Philippine Education Co. vs.

Soriano
L-22405

June 30, 1971

Dizon, J.:
Facts:
Enrique Montinola sought to purchase from Manila Post
Office ten money orders of 200php each payable to E. P. Montinola.
Montinola offered to pay with the money orders with a private
check. Private check were not generally accepted in payment of
money orders, the teller advised him to see the Chief of the Money
Order Division, but instead of doing so, Montinola managed to leave
the building without the knowledge of the teller. Upon the
disappearance of the unpaid money order, a message was sent to
instruct all banks that it must not pay for the money order stolen
upon presentment. The Bank of America received a copy of said
notice. However, The Bank of America received the money order
and deposited it to the appellants account upon clearance.
Mauricio Soriano, Chief of the Money Order Division notified the
Bank of America that the money order deposited had been found to
have been irregularly issued and that, the amount it represented
had been deducted from the banks clearing account. The Bank of
America debited appellants account with the same account and
give notice by mean of debit memo.
Issue:
Whether or not the postal money order in question is a
negotiable instrument
Held:
No. It is not disputed that the Philippine postal statutes were
patterned after similar statutes in force in United States. The Weight
of authority in the United States is that postal money orders are not
negotiable instruments, the reason being that in establishing and
operating a postal money order system, the government is not
engaged in commercial transactions but merely exercises a
governmental power for the public benefit. Moreover, some of the
restrictions imposed upon money orders by postal laws and
regulations are inconsistent with the character of negotiable
instruments. For instance, such laws and regulations usually provide
for not more than one endorsement; payment of money orders may
be withheld under a variety of circumstances.

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

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.
Marcial Esposo for plaintiff-appellant.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor
General Antonio G. Ibarra and Attorney Concepcion TorrijosAgapinan for defendants-appellees.
DIZON, J.:
An appeal from a decision of the Court of First Instance of Manila
dismissing the complaint filed by the Philippine Education Co., Inc.
against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the
Manila Post Office ten (10) money orders of P200.00 each payable
to E.P. Montinola withaddress at Lucena, Quezon. After the postal
teller had made out money ordersnumbered 124685, 124687124695, Montinola offered to pay for them with a private checks
were not generally accepted in payment of money orders, the teller
advised him to see the Chief of the Money Order Division, but
instead of doing so, Montinola managed to leave building with his
own check and the ten(10) money orders without the knowledge of
the teller.
On the same date, April 18, 1958, upon discovery of the
disappearance of the unpaid money orders, an urgent message was
sent to all postmasters, and the following day notice was likewise
served upon all banks, instructing them not to pay anyone of the
money orders aforesaid if presented for payment. The Bank of
America received a copy of said notice three days later.
On April 23, 1958 one of the above-mentioned money orders
numbered 124688 was received by appellant as part of its sales
receipts. The following day it deposited the same with the Bank of
America, and one day thereafter the latter cleared it with the
Bureau of Posts and received from the latter its face value of
P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the
Money Order Division of the Manila Post Office, acting for and in
behalf of his co-appellee, Postmaster Enrico Palomar, notified the
Bank of America that money order No. 124688 attached to his letter
had been found to have been irregularly issued and that, in view
thereof, the amount it represented had been deducted from the
bank's clearing account. For its part, on August 2 of the same year,
the Bank of America debited appellant's account with the same

amount and gave it advice thereof by means of a debit memo.

On October 12, 1961 appellant requested the Postmaster General to
reconsider the action taken by his office deducting the sum of
P200.00 from the clearing account of the Bank of America, but his
request was denied. So was appellant's subsequent request that the
matter be referred to the Secretary of Justice for advice. Thereafter,
appellant elevated the matter to the Secretary of Public Works and
Communications, but the latter sustained the actions taken by the
postal officers.
In connection with the events set forth above, Montinola was
charged with theft in the Court of First Instance of Manila (Criminal
Case No. 43866) but after trial he was acquitted on the ground of
reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the
Municipal Court of Manila praying for judgment as follows:
WHEREFORE, plaintiff prays that after hearing defendants be
ordered:
(a) To countermand the notice given to the Bank of America on
September 27, 1961, deducting from the said Bank's clearing
account the sum of P200.00 represented by postal money order No.
124688, or in the alternative indemnify the plaintiff in the same
amount with interest at 8-% per annum from September 27, 1961,
which is the rate of interest being paid by plaintiff on its overdraft
account;
(b) To pay to the plaintiff out of their own personal funds, jointly and
severally, actual and moral damages in the amount of P1,000.00 or
in such amount as will be proved and/or determined by this
Honorable Court: exemplary damages in the amount of P1,000.00,
attorney's fees of P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be
deemed just and equitable.
On November 17, 1962, after the parties had submitted the
stipulation of facts reproduced at pages 12 to 15 of the Record on
Appeal, the above-named court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered, ordering the
defendants to countermand the notice given to the Bank of America
on September 27, 1961, deducting from said Bank's clearing
account the sum of P200.00 representing the amount of postal
money order No. 124688, or in the alternative, to indemnify the
plaintiff in the said sum of P200.00 with interest thereon at the rate
of 8-% per annum from September 27, 1961 until fully paid;
without any pronouncement as to cost and attorney's fees.
The case was appealed to the Court of First Instance of
Manila where, after the parties had resubmitted the same
stipulation of facts, the appealed decision dismissing the complaint,
with costs, was rendered.

The first, second and fifth assignments of error discussed in

appellant's brief are related to the other and will therefore be
discussed jointly. They raise this main issue: that the postal money
order in question is a negotiable instrument; that its nature as such
is not in anyway affected by the letter dated October 26, 1948
signed by the Director of Posts and addressed to all banks with a
clearing account with the Post Office, and that money orders, once
issued, create a contractual relationship of debtor and creditor,
respectively, between the government, on the one hand, and the
remitters payees or endorses, on the other.
It is not disputed that our postal statutes were patterned
after statutes in force in the United States. For this reason, ours are
generally construed in accordance with the construction given in
the United States to their own postal statutes, in the absence of any
special reason justifying a departure from this policy or practice.
The weight of authority in the United States is that postal money
orders are not negotiable instruments (Bolognesi vs. U.S. 189 Fed.
395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason
behind this rule being that, in establishing and operating a postal
money order system, the government is not engaging in
commercial transactions but merely exercises a governmental
power for the public benefit.
It is to be noted in this connection that some of the
restrictions imposed upon money orders by postal laws and
regulations are inconsistent with the character of negotiable
instruments. For instance, such laws and regulations usually provide
for not more than one endorsement; payment of money orders may
be withheld under a variety of circumstances (49 C.J. 1153).
Of particular application to the postal money order in
question are the conditions laid down in the letter of the Director of
Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the
redemption of postal money orders received by it from its
depositors. Among others, the condition is imposed that "in cases of
adverse claim, the money order or money orders involved will be
returned to you (the bank) and the, corresponding amount will have
to be refunded to the Postmaster, Manila, who reserves the right to
deduct the value thereof from any amount due you if such step is
deemed necessary." The conditions thus imposed in order to enable
the bank to continue enjoying the facilities theretofore enjoyed by
its depositors, were accepted by the Bank of America. The latter is
therefore bound by them. That it is so is clearly referred from the
fact that, upon receiving advice that the amount represented by the
money order in question had been deducted from its clearing
account with the Manila Post Office, it did not file any protest
against such action.
Moreover, not being a party to the understanding existing between

the postal officers, on the one hand, and the Bank of America, on
the other, appellant has no right to assail the terms and conditions
thereof on the ground that the letter setting forth the terms and
conditions aforesaid is void because it was not issued by a
Department Head in accordance with Sec. 79 (B) of the Revised
Administrative Code. In reality, however, said legal provision does
not apply to the letter in question because it does not provide for a
department regulation but merely sets down certain conditions
upon the privilege granted to the Bank of Amrica to accept and pay
postal money orders presented for payment at the Manila Post
Office. Such being the case, it is clear that the Director of Posts had
ample authority to issue it pursuant to Sec. 1190 of the Revised
Administrative Code.
In view of the foregoing, We do not find it necessary to
resolve the issues raised in the third and fourth assignments of
error.
WHEREFORE, the appealed decision being in accordance with law,
the same is hereby affirmed with costs.

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

PHILIPPINE AIRLINES, INC., petitioner,
vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO,
Court of First Instance of Manila, Branch XIII, JAIME K. DEL
ROSARIO, Deputy Sheriff, Court of First Instance, Manila,
and AMELIA TAN, respondents.
GUTIERREZ, JR., J.:
Behind the simple issue of validity of an alias writ of execution in
this case is a more fundamental question. Should the Court allow a
too literal interpretation of the Rules with an open invitation to
knavery to prevail over a more discerning and just approach?
Should we not apply the ancient rule of statutory construction that
laws are to be interpreted by the spirit which vivifies and not by the
letter which killeth?
This is a petition to review on certiorari the decision of the
Court of Appeals in CA-G.R. No. 07695 entitled "Philippine Airlines,
Inc. v. Hon. Judge Ricardo D. Galano, et al.", dismissing the petition
for certiorari against the order of the Court of First Instance of

Manila which issued an alias writ of execution against the petitioner.

The petition involving the alias writ of execution had its
beginnings on November 8, 1967, when respondent Amelia Tan,
under the name and style of Able Printing Press commenced a
complaint for damages before the Court of First Instance of Manila.
The case was docketed as Civil Case No. 71307, entitled Amelia
Tan, et al. v. Philippine Airlines, Inc.
After trial, the Court of First Instance of Manila, Branch 13,
then presided over by the late Judge Jesus P. Morfe rendered
judgment on June 29, 1972, in favor of private respondent Amelia
Tan and against petitioner Philippine Airlines, Inc. (PAL) as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendant
Philippine Air Lines:
1. On the first cause of action, to pay to the plaintiff the amount of
P75,000.00 as actual damages, with legal interest thereon from
plaintiffs extra-judicial demand made by the letter of July 20, 1967;
2. On the third cause of action, to pay to the plaintiff the amount of
P18,200.00, representing the unrealized profit of 10% included in
the contract price of P200,000.00 plus legal interest thereon from
July 20,1967;
3. On the fourth cause of action, to pay to the plaintiff the amount
of P20,000.00 as and for moral damages, with legal interest thereon
from July 20, 1 967;
4. On the sixth cause of action, to pay to the plaintiff the amount of
P5,000.00 damages as and for attorney's fee.
Plaintiffs second and fifth causes of action, and defendant's
counterclaim, are dismissed.
With costs against the defendant. (CA Rollo, p. 18)
On July 28, 1972, the petitioner filed its appeal with the Court of
Appeals. The case was docketed as CA-G.R. No. 51079-R.
On February 3, 1977, the appellate court rendered its decision, the
dispositive portion of which reads:
IN VIEW WHEREOF, with the modification that PAL is condemned to
pay plaintiff the sum of P25,000.00 as damages and P5,000.00 as
attorney's fee, judgment is affirmed, with costs. (CA Rollo, p. 29)
Notice of judgment was sent by the Court of Appeals to the trial
court and on dates subsequent thereto, a motion for
reconsideration was filed by respondent Amelia Tan, duly opposed
by petitioner PAL.
On May 23,1977, the Court of Appeals rendered its resolution
denying the respondent's motion for reconsideration for lack of
merit.
No further appeal having been taken by the parties, the judgment
became final and executory and on May 31, 1977, judgment was
correspondingly entered in the case.

