Memorize

Section 1. Form of negotiable instruments. - An instrument to be

negotiable must conform to the following requirements: chanroblesvirtuall awlibrar y

(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.

Sec. 126. Bill of exchange, defined. - 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.

Sec. 184. Promissory note, defined. - A negotiable promissory

note within the meaning of this Act is an unconditional
promise in writing made by one person to another, signed by
the maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or
to bearer. Where a note is drawn to the maker's own order, it
is not complete until indorsed by him.
 ROMAN CATHOLIC OF MALOLOS V. IAC
191 SCRA 411

FACTS:
Petitioner was the owner of a parcel of land. It then entered into a contract of lease
agreement with Robes-Fransisco Realty for the parcel of
land. The agreement was that there would be downpayment plus installments with
interest. Robes-Fransisco was then in default. Knowing
that it was in its payment of the installments, it requested for the
restructuring of the installment payments but was denied. It then asked for grace period
to pay the same and tendered a check thereafter. Such was refused and the contract was cancelled.

HELD:
A check whether a manager’s check or ordinary check is not legal tender and an offer of a check in
payment of a debt is not valid tender of payment and may be refused receipt by the obligee or
creditor. As this is the case,
the subsequent consignation of the check didn't operate to discharge Robes-Fransisco
from its obligation to petitioner.

PHILIPPINE SUPREME COURT DECISIONS

SECOND DIVISION

[G.R. No. 72110. November 16, 1990.]

ROMAN CATHOLIC BISHOP OF MALOLOS, INC., Petitioner, v. INTERMEDIATE APPELLATE COURT, and
ROBES-FRANCISCO REALTY AND DEVELOPMENT CORPORATION, Respondents.

Rodrigo Law Office for Petitioner.

Antonio P. Barredo and Napoleon M. Malinas for Private Respondent.

SYLLABUS
1. CIVIL LAW; CONTRACTS; TENDER OF PAYMENT; CANNOT BE PRESUMED BY MERE INFERENCE FROM
SURROUNDING CIRCUMSTANCES. — We agree with the petitioner that a finding that the private
respondent had sufficient available funds on or before the grace period for the payment of its
obligation does not constitute proof of tender of payment by the latter for its obligation within the
said period. Tender of payment involves a positive and unconditional act by the obligor of offering
legal tender currency as payment to the obligee for the former’s obligation and demanding that the
latter accept the same. Thus, tender of payment cannot be presumed by a mere inference from
surrounding circumstances. At most, sufficiency of available funds is only affirmative of the capacity
or ability of the obligor to fulfill his part of the bargain. But whether or not the obligor avails himself
of such funds to settle his outstanding account remains to be proven by independent and credible
evidence. Tender of payment presupposes not only that the obligor is able, ready, and willing, but
more so, in the act of performing his obligation. Ab posse ad actu non vale illatio. "A proof that an act
could have been done is no proof that it was actually done." The respondent court was therefore in
error to have concluded from the sheer proof of sufficient available funds on the part of the private
respondent to meet more than the total obligation within the grace period, the alleged truth of
tender of payment. The same is a classic case of non-sequitur.

2. ID.; ID.; ID.; NOT VALIDLY CONSTITUTED BY PAYMENT OF A CERTIFIED PERSONAL CHECK. — With
regard to the third issue, granting arguendo that we would rule affirmatively on the two preceding
issues, the case of the private respondent still can not succeed in view of the fact that the latter used
a certified personal check which is not legal tender nor the currency stipulated, and therefore, can not
constitute valid tender of payment. The first paragraph of Art. 1249 of the Civil Code provides that
"the payment of debts in money shall be made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal tender in the Philippines. The Court en banc
in the recent case of Philippine Airlines v. Court of Appeals, (Promulgated on January 30, 1990) G.R.
No. L-49188, stated thus: Since a negotiable instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself, operate as payment (citing Sec. 189, Act 2031
on Negs. Insts.; Art. 1249, Civil Code; Bryan London Co. v. American Bank, 7 Phil. 255; Tan Sunco v.
Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager’s check or ordinary check, is not legal
tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be
refused receipt by the obligee or creditor. Hence, where the tender of payment by the private
respondent was not valid for failure to comply with the requisite payment in legal tender or currency
stipulated within the grace period and as such, was validly refused receipt by the petitioner, the
subsequent consignation did not operate to discharge the former from its obligation to the latter.

3. ID.; ID.; OBLIGATIONS ARISING THEREFROM HAVE THE FORCE OF LAW BETWEEN THE
CONTRACTING PARTIES. — Art. 1159 of the Civil Code of the Philippines provides that "obligations
arising from contracts have the force of law between the contracting parties and should be complied
with in good faith." And unless the stipulations in said contract are contrary to law, morals, good
customs, public order, or public policy, the same are binding as between the parties. (Article 1409,
Civil Code, par. 1). What the private respondent should have done if it was indeed desirous of
complying with its obligations would have been to pay the petitioner within the grace period and
obtain a receipt of such payment duly issued by the latter. Thereafter, or, allowing a reasonable time,
the private respondent could have demanded from the petitioner the execution of the necessary
documents. In case the petitioner refused, the private respondent could have had always resorted to
judicial action for the legitimate enforcement of its right. For the failure of the private respondent to
undertake this more judicious course of action, it alone shall suffer the consequences.
4. REMEDIAL LAW; APPEAL; FACTUAL FINDINGS OF TRIAL COURT AS A RULE, SHOULD BE ACCORDED
FULL CONSIDERATION AND RESPECT. — On the contrary, the respondent court finds itself remiss in
overlooking or taking lightly the more important findings of fact made by the trial court which we
have earlier mentioned and which as a rule, are entitled to great weight on appeal and should be
accorded full consideration and respect and should not be disturbed unless for strong and cogent
reasons. (Natividad del Rosario Vda. de Alberto v. Court of Appeals, G.R. 29759, May 18, 1989;
Matabuena v. Court of Appeals, G.R. 76542, May 5, 1989).

5. ID.; SUPREME COURT; INSTANCES WHEN THE COURT HAS TO REVIEW THE EVIDENCE. — While the
Court is not a trier of facts, yet, when the findings of fact of the Court of Appeals are at variance with
those of the trial court, (Robleza v. Court of Appeals, G.R. 80364, June 28, 1989) or when the
inference of the Court of Appeals from its findings of fact is manifestly mistaken, (Reynolds Philippine
Corporation v. Court of Appeals, G.R. 38187, January 17, 1987) the Court has to review the evidence
in order to arrive at the correct findings based on the record.

DECISION

SARMIENTO, J.:

This is a petition for review on certiorari which seeks the reversal and setting aside of the decision 1
of the Court of Appeals, 2 the dispositive portion of which reads:chanrobles law library : red

WHEREFORE, the decision appealed from is hereby reversed and set aside and another one entered
for the plaintiff ordering the defendant-appellee Roman Catholic Bishop of Malolos, Inc. to accept the
balance of P124,000.00 being paid by plaintiff-appellant and thereafter to execute in favor of
Robes-Francisco Realty Corporation a registerable Deed of Absolute Sale over 20,655 square meters
portion of that parcel of land situated in San Jose del Monte, Bulacan described in OCT No. 575 (now
Transfer Certificates of Title Nos. T-169493, 169494,169495 and 169496) of the Register of Deeds of
Bulacan. In case of refusal of the defendant to execute the Deed of Final Sale, the clerk of court is
directed to execute the said document. Without pronouncement as to damages and attorney’s fees.
Costs against the defendant-appellee. 3

The case at bar arose from a complaint filed by the private respondent, then plaintiff, against the
petitioner, then defendant, in the Court of First Instance (now Regional Trial Court) of Bulacan, at Sta.
Maria, Bulacan, 4 for specific performance with damages, based on a contract 5 executed on July 7,
1971.
The property subject matter of the contract consists of a 20,655 sq.m.-portion, out of the 30,655 sq.m.
total area, of a parcel of land covered by Original Certificate of Title No. 575 of the Province of
Bulacan, issued and registered in the name of the petitioner which it sold to the private respondent
for and in consideration of P123,930.00.chanrobles virtual lawlibrary

The crux of the instant controversy lies in the compliance or non-compliance by the private
respondent with the provision for payment to the petitioner of the principal balance of P100,000.00
and the accrued interest of P24,000.00 within the grace period.

A chronological narration of the antecedent facts is as follows:chanrob1es virtual 1aw library

On July 7, 1971, the subject contract over the land in question was executed between the petitioner
as vendor and the private respondent through its then president, Mr. Carlos F. Robes, as vendee,
stipulating for a downpayment of P23,930.00 and the balance of P100,000.00 plus 12% interest per
annum to be paid within four (4) years from execution of the contract, that is, on or before July 7,
1975. The contract likewise provides for cancellation, forfeiture of previous payments, and
reconveyance of the land in question in case the private respondent would fail to complete payment
within the said period.

On March 12, 1973, the private respondent, through its new president, Atty. Adalia Francisco,
addressed a letter 6 to Father Vasquez, parish priest of San Jose Del Monte, Bulacan, requesting to be
furnished with a copy of the subject contract and the supporting documents.

On July 17, 1975, admittedly after the expiration of the stipulated period for payment, the same Atty.
Francisco wrote the petitioner a formal request 7 that her company be allowed to pay the principal
amount of P100,000.00 in three (3) equal installments of six (6) months each with the first installment
and the accrued interest of P24,000.00 to be paid immediately upon approval of the said request.

On July 29, 1975, the petitioner, through its counsel, Atty. Carmelo Fernandez, formally denied the
said request of the private respondent, but granted the latter a grace period of five (5) days from the
receipt of the denial 8 to pay the total balance of P124,000.00, otherwise, the provisions of the
contract regarding cancellation, forfeiture, and reconveyance would be implemented.

On August 4, 1975, the private respondent, through its president, Atty. Francisco, wrote 9 the counsel
of the petitioner requesting an extension of 30 days from said date to fully settle its account. The
counsel for the petitioner, Atty. Fernandez, received the said letter on the same day. Upon
consultation with the petitioner in Malolos, Bulacan, Atty. Fernandez, as instructed, wrote the private
respondent a letter 10 dated August 7, 1975 informing the latter of the denial of the request for an
extension of the grace period.

Consequently, Atty. Francisco, the private respondent’s president, wrote a letter 11 dated August 22,
1975, directly addressed to the petitioner, protesting the alleged refusal of the latter to accept tender
of payment purportedly made by the former on August 5, 1975, the last day of the grace period. In
the same letter of August 22, 1975, received on the following day by the petitioner, the private
respondent demanded the execution of a deed of absolute sale over the land in question and after
which it would pay its account in full, otherwise, judicial action would be resorted
to.chanrobles.com.ph : virtual law library

On August 27, 1975, the petitioner’s counsel, Atty. Fernandez, wrote a reply 12 to the private
respondent stating the refusal of his client to execute the deed of absolute sale due to its (private
respondent’s) failure to pay its full obligation. Moreover, the petitioner denied that the private
respondent had made any tender of payment whatsoever within the grace period. In view of this
alleged breach of contract, the petitioner cancelled the contract and considered all previous
payments forfeited and the land as ipso facto reconveyed.

From a perusal of the foregoing facts, we find that both the contending parties have conflicting
versions on the main question of tender of payment.

The trial court, in its ratiocination, preferred not to give credence to the evidence presented by the
private Respondent. According to the trial court:chanrob1es virtual 1aw library

. . . What made Atty. Francisco suddenly decide to pay plaintiff’s obligation on August 5, 1975, go to
defendant’s office at Malolos, and there tender her payment, when her request of August 4, 1975 had
not yet been acted upon until August 7, 1975? If Atty. Francisco had decided to pay the obligation and
had available funds for the purpose on August 5, 1975, then there would have been no need for her
to write defendant on August 4, 1975 to request an extension of time. Indeed, Atty. Francisco’s claim
that she made a tender of payment on August 5, 1975 — such alleged act, considered in relation to
the circumstances both antecedent and subsequent thereto, being not in accord with the normal
pattern of human conduct — is not worthy of credence. 13

The trial court likewise noted the inconsistency in the testimony of Atty. Francisco, president of the
private respondent, who earlier testified that a certain Mila Policarpio accompanied her on August 5,
1975 to the office of the petitioner. Another person, however, named Aurora Oracion, was presented
to testify as the secretary-companion of Atty. Francisco on that same occasion.

Furthermore, the trial court considered as fatal the failure of Atty. Francisco to present in court the
certified personal check allegedly tendered as payment or, at least, its xerox copy, or even bank
records thereof. Finally, the trial court found that the private respondent had insufficient funds
available to fulfill the entire obligation considering that the latter, through its president, Atty.
Francisco, only had a savings account deposit of P64,840.00, and although the latter had a
money-market placement of P300,000.00, the same was to mature only after the expiration of the
5-day grace period.

Based on the above considerations, the trial court rendered a decision in favor of the petitioner, the
dispositive portion of which reads:chanrobles virtual lawlibrary
WHEREFORE, finding plaintiff to have failed to make out its case, the court hereby declares the
subject contract cancelled and plaintiff’s downpayment of P23,930.00 forfeited in favor of defendant,
and hereby dismisses the complaint; and on the counterclaim, the Court orders plaintiff to pay
defendant.

(1) Attorney’s fees of P10,000.00;

(2) Litigation expenses of P2,000.00; and

(3) Judicial costs.

SO ORDERED. 14

Not satisfied with the said decision, the private respondent appealed to the respondent Intermediate
Appellate Court (now Court of Appeals) assigning as reversible errors, among others, the findings of
the trial court that the available funds of the private respondent were insufficient and that the latter
did not effect a valid tender of payment and consignation.

The respondent court, in reversing the decision of the trial court, essentially relies on the following
findings:chanrob1es virtual 1aw library

. . . We are convinced from the testimony of Atty. Adalia Francisco and her witnesses that in behalf of
the plaintiff-appellant they have a total available sum of P364,840.00 at her and at the plaintiff’s
disposal on or before August 4, 1975 to answer for the obligation of the plaintiff-appellant. It was not
correct for the trial court to conclude that the plaintiff-appellant had only about P64,840.00 in savings
deposit on or before August 5, 1975, a sum not enough to pay the outstanding account of
P124,000.00. The plaintiff-appellant, through Atty. Francisco proved and the trial court even
acknowledged that Atty. Adalia Francisco had about P300,000.00 in money market placement. The
error of the trial court has in concluding that the money market placement of P300,000.00 was out of
reach of Atty. Francisco. But as testified to by Mr. Catalino Estrella, a representative of the Insular
Bank of Asia and America, Atty. Francisco could withdraw anytime her money market placement and
place it at her disposal, thus proving her financial capability of meeting more than the whole of
P124,000.00 then due per contract. This situation, We believe, proves the truth that Atty. Francisco
apprehensive that her request for a 30-day grace period would be denied, she tendered payment on
August 4, 1975 which offer defendant through its representative and counsel refused to receive. . .15
(Emphasis supplied)

In other words, the respondent court, finding that the private respondent had sufficient available
funds, ipso facto concluded that the latter had tendered payment. Is such conclusion warranted by
the facts proven? The petitioner submits that it is not.cralawnad

Hence, this petition. 16

The petitioner presents the following issues for resolution:chanrob1es virtual 1aw library

x x x

A. Is a finding that private respondent had sufficient available funds on or before the grace period for
the payment of its obligation proof that it (private respondent) did tender of (sic) payment for its said
obligation within said period?

x x x

B. Is it the legal obligation of the petitioner (as vendor) to execute a deed of absolute sale in favor of
the private respondent (as vendee) before the latter has actually paid the complete consideration of
the sale — where the contract between and executed by the parties stipulates —

"That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall
cause the execution of a Deed of Absolute Sale in favor of the VENDEE."cralaw virtua1aw library

x x x.

C. Is an offer of a check a valid tender of payment of an obligation under a contract which stipulates
that the consideration of the sale is in Philippine Currency? 17

We find the petition impressed with merit.

