Republic of the Philippines SUPREME COURT Manila

EN BANC
G.R. No. L-1405 July 31, 1948
BENJAMIN ABUBAKAR, petitioner, vs. THE AUDITOR GENERAL, respondent.
Viray and Viola Viray for petitioner. First Assistant Solicitor General Roberto A. Gianzon and Solicitor
Manuel Tomacruz for respondent.
BENGZON, J .:
We are asked to overrule the decision of the Auditor General refusing to authorize the payment of
Treasury warrant No. A-2867376 for P1,000 which was issued in favor of Placido S. Urbanes on
December 10, 1941, but is now in the hands of herein petitioner Benjamin Abubakar.
For his refusal the respondent gave two reasons: first, because the money available for the
redemption of treasury warrants issued before January 2, 1942, is appropriated by Republic Act No.
80 (Item F-IV-8) and this warrant does not come within the purview of said appropriation; and second,
because on of the requirements of his office had not been complied with, namely, that it must be
shown that the holders of warrants covering payment or replenishment of cash advances for official
expenditures (as this warrant is) received them in payment of definite government obligations.
Finding the first reason to be sufficiently valid we shall not discuss, nor pass upon the second.
There is no doubt as to the authenticity and date of the treasury warrant. There is no question that it
was regularly indorsed by the payee and is now in the custody of the herein petitioner who is a private
individual. On the other hand, it is admitted that the warrant was originally made payable to Placido S.
Urbanes in his capacity as disbursing officer of the Food Administration for "additional cash advance
for Food Production Campaign in La Union" (Annex A). It is thus apparent that this is a treasury
warrant issued in favor of a public officer or employee and held in possession by a private individual.
Such being the case, the Auditor General can hardly be blamed for not authorizing its redemption out
of an appropriation specifically for "treasury warrants issued ... in favor of and held in possession by
private individuals." (Republic Act No. 80, Item F-IV-8.) This warrant was not issued in favor of a
private individual. It was issued in favor of a government employee.
The distinction is not without a difference. Outstanding treasury warrants issued prior to January 2,
1942, amount to more than four million pesos. The appropriation herein mentioned is only for
P1,750,000. Obviously Congress wished to provide for redemption of one class of warrants those
issued to private individuals as distinguished from those issued in favor of government officials.
Basis for the discrimination is not lacking. Probably the Government is not so sure that those warrants
to officials have all been properly used by the latter during the Japanese occupation or maybe it wants
to conduct further inquiries as to the equities of the present holders thereof.
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument an dis
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 instruments 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. (Section 3 last sentenced and section 1[b] of the Negotiable
Instruments Law.) In the United States, government warrants for the payment of money are not
negotiable instruments nor commercial proper
1

Anyway the question here is not whether the Government should eventually pay this warrant, or is
ultimately responsible for it, but whether the Auditor General erred in refusing to permit payment out of
the particular appropriation in Item F-IV-8 of Republic Act No. 80. We think that he did not. Petition
dismissed, with costs.

Republic of the Philippines SUPREME COURT Manila
EN BANC
G.R. No. L-2516 September 25, 1950
ANG TEK LIAN, petitioner, vs. THE COURT OF APPEALS, respondent.
Laurel, Sabido, Almario and Laurel for petitioner. Office of the Solicitor General Felix Bautista Angelo
and Solicitor Manuel Tomacruz for respondent.
BENGZON, J .:
For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court of First Instance
of Manila. The Court of Appeals affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday, November 16,
1946, the check Exhibits A upon the China Banking Corporation for the sum of P4,000, payable to the
order of "cash". He delivered it to Lee Hua Hong in exchange for money which the latter handed in act.
On November 18, 1946, the next business day, the check was presented by Lee Hua Hong to the
drawee bank for payment, but it was dishonored for insufficiency of funds, the balance of the deposit
of Ang Tek Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who testified that "on November 16,
1946, appellant went to his (complainant's) office, at 1217 Herran, Paco, Manila, and asked him to
exchange Exhibit A which he (appellant) then brought with him with cash alleging that he needed
badly the sum of P4,000 represented by the check, but could not withdraw it from the bank, it being
then already closed; that in view of this request and relying upon appellant's assurance that he had
sufficient funds in the blank to meet Exhibit A, and because they used to borrow money from each
other, even before the war, and appellant owns a hotel and restaurant known as the North Bay Hotel,
said complainant delivered to him, on the same date, the sum of P4,000 in cash; that despite repeated
efforts to notify him that the check had been dishonored by the bank, appellant could not be located
any-where, until he was summoned in the City Fiscal's Office in view of the complaint for estafa filed in
connection therewith; and that appellant has not paid as yet the amount of the check, or any part
thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for decision
is whether under the facts found, estafa had been accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling committed "By
post dating a check, or issuing such check in payment of an obligation the offender knowing that at the
time he had no funds in the bank, or the funds deposited by him in the bank were not sufficient to
cover the amount of the check, and without informing the payee of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly held liable. In this connection, it
must be stated that, as explained in People vs. Fernandez (59 Phil., 615), estafa is committed by
issuing either a postdated check or an ordinary check to accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash" and had not been endorsed
by Ang Tek Lian, the defendant is not guilty of the offense charged. Based on the proposition that "by
uniform practice of all banks in the Philippines a check so drawn is invariably dishonored," the
following line of reasoning is advanced in support of the argument:
. . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from the appellant, he did
so with full knowledge that it would be dishonored upon presentment. In that sense, the appellant
could not be said to have acted fraudulently because the complainant, in so accepting the check as it
was drawn, must be considered, by every rational consideration, to have done so fully aware of the
risk he was running thereby." (Brief for the appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have undoubtedly occurred wherein the
Bank required the indorsement of the drawer before honoring a check payable to "cash." But cases
there are too, where no such requirement had been made . It depends upon the circumstances of
each transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of "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 costs.
Moran, C. J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.









