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NEGOTIABLE INSTRUMENTS LAW CASES

[G.R. No. 75908. October 22, 1999]

FEDERICO O. BORROMEO, LOURDES O. BORROMEO and FEDERICO O. BORROMEO, INC,


petitioners vs. AMANCIO SUN and the COURT OF APPEALS,respondents.

DECISION

PURISIMA, J.:

At bar is a Petition for review on Certiorari under Rule 45 of the Revised Rules of Court seeking to set
aside the Resolution of the then Intermediate Appellate Court[1], dated March 13, 1986, in AC-G.R. CV NO.
67988, which reversed its earlier Decision dated February 12, 1985, setting aside the Decision of the former
Court of the First Instance of Rizal, Branch X, in Civil Case No. 19466.

The antecedent facts are as follows:

Private respondent Amancio Sun brought before the then Court of the First Instance of Rizal, Branch X, an
action against Lourdes O. Borromeo (in her capacity as corporate secretary), Federico O. Borromeo and
Federico O. Borromeo (F.O.B.), Inc., to compel the transfer to his name in the books of F.O.B., Inc., 23,223
shares of stock registered in the name of Federico O. Borromeo, as evidenced by a Deed of Assignment dated
January 16, 1974.

Private respondent averred[2] that all the shares of stock of F.O.B. Inc. registered in the name of Federico O.
Borromeo belong to him, as the said shares were placed in the name of Federico O. Borromeo only to give the
latter personality and importance in the business world.[3] According to the private respondent, on January 16,
1974 Federico O. Borromeo executed in his favor a Deed of Assignment with respect to the said 23,223 shares
of stock.

On the other hand, petitioner Federico O. Borromeo disclaimed any participation in the execution of the
Deed of Assignment, theorizing that his supposed signature thereon was forged.

After trial, the lower court of origin came out with a decision declaring the questioned signature on subject
Deed of Assignment, dated January 16, 1974, as the genuine signature of Federico O. Borromeo; ratiocinating
thus:

After considering the testimonies of the two expert witnesses for the parties and after a careful and judicious
study and analysis of the questioned signature as compared to the standard signatures, the Court is not in a
position to declare that the questioned signature in Exh. A is a forgery. On the other hand, the Court is of the
opinion that the questioned signature is the real signature of Federico O. Borromeo between the years 1954 to
1957 but definitely is not his signature in 1974 for by then he has changed his signature. Consequently, to the
mind of the Court Exhibit A was signed by defendant Federico O. Borromeo between the years 1954 to 1957
although the words in the blank were filled at a much later date.[4]

On appeal by petitioners, the Court of Appeals adjudged as forgery the controverted signature of Federico
O. Borromeo; disposing as follows:

WHEREFORE, the judgment of the Court a quo as to the second cause of action dated March 12, 1980 is
hereby reversed and set aside and a new judgment is hereby rendered:
1. Ordering the dismissal of the complaint as to defendant-appellants;

2. Ordering plaintiff-appellee on appellants counterclaim to pay the latter:

a) P 20,000.00 as moral damages;

b) P 10,000.00 as exemplary damages;

c) P 10,000.00 as attorneys fees.

3. Ordering plaintiff-appellee to pay the costs.[5]

On March 29, 1985, Amancio Sun interposed a motion for reconsideration of the said decision, contending
that Segundo Tabayoyong, petitioners expert witness, is not a credible witness as found and concluded in the
following disposition by this Court in Cesar vs. Sandigan Bayan[6]:

The testimony of Mr. Segundo Tabayoyong on March 5, 1980, part of which is cited on pages 19-23 of the
petition, shows admissions which are summarized by the petitioner as follows:

He never finished any degree in Criminology. Neither did he obtain any degree in physics or chemistry. He was
a mere trainee in the NBI laboratory. He said he had gone abroad only once-to Argentina which, according to
him is the only one country in the world that gives this degree (?) People go there where they obtain this sort of
degree (?) where they are authorized to practice (sic) examination of questioned documents.

His civil service eligibility was second grade (general clerical). His present position had to be re-classified
confidential in order to qualify him to it. He never passed any Board Examination.

He has never authored any book on the subject on which he claimed to be an expert. Well, he did write a so-
called pamphlet pretentiously called Fundamentals of Questioned Documents Examination and Forgery
Detection. In that pamphlet, he mentioned some references (some) are Americans and one I think is a British,
sir, like in the case of Dr. Wilson Harrison, a British (he repeated with emphasis). Many of the theories
contained in his pamphlet were lifted body and soul from those references, one of them being Albert
Osborn. His pamphlet has neither quotations nor footnotes, although he was too aware of the crime committed
by many an author called plagiarism. But that did not deter him, nor bother him in the least. He has never been a
member of any professional organization of experts in his supposed field of expertise, because he said there is
none locally. Neither is he on an international level.[7]

Acting on the aforesaid motion for reconsideration, the Court of Appeals reconsidered its decision of
February 12, 1985 aforementioned. Thereafter, the parties agreed to have subject Deed of Assignment examined
by the Philippine Constabulary (PC) Crime Laboratory, which submitted a Report on January 9, 1986, the
pertinent portion of which, stated:

1. Comparative examination and analysis of the questioned and the standard signature reveal
significant similarities in the freedom of movement, good quality of lines, skills and individual
handwriting characteristics.

2. By process of interpolation the questioned signature fits in and can be bracketed in time with the
standard signatures written in the years between 1956 to 1959. Microscopic examination of the ink
used in the questioned signature and the standard signature in document dated 30 July 1959 marked
Exh. E indicate gallotanic ink.
xxx

1. The questioned signature FEDERICO O. BORROMEO marked Q appearing in the original Deed of
Assignment dated 16 January 1974 and the submitted standard signatures of Federico O. Borromeo
marked S-1 to S-49 inclusive were written BY ONE AND THE SAME PERSON.

2. The questioned signature FEDERICO O. BORROMEO marked Q COULD HAVE BEEN SIGNED
IN THE YEARS BETWEEN 1950-1957.[8]

After hearing the arguments the lawyers of record advanced on the said Report of the PC Crime Laboratory,
the Court of Appeals resolved:

"xxx

1) to ADMIT the Report dated Jan. 9, 1986 of the PC Crime Laboratory on the Deed of Assignment in
evidence, without prejudice to the parties assailing the credibility of said Report;

2) to GIVE both parties a non-extendible period of FIVE (5) DAYS from February 27, 1986, within
which to file simultaneous memoranda.[9]

On March 13, 1986, the Court of Appeals reversed its decision of February 12, 1985, which affirmed
in toto the decision of the trial court of origin; resolving thus:

WHEREFORE, finding the Motion for Reconsideration meritorious, We hereby set aside our Decision, dated
February 12, 1985 and in its stead a new judgment is hereby rendered affirming in toto the decision of the trial
Court, dated March 12, 1980, without pronouncement as to costs.

SO ORDERED.[10]

Therefrom, petitioners found their way to this court via the present Petition; theorizing that:

I.

THE RESPONDENT COURT ERRED IN HOLDING THAT WHEN PETITIONER AGREED TO THE
SUGGESTION OF RESPONDENT COURT TO HAVE THE QUESTIONED DOCUMENT EXAMINED BY
THE PC CRIME LABORATORY THEY COULD NO LONGER QUESTION THE COMPETENCY OF THE
DOCUMENT.

II

THE COURT OF APPEALS ERRED IN HOLDING THAT THE QUESTIONED DOCUMENT WAS SIGNED
IN 1954 BUT WAS DATED IN 1974.

III

THE COURT OF APPEALS ERRED IN HOLDING THAT THE SIGNATURE OF FEDERICO O.


BORROMEO IN THE DEED OF ASSIGNMENT (EXHIBIT A ) IS A GENUINE SIGNATURE CIRCA
1954-1957.

The Petition is barren of merit.


Well-settled is the rule that factual finding of the Court of Appeals are conclusive on the parties and not
reviewable by the Supreme Court and they carry even more weight when the Court of Appeals affirms the
factual findings of the trial court. [11]

In the present case, the trial court found that the signature in question is the genuine signature of Federico
O. Borromeo between the years 1954 to 1957 although the words in the blank space of the document in question
were written on a much later date. The same conclusion was arrived at by the Court of Appeals on the basis of
the Report of the PC crime Laboratory corroborating the findings of Col. Jose Fernandez that the signature
under controversy is genuine.

It is significant to note that Mr. Tabayoyong, petitioners expert witness, limited his comparison of the
questioned signature with the 1974 standard signature of Federico O. Borromeo. No comparison of the subject
signature with the 1950 - 1957 standard signature was ever made by Mr. Tabayoyong despite his awareness that
the expert witness of private respondent, Col. Jose Fernandez, made a comparison of said signatures and
notwithstanding his (Tabayoyongs) access to such signatures as they were all submitted to the lower Court. As
correctly ratiocinated[12] by the Court of origin, the only conceivable reason why Mr. Tabayoyong avoided
making such a comparison must have been, that even to the naked eye, the questioned signature affixed to the
Deed of Assignment, dated January 16, 1974, is strikingly similar to the 1950 to 1954 standard signature of
Federico O. Borromeo, such that if a comparison thereof was made by Mr. Tabayoyong, he would have found
the questioned signature genuine.

That the Deed of Assignment is dated January 16, 1974 while the questioned signature was found to be
circa 1954-1957, and not that of 1974, is of no moment. It does not necessarily mean, that the deed is a
forgery. Pertinent records reveal that the subject Deed of Assignment is embodied in a blank form for the
assignment of shares with authority to transfer such shares in the books of the corporation. It was clearly
intended to be signed in blank to facilitate the assignment of shares from one person to another at any future
time. This is similar to Section 14 of the Negotiable Instruments Law where the blanks may be filled up by the
holder, the signing in blank being with the assumed authority to do so. Indeed, as the shares were registered in
the name of Federico O. Borromeo just to give him personality and standing in the business community, private
respondent had to have a counter evidence of ownership of the shares involve. Thus the execution of the deed of
assignment in blank, to be filled up whenever needed. The same explains the discrepancy between the date of
the deed of assignment and the date when the signature was affixed thereto.

While it is true that the 1974 standard signature of Federico O. Borromeo is to the naked eye dissimilar to
his questioned signature circa 1954-1957, which could have been caused by sheer lapse of time, Col. Jose
Fernandez, respondents expert witness, found the said signatures similar to each other after subjecting the same
to stereomicroscopic examination and analysis because the intrinsic and natural characteristic of Federico O.
Borromeos handwriting were present in all the exemplar signatures used by both Segundo Tabayoyong and Col.
Jose Fernandez.

It is therefore beyond cavil that the findings of the Court of origin affirmed by the Court of Appeals on the
basis of the corroborative findings of the Philippine Constabulary Crime Laboratory confirmed the genuineness
of the signature of Federico O. Borromeo in the Deed of Assignment dated January 16, 1974.

Petitioners, however, question the Report of the document examiner on the ground that they were not given
an opportunity to cross-examine the Philippine Constabulary document examiner; arguing that they never
waived their right to question the competency of the examiner concerned. While the Court finds merit in the
contention of petitioners, that they did not actually waived their right to cross-examine on any aspect of subject
Report of the Philippine Constabulary Crime Laboratory, the Court discerns no proper basis for deviating from
the findings of the Court of Appeals on the matter. It is worthy to stress that courts may place whatever weight
due on the testimony of an expert witness.[13] Conformably, in giving credence and probative value to the said
Report of the Philippine Constabulary Crime Laboratory, corroborating the findings of the trial Court, the Court
of Appeals merely exercised its discretion. There being no grave abuse in the exercise of such judicial
discretion, the findings by the Court of Appeals should not be disturbed on appeal.

Premises studiedly considered, the Court is of the irresistible conclusion, and so holds, that the respondent
court erred not in affirming the decision of the Regional Trial Court a quo in Civil Case No. 19466.

WHEREFORE, the Petition is DISMISSED for lack of merit and the assailed Resolution, dated March 13,
1986, AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Gonzaga_Reyes, JJ., concur.

THIRD DIVISION

[G.R. No. 128524. April 20, 1999]

GOVERNMENT SERVICE INSURANCE SYSTEM (GSIS), petitioner, vs. THE HONORABLE COURT
OF APPEALS and FELONILA ALEGRE, respondents.

DECISION

ROMERO, J.:

May a moonlighting policemans death be considered compensable? This is the crux of the controversy now
at bar.

The records[1].1 disclose that private respondent Felonila Alegres deceased husband, SPO2 Florencio A.
Alegre, was a police officer assigned to the Philippine National Police station in the town of Vigan, Ilocos
Sur. On that fateful day of December 6, 1994, he was driving his tricycle and ferrying passengers within the
vicinity of Imelda Commercial Complex when SPO4 Alejandro Tenorio, Jr., Team/Desk Officer of the Police
Assistance Center located at said complex, confronted him regarding his tour of duty. SPO2 Alegre allegedly
snubbed SPO4 Tenorio and even directed curse words upon the latter. A verbal tussle then ensued between the
two which led to the fatal shooting of the deceased police officer.

On account of her husbands death, private respondent seasonably filed a claim for death benefits with
petitioner Government Service Insurance System (GSIS) pursuant to Presidential Decree No. 626. In its
decision on August 7, 1995, the GSIS, however, denied the claim on the ground that at the time of SPO2
Alegres death, he was performing a personal activity which was not work-connected. Subsequent appeal to the
Employees Compensation Commission (ECC) proved futile as said body, in a decision dated May 9, 1996,
merely affirmed the ruling of the GSIS.

Private respondent finally obtained a favorable ruling in the Court of Appeals when on February 28, 1997,
the appellate court reversed[2] the ECCs decision and ruled that SPO2 Alegres death was work-connected and,
therefore, compensable. Citing Nitura v. Employees Compensation Commission[3] and Employees Compensation
Commission v. Court of Appeals,[4] the appellate court explained the conclusion arrived at, thus:

[T]he Supreme Court held that the concept of a workplace cannot always be literally applied to a person in
active duty status, as if he were a machine operator or a worker in an assembly line in a factory or a clerk in a
particular fixed office.

