G.R. No. 121413 January 29, 2001 G.R. Nos.

G.R. Nos. 121413 and 121479 are twin petitions for review of the
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly
INSULAR BANK OF ASIA AND AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and
CITIBANK, N.A., respondents.
March 27, 1995 Decision1 of the Court of Appeals in CA-G.R. CV No.
25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular
Bank of Asia and America (now Philipppine Commercial International
Bank), and the August 8, 1995 Resolution, 2 ordering the collecting
bank, Philippine Commercial International Bank, to pay the amount
of Citibank Check No. SN-04867.

In G.R. No. 128604, petitioner Ford Philippines assails the October

15, 1996 Decision3 of the Court of Appeals and its March 5, 1997
G.R. No. 121479 January 29, 2001 Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs.
Citibank, N.A. and Philippine Commercial International Bank,"
affirming in toto the judgment of the trial court holding the
FORD PHILIPPINES, INC., petitioner-plaintiff,
defendant drawee bank, Citibank, N.A., solely liable to pay the
vs.
amount of P12,163,298.10 as damages for the misapplied proceeds
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE
of the plaintiff's Citibanl Check Numbers SN-10597 and 16508.
COMMERCIAL INTERNATIONAL BANK, respondents.

I. G.R. Nos. 121413 and 121479

The stipulated facts submitted by the parties as accepted by the

G.R. No. 128604 January 29, 2001
Court of Appeals are as follows:
FORD PHILIPPINES, INC., petitioner,
"On October 19, 1977, the plaintiff Ford drew and issued its
vs.
Citibank Check No. SN-04867 in the amount of
CITIBANK, N.A., PHILIPPINE COMMERCIAL
P4,746,114.41, in favor of the Commissioner of Internal
INTERNATIONAL BANK and COURT OF APPEALS, respondents.
Revenue as payment of plaintiff;s percentage or
manufacturer's sales taxes for the third quarter of 1977.
QUISUMBING, J.:
The aforesaid check was deposited with the degendant IBAA
These consolidated petitions involve several fraudulently negotiated (now PCIBank) and was subsequently cleared at the Central
checks. Bank. Upon presentment with the defendant Citibank, the
proceeds of the check was paid to IBAA as collecting or
The original actions a quo were instituted by Ford Philippines to depository bank.
recover from the drawee bank, CITIBANK, N.A. (Citibank) and
collecting bank, Philippine Commercial International Bank (PCIBank) The proceeds of the same Citibank check of the plaintiff was
[formerly Insular Bank of Asia and America], the value of several never paid to or received by the payee thereof, the
checks payable to the Commissioner of Internal Revenue, which Commissioner of Internal Revenue.
were embezzled allegedly by an organized syndicate.1âwphi1.nêt
As a consequence, upon demand of the Bureau and/or
Commissioner of Internal Revenue, the plaintiff was
compelled to make a second payment to the Bureau of
Internal Revenue of its percentage/manufacturers' sales
taxes for the third quarter of 1977 and that said second
payment of plaintiff in the amount of P4,746,114.41 was
duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the
time of the transactions in question, plaintiff had been
maintaining a checking account with defendant Citibank;
that Citibank Check No. SN-04867 which was drawn and
issued by the plaintiff in favor of the Commissioner of
Internal Revenue was a crossed check in that, on its face
were two parallel lines and written in between said lines was
the phrase "Payee's Account Only"; and that defendant
Citibank paid the full face value of the check in the amount
of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of
plaintiff's percentage tax for the last quarter of 1977, the
Bureau of Internal Revenue issued Revenue Tax Receipt No.
18747002, dated October 20, 1977, designating therein in
Muntinlupa, Metro Manila, as the authorized agent bank of
Metrobanl, Alabang branch to receive the tax payment of the
plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-
04867, together with the Revenue Tax Receipt No.
18747002, was deposited with defendant IBAA, through its
Ermita Branch. The latter accepted the check and sent it to
the Central Clearing House for clearing on the samd day,
with the indorsement at the back "all prior indorsements
and/or lack of indorsements guaranteed." Thereafter,
defendant IBAA presented the check for payment to
defendant Citibank on same date, December 19, 1977, and
the latter paid the face value of the check in the amount of
P4,746,114.41. Consequently, the amount of P4,746,114.41
was debited in plaintiff's account with the defendant Citibank
and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check
No. SN-04867 in the amount of P4,746,114.41 was not paid
to the Commissioner of Internal Revenue. Hence, in
separate letters dated October 26, 1979, addressed to the
defendants, the plaintiff notified the latter that in case it will
be re-assessed by the BIR for the payment of the taxes
covered by the said checks, then plaintiff shall hold the
defendants liable for reimbursement of the face value of the
same. Both defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting
Commissioner of Internal Revenue addressed to the plaintiff
- supposed to be Exhibit "D", the latter was officially
informed, among others, that its check in the amount of P4,
746,114.41 was not paid to the government or its authorized
agent and instead encashed by unauthorized persons,
hence, plaintiff has to pay the said amount within fifteen
days from receipt of the letter. Upon advice of the plaintiff's
lawyers, plaintiff on March 11, 1982, paid to the Bureau of
Internal Revenue, the amount of P4,746,114.41,
representing payment of plaintiff's percentage tax for the
third quarter of 1977.
As a consequence of defendant's refusal to reimburse
plaintiff of the payment it had made for the second time to
the BIR of its percentage taxes, plaintiff filed on January 20,
1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with
the Philippine Commercial International Bank (PCI Bank)
with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of
plaintiff's Citibank Check No. SN-04867 in the amount of
 P4,746,114.41 "was in due course"; it merely relied on the
clearing stamp of the depository/collecting bank, the
defendant IBAA that "all prior indorsements and/or lack of
indorsements guaranteed"; and the proximate cause of
plaintiff's injury is the gross negligence of defendant IBAA in
indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the
proceeds of plaintiff's Citibank Check No. SN-048867 was
paid to defendant IBAA as collecting bank, plaintiff was
maintaining a checking account with defendant Citibank." 5
Although it was not among the stipulated facts, an investigation by
the National Bureau of Investigation (NBI) revealed that Citibank
Check No. SN-04867 was recalled by Godofredo Rivera, the General
Ledger Accountant of Ford. He purportedly needed to hold back the
check because there was an error in the computation of the tax due
to the Bureau of Internal Revenue (BIR). With Rivera's instruction,
PCIBank replaced the check with two of its own Manager's Checks
(MCs). Alleged members of a syndicate later deposited the two MCs
with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial
court impleading Pacific Banking Corporation (PBC) and Godofredo
Rivera, as third party defendants. But the court dismissed the
complaint against PBC for lack of cause of action. The course
likewise dismissed the third-party complaint against Godofredo
Rivera because he could not be served with summons as the NBI
declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as
follows:
"1. Ordering the defendants Citibank and IBAA (now
PCI Bank), jointly and severally, to pay the plaintiff
the amount of P4,746,114.41 representing the face
value of plaintiff's Citibank Check No. SN-04867,
with interest thereon at the legal rate starting
January 20, 1983, the date when the original
complaint was filed until the amount is fully paid,
plus costs;
"2. On defendant Citibank's cross-claim: ordering the
cross-defendant IBAA (now PCI Bank) to reimburse
defendant Citibank for whatever amount the latter
has paid or may pay to the plaintiff in accordance
with next preceding paragraph;
"3. The counterclaims asserted by the defendants
against the plaintiff, as well as that asserted by the
cross-defendant against the cross-claimant are
dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants, Citibank and
PCIBank, elevated their respective petitions for review on certiorari
to the Courts of Appeals. On March 27, 1995, the appellate court
issued its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS
the appealed decision with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287
insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to
pay the plaintiff the amount of P4,746,114.41
 representing the face value of plaintiff's Citibank
Check No. SN-04867, with interest thereon at the
legal rate starting January 20, 1983, the date when
the original complaint was filed until the amount is
fully paid;
3. Dismissing the counterclaims asserted by the
defendants against the plaintiff as well as that
asserted by the cross-defendant against the cross-
claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the
Court of Appeals, while Ford filed a "Motion for Partial
Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for
review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and
resolution of the Twelfth Division of the Court of Appeals contending
that it merely acted on the instruction of Ford and such casue of
action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the
petitioner acted on the check drawn by respondent Ford on
the said respondent's instructions, it nevertheless found the
petitioner liable to the said respondent for the full amount of
the said check.
II. Did the respondent court err when it did not find
prescription in favor of the petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No.
121479, questioning the same decision and resolution of the Court of
Appeals, and praying for the reinstatement in toto of the decision of
the trial court which found both PCIBank and Citibank jointly and
severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following
propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering
that:
1. As drawee bank, respondent Citibank owes to
petitioner Ford, as the drawer of the subject check
and a depositor of respondent Citibank, an absolute
and contractual duty to pay the proceeds of the
subject check only to the payee thereof, the
Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty as
banker with respect to the subject check, which was
crossed and payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first
time on appeal; thus the same should not be
considered by the Honorable Court.
4. As correctly held by the trial court, there is no
evidence of gross negligence on the part of
petitioner Ford.9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to
deliver the proceeds of the subject check to a
person other than the payee named therein, the
Commissioner of the Bureau of Internal Revenue;
 thus, PCIBank's only obligation is to deliver the
proceeds to the Commissioner of the Bureau of
Internal Revenue.10
2. PCIBank which affixed its indorsement on the
subject check ("All prior indorsement and/or lack of
indorsement guaranteed"), is liable as collecting
bank.11
3. PCIBank is barred from raising issues of fact in
the instant proceedings.12
4. Petitioner Ford's cause of action had not
prescribed.13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks
intended, this time, to settle Ford's percentage taxes appertaining to
the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the
amount of P5,851,706.37 representing the percentage tax due for
the second quarter of 1978 payable to the Commissioner of Internal
Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for
the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508
in the amount of P6,311,591.73, representing the payment of
percentage tax for the first quarter of 1979 and payable to the
Commissioner of Internal Revenue. Again a BIR Revenue Tax
Receipt No. A-1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal lines
on its upper corner between, which were written the words "payable
to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated
February 28, 1980, the BIR, Region 4-B, demanded for the said tax
payments the corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax
Receipts were considered "fake and spurious". This anomaly was
confirmed by the NBI upon the initiative of the BIR. The findings
forced Ford to pay the BIR a new, while an action was filed against
Citibank and PCIBank for the recovery of the amount of Citibank
Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case,
made its findings on the modus operandi of the syndicate, as
follows:
"A certain Mr. Godofredo Rivera was employed by the
plaintiff FORD as its General Ledger Accountant. As such, he
prepared the plaintiff's check marked Ex. 'A' [Citibank Check
No. Sn-10597] for payment to the BIR. Instead, however, fo
delivering the same of the payee, he passed on the check to
a co-conspirator named Remberto Castro who was a pro-
manager of the San Andres Branch of PCIB.* In connivance
with one Winston Dulay, Castro himself subsequently
opened a Checking Account in the name of a fictitious
person denominated as 'Reynaldo reyes' in the Meralco
Branch of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account,
Castro deposited a worthless Bank of America Check in
exactly the same amount as the first FORD check (Exh. "A",
P5,851,706.37) while this worthless check was coursed
through PCIB's main office enroute to the Central Bank for
clearing, replaced this worthless check with FORD's Exhibit
'A' and accordingly tampered the accompanying documents
to cover the replacement. As a result, Exhibit 'A' was cleared
by defendant CITIBANK, and the fictitious deposit account of
'Reynaldo Reyes' was credited at the PCIB Meralco Branch
with the total amount of the FORD check Exhibit 'A'. The
same method was again utilized by the syndicate in profiting
from Exh. 'B' [Citibank Check No. SN-16508] which was
subsequently pilfered by Alexis Marindo, Rivera's Assistant at
FORD.
From this 'Reynaldo Reyes' account, Castro drew various
checks distributing the sahres of the other participating
conspirators namely (1) CRISANTO BERNABE, the
mastermind who formulated the method for the
embezzlement; (2) RODOLFO R. DE LEON a customs broker
who negotiated the initial contact between Bernabe, FORD's
Godofredo Rivera and PCIB's Remberto Castro; (3) JUAN
VASTILLO who assisted de Leon in the initial arrangements;
(4) GODOFREDO RIVERA, FORD's accountant who passed
on the first check (Exhibit "A") to Castro; (5) REMERTO
CASTRO, PCIB's pro-manager at San Andres who performed
the switching of checks in the clearing process and opened
the fictitious Reynaldo Reyes account at the PCIB Meralco
Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at
its Meralco Branch, who assisted Castro in switching the
checks in the clearing process and facilitated the opening of
the fictitious Reynaldo Reyes' bank account; (7) ALEXIS
MARINDO, Rivera's Assistant at FORD, who gave the second
check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR
Collection Agent who provided the fake and spurious
revenue tax receipts to make it appear that the BIR had
received FORD's tax payments.
Several other persons and entities were utilized by the
syndicate as conduits in the disbursements of the proceeds
of the two checks, but like the aforementioned participants
in the conspiracy, have not been impleaded in the present
case. The manner by which the said funds were distributed
among them are traceable from the record of checks drawn
against the original "Reynaldo Reyes" account and
indubitably identify the parties who illegally benefited
therefrom and readily indicate in what amounts they did
so."14
On December 9, 1988, Regional Trial Court of Makati, Branch 57,
held drawee-bank, Citibank, liable for the value of the two checks
while adsolving PCIBank from any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing
defendant CITIBANK to reimburse plaintiff FORD the total
amount of P12,163,298.10 prayed for in its complaint, with
6% interest thereon from date of first written demand until
full payment, plus P300,000.00 attorney's fees and expenses
litigation, and to pay the defendant, PCIB (on its
counterclaim to crossclaim) the sum of P300,000.00 as
attorney's fees and costs of litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which
affirmed, in toto, the decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the
portion of the Court of Appeals decision and its resolution dated
March 5, 1997, with respect to the dismissal of the complaint against
PCIBank and holding Citibank solely responsible for the proceeds of
Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and
P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the
complaint against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to
exercise the diligence required to be exercised by it as a
banking insitution.
 II. Defendant PCIBank clearly failed to observe the diligence
required in the selection and supervision of its officers and
employees.
III. Defendant PCIBank was, due to its negligence, clearly
liable for the loss or damage resulting to the plaintiff Ford as
a consequence of the substitution of the check consistent
with Section 5 of Central Bank Circular No. 580 series of
1977.
IV. Assuming arguedo that defedant PCIBank did not accept,
endorse or negotiate in due course the subject checks, it is
liable, under Article 2154 of the Civil Code, to return the
money which it admits having received, and which was
credited to it its Central bank account.16
The main issue presented for our consideration by these petitions
could be simplified as follows: Has petitioner Ford the right to
recover from the collecting bank (PCIBank) and the drawee bank
(Citibank) the value of the checks intended as payment to the
Commissioner of Internal Revenue? Or has Ford's cause of action
already prescribed?
Note that in these cases, the checks were drawn against the drawee
bank, but the title of the person negotiating the same was allegedly
defective because the instrument was obtained by fraud and
unlawful means, and the proceeds of the checks were not remitted
to the payee. It was established that instead of paying the checks to
the CIR, for the settlement of the approprite quarterly percentage
taxes of Ford, the checks were diverted and encashed for the
eventual distribution among the mmbers of the syndicate. As to the
unlawful negotiation of the check the applicable law is Section 55 of
the Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who negotiates
an instrument is defective within the meaning of this Act
when he obtained the instrument, or any signature thereto,
by fraud, duress, or fore and fear, or other unlawful means,
or for an illegal consideration, or when he negotiates it in
breach of faith or under such circumstances as amount to a
fraud."
Pursuant to this provision, it is vital to show that the negotiation is
made by the perpetator in breach of faith amounting to fraud. The
person negotiating the checks must have gone beyond the authority
given by his principal. If the principal could prove that there was no
negligence in the performance of his duties, he may set up the
personal defense to escape liability and recover from other parties
who. Though their own negligence, alowed the commission of the
crime.
In this case, we note that the direct perpetrators of the offense,
namely the embezzlers belonging to a syndicate, are now fugitives
from justice. They have, even if temporarily, escaped liability for the
embezzlement of millions of pesos. We are thus left only with the
task of determining who of the present parties before us must bear
the burden of loss of these millions. It all boils down to thequestion
of liability based on the degree of negligence among the parties
concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty
of the "imputed contributory negligence" that would defeat its claim
for reimbursement, bearing ing mind that its employees, Godofredo
Rivera and Alexis Marindo, were among the members of the
syndicate.
Citibank points out that Ford allowed its very own employee,
Godofredo Rivera, to negotiate the checks to his co-conspirators,
instead of delivering them to the designated authorized collecting
bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the
fact that Ford was remiss in the supervision and control of its own
employees, inasmuch as it only discovered the syndicate's activities
through the information given by the payee of the checks after an
unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized
Godofredo Rivera to divert the proceeds of Citibank Check No. SN-
04867, instead of using it to pay the BIR. As to the subsequent run-
around of unds of Citibank Check Nos. SN-10597 and 16508,
PCIBank claims that the proximate cause of the damge to Ford lies
in its own officers and employees who carried out the fradulent
schemes and the transactions. These circumstances were not
checked by other officers of the company including its comptroller or
internal auditor. PCIBank contends that the inaction of Ford despite
the enormity of the amount involved was a sheer negligence and
stated that, as between two innocent persons, one of whom must
suffer the consequences of a breach of trust, the one who made it
possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its
duties. It avers that there was no evidence presented before the trial
court showing lack of diligence on the part of Ford. And, citing the
case of Gempesaw vs. Court of Appeals,17 Ford argues that even if
there was a finding therein that the drawer was negligent, the
drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not authorized
to make any representation in its behalf, specifically, to divert the
proceeds of the checks. It adds that Citibank raised the issue of
imputed negligence against Ford for the first time on appeal. Thus, it
should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of
employer in a master-servant relationship is instructive. Since a
master may be held for his servant's wrongful act, the law imputes
to the master the act of the servant, and if that act is negligent or
wrongful and proximately results in injury to a third person, the
negligence or wrongful conduct is the negligence or wrongful
conduct of the master, for which he is liable. 18 The general rule is
that if the master is injured by the negligence of a third person and
by the concuring contributory negligence of his own servant or
agent, the latter's negligence is imputed to his superior and will
defeat the superior's action against the third person, asuming, of
course that the contributory negligence was the proximate
cause of the injury of which complaint is made.19
Accordingly, we need to determine whether or not the action of
Godofredo Rivera, Ford's General Ledger Accountant, and/or Alexis
Marindo, his assistant, was the proximate cause of the loss or
damage. AS defined, proximate cause is that which, in the natural
and continuous sequence, unbroken by any efficient, intervening
cause produces the injury and without the result would not have
occurred.20
It appears that although the employees of Ford initiated the
transactions attributable to an organized syndicate, in our view, their
actions were not the proximate cause of encashing the checks
payable to the CIR. The degree of Ford's negligence, if any, could
not be characterized as the proximate cause of the injury to the
parties.
The Board of Directors of Ford, we note, did not confirm the request
of Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera's
instruction to replace the said check with PCIBank's Manager's Check
was not in theordinary course of business which could have
prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508,
it was established that these checks were made payable to the CIR.
Both were crossed checks. These checks were apparently turned
around by Ford's emploees, who were acting on their own personal
capacity.
Given these circumstances, the mere fact that the forgery was
committed by a drawer-payor's confidential employee or agent, who
by virtue of his position had unusual facilities for perpertrating the
fraud and imposing the forged paper upon the bank, does notentitle
the bank toshift the loss to the drawer-payor, in the absence of
some circumstance raising estoppel against the drawer.21 This rule
likewise applies to the checks fraudulently negotiated or diverted by
the confidential employees who hold them in their possession.
With respect to the negligence of PCIBank in the payment of the
three checks involved, separately, the trial courts found variations
between the negotiation of Citibank Check No. SN-04867 and the
misapplication of total proceeds of Checks SN-10597 and 16508.
Therefore, we have to scrutinize, separately, PCIBank's share of
negligence when the syndicate achieved its ultimate agenda of
stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its
Ermita Branch. It was coursed through the ordinary banking
transaction, sent to Central Clearing with the indorsement at the
back "all prior indorsements and/or lack of indorsements
guaranteed," and was presented to Citibank for payment. Thereafter
PCIBank, instead of remitting the proceeds to the CIR, prepared two
of its Manager's checks and enabled the syndicate to encash the
same.
On record, PCIBank failed to verify the authority of Mr. Rivera to
negotiate the checks. The neglect of PCIBank employees to verify
whether his letter requesting for the replacement of the Citibank
Check No. SN-04867 was duly authorized, showed lack of care and
prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect
the payment of taxpayers in behalf of the BIR. As an agent of BIR,
PCIBank is duty bound to consult its principal regarding the
unwarranted instructions given by the payor or its agent. As aptly
stated by the trial court, to wit:
"xxx. Since the questioned crossed check was deposited with
IBAA [now PCIBank], which claimed to be a
depository/collecting bank of BIR, it has the responsibility to
make sure that the check in question is deposited in Payee's
account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant
IBAA should receive instructions only from its principal BIR
and not from any other person especially so when that
person is not known to the defendant. It is very imprudent
on the part of the defendant IBAA to just rely on the alleged
telephone call of the one Godofredo Rivera and in his
signature considering that the plaintiff is not a client of the
defendant IBAA."
It is a well-settled rule that the relationship between the payee or
holder of commercial paper and the bank to which it is sent for
collection is, in the absence of an argreement to the contrary, that of
principal and agent.22 A bank which receives such paper for
collection is the agent of the payee or holder. 23
Even considering arguendo, that the diversion of the amount of a
check payable to the collecting bank in behalf of the designated
payee may be allowed, still such diversion must be properly
authorized by the payor. Otherwise stated, the diversion can be
justified only by proof of authority from the drawer, or that the
drawer has clothed his agent with apparent authority to receive the
proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at
the back of the questioned checks stating that ALL PRIOR
INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED
should render PCIBank liable because it made it pass through the
clearing house and therefore Citibank had no other option but to pay
it. Thus, Citibank had no other option but to pay it. Thus, Citibank
assets that the proximate cause of Ford's injury is the gross
negligence of PCIBank. Since the questione dcrossed check was
deposited with PCIBank, which claimed to be a depository/collecting
bank of the BIR, it had the responsibility to make sure that the check
in questions is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account
Only," is a warning that the check should be deposited only in the
account of the CIR. Thus, it is the duty of the collecting bank
PCIBank to ascertain that the check be deposited in payee's account
only. Therefore, it is the collecting bank (PCIBank) which is bound to
scruninize the check and to know its depositors before it could make
the clearing indorsement "all prior indorsements and/or lack of
indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this court is
in full accord with the ruling of the PCHC's Board of Directors
that:
'In presenting the checks for clearing and for payment, the
defendant made an express guarantee on the validity of "all
prior endorsements." Thus, stamped at the back of the
checks are the defedant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, plaintiff would not
have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of
defendant's warranty. As the warranty has proven to be
false and inaccurate, the defendant is liable for any damage
arising out of the falsity of its representation."25
Lastly, banking business requires that the one who first cashes and
negotiates the check must take some percautions to learn whether
or not it is genuine. And if the one cashing the check through
indifference or othe circumstance assists the forger in committing
the fraud, he should not be permitted to retain the proceeds of the
check from the drawee whose sole fault was that it did not discover
the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which
cashes a check drawn upon another bank, without requiring proof as
to the identity of persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against the drawee when
the proceeds of the checks were afterwards diverted to the hands of
a third party. In such cases the drawee bank has a right to believe
that the cashing bank (or the collecting bank) had, by the usual
proper investigation, satisfied itself of the authenticity of the
negotiation of the checks. Thus, one who encashed a check which
had been forged or diverted and in turn received payment thereon
from the drawee, is guilty of negligence which proximately
contributed to the success of the fraud practiced on the drawee
bank. The latter may recover from the holder the money paid on the
check.26
Having established that the collecting bank's negligence is the
proximate cause of the loss, we conclude that PCIBank is liable in
the amount corresponding to the proceeds of Citibank Check No. SN-
04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no
official act in the ordinary course of business that would attribute to
it the case of the embezzlement of Citibank Check Numbers SN-
10597 and 16508, because PCIBank did not actually receive nor hold
the two Ford checks at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank
contributed any official or conscious participation in the
process of the embezzlement. This Court is convinced that
the switching operation (involving the checks while in transit
for "clearing") were the clandestine or hidden actuations
performed by the members of the syndicate in their own
personl, covert and private capacity and done without the
knowledge of the defendant PCIBank…" 27
In this case, there was no evidence presented confirming the
conscious particiapation of PCIBank in the embezzlement. As a
general rule, however, a banking corporation is liable for the
wrongful or tortuous acts and declarations of its officers or agents
within the course and scope of their employment. 28 A bank will be
held liable for the negligence of its officers or agents when acting
within the course and scope of their employment. It may be liable
for the tortuous acts of its officers even as regards that species of
tort of which malice is an essential element. In this case, we find a
situation where the PCIBank appears also to be the victim of the
scheme hatched by a syndicate in which its own management
employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto
Castro, received Citibank Check Numbers SN-10597 and 16508. He
passed the checks to a co-conspirator, an Assistant Manager of
PCIBank's Meralco Branch, who helped Castro open a Checking
account of a fictitious person named "Reynaldo Reyes." Castro
deposited a worthless Bank of America Check in exactly the same
amount of Ford checks. The syndicate tampered with the checks and
succeeded in replacing the worthless checks and the eventual
encashment of Citibank Check Nos. SN 10597 and 16508. The
PCIBank Ptro-manager, Castro, and his co-conspirator Assistant
Manager apparently performed their activities using facilities in their
official capacity or authority but for their personal and private gain or
benefit.
A bank holding out its officers and agents as worthy of confidence
will not be permitted to profit by the frauds these officers or agents
were enabled to perpetrate in the apparent course of their
employment; nor will t be permitted to shirk its responsibility for
such frauds, even though no benefit may accrue to the bank
therefrom. For the general rule is that a bank is liable for the
fraudulent acts or representations of an officer or agent acting within
the course and apparent scope of his employment or
authority.29 And if an officer or employee of a bank, in his official
capacity, receives money to satisfy an evidence of indebetedness
lodged with his bank for collection, the bank is liable for his
misappropriation of such sum.30
Moreover, as correctly pointed out by Ford, Section 5 31 of Central
Bank Circular No. 580, Series of 1977 provides that any theft
affecting items in transit for clearing, shall be for the account of
sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on
PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was
likewise negligent in the performance of its duties. Citibank failed to
establish that its payment of Ford's checjs were made in due course
and legally in order. In its defense, Citibank claims the genuineness
and due execution of said checks, considering that Citibank (1) has
no knowledge of any informity in the issuance of the checks in
question (2) coupled by the fact that said checks were sufficiently
funded and (3) the endorsement of the Payee or lack thereof was
guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation
to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to
Ford an absolute and contractual duty to pay the proceeds of the
subject check only to the payee thereof, the CIR. Citing Section
6232 of the Negotiable Instruments Law, Ford argues that by
accepting the instrument, the acceptro which is Citibank engages
that it will pay according to the tenor of its acceptance, and that it
will pay only to the payee, (the CIR), considering the fact that here
the check was crossed with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for
the damages incurred by Ford on Citibank Checks Numbers SN
10597 and 16508, because of the contractual relationship existing
between the two. Citibank, as the drawee bank breached its
contractual obligation with Ford and such degree of culpability
contributed to the damage caused to the latter. On this score, we
agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597
and 16508 before paying the amount of the proceeds thereof to the
collecting bank of the BIR. One thing is clear from the record: the
clearing stamps at the back of Citibank Check Nos. SN 10597 and
16508 do not bear any initials. Citibank failed to notice and verify the
absence of the clearing stamps. Had this been duly examined, the
switching of the worthless checks to Citibank Check Nos. 10597 and
16508 would have been discovered in time. For this reason, Citibank
had indeed failed to perform what was incumbent upon it, which is
to ensure that the amount of the checks should be paid only to its
designated payee. The fact that the drawee bank did not discover
the irregularity seasonably, in our view, consitutes negligence in
carrying out the bank's duty to its depositors. The point is that as a
business affected with public interest and because of the nature of
its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary
nature of their relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the
view that both PCIBank and Citibank failed in their respective
obligations and both were negligent in the selection and supervision
of their employees resulting in the encashment of Citibank Check
Nos. SN 10597 AND 16508. Thus, we are constrained to hold them
equally liable for the loss of the proceeds of said checks issued by
Ford in favor of the CIR.
Time and again, we have stressed that banking business is so
impressed with public interest where the trust and confidence of the
public in general is of paramount umportance such that the
appropriate standard of diligence must be very high, if not the
highest, degree of diligence.34 A bank's liability as obligor is not
merely vicarious but primary, wherein the defense of exercise of due
diligence in the selection and supervision of its employees is of no
moment.35
Banks handle daily transactions involving millions of pesos.36 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. 37 Banks are
expected to exercise the highest degree of diligence in the selection
and supervision of their employees.38
On the issue of prescription, PCIBank claims that the action of Ford
had prescribed because of its inability to seek judicial relief
seasonably, considering that the alleged negligent act took place
prior to December 19, 1977 but the relief was sought only in 1983,
or seven years thereafter.
The statute of limitations begins to run when the bank gives the
depositor notice of the payment, which is ordinarily when the check
is returned to the alleged drawer as a voucher with a statement of
his account,39 and an action upon a check is ordinarily governed by
the statutory period applicable to instruments in writing.40
Our laws on the matter provide that the action upon a written
contract must be brought within ten year from the time the right of
action accrues.41 hence, the reckoning time for the prescriptive
period begins when the instrument was issued and the
corresponding check was returned by the bank to its depositor
(normally a month thereafter). Applying the same rule, the cause of
action for the recovery of the proceeds of Citibank Check No. SN
04867 would normally be a month after December 19, 1977, when
Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of action
was filed on January 20, 1984, barely six years had lapsed. Thus, we
conclude that Ford's cause of action to recover the amount of
Citibank Check No. SN 04867 was seasonably filed within the period
provided by law.
Finally, we also find thet Ford is not completely blameless in its
failure to detect the fraud. Failure on the part of the depositor to
examine its passbook, statements of account, and cancelled checks
and to give notice within a reasonable time (or as required by
statute) of any discrepancy which it may in the exercise of due care
and diligence find therein, serves to mitigate the banks' liability by
reducing the award of interest from twelve percent (12%) to six
percent (6%) per annum. As provided in Article 1172 of the Civil
Code of the Philippines, respondibility arising from negligence in the
performance of every kind of obligation is also demandable, but such
liability may be regulated by the courts, according to the
circumstances. In quasi-delicts, the contributory negligence of the
plaintiff shall reduce the damages that he may recover.42