Republic of the Philippines SUPREME COURT Manila
EN BANC
G.R. No. L-10221 February 28, 1958
Intestate of Luther Young and Pacita Young, spouses. PACIFICA JIMENEZ, petitioner-appellee,
vs. DR. JOSE BUCOY, administrator-appellant.
Frank W. Brady and Pablo C. de Guia, Jr. for appellee. E. A. Beltran for appellant.
BENGZON, J .:
In this intestate of Luther Young and Pacita Young who died in 1954 and 1952 respectively, Pacifica
Jimenez presented for payment four promissory notes signed by Pacita for different amounts totalling
twenty-one thousand pesos (P21,000).
Acknowledging receipt by Pacita during the Japanese occupation, in the currency then prevailing, the
administrator manifested willingness to pay provided adjustment of the sums be made in line with the
Ballantyne schedule.
The claimant objected to the adjustment insisting on full payment in accordance with the notes.
Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales, Judge, held that the
notes should be paid in the currency prevailing after the war, and that consequently plaintiff was
entitled to recover P21,000 plus attorneys fees for the sum of P2,000.
Hence this appeal.
Executed in the month of August 1944, the first promissory note read as follows:
Received from Miss Pacifica Jimenez the total amount of P10,000) ten thousand pesos payable six
months after the war, without interest.
The other three notes were couched in the same terms, except as to amounts and dates.
There can be no serious question that the notes were promises to pay "six months after the war," the
amounts mentioned.
But the important question, which obviously compelled the administrator to appeal, is whether the
amounts should be paid, peso for peso, or whether a reduction should be made in accordance with
the well-known Ballantyne schedule.
This matter of payment of loans contracted during the Japanese occupation has received our attention
in many litigations after the liberation. The gist of our adjudications, in so far as material here, is that if
the loan should be paid during the Japanese occupation, the Ballantyne schedule should apply with
corresponding reduction of the amount.
1
However, if the loan was expressly agreed to be payable only
after the war or after liberation, or became payable after those dates, no reduction could be effected,
and peso-for-peso payment shall be ordered in Philippine currency.
2

