Name: Andrew M.

Navarrete
Subject: Negotiable Instruments Law
Topics: Liability of a Drawer of a Check; Rights of the Holder (Sections 51- 59)

Producers Bank of the Phils vs Excelsa Industries, Inc.

587 SCRA 370 (2009)

Facts:
This is a petition for review on certiorari under Rule 43 of the 1997 Rules of Civil Procedure, assailing the decision and resolution of the Court of Appeals
in CA-G.R. CV No. 59931. The Court of Appeals’ decision reversed the decision of the Regional Trial Court (RTC), Branch 73, Antipolo, Rizal, upholding
the extrajudicial foreclosure of the mortgage on respondent’s properties, while the resolution denied petitioner’s motion for reconsideration.

Respondent Excelsa Industries, Inc. is a manufacturer and exporter of fuel products, particularly charcoal briquettes, as an alternative fuel source. Sometime
in January 1987, respondent applied for a packing credit line or a credit export advance with petitioner Producers Bank of the Philippines, a banking
institution duly organized and existing under Philippines laws.
The application was supported by Letter of Credit No. M3411610NS2970 dated 14 October 1986. Kwang Ju Bank, Ltd. of Seoul, Korea issued the letter of
credit through its correspondent bank, the Bank of the Philippine Islands, in the amount of US$23,000.00 for the account of Shin Sung Commercial Co.,
Ltd., also located in Seoul, Korea. T.L. World Development Corporation was the original beneficiary of the letter of credit. On 05 December 1986, for
value received, T.L. World transferred to respondent all its rights and obligations under the said letter of credit. Petitioner approved respondent’s
application for a packing credit line in the amount of ₱300,000.00, of which about ₱96,000.00 in principal remained outstanding.7 Respondent executed the
corresponding promissory notes evidencing the indebtedness.

Prior to the application for the packing credit line, respondent had obtained a loan from petitioner in the form of a bill discounted and secured credit
accommodation in the amount of ₱200,000.00, of which ₱110,000.00 was outstanding at the time of the approval of the packing credit line. The loan was
secured by a real estate mortgage dated 05 December 1986 over respondent’s properties covered by Transfer Certificates of Titles (TCT) No. N-68661, N-
68662, N-68663, N-68664, N-68665 and N-68666, all issued by the Register of Deeds of Marikina.
On 17 March 1987, respondent presented for negotiation to petitioner drafts drawn under the letter of credit and the corresponding export documents in
consideration for its drawings in the amounts of US$5,739.76 and US$4,585.79. Petitioner purchased the drafts and export documents by paying respondent
the peso equivalent of the drawings. The purchase was subject to the conditions laid down in two separate undertakings by respondent dated 17 March 1987
and 10 April 1987.
On 24 April 1987, Kwang Ju Bank, Ltd. notified petitioner through cable that the Korean buyer refused to pay respondent’s export documents on account of
typographical discrepancies. Kwang Ju Bank, Ltd. returned to petitioner the export documents.

Upon learning about the Korean importer’s non-payment, respondent sent petitioner a letter dated 27 July 1987, informing the latter that respondent had
brought the matter before the Korea Trade Court and that it was ready to liquidate its past due account with petitioner. Respondent sent another letter dated
08 September 1987, reiterating the same assurance. In a letter 05 October 1987, Kwang Ju Bank, Ltd. informed petitioner that it would be returning the
export documents on account of the non-acceptance by the importer.
Petitioner demanded from respondent the payment of the peso equivalent of the export documents, plus interest and other charges, and also of the other due
and unpaid loans. Due to respondent’s failure to heed the demand, petitioner moved for the extrajudicial foreclosure on the real estate mortgage over
respondent’s properties.

The total approved bid price, which included the attorney’s fees and sheriff fees, was pegged at ₱752,074.63. At the public auction held on 05 January
1988, the Sheriff of Antipolo, Rizal issued a Certificate of Sale in favor of petitioner as the highest bidder. The certificate of sale was registered on 24
March 1988.

On 12 June 1989, petitioner executed an affidavit of consolidation over the foreclosed properties after respondent failed to redeem the same. As a result, the
Register of Deeds of Marikina issued new certificates of title in the name of petitioner.

On 17 November 1989, respondent instituted an action for the annulment of the extrajudicial foreclosure with prayer for preliminary injunction and
damages against petitioner and the Register of Deeds of Marikina. Docketed as Civil Case No. 1587-A, the complaint was raffled to Branch 73 of the RTC
of Antipolo, Rizal. The complaint prayed, among others, that the defendants be enjoined from causing the transfer of ownership over the foreclosed
properties from respondent to petitioner.

On 05 April 1990, petitioner filed a petition for the issuance of a writ of possession, docketed as LR Case No. 90-787, before the same branch of the RTC
of Antipolo, Rizal. The RTC ordered the consolidation of Civil Case No, 1587-A and LR Case No. 90-787.

On 18 December 1997, the RTC rendered a decision upholding the validity of the extrajudicial foreclosure and ordering the issuance of a writ of possession
in favor of petitioner.

The RTC held that petitioner, whose obligation consisted only of receiving, and not of collecting, the export proceeds for the purpose of converting into
Philippine currency and remitting the same to respondent, cannot be considered as respondent’s agent. The RTC also held that petitioner cannot be
presumed to have received the export proceeds, considering that respondent executed undertakings warranting that the drafts and accompanying documents
were genuine and accurately represented the facts stated therein and would be accepted and paid in accordance with their tenor.

