NAME: CHOYSTEL MAE S.

ARTIGAS
SUBJECT: Negotiable Instruments Law ISSUE:
TOPIC: Possessor in Bad Faith Whether or not it has the right to remove all the useful
improvements introduced by NAWASA to the Dagupan
CASE TITLE: METROPOLITAN WATERWORKS AND
Waterworks System, notwithstanding the fact that
SEWERAGE SYSTEM vs.
NAWASA was found to be a possessor in bad faith.
THE COURT OF APPEALS and
THE CITY OF DAGUPAN
G.R. No. L-54526 August 25, 1986 RULING:
NO, Article 449 of the Civil Code of the Philippines
provides that "he who builds, plants or sows in bad faith
FACTS:
on the land of another, loses what is built, planted or
The City of Dagupan (hereinafter referred to as the sown without right to indemnity." As a builder in bad
CITY) filed a complaint against the former National faith, NAWASA lost whatever useful improvements it had
Waterworks and Sewerage Authority (hereinafter made without right to indemnity (Santos vs. Mojica, Jan.
referred to as the NAWASA), now the Metropolitan 31, 1969, 26 SCRA 703).
Waterworks and Sewerage System (hereinafter referred
Moreover, under Article 546 of said code, only a
to as MWSS), for recovery of the ownership and
possessor in good faith shall be refunded for useful
possession of the Dagupan Waterworks System.
expenses with the right of retention until reimbursed; and
NAWASA interposed as one of its special defenses R.A. under Article 547 thereof, only a possessor in good faith
1383 which vested upon it the ownership, possession may remove useful improvements if this can be done
and control of all waterworks systems throughout the without damage to the principal thing and if the person
Philippines and as one of its counterclaims the who recovers the possession does not exercise the
reimbursement of the expenses it had incurred for option of reimbursing the useful expenses. The right
necessary and useful improvements amounting to given a possessor in bad faith is to remove
P255,000.00. improvements applies only to improvements for pure
luxury or mere pleasure, provided the thing suffers no
Judgment was rendered by the trial court in favor of the injury thereby and the lawful possessor does not prefer
CITY on the basis of a stipulation of facts. The trial court to retain them by paying the value they have at the time
found NAWASA to be a possessor in bad faith and he enters into possession (Article 549, Id.).
hence not entitled to the reimbursement claimed by it.
NAWASA appealed to the Court of Appeals and argued WHEREFORE, the decision of the appellate court is
in its lone assignment of error that the CITY should have affirmed with costs against petitioner.
been held liable for the amortization of the balance of the
loan secured by NAWASA for the improvement of the
Dagupan Waterworks System. The appellate court
affirmed the judgment of the trial court.
In support of its claim for removal of said useful
improvements, MWSS argues that the pertinent laws on
the subject, particularly Articles 546, 547 and 549 of the
Civil Code of the Philippines, do not definitely settle the
question of whether a possessor in bad faith has the
right to remove useful improvements
The CITY in its brief questions the raising of the issue of
the removal of useful improvements for the first time in
this Court, inasmuch as it was not raised in the trial
court, much less assigned as an error before the then
Court of Appeals. The CITY further argues that
petitioner, as a possessor in bad faith, has absolutely no
right to the useful improvements; that the rulings in the
cases cited by petitioner are not applicable to the case at
bar; that even assuming that petitioner has the right to
remove the useful improvements, such improvements
were not actually identified, and hence a rehearing
would be required which is improper at this stage of the
proceedings; and finally, that such improvements, even if
they could be identified, could not be separated without
causing substantial injury or damage to the Dagupan
Waterworks System.
NAME: CHOYSTEL MAE S. ARTIGAS
SUBJECT: Negotiable Instruments Law
TOPIC: Forged Signature
CASE TITLE: REPUBLIC BANK vs. MAURICIA T.
EBRADA
G.R. No. L-40796 July 31, 1975
FACTS:
Mauricia T. Ebrada, encashed Back Pay Check No.