The Ballantyne Conversion Table does not apply where the monetary obligation, under the contract,
was not payable during the Japanese occupation but until after one year counted for the date of
ratification of the Treaty of Peace concluding the Greater East Asia War. (Arellano vs. De Domingo,
101 Phil., 902.)
When a monetary obligation is contracted during the Japanese occupation, to be discharged after the
war, the payment should be made in Philippine Currency. (Kare et al. vs. Imperial et al., 102 Phil.,
173.)
Now then, as in the case before us, the debtor undertook to pay "six months after the war," peso for
peso payment is indicated.
The Ang Lam
3
case cited by appellant is not controlling, because the loan therein given could have
been repaid during the Japanese occupation. Dated December 26, 1944, it was payable within one
year. Payment could therefore have been made during January 1945. The notes here in question
were payable only after the war.
The appellant administrator calls attention to the fact that the notes contained no express promise to
pay a specified amount. We declare the point to be without merit. In accordance with doctrines on the
matter, the note herein-above quoted amounted in effect to "a promise to pay ten thousand pesos six
months after the war, without interest." And so of the other notes.
"An acknowledgment may become a promise by the addition of words by which a promise of payment
is naturally implied, such as, "payable," "payable" on a given day, "payable on demand," "paid . . .
when called for," . . . (10 Corpus Juris Secundum p. 523.)
"To constitute a good promissory note, no precise words of contract are necessary, provided they
amount, in legal effect, to a promise to pay. In other words, if over and above the mere
acknowledgment of the debt there may be collected from the words used a promise to pay it, the
instrument may be regarded as a promissory note. 1 Daniel, Neg. Inst. sec. 36 et seq.; Byles, Bills, 10,
11, and cases cited . . . "Due A. B. $325, payable on demand," or, "I acknowledge myself to be
indebted to A in $109, to be paid on demand, for value received," or, "I O. U. $85 to be paid on May
5th," are held to be promissory notes, significance being given to words of payment as indicating a
promise to pay." 1 Daniel Neg. Inst. see. 39, and cases cited. (Cowan vs. Hallack, (Colo.) 13 Pacific
Reporter 700, 703.)
Another argument of appellant is that as the deceased Luther Young did not sign these notes, his
estate is not liable for the same. This defense, however, was not interposed in the lower court. There
the only issue related to the amount to be amount, considering that the money had been received in
Japanese money. It is now unfair to put up this new defense, because had it been raised in the court
below, appellees could have proved, what they now alleged that Pacita contracted the obligation to
support and maintain herself, her son and her husband (then concentrated at Santo Tomas University)
during the hard days of the occupation.
It is now settled practice that on appeal a change of theory is not permitted.
In order that a question may be raised on appeal, it is essential that it be within the issues made by the
parties in their pleadings. Consequently, when a party deliberately adopts a certain theory, and the
case is tried and decided upon that theory in the court below, he will not be permitted to change his
theory on appeal because, to permit him to do so, would be unfair to the adverse party. (Rules of
Court by Moran-1957 Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38 Phil., 424; American Express
Company vs. Natividad, 46 Phil., 207; San Agustin vs. Barrios, 68 Phil., 475, 480; Toribio vs. Dacasa,
55 Phil., 461.)
Appellant's last assignment of error concerns attorneys fees. He says there was no reason for making
this and exception to the general rule that attorney's fees are not recoverable in the absence of
stipulation.
Under the new Civil Code, attorney's fees and expenses of litigation new be awarded in this case if
defendant acted in gross and evident bad faith in refusing to satisfy plaintiff's plainly valid, just and
demandable claim" or "where the court deems it just and equitable that attorney's fees be recovered"
(Article 2208 Civil Code). These are if applicable some of the exceptions to the general rule that
in the absence of stipulation no attorney's fees shall be awarded.
The trial court did not explain why it ordered payment of counsel fees. Needless to say, it is desirable
that the decision should state the reason why such award is made bearing in mind that it must
necessarily rest on an exceptional situation. Unless of course the text of the decision plainly shows the
case to fall into one of the exceptions, for instance "in actions for legal support," when exemplary
damages are awarded," etc. In the case at bar, defendant could not obviously be held to have acted in
gross and evident bad faith." He did not deny the debt, and merely pleaded for adjustment, invoking
decisions he thought to be controlling. If the trial judge considered it "just and equitable" to require
payment of attorney's fees because the defense adjustment under Ballantyne schedule proved
to be untenable in view of this Court's applicable rulings, it would be error to uphold his view.
Otherwise, every time a defendant loses, attorney's fees would follow as a matter of course. Under the
article above cited, even a clearly untenable defense would be no ground for awarding attorney's fees
unless it amounted to "gross and evident bad faith."
Plaintiff's attorneys attempt to sustain the award on the ground of defendant's refusal to accept her
offer, before the suit, to take P5,000 in full settlement of her claim. We do not think this is tenable,
defendant's attitude being merely a consequence of his line of defense, which though erroneous does
not amount to "gross and evident bad faith." For one thing, there is a point raised by defendant, which
so far as we are informed, has not been directly passed upon in this jurisdiction: the notes contained
no express promise to pay a definite amount.
There being no circumstance making it reasonable and just to require defendant to pay attorney's
fees, the last assignment of error must be upheld.
Wherefore, in view of the foregoing considerations, the appealed decision is affirmed, except as to the
attorney's fees which are hereby disapproved. So ordered.
Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L. Endencia and Felix,
JJ., concur.




