The case was remanded to the trial court for execution and
on September 2,1977, respondent Amelia Tan filed a motion praying
for the issuance of a writ of execution of the judgment rendered by
the Court of Appeals. On October 11, 1977, the trial court, presided
over by Judge Galano, issued its order of execution with the
corresponding writ in favor of the respondent. The writ was duly
referred to Deputy Sheriff Emilio Z. Reyes of Branch 13 of the Court
of First Instance of Manila for enforcement.
Four months later, on February 11, 1978, respondent Amelia Tan
moved for the issuance of an alias writ of execution stating that the
judgment rendered by the lower court, and affirmed with
modification by the Court of Appeals, remained unsatisfied.
On March 1, 1978, the petitioner filed an opposition to the
motion for the issuance of an alias writ of execution stating that it
had already fully paid its obligation to plaintiff through the deputy
sheriff of the respondent court, Emilio Z. Reyes, as evidenced by
cash vouchers properly signed and receipted by said Emilio Z.
Reyes.
On March 3,1978, the Court of Appeals denied the issuance
of the alias writ for being premature, ordering the executing sheriff
Emilio Z. Reyes to appear with his return and explain the reason for
his failure to surrender the amounts paid to him by petitioner PAL.
However, the order could not be served upon Deputy Sheriff Reyes
who had absconded or disappeared.
On March 28, 1978, motion for the issuance of a partial alias writ of
execution was filed by respondent Amelia Tan.
On April 19, 1978, respondent Amelia Tan filed a motion to withdraw
"Motion for Partial Alias Writ of Execution" with Substitute Motion for
Alias Writ of Execution. On May 1, 1978, the respondent Judge
issued an order which reads:
As prayed for by counsel for the plaintiff, the Motion to Withdraw
'Motion for Partial Alias Writ of Execution with Substitute Motion for
Alias Writ of Execution is hereby granted, and the motion for partial
alias writ of execution is considered withdrawn.
Let an Alias Writ of Execution issue against the defendant for the
fall satisfaction of the judgment rendered. Deputy Sheriff Jaime K.
del Rosario is hereby appointed Special Sheriff for the enforcement
thereof. (CA Rollo, p. 34)
On May 18, 1978, the petitioner received a copy of the first alias
writ of execution issued on the same day directing Special Sheriff
Jaime K. del Rosario to levy on execution in the sum of P25,000.00
with legal interest thereon from July 20,1967 when respondent
Amelia Tan made an extra-judicial demand through a letter. Levy
was also ordered for the further sum of P5,000.00 awarded as
attorney's fees.
On May 23, 1978, the petitioner filed an urgent motion to

quash the alias writ of execution stating that no return of the writ
had as yet been made by Deputy Sheriff Emilio Z. Reyes and that
the judgment debt had already been fully satisfied by the petitioner
as evidenced by the cash vouchers signed and receipted by the
server of the writ of execution, Deputy Sheriff Emilio Z. Reyes.
On May 26,1978, the respondent Jaime K. del Rosario served
a notice of garnishment on the depository bank of petitioner, Far
East Bank and Trust Company, Rosario Branch, Binondo, Manila,
through its manager and garnished the petitioner's deposit in the
said bank in the total amount of P64,408.00 as of May 16, 1978.
Hence, this petition for certiorari filed by the Philippine Airlines, Inc.,
on the grounds that:
I
AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR
RETURN OF THE ORIGINAL WRIT BY THE IMPLEMENTING OFFICER.
II
PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS
DIRECTED IN THE WRIT OF EXECUTION CONSTITUTES SATISFACTION
OF JUDGMENT.
III
INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO
THE PAYMENT THEREOF.
IV
SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY
OF JUDGMENT DEBTOR AND DISPOSAL OR SALE THEREOF TO
SATISFY JUDGMENT.
Can an alias writ of execution be issued without a prior return of the
original writ by the implementing officer?
We rule in the affirmative and we quote the respondent court's
decision with approval:
The issuance of the questioned alias writ of execution under
the circumstances here obtaining is justified because even with the
absence of a Sheriffs return on the original writ, the unalterable fact
remains that such a return is incapable of being obtained (sic)
because the officer who is to make the said return has absconded
and cannot be brought to the Court despite the earlier order of the
court for him to appear for this purpose. (Order of Feb. 21, 1978,
Annex C, Petition). Obviously, taking cognizance of this
circumstance, the order of May 11, 1978 directing the issuance of
an alias writ was therefore issued. (Annex D. Petition). The need for
such a return as a condition precedent for the issuance of an alias
writ was justifiably dispensed with by the court below and its action
in this regard meets with our concurrence. A contrary view will
produce an abhorent situation whereby the mischief of an erring
officer of the court could be utilized to impede indefinitely the
undisputed and awarded rights which a prevailing party rightfully

deserves to obtain and with dispatch. The final judgment in this

case should not indeed be permitted to become illusory or
incapable of execution for an indefinite and over extended period,
as had already transpired. (Rollo, pp. 35-36)
Judicium non debet esse illusorium; suum effectum habere debet (A
judgment ought not to be illusory it ought to have its proper effect).
Indeed, technicality cannot be countenanced to defeat the
execution of a judgment for execution is the fruit and end of the suit
and is very aptly called the life of the law (Ipekdjian Merchandising
Co. v. Court of Tax Appeals, 8 SCRA 59 [1963]; Commissioner of
Internal Revenue v. Visayan Electric Co., 19 SCRA 697, 698 [1967]).
A judgment cannot be rendered nugatory by the unreasonable
application of a strict rule of procedure. Vested rights were never
intended to rest on the requirement of a return, the office of which
is merely to inform the court and the parties, of any and all actions
taken under the writ of execution. Where such information can be
established in some other manner, the absence of an executing
officer's return will not preclude a judgment from being treated as
discharged or being executed through an alias writ of execution as
the case may be. More so, as in the case at bar. Where the return
cannot be expected to be forthcoming, to require the same would
be to compel the enforcement of rights under a judgment to rest on
an impossibility, thereby allowing the total avoidance of judgment
debts. So long as a judgment is not satisfied, a plaintiff is entitled to
other writs of execution (Government of the Philippines v. Echaus
and Gonzales, 71 Phil. 318). It is a well known legal maxim that he
who cannot prosecute his judgment with effect, sues his case vainly.
More important in the determination of the propriety of the
trial court's issuance of an alias writ of execution is the issue of
satisfaction of judgment.
Under the peculiar circumstances surrounding this case, did the
payment made to the absconding sheriff by check in his name
operate to satisfy the judgment debt? The Court rules that the
plaintiff who has won her case should not be adjudged as having
sued in vain. To decide otherwise would not only give her an empty
but a pyrrhic victory.
It should be emphasized that under the initial judgment, Amelia Tan
was found to have been wronged by PAL.
She filed her complaint in 1967.
After ten (10) years of protracted litigation in the Court of
First Instance and the Court of Appeals, Ms. Tan won her case.
It is now 1990.
Almost twenty-two (22) years later, Ms. Tan has not seen a
centavo of what the courts have solemnly declared as rightfully
hers. Through absolutely no fault of her own, Ms. Tan has been
deprived of what, technically, she should have been paid from the

start, before 1967, without need of her going to court to enforce her
rights. And all because PAL did not issue the checks intended for
her, in her name.
Under the peculiar circumstances of this case, the payment to the
absconding sheriff by check in his name did not operate as a
satisfaction of the judgment debt.
In general, a payment, in order to be effective to discharge
an obligation, must be made to the proper person. Article 1240 of
the Civil Code provides:
Payment shall be made to the person in whose favor the obligation
has been constituted, or his successor in interest, or any person
authorized to receive it. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an
agent having authority, express or implied, to receive the particular
payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65).
Payment made to one having apparent authority to receive the
money will, as a rule, be treated as though actual authority had
been given for its receipt. Likewise, if payment is made to one who
by law is authorized to act for the creditor, it will work a discharge
(Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt
of money due on ajudgment by an officer authorized by law to
accept it will, therefore, satisfy the debt (See 40 Am Jm 729, 25;
Hendry v. Benlisa supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24
LRA [NS] 1275).
The theory is where payment is made to a person authorized
and recognized by the creditor, the payment to such a person so
authorized is deemed payment to the creditor. Under ordinary
circumstances, payment by the judgment debtor in the case at bar,
to the sheriff should be valid payment to extinguish the judgment
debt.
There are circumstances in this case, however, which compel a
different conclusion.
The payment made by the petitioner to the absconding
sheriff was not in cash or legal tender but in checks. The checks
were not payable to Amelia Tan or Able Printing Press but to the
absconding sheriff.
Did such payments extinguish the judgment debt?
Article 1249 of the Civil Code provides:
The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in
the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the
fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation

shall be held in abeyance.
In the absence of an agreement, either express or implied, payment
means the discharge of a debt or obligation in money (US v.
Robertson, 5 Pet. [US] 641, 8 L. ed. 257) and unless the parties so
agree, a debtor has no rights, except at his own peril, to substitute
something in lieu of cash as medium of payment of his debt
(Anderson v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep.
402). Consequently, unless authorized to do so by law or by consent
of the obligee a public officer has no authority to accept anything
other than money in payment of an obligation under a judgment
being executed. Strictly speaking, the acceptance by the sheriff of
the petitioner's checks, in the case at bar, does not, per se, operate
as a discharge of the judgment debt.
Since a negotiable instrument is only a substitute for money and
not money, the delivery of such an instrument does not, by itself,
operate as payment (See. 189, Act 2031 on Negs. Insts.; Art. 1249,
Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan
Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a
manager's check or ordinary cheek, is not legal tender, and an offer
of a check in payment of a debt is not a valid tender of payment
and may be refused receipt by the obligee or creditor. Mere delivery
of checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the
payment by commercial document is actually realized (Art. 1249,
Civil Code, par. 3).
If bouncing checks had been issued in the name of Amelia Tan and
not the Sheriff's, there would have been no payment. After dishonor
of the checks, Ms. Tan could have run after other properties of PAL.
The theory is that she has received no value for what had been
awarded her. Because the checks were drawn in the name of Emilio
Z. Reyes, neither has she received anything. The same rule should
apply.
It is argued that if PAL had paid in cash to Sheriff Reyes, there would
have been payment in full legal contemplation. The reasoning is
logical but is it valid and proper? Logic has its limits in decision
making. We should not follow rulings to their logical extremes if in
doing so we arrive at unjust or absurd results.
In the first place, PAL did not pay in cash. It paid in cheeks.
And second, payment in cash always carries with it certain cautions.
Nobody hands over big amounts of cash in a careless and inane
manner. Mature thought is given to the possibility of the cash being
lost, of the bearer being waylaid or running off with what he is
carrying for another. Payment in checks is precisely intended to
avoid the possibility of the money going to the wrong party. The
situation is entirely different where a Sheriff seizes a car, a tractor,

or a piece of land. Logic often has to give way to experience and to

reality. Having paid with checks, PAL should have done so properly.
Payment in money or cash to the implementing officer may
be deemed absolute payment of the judgment debt but the Court
has never, in the least bit, suggested that judgment debtors should
settle their obligations by turning over huge amounts of cash or
legal tender to sheriffs and other executing officers. Payment in
cash would result in damage or interminable litigations each time a
sheriff with huge amounts of cash in his hands decides to abscond.
As a protective measure, therefore, the courts encourage the
practice of payments by cheek provided adequate controls are
instituted to prevent wrongful payment and illegal withdrawal or
disbursement of funds. If particularly big amounts are involved,
escrow arrangements with a bank and carefully supervised by the
court would be the safer procedure. Actual transfer of funds takes
place within the safety of bank premises. These practices are
perfectly legal. The object is always the safe and incorrupt
execution of the judgment.
It is, indeed, out of the ordinary that checks intended for a
particular payee are made out in the name of another. Making the
checks payable to the judgment creditor would have prevented the
encashment or the taking of undue advantage by the sheriff, or any
person into whose hands the checks may have fallen, whether
wrongfully or in behalf of the creditor. The issuance of the checks in
the name of the sheriff clearly made possible the misappropriation
of the funds that were withdrawn.
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for the
private party respondent Amelia Tan, the petitioner corporation,
utilizing the services of its personnel who are or should be
knowledgeable about the accepted procedures and resulting
consequences of the checks drawn, nevertheless, in this instance,
without prudence, departed from what is generally observed and
done, and placed as payee in the checks the name of the errant
Sheriff and not the name of the rightful payee. Petitioner thereby
created a situation which permitted the said Sheriff to personally
encash said checks and misappropriate the proceeds thereof to his
exclusive personal benefit. For the prejudice that resulted, the
petitioner himself must bear the fault. The judicial guideline which
we take note of states as follows:
As between two innocent persons, one of whom must suffer the
consequence of a breach of trust, the one who made it possible by
his act of confidence must bear the loss. (Blondeau, et al. v. Nano,
et al., L-41377, July 26, 1935, 61 Phil. 625)
Having failed to employ the proper safeguards to protect
itself, the judgment debtor whose act made possible the loss had

but itself to blame.