WHEREFORE, the assailed Decision and Resolution of the Court of

Appeals in CA-G.R. CV No. 25017 are AFFIRMED. PCIBank, know
formerly as Insular Bank of Asia and America, id declared solely
responsible for the loss of the proceeds of Citibank Check No SN
04867 in the amount P4,746,114.41, which shall be paid together
with six percent (6%) interest thereon to Ford Philippines Inc. from
the date when the original complaint was filed until said amount is
fully paid.

However, the Decision and Resolution of the Court of Appeals in CA-

G.R. No. 28430 are MODIFIED as follows: PCIBank and Citibank
are adjudged liable for and must share the loss, (concerning the
proceeds of Citibank Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to
pay Ford Philippines Inc. P6,081,649.05, with six percent (6%)
interest thereon, from the date the complaint was filed until full
payment of said amount.1âwphi1.nêt

Costs against Philippine Commercial International Bank and Citibank

N.A.

SO ORDERED.

Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.

G.R. No. 138510. October 10, 2002.]
The BIR granted the request and accordingly, on June 26, 1986,
TRADERS ROYAL BANK, Petitioner, v. RADIO PHILIPPINES plaintiffs purchased from defendant Traders Royal Bank (TRB) three
NETWORK, INC., INTERCONTINENTAL BROADCASTING (3) manager’s checks to be used as payment for their tax liabilities,
CORPORATION and BANAHAW BROADCASTING to wit:chanrob1es virtual 1aw library
CORPORATION, through the BOARD OF ADMINISTRATORS,
and SECURITY BANK AND TRUST COMPANY, Respondents. Check Number Amount

DECISION 30652 P4,155.835.00

30650 3,949,406.12
CORONA, J.:
30796 1,685,475.75

Petitioner seeks the review and prays for the reversal of the Decision Defendant TRB, through Aida Nuñez, TRB Branch Manager at
1 of April 30, 1999 of Court of Appeals in CA-G.R. CV No. 54656, the Broadcast City Branch, turned over the checks to Mrs. Vera who was
dispositive portion of which reads:chanrob1es virtual 1aw library supposed to deliver the same to the BIR in payment of plaintiffs’
taxes.
WHEREFORE, the appealed decision is AFFIRMED with modification
in the sense that appellant SBTC is hereby absolved from any Sometime in September, 1988, the BIR again assessed plaintiffs for
liability. Appellant TRB is solely liable to the appellees for the their tax liabilities for the years 1979-82. It was then they discovered
damages and costs of suit specified in the dispositive portion of the that the three (3) managers checks (Nos. 30652, 30650 and 30796)
appealed decision. Costs against appellant TRB. intended as payment for their taxes were never delivered nor paid to
the BIR by Mrs. Vera. Instead, the checks were presented for
SO ORDERED. 2 payment by unknown persons to defendant Security Bank and Trust
Company (SBTC), Taytay Branch as shown by the bank’s routing
As found by the Court of Appeals, the antecedent facts of the case symbol transit number (BRSTN 01140027) or clearing code stamped
are as follows:chanrob1es virtual 1aw library on the reverse sides of the checks.chanrob1es virtua1 1aw 1ibrary

On April 15, 1985, the Bureau of Internal Revenue (BIR) assessed
plaintiffs Radio Philippines Network (RPN), Intercontinental
Broadcasting Corporation (IBC), and Banahaw Broadcasting
Corporation (BBC) of their tax obligations for the taxable years 1978
to 1983.
On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs’ comptroller,
sent a letter to the BIR requesting settlement of plaintiffs’ tax
obligations.
Meanwhile, for failure of the plaintiffs to settle their obligations, the
BIR issued warrants of levy, distraint and garnishment against them.
Thus, they were constrained to enter into a compromise and paid
BIR P18,962,225.25 in settlement of their unpaid deficiency taxes.
Thereafter, plaintiffs sent letters to both defendants, demanding that
the amounts covered by the checks be reimbursed or credited to
their account. The defendants refused, hence, the instant suit. 3
On February 17, 1985, the trial court rendered its decision, appellate court absolved defendant SBTC from any liability and held
thus:chanrob1es virtual 1aw library TRB solely liable to respondent networks for damages and costs of
suit.
WHEREFORE, in view of the foregoing considerations, judgment is
hereby rendered in favor of the plaintiffs and against the defendants In the instant petition for review on certiorari of the Court of
by:chanrob1es virtual 1aw library Appeals’ decision, petitioner TRB assigns the following errors: (a) the
Honorable Court of Appeals manifestly overlooked facts which would
a) Condemning the defendant Traders Royal Bank to pay actual justify the conclusion that negligence on the part of RPN, IBC and
damages in the sum of Nine Million Seven Hundred Ninety Thousand BBC bars them from recovering anything from TRB, (b) the
and Seven Hundred Sixteen Pesos and Eighty-Seven Centavos Honorable Court of Appeals plainly erred and misapprehended the
(P9,790,716.87) broken down as follows:chanrob1es virtual 1aw facts in relieving SBTC of its liability to TRB as collecting bank and
library indorser by overturning the trial court’s factual finding that SBTC did
endorse the three (3) managers checks subject of the instant case,
1) To plaintiff RPN-9 — P4,155,835.00 and (c) the Honorable Court of Appeals plainly misapplied the law in
affirming the award of exemplary damages in favor of RPN, IBC and
2) To Plaintiff IBC-13 — P3,949,406.12 BBC.

