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Republic of the Philippines contained in the contract would give the

SUPREME COURT vendor the right to rescind the contract and in

Manila that case all payments already made would be
EN BANC lost to the vendor by the purchasers without
G.R. No. L-333 April 21, 1950 any right to reimbursement.
JOSE G. CUAYCONG, ET AL., plaintiffs- Up to December, 1941, the purchasers, or
appellees, plaintiffs and appellees herein, have been up-
vs. to-date in their payments of the purchase
RAMON S. RIUS, defendant-appellant. price, but on February 18, 1942, they failed to
Carlos B. Hilado for appellant. pay the amount of P10,500 representing
Carlos M. Sison for appellees. interests, and on February 18, 1943, they
Delgado, Dizon, Flores and Rodrigo for again failed to pay the balance of P160,500.
intervenors-cross-claimants. However, the vendor, or the defendant and
MORAN, C.J.: appellant herein, chose not to rescind the
This is an action to compel acceptance of contract, waiving thus his right to appropriate
payment of a mortgage debt. The material for himself all the payments already made by
facts are as follows: plaintiffs and appellees, his reason being that
On February 18, 1937, Ramon S. Rius, it was not fair to take advantage of the
defendant-appellant, sold his hacienda financial difficulties which war might have
"Tibidabo" located at the municipality of brought upon the purchasers.
Manapla, Occidental Negros, to Jose G. Upon the other hand, the purchasers, on
Cuaycong and Vicente F. Gustilo, plaintiffs and January 24, 1944, made an offer to the
appellees, for the sum of P350,000, of which vendor to pay in Japanese military notes the
P30,000 was paid upon the execution of the whole balance of the mortgage debt, offer
deed of sale and P70,000 on March 15, 1937, which was reiterated on February 17, 1944,
without interest. The balance in the amount of with the warning that if after three days the
P250,000 was to be paid with interest of 7 per offer was not accepted, plaintiffs and appellees
cent per annum as follows: would bring action and deposit the amount in
P50,000 plus interest for one year on court. The value of Japanese military notes
P250,000, a total of P67,000, on February 16, was then already very low and had the
1938; installments been paid when they were due
P25,000 plus interest for one year on the creditor could have invested the money
P200,000, a total of P39,000 on February 18, profitably in buying real property. Thus,
1939; defendant and appellant refused to accept
P25,000 plus interest for one year on payment under the circumstances till the war
P175,000, a total of P37,250 on February 18, was over, and on February 22, 1944, an action
1940; was filed to compel him to accept payment
P10,500 representing interest for one year on and to issue a deed of cancellation of the
P150,000 on February 18, 1942; mortgage debt. A manager's check in the
And the balance of P150,000 plus one year amount of P181,000 issued by the Philippine
interest, a total of P160,500 on February 18, Bank of Commerce in favor of the clerk of
1943. court was delivered to the latter.
As security for this unpaid balance the Defendant filed his answer alleging among
purchasers mortgaged the same property to several defenses that the consignation in court
the vendor with the stipulation that their was not made in accordance with law; that
failure to comply with any for the conditions after February 18, 1944, plaintiffs and
regarding payment or any other matter appellees made a proposition to defendant and

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appellant to the effect that they would sell the It is not necessary, in our opinion, to examine
property to Mrs. Caridad Jison subject to the all the questions raised by appellant in his
condition that the balance of the purchase brief, in view of our conclusion on the question
price still owing defendant and appellant be of the validity of the conclusion on the
paid after termination of the war if defendant question of the validity of the consignation
and appellant would agree to receive made in court.
immediately payment of the interests; that Under article 1127 of the Civil Code,
this proposition was made on a Saturday and "Consignation should not be efficacious unless
defendant and appellant promised to give his made strictly in accordance with the provision
answer on the succeeding Monday; that when governing payment". And article 1170
on that day defendant and appellant was provides that, "payment of debts of money
decided to accept the proposition, plaintiffs shall be made in the specie stipulated and,
and appellees told him that Caridad Jison had should it not be possible to deliver such
withdrawn the o ffer. It turned out, however, specie, in silver or gold coin which is legal
that such withdrawal was not true, for on tender in the Philippine." Under this provision,
February 17, 1944, a promise of sale was a consignation by check is not binding upon
made in favor of Caridad Jison with the the creditor (Belisario vs. Natividad, 60 Phil.,
stimulation that P150,000 of the purchase 156), unless accepted by him (Gutierrez vs.
price would be paid by her after the war. Carpio, 53 Phil., 334,336), and in the instant
On March 25, 1944, plaintiffs-appellees filed a case, there has been no such acceptance. In
motion for summary judgment supported by some case it was held by this Court that where
an affidavit showing the deposit of P181,000 a person entitled to make a repurchase of
in court by means of manager's check. some property, deposits with the court, by
Defendant-appellant opposed the motion way of consignation, a check for the
which remained in court pending for about five repurchase price, the vendee is not under a
months. On August 16, 1944, plaintiffs- duty to accept the check and may refuse the
appellees withdrew their motion for summary consignation which cannot produce the effect
judgment. But on August 28, 1944, Caridad of payment. (Villanueva vs. Santos, Off. Gaz.,
Jison and her husband filed a motion for leave March 8, 1941, p. 681)
to intervene, alleging the promise of sale True that the consignation in the instant case
made to them, which motion was granted was made by means of a manager's check.
despite the opposition of both the plaintiffs But a manager' check is, like an ordinary
and the defendant. And on November 16, check, not legal-tender in the Philippines.
1944, intervenors filed a motion for summary Even treasury certificates are not legal-tender
judgment based on the same grounds on except for the payment of taxes and public
which plaintiffs' original motion for summary debts, under section 1626 of Act No. 2711 as
judgment was based. In said motion, it was amended by Act No. 3058. In the United
asked that a judgment be rendered ordering States, "the general rule is that an offer of a
defendant and appellant to accept payment bank check for the amount due is not a good
with the amount deposited in court by tender and this is true even though the check
plaintiffs, to release the mortgage in his favor is certified" (62 C. J., p. 668), except "where
over the hacienda "Tibidabo" and to pay the no objection is made on this ground" (62 C. J.,
expenses of consignation and costs. p. 668). Again it is said that "on the same
Notwithstanding defendant's opposition, the principle a check is not good legal-tender as
motion was granted and judgment was against an objection duly made, whether the
rendered in accordance with the prayer check is certified or not ..." (40 Am. Jur., p.
contained in that motion. Hence, this appeal. 764.)

