; they do not contain an unconditional order to pay a sum certain in money as
the payment is supposed to come from a specific fund or account of the investor-clients; and,
they are not payable to order or bearer but to a specifically designated third party. Thus, the
electronic messages are not bills of exchange. As there was no bill of exchange or order for
the payment drawn abroad and made payable here in the Philippines, there could have been
no acceptance or payment that will trigger the imposition of the DST under Section 181 of
the Tax Code.
Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax refund for taxable year
1998 subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any
acceptance or payment of any bill of exchange or order for the payment of money purporting
to be drawn in a foreign country but payable in the Philippines, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (P200), or
fractional part thereof, of the face value of any such bill of exchange, or order, or the
Philippine equivalent of such value, if expressed in foreign currency. (Emphasis supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s claim for tax refund for
DST paid during the period September to December 1997 and subject of G.R. No. 166018, is
worded exactly the same as its counterpart provision in the 1997 Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of 1904,17 which provided:
SECTION 117. The acceptor or acceptors of any bill of exchange or order for the payment of
any sum of money drawn or purporting to be drawn in any foreign country but payable in the
Philippine Islands, shall, before paying or accepting the same, place thereupon a stamp in
payment of the tax upon such document in the same manner as is required in this Act for the
stamping of inland bills of exchange or promissory notes, and no bill of exchange shall be
paid nor negotiated until such stamp shall have been affixed thereto.18 (Emphasis supplied.)
It then became Section 30(h) of the 1914 Tax Code19:
36
SEC. 30. Stamp tax upon documents and papers. – Upon documents, instruments, and
papers, and upon acceptances, assignments, sales, and transfers of the obligation, right, or
property incident thereto documentary taxes for and in respect of the transaction so had or
accomplished shall be paid as hereinafter prescribed, by the persons making, signing, issuing,
accepting, or transferring the same, and at the time such act is done or transaction had:
(h) Upon any acceptance or payment upon acceptance of any bill of exchange or order for
the payment of money purporting to be drawn in a foreign country but payable in the
Philippine Islands, on each two hundred pesos, or fractional part thereof, of the face value of
any such bill of exchange or order, or the Philippine equivalent of such value, if expressed in
foreign currency, two centavos[.] (Emphasis supplied.)
It was implemented by Section 46 in relation to Section 39 of Revenue Regulations No.
26,20 as amended:
SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other kinds of orders
for the payment of money, payable at sight or on demand, or after a specific period after
sight or from a stated date."
SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the payment of money
drawn in a foreign country but payable in this country whether at sight or on demand or after
a specified period after sight or from a stated date, is presented for acceptance or payment,
there must be affixed upon acceptance or payment of documentary stamp equal to P0.02 for
each P200 or fractional part thereof. (Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of 1939,21 which provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any
acceptance or payment of any bill of exchange or order for the payment of money purporting
to be drawn in a foreign country but payable in the Philippines, there shall be collected a
documentary stamp tax of four centavos on each two hundred pesos, or fractional part
thereof, of the face value of any such bill of exchange or order, or the Philippine equivalent
of such value, if expressed in foreign currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code,22 as amended by Presidential Decree Nos.
1457 and 1959,which, as stated earlier, was worded exactly as Section 181 of the current Tax
Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and others. – Upon any acceptance
or payment of any bill of exchange or order for the payment of money purporting to be
drawn in a foreign country but payable in the Philippines, there shall be collected a
documentary stamp tax of thirty centavos on each two hundred pesos, or fractional part
thereof, of the face value of any such bill of exchange, or order, or the Philippine equivalent
of such value, if expressed in foreign currency. (Emphasis supplied.)

The pertinent provision of the present Tax Code has therefore remained substantially the
same for the past one hundred years.1âwphi1 The identical text and common history of
Section 230 of the 1977 Tax Code, as amended, and the 1997 Tax Code, as amended, show
that the law imposes DST on either (a) the acceptance or (b) the payment of a foreign bill of
exchange or order for the payment of money that was drawn abroad but payable in the
Philippines.
DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or
properties incident thereto.23 Under Section 173 of the 1997 Tax Code, the persons primarily
liable for the payment of the DST are those (1) making, (2) signing, (3) issuing, (4) accepting,
or (5) transferring the taxable documents, instruments or papers.24
In general, DST is levied on the exercise by persons of certain privileges conferred by law for
the creation, revision, or termination of specific legal relationships through the execution of
specific instruments. Examples of such privileges, the exercise of which, as effected through
the issuance of particular documents, are subject to the payment of DST are leases of lands,
mortgages, pledges and trusts, and conveyances of real property. 25
As stated above, Section 230 of the 1977 Tax Code, as amended, now Section 181 of the
1997 Tax Code, levies DST on either (a) the acceptance or (b) the payment of a foreign bill of
exchange or order for the payment of money that was drawn abroad but payable in the
Philippines. In other words, it levies DST as an excise tax on the privilege of the drawee to
accept or pay a bill of exchange or order for the payment of money, which has been drawn
abroad but payable in the Philippines, and on the corresponding privilege of the drawer to
have acceptance of or payment for the bill of exchange or order for the payment of money
which it has drawn abroad but payable in the Philippines.
Acceptance applies only to bills of exchange.26 Acceptance of a bill of exchange has a very
definite meaning in law.27 In particular, Section 132 of the Negotiable Instruments Law
provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchange28] is
the signification by the drawee of his assent to the order of the drawer. The acceptance must
be in writing and signed by the drawee. It must not express that the drawee will perform his
promise by any other means than the payment of money.
Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of a bill
of exchange is both the manifestation of the drawee’s consent to the drawer’s order to pay
money and the expression of the drawee’s promise to pay. It is "the act by which the drawee
manifests his consent to comply with the request contained in the bill of exchange directed
to him and it contemplates an engagement or promise to pay."29 Once the drawee accepts,
he becomes an acceptor.30 As acceptor, he engages to pay the bill of exchange according to
the tenor of his acceptance.31
37
Acceptance is made upon presentment of the bill of exchange, or within 24 hours after such
presentment.32Presentment for acceptance is the production or exhibition of the bill of
exchange to the drawee for the purpose of obtaining his acceptance.33
Presentment for acceptance is necessary only in the instances where the law requires it.34 In
the instances where presentment for acceptance is not necessary, the holder of the bill of
exchange can proceed directly to presentment for payment.
Presentment for payment is the presentation of the instrument to the person primarily liable
for the purpose of demanding and obtaining payment thereof.35
Thus, whether it be presentment for acceptance or presentment for payment, the negotiable
instrument has to be produced and shown to the drawee for acceptance or to the acceptor
for payment.
Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of exchange
or orders for the payment of money that have been drawn abroad but payable in the
Philippines) that is subjected to DST under Section 181 of the 1997 Tax Code is done after
presentment for acceptance or presentment for payment, respectively. In other words, the
acceptance or payment of the subject bill of exchange or order for the payment of money is
done when there is presentment either for acceptance or for payment of the bill of exchange
or order for the payment of money.
Applying the above concepts to the matter subjected to DST in these cases, the electronic
messages received by HSBC from its investor-clients abroad instructing the former to debit
the latter's local and foreign currency accounts and to pay the purchase price of shares of
stock or investment in securities do not properly qualify as either presentment for
acceptance or presentment for payment. There being neither presentment for acceptance
nor presentment for payment, then there was no acceptance or payment that could have
been subjected to DST to speak of.
Indeed, there had been no acceptance of a bill of exchange or order for the payment of
money on the part of HSBC. To reiterate, there was no bill of exchange or order for the
payment drawn abroad and made payable here in the Philippines. Thus, there was no
acceptance as the electronic messages did not constitute the written and signed
manifestation of HSBC to a drawer's order to pay money. As HSBC could not have been an
acceptor, then it could not have made any payment of a bill of exchange or order for the
payment of money drawn abroad but payable here in the Philippines. In other words, HSBC
could not have been held liable for DST under Section 230 of the 1977 Tax Code, as
amended, and Section 181 of the 1997 Tax Code as it is not "a person making, signing,
issuing, accepting, or, transferring" the taxable instruments under the said provision. Thus,
HSBC erroneously paid DST on the said electronic messages for which it is entitled to a tax
refund.

WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May 2, 2002 in CTA
Case No. 6009 and dated December 18, 2002 in CT A Case No. 5951 of the Court of Tax
Appeals are REINSTATED.
SO ORDERED.
Facts:
HSBC serves as the collection/payment agent with respect to dividends and other income
derived from its investor-clients’ passive investments.HSBC’s investor-clients maintain
Philippine peso and/or foreign currency accounts, which are managed by HSBC through
instructions given through electronic messages. The said instructions are standard forms
known in the banking industry as SWIFT, or "Society for Worldwide Interbank Financial
Telecommunication." In purchasing shares of stock and other investment in securities, the
investor-clients would send electronic messages from abroad instructing HSBC to debit their
local or foreign currency accounts and to pay the purchase price therefor upon receipt of the
securities.Pursuant to the electronic messages of its investor-clients, HSBC purchased and
paid Documentary Stamp Tax (DST) from September to December 1997 and also from
January to December 1998 amounting to P19,572,992.10 and P32,904,437.30.
On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner,
Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect that instructions or advises from
abroad on the management of funds located in the Philippines which do not involve transfer
of funds from abroad are not subject to DST.
HSBC filed on October 8, 1999 an administrative claim for the refund of the amount
of P19,572,992.10 allegedly representing erroneously paid DST to the BIR for the period
covering September to December 1997.Subsequently, on January 31, 2000, HSBC filed
another administrative claim for the refund of the amount of P32,904,437.30 allegedly
representing erroneously paid DST to the BIR for the period covering January to December
1998.
As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the
matter to the CTA as CTA Case Nos. 5951 and 6009, respectively, in order to suspend the
running of the two-year prescriptive period.CTA ruled that HSBC is entitled to a tax refund or
tax credit because Sections 180 and 181 of the 1997 Tax Code do not apply to electronic
message instructions transmitted by HSBC’s non-resident investor-clients. Court of Appeals
reversed both decisions of the CTA and ruled that the electronic messages of HSBC’s
investor-clients are subject to DST.
The Commissioner of Internal Revenue, on the other hand, claims that Section 181 of the
1997 Tax Code imposes DST on the acceptance or payment of a bill of exchange or order for
the payment of money.
38
Issue:
Definition of Acceptance
Whether or not there was an acceptance or payment of a bill of exchange or order for the
payment of moneyon the part of HSBC that would made it liable for DST
Ruling:
The electronic messages are not signed by the investor-clients as supposed drawers of a bill
of exchange; they do not contain an unconditional order to pay a sum certain in money as
the payment is supposed to come from a specific fund or account of the investor-clients; and,
they are not payable to order or bearer but to a specifically designated third party. Thus, the
electronic messages are not bills of exchange. As there was no bill of exchange or order for
the payment drawn abroad and made payable here in the Philippines, there could have been
no acceptance or payment that will trigger the imposition of the DST under Section 181 of
the Tax Code.
Acceptance applies only to bills of exchange.Acceptance of a bill of exchange has a very
definite meaning in law.In particular, Section 132 of the Negotiable Instruments Law
provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchangeis
the signification by the drawee of his assent to the order of the drawer. The acceptance must
be in writing and signed by the drawee. It must not express that the drawee will perform his
promise by any other means than the payment of money.
Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of a bill
of exchange is both the manifestation of the drawee’s consent to the drawer’s order to pay
money and the expression of the drawee’s promise to pay. It is "the act by which the drawee
manifests his consent to comply with the request contained in the bill of exchange directed
to him and it contemplates an engagement or promise to pay."Once the drawee accepts, he
becomes an acceptor.As acceptor, he engages to pay the bill of exchange according to the
tenor of his acceptance.Acceptance is made upon presentment of the bill of exchange, or
within 24 hours after such presentment.Presentment for acceptance is the production or
exhibition of the bill of exchange to the drawee for the purpose of obtaining his
acceptance.Presentment for acceptance is necessary only in the instances where the law
requires it.In the instances where presentment for acceptance is not necessary, the holder of
the bill of exchange can proceed directly to presentment for payment.
Presentment for payment is the presentation of the instrument to the person primarily liable
for the purpose of demanding and obtaining payment thereof.Thus, whether it be
presentment for acceptance or presentment for payment, the negotiable instrument has to
be produced and shown to the drawee for acceptance or to the acceptor for
 39

payment.Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of
exchange or orders for the payment of money that have been drawn abroad but payable in
the Philippines) that is subjected to DST under Section 181 of the 1997 Tax Code is done after
presentment for acceptance or presentment for payment, respectively. In other words, the
acceptance or payment of the subject bill of exchange or order for the payment of money is
done when there is presentment either for acceptance or for payment of the bill of exchange
or order for the payment of money.

Indeed, there had been no acceptance of a bill of exchange or order for the payment of
money on the part of HSBC. To reiterate, there was no bill of exchange or order for the
payment drawn abroad and made payable here in the Philippines. Thus, there was no
acceptance as the electronic messages did not constitute the written and signed
manifestation of HSBC to a drawer's order to pay money. As HSBC could not have been an
acceptor, then it could not have made any payment of a bill of exchange or order for the
payment of money drawn abroad but payable here in the Philippines. In other words, HSBC
could not have been held liable for DST under Section 230 of the 1977 Tax Code, as
amended, and Section 181 of the 1997 Tax Code as it is not "a person making, signing,
issuing, accepting, or, transferring" the taxable instruments under the said provision. Thus,
HSBC erroneously paid DST on the said electronic messages for which it is entitled to a tax
refund.