3) To Plaintiff BBC-2 — P1,685,475.72 In reply, respondents RPN, IBC, and BBC assert that TRB’s petition
raises questions of fact in violation of Rule 45 of the 1997 Revised
plus interest at the legal rate from the filing of this case in court. Rules on Civil Procedure which restricts petitions for review
on certiorari of the decisions of the Court of Appeals on pure
b) Condemning the defendant Security Bank and Trust Company, questions of law. RPN, IBC and BBC maintain that the issue of
being collecting bank, to reimburse the defendant Traders Royal whether or not respondent networks had been negligent were
Bank, all the amounts which the latter would pay to the aforenamed already passed upon both by the trial and appellate courts, and that
plaintiffs; the factual findings of both courts are binding and conclusive upon
this Court.chanrob1es virtual law library
c) Condemning both defendants to pay to each of the plaintiffs the
sum of Three Hundred Thousand (P300,000.00) Pesos as exemplary Likewise, respondent SBTC denies liability on the ground that it had
damages and attorney’s fees equivalent to twenty-five percent of the no participation in the negotiation of the checks, emphasizing that
total amount recovered; and the BRSTN imprints at the back of the checks cannot be considered
as proof that respondent SBTC accepted the disputed checks and
d) Costs of suit.chanrob1es virtua1 1aw 1ibrary presented them to Philippine Clearing House Corporation for
clearing.
SO ORDERED. 4
Setting aside the factual ramifications of the instant case, the
Defendants Traders Royal Bank and Security Bank and Trust threshold issue now is whether or not TRB should be held solely
Company, Inc. both appealed the trial court’s decision to the Court liable when it paid the amount of the checks in question to a person
of Appeals. However, as quoted in the beginning hereof, the other than the payee indicated on the face of the check, the Bureau
of Internal Revenue. otherwise, he is not a holder in due course. 7

"When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto, can be
acquired through or under such signature." 5 Consequently, if a
bank pays a forged check, it must be considered as paying out of its
funds and cannot charge the amount so paid to the account of the
depositor.chanrob1es virtua1 1aw 1ibrary
In the instant case, the 3 checks were payable to the BIR. It was
established, however, that said checks were never delivered or paid
to the payee BIR but were in fact presented for payment by some
unknown persons who, in order to receive payment therefor, forged
the name of the payee. Despite this fraud, petitioner TRB paid the 3
checks in the total amount of P9,790,716.87.
Petitioner ought to have known that, where a check is drawn
payable to the order of one person and is presented for payment by
another and purports upon its face to have been duly indorsed by
the payee of the check, it is the primary duty of petitioner to know
that the check was duly indorsed by the original payee and, where it
pays the amount of the check to a third person who has forged the
signature of the payee, the loss falls upon petitioner who cashed the
check. Its only remedy is against the person to whom it paid the
money. 6 that SBTC, as a collecting bank, should similarly bear the loss.
By encashing in favor of unknown persons checks which were on
their face payable to the BIR, a government agency which can only
act only through its agents, petitioner did so at its peril and must
suffer the consequences of the unauthorized or wrongful
endorsement. 8 In this light, petitioner TRB cannot exculpate itself
from liability by claiming that respondent networks were themselves
negligent.
A bank is engaged in a business impressed with public interest and it
is its duty to protect its many clients and depositors who transact
business with it. It is under the obligation to treat the accounts of
the depositors and clients with meticulous care, whether such
accounts consist only of a few hundreds or millions of pesos.
9chanrob1es virtua1 1aw 1ibrary
Petitioner argues that respondent SBTC, as the collecting bank and
indorser, should be held responsible instead for the amount of the
checks.
The Court of Appeals addressed exactly the same issue and made
the following findings and conclusions:chanrob1es virtual 1aw library
As to the alleged liability of appellant SBTC, a close examination of
the records constrains us to deviate from the lower court’s finding

It should be noted further that one of the subject checks was "A collecting bank where a check is deposited and which indorses
crossed. The crossing of one of the subject checks should have put the check upon presentment with the drawee bank, is such an
petitioner on guard; it was duty-bound to ascertain the indorser’s indorser. So even if the indorsement on the check deposited by the
title to the check or the nature of his possession. Petitioner should bank’s client is forged, the collecting bank is bound by his warranties
have known the effects of a crossed check: (a) the check may not be as an indorser and cannot set up the defense of forgery as against
encashed but only deposited in the bank; (b) the check may be the drawee bank."cralaw virtua1aw library
negotiated only once to one who has an account with a bank and (c)
the act of crossing the check serves as a warning to the holder that To hold appellant SBTC liable, it is necessary to determine whether it
the check has been issued for a definite purpose so that he must is a party to the disputed transactions.
inquire if he has received the check pursuant to that purpose,
Section 3 of the Negotiable Instruments Law
reads:jgc:chanrobles.com.ph
"SECTION 63. When person deemed indorser. — A person placing
his signature upon an instrument otherwise than as maker, drawer,
or acceptor, is deemed to be an indorser unless he clearly indicates
by appropriate words his intention to be bound in some other
capacity."cralaw virtua1aw library
Upon the other hand, the Philippine Clearing House Corporation
(PCHC) rules provide:jgc:chanrobles.com.ph
"Sec. 17. BANK GUARANTEE. — All checks cleared through the PCHC
shall bear the guarantee affixed thereto by the Presenting
Bank/Branch which shall read as follows:jgc:chanrobles.com.ph
"Cleared thru the Philippine Clearing House Corporation. All prior
endorsements and/or lack of endorsement guaranteed. NAME OF
BANK/BRANCH BRSTN (Date of clearing)."cralaw virtua1aw library
Here, not one of the disputed checks bears the requisite
endorsement of appellant SBTC. What appears to be a guarantee
stamped at the back of the checks is that of the Philippine National
Bank, Buendia Branch, thereby indicating that it was the latter Bank
which received the same.chanrob1es virtua1 1aw 1ibrary
It was likewise established during the trial that whenever appellant
SBTC receives a check for deposit, its practice is to stamp on its face
the words, "non-negotiable." Lana Echevarria’s testimony is
relevant:jgc:chanrobles.com.ph
"ATTY. ROMANO: Could you tell us briefly the procedure you follow
in receiving checks?
"A: First of all, I verify the check itself, the place, the date, the
amount in words and everything. And then, if all these things are in
order and verified in the data sheet I stamp my non-negotiable
stamp at the face of the check."cralaw virtua1aw library
Unfortunately, the words "non-negotiable" do not appear on the face
of either of the three (3) disputed checks.
Moreover, the aggregate amount of the checks is not reflected in the
clearing documents of appellant SBTC. Section 19 of the Rules of the
PCHC states:jgc:chanrobles.com.ph
"Section 19. Regular Item Procedure:chanrob1es virtual 1aw library
Each clearing participant, through its authorized representatives,
shall deliver to the PCHC fully qualified MICR checks grouped in 200
or less items to a batch and supported by an add-list, a batch control
slip, and a delivery statement.
It bears stressing that through the add-list, the PCHC can
countercheck and determine which checks have been presented on a
particular day by a particular bank for processing and clearing. In
this case, however, the add-list submitted by appellant SBTC
together with the checks it presented for clearing on August 3, 1987
does not show that Check No. 306502 in the sum of P3,949,406.12
was among those that passed for clearing with the PCHC on that
date. The same is true with Check No. 30652 with a face amount of
P4,155,835.00 presented for clearing on August 11, 1987 and Check
No. 30796 with a face amount of P1,685,475.75.chanrob1es virtua1
1aw 1ibrary
The foregoing circumstances taken altogether create a serious doubt
on whether the disputed checks passed through the hands of
appellant SBTC." 10
We subscribe to the foregoing findings and conclusions of the Court
of Appeals.
A collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all prior
indorsements, including the forged indorsement itself, and ultimately
should be held liable therefor. However, it is doubtful if the subject
checks were ever presented to and accepted by SBTC so as to hold it
liable as a collecting bank, as held by the Court of
Appeals.chanrob1es virtua1 1aw 1ibrary

Since TRB did not pay the rightful holder or other person or entity
entitled to receive payment, it has no right to reimbursement.
Petitioner TRB was remiss in its duty and obligation, and must
therefore suffer the consequences of its own negligence and
disregard of established banking rules and procedures.

We agree with petitioner, however, that it should not be made to

pay exemplary damages to RPN, IBC and BBC because its wrongful
act was not done in bad faith, and it did not act in a wanton,
fraudulent, reckless or malevolent manner. 11

We find the award of attorney’s fees, 25% of P10 million, to be

manifestly exorbitant. 12 Considering the nature and extent of the
services rendered by respondent networks’ counsel, however, the
Court deems it appropriate to award the amount of P100,000 as
attorney’s fees.

WHEREFORE, the appealed decision is MODIFIED by deleting the

award of exemplary damages. Further, respondent networks are
granted the amount of P100,000 as attorney’s fees. In all other
respects, the Court of Appeals’ decision is hereby AFFIRMED.

SO ORDERED.

Puno, Panganiban, and Carpio-Morales, JJ., concur.

Sandoval-Gutierrez, JJ., no part.

G.R. No. 172652 November 26, 2014 and Nuguid had been dealing in this manner for about six to eight
years, with their transactions running into millions of pesos. For this
METROPOLITAN BANK AND TRUST COMPANY, Petitioner, purpose, Chiok maintained accounts with petitioners Metropolitan
vs. Bank and Trust Company (Metrobank) and Global Business Bank,
WILFRED N. CHIOK, Respondent. Inc. (Global Bank), the latter being then referred to as the Asian
Banking Corporation (Asian Bank). Chiok likewise entered into a Bills
x-----------------------x Purchase Line Agreement (BPLA) with Asian Bank. Under the BPLA,
checks drawn in favor of, or negotiated to, Chiok may be purchased
by Asian Bank. Upon such purchase, Chiok receives a discounted
G.R. No. 175302
cash equivalent of the amount of the check earlier than the normal
clearing period.
BANK OF THE PHILIPPINE ISLANDS, Petitioner,
vs.
On July 5, 1995, pursuant to the BPLA, Asian Bank "bills purchased"
WILFRED N. CHIOK, Respondent.
Security Bank & Trust Company (SBTC) Manager’s Check (MC) No.
037364 in the amount of ₱25,500,000.00 issued in the name of
x-----------------------x Chiok, and credited the same amount to the latter’s Savings Account
No. 2-007-03-00201-3.
G.R. No. 175394
On the same day, July 5, 1995, Asian Bank issued MC No. 025935 in
GLOBAL BUSINESS BANK, INC., Petitioner, the amount of ₱7,550,000.00 and MC No. 025939 in the amount of
vs. ₱10,905,350.00 to Gonzalo Bernardo, who is the same person as
WILFRED N. CHIOK, Respondent. Gonzalo B. Nuguid. The two Asian Bank manager’s checks, with a
total value of ₱18,455,350.00 were issued pursuant toChiok’s
DECISION instruction and was debited from his account. Likewise upon Chiok’s
application, Metrobank issued Cashier’s Check (CC) No. 003380 in
LEONARDO-DE CASTRO, J.: the amount of ₱7,613,000.00 in the name of Gonzalo Bernardo. The
same was debited from Chiok’s Savings Account No. 154-42504955.
The three consolidated petitions herein all assail the Decision 1 of the The checks bought by Chiok for payee Gonzalo Bernardo are
Court of Appeals in CA-G.R. CV No. 77508 dated May 5, 2006, and therefore summarized as follows:
the Resolution2 in the same case dated November 6, 2006.