It is our considered view that, as applied to a peace officer, his work place is not confined to the police precinct
or station but to any place where his services, as a lawman, to maintain peace and security, are required.

At the time of his death, Alegre was driving a tricycle at the northeastern part of the Imelda Commercial
Complex where the police assistance center is located. There can be no dispute therefore that he met his death
literally in his place of work.

It is true that the deceased was driving his tricycle, with passengers aboard, when he was accosted by another
police officer. This would lend some semblance of viability to the argument that he was not in the performance
of official duty at the time.

However, the argument, though initially plausible, overlooks the fact that policemen, by the nature of their
functions, are deemed to be on a round-the-clock duty.

Aggrieved, GSIS comes to us on petition for review on certiorari reiterating its position that SPO2 Alegres
death lacks the requisite element of compensability which is, that the activity being performed at the time of
death must be work-connected.

We grant the petition.

As stated at the outset, the sole issue for the Courts resolution is whether the death of SPO2 Alegre is
compensable pursuant to the applicable laws and regulations.

Under the pertinent guidelines of the ECC on compensability, it is provided that for the injury and the
resulting disability or death to be compensable, the injury must be the result of an employment accident
satisfying all of the following conditions:

(1) The employee must have been injured at the place where his work requires him to be;

(2) The employee must have been performing his official functions; and

(3) If the injury is sustained elsewhere, the employee must have been executing an order for the
employer.[5]

Actually, jurisprudence is rather scant with respect to the above rules application in the case of police
officers. Nevertheless, owing to the similarity of functions, that is, to keep peace and order, and the risks
assumed, the Court has treated police officers similar to members of the Armed Forces of the Philippines with
regard to the compensability of their deaths. Thus, echoing Hinoguin v. Employees Compensation Commission,
[6] a case involving a soldier who was accidentally fired at by a fellow soldier, we held in Employees

Compensation Commission v. Court of Appeals,[7] that members of the national police are by the nature of their
functions technically on duty 24 hours a day because policemen are subject to call at any time and may be asked
by their superiors or by any distressed citizen to assist in maintaining the peace and security of the community.
Upon examination of the Court of Appeals reasoning, we believe that the appellate court committed
reversible error in applying the precepts enunciated in the cited cases. While we agree that policemen, like
soldiers, are at the beck and call of public duty as peace officers and technically on duty round-the-clock, the
same does not justify the grant of compensation benefits for the death of SPO2 Alegre based on the facts
disclosed by the records. For clarity, a review of the cases relevant to the matter at hand is in order.

In Hinoguin, the deceased Philippine Army soldier, Sgt. Limec Hinoguin, together with two other members
of his detachment, sought and were orally granted permission by the commanding officer of their company to
leave their station in Carranglan, Nueva Ecija to go on overnight pass to Aritao, Nueva Vizcaya. As they were
returning to their headquarters, one of his companions, not knowing that his M-16 rifle was on semi-automatic
mode, accidentally pulled the trigger and shot Sgt. Hinoguin who then died as a result thereof. Ruling for the
grant of death compensation benefits, this Court held:

The concept of a workplace referred to in Ground 1, for instance, cannot always be literally applied to a soldier
on active duty status, as if he were a machine operator or a worker in assembly line in a factory or a clerk in a
particular fixed office. Obviously, a soldier must go where his company is stationed. In the instant case, Aritao,
Nueva Vizcaya was not, of course, Carranglan, Nueva Ecija. Aritao being approximately 1-1/2 hours away from
the latter by public transportation. But Sgt. Hinoguin, Cpl. Clavo and Dft. Alibuyog had permission from their
Commanding Officer to proceed to Aritao, and it appears to us that a place which soldiers have secured
lawful permission to be at cannot be very different, legally speaking, from a place where they are required to go
by their commanding officer. We note that the three (3) soldiers were on an overnight pass which, notably, they
did not utilize in full. They were not on vacation leave. Moreover, they were required or authorized to carry
their firearms with which presumably they were to defend themselves if NPA elements happened to attack them
while en route to and from Aritao or with which to attack and seek to capture such NPA elements as they might
encounter. Indeed, if the three (3) soldiers had in fact encountered NPAs while on their way to or from Aritao
and been fired upon by them and if Sgt. Hinoguin had been killed by an NPA bullet, we do not believe that
respondent GSIS would have had any difficulty in holding the death a compensable one.

Then came the case of Nitura, likewise involving a member of the Philippine Army, Pfc. Regino S. Nitura,
who was assigned at Basagan, Katipunan, Zamboanga del Norte. At the time he met his death, he was instructed
by his battalion commander to check on several personnel of his command post who were then attending a
dance party in Barangay San Jose, Dipolog City. But on his way back to the camp, he passed, crossed and fell
from a hanging wooden bridge which accident caused his death. Reversing the ECC which earlier denied death
benefits to the deceaseds widow, the Court ruled:

A soldier must go where his company is stationed. In the case at bar, Pfc. Nituras station was at Basagan,
Katipunan, Zamboanga del Norte. But then his presence at the site of the accident was with the permission of
his superior officer having been directed to go to Barangay San Jose, Dipolog City. In carrying out said
directive, he had to pass by the hanging bridge which connects the two places. As held in the Hinoguin case
(supra.), a place where soldiers have secured lawful permission to be at cannot be very different, legally
speaking, from a place where they are required to go by their commanding officer.

As to the question of whether or not he was performing an official function at the time of the incident, it has
been held that a soldier on active duty status is really on a 24 hours a day official duty status and is subject to
military discipline and military law 24 hours a day. He is subject to call and to the orders of his superior officers
at all times, seven (7) days a week, except, of course, when he is on vacation leave status. Thus, a soldier should
be presumed to be on official duty unless he is shown to have clearly and unequivocally put aside that status or
condition temporarily by going on approved vacation leave.
The more recent case which was cited by the appellate court in support of its decision is Employees
Compensation Commission v. Court of Appeals. This time, the claim for death compensation benefits was made
in behalf of a deceased police officer, P/Sgt. Wilfredo Alvaran, who, at the time of his death, was a member of
the Mandaluyong Police Station but assigned to the Pasig Provincial Jail. Findings showed that the deceased
brought his son to the Mandaluyong Police Station for interview because the latter was involved in a stabbing
incident. While in front of the said station, the deceased was approached by another policeman and shot him to
death. Both the GSIS and the ECC denied the claim by the deceaseds widow on the ground that Sgt. Alvaran
was plainly acting as a father to his son and that he was in a place where he was not required to be. The Court of
Appeals reversed said denial which decision was affirmed by this Court, declaring that:

But for claritys sake and as a guide for future cases, we hereby hold that members of the national police, like P/
Sgt. Alvaran, are by the nature of their functions technically on duty 24 hours a day. Except when they are on
vacation leave, policemen are subject to call at anytime and may be asked by their superiors or by any distressed
citizen to assist in maintaining the peace and security of the community.

xxxxxxxxx

We hold that by analogy and for purposes of granting compensation under P. D. No. 626, as amended,
policemen should be treated in the same manner as soldiers.

While it is true that, geographically speaking, P/Sgt Alvaran was not actually at his assigned post at the Pasig
Provincial Jail when he was attacked and killed, it could not also be denied that in bringing his son --- as a
suspect in a case --- to the police station for questioning to shed light on a stabbing incident, he was not merely
acting as father but as a peace officer.

From the foregoing cases, it can be gleaned that the Court did not justify its grant of death benefits merely
on account of the rule that soldiers or policemen, as the case may be, are virtually working round-the-
clock. Note that the Court likewise attempted in each case to find a reasonable nexus between the absence of the
deceased from his assigned place of work and the incident that led to his death.

In Hinoguin, the connection between his absence from the camp where he was assigned and the place
where he was accidentally shot was the permission duly given to him and his companions by the camp
commander to go on overnight pass. According to the Court, a place which soldiers have secured lawful
permission cannot be very different, legally speaking, from a place where they are required to go by their
commanding officer and, hence, the deceased is to be considered as still in the performance of his official
functions.

The same thing can be said of Nitura where the deceased had to go outside of his station on permission and
directive by his superior officer to check on several personnel of his command who were then attending a dance
party.

As for P/Sgt. Alvaran in the Employees Compensation Commission case, although he was not given any
directive or permission by a superior officer to be at the Mandaluyong Police Station, his presence there was
nonetheless justified by the peacekeeping nature of the matter he was attending to at the time that he was
attacked and shot to death, that is, bringing his son to the police station to answer for a crime, a basic duty
which any policeman is expected and ought to perform.

Taking together jurisprudence and the pertinent guidelines of the ECC with respect to claims for death
benefits, namely: (a) that the employee must be at the place where his work requires him to be; (b) that the
employee must have been performing his official functions; and (c) that if the injury is sustained elsewhere, the
employee must have been executing an order for the employer, it is not difficult to understand then why SPO2
Alegres widow should be denied the claims otherwise due her. Obviously, the matter SPO2 Alegre was
attending to at the time he met his death, that of ferrying passengers for a fee, was intrinsically private and
unofficial in nature proceeding as it did from no particular directive or permission of his superior officer. In the
absence of such prior authority as in the cases of Hinoguin and Nitura, or peacekeeping nature of the act
attended to by the policeman at the time he died even without the explicit permission or directive of a superior
officer, as in the case of P/Sgt. Alvaran, there is no justification for holding that SPO2 Alegre met the requisites
set forth in the ECC guidelines.That he may be called upon at any time to render police work as he is considered
to be on a round-the-clock duty and was not on an approved vacation leave will not change the conclusion
arrived at considering that he was not placed in a situation where he was required to exercise his authority and
duty as a policeman. In fact, he was refusing to render one pointing out that he already complied with the duty
detail.[8] At any rate, the 24-hour duty doctrine, as applied to policemen and soldiers, serves more as an after-
the-fact validation of their acts to place them within the scope of the guidelines rather than a blanket license to
benefit them in all situations that may give rise to their deaths. In other words, the 24-hour duty doctrine should
not be sweepingly applied to all acts and circumstances causing the death of a police officer but only to those
which, although not on official line of duty, are nonetheless basically police service in character.

WHEREFORE, the petition is hereby GRANTED. The assailed decision of the Court of Appeals in CA-G.
R. SP No. 42003 dated February 28, 1997, is hereby REVERSED and SET ASIDE.

No pronouncement as to costs.

SO ORDERED.

Vitug, Panganiban, Purisima, and Gonzaga-Reyes, JJ., concur.

Republic of the Philippines



SUPREME COURT

Manila

EN BANC

G.R. No. 16454 September 29, 1921

GEORGE A. KAUFFMAN, plaintiff-appellee, 



vs.

THE PHILIPPINE NATIONAL BANK, defendant-appellant.

Roman J. Lacson for appellant. 



Ross and Lawrence for appellee.

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

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

October 9th, 1918.

CABLE TRANSFER BOUGHT FROM



PHILIPPINE NATIONAL BANK,

Manila, P.I. Stamp P18

Foreign Amount Rate



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

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

(Sgd.) Y LERMA, 

Manager, Foreign Department.

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

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

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

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

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

Among additional facts pertinent to the case we note the circumstance that at the time of the transaction above-
mentioned, the Philippines Fiber and Produce Company did not have on deposit in the Philippine National Bank
money adequate to pay the check for P90,355.50, which was delivered in payment of the telegraphic order; but
the company did have credit to that extent, or more, for overdraft in current account, and the check in question
was charged as an overdraft against the Philippine Fiber and Produce Company and has remained on the books
of the bank as an interest-bearing item in the account of said company.

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

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

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

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

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

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

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

In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate dissertation upon the history
and interpretation of the paragraph above quoted and so complete is the discussion contained in that opinion
that it would be idle for us here to go over the same matter. Suffice it to say that Justice Trent, speaking for the
court in that case, sums up its conclusions upon the conditions governing the right of the person for whose
benefit a contract is made to maintain an action for the breach thereof in the following words:

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

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

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

In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is clear enough;
for it is undeniable that the bank's promise to cause a definite sum of money to be paid to the plaintiff in New
York City is a stipulation in his favor within the meaning of the paragraph above quoted; and the circumstances
under which that promise was given disclose an evident intention on the part of the contracting parties that the
plaintiff should have the money upon demand in New York City. The recognition of this unqualified right in the
plaintiff to receive the money implies in our opinion the right in him to maintain an action to recover it; and
indeed if the provision in question were not applicable to the facts now before us, it would be difficult to
conceive of a case arising under it.
It will be noted that under the paragraph cited a third person seeking to enforce compliance with a stipulation in
his favor must signify his acceptance before it has been revoked. In this case the plaintiff clearly signified his
acceptance to the bank by demanding payment; and although the Philippine National Bank had already directed
its New York agency to withhold payment when this demand was made, the rights of the plaintiff cannot be
considered to as there used, must be understood to imply revocation by the mutual consent of the contracting
parties, or at least by direction of the party purchasing he exchange.

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

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

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

Johnson, Araullo, Avanceña and Villamor, JJ., concur.


Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner, 



vs.

COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

REGALADO, J.:

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

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

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

CTD CTD

Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000



26 Feb. 82 74602 to 74691 90 360,000

2 Mar. 82 74701 to 74740 40 160,000

4 Mar. 82 90127 to 90146 20 80,000

5 Mar. 82 74797 to 94800 4 16,000

5 Mar. 82 89965 to 89986 22 88,000

5 Mar. 82 70147 to 90150 4 16,000

8 Mar. 82 90001 to 90020 20 80,000

9 Mar. 82 90023 to 90050 28 112,000

9 Mar. 82 89991 to 90000 10 40,000

9 Mar. 82 90251 to 90272 22 88,000

——— ————

Total 280 P1,120,000

===== ========

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

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

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

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

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc.,
went to the defendant bank's Sucat branch and presented for verification the CTDs declared lost
by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for
purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp.
54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein
plaintiff formally informing it of its possession of the CTDs in question and of its decision to
pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a
copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as
"the details of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time
deposits (Defendant's Exhibit 564).