With respect to the first issue, we agree with the petitioner that a finding that the private respondent
had sufficient available funds on or before the grace period for the payment of its obligation does not
constitute proof of tender of payment by the latter for its obligation within the said period. Tender of
payment involves a positive and unconditional act by the obligor of offering legal tender currency
as payment to the obligee for the former’s obligation and demanding that the latter accept the
same. Thus, tender of payment cannot be presumed by a mere inference from surrounding
circumstances. At most, sufficiency of available funds is only affirmative of the capacity or ability of
the obligor to fulfill his part of the bargain. But whether or not the obligor avails himself of such funds
to settle his outstanding account remains to be proven by independent and credible evidence. Tender
of payment presupposes not only that the obligor is able, ready, and willing, but more so, in the act of
performing his obligation. Ab posse ad actu non vale illatio. "A proof that an act could have been done
is no proof that it was actually done."cralaw virtua1aw library
The respondent court was therefore in error to have concluded from the sheer proof of sufficient
available funds on the part of the private respondent to meet more than the total obligation within
the grace period, the alleged truth of tender of payment. The same is a classic case of
non-sequitur.chanrobles virtual lawlibrary

On the contrary, the respondent court finds itself remiss in overlooking or taking lightly the more
important findings of fact made by the trial court which we have earlier mentioned and which as a
rule, are entitled to great weight on appeal and should be accorded full consideration and respect and
should not be disturbed unless for strong and cogent reasons. 18

While the Court is not a trier of facts, yet, when the findings of fact of the Court of Appeals are at
variance with those of the trial court, 19 or when the inference of the Court of Appeals from its
findings of fact is manifestly mistaken, 20 the Court has to review the evidence in order to arrive at
the correct findings based on the record.

Apropos the second issue raised, although admittedly the documents for the deed of absolute sale
had not been prepared, the subject contract clearly provides that the full payment by the private
respondent is an a priori condition for the execution of the said documents by the petitioner.

That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall
cause the execution of a Deed of Absolute Sale in favor of the VENDEE. 21

The private respondent is therefore in estoppel to claim otherwise as the latter did in the testimony in
cross-examination of its president, Atty. Francisco, which reads:chanrob1es virtual 1aw library

Q Now, you mentioned, Atty. Francisco, that you wanted the defendant to execute the final deed of
sale before you would given (sic) the personal certified check in payment of your balance, is that
correct?

A Yes, sir. 22

x x x

Art. 1159 of the Civil Code of the Philippines provides that "obligations arising from contracts have the
force of law between the contracting parties and should be complied with in good faith." And unless
the stipulations in said contract are contrary to law, morals, good customs, public order, or public
policy, the same are binding as between the parties.23
What the private respondent should have done if it was indeed desirous of complying with its
obligations would have been to pay the petitioner within the grace period and obtain a receipt of
such payment duly issued by the latter. Thereafter, or, allowing a reasonable time, the private
respondent could have demanded from the petitioner the execution of the necessary documents. In
case the petitioner refused, the private respondent could have had always resorted to judicial action
for the legitimate enforcement of its right. For the failure of the private respondent to undertake this
more judicious course of action, it alone shall suffer the consequences.chanrobles.com:cralaw:red

With regard to the third issue, granting arguendo that we would rule affirmatively on the two
preceding issues, the case of the private respondent still can not succeed in view of the fact that the
latter used a certified personal check which is not legal tender nor the currency stipulated, and
therefore, can not constitute valid tender of payment. The

first paragraph of Art. 1249 of the Civil Code provides that "the payment of debts in money shall be
made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency
which is legal tender in the Philippines.

The Court en banc in the recent case of Philippine Airlines v. Court of Appeals, 24 G.R. No. L-49188,
stated thus:chanrob1es virtual 1aw library

Since a negotiable instrument is only a substitute for money and not money, the delivery of such an
instrument does not, by itself, operate as payment (citing Sec. 189, Act 2031 on Negs. Insts.; Art. 1249,
Civil Code; Bryan London Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L.
60, 61). A check, whether a manager’s check or ordinary check, is not legal tender, and an offer of a
check in payment of a debt is not a valid tender of payment and may be refused receipt by the
obligee or creditor.

Hence, where the tender of payment by the private respondent was not valid for failure to comply
with the requisite payment in legal tender or currency stipulated within the grace period and as such,
was validly refused receipt by the petitioner, the subsequent consignation did not operate to
discharge the former from its obligation to the latter.

In view of the foregoing, the petitioner in the legitimate exercise of its rights pursuant to the subject
contract, did validly order therefore the cancellation of the said contract, the forfeiture of the
previous payment, and the reconveyance ipso facto of the land in question.chanrobles lawlibrary :
rednad

WHEREFORE, the petition for review on certiorari is GRANTED and the DECISION of the respondent
court promulgated on April 25, 1985 is hereby SET ASIDE and ANNULLED and the DECISION of the trial
court dated May 25, 1981 is hereby REINSTATED. Costs against the private Respondent.

SO ORDERED.
Melencio-Herrera, Paras and Regalado, JJ., concur.

Padilla, J., took no part.

Endnotes:

1. Promulgated on April 25, 1985; Zosa, M.A., J., ponente; Bartolome, F.C. and Ejercito, B.C., JJ.,
concurring.

2. AC-G.R. CV No. 69626, Robes-Francisco Realty & Development Corporation v. Roman Catholic
Bishop of Malolos, Inc.

3. Rollo, 37.

4. Hon. Jesus M. Elbinias, Presiding Judge, Branch V.

5. Rollo, 9-11.

6. Annex "T", 2, Record on Appeal, Court of First Instance, Bulacan, Branch V, Rollo, 49.

7. Annex "C-3", Id.

8. Annex "A-4", Id.

9. Annex "A-5, Id.

10. Annex "T", 5, Id.

11. Annex "C-6", Id.

12. Annex "C-7", 1-2, Id.

13. Annex "T", 14, Id.

14. Annex "T", 22 Id.

15. Rollo, 35.

16. Filed on October 25, 1985.

17. Rollo, 8-9.

18. Natividad del Rosario Vda. de Alberto v. Court of Appeals, G.R. 29759, May 18, 1989; Matabuena v.
Court of Appeals, G.R. 76542, May 5, 1989.

19. Robleza v. Court of Appeals, G.R. 80364, June 28, 1989.

20. Reynolds Philippine Corporation v. Court of Appeals, G.R. 38187, January 17, 1987.

21. Rollo, 11.

22. T.s.n., June 9, 1977, 24.

23. Article 1409, Civil Code, par. 1.

24. Promulgated on January 30, 1990.

BPI EXPRESS CARD

CORPORATION V. CA 292
SCRA 260
Category: Mercantile Law Jurisprudence

BPI EXPRESS CARD CORPORATION V. CA

 292 SCRA 260
FACTS:

Marasigan was the holder of a BPI credit card. Due to his delinquency in
payment, immediate demand was given by BPI to pay account. Marasigan
issued a postdated check. The check was thereafter kept in custio
dy by
BPI and card was temporarily suspended. And on a relevant date,
Marasigan after eating in Café Adriatico tried to use his card to pay but it was
dishonored.

HELD:

The issuance of the postdated check was not effective payment on the part of
Marasigan and thus, the bank was justified in suspending temporarily his
use of the credit card. A check is only a substitute for money an
d not
money, and the delivery of such instrument doesn't itself operate as
payment.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 120639 September 25, 1998

BPI EXPRESS CARD CORPORATION, petitioner,

vs.
COURT OF APPEALS and RICARDO J. MARASIGAN, respondents.

KAPUNAN, J.:

The question before this Court is whether private respondent can recover moral
damages arising from the cancellation of his credit card by petitioner credit card
corporation.
The facts of the case are as stated in the decision of the respondent court, to 1

wit:

The case arose from the dishonor of the credit card of the plaintiff Atty. Ricardo J.
Marasigan by Café Adriatico, a business establishment accredited with the
defendant-appellate BPI Express Card Corporation (BECC for brevity), on December 8,
1989 when the plaintiff entertained some guests thereat.

The records of this case show that plaintiff, who is a lawyer by profession, was a
complimentary member of BECC from February 1988 to February 1989 and was issued
Credit Card No. 100-012-5534 with a credit limit of P3,000.00 and with a monthly billing
every 27th of the month (Exh. N), subject to the terms and conditions stipulated in the
contract (Exh. 1-b). His membership was renewed for another year or until February 1990
and the credit limit was increased to P5,000.00 (Exh. A). The plaintiffs oftentimes
exceeded his credit limits (Exhs. I, I-1 to I-12) but this was never taken against him by the
defendant and even his mode of paying his monthly bills in check was tolerated. Their
contractual relations went on smoothly until his statement of account for October 1989
amounting to P8,987.84 was not paid in due time. The plaintiff admitted having
inadvertently failed to pay his account for the said month because he was in Quezon
province attending to some professional and personal commitments. He was informed by
his secretary that defendant was demanding immediate payment of his outstanding
account, was requiring him to issue a check for P15,000.00 which would include his future
bills, and was threatening to suspend his credit card. Plaintiff issued Far East Bank and
Trust Co. Check No. 494675 in the amount of P15,000.00, postdated December 15, 1989
which was received on November 23, 1989 by Tess Lorenzo, an employee of the
defendant (Exhs. J and J-1), who in turn gave the said check to Jeng Angeles, a
co-employee who handles the account of the plaintiff. The check remained in the custody
of Jeng Angeles. Mr. Roberto Maniquiz, head of the collection department of defendant
was formally informed of the postdated check about a week later. On November 28, 1989,
defendant served plaintiff a letter by ordinary mail informing him of the temporary
suspension of the privileges of his credit card and the inclusion of his account number
in their Caution List. He was also told to refrain from further use of his credit card to
avoid any inconvenience/embarrassment and that unless he settles his outstanding
account with the defendant within 5 days from receipt of the letter, his membership will be
permanently cancelled (Exh. 3). There is no showing that the plaintiff received this letter
before December 8, 1989. Confidential that he had settled his account with the issuance
of the postdated check, plaintiff invited some guests on December 8, 1989 and
entertained them at Café Adriatico. When he presented his credit card to Café Adriatico
for the bill amounting to P735.32, said card was dishonored. One of his guests, Mary
Ellen Ringler, paid the bill by using her own credit card a Unibankard (Exhs. M, M-1 and
M-2).

In a letter addressed to the defendant dated December 12, 1989, plaintiff requested that
he be sent the exact billing due him as of December 15, 1989, to withhold the deposit of
his postdated check and that said check be returned to him because he had already
instructed his bank to stop the payment thereof as the defendant violated their agreement
that the plaintiff issue the check to the defendant to cover his account amounting to only
P8,987.84 on the condition that the defendant will not suspend the effectivity of the card
(Exh. D). A letter dated December 16, 1989 was sent by the plaintiff to the manager of
FEBTC, Ramada Branch, Manila requesting the bank to stop the payment of the check
(Exhs. E, E-1). No reply was received by plaintiff from the defendant to his letter dated
December 12, 1989. Plaintiff sent defendant another letter dated March 12, 1990
reminding the latter that he had long rescinded and cancelled whatever arrangement he
entered into with defendant and requesting for his correct billing, less the improper
charges and penalties, and for an explanation within five (5) days from receipt thereof why
his card was dishonored on December 8, 1989 despite assurance to the contrary by
defendant's personnel-in-charge, otherwise the necessary court action shall be filed to
hold defendant responsible for the humiliation and embarrassment suffered by him (Exh.
F). Plaintiff alleged further that after a few days, a certain Atty. Albano, representing
himself to be working with the office of Atty. Lopez, called him inquiring as to how the
matter can be threshed out extrajudicially but the latter said that such is a serious matter
cannot be discussed over the phone. The defendant served its final demand to the plaintiff
dated March 21, 1990 requiring him to pay in full his overdue account, including stipulated
fees and charges, within 5 days from receipt thereof or face court action and also to
replace the postdated check with cash within the same period or face criminal suit for
violation of Bouncing Check Law (Exh. G/Exh. 13). The plaintiff in a reply letter dated April
5, 1990 (Exh. H), demanded defendant's compliance with his request in his first letter
dated March 12, 1990 within three (3) days from receipt, otherwise the plaintiff will file a
case against them, . . . .
2

Thus, on May 7, 1990 private respondent filed a complaint for damages against petitioner
before the Regional Trial Court of Makati, Branch 150, docketed as Civil Case No.
90-1174.

After trial the trial court ruled for private respondent, finding that herein petitioner
abused its right in contravention of Article 19 of the Civil Code. The dispositive portion of
3

the decision reads:

Wherefore, judgment is hereby rendered ordering the defendant to pay plaintiff the
following:

1. P 100,000.00 as moral damages;

2. P 50,000.00 as exemplary damages; and

3. P 20,000.00 by way of attorney's fees.

On the other hand, plaintiff is ordered to pay defendant its outstanding obligation in the
amount of P14,439.41, amount due as of December 15, 1989. 4

The trial court's ruling was based on its findings and conclusions, to wit:

There is no question that plaintiff had been in default in the payment of his billings for
more than two months, prompting defendant to call him and reminded him of his obligation.
Unable to personally talk with him, this Court is convinced that somehow one or another
employee of defendant called him up more that once.

However, while it is true that as indicated in the terms and conditions of the application for
BPI credit card upon failure of the cardholder to pay his outstanding obligation for more
that thirty (30) days, the defendant can automatically suspend or cancel the credit card,
that reserved right should not have been abused as it was in fact abused, in plaintiff's case.
What is more peculiar here is that there have been admitted communications between
plaintiff and defendant prior to the suspension or cancellation of plaintiff's credit card and
his inclusion in the cautions list. However, nowhere in any of these communications was
there ever a hint given to plaintiff that his card had already been suspended or cancelled.
In fact, the Court observed that while defendant was trying its best to persuade plaintiff to
update its account and pay its obligation, it had already taken steps to suspend/cancel
plaintiff's card and include him in the caution list. While the Court admires defendant's
diplomacy in dealing with its clients, it cannot help but frown upon the backhanded way
defendant deal with plaintiff's case. For despite Tess Lorenzo's denial, there is reason to
believe that plaintiff was indeed assured by defendant of the continued honoring of his
credit card so long as he pays his obligation of P15,000.00. Worst, upon receipt of the
postdated check, defendant kept the same until a few days before it became due and said
check was presented to the head of the collection department, Mr. Maniquiz, to take steps
thereon, resulting to the embarrassing situations plaintiff found himself in on December 8,
1989. Moreover, Mr. Maniquiz himself admitted that his request for plaintiff to replace the
check with cash was not because it was a postdated check but merely to tally the payment
with the account due.

Likewise, the Court is not persuaded by the sweeping denials made by Tess Lorenzo and
her claim that her only participation was to receive the subject check. Her immediate
superior, Mr. Maniquiz testified that he had instructed Lorenzo to communicate with
plaintiff once or twice to request the latter to replace the questioned check with cash, thus
giving support to the testimony of plaintiff's witness, Dolores Quizon, that it was one Tess
Lorenzo whom she had talked over the phone regarding plaintiff's account and plaintiff's
own statement that it was this woman who assured him that his card has not yet been and
will not be cancelled/suspended if he would pay defendant the sum of P15,000.00.

Now, on the issue of whether or not upon receipt of the subject check defendant had
agreed that the card shall remain effective the Court takes note of the following:

1. An employee of defendant corporation unconditionally accepted the subject check upon

its delivery despite its being a postdated one; and the amount did not tally with plaintiff's
obligation;

2. Defendant did not deny nor controvert plaintiff's claim that all of his payments were
made in checks;

3. Defendant's main witness, Mr. Maniquiz, categorically stated that the request for
plaintiff to replace his postdated check with a cash was merely for the purpose of tallying
plaintiff's outstanding obligation with his payment and not to question the postdated check;

4. That the card was suspended almost a week after receipt of the postdated check;

5. That despite the many instances that defendant could have informed plaintiff over the
phone of the cancellation or suspension of his credit card, it did not do so, which could
have prevented the incident of December 8, 1989, the notice allegedly sent thru ordinary
mail is not only unreliable but takes a long time. Such action as suspension of credit card
must be immediately relayed to the person affected so as to avoid embarrassing
situations.

6. And that the postdated check was deposited on December 20, 1989.

In view of the foregoing observations, it is needless to say that there was indeed an
arrangement between plaintiff and the defendant, as can be inferred from the acts of the
defendant's employees, that the subject credit card is still good and could still be used by
the plaintiff as it would be honored by the duly accredited establishment of defendant.
Not satisfied with the Regional Trial Court's decision, petitioner appealed to the Court of
Appeals, which in a decision promulgated on March 9, 1995 ruled in its dispositive portion.

