UP Law F2021 011 Traders Royal Bank vs.

CA
NIL – Requisites of Negotiability Sec 1. (d), Act 2031 1997 Torres, Jr.

SUMMARY
Private respondent Filriters is the registered owner of the subject certificate of indebtedness (CBCI) issued by the Central
Bank. It transferred such CBCI to Philfinance under a deed of assignment. Subsequently, Philfinance transferred the same
note to petitioner TRB. Petitioner sought to register in its name the CBCI before the Central Bank but the latter refused
over objections of Filriters, arguing among others, that the CBCI was not a negotiable instrument. The RTC and CA ruled
in favor of Filriters, upholding the non-negotiability of the certificate as it indicated on its face that the same was payable
to Filriters only. The Supreme Court affirmed the lower courts’ ruling and holding that the freedom in negotiability is
totally absent in the said certificate of indebtedness as it merely provides to pay a sum of money to a specified person or
entity for a period of time.

FACTS
 Petitioner: Traders Royal Bank (TRB)
 Private respondents: Filriters Guaranty Assurance Corporation (Filriters) & Central Bank of the Philippines
(Central Bank)

 Private respondent Filriters is the registered owner of Central Bank Certificate of Indebtedness (CBCI) No. D891.
The Certificate of Indebtedness issued by the Central Bank reads:
“The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer, if this Certificate
of Indebtedness be registered, to Filriters Guaranty Assurance Corporation, the registered owner hereof, the
principal sum of Five Hundred Thousand Pesos.”

 On November 27, 1979, Filriters executed a Deed of Assignment to transfer unto Philippine Underwriters Finance
Corporation (Philfinance) all its right and title to CBCI No. D891. On February 4, 1981, while CBCI No. D891 was
still registered under the name of Filriters, Philfinance transferred the said CBCI to petitioner TRB under a
repurchase agreement. Philfinance failed to repurchase the CBCI. As such, Philfinance executed a deed of
assignment, conveying to TRB all its right and title to CBCI No. D891.

 TRB then sought the transfer and registration of CBCI No. D891 in its name before the Central Bank. However, the
latter refuse to effect the transfer and registration in view of the objection by Filriters.

 TRB filed a petition for Mandamus before the RTC-Manila, compelling the Central Bank to register the transfer of
the subject CBCI to the petitioner. Central Bank prayed that Filriters be impleaded, which was granted by the
lower court. Filriters interjected the following special defenses against the allegations of TRB: (a) that the note
was transferred to Philfinance without consideration or any benefit to Filriters, violating the trust fund doctrine;
(b) no board resolution or clearance from the Insurance Commission was issued authorizing the transfer of the
CBCI to Philfinance; (c) that the assignment of the CBCI to Philfinance was an illegal act in the sense of a malum in
se or malum prohibitum since the CBCI constitutes reserve investment of Filriters against liabilities, which is a
requirement under the Insurance Code, and such diminution of reserve investments is immoral and against
public policy; and (d) the CBCI No. D891 was not a negotiable instrument since the CBCI was not payable to
bearer but was registered in the name of Filriters.

 The RTC-Manila ruled in favor of Central Bank and Filriters and declared the assignment of CBCI to Philfinance
and subsequently, to TRB, as null and void. Petitioner TRB appealed before the CA, arguing that the CBCI was a
negotiable instrument, having acquired the said note from Philfinance as a holder in due course. The CA ruled
against TRB, holding that the CBCI was not a negotiable instrument as it clearly stated that it was payable to
Filriters.

 Before the SC, petitioner TRB argued that Philfinance owns 90% of Filriters’ equity and the two corporations
have identical corporate officers, thus demanding the application of the doctrine of piercing the veil of corporate
fiction so as to give validity to the transfer of the CBCI to petitioner TRB. TRB posits that the consideration paid
by it for the CBCI to Philfinance constitutes payment to Filriters, the registered owner of the note. Thus, there is
 no merit to the RTC’s ruling that the transfer of CBCI from Filriters to Philfinance was null and void for lack of
consideration.

RATIO
[MAIN] W/N the CBCI was a negotiable instrument - NO
The subject CBCI is not a negotiable instrument in the absence of words of negotiability within the meaning of the
negotiable instruments law (Act 2031).

A certificate of indebtedness pertains to certificates for the creation and maintenance of a permanent revolving fund,
and is similar to a bond. Being equivalent to a bond, it is properly understood as acknowledgment of an obligation to
pay a fixed sum of money. Citing the Court of Appeals: ‘The instrument provides a promise to pay Filriters Guaranty
Assurance Corporation, the registered owner thereof (see the provision of the CBCI above).” The instrument is payable
only to Filriters, the registered owner, whose name is inscribed thereon. It lacks the words of negotiability which
should have served as an expression of consent that the instrument may be transferred by negotiation.

The language of negotiability which characterizes a negotiable paper as a credit instrument is its freedom to circulate
as a substitute for money. This freedom in negotiability is total absent in a certificate of indebtedness as it merely
provides to pay a sum of money to a specified person or entity for a period of time.

What transpired between Philfinance and TRB?

The transfer of the instrument from Philfinance to TRB was merely an assignment, and is not governed by the
negotiable instruments law.

W/N there was a valid transfer of CBCI from Filriters to Philfinance? – NONE
Philfinance merely borrowed the subject CBCI from Filriters, a sister corporation. Since there was no consideration
involved, the assignment made was a complete nullity.

Moreover, the transfer between Filriters and Philfinance did not conform to Central Bank Circ. No. 769, which
provides that any assignment of registered certificates shall not be valid unless made by the registered owner in
person or by his representative duly authorized in writing. Since there was no board resolution passed by the Bod of
Filriters authorizing such assignment, the transfer did not bind Filriters and violated the Circular, resulting in the
nullity of the transfer.

W/N the case calls for the application of the doctrine of piercing the veil of corporate fiction (see argument of
TRB before the Ratio portion)- NO
The fact that Philfinance owns majority shares in Filriters is not by itself a ground to disregard the independent
corporate status of Filriters, citing Liddel vs. CIR. The doctrine is merely an equitable remedy, and may be awarded
only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime or where a corporation is a mere alter ego or business conduit of a person.

The petitioner was not defrauded when it acquired the subject CBCI from Philfinance as the certificate states on its
face that it is registered in the name of Filriters. This should have put the petitioner on notice, and prompted it to
inquire from Filriters as to Philfinance's title over the same or its authority to assign the certificate.

FALLO

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