APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS LAW

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 16454

September 29, 1921

GEORGE A. KAUFFMAN, plaintiff-appellee,

vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Roman J. Lacson for appellant.
Ross and Lawrence for appellee.

CABLE TRANSFER BOUGHT FROM

PHILIPPINE NATIONAL BANK,
Manila, P.I.
Stamp P18
Foreign
$45,000.

Amount
3/8 %

Rate
P90,337.50

Payable through Philippine National Bank, New York. To G. A. Kauffman, New

York. Total P90,355.50. Account of Philippine Fiber and Produce Company. Sold
to Messrs. Philippine Fiber and Produce Company, Manila.

STREET, J.:
At the time of the transaction which gave rise to this litigation the plaintiff, George A.
Kauffman, was the president of a domestic corporation engaged chiefly in the exportation
of hemp from the Philippine Islands and known as the Philippine Fiber and Produce
Company, of which company the plaintiff apparently held in his own right nearly the entire
issue of capital stock. On February 5, 1918, the board of directors of said company,
declared a dividend of P100,000 from its surplus earnings for the year 1917, of which the
plaintiff was entitled to the sum of P98,000. This amount was accordingly placed to his
credit on the books of the company, and so remained until in October of the same year
when an unsuccessful effort was made to transmit the whole, or a greater part thereof, to
the plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the
Philippine Fiber and Produce Company, presented himself in the exchange department
of the Philippine National Bank in Manila and requested that a telegraphic transfer of
$45,000 should be made to the plaintiff in New York City, upon account of the Philippine
Fiber and Produce Company. He was informed that the total cost of said transfer,
including exchange and cost of message, would be P90,355.50. Accordingly, Wicks, as
treasurer of the Philippine Fiber and Produce Company, thereupon drew and delivered a
check for that amount on the Philippine National Bank; and the same was accepted by
the officer selling the exchange in payment of the transfer in question. As evidence of this
transaction a document was made out and delivered to Wicks, which is referred to by the
bank's assistant cashier as its official receipt. This memorandum receipt is in the
following language:

October 9th, 1918.

(Sgd.) Y LERMA,
Manager, Foreign Department.

On the same day the Philippine National Bank dispatched to its New York agency a
cablegram to the following effect:
Pay George A. Kauffman, New York, account Philippine Fiber Produce Co.,
$45,000. (Sgd.) PHILIPPINE NATIONAL BANK, Manila.
Upon receiving this telegraphic message, the bank's representative in New York sent a
cable message in reply suggesting the advisability of withholding this money from
Kauffman, in view of his reluctance to accept certain bills of the Philippine Fiber and
Produce Company. The Philippine National Bank acquiesced in this and on October 11
dispatched to its New York agency another message to withhold the Kauffman payment
as suggested.
Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to
Kauffman in New York, advising him that $45,000 had been placed to his credit in the
New York agency of the Philippine National Bank; and in response to this advice
Kauffman presented himself at the office of the Philippine National Bank in New York City
on October 15, 1918, and demanded the money. By this time, however, the message
from the Philippine National Bank of October 11, directing the withholding of payment
had been received in New York, and payment was therefore refused.

In view of these facts, the plaintiff Kauffman instituted the present action in the Court of
First Instance of the city of Manila to recover said sum, with interest and costs; and
judgment having been there entered favorably to the plaintiff, the defendant appealed.
Among additional facts pertinent to the case we note the circumstance that at the time of
the transaction above-mentioned, the Philippines Fiber and Produce Company did not
have on deposit in the Philippine National Bank money adequate to pay the check for
P90,355.50, which was delivered in payment of the telegraphic order; but the company
did have credit to that extent, or more, for overdraft in current account, and the check in
question was charged as an overdraft against the Philippine Fiber and Produce
Company and has remained on the books of the bank as an interest-bearing item in the
account of said company.
It is furthermore noteworthy that no evidence has been introduced tending to show failure
of consideration with respect to the amount paid for said telegraphic order. It is true that
in the defendant's answer it is suggested that the failure of the bank to pay over the
amount of this remittance to the plaintiff in New York City, pursuant to its agreement, was
due to a desire to protect the bank in its relations with the Philippine Fiber and Produce
Company, whose credit was secured at the bank by warehouse receipts on Philippine
products; and it is alleged that after the exchange in question was sold the bank found
that it did not have sufficient to warrant payment of the remittance. In view, however, of
the failure of the bank to substantiate these allegations, or to offer any other proof
showing failure of consideration, it must be assumed that the obligation of the bank was
supported by adequate consideration.
In this court the defense is mainly, if not exclusively, based upon the proposition that,
inasmuch as the plaintiff Kauffman was not a party to the contract with the bank for the
transmission of this credit, no right of action can be vested in him for the breach thereof.
"In this situation," we here quote the words of the appellant's brief, "if there exists a
cause of action against the defendant, it would not be in favor of the plaintiff who had
taken no part at all in the transaction nor had entered into any contract with the plaintiff,
but in favor of the Philippine Fiber and Produce Company, the party which contracted in
its own name with the defendant."
The question thus placed before us is one purely of law; and at the very threshold of the
discussion it can be stated that the provisions of the Negotiable Instruments Law can
come into operation there must be a document in existence of the character described in
section 1 of the Law; and no rights properly speaking arise in respect to said instrument
until it is delivered. In the case before us there was an order, it is true, transmitted by the
defendant bank to its New York branch, for the payment of a specified sum of money to
George A. Kauffman. But this order was not made payable "to order or "to bearer," as
required in subsection (d) of that Act; and inasmuch as it never left the possession of the
bank, or its representative in New York City, there was no delivery in the sense intended
in section 16 of the same Law. In this connection it is unnecessary to point out that the
official receipt delivered by the bank to the purchaser of the telegraphic order, and
already set out above, cannot itself be viewed in the light of a negotiable instrument,
although it affords complete proof of the obligation actually assumed by the bank.
Stated in bare simplicity the admitted facts show that the defendant bank for a valuable
consideration paid by the Philippine Fiber and Produce Company agreed on October 9,

1918, to cause a sum of money to be paid to the plaintiff in New York City; and the
question is whether the plaintiff can maintain an action against the bank for the
nonperformance of said undertaking. In other words, is the lack of privity with the contract
on the part of the plaintiff fatal to the maintenance of an action by him?
The only express provision of law that has been cited as bearing directly on this question
is the second paragraph of article 1257 of the Civil Code; and unless the present action
can be maintained under the provision, the plaintiff admittedly has no case. This
provision states an exception to the more general rule expressed in the first paragraph of
the same article to the effect that contracts are productive of effects only between the
parties who execute them; and in harmony with this general rule are numerous decisions
of this court (Wolfson vs. Estate of Martinez, 20 Phil., 340; Ibaez de
Aldecoa vs. Hongkong and Shanghai Banking Corporation, 22 Phil., 572, 584; Manila
Railroad Co. vs. Compaia Trasatlantica and Atlantic, Gulf and Pacific Co., 38 Phil., 873,
894.)
The paragraph introducing the exception which we are now to consider is in these words:
Should the contract contain any stipulation in favor of a third person, he may
demand its fulfillment, provided he has given notice of his acceptance to the
person bound before the stipulation has been revoked. (Art. 1257, par. 2, Civ.
Code.)
In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate
dissertation upon the history and interpretation of the paragraph above quoted and so
complete is the discussion contained in that opinion that it would be idle for us here to go
over the same matter. Suffice it to say that Justice Trent, speaking for the court in that
case, sums up its conclusions upon the conditions governing the right of the person for
whose benefit a contract is made to maintain an action for the breach thereof in the
following words:
So, we believe the fairest test, in this jurisdiction at least, whereby to determine
whether the interest of a third person in a contract is a stipulation pour autrui, or
merely an incidental interest, is to rely upon the intention of the parties as
disclosed by their contract.
If a third person claims an enforcible interest in the contract, the question must
be settled by determining whether the contracting parties desired to tender him
such an interest. Did they deliberately insert terms in their agreement with the
avowed purpose of conferring a favor upon such third person? In resolving this
question, of course, the ordinary rules of construction and interpretation of
writings must be observed. (Uy Tam and Uy Yet vs. Leonard, supra.)
Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui,
it matters not whether the stipulation is in the nature of a gift or whether there is an
obligation owing from the promise to the third person. That no such obligation exists may
in some degree assist in determining whether the parties intended to benefit a third
person, whether they stipulated for him." (Uy Tam and Uy Yet vs. Leonard, supra.)

