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CA- Material Alteration

256 SCRA 491
DECS issued a check in favor of Abante Marketing containing a specific serial
number, drawn against PNB. The check was deposited by Abante in its account
with Capitol and the latter consequently deposited the same with its account
with PBCOM which later deposited it with petitioner for
clearing. The check was thereafter cleared. However, on a relevant date, petitioner
PNB returned the check on account that there had been a material alteration
on it. Subsequent debits were made but Capitol cannot debit the account of Abante
any longer for the latter had withdrawn all the money already from the account.
This prompted Capitol to seek reclarification from PBCOM and demanded the
recrediting of its account. PBCOM followed suit by doing the same against PNB.
Demands unheeded,
it filed an action against PBCOM and the latter filed a third-party complaint against
An alteration is said to be material if it alters the effect of the instrument. It means
an unauthorized change in the 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 the party.
In other words, a material alteration is one which changes the items which are
required to be stated under Section 1 of the NIL.
In this case, the alleged material alteration was the alteration of the serial number
of the check in issuewhich is not an essential element of a negotiable
instrument under Section 1. PNB alleges that the alteration was material since it
is an accepted concept that a TCAA check by its very
nature is the medium of exchange of governments, instrumentalities and
agencies. As a safety measure, every government office or agency is
assigned checks bearing different serial numbers.
But this contention has to fail. The checks serial number is not the sole indicia of
its origin. The name of the government agency issuing the check is clearly stated
therein. Thus, the checks drawer is sufficiently identified, rendering redundant the
referral to its serial number.
Therefore, there being no material alteration in the check committed, PNB could not
return the check to PBCOM. It should pay the same.

Republic of the Philippines

G.R. No. 129910

September 5, 2006


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:
Check Number

Trade Factors, Inc.

P 97,500.00
Romero D. Palmares
Trade Factors, Inc.
Trade Factors, Inc.
Antonio Lisan
Antonio Lisan
Golden City Trading

Red Arrow Trading
Antonio Lisan
Antonio Lisan
Ace Enterprises, Inc.
Golden City Trading
Wintrade Marketing

ABC Trading, Inc.
Golden Enterprises
The checks were deposited on the following dates for the following accounts:
Check Number
Date Deposited
Account Deposited
CA 0060 02360 3
CA 0060 02360 3
CA 0060 02360 3
CA 0060 02360 3

SA 0061 32331 7
CA 0060 30982 5
CA 0060 02360 3
CA 0060 02360 3
CA 0060 30982 5
SA 0061 32331 7
CA 0060 02360 3
CA 0060 30982 5

CA 0060 02360 3
CA 0060 30982 56
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. 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 petitioners 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 courts Decision reads:
WHEREFORE, judgment is hereby rendered dismissing both the complaint and the
counterclaim. Costs shall, however be assessed against the plaintiff.
Petitioner appealed the trial courts 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 courts
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
The Court of Appeals rejected the trial courts 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
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.
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 Ybaez 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.
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 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 checks 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 checks 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
Likewise, in the present case the alterations of the serial numbers do not constitute
material alterations on the checks.
Incidentally, we agree with the petitioners 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 Respondents Motion for Reconsideration

Respondent filed its motion for reconsideration of the 10 October 1991 Decision on
6 November 1991. Respondents 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
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 respondents 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
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.
Quisumbing, Chairperson, Carpio-Morales, Tinga, Velasco, Jr., J.J., concur.