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And furthermore, according to the second on presumptions."(31 Corpus Juris Secundum,
paragraph of article 1170 of the Civil Code, p. 727.)
"the delivery of promissory notes payable to To the same effect is Rule 704 of the Model
order, or bills of exchange or other commercial Code of Evidence, drafted by the American
papers, shall produce the effects of Law Institute.
payment only when collected, or when by the Upon the other hand, since the deposit of the
fault of the creditor they have lost their manager's checks is invalid because of the
value." (Emphasis ours.) "Commercial papers" objection made thereto, and in truth, under
include not only ordinary checks but also the law, collection of the check deposited is
manager's checks. And here there is no proof the only fact constituting valid payment, such
that the manager's check deposited in court fact must be made to appear on the face of
has ever been collected or has lost its value by the record and not merely presumed.
the fault of the creditor. There being no valid consignation in the
It is here maintained that since it was the duty instant case, the previous tenders of payment
of the clerk of court to deposit the manager's made by plaintiffs do not exempt them from
check with the National Treasurer (sec. 130, paying their obligation.
Rev. Adm. Code), it is presumed that he For all the foregoing, the judgment appealed
complied with such duty (Rule 123, sec. 69, from is reversed and plaintiffs-appellees are
Rules of Court), and since it is the duty of a given thirty (30) days, from the date
holder of a check to present it for payment judgement is entered in this Court, within
within a reasonable time after its issue (Sec. which to pay to defendant-appellant the sum
186, Negotiable Instruments Law) it is also of P181,000 plus interest at the rate of 7 per
presumed that the National Treasurer has cent per annum from February 18, 1945, and
presented the manager's check for collector defendant-appellant is given fifteen (15) days,
and has collected it. This argument is from date of payment, within which to execute
defective in that a presumption cannot be a deed of cancellation of the mortgage debt.
made to rest upon another presumption, but Plaintiff's failure to make payment within the
on facts proven in the case. period above given, will give defendant right
"Presumption are not admissible, except when to rescind their contract of sale, and in that
the fact from which they are to be deduced is case the payments already made by them will
fully proven." (Art. 1249, Civil Code.) be lost to vendor without any right to
"The decision are generally agreed that a reimbursement. Plaintiffs will pay the costs of
presumption must rest upon facts proved by both instances.
direct evidence and can not be based upon, or
inferred from, another presumption." (20 Am.
Jur., p. 166)
"There seems to be no sufficient reason for
questioning the rule that a presumption
cannot be based upon a presumption,
provided the term `presumption' is used in
the sense of a deduction which the law directs
to be made from particular facts." (20 Am.
Jur., p. 169.)
"A presumption of fact must not be drawn
from premises which are uncertain, but must
be founded on facts established by direct
evidence. Presumptions may not be founded

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Republic of the Philippines manager of respondent Express Savings Bank
SUPREME COURT (the Bank) was present during the transaction
Manila and immediately offered the services of the
FIRST DIVISION Bank for the processing and eventual crediting
G.R. No. 176697 September 10, of the said checks to petitioners account.4 On
2014 the other hand,Potenciano countered that he
CESAR V. AREZA and LOLITA B. was prevailed upon to accept the checks by
AREZA, Petitioners, way of accommodation of petitioners who
vs. were valued clients of the Bank.5
EXPRESS SAVINGS BANK, INC. and On 3 May 2000, petitioners deposited the said
MICHAEL POTENCIANO, Respondnets. checks in their savings account with the Bank.
DECISION The Bank, inturn, deposited the checks with its
PEREZ, J.: depositary bank, Equitable-PCI Bank, in
Before this Court is a Petition for Review on Bian,Laguna. Equitable-PCI Bank presented
Certiorari under Ruic 45 of the Rules of Court, the checks to the drawee, the Philippine
which seeks to reverse the Decision1 and Veterans Bank, which honored the checks.
Resolution2 dated 29 June 2006 and 12 On 6 May 2000, Potenciano
February 2007 of the Court of Appeals in informedpetitioners that the checks they
CAG.R. CV No. 83192. The Court of Appeals deposited with the Bank werehonored. He
affirmed with modification the 22 April 2004 allegedly warned petitioners that the clearing
Resolution3 of the Regional Trial Court (RTC) of the checks pertained only to the availability
of Calamba, Laguna, Branch 92, in Civil Case of funds and did not mean that the checks
No. B-5886. were not infirmed.6 Thus, the entire amount of
The factual antecedents follow. 1,800,000.00 was credited to petitioners
Petitioners Cesar V. Areza and LolitaB. Areza savings account. Based on this information,
maintained two bank deposits with respondent petitioners released the two cars to the buyer.
Express Savings Banks Bian branch: 1) Sometime in July 2000, the subjectchecks
Savings Account No. 004-01-000185-5 and 2) were returned by PVAO to the drawee on the
Special Savings Account No. 004-02-000092- ground that the amount on the face of the
3. checks was altered from the original amount
They were engaged in the business of "buy of 4,000.00 to 200,000.00. The drawee
and sell" of brand new and second-hand motor returned the checks to Equitable-PCI Bank by
vehicles. On 2 May 2000, they received an way of Special Clearing Receipts. In August
order from a certain Gerry Mambuay 2000, the Bank was informed by Equitable-PCI
(Mambuay) for the purchase of a second-hand Bank that the drawee dishonored the checks
Mitsubishi Pajero and a brand-new Honda onthe ground of material alterations.
CRV. Equitable-PCI Bank initially filed a protest with
The buyer, Mambuay, paid petitioners with the Philippine Clearing House. In February
nine (9) Philippine Veterans Affairs Office 2001, the latter ruled in favor of the drawee
(PVAO) checks payable to different payees and Philippine Veterans Bank. Equitable-PCI Bank,
drawn against the Philippine Veterans Bank in turn, debited the deposit account of the
(drawee), each valued at Two Hundred Bank in the amount of 1,800,000.00.
Thousand Pesos (200,000.00) for a total of The Bank insisted that they informed
One Million Eight Hundred Thousand Pesos petitioners of said development in August
(1,800,000.00). 2000 by furnishing them copies of the
About this occasion, petitioners claimed that documents given by its depositary bank.7 On
Michael Potenciano (Potenciano), the branch the other hand, petitioners maintained that