508060 dated January 15, 1963 for P1,246.08 at the
main office of the plaintiff Republic Bank at Escolta,
Manila. The check was issued by the Bureau of
Treasury.1 Plaintiff Bank was later advised by the said
bureau that the alleged indorsement on the reverse side
of the aforesaid check by the payee, "Martin Lorenzo"
was a forgery2 since the latter had allegedly died as of
July 14, 1952.3 Plaintiff Bank was then requested by the
Bureau of Treasury to refund the amount of
P1,246.08.4 To recover what it had refunded to the
Bureau of Treasury, plaintiff Bank made verbal and
formal demands upon defendant Ebrada to account for
the sum of P1,246.08, but said defendant refused to do
so. So plaintiff Bank sued defendant Ebrada before the
City Court of Manila.
defendant Ebrada filed her answer denying the
material allegations of the complaint and as
affirmative defenses alleged that she was a holder in
due course of the check in question, or at the very
least, has acquired her rights from a holder in due
course and therefore entitled to the proceeds
thereof.
The City Court of Manila rendered judgment for the
plaintiff Bank against defendant Ebrada. Defendant
Ebrada took an appeal to the Court of First Instance of
Manila. The trial court favoured the bank and ordered
Ebrada to pay the plaintiff.
ISSUE:
1. Whether or not the existence of one forged signature
therein will render void all the other negotiations of the
check with respect to the other parties whose signature
are genuine.
2. Whether or not the drawee bank recover from the one
who encashed the check.
RULING:
1. NO, the existence of one forged signature
therein will render void all the other negotiations
of the check with respect to the other parties
whose signature are genuine.
The signature of the original payee of the check, Martin
Lorenzo was a forgery because he was already dead 7
almost 11 years before the check in question was issued
by the Bureau of Treasury. Under action 23 of the
Negotiable Instruments Law (Act 2031):
When a signature is forged or made
without the authority of the person
whose signature it purports to be, it is
wholly inoperative, and no right to retain
the instruments, or to give a discharge
thereof against any party thereto, can be
acquired through or under such
signature unless the party against whom
it is sought to enforce such right is
precluded from setting up the forgery or
want of authority.
However it does this mean that the existence of one
forged signature therein will render void all the other
negotiations of the check with respect to the other
parties whose signature are genuine.
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W.
590, where a check has several indorsements on it, it
was held that it is only the negotiation based on the
forged or unauthorized signature which is inoperative.
Applying this principle to the case before Us, it can be
safely concluded that it is only the negotiation predicated
on the forged indorsement that should be declared
inoperative. This means that the negotiation of the check
in question from Martin Lorenzo, the original payee, to
Ramon R. Lorenzo, the second indorser, should be
declared of no affect, but the negotiation of the aforesaid
check from Ramon R. Lorenzo to Adelaida Dominguez,
the third indorser, and from Adelaida Dominguez to the
defendant-appellant who did not know of the forgery,
should be considered valid and enforceable, barring any
claim of forgery.
2. YES, In the case of State v. Broadway Mut.
Bank, 282 S.W. 196, 197, it was held that the
drawee of a check can recover from the holder
the money paid to him on a forged instrument. It
is not supposed to be its duty to ascertain
whether the signatures of the payee or indorsers
are genuine or not. This is because the indorser
is supposed to warrant to the drawee that the
signatures of the payee and previous indorsers
are genuine, warranty not extending only to
holders in due course. One who purchases a
check or draft is bound to satisfy himself that the
paper is genuine and that by indorsing it or
presenting it for payment or putting it into
circulation before presentation he impliedly
asserts that he has performed his duty and the
drawee who has paid the forged check, without
actual negligence on his part, may recover the
money paid from such negligent purchasers. In
such cases the recovery is permitted because
although the drawee was in a way negligent in
failing to detect the forgery, yet if the encasher
of the check had performed his duty, the forgery
would in all probability, have been detected and
the fraud defeated.
The court conceded that the plaintiff Bank should suffer
the loss when it paid the amount of the check in question
to defendant-appellant, but it has the remedy to recover
from the latter the amount it paid to her. Although the
defendant-appellant to whom the plaintiff Bank paid the
check was not proven to be the author of the supposed
forgery, yet as last indorser of the check, she has
warranted that she has good title to it even if in fact she
did not have it because the payee of the check was
already dead 11 years before the check was issued.
The fact that immediately after receiving title cash
proceeds of the check in question in the amount of
P1,246.08 from the plaintiff Bank, defendant-appellant
immediately turned over said amount to Adelaida
Dominguez (Third-Party defendant and the Fourth-Party
plaintiff) who in turn handed the amount to Justina Tinio
on the same date would not exempt her from liability
because by doing so, she acted as an accommodation
party in the check for which she is also liable under
Section 29 of the Negotiable Instruments Law (Act
2031), thus: .An accommodation party is one who has
signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such
a person is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the
instrument knew him to be only an accommodation
party.
