1. GEORGE A. KAUFFMAN, plaintiff-appellee, vs.

THE PHILIPPINE NATIONAL BANK,

defendant-appellant. G.R. No. 16454           September 29, 1921

At the time of the transaction which gave rise to this litigation the plaintiff, George A. Kauffman,
was the president of a domestic corporation engaged chiefly in the exportation of hemp from the
Philippine Islands and known as the Philippine Fiber and Produce Company, of which company
the plaintiff apparently held in his own right nearly the entire issue of capital stock. On February
5, 1918, the board of directors of said company, declared a dividend of P100,000 from its surplus
earnings for the year 1917, of which the plaintiff was entitled to the sum of P98,000. This amount
was accordingly placed to his credit on the books of the company, and so remained until in
October of the same year when an unsuccessful effort was made to transmit the whole, or a
greater part thereof, to the plaintiff in New York City.

In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the
Philippine Fiber and Produce Company, presented himself in the exchange department of the
Philippine National Bank in Manila and requested that a telegraphic transfer of $45,000 should be
made to the plaintiff in New York City, upon account of the Philippine Fiber and Produce
Company. He was informed that the total cost of said transfer, including exchange and cost of
message, would be P90,355.50. Accordingly, Wicks, as treasurer of the Philippine Fiber and
Produce Company, thereupon drew and delivered a check for that amount on the Philippine
National Bank; and the same was accepted by the officer selling the exchange in payment of the
transfer in question. As evidence of this transaction a document was made out and delivered to
Wicks, which is referred to by the bank's assistant cashier as its official receipt. This
memorandum receipt is in the following language:

October 9th, 1918.

CABLE TRANSFER BOUGHT FROM

            PHILIPPINE NATIONAL BANK,
           Manila, P.I.                       Stamp P18

Foreign             Amount                 Rate

$45,000.            3/8 %             P90,337.50

Payable through Philippine National Bank, New York. To G. A. Kauffman, New York.
Total P90,355.50. Account of Philippine Fiber and Produce Company. Sold to Messrs.
Philippine Fiber and Produce Company, Manila.

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

On the same day the Philippine National Bank dispatched to its New York agency a cablegram to
the following effect:

Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000.
(Sgd.) PHILIPPINE NATIONAL BANK, Manila.

Upon receiving this telegraphic message, the bank's representative in New York sent a cable
message in reply suggesting the advisability of withholding this money from Kauffman, in view of
his reluctance to accept certain bills of the Philippine Fiber and Produce Company. The Philippine
National Bank acquiesced in this and on October 11 dispatched to its New York agency another
message to withhold the Kauffman payment as suggested.

Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to
Kauffman in New York, advising him that $45,000 had been placed to his credit in the New York
agency of the Philippine National Bank; and in response to this advice Kauffman presented
himself at the office of the Philippine National Bank in New York City on October 15, 1918, and
demanded the money. By this time, however, the message from the Philippine National Bank of
October 11, directing the withholding of payment had been received in New York, and payment
was therefore refused.

In view of these facts, the plaintiff Kauffman instituted the present action in the Court of First
Instance of the city of Manila to recover said sum, with interest and costs; and judgment having
been there entered favorably to the plaintiff, the defendant appealed.
Among additional facts pertinent to the case we note the circumstance that at the time of the
transaction above-mentioned, the Philippines Fiber and Produce Company did not have on
deposit in the Philippine National Bank money adequate to pay the check for P90,355.50, which
was delivered in payment of the telegraphic order; but the company did have credit to that
extent, or more, for overdraft in current account, and the check in question was charged as an
overdraft against the Philippine Fiber and Produce Company and has remained on the books of
the bank as an interest-bearing item in the account of said company.

It is furthermore noteworthy that no evidence has been introduced tending to show failure of
consideration with respect to the amount paid for said telegraphic order. It is true that in the
defendant's answer it is suggested that the failure of the bank to pay over the amount of this
remittance to the plaintiff in New York City, pursuant to its agreement, was due to a desire to
protect the bank in its relations with the Philippine Fiber and Produce Company, whose credit
was secured at the bank by warehouse receipts on Philippine products; and it is alleged that
after the exchange in question was sold the bank found that it did not have sufficient to warrant
payment of the remittance. In view, however, of the failure of the bank to substantiate these
allegations, or to offer any other proof showing failure of consideration, it must be assumed that
the obligation of the bank was supported by adequate consideration.

In this court the defense is mainly, if not exclusively, based upon the proposition that, inasmuch
as the plaintiff Kauffman was not a party to the contract with the bank for the transmission of
this credit, no right of action can be vested in him for the breach thereof. "In this situation," —
we here quote the words of the appellant's brief, — "if there exists a cause of action against the
defendant, it would not be in favor of the plaintiff who had taken no part at all in the transaction
nor had entered into any contract with the plaintiff, but in favor of the Philippine Fiber and
Produce Company, the party which contracted in its own name with the defendant."

The question thus placed before us is one purely of law; and at the very threshold of the
discussion it can be stated that the provisions of the Negotiable Instruments Law can come into
operation there must be a document in existence of the character described in section 1 of the
Law; and no rights properly speaking arise in respect to said instrument until it is delivered. In
the case before us there was an order, it is true, transmitted by the defendant bank to its New
York branch, for the payment of a specified sum of money to George A. Kauffman. But this order
was not made payable "to order or "to bearer," as required in subsection (d) of that Act; and
inasmuch as it never left the possession of the bank, or its representative in New York City, there
was no delivery in the sense intended in section 16 of the same Law. In this connection it is
unnecessary to point out that the official receipt delivered by the bank to the purchaser of the
telegraphic order, and already set out above, cannot itself be viewed in the light of a negotiable
instrument, although it affords complete proof of the obligation actually assumed by the bank.

Stated in bare simplicity the admitted facts show that the defendant bank for a valuable
consideration paid by the Philippine Fiber and Produce Company agreed on October 9, 1918, to
cause a sum of money to be paid to the plaintiff in New York City; and the question is whether
the plaintiff can maintain an action against the bank for the nonperformance of said undertaking.
In other words, is the lack of privity with the contract on the part of the plaintiff fatal to the
maintenance of an action by him?

The only express provision of law that has been cited as bearing directly on this question is the
second paragraph of article 1257 of the Civil Code; and unless the present action can be
maintained under the provision, the plaintiff admittedly has no case. This provision states an
exception to the more general rule expressed in the first paragraph of the same article to the
effect that contracts are productive of effects only between the parties who execute them; and in
harmony with this general rule are numerous decisions of this court (Wolfson vs. Estate of
Martinez, 20 Phil., 340; Ibañez de Aldecoa vs. Hongkong and Shanghai Banking Corporation, 22
Phil., 572, 584; Manila Railroad Co. vs. Compañia Trasatlantica and Atlantic, Gulf and Pacific Co.,
38 Phil., 873, 894.)

The paragraph introducing the exception which we are now to consider is in these words:

Should the contract contain any stipulation in favor of a third person, he may
demand its fulfillment, provided he has given notice of his acceptance to the person
bound before the stipulation has been revoked. (Art. 1257, par. 2, Civ. Code.)

In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate dissertation
upon the history and interpretation of the paragraph above quoted and so complete is the
discussion contained in that opinion that it would be idle for us here to go over the same matter.
Suffice it to say that Justice Trent, speaking for the court in that case, sums up its conclusions
upon the conditions governing the right of the person for whose benefit a contract is made to
maintain an action for the breach thereof in the following words:
 So, we believe the fairest test, in this jurisdiction at least, whereby to determine
whether the interest of a third person in a contract is a stipulation pour autrui, or
merely an incidental interest, is to rely upon the intention of the parties as disclosed
by their contract.

If a third person claims an enforcible interest in the contract, the question must be
settled by determining whether the contracting parties desired to tender him such
an interest. Did they deliberately insert terms in their agreement with the avowed
purpose of conferring a favor upon such third person? In resolving this question, of
course, the ordinary rules of construction and interpretation of writings must be
observed. (Uy Tam and Uy Yet vs. Leonard, supra.)

Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it
matters not whether the stipulation is in the nature of a gift or whether there is an obligation
owing from the promise to the third person. That no such obligation exists may in some degree
assist in determining whether the parties intended to benefit a third person, whether they
stipulated for him." (Uy Tam and Uy Yet vs. Leonard, supra.)

In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action
is clear enough; for it is undeniable that the bank's promise to cause a definite sum of money to
be paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the
paragraph above quoted; and the circumstances under which that promise was given disclose an
evident intention on the part of the contracting parties that the plaintiff should have the money
upon demand in New York City. The recognition of this unqualified right in the plaintiff to receive
the money implies in our opinion the right in him to maintain an action to recover it; and indeed
if the provision in question were not applicable to the facts now before us, it would be difficult to
conceive of a case arising under it.

It will be noted that under the paragraph cited a third person seeking to enforce compliance with
a stipulation in his favor must signify his acceptance before it has been revoked. In this case the
plaintiff clearly signified his acceptance to the bank by demanding payment; and although the
Philippine National Bank had already directed its New York agency to withhold payment when
this demand was made, the rights of the plaintiff cannot be considered to as there used, must be
understood to imply revocation by the mutual consent of the contracting parties, or at least by
direction of the party purchasing he exchange.

In the course of the argument attention was directed to the case of Legniti vs. Mechanics, etc.
Bank (130 N.E. Rep., 597), decided by the Court of Appeals of the State of New York on March 1,
1921, wherein it is held that, by selling a cable transfer of funds on a foreign country in ordinary
course, a bank incurs a simple contractual obligation, and cannot be considered as holding the
money which was paid for the transfer in the character of a specific trust. Thus, it was said,
"Cable transfers, therefore, mean a method of transmitting money by cable wherein the seller
engages that he has the balance at the point on which the payment is ordered and that on
receipt of the cable directing the transfer his correspondent at such point will make payment to
the beneficiary described in the cable. All these transaction are matters of purchase and sale
create no trust relationship."

As we view it there is nothing in the decision referred to decisive of the question now before us,
wish is merely that of the right of the beneficiary to maintain an action against the bank selling
the transfer.

Upon the considerations already stated, we are of the opinion that the right of action exists, and
the judgment must be affirmed. It is so ordered, with costs against the appellant. Interest will be
computed as prescribed in section 510 of the Code of Civil Procedure.

GEORGE A. KAUFFMAN, plaintiff-appellee, vs. THE PHILIPPINE NATIONAL BANK, defendant-

appellant. G.R. No. 16454. September 29, 1921

FACTS:

Plaintiff George Kauffman was the president and owner of almost all shares of stocks of the
Philippine Fiber and Produce Company in the Philippine Islands. On February 5, 1918, the board
of directors of said company, declared a dividend of P100,000 from its surplus earnings for the
year 1917, of which the plaintiff was entitled to the sum of P98,000. This amount was
accordingly placed to his credit on the books of the company, and so remained until in October
of the same year when an unsuccessful effort was made to transmit the whole, or a greater part
thereof, to the plaintiff in New York City.
On October 9, 1918, George B. Wicks, treasurer of the Philippine Fiber and Produce Company,
presented himself in the exchange department of the Philippine National Bank in Manila and
requested that a telegraphic transfer of $45,000 should be made to the plaintiff in New York City,
upon account of the Philippine Fiber and Produce Company.

On the same day the Philippine National Bank dispatched to its New York agency a cablegram to
the following effect: "Pay George A. Kauffman, New York, account Philip- pine Fiber Produce Co.,
$45,000. (Sgd.) PHILIPPINE NATIONAL BANK, Manila."

However the Philippine National Bank in Manila, upon advise by the bank’s representative in New
York of the plaintiff’s reluctance to accept bills from his company and that payment be withheld,
sent another telegram message on October 11 to its representative to withhold the payment to
plaintiff as suggested.