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the Bank never informed them of these trial court stated that the depositary cannot
developments. make use of the thing deposited without the
On 9 March 2001, petitioners issued a check in express permission of the depositor. The trial
the amount of 500,000.00. Said check was court also held that respondents should have
dishonored by the Bank for the reason observed the 24-hour clearing house rule that
"Deposit Under Hold." According topetitioners, checks should be returned within 24-hours
the Bank unilaterally and unlawfully put their after discovery of the forgery but in no event
account with the Bank on hold. On 22 March beyond the period fixed by law for filing a
2001, petitioners counsel sent a demand legal action. In this case, petitioners deposited
letter asking the Bank to honor their check. the checks in May 2000, and respondents
The Bank refused to heed their request and notified them of the problems on the check
instead, closed the Special Savings Account of three months later or in August 2000. In sum,
the petitioners with a balance of the trial court characterized said acts of
1,179,659.69 and transferred said amount to respondents as attended with bad faith when
their savings account. The Bank then withdrew they debited the amount of 1,800,000.00
the amount of 1,800,000.00representing the from the account of petitioners.
returned checks from petitioners savings Respondents filed a motion for reconsideration
account. while petitioners filed a motion for execution
Acting on the alleged arbitrary and groundless from the Decision of the RTC on the ground
dishonoring of their checks and the unlawful that respondents motion for reconsideration
and unilateral withdrawal from their savings did not conform with Section 5, Rule 16 of the
account, petitioners filed a Complaint for Sum Rules of Court; hence, it was a mere scrap of
of Money with Damages against the Bank and paper that did not toll the running of the
Potenciano with the RTC of Calamba. period to appeal.
On 15 January 2004, the RTC, through Judge On 22 April 2004, the RTC, through Pairing
Antonio S. Pozas, ruled in favor of petitioners. Judge Romeo C. De Leon granted the motion
The dispositive portion of the Decision reads: for reconsideration, set aside the Pozas
WHEREFORE, the foregoing considered, the Decision, and dismissed the complaint. The
Court orders that judgment be rendered in trial court awarded respondents their
favor of plaintiffs and against the defendants counterclaim of moral and exemplary damages
jointly and severally to pay plaintiffs as of 100,000.00 each. The trial court first
follows, to wit: applied the principle of liberality when it
1. 1,800,000.00 representing the disregarded the alleged absence of a notice of
amount unlawfully withdrawn by the hearing in respondents motion for
defendants from the account of reconsideration. On the merits, the trial court
plaintiffs; considered the relationship of the Bank and
2. 500,000.00 as moral damages; and petitioners with respect to their savings
3. 300,000.00 as attorneys fees.8 account deposits as a contract of loan with the
The trial court reduced the issue to whether or bank as the debtor and petitioners as
not the rights of petitioners were violated by creditors. As such, Article 1977 of the Civil
respondents when the deposits of the former Code prohibiting the depository from making
were debited by respondents without any use of the thing deposited without the express
court order and without their knowledge and permission of the depositor is not applicable.
consent. According to the trial court, it is the Instead, the trial court applied Article 1980
depositary bank which should safeguard the which provides that fixed, savings and current
right ofthe depositors over their money. deposits ofmoney in banks and similar
Invoking Article 1977 of the Civil Code, the institutions shall be governed by the

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

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As held in Maturan v. Araula,11 the rule lapsed before the drawee dishonored the
requiring that the notice be addressed to the checks and returned them to Equitable-PCI
adverse party has beensubstantially complied Bank, the respondents depositary bank. And
with when a copy of the motion for itwas not until 10 months later when
reconsideration was furnished to the counsel petitioners accounts were debited. A question
of the adverse party, coupled with the fact thus arises: What are the liabilities of the
that the trial court acted on said notice of drawee, the intermediary banks, and the
hearing and, as prayed for, issued an petitioners for the altered checks?
order12 setting the hearing of the motion on 26 LIABILITY OF THE DRAWEE
March 2004. Section 63 of Act No. 2031 orthe Negotiable
We would reiterate later that there is Instruments Law provides that the acceptor,
substantial compliance with the foregoing Rule by accepting the instrument, engages that he
if a copy of the said motion for reconsideration will pay it according to the tenor of his
was furnished to the counsel of the adverse acceptance. The acceptor is a drawee who
party.13 accepts the bill. In Philippine National Bank v.
Now to the substantive issues to which Court of Appeals,14 the payment of the amount
procedural imperfection must, in this case, of a check implies not only acceptance but
give way. also compliance with the drawees obligation.
The central issue is whether the Bank had the In case the negotiable instrument isaltered
right to debit 1,800,000.00 from petitioners before acceptance, is the drawee liable for the
accounts. original or the altered tenor of acceptance?
On 6 May 2000, the Bank informed petitioners There are two divergent intepretations
that the subject checks had been honored. proffered by legal analysts.15 The first view is
Thus, the amountof 1,800,000.00 was supported by the leading case of National City
accordingly credited to petitioners accounts, Bank ofChicago v. Bank of the Republic.16 In
prompting them to release the purchased cars said case, a certain Andrew Manning stole a
to the buyer. draft and substituted his name for that of the
Unknown to petitioners, the Bank deposited original payee. He offered it as payment to a
the checks in its depositary bank, Equitable- jeweler in exchange for certain jewelry. The
PCI Bank. Three months had passed when the jeweler deposited the draft to the defendant
Bank was informed by its depositary bank that bank which collectedthe equivalent amount
the drawee had dishonored the checks on the from the drawee. Upon learning of the
ground of material alterations. alteration, the drawee sought to recover from
The return of the checks created a chain of the defendant bank the amount of the draft,
debiting of accounts, the last loss eventually as money paid by mistake. The court denied
falling upon the savings account of petitioners recovery on the ground that the drawee by
with respondent bank. The trial court inits accepting admitted the existence of the payee
reconsidered decision and the appellate court and his capacity to endorse.17 Still, in Wells
were one in declaring that petitioners should Fargo Bank & Union Trust Co. v. Bank of
bear the loss. Italy,18 the court echoed the courts
We reverse. interpretation in National City Bank of
The fact that material alteration caused the Chicago, in this wise:
eventual dishonor of the checks issued by We think the construction placed upon the
PVAO is undisputed. In this case, before the section by the Illinois court is correct and that
alteration was discovered, the checks were it was not the legislative intent that the
already cleared by the drawee bank, the obligation of the acceptor should be limited to
Philippine Veterans Bank. Three months had the tenorof the instrument as drawn by the

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maker, as was the rule at common law,but only to the extent of the bill prior to
that it should be enforceable in favor of a alteration.20 This view appears to be in
holder in due course against the acceptor consonance with Section 124 of the Negotiable
according to its tenor at the time of its Instruments Law which statesthat a material
acceptance or certification. alteration avoids an instrument except as
The foregoing opinion and the Illinois decision against an assenting party and subsequent
which it follows give effect to the literal words indorsers, but a holder in due course may
of the Negotiable Instruments Law. As stated enforce payment according to its original
in the Illinois case: "The court must take the tenor. Thus, when the drawee bank pays a
act as it is written and should give to the materially altered check, it violates the terms
words their natural and common meaning . . . of the check, as well as its duty tocharge its
ifthe language of the act conflicts with statutes clients account only for bona fide
or decisions in force before its enactment the disbursements he had made. If the drawee did
courts should not give the act a strained not pay according to the original tenor of the
construction in order to make it harmonize instrument, as directed by the drawer, then it
with earlier statutes or decisions." The has no right to claim reimbursement from the
wording of the act suggests that a change in drawer, much less, the right to deduct the
the common law was intended. A careful erroneous payment it made from the drawers
reading thereof, independent of any common- account which it was expected to treat with
law influence, requires that the words utmost fidelity.21 The drawee, however, still
"according to the tenor of his acceptance" be has recourse to recover its loss. It may pass
construed as referring to the instrument as it the liability back to the collecting bank which
was at the time it came into the hands of the is what the drawee bank exactly did in this
acceptor for acceptance, for he accepts no case. It debited the account of Equitable-PCI
other instrument than the one presented to Bank for the altered amount of the checks.
him the altered form and it alone he LIABILITY OF DEPOSITARY BANK AND
engages to pay. This conclusion is in harmony COLLECTING BANK
with the law of England and the continental A depositary bank is the first bank to take an
countries. It makes for the usefulness and item even though it is also the payor bank,
currency of negotiable paper without seriously unless the item is presented for immediate
endangering accepted banking practices, for payment over the counter.22 It is also the
banking institutions can readily protect bank to which a check is transferred for
themselves against liability on altered deposit in an account at such bank, evenif the
instruments either by qualifying their check is physically received and indorsed first
acceptance or certification or by relying on by another bank.23 A collecting bank is defined
forgery insurance and specialpaper which will as any bank handling an item for collection
make alterations obvious. All of the arguments except the bank on which the check is
advanced against the conclusion herein drawn.24
announced seem highly technical in the face of When petitioners deposited the check with the
the practical facts that the drawee bank has Bank, they were designating the latter as the
authenticated an instrument in a certain form, collecting bank. This is in consonance with the
and that commercial policy favors the rule that a negotiable instrument, such as a
protection of anyone who, in due course, check, whether a manager's check or ordinary
changes his position on the faith of that check, is not legal tender. As such, after
authentication.19 receiving the deposit, under its own rules, the
The second view is that the acceptor/drawee Bank shall credit the amount in petitioners
despite the tenor of his acceptance is liable account or infuse value thereon only after the

