THIRD DIVISION

FAR EAST BANK & TRUST G.R. No. 168274

COMPANY,
Petitioner, Present:

YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
GOLD PALACE JEWELLERY CO., as
represented by Judy L. Yang, Julie Yang- Promulgated:
Go and Kho Soon Huat,
Respondent. August 20, 2008

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

For the review of the Court through a Rule 45 petition are the following issuances
of the Court of Appeals (CA) in CA-G.R. CV No. 71858: (1) the March 15, 2005
Decision[1] which reversed the trial courts ruling, and (2) the May 26, 2005
Resolution[2] which denied the motion for reconsideration of the said CA decision.

The instant controversy traces its roots to a transaction consummated sometime in

June 1998, when a foreigner, identified as Samuel Tagoe, purchased from the
respondent Gold Palace Jewellery Co.s (Gold Palaces) store at SM-North EDSA
several pieces of jewelry valued at P258,000.00.[3] In payment of the same, he
offered Foreign Draft No. M-069670 issued by the United Overseas Bank (Malaysia)
BHD Medan Pasar, Kuala Lumpur Branch (UOB), addressed to the Land Bank of
the Philippines, Manila (LBP), and payable to the respondent company
for P380,000.00.[4]

Before receiving the draft, respondent Judy Yang, the assistant general
manager of Gold Palace, inquired from petitioner Far East Bank & Trust Companys
(Far Easts) SM North EDSA Branch, its neighbor mall tenant, the nature of the draft.
The teller informed her that the same was similar to a managers check, but advised
her not to release the pieces of jewelry until the draft had been cleared.[5] Following
the banks advice, Yang issued Cash Invoice No. 1609[6] to the foreigner, asked him
to come back, and informed him that the pieces of jewelry would be released when
the draft had already been cleared.[7] Respondent Julie Yang-Go, the manager
of Gold Palace, consequently deposited the draft in the companys account with the
aforementioned Far East branch on June 2, 1998.[8]

When Far East, the collecting bank, presented the draft for clearing to LBP,
the drawee bank, the latter cleared the same[9]UOBs account with LBP was
debited,[10] and Gold Palaces account with Far East was credited with the amount
stated in the draft.[11]

The foreigner eventually returned to respondents store on June 6, 1998 to claim the
purchased goods. After ascertaining that the draft had been cleared, respondent Yang
released the pieces of jewelry to Samuel Tagoe; and because the amount in the draft
was more than the value of the goods purchased, she issued, as his change, Far East
Check No. 1730881[12] for P122,000.00.[13] This check was later presented for
encashment and was, in fact, paid by the said bank.[14]

On June 26, 1998, or after around three weeks, LBP informed Far East that the
amount in Foreign Draft No. M-069670 had been materially altered from P300.00
to P380,000.00 and that it was returning the same. Attached to its official
correspondence were Special Clearing Receipt No. 002593 and the duly notarized
and consul-authenticated affidavit of a corporate officer of the drawer, UOB.[15] It is
noted at this point that the material alteration was discovered by UOB after LBP had
informed it that its funds were being depleted following the encashment of the
subject draft.[16] Intending to debit the amount from respondents account, Far
Eastsubsequently refunded the P380,000.00 earlier paid by LBP.
 Gold Palace, in the meantime, had already utilized portions of the amount.
Thus, on July 20, 1998, as the outstanding balance of its account was already
inadequate, Far East was able to debit only P168,053.36,[17] but this was done
without a prior written notice to the account holder.[18] Far East only notified by
phone the representatives of the respondent company.[19]

On August 12, 1998, petitioner demanded from respondents the payment

of P211,946.64 or the difference between the amount in the materially altered draft
and the amount debited from the respondent companys
[20]
account. Because Gold Palace did not heed the demand, Far East consequently
instituted Civil Case No. 99-296 for sum of money and damages before the Regional
Trial Court (RTC), Branch 64 of Makati City.[21]

In their Answer, respondents specifically denied the material allegations in

the complaint and interposed as a defense that the complaint states no cause of
actionthe subject foreign draft having been cleared and the respondent not being the
party who made the material alteration. Respondents further counterclaimed for
actual damages, moral and exemplary damages, and attorneys fees considering,
among others, that the petitioner had confiscated without basis Gold Palaces balance
in its account resulting in operational loss, and had maliciously imputed to the latter
the act of alteration.[22]

After trial on the merits, the RTC rendered its July 30, 2001 Decision [23] in
favor of Far East, ordering Gold Palace to pay the former P211,946.64 as actual
damages and P50,000.00 as attorneys fees.[24] The trial court ruled that, on the basis
of its warranties as a general indorser, Gold Palace was liable to Far East.[25]

On appeal, the CA, in the assailed March 15, 2005 Decision,[26] reversed the
ruling of the trial court and awarded respondents counterclaim. It ruled in the main
that Far East failed to undergo the proceedings on the protest of the foreign draft or
to notify Gold Palace of the drafts dishonor; thus, Far East could not
charge Gold Palace on its secondary liability as an indorser.[27] The appellate court
further ruled that the drawee bank had cleared the check, and its remedy should be
against the party responsible for the alteration. Considering that, in this
case, Gold Palace neither altered the draft nor knew of the alteration, it could not be
held liable.[28] The dispositive portion of the CA decision reads:
 WHEREFORE, premises considered, the appeal is GRANTED; the assailed
Decision dated 30 July 2001 of the Regional Trial Court of Makati City, Branch 64
is hereby REVERSED and SET ASIDE; the Complaint dated January 1999 is
DISMISSED; and appellee Far East Bank and Trust Company is hereby ordered to
pay appellant Gold Palace Jewellery Company the amount of Php168,053.36 for
actual damages plus legal interest of 12% per annum from 20 July 1998,
Php50,000.00 for exemplary damages, and Php50,000.00 for attorneys fees. Costs
against appellee Far East Bank and Trust Company.[29]

The appellate court, in the further challenged May 26, 2005

Resolution,[30] denied petitioners Motion for Reconsideration,[31] which prompted
the petitioner to institute before the Court the instant Petition for Review
on Certiorari.[32]

We deny the petition.

Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides
that the acceptor, by accepting the instrument, engages that he will pay it according
to the tenor of his acceptance.[33] This provision applies with equal force in case the
drawee pays a bill without having previously accepted it. His actual payment of the
amount in the check implies not only his assent to the order of the drawer and a
recognition of his corresponding obligation to pay the aforementioned sum, but also,
his clear compliance with that obligation.[34] Actual payment by the drawee is greater
than his acceptance, which is merely a promise in writing to pay. The payment of a
check includes its acceptance.[35]

Unmistakable herein is the fact that the drawee bank cleared and paid the
subject foreign draft and forwarded the amount thereof to the collecting bank. The
latter then credited to Gold Palaces account the payment it received. Following the
plain language of the law, the drawee, by the said payment, recognized and complied
with its obligation to pay in accordance with the tenor of his acceptance. The tenor
of the acceptance is determined by the terms of the bill as it is when the drawee
accepts.[36] Stated simply, LBP was liable on its payment of the check according to
the tenor of the check at the time of payment, which was the raised amount.
 Because of that engagement, LBP could no longer repudiate the payment it
erroneously made to a due course holder. We note at this point that Gold Palace was
not a participant in the alteration of the draft, was not negligent, and was a holder in
due courseit received the draft complete and regular on its face, before it became
overdue and without notice of any dishonor, in good faith and for value, and absent
any knowledge of any infirmity in the instrument or defect in the title of the person
negotiating it.[37] Having relied on the drawee banks clearance and payment of the
draft and not being negligent (it delivered the purchased jewelry only when the draft
was cleared and paid), respondent is amply protected by the said Section 62.
Commercial policy favors the protection of any one who, in due course, changes his
position on the faith of the drawee banks clearance and payment of a check or
draft.[38]

This construction and application of the law gives effect to the plain language
of the NIL[39] and is in line with the sound principle that where one of two innocent
parties must suffer a loss, the law will leave the loss where it finds it.[40] It further
reasserts the usefulness, stability and currency of negotiable paper without seriously
endangering accepted banking practices. Indeed, banking institutions can readily
protect themselves against liability on altered instruments either by qualifying their
acceptance or certification, or by relying on forgery insurance and special paper
which will make alterations obvious.[41] This is not to mention, but we state
nevertheless for emphasis, that the drawee bank, in most cases, is in a better position,
compared to the holder, to verify with the drawer the matters stated in the instrument.
As we have observed in this case, were it not for LBPs communication with the
drawer that its account in the Philippines was being depleted after the subject foreign
draft had been encashed, then, the alteration would not have been discovered. What
we cannot understand is why LBP, having the most convenient means to correspond
with UOB, did not first verify the amount of the draft before it cleared and paid the
same. Gold Palace, on the other hand, had no facility to ascertain with the drawer,
UOB Malaysia, the true amount in the draft. It was left with no option but to rely on
the representations of LBP that the draft was good.

In arriving at this conclusion, the Court is not closing its eyes to the other view
espoused in common law jurisdictions that a drawee bank, having paid to an
innocent holder the amount of an uncertified, altered check in good faith and without
negligence which contributed to the loss, could recover from the person to whom
payment was made as for money paid by mistake.[42] However, given the foregoing
discussion, we find no compelling reason to apply the principle to the instant case.

The Court is also aware that under the Uniform Commercial Code in the
United States of America, if an unaccepted draft is presented to a drawee for
payment or acceptance and the drawee pays or accepts the draft, the person
obtaining payment or acceptance, at the time of presentment, and a previous
transferor of the draft, at the time of transfer, warrant to the drawee making payment
or accepting the draft in good faith that the draft has not been
altered.[43] Nonetheless, absent any similar provision in our law, we cannot extend
the same preferential treatment to the paying bank.

Thus, considering that, in this case, Gold Palace is protected by Section 62 of

the NIL, its collecting agent, Far East, should not have debited the money paid by
the drawee bank from respondent companys account. When Gold Palace deposited
the check with Far East, the latter, under the terms of the deposit and the provisions
of the NIL, became an agent of the former for the collection of the amount in the
draft.[44] The subsequent payment by the drawee bank and the collection of the
amount by the collecting bank closed the transaction insofar as the drawee and the
holder of the check or his agent are concerned, converted the check into a mere
voucher,[45] and, as already discussed, foreclosed the recovery by the drawee of the
amount paid. This closure of the transaction is a matter of course; otherwise,
uncertainty in commercial transactions, delay and annoyance will arise if a bank at
some future time will call on the payee for the return of the money paid to him on
the check.[46]

As the transaction in this case had been closed and the principal-agent
relationship between the payee and the collecting bank had already ceased, the latter
in returning the amount to the drawee bank was already acting on its own and should
now be responsible for its own actions. Neither can petitioner be considered to have
acted as the representative of the drawee bank when it debited respondents account,
because, as already explained, the drawee bank had no right to recover what it
paid. Likewise, Far East cannot invoke the warranty of the payee/depositor who
indorsed the instrument for collection to shift the burden it brought upon itself. This
is precisely because the said indorsement is only for purposes of collection which,
under Section 36 of the NIL, is a restrictive indorsement.[47] It did not in any way
transfer the title of the instrument to the collecting bank. Far East did not own the
draft, it merely presented it for payment. Considering that the warranties of a general
indorser as provided in Section 66 of the NIL are based upon a transfer of title and
are available only to holders in due course,[48] these warranties did not attach to the
indorsement for deposit and collection made by Gold Palace to Far East. Without
any legal right to do so, the collecting bank, therefore, could not debit respondents
account for the amount it refunded to the drawee bank.

The foregoing considered, we affirm the ruling of the appellate court to the
extent that Far East could not debit the account of Gold Palace, and for doing so, it
must return what it had erroneously taken. Far Easts remedy under the law is not
against Gold Palace but against the drawee-bank or the person responsible for the
alteration. That, however, is another issue which we do not find necessary to discuss
in this case.

However, we delete the exemplary damages awarded by the appellate court.

Respondents have not shown that they are entitled to moral, temperate or
compensatory damages.[49] Neither was petitioner impelled by malice or bad faith in
debiting the account of the respondent company and in pursuing its cause.[50]On the
contrary, petitioner was honestly convinced of the propriety of the debit. We also
delete the award of attorneys fees for, in a plethora of cases, we have ruled that it is
not a sound public policy to place a premium on the right to litigate. No damages
can be charged to those who exercise such precious right in good faith, even if done
erroneously.[51]

WHEREFORE, premises considered, the March 15, 2005 Decision and the
May 26, 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 71858
are AFFIRMED WITH THE MODIFICATION that the award of exemplary
damages and attorneys fees is DELETED.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice
WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice

RUBEN T. REYES
Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairperson's Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the opinion
of the Courts Division.

