Section 8

SALAS V. CA
181 SCRA 296

FACTS:

Petitioner bought a car from Viologo Motor Sales Company, which

was secured by a promissory note, which was later on indorsed
to Filinvest
Finance, which financed the transaction. Petitioner later on defaulted
in
her installment payments, allegedly due to the fraud imputed by VM
S in
selling her a different vehicle from what was agreed upon. This default in
payment prompted Filinvest Finance to initiate a case against petition
er. The trial court decided in favor of Filinvest, to which the appell
ate court upheld by increasing the amount to be paid.

It is the contention of petitioner that since the agreement between her and
the motor company was inexistent, none had been assigned in favor
of private respondent.

HELD:

Petitioner’s liability on the promissory note, the due execution and

genuineness of which she never denied under oath, is under the foregoing
factual milieu, as inevitable as it is clearly established.

The records reveal that involved herein is not a simple case of assignment
of credit as petitioner would have it appear, where the assignee me
rely
steps into the shoes of, is open to all defenses available against a
nd can enforce payment only to the same extent as, the assignor-vendor.

The instrument to be negotiable must contain the so-called words of

negotiability. There are only 2 ways for an instrument to be payabl
e to order. There must always be a specified person named in the instrument
and the bill or note is to be paid to the person designated in the instrument
or to any person to whom he has indorsed and delivered the sam
e. Without the words “or order” or “to the order of”, the instrument is payable
only to the person designated therein and is thus non-negotiable.
Any
subsequent purchaser thereof will not enjoy the advantages of being
a
holder in due course but will merely step into the shoes of the per
son
designated in the instrument and will thus be open to the defenses
available against the latter.

In the case at bar, the promissory notes is earmarked with negotia

bility and Filinvest is a holder in due course.

Salas vs CA
G.R. No. 76788 January 22, 1990

JUANITA SALAS, vs. HON. COURT OF APPEALS and FIRST FINANCE & LEASING
CORPORATION

Facts: Juanita Salas (Petitioner) bought a motor vehicle from the Violago Motor Sales Corporation
(VMS) for as evidenced by a promissory note. This note was subsequently endorsed to Filinvest
Finance & Leasing Corporation (private respondent) which financed the purchase.

Petitioner defaulted in her installments allegedly due to a discrepancy in the engine and chassis
numbers of the vehicle delivered to her and those indicated in the sales invoice, certificate of
registration and deed of chattel mortgage, which fact she discovered when the vehicle figured in an
accident.

This failure to pay prompted private respondent to initiate an action for a sum of money against
petitioner before the Regional Trial Court.

Issue: WON private respondent is a holder in due course?

Held: YES. The PN was negotiated by indorsement in writing on the instrument itself payable to the
Order of Filinvest Finance and Leasing Corporation and it is an indorsement of the entire
instrument.
Under the circumstances, there appears to be no question that Filinvest is a holder in due course,
having taken the instrument under the following conditions: [a] it is complete and regular upon its
face; [b] it became the holder thereof before it was overdue, and without notice that it had previously
been dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to
Filinvest, the latter had no notice of any infirmity in the instrument or defect in the title of VMS
Corporation.

Accordingly, respondent corporation holds the instrument free from any defect of title of prior
parties, and free from defenses available to prior parties among themselves, and may enforce
payment of the instrument for the full amount thereof. This being so, petitioner cannot set up
against respondent the defense of nullity of the contract of sale between her and VMS.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 76788 January 22, 1990

JUANITA SALAS, petitioner,

vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING
CORPORATION, respondents.

Arsenio C. Villalon, Jr. for petitioner.

Labaguis, Loyola, Angara & Associates for private respondent.

FERNAN, C.J.:

Assailed in this petition for review on certiorari is the decision of the Court of
Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance & Leasing
Corporation v. Salas", which modified the decision of the Regional Trial Court of
San Fernando, Pampanga in Civil Case No. 5915, a collection suit between the
same parties.

Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred

to as petitioner) bought a motor vehicle from the Violago Motor Sales
Corporation (VMS for brevity) for P58,138.20 as evidenced by a
promissory note. This note was subsequently endorsed to Filinvest Finance &
Leasing Corporation (hereinafter referred to as private respondent) which
financed the purchase.

Petitioner defaulted in her installments beginning May 21, 1980 allegedly due
to a discrepancy in the engine and chassis numbers of the vehicle delivered to
her and those indicated in the sales invoice, certificate of registration and deed
of chattel mortgage, which fact she discovered when the vehicle figured in an
accident on 9 May 1980.

This failure to pay prompted private respondent to initiate Civil Case No. 5915
for a sum of money against petitioner before the Regional Trial Court of San
Fernando, Pampanga.

In its decision dated September 10, 1982, the trial court held, thus:

WHEREFORE, and in view of all the foregoing, judgment is hereby rendered

ordering the defendant (Salas) to pay the plaintiff(filinvest) the sum of
P28,414.40 with interest thereon at the rate of 14% from October 2, 1980 until
the said sum is fully paid; and the further amount of P1,000.00 as attorney's
fees.

The counterclaim of defendant is dismissed.

With costs against defendant. 1

Both petitioner and private respondent appealed the aforesaid decision to the Court
of Appeals.

Imputing fraud, bad faith and misrepresentation against VMS for having delivered a
different vehicle to petitioner(salas), the latter prayed for a reversal of the trial court's
decision so that she may be absolved from the obligation under the contract.

On October 27, 1986, the Court of Appeals rendered its assailed decision, the pertinent
portion of which is quoted hereunder:

The allegations, statements, or admissions contained in a pleading are conclusive as

against the pleader. A party cannot subsequently take a position contradictory of, or
inconsistent with his pleadings (Cunanan vs. Amparo, 80 Phil. 227). Admissions made by
the parties in the pleadings, or in the course of the trial or other proceedings, do not
require proof and cannot be contradicted unless previously shown to have been made
through palpable mistake (Sec. 2, Rule 129, Revised Rules of Court; Sta. Ana vs. Maliwat,
L-23023, Aug. 31, 1968, 24 SCRA 1018).

When an action or defense is founded upon a written instrument, copied in or attached

to the corresponding pleading as provided in the preceding section, the genuineness and
due execution of the instrument shall be deemed admitted unless the adverse party,
under oath, specifically denied them, and sets forth what he claims to be the facts (Sec. 8,
Rule 8, Revised Rules of Court; Hibbered vs. Rohde and McMillian, 32 Phil. 476).

A perusal of the evidence shows that the amount of P58,138.20 stated in the promissory
note is the amount assumed by the plaintiff in financing the purchase of defendant's
motor vehicle from the Violago Motor Sales Corp., the monthly amortization of winch is
Pl,614.95 for 36 months. Considering that the defendant was able to pay twice (as
admitted by the plaintiff, defendant's account became delinquent only beginning May,
1980) or in the total sum of P3,229.90, she is therefore liable to pay the remaining
balance of P54,908.30 at l4% per annum from October 2, 1980 until full payment.
WHEREFORE, considering the foregoing, the appealed decision is hereby modified
ordering the defendant(salas) to pay the plaintiff the sum of P54,908.30 at 14% per
annum from October 2, 1980 until full payment. The decision is AFFIRMED in all other
respects. With costs to defendant. 2

Petitioner's motion for reconsideration was denied; hence, the present recourse.

In the petition before us, petitioner(salas) assigns twelve (12) errors which focus on the
alleged fraud, bad faith and misrepresentation of Violago Motor Sales Corporation in the
conduct of its business and which fraud, bad faith and misrepresentation supposedly
released petitioner from any liability to private respondent who should instead
proceed against VMS. 3

Petitioner argues that in the light of the provision of the law on sales by description which
4

she alleges is applicable here, no contract ever existed between her and VMS and
therefore none had been assigned in favor of private respondent.

She contends that it is not necessary, as opined by the appellate court, to implead VMS
as a party to the case before it can be made to answer for damages because VMS was
earlier sued by her for "breach of contract with damages" before the Regional Trial
Court of Olongapo City, Branch LXXII, docketed as Civil Case No. 2916-0. She cites as
authority the decision therein where the court originally ordered petitioner to pay the
remaining balance of the motor vehicle installments in the amount of P31,644.30
representing the difference between the agreed consideration of P49,000.00 as shown in
the sales invoice and petitioner's initial downpayment of P17,855.70 allegedly evidenced
by a receipt. Said decision was however reversed later on, with the same court ordering
defendant VMS instead to return to petitioner the sum of P17,855.70. Parenthetically,
said decision is still pending consideration by the First Civil Case Division of the Court of
Appeals, upon an appeal by VMS, docketed as AC-G.R. No. 02922. 5

Private respondent in its comment, prays for the dismissal of the petition and counters that
the issues raised and the allegations adduced therein are a mere rehash of those
presented and already passed upon in the court below, and that the judgment in the
"breach of contract" suit cannot be invoked as an authority as the same is still pending
determination in the appellate court.

We see no cogent reason to disturb the challenged decision.

The pivotal issue in this case is whether the promissory note in question is a
negotiable instrument which will bar completely all the available defenses of the
petitioner against private respondent.

Petitioner's liability on the promissory note, the due execution and genuineness of
which she never denied under oath is, under the foregoing factual milieu, as inevitable as
it is clearly established.

The records reveal that involved herein is not a simple case of assignment of credit as
petitioner would have it appear, where the assignee merely steps into the shoes of, is
open to all defenses available against and can enforce payment only to the same extent
as, the assignor-vendor.
Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and
Acceptance Corp., this Court had the occasion to clearly distinguish between a
6

negotiable and a non-negotiable instrument.

Among others, the instrument in order to be considered negotiable must contain the
so-called "words of negotiability — i.e., must be payable to "order" or "bearer"". Under
Section 8 of the Negotiable Instruments Law, there are only two ways by which an
instrument may be made payable to order. There must always be a specified person
named in the instrument and the bill or note is to be paid to the person designated in the
instrument or to any person to whom he has indorsed and delivered the same. Without
the words "or order or "to the order of", the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any subsequent
purchaser thereof will not enjoy the advantages of being a holder of a negotiable
instrument, but will merely "step into the shoes" of the person designated in the instrument
and will thus be open to all defenses available against the latter. Such being the situation
in the above-cited case, it was held that therein private respondent is not a holder in due
course but a mere assignee against whom all defenses available to the assignor may be
raised.7

In the case at bar, however, the situation is different. Indubitably, the basis of private
respondent's claim against petitioner is a promissory note which bears all the earmarks
of negotiability.

The pertinent portion of the note reads:

PROMISSORY NOTE
(MONTHLY)

P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980

For value received, I/We jointly and severally, promise to pay Violago Motor Sales
Corporation or order, at its office in San Fernando, Pampanga, the sum of FIFTY EIGHT
THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine
currency, which amount includes interest at 14% per annum based on the diminishing
balance, the said principal sum, to be payable, without need of notice or demand, in
installments of the amounts following and at the dates hereinafter set forth, to
wit: P1,614.95 monthly for "36" months due and payable on the 21st day of each month
starting March 21, 1980 thru and inclusive of February 21, 1983. P_________ monthly for
______ months due and payable on the ______ day of each month starting _____198__
thru and inclusive of _____, 198________ provided that interest at 14% per annum shall
be added on each unpaid installment from maturity hereof until fully paid.

xxx xxx xxx

Maker; Co-Maker:

(SIGNED) JUANITA SALAS _________________

Address:
____________________ ____________________

WITNESSES

SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE

TAN # TAN #

PAY TO THE ORDER OF

FILINVEST FINANCE AND LEASING CORPORATION

VIOLAGO MOTOR SALES CORPORATION

BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8

A careful study of the questioned promissory note shows that it is a negotiable instrument,
having complied with the requisites under the law as follows: [a] it is in writing and signed
by the maker Juanita Salas; [b] it contains an unconditional promise to pay the amount of
P58,138.20; [c] it is payable at a fixed or determinable future time which is "P1,614.95
monthly for 36 months due and payable on the 21 st day of each month starting March 21,
1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to Violago Motor Sales
Corporation, or order and as such, [e] the drawee is named or indicated with certainty. 9

It was negotiated by indorsement in writing on the instrument itself payable to the Order of
Filinvest Finance and Leasing Corporation and it is an indorsement of the entire
10

instrument. 11

Under the circumstances, there appears to be no question that Filinvest is a holder in due
course, having taken the instrument under the following conditions: [a] it is complete and
regular upon its face; [b] it became the holder thereof before it was overdue, and without
notice that it had previously been dishonored; [c] it took the same in good faith and for
value; and [d] when it was negotiated to Filinvest, the latter had no notice of any infirmity in
the instrument or defect in the title of VMS Corporation. 12

Accordingly, respondent corporation holds the instrument free from any defect of title of
prior parties, and free from defenses available to prior parties among themselves, and
may enforce payment of the instrument for the full amount thereof. This being so,
13

petitioner cannot set up against respondent the defense of nullity of the contract of
sale between her and VMS.

Even assuming for the sake of argument that there is an iota of truth in petitioner's
allegation that there was in fact deception made upon her in that the vehicle she
purchased was different from that actually delivered to her, this matter cannot be
passed upon in the case before us, where the VMS was never impleaded as a party.

Whatever issue is raised or claim presented against VMS must be resolved in the "breach
of contract" case.

