G.R. No.
180144 September 24, 2014 Sometime in March 1997, the petitioner applied for another loan
LEONARDO BOGNOT, Petitioner,
vs.
RRI LENDING CORPORATION, represented by its General
Manager, DARIO J. BERNARDEZ, Respondent.
DECISION
BRION, J.:
Before the Court is the petition for review on certiorari filed by
1
Leonardo Bognot (petitioner) assailing the March 28, 2007
decision and the October 15, 2007 resolution of the Court of Appeals
2 3
(CA) in CA-G.R. CV No. 66915.
Background Facts
RRI Lending Corporation (respondent) is an entity engaged in the
business of lending money to its borrowers within Metro Manila. It is
duly represented by its General Manager, Mr. Dario J. Bernardez
(Bernardez).
Sometime in September 1996, the petitioner and his younger brother,
Rolando A. Bognot (collectively referred to as the "Bognot siblings"),
applied for and obtained a loan of Five Hundred Thousand Pesos
(₱500,000.00) from the respondent, payable on November 30,
1996. The loan was evidenced by a promissory note and was secured
4
by a post dated check dated November 30, 1996.
5
Evidence on record shows that the petitioner renewed the loan several
times on a monthly basis. He paid a renewal fee of ₱54,600.00 for each
renewal, issued a new post-dated checkas security, and executed
and/or renewed the promissory note previouslyissued. The respondent
on the other hand, cancelled and returned to the petitioner the post-
dated checks issued prior to their renewal.
renewal. He again executed as principal and signed Promissory Note
No. 97-035 payable on April 1, 1997; his co-maker was again Rolando.
6
As security for the loan, the petitioner also issued BPI Check No.
0595236, post dated to April 1, 1997.
7 8
Subsequently, the loan was again renewed on a monthly basis (until
June 30, 1997), as shown by the Official Receipt No. 797 dated May 5,
9
1997, and the Disclosure Statement dated May 30, 1997 duly signed by
Bernardez. The petitioner purportedly paid the renewal fees and issued
a post-dated check dated June 30, 1997 as security. As had been done
in the past, the respondent superimposed the date "June 30, 1997" on
the upper right portion of Promissory Note No. 97-035 to make it appear
that it would mature on the said date.
Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot
(Mrs. Bognot), went to the respondent’s office and applied for another
renewal of the loan. She issued in favor of the respondent Promissory
Note No. 97-051, and International Bank Exchange (IBE) Check No.
00012522, dated July 30, 1997, in the amount of ₱54,600.00 as
renewal fee.
On the excuse that she needs to bring home the loan documents for the
Bognot siblings’ signatures and replacement, Mrs. Bognot asked the
respondent’s clerk to release to her the promissory note, the disclosure
statement, and the check dated July 30, 1997. Mrs. Bognot, however,
never returned these documents nor issued a new post-dated check.
Consequently, the respondent sent the petitioner follow-up letters
demanding payment of the loan, plus interest and penalty charges.
These demands went unheeded.
On November 27, 1997, the respondent, through Bernardez, filed a
complaint for sum of money before the Regional Trial Court (RTC)
against the Bognot siblings. The respondent mainly alleged that the
loan renewal payable on June 30, 1997 which the Bognot siblings
applied for remained unpaid; that before June30, 1997, Mrs. Bognot
applied for another loan extension and issued IBE Check No. 00012522
as payment for the renewal fee; that Mrs. Bognot convinced the
respondent’s clerk to release to her the promissory note and the other
loan documents; that since Mrs. Bognot never issued any replacement
check, no loanextension took place and the loan, originally payable on
June 30, 1997, became due on this date; and despite repeated
demands, the Bognot siblings failed to pay their joint and solidary
obligation.
Summons were served on the Bognotsiblings. However, only the
petitioner filed his answer.
In his Answer, the petitioner claimed that the complaint states no cause
10
of action because the respondent’s claim had been paid, waived,
abandoned or otherwise extinguished. He denied being a party to any
loan application and/or renewal in May 1997. He also denied having
issued the BPI check post-dated to June 30, 1997, as well as the
promissory note dated June 30, 1997, claiming that this note had been
tampered. He claimed that the one (1) month loan contracted by
Rolando and his wife in November 1996 which was lastly renewed in
March 1997 had already been fully paid and extinguished in April 1997. 11
Trial on the merits thereafter ensued.
The Regional Trial Court Ruling
In a decision dated January 17, 2000,the RTC ruled in the
12
respondent’s favor and ordered the Bognot siblings to pay the amount
of the loan, plus interest and penalty charges. It considered the
wordings of the promissory note and found that the loan they contracted
was joint and solidary. It also noted that the petitioner signed the
promissory note as a principal (and not merely as a guarantor), while
Rolando was the co-maker. It brushed the petitioner’s defense of full
payment aside, ruling that the respondent had successfully proven, by
preponderance of evidence, the nonpayment of the loan. The trial court
said:
Records likewise reveal that while he claims that the obligation had
been fully paid in his Answer, he did not, in order to protect his right filed
(sic) a cross-claim against his co-defendant Rolando Bognot despite
the fact that the latter did not file any responsive pleading.
In fine, defendants are liable solidarily to plaintiff and must pay the loan
of ₱500,000.00 plus 5% interest monthly as well as 10% monthly
penalty charges from the filing of the complaint on December 3, 1997
until fully paid. As plaintiff was constrained to engage the services of
counsel in order to protect his right,defendants are directed to pay the
former jointly and severally the amount of ₱50,000.00 as and by way of
attorney’s fee.
The petitioner appealed the decision to the Court of Appeals.
The Court of Appeals Ruling
In its decision dated March 28, 2007, the CA affirmed the RTC’s
findings. It found the petitioner’s defense of payment untenable and
unsupported by clear and convincing evidence. It observed that the
petitioner did not present any evidence showing that the check dated
June 30, 1997 had, in fact, been encashed by the respondent and the
proceeds applied to the loan, or any official receipt evidencing the
payment of the loan. It further stated that the only document relied
uponby the petitioner to substantiate his defense was the April 1, 1997
checkhe issued which was cancelled and returned to him by the
respondent.
The CA, however, noted the respondent’s established policy of
cancelling and returning the post-dated checks previously issued, as
well as the subsequent loan renewals applied for by the petitioner, as
manifested by the official receipts under his name. The CA thus ruled
that the petitioner failed to discharge the burden of proving payment.
The petitioner moved for the reconsideration of the decision, but the CA
denied his motion in its resolution of October 15, 2007, hence, the
present recourse to us pursuant toRule 45 of the Rules of Court.
The Petition
The petitioner submits that the CA erred in holding him solidarily liable
with Rolando and his wife. Heclaimed that based on the legal
presumption provided by Article 1271 of the Civil Code, his obligation
13
had been discharged by virtue of his possession of the post-dated
check (stamped "CANCELLED") that evidenced his indebtedness. He
argued that it was Mrs. Bognot who subsequently assumed the
obligation by renewing the loan, paying the fees and charges, and
issuing a check. Thus, there is an entirely new obligation whose
payment is her sole responsibility.
The petitioner also argued that as a result of the alteration of the
promissory note without his consent (e.g., the superimposition of the
date "June 30, 1997" on the upper right portion of Promissory Note No.
97-035 to make it appear that it would mature on this date), the
respondent can no longer collect on the tampered note, let alone, hold
him solidarily liable with Rolando for the payment of the loan. He
maintained that even without the proof of payment, the material
alteration of the promissory note is sufficient to extinguish his liability.
Lastly, he claimed that he had been released from his indebtedness by
novation when Mrs. Bognot renewed the loan and assumed the
indebtedness.
The Case for the Respondents
The respondent submits that the issues the petitioner raised hinge on
the appreciation of the adduced evidence and of the factual lower
courts’ findings that, as a rule, are notreviewable by this Court.
The Issues
The case presents to us the following issues:
1. Whether the CA committed a reversible error in holding the
petitioner solidarily liable with Rolando;
2. Whether the petitioner is relieved from liability by reason of the
material alteration in the promissory note; and
3. Whether the parties’ obligation was extinguished by: (i)
payment; and (ii) novation by substitution of debtors.
Our Ruling
We find the petition partly meritorious.
As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the
review of pure questions of law. Appreciation of evidence and inquiry
14
on the correctness of the appellate court's factual findings are not the
functions of this Court; we are not a trier of facts.
15
A question of law exists when the doubt or dispute relates to the
application of the law on given facts. On the other hand, a question of
fact exists when the doubt or dispute relates to the truth or falsity of the
parties’ factual allegations.
16
As the respondent correctly pointedout, the petitioner’s allegations are
factual issuesthat are not proper for the petition he filed. In the absence
of compelling reasons, the Court cannot re-examine, review or re-
evaluate the evidence and the lower courts’ factual conclusions. This is
especially true when the CA affirmed the lower court’s findings, as in
this case. Since the CA’s findings of facts affirmed those of the trial
court, they are binding on this Court, rendering any further factual
review unnecessary.
If only to lay the issues raised - both factual and legal – to rest, we shall
proceed to discuss their merits and demerits.
No Evidence Was Presented to Establish the Fact of Payment
Jurisprudence tells us that one who pleads payment has the burden of
proving it; the burden rests on the defendant to prove payment, rather
17
than on the plaintiff to prove non-payment. Indeed, once the existence
18
of an indebtedness is duly established by evidence, the burden of
showing with legal certainty that the obligation has been discharged by
payment rests on the debtor. 19
In the present case, the petitioner failed to satisfactorily prove that his
obligation had already been extinguished by payment. As the CA
correctly noted, the petitioner failed to present any evidence that the
respondent had in fact encashed his check and applied the proceeds to
the payment of the loan. Neither did he present official receipts
evidencing payment, nor any proof that the check had been dishonored.
We note that the petitioner merely relied on the respondent’s
cancellation and return to him of the check dated April 1, 1997. The
evidence shows that this check was issued to secure the indebtedness.
The acts imputed on the respondent, standing alone, do not constitute
sufficient evidence of payment.
Article 1249, paragraph 2 of the Civil Code provides:
xxxx
The delivery of promissory notes payable to order, or bills of exchange
or other mercantile documents shall produce the effect of payment only
when they have been cashed, or when through the fault of the creditor
they have been impaired. (Emphasis supplied)
Also, we held in Bank of the Philippine Islands v. Spouses Royeca: 20
Settled is the rule that payment must be made in legal tender. A check
is not legal tender and, therefore, cannot constitute a valid tender of
payment. Since a negotiable instrument is only a substitute for money
and not money, the delivery of such an instrument does not, by itself,
operate as payment. Mere delivery of checks does not discharge the
obligation under a judgment. The obligation is not extinguished and
remains suspended until the payment by commercial document is
actually realized.(Emphasis supplied)
Although Article 1271 of the Civil Code provides for a legal presumption
of renunciation of action (in cases where a private document evidencing
a credit was voluntarily returned by the creditor to the debtor), this
presumption is merely prima facieand is not conclusive; the
presumption loses efficacy when faced with evidence to the contrary.
Moreover, the cited provision merely raises a presumption, not of
payment, but of the renunciation of the credit where more convincing
evidence would be required than what normally would be called for to
prove payment. Thus, reliance by the petitioner on the legal
21
presumption to prove payment is misplaced.
To reiterate, no cash payment was proven by the petitioner. The
cancellation and return of the check dated April 1, 1997, simply
established his renewal of the loan – not the fact of payment.
Furthermore, it has been established during trial, through repeated acts,
that the respondent cancelled and surrendered the post-dated check
previously issued whenever the loan is renewed. We trace whatwould
amount to a practice under the facts of this case, to the following
testimonial exchanges:
Civil Case No. 97-0572
TSN December 14, 1998, Page 13.
Atty. Almeda:
Q: In the case of the renewal of the loan you admitted that a renewal
fee is charged to the debtor which he or she must pay before a renewal
is allowed. I show you Exhibit "3" official receipt of plaintiff dated July 3,
1997, would this be your official receipt which you issued to your client The Alteration of the Promissory Note
which they make renewal of the loan?
Did Not Relieve the Petitioner From Liability
A: Yes, sir.
We now come to the issue of material alteration. The petitioner raised
xxx xxx xxx as defense the alleged material alteration of Promissory Note No. 97-
035 as basis to claim release from his loan. He alleged that the
Q: And naturally when a loan has been renewed, the old one which is respondent’s superimposition of the due date "June 30, 1997" on the
replaced by the renewal has already been cancelled, is that correct? promissory note without his consent effectively relieved him of liability.

A: Yes, sir. We find this defense untenable.

Q: It is also true to say that all promissory notes and all postdated Although the respondent did not dispute the fact of alteration, he
checks covered by the old loan which have been the subject of the nevertheless denied that the alteration was done without the petitioner’s
renewal are deemed cancelled and replaced is that correct? consent. The parties’ Pre-Trial Order dated November 3, 1998 states
24

that:
A: Yes, sir. xxx 22

xxx There being no possibility of a possible compromise agreement,

Civil Case No. 97-0572 stipulations, admissions, and denials were made, to wit:

TSN November 27, 1998, Page 27. FOR DEFENDANT LEONARDO BOGNOT

Q: What happened to the check that Mr. Bognot issued?
Court: There are two Bognots. Who in particular?
Q: Leonardo Bognot, Your Honor.
A: Every month, they were renewed, he issued a new check, sir.
13. That the promissory note subject of this case marked as Annex "A"
of the complaint was originally dated April 1, 1997 with a superimposed
rubber stamp mark "June 30, 1997" to which the plaintiff admitted the
superimposition.
14. The superimposition was done without the knowledge, consent or
prior consultation with Leonardo Bognot which was denied by
plaintiff." (Emphasis supplied)
25

Q: Do you have a copy of the checks?

Significantly, the respondent also admitted in the Pre-Trial Order that
A: We returned the check upon renewing the loan. 23
part of its company practice is to rubber stamp, or make a
superimposition through a rubber stamp, the old promissory note which
In light of these exchanges, wefind that the petitioner failed to discharge has been renewed to make it appear that there is a new loan obligation.
his burden ofproving payment.
The petitioner did not rebut this statement. To our mind, the failure to
rebut is tantamount to an admission of the respondent’s allegations:
"22. That it is the practice of plaintiff to just rubber stamp or make
superimposition through a rubber stamp on old promissory note which
has been renewed to make it appear that there is a new loan obligation
to which the plaintiff admitted." (Emphasis Supplied). 26
Even assuming that the note had indeed been tampered without the
petitioner’s consent, the latter cannot totally avoid payment of his
obligation to the respondent based on the contract of loan.
Based on the records, the Bognot Siblings had applied for and were
granted a loan of ₱500,000.00 by the respondent. The loan was
evidenced by a promissory note and secured by a post-dated
check dated November 30, 1996. In fact, the petitioner himself
27
admitted his loan application was evidenced by the Promissory Note
dated April 1, 1997. This loan was renewed several times by the
28
petitioner, after paying the renewal fees, as shown by the Official
Receipt Nos. 797 and 587 dated May 5 and July 3, 1997, respectively.
29 30
These official receipts were issued in the name of the petitioner.
Although the petitioner had insisted that the loan had been
extinguished, no other evidence was presented to prove payment other
than the cancelled and returnedpost-dated check.
Under this evidentiary situation, the petitioner cannot validly deny his
obligation and liability to the respondent solely on the ground that the
Promissory Note in question was tampered. Notably, the existence of
the obligation, as well as its subsequent renewals, have been duly
established by: first, the petitioner’s application for the loan; second, his
admission that the loan had been obtained from the respondent; third,
the post-dated checks issued by the petitioner to secure the loan;
fourth, the testimony of Mr. Bernardez on the grant, renewal and non-
payment of the loan; fifth, proof of non-payment of the loan; sixth, the
loan renewals; and seventh, the approval and receipt of the loan
renewals.
In Guinsatao v. Court of Appeals, this Court pointed out that while a
31
promissory note is evidence of an indebtedness, it is not the only
evidence, for the existence of the obligation can be proven by other
documentary evidence such as a written memorandum signed by the
parties. In Pacheco v. Court of Appeals, this Court likewise expressly
32
recognized that a check constitutes anevidence of indebtedness and is
a veritable proof of an obligation. It canbe used in lieu of and for the
same purpose as a promissory note and can therefore be presented to
establish the existence of indebtedness. 33
In the present petition, we find that the totality of the evidence on record
sufficiently established the existence of the petitioner’s indebtedness
(and liability) based on the contract ofloan. Even with the tampered
promissory note, we hold that the petitioner can still be held liable for
the unpaid loan.
The Petitioner’s BelatedClaim of Novation by Substitution May no
Longer be Entertained
It has not escaped the Court’s attention that the petitioner raised the
argument that the obligation had been extinguished by novation. The
petitioner never raised this issue before the lower courts.
It is a settled principle of law thatno issue may be raised on appeal
unless it has been brought before the lower tribunal for its
consideration. Matters neither alleged in the pleadingsnor raised
34
during the proceedings below cannot be ventilated for the first time on
appeal before the Supreme Court. 35
In any event, we find no merit in the defense of novation as we discuss
at length below. Novation cannot be presumed and must be clearly and
unequivocably proven.
Novation is a mode of extinguishing an obligation by changing its
objects or principal obligations, by substituting a new debtor in place of
the old one, or by subrogating a third person to the rights of the
creditor.
36
Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists insubstituting a new debtor in the
place of the originalone, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned in Articles 1236
and 1237."
To give novation legal effect, the original debtor must be expressly
released from the obligation, and the new debtor must assume the
original debtor’s place in the contractual relationship. Depending on
who took the initiative, novation by substitution of debtor has two forms
– substitution by expromision and substitution by delegacion. The
difference between these two was explained in Garcia v. Llamas: 37
"In expromision, the initiative for the change does not come from -- and
may even be made without the knowledge of -- the debtor, since it
consists of a third person’s assumption of the obligation. As such, it
logically requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person
who consents to the substitution and assumes the obligation; thus, the
consent of these three persons are necessary."
In both cases, the original debtor must be released from the obligation;
otherwise, there can be no valid novation. Furthermore, novation by
38
substitution of debtor must alwaysbe made with the consent of the
creditor.
39
The petitioner contends thatnovation took place through a substitution
of debtors when Mrs. Bognot renewed the loan and assumed the debt.
He alleged that Mrs. Bognot assumed the obligation by paying the
renewal fees and charges, and by executing a new promissory note. He
further claimed that she issued her own check to cover the renewal
40
fees, which fact, according to the petitioner, was done with the
respondent’s consent.
Contrary to the petitioner’s contention, Mrs. Bognot did not substitute
the petitioner as debtor. She merely attempted to renew the original
loan by executing a new promissory note and check. The purported
41
one month renewal of the loan, however, did not push through, as Mrs.
Bognot did not return the documents or issue a new post dated check.
Since the loan was not renewed for another month, the originaldue
date, June 30,1997, continued to stand.
More importantly, the respondent never agreed to release the petitioner
from his obligation. That the respondent initially allowed Mrs. Bognot to
bring home the promissory note, disclosure statement and the
petitioner’s previous check dated June 30, 1997, does not ipso
factoresult in novation. Neither will this acquiescence constitute an
implied acceptance of the substitution of the debtor.
In order to give novation legal effect, the creditor should consent to the
substitution of a new debtor. Novation must be clearly and
unequivocally shown, and cannot be presumed.
Since the petitioner failed to show thatthe respondent assented to the
substitution, no valid novation took place with the effect of releasing the
petitioner from his obligation to the respondent.
Moreover, in the absence of showing that Mrs. Bognot and the
respondent had agreed to release the petitioner, the respondent can
still enforce the payment of the obligation against the original debtor.
Mere acquiescence to the renewal of the loan, when there is clearly no
agreement to release the petitioner from his responsibility, does not
constitute novation.
The Nature of the Petitioner’s Liability
On the nature of the petitioner’s liability, we rule however, that the CA
erred in holding the petitioner solidarily liable with Rolando.
A solidary obligation is one in which each of the debtors is liable for the
entire obligation, and each of the creditors is entitled to demand the
satisfaction of the whole obligation from any or all of the debtors. There
42
is solidary liability when the obligation expressly so states, when the law
so provides, or when the nature of the obligation so requires. Thus,
43
when the obligor undertakes to be "jointly and severally" liable, the
obligation is solidary,
In this case, both the RTC and the CA found the petitioner solidarily
liable with Rolando based on Promissory Note No. 97-035 dated June
30, 1997. Under the promissory note, the Bognot Siblings defined the
parameters of their obligation as follows:
"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay to
READY RESOURCES INVESTORS RRI LENDING CORPO. or Order,
its office at Paranaque, M.M. the principal sum of Five Hundred
Thousand PESOS (₱500,000.00), PhilippineCurrency, with interest
thereon at the rate of Five percent (5%) per month/annum, payable in
One Installment (01) equal daily/weekly/semi-monthly/monthly of
PESOS Five Hundred Thousand Pesos (₱500,000.00), first installment
to become due on June 30, 1997. xxx" (Emphasis Ours).
44
Although the phrase "jointly and severally" in the promissory note
clearly and unmistakably provided for the solidary liability of the parties,
we note and stress that the promissory note is merely a photocopyof
the original, which was never produced.
Under the best evidence rule, whenthe subject of inquiry is the contents
of a document, no evidence isadmissible other than the original
document itself except in the instances mentioned in Section 3, Rule
130 of the Revised Rules of Court. 45
The records show that the respondenthad the custody of the original
promissory note dated April 1, 1997, with a superimposed rubber stamp
mark "June 30, 1997", and that it had been given every opportunity to
present it. The respondent even admitted during pre-trial that it could
not present the original promissory note because it is in the custody of
its cashier who is stranded in Bicol. Since the respondent never
46
produced the original of the promissory note, much less offered to
produce it, the photocopy of the promissory note cannot be admitted as
evidence. Other than the promissory note in question, the respondent
has not presented any other evidence to support a finding of solidary
liability. As we earlier noted, both lower courts completely relied on the
note when they found the Bognot siblingssolidarily liable.
The well-entrenched rule is that solidary obligation cannot be inferred
lightly. It must be positively and clearly expressed and cannot be
presumed. 47
In view of the inadmissibility of the promissory note, and in the absence
of evidence showing that the petitioner had bound himself solidarily with
Rolando for the payment of the loan, we cannot but conclude that the
obligation to pay is only joint. 48
The 5% Monthly Interest Stipulated in the Promissory Note is
Unconscionable and Should be Equitably Reduced
Finally, on the issue of interest, while we agree with the CA that the
petitioner is liable to the respondentfor the unpaid loan, we find the
imposition of the 5% monthly interest to be excessive, iniquitous,
unconscionable and exorbitant, and hence, contrary to morals and
jurisprudence. Although parties to a loan agreement have wide latitude
to stipulate on the applicable interest rate under Central Bank Circular
No. 905 s. 1982 (which suspended the Usury Law ceiling on interest
effective January 1, 1983), we stress that unconscionable interest rates
may still be declared illegal.
49
In several cases, we haveruled that stipulations authorizing iniquitous or G.R. No. 93397 March 3, 1997
unconscionable interests are contrary to morals and are illegal. In
Medel v. Court of Appeals, we annulled a stipulated 5.5% per month or
50 TRADERS ROYAL BANK, petitioner,
66% per annum interest on a ₱500,000.00 loan, and a 6% per month or vs.
72% per annum interest on a ₱60,000.00 loan, respectively, for being COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE
excessive, iniquitous, unconscionableand exorbitant. 1âwphi1
CORPORATION and CENTRAL BANK of the
PHILIPPINES, respondents.
We reiterated this ruling in Chua v. Timan, where we held that the
51

stipulated interest rates of 3% per month and higher are excessive,

iniquitous, unconscionable and exorbitant, and must therefore be
reduced to 12% per annum. TORRES, JR., J.:

Applying these cited rulings, we now accordingly hold that the stipulated Assailed in this Petition for Review on Certiorari is the Decision of the
interest rate of 5% per month, (or 60% per annum) in the promissory respondent Court of Appeals dated January 29, 1990, affirming the
1

note is excessive, unconscionable, contrary to morals and is thus nullity of the transfer of Central Bank Certificate of Indebtedness (CBCI)
illegal. It is void ab initiofor violating Article 1306 of the Civil Code. We
52 No. D891, with a face value of P500,000.00, from the Philippine
2

Underwriters Finance Corporation (Philfinance) to the petitioner

1âwphi1

accordingly find it equitable to reduce the interest rate from 5% per

month to 1% per month or 12% per annum in line with the prevailing Trader's Royal Bank (TRB), under a Repurchase Agreement dated 3

jurisprudence. February 4, 1981, and a Detached Assignment dated April 27, 1981.
4

WHEREFORE, premises considered, the Decision dated March 28, Docketed as Civil Case No. 83-17966 in the Regional Trial Court of
2007 of the Court of Appeals in CA-G.R. CV No. 66915 is hereby Manila, Branch 32, the action was originally filed as a Petition
AFFIRMED with MODIFICATION, as follows: for Mandamus under Rule 65 of the Rules of Court, to compel the
5

Central Bank of the Philippines to register the transfer of the subject

1. The petitioner Leonardo A. Bognotand his brother, Rolando A. CBCI to petitioner Traders Royal Bank (TRB).
Bognot are JOINTLY LIABLE to pay the sum of ₱500,000.00 plus
12% interest per annum from December 3, 1997 until fully paid. In the said petition, TRB stated that:

2. The rest of the Court of Appeals' dispositions are hereby 3. On November 27, 1979, Filriters Guaranty Assurance
AFFIRMED. Corporation (Filriters) executed a "Detached
Assignment" . . ., whereby Filriters, as registered owner,
Costs against petitioner Leonardo A. Bognot. sold, transferred, assigned and delivered unto Philippine
Underwriters Finance Corporation (Philfinance) all its rights
SO ORDERED. and title to Central Bank Certificates of Indebtedness of
PESOS: FIVE HUNDRED THOUSAND (P500,000) and
having an aggregate value of PESOS: THREE MILLION
FIVE HUNDRED THOUSAND (P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A")
contains an express authorization executed by the
transferor intended to complete the assignment through the
registration of the transfer in the name of PhilFinance,
which authorization is specifically phrased as follows:
'(Filriters) hereby irrevocably authorized the said issuer
(Central Bank) to transfer the said bond/certificates on the
books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a
Repurchase Agreement with PhilFinance . . ., whereby, for
and in consideration of the sum of PESOS: FIVE
HUNDRED THOUSAND (P500,000.00), PhilFinance sold,
transferred and delivered to petitioner CBCI 4-year, 8th
series, Serial No. D891 with a face value of P500,000.00 . .
., which CBCI was among those previously acquired by
PhilFinance from Filriters as averred in paragraph 3 of the
Petition;
6. Pursuant to the aforesaid Repurchase Agreement
(Annex "B"), Philfinance agreed to repurchase CBCI Serial
No. D891 (Annex "C"), at the stipulated price of PESOS:
FIVE HUNDRED NINETEEN THOUSAND THREE
HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on April
27, 1981;
7. PhilFinance failed to repurchase the CBCI on the agreed
date of maturity, April 27, 1981, when the checks it issued
in favor of petitioner were dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed a
Detached Assignment in favor of the Petitioner to enable
the latter to have its title completed and registered in the
books of the respondent. And by means of said
Detachment, Philfinance transferred and assigned all, its
rights and title in the said CBCI (Annex "C") to petitioner
and, furthermore, it did thereby "irrevocably authorize the
said issuer (respondent herein) to transfer the said
bond/certificate on the books of its fiscal agent." . . .
9. Petitioner presented the CBCI (Annex "C"), together with
the two (2) aforementioned Detached Assignments
(Annexes "B" and "D"), to the Securities Servicing
Department of the respondent, and requested the latter to
effect the transfer of the CBCI on its books and to issue a
new certificate in the name of petitioner as absolute owner
thereof;
10. Respondent failed and refused to register the transfer
as requested, and continues to do so notwithstanding
petitioner's valid and just title over the same and despite
repeated demands in writing, the latest of which is hereto
attached as Annex "E" and made an integral part hereof;
11. The express provisions governing the transfer of the
CBCI were substantially complied with the petitioner's
request for registration, to wit:
"No transfer thereof shall be valid unless made
at said office (where the Certificate has been
registered) by the registered owner hereof, in
person or by his attorney duly authorized in
writing, and similarly noted hereon, and upon
payment of a nominal transfer fee which may
be required, a new Certificate shall be issued
to the transferee of the registered holder
thereof."
 and, without a doubt, the Detached Assignments presented
to respondent were sufficient authorizations in writing
executed by the registered owner, Filriters, and its
transferee, PhilFinance, as required by the above-quoted
provision;
12. Upon such compliance with the aforesaid requirements,
the ministerial duties of registering a transfer of ownership
over the CBCI and issuing a new certificate to the
transferee devolves upon the respondent;
Upon these assertions, TRB prayed for the registration by the Central
Bank of the subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the case took
cognizance of the defendant Central Bank of the Philippines' Motion for
Admission of Amended Answer with Counter Claim for
Interpleader thereby calling to fore the respondent Filriters Guaranty
6 15. The detached assignment is patently void and
Assurance Corporation (Filriters), the registered owner of the subject
CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI No. 891;
12. The CBCI constitutes part of the reserve investment
against liabilities required of respondent as an insurance
company under the Insurance Code;
13. Without any consideration or benefit whatsoever to
Filriters, in violation of law and the trust fund doctrine and
to the prejudice of policyholders and to all who have
present or future claim against policies issued by Filriters,
Alfredo Banaria, then Senior Vice-President-Treasury of
Filriters, without any board resolution, knowledge or
consent of the board of directors of Filriters, and without
any clearance or authorization from the Insurance
Commissioner, executed a detached assignment
purportedly assigning CBCI No. 891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-President-
Comptroller are Pilar Jacobe, Vice-President-Treasury of
Filriters (both of whom were holding the same positions in
Philfinance), without any consideration or benefit
redounding to Filriters and to the grave prejudice of
Filriters, its policy holders and all who have present or
future claims against its policies, executed similar detached
assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
inoperative because the assignment is without the
knowledge and consent of directors of Filriters, and not
duly authorized in writing by the Board, as requiring by
Article V, Section 3 of CB Circular No. 769;
16. The assignment of the CBCI to Philfinance is a
personal act of Alfredo Banaria and not the corporate act of
Filriters and such null and void;
a) The assignment was executed without consideration and
for that reason, the assignment is void from the beginning
(Article 1409, Civil Code);
b) The assignment was executed without any knowledge
and consent of the board of directors of Filriters;
c) The CBCI constitutes reserve investment of Filriters
against liabilities, which is a requirement under the
Insurance Code for its existence as an insurance company
and the pursuit of its business operations. The assignment
of the CBCI is illegal act in the sense of malum in
se or malum prohibitum, for anyone to make, either as
corporate or personal act;
d) The transfer of dimunition of reserve investments of
Filriters is expressly prohibited by law, is immoral and
against public policy;
e) The assignment of the CBCI has resulted in the capital
impairment and in the solvency deficiency of Filriters (and
has in fact helped in placing Filriters under
conservatorship), an inevitable result known to the officer
who executed assignment.
17. Plaintiff had acted in bad faith and with knowledge of
the illegality and invalidity of the assignment.
a) The CBCI No. 891 is not a negotiable instrument and as
a certificate of indebtedness is not payable to bearer but is
a registered in the name of Filriters;
b) The provision on transfer of the CBCIs provides that the
Central Bank shall treat the registered owner as the
absolute owner and that the value of the registered
certificates shall be payable only to the registered owner; a
sufficient notice to plaintiff that the assignments do not give
them the registered owner's right as absolute owner of the
CBCI's;
c) CB Circular 769, Series of 1980 (Rules and Regulations
Governing CBCIs) provides that the registered certificates
are payable only to the registered owner (Article II, Section
1).
18. Plaintiff knew full well that the assignment by
Philfinance of CBCI No. 891 by Filriters is not a regular
transaction made in the usual of ordinary course of
business;
a) The CBCI constitutes part of the reserve investments of
Filriters against liabilities requires by the Insurance Code
and its assignment or transfer is expressly prohibited by
law. There was no attempt to get any clearance or
authorization from the Insurance Commissioner;
b) The assignment by Filriters of the CBCI is clearly not a
transaction in the usual or regular course of its business;
c) The CBCI involved substantial amount and its
assignment clearly constitutes disposition of "all or
substantially all" of the assets of Filriters, which requires
the affirmative action of the stockholders (Section 40,
Corporation [sic] Code. 7
In its Decision dated April 29, 1988, the Regional Trial Court of Manila,
8
Branch XXXIII found the assignment of CBCI No. D891 in favor of
Philfinance, and the subsequent assignment of the same CBCI by
Philfinance in favor of Traders Royal Bank null and void and of no force
and effect. The dispositive portion of the decision reads:
ACCORDINGLY, judgment is hereby rendered in favor of
the respondent Filriters Guaranty Assurance Corporation
and against the plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of
PhilFinance, and the subsequent assignment of CBCI by
PhilFinance in favor of the plaintiff Traders Royal Bank as
null and void and of no force and effect;
 (b) Ordering the respondent Central Bank of the Philippines
to disregard the said assignment and to pay the value of
the proceeds of the CBCI No. D891 to the Filriters
Guaranty Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay
respondent Filriters Guaranty Assurance Corp. The sum of
P10,000 as attorney's fees; and
(d) to pay the costs.
SO ORDERED. 9
The petitioner assailed the decision of the trial court in the Court of
Appeals , but their appeals likewise failed. The findings of the fact of
10
the said court are hereby reproduced:
The records reveal that defendant Filriters is the registered
owner of CBCI No. D891. Under a deed of assignment
dated November 27, 1971, Filriters transferred CBCI No.
D891 to Philippine Underwriters Finance Corporation
(Philfinance). Subsequently, Philfinance transferred CBCI
No. D891, which was still registered in the name of Filriters,
to appellant Traders Royal Bank (TRB). The transfer was
made under a repurchase agreement dated February 4,
1981, granting Philfinance the right to repurchase the
instrument on or before April 27, 1981. When Philfinance
failed to buy back the note on maturity date, it executed a
deed of assignment, dated April 27, 1981, conveying to
appellant TRB all its right and the title to CBCI No. D891.
Armed with the deed of assignment, TRB then sought the
transfer and registration of CBCI No. D891 in its name
before the Security and Servicing Department of the
Central Bank (CB). Central Bank, however, refused to
effect the transfer and registration in view of an adverse
claim filed by defendant Filriters.
Left with no other recourse, TRB filed a special civil action
for mandamus against the Central Bank in the Regional
Trial Court of Manila. The suit, however, was subsequently
treated by the lower court as a case of interpleader when
CB prayed in its amended answer that Filriters be
impleaded as a respondent and the court adjudge which of
them is entitled to the ownership of CBCI No. D891. Failing
to get a favorable judgment. TRB now comes to this Court
on appeal. 11
In the appellate court, petitioner argued that the subject CBCI was a
negotiable instrument, and having acquired the said certificate from
Philfinance as a holder in due course, its possession of the same is
thus free fro any defect of title of prior parties and from any defense
available to prior parties among themselves, and it may thus, enforce
payment of the instrument for the full amount thereof against all parties
liable thereon.12
In ignoring said argument, the appellate court that the CBCI is not a
negotiable instrument, since the instrument clearly stated that it was
payable to Filriters, the registered owner, whose name was inscribed
thereon, and that the certificate lacked the words of negotiability which
serve as an expression of consent that the instrument may be
transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to Philfinance
was fictitious, having made without consideration, and did not conform
to Central Bank Circular No. 769, series of 1980, better known as the
"Rules and Regulations Governing Central Bank Certificates of
Indebtedness", which provided that any "assignment of registered
certificates shall not be valid unless made . . . by the registered owner
thereof in person or by his representative duly authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from
Philfinance whose interest was inexistent, having acquired the
certificate through simulation. What happened was Philfinance merely
borrowed CBCI No. D891 from Filriters, a sister corporation, to
guarantee its financing operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed the deed
of assignment purportedly for and on behalf of Filriters, did
not have the necessary written authorization from the
Board of Directors of Filriters to act for the latter. For lack of
such authority, the assignment did not therefore bind
Filriters and violated as the same time Central Bank
Circular No. 769 which has the force and effect of a law,
resulting in the nullity of the transfer (People v. Que Po Lay,
94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of
Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI
No. D891 which it could assign or transfer to Traders Royal
Bank and which the latter can register with the Central
Bank.
WHEREFORE, the judgment appealed from is AFFIRMED,
with costs against plaintiff-appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the argument that
Philfinance owns 90% of Filriters equity and the two corporations have
identical corporate officers, thus demanding the application of the
doctrine or piercing the veil of corporate fiction, as to give validity to the
transfer of the CBCI from registered owner to petitioner TRB. This 14
renders the payment by TRB to Philfinance of CBCI, as actual payment
to Filriters. Thus, there is no merit to the lower court's ruling that the
transfer of the CBCI from Filriters to Philfinance was null and void for
lack of consideration.
Admittedly, the subject CBCI is not a negotiable instrument in the
absence of words of negotiability within the meaning of the negotiable
instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value
received, hereby promises to pay bearer, of if this
Certificate of indebtedness be registered, to FILRITERS
GUARANTY ASSURANCE CORPORATION, the registered
owner hereof, the principal sum of FIVE HUNDRED
THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to
certificates for the creation and maintenance of a permanent
improvement revolving fund, is similar to a "bond," (82 Minn. 202).
Being equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum of money. It is
usually used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable
instrument, stating that:
As worded, the instrument provides a promise "to pay
Filriters Guaranty Assurance Corporation, the registered
owner hereof." Very clearly, the instrument is payable only
to Filriters, the registered owner, whose name is inscribed
thereon. It lacks the words of negotiability which should
 have served as an expression of consent that the
instrument may be transferred by negotiation. 15
A reading of the subject CBCI indicates that the same is payable to
FILRITERS GUARANTY ASSURANCE CORPORATION, and to no one
else, thus, discounting the petitioner's submission that the same is a
negotiable instrument, and that it is a holder in due course of the
certificate.
The language of negotiability which characterize a negotiable paper as
a credit instrument is its freedom to circulate as a substitute for money.
Hence, freedom of negotiability is the touchtone relating to the
protection of holders in due course, and the freedom of negotiability is
the foundation for the protection which the law throws around a holder
in due course (11 Am. Jur. 2d, 32). This freedom in negotiability is totally
absent in a certificate indebtedness as it merely to pay a sum of money
to a specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, :
16
The accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. In the
construction of a bill or note, the intention of the parties is
to control, if it can be legally ascertained. While the writing
may be read in the light of surrounding circumstance in
order to more perfectly understand the intent and meaning
of the parties, yet as they have constituted the writing to be
the only outward and visible expression of their meaning,
no other words are to be added to it or substituted in its
stead. The duty of the court in such case is to ascertain,
not what the parties may have secretly intended as
contradistinguished from what their words express, but
what is the meaning of the words they have used. What the
parties meant must be determined by what they said.
Thus, the transfer of the instrument from Philfinance to TRB was merely
an assignment, and is not governed by the negotiable instruments law.
The pertinent question then is, was the transfer of the CBCI from
Filriters to Philfinance and subsequently from Philfinance to TRB, in
accord with existing law, so as to entitle TRB to have the CBCI
registered in its name with the Central Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that Philfinance's
title over CBCI No. D891 is defective since it acquired the
instrument from Filriters fictitiously. Although the deed of
assignment stated that the transfer was for "value
received", there was really no consideration involved. What
happened was Philfinance merely borrowed CBCI No.
D891 from Filriters, a sister corporation. Thus, for lack of
any consideration, the assignment made is a complete
nullity.
What is more, We find that the transfer made by Filriters to
Philfinance did not conform to Central Bank Circular No.
769, series of 1980, otherwise known as the "Rules and
Regulations Governing Central Bank Certificates of
Indebtedness", under which the note was issued.
Published in the Official Gazette on November 19, 1980,
Section 3 thereof provides that any assignment of
registered certificates shall not be valid unless made . . . by
the registered owner thereof in person or by his
representative duly authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed the deed
of assignment purportedly for and on behalf of Filriters, did
not have the necessary written authorization from the
Board of Directors of Filriters to act for the latter. For lack of
such authority, the assignment did not therefore bind
Filriters and violated at the same time Central Bank
 Circular No. 769 which has the force and effect of a law,
resulting in the nullity of the transfer (People vs. Que Po
Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of
Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI
No. D891 which it could assign or transfer to Traders Royal
Bank and which the latter can register with the Central
Bank
Petitioner now argues that the transfer of the subject CBCI to TRB must
upheld, as the respondent Filriters and Philfinance, though separate
corporate entities on paper, have used their corporate fiction to defraud
TRB into purchasing the subject CBCI, which purchase now is refused
registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two
companies have the same corporate officers, if the
principle of piercing the veil of corporate entity were to be
applied in this case, then TRB's payment to Philfinance for
the CBCI purchased by it could just as well be considered
a payment to Filriters, the registered owner of the CBCI as
to bar the latter from claiming, as it has, that it never
received any payment for that CBCI sold and that said
CBCI was sold without its authority.
xxx xxx xxx
We respectfully submit that, considering that the Court of
Appeals has held that the CBCI was merely borrowed by
Philfinance from Filriters, a sister corporation, to guarantee
its (Philfinance's) financing operations, if it were to be
consistent therewith, on the issued raised by TRB that
there was a piercing a veil of corporate entity, the Court of
Appeals should have ruled that such veil of corporate entity
was, in fact, pierced, and the payment by TRB to
Philfinance should be construed as payment to Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate
entity, as this merely an equitable remedy, and may be awarded only in
cases when the corporate fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime or where a corporation is a
mere alter ego or business conduit of a person. 18
Peiercing the veil of corporate entity requires the court to see through
the protective shroud which exempts its stockholders from liabilities that
ordinarily, they could be subject to, or distinguished one corporation
from a seemingly separate one, were it not for the existing corporate
fiction. But to do this, the court must be sure that the corporate fiction
was misused, to such an extent that injustice, fraud, or crime was
committed upon another, disregarding, thus, his, her, or its rights. It is
the protection of the interests of innocent third persons dealing with the
corporate entity which the law aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains,
despite the petitioners insistence on the contrary. For one, other than
the allegation that Filriters is 90% owned by Philfinance, and the identity
of one shall be maintained as to the other, there is nothing else which
could lead the court under circumstance to disregard their corporate
personalities.
Though it is true that when valid reasons exist, the legal fiction that a
corporation is an entity with a juridical personality separate from its
stockholders and from other corporations may be disregarded, in the
19
absence of such grounds, the general rule must upheld. The fact that
Filfinance owns majority shares in Filriters is not by itself a ground to
disregard the independent corporate status of Filriters. In Liddel &
Co., Inc. vs. Collector of Internal Revenue, the mere ownership by a
20
single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself a sufficient reason for
disregarding the fiction of separate corporate personalities.
In the case at bar, there is sufficient showing that the petitioner was not
defrauded at all when it acquired the subject certificate of indebtedness
from Philfinance.
On its face the subject certificates states that it is registered in the
name of Filriters. This should have put the petitioner on notice, and
prompted it to inquire from Filriters as to Philfinance's title over the
same or its authority to assign the certificate. As it is, there is no
showing to the effect that petitioner had any dealings whatsoever with
Filriters, nor did it make inquiries as to the ownership of the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER.
Thus:
TRANSFER. This Certificate shall pass by delivery unless
it is registered in the owner's name at any office of the
Bank or any agency duly authorized by the Bank, and such
registration is noted hereon. After such registration no
transfer thereof shall be valid unless made at said office
(where the Certificates has been registered) by the
registered owner hereof, in person, or by his attorney, duly
authorized in writing and similarly noted hereon and upon
payment of a nominal transfer fee which may be required,
a new Certificate shall be issued to the transferee of the
registered owner thereof. The bank or any agency duly
authorized by the Bank may deem and treat the bearer of
this Certificate, or if this Certificate is registered as herein
authorized, the person in whose name the same is
registered as the absolute owner of this Certificate, for the
purpose of receiving payment hereof, or on account hereof,
and for all other purpose whether or not this Certificate
shall be overdue.
This is notice to petitioner to secure from Filriters a written authorization
for the transfer or to require Philfinance to submit such an authorization
from Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI No.
D891. The fact that a non-owner was disposing of the registered CBCI
owned by another entity was a good reason for petitioner to verify of
inquire as to the title Philfinance to dispose to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series
of 1990 , known as the Rules and Regulations Governing Central Bank
21
Certificates of Indebtedness, Section 3, Article V of which provides that:
Sec. 3. Assignment of Registered Certificates. —
Assignment of registered certificates shall not be valid
unless made at the office where the same have been
issued and registered or at the Securities Servicing
Department, Central Bank of the Philippines, and by the
registered owner thereof, in person or by his
representative, duly authorized in writing. For this purpose,
the transferee may be designated as the representative of
the registered owner.
Petitioner, being a commercial bank, cannot feign ignorance of Central
Bank Circular 769, and its requirements. An entity which deals with
corporate agents within circumstances showing that the agents are
acting in excess of corporate authority, may not hold the corporation
liable. This is only fair, as everyone must, in the exercise of his rights
22
and in the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith. 23
The transfer made by Filriters to Philfinance did not conform to the said.
Central Bank Circular, which for all intents, is considered part of the law.
As found by the courts a quo, Alfredo O. Banaria, who had signed the
deed of assignment from Filriters to Philfinance, purportedly for and in
favor of Filriters, did not have the necessary written authorization from
the Board of Directors of Filriters to act for the latter. As it is, the sale
from Filriters to Philfinance was fictitious, and therefore void and
inexistent, as there was no consideration for the same. This is fatal to
the petitioner's cause, for then, Philfinance had no title over the subject
certificate to convey the Traders Royal Bank. Nemo potest nisi quod de
jure potest — no man can do anything except what he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part of
its legal and capital reserves, which are required by law to be
24
maintained at a mandated level. This was pointed out by Elias Garcia,
Manager-in-Charge of respondent Filriters, in his testimony given
before the court on May 30, 1986.
Q Do you know this Central Bank Certificate of
Indebtedness, in short, CBCI No. D891 in the
face value of P5000,000.00 subject of this
case?
A Yes, sir.
Q Why do you know this?
A Well, this was CBCI of the company sought
to be examined by the Insurance Commission
sometime in early 1981 and this CBCI No. 891
was among the CBCI's that were found to be
missing.
Q Let me take you back further before 1981.
Did you have the knowledge of this CBCI No.
891 before 1981?
A Yes, sir. This CBCI is an investment of
Filriters required by the Insurance Commission
as legal reserve of the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are
required to put up legal reserves under
Section 213 of the Insurance Code equivalent
to 40 percent of the premiums receipt and
further, the Insurance Commission requires
this reserve to be invested preferably in
government securities or government binds.
This is how this CBCI came to be purchased
by the company.
It cannot, therefore, be taken out of the said funds, without violating the
requirements of the law. Thus, the anauthorized use or distribution of
the same by a corporate officer of Filriters cannot bind the said
corporation, not without the approval of its Board of Directors, and the
maintenance of the required reserve fund.
Consequently, the title of Filriters over the subject certificate of
indebtedness must be upheld over the claimed interest of Traders
Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed
from dated January 29, 1990 is hereby AFFIRMED.
SO ORDERED.
G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofileña & Guingona for private.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of
the decision promulgated by respondent court on March 8, 1991 in CA-
G.R. CV No. 23615 affirming with modifications, the earlier decision of
1
the Regional Trial Court of Manila, Branch XLII, which dismissed the
2
complaint filed therein by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a
quo and adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial banking
institution, through its Sucat Branch issued 280 certificates
of time deposit (CTDs) in favor of one Angel dela Cruz who
deposited with herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial Stipulation of
Facts and Statement of Issues, Original Records, p. 207;
Defendant's Exhibits 1 to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time
(CTDs) to herein plaintiff in connection with his purchased
of fuel products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr.
Timoteo Tiangco, the Sucat Branch Manger, that he lost all
the certificates of time deposit in dispute. Mr. Tiangco
advised said depositor to execute and submit a notarized
Affidavit of Loss, as required by defendant bank's
procedure, if he desired replacement of said lost CTDs
(TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and
delivered to defendant bank the required Affidavit of Loss
(Defendant's Exhibit 281). On the basis of said affidavit of
loss, 280 replacement CTDs were issued in favor of said
depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and
obtained a loan from defendant bank in the amount of Eight
Hundred Seventy Five Thousand Pesos (P875,000.00). On
the same date, said depositor executed a notarized Deed
of Assignment of Time Deposit (Exhibit 562) which stated,
among others, that he (de la Cruz) surrenders to defendant
bank "full control of the indicated time deposits from and
after date" of the assignment and further authorizes said
bank to pre-terminate, set-off and "apply the said time
deposits to the payment of whatever amount or amounts
may be due" on the loan upon its maturity (TSN, February
9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit
Manager of plaintiff Caltex (Phils.) Inc., went to the
defendant bank's Sucat branch and presented for
verification the CTDs declared lost by Angel dela Cruz
alleging that the same were delivered to herein plaintiff "as
security for purchases made with Caltex Philippines, Inc."
by said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter
(Defendant's Exhibit 563) from herein plaintiff formally
informing it of its possession of the CTDs in question and
of its decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein
defendant to furnish the former "a copy of the document
evidencing the guarantee agreement with Mr. Angel dela
Cruz" as well as "the details of Mr. Angel dela Cruz"
obligation against which plaintiff proposed to apply the time
deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished
herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's
demand and claim for payment of the value of the CTDs in
a letter dated February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the
defendant bank matured and fell due and on August 5,
1983, the latter set-off and applied the time deposits in
question to the payment of the matured loan (TSN,
February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant
complaint, praying that defendant bank be ordered to pay it
the aggregate value of the certificates of time deposit of
P1,120,000.00 plus accrued interest and compounded
interest therein at 16% per annum, moral and exemplary
damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing
the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's
dismissal of the complaint, hence this petition wherein petitioner faults
respondent court in ruling (1) that the subject certificates of deposit are
non-negotiable despite being clearly negotiable instruments; (2) that
petitioner did not become a holder in due course of the said certificates
of deposit; and (3) in disregarding the pertinent provisions of the Code
of Commerce relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to
provide a better understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982,
19____
This is to Certify that B E A R E R has
deposited in this Bank the sum of PESOS:
 FOUR THOUSAND ONLY, SECURITY BANK
SUCAT OFFICE P4,000 & 00 CTS Pesos,
Philippine Currency, repayable to said
depositor 731 days. after date, upon
presentation and surrender of this certificate,
with interest at the rate of 16% per cent per
annum.
(Sgd. Illegible) (Sgd. Illegible)
—————————— ———————————
AUTHORIZED SIGNATURES 5 reasonable certainty.
Respondent court ruled that the CTDs in question are non-negotiable
instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears
rather boldly in the CTDs issued, it is important to note that
after the word "BEARER" stamped on the space provided
supposedly for the name of the depositor, the words "has
deposited" a certain amount follows. The document further
provides that the amount deposited shall be "repayable to
said depositor" on the period indicated. Therefore, the text
of the instrument(s) themselves manifest with clarity that
they are payable, not to whoever purports to be the
"bearer" but only to the specified person indicated therein,
the depositor. In effect, the appellee bank acknowledges its
depositor Angel dela Cruz as the person who made the
deposit and further engages itself to pay said depositor the
amount indicated thereon at the stipulated date. 6 witness:
We disagree with these findings and conclusions, and hereby hold that
the CTDs in question are negotiable instruments. Section 1 Act No.
2031, otherwise known as the Negotiable Instruments Law, enumerates
the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties' bone of contention is with regard to requisite
(d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security
Bank's Branch Manager way back in 1982, testified in open court that
the depositor reffered to in the CTDs is no other than Mr. Angel de la
Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying
that per books of the bank, the depositor
referred (sic) in these certificates states that it
was Angel dela Cruz?
a Yes, your Honor, and we have the record to
show that Angel dela Cruz was the one who
cause (sic) the amount.
 Atty. Calida:
q And no other person or entity or company,
Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified
in all of these certificates of time deposit
insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the writing, that is,
from the face of the instrument itself. In the construction of a bill or
9
note, the intention of the parties is to control, if it can be legally
ascertained. While the writing may be read in the light of surrounding
10
circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be
the only outward and visible expression of their meaning, no other
words are to be added to it or substituted in its stead. The duty of the
court in such case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what their words express,
but what is the meaning of the words they have used. What the parties
meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall
be repayable to the depositor. And who, according to the document, is
the depositor? It is the "bearer." The documents do not say that the
depositor is Angel de la Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are to be repayable
to the bearer of the documents or, for that matter, whosoever may be
the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to
Angel de la Cruz only, it could have with facility so expressed that fact in
clear and categorical terms in the documents, instead of having the
word "BEARER" stamped on the space provided for the name of the
depositor in each CTD. On the wordings of the documents, therefore,
the amounts deposited are repayable to whoever may be the bearer
thereof. Thus, petitioner's aforesaid witness merely declared that Angel
de la Cruz is the depositor "insofar as the bank is concerned," but
obviously other parties not privy to the transaction between them would
not be in a position to know that the depositor is not the bearer stated in
the CTDs. Hence, the situation would require any party dealing with the
CTDs to go behind the plain import of what is written thereon to unravel
the agreement of the parties thereto through facts aliunde. This need
for resort to extrinsic evidence is what is sought to be avoided by the
Negotiable Instruments Law and calls for the application of the
elementary rule that the interpretation of obscure words or stipulations
in a contract shall not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs.
This time, the answer is in the negative. The records reveal that Angel
de la Cruz, whom petitioner chose not to implead in this suit for reasons
of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner
without informing respondent bank thereof at any time. Unfortunately for
petitioner, although the CTDs are bearer instruments, a valid
negotiation thereof for the true purpose and agreement between it and
De la Cruz, as ultimately ascertained, requires both delivery and
indorsement. For, although petitioner seeks to deflect this fact, the
CTDs were in reality delivered to it as a security for De la Cruz' the presumption that evidence willfully suppressed would be adverse if
purchases of its fuel products. Any doubt as to whether the CTDs were produced. 19