Furthermore, the RTC concluded that petitioner had no obligation to return the export documents and respondent could not expect their return prior to the
payment of the export advances because the drafts and export documents were the evidence that respondent received export advances from petitioner.

The RTC also found that by its admission, respondent had other loan obligations obtained from petitioner which were due and demandable; hence,
petitioner correctly exercised its right to foreclose the real estate mortgage, which provided that the same secured the payment of not only the loans already
obtained but also the export advances.

Lastly, the RTC found respondent guilty of laches in questioning the foreclosure sale considering that petitioner made several demands for payment of
respondent’s outstanding loans as early as July 1987 and that respondent acknowledged the failure to pay its loans and advances.

The RTC denied respondent’s motion for reconsideration. Thus, respondent elevated the matter to the Court of Appeals, reiterating its claim that petitioner
was not only a collection agent but was considered a purchaser of the export
On 30 May 2001, the Court of Appeals rendered the assailed decision, reversing the RTC’s decision.

The Court of Appeals held that respondent should not be faulted for the dishonor of the drafts and export documents because the obligation to collect the
export proceeds from Kwang Ju Bank, Ltd. devolved upon petitioner. It cited the testimony of petitioner’s manager for the foreign currency department to
the effect that petitioner was respondent’s agent, being the only entity authorized under Central Bank Circular No. 491 to collect directly from the importer
the export proceeds on respondent’s behalf and converting the same to Philippine currency for remittance to respondent. The appellate court found that
respondent was not authorized and even powerless to collect from the importer and it appeared that respondent was left at the mercy of petitioner, which
kept the export documents during the time that respondent attempted to collect payment from the Korean importer.

The Court of Appeals disregarded the RTC’s finding that the export documents were the only evidence of respondent’s export advances and that petitioner
was justified in refusing to return them. It opined that granting petitioner had no obligation to return the export documents, the former should have helped
respondent in the collection efforts instead of augmenting respondent’s dilemma.

Furthermore, the Court of Appeals found petitioner’s negligence as the cause of the refusal by the Korean buyer to pay the export proceeds based on the
following: first, petitioner had a hand in preparing and scrutinizing the export documents wherein the discrepancies were found; and, second, petitioner
failed to advise respondent about the warning from Kwang Ju Bank, Ltd. that the export documents would be returned if no explanation regarding the
discrepancies would be made.

The Court of Appeals invalidated the extrajudicial foreclosure of the real estate mortgage on the ground that the posting and publication of the notice of
extrajudicial foreclosure proceedings did not comply with the personal notice requirement under paragraph 12 of the real estate mortgage executed between
petitioner and respondent. The Court of Appeals also overturned the RTC’s finding that respondent was guilty of estoppel by laches in questioning the
extrajudicial foreclosure sale.

Petitioner’s motion for reconsideration was denied in a Resolution dated 29 January 2002. Hence, the instant petition, arguing that the Court of Appeals
erred in finding petitioner as respondent’s agent, which was liable for the discrepancies in the export documents, in invalidating the foreclosure sale and in
declaring that respondent was not estopped from questioning the foreclosure sale.

Issues:
1. The validity of the extrajudicial foreclosure of the mortgage is dependent on the following issues posed by petitioner: (1) the coverage of the
"blanket mortgage clause;" (2) petitioner’s failure to furnish personal notice of the foreclosure to respondent; and (3) petitioner’s obligation as
negotiating bank under the letter of credit.

2. As regards the issue of whether respondent may still question the foreclosure sale, the RTC held that the sale was conducted according to the legal
procedure, to wit:

Held:
First issue:
The petition for review on certiorari is GRANTED and the decision and resolution of the Court of Appeals in CA-G.R. CV No. 59931 are REVERSED and
SET ASIDE
Notably, the errors cited by petitioners are factual in nature. Although the instant case is a petition for review under Rule 45 which, as a general rule, is
limited to reviewing errors of law, findings of fact being conclusive as a matter of general principle, however, considering the conflict between the factual
findings of the RTC and the Court of Appeals, there is a need to review the factual issues as an exception to the general rule.

Much of the discussion has revolved around who should be liable for the dishonor of the draft and export documents. In the two undertakings executed by
respondent as a condition for the negotiation of the drafts, respondent held itself liable if the drafts were not accepted. The two undertakings signed by
respondent are similarly-worded and contained respondent’s express warranties, to wit:

In consideration of your negotiating the above described draft(s), we hereby warrant that the said draft(s) and accompanying documents thereon are valid,
genuine and accurately represent the facts stated therein, and that such draft(s) will be accepted and paid in accordance with its/their tenor. We further
undertake and agree, jointly and severally, to defend and hold you free and harmless from any and all actions, claims and demands whatsoever, and to pay
on demand all damages actual or compensatory including attorney’s fees, costs and other awards or be adjudged to pay, in case of suit, which you may
suffer arising from, by reason, or on account of your negotiating the above draft(s) because of the following discrepancies or reasons or any other
discrepancy or reason whatever.
We hereby undertake to pay on demand the full amount of the above draft(s) or any unpaid balance thereof, the Philippine perso equivalent converted at the
prevailing selling rate (or selling rate prevailing at the date you negotiate our draft, whichever is higher) allowed by the Central Bank with interest at the
rate prevailing today from the date of negotiation, plus all charges and expenses whatsoever incurred in connection therewith. You shall neither be obliged
to contest or dispute any refusal to accept or to pay the whole or any part of the above draft(s), nor proceed in any way against the drawee, the issuing bank
or any endorser thereof, before making a demand on us for the payment of the whole or any unpaid balance of the draft(s).(Emphasis supplied)