IN VIEW OF THE FOREGOING, the judgment appealed
from is hereby affirmed in toto with costs against
defendant-appellant.
NAME: CHOYSTEL MAE S. ARTIGAS
SUBJECT: Negotiable Instruments Law
TOPIC: Altered Check
CASE TITLE: REPUBLIC BANK v. COURT OF
APPEALS and FIRST NATIONAL
CITY BANK
G.R. No. 42725. April 22, 1991
FACTS:
San Miguel Corporation (SMC for short), drew a dividend
Check No. 108854 for P240, Philippine currency, on its
account in the respondent First National City Bank
("FNCB" for brevity) in favor of J. Roberto C. Delgado, a
stockholder. After the check had been delivered to
Delgado, the amount on its face was fraudulently and
without authority of the drawer, SMC, altered by
increasing it from P240 to P9,240. The check was
indorsed and deposited on March 14, 1966 by Delgado
in his account with the petitioner Republic Bank.
Republic accepted the check for deposit without
ascertaining its genuineness and regularity. Later,
Republic endorsed the check to FNCB by stamping on
the back of the check "all prior and/or lack of
indorsement guaranteed" and presented it to FNCB for
payment through the Central Bank Clearing House.
Believing the check was genuine, and relying on the
guaranty and endorsement of Republic appearing on the
back of the check, FNCB paid P9,240 to Republic
through the Central Bank Clearing House.
SMC notified FNCB of the material alteration in the
amount of the check in question. FNCB lost no time in
recrediting P9,240 to SMC. On May 19, 1966, FNCB
informed Republic in writing of the alteration and the
forgery of the endorsement of J. Roberto C. Delgado. By
then, Delgado had already withdrawn his account from
Republic.
FNCB demanded that Republic refund the P9,240 on the
basis of the latter’s endorsement and guaranty. Republic
refused, claiming there was delay in giving it notice of
the alteration; that it was not guilty of negligence; that it
was the drawer’s (SMC’s) fault in drawing the check in
such a way as to permit the insertion of numerals
increasing the amount; that FNCB, as drawee, was
absolved of any liability to the drawer (SMC), thus,
FNCB had no right of recourse against Republic.
The trial court rendered judgment ordering Republic to
pay P9,240 to FNCB with 6% interest per annum.
ISSUE:
Whether Republic, as the collecting bank, is protected,
by the 24-hour clearing house rule, found in CB Circular
No. 9, as amended, from liability to refund the amount
paid by FNCB, as drawee of the SMC dividend check.
RULING:
YES, The 24-hour clearing house rule embodied in
Section 4(c) of Central Bank Circular No. 9, as
amended, provides:
"Items which should be returned for any reason
whatsoever shall be returned directly to the bank,
institution or entity from which the item was received. For
this purpose, the Receipt for Returned Checks (Cash
Form No. 9) should be used. The original and duplicate
copies of said Receipt shall be given to the Bank,
institution or entity which returned the items and the
triplicate copy should be retained by the bank, institution
or entity whose demand is being returned. At the
following clearing, the original of the Receipt for
Returned Checks shall be presented through the
Clearing Office as a demand against the bank, institution
or entity whose item has been returned. Nothing in this
section shall prevent the returned items from being
settled by direct reimbursement to the bank, institution or
entity returning the items. All items cleared at 11:00
o’clock A.M. shall be returned not later than 2:00 o’clock
P.M. on the same day and all items cleared at 3:00
o’clock P.M. shall be returned not later than 8:30 A.M. of
the following business day except for items cleared on
Saturday which may be returned not later than 8:30 A.M.
of the following day.”
The 24-hour clearing house rule is a valid rule applicable
to commercial banks (Republic v. Equitable Banking
Corporation, 10 SCRA 8 [1964]; Metropolitan Bank &
Trust Co. v. First National City Bank, 118 SCRA 537).
It is true that when an endorsement is forged, the
collecting bank or last endorser, as a general rule, bears
the loss (Banco de Oro Savings & Mortgage Bank v.