WHEREFORE, premises considered the decision appealed from is hereby AFFIRMED

with the MODIFICATION that the defendant-appellant shall pay the plaintiff-appellee the
following: P50,000.00 as moral damages: P25,000.00 as exemplary damages; and
P10,000.00 by way of attorney's fees.

SO ORDERED. 6

Hence, the present petition on the following assignment of errors:

THE LOWER COURT ERRED IN DECLARING THAT THERE WAS INDEED AN

AGREEMENT OR ARRANGEMENT ENTERED INTO BETWEEN THE PARTIES
WHEREIN THE DEFENDANT REQUIRED THE PLAINTIFF TO ISSUE A POSTDATED
CHECK IN ITS FAVOR IN THE AMOUNT OF P15,000.00 AS PAYMENT FOR HIS
OVERDUE ACCOUNTS, WITH THE CONDITION THAT THE PLAINTIFF'S CREDIT
CARD WILL NOT BE SUSPENDED OR CANCELLED.

II

THE LOWER COURT ERRED IN HOLDING DEFENDANT LIABLE FOR DAMAGES AND
ATTORNEY'S FEES ARISING OUT FROM THE DISHONOR OF THE PLAINTIFF'S
CREDIT CARD. 7

We find the petition meritorious.

The first issue to be resolved is whether petitioner had the right to suspend the credit
card of the private respondent.

Under the terms and conditions of the credit card, signed by the private respondent, any
card with outstanding balances after thirty (30) days from original billing/statement shall
automatically be suspended, thus:

PAYMENT OF CHARGES — BECC shall furnish the Cardholder a monthly statement of

account made through the use of the CARD and the Cardholder agrees that all charges
made through the use of the CARD shall be paid by the Cardholder on or before the last
day for payment, which is twenty (20) days from the date of the said statement of account;
and such payment due date may be changed to an earlier date if the Cardholder's account
is considered overdue and/or with balances in excess of the approved credit limit; or to
such other date as may be deemed proper by the CARD issuer with notice to the
Cardholder on the same monthly statement of account. If the last day for payment falls on
a Saturday, Sunday or Holiday, the last day for payment automatically becomes the last
working day prior to the said payment date. However, notwithstanding the absence or lack
of proof of service of the statement of charges to the Cardholder, the latter shall pay any
or all charges made through the use of the CARD within thirty (30) days from the date or
dates thereof. Failure of Cardholder to pay any and all charges made through the
CARD within the payment period as stated in the statement of charges or with in
thirty (30) days from actual date or dates whichever occur earlier, shall render him
in default without the necessity of demand from BECC, which the Cardholder
expressly waives. These charges or balance thereof remaining unpaid after the payment
due date indicated on the monthly statement of account shall bear interest of 3% per
month and an additional penalty fee equivalent to another 3% of the amount due for every
month or a fraction of a month's delay. PROVIDED, that if there occurs any changes on
the prevailing market rates BECC shall have the option to adjust the rate of interest and/or
penalty fee due on the outstanding obligation with prior notice to the Cardholder.

xxx xxx xxx

Any CARD with outstanding balances unpaid after thirty (30) days from original
billing/statement date shall automatically be suspended and those with accounts unpaid
after sixty (60) days from said original billing/statement date shall automatically be
cancelled without prejudice to BECC's right to suspend or cancel any CARD any time and
for whatever reason. In case of default in his obligation as provided for in the preceding
paragraph, Cardholder shall surrender his CARD to BECC and shall in addition to the
interest and penalty charges aforementioned, pay the following liquidated damages
and/or fees (a) a collection fee of 25% of the amount due if the account is referred to a
collection agency or attorney; (b) a service fee of P100 for every dishonored check issued
by the Cardholder's in payment of his account, without prejudice; however to BECC's right
of considering Cardholder's obligation unpaid; cable cost for demanding payment or
advising cancellation of membership shall also be for Cardholder's account; and (c) a final
fee equivalent to 25% of the unpaid balance, exclusive of litigation expenses and judicial
costs, if the payment of the account is enforced through court action. 8

The aforequoted provision of the card cannot be any clearer. By his own admission
private respondent no payment within thirty days for his billing/statement dated 27
September 1989. Neither did he make payment for his original billing/statement dated 27
October 1989. Consequently as early as 28 October 1989 thirty days from the
non-payment of his billing dated 27 September 1989, petitioner corporation could
automatically suspend his credit card.

The next issue is whether prior to the suspension of private respondent's credit card on
28 November 1989 the parties entered into an agreement whereby the card could still be
used and would be duly honored by duly accredited establishments.

We agree with the findings of the respondent court, that there was an arrangement
between the parties, wherein the petitioner required the private respondent to issue a
check worth P15,000.00 as payment for the latter's billings. However we find that the
private respondent was not able to comply with this obligation.

As the testimony of private respondent himself bears out, the agreement was for the
immediate payment of the outstanding account:

Q In said statement of account that you are supposed to pay the P8,974.84 the charge of
interest and penalties, did you note that?

A Yes, sir I noted the date.

Q When?

A When I returned from the Quezon province, sir

Q When?

A I think November 22, sir.

Q So that before you used again the credit card you were not able to pay immediately this
P8,987.84 in cash?

A I paid P15,000.00, sir.

Q My question Mr. witness is, did you pay this P8,987.84 in charge of interest and
penalties immediately in cash?

A In cash no, but in check, sir.

Q You said that you noted the word "immediately" in bold letters in your statement of
accounts, why did not pay immediately?

A Because I received that late, sir.

Q Yes, on November 22 when you received from the secretary of the defendant telling you
to pay the principal amount of P8,987.84, why did you not pay?

A There was a communication between me and the defendant, I was required to pay
P8,000.00 but I paid in check for P15,000.00, sir.

Q Do you have any evidence to show that the defendant required you to pay in check for
P15,000.00?

A Yes, sir.

Q Where is it?

A It was telecommunication, sir.

Q So there is no written communication between you and the defendant?

A There was none, sir.

Q There is no written agreement which says that P8,987.84 should be paid for P15,000.00
in check, there is none?

A Yes, no written agreement, sir.

Q And you as a lawyer you know that a check is not considered as cash specially when it
is postdated sent to the defendant?

A That is correct, sir.

Clearly the purpose of the arrangement between the parties on November 22, 1989, was
for the immediate payment of the private respondent's outstanding account, in order that
his credit card would not be suspended.
As agreed upon by the parties, on the following day, private respondent did issue a check
for P15,000.00. However, the check was postdated 15 December 1989. Settled is the
doctrine that a check is only a substitute for money and not money, the delivery of such an
instrument does not, by itself operate as payment. This is especially true in the case of a
9

postdated check.

Thus, the issuance by the private respondent of the postdated check was not
effective payment. It did not comply with his obligation under the arrangement with
Miss Lorenzo. Petitioner corporation was therefore justified in suspending his
credit card.

Finally, we find no legal and factual basis for private respondent's assertion that in
canceling the credit card of the private respondent, petitioner abused its right under the
terms and conditions of the contract.

To find the existence of an abuse of right Article 19 the following elements must be
present (1) There is a legal right or duty; (2) which is exercised in bad faith; (3) for the sole
intent of prejudicing or injuring another. 10

Time and again this Court has held that good faith is presumed and the burden of proving
bad faith is on the party alleging it. This private respondent failed to do. In fact, the action
11

of the petitioner belies the existence of bad faith. As early as 28 October 1989, petitioner
could have suspended private respondent's card outright. Instead, petitioner allowed
private respondent to use his card for several weeks. Petitioner had even notified private
respondent of the impending suspension of his credit card and made special
accommodations for him for setting his outstanding account. As such, petitioner cannot be
said to have capriciously and arbitrarily canceled the private respondent's credit card.

We do not dispute the findings of the lower court that private respondent suffered
damages as a result of the cancellation of his credit card. However, there is a material
distinction between damages and injury. Injury is the illegal invasion of a legal right;
damage is the loss, hurt or harm which results from the injury; and damages are the
recompense or compensation awarded for the damage suffered. Thus, there can be
damage without injury in those instances in which the loss or harm was not the results of a
violation of a legal duty. In such cases, the consequences must be borne by the injured
person alone, the law affords no remedy for damages resulting from an act which
does not amount to a legal injury or wrong. These situations are often called damnum
absque
injuria.
12

In other words, in order that the plaintiff may maintain an action for the injuries of which he
complaints, he must establish that such injuries resulted from a breach of duty which the
defendant owed to the plaintiff a concurrence of injury to the plaintiff and legal
responsibility by the person causing it. The underlying basis for the award of tort damages
is the premise that an individual was injured in contemplation of law. Thus, there must first
be a breach of some duty and the imposition of liability for that breach before damages
may be awarded; and the breach of such duty should be the proximate cause of the
13

injury.

We therefore disagree with the ruling of the respondent court that the dishonor of the
credit card of the private respondent by Café Adriatico is attributable to petitioner for its
willful or gross neglect to inform the private respondent of the suspension of his credit card,
the unfortunate consequence of which brought social humiliation and embarrassment to
the private respondent. 14

It was petitioner's failure to settle his obligation which caused the suspension of
his credit card and subsequent dishonor at Café Adriatico. He can not now pass the
blame to the petitioner for not notifying him of the suspension of his card. As quoted
earlier, the application contained the stipulation that the petitioner could automatically
suspend a card whose billing has not been paid for more than thirty days. Nowhere is it
stated in the terms and conditions of the application that there is a need of notice before
suspension may be affected as private respondent claims. 15

This notwithstanding on November 28, 1989, the day of the suspension of private
respondent's card, petitioner sent a letter by ordinary mail notifying private respondent
that his card had been temporarily suspended. Under the Rules on Evidence, there is a
disputable presumption that letters duly directed and mailed were received on the regular
course of mail. Aside from the private respondent's bare denial he failed to present
16

evidence to rebut the presumption that he received said notice. In fact upon cross
examination private respondent admitted that he did receive the letter notifying him of the
cancellation:

Q Now you were saying that there was a first letter sent to you by the defendant?

A Your letter, sir.

Q Was that the first letter that you received?

A Yes, sir.

Q It is that there was a communication first between you and the defendant?

A There was none, sir. I received a cancellation notice but that was after November 27. 17

As it was private respondent's own negligence which was the proximate cause of his
embarrassing and humiliating experience, we find the award of damages by the
respondent court clearly unjustified. We take note of the fact that private respondent has
not yet paid his outstanding account with petitioner.

IN VIEW OF THE FOREGOING, the decision of the Court of Appeals ordering petitioner
to pay private respondent P100,000.00 as moral damages P50,000.00 as exemplary
damages and P20,000.00 as attorney's fees, is SET ASIDE. Private respondent is
DIRECTED to pay his outstanding obligation with the petitioner in the amount of
P14,439.41.

SO ORDERED.

Narvasa, C.J. and Romero, JJ., concur.

Purisima, J., took no part.

Footnotes
1 CA decision penned by: Justice Salome A. Montoya, concurred by: Justices Fidel P.
Purisima and Godardo A. Jacinto, Rollo, p. 12.

2 Id., at 24-26.

3 Art. 19. Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honestly and good faith.

4 See note 1, p. 45.

5 Id., at 42-44.

6 Id., at 35.

7 Id., at 6.

8 Records, p. 104.

9 Roman Catholic Bishop of Malolos, Inc. vs. IAC, 191 SCRA 411 (1990).

10 Albenson Enterprises Corp. vs. CA, 217 SCRA 16, 25 (1993).

11 Barons Marketing Corp. vs. Court of Appeals and Phelps Dodge Phils., Inc., G.R No.
126486, February 9, 1998.

12 Custodio vs. CA, 253 SCRA 483 (1996) citing 22 Am Jur 2d, Damages, Sec. 4, 35-36.

13 Ibid.

14 See note 1, p. 33.

15 During cross-examination of plaintiff-private respondent Ricardo Marasigan by counsel

for the defendant-petitioner the following exchange ensued:

Q Now you know that after using the credit card you have to pay the monthly charges as
they fall due in accordance with the obligation/application that you signed?

A Yes, sir.

Q And if the payments were not made on time they are supposed to earn interest?

A Yes, sir.

Q They also earn charges, may we know your answer Mr. Witness?

A Yes, sir.

Q Thank you. In case collection suit is filed you know that there were litigation charges
that will be claimed against you, is it not?

A I don't know, sir.

Q But you as practicing lawyer?

A Yes, as a matter of fact that is the procedure.

Q But you did not read the contests?

A Yes, sir.

Q But how did you come to know that you are supposed to pay the charges since you
have not read the contents?

A By the statement of account, sir.

Q What about the date when you should pay your monthly charges, did you know when to
pay it?

A It is also stated there, sir.

Q In the monthly statement of account?

A Yes, sir.

Q When you received this monthly statement of account did you not complain to the
defendant the credit card since you have not read the contents of your application?

A No, sir I did not.

Q You continued using that credit card until it was suspended and terminated?

A Yes, sir.

Q Now do you also know from the terms and conditions of the contract between you and
the defendant that if the charges for the use of the credit card are not paid it will be
suspended?

A Yes, sir. But there has got to be a prior notice.

Q Thank you. After a suspension is still not paid you credit card has to be terminated?

A I think is the procedure, sir. (TSN, November 5, 1990, pp. 39-42).

16 Revised Rules of Court, Rule 131 Sec. 3 (m).

17 TSN, November 5, 1990, pp. 51-52.

Republic of the Philippines

SUPREME COURT
Manila
 SECOND DIVISION

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,

vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 affirming with modifications, the earlier
1

decision of the Regional Trial Court of Manila, Branch XLII, which dismissed the complaint filed therein by herein
2

petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of
record:

1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates
of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein defendant the aggregate
amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original
Records, p. 207; Defendant's Exhibits 1 to 280);

CTD CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with his purchased
of fuel products from the latter (Original Record, p. 208).

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manger, that he
lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a
notarized Affidavit of Loss, as required by defendant bank's procedure, if he desired replacement of said lost
CTDs (TSN, February 9, 1987, pp. 48-50).

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of Loss
(Defendant's Exhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said
depositor (Defendant's Exhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the amount of
Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor executed a
notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la Cruz)
surrenders to defendant bank "full control of the indicated time deposits from and after date" of the
assignment and further authorizes said bank to pre-terminate, set-off and "apply the said time deposits to the
payment of whatever amount or amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp.
60-62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant
bank's Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that
the same were delivered to herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said
depositor (TSN, February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff formally
informing it of its possession of the CTDs in question and of its decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of the
document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel
dela Cruz" obligation against which plaintiff proposed to apply the time deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the
CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5,
1983, the latter set-off and applied the time deposits in question to the payment of the matured loan (TSN,
February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it
the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded
interest therein at 16% per annum, moral and exemplary damages as well as attorney's fees.

TRIAL COURT: After trial, the court a quo rendered its decision dismissing the instant complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence
this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are
non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due
course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of
Commerce relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues
involved in this recourse.

SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY,
SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said
depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at the rate
of 16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important to note
that after the word "BEARER" stamped on the space provided supposedly for the name of the depositor, the
words "has deposited" a certain amount follows. The document further provides that the amount deposited shall
be "repayable to said depositor" on the period indicated. Therefore, the text of the instrument(s) themselves
manifest with clarity that they are payable, not to whoever purports to be the "bearer" but only to the
specified person indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor
Angel dela Cruz as the person who made the deposit and further engages itself to pay said depositor the amount
indicated thereon at the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable
instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

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

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
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. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in these
certificates states that it was Angel dela Cruz?

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 of time deposit insofar as the bank is
concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from
the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention of
9

the parties is to control, if it can be legally ascertained. While the writing may be read in the light of
10

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.) This admission is conclusive upon petitioner, its protestations
13

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. A party may not go
14

back on his own acts and representations to the prejudice of the other party who relied upon them. In the law of
15

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 praying, among others, that
17

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. Had it produced the receipt prayed for, it could have proved, if such
18

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.
(Note: They cant even present the receipts) 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National
Bank, et al. is apropos:
20

. . . 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, and a holder may be the payee or indorsee of a bill or note, who is in
21

possession of it, or the bearer thereof. In the present case, however, there was no negotiation in the sense of a
22

transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of
the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la
Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be
effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent
disposition of such security, in the event of non-payment of the principal obligation, must be contractually
provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is
deemed a holder for value to the extent of his lien. As such holder of collateral security, he would be a pledgee
23

but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law,
shall be governed by the Civil Code provisions on pledge of incorporeal rights, which inceptively provide:
24

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument
proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of
the pledge do not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court
quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of
pledge or guarantee agreement between it and Angel de la Cruz. Consequently, the mere delivery of the CTDs
25

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. With regard to this other mode of transfer, the Civil Code specifically
27

declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it
appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment
involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser,
assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the
execution of any public instrument which could affect or bind private respondent. Necessarily, therefore, as
between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private
respondent observed the requirements of the law in the case of lost negotiable instruments and the
issuance of replacement certificates therefor, on the ground that petitioner failed to raised that issue in the
lower court.28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent
was not included in the stipulation of the parties and in the statement of issues submitted by them to the trial
court. The issues agreed upon by them for resolution in this case are:
29

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDs against the depositor's loan
by virtue of the assignment (Annex "C").

