FACTS:

The case involves a transaction between a foreigner and Gold Palace Jewellery Co. The foreigner purchased several pieces of jewelry valued at P258,000.00 and offered a foreign draft issued by United Overseas Bank (Malaysia) for payment in the amount of P380,000.00. Prior to releasing the jewelry, Gold Palace made inquiries about the nature of the draft from Far East Bank & Trust Company. Far East informed Gold Palace that the draft was similar to a manager's check and should be cleared before the jewelry could be released. As a result, Gold Palace deposited the draft in their account with Far East Bank. The draft was subsequently cleared, and Gold Palace released the jewelry to the foreigner, who received change in the form of a check. However, three weeks later, LBP, the drawee bank, returned the draft to Far East Bank, stating that the amount in the draft had been materially altered. Far East Bank refunded the amount to LBP, debiting Gold Palace's account. Far East Bank then demanded payment from Gold Palace for the difference in amount, but Gold Palace refused to pay. Far East Bank filed a case against Gold Palace, which ruled in favor of Far East. However, the Court of Appeals (CA) reversed the ruling, holding that Far East Bank failed to undergo the necessary procedures and therefore could not charge Gold Palace as an indorser. The CA also ruled that Gold Palace was not liable for the alteration of the draft. Far East Bank filed a petition for review before the Supreme Court, but it was denied.

ISSUES:

1. Whether or not Gold Palace Jewellery Company can be held liable for the material alteration of the foreign draft.

2. Whether or not Far East Bank & Trust Company can charge Gold Palace on its secondary liability as an indorser.

RULING:

1. The Court denied the petition and affirmed the decision of the Court of Appeals. The appellate court ruled that Gold Palace cannot be held liable for the material alteration of the foreign draft since it neither altered the draft nor knew of the alteration. It further ruled that Far East Bank & Trust Company cannot charge Gold Palace on its secondary liability as an indorser because it failed to undergo the proceedings on the protest of the foreign draft or to notify Gold Palace of the draft's dishonor.

PRINCIPLES:

• The acceptor of a negotiable instrument, by accepting it, engages that he will pay it according to the tenor of his acceptance, and his actual payment of the amount in the instrument implies his assent to the order of the drawer and a recognition of his obligation to pay. (Act No. 2031 or the Negotiable Instruments Law)

• Secondary liability as an indorser arises when the instrument is dishonored and proper proceedings on the protest of the instrument are not undertaken or notice of dishonor is not given to the indorser.