Hence, we reach a similar opinion as did respondent court when it held:

We can only extend our sympathies to the defendant (herein petitioner) in this unfortunate
incident. Indeed, there is nothing We can do as far as the Violago Motor Sales
Corporation is concerned since it is not a party in this case. To even discuss the issue as
to whether or not the Violago Motor Sales Corporation is liable in the transaction in
question would amount, to denial of due process, hence, improper and unconstitutional.
She should have impleaded Violago Motor Sales. 14

IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs
against petitioner.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Cortés, JJ., concur.

Footnotes

1 Rollo, p. 21.

2 Rollo, pp. 23-24.

3 Rollo, pp. 57-59.

4 Art. 1481, New Civil Code.

5 Rollo, p. 10.

6 149 SCRA 459 (1987).

7 Ibid.

8 Ex. "7 "; Folder of Exhibits.

9 Section 1, Negotiable Instruments Law, emphasis supplied.

10 Section 31, NIL.

11 Section 32, NIL.

12 Section 52, NIL.

13 Section 57, Negotiable Instruments Law; Consolidated Plywood Industries, Inc. v.

IFC Leasing and Acceptance Corporation, (supra).

14 Rollo, pp. 22-23.

CONSOLIDATED PLYWOOD V. IFC

149 SCRA 448
FACTS:

Petitioner bought from Atlantic Gulf and Pacific Company, through its sister
company Industrial Products Marketing, two used tractors. Petitioner was
issued a sales invoice for the two used tractors. At the same tim
e, the
deed of sale with chattel mortgage with promissory note was issued.

Simultaneously, the seller assigned the deed of sale with chattel mortgage and
promissory note to respondent. The used tractors were then delivered
but barely 14 days after, the tractors broke down. The seller sent
mechanics but the tractors were not repaired accordingly as they were no
longer serviceable. Petitioner would delay the payments on the promissory
notes until the seller completes its obligation under the warranty.

Thereafter, a collection suit was filed against petitioner for the payment of the
promissory note.

HELD:

It is patent that the seller is liable for the breach in warranty against the
petitioner. This liability as a general rule extends to the corporation
to whom it assigned its rights and interests unless the assignee is a holder in
due course of the promissory note in question, assuming the note i
s
negotiable, in which case, the latter’s rights are based on a negotia
ble
instrument and assuming further that the petitioner’s defense may n
ot prevail against it.

The promissory note in question is not a negotiable instrument. Th

e promissory note in question lacks the so-called words of negotiability. And
as such, it follows that the respondent can never be a holder in due course
but remains merely an assignee of the note in question. Thus, the
petitioner may raise against the respondents all defenses available to
it against the seller.


Consolidated Plywood, et. al. vs. IFC
Leasing , G.R. No. 72593, April 30, 1987
Full Text

Facts: Consolidated Plywood Industries Inc. (CPII) is a corporation engaged in the

logging business. It had for its program of logging activities for the year 1978 the
opening of additional roads, and simultaneous logging operations along the route of
said roads, in its logging concession area at Baganga, Manay, and Caraga, Davao
Oriental.

For this purpose, it needed 2 additional units of tractors. Cognizant of CPII’s need and
purpose, Atlantic Gulf & Pacific Company of Manila, through its sister company and
marketing arm, Industrial Products Marketing (IPM), a corporation dealing in tractors
and other heavy equipment business, offered to sell to CPII 2 “Used” Allis Crawler
Tractors, 1 an HD-21-B and the other an HD-16-B. After conducting said inspection,
IPM assured CPII that the “Used” Allis Crawler Tractors which were being offered
were fit for the job, and gave the corresponding warranty of 90 days performance of the
machines and availability of parts. With said assurance and warranty, and relying on the
IPM’s skill and judgment, CPII through Henry Wee and Rodolfo T. Vergara, president
and vice-president, respectively, agreed to purchase on installment said 2 units of
“Used” Allis Crawler Tractors. It also paid the down payment of P210,000.00. On 5
April 1978, IPM issued the sales invoice for the 2 units of tractors. At the same time, the
deed of sale with chattel mortgage with promissory note was executed.

Barely 14 days had elapsed after their delivery when one of the tractors broke down and
after another 9 days, the other tractor likewise broke down. IPM sent to the jobsite its
mechanics to conduct the necessary repairs, but the tractors did not come out to be what
they should be after the repairs were undertaken because the units were no longer
serviceable. Because of the breaking down of the tractors, the road building and
simultaneous logging operations of CPII were delayed and Vergara advised IPM that
the payments of the installments as listed in the promissory note would likewise be
delayed until IPM completely fulfills its obligation under its warranty.

Since the tractors were no longer serviceable, on 7 April 1979, Wee asked IPM to pull
out the units and have them reconditioned, and thereafter to offer them for sale. The
proceeds were to be given to IFC Leasing and the excess, if any, to be divided between
IPM and CPII which offered to bear 1/2 of the reconditioning cost. No response to this
letter was received by CPII and despite several follow-up calls, IPM did nothing with
regard to the request, until the complaint in the case was filed by IFC Leasing against
CPII, Wee, and Vergara. The complaint was filed by IFC Leasing against CPII, et al.
for the recovery of the principal sum of P1,093,789.71, accrued interest of P151,618.86
as of 15 August 1979, accruing interest there after at the rate of 12% per annum,
attorney’s fees of P249,081.71 and costs of suit.
CPII, et al. filed their amended answer praying for the dismissal of the complaint. In a
decision dated 20 April 1981, the trial court rendered judgment, ordering CPII, et al. to
pay jointly and severally in their official and personal capacities

On 17 July 1985, the Intermediate Appellate Court issued the decision affirming in toto
the decision of the trial court.

Issue: Whether the promissory note in question is a negotiable instrument.

Held: No. The pertinent portion of the note provides that “”FOR VALUE RECEIVED,
I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of P1,093,789.71, Philippine Currency, the said principal sum,
to be payable in 24 monthly installments starting July 15, 1978 and every 15th of the
month thereafter until fully paid.” Considering that paragraph (d), Section 1 of the
Negotiable Instruments Law requires that a promissory note “must be payable to order
or bearer,” it cannot be denied that the promissory note in question is not a negotiable
instrument.

The instrument in order to be considered negotiable must contain the so called “words
of negotiability” — i.e., must be payable to “order” or “bearer.” These words serve as
an expression of consent that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a negotiable instrument than
under a non- negotiable one. Without the words “or order” or “to the order of,” the
instrument is payable only to the person designated therein and is therefore
non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of
being a holder of a negotiable instrument, but will merely “step into the shoes” of the
person designated in the instrument and will thus be open to all defenses available
against the latter.

Therefore, considering that the subject promissory note is not a negotiable instrument,
it follows that IFC Leasing can never be a holder in due course but remains a mere
assignee of the note in question. Thus, CPII may raise against IFC Leasing all defenses
available to it as against IPM. This being so, there was no need for CPII to implead IPM
when it was sued by IFC Leasing because CPII’s defenses apply to both or either of
them.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and

RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.

Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which assails
on questions of law a decision of the Intermediate Appellate Court in AC-G.R. CV
No. 68609 dated July 17, 1985, as well as its resolution dated October 17, 1985,
denying the motion for reconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional roads,
and simultaneous logging operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao Oriental. For this
purpose, it needed two (2) additional units of tractors.

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific

Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (the "seller-assignor"), a corporation dealing in tractors and
other heavy equipment business, offered to sell to petitioner-corporation two (2)
"Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.

In order to ascertain the extent of work to which the tractors were to be exposed,
(t.s.n., May 28, 1980, p. 44) and to determine the capability of the "Used"
tractors being offered, petitioner-corporation requested the
seller-assignor to inspect the job site. After conducting said inspection, the
seller-assignor assured petitioner-corporation that the "Used" Allis Crawler
Tractors which were being offered were fit for the job, and gave the
corresponding warranty of ninety (90) days performance of the machines and
availability of parts. (t.s.n., May 28, 1980, pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor's skill
and judgment, petitioner-corporation through petitioners Wee and Vergara,
president and vice- president, respectively, agreed to purchase on installment
said two (2) units of "Used" Allis Crawler Tractors. It also paid the down
payment of Two Hundred Ten Thousand Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2)
units of tractors (Exh. "3-A"). At the same time, the deed of sale with
chattel mortgage with promissory note was executed (Exh. "2").

Simultaneously with the execution of the deed of sale with chattel mortgage
with promissory note, the seller-assignor, by means of a deed of
assignment (E exh. " 1 "), assigned its rights and interest in the chattel
mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of
"Used" tractors to the petitioner-corporation's job site and as agreed, the
seller-assignor stationed its own mechanics to supervise the operations of the
machines.

Barely fourteen (14) days had elapsed after their delivery when one of the
tractors broke down and after another nine (9) days, the other tractor
likewise broke down (t.s.n., May 28, 1980, pp. 68-69).

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the

seller-assignor of the fact that the tractors broke down and requested for the
seller-assignor's usual prompt attention under the warranty (E exh. " 5 ").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5,"

the seller-assignor sent to the job site its mechanics to conduct the necessary
repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the
tractors did not come out to be what they should be after the repairs were
undertaken because the units were no longer serviceable (t. s. n., May 28,
1980, p. 78).

Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were delayed and
petitioner Vergara advised the seller-assignor that the payments of the
installments as listed in the promissory note would likewise be delayed
until the seller-assignor completely fulfills its obligation under its warranty (t.s.n,
May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee
asked the seller-assignor to pull out the units and have them reconditioned, and
thereafter to offer them for sale. The proceeds were to be given to the
respondent and the excess, if any, to be divided between the
seller-assignor and petitioner-corporation which offered to bear one-half
(1/2) of the reconditioning cost (E exh. " 7 ").

No response to this letter, Exhibit "7," was received by the

petitioner-corporation and despite several follow-up calls, the seller-assignor
did nothing with regard to the request, until the complaint in this case was
filed by the respondent against the petitioners, the corporation, Wee,
and Vergara.

The complaint was filed by the respondent against the petitioners for the
recovery of the principal sum of One Million Ninety Three Thousand Seven
Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of One
Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest thereafter at the rate of
twelve (12%) percent per annum, attorney's fees of Two Hundred Forty Nine
Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.

The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the
petitioners damages in an amount at the sound discretion of the court, Twenty
Thousand Pesos (P20,000.00) as and for attorney's fees, and Five Thousand
Pesos (P5,000.00) for expenses of litigation. The petitioners likewise prayed for
such other and further relief as would be just under the premises.

In a decision dated April 20, 1981, the trial court rendered the following
judgment:

WHEREFORE, judgment is hereby rendered:

1. ordering defendants to pay jointly and severally in their official and personal
capacities the principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN
HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with accrued
interest of ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN
PESOS & 86/100 (P151,618.,86) as of August 15, 1979 and accruing interest
thereafter at the rate of 12% per annum;

2. ordering defendants to pay jointly and severally attorney's fees equivalent to

ten percent (10%) of the principal and to pay the costs of the suit.

Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and

assigned therein the following errors:

THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC
GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE
DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.

II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A

HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID
NOTE AS HOLDER THEREOF IN DUE COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged
decision affirming in toto the decision of the trial court. The pertinent
portions of the decision are as follows:

xxx xxx xxx

From the evidence presented by the parties on the issue of warranty, We are of
the considered opinion that aside from the fact that no provision of warranty
appears or is provided in the Deed of Sale of the tractors and even admitting
that in a contract of sale unless a contrary intention appears, there is an implied
warranty, the defense of breach of warranty, if there is any, as in this case, does
not lie in favor of the appellants and against the plaintiff-appellee who is the
assignee of the promissory note and a holder of the same in due course.
Warranty lies in this case only between Industrial Products Marketing
and Consolidated Plywood Industries, Inc. The plaintiff-appellant herein
upon application by appellant corporation granted financing for the purchase of
the questioned units of Fiat-Allis Crawler,Tractors.

xxx xxx xxx

Holding that breach of warranty if any, is not a defense available to appellants

either to withdraw from the contract and/or demand a proportionate reduction
of the price with damages in either case (Art. 1567, New Civil Code). We now
come to the issue as to whether the plaintiff-appellee is a holder in due course
of the promissory note.

To begin with, it is beyond arguments that the plaintiff-appellee is a financing

corporation engaged in financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable duly
authorized pursuant to R.A. 5980 otherwise known as the Financing Act.

A study of the questioned promissory note reveals that it is a negotiable

instrument which was discounted or sold to the IFC Leasing and
Acceptance Corporation for P800,000.00 (Exh. "A") considering the
following. it is in writing and signed by the maker; it contains an unconditional
promise to pay a certain sum of money payable at a fixed or determinable future
time; it is payable to order (Sec. 1, NIL); the promissory note was negotiated
when it was transferred and delivered by IPM to the appellee and duly endorsed
to the latter (Sec. 30, NIL); it was taken in the conditions that the note was
complete and regular upon its face before the same was overdue and without
notice, that it had been previously dishonored and that the note is in good faith
and for value without notice of any infirmity or defect in the title of IPM (Sec. 52,
NIL); that IFC Leasing and Acceptance Corporation held the instrument free
from any defect of title of prior parties and free from defenses available to prior
parties among themselves and may enforce payment of the instrument for the
full amount thereof against all parties liable thereon (Sec. 57, NIL); the
appellants engaged that they would pay the note according to its tenor, and
admit the existence of the payee IPM and its capacity to endorse (Sec. 60, NIL).

In view of the essential elements found in the questioned promissory note, We

opine that the same is legally and conclusively enforceable against the
defendants-appellants.

WHEREFORE, finding the decision appealed from according to law and evidence,
We find the appeal without merit and thus affirm the decision in toto. With costs
against the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was
denied by the Intermediate Appellate Court in its resolution dated October 17,
1985, a copy of which was received by the petitioners on October 21, 1985.