G.R. No. 150228
PUNO, C.J., Chairperson,
July 30, 2009

This is a petition for review on certiorari under Rule 45 of the Rules of Court from
the Decision[1] 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 Decision[2] 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 Resolution[3]
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-appellees 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 corporations 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-appellees 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 defendantappellant bank for encashment a couple of plaintiff-appellee corporations 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
corporations authorized signatories.
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. PRCIs 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:
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;
The sum of Twenty Thousand (P20,000.00) Pesos by way of attorneys
The sum of Ten Thousand (P10,000.00) Pesos for litigation expenses,
To pay the costs of suit.
Petitioner appealed the aforesaid trial court Decision to the CA which, however,
affirmed said decision in toto in its July 16, 2001 Decision. Petitioners Motion for
Reconsideration of the CA Decision was subsequently denied on September 28,
Petitioner now comes before this Court arguing that:
The Court of Appeals gravely erred in holding that the proximate cause
of respondents loss was petitioners 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.
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.
The Court of Appeals gravely erred in not applying Section 14 of the
Negotiable Instruments Law, despite its clear applicability to this case;
The Court of Appeals gravely erred in not holding that the proximate
cause of respondents 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).
The Court of Appeals gravely erred in affirming the trial courts award of
attorneys fees despite the absence of any applicable ground under Article 2208 of
the Civil Code.

The Court of Appeals gravely erred in not awarding attorneys 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) petitioners 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 126[7] and 185[8] 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-clients genuine signatures. The genuine signatures of the clients
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-clients 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 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.
There is no dispute that the signatures appearing on the subject checks were
genuine signatures of the respondents authorized joint signatories; namely, Antonia
Reyes and Gregorio Reyes who were respondents 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 clients
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 petitioners 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 petitioners 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
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. Respondents witness testified that for checks in amounts greater
than Twenty Thousand Pesos (P20,000.00) it is the companys 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 banks 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 petitioners employees on guard that the
checks were possibly not issued by the respondent in due course of its business.
Petitioners 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

Indeed, taking this with the testimony of petitioners 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 petitioners
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/tellers questionable action, petitioner insists that pursuant
to Sections 14[16] and 16[17] 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 petitioners 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 respondents 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
Petitioners contention would have been correct if the subject checks were correctly
and properly filled out by the thief and presented to the bank in good order. In that
instance, there would be nothing to give notice to the bank of any infirmity in the
title of the holder of the checks and it could validly presume that there was proper
delivery to the holder. The bank could not be faulted if it encashed the checks under
those circumstances. 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 15[20] of the NIL applicable in this case.
However, we do agree with petitioner that respondents officers practice of presigning 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 respondents 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
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, petitioners 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] Petitioners 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 respondents
own negligence to mitigate petitioners liability. Article 2179 of the Civil Code
Art. 2179. When the plaintiffs 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 defendants
lack of due care, the plaintiff may recover damages, but the courts shall mitigate
the damages to be awarded.
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, respondents 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 respondents business. As
testified to by petitioners 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.[26] Indeed, 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

drawers 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 respondents accountant turned out to be another
employee, purportedly a clerk in respondents 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
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 attorneys 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 attorneys fees and litigation expenses under Article
2208 of the NCC[28] demands factual, legal, and equitable justification.
An adverse decision does not ipso facto justify an award of attorneys 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 attorneys fees may not be awarded
where no sufficient showing of bad faith could be reflected in a partys 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 attorneys fees and litigation expenses in favor of respondent are

G.R. No. 176697

September 10, 2014

CESAR V. AREZA and LOLITA B. AREZA, Petitioners,

Before this Court is a Petition for Review on Certiorari under Ruic 45 of the Rules of
Court, which seeks to reverse the Decision1 and Resolution2 dated 29 June 2006
and 12 February 2007 of the Court of Appeals in CAG.R. CV No. 83192. The Court of
Appeals affirmed with modification the 22 April 2004 Resolution3 of the Regional
Trial Court (RTC) of Calamba, Laguna, Branch 92, in Civil Case No. B-5886.
The factual antecedents follow.
Petitioners Cesar V. Areza and LolitaB. Areza maintained two bank deposits with
respondent Express Savings Banks Bian branch: 1) Savings Account No. 004-01000185-5 and 2) Special Savings Account No. 004-02-000092-3.
They were engaged in the business of "buy and sell" of brand new and second-hand
motor vehicles. On 2 May 2000, they received an order from a certain Gerry
Mambuay (Mambuay) for the purchase of a second-hand Mitsubishi Pajero and a
brand-new Honda CRV.
The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs Office
(PVAO) checks payable to different payees and drawn against the Philippine
Veterans Bank (drawee), each valued at Two Hundred Thousand Pesos
(P200,000.00) for a total of One Million Eight Hundred Thousand Pesos
About this occasion, petitioners claimed that Michael Potenciano (Potenciano), the
branch manager of respondent Express Savings Bank (the Bank) was present during
the transaction and immediately offered the services of the Bank for the processing
and eventual crediting of the said checks to petitioners account.4 On the other