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

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

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

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

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

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

The instant petition is bereft of merit.

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

SECURITY BANK

AND TRUST COMPANY

6778 Ayala Ave., Makati No. 90101

Metro Manila, Philippines

SUCAT OFFICEP 4,000.00

CERTIFICATE OF DEPOSIT

Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS:
FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00
CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date,
upon presentation and surrender of this certificate, with interest at the rate
of 16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

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

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is
important to note that after the word "BEARER" stamped on the space provided supposedly for
the name of the depositor, the words "has deposited" a certain amount follows. The document
further provides that the amount deposited shall be "repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are
payable, not to whoever purports to be the "bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz as
the person who made the deposit and further engages itself to pay said depositor the amount
indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable
instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:

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

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

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

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

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

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

xxx xxx xxx

Atty. Calida:

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

witness:

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

Atty. Calida:

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

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these certificates of time
deposit insofar as the bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx


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

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

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

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

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit
Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee
his purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or disproved as against the person relying
thereon. 14 A party may not go back on his own acts and representations to the prejudice of the other party who
relied upon them. 15 In the law of evidence, whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 16

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

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

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

The character of the transaction between the parties is to be determined by their


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

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

The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is
deemed a holder for value to the extent of his lien. 23 As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable
Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, 24 which
inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged
and the date of the pledge do not appear in a public instrument.

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

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

Art. 1625. An assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property.

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

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

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

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

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

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

4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity
date provided therein.

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


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

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

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

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

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

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

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the
"dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of
the lost instrument. Where the provision reads "may," this word shows that it is not mandatory but
discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty,
opportunity, permission and possibility. 36

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

SO ORDERED.

Narvasa, C.J., Padilla and Nocon, JJ., concur.

Republic of the Philippines



SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 76788 January 22, 1990

JUANITA SALAS, petitioner, 



vs.

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

Arsenio C. Villalon, Jr. for petitioner.



Labaguis, Loyola, Angara & Associates for private respondent.

FERNAN, C.J.:

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

Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred to as petitioner) bought a motor
vehicle from the Violago Motor Sales Corporation (VMS for brevity) for P58,138.20 as evidenced by a
promissory note. This note was subsequently endorsed to Filinvest Finance & Leasing Corporation (hereinafter
referred to as private respondent) which financed the purchase.

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

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

In its decision dated September 10, 1982, the trial court held, thus:
WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering the defendant 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, L-23023, Aug. 31, 1968, 24 SCRA 1018).

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

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

WHEREFORE, considering the foregoing, the appealed decision is hereby modified ordering the
defendant 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.

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

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

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

Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and Acceptance Corp., 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.

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

[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 xEduardo 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:

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.

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:

x x x. Plaintiffs acceptance of the bum check did not result in substitution by de Jesus either, the nature of the
obligation being 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.

This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:

PROMISSORY NOTE

P400,000.00

RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS,
Philippine Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, QuezonCity, 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 specific 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 non-
negotiable 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.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

Republic of the Philippines



SUPREME COURT

Manila

EN BANC

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


Intestate of Luther Young and Pacita Young, spouses. PACIFICA JIMENEZ, petitioner-appellee, 

vs.

DR. JOSE BUCOY, administrator-appellant.

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



E. A. Beltran for appellant.

BENGZON, J.:

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

Acknowledging receipt by Pacita during the Japanese occupation, in the currency then prevailing, the
administrator manifested willingness to pay provided adjustment of the sums be made in line with the
Ballantyne schedule.

The claimant objected to the adjustment insisting on full payment in accordance with the notes.

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

Hence this appeal.

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

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

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

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

But the important question, which obviously compelled the administrator to appeal, is whether the amounts
should be paid, peso for peso, or whether a reduction should be made in accordance with the well-known
Ballantyne schedule.

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

The Ballantyne Conversion Table does not apply where the monetary obligation, under the contract, was
not payable during the Japanese occupation but until after one year counted for the date of ratification of
the Treaty of Peace concluding the Greater East Asia War. (Arellano vs. De Domingo, 101 Phil., 902.)
When a monetary obligation is contracted during the Japanese occupation, to be discharged after the
war, the payment should be made in Philippine Currency. (Kare et al. vs. Imperial et al., 102 Phil., 173.)

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

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

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

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

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

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

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

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

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

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

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

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

There being no circumstance making it reasonable and just to require defendant to pay attorney's fees, the last
assignment of error must be upheld.

Wherefore, in view of the foregoing considerations, the appealed decision is affirmed, except as to the attorney's
fees which are hereby disapproved. So ordered.

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

[G.R. No. 113236. March 5, 2001]

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner, vs., COURT OF
APPEALS and LUZON DEVELOPMENT BANK, respondents.

DECISION

QUISUMBING, J.:

This petition assails the decision[1] dated December 29, 1993 of the Court of Appeals in CA-G.R. CV No.
29546, which affirmed the judgment[2] of the Regional Trial Court of Pasay City, Branch 113 in Civil Case No.
PQ-7854-P, dismissing Firestones complaint for damages.

The facts of this case, adopted by the CA and based on findings by the trial court, are as follows:
[D]efendant is a banking corporation. It operates under a certificate of authority issued by the Central Bank of
the Philippines, and among its activities, accepts savings and time deposits. Said defendant had as one of its
client-depositors the Fojas-Arca Enterprises Company (Fojas-Arca for brevity). Fojas-Arca maintaining a
special savings account with the defendant, the latter authorized and allowed withdrawals of funds therefrom
through the medium of special withdrawal slips. These are supplied by the defendant to Fojas-Arca.

In January 1978, plaintiff and Fojas-Arca entered into a Franchised Dealership Agreement (Exh. B) whereby
Fojas-Arca has the privilege to purchase on credit and sell plaintiffs products.

On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased on credit
Firestone products from plaintiff with a total amount of P4,896,000.00. In payment of these purchases, Fojas-
Arca delivered to plaintiff six (6) special withdrawal slips drawn upon the defendant. In turn, these were
deposited by the plaintiff with its current account with the Citibank. All of them were honored and paid by the
defendant. This singular circumstance made plaintiff believe [sic] and relied [sic] on the fact that the succeeding
special withdrawal slips drawn upon the defendant would be equally sufficiently funded. Relying on such
confidence and belief and as a direct consequence thereof, plaintiff extended to Fojas-Arca other purchases on
credit of its products.

On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and delivered to
plaintiff the corresponding special withdrawal slips in payment thereof drawn upon the defendant, to wit:

DATE WITHDRAWAL AMOUNT

SLIP NO.

June 15, 1978 42127 P1,198,092.80

July 15, 1978 42128 940,190.00

Aug. 15, 1978 42129 880,000.00

Sep. 15, 1978 42130 981,500.00

These were likewise deposited by plaintiff in its current account with Citibank and in turn the Citibank
forwarded it [sic] to the defendant for payment and collection, as it had done in respect of the previous special
withdrawal slips. Out of these four (4) withdrawal slips only withdrawal slip No. 42130 in the amount of
P981,500.00 was honored and paid by the defendant in October 1978. Because of the absence for a long period
coupled with the fact that defendant honored and paid withdrawal slips No. 42128 dated July 15, 1978, in the
amount of P981,500.00 plaintiffs belief was all the more strengthened that the other withdrawal slips were
likewise sufficiently funded, and that it had received full value and payment of Fojas-Arcas credit purchased
then outstanding at the time. On this basis, plaintiff was induced to continue extending to Fojas-Arca further
purchase on credit of its products as per agreement (Exh. B).

However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal slips No. 42127
dated June 15, 1978 for P1,198,092.80 and No. 42129 dated August 15, 1978 for P880,000.00 were dishonored
and not paid for the reason NO ARRANGEMENT. As a consequence, the Citibank debited plaintiffs account
for the total sum of P2,078,092.80 representing the aggregate amount of the above-two special withdrawal
slips. Under such situation, plaintiff averred that the pecuniary losses it suffered is caused by and directly
attributable to defendants gross negligence.
On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for the satisfaction of
the damages suffered by it. And due to defendants refusal to pay plaintiffs claim, plaintiff has been constrained
to file this complaint, thereby compelling plaintiff to incur litigation expenses and attorneys fees which amount
are recoverable from the defendant.

Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the transactions
mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which defendant is not involved;
Vehemently, it was denied by defendant that the special withdrawal slips were honored and treated as if it were
checks, the truth being that when the special withdrawal slips were received by defendant, it only verified
whether or not the signatures therein were authentic, and whether or not the deposit level in the passbook
concurred with the savings ledger, and whether or not the deposit is sufficient to cover the withdrawal; if
plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame itself for
being grossly negligent in treating the withdrawal slips as check when it is clearly stated therein that the
withdrawal slips are non-negotiable; that defendant is not a privy to any of the transactions between Fojas-Arca
and plaintiff for which reason defendant is not duty bound to notify nor give notice of anything to plaintiff. If at
first defendant had given notice to plaintiff it is merely an extension of usual bank courtesy to a prospective
client; that defendant is only dealing with its depositor Fojas-Arca and not the plaintiff. In summation,
defendant categorically stated that plaintiff has no cause of action against it (pp. 1-3, Dec.; pp. 368-370, id).[3]

Petitioners complaint[4] for a sum of money and damages with the Regional Trial Court of Pasay City,
Branch 113, docketed as Civil Case No. 29546, was dismissed together with the counterclaim of defendant.

Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon Development
Bank was liable for damages under Article 2176[5] in relation to Articles 19[6] and 20[7] of the Civil Code. As
noted by the CA, petitioner alleged the following tortious acts on the part of private respondent: 1) the
acceptance and payment of the special withdrawal slips without the presentation of the depositors passbook
thereby giving the impression that the withdrawal slips are instruments payable upon presentment; 2) giving the
special withdrawal slips the general appearance of checks; and 3) the failure of respondent bank to seasonably
warn petitioner that it would not honor two of the four special withdrawal slips.

On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the appeal and
affirmed the judgment of the trial court. According to the appellate court, respondent bank notified the depositor
to present the passbook whenever it received a collection note from another bank, belying petitioners claim that
respondent bank was negligent in not requiring a passbook under the subject transaction. The appellate court
also found that the special withdrawal slips in question were not purposely given the appearance of checks,
contrary to petitioners assertions, and thus should not have been mistaken for checks. Lastly, the appellate court
ruled that the respondent bank was under no obligation to inform petitioner of the dishonor of the special
withdrawal slips, for to do so would have been a violation of the law on the secrecy of bank deposits.

Hence, the instant petition, alleging the following assignment of error:

25. The CA grievously erred in holding that the [Luzon Development] Bank was free from any
fault or negligence regarding the dishonor, or in failing to give fair and timely advice of the
dishonor, of the two intermediate LDB Slips and in failing to award damages to Firestone
pursuant to Article 2176 of the New Civil Code.[8]

The issue for our consideration is whether or not respondent bank should be held liable for damages
suffered by petitioner, due to its allegedly belated notice of non-payment of the subject withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter purchased
tires from the former with special withdrawal slips drawn upon Fojas-Arcas special savings account with
respondent bank. Petitioner in turn deposited these withdrawal slips with Citibank. The latter credited the same
to petitioners current account, then presented the slips for payment to respondent bank. It was at this point that
the bone of contention arose.

On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and 42129
dated June 15, 1978 and August 15, 1978, respectively, were refused payment by respondent bank due to
insufficiency of Fojas-Arcas funds on deposit. That information came about six months from the time Fojas-
Arca purchased tires from petitioner using the subject withdrawal slips. Citibank then debited the amount of
these withdrawal slips from petitioners account, causing the alleged pecuniary damage subject of petitioners
cause of action.

At the outset, we note that petitioner admits that the withdrawal slips in question were non-negotiable.
[9]Hence, the rules governing the giving of immediate notice of dishonor of negotiable instruments do not apply
in this case.[10] Petitioner itself concedes this point.[11] Thus, respondent bank was under no obligation to give
immediate notice that it would not make payment on the subject withdrawal slips.Citibank should have known
that withdrawal slips were not negotiable instruments. It could not expect these slips to be treated as checks by
other entities. Payment or notice of dishonor from respondent bank could not be expected immediately, in
contrast to the situation involving checks.

In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon Development Bank,
had honored and paid the previous withdrawal slips, automatically credited petitioners current account with the
amount of the subject withdrawal slips, then merely waited for the same to be honored and paid by respondent
bank. It presumed that the withdrawal slips were good.

It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal
slips. The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its
freedom to circulate freely as a substitute for money.[12] The withdrawal slips in question lacked this character.

A bank is under obligation to treat the accounts of its depositors with meticulous care, whether such
account consists only of a few hundred pesos or of millions of pesos.[13] The fact that the other withdrawal slips
were honored and paid by respondent bank was no license for Citibank to presume that subsequent slips would
be honored and paid immediately. By doing so, it failed in its fiduciary duty to treat the accounts of its clients
with the highest degree of care.[14]

In the ordinary and usual course of banking operations, current account deposits are accepted by the bank
on the basis of deposit slips prepared and signed by the depositor, or the latters agent or representative, who
indicates therein the current account number to which the deposit is to be credited, the name of the depositor or
current account holder, the date of the deposit, and the amount of the deposit either in cash or in check.[15]

The withdrawal slips deposited with petitioners current account with Citibank were not checks, as
petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit. But having
erroneously accepted them as such, Citibank and petitioner as account-holder must bear the risks attendant to
the acceptance of these instruments. Petitioner and Citibank could not now shift the risk and hold private
respondent liable for their admitted mistake.

WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No.
29546 is AFFIRMED. Costs against petitioner.
SO ORDERED.

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

[G.R. NO. 117913. February 1, 2002]

CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP, RICHARD VELASCO and
ALFONSO CO, petitioners, vs. COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.

[G.R. NO. 117914. February 1, 2002]

MICO METALS CORPORATION, petitioner, vs. COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.

DECISION

DE LEON, JR., J:

Before us is the joint and consolidated petition for review of the Decision[1] dated June 15, 1994 of the
Court of Appeals in CA-G.R. CV No. 27480 entitled, Philippine Bank of Communications vs. Mico Metals
Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co, which
reversed the decision of the Regional Trial Court (RTC) of Manila, Branch 55 dismissing the complaint for
a sum of money filed by private respondent Philippine Bank of Communications against herein
petitioners, Mico Metals Corporation (MICO, for brevity), Charles Lee, Chua Siok Suy,[2] Mariano Sio, Alfonso
Yap, Richard Velasco and Alfonso Co.[3] The dispositive portion of the said Decision of the Court of Appeals,
reads:

WHEREFORE, the decision of the Regional Trial Court is hereby reversed and in lieu thereof, a new one is
entered:

a) Ordering the defendants-appellees jointly and severally to pay plaintiff PBCom the sum of Five
million four hundred fifty-one thousand six hundred sixty-three pesos and ninety centavos
(P5,451,663.90) representing defendants-appellees unpaid obligations arising from ordinary loans
granted by the plaintiff plus legal interest until fully paid.

b) Ordering defendants-appellees jointly and severally to pay PBCom the sum of Four hundred sixty-
one thousand six hundred pesos and sixty-six centavos (P46 1,600.66) representing defendants-
appellees unpaid obligations arising from their letters of credit and trust receipt transactions with
plaintiff PBCom plus legal interest until fully paid.

c) Ordering defendants-appellees jointly and severally to pay PBCom the sum of P50,000.00 as
attorneys fees.

No pronouncement as to costs.

The facts of the case are as follows:


On March 2, 1979, Charles Lee, as President of MICO wrote private respondent Philippine Bank of
Communications (PBCom) requesting for a grant of a discounting loan/credit line in the sum of Three Million
Pesos (P3,000,000.00) for the purpose of carrying out MICOs line of business as well as to maintain its volume
of business.

On the same day, Charles Lee requested for another discounting loan/credit line of Three Million Pesos
(P3,000,000.00) from PBCom for the purpose of opening letters of credit and trust receipts.

In connection with the requests for discounting loan/credit lines, PBCom was furnished by MICO the
following resolution which was adopted unanimously by MICOs Board of Directors:

RESOLVED, that the President, Mr. Charles Lee, and the Vice-President and General Manager, Mr. Mariano
A. Sio, singly or jointly, be and they are duly authorized and empowered for and in behalf of this Corporation to
apply for, negotiate and secure the approval of commercial loans and other banking facilities and
accommodations, such as, but not limited to discount loans, letters of credit, trust receipts, lines for marginal
deposits on foreign and domestic letters of credit, negotiate out-of-town checks, etc. from the Philippine Bank of
Communications, 216 Juan Luna, Manila in such sums as they shall deem advantageous, the principal of all of
which shall not exceed the total amount of TEN MILLION PESOS (P10,000,000.00), Philippine Currency, plus
any interests that may be agreed upon with said Bank in such loans and other credit lines of the same kind and
such further terms and conditions as may, upon granting of said loans and other banking facilities, be imposed
by the Bank; and to make, execute, sign and deliver any contracts of mortgage, pledge or sale of one, some or
all of the properties of the Company, or any other agreements or documents of whatever nature or kind,
including the signing, indorsing, cashing, negotiation and execution of promissory notes, checks, money orders
or other negotiable instruments, which may be necessary and proper in connection with said loans and other
banking facilities, or with their amendments, renewals and extensions of payment of the whole or any part
thereof.[4]

On March 26, 1979, MICO availed of the first loan of One Million Pesos (P1,000,000.00) from PBCom.
Upon maturity of the loan, MICO caused the same to be renewed, the last renewal of which was made on May
21, 1982 under Promissory Note BNA No. 26218.[5]

Another loan of One Million Pesos (P1,000,000.00) was availed of by MICO from PBCom which was
likewise later on renewed, the last renewal of which was made on May 21, 1982under Promissory Note BNA
No. 26219.[6] To complete MICOs availment of Three Million Pesos (P3,000,000.00) discounting loan/credit
line with PBCom, MICO availed of another loan from PBCom in the sum of One Million Pesos
(P1,000,000.00) on May 24, 1979. As in previous loans, this was rolled over or renewed, the last renewal of
which was made on May 25, 1982 under Promissory Note BNA No. 26253.[7]

As security for the loans, MICO through its Vice-President and General Manager, Mariano Sio, executed
on May 16, 1979 a Deed of Real Estate Mortgage over its properties situated in Pasig, Metro Manila covered by
Transfer Certificates of Title (TCT) Nos. 11248 and 11250.

On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap and Richard Velasco, in their
personal capacities executed a Surety Agreement[8] in favor of PBComwhereby the petitioners jointly and
severally, guaranteed the prompt payment on due dates or at maturity of overdrafts, promissory notes, discounts,
drafts, letters of credit, bills of exchange, trust receipts, and other obligations of every kind and nature, for
which MICO may be held accountable by PBCom. It was provided, however, that the liability of the sureties
shall not at any one time exceed the principal amount of Three Million Pesos (P3,000,000.00) plus interest,
costs, losses, charges and expenses including attorneys fees incurred by PBCom in connection therewith.
On July 14, 1980, petitioner Charles Lee, in his capacity as president of MICO, wrote PBCom and applied
for an additional loan in the sum of Four Million Pesos (P4,000,000.00). The loan was intended for the
expansion and modernization of the companys machineries. Upon approval of the said application for loan,
MICO availed of the additional loan of Four Million Pesos (P4,000,000.00) as evidenced by Promissory Note
TA No. 094.[9]

As per agreement, the proceeds of all the loan availments were credited to MICOs current checking account
with PBCom. To induce the PBCom to increase the credit line of MICO, Charles Lee, Chua Siok Suy,
Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co (hereinafter referred to as petitioners-sureties),
executed another surety agreement[10] in favor of PBCom on July 28, 1980, whereby they jointly and severally
guaranteed the prompt payment on due dates or at maturity of overdrafts, promissory notes, discounts, drafts,
letters of credit, bills of exchange, trust receipts and all other obligations of any kind and nature for which
MICO may be held accountable by PBCom. It was provided, however, that their liability shall not at any one
time exceed the sum of Seven Million Five Hundred Thousand Pesos (P7,500,000.00) including interest, costs,
charges, expenses and attorneys fees incurred by MICO in connection therewith.

On July 29, 1980, MICO furnished PBCom with a notarized certification issued by its corporate secretary,
Atty. P.B. Barrera, that Chua Siok Suy was duly authorized by the Board of Directors to negotiate on behalf of
MICO for loans and other credit availments from PBCom. Indicated in the certification was the following
resolution unanimously approved by the Board of Directors:

RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as he is hereby authorized and
empowered, on behalf of MICO METALS CORPORATION from time to time, to borrow money and obtain other
credit facilities, with or without security, from the PHILIPPINE BANK OF COMMUNICATIONS in such
amount(s) and under such terms and conditions as he may determine, with full power and authority to execute,
sign and deliver such contracts, instruments and papers in connection therewith, including real estate and
chattel mortgages, pledges and assignments over the properties of the Corporation; and to renew and/or extend
and/or roll-over and/or reavail of the credit facilities granted thereunder, either for lesser or for greater
amount(s), the intention being that such credit facilities and all securities of whatever kind given as
collaterals therefor shall be a continuing security.

RESOLVED FURTHER, That said bank is hereby authorized, empowered and directed to rely on the authority
given hereunder, the same to continue in full force and effect until written notice of its revocation shall be
received by said Bank.[11]

On July 2, 1981, MICO filed with PBCom an application for a domestic letter of credit in the sum of Three
Hundred Forty-Eight Thousand Pesos (P348,000.00).[12] The corresponding irrevocable letter of credit was
approved and opened under LC No. L-16060.[13] Thereafter, the domestic letter of credit was negotiated and
accepted by MICO as evidenced by the corresponding bank draft issued for the purpose.[14] After the supplier of
the merchandise was paid, a trust receipt upon MICOs own initiative, was executed in favor of PBCom.[15]

On September 14, 1981, MICO applied for another domestic letter of credit with PBCom in the sum of Two
Hundred Ninety Thousand Pesos (P290,000.00).[16] The corresponding irrevocable letter of credit was issued
on September 22, 1981 under LC No. L-16334.[17] After the beneficiary of the said letter of credit was paid
by PBCom for the price of the merchandise, the goods were delivered to MICO which executed a corresponding
trust receipt[18] in favor of PBCom.

On November 10, 1981, MICO applied for authority to open a foreign letter of credit in favor of
Ta Jih Enterprises Co., Ltd.,[19] and thus, the corresponding letter of credit[20] was then issued by PBCom with a
cable sent to the beneficiary, Ta Jih Enterprises Co., Ltd. advising that said beneficiary may draw funds from the
account of PBCom in its correspondent banks New York Office.[21] PBCom also informed its corresponding
bank in Taiwan, the Irving Trust Company, of the approved letter of credit. The correspondent bank
acknowledged PBComsadvice through a confirmation letter[22] and by debiting from PBComs account with the
said correspondent bank the sum of Eleven Thousand Nine Hundred Sixty US Dollars ($11 ,960.00).[23] As in
past transactions, MICO executed in favor of PBCom a corresponding trust receipt.[24]

On January 4, 1982, MICO applied, for authority to open a foreign letter of credit in the sum of One
Thousand Nine Hundred US Dollars ($1,900.00), with PBCom.[25] Upon approval, the corresponding letter of
credit denominated as LC No. 62293[26] was issued whereupon PBCom advised its correspondent bank and
MICO[27] of the same. Negotiation and proper acceptance of the letter of credit were then made by MICO.
Again, a corresponding trust receipt[28] was executed by MICO in favor of PBCom.

In all the transactions involving foreign letters of credit, PBCom turned over to MICO the necessary
documents such as the bills of lading and commercial invoices to enable the latter to withdraw the goods from
the port of Manila.

On May 21, 1982 MICO obtained from PBCom another loan in the sum of Three Hundred Seventy-Seven
Thousand Pesos (P377,000.00) covered by Promissory Note BA No. 7458.[29]

Upon maturity of all credit availments obtained by MICO from PBCom, the latter made a demand for
payment.[30] For failure of petitioner MICO to pay the obligations incurred despite repeated demands, private
respondent PBCom extrajudicially foreclosed MICOs real estate mortgage and sold the said mortgaged
properties in a public auction sale held on November 23, 1982. Private respondent PBCom which emerged as
the highest bidder in the auction sale, applied the proceeds of the purchase price at public auction of Three
Million Pesos (P3,000,000.00) to the expenses of the foreclosure, interest and charges and part of the principal
of the loans, leaving an unpaid balance of Five Million Four Hundred Forty-One Thousand Six Hundred Sixty-
Three Pesos and Ninety Centavos (P5,441,663.90) exclusive of penalty and interest charges. Aside from the
unpaid balance of Five Million Four Hundred Forty-One Thousand Six Hundred Sixty-Three Pesos and Ninety
Centavos (P5,441,663.90), MICO likewise had another standing obligation in the sum of Four Hundred Sixty-
One Thousand Six Hundred Pesos and Six Centavos (P461,600.06) representing its trust receipts liabilities to
private respondent. PBCom then demanded the settlement of the aforesaid obligations from herein petitioners-
sureties who, however, refused to acknowledge their obligations to PBCom under the surety agreements.
Hence, PBCom filed a complaint with prayer for writ of preliminary attachment before the Regional Trial Court
of Manila, which was raffled to Branch 55, alleging that MICO was no longer in operation and had no
properties to answer for its obligations. PBCom further alleged that petitioner Charles Lee has disposed or
concealed his properties with intent to defraud his creditors. Except for MICO and Charles Lee, the sheriff of
the RTC failed to serve the summons on herein petitioners-sureties since they were all reportedly abroad at the
time. An alias summons was later issued but the sheriff was not able to serve the same to petitioners Alfonso Co
and Chua Siok Suy who was already sickly at the time and reportedly in Taiwan where he later died.

Petitioners (MICO and herein petitioners-sureties) denied all the allegations of the complaint filed by
respondent PBCom, and alleged that: a) MICO was not granted the alleged loans and neither did it receive the
proceeds of the aforesaid loans; b) Chua Siok Suy was never granted any valid Board Resolution to sign for and
in behalf of MICO; c) PBCom acted in bad faith in granting the alleged loans and in releasing the proceeds
thereof; d) petitioners were never advised of the alleged grant of loans and the subsequent releases therefor, if
any; e) since no loan was ever released to or received by MICO, the corresponding real estate mortgage and the
surety agreements signed concededly by the petitioners-sureties are null and void.
The trial court gave credence to the testimonies of herein petitioners and dismissed the complaint filed
by PBCom. The trial court likewise declared the real estate mortgage and its foreclosure null and void. In ruling
for herein petitioners, the trial court said that PBCom failed to adequately prove that the proceeds of the loans
were ever delivered to MICO. The trial court pointed out, among others, that while PBCom claimed that the
proceeds of the Four Million Pesos (P4,000,000.00) loan covered by promissory note TA 094 were deposited to
the current account of petitioner MICO, PBCom failed to produce the ledger account showing such deposit. The
trial court added that while PBCom may have loaned to MICO the other sums of Three Hundred Forty-Eight
Thousand Pesos (P348,000.00) and Two Hundred Ninety Thousand Pesos (P290,000.00), no proof has been
adduced as to the existence of the goods covered and paid by the said amounts. Hence, inasmuch as no
consideration ever passed from PBCom to MICO, all the documents involved therein, such as the promissory
notes, real estate mortgage including the surety agreements were all void or nonexistent for lack of cause or
consideration. The trial court said that the lack of proof as regards the existence of the merchandise covered by
the letters of credit bolstered the claim of herein petitioners that no purchases of the goods were really made and
that the letters of credit transactions were simply resorted to by the PBCom and Chua Siok Suy to accommodate
the latter in his financial requirements.