Hence, this petition was filed on the following grounds:

I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE

INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO
ORDER NOR TO BEARER.

II

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE

ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND

THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE
PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT
ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL
PRODUCTS MARKETING.

IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY
NOTE BECAUSE:

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE

LAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE

SELLER-ASSIGNOR OF THE PROMISSORY NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN

FAVOR OF THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE
TRANSACTION FROM BEING A SALE ON INSTALLMENTS TO A PURE LOAN.

VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY

COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN
AFFIXED THEREON OR CANCELLED.

The petitioners prayed that judgment be rendered setting aside the decision
dated July 17, 1985, as well as the resolution dated October 17, 1985 and
dismissing the complaint but granting petitioners' counterclaims before the
court of origin.

On the other hand, the respondent corporation in its comment to the petition
filed on February 20, 1986, contended that the petition was filed out of time;
that the promissory note is a negotiable instrument and respondent a holder in
due course; that respondent is not liable for any breach of warranty; and finally,
that the promissory note is admissible in evidence.

The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of the
petitioner against the respondent-assignee.

Preliminarily, it must be established at the outset that we consider the instant

petition to have been filed on time because the petitioners' motion for
reconsideration actually raised new issues. It cannot, therefore, be considered
pro- formal.

The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-day
warranty because the findings of the trial court, adopted by the respondent
appellate court, that "14 days after delivery, the first tractor broke down and 9
days, thereafter, the second tractor became inoperable" are sustained by the
records. The petitioner was clearly a victim of a warranty not honored by the
maker.

The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty against the hidden
defects which the thing sold may have, should they render it unfit for the use for
which it is intended, or should they diminish its fitness for such use to such an
extent that, had the vendee been aware thereof, he would not have acquired it
or would have given a lower price for it; but said vendor shall not be answerable
for patent defects or those which may be visible, or for those which are not
visible if the vendee is an expert who, by reason of his trade or profession,
should have known them.

ART. 1562. In a sale of goods, there is an implied warranty or condition as to the

quality or fitness of the goods, as follows:

(1) Where the buyer, expressly or by implication makes known to the seller the
particular purpose for which the goods are acquired, and it appears that the
buyer relies on the sellers skill or judge judgment (whether he be the
grower or manufacturer or not), there is an implied warranty that the goods
shall be reasonably fit for such purpose;

xxx xxx xxx

ART. 1564. An implied warranty or condition as to the quality or fitness for a
particular purpose may be annexed by the usage of trade.

xxx xxx xxx

ART. 1566. The vendor is responsible to the vendee for any hidden faults or
defects in the thing sold even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor
was not aware of the hidden faults or defects in the thing sold. (Emphasis
supplied).

It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the
assignee is a holder in due course of the promissory note in question, assuming
the note is negotiable, in which case the latter's rights are based on the
negotiable instrument and assuming further that the petitioner's defenses may
not prevail against it.

Secondly, it likewise cannot be denied that as soon as the tractors broke down,
the petitioner-corporation notified the seller-assignor's sister company, AG & P,
about the breakdown based on the seller-assignor's express 90-day warranty,
with which the latter complied by sending its mechanics. However, due to the
seller-assignor's delay and its failure to comply with its warranty, the
tractors became totally unserviceable and useless for the purpose for
which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its

contract with the seller-assignor.

Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in

case one of the obligors should not comply with what is incumbent
upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.

xxx xxx xxx

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the
vendee may elect between withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in either case. (Emphasis
supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the
seller-assignor, necessarily can no longer sue the seller-assignor except
by way of counterclaim if the seller-assignor sues it because of the rescission.

In the case of the University of the Philippines v. De los Angeles (35 SCRA 102)
we held:

In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous court action, but it
proceeds at its own risk. For it is only the final judgment of the corresponding
court that will conclusively and finally settle whether the action taken was or
was not correct in law. But the law definitely does not require that the
contracting party who believes itself injured must first file suit and wait for
adjudgement before taking extrajudicial steps to protect its interest. Otherwise,
the party injured by the other's breach will have to passively sit and watch its
damages accumulate during the pendency of the suit until the final judgment of
rescission is rendered when the law itself requires that he should exercise due
diligence to minimize its own damages (Civil Code, Article 2203). (Emphasis
supplied)

Going back to the core issue, we rule that the promissory note in question is
not a negotiable instrument.

The pertinent portion of the note is as follows:

FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P
1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24
monthly installments starting July 15, 1978 and every 15th of the month
thereafter until fully paid. ...

Considering that paragraph (d), Section 1 of the Negotiable Instruments

Law requires that a promissory note "must be payable to order or
bearer, " it cannot be denied that the promissory note in question is not a
negotiable instrument.

The instrument in order to be considered negotiablility-i.e. must contain the

so-called 'words of negotiable, must be payable to 'order' or 'bearer'. These
words serve as an expression of consent that the instrument may be transferred.
This consent is indispensable since a maker assumes greater risk under a
negotiable instrument than under a non-negotiable one. ...

xxx xxx xxx

When instrument is payable to order.

SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where

it is drawn payable to the order of a specified person or to him or his order. . . .
xxx xxx xxx

These are the only two ways by which an instrument may be made payable to
order. There must always be a specified person named in the instrument. It
means that the bill or note is to be paid to the person designated in the
instrument or to any person to whom he has indorsed and delivered the
same. Without the words "or order" or"to the order of, "the instrument is
payable only to the person designated therein and is therefore non-negotiable.
Any subsequent purchaser thereof will not enjoy the advantages of being a
holder of a negotiable instrument but will merely "step into the shoes" of the
person designated in the instrument and will thus be open to all defenses
available against the latter." (Campos and Campos, Notes and Selected Cases
on Negotiable Instruments Law, Third Edition, page 38). (Emphasis supplied)

Therefore, considering that the subject promissory note is not a negotiable

instrument, it follows that the respondent can never be a holder in due
course but remains a mere assignee of the note in question. Thus, the
petitioner may raise against the respondent all defenses available to it
as against the seller-assignor Industrial Products Marketing.

This being so, there was no need for the petitioner to implied the seller-assignor
when it was sued by the respondent-assignee because the petitioner's defenses
apply to both or either of either of them. Actually, the records show that even
the respondent itself admitted to being a mere assignee of the
promissory note in question, to wit:

ATTY. PALACA:

Did we get it right from the counsel that what is being assigned is the Deed of
Sale with Chattel Mortgage with the promissory note which is as testified to by
the witness was indorsed? (Counsel for Plaintiff nodding his head.) Then we
have no further questions on cross,

COURT:

You confirm his manifestation? You are nodding your head? Do you confirm
that?

ATTY. ILAGAN:

The Deed of Sale cannot be assigned. A deed of sale is a transaction between

two persons; what is assigned are rights, the rights of the mortgagee were
assigned to the IFC Leasing & Acceptance Corporation.

COURT:

He puts it in a simple way as one-deed of sale and chattel mortgage were

assigned; . . . you want to make a distinction, one is an assignment of mortgage
right and the other one is indorsement of the promissory note. What counsel for
defendants wants is that you stipulate that it is contained in one single
transaction?

ATTY. ILAGAN:

We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).

Secondly, even conceding for purposes of discussion that the promissory note in
question is a negotiable instrument, the respondent cannot be a holder in due
course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the
seller-assignor, Industrial Products Marketing, and the respondent whereby the
latter would pay the seller-assignor the entire purchase price and the
seller-assignor, in turn, would assign its rights to the respondent which acquired
the right to collect the price from the buyer, herein petitioner Consolidated
Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note,
the Deed of Assignment and the Disclosure of Loan/Credit Transaction shows
that said documents evidencing the sale on installment of the tractors were all
executed on the same day by and among the buyer, which is herein petitioner
Consolidated Plywood Industries, Inc.; the seller-assignor which is the
Industrial Products Marketing; and the assignee-financing company, which is
the respondent. Therefore, the respondent had actual knowledge of the
fact that the seller-assignor's right to collect the purchase price was
conditional, and that it was subject to the condition that the tractors -sold
were not defective. The respondent knew that when the tractors turned out to
be defective, it would be subject to the defense of failure of consideration and
cannot recover the purchase price from the petitioners. Even assuming for
the sake of argument that the promissory note is negotiable, the
respondent, which took the same with actual knowledge of the foregoing facts
so that its action in taking the instrument amounted to bad faith, is not a holder
in due course. As such, the respondent is subject to all defenses which the
petitioners may raise against the seller-assignor. Any other interpretation would
be most inequitous to the unfortunate buyer who is not only saddled with two
useless tractors but must also face a lawsuit from the assignee for the entire
purchase price and all its incidents without being able to raise valid defenses
available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it

had no knowledge of any fact, which would justify its act of taking the
promissory note as not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating

it.

xxx xxx xxx

SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due
course is a holder who has taken the instrument under the following conditions:

xxx xxx xxx

xxx xxx xxx

(c) That he took it in good faith and for value

(d) That the time it was negotiated by him he had no notice of any infirmity in
the instrument of deffect in the title of the person negotiating it

xxx xxx xxx

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of

an infirmity in the instrument or defect in the title of the person negotiating the
same, the person to whom it is negotiated must have had actual knowledge
of the infirmity or defect, or knowledge of such facts that his action in taking
the instrument amounts to bad faith. (Emphasis supplied)

We subscribe to the view of Campos and Campos that a financing company is

not a holder in good faith as to the buyer, to wit:

In installment sales, the buyer usually issues a note payable to the seller to
cover the purchase price. Many times, in pursuance of a previous arrangement
with the seller, a finance company pays the full price and the note is indorsed to
it, subrogating it to the right to collect the price from the buyer, with interest.
With the increasing frequency of installment buying in this country, it is most
probable that the tendency of the courts in the United States to protect the
buyer against the finance company will , the finance company will be subject to
the defense of failure of consideration and cannot recover the purchase price
from the buyer. As against the argument that such a rule would seriously affect
"a certain mode of transacting business adopted throughout the State," a court
in one case stated:

It may be that our holding here will require some changes in business methods
and will impose a greater burden on the finance companies. We think the
buyer-Mr. & Mrs. General Public-should have some protection somewhere along
the line. We believe the finance company is better able to bear the risk of the
dealer's insolvency than the buyer and in a far better position to protect his
interests against unscrupulous and insolvent dealers. . . .

If this opinion imposes great burdens on finance companies it is a potent

argument in favor of a rule which win afford public protection to the general
buying public against unscrupulous dealers in personal property. . . . (Mutual
Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and
Campos, Notes and Selected Cases on Negotiable Instruments Law, Third
Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine
Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real
sense, the finance company was a moving force in the transaction from its very
inception and acted as a party to it. When a finance company actively
participates in a transaction of this type from its inception, it cannot be regarded
as a holder in due course of the note given in the transaction.

In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively
participated in the sale on installment of the subject two Allis Crawler
tractors, cannot be regarded as a holder in due course of said note. It
follows that the respondent's rights under the promissory note involved in this
case are subject to all defenses that the petitioners have against the
seller-assignor, Industrial Products Marketing. For Section 58 of the Negotiable
Instruments Law provides that "in the hands of any holder other than a holder
in due course, a negotiable instrument is subject to the same defenses as if it
were non-negotiable. ... "

Prescinding from the foregoing and setting aside other peripheral issues, we
find that both the trial and respondent appellate court erred in holding the
promissory note in question to be negotiable. Such a ruling does not only
violate the law and applicable jurisprudence, but would result in unjust
enrichment on the part of both the assigner- assignor and respondent
assignee at the expense of the petitioner-corporation which rightfully
rescinded an inequitable contract. We note, however, that since the
seller-assignor has not been impleaded herein, there is no obstacle for the
respondent to file a civil Suit and litigate its claims against the seller- assignor in
the rather unlikely possibility that it so desires,

WHEREFORE, in view of the foregoing, the decision of the respondent appellate

court dated July 17, 1985, as well as its resolution dated October 17, 1986, are
hereby ANNULLED and SET ASIDE. The complaint against the petitioner before
the trial court is DISMISSED.

SO ORDERED.

Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.

PECO vs. Soriano

Philippine Education Co. vs. Soriano

L-22405 June 30, 1971

Dizon, J.:

Facts:
 Enrique Montinola sought to purchase from Manila Post Office ten money
orders of 200php each payable to E. P. Montinola. Montinola offered to pay with the
money orders with a private check. Private check were not generally accepted in
payment of money orders, the teller advised him to see the Chief of the Money Order
Division, but instead of doing so, Montinola managed to leave the building without
the knowledge of the teller. Upon the disappearance of the unpaid money order, a
message was sent to instruct all banks that it must not pay for the money order stolen
upon presentment. The Bank of America received a copy of said notice. However,
The Bank of America received the money order and deposited it to the appellant’s
account upon clearance. Mauricio Soriano, Chief of the Money Order Division
notified the Bank of America that the money order deposited had been found to have
been irregularly issued and that, the amount it represented had been deducted from the
bank’s clearing account. The Bank of America debited appellant’s account with the
same account and give notice by mean of debit memo.

Issue:
Whether or not the postal money order in question is a negotiable instrument

Held:
No. It is not disputed that the Philippine postal statutes were patterned after
similar statutes in force in United States. The Weight of authority in the United States
is that postal money orders are not negotiable instruments, the reason being that in
establishing and operating a postal money order system, the government is not
engaged in commercial transactions but merely exercises a governmental power for
the public benefit. Moreover, some of the restrictions imposed upon money orders by
postal laws and regulations are inconsistent with the character of negotiable
instruments. For instance, such laws and regulations usually provide for not more than
one endorsement; payment of money orders may be withheld under a variety of
circumstances.