hand,Potenciano countered that he was prevailed upon to accept the checks by way
of accommodation of petitioners who were valued clients of the Bank.5
On 3 May 2000, petitioners deposited the said checks in their savings account with
the Bank. The Bank, inturn, deposited the checks with its depositary bank,
Equitable-PCI Bank, in Bian,Laguna. Equitable-PCI Bank presented the checks to
the drawee, the Philippine Veterans Bank, which honored the checks.
On 6 May 2000, Potenciano informedpetitioners that the checks they deposited with
the Bank werehonored. He allegedly warned petitioners that the clearing of the
checks pertained only to the availability of funds and did not mean that the checks
were not infirmed.6 Thus, the entire amount of P1,800,000.00 was credited to
petitioners savings account. Based on this information, petitioners released the two
cars to the buyer.
Sometime in July 2000, the subjectchecks were returned by PVAO to the drawee on
the ground that the amount on the face of the checks was altered from the original
amount of P4,000.00 to P200,000.00. The drawee returned the checks to EquitablePCI Bank by way of Special Clearing Receipts. In August 2000, the Bank was
informed by Equitable-PCI Bank that the drawee dishonored the checks onthe
ground of material alterations. Equitable-PCI Bank initially filed a protest with the
Philippine Clearing House. In February 2001, the latter ruled in favor of the drawee
Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the deposit account of
the Bank in the amount of P1,800,000.00.
The Bank insisted that they informed petitioners of said development in August
2000 by furnishing them copies of the documents given by its depositary bank.7 On
the other hand, petitioners maintained that the Bank never informed them of these
On 9 March 2001, petitioners issued a check in the amount of P500,000.00. Said
check was dishonored by the Bank for the reason "Deposit Under Hold." According
topetitioners, the Bank unilaterally and unlawfully put their account with the Bank
on hold. On 22 March 2001, petitioners counsel sent a demand letter asking the
Bank to honor their check. The Bank refused to heed their request and instead,
closed the Special Savings Account of the petitioners with a balance of
P1,179,659.69 and transferred said amount to their savings account. The Bank then
withdrew the amount of P1,800,000.00representing the returned checks from
petitioners savings account.
Acting on the alleged arbitrary and groundless dishonoring of their checks and the
unlawful and unilateral withdrawal from their savings account, petitioners filed a
Complaint for Sum of Money with Damages against the Bank and Potenciano with
the RTC of Calamba.
On 15 January 2004, the RTC, through Judge Antonio S. Pozas, ruled in favor of
petitioners. The dispositive portion of the Decision reads:

WHEREFORE, the foregoing considered, the Court orders that judgment be rendered
in favor of plaintiffs and against the defendants jointly and severally to pay plaintiffs
as follows, to wit:
1. P1,800,000.00 representing the amount unlawfully withdrawn by the defendants
from the account of plaintiffs;
2. P500,000.00 as moral damages; and
3. P300,000.00 as attorneys fees.8
The trial court reduced the issue to whether or not the rights of petitioners were
violated by respondents when the deposits of the former were debited by
respondents without any court order and without their knowledge and consent.
According to the trial court, it is the depositary bank which should safeguard the
right ofthe depositors over their money. Invoking Article 1977 of the Civil Code, the
trial court stated that the depositary cannot make use of the thing deposited
without the express permission of the depositor. The trial court also held that
respondents should have observed the 24-hour clearing house rule that checks
should be returned within 24-hours after discovery of the forgery but in no event
beyond the period fixed by law for filing a legal action. In this case, petitioners
deposited the checks in May 2000, and respondents notified them of the problems
on the check three months later or in August 2000. In sum, the trial court
characterized said acts of respondents as attended with bad faith when they
debited the amount of P1,800,000.00 from the account of petitioners.
Respondents filed a motion for reconsideration while petitioners filed a motion for
execution from the Decision of the RTC on the ground that respondents motion for
reconsideration did not conform with Section 5, Rule 16 of the Rules of Court; hence,
it was a mere scrap of paper that did not toll the running of the period to appeal.
On 22 April 2004, the RTC, through Pairing Judge Romeo C. De Leon granted the
motion for reconsideration, set aside the Pozas Decision, and dismissed the
complaint. The trial court awarded respondents their counterclaim of moral and
exemplary damages of P100,000.00 each. The trial court first applied the principle
of liberality when it disregarded the alleged absence of a notice of hearing in
respondents motion for reconsideration. On the merits, the trial court considered
the relationship of the Bank and petitioners with respect to their savings account
deposits as a contract of loan with the bank as the debtor and petitioners as
creditors. As such, Article 1977 of the Civil Code prohibiting the depository from
making use of the thing deposited without the express permission of the depositor
is not applicable. Instead, the trial court applied Article 1980 which provides that
fixed, savings and current deposits ofmoney in banks and similar institutions shall
be governed by the provisions governing simple loan. The trial court then opined
thatthe Bank had all the right to set-off against petitioners savings deposits the
value of their nine checks that were returned.
On appeal, the Court of Appeals affirmed the ruling of the trial court but deleted the
award of damages. The appellate court made the following ratiocination:

Any argument as to the notice of hearing has been resolved when the pairing judge
issued the order on February 24, 2004 setting the hearing on March 26, 2004. A
perusal of the notice of hearing shows that request was addressed to the Clerk of
Court and plaintiffs counsel for hearing to be set on March 26, 2004.
The core issues in this case revolve on whether the appellee bank had the right to
debit the amount of P1,800,000.00 from the appellants accounts and whether the
banks act of debiting was done "without the plaintiffs knowledge."
We find that the elements of legal compensation are all present in the case at bar.
Hence, applying the case of the Bank of the Philippine Islands v. Court of Appeals,
the obligors bound principally are at the same time creditors of each other. Appellee
bank stands as a debtor of appellant, a depositor. At the same time, said bank is the
creditor of the appellant with respect to the dishonored treasury warrant checks
which amount were already credited to the account of appellants. When the
appellants had withdrawn the amount of the checks they deposited and later on
said checks were returned, they became indebted to the appellee bank for the
corresponding amount.
It should be noted that [G]erry Mambuay was the appellants walkin buyer. As
sellers, appellants oughtto have exercised due diligence in assessing his credit or
personal background. The 24-hour clearing house rule is not the one that governs in
this case since the nine checks were discovered by the drawee bank to contain
material alterations.
Appellants merely allege that they were not informed of any development on the
checks returned. However, this Court believes that the bank and appellants had
opportunities to communicate about the checks considering that several
transactions occurred from the time of alleged return of the checks to the date of
the debit.
However, this Court agrees withappellants that they should not pay moral and
exemplary damages to each of the appellees for lack of basis. The appellants were
not shown to have acted in bad faith.9
Petitioners filed the present petition for review on certiorariraising both procedural
and substantive issues, to wit:
1. Whether or not the Honorable Court of Appeals committed a reversible error of
law and grave abuse of discretion in upholding the legality and/or propriety of the
Motion for Reconsideration filed in violation of Section 5, Rule 15 ofthe Rules on Civil
2. Whether or not the Honorable Court of Appeals committed a grave abuse of
discretion in declaring that the private respondents "had the right to debit the
amount of P1,800,000.00 from the appellants accounts" and the banks act of
debiting was done with the plaintiffs knowledge.10
Before proceeding to the substantive issue, we first resolve the procedural issue
raised by petitioners.