The Court of Appeals reversed the ruling of the trial court, saying that the latter committed an erroneous
application and appreciation of the rules governing the burden of proof. Citing Section 24 of the Negotiable
Instruments Law which provides that Every negotiable instrument is deemed prima facie to have been
issued for valuable consideration and every person whose signature appears thereon to have become a
party thereto for value, the Court of Appeals said that while the subject promissory notes and letters of credit
issued by the PBCom made no mention of delivery of cash, it is presumed that said negotiable instruments were
issued for valuable consideration. The Court of Appeals also cited the case of Gatmaitan vs. Court of
Appeals[31] which holds that "there is a presumption that an instrument sets out the true agreement of the
parties thereto and that it was executed for valuable consideration. The appellate court noted and found that
a notarized Certification was issued by MICOs corporate secretary, P.B. Barrera, that Chua Siok Suy, was duly
authorized by the Board of Directors of MICO to borrow money and obtain credit facilities from PBCom.

Petitioners filed a motion for reconsideration of the challenged decision of the Court of Appeals but this
was denied in a Resolution dated November 7, 1994 issued by its Former Second Division. Petitioners-sureties
then filed a petition for review on certiorari with this Court, docketed as G.R. No. 117913, assailing the decision
of the Court of Appeals. MICO likewise filed a separate petition for review on certiorari, docketed as G.R. No.
117914, with this Court assailing the same decision rendered by the Court of Appeals. Upon motion filed by
petitioners, the two (2) petitions were consolidated on January 11, 1995.[32]

Petitioners contend that there was no proof that the proceeds of the loans or the goods under the trust
receipts were ever delivered to and received by MICO. But the record shows otherwise. Petitioners-sureties
further contend that assuming that there was delivery by PBCom of the proceeds of the loans and the goods, the
contracts were executed by an unauthorized person, more specifically Chua Siok Suy who acted fraudulently
and in collusion with PBCom to defraud MICO.

The pertinent issues raised in the consolidated cases at bar are: a) whether or not the proceeds of the loans
and letters of credit transactions were ever delivered to MICO, and b) whether or not the individual petitioners,
as sureties, may be held liable under the two (2) Surety Agreements executed on March 26, 1979 and July 28,
1980.

In civil cases, the party having the burden of proof must establish his case by preponderance of evidence.
[33]Preponderance of evidence means evidence which is more convincing to the court as worthy of belief than
that which is offered in opposition thereto. Petitioners contend that the alleged promissory notes, trust receipts
and surety agreements attached to the complaint filed by PBCom did not ripen into valid and binding contracts
inasmuch as there is no evidence of the delivery of money or loan proceeds to MICO or to any of the
petitioners-sureties. Petitioners claim that under normal banking practice, borrowers are required to accomplish
promissory notes in blank even before the grant of the loans applied for and such documents become valid
written contracts only when the loans are actually released to the borrower.

We are not convinced.

During the trial of an action, the party who has the burden of proof upon an issue may be aided in
establishing his claim or defense by the operation of a presumption, or, expressed differently, by the probative
value which the law attaches to a specific state of facts. A presumption may operate against his adversary who
has not introduced proof to rebut the presumption. The effect of a legal presumption upon a burden of proof is
to create the necessity of presenting evidence to meet the legal presumption or the prima facie case created
thereby, and which if no proof to the contrary is presented and offered, will prevail. The burden of proof
remains where it is, but by the presumption the one who has that burden is relieved for the time being from
introducing evidence in support of his averment, because the presumption stands in the place of evidence unless
rebutted.

Under Section 3, Rule 131 of the Rules of Court the following presumptions, among others, are satisfactory
if uncontradicted: a) That there was a sufficient consideration for a contract and b) That a negotiable instrument
was given or indorsed for sufficient consideration. As observed by the Court of Appeals, a similar presumption
is found in Section 24 of the Negotiable Instruments Law which provides that every negotiable instrument is
deemed prima facie to have been issued for valuable consideration and every person whose signature appears
thereon to have become a party for value. Negotiable instruments which are meant to be substitutes for money,
must conform to the following requisites to be considered as such a) it must be in writing; b) it must be signed
by the maker or drawer; c) it must contain an unconditional promise or order to pay a sum certain in money; d)
it must be payable on demand or at a fixed or determinable future time; e) it must be payable to order or bearer;
and f) where it is a bill of exchange, the drawee must be named or otherwise indicated with reasonable certainty.
Negotiable instruments include promissory notes, bills of exchange and checks. Letters of credit and trust
receipts are, however, not negotiable instruments. But drafts issued in connection with letters of credit are
negotiable instruments.

Private respondent PBCom presented the following documentary evidence to prove petitioners
credit availments and liabilities:

1) Promissory Note No. BNA 26218 dated May 21, 1982 in the sum of P1,000,000.00 executed by
MICO in favor of PBCom.

2) Promissory Note No. BNA 26219 dated May 21, 1982 in the sum of P1,000,000.00 executed by
MICO in favor of PBCom.

3) Promissory Note No. BNA 26253 dated May 25, 1982 in the sum of P1,000,000.00 executed by
MICO in favor of PBCom.

4) Promissory Note No. BNA 7458 dated May 21, 1982 in the sum of P377,000.00 executed by MICO
in favor of PBCom.

5) Promissory Note No. TA 094 dated July 29, 1980 in the sum of P4,000.000.00 executed by MICO in
favor of PBCom.
6) Irrevocable letter of credit No. L-16060 dated July 2,1981 issued in favor
of Perez Battery Center for account of Mico Metals Corp.

7) Draft dated July 2, 1981 in the sum of P348,000.00 issued by Perez Battery Center, beneficiary of
irrevocable Letter of Credit No. No. L-16060 and accepted by MICO Metals corporation.

8) Letter dated July 2, 1981 from Perez Battery Center addressed to private
respondent PBCom showing that proceeds of the irrevocable letter of credit No. L- 16060 was
received by Mr. MoisesRosete, representative of Perez Battery Center.

9) Trust receipt dated July 2, 1981 executed by MICO in favor of PBCom covering the merchandise
purchased under Letter of Credit No. 16060.

10) Irrevocable letter of credit No. L-16334 dated September 22, 1981 issued in favor of Perez Battery
Center for account of MICO Metals Corp.

11) Draft dated September 22, 1981 in the sum of P290,000.00 issued by Perez Battery Center and
accepted by MICO.

12) Letter dated September 17, 1981 from Perez Battery addressed to PBCom showing that the
proceeds of credit no. L-16344 was received by Mr. Moises Rosete, a representative
of PerezBattery Center.

13) Trust Receipt dated September 22, 1981 executed by MICO in favor of PBCom covering the
merchandise under Letter of Credit No. L-16334.

14) Irrevocable Letter of Credit no. 61873 dated November 10, 1981 for US$11,960.00 issued
by PBCom in favor of TA JIH Enterprises Co. Ltd., through its correspondent bank, Irving Trust
Company of Taipei, Taiwan.

15) Trust Receipt dated December 15, 9181 executed by MICO in favor of PBCom showing that
possession of the merchandise covered by Irrevocable Letter of Credit no. 61873 was released
by PBCom to MICO.

16) Letters dated March 2, 1979 from MICO signed by its president, Charles Lee, showing that MICO
sought credit line from PBCom in the form of loans, letters of credit and trust receipt in the sum
of P7,500,000.00.

17) Letter dated July 14, 1980 from MICO signed by its president, Charles Lee, showing that MICO
requested for additional financial assistance in the sum of P4,000,000.00.

18) Board resolution dated March 6, 1979 of MICO authorizing Charles Lee and Mariano Sio singly
or jointly to act and sign for and in behalf of MICO relative to the obtention of credit facilities
from PBCom.

19) Duly notarized Deed of Mortgage dated May 16, 1979 executed by MICO in favor
of PBCom over MICO s real properties covered by TCT Nos. 11248 and 11250 located in Pasig.

20) Duly notarized Surety Agreement dated March 26, 1979 executed by herein petitioners Charles
Lee, Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.
21) Duly notarized Surety Agreement dated July 28, 1980 executed by herein petitioners Charles Lee,
Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.

22) Duly notarized certification dated July 28, 1980 issued by MICO s corporate secretary, Mr. P.B.
Barrera, attesting to the adoption of a board resolution authorizing Chua Siok Suy to sign, for and
in behalf of MICO, all the necessary documents including contracts, loan instruments and
mortgages relative to the obtention of various credit facilities from PBCom.

The above-cited documents presented have not merely created a prima facie case but have actually proved
the solidary obligation of MICO and the petitioners, as sureties of MICO, in favor of respondent PBCom. While
the presumption found under the Negotiable Instruments Law may not necessarily be applicable to trust receipts
and letters of credit, the presumption that the drafts drawn in connection with the letters of credit have sufficient
consideration. Under Section 3(r), Rule 131 of the Rules of Court there is also a presumption that sufficient
consideration was given in a contract. Hence, petitioners should have presented credible evidence to rebut that
presumption as well as the evidence presented by private respondent PBCom. The letters of credit show that the
pertinent materials/merchandise have been received by MICO. The drafts signed by the beneficiary/suppliers in
connection with the corresponding letters of credit proved that said suppliers were paid by PBCom for the
account of MICO. On the other hand, aside from their bare denials petitioners did not present sufficient and
competent evidence to rebut the evidence of private respondent PBCom. Petitioner MICO did not proffer a
single piece of evidence, apart from its bare denials, to support its allegation that the loan transactions, real
estate mortgage, letters of credit and trust receipts were issued allegedly without any consideration.

Petitioners-sureties, for their part, presented the By-Laws[34] of Mico Metals Corporation (MICO) to prove
that only the president of MICO is authorized to borrow money, arrange letters of credit, execute trust receipts,
and promissory notes and consequently, that the loan transactions, letters of credit, promissory notes and trust
receipts, most of which were executed by Chua Siok Suy in representation of MICO were not allegedly
authorized and hence, are not binding upon MICO. A perusal of the By-Laws of MICO, however, shows that the
power to borrow money for the company and issue mortgages, bonds, deeds of trust and negotiable instruments
or securities, secured by mortgages or pledges of property belonging to the company is not confined solely to
the president of the corporation. The Board of Directors of MICO can also borrow money, arrange letters of
credit, execute trust receipts and promissory notes on behalf of the corporation.[35] Significantly, this power of
the Board of Directors according to the by-laws of MICO, may be delegated to any of its standing committee,
officer or agent.[36] Hence, PBCom had every right to rely on the Certification issued by MICO's corporate
secretary, P.B. Barrera, that Chua Siok Suy was duly authorized by its Board of Directors to borrow money and
obtain credit facilities in behalf of MICO from PBCom.

Petitioners-sureties also presented a letter of their counsel dated October 9, 1982, addressed to private
respondent PBCom purportedly to show that PBCom knew that Chua Siok Suyallegedly used the credit and
good names of the petitioner-sureties for his benefit, and that petitioner-sureties were made to sign blank
documents and were furnished copies of the same. The letter, however, is in fact merely a reply of petitioners-
sureties counsel to PBComs demand for payment of MICOs obligations, and appears to be an inconsequential
piece of self-serving evidence.

In addition to the foregoing, MICO and petitioners-sureties cited the decision of the trial court which stated
that there was no proof that the proceeds of the loans were ever delivered to MICO. Although the private
respondents witness, Mr. Gardiola, testified that the proceeds of the loans were deposited in MICOs current
account with PBCom, his testimony was allegedly not supported by any bank record, note or memorandum. A
careful scrutiny of the record including the transcript of stenographic notes reveals, however, that although
private respondent PBCom was willing to produce the corresponding account ledger showing that the proceeds
of the loans were credited to MICOs current account with PBCom, MICO in fact vigorously objected to the
presentation of said document. That point is shown in the testimony of PBComs witness, Gardiola, thus:

Q: Now, all of these promissory note Exhibits I and J which as you have said previously (sic) availed
originally by defendant Mico Metals Corp. sometime in 1979, my question now is, do you know
what happened to the proceeds of the original availment?

A: Well, it was credited to the current account of Mico Metals Corp.

Q: Why did it was credited to the proceeds to the account of Mico Metals Corp? (sic)

A: Well, that is our understanding.

ATTY. DURAN:

Your honor, may we be given a chance to object, the best evidence is the so-called current
account...

COURT:

Can you produce the ledger account?

A: Yes, Your Honor, I will bring.

COURT:

The ledger or record of the current account of Mico Metals Corp.

A: Yes, Your Honor.

ATTY. ACEJAS:

Your Honor, these are a confidential record, and they might not be disclosed without the consent
of the person concerned. (sic)

ATTY. SANTOS:

Well, you are the one who is asking that.

ATTY. DURAN:

Your Honor, Im precisely want to show for the ... (sic)

COURT:

But the amount covered by the current account of defendant Mico Metals Corp. is the subject
matter of this case.

xxx xxx xxx

Q: Are those availments were release? (sic)


A: Yes, Your Honor, to the defendant corporation.

Q: By what means?

A: By the credit to their current account.

ATTY. ACEJAS:

We object to that, your Honor, because the disclose is the secrecy of the bank deposit. (sic)

xxx xxx xxx

Q: Before the recess Mr. Gardiola, you stated that the proceeds of the three (3) promissory notes were
credited to the accounts of Mico Metals Corporation, now do you know what kind of current
account was that which you are referring to?