The attention of this Court has been called to the bad practice of a
number of executing officers, of requiring checks in satisfaction of
judgment debts to be made out in their own names. If a sheriff
directs a judgment debtor to issue the checks in the sheriff's name,
claiming he must get his commission or fees, the debtor must
report the sheriff immediately to the court which ordered the
execution or to the Supreme Court for appropriate disciplinary
action. Fees, commissions, and salaries are paid through regular
channels. This improper procedure also allows such officers, who
have sixty (60) days within which to make a return, to treat the
moneys as their personal finds and to deposit the same in their
private accounts to earn sixty (60) days interest, before said finds
are turned over to the court or judgment creditor (See Balgos v.
Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers could
put up the defense that said checks had been issued to them in
their private or personal capacity. Without a receipt evidencing
payment of the judgment debt, the misappropriation of finds by
such officers becomes clean and complete. The practice is
ingenious but evil as it unjustly enriches court personnel at the
expense of litigants and the proper administration of justice. The
temptation could be far greater, as proved to be in this case of the
absconding sheriff. The correct and prudent thing for the petitioner
was to have issued the checks in the intended payee's name.
The pernicious effects of issuing checks in the name of a
person other than the intended payee, without the latter's
agreement or consent, are as many as the ways that an artful mind
could create to get around the safeguards provided by the law on
negotiable instruments. An angry litigant who loses a case, as a
rule, would not want the winning party to get what he won in the
judgment. He would think of ways to delay the winning party's
getting what has been adjudged in his favor. We cannot condone
that practice especially in cases where the courts and their officers
are involved. We rule against the petitioner.
Anent the applicability of Section 15, Rule 39, as follows:
Section 15. Execution of money judgments. The officer must
enforce an execution of a money judgment by levying on all the
property, real and personal of every name and nature whatsoever,
and which may be disposed of for value, of the judgment debtor not
exempt from execution, or on a sufficient amount of such property,
if they be sufficient, and selling the same, and paying to the
judgment creditor, or his attorney, so much of the proceeds as will
satisfy the judgment. ...
the respondent court held:

We are obliged to rule that the judgment debt cannot be considered

satisfied and therefore the orders of the respondent judge granting
the alias writ of execution may not be pronounced as a nullity.
xxx xxx xxx
It is clear and manifest that after levy or garnishment, for a
judgment to be executed there is the requisite of payment by the
officer to the judgment creditor, or his attorney, so much of the
proceeds as will satisfy the judgment and none such payment had
been concededly made yet by the absconding Sheriff to the private
respondent Amelia Tan. The ultimate and essential step to complete
the execution of the judgment not having been performed by the
City Sheriff, the judgment debt legally and factually remains
unsatisfied.
Strictly speaking execution cannot be equated with satisfaction of a
judgment. Under unusual circumstances as those obtaining in this
petition, the distinction comes out clearly.
Execution is the process which carries into effect a decree or
judgment (Painter v. Berglund, 31 Cal. App. 2d. 63, 87 P 2d 360,
363; Miller v. London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law
Dictionary), whereas the satisfaction of a judgment is the payment
of the amount of the writ, or a lawful tender thereof, or the
conversion by sale of the debtor's property into an amount equal to
that due, and, it may be done otherwise than upon an execution
(Section 47, Rule 39). Levy and delivery by an execution officer are
not prerequisites to the satisfaction of a judgment when the same
has already been realized in fact (Section 47, Rule 39). Execution is
for the sheriff to accomplish while satisfaction of the judgment is for
the creditor to achieve. Section 15, Rule 39 merely provides the
sheriff with his duties as executing officer including delivery of the
proceeds of his levy on the debtor's property to satisfy the
judgment debt. It is but to stress that the implementing officer's
duty should not stop at his receipt of payments but must continue
until payment is delivered to the obligor or creditor.
Finally, we find no error in the respondent court's
pronouncement on the inclusion of interests to be recovered under
the alias writ of execution. This logically follows from our ruling that
PAL is liable for both the lost checks and interest. The respondent
court's decision in CA-G.R. No. 51079-R does not totally supersede
the trial court's judgment in Civil Case No. 71307. It merely
modified the same as to the principal amount awarded as actual
damages.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby
DISMISSED. The judgment of the respondent Court of Appeals is
AFFIRMED and the trial court's issuance of the alias writ of
execution against the petitioner is upheld without prejudice to any
action it should take against the errant sheriff Emilio Z. Reyes. The

Court Administrator is ordered to follow up the actions taken against

Emilio Z. Reyes.
SO ORDERED.

DIGEST
Philippine Airlines, Inc. vs Court of Appeals, 181 SCRA 557, GR No.
49188,
THE FACTS:
Amelia Tan commenced a complaint for damages before the Court
of First Instance against Philippine Airlines, Inc. (PAL). The Court
rendered a judgment in favor of the former and against the latter.
PAL filed its appeal with the Court of Appeals (CA), and the
appellate court affirmed the judgment of the lower court with the
modification that PAL is condemned to pay the latter the sum of
P25, 000.00 as damages and P5, 000.00 as attorneys fee.
Judgment became final and executory and was correspondingly
entered in the case, which was remanded to the trial court for
execution. The trial court upon the motion of Amelia Tan issued an
order of execution with the corresponding writ in favor of the
respondent. Said writ was duly referred to Deputy Sheriff Reyes for
enforcement.
Four months later, Amelia Tan moved for the issuance of an alias
writ of execution, stating that the judgment rendered by the lower
court, and affirmed with modification by the CA, remained
unsatisfied. PAL opposed the motion, stating that it had already fully
paid its obligation to plaintiff through the issuance of checks
payable to the deputy sheriff who later did not appear with his
return and instead absconded.
The CA denied the issuance of the alias writ for being premature.
After two months the CA granted her an alias writ of execution for
the full satisfaction of the judgment rendered, when she filed
another motion. Deputy Sheriff del Rosario is appointed special
sheriff for enforcement thereof.
PAL filed an urgent motion to quash the alias writ of execution
stating that no return of the writ had as yet been made by Deputy
Sheriff Reyes and that judgment debt had already been fully
satisfied by the former as evidenced by the cash vouchers signed
and received by the executing sheriff.
Deputy Sheriff del Rosario served a notice of garnishment on the
depository bank of PAL, through its manager and garnished the
latters deposit. Hence, PAL brought the case to the Supreme Court
and filed a petition for certiorari.
THE ISSUES:

WON an alias writ of execution can be issued without prior

return of the original writ by the implementing officer.
WON payment of judgment to the implementing officer as
directed in the writ of execution constitutes satisfaction of
judgment.
WON payment made in checks to the sheriff and under his
name is a valid payment to extinguish judgment of debt.
THE RULING:
1. Affirmative. Technicality cannot be countenanced to defeat the
execution of a judgment for execution is the fruit and end of the suit
and is very aptly called the life of the law. A judgment cannot be
rendered nugatory by unreasonable application of a strict rule of
procedure. Vested right were never intended to rest on the
requirement of a return. So long as judgment is not satisfied, a
plaintiff is entitled to other writs of execution.
2. Negative. In general, a payment, in order to be effective to
discharge an obligation, must be made to the proper person. Article
1240 of the Civil Code provides:
Payment made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person
authorized to receive it.
Under ordinary circumstances, payment by the judgment debtor in
the case at bar, to the sheriff should be valid payment to extinguish
judgment of debt.
However, under the peculiar circumstances of this case, the
payment to the absconding sheriff by check in his name did not
operate as a satisfaction of the judgment debt.
3. Negative. Article 1249 of the Civil Code provides:
The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in
the currency which is legal tender in the Philippines.
Unless authorized to do so by law or by consent of the obligee, a
public officer has no authority to accept anything other than money
in payment of an obligation under a judgment being executed.
Strictly speaking, the acceptance by the sheriff of the petitioners
checks does not, per se, operate as a discharge of the judgment of
debt.
A check, whether managers check or ordinary check, is not legal
tender, and an offer of a check in payment of a debt is not a valid
tender or payment and may be refused receipt by the oblige or
creditor. Hence, the obligation is not extinguished.
THE TWIST: Payment in cash is logical, but it was not proper.
Payment in cash to the implementing officer may be deemed
absolute payment of judgment debt but the Court has never, in the
least bit, suggested that judgment debtors should settle their
obligations by turning over huge amounts of cash or legal tender to

the executing officers. Payment in cash would result in damage or

endless litigations each time a sheriff with huge amounts of cash in
his hands decides to abscond.
As a protective measure, the courts encourage the practice of
payment of check provided adequate controls are instituted to
prevent wrongful payment and illegal withdrawal or disbursement of
funds.
However, in the case at bar, it is out of the ordinary that checks
intended for a particular payee are made out in the name of
another. The issuance of the checks in the name of the sheriff
clearly made possible the misappropriation of the funds that were
withdrawn.
The Court of Appeals explained:
Knowing as it does that the intended payment was for the
respondent Amelia Tan, the petitioner corporation, utilizing the
services of its personnel who are or should be knowledgeable about
the accepted procedure and resulting consequences of the checks
drawn, nevertheless, in this instance, without prudence, departed
from what is generally observed and done, and placed as payee in
the checks the name of the errant Sheriff and not the name of the
rightful payee. Petitioner thereby created a situation which
permitted the said Sheriff to personally encash said checks and
misappropriate the proceeds thereof to his exclusive benefit. For the
prejudice that resulted, the petitioner himself must bear the fault
Having failed to employ the proper safeguards to protect itself, the
judgment debtor whose act made possible the loss had but itself to
blame.

G.R. No. 74451

May 25, 1988

EQUITABLE BANKING CORPORATION, petitioner,

vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT and THE
EDWARD J. NELL CO., respondents.
William R. Veto for petitioner.
Pelaez, Adriano & Gregorio for respondents.

credit line with defendant Equitable Banking Corporation.

Apparently, impressed with this assertion, Javier agreed to have the
skidders paid by way of a domestic letter of credit which defendant
Casals promised to open in plaintiffs favor, in lieu of cash payment.
Accordingly, on December 22, 1975, defendant Casville, through its
president, defendant Casals, ordered from plaintiff two units of
garrett skidders ...
The purchase order for the garrett skidders bearing No. 0051 and
dated December 22, 1975 (Exhibit "A") contained the following
terms and conditions:
Two (2) units GARRETT Skidders Model 30A complete as basically
described in the bulletin

MELENCIO-HERRERA, J.:

PRICE: F.O.B. dock

In this Petition for Review on certiorari petitioner, Equitable Banking

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

Manila P485,000.00/unit

The facts pertinent to this Petition, as summarized by the Trial Court

and adopted by reference by Respondent Appellate Court,
emanated from the case entitled "Edward J. Nell Co. vs. Liberato V.
Casals, Casville Enterprises, Inc., and Equitable Banking
Corporation" of the Court of First Instance of Rizal (Civil Case No.
25112), and read:
From the evidence submitted by the parties, the Court finds that
sometime in 1975 defendant Liberato Casals went to plaintiff
Edward J. Nell Company and told its senior sales engineer, Amado
Claustro that he was interested in buying one of the plaintiff's
garrett skidders. Plaintiff was a dealer of machineries, equipment
and supplies. Defendant Casals represented himself as the majority
stockholder, president and general manager of Casville Enterprises,
Inc., a firm engaged in the large scale production, procurement and
processing of logs and lumber products, which had a plywood plant
in Sta. Ana, Metro Manila.
After defendant Casals talked with plaintiff's sales engineer, he was
referred to plaintiffs executive vice-president, Apolonio Javier, for
negotiation in connection with the manner of payment. When Javier
asked for cash payment for the skidders, defendant Casals informed
him that his corporation, defendant Casville Enterprises, Inc., had a

For two (2) units P970,000.00

SHIPMENT: We will inform you the date and name of the vessel as
soon as arranged.
TERMS: By irrevocable domestic letter of credit to be issued in favor
of THE EDWARD J. NELL CO. or ORDER payable in thirty six (36)
months and will be opened within ninety (90) days after date of
shipment. at first installment will be due one hundred eighty (180)
days after date of shipment. Interest-14% per annum (Exhibit A)
xxx

xxx

xxx

... in a letter dated April 21, 1976, defendants Casals and Casville
requested from plaintiff the delivery of one (1) unit of the bidders,
complete with tools and cables, to Cagayan de Oro, on or before
Saturday, April 24,1976, on board a Lorenzo shipping vessel, with
the information that an irrevocable Domestic Letter of Credit would
be opened in plaintiff's favor on or before June 30, 1976 under the
terms and conditions agreed upon (Exhibit "B")
On May 3, 1976, in compliance with defendant Casvile's recognition
request, plaintiff shipped to Cagayan de Oro City a Garrett skidder.
Plaintiff paid the shipping cost in the amount of P10,640.00 because
of the verbal assurance of defendant Casville that it would be
covered by the letter of credit soon to be opened.

xxx

xxx

xxx

On July 15, 1976, defendant Casals handed to plaintiff a check in

the amount of P300,000.00 postdated August 4, 1976, which was
followed by another check of same date. Plaintiff considered these
checks either as partial payment for the skidder that was already
delivered to Cagayan de Oro or as reimbursement for the marginal
deposit that plaintiff was supposed to pay.
In a letter dated August 3, 1976 (Exhibit "C"), defendants Casville
informed the plaintiff that their application for a letter of credit for
the payment of the Garrett skidders had been approved by the
Equitable Banking Corporation. However, the defendants said that
they would need the sum of P300,000.00 to stand as collateral or
marginal deposit in favor of Equitable Banking Corporation and an
additional amount of P100,000.00, also in favor of Equitable
Banking Corporation, to clear the title of the Estrada property
belonging to defendant Casals which had been approved as security
for the trust receipts to be issued by the bank, covering the abovementioned equipment.
Although the marginal deposit was supposed to be produced by
defendant Casville Enterprises, plaintiff agreed to advance the
necessary amount in order to facilitate the transaction. Accordingly,
on August 5,1976, plaintiff issued a check in the amount of
P400,000.00 (Exhibit "2") drawn against the First National City Bank
and made payable to the order of Equitable Banking Corporation
and with the following notation or memorandum:
a/c of Casville Enterprises Inc. for Marginal deposit and payment of
balance on Estrada Property to be used as security for trust receipt
for opening L/C of Garrett Skidders in favor of the Edward J. Nell Co."
Said check together with the cash disbursement voucher (Exhibit
"2-A") containing the explanation:
Payment for marginal deposit and other expenses re opening of L/C
for account of Casville Ent..
A covering letter (Exhibit "3") was also sent and when the three
documents were presented to Severino Santos, executive vice
president of defendant bank, Santos did not accept them because
the terms and conditions required by the bank for the opening of
the letter of credit had not yet been agreed on.