3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs and
the depositor's outstanding account with defendant, if any.

4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date
provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each other.

As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing
enumeration does not include the issue of negligence on the part of respondent bank. An issue raised for the first
time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. Questions raised
30

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.

Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of
competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be not paid a
third person, as well as in order to prevent the ownership of the instrument that a duplicate be issued him.
(Emphasis ours.)
 xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the
"dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the
lost instrument. Where the provision reads "may," this word shows that it is not mandatory but discretional. The
34

word "may" is usually permissive, not mandatory. It is an auxiliary verb indicating liberty, opportunity, permission
35

and possibility. 36

Moreover, as correctly analyzed by private respondent, Articles 548 to 558 of the Code of Commerce, on which
37

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.

Narvasa, C.J., Padilla and Nocon, JJ., concur.

Footnotes

1 Per Justice Segundino G. Chua, with the concurrence of Justices Santiago M. Kapunan and Luis L. Victor.

2 Judge Ramon Mabutas, Jr., presiding; Rollo, 64-88.

3 Rollo, 24-26.

4 Ibid., 12.

5 Exhibit A, Documentary Evidence for the Plaintiff, 8.

6 Rollo, 28.

7 TSN, February 9, 1987, 46-47.

8 Ibid., id., 152-153.

9 11 Am. Jur. 2d, Bills and Notes, 79.

10 Ibid., 86.

11 Ibid., 87-88.

12 Art. 1377, Civil Code.

13 Exhibit 563, Documentary Evidence for the Defendant, 442; Original Record, 211.

14 Panay Electric Co., Inc. vs. Court of Appeals, et al., 174 SCRA 500 (1989).

15 Philippine National Bank vs. Intermediate Appellate Court, et al., 189 SCRA 680 (1990).

16 Section 2(a), Rule 131, Rules of Court.

17 Original Record, 152.

18 Ibid., 154.

19 Section 3(e), Rule 131, Rules of Court.

20 174 SCRA 295 (1989), jointly decided with Overseas Bank of Manila vs. Court of Appeals, et al., G.R. No.
60907.

21 Sec. 30, Act No. 2031.

22 Sec. 191, id.

23 Sec. 27, id.; see also Art. 2118, Civil Code.

24 Commentaries and Jurisprudence on the Philippine Commercial Laws, T.C. Martin, 1985 Rev. Ed., Vol. I, 134;
Art. 18, Civil Code; Sec. 196, Act No. 2031.

25 Rollo, 25.

26 Tec Bi & Co. vs. Chartered Bank of India, Australia and China, 41 Phil. 596 (1916); Ocejo, Perez & Co. vs. The
International Banking Corporation, 37 Phil. 631 (1918); Te Pate vs. Ingersoll, 43 Phil. 394 (1922).

27 Rollo, 25.

28 Ibid., 15.

29 Joint Partial Stipulation of Facts and Statement of Issues, dated November 27, 1984; Original Record, 209.

30 Mejorada vs. Municipal Council of Dipolog, 52 SCRA 451 (1973).

31 Sec. 18, Rule 46, Rules of Court; Garcia, et al. vs. Court of Appeals, et al., 102 SCRA 597 (1981); Matienzo vs.
Servidad, 107 SCRA 276 (1981); Aguinaldo Industries Corporation, etc. vs. Commissioner of Internal Revenue, et
al., 112 SCRA 136 (1982); Dulos Realty & Development Corporation vs. Court of Appeals, et al., 157 SCRA 425
(1988).

32 Bergado vs. Court of Appeals, et al., 173 SCRA 497 (1989).

33 Rollo, 58.

34 U.S. vs. Sanchez, 13 Phil. 336 (1909); Capati vs. Ocampo, 113 SCRA 794 (1982).
35 Luna vs. Abaya, 86 Phil. 472 (1950).

36 Philippine Law Dictionary, F.B. Moreno, Third Edition, 590.

37 Rollo, 59.

Traders Royal Bank v CA (Negotiable Instruments Law)

TRADERS ROYAL BANK V CA G.R. No. 93397 March 3, 1997

FACTS:

Filriters registered owner of Central Bank Certificate of Indebtedness (CBCI). Filriters transferred it to
Philfinance by one of its officers without authorization from the company. Subsequently, Philfinance
transferred same CBCI to Traders Royal Bank (TRB) under a repurchase agreement. When
Philfinance failed to do so, The TRB tried to register in its name in the CBCI.

The Central Bank did not want to recognize the transfer.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action was
originally filed as a Petition for Mandamus 5 under Rule 65 of the Rules of Court, to compel the Central
Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank
(TRB).

DECISION OF LOWER COURTS: * RTC: transfer is null and void. * CA: The appellate court ruled that
the subject CBCI is not a nego bnghvtytiable instrument. Philfinance acquired no title or rights under CBCI
No. D891 which it could assign or transfer to Traders Royal Bank and which the latter can register with the
Central Bank. Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and
is not governed by the negotiable instruments law.

APPLICABLE LAWS:

Under section 1 of Act no. 2031 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.

Under section 3, Article V of Rules and Regulations Governing Central Bank Certificates of Indebtedness
states that the assignment of registered certificates shall not be valid unless made at the office where the
same have been issued and registered or at the Securities Servicing Department, Central Bank of the
Philippines, and by the registered owner thereof, in person or by his representative, duly authorized in
writing. For this purpose, the transferee may be designated as the representative of the registered
owner. ISSUES & RULING: 1. Whether the CBCI is negotiable instrument or not.

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer, of if this
Certificate of indebtedness be registered, to FILRITERS GUARANTY ASSURANCE CORPORATION,
the registered owner hereof, the principal sum of FIVE HUNDRED THOUSAND PESOS.

NO. The CBCI is not a negotiable instrument, since the instrument clearly stated that it was payable to
Filriters, and the certificate lacked the words of negotiability which serve as an expression of consent that
the instrument may be transferred by negotiation.

Before the instruments become negotiable instruments, the instrument must conform to the requirements
under the Negotiable Instrument Law. Otherwise instrument shall not bind the parties.

2. Whether the Assignment of registered certificate is valid or null and void.

IT'S NULL AND VOID. Obviously the Assignment of certificate from Filriters to Philfinance was null and
void. One of officers who signed the deed of assignment in behalf of Filriters did not have the necessary
written authorization from the Board of Directors of Filriters. For lack of such authority the assignment is
considered null and void.

Clearly shown in the record is the fact that

Philfinance's title over CBCI is defective since it acquired the instrument from Filriters
fictitiously. Under 1409 of the Civil Code those contracts which are absolutely simulated or fictitious are
considered void and inexistent from the beginning.

Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a non-owner
was disposing of the registered CBCI owned by another entity was a good reason for petitioner to verify of
inquire as to the title Philfinance to dispose to the CBCI.

OTHER NOTES:

1. the mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate
personalities.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 93397 March 3, 1997

TRADERS ROYAL BANK, petitioner,

vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE
CORPORATION and CENTRAL BANK of the PHILIPPINES, respondents.

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision of the

respondent Court of Appeals dated January 29, 1990, affirming the nullity of the
1

transfer of Central Bank Certificate of Indebtedness (CBCI) No. D891, with a face value of
2

P500,000.00, from the Philippine Underwriters Finance Corporation (Philfinance) to the

petitioner Trader's Royal Bank (TRB), under a Repurchase Agreement dated February 4,
3

1981, and a Detached Assignment dated April 27, 1981.

4

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the
action was originally filed as a Petition for Mandamus under Rule 65 of the Rules of Court,
5

to compel the Central Bank of the Philippines to register the transfer of the subject CBCI
to petitioner Traders Royal Bank (TRB).

In the said petition, TRB stated that:

3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed a

"Detached Assignment" . . ., whereby Filriters, as registered owner, sold, transferred,
assigned and delivered unto Philippine Underwriters Finance Corporation (Philfinance) all
its rights and title to Central Bank Certificates of Indebtedness of PESOS: FIVE
HUNDRED THOUSAND (P500,000) and having an aggregate value of PESOS: THREE
MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);

4. The aforesaid Detached Assignment (Annex "A") contains an express authorization

executed by the transferor intended to complete the assignment through the registration
of the transfer in the name of PhilFinance, which authorization is specifically phrased as
follows: '(Filriters) hereby irrevocably authorized the said issuer (Central Bank) to transfer
the said bond/certificates on the books of its fiscal agent;

5. On February 4, 1981, petitioner entered into a Repurchase Agreement with

PhilFinance . . ., whereby, for and in consideration of the sum of PESOS: FIVE
HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and delivered to
petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of P500,000.00 . . .,
which CBCI was among those previously acquired by PhilFinance from Filriters as
averred in paragraph 3 of the Petition;

6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to

repurchase CBCI Serial No. D891 (Annex "C"), at the stipulated price of PESOS: FIVE
HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100
(P519,361.11) on April 27, 1981;

7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27,
1981, when the checks it issued in favor of petitioner were dishonored for insufficient
funds;

8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the

Petitioner to enable the latter to have its title completed and registered in the books of the
respondent. And by means of said Detachment, Philfinance transferred and assigned all,
its rights and title in the said CBCI (Annex "C") to petitioner and, furthermore, it did thereby
"irrevocably authorize the said issuer (respondent herein) to transfer the said
bond/certificate on the books of its fiscal agent." . . .

9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned
Detached Assignments (Annexes "B" and "D"), to the Securities Servicing Department of
the respondent, and requested the latter to effect the transfer of the CBCI on its books and
to issue a new certificate in the name of petitioner as absolute owner thereof;

10. Respondent failed and refused to register the transfer as requested, and continues to
do so notwithstanding petitioner's valid and just title over the same and despite repeated
demands in writing, the latest of which is hereto attached as Annex "E" and made an
integral part hereof;

11. The express provisions governing the transfer of the CBCI were substantially
complied with the petitioner's request for registration, to wit:

"No transfer thereof shall be valid unless made at said office (where the Certificate has
been registered) by the registered owner hereof, in person or by his attorney duly
authorized in writing, and similarly noted hereon, and upon payment of a nominal transfer
fee which may be required, a new Certificate shall be issued to the transferee of the
registered holder thereof."

and, without a doubt, the Detached Assignments presented to respondent were sufficient
authorizations in writing executed by the registered owner, Filriters, and its transferee,
PhilFinance, as required by the above-quoted provision;

12. Upon such compliance with the aforesaid requirements, the ministerial duties of
registering a transfer of ownership over the CBCI and issuing a new certificate to the
transferee devolves upon the respondent;

Upon these assertions, TRB prayed for the registration by the Central Bank of the subject
CBCI in its name.

On December 4, 1984, the Regional Trial Court the case took cognizance of the
defendant Central Bank of the Philippines' Motion for Admission of Amended Answer with
Counter Claim for Interpleader thereby calling to fore the respondent Filriters Guaranty
6
Assurance Corporation (Filriters), the registered owner of the subject CBCI as
respondent.

For its part, Filriters interjected as Special Defenses the following:

11. Respondent is the registered owner of CBCI No. 891;

12. The CBCI constitutes part of the reserve investment against liabilities required of
respondent as an insurance company under the Insurance Code;

13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the
trust fund doctrine and to the prejudice of policyholders and to all who have present or
future claim against policies issued by Filriters, Alfredo Banaria, then Senior
Vice-President-Treasury of Filriters, without any board resolution, knowledge or consent
of the board of directors of Filriters, and without any clearance or authorization from the
Insurance Commissioner, executed a detached assignment purportedly assigning CBCI
No. 891 to Philfinance;

xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe,

Vice-President-Treasury of Filriters (both of whom were holding the same positions in
Philfinance), without any consideration or benefit redounding to Filriters and to the grave
prejudice of Filriters, its policy holders and all who have present or future claims against its
policies, executed similar detached assignment forms transferring the CBCI to plaintiff;

xxx xxx xxx

15. The detached assignment is patently void and inoperative because the assignment is
without the knowledge and consent of directors of Filriters, and not duly authorized in
writing by the Board, as requiring by Article V, Section 3 of CB Circular No. 769;

16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria
and not the corporate act of Filriters and such null and void;

a) The assignment was executed without consideration and for that reason, the
assignment is void from the beginning (Article 1409, Civil Code);

b) The assignment was executed without any knowledge and consent of the board of
directors of Filriters;

c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a

requirement under the Insurance Code for its existence as an insurance company and the
pursuit of its business operations. The assignment of the CBCI is illegal act in the sense
of malum in se or malum prohibitum, for anyone to make, either as corporate or personal
act;

d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited by

law, is immoral and against public policy;
e) The assignment of the CBCI has resulted in the capital impairment and in the solvency
deficiency of Filriters (and has in fact helped in placing Filriters under conservatorship), an
inevitable result known to the officer who executed assignment.

17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the
assignment.

a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is
not payable to bearer but is a registered in the name of Filriters;

b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the
registered owner as the absolute owner and that the value of the registered certificates
shall be payable only to the registered owner; a sufficient notice to plaintiff that the
assignments do not give them the registered owner's right as absolute owner of the
CBCI's;

c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides
that the registered certificates are payable only to the registered owner (Article II, Section
1).

18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by
Filriters is not a regular transaction made in the usual of ordinary course of
business;

a) The CBCI constitutes part of the reserve investments of Filriters against liabilities
requires by the Insurance Code and its assignment or transfer is expressly prohibited by
law. There was no attempt to get any clearance or authorization from the Insurance
Commissioner;

b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or
regular course of its business;

c) The CBCI involved substantial amount and its assignment clearly constitutes
disposition of "all or substantially all" of the assets of Filriters, which requires the
affirmative action of the stockholders (Section 40, Corporation [sic] Code. 7

In its Decision dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII
8

found the assignment of CBCI No. D891 in favor of Philfinance, and the subsequent
assignment of the same CBCI by Philfinance in favor of Traders Royal Bank null
and void and of no force and effect. The dispositive portion of the decision reads:

ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters

Guaranty Assurance Corporation and against the plaintiff Traders Royal Bank:

(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent
assignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal Bank as null and
void and of no force and effect;

(b) Ordering the respondent Central Bank of the Philippines to disregard the said
assignment and to pay the value of the proceeds of the CBCI No. D891 to the Filriters
Guaranty Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty
Assurance Corp. The sum of P10,000 as attorney's fees; and

(d) to pay the costs.

SO ORDERED. 9

The petitioner assailed the decision of the trial court in the Court of Appeals , but their
10

appeals likewise failed. The findings of the fact of the said court are hereby reproduced:

The records reveal that defendant Filriters is the registered owner of CBCI No. D891.
Under a deed of assignment dated November 27, 1971, Filriters transferred CBCI No.
D891 to Philippine Underwriters Finance Corporation (Philfinance). Subsequently,
Philfinance transferred CBCI No. D891, which was still registered in the name of Filriters,
to appellant Traders Royal Bank (TRB). The transfer was made under a repurchase
agreement dated February 4, 1981, granting Philfinance the right to repurchase the
instrument on or before April 27, 1981. When Philfinance failed to buy back the note on
maturity date, it executed a deed of assignment, dated April 27, 1981, conveying to
appellant TRB all its right and the title to CBCI No. D891.

Armed with the deed of assignment, TRB then sought the transfer and registration of
CBCI No. D891 in its name before the Security and Servicing Department of the Central
Bank (CB). Central Bank, however, refused to effect the transfer and registration in view
of an adverse claim filed by defendant Filriters.