REYNATO S. PUNO
Chief Justice

[1]
Penned by Associate Justice Celia C. Librea-Leagogo, with Associate Justices Andres B. Reyes, Jr. and Lucas P.
Bersamin, concurring; CA rollo, pp. 78-126.
[2]
Id. at 203-205.
[3]
TSN, December 6, 2000, pp. 8-10.
[4]
Records, p. 121.
[5]
TSN, December 6, 2000, pp. 9-10.
[6]
Records, p. 161.
[7]
TSN, December 6, 2000, p. 10.
[8]
Records, pp. 121, 162.
[9]
TSN, October 6, 1999, pp. 21-22, 36.
[10]
TSN, February 23, 2000, p. 8.
[11]
TSN, October 6, 1999, p. 22.
[12]
Records, p. 159.
[13]
TSN, December 6, 2000, pp. 13-14.
[14]
Id.
[15]
Records, pp. 124-127.
[16]
TSN, February 23, 2000, pp. 8-10.
[17]
Id. at 13; TSN, October 6, 1999, pp. 28-30.
[18]
TSN, May, 10, 2000, pp. 17-19.
[19]
Id. at 9-10.
[20]
Records, p. 14.
[21]
Id. at 1-6.
[22]
Id. at 33-34.
[23]
Id. at 191-198.
[24]
Id. at 198. The dispositive portion of the RTC decision reads:
WHEREFORE, in view of the foregoing, judgment is rendered against defendant Gold Palace Jewellery Co., to pay
plaintiff Far East Bank and Trust Co., the following:
a. The sum of P211,946.64, representing actual damages plus legal interest thereon from 26 June 1998, until the same
is fully paid;
b. P50,000.00 as attorneys fees; and
c. Costs of suit.
SO ORDERED.
[25]
Id. at 194-196.
[26]
Supra note 1.
[27]
CA rollo, pp. 106-112.
[28]
Id. at 112-116.
[29]
Id. at 123.
[30]
Supra note 2.
[31]
CA rollo, pp. 127-142.
[32]
Rollo, pp. 3-26.
[33]
Section 62 of the NIL, which, in full, reads:
SECTION 62. Liability of acceptor.The acceptor, by accepting the instrument, engages that he will pay it according
to the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument;
and
(b) The existence of the payee and his then capacity to indorse.
[34]
Philippine National Bank v. Court of Appeals, 134 Phil. 829, 833-835 (1968).
[35]
Kansas Bankers Surety Company v. Ford County State Bank, 184 Kan. 529, 534; 338 P.2d 309, 313 (1959).
[36]
Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., 214 Cal. 156, 163; 4 P.2d 781, 784 (1931); citing
Prof. Brannan in his work on Negotiable Instruments Law (4th Ed.) at page 567; Kansas Bankers Surety Company v.
Ford County State Bank, supra.
[37]
Section 52 of the NIL reads:
SECTION 52. What constitutes a holder in due course.A holder in due course is a holder who has taken the instrument
under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored,
if such was the fact;
(c) That he took it in good faith and for value;
(d) 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.
See Vicente R. de Ocampo & Co. v. Gatchalian, No. L-15126, November 30, 1961, 3 SCRA 596, in which the Court
acknowledged the fact of negotiation of an instrument by an agent of the drawer to the payee.
[38]
Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36, at 165-166; see Aetna Casualty &
Surety Co. v. Corpus Christi National Bank, 186 S.W.2d 840, 841-842 (1944); The National Park Bank of New York
v. The Seaboard Bank, 69 Sickels 28, 114 N.Y. 28, 20 N.E. 632 (1889); Seaboard Surety Company v. First National
City Bank of New York, 15 Misc.2d 816, 180 N.Y.S.2d 156 (1958).
[39]
Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36, at 165.
[40]
National City Bank of Chicago v. National Bank of the Republic of Chicago, 300 Ill. 103, 108; 132 N.E. 832, 833
(1921).
[41]
Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36.
[42]
Central National Bank v. F.W. Drosten Jewelry Co., 203 Mo.App. 646, 220 S.W. 511 (1920); Interstate Trust Co.,
et al. v. United States National Bank, 67 Colo. 6, 185 P. 260, 10 A.L.R. 705 (1919); National Park Bank of New York
v. Eldred Bank, 90 Hun 285, 70 N.Y.St.Rep. 497, 35 N.Y.S. 752 (1895); Third National Bank of St. Louis v. Thomas
Allen, 59 Mo. 310, 1875 WL 7732 (Mo.) (1875); The Marine National Bank v. The National City Bank, 10 Alb. L.J.
360, 59 N.Y. 67, 17 Am. Rep. 305 (1874); Espy v. Bank of Cincinnati, 85 U.S. 604, 18 Wall 604, 21 L. Ed. 947
(1874); Redington, et al. v. Woods, et al., 45 Cal. 406, 13 Am. Rep. 190 (1873).
[43]
UCC 3-417 (a) on presentment warranties.
[44]
Jai-Alai Corporation v. Bank of the Philippine Islands, No. L-29432, August 6, 1975, 66 SCRA 29, 34.
[45]
Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36, at 164; Kansas Bankers Surety
Company v. Ford County State Bank, supra note 35, at 536.
[46]
Citizens National Bank v. First National Bank, 347 So.2d 964, 968 (1977).
[47]
Section 36 of the NIL reads:
SECTION 36. When indorsement restrictive.An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an indorsement restrictive. (Italics
supplied.)
[48]
Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36; Kansas Bankers Surety Company v.
Ford County State Bank, supra note 35, at 535.
[49]
Civil Code, Art. 2234.
[50]
ABS-CBN Broadcasting Corporation v. Court of Appeals, 361 Phil. 499, 531 (1999).
[51]
Republic v. Lorenzo Shipping Corp., G.R. No. 153563, February 7, 2005, 450 SCRA 550, 558; Pajuyo v. Court of
Appeals, G.R. No. 146364, June 3, 2004, 430 SCRA 492, 524; Alonso v. Cebu Country Club, Inc., 426 Phil. 61, 88
(2002); Orosa v. Court of Appeals, 386 Phil. 94, 105 (2000); J Marketing Corporation v. Sia, Jr., 349 Phil. 513, 517
(1998).
 FIRST DIVISION

G.R. No. 154469 December 6, 2006

METROPOLITAN BANK AND TRUST COMPANY, petitioners,

vs.
RENATO D. CABILZO, respondent.

DECISION

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari, filed by petitioner Metropolitan Bank and
Trust Company (Metrobank) seeking to reverse and set aside the Decision1 of the Court of Appeals
dated 8 March 2002 and its Resolution dated 26 July 2002 affirming the Decision of the Regional
Trial Court (RTC) of Manila, Branch 13 dated 4 September 1998. The dispositive portion of the Court
of Appeals Decision reads:

WHEREFORE, the assailed decision dated September 4, 1998 is AFFIRMED with

modifications (sic) that the awards for exemplary damages and attorney’s fees are hereby
deleted.

Petitioner Metrobank is a banking institution duly organized and existing as such under Philippine
laws.2

Respondent Renato D. Cabilzo (Cabilzo) was one of Metrobank’s clients who maintained a current
account with Metrobank Pasong Tamo Branch.3

On 12 November 1994, Cabilzo issued a Metrobank Check No. 985988, payable to "CASH" and
postdated on 24 November 1994 in the amount of One Thousand Pesos (P1,000.00). The check
was drawn against Cabilzo’s Account with Metrobank Pasong Tamo Branch under Current Account
No. 618044873-3 and was paid by Cabilzo to a certain Mr. Marquez, as his sales commission.4
Subsequently, the check was presented to Westmont Bank for payment. Westmont Bank, in turn,
indorsed the check to Metrobank for appropriate clearing. After the entries thereon were examined,
including the availability of funds and the authenticity of the signature of the drawer, Metrobank
cleared the check for encashment in accordance with the Philippine Clearing House Corporation
(PCHC) Rules.