Respondent Wilfred N. Chiok (Chiok) had been engaged in dollar

trading for several years. He usually buys dollars from Gonzalo B.
Nuguid (Nuguid) at the exchange rate prevailing on the date of the
sale. Chiok pays Nuguid either in cash or manager’s check, to be
picked up by the latter or deposited in the latter’s bank account.
Nuguid delivers the dollars either on the same day or on a later date
as may be agreed upon between them, up to a week later. Chiok
Drawee Bank/Check On the same day, July 6, 1995, the RTC issued a temporary
Amount (P) Source of fund restraining order (TRO) directing the spouses Nuguid to refrain from
No.
presenting the said checks for payment and the depositary banks
Asian Bank MC No. 7,550,000.00 from honoring the sameuntil further orders from the court.6
025935 Chiok’s Asian Bank Savings
Asian Bank MC No. 10,905,350.00 Account No. 2-007-03-00201-3, Asian Bank refused to honor MC Nos. 025935 and 025939 in
025939 which had been credited with the deference to the TRO. Metrobank claimed that when it received the
(aggregate value value of SBTC MC No. 037364 TRO on July 6, 1995, it refused to honor CC No. 003380 and stopped
of (₱25,500,000.00) when the latter was purchased payment
by thereon. However, in a letter also dated July 6, 1995, Ms.
Asian Bank MCs: Asian Bank from Chiok pursuant to their BPLA. Jocelyn T. Paz of FEBTC, Cubao-Araneta Branch informed Metrobank
18,455,350.00) that the TRO was issued a day after the check was presented for
payment. Thus, according to Paz, the transaction was already
Metrobank CC No. 7,613,000.00 Chiok’s Metrobank Savings consummated and FEBTC had already validly accepted the same. In
003380 Account No. 154-425049553 another letter, FEBTC informed Metrobank that "the restraining order
indicates the name of the payee of the check as GONZALO NUGUID,
TOTAL 26,068,350.00 but the check isin fact payable to GONZALO BERNARDO. We believe
there is a defect in the restraining order and as such should not bind
Chiok then deposited the three checks (Asian Bank MC Nos. 025935 your bank."7 Alice Rivera of Metrobank replied to said letters,
and 025939, and Metrobank CC No. 003380), with an aggregate reiterating Metrobank’s position tocomply with the TRO lest it be
value of ₱26,068,350.00 in Nuguid’s account with Far East Bank & cited for contempt by the trial court. However, as would later be
Trust Company (FEBTC), the predecessor-in-interest of petitioner alleged in Metrobank’s Answer before the trial court, Metrobank
Bank of the Philippine Islands (BPI). Nuguid was supposed to deliver eventually acknowledged the check when it became clear that
US$1,022,288.50,4 the dollar equivalent of the three checks as nothing more can be done to retrieve the proceeds of the check.
agreed upon, in the afternoon of the same day. Nuguid, however, Metrobank furthermore claimed that since it is the issuer of CC No.
failed to do so, prompting Chiok to request that payment on the 003380, the check is its primary obligation and should not be
three checks be stopped. Chiok was allegedly advised to secure a affected by any prior transaction between the purchaser (Chiok) and
court order within the 24-hour clearing period. On the following day, the payee (Nuguid).
July 6, 1995, Chiok filed a Complaint for damages with application
for ex parte restraining order and/or preliminary injunction with the In the meantime, FEBTC, as the collecting bank, filed a complaint
Regional Trial Court (RTC) of Quezon City against the spouses against Asian Bank before the Philippine Clearing House Corporation
Gonzalo and Marinella Nuguid, and the depositary banks, Asian Bank (PCHC) Arbitration Committee for the collection of the value of Asian
and Metrobank, represented by their respective managers, Julius de Bank MC No. 025935 and 025939, which FEBTC had allegedly
la Fuente and Alice Rivera. The complaint was docketed as Civil Case allowed Nuguid to withdraw on July 5, 1995, the same day the
No. Q-95-24299 and was raffled to Branch 96. The complaint was checks were deposited. The case was docketed as Arbicom Case No.
later amended5 to include the prayer of Chiok to be declared the 95-082. The PCHC Arbitration Committee later relayed, in a letter
legal owner of the proceeds of the subject checks and to be allowed dated August 4, 1995, its refusal to assume jurisdiction over the case
to withdraw the entire proceeds thereof. on the ground that any step it may take might be misinterpreted as
undermining the jurisdiction of the RTC over the case or a violation
of the July 6, 1995 TRO.
On July 25, 1995, the RTC issued an Order directing the issuance of
a writ of preliminary prohibitory injunction:
WHEREFORE, upon filing by the plaintiff of a sufficient bond in the
amount of ₱26,068,350.00, to be executed in favor of the
defendants under the condition that the same shall answer for
whatever damages they may sustain by reason of this injunction
should the Court ultimately determine that he was not entitled
thereto, let a writ of preliminary prohibitory injunction issue
restraining and preventing during the pendency of the case:
a) Defendant Asian Bank frompaying Manager’s Checks No.
025935 in the amount of ₱7,550,000.00 and No. 025939 in
the amount of ₱10,905,350.00; and
b) Defendant Metro Bank frompaying Cashier’s Check No.
003380 in the amount of ₱7,613,000.00.
The application for preliminary mandatory injunctionis hereby denied
and the order issued on July 7, 1995 directing defendant Metro Bank
(Annapolis, Greenhills Branch) to allow the plaintiff to withdraw the
proceeds of Cashier’s Check No. 003380 in the amount of
₱7,613,000.00 is hereby set aside.
The plaintiff’s urgent motion todeclare defendants Asian Bank and
Metro Bank in contempt of court filed last July 13, 1995 is hereby
denied for lack of legal basis.
The writ of preliminary prohibitory injunction and a copy of this order
shall be served on the defendants by Deputy Sheriff Jose Martinez of
this Branch.8
Upon the filing by Chiok of the requisite bond, the Writ was
subsequently issued on July 26, 1995.
Before the RTC, Asian Bank pointed out that SBTC returned and
issued a Stop Payment Order on SBTC MC No. 037364 (payable to
Chiok in the amount of ₱25,500,000.00) on the basis of an Affidavit
of Loss & Undertaking executed by a certain Helen Tan. Under said
Affidavit of Loss & Undertaking, Tan claims that she purchased SBTC
MC No. 037364 from SBTC, but the manager’s check got lost on that
day. Asian Bank argued that Chiok would therefore be liable for the
dishonor of the manager’s check under the terms of the BPLA, which
provides for recourse against the seller (Chiok) of the check when it
is dishonored by the drawee (SBTC) for any reason, whether valid or
not.
On October 18, 1995, FEBTC filed a Complaint-in-Intervention in Civil
Case No. Q-95-24299. On February6, 1996, the RTC initially denied
FEBTC’s intervention in the case. On Motion for Reconsideration,
however, the RTC, on April 15, 1996, reversed itself and allowed the
same.
In the Complaint-in-Intervention, FEBTC claimed that it allowed the
immediate withdrawal of the proceeds of Asian Bank MC Nos.
025935 and 025939 on the ground that, as manager’schecks, they
were the direct obligations of Asian Bank and were accepted in
advance by Asian Bank by the mere issuance thereof. FEBTC
presented the checks for payment on July 5, 1995 through the
PCHC. Asian Bank, as admitted in its Answer before the RTC,
received the same on that day. Consequently, Asian Bank was
deemed to have confirmed and booked payment of the subject
checks in favor of FEBTC or, at the latest, during the first banking
hour of July 6, 1995, when payment should have been made. FEBTC
claimed that Asian Bank exhibited bad faith when, in anticipation of
the TRO, it opted to float the checks until it received the TRO at
12:00 noon of July 6, 1995 to justify the nonpayment thereof.
In their own Answer, the spouses Nuguid claimed that Gonzalo
Nuguid had delivered much more dollars than what was required for
the three checks at the time of payment. By way of special
affirmative defense, the spouses Nuguid also claims that since the
subject checks had already been paid to him, Chiok is no longer
entitled to an injunction (to hold the payment of the subject checks),
and Civil Case No. Q-95-24299 has already become moot.
On August 29, 2002, the RTC rendered its Decision, the dispositive
portion of which states:
WHEREFORE, judgment is rendered:
1. Declaring as permanent the writ of preliminary injunction
issued under the Order of July 25, 1995;
2. Ordering Global Business Bank, Inc.to pay the plaintiff
[Chiok]:
a.) The amount of ₱34,691,876.71 (less the
attorney’s fees of ₱255,000.00 which shall remain
with Global Business Bank, Inc.), plus interest at the
legal rate of 12%/p.a. from September 30, 1999
until fully paid;
b.) The amount of ₱215,000.00, representing the
excess amount debited from the plaintiff’s deposit in
his account with Global Business Bank, Inc. on July
7, 1995, plus interest of 12%/p.a. from July 7, 1995,
until fully paid;
c.) Attorney’s fees equivalentof 5% of the total
amount due; and
3. Ordering Metropolitan Bank & Trust Companyto pay the
plaintiff:
a. The amount of his deposit of ₱7,613,000.00, plus
interest of 12%/p.a. from July 5, 1995 until said
amount is fully paid; and
b. Attorney’s fees of 5%of the total amount due;
4. Ordering Spouses Gonzalo B. Nuguid and Marinella O.
Nuguid liable jointly and severally with Global Business Bank,
Inc. and Metropolitan Bank & Trust Company, Inc. for the
respective attorney’s fees;
5. Dismissing the complaint-in-interventionof BPI for lack of
merit;
6. Ordering the defendantsand the intervenorto pay, jointly
and severally, the costs of suit.9
(Emphases supplied.)
The RTC held that Nuguid failed to prove the delivery of dollars to
Chiok. According to the RTC, Nuguid’s claim that Chiok was still liable
for seven dishonored China Banking Corporation (CBC) checks with a
total worth of ₱72,984,020.00 is highly doubtful since such claim was
not presented as a counterclaim in the case. Furthermore, the court
ruled that the certification of CBC stating the reasons 10 for the stop
payment order "are indicative of Chiok’s non-liability to Nuguid." The
RTC further noted that there was a criminal case filed by Chiok
against Nuguid on March 29, 1996 for estafa and other deceit on
account of Nuguid’s alleged failure to return the originals of the
seven CBC checks.11
The RTC went on to rule that manager’s checks and cashier’s checks
may be the subject of a Stop Payment Order from the purchaser on
the basis of the payee’s contractual breach. As explanation for this
ruling, the RTC adopted its pronouncements when it issued the July
25, 1995 Order:
Defendant Nuguid’s argument that the injunction could render
manager’s and cashier’schecks unworthy of the faith they should
have and could impair their nature as independent undertakings of
the issuing banks is probably an undistinguished simplification. While
the argument may be applicable to such checks in general, it does
not adequately address the situation, as here, when specific
manager’s and cashier’s checks are already covered by reciprocal
undertakings between their purchaser and their payee, in which the
latter allegedly failed to perform. The agreement herein was
supposedly one in which Nuguid would deliver the equivalent
amount in US dollars ($1,022,288.23) "on the same date" that the
plaintiff purchased and delivered the manager’s and cashier’s checks
(₱26,068,350.00). Assuming that such a reciprocity was true, the
purchaser should have the legal protection of the injunctive writ
(which, after all, the legal departments of the issuing banks
themselves allegedly advised the plaintiff to obtain), since the usual
order or instruction to stop payment available in case of ordinary
checks did not avail. This was probably the reason that Asian Bank
has expressly announced in its own comment/opposition of July 14,
1995 that it was not opposing the application for the prohibitory
injunction.
The dedication of such checks pursuantto specific reciprocal
undertakings between their purchasers and payees authorizes
rescission by the former to prevent substantial and material damage
to themselves, which authority includes stopping the payment of the
checks.12 According to the RTC, both manager’s and cashier’s checks
are still subject to regular clearing under the regulations of the
Bangko Sentral ng Pilipinas. Since manager’s and cashier’s checks
are the subject of regular clearing, they may consequently be
refused for cause by the drawee, which refusal is in fact provided for
in the PCHC Rule Book.
The RTC found the argument by BPI that the manager’s and
cashier’s checks are pre-cleared untenable under Section 60 of the
New Central Bank Act and Article 1249 of the Civil Code, which
respectively provides:
Section 60. Legal Character. – Checks representing demand deposits
do not have legal tender power and their acceptance in the payment
of debts, both public and private, is at the option of the creditor;
Provided, however, that a check which has been cleared and
credited to the account of the creditor shall be equivalent to a
delivery to the creditor of cash in an amount equal to the amount
credited to his account.
Art. 1249. The payment of debts inmoney shall be made in the
currency stipulated, and if it is not possible to deliver such currency,
then in the currency which is legal tender in the Philippines. The
delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only
when they have been cashed, or when through the fault of the
creditor they have been impaired.
In the meantime, the action derived from the original obligation shall
be held in the abeyance. The RTC went on to rule that due to the
timely service of the TRO and the injunction, the value of the three
checks remained with Global Bank and Metrobank.13 The RTC
concluded that since Nuguid did not have a valid title to the
proceeds of the manager’s and cashier’s checks, Chiok is entitled to
be paid back everything he had paid to the drawees for the checks. 14
With respect to Global Bank, the RTC ruled that the entire amount of
₱34,691,876.71 it recovered from SBTC from the September 15,
1997 PCHC Decision, as reflected in the September 29, 1999 Charge
Slip No. 114977, less the sum of ₱225,000.00 awarded by the
arbitration committee’s decision as attorney’s fees, should be paidto
Chiok, with interest at 12% per annum from September 30, 1999
until full payment. The RTC likewise ordered Global Bank to pay
Chiok the amount of ₱215,390.00, an amount debited from Chiok’s
account as payment for outstanding bills purchase. 15
With respect to Metrobank, the RTC ruled that it should pay Chiok
₱7,613,000.00, the amount paid by Chiok to purchase the CC, plus
interest of 12 percent per annum from July 5,1995 until full
payment. The RTC explained this finding as follows:
The same conclusion is true with respect to Metro Bank, with whom
the funds amounting to ₱7,613,000.00 for the purchase of CC No.
003380 has remained. According to Chiok, Metro Bank used such
funds in its operations.
In the hearing on May 17, 2001, Lita Salonga Tan was offered as a
witness for Metro Bank, but in lieu ofher testimony, the parties
agreed to stipulate on the following as her testimony, to wit:
1. That Metro Bank paid the amount of CC No. 003280;
2. That the payment on July 12, 1995 was made while the
TRO of July 5, 1995 was in force;
3. [That] the payment on July 12, 1995 was on the third
clearing of CC No. 003380; and
4. That the PCHC Rule book was the authority on the rules
and regulations on the clearing operations of banks.
The payment to FEBTC by Metro Bank of CC No. 003380 on July 12,
1995 was an open defiance of the TRO of July 6, 1995. Metro Bank’s
Branch Manager Alice Rivera, through her letter of July 10, 1995 to
FEBTC as the collecting bank, returned the CC to FEBTC in
compliance with the TRO which was received about 12:10 noon of
July 6, 1999. Hence, Metro Bank should not have paid because the
TRO was served within the 24-hour period to clear checks.
Moreover, the payment, being made on third clearing, was
unjustified for violating existing regulations, particularly paragraph 1
of the Clearing House Operating Memo (CHOM), effective September
1, 1984, which prohibited the reclearing of a check after its first
presentation if it was returned for the reason of "stop payment" or
"closed account."
It also seems that Metro Bank paid the CC without first checking
whether, in fact, any actual payment of the 3 checks had been made
on July 5, 1995 to the payee when the checks were deposited in
payee’s account with FEBTC on July 5, 1995. The records show no
such payment was ever made to render the TRO of July 6, 1995 or
the writ of preliminary injunction applied for moot and academic.
Jessy A. Degaños – adopted by Metro Bank as its own witness in
injunction hearing of July 24, 1995 – stated that the payment of the
3 checks consisted of the accounting entry made at the PCHC during
the presenting process by debiting the respective accounts of the
drawees and crediting the account of collecting bank FEBTC. Yet, as
already found hereinabove, such process was reversed due to the
return by the drawees of the checks which they dishonored on
account of the TRO.
Also, Degaños, testifying on January 17, 2002 for intervenor BPI,
was asked in what form was the withdrawal of the amounts of the
checks made by Nuguid on July 5, 1995, that is, whether:- 1) cash
withdrawal; or 2) credit to Nuguid’s account; or 3) draft issued to
Nuguid. His reply was that only the bank’s branch which serviced the
payee’s account could provide the answer. Yet, BPI did not present
any competent personnel from the branch concerned to enlighten
the Court on this material point.
This amount of ₱7,613,000.00, having remained with Metro Bank
since the service of the TRO of July 6, 1995 and the writ of
preliminary injunction issued under the Order of July 25, 1998,
should be returned to Chiok with interest of 12%/p.a. from July 7,
1995 until full payment.16
(Citations omitted.)
The RTC likewise denied BPI’s complaint-in-intervention to recover
the value of the three checks from drawees Global Bank and
Metrobank for lack of merit. The RTC, after reprimanding Global
Bank and Metrobank for siding with BPI on this issue, held that BPI,
as a mere collecting bank of the payee with a void title to the
checks, had no valid claim as to the amounts of such checks. The
RTC explained:
Firstly: BPI, being a collecting bankin relation to the 3 checks, was
merely performing collection services as an agent of Nuguid, the
payee. If, as found hereinbefore, Nuguid could not have legal title to
the 3 checks, it follows that BPI could not stake any claim for title
better than Nuguid’s own void title. Consequently, BPI has no right
to claim the amounts of the 3 checks from the drawee-banks.
Secondly: The purpose of the delivery of the 3 checks to BPI – which
was not even accompanied by Nuguid’s endorsement – was solely
for deposit in the account of payee Nuguid. Assuming, for the sake
of argument, that BPI as the collecting bank paid the value of the
checks – of which fact there has been no proof whatsoever – BPI
was nonetheless, at best, a mere transferee whose title was no
better than the void title of the transferor, payee Nuguid. Under such
circumstance, BPI has no legal basis to demand payment of the
amounts of the 3 checks from the draweebanks.
Thirdly: Under Sec. 49, Negotiable Instruments Law, BPI, as
transferee without indorsement, was not considered a holder of the
instrument since it was neither a payee nor an indorsee. It would
become so only when and if the indorsement is actually made, and
only as of then, but not before, is the issue whether BPI was a
holder in due course or not is determined.
Consequently, any alleged payment by BPI as the collecting bank,
through the supposed though unproved withdrawal of the amounts
of the 3 checks by Nuguid upon the deposit of the checks on July 5,
1995, is not the payment which discharges liability under the 3
checks because BPI is neither the party primarily liable northe
drawee.
Such a payment, if true, is akin to, if it is not, drawing against
uncollected deposits (DAUD). In such a case, BPI was in duty bound
to send the 3 checks to the PCHC for clearing pursuant to Section
1603.c.1 of the BSP Manual of Regulations and Sec. 60, R.A. No.
7653. It serves well to note herein that Global Bank and Metro Bank
returned the checks through the PCHC on July 6, 1995, well within
the 24-hour clearing period, in compliance with the TRO of July 6,
1995. Finally: As earlier noted and discussed, there is no evidence of
any prior valid payment by the collecting bank to support its claim of
the amounts of the 3 checks against the defendant banks. 17 (Citation
omitted.)
The RTC held Global Bank and Metrobank liable for attorney’s fees
equivalent to 5% of the total amountdue them, while the spouses
Nuguid were held solidarily liable for said fees.
Defendants Global Bank, Metrobank, and the spouses Nuguid, and
intervenor BPI filed separate notices of appeal, which were approved
in the Order18 dated April 3, 2003. Chiok filed a Motion to Dismiss
against the appeal of Global Bank, on the ground that the latter had
ceased to operate as a banking institution.
On May 26, 2004, the Court of Appeals dismissed the appeal of the
spouses Nuguid pursuant to Section 1(e), Rule 50 of the Rules of
Court, on account of their failure to file their appellant’s brief. In the
same Resolution, the Court of Appeals denied Chiok’s Motion to
Dismiss.
On May 5, 2006, the Court of Appeals rendered the assailed Decision
affirming the RTC Decision with modifications. The fallo of the
Decision reads:
WHEREFORE, premises considered, the Decision dated August 29,
2000 of the RTC, Branch 96, Quezon City is AFFIRMED with the
following MODIFICATIONS:
1.) The contract to buy foreign currency in the amount of
$1,022,288.50 between plaintiff-appellee Wilfred N. Chiok
and defendant Gonzalo B. Nuguid is hereby rescinded.
Corollarily, Manager’s Check Nos. 025935 and 025939 and
Cashier’s Check No. 003380 are ordered cancelled.
2.) Global Business Holdings, Inc. is ordered to credit
Savings Account No. 2-007-03-00201-3 with:
 a) The amount of ₱25,500,000.00, plus interest at
4% from September 29, 1999 until withdrawn by
plaintiff-appellee;
b) The amount of ₱215,390.00, plus interest at 4%
from July 7, 1995 until withdrawn by plaintiff-
appellee.
3.) Metropolitan Bank & Trust Company is ordered to credit
Savings Account No. 154-42504955 the amount of
₱7,613,000.00, with interest at 6% [per annum] from July
12, 1995 until the same is withdrawn;
4.) The Spouses Gonzalo B. Nuguid and Marinella O. Nuguid
are ordered to pay attorney’s fees equivalent to 5% of the
total amount due to plaintiff-appellee from both depository
banks, as well as the costs of suit.19
According to the Court of Appeals, Article 1191 of the Civil Code
provides a legal basis of the right of purchasers of MCs and CCs to
make a stop payment order on the ground of the failure of the
payee to perform his obligation to the purchaser. The appellate court
ruled that such claim was impliedly incorporated in Chiok’s
complaint. The Court of Appeals held:
By depositing the subject checks to the account of Nuguid, Chiok
had already performed his obligation under the contract, and the
subsequent failure of Nuguid to comply with what was incumbent
upon him gave rise to an action for rescission pursuant to Article
1191 of the Civil Code, which states:
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.
The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.
xxxx
Although the complaint a quowas entitled "DAMAGES, W/ EX PARTE
RESTRAINING ORDER/INJUNCTION" when the action was really one
for rescission and damages, it is an elementary rule of procedure
that what controls or determines the nature of the action is not the
caption of the complaint but the allegations contained therein. And
even without the prayer for a specific remedy, proper relief may
nevertheless be granted by the court if the facts alleged in the
complaint and the evidence introduced so warrant.
That Chiok had intended rescission isevident from his prayer to be
declared the legal owner of the proceeds of the subject checks and
to be allowed to withdraw the same. Therefore, the argument of BPI
that the obligation on the part of Nuguid to deliver the dollars still
subsists is untenable. Article 1385 of the same Code provides that
rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with
its interest. The object of the contract herein to buy foreign currency
is the peso-value of the dollars bought but in the form of negotiable
instruments – Manager’s Check/Cashier’s Check. Hence, respecting
the negotiation thereof, and in order to afford complete relief to
Chiok, there arose the necessity for the issuance of the injunction
restraining the payment of the subject checks with the end in view
of the eventual return of the proceeds to give effect to Article 1385.
In other words, the injunctive relief was necessary in order not to
render ineffectual the judgment in the instant case. We quote with
approval the following disquisition of the trial court, to wit:
xxxx
There is no question about the nature of manager’s and cashier’s
checks being as good as cash, being primary obligations of the
issuing bank and accepted in advanceby their mere issuance. But
even as such nature of unconditional commitment to pay on the part
of the issuing bank may be conceded, the Court opines that the
injunctive relief cannot be denied to a party who purchased the
manager’s or cashier’s check to stop its payment to the payee in a
suit against the payee and the issuing banks upon a claim that the
payee himself had not performed his reciprocal obligation for which
the issuance and delivery of the self-same manager’sor cashier’s
check were, in the first place, made x x x.
It bears stressing that the subject checks would not have been
issued were it not for the contract between Chiok and Nuguid.
Therefore, they cannot be disassociated from the contract and given
a distinct and exclusive signification, as the purchase thereof is part
and parcel of the series of transactions necessary to consummate
the contract. Taken in this light, it cannot be argued that the issuing
banks are bound to honor only their unconditional undertakings on
the subject checks vis-à-vis the payee thereof regardless of the
failed transaction between the purchaser of the checks and the
payee on the ground that the banks were not privy to the said
transaction.
Lest it be forgotten, the purchase of the checks was funded by the
account of Chiok with the banks. As such, the banks were equally
obligated to treat the account of their depositor with meticulous care
bearing in mind the fiduciary nature of their relationship with the
depositor. Surely, the banks would not allow their depositor to sit
idly by and watch the dissipation of his livelihood considering that
the business of foreign currency exchange is a highly volatile
undertaking where the probability of losing or gaining is counted by
the ticking of the clock. With the millions of money involved in this
transaction, Chiok could not afford to be complacent and his
vigilance for his rights could not have been more opportune under
the circumstances.20 (Citations omitted.)
The Court of Appeals proceeded to sustain the dismissal of BPI’s
complaint-in-intervention, which sought to recover from Global Bank
the amounts allegedly paid to Nuguid. The Court of Appeals pointed
out that BPI failed to prove the alleged withdrawal by Nuguid of the
proceeds of the two manager’s checks, as BPI’s representative, Jessy
A. Degaños, failed to answer the question on the form of the alleged
withdrawal. Furthermore, BPI failed to prove that it was a holder in
due course of the subject manager’s checks, for two reasons: (1) the
checks were not indorsed to it by Nuguid; and (2) BPI never
presented its alleged bills purchase agreement with Nuguid.21
The Court of Appeals likewise modified the order by the RTC for
Global Bank and Metrobank to pay Chiok. The Court of Appeals held
that Chiok’s cause of action against Global Bank is limited to the
proceeds of the two manager’s checks. Hence, Global Bank was
ordered to credit Chiok’s Savings Account No. 2-007-03-00201-3
with the amount of ₱25,500,000.00, the aggregate value of the two
managers’ checks, instead of the entire ₱34,691,876.71 recovered
from SBTC from the September 15, 1997 PCHC Decision. The
interest was also reduced from 12% per annum to that imposed
upon savings deposits, which was established during the trial as 4%
per annum.22
As regards Metrobank, the appellate court noted that there was no
evidence as to the interest rate imposed upon savings deposits at
Metrobank. Metrobank was ordered to credit the amount of
₱7,613,000.00 to Chiok’s Savings Account No. 154-42504955, with
interest at 6% per annum.23
Global Bank and BPI filed separate Motions for Reconsideration of
the May 5, 2006 Court of Appeals’ Decision. On November 6, 2006,
the Court of Appeals denied the Motions for Reconsideration.
Metrobank (G.R. No. 172652), BPI (G.R. No. 175302), and Global
Bank (G.R. No. 175394) filed with this Court separate Petitions for
Review on Certiorari. In Resolutions dated February 21, 2007 24 and
March 12, 2007,25 this Court resolved to consolidate the three
petitions. Metrobank submitted the following issues for the
consideration of this Court:
(A) WHETHER OR NOT THE HONORABLE COURT OF
APPEALS ERRED IN RULING THAT "IT IS LEGALLY
POSSIBLE FOR A PURCHASER OF A MANAGER’S CHECK OR
CASHIER’S CHECK TO STOP PAYMENT THEREON THROUGH
A COURT ORDER ON THE GROUND OF THE PAYEE’S
ALLEGED BREACH OF CONTRACTUAL OBLIGATION
AMOUNTING TO AN ABSENCE OF CONSIDERATION
THEREFOR."
(B) GRANTING ARGUENDO THAT A MANAGER’S CHECK OR
CASHIER’S CHECK, "IN VIEW OF THE PECULIAR
CIRCUMSTANCES OF THIS CASE" MAY BE SUBJECT TO A
STOP PAYMENT ORDER BY THE PURCHASER THEREOF
THROUGH A COURT ORDER, WHETHER OR NOT THE
HONORABLE COURT OF APPEALS ERRED IN CONCLUDING
THAT PETITIONER HEREIN "HAD KNOWLEDGE OF
CIRCUMSTANCES THAT WOULD DEFEAT THE TITLE OF THE
PAYEE TO THE CHECKS" WITHOUT, HOWEVER, CITING ANY
SPECIFIC EVIDENCE WHICH WOULD PROVE THE
EXISTENCE OF SUCH KNOWLEDGE. (C) WHETHER OR NOT
THE HONORABLE COURT OF APPEALS ERRED IN
SUSTAINING THE TRIAL COURT’S ORDER FOR PETITIONER
HEREIN "TO PAY (TO CHIOK) THE VALUE OF CASHIER’S
CHECK NO. 003380 IN THE AMOUNT OF ₱7,613,000.00,
WHICH WAS DEBITED AGAINST CHIOK’S SAVINGS
ACCOUNT # 154-42504955 ON THE OBSERVATION THAT
THE PAYMENT TO FEBTC BY METROBANK OF CC NO.
003380ON JULY 12, 1995 WAS AN OPEN DEFIANCE OF THE
TRO OF JULY 6, 1995."26
BPI, on the other hand, presented the following issues:
I.
Whether or not the Court of Appeals detracted from well-settled
concepts and principles in commercial law regarding the nature,
causes, and effects of a manager’s check and cashier’s checkin ruling
that [the] power of the court can be invoked by the purchaser
[Chiok] in a proper action, which the Court su[b]stantially construed
as a rescissory action or the power to rescind obligations under
Article 1191 of the Civil Code.
II.
Whether or not the Honorable Court of Appeals erred in ruling that
where a purchaser invokes rescission due to an alleged breach of the
payee’s contractual obligation, it is deemed as "peculiar
circumstance" which justifies a stop payment order issued by the
purchaser or a temporary restraining order/injunction from a Court
to prevent payment of a Manager’s Check or a Cashier’s Check.
III.
Whether or not the Honorable Court of Appeals erred in ruling that
judicial admissions in the pleadings of Nuguid, BPI, Asian Bank,
Metrobank and even Chiok himself that Nuguid had withdrawn the
proceeds of the checks will not defeat Chiok’s "substantial right" to
restrain the drawee bank from paying BPI, the collecting bank or
presenting bank in this case who paid the value of the
Cashier’s/Manager’s Checks to the payee.27
Finally, Global Bank rely upon the following grounds in its petition
with this Court:
A.
THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT
PETITIONER GLOBAL BANK HAD NO JUSTIFICATION FOR ITS
RIGHT OF RECOURSE AGAINST RESPONDENT CHIOK
NOTWITHSTANDING THE CLEAR AND UNMISTAKABLE PROVISIONS
OF THE BILLS PURCHASE AGREEMENT.
B. WHEREFORE, it is respectfully prayed that no further action be taken
by this Honorable Court on the foregoing petitions, that the instant
THE COURT OF APPEALS GRAVELY ERRED IN MAKING PETITIONER proceedings be declared CLOSED and TERMINATED, and that an
GLOBAL BANK LIABLE FOR INTEREST OF 4% PER ANNUM DESPITE Order be rendered dismissing the above-referenced cases with
THE FACT THAT: prejudice.