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drawee bank shall have paid the amount of bank notified Equitable-PCI that there were
the check or the check has been cleared for material alterations in the checks.
deposit.25 We do not subscribe to the position taken by
The Bank and Equitable-PCI Bank are both petitioners that the drawee bank was at fault
depositary and collecting banks. because it did not follow the 24-hour clearing
A depositary/collecting bank where a check is period which provides that when a drawee
deposited, and which endorses the check upon bank fails to return a forged or altered check
presentment with the drawee bank, is an to the collecting bank within the 24-hour
endorser. Under Section 66 of the Negotiable clearing period, the collecting bank is absolved
Instruments Law, an endorser warrants "that from liability.
the instrument is genuine and in all respects Section 21 of the Philippine Clearing House
what it purports to be; that he has good title Rules and Regulations provides: Sec. 21.
to it; that all prior parties had capacity to Special Return Items Beyond The
contract; and that the instrument is at the Reglementary Clearing Period.- Items which
time of his endorsement valid and subsisting." have been the subject of material alteration or
It has been repeatedly held that in check items bearing forged endorsement when such
transactions, the depositary/collecting bank or endorsement is necessary for negotiation shall
last endorser generally suffers the loss be returned by direct presentation or demand
because it has the duty to ascertain the to the Presenting Bank and not through the
genuineness of all prior endorsements regular clearing house facilities within the
considering that the act of presenting the period prescribed by law for the filing of a
check for payment to the drawee is an legal action by the returning bank/branch,
assertion that the party making the institution or entity sending the same.
presentment has done its duty to ascertain the Antonio Viray, in his book Handbook on Bank
genuineness of the endorsements.26 If any of Deposits, elucidated:
the warranties made by the It is clear that the so-called "24-hour" rule has
depositary/collecting bank turns out to be been modified. In the case of Hongkong &
false, then the drawee bank may recover from Shanghai vs. Peoples Bank reiterated in
it up to the amount of the check.27 Metropolitan Bank and Trust Co. vs. FNCB, the
The law imposes a duty of diligence on the Supreme Court strictly enforced the 24-hour
collecting bank to scrutinize checks deposited rule under which the drawee bank forever
with it for the purpose of determining their loses the right to claim against
genuineness and regularity. The collecting presenting/collecting bank if the check is not
bank being primarily engaged in banking holds returned at the next clearing day orwithin 24
itself out to the public as the expert and the hours. Apparently, the commercial banks felt
law holds it to a high standard of conduct.28 strict enforcement of the 24-hour rule is too
As collecting banks, the Bank and Equitable- harsh and therefore made representations and
PCI Bank are both liable for the amount of the obtained modification of the rule, which
materially altered checks. Since Equitable-PCI modification is now incorporated in the Manual
Bank is not a party to this case and the Bank of Regulations. Since the same commercial
allowed its account with EquitablePCI Bank to banks controlled the Philippine Clearing House
be debited, it has the option toseek recourse Corporation, incorporating the amended rule
against the latter in another forum. in the PCHC Rules naturally followed.
24-HOUR CLEARING RULE As the rule now stands, the 24-hour rule is
Petitioners faulted the drawee bank for not still in force, that is, any check which should
following the 24-hour clearing period because be refused by the drawee bank in accordance
it was only in August 2000 that the drawee with long standing and accepted banking

Page 9 of 20
practices shall be returned through the according to the tenor of the check at the time
PCHC/local clearing office, as the case may be, of payment, which was the raised amount"31 is
not later than the next regular clearing (24- inapplicable to the factual milieu obtaining
hour). The modification, however, is that herein.
items which have been the subject of material We only adopt said decision in so far as it
alteration or bearing forged endorsement may adjudged liability on the part of the collecting
be returned even beyond 24 hours so long bank, thus:
that the same is returned within the Thus, considering that, in this case, Gold
prescriptive period fixed by law. The Palace is protected by Section 62 of the NIL,
consensus among lawyers is that the its collecting agent, Far East, should not have
prescriptiveperiod is ten (10)years because a debited the money paid by the drawee bank
check or the endorsement thereon is a written from respondent company's account. When
contract. Moreover, the item need not be Gold Palace deposited the check with Far East,
returned through the clearing house but by the latter, under the terms of the deposit and
direct presentation to the presenting bank.29 the provisions of the NIL, became an agent of
In short, the 24-hour clearing ruledoes not the former for the collection of the amount in
apply to altered checks. the draft. The subsequent payment by the
LIABILITY OF PETITIONERS drawee bank and the collection of the amount
The 2008 case of Far East Bank & Trust by the collecting bank closed the transaction
Company v. Gold Palace Jewellery Co.30 is in insofar as the drawee and the holder of the
point. A foreigner purchased several pieces of check or his agent are concerned, converted
jewelry from Gold Palace Jewellery using a the check into a mere voucher, and, as
United Overseas Bank (Malaysia) issued draft already discussed, foreclosed the recovery by
addressed to the Land Bank of the Philippines the drawee of the amount paid. This closure of
(LBP). Gold Palace Jewellery deposited the the transaction is a matter of course;
draft in the companys account with Far East otherwise, uncertainty in commercial
Bank. Far East Bank presented the draft for transactions, delay and annoyance will arise if
clearing to LBP. The latter cleared the same a bank at some future time will call on the
and Gold Palace Jewellerys account was payee for the return of the money paid to him
credited with the amount stated in the draft. on the check.
Consequently, Gold Palace Jewellery released As the transaction in this case had been closed
the pieces of jewelries to the foreigner. Three and the principalagent relationship between
weeks later, LBP informed Far East Bank that the payee and the collecting bank had already
the amount in the foreign draft had been ceased, the latter in returning the amount to
materially altered from 300,000.00 to the drawee bank was already acting on its
380,000.00. LBP returnedthe check to Far own and should now be responsible for its own
East Bank. Far East Bank refunded LBP the actions. x x x Likewise, Far East cannot invoke
380,000.00 paid by LBP. Far East Bank the warranty of the payee/depositor who
initially debited 168,053.36 from Gold Palace indorsed the instrument for collection to shift
Jewellerys account and demanded the the burden it brought upon itself. This is
payment of the difference between the precisely because the said indorsement is only
amount in the altered draft and the amount for purposes of collection which, under Section
debited from Gold Palace Jewellery. 36 of the NIL, is a restrictive indorsement. It
However, for the reasons already discussed did not in any way transfer the title of the
above, our pronouncement in the Far East instrument to the collecting bank. Far East did
Bank and Trust Companycase that "the not own the draft, it merely presented it for
drawee is liable on its payment of the check payment. Considering that the warranties of a