delivered as payment for the fuel products or as a security has been

dissipated and resolved in favor of the latter by petitioner's own Under the foregoing circumstances, this disquisition in Intergrated
authorized and responsible representative himself. Realty Corporation, et al. vs. Philippine National Bank, et al. is
20

apropos:
In a letter dated November 26, 1982 addressed to respondent Security
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These . . . Adverting again to the Court's pronouncements
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to in Lopez, supra, we quote therefrom:
guarantee his purchases of fuel products" (Emphasis ours.) This 13

admission is conclusive upon petitioner, its protestations The character of the transaction between the
notwithstanding. Under the doctrine of estoppel, an admission or parties is to be determined by their intention,
representation is rendered conclusive upon the person making it, and regardless of what language was used or what
cannot be denied or disproved as against the person relying the form of the transfer was. If it was intended
thereon. A party may not go back on his own acts and representations
14 to secure the payment of money, it must be
to the prejudice of the other party who relied upon them. In the law of
15 construed as a pledge; but if there was some
evidence, whenever a party has, by his own declaration, act, or other intention, it is not a pledge. However,
omission, intentionally and deliberately led another to believe a even though a transfer, if regarded by itself,
particular thing true, and to act upon such belief, he cannot, in any appears to have been absolute, its object and
litigation arising out of such declaration, act, or omission, be permitted character might still be qualified and explained
to falsify it.16 by contemporaneous writing declaring it to
have been a deposit of the property as
If it were true that the CTDs were delivered as payment and not as collateral security. It has been said that a
security, petitioner's credit manager could have easily said so, instead transfer of property by the debtor to a creditor,
of using the words "to guarantee" in the letter aforequoted. Besides, even if sufficient on its face to make an
when respondent bank, as defendant in the court below, moved for a absolute conveyance, should be treated as a
bill of particularity therein praying, among others, that petitioner, as
17 pledge if the debt continues in inexistence and
plaintiff, be required to aver with sufficient definiteness or particularity is not discharged by the transfer, and that
(a) the due date or dates of payment of the alleged indebtedness of accordingly the use of the terms ordinarily
Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt importing conveyance of absolute ownership
showing that the CTDs were delivered to it by De la Cruz as payment of will not be given that effect in such a
the latter's alleged indebtedness to it, plaintiff corporation opposed the transaction if they are also commonly used in
motion. Had it produced the receipt prayed for, it could have proved, if
18 pledges and mortgages and therefore do not
such truly was the fact, that the CTDs were delivered as payment and unqualifiedly indicate a transfer of absolute
not as security. Having opposed the motion, petitioner now labors under ownership, in the absence of clear and
 unambiguous language or other
circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof, and a holder
21
may be the payee or indorsee of a bill or note, who is in possession of
it, or the bearer thereof. In the present case, however, there was no
22
negotiation in the sense of a transfer of the legal title to the CTDs in
favor of petitioner in which situation, for obvious reasons, mere delivery
of the bearer CTDs would have sufficed. Here, the delivery thereof only
as security for the purchases of Angel de la Cruz (and we even
disregard the fact that the amount involved was not disclosed) could at
the most constitute petitioner only as a holder for value by reason of his
lien. Accordingly, a negotiation for such purpose cannot be effected by
mere delivery of the instrument since, necessarily, the terms thereof
and the subsequent disposition of such security, in the event of non-
payment of the principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien. As such holder of collateral security, he would be a
23
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by
the Civil Code provisions on pledge of incorporeal rights, which
24
inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, . . . may also be pledged. The instrument
proving the right pledged shall be delivered to the creditor,
and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third
persons if a description of the thing pledged and the date of
the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed,
the factual findings of respondent court quoted at the start of this
opinion show that petitioner failed to produce any document evidencing
any contract of pledge or guarantee agreement between it and Angel de
la Cruz. Consequently, the mere delivery of the CTDs did not legally
25
vest in petitioner any right effective against and binding upon
respondent bank. The requirement under Article 2096 aforementioned
is not a mere rule of adjective law prescribing the mode whereby proof
may be made of the date of a pledge contract, but a rule of substantive
law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la
Cruz in favor of respondent bank was embodied in a public
instrument. With regard to this other mode of transfer, the Civil Code
27
specifically declares:
Art. 1625. An assignment of credit, right or action shall
produce no effect as against third persons, unless it
appears in a public instrument, or the instrument is
recorded in the Registry of Property in case the assignment
involves real property.
Respondent bank duly complied with this statutory requirement.
Contrarily, petitioner, whether as purchaser, assignee or lien holder of
the CTDs, neither proved the amount of its credit or the extent of its lien
nor the execution of any public instrument which could affect or bind
private respondent. Necessarily, therefore, as between petitioner and
respondent bank, the latter has definitely the better right over the CTDs
in question.
Finally, petitioner faults respondent court for refusing to delve into the
question of whether or not private respondent observed the
requirements of the law in the case of lost negotiable instruments and
the issuance of replacement certificates therefor, on the ground that
petitioner failed to raised that issue in the lower court.
28
On this matter, we uphold respondent court's finding that the aspect of
alleged negligence of private respondent was not included in the
stipulation of the parties and in the statement of issues submitted by
them to the trial court. The issues agreed upon by them for resolution
29
in this case are:
1. Whether or not the CTDs as worded are negotiable
instruments.
2. Whether or not defendant could legally apply the amount
covered by the CTDs against the depositor's loan by virtue
of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off
involving the amount covered by the CTDs and the
depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to
preterminate the CTDs before the maturity date provided
therein.
5. Whether or not plaintiff is entitled to the proceeds of the
CTDs.
6. Whether or not the parties can recover damages,
attorney's fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of
some doctrinal authorities, the foregoing enumeration does not include
the issue of negligence on the part of respondent bank. An issue raised
for the first time on appeal and not raised timely in the proceedings in
the lower court is barred by estoppel. Questions raised on appeal
30
must be within the issues framed by the parties and, consequently,
issues not raised in the trial court cannot be raised for the first time on
appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary
to the disposition of a case are properly raised. Thus, to obviate the
element of surprise, parties are expected to disclose at a pre-trial
conference all issues of law and fact which they intend to raise at the
trial, except such as may involve privileged or impeaching matters. The
determination of issues at a pre-trial conference bars the consideration
of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed
negligence may be considered encompassed by the issues on its right
to preterminate and receive the proceeds of the CTDs would be
tantamount to saying that petitioner could raise on appeal any issue.
We agree with private respondent that the broad ultimate issue of
petitioner's entitlement to the proceeds of the questioned certificates
can be premised on a multitude of other legal reasons and causes of
action, of which respondent bank's supposed negligence is only one.
Hence, petitioner's submission, if accepted, would render a pre-trial
delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised
in the court below, petitioner still cannot have the odds in its favor. A
close scrutiny of the provisions of the Code of Commerce laying down
the rules to be followed in case of lost instruments payable to bearer,
which it invokes, will reveal that said provisions, even assuming their
applicability to the CTDs in the case at bar, are merely permissive and
not mandatory. The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what
cause it may be, may apply to the judge or court of
competent jurisdiction, asking that the principal, interest or
dividends due or about to become due, be not paid a third
person, as well as in order to prevent the ownership of the
instrument that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not
mandatory but discretionary on the part of the "dispossessed owner" to
apply to the judge or court of competent jurisdiction for the issuance of
a duplicate of the lost instrument. Where the provision reads "may," this
word shows that it is not mandatory but discretional. The word "may"
34
is usually permissive, not mandatory. It is an auxiliary verb indicating
35
liberty, opportunity, permission and possibility.36
Moreover, as correctly analyzed by private respondent, Articles 548 to
37
558 of the Code of Commerce, on which petitioner seeks to anchor
respondent bank's supposed negligence, merely established, on the
one hand, a right of recourse in favor of a dispossessed owner or
holder of a bearer instrument so that he may obtain a duplicate of the
same, and, on the other, an option in favor of the party liable thereon
who, for some valid ground, may elect to refuse to issue a replacement
of the instrument. Significantly, none of the provisions cited by petitioner
categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined
therein, and none establishes a mandatory precedent requirement
therefor.
WHEREFORE, on the modified premises above set forth, the petition is
DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST COMPANY, petitioner,
vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION,
INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA
CASTILLO, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and
Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden
Savings & Loan Association, Inc.
CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question of
negligence. The facts, pruned of all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with
branches throughout the Philippines and even abroad. Golden Savings
and Loan Association was, at the time these events happened,
operating in Calapan, Mindoro, with the other private respondents as its
principal officers.
In January 1979, a certain Eduardo Gomez opened an account with
Golden Savings and deposited over a period of two months 38 treasury
warrants with a total value of P1,755,228.37. They were all drawn by
the Philippine Fish Marketing Authority and purportedly signed by its
General Manager and countersigned by its Auditor. Six of these were
directly payable to Gomez while the others appeared to have been
indorsed by their respective payees, followed by Gomez as second
indorser.
1
On various dates between June 25 and July 16, 1979, all these
warrants were subsequently indorsed by Gloria Castillo as Cashier of
Golden Savings and deposited to its Savings Account No. 2498 in the
Metrobank branch in Calapan, Mindoro. They were then sent for
clearing by the branch office to the principal office of Metrobank, which
forwarded them to the Bureau of Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the
Calapan branch several times to ask whether the warrants had been
cleared. She was told to wait. Accordingly, Gomez was meanwhile not
allowed to withdraw from his account. Later, however, "exasperated"
over Gloria's repeated inquiries and also as an accommodation for a
"valued client," the petitioner says it finally decided to allow Golden
Savings to withdraw from the proceeds of the
warrants.3
The first withdrawal was made on July 9, 1979, in the amount of
P508,000.00, the second on July 13, 1979, in the amount of
P310,000.00, and the third on July 16, 1979, in the amount of
P150,000.00. The total withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make
withdrawals from his own account, eventually collecting the total
amount of P1,167,500.00 from the proceeds of the apparently cleared
warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the
warrants had been dishonored by the Bureau of Treasury on July 19,
1979, and demanded the refund by Golden Savings of the amount it
had previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the
Regional Trial Court of Mindoro. After trial, judgment was rendered in
5 grounds:
favor of Golden Savings, which, however, filed a motion for
reconsideration even as Metrobank filed its notice of appeal. On
November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of
defendant Golden Savings and Loan Association, Inc. and
defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings
Account No. 2498 of the sum of P1,754,089.00 and to reinstate
and credit to such account such amount existing before the debit
was made including the amount of P812,033.37 in favor of
defendant Golden Savings and Loan Association, Inc. and
thereafter, to allow defendant Golden Savings and Loan
Association, Inc. to withdraw the amount outstanding thereon
before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and
Loan Association, Inc. attorney's fees and expenses of litigation
in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno
Castillo and Lucia Castillo attorney's fees and expenses of
litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court, the decision was affirmed,
6
prompting Metrobank to file this petition for review on the following
1. Respondent Court of Appeals erred in disregarding and failing
to apply the clear contractual terms and conditions on the deposit
slips allowing Metrobank to charge back any amount erroneously
credited.
(a) Metrobank's right to charge back is not limited to
instances where the checks or treasury warrants are forged
or unauthorized.
 (b) Until such time as Metrobank is actually paid, its
obligation is that of a mere collecting agent which cannot
be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court
of Appeals, Metrobank is made to pay for warrants already
dishonored, thereby perpetuating the fraud committed by
Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as
between Metrobank and Golden Savings, the latter should bear
the loss.
4. Respondent Court of Appeals erred in holding that the treasury
warrants involved in this case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that
Metrobank was indeed negligent in giving Golden Savings the
impression that the treasury warrants had been cleared and that,
consequently, it was safe to allow Gomez to withdraw the proceeds
thereof from his account with it. Without such assurance, Golden
Savings would not have allowed the withdrawals; with such assurance,
there was no reason not to allow the withdrawal. Indeed, Golden
Savings might even have incurred liability for its refusal to return the
money that to all appearances belonged to the depositor, who could
therefore withdraw it any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that
Golden Savings deposited them to its account with Metrobank. Golden
Savings had no clearing facilities of its own. It relied on Metrobank to
determine the validity of the warrants through its own services. The
proceeds of the warrants were withheld from Gomez until Metrobank
allowed Golden Savings itself to withdraw them from its own deposit. It
7
was only when Metrobank gave the go-signal that Gomez was finally
allowed by Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have
exercised more care in checking the personal circumstances of Gomez
before accepting his deposit does not hold water. It was Gomez who
was entrusting the warrants, not Golden Savings that was extending
him a loan; and moreover, the treasury warrants were subject to
clearing, pending which the depositor could not withdraw its proceeds.
There was no question of Gomez's identity or of the genuineness of his
signature as checked by Golden Savings. In fact, the treasury warrants
were dishonored allegedly because of the forgery of the signatures of
the drawers, not of Gomez as payee or indorser. Under the
circumstances, it is clear that Golden Savings acted with due care and
diligence and cannot be faulted for the withdrawals it allowed Gomez to
make.
By contrast, Metrobank exhibited extraordinary carelessness. The
amount involved was not trifling — more than one and a half million
pesos (and this was 1979). There was no reason why it should not have
waited until the treasury warrants had been cleared; it would not have
lost a single centavo by waiting. Yet, despite the lack of such clearance
— and notwithstanding that it had not received a single centavo from
the proceeds of the treasury warrants, as it now repeatedly stresses —
it allowed Golden Savings to withdraw — not once, not twice, but thrice
— from the uncleared treasury warrants in the total amount of
P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria
Castillo about the clearance and it also wanted to "accommodate" a
valued client. It "presumed" that the warrants had been cleared simply
because of "the lapse of one week." For a bank with its long
8
experience, this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the
conditions printed on the dorsal side of the deposit slips through which
the treasury warrants were deposited by Golden Savings with its
Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates
itself only as the depositor's collecting agent, assuming no
responsibility beyond care in selecting correspondents, and until
such time as actual payment shall have come into possession of
this bank, the right is reserved to charge back to the depositor's
account any amount previously credited, whether or not such
item is returned. This also applies to checks drawn on local banks
and bankers and their branches as well as on this bank, which
are unpaid due to insufficiency of funds, forgery, unauthorized
overdraft or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was
acting only as a collecting agent for Golden Savings and give it the right
to "charge back to the depositor's account any amount previously
credited, whether or not such item is returned. This also applies to
checks ". . . which are unpaid due to insufficiency of funds, forgery,
unauthorized overdraft of any other reason." It is claimed that the said
conditions are in the nature of contractual stipulations and became
binding on Golden Savings when Gloria Castillo, as its Cashier, signed
the deposit slips.
Doubt may be expressed about the binding force of the conditions,
considering that they have apparently been imposed by the bank
unilaterally, without the consent of the depositor. Indeed, it could be
argued that the depositor, in signing the deposit slip, does so only to
identify himself and not to agree to the conditions set forth in the given
permit at the back of the deposit slip. We do not have to rule on this
matter at this time. At any rate, the Court feels that even if the deposit
slip were considered a contract, the petitioner could still not validly
disclaim responsibility thereunder in the light of the circumstances of
this case.
In stressing that it was acting only as a collecting agent for Golden
Savings, Metrobank seems to be suggesting that as a mere agent it
cannot be liable to the principal. This is not exactly true. On the
contrary, Article 1909 of the Civil Code clearly provides that —
Art. 1909. — The agent is responsible not only for fraud, but also
for negligence, which shall be judged 'with more or less rigor by
the courts, according to whether the agency was or was not for a
compensation.
The negligence of Metrobank has been sufficiently established. To
repeat for emphasis, it was the clearance given by it that assured
Golden Savings it was already safe to allow Gomez to withdraw the
proceeds of the treasury warrants he had deposited
Metrobank misled Golden Savings. There may have been no express
clearance, as Metrobank insists (although this is refuted by Golden
Savings) but in any case that clearance could be implied from its
allowing Golden Savings to withdraw from its account not only once or
even twice but three times. The total withdrawal was in excess of its
original balance before the treasury warrants were deposited, which
only added to its belief that the treasury warrants had indeed been
cleared.
Metrobank's argument that it may recover the disputed amount if the
warrants are not paid for any reason is not acceptable. Any reason
does not mean no reason at all. Otherwise, there would have been no
need at all for Golden Savings to deposit the treasury warrants with it
for clearance. There would have been no need for it to wait until the
warrants had been cleared before paying the proceeds thereof to
Gomez. Such a condition, if interpreted in the way the petitioner
suggests, is not binding for being arbitrary and unconscionable. And it
becomes more so in the case at bar when it is considered that the
supposed dishonor of the warrants was not communicated to Golden
Savings before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in
giving express or at least implied clearance to the treasury warrants
and allowing payments therefrom to Golden Savings. But that is not all.
On top of this, the supposed reason for the dishonor, to wit, the forgery
of the signatures of the general manager and the auditor of the drawer
corporation, has not been established. This was the finding of the lower
9 Sec. 3. When promise is unconditional. — An unqualified order or
courts which we see no reason to disturb. And as we said in MWSS v.
Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139
SCRA 238). It must be established by clear, positive and
convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury
warrants in question are not negotiable instruments. Clearly stamped
on their face is the word "non-negotiable." Moreover, and this is of
equal significance, it is indicated that they are payable from a particular
fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially
the underscored parts, are pertinent:
Sec. 1. — Form of negotiable instruments. — An instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
xxx xxx xxx
promise to pay is unconditional within the meaning of this Act
though coupled with —
(a) An indication of a particular fund out of which reimbursement
is to be made or a particular account to be debited with the
amount; or
(b) A statement of the transaction which gives rise to the
instrument judgment.
But an order or promise to pay out of a particular fund is not
unconditional.
The indication of Fund 501 as the source of the payment to be made on
the treasury warrants makes the order or promise to pay "not
unconditional" and the warrants themselves non-negotiable. There
should be no question that the exception on Section 3 of the Negotiable
Instruments Law is applicable in the case at bar. This conclusion
conforms to Abubakar vs. Auditor General where the Court held:
11
The petitioner argues that he is a holder in good faith and for
value of a negotiable instrument and is entitled to the rights and
privileges of a holder in due course, free from defenses. But this
treasury warrant is not within the scope of the negotiable
instrument law. For one thing, the document bearing on its face
the words "payable from the appropriation for food administration,
is actually an Order for payment out of "a particular fund," and is
not unconditional and does not fulfill one of the essential
requirements of a negotiable instrument (Sec. 3 last sentence
and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general,
Golden Savings assumed that they were "genuine and in all respects
what they purport to be," in accordance with Section 66 of the
Negotiable Instruments Law. The simple reason is that this law is not
applicable to the non-negotiable treasury warrants. The indorsement
was made by Gloria Castillo not for the purpose of guaranteeing the
genuineness of the warrants but merely to deposit them with Metrobank
for clearing. It was in fact Metrobank that made the guarantee when it
stamped on the back of the warrants: "All prior indorsement and/or lack
of endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan
Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the
Philippine Islands, but we feel this case is inapplicable to the present
12
controversy. That case involved checks whereas this case involves
1âwphi1
treasury warrants. Golden Savings never represented that the warrants
were negotiable but signed them only for the purpose of depositing
them for clearance. Also, the fact of forgery was proved in that case but
not in the case before us. Finally, the Court found the Jai Alai
Corporation negligent in accepting the checks without question from
one Antonio Ramirez notwithstanding that the payee was the Inter-
Island Gas Services, Inc. and it did not appear that he was authorized
to indorse it. No similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we
will have to amend it insofar as it directs the petitioner to credit Golden
Savings with the full amount of the treasury checks deposited to its
account.
The total value of the 32 treasury warrants dishonored was
P1,754,089.00, from which Gomez was allowed to withdraw
P1,167,500.00 before Golden Savings was notified of the dishonor. The
amount he has withdrawn must be charged not to Golden Savings but
to Metrobank, which must bear the consequences of its own
negligence. But the balance of P586,589.00 should be debited to
Golden Savings, as obviously Gomez can no longer be permitted to
withdraw this amount from his deposit because of the dishonor of the
warrants. Gomez has in fact disappeared. To also credit the balance to
Golden Savings would unduly enrich it at the expense of Metrobank, let
alone the fact that it has already been informed of the dishonor of the
treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the
modification that Paragraph 3 of the dispositive portion of the judgment
of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00
only and thereafter allowing defendant Golden Savings & Loan
Association, Inc. to withdraw the amount outstanding thereon, if
any, after the debit.
SO ORDERED.
Narvasa, Gancayco, Griño-Aquino and Medialdea, JJ., concur.
G.R. No. L-22405 June 30, 1971
PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.
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.
DIZON, J.:
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, 124687-124695,
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 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.
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.
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:
WHEREFORE, plaintiff prays that after hearing defendants
be ordered:
(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 8-½% 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 8-½% 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.
G.R. No. 89252 May 24, 1993
RAUL SESBREÑO, 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.
FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreño 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.
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:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
Februa
———
VALUE
 TO Raul Sesbreño Illegible
Signatu
April 6, 1981
————————
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private
MATURITY
respondent
DATE Pilipinas, Makati Branch, and handed her a demand letter
informing the bank that his placement with Philfinance in the amount
NO. 10805
reflected in the DCR No. 10805 had remained unpaid and outstanding,
and that he in effect was asking for the physical delivery of the
DENOMINATED CUSTODIAN RECEIPT underlying promissory note. Petitioner then examined the original of the
DMC PN No. 2731 and found: that the security had been issued on 10
This confirms that as a duly Custodian Bank, and upon April 1980; that it would mature on 6 April 1981; that it had a face value
instruction of PHILIPPINE UNDERWRITES FINANCE of P2,300,833.33, with the Philfinance as "payee" and private
CORPORATION, we have in our custody the following respondent Delta Motors Corporation ("Delta") as "maker;" and that on
securities to you [sic] the extent herein indicated. face of the promissory note was stamped "NON NEGOTIABLE."
Pilipinas did not deliver the Note, nor any certificate of participation in
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT respect thereof, to petitioner.
NUMBER DATE VALUE BY HOLDER PAYEE
Petitioner later made similar demand letters, dated 3 July 1981 and 3
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33 August 1981, again asking private respondent Pilipinas for physical
2

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 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.
Petitioner also made a written demand on 14 July 1981 upon private
3

delivery of the above securities fully assigned to you should respondent Delta for the partial satisfaction of DMC PN No. 2731,
this Denominated Custodianship Receipt remain explaining that Philfinance, as payee thereof, had assigned to him said
outstanding in your favor thirty (30) days after its maturity. 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
PILIPINAS
previously agreed with Philfinance to offset its DMC PN No. 2731 (along
BANK with DMC PN No. 2730) against Philfinance PN No. 143-A issued in
(By Elizabeth
favor of Delta.
De Villa
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
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. The trial court, in a decision dated 5
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 plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without
success.
Hence, this Petition for Review on Certiorari.
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-vis Delta; 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.
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 "non-negotiable" stamp across the
face of the Note and because maker Delta and payee
10
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
(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 the assignment 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. (Emphasis
12
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
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
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. Delta's argument
14

PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our
representative, Mr. Eric Castillo.
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, must be clearly established by the
15

unequivocal terms of the substituting obligation or by the evident

Very Truly
incompatibility of the new and old obligations on every point. Nothing
16

Yours,
of the sort is present in the instant case.
(Sgd.)
It is in fact difficult to be impressed with Delta's complaint, since it
Florencio B.
released its DMC PN No. 2731 to Philfinance, an entity engaged in the
Biagan
business of buying and selling debt instruments and other securities,
Senior Vice
and more generally, in money market transactions. In Perez v. Court of
President
Appeals, the Court, speaking through Mme. Justice Herrera, made the
17