ATTY. ACEJAS:

Objection your Honor, that is the disclose of the deposit of defendant Mico Metals Corporation
and it cannot disclosed without the authority of the depositor. (sic)[37]

That proceeds of the loans which were originally availed of in 1979 were delivered to MICO is bolstered
by the fact that more than a year later, specifically on July 14, 1980, MICO through its president, petitioner-
surety Charles Lee, requested for an additional loan of Four Million Pesos (P4,000,000.00) from PBCom. The
fact that MICO was requesting for an additional loan implied that it has already availed of earlier loans
from PBCom.

Petitioners allege that PBCom presented no evidence that it remitted payments to cover the domestic and
foreign letters of credit. Petitioners placed much reliance on the erroneous decision of the trial court which
stated that private respondent PBCom allegedly failed to prove that it actually made payments under the letters
of credit since the bank drafts presented as evidence show that they were made in favor of the Bank of Taiwan
and First Commercial Bank.

Petitioners allegations are untenable.

Modern letters of credit are usually not made between natural persons. They involve bank to bank
transactions. Historically, the letter of credit was developed to facilitate the sale of goods between, distant and
unfamiliar buyers and sellers. It was an arrangement under which a bank, whose credit was acceptable to the
seller, would at the instance of the buyer agree to pay drafts drawn on it by the seller, provided that certain
documents are presented such as bills of lading accompanied the corresponding drafts. Expansion in the use of
letters of credit was a natural development in commercial banking.[38] Parties to a commercial letter of credit
include (a) the buyer or the importer, (b) the seller, also referred to as beneficiary, (c) the opening bank which is
usually the buyers bank which actually issues the letter of credit, (d) the notifying bank which is the
correspondent bank of the opening bank through which it advises the beneficiary of the letter of credit, (e)
negotiating bank which is usually any bank in the city of the beneficiary. The services of the notifying bank
must always be utilized if the letter of credit is to be advised to the beneficiary through cable, (f) the paying
bank which buys or discounts the drafts contemplated by the letter of credit, if such draft is to be drawn on the
opening bank or on another designated bank not in the city of the beneficiary. As a rule, whenever the facilities
of the opening bank are used, the beneficiary is supposed to present his drafts to the notifying bank for
negotiation and (g) the confirming bank which, upon the request of the beneficiary, confirms the letter of credit
issued by the opening bank.

From the foregoing, it is clear that letters of credit, being usually bank to bank transactions, involve more
than just one bank. Consequently, there is nothing unusual in the fact that the drafts presented in evidence by
respondent bank were not made payable to PBCom. As explained by respondent bank, a draft was drawn on the
Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods covered by the foreign letter of
credit. Having paid the supplier, the Bank of Taiwan then presented the bank draft for reimbursement
by PBComscorrespondent bank in Taiwan, the Irving Trust Company which explains the reason why on its face,
the draft was made payable to the Bank of Taiwan. Irving Trust Company accepted and endorsed the draft
to PBCom. The draft was later transmitted to PBCom to support the latters claim for payment from MICO.
MICO accepted the draft upon presentment and negotiated it to PBCom.

Petitioners further aver that MICO never requested that legal possession of the merchandise be transferred
to PBCom by way of trust receipts. Petitioners insist that assuming that MICO transferred possession of the
merchandise to PBCom by way of trust receipts, the same would be illegal since PBCom, being a banking
institution, is not authorized by law to engage in the business of importing and selling goods.

A trust receipt is considered as a security transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through utilization, as collateral of the merchandise imported
or purchased.[39] A trust receipt, therefor, is a document of security pursuant to which a bank acquires a security
interest in the goods under trust receipt. Under a letter of credit-trust receipt arrangement, a bank extends a loan
covered by a letter of credit, with the trust receipt as a security for the loan. The transaction involves a loan
feature represented by a letter of credit, and a security feature which is in the covering trust receipt which
secures an indebtedness.

Petitioners averments with regard to the second issue are no less incredulous. Petitioners contend that the
letters of credit, surety agreements and loan transactions did not ripen into valid and binding contracts
since no part of the proceeds of the loan transactions were delivered to MICO or to any of the petitioners-
sureties. Petitioners-sureties allege that Chua SiokSuy was the beneficiary of the proceeds of the loans and that
the latter made them sign the surety agreements in blank. Thus, they maintain that they should not be held
accountable for any liability that might arise therefrom.

It has not escaped our notice that it was petitioner-surety Charles Lee, as president of MICO Metals
Corporation, who first requested for a discounting loan of Three Million Pesos (P3,000,000.00) from PBCom as
evidenced by his letter dated March 2, 1979.[40] On the same day, Charles Lee, as President of MICO, requested
for a Letter of Credit and Trust Receipt line in the sum of Three Million Pesos (P3,000,000.00).[41] Still, on the
same day, Charles Lee again as President of MICO, wrote another letter to PBCOM requesting for a financing
line in the sum of One Million Five Hundred Thousand Pesos (P1,500,000.00) to be used exclusively as
marginal deposit for the opening of MICOs foreign and local letters of credit with PBCom.[42] More than a year
later, it was also Charles Lee, again in his capacity as president of MICO, who asked for an additional loan in
the sum of Four Million Pesos (P4,000,000.00). The claim therefore of petitioners that it was Chua Siok Suy, in
connivance with the respondent PBCom, who applied for and obtained the loan transactions and letters of credit
strains credulity considering that even the Deed of the Real Estate Mortgage in favor of PBCom was executed
by petitioner-surety Mariano Sio in his capacity as general manager of MICO[43] to secure the loan
accommodations obtained by MICO from PBCom.
Petitioners-sureties allege that they were made to sign the surety agreements in blank by Chua Siok Suy.
Petitioner Alfonso Yap, the corporate treasurer, for his part testified that he signed booklets of checks, surety
agreements and promissory notes in blank; that he signed the documents in blank despite his misgivings since
Chua Siok Suy assured him that the transaction can easily be taken cared of since Chua Siok Suy personally
knew the Chairman of the Board of PBCom; that he was not receiving salary as treasurer of Mico Metals and
since Chua Siok Suy had a direct hand in the management of Malayan Sales Corporation, of which Yap is an
employee, he (Yap) signed the documents in blank as consideration for his continued employment in Malayan
Sales Corporation. Petitioner Antonio Co testified that he worked as office manager for MICO from 1978-1982.
As office manager, he was the one in charge of transacting business like purchasing, selling and paying the
salary of the employees. He was also in charge of the handling of documents pertaining to surety agreements,
trust receipts and promissory notes;[44] that when he first joined MICO Metals Corporation, he was able to read
the by-laws of the corporation and he came to know that only the chairman and the president can borrow money
in behalf of the corporation; that Chua Siok Suy once called him up and told him to secure an invoice so that a
credit line can be opened in the bank with a local letter of credit; that when the invoice was secured, he (Co)
brought it together with the application for a credit line to Chua Siok Suy, and that he questioned the authority
of Chua SiokSuy pointing out that he (Co) is not empowered to sign the document inasmuch as only the latter,
as president, was authorized to do so. However, Chua Siok Suy allegedly just said that he had already talked
with the Chairman of the Board of PBCom; and that Chua Siok Suy reportedly said that he needed the money to
finance a project that he had with the Taipeigovernment. Co also testified that he knew of the application for
domestic letter of credit in the sum of Three Hundred Forty-Eight Thousand Pesos (P348,000.00); and that a
certain Moises Rosete was authorized to claim the check covering the Three Hundred Forty-Eight Thousand
Pesos (P348,000.00) from PBCom; and that after claiming the check Rosete brought it to Perez Battery Center
for indorsement after which the same was deposited to the personal account of Chua Siok Suy.[45]

We consider as incredible and unacceptable the claim of petitioners-sureties that the Board of Directors of
MICO was so careless about the business affairs of MICO as well as about their own personal reputation and
money that they simply relied on the say so of Chua Siok Suy on matters involving millions of pesos. Under
Section 3 (d), Rule 131 of the Rules of Court, it is presumed that a person takes ordinary care of his concerns.
Hence, the natural presumption is that one does not sign a document without first informing himself of its
contents and consequences. Said presumption acquires greater force in the case at bar where not only one but
several documents were executed at different times and at different places by the petitioner sureties and
Chua Siok Suy as president of MICO.

MICO and herein petitioners-sureties insist that Chua Siok Suy was not duly authorized to negotiate for
loans in behalf of MICO from PBCom. Petitioners allegation, however, is belied by the July 28, 1980
Certification issued by the corporate secretary of PBCom, Atty. P.B. Barrera, that MICO's Board of Directors
gave Chua Siok Suy full authority to negotiate for loans in behalf of MICO with PBCom. In fact, the
Certification even provided that Chua Siok Suys authority continues until and unless PBCom is notified in
writing of the withdrawal thereof by the said Board. Notably, petitioners failed to contest the genuineness of the
said Certification which is notarized and to show any written proof of any alleged withdrawal of the said
authority given by the Board of Directors to Chua Siok Suy to negotiate for loans in behalf of MICO.

There was no need for PBCom to personally inform the petitioners-sureties individually about the terms of
the loans, letters of credit and other loan documents. The petitioners-sureties themselves happen to comprise the
Board of Directors of MICO, which gave full authority to Chua Siok Suy to negotiate for loans in behalf of
MICO. Notice to MICOs authorized representative, Chua Siok Suy, was notice to MICO. The Certification
issued by PBComs corporate secretary, Atty. P.B. Barrera, indicated that Chua Siok Suy had full authority to
negotiate and sign the necessary documents, in behalf of MICO for loans from PBCom.
Respondent PBCom therefore had the right to rely on the said notarized Certification of MICOs Corporate
Secretary.

Anent petitioners-sureties contention that they obtained no consideration whatsoever on the surety
agreements, we need only point out that the consideration for the sureties is the very consideration for the
principal obligor, MICO, in the contracts of loan. In the case of Willex Plastic Industries Corporation vs. Court
of Appeals,[46] we ruled that the consideration necessary to support a surety obligation need not pass directly to
the surety, a consideration moving to the principal alone being sufficient. For a guarantor or surety is bound by
the same consideration that makes the contract effective between the parties thereto. It is not necessary that a
guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.

Petitioners placed too much reliance on the rule in evidence that the burden of proof does not shift whereas
the burden of going forward with the evidence does pass from party to party. It is true that said rule is not
changed by the fact that the party having the burden of proof has introduced evidence which established prima
facie his assertion because such evidence does not shift the burden of proof; it merely puts the adversary to the
necessity of producing evidence to meet the prima facie case. Where the defendant merely denies, either
generally or otherwise, the allegations of the plaintiffs pleadings, the burden of proof continues to rest on the
plaintiff throughout the trial and does not shift to the defendant until the plaintiffs evidence has been presented
and duly offered. The defendant has then no burden except to produce evidence sufficient to create a state of
equipoise between his proof and that of the plaintiff to defeat the latter, whereas the plaintiff has the burden, as
in the beginning, of establishing his case by a preponderance of evidence.[47] But where the defendant has failed
to present and marshall evidence sufficient to create a state of equipoise between his proof and that of plaintiff,
the prima facie case presented by the plaintiff will prevail.

In the case at bar, respondent PBCom, as plaintiff in the trial court, has in fact presented sufficient
documentary and testimonial evidence that proved by preponderance of evidence its subject collection case
against the defendants who are the petitioners herein. In view of all the foregoing, the Court of Appeals
committed no reversible error in its appealed Decision.

WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 27480 entitled,
Philippine Bank of Communications vs. Mico Metals Corporation, Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap, Richard Velasco and Alfonso Co, is AFFIRMED in toto.

Costs against the petitioners.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

Republic of the Philippines



SUPREME COURT

Manila

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

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



vs.

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

Marcial Esposo for plaintiff-appellant.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and Attorney
Concepcion Torrijos-Agapinan for defendants-appellees.

DIZON, J.:

An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by the
Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras.

On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money orders of
P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal teller had made out
money ordersnumbered 124685, 124687-124695, Montinola offered to pay for them with a private checks were
not generally accepted in payment of money orders, the teller advised him to see the Chief of the Money Order
Division, but instead of doing so, Montinola managed to leave building with his own check and the ten(10)
money orders without the knowledge of the teller.

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

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

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila Post
Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified the Bank of America that
money order No. 124688 attached to his letter had been found to have been irregularly issued and that, in view
thereof, the amount it represented had been deducted from the bank's clearing account. For its part, on August 2
of the same year, the Bank of America debited appellant's account with the same amount and gave it advice
thereof by means of a debit memo.

On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by his office
deducting the sum of P200.00 from the clearing account of the Bank of America, but his request was denied. So
was appellant's subsequent request that the matter be referred to the Secretary of Justice for advice. Thereafter,
appellant elevated the matter to the Secretary of Public Works and Communications, but the latter sustained the
actions taken by the postal officers.

In connection with the events set forth above, Montinola was charged with theft in the Court of First Instance of
Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila praying for
judgment as follows:

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

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

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

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

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

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

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

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

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

It is to be noted in this connection that some of the restrictions imposed upon money orders by postal laws and
regulations are inconsistent with the character of negotiable instruments. For instance, such laws and regulations
usually provide for not more than one endorsement; payment of money orders may be withheld under a variety
of circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are the conditions laid down in the letter of the
Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the redemption of postal money
orders received by it from its depositors. Among others, the condition is imposed that "in cases of adverse
claim, the money order or money orders involved will be returned to you (the bank) and the, corresponding
amount will have to be refunded to the Postmaster, Manila, who reserves the right to deduct the value thereof
from any amount due you if such step is deemed necessary." The conditions thus imposed in order to enable the
bank to continue enjoying the facilities theretofore enjoyed by its depositors, were accepted by the Bank of
America. The latter is therefore bound by them. That it is so is clearly referred from the fact that, upon receiving
advice that the amount represented by the money order in question had been deducted from its clearing account
with the Manila Post Office, it did not file any protest against such action.