Page 10 of 20
general indorser as provided in Section 66 of Art. 1279. In order that compensation may be
the NIL are based upon a transfer of title and proper, it is necessary:
are available only to holders in due course, (1) That each one of the obligors be
these warranties did not attach to the bound principally, and that he be at the
indorsement for deposit and collection made same time a principal creditor of the
by Gold Palace to Far East. Without any legal other;
right to do so, the collecting bank, therefore, (2) That both debts consist in a sum of
could not debit respondent's account for the money, or if the things due are
amount it refunded to the drawee bank. consumable, they be of the same kind,
The foregoing considered, we affirm the ruling and also of the same quality if the latter
of the appellate court to the extent that Far has been stated;
East could not debit the account of Gold (3) That the two debts be due;
Palace, and for doing so, it must return what it (4) That they be liquidated and
had erroneously taken.32 demandable;
Applying the foregoing ratiocination, the Bank (5) That over neither of them there be
cannot debit the savings account of any retention or controversy,
petitioners. A depositary/collecting bank may commenced by third persons and
resist or defend against a claim for breach of communicated in due time to the
warranty if the drawer, the payee, or either debtor.
the drawee bank or depositary bank was It is well-settled that the relationship of the
negligent and such negligence substantially depositors and the Bank or similar institution
contributed tothe loss from alteration. In the is that of creditor-debtor. Article 1980 of the
instant case, no negligence can be attributed New Civil Code provides that fixed, savings
to petitioners. We lend credence to their claim and current deposits of money in banks and
that at the time of the sales transaction, the similar institutions shall be governed by the
Banks branch manager was present and even provisions concerning simple loans. The bank
offered the Banks services for the processing is the debtorand the depositor is the creditor.
and eventual crediting of the checks. True to The depositor lends the bank money and the
the branch managers words, the checks were bank agrees to pay the depositor on demand.
cleared three days later when deposited by The savings deposit agreement between the
petitioners and the entire amount ofthe checks bank and the depositor is the contract that
was credited to their savings account. determines the rights and obligations of the
Petitioners insist that the Bank cannotbe But as previously discussed, petitioners are
considered a creditor of the petitioners not liable for the deposit of the altered checks.
because it should have made a claim of the The Bank, asthe depositary and collecting
amount of 1,800,000.00 from Equitable-PCI bank ultimately bears the loss. Thus, there
Bank, its own depositary bank and the being no indebtedness to the Bank on the part
collecting bank in this case and not from of petitioners, legal compensation cannot take
them. place. DAMAGES
The Bank cannot set-off the amount it paid to The Bank incurred a delay in informing
Equitable-PCI Bank with petitioners savings petitioners of the checks dishonor. The Bank
account. Under Art. 1278 of the New Civil was informed of the dishonor by Equitable-PCI
Code, compensation shall take place when two Bank as early as August 2000 but it was only
persons, in their own right, are creditors and on 7 March 2001 when the Bank informed
debtors of each other. And the requisites for petitioners that it will debit from their account
legal compensation are: the altered amount. This delay is tantamount

Page 11 of 20
to negligence on the part of the collecting respondents, as well as its failure toobserve
bank which would entitle petitioners to an the 24-hour clearing rule.
award for damages under Article 1170 of the WHEREFORE, the petition is GRANTED. The
New Civil Code which reads: Decision and Resolution dated 29 June 2006
Art. 1170. Those who in the performance of and 12 February 2007 respectively of the
their obligations are guilty of fraud, Court of Appeals in CA-G.R. CV No. 83192 are
negligence, or delay, and those who in any REVERSED and SET ASIDE. The 15 January
manner contravene the tenor thereof, are 2004 Decision of the Regional Trial Court of
liable for damages. Calamba City, Branch 92 in Civil Case No. B-
The damages in the form of actual or 5886 rendered by Judge Antonio S. Pozas is
compensatory damages represent the amount REINSTATEDonly insofar as it ordered
debited by the Bank from petitioners account. respondents to jointly and severally pay
We delete the award of moral damages. petitioners 1,800,000.00 representing the
Contrary to the lower courts finding, there amount withdrawn from the latters account.
was no showing that the Bank acted The award of moral damages and attorneys
fraudulently or in bad faith. It may have been fees are DELETED.
remiss in its duty to diligently protect the SO ORDERED.
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
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
Equitable-PCI 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 1,800,000.00, 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

Page 12 of 20
Republic of the Philippines rediscount the postdated checks issued to
SUPREME COURT members whenever the association was short
Manila of funds. As was customary, the spouses
THIRD DIVISION would replace the postdated checks with their
G.R. No. 170325 September 26, own checks issued in the name of the
2008 members.
PHILIPPINE NATIONAL BANK, Petitioner, It was PEMSLAs policy not to approve
vs. applications for loans of members with
ERLANDO T. RODRIGUEZ and NORMA outstanding debts. To subvert this policy,
RODRIGUEZ, Respondents. some PEMSLA officers devised a scheme to
DECISION obtain additional loans despite their
REYES, R.T., J.: outstanding loan accounts. They took out
WHEN the payee of the check is not intended loans in the names of unknowing members,
to be the true recipient of its proceeds, is it without the knowledge or consent of the
payable to order or bearer? What is the latter. The PEMSLA checks issued for these
fictitious-payee rule and who is liable under it? loans were then given to the spouses for
Is there any exception? rediscounting. The officers carried this out by
These questions seek answers in this petition forging the indorsement of the named payees
for review on certiorari of the Amended in the checks.
Decision1 of the Court of Appeals (CA) which In return, the spouses issued their personal
affirmed with modification that of the Regional checks (Rodriguez checks) in the name of the
Trial Court (RTC).2 members and delivered the checks to an
The Facts officer of PEMSLA. The PEMSLA checks, on the
The facts as borne by the records are as other hand, were deposited by the spouses to
follows: their account.
Respondents-Spouses Erlando and Norma Meanwhile, the Rodriguez checks were
Rodriguez were clients of petitioner Philippine deposited directly by PEMSLA to its savings
National Bank (PNB), Amelia Avenue Branch, account without any indorsement from the
Cebu City. They maintained savings and named payees. This was an irregular
demand/checking accounts, namely, PNBig procedure made possible through the
Demand Deposits (Checking/Current Account facilitation of Edmundo Palermo, Jr., treasurer
No. 810624-6 under the account name of PEMSLA and bank teller in the PNB Branch.
Erlando and/or Norma Rodriguez), and PNBig It appears that this became the usual practice
Demand Deposit (Checking/Current Account for the parties.
No. 810480-4 under the account name For the period November 1998 to February
Erlando T. Rodriguez). 1999, the spouses issued sixty nine (69)
The spouses were engaged in the informal checks, in the total amount of P2,345,804.00.
lending business. In line with their business, These were payable to forty seven (47)
they had a discounting3 arrangement with the individual payees who were all members of
Philnabank Employees Savings and Loan PEMSLA.4
Association (PEMSLA), an association of PNB Petitioner PNB eventually found out about
employees. Naturally, PEMSLA was likewise a these fraudulent acts. To put a stop to this
client of PNB Amelia Avenue Branch. The scheme, PNB closed the current account of
association maintained current and savings PEMSLA. As a result, the PEMSLA checks
accounts with petitioner bank. deposited by the spouses were returned or
PEMSLA regularly granted loans to its dishonored for the reason "Account Closed."
members. Spouses Rodriguez would The corresponding Rodriguez checks,