Left with no other recourse, TRB filed a special civil action for mandamus against the
Central Bank in the Regional Trial Court of Manila. The suit, however, was subsequently
treated by the lower court as a case of interpleader when CB prayed in its amended
answer that Filriters be impleaded as a respondent and the court adjudge which of them is
entitled to the ownership of CBCI No. D891. Failing to get a favorable judgment. TRB now
comes to this Court on appeal. 11

In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument,
and having acquired the said certificate from Philfinance as a holder in due course,
its possession of the same is thus free fro any defect of title of prior parties and
from any defense available to prior parties among themselves, and it may thus, enforce
payment of the instrument for the full amount thereof against all parties liable thereon. 12

In ignoring said argument, the appellate court that the CBCI is not a negotiable
instrument, since the instrument clearly stated that it was payable to Filriters, the
registered owner, whose name was inscribed thereon, and that the certificate lacked the
words of negotiability which serve as an expression of consent that the instrument may be
transferred by negotiation.

Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious,
having made without consideration, and did not conform to Central Bank Circular No. 769,
series of 1980, better known as the "Rules and Regulations Governing Central Bank
Certificates of Indebtedness", which provided that any "assignment of registered
certificates shall not be valid unless made . . . by the registered owner thereof in person or
by his representative duly authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from Philfinance whose
interest was inexistent, having acquired the certificate through simulation. What happened
was Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation, to
guarantee its financing operations.

Said the Court:

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for
and on behalf of Filriters, did not have the necessary written authorization from the Board
of Directors of Filriters to act for the latter. For lack of such authority, the assignment did
not therefore bind Filriters and violated as the same time Central Bank Circular No. 769
which has the force and effect of a law, resulting in the nullity of the transfer (People v.
Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165
SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign
or transfer to Traders Royal Bank and which the latter can register with the Central Bank.

WHEREFORE, the judgment appealed from is AFFIRMED, with costs against

plaintiff-appellant.

SO ORDERED. 13

Petitioner's present position rests solely on the argument that Philfinance owns 90% of
Filriters equity and the two corporations have identical corporate officers, thus
demanding the application of the doctrine or piercing the veil of corporate fiction, as
to give validity to the transfer of the CBCI from registered owner to petitioner TRB. This
14

renders the payment by TRB to Philfinance of CBCI, as actual payment to Filriters. Thus,
there is no merit to the lower court's ruling that the transfer of the CBCI from Filriters to
Philfinance was null and void for lack of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of
negotiability within the meaning of the negotiable instruments law (Act 2031).

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay
bearer, of if this Certificate of indebtedness be registered, to FILRITERS GUARANTY
ASSURANCE CORPORATION, the registered owner hereof, the principal sum of FIVE
HUNDRED THOUSAND PESOS.

xxx xxx xxx

Properly understood, a certificate of indebtedness pertains to certificates for the creation

and maintenance of a permanent improvement revolving fund, is similar to a "bond," (82
Minn. 202). Being equivalent to a bond, it is properly understood as acknowledgment of
an obligation to pay a fixed sum of money. It is usually used for the purpose of long term
loans.

The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:
As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance
Corporation, the registered owner hereof." Very clearly, the instrument is payable only to
Filriters, the registered owner, whose name is inscribed thereon. It lacks the words of
negotiability which should have served as an expression of consent that the instrument
may be transferred by negotiation. 15

A reading of the subject CBCI indicates that the same is payable to FILRITERS
GUARANTY ASSURANCE CORPORATION, and to no one else, thus, discounting the
petitioner's submission that the same is a negotiable instrument, and that it is a holder in
due course of the certificate.

The language of negotiability which characterize a negotiable paper as a credit instrument

is its freedom to circulate as a substitute for money. Hence, freedom of negotiability is the
touchtone relating to the protection of holders in due course, and the freedom of
negotiability is the foundation for the protection which the law throws around a holder in
due course (11 Am. Jur. 2d, 32). This freedom in negotiability is totally absent in a
certificate indebtedness as it merely to pay a sum of money to a specified person or entity
for a period of time.

As held in Caltex (Philippines), Inc. v. Court of Appeals, :16

The accepted rule is that the negotiability or non-negotiability of an instrument is

determined from the writing, that is, from the face of the instrument itself. In the
construction of a bill or note, the intention of the parties is to control, if it can be legally
ascertained. While the writing may be read in the light of surrounding circumstance in
order to more perfectly understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their meaning, no
other words are to be added to it or substituted in its stead. The duty of the court in such
case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words
they have used. What the parties meant must be determined by what they said.

Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment,
and is not governed by the negotiable instruments law. The pertinent question then is,
was the transfer of the CBCI from Filriters to Philfinance and subsequently from
Philfinance to TRB, in accord with existing law, so as to entitle TRB to have the
CBCI registered in its name with the Central Bank?

The following are the appellate court's pronouncements on the matter:

Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is
defective since it acquired the instrument from Filriters fictitiously. Although the deed of
assignment stated that the transfer was for "value received", there was really no
consideration involved. What happened was Philfinance merely borrowed CBCI No. D891
from Filriters, a sister corporation. Thus, for lack of any consideration, the assignment
made is a complete nullity.

What is more, We find that the transfer made by Filriters to Philfinance did not conform to
Central Bank Circular No. 769, series of 1980, otherwise known as the "Rules and
Regulations Governing Central Bank Certificates of Indebtedness", under which the note
was issued. Published in the Official Gazette on November 19, 1980, Section 3 thereof
provides that any assignment of registered certificates shall not be valid unless made . . .
by the registered owner thereof in person or by his representative duly authorized in
writing.

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for
and on behalf of Filriters, did not have the necessary written authorization from the Board
of Directors of Filriters to act for the latter. For lack of such authority, the assignment did
not therefore bind Filriters and violated at the same time Central Bank Circular No. 769
which has the force and effect of a law, resulting in the nullity of the transfer (People vs.
Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165
SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign
or transfer to Traders Royal Bank and which the latter can register with the Central Bank

Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the
respondent Filriters and Philfinance, though separate corporate entities on paper, have
used their corporate fiction to defraud TRB into purchasing the subject CBCI, which
purchase now is refused registration by the Central Bank.

Says the petitioner;

Since Philfinance own about 90% of Filriters and the two companies have the same
corporate officers, if the principle of piercing the veil of corporate entity were to be applied
in this case, then TRB's payment to Philfinance for the CBCI purchased by it could just as
well be considered a payment to Filriters, the registered owner of the CBCI as to bar the
latter from claiming, as it has, that it never received any payment for that CBCI sold and
that said CBCI was sold without its authority.

xxx xxx xxx

We respectfully submit that, considering that the Court of Appeals has held that the CBCI
was merely borrowed by Philfinance from Filriters, a sister corporation, to guarantee its
(Philfinance's) financing operations, if it were to be consistent therewith, on the issued
raised by TRB that there was a piercing a veil of corporate entity, the Court of Appeals
should have ruled that such veil of corporate entity was, in fact, pierced, and the payment
by TRB to Philfinance should be construed as payment to Filriters. 17

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely
an equitable remedy, and may be awarded only in cases when the corporate fiction is
used to defeat public convenience, justify wrong, protect fraud or defend crime or where a
corporation is a mere alter ego or business conduit of a person. 18

Peiercing the veil of corporate entity requires the court to see through the protective
shroud which exempts its stockholders from liabilities that ordinarily, they could be subject
to, or distinguished one corporation from a seemingly separate one, were it not for the
existing corporate fiction. But to do this, the court must be sure that the corporate fiction
was misused, to such an extent that injustice, fraud, or crime was committed upon another,
disregarding, thus, his, her, or its rights. It is the protection of the interests of innocent third
persons dealing with the corporate entity which the law aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains, despite the
petitioners insistence on the contrary. For one, other than the allegation that Filriters is
90% owned by Philfinance, and the identity of one shall be maintained as to the other,
there is nothing else which could lead the court under circumstance to disregard their
corporate personalities.

Though it is true that when valid reasons exist, the legal fiction that a corporation is an
entity with a juridical personality separate from its stockholders and from other
corporations may be disregarded, in the absence of such grounds, the general rule must
19

upheld. The fact that Filfinance owns majority shares in Filriters is not by itself a
ground to disregard the independent corporate status of Filriters. In Liddel &
Co., Inc. vs. Collector of Internal Revenue, the mere ownership by a single stockholder
20

or by another corporation of all or nearly all of the capital stock of a corporation is not of
itself a sufficient reason for disregarding the fiction of separate corporate personalities.

In the case at bar, there is sufficient showing that the petitioner was not defrauded
at all when it acquired the subject certificate of indebtedness from Philfinance.

On its face the subject certificates states that it is registered in the name of Filriters. This
should have put the petitioner on notice, and prompted it to inquire from Filriters as to
Philfinance's title over the same or its authority to assign the certificate. As it is, there is no
showing to the effect that petitioner had any dealings whatsoever with Filriters, nor did it
make inquiries as to the ownership of the certificate.

The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:

TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's
name at any office of the Bank or any agency duly authorized by the Bank, and such
registration is noted hereon. After such registration no transfer thereof shall be valid
unless made at said office (where the Certificates has been registered) by the registered
owner hereof, in person, or by his attorney, duly authorized in writing and similarly noted
hereon and upon payment of a nominal transfer fee which may be required, a new
Certificate shall be issued to the transferee of the registered owner thereof. The bank or
any agency duly authorized by the Bank may deem and treat the bearer of this Certificate,
or if this Certificate is registered as herein authorized, the person in whose name the
same is registered as the absolute owner of this Certificate, for the purpose of receiving
payment hereof, or on account hereof, and for all other purpose whether or not this
Certificate shall be overdue.

This is notice to petitioner to secure from Filriters a written authorization for the transfer or
to require Philfinance to submit such an authorization from Filriters.

Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The
fact that a non-owner was disposing of the registered CBCI owned by another entity
was a good reason for petitioner to verify of inquire as to the title Philfinance to
dispose to the CBCI.

Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 , known as 21

the Rules and Regulations Governing Central Bank Certificates of Indebtedness, Section
3, Article V of which provides that:
Sec. 3. Assignment of Registered Certificates. — Assignment of registered certificates
shall not be valid unless made at the office where the same have been issued and
registered or at the Securities Servicing Department, Central Bank of the Philippines, and
by the registered owner thereof, in person or by his representative, duly authorized in
writing. For this purpose, the transferee may be designated as the representative of the
registered owner.

Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769,
and its requirements. An entity which deals with corporate agents within circumstances
showing that the agents are acting in excess of corporate authority, may not hold the
corporation liable. This is only fair, as everyone must, in the exercise of his rights and in
22

the performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith. 23

The transfer made by Filriters to Philfinance did not conform to the said. Central Bank
Circular, which for all intents, is considered part of the law. As found by the courts a quo,
Alfredo O. Banaria, who had signed the deed of assignment from Filriters to Philfinance,
purportedly for and in favor of Filriters, did not have the necessary written authorization
from the Board of Directors of Filriters to act for the latter. As it is, the sale from Filriters to
Philfinance was fictitious, and therefore void and inexistent, as there was no consideration
for the same. This is fatal to the petitioner's cause, for then, Philfinance had no title over
the subject certificate to convey the Traders Royal Bank. Nemo potest nisi quod de jure
potest — no man can do anything except what he can do lawfully.

Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital
reserves, which are required by law to be maintained at a mandated level. This was
24

pointed out by Elias Garcia, Manager-in-Charge of respondent Filriters, in his testimony

given before the court on May 30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in
the face value of P5000,000.00 subject of this case?

A Yes, sir.

Q Why do you know this?

A Well, this was CBCI of the company sought to be examined by the Insurance
Commission sometime in early 1981 and this CBCI No. 891 was among the CBCI's that
were found to be missing.

Q Let me take you back further before 1981. Did you have the knowledge of this CBCI No.
891 before 1981?

A Yes, sir. This CBCI is an investment of Filriters required by the Insurance Commission
as legal reserve of the company.

Q Legal reserve for the purpose of what?

A Well, you see, the Insurance companies are required to put up legal reserves under
Section 213 of the Insurance Code equivalent to 40 percent of the premiums receipt and
further, the Insurance Commission requires this reserve to be invested preferably in
government securities or government binds. This is how this CBCI came to be purchased
by the company.

It cannot, therefore, be taken out of the said funds, without violating the requirements of
the law. Thus, the anauthorized use or distribution of the same by a corporate officer of
Filriters cannot bind the said corporation, not without the approval of its Board of Directors,
and the maintenance of the required reserve fund.

Consequently, the title of Filriters over the subject certificate of indebtedness must be
upheld over the claimed interest of Traders Royal Bank.

ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated
January 29, 1990 is hereby AFFIRMED.

SO ORDERED.

Regalado, Romero and Mendoza, JJ., concur.

Puno, J., took no part.

Footnotes

1 Justice Ricardo L. Pronove, Jr., ponente; concurred in by Justices Alfredo L. Benipayo

and Serafain V.C. Guingona, p. 18, Rollo.

2 P. 143, Record.

3 Ibid. at p. 146.

4 Ibid., at p. 148.

5 P. 1, Record.

6 P. 75, Record.

7 Answer, p. 97, Record.

8 P. 315, Record.

9 Pp. 16-17, RTC Decision, p. 330, Rollo.

10 Annex "A". Petition, supra.

11 Court of Appeals Decision, pp. 18-19, Rollo.

12 Section 57. Negotiable Instruments Law.

13 Petition, Annex "A", pp. 21-22, Rollo.

14 Ibid.
15 Campos and Campos, Negotiable Instruments Law, p. 38, 1971 ed.

16 G.R. No. 97753, August 10, 1992, 212 SCRA 448.

17 Petition

18 Yu vs. National Labor Relations Commission 245 SCRA 134.

19 Guatson International Travel and Tours, Inc. vs. National Labor Relations Commission,
230 SCRA 815.

20 2 SCRA 632.

21 Official Gazette 9370.

22 See Article 1883, Civil Code.

23 See Article 19, Civil Code.

24 Sec. 213 Every insurance company, other than life, shall maintain a reserve fro
unearned premiums on its policies in force, which shall be charged as a liability in any
determination of its financial condition. Such reserve shall be equal to forty per centum of
the gross permiums, less returns and cancellations, received on policies or risks having
more than a year to run; Provided That for marine cargo risks, the reserve shall be equal
to forty per centum of the premiums written in the policies upon yearly risks, and the full
amount of premiums written during the last two months of the calendar year upon all other
marine risks not terminated. Presidential Decree No. 612 (The Insurance Code of the
Philippines).

FIRESTONE TIRE V. CA
353 SCRA 601

FACTS:
Fojas Arca and Firestone Tire entered into a franchising agreement wherein the former had the
privilege to purchase on credit the latter’s products. In paying for these products, the former could
pay through special withdrawal slips. In turn, Firestone would deposit these slips with
Citibank. Citibank
would then honor and pay the slips. Citibank automatically credits the
account of Firestone then merely waited for the same to be honored and
paid by Luzon Development Bank. As this was the circumstances,
Firestone believed in the sufficient funding of the slips until there was a
time that Citibank informed it that one of the slips was dishonored. It
wrote then a demand letter to Fojas Arca for the payment and damages but the latter
refused to pay, prompting Firestone to file an action against
it.
HELD:

The withdrawal slips, at the outset, are non-negotiable. Hence, the rule on
immediate notice of dishonor is non-applicable to the case at hand. Thus, the
bank was under no obligation to give immediate notice that it wouldn't
make payment on the subject withdrawal slips. Citibank should ha
ve
known that withdrawal slips are not negotiable instruments. It
couldn't expect then the slips be treated like checks by other entities. Payment
or notice of dishonor from respondent bank couldn't be expected immediately in
contrast to the situation involving checks.

In the case at bar, Citibank relied on the fact that LDB honored and paid
the withdrawal slips which made it automatically credit the account o
f
Firestone with the amount of the subject withdrawal slips then merel
y waited for LDB to honor and pay the same. It bears stressing though that
Citibank couldn't have missed the non-negotiable character of the sli
ps. The essence of negotiability which characterizes a negotiable pa
per as a
credit instrument lies in its freedom to be a substitute for money.
The withdrawal slips in question lacked this character.

The withdrawal slips deposited were not checks as Firestone admits

and Citibank generally was not bound to accept the withdrawal slips as a valid
mode of deposit. Nonetheless, Citibank erroneously accepted the same as
such and thus, must bear the risks attendant to the acceptance of
the instruments. Firestone and Citibank could not now shift the risk to LDB for
their committed mistake.