On 16 November 1994, Cabilzo’s representative was at Metrobank Pasong Tamo Branch to make
some transaction when he was asked by a bank personnel if Cabilzo had issued a check in the
amount of P91,000.00 to which the former replied in the negative. On the afternoon of the same
date, Cabilzo himself called Metrobank to reiterate that he did not issue a check in the amount
of P91,000.00 and requested that the questioned check be returned to him for verification, to which
Metrobank complied.5

Upon receipt of the check, Cabilzo discovered that Metrobank Check No. 985988 which he issued
on 12 November 1994 in the amount of P1,000.00 was altered to P91,000.00 and the date 24
November 1994 was changed to 14 November 1994.6

Hence, Cabilzo demanded that Metrobank re-credit the amount of P91,000.00 to his account.
Metrobank, however, refused reasoning that it has to refer the matter first to its Legal Division for
appropriate action. Repeated verbal demands followed but Metrobank still failed to re-credit the
amount of P91,000.00 to Cabilzo’s account.7

On 30 June 1995, Cabilzo, thru counsel, finally sent a letter-demand8 to Metrobank for the payment
of P90,000.00, after deducting the original value of the check in the amount of P1,000.00. Such
written demand notwithstanding, Metrobank still failed or refused to comply with its obligation.

Consequently, Cabilzo instituted a civil action for damages against Metrobank before the RTC of
Manila, Branch 13. In his Complaint docketed as Civil Case No. 95-75651, Renato D. Cabilzo v.
Metropolitan Bank and Trust Company,Cabilzo prayed that in addition to his claim for
reimbursement, actual and moral damages plus costs of the suit be awarded in his favor.9

For its part, Metrobank countered that upon the receipt of the said check through the PCHC on 14
November 1994, it examined the genuineness and the authenticity of the drawer’s signature
appearing thereon and the technical entries on the check including the amount in figures and in
words to determine if there were alterations, erasures, superimpositions or intercalations thereon,
but none was noted. After verifying the authenticity and propriety of the aforesaid entries, including
the indorsement of the collecting bank located at the dorsal side of the check which stated that, "all
prior indorsements and lack of indorsement guaranteed," Metrobank cleared the check.10

Anent thereto, Metrobank claimed that as a collecting bank and the last indorser, Westmont Bank
should be held liable for the value of the check. Westmont Bank indorsed the check as the an
unqualified indorser, by virtue of which it assumed the liability of a general indorser, and thus, among
others, warranted that the instrument is genuine and in all respect what it purports to be.

In addition, Metrobank, in turn, claimed that Cabilzo was partly responsible in leaving spaces on the
check, which, made the fraudulent insertion of the amount and figures thereon, possible. On account
of his negligence in the preparation and issuance of the check, which according to Metrobank, was
the proximate cause of the loss, Cabilzo cannot thereafter claim indemnity by virtue of the doctrine of
equitable estoppel.
Thus, Metrobank demanded from Cabilzo, for payment in the amount of P100,000.00 which
represents the cost of litigation and attorney’s fees, for allegedly bringing a frivolous and baseless
suit. 11

On 19 April 1996, Metrobank filed a Third-Party Complaint12 against Westmont Bank on account of
its unqualified indorsement stamped at the dorsal side of the check which the former relied upon in
clearing what turned out to be a materially altered check.

Subsequently, a Motion to Dismiss13 the Third-Party Complaint was then filed by Westmont bank
because another case involving the same cause of action was pending before a different court. The
said case arose from an action for reimbursement filed by Metrobank before the Arbitration
Committee of the PCHC against Westmont Bank, and now the subject of a Petition for Review
before the RTC of Manila, Branch 19.

In an Order14 dated 4 February 1997, the trial court granted the Motion to Dismiss the Third-Party
Complaint on the ground of litis pendentia.

On 4 September 1998, the RTC rendered a Decision15 in favor of Cabilzo and thereby ordered
Metrobank to pay the sum of P90,000.00, the amount of the check. In stressing the fiduciary nature
of the relationship between the bank and its clients and the negligence of the drawee bank in failing
to detect an apparent alteration on the check, the trial court ordered for the payment of exemplary
damages, attorney’s fees and cost of litigation. The dispositive portion of the Decision reads:

WHEREFORE, judgment is rendered ordering defendant Metropolitan Bank and Trust

Company to pay plaintiff Renato Cabilzo the sum of P90,000 with legal interest of 6 percent
per annum from November 16, 1994 until payment is made plus P20,000 attorney’s fees,
exemplary damages of P50,000, and costs of the suit.16

Aggrieved, Metrobank appealed the adverse decision to the Court of Appeals reiterating its previous
argument that as the last indorser, Westmont Bank shall bear the loss occasioned by the fraudulent
alteration of the check. Elaborating, Metrobank maintained that by reason of its unqualified
indorsement, Westmont Bank warranted that the check in question is genuine, valid and subsisting
and that upon presentment the check shall be accepted according to its tenor.

Even more, Metrobank argued that in clearing the check, it was not remiss in the performance of its
duty as the drawee bank, but rather, it exercised the highest degree of diligence in accordance with
the generally accepted banking practice. It further insisted that the entries in the check were regular
and authentic and alteration could not be determined even upon close examination.

In a Decision17 dated 8 March 2002, the Court of Appeals affirmed with modification the Decision of
the court a quo, similarly finding Metrobank liable for the amount of the check, without prejudice,
however, to the outcome of the case between Metrobank and Westmont Bank which was pending
before another tribunal. The decretal portion of the Decision reads:

WHEREFORE, the assailed decision dated September 4, 1998 is AFFIRMED with the
modifications (sic) that the awards for exemplary damages and attorney’s fees are hereby
deleted.18

Similarly ill-fated was Metrobank’s Motion for Reconsideration which was also denied by the
appellate court in its Resolution19 issued on 26 July 2002, for lack of merit.
Metrobank now poses before this Court this sole issue:

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING METROBANK,

AS DRAWEE BANK, LIABLE FOR THE ALTERATIONS ON THE SUBJECT CHECK
BEARING THE AUTHENTIC SIGNATURE OF THE DRAWER THEREOF.

We resolve to deny the petition.

An alteration is said to be material if it changes the effect of the instrument. It means that an
unauthorized change in an instrument that purports to modify in any respect the obligation of a party
or an unauthorized addition of words or numbers or other change to an incomplete instrument
relating to the obligation of a party.20 In other words, a material alteration is one which changes the
items which are required to be stated under Section 1 of the Negotiable Instruments Law.

Section 1 of the Negotiable Instruments Law provides:

Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to

the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand or at a fixed determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.

Also pertinent is the following provision in the Negotiable Instrument Law which states:

Section 125. What constitutes material alteration. – Any alteration which changes:

(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment;

(d) The number or the relation of the parties;

(e) The medium or currency in which payment is to be made;

Or which adds a place of payment where no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect is a material
alteration.