Sections 5, Rule 15 of the Rules of Court states:

Section 5. Notice of hearing. The notice of hearing shall be addressed to all parties
concerned, and shall specify the time and date of the hearing which must not be
later than ten (10) days after the filing of the motion.
Petitioners claim that the notice of hearing was addressed to the Clerk of Court and
not to the adverse party as the rules require. Petitioners add that the hearing on the
motion for reconsideration was scheduled beyond 10 days from the date of filing.
As held in Maturan v. Araula,11 the rule requiring that the notice be addressed to
the adverse party has beensubstantially complied with when a copy of the motion
for reconsideration was furnished to the counsel of the adverse party, coupled with
the fact that the trial court acted on said notice of hearing and, as prayed for,
issued an order12 setting the hearing of the motion on 26 March 2004.
We would reiterate later that there is substantial compliance with the foregoing Rule
if a copy of the said motion for reconsideration was furnished to the counsel of the
adverse party.13
Now to the substantive issues to which procedural imperfection must, in this case,
give way.
The central issue is whether the Bank had the right to debit P1,800,000.00 from
petitioners accounts.
On 6 May 2000, the Bank informed petitioners that the subject checks had been
honored. Thus, the amountof P1,800,000.00 was accordingly credited to petitioners
accounts, prompting them to release the purchased cars to the buyer.
Unknown to petitioners, the Bank deposited the checks in its depositary bank,
Equitable-PCI Bank. Three months had passed when the Bank was informed by its
depositary bank that the drawee had dishonored the checks on the ground of
material alterations.
The return of the checks created a chain of debiting of accounts, the last loss
eventually falling upon the savings account of petitioners with respondent bank. The
trial court inits reconsidered decision and the appellate court were one in declaring
that petitioners should bear the loss.
We reverse.
The fact that material alteration caused the eventual dishonor of the checks issued
by PVAO is undisputed. In this case, before the alteration was discovered, the
checks were already cleared by the drawee bank, the Philippine Veterans Bank.
Three months had lapsed before the drawee dishonored the checks and returned
them to Equitable-PCI Bank, the respondents depositary bank. And itwas not until
10 months later when petitioners accounts were debited. A question thus arises:

What are the liabilities of the drawee, the intermediary banks, and the petitioners
for the altered checks?
Section 63 of Act No. 2031 orthe Negotiable Instruments Law provides that the
acceptor, by accepting the instrument, engages that he will pay it according to the
tenor of his acceptance. The acceptor is a drawee who accepts the bill. In Philippine
National Bank v. Court of Appeals,14 the payment of the amount of a check implies
not only acceptance but also compliance with the drawees obligation.
In case the negotiable instrument isaltered before acceptance, is the drawee liable
for the original or the altered tenor of acceptance? There are two divergent
intepretations proffered by legal analysts.15 The first view is supported by the
leading case of National City Bank ofChicago v. Bank of the Republic.16 In said case,
a certain Andrew Manning stole a draft and substituted his name for that of the
original payee. He offered it as payment to a jeweler in exchange for certain jewelry.
The jeweler deposited the draft to the defendant bank which collectedthe
equivalent amount from the drawee. Upon learning of the alteration, the drawee
sought to recover from the defendant bank the amount of the draft, as money paid
by mistake. The court denied recovery on the ground that the drawee by accepting
admitted the existence of the payee and his capacity to endorse.17 Still, in Wells
Fargo Bank & Union Trust Co. v. Bank of Italy,18 the court echoed the courts
interpretation in National City Bank of Chicago, in this wise:
We think the construction placed upon the section by the Illinois court is correct and
that it was not the legislative intent that the obligation of the acceptor should be
limited to the tenorof the instrument as drawn by the maker, as was the rule at
common law,but that it should be enforceable in favor of a holder in due course
against the acceptor according to its tenor at the time of its acceptance or
The foregoing opinion and the Illinois decision which it follows give effect to the
literal words of the Negotiable Instruments Law. As stated in the Illinois case: "The
court must take the act as it is written and should give to the words their natural
and common meaning . . . ifthe language of the act conflicts with statutes or
decisions in force before its enactment the courts should not give the act a strained
construction in order to make it harmonize with earlier statutes or decisions." The
wording of the act suggests that a change in the common law was intended. A
careful reading thereof, independent of any common-law influence, requires that
the words "according to the tenor of his acceptance" be construed as referring to
the instrument as it was at the time it came into the hands of the acceptor for
acceptance, for he accepts no other instrument than the one presented to him
the altered form and it alone he engages to pay. This conclusion is in harmony
with the law of England and the continental countries. It makes for the usefulness
and currency of negotiable paper without seriously endangering accepted banking
practices, for 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 specialpaper which will make alterations obvious.
All of the arguments advanced against the conclusion herein announced seem