Republic of the Philippines SUPREME COURT Manila
SECOND DIVISION

G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS and SECURITY BANK AND
TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.

REGALADO, J .:
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615
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)

AUTHORIZED SIGNATURES
5

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

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law,
enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties'
bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P.
Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the depositor
reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in
these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic)
the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor.
7

xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the
bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself.
9
In the construction of a bill
or note, the intention of the parties is to control, if it can be legally ascertained.
10
While the writing may
be read in the light of surrounding circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or substituted in its stead. The duty
of the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they said.
11

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

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the
negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit
for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer
instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz,
as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to
deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its
fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or
as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and
responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex
Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz
to guarantee his purchases of fuel products" (Emphasis ours.)
13
This admission is conclusive upon
petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved
as against the person relying thereon.
14
A party may not go back on his own acts and representations
to the prejudice of the other party who relied upon them.
15
In the law of evidence, whenever a party
has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a
particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such
declaration, act, or omission, be permitted to falsify it.
16

If it were true that the CTDs were delivered as payment and not as security, petitioner's credit
manager could have easily said so, instead of using the words "to guarantee" in the letter aforequoted.
Besides, when respondent bank, as defendant in the court below, moved for a bill of particularity
therein
17
praying, among others, that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel
de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered
to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed
the motion.
18
Had it produced the receipt prayed for, it could have proved, if such truly was the fact,
that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner
now labors under the presumption that evidence willfully suppressed would be adverse if produced.
19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al.
20
is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:
The character of the transaction between the parties is to be determined by their intention, regardless
of what language was used or what the form of the transfer was. If it was intended to secure the
payment of money, it must be construed as a pledge; but if there was some other intention, it is not a
pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its
object and character might still be qualified and explained by contemporaneous writing declaring it to
have been a deposit of the property as collateral security. It has been said that a transfer of property
by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be
treated as a pledge if the debt continues in inexistence and is not discharged by the transfer, and that
accordingly the use of the terms ordinarily importing conveyance of absolute ownership will not be
given that effect in such a transaction if they are also commonly used in pledges and mortgages and
therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and
unambiguous language or other circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from one person to another in such
a manner as to constitute the transferee the holder thereof,
21
and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof.
22
In the present case,
however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of
petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have
sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we
even disregard the fact that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of the principal obligation, must
be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien.
23
As such holder of collateral
security, he would be a pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights,
24
which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and
the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz.
25
Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective
against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not
a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge
contract, but a rule of substantive law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely.
26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank
was embodied in a public instrument.
27
With regard to this other mode of transfer, the Civil Code
specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons,
unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in
case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of
its lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better
right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not
private respondent observed the requirements of the law in the case of lost negotiable instruments
and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised that
issue in the lower court.
28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted
by them to the trial court.
29
The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against the
depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs
and the depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date
provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each
other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel.
30
Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal.
31

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

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

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner
still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce
laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will
reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely
permissive and not mandatory. The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court
of competent jurisdiction, asking that the principal, interest or dividends due or about to become due,
be not paid a third person, as well as in order to prevent the ownership of the instrument that a
duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part
of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of
a duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not
mandatory but discretional.
34
The word "may" is usually permissive, not mandatory.
35
It is an auxiliary
verb indicating liberty, opportunity, permission and possibility.
36

Moreover, as correctly analyzed by private respondent,
37
Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely
established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in favor
of the party liable thereon who, for some valid ground, may elect to refuse to issue a replacement of
the instrument. Significantly, none of the provisions cited by petitioner categorically restricts or
prohibits the issuance a duplicate or replacement instrument sans compliance with the procedure
outlined therein, and none establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed
decision is hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., Padilla and Nocon, JJ., concur.

























Republic of the Philippines SUPREME COURT Manila
SECOND DIVISION

G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS and SECURITY BANK AND
TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.