Page 13 of 20
however, were deposited as usual to the ordered to reimburse PNB the amount it shall
PEMSLA savings account. The amounts were pay.
duly debited from the Rodriguez account. After trial, the RTC rendered judgment in favor
Thus, because the PEMSLA checks given as of spouses Rodriguez (plaintiffs). It ruled that
payment were returned, spouses Rodriguez PNB (defendant) is liable to return the value of
incurred losses from the rediscounting the checks. All counterclaims and cross-claims
transactions. were dismissed. The dispositive portion of the
RTC Disposition RTC decision reads:
Alarmed over the unexpected turn of events, WHEREFORE, in view of the foregoing, the
the spouses Rodriguez filed a civil complaint Court hereby renders judgment, as follows:
for damages against PEMSLA, the Multi- 1. Defendant is hereby ordered to pay
Purpose Cooperative of Philnabankers (MCP), the plaintiffs the total amount
and petitioner PNB. They sought to recover of P2,345,804.00 or reinstate or restore
the value of their checks that were deposited the amount of P775,337.00 in the PNBig
to the PEMSLA savings account amounting Demand Deposit Checking/Current
to P2,345,804.00. The spouses contended that Account No. 810480-4 of Erlando T.
because PNB credited the checks to the Rodriguez, and the amount
PEMSLA account even without indorsements, of P1,570,467.00 in the PNBig Demand
PNB violated its contractual obligation to them Deposit, Checking/Current Account No.
as depositors. PNB paid the wrong payees, 810624-6 of Erlando T. Rodriguez
hence, it should bear the loss. and/or Norma Rodriguez, plus legal rate
PNB moved to dismiss the complaint on the of interest thereon to be computed from
ground of lack of cause of action. PNB argued the filing of this complaint until fully
that the claim for damages should come from paid;
the payees of the checks, and not from 2. The defendant PNB is hereby ordered
spouses Rodriguez. Since there was no to pay the plaintiffs the following
demand from the said payees, the obligation reasonable amount of damages suffered
should be considered as discharged. by them taking into consideration the
In an Order dated January 12, 2000, the RTC standing of the plaintiffs being
denied PNBs motion to dismiss. sugarcane planters, realtors, residential
In its Answer,5 PNB claimed it is not liable for subdivision owners, and other
the checks which it paid to the PEMSLA businesses:
account without any indorsement from the (a) Consequential damages,
payees. The bank contended that spouses unearned income in the amount
Rodriguez, the makers, actually did not intend of P4,000,000.00, as a result of
for the named payees to receive the proceeds their having incurred great
of the checks. Consequently, the payees were dificulty (sic) especially in the
considered as "fictitious payees" as defined residential subdivision business,
under the Negotiable Instruments Law (NIL). which was not pushed through
Being checks made to fictitious payees which and the contractor even
are bearer instruments, the checks were threatened to file a case against
negotiable by mere delivery. PNBs Answer the plaintiffs;
included its cross-claim against its co- (b) Moral damages in the amount
defendants PEMSLA and the MCP, praying that of P1,000,000.00;
in the event that judgment is rendered against (c) Exemplary damages in the
the bank, the cross-defendants should be amount of P500,000.00;

Page 14 of 20
(d) Attorneys fees in the amount According to plaintiff-appellee Erlando
of P150,000.00 considering that Rodriguez testimony, PEMSLA allegedly issued
this case does not involve very post-dated checks to its qualified members
complicated issues; and for the who had applied for loans. However, because
(e) Costs of suit. of PEMSLAs insufficiency of funds, PEMSLA
3. Other claims and counterclaims are approached the plaintiffs-appellees for the
hereby dismissed.6 latter to issue rediscounted checks in favor of
CA Disposition said applicant members. Based on the
PNB appealed the decision of the trial court to investigation of the defendant-appellant,
the CA on the principal ground that the meanwhile, this arrangement allowed the
disputed checks should be considered as plaintiffs-appellees to make a profit by issuing
payable to bearer and not to order. rediscounted checks, while the officers of
In a Decision7 dated July 22, 2004, the CA PEMSLA and other members would be able to
reversed and set aside the RTC disposition. claim their loans, despite the fact that they
The CA concluded that the checks were were disqualified for one reason or another.
obviously meant by the spouses to be really They were able to achieve this conspiracy by
paid to PEMSLA. The court a quo declared: using other members who had loaned lesser
We are not swayed by the contention of the amounts of money or had not applied at all. x
plaintiffs-appellees (Spouses Rodriguez) that x x.8 (Emphasis added)
their cause of action arose from the alleged The CA found that the checks were bearer
breach of contract by the defendant-appellant instruments, thus they do not require
(PNB) when it paid the value of the checks to indorsement for negotiation; and that spouses
PEMSLA despite the checks being payable to Rodriguez and PEMSLA conspired with each
order. Rather, we are more convinced by the other to accomplish this money-making
strong and credible evidence for the scheme. The payees in the checks were
defendant-appellant with regard to the "fictitious payees" because they were not the
plaintiffs-appellees and PEMSLAs business intended payees at all.
arrangement that the value of the The spouses Rodriguez moved for
rediscounted checks of the plaintiffs-appellees reconsideration. They argued, inter alia, that
would be deposited in PEMSLAs account for the checks on their faces were unquestionably
payment of the loans it has approved in payable to order; and that PNB committed a
exchange for PEMSLAs checks with the full breach of contract when it paid the value of
value of the said loans. This is the only the checks to PEMSLA without indorsement
obvious explanation as to why all the disputed from the payees. They also argued that their
sixty-nine (69) checks were in the possession cause of action is not only against PEMSLA but
of PEMSLAs errand boy for presentment to also against PNB to recover the value of the
the defendant-appellant that led to this checks.
present controversy. It also appears that the On October 11, 2005, the CA reversed itself
teller who accepted the said checks was via an Amended Decision, the last paragraph
PEMSLAs officer, and that such was a regular and fallo of which read:
practice by the parties until the defendant- In sum, we rule that the defendant-appellant
appellant discovered the scam. The logical PNB is liable to the plaintiffs-appellees Sps.
conclusion, therefore, is that the checks were Rodriguez for the following:
never meant to be paid to order, but instead, 1. Actual damages in the amount
to PEMSLA. We thus find no breach of contract of P2,345,804 with interest at 6% per
on the part of the defendant-appellant. annum from 14 May 1999 until fully