highly technical in the face of the practical facts that the drawee bank has
authenticated an instrument in a certain form, and that commercial policy favors
the protection of anyone who, in due course, changes his position on the faith of
that authentication.19
The second view is that the acceptor/drawee despite the tenor of his acceptance is
liable only to the extent of the bill prior to alteration.20 This view appears to be in
consonance with Section 124 of the Negotiable Instruments Law which statesthat a
material alteration avoids an instrument except as against an assenting party and
subsequent indorsers, but a holder in due course may enforce payment according to
its original tenor. Thus, when the drawee bank pays a materially altered check, it
violates the terms of the check, as well as its duty tocharge its clients account only
for bona fide disbursements he had made. If the drawee did not pay according to
the original tenor of the instrument, as directed by the drawer, then it has no right
to claim reimbursement from the drawer, much less, the right to deduct the
erroneous payment it made from the drawers account which it was expected to
treat with utmost fidelity.21 The drawee, however, still has recourse to recover its
loss. It may pass the liability back to the collecting bank which is what the drawee
bank exactly did in this case. It debited the account of Equitable-PCI Bank for the
altered amount of the checks.
A depositary bank is the first bank to take an item even though it is also the payor
bank, unless the item is presented for immediate payment over the counter.22 It is
also the bank to which a check is transferred for deposit in an account at such bank,
evenif the check is physically received and indorsed first by another bank.23 A
collecting bank is defined as any bank handling an item for collection except the
bank on which the check is drawn.24
When petitioners deposited the check with the Bank, they were designating the
latter as the collecting bank. This is in consonance with the rule that a negotiable
instrument, such as a check, whether a manager's check or ordinary check, is not
legal tender. As such, after receiving the deposit, under its own rules, the Bank shall
credit the amount in petitioners account or infuse value thereon only after the
drawee bank shall have paid the amount of the check or the check has been cleared
for deposit.25
The Bank and Equitable-PCI Bank are both depositary and collecting banks.
A depositary/collecting bank where a check is deposited, and which endorses the
check upon presentment with the drawee bank, is an endorser. Under Section 66 of
the Negotiable Instruments Law, an endorser warrants "that the instrument is
genuine and in all respects what it purports to be; that he has good title to it; that
all prior parties had capacity to contract; and that the instrument is at the time of
his endorsement valid and subsisting." It has been repeatedly held that in check
transactions, the depositary/collecting bank or last endorser generally suffers the
loss because it has the duty to ascertain the genuineness of all prior endorsements
considering that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to ascertain the