On August 9, 1976, defendant Casville wrote the bank applying for

two letters of credit to cover its purchase from plaintiff of two
Garrett skidders, under the following terms and conditions:
a)
On sight Letter of Credit for P485,000.00; b) One 36 months
Letter of Credit for P606,000.00; c) P300,000.00 CASH marginal
deposit1 d) Real Estate Collateral to secure the Trust Receipts; e)
We shall chattel mortgage the equipments purchased even after
payment of the first L/C as additional security for the balance of the
second L/C and f) Other conditions you deem necessary to protect
the interest of the bank."
In a letter dated August 11, 1976 (Exhibit "D-l"), defendant bank
replied stating that it was ready to open the letters of credit upon
defendant's compliance of the following terms and conditions:
c)
30% cash margin deposit; d) Acceptable Real Estate
Collateral to secure the Trust Receipts; e) Chattel Mortgage on the
equipment; and Ashville f) Other terms and conditions that our bank
may impose.
Defendant Casville sent a copy of the foregoing letter to the plaintiff
enclosing three postdated checks. In said letter, plaintiff was
informed of the requirements imposed by the defendant bank
pointing out that the "cash marginal required under paragraph (c) is
30% of Pl,091,000.00 or P327,300.00 plus another P100,000.00 to
clean up the Estrada property or a total of P427,300.00" and that
the check covering said amount should be made payable "to the
Order of EQUITABLE BANKING CORPORATION for the account of
Casville Enterprises Inc." Defendant Casville also stated that the
three (3) enclosed postdated checks were intended as replacement
of the checks that were previously issued to plaintiff to secure the
sum of P427,300.00 that plaintiff would advance to defendant bank
for the account of defendant Casville. All the new checks were
postdated November 19, 1976 and drawn in the sum of Pl45,500.00
(Exhibit "F"), P181,800.00 (Exhibit "G") and P100,000.00 (Exhibit
"H").
On the same occasion, defendant Casals delivered to plaintiff TCT
No. 11891 of the Register of Deeds of Quezon City and TCT No.
50851 of the Register of Deeds of Rizal covering two pieces of real
estate properties.
Subsequently, Cesar Umali, plaintiffs credit and collection manager,
accompanied by a representative of defendant Casville, went to see
Severino Santos to find out the status of the credit line being sought

by defendant Casville. Santos assured Umali that the letters of

credit would be opened as soon as the requirements imposed by
defendant bank in its letter dated August 11, 1976 had been
complied with by defendant Casville.
On August 16, 1976, plaintiff issued a check for P427,300.00,
payable to the "order of EQUITABLE BANKING CORPORATION A/C
CASVILLE ENTERPRISES, INC." and drawn against the first National
City Bank (Exhibit "E-l"). The check did not contain the notation
found in the previous check issued by the plaintiff (Exhibit "2") but
the substance of said notation was reproduced in a covering letter
dated August 16,1976 that went with the check (Exhibit "E").<re||
an1w> Both the check and the covering letter were sent to
defendant bank through defendant Casals. Plaintiff entrusted the
delivery of the check and the latter to defendant Casals because it
believed that no one, including defendant Casals, could encash the
same as it was made payable to the defendant bank alone. Besides,
defendant Casals was known to the bank as the one following up
the application for the letters of credit.
Upon receiving the check for P427,300.00 entrusted to him by
plaintiff defendant Casals immediately deposited it with the
defendant bank and the bank teller accepted the same for deposit
in defendant Casville's checking account. After depositing said
check, defendant Casville, acting through defendant Casals, then
withdrew all the amount deposited.
Meanwhile, upon their presentation for encashment, plaintiff
discovered that the three checks (Exhibits "F, "G" and "H") in the
total amount of P427,300.00, that were issued by defendant
Casville as collateral were all dishonored for having been drawn
against a closed account.
As defendant Casville failed to pay its obligation to defendant bank,
the latter foreclosed the mortgage executed by defendant Casville
on the Estrada property which was sold in a public auction sale to a
third party.
Plaintiff allowed some time before following up the application for
the letters of credit knowing that it took time to process the same.
However, when the three checks issued to it by defendant Casville
were dishonored, plaintiff became apprehensive and sent Umali on
November 29, 1976, to inquire about the status of the application
for the letters of credit. When plaintiff was informed that no letters
of credit were opened by the defendant bank in its favor and then
discovered that defendant Casville had in the meanwhile withdrawn

the entire amount of P427,300.00, without paying its obligation to

the bank plaintiff filed the instant action.
While the the instant case was being tried, defendants Casals and
Casville assigned the garrett skidder to plaintiff which credited in
favor of defendants the amount of P450,000.00, as partial
satisfaction of plaintiff's claim against them.
Defendants Casals and Casville hardly disputed their liability to
plaintiff. Not only did they show lack of interest in disputing
plaintiff's claim by not appearing in most of the hearings, but they
also assigned to plaintiff the garrett skidder which is an action of
clear recognition of their liability.
What is left for the Court to determine, therefore, is only the liability
of defendant bank to plaintiff.
xxx

xxx

xxx

Resolving that issue, the Trial Court rendered judgment, affirmed by

Respondent Court in toto, the pertinent portion of which reads:
xxx

xxx

xxx

Defendants Casals and Casville Enterprises and Equitable Banking

Corporation are ordered to pay plaintiff, jointly and severally, the
sum of P427,300.00, representing the amount of plaintiff's check
which defendant bank erroneously credited to the account of
defendant Casville and which defendants Casal and Casville
misappropriated, with 12% interest thereon from April 5, 1977, until
the said sum is fully paid.
Defendant Equitable Banking Corporation is ordered to pay plaintiff
attorney's fees in the sum of P25,000.00 .
Proportionate cost against all the defendants.
SO ORDERED.
The crucial issue to resolve is whether or not petitioner Equitable
Banking Corporation (briefly, the Bank) is liable to private
respondent Edward J. Nell Co. (NELL, for short) for the value of the
second check issued by NELL, Exhibit "E-l," which was made
payable

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

CASVILLE ENTERPRISES INC.
and which the Bank teller credited to the account of Casville.
The Trial Court found that the amount of the second check had been
erroneously credited to the Casville account; held the Bank liable for
the mistake of its employees; and ordered the Bank to pay NELL the
value of the check in the sum of P427,300.00, with legal interest.
Explained the Trial Court:
The Court finds that the check in question was payable only to the
defendant bank and to no one else. Although the words "A/C OF
CASVILLE ENTERPRISES INC. "appear on the face of the check after
or under the name of defendant bank, the payee was still the latter.
The addition of said words did not in any way make Casville
Enterprises, Inc. the Payee of the instrument for the words merely
indicated for whose account or in connection with what account the
check was issued by the plaintiff.
Indeed, the bank teller who received it was fully aware that the
check was not negotiable since he stamped thereon the words
"NON-NEGOTIABLE For Payee's Account Only" and "NONNEGOTIABLE TELLER NO. 4, August 17,1976 EQUITABLE BANKING
CORPORATION.
But said teller should have exercised more prudence in the handling
of Id check because it was not made out in the usual manner. The
addition of the words A/C OF CASVILLE ENTERPRISES INC." should
have placed the teller on guard and he should have clarified the
matter with his superiors. Instead of doing so, however, the teller
decided to rely on his own judgment and at the risk of making a
wrong decision, credited the entire amount in the name of
defendant Casville although the latter was not the payee named in
the check. Such mistake was crucial and was, without doubt, the
proximate cause of plaintiffs defraudation.
xxx

xxx

xxx

Respondent Appellate Court upheld the above conclusions stating in

addition:
1)
The appellee made the subject check payable to appellant's
order, for the account of Casville Enterprises, Inc. In the light of the
other facts, the directive was for the appellant bank to apply the
value of the check as payment for the letter of credit which Casville

Enterprises, Inc. had previously applied for in favor of the appellee

(Exhibit D-1, p. 5). The issuance of the subject check was precisely
to meet the bank's prior requirement of payment before issuing the
letter of credit previously applied for by Casville Enterprises in favor
of the appellee;
xxx

xxx

xxx

We disagree.
1)
The subject check was equivocal and patently ambiguous.
By making the check read:
Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF
CASVILLE ENTERPRISES, INC.
the payee ceased to be indicated with reasonable certainty in
contravention of Section 8 of the Negotiable Instruments Law. 3 As
worded, it could be accepted as deposit to the account of the party
named after the symbols "A/C," or payable to the Bank as trustee,
or as an agent, for Casville Enterprises, Inc., with the latter being
the ultimate beneficiary. That ambiguity is to be taken contra
proferentem that is, construed against NELL who caused the
ambiguity and could have also avoided it by the exercise of a little
more care. Thus, Article 1377 of the Civil Code, provides:
Art. 1377. The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity.
2)
Contrary to the finding of respondent Appellate Court, the
subject check was, initially, not non-negotiable. Neither was it a
crossed check. The rubber-stamping transversall on the face of the
subject check of the words "Non-negotiable for Payee's Account
Only" between two (2) parallel lines, and "Non-negotiable, TellerNo. 4, August 17, 1976," separately boxed, was made only by the
Bank teller in accordance with customary bank practice, and not by
NELL as the drawer of the check, and simply meant that thereafter
the same check could no longer be negotiated.
3)
NELL's own acts and omissions in connection with the
drawing, issuance and delivery of the 16 August 1976 check, Exhibit
"E-l," and its implicit trust in Casals, were the proximate cause of its
own defraudation: (a) The original check of 5 August 1976, Exhibit
"2," was payable to the order solely of "Equitable Banking
Corporation." NELL changed the payee in the subject check, Exhibit
"E", however, to "Equitable Banking Corporation, A/C of Casville

Enterprises Inc.," upon Casals request. NELL also eliminated both

the cash disbursement voucher accompanying the check which
read:
Payment for marginal deposit and other expense re opening of L/C
for account of Casville Enterprises.
and the memorandum:
a/c of Casville Enterprises Inc. for Marginal deposit and payment of
balance on Estrada Property to be used as security for trust receipt
for opening L/C of Garrett Skidders in favor of the Edward Ashville J
Nell Co.
Evidencing the real nature of the transaction was merely a separate
covering letter, dated 16 August 1976, which Casals, sinisterly
enough, suppressed from the Bank officials and teller.
(b)
NELL entrusted the subject check and its covering letter,
Exhibit "E," to Casals who, obviously, had his own antagonistic
interests to promote. Thus it was that Casals did not purposely
present the subject check to the Executive Vice-President of the
Bank, who was aware of the negotiations regarding the Letter of
Credit, and who had rejected the previous check, Exhibit "2,"
including its three documents because the terms and conditions
required by the Bank for the opening of the Letter of Credit had not
yet been agreed on.

vs. Nano, et al., 61 Phil. 625 [1935]; Sta. Maria vs. Hongkong and
Shanghai Banking Corporation, 89 Phil. 780 [1951]; Republic of the
Philippines vs. Equitable Banking Corporation, L-15895, January
30,1964, 10 SCRA 8).
... As between two innocent persons, one of whom must suffer the
consequence of a breach of trust, the one who made it possible by
his act of confidence must bear the loss.
WHEREFORE, the Petition is granted and the Decision of respondent
Appellate Court, dated 4 October 1985, and its majority Resolution,
dated
28
April
1986,
denying
petitioner's
Motion
for
Reconsideration, are hereby SET ASIDE. The Decision of the then
Court of First Instance of Rizal, Branch XI. is modified in that
petitioner Equitable Banking Corporation is absolved from any and
all liabilities to the private respondent, Edward J. Nell Company, and
the Amended Complaint against petitioner bank is hereby ordered
dismissed. No costs.
SO ORDERED.

(c)
NELL was extremely accommodating to Casals. Thus, to
facilitate the sales transaction, NELL even advanced the marginal
deposit for the garrett skidder. It is, indeed, abnormal for the seller
of goods, the price of which is to be covered by a letter of credit, to
advance the marginal deposit for the same.
(d)
NELL had received three (3) postdated checks all dated 16
November, 1976 from Casvine to secure the subject check and had
accepted the deposit with it of two (2) titles of real properties as
collateral for said postdated checks. Thus, NELL was erroneously
confident that its interests were sufficiently protected. Never had it
suspected that those postdated checks would be dishonored, nor
that the subject check would be utilized by Casals for a purpose
other than for opening the letter of credit.
In the last analysis, it was NELL's own acts, which put it into the
power of Casals and Casville Enterprises to perpetuate the fraud
against it and, consequently, it must bear the loss (Blondeau, et al.,

DIGEST
EQUITABLE BANKING CORPORATION, petitioner,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT

Nell Company sent the check to Casville so that it would be the

latter who could send it to Equitable Bank to cover the deposit in
lieu of the letter of credit. Casals received the check, he went to
Equitable Bank, and the teller received the check. The teller,
instead of applying the amount as deposit in lieu of the letter of
credit, credited the check to Casvilles account with Equitable Bank.
Casals later withdrew all the P427,300.00 and appropriated it to
himself.