Meanwhile, Wicks cabled the plaintiff in New York advising him that the $45,000 had been placed
to his credit in the New York agency of PNB. Thereafter, plaintiff presented himself at the office
of PNB in New York City demanding payment. By this time, the message from PNB Manila of
October 11 directing the withholding of payment and that payment was therefore refused.

In view of these facts, the plaintiff Kauffman instituted the present action in the Court of First
Instance of the city of Manila to recover said sum, with interest and costs; and judgment having
been there entered favorably to the plaintiff, the defendant appealed.

ISSUE: WON THE PLAINTIFF CAN MAINTAIN THE ACTION CONSIDERING HIS LACK OF PRIVITY TO
THE CONTRACT BETWEEN PNB AND GEORGE WICKS?

HELD – YES

The only express provision of law as bearing directly on this question is the second paragraph of
article 1257 of the Civil Code; This provision states an exception to the general rule expressed in
the first paragraph of the same article to the effect that contracts are productive of effects only
between the parties who execute them; XXXX

The paragraph introducing the exception which we are now to consider is in these words:

"Should the contract contain any stipulation in favor of a third person, he may demand its
fulfillment, provided he has given notice of his acceptance to the person bound before the
stipulation has been revoked." (Art. 1257, par. 2, Civ. Code.)

In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), XXXXX Justice Trent, speaking for
the court in that case, sums up the conditions governing the right of the person for whose
benefit a contract is made to maintain an action for the breach thereof in the following words:

"So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether the
interest of a third person in a contract is a stipulation pour autrui, or merely an incidental
interest, is to rely upon the intention of the parties as disclosed by their contract.

"If a third person claims an enforceable interest in the contract, that question must be settled by
determining whether the contracting parties desired to tender him such an interest. Did they
deliberately insert terms in their agreement with the avowed purpose of conferring a favor upon
such third person? In resolving this question, of course, the ordinary rules of construction and
interpretation of writings must be observed." (Uy Tam and Uy Yet vs. Leonard, supra.)

In the light of the conclusions thus stated, the right of the plaintiff to maintain the present action
is clear enough; for it is undeniable that the bank's promise to cause a definite sum of money to
be paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the
paragraph above quoted; and the circumstances under which that promise was given disclose an
evident intention on the part of the contracting parties that the plaintiff should have that money
upon demand in New York City. The recognition of this unqualified right in the plaintiff to receive
the money implies in our opinion the right in him to maintain an action to recover it;

It will be noted that under the paragraph cited a third person seeking to enforce compliance with
a stipulation in his favor must signify his acceptance before it has been revoked. In this case the
plaintiff clearly signified his acceptance to the bank by demanding payment; and although the
Philippine National Bank had already directed its New York agency to withhold payment when
this demand was made, the rights of the plaintiff cannot be considered to have been prejudiced
by that fact. The word "revoked," as there used, must be understood to imply revocation by the
mutual consent of the contracting parties, or at least by direction of the party purchasing the
exchange.

In Legniti vs. Mechanics, etc. Bank (130 N. E. Rep., 597), decided by the Court of Appeals of the
State of New York on March 1, 1921, wherein it is held that, by selling a cable transfer of funds
on a foreign country in ordinary course, a bank incurs a simple contractual obligation, and cannot
be considered as holding the money which was paid for the transfer in the character of a specific
trust. Thus, it was said, "Cable transfers, therefore, mean a method of transmitting money by
cable wherein the seller engages that he has the balance at the point on which the payment is
ordered and that on receipt of the cable directing the transfer his correspondent at such point
will make payment to the beneficiary described in the cable. All these transactions are matters of
purchase and sale create no trust relationship."

As we view it there is nothing in the decision referred to decisive of the question now before us,
which is merely that of the right of the beneficiary to maintain an action against the bank selling
the transfer.

Upon the considerations already stated, we are of the opinion that the right of action exists, and
the judgment must be affirmed. It is so ordered, with costs against the appellant. Interest will be
computed as prescribed in section 510 of the Code of Civil Procedure.

2. G.R. No. L-49188               January 30, 1990

PHILIPPINE AIRLINES, INC., petitioner, vs.HON. COURT OF APPEALS, HON. JUDGE

RICARDO D. GALANO, Court of First Instance of Manila, Branch XIII, JAIME K. DEL
ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and AMELIA TAN,
respondents.

Behind the simple issue of validity of an alias writ of execution in this case is a more fundamental
question. Should the Court allow a too literal interpretation of the Rules with an open invitation to
knavery to prevail over a more discerning and just approach? Should we not apply the ancient
rule of statutory construction that laws are to be interpreted by the spirit which vivifies and not
by the letter which killeth?

This is a petition to review on certiorari the decision of the Court of Appeals in CA-G.R. No. 07695
entitled "Philippine Airlines, Inc. v. Hon. Judge Ricardo D. Galano, et al.", dismissing the petition
for certiorari against the order of the Court of First Instance of Manila which issued an alias writ
of execution against the petitioner.

The petition involving the alias writ of execution had its beginnings on November 8, 1967, when
respondent Amelia Tan, under the name and style of Able Printing Press commenced a complaint
for damages before the Court of First Instance of Manila. The case was docketed as Civil Case
No. 71307, entitled Amelia Tan, et al. v. Philippine Airlines, Inc.

After trial, the Court of First Instance of Manila, Branch 13, then presided over by the late Judge
Jesus P. Morfe rendered judgment on June 29, 1972, in favor of private respondent Amelia Tan
and against petitioner Philippine Airlines, Inc. (PAL) as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine Air

Lines:

1. On the first cause of action, to pay to the plaintiff the amount of

P75,000.00 as actual damages, with legal interest thereon from plaintiffs
extra-judicial demand made by the letter of July 20, 1967;

2. On the third cause of action, to pay to the plaintiff the amount of

P18,200.00, representing the unrealized profit of 10% included in the
contract price of P200,000.00 plus legal interest thereon from July 20,1967;

3. On the fourth cause of action, to pay to the plaintiff the amount of

P20,000.00 as and for moral damages, with legal interest thereon from July
20, 1 967;
 4. On the sixth cause of action, to pay to the plaintiff the amount of
P5,000.00 damages as and for attorney's fee.

Plaintiffs second and fifth causes of action, and defendant's counterclaim, are
dismissed.

With costs against the defendant. (CA Rollo, p. 18)

On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case was docketed
as CA-G.R. No. 51079-R.

On February 3, 1977, the appellate court rendered its decision, the dispositive portion of which
reads:

IN VIEW WHEREOF, with the modification that PAL is condemned to pay plaintiff the
sum of P25,000.00 as damages and P5,000.00 as attorney's fee, judgment is
affirmed, with costs. (CA Rollo, p. 29)

Notice of judgment was sent by the Court of Appeals to the trial court and on dates subsequent
thereto, a motion for reconsideration was filed by respondent Amelia Tan, duly opposed by
petitioner PAL.

On May 23,1977, the Court of Appeals rendered its resolution denying the respondent's motion
for reconsideration for lack of merit.

No further appeal having been taken by the parties, the judgment became final and executory
and on May 31, 1977, judgment was correspondingly entered in the case.

The case was remanded to the trial court for execution and on September 2,1977, respondent
Amelia Tan filed a motion praying for the issuance of a writ of execution of the judgment
rendered by the Court of Appeals. On October 11, 1977, the trial court, presided over by Judge
Galano, issued its order of execution with the corresponding writ in favor of the respondent. The
writ was duly referred to Deputy Sheriff Emilio Z. Reyes of Branch 13 of the Court of First
Instance of Manila for enforcement.

Four months later, on February 11, 1978, respondent Amelia Tan moved for the issuance of an
alias writ of execution stating that the judgment rendered by the lower court, and affirmed with
modification by the Court of Appeals, remained unsatisfied.

On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of an alias
writ of execution stating that it had already fully paid its obligation to plaintiff through the deputy
sheriff of the respondent court, Emilio Z. Reyes, as evidenced by cash vouchers properly signed
and receipted by said Emilio Z. Reyes.

On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature,
ordering the executing sheriff Emilio Z. Reyes to appear with his return and explain the reason
for his failure to surrender the amounts paid to him by petitioner PAL. However, the order could
not be served upon Deputy Sheriff Reyes who had absconded or disappeared.

On March 28, 1978, motion for the issuance of a partial alias writ of execution was filed by
respondent Amelia Tan.

On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for Partial Alias Writ
of Execution" with Substitute Motion for Alias Writ of Execution. On May 1, 1978, the respondent
Judge issued an order which reads:

As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for Partial
Alias Writ of Execution with Substitute Motion for Alias Writ of Execution is hereby
granted, and the motion for partial alias writ of execution is considered withdrawn.

Let an Alias Writ of Execution issue against the defendant for the fall satisfaction of
the judgment rendered. Deputy Sheriff Jaime K. del Rosario is hereby appointed
Special Sheriff for the enforcement thereof. (CA Rollo, p. 34)

On May 18, 1978, the petitioner received a copy of the first alias writ of execution issued on the
same day directing Special Sheriff Jaime K. del Rosario to levy on execution in the sum of
P25,000.00 with legal interest thereon from July 20,1967 when respondent Amelia Tan made an
extra-judicial demand through a letter. Levy was also ordered for the further sum of P5,000.00
awarded as attorney's fees.

On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of execution
stating that no return of the writ had as yet been made by Deputy Sheriff Emilio Z. Reyes and
that the judgment debt had already been fully satisfied by the petitioner as evidenced by the
cash vouchers signed and receipted by the server of the writ of execution, Deputy Sheriff Emilio
Z. Reyes.

On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment on the
depository bank of petitioner, Far East Bank and Trust Company, Rosario Branch, Binondo,
Manila, through its manager and garnished the petitioner's deposit in the said bank in the total
amount of P64,408.00 as of May 16, 1978. Hence, this petition for certiorari filed by the
Philippine Airlines, Inc., on the grounds that:

AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR RETURN OF THE

ORIGINAL WRIT BY THE IMPLEMENTING OFFICER.

II

PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN THE WRIT

OF EXECUTION CONSTITUTES SATISFACTION OF JUDGMENT.

III

INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE PAYMENT

THEREOF.

IV

SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF JUDGMENT

DEBTOR AND DISPOSAL OR SALE THEREOF TO SATISFY JUDGMENT.

Can an alias writ of execution be issued without a prior return of the original writ by the
implementing officer?

We rule in the affirmative and we quote the respondent court's decision with approval:

The issuance of the questioned alias writ of execution under the circumstances here
obtaining is justified because even with the absence of a Sheriffs return on the
original writ, the unalterable fact remains that such a return is incapable of being
obtained (sic) because the officer who is to make the said return has absconded and
cannot be brought to the Court despite the earlier order of the court for him to
appear for this purpose. (Order of Feb. 21, 1978, Annex C, Petition). Obviously,
taking cognizance of this circumstance, the order of May 11, 1978 directing the
issuance of an alias writ was therefore issued. (Annex D. Petition). The need for
such a return as a condition precedent for the issuance of an alias writ was
justifiably dispensed with by the court below and its action in this regard meets with
our concurrence. A contrary view will produce an abhorent situation whereby the
mischief of an erring officer of the court could be utilized to impede indefinitely the
undisputed and awarded rights which a prevailing party rightfully deserves to obtain
and with dispatch. The final judgment in this case should not indeed be permitted to
become illusory or incapable of execution for an indefinite and over extended
period, as had already transpired. (Rollo, pp. 35-36)

Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought not to be
illusory it ought to have its proper effect).