PECO V. SORIANO
39 SCRA 587

FACTS:
Montinola purchased money orders from the postal office. He issue
d a personal check to pay for the money orders and since it is irregular to have
checks as payments, he was advised to see the Chief of the Money Order
Division. He didn’t do so but left the office with the money orders and the
check. A notice was thereafter issued to all post offices as well as the Bank of
America, about the irregularly issued money orders and the order not to accept
such orders.
Plaintiff was one of those who received the subject money orders a
nd encashed it with the Bank of America. At first, it was given the money but
later on, his account was debited in pursuance of the letter given
by the Chief.

HELD:
Postal money orders are not negotiable instruments. In establishing
and operating a postal money order system, the government is not engaged in
commercial transactions but merely exercises a governmental power f
or the public benefit. Moreover, some restrictions imposed money orders by
postal laws and regulations are inconsistent with the character
of negotiable instruments.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,

vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.

Marcial Esposo for plaintiff-appellant.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General

Antonio G. Ibarra and Attorney Concepcion Torrijos-Agapinan for
defendants-appellees.

DIZON, J.:

An appeal from a decision of the Court of First Instance of Manila dismissing the
complaint filed by the Philippine Education Co., Inc. against Mauricio A. Soriano,
Enrico Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post
Office ten (10) money orders of P200.00 each payable to E.P. Montinola
withaddress at Lucena, Quezon. After the postal teller had made out
money ordersnumbered 124685, 124687-124695, Montinola offered to pay
for them with a private checks were not generally accepted in payment of
money orders, the teller advised him to see the Chief of the Money Order
Division, but instead of doing so, Montinola managed to leave building
with his own check and the ten(10) money orders without the
knowledge of the teller.

On the same date, April 18, 1958, upon discovery of the disappearance of the
unpaid money orders, an urgent message was sent to all postmasters, and the
following day notice was likewise served upon all banks, instructing them not to
pay anyone of the money orders aforesaid if presented for payment. The Bank
of America received a copy of said notice three days later.

On April 23, 1958 one of the above-mentioned money orders numbered 124688
was received by appellant as part of its sales receipts. The following day it
deposited the same with the Bank of America, and one day thereafter the
latter cleared it with the Bureau of Posts and received from the latter
its face value of P200.00.

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money

Order Division of the Manila Post Office, acting for and in behalf of his
co-appellee, Postmaster Enrico Palomar, notified the Bank of America that
money order No. 124688 attached to his letter had been found to have
been irregularly issued and that, in view thereof, the amount it
represented had been deducted from the bank's clearing account. For
its part, on August 2 of the same year, the Bank of America debited
appellant's account with the same amount and gave it advice thereof by
means of a debit memo.

On October 12, 1961 appellant requested the Postmaster General to reconsider

the action taken by his office deducting the sum of P200.00 from the clearing
account of the Bank of America, but his request was denied. So was appellant's
subsequent request that the matter be referred to the Secretary of Justice for
advice. Thereafter, appellant elevated the matter to the Secretary of Public
Works and Communications, but the latter sustained the actions taken by the
postal officers.

In connection with the events set forth above, Montinola was charged with
theft in the Court of First Instance of Manila (Criminal Case No. 43866) but
after trial he was acquitted on the ground of reasonable doubt.

On January 8, 1962 appellant filed an action against appellees in the Municipal

Court of Manila praying for judgment as follows:

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

(a) To countermand the notice given to the Bank of America on September 27,
1961, deducting from the said Bank's clearing account the sum of P200.00
represented by postal money order No. 124688, or in the alternative indemnify
the plaintiff in the same amount with interest at 8-½% per annum from
September 27, 1961, which is the rate of interest being paid by plaintiff on its
overdraft account;

(b) To pay to the plaintiff out of their own personal funds, jointly and severally,
actual and moral damages in the amount of P1,000.00 or in such amount as will
be proved and/or determined by this Honorable Court: exemplary damages in
the amount of P1,000.00, attorney's fees of P1,000.00, and the costs of action.

Plaintiff also prays for such other and further relief as may be deemed just and
equitable.

On November 17, 1962, after the parties had submitted the stipulation of facts
reproduced at pages 12 to 15 of the Record on Appeal, the above-named court
rendered judgment as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendants to

countermand (cancel officially) the notice given to the Bank of America on
September 27, 1961, deducting from said Bank's clearing account the sum of
P200.00 representing the amount of postal money order No. 124688, or in the
alternative, to indemnify the plaintiff in the said sum of P200.00 with interest
thereon at the rate of 8-½% per annum from September 27, 1961 until fully
paid; without any pronouncement as to cost and attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after
the parties had resubmitted the same stipulation of facts, the appealed decision
dismissing the complaint, with costs, was rendered.

The first, second and fifth assignments of error discussed in appellant's brief are
related to the other and will therefore be discussed jointly. They raise this main
issue: that the postal money order in question is a negotiable instrument; that
its nature as such is not in anyway affected by the letter dated October 26, 1948
signed by the Director of Posts and addressed to all banks with a clearing
account with the Post Office, and that money orders, once issued, create a
contractual relationship of debtor and creditor, respectively, between the
government, on the one hand, and the remitters payees or endorses, on the
other.

It is not disputed that our postal statutes were patterned after statutes in force
in the United States. For this reason, ours are generally construed in accordance
with the construction given in the United States to their own postal statutes, in
the absence of any special reason justifying a departure from this policy or
practice. The weight of authority in the United States is that postal money
orders are not negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs.
Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule being
that, in establishing and operating a postal money order system, the
government is not engaging in commercial transactions but merely exercises a
governmental power for the public benefit.

It is to be noted in this connection that some of the restrictions imposed upon

money orders by postal laws and regulations are inconsistent with the character
of negotiable instruments. For instance, such laws and regulations usually
provide for not more than one endorsement; payment of money orders may be
withheld under a variety of circumstances (49 C.J. 1153).

Of particular application to the postal money order in question are the

conditions laid down in the letter of the Director of Posts of October 26, 1948
(Exhibit 3) to the Bank of America for the redemption of postal money orders
received by it from its depositors. Among others, the condition is imposed that
"in cases of adverse claim, the money order or money orders involved will be
returned to you (the bank) and the, corresponding amount will have to be
refunded to the Postmaster, Manila, who reserves the right to deduct the value
thereof from any amount due you if such step is deemed necessary." The
conditions thus imposed in order to enable the bank to continue enjoying the
facilities theretofore enjoyed by its depositors, were accepted by the Bank of
America. The latter is therefore bound by them. That it is so is clearly referred
from the fact that, upon receiving advice that the amount represented by the
money order in question had been deducted from its clearing account with the
Manila Post Office, it did not file any protest against such action.

Moreover, not being a party to the understanding existing between the postal
officers, on the one hand, and the Bank of America, on the other, appellant has
no right to assail the terms and conditions thereof on the ground that the letter
setting forth the terms and conditions aforesaid is void because it was not
issued by a Department Head in accordance with Sec. 79 (B) of the Revised
Administrative Code. In reality, however, said legal provision does not apply to
the letter in question because it does not provide for a department regulation
but merely sets down certain conditions upon the privilege granted to the Bank
of Amrica to accept and pay postal money orders presented for payment at the
Manila Post Office. Such being the case, it is clear that the Director of Posts had
ample authority to issue it pursuant to Sec. 1190 of the Revised Administrative
Code.

In view of the foregoing, We do not find it necessary to resolve the issues raised
in the third and fourth assignments of error.

WHEREFORE, the appealed decision being in accordance with law, the same is
hereby affirmed with costs.

Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee,

Barredo and Villamor, JJ., concur.

Castro and Makasiar, JJ., took no part.

EQUITABLE BANKING V. IAC

 161 SCRA 518

FACTS:

Nell Company issued a check to help Casals and Casville Enterprises obtain
a letter of credit from Equitable Banking in connection with equipme
nt, a
garrett skidder, which Casals and Casville were buying from Nell.
Nell
indicated the payee as follows “EQUITABLE BANKING CORPORATIO
N A/C
CASVILLE ENTERPRISES INC.”

Casals deposited the check with the bank and the bank teller accepted the
same and in accordance with customary bank practice, stamped in t
he
check the words “non-negotiable”. The amount was withdrawn after
the deposit.

This prompted Nell to file a case against the bank, Casals and Ca
sville. While the instant case was being tried, Casals and Casville
assigned the garrett skidder to plaintiff which credited in favor of
defendants the amount of P450,000, as partial satisfaction of its claim
against them.

HELD:

Equitable is not liable to Nell. Nell should bear the loss as it was through its
own acts, which put it into the power of Casals and Casville Enterprises to
perpetuate the fraud against it.

The check wasn’t initially non-negotiable. Neither was it cross-check

ed. The rubber-stamping transversally on the face of the check was only made
the bank teller in accordance with customary bank practice, and not by Nell
as the drawer of the check, and simply meant that thereafter the s
ame
check could no longer be negotiated.
The payee was not indicated with reasonable certainty in contravention of
Section 8. As worded, it could be accepted as deposit to the account of the
party named therein after the symbols of A/C, or payable to the bank as
trustee, or as an agent, for Casville with the latter being the ultima
te beneficiary.

Equitable Bank vs IAC 1988

161 SCRA 518 – Mercantile Law – Negotiable Instruments Law – Negotiable
Instruments in General – Certainty of Payee

In 1975, Liberato Casals, majority stockholder of Casville Enterprises, went to buy two
garrett skidders (bulldozers) from Edward J. Nell Company amounting to P970,000.00.
To pay the bulldozers, Casals agreed to open a letter of credit with the Equitable
Banking Corporation. Pursuant to this, Nell Company shipped one of the bulldozers to
Casville. Meanwile, Casville advised Nell Company that in order for the letter of
credit to be opened, Casville needs to deposit P427,300.00 with Equitable Bank, and
that since
Casville is a little short, it requested Nell Company to pay the deposit in the
meantime.
Nell Company agreed and so it eventually sent a check in the amount of P427,300.00.
The check read:
Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE
ENTERPRISES, INC.
Nell Company sent the check to Casville so that it would be the latter who could send it
to Equitable Bank
to cover the deposit in lieu of the letter of credit. Casals received the check, he went to
Equitable Bank,
and the teller received the check. The teller, instead of applying the amount as
deposit in lieu of the letter
of credit, credited the check to Casville’s account with Equitable Bank. Casals
later withdrew all the
P427,300.00 and appropriated it to himself.
ISSUE: Whether or not Equitable Bank is liable to cover for the loss.
HELD: No. The subject check was equivocal and patently ambiguous. Reading on the
wordings of the
check, the payee thereon ceased to be indicated with reasonable certainty in
contravention of Section 8
of the Negotiable Instruments Law. As worded, it could be accepted as deposit to the
account of the party
named after the symbols “A/C,” or payable to the Bank as trustee, or as an agent, for
Casville
Enterprises, Inc., with the latter being the ultimate beneficiary. That ambiguity is to be
taken contra proferentem that is, construed against Nell Company who caused
the ambiguity and could
have also avoided it by the exercise of a little more care. Thus, Article 1377 of the
Civil Code, provides:
Art. 1377. The interpretation of obscure words or stipulations in a contract shall not
favor the party who
caused the obscurity.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 74451 May 25, 1988

EQUITABLE BANKING CORPORATION, petitioner,

vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT and THE EDWARD
J. NELL CO., respondents.

William R. Veto for petitioner.

Pelaez, Adriano & Gregorio for respondents.

MELENCIO-HERRERA, J.:

In this Petition for Review on certiorari petitioner, Equitable Banking Corporation, prays that the adverse judgment against it
rendered by respondent Appellate Court, 1 dated 4 October 1985, and its majority Resolution, dated 28 April 1986, denying
petitioner's Motion for Reconsideration, 2 be annulled and set aside.

The facts pertinent to this Petition, as summarized by the Trial Court and adopted by
reference by Respondent Appellate Court, emanated from the case entitled "Edward J.
Nell Co. vs. Liberato V. Casals, Casville Enterprises, Inc., and Equitable Banking
Corporation" of the Court of First Instance of Rizal (Civil Case No. 25112), and read:

From the evidence submitted by the parties, the Court finds that sometime in 1975
defendant Liberato Casals went to plaintiff Edward J. Nell Company and told its senior
sales engineer, Amado Claustro that he was interested in buying one of the plaintiff's
garrett skidders. Plaintiff was a dealer of machineries, equipment and supplies.
Defendant Casals represented himself as the majority stockholder, president and general
manager of Casville Enterprises, Inc., a firm engaged in the large scale production,
procurement and processing of logs and lumber products, which had a plywood plant in
Sta. Ana, Metro Manila.

After defendant Casals talked with plaintiff's sales engineer, he was referred to plaintiffs
executive vice-president, Apolonio Javier, for negotiation in connection with the manner of
payment. When Javier asked for cash payment for the skidders, defendant Casals
informed him that his corporation, defendant Casville Enterprises, Inc., had a credit
line with defendant Equitable Banking Corporation. Apparently, impressed with this
assertion, Javier agreed to have the skidders paid by way of a domestic letter of credit
which defendant Casals promised to open in plaintiffs favor, in lieu of cash payment.
Accordingly, on December 22, 1975, defendant Casville, through its president, defendant
Casals, ordered from plaintiff two units of garrett skidders ...
The purchase order for the garrett skidders bearing No. 0051 and dated December 22,
1975 (Exhibit "A") contained the following terms and conditions:

Two (2) units GARRETT Skidders Model 30A complete as basically described in the
bulletin

PRICE: F.O.B. dock

Manila P485,000.00/unit

For two (2) units P970,000.00

SHIPMENT: We will inform you the date and name of the vessel as soon as arranged.