Equitable Banking Corp., 167 SCRA 188). But the
unqualified endorsement of the collecting bank on the
check should be read together with the 24-hour
regulation on clearing house operation (Metropolitan
Bank & Trust Co. v. First National City Bank, supra).
Thus, when the drawee bank fails to return a forged or
altered check to the collecting bank within the 24-hour
clearing period, the collecting bank is absolved from
liability.
WHEREFORE, the petition for review is granted. The
decision of the Court of Appeals is hereby reversed and
set aside, and another is entered absolving the petitioner
Republic Bank from liability to refund to the First National
City Bank the sum of P9,240, which the latter paid on the
check in question.
NAME: CHOYSTEL MAE S. ARTIGAS
SUBJECT: Negotiable Instruments Law
TOPIC: Blanks; when may be filled/ Holder in Due
Course
CASE TITLE: ALVIN PATRIMONIO vs. NAPOLEON
GUTIERREZ and OCTAVIO
MARASIGAN III
G.R. No. 187769 June 4, 2014
FACTS:
The petitioner and the respondent Napoleon Gutierrez
(Gutierrez) entered into a business venture under the
name of Slam Dunk Corporation (Slum Dunk), a
production outfit that produced mini-concerts and shows
related to basketball. Petitioner was already then a
decorated professional basketball player while Gutierrez
was a well-known sports columnist.
In the course of their business, 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. According to petitioner, the arrangement was
made so that he could verify the validity of the payment
and make the proper arrangements to fund the account.
In 1993, without the petitioner’s knowledge and consent,
Gutierrez went to Marasigan (the petitioner’s former
teammate), to secure a loan in the amount of
₱200,000.00 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 from March to May 1994.
After much contemplation and taking into account his
relationship with the petitioner and Gutierrez, Marasigan
acceded to Gutierrez’ request and gave him
₱200,000.00 sometime in February 1994. Gutierrez
simultaneously delivered to Marasigan one of the blank
checks the petitioner pre-signed with Pilipinas Bank,
Greenhills Branch, Check No. 21001764 with the blank
portions filled out with the words "Cash" "Two Hundred
Thousand Pesos Only", and the amount of
"₱200,000.00". The upper right portion of the check
corresponding to the date was also filled out with the
words "May 23, 1994" but the petitioner contended that
the same was not written by Gutierrez.
On May 24, 1994, 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 since May 28, 1993.
Marasigan sought recovery from Gutierrez, to no avail.
He thereafter sent several demand letters to the
petitioner asking for the payment of ₱200,000.00, but his
demands likewise went unheeded.
On September 10, 1997, the petitioner filed before the
Regional Trial Court (RTC) a Complaint for Declaration
of Nullity of Loan and Recovery of Damages against
Gutierrez and co-respondent Marasigan. He completely
denied authorizing the loan or the check’s negotiation,
and asserted that he was not privy to the parties’ loan
agreement.
Only Marasigan filed his answer to the complaint. In the
RTC’s order dated December 22, 1997, Gutierrez was
declared in default.
RTC ruled on February 3,2003 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.
While under Section 14 of the Negotiable Instruments
Law Gutierrez had the prima facie authority to complete
the checks by filling up the blanks therein, the RTC ruled
that he deliberately violated petitioner’s specific
instructions and took advantage of the trust reposed in
him by the latter.
The petitioner elevated the case to the Court of
Appeals. The CA affirmed the RTC ruling, although
premised on different factual findings. After careful
analysis, the CA agreed with the petitioner that
Marasigan is not a holder in due course as he did not
receive the check in good faith.
The CA also concluded that the check had been strictly
filled out by Gutierrez in accordance with the petitioner’s
authority. It held that the loan may not be nullified since it
is grounded on an obligation arising from law and ruled
that the petitioner is still liable to pay Marasigan the sum
of ₱200,000.00.
ISSUE:
1. Whether respondent Gutierrez has completely
filled out the subject check strictly under the
authority given by the petitioner.
2. Whether Marasigan is a holder in due course.
RULING:
1. NO. He did not filled it according to the authority
given.
Liability Under the Instrument
The answer is supplied by the applicable statutory
provision found in Section 14 of the Negotiable
Instruments Law (NIL) which states:
Sec. 14. Blanks; when may be filled.- Where the
instrument is wanting in any material particular, the
person in possession thereof has a prima facie authority
to complete it by filling up the blanks therein. And a
signature on a blank paper delivered by the person
making the signature in order that the paper may be
converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount.