TRADERS ROYAL BANK VS COURT OF APPEALS

FACTS: Filriters Guaranty Assurance Corporation (FGAC) is the
owner of several Central Bank Certificates of Indebtedness (CBCI).
These certificates are actually proof that FGAC has the required
reserve investment with the Central Bank to operate as an insurer
and to protect third persons from whatever liabilities FGAC may
incur. In 1979, FGAC agreed to assign said CBCI to Philippine
Underwriters Finance Corporation (PUFC). Later, PUFC sold said CBCI
to Traders Royal Bank (TRB). Said sale with TRB comes with a right
to repurchase on a date certain. However, when the day to
repurchase arrived, PUFC failed to repurchase said CBCI hence TRB
requested the Central Bank to have said CBCI be registered in TRBs
name. Central Bank refused as it alleged that the CBCI are not
negotiable; that as such, the transfer from FGAC to PUFC is not
valid; that since it was invalid, PUFC acquired no valid title over the
CBCI; that the subsequent transfer from PUFC to TRB is likewise
invalid.
TRB then filed a petition for mandamus to compel the Central Bank
to register said CBCI in TRBs name. TRB averred that PUFC is the
alter ego of FGAC; that PUFC owns 90% of FGAC; that the two
corporations have identical sets of directors; that payment of said
CBCI to PUFC is like a payment to FGAC hence the sale between
PUFC and TRB is valid. In short, TRB avers that that the veil of
corporate fiction, between PUFC and FGAC, should be pierced
because the two corporations allegedly used their separate identity
to defraud TRD into buying said CBCI.

ISSUE: Whether or not Equitable Bank is liable to cover for the loss.

ISSUE: Whether or not Traders Royal Bank is correct.

HELD:
No. The subject check was equivocal and patently
ambiguous. Reading on the wordings of the check, the payee
thereon ceased to be indicated with reasonable certainty in
contravention of Section 8 of the Negotiable Instruments Law. As
worded, it could be accepted as deposit to the account of the party
named after the symbols A/C, or payable to the Bank as trustee,
or as an agent, for Casville Enterprises, Inc., with the latter being
the ultimate beneficiary. That ambiguity is to be taken contra
proferentem that is, construed against Nell Company who caused
the ambiguity and could have also avoided it by the exercise of a
little more care. Thus, Article 1377 of the Civil Code, provides:

HELD: No. Traders Royal Bank failed to show that the corporate
fiction is used by the two corporations to defeat public convenience,
justify wrong, protect fraud or defend crime or where a corporation
is a mere alter ego or business conduit of a person. TRB merely
showed that PUFC owns 90% of FGAC and that their directors are
the same. The identity of PUFC cant be maintained as that of FGAC
because of this mere fact; there is nothing else which could lead the
court under the circumstance to disregard their corporate
personalities. Further, TRB cant argue that it was defrauded into
buying those certificates. In the first place, TRB as a banking
institution is not ignorant about these types of transactions. It
should know for a fact that a certificate of indebtedness is not
negotiable because the payee therein is inscribed specifically and
that the Central Bank is obliged to pay the named payee only and
no one else.

In 1975, Liberato Casals, majority stockholder of Casville

Enterprises, went to buy two garrett skidders (bulldozers) from
Edward J. Nell Company amounting to P970,000.00. To pay the
bulldozers, Casals agreed to open a letter of credit with the
Equitable Banking Corporation. Pursuant to this, Nell Company
shipped one of the bulldozers to Casville. Meanwile, Casville advised
Nell Company that in order for the letter of credit to be opened,
Casville needs to deposit P427,300.00 with Equitable Bank, and that
since Casville is a little short, it requested Nell Company to pay the
deposit in the meantime.
Nell Company agreed and so it eventually sent a check in the
amount of P427,300.00. The check read:
Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF
CASVILLE ENTERPRISES, INC.

Art. 1377. The interpretation of obscure words or stipulations in a

contract shall not favor the party who caused the obscurity.

[G.R. No. 154127. December 8, 2003]

ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by
the express assent of the parties or by the complete incompatibility
between the old and the new agreements. Petitioner herein fails to
show either requirement convincingly; hence, the summary
judgment holding him liable as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of
Court, seeking to nullify the November 26, 2001 Decision[2] and the
June 26, 2002 Resolution[3] of the Court of Appeals (CA) in CA-GR
CV No. 60521. The appellate court disposed as follows:
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment
appealed from, insofar as it pertains to [Petitioner] Romeo
Garcia, must be, as it hereby is, AFFIRMED, subject to the
modification that the award for attorneys fees and cost of suit is
DELETED. The portion of the judgment that pertains to x x x
Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the case
against x x x Eduardo de Jesus is REMANDED to the court of origin
for purposes of receiving ex parte [Respondent] Dionisio Llamas
evidence against x x x Eduardo de Jesus.[4]
The challenged Resolution, on the other hand, denied petitioners
Motion for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
This case started out as a complaint for sum of money and
damages by x x x [Respondent] Dionisio Llamas against x x x
[Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil

Case No. Q97-32-873, the complaint alleged that on 23 December

1996[,] [petitioner and de Jesus] borrowed P400,000.00 from
[respondent]; that, on the same day, [they] executed a promissory
note wherein they bound themselves jointly and severally to pay
the loan on or before 23 January 1997 with a 5% interest per month;
that the loan has long been overdue and, despite repeated
demands, [petitioner and de Jesus] have failed and refused to pay
it; and that, by reason of the[ir] unjustified refusal, [respondent]
was compelled to engage the services of counsel to whom he
agreed to pay 25% of the sum to be recovered from [petitioner and
de Jesus], plus P2,000.00 for every appearance in court. Annexed to
the complaint were the promissory note above-mentioned and a
demand letter, dated 02 May 1997, by [respondent] addressed to
[petitioner and de Jesus].
Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred
that he assumed no liability under the promissory note because he
signed it merely as an accommodation party for x x x de Jesus; and,
alternatively, that he is relieved from any liability arising from the
note inasmuch as the loan had been paid by x x x de Jesus by
means of a check dated 17 April 1997; and that, in any event, the
issuance of the check and [respondents] acceptance thereof
novated or superseded the note.
[Respondent] tendered a reply to [Petitioner] Garcias answer,
thereunder asserting that the loan remained unpaid for the reason
that the check issued by x x x de Jesus bounced, and that
[Petitioner] Garcias answer was not even accompanied by a
certificate of non-forum shopping. Annexed to the reply were the
face of the check and the reverse side thereof.
For his part, x x x de Jesus asserted in his [A]nswer with
[C]ounterclaim that out of the supposed P400,000.00 loan, he
received only P360,000.00, the P40,000.00 having been advance
interest thereon for two months, that is, for January and February
1997; that[,] in fact[,] he paid the sum of P120,000.00 by way of
interests; that this was made when [respondents] daughter, one
Nits Llamas-Quijencio, received from the Central Police District
Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus
worked), the sum of P40,000.00, representing the peso equivalent
of his accumulated leave credits, another P40,000.00 as advance
interest, and still another P40,000.00 as interest for the months of
March and April 1997; that he had difficulty in paying the loan and
had asked [respondent] for an extension of time; that [respondent]
acted in bad faith in instituting the case, [respondent] having
agreed to accept the benefits he (de Jesus) would receive for his

retirement, but [respondent] nonetheless filed the instant case

while his retirement was being processed; and that, in defense of
his rights, he agreed to pay his counsel P20,000.00 [as] attorneys
fees, plus P1,000.00 for every court appearance.
During the pre-trial conference, x x x de Jesus and his lawyer did not
appear, nor did they file any pre-trial brief. Neither did [Petitioner]
Garcia file a pre-trial brief, and his counsel even manifested that he
would no [longer] present evidence. Given this development, the
trial court gave [respondent] permission to present his evidence ex
parte against x x x de Jesus; and, as regards [Petitioner] Garcia, the
trial court directed [respondent] to file a motion for judgment on the
pleadings, and for [Petitioner] Garcia to file his comment or
opposition thereto.
Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia
in default and to allow him to present his evidence ex parte.
Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his
defense to a judgment on the pleadings. Subsequently,
[respondent] filed a [M]anifestation/[M]otion to submit the case for
judgement on the pleadings, withdrawing in the process his
previous motion. Thereunder, he asserted that [petitioners and de
Jesus] solidary liability under the promissory note cannot be any
clearer, and that the check issued by de Jesus did not discharge the
loan since the check bounced.[5]
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City
(Branch 222) disposed of the case as follows:
WHEREFORE, premises considered, judgment on the pleadings is
hereby rendered in favor of [respondent] and against [petitioner
and De Jesus], who are hereby ordered to pay, jointly and severally,
the [respondent] the following sums, to wit:
1) P400,000.00 representing the principal amount plus 5% interest
thereon per month from January 23, 1997 until the same shall have
been fully paid, less the amount of P120,000.00 representing
interests already paid by x x x de Jesus;
2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00
for each day of [c]ourt appearance, and;
3) Cost of this suit.[6]
Ruling of the Court of Appeals

The CA ruled that the trial court had erred when it rendered a
judgment on the pleadings against De Jesus. According to the
appellate court, his Answer raised genuinely contentious issues.
Moreover, he was still required to present his evidence ex parte.
Thus, respondent was not ipso facto entitled to the RTC judgment,
even though De Jesus had been declared in default. The case
against the latter was therefore remanded by the CA to the trial
court for the ex parte reception of the formers evidence.
As to petitioner, the CA treated his case as a summary judgment,
because his Answer had failed to raise even a single genuine issue
regarding any material fact.
The appellate court ruled that no novation -- express or implied -had taken place when respondent accepted the check from De
Jesus. According to the CA, the check was issued precisely to pay for
the loan that was covered by the promissory note jointly and
severally undertaken by petitioner and De Jesus. Respondents
acceptance of the check did not serve to make De Jesus the sole
debtor because, first, the obligation incurred by him and petitioner
was joint and several; and, second, the check -- which had been
intended to extinguish the obligation -- bounced upon its
presentment.
Hence, this Petition.[7]
Issues
Petitioner submits the following issues for our consideration:
I
Whether or not the Honorable Court of Appeals gravely erred in not
holding that novation applies in the instant case as x x x Eduardo
de Jesus had expressly assumed sole and exclusive liability for the
loan obligation he obtained from x x x Respondent Dionisio Llamas,
as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full
amount of the loan of P400,000.00 in favor of Respondent Llamas,
although the check subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which
resulted in [the] substitution by x x x de Jesus or [the superseding
of] the promissory note;

c) x x x de Jesus having paid interests on the loan in the total

amount of P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x
de Jesus that due to financial difficulties, he be given an extension
of time to pay his loan obligation and that his retirement benefits
from the Philippine National Police will answer for said obligation.
II
Whether or not the Honorable Court of Appeals seriously erred in
not holding that the defense of petitioner that he was merely an
accommodation party, despite the fact that the promissory note
provided for a joint and solidary liability, should have been given
weight and credence considering that subsequent events showed
that the principal obligor was in truth and in fact x x x de Jesus, as
evidenced by the foregoing circumstances showing his assumption
of sole liability over the loan obligation.
III
Whether or not judgment on the pleadings or summary judgment
was properly availed of by Respondent Llamas, despite the fact that
there are genuine issues of fact, which the Honorable Court of
Appeals itself admitted in its Decision, which call for the
presentation of evidence in a full-blown trial.[8]
Simply put, the issues are the following: 1) whether there was
novation of the obligation; 2) whether the defense that petitioner
was only an accommodation party had any basis; and 3) whether
the judgment against him -- be it a judgment on the pleadings or a
summary judgment -- was proper.
The Courts Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and
solidary debtor by insisting that novation took place, either through
the substitution of De Jesus as sole debtor or the replacement of the
promissory note by the check. Alternatively, the former argues that
the original obligation was extinguished when the latter, who was
his co-obligor, paid the loan with the check.

The fallacy of the second (alternative) argument is all too apparent.