In Velasquez v. Solidbank Corporation, where the drawer therein also executed a separate letter of undertaking in consideration for the bank’s negotiation
of its sight drafts, the Court held that the drawer can still be made liable under the letter of undertaking even if he is discharged due to the bank’s failure to
protest the non-acceptance of the drafts. The Court explained, thus:
Petitioner, however, can still be made liable under the letter of undertaking. It bears stressing that it is a separate contract from the sight draft. The liability
of petitioner under the letter of undertaking is direct and primary. It is independent from his liability under the sight draft. Liability subsists on it even if the
sight draft was dishonored for non-acceptance or non-payment.

Respondent agreed to purchase the draft and credit petitioner its value upon the undertaking that he will reimburse the amount in case the sight draft is
dishonored. The bank would certainly not have agreed to grant petitioner an advance export payment were it not for the letter of undertaking. The
consideration for the letter of undertaking was petitioner’s promise to pay respondent the value of the sight draft if it was dishonored for any reason by the
Bank of Seoul.

Thus, notwithstanding petitioner’s alleged failure to comply with the requirements of notice of dishonor and protest under Sections 89 and 152,respectively,
of the Negotiable Instruments Law, respondent may not escape its liability under the separate undertakings, where respondent promised to pay on demand
the full amount of the drafts.

The next question, therefore, is whether the real estate mortgage also served as security for respondent’s drafts that were not accepted and paid by the
Kwang Ju Bank, Ltd.
Respondent executed a real estate mortgage containing a "blanket mortgage clause," also known as a "dragnet clause." It has been settled in a long line of
decisions that mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in said contracts do not
limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness
can be gathered.

In Union Bank of the Philippines v. Court of Appeals, the nature of a dragnet clause was explained, thus:

Is one which is specifically phrased to subsume all debts of past and future origins. Such clauses are "carefully scrutinized and strictly construed."
Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time,
and they avoid the expense and inconvenience of executing a new security on each new transaction. A "dragnet clause" operates as a convenience and
accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time,
travel, loan closing costs, costs of extra legal services, recording fees, et cetera.

Petitioner, therefore, was not precluded from seeking the foreclosure of the real estate mortgage based on the unpaid drafts drawn by respondent. In any
case, respondent had admitted that aside from the unpaid drafts, respondent also had due and demandable loans secured from another account as evidenced
by Promissory Notes (PN Nos.) BDS-001-87, BDS-030/86 A, BDS-PC-002-/87 and BDS-005/87.

However, the Court of Appeals invalidated the extrajudicial foreclosure of the mortgage on the ground that petitioner had failed to furnish respondent
personal notice of the sale contrary to the stipulation in the real estate mortgage.

Petitioner, on the other hand, claims that under paragraph 12 of the real estate mortgage, personal notice of the foreclosure sale is not a requirement to the
validity of the foreclosure sale.

A perusal of the records of the case shows that a notice of sheriff’s sale was sent by registered mail to respondent and received in due course. Yet,
respondent claims that it did not receive the notice but only learned about it from petitioner. In any event, paragraph 12 of the real estate mortgage requires
petitioner merely to furnish respondent with the notice and does not oblige petitioner to ensure that respondent actually receives the notice. On this score,
the Court holds that petitioner has performed its obligation under paragraph 12 of the real estate mortgage.

Second Issue:
As regards the issue of whether respondent may still question the foreclosure sale, the RTC held that the sale was conducted according to the legal
procedure, to wit:

Plaintiff is estopped from questioning the foreclosure. The plaintiff is guilty of laches and cannot at this point in time question the foreclosure of the subject
properties. Defendant bank made demands against the plaintiff for the payment of plaintiff’s outstanding loans and advances with the defendant as early as
July 1997. Plaintiff acknowledged such outstanding loans and advances to the defendant bank and committed to liquidate the same. For failure of the
plaintiff to pay its obligations on maturity, defendant bank foreclosed the mortgage on subject properties on January 5, 1988 the certificate of sale was
annotated on March 24, 1988 and there being no redemption made by the plaintiff, title to said properties were consolidated in the name of defendant in
July 1989. Undeniably, subject foreclosure was done in accordance with the prescribed rules as may be borne out by the exhibits submitted to this Court
which are Exhibit "33," a notice of extrajudicial sale executed by the Sheriff of Antipolo, Exhibit "34" certificate posting of extrajudicial sale, Exhibit "35"
return card evidencing receipt by plaintiff of the notice of extrajudicial sale and Exhibit "21" affidavit of publication.
The Court adopts and approves the aforequoted findings by the RTC, the same being fully supported by the evidence on record.
Name: Andrew M. Navarrete
Subject: Negotiable Instruments Law
Topics: Liability of Acceptor (Sec 62); Classification of Parties according to Liability: Liability of Maker (Sec. 60 to Sec 62)

Bank of America, NT and SA vs. Associated Citizens Bank

G.R. No. 141001, May 21, 2009
558 SCRA 51 (2009)

The Bank is under strict liability, based on the contract between the bank and its customer (drawer), to pay the check only to the payee or the payee’s
order. The drawer’s instructions are reflected on the face and by the terms of the check. When the drawee bank pays a person other than the payee named
on the check, it does not comply with the terms of the check and violates its duty to charge the drawer’s account only for properly payable items.