Page 15 of 20
2. Moral damages in the amount parties. A court discovering an erroneous
of P200,000; judgment before it becomes final may, motu
3. Attorneys fees in the amount proprio or upon motion of the parties, correct
of P100,000; and its judgment with the singular objective of
4. Costs of suit. achieving justice for the litigants.10
WHEREFORE, in view of the foregoing However, a word of caution to lower courts,
premises, judgment is hereby rendered by Us the CA in Cebu in this particular case, is in
AFFIRMING WITH MODIFICATION the assailed order. The Court does not sanction careless
decision rendered in Civil Case No. 99-10892, disposition of cases by courts of justice. The
as set forth in the immediately next preceding highest degree of diligence must go into the
paragraph hereof, and SETTING ASIDE Our study of every controversy submitted for
original decision promulgated in this case on decision by litigants. Every issue and factual
22 July 2004. detail must be closely scrutinized and
SO ORDERED.9 analyzed, and all the applicable laws
The CA ruled that the checks were payable to judiciously studied, before the promulgation of
order. According to the appellate court, PNB every judgment by the court. Only in this
failed to present sufficient proof to defeat the manner will errors in judgments be avoided.
claim of the spouses Rodriguez that they really Now to the core of the petition.
intended the checks to be received by the As a rule, when the payee is fictitious or not
specified payees. Thus, PNB is liable for the intended to be the true recipient of the
value of the checks which it paid to PEMSLA proceeds, the check is considered as a bearer
without indorsements from the named payees. instrument. A check is "a bill of exchange
The award for damages was deemed drawn on a bank payable on demand."11 It is
appropriate in view of the failure of PNB to either an order or a bearer instrument.
treat the Rodriguez account with the highest Sections 8 and 9 of the NIL states:
degree of care considering the fiduciary nature SEC. 8. When payable to order. The
of their relationship, which constrained instrument is payable to order where it is
respondents to seek legal action. drawn payable to the order of a specified
Hence, the present recourse under Rule 45. person or to him or his order. It may be drawn
Issues payable to the order of
The issues may be compressed to whether the (a) A payee who is not maker, drawer,
subject checks are payable to order or to or drawee; or
bearer and who bears the loss? (b) The drawer or maker; or
PNB argues anew that when the spouses (c) The drawee; or
Rodriguez issued the disputed checks, they did (d) Two or more payees jointly; or
not intend for the named payees to receive (e) One or some of several payees; or
the proceeds. Thus, they are bearer (f) The holder of an office for the time
instruments that could be validly negotiated being.
by mere delivery. Further, testimonial and Where the instrument is payable to order, the
documentary evidence presented during trial payee must be named or otherwise indicated
amply proved that spouses Rodriguez and the therein with reasonable certainty.
officers of PEMSLA conspired with each other SEC. 9. When payable to bearer. The
to defraud the bank. instrument is payable to bearer
Our Ruling (a) When it is expressed to be so
Prefatorily, amendment of decisions is more payable; or
acceptable than an erroneous judgment (b) When it is payable to a person
attaining finality to the prejudice of innocent named therein or bearer; or

Page 16 of 20
(c) When it is payable to the order of a the Uniform Negotiable Instruments Law of
fictitious or non-existing person, and the United States.13
such fact is known to the person making A review of US jurisprudence yields that an
it so payable; or actual, existing, and living payee may also be
(d) When the name of the payee does "fictitious" if the maker of the check did not
not purport to be the name of any intend for the payee to in fact receive the
person; or proceeds of the check. This usually occurs
(e) Where the only or last indorsement when the maker places a name of an existing
is an indorsement in payee on the check for convenience or to
blank.12 (Underscoring supplied) cover up an illegal activity.14 Thus, a check
The distinction between bearer and order made expressly payable to a non-fictitious and
instruments lies in their manner of existing person is not necessarily an order
negotiation. Under Section 30 of the NIL, an instrument. If the payee is not the intended
order instrument requires an indorsement recipient of the proceeds of the check, the
from the payee or holder before it may be payee is considered a "fictitious" payee and
validly negotiated. A bearer instrument, on the the check is a bearer instrument.
other hand, does not require an indorsement In a fictitious-payee situation, the drawee
to be validly negotiated. It is negotiable by bank is absolved from liability and the drawer
mere delivery. The provision reads: bears the loss. When faced with a check
SEC. 30. What constitutes negotiation. An payable to a fictitious payee, it is treated as a
instrument is negotiated when it is transferred bearer instrument that can be negotiated by
from one person to another in such manner as delivery. The underlying theory is that one
to constitute the transferee the holder thereof. cannot expect a fictitious payee to negotiate
If payable to bearer, it is negotiated by the check by placing his indorsement thereon.
delivery; if payable to order, it is negotiated And since the maker knew this limitation, he
by the indorsement of the holder completed must have intended for the instrument to be
by delivery. negotiated by mere delivery. Thus, in case of
A check that is payable to a specified payee is controversy, the drawer of the check will bear
an order instrument. However, under Section the loss. This rule is justified for otherwise, it
9(c) of the NIL, a check payable to a specified will be most convenient for the maker who
payee may nevertheless be considered as a desires to escape payment of the check to
bearer instrument if it is payable to the order always deny the validity of the indorsement.
of a fictitious or non-existing person, and such This despite the fact that the fictitious payee
fact is known to the person making it so was purposely named without any intention
payable. Thus, checks issued to "Prinsipe that the payee should receive the proceeds of
Abante" or "Si Malakas at si Maganda," who the check.15
are well-known characters in Philippine The fictitious-payee rule is best illustrated in
mythology, are bearer instruments because Mueller & Martin v. Liberty Insurance
the named payees are fictitious and non- Bank.16 In the said case, the corporation
existent. Mueller & Martin was defrauded by George L.
We have yet to discuss a broader meaning of Martin, one of its authorized signatories.
the term "fictitious" as used in the NIL. It is Martin drew seven checks payable to the
for this reason that We look elsewhere for German Savings Fund Company Building
guidance. Court rulings in the United States Association (GSFCBA) amounting to $2,972.50
are a logical starting point since our law on against the account of the corporation without
negotiable instruments was directly lifted from authority from the latter. Martin was also an
officer of the GSFCBA but did not have signing