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. (Citations omitted; emphasis
18
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;
(3) That the two debts are due;
(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, that is, after the maturity
19
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 and that the assignee acquires his rights subject to the
20
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.
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.
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)
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. Yap-Tico, the Court explained
21
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. Accordingly, petitioner's theory that
25
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 Sesbreño.
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 Sesbreño 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. Accordingly, any stipulation in the contract of deposit or
26
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 beneficiary-
placer.
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. The custodian bank, if it is not related
27
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 Sesbreño. 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 Sesbreño 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 have vis-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.
FIRESTONE TIRE & RUBBER COMPANY OF THE
PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and LUZON DEVELOPMENT
BANK, respondents.
QUISUMBING, J.:
This petition assails the decision 1 dated December 29, 1993 of the
Court of Appeals in CA-G.R. CV No. 29546, which affirmed the
judgment 2 of the Regional Trial Court of Pasay City, Branch 113 in Civil
Case No. PQ-7854-P, dismissing Firestone's complaint for damages.
The facts of this case, adopted by the CA and based on findings by the
trial court, are as follows:
. . . [D]efendant is a banking corporation. It operates under a
certificate of authority issued by the Central Bank of the
Philippines, and among its activities, accepts savings and time
deposits. Said defendant had as one of its client-depositors the
Fojas-Arca Enterprises Company ("Fojas-Arca" for brevity).
Fojas-Arca maintaining a special savings account with the
defendant, the latter authorized and allowed withdrawals of funds
therefrom through the medium of special withdrawal slips. These
are supplied by the defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a
"Franchised Dealership Agreement" (Exh. B) whereby Fojas-Arca
has the privilege to purchase on credit and sell plaintiff's
products.
On January 14, 1978 up to May 15, 1978. Pursuant to the
aforesaid Agreement, Fojas-Arca purchased on credit Firestone
products from plaintiff with a total amount of P4,896,000.00. In
payment of these purchases, Fojas-Arca delivered to plaintiff six
(6) special withdrawal slips drawn upon the defendant. In turn,
these were deposited by the plaintiff with its current account with
the Citibank. All of them were honored and paid by the defendant.
This singular circumstance made plaintiff believe [sic] and relied
[sic] on the fact that the succeeding special withdrawal slips
drawn upon the defendant would be equally sufficiently funded.
Relying on such confidence and belief and as a direct
consequence thereof, plaintiff extended to Fojas-Arca other
purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products
on credit (Exh. M, I, J, K) and delivered to plaintiff the
corresponding special withdrawal slips in payment thereof drawn
upon the defendant, to wit:
WITHDRAWAL
DATE AMOUNT
SLIP NO.
June 15, 42127 P1,198,092.80
1978
July 15, 42128 940,190.00
1978
Aug. 15, 42129 880,000.00
1978
Sep. 15, 42130 981,500.00
1978
These were likewise deposited by plaintiff in its current account
with Citibank and in turn the Citibank forwarded it [sic] to the
defendant for payment and collection, as it had done in respect of
the previous special withdrawal slips. Out of these four (4)
withdrawal slips only withdrawal slip No. 42130 in the amount of
P981,500.00 was honored and paid by the defendant in October
1978. Because of the absence for a long period coupled with the
fact that defendant honored and paid withdrawal slips No. 42128
dated July 15, 1978, in the amount of P981,500.00 plaintiff's
belief was all the more strengthened that the other withdrawal
slips were likewise sufficiently funded, and that it had received full
value and payment of Fojas-Arca's credit purchased then
outstanding at the time. On this basis, plaintiff was induced to
continue extending to Fojas-Arca further purchase on credit of its
products as per agreement (Exh. "B").
However, on December 14, 1978, plaintiff was informed by
Citibank that special withdrawal slips No. 42127 dated June 15,
1978 for P1,198,092.80 and No. 42129 dated August 15, 1978 for
P880,000.00 were dishonored and not paid for the reason 'NO
ARRANGEMENT.' As a consequence, the Citibank debited
plaintiff's account for the total sum of P2,078,092.80 representing
the aggregate amount of the above-two special withdrawal slips.
Under such situation, plaintiff averred that the pecuniary losses it
suffered is caused by and directly attributable to defendant's
gross negligence.
 On September 25, 1979, counsel of plaintiff served a written
demand upon the defendant for the satisfaction of the damages
suffered by it. And due to defendant's refusal to pay plaintiff's
claim, plaintiff has been constrained to file this complaint, thereby
compelling plaintiff to incur litigation expenses and attorney's fees
which amount are recoverable from the defendant.
Controverting the foregoing asseverations of plaintiff, defendant
asserted, inter alia that the transactions mentioned by plaintiff are
that of plaintiff and Fojas-Arca only, [in] which defendant is not
involved; Vehemently, it was denied by defendant that the special
withdrawal slips were honored and treated as if it were checks,
the truth being that when the special withdrawal slips were
received by defendant, it only verified whether or not the
signatures therein were authentic, and whether or not the deposit
level in the passbook concurred with the savings ledger, and
whether or not the deposit is sufficient to cover the withdrawal; if
plaintiff treated the special withdrawal slips paid by Fojas-Arca as
checks then plaintiff has to blame itself for being grossly negligent
in treating the withdrawal slips as check when it is clearly stated
therein that the withdrawal slips are non-negotiable; that
defendant is not a privy to any of the transactions between Fojas-
Arca and plaintiff for which reason defendant is not duty bound to
notify nor give notice of anything to plaintiff. If at first defendant
had given notice to plaintiff it is merely an extension of usual bank
courtesy to a prospective client; that defendant is only dealing
with its depositor Fojas-Arca and not the plaintiff. In summation,
defendant categorically stated that plaintiff has no cause of action
against it (pp. 1-3, Dec.; pp. 368-370, id).3
Petitioner's complaint4 for a sum of money and damages with the
Regional Trial Court of Pasay City, Branch 113, docketed as Civil Case
No. 29546, was dismissed together with the counterclaim of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that
respondent Luzon Development Bank was liable for damages under
Article 21765 in relation to Articles 196 and 207 of the Civil Code. As
noted by the CA, petitioner alleged the following tortious acts on the
part of private respondent: 1) the acceptance and payment of the
special withdrawal slips without the presentation of the depositor's
passbook thereby giving the impression that the withdrawal slips are
instruments payable upon presentment; 2) giving the special withdrawal
slips the general appearance of checks; and 3) the failure of respondent
bank to seasonably warn petitioner that it would not honor two of the
four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed
decision. It denied the appeal and affirmed the judgment of the trial
court. According to the appellate court, respondent bank notified the
depositor to present the passbook whenever it received a collection
note from another bank, belying petitioner's claim that respondent bank
was negligent in not requiring a passbook under the subject transaction.
The appellate court also found that the special withdrawal slips in
question were not purposely given the appearance of checks, contrary
to petitioner's assertions, and thus should not have been mistaken for
checks. Lastly, the appellate court ruled that the respondent bank was
under no obligation to inform petitioner of the dishonor of the special
withdrawal slips, for to do so would have been a violation of the law on
the secrecy of bank deposits.
Hence, the instant petition, alleging the following assignment of error:
25. The CA grievously erred in holding that the [Luzon
Development] Bank was free from any fault or negligence
regarding the dishonor, or in failing to give fair and timely advice
of the dishonor, of the two intermediate LDB Slips and in failing to
award damages to Firestone pursuant to Article 2176 of the New
Civil Code.8
The issue for our consideration is whether or not respondent bank
should be held liable for damages suffered by petitioner, due to its
allegedly belated notice of non-payment of the subject withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-
Arca, whereby the latter purchased tires from the former with special
withdrawal slips drawn upon Fojas-Arca's special savings account with
respondent bank. Petitioner in turn deposited these withdrawal slips
with Citibank. The latter credited the same to petitioner's current
account, then presented the slips for payment to respondent bank. It
was at this point that the bone of contention arose.
On December 14, 1978, Citibank informed petitioner that special
withdrawal slips Nos. 42127 and 42129 dated June 15, 1978 and
August 15, 1978, respectively, were refused payment by respondent
bank due to insufficiency of Fojas-Arca's funds on deposit. That
information came about six months from the time Fojas-Arca purchased
tires from petitioner using the subject withdrawal slips. Citibank then
debited the amount of these withdrawal slips from petitioner's account,
causing the alleged pecuniary damage subject of petitioner's cause of
action.
At the outset, we note that petitioner admits that the withdrawal slips in
question were non-negotiable.9 Hence, the rules governing the giving of
immediate notice of dishonor of negotiable instruments do not apply in
this case.10Petitioner itself concedes this point.11 Thus, respondent bank
was under no obligation to give immediate notice that it would not make
payment on the subject withdrawal slips. Citibank should have known
that withdrawal slips were not negotiable instruments. It could not
expect these slips to be treated as checks by other entities. Payment or
notice of dishonor from respondent bank could not be expected
immediately, in contrast to the situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that
respondent Luzon Development Bank, had honored and paid the
previous withdrawal slips, automatically credited petitioner's current
account with the amount of the subject withdrawal slips, then merely
waited for the same to be honored and paid by respondent bank. It
presumed that the withdrawal slips were "good."
It bears stressing that Citibank could not have missed the non-
negotiable nature of the withdrawal slips. The essence of negotiability
which characterizes a negotiable paper as a credit instrument lies in its
freedom to circulate freely as a substitute for money.12 The withdrawal
slips in question lacked this character.
A bank is under obligation to treat the accounts of its depositors with
meticulous care, whether such account consists only of a few hundred
pesos or of millions of pesos.13 The fact that the other withdrawal slips
were honored and paid by respondent bank was no license for Citibank
to presume that subsequent slips would be honored and paid
immediately. By doing so, it failed in its fiduciary duty to treat the
accounts of its clients with the highest degree of care.14
In the ordinary and usual course of banking operations, current account
deposits are accepted by the bank on the basis of deposit slips
prepared and signed by the depositor, or the latter's agent or
representative, who indicates therein the current account number to
which the deposit is to be credited, the name of the depositor or current
account holder, the date of the deposit, and the amount of the
deposit either in cash or in check.15
The withdrawal slips deposited with petitioner's current account with
Citibank were not checks, as petitioner admits. Citibank was not bound
to accept the withdrawal slips as a valid mode of deposit. But having
erroneously accepted them as such, Citibank — and petitioner as
account-holder — must bear the risks attendant to the acceptance of
these instruments. Petitioner and Citibank could not now shift the risk
and hold private respondent liable for their admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of
Appeals in CA-G.R. CV No. 29546 is AFFIRMED. Costs against
petitioner.
SO ORDERED.

G.R. No. L-2516 September 25, 1950
ANG TEK LIAN, petitioner,
vs.
THE COURT OF APPEALS, respondent.
Laurel, Sabido, Almario and Laurel for petitioner.
Office of the Solicitor General Felix Bautista Angelo and Solicitor
Manuel Tomacruz for respondent.
BENGZON, J.:
For having issued a rubber check, Ang Tek Lian was convicted
of estafa in the Court of First Instance of Manila. The Court of Appeals
affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on
Saturday, November 16, 1946, the check Exhibits A upon the China
Banking Corporation for the sum of P4,000, payable to the order of
"cash". He delivered it to Lee Hua Hong in exchange for money which
the latter handed in act. On November 18, 1946, the next business day,
the check was presented by Lee Hua Hong to the drawee bank for
payment, but it was dishonored for insufficiency of funds, the balance of
the deposit of Ang Tek Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who
testified that "on November 16, 1946, appellant went to his
(complainant's) office, at 1217 Herran, Paco, Manila, and asked him to
exchange Exhibit A — which he (appellant) then brought with him —
with cash alleging that he needed badly the sum of P4,000 represented
by the check, but could not withdraw it from the bank, it being then
already closed; that in view of this request and relying upon appellant's
assurance that he had sufficient funds in the blank to meet Exhibit A,
and because they used to borrow money from each other, even before
the war, and appellant owns a hotel and restaurant known as the North
Bay Hotel, said complainant delivered to him, on the same date, the
sum of P4,000 in cash; that despite repeated efforts to notify him that
the check had been dishonored by the bank, appellant could not be
located any-where, until he was summoned in the City Fiscal's Office in
view of the complaint for estafa filed in connection therewith; and that
appellant has not paid as yet the amount of the check, or any part
thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the
only question of law for decision is whether under the facts
found, estafa had been accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code,
punishes swindling committed "By post dating a check, or issuing such
check in payment of an obligation the offender knowing that at the time
he had no funds in the bank, or the funds deposited by him in the bank
were not sufficient to cover the amount of the check, and without
informing the payee of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly
held liable. In this connection, it must be stated that, as explained
in People vs. Fernandez (59 Phil., 615), estafa is committed by issuing
either a postdated check or an ordinary check to accomplish the deceit.
It is argued, however, that as the check had been made payable to
"cash" and had not been endorsed by Ang Tek Lian, the defendant is
not guilty of the offense charged. Based on the proposition that "by
uniform practice of all banks in the Philippines a check so drawn is
invariably dishonored," the following line of reasoning is advanced in
support of the argument:
. . . When, therefore, he (the offended party ) accepted the check
(Exhibit A) from the appellant, he did so with full knowledge that it
would be dishonored upon presentment. In that sense, the
appellant could not be said to have acted fraudulently because
 the complainant, in so accepting the check as it was drawn, must
be considered, by every rational consideration, to have done so
fully aware of the risk he was running thereby." (Brief for the
appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have
undoubtedly occurred wherein the Bank required the indorsement of the
drawer before honoring a check payable to "cash." But cases there are
too, where no such requirement had been made . It depends upon the
circumstances of each transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn
payable to the order of "cash" is a check payable to bearer, and the
bank may pay it to the person presenting it for payment without the
drawer's indorsement.
A check payable to the order of cash is a bearer instrument.
Bacal vs. National City Bank of New York (1933), 146 Misc., 732;
262 N. Y. S., 839; Cleary vs. De Beck Plate Glass Co. (1907), 54
Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding &
Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App.,
1939), 135 S. W. (2d), 818. See also H. Cook & Son vs. Moody
(1916), 17 Ga. App., 465; 87 S. E., 713.
Where a check is made payable to the order of "cash", the word
cash "does not purport to be the name of any person", and hence
the instrument is payable to bearer. The drawee bank need not
obtain any indorsement of the check, but may pay it to the person
presenting it without any indorsement. . . . (Zollmann, Banks and
Banking, Permanent Edition, Vol. 6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial
solvency, it has the right to demand identification and /or assurance
against possible complications, — for instance, (a) forgery of drawer's
signature, (b) loss of the check by the rightful owner, (c) raising of the
amount payable, etc. The bank may therefore require, for its protection,
that the indorsement of the drawer — or of some other person known to
it — be obtained. But where the Bank is satisfied of the identity and /or
the economic standing of the bearer who tenders the check for
collection, it will pay the instrument without further question; and it
would incur no liability to the drawer in thus acting.
A check payable to bearer is authority for payment to holder.
Where a check is in the ordinary form, and is payable to bearer,
so that no indorsement is required, a bank, to which it is
presented for payment, need not have the holder identified, and
is not negligent in falling to do so. . . . (Michie on Banks and
Banking, Permanent Edition, Vol. 5, p. 343.)
. . . Consequently, a drawee bank to which a bearer check is
presented for payment need not necessarily have the holder
identified and ordinarily may not be charged with negligence in
failing to do so. See Opinions 6C:2 and 6C:3 If the bank has no
reasonable cause for suspecting any irregularity, it will be
protected in paying a bearer check, "no matter what facts
unknown to it may have occurred prior to the presentment." 1
Morse, Banks and Banking, sec. 393.
Although a bank is entitled to pay the amount of a bearer check
without further inquiry, it is entirely reasonable for the bank to
insist that holder give satisfactory proof of his identity. . . .
(Paton's Digest, Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check
Exhibit A was totally unconnected with its dishonor. The Court of
Appeals declared that it was returned unsatisfied because the drawer
had insufficient funds— not because the drawer's indorsement was
lacking.
Wherefore, there being no question as to the correctness of the penalty
imposed on the appellant, the writ of certiorari is denied and the
decision of the Court of Appeals is hereby affirmed, with costs.
Moran, C. J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.
G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and
in his personal capacity as garnishee, petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City,
and RAUL H. SESBREÑO, respondents.
BELLOSILLO, J.:
RAUL H. SESBREÑO filed a complaint for damages against Assistant
City Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr., before
the Regional Trial Court of Cebu City. After trial judgment was rendered
ordering the defendants to pay P11,000.00 to the plaintiff, private
respondent herein. The decision having become final and executory, on
motion of the latter, the trial court ordered its execution. This order was
questioned by the defendants before the Court of Appeals. However, on
15 January 1992 a writ of execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner
Loreto D. de la Victoria as City Fiscal of Mandaue City where defendant
Mabanto, Jr., was then detailed. The notice directed petitioner not to
disburse, transfer, release or convey to any other person except to the
deputy sheriff concerned the salary checks or other checks, monies, or
cash due or belonging to Mabanto, Jr., under penalty of law. On 10
1
March 1992 private respondent filed a motion before the trial court for
examination of the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was
dismissed. Thus the trial court, finding no more legal obstacle to act on
the motion for examination of the garnishees, directed petitioner on 4
November 1992 to submit his report showing the amount of the
garnished salaries of Mabanto, Jr., within fifteen (15) days from
receipt taking into consideration the provisions of Sec. 12, pars. (f) and
2
(i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require
petitioner to explain why he should not be cited in contempt of court for
failing to comply with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the
notice of garnishment claiming that he was not in possession of any
money, funds, credit, property or anything of value belonging to
Mabanto, Jr., except his salary and RATA checks, but that said checks
were not yet properties of Mabanto, Jr., until delivered to him. He further
claimed that, as such, they were still public funds which could not be
subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered
petitioner to immediately comply with its order of 4 November 1992. It 3
opined that the checks of Mabanto, Jr., had already been released
through petitioner by the Department of Justice duly signed by the
officer concerned. Upon service of the writ of garnishment, petitioner as
custodian of the checks was under obligation to hold them for the
judgment creditor. Petitioner became a virtual party to, or a forced
intervenor in, the case and the trial court thereby acquired jurisdiction to
bind him to its orders and processes with a view to the complete
satisfaction of the judgment. Additionally, there was no sufficient reason
for petitioner to hold the checks because they were no longer
government funds and presumably delivered to the payee, conformably
with the last sentence of Sec. 16 of the Negotiable Instruments Law.
With regard to the contempt charge, the trial court was not morally
convinced of petitioner's guilt. For, while his explanation suffered from
procedural infirmities nevertheless he took pains in enlightening the
court by sending a written explanation dated 22 July 1992 requesting
for the lifting of the notice of garnishment on the ground that the notice
should have been sent to the Finance Officer of the Department of
Justice. Petitioner insists that he had no authority to segregate a portion
of the salary of Mabanto, Jr. The explanation however was not
submitted to the trial court for action since the stenographic reporter
failed to attach it to the record.
4
On 20 April 1993 the motion for reconsideration was denied. The trial
court explained that it was not the duty of the garnishee to inquire or
judge for himself whether the issuance of the order of execution, writ of
execution and notice of garnishment was justified. His only duty was to
turn over the garnished checks to the trial court which issued the order
of execution. 5
Petitioner raises the following relevant issues: (1) whether a check still
in the hands of the maker or its duly authorized representative is owned
by the payee before physical delivery to the latter: and, (2) whether the
salary check of a government official or employee funded with public
funds can be subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned
by Mabanto, Jr., because they were not yet delivered to him, and that
petitioner as garnishee has no legal obligation to hold and deliver them
to the trial court to be applied to Mabanto, Jr.'s judgment debt. The
thesis of petitioner is that the salary checks still formed part of public
funds and therefore beyond the reach of garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching
credits belonging to the judgment debtor owing to him from a stranger
to the litigation. Emphasis is laid on the phrase "belonging to the
6
judgment debtor" since it is the focal point in resolving the issues
raised.
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is
public funds. He receives his compensation in the form of checks from
the Department of Justice through petitioner as City Fiscal of Mandaue
City and head of office. Under Sec. 16 of the Negotiable Instruments
Law, every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving effect
thereto. As ordinarily understood, delivery means the transfer of the
possession of the instrument by the maker or drawer with intent to
transfer title to the payee and recognize him as the holder thereof. 7
According to the trial court, the checks of Mabanto, Jr., were already
released by the Department of Justice duly signed by the officer
concerned through petitioner and upon service of the writ of
garnishment by the sheriff petitioner was under obligation to hold them
for the judgment creditor. It recognized the role of petitioner
as custodian of the checks. At the same time however it considered the
checks as no longer government funds and presumed delivered to the
payee based on the last sentence of Sec. 16 of the Negotiable
Instruments Law which states: "And where the instrument is no longer
in the possession of a party whose signature appears thereon, a valid
and intentional delivery by him is presumed." Yet, the presumption is
not conclusive because the last portion of the provision says "until the
contrary is proved." However this phrase was deleted by the trial court
for no apparent reason. Proof to the contrary is its own finding that the
checks were in the custody of petitioner. Inasmuch as said checks had
not yet been delivered to Mabanto, Jr., they did not belong to him and
still had the character of public funds. In Tiro v. Hontanosas we ruled
8
that —
The salary check of a government officer or employee such
as a teacher does not belong to him before it is physically
delivered to him. Until that time the check belongs to the
government. Accordingly, before there is actual delivery of
the check, the payee has no power over it; he cannot
assign it without the consent of the Government.
As a necessary consequence of being public fund, the checks may not subject of the petition are SET ASIDE. The notice of garnishment
be garnished to satisfy the judgment. The rationale behind this
9
served on petitioner dated 3 February 1992 is ordered DISCHARGED.
doctrine is obvious consideration of public policy. The Court succinctly
stated in Commissioner of Public Highways v. San Diego that —
10 SO ORDERED.

The functions and public services rendered by the State Quiason and Kapunan, JJ., concur.
cannot be allowed to be paralyzed or disrupted by the
diversion of public funds from their legitimate and specific
objects, as appropriated by law.