1. RESPONDENT DID NOT ASK FOR SUCH RELIEF IN HIS In the above Joint Manifestation and Motion, respondent Chiok was
COMPLAINT; not represented by his counsel of record, Cruz Durian Alday and
Cruz-Matters, but was assisted by Espiritu Vitales Espiritu Law Office,
2. RESPONDENT HAD WAIVED HIS RIGHT TO ANY with Atty. Cesar D. Vitales as signatory, by way of special
INTEREST; AND appearance and assistance.

3. THERE IS NO EVIDENCE ON RECORD AS THE BASIS FOR On June 19, 2013, this Court issued a Resolution requiring petitioner
ANY INTEREST.28 BPI to comment on the Joint Manifestation and Motion filed by its
copetitioners Metrobank, Global Bank, and respondent Chiok. The
Resolution reads:
Before delving into the merits of these cases, we shall first dispose
of a procedural development during their pendency with the Court.
Considering the joint manifestation and motion of petitioners
Metropolitan Bank and Trust Company and Global Business Bank,
Joint Manifestation and Motion allegedly
Inc., and respondent, that after a thorough consideration, they have
filed by Metrobank, Global Bank and
decided to forego their respective claims against each other,
respondent Chiok
including past, present and/or contingent, in these cases and praying
that the instant proceedings in G.R. Nos. 172652 and 175394 be
On May 28, 2013, this Court received a Joint Manifestation and declared closed and terminated, the Court resolves to require
Motion allegedly filed by petitioners Metrobank, Global Bank, and petitioner Bank of the Philippine Islands to COMMENT thereon within
respondent Chiok, which reads: ten (10) days from notice thereof x x x.

PETITIONERS METROPOLITAN BANK & TRUST COMPANY & GLOBAL
BUSINESS BANK, INC., and RESPONDENT WILFRED N. CHIOK, by
their respective counsels, unto this Honorable Court, respectfully
state that after a thorough consideration, the parties herein have
decided to forego their respective claims against each other,
including, past, present and/or contingent, in relation to the above
referenced cases.
PRAYER
On September 12, 2013, respondent Chiok, this time assisted by his
counsel of record, Cruz Durian Alday & Cruz-Matters, filed a Motion
for Reconsideration of our Resolution dated June 19, 2013. The
signatory to the Motion for Reconsideration, Atty. Angel Cruz, grossly
misread our Resolution requiring BPI to comment on the Joint
Manifestation and Motion, and apparently contemplated that we are
already granting said Motion. Atty. Cruz objected to the Joint
Manifestation and Motion, labeling the same as tainted with fraud.
According to Atty. Cruz, Espiritu Vitales and Espiritu’s failure to give
prior notice to him is in violation of Canon 8 of the Code of
Professional Responsibility. Atty. Cruz prays that Metrobank and
Global Bank be ordered to submit a document of their settlement
showing the amounts paid to Chiok, and for the June19, 2013
Resolution of this Court be reconsidered and set aside.
On October 9, 2013, BPI filed its comment to the Joint Manifestation
and Motion, opposing the samefor being an implied procedural
shortcut to a Compromise Agreement. It averred that while the
courts encourage parties to amicably settle cases, such settlements
are strictly scrutinized by the courts for approval. BPI also pointed
out that the Joint Manifestation and Motion was not supported by
any required appropriate Board Resolution of Metrobank and Global
Bank granting the supposed signatories the authority to enter into a
compromise. BPI prayed that the Joint Manifestation and Motion of
Metrobank, Global Bank, and Chiok be denied, and to render a full
Decision on the merits reversing the Decision of the Court of
Appeals.
On January 20, 2014, Global Bank filed a Comment to Atty. Cruz’s
Motion for Reconsideration on behalf of Chiok, praying that said
Motion be expunged from the records for failure of Atty. Cruz to
indicate the number and date of issue of his MCLE Certificate of
Compliance or Certificate of Exemption for the immediately
preceding compliance period.
As far as this Court is concerned, the counsel of record of
respondent Chiok is still Cruz Durian Alday & Cruz-Matters. The
requisites of a proper substitution of counsel of record are stated
and settled in jurisprudence:
No substitution of counsel of record is allowed unless the following
essential requisites of a valid substitution of counsel concur: (1)
there must be a written request for substitution; (2) it must be filed
with the written consent of the client; (3) it must be with the written
consent of the attorney to be substituted; and (4) in case the
consent of the attorney to be substituted cannot be obtained, there
must be at least a proof of notice that the motion for substitution
was served on him in the manner prescribed by the Rules of
Court.29 (Citation omitted.)
Therefore, while we should indeed require Atty. Cruz to indicate the
number and date of issue of his MCLE Certificate of Compliance or
Certificate of Exemption for the immediately preceding compliance
period, he is justified in pointing out the violation of Canon 8 30 of the
Code of Professional Responsibility, Rule 8.02 of which provides:
Rule 8.02. – A lawyer shall not, directly or indirectly, encroach upon
the professional employment of another lawyer; however, it is the
right of any lawyer, without fear or favor, to give proper advice and
assistance to those seeking relief against unfaithful or neglectful
counsel.
We should also give weight to the opposition of BPI to the supposed
compromise agreement. As stated above, the consolidated petitions
filed by Metrobank, BPI, and Global Bank all assail the Decision of
the Court of Appeals in CA-G.R. CV No. 77508 dated May 5, 2006,
and the Resolution on the same case dated November 6, 2006. BPI
itself has a claim against Global Bank, which appear to be intimately
related to issues brought forth in the other consolidated petitions.
Furthermore, the failure of the parties to the Joint Manifestation and
Motion to declare with particularity the terms of their agreement
prevents us from approving the same so as to allow it to attain the
effect of res judicata. A judicial compromise is not a mere contract
between the parties. Thus, we have held that:
A compromise agreement intended to resolve a matter already under
litigation is a judicial compromise. Having judicial mandate and
entered as its determination of the controversy, such judicial
compromise has the force and effect of a judgment. It transcends its
identity as a mere contract between the parties, as it becomes a
judgment that is subject to execution in accordance with the Rules
of Court. Thus, a compromise agreement that has been made and
duly approved by the court attains the effect and authority of res
judicata, although no execution may be issued unless the agreement
receives the approval of the court where the litigation is pending and
compliance with the terms of the agreement is decreed. 31 (Citation
omitted.)
We are therefore constrained to deny the Joint Manifestation and fact borne out by the BSP manual for banks and intermediaries,
Motion filed with this Court on May 28, 2013 and to hereby decide which provides, among others, in its Section 1603.1, c, as follows:
the consolidated petitions on their merits.
xxxx
The Court’s ruling on the merits of these
consolidated petitions c. Items for clearing. All checks and documents payable on demand
and drawn against a bank/branch, institution or entity allowed to
Whether or not payment of manager’s clear may be exchanged through the Clearing Office inManila and
and cashier’s checks are subject to the the Regional Clearing Units in regional clearing centers designated
condition that the payee thereof should by the Central Bank x x x.33
comply with his obligations to the
purchaser of the checks The RTC added that since manager’s and cashier’s checks are the
subject of regular clearing, they may consequently be refused for
The legal effects of a manager’s check and a cashier’s check are the cause by the drawee, which refusal is in fact provided for in Section
same. A manager’s check, like a cashier’s check, is an order of the 20 of the Rule Book of the PCHC:
bank to pay, drawn upon itself, committing in effect its total
resources, integrity, and honor behind its issuance. By its peculiar Sec. 20 – REGULAR RETURN ITEM PROCEDURE
character and general use in commerce, a manager’s check or a
cashier’s check is regarded substantially to be as good as the money 20.1 Any check/item sent for clearing through the PCHC on which
it represents.32 Thus, the succeeding discussions and jurisprudence payment should be refused by the Drawee Bank in accordance with
on manager’s checks, unless stated otherwise, are applicable to long standing and accepted banking practices, such as but not
cashier’s checks, and vice versa. The RTC effectively ruled that limited to the fact that:
payment of manager’s and cashier’s checks are subject to the
condition that the payee thereof complies with his obligations to the
(a) it bears the forged or unauthorized signature of the
purchaser of the checks:
drawer(s); or