In the light of the conclusion thus stated, the right of the plaintiff to maintain the present
action is clear enough; for it is undeniable that the bank's promise to cause a definite
sum of money to be paid to the plaintiff in New York City is a stipulation in his favor within
the meaning of the paragraph above quoted; and the circumstances under which that
promise was given disclose an evident intention on the part of the contracting parties that
the plaintiff should have the money upon demand in New York City. The recognition of
this unqualified right in the plaintiff to receive the money implies in our opinion the right in
him to maintain an action to recover it; and indeed if the provision in question were not
applicable to the facts now before us, it would be difficult to conceive of a case arising
under it.
It will be noted that under the paragraph cited a third person seeking to enforce
compliance with a stipulation in his favor must signify his acceptance before it has been
revoked. In this case the plaintiff clearly signified his acceptance to the bank by
demanding payment; and although the Philippine National Bank had already directed its
New York agency to withhold payment when this demand was made, the rights of the
plaintiff cannot be considered to as there used, must be understood to imply revocation
by the mutual consent of the contracting parties, or at least by direction of the party
purchasing he exchange.
In the course of the argument attention was directed to the case of Legniti vs. Mechanics,
etc. Bank (130 N.E. Rep., 597), decided by the Court of Appeals of the State of New York
on March 1, 1921, wherein it is held that, by selling a cable transfer of funds on a foreign
country in ordinary course, a bank incurs a simple contractual obligation, and cannot be
considered as holding the money which was paid for the transfer in the character of a
specific trust. Thus, it was said, "Cable transfers, therefore, mean a method of
transmitting money by cable wherein the seller engages that he has the balance at the
point on which the payment is ordered and that on receipt of the cable directing the
transfer his correspondent at such point will make payment to the beneficiary described
in the cable. All these transaction are matters of purchase and sale create no trust
relationship."
As we view it there is nothing in the decision referred to decisive of the question now
before us, wish is merely that of the right of the beneficiary to maintain an action against
the bank selling the transfer.
Upon the considerations already stated, we are of the opinion that the right of action
exists, and the judgment must be affirmed. It is so ordered, with costs against the
appellant. Interest will be computed as prescribed in section 510 of the Code of Civil
Procedure.
Johnson, Araullo, Avancea and Villamor, JJ., concur.

APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS LAW

Republic of the Philippines
SUPREME COURT
Manila

Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly
the payment of the amortizations due, GSIS extrajudicially foreclosed the mortgage and
caused the mortgaged property to be sold at public auction on December 3, 1962. 6
More than two years thereafter, or on August 23, 1965, herein private respondents filed a
complaint against the petitioner and the Lagasca spouses in the former Court of

SECOND DIVISION
G.R. No. L-40824 February 23, 1989
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,
vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.

First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their
property and all other documents executed in relation thereto in favor of the Government
Service Insurance System" be declared null and void. It was further prayed that they be
allowed to recover said property, and/or the GSIS be ordered to pay them the value
thereof, and/or they be allowed to repurchase the land. Additionally, they asked for actual
and moral damages and attorney's fees.
In their aforesaid complaint, private respondents alleged that they signed the mortgage
contracts not as sureties or guarantors for the Lagasca spouses but they merely gave
their common property to the said co-owners who were solely benefited by the loans
from the GSIS.
The trial court rendered judgment on February 25, 1968 dismissing the complaint for
failure to establish a cause of action. 8

REGALADO , J.:
Said decision was reversed by the respondent Court of Appeals 9 which held that:
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and
Mrs Flaviano Lagasca, executed a deed of mortgage, dated November 13, 1957, in favor
of petitioner Government Service Insurance System (hereinafter referred to as GSIS) and
subsequently, another deed of mortgage, dated April 14, 1958, in connection with two
loans granted by the latter in the sums of P 11,500.00 and P 3,000.00, respectively. 1 A
parcel of land covered by Transfer Certificate of Title No. 38989 of the Register of Deed
of Quezon City, co-owned by said mortgagor spouses, was given as security under the
aforesaid two deeds. 2 They also executed a 'promissory note" which states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY
and SOLIDARILY, promise to pay the GOVERNMENT SERVICE
INSURANCE SYSTEM the sum of . . . (P 11,500.00) Philippine
Currency, with interest at the rate of six (6%) per centum compounded
monthly payable in . . . (120)equal monthly installments of . . . (P
127.65) each. 3
On July 11, 1961, the Lagasca spouses executed an instrument denominated
"Assumption of Mortgage" under which they obligated themselves to assume the
aforesaid obligation to the GSIS and to secure the release of the mortgage covering that
portion of the land belonging to herein private respondents and which was mortgaged to
the GSIS. 4 This undertaking was not fulfilled. 5

... although formally they are co-mortgagors, they are so only for
accomodation (sic) in that the GSIS required their consent to the
mortgage of the entire parcel of land which was covered with only one
certificate of title, with full knowledge that the loans secured thereby
were solely for the benefit of the appellant (sic) spouses who alone
applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a valid
cause for having foreclosed the mortgage without having given
sufficient notice to them as required either as to their delinquency in
the payment of amortization or as to the subsequent foreclosure of the
mortgage by reason of any default in such payment. The notice
published in the newspaper, 'Daily Record (Exh. 12) and posted
pursuant to Sec 3 of Act 3135 is not the notice to which the mortgagor
is entitled upon the application being made for an extrajudicial
foreclosure. ... 10
On the foregoing findings, the respondent court consequently decreed that-

In view of all the foregoing, the judgment appealed from is hereby

reversed, and another one entered (1) declaring the foreclosure of the
mortgage void insofar as it affects the share of the appellants; (2)
directing the GSIS to reconvey to appellants their share of the
mortgaged property, or the value thereof if already sold to third party, in
the sum of P 35,000.00, and (3) ordering the appellees Flaviano
Lagasca and Esther Lagasca to pay the appellants the sum of P
10,00.00 as moral damages, P 5,000.00 as attorney's fees, and
costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties relied on the provisions of Section 29
of Act No. 2031, otherwise known as the Negotiable Instruments Law, which provide that
an accommodation party is one who has signed an instrument as maker, drawer,
acceptor of indorser without receiving value therefor, but is held liable on the instrument
to a holder for value although the latter knew him to be only an accommodation party.
This approach of both parties appears to be misdirected and their reliance misplaced.
The promissory note hereinbefore quoted, as well as the mortgage deeds subject of this
case, are clearly not negotiable instruments. These documents do not comply with the
fourth requisite to be considered as such under Section 1 of Act No. 2031 because they
are neither payable to order nor to bearer. The note is payable to a specified party, the
GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply;
governance shall be afforded, instead, by the provisions of the Civil Code and special
laws on mortgages.
As earlier indicated, the factual findings of respondent court are that private respondents
signed the documents "only to give their consent to the mortgage as required by GSIS",
with the latter having full knowledge that the loans secured thereby were solely for the
benefit of the Lagasca spouses. 12 This appears to be duly supported by sufficient
evidence on record. Indeed, it would be unusual for the GSIS to arrange for and deduct
the monthly amortizations on the loans from the salary as an army officer of Flaviano
Lagasca without likewise affecting deductions from the salary of Isabelo Racho who was
also an army sergeant. Then there is also the undisputed fact, as already stated, that the
Lagasca spouses executed a so-called "Assumption of Mortgage" promising to exclude
private respondents and their share of the mortgaged property from liability to the
mortgagee. There is no intimation that the former executed such instrument for a
consideration, thus confirming that they did so pursuant to their original agreement.
The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is
clear that there was no objection in the court below regarding the admissibility of the
testimony and documents that were presented to prove that the private respondents
signed the mortgage papers just to accommodate their co-owners, the Lagasca spouses.
Besides, the introduction of such evidence falls under the exception to said rule, there
being allegations in the complaint of private respondents in the court below regarding the
failure of the mortgage contracts to express the true agreement of the parties.14

However, contrary to the holding of the respondent court, it cannot be said that private
respondents are without liability under the aforesaid mortgage contracts. The factual
context of this case is precisely what is contemplated in the last paragraph of Article 2085
of the Civil Code to the effect that third persons who are not parties to the principal
obligation may secure the latter by pledging or mortgaging their own property
So long as valid consent was given, the fact that the loans were solely for the benefit of
the Lagasca spouses would not invalidate the mortgage with respect to private
respondents' share in the property. In consenting thereto, even assuming that private
respondents may not be assuming personal liability for the debt, their share in the
property shall nevertheless secure and respond for the performance of the principal
obligation. The parties to the mortgage could not have intended that the same would
apply only to the aliquot portion of the Lagasca spouses in the property, otherwise the
consent of the private respondents would not have been required.
The supposed requirement of prior demand on the private respondents would not be in
point here since the mortgage contracts created obligations with specific terms for the
compliance thereof. The facts further show that the private respondents expressly bound
themselves as solidary debtors in the promissory note hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the
ruling of respondent court that lack of notice to the private respondents of the
extrajudicial foreclosure sale impairs the validity thereof. In Bonnevie, et al. vs. Court of
appeals, et al., 15 the Court ruled that Act No. 3135, as amended, does not require
personal notice on the mortgagor, quoting the requirement on notice in such cases as
follows:
Section 3. Notice shall be given by posting notices of sale for not less
than twenty days in at least three public places of the municipality
where the property is situated, and if such property is worth more than
four hundred pesos, such notice shall also be published once a week
for at least three consecutive weeks in a newspaper of general
circulation in the municipality or city.
There is no showing that the foregoing requirement on notice was not complied with in
the foreclosure sale complained of .
The respondent court, therefore, erred in annulling the mortgage insofar as it affected the
share of private respondents or in directing reconveyance of their property or the
payment of the value thereof Indubitably, whether or not private respondents herein
benefited from the loan, the mortgage and the extrajudicial foreclosure proceedings were
valid.
WHEREFORE, judgment is hereby rendered REVERSING the decision of the
respondent Court of Appeals and REINSTATING the decision of the court a quo in Civil
Case No. Q-9418 thereof.