Facts:

Before the Court are consolidated cases docketed as G.R. No. 141001 and G.R. No. 141018. These two cases are petitions for review on certiorari 1 of the
Decision2 dated 26 February 1999 and the Resolution dated 6 December 1999 of the Court of Appeals in CA-G.R. CV No. 48821. The Court of Appeals
affirmed with modifications the Decision of the Regional Trial Court of Makati, Branch 64 (RTC).

BA-Finance Corporation (BA Finance) and Miller Offset Press, Inc. (Miller) entered into a credit line facility agreement whereby Miller can discount and
assign its trade receivables with the BA Finance. At the same time, Uy Kiat Chung, Ching Uy Seng, and Uy Chung Guan Seng, acting for Miller, executed
a Continuing Suretyship Agreement with BA-Finance. Under the agreement, they jointly and severally guaranteed the full and prompt payment of any and
all indebtedness which Miller may incur with BA-Finance.

Miller discounted and assigned several trade receivables to BA-Finance by executing Deeds of Assignment in favor of the latter. In consideration thereof,
BA-Finance issued four checks payable to the order of Miller with the notation “For Payee’s Account Only.” These checks were drawn against Bank of
America. The four checks were deposited by Ching Uy Seng in Associated Citizens Bank with his joint account with Uy Chung Seng. Associated Bank
stamped the checks and guaranteed all prior endorsements and/or lack of endorsements and sent them through clearing. Later, Bank of America as drawee
bank honored the checks and paid the proceeds to Associated Bank as the collecting bank. When Miller failed to deliver to BA-Finance the proceeds of the
assigned trade receivables, BA-Finance filed a collection suit against Miller and impleaded the three representative of the latter.

Bank of America filed a third party complaint against Associated Bank. In its answer to the third party complaint, Associated Bank admitted having
received the four checks for deposit in the joint account of Ching Uy Seng and Uy Chung Guan Seng, but alleged that Ching Uy Seng, being one of the
corporate officers of Miller, was duly authorized to act for and on behalf of Miller.

Issues:
Whether or not Bank of America is liable to pay BA-Finance and whether or not Associated Bank should reimburse Bank of America the amount of the
four checks.

Held:
The bank on which a check is drawn, known as the drawee bank, is under strict liability, based on the contract between the bank and its customer (drawer),
to pay the check only to the payee or the payee’s order. The drawer’s instructions are reflected on the face and by the terms of the check. When the drawee
bank pays a person other than the payee named on the check, it does not comply with the terms of the check and violates its duty to charge the drawer’s
account only for properly payable items. On the part of Associated Bank, the law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it for the purpose of determining their genuineness and regularity. The collecting bank being primarily engaged in banking holds itself out to
the public as the expert and the law holds it to a high standard of conduct. In presenting the checks for clearing and for payment, the defendant [collecting
bank] made an express guarantee on the validity of “all prior endorsements.” Thus, stamped at the back of the checks are the defendant’s clear warranty. As
the warranty has proven to be false and inaccurate, Associated Bank is liable for any damage arising out of the falsity of its representation.

A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the payee is apparently grossly negligent in its
operations. This Court has recognized the unique public interest possessed by the banking industry and the need for the people to have full trust and
confidence in their banks. For this reason, banks are minded to treat their customer’s accounts with utmost care, confidence, and honesty. In a checking
transaction, the drawee bank has the duty to verify the genuineness of the signature of the drawer and to pay the check strictly in accordance with the
drawer’s instructions, i.e., to the named payee in the check. It should charge to the drawer’s accounts only the payables authorized by the latter. Otherwise,
the drawee will be violating the instructions of the drawer and it shall be liable for the amount charged to the drawer’s account. Rodriguez checks are
payable to order since the bank failed to prove that the named payees therein are fictitious.

Hence, the fictitious-payee rule which will make the instrument payable to bearer does not apply. PNB accepted the 69 checks for deposit to the PEMSLA
account even without any indorsement from the named payees. It bears stressing that order instruments can only be negotiated with a valid indorsement.
Name: Andrew M. Navarrete
Subject: Negotiable Instruments Law
Topics: Liability of General Indorser (Sec 66); When a person deemed an Indorser to Liability of an Agent/Broker (Sections 63- 69)

Tuazon vs Heirs of B. Ramos

463 SCRA 408 (2005)
G.R. No. 156262 July 14, 2005

Facts:
The present case involves the collection of a sum of money. Specifically, this case arose from the failure of petitioners to pay respondents’ predecessor-in-
interest. This fact was shown by the non-encashment of checks issued by a third person, but indorsed by herein Petitioner Maria Tuazon in favor of the said
predecessor. Under these circumstances, to enable respondents to collect on the indebtedness, the check drawer need not be impleaded in the Complaint.
Thus, the suit is directed, not against the drawer, but against the debtor who indorsed the checks in payment of the obligation.

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the July 31, 2002 Decision of the Court of Appeals (CA) in CA-GR
CV No. 46535 were the appeal is DISMISSED and the appealed decision is AFFIRMED.