The dedication of such checks pursuant to specific reciprocal

(b) it is drawn against a closed account; or
undertakings between their purchasers and payees authorizes
rescission by the former to prevent substantial and material damage
to themselves, which authority includes stopping the payment of the (c) it is drawn against insufficient funds; or
checks.
(d) payment thereof has been stopped; or
Moreover, it seems to be fallacious to hold that the unconditional
payment of manager’s and cashier’s checks is the rule. To begin (e) it is post-dated or stale-dated; and
with, both manager’sand cashier’s checks are still subject to regular
clearing under the regulations of the Bangko Sentral ng Pilipinas, a (f) it is a cashier’s/manager’s/treasurer’s check of the
drawee which has been materially altered;
shall be returned through the PCHC not later than the next regular
clearing for local exchanges and the acceptance of said return by the
Sending Bank shall be mandatory.
It goes without saying that under the aforecited clearing rule[,] the
enumeration of causes to return checks is not exclusive but may
include other causes which are consistent with long standing and
accepted banking practices. The reason of plaintiffs can well
constitute such a justifiable cause to enjoin payment.34
The RTC made an error at this point. While indeed, it cannot be said
that manager’s and cashier’s checks are pre-cleared, clearing should
not be confused with acceptance. Manager’s and cashier’s checks
are still the subject of clearing to ensure that the same have not
been materially altered or otherwise completely counterfeited.
However, manager’s and cashier’s checks are pre-accepted by the
mere issuance thereof by the bank, which is both its drawer and
drawee. Thus, while manager’s and cashier’s checks are still subject
to clearing, they cannot be countermanded for being drawn against
a closed account, for being drawn against insufficient funds, or for
similar reasons such as a condition not appearing on the face of the
check. Long standing and accepted banking practicesdo not
countenance the countermanding of manager’s and cashier’s checks
on the basis of a mere allegation of failure of the payee to comply
with its obligations towards the purchaser. On the contrary, the
accepted banking practice is that such checks are as good as cash.
Thus, in New Pacific Timber & Supply Company, Inc. v. Hon.
Seneris,35 we held:
It is a well-known and accepted practice in the business sector that a
Cashier's Check is deemed as cash. Moreover, since the said check
had been certified by the drawee bank, by the certification, the
funds represented by the check are transferred from the credit of
the maker to that of the payee or holder, and for all intents and
purposes, the latter becomes the depositor of the drawee bank, with
rights and duties of one in such situation. Where a check is certified
by the bank on which it is drawn, the certification is equivalent to
acceptance. Said certification "implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they have been set
apart for its satisfaction, and that they shall be so applied whenever
the check is presented for payment. It is an understanding that the
check is good then, and shall continue good, and this agreement is
as binding on the bank as its notes in circulation, a certificate of
deposit payable to the order of the depositor, or any other obligation
it can assume. The object of certifying a check, as regards both
parties, is to enable the holder to use it as money." When the holder
procures the check to be certified, "the check operates as an
assignment of a part of the funds to the creditors." Hence, the
exception to the rule enunciated under Section 63 of the Central
Bank Act to the effect "that a check which has been cleared and
credited to the account of the creditor shall be equivalent to a
delivery to the creditor in cash in an amount equal to the amount
credited to his account" shall apply in this case. x x x. (Emphases
supplied, citations omitted.)
Even more telling is the Court’s pronouncement in Tan v. Court of
Appeals,36 which unequivocally settled the unconditional nature of
the credit created by the issuance of manager’s or cashier’s checks:
A cashier’s check is a primary obligation of the issuing bank and
accepted in advanceby its mere issuance. By its very nature, a
cashier’s check is the bank’s order to pay drawn upon itself,
committing in effect its total resources, integrity and honor behind
the check. A cashier’s check by its peculiar character and general use
in the commercial world is regarded substantially to be as good
asthe money which it represents. In this case, therefore, PCIB by
issuing the check created an unconditional creditin favor of any
collecting bank. (Emphases supplied, citations omitted.)
Furthermore, under the principle of ejusdem generis, where a
statute describes things of a particular class or kind accompanied by
words of a generic character, the generic word willusually be limited
to things of a similar nature with those particularly enumerated,
unless there be something in the context of the statute which would
repel such inference.37 Thus, any long standing and accepted
banking practice which can be considered as a valid cause to return
manager’s or cashier’s checks should be of a similar nature to the the subject checks with the end in view of the return of the proceeds
enumerated cause applicable to manager’s or cashier’s checks: to Chiok.40
material alteration. As stated above, an example ofa similar cause is
the presentation of a counterfeit check. Thus, as it was construed by the Court of Appeals, the Amended
Complaint of Chiok was in reality an action for rescission of the
Whether or not the purchaser of contract to buy foreign currency between Chiok and Nuguid. The
manager’s and cashier’s checks has the Court of Appeals then proceeded to cancel the manager’s and
right to have the checks cancelled by cashier’s checks as a consequence of the granting of the action for
filing an action for rescission of its rescission, explaining that "the subject checks would not have been
contract with the payee issued were it not for the contract between Chiok and Nuguid.
Therefore, they cannot be disassociated from the contract and given
The Court of Appeals affirmed the order of the RTC for Global Bank a distinct and exclusive signification, as the purchase thereof is part
and Metrobank to pay Chiok for the amounts of the subject and parcel of the series of transactions necessary to consummate
manager’s and cashier’s checks. However, since it isclear to the the contract."41
appellate court that the payment of manager’s and cashier’s checks
cannot be considered to be subject to the condition the payee We disagree with the above ruling.
thereof complies with his obligations to the purchaser of the checks,
the Court of Appeals provided another legal basis for such liability – The right to rescind invoked by the Court of Appeals is provided by
rescission under Article 1191 of the Civil Code: Article 1191 of the Civil Code, which reads:

WHEREFORE, premises considered, the Decision dated August 29, Art. 1191. The power to rescind obligations is implied in reciprocal
2000 of the RTC, Branch 96, Quezon City is AFFIRMED with the ones, in case one of the obligors should not comply with what is
following MODIFICATIONS: incumbent upon him.

1.) The contract to buy foreign currency in the amount of
$1,022,288.50 between plaintiff-appellee Wilfred N. Chiok and
defendant Gonzalo B. Nuguid is hereby rescinded. Corollarily,
Manager’s Check Nos. 025935 and 025939 and Cashier’s Check No.
003380 are ordered cancelled.38
According to the Court of Appeals, while such rescission was not
mentioned in Chiok’s Amended Complaint, the same was evident
from his prayer to be declared the legal owner of the proceeds of
the subject checks and to be allowed to withdraw the same. Since
rescission creates the obligation to return the things which are the
object of the contract, together with the fruits, the price and the
interest,39 injunctive relief was necessary to restrain the payment of
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.
The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with Articles
1385 and 1388 and the Mortgage Law.
The cause of action supplied by the above article, however, is clearly
predicated upon the reciprocity of the obligations of the injured party
and the guilty party. Reciprocal obligations are those which arise
from the same cause, and in which each party is a debtor and a
creditor of the other, such that the obligation of one is dependent
upon the obligation of the other. They are to be performed
simultaneously such that the performance of one is conditioned upon
the simultaneous fulfillment of the other.42 When Nuguid failed to
deliver the agreed amount to Chiok, the latter had a cause of action
against Nuguid to ask for the rescission of their contract. On the
other hand, Chiok did not have a cause of action against Metrobank
and Global Bank that would allow him to rescind the contracts of
sale of the manager’s or cashier’s checks, which would have resulted
in the crediting of the amounts thereof back to his accounts.
Otherwise stated, the right of rescission43 under Article 1191 of the
Civil Code can only be exercised in accordance with the principle of
relativity of contracts under Article 1131 of the same code, which
provides:
Art. 1311. Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and obligations
arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. x x x.
In several cases, this Court has ruled that under the civil law
principle of relativity of contracts under Article 1131, contracts can
only bind the parties who entered into it, and it cannot favor or
prejudice a third person, even if he is aware of such contract and
has acted with knowledge thereof. 44 Metrobank and Global Bank are
not parties to the contract to buy foreign currency between Chiok
and Nuguid. Therefore, they are not bound by such contract and
cannot be prejudiced by the failure of Nuguid to comply with the
terms thereof.
Neither could Chiok be validly granted a writ of injunction against
Metrobank and Global Bank to enjoin said banks from honoring the
subject manager’s and cashier’s checks. It is elementary that "(a)n
injunction should never issue when an action for damages would
adequately compensate the injuries caused. The very foundation of
the jurisdiction to issue the writ of injunction rests in the fact that
the damages caused are irreparable and that damages would not
adequately compensate."45 Chiok could have and should have
proceeded directly against Nuguid to claim damages for breach of
contract and to have the very account where he deposited the
subject checks garnished under Section 7(d)46 and Section 8,47 Rule
57 of the Rules of Court. Instead, Chiok filed an action to enjoin
Metrobank and Global Bank from complying with their primary
obligation under checks in which they are liable as both drawer and
drawee.
It is undisputed that Chiok personally deposited the subject
manager’s and cashier’s checks to Nuguid’s account. 1âwphi1 If the
intention of Chiok was for Nuguid to be allowed to withdraw the
proceeds of the checks after clearing, he could have easily deposited
personal checks, instead of going through the trouble of purchasing
manager’s and cashier’s checks. Chiok therefore knew, and actually
intended, that Nuguid will be allowed to immediately withdraw the
proceeds of the subject checks. The deposit of the checks which
were practically as good as cash was willingly and voluntarily made
by Chiok, without any assurance that Nuguid will comply with his
end of the bargain on the same day. The explanation for such
apparently reckless action was admitted by Chiok in the Amended
Complaint itself:
That plaintiff [Chiok] due to the numberof years (five to seven years)
of business transactions with defendant [Nuguid] has reposed
utmost trust and confidence on the latterthat their transactions as of
June 1995 reaches millions of pesos. x x x.48 (Emphases supplied.)
As between two innocent persons, one of whom must suffer the
consequences of a breach of trust, the one who made it possible by
his act of confidence must bear the loss.49 Evidently, it was the
utmost trust and confidence reposed by Chiok to Nuguid that caused
this entire debacle, dragging three banks into the controversy, and
having their resources threatened because of an alleged default in a consequently, the bank has the right to refuse payment when the
contract they were not privy to. check is presented by the payee.

Whether or not the peculiar While the factual milieu of the Mesinacase is different from the case
circumstances of this case justify the at bench, the inference drawn therein by the High Court is
deviation from the general principles on nevertheless applicable. The refusal of Nuguid to deliver the dollar
causes and effects of manager’s and equivalent of the three checks in the amount of $1,022,288.50 in the
cashier’s checks afternoon of July 5, 1995 amounted to a failure of consideration that
would not entitle Nuguid to collect on the subject checks.
The Court of Appeals, while admitting that the general principles on
the causes and effects of manager’s and cashier’s checks do not xxxx
allow the countermanding of such checks on the basis of an alleged
failure of consideration of the payee to the purchaser, nevertheless Let it be emphasized that in resolving the matter before Us, We do
held that the peculiar circumstances of this case justify a deviation not detract from well-settled concepts and principles in commercial
from said general principles, applying the aforementioned case of law regarding the nature, causes and effects of a manager’s check
Mesina. The Court of Appeals held: and cashier’s check. Such checks are primary obligations of the
issuing bank and accepted in advance by the mere issuance thereof.
At the core of the appeal interposed by the intervenor BPI, as well as They are a bank’s order to pay drawn upon itself, committing in
the depository banks, Global Bank and Metrobank, is the issue of effect its total resources, integrity, and honor. By their peculiar
whether or not it is legally possible for a purchaser of a Manager’s character and general use in the commercial world, they are
Check or Cashier’s Check to stop payment thereon through a court regarded substantially as good as the money they represent.
order on the ground of the payee’s alleged breach of contractual However, in view of the peculiar circumstances of the case at bench,
obligation amounting to an absence of consideration therefor. We are constrained to set aside the foregoing concepts and
principles in favor of the exercise of the right to rescind a contract
In view of the peculiar circumstances of this case, and in the interest upon the failure of consideration thereof.50 (Emphases ours, citations
of substantial justice, We are constrained to rule in the affirmative. omitted.)