SO ORDERED.
Melencio-Herrera (Chairperson), Paras, Padilla and Sarmiento, JJ., concur.

CONCEPT OF NEGOTIABLE INSTRUMENTS

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 100290 June 4, 1993

NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and EDEN TAN, respondents.

PADILLA, J.:
Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before this Court
assailing the decision * of respondent appellate court dated 24 April 1991 in CA-G.R. SP
No. 24164 denying their petition for certiorariprohibition, and injunction which sought to
annul the order of Judge Eutropio Migrio of the Regional Trial Court, Branch 151, Pasig,
Metro Manila in Civil Case No. 54863 entitled "Eden Tan vs. Sps. Norberto and Carmen
Tibajia."
Stated briefly, the relevant facts are as follows:
Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan against the
Tibajia spouses. A writ of attachment was issued by the trial court on 17 August 1987 and
on 17 September 1987, the Deputy Sheriff filed a return stating that a deposit made by
the Tibajia spouses in the Regional Trial Court of Kalookan City in the amount of Four
Hundred Forty Two Thousand Seven Hundred and Fifty Pesos (P442,750.00) in another
case, had been garnished by him. On 10 March 1988, the Regional Trial Court, Branch
151 of Pasig, Metro Manila rendered its decision in Civil Case No. 54863 in favor of the
plaintiff Eden Tan, ordering the Tibajia spouses to pay her an amount in excess of Three
Hundred Thousand Pesos (P300,000.00). On appeal, the Court of Appeals modified the
decision by reducing the award of moral and exemplary damages. The decision having
become final, Eden Tan filed the corresponding motion for execution and thereafter, the
garnished funds which by then were on deposit with the cashier of the Regional Trial
Court of Pasig, Metro Manila, were levied upon.
On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima
the total money judgment in the following form:

Cashier's Check P262,750.00

Cash 135,733.70

Total P398,483.70
Private respondent, Eden Tan, refused to accept the payment made by the Tibajia
spouses and instead insisted that the garnished funds deposited with the cashier of the
Regional Trial Court of Pasig, Metro Manila be withdrawn to satisfy the judgment
obligation. On 15 January 1991, defendant spouses (petitioners) filed a motion to lift the
writ of execution on the ground that the judgment debt had already been paid. On 29
January 1991, the motion was denied by the trial court on the ground that payment in
cashier's check is not payment in legal tender and that payment was made by a third
party other than the defendant. A motion for reconsideration was denied on 8 February
1991. Thereafter, the spouses Tibajia filed a petition for certiorari, prohibition and
injunction in the Court of Appeals. The appellate court dismissed the petition on 24 April
1991 holding that payment by cashier's check is not payment in legal tender as required
by Republic Act No. 529. The motion for reconsideration was denied on 27 May 1991.
In this petition for review, the Tibajia spouses raise the following issues:
I WHETHER OR NOT THE BPI CASHIER'S CHECK NO. 014021 IN
THE AMOUNT OF P262,750.00 TENDERED BY PETITIONERS FOR
PAYMENT OF THE JUDGMENT DEBT, IS "LEGAL TENDER".
II WHETHER OR NOT THE PRIVATE RESPONDENT MAY VALIDLY
REFUSE THE TENDER OF PAYMENT PARTLY IN CHECK AND
PARTLY IN CASH MADE BY PETITIONERS, THRU AURORA VITO
AND COUNSEL, FOR THE SATISFACTION OF THE MONETARY
OBLIGATION OF PETITIONERS-SPOUSES. 1
The only issue to be resolved in this case is whether or not payment by means of check
(even by cashier's check) is considered payment in legal tender as required by the Civil
Code, Republic Act No. 529, and the Central Bank Act.
It is contended by the petitioners that the check, which was a cashier's check of the Bank
of the Philippine Islands, undoubtedly a bank of good standing and reputation, and which
was a crossed check marked "For Payee's Account Only" and payable to private
respondent Eden Tan, is considered legal tender, payment with which operates to
discharge their monetary obligation. 2 Petitioners, to support their contention, cite the
case of New Pacific Timber and Supply Co., Inc. v. Seeris 3 where this Court held
through Mr. Justice Hermogenes Concepcion, Jr. that "It is a well-known and accepted
practice in the business sector that a cashier's check is deemed as cash".
The provisions of law applicable to the case at bar are the following:
a. Article 1249 of the Civil Code which provides:

Art. 1249. 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 ruling in these two (2) cases merely applies the statutory provisions which lay down
the rule that a check is not legal tender and that a creditor may validly refuse payment by
check, whether it be a manager's, cashier's or personal check.

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.

Petitioners erroneously rely on one of the dissenting opinions in the Philippine

Airlines case 6 to support their cause. The dissenting opinion however does not in any
way support the contention that a check is legal tender but, on the contrary, states that "If
the PAL checks in question had not been encashed by Sheriff Reyes, there would be no
payment by PAL and, consequently, no discharge or satisfaction of its judgment
obligation." 7 Moreover, the circumstances in the Philippine Airlines case are quite
different from those in the case at bar for in that case the checks issued by the judgment
debtor were made payable to the sheriff, Emilio Z. Reyes, who encashed the checks but
failed to deliver the proceeds of said encashment to the judgment creditor.

In the meantime, the action derived from the original obligation shall be
held in abeyance.;
b. Section 1 of Republic Act No. 529, as amended, which provides:
Sec. 1. Every provision contained in, or made with respect to, any
obligation which purports to give the obligee the right to require
payment in gold or in any particular kind of coin or currency other than
Philippine currency or in an amount of money of the Philippines
measured thereby, shall be as it is hereby declared against public
policy null and void, and of no effect, and no such provision shall be
contained in, or made with respect to, any obligation thereafter
incurred. Every obligation heretofore and hereafter incurred, whether
or not any such provision as to payment is contained therein or made
with respect thereto, shall be discharged upon payment in any coin or
currency which at the time of payment is legal tender for public and
private debts.
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:
Sec. 63. Legal character Checks representing deposit money do not
have legal tender power and their acceptance in the payment of debts,
both public and private, is at the option of the creditor: Provided,
however, that a check which has been cleared and credited to the
account of the creditor shall be equivalent to a delivery to the creditor
of cash in an amount equal to the amount credited to his account.
From the aforequoted provisions of law, it is clear that this petition must fail.
In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals 4 and Roman Catholic
Bishop of Malolos, Inc. vs. Intermediate Appellate Court, 5 this Court held that
A check, whether a manager's 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.

In the more recent case of Fortunado vs. Court of Appeals, 8 this Court stressed that, "We
are not, by this decision, sanctioning the use of a check for the payment of obligations
over the objection of the creditor."
WHEREFORE, the petition is DENIED. The appealed decision is hereby AFFIRMED,
with costs against the petitioners.
SO ORDERED.
Narvasa, C.J., Regalado and Nocon, JJ., concur.

CONCEPT OF NEGOTIABLE INSTRUMENTS

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-49188 January 30, 1990
PHILIPPINE AIRLINES, INC., petitioner,
vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO, Court of First
Instance of Manila, Branch XIII, JAIME K. DEL ROSARIO, Deputy Sheriff, Court of
First Instance, Manila, and AMELIA TAN,respondents.