In order, however, that any such instrument when
completed may be enforced against any person who
became a party thereto prior to its completion, it must be
filled up strictly in accordance with the authority given
and within a reasonable time. But if any such instrument,
after completion, is negotiated to a holder in due course,
it is valid and effectual for all purposes in his hands, and
he may enforce it as if it had been filled up strictly in
accordance with the authority given and within a
reasonable time.
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 this case, no evidence is on record that Gutierrez
secured prior approval from Patrimonio to fill up the
blank or to use the check even though the former had a
prima facie authority to complete the check. Thus,
Gutierrez exceeded his authority given by Patrimonio
that the check should be used for the operation of their
business provided that the former acquires prior
approval from the latter.
2. NO. Marasigan is Not a Holder in Due Course
The Negotiable Instruments Law (NIL) defines a holder
in due course, thus:
Sec. 52 — 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.(emphasis supplied)
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.
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.
The Petition is GRANTED. The appealed CA Decision
and Resolution are ANNULLED AND SET ASIDE
NAME: CHOYSTEL MAE S. ARTIGAS The Petition is GRANTED. The CA Decision is SET
ASIDE. The NLRC Decision is REINSTATED.
SUBJECT: Negotiable Instruments Law
TOPIC: Encashment of Crossed Check
CASE TITLE: WESLEYAN UNIVERSITY PHILIPPINES
v. REYES
G.R. No. 208321 July 30, 2014

FACTS:
Defendant Reyes was appointed as WUP's University
Treasurer initially on probationary basis but after a year,
as full time. The new WUP's Board of Trustees engaged
in the services of Nepomuceno Suner & Associates
Accounting Firm ("External Auditor") to investigate the
rumors on alleged anomalies in the contracts entered
into by WUP and in its finances.
The External Auditor discovered irregularities in handling
WUP's finances including the encashment of various
crossed checks payable to the University Treasurer by
Chinabank despite the management's intention to
merely have the funds covered thereby transferre from
one of WUP's bank accounts to another. Reyes was put
under preventive suspension while the investigation was
conducted, but eventually, dismissed. She filed a
complaint for illegal dismissal.

ISSUE :
Whether or not the encashment of crossed checks is
proper SC.

RULING :
NO, the encashment of crossed checks is not proper for
it contradicts the management's intention to merely
transfer the funds to another WUP's bank account.
Jurisprudence has pronounced that the crossing of a
check means that the check may not be encashed but
only deposited in the bank. As Treasurer, Reyes knew or
at least expected to be aware of and abide by this basic
banking practice and commercial custom. Clearly, the
issuance of a crossed check reflects management's
intention to safeguard the funds covered thereby, its
special instruction to have the same deposited to
another account and its restriction on its encashment. In
this case, Reyes disregarded management's intentions
and ignored the measures in place to secure the
handling of WUP's funds. By encashing the crossed
checks, Reyes put the funds covered thereby under the
risk of being lost, stolen, co-mingled with other funds or
spent for other purposes. That the encashment of
crossed checks has been a practice of the previous and
present administration of WUP is of no moment. The
prevalence of this practice could have been contained if
only Reyes consistently observed the regular procedure
for encashing crossed checks. Hence, such practice of
encashing crossed checks cannot be considered proper.
NAME: CHOYSTEL MAE S. ARTIGAS
SUBJECT: Negotiable Instruments Law
TOPIC: Collecting bank of altered checks
CASE TITLE: CESAR V. AREZA and LOLITA B.
AREZA vs EXPRESS SAVINGS
BANK, INC. and MICHAEL
POTENCIANO
G.R. No. 176697 September 10, 2014
FACTS:
Petitioners maintained two bank deposits with
respondent Express Savings Bank’s Biñan branch.
They were engaged in the business of "buy and sell" of
brand new and second-hand motor vehicles. They
received an order from a certain Gerry Mambuay
(Mambuay) for the purchase of two vehicles.
The buyer, Mambuay, paid petitioners with nine (9)
Philippine Veterans Affairs Office (PVAO) checks
payable to different payees and drawn against the
Philippine Veterans Bank (drawee),
Petitioners deposited the said checks in their savings
account with the Bank. The Bank, in turn, deposited the
checks with its depositary bank, Equitable-PCI Bank.