xxxx
In the case of Mesina v. Intermediate Appellate Court, cited by BPI
in its appeal brief, the Supreme Court had the occasion to rule that
general principles on causes and effects of a cashier’s check, i.e.,
that it cannot be countermanded in the hands of a holder in due
course and that it is a bill of exchange drawn by the bank against
itself, cannot be applied without considering that the bank was
aware of facts (in this case, the cashier’s check was stolen) that
would not entitle the payee thereof to collect on the check and,
In deviating from general banking principles and disposing the case
on the basis of equity, the courts a quo should have at least ensured
that their dispositions were indeed equitable. This Court observes
that equity was not served in the dispositions below wherein Nuguid,
the very person found to have violated his contract by not delivering
his dollar obligation, was absolved from his liability, leaving the
banks who are not parties to the contract to suffer the losses of
millions of pesos.
The Court of Appeals’ reliance in the 1986 case of Mesina was
likewise inappropriate. In Mesina, respondent Jose Go purchased
from Associated Bank a cashier’s check for ₱800,000.00, payable to
bearer.51 Jose Go inadvertently left the check on the top desk of the
bank manager
when he left the bank. The bank manager entrusted the check for
safekeeping to a certain bank official named Albert Uy, who then had
a certain Alexander Lim as visitor. Uy left his deskto answer a phone
call and to go to the men’s room. When Uy returned to his desk, Lim
was gone. Jose Go inquired for his check from Uy, but the check was
nowhereto be found. At the advice of Uy, Jose Go accomplished a
Stop Payment Order and executed an affidavit of loss. Uy reported
the loss to the police. Petitioner Marcelo Mesina tried to encash the
check with Prudential Bank, but the check was dishonored by
Associated Bank by sending it back to Prudential Bank with the
words "Payment Stopped" stamped on it. When the police asked
Mesina how he came to possess the check, he said it was paid to
him by Alexander Lim in a "certain transaction"but refused to
elucidate further. Associated Bank filed an action for Interpleader
against Jose Go and Mesina to determine which of them is entitled to
the proceeds of the check. It was in the appeal on said interpleader
case that this Court allowed the deviation from the general principles
on cashier’s checks on account of the bank’s awareness of certain
facts that would prevent the payee to collect on the check.
There is no arguing that the peculiar circumstances in Mesina indeed
called for such deviation on account of the drawee bank’s awareness
of certain relevant facts. There is, however, no comparable peculiar
circumstance in the case at bar that would justify applying the
Mesina disposition. In Mesina, the cashier’s check was stolen while it
was in the possession of the drawee bank. In the case at bar, the
manager’s and cashier’s checks were personally deposited by Chiok
in the account of Nuguid. The only knowledge that can be attributed
to the drawee banks is whatever was relayed by Chiok himself when
he asked for a Stop Payment Order. Chiok testified on this matter, to
wit:
Q: Now, Mr. witness, since according to you the defendant
failed to deliver [this] amount of ₱1,023,288.23 what action
have you undertaken to protect yourinterest Mr. witness?
A: I immediately call my lawyer, Atty. Espiritu to seek his
legal advise in this matter.
Q: Prior to that matter that you soughtthe advise of your
lawyer, Atty. Espiritu insofar as the issuing bank is
concerned, namely, Asian Bank, what did you do in order to
protect your interest? A: I immediately call the bank asking
them if what is the procedure for stop payment and the
bank told me that you have to secure a court order as soon
as possible before the clearing of these checks. 52 (Emphasis
supplied.)
Asian Bank, which is now Global Bank, obeyed the TRO and denied
the clearing of the manager’s checks. As such, Global Bank may not
be held liable on account of the knowledge of whatever else Chiok
told them when he asked for the procedure to secure a Stop
Payment Order. On the other hand, there was no mention that
Metrobank was ever notified of the alleged failure of consideration.
Only Asian Bank was notified of such fact. Furthermore, the mere
allegation of breach on the part of the payee of his personal contract
with the purchaser should not be considered a sufficient cause to
immediately nullify such checks, thereby eroding their integrity and
honor as being as good as cash.
In view of all the foregoing, we resolve that Chiok’s complaint should
be denied insofar as it prayed for the withdrawal of the proceeds of
the subject manager’s and cashier’s checks. Accordingly, the writ of
preliminary prohibitory injunction enjoining Metrobank and Global
Bank from honoring the subject manager’s and cashier’s checks
should be lifted.
Since we have ruled that Chiok cannot claim the amounts of the
checks from Metrobank and Global Bank, the issue concerning the
setting off of Global Bank’s judgment debt to Chiok with the
outstanding obligations of Chiok is hereby mooted. We furthermore
note that Global Bank had not presented 53 such issue as a
counterclaim in the case at bar, preventing us from ruling on the
same.
BPI’s right to the proceeds of the
manager’s checks from Global Bank
While our ruling in Mesinais inapplicable to the case at bar, a much
more relevant case as regards the effect of a Stop Payment Order
upon a manager’s check would be Security Bank and Trust Company
v. Rizal Commercial Banking Corporation, 54 which was decided by
this Court in 2009. In said case, SBTC issued a manager’s check for
₱8 million, payable to "CASH," as proceeds of the loan granted to
Guidon Construction and Development Corporation (GCDC). On the
same day, the manager’s check was deposited by Continental
Manufacturing Corporation (CMC) in its current account with Rizal
Commercial Banking Corporation (RCBC). RCBC immediately honored
the manager’s check and allowed CMC to withdraw the same. GCDC
issued a Stop Payment Order to SBTC on the next day, claiming that
the check was released to a third party by mistake. SBTC dishonored
and returned the manager’s check to RCBC. The check was returned
back and forth between the two banks, resulting in automatic debits
and credits in each bank’s clearing balance. RCBC filed a complaint
for damages against SBTC. When the case reached this Court, we
held:
At the outset, it must be noted that the questioned check issued by
SBTC is not just an ordinary check but a manager’s check. A
manager’s check is one drawn by a bank’s manager upon the bank
itself. It stands on the same footing as a certified check, which is
deemed to have been accepted by the bank that certified it. As the
bank’s own check, a manager’s check becomes the primary
obligation of the bank and is accepted in advance by the act of its
issuance.
In this case, RCBC, in immediately crediting the amount of ₱8 million
to CMC’s account, relied on the integrity and honor of the check as it
is regarded in commercial transactions. Where the questioned check,
which was payable to"Cash," appeared regular on its face, and the
bank found nothing unusual in the transaction, as the drawer usually
issued checks in big amounts made payable to cash, RCBC cannot be
faulted in paying the value of the questioned check.
In our considered view, SBTC cannot escape liability by invoking
Monetary Board Resolution No. 2202 dated December 21, 1979,
prohibiting drawings against uncollected deposits. For we must point
out that the Central Bank at that timeissued a Memorandum dated
July 9, 1980, which interpreted said Monetary Board Resolution No.
2202. In its pertinent portion, saidMemorandum reads:
MEMORANDUM TO ALL BANKS
July 9, 1980
For the guidance of all concerned, Monetary Board Resolution No.
2202 dated December 31, 1979 prohibiting, as a matter of policy,
drawing against uncollected deposit effective July 1, 1980,
uncollected deposits representing
manager’s/cashier’s/treasurer’schecks, treasury warrants, postal
money orders and duly funded "on us" checks which may be
permitted at the discretion of each bank, covers drawings against
demand deposits as well as withdrawals from savings deposits.
Thus, it is clear from the July 9, 1980 Memorandum that banks were
given the discretion to allow immediate drawings on uncollected
deposits of manager’s checks, among others. Consequently, RCBC,
in allowing the immediate withdrawal against the subject manager’s
check, only exercised a prerogative expressly granted to it bythe
Monetary Board.
Moreover, neither Monetary Board Resolution No. 2202 nor the July
9, 1980 Memorandum alters the extraordinary nature of the
manager’s check and the relativerights of the parties thereto. SBTC’s
liability as drawer remains the same— by drawing the instrument, it
admits the existence of the payee and his then capacity to indorse;
and engages that on due presentment, the instrument will be
accepted, or paid, or both, according to its tenor. 55(Emphases
supplied, citations omitted.)
As in SBTC, BPI in the case at bar relied on the integrity and honor
of the manager’s and cashier’s checks asthey are regarded in
commercial transactions when it immediately credited their amounts
to Nuguid’s account.
The Court of Appeals, however, sustained the dismissal of BPI’s
complaint-in-intervention to recover the amounts of the manager’s
checks from Global Bank on account of BPI’s failure to prove the
supposed withdrawal by Nuguid of the value of the checks:
BPI’s cause of action against Asian Bank (now Global Bank) is
derived from the supposed withdrawal by Nuguid of the proceeds of
the two Manager’s Checks it issued and the refusal of Asian Bank to
make good the same. That the admissions in the pleadings to the
effect that Nuguid had withdrawn the said proceeds failed to satisfy
the trial court is understandable. Such withdrawal is anessential fact
that, if properly substantiated, would have defeated Chiok’s right
toan injunction. BPI could so easily have presented withdrawal slips
or, with Nuguid’s consent, statements of account orthe passbook
itself, which would indubitably show that money actually changed
hands at the crucial period before the issuance of the TRO. But it did
not.56
We disagree with this ruling. As provided for in Section 4, Rule 129
of the Rules of Court, admissions in pleadings are judicial admissions
and do not require proof:
Section 4. Judicial admissions. – An admission, verbal or written,
made by a party in the course of the proceedings in the same case,
does not require proof. The admission may be contradicted only by
showing that it was made through palpable mistake or that no such
admission was made.
Nuguid has admitted that FEBTC (now BPI) has paid him the value
of the subject checks.57 This statement by Nuguid is certainly against
his own interest as he can be held liable for said amounts.
Unfortunately, Nuguid allowed his appeal with the Court of Appeals
to lapse, without taking steps to have it reinstated. This course of
action, which is highly unlikely if Nuguid had not withdrawn the
value of the manager’s and cashier’s checks deposited into his
account, likewise prevents us from ordering Nuguid to deliver the
amounts of the checks to Chiok. Parties who did not appeal will not
be affected by the decision of an appellate court rendered to
appealing parties.58
Another reason given by the Court of Appeals for sustaining the
dismissal of BPI’s complaint-in-intervention was that BPI failed to
prove that it was a holder in due course with respect to the
manager’s checks.59
We agree with the finding of the Court of Appeals that BPI is not a
holder in due course with respect to manager’s checks. Said checks
were never indorsed by Nuguid to FEBTC, the predecessor-in-
interest of BPI, for the reason that they were deposited by Chiok
directly to Nuguid’s account with FEBTC. However, inview of our
ruling that Nuguid has withdrawn the value of the checks from his
account, BPI has the rights of an equitable assignee for value under
Section 49 of the Negotiable Instruments Law, which provides:
Section 49. Transfer without indorsement; effect of. – Where the
holder of an instrument payable to his order transfers it for value
without indorsing it, the transfer vests in the transferee suchtitle as
the transferor had therein, and the transferee acquires in addition,
the right to have the indorsement of the transferor. But for the
purpose of determining whether the transferee is a holder in due
course, the negotiation takes effect as of the time when the
indorsement is actually made.
As an equitable assignee, BPI acquires the instrument subject to
defenses and equities available among prior parties 60 and, in
addition, the right to have the indorsement of Nuguid. Since the
checks in question are manager’s checks, the drawer and the drawee
thereof are both Global Bank. Respondent Chiok cannot be
considered a prior party as he is not the check’s drawer, drawee,
indorser, payee or indorsee. Global Bank is consequently primarily
liable upon the instrument, and cannot hide behind respondent
Chiok’s defenses. As discussed above, manager’s checks are pre-
accepted. By issuing the manager’s check, therefore, Global Bank
committed in effect its total resources, integrity and honor towards
its payment.61
Resultantly, Global Bank should pay BPI the amount of
₱18,455,350.00, representing the aggregate face value ofMC No.
025935 and MC No. 025939. Since Global Bank was merely following
the TRO and preliminary injunction issued by the RTC, it cannot be
held liable for legal interest during the time said amounts are in its
possession. Instead, we are adopting the formulation of the Court of
Appeals that the amounts be treated as savings deposits in Global
Bank. The interest rate, however, should not be fixed at 4% as
determined by the Court of Appeals, since said rates have fluctuated
since July 7, 1995, the date Global Bank refused to honor the subject
manager’s checks. Thus, Global Bank should pay BPI interest based
on the rates it actually paid its depositors from July 7, 1995 until the
finality of this Decision, in accordance with the same compounding
rules it applies to its depositors. The legal rate of6% per annum shall
apply after the finality of this Decision.62
We have to stress that respondent Chiok is not left without recourse.
Respondent Chiok’s cause of action to recover the value of the
checks is against Nuguid. Unfortunately, Nuguid allowed his appeal
with the Court of Appeals to lapse, without taking steps tohave it
reinstated. As stated above, parties who did not appeal will not be
affected by the decision of the appellate court rendered to appealing
parties.63 Moreover, since Nuguid was not impleaded as a party to
the present consolidated cases, he cannot be bound by our
judgment herein. Respondent Chiok should therefore pursue his
remedy against Nuguid in a separate action to recover the amounts
of the checks.
Despite the reversal of the Court of Appeals Decision, the liability of
Nuguid therein to respondent Chiok for attorney’s fees equivalent to
5% of the total amount due remains valid, computed from the
amounts stated in said Decision. This is a consequence of the finality
of the Decision of the Court of Appeals with respect to him.
WHEREFORE, the Court resolves to DENY the Joint Manifestation
and Motion filed with this Court on May 28, 2013.
The petitions in G.R. No. 172652 and G.R. No. 175302 are
GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No.
77508 dated May 5, 2006, and the Resolution on the same case
dated November 6, 2006 are hereby REVERSED AND SET ASIDE,
and a new one is issued ordering the DENIAL of the Amended
Complaint in Civil Case No. Q-95-24299 in Branch 96 of the Regional
Trial Court of Quezon City for lack of merit. The Writ of Preliminary
Prohibitory Injunction enjoining Asian Banking Corporation (now
Global Business Bank, Inc.) from honoring MC No. 025935 and MC
No. 025939, and Metropolitan Bank & Trust Company from honoring
CC No. 003380, is hereby LIFTED and SET ASIDE.
Global Business Bank, Inc. is ORDERED TO PAY the Bank of the
Philippine Islands, as successor-in-interest of Far East Bank & Trust
Company, the amount of ₱18,455,350.00, representing the
aggregate face value of MC No. 025935 and MC No. 025939, with
interest based on the rates it actually paid its depositors from July 7,
1995 until the finality of this Decision, in accordance with the same
compounding rules it applies to its depositors.
The petition in G.R. No. 175394 is hereby rendered MOOT.
The liabilities of spouses Gonzalo B. Nuguid and Marinella O. Nuguid
under the Decision and Resolution of the Court of Appeals in CAG.R.
CV No. 77508 remain VALID and SUBSISTING, computed from the
amounts adjudged by the Court of Appeals, without prejudice to any
further action that may be filed by Wilfred N. Chiok.

SO ORDERED.
G.R. No. 97753 August 10, 1992 22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
CALTEX (PHILIPPINES), INC., petitioner, 2 Mar. 82 74701 to 74740 40 160,000
vs. 4 Mar. 82 90127 to 90146 20 80,000
COURT OF APPEALS and SECURITY BANK AND TRUST 5 Mar. 82 74797 to 94800 4 16,000
COMPANY, respondents. 5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
Bito, Lozada, Ortega & Castillo for petitioners. 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
Nepomuceno, Hofileña & Guingona for private.
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========
REGALADO, J.:
2. Angel dela Cruz delivered the said certificates of
This petition for review on certiorari impugns and seeks the reversal time (CTDs) to herein plaintiff in connection with his
of the decision promulgated by respondent court on March 8, 1991 purchased of fuel products from the latter (Original
in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier Record, p. 208).
decision of the Regional Trial Court of Manila, Branch XLII, 2 which
dismissed the complaint filed therein by herein petitioner against 3. Sometime in March 1982, Angel dela Cruz
respondent bank. informed Mr. Timoteo Tiangco, the Sucat Branch
Manger, that he lost all the certificates of time
The undisputed background of this case, as found by the court a deposit in dispute. Mr. Tiangco advised said
quo and adopted by respondent court, appears of record: depositor to execute and submit a notarized Affidavit
of Loss, as required by defendant bank's procedure,
1. On various dates, defendant, a commercial if he desired replacement of said lost CTDs (TSN,
banking institution, through its Sucat Branch issued February 9, 1987, pp. 48-50).
280 certificates of time deposit (CTDs) in favor of
one Angel dela Cruz who deposited with herein 4. On March 18, 1982, Angel dela Cruz executed and
defendant the aggregate amount of P1,120,000.00, delivered to defendant bank the required Affidavit of
as follows: (Joint Partial Stipulation of Facts and Loss (Defendant's Exhibit 281). On the basis of said
Statement of Issues, Original Records, p. 207; affidavit of loss, 280 replacement CTDs were issued
Defendant's Exhibits 1 to 280); in favor of said depositor (Defendant's Exhibits 282-
561).
CTD CTD
Dates Serial Nos. Quantity Amount 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 provides that the amount deposited shall be
AND TRUST COMPANY "repayable to said depositor" on the period
6778 Ayala Ave., Makati No. 90101 indicated. Therefore, the text of the instrument(s)
Metro Manila, Philippines themselves manifest with clarity that they are
SUCAT OFFICEP 4,000.00 payable, not to whoever purports to be the "bearer"
CERTIFICATE OF DEPOSIT but only to the specified person indicated therein,
Rate 16% the depositor. In effect, the appellee bank
acknowledges its depositor Angel dela Cruz as the
Date of Maturity FEB. 23, 1984 FEB 22, person who made the deposit and further engages
1982, 19____ itself to pay said depositor the amount indicated
thereon at the stipulated date. 6
This is to Certify that B E A R E
R has deposited in this Bank the We disagree with these findings and conclusions, and hereby hold
sum of PESOS: FOUR THOUSAND that the CTDs in question are negotiable instruments. Section 1 Act
ONLY, SECURITY BANK SUCAT No. 2031, otherwise known as the Negotiable Instruments Law,
OFFICE P4,000 & 00 CTS Pesos, enumerates the requisites for an instrument to become
Philippine Currency, repayable to negotiable, viz:
said depositor 731 days. after date,
upon presentation and surrender of (a) It must be in writing and signed by the maker or
this certificate, with interest at the drawer;
rate of 16% per cent per annum.
(b) Must contain an unconditional promise or order
(Sgd. Illegible) (Sgd. Illegible) to pay a sum certain in money;

—————————— ——————————— (c) Must be payable on demand, or at a fixed or

determinable future time;
AUTHORIZED SIGNATURES 5

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

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
(e) Where the instrument is addressed to a drawee,
he must be named or otherwise indicated therein
with reasonable certainty.
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. of time deposit insofar as the bank
Angel de la Cruz. is concerned?

xxx xxx xxx witness:

Atty. Calida: a Angel dela Cruz is the depositor. 8

q In other words Mr. Witness, you xxx xxx xxx

are saying that per books of the
bank, the depositor referred (sic) in
these certificates states that it was
Angel dela Cruz?
witness:
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
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. 9 In the construction of a bill or
note, the intention of the parties is to control, if it can be legally
ascertained. 10 While the writing may be read in the light of
surrounding 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' purchases of its fuel
products. Any doubt as to whether the CTDs were 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 authorized and
responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent
Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . .
These certificates of deposit were negotiated to us by Mr. Angel dela
Cruz to guarantee his purchases of fuel products " (Emphasis
ours.) 13 This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an
admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person
relying thereon. 14 A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon
them. 15 In the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing true, and to act upon such
belief, he cannot, in any litigation arising out of such declaration,
act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as
security, petitioner's credit manager could have easily said so,
instead of using the words "to guarantee" in the letter aforequoted.
Besides, when respondent bank, as defendant in the court below,
moved for a bill of particularity therein 17 praying, among others,
that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of
the alleged indebtedness of Angel de la Cruz to plaintiff and (b)
whether or not it issued a receipt showing that the CTDs were
delivered to it by De la Cruz as payment of the latter's alleged
indebtedness to it, plaintiff corporation opposed the motion. 18 Had it
produced the receipt prayed for, it could have proved, if such truly
was the fact, that the CTDs were delivered as payment and not as
security. Having opposed the motion, petitioner now labors under
the presumption that evidence willfully suppressed would be adverse
if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated
Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is
apropos:
. . . Adverting again to the Court's pronouncements
in Lopez, supra, we quote therefrom:
The character of the transaction
between the parties is to be
determined by their intention,
regardless of what language was
 used or what the form of the
transfer was. If it was intended to
secure the payment of money, it
must be construed as a pledge; but
if there was some other intention, it
is not a pledge. However, even
though a transfer, if regarded by
itself, appears to have been
absolute, its object and character
might still be qualified and explained
by contemporaneous writing
declaring it to have been a deposit
of the property as collateral
security. It has been said that a
transfer of property by the debtor to
a creditor, even if sufficient on its
face to make an absolute
conveyance, should be treated as a
pledge if the debt continues in
inexistence and is not discharged by
the transfer, and that accordingly
the use of the terms ordinarily
importing conveyance of absolute
ownership will not be given that
effect in such a transaction if they
are also commonly used in pledges
and mortgages and therefore do not
unqualifiedly indicate a transfer of
absolute 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, 21 and a
holder may be the payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. 22 In the present case,
however, there was no 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. 23 As such holder of collateral security, he
would be a 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, 24 which 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. 25 Consequently, the mere delivery of the
CTDs did not legally 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. 27 With regard to this other mode of transfer, the Civil
Code 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. 29 The issues agreed upon by them for
resolution 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. 30 Questions
raised on appeal 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.
reads "may," this word shows that it is not mandatory but
discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity,
permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles
548 to 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.

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
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 xxx xxx xxx
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.
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 II
been previously dishonored and that the note is in
good faith and for value without notice of any THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT
infirmity or defect in the title of IPM (Sec. 52, NIL); IS A MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
that IFC Leasing and Acceptance Corporation held
the instrument free from any defect of title of prior III.
parties and free from defenses available to prior
parties among themselves and may enforce
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE
payment of the instrument for the full amount
INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH A
thereof against all parties liable thereon (Sec. 57,
MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE
NIL); the appellants engaged that they would pay
RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS
the note according to its tenor, and admit the
AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
existence of the payee IPM and its capacity to
MARKETING.
endorse (Sec. 60, NIL).
IV.
In view of the essential elements found in the
questioned promissory note, We opine that the
same is legally and conclusively enforceable against THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE
the defendants-appellants. PROMISSORY NOTE BECAUSE:

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.
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.
G.R. No. 154127 December 8, 2003
ROMEO C. GARCIA, petitioner,
vs.
DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by
the express assent of the parties or by the complete incompatibility
between the old and the new agreements. Petitioner herein fails to
show either requirement convincingly; hence, the summary
judgment holding him liable as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of
Court, seeking to nullify the November 26, 2001 Decision2 and the
June 26, 2002 Resolution3 of the Court of Appeals (CA) in CA-GR CV
No. 60521. The appellate court disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment
appealed from, insofar as it pertains to [Petitioner] Romeo Garcia,
must be, as it hereby is, AFFIRMED, subject to the modification that
the award for attorney’s fees and cost of suit is DELETED. The
portion of the judgment that pertains to x x x Eduardo de Jesus is
SET ASIDE and VACATED. Accordingly, the case against x x x
Eduardo de Jesus is REMANDED to the court of origin for purposes
of receiving ex parte [Respondent] Dionisio Llamas’ evidence against
x x x Eduardo de Jesus."4
The challenged Resolution, on the other hand, denied petitioner’s
Motion for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
"This case started out as a complaint for sum of money and
damages by x x x [Respondent] Dionisio Llamas against x x x
[Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil
Case No. Q97-32-873, the complaint alleged that on 23 December
1996[,] [petitioner and de Jesus] borrowed ₱400,000.00 from
[respondent]; that, on the same day, [they] executed a promissory
note wherein they bound themselves jointly and severally to pay the
loan on or before 23 January 1997 with a 5% interest per month;
that the loan has long been overdue and, despite repeated
demands, [petitioner and de Jesus] have failed and refused to pay it;
and that, by reason of the[ir] unjustified refusal, [respondent] was
compelled to engage the services of counsel to whom he agreed to
pay 25% of the sum to be recovered from [petitioner and de Jesus],
plus ₱2,000.00 for every appearance in court. Annexed to the
complaint were the promissory note above-mentioned and a demand
letter, dated 02 May 1997, by [respondent] addressed to [petitioner
and de Jesus].
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred
that he assumed no liability under the promissory note because he
signed it merely as an accommodation party for x x x de Jesus; and,
alternatively, that he is relieved from any liability arising from the
note inasmuch as the loan had been paid by x x x de Jesus by
means of a check dated 17 April 1997; and that, in any event, the
issuance of the check and [respondent’s] acceptance thereof
novated or superseded the note.
"[Respondent] tendered a reply to [Petitioner] Garcia’s answer,
thereunder asserting that the loan remained unpaid for the reason
that the check issued by x x x de Jesus bounced, and that
[Petitioner] Garcia’s answer was not even accompanied by a
certificate of non-forum shopping. Annexed to the reply were the
face of the check and the reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with
[C]ounterclaim that out of the supposed ₱400,000.00 loan, he
received only ₱360,000.00, the P40,000.00 having been advance
interest thereon for two months, that is, for January and February
1997; that[,] in fact[,] he paid the sum of ₱120,000.00 by way of
interests; that this was made when [respondent’s] daughter, one
Nits Llamas-Quijencio, received from the Central Police District
Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus
worked), the sum of ₱40,000.00, representing the peso equivalent of
his accumulated leave credits, another ₱40,000.00 as advance
interest, and still another ₱40,000.00 as interest for the months of
March and April 1997; that he had difficulty in paying the loan and
had asked [respondent] for an extension of time; that [respondent]
acted in bad faith in instituting the case, [respondent] having agreed
to accept the benefits he (de Jesus) would receive for his retirement,
but [respondent] nonetheless filed the instant case while his
retirement was being processed; and that, in defense of his rights,
he agreed to pay his counsel ₱20,000.00 [as] attorney’s fees, plus
₱1,000.00 for every court appearance.
"During the pre-trial conference, x x x de Jesus and his lawyer did
not appear, nor did they file any pre-trial brief. Neither did
[Petitioner] Garcia file a pre-trial brief, and his counsel even
manifested that he would no [longer] present evidence. Given this
development, the trial court gave [respondent] permission to present
his evidence ex parte against x x x de Jesus; and, as regards
[Petitioner] Garcia, the trial court directed [respondent] to file a
motion for judgment on the pleadings, and for [Petitioner] Garcia to
file his comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia
in default and to allow him to present his evidence ex parte.
Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his
defense to a judgment on the pleadings. Subsequently, [respondent]
filed a [M]anifestation/[M]otion to submit the case for judgement on
the pleadings, withdrawing in the process his previous motion.
Thereunder, he asserted that [petitioner’s and de Jesus’] solidary
liability under the promissory note cannot be any clearer, and that
the check issued by de Jesus did not discharge the loan since the
check bounced."5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City
(Branch 222) disposed of the case as follows:
"WHEREFORE, premises considered, judgment on the pleadings is
hereby rendered in favor of [respondent] and against [petitioner and
De Jesus], who are hereby ordered to pay, jointly and severally, the
[respondent] the following sums, to wit:
‘1) ₱400,000.00 representing the principal amount plus 5%
interest thereon per month from January 23, 1997 until the
same shall have been fully paid, less the amount of
₱120,000.00 representing interests already paid by x x x de
Jesus;
‘2) ₱100,000.00 as attorney’s fees plus appearance fee of
₱2,000.00 for each day of [c]ourt appearance, and;
‘3) Cost of this suit.’"6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a
judgment on the pleadings against De Jesus. According to the
appellate court, his Answer raised genuinely contentious issues.
Moreover, he was still required to present his evidence ex parte.
Thus, respondent was not ipso facto entitled to the RTC judgment,
even though De Jesus had been declared in default. The case
against the latter was therefore remanded by the CA to the trial
court for the ex parte reception of the former’s evidence.
As to petitioner, the CA treated his case as a summary judgment,
because his Answer had failed to raise even a single genuine issue
regarding any material fact.
The appellate court ruled that no novation -- express or implied --
had taken place when respondent accepted the check from De
Jesus. According to the CA, the check was issued precisely to pay for
the loan that was covered by the promissory note jointly and
severally undertaken by petitioner and De Jesus. Respondent’s
acceptance of the check did not serve to make De Jesus the sole
debtor because, first, the obligation incurred by him and petitioner
was joint and several; and, second, the check -- which had been
intended to extinguish the obligation -- bounced upon its
presentment.
Hence, this Petition.7
Issues
Petitioner submits the following issues for our consideration:
"I
Whether or not the Honorable Court of Appeals gravely erred in not
holding that novation applies in the instant case as x x x Eduardo de
Jesus had expressly assumed sole and exclusive liability for the loan
obligation he obtained from x x x Respondent Dionisio Llamas, as
clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the
full amount of the loan of ₱400,000.00 in favor of
Respondent Llamas, although the check subsequently
bounced[;]
b) Acceptance of the check by the x x x respondent x x x
which resulted in [the] substitution by x x x de Jesus or [the
superseding of] the promissory note;
c) x x x de Jesus having paid interests on the loan in the
total amount of ₱120,000.00;
d) The fact that Respondent Llamas agreed to the proposal
of x x x de Jesus that due to financial difficulties, he be
given an extension of time to pay his loan obligation and
that his retirement benefits from the Philippine National
Police will answer for said obligation.
"II
Whether or not the Honorable Court of Appeals seriously erred in not
holding that the defense of petitioner that he was merely an
accommodation party, despite the fact that the promissory note
provided for a joint and solidary liability, should have been given
weight and credence considering that subsequent events showed
that the principal obligor was in truth and in fact x x x de Jesus, as
evidenced by the foregoing circumstances showing his assumption of
sole liability over the loan obligation.
"III
Whether or not judgment on the pleadings or summary judgment
was properly availed of by Respondent Llamas, despite the fact that
there are genuine issues of fact, which the Honorable Court of
Appeals itself admitted in its Decision, which call for the presentation
of evidence in a full-blown trial."8
Simply put, the issues are the following: 1) whether there was
novation of the obligation; 2) whether the defense that petitioner
was only an accommodation party had any basis; and 3) whether
the judgment against him -- be it a judgment on the pleadings or a
summary judgment -- was proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and
solidary debtor by insisting that novation took place, either through
the substitution of De Jesus as sole debtor or the replacement of the
promissory note by the check. Alternatively, the former argues that
the original obligation was extinguished when the latter, who was his
co-obligor, "paid" the loan with the check.
The fallacy of the second (alternative) argument is all too apparent.
The check could not have extinguished the obligation, because it
bounced upon presentment. By law,9 the delivery of a check
produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
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.10 Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in
the place of the original one, 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."
In general, there are two modes of substituting the person of the
debtor: (1) expromision and (2) delegacion. 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.11Both modes
of substitution by the debtor require the consent of the creditor. 12
Novation may also be extinctive or modificatory. It is extinctive when
an old obligation is terminated by the creation of a new one that
takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the
amendatory agreement.13 Whether extinctive or modificatory,
novation is made either by changing the object or the principal
conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person
to the rights of the creditor, an act known as subjective or personal
novation.14 For novation to take place, the following requisites must
concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.15
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible
with the old one on every point.16 The test of incompatibility is
whether the two obligations can stand together, each one with its
own independent existence.17
Applying the foregoing to the instant case, we hold that no novation
took place.
The parties did not unequivocally declare that the old obligation had
been extinguished by the issuance and the acceptance of the check,
or that the check would take the place of the note. There is no
incompatibility between the promissory note and the check. As the
CA correctly observed, the check had been issued precisely to
answer for the obligation. On the one hand, the note evidences the
loan obligation; and on the other, the check answers for it. Verily,
the two can stand together.
Neither could the payment of interests -- which, in petitioner’s view,
also constitutes novation18 -- change the terms and conditions of the
obligation. Such payment was already provided for in the promissory
note and, like the check, was totally in accord with the terms
thereof.
Also unmeritorious is petitioner’s argument that the obligation was
novated by the substitution of debtors. In order to change the
person of the debtor, the old one must be expressly released from
the obligation, and the third person or new debtor must assume the
former’s place in the relation.19 Well-settled is the rule that novation
is never presumed.20 Consequently, that which arises from a
purported change in the person of the debtor must be clear and
express.21 It is thus incumbent on petitioner to show clearly and
unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly
released from the obligation, that a third person was substituted in
his place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus. The CA aptly
held:
"x x x. Plaintiff’s acceptance of the bum check did not result in
substitution by de Jesus either, the nature of the obligation being
solidary due to the fact that the promissory note expressly declared
that the liability of appellants thereunder is joint and [solidary.]
Reason: under the law, a creditor may demand payment or
performance from one of the solidary debtors or some or all of them
simultaneously, and payment made by one of them extinguishes the
obligation. It therefore follows that in case the creditor fails to collect
from one of the solidary debtors, he may still proceed against the
other or others. x x x "22
Moreover, it must be noted that for novation to be valid and legal,
the law requires that the creditor expressly consent to the
substitution of a new debtor.23 Since novation implies a waiver of the
right the creditor had before the novation, such waiver must be
express.24 It cannot be supposed, without clear proof, that the
present respondent has done away with his right to exact fulfillment
from either of the solidary debtors.25
More important, De Jesus was not a third person to the obligation.
From the beginning, he was a joint and solidary obligor of the
₱400,000 loan; thus, he can be released from it only upon its
extinguishment. Respondent’s acceptance of his check did not
change the person of the debtor, because a joint and solidary obligor
is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled
to demand the satisfaction of the whole obligation from any or all of
the debtors.26 It is up to the former to determine against whom to
enforce collection.27Having made himself jointly and severally liable
with De Jesus, petitioner is therefore liable28 for the entire
obligation.29
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an
accommodation party; and that, as such, he was released as obligor
when respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a
negotiable instrument. The note reads:
"PROMISSORY NOTE
"₱400,000.00
"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR
HUNDRED THOUSAND PESOS, Philippine Currency payable on or
before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City,
with interest at the rate of 5% per month or fraction thereof.
"It is understood that our liability under this loan is jointly and
severally [sic].
"Done at Quezon City, Metro Manila this 23rd day of December,
1996."30
By its terms, the note was made payable to a specific person rather
than to bearer or to order31 -- a requisite for negotiability under Act
2031, the Negotiable Instruments Law (NIL). Hence, petitioner
cannot avail himself of the NIL’s provisions on the liabilities and
defenses of an accommodation party. Besides, a non-negotiable note
is merely a simple contract in writing and is evidence of such
intangible rights as may have been created by the assent of the
parties.32 The promissory note is thus covered by the general
provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner
would be liable for the promissory note. Under Article 29 of Act
2031, an accommodation party is liable for the instrument to a
holder for value even if, at the time of its taking, the latter knew the
former to be only an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect, one
of principal and surety -- the accommodation party being the
surety.33 It is a settled rule that a surety is bound equally and
absolutely with the principal and is deemed an original promissor
and debtor from the beginning. The liability is immediate and
direct.34
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment
on the pleadings and a summary judgment. Under Section 3 of Rule
35 of the Rules of Court, a summary judgment may be rendered
after a summary hearing if the pleadings, supporting affidavits,
depositions and admissions on file show that (1) except as to the
amount of damages, there is no genuine issue regarding any
material fact; and (2) the moving party is entitled to a judgment as a
matter of law.
A summary judgment is a procedural device designed for the prompt
disposition of actions in which the pleadings raise only a legal, not a
genuine, issue regarding any material fact. 35 Consequently, facts are
asserted in the complaint regarding which there is yet no admission,
disavowal or qualification; or specific denials or affirmative defenses
are set forth in the answer, but the issues are fictitious as shown by
the pleadings, depositions or admissions.36 A summary judgment
may be applied for by either a claimant or a defending party.37
On the other hand, under Section 1 of Rule 34 of the Rules of Court,
a judgment on the pleadings is proper when an answer fails to
render an issue or otherwise admits the material allegations of the
adverse party’s pleading. The essential question is whether there are
issues generated by the pleadings.38 A judgment on the pleadings
may be sought only by a claimant, who is the party seeking to
recover upon a claim, counterclaim or cross-claim; or to obtain a
declaratory relief. 39
Apropos thereto, it must be stressed that the trial court’s judgment
against petitioner was correctly treated by the appellate court as a
summary judgment, rather than as a judgment on the pleadings. His
Answer40 apparently raised several issues -- that he signed the
promissory note allegedly as a mere accommodation party, and that
the obligation was extinguished by either payment or novation.
However, these are not factual issues requiring trial. We quote with
approval the CA’s observations:
"Although Garcia’s [A]nswer tendered some issues, by way of
affirmative defenses, the documents submitted by [respondent]
nevertheless clearly showed that the issues so tendered were not
valid issues. Firstly, Garcia’s claim that he was merely an
accommodation party is belied by the promissory note that he
signed. Nothing in the note indicates that he was only an
accommodation party as he claimed to be. Quite the contrary, the
promissory note bears the statement: ‘It is understood that our
liability under this loan is jointly and severally [sic].’ Secondly, his
claim that his co-defendant de Jesus already paid the loan by means
of a check collapses in view of the dishonor thereof as shown at the
dorsal side of said check."41

From the records, it also appears that petitioner himself moved to

submit the case for judgment on the basis of the pleadings and
documents.1âwphi1 In a written Manifestation,42 he stated that
"judgment on the pleadings may now be rendered without further
evidence, considering the allegations and admissions of the
parties."43

In view of the foregoing, the CA correctly considered as a summary

judgment that which the trial court had issued against petitioner.

WHEREFORE, this Petition is hereby DENIED and the assailed

Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna,

JJ., concur.
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
LIMITED-PHILIPPINE BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari1 assail the Decision2 and
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
Decision3 and Resolution dated September 2, 2004 and April 4,
2005, respectively, of the Court of Appeals in CA-G.R. SP No. 70814.
The respective Decisions in the said cases similarly reversed and set
aside the decisions of the Court of Tax Appeals (CTA) in CTA Case
Nos. 59514 and 6009,5 respectively, and dismissed the petitions of
petitioner Hongkong and Shanghai Banking Corporation Limited-
Philippine Branches (HSBC). The corresponding Resolutions, on the
other hand, denied the respective motions for reconsideration of the
said Decisions.
HSBC performs, among others, custodial services on behalf of its January 1998
investor-clients, corporate and individual, resident or non-resident of
the Philippines, with respect to their passive investments in the February 1998
Philippines, particularly investments in shares of stocks in domestic
corporations. As a custodian bank, HSBC serves as the
collection/payment agent with respect to dividends and other income
derived from its investor-clients’ passive investments.6
HSBC’s investor-clients maintain Philippine peso and/or foreign
currency accounts, which are managed by HSBC through instructions
given through electronic messages. The said instructions are
standard forms known in the banking industry as SWIFT, or "Society
for Worldwide Interbank Financial Telecommunication." In
purchasing shares of stock and other investment in securities, the
investor-clients would send electronic messages from abroad
instructing HSBC to debit their local or foreign currency accounts and
to pay the purchase price therefor upon receipt of the securities. 7
Pursuant to the electronic messages of its investor-clients, HSBC
purchased and paid Documentary Stamp Tax (DST) from September
to December 1997 and also from January to December 1998
amounting to ₱19,572,992.10 and ₱32,904,437.30, respectively,
broken down as follows:
A. September to December 1997
September 1997 P 6,981,447.90
October 1997 6,209,316.60
November 1997 3,978,510.30
December 1997 2,403,717.30
Total ₱19,572,992.10
B. January to December 1998
P 3,328,305.60
4,566,924.90
March 1998 5,371,797.30 This refers to your letter dated July 26, 1999 requesting on behalf of
your clients, the CITIBANK & STANDARD CHARTERED BANK, for a
April 1998 4,197,235.50 ruling as to whether or not the electronic instructions involving the
following transactions of residents and non-residents of the
May 1998 2,519,587.20
Philippines with respect to their local or foreign currency accounts
June 1998 2,301,333.00 are subject to documentary stamp tax under Section 181 of the 1997
Tax Code, viz:
July 1998 1,586,404.50
August 1998 1,787,359.50 A. Investment purchase transactions:

September 1998 1,231,828.20 An overseas client sends instruction to its bank in the Philippines to
October 1998 1,303,184.40 either:

November 1998 2,026,379.70 (i) debit its local or foreign currency account and to
pay a named recipient in the Philippines; or
December 1998 2,684,097.50
Total ₱32,904,437.30 (ii) receive funds from another bank in the
Philippines for deposit into its account and to pay a
On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its named recipient in the Philippines."
then Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99
to the effect that instructions or advises from abroad on the The foregoing transactions are carried out under instruction from
management of funds located in the Philippines which do not involve abroad and [do] not involve actual fund transfer since the funds are
transfer of funds from abroad are not subject to DST. BIR Ruling No. already in the Philippine accounts. The instructions are in the form of
132-99 reads: electronic messages (i.e., SWIFT MT100 or MT 202 and/or MT 521).
In both cases, the payment is against the delivery of investments
Date: August 23, 1999 purchased. The purchase of investments and the payment comprise
one single transaction. DST has already been paid under Section 176
for the investment purchase.
FERRY TOLEDO VICTORINO GONZAGA
& ASSOCIATES
G/F AFC Building, Alfaro St. B. Other transactions:
Salcedo Village, Makati
Metro Manila An overseas client sends an instruction to its bank in the Philippines
to either:
Attn: Atty. Tomas C. Toledo
Tax Counsel (i) debit its local or foreign currency account and to
pay a named recipient, who may be another bank, a
Gentlemen:
 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."
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 Revenue8
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
1904,17 which provided: SECTION 117. The acceptor or acceptors of
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.18 (Emphasis supplied.)
It then became Section 30(h) of the 1914 Tax Code19:
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. 26,20 as amended:
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
1939,21 which 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, 22 as amended by
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.1âwphi1 The identical 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. 23 Under Section 173
of 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.26 Acceptance of a bill of
exchange has a very definite meaning in law. 27 In particular, Section
132 of the Negotiable Instruments Law provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance
of a bill [of exchange28] is the signification by the drawee of his
assent to 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."29 Once the drawee accepts, he
becomes an acceptor.30 As acceptor, he engages to pay the bill of
exchange 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. 32Presentment for
acceptance is the 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.34 In the instances where presentment for
acceptance 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.