TERMS: By irrevocable domestic letter of credit to be issued in favor of THE

EDWARD J. NELL CO. or ORDER payable in thirty six (36) months and will be opened
within ninety (90) days after date of shipment. at first installment will be due one hundred
eighty (180) days after date of shipment. Interest-14% per annum (Exhibit A)

xxx xxx xxx

... in a letter dated April 21, 1976, defendants Casals and Casville requested from plaintiff
the delivery of one (1) unit of the bidders, complete with tools and cables, to Cagayan de
Oro, on or before Saturday, April 24,1976, on board a Lorenzo shipping vessel, with the
information that an irrevocable Domestic Letter of Credit would be opened in
plaintiff's favor on or before June 30, 1976 under the terms and conditions agreed upon
(Exhibit "B")

On May 3, 1976, in compliance with defendant Casvile's recognition request, plaintiff

shipped to Cagayan de Oro City a Garrett skidder. Plaintiff paid the shipping cost in the
amount of P10,640.00 because of the verbal assurance of defendant Casville that it
would be covered by the letter of credit soon to be opened.

xxx xxx xxx

On July 15, 1976, defendant Casals handed to plaintiff a check in the amount of
P300,000.00 postdated August 4, 1976, which was followed by another check of same
date. Plaintiff considered these checks either as partial payment for the skidder that was
already delivered to Cagayan de Oro or as reimbursement for the marginal deposit that
plaintiff was supposed to pay.

In a letter dated August 3, 1976 (Exhibit "C"), defendants Casville informed the plaintiff
that their application for a letter of credit for the payment of the Garrett skidders
had been approved by the Equitable Banking Corporation. However, the defendants
said that they would need the sum of P300,000.00 to stand as collateral or marginal
deposit in favor of Equitable Banking Corporation and an additional amount of
P100,000.00, also in favor of Equitable Banking Corporation, to clear the title of the
Estrada property belonging to defendant Casals which had been approved as security
for the trust receipts to be issued by the bank, covering the above-mentioned
equipment.
Although the marginal deposit was supposed to be produced by defendant Casville
Enterprises, plaintiff agreed to advance the necessary amount in order to facilitate
the transaction. Accordingly, on August 5,1976, plaintiff issued a check in the amount of
P400,000.00 (Exhibit "2") drawn against the First National City Bank and made payable to
the order of Equitable Banking Corporation and with the following notation or
memorandum:

a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada
Property to be used as security for trust receipt for opening L/C of Garrett Skidders in
favor of the Edward J. Nell Co." Said check together with the cash disbursement voucher
(Exhibit "2-A") containing the explanation:

Payment for marginal deposit and other expenses re opening of L/C for account of
Casville Ent..

A covering letter (Exhibit "3") was also sent and when the three documents were
presented to Severino Santos, executive vice president of defendant bank, Santos did
not accept them because the terms and conditions required by the bank for the opening
of the letter of credit had not yet been agreed on.

On August 9, 1976, defendant Casville wrote the bank applying for two letters of credit to
cover its purchase from plaintiff of two Garrett skidders, under the following terms and
conditions:

a) On sight Letter of Credit for P485,000.00; b) One 36 months Letter of Credit for
P606,000.00; c) P300,000.00 CASH marginal deposit1 d) Real Estate Collateral to secure
the Trust Receipts; e) We shall chattel mortgage the equipments purchased even after
payment of the first L/C as additional security for the balance of the second L/C and f)
Other conditions you deem necessary to protect the interest of the bank."

In a letter dated August 11, 1976 (Exhibit "D-l"), defendant bank replied stating that it was
ready to open the letters of credit upon defendant's compliance of the following terms and
conditions:

c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure the Trust
Receipts; e) Chattel Mortgage on the equipment; and Ashville f) Other terms and
conditions that our bank may impose.

Defendant Casville sent a copy of the foregoing letter to the plaintiff enclosing three
postdated checks. In said letter, plaintiff was informed of the requirements imposed by the
defendant bank pointing out that the "cash marginal required under paragraph (c) is 30%
of Pl,091,000.00 or P327,300.00 plus another P100,000.00 to clean up the Estrada
property or a total of P427,300.00" and that the check covering said amount should be
made payable "to the Order of EQUITABLE BANKING CORPORATION for the account of
Casville Enterprises Inc." Defendant Casville also stated that the three (3) enclosed
postdated checks were intended as replacement of the checks that were previously
issued to plaintiff to secure the sum of P427,300.00 that plaintiff would advance to
defendant bank for the account of defendant Casville. All the new checks were postdated
November 19, 1976 and drawn in the sum of Pl45,500.00 (Exhibit "F"), P181,800.00
(Exhibit "G") and P100,000.00 (Exhibit "H").
On the same occasion, defendant Casals delivered to plaintiff TCT No. 11891 of the
Register of Deeds of Quezon City and TCT No. 50851 of the Register of Deeds of Rizal
covering two pieces of real estate properties.

Subsequently, Cesar Umali, plaintiffs credit and collection manager, accompanied by a

representative of defendant Casville, went to see Severino Santos to find out the status of
the credit line being sought by defendant Casville. Santos assured Umali that the letters of
credit would be opened as soon as the requirements imposed by defendant bank in its
letter dated August 11, 1976 had been complied with by defendant Casville.

On August 16, 1976, plaintiff issued a check for P427,300.00, payable to the "order of
EQUITABLE BANKING CORPORATION A/C CASVILLE ENTERPRISES, INC." and
drawn against the first National City Bank (Exhibit "E-l"). The check did not contain the
notation found in the previous check issued by the plaintiff (Exhibit "2") but the substance
of said notation was reproduced in a covering letter dated August 16,1976 that went with
the check (Exhibit "E"). Both the check and the covering letter were sent to defendant
<äre|| anº •1àw >

bank through defendant Casals. Plaintiff entrusted the delivery of the check and the
latter to defendant Casals because it believed that no one, including defendant
Casals, could encash the same as it was made payable to the defendant bank alone.
Besides, defendant Casals was known to the bank as the one following up the application
for the letters of credit.

Upon receiving the check for P427,300.00 entrusted to him by plaintiff defendant Casals
immediately deposited it with the defendant bank and the bank teller accepted the same
for deposit in defendant Casville's checking account. After depositing said check,
defendant Casville, acting through defendant Casals, then withdrew all the amount
deposited.

Meanwhile, upon their presentation for encashment, plaintiff discovered that the three
checks (Exhibits "F, "G" and "H") in the total amount of P427,300.00, that were issued by
defendant Casville as collateral were all dishonored for having been drawn against a
closed account.

As defendant Casville failed to pay its obligation to defendant bank, the latter foreclosed
the mortgage executed by defendant Casville on the Estrada property which was sold in a
public auction sale to a third party.

Plaintiff allowed some time before following up the application for the letters of credit
knowing that it took time to process the same. However, when the three checks issued
to it by defendant Casville were dishonored, plaintiff became apprehensive and
sent Umali on November 29, 1976, to inquire about the status of the application for
the letters of credit. When plaintiff was informed that no letters of credit were opened by
the defendant bank in its favor and then discovered that defendant Casville had in the
meanwhile withdrawn the entire amount of P427,300.00, without paying its
obligation to the bank plaintiff filed the instant action.

While the the instant case was being tried, defendants Casals and Casville assigned
the garrett skidder to plaintiff which credited in favor of defendants the amount of
P450,000.00, as partial satisfaction of plaintiff's claim against them.

Defendants Casals and Casville hardly disputed their liability to plaintiff. Not only did they
show lack of interest in disputing plaintiff's claim by not appearing in most of the hearings,
but they also assigned to plaintiff the garrett skidder which is an action of clear recognition
of their liability.

What is left for the Court to determine, therefore, is only the liability of defendant
bank to plaintiff.

xxx xxx xxx

Resolving that issue, the Trial Court rendered judgment, affirmed by Respondent Court in
toto, the pertinent portion of which reads:

xxx xxx xxx

Defendants Casals and Casville Enterprises and Equitable Banking Corporation are
ordered to pay plaintiff, jointly and severally, the sum of P427,300.00, representing the
amount of plaintiff's check which defendant bank erroneously credited to the account
of defendant Casville and which defendants Casal and Casville misappropriated,
with 12% interest thereon from April 5, 1977, until the said sum is fully paid.

Defendant Equitable Banking Corporation is ordered to pay plaintiff attorney's fees in the
sum of P25,000.00 .

Proportionate cost against all the defendants.

SO ORDERED.

The crucial issue to resolve is whether or not petitioner Equitable Banking Corporation
(briefly, the Bank) is liable to private respondent Edward J. Nell Co. (NELL, for short) for
the value of the second check issued by NELL, Exhibit "E-l," which was made payable

to the order of EQUITABLE Ashville BANIUNG CORPORATION A/C OF CASVILLE

ENTERPRISES INC.

and which the Bank teller credited to the account of Casville.

The Trial Court found that the amount of the second check had been erroneously
credited to the Casville account; held the Bank liable for the mistake of its employees; and
ordered the Bank to pay NELL the value of the check in the sum of P427,300.00, with
legal interest. Explained the Trial Court:

The Court finds that the check in question was payable only to the defendant bank and to
no one else. Although the words "A/C OF CASVILLE ENTERPRISES INC. "appear on
the face of the check after or under the name of defendant bank, the payee was still the
latter. The addition of said words did not in any way make Casville Enterprises, Inc. the
Payee of the instrument for the words merely indicated for whose account or in connection
with what account the check was issued by the plaintiff.

Indeed, the bank teller who received it was fully aware that the check was not
negotiable since he stamped thereon the words "NON-NEGOTIABLE For Payee's
Account Only" and "NON-NEGOTIABLE TELLER NO. 4, August 17,1976 EQUITABLE
BANKING CORPORATION.
But said teller should have exercised more prudence in the handling of Id check because
it was not made out in the usual manner. The addition of the words A/C OF CASVILLE
ENTERPRISES INC." should have placed the teller on guard and he should have clarified
the matter with his superiors. Instead of doing so, however, the teller decided to rely on
his own judgment and at the risk of making a wrong decision, credited the entire
amount in the name of defendant Casville although the latter was not the payee named in
the check. Such mistake was crucial and was, without doubt, the proximate cause of
plaintiffs defraudation.

xxx xxx xxx

Respondent Appellate Court upheld the above conclusions stating in addition:

1) The appellee made the subject check payable to appellant's order, for the account of
Casville Enterprises, Inc. In the light of the other facts, the directive was for the appellant
bank to apply the value of the check as payment for the letter of credit which Casville
Enterprises, Inc. had previously applied for in favor of the appellee (Exhibit D-1, p. 5).
The issuance of the subject check was precisely to meet the bank's prior requirement of
payment before issuing the letter of credit previously applied for by Casville Enterprises in
favor of the appellee;

xxx xxx xxx

We disagree.

1) The subject check was equivocal and patently ambiguous. By making the check read:

Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE

ENTERPRISES, INC.

the payee ceased to be indicated with reasonable certainty in contravention of

Section 8 of the Negotiable Instruments Law. As worded, it could be accepted as
3

deposit to the account of the party named after the symbols "A/C," or payable to the Bank
as trustee, or as an agent, for Casville Enterprises, Inc., with the latter being the ultimate
beneficiary. That ambiguity is to be taken contra proferentem that is, construed
against NELL who caused the ambiguity and could have also avoided it by the
exercise of a little more care. Thus, Article 1377 of the Civil Code, provides:

Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity.

2) Contrary to the finding of respondent Appellate Court, the subject check was, initially,
not non-negotiable (NEGOTIABLE ORIGINALLY). Neither was it a crossed check. The
rubber-stamping transversall on the face of the subject check of the words
"Non-negotiable for Payee's Account Only" between two (2) parallel lines, and
"Non-negotiable, Teller- No. 4, August 17, 1976," separately boxed, was made only by
the Bank teller in accordance with customary bank practice, and not by NELL as the
drawer of the check, and simply meant that thereafter the same check could no longer
be negotiated.

3) NELL's own acts and omissions in connection with the drawing, issuance and delivery
of the 16 August 1976 check, Exhibit "E-l," and its implicit trust in Casals, were the
proximate cause of its own defraudation: (a) The original check of 5 August 1976, Exhibit
"2," was payable to the order solely of "Equitable Banking Corporation." NELL
changed the payee in the subject check, Exhibit "E", however, to "Equitable Banking
Corporation, A/C of Casville Enterprises Inc.," upon Casals request. NELL also
eliminated both the cash disbursement voucher accompanying the check which read:

Payment for marginal deposit and other expense re opening of L/C for account of Casville
Enterprises.

and the memorandum:

a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada
Property to be used as security for trust receipt for opening L/C of Garrett Skidders in
favor of the Edward Ashville J Nell Co.

Evidencing the real nature of the transaction was merely a separate covering letter, dated
16 August 1976, which Casals, sinisterly enough, suppressed from the Bank officials and
teller.