Indeed, technicality cannot be countenanced to defeat the execution of a judgment for execution
is the fruit and end of the suit and is very aptly called the life of the law (Ipekdjian Merchandising
Co. v. Court of Tax Appeals, 8 SCRA 59 [1963]; Commissioner of Internal Revenue v. Visayan
Electric Co., 19 SCRA 697, 698 [1967]). A judgment cannot be rendered nugatory by the
unreasonable application of a strict rule of procedure. Vested rights were never intended to rest
on the requirement of a return, the office of which is merely to inform the court and the parties,
of any and all actions taken under the writ of execution. Where such information can be
established in some other manner, the absence of an executing officer's return will not preclude
a judgment from being treated as discharged or being executed through an alias writ of
execution as the case may be. More so, as in the case at bar. Where the return cannot be
expected to be forthcoming, to require the same would be to compel the enforcement of rights
under a judgment to rest on an impossibility, thereby allowing the total avoidance of judgment
debts. So long as a judgment is not satisfied, a plaintiff is entitled to other writs of execution
(Government of the Philippines v. Echaus and Gonzales, 71 Phil. 318). It is a well-known legal
maxim that he who cannot prosecute his judgment with effect, sues his case vainly.

More important in the determination of the propriety of the trial court's issuance of an alias writ
of execution is the issue of satisfaction of judgment.

Under the peculiar circumstances surrounding this case, did the payment made to the
absconding sheriff by check in his name operate to satisfy the judgment debt? The Court rules
that the plaintiff who has won her case should not be adjudged as having sued in vain. To decide
otherwise would not only give her an empty but a pyrrhic victory.

It should be emphasized that under the initial judgment, Amelia Tan was found to have been
wronged by PAL.

She filed her complaint in 1967.

After ten (10) years of protracted litigation in the Court of First Instance and the Court of
Appeals, Ms. Tan won her case.

It is now 1990.

Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the courts have
solemnly declared as rightfully hers. Through absolutely no fault of her own, Ms. Tan has been
deprived of what, technically, she should have been paid from the start, before 1967, without
need of her going to court to enforce her rights. And all because PAL did not issue the checks
intended for her, in her name.

Under the peculiar circumstances of this case, the payment to the absconding sheriff by check in
his name did not operate as a satisfaction of the judgment debt.

In general, a payment, in order to be effective to discharge an obligation, must be made to the

proper person. Article 1240 of the Civil Code provides:

Payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive it.

Thus, payment must be made to the obligee himself or to an agent having authority, express or
implied, to receive the particular payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR
65). Payment made to one having apparent authority to receive the money will, as a rule, be
treated as though actual authority had been given for its receipt. Likewise, if payment is made to
one who by law is authorized to act for the creditor, it will work a discharge (Hendry v. Benlisa 37
Fla. 609, 20 SO 800,34 LRA 283). The receipt of money due on ajudgment by an officer
authorized by law to accept it will, therefore, satisfy the debt (See 40 Am Jm 729, 25; Hendry v.
Benlisa supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).

The theory is where payment is made to a person authorized and recognized by the creditor, the
payment to such a person so authorized is deemed payment to the creditor. Under ordinary
circumstances, payment by the judgment debtor in the case at bar, to the sheriff should be valid
payment to extinguish the judgment debt.

There are circumstances in this case, however, which compel a different conclusion.

The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but
in checks. The checks were not payable to Amelia Tan or Able Printing Press but to the
absconding sheriff.

Did such payments extinguish the judgment debt?

Article 1249 of the Civil Code provides:

The payment of debts in money shall be made in the currency stipulated, and if it is
not possible to deliver such currency, then in the currency which is legal tender in
the Philippines.
 The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have
been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in
abeyance.

In the absence of an agreement, either express or implied, payment means the discharge of a
debt or obligation in money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed. 257) and unless the
parties so agree, a debtor has no rights, except at his own peril, to substitute something in lieu of
cash as medium of payment of his debt (Anderson v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47
Am. St. Rep. 402). Consequently, unless authorized to do so by law or by consent of the obligee a
public officer has no authority to accept anything other than money in payment of an obligation
under a judgment being executed. Strictly speaking, the acceptance by the sheriff of the
petitioner's checks, in the case at bar, does not, per se, operate as a discharge of the judgment
debt.

Since a negotiable instrument is only a substitute for money and not money, the delivery of such
an instrument does not, by itself, operate as payment (See. 189, Act 2031 on Negs. Insts.; Art.
1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil.
44; 21 R.C.L. 60, 61). A check, whether a manager's check or ordinary cheek, is not legal tender,
and an offer of a check in payment of a debt is not a valid tender of payment and may be
refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the
obligation under a judgment. The obligation is not extinguished and remains suspended until the
payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).

If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would
have been no payment. After dishonor of the checks, Ms. Tan could have run after other
properties of PAL. The theory is that she has received no value for what had been awarded her.
Because the checks were drawn in the name of Emilio Z. Reyes, neither has she received
anything. The same rule should apply.

It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full
legal contemplation. The reasoning is logical but is it valid and proper? Logic has its limits in
decision making. We should not follow rulings to their logical extremes if in doing so we arrive at
unjust or absurd results.

In the first place, PAL did not pay in cash. It paid in cheeks.

And second, payment in cash always carries with it certain cautions. Nobody hands over big
amounts of cash in a careless and inane manner. Mature thought is given to the possibility of the
cash being lost, of the bearer being waylaid or running off with what he is carrying for another.
Payment in checks is precisely intended to avoid the possibility of the money going to the wrong
party. The situation is entirely different where a Sheriff seizes a car, a tractor, or a piece of land.
Logic often has to give way to experience and to reality. Having paid with checks, PAL should
have done so properly.

Payment in money or cash to the implementing officer may be deemed absolute payment of the
judgment debt but the Court has never, in the least bit, suggested that judgment debtors should
settle their obligations by turning over huge amounts of cash or legal tender to sheriffs and other
executing officers. Payment in cash would result in damage or interminable litigations each time
a sheriff with huge amounts of cash in his hands decides to abscond.

As a protective measure, therefore, the courts encourage the practice of payments by cheek
provided adequate controls are instituted to prevent wrongful payment and illegal withdrawal or
disbursement of funds. If particularly big amounts are involved, escrow arrangements with a
bank and carefully supervised by the court would be the safer procedure. Actual transfer of funds
takes place within the safety of bank premises. These practices are perfectly legal. The object is
always the safe and incorrupt execution of the judgment.

It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the
name of another. Making the checks payable to the judgment creditor would have prevented the
encashment or the taking of undue advantage by the sheriff, or any person into whose hands the
checks may have fallen, whether wrongfully or in behalf of the creditor. The issuance of the
checks in the name of the sheriff clearly made possible the misappropriation of the funds that
were withdrawn.

As explained and held by the respondent court:

 ... [K]nowing as it does that the intended payment was for the private party
respondent Amelia Tan, the petitioner corporation, utilizing the services of its
personnel who are or should be knowledgeable about the accepted procedures and
resulting consequences of the checks drawn, nevertheless, in this instance, without
prudence, departed from what is generally observed and done, and placed as payee
in the checks the name of the errant Sheriff and not the name of the rightful payee.
Petitioner thereby created a situation which permitted the said Sheriff to personally
encash said checks and misappropriate the proceeds thereof to his exclusive
personal benefit. For the prejudice that resulted, the petitioner himself must bear
the fault. The judicial guideline which we take note of states as follows:

As between two innocent persons, one of whom must suffer the consequence of a
breach of trust, the one who made it possible by his act of confidence must bear the
loss. (Blondeau, et al. v. Nano, et al., L-41377, July 26, 1935, 61 Phil. 625)

Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act
made possible the loss had but itself to blame.

The attention of this Court has been called to the bad practice of a number of executing officers,
of requiring checks in satisfaction of judgment debts to be made out in their own names. If a
sheriff directs a judgment debtor to issue the checks in the sheriff's name, claiming he must get
his commission or fees, the debtor must report the sheriff immediately to the court which
ordered the execution or to the Supreme Court for appropriate disciplinary action. Fees,
commissions, and salaries are paid through regular channels. This improper procedure also
allows such officers, who have sixty (60) days within which to make a return, to treat the moneys
as their personal finds and to deposit the same in their private accounts to earn sixty (60) days
interest, before said finds are turned over to the court or judgment creditor (See Balgos v.
Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers could put up the defense that said
checks had been issued to them in their private or personal capacity. Without a receipt
evidencing payment of the judgment debt, the misappropriation of finds by such officers
becomes clean and complete. The practice is ingenious but evil as it unjustly enriches court
personnel at the expense of litigants and the proper administration of justice. The temptation
could be far greater, as proved to be in this case of the absconding sheriff. The correct and
prudent thing for the petitioner was to have issued the checks in the intended payee's name.

The pernicious effects of issuing checks in the name of a person other than the intended payee,
without the latter's agreement or consent, are as many as the ways that an artful mind could
concoct to get around the safeguards provided by the law on negotiable instruments. An angry
litigant who loses a case, as a rule, would not want the winning party to get what he won in the
judgment. He would think of ways to delay the winning party's getting what has been adjudged
in his favor. We cannot condone that practice especially in cases where the courts and their
officers are involved.1âwphi1 We rule against the petitioner.

Anent the applicability of Section 15, Rule 39, as follows:

Section 15. Execution of money judgments. — The officer must enforce an

execution of a money judgment by levying on all the property, real and personal of
every name and nature whatsoever, and which may be disposed of for value, of the
judgment debtor not exempt from execution, or on a sufficient amount of such
property, if they be sufficient, and selling the same, and paying to the judgment
creditor, or his attorney, so much of the proceeds as will satisfy the judgment. ...

the respondent court held:

We are obliged to rule that the judgment debt cannot be considered satisfied and
therefore the orders of the respondent judge granting the alias writ of execution
may not be pronounced as a nullity.

It is clear and manifest that after levy or garnishment, for a judgment to be

executed there is the requisite of payment by the officer to the judgment creditor,
or his attorney, so much of the proceeds as will satisfy the judgment and none such
payment had been concededly made yet by the absconding Sheriff to the private
respondent Amelia Tan. The ultimate and essential step to complete the execution
of the judgment not having been performed by the City Sheriff, the judgment debt
legally and factually remains unsatisfied.

Strictly speaking execution cannot be equated with satisfaction of a judgment. Under unusual
circumstances as those obtaining in this petition, the distinction comes out clearly.
Execution is the process which carries into effect a decree or judgment (Painter v. Berglund, 31
Cal. App. 2d. 63, 87 P 2d 360, 363; Miller v. London, 294 Mass 300, 1 NE 2d 198, 200; Black's
Law Dictionary), whereas the satisfaction of a judgment is the payment of the amount of the
writ, or a lawful tender thereof, or the conversion by sale of the debtor's property into an amount
equal to that due, and, it may be done otherwise than upon an execution (Section 47, Rule 39).
Levy and delivery by an execution officer are not prerequisites to the satisfaction of a judgment
when the same has already been realized in fact (Section 47, Rule 39). Execution is for the
sheriff to accomplish while satisfaction of the judgment is for the creditor to achieve. Section 15,
Rule 39 merely provides the sheriff with his duties as executing officer including delivery of the
proceeds of his levy on the debtor's property to satisfy the judgment debt. It is but to stress that
the implementing officer's duty should not stop at his receipt of payments but must continue
until payment is delivered to the obligor or creditor.

Finally, we find no error in the respondent court's pronouncement on the inclusion of interests to
be recovered under the alias writ of execution. This logically follows from our ruling that PAL is
liable for both the lost checks and interest. The respondent court's decision in CA-G.R. No.
51079-R does not totally supersede the trial court's judgment in Civil Case No. 71307. It merely
modified the same as to the principal amount awarded as actual damages.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The judgment of
the respondent Court of Appeals is AFFIRMED and the trial court's issuance of the alias writ of
execution against the petitioner is upheld without prejudice to any action it should take against
the errant sheriff Emilio Z. Reyes. The Court Administrator is ordered to follow up the actions
taken against Emilio Z. Reyes. SO ORDERED

Philippine Airlines v. Court of Appeals G.R. No. L-49188. January 30, 1990

FACTS: Amelia Tan was found to have been wronged by Philippine Air Lines (PAL). She filed her
complaint in 1967. After ten (10) years of protracted litigation in the Court of First Instance and
the Court of Appeals, Ms. Tan won her case. Almost twenty-two (22) years later, Ms. Tan has not
seen a centavo of what the courts have solemnly declared as rightfully hers. Through absolutely
no fault of her own, Ms. Tan has been deprived of what, technically, she should have been paid
from the start, before 1967, without need of her going to court to enforce her rights. And all
because PAL did not issue the checks intended for her, in her name. Petitioner PAL filed a petition
for review on certiorari the decision of Court of Appeals dismissing the petition for certiorari
against the order of the Court of First Instance (CFI) which issued an alias writ of execution
against them. Petitioner alleged that the payment in check had already been effected to the
absconding sheriff, satisfying the judgment.