Firestone Tire vs. CA

Firestone Tire & rubber Co. vs. Court of Appeals

GR No. 113236 March 5, 2001
Quisumbing, J.:

Facts:
Forjas-Arca Enterprise Company is maintaining a special savings account with
Luzon Development Bank, the latter authorized and allowed withdrawals of funds
though the medium of special withdrawal slips. These are supplied by Fojas-Arca.
Fojas-Arca purchased on credit with FirestoneTire & Rubber Company, in payment
Fojas-Arca delivered a 6 special withdrawal slips. In turn, these were deposited by the
Firsestone to its bank account in Citibank. With this, relying on such confidence and
belief Firestone extended to Fojas-Arca other purchase on credit of its products but
several withdrawal slips were dishonored and not paid. As a consequence, Citibank
debited the plaintiff’s account representing the aggregate amount of the two
dishonored special withdrawal slips. Fojas-Arca averred that the pecuniary losses it
suffered are a caused by and directly attributes to defendant’s gross negligence as a
result Fojas-Arca filed a complaint.

Issue:
Whether or not the acceptance and payment of the special withdrawal slips
without the presentation of the depositor’s passbook thereby giving the impression
that it is a negotiable instrument like a check.

Held:
No. Withdrawal slips in question were non negotiable instrument. Hence, the
rules governing the giving immediate notice of dishonor of negotiable instrument do
not apply. The essence of negotiability which characterizes a negotiable paper as a
credit instrument lies in its freedom to circulate freely as a substitute for money. The
withdrawal slips in question lacked this character.

G.R. No. 113236 March 5, 2001

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.

QUISUMBING, J.:

This petition assails the decision 1 dated December 29, 1993 of the Court of
Appeals in CA-G.R. CV No. 29546, which affirmed the judgment 2 of the
Regional Trial Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P,
dismissing Firestone's complaint for damages.

The facts of this case, adopted by the CA and based on findings by the trial court,
are as follows:

. . . [D]efendant is a banking corporation. It operates under a certificate of

authority issued by the Central Bank of the Philippines, and among its activities,
accepts savings and time deposits. Said defendant had as one of its
client-depositors the Fojas-Arca Enterprises Company ("Fojas-Arca" for brevity).
Fojas-Arca maintaining a special savings account with the defendant, the
latter authorized and allowed withdrawals of funds therefrom through
the medium of special withdrawal slips. These are supplied by the
defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a "Franchised
Dealership Agreement" (Exh. B) whereby Fojas-Arca has the privilege to
purchase on credit and sell plaintiff's products.

On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement,
Fojas-Arca purchased on credit Firestone products from plaintiff with a total
amount of P4,896,000.00. In payment of these purchases, Fojas-Arca delivered
to plaintiff six (6) special withdrawal slips drawn upon the defendant. In
turn, these were deposited by the plaintiff with its current account with
the Citibank. All of them were honored and paid by the defendant. This
singular circumstance made plaintiff believe [sic] and relied [sic] on the fact
that the succeeding special withdrawal slips drawn upon the defendant would be
equally sufficiently funded. Relying on such confidence and belief and as a direct
consequence thereof, plaintiff extended to Fojas-Arca other purchases on credit
of its products.

On the following dates Fojas-Arca purchased Firestone products on credit (Exh.

M, I, J, K) and delivered to plaintiff the corresponding special withdrawal slips in
payment thereof drawn upon the defendant, to wit:

WITHDRAWAL
DATE AMOUNT
SLIP NO.
June 15, 1978 42127 P1,198,092.80
July 15, 1978 42128 940,190.00
Aug. 15, 1978 42129 880,000.00
Sep. 15, 1978 42130 981,500.00

These were likewise deposited by plaintiff in its current account with Citibank
and in turn the Citibank forwarded it [sic] to the defendant for payment and
collection, as it had done in respect of the previous special withdrawal slips. Out
of these four (4) withdrawal slips only withdrawal slip No. 42130 in the amount
of P981,500.00 was honored and paid by the defendant in October 1978.
Because of the absence for a long period coupled with the fact that defendant
honored and paid withdrawal slips No. 42128 dated July 15, 1978, in the
amount of P981,500.00 plaintiff's belief was all the more strengthened that the
other withdrawal slips were likewise sufficiently funded, and that it had received
full value and payment of Fojas-Arca's credit purchased then outstanding at the
time. On this basis, plaintiff was induced to continue extending to Fojas-Arca
further purchase on credit of its products as per agreement (Exh. "B").

However, on December 14, 1978, plaintiff was informed by Citibank that special
withdrawal slips No. 42127 dated June 15, 1978 for P1,198,092.80 and No.
42129 dated August 15, 1978 for P880,000.00 were dishonored and not paid for
the reason 'NO ARRANGEMENT.' As a consequence, the Citibank debited
plaintiff's account for the total sum of P2,078,092.80 representing the
aggregate amount of the above-two special withdrawal slips. Under such
situation, plaintiff averred that the pecuniary losses it suffered is caused by
and directly attributable to defendant's gross negligence.
On September 25, 1979, counsel of plaintiff served a written demand upon the
defendant for the satisfaction of the damages suffered by it. And due to
defendant's refusal to pay plaintiff's claim, plaintiff has been constrained to
file this complaint, thereby compelling plaintiff to incur litigation
expenses and attorney's fees which amount are recoverable from the
defendant.

Controverting the foregoing asseverations of plaintiff, defendant asserted, inter

alia that the transactions mentioned by plaintiff are that of plaintiff and
Fojas-Arca only, [in] which defendant is not involved; Vehemently, it was
denied by defendant that the special withdrawal slips were honored
and treated as if it were checks, the truth being that when the special
withdrawal slips were received by defendant, it only verified whether or not the
signatures therein were authentic, and whether or not the deposit level in the
passbook concurred with the savings ledger, and whether or not the deposit is
sufficient to cover the withdrawal; if plaintiff treated the special withdrawal slips
paid by Fojas-Arca as checks then plaintiff has to blame itself for being grossly
negligent in treating the withdrawal slips as check when it is clearly stated
therein that the withdrawal slips are non-negotiable; that defendant is
not a privy to any of the transactions between Fojas-Arca and plaintiff for which
reason defendant is not duty bound to notify nor give notice of anything to
plaintiff. If at first defendant had given notice to plaintiff it is merely an
extension of usual bank courtesy to a prospective client; that defendant is only
dealing with its depositor Fojas-Arca and not the plaintiff. In summation,
defendant categorically stated that plaintiff has no cause of action against it (pp.
1-3, Dec.; pp. 368-370, id).3

Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of
Pasay City, Branch 113, docketed as Civil Case No. 29546, was dismissed together with
the counterclaim of defendant.

Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon
Development Bank was liable for damages under Article 21765 in relation to Articles
196 and 207 of the Civil Code. As noted by the CA, petitioner alleged the following tortious
acts on the part of private respondent: 1) the acceptance and payment of the special
withdrawal slips without the presentation of the depositor's passbook thereby giving
the impression that the withdrawal slips are instruments payable upon presentment; 2)
giving the special withdrawal slips the general appearance of checks; and 3) the failure
of respondent bank to seasonably warn petitioner that it would not honor two of the four
special withdrawal slips.

On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied
the appeal and affirmed the judgment of the trial court. According to the appellate court,
respondent bank notified the depositor to present the passbook whenever it
received a collection note from another bank, belying petitioner's claim that
respondent bank was negligent in not requiring a passbook under the subject transaction.
The appellate court also found that the special withdrawal slips in question were not
purposely given the appearance of checks, contrary to petitioner's assertions, and thus
should not have been mistaken for checks. Lastly, the appellate court ruled that the
respondent bank was under no obligation to inform petitioner of the dishonor of the
special withdrawal slips, for to do so would have been a violation of the law on the
secrecy of bank deposits.

Hence, the instant petition, alleging the following assignment of error:

25. The CA grievously erred in holding that the [Luzon Development] Bank was free from
any fault or negligence regarding the dishonor, or in failing to give fair and timely advice of
the dishonor, of the two intermediate LDB Slips and in failing to award damages to
Firestone pursuant to Article 2176 of the New Civil Code.8

The issue for our consideration is whether or not respondent bank should be held
liable for damages suffered by petitioner, due to its allegedly belated notice of
non-payment of the subject withdrawal slips.

The initial transaction in this case was between petitioner and Fojas-Arca, whereby the
latter purchased tires from the former with special withdrawal slips drawn upon
Fojas-Arca's special savings account with respondent bank. Petitioner in turn deposited
these withdrawal slips with Citibank. The latter credited the same to petitioner's current
account, then presented the slips for payment to respondent bank. It was at this point that
the bone of contention arose.

On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos.
42127 and 42129 dated June 15, 1978 and August 15, 1978, respectively, were refused
payment by respondent bank due to insufficiency of Fojas-Arca's funds on deposit.
That information came about six months from the time Fojas-Arca purchased tires
from petitioner using the subject withdrawal slips. Citibank then debited the amount of
these withdrawal slips from petitioner's account, causing the alleged pecuniary damage
subject of petitioner's cause of action.

At the outset, we note that petitioner admits that the withdrawal slips in question were
non-negotiable.9 Hence, the rules governing the giving of immediate notice of
dishonor of negotiable instruments do not apply in this case.10 Petitioner itself
concedes this point.11 Thus, respondent bank was under no obligation to give immediate
notice that it would not make payment on the subject withdrawal slips. Citibank should
have known that withdrawal slips were not negotiable instruments. It could not
expect these slips to be treated as checks by other entities. Payment or notice of dishonor
from respondent bank could not be expected immediately, in contrast to the situation
involving checks.

In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon
Development Bank, had honored and paid the previous withdrawal slips, automatically
credited petitioner's current account with the amount of the subject withdrawal slips, then
merely waited for the same to be honored and paid by respondent bank. It presumed that
the withdrawal slips were "good."

It bears stressing that Citibank could not have missed the non-negotiable nature of
the withdrawal slips. The essence of negotiability which characterizes a negotiable
paper as a credit instrument lies in its freedom to circulate freely as a substitute for
money.12 The withdrawal slips in question lacked this character.

A bank is under obligation to treat the accounts of its depositors with meticulous
care, whether such account consists only of a few hundred pesos or of millions of
pesos.13 The fact that the other withdrawal slips were honored and paid by respondent
bank was no license for Citibank to presume that subsequent slips would be honored and
paid immediately. By doing so, it failed in its fiduciary duty to treat the accounts of its
clients with the highest degree of care.14

In the ordinary and usual course of banking operations, current account deposits are
accepted by the bank on the basis of deposit slips prepared and signed by the depositor,
or the latter's agent or representative, who indicates therein the current account number to
which the deposit is to be credited, the name of the depositor or current account holder,
the date of the deposit, and the amount of the deposit either in cash or in check.15

The withdrawal slips deposited with petitioner's current account with Citibank were not
checks, as petitioner admits. Citibank was not bound to accept the withdrawal slips
as a valid mode of deposit. But having erroneously accepted them as such,
Citibank — and petitioner as account-holder — must bear the risks attendant to the
acceptance of these instruments. Petitioner and Citibank could not now shift the risk
and hold private respondent liable for their admitted mistake.

WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R.
CV No. 29546 is AFFIRMED. Costs against petitioner.

SO ORDERED.

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

Footnotes

1 Rollo, pp. 27-34.

2 Id. at 44-48.

3 Id. at 27-30.

4 Id. at 35-43.

5 ARTICLE 2176. Whoever by act or omission causes damage to another, there being
fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if
there is no pre-existing contractual relation between the parties, is called a quasi-delict
and is governed by the provisions of this Chapter.

6 ARTICLE 19. The local civil registrar shall require the payment of the fees prescribed by
law or regulations before the issuance of the marriage license. No other sum shall be
collected in the nature of a fee or tax of any kind for the issuance of said license. It shall,
however, be issued free of charge to indigent parties, that is, those who have no visible
means of income or whose income is insufficient for their subsistence, a fact established
by their affidavit or by their oath before the local civil registrar.

7ARTICLE 20. The license shall be valid in any part of the Philippines for a period of one
hundred twenty days from the date of issue, and shall be deemed automatically cancelled
at the expiration of said period if the contracting parties have not made use of it. The
expiry date shall be stamped in bold characters on the face of every license issued.

8 Rollo, p. 13.

9 Id. at 19; Petition, paragraph 34, subparagraph B.

10 NEGOTIABLE INSTRUMENTS LAW — ACT NO. 2031

SECTION 89. To whom notice of dishonor must be given. — Except as otherwise

provided, when a negotiable instrument has been dishonored by non-acceptance or
non-payment, notice of dishonor must be given to the drawer and to each indorser, and
any drawer or indorser to whom such notice is not given is discharge.

SECTION 103. Where parties reside in same place. — Where the person giving and the
person to receive notice reside in the same place, notice must be given within the
following times:

(a) If given at the place of business of the person to receive notice, it must be given before
the close of business hours the day following;

(b) If given at his residence, it must be given before the usual hours of rest on the day
following;

(c) If sent by mail, it must be deposited in the post-office in time to reach him in usual
course on the day following.

SECTION 104. Where parties reside in different places. — Where the person giving and
the person to receive notice reside in different places, the notice must be given within the
following times:

(a) If sent by mail, it must be deposited in the post-office in time to go by mail the day
following the day of dishonor, or if there be no mail at a convenient hour on that day, by
the next mail thereafter;

(b) If given otherwise than through the post-office, then within the time that notice would
have been received in due course of mail if it had been deposited in the post-office within
the time specified in the last subdivision.

Sesbreno vs CA

Sesbreno vs. Court of Appeals

GR 89252, 24 May 1993

FACTS:
Petitioner Sesbreno made a money market placement in the amount of P300,000 with
the Philippine Underwriters Finance Corporation (PhilFinance), with a term of 32
days. PhilFinance issued to Sesbreno the Certificate of Confirmation of Sale of a
Delta Motor Corporation Promissory Note, the Certificate of Securities Delivery
Receipt indicating the sale of the note with notation that said security was in the
custody of Pilipinas Bank, and postdated checks drawn against the Insular Bank of
Asia and America for P304,533.33 payable on March 13, 1981. The checks were
dishonored for having been drawn against insufficient funds. Pilipinas Bank never
released the note, nor any instrument related thereto, to Sesbreno; but Sesbreno
learned that the security which was issued on April 10, 1980, maturing on 6 April
1981, has a face value of P2,300,833.33 with PhilFinance as payee and Delta Motors
as maker; and was stamped “non-negotiable” on its face. As Sesbreno was unable to
collect his investment and interest thereon, he filed an action for damages against
Delta Motors and Pilipinas Bank. Delta Motors contents that said promissory note
was not intended to be negotiated or otherwise transferred by Philfinance as
manifested by the word "non-negotiable" stamped across the face of the Note.

ISSUE:
Whether the non-negotiability of a promissory note prevents its assignment.

RULING:
A negotiable instrument, instead of being negotiated, may also be assigned or
transferred. The legal consequences of negotiation and assignment of the
instrument are different. A non-negotiable instrument may not be negotiated but
may be assigned or transferred, absent an express prohibition against assignment or
transfer written in the face of the instrument. The subject promissory note, while
marked "non-negotiable," was not at the same time stamped "non-transferable" or
"non-assignable." It contained no stipulation which prohibited Philfinance from
assigning or transferring such note, in whole or in part.

**A non-negotiable instrument may not be negotiated but may be assigned or

transferred, absent an express prohibition against assignment or transfer written on
the face of the instrument.

SESBRENO V. CA
222 SCRA 466

FACTS:
Petitioner made a placement with Philfinance. The latter delivered to him documents, some of
which was a promissory note from Delta Motors and a post-dated check. The post-dated checks
were dishonored. This prompted petitioner to ask for the promissory note from DMC and it was
discovered that the note issued by DMC was marked as non-negotiable. As Sesbreno failed to
recover his money, he filed case against DMC and Philfinance.

HELD:
The non-negotiability of the instrument doesn’t mean that it is non-assignable or
transferable. It may still be assigned or transferred in whole or in part, even without the consent of
the promissory note, since consent is not necessary for the validity of the assignment.

In assignment, the assignee is merely placed in the position of the

assignors and acquires the instrument subject to all the defenses that
might have been set up against the original payee.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 89252 May 24, 1993

RAUL SESBREÑO, petitioner,

vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND
PILIPINAS BANK, respondents.

Salva, Villanueva & Associates for Delta Motors Corporation.

Reyes, Salazar & Associates for Pilipinas Bank.