(b) NELL entrusted the subject check and its covering letter, Exhibit "E," to Casals who,
obviously, had his own antagonistic interests to promote. Thus it was that Casals did not
purposely present the subject check to the Executive Vice-President of the Bank,
who was aware of the negotiations regarding the Letter of Credit, and who had
rejected the previous check, Exhibit "2," including its three documents because the
terms and conditions required by the Bank for the opening of the Letter of Credit had not
yet been agreed on.

(c) NELL was extremely accommodating to Casals. Thus, to facilitate the sales
transaction, NELL even advanced the marginal deposit for the garrett skidder. It is, indeed,
abnormal for the seller of goods, the price of which is to be covered by a letter of credit,
to advance the marginal deposit for the same.

(d) NELL had received three (3) postdated checks all dated 16 November, 1976 from
Casvine to secure the subject check and had accepted the deposit with it of two (2) titles
of real properties as collateral for said postdated checks. Thus, NELL was erroneously
confident that its interests were sufficiently protected. Never had it suspected that
those postdated checks would be dishonored, nor that the subject check would be utilized
by Casals for a purpose other than for opening the letter of credit.

In the last analysis, it was NELL's own acts, which put it into the power of Casals and
Casville Enterprises to perpetuate the fraud against it and, consequently, it must bear the
loss (Blondeau, et al., vs. Nano, et al., 61 Phil. 625 [1935]; Sta. Maria vs. Hongkong and
Shanghai Banking Corporation, 89 Phil. 780 [1951]; Republic of the Philippines vs.
Equitable Banking Corporation, L-15895, January 30,1964, 10 SCRA 8).

... As between two innocent persons, one of whom must suffer the consequence of a
breach of trust, the one who made it possible by his act of confidence must bear the loss.

WHEREFORE, the Petition is granted and the Decision of respondent Appellate Court,
dated 4 October 1985, and its majority Resolution, dated 28 April 1986, denying
petitioner's Motion for Reconsideration, are hereby SET ASIDE. The Decision of the then
Court of First Instance of Rizal, Branch XI. is modified in that petitioner Equitable Banking
Corporation is absolved from any and all liabilities to the private respondent, Edward J.
Nell Company, and the Amended Complaint against petitioner bank is hereby ordered
dismissed. No costs.

SO ORDERED.

Yap, C.J., Paras and Sarmiento, J.J., concur.

Padilla, J., took no part.

Footnotes

1 Penned by, Justice Crisolito Pascual and concurred in by Justices Jose C. Campos, Jr.,
Serafin Ashville E Camilon, and Desiderio P. Jurado.

2 With Justice Desiderio P. Jurado, dissenting

3 Section 8. ...

Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.

SECTION 9

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.

DECISION

REYES, R.T., J.:

WHEN the payee of the check is not intended to be the true recipient of its proceeds, is
it payable to order or bearer? What is the fictitious-payee rule and who is liable under it?
Is there any exception?

These questions seek answers in this petition for review on certiorari of the Amended
Decision1 of the Court of Appeals (CA) which affirmed with modification that of the
Regional Trial Court (RTC).2

The Facts

The facts as borne by the records are as follows:

Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine
National Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained savings and
demand/checking accounts, namely, PNBig Demand Deposits (Checking/Current
Account No. 810624-6 under the account name Erlando and/or Norma Rodriguez), and
PNBigPHILIPPINE NATIONAL BANK Demand Deposit (Checking/Current Account No.
810480-4 under the account name Erlando T. Rodriguez).

The spouses were engaged in the informal lending business. In line with their business,
they had a discounting3 arrangement with the Philnabank Employees Savings and
Loan Association (PEMSLA), an association of PNB employees. Naturally, PEMSLA
was likewise a client of PNB Amelia Avenue Branch. The association maintained
current and savings accounts with petitioner bank.

PEMSLA regularly granted loans to its members. Spouses Rodriguez would

rediscount the postdated checks issued to members whenever the association
was short of funds. As was customary, the spouses would replace the postdated
checks with their own checks issued in the name of the members.

It was PEMSLA’s policy not to approve applications for loans of members with
outstanding debts. To subvert this policy, some PEMSLA officers devised a scheme to
obtain additional loans despite their outstanding loan accounts. They took out loans in
the names of unknowing members, without the knowledge or consent of the
latter. The PEMSLA checks issued for these loans were then given to the
spouses for rediscounting. The officers carried this out by forging the indorsement of
the named payees in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the name of
the members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on
the other hand, were deposited by the spouses to their account.

Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings
account without any indorsement from the named payees. This was an irregular
procedure made possible through the facilitation of Edmundo Palermo, Jr.,
treasurer of PEMSLA and bank teller in the PNB Branch. It appears that this
became the usual practice for the parties.

For the period November 1998 to February 1999, the spouses issued sixty nine (69)
checks, in the total amount of P2,345,804.00. These were payable to forty seven (47)
individual payees who were all members of PEMSLA.4

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to
this scheme, PNB closed the current account of PEMSLA. As a result, the PEMSLA
checks deposited by the spouses were returned or dishonored for the reason
"Account Closed." The corresponding Rodriguez checks, however, were
deposited as usual to the PEMSLA savings account. The amounts were duly
debited from the Rodriguez account. Thus, because the PEMSLA checks given as
payment were returned, spouses Rodriguez incurred losses from the rediscounting
transactions.

RTC Disposition

Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil
complaint for damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers
(MCP), and petitioner PNB. They sought to recover the value of their checks that were
deposited to the PEMSLA savings account amounting to P2,345,804.00. The spouses
contended that because PNB credited the checks to the PEMSLA account even without
indorsements, PNB violated its contractual obligation to them as depositors. PNB
paid the wrong payees, hence, it should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB
argued that the claim for damages should come from the payees of the checks,
and not from spouses Rodriguez. Since there was no demand from the said payees, the
obligation should be considered as discharged.

In an Order dated January 12, 2000, the RTC denied PNB’s motion to dismiss.

In its Answer,5 PNB claimed it is not liable for the checks which it paid to the PEMSLA
account without any indorsement from the payees. The bank contended that spouses
Rodriguez, the makers, actually did not intend for the named payees to receive the
proceeds of the checks. Consequently, the payees were considered as "fictitious
payees" as defined under the Negotiable Instruments Law (NIL). Being checks made
to fictitious payees which are bearer instruments, the checks were negotiable
by mere delivery. PNB’s Answer included its cross-claim against its co-defendants
PEMSLA and the MCP, praying that in the event that judgment is rendered against the
bank, the cross-defendants should be ordered to reimburse PNB the amount it shall pay.

After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled
that PNB (defendant) is liable to return the value of the checks. All counterclaims and
cross-claims were dismissed. The dispositive portion of the RTC decision reads:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows:

1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00
or reinstate or restore the amount of P775,337.00 in the PNBig Demand Deposit
Checking/Current Account No. 810480-4 of Erlando T. Rodriguez, and the amount
of P1,570,467.00 in the PNBig Demand Deposit, Checking/Current Account No.
810624-6 of Erlando T. Rodriguez and/or Norma Rodriguez, plus legal rate of interest
thereon to be computed from the filing of this complaint until fully paid;

2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable
amount of damages suffered by them taking into consideration the standing of the
plaintiffs being sugarcane planters, realtors, residential subdivision owners, and other
businesses:

(a) Consequential damages, unearned income in the amount of P4,000,000.00, as a

result of their having incurred great dificulty (sic) especially in the residential subdivision
business, which was not pushed through and the contractor even threatened to file a
case against the plaintiffs;

(b) Moral damages in the amount of P1,000,000.00;

(c) Exemplary damages in the amount of P500,000.00;

(d) Attorney’s fees in the amount of P150,000.00 considering that this case does not
involve very complicated issues; and for the

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed.6

CA Disposition

PNB appealed the decision of the trial court to the CA on the principal ground that the
disputed checks should be considered as payable to bearer and not to order.

In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC disposition.
The CA concluded that the checks were obviously meant by the spouses to be really paid
to PEMSLA. The court a quo declared:

We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez)

that their cause of action arose from the alleged breach of contract by the
defendant-appellant (PNB) when it paid the value of the checks to PEMSLA despite the
checks being payable to order. Rather, we are more convinced by the strong and
credible evidence for the defendant-appellant with regard to the plaintiffs-appellees’
and PEMSLA’s business arrangement – that the value of the rediscounted checks of
the plaintiffs-appellees would be deposited in PEMSLA’s account for payment of the
loans it has approved in exchange for PEMSLA’s checks with the full value of the said
loans. This is the only obvious explanation as to why all the disputed sixty-nine (69)
checks were in the possession of PEMSLA’s errand boy for presentment to the
defendant-appellant that led to this present controversy. It also appears that the
teller who accepted the said checks was PEMSLA’s officer, and that such was a
regular practice by the parties until the defendant-appellant discovered the scam.
The logical conclusion, therefore, is that the checks were never meant to be paid to
order, but instead, to PEMSLA. We thus find no breach of contract on the part of
the defendant-appellant.

According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA allegedly issued

post-dated checks to its qualified members who had applied for loans. However,
because of PEMSLA’s insufficiency of funds, PEMSLA approached the plaintiffs-appellees
for the latter to issue rediscounted checks in favor of said applicant members. Based on
the investigation of the defendant-appellant, meanwhile, this arrangement allowed the
plaintiffs-appellees to make a profit by issuing rediscounted checks, while the officers of
PEMSLA and other members would be able to claim their loans, despite the fact that
they were disqualified for one reason or another. They were able to achieve this
conspiracy by using other members who had loaned lesser amounts of money or
had not applied at all. x x x.8 (Emphasis added)

The CA found that the checks were bearer instruments, thus they do not require
indorsement for negotiation; and that spouses Rodriguez and PEMSLA conspired with
each other to accomplish this money-making scheme. The payees in the checks were
"fictitious payees" because they were not the intended payees at all.

The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the
checks on their faces were unquestionably payable to order; and that PNB
committed a breach of contract when it paid the value of the checks to PEMSLA without
indorsement from the payees. They also argued that their cause of action is not only
against PEMSLA but also against PNB to recover the value of the checks.

On October 11, 2005, the CA reversed itself via an Amended Decision, the last
paragraph and fallo of which read:
In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps.
Rodriguez for the following:

1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14
May 1999 until fully paid;

2. Moral damages in the amount of P200,000;

3. Attorney’s fees in the amount of P100,000; and

4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us

AFFIRMING WITH MODIFICATION the assailed decision rendered in Civil Case No.
99-10892, as set forth in the immediately next preceding paragraph hereof, and
SETTING ASIDE Our original decision promulgated in this case on 22 July 2004.

SO ORDERED.9

The CA ruled that the checks were payable to order. According to the appellate court,
PNB failed to present sufficient proof to defeat the claim of the spouses
Rodriguez that they really intended the checks to be received by the specified
payees. Thus, PNB is liable for the value of the checks which it paid to PEMSLA
without indorsements from the named payees. The award for damages was deemed
appropriate in view of the failure of PNB to treat the Rodriguez account with the
highest degree of care considering the fiduciary nature of their relationship,
which constrained respondents to seek legal action.

Hence, the present recourse under Rule 45.

Issues

The issues may be compressed to whether the subject checks are payable to order
or to bearer and who bears the loss?

PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did
not intend for the named payees to receive the proceeds. Thus, they are bearer
instruments that could be validly negotiated by mere delivery. Further, testimonial and
documentary evidence presented during trial amply proved that spouses Rodriguez
and the officers of PEMSLA conspired with each other to defraud the bank.

Our Ruling

Prefatorily, amendment of decisions is more acceptable than an erroneous judgment

attaining finality to the prejudice of innocent parties. A court discovering an erroneous
judgment before it becomes final may, motu proprio or upon motion of the parties,
correct its judgment with the singular objective of achieving justice for the litigants.10

However, a word of caution to lower courts, the CA in Cebu in this particular case, is in
order. The Court does not sanction careless disposition of cases by courts of justice. The
highest degree of diligence must go into the study of every controversy submitted for
decision by litigants. Every issue and factual detail must be closely scrutinized and
analyzed, and all the applicable laws judiciously studied, before the promulgation of
every judgment by the court. Only in this manner will errors in judgments be avoided.
Now to the core of the petition.

As a rule, when the payee is fictitious or not intended to be the true recipient of
the proceeds, the check is considered as a bearer instrument. A check is "a bill of
exchange drawn on a bank payable on demand."11 It is either an order or a bearer
instrument. Sections 8 and 9 of the NIL states:

SEC. 8. When payable to order. – The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or his order. It may be drawn payable
to the order of –

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.

SEC. 9. When payable to bearer. – The instrument is payable to bearer –

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

(c) When it is payable to the order of a fictitious or non-existing person, and such fact is
known to the person making it so payable; or

(d) When the name of the payee does not purport to be the name of any person; or

(e) Where the only or last indorsement is an indorsement in blank.12 (Underscoring

supplied)

The distinction between bearer and order instruments lies in their manner of negotiation.
Under Section 30 of the NIL, an order instrument requires an indorsement from
the payee or holder before it may be validly negotiated. A bearer instrument,
on the other hand, does not require an indorsement to be validly negotiated. It
is negotiable by mere delivery. The provision reads:

SEC. 30. What constitutes negotiation. – An instrument is negotiated when it is

transferred from one person to another in such manner as to constitute the transferee
the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order,
it is negotiated by the indorsement of the holder completed by delivery.

A check that is payable to a specified payee is an order instrument. However, under

Section 9(c) of the NIL, a check payable to a specified payee may nevertheless
be considered as a bearer instrument if it is payable to the order of a fictitious or
non-existing person, and such fact is known to the person making it so payable. Thus,
checks issued to "Prinsipe Abante" or "Si Malakas at si Maganda," who are well-known
characters in Philippine mythology, are bearer instruments because the named payees
are fictitious and non-existent.