Equitable-PCI Bank presented the checks to the drawee,
the Philippine Veterans Bank, which honored the
checks.
the Bank informed petitioners that the subject checks
had been honored. Thus, the amount of ₱1,800,000.00
was accordingly credited to petitioners’ accounts,
prompting them to release the purchased cars to the
buyer.
Unknown to petitioners, the Bank deposited the checks
in its depositary bank, Equitable-PCI Bank. Three
months had passed when the Bank was informed by its
depositary bank that the drawee had dishonored the
checks on the ground of material alterations.
.The Bank unilaterally withdrew the amount representing
the returned checks from petitioners’ savings account.
Acting on the alleged arbitrary and groundless
dishonoring of their checks and the unlawful and
unilateral withdrawal from their savings account,
petitioners filed a Complaint for Sum of Money with
Damages against the Bank and Potenciano with the
RTC of Calamba.
The RTC initially rendered judgement in favor of the
petitioners.
According to the trial court, it is the depositary bank
which should safeguard the right ofthe depositors over
their money. Invoking Article 1977 of the Civil Code, the
trial court stated that the depositary cannot make use of
the thing deposited without the express permission of
the depositor. The trial court also held that respondents
should have observed the 24-hour clearing house rule
that checks should be returned within 24-hours after
discovery of the forgery but in no event beyond the
period fixed by law for filing a legal action.
Respondents filed a motion for reconsideration while
petitioners filed a motion for execution from the Decision
of the RTC
the RTC granted the motion for reconsideration, set
aside the prior Decision, and dismissed the complaint.
On the merits, the trial court considered the relationship
of the Bank and petitioners with respect to their savings
account deposits as a contract of loan with the bank as
the debtor and petitioners as creditors. As such, Article
1977 of the Civil Code prohibiting the depository from
making use of the thing deposited without the express
permission of the depositor is not applicable. Instead,
the trial court applied Article 1980 which provides that
fixed, savings and current deposits of money in banks
and similar institutions shall be governed by the
provisions governing simple loan. The trial court then
opined that the Bank had all the right to set-off against
petitioners’ savings deposits the value of their nine
checks that were returned.
On appeal, the Court of Appeals affirmed the ruling of
the trial court.
ISSUE:
Whether or not the Bank had the right to debit
₱1,800,000.00 from petitioners’ accounts.
RULING:
LIABILITY OF DEPOSITARY BANK AND COLLECTING
BANK
A depositary bank is the first bank to take an item even
though it is also the payor bank, unless the item is
presented for immediate payment over the counter. It is
also the bank to which a check is transferred for deposit
in an account at such bank, evenif the check is
physically received and indorsed first by another bank. A
collecting bank is defined as any bank handling an item
for collection except the bank on which the check is
drawn.
When petitioners deposited the check with the Bank,
they were designating the latter as the collecting bank.
This is in consonance with the rule that a negotiable
instrument, such as a check, whether a manager's check
or ordinary check, is not legal tender. As such, after
receiving the deposit, under its own rules, the Bank shall
credit the amount in petitioners’ account or infuse value
thereon only after the drawee bank shall have paid the
amount of the check or the check has been cleared for
deposit.
The Bank and Equitable-PCI Bank are both depositary
and collecting banks.
A depositary/collecting bank where a check is deposited,
and which endorses the check upon presentment with
the drawee bank, is an endorser. Under Section 66 of
the Negotiable Instruments Law, an endorser warrants
"that the instrument is genuine and in all respects what it
purports to be; that he has good title to it; that all prior
parties had capacity to contract; and that the instrument
is at the time of his endorsement valid and subsisting." It
has been repeatedly held that in check transactions, the
depositary/collecting bank or last endorser generally
suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that
the act of presenting the check for payment to the
drawee is an assertion that the party making the
presentment has done its duty to ascertain the
genuineness of the endorsements. If any of the
warranties made by the depositary/collecting bank turns
out to be false, then the drawee bank may recover from
it up to the amount of the check.
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.
As collecting banks, the Bank and Equitable-PCI Bank
are both liable for the amount of the materially altered
checks. Since Equitable-PCI Bank is not a party to this
case and the Bank allowed its account with EquitablePCI
Bank to be debited, it has the option toseek recourse
against the latter in another forum.