On the other hand, the affirmed Decision of Branch 34 of the Regional Trial Court (RTC) of Gapan, Nueva Ecija rendered in favor of the plaintiffs and
against the defendants.

Respondents alleged that between the period of May 2, 1988 and June 5, 1988, spouses Leonilo and Maria Tuazon purchased a total of 8,326 cavans of rice
from the deceased Bartolome Ramos [predecessor-in-interest of respondents]. That of this quantity, only 4,437 cavans [have been paid for so far], leaving
unpaid 3,889 cavans valued at ₱1,211,919.00. In payment therefor, the spouses Tuazon issued several Traders Royal Bank checks.
But when these checks were encashed, all of the checks bounced due to insufficiency of funds. Respondents advanced that before issuing said checks,
spouses Tuazon already knew that they had no available fund to support the checks, and they failed to provide for the payment of these despite repeated
demands made on them.

Respondents averred that because spouses Tuazon anticipated that they would be sued, they conspired with the other defendants to defraud them as
creditors by executing fictitious sales of their properties. They executed simulated sales of three lots in favor of the spouses Buenaventura, as well as their
residential lot and the house thereon, all located at Nueva Ecija, and another simulated deed of sale dated July 12, 1988 of a Stake Toyota registered with
the Land Transportation Office of Cabanatuan City on September 7, 1988. Co-petitioner Melecio Tuazon, a son of spouses Tuazon, registered a fictitious
Deed of Sale on July 19, 1988 over a residential lot located at Nueva Ecija. Another simulated sale of a Toyota Willys was executed on January 25, 1988 in
favor of their other son, [co-petitioner] Alejandro Tuazon. As a result of the said sales, the titles of these properties issued in the names of spouses Tuazon
were cancelled and new ones were issued in favor of the co-defendants spouses Buenaventura, Alejandro Tuazon and Melecio Tuazon. Resultantly, by the
said ante-dated and simulated sales and the corresponding transfers there was no more property left registered in the names of spouses Tuazon answerable
to creditors, to the damage and prejudice of respondents.
For their part, defendants denied having purchased x x x rice from [Bartolome] Ramos. They alleged that it was Magdalena Ramos, wife of said deceased,
who owned and traded the merchandise and Maria Tuazon was merely her agent. They argued that it was Evangeline Santos who was the buyer of the rice
and issued the checks to Maria Tuazon as payments therefor. In good faith, the checks were received [by petitioner] from Evangeline Santos and turned
over to Ramos without knowing that these were not funded. And it is for this reason that [petitioners] have been insisting on the inclusion of Evangeline
Santos as an indispensable party, and her non-inclusion was a fatal error. Refuting that the sale of several properties were fictitious or simulated, spouses
Tuazon contended that these were sold because they were then meeting financial difficulties but the disposals were made for value and in good faith and
done before the filing of the instant suit. To dispute the contention of plaintiffs that they were the buyers of the rice, they argued that there was no sales
invoice, official receipts or like evidence to prove this. They assert that they were merely agents and should not be held answerable."

The corresponding civil and criminal cases were filed by respondents against Spouses Tuazon. Those cases were later consolidated and amended to include
Spouses Anastacio and Mary Buenaventura, with Alejandro Tuazon and Melecio Tuazon as additional defendants. Having passed away before the pretrial,
Bartolome Ramos was substituted by his heirs, herein respondents.

Contending that Evangeline Santos was an indispensable party in the case, petitioners moved to file a third-party complaint against her. Allegedly, she was
primarily liable to respondents, because she was the one who had purchased the merchandise from their predecessor, as evidenced by the fact that the
checks had been drawn in her name.
The RTC, however, denied petitioners’ Motion.
Since the trial court acquitted petitioners in all three of the consolidated criminal cases, they appealed only its decision finding them civilly liable to
respondents.

Ruling of the Court of Appeals

Sustaining the RTC, the CA held that petitioners had failed to prove the existence of an agency between respondents and Spouses Tuazon. The appellate
court disbelieved petitioners’ contention that Evangeline Santos should have been impleaded as an indispensable party. Inasmuch as all the checks had been
indorsed by Maria Tuazon, who thereby became liable to subsequent holders for the amounts stated in those checks, there was no need to implead Santos.
Hence, this Petition.

Issues:
Petitioners raise the following issues for our consideration:
"1. Whether or not the Honorable Court of Appeals erred in ruling that petitioners are not agents of the respondents.

"2. Whether or not the Honorable Court of Appeals erred in rendering judgment against the petitioners despite x x x the failure of the respondents to include
in their action Evangeline Santos, an indispensable party to the suit."7

Held:
The Petition is unmeritorious.

First Issue:
Agency
Well-entrenched is the rule that the Supreme Court’s role in a petition under Rule 45 is limited to reviewing errors of law allegedly committed by the Court
of Appeals. Factual findings of the trial court, especially when affirmed by the CA, are conclusive on the parties and this Court. 8 Petitioners have not given
us sufficient reasons to deviate from this rule.