GUTIERREZ, JR., J.:

Behind the simple issue of validity of an alias writ of execution in this case is a more
fundamental question. Should the Court allow a too literal interpretation of the Rules with
an open invitation to knavery to prevail over a more discerning and just approach?
Should we not apply the ancient rule of statutory construction that laws are to be
interpreted by the spirit which vivifies and not by the letter which killeth?
This is a petition to review on certiorari the decision of the Court of Appeals in CA-G.R.
No. 07695 entitled "Philippine Airlines, Inc. v. Hon. Judge Ricardo D. Galano, et
al.", dismissing the petition for certiorari against the order of the Court of First Instance of
Manila which issued an alias writ of execution against the petitioner.
The petition involving the alias writ of execution had its beginnings on November 8, 1967,
when respondent Amelia Tan, under the name and style of Able Printing Press
commenced a complaint for damages before the Court of First Instance of Manila. The
case was docketed as Civil Case No. 71307, entitled Amelia Tan, et al. v. Philippine
Airlines, Inc.
After trial, the Court of First Instance of Manila, Branch 13, then presided over by the late
Judge Jesus P. Morfe rendered judgment on June 29, 1972, in favor of private
respondent Amelia Tan and against petitioner Philippine Airlines, Inc. (PAL) as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine
Air Lines:

1. On the first cause of action, to pay to the plaintiff the amount of P75,000.00
as actual damages, with legal interest thereon from plaintiffs extra-judicial
demand made by the letter of July 20, 1967;
2. On the third cause of action, to pay to the plaintiff the amount of P18,200.00,
representing the unrealized profit of 10% included in the contract price of
P200,000.00 plus legal interest thereon from July 20,1967;
3. On the fourth cause of action, to pay to the plaintiff the amount of P20,000.00
as and for moral damages, with legal interest thereon from July 20, 1 967;
4. On the sixth cause of action, to pay to the plaintiff the amount of P5,000.00
damages as and for attorney's fee.
Plaintiffs second and fifth causes of action, and defendant's counterclaim, are
dismissed.
With costs against the defendant. (CA Rollo, p. 18)
On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case was
docketed as CA-G.R. No. 51079-R.
On February 3, 1977, the appellate court rendered its decision, the dispositive portion of
which reads:
IN VIEW WHEREOF, with the modification that PAL is condemned to
pay plaintiff the sum of P25,000.00 as damages and P5,000.00 as
attorney's fee, judgment is affirmed, with costs. (CA Rollo, p. 29)
Notice of judgment was sent by the Court of Appeals to the trial court and on dates
subsequent thereto, a motion for reconsideration was filed by respondent Amelia Tan,
duly opposed by petitioner PAL.
On May 23,1977, the Court of Appeals rendered its resolution denying the respondent's
motion for reconsideration for lack of merit.
No further appeal having been taken by the parties, the judgment became final and
executory and on May 31, 1977, judgment was correspondingly entered in the case.
The case was remanded to the trial court for execution and on September 2,1977,
respondent Amelia Tan filed a motion praying for the issuance of a writ of execution of
the judgment rendered by the Court of Appeals. On October 11, 1977, the trial court,
presided over by Judge Galano, issued its order of execution with the corresponding writ
in favor of the respondent. The writ was duly referred to Deputy Sheriff Emilio Z. Reyes of
Branch 13 of the Court of First Instance of Manila for enforcement.

Four months later, on February 11, 1978, respondent Amelia Tan moved for the issuance
of an alias writ of execution stating that the judgment rendered by the lower court, and
affirmed with modification by the Court of Appeals, remained unsatisfied.
On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of an
alias writ of execution stating that it had already fully paid its obligation to plaintiff through
the deputy sheriff of the respondent court, Emilio Z. Reyes, as evidenced by cash
vouchers properly signed and receipted by said Emilio Z. Reyes.
On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being
premature, ordering the executing sheriff Emilio Z. Reyes to appear with his return and
explain the reason for his failure to surrender the amounts paid to him by petitioner PAL.
However, the order could not be served upon Deputy Sheriff Reyes who had absconded
or disappeared.
On March 28, 1978, motion for the issuance of a partial alias writ of execution was filed
by respondent Amelia Tan.
On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for Partial
Alias Writ of Execution" with Substitute Motion for Alias Writ of Execution. On May 1,
1978, the respondent Judge issued an order which reads:
As prayed for by counsel for the plaintiff, the Motion to Withdraw
'Motion for Partial Alias Writ of Execution with Substitute Motion for
Alias Writ of Execution is hereby granted, and the motion for partial
alias writ of execution is considered withdrawn.
Let an Alias Writ of Execution issue against the defendant for the fall
satisfaction of the judgment rendered. Deputy Sheriff Jaime K. del
Rosario is hereby appointed Special Sheriff for the enforcement
thereof. (CA Rollo, p. 34)

Binondo, Manila, through its manager and garnished the petitioner's deposit in the said
bank in the total amount of P64,408.00 as of May 16, 1978. Hence, this petition for
certiorari filed by the Philippine Airlines, Inc., on the grounds that:
I
AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT
PRIOR RETURN OF THE ORIGINAL WRIT BY THE IMPLEMENTING
OFFICER.
II
PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS
DIRECTED IN THE WRIT OF EXECUTION CONSTITUTES
SATISFACTION OF JUDGMENT.
III
INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS
TO THE PAYMENT THEREOF.
IV
SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF
PROPERTY OF JUDGMENT DEBTOR AND DISPOSAL OR SALE
THEREOF TO SATISFY JUDGMENT.
Can an alias writ of execution be issued without a prior return of the original writ by the
implementing officer?
We rule in the affirmative and we quote the respondent court's decision with approval:

On May 18, 1978, the petitioner received a copy of the first alias writ of execution issued
on the same day directing Special Sheriff Jaime K. del Rosario to levy on execution in
the sum of P25,000.00 with legal interest thereon from July 20,1967 when respondent
Amelia Tan made an extra-judicial demand through a letter. Levy was also ordered for
the further sum of P5,000.00 awarded as attorney's fees.
On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of
execution stating that no return of the writ had as yet been made by Deputy Sheriff Emilio
Z. Reyes and that the judgment debt had already been fully satisfied by the petitioner as
evidenced by the cash vouchers signed and receipted by the server of the writ of
execution, Deputy Sheriff Emilio Z. Reyes.
On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment on
the depository bank of petitioner, Far East Bank and Trust Company, Rosario Branch,

The issuance of the questioned alias writ of execution under the

circumstances here obtaining is justified because even with the
absence of a Sheriffs return on the original writ, the unalterable fact
remains that such a return is incapable of being obtained (sic) because
the officer who is to make the said return has absconded and cannot
be brought to the Court despite the earlier order of the court for him to
appear for this purpose. (Order of Feb. 21, 1978, Annex C, Petition).
Obviously, taking cognizance of this circumstance, the order of May 11,
1978 directing the issuance of an alias writ was therefore issued.
(Annex D. Petition). The need for such a return as a condition
precedent for the issuance of an alias writ was justifiably dispensed
with by the court below and its action in this regard meets with our
concurrence. A contrary view will produce an abhorent situation

whereby the mischief of an erring officer of the court could be utilized

to impede indefinitely the undisputed and awarded rights which a
prevailing party rightfully deserves to obtain and with dispatch. The
final judgment in this case should not indeed be permitted to become
illusory or incapable of execution for an indefinite and over extended
period, as had already transpired. (Rollo, pp. 35-36)
Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought not
to be illusory it ought to have its proper effect).
Indeed, technicality cannot be countenanced to defeat the execution of a judgment for
execution is the fruit and end of the suit and is very aptly called the life of the law
(Ipekdjian Merchandising Co. v. Court of Tax Appeals, 8 SCRA 59 [1963]; Commissioner
of Internal Revenue v. Visayan Electric Co., 19 SCRA 697, 698 [1967]). A judgment
cannot be rendered nugatory by the unreasonable application of a strict rule of
procedure. Vested rights were never intended to rest on the requirement of a return, the
office of which is merely to inform the court and the parties, of any and all actions taken
under the writ of execution. Where such information can be established in some other
manner, the absence of an executing officer's return will not preclude a judgment from
being treated as discharged or being executed through an alias writ of execution as the
case may be. More so, as in the case at bar. Where the return cannot be expected to be
forthcoming, to require the same would be to compel the enforcement of rights under a
judgment to rest on an impossibility, thereby allowing the total avoidance of judgment
debts. So long as a judgment is not satisfied, a plaintiff is entitled to other writs of
execution (Government of the Philippines v. Echaus and Gonzales, 71 Phil. 318). It is a
well known legal maxim that he who cannot prosecute his judgment with effect, sues his
case vainly.
More important in the determination of the propriety of the trial court's issuance of an
alias writ of execution is the issue of satisfaction of judgment.
Under the peculiar circumstances surrounding this case, did the payment made to the
absconding sheriff by check in his name operate to satisfy the judgment debt? The Court
rules that the plaintiff who has won her case should not be adjudged as having sued in
vain. To decide otherwise would not only give her an empty but a pyrrhic victory.
It should be emphasized that under the initial judgment, Amelia Tan was found to have
been wronged by PAL.
She filed her complaint in 1967.
After ten (10) years of protracted litigation in the Court of First Instance and the Court of
Appeals, Ms. Tan won her case.
It is now 1990.

Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the courts
have solemnly declared as rightfully hers. Through absolutely no fault of her own, Ms.
Tan has been deprived of what, technically, she should have been paid from the
start, before 1967, without need of her going to court to enforce her rights. And all
because PAL did not issue the checks intended for her, in her name.
Under the peculiar circumstances of this case, the payment to the absconding sheriff by
check in his name did not operate as a satisfaction of the judgment debt.
In general, a payment, in order to be effective to discharge an obligation, must be made
to the proper person. Article 1240 of the Civil Code provides:
Payment shall be made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person authorized
to receive it. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an agent having authority,
express or implied, to receive the particular payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d]
446, 111 ALR 65). Payment made to one having apparent authority to receive the money
will, as a rule, be treated as though actual authority had been given for its receipt.
Likewise, if payment is made to one who by law is authorized to act for the creditor, it will
work a discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt of
money due on ajudgment by an officer authorized by law to accept it will, therefore,
satisfy the debt (See 40 Am Jm 729, 25; Hendry v. Benlisa supra; Seattle v. Stirrat 55
Wash. 104 p. 834,24 LRA [NS] 1275).
The theory is where payment is made to a person authorized and recognized by the
creditor, the payment to such a person so authorized is deemed payment to the creditor.
Under ordinary circumstances, payment by the judgment debtor in the case at bar, to the
sheriff should be valid payment to extinguish the judgment debt.
There are circumstances in this case, however, which compel a different conclusion.
The payment made by the petitioner to the absconding sheriff was not in cash or legal
tender but in checks. The checks were not payable to Amelia Tan or Able Printing Press
but to the absconding sheriff.
Did such payments extinguish the judgment debt?
Article 1249 of the Civil Code provides:
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.
In the absence of an agreement, either express or implied, payment means the
discharge of a debt or obligation in money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed.
257) and unless the parties so agree, a debtor has no rights, except at his own peril, to
substitute something in lieu of cash as medium of payment of his debt (Anderson v. Gill,
79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402). Consequently, unless
authorized to do so by law or by consent of the obligee a public officer has no authority to
accept anything other than money in payment of an obligation under a judgment being
executed. Strictly speaking, the acceptance by the sheriff of the petitioner's checks, in the
case at bar, does not, per se, operate as a discharge of the judgment debt.
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 (See. 189, Act 2031 on
Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan
Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager's check or
ordinary cheek, 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).
If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's,
there would have been no payment. After dishonor of the checks, Ms. Tan could have run
after other properties of PAL. The theory is that she has received no value for what had
been awarded her. Because the checks were drawn in the name of Emilio Z. Reyes,
neither has she received anything. The same rule should apply.
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment
in full legal contemplation. The reasoning is logical but is it valid and proper? Logic has
its limits in decision making. We should not follow rulings to their logical extremes if in
doing so we arrive at unjust or absurd results.

seizes a car, a tractor, or a piece of land. Logic often has to give way to experience and
to reality. Having paid with checks, PAL should have done so properly.
Payment in money or cash to the implementing officer may be deemed absolute payment
of the judgment debt but the Court has never, in the least bit, suggested that judgment
debtors should settle their obligations by turning over huge amounts of cash or legal
tender to sheriffs and other executing officers. Payment in cash would result in damage
or interminable litigations each time a sheriff with huge amounts of cash in his hands
decides to abscond.
As a protective measure, therefore, the courts encourage the practice of payments by
cheek provided adequate controls are instituted to prevent wrongful payment and illegal
withdrawal or disbursement of funds. If particularly big amounts are involved, escrow
arrangements with a bank and carefully supervised by the court would be the safer
procedure. Actual transfer of funds takes place within the safety of bank premises. These
practices are perfectly legal. The object is always the safe and incorrupt execution of the
judgment.
It is, indeed, out of the ordinary that checks intended for a particular payee are made out
in the name of another. Making the checks payable to the judgment creditor would have
prevented the encashment or the taking of undue advantage by the sheriff, or any person
into whose hands the checks may have fallen, whether wrongfully or in behalf of the
creditor. The issuance of the checks in the name of the sheriff clearly made possible the
misappropriation of the funds that were withdrawn.
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for the private
party respondent Amelia Tan, the petitioner corporation, utilizing the
services of its personnel who are or should be knowledgeable about
the accepted procedures and resulting consequences of the checks
drawn, nevertheless, in this instance, without prudence, departed from
what is generally observed and done, and placed as payee in the
checks the name of the errant Sheriff and not the name of the rightful
payee. Petitioner thereby created a situation which permitted the said
Sheriff to personally encash said checks and misappropriate the
proceeds thereof to his exclusive personal benefit. For the prejudice
that resulted, the petitioner himself must bear the fault. The judicial
guideline which we take note of states as follows:

In the first place, PAL did not pay in cash. It paid in cheeks.
And second, payment in cash always carries with it certain cautions. Nobody hands over
big amounts of cash in a careless and inane manner. Mature thought is given to the
possibility of the cash being lost, of the bearer being waylaid or running off with what he
is carrying for another. Payment in checks is precisely intended to avoid the possibility of
the money going to the wrong party. The situation is entirely different where a Sheriff

As between two innocent persons, one of whom must suffer the

consequence of a breach of trust, the one who made it possible by his
act of confidence must bear the loss. (Blondeau, et al. v. Nano, et al.,
L-41377, July 26, 1935, 61 Phil. 625)
Having failed to employ the proper safeguards to protect itself, the judgment debtor
whose act made possible the loss had but itself to blame.

The attention of this Court has been called to the bad practice of a number of executing
officers, of requiring checks in satisfaction of judgment debts to be made out in their own
names. If a sheriff directs a judgment debtor to issue the checks in the sheriff's name,
claiming he must get his commission or fees, the debtor must report the sheriff
immediately to the court which ordered the execution or to the Supreme Court for
appropriate disciplinary action. Fees, commissions, and salaries are paid through regular
channels. This improper procedure also allows such officers, who have sixty (60) days
within which to make a return, to treat the moneys as their personal finds and to deposit
the same in their private accounts to earn sixty (60) days interest, before said finds are
turned over to the court or judgment creditor (See Balgos v. Velasco, 108 SCRA 525
[1981]). Quite as easily, such officers could put up the defense that said checks had been
issued to them in their private or personal capacity. Without a receipt evidencing payment
of the judgment debt, the misappropriation of finds by such officers becomes clean and
complete. The practice is ingenious but evil as it unjustly enriches court personnel at the
expense of litigants and the proper administration of justice. The temptation could be far
greater, as proved to be in this case of the absconding sheriff. The correct and prudent
thing for the petitioner was to have issued the checks in the intended payee's name.
The pernicious effects of issuing checks in the name of a person other than the intended
payee, without the latter's agreement or consent, are as many as the ways that an artful
mind could concoct to get around the safeguards provided by the law on negotiable
instruments. An angry litigant who loses a case, as a rule, would not want the winning
party to get what he won in the judgment. He would think of ways to delay the winning
party's getting what has been adjudged in his favor. We cannot condone that practice
especially in cases where the courts and their officers are involved. We rule against the
petitioner.
Anent the applicability of Section 15, Rule 39, as follows:
Section 15. Execution of money judgments. The officer must
enforce an execution of a money judgment by levying on all the
property, real and personal of every name and nature whatsoever, and
which may be disposed of for value, of the judgment debtor not exempt
from execution, or on a sufficient amount of such property, if they be
sufficient, and selling the same, and paying to the judgment creditor, or
his attorney, so much of the proceeds as will satisfy the judgment. ...

judgment creditor, or his attorney, so much of the proceeds as will

satisfy the judgment and none such payment had been concededly
made yet by the absconding Sheriff to the private respondent Amelia
Tan. The ultimate and essential step to complete the execution of the
judgment not having been performed by the City Sheriff, the judgment
debt legally and factually remains unsatisfied.
Strictly speaking execution cannot be equated with satisfaction of a judgment. Under
unusual circumstances as those obtaining in this petition, the distinction comes out
clearly.
Execution is the process which carries into effect a decree or judgment (Painter v.
Berglund, 31 Cal. App. 2d. 63, 87 P 2d 360, 363; Miller v. London, 294 Mass 300, 1 NE
2d 198, 200; Black's Law Dictionary), whereas the satisfaction of a judgment is the
payment of the amount of the writ, or a lawful tender thereof, or the conversion by sale of
the debtor's property into an amount equal to that due, and, it may be done otherwise
than upon an execution (Section 47, Rule 39). Levy and delivery by an execution officer
are not prerequisites to the satisfaction of a judgment when the same has already been
realized in fact (Section 47, Rule 39). Execution is for the sheriff to accomplish while
satisfaction of the judgment is for the creditor to achieve. Section 15, Rule 39 merely
provides the sheriff with his duties as executing officer including delivery of the proceeds
of his levy on the debtor's property to satisfy the judgment debt. It is but to stress that the
implementing officer's duty should not stop at his receipt of payments but must continue
until payment is delivered to the obligor or creditor.
Finally, we find no error in the respondent court's pronouncement on the inclusion of
interests to be recovered under the alias writ of execution. This logically follows from our
ruling that PAL is liable for both the lost checks and interest. The respondent court's
decision in CA-G.R. No. 51079-R does not totally supersede the trial court's judgment in
Civil Case No. 71307. It merely modified the same as to the principal amount awarded as
actual damages.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The
judgment of the respondent Court of Appeals is AFFIRMED and the trial court's issuance
of the alias writ of execution against the petitioner is upheld without prejudice to any
action it should take against the errant sheriff Emilio Z. Reyes. The Court Administrator is
ordered to follow up the actions taken against Emilio Z. Reyes.

the respondent court held:

SO ORDERED.
We are obliged to rule that the judgment debt cannot be considered
satisfied and therefore the orders of the respondent judge granting the
alias writ of execution may not be pronounced as a nullity.
xxx xxx xxx
It is clear and manifest that after levy or garnishment, for a judgment to
be executed there is the requisite of payment by the officer to the

Fernan, C.J., Cruz, Paras, Bidin, Grio-Aquino, Medialdea and Regalado, JJ., concur.