In the case at bar, the check was altered so that the amount was increased from P1,000.00
to P91,000.00 and the date was changed from 24 November 1994 to 14 November 1994.
Apparently, since the entries altered were among those enumerated under Section 1 and 125,
namely, the sum of money payable and the date of the check, the instant controversy therefore
squarely falls within the purview of material alteration.

Now, having laid the premise that the present petition is a case of material alteration, it is now
necessary for us to determine the effect of a materially altered instrument, as well as the rights and
obligations of the parties thereunder. The following provision of the Negotiable Instrument Law will
shed us some light in threshing out this issue:

Section 124. Alteration of instrument; effect of. – Where a negotiable instrument is materially
altered without the assent of all parties liable thereon, it is avoided, except as against a party
who has himself made,authorized, and assented to the alteration and subsequent indorsers.

But when the instrument has been materially altered and is in the hands of a holder in due
course not a party to the alteration, he may enforce the payment thereof according to its
original tenor. (Emphasis ours.)

Indubitably, Cabilzo was not the one who made nor authorized the alteration. Neither did he assent
to the alteration by his express or implied acts. There is no showing that he failed to exercise such
reasonable degree of diligence required of a prudent man which could have otherwise prevented the
loss. As correctly ruled by the appellate court, Cabilzo was never remiss in the preparation and
issuance of the check, and there were no indicia of evidence that would prove otherwise. Indeed,
Cabilzo placed asterisks before and after the amount in words and figures in order to forewarn the
subsequent holders that nothing follows before and after the amount indicated other than the one
specified between the asterisks.

The degree of diligence required of a reasonable man in the exercise of his tasks and the
performance of his duties has been faithfully complied with by Cabilzo. In fact, he was wary enough
that he filled with asterisks the spaces between and after the amounts, not only those stated in
words, but also those in numerical figures, in order to prevent any fraudulent insertion, but
unfortunately, the check was still successfully altered, indorsed by the collecting bank, and cleared
by the drawee bank, and encashed by the perpetrator of the fraud, to the damage and prejudice of
Cabilzo.

Verily, Metrobank cannot lightly impute that Cabilzo was negligent and is therefore prevented from
asserting his rights under the doctrine of equitable estoppel when the facts on record are bare of
evidence to support such conclusion. The doctrine of equitable estoppel states that when one of the
two innocent persons, each guiltless of any intentional or moral wrong, must suffer a loss, it must be
borne by the one whose erroneous conduct, either by omission or commission, was the cause of
injury.21 Metrobank’s reliance on this dictum, is misplaced. For one, Metrobank’s representation that
it is an innocent party is flimsy and evidently, misleading. At the same time, Metrobank cannot
asseverate that Cabilzo was negligent and this negligence was the proximate cause22 of the loss in
the absence of even a scintilla proof to buttress such claim. Negligence is not presumed but must be
proven by the one who alleges it.23

Undoubtedly, Cabilzo was an innocent party in this instant controversy. He was just an ordinary
businessman who, in order to facilitate his business transactions, entrusted his money with a bank,
not knowing that the latter would yield a substantial amount of his deposit to fraud, for which Cabilzo
can never be faulted.

We never fail to stress the remarkable significance of a banking institution to commercial

transactions, in particular, and to the country’s economy in general. The banking system is an
indispensable institution in the modern world and plays a vital role in the economic life of every
civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as
active instruments of business and commerce, banks have become an ubiquitous presence among
the people, who have come to regard them with respect and even gratitude and, most of all,
confidence.24

Thus, even the humble wage-earner does not hesitate to entrust his life's savings to the bank of his
choice, knowing that they will be safe in its custody and will even earn some interest for him. The
ordinary person, with equal faith, usually maintains a modest checking account for security and
convenience in the settling of his monthly bills and the payment of ordinary expenses. As for a
businessman like the respondent, the bank is a trusted and active associate that can help in the
running of his affairs, not only in the form of loans when needed but more often in the conduct of
their day-to-day transactions like the issuance or encashment of checks.25

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether
such account consists only of a few hundred pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if
the account is to reflect at any given time the amount of money the depositor can dispose of as he
sees fit, confident that the bank will deliver it as and to whomever he directs.26

The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship. The appropriate degree of diligence
required of a bank must be a high degree of diligence, if not the utmost diligence.27

In the present case, it is obvious that Metrobank was remiss in that duty and violated that
relationship. As observed by the Court of Appeals, there are material alterations on the check that
are visible to the naked eye. Thus:

x x x The number "1" in the date is clearly imposed on a white figure in the shape of the
number "2". The appellant’s employees who examined the said check should have likewise
been put on guard as to why at the end of the amount in words, i.e., after the word "ONLY",
there are 4 asterisks, while at the beginning of the line or before said phrase, there is none,
even as 4 asterisks have been placed before and after the word "CASH" in the space for
payee. In addition, the 4 asterisks before the words "ONE THOUSAND PESOS ONLY" have
noticeably been erased with typing correction paper, leaving white marks, over which the
word "NINETY" was superimposed. The same can be said of the numeral "9" in the amount
"91,000", which is superimposed over a whitish mark, obviously an erasure, in lieu of the
asterisk which was deleted to insert the said figure. The appellant’s employees should have
again noticed why only 2 asterisks were placed before the amount in figures, while 3
asterisks were placed after such amount. The word "NINETY" is also typed differently and
with a lighter ink, when compared with the words "ONE THOUSAND PESOS ONLY." The
letters of the word "NINETY" are likewise a little bigger when compared with the letters of the
words "ONE THOUSAND PESOS ONLY".28

Surprisingly, however, Metrobank failed to detect the above alterations which could not escape the
attention of even an ordinary person. This negligence was exacerbated by the fact that, as found by
the trial court, the check in question was examined by the cash custodian whose functions do not
include the examinations of checks indorsed for payment against drawer’s accounts.29 Obviously, the
employee allowed by Metrobank to examine the check was not verse and competent to handle such
duty. These factual findings of the trial court is conclusive upon this court especially when such
findings was affirmed the appellate court.30
Apropos thereto, we need to reiterate that by the very nature of their work the degree of
responsibility, care and trustworthiness expected of their employees and officials is far better than
those of ordinary clerks and employees. Banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees.31

In addition, the bank on which the check is drawn, known as the drawee bank, is under strict liability
to pay to the order of the payee in accordance with the drawer’s instructions as reflected on the face
and by the terms of the check. Payment made under materially altered instrument is not payment
done in accordance with the instruction of the drawer.

When the drawee bank pays a materially altered check, it violates the terms of the check, as well as
its duty to charge its client’s account only for bona fide disbursements he had made. Since the
drawee bank, in the instant case, did not pay according to the original tenor of the instrument, as
directed by the drawer, then it has no right to claim reimbursement from the drawer, much less, the
right to deduct the erroneous payment it made from the drawer’s account which it was expected to
treat with utmost fidelity.