The check could not have extinguished the obligation, because it
bounced upon presentment. By law,[9] the delivery of a check
produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its
objects or principal obligations, by substituting a new debtor in
place of the old one, or by subrogating a third person to the rights
of the creditor.[10] Article 1293 of the Civil Code defines novation
as follows:
Art. 1293. Novation which consists in substituting a new debtor in
the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237.
In general, there are two modes of substituting the person of the
debtor: (1) expromision and (2) delegacion. In expromision, the
initiative for the change does not come from -- and may even be
made without the knowledge of -- the debtor, since it consists of a
third persons assumption of the obligation. As such, it logically
requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third
person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary.
[11] Both modes of substitution by the debtor require the consent of
the creditor.[12]
Novation may also be extinctive or modificatory. It is extinctive
when an old obligation is terminated by the creation of a new one
that takes the place of the former. It is merely modificatory when
the old obligation subsists to the extent that it remains compatible
with the amendatory agreement.[13] Whether extinctive or
modificatory, novation is made either by changing the object or the
principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person
to the rights of the creditor, an act known as subjective or personal
novation.[14] For novation to take place, the following requisites
must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.[15]
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible
with the old one on every point.[16] The test of incompatibility is
whether the two obligations can stand together, each one with its
own independent existence.[17]
Applying the foregoing to the instant case, we hold that no novation
took place.
The parties did not unequivocally declare that the old obligation had
been extinguished by the issuance and the acceptance of the
check, or that the check would take the place of the note. There is
no incompatibility between the promissory note and the check. As
the CA correctly observed, the check had been issued precisely to
answer for the obligation. On the one hand, the note evidences the
loan obligation; and on the other, the check answers for it. Verily,
the two can stand together.
Neither could the payment of interests -- which, in petitioners view,
also constitutes novation[18] -- change the terms and conditions of
the obligation. Such payment was already provided for in the
promissory note and, like the check, was totally in accord with the
terms thereof.
Also unmeritorious is petitioners argument that the obligation was
novated by the substitution of debtors. In order to change the
person of the debtor, the old one must be expressly released from
the obligation, and the third person or new debtor must assume the
formers place in the relation.[19] Well-settled is the rule that
novation is never presumed.[20] Consequently, that which arises
from a purported change in the person of the debtor must be clear
and express.[21] It is thus incumbent on petitioner to show clearly
and unequivocally that novation has indeed taken place.

solidary due to the fact that the promissory note expressly declared
that the liability of appellants thereunder is joint and [solidary.]
Reason: under the law, a creditor may demand payment or
performance from one of the solidary debtors or some or all of them
simultaneously, and payment made by one of them extinguishes
the obligation. It therefore follows that in case the creditor fails to
collect from one of the solidary debtors, he may still proceed
against the other or others. x x x [22]
Moreover, it must be noted that for novation to be valid and legal,
the law requires that the creditor expressly consent to the
substitution of a new debtor.[23] Since novation implies a waiver of
the right the creditor had before the novation, such waiver must be
express.[24] It cannot be supposed, without clear proof, that the
present respondent has done away with his right to exact fulfillment
from either of the solidary debtors.[25]
More important, De Jesus was not a third person to the obligation.
From the beginning, he was a joint and solidary obligor of the
P400,000 loan; thus, he can be released from it only upon its
extinguishment. Respondents acceptance of his check did not
change the person of the debtor, because a joint and solidary
obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled
to demand the satisfaction of the whole obligation from any or all of
the debtors.[26] It is up to the former to determine against whom to
enforce collection.[27] Having made himself jointly and severally
liable with De Jesus, petitioner is therefore liable[28] for the entire
obligation.[29]
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an
accommodation party; and that, as such, he was released as obligor
when respondent agreed to extend the term of the obligation.

In the present case, petitioner has not shown that he was expressly
released from the obligation, that a third person was substituted in
his place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus. The CA aptly
held:

This reasoning is misplaced, because the note herein is not a

negotiable instrument. The note reads:

x x x. Plaintiffs acceptance of the bum check did not result in

substitution by de Jesus either, the nature of the obligation being

RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR

HUNDRED THOUSAND PESOS, Philippine Currency payable on or

PROMISSORY NOTE
P400,000.00

before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City,
with interest at the rate of 5% per month or fraction thereof.
It is understood that our liability under this loan is jointly and
severally [sic].
Done at Quezon City, Metro Manila this 23rd day of December,
1996.[30]
By its terms, the note was made payable to a specifc
person rather than to bearer or to order[31] -- a requisite for
negotiability under Act 2031, the Negotiable Instruments Law (NIL).
Hence, petitioner cannot avail himself of the NILs provisions on the
liabilities and defenses of an accommodation party. Besides, a nonnegotiable note is merely a simple contract in writing and is
evidence of such intangible rights as may have been created by the
assent of the parties.[32] The promissory note is thus covered by
the general provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still,
petitioner would be liable for the promissory note. Under Article 29
of Act 2031, an accommodation party is liable for the instrument to
a holder for value even if, at the time of its taking, the latter knew
the former to be only an accommodation party. The relation
between an accommodation party and the party accommodated is,
in effect, one of principal and surety -- the accommodation party
being the surety.[33] It is a settled rule that a surety is bound
equally and absolutely with the principal and is deemed an original
promissor and debtor from the beginning. The liability is immediate
and direct.[34]
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment
on the pleadings and a summary judgment. Under Section 3 of Rule
35 of the Rules of Court, a summary judgment may be rendered
after a summary hearing if the pleadings, supporting affidavits,
depositions and admissions on file show that (1) except as to the
amount of damages, there is no genuine issue regarding any
material fact; and (2) the moving party is entitled to a judgment as
a matter of law.
A summary judgment is a procedural device designed for the
prompt disposition of actions in which the pleadings raise only a
legal, not a genuine, issue regarding any material fact.[35]

Consequently, facts are asserted in the complaint regarding which

there is yet no admission, disavowal or qualification; or specific
denials or affirmative defenses are set forth in the answer, but the
issues are fictitious as shown by the pleadings, depositions or
admissions.[36] A summary judgment may be applied for by either
a claimant or a defending party.[37]
On the other hand, under Section 1 of Rule 34 of the Rules of Court,
a judgment on the pleadings is proper when an answer fails to
render an issue or otherwise admits the material allegations of the
adverse partys pleading. The essential question is whether there
are issues generated by the pleadings.[38] A judgment on the
pleadings may be sought only by a claimant, who is the party
seeking to recover upon a claim, counterclaim or cross-claim; or to
obtain a declaratory relief. [39]
Apropos thereto, it must be stressed that the trial courts judgment
against petitioner was correctly treated by the appellate court as a
summary judgment, rather than as a judgment on the pleadings.
His Answer[40] apparently raised several issues -- that he signed
the promissory note allegedly as a mere accommodation party, and
that the obligation was extinguished by either payment or novation.
However, these are not factual issues requiring trial. We quote with
approval the CAs observations:
Although Garcias [A]nswer tendered some issues, by way of
affirmative defenses, the documents submitted by [respondent]
nevertheless clearly showed that the issues so tendered were not
valid issues. Firstly, Garcias claim that he was merely an
accommodation party is belied by the promissory note that he
signed. Nothing in the note indicates that he was only an
accommodation party as he claimed to be. Quite the contrary, the
promissory note bears the statement: It is understood that our
liability under this loan is jointly and severally [sic]. Secondly, his
claim that his co-defendant de Jesus already paid the loan by means
of a check collapses in view of the dishonor thereof as shown at the
dorsal side of said check.[41]
From the records, it also appears that petitioner himself
moved to submit the case for judgment on the basis of the
pleadings and documents. In a written Manifestation,[42] he stated
that judgment on the pleadings may now be rendered without
further evidence, considering the allegations and admissions of the
parties.[43]
In view of the foregoing, the CA correctly considered as a summary
judgment that which the trial court had issued against petitioner.

WHEREFORE, this Petition is hereby DENIED and the assailed

Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
Metropolitan Bank & Trust Company vs Court of Appeals
194 SCRA 169; 1991
Facts: The Metropolitan Bank and Trust Co. (MetroBank) is a
commercial bank with branches throughout the Philippines and
even abroad. Golden Savings and Loan Association was, at the time
these events happened, operating in Calapan, Mindoro, with Lucia
Castillo, Magno Castillo and Gloria Castillo as its principal officers. In
January 1979, a certain Eduardo Gomez opened an account with
Golden Savings and deposited over a period of 2 months 38
treasury warrants with a total value of P1,755,228.37. They were all
drawn by the Philippine Fish Marketing Authority and purportedly
signed by its General Manager and counter-signed by its Auditor. 6
of these were directly payable to Gomez while the others appeared
to have been indorsed by their respective payees, followed by
Gomez as second indorser.
On various dates between June 25 and July 16, 1979, all these
warrants were subsequently indorsed by Gloria Castillo as Cashier
of Golden Savings and deposited to its Savings Account 2498 in the
Metrobank branch in Calapan, Mindoro. They were then sent for
clearing by the branch office to the principal office of Metrobank,
which forwarded them to the Bureau of Treasury for special clearing.
More than 2 weeks after the deposits, Gloria Castillo went to the
Calapan branch several times to ask whether the warrants had been
cleared. She was told to wait. Accordingly, Gomez was meanwhile
not allowed to withdraw from his account.
Later, however, "exasperated" over Gloria's repeated inquiries and
also as an accommodation for a "valued client," MetroBank says it
finally decided to allow Golden Savings to withdraw from the
proceeds of the warrants. The first withdrawal was made on 9 July
1979, in the amount of P508,000.00, the second on 13 July 1979, in
the amount of P310,000.00, and the third on 16 July 1979, in the
amount of P150,000.00. The total withdrawal was P968,000.00.
In turn, Golden Savings subsequently allowed Gomez to make
withdrawals from his own account, eventually collecting the total
amount of P1,167,500.00 from the proceeds of the apparently
cleared warrants. The last withdrawal was made on 16 July 1979.
On 21 July 1979, Metrobank informed Golden Savings that 32 of the
warrants had been dishonored by the Bureau of Treasury on 19 July
1979, and demanded the refund by Golden Savings of the amount it

had previously withdrawn, to make up the deficit in its account. The

demand was rejected. Metrobank then sued Golden Savings in the
Regional Trial Court of Mindoro. After trial, judgment was rendered
in favor of Golden Savings, which, however, filed a motion for
reconsideration even as Metrobank filed its notice of appeal. On 4
November 1986, the lower court modified its decision, by dismissing
the complaint with costs against Metrobank; by issolving and lifting
the writ of attachment of the properties of Golden Savings and
Spouses Magno Castillo and Lucia Castillo; directing Metrobank to
reverse its action of debiting Savings Account 2498 of the sum of
P1,754,089.00 and to reinstate and credit to such account such
amount existing before the debit was made including the amount of
P812,033.37 in favor of Golden Savings and thereafter, to allow
Golden Savings to withdraw the amount outstanding thereon before
the debit; by ordering Metrobank to pay Golden Savings attorney's
fees and expenses of litigation in the amount of P200,000.00; and
by ordering Metrobank to pay the Spouses Magno Castillo and Lucia
Castillo attorney's fees and expenses of litigation in the amount of
P100,000.00. On appeal to the appellate court, the decision was
affirmed, prompting Metrobank to file the petition for review.
Issue: Whether the treasury warrants in question are negotiable
instruments.
Held: Clearly stamped on the treasury warrants' face is the word
"non-negotiable." Moreover, and this is of equal significance, it is
indicated that they are payable from a particular fund, to wit, Fund
501. Section 1 of the Negotiable Instruments Law, provides that "An
instrument to be negotiable must conform to the following
requirements: (a) It must be in writing and signed by the maker or
drawer; (b) Must contain an unconditional promise or order to pay a
sum certain in money; (c) Must be payable on demand, or at a fixed
or determinable future time; (d) Must be payable to order or to
bearer; and (e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with reasonable
certainty." Section 3 (When promise is unconditional) thereof
provides that "An unqualified order or promise to pay is
unconditional within the meaning of this Act though coupled with
(a) An indication of a particular fund out of which reimbursement is
to be made or a particular account to be debited with the amount;
or (b) A statement of the transaction which gives rise to the
instrument. But an order or promise to pay out of a particular fund
is not unconditional." The indication of Fund 501 as the source of
the payment to be made on the treasury warrants makes the order
or promise to pay "not unconditional" and the warrants themselves
non-negotiable. There should be no question that the exception on

Section 3 of the Negotiable Instruments Law is applicable in the

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

G.R. No. 88866

February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN
ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and
GLORIA CASTILLO, respondents.
CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question
of negligence. The facts, pruned of all non-essentials, are easily
told.
The Metropolitan Bank and Trust Co. is a commercial bank with
branches throughout the Philippines and even abroad. Golden
Savings and Loan Association was, at the time these events
happened, operating in Calapan, Mindoro, with the other private
respondents as its principal officers.
In January 1979, a certain Eduardo Gomez opened an account with
Golden Savings and deposited over a period of two months 38
treasury warrants with a total value of P1,755,228.37. They were all
drawn by the Philippine Fish Marketing Authority and purportedly
signed by its General Manager and countersigned by its Auditor. Six
of these were directly payable to Gomez while the others appeared
to have been indorsed by their respective payees, followed by
Gomez as second indorser. 1

On various dates between June 25 and July 16, 1979, all these
warrants were subsequently indorsed by Gloria Castillo as Cashier
of Golden Savings and deposited to its Savings Account No. 2498 in
the Metrobank branch in Calapan, Mindoro. They were then sent for
clearing by the branch office to the principal office of Metrobank,
which forwarded them to the Bureau of Treasury for special clearing.
2
More than two weeks after the deposits, Gloria Castillo went to the
Calapan branch several times to ask whether the warrants had been
cleared. She was told to wait. Accordingly, Gomez was meanwhile
not allowed to withdraw from his account. Later, however,
"exasperated" over Gloria's repeated inquiries and also as an
accommodation for a "valued client," the petitioner says it finally
decided to allow Golden Savings to withdraw from the proceeds of
the
warrants. 3
The first withdrawal was made on July 9, 1979, in the amount of
P508,000.00, the second on July 13, 1979, in the amount of
P310,000.00, and the third on July 16, 1979, in the amount of
P150,000.00. The total withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make
withdrawals from his own account, eventually collecting the total
amount of P1,167,500.00 from the proceeds of the apparently
cleared warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the
warrants had been dishonored by the Bureau of Treasury on July 19,
1979, and demanded the refund by Golden Savings of the amount it
had previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in
the Regional Trial Court of Mindoro. 5 After trial, judgment was
rendered in favor of Golden Savings, which, however, filed a motion
for reconsideration even as Metrobank filed its notice of appeal. On
November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1.