In a contract of agency, one binds oneself to render some service or to do something in representation or on behalf of another, with the latter’s consent or
authority. The following are the elements of agency: (1) the parties’ consent, express or implied, to establish the relationship; (2) the object, which is the
execution of a juridical act in relation to a third person; (3) the representation, by which the one who acts as an agent does so, not for oneself, but as a
representative; (4) the limitation that the agent acts within the scope of his or her authority. As the basis of agency is representation, there must be, on the
part of the principal, an actual intention to appoint, an intention naturally inferable from the principal’s words or actions. In the same manner, there must be
an intention on the part of the agent to accept the appointment and act upon it. Absent such mutual intent, there is generally no agency.

This Court finds no reversible error in the findings of the courts a quo that petitioners were the rice buyers themselves; they were not mere agents of
respondents in their rice dealership. The question of whether a contract is one of sale or of agency depends on the intention of the parties.

The declarations of agents alone are generally insufficient to establish the fact or extent of their authority. The law makes no presumption of agency;
proving its existence, nature and extent is incumbent upon the person alleging it. In the present case, petitioners raise the fact of agency as an affirmative
defense, yet fail to prove its existence.

The Court notes that petitioners, on their own behalf, sued Evangeline Santos for collection of the amounts represented by the bounced checks, in a separate
civil case that they sought to be consolidated with the current one. If, as they claim, they were mere agents of respondents, petitioners should have brought
the suit against Santos for and on behalf of their alleged principal, in accordance with Section 2 of Rule 3 of the Rules on Civil Procedure. Their filing a suit
against her in their own names negates their claim that they acted as mere agents in selling the rice obtained from Bartolome Ramos.

Second Issue:
Indispensable Party
Petitioners argue that the lower courts erred in not allowing Evangeline Santos to be impleaded as an indispensable party. They insist that respondents’
Complaint against them is based on the bouncing checks she issued; hence, they point to her as the person primarily liable for the obligation.

We hold that respondents’ cause of action is clearly founded on petitioners’ failure to pay the purchase price of the rice. The trial court held that Petitioner
Maria Tuazon had indorsed the questioned checks in favor of respondents, in accordance with Sections 31 and 63 of the Negotiable Instruments Law. That
Santos was the drawer of the checks is thus immaterial to the respondents’ cause of action.

As indorser, Petitioner Maria Tuazon warranted that upon due presentment, the checks were to be accepted or paid, or both, according to their tenor; and
that in case they were dishonored, she would pay the corresponding amount. After an instrument is dishonored by nonpayment, indorsers cease to be merely
secondarily liable; they become principal debtors whose liability becomes identical to that of the original obligor. The holder of a negotiable instrument
need not even proceed against the maker before suing the indorser. Clearly, Evangeline Santos -- as the drawer of the checks -- is not an indispensable party
in an action against Maria Tuazon, the indorser of the checks.
Indispensable parties are defined as "parties in interest without whom no final determination can be had." The instant case was originally one for the
collection of the purchase price of the rice bought by Maria Tuazon from respondents’ predecessor. In this case, it is clear that there is no privity of contract
between respondents and Santos. Hence, a final determination of the rights and interest of the parties may be made without any need to implead her.
Name: Andrew M. Navarrete
Subject: Negotiable Instruments Law
Topics: Liability under an Incomplete but Delivered Instrument; Notice of Dishonor (Sec. 89 – 108)

Alvin Patrimonio vs Napoleon Gutierrez and Octavio Marasigan III

G.R. No. 187769, June 14, 2014

Facts:
Petition for review on certiorari assailing the decision and the resolution of the CA which affirmed the decision of RTC dismissing the complaint for
declaration of nullity of loan filed by petitioner Alvin Patrimonio and ordering him to pay respondent Octavio Marasigan III.

The petitioner and the respondent Gutierrez entered into a business venture under the name of Slam Dunk Corporation, a production outfit that produced
mini-concerts and shows related to basketball.

The petitioner pre-signed several checks to answer for the expenses of Slam Dunk. Although signed, these checks had no payee’s name, date or amount.
The blank checks were entrusted to Gutierrez with the specific instruction not to fill them out without previous notification to and approval by the
petitioner.

Without the petitioner’s knowledge and consent, Gutierrez went to Marasigan to secure a loan in the amount of P200,000.00 on the excuse that the
petitioner needed the money for the construction of his house. In addition to the payment of the principal, Gutierrez assured Marasigan that he would be
paid an interest of 5% per month.

Marasigan acceded to Gutierrez’ request and gave him P200,000.00. Gutierrez simultaneously delivered to Marasigan one of the blank checks the petitioner
pre-signed with Pilipinas Bank with the blank portions filled out with the words "Cash" "Two Hundred Thousand Pesos Only", and the amount of
"P200,000.00."

Marasigan deposited the check but it was dishonored for the reason "ACCOUNT CLOSED." It was later revealed that petitioner’s account with the bank
had been closed.

Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand letters to the petitioner asking for the payment of P200,000.00,
but his demands likewise went unheeded. Consequently, he filed a criminal case for violation of B.P. 22 against the petitioner.

Petitioner filed before the RTC a Complaint for Declaration of Nullity of Loan and Recovery of Damages against Gutierrez and co-respondent Marasigan.

RTC--- in favor of Marasigan. It found that the petitioner, in issuing the pre-signed blank checks, had the intention of issuing a negotiable instrument, albeit
with specific instructions to Gutierrez not to negotiate or issue the check without his approval. RTC declared Marasigan as a holder in due course and
accordingly dismissed the petitioner’s complaint for declaration of nullity of the loan. It ordered the petitioner to pay Marasigan the face value of the check
with a right to claim reimbursement from Gutierrez.