genuineness of the endorsements.26 If any of the warranties made by the

depositary/collecting bank turns out to be false, then the drawee bank may recover
from it up to the amount of the check.27
The law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it for the purpose of determining their genuineness and regularity.
The collecting bank being primarily engaged in banking holds itself out to the public
as the expert and the law holds it to a high standard of conduct.28
As collecting banks, the Bank and Equitable-PCI Bank are both liable for the amount
of the materially altered checks. Since Equitable-PCI Bank is not a party to this case
and the Bank allowed its account with EquitablePCI Bank to be debited, it has the
option toseek recourse against the latter in another forum.
Petitioners faulted the drawee bank for not following the 24-hour clearing period
because it was only in August 2000 that the drawee bank notified Equitable-PCI that
there were material alterations in the checks.
We do not subscribe to the position taken by petitioners that the drawee bank was
at fault because it did not follow the 24-hour clearing period which provides that
when a drawee bank fails to return a forged or altered check to the collecting bank
within the 24-hour clearing period, the collecting bank is absolved from liability.
Section 21 of the Philippine Clearing House Rules and Regulations provides: Sec. 21.
Special Return Items Beyond The Reglementary Clearing Period.- Items which have
been the subject of material alteration or items bearing forged endorsement when
such endorsement is necessary for negotiation shall be returned by direct
presentation or demand to the Presenting Bank and not through the regular clearing
house facilities within the period prescribed by law for the filing of a legal action by
the returning bank/branch, institution or entity sending the same.
Antonio Viray, in his book Handbook on Bank Deposits, elucidated:
It is clear that the so-called "24-hour" rule has been modified. In the case of
Hongkong & Shanghai vs. Peoples Bank reiterated in Metropolitan Bank and Trust
Co. vs. FNCB, the Supreme Court strictly enforced the 24-hour rule under which the
drawee bank forever loses the right to claim against presenting/collecting bank if
the check is not returned at the next clearing day orwithin 24 hours. Apparently, the
commercial banks felt strict enforcement of the 24-hour rule is too harsh and
therefore made representations and obtained modification of the rule, which
modification is now incorporated in the Manual of Regulations. Since the same
commercial banks controlled the Philippine Clearing House Corporation,
incorporating the amended rule in the PCHC Rules naturally followed.
As the rule now stands, the 24-hour rule is still in force, that is, any check which
should be refused by the drawee bank in accordance with long standing and
accepted banking practices shall be returned through the PCHC/local clearing office,
as the case may be, not later than the next regular clearing (24-hour). The