ISSUE: Whether or not payment by check to the sheriff extinguished the judgment debt.

RULING: NO.  The payment made by the petitioner to the absconding sheriff was not in cash or
legal tender but in checks. The checks were not payable to Amelia Tan or Able Printing Press but
to the absconding sheriff.In the absence of an agreement, either express or implied, payment
means the discharge of a debt or obligation in money and unless the parties so agree, a debtor
has no rights, except at his own peril, to substitute something in lieu of cash as medium of
payment of his debt. Strictly speaking, the acceptance by the sheriff of the petitioner’s checks, in
the case at bar, does not, per se, operate as a discharge of the judgment debt. The check as a
negotiable instrument is only a substitute for money and not money, the delivery of such an
instrument does not, by itself, operate as payment. A check, whether a manager’s check or
ordinary cheek, is not legal tender, and an offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of
checks does not discharge the obligation under a judgment. The obligation is not extinguished
and remains suspended until the payment by commercial document is actually realized (Art.
1249, Civil Code, par. 3)

3. METROPOLITAN BANK & TRUST COMPANY, Petitioner, v. COURT OF APPEALS,

GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and
GLORIA CASTILLO, Respondents. G.R. No. 88866. February 18, 1991

This case, for all its seeming complexity, turns on a simple question of negligence. The facts,
pruned of all non-essentials, are easily told.

The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the
Philippines and even abroad. Golden Savings and Loan Association was, at the time these events
happened, operating in Calapan, Mindoro, with the other private respondents as its principal
officers.

In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and
deposited over a period of two months 38 treasury warrants with a total value of P1,755,228.37.
They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its
General Manager and counter-signed by its Auditor. Six of these were directly payable to Gomez
while the others appeared to have been indorsed by their respective payees, followed by Gomez
as second indorser.

On various dates between June 25 and July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No.
2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the
branch office to the principal office of Metrobank, which forwarded them to the Bureau of
Treasury for special clearing.

More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times
to ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was
meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over
Gloria’s repeated inquiries and also as an accommodation for a "valued client," the petitioner
says it finally decided to allow Golden Savings to withdraw from the proceeds of the warrants.
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July
13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of
P150,000.00. The total withdrawal was P968,000.00.

In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account,
eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently
cleared warrants. The last withdrawal was made on July 16, 1979.

On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been
dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden
Savings of the amount it had previously withdrawn, to make up the deficit in its account.

The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of
Mindoro. After trial, judgment was rendered in favor of Golden Savings, which, however, filed a
motion for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986,
the lower court modified its decision thus:chanrob1es virtual 1aw library

ACCORDINGLY, judgment is hereby rendered:chanrob1es virtual 1aw library

1. Dismissing the complaint with costs against the plaintiff;

2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and
Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;

3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of
P1,754,089.00 and to reinstate and credit to such account such amount existing before the debit
was made including the amount of P812,033.37 in favor of defendant Golden Savings and Loan
Association, Inc. and thereafter, to allow defendant Golden Savings and Loan Association, Inc. to
withdraw the amount outstanding thereon before the debit;

4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc.
attorney’s fees and expenses of litigation in the amount of P200,000.00.

5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo
attorney’s fees and expenses of litigation in the amount of P100,000.00.

SO ORDERED.

On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file this
petition for review on the following grounds:chanrob1es virtual 1aw library

1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual
terms and conditions on the deposit slips allowing Metrobank to charge back any amount
erroneously credited.

(a) Metrobank’s right to charge back is not limited to instances where the checks or treasury
warrants are forged or unauthorized.

(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent
which cannot be held liable for its failure to collect on the warrants.

2. Under the lower court’s decision, affirmed by respondent Court of Appeals, Metrobank is made
to pay for warrants already dishonored, thereby perpetuating the fraud committed by Eduardo
Gomez.

3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden
Savings, the latter should bear the loss.

4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case
are not negotiable instruments.

The petition has no merit.

From the above undisputed facts, it would appear to the Court that Metrobank was indeed
negligent in giving Golden Savings the impression that the treasury warrants had been cleared
and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his
account with it. Without such assurance, Golden Savings would not have allowed the
withdrawals; with such assurance, there was no reason not to allow the withdrawal. Indeed,
Golden Savings might even have incurred liability for its refusal to return the money that to all
appearances belonged to the depositor, who could therefore withdraw it any time and for any
reason he saw fit.

It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited
them to its account with Metrobank. Golden Savings had no clearing facilities of its own. It relied
on Metrobank to determine the validity of the warrants through its own services. The proceeds of
the warrants were withheld from Gomez until Metrobank allowed Golden Savings itself to
withdraw them from its own deposit. 7 It was only when Metrobank gave the go-signal that
Gomez was finally allowed by Golden Savings to withdraw them from his own account.

The argument of Metrobank that Golden Savings should have exercised more care in checking
the personal circumstances of Gomez before accepting his deposit does not hold water. It was
Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan; and
moreover, the treasury warrants were subject to clearing, pending which the depositor could not
withdraw its proceeds. There was no question of Gomez’s identity or of the genuineness of his
signature as checked by Golden Savings. In fact, the treasury warrants were dishonored
allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or
indorser. Under the circumstances, it is clear that Golden Savings acted with due care and
diligence and cannot be faulted for the withdrawals it allowed Gomez to make.

By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not
trifling — more than one and a half million pesos (and this was 1979). There was no reason why
it should not have waited until the treasury warrants had been cleared; it would not have lost a
single centavo by waiting. Yet, despite the lack of such clearance — and notwithstanding that it
had not received a single centavo from the proceeds of the treasury warrants, as it now
repeatedly stresses — it allowed Golden Savings to withdraw — not once, not twice, but thrice —
from the uncleared treasury warrants in the total amount of P968,000.00.cralawnad

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the
clearance and it also wanted to "accommodate" a valued client. It "presumed" that the warrants
had been cleared simply because of "the lapse of one week." 8 For a bank with its long
experience, this explanation is unbelievably naive.chanrobles lawlibrary : rednad

And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the
dorsal side of the deposit slips through which the treasury warrants were deposited by Golden
Savings with its Calapan branch. The conditions read as follows:chanrob1es virtual 1aw library

Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor’s
collecting agent, assuming no responsibility beyond care in selecting correspondents, and until
such time as actual payment shall have come into possession of this bank, the right is reserved
to charge back to the depositor’s account any amount previously credited, whether or not such
item is returned. This also applies to checks drawn on local banks and bankers and their
branches as well as on this bank, which are unpaid due to insufficiency of funds, forgery,
unauthorized overdraft or any other reason.

According to Metrobank, the said conditions clearly show that it was acting only as a collecting
agent for Golden Savings and give it the right to "charge back to the depositor’s account any
amount previously credited, whether or not such item is returned. This also applies to checks." .
which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other
reason." It is claimed that the said conditions are in the nature of contractual stipulations and
became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit
slips.chanrobles law library : red
Doubt may be expressed about the binding force of the conditions, considering that they have
apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed,
it could be argued that the depositor, in signing the deposit slip, does so only to identify himself
and not to agree to the conditions set forth in the given permit at the back of the deposit slip. We
do not have to rule on this matter at this time. At any rate, the Court feels that even if the
deposit slip were considered a contract, the petitioner could still not validly disclaim
responsibility thereunder in the light of the circumstances of this case.chanrobles.com : virtual
law library
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to
be suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true.
On the contrary, Article 1909 of the Civil Code clearly provides that —

Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which shall be
judged with more or less rigor by the courts, according to whether the agency was or was not for
a compensation.

The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was
the clearance given by it that assured Golden Savings it was already safe to allow Gomez to
withdraw the proceeds of the treasury warrants he had deposited. Metrobank misled Golden
Savings. There may have been no express clearance, as Metrobank insists (although this is
refuted by Golden Savings) but in any case that clearance could be implied from its allowing
Golden Savings to withdraw from its account not only once or even twice but three times. The
total withdrawal was in excess of its original balance before the treasury warrants were
deposited, which only added to its belief that the treasury warrants had indeed been cleared.

Metrobank’s argument that it may recover the disputed amount if the warrants are not paid for
any reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would
have been no need at all for Golden Savings to deposit the treasury warrants with it for
clearance. There would have been no need for it to wait until the warrants had been cleared
before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way the
petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes more
so in the case at bar when it is considered that the supposed dishonor of the warrants was not
communicated to Golden Savings before it made its own payment to
Gomez.chanrobles.com:cralaw:red

The belated notification aggravated the petitioner’s earlier negligence in giving express or at
least implied clearance to the treasury warrants and allowing payments therefrom to Golden
Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the
forgery of the signatures of the general manager and the auditor of the drawer corporation, has
not been established. 9 This was the finding of the lower courts which we see no reason to
disturb. And as we said in MWSS v. Court of Appeals: 10

Forgery cannot be presumed (Siasat, Et. Al. v. IAC, Et Al., 139 SCRA 238). It must be established
by clear, positive and convincing evidence. This was not done in the present case.

A no less important consideration is the circumstance that the treasury warrants in question are
not negotiable instruments. Clearly stamped on their face is the word "non-negotiable."
Moreover, and this is of equal significance, it is indicated that they are payable from a particular
fund, to wit, Fund 501.

The following sections of the Negotiable Instruments Law, especially the underscored parts, are
pertinent:chanrob1es virtual 1aw library

SECTION 1. — Form of negotiable instruments. — An instrument to be negotiable must conform

to the following requirements:chanrob1es virtual 1aw library

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

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

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

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

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.

SEC. 3. When promise is unconditional. — An unqualified order or promise to pay is unconditional

within the meaning of this Act though coupled with —

(a) An indication of a particular fund out of which reimbursement is to be made or a particular

account to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument.

But an order or promise to pay out of a particular fund is not unconditional.

The indication of Fund 501 as the source of the payment to be made on the treasury warrants
makes the order or promise to pay "not unconditional" and the warrants themselves non-
negotiable. There should be no question that the exception on Section 3 of the Negotiable
Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar v. Auditor
General 11 where the Court held:chanrob1es virtual 1aw library

The petitioner argues that he is a holder in good faith and for value of a negotiable instrument
and is entitled to the rights and privileges of a holder in due course, free from defenses. But this
treasury warrant is not within the scope of the negotiable instrument law. For one thing, the
document bearing on its face the words "payable from the appropriation for food administration,
is actually an Order for payment out of "a particular fund," and is not unconditional and does not
fulfill one of the essential requirements of a negotiable instrument (Sec. 3 last sentence and
section [1(b)] of the Negotiable Instruments Law).

Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed
that they were "genuine and in all respects what they purport to be," in accordance with Section
66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the
non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the
purpose of guaranteeing the genuineness of the warrants but merely to deposit them with
Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped on
the back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed,
Metropolitan Bank & Trust Co., Calapan Branch." chanrobles law library

The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but
we feel this case is inapplicable to the present controversy. That case involved checks whereas
this case involves treasury warrants. Golden Savings never represented that the warrants were
negotiable but signed them only for the purpose of depositing them for clearance. Also, the fact
of forgery was proved in that case but not in the case before us. Finally, the Court found the Jai
Alai Corporation negligent in accepting the checks without question from one Antonio Ramirez
notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not appear that
he was authorized to indorse it. No similar negligence can be imputed to Golden
Savings.chanrobles.com:cralaw:red

We find the challenged decision to be basically correct. However, we will have to amend it
insofar as it directs the petitioner to credit Golden Savings with the full amount of the treasury
checks deposited to its account.