THIRD DIVISION
G.R. No. 168274 August 20, 2008
FAR EAST BANK & TRUST COMPANY, petitioner,
vs.
GOLD PALACE JEWELLERY CO., as represented by Judy L. Yang, Julie Yang-Go and Kho Soon
Huat, respondent.
DECISION
NACHURA, J.:
For the review of the Court through a Rule 45 petition are the following issuances of the
Court of Appeals (CA) in CA-G.R. CV No. 71858: (1) the March 15, 2005 Decision1 which
reversed the trial court's ruling, and (2) the May 26, 2005 Resolution2 which denied the
motion for reconsideration of the said CA decision.
The instant controversy traces its roots to a transaction consummated sometime in June
1998, when a foreigner, identified as Samuel Tagoe, purchased from the respondent Gold
Palace Jewellery Co.'s (Gold Palace's) store at SM-North EDSA several pieces of jewelry
valued at P258,000.00.3 In payment of the same, he offered Foreign Draft No. M-069670
issued by the United Overseas Bank (Malaysia) BHD Medan Pasar, Kuala Lumpur Branch
(UOB), addressed to the Land Bank of the Philippines, Manila (LBP), and payable to the
respondent company for P380,000.00.4
Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold
Palace, inquired from petitioner Far East Bank & Trust Company's (Far East's) SM North EDSA
Branch, its neighbor mall tenant, the nature of the draft. The teller informed her that the
same was similar to a manager's check, but advised her not to release the pieces of jewelry
until the draft had been cleared.5 Following the bank's advice, Yang issued Cash Invoice No.
16096 to the foreigner, asked him to come back, and informed him that the pieces of jewelry
would be released when the draft had already been cleared.7 Respondent Julie Yang-Go, the
manager of Gold Palace, consequently deposited the draft in the company's account with the
aforementioned Far East branch on June 2, 1998.8
When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank,
the latter cleared the same9-UOB's account with LBP was debited,10 and Gold Palace's
account with Far East was credited with the amount stated in the draft.11
The foreigner eventually returned to respondent's store on June 6, 1998 to claim the
purchased goods. After ascertaining that the draft had been cleared, respondent Yang
released the pieces of jewelry to Samuel Tagoe; and because the amount in the draft was
more than the value of the goods purchased, she issued, as his change, Far East Check No.
40
173088112 for P122,000.00.13 This check was later presented for encashment and was, in
fact, paid by the said bank.14
On June 26, 1998, or after around three weeks, LBP informed Far East that the amount in
Foreign Draft No. M-069670 had been materially altered from P300.00 to P380,000.00 and
that it was returning the same. Attached to its official correspondence were Special Clearing
Receipt No. 002593 and the duly notarized and consul-authenticated affidavit of a corporate
officer of the drawer, UOB.15It is noted at this point that the material alteration was
discovered by UOB after LBP had informed it that its funds were being depleted following the
encashment of the subject draft.16 Intending to debit the amount from respondent's account,
Far East subsequently refunded the P380,000.00 earlier paid by LBP.
Gold Palace, in the meantime, had already utilized portions of the amount. Thus, on July 20,
1998, as the outstanding balance of its account was already inadequate, Far East was able to
debit only P168,053.36,17 but this was done without a prior written notice to the account
holder.18 Far East only notified by phone the representatives of the respondent company. 19
On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or
the difference between the amount in the materially altered draft and the amount debited
from the respondent company's account.20 Because Gold Palace did not heed the demand,
Far East consequently instituted Civil Case No. 99-296 for sum of money and damages before
the Regional Trial Court (RTC), Branch 64 of Makati City.21
In their Answer, respondents specifically denied the material allegations in the complaint and
interposed as a defense that the complaint states no cause of action-the subject foreign draft
having been cleared and the respondent not being the party who made the material
alteration. Respondents further counterclaimed for actual damages, moral and exemplary
damages, and attorney's fees considering, among others, that the petitioner had confiscated
without basis Gold Palace's balance in its account resulting in operational loss, and had
maliciously imputed to the latter the act of alteration.22
After trial on the merits, the RTC rendered its July 30, 2001 Decision23 in favor of Far East,
ordering Gold Palace to pay the former P211,946.64 as actual damages and P50,000.00 as
attorney's fees.24The trial court ruled that, on the basis of its warranties as a general
indorser, Gold Palace was liable to Far East.25
On appeal, the CA, in the assailed March 15, 2005 Decision,26 reversed the ruling of the trial
court and awarded respondents' counterclaim. It ruled in the main that Far East failed to
undergo the proceedings on the protest of the foreign draft or to notify Gold Palace of the
draft's dishonor; thus, Far East could not charge Gold Palace on its secondary liability as an
indorser.27 The appellate court further ruled that the drawee bank had cleared the check,
and its remedy should be against the party responsible for the alteration. Considering that, in
this case, Gold Palace neither altered the draft nor knew of the alteration, it could not be
held liable.28 The dispositive portion of the CA decision reads:

WHEREFORE, premises considered, the appeal is GRANTED; the assailed Decision
dated 30 July 2001 of the Regional Trial Court of Makati City, Branch 64 is hereby
REVERSED and SET ASIDE; the Complaint dated January 1999 is DISMISSED; and
appellee Far East Bank and Trust Company is hereby ordered to pay appellant Gold
Palace Jewellery Company the amount of Php168,053.36 for actual damages plus
legal interest of 12% per annum from 20 July 1998, Php50,000.00 for exemplary
damages, and Php50,000.00 for attorney's fees. Costs against appellee Far East
Bank and Trust Company.29
The appellate court, in the further challenged May 26, 2005 Resolution,30 denied petitioner's
Motion for Reconsideration,31 which prompted the petitioner to institute before the Court
the instant Petition for Review on Certiorari.32
We deny the petition.
Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor,
by accepting the instrument, engages that he will pay it according to the tenor of his
acceptance.33 This provision applies with equal force in case the drawee pays a bill without
having previously accepted it. His actual payment of the amount in the check implies not only
his assent to the order of the drawer and a recognition of his corresponding obligation to pay
the aforementioned sum, but also, his clear compliance with that obligation.34 Actual
payment by the drawee is greater than his acceptance, which is merely a promise in writing
to pay. The payment of a check includes its acceptance.35
Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign
draft and forwarded the amount thereof to the collecting bank. The latter then credited to
Gold Palace's account the payment it received. Following the plain language of the law, the
drawee, by the said payment, recognized and complied with its obligation to pay in
accordance with the tenor of his acceptance. The tenor of the acceptance is determined by
the terms of the bill as it is when the drawee accepts.36Stated simply, LBP was liable on its
payment of the check according to the tenor of the check at the time of payment, which was
the raised amount.
Because of that engagement, LBP could no longer repudiate the payment it erroneously
made to a due course holder. We note at this point that Gold Palace was not a participant in
the alteration of the draft, was not negligent, and was a holder in due course-it received the
draft complete and regular on its face, before it became overdue and without notice of any
dishonor, in good faith and for value, and absent any knowledge of any infirmity in the
instrument or defect in the title of the person negotiating it.37 Having relied on the drawee
bank's clearance and payment of the draft and not being negligent (it delivered the
purchased jewelry only when the draft was cleared and paid), respondent is amply protected
by the said Section 62. Commercial policy favors the protection of any one who, in due
course, changes his position on the faith of the drawee bank's clearance and payment of a
check or draft.38
41
This construction and application of the law gives effect to the plain language of the
NIL39 and is in line with the sound principle that where one of two innocent parties must
suffer a loss, the law will leave the loss where it finds it.40 It further reasserts the usefulness,
stability and currency of negotiable paper without seriously endangering accepted banking
practices. Indeed, banking institutions can readily protect themselves against liability on
altered instruments either by qualifying their acceptance or certification, or by relying on
forgery insurance and special paper which will make alterations obvious.41 This is not to
mention, but we state nevertheless for emphasis, that the drawee bank, in most cases, is in a
better position, compared to the holder, to verify with the drawer the matters stated in the
instrument. As we have observed in this case, were it not for LBP's communication with the
drawer that its account in the Philippines was being depleted after the subject foreign draft
had been encashed, then, the alteration would not have been discovered. What we cannot
understand is why LBP, having the most convenient means to correspond with UOB, did not
first verify the amount of the draft before it cleared and paid the same. Gold Palace, on the
other hand, had no facility to ascertain with the drawer, UOB Malaysia, the true amount in
the draft. It was left with no option but to rely on the representations of LBP that the draft
was good.
In arriving at this conclusion, the Court is not closing its eyes to the other view espoused in
common law jurisdictions that a drawee bank, having paid to an innocent holder the amount
of an uncertified, altered check in good faith and without negligence which contributed to the
loss, could recover from the person to whom payment was made as for money paid by
mistake.42 However, given the foregoing discussion, we find no compelling reason to apply
the principle to the instant case.
The Court is also aware that under the Uniform Commercial Code in the United States of
America, if an unaccepted draft is presented to a drawee for payment or acceptance and the
drawee pays or accepts the draft, the person obtaining payment or acceptance, at the time of
presentment, and a previous transferor of the draft, at the time of transfer, warrant to the
drawee making payment or accepting the draft in good faith that the draft has not been
altered.43 Nonetheless, absent any similar provision in our law, we cannot extend the same
preferential treatment to the paying bank.
Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its
collecting agent, Far East, should not have debited the money paid by the drawee bank from
respondent company's account. When Gold Palace deposited the check with Far East, the
latter, under the terms of the deposit and the provisions of the NIL, became an agent of the
former for the collection of the amount in the draft.44 The subsequent payment by the
drawee bank and the collection of the amount by the collecting bank closed the transaction
insofar as the drawee and the holder of the check or his agent are concerned, converted the
check into a mere voucher,45 and, as already discussed, foreclosed the recovery by the
drawee of the amount paid. This closure of the transaction is a matter of course; otherwise,
uncertainty in commercial transactions, delay and annoyance will arise if a bank at some
future time will call on the payee for the return of the money paid to him on the check.46