FELICIANO, J.:

On 9 February 1981, petitioner Raul Sesbreño made a money market placement

in the amount of P300,000.00 with the Philippine Underwriters Finance
Corporation ("Philfinance"), Cebu Branch; the placement, with a term of
thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on 9
February 1981, issued the following documents to petitioner:

(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one
(1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term
of 32 days at 17.0% per annum;

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of
DMC PN No. 2731 to petitioner, with the notation that the said security was in
custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR")
No. 10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of
petitioner's investment), with petitioner as payee, Philfinance as drawer, and
Insular Bank of Asia and America as drawee, in the total amount of
P304,533.33.

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

Philfinance. However, the checks were dishonored for having been drawn
against insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued
by private respondent Pilipinas Bank ("Pilipinas"). It reads as follows:

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

February 9, 1981
———————
VALUE DATE

TO Raul Sesbreño

April 6, 1981
————————
MATURITY DATE

NO. 10805

DENOMINATED CUSTODIAN RECEIPT

This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE
UNDERWRITES FINANCE CORPORATION, we have in our custody the following
securities to you [sic] the extent herein indicated.

SERIAL MAT. FACE ISSUED REGISTERED AMOUNT

NUMBER DATE VALUE BY HOLDER PAYEE

2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33

UNDERWRITERS
FINANCE CORP.

We further certify that these securities may be inspected by you or your duly
authorized representative at any time during regular banking hours.

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

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

Pilipinas, Makati Branch, and handed her a demand letter informing the bank that his
placement with Philfinance in the amount reflected in the DCR No. 10805 had remained
unpaid and outstanding, and that he in effect was asking for the physical delivery of
the underlying promissory note. Petitioner then examined the original of the DMC PN
No. 2731 and found: that the security had been issued on 10 April 1980; that it would
mature on 6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as
"payee" and private respondent Delta Motors Corporation ("Delta") as "maker;" and that
on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not
deliver the Note, nor any certificate of participation in respect thereof, to petitioner.

Petitioner later made similar demand letters, dated 3 July 1981 and 3 August
1981, again asking private respondent Pilipinas for physical delivery of the original of
2

DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's demand letters to
Philfinance for written instructions, as has been supposedly agreed upon in "Securities
Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not
provide the appropriate instructions; Pilipinas never released DMC PN No. 2731, nor
any other instrument in respect thereof, to petitioner.

Petitioner also made a written demand on 14 July 1981 upon private respondent Delta for
3

the partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof,
had assigned to him said Note to the extent of P307,933.33. Delta, however, denied any
liability to petitioner on the promissory note, and explained in turn that it had
previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No.
2730) against Philfinance PN No. 143-A issued in favor of Delta.

In the meantime, Philfinance, on 18 June 1981, was placed under the joint management
of the Securities and exchange commission ("SEC") and the Central Bank. Pilipinas
delivered to the SEC DMC PN No. 2731, which to date apparently remains in the custody
of the SEC. 4

As petitioner had failed to collect his investment and interest thereon, he filed on 28
September 1982 an action for damages with the Regional Trial Court ("RTC") of Cebu
City, Branch 21, against private respondents Delta and Pilipinas. The trial court, in a
5

decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of merit
and for lack of cause of action, with costs against petitioner.

Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a

Decision dated 21 March 1989, the Court of Appeals denied the appeal and held: 6

Be that as it may, from the evidence on record, if there is anyone that appears liable for
the travails of plaintiff-appellant, it is Philfinance. As correctly observed by the trial court:

This act of Philfinance in accepting the investment of plaintiff and charging it against DMC
PN No. 2731 when its entire face value was already obligated or earmarked for set-off or
compensation is difficult to comprehend and may have been motivated with bad faith.
Philfinance, therefore, is solely and legally obligated to return the investment of plaintiff,
together with its earnings, and to answer all the damages plaintiff has suffered incident
thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of the defendants
in this case at bar; hence, this Court is without jurisdiction to pronounce judgement
against it. (p. 11, Decision)

WHEREFORE, finding no reversible error in the decision appealed from, the same is
hereby affirmed in toto. Cost against plaintiff-appellant.

Petitioner moved for reconsideration of the above Decision, without success.

Hence, this Petition for Review on Certiorari.

After consideration of the allegations contained and issues raised in the pleadings, the
Court resolved to give due course to the petition and required the parties to file their
respective memoranda. 7

Petitioner reiterates the assignment of errors he directed at the trial court decision, and
contends that respondent court of Appeals gravely erred: (i) in concluding that he cannot
recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in
failing to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in
view of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii)
in refusing to pierce the veil of corporate entity between Philfinance, and private
respondents Delta and Pilipinas, considering that the three (3) entities belong to the
"Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8

There are at least two (2) sets of relationships which we need to address: firstly, the
relationship of petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect
of Pilipinas. Actually, of course, there is a third relationship that is of critical importance:
the relationship of petitioner and Philfinance. However, since Philfinance has not been
impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction
over the person of Philfinance. It is, consequently, not necessary for present purposes to
deal with this third relationship, except to the extent it necessarily impinges upon or
intersects the first and second relationships.

I.

We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in
respect of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without
recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this
point:

Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same
is "non-negotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the
transfer of an instrument from one person to another so as to constitute the transferee the
holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a holder
cannot sue on the instrument in his own name and cannot demand or receive payment
(Section 51, id.)9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note
had been validly transferred, in part to him by assignment and that as a result of such
transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of
that Note assigned to him by the payee Philfinance.

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

(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by
Philfinance as manifested by the word "non-negotiable" stamp across the face of the
Note and because maker Delta and payee Philfinance intended that this Note would be
10

offset against the outstanding obligation of Philfinance represented by Philfinance PN No.

143-A issued to Delta as payee;

(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent,
if not against its instructions; and

(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid,
petitioner took the Note subject to the defenses available to Delta, in particular, the
offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A. 11

We consider Delta's arguments seriatim.

Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must
be distinguished from the assignment or transfer of an instrument whether that be
negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument
under the relevant statute may be negotiated either by indorsement thereof coupled with
delivery, or by delivery alone where the negotiable instrument is in bearer form. A
negotiable instrument may, however, instead of being negotiated, also
be assigned or transferred. The legal consequences of negotiation as distinguished from
assignment of a negotiable instrument are, of course, different. A non-negotiable
instrument may, obviously, not be negotiated; but it may be assigned or transferred,
absent an express prohibition against assignment or transfer written in the face of
the instrument:

The words "not negotiable," stamped on the face of the bill of lading, did not destroy its
assignability, but the sole effect was to exempt the bill from the statutory provisions
relative thereto, and a bill, though not negotiable, may be transferred by assignment; the
assignee taking subject to the equities between the original parties. (Emphasis added)
12

DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped
"non-transferable" or "non-assignable." It contained no stipulation which prohibited
Philfinance from assigning or transferring, in whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and
which should be quoted in full:

April 10, 1980

Philippine Underwriters Finance Corp.

Benavidez St., Makati,
Metro Manila.

Attention: Mr. Alfredo O. Banaria

SVP-Treasurer
GENTLEMEN:

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

Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981.

As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for
P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A
upon co-terminal maturity.

Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.

Very Truly Yours,

(Sgd.)
Florencio B. Biagan
Senior Vice President 13

We find nothing in his "Letter of Agreement" which can be reasonably construed as a

prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731,
before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of
Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a prohibition
cannot be invoked against an assignee or transferee of the Note who parted with valuable
consideration in good faith and without notice of such prohibition. It is not disputed that
petitioner was such an assignee or transferee. Our conclusion on this point is reinforced
by the fact that what Philfinance and Delta were doing by their exchange of their
promissory notes was this: Delta invested, by making a money market placement with
Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same
day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2)
promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April
1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash and
the two (2) Delta promissory notes.

Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731
had been effected without the consent of Delta, we note that such consent was not
necessary for the validity and enforceability of the assignment in favor of
petitioner. Delta's argument that Philfinance's sale or assignment of part of its rights to
14

DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's)
consent, is quite mistaken. Conventional subrogation, which in the first place is never
lightly inferred, must be clearly established by the unequivocal terms of the substituting
15

obligation or by the evident incompatibility of the new and old obligations on every
point. Nothing of the sort is present in the instant case.
16

It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN
No. 2731 to Philfinance, an entity engaged in the business of buying and selling debt
instruments and other securities, and more generally, in money market transactions.
In Perez v. Court of Appeals, the Court, speaking through Mme. Justice Herrera, made
17

the following important statement:

There is another aspect to this case. What is involved here is a money market
transaction. As defined by Lawrence Smith "the money market is a market dealing in
standardized short-term credit instruments (involving large amounts) where lenders and
borrowers do not deal directly with each other but through a middle manor a dealer in the
open market." It involves "commercial papers" which are instruments "evidencing
indebtness of any person or entity. . ., which are issued, endorsed, sold or transferred or
in any manner conveyed to another person or entity, with or without recourse". The
fundamental function of the money market device in its operation is to match and bring
together in a most impersonal manner both the "fund users" and the "fund suppliers." The
money market is an "impersonal market", free from personal considerations. "The market
mechanism is intended to provide quick mobility of money and securities."

The impersonal character of the money market device overlooks the individuals or entities
concerned. The issuer of a commercial paper in the money market necessarily knows in
advance that it would be expenditiously transacted and transferred to any investor/lender
without need of notice to said issuer. In practice, no notification is given to the borrower or
issuer of commercial paper of the sale or transfer to the investor.

xxx xxx xxx

There is need to individuate a money market transaction, a relatively novel institution in

the Philippine commercial scene. It has been intended to facilitate the flow and acquisition
of capital on an impersonal basis. And as specifically required by Presidential Decree No.
678, the investing public must be given adequate and effective protection in availing of the
credit of a borrower in the commercial paper market. (Citations omitted; emphasis
18

supplied)

We turn to Delta's arguments concerning alleged compensation or offsetting between

DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time
Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February
1981, no compensation had as yet taken place and indeed none could have taken
place. The essential requirements of compensation are listed in the Civil Code as follows:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

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

(3) That the two debts are due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor. (Emphasis supplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due.
This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with
Philfinance, where Delta acknowledged that the relevant promissory notes were "to be
offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."

As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine
(49) days before the "co-terminal maturity" date, that is to say, before any compensation
had taken place. Further, the assignment to petitioner would have prevented
compensation had taken place between Philfinance and Delta, to the extent of
P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance
and Delta would have ceased to be creditors and debtors of each other in their own right
to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that
the assignment effected by Philfinance in favor of petitioner was a valid one and that
petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion
thereof assigned to him.

The record shows, however, that petitioner notified Delta of the fact of the assignment to
him only on 14 July 1981, that is, after the maturity not only of the money market
19

placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No.
143-A. In other words, petitioner notified Delta of his rights as assignee after
compensation had taken place by operation of law because the offsetting instruments had
both reached maturity. It is a firmly settled doctrine that the rights of an assignee are not
any greater that the rights of the assignor, since the assignee is merely substituted in the
place of the assignor and that the assignee acquires his rights subject to the equities —
20

i.e., the defenses — which the debtor could have set up against the original assignor
before notice of the assignment was given to the debtor. Article 1285 of the Civil Code
provides that:

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in
favor of a third person, cannot set up against the assignee the compensation which would
pertain to him against the assignor, unless the assignor was notified by the debtor at the
time he gave his consent, that he reserved his right to the compensation.

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

If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he had knowledge
of the assignment. (Emphasis supplied)

Article 1626 of the same code states that: "the debtor who, before having knowledge of
the assignment, pays his creditor shall be released from the obligation." In Sison
v. Yap-Tico, the Court explained that:
21

[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay;
and if he pay before notice that his debt has been assigned, the law holds him exonerated,
for the reason that it is the duty of the person who has acquired a title by transfer to
demand payment of the debt, to give his debt or notice. 22

At the time that Delta was first put to notice of the assignment in petitioner's favor on 14
July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the
assignor Philfinance could not have then compelled payment anew by Delta of DMC PN
No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting from
Delta the portion of the Note assigned to him.

It bears some emphasis that petitioner could have notified Delta of the assignment or sale
was effected on 9 February 1981. He could have notified Delta as soon as his money
market placement matured on 13 March 1981 without payment thereof being made by
Philfinance; at that time, compensation had yet to set in and discharge DMC PN No. 2731.
Again petitioner could have notified Delta on 26 March 1981 when petitioner received from
Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805 issued by private
respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at
any time before the maturity date of DMC PN No. 2731. Because petitioner failed to do so,
and because the record is bare of any indication that Philfinance had itself notified Delta of
the assignment to petitioner, the Court is compelled to uphold the defense of
compensation raised by private respondent Delta. Of course, Philfinance remains liable to
petitioner under the terms of the assignment made by Philfinance to petitioner.

II.

We turn now to the relationship between petitioner and private respondent Pilipinas.
Petitioner contends that Pilipinas became solidarily liable with Philfinance and Delta when
Pilipinas issued DCR No. 10805 with the following words:

Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above
securities fully assigned to you —.23

The Court is not persuaded. We find nothing in the DCR that establishes an obligation on
the part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of
liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR
as a confirmation on the part of Pilipinas that:

(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain
face value, to mature on 6 April 1981 and payable to the order of Philfinance;

(2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9
February 1981), holding that Note on behalf and for the benefit of petitioner, at least to the
extent it had been assigned to petitioner by payee Philfinance; 24

(3) petitioner may inspect the Note either "personally or by authorized representative", at
any time during regular bank hours; and

(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN
No. 2731 (or a participation therein to the extent of P307,933.33) "should this
Denominated Custodianship receipt remain outstanding in [petitioner's] favor thirty (30)
days after its maturity."

Thus, we find nothing written in printers ink on the DCR which could reasonably be read
as converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to
petitioner, either upon maturity thereof or any other time. We note that both in his
complaint and in his testimony before the trial court, petitioner referred merely to the
obligation of private respondent Pilipinas to effect the physical delivery to him of DMC PN
No. 2731. Accordingly, petitioner's theory that Pilipinas had assumed a solidary
25

obligation to pay the amount represented by a portion of the Note assigned to him by
Philfinance, appears to be a new theory constructed only after the trial court had ruled
against him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however,
be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary liability only
when the law or the nature of the obligation requires solidarity," The record here exhibits
no express assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas.
Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor
has petitioner argued that the very nature of the custodianship assumed by private
respondent Pilipinas necessarily implies solidary liability under the securities, custody of
which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable
with Philfinance and private respondent Delta under DMC PN No. 2731.

We do not, however, mean to suggest that Pilipinas has no responsibility and liability in
respect of petitioner under the terms of the DCR. To the contrary, we find, after prolonged
analysis and deliberation, that private respondent Pilipinas had breached its undertaking
under the DCR to petitioner Sesbreño.

We believe and so hold that a contract of deposit was constituted by the act of Philfinance
in designating Pilipinas as custodian or depositary bank. The depositor was initially
Philfinance; the obligation of the depository was owed, however, to petitioner Sesbreño as
beneficiary of the custodianship or depository agreement. We do not consider that this is a
simple case of a stipulation pour autri. The custodianship or depositary agreement was
established as an integral part of the money market transaction entered into by petitioner
with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as
assignor-vendor deposited that Note with Pilipinas in order that the thing sold would be
placed outside the control of the vendor. Indeed, the constituting of the depositary or
custodianship agreement was equivalent to constructive delivery of the Note (to the extent
it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship
agreements are designed to facilitate transactions in the money market by providing a
basis for confidence on the part of the investors or placers that the instruments bought by
them are effectively taken out of the pocket, as it were, of the vendors and placed safely
beyond their reach, that those instruments will be there available to the placers of funds
should they have need of them. The depositary in a contract of deposit is obliged to return
the security or the thing deposited upon demand of the depositor (or, in the presented
case, of the beneficiary) of the contract, even though a term for such return may have
been established in the said contract. Accordingly, any stipulation in the contract of
26

deposit or custodianship that runs counter to the fundamental purpose of that agreement
or which was not brought to the notice of and accepted by the placer-beneficiary, cannot
be enforced as against such beneficiary-placer.