The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez
was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The
amount he has withdrawn must be charged not to Golden Savings but to Metrobank, which must
bear the consequences of its own negligence. But the balance of P586,589.00 should be debited
to Golden Savings, as obviously Gomez can no longer be permitted to withdraw this amount from
his deposit because of the dishonor of the warrants. Gomez has in fact disappeared. To also
credit the balance to Golden Savings would unduly enrich it at the expense of Metrobank, let
alone the fact that it has already been informed of the dishonor of the treasury
warrants.chanrobles law library : red

WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the
dispositive portion of the judgment of the lower court shall be reworded as follows:chanrob1es
virtual 1aw library
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing
defendant Golden Savings & Loan Association, Inc. to withdraw the amount outstanding thereon,
if any, after the debit. SO ORDERED
4. CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T.
VERGARA, Petitioners, v. IFC LEASING AND ACCEPTANCE CORPORATION, Respondent.
G.R. No. 72593. April 30, 1987

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:chanrob1es virtual 1aw library

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 HD-21-B and the other
an HD-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 jobsite. 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 (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 jobsite 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 (Exh. "5").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor
sent to the jobsite its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," "6-C,"
"6-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 (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 there after at the rate of
twelve (12%) percent per annum, attorney’s fees of Two Hundred Forty Nine Thousand Eighty
One Pesos & 71/100 (P249,081.71) 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:jgc:chanrobles.com.ph

"WHEREFORE, judgment is hereby rendered:chanrob1es virtual 1aw library

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:chanrob1es virtual 1aw library
I

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

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-APPELLEE IS A HOLDER IN DUE
COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE
COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in
toto the decision of the trial court. The pertinent portions of the decision are as
follows:chanrob1es virtual 1aw librar

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

"Holding that breach of warranty if any, is not a defense available to appellants either to
withdraw from the contract and/or demand a proportionate reduction of the price with damages
in either case (Art. 1567, New Civil Code). We now come to the issue as to whether the plaintiff-
appellee is a holder in due course of the promissory note.

"To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation
engaged in financing and receivable discounting extending credit facilities to consumers and
industrial, commercial or agricultural enterprises by discounting or factoring commercial papers
or accounts receivable duly authorized pursuant to R.A. 5980 otherwise known as the Financing
Act.

"A study of the questioned promissory note reveals that it is a negotiable instrument which was
discounted or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 (Exh. "A")
considering the following: it is in writing and signed by the maker; it contains an unconditional
promise to pay a certain sum of money payable at a fixed or determinable future time; it is
payable to order (Sec. 1, NIL); the promissory note was negotiated when it was transferred and
delivered by IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in
the conditions that the note was complete and regular upon its face before the same was
overdue and without notice, that it had 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

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:chanrob1es virtual 1aw library
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:chanrob1es virtual 1aw library

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-forma.

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:jgc:c

"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:jgc:chanrobles.com.ph

"(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 seller’s skill
or 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;

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

"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.

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:jgc:chanrobles.com.ph

"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.

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.

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:jgc:chanrobles.com.ph

"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 a judgment
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).

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:jgc:chanrobles.com.ph

"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 (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. .

"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 .

"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).

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 implead the seller-assignor when it was
sued by the respondent-assignee because the petitioner’s defenses apply to both or 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:jgc:chanrobles.com.ph

"ATTY. PALACA:jgc:chanrobles.com.ph

"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:jgc:chanrobles.com.ph

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

"ATTY. ILAGAN:jgc:chanrobles.com.ph

"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:jgc:chanrobles.com.ph

"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:jgc:chanrobles.com.ph

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

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

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

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

Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any
fact, which would justify its act of taking the promissory note as not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that:jgc:chanrobles.com.ph

"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:chanrob1es virtual 1aw library

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

"(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it.

"SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT. — 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.

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:jgc:chanrobles.com.ph

"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 find judicial approval here. Where the goods sold turn out to be
defective, 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:jgc:chanrobles.com.ph

"‘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 will 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. . . . ."cralaw virtua1aw library

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 seller-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

5. G.R. No. 88866             February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner, vs. COURT OF APPEALS, GOLDEN
SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA
CASTILLO, respondents.
This case, for all its seeming complexity, turns on a simple question of negligence. The facts,
pruned of all non-essentials, are easily told.

The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the
Philippines and even abroad. Golden Savings and Loan Association was, at the time these events
happened, operating in Calapan, Mindoro, with the other private respondents as its principal
officers.

In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and
deposited over a period of two months 38 treasury warrants with a total value of P1,755,228.37.
They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its
General Manager and countersigned by its Auditor. Six of these were directly payable to Gomez
while the others appeared to have been indorsed by their respective payees, followed by Gomez
as second indorser.1

On various dates between June 25 and July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No.
2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the
branch office to the principal office of Metrobank, which forwarded them to the Bureau of
Treasury for special clearing.2

More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times
to ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was
meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over
Gloria's repeated inquiries and also as an accommodation for a "valued client," the petitioner
says it finally decided to allow Golden Savings to withdraw from the proceeds of the
warrants.3

The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July
13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of
P150,000.00. The total withdrawal was P968.000.00.4

In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account,
eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently
cleared warrants. The last withdrawal was made on July 16, 1979.

On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been
dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden
Savings of the amount it had previously withdrawn, to make up the deficit in its account.

The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of
Mindoro.5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed a
motion for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986,
the lower court modified its decision thus:

ACCORDINGLY, judgment is hereby rendered:

1. Dismissing the complaint with costs against the plaintiff;

2. Dissolving and lifting the writ of attachment of the properties of defendant

Golden Savings and Loan Association, Inc. and defendant Spouses Magno Castillo
and Lucia Castillo;

3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498
of the sum of P1,754,089.00 and to reinstate and credit to such account such
amount existing before the debit was made including the amount of P812,033.37 in
favor of defendant Golden Savings and Loan Association, Inc. and thereafter, to
allow defendant Golden Savings and Loan Association, Inc. to withdraw the amount
outstanding thereon before the debit;

4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association,
Inc. attorney's fees and expenses of litigation in the amount of P200,000.00.

5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia
Castillo attorney's fees and expenses of litigation in the amount of P100,000.00.

SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file this
petition for review on the following grounds:

1. Respondent Court of Appeals erred in disregarding and failing to apply the clear
contractual terms and conditions on the deposit slips allowing Metrobank to charge
back any amount erroneously credited.

(a) Metrobank's right to charge back is not limited to instances where the
checks or treasury warrants are forged or unauthorized.

(b) Until such time as Metrobank is actually paid, its obligation is that of a
mere collecting agent which cannot be held liable for its failure to collect on
the warrants.

2. Under the lower court's decision, affirmed by respondent Court of Appeals,

Metrobank is made to pay for warrants already dishonored, thereby perpetuating
the fraud committed by Eduardo Gomez.

3. Respondent Court of Appeals erred in not finding that as between Metrobank and
Golden Savings, the latter should bear the loss.

4. Respondent Court of Appeals erred in holding that the treasury warrants involved
in this case are not negotiable instruments.

The petition has no merit.

From the above undisputed facts, it would appear to the Court that Metrobank was indeed
negligent in giving Golden Savings the impression that the treasury warrants had been cleared
and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his
account with it. Without such assurance, Golden Savings would not have allowed the
withdrawals; with such assurance, there was no reason not to allow the withdrawal. Indeed,
Golden Savings might even have incurred liability for its refusal to return the money that to all
appearances belonged to the depositor, who could therefore withdraw it any time and for any
reason he saw fit.

It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited
them to its account with Metrobank. Golden Savings had no clearing facilities of its own. It relied
on Metrobank to determine the validity of the warrants through its own services. The proceeds of
the warrants were withheld from Gomez until Metrobank allowed Golden Savings itself to
withdraw them from its own deposit.7 It was only when Metrobank gave the go-signal that Gomez
was finally allowed by Golden Savings to withdraw them from his own account.

The argument of Metrobank that Golden Savings should have exercised more care in checking
the personal circumstances of Gomez before accepting his deposit does not hold water. It was
Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan; and
moreover, the treasury warrants were subject to clearing, pending which the depositor could not
withdraw its proceeds. There was no question of Gomez's identity or of the genuineness of his
signature as checked by Golden Savings. In fact, the treasury warrants were dishonored
allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or
indorser. Under the circumstances, it is clear that Golden Savings acted with due care and
diligence and cannot be faulted for the withdrawals it allowed Gomez to make.

By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not
trifling — more than one and a half million pesos (and this was 1979). There was no reason why
it should not have waited until the treasury warrants had been cleared; it would not have lost a
single centavo by waiting. Yet, despite the lack of such clearance — and notwithstanding that it
had not received a single centavo from the proceeds of the treasury warrants, as it now
repeatedly stresses — it allowed Golden Savings to withdraw — not once, not twice, but thrice —
from the uncleared treasury warrants in the total amount of P968,000.00

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the
clearance and it also wanted to "accommodate" a valued client. It "presumed" that the warrants
had been cleared simply because of "the lapse of one week." 8 For a bank with its long
experience, this explanation is unbelievably naive.

And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the
dorsal side of the deposit slips through which the treasury warrants were deposited by Golden
Savings with its Calapan branch. The conditions read as follows:
 Kindly note that in receiving items on deposit, the bank obligates itself only as the
depositor's collecting agent, assuming no responsibility beyond care in selecting
correspondents, and until such time as actual payment shall have come into
possession of this bank, the right is reserved to charge back to the depositor's
account any amount previously credited, whether or not such item is returned. This
also applies to checks drawn on local banks and bankers and their branches as well
as on this bank, which are unpaid due to insufficiency of funds, forgery,
unauthorized overdraft or any other reason. (Emphasis supplied.)

According to Metrobank, the said conditions clearly show that it was acting only as a collecting
agent for Golden Savings and give it the right to "charge back to the depositor's account any
amount previously credited, whether or not such item is returned. This also applies to checks
". . . which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other
reason." It is claimed that the said conditions are in the nature of contractual stipulations and
became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.

Doubt may be expressed about the binding force of the conditions, considering that they have
apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed,
it could be argued that the depositor, in signing the deposit slip, does so only to identify himself
and not to agree to the conditions set forth in the given permit at the back of the deposit slip. We
do not have to rule on this matter at this time. At any rate, the Court feels that even if the
deposit slip were considered a contract, the petitioner could still not validly disclaim
responsibility thereunder in the light of the circumstances of this case.

In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to
be suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true.
On the contrary, Article 1909 of the Civil Code clearly provides that —

Art. 1909. — The agent is responsible not only for fraud, but also for negligence,
which shall be judged 'with more or less rigor by the courts, according to whether
the agency was or was not for a compensation.

The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was
the clearance given by it that assured Golden Savings it was already safe to allow Gomez to
withdraw the proceeds of the treasury warrants he had deposited Metrobank misled Golden
Savings. There may have been no express clearance, as Metrobank insists (although this is
refuted by Golden Savings) but in any case that clearance could be implied from its allowing
Golden Savings to withdraw from its account not only once or even twice but three times. The
total withdrawal was in excess of its original balance before the treasury warrants were
deposited, which only added to its belief that the treasury warrants had indeed been cleared.

Metrobank's argument that it may recover the disputed amount if the warrants are not paid for
any reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would
have been no need at all for Golden Savings to deposit the treasury warrants with it for
clearance. There would have been no need for it to wait until the warrants had been cleared
before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way the
petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes more
so in the case at bar when it is considered that the supposed dishonor of the warrants was not
communicated to Golden Savings before it made its own payment to Gomez.