As the transaction in this case had been closed and the principal-agent relationship between
the payee and the collecting bank had already ceased, the latter in returning the amount to
the drawee bank was already acting on its own and should now be responsible for its own
actions. Neither can petitioner be considered to have acted as the representative of the
drawee bank when it debited respondent's account, because, as already explained, the
drawee bank had no right to recover what it paid. Likewise, Far East cannot invoke the
warranty of the payee/depositor who indorsed the instrument for collection to shift the
burden it brought upon itself. This is precisely because the said indorsement is only for
purposes of collection which, under Section 36 of the NIL, is a restrictive indorsement.47 It did
not in any way transfer the title of the instrument to the collecting bank. Far East did not own
the draft, it merely presented it for payment. Considering that the warranties of a general
indorser as provided in Section 66 of the NIL are based upon a transfer of title and are
available only to holders in due course,48 these warranties did not attach to the indorsement
for deposit and collection made by Gold Palace to Far East. Without any legal right to do so,
the collecting bank, therefore, could not debit respondent's account for the amount it
refunded to the drawee bank.
The foregoing considered, we affirm the ruling of the appellate court to the extent that Far
East could not debit the account of Gold Palace, and for doing so, it must return what it had
erroneously taken. Far East's remedy under the law is not against Gold Palace but against the
drawee-bank or the person responsible for the alteration. That, however, is another issue
which we do not find necessary to discuss in this case.
However, we delete the exemplary damages awarded by the appellate court. Respondents
have not shown that they are entitled to moral, temperate or compensatory
damages.49 Neither was petitioner impelled by malice or bad faith in debiting the account of
the respondent company and in pursuing its cause.50 On the contrary, petitioner was
honestly convinced of the propriety of the debit. We also delete the award of attorney's fees
for, in a plethora of cases, we have ruled that it is not a sound public policy to place a
premium on the right to litigate. No damages can be charged to those who exercise such
precious right in good faith, even if done erroneously.51
WHEREFORE, premises considered, the March 15, 2005 Decision and the May 26, 2005
Resolution of the Court of Appeals in CA-G.R. CV No. 71858 are AFFIRMED WITH THE
MODIFICATION that the award of exemplary damages and attorney's fees is DELETED.
SO ORDERED.
Case Name:Far East Bank & Trust Company vs. Gold By:Biehihi
Palace Jewelry Co.
Topic:Liabilities of Parties:
GR No.168274 Acceptor
Date:August 20, 2008
42
Facts
 Samuel Tagoe, a foreigner, purchased from Gold Palace Jewellery Co.’s store
several pieces of jewelry valued at P258,000.
 He paid thru a Foreign Draft issued by the United Overseas Bank (UOB) to Land
Bank of the Philippines (LBP) for P380,000.
 The teller of Far East Bank (FEBTC), its neighbor mall tenant, informed Judy Yang,
Gold Palace’s assistant general manager, that such foreign draft was similar to a
manager’s check, but advised her not to release the pieces of jewelry until the draft
had been cleared.
 Following the advice, Yang issued Cash Invoice to the foreigner and asked him to
come back for the release of the pieces of jewelry upon clearance of the draft.
 Julie Yang-Go, Gold Palace’s manager, deposited the draft in the company’s
account with the FEBTC.
 When FEBTC presented the draft for clearing to LBP, the latter cleared the same
and Gold Palace’s account with FEBTC was credited.
 The foreigner eventually returned to Gold Palace’s store to claim the purchased
goods.
 After ascertaining that the draft had been cleared, Yang released the pieces of
jewelry and his change, issuing a FEBTC Check for P122,000, which was paid by the
bank.
 LBP informed FEBTC that the Foreign Draft had been materially altered from P300
to P380,000 and that it was returning the same.
 FEBTC refunded the amount to LBP.
 FEBTC was able to debit only P168.053.36 of the amount left in Gold Palace’s
account without prior written notice to the account holder. FEBTC only notified by
phone the representatives of the respondents company.
 FEBTC demanded from Gold Palace the payment of the balance and upon refusal
filed in the RTC for sum of money and damages
 RTC: in favor of FEBTC; ordering Gold Palace to pay FEBTC on the basis of its
warranties as a general indorser.
 CA: reversed RTC. It ruled that FEBTC failed to undergo the proceedings on the
protest of the foreign draft or to notify Gold Palace of the draft’s dishonor; thus,
FEBTC could not charge Gold Palace on its secondary liability as an indorser.
Issue/s: W/N Gold Palace should be held liable for the altered Foreign Draft.

Ruling: NO. CA Affirmed.
 Act No. 2031, or the Negotiable Instruments Law, explicitly provides that “the
acceptor, by accepting the instrument, engages that he will pay it according to the
tenor of his acceptance.”
 This provision applies with equal force in case the drawee pays a bill without having
previously accepted it.
 Actual payment by the drawee is greater than his acceptance, which is merely a
promise in writing to pay.
 The payment of a check includes its acceptance.
 The tenor of the acceptance is determined by the terms of the bill as it is when the
drawee accepts.
 Stated simply, LBP was liable on its payment of the check according to the tenor of
the check at the time of payment, which was the raised amount.
 Gold Palace was not a participant in the alteration of the draft, was not negligent,
and was a holder in due course.
 LBP, having the most convenient means to correspond with UOB, did not first verify
the amount of the draft before it cleared and paid the same. Gold Palace had no
facility to ascertain with the drawer, UOB, the true amount in the draft. It was left
with no option but to rely on the representations of LBP that the draft was good.
 Gold Palace is protected by Sec. 62 of the NIL. Its collecting agent, FEBTC, should
not have debited the money paid by LBP from Gold Palace’s account. When Gold
Palace deposited the check with FEBTC, it, under the terms of the deposit and the
provisions of the NIL, became an agent of the Gold Palace for the collection of the
amount in the draft.
 FEBTC should now be responsible for its own actions in returning the amount to
LBP as the transaction in this case had been closed and the principal-agent
relationship between Gold Palace and FEBTC had already ceased.
 Neither can FEBTC be considered to have acted as LBP’s representative when it
debited Gold Palace’s account because LBP had no right to recover what it paid.
 Likewise, FEBTC cannot invoke the warranty of the payee/depositor who indorsed
the instrument for collection to shift the burden it brought upon itself. This is
because the said indorsement is only for purposes of collection which is a
restrictive indorsement under Sec. 36. It did not in any way transfer the title of the
instrument to the collectingbank.
 Hence, without any legal right to do so, FEBTC could not debit Gold Palace’s
account for the amount it refunded to LBP.
Doctrine: Notes:
PARTIES:
Sec. 62. Liability of acceptor – The acceptor, by accepting Drawer – United Overseas Bank
the instrument, engages that he will pay it according to
the tenor of his acceptance and admits: Drawee bank – Land Bank of the
Philippines
(a) the existence of the drawer, the genuineness of his
43
signature, and his capacity and authority to draw the Payee – Gold PalaceJewellery
instrument; and Co.
(b) the existence of the payee and his then capacity to Collecting Bank – Far East Bank
indorse. &Trust Company
Sec. 36. When indorsement restrictive – An indorsement PRINCIPLE NOT APPLICABLE:
is restrictive which either:
“That a drawee bank, having
(a) prohibits the further negotiation of the instrument; or paid to an innocent holder the
amount of an uncertified,
(b) constitutes the indorsee the agent of the indorser; or altered check in good faith and
(c) vests the title in the indorsee in trust or to the use of without negligence which
some other persons contributed to the loss, could
recover from the person to
But the mere absence of words implying power to whom payment was made as for
negotiate does not make an indorsement restrictive. money paid by mistake.”
FACTS:
Samuel Tagoe, a foreigner, purchased from respondent Gold Palace Jewellery Co. pieces of
jewelry. As payment, Tagoe offered a foreign draft issued by the United Overseas Bank of
Malaysia, addressed to the Landbank of the Philippines. Petitioner Far East Bank & Trust
Company informed Gold Palace advised Gold Palace not to release the jewelry until the draft
had been cleared. The latter followed FEBTC’s advice. Consequently, the manager of Gold
Palace deposited the draft in the company’s account with FEBTC. FEBTC, as collecting bank,
presented the draft to drawee bank LBP. Thereafter, Gold Palace’s account was credited with
the amount stated in the draft.
Tagoe then returned to Gold Palace to claim his purchase. Gold Palace released the same and
even issued an FEBTC check representing an overpayment. Tagoe eventually encashed this
and FEBTC paid the same.Thereafter, LBP informed FEBTC that the foreign draft had been
materially altered from P300 to P380,000 and that LBP will be returning it. FEBTC then
refunded LBP, intending to debit Gold Palace’s account in return.
In the meantime, Gold Palace had already used portions of the amount. FEBTC was able to
debit a portion of the amount from Gold Palace’s account, without a proper written notice.
FEBTC demanded from Gold Palace the remaining balance. However, the latter did not
comply. FEBTC then instituted a case for sum of money and damages against Gold Palace.
 44