In denying petitioner's motion for reconsideration, the trial court

expressed the additional ratiocination that it was not the duty of the G.R. No. L-18103 June 8, 1922
garnishee to inquire or judge for himself whether the issuance of the
order of execution, the writ of execution, and the notice of garnishment PHILIPPINE NATIONAL BANK, plaintiff-appellee,
was justified, citing our ruling in Philippine Commercial Industrial Bank vs.
v. Court of Appeals. Our precise ruling in that case was that "[I]t is not
11 MANILA OIL REFINING & BY-PRODUCTS COMPANY,
incumbent upon the garnishee to inquire or to judge for itself whether or INC., defendant-appellant.
not the order for the advance execution of a judgment is valid." But that
is invoking only the general rule. We have also established therein the Antonio Gonzalez for appellant.
compelling reasons, as exceptions thereto, which were not taken into Roman J. Lacson for appellee.
account by the trial court, e.g., a defect on the face of the writ or actual Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs,
knowledge by the garnishee of lack of entitlement on the part of the Mc Donough and Johnson; Julian Wolfson; Ross and Lawrence;
garnisher. It is worth to note that the ruling referred to the validity of Francis B. Mahoney, and Jose A. Espiritu, amici curiae.
advance execution of judgments, but a careful scrutiny of that case and
MALCOLM, J.:
similar cases reveals that it was applicable to a notice of garnishment
as well. In the case at bench, it was incumbent upon petitioner to
The question of first impression raised in this case concerns the validity
inquire into the validity of the notice of garnishment as he had actual
in this jurisdiction of a provision in a promissory note whereby in case
knowledge of the non-entitlement of private respondent to the checks in
the same is not paid at maturity, the maker authorizes any attorney to
question. Consequently, we find no difficulty concluding that the trial
appear and confess judgment thereon for the principal amount, with
court exceeded its jurisdiction in issuing the notice of garnishment
interest, costs, and attorney's fees, and waives all errors, rights to
concerning the salary checks of Mabanto, Jr., in the possession of
inquisition, and appeal, and all property exceptions.
petitioner.
On May 8, 1920, the manager and the treasurer of the Manila Oil
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993
Refining & By-Products Company, Inc., executed and delivered to the
and 20 April 1993 of the Regional Trial Court of Cebu City, Br. 17,
Philippine National Bank, a written instrument reading as follows:
 RENEWAL.
P61,000.00
MANILA, P.I., May 8, 1920.
On demand after date we promise to pay to the order of the
Philippine National Bank sixty-one thousand only pesos at
Philippine National Bank, Manila, P.I.
Without defalcation, value received; and to hereby authorize any
attorney in the Philippine Islands, in case this note be not paid at
maturity, to appear in my name and confess judgment for the
above sum with interest, cost of suit and attorney's fees of ten
(10) per cent for collection, a release of all errors and waiver of all
rights to inquisition and appeal, and to the benefit of all laws
exempting property, real or personal, from levy or sale. Value
received. No. ____ Due ____
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) VICENTE SOTELO,
Manager.
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) RAFAEL LOPEZ,
Treasurer
The Manila Oil Refining and By-Products Company, Inc. failed to pay
the promissory note on demand. The Philippine National Bank brought
action in the Court of First Instance of Manila, to recover P61,000, the
amount of the note, together with interest and costs. Mr. Elias N.
Rector, an attorney associated with the Philippine National Bank,
entered his appearance in representation of the defendant, and filed a
motion confessing judgment. The defendant, however, in a sworn
declaration, objected strongly to the unsolicited representation of
attorney Recto. Later, attorney Antonio Gonzalez appeared for the
defendant and filed a demurrer, and when this was overruled,
presented an answer. The trial judge rendered judgment on the motion
of attorney Recto in the terms of the complaint.
The foregoing facts, and appellant's three assignments of error, raise
squarely the question which was suggested in the beginning of this
opinion. In view of the importance of the subject to the business
community, the advice of prominent attorneys-at-law with banking
connections, was solicited. These members of the bar responded
promptly to the request of the court, and their memoranda have proved
highly useful in the solution of the question. It is to the credit of the bar
that although the sanction of judgement notes in the Philippines might
prove of immediate value to clients, every one of the attorneys has
looked upon the matter in a big way, with the result that out of their
independent investigations has come a practically unanimous protest
against the recognition in this jurisdiction of judgment notes.1
Neither the Code of Civil Procedure nor any other remedial statute
expressly or tacitly recognizes a confession of judgment commonly
called a judgment note. On the contrary, the provisions of the Code of
Civil Procedure, in relation to constitutional safeguards relating to the
right to take a man's property only after a day in court and after due
process of law, contemplate that all defendants shall have an
opportunity to be heard. Further, the provisions of the Code of Civil
Procedure pertaining to counter claims argue against judgment notes,
especially as the Code provides that in case the defendant or his
assignee omits to set up a counterclaim, he cannot afterwards maintain
an action against the plaintiff therefor. (Secs. 95, 96, 97.) At least one
provision of the substantive law, namely, that the validity and fulfillment
of contracts cannot be left to the will of one of the contracting parties
(Civil Code, art. 1356), constitutes another indication of fundamental
legal purposes.
The attorney for the appellee contends that the Negotiable Instruments
Law (Act No. 2031) expressly recognizes judgment notes, and that they
are enforcible under the regular procedure. The Negotiable Instruments
Law, in section 5, provides that "The negotiable character of an
instrument otherwise negotiable is not affected by a provision which
". . . (b) Authorizes a confession of judgment if the instrument be not
paid at maturity." We do not believe, however, that this provision of law
can be taken to sanction judgments by confession, because it is a
portion of a uniform law which merely provides that, in jurisdiction
where judgment notes are recognized, such clauses shall not affect the
negotiable character of the instrument. Moreover, the same section of
the Negotiable Instruments. Law concludes with these words: "But
nothing in this section shall validate any provision or stipulation
otherwise illegal."
The court is thus put in the position of having to determine the validity in
the absence of statute of a provision in a note authorizing an attorney to
appear and confess judgment against the maker. This situation, in
reality, has its advantages for it permits us to reach that solution which
is best grounded in the solid principles of the law, and which will best
advance the public interest.
The practice of entering judgments in debt on warrants of attorney is of
ancient origin. In the course of time a warrant of attorney to confess
judgement became a familiar common law security. At common law,
there were two kinds of judgments by confession; the one a judgment
by cognovit actionem, and the other by confession relicta verificatione.
A number of jurisdictions in the United States have accepted the
common law view of judgments by confession, while still other
jurisdictions have refused to sanction them. In some States, statutes
have been passed which have either expressly authorized confession
of judgment on warrant of attorney, without antecedent process, or have
forbidden judgments of this character. In the absence of statute, there is
a conflict of authority as to the validity of a warrant of attorney for the
confession of judgement. The weight of opinion is that, unless
authorized by statute, warrants of attorney to confess judgment are
void, as against public policy.
Possibly the leading case on the subject is First National Bank of
Kansas City vs. White ([1909], 220 Mo., 717; 16 Ann. Cas., 889; 120 S.
W., 36; 132 Am. St. Rep., 612). The record in this case discloses that
on October 4, 1990, the defendant executed and delivered to the
plaintiff an obligation in which the defendant authorized any attorney-at-
law to appear for him in an action on the note at any time after the note
became due in any court of record in the State of Missouri, or
elsewhere, to waive the issuing and service of process, and to confess
judgement in favor of the First National Bank of Kansas City for the
amount that might then be due thereon, with interest at the rate therein
mentioned and the costs of suit, together with an attorney's fee of 10
per cent and also to waive and release all errors in said proceedings
and judgment, and all proceedings, appeals, or writs of error thereon.
Plaintiff filed a petition in the Circuit Court to which was attached the
above-mentioned instrument. An attorney named Denham appeared
pursuant to the authority given by the note sued on, entered the
appearance of the defendant, and consented that judgement be
rendered in favor of the plaintiff as prayed in the petition. After the
Circuit Court had entered a judgement, the defendants, through
counsel, appeared specially and filed a motion to set it aside. The
Supreme Court of Missouri, speaking through Mr. Justice Graves, in
part said:
But going beyond the mere technical question in our preceding
paragraph discussed, we come to a question urged which goes
to the very root of this case, and whilst new and novel in this
state, we do not feel that the case should be disposed of without
discussing and passing upon that question.
xxx xxx xxx
And if this instrument be considered as security for a debt, as it
was by the common law, it has never so found recognition in this
state. The policy of our law has been against such hidden
securities for debt. Our Recorder's Act is such that instruments
intended as security for debt should find a place in the public
records, and if not, they have often been viewed with suspicion,
and their bona fides often questioned.
Nor do we thing that the policy of our law is such as to thus place
a debtor in the absolute power of his creditor. The field for fraud is
too far enlarged by such an instrument. Oppression and tyranny
would follow the footsteps of such a diversion in the way of
security for debt. Such instruments procured by duress could
shortly be placed in judgment in a foreign court and much
distress result therefrom.
Again, under the law the right to appeal to this court or some
other appellate court is granted to all persons against whom an
adverse judgment is rendered, and this statutory right is by the
instrument stricken down. True it is that such right is not claimed
in this case, but it is a part of the bond and we hardly know why
this pound of flesh has not been demanded. Courts guard with
jealous eye any contract innovations upon their jurisdiction. The
instrument before us, considered in the light of a contract,
actually reduces the courts to mere clerks to enter and record the
judgment called for therein. By our statute (Rev. St. 1899, sec.
645) a party to a written instrument of this character has the right
to show a failure of consideration, but this right is brushed to the
wind by this instrument and the jurisdiction of the court to hear
that controversy is by the whose object is to oust the jurisdiction
of the courts are contrary to public policy and will not be enforced.
Thus it is held that any stipulation between parties to a contract
distinguishing between the different courts of the country is
contrary to public policy. The principle has also been applied to a
stipulation in a contract that a party who breaks it may not be
sued, to an agreement designating a person to be sued for its
breach who is nowise liable and prohibiting action against any but
him, to a provision in a lease that the landlord shall have the right
to take immediate judgment against the tenant in case of a
default on his part, without giving the notice and demand for
possession and filing the complaint required by statute, to a by-
law of a benefit association that the decisions of its officers on
claim shall be final and conclusive, and to many other
agreements of a similar tendency. In some courts, any agreement
as to the time for suing different from time allowed by the statute
of limitations within which suit shall be brought or the right to sue
be barred is held void.
xxx xxx xxx
We shall not pursue this question further. This contract, in so far
as it goes beyond the usual provisions of a note, is void as
against the public policy of the state, as such public policy is
found expressed in our laws and decisions. Such agreements are
iniquitous to the uttermost and should be promptly condemned by
the courts, until such time as they may receive express statutory
recognition, as they have in some states.
xxx xxx xxx
From what has been said, it follows that the Circuit Court never
had jurisdiction of the defendant, and the judgement is reversed.
The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40
L.R.A. [N. S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another
well-considered authority. The notes referred to in the record contained
waiver of presentment and protest, homestead and exemption rights
real and personal, and other rights, and also the following material
provision: "And we do hereby empower and authorize the said A. B.
Farquhar Co. Limited, or agent, or any prothonotary or attorney of any
Court of Record to appear for us and in our name to confess judgement
against us and in favor of said A. B. Farquhar Co., Limited, for the
above named sum with costs of suit and release of all errors and
without stay of execution after the maturity of this note." The Supreme
Court of West Virginia, on consideration of the validity of the judgment
note above described, speaking through Mr. Justice Miller, in part said:
As both sides agree the question presented is one of first
impression in this State. We have no statutes, as has
Pennsylvania and many other states, regulating the subject. In
the decision we are called upon to render, we must have
recourse to the rules and principles of the common law, in force
here, and to our statute law, applicable, and to such judicial
decisions and practices in Virginia, in force at the time of the
separation, as are properly binding on us. It is pertinent to remark
in this connection, that after nearly fifty years of judicial history
this question, strong evidence, we think, that such notes, if at all,
have never been in very general use in this commonwealth. And
in most states where they are current the use of them has grown
up under statutes authorizing them, and regulating the practice of
employing them in commercial transactions.
xxx xxx xxx
It is contended, however, that the old legal maxim, qui facit per
alium, facit per se, is as applicable here as in other cases. We do
not think so. Strong reasons exist, as we have shown, for denying
its application, when holders of contracts of this character seek
the aid of the courts and of their execution process to enforce
them, defendant having had no day in court or opportunity to be
heard. We need not say in this case that a debtor may not, by
proper power of attorney duly executed, authorize another to
appear in court, and by proper endorsement upon the writ waive
service of process, and confess judgement. But we do not wish to
be understood as approving or intending to countenance the
practice employing in this state commercial paper of the
character here involved. Such paper has heretofore had little if
any currency here. If the practice is adopted into this state it
ought to be, we think, by act of the Legislature, with all proper
safeguards thrown around it, to prevent fraud and imposition. The
policy of our law is, that no man shall suffer judgment at the
hands of our courts without proper process and a day to be
heard. To give currency to such paper by judicial pronouncement
would be to open the door to fraud and imposition, and to subject
the people to wrongs and injuries not heretofore contemplated.
This we are unwilling to do.
A case typical of those authorities which lend support to judgment notes
is First National Bank of Las Cruces vs. Baker ([1919], 180 Pac., 291).
The Supreme Court of New Mexico, in a per curiam decision, in part,
said:
In some of the states the judgments upon warrants of attorney
are condemned as being against public policy. (Farquhar and Co.
vs. Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956;
Ann. Cas. [1914 A]. 640, and First National Bank of Kansas City
vs. White, 220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep., 612; 16
Ann. Cas., 889, are examples of such holding.) By just what
course of reasoning it can be said by the courts that such
judgments are against public policy we are unable to understand.
It was a practice from time immemorial at common law, and the
common law comes down to us sanctioned as justified by the
reason and experience of English-speaking peoples. If conditions
have arisen in this country which make the application of the
common law undesirable, it is for the Legislature to so announce,
and to prohibit the taking of judgments can be declared as
against the public policy of the state. We are aware that the
argument against them is that they enable the unconscionable
creditor to take advantage of the necessities of the poor debtor
and cut him off from his ordinary day in court. On the other hand,
it may be said in their favor that it frequently enables a debtor to
obtain money which he could by no possibility otherwise obtain. It
strengthens his credit, and may be most highly beneficial to him
at times. In some of the states there judgments have been
condemned by statute and of course in that case are not allowed.
Our conclusion in this case is that a warrant of attorney given as
security to a creditor accompanying a promissory note confers a
valid power, and authorizes a confession of judgment in any court
 of competent jurisdiction in an action to be brought upon said
note; that our cognovit statute does not cover the same field as
that occupied by the common-law practice of taking judgments
upon warrant of attorney, and does not impliedly or otherwise
abrogate such practice; and that the practice of taking judgments
upon warrants of attorney as it was pursued in this case is not
against any public policy of the state, as declared by its laws.
With reference to the conclusiveness of the decisions here mentioned,
it may be said that they are based on the practice of the English-
American common law, and that the doctrines of the common law are
binding upon Philippine courts only in so far as they are founded on
sound principles applicable to local conditions.
Judgments by confession as appeared at common law were considered
an amicable, easy, and cheap way to settle and secure debts. They are
a quick remedy and serve to save the court's time. They also save the
time and money of the litigants and the government the expenses that a
long litigation entails. In one sense, instruments of this character may
be considered as special agreements, with power to enter up
judgments on them, binding the parties to the result as they themselves
viewed it.
On the other hand, are disadvantages to the commercial world which
outweigh the considerations just mentioned. Such warrants of attorney
are void as against public policy, because they enlarge the field for
fraud, because under these instruments the promissor bargains away
his right to a day in court, and because the effect of the instrument is to
strike down the right of appeal accorded by statute. The recognition of
such a form of obligation would bring about a complete reorganization
of commercial customs and practices, with reference to short-term
obligations. It can readily be seen that judgement notes, instead of
resulting to the advantage of commercial life in the Philippines might be
the source of abuse and oppression, and make the courts involuntary
parties thereto. If the bank has a meritorious case, the judgement is
ultimately certain in the courts.
We are of the opinion that warrants of attorney to confess judgment are
not authorized nor contemplated by our law. We are further of the
opinion that provisions in notes authorizing attorneys to appear and
confess judgments against makers should not be recognized in this
jurisdiction by implication and should only be considered as valid when
given express legislative sanction.
The judgment appealed from is set aside, and the case is remanded to
the lower court for further proceedings in accordance with this decision.
Without special finding as to costs in this instance, it is so ordered.
Araullo, C.J., Avanceña, Villamor, Ostrand, Johns and Romualdez, JJ.,
concur.
G.R. No. 93073 December 21, 1992
REPUBLIC PLANTERS BANK, petitioner,
vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.
CAMPOS, JR., J.:
This is an appeal by way of a Petition for Review on Certiorari from the
decision * of the Court of Appeals in CA G.R. CV No. 07302, entitled "Republic Planters Bank.Plaintiff-Appellee vs.
Pinch Manufacturing Corporation, et al., Defendants, and Fermin Canlas, Defendant-Appellant", which affirmed the
decision ** in Civil Case No. 82-5448 except that it completely absolved Fermin Canlas from liability under the promissory
notes and reduced the award for damages and attorney's fees. The RTC decision, rendered on June 20, 1985, is quoted
hereunder:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of the plaintiff Republic Planters Bank,
ordering defendant Pinch Manufacturing Corporation
(formerly Worldwide Garment Manufacturing, Inc.) and
defendants Shozo Yamaguchi and Fermin Canlas to pay,
jointly and severally, the plaintiff bank the following sums
with interest thereon at 16% per annum from the dates
indicated, to wit:
Under the promissory note (Exhibit "A"), the sum of
P300,000.00 with interest from January 29, 1981 until fully
paid; under promissory note (Exhibit "B"), the sum of
P40,000.00 with interest from November 27, 1980; under
the promissory note (Exhibit "C"), the sum of P166,466.00
which interest from January 29, 1981; under the
promissory note (Exhibit "E"), the sum of P86,130.31 with
interest from January 29, 1981; under the promissory note
(Exhibit "G"), the sum of P12,703.70 with interest from
November 27, 1980; under the promissory note (Exhibit
"H"), the sum of P281,875.91 with interest from January
29, 1981; and under the promissory note (Exhibit "I"), the
sum of P200,000.00 with interest from January 29, 1981.
Under the promissory note (Exhibit "D") defendants Pinch
Manufacturing Corporation (formerly named Worldwide
Garment Manufacturing, Inc.), and Shozo Yamaguchi are
ordered to pay jointly and severally, the plaintiff bank the
sum of P367,000.00 with interest of 16% per annum from
January 29, 1980 until fully paid
Under the promissory note (Exhibit "F") defendant
corporation Pinch (formerly Worldwide) is ordered to pay
the plaintiff bank the sum of P140,000.00 with interest at
16% per annum from November 27, 1980 until fully paid.
Defendant Pinch (formely Worldwide) is hereby ordered to
pay the plaintiff the sum of P231,120.81 with interest at
12% per annum from July 1, 1981, until fully paid and the
sum of P331,870.97 with interest from March 28, 1981,
until fully paid.
All the defendants are also ordered to pay, jointly and
severally, the plaintiff the sum of P100,000.00 as and for
reasonable attorney's fee and the further sum equivalent to
3% per annum of the respective principal sums from the
dates above stated as penalty charge until fully paid, plus
one percent (1%) of the principal sums as service charge.
With costs against the defendants.
SO ORDERED. 1
From the above decision only defendant Fermin Canlas appealed to the
then Intermediate Court (now the Court Appeals). His contention was
that inasmuch as he signed the promissory notes in his capacity as
officer of the defunct Worldwide Garment Manufacturing, Inc, he should
not be held personally liable for such authorized corporate acts that he
performed. It is now the contention of the petitioner Republic Planters
Bank that having unconditionally signed the nine (9) promissory notes
with Shozo Yamaguchi, jointly and severally, defendant Fermin Canlas
is solidarity liable with Shozo Yamaguchi on each of the nine notes.
We find merit in this appeal.
From the records, these facts are established: Defendant Shozo
Yamaguchi and private respondent Fermin Canlas were President/Chief
Operating Officer and Treasurer respectively, of Worldwide Garment
Manufacturing, Inc.. By virtue of Board Resolution No.1 dated August 1,
1979, defendant Shozo Yamaguchi and private respondent Fermin
Canlas were authorized to apply for credit facilities with the petitioner
Republic Planters Bank in the forms of export advances and letters of
credit/trust receipts accommodations. Petitioner bank issued nine
promissory notes, marked as Exhibits A to I inclusive, each of which
were uniformly worded in the following manner:
___________, after date, for value received, I/we, jointly
and severaIly promise to pay to the ORDER of the
 REPUBLIC PLANTERS BANK, at its office in Manila,
Philippines, the sum of ___________ PESOS(....)
Philippine Currency...
On the right bottom margin of the promissory notes appeared the
signatures of Shozo Yamaguchi and Fermin Canlas above their printed
names with the phrase "and (in) his personal capacity" typewritten
below. At the bottom of the promissory notes appeared: "Please credit
proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
These entries were separated from the text of the notes with a bold line
which ran horizontally across the pages.
In the promissory notes marked as Exhibits C, D and F, the name
Worldwide Garment Manufacturing, Inc. was apparently rubber
stamped above the signatures of defendant and private respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted
to change its corporate name to Pinch Manufacturing Corporation.
On February 5, 1982, petitioner bank filed a complaint for the recovery
of sums of money covered among others, by the nine promissory notes
with interest thereon, plus attorney's fees and penalty charges. The
complainant was originally brought against Worldwide Garment
Manufacturing, Inc. inter alia, but it was later amended to drop
Worldwide Manufacturing, Inc. as defendant and substitute Pinch
Manufacturing Corporation it its place. Defendants Pinch Manufacturing
Corporation and Shozo Yamaguchi did not file an Amended Answer and
failed to appear at the scheduled pre-trial conference despite due
notice. Only private respondent Fermin Canlas filed an Amended
Answer wherein he, denied having issued the promissory notes in
question since according to him, he was not an officer of Pinch
Manufacturing Corporation, but instead of Worldwide Garment
Manufacturing, Inc., and that when he issued said promissory notes in
behalf of Worldwide Garment Manufacturing, Inc., the same were in
blank, the typewritten entries not appearing therein prior to the time he
affixed his signature.
In the mind of this Court, the only issue material to the resolution of this
appeal is whether private respondent Fermin Canlas is solidarily liable
with the other defendants, namely Pinch Manufacturing Corporation
and Shozo Yamaguchi, on the nine promissory notes.
We hold that private respondent Fermin Canlas is solidarily liable on
each of the promissory notes bearing his signature for the following
reasons:
The promissory motes are negotiable instruments and must be
governed by the Negotiable Instruments Law. 2
Under the Negotiable lnstruments Law, persons who write their names
on the face of promissory notes are makers and are liable as such. By 3
signing the notes, the maker promises to pay to the order of the payee
or any holder according to the tenor thereof. Based on the above
4 5
provisions of law, there is no denying that private respondent Fermin
Canlas is one of the co-makers of the promissory notes. As such, he
cannot escape liability arising therefrom.
Where an instrument containing the words "I promise to pay" is signed
by two or more persons, they are deemed to be jointly and severally
liable thereon. An instrument which begins" with "I" ,We" , or "Either of
6
us" promise to, pay, when signed by two or more persons, makes them
solidarily liable. The fact that the singular pronoun is used indicates
7
that the promise is individual as to each other; meaning that each of the
co-signers is deemed to have made an independent singular promise to
pay the notes in full.
In the case at bar, the solidary liability of private respondent Fermin
Canlas is made clearer and certain, without reason for ambiguity, by the
presence of the phrase "joint and several" as describing the
unconditional promise to pay to the order of Republic Planters Bank. A
joint and several note is one in which the makers bind themselves both
jointly and individually to the payee so that all may be sued together for
its enforcement, or the creditor may select one or more as the object of
the suit. 8 A joint and several obligation in common law corresponds to a civil law solidary obligation; that is, one of
several debtors bound in such wise that each is liable for the entire amount, and not merely for his proportionate share. 9 By
making a joint and several promise to pay to the order of Republic Planters Bank, private respondent Fermin Canlas
assumed the solidary liability of a debtor and the payee may choose to enforce the notes against him alone or jointly with
Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.
As to whether the interpolation of the phrase "and (in) his personal
capacity" below the signatures of the makers in the notes will affect the
liability of the makers, We do not find it necessary to resolve and
decide, because it is immaterial and will not affect to the liability of
private respondent Fermin Canlas as a joint and several debtor of the
notes. With or without the presence of said phrase, private respondent
Fermin Canlas is primarily liable as a co-maker of each of the notes and
his liability is that of a solidary debtor.
Finally, the respondent Court made a grave error in holding that an
amendment in a corporation's Articles of Incorporation effecting a
change of corporate name, in this case from Worldwide Garment
manufacturing Inc to Pinch Manufacturing Corporation extinguished the
personality of the original corporation.
The corporation, upon such change in its name, is in no sense a new
corporation, nor the successor of the original corporation. It is the same
corporation with a different name, and its character is in no respect
changed. 10
A change in the corporate name does not make a new corporation, and
whether effected by special act or under a general law, has no affect on
the identity of the corporation, or on its property, rights, or liabilities. 11
The corporation continues, as before, responsible in its new name for
all debts or other liabilities which it had previously contracted or
incurred.12
As a general rule, officers or directors under the old corporate name
bear no personal liability for acts done or contracts entered into by
officers of the corporation, if duly authorized. Inasmuch as such officers
acted in their capacity as agent of the old corporation and the change of
name meant only the continuation of the old juridical entity, the
corporation bearing the same name is still bound by the acts of its
agents if authorized by the Board. Under the Negotiable Instruments
Law, the liability of a person signing as an agent is specifically provided
for as follows:
Sec. 20. Liability of a person signing as agent and so forth.
Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf of
a principal , or in a representative capacity, he is not liable
on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling a
representative character, without disclosing his principal,
does not exempt him from personal liability.
Where the agent signs his name but nowhere in the instrument has he
disclosed the fact that he is acting in a representative capacity or the
name of the third party for whom he might have acted as agent, the
agent is personally liable to take holder of the instrument and cannot be
permitted to prove that he was merely acting as agent of another and
parol or extrinsic evidence is not admissible to avoid the agent's
personal liability.13
On the private respondent's contention that the promissory notes were
delivered to him in blank for his signature, we rule otherwise. A careful
examination of the notes in question shows that they are the stereotype
printed form of promissory notes generally used by commercial banking
institutions to be signed by their clients in obtaining loans. Such printed
notes are incomplete because there are blank spaces to be filled up on
material particulars such as payee's name, amount of the loan, rate of
interest, date of issue and the maturity date. The terms and conditions
of the loan are printed on the note for the borrower-debtor 's perusal. An
incomplete instrument which has been delivered to the borrower for his
signature is governed by Section 14 of the Negotiable Instruments Law
which provides, in so far as relevant to this case, thus:
Sec. 14. Blanks: when may be filled. — Where the
instrument is wanting in any material particular, the person
in possesion thereof has a prima facie authority to
complete it by filling up the blanks therein. ... In order,
however, that any such instrument when completed may be
enforced against any person who became a party thereto
prior to its completion, it must be filled up strictly in
accordance with the authority given and within a
reasonable time...
Proof that the notes were signed in blank was only the self-serving
testimony of private respondent Fermin Canlas, as determined by the
trial court, so that the trial court ''doubts the defendant (Canlas) signed
in blank the promissory notes". We chose to believe the bank's
testimony that the notes were filled up before they were given to private
respondent Fermin Canlas and defendant Shozo Yamaguchi for their
signatures as joint and several promissors. For signing the notes above
their typewritten names, they bound themselves as unconditional
makers. We take judicial notice of the customary procedure of
commercial banks of requiring their clientele to sign promissory notes
prepared by the banks in printed form with blank spaces already filled
up as per agreed terms of the loan, leaving the borrowers-debtors to do
nothing but read the terms and conditions therein printed and to sign as
makers or co-makers. When the notes were given to private respondent
Fermin Canlas for his signature, the notes were complete in the sense
that the spaces for the material particular had been filled up by the bank
as per agreement. The notes were not incomplete instruments; neither
were they given to private respondent Fermin Canlas in blank as he
claims. Thus, Section 14 of the NegotiabIe Instruments Law is not
applicable.
The ruling in case of Reformina vs. Tomol relied upon by the appellate
court in reducing the interest rate on the promissory notes from 16% to
12% per annum does not squarely apply to the instant petition. In the
abovecited case, the rate of 12% was applied to forebearances of
money, goods or credit and court judgemets thereon, only in the
absence of any stipulation between the parties.
In the case at bar however , it was found by the trial court that the rate
of interest is 9% per annum, which interest rate the plaintiff may at any
time without notice, raise within the limits allowed law. And so, as of
February 16, 1984 , the plaintiff had fixed the interest at 16% per
annum.
This Court has held that the rates under the Usury Law, as amended by
Presidential Decree No. 116, are applicable only to interests by way of
compensation for the use or forebearance of money. Article 2209 of the
Civil Code, on the other hand, governs interests by way of
damages. This fine distinction was not taken into consideration by the
15
appellate court, which instead made a general statement that the
interest rate be at 12% per annum.
Inasmuch as this Court had declared that increases in interest rates are
not subject to any ceiling prescribed by the Usury Law, the appellate
court erred in limiting the interest rates at 12% per annum. Central Bank
Circular No. 905, Series of 1982 removed the Usury Law ceiling on
interest rates.16
In the 1ight of the foregoing analysis and under the plain language of
the statute and jurisprudence on the matter, the decision of the
respondent: Court of Appeals absolving private respondent Fermin
Canlas is REVERSED and SET ASIDE. Judgement is hereby rendered
declaring private respondent Fermin Canlas jointly and severally liable
on all the nine promissory notes with the following sums and at 16%
interest per annum from the dates indicated, to wit:
Under the promissory note marked as exhibit A, the sum of
P300,000.00 with interest from January 29, 1981 until fully paid; under
promissory note marked as Exhibit B, the sum of P40,000.00 with
interest from November 27, 1980: under the promissory note
denominated as Exhibit C, the amount of P166,466.00 with interest
from January 29, 1981; under the promissory note denominated as
Exhibit D, the amount of P367,000.00 with interest from January 29,
1981 until fully paid; under the promissory note marked as Exhibit E,
the amount of P86,130.31 with interest from January 29, 1981; under
the promissory note marked as Exhibit F, the sum of P140,000.00 with
interest from November 27, 1980 until fully paid; under the promissory
note marked as Exhibit G, the amount of P12,703.70 with interest from
November 27, 1980; the promissory note marked as Exhibit H, the sum
of P281,875.91 with interest from January 29, 1981; and the promissory
note marked as Exhibit I, the sum of P200,000.00 with interest on
January 29, 1981.
The liabilities of defendants Pinch Manufacturing Corporation (formerly
Worldwide Garment Manufacturing, Inc.) and Shozo Yamaguchi, for not
having appealed from the decision of the trial court, shall be adjudged
in accordance with the judgment rendered by the Court a quo.
With respect to attorney's fees, and penalty and service charges, the
private respondent Fermin Canlas is hereby held jointly and solidarity
liable with defendants for the amounts found, by the Court a quo. With
costs against private respondent.
SO ORDERED.
G.R. No. 148864 August 21, 2003
SPOUSES EDUARDO B. EVANGELISTA and EPIFANIA C.
EVANGELISTA, Petitioners,
vs.
MERCATOR FINANCE CORP., LYDIA P. SALAZAR,
LAMEC'S** REALTY AND DEVELOPMENT CORP. and the
REGISTER OF DEEDS OF BULACAN, Respondents.
DECISION
PUNO, J.:
Petitioners, Spouses Evangelista ("Petitioners"), are before this Court
on a Petition for Review on Certiorari under Rule 45 of the Revised
Rules of Court, assailing the decision of the Court of Appeals
dismissing their petition.
Petitioners filed a complaint for annulment of titles against respondents,
1
Mercator Finance Corporation, Lydia P. Salazar, Lamecs Realty and
Development Corporation, and the Register of Deeds of Bulacan.
Petitioners claimed being the registered owners of five (5) parcels of
land contained in the Real Estate Mortgage executed by them and
2 3
Embassy Farms, Inc. ("Embassy Farms"). They alleged that they
executed the Real Estate Mortgage in favor of Mercator Financing
Corporation ("Mercator") only as officers of Embassy Farms. They did
not receive the proceeds of the loan evidenced by a promissory note,
as all of it went to Embassy Farms. Thus, they contended that the
mortgage was without any consideration as to them since they did not
personally obtain any loan or credit accommodations. There being no
principal obligation on which the mortgage rests, the real estate
mortgage is void. With the void mortgage, they assailed the validity of
4
the foreclosure proceedings conducted by Mercator, the sale to it as the
highest bidder in the public auction, the issuance of the transfer
certificates of title to it, the subsequent sale of the same parcels of land
to respondent Lydia P. Salazar ("Salazar"), and the transfer of the titles
to her name, and lastly, the sale and transfer of the properties to
respondent Lamecs Realty & Development Corporation ("Lamecs").
Mercator admitted that petitioners were the owners of the subject
parcels of land. It, however, contended that "on February 16, 1982,
plaintiffs executed a Mortgage in favor of defendant Mercator Finance
Corporation ‘for and in consideration of certain loans, and/or other
forms of credit accommodations obtained from the Mortgagee
(defendant Mercator Finance Corporation) amounting to EIGHT
HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE
& 78/100 (P844,625.78) PESOS, Philippine Currency and to secure the
payment of the same and those others that the MORTGAGEE may
extend to the MORTGAGOR (plaintiffs) x x x.’" It contended that since
5 d. Whether or not the parties are entitled to damages.
petitioners and Embassy Farms signed the promissory note as co- 6
makers, aside from the Continuing Suretyship Agreement subsequently
7 After pre-trial, Mercator moved for summary judgment on the ground
executed to guarantee the indebtedness of Embassy Farms, and the
succeeding promissory notes restructuring the loan, then petitioners are
8 litigated. Mercator argued that petitioners had admitted in their pre-trial
jointly and severally liable with Embassy Farms. Due to their failure to
pay the obligation, the foreclosure and subsequent sale of the
mortgaged properties are valid.
Respondents Salazar and Lamecs asserted that they are innocent
purchasers for value and in good faith, relying on the validity of the title
of Mercator. Lamecs admitted the prior ownership of petitioners of the
subject parcels of land, but alleged that they are the present registered
owner. Both respondents likewise assailed the long silence and inaction
by petitioners as it was only after a lapse of almost ten (10) years from
the foreclosure of the property and the subsequent sales that they
made their claim. Thus, Salazar and Lamecs averred that petitioners
are in estoppel and guilty of laches.9
During pre-trial, the parties agreed on the following issues:
a. Whether or not the Real Estate Mortgage executed by the
plaintiffs in favor of defendant Mercator Finance Corp. is null and
void;
b. Whether or not the extra-judicial foreclosure proceedings
undertaken on subject parcels of land to satisfy the indebtedness
of Embassy Farms, Inc. is (sic) null and void;
c. Whether or not the sale made by defendant Mercator Finance
Corp. in favor of Lydia Salazar and that executed by the latter in
favor of defendant Lamecs Realty and Development Corp. are
null and void;
10
that except as to the amount of damages, there is no factual issue to be
brief the existence of the promissory note, the continuing suretyship
agreement and the subsequent promissory notes restructuring the loan,
hence, there is no genuine issue regarding their liability. The mortgage,
foreclosure proceedings and the subsequent sales are valid and the
complaint must be dismissed. 11
Petitioners opposed the motion for summary judgment claiming that
because their personal liability to Mercator is at issue, there is a need
for a full-blown trial.
12
The RTC granted the motion for summary judgment and dismissed the
complaint. It held:
A reading of the promissory notes show (sic) that the liability of the
signatories thereto are solidary in view of the phrase "jointly and
severally." On the promissory note appears (sic) the signatures of
Eduardo B. Evangelista, Epifania C. Evangelista and another signature
of Eduardo B. Evangelista below the words Embassy Farms, Inc. It is
crystal clear then that the plaintiffs-spouses signed the promissory note
not only as officers of Embassy Farms, Inc. but in their personal
capacity as well(.) Plaintiffs(,) by affixing their signatures thereon in a
dual capacity have bound themselves as solidary debtor(s) with
Embassy Farms, Inc. to pay defendant Mercator Finance Corporation
the amount of indebtedness. That the principal contract of loan is void
for lack of consideration, in the light of the foregoing is untenable.
13
Petitioners’ motion for reconsideration was denied for lack of
merit. Thus, petitioners went up to the Court of Appeals, but again were
14
unsuccessful. The appellate court held:
The appellants’ insistence that the loans secured by the mortgage they
executed were not personally theirs but those of Embassy Farms, Inc.
is clearly self-serving and misplaced. The fact that they signed the
subject promissory notes in the(ir) personal capacities and as officers of
the said debtor corporation is manifest on the very face of the said
documents of indebtedness (pp. 118, 128-131, Orig. Rec.). Even
assuming arguendo that they did not, the appellants lose sight of the
fact that third persons who are not parties to a loan may secure the
latter by pledging or mortgaging their own property (Lustan vs. Court of
Appeals, 266 SCRA 663, 675). x x x. In constituting a mortgage over
their own property in order to secure the purported corporate debt of
Embassy Farms, Inc., the appellants undeniably assumed the
personality of persons interested in the fulfillment of the principal
obligation who, to save the subject realities from foreclosure and with a
view towards being subrogated to the rights of the creditor, were free to
discharge the same by payment (Articles 1302 [3] and 1303, Civil Code
of the Philippines). (emphases in the original)
15
The appellate court also observed that "if the appellants really felt
aggrieved by the foreclosure of the subject mortgage and the
subsequent sales of the realties to other parties, why then did they
commence the suit only on August 12, 1997 (when the certificate of
sale was issued on January 12, 1987, and the certificates of title in the
name of Mercator on September 27, 1988)?" Petitioners’
"procrastination for about nine (9) years is difficult to understand. On so
flimsy a ground as lack of consideration, (w)e may even venture to say
that the complaint was not worth the time of the courts." 16
A motion for reconsideration by petitioners was likewise denied for lack
of merit. Thus, this petition where they allege that:
17
The court a quo erred and acted with grave abuse of discretion
amounting to lack or excess of jurisdiction in affirming in toto the May 4,
1998 order of the trial court granting respondent’s motion for summary
judgment despite the existence of genuine issues as to material facts
and its non-entitlement to a judgment as a matter of law, thereby
deciding the case in a way probably not in accord with applicable
decisions of this Honorable Court. 18
we affirm.
Summary judgment "is a procedural technique aimed at weeding out
sham claims or defenses at an early stage of the litigation." The crucial
19
question in a motion for summary judgment is whether the issues raised
in the pleadings are genuine or fictitious, as shown by affidavits,
depositions or admissions accompanying the motion. A genuine issue
means "an issue of fact which calls for the presentation of evidence, as
distinguished from an issue which is fictitious or contrived so as not to
constitute a genuine issue for trial." To forestall summary judgment, it is
20
essential for the non-moving party to confirm the existence of genuine
issues where he has substantial, plausible and fairly arguable defense,
i.e., issues of fact calling for the presentation of evidence upon which a
reasonable finding of fact could return a verdict for the non-moving
party. The proper inquiry would therefore be whether the affirmative
defenses offered by petitioners constitute genuine issue of fact requiring
a full-blown trial.
21
In the case at bar, there are no genuine issues raised by petitioners.
Petitioners do not deny that they obtained a loan from Mercator. They
merely claim that they got the loan as officers of Embassy Farms
without intending to personally bind themselves or their property.
However, a simple perusal of the promissory note and the continuing
suretyship agreement shows otherwise. These documentary evidence
prove that petitioners are solidary obligors with Embassy Farms.
The promissory note states:
22
(Mercator Finance Corporation)
Creditor
For value received, I/We jointly and severally promise to pay to the
order of MERCATOR FINANCE CORPORATION at its office, the To: MERCATOR FINANCE COPORATION
principal sum of EIGHT HUNDRED FORTY-FOUR THOUSAND SIX
HUNDRED TWENTY-FIVE PESOS & 78/100 (P 844,625.78), Philippine (1) For valuable and/or other consideration, EDUARDO B.
currency, x x x, in installments as follows: EVANGELISTA and EPIFANIA C. EVANGELISTA
(hereinafter called Surety), jointly and severally
September 16, 1982 - P154,267.87 unconditionally guarantees (sic) to MERCATOR FINANCE
COPORATION (hereinafter called Creditor), the full, faithful
October 16, 1982 - P154,267.87 and prompt payment and discharge of any and all
November 16, 1982 - P154,267.87 indebtedness of EMBASSY FARMS, INC. (hereinafter
called Principal) to the Creditor.
December 16, 1982 - P154,267.87
January 16, 1983 - P154,267.87 xxx xxx xxx