Metrobank vigorously asserts that the entries in the check were carefully examined: The date of the
instrument, the amount in words and figures, as well as the drawer’s signature, which after
verification, were found to be proper and authentic and was thus cleared. We are not persuaded.
Metrobank’s negligence consisted in the omission of that degree of diligence required of a bank
owing to the fiduciary nature of its relationship with its client. Article 1173 of the Civil Code provides:

The fault or negligence of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the
persons, of the time and of the place. x x x.

Beyond question, Metrobank failed to comply with the degree required by the nature of its business
as provided by law and jurisprudence. If indeed it was not remiss in its obligation, then it would be
inconceivable for it not to detect an evident alteration considering its vast knowledge and technical
expertise in the intricacies of the banking business. This Court is not completely unaware of banks’
practices of employing devices and techniques in order to detect forgeries, insertions, intercalations,
superimpositions and alterations in checks and other negotiable instruments so as to safeguard their
authenticity and negotiability. Metrobank cannot now feign ignorance nor claim diligence; neither can
it point its finger at the collecting bank, in order to evade liability.

Metrobank argues that Westmont Bank, as the collecting bank and the last indorser, shall bear the
loss. Without ruling on the matter between the drawee bank and the collecting bank, which is already
under the jurisdiction of another tribunal, we find that Metrobank cannot rely on such indorsement, in
clearing the questioned check. The corollary liability of such indorsement, if any, is separate and
independent from the liability of Metrobank to Cabilzo.

The reliance made by Metrobank on Westmont Bank’s indorsement is clearly inconsistent, if not
totally offensive to the dictum that being impressed with public interest, banks should exercise the
highest degree of diligence, if not utmost diligence in dealing with the accounts of its own clients. It
owes the highest degree fidelity to its clients and should not therefore lightly rely on the judgment of
other banks on occasions where its clients money were involve, no matter how small or substantial
the amount at stake.

Metrobank’s contention that it relied on the strength of collecting bank’s indorsement may be merely
a lame excuse to evade liability, or may be indeed an actual banking practice. In either case, such
act constitutes a deplorable banking practice and could not be allowed by this Court bearing in mind
that the confidence of public in general is of paramount importance in banking business.

What is even more deplorable is that, having been informed of the alteration, Metrobank did not
immediately re-credit the amount that was erroneously debited from Cabilzo’s account but permitted
a full blown litigation to push through, to the prejudice of its client. Anyway, Metrobank is not left with
no recourse for it can still run after the one who made the alteration or with the collecting bank,
which it had already done. It bears repeating that the records are bare of evidence to prove that
Cabilzo was negligent. We find no justifiable reason therefore why Metrobank did not immediately
reimburse his account. Such ineptness comes within the concept of wanton manner contemplated
under the Civil Code which warrants the imposition of exemplary damages, "by way of example or
correction for the public good," in the words of the law. It is expected that this ruling will serve as a
stern warning in order to deter the repetition of similar acts of negligence, lest the confidence of the
public in the banking system be further eroded. 32

WHEREFORE, premises considered, the instant Petition is DENIED. The Decision dated 8 March
2002 and the Resolution dated 26 July 2002 of the Court of Appeals are AFFIRMED with
modification that exemplary damages in the amount of P50,000.00 be awarded. Costs against the
petitioner.

SO ORDERED.

Panganiban, C.J. (Chairperson), Ynares-Santiago, Austria-Martinez, and Callejo, Sr., JJ., concur.

Synopsis/Syllabi

SECOND DIVISION

[G.R. No. 123031. October 12, 1999]

CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,

vs. COURT OF APPEALS, VICENTE ALEGRE, respondents.

DECISION
QUISUMBING, J.:

This petition for review on certiorari assails respondent appellate courts Decision,[1] dated
December 8, 1995, in CA G.R. CV No. 44085, which affirmed the ruling of the Regional Trial
Court of Makati, Branch 132. The dispositive portion of the trial courts decision reads:

WHEREFORE, judgment is hereby rendered ordering defendant [herein

petitioner] to pay plaintiff [herein private respondent]:
 (1) the principal sum of P514,390.94 with legal interest thereon computed from
August 6, 1991 until fully paid; and

(2) the costs of suit.

SO ORDERED.[2]