24-HOUR CLEARING RULE
Petitioners faulted the drawee bank for not following the
24-hour clearing period because it was only in August
2000 that the drawee bank notified Equitable-PCI that
there were material alterations in the checks.
We do not subscribe to the position taken by petitioners
that the drawee bank was at fault because it did not
follow the 24-hour clearing period which provides that
when a drawee bank fails to return a forged or altered
check to the collecting bank within the 24-hour clearing
period, the collecting bank is absolved from liability.
Section 21 of the Philippine Clearing House Rules and
Regulations provides: Sec. 21. Special Return Items
Beyond The Reglementary Clearing Period.- Items
which have been the subject of material alteration or
items bearing forged endorsement when such
endorsement is necessary for negotiation shall be
returned by direct presentation or demand to the
Presenting Bank and not through the regular clearing
house facilities within the period prescribed by law for
the filing of a legal action by the returning bank/branch,
institution or entity sending the same.
Antonio Viray, in his book Handbook on Bank Deposits,
elucidated:
It is clear that the so-called "24-hour" rule has been
modified. In the case of Hongkong & Shanghai vs.
People’s Bank reiterated in Metropolitan Bank and Trust
Co. vs. FNCB, the Supreme Court strictly enforced the
24-hour rule under which the drawee bank forever loses
the right to claim against presenting/collecting bank if the
check is not returned at the next clearing day orwithin 24
hours. Apparently, the commercial banks felt strict
enforcement of the 24-hour rule is too harsh and
therefore made representations and obtained
modification of the rule, which modification is now
incorporated in the Manual of Regulations. Since the
same commercial banks controlled the Philippine
Clearing House Corporation, incorporating the amended
rule in the PCHC Rules naturally followed.
As the rule now stands, the 24-hour rule is still in force,
that is, any check which should be refused by the
drawee bank in accordance with long standing and
accepted banking practices shall be returned through the
PCHC/local clearing office, as the case may be, not later
than the next regular clearing (24-hour). The
modification, however, is that items which have been the
subject of material alteration or bearing forged
endorsement may be returned even beyond 24 hours so
long that the same is returned within the prescriptive
period fixed by law. The consensus among lawyers is
that the prescriptiveperiod is ten (10)years because a
check or the endorsement thereon is a written contract.
Moreover, the item need not be returned through the
clearing house but by direct presentation to the
presenting bank.
In short, the 24-hour clearing ruledoes not apply to
altered checks.

NAME: CHOYSTEL MAE S. ARTIGAS
SUBJECT: Negotiable Instruments Law
TOPIC: Non-extinguishment of Liability even if
Promissory Note is altered
CASE TITLE: LEONARDO BOGNOT vs. RRI LENDING
CORPORATION, represented by
its General Manager, DARIO J.
BERNARDEZ
G.R. No. 180144 September 24, 2014
FACTS:
RRI Lending Corporation (respondent) is an entity
engaged in the business of lending money to its
borrowers within Metro Manila.
Sometime in September 1996, the petitioner and his
younger brother, Rolando A. Bognot (collectively
referred to as the "Bognot siblings"), applied for and
obtained a loan from the respondent, payable on
November 30, 1996. The loan was evidenced by a
promissory note and was secured by a post dated
check.
Evidence on record shows that the petitioner renewed
the loan several times on a monthly basis. He paid a
renewal fee of ₱54,600.00 for each renewal, issued a
new post-dated check as security, and executed and/or
renewed the promissory note previouslyissued. The
respondent on the other hand, cancelled and returned to
the petitioner the post-dated checks issued prior to their
renewal.
Subsequently, the loan was again renewed on a monthly
basis. The petitioner purportedly paid the renewal fees
and issued a post-dated check dated as security. As had
been done in the past, the respondent superimposed the
date "June 30, 1997" on the upper right portion of
Promissory Note No. 97-035 to make it appear that it
would mature on the said date.
Several days before the loan’s maturity, Rolando’s wife,
Julieta Bognot (Mrs. Bognot), went to the respondent’s
office and applied for another renewal of the loan. She
issued in favor of the respondent Promissory Note No.
97-051, and International Bank Exchange (IBE) Check
No. 00012522, dated July 30, 1997, in the amount of
₱54,600.00 as renewal fee.
On the excuse that she needs to bring home the loan
documents for the Bognot siblings’ signatures and
replacement, Mrs. Bognot asked the respondent’s clerk
to release to her the promissory note, the disclosure
statement, and the check dated July 30, 1997. Mrs.