REGALADO, J .:
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615
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)

AUTHORIZED SIGNATURES
5

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

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law,
enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties'
bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P.
Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the depositor
reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in
these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic)
the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor.
7

xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the
bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself.
9
In the construction of a bill
or note, the intention of the parties is to control, if it can be legally ascertained.
10
While the writing may
be read in the light of surrounding circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or substituted in its stead. The duty
of the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they said.
11

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

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the
negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit
for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer
instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz,
as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to
deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its
fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or
as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and
responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex
Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz
to guarantee his purchases of fuel products" (Emphasis ours.)
13
This admission is conclusive upon
petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved
as against the person relying thereon.
14
A party may not go back on his own acts and representations
to the prejudice of the other party who relied upon them.
15
In the law of evidence, whenever a party
has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a
particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such
declaration, act, or omission, be permitted to falsify it.
16

If it were true that the CTDs were delivered as payment and not as security, petitioner's credit
manager could have easily said so, instead of using the words "to guarantee" in the letter aforequoted.
Besides, when respondent bank, as defendant in the court below, moved for a bill of particularity
therein
17
praying, among others, that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel
de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered
to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed
the motion.
18
Had it produced the receipt prayed for, it could have proved, if such truly was the fact,
that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner
now labors under the presumption that evidence willfully suppressed would be adverse if produced.
19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al.
20
is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:
The character of the transaction between the parties is to be determined by their intention, regardless
of what language was used or what the form of the transfer was. If it was intended to secure the
payment of money, it must be construed as a pledge; but if there was some other intention, it is not a
pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its
object and character might still be qualified and explained by contemporaneous writing declaring it to
have been a deposit of the property as collateral security. It has been said that a transfer of property
by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be
treated as a pledge if the debt continues in inexistence and is not discharged by the transfer, and that
accordingly the use of the terms ordinarily importing conveyance of absolute ownership will not be
given that effect in such a transaction if they are also commonly used in pledges and mortgages and
therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and
unambiguous language or other circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from one person to another in such
a manner as to constitute the transferee the holder thereof,
21
and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof.
22
In the present case,
however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of
petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have
sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we
even disregard the fact that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of the principal obligation, must
be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien.
23
As such holder of collateral
security, he would be a pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights,
24
which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and
the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz.
25
Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective
against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not
a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge
contract, but a rule of substantive law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely.
26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank
was embodied in a public instrument.
27
With regard to this other mode of transfer, the Civil Code
specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons,
unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in
case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of
its lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better
right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not
private respondent observed the requirements of the law in the case of lost negotiable instruments
and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised that
issue in the lower court.
28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted
by them to the trial court.
29
The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against the
depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs
and the depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date
provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each
other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel.
30
Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal.
31

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

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

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner
still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce
laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will
reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely
permissive and not mandatory. The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court
of competent jurisdiction, asking that the principal, interest or dividends due or about to become due,
be not paid a third person, as well as in order to prevent the ownership of the instrument that a
duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part
of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of
a duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not
mandatory but discretional.
34
The word "may" is usually permissive, not mandatory.
35
It is an auxiliary
verb indicating liberty, opportunity, permission and possibility.
36

Moreover, as correctly analyzed by private respondent,
37
Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely
established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in favor
of the party liable thereon who, for some valid ground, may elect to refuse to issue a replacement of
the instrument. Significantly, none of the provisions cited by petitioner categorically restricts or
prohibits the issuance a duplicate or replacement instrument sans compliance with the procedure
outlined therein, and none establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed
decision is hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., Padilla and Nocon, JJ., concur.

















Republic of the Philippines
Supreme Court
Manila

THIRD DIVISION


PHILIPPINE NATIONAL BANK, G.R. No. 170325
Petitioner,
Present:

YNARES-SANTIAGO, J.,
C
hairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

ERLANDO T. RODRIGUEZ Promulgated:
and NORMA RODRIGUEZ,
Respondents. September 26, 2008
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N


REYES, R.T., J .:


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

These questions seek answers in this petition for review on certiorari of the Amended Decision[1] of
the Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC).[2]



The Facts

The facts as borne by the records are as follows:

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

The spouses were engaged in the informal lending business. In line with their business, they had a
discounting[3] arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch. The
association maintained current and savings accounts with petitioner bank.

PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the
postdated checks issued to members whenever the association was short of funds. As was customary, the
spouses would replace the postdated checks with their own checks issued in the name of the members.

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

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

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

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

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

RTC Disposition

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

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

In an Order dated January 12, 2000, the RTC denied PNBs motion to dismiss.