modification, however, is that items which have been the subject of material
alteration or bearing forged endorsement may be returned even beyond 24 hours so
long that the same is returned within the prescriptive period fixed by law. The
consensus among lawyers is that the prescriptiveperiod is ten (10)years because a
check or the endorsement thereon is a written contract. Moreover, the item need
not be returned through the clearing house but by direct presentation to the
presenting bank.29
In short, the 24-hour clearing ruledoes not apply to altered checks.
The 2008 case of Far East Bank & Trust Company v. Gold Palace Jewellery Co.30 is in
point. A foreigner purchased several pieces of jewelry from Gold Palace Jewellery
using a United Overseas Bank (Malaysia) issued draft addressed to the Land Bank of
the Philippines (LBP). Gold Palace Jewellery deposited the draft in the companys
account with Far East Bank. Far East Bank presented the draft for clearing to LBP.
The latter cleared the same and Gold Palace Jewellerys account was credited with
the amount stated in the draft. Consequently, Gold Palace Jewellery released the
pieces of jewelries to the foreigner. Three weeks later, LBP informed Far East Bank
that the amount in the foreign draft had been materially altered from P300,000.00
to P380,000.00. LBP returnedthe check to Far East Bank. Far East Bank refunded
LBP the P380,000.00 paid by LBP. Far East Bank initially debited P168,053.36 from
Gold Palace Jewellerys account and demanded the payment of the difference
between the amount in the altered draft and the amount debited from Gold Palace
However, for the reasons already discussed above, our pronouncement in the Far
East Bank and Trust Companycase that "the drawee is liable on its payment of the
check according to the tenor of the check at the time of payment, which was the
raised amount"31 is inapplicable to the factual milieu obtaining herein.
We only adopt said decision in so far as it adjudged liability on the part of the
collecting bank, thus:
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.
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,
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.
As the transaction in this case had been closed and the principalagent 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. x x x 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. 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, 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.32
Applying the foregoing ratiocination, the Bank cannot debit the savings account of
petitioners. A depositary/collecting bank may resist or defend against a claim for
breach of warranty if the drawer, the payee, or either the drawee bank or
depositary bank was negligent and such negligence substantially contributed tothe
loss from alteration. In the instant case, no negligence can be attributed to
petitioners. We lend credence to their claim that at the time of the sales
transaction, the Banks branch manager was present and even offered the Banks
services for the processing and eventual crediting of the checks. True to the branch
managers words, the checks were cleared three days later when deposited by
petitioners and the entire amount ofthe checks was credited to their savings
Petitioners insist that the Bank cannotbe considered a creditor of the petitioners
because it should have made a claim of the amount of P1,800,000.00 from
Equitable-PCI Bank, its own depositary bank and the collecting bank in this case and
not from them.
The Bank cannot set-off the amount it paid to Equitable-PCI Bank with petitioners
savings account. Under Art. 1278 of the New Civil Code, compensation shall take
place when two persons, in their own right, are creditors and debtors of each other.
And the requisites for legal compensation are:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.
It is well-settled that the relationship of the depositors and the Bank or similar
institution is that of creditor-debtor. Article 1980 of the New Civil Code provides that
fixed, savings and current deposits of money in banks and similar institutions shall
be governed by the provisions concerning simple loans. The bank is the debtorand
the depositor is the creditor. The depositor lends the bank money and the bank
agrees to pay the depositor on demand. The savings deposit agreement between
the bank and the depositor is the contract that determines the rights and
obligations of the parties.33
But as previously discussed, petitioners are not liable for the deposit of the altered
checks. The Bank, asthe depositary and collecting bank ultimately bears the loss.
Thus, there being no indebtedness to the Bank on the part of petitioners, legal
compensation cannot take place. DAMAGES
The Bank incurred a delay in informing petitioners of the checks dishonor. The Bank
was informed of the dishonor by Equitable-PCI Bank as early as August 2000 but it
was only on 7 March 2001 when the Bank informed petitioners that it will debit from
their account the altered amount. This delay is tantamount to negligence on the
part of the collecting bank which would entitle petitioners to an award for damages
under Article 1170 of the New Civil Code which reads:
Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof,
are liable for damages.
The damages in the form of actual or compensatory damages represent the amount
debited by the Bank from petitioners account.
We delete the award of moral damages. Contrary to the lower courts finding, there
was no showing that the Bank acted fraudulently or in bad faith. It may have been
remiss in its duty to diligently protect the account of its depositors but its honest
but mistaken belief that petitioners account should be debited is not tantamount to
bad faith. We also delete the award of attorneys fees for it is not a sound public
policy to place a premium on the right to litigate. No damages can becharged to
those who exercise such precious right in good faith, even if done erroneously.34
To recap, the drawee bank, Philippine Veterans Bank in this case, is only liable to the
extent of the check prior to alteration.1wphi1 Since Philippine Veterans Bank paid
the altered amount of the check, it may pass the liability back as it did, to EquitablePCI Bank,the collecting bank. The collecting banks, Equitable-PCI Bank and the
Bank, are ultimately liable for the amount of the materially altered check. It cannot
further pass the liability back to the petitioners absent any showing in the

negligence on the part of the petitioners which substantially contributed to the loss
from alteration.
Based on the foregoing, we affirm the Pozasdecision only insofar as it ordered
respondents to jointly and severally pay petitioners P1,800,000.00, representing the
amount withdrawn from the latters account. We do not conform with said ruling
regarding the finding of bad faith on the part of respondents, as well as its failure
toobserve the 24-hour clearing rule.
WHEREFORE, the petition is GRANTED. The Decision and Resolution dated 29 June
2006 and 12 February 2007 respectively of the Court of Appeals in CA-G.R. CV No.
83192 are REVERSED and SET ASIDE. The 15 January 2004 Decision of the Regional
Trial Court of Calamba City, Branch 92 in Civil Case No. B-5886 rendered by Judge
Antonio S. Pozas is REINSTATEDonly insofar as it ordered respondents to jointly and
severally pay petitioners P1,800,000.00 representing the amount withdrawn from
the latters account. The award of moral damages and attorneys fees are DELETED.