The Regional Trial Court ruled in favor of FEBTC, ordering Gold Palace to pay the remaining
balance on the basis of its warranties as general indorser. However, the Court of Appeals
reversed the RTC decision as FEBTC failed to undergo the proceedings on the protest of the
foreign draft or to notify Gold Palace of the dishonor of the drafts. Thus, FEBTC could not
charge Gold Palace on its secondary liability as an indorser. Its remedy therefore is against
the party who made the material alteration.

ISSUE: Whether or not Gold Palace should be held liable for the materially altered foreign
draft

RULING:

No. Section 62 of the Negotiable Instruments law provides that the acceptor, by accepting
the instrument, engages that he will pay it according to the tenor of his acceptance. The
same is applicable if the drawee pays a bill without having previously accepted it. It amounts
not only to an assent to the order of the drawer and recognition of an obligation, but also his
clear compliance. The payment of a check includes its acceptance. In this case, LBP cleared
and paid the foreign draft and forwarded the amount to FEBTC, which credited the same to
Gold Palace. LBP then, by said payment, recognized and complied with its obligation to pay in
accordance of his acceptance. LBP was liable on its payment of the check according to the
tenor of the check at the time of payment, which was the raised amount. Therefore, LBP
could not question anymore the payment it erroneously made to a holder in due course.
Gold Palace was not guilty of negligence or participation in the alteration, and was thus a
holder in due course. Gold Palace is protected by Sec. 62 of the NIL. LBP, having the means to
communicate with the Malaysian bank, should have first verified the amount of the draft
before clearing and paying it. Gold Palace, on the other hand, merely relied on the clearance
of the banks. FEBTC, consequently, should not have debited Gold Palace’s account.

In some cases, the Court may rule that a drawee bank may recover, having paid to an
innocent holder the amount of an uncertified, altered check, from an innocent holder if said
drawee bank was in good faith and without negligence which contributed to the loss.
However, this does not apply in the present case.

FIRST DIVISION
G.R. No. 184458 January 14, 2015
RODRIGO RIVERA, Petitioner,
vs.
SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA, Respondents.
DECISION
PEREZ, J.:
Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of
Court assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 90609 which affirmed
with modification the separate rulings of the Manila City trial courts, the Regional Trial Court,
Branch 17 in Civil Case No. 02-1052562 and the Metropolitan Trial Court (MeTC), Branch 30,
in Civil Case No. 163661,3 a case for collection of a sum of money due a promissory note.
While all three (3) lower courts upheld the validity and authenticity of the promissory note as
duly signed by the obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the
appellate court modified the trial courts’ consistent awards: (1) the stipulated interest rate of
sixty percent (60%) reduced to twelve percent (12%) per annumcomputed from the date of
judicial or extrajudicial demand, and (2) reinstatement of the award of attorney’s fees also in
a reduced amount of P50,000.00.
In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note
and questions the entire ruling of the lower courts. On the other hand, petitioners in G.R. No.
184472, Spouses Salvador and Violeta Chua (Spouses Chua), take exception to the appellate
court’s reduction of the stipulated interest rate of sixty percent (60%) to twelve percent
(12%) per annum.
We proceed to the facts.
The parties were friends of long standing having known each other since 1973: Rivera and
Salvador are kumpadres, the former is the godfather of the Spouses Chua’s son.
On 24 February 1995, Rivera obtained a loan from the Spouses Chua:
PROMISSORY NOTE
120,000.00
45
FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and
VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine Currency
(P120,000.00) on December 31, 1995.
It is agreed and understood that failure on my part to pay the amount of (120,000.00) One
Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum
equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the entire
obligation is fully paid for.
Should this note be referred to a lawyer for collection, I agree to pay the further sum
equivalent to twenty percent (20%) of the total amount due and payable as and for
attorney’s fees which in no case shall be less than P5,000.00 and to pay in addition the cost
of suit and other incidental litigation expense.
Any action which may arise in connection with this note shall be brought in the proper Court
of the City of Manila.
Manila, February 24, 1995[.]
(SGD.) RODRIGO RIVERA4
In October 1998, almost three years from the date of payment stipulated in the promissory
note, Rivera, as partial payment for the loan, issued and delivered to the SpousesChua, as
payee, a check numbered 012467, dated 30 December 1998, drawn against Rivera’s current
account with the Philippine Commercial International Bank (PCIB) in the amount
of P25,000.00.
On 21 December 1998, the Spouses Chua received another check presumably issued by
Rivera, likewise drawn against Rivera’s PCIB current account, numbered 013224, duly signed
and dated, but blank as to payee and amount. Ostensibly, as per understanding by the
parties, PCIB Check No. 013224 was issued in the amount of P133,454.00 with "cash" as
payee. Purportedly, both checks were simply partial payment for Rivera’s loan in the
principal amount of P120,000.00.
Upon presentment for payment, the two checks were dishonored for the reason "account
closed."
As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering
the principal of P120,000.00 plus five percent (5%) interest per month from 1 January 1996
to 31 May 1999.
The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no
avail. Because of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to