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

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

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

Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo and Villamor, JJ., concur.

Castro and Makasiar, JJ., took no part.

Republic of the Philippines



SUPREME COURT

Manila

EN BANC

G.R. No. L-1405 July 31, 1948

BENJAMIN ABUBAKAR, petitioner, 



vs.

THE AUDITOR GENERAL, respondent.

Viray and Viola Viray for petitioner.



First Assistant Solicitor General Roberto A. Gianzon and Solicitor Manuel Tomacruz for respondent.

BENGZON, J.:
We are asked to overrule the decision of the Auditor General refusing to authorize the payment of Treasury
warrant No. A-2867376 for P1,000 which was issued in favor of Placido S. Urbanes on December 10, 1941, but
is now in the hands of herein petitioner Benjamin Abubakar.

For his refusal the respondent gave two reasons: first, because the money available for the redemption of
treasury warrants issued before January 2, 1942, is appropriated by Republic Act No. 80 (Item F-IV-8) and this
warrant does not come within the purview of said appropriation; and second, because on of the requirements of
his office had not been complied with, namely, that it must be shown that the holders of warrants covering
payment or replenishment of cash advances for official expenditures (as this warrant is) received them in
payment of definite government obligations.

Finding the first reason to be sufficiently valid we shall not discuss, nor pass upon the second.

There is no doubt as to the authenticity and date of the treasury warrant. There is no question that it was
regularly indorsed by the payee and is now in the custody of the herein petitioner who is a private individual.
On the other hand, it is admitted that the warrant was originally made payable to Placido S. Urbanes in his
capacity as disbursing officer of the Food Administration for "additional cash advance for Food Production
Campaign in La Union" (Annex A). It is thus apparent that this is a treasury warrant issued in favor of a public
officer or employee and held in possession by a private individual. Such being the case, the Auditor General can
hardly be blamed for not authorizing its redemption out of an appropriation specifically for "treasury warrants
issued ... in favor of and held in possession by private individuals." (Republic Act No. 80, Item F-IV-8.) This
warrant was not issued in favor of aprivate individual. It was issued in favor of a government employee.

The distinction is not without a difference. Outstanding treasury warrants issued prior to January 2, 1942,
amount to more than four million pesos. The appropriation herein mentioned is only for P1,750,000. Obviously
Congress wished to provide for redemption of one class of warrants — those issued to private individuals — as
distinguished from those issued in favor of government officials. Basis for the discrimination is not lacking.
Probably the Government is not so sure that those warrants to officials have all been properly used by the latter
during the Japanese occupation or maybe it wants to conduct further inquiries as to the equities of the present
holders thereof.

The petitioner argues that he is a holder in good faith and for value of a negotiable instrument an dis entitled to
the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within the
scope of the negotiable instruments law. For one thing, the document bearing on its face the words "payable
from the appropriation for food administration," is actually an order for payment out of "a particular fund," and
is not unconditional, and does not fulfill one of the essential requirements of a negotiable instrument. (Section 3
last sentenced and section 1[b] of the Negotiable Instruments Law.) In the United States, government warrants
for the payment of money are not negotiable instruments nor commercial proper1

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

Paras, Actg. C.J., Feria, Pablo, Perfecto, Briones, and Padilla, JJ., concur.
Republic of the Philippines

SUPREME COURT

Manila

FIRST DIVISION

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.

Angara, Abello, Concepcion, Regala & Cruz for petitioner.



Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.

Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

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.

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

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

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

3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden Savings, the
latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case are not
negotiable instruments.

The petition has no merit.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear,
positive and convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question are not negotiable
instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and this is of equal
significance, it is indicated that they are payable from a particular fund, to wit, Fund 501.

The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent:

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


following requirements:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SO ORDERED.

Narvasa, Gancayco, Griño-Aquino and Medialdea, JJ., concur.

Republic of the Philippines



SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 89252 May 24, 1993

RAUL SESBREÑO, petitioner, 



vs.

HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS
BANK, respondents.

Salva, Villanueva & Associates for Delta Motors Corporation.

Reyes, Salazar & Associates for Pilipinas Bank.

FELICIANO, J.:

On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the amount of P300,000.00
with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term
of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the
following documents to petitioner:

(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta
Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per
annum;

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No.
2731 to petitioner, with the notation that the said security was in custodianship of Pilipinas Bank,
as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and

(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's
investment), with petitioner as payee, Philfinance as drawer, and Insular Bank of Asia and
America as drawee, in the total amount of P304,533.33.

On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However, the checks
were dishonored for having been drawn against insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent
Pilipinas Bank ("Pilipinas"). It reads as follows:

PILIPINAS BANK

Makati Stock Exchange Bldg.,

Ayala Avenue, Makati,

Metro Manila

Feb
rua
r y
9 ,
198
1







—

VA
LU
E
DA
TE

TO Raul Sesbreño

Ap
ril
6 ,
198
1








—

M
AT
UR
I T
Y
DA
TE

NO
.
108
05

DENOMINATED CUSTODIAN RECEIPT

This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE
UNDERWRITES FINANCE CORPORATION, we have in our custody the following securities
to you [sic] the extent herein indicated.

SERIAL MAT. FACE ISSUED REGISTERED AMOUNT



NUMBER DATE VALUE BY HOLDER PAYEE

2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33



UNDERWRITERS

FINANCE CORP.
We further certify that these securities may be inspected by you or your duly authorized
representative at any time during regular banking hours.

Upon your written instructions we shall undertake physical delivery of the above securities fully
assigned to you should this Denominated Custodianship Receipt remain outstanding in your
favor thirty (30) days after its maturity.

PILIPI
N A S
BANK

( B y
Elizabe
th De
Villa

Illegibl
e
Signat
ure)1

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch,
and handed her a demand letter informing the bank that his placement with Philfinance in the amount reflected
in the DCR No. 10805 had remained unpaid and outstanding, and that he in effect was asking for the physical
delivery of the underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731 and
found: that the security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a
face value of P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation
("Delta") as "maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas
did not deliver the Note, nor any certificate of participation in respect thereof, to petitioner.

Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981,2 again asking private
respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all
of petitioner's demand letters to Philfinance for written instructions, as has been supposedly agreed upon in
"Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not provide the
appropriate instructions; Pilipinas never released DMC PN No. 2731, nor any other instrument in respect
thereof, to petitioner.

Petitioner also made a written demand on 14 July 19813 upon private respondent Delta for the partial
satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him said Note
to the extent of P307,933.33. Delta, however, denied any liability to petitioner on the promissory note, and
explained in turn that it had previously agreed with Philfinance to offset its DMC PN No. 2731 (along with
DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of Delta.

In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and
exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which
to date apparently remains in the custody of the SEC.4

As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action
for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private respondents Delta
and Pilipinas.5The trial court, in a decision dated 5 August 1987, dismissed the complaint and counterclaims for
lack of merit and for lack of cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March
1989, the Court of Appeals denied the appeal and held:6

Be that as it may, from the evidence on record, if there is anyone that appears liable for the
travails of plaintiff-appellant, it is Philfinance. As correctly observed by the trial court:

This act of Philfinance in accepting the investment of plaintiff and charging it


against DMC PN No. 2731 when its entire face value was already obligated or
earmarked for set-off or compensation is difficult to comprehend and may have
been motivated with bad faith. Philfinance, therefore, is solely and legally
obligated to return the investment of plaintiff, together with its earnings, and to
answer all the damages plaintiff has suffered incident thereto. Unfortunately for
plaintiff, Philfinance was not impleaded as one of the defendants in this case at
bar; hence, this Court is without jurisdiction to pronounce judgement against it.
(p. 11, Decision)

WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby
affirmed in toto. Cost against plaintiff-appellant.

Petitioner moved for reconsideration of the above Decision, without success.

Hence, this Petition for Review on Certiorari.

After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give
due course to the petition and required the parties to file their respective memoranda.7

Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent
court of Appeals gravely erred: (i) in concluding that he cannot recover from private respondent Delta his
assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas solidarily liable on
the DMC PN No. 2731 in view of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner,
and (iii) in refusing to pierce the veil of corporate entity between Philfinance, and private respondents Delta and
Pilipinas, considering that the three (3) entities belong to the "Silverio Group of Companies" under the
leadership of Mr. Ricardo Silverio, Sr.8

There are at least two (2) sets of relationships which we need to address: firstly, the relationship of
petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course,
there is a third relationship that is of critical importance: the relationship of petitioner and Philfinance.
However, since Philfinance has not been impleaded in this case, neither the trial court nor the Court of Appeals
acquired jurisdiction over the person of Philfinance. It is, consequently, not necessary for present purposes to
deal with this third relationship, except to the extent it necessarily impinges upon or intersects the first and
second relationships.

I.

We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta
promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of
P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is
"non-negotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the transfer of
an instrument from one person to another so as to constitute the transferee the holder of the
instrument (Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the
instrument in his own name and cannot demand or receive payment (Section 51, id.)9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly
transferred, in part to him by assignment and that as a result of such transfer, Delta as debtor-maker of the Note,
was obligated to pay petitioner the portion of that Note assigned to him by the payee Philfinance.

Delta, however, disputes petitioner's contention and argues:

(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by
Philfinance as manifested by the word "non-negotiable" stamp across the face of the Note10 and
because maker Delta and payee Philfinance intended that this Note would be offset against the
outstanding obligation of Philfinance represented by Philfinance PN No. 143-A issued to Delta
as payee;

(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not
against its instructions; and

(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid,
petitioner took the Note subject to the defenses available to Delta, in particular, the offsetting of
DMC PN No. 2731 against Philfinance PN No. 143-A.11

We consider Delta's arguments seriatim.

Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from
the assignment or transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument
qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof
coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable
instrument may, however, instead of being negotiated, also be assigned or transferred. The legal consequences
of negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A non-
negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express
prohibition against assignment or transfer written in the face of the instrument:

The words "not negotiable," stamped on the face of the bill of lading, did not destroy its
assignability, but the sole effect was to exempt the bill from the statutory provisions relative
thereto, and a bill, though not negotiable, may be transferred by assignment; the assignee taking
subject to the equities between the original parties.12 (Emphasis added)

DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferable" or
"non-assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in
whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted
in full:
April
1 0 ,
1980

Philippine Underwriters Finance Corp.



Benavidez St., Makati,

Metro Manila.

Attention: Mr. Alfredo O. Banaria



SVP-Treasurer

GENTLEMEN:

This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory


Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981.

As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for
P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon
co-terminal maturity.

Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.

Ve r y
Truly
Yours,

(Sgd.)

Floren
cio B.
Biagan

Senior
Vice
Preside
nt13

We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon
Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is scarcely
necessary to add that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon
Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the Note who parted with
valuable consideration in good faith and without notice of such prohibition. It is not disputed that petitioner was
such an assignee or transferee. Our conclusion on this point is reinforced by the fact that what Philfinance and
Delta were doing by their exchange of their promissory notes was this: Delta invested, by making a money
market placement with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same
day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes:
DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not
P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes.

Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected
without the consent of Delta, we note that such consent was not necessary for the validity and enforceability of
the assignment in favor of petitioner.14 Delta's argument that Philfinance's sale or assignment of part of its rights
to DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite
mistaken. Conventional subrogation, which in the first place is never lightly inferred,15 must be clearly
established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new
and old obligations on every point.16 Nothing of the sort is present in the instant case.

It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to
Philfinance, an entity engaged in the business of buying and selling debt instruments and other securities, and
more generally, in money market transactions. In Perez v. Court of Appeals,17 the Court, speaking through Mme.
Justice Herrera, made the following important statement:

There is another aspect to this case. What is involved here is a money market transaction. As
defined by Lawrence Smith "the money market is a market dealing in standardized short-term
credit instruments (involving large amounts) where lenders and borrowers do not deal directly
with each other but through a middle manor a dealer in the open market." It involves
"commercial papers" which are instruments "evidencing indebtness of any person or entity. . .,
which are issued, endorsed, sold or transferred or in any manner conveyed to another person or
entity, with or without recourse". The fundamental function of the money market device in its
operation is to match and bring together in a most impersonal manner both the "fund users" and
the "fund suppliers." The money market is an "impersonal market", free from personal
considerations. "The market mechanism is intended to provide quick mobility of money and
securities."

The impersonal character of the money market device overlooks the individuals or entities
concerned. The issuer of a commercial paper in the money market necessarily knows in advance
that it would be expenditiously transacted and transferred to any investor/lender without need of
notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial
paper of the sale or transfer to the investor.

xxx xxx xxx

There is need to individuate a money market transaction, a relatively novel institution in the
Philippine commercial scene. It has been intended to facilitate the flow and acquisition of capital
on an impersonal basis. And as specifically required by Presidential Decree No. 678, the
investing public must be given adequate and effective protection in availing of the credit of a
borrower in the commercial paper market.18(Citations omitted; emphasis supplied)

We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and
Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights under DMC
PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken place and indeed none could
have taken place. The essential requirements of compensation are listed in the Civil Code as follows:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) That both debts consists in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts are due;


(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor. (Emphasis supplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly
recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged
that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-A upon co-
terminal maturity."

As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the
"co-terminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to
petitioner would have prevented compensation had taken place between Philfinance and Delta, to the extent of
P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have
ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by
Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner
was a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion
thereof assigned to him.