The belated notification aggravated the petitioner's earlier negligence in giving express or at
least implied clearance to the treasury warrants and allowing payments therefrom to Golden
Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the
forgery of the signatures of the general manager and the auditor of the drawer corporation, has
not been established.9 This was the finding of the lower courts which we see no reason to
disturb. And as we said in MWSS v. Court of Appeals: 10

Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be
established by clear, positive and convincing evidence. This was not done in the
present case.

A no less important consideration is the circumstance that the treasury warrants in question are
not negotiable instruments. Clearly stamped on their face is the word "non-negotiable."
Moreover, and this is of equal significance, it is indicated that they are payable from a particular
fund, to wit, Fund 501.

The following sections of the Negotiable Instruments Law, especially the underscored parts, are
pertinent:
 Sec. 1. — Form of negotiable instruments. — An instrument to be negotiable must
conform to the following requirements:

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

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

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

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

(e) Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.

Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is

unconditional within the meaning of this Act though coupled with —

(a) An indication of a particular fund out of which reimbursement is to be made or a

particular account to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument judgment.

But an order or promise to pay out of a particular fund is not unconditional.

The indication of Fund 501 as the source of the payment to be made on the treasury warrants
makes the order or promise to pay "not unconditional" and the warrants themselves non-
negotiable. There should be no question that the exception on Section 3 of the Negotiable
Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs.
Auditor General11 where the Court held:

The petitioner argues that he is a holder in good faith and for value of a negotiable
instrument and is entitled to the rights and privileges of a holder in due course, free
from defenses. But this treasury warrant is not within the scope of the negotiable
instrument law. For one thing, the document bearing on its face the words "payable
from the appropriation for food administration, is actually an Order for payment out
of "a particular fund," and is not unconditional and does not fulfill one of the
essential requirements of a negotiable instrument (Sec. 3 last sentence and section
[1(b)] of the Negotiable Instruments Law).

Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed
that they were "genuine and in all respects what they purport to be," in accordance with Section
66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the
non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the
purpose of guaranteeing the genuineness of the warrants but merely to deposit them with
Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped on
the back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed,
Metropolitan Bank & Trust Co., Calapan Branch."

The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we
feel this case is inapplicable to the present controversy.1âwphi1 That case involved checks
whereas this case involves treasury warrants. Golden Savings never represented that the
warrants were negotiable but signed them only for the purpose of depositing them for clearance.
Also, the fact of forgery was proved in that case but not in the case before us. Finally, the Court
found the Jai Alai Corporation negligent in accepting the checks without question from one
Antonio Ramirez notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did
not appear that he was authorized to indorse it. No similar negligence can be imputed to Golden
Savings.

We find the challenged decision to be basically correct. However, we will have to amend it
insofar as it directs the petitioner to credit Golden Savings with the full amount of the treasury
checks deposited to its account.

The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez
was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The
amount he has withdrawn must be charged not to Golden Savings but to Metrobank, which must
bear the consequences of its own negligence. But the balance of P586,589.00 should be debited
to Golden Savings, as obviously Gomez can no longer be permitted to withdraw this amount from
his deposit because of the dishonor of the warrants. Gomez has in fact disappeared. To also
credit the balance to Golden Savings would unduly enrich it at the expense of Metrobank, let
alone the fact that it has already been informed of the dishonor of the treasury warrants.

WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the
dispositive portion of the judgment of the lower court shall be reworded as follows:

3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter
allowing defendant Golden Savings & Loan Association, Inc. to withdraw the amount
outstanding thereon, if any, after the debit.

SO ORDERED

Metropolitan Bank & Trust Company vs. Court of Appeals G.R. No. 88866 February,
18, 1991

Facts:
Eduardo Gomez opened an account with Golden Savings and deposited 38 treasury
warrants. All warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden
Savings and deposited to its Savings account in Metrobank branch in Calapan, Mindoro. They
were sent for clearance. Meanwhile, Gomez is not allowed to withdraw from his account, later,
however, “exasperated” over Floria repeated inquiries and also as an accommodation for a
“valued” client Metrobank decided to allow Golden Savings to withdraw from proceeds of the
warrants. In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his
own account. Metrobank informed Golden Savings that 32 of the warrants had been dishonored
by the Bureau of Treasury and demanded the refund by Golden Savings of the amount it had
previously withdrawn, to make up the deficit in its account. The demand was rejected. Metrobank
then sued Golden Savings.

Issue:
1. Whether or not Metrobank can demand refund agaist Golden Savings with regard to the
amount withdraws to make up with the deficit as a result of the dishonored treasury warrants.
2. Whether or not treasury warrants are negotiable instruments

Held:
No. Metrobank is negligent in giving Golden Savings the impression that the treasury
warrants had been cleared and that, consequently, it was safe to allow Gomez to withdraw.
Without such assurance, Golden Savings would not have allowed the withdrawals. Indeed,
Golden Savings might even have incurred liability for its refusal to return the money that all
appearances belonged to the depositor, who could therefore withdraw it anytime and for any
reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings
deposited them to its account with Metrobank. Golden Savings had no clearing facilities of its
own. It relied on Metrobank to determine the validity of the warrants through its own services.
The proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden Savings
itself to withdraw them from its own deposit.
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed
that they were genuine and in all respects what they purport to be,” in accordance with Sec. 66
of NIL. The simple reason that NIL is not applicable to non negotiable instruments, treasury
warrants.

No. The treasury warrants are not negotiable instruments. Clearly stamped on their face is
the word: non negotiable.” Moreover, and this is equal significance, it is indicated that they are
payable from a particular fund, to wit, Fund 501. An instrument to be negotiable instrument must
contain an unconditional promise or orders to pay a sum certain in money. As provided by Sec 3
of NIL an unqualified order or promise to pay is unconditional though coupled with: 1 st, an
indication of a particular fund out of which reimbursement is to be made or a particular account
to be debited with the amount; or 2 nd, a statement of the transaction which give rise to the
instrument. But an order to promise to pay out of particular fund is not unconditional. The
indication of Fund 501 as the source of the payment to be made on the treasury warrants makes
the order or promise to pay “not conditional” and the warrants themselves non-negotiable. There
should be no question that the exception on Section 3 of NIL is applicable in the case at bar.

6. G.R. No. L-29900 June 28, 1974

IN THE MATTER OF THE INTESTATE ESTATE OF JUSTO PALANCA, Deceased, GEORGE

PAY, petitioner-appellant, vs. SEGUNDINA CHUA VDA. DE PALANCA, oppositor-appellee.

There is no difficulty attending the disposition of this appeal by petitioner on questions of law.
While several points were raised, the decisive issue is whether a creditor is barred by
prescription in his attempt to collect on a promissory note executed more than fifteen years
earlier with the debtor sued promising to pay either upon receipt by him of his share from a
certain estate or upon demand, the basis for the action being the latter alternative. The lower
court held that the ten-year period of limitation of actions did apply, the note being immediately
due and demandable, the creditor admitting expressly that he was relying on the wording "upon
demand." On the above facts as found, and with the law being as it is, it cannot be said that its
decision is infected with error. We affirm.

From the appealed decision, the following appears: "The parties in this case agreed to submit the
matter for resolution on the basis of their pleadings and annexes and their respective
memoranda submitted. Petitioner George Pay is a creditor of the Late Justo Palanca who died in
Manila on July 3, 1963. The claim of the petitioner is based on a promissory note dated January
30, 1952, whereby the late Justo Palanca and Rosa Gonzales Vda. de Carlos Palanca promised to
pay George Pay the amount of P26,900.00, with interest thereon at the rate of 12% per annum.
George Pay is now before this Court, asking that Segundina Chua vda. de Palanca, surviving
spouse of the late Justo Palanca, he appointed as administratrix of a certain piece of property
which is a residential dwelling located at 2656 Taft Avenue, Manila, covered by Tax Declaration
No. 3114 in the name of Justo Palanca, assessed at P41,800.00. The idea is that once said
property is brought under administration, George Pay, as creditor, can file his claim against the
administratrix."1 It then stated that the petition could not prosper as there was a refusal on the
part of Segundina Chua Vda. de Palanca to be appointed as administratrix; that the property
sought to be administered no longer belonged to the debtor, the late Justo Palanca; and that the
rights of petitioner-creditor had already prescribed. The promissory note, dated January 30,
1962, is worded thus: " `For value received from time to time since 1947, we [jointly and
severally promise to] pay to Mr. [George Pay] at his office at the China Banking Corporation the
sum of [Twenty Six Thousand Nine Hundred Pesos] (P26,900.00), with interest thereon at the
rate of 12% per annum upon receipt by either of the undersigned of cash payment from the
Estate of the late Don Carlos Palanca or upon demand'. . . . As stated, this promissory note is
signed by Rosa Gonzales Vda. de Carlos Palanca and Justo Palanca." 2 Then came this paragraph:
"The Court has inquired whether any cash payment has been received by either of the signers of
this promissory note from the Estate of the late Carlos Palanca. Petitioner informed that he does
not insist on this provision but that petitioner is only claiming on his right under the promissory
note ."3 After which, came the ruling that the wording of the promissory note being "upon
demand," the obligation was immediately due. Since it was dated January 30, 1952, it was clear
that more "than ten (10) years has already transpired from that time until to date. The action,
therefore, of the creditor has definitely prescribed." 4 The result, as above noted, was the
dismissal of the petition.

In an exhaustive brief prepared by Attorney Florentino B. del Rosario, petitioner did assail the
correctness of the rulings of the lower court as to the effect of the refusal of the surviving spouse
of the late Justo Palanca to be appointed as administratrix, as to the property sought to be
administered no longer belonging to the debtor, the late Justo Palanca, and as to the rights of
petitioner-creditor having already prescribed. As noted at the outset, only the question of
prescription need detain us in the disposition of this appeal. Likewise, as intimated, the decision
must be affirmed, considering the clear tenor of the promissory note.

From the manner in which the promissory note was executed, it would appear that petitioner
was hopeful that the satisfaction of his credit could he realized either through the debtor sued
receiving cash payment from the estate of the late Carlos Palanca presumptively as one of the
heirs, or, as expressed therein, "upon demand." There is nothing in the record that would
indicate whether or not the first alternative was fulfilled. What is undeniable is that on August 26,
1967, more than fifteen years after the execution of the promissory note on January 30, 1952,
this petition was filed. The defense interposed was prescription. Its merit is rather obvious.
Article 1179 of the Civil Code provides: "Every obligation whose performance does not depend
upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at
once." This used to be Article 1113 of the Spanish Civil Code of 1889. As far back as Floriano v.
Delgado,5 a 1908 decision, it has been applied according to its express language. The well-known
Spanish commentator, Manresa, on this point, states: "Dejando con acierto, el caracter mas
teorico y grafico del acto, o sea la perfeccion de este, se fija, para determinar el concepto de la
obligacion pura, en el distinctive de esta, y que es consecuencia de aquel: la exigibilidad
immediata."6

The obligation being due and demandable, it would appear that the filing of the suit after fifteen
years was much too late. For again, according to the Civil Code, which is based on Section 43 of
Act No. 190, the prescriptive period for a written contract is that of ten years. 7 This is another
instance where this Court has consistently adhered to the express language of the applicable
norm.8 There is no necessity therefore of passing upon the other legal questions as to whether or
not it did suffice for the petition to fail just because the surviving spouse refuses to be made
administratrix, or just because the estate was left with no other property. The decision of the
lower court cannot be overturned.

WHEREFORE, the lower court decision of July 24, 1968 is affirmed. Costs against George Pay.

7. G.R. No. L-2516  September 25, 1950. ANG TEK LIAN, petitioner, vs. THE COURT OF
APPEALS, respondent.

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

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

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

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

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

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

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

. . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from
the appellant, he did so with full knowledge that it would be dishonored upon
presentment. In that sense, the appellant could not be said to have acted
fraudulently because the complainant, in so accepting the check as it was drawn,
must be considered, by every rational consideration, to have done so fully aware of
the risk he was running thereby." (Brief for the appellant, p. 11.)