CA--- affirmed the RTC ruling.

Issue:
Whether or not Marasigan is a holder in due course, thus, may hold Petitioner liable.

Held:
NO.

Section 14 of the Negotiable Instruments Law provides for when blanks may be filled. This provision applies to an incomplete but delivered instrument.
Under this rule, if the maker or drawer delivers a pre-signed blank paper to another person for the purpose of converting it into a negotiable instrument, that
person is deemed to have prima facie authority to fill it up. It merely requires that the instrument be in the possession of a person other than the drawer or
maker and from such possession, together with the fact that the instrument is wanting in a material particular, the law presumes agency to fill up the blanks.

In order however that one who is not a holder in due course can enforce the instrument against a party prior to the instrument’s completion, two requisites
must exist: (1) that the blank must be filled strictly in accordance with the authority given; and (2) it must be filled up within a reasonable time. If it was
proven that the instrument had not been filled up strictly in accordance with the authority given and within a reasonable time, the maker can set this up as a
personal defense and avoid liability. However, if the holder is a holder in due course, there is a conclusive presumption that authority to fill it up had been
given and that the same was not in excess of authority.

In the present case, the petitioner contends that there is no legal basis to hold him liable both under the contract and loan and under the check because: first,
the subject check was not completely filled out strictly under the authority he has given and second, Marasigan was not a holder in due course.

Section 52(c) of the NIL states that a holder in due course is one who takes the instrument "in good faith and for value." It also provides in Section 52(d)
that in order that one may be a holder in due course, it is necessary that at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

Acquisition in good faith means taking without knowledge or notice of equities of any sort which could beset up against a prior holder of the instrument. It
means that he does not have any knowledge of fact which would render it dishonest for him to take a negotiable paper. The absence of the defense, when
the instrument was taken, is the essential element of good faith.

In order to show that the defendant had "knowledge of such facts that his action in taking the instrument amounted to bad faith," it is not necessary to prove
that the defendant knew the exact fraud that was practiced upon the plaintiff by the defendant's assignor, it being sufficient to show that the defendant had
notice that there was something wrong about his assignor's acquisition of title, although he did not have notice of the particular wrong that was committed.

The term ‘bad faith’ does not necessarily involve furtive motives, but means bad faith in a commercial sense. Although gross negligence does not of itself
constitute bad faith, it is evidence from which bad faith may be inferred.
In the present case, Marasigan’s knowledge that the petitioner is not a party or a privy to the contract of loan, and correspondingly had no obligation or
liability to him, renders him dishonest, hence, in bad faith. Since he knew that the underlying obligation was not actually for the petitioner, the rule that a
possessor of the instrument is prima facie a holder in due course is inapplicable. As correctly noted by the CA, his inaction and failure to verify, despite
knowledge of that the petitioner was not a party to the loan, may be construed as gross negligence amounting to bad faith.

Yet, it does not follow that simply because he is not a holder in due course, Marasigan is already totally barred from recovery. The NIL does not provide
that a holder who is not a holder in due course may not in any case recover on the instrument. The only disadvantage of a holder who is not in due course is
that the negotiable instrument is subject to defenses as if it were non-negotiable. Among such defenses is the filling up blank not within the authority.

While under the law, Gutierrez had a prima facie authority to complete the check, such prima facie authority does not extend to its use (i.e., subsequent
transfer or negotiation) once the check is completed. In other words, only the authority to complete the check is presumed. Further, the law used the term
"prima facie" to underscore the fact that the authority which the law accords to a holder is a presumption juris tantumonly; hence, subject to subject to
contrary proof. Thus, evidence that there was no authority or that the authority granted has been exceeded may be presented by the maker in order to avoid
liability under the instrument.

Notably, Gutierrez was only authorized to use the check for business expenses; thus, he exceeded the authority when he used the check to pay the loan he
supposedly contracted for the construction of petitioner's house. This is a clear violation of the petitioner's instruction to use the checks for the expenses of
Slam Dunk. It cannot therefore be validly concluded that the check was completed strictly in accordance with the authority given by the petitioner.

Considering that Marasigan is not a holder in due course, the petitioner can validly set up the personal defense that the blanks were not filled up in
accordance with the authority he gave. Consequently, Marasigan has no right to enforce payment against the petitioner and the latter cannot be obliged to
pay the face value of the check.
Name: Andrew M. Navarrete
Subject: Negotiable Instruments Law
Topics: Liability of Depositary/Collecting Bank in Altered Checks; Discharge of Negotiable Instrument (Sections 119- 125)

Cesar Areza and Lolit Areza vs Express Savings Bank Inc and Michael Potenciano
G.R. No. 176697, September 10, 2014

Facts:
Petitioners Cesar V. Areza and Lolita B. Areza have two bank deposits with respondent Express Savings Bank. They were engaged in the business of “buy
and sell” of brand new and second-hand motor vehicles. On May 2, 2000, they received an order from a certain Gerry 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, each valued at Two Hundred Thousand Pesos (P200,000.00) for a total of One Million Eight Hundred Thousand Pesos
(P1,800,000.00).

Michael Potenciano, the branch manager of Express Savings Bank, was present during the transaction and immediately offered the services of the bank for
the processing and eventual crediting of the checks to the account of the petitioners because the Arezas were valued clients of the bank.