NEGOTIABLE INSTRUMENTS COMPARED WITH OTHER PAPERS

Republic of the Philippines
SUPREME COURT
Manila

On 13 March 1981, petitioner sought to encash the postdated checks issued by

Philfinance. However, the checks were dishonored for having been drawn against
insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by
private respondent Pilipinas Bank ("Pilipinas"). It reads as follows:

THIRD DIVISION
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila

G.R. No. 89252 May 24, 1993

RAUL SESBREO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS
BANK, respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.

February 9, 1981

VALUE DATE
TO Raul Sesbreo
April 6, 1981

MATURITY DATE
NO. 10805

FELICIANO, J.:

DENOMINATED CUSTODIAN RECEIPT

On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the
amount of P300,000.00 with the Philippine Underwriters Finance Corporation
("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would
mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following
documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No.
20496 of one (1) Delta Motors Corporation Promissory Note ("DMC
PN") No. 2731 for a term of 32 days at 17.0% per annum;
(b) the Certificate of securities Delivery Receipt No. 16587 indicating
the sale of DMC PN No. 2731 to petitioner, with the notation that the
said security was in custodianship of Pilipinas Bank, as per
Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February
1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity
date of petitioner's investment), with petitioner as payee, Philfinance as
drawer, and Insular Bank of Asia and America as drawee, in the total
amount of P304,533.33.

This confirms that as a duly Custodian Bank, and upon instruction of

PHILIPPINE UNDERWRITES FINANCE CORPORATION, we have in
our custody the following securities to you [sic] the extent herein
indicated.

SERIAL MAT. FACE ISSUED REGISTERED

AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE

2731 4-6-81 2,300,833.34 DMC PHIL.

307,933.33
UNDERWRITERS
FINANCE CORP.

We further certify that these securities may be inspected by you or

your duly authorized representative at any time during regular banking
hours.
Upon your written instructions we shall undertake physical delivery of
the above securities fully assigned to you should this Denominated
Custodianship Receipt remain outstanding in your favor thirty (30) days
after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature) 1

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent

Pilipinas, Makati Branch, and handed her a demand letter informing the bank that his
placement with Philfinance in the amount reflected in the DCR No. 10805 had remained
unpaid and outstanding, and that he in effect was asking for the physical delivery of the
underlying promissory note. Petitioner then examined the original of the DMC PN No.
2731 and found: that the security had been issued on 10 April 1980; that it would mature
on 6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as "payee"
and private respondent Delta Motors Corporation ("Delta") as "maker;" and that on face
of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the
Note, nor any certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August
1981, 2 again asking private respondent Pilipinas for physical delivery of the original of
DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's demand letters to
Philfinance for written instructions, as has been supposedly agreed upon in "Securities
Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not provide
the appropriate instructions; Pilipinas never released DMC PN No. 2731, nor any other
instrument in respect thereof, to petitioner.

As petitioner had failed to collect his investment and interest thereon, he filed on 28
September 1982 an action for damages with the Regional Trial Court ("RTC") of Cebu
City, Branch 21, against private respondents Delta and Pilipinas. 5 The trial court, in a
decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of
merit and for lack of cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a
Decision dated 21 March 1989, the Court of Appeals denied the appeal and held: 6
Be that as it may, from the evidence on record, if there is anyone that
appears liable for the travails of plaintiff-appellant, it is Philfinance. As
correctly observed by the trial court:
This act of Philfinance in accepting the investment of
plaintiff and charging it against DMC PN No. 2731
when its entire face value was already obligated or
earmarked for set-off or compensation is difficult to
comprehend and may have been motivated with bad
faith. Philfinance, therefore, is solely and legally
obligated to return the investment of plaintiff,
together with its earnings, and to answer all the
damages plaintiff has suffered incident thereto.
Unfortunately for plaintiff, Philfinance was not
impleaded as one of the defendants in this case at
bar; hence, this Court is without jurisdiction to
pronounce judgement against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the decision appealed
from, the same is hereby affirmed in toto. Cost against plaintiffappellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.

Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta
for the partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee
thereof, had assigned to him said Note to the extent of P307,933.33. Delta, however,
denied any liability to petitioner on the promissory note, and explained in turn that it had
previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN
No. 2730) against Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management
of the Securities and exchange commission ("SEC") and the Central Bank. Pilipinas
delivered to the SEC DMC PN No. 2731, which to date apparently remains in the custody
of the SEC. 4

After consideration of the allegations contained and issues raised in the pleadings, the
Court resolved to give due course to the petition and required the parties to file their
respective memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and
contends that respondent court of Appeals gravely erred: (i) in concluding that he cannot
recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in
failing to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in
view of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii)
in refusing to pierce the veil of corporate entity between Philfinance, and private

respondents Delta and Pilipinas, considering that the three (3) entities belong to the
"Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8
There are at least two (2) sets of relationships which we need to address: firstly, the
relationship of petitioner vis-a-visDelta; secondly, the relationship of petitioner in respect
of Pilipinas. Actually, of course, there is a third relationship that is of critical importance:
the relationship of petitioner and Philfinance. However, since Philfinance has not been
impleaded in this case, neither the trial court nor the Court of Appeals acquired
jurisdiction over the person of Philfinance. It is, consequently, not necessary for present
purposes to deal with this third relationship, except to the extent it necessarily impinges
upon or intersects the first and second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in
respect of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without
recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this
point:
Nor could plaintiff-appellant have acquired any right over DMC PN No.
2731 as the same is "non-negotiable" as stamped on its face (Exhibit
"6"), negotiation being defined as the transfer of an instrument from
one person to another so as to constitute the transferee the holder of
the instrument (Sec. 30, Negotiable Instruments Law). A person not a
holder cannot sue on the instrument in his own name and cannot
demand or receive payment (Section 51, id.) 9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note
had been validly transferred, in part to him by assignment and that as a result of such
transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of
that Note assigned to him by the payee Philfinance.

(3) assuming (arguendo only) that the partial assignment in favor of

petitioner was valid, petitioner took the Note subject to the defenses
available to Delta, in particular, the offsetting of DMC PN No. 2731
against Philfinance PN No. 143-A. 11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must
be distinguished from theassignment or transfer of an instrument whether that be
negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument
under the relevant statute may be negotiated either by indorsement thereof coupled with
delivery, or by delivery alone where the negotiable instrument is in bearer form. A
negotiable instrument may, however, instead of being negotiated, also
be assigned or transferred. The legal consequences of negotiation as distinguished from
assignment of a negotiable instrument are, of course, different. A non-negotiable
instrument may, obviously, not be negotiated; but it may be assigned or transferred,
absent an express prohibition against assignment or transfer written in the face of the
instrument:
The words "not negotiable," stamped on the face of the bill of
lading, did not destroy its assignability, but the sole effect was to
exempt the bill from the statutory provisions relative thereto, and a bill,
though not negotiable, may be transferred by assignment; the
assignee taking subject to the equities between the original
parties. 12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped
"non-transferable" or "non-assignable." It contained no stipulation which prohibited
Philfinance from assigning or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and
which should be quoted in full:
April 10, 1980

Delta, however, disputes petitioner's contention and argues:

(1) that DMC PN No. 2731 was not intended to be negotiated or
otherwise transferred by Philfinance as manifested by the word "nonnegotiable" stamp across the face of the Note 10 and because maker
Delta and payee Philfinance intended that this Note would be offset
against the outstanding obligation of Philfinance represented by
Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was
without Delta's consent, if not against its instructions; and

Philippine Underwriters Finance Corp.

Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O.
Banaria
SVP-Treasurer
GENTLEMEN:

This refers to our outstanding placement of P4,601,666.67 as

evidenced by your Promissory Note No. 143-A, dated April 10, 1980, to
mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No.
2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to be
offsetted [sic] against your PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric
Castillo.
Very Truly Yours,
(Sgd.)
Florencio B.
BiaganSenior Vice
President 13
We find nothing in his "Letter of Agreement" which can be reasonably construed as a
prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731,
before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of
Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a
prohibition cannot be invoked against an assignee or transferee of the Note who parted
with valuable consideration in good faith and without notice of such prohibition. It is not
disputed that petitioner was such an assignee or transferee. Our conclusion on this point
is reinforced by the fact that what Philfinance and Delta were doing by their exchange of
their promissory notes was this: Delta invested, by making a money market placement
with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the
same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its
two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10
April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in
cash and the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No.
2731 had been effected without the consent of Delta, we note that such consent was not
necessary for the validity and enforceability of the assignment in favor of
petitioner. 14 Delta's argument that Philfinance's sale or assignment of part of its rights to
DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's)
consent, is quite mistaken. Conventional subrogation, which in the first place is never
lightly inferred, 15 must be clearly established by the unequivocal terms of the substituting
obligation or by the evident incompatibility of the new and old obligations on every
point. 16 Nothing of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN
No. 2731 to Philfinance, an entity engaged in the business of buying and selling debt

instruments and other securities, and more generally, in money market transactions.
In Perez v. Court of Appeals, 17 the Court, speaking through Mme. Justice Herrera, made
the following important statement:
There is another aspect to this case. What is involved here is a money
market transaction. As defined by Lawrence Smith "the 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 manor a dealer in the
open market." It involves "commercial papers" which are instruments
"evidencing indebtness of any person or entity. . ., which are issued,
endorsed, sold or transferred or in any manner conveyed to another
person or entity, with or without recourse". The fundamental function of
the money market device in its operation is to match and bring together
in a most impersonal manner both the "fund users" and the "fund
suppliers." The money market is an "impersonal market", free from
personal considerations. "The market mechanism is intended to
provide quick mobility of money and securities."
The impersonal character of the money market device overlooks the
individuals or entities concerned. The issuer of a commercial paper in
the money market necessarily knows in advance that it would be
expenditiously transacted and transferred to any investor/lender
without need of notice to said issuer. In practice, no notification is
given to the borrower or issuer of commercial paper of the sale or
transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively
novel institution in the Philippine commercial scene. It has been
intended to facilitate the flow and acquisition of capital on an
impersonal basis. And as specifically required by Presidential Decree
No. 678, the investing public must be given adequate and effective
protection in availing of the credit of a borrower in the commercial
paper market.18 (Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between
DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time
Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February
1981, no compensation had as yet taken place and indeed none could have taken
place. The essential requirements of compensation are listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be
at the same time a principal creditor of the other;

(2) That both debts consists in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if
the latter has been stated;

If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of
debts previous to the cession, but not of subsequent ones.

(3) That the two debts are due;

If the assignment is made without the knowledge of the debtor, he may

set up the compensation of all credits prior to the same and also later
ones until he had knowledge of the assignment. (Emphasis supplied)

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor. (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due.
This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with
Philfinance, where Delta acknowledged that the relevant promissory notes were "to be
offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine
(49) days before the "co-terminal maturity" date, that is to say, before any compensation
had taken place. Further, the assignment to petitioner would have prevented
compensation had taken place between Philfinance and Delta, to the extent of
P304,533.33, because upon execution of the assignment in favor of petitioner,
Philfinance and Delta would have ceased to be creditors and debtors of each other in
their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we
conclude that the assignment effected by Philfinance in favor of petitioner was a valid
one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of
the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to
him only on 14 July 1981, 19that is, after the maturity not only of the money market
placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No.
143-A. In other words, petitioner notified Delta of his rights as assignee after
compensation had taken place by operation of law because the offsetting instruments
had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are
not any greater that the rights of the assignor, since the assignee is merely substituted in
the place of the assignor 20 and that the assignee acquires his rights subject to the
equities i.e., the defenses which the debtor could have set up against the original
assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil
Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights
made by a creditor in favor of a third person, cannot set up against the
assignee the compensation which would pertain to him against the
assignor, unless the assignor was notified by the debtor at the time he
gave his consent, that he reserved his right to the compensation.

Article 1626 of the same code states that: "the debtor who, before having knowledge of
the assignment, pays his creditor shall be released from the obligation." In Sison v. YapTico, 21 the Court explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom he
contacted to pay; and if he pay before notice that his debt has been
assigned, the law holds him exonerated, for the reason that it is the
duty of the person who has acquired a title by transfer to demand
payment of the debt, to give his debt or notice. 22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14
July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the
assignor Philfinance could not have then compelled payment anew by Delta of DMC PN
No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting from
Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment or
sale was effected on 9 February 1981. He could have notified Delta as soon as his
money market placement matured on 13 March 1981 without payment thereof being
made by Philfinance; at that time, compensation had yet to set in and discharge DMC PN
No. 2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner
received from Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805
issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have
notified Delta at any time before the maturity date of DMC PN No. 2731. Because
petitioner failed to do so, and because the record is bare of any indication that
Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled
to uphold the defense of compensation raised by private respondent Delta. Of course,
Philfinance remains liable to petitioner under the terms of the assignment made by
Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent Pilipinas.
Petitioner contends that Pilipinas became solidarily liable with Philfinance and Delta
when Pilipinas issued DCR No. 10805 with the following words:
Upon your written instruction, we [Pilipinas] shall undertake physical
delivery of the above securities fully assigned to you . 23

The Court is not persuaded. We find nothing in the DCR that establishes an obligation on
the part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of
liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR
as a confirmation on the part of Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN
No. 2731 of a certain face value, to mature on 6 April 1981 and
payable to the order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by
Philfinance to petitioner (9 February 1981), holding that Note on behalf
and for the benefit of petitioner, at least to the extent it had been
assigned to petitioner by payee Philfinance; 24
(3) petitioner may inspect the Note either "personally or by authorized
representative", at any time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically
deliver the DMC PN No. 2731 (or a participation therein to the extent
of P307,933.33) "should this Denominated Custodianship receipt
remain outstanding in [petitioner's] favor thirty (30) days after its
maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read
as converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to
petitioner, either upon maturity thereof or any other time. We note that both in his
complaint and in his testimony before the trial court, petitioner referred merely to the
obligation of private respondent Pilipinas to effect the physical delivery to him of DMC PN
No. 2731. 25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary
obligation to pay the amount represented by a portion of the Note assigned to him by
Philfinance, appears to be a new theory constructed only after the trial court had ruled
against him. The solidary liability that petitioner seeks to impute Pilipinas cannot,
however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary
liability only when the law or the nature of the obligation requires solidarity," The record
here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of
Pilipinas. Petitioner has not pointed to us to any law which imposed such liability upon
Pilipinas nor has petitioner argued that the very nature of the custodianship assumed by
private respondent Pilipinas necessarily implies solidary liability under the securities,
custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas
solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability in
respect of petitioner under the terms of the DCR. To the contrary, we find, after prolonged
analysis and deliberation, that private respondent Pilipinas had breached its undertaking
under the DCR to petitioner Sesbreo.

We believe and so hold that a contract of deposit was constituted by the act of
Philfinance in designating Pilipinas as custodian or depositary bank. The depositor was
initially Philfinance; the obligation of the depository was owed, however, to petitioner
Sesbreo as beneficiary of the custodianship or depository agreement. We do not
consider that this is a simple case of a stipulation pour autri. The custodianship or
depositary agreement was established as an integral part of the money market
transaction entered into by petitioner with Philfinance. Petitioner bought a portion of DMC
PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order
that the thing sold would be placed outside the control of the vendor. Indeed, the
constituting of the depositary or custodianship agreement was equivalent to constructive
delivery of the Note (to the extent it had been sold or assigned to petitioner) to petitioner.
It will be seen that custodianship agreements are designed to facilitate transactions in the
money market by providing a basis for confidence on the part of the investors or placers
that the instruments bought by them are effectively taken out of the pocket, as it were, of
the vendors and placed safely beyond their reach, that those instruments will be there
available to the placers of funds should they have need of them. The depositary in a
contract of deposit is obliged to return the security or the thing deposited upon demand of
the depositor (or, in the presented case, of the beneficiary) of the contract, even though a
term for such return may have been established in the said contract. 26 Accordingly, any
stipulation in the contract of deposit or custodianship that runs counter to the
fundamental purpose of that agreement or which was not brought to the notice of and
accepted by the placer-beneficiary, cannot be enforced as against such beneficiaryplacer.
We believe that the position taken above is supported by considerations of public policy.
If there is any party that needs the equalizing protection of the law in money market
transactions, it is the members of the general public whom place their savings in such
market for the purpose of generating interest revenues. 27 The custodian bank, if it is not
related either in terms of equity ownership or management control to the borrower of the
funds, or the commercial paper dealer, is normally a preferred or traditional banker of
such borrower or dealer (here, Philfinance). The custodian bank would have every
incentive to protect the interest of its client the borrower or dealer as against the placer of
funds. The providers of such funds must be safeguarded from the impact of stipulations
privately made between the borrowers or dealers and the custodian banks, and disclosed
to fund-providers only after trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security
deposited with it when petitioner first demanded physical delivery thereof on 2 April 1981.
We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731
had not yet matured and therefore, compensation or offsetting against Philfinance PN
No. 143-A had not yet taken place. Instead of complying with the demand of the
petitioner, Pilipinas purported to require and await the instructions of Philfinance, in
obvious contravention of its undertaking under the DCR to effect physical delivery of the
Note upon receipt of "written instructions" from petitioner Sesbreo. The ostensible term
written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30]
days after its maturity") was not a defense against petitioner's demand for physical
surrender of the Note on at least three grounds: firstly, such term was never brought to
the attention of petitioner Sesbreo at the time the money market placement with