We are not aware of the uniformity of such practice. Instances have undoubtedly occurred
wherein the Bank required the indorsement of the drawer before honoring a check payable to
"cash." But cases there are too, where no such requirement had been made . It depends upon
the circumstances of each transaction.

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

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

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

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

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

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

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

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

Although a bank is entitled to pay the amount of a bearer check without further
inquiry, it is entirely reasonable for the bank to insist that holder give satisfactory
proof of his identity. . . . (Paton's Digest, Vol. I, p. 1089.)

Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally
unconnected with its dishonor. The Court of Appeals declared that it was returned unsatisfied
because the drawer had insufficient funds — not because the drawer's indorsement was lacking.

Wherefore, there being no question as to the correctness of the penalty imposed on the
appellant, the writ of certiorari is denied and the decision of the Court of Appeals is hereby
affirmed, with cost

Ang Tek Lian vs. Court of Appeals G.R. No. L-2516. September 25, 1950

FACTS: Knowing he had no funds therefor, petitioner Ang Tek Lian drew a check 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 the act. 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.

Petitioner was sued for estafa. In his defense, however, he argues 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.

ISSUE: WON a check payable to “cash” needs indorsement?

HELD: NO. Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order
of “cash” is a check payable to bearer, and the bank may pay it to the person presenting it for
payment without the drawer’s indorsement. 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.

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.  

8. G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS and SECURITY BANK
AND TRUST COMPANY, respondents.

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated
by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications,
the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the
complaint filed therein by herein petitioner against respondent bank.

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

1. On various dates, defendant, a commercial banking institution, through its

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

CTD CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

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

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

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

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

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

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff

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

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit

563) from herein plaintiff formally informing it of its possession of the CTDs in
question and of its decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to

furnish the former "a copy of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela
Cruz" obligation against which plaintiff proposed to apply the time deposits
(Defendant's Exhibit 564).

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

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

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

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

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

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

The instant petition is bereft of merit.

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

SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
 Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the

sum of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT
OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable
to said depositor 731 days. after date, upon presentation and
surrender of this certificate, with interest at the rate of 16% per
cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

5
AUTHORIZED SIGNATURES

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

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

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

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

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

money;

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

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

(e) Where the instrument is addressed to a drawee, he must be named or

otherwise indicated therein with reasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law for negotiability. The
parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr.
Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court
that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.

Atty. Calida:

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

witness:

a Yes, your Honor, and we have the record to show that Angel
dela Cruz was the one who cause (sic) the amount.

Atty. Calida:

q And no other person or entity or company, Mr. Witness?

 witness:

7
a None, your Honor.

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these

certificates of time deposit insofar as the bank is concerned?

witness:

a Angel dela Cruz is the depositor.

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself. 9 In the construction of
a bill or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the
writing may be read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they have constituted the writing to be
the only outward and visible expression of their meaning, no other words are to be added to it or
substituted in its stead. The duty of the court in such case is to ascertain, not what the parties
may have secretly intended as contradistinguished from what their words express, but what is
the meaning of the words they have used. What the parties meant must be determined by what
they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documents
provide that the amounts deposited shall be repayable to the depositor. And who, according to
the document, is the depositor? It is the "bearer." The documents do not say that the depositor is
Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the
amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may
be the bearer at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it
could have with facility so expressed that fact in clear and categorical terms in the documents,
instead of having the word "BEARER" stamped on the space provided for the name of the
depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are
repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely
declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously
other parties not privy to the transaction between them would not be in a position to know that
the depositor is not the bearer stated in the CTDs. Hence, the situation would require any party
dealing with the CTDs to go behind the plain import of what is written thereon to unravel the
agreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence
is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of
the elementary rule that the interpretation of obscure words or stipulations in a contract shall not
favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is
in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead
in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner
without informing respondent bank thereof at any time. Unfortunately for petitioner, although
the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement
between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement.
For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a
security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were
delivered as payment for the fuel products or as a security has been dissipated and resolved in
favor of the latter by petitioner's own authorized and responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr.,
Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr.
Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission
is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel,
an admission or representation is rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon. 14 A party may not go back on his own
acts and representations to the prejudice of the other party who relied upon them. 15 In the law
of evidence, whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing true, and to act upon such belief, he cannot,
in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit
manager could have easily said so, instead of using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill
of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver
with sufficient definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing
that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness
to it, plaintiff corporation opposed the motion.

Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the
CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now
labors under the presumption that evidence willfully suppressed would be adverse if produced. 19

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

. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote

therefrom:

The character of the transaction between the parties is to be

determined by their intention, regardless of what language was
used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge;
but if there was some other intention, it is not a pledge.
However, even though a transfer, if regarded by itself, appears
to have been absolute, its object and character might still be
qualified and explained by contemporaneous writing declaring it
to have been a deposit of the property as collateral security. It
has been said that a transfer of property by the debtor to a
creditor, even if sufficient on its face to make an absolute
conveyance, should be treated as a pledge if the debt continues
in inexistence and is not discharged by the transfer, and that
accordingly the use of the terms ordinarily importing
conveyance of absolute ownership will not be given that effect in
such a transaction if they are also commonly used in pledges
and mortgages and therefore do not unqualifiedly indicate a
transfer of absolute ownership, in the absence of clear and
unambiguous language or other circumstances excluding an
intent to pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the
Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person
to another in such a manner as to constitute the transferee the holder thereof, 21 and a holder
may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22
In the present case, however, there was no negotiation in the sense of a transfer of the legal title
to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the
bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of
Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed)
could at the most constitute petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition of such security,
in the event of non-payment of the principal obligation, must be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral
security, he would be a pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions
on pledge of incorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may

also be pledged. The instrument proving the right pledged shall be delivered
to the creditor, and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description
of the thing pledged and the date of the pledge do not appear in a public
instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de la
Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right
effective against and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be
made of the date of a pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third persons adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent
bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil
Code specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as

against third persons, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case the assignment
involves real property.

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

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

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

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

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

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

4. Whether or not plaintiff could compel defendant to preterminate the CTDs

before the maturity date provided therein.

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

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

As respondent court correctly observed, with appropriate citation of some doctrinal authorities,
the foregoing enumeration does not include the issue of negligence on the part of respondent
bank. An issue raised for the first time on appeal and not raised timely in the proceedings in the
lower court is barred by estoppel. 30 Questions raised on appeal must be within the issues framed
by the parties and, consequently, issues not raised in the trial court cannot be raised for the first
time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a
case are properly raised. Thus, to obviate the element of surprise, parties are expected to
disclose at a pre-trial conference all issues of law and fact which they intend to raise at the trial,
except such as may involve privileged or impeaching matters. The determination of issues at a
pre-trial conference bars the consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may be

considered encompassed by the issues on its right to preterminate and receive the proceeds of
the CTDs would be tantamount to saying that petitioner could raise on appeal any issue. We
agree with private respondent that the broad ultimate issue of petitioner's entitlement to the
proceeds of the questioned certificates can be premised on a multitude of other legal reasons
and causes of action, of which respondent bank's supposed negligence is only one. Hence,
petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless
exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below,
petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of
Commerce laying down the rules to be followed in case of lost instruments payable to bearer,
which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in
the case at bar, are merely permissive and not mandatory. The very first article cited by
petitioner speaks for itself.

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

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

It is an auxiliary verb indicating liberty, opportunity, permission and possibility.

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely
established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in
favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument. Significantly, none of the provisions cited by petitioner
categorically restricts or prohibits the issuance a duplicate or replacement instrument sans
compliance with the procedure outlined therein, and none establishes a mandatory precedent
requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed
decision is hereby AFFIRMED.

SO ORDERED.

9. G.R. Nos. L-25836-37 January 31, 1981 THE PHILIPPINE BANK OF COMMERCE,
plaintiff-appellee,
vs. JOSE M. ARUEGO, defendant-appellant.

The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of
First Instance of Manila, Branch XIII, in Civil Case No. 42066 denying his motion to set aside the
order declaring him in default, 1 and from the order of said court in the same case denying his
motion to set aside the judgment rendered after he was declared in default. 2 These two appeals
of the defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R, respectively.

Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file
one consolidated record on appeal of CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4

In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the
consolidated appeal to the Supreme Court on the ground that only questions of law are involved.
5

On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil
Case No. 42066 for the recovery of the total sum of about P35,000.00 with daily interest thereon
from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30)
days or fraction thereof plus attorney's fees equivalent to 10% of the total amount due and
costs. 6 The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes
of action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on
different dates covering the period from August 28, 1950 to March 14, 1951. 7 The sum sought to
be recovered represents the cost of the printing of "World Current Events," a periodical published
by the defendant. To facilitate the payment of the printing the defendant obtained a credit
accommodation from the plaintiff. Thus, for every printing of the "World Current Events," the
printer, Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against
the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for
the payment of the amounts advanced to Encal Press and Photo-Engraving, the plaintiff bank
also required defendant Aruego to execute a trust receipt in favor of said bank wherein said
defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the
promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for the
payment of all obligations arising from the draft. 8

Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On
December 14, 1959 defendant filed an urgent motion for extension of time to plead, and set the
hearing on December 16, 1959. 10 At the hearing, the court denied defendant's motion for
extension. Whereupon, the defendant filed a motion to dismiss the complaint on December 17,
1959 on the ground that the complaint states no cause of action because:

a) When the various bills of exchange were presented to the defendant as drawee for
acceptance, the amounts thereof had already been paid by the plaintiff to the drawer (Encal
Press and Photo Engraving), without knowledge or consent of the defendant drawee.

b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee
is an accommodating party only for the drawer (Encal Press and Photo-Engraving) and win be
liable in the event that the accommodating party (drawer) fails to pay its obligation to the
plaintiff. 11

The complaint was dismissed in an order dated December 22, 1959, copy of which was received
by the defendant on December 24, 1959. 12

On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting
upon the motion for reconsideration filed by the plaintiff, the trial court set aside its order
dismissing the complaint and set the case for hearing on March 15, 1960 at 8:00 in the morning.
14
A copy of the order setting aside the order of dismissal was received by the defendant on
March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit of the deputy sheriff of
Manila, Mamerto de la Cruz. On the following day, March 12, 1960, the defendant filed a motion
to postpone the trial of the case on the ground that there having been no answer as yet, the
issues had not yet been joined. 15 On the same date, the defendant filed his answer to the
complaint interposing the following defenses: That he signed the document upon which the
plaintiff sues in his capacity as President of the Philippine Education Foundation; that his liability
is only secondary; and that he believed that he was signing only as an accommodation party. 16

On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on
the ground that the defendant should have filed his answer on March 11, 1960. He contends that
by filing his answer on March 12, 1960, defendant was one day late. 17 On March 19, 1960 the
trial court declared the defendant in default. 18 The defendant learned of the order declaring him
in default on March 21, 1960. On March 22, 1960 the defendant filed a motion to set aside the
order of default alleging that although the order of the court dated March 7, 1960 was received
on March 11, 1960 at 5:00 in the afternoon, it could not have been reasonably expected of the
defendant to file his answer on the last day of the reglementary period, March 11, 1960, within
office hours, especially because the order of the court dated March 7, 1960 was brought to the
attention of counsel only in the early hours of March 12, 1960. The defendant also alleged that
he has a good and substantial defense. Attached to the motion are the affidavits of deputy sheriff
Mamerto de la Cruz that he served the order of the court dated March 7, 1960 on March 11,
1960, at 5:00 o'clock in the afternoon and the affidavit of the defendant Aruego that he has a
good and substantial defense. 19 The trial court denied the defendant's motion on March 25,
1960. 20 On May 6, 1960, the trial court rendered judgment sentencing the defendant to pay to
the plaintiff the sum of P35,444.35 representing the total amount of his obligation to the said
plaintiff under the twenty-two (22) causes of action alleged in the complaint as of November 15,
1957 and the sum of P10,000.00 as attorney's fees. 21