The petitioners then deposited the checks to Express Savings Bank which in turn deposited the checks with its depository bank, Equitable-PCI Bank.
Equitable-PCI Bank then presented the checks to the drawee bank, Philippine Veterans Bank, which honoured the checks.

Sometime in July 2000, the checks 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 bank, in turn, returned the checks to Equitable-PCI Bank. Equitable-PCI Bank then informed
Express Savings Bank that the drawee dishonored the checks on the ground of material alterations. It also debited the deposit account of Express Savings
Bank in the amount of P1,800,000.00. Express Savings Bank insisted that it informed the petitioners of what happened to the checks. On the other hand, the
petitioners maintained that the said bank never informed them of the said progress.
The petitioners then issued a check in the amount of P500,000.00 but it was dishonored. They demanded the bank to honor the check but it refused. Instead,
it closed the Special Savings Account of the petitioners with a balance of P1,179,659.69 and transferred said amount to their savings account. Express
Savings Bank then withdrew the amount of P1,800,000.00 representing the returned checks from petitioners’ savings account.

The petitioners filed a Complaint for Sum of Money with Damages against Express Savings Bank and Potenciano for the alleged arbitrary and groundless
dishonouring of their checks and the unlawful and unilateral withdrawal from their savings account.

The RTC, through Judge Antonio S. Pozas, initially ruled in favor of the petitioners but the same court, through Pairing Judge Romeo C. De Leon,
eventually granted the Motion for Reconsideration filed by the respondents and set aside the Pozas Decision. On appeal, the Court of Appeals affirmed the
ruling of the RTC. Hence, this petition for review on certiorari.

Issues:
 I. Whether or not the drawee bank is liable for the altered tenor of acceptance in case the negotiable instrument is altered before acceptance.

II. Whether or not the respondent bank has the right to debit P1,800,000.00 from the petitioners’ accounts.

Ruling:
First Issue:
Section 63 of Act No. 2031 or the Negotiable Instruments Law provides that the acceptor, by accepting the instrument, engages that he will pay it according
to the tenor of his acceptance. The acceptor is a drawee who accepts the bill. In Philippine National Bank v. Court of Appeals, the payment of the amount
of a check implies not only acceptance but also compliance with the drawee’s obligation.

In case the negotiable instrument is altered before acceptance, is the drawee liable for the original or the altered tenor of acceptance? There are two
divergent intepretations proffered by legal analysts. The first view is that the obligation of the acceptor should be limited to the tenor of 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 certification.

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. This view appears to
be in consonance with Section 124 of the Negotiable Instruments Law which states that 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 to charge its client’s 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 drawer’s account which it was expected to treat with utmost fidelity. 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.

Second Issue:
No. 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 to the 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 Bank’s branch
manager was present and even offered the Bank’s services for the processing and eventual crediting of the checks. True to the branch manager’s words, the
checks were cleared three days later when deposited by petitioners and the entire amount of the checks was credited to their savings account.

Moreover, 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. It is well-settled that the relationship of the
depositors and the Bank or similar institution is that of creditor-debtor. But as previously discussed, petitioners are not liable for the deposit of the altered
checks. The Bank, as the 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.

To recap, the drawee bank, Philippine Veterans Bank in this case, is only liable to the extent of the check prior to alteration. 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 Express Savings 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, the SC granted the petition and affirmed the Pozas decision only insofar as it ordered respondents to jointly and severally pay
petitioners P1,800,000.00, representing the amount withdrawn from the latter’s account.
Name: Andrew M. Navarrete
Subject: Negotiable Instruments Law
Topics: Promissory Notes and Checks

Metropolitan Waterworks and Sewerage System vs Court of Appeals

143 SCRA 20 (1986)

Facts:
Metropolitan Waterworks and Sewerage System (MWSS) had an account with PNB. When it was still called NAWASA, MWSS made a special
arrangement with PNB so that it may have personalized checks to be printed Mesina Enterprises. These personalized checks are the ones being used by
MWSS in its business transactions.

From March to May 1969, MWSS issued 23 checks to various payees in the aggregate amount of P320,636.26. During the same months, another set of 23
checks containing the same check numbers earlier issued were forged. The aggregate amount of the forged checks amounted to P3,457,903.00. This amount
was distributed to the bank accounts of three persons: Arturo Sison, Antonio Mendoza, and Raul Dizon.

MWSS then demanded PNB to restore the amount of P3,457,903.00. PNB refused. The trial court ruled in favor of MWSS but the Court of Appeals
reversed the trial court’s decision.

Issue:
Whether or not PNB should restore the said amount.

Held:
No. MWSS is precluded from setting up the defense of forgery. It has been proven that MWSS has been negligent in supervising the printing of its
personalized checks. It failed to provide security measures and coordinate the same with PNB. Further, the signatures in the forged checks appear to be
genuine as reported by the National Bureau of Investigation so much so that the MWSS itself cannot tell the difference between the forged signature and the
genuine one. The records likewise show that MWSS failed to provide appropriate security measures over its own records thereby laying confidential
records open to unauthorized persons. Even if the twenty-three (23) checks in question are considered forgeries, considering the MWSS’s gross negligence,
it is barred from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law.
The Supreme Court further emphasized that forgery cannot be presumed. It must be established by clear, positive, and convincing evidence. This was not
done in the present case.