February 16, 1983 - P154,267.87 (3) The obligations hereunder are joint and several and
independent of the obligations of the Principal. A separate
xxx xxx xxx action or actions may be brought and prosecuted against
the Surety whether or not the action is also brought and
The note was signed at the bottom by petitioners Eduardo B. prosecuted against the Principal and whether or not the
Evangelista and Epifania C. Evangelista, and Embassy Farms, Inc. with Principal be joined in any such action or actions.
the signature of Eduardo B. Evangelista below it.
xxx xxx xxx
The Continuing Suretyship Agreement also proves the solidary
23

obligation of petitioners, viz: The agreement was signed by petitioners on February 16, 1982. The
promissory notes subsequently executed by petitioners and Embassy
24

(Embassy Farms, Inc.) Farms, restructuring their loan, likewise prove that petitioners are
Principal solidarily liable with Embassy Farms.

(Eduardo B. Evangelista) Petitioners further allege that there is an ambiguity in the wording of the
Surety promissory note and claim that since it was Mercator who provided the
form, then the ambiguity should be resolved against it.
(Epifania C. Evangelista)
Surety Courts can interpret a contract only if there is doubt in its letter. But, an
25

examination of the promissory note shows no such ambiguity. Besides,

assuming arguendo that there is an ambiguity, Section 17 of the only repository and memorial of truth, and whatever is not found in the
Negotiable Instruments Law states, viz: writing must be understood to have been waived and abandoned.

SECTION 17. Construction where instrument is ambiguous. – Where IN VIEW WHEREOF, the petition is dismissed. Treble costs against the
the language of the instrument is ambiguous or there are omissions petitioners.
therein, the following rules of construction apply:
SO ORDERED.
xxx xxx xxx
Panganiban, and Sandoval-Gutierrez, JJ., concur.
(g) Where an instrument containing the word "I promise to pay" is Corona, and Carpio-Morales, JJ., on official leave.
signed by two or more persons, they are deemed to be jointly and
severally liable thereon.

Petitioners also insist that the promissory note does not convey their G.R. No. 170325 September 26, 2008
true intent in executing the document. The defense is unavailing. Even
1âwphi1

if petitioners intended to sign the note merely as officers of Embassy PHILIPPINE NATIONAL BANK, Petitioner,
Farms, still this does not erase the fact that they subsequently executed vs.
a continuing suretyship agreement. A surety is one who is solidarily ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.
liable with the principal. Petitioners cannot claim that they did not
26