On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961
denying his motion to set aside the order declaring him in default, an appeal bond in the amount
of P60.00, and his record on appeal. The plaintiff filed his opposition to the approval of
defendant's record on appeal on May 13, 1960. The following day, May 14, 1960, the lower court
dismissed defendant's appeal from the order dated March 25, 1960 denying his motion to set
aside the order of default. 22 On May 19, 1960, the defendant filed a motion for reconsideration of
the trial court's order dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the
defendant's motion for reconsideration of the order dismissing appeal. 24 On May 21, 1960, the
trial court reconsidered its previous order dismissing the appeal and approved the defendant's
record on appeal. 25 On May 30, 1960, the defendant received a copy of a notice from the Clerk
of Court dated May 26, 1960, informing the defendant that the record on appeal filed ed by the
defendant was forwarded to the Clerk of Court of Appeals. 26

On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared
in default reiterating the same ground previously advanced by him in his motion for relief from
the order of default. 27 Upon opposition of the plaintiff filed on June 3, 1960, 28 the trial court
denied the defendant's motion to set aside the judgment by default in an order of June 11, 1960.
29
On June 20, 1960, the defendant filed his notice of appeal from the order of the court denying
his motion to set aside the judgment by default, his appeal bond, and his record on appeal. The
defendant's record on appeal was approved by the trial court on June 25, 1960. 30 Thus, the
defendant had two appeals with the Court of Appeals: (1) Appeal from the order of the lower
court denying his motion to set aside the order of default docketed as CA-G.R. NO. 27734-R; (2)
Appeal from the order denying his motion to set aside the judgment by default docketed as CA-
G.R. NO. 27940-R.

In his brief, the defendant-appellant assigned the following errors:

THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN

DEFAULT.

II

THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE

DEFENDANT IN DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON
FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN
APPROPRIATE ACTION.

III

THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF

OF ORDER OF DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST
DEFENDANT.

It has been held that to entitle a party to relief from a judgment taken against him through his
mistake, inadvertence, surprise or excusable neglect, he must show to the court that he has a
meritorious defense. 32 In other words, in order to set aside the order of default, the defendant
must not only show that his failure to answer was due to fraud, accident, mistake or excusable
negligence but also that he has a meritorious defense.

The record discloses that Aruego received a copy of the complaint together with the summons
on December 2, 1960; that on December 17, 1960, the last day for filing his answer, Aruego filed
a motion to dismiss; that on December 22, 1960 the lower court dismissed the complaint; that on
January 23, 1960, the plaintiff filed a motion for reconsideration and on March 7, 1960, acting
upon the motion for reconsideration, the trial court issued an order setting aside the order of
dismissal; that a copy of the order was received by the defendant on March 11, 1960 at 5:00
o'clock in the afternoon as shown in the affidavit of the deputy sheriff; and that on the following
day, March 12, 1960, the defendant filed his answer to the complaint.

The failure then of the defendant to file his answer on the last day for pleading is excusable. The
order setting aside the dismissal of the complaint was received at 5:00 o'clock in the afternoon.
It was therefore impossible for him to have filed his answer on that same day because the courts
then held office only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately
filed his answer on the following day.

However, while the defendant successfully proved that his failure to answer was due to
excusable negligence, he has failed to show that he has a meritorious defense. The defendant
does not have a good and substantial defense.

Defendant Aruego's defenses consist of the following:

a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a
representative capacity, as the then President of the Philippine Education Foundation Company,
publisher of "World Current Events and Decision Law Journal," printed by Encal Press and Photo-
Engraving, drawer of the said bills of exchange in favor of the plaintiff bank;
b) The defendant signed these bills of exchange not as principal obligor, but as accommodation
or additional party obligor, to add to the security of said plaintiff bank. The reason for this
statement is that unlike real bills of exchange, where payment of the face value is advanced to
the drawer only upon acceptance of the same by the drawee, in the case in question, payment
for the supposed bills of exchange were made before acceptance; so that in effect, although
these documents are labelled bills of exchange, legally they are not bills of exchange but mere
instruments evidencing indebtedness of the drawee who received the face value thereof, with
the defendant as only additional security of the same. 33

The first defense of the defendant is that he signed the supposed bills of exchange as an agent
of the Philippine Education Foundation Company where he is president. Section 20 of the
Negotiable Instruments Law provides that "Where the instrument contains or a person adds to
his signature words indicating that he signs for or on behalf of a principal or in a representative
capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of
words describing him as an agent or as filing a representative character, without disclosing his
principal, does not exempt him from personal liability."

An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that
he was signing as a representative of the Philippine Education Foundation Company. 34 He
merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose
his principal, Aruego is personally liable for the drafts he accepted.

The defendant also contends that he signed the drafts only as an accommodation party and as
such, should be made liable only after a showing that the drawer is incapable of paying. This
contention is also without merit.

An accommodation party is one who has signed the instrument as maker, drawer, indorser,
without receiving value therefor and for the purpose of lending his name to some other person.
Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the
time of the taking of the instrument knew him to be only an accommodation party. 35 In lending
his name to the accommodated party, the accommodation party is in effect a surety for the
latter. He lends his name to enable the accommodated party to obtain credit or to raise money.
He receives no part of the consideration for the instrument but assumes liability to the other
parties thereto because he wants to accommodate another. In the instant case, the defendant
signed as a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is primarily liable.
Thus, if the defendant who is a lawyer, he should not have signed as an acceptor/drawee. In
doing so, he became primarily and personally liable for the drafts.

The defendant also contends that the drafts signed by him were not really bills of exchange but
mere pieces of evidence of indebtedness because payments were made before acceptance. This
is also without merit.

Under the Negotiable Instruments Law, a bill of exchange is an unconditional order in writting
addressed by one person to another, signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain
in money to order or to bearer. 36 As long as a commercial paper conforms with the definition of a
bill of exchange, that paper is considered a bill of exchange. The nature of acceptance is
important only in the determination of the kind of liabilities of the parties involved, but not in the
determination of whether a commercial paper is a bill of exchange or not.

It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer
will result in a new trial which will serve no purpose and will just waste the time of the courts as
well as of the parties because the defense is nil or ineffective. 37

WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of
Manila denying the petition for relief from the judgment rendered in said case is hereby affirmed,
without pronouncement as to costs.

SO ORDERED.

PBC v Aruego| G.R. Nos. L-25836-37| January 31, 1981 |FERNANDEZ, J.:

SUMMARY: There were 22 transactions between Bank and Aruego for the printing of
defendant's periodical. Defendant had a credit accommodation with Bank. The printers would
collect the cost of printing from Bank. The total amount demanded was P35k. The instruments
were signed: "Jose Aruego (Acceptor) (Sgd.) Jose Aruego" Aruego alleged that he signed in his
capacity as President of Philippine Education Foundation (PEFC), publisher of the periodical; he's
not a principal obligor, but only an accommodation party; the documents are not legally bills of
exchange but only instruments evidencing indebtedness because payments were made before
acceptance. Court held that an agent who does not disclose his principal is not exempt from
liability. Aruego did not disclose that he was signing as a representative of PEFC. For failure to
disclose his principal, Aruego is personally liable.

As an accommodation drawee/acceptor, he became primarily and personally liable for the drafts.
As long as a commercial paper conforms with the definition of a bill of exchange, that paper is
considered a bill of exchange.

Facts:

 PBC instituted against Jose M. Aruego Civil Case for P35,000.00

o It involved 22 transactions on different dates from August 28, 1950 to March 14,
1951.
o This was for the cost of the printing of "World Current Events," a periodical
published by the defendant.
o To facilitate the payment of the printing the Aruego obtained a credit
accommodation from PBCom.
 for every printing of the "World Current Events," the printer, Encal Press and
Photo Engraving, collected the cost of printing by drawing a draft against the
PBC, said draft being sent later to Aruego for acceptance.
 As an added security PBC also required Aruego to execute a trust receipt in
favor of said bank
 Aruego filed a Motion to Dismiss1
 LC dismissed complaint, PBC filed MR
 LC, IFO of PBC for of P35,444.35, the total amount under the 22 transactions
 SC on Declaration of Default of Aruego
o The failure then of the defendant to file his answer on the last day for pleading is
excusable. The order setting aside the dismissal of the complaint was received at
5:00 o'clock in the afternoon. It was therefore impossible for him to have filed his
answer on that same day because the courts then held office only up to 5:00 o'clock
in the afternoon. Moreover, the defendant immediately filed his answer on the
following day.

o SC: while the defendant successfully proved that his failure to answer was due to
excusable negligence, he has failed to show that he has a meritorious defense.

ISSUES + RULING
W/N Aruego has a meritorious defense NO
Defendant Aruego's defenses:

1) He signed the BoEs in a representative capacity, as the then President of the Philippine
Education Foundation Company, publisher of "World Current Events and Decision Law Journal,"
printed by Encal Press and Photo-Engraving, drawer of the said bills of exchange in favor of the
plaintiff bank;

2) He signed them not as principal obligor, but as accommodation or additional party obligor, to
add to the security of said plaintiff bank

 reason:unlike real bills of exchange, where payment of the face value is advanced to the
drawer only upon acceptance of the same by the drawee, in the case in question, payment
for the supposed bills of exchange were made before acceptance; so that in effect,
although these documents are labelled bills of exchange, legally they are not bills of
exchange but mere instruments evidencing indebtedness of the drawee who received the
face value thereof, with the defendant as only additional security of the same. 

1st Defense

SC

1
When the various bills of exchange were presented to the Aruego as drawee for acceptance, the amounts thereof had already been paid by the PBC to
the drawer (Encal Press and Photo Engraving), without knowledge or consent of the Aruego as Drawee
Aruego (Drawee) is an accommodating party only for the drawer (Encal Press and Photo-Engraving) and will be liable in the event that the
accommodating party (drawer) fails to pay its obligation to the plaintiff [PBC]
 - SC: S20 NIL:"Where the instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal or in a representative capacity, he is
not liable on the instrument if he was duly authorized; but the mere addition of words
describing him as an agent or as filing a representative character, without disclosing his
principal, does not exempt him from personal liability."
- In the drafts, there was no disclosure that he was signing as a representative of the
Philippine Education Foundation Company. He merely signed as follows: "JOSE ARUEGO
(Acceptor) (SGD) JOSE ARGUEGO
- For failure to disclose his principal, Aruego is personally liable for the drafts he accepted.

2nd Defense

- An accommodation party is one who has signed the instrument as maker, drawer,
indorser, without receiving value therefor and for the purpose of lending his name to some
other person. Such person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of the taking of the instrument knew him to be
only an accommodation party.
- In lending his name to the accommodated party, the accommodation party is in effect a
surety for the latter. He lends his name to enable the accommodated party to obtain credit
or to raise money. He receives no part of the consideration for the instrument but assumes
liability to the other parties thereto because he wants to accommodate another.
- In the instant case, the defendant signed as a drawee/acceptor. Under NIL, a drawee is
primarily liable.
- Aruego is a lawyer, he should not have signed as an acceptor/drawee. In doing so, he
became primarily and personally liable for the drafts.

W/N the drafts signed by Aruego were not really bills of exchange but mere pieces of
evidence of indebtedness because payments were made before acceptance. NO

- NIL: a bill of exchange is an unconditional order in writing addressed by one person to

another, signed by the person giving it, requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future time a sum certain in money to order
or to bearer. 
- As long as a commercial paper conforms with the definition of a bill of
exchange, that paper is considered a bill of exchange.
o The nature of acceptance is important only in the determination of the kind of
liabilities of the parties involved, but not in the determination of whether a
commercial paper is a bill of exchange or not.

Disposition: Affirmed