Based on the records, the following are the pertinent facts of the case:
Cebu International Finance Corporation (CIFC), a quasi-banking institution, is engaged in
money market operations.
On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred
thousand (P500,000.00) pesos, in cash. Petitioner issued a promissory note to mature on May 27,
1991. The note for five hundred sixteen thousand, two hundred thirty-eight pesos and sixty-seven
centavos (P516,238.67) covered private respondents placement plus interest at twenty and a half
(20.5%) percent for thirty-two (32) days.
On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for five
hundred fourteen thousand, three hundred ninety pesos and ninety-four centavos (P514,390.94) in
favor of the private respondent as proceeds of his matured investment plus interest. The CHECK
was drawn from petitioners current account number 0011-0803-59, maintained with the Bank of
the Philippine Islands (BPI), main branch at Makati City.
On June 17, 1991, private respondents wife deposited the CHECK with Rizal Commercial
Banking Corp. (RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK with the
annotation, that the Check (is) Subject of an Investigation. BPI took custody of the CHECK
pending an investigation of several counterfeit checks drawn against CIFCs aforestated checking
account. BPI used the check to trace the perpetrators of the forgery.
Immediately, private respondent notified CIFC of the dishonored CHECK and demanded, on
several occasions, that he be paid in cash. CIFC refused the request, and instead instructed private
respondent to wait for its ongoing bank reconciliation with BPI. Thereafter, private respondent,
through counsel, made a formal demand for the payment of his money market placement.In turn,
CIFC promised to replace the CHECK but required an impossible condition that the original must
first be surrendered.
On February 25, 1992, private respondent Alegre filed a complaint[3] for recovery of a sum of
money against the petitioner with the Regional Trial Court of Makati (RTC-Makati), Branch 132.
On July 13, 1992, CIFC sought to recover its lost funds and formally filed against BPI, a
separate civil action[4] for collection of a sum of money with the RTC-Makati, Branch 147. The
collection suit alleged that BPI unlawfully deducted from CIFCs checking account, counterfeit
checks amounting to one million, seven hundred twenty-four thousand, three hundred sixty-four
pesos and fifty-eight centavos (P1,724,364.58). The action included the prayer to collect the
amount of the CHECK paid to Vicente Alegre but dishonored by BPI.
Meanwhile, in response to Alegres complaint with RTC-Makati, Branch 132, CIFC filed a
motion for leave of court to file a third-party complaint against BPI. BPI was impleaded by CIFC
to enforce a right, for contribution and indemnity, with respect to Alegres claim. CIFC asserted
that the CHECK it issued in favor of Alegre was genuine, valid and sufficiently funded.
On July 23, 1992, the trial court granted CIFCs motion. However, BPI moved to dismiss the
third-party complaint on the ground of pendency of another action with RTC-Makati, Branch
147. Acting on the motion, the trial court dismissed the third-party complaint on November 4,
1992, after finding that the third party complaint filed by CIFC against BPI is similar to its ancillary
claim against the bank, filed with RTC-Makati Branch 147.
Thereafter, during the hearing by RTC-Makati, Branch 132, held on May 27, and June 22,
1993, Vito Arieta, Bank Manager of BPI, testified that the bank, indeed, dishonored the CHECK,
retained the original copy and forwarded only a certified true copy to RCBC. When Arieta was
recalled on July 20, 1993, he testified that on July 16, 1993, BPI encashed and deducted the said
amount from the account of CIFC, but the proceeds, as well as the CHECK remained in BPIs
custody. The banks move was in accordance with the Compromise Agreement[5] it entered with
CIFC to end the litigation in RTC-Makati, Branch 147. The compromise agreement, which was
submitted for the approval of the said court, provided that:
1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of P1,724,364.58 plus P 20,000
litigation expenses as full and final settlement of all of plaintiffs claims as contained in the
Amended Complaint dated September 10, 1992. The aforementioned amount shall be credited
to plaintiffs current account No. 0011-0803-59 maintained at defendants Main Branch upon
execution of this Compromise Agreement.
2. Thereupon, defendant shall debit the sum of P 514,390.94 from the aforesaid current account
representing payment/discharge of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the
alleged dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant: otherwise
stated, the defendant shall not be liable to the plaintiff. Plaintiff [CIFC] may however set-up
the defense of payment/discharge stipulated in par. 2 above.[6]
On July 27, 1993, BPI filed a separate collection suit[7] against Vicente Alegre with the RTC-
Makati, Branch 62. The complaint alleged that Vicente Alegre connived with certain Lina A. Pena
and Lita A. Anda and forged several checks of BPIs client, CIFC. The total amount of counterfeit
checks was P 1,724,364.58. BPI prevented the encashment of some checks amounting to two
hundred ninety five thousand, seven hundred seventy-five pesos and seven centavos
(P295,775.07). BPI admitted that the CHECK, payable to Vicente Alegre for P514,390.94, was
deducted from BPIs claim, hence, the balance of the loss incurred by BPI was nine hundred
fourteen thousand, one hundred ninety-eight pesos and fifty-seven centavos (P914,198.57), plus
costs of suit for twenty thousand (P20,000.00) pesos. The records are silent on the outcome of this
case.
On September 27, 1993, RTC-Makati, Branch 132, rendered judgment in favor of Vicente
Alegre.
CIFC appealed from the adverse decision of the trial court. The respondent court affirmed the
decision of the trial court.
Hence this appeal,[8] in which petitioner interposes the following assignments of errors:
 1. The Honorable Court of Appeals erred in affirming the finding of the Honorable Trial Court
holding that petitioner was not discharged from the liability of paying the value of the subject
check to private respondent after BPI has debited the value thereof against petitioners current
account.
2. The Honorable Court of Appeals erred in applying the provisions of paragraph 2 of Article
1249 of the Civil Code in the instant case. The applicable law being the Negotiable
Instruments Law.
3. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts findings that
the petitioner was guilty of negligence and delay in the performance of its obligation to the
private respondent.
4. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts decision
ordering petitioner to pay legal interest and the cost of suit.
5. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts dismissal of
petitioners third-party complaint against BPI.
These issues may be synthesized into three:
1. WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL CODE APPLIES IN THE
PRESENT CASE;
2. WHETHER OR NOT BPI CHECK NO. 513397 WAS VALIDLY DISCHARGED; and
3. WHETHER OR NOT THE DISMISSAL OF THE THIRD PARTY COMPLAINT OF
PETITIONER AGAINST BPI BY REASON OF LIS PENDENS WAS PROPER?
On the first issue, petitioner contends that the provisions of the Negotiable Instruments Law
(NIL) are the pertinent laws to govern its money market transaction with private respondent, and
not paragraph 2 of Article 1249 of the Civil Code. Petitioner stresses that it had already been
discharged from the liability of paying the value of the CHECK due to the following
circumstances:
1) There was ACCEPTANCE of the subject check by BPI, the drawee bank, as defined under the
Negotiable Instruments Law, and therefore, BPI, the drawee bank, became primarily liable
for the payment of the check, and consequently, the drawer, herein petitioner, was
discharged from its liability thereon;
2) Moreover, BPI, the drawee bank, has not validly DISHONORED the subject check; and,
3) The act of BPI, the drawee bank of debiting/deducting the value of the check from petitioners
account amounted to and/or constituted a discharge of the drawers (petitioners) liability
under the instrument/subject check.[9]
Petitioner cites Section 137 of the Negotiable Instruments Law, which states:

Liability of drawee retaining or destroying bill - Where a drawee to whom a bill is

delivered for acceptance destroys the same, or refuses within twenty-four hours after
such delivery or such other period as the holder may allow, to return the bill accepted
or non-accepted to the Holder, he will be deemed to have accepted the same.
Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable for the
payment of the CHECK. Consequently, when BPI offset the value of CHECK against the losses
from the forged checks allegedly committed by the private respondent, the check was deemed paid.
Article 1249 of the New Civil Code deals with a mode of extinction of an obligation and
expressly provides for the medium in the payment of debts. It provides that:

The payment of debts in money shall be made in the currency stipulated, and if it is
not possible to deliver such currency, then in the currency, which is legal tender in the
Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other

mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in
abeyance.

Considering the nature of a money market transaction, the above-quoted provision should be
applied in the present controversy. As held in Perez vs. Court of Appeals,[10] a money market is a
market dealing in standardized short-term credit instruments (involving large amounts) where
lenders and borrowers do not deal directly with each other but through a middle man or dealer in
open market. In a money market transaction, the investor is a lender who loans his money to a
borrower through a middleman or dealer.[11]
In the case at bar, the money market transaction between the petitioner and the private
respondent is in the nature of a loan. The private respondent accepted the CHECK, instead of
requiring payment in money. Yet, when he presented it to RCBC for encashment, as early as June
17, 1991, the same was dishonored by non-acceptance, with BPIs annotation: Check (is) subject
of an investigation. These facts were testified to by BPIs manager. Under these circumstances, and
after the notice of dishonor,[12] the holder has an immediate right of recourse against the
drawer,[13]and consequently could immediately file an action for the recovery of the value of the
check.
In a loan transaction, the obligation to pay a sum certain in money may be paid in money,
which is the legal tender or, by the use of a check. A check is not a legal tender, and therefore
cannot constitute valid tender of payment. In the case of Philippine Airlines, Inc. vs. Court of
Appeals,[14] this Court held:

Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment (citation
omitted). A check, whether a managers check or ordinary check, is not legal tender,
and an offer of a check in payment of a debt is not a valid tender of payment and may
be refused receipt by the obligee or creditor. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not extinguished and
remains suspended until the payment by commercial document is actually realized
(Art. 1249, Civil Code, par. 3.)[15]