We believe that the position taken above is supported by considerations of public policy. If
there is any party that needs the equalizing protection of the law in money market
transactions, it is the members of the general public whom place their savings in such
market for the purpose of generating interest revenues. The custodian bank, if it is not
27

related either in terms of equity ownership or management control to the borrower of the
funds, or the commercial paper dealer, is normally a preferred or traditional banker of
such borrower or dealer (here, Philfinance). The custodian bank would have every
incentive to protect the interest of its client the borrower or dealer as against the placer of
funds. The providers of such funds must be safeguarded from the impact of stipulations
privately made between the borrowers or dealers and the custodian banks, and disclosed
to fund-providers only after trouble has erupted.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security
deposited with it when petitioner first demanded physical delivery thereof on 2 April 1981.
We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731
had not yet matured and therefore, compensation or offsetting against Philfinance PN No.
143-A had not yet taken place. Instead of complying with the demand of the petitioner,
Pilipinas purported to require and await the instructions of Philfinance, in obvious
contravention of its undertaking under the DCR to effect physical delivery of the Note
upon receipt of "written instructions" from petitioner Sesbreño. The ostensible term written
into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days
after its maturity") was not a defense against petitioner's demand for physical surrender of
the Note on at least three grounds: firstly, such term was never brought to the attention of
petitioner Sesbreño at the time the money market placement with Philfinance was made;
secondly, such term runs counter to the very purpose of the custodianship or depositary
agreement as an integral part of a money market transaction; and thirdly, it is inconsistent
with the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle,
petitioner became entitled to demand physical delivery of the Note held by Pilipinas as
soon as petitioner's money market placement matured on 13 March 1981 without
payment from Philfinance.

We conclude, therefore, that private respondent Pilipinas must respond to petitioner for
damages sustained by arising out of its breach of duty. By failing to deliver the Note to the
petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and
unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself
benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no
moment for present purposes. Prima facie, the damages suffered by petitioner consisted
of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him
by reason of discharge of the Note by compensation, plus legal interest of six percent
(6%) per annum containing from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such right of
reimbursement as Pilipinas may have vis-a-vis Philfinance.

III.

The third principal contention of petitioner — that Philfinance and private respondents
Delta and Pilipinas should be treated as one corporate entity — need not detain us for
long.

In the first place, as already noted, jurisdiction over the person of Philfinance was never
acquired either by the trial court nor by the respondent Court of Appeals. Petitioner
similarly did not seek to implead Philfinance in the Petition before us.

Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas
have been organized as separate corporate entities. Petitioner asks us to pierce their
separate corporate entities, but has been able only to cite the presence of a common
Director — Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3)
companies. Petitioner has neither alleged nor proved that one or another of the three (3)
concededly related companies used the other two (2) as mere alter egos or that the
corporate affairs of the other two (2) were administered and managed for the benefit of
one. There is simply not enough evidence of record to justify disregarding the separate
corporate personalities of delta and Pilipinas and to hold them liable for any assumed or
undetermined liability of Philfinance to petitioner.28

WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals
in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are
hereby MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had
dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank
is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33,
plus legal interest thereon at the rate of six percent (6%) per annum counted from 2 April
1981. As so modified, the Decision and Resolution of the Court of Appeals are hereby
AFFIRMED. No pronouncement as to costs.

SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.

# Footnotes

Sesbreño v. Court of Appeals [G.R. No. 89252. May 24, 1993]

24

MAR

FACTS

Petitioner Raul Sesbreño made a money market placement in the amount of P300,000.00
with the Philippine Underwriters Finance Corporation (“Philfinance”). The latter issued a
Certificate of Confirmation of Sale “without recourse” from Delta Motors Corporation
Promissory Note, a Certificate of securities indicating the sale to petitioner, with the
notation that the said security was in custodianship of Pilipinas Bank, andpost-dated
checks payable with petitioner as payee, Philfinance as drawer. Petitioner approached
private respondent Pilipinas Bank and handed her a demand letter informing the bank that
his placement with Philfinance had remained unpaid and outstanding, and that he in effect
was asking for the physical delivery of the underlying promissory note. Pilipinas did not
deliver the Note, nor any certificate of participation in respect thereof, to petitioner.

ISSUES

(a) Whether or not Pilipinas Bank is liable for its action.

(b)Whether or not non-negotiable instruments are transferrable.

RULING

(1) YES. Private respondent Pilipinas bank is liable for damages plus legal interest
thereon by arising out of its breach of duty. By failing to deliver the Note to the petitioner
as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully
deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted
from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for
present purposes.In the case at bar, the custodian-depositary bank Pilipinas refused to
deliver the security deposited with it when petitioner first demanded physical delivery
thereof. Instead of complying with the demand of the petitioner, Pilipinas purported to
require and await the instructions of Philfinance, in obvious contravention of its
undertaking under the DCR to effect physical delivery of the Note upon receipt of
“written instructions” from petitioner Sesbreño.

(2) YES. A non-negotiable instrument may, obviously, not be negotiated; but it may be
assigned or transferred, absent an express prohibition against assignment or transfer
written in the face of the instrument. It is important to bear in mind that the negotiation of a
negotiable instrument must be distinguished from the assignment or transfer of an
instrument whether that be negotiable or non-negotiable. Only an instrument qualifying as
a negotiable instrument under the relevant statute may be negotiated either by
indorsement thereof coupled with delivery, or by delivery alone where the negotiable
instrument is in bearer form. A negotiable instrument may, however, instead of being
negotiated, also be assigned or transferred. The legal consequences of negotiation as
distinguished from assignment of a negotiable instrument are, of course, different.

SERRANO V. CA
196 SCRA 107

FACTS:

Serrano bought some jewelry from Ribaya. Due to need of finances, she
decided to have the jewelry pawned. She instructed her secretary to do so
for her, which the secretary did but absconded after receiving the
proceeds.
It is to be noted that the pawnshop ticket indicated that the
jewelry was redeemable “by presentation by the bearer.” Afterwards,
there was a lead on where the jewelry was pawned. An investigation was done
to verify the suspicion. The jewelry was to be sold in a public auction
then. The petitioner and police authorities informed the pawnshop owner
not to sell the jewelry as she was the rightful owner thereof.
Despite of
this however, the jewelry was redeemed by a Tomasa de Leon wh
o presented the pawnshop ticket.

HELD:
Having been informed by the petitioner and the police that jewelry pawned to it
was either stolen or involved in an embezzlement of the proceeds of the pledge,
pawnbroker became duty bound to hold the things pledged and
to give notice to the petitioner and authorities of any effort to rede
em them. Such a duty was imposed by Article 21 of the CC. The
circumstance that the pawn ticket stated that the pawn was redeemable by the
bearer, didn’t dissolve this duty. The pawn ticket wasn’t a negotiable
instrument under the NIL, nor was it a negotiable document of title under Article
1507of the CC.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 45125 April 22, 1991

LORETA SERRANO, petitioner,

vs.
COURT OF APPEALS and LONG LIFE PAWNSHOP, INC., respondents.

Cecilio D. Ignacio for petitioner.

Hildawa & Gomez for private respondent.

RESOLUTION

FELICIANO, J.:

Sometime in early March 1968, petitioner Loreta Serrano bought some pieces of
jewelry for P48,500.00 from Niceta Ribaya. On 21 March 1968, petitioner, then
in need of money, instructed her private secretary, Josefina Rocco, to pawn the
jewelry. Josefina Rocco went to private respondent Long Life Pawnshop, Inc.
("Long Life"), pledged the jewelry for P22,000.00 with its principal owner and
General Manager, Yu An Kiong, and then absconded with said amount and the
pawn ticket. The pawnshop ticket issued to Josefina Rocco stipulated that it was
redeemable "on presentation by the bearer."

Three (3) months later, Gloria Duque and Amalia Celeste informed Niceta
Ribaya that a pawnshop ticket issued by private respondent was being offered
for sale. They told Niceta the ticket probably covered jewelry once owned by the
latter which jewelry had been pawned by one Josefina Rocco. Suspecting that it
was the same jewelry she had sold to petitioner, Niceta informed the latter of
this offer and suggested that petitioner go to the Long Life pawnshop to check
the matter out. Petitioner claims she went to private respondent pawnshop,
verified that indeed her missing jewelry was pledged there and told Yu An Kiong
not to permit anyone to redeem the jewelry because she was the lawful owner
thereof. Petitioner claims that Yu An Kiong agreed.

On 9 July 1968, petitioner went to the Manila Police Department to report the
loss, and a complaint first for qualified theft and later changed to estafa was
subsequently filed against Josefina Rocco. On the same date, Detective
Corporal Oswaldo Mateo of the Manila Police also claims to have gone to the
pawnshop, showed Yu An Kiong petitioner's report and left the latter a note
asking him to hold the jewelry and notify the police in case some one should
redeem the same. The next day, on 10 July 1968, Yu An Kiong permitted one
Tomasa de Leon, exhibiting the appropriate pawnshop ticket, to redeem the
jewelry.

On 4 October 1968, petitioner filed a complaint with the then Court of First
Instance of Manila for damages against private respondent Long Life for failure
to hold the jewelry and for allowing its redemption without first notifying
petitioner or the police. After trial, the trial judge, Hon. Luis B. Reyes, rendered
a decision in favor of petitioner, awarding her P26,500.00 as actual damages,
with legal interest thereon from the date of the filing of the complaint,
P2,000.00 as attorney's fees, and the costs of the suit.

Judge L.B. Reyes' decision was reversed on appeal and the complaint dismissed
by the public respondent Court of Appeals in a Decision promulgated on 26
September 1976.

The Court of Appeals gave credence to Yu An Kiong's testimony that neither

petitioner nor Detective Mateo ever apprised him of the misappropriation of
petitioner's loan, or obtained a commitment from him not to permit redemption
of the jewelry, prior to 10 July 1968. Yu An Kiong claims to have become aware
of the loan's misappropriation only on 16 August 1968 when a subpoena duces
tecum was served by the Manila Fiscal's Office requiring him to bring the record
of the pledge in connection with the preliminary investigation of the estafa
charge against Josefina Rocco. Consequently, the appellate court ruled, there
could have been no negligence, much less a grave one amounting to bad faith,
imputable to Yu An Kiong as the basis for an award of damages.

In this Petition for Review, petitioner seeks reversal of the Public respondent's
findings relating to the credibility of witnesses and the restoration of the trial
court's decision.

Deliberating on the present Petition for Review, the Court considers that the
public respondent Court of Appeals committed reversible error in rendering its
questioned Decision.

It is a settled principle of civil procedure that the conclusions of the trial court
regarding the credibility of witnesses are entitled to great respect from the
appellate courts because the trial court had an opportunity to observe the
demeanor of witnesses while giving testimony which may indicate their candor
or lack thereof. While the Supreme Court ordinarily does not rule on the issue of
1

credibility of witnesses, that being a question of fact not properly raised in a petition under
Rule 45, the Court has undertaken to do so in exceptional situations where, for instance,
as here, the trial court and the Court of Appeals arrived at divergent conclusions on
questions of fact and the credibility of witnesses.2

The Court of Appeals rejected what it considered to be the incredible testimony of

petitioner and Detective Mateo. It faulted petitioner for failing to report to the police
authorities the loss of her jewelry immediately on 21 March 1968 when Josefina Rocco
failed to return to her either the loan proceeds or the jewelry. But it must be noted that
Josefina Rocco simply disappeared without a trace on said date. Petitioner had no way of
knowing if Josefina had misappropriated her jewelry, or had first pledged the jewelry as
instructed and then misappropriated the proceeds of the loan. In the latter case, which
was in fact what had occurred, petitioner could have had no idea as to the identity of the
pawnbroker. Moreover, this Court has several times recognized that different people may
have diverse reasons for failing to report promptly to the police their having been
victimized by some criminal or fraudulent scheme and that such failure does not by itself
render their subsequent testimony unworthy of credence. 3

The Court of Appeals also found it hard to believe that Detective Mateo had failed to
obtain a written acknowledgment from Yu An Kiong of the receipt of the note as
corroboration for his testimony. However, absent evidence that it was an established
practice for police officers to obtain such acknowledgment in situations like the one here, it
is difficult to see why Detective Mateo's behavior should be considered unbelievable. On
the other hand, as the trial court pointed out, it would not have been sensible for Detective
Mateo to leave a note reminding Yu An Kiong to hold unto the jewelry if the latter had in
fact then told the policeman that the jewelry had already been redeemed.

The public respondent apparently believed petitioner had failed to establish her ownership
of the jewelry pledged by Josefina Rocco, such failure purportedly engendering doubt that
Tomasa de Leon may have redeemed jewelry different from that owned by petitioner. This
is curious and untenable because the record on appeal indicates that Yu An Kiong had
admitted in his answer and memorandum before the trial court that he received pledged
jewelry from Josefina Rocco and, in his memorandum, that such jewelry had been
entrusted to Josefina by petitioner as the latter's employer. It is clear from these judicial
admissions that he considered petitioner to have been the true owner of the jewelry.

Finally, the Court of Appeals did not believe petitioner's testimony because of a claimed
material inconsistency therein. On direct examination, petitioner said she "immediately"
1âwphi1

went to the private respondent's establishment upon being informed by Niceta Ribaya of
the possible whereabouts of her jewelry. On cross-examination, she said she went to the
establishment "a few days later." If this is an inconsistency, it relates to an unimportant
detail. What is clear is that in any event, petitioner testified that she went to the
respondent's pawnshop to meet Yu An Kiong and notify him of the
misappropriation before anyone had redeemed the jewelry.

We must also note that the Court of Appeals apparently over-looked a fact of substance
which did not escape the attention of the trial court. Petitioner's version of events was
corroborated by Police Detective Mateo and by Niceta Ribaya. These were two (2)
individuals who had nothing to gain from the outcome of the case. Certainly, their
disinterested testimony should have been accorded more probative weight than the
negative, uncorroborated and self-serving testimony of Yu An Kiong, which presented a
diametrically opposed version of events calculated to show that in permitting redemption
of the jewelry, he was acting in good faith.4

The testimony of Detective Mateo was moreover supported by the presumption that he
had acted in the regular performance of his official duty as a police officer, a presumption
that Yu An Kiong did not try to rebut.

This being a civil case, it was enough for petitioner to show, by a preponderance of
evidence, that her version of events did in fact occur. We agree with the trial court that this
burden of proof had been discharged by petitioner because her evidence was direct and
more credible and persuasive than that propounded by Yu An Kiong, and corroborated by
5

disinterested witnesses.

Turning to the substantive legal rights and duties of the parties, we believe and so hold
that, having been notified by petitioner and the police that jewelry pawned to it was either
stolen or involved in an embezzlement of the proceeds of the pledge, private respondent
pawnbroker became duty bound to hold the things pledged and to give notice to petitioner
and the police of any effort to redeem them. Such a duty was imposed by Article 21 of the
Civil Code. The circumstance that the pawn ticket stated that the pawn was redeemable
6

by the bearer, did not dissolve that duty. The pawn ticket was not a negotiable instrument
under the Negotiable Instruments Law nor a negotiable document of title under Articles
1507 et seq. of the Civil Code. If the third person Tomasa de Leon, who redeemed the
things pledged a day after petitioner and the police had notified Long Life, claimed to be
owner thereof, the prudent recourse of the pawnbroker was to file an interpleader suit,
impleading both petitioner and Tomasa de Leon. The respondent pawnbroker was, of
course, entitled to demand payment of the loan extended on the security of the pledge
before surrendering the jewelry, upon the assumption that it had given the loan in good
faith and was not a "fence" for stolen articles and had not conspired with the faithless
Josefina Rocco or with Tomasa de Leon. Respondent pawnbroker acted in reckless
disregard of that duty in the instant case and must bear the consequences, without
prejudice to its right to recover damages from Josefina Rocco.

The trial court correctly held that private respondent was liable to petitioner for actual
damages which corresponded to the difference in the value of the jewelry (P48,500.00)
and the amount of the loan (P22,000.00), or the sum of P26,500.00. Petitioner is entitled
to collect the balance of the value of the jewelry, corresponding to the amount of the loan,
in an appropriate action against Josefina Rocco. Private respondent Long Life in turn is
entitled to seek reimbursement from Josefina Rocco of the amount of the damages it must
pay to petitioner.

ACCORDINGLY, the Petition is GRANTED. The Decision of the Court of Appeals dated
23 September 1976 is hereby REVERSED and SET ASIDE. The Decision of the Court of
First Instance dated 22 May 1970 is hereby REINSTATED in toto. No pronouncement as
to costs.

Fernan, C.J., Gutierrez, Jr., Bidin and Davide, Jr., JJ., concur.