file a suit on 11 June 1999. The case was raffled before the MeTC, Branch 30, Manila and
docketed as Civil Case No. 163661.
In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed
the subject Promissory Note; (2) in all instances when he obtained a loan from the Spouses
Chua, the loans were always covered by a security; (3) at the time of the filing of the
complaint, he still had an existing indebtedness to the Spouses Chua, secured by a real estate
mortgage, but not yet in default; (4) PCIB Check No. 132224 signed by him which he
delivered to the Spouses Chua on 21 December 1998, should have been issued in the amount
of only 1,300.00, representing the amount he received from the Spouses Chua’s saleslady; (5)
contrary to the supposed agreement, the Spouses Chua presented the check for payment in
the amount of P133,454.00; and (6) there was no demand for payment of the amount
of P120,000.00 prior to the encashment of PCIB Check No. 0132224.5
In the main, Rivera claimed forgery of the subject Promissory Note and denied his
indebtedness thereunder.
The MeTC summarized the testimonies of both parties’ respective witnesses:
[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence
(consisting of the testimonies of [the spouses] Chua and NBI Senior Documents Examiner
Antonio Magbojos). x x x
Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI
document examiner (1989); NBI Senior Document Examiner (1994 to the date he testified);
registered criminologist; graduate of 18th Basic Training Course [i]n Questioned Document
Examination conducted by the NBI; twice attended a seminar on US Dollar Counterfeit
Detection conducted by the US Embassy in Manila; attended a seminar on Effective
Methodology in Teaching and Instructional design conducted by the NBI Academy; seminar
lecturer on Questioned Documents, Signature Verification and/or Detection; had examined
more than a hundred thousand questioned documents at the time he testified.
Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera]
appearing in the Promissory Note and compared the signature thereon with the specimen
signatures of [Rivera] appearing on several documents. After a thorough study, examination,
and comparison of the signature on the questioned document (Promissory Note) and the
specimen signatures on the documents submitted to him, he concluded that the questioned
signature appearing in the Promissory Note and the specimen signatures of [Rivera]
appearing on the other documents submitted were written by one and the same person. In
connection with his findings, Magbojos prepared Questioned Documents Report No. 712-
1000 dated 8 January 2001, with the following conclusion: "The questioned and the standard
specimen signatures RODGRIGO RIVERA were written by one and the same person."
46
[Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May 1998, he
obtained a loan from [respondent] Salvador and executed a real estate mortgage over a
parcel of land in favor of [respondent Salvador] as collateral; aside from this loan, in October,
1998 he borrowed P25,000.00 from Salvador and issued PCIB Check No. 126407 dated 30
December 1998; he expressly denied execution of the Promissory Note dated 24 February
1995 and alleged that the signature appearing thereon was not his signature; [respondent
Salvador’s] claim that PCIB Check No. 0132224 was partial payment for the Promissory Note
was not true, the truth being that he delivered the check to [respondent Salvador] with the
space for amount left blank as he and [respondent] Salvador had agreed that the latter was
to fill it in with the amount of P1,300.00 which amount he owed [the spouses Chua];
however, on 29 December 1998 [respondent] Salvador called him and told him that he had
written P133,454.00 instead of P1,300.00; x x x. To rebut the testimony of NBI Senior
Document Examiner Magbojos, [Rivera] reiterated his averment that the signature appearing
on the Promissory Note was not his signature and that he did not execute the Promissory
Note.6
After trial, the MeTC ruled in favor of the Spouses Chua:
WHEREFORE, [Rivera] is required to pay [the spouses Chua]: P120,000.00 plus stipulated
interest at the rate of 5% per month from 1 January 1996, and legal interest at the rate of
12% percent per annum from 11 June 1999, as actual and compensatory damages; 20% of
the whole amount due as attorney’s fees.7
On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC,
but deleted the award of attorney’s fees to the Spouses Chua:
WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of
the Decision dated October 21, 2002 is hereby AFFIRMED.8
Both trial courts found the Promissory Note as authentic and validly bore the signature of
Rivera. Undaunted, Rivera appealed to the Court of Appeals which affirmed Rivera’s liability
under the Promissory Note, reduced the imposition of interest on the loan from 60% to 12%
per annum, and reinstated the award of attorney’s fees in favor of the Spouses Chua:
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the
MODIFICATION that the interest rate of 60% per annum is hereby reduced to12% per annum
and the award of attorney’s fees is reinstated atthe reduced amount of P50,000.00 Costs
against [Rivera].9
Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No. 184458 and
the Spouses Chua in G.R. No. 184472, respectively raising the following issues:
A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING
THE RULING OF THE RTC AND M[e]TC THAT THERE WAS A VALID PROMISSORY
NOTE EXECUTED BY [RIVERA].
2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT DEMAND IS NO LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF
THE NEGOTIABLE INSTRUMENTS LAW.
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING
ATTORNEY’S FEES DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND
IN LAW AND DESPITE THE FACT THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM
THE DECISION OF THE RTC DELETING THE AWARD OF ATTORNEY’S FEES. 10
B. In G.R. No. 184472
[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL ERROR
WHEN IT MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60%
PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT RIVERA NEVER RAISED IN HIS
ANSWER THE DEFENSE THAT THE SAID STIPULATED RATE OF INTEREST IS EXORBITANT,
UNCONSCIONABLE, UNREASONABLE, INEQUITABLE, ILLEGAL, IMMORAL OR VOID. 11
As early as 15 December 2008, wealready disposed of G.R. No. 184472 and denied the
petition, via a Minute Resolution, for failure to sufficiently show any reversible error in the
ruling of the appellate court specifically concerning the correct rate of interest on Rivera’s
indebtedness under the Promissory Note.12
On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.
Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning
the entire ruling of the Court of Appeals in CA-G.R. SP No. 90609.
Rivera continues to deny that heexecuted the Promissory Note; he claims that given his
friendship withthe Spouses Chua who were money lenders, he has been able to maintain a
loan account with them. However, each of these loan transactions was respectively "secured
by checks or sufficient collateral."
Rivera points out that the Spouses Chua "never demanded payment for the loan nor interest
thereof (sic) from [Rivera] for almost four (4) years from the time of the alleged default in
payment [i.e., after December 31, 1995]."13
On the issue of the supposed forgery of the promissory note, we are not inclined to depart
from the lower courts’ uniform rulings that Rivera indeed signed it.
47
Rivera offers no evidence for his asseveration that his signature on the promissory note was
forged, only that the signature is not his and varies from his usual signature. He likewise
makes a confusing defense of having previously obtained loans from the Spouses Chua who
were money lenders and who had allowed him a period of "almost four (4) years" before
demanding payment of the loan under the Promissory Note.
First, we cannot give credence to such a naked claim of forgery over the testimony of the
National Bureau of Investigation (NBI) handwriting expert on the integrity of the promissory
note. On that score, the appellate court aptly disabled Rivera’s contention:
[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory
note is a forgery. The fact of forgery cannot be presumed but must be proved by clear,
positive and convincing evidence. Mere variance of signatures cannot be considered as
conclusive proof that the same was forged. Save for the denial of Rivera that the signature on
the note was not his, there is nothing in the records to support his claim of forgery. And
while it is true that resort to experts is not mandatory or indispensable to the examination of
alleged forged documents, the opinions of handwriting experts are nevertheless helpful in
the court’s determination of a document’s authenticity.
To be sure, a bare denial will not suffice to overcome the positive value of the promissory
note and the testimony of the NBI witness. In fact, even a perfunctory comparison of the
signatures offered in evidence would lead to the conclusion that the signatures were made
by one and the same person.
It is a basic rule in civil cases that the party having the burden of proof must establish his case
by preponderance of evidence, which simply means "evidence which is of greater weight, or
more convincing than that which is offered in opposition to it."
Evaluating the evidence on record, we are convinced that [the Spouses Chua] have
established a prima faciecase in their favor, hence, the burden of evidence has shifted to
[Rivera] to prove his allegation of forgery. Unfortunately for [Rivera], he failed to
substantiate his defense.14 Well-entrenched in jurisprudence is the rule that factual findings
of the trial court, especially when affirmed by the appellate court, are accorded the highest
degree of respect and are considered conclusive between the parties.15 A review of such
findings by this Court is not warranted except upon a showing of highly meritorious
circumstances, such as: (1) when the findings of a trial court are grounded entirely on
speculation, surmises or conjectures; (2) when a lower court's inference from its factual
findings is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
discretion in the appreciation of facts; (4) when the findings of the appellate court go beyond
the issues of the case, or fail to notice certain relevant facts which, if properly considered,
will justify a different conclusion; (5) when there is a misappreciation of facts; (6) when the
findings of fact are conclusions without mention of the specific evidence on which they are
based, are premised on the absence of evidence, or are contradicted by evidence on
record.16None of these exceptions obtains in this instance. There is no reason to depart from