Dismissing the complaint with costs against the plaintiff;

2.
Dissolving and lifting the writ of attachment of the properties
of defendant Golden Savings and Loan Association, Inc. and
defendant Spouses Magno Castillo and Lucia Castillo;
3.
Directing the plaintiff to reverse its action of debiting
Savings Account No. 2498 of the sum of P1,754,089.00 and to
reinstate and credit to such account such amount existing before
the debit was made including the amount of P812,033.37 in favor of
defendant Golden Savings and Loan Association, Inc. and thereafter,
to allow defendant Golden Savings and Loan Association, Inc. to
withdraw the amount outstanding thereon before the debit;
4.
Ordering the plaintiff to pay the defendant Golden Savings
and Loan Association, Inc. attorney's fees and expenses of litigation
in the amount of P200,000.00.
5.
Ordering the plaintiff to pay the defendant Spouses Magno
Castillo and Lucia Castillo attorney's fees and expenses of litigation
in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed,
prompting Metrobank to file this petition for review on the following
grounds:
1.
Respondent Court of Appeals erred in disregarding and
failing to apply the clear contractual terms and conditions on the
deposit slips allowing Metrobank to charge back any amount
erroneously credited.

4.
Respondent Court of Appeals erred in holding that the
treasury warrants involved in this case are not negotiable
instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that
Metrobank was indeed negligent in giving Golden Savings the
impression that the treasury warrants had been cleared and that,
consequently, it was safe to allow Gomez to withdraw the proceeds
thereof from his account with it. Without such assurance, Golden
Savings would not have allowed the withdrawals; with such
assurance, there was no reason not to allow the withdrawal. Indeed,
Golden Savings might even have incurred liability for its refusal to
return the money that to all appearances belonged to the depositor,
who could therefore withdraw it any time and for any reason he saw
fit.
It was, in fact, to secure the clearance of the treasury warrants that
Golden Savings deposited them to its account with Metrobank.
Golden Savings had no clearing facilities of its own. It relied on
Metrobank to determine the validity of the warrants through its own
services. The proceeds of the warrants were withheld from Gomez
until Metrobank allowed Golden Savings itself to withdraw them
from its own deposit. 7 It was only when Metrobank gave the gosignal that Gomez was finally allowed by Golden Savings to
withdraw them from his own account.

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

The argument of Metrobank that Golden Savings should have

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

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

By contrast, Metrobank exhibited extraordinary carelessness. The

amount involved was not trifling more than one and a half million
pesos (and this was 1979). There was no reason why it should not

(a)
Metrobank's right to charge back is not limited to instances
where the checks or treasury warrants are forged or unauthorized.
(b)
Until such time as Metrobank is actually paid, its obligation is
that of a mere collecting agent which cannot be held liable for its
failure to collect on the warrants.

have waited until the treasury warrants had been cleared; it would
not have lost a single centavo by waiting. Yet, despite the lack of
such clearance and notwithstanding that it had not received a
single centavo from the proceeds of the treasury warrants, as it now
repeatedly stresses it allowed Golden Savings to withdraw not
once, not twice, but thrice from the uncleared treasury warrants
in the total amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of
Gloria Castillo about the clearance and it also wanted to
"accommodate" a valued client. It "presumed" that the warrants
had been cleared simply because of "the lapse of one week." 8 For a
bank with its long experience, this explanation is unbelievably
naive.
And now, to gloss over its carelessness, Metrobank would invoke
the conditions printed on the dorsal side of the deposit slips through
which the treasury warrants were deposited by Golden Savings with
its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates
itself only as the depositor's collecting agent, assuming no
responsibility beyond care in selecting correspondents, and until
such time as actual payment shall have come into possession of
this bank, the right is reserved to charge back to the depositor's
account any amount previously credited, whether or not such item
is returned. This also applies to checks drawn on local banks and
bankers and their branches as well as on this bank, which are
unpaid due to insufficiency of funds, forgery, unauthorized overdraft
or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was
acting only as a collecting agent for Golden Savings and give it the
right to "charge back to the depositor's account any amount
previously credited, whether or not such item is returned. This also
applies to checks ". . . which are unpaid due to insufficiency of
funds, forgery, unauthorized overdraft of any other reason." It is
claimed that the said conditions are in the nature of contractual
stipulations and became binding on Golden Savings when Gloria
Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions,
considering that they have apparently been imposed by the bank
unilaterally, without the consent of the depositor. Indeed, it could be
argued that the depositor, in signing the deposit slip, does so only
to identify himself and not to agree to the conditions set forth in the

given permit at the back of the deposit slip. We do not have to rule
on this matter at this time. At any rate, the Court feels that even if
the deposit slip were considered a contract, the petitioner could still
not validly disclaim responsibility thereunder in the light of the
circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden
Savings, Metrobank seems to be suggesting that as a mere agent it
cannot be liable to the principal. This is not exactly true. On the
contrary, Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for
negligence, which shall be judged 'with more or less rigor by the
courts, according to whether the agency was or was not for a
compensation.
The negligence of Metrobank has been sufficiently established. To
repeat for emphasis, it was the clearance given by it that assured
Golden Savings it was already safe to allow Gomez to withdraw the
proceeds of the treasury warrants he had deposited Metrobank
misled Golden Savings. There may have been no express clearance,
as Metrobank insists (although this is refuted by Golden Savings)
but in any case that clearance could be implied from its allowing
Golden Savings to withdraw from its account not only once or even
twice but three times. The total withdrawal was in excess of its
original balance before the treasury warrants were deposited, which
only added to its belief that the treasury warrants had indeed been
cleared.
Metrobank's argument that it may recover the disputed amount if
the warrants are not paid for any reason is not acceptable. Any
reason does not mean no reason at all. Otherwise, there would have
been no need at all for Golden Savings to deposit the treasury
warrants with it for clearance. There would have been no need for it
to wait until the warrants had been cleared before paying the
proceeds thereof to Gomez. Such a condition, if interpreted in the
way the petitioner suggests, is not binding for being arbitrary and
unconscionable. And it becomes more so in the case at bar when it
is considered that the supposed dishonor of the warrants was not
communicated to Golden Savings before it made its own payment
to Gomez.
The belated notification aggravated the petitioner's earlier
negligence in giving express or at least implied clearance to the
treasury warrants and allowing payments therefrom to Golden
Savings. But that is not all. On top of this, the supposed reason for

the dishonor, to wit, the forgery of the signatures of the general

manager and the auditor of the drawer corporation, has not been
established. 9 This was the finding of the lower courts which we see
no reason to disturb. And as we said in MWSS v. Court of Appeals:
10

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

Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA

238). It must be established by clear, positive and convincing
evidence. This was not done in the present case.

The indication of Fund 501 as the source of the payment to be

made on the treasury warrants makes the order or promise to pay
"not unconditional" and the warrants themselves non-negotiable.
There should be no question that the exception on Section 3 of the
Negotiable Instruments Law is applicable in the case at bar. This
conclusion conforms to Abubakar vs. Auditor General 11 where the
Court held:

A no less important consideration is the circumstance that the

treasury warrants in question are not negotiable instruments.
Clearly stamped on their face is the word "non-negotiable."
Moreover, and this is of equal significance, it is indicated that they
are payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially
the underscored parts, are pertinent:
Sec. 1. Form of negotiable instruments. An instrument to be
negotiable must conform to the following requirements:
(a)

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

(b)
Must contain an unconditional promise or order to pay a sum
certain in money;
(c)
Must be payable on demand, or at a fixed or determinable
future time;
(d)

Must be payable to order or to bearer; and

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

xxx

xxx

Sec. 3. When promise is unconditional. An unqualified order or

promise to pay is unconditional within the meaning of this Act
though coupled with
(a)
An indication of a particular fund out of which
reimbursement is to be made or a particular account to be debited
with the amount; or

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

unconditional.

The petitioner argues that he is a holder in good faith and for value
of a negotiable instrument and is entitled to the rights and
privileges of a holder in due course, free from defenses. But this
treasury warrant is not within the scope of the negotiable
instrument law. For one thing, the document bearing on its face the
words "payable from the appropriation for food administration, is
actually an Order for payment out of "a particular fund," and is not
unconditional and does not fulfill one of the essential requirements
of a negotiable instrument (Sec. 3 last sentence and section [1(b)]
of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in
general, Golden Savings assumed that they were "genuine and in
all respects what they purport to be," in accordance with Section 66
of the Negotiable Instruments Law. The simple reason is that this
law is not applicable to the non-negotiable treasury warrants. The
indorsement was made by Gloria Castillo not for the purpose of
guaranteeing the genuineness of the warrants but merely to deposit
them with Metrobank for clearing. It was in fact Metrobank that
made the guarantee when it stamped on the back of the warrants:
"All prior indorsement and/or lack of endorsements guaranteed,
Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of
the Philippine Islands, 12 but we feel this case is inapplicable to the
present controversy.1wphi1 That case involved checks whereas
this case involves treasury warrants. Golden Savings never
represented that the warrants were negotiable but signed them
only for the purpose of depositing them for clearance. Also, the fact
of forgery was proved in that case but not in the case before us.
Finally, the Court found the Jai Alai Corporation negligent in
accepting the checks without question from one Antonio Ramirez

notwithstanding that the payee was the Inter-Island Gas Services,

Inc. and it did not appear that he was authorized to indorse it. No
similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However,
we will have to amend it insofar as it directs the petitioner to credit
Golden Savings with the full amount of the treasury checks
deposited to its account.
The total value of the 32 treasury warrants dishonored was
P1,754,089.00, from which Gomez was allowed to withdraw
P1,167,500.00 before Golden Savings was notified of the dishonor.
The amount he has withdrawn must be charged not to Golden
Savings but to Metrobank, which must bear the consequences of its
own negligence. But the balance of P586,589.00 should be debited
to Golden Savings, as obviously Gomez can no longer be permitted
to withdraw this amount from his deposit because of the dishonor of
the warrants. Gomez has in fact disappeared. To also credit the
balance to Golden Savings would unduly enrich it at the expense of
Metrobank, let alone the fact that it has already been informed of
the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the
modification that Paragraph 3 of the dispositive portion of the
judgment of the lower court shall be reworded as follows:
3.
Debiting Savings Account No. 2498 in the sum of
P586,589.00 only and thereafter allowing defendant Golden Savings
& Loan Association, Inc. to withdraw the amount outstanding
thereon, if any, after the debit.
SO ORDERED.

Caltex (Philippines) vs CA
212 SCRA 448
August 10, 1992
Facts:
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 is tasked to deposit
aggregate amounts.
One time Mr. dela Cruz delivered the CTDs to Caltex Philippines in
connection with his purchased of fuel products from the latter.
However, Sometime in March 1982, he 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.
Angel dela Cruz negotiated and obtained a loan from defendant
bank and executed a notarized Deed of Assignment of Time
Deposit, which stated, among others, that he 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.
In 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.
Mr dela Cruz received a letter from the plaintiff formally informing of
its possession of the CTDs in question and of its decision to preterminate the same. ccordingly, defendant bank rejected the
plaintiff's demand and claim for payment of the value of the CTDs in
a letter dated February 7, 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.
However, the 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.
On appeal, CA affirmed the lower court's dismissal of the complaint,
and ruled (1) that the subject certifcates of deposit are nonnegotiable 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.

Issues:
a) Whether certificates of time deposit (CTDs) are negotiable
instruments?
b) Is the depositor also the bearer of the document?
c) Whether petitioner can rightfully recover on the CTDs?
Held:
The CTDs in question are not 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 accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of
the instrument itself. In the construction of a bill or note, the
intention of the parties is to control, if it can be legally ascertained.
While the writing may be read in the light of surrounding
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.
Petitioner's insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in
such a manner as to constitute the transferee the holder thereof,
and a holder may be the payee or indorsee of a bill or note, who is
in possession of it, or the bearer thereof. 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.