Philfinance was made; secondly, such term runs counter to the very purpose of the
custodianship or depositary agreement as an integral part of a money market
transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil
Code noted above. Indeed, in principle, petitioner became entitled to demand physical
delivery of the Note held by Pilipinas as soon as petitioner's money market placement
matured on 13 March 1981 without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for
damages sustained by arising out of its breach of duty. By failing to deliver the Note to
the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and
unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself
benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no
moment for present purposes.Prima facie, the damages suffered by petitioner consisted
of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by
him by reason of discharge of the Note by compensation, plus legal interest of six
percent (6%) per annum containing from 14 March 1981.
The conclusion we have reached is, of course, without prejudice to such right of
reimbursement as Pilipinas may havevis-a-vis Philfinance.
III.
The third principal contention of petitioner that Philfinance and private respondents
Delta and Pilipinas should be treated as one corporate entity need not detain us for
long.
In the first place, as already noted, jurisdiction over the person of Philfinance was never
acquired either by the trial court nor by the respondent Court of Appeals. Petitioner
similarly did not seek to implead Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas
have been organized as separate corporate entities. Petitioner asks us to pierce their
separate corporate entities, but has been able only to cite the presence of a common
Director Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3)
companies. Petitioner has neither alleged nor proved that one or another of the three (3)
concededly related companies used the other two (2) as mere alter egos or that the
corporate affairs of the other two (2) were administered and managed for the benefit of
one. There is simply not enough evidence of record to justify disregarding the separate
corporate personalities of delta and Pilipinas and to hold them liable for any assumed or
undetermined liability of Philfinance to petitioner. 28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals
in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are
hereby MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had
dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas
bank is hereby ORDERED to indemnify petitioner for damages in the amount of
P304,533.33, plus legal interest thereon at the rate of six percent (6%) per

annum counted from 2 April 1981. As so modified, the Decision and Resolution of the
Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.

SOME NEGOTIABLE INSTRUMENTS

same with the Bank of America, and one day thereafter the latter cleared it with the
Bureau of Posts and received from the latter its face value of P200.00.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order
Division of the Manila Post Office, acting for and in behalf of his co-appellee, Postmaster
Enrico Palomar, notified the Bank of America that money order No. 124688 attached to
his letter had been found to have been irregularly issued and that, in view thereof, the
amount it represented had been deducted from the bank's clearing account. For its part,
on August 2 of the same year, the Bank of America debited appellant's account with the
same amount and gave it advice thereof by means of a debit memo.
On October 12, 1961 appellant requested the Postmaster General to reconsider the
action taken by his office deducting the sum of P200.00 from the clearing account of the
Bank of America, but his request was denied. So was appellant's subsequent request
that the matter be referred to the Secretary of Justice for advice. Thereafter, appellant
elevated the matter to the Secretary of Public Works and Communications, but the latter
sustained the actions taken by the postal officers.

Marcial Esposo for plaintiff-appellant.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G.
Ibarra and Attorney Concepcion Torrijos-Agapinan for defendants-appellees.

In connection with the events set forth above, Montinola was charged with theft in the
Court of First Instance of Manila (Criminal Case No. 43866) but after trial he was
acquitted on the ground of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of
Manila praying for judgment as follows:

DIZON, J.:
WHEREFORE, plaintiff prays that after hearing defendants be ordered:
An appeal from a decision of the Court of First Instance of Manila dismissing the
complaint filed by the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico
Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten
(10) money orders of P200.00 each payable to E.P. Montinola withaddress at Lucena,
Quezon. After the postal teller had made out money ordersnumbered 124685, 124687124695, Montinola offered to pay for them with a private checks were not generally
accepted in payment of money orders, the teller advised him to see the Chief of the
Money Order Division, but instead of doing so, Montinola managed to leave building with
his own check and the ten(10) money orders without the knowledge of the teller.
On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid
money orders, an urgent message was sent to all postmasters, and the following day
notice was likewise served upon all banks, instructing them not to pay anyone of the
money orders aforesaid if presented for payment. The Bank of America received a copy
of said notice three days later.
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was
received by appellant as part of its sales receipts. The following day it deposited the

(a) To countermand the notice given to the Bank of America on

September 27, 1961, deducting from the said Bank's clearing account
the sum of P200.00 represented by postal money order No. 124688, or
in the alternative indemnify the plaintiff in the same amount with
interest at 8-% per annum from September 27, 1961, which is the
rate of interest being paid by plaintiff on its overdraft account;
(b) To pay to the plaintiff out of their own personal funds, jointly and
severally, actual and moral damages in the amount of P1,000.00 or in
such amount as will be proved and/or determined by this Honorable
Court: exemplary damages in the amount of P1,000.00, attorney's fees
of P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be deemed
just and equitable.
On November 17, 1962, after the parties had submitted the stipulation of facts
reproduced at pages 12 to 15 of the Record on Appeal, the above-named court rendered
judgment as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendants

to countermand the notice given to the Bank of America on September
27, 1961, deducting from said Bank's clearing account the sum of
P200.00 representing the amount of postal money order No. 124688,
or in the alternative, to indemnify the plaintiff in the said sum of
P200.00 with interest thereon at the rate of 8-% per annum from
September 27, 1961 until fully paid; without any pronouncement as to
cost and attorney's fees.
The case was appealed to the Court of First Instance of Manila where, after the parties
had resubmitted the same stipulation of facts, the appealed decision dismissing the
complaint, with costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's brief are related
to the other and will therefore be discussed jointly. They raise this main issue: that the
postal money order in question is a negotiable instrument; that its nature as such is not in
anyway affected by the letter dated October 26, 1948 signed by the Director of Posts and
addressed to all banks with a clearing account with the Post Office, and that money
orders, once issued, create a contractual relationship of debtor and creditor, respectively,
between the government, on the one hand, and the remitters payees or endorses, on the
other.
It is not disputed that our postal statutes were patterned after statutes in force in the
United States. For this reason, ours are generally construed in accordance with the
construction given in the United States to their own postal statutes, in the absence of any
special reason justifying a departure from this policy or practice. The weight of authority
in the United States is that postal money orders are not negotiable instruments
(Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912),
the reason behind this rule being that, in establishing and operating a postal money order
system, the government is not engaging in commercial transactions but merely exercises
a governmental power for the public benefit.
It is to be noted in this connection that some of the restrictions imposed upon money
orders by postal laws and regulations are inconsistent with the character of negotiable
instruments. For instance, such laws and regulations usually provide for not more than
one endorsement; payment of money orders may be withheld under a variety of
circumstances (49 C.J. 1153).

Of particular application to the postal money order in question are the conditions laid
down in the letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of
America for the redemption of postal money orders received by it from its depositors.
Among others, the condition is imposed that "in cases of adverse claim, the money order
or money orders involved will be returned to you (the bank) and the, corresponding
amount will have to be refunded to the Postmaster, Manila, who reserves the right to
deduct the value thereof from any amount due you if such step is deemed necessary."
The conditions thus imposed in order to enable the bank to continue enjoying the
facilities theretofore enjoyed by its depositors, were accepted by the Bank of America.
The latter is therefore bound by them. That it is so is clearly referred from the fact that,
upon receiving advice that the amount represented by the money order in question had
been deducted from its clearing account with the Manila Post Office, it did not file any
protest against such action.
Moreover, not being a party to the understanding existing between the postal officers, on
the one hand, and the Bank of America, on the other, appellant has no right to assail the
terms and conditions thereof on the ground that the letter setting forth the terms and
conditions aforesaid is void because it was not issued by a Department Head in
accordance with Sec. 79 (B) of the Revised Administrative Code. In reality, however, said
legal provision does not apply to the letter in question because it does not provide for a
department regulation but merely sets down certain conditions upon the privilege granted
to the Bank of Amrica to accept and pay postal money orders presented for payment at
the Manila Post Office. Such being the case, it is clear that the Director of Posts had
ample authority to issue it pursuant to Sec. 1190 of the Revised Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the issues raised in the
third and fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law, the same is hereby
affirmed with costs.
Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo
and Villamor, JJ., concur.
Castro and Makasiar, JJ., took no part.