the separate factual findings of the three (3) lower courts on the validity of Rivera’s signature
reflected in the Promissory Note.
Indeed, Rivera had the burden ofproving the material allegations which he sets up in his
Answer to the plaintiff’s claim or cause of action, upon which issue is joined, whether they
relate to the whole case or only to certain issues in the case.17
In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony
of a handwriting expert from the NBI. While it is true that resort to experts is not mandatory
or indispensable to the examination or the comparison of handwriting, the trial courts in this
case, on its own, using the handwriting expert testimony only as an aid, found the disputed
document valid.18
Hence, the MeTC ruled that:
[Rivera] executed the Promissory Note after consideration of the following: categorical
statement of [respondent] Salvador that [Rivera] signed the Promissory Note before him, in
his ([Rivera’s]) house; the conclusion of NBI Senior Documents Examiner that the questioned
signature (appearing on the Promissory Note) and standard specimen signatures "Rodrigo
Rivera" "were written by one and the same person"; actual view at the hearing of the
enlarged photographs of the questioned signature and the standard specimen signatures.19
Specifically, Rivera insists that: "[i]f that promissory note indeed exists, it is beyond logic for a
money lender to extend another loan on May 4, 1998 secured by a real estate mortgage,
when he was already in default and has not been paying any interest for a loan incurred in
February 1995."20
We disagree.
It is likewise likely that precisely because of the long standing friendship of the parties as
"kumpadres," Rivera was allowed another loan, albeit this time secured by a real estate
mortgage, which will cover Rivera’s loan should Rivera fail to pay. There is nothing
inconsistent with the Spouses Chua’s two (2) and successive loan accommodations to Rivera:
one, secured by a real estate mortgage and the other, secured by only a Promissory Note.
Also completely plausible is thatgiven the relationship between the parties, Rivera was
allowed a substantial amount of time before the Spouses Chua demanded payment of the
obligation due under the Promissory Note.
In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a
discordant defense to assail the authenticity and validity of the Promissory Note. Although
the burden of proof rested on the Spouses Chua having instituted the civil case and after
they established a prima facie case against Rivera, the burden of evidence shifted to the
latter to establish his defense.21 Consequently, Rivera failed to discharge the burden of
48
evidence, refute the existence of the Promissory Note duly signed by him and subsequently,
that he did not fail to pay his obligation thereunder. On the whole, there was no question left
on where the respective evidence of the parties preponderated—in favor of plaintiffs, the
Spouses Chua. Rivera next argues that even assuming the validity of the Promissory Note,
demand was still necessary in order to charge him liable thereunder. Rivera argues that it
was grave error on the part of the appellate court to apply Section 70 of the Negotiable
Instruments Law (NIL).22
We agree that the subject promissory note is not a negotiable instrument and the provisions
of the NIL do not apply to this case. Section 1 of the NIL requires the concurrence of the
following elements to be a negotiable instrument:
(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.
On the other hand, Section 184 of the NIL defines what negotiable promissory note is:
SECTION 184. Promissory Note, Defined. – A negotiable promissory note within the meaning
of this Act is an unconditional promise in writing made by one person to another, signed by
the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum
certain in money to order or to bearer. Where a note is drawn to the maker’s own order, it is
not complete until indorsed by him.
The Promissory Note in this case is made out to specific persons, herein respondents, the
Spouses Chua, and not to order or to bearer, or to the order of the Spouses Chua as payees.
However, even if Rivera’s Promissory Note is not a negotiable instrument and therefore
outside the coverage of Section 70 of the NIL which provides that presentment for payment
is not necessary to charge the person liable on the instrument, Rivera is still liable under the
terms of the Promissory Note that he issued.
The Promissory Note is unequivocal about the date when the obligation falls due and
becomes demandable—31 December 1995. As of 1 January 1996, Rivera had already
incurred in delay when he failed to pay the amount of P120,000.00 due to the Spouses Chua
on 31 December 1995 under the Promissory Note.
Article 1169 of the Civil Code explicitly provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond
his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment
one of the parties fulfills his obligation, delay by the other begins. (Emphasis supplied)
There are four instances when demand is not necessary to constitute the debtor in default:
(1) when there is an express stipulation to that effect; (2) where the law so provides; (3)
when the period is the controlling motive or the principal inducement for the creation of the
obligation; and (4) where demand would be useless. In the first two paragraphs, it is not
sufficient that the law or obligation fixes a date for performance; it must further state
expressly that after the period lapses, default will commence.
We refer to the clause in the Promissory Note containing the stipulation of interest:
It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One
Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum
equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the entire
obligation is fully paid for.23
which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the "date of
default" until the entire obligation is fully paid for. The parties evidently agreed that the
maturity of the obligation at a date certain, 31 December 1995, will give rise to the obligation
to pay interest. The Promissory Note expressly provided that after 31 December 1995,
default commences and the stipulation on payment of interest starts.
The date of default under the Promissory Note is 1 January 1996, the day following 31
December 1995, the due date of the obligation. On that date, Rivera became liable for the
stipulated interest which the Promissory Note says is equivalent to 5% a month. In sum, until
31 December 1995, demand was not necessary before Rivera could be held liable for the
49
principal amount of P120,000.00. Thereafter, on 1 January 1996, upon default, Rivera
became liable to pay the Spouses Chua damages, in the form of stipulated interest.
The liability for damages of those who default, including those who are guilty of delay, in the
performance of their obligations is laid down on Article 117024 of the Civil Code.
Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an
indemnity for damages when the obligor incurs in delay:
Art. 2209. If the obligation consists inthe payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of stipulation, the legal interest,
which is six percent per annum. (Emphasis supplied)
Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of
money; (2) the debtor, Rivera, incurred in delay when he failed to pay on or before 31
December 1995; and (3) the Promissory Note provides for an indemnity for damages upon
default of Rivera which is the payment of a 5%monthly interest from the date of default.
We do not consider the stipulation on payment of interest in this case as a penal clause
although Rivera, as obligor, assumed to pay additional 5% monthly interest on the principal
amount of P120,000.00 upon default.
Article 1226 of the Civil Code provides:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there isno stipulation to
the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or
is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions
of this Code.
The penal clause is generally undertaken to insure performance and works as either, or both,
punishment and reparation. It is an exception to the general rules on recovery of losses and
damages. As an exception to the general rule, a penal clause must be specifically set forth in
the obligation.25
In high relief, the stipulation in the Promissory Note is designated as payment of interest, not
as a penal clause, and is simply an indemnity for damages incurred by the Spouses Chua
because Rivera defaulted in the payment of the amount of P120,000.00. The measure of
damages for the Rivera’s delay is limited to the interest stipulated in the Promissory Note. In
apt instances, in default of stipulation, the interest is that provided by law.26