JUANITA SALAS, petitioner,

vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING
CORPORATION, respondents.
Arsenio C. Villalon, Jr. for petitioner.
Labaguis, Loyola, Angara & Associates for private respondent.
FERNAN, C.J.:
Assailed in this petition for review on certiorari is the decision of the
Court of Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest
Finance & Leasing Corporation v. Salas", which modified the
decision of the Regional Trial Court of San Fernando, Pampanga in
Civil Case No. 5915, a collection suit between the same parties.
Records disclose that on February 6, 1980, Juanita Salas
(hereinafter referred to as petitioner) bought a motor vehicle from
the Violago Motor Sales Corporation (VMS for brevity) for

P58,138.20 as evidenced by a promissory note. This note was

subsequently endorsed to Filinvest Finance & Leasing Corporation
(hereinafter referred to as private respondent) which financed the
purchase.
Petitioner defaulted in her installments beginning May 21,
1980 allegedly due to a discrepancy in the engine and chassis
numbers of the vehicle delivered to her and those indicated in the
sales invoice, certificate of registration and deed of chattel
mortgage, which fact she discovered when the vehicle figured in an
accident on 9 May 1980.
This failure to pay prompted private respondent to initiate
Civil Case No. 5915 for a sum of money against petitioner before
the Regional Trial Court of San Fernando, Pampanga.
In its decision dated September 10, 1982, the trial court
held, thus:
WHEREFORE, and in view of all the foregoing, judgment is hereby
rendered ordering the defendant to pay the plaintiff the sum of
P28,414.40 with interest thereon at the rate of 14% from October 2,
1980 until the said sum is fully paid; and the further amount of
P1,000.00 as attorney's fees.
The counterclaim of defendant is dismissed.
With costs against defendant. 1
Both petitioner and private respondent appealed the aforesaid
decision to the Court of Appeals.
Imputing fraud, bad faith and misrepresentation against VMS
for having delivered a different vehicle to petitioner, the latter
prayed for a reversal of the trial court's decision so that she may be
absolved from the obligation under the contract.
On October 27, 1986, the Court of Appeals rendered its assailed
decision, the pertinent portion of which is quoted hereunder:
The allegations, statements, or admissions contained in a
pleading are conclusive as against the pleader. A party cannot
subsequently take a position contradictory of, or inconsistent with
his pleadings (Cunanan vs. Amparo, 80 Phil. 227). Admissions made
by the parties in the pleadings, or in the course of the trial or other
proceedings, do not require proof and cannot be contradicted unless
previously shown to have been made through palpable mistake
(Sec. 2, Rule 129, Revised Rules of Court; Sta. Ana vs. Maliwat, L23023, Aug. 31, 1968, 24 SCRA 1018).
When an action or defense is founded upon a written
instrument, copied in or attached to the corresponding pleading as
provided in the preceding section, the genuineness and due
execution of the instrument shall be deemed admitted unless the
adverse party, under oath, specifically denied them, and sets forth
what he claims to be the facts (Sec. 8, Rule 8, Revised Rules of
Court; Hibbered vs. Rohde and McMillian, 32 Phil. 476).

A perusal of the evidence shows that the amount of

P58,138.20 stated in the promissory note is the amount assumed by
the plaintiff in financing the purchase of defendant's motor vehicle
from the Violago Motor Sales Corp., the monthly amortization of
winch is Pl,614.95 for 36 months. Considering that the defendant
was able to pay twice (as admitted by the plaintiff, defendant's
account became delinquent only beginning May, 1980) or in the
total sum of P3,229.90, she is therefore liable to pay the remaining
balance of P54,908.30 at l4% per annum from October 2, 1980 until
full payment.
WHEREFORE, considering the foregoing, the appealed
decision is hereby modified ordering the defendant to pay the
plaintiff the sum of P54,908.30 at 14% per annum from October 2,
1980 until full payment. The decision is AFFIRMED in all other
respects. With costs to defendant. 2
Petitioner's motion for reconsideration was denied; hence,
the present recourse.
In the petition before us, petitioner assigns twelve (12)
errors which focus on the alleged fraud, bad faith and
misrepresentation of Violago Motor Sales Corporation in the conduct
of its business and which fraud, bad faith and misrepresentation
supposedly released petitioner from any liability to private
respondent who should instead proceed against VMS. 3
Petitioner argues that in the light of the provision of the law on sales
by description 4 which she alleges is applicable here, no contract
ever existed between her and VMS and therefore none had been
assigned in favor of private respondent.
She contends that it is not necessary, as opined by the
appellate court, to implead VMS as a party to the case before it can
be made to answer for damages because VMS was earlier sued by
her for "breach of contract with damages" before the Regional Trial
Court of Olongapo City, Branch LXXII, docketed as Civil Case No.
2916-0. She cites as authority the decision therein where the court
originally ordered petitioner to pay the remaining balance of the
motor vehicle installments in the amount of P31,644.30
representing the difference between the agreed consideration of
P49,000.00 as shown in the sales invoice and petitioner's initial
downpayment of P17,855.70 allegedly evidenced by a receipt. Said
decision was however reversed later on, with the same court
ordering defendant VMS instead to return to petitioner the sum of
P17,855.70. Parenthetically, said decision is still pending
consideration by the First Civil Case Division of the Court of Appeals,
upon an appeal by VMS, docketed as AC-G.R. No. 02922. 5
Private respondent in its comment, prays for the dismissal of the

petition and counters that the issues raised and the allegations
adduced therein are a mere rehash of those presented and already
passed upon in the court below, and that the judgment in the
"breach of contract" suit cannot be invoked as an authority as the
same is still pending determination in the appellate court.
We see no cogent reason to disturb the challenged decision.

issue

The pivotal
in this case is whether the promissory note in
question is a negotiable instrument which will bar completely all the
available defenses of the petitioner against private respondent.
Petitioner's liability on the promissory note, the due execution and
genuineness of which she never denied under oath is, under the
foregoing factual milieu, as inevitable as it is clearly established.
The records reveal that involved herein is not a simple case of
assignment of credit as petitioner would have it appear, where the
assignee merely steps into the shoes of, is open to all defenses
available against and can enforce payment only to the same extent
as, the assignor-vendor.
Recently, in the case of Consolidated Plywood Industries Inc. v. IFC
Leasing and Acceptance Corp., 6 this Court had the occasion to
clearly distinguish between a negotiable and a non-negotiable
instrument.
Among others, the instrument in order to be considered negotiable
must contain the so-called "words of negotiability i.e., must be
payable to "order" or "bearer"". Under Section 8 of the Negotiable
Instruments Law, there are only two ways by which an instrument
may be made payable to order. There must always be a specified
person named in the instrument and the bill or note is to be paid to
the person designated in the instrument or to any person to whom
he has indorsed and delivered the same. Without the words "or
order or "to the order of", the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any
subsequent purchaser thereof will not enjoy the advantages of
being a holder of a negotiable instrument, but will merely "step into
the shoes" of the person designated in the instrument and will thus
be open to all defenses available against the latter. Such being the
situation in the above-cited case, it was held that therein private
respondent is not a holder in due course but a mere assignee
against whom all defenses available to the assignor may be raised.
7

In the case at bar, however, the situation is different. Indubitably,

the basis of private respondent's claim against petitioner is a

promissory note which bears all the earmarks of negotiability.

The pertinent portion of the note reads:
PROMISSORY NOTE
(MONTHLY)
P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980
For value received, I/We jointly and severally, promise to pay
Violago Motor Sales Corporation or order, at its office in San
Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE
HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine
currency, which amount includes interest at 14% per annum based
on the diminishing balance, the said principal sum, to be payable,
without need of notice or demand, in installments of the amounts
following and at the dates hereinafter set forth, to wit: P1,614.95
monthly for "36" months due and payable on the 21st day of each
month starting March 21, 1980 thru and inclusive of February 21,
1983. P_________ monthly for ______ months due and payable on the
______ day of each month starting _____198__ thru and inclusive of
_____, 198________ provided that interest at 14% per annum shall be
added on each unpaid installment from maturity hereof until fully
paid.
xxx xxx xxx
Maker; Co-Maker:
(SIGNED) JUANITA SALAS _________________
Address:
____________________ ____________________
WITNESSES
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
TAN # TAN #
PAY TO THE ORDER OF
FILINVEST FINANCE AND LEASING CORPORATION
VIOLAGO MOTOR SALES CORPORATION
BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8
A careful study of the questioned promissory note shows that it is a
negotiable instrument, having complied with the requisites under
the law as follows: [a] it is in writing and signed by the maker
Juanita Salas; [b] it contains an unconditional promise to pay the
amount of P58,138.20; [c] it is payable at a fixed or determinable
future time which is "P1,614.95 monthly for 36 months due and
payable on the 21 st day of each month starting March 21, 1980
thru and inclusive of Feb. 21, 1983;" [d] it is payable to Violago
Motor Sales Corporation, or order and as such, [e] the drawee is
named or indicated with certainty. 9
It was negotiated by indorsement in writing on the instrument itself

payable to the Order of Filinvest Finance and Leasing Corporation 10

and it is an indorsement of the entire instrument. 11
Under the circumstances, there appears to be no question that
Filinvest is a holder in due course, having taken the instrument
under the following conditions: [a] it is complete and regular upon
its face; [b] it became the holder thereof before it was overdue, and
without notice that it had previously been dishonored; [c] it took the
same in good faith and for value; and [d] when it was negotiated to
Filinvest, the latter had no notice of any infirmity in the instrument
or defect in the title of VMS Corporation. 12
Accordingly, respondent corporation holds the instrument free from
any defect of title of prior parties, and free from defenses available
to prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof. 13 This being so, petitioner
cannot set up against respondent the defense of nullity of the
contract of sale between her and VMS.
Even assuming for the sake of argument that there is an iota of
truth in petitioner's allegation that there was in fact deception made
upon her in that the vehicle she purchased was different from that
actually delivered to her, this matter cannot be passed upon in the
case before us, where the VMS was never impleaded as a party.
Whatever issue is raised or claim presented against VMS must be
resolved in the "breach of contract" case.
Hence, we reach a similar opinion as did respondent court when it
held:
We can only extend our sympathies to the defendant (herein
petitioner) in this unfortunate incident. Indeed, there is nothing We
can do as far as the Violago Motor Sales Corporation is concerned
since it is not a party in this case. To even discuss the issue as to
whether or not the Violago Motor Sales Corporation is liable in the
transaction in question would amount, to denial of due process,
hence, improper and unconstitutional. She should have impleaded
Violago Motor Sales. 14
IN VIEW OF THE FOREGOING, the assailed decision is hereby
AFFIRMED. With costs against petitioner.
SO ORDERED.

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).
PHILIPPINE NATIONAL BANK, G.R. No. 170325
Petitioner,
Present:
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
ERLANDO T. RODRIGUEZ Promulgated:
and NORMA RODRIGUEZ,
Respondents. September 26, 2008
x-------------------------------------------------x
DECISION
REYES, R.T., J.:
WHEN the payee of the check is not intended to be the true
recipient of its proceeds, is it payable to order or bearer? What is
the fictitious-payee rule and who is liable under it? Is there any
exception?
These questions seek answers in this petition for review on
certiorari of the Amended Decision of the Court of Appeals (CA)
which affirmed with modification that of the Regional Trial Court
(RTC).
The Facts
The facts as borne by the records are as follows:

The spouses were engaged in the informal lending

business. In line with their business, they had a discounting
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.

judgment is rendered against the bank, the cross-defendants should

be ordered to reimburse PNB the amount it shall pay.

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.

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:

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,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 fctitious 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

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.
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 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.(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 moneymaking scheme. The payees in the checks were fictitious payees
because they were not the intended payees at all.
The spouses Rodriguez moved for reconsideration. They
argued, inter alia, that the checks on their faces were
unquestionably payable to order; and that PNB committed a breach
of contract when it paid the value of the checks to PEMSLA without
indorsement from the payees. They also argued that their cause of
action is not only against PEMSLA but also against PNB to recover
the value of the checks.
On October 11, 2005, the CA reversed itself via an
Amended Decision, the last paragraph and fallo of which read:
In sum, we rule that the defendant-appellant PNB is liable to the
plaintiffs-appellees Sps. Rodriguez for the following:
1.
Actual damages in the amount of P2,345,804 with interest
at 6% per annum from 14 May 1999 until fully paid;
2.
3.
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.
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 fduciary 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.
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 fctitious 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. 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)
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f)

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)
(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)
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 nonexistent.

of the checks, the claim was denied.

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.
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. Thus, a check made expressly payable to a nonfictitious 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 fctitious 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.
The fictitious-payee rule is best illustrated in Mueller &
Martin v. Liberty Insurance Bank. 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

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.
The more recent Getty Petroleum Corp. v. American
Express Travel Related Services Company, Inc. upheld the fictitiouspayee 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
fctitious-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
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.

confidence in their banks. For this reason, banks are minded to treat
their customers accounts with utmost care, confidence, and
honesty.

What remains to be determined is if the payees, though

existing persons, were fictitious in its broader context.

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.

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.
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. This Court has
recognized the unique public interest possessed by the banking
industry and the need for the people to have full trust and

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, 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.
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.
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. 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.
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.