Page 17 of 20
authority. At the back of the checks, Martin considerations under Section 3-405 x x x.
placed the rubber stamp of the GSFCBA and Rather, there is a "commercial bad faith"
signed his own name as indorsement. He then exception to UCC 3-405, applicable when the
successfully drew the funds from Liberty transferee "acts dishonestly where it has
Insurance Bank for his own personal profit. actual knowledge of facts and circumstances
When the corporation filed an action against that amount to bad faith, thus itself becoming
the bank to recover the amount of the checks, a participant in a fraudulent scheme. x x x
the claim was denied. Such a test finds support in the text of the
The US Supreme Court held in Mueller that Code, which omits a standard of care
when the person making the check so payable requirement from UCC 3-405 but imposes on
did not intend for the specified payee to have all parties an obligation to act with "honesty in
any part in the transactions, the payee is fact." x x x19 (Emphasis added)
considered as a fictitious payee. The check is Getty also laid the principle that the fictitious-
then considered as a bearer instrument to be payee rule extends protection even to non-
validly negotiated by mere delivery. Thus, the bank transferees of the checks.
US Supreme Court held that Liberty Insurance In the case under review, the Rodriguez
Bank, as drawee, was authorized to make checks were payable to specified payees. It is
payment to the bearer of the check, unrefuted that the 69 checks were payable to
regardless of whether prior indorsements were specific persons. Likewise, it is uncontroverted
genuine or not.17 that the payees were actual, existing, and
The more recent Getty Petroleum Corp. v. living persons who were members of PEMSLA
American Express Travel Related Services that had a rediscounting arrangement with
Company, Inc.18 upheld the fictitious-payee spouses Rodriguez.
rule. The rule protects the depositary bank What remains to be determined is if the
and assigns the loss to the drawer of the payees, though existing persons, were
check who was in a better position to prevent "fictitious" in its broader context.
the loss in the first place. Due care is not even For the fictitious-payee rule to be available as
required from the drawee or depositary bank a defense, PNB must show that the makers did
in accepting and paying the checks. The effect not intend for the named payees to be part of
is that a showing of negligence on the part of the transaction involving the checks. At most,
the depositary bank will not defeat the the banks thesis shows that the payees did
protection that is derived from this rule. not have knowledge of the existence of the
However, there is a commercial bad faith checks. This lack of knowledge on the part of
exception to the fictitious-payee rule. A the payees, however, was not tantamount to a
showing of commercial bad faith on the part of lack of intention on the part of respondents-
the drawee bank, or any transferee of the spouses that the payees would not receive the
check for that matter, will work to strip it of checks proceeds. Considering that
this defense. The exception will cause it to respondents-spouses were transacting with
bear the loss. Commercial bad faith is present PEMSLA and not the individual payees, it is
if the transferee of the check acts dishonestly, understandable that they relied on the
and is a party to the fraudulent scheme. Said information given by the officers of PEMSLA
the US Supreme Court in Getty: that the payees would be receiving the checks.
Consequently, a transferees lapse of wary Verily, the subject checks are presumed order
vigilance, disregard of suspicious instruments. This is because, as found by both
circumstances which might have well induced lower courts, PNB failed to present sufficient
a prudent banker to investigate and other evidence to defeat the claim of respondents-
permutations of negligence are not relevant spouses that the named payees were the

Page 18 of 20
intended recipients of the checks proceeds. Lastly, PNB was obligated to pay the checks in
The bank failed to satisfy a requisite condition strict accordance with the instructions of the
of a fictitious-payee situation that the maker drawers. Petitioner miserably failed to
of the check intended for the payee to have no discharge this burden.
interest in the transaction. The checks were presented to PNB for deposit
Because of a failure to show that the payees by a representative of PEMSLA absent any
were "fictitious" in its broader sense, the type of indorsement, forged or otherwise. The
fictitious-payee rule does not apply. Thus, the facts clearly show that the bank did not pay
checks are to be deemed payable to order. the checks in strict accordance with the
Consequently, the drawee bank bears the instructions of the drawers, respondents-
loss.20 spouses. Instead, it paid the values of the
PNB was remiss in its duty as the drawee checks not to the named payees or their
bank. It does not dispute the fact that its teller order, but to PEMSLA, a third party to the
or tellers accepted the 69 checks for deposit to transaction between the drawers and the
the PEMSLA account even without any payees.alf-ITC
indorsement from the named payees. It bears Moreover, PNB was negligent in the selection
stressing that order instruments can only be and supervision of its employees. The
negotiated with a valid indorsement. trustworthiness of bank employees is
A bank that regularly processes checks that indispensable to maintain the stability of the
are neither payable to the customer nor duly banking industry. Thus, banks are enjoined to
indorsed by the payee is apparently grossly be extra vigilant in the management and
negligent in its operations.21 This Court has supervision of their employees. In Bank of the
recognized the unique public interest Philippine Islands v. Court of Appeals,25 this
possessed by the banking industry and the Court cautioned thus:
need for the people to have full trust and Banks handle daily transactions involving
confidence in their banks.22 For this reason, millions of pesos. By the very nature of their
banks are minded to treat their customers work the degree of responsibility, care and
accounts with utmost care, confidence, and trustworthiness expected of their employees
honesty.23 and officials is far greater than those of
In a checking transaction, the drawee bank ordinary clerks and employees. For obvious
has the duty to verify the genuineness of the reasons, the banks are expected to exercise
signature of the drawer and to pay the check the highest degree of diligence in the selection
strictly in accordance with the drawers and supervision of their employees.26
instructions, i.e., to the named payee in the PNBs tellers and officers, in violation of
check. It should charge to the drawers banking rules of procedure, permitted the
accounts only the payables authorized by the invalid deposits of checks to the PEMSLA
latter. Otherwise, the drawee will be violating account. Indeed, when it is the gross
the instructions of the drawer and it shall be negligence of the bank employees that caused
liable for the amount charged to the drawers the loss, the bank should be held liable.27
account.24 PNBs argument that there is no loss to
In the case at bar, respondents-spouses were compensate since no demand for payment has
the banks depositors. The checks were drawn been made by the payees must also fail.
against respondents-spouses accounts. PNB, Damage was caused to respondents-spouses
as the drawee bank, had the responsibility to when the PEMSLA checks they deposited were
ascertain the regularity of the indorsements, returned for the reason "Account Closed."
and the genuineness of the signatures on the These PEMSLA checks were the corresponding
checks before accepting them for deposit. payments to the Rodriguez checks. Since they

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could not encash the PEMSLA checks,
respondents-spouses were unable to collect
payments for the amounts they had advanced.
A bank that has been remiss in its duty must
suffer the consequences of its negligence.
Being issued to named payees, PNB was duty-
bound by law and by banking rules and
procedure to require that the checks be
properly indorsed before accepting them for
deposit and payment. In fine, PNB should be
held liable for the amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the
merits of PNBs cross-claim against its co-
defendants PEMSLA and MPC. The records are
bereft of any pleading filed by these two
defendants in answer to the complaint of
respondents-spouses and cross-claim of PNB.
The Rules expressly provide that failure to file
an answer is a ground for a declaration that
defendant is in default.28 Yet, the RTC failed to
sanction the failure of both PEMSLA and MPC
to file responsive pleadings. Verily, the RTC
dismissal of PNBs cross-claim has no basis.
Thus, this judgment shall be without prejudice
to whatever action the bank might take
against its co-defendants in the trial court.
To PNBs credit, it became involved in the
controversial transaction not of its own volition
but due to the actions of some of its
employees. Considering that moral damages
must be understood to be in concept of
grants, not punitive or corrective in nature,
We resolve to reduce the award of moral
damages to P50,000.00.29
WHEREFORE, the appealed Amended Decision
is AFFIRMED with the MODIFICATION that the
award for moral damages is reduced
to P50,000.00, and that this is without
prejudice to whatever civil, criminal, or
administrative action PNB might take against
PEMSLA, MPC, and the employees involved.

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