DECISION
personally receive any consideration for the contract for well-
entrenched is the rule that the consideration necessary to support a REYES, R.T., J.:
surety obligation need not pass directly to the surety, a consideration
moving to the principal alone being sufficient. A surety is bound by the WHEN the payee of the check is not intended to be the true recipient of its
same consideration that makes the contract effective between the proceeds, is it payable to order or bearer? What is the fictitious-payee rule
principal parties thereto. Having executed the suretyship agreement,
27
and who is liable under it? Is there any exception?
there can be no dispute on the personal liability of petitioners.
These questions seek answers in this petition for review on certiorari of the
Lastly, the parol evidence rule does not apply in this case. We held in
28
Amended Decision1 of the Court of Appeals (CA) which affirmed with
Tarnate v. Court of Appeals, that where the parties admitted the
29 modification that of the Regional Trial Court (RTC). 2
existence of the loans and the mortgage deeds and the fact of default
on the due repayments but raised the contention that they were misled The Facts
by respondent bank to believe that the loans were long-term
The facts as borne by the records are as follows:
accommodations, then the parties could not be allowed to introduce
evidence of conditions allegedly agreed upon by them other than those Respondents-Spouses Erlando and Norma Rodriguez were clients of
stipulated in the loan documents because when they reduced their petitioner Philippine National Bank (PNB), Amelia Avenue Branch, Cebu City.
agreement in writing, it is presumed that they have made the writing the They maintained savings and demand/checking accounts, namely, PNBig
Demand Deposits (Checking/Current Account No. 810624-6 under the
account name Erlando and/or Norma Rodriguez), and PNBig Demand
Deposit (Checking/Current Account No. 810480-4 under the account name
Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line with their
business, they had a discounting3 arrangement with the Philnabank
Employees Savings and Loan Association (PEMSLA), an association of PNB
employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue
Branch. The association maintained current and savings accounts with
petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez would
rediscount the postdated checks issued to members whenever the
association was short of funds. As was customary, the spouses would replace
the postdated checks with their own checks issued in the name of the
members.
It was PEMSLA’s policy not to approve applications for loans of members with
outstanding debts. To subvert this policy, some PEMSLA officers devised a
scheme to obtain additional loans despite their outstanding loan accounts.
They took out loans in the names of unknowing members, without the
knowledge or consent of the latter. The PEMSLA checks issued for these
loans were then given to the spouses for rediscounting. The officers carried
this out by forging the indorsement of the named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez checks) in the
name of the members and delivered the checks to an officer of PEMSLA. The
PEMSLA checks, on the other hand, were deposited by the spouses to their
account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its
savings account without any indorsement from the named payees. This was
an irregular procedure made possible through the facilitation of Edmundo
Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It
appears that this became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses issued sixty
nine (69) checks, in the total amount of P2,345,804.00. These were payable
to forty seven (47) individual payees who were all members of PEMSLA. 4
Petitioner PNB eventually found out about these fraudulent acts. To put a stop
to this scheme, PNB closed the current account of PEMSLA. As a result, the
PEMSLA checks deposited by the spouses were returned or dishonored for
the reason "Account Closed." The corresponding Rodriguez checks, however,
were deposited as usual to the PEMSLA savings account. The amounts were
duly debited from the Rodriguez account. Thus, because the PEMSLA checks
given as payment were returned, spouses Rodriguez incurred losses from the
rediscounting transactions.
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez filed a
civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative
of Philnabankers (MCP), and petitioner PNB. They sought to recover the
value of their checks that were deposited to the PEMSLA savings account
amounting to P2,345,804.00. The spouses contended that because PNB
credited the checks to the PEMSLA account even without indorsements, PNB
violated its contractual obligation to them as depositors. PNB paid the wrong
payees, hence, it should bear the loss.
PNB moved to dismiss the complaint on the ground of lack of cause of action.
PNB argued that the claim for damages should come from the payees of the
checks, and not from spouses Rodriguez. Since there was no demand from
the said payees, the obligation should be considered as discharged.
In an Order dated January 12, 2000, the RTC denied PNB’s motion to
dismiss.
In its Answer,5 PNB claimed it is not liable for the checks which it paid to the
PEMSLA account without any indorsement from the payees. The bank
contended that spouses Rodriguez, the makers, actually did not intend for the
named payees to receive the proceeds of the checks. Consequently, the
payees were considered as "fictitious payees" as defined under the
Negotiable Instruments Law (NIL). Being checks made to fictitious payees
which are bearer instruments, the checks were negotiable by mere delivery.
PNB’s Answer included its cross-claim against its co-defendants PEMSLA
and the MCP, praying that in the event that judgment is rendered against the
bank, the cross-defendants should be ordered to reimburse PNB the amount
it shall pay.
After trial, the RTC rendered judgment in favor of spouses Rodriguez
(plaintiffs). It ruled that PNB (defendant) is liable to return the value of the
checks. All counterclaims and cross-claims were dismissed. The dispositive
portion of the RTC decision reads:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment,
as follows:
1. Defendant is hereby ordered to pay the plaintiffs the total amount
of P2,345,804.00 or reinstate or restore the amount of P775,337.00 in
the PNBig Demand Deposit Checking/Current Account No. 810480-4
of Erlando T. Rodriguez, and the amount of P1,570,467.00 in the
PNBig Demand Deposit, Checking/Current Account No. 810624-6 of
Erlando T. Rodriguez and/or Norma Rodriguez, plus legal rate of
interest thereon to be computed from the filing of this complaint until
fully paid;
2. The defendant PNB is hereby ordered to pay the plaintiffs the
following reasonable amount of damages suffered by them taking into
consideration the standing of the plaintiffs being sugarcane planters,
realtors, residential subdivision owners, and other businesses:
(a) Consequential damages, unearned income in the amount
of P4,000,000.00, as a result of their having incurred great
dificulty (sic) especially in the residential subdivision business,
which was not pushed through and the contractor even
threatened to file a case against the plaintiffs;
(b) Moral damages in the amount of P1,000,000.00;
(c) Exemplary damages in the amount of P500,000.00;
(d) Attorney’s fees in the amount of P150,000.00 considering
that this case does not involve very complicated issues; and for
the
(e) Costs of suit.
3. Other claims and counterclaims are hereby dismissed. 6
CA Disposition
PNB appealed the decision of the trial court to the CA on the principal ground
that the disputed checks should be considered as payable to bearer and not
to order.
In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC
disposition. The CA concluded that the checks were obviously meant by the
spouses to be really paid to PEMSLA. The court a quo declared:
We are not swayed by the contention of the plaintiffs-appellees (Spouses
Rodriguez) that their cause of action arose from the alleged breach of
contract by the defendant-appellant (PNB) when it paid the value of the
checks to PEMSLA despite the checks being payable to order. Rather, we are
more convinced by the strong and credible evidence for the defendant-
appellant with regard to the plaintiffs-appellees’ and PEMSLA’s business
arrangement – that the value of the rediscounted checks of the plaintiffs-
appellees would be deposited in PEMSLA’s account for payment of the loans
it has approved in exchange for PEMSLA’s checks with the full value of the
said loans. This is the only obvious explanation as to why all the disputed
sixty-nine (69) checks were in the possession of PEMSLA’s errand boy for
presentment to the defendant-appellant that led to this present controversy. It
also appears that the teller who accepted the said checks was PEMSLA’s
officer, and that such was a regular practice by the parties until the defendant-
appellant discovered the scam. The logical conclusion, therefore, is that the
checks were never meant to be paid to order, but instead, to PEMSLA. We
thus find no breach of contract on the part of the defendant-appellant.
According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA
allegedly issued post-dated checks to its qualified members who had applied
for loans. However, because of PEMSLA’s insufficiency of funds, PEMSLA
approached the plaintiffs-appellees for the latter to issue rediscounted checks
in favor of said applicant members. Based on the investigation of the
defendant-appellant, meanwhile, this arrangement allowed the plaintiffs-
appellees to make a profit by issuing rediscounted checks, while the officers
of PEMSLA and other members would be able to claim their loans, despite
the fact that they were disqualified for one reason or another. They were able
to achieve this conspiracy by using other members who had loaned lesser
amounts of money or had not applied at all. x x x.8 (Emphasis added)
The CA found that the checks were bearer instruments, thus they do not
require indorsement for negotiation; and that spouses Rodriguez and
PEMSLA conspired with each other to accomplish this money-making
scheme. The payees in the checks were "fictitious payees" because they
were not the intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued, inter alia,
that the checks on their faces were unquestionably payable to order; and that
PNB committed a breach of contract when it paid the value of the checks to
PEMSLA without indorsement from the payees. They also argued that their
cause of action is not only against PEMSLA but also against PNB to recover
the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended Decision, the
last paragraph and fallo of which read:
In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-
appellees Sps. Rodriguez for the following:
1. Actual damages in the amount of P2,345,804 with interest at 6% per
annum from 14 May 1999 until fully paid;
2. Moral damages in the amount of P200,000;
3. Attorney’s fees in the amount of P100,000; and
4. Costs of suit.
WHEREFORE, in view of the foregoing premises, judgment is hereby
rendered by Us AFFIRMING WITH MODIFICATION the assailed decision
rendered in Civil Case No. 99-10892, as set forth in the immediately next
preceding paragraph hereof, and SETTING ASIDE Our original decision
promulgated in this case on 22 July 2004.
SO ORDERED.9
The CA ruled that the checks were payable to order. According to the
appellate court, PNB failed to present sufficient proof to defeat the claim of
the spouses Rodriguez that they really intended the checks to be received by
the specified payees. Thus, PNB is liable for the value of the checks which it
paid to PEMSLA without indorsements from the named payees. The award
for damages was deemed appropriate in view of the failure of PNB to treat the
Rodriguez account with the highest degree of care considering the fiduciary
nature of their relationship, which constrained respondents to seek legal
action.
Hence, the present recourse under Rule 45.
Issues
The issues may be compressed to whether the subject checks are payable to
order or to bearer and who bears the loss?
PNB argues anew that when the spouses Rodriguez issued the disputed
checks, they did not intend for the named payees to receive the proceeds.
Thus, they are bearer instruments that could be validly negotiated by mere
delivery. Further, testimonial and documentary evidence presented during trial
amply proved that spouses Rodriguez and the officers of PEMSLA conspired
with each other to defraud the bank.
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an erroneous
judgment attaining finality to the prejudice of innocent parties. A court
discovering an erroneous judgment before it becomes final may, motu proprio
or upon motion of the parties, correct its judgment with the singular objective
of achieving justice for the litigants.10
However, a word of caution to lower courts, the CA in Cebu in this particular
case, is in order. The Court does not sanction careless disposition of cases by
courts of justice. The highest degree of diligence must go into the study of
every controversy submitted for decision by litigants. Every issue and factual
detail must be closely scrutinized and analyzed, and all the applicable laws
judiciously studied, before the promulgation of every judgment by the court.
Only in this manner will errors in judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true recipient
of the proceeds, the check is considered as a bearer instrument. A check is "a
bill of exchange drawn on a bank payable on demand." 11 It is either an order
or a bearer instrument. Sections 8 and 9 of the NIL states:
SEC. 8. When payable to order. – The instrument is payable to order where it
is drawn payable to the order of a specified person or to him or his order. It
may be drawn payable to the order of –
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or
otherwise indicated therein with reasonable certainty.
SEC. 9. When payable to bearer. – The instrument is payable to bearer –
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person,
and such fact is known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of
any person; or
(e) Where the only or last indorsement is an indorsement in
blank.12 (Underscoring supplied)
The distinction between bearer and order instruments lies in their manner of
negotiation. Under Section 30 of the NIL, an order instrument requires an
indorsement from the payee or holder before it may be validly negotiated. A
bearer instrument, on the other hand, does not require an indorsement to be
validly negotiated. It is negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. – An instrument is negotiated when it
is transferred from one person to another in such manner as to constitute the
transferee the holder thereof. If payable to bearer, it is negotiated by delivery;
if payable to order, it is negotiated by the indorsement of the holder completed
by delivery.
A check that is payable to a specified payee is an order instrument. However,
under Section 9(c) of the NIL, a check payable to a specified payee may
nevertheless be considered as a bearer instrument if it is payable to the order
of a fictitious or non-existing person, and such fact is known to the person
making it so payable. Thus, checks issued to "Prinsipe Abante" or "Si
Malakas at si Maganda," who are well-known characters in Philippine
mythology, are bearer instruments because the named payees are fictitious
and non-existent.
We have yet to discuss a broader meaning of the term "fictitious" as used in
the NIL. It is for this reason that We look elsewhere for guidance. Court
rulings in the United States are a logical starting point since our law on
negotiable instruments was directly lifted from the Uniform Negotiable
Instruments Law of the United States.13
A review of US jurisprudence yields that an actual, existing, and living payee
may also be "fictitious" if the maker of the check did not intend for the payee
to in fact receive the proceeds of the check. This usually occurs when the
maker places a name of an existing payee on the check for convenience or to
cover up an illegal activity.14 Thus, a check made expressly payable to a non-
fictitious and existing person is not necessarily an order instrument. If the
payee is not the intended recipient of the proceeds of the check, the payee is
considered a "fictitious" payee and the check is a bearer instrument.
In a fictitious-payee situation, the drawee bank is absolved from liability and
the drawer bears the loss. When faced with a check payable to a fictitious
payee, it is treated as a bearer instrument that can be negotiated by delivery.
The underlying theory is that one cannot expect a fictitious payee to negotiate
the check by placing his indorsement thereon. And since the maker knew this
limitation, he must have intended for the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the drawer of the check will bear the
loss. This rule is justified for otherwise, it will be most convenient for the
maker who desires to escape payment of the check to always deny the
validity of the indorsement. This despite the fact that the fictitious payee was
purposely named without any intention that the payee should receive the
proceeds of the check.15
The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty
Insurance Bank.16 In the said case, the corporation Mueller & Martin was
defrauded by George L. Martin, one of its authorized signatories. Martin drew
seven checks payable to the German Savings Fund Company Building
Association (GSFCBA) amounting to $2,972.50 against the account of the
corporation without authority from the latter. Martin was also an officer of the
GSFCBA but did not have signing authority. At the back of the checks, Martin
placed the rubber stamp of the GSFCBA and signed his own name as
indorsement. He then successfully drew the funds from Liberty Insurance
Bank for his own personal profit. When the corporation filed an action against
the bank to recover the amount of the checks, the claim was denied.
The US Supreme Court held in Mueller that when the person making the
check so payable did not intend for the specified payee to have any part in
the transactions, the payee is considered as a fictitious payee. The check is
then considered as a bearer instrument to be validly negotiated by mere
delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as
drawee, was authorized to make payment to the bearer of the check,
regardless of whether prior indorsements were genuine or not. 17
The more recent Getty Petroleum Corp. v. American Express Travel Related
Services Company, Inc.18 upheld the fictitious-payee rule. The rule protects
the depositary bank and assigns the loss to the drawer of the check who was
in a better position to prevent the loss in the first place. Due care is not even
required from the drawee or depositary bank in accepting and paying the
checks. The effect is that a showing of negligence on the part of the
depositary bank will not defeat the protection that is derived from this rule.
However, there is a commercial bad faith exception to the fictitious-payee
rule. A showing of commercial bad faith on the part of the drawee bank, or
any transferee of the check for that matter, will work to strip it of this defense.
The exception will cause it to bear the loss. Commercial bad faith is present if
the transferee of the check acts dishonestly, and is a party to the fraudulent
scheme. Said the US Supreme Court in Getty:
Consequently, a transferee’s lapse of wary vigilance, disregard of suspicious
circumstances which might have well induced a prudent banker to investigate
and other permutations of negligence are not relevant considerations under
Section 3-405 x x x. Rather, there is a "commercial bad faith" exception to
UCC 3-405, applicable when the transferee "acts dishonestly – where it has
actual knowledge of facts and circumstances that amount to bad faith, thus
itself becoming a participant in a fraudulent scheme. x x x Such a test finds
support in the text of the Code, which omits a standard of care requirement
from UCC 3-405 but imposes on all parties an obligation to act with "honesty
in fact." x x x19 (Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends protection
even to non-bank transferees of the checks.
In the case under review, the Rodriguez checks were payable to specified
payees. It is unrefuted that the 69 checks were payable to specific persons.
Likewise, it is uncontroverted that the payees were actual, existing, and living
persons who were members of PEMSLA that had a rediscounting
arrangement with spouses Rodriguez.
What remains to be determined is if the payees, though existing persons,
were "fictitious" in its broader context.
For the fictitious-payee rule to be available as a defense, PNB must show that
the makers did not intend for the named payees to be part of the transaction
involving the checks. At most, the bank’s thesis shows that the payees did not
have knowledge of the existence of the checks. This lack of knowledge on the
part of the payees, however, was not tantamount to a lack of intention on the
part of respondents-spouses that the payees would not receive the checks’
proceeds. Considering that respondents-spouses were transacting with
PEMSLA and not the individual payees, it is understandable that they relied
on the information given by the officers of PEMSLA that the payees would be
receiving the checks.
Verily, the subject checks are presumed order instruments. This is because,
as found by both lower courts, PNB failed to present sufficient evidence to
defeat the claim of respondents-spouses that the named payees were the
intended recipients of the checks’ proceeds. The bank failed to satisfy a
requisite condition of a fictitious-payee situation – that the maker of the check
intended for the payee to have no interest in the transaction.
Because of a failure to show that the payees were "fictitious" in its broader
sense, the fictitious-payee rule does not apply. Thus, the checks are to be
deemed payable to order. Consequently, the drawee bank bears the loss. 20
PNB was remiss in its duty as the drawee bank. It does not dispute the fact
that its teller or tellers accepted the 69 checks for deposit to the PEMSLA
account even without any indorsement from the named payees. It bears
stressing that order instruments can only be negotiated with a valid
indorsement.
A bank that regularly processes checks that are neither payable to the
customer nor duly indorsed by the payee is apparently grossly negligent in its
operations.21 This Court has recognized the unique public interest possessed
by the banking industry and the need for the people to have full trust and
confidence in their banks.22 For this reason, banks are minded to treat their
customer’s accounts with utmost care, confidence, and honesty. 23
In a checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check strictly in
accordance with the drawer’s instructions, i.e., to the named payee in the
check. It should charge to the drawer’s accounts only the payables authorized
by the latter. Otherwise, the drawee will be violating the instructions of the
drawer and it shall be liable for the amount charged to the drawer’s account. 24
In the case at bar, respondents-spouses were the bank’s depositors. The
checks were drawn against respondents-spouses’ accounts. PNB, as the
drawee bank, had the responsibility to ascertain the regularity of the
indorsements, and the genuineness of the signatures on the checks before
accepting them for deposit. Lastly, PNB was obligated to pay the checks in
strict accordance with the instructions of the drawers. Petitioner miserably
failed to discharge this burden.
The checks were presented to PNB for deposit by a representative of
PEMSLA absent any type of indorsement, forged or otherwise. The facts
clearly show that the bank did not pay the checks in strict accordance with the
instructions of the drawers, respondents-spouses. Instead, it paid the values
of the checks not to the named payees or their order, but to PEMSLA, a third
party to the transaction between the drawers and the payees.alf-ITC
Moreover, PNB was negligent in the selection and supervision of its
employees. The trustworthiness of bank employees is indispensable to
maintain the stability of the banking industry. Thus, banks are enjoined to be
extra vigilant in the management and supervision of their employees. In Bank
of the Philippine Islands v. Court of Appeals, 25 this Court cautioned thus:
Banks handle daily transactions involving millions of pesos. By the very
nature of their work the degree of responsibility, care and trustworthiness
expected of their employees and officials is far greater than those of ordinary
clerks and employees. For obvious reasons, the banks are expected to
exercise the highest degree of diligence in the selection and supervision of
their employees.26
PNB’s tellers and officers, in violation of banking rules of procedure, permitted
the invalid deposits of checks to the PEMSLA account. Indeed, when it is the
gross negligence of the bank employees that caused the loss, the bank
should be held liable.27
PNB’s argument that there is no loss to compensate since no demand for
payment has been made by the payees must also fail. Damage was caused
to respondents-spouses when the PEMSLA checks they deposited were
returned for the reason "Account Closed." These PEMSLA checks were the
corresponding payments to the Rodriguez checks. Since they could not
encash the PEMSLA checks, respondents-spouses were unable to collect
payments for the amounts they had advanced.
A bank that has been remiss in its duty must suffer the consequences of its
negligence. Being issued to named payees, PNB was duty-bound by law and
by banking rules and procedure to require that the checks be properly
indorsed before accepting them for deposit and payment. In fine, PNB should
be held liable for the amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNB’s cross-claim
against its co-defendants PEMSLA and MPC. The records are bereft of any
pleading filed by these two defendants in answer to the complaint of
respondents-spouses and cross-claim of PNB. The Rules expressly provide
that failure to file an answer is a ground for a declaration that defendant is in
default.28 Yet, the RTC failed to sanction the failure of both PEMSLA and MPC
to file responsive pleadings. Verily, the RTC dismissal of PNB’s cross-claim
has no basis. Thus, this judgment shall be without prejudice to whatever
action the bank might take against its co-defendants in the trial court.
To PNB’s credit, it became involved in the controversial transaction not of its
own volition but due to the actions of some of its employees. Considering that
moral damages must be understood to be in concept of grants, not punitive or
corrective in nature, We resolve to reduce the award of moral damages
to P50,000.00.29
WHEREFORE, the appealed Amended Decision is AFFIRMED with the
MODIFICATION that the award for moral damages is reduced to P50,000.00,
and that this is without prejudice to whatever civil, criminal, or administrative
action PNB might take against PEMSLA, MPC, and the employees involved.
SO ORDERED.
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and
RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court which
assails on questions of law a decision of the Intermediate Appellate
Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its
resolution dated October 17, 1985, denying the motion for
reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had
for its program of logging activities for the year 1978 the opening of
additional roads, and simultaneous logging operations along the route
of said roads, in its logging concession area at Baganga, Manay, and
Caraga, Davao Oriental. For this purpose, it needed two (2) additional
units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf &
Pacific Company of Manila, through its sister company and marketing
arm, Industrial Products Marketing (the "seller-assignor"), a corporation
dealing in tractors and other heavy equipment business, offered to sell
to petitioner-corporation two (2) "Used" Allis Crawler Tractors, one (1)
an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be
exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability of
the "Used" tractors being offered, petitioner-corporation requested the
seller-assignor to inspect the job site. After conducting said inspection,
the seller-assignor assured petitioner-corporation that the "Used" Allis
Crawler Tractors which were being offered were fit for the job, and gave
the corresponding warranty of ninety (90) days performance of the
machines and availability of parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's
skill and judgment, petitioner-corporation through petitioners Wee and
Vergara, president and vice- president, respectively, agreed to purchase
on installment said two (2) units of "Used" Allis Crawler Tractors. It also
paid the down payment of Two Hundred Ten Thousand Pesos
(P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two
2) units of tractors (Exh. "3-A"). At the same time, the deed of sale with
chattel mortgage with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel
mortgage with promissory note, the seller-assignor, by means of a deed
of assignment (E exh. " 1 "), assigned its rights and interest in the
chattel mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units
of "Used" tractors to the petitioner-corporation's job site and as agreed,
the seller-assignor stationed its own mechanics to supervise the
operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of
the tractors broke down and after another nine (9) days, the other
tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the
seller-assignor of the fact that the tractors broke down and requested
for the seller-assignor's usual prompt attention under the warranty (E
exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara,
Exhibit "5," the seller-assignor sent to the job site its mechanics to
conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1,"
"6-D," and "6-E"), but the tractors did not come out to be what they
should be after the repairs were undertaken because the units were no
longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were delayed
and petitioner Vergara advised the seller-assignor that the payments of
the installments as listed in the promissory note would likewise be
delayed until the seller-assignor completely fulfills its obligation under
its warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979,
petitioner Wee asked the seller-assignor to pull out the units and have
them reconditioned, and thereafter to offer them for sale. The proceeds
were to be given to the respondent and the excess, if any, to be divided
between the seller-assignor and petitioner-corporation which offered to
bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the petitioner-
corporation and despite several follow-up calls, the seller-assignor did
nothing with regard to the request, until the complaint in this case was
filed by the respondent against the petitioners, the corporation, Wee,
and Vergara.
The complaint was filed by the respondent against the petitioners for
the recovery of the principal sum of One Million Ninety Three Thousand
Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued
interest of One Hundred Fifty One Thousand Six Hundred Eighteen
Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing interest
thereafter at the rate of twelve (12%) percent per annum, attorney's
fees of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100
(P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of
the complaint and asking the trial court to order the respondent to pay
the petitioners damages in an amount at the sound discretion of the
court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees,
and Five Thousand Pesos (P5,000.00) for expenses of litigation. The
petitioners likewise prayed for such other and further relief as would be
just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following
judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their
official and personal capacities the principal sum of ONE
MILLION NINETY THREE THOUSAND SEVEN
HUNDRED NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of ONE HUNDRED
FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN
PESOS & 86/100 (P151,618.,86) as of August 15, 1979
and accruing interest thereafter at the rate of 12% per
annum;
2. ordering defendants to pay jointly and severally
attorney's fees equivalent to ten percent (10%) of the
principal and to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and
assigned therein the following errors:
I
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER
ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT
APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-
APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY
NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN
DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the
challenged decision affirming in toto the decision of the trial court. The
pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of
warranty, We are of the considered opinion that aside from
the fact that no provision of warranty appears or is provided
in the Deed of Sale of the tractors and even admitting that
in a contract of sale unless a contrary intention appears,
there is an implied warranty, the defense of breach of
warranty, if there is any, as in this case, does not lie in
favor of the appellants and against the plaintiff-appellee
who is the assignee of the promissory note and a holder of
the same in due course. Warranty lies in this case only
between Industrial Products Marketing and Consolidated
Plywood Industries, Inc. The plaintiff-appellant herein upon
application by appellant corporation granted financing for
the purchase of the questioned units of Fiat-Allis
Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense
available to appellants either to withdraw from the contract
and/or demand a proportionate reduction of the price with
damages in either case (Art. 1567, New Civil Code). We
now come to the issue as to whether the plaintiff-appellee
is a holder in due course of the promissory note.
To begin with, it is beyond arguments that the plaintiff-
appellee is a financing corporation engaged in financing
and receivable discounting extending credit facilities to
consumers and industrial, commercial or agricultural
enterprises by discounting or factoring commercial papers
or accounts receivable duly authorized pursuant to R.A.
5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is
a negotiable instrument which was discounted or sold to
the IFC Leasing and Acceptance Corporation for
P800,000.00 (Exh. "A") considering the following. it is in
writing and signed by the maker; it contains an
unconditional promise to pay a certain sum of money
payable at a fixed or determinable future time; it is payable
to order (Sec. 1, NIL); the promissory note was negotiated
when it was transferred and delivered by IPM to the
appellee and duly endorsed to the latter (Sec. 30, NIL); it
was taken in the conditions that the note was complete and
regular upon its face before the same was overdue and
without notice, that it had been previously dishonored and
that the note is in good faith and for value without notice of
any infirmity or defect in the title of IPM (Sec. 52, NIL); that
IFC Leasing and Acceptance Corporation held the
instrument free from any defect of title of prior parties and
free from defenses available to prior parties among
themselves and may enforce payment of the instrument for
the full amount thereof against all parties liable thereon
(Sec. 57, NIL); the appellants engaged that they would pay
the note according to its tenor, and admit the existence of
the payee IPM and its capacity to endorse (Sec. 60, NIL).
In view of the essential elements found in the questioned
promissory note, We opine that the same is legally and
conclusively enforceable against the defendants-
appellants.
WHEREFORE, finding the decision appealed from
according to law and evidence, We find the appeal without
merit and thus affirm the decision in toto. With costs
against the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17,
1985 was denied by the Intermediate Appellate Court in its resolution
dated October 17, 1985, a copy of which was received by the
petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A
NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW SINCE
IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST,
IT IS A MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE
INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH A
MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE
RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS
AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE
PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY
UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE
SELLER-ASSIGNOR OF THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE
SELLER- ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT
CHANGE THE NATURE OF THE TRANSACTION FROM BEING A
SALE ON INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN
EVIDENCE IN ANY COURT BECAUSE THE REQUISITE
DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR
CANCELLED.
The petitioners prayed that judgment be rendered setting aside the
decision dated July 17, 1985, as well as the resolution dated October
17, 1985 and dismissing the complaint but granting petitioners'
counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to the
petition filed on February 20, 1986, contended that the petition was filed
out of time; that the promissory note is a negotiable instrument and
respondent a holder in due course; that respondent is not liable for any
breach of warranty; and finally, that the promissory note is admissible in
evidence.
The core issue herein is whether or not the promissory note in question
is a negotiable instrument so as to bar completely all the available
defenses of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the
instant petition to have been filed on time because the petitioners'
motion for reconsideration actually raised new issues. It cannot,
therefore, be considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express
90-day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor
broke down and 9 days, thereafter, the second tractor became
inoperable" are sustained by the records. The petitioner was clearly a
victim of a warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty
against the hidden defects which the thing sold may have,
should they render it unfit for the use for which it is
intended, or should they diminish its fitness for such use to
such an extent that, had the vendee been aware thereof,
he would not have acquired it or would have given a lower
 price for it; but said vendor shall not be answerable for
patent defects or those which may be visible, or for those
which are not visible if the vendee is an expert who, by
reason of his trade or profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty
or condition as to the quality or fitness of the goods, as
follows:
(1) Where the buyer, expressly or by implication makes
known to the seller the particular purpose for which the
goods are acquired, and it appears that the buyer relies on
the sellers skill or judge judgment (whether he be the
grower or manufacturer or not), there is an implied
warranty that the goods shall be reasonably fit for such
purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the
quality or fitness for a particular purpose may be annexed
by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for
any hidden faults or defects in the thing sold even though
he was not aware thereof.
This provision shall not apply if the contrary has been
stipulated, and the vendor was not aware of the hidden
faults or defects in the thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of
warranty against the petitioner. This liability as a general rule, extends
to the corporation to whom it assigned its rights and interests unless the
assignee is a holder in due course of the promissory note in question,
assuming the note is negotiable, in which case the latter's rights are
based on the negotiable instrument and assuming further that the
petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors
broke down, the petitioner-corporation notified the seller-assignor's
sister company, AG & P, about the breakdown based on the seller-
assignor's express 90-day warranty, with which the latter complied by
sending its mechanics. However, due to the seller-assignor's delay and
its failure to comply with its warranty, the tractors became totally
unserviceable and useless for the purpose for which they were
purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its
contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and
the rescission of the obligation with the payment of
damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become
impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565
and 1566, the vendee may elect between withdrawing from
the contract and demanding a proportionate reduction of
the price, with damages in either case. (Emphasis
supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract
with the seller-assignor, necessarily can no longer sue the seller-
assignor except by way of counterclaim if the seller-assignor sues it
because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35
SCRA 102) we held:
In other words, the party who deems the contract violated
may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds
at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle
whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting
party who believes itself injured must first file suit and wait
for adjudgement before taking extrajudicial steps to protect
its interest. Otherwise, the party injured by the other's
breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final
judgment of rescission is rendered when the law itself
requires that he should exercise due diligence to minimize
its own damages (Civil Code, Article 2203). (Emphasis
supplied)
Going back to the core issue, we rule that the promissory note in
question is not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise
to pay to the INDUSTRIAL PRODUCTS MARKETING, the
sum of ONE MILLION NINETY THREE THOUSAND
SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only
(P 1,093,789.71), Philippine Currency, the said principal
sum, to be payable in 24 monthly installments starting July
15, 1978 and every 15th of the month thereafter until fully
paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments
Law requires that a promissory note "must be payable to order or
bearer, " it cannot be denied that the promissory note in question is not
a negotiable instrument.
The instrument in order to be considered negotiablility-i.e.
must contain the so-called 'words of negotiable, must be
payable to 'order' or 'bearer'. These words serve as an
expression of consent that the instrument may be
transferred. This consent is indispensable since a maker
assumes greater risk under a negotiable instrument than
under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The instrument
is payable to order where it is drawn payable to the order of
a specified person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may
be made payable to order. There must always be a
specified person named in the instrument. It means that the
bill or note is to be paid to the person designated in the
instrument or to any person to whom he has indorsed and
delivered the same. Without the words "or order" or"to the
order of, "the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any
subsequent purchaser thereof will not enjoy the
advantages of being a holder of a negotiable instrument
 but will merely "step into the shoes" of the person
designated in the instrument and will thus be open to all
defenses available against the latter." (Campos and
Campos, Notes and Selected Cases on Negotiable
Instruments Law, Third Edition, page 38). (Emphasis
supplied)
Therefore, considering that the subject promissory note is not a
negotiable instrument, it follows that the respondent can never be a
holder in due course but remains a mere assignee of the note in
question. Thus, the petitioner may raise against the respondent all
defenses available to it as against the seller-assignor Industrial
Products Marketing.
This being so, there was no need for the petitioner to implied the seller-
assignor when it was sued by the respondent-assignee because the
petitioner's defenses apply to both or either of either of them. Actually,
the records show that even the respondent itself admitted to being a
mere assignee of the promissory note in question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what is
being assigned is the Deed of Sale with
Chattel Mortgage with the promissory note
which is as testified to by the witness was
indorsed? (Counsel for Plaintiff nodding his
head.) Then we have no further questions on
cross,
COURT:
You confirm his manifestation? You are
nodding your head? Do you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed
of sale is a transaction between two persons;
what is assigned are rights, the rights of the
mortgagee were assigned to the IFC Leasing
& Acceptance Corporation.
COURT:
He puts it in a simple way as one-deed of sale
and chattel mortgage were assigned; . . . you
want to make a distinction, one is an
assignment of mortgage right and the other
one is indorsement of the promissory note.
What counsel for defendants wants is that you
stipulate that it is contained in one single
transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction. (pp.
27-29, TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the
promissory note in question is a negotiable instrument, the respondent
cannot be a holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale
on installment of the tractors, there was an arrangement between the
seller-assignor, Industrial Products Marketing, and the respondent
whereby the latter would pay the seller-assignor the entire purchase
price and the seller-assignor, in turn, would assign its rights to the
respondent which acquired the right to collect the price from the buyer,
herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with
Promissory Note, the Deed of Assignment and the Disclosure of
Loan/Credit Transaction shows that said documents evidencing the sale
on installment of the tractors were all executed on the same day by and
among the buyer, which is herein petitioner Consolidated Plywood
Industries, Inc.; the seller-assignor which is the Industrial Products
Marketing; and the assignee-financing company, which is the
respondent. Therefore, the respondent had actual knowledge of the fact
that the seller-assignor's right to collect the purchase price was not
unconditional, and that it was subject to the condition that the tractors
-sold were not defective. The respondent knew that when the tractors
turned out to be defective, it would be subject to the defense of failure
of consideration and cannot recover the purchase price from the
petitioners. Even assuming for the sake of argument that the
promissory note is negotiable, the respondent, which took the same
with actual knowledge of the foregoing facts so that its action in taking
the instrument amounted to bad faith, is not a holder in due course. As
such, the respondent is subject to all defenses which the petitioners
may raise against the seller-assignor. Any other interpretation would be
most inequitous to the unfortunate buyer who is not only saddled with
two useless tractors but must also face a lawsuit from the assignee for
the entire purchase price and all its incidents without being able to raise
valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it
had no knowledge of any fact, which would justify its act of taking the
promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that:
negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE
COURSE. — A holder in due course is a holder who has
taken the instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice
of any infirmity in the instrument of deffect in the title of the
person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT.
— To constitute notice of an infirmity in the instrument or
defect in the title of the person negotiating the same, the
person to whom it is negotiated must have had actual
knowledge of the infirmity or defect, or knowledge of such
facts that his action in taking the instrument amounts to
bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing
company is not a holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note
payable to the seller to cover the purchase price. Many
times, in pursuance of a previous arrangement with the
seller, a finance company pays the full price and the note is
indorsed to it, subrogating it to the right to collect the price
from the buyer, with interest. With the increasing frequency
of installment buying in this country, it is most probable that
the tendency of the courts in the United States to protect
the buyer against the finance company will , the finance
company will be subject to the defense of failure of
consideration and cannot recover the purchase price from
the buyer. As against the argument that such a rule would
seriously affect "a certain mode of transacting business
adopted throughout the State," a court in one case stated:
 It may be that our holding here will require
some changes in business methods and will
impose a greater burden on the finance
companies. We think the buyer-Mr. & Mrs.
General Public-should have some protection
somewhere along the line. We believe the
finance company is better able to bear the risk
of the dealer's insolvency than the buyer and
in a far better position to protect his interests
against unscrupulous and insolvent dealers. . .
. assignor and respondent assignee at the expense of the petitioner-
If this opinion imposes great burdens on
finance companies it is a potent argument in
favor of a rule which win afford public
protection to the general buying public against
unscrupulous dealers in personal property. . . .
(Mutual Finance Co. v. Martin, 63 So. 2d 649,
44 ALR 2d 1 [1953]) (Campos and Campos,
Notes and Selected Cases on Negotiable
Instruments Law, Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country
Machine Works (34 Cal. 2d 766) involving similar facts, it was held that
in a very real sense, the finance company was a moving force in the
transaction from its very inception and acted as a party to it. When a
finance company actively participates in a transaction of this type from
its inception, it cannot be regarded as a holder in due course of the note
given in the transaction.
In like manner, therefore, even assuming that the subject promissory
note is negotiable, the respondent, a financing company which actively
participated in the sale on installment of the subject two Allis Crawler
tractors, cannot be regarded as a holder in due course of said note. It
follows that the respondent's rights under the promissory note involved
in this case are subject to all defenses that the petitioners have against
the seller-assignor, Industrial Products Marketing. For Section 58 of the
Negotiable Instruments Law provides that "in the hands of any holder
other than a holder in due course, a negotiable instrument is subject to
the same defenses as if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral
issues, we find that both the trial and respondent appellate court erred
in holding the promissory note in question to be negotiable. Such a
ruling does not only violate the law and applicable jurisprudence, but
would result in unjust enrichment on the part of both the assigner-
corporation which rightfully rescinded an inequitable contract. We note,
however, that since the seller-assignor has not been impleaded herein,
there is no obstacle for the respondent to file a civil Suit and litigate its
claims against the seller- assignor in the rather unlikely possibility that it
so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent
appellate court dated July 17, 1985, as well as its resolution dated
October 17, 1986, are hereby ANNULLED and SET ASIDE. The
complaint against the petitioner before the trial court is DISMISSED.
SO ORDERED.
G.R. No. 166018 June 4, 2014
THE HONGKONG AND SHANGHAI BANKING CORPORATION
LIMITED-PHILIPPINE BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;
x-----------------------x
G.R. No. 167728
THE HONGKONG AND SHANGHAI BANKING CORPORATION their local or foreign currency accounts and to pay the purchase price
LIMITED-PHILIPPINE BRANCHES, Petitioner, therefor upon receipt of the securities.
7

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent. Pursuant to the electronic messages of its investor-clients, HSBC
purchased and paid Documentary Stamp Tax (DST) from September to
DECISION December 1997 and also from January to December 1998 amounting
to ₱19,572,992.10 and ₱32,904,437.30, respectively, broken down as
LEONARDO-DE CASTRO, J.: follows:

These petitions for review on certiorari assail the Decision and

1 2
A. September to December 1997
Resolution dated July 8, 2004 and October 25, 2004, respectively, of
the Court of Appeals in CA-G.R. SP No. 77580, as well as the September 1997 P 6,981,447.90
Decision and Resolution dated September 2, 2004 and April 4, 2005,
3

respectively, of the Court of Appeals in CA-G.R. SP No. 70814. The October 1997 6,209,316.60
respective Decisions in the said cases similarly reversed and set aside November 1997 3,978,510.30
the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos.
5951 and 6009, respectively, and dismissed the petitions of petitioner
4 5 December 1997 2,403,717.30
Hongkong and Shanghai Banking Corporation Limited-Philippine Total ₱19,572,992.10
Branches (HSBC). The corresponding Resolutions, on the other hand,
denied the respective motions for reconsideration of the said Decisions. B. January to December 1998
HSBC performs, among others, custodial services on behalf of its
investor-clients, corporate and individual, resident or non-resident of the January 1998 P 3,328,305.60
Philippines, with respect to their passive investments in the Philippines, February 1998 4,566,924.90
particularly investments in shares of stocks in domestic corporations. As
a custodian bank, HSBC serves as the collection/payment agent with March 1998 5,371,797.30
respect to dividends and other income derived from its investor-clients’ April 1998 4,197,235.50
passive investments. 6

May 1998 2,519,587.20

HSBC’s investor-clients maintain Philippine peso and/or foreign June 1998 2,301,333.00
currency accounts, which are managed by HSBC through instructions
given through electronic messages. The said instructions are standard July 1998 1,586,404.50
forms known in the banking industry as SWIFT, or "Society for August 1998 1,787,359.50
Worldwide Interbank Financial Telecommunication." In purchasing
shares of stock and other investment in securities, the investor-clients September 1998 1,231,828.20
would send electronic messages from abroad instructing HSBC to debit
 October 1998 1,303,184.40 An overseas client sends instruction to its bank in the Philippines to
either:
November 1998 2,026,379.70
December 1998 2,684,097.50 (i) debit its local or foreign currency account and to pay a
named recipient in the Philippines; or
Total ₱32,904,437.30
(ii) receive funds from another bank in the Philippines for
On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then deposit into its account and to pay a named recipient in the
Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 to the Philippines."
effect that instructions or advises from abroad on the management of
funds located in the Philippines which do not involve transfer of funds The foregoing transactions are carried out under instruction from
from abroad are not subject to DST. BIR Ruling No. 132-99 reads: abroad and [do] not involve actual fund transfer since the funds are
already in the Philippine accounts. The instructions are in the form of
Date: August 23, 1999 electronic messages (i.e., SWIFT MT100 or MT 202 and/or MT 521). In
both cases, the payment is against the delivery of investments
FERRY TOLEDO VICTORINO GONZAGA purchased. The purchase of investments and the payment comprise
& ASSOCIATES one single transaction. DST has already been paid under Section 176
G/F AFC Building, Alfaro St. for the investment purchase.
Salcedo Village, Makati
Metro Manila B. Other transactions:

Attn: Atty. Tomas C. Toledo An overseas client sends an instruction to its bank in the Philippines to
Tax Counsel either:

Gentlemen:
This refers to your letter dated July 26, 1999 requesting on behalf of
your clients, the CITIBANK & STANDARD CHARTERED BANK, for a
ruling as to whether or not the electronic instructions involving the
following transactions of residents and non-residents of the Philippines
with respect to their local or foreign currency accounts are subject to
documentary stamp tax under Section 181 of the 1997 Tax Code, viz:
(i) debit its local or foreign currency account and to pay a
named recipient, who may be another bank, a corporate
entity or an individual in the Philippines; or
(ii) receive funds from another bank in the Philippines for
deposit to its account and to pay a named recipient, who
may be another bank, a corporate entity or an individual in
the Philippines."