We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL.
It is for this reason that We look elsewhere for guidance. Court rulings in the United
States are a logical starting point since our law on negotiable instruments was directly
lifted from the Uniform Negotiable Instruments Law of the United States.13

A review of US jurisprudence yields that an actual, existing, and living payee may
also be "fictitious" if the maker of the check did not intend for the payee to in
fact receive the proceeds of the check. This usually occurs when the maker places
a name of an existing payee on the check for convenience or to cover up an
illegal activity.14 Thus, a check made expressly payable to a non-fictitious and existing
person is not necessarily an order instrument. If the payee is not the intended
recipient of the proceeds of the check, the payee is considered a "fictitious" payee
and the check is a bearer instrument.

In a fictitious-payee situation, the drawee bank is absolved from liability and the
drawer bears the loss. When faced with a check payable to a fictitious payee, it is
treated as a bearer instrument that can be negotiated by delivery. The underlying theory
is that one cannot expect a fictitious payee to negotiate the check by placing his
indorsement thereon. And since the maker knew this limitation, he must have
intended for the instrument to be negotiated by mere delivery. Thus, in case of
controversy, the drawer of the check will bear the loss. This rule is justified for otherwise,
it will be most convenient for the maker who desires to escape payment of the check to
always deny the validity of the indorsement. This despite the fact that the fictitious
payee was purposely named without any intention that the payee should receive the
proceeds of the check.15

The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance
Bank.16 In the said case, the corporation Mueller & Martin was defrauded by George L.
Martin, one of its authorized signatories. Martin drew seven checks payable to the
German Savings Fund Company Building Association (GSFCBA) amounting to $2,972.50
against the account of the corporation without authority from the latter. Martin was also
an officer of the GSFCBA but did not have signing authority. At the back of the checks,
Martin placed the rubber stamp of the GSFCBA and signed his own name as indorsement.
He then successfully drew the funds from Liberty Insurance Bank for his own personal
profit. When the corporation filed an action against the bank to recover the amount of
the checks, the claim was denied.

The US Supreme Court held in Mueller that when the person making the check so
payable did not intend for the specified payee to have any part in the transactions, the
payee is considered as a fictitious payee. The check is then considered as a bearer
instrument to be validly negotiated by mere delivery. Thus, the US Supreme Court held
that Liberty Insurance Bank, as drawee, was authorized to make payment to the bearer
of the check, regardless of whether prior indorsements were genuine or not.17

The more recent Getty Petroleum Corp. v. American Express Travel Related Services
Company, Inc.18 upheld the fictitious-payee rule. The rule protects the depositary bank
and assigns the loss to the drawer of the check who was in a better position to prevent
the loss in the first place. Due care is not even required from the drawee or depositary
bank in accepting and paying the checks. The effect is that a showing of negligence on
the part of the depositary bank will not defeat the protection that is derived from this
rule.

However, there is a commercial bad faith exception to the fictitious-payee rule. A

showing of commercial bad faith on the part of the drawee bank, or any transferee of the
check for that matter, will work to strip it of this defense. The exception will cause it to
bear the loss. Commercial bad faith is present if the transferee of the check acts
dishonestly, and is a party to the fraudulent scheme. Said the US Supreme Court in
Getty:

Consequently, a transferee’s lapse of wary vigilance, disregard of suspicious

circumstances which might have well induced a prudent banker to investigate and other
permutations of negligence are not relevant considerations under Section 3-405 x x x.
Rather, there is a "commercial bad faith" exception to UCC 3-405, applicable when the
transferee "acts dishonestly – where it has actual knowledge of facts and circumstances
that amount to bad faith, thus itself becoming a participant in a fraudulent scheme. x x
x Such a test finds support in the text of the Code, which omits a standard of care
requirement from UCC 3-405 but imposes on all parties an obligation to act with
"honesty in fact." x x x19 (Emphasis added)

Getty also laid the principle that the fictitious-payee rule extends protection even to
non-bank transferees of the checks.

In the case under review, the Rodriguez checks were payable to specified payees. It is
unrefuted that the 69 checks were payable to specific persons. Likewise, it is
uncontroverted that the payees were actual, existing, and living persons who were
members of PEMSLA that had a rediscounting arrangement with spouses Rodriguez.

What remains to be determined is if the payees, though existing persons, were

"fictitious" in its broader context.

For the fictitious-payee rule to be available as a defense, PNB must show that the
makers did not intend for the named payees to be part of the transaction
involving the checks. At most, the bank’s thesis shows that the payees did not have
knowledge of the existence of the checks. This lack of knowledge on the part of the
payees, however, was not tantamount to a lack of intention on the part of
respondents-spouses that the payees would not receive the checks’ proceeds.
Considering that respondents-spouses were transacting with PEMSLA and not the
individual payees, it is understandable that they relied on the information given by
the officers of PEMSLA that the payees would be receiving the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by
both lower courts, PNB failed to present sufficient evidence to defeat the claim of
respondents-spouses that the named payees were the intended recipients of
the checks’ proceeds. The bank failed to satisfy a requisite condition of a
fictitious-payee situation – that the maker of the check intended for the payee to
have no interest in the transaction.

Because of a failure to show that the payees were "fictitious" in its broader sense, the
fictitious-payee rule does not apply. Thus, the checks are to be deemed payable to
order. Consequently, the drawee bank bears the loss.20

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller
or tellers accepted the 69 checks for deposit to the PEMSLA account even without any
indorsement from the named payees. It bears stressing that order instruments can
only be negotiated with a valid indorsement.

A bank that regularly processes checks that are neither payable to the
customer nor duly indorsed by the payee is apparently grossly negligent in its
operations.21 This Court has recognized the unique public interest possessed by the
banking industry and the need for the people to have full trust and confidence in their
banks.22 For this reason, banks are minded to treat their customer’s accounts with
utmost care, confidence, and honesty.23

In a checking transaction, the drawee bank has the duty to verify the genuineness of the
signature of the drawer and to pay the check strictly in accordance with the drawer’s
instructions, i.e., to the named payee in the check. It should charge to the drawer’s
accounts only the payables authorized by the latter. Otherwise, the drawee will be
violating the instructions of the drawer and it shall be liable for the amount charged to
the drawer’s account.24

In the case at bar, respondents-spouses were the bank’s depositors. The checks were
drawn against respondents-spouses’ accounts. PNB, as the drawee bank, had the
responsibility to ascertain the regularity of the indorsements, and the genuineness of
the signatures on the checks before accepting them for deposit. Lastly, PNB was
obligated to pay the checks in strict accordance with the instructions of the drawers.
Petitioner miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a representative of PEMSLA absent any
type of indorsement, forged or otherwise. The facts clearly show that the bank did not
pay the checks in strict accordance with the instructions of the drawers,
respondents-spouses. Instead, it paid the values of the checks not to the named
payees or their order, but to PEMSLA, a third party to the transaction between the
drawers and the payees.alf-ITC

Moreover, PNB was negligent in the selection and supervision of its employees.
The trustworthiness of bank employees is indispensable to maintain the stability of the
banking industry. Thus, banks are enjoined to be extra vigilant in the management and
supervision of their employees. In Bank of the Philippine Islands v. Court of
Appeals,25 this Court cautioned thus:

Banks handle daily transactions involving millions of pesos. By the very nature of their
work the degree of responsibility, care and trustworthiness expected of their employees
and officials is far greater than those of ordinary clerks and employees. For obvious
reasons, the banks are expected to exercise the highest degree of diligence in the
selection and supervision of their employees.26

PNB’s tellers and officers, in violation of banking rules of procedure, permitted the
invalid deposits of checks to the PEMSLA account. Indeed, when it is the gross
negligence of the bank employees that caused the loss, the bank should be
held liable.27

PNB’s argument that there is no loss to compensate since no demand for

payment has been made by the payees must also fail. Damage was caused to
respondents-spouses when the PEMSLA checks they deposited were returned for the
reason "Account Closed." These PEMSLA checks were the corresponding payments to
the Rodriguez checks. Since they could not encash the PEMSLA checks,
respondents-spouses were unable to collect payments for the amounts they had
advanced.
A bank that has been remiss in its duty must suffer the consequences of its negligence.
Being issued to named payees, PNB was duty-bound by law and by banking rules and
procedure to require that the checks be properly indorsed before accepting them for
deposit and payment. In fine, PNB should be held liable for the amounts of the checks.

One Last Note

We note that the RTC failed to thresh out the merits of PNB’s cross-claim against its
co-defendants PEMSLA and MPC. The records are bereft of any pleading filed by these
two defendants in answer to the complaint of respondents-spouses and cross-claim of
PNB. The Rules expressly provide that failure to file an answer is a ground for a
declaration that defendant is in default.28 Yet, the RTC failed to sanction the failure of
both PEMSLA and MPC to file responsive pleadings. Verily, the RTC dismissal of PNB’s
cross-claim has no basis. Thus, this judgment shall be without prejudice to
whatever action the bank might take against its co-defendants in the trial
court.

To PNB’s credit, it became involved in the controversial transaction not of its own volition
but due to the actions of some of its employees. Considering that moral damages must
be understood to be in concept of grants, not punitive or corrective in nature, We resolve
to reduce the award of moral damages to P50,000.00.29

WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION

that the award for moral damages is reduced to P50,000.00, and that this is without
prejudice to whatever civil, criminal, or administrative action PNB might take against
PEMSLA, MPC, and the employees involved.

SO ORDERED.

RUBEN T. REYES
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA
MINITA V. CHICO-NAZARIO
AUSTRIA-MARTINEZ
Associate Justice
Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Court’s Division.
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairpersonp

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s
Attestation, I certify that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the Court’s
Division.

REYNATO S. PUNO
Chief Justice

Ang Tek Lian vs. CA

Ang Tek Lian vs. Court of Appeals

L-2516 September, 1950
Bengzon, J.:

Facts:
Ang Tek Lian knowing that he had no funds therefor, drew a check upon
China Banking Corporation payable to the order of “cash”. He delivered it toLee Hua
Hong in exchange for money. The check was presented by Lee Hua hong to the
drawee bank for payment, but it w3as dishonored for insufficiency of funds. With this,
Ang Tek Lian was convicted of estafa.

Issue:
Whether or not the check issued by Ang Tek Lian that is payable to the order
to “cash” and not have been indorsed by Ang Tek Lian, making him not guilty for the
crime of estafa.

Held:
No.Under Sec. 9 of NIL a check drawn payable to the order of “cash” is a
check payable to bearer and the bank may pay it to the person presenting it for
payment without the drawer’s indorsement. However, if the bank is not sure of the
bearer’s identity or financial solvency, it has the right to demand identification or
assurance against possible complication, such as forgery of drawer’s signature, loss of
the check by the rightful owner, raising of the amount payable, etc. But where the
bank is satisfied of the identity or economic standing of the bearer who tenders the
check for collection, it will pay the instrument without further question; and it would
incur no liability to the drawer in thus acting.
 ANG TEK LIAN V. CA
87 PHIL 383

FACTS:
Knowing he had insufficient funds, Ang Tek Lian issued a check for P4000,
payable to cash. This was given to Lee Hua Hong in exchange for cash. Upon pre
sentment of the check, it was dishonored for having insufficient funds. It is argued that the
check, being payable to cash, wasn’t indorsed by the defendant, and thus, isn’t guilty of the crime
charged.

HELD:
A check drawn to the order of “cash” is payable to bearer, and the bank
may pay it to the person presenting it for payment without the drawer’s
indorsement. Of course, if the bank is not sure of the bearer’s identity or
financial solvency, it has the right to demand for identification and/or
assurance against possible complications—for instance, forgery of the
drawer’s signature, loss of the check by the rightful owner, raising the amount payable,
etc. The bank therefore, requires for its protection that
the indorsement of the drawer—or some other persons known to it—be
obtained. A check payable to bearer is authority for payment to the holder. Where a
check is in the ordinary form and is payable to bearer so
that no indorsement is required, a bank to which it is presented for payment need not
have the holder identified, and is not negligent in failing to do so.

SECTION 9

G.R. No. L-2516 September 25, 1950

ANG TEK LIAN, petitioner,

vs.
THE COURT OF APPEALS, respondent.

Laurel, Sabido, Almario and Laurel for petitioner.

Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel
Tomacruz for respondent.

BENGZON, J.:

For having issued a rubber check, Ang Tek Lian was convicted of estafa in the
Court of First Instance of Manila. The Court of Appeals affirmed the verdict.

It appears that, knowing he had no funds therefor, Ang Tek Lian drew on
Saturday, November 16, 1946, the check Exhibits A upon the China Banking
Corporation for the sum of P4,000, payable to the order of "cash". He
delivered it to Lee Hua Hong in exchange for money which the latter handed
in act. On November 18, 1946, the next business day, the check was
presented by Lee Hua Hong to the drawee bank for payment, but it was
dishonored for insufficiency of funds, the balance of the deposit of Ang Tek
Lian on both dates being P335 only.