Turning now to the second issue, when the bank deducted the amount of the CHECK from
CIFCs current account, this did not ipso facto operate as a discharge or payment of the
instrument.Although the value of the CHECK was deducted from the funds of CIFC, it was not
delivered to the payee, Vicente Alegre. Instead, BPI offset the amount against the losses it incurred
from forgeries of CIFC checks, allegedly committed by Alegre. The confiscation of the value of
the check was agreed upon by CIFC and BPI. The parties intended to amicably settle the collection
suit filed by CIFC with the RTC-Makati, Branch 147, by entering into a compromise agreement,
which reads:
xxx
2. Thereupon, defendant shall debit the sum of P 514,390.94 from the aforesaid current account
representing payment/discharge of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the
alleged dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant;
otherwise stated, the defendant shall not be liable to the plaintiff. Plaintiff however (sic) set-
up the defense of payment/discharge stipulated in par. 2 above.[16]
A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a
litigation or put an end to one already commenced.[17] It is an agreement between two or more
persons who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual
consent in the manner which they agree on, and which everyone of them prefers in the hope of
gaining, balanced by the danger of losing.[18] The compromise agreement could not bind a party
who did not sign the compromise agreement nor avail of its benefits.[19] Thus, the stipulations in
the compromise agreement is unenforceable against Vicente Alegre, not a party thereto. His money
could not be the subject of an agreement between CIFC and BPI. Although Alegres money was in
custody of the bank, the banks possession of it was not in the concept of an owner. BPI cannot
validly appropriate the money as its own. The codal admonition on this issue is clear:

Art. 1317 -

No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.

A Contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it
is ratified, expressly or impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other contracting party.[20]

BPIs confiscation of Alegres money constitutes garnishment without the parties going through
a valid proceeding in court. Garnishment is an attachment by means of which the plaintiff seeks to
subject to his claim the property of the defendant in the hands of a third person or money owed to
such third person or a garnishee to the defendant.[21] The garnishment procedure must be upon
proper order of RTC-Makati, Branch 62, the court who had jurisdiction over the collection suit
filed by BPI against Alegre. In effect, CIFC has not yet tendered a valid payment of its obligation
to the private respondent. Tender of payment involves a positive and unconditional act by the
obligor of offering legal tender currency as payment to the obligee for the formers obligation and
demanding that the latter accept the same.[22] Tender of payment cannot be presumed by a mere
inference from surrounding circumstances.
With regard to the third issue, for litis pendentia to be a ground for the dismissal of an action,
the following requisites must concur: (a) identity of parties or at least such as to represent the same
interest in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded
on the same acts; and (c) the identity in the two cases should be such that the judgment which may
be rendered in one would, regardless of which party is successful, amount to res judicata in the
other.[23]
The trial courts ruling as adopted by the respondent court states, thus:

A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu International
Finance Corporation vs. Bank of the Philippine Islands now pending before Branch
147 of this Court and the Third Party Complaint in the instant case would readily
show that the parties are not only identical but also the cause of action being asserted,
which is the recovery of the value of BPI Check No. 513397 is the same. In Civil
Case No. 92-1940 and in the Third Party Complaint the rights asserted and relief
prayed for, the reliefs being founded on the facts, are identical.

xxx

WHEREFORE, the motion to dismiss is granted and consequently, the Third Party
Complaint is hereby ordered dismissed on ground of lis pendens.[24]

We agree with the observation of the respondent court that, as between the third party claim
filed by the petitioner against BPI in Civil Case No. 92-515 and petitioners ancillary claim against
the bank in Civil Case No. 92-1940, there is identity of parties as well as identity of rights asserted,
and that any judgment that may be rendered in one case will amount to res judicata in another.
The compromise agreement between CIFC and BPI, categorically provided that In case
plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged
dishonor of BPI Check No. 513397, plaintiff (CIFC) cannot go after the defendant (BPI); otherwise
stated, the defendant shall not be liable to the plaintiff.[25] Clearly, this stipulation expressed that
CIFC had already abandoned any further claim against BPI with respect to the value of BPI Check
No. 513397. To ask this Court to allow BPI to be a party in the case at bar, would amount to res
judicata and would violate terms of the compromise agreement between CIFC and BPI. The
general rule is that a compromise has upon the parties the effect and authority of res judicata, with
respect to the matter definitely stated therein, or which by implication from its terms should be
deemed to have been included therein.[26] This holds true even if the agreement has not been
judicially approved.[27]
WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 44085 is AFFIRMED. Costs against petitioner.
 SO ORDERED.
Mendoza, and Buena, JJ., concur.
Bellosillo, (Chairman), J., on official leave.

[1]
Rollo, pp. 46-52.
[2]
Court of Appeals Rollo, p. 65.
[3]
Vicente Alegre vs. Cebu International Finance, Corporation, Civil Case No. 92-515; Record, Regional Trial Court,
pp. 1-12.
[4]
Cebu International Finance Corporation vs. Bank of the Philippine Islands, Civil Case No. 92-1940; Court of
Appeals, Rollo pp. 67-77.
[5]
Rollo, pp. 71-72.
[6]
Id. at 71.
[7]
Id. at 100 -103; Bank of the Philippine Island, vs. Vicente A. Alegre, Civil Case No. 93-2550.
[8]
Id. at 743.
[9]
Id. at 143.
[10]
127 SCRA 636 (1984).
[11]
Sesbreo vs. Court of Appeals, 240 SCRA 606, 614 (1995).
[12]
Negotiable Instruments Law, Section 89.
[13]
Id., Section 151.
[14]
181 SCRA 557 (1990).
[15]
Id. at 568.
[16]
Supra, note 5.
[17]
Del Rosario vs. Madayag, 247 SCRA 767, 770 (1995).
[18]
Id., citing David vs. Court of Appeals, 214 SCRA 644, 650 (1992), citing Rovero vs. Amparo, 91 Phil. 228, 235
(1952); Arcenas vs. Cinco, 74 SCRA 118, 123 (1976).
[19]
Jag and Haggar Jeans and Sportswear Corp. vs. NLRC, 241 SCRA 635, 642 (1995).
[20]
Civil Code of the Philippines, Article 1317.
[21]
Manila Remnant Co., Inc. vs. CA, 231 SCRA 281, 289 (1994)
[22]
Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court, 191 SCRA 411, 419 (1990).
[23]
Ramos vs. Peralta, 203 SCRA 412, 416-417 (1991); Yu vs. CA, 232 SCRA 594, at 598 (1994).
[24]
Court of Appeals Rollo, p. 61.
[25]
Supra, note 5.
[26]
Del Rosario vs. Madayag, 247 SCRA 767, 771 (1995); citing Nieves vs. Court of Appeals, 198 SCRA 63, 69
(1991); World Machine Enterprises vs. Intermediate Appellate Court, 192 SCRA 459, 465 (1990).
[27]
Id., 771; citing Mayuga vs. Court of Appeals, 154 SCRA 309 (1987) citing Meneses vs. De la Rosa, 77 Phil. 34
(1946); Vda. de Guilas vs David, 23 SCRA 762 (1968); Cochingyan vs. Cloribel, 76 SCRA 361.