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

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

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

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

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

(a) Consequential damages, unearned income in the amount of
P4,000,000.00, as a result of their having incurred great
dificulty (sic) especially in the residential subdivision
business, which was not pushed through and the
contractor even threatened to file a case against the
plaintiffs;

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

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

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

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed.[6]


CA Disposition

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

In a Decision[7] dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA
concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The court a quo
declared:

We are not swayed by the contention of the plaintiffs-appellees (Spouses
Rodriguez) that their cause of action arose from the alleged breach of contract by the
defendant-appellant (PNB) when it paid the value of the checks to PEMSLA despite the
checks being payable to order. Rather, we are more convinced by the strong and
credible evidence for the defendant-appellant with regard to the plaintiffs-appellees and
PEMSLAs business arrangement that the value of the rediscounted checks of the
plaintiffs-appellees would be deposited in PEMSLAs account for payment of the loans it
has approved in exchange for PEMSLAs checks with the full value of the said
loans. This is the only obvious explanation as to why all the disputed sixty-nine (69)
checks were in the possession of PEMSLAs errand boy for presentment to the
defendant-appellant that led to this present controversy. It also appears that the teller
who accepted the said checks was PEMSLAs officer, and that such was a regular
practice by the parties until the defendant-appellant discovered the scam. The logical
conclusion, therefore, is that the checks were never meant to be paid to order, but
instead, to PEMSLA. We thus find no breach of contract on the part of the defendant-
appellant.

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


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

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

On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and fallo
of which read:

In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-
appellees Sps. Rodriguez for the following:

1. Actual damages in the amount of P2,345,04 with
interest at 6 per annum from 14 May 1999 until fully
paid;

2. Moral damages in the amount of P200,000

3. Attorneys fees in the amount of P100,000 and

4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby
rendered by Us AFFIRMING WITH MODIFICATION the assailed decision rendered in
Civil Case No. 99-10892, as set forth in the immediately next preceding paragraph
hereof, and SETTING ASIDE Our original decision promulgated in this case on 22 July
2004.

SO ORDERED.[9]

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

Hence, the present recourse under Rule 45.

Issues

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

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

Our Ruling

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

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

Now to the core of the petition.

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

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

(a) A payee who is not maker, drawer, or drawee or
(b) The drawer or maker or
(c) The drawee or
(d) Two or more payees jointly or
(e) One or some of several payees or
(f) The holder of an office for the time being.

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

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

(a) When it is expressed to be so payable or
(b) When it is payable to a person named therein or bearer or
(c) When it is payable to the order of a fictitious or non-existing person,
and such fact is known to the person making it so payable or
(d) When the name of the payee does not purport to be the name of any
person or
(e) Where the only or last indorsement is an indorsement in
blank.[12] (Underscoring supplied)

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

SEC. 30. What constitutes negotiation. An instrument is negotiated when
it is transferred from one person to another in such manner as to constitute the transferee
the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order,
it is negotiated by the indorsement of the holder completed by delivery.

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

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

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

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

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

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

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

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

Consequently, a transferees lapse of wary vigilance, disregard of suspicious
circumstances which might have well induced a prudent banker to investigate and other
permutations of negligence are not relevant considerations under Section 3-405 x x
x. Rather, there is a commercial bad faith exception to UCC 3-405, applicable when
the transferee acts dishonestly where it has actual knowledge of facts and
circumstances that amount to bad faith, thus itself becoming a participant in a
fraudulent scheme. x x x Such a test finds support in the text of the Code, which omits a
standard of care requirement from UCC 3-405 but imposes on all parties an obligation to
act with honesty in fact. x x x[19] (Emphasis added)

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

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

What remains to be determined is if the payees, though existing persons, were fictitious in its
broader context.

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


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

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

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

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

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

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

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

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

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

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

PNBs argument that there is no loss to compensate since no demand for payment has been made by
the payees must also fail. Damage was caused to respondents-spouses when the PEMSLA checks they deposited
were returned for the reason Account Closed. These PEMSLA checks were the corresponding payments to the
Rodriguez checks. Since they could not encash the PEMSLA checks, respondents-spouses were unable to
collect payments for the amounts they had advanced.

A bank that has been remiss in its duty must suffer the consequences of its negligence. Being issued
to named payees, PNB was duty-bound by law and by banking rules and procedure to require that the checks be
properly indorsed before accepting them for deposit and payment. In fine, PNB should be held liable for the
amounts of the checks.

One Last Note

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

To PNBs credit, it became involved in the controversial transaction not of its own volition but due to the
actions of some of its employees. Considering that moral damages must be understood to be in concept of
grants, not punitive or corrective in nature, We resolve to reduce the award of moral damages to P50,000.00.[29]

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

SO ORDERED.