The Court of Appeals believed the version of Lee Huan Hong who testified that
"on November 16, 1946, appellant went to his (complainant's) office, at 1217
Herran, Paco, Manila, and asked him to exchange Exhibit A — which he
(appellant) then brought with him — with cash alleging that he needed badly the
sum of P4,000 represented by the check, but could not withdraw it from the
bank, it being then already closed; that in view of this request and relying upon
appellant's assurance that he had sufficient funds in the blank to meet Exhibit A,
and because they used to borrow money from each other, even before the war,
and appellant owns a hotel and restaurant known as the North Bay Hotel, said
complainant delivered to him, on the same date, the sum of P4,000 in cash; that
despite repeated efforts to notify him that the check had been dishonored by the
bank, appellant could not be located any-where, until he was summoned in
the City Fiscal's Office in view of the complaint for estafa filed in
connection therewith; and that appellant has not paid as yet the amount of the
check, or any part thereof."

Inasmuch as the findings of fact of the Court of Appeals are final, the only
question of law for decision is whether under the facts found, estafa had been
accomplished.

Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes
swindling committed "By post dating a check, or issuing such check in payment
of an obligation the offender knowing that at the time he had no funds in the
bank, or the funds deposited by him in the bank were not sufficient to cover the
amount of the check, and without informing the payee of such circumstances".

We believe that under this provision of law Ang Tek Lian was properly held liable.
In this connection, it must be stated that, as explained in People vs.
Fernandez (59 Phil., 615), estafa is committed by issuing either a postdated
check or an ordinary check to accomplish the deceit.

It is argued, however, that as the check had been made payable to "cash"
and had not been endorsed by Ang Tek Lian, the defendant is not guilty
of the offense charged. Based on the proposition that "by uniform practice of
all banks in the Philippines a check so drawn is invariably dishonored," the
following line of reasoning is advanced in support of the argument:

. . . When, therefore, he (the offended party ) accepted the check (Exhibit A)

from the appellant, he did so with full knowledge that it would be
dishonored upon presentment. In that sense, the appellant could not be
said to have acted fraudulently because the complainant, in so accepting the
check as it was drawn, must be considered, by every rational consideration, to
have done so fully aware of the risk he was running thereby." (Brief for the
appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have
undoubtedly occurred wherein the Bank required the indorsement of the drawer
before honoring a check payable to "cash." But cases there are too, where no
such requirement had been made . It depends upon the circumstances of each
transaction.

Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the
order of is a check payable to bearer, and the bank may pay it to the person
presenting it for payment without the drawer's indorsement.

A check payable to the order of cash is a bearer instrument.

Bacal vs. National City Bank of New York (1933), 146 Misc., 732; 262 N. Y. S.,
839; Cleary vs. De Beck Plate Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831;
Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex.
Civ. App., 1939), 135 S. W. (2d), 818. See also H. Cook & Son vs. Moody
(1916), 17 Ga. App., 465; 87 S. E., 713.

Where a check is made payable to the order of "cash", the word cash "does
not purport to be the name of any person", and hence the instrument is
payable to bearer. The drawee bank need not obtain any indorsement of
the check, but may pay it to the person presenting it without any
indorsement. . . . (Zollmann, Banks and Banking, Permanent Edition, Vol. 6, p.
494.)

Of course, if the bank is not sure of the bearer's identity or financial solvency, it
has the right to demand identification and /or assurance against possible
complications, — for instance, (a) forgery of drawer's signature, (b) loss of the
check by the rightful owner, (c) raising of the amount payable, etc. The bank
may therefore require, for its protection, that the indorsement of the drawer —
or of some other person known to it — be obtained. But where the Bank is
satisfied of the identity and /or the economic standing of the bearer
who tenders the check for collection, it will pay the instrument without further
question; and it would incur no liability to the drawer in thus acting.

A check payable to bearer is authority for payment to holder. Where a check is

in the ordinary form, and is payable to bearer, so that no indorsement is
required, a bank, to which it is presented for payment, need not have the holder
identified, and is not negligent in falling to do so. . . . (Michie on Banks and
Banking, Permanent Edition, Vol. 5, p. 343.)

. . . Consequently, a drawee bank to which a bearer check is presented for

payment need not necessarily have the holder identified and ordinarily may not
be charged with negligence in failing to do so. See Opinions 6C:2 and 6C:3 If the
bank has no reasonable cause for suspecting any irregularity, it will be
protected in paying a bearer check, "no matter what facts unknown to it may
have occurred prior to the presentment." 1 Morse, Banks and Banking, sec. 393.

Although a bank is entitled to pay the amount of a bearer check without further
inquiry, it is entirely reasonable for the bank to insist that holder give
satisfactory proof of his identity. . . . (Paton's Digest, Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check Exhibit A
was totally unconnected with its dishonor. The Court of Appeals declared
that it was returned unsatisfied because the drawer had insufficient
funds — not because the drawer's indorsement was lacking.

Wherefore, there being no question as to the correctness of the penalty imposed

on the appellant, the writ of certiorari is denied and the decision of the Court of
Appeals is hereby affirmed, with costs.

Moran, C. J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.

Section 10

JIMENEZ V. BUCOY
103 PHIL 40

FACTS:
In the intestate of the estate of spouses Young, Jimenez presents a
promissory note signed by Pacita Young for different amounts totaling
P21,000. The administrator is willing to pay the promissory note on the premise that
the amount be adjusted. Claimant assails the adjustment and
hence, she instituted a case for collection of sum of money.

*Note: “6 months after the war”

HELD:
The administrator calls attention to the fact that the notes contained no
express promise to pay for a certain amount. This is without merit. An
acknowledge may become a promise to pay by the addition of words by
which a promise of payment is naturally implied, such as “payable”,
“payable” on a given date, “payable on demand”, “paid…when called for”.

To constitute a good promissory note, no precise words of contract are necessary,

provided they amount, in legal effect, a promise to pay.

Republic of the Philippines

SUPREME COURT
Manila
 EN BANC

G.R. No. L-10221 February 28, 1958

Intestate of Luther Young and Pacita Young, spouses. PACIFICA

JIMENEZ, petitioner-appellee,
vs.
DR. JOSE BUCOY, administrator-appellant.

Frank W. Brady and Pablo C. de Guia, Jr. for appellee.

E. A. Beltran for appellant.

BENGZON, J.:

In this intestate of Luther Young and Pacita Young who died in 1954 and
1952 respectively, Pacifica Jimenez presented for payment four
promissory notes signed by Pacita for different amounts totalling
twenty-one thousand pesos (P21,000).

Acknowledging receipt by Pacita during the Japanese occupation, in the

currency then prevailing, the administrator manifested willingness to
pay provided adjustment of the sums be made in line with the
Ballantyne schedule.

The claimant objected to the adjustment insisting on full payment in

accordance with the notes.

Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales,
Judge, held that the notes should be paid in the currency prevailing after
the war, and that consequently plaintiff was entitled to recover P21,000 plus
attorneys fees for the sum of P2,000.

Hence this appeal.

Executed in the month of August 1944, the first promissory note read as
follows:

Received from Miss Pacifica Jimenez the total amount of P10,000) ten thousand
pesos payable six months after the war, without interest.

The other three notes were couched in the same terms, except as to amounts
and dates.

There can be no serious question that the notes were promises to pay "six
months after the war," the amounts mentioned.

But the important question, which obviously compelled the administrator to

appeal, is whether the amounts should be paid, peso for peso, or
whether a reduction should be made in accordance with the
well-known Ballantyne schedule.
This matter of payment of loans contracted during the Japanese occupation has
received our attention in many litigations after the liberation. The gist of our
adjudications, in so far as material here, is that if the loan should be paid during
the Japanese occupation, the Ballantyne schedule should apply with
corresponding reduction of the amount.1 However, if the loan was expressly
agreed to be payable only after the war or after liberation, or became payable after
those dates, no reduction could be effected, and peso-for-peso payment shall be
ordered in Philippine currency.2

The Ballantyne Conversion Table does not apply where the monetary obligation, under
the contract, was not payable during the Japanese occupation but until after one year
counted for the date of ratification of the Treaty of Peace concluding the Greater East Asia
War. (Arellano vs. De Domingo, 101 Phil., 902.)

When a monetary obligation is contracted during the Japanese occupation, to be

discharged after the war, the payment should be made in Philippine Currency. (Kare et
al. vs. Imperial et al., 102 Phil., 173.)

Now then, as in the case before us, the debtor undertook to pay "six months after the
war," peso for peso payment is indicated.

The Ang Lam3 case cited by appellant is not controlling, because the loan therein given
could have been repaid during the Japanese occupation. Dated December 26, 1944,
it was payable within one year. Payment could therefore have been made during January
1945. The notes here in question were payable only after the war.

The appellant administrator calls attention to the fact that the notes contained no express
promise to pay a specified amount. We declare the point to be without merit. In
accordance with doctrines on the matter, the note herein-above quoted amounted in
effect to "a promise to pay ten thousand pesos six months after the war, without
interest." And so of the other notes.

"An acknowledgment may become a promise by the addition of words by which a promise
of payment is naturally implied, such as, "payable," "payable" on a given day, "payable on
demand," "paid . . . when called for," . . . (10 Corpus Juris Secundum p. 523.)

"To constitute a good promissory note, no precise words of contract are necessary,
provided they amount, in legal effect, to a promise to pay. In other words, if over and
above the mere acknowledgment of the debt there may be collected from the words
used a promise to pay it, the instrument may be regarded as a promissory note. 1
Daniel, Neg. Inst. sec. 36 et seq.; Byles, Bills, 10, 11, and cases cited . . . "Due A. B. $325,
payable on demand," or, "I acknowledge myself to be indebted to A in $109, to be paid on
demand, for value received," or, "I O. U. $85 to be paid on May 5th," are held to be
promissory notes, significance being given to words of payment as indicating a promise to
pay." 1 Daniel Neg. Inst. see. 39, and cases cited. (Cowan vs. Hallack, (Colo.) 13 Pacific
Reporter 700, 703.)

Another argument of appellant is that as the deceased Luther Young did not sign these
notes, his estate is not liable for the same. This defense, however, was not interposed
in the lower court. There the only issue related to the amount to be amount, considering
that the money had been received in Japanese money. It is now unfair to put up this new
defense, because had it been raised in the court below, appellees could have proved,
what they now alleged that Pacita contracted the obligation to support and maintain
herself, her son and her husband (then concentrated at Santo Tomas University) during
the hard days of the occupation.

It is now settled practice that on appeal a change of theory is not permitted.

In order that a question may be raised on appeal, it is essential that it be within the
issues made by the parties in their pleadings. Consequently, when a party deliberately
adopts a certain theory, and the case is tried and decided upon that theory in the
court below, he will not be permitted to change his theory on appeal because, to
permit him to do so, would be unfair to the adverse party. (Rules of Court by Moran-1957
Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38 Phil., 424; American Express
Company vs. Natividad, 46 Phil., 207; San Agustin vs. Barrios, 68 Phil., 475, 480;
Toribio vs. Dacasa, 55 Phil., 461.)

Appellant's last assignment of error concerns attorneys fees. He says there was no
reason for making this and exception to the general rule that attorney's fees are not
recoverable in the absence of stipulation.

Under the new Civil Code, attorney's fees and expenses of litigation new be awarded in
this case if defendant acted in gross and evident bad faith in refusing to satisfy plaintiff's
plainly valid, just and demandable claim" or "where the court deems it just and equitable
that attorney's fees be recovered" (Article 2208 Civil Code). These are — if applicable —
some of the exceptions to the general rule that in the absence of stipulation no attorney's
fees shall be awarded.

The trial court did not explain why it ordered payment of counsel fees. Needless to say, it
is desirable that the decision should state the reason why such award is made bearing in
mind that it must necessarily rest on an exceptional situation. Unless of course the text of
the decision plainly shows the case to fall into one of the exceptions, for instance "in
actions for legal support," when exemplary damages are awarded," etc. In the case at bar,
defendant could not obviously be held to have acted in gross and evident bad faith." He
did not deny the debt, and merely pleaded for adjustment, invoking decisions he
thought to be controlling. If the trial judge considered it "just and equitable" to require
payment of attorney's fees because the defense — adjustment under Ballantyne schedule
— proved to be untenable in view of this Court's applicable rulings, it would be error to
uphold his view. Otherwise, every time a defendant loses, attorney's fees would follow as
a matter of course. Under the article above cited, even a clearly untenable defense would
be no ground for awarding attorney's fees unless it amounted to "gross and evident bad
faith."

Plaintiff's attorneys attempt to sustain the award on the ground of defendant's refusal to
accept her offer, before the suit, to take P5,000 in full settlement of her claim. We do not
think this is tenable, defendant's attitude being merely a consequence of his line of
defense, which though erroneous does not amount to "gross and evident bad faith." For
one thing, there is a point raised by defendant, which so far as we are informed, has not
been directly passed upon in this jurisdiction: the notes contained no express promise to
pay a definite amount.

There being no circumstance making it reasonable and just to require defendant to pay
attorney's fees, the last assignment of error must be upheld.
Wherefore, in view of the foregoing considerations, the appealed decision is affirmed,
except as to the attorney's fees which are hereby disapproved. So ordered.

Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L. Endencia
and Felix, JJ., concur.

Footnotes

1Asis vs. Agdamag, 90 Phil., 249; Soriano vs. Abalos, 84 Phil., 206; 47 Off. Gaz., 168;
Ang Lam vs. Perigrina, 92 Phil 506.

2Roño vs. Gomez, 83 Phil., 890, 49 Off. Gaz., p. 339; Gomez vs. Tabia, 84 Phil., 269; 47
Off. Gaz., p. 6414; Garcia vs. De los Santos. 93 Phil., 683, 49 Off. Gaz., [ll], 4830;
Arevalo vs. Barretto, 89 Phil., 633.

3 92 Phil., 506.