In this instance, the parties stipulated that in case of default, Rivera will pay interest at the
rate of 5% a month or 60% per annum. On this score, the appellate court ruled:
It bears emphasizing that the undertaking based on the note clearly states the date of
payment tobe 31 December 1995. Given this circumstance, demand by the creditor isno
longer necessary in order that delay may exist since the contract itself already expressly so
declares. The mere failure of [Spouses Chua] to immediately demand or collect payment of
the value of the note does not exonerate [Rivera] from his liability therefrom. Verily, the trial
court committed no reversible error when it imposed interest from 1 January 1996 on the
ratiocination that [Spouses Chua] were relieved from making demand under Article 1169 of
the Civil Code.
As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in
addition to legal interests and attorney’s fees is, indeed, highly iniquitous and unreasonable.
Stipulated interest rates are illegal if they are unconscionable and the Court is allowed to
temper interest rates when necessary. Since the interest rate agreed upon is void, the parties
are considered to have no stipulation regarding the interest rate, thus, the rate of interest
should be 12% per annum computed from the date of judicial or extrajudicial demand.27
The appellate court found the 5% a month or 60% per annum interest rate, on top of the
legal interest and attorney’s fees, steep, tantamount to it being illegal, iniquitous and
unconscionable. Significantly, the issue on payment of interest has been squarely disposed of
in G.R. No. 184472 denying the petition of the Spouses Chua for failure to sufficiently
showany reversible error in the ruling of the appellate court, specifically the reduction of the
interest rate imposed on Rivera’s indebtedness under the Promissory Note. Ultimately, the
denial of the petition in G.R. No. 184472 is res judicata in its concept of "bar by prior
judgment" on whether the Court of Appeals correctly reduced the interest rate stipulated in
the Promissory Note.
Res judicata applies in the concept of "bar by prior judgment" if the following requisites
concur: (1) the former judgment or order must be final; (2) the judgment or order must be on
the merits; (3) the decision must have been rendered by a court having jurisdiction over the
subject matter and the parties; and (4) there must be, between the first and the second
action, identity of parties, of subject matter and of causes of action.28
In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and
subject matter raising specifically errors in the Decision of the Court of Appeals. Where the
Court of Appeals’ disposition on the propriety of the reduction of the interest rate was raised
by the Spouses Chua in G.R. No. 184472, our ruling thereon affirming the Court of Appeals is
a "bar by prior judgment."
At the time interest accrued from 1 January 1996, the date of default under the Promissory
Note, the then prevailing rate of legal interest was 12% per annum under Central Bank (CB)
Circular No. 416 in cases involving the loan or for bearance of money.29 Thus, the legal
interest accruing from the Promissory Note is 12% per annum from the date of default on 1
50
January 1996. However, the 12% per annumrate of legal interest is only applicable until 30
June 2013, before the advent and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No.
799, Series of 2013 reducing the rate of legal interest to 6% per annum. Pursuant to our
ruling in Nacar v. Gallery Frames,30 BSP Circular No. 799 is prospectively applied from 1 July
2013. In short, the applicable rate of legal interest from 1 January 1996, the date when
Rivera defaulted, to date when this Decision becomes final and executor is divided into two
periods reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996 to 30
June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this Decision becomes final
and executory.
As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the
date when this Decision becomes final and executory, such is likewise divided into two
periods: (1) 12% per annum from 11 June 1999, the date of judicial demand to 30 June 2013;
and (2) 6% per annum from 1 July 2013 to date when this Decision becomes final and
executor.31 We base this imposition of interest on interest due earning legal interest on
Article 2212 of the Civil Code which provides that "interest due shall earn legal interest from
the time it is judicially demanded, although the obligation may be silent on this point."
From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the
Spouses Chua could already be determined with reasonable certainty given the wording of
the Promissory Note.32
We cite our recent ruling in Nacar v. Gallery Frames:33
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or for bearance 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 6%
per annum to be computed from default, i.e., from judicial or extra
judicial demand under and subject to the provisions ofArticle 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 6% per
annum.1âwphi1 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 6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a for bearance of
credit. And, in addition to the above, judgments that have become final
and executory prior to July 1, 2013, shall not be disturbed and shall
continue to be implemented applying the rate of interest fixed therein.
(Emphasis supplied)
On the reinstatement of the award of attorney’s fees based on the stipulation in the
Promissory Note, weagree with the reduction thereof but not the ratiocination of the
appellate court that the attorney’s fees are in the nature of liquidated damages or penalty.
The interest imposed in the Promissory Note already answers as liquidated damages for
Rivera’s default in paying his obligation. We award attorney’s fees, albeit in a reduced
amount, in recognition that the Spouses Chua were compelled to litigate and incurred
expenses to protect their interests.34Thus, the award of P50,000.00 as attorney’s fees is
proper.
For clarity and to obviate confusion, we chart the breakdown of the total amount owed by
Rivera to the Spouses Chua:
The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal
interest at the rate of 6% per annum computed from its finality until full payment thereof,
the interim period being deemed to be a forbearance of credit.
WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals
in CA-G.R. SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to pay
respondents Spouse Salvador and Violeta Chua the following:
(1) the principal amount of P120,000.00;
(2) legal interest of 12% per annumof the principal amount of P120,000.00
reckoned from 1 January 1996 until 30 June 2013;
51
(3) legal interest of 6% per annumof the principal amount of P120,000.00 form 1
July 2013 to date when this Decision becomes final and executory;
(4) 12% per annumapplied to the total of paragraphs 2 and 3 from 11 June 1999,
date of judicial demand, to 30 June 2013, as interest due earning legal interest;
(5) 6% per annumapplied to the total amount of paragraphs 2 and 3 from 1 July
2013 to date when this Decision becomes final and executor, asinterest due
earning legal interest;
(6) Attorney’s fees in the amount of P50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the finality of
this Decision until full payment thereof.
Costs against petitioner Rodrigo Rivera.
SO ORDERED.
RIVERA VS SPOUSES CHUA
GR NO. 184458
JANUARY 14, 2015
FACTS:
The parties were friends and kumpadres for a long time already. Rivera obtained a loan from
the Spouses Chua evidenced by a Promissory Note. The relevant parts of the note are the
following:
 FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C.
CHUA and VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine
Currency (_120,000.00) on December 31, 1995.
 It is agreed and understood that failure on my part to pay the amount of
(_120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. I
agree to pay the sum equivalent to FIVEPERCENT (5%) interest monthly from the
date of default until the entire obligation is fully paid for.
Three years from the date of payment stipulated in the promissory note, Rivera, issued and
delivered to Spouses Chua two (2) checks drawn against his account at Philippine Commercial
International Bank (PCIB) but upon presentment for payment, the two checks were
dishonored forthe reason “account closed.” As of 31 May 1999, the amount due the Spouses
 52

Chua was pegged at P366,000.00 covering the principal of P120,000.00 plus five percent (5%)
interest per month from 1 January 1996 to 31 May 1999.
The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no
avail. Because of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to
file a suit before the MeTC, Branch 30, Manila.
The MeTC ruled against Rivera requiring him to pay the spouses Chua P120,000.00 plus
stipulated interest at the rate of 5% per month from 1 January 1996, and legal interest at the
rate of 12% percent per annum fromn11 June 1999 and was affirmed by the RTC of Manila.
The Court of Appeals further affirmed the decision upon appeal of the two inferior courts but
with modification of lowering the stipulated interest to 12% per annum. Hence, a petition at
the Supreme Court.
ISSUES:
1. Whether or not the Promissory Note executed as evidence of loan falls under
Negiotiable Instruments Law.
2. Whether or not a demand from spouses Chua is needed to make Rivera liable.
3. Whether or not the stipulated interest is unconscionable and should really be
lowered.
interest from the “date of default” until the entire obligation is fully paid for.
Theparties evidently agreed that the maturity of the obligation at a date certain, 31
December 1995, will give rise to the obligation to pay interest.
3. YES, the stipulated interest is unconscionable and should really be lowered. The
Supreme Court held that as observed by Rivera, the stipulated interest of 5% per
month or 60% per annum in addition to legal interests and attorney’s fees is,
indeed, highly iniquitous and unreasonable and stipulated interest rates if illegal
and are unconscionable the Court is allowed to temper interest rates when
necessary. Since the interest rate agreed upon is void, the parties are considered to
have no stipulation regarding the interest rate, thus, the rate of interest should be
12% per annum computed from the date of judicial or extrajudicial demand.
However, the 12% per annum rate of legal interest is only applicable until 30 June
2013, before the advent and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular
No. 799, Series of 2013 reducing the rate of legal interest to 6% per annum.
Pursuant to our ruling in Nacar v. Gallery Frames,30 BSP Circular No. 799 is
prospectively applied from 1 July 2013.

RULINGS:

1. NO, the Promissory Note executed as evidence of loan does not fall under
Negotiable Instruments Law. The instrument is still governed by the Civil Code as to
interpretation of their obligations. The Supreme Court held that the Instrument
was not able to meet the requisites laid down by Section 1 of the Negotiable
Instruments Law as the instrument was made out to specific persons, herein
respondents, the Spouses Chua, and not to order or to bearer, or to the order of
the Spouses Chua as payees.

2. NO, a demand from spouses Chua is not needed to make Rivera liable. Even if
Rivera’s Promissory Note is not a negotiable instrument and therefore outside the
coverage of Section 70 of the NIL which provides that presentment for payment is
not necessary to charge the person liable on the instrument, Rivera is still liable
under the terms of the Promissory Note that he issued. Article 1169 of the Civil
Code explicitly provides that the demand by the creditor shall not be necessary in
order that delay may exist when the obligation or the law expressly so declare. The
clause in the Promissory Note containing the stipulation of interest (letter B in the
above facts) which expressly requires the debtor (Rivera) to pay a 5% monthly