A. Investment purchase transactions: The above instruction is in the form of an electronic message (i.e.,
SWIFT MT 100 or MT 202) or tested cable, and may not refer to any
particular transaction.
The opening and maintenance by a non-resident of local or foreign
currency accounts with a bank in the Philippines is permitted by the
Bangko Sentral ng Pilipinas, subject to certain conditions.
In reply, please be informed that pursuant to Section 181 of the 1997
Tax Code, which provides that –
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and
Others.– Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each Two
hundred pesos (₱200), or fractional part thereof, of the face value of
any such bill of exchange, or order, or Philippine equivalent of such
value, if expressed in foreign currency. (Underscoring supplied.)
a documentary stamp tax shall be imposed on any bill of exchange or
order for payment purporting to be drawn in a foreign country but
payable in the Philippines.
Under the foregoing provision, the documentary stamp tax shall be
levied on the instrument, i.e., a bill of exchange or order for the
payment of money, which purports to draw money from a foreign
country but payable in the Philippines. In the instant case, however,
while the payor is residing outside the Philippines, he maintains a local
and foreign currency account in the Philippines from where he will draw
the money intended to pay a named recipient. The instruction or order
to pay shall be made through an electronic message, i.e., SWIFT MT
100 or MT 202 and/or MT 521. Consequently, there is no negotiable
instrument to be made, signed or issued by the payee. In the meantime,
such electronic instructions by the non-resident payor cannot be
considered as a transaction per se considering that the same do not
involve any transfer of funds from abroad or from the place where the
instruction originates. Insofar as the local bank is concerned, such
instruction could be considered only as a memorandum and shall be
entered as such in its books of accounts. The actual debiting of the
payor’s account, local or foreign currency account in the Philippines, is
the actual transaction that should be properly entered as such.
Under the Documentary Stamp Tax Law, the mere withdrawal of money
from a bank deposit, local or foreign currency account, is not subject to
DST, unless the account so maintained is a current or checking
account, in which case, the issuance of the check or bank drafts is
subject to the documentary stamp tax imposed under Section 179 of
the 1997 Tax Code. In the instant case, and subject to the physical
impossibility on the part of the payor to be present and prepare and
sign an instrument purporting to pay a certain obligation, the withdrawal
and payment shall be made in cash. In this light, the withdrawal shall
not be subject to documentary stamp tax. The case is parallel to an
automatic bank transfer of local funds from a savings account to a
checking account maintained by a depositor in one bank.
Likewise, the receipt of funds from another bank in the Philippines for
deposit to the payee’s account and thereafter upon instruction of the
non-resident depositor-payor, through an electronic message, the
depository bank to debit his account and pay a named recipient shall
not be subject to documentary stamp tax.
It should be noted that the receipt of funds from another local bank in
the Philippines by a local depository bank for the account of its client
residing abroad is part of its regular banking transaction which is not
subject to documentary stamp tax. Neither does the receipt of funds
makes the recipient subject to the documentary stamp tax. The funds
are deemed to be part of the deposits of the client once credited to his
account, and which, thereafter can be disposed in the manner he
wants. The payor-client’s further instruction to debit his account and pay
a named recipient in the Philippines does not involve transfer of funds
from abroad. Likewise, as stated earlier, such debit of local or foreign
currency account in the Philippines is not subject to the documentary
stamp tax under the aforementioned Section 181 of the Tax Code.
In the light of the foregoing, this Office hereby holds that the instruction
made through an electronic message by non-resident payor-client to
debit his local or foreign currency account maintained in the Philippines
and to pay a certain named recipient also residing in the Philippines is
not the transaction contemplated under Section 181 of the 1997 Tax
Code. Such being the case, such electronic instruction purporting to
draw funds from a local account intended to be paid to a named
recipient in the Philippines is not subject to documentary stamp tax
imposed under the foregoing Section.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation it shall be disclosed that the
facts are different, this ruling shall be considered null and void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue 8
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999
an administrative claim for the refund of the amount of ₱19,572,992.10
allegedly representing erroneously paid DST to the BIR for the period
covering September to December 1997.
Subsequently, on January 31, 2000, HSBC filed another administrative
claim for the refund of the amount of ₱32,904,437.30 allegedly
representing erroneously paid DST to the BIR for the period covering
January to December 1998.
As its claims for refund were not acted upon by the BIR, HSBC
subsequently brought the matter to the CTA as CTA Case Nos. 5951
and 6009, respectively, in order to suspend the running of the two-year
prescriptive period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and
dated December 18, 2002 in CTA Case No. 5951 favored HSBC.
Respondent Commissioner of Internal Revenue was ordered to refund
or issue a tax credit certificate in favor of HSBC in the reduced amounts
of ₱30,360,570.75 in CTA Case No. 6009 and ₱16,436,395.83 in CTA
Case No. 5951, representing erroneously paid DST that have been
sufficiently substantiated with documentary evidence. The CTA ruled
that HSBC is entitled to a tax refund or tax credit because Sections 180
and 181 of the 1997 Tax Code do not apply to electronic message
instructions transmitted by HSBC’s non-resident investor-clients:
The instruction made through an electronic message by a nonresident
investor-client, which is to debit his local or foreign currency account in
the Philippines and pay a certain named recipient also residing in the
Philippines is not the transaction contemplated in Section 181 of the
Code. In this case, the withdrawal and payment shall be made in cash.
It is parallel to an automatic bank transfer of local funds from a savings
account to a checking account maintained by a depositor in one bank.
The act of debiting the account is not subject to the documentary stamp
tax under Section 181. Neither is the transaction subject to the
documentary stamp tax under Section 180 of the same Code. These
electronic message instructions cannot be considered negotiable
instruments as they lack the feature of negotiability, which, is the ability
to be transferred (Words and Phrases).
These instructions are considered as mere memoranda and entered as
such in the books of account of the local bank, and the actual debiting
of the payor’s local or foreign currency account in the Philippines is the
actual transaction that should be properly entered as such. 9
The respective dispositive portions of the Decisions dated May 2, 2002
in CTA Case No. 6009 and dated December 18, 2002 in CTA Case No.
5951 read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for
Review is PARTIALLY GRANTED. Respondent is hereby ORDERED to
REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner
the amount of ₱30,360,570.75 representing erroneous payment of
documentary stamp tax for the taxable year 1998. 10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is
hereby partially granted. Accordingly, respondent is hereby ORDERED
to REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE
in favor of the petitioner in the reduced amount of ₱16,436,395.83
representing erroneously paid documentary stamp tax for the months of
September 1997 to December 1997. 11
However, the Court of Appeals reversed both decisions of the CTA and
ruled that the electronic messages of HSBC’s investor-clients are
subject to DST. The Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-
clients as regards their passive investments in the Philippines mainly
involving shares of stocks in domestic corporations. These investor-
clients maintain Philippine peso and/or foreign currency accounts with
[HSBC]. Should they desire to purchase shares of stock and other
investments securities in the Philippines, the investor-clients send their
instructions and advises via electronic messages from abroad to
[HSBC] in the form of SWIFT MT 100, MT 202, or MT 521 directing the
latter to debit their local or foreign currency account and to pay the
purchase price upon receipt of the securities (CTA Decision, pp. 1-2;
Rollo, pp. 41-42). Pursuant to Section 181 of the NIRC, [HSBC] was
thus required to pay [DST] based on its acceptance of these electronic
messages – which, as [HSBC] readily admits in its petition filed before
the [CTA], were essentially orders to pay the purchases of securities
made by its client-investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the
[DST] from [HSBC] considering that the said tax was levied against the
acceptances and payments by [HSBC] of the subject electronic
messages/orders for payment. The issue of whether such electronic
messages may be equated as a written document and thus be subject
to tax is beside the point. As We have already stressed, Section 181 of
the law cited earlier imposes the [DST] not on the bill of exchange or
order for payment of money but on the acceptance or payment of the
said bill or order. The acceptance of a bill or order is the signification by
the drawee of its assent to the order of the drawer to pay a given sum
of money while payment implies not only the assent to the said order of
the drawer and a recognition of the drawer’s obligation to pay such
aforesaid sum, but also a compliance with such obligation (Philippine
National Bank vs. Court of Appeals, 25 SCRA 693 [1968]; Prudential
Bank vs. Intermediate Appellate Court, 216 SCRA 257 [1992]). What is
vital to the valid imposition of the [DST] under Section 181 is the
existence of the requirement of acceptance or payment by the drawee
(in this case, [HSBC]) of the order for payment of money from its
investor-clients and that the said order was drawn from a foreign
country and payable in the Philippines. These requisites are surely
present here.
It would serve the parties well to understand the nature of the tax being
imposed in the case at bar. In Philippine Home Assurance Corporation
vs. Court of Appeals (301 SCRA 443 [1999]), the Supreme Court ruled
that [DST is] levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of specific
legal relationships through the execution of specific instruments,
independently of the legal status of the transactions giving rise thereto.
In the same case, the High Court also declared – citing Du Pont vs.
United States (300 U.S. 150, 153 [1936])
The tax is not upon the business transacted but is an excise upon the
privilege, opportunity, or facility offered at exchanges for the transaction
of the business. It is an excise upon the facilities used in the transaction
of the business separate and apart from the business itself. x x x.
To reiterate, the subject [DST] was levied on the acceptance and
payment made by [HSBC] pursuant to the order made by its client-
investors as embodied in the cited electronic messages, through which
the herein parties’ privilege and opportunity to transact business
respectively as drawee and drawers was exercised, separate and apart
from the circumstances and conditions related to such acceptance and
subsequent payment of the sum of money authorized by the concerned
drawers. Stated another way, the [DST] was exacted on [HSBC’s]
exercise of its privilege under its drawee-drawer relationship with its
client-investor through the execution of a specific instrument which, in
the case at bar, is the acceptance of the order for payment of money.
The acceptance of a bill or order for payment may be done in writing by
the drawee in the bill or order itself, or in a separate instrument
(Prudential Bank vs. Intermediate Appellate Court, supra.)Here,
[HSBC]’s acceptance of the orders for the payment of money was
veritably ‘done in writing in a separate instrument’ each time it debited
the local or foreign currency accounts of its client-investors pursuant to
the latter’s instructions and advises sent by electronic messages to
[HSBC]. The [DST] therefore must be paid upon the execution of the
specified instruments or facilities covered by the tax – in this case, the
acceptance by [HSBC] of the order for payment of money sent by the
client-investors through electronic messages. x x x. 12
Hence, these petitions.
HSBC asserts that the Court of Appeals committed grave error when it
disregarded the factual and legal conclusions of the CTA. According to
HSBC, in the absence of abuse or improvident exercise of authority, the
CTA’s ruling should not have been disturbed as the CTA is a highly
specialized court which performs judicial functions, particularly for the
review of tax cases. HSBC further argues that the Commissioner of
Internal Revenue had already settled the issue on the taxability of
electronic messages involved in these cases in BIR Ruling No. 132-99
and reiterated in BIR Ruling No. DA-280-2004. 13
The Commissioner of Internal Revenue, on the other hand, claims that
Section 181 of the 1997 Tax Code imposes DST on the acceptance or
payment of a bill of exchange or order for the payment of money. The
DST under Section 18 of the 1997 Tax Code is levied on HSBC’s
exercise of a privilege which is specifically taxed by law. BIR Ruling No.
132-99 is inconsistent with prevailing law and long standing
administrative practice, respondent is not barred from questioning his
own revenue ruling. Tax refunds like tax exemptions are strictly
construed against the taxpayer. 14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of the
Tax Code is levied on the acceptance or payment of "a bill of exchange
purporting to be drawn in a foreign country but payable in the
Philippines" and that "a bill of exchange is an unconditional order in
writing addressed by one person to another, signed by the person
giving it, requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum certain in
money to order or to bearer." A bill of exchange is one of two general
forms of negotiable instruments under the Negotiable Instruments Law. 15
The Court further agrees with the CTA that the electronic messages of
HSBC’s investor-clients containing instructions to debit their respective
local or foreign currency accounts in the Philippines and pay a certain
named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the Tax Code as such instructions
are "parallel to an automatic bank transfer of local funds from a savings
account to a checking account maintained by a depositor in one bank."
The Court favorably adopts the finding of the CTA that the electronic
messages "cannot be considered negotiable instruments as they lack
the feature of negotiability, which, is the ability to be transferred" and
that the said electronic messages are "mere memoranda" of the
transaction consisting of the "actual debiting of the [investor-client-
payor’s] local or foreign currency account in the Philippines" and
"entered as such in the books of account of the local bank," HSBC. 16
More fundamentally, the instructions given through electronic messages
that are subjected to DST in these cases are not negotiable instruments
as they do not comply with the requisites of negotiability under Section
1 of the Negotiable Instruments Law, which provides:
Sec. 1. Form of negotiable instruments.– An instrument to be negotiable
must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
The electronic messages are not signed by the investor-clients as
supposed drawers of a bill of exchange; they do not contain an
unconditional order to pay a sum certain in money as the payment is
supposed to come from a specific fund or account of the investor-
clients; and, they are not payable to order or bearer but to a specifically
designated third party. Thus, the electronic messages are not bills of
exchange. As there was no bill of exchange or order for the payment
drawn abroad and made payable here in the Philippines, there could
have been no acceptance or payment that will trigger the imposition of
the DST under Section 181 of the Tax Code.
Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax
refund for taxable year 1998 subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and
Others. – Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each Two
hundred pesos (₱200), or fractional part thereof, of the face value of
any such bill of exchange, or order, or the Philippine equivalent of such
value, if expressed in foreign currency. (Emphasis supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s
claim for tax refund for DST paid during the period September to
December 1997 and subject of G.R. No. 166018, is worded exactly the
same as its counterpart provision in the 1997 Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of
1904, which provided: SECTION 117. The acceptor or acceptors of
17
any bill of exchange or order for the payment of any sum of money
drawn or purporting to be drawn in any foreign country but payable in
the Philippine Islands, shall, before paying or accepting the same, place
thereupon a stamp in payment of the tax upon such document in the
same manner as is required in this Act for the stamping of inland bills of
exchange or promissory notes, and no bill of exchange shall be paid
nor negotiated until such stamp shall have been affixed
thereto. (Emphasis supplied.)
18
It then became Section 30(h) of the 1914 Tax Code : 19
SEC. 30. Stamp tax upon documents and papers. – Upon documents,
instruments, and papers, and upon acceptances, assignments, sales,
and transfers of the obligation, right, or property incident thereto
documentary taxes for and in respect of the transaction so had or
accomplished shall be paid as hereinafter prescribed, by the persons
making, signing, issuing, accepting, or transferring the same, and at the
time such act is done or transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of
exchange or order for the payment of money purporting to be drawn in
a foreign country but payable in the Philippine Islands, on each two
hundred pesos, or fractional part thereof, of the face value of any such
bill of exchange or order, or the Philippine equivalent of such value, if
expressed in foreign currency, two centavos[.] (Emphasis supplied.)
It was implemented by Section 46 in relation to Section 39 of Revenue
Regulations No. 26, as amended:
20
SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all
other kinds of orders for the payment of money, payable at sight or on
demand, or after a specific period after sight or from a stated date."
SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for
the payment of money drawn in a foreign country but payable in this
country whether at sight or on demand or after a specified period after
sight or from a stated date, is presented for acceptance or payment,
there must be affixed upon acceptance or payment of documentary
stamp equal to P0.02 for each ₱200 or fractional part thereof.
(Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of 1939, which
21
provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and
Others. – Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a
documentary stamp tax of four centavos on each two hundred pesos, or
fractional part thereof, of the face value of any such bill of exchange or
order, or the Philippine equivalent of such value, if expressed in foreign
currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code, as amended by
22
Presidential Decree Nos. 1457 and 1959,which, as stated earlier, was
worded exactly as Section 181 of the current Tax Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and others.
– Upon any acceptance or payment of any bill of exchange or order for
the payment of money purporting to be drawn in a foreign country but
payable in the Philippines, there shall be collected a documentary
stamp tax of thirty centavos on each two hundred pesos, or fractional
part thereof, of the face value of any such bill of exchange, or order, or
the Philippine equivalent of such value, if expressed in foreign currency.
(Emphasis supplied.)
The pertinent provision of the present Tax Code has therefore remained
substantially the same for the past one hundred years. The identical
1âwphi1
text and common history of Section 230 of the 1977 Tax Code, as
amended, and the 1997 Tax Code, as amended, show that the law
imposes DST on either (a) the acceptance or (b) the payment of a
foreign bill of exchange or order for the payment of money that was
drawn abroad but payable in the Philippines.
DST is an excise tax on the exercise of a right or privilege to transfer
obligations, rights or properties incident thereto. Under Section 173 of
23
the 1997 Tax Code, the persons primarily liable for the payment of the
DST are those (1) making, (2) signing, (3) issuing, (4) accepting, or (5)
transferring the taxable documents, instruments or papers. 24
In general, DST is levied on the exercise by persons of certain
privileges conferred by law for the creation, revision, or termination of
specific legal relationships through the execution of specific
instruments. Examples of such privileges, the exercise of which, as
effected through the issuance of particular documents, are subject to
the payment of DST are leases of lands, mortgages, pledges and trusts,
and conveyances of real property. 25
As stated above, Section 230 of the 1977 Tax Code, as amended, now
Section 181 of the 1997 Tax Code, levies DST on either (a) the
acceptance or (b) the payment of a foreign bill of exchange or order for
the payment of money that was drawn abroad but payable in the
Philippines. In other words, it levies DST as an excise tax on the
privilege of the drawee to accept or pay a bill of exchange or order for
the payment of money, which has been drawn abroad but payable in
the Philippines, and on the corresponding privilege of the drawer to
have acceptance of or payment for the bill of exchange or order for the
payment of money which it has drawn abroad but payable in the
Philippines.
Acceptance applies only to bills of exchange. Acceptance of a bill of
26
exchange has a very definite meaning in law. In particular, Section 132
27
of the Negotiable Instruments Law provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance of
a bill [of exchange ] is the signification by the drawee of his assent to
28
the order of the drawer. The acceptance must be in writing and signed
by the drawee. It must not express that the drawee will perform his
promise by any other means than the payment of money.
Under the law, therefore, what is accepted is a bill of exchange, and the
acceptance of a bill of exchange is both the manifestation of the
drawee’s consent to the drawer’s order to pay money and the
expression of the drawee’s promise to pay. It is "the act by which the
drawee manifests his consent to comply with the request contained in
the bill of exchange directed to him and it contemplates an engagement
or promise to pay." Once the drawee accepts, he becomes an
29
acceptor. As acceptor, he engages to pay the bill of exchange
30
according to the tenor of his acceptance. 31
Acceptance is made upon presentment of the bill of exchange, or within
24 hours after such presentment. Presentment for acceptance is the
32
production or exhibition of the bill of exchange to the drawee for the
purpose of obtaining his acceptance. 33
Presentment for acceptance is necessary only in the instances where
the law requires it. In the instances where presentment for acceptance
34
is not necessary, the holder of the bill of exchange can proceed directly
to presentment for payment.
Presentment for payment is the presentation of the instrument to the
person primarily liable for the purpose of demanding and obtaining
payment thereof.35
Thus, whether it be presentment for acceptance or presentment for
payment, the negotiable instrument has to be produced and shown to
the drawee for acceptance or to the acceptor for payment.
Revenue Regulations No. 26 recognizes that the acceptance or
payment (of bills of exchange or orders for the payment of money that
have been drawn abroad but payable in the Philippines) that is
subjected to DST under Section 181 of the 1997 Tax Code is done after
presentment for acceptance or presentment for payment, respectively.
In other words, the acceptance or payment of the subject bill of
exchange or order for the payment of money is done when there is
presentment either for acceptance or for payment of the bill of
exchange or order for the payment of money.
Applying the above concepts to the matter subjected to DST in these
cases, the electronic messages received by HSBC from its investor-
clients abroad instructing the former to debit the latter's local and
foreign currency accounts and to pay the purchase price of shares of
stock or investment in securities do not properly qualify as either
presentment for acceptance or presentment for payment. There being
neither presentment for acceptance nor presentment for payment, then
there was no acceptance or payment that could have been subjected to
DST to speak of.
Indeed, there had been no acceptance of a bill of exchange or order for
the payment of money on the part of HSBC. To reiterate, there was no
bill of exchange or order for the payment drawn abroad and made
payable here in the Philippines. Thus, there was no acceptance as the
electronic messages did not constitute the written and signed
manifestation of HSBC to a drawer's order to pay money. As HSBC
could not have been an acceptor, then it could not have made any
payment of a bill of exchange or order for the payment of money drawn
abroad but payable here in the Philippines. In other words, HSBC could
not have been held liable for DST under Section 230 of the 1977 Tax
Code, as amended, and Section 181 of the 1997 Tax Code as it is not
"a person making, signing, issuing, accepting, or, transferring" the
taxable instruments under the said provision. Thus, HSBC erroneously
paid DST on the said electronic messages for which it is entitled to a tax
refund.
WHEREFORE, the petitions are hereby GRANTED and the Decisions
dated May 2, 2002 in CTA Case No. 6009 and dated December 18,
2002 in CT A Case No. 5951 of the Court of Tax Appeals are
REINSTATED.
SO ORDERED.
From the appealed decision, the following appears: "The parties in this
case agreed to submit the matter for resolution on the basis of their
pleadings and annexes and their respective memoranda submitted.
Petitioner George Pay is a creditor of the Late Justo Palanca who died
in Manila on July 3, 1963. The claim of the petitioner is based on a
promissory note dated January 30, 1952, whereby the late Justo
Palanca and Rosa Gonzales Vda. de Carlos Palanca promised to pay
George Pay the amount of P26,900.00, with interest thereon at the rate
of 12% per annum. George Pay is now before this Court, asking that
Segundina Chua vda. de Palanca, surviving spouse of the late Justo
Palanca, he appointed as administratrix of a certain piece of property
which is a residential dwelling located at 2656 Taft Avenue, Manila,
covered by Tax Declaration No. 3114 in the name of Justo Palanca,
assessed at P41,800.00. The idea is that once said property is brought
under administration, George Pay, as creditor, can file his claim against
the administratrix." It then stated that the petition could not prosper as
1

there was a refusal on the part of Segundina Chua Vda. de Palanca to

G.R. No. L-29900 June 28, 1974 be appointed as administratrix; that the property sought to be
administered no longer belonged to the debtor, the late Justo Palanca;
IN THE MATTER OF THE INTESTATE ESTATE OF JUSTO and that the rights of petitioner-creditor had already prescribed. The
PALANCA, Deceased, GEORGE PAY, petitioner-appellant, promissory note, dated January 30, 1962, is worded thus: " `For value
vs. received from time to time since 1947, we [jointly and severally promise
SEGUNDINA CHUA VDA. DE PALANCA, oppositor-appellee. to] pay to Mr. [George Pay] at his office at the China Banking
Corporation the sum of [Twenty Six Thousand Nine Hundred Pesos]
Florentino B. del Rosario for petitioner-appellant. (P26,900.00), with interest thereon at the rate of 12% per annum upon
receipt by either of the undersigned of cash payment from the Estate of
Manuel V. San Jose for oppositor-appellee. the late Don Carlos Palanca or upon demand'. . . . As stated, this
promissory note is signed by Rosa Gonzales Vda. de Carlos Palanca
and Justo Palanca." Then came this paragraph: "The Court has
2

FERNANDO, J.:p
There is no difficulty attending the disposition of this appeal by petitioner on questions of law. While several points were
raised, the decisive issue is whether a creditor is barred by prescription in his attempt to collect on a promissory note
executed more than fifteen years earlier with the debtor sued promising to pay either upon receipt by him of his share from a
certain estate or upon demand, the basis for the action being the latter alternative. The lower court held that the ten-year
period of limitation of actions did apply, the note being immediately due and demandable, the creditor admitting expressly
inquired whether any cash payment has been received by either of the
signers of this promissory note from the Estate of the late Carlos
Palanca. Petitioner informed that he does not insist on this provision but
that petitioner is only claiming on his right under the promissory
note ." After which, came the ruling that the wording of the promissory
3

that he was relying on the wording "upon demand." On the above facts as found, and with the law being as it is, it cannot be
said that its decision is infected with error. We affirm.
note being "upon demand," the obligation was immediately due. Since it
was dated January 30, 1952, it was clear that more "than ten (10) years
has already transpired from that time until to date. The action, therefore,
of the creditor has definitely prescribed." The result, as above noted,
4
was the dismissal of the petition.
In an exhaustive brief prepared by Attorney Florentino B. del Rosario,
The obligation being due and demandable, it would appear that the
filing of the suit after fifteen years was much too late. For again,
according to the Civil Code, which is based on Section 43 of Act No.
190, the prescriptive period for a written contract is that of ten
years. This is another instance where this Court has consistently
7

petitioner did assail the correctness of the rulings of the lower court as adhered to the express language of the applicable norm. There is no
8

to the effect of the refusal of the surviving spouse of the late Justo
Palanca to be appointed as administratrix, as to the property sought to
be administered no longer belonging to the debtor, the late Justo
Palanca, and as to the rights of petitioner-creditor having already
prescribed. As noted at the outset, only the question of prescription
need detain us in the disposition of this appeal. Likewise, as intimated,
the decision must be affirmed, considering the clear tenor of the
promissory note.
necessity therefore of passing upon the other legal questions as to
whether or not it did suffice for the petition to fail just because the
surviving spouse refuses to be made administratrix, or just because the
estate was left with no other property. The decision of the lower court
cannot be overturned.
WHEREFORE, the lower court decision of July 24, 1968 is affirmed.
Costs against George Pay.

From the manner in which the promissory note was executed, it would Zaldivar (Chairman), Barredo, Antonio, Fernandez and Aquino, JJ.,
appear that petitioner was hopeful that the satisfaction of his credit concur.
could he realized either through the debtor sued receiving cash
payment from the estate of the late Carlos Palanca presumptively as
one of the heirs, or, as expressed therein, "upon demand." There is
nothing in the record that would indicate whether or not the first
alternative was fulfilled. What is undeniable is that on August 26, 1967,
more than fifteen years after the execution of the promissory note on
January 30, 1952, this petition was filed. The defense interposed was
prescription. Its merit is rather obvious. Article 1179 of the Civil Code
provides: "Every obligation whose performance does not depend upon
a future or uncertain event, or upon a past event unknown to the
parties, is demandable at once." This used to be Article 1113 of the
Spanish Civil Code of 1889. As far back as Floriano v. Delgado, a 1908
5

decision, it has been applied according to its express language. The

well-known Spanish commentator, Manresa, on this point, states:
"Dejando con acierto, el caracter mas teorico y grafico del acto, o sea la
perfeccion de este, se fija, para determinar el concepto de la obligacion
pura, en el distinctive de esta, y que es consecuencia de aquel:
la exigibilidad immediata."6