Bognot, however, never returned these documents nor
issued a new post-dated check. Consequently, the
respondent sent the petitioner follow-up letters
demanding payment of the loan, plus interest and
penalty charges. These demands went unheeded.
On November 27, 1997, the respondent, through
Bernardez, filed a complaint for sum of money before the
Regional Trial Court (RTC) against the Bognot siblings.
The respondent alleged, among others, the Bognot
siblings failed to pay their joint and solidary obligation.
Summons were served on the Bognot siblings. However,
only the petitioner filed his answer.
In his Answer,10 the petitioner claimed that the complaint
states no cause of action because the respondent’s
claim had been paid, waived, abandoned or otherwise
extinguished; and that his promissory note was
tampered.
Trial on the merits thereafter ensued.
The Regional Trial Court Ruling
The RTC ruled in the respondent’s favor and ordered the
Bognot siblings to pay the amount of the loan, plus
interest and penalty charges. That the loan they
contracted was joint and solidary. Petitioner signed the
promissory note as a principal (and not merely as a
guarantor), while Rolando was the co-maker. It brushed
the petitioner’s defense of full payment aside, ruling that
the respondent had successfully proven, by
preponderance of evidence, the nonpayment of the loan.
The petitioner appealed the decision to the Court of
Appeals and CA affirmed the RTC’s findings.
ISSUE:
Whether or not the petitioner is relieved from liability by
reason of the material alteration in the promissory note.
RULING:
Petitioner is not relieved from liability.
No Evidence Was Presented to Establish the Fact of
Payment
Jurisprudence tells us that one who pleads payment has
the burden of proving it;17 the burden rests on the
defendant to prove payment, rather than on the plaintiff
to prove non-payment.18 Indeed, once the existence of
an indebtedness is duly established by evidence, the
burden of showing with legal certainty that the obligation
has been discharged by payment rests on the debtor.19
In the present case, the petitioner failed to satisfactorily
prove that his obligation had already been extinguished
by payment. As the CA correctly noted, the petitioner
failed to present any evidence that the respondent had in
fact encashed his check and applied the proceeds to the
payment of the loan. Neither did he present official
receipts evidencing payment, nor any proof that the
check had been dishonored.
The evidence shows that this check was issued to
secure the indebtedness. The acts imputed on the
respondent, standing alone, do not constitute sufficient
evidence of payment.
Article 1249, paragraph 2 of the Civil Code provides: note, we hold that the petitioner can still be held liable for
the unpaid loan.
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.
(Emphasis supplied)
Also, we held in Bank of the Philippine Islands v.
Spouses Royeca:20
Settled is the rule that payment must be made
in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of
payment. 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. 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.(Emphasis supplied)
Although Article 1271 of the Civil Code provides for a
legal presumption of renunciation of action (in cases
where a private document evidencing a credit was
voluntarily returned by the creditor to the debtor), this
presumption is merely prima facieand is not conclusive;
the presumption loses efficacy when faced with evidence
to the contrary.
Moreover, the cited provision merely raises a
presumption, not of payment, but of the renunciation of
the credit where more convincing evidence would be
required than what normally would be called for to prove
payment.21Thus, reliance by the petitioner on the legal
presumption to prove payment is misplaced.
To reiterate, no cash payment was proven by the
petitioner. The cancellation and return of the check
dated April 1, 1997, simply established his renewal of
the loan – not the fact of payment. Furthermore, it has
been established during trial, through repeated acts, that
the respondent cancelled and surrendered the post-
dated check previously issued whenever the loan is
renewed.
In Guinsatao v. Court of Appeals,31 this Court pointed
out that while a promissory note is evidence of an
indebtedness, it is not the only evidence, for the
existence of the obligation can be proven by other
documentary evidence such as a written memorandum
signed by the parties. In Pacheco v. Court of
Appeals,32 this Court likewise expressly recognized that
a check constitutes anevidence of indebtedness and is a
veritable proof of an obligation. It canbe used in lieu of
and for the same purpose as a promissory note and can
therefore be presented to establish the existence of
indebtedness.33
In the present petition, we find that the totality of the
evidence on record sufficiently established the existence
of the petitioner’s indebtedness (and liability) based on
the contract of loan. Even with the tampered promissory