The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July
1981, 19 that is, after the maturity not only of the money market placement made by petitioner but also of both
DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as
assignee after compensation had taken place by operation of law because the offsetting instruments had both
reached maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater that the rights of
the assignor, since the assignee is merely substituted in the place of the assignor 20 and that the assignee
acquires his rights subject to the equities — i.e., the defenses — which the debtor could have set up against the
original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil Code
provides that:

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor
of a third person, cannot set up against the assignee the compensation which would pertain to
him against the assignor, unless the assignor was notified by the debtor at the time he gave his
consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent thereto, the
latter may set up the compensation of debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the compensation of
all credits prior to the same and also later ones until he had knowledge of the assignment.
(Emphasis supplied)

Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his
creditor shall be released from the obligation." In Sison v. Yap-Tico,21 the Court explained that:

[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if
he pay before notice that his debt has been assigned, the law holds him exonerated, for the reason
that it is the duty of the person who has acquired a title by transfer to demand payment of the
debt, to give his debt or notice.22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN
No. 2731 had already been discharged by compensation. Since the assignor Philfinance could not have then
compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly
disabled from collecting from Delta the portion of the Note assigned to him.

It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9
February 1981. He could have notified Delta as soon as his money market placement matured on 13 March
1981 without payment thereof being made by Philfinance; at that time, compensation had yet to set in and
discharge DMC PN No. 2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner
received from Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805 issued by private
respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at any time before the
maturity date of DMC PN No. 2731. Because petitioner failed to do so, and because the record is bare of any
indication that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to
uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance remains liable to
petitioner under the terms of the assignment made by Philfinance to petitioner.

II.

We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that
Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued DCR No. 10805 with the
following words:

Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above
securities fully assigned to you —.23

The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to
pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with Philfinance and Delta
under DMC PN No. 2731. We read the DCR as a confirmation on the part of Pilipinas that:

(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face
value, to mature on 6 April 1981 and payable to the order of Philfinance;

(2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9
February 1981), holding that Note on behalf and for the benefit of petitioner, at least to the extent
it had been assigned to petitioner by payee Philfinance;24

(3) petitioner may inspect the Note either "personally or by authorized representative", at any
time during regular bank hours; and

(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No.
2731 (or a participation therein to the extent of P307,933.33) "should this Denominated
Custodianship receipt remain outstanding in [petitioner's] favor thirty (30) days after its
maturity."

Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting
Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity
thereof or any other time. We note that both in his complaint and in his testimony before the trial court,
petitioner referred merely to the obligation of private respondent Pilipinas to effect the physical delivery to him
of DMC PN No. 2731.25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary obligation to pay
the amount represented by a portion of the Note assigned to him by Philfinance, appears to be a new theory
constructed only after the trial court had ruled against him. The solidary liability that petitioner seeks to impute
Pilipinas cannot, however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary liability
only when the law or the nature of the obligation requires solidarity," The record here exhibits no express
assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed to us to
any law which imposed such liability upon Pilipinas nor has petitioner argued that the very nature of the
custodianship assumed by private respondent Pilipinas necessarily implies solidary liability under the securities,
custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with
Philfinance and private respondent Delta under DMC PN No. 2731.

We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner
under the terms of the DCR. To the contrary, we find, after prolonged analysis and deliberation, that private
respondent Pilipinas had breached its undertaking under the DCR to petitioner Sesbreño.

We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating
Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the obligation of the
depository was owed, however, to petitioner Sesbreño as beneficiary of the custodianship or depository
agreement. We do not consider that this is a simple case of a stipulation pour autri. The custodianship or
depositary agreement was established as an integral part of the money market transaction entered into by
petitioner with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor
deposited that Note with Pilipinas in order that the thing sold would be placed outside the control of the vendor.
Indeed, the constituting of the depositary or custodianship agreement was equivalent to constructive delivery of
the Note (to the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship
agreements are designed to facilitate transactions in the money market by providing a basis for confidence on
the part of the investors or placers that the instruments bought by them are effectively taken out of the pocket, as
it were, of the vendors and placed safely beyond their reach, that those instruments will be there available to the
placers of funds should they have need of them. The depositary in a contract of deposit is obliged to return the
security or the thing deposited upon demand of the depositor (or, in the presented case, of the beneficiary) of the
contract, even though a term for such return may have been established in the said contract.26 Accordingly, any
stipulation in the contract of deposit or custodianship that runs counter to the fundamental purpose of that
agreement or which was not brought to the notice of and accepted by the placer-beneficiary, cannot be enforced
as against such beneficiary-placer.

We believe that the position taken above is supported by considerations of public policy. If there is any party
that needs the equalizing protection of the law in money market transactions, it is the members of the general
public whom place their savings in such market for the purpose of generating interest revenues.27 The custodian
bank, if it is not related either in terms of equity ownership or management control to the borrower of the funds,
or the commercial paper dealer, is normally a preferred or traditional banker of such borrower or dealer (here,
Philfinance). The custodian bank would have every incentive to protect the interest of its client the borrower or
dealer as against the placer of funds. The providers of such funds must be safeguarded from the impact of
stipulations privately made between the borrowers or dealers and the custodian banks, and disclosed to fund-
providers only after trouble has erupted.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when
petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this connection, that
on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting against
Philfinance PN No. 143-A had not yet taken place. Instead of complying with the demand of the petitioner,
Pilipinas purported to require and await the instructions of Philfinance, in obvious contravention of its
undertaking under the DCR to effect physical delivery of the Note upon receipt of "written instructions"
from petitioner Sesbreño. The ostensible term written into the DCR (i.e., "should this [DCR] remain outstanding
in your favor thirty [30] days after its maturity") was not a defense against petitioner's demand for physical
surrender of the Note on at least three grounds: firstly, such term was never brought to the attention of petitioner
Sesbreño at the time the money market placement with Philfinance was made; secondly, such term runs counter
to the very purpose of the custodianship or depositary agreement as an integral part of a money market
transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted above.
Indeed, in principle, petitioner became entitled to demand physical delivery of the Note held by Pilipinas as
soon as petitioner's money market placement matured on 13 March 1981 without payment from Philfinance.

We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by
arising out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the
thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether
or not Pilipinas itself benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no
moment for present purposes. Prima facie, the damages suffered by petitioner consisted of P304,533.33, the
portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the Note by
compensation, plus legal interest of six percent (6%)per annum containing from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas
may have vis-a-vis Philfinance.

III.

The third principal contention of petitioner — that Philfinance and private respondents Delta and Pilipinas
should be treated as one corporate entity — need not detain us for long.

In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the
trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in
the Petition before us.

Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as
separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to
cite the presence of a common Director — Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all
three (3) companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly
related companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2)
were administered and managed for the benefit of one. There is simply not enough evidence of record to justify
disregarding the separate corporate personalities of delta and Pilipinas and to hold them liable for any assumed
or undetermined liability of Philfinance to petitioner.28

WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No.
15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the
extent that such Decision and Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private
respondent Pilipinas bank is hereby ORDERED to indemnify petitioner for damages in the amount of
P304,533.33, plus legal interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981.
As so modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No
pronouncement as to costs.

SO ORDERED.
Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-7271 August 30, 1957

PHILIPPINE NATIONAL BANK, plaintiff-appellant, 



vs.

JOSE ZULUETA, defendant-appellee.

Natalio M. Balboa and Ramon B. de los Reyes for appellant.



Lorenzo F. Miravite for appellee.

BENGZON, J.:

In the Manila court of first instance, the Philippine National Bank sued the defendant upon a letter of credit and
a draft for the amount of $14,449.15. Although willing to pay the equivalent in pesos of the draft, plus bank
charges, the defendant objected to the 17% excise tax imposed by Republic Act No. 601 which the Bank tried to
collect. Both documents, he contended, had been issued and had matured before the approval of said Act,
therefore the excise tax should not be charged.

After the trial, the court rendered judgment exempting defendant from the 17% excise tax; but ordered him to
deliver to plaintiff the sum of P37,622.11 plus daily interest of P3.9938 on P29,154.55 beginning from January
9, 1953.

The plaintiff appealed, insisting on the right to collect 17% excise or exchange tax. This is the only issue
between the parties now.

For a statement of the facts we may quote from plaintiff's brief. "On October 26, 1948, Defendant-Appellee
applied for a commercial letter of credit with Plaintiff-Appellant, Philippine National Bank (Manila) and was
granted L/C No. 35171 (Exhibit "B") on November 6, 1948, in favor of Otis Elevator Co., 260 Eleventh
Avenue, New York City, U.S.A., for $14,449.15 for the purchase of an electric passenger elevator; on May 17,
1949, and under the said letter of credit (Exhibit "B"), Otis Elevator Co. drew a 90 day sight draft for
$14,449.15 (Exhibit "A") which draft was duly presented to and accepted by Defendant-Appellee on July 6,
1949. Said acceptance matured on October 4, 1949. Upon Defendant-Appellee's signing a 90 day trust receipt
(Exhibit "C") on June 3, 1949, Plaintiff-Appellant released to Defendant-Appellee the covering documents of
the shipment. In the meantime, debit advice (Exhibit "G") was received from Plaintiff-Appellant's New York
Agency to the effect that it advanced or paid the draft (Exhibit "A") to Otis Elevator Co. on May 17, 1949, and
charged Plaintiff-Appellant the sum of $14,467.21 representing the face value of the draft (Exhibit "A") plus
$18.06 as 1/8 of 1% commission. After the maturity date (October 4, 1949) Plaintiff-Appellant presented the
draft to Defendant-Appellee for payment but the latter failed, neglected and refused to pay.

During its special session in January, 1951, Congress passed House Bill No. 1513, now Republic Act No. 601,
approved on March 28, 1951, imposing a 17% special excise tax (otherwise known as foreign exchange tax) on
the value in Philippine peso of foreign exchange sold by the Central Bank of the Philippines or its authorized
agents. Plaintiff-appellant, as any other commercial bank in the Philippines, is an authorized agent of the
Central Bank of the Philippines.

On October 17, 1952, and January 18, 1953, Plaintiff-Appellant sent bills or statements of collection (Exhibits
"D" and "D-1") to Defendant-Appellee but the latter failed and refused to effect payment thereof. In those
statements, the sum of P4,955.74 was included representing the 17% special excise tax on the peso value of the
draft for US $14,449.15 (Exhibit "A"), . . . .

Defendant's application for a letter of credit party read as follows:

Please arrange by cable for the establishment of an Irrevocable Letter of Credit on New York in favor of
Otis Elevator Co., 260 Eleventh Avenue, New York City for account of Ho. Jose C. Zulueta for the sum
of FOURTEEN THOUSAND FOUR HUNDRED FORTY-NINE AND 15/100 ($14,449.15) DOLLARS
against drawn at NINETY DAYS accompanied by shipping documents covering of One COMPLETE
ELECTRIC PASSENGER ELEVATOR . . .

Drafts must be drawn and presented or negotiated not later than May 31, 1949.

IN CONSIDERATION THEREOF, I/we promise and agree to pay you at maturity in Philippine
Currency, the equivalent of the above amount or such portion thereof as may be drawn or paid upon the
faith of said credit, together with your usual charges, and I/we authorize you and your respective
correspondents to pay or to accept drafts under this credit, . . .

And the draft issued thereunder (Exhibit A) was negotiable and addressed to herein defendant as the drawee.

From plaintiff's statement of its position it is not clear whether recovery is demanded upon the letter of credit, or
upon the draft Exhibit A. Plaintiff may, undoubtedly, proceed on either cause of action. (See Art. 571 Code of
Commerce; Sec. 51 Negotiable Instruments Law.)

Had the plaintiff elected to recover on said letter of credit, then it would meet with the doctrines in Araneta vs.
Philippine National Bank, 95 Phil., 160, 50 Off. Gaz., (11) 5350), According to the majority opinion in that
case, plaintiff should receive the equivalent in pesos, on May 17, 1949, of what the New York Agency paid to
Otis Elevator, i.e. $14,467.21 (plus bank fees of course.) According to the minority opinion, the equivalent in
pesos of the same amount of dollars on October 4, 1949. No. 17% tax on both dates. In converting dollars into
pesos, no 17% exchange tax would be imposable, since it was created only in March 1951. The plaintiff knows
the case, for it was a party to it; and anticipating, in this appeal, the obvious conclusions, it insists not so much
on the letter of credit, as on the bill of exchange Exhibit A1 . As stated before, such draft was drawn by Otis
Elevator Co. in New York. It was addressed to defendant as drawee, who is due course accepted it. There is no,
question that upon accepting it, defendant became a party primarily liable2; and the holder (Philippine National
Bank) may sue him, even if there had been no presentation for payment on the day of maturity. (Sec. 70
Negotiable Instruments Law.)

Admittedly, defendant's responsibility is for $14,449.15 due in Manila on October 4, 1949 (plus bank fees). He
is under obligation to deliver such amount in pesos as were the equivalent of $14,449.15. At what rate of
exchange? The rate prevailing on the day of issuance, day of acceptance, day of maturity, the day suit is filed, or
that prevailing on the day judgment is rendered requiring him to pay? Herein lies the center of the controversy.
Appellant will win this appeal only if the rate on the last days above mentioned is held to be the legal rate.

The document is negotiable and is governed by the Negotiable Instruments Law. But this statute does not
certain any express provision on the question. We know the draft is a foreign bill of exchange, because, drawn
in New York, it is payable here. (See. 129 Negotiable Instruments Law.) We also know that although the amount
payable is expressed in dollars — not current money here — it is still negotiable, for it may be discharged with
pesos of equivalent amount3. The problem arises when we try to determine the "equivalent amount", because
the rate of exchange fluctuates from day to day.

There are decisions in America to the effect that, "the rate of exchange in effect at the time the bill should have
been paid" controls. (11 C.J.S. p. 264.)

Such decisions agree with the provisions of the Bills of Exchange Act of England4 and could be taken as
enunciating the correct principle, inasmuch as our Negotiable Instruments Law, practically copied the American
Uniform Negotiable Instruments Law which in turn was based largely on the Bills of Exchange Act of England
of 1882. In fact we practically followed this rule in Westminster Bank vs. K. Nassor, 58 Phil. 855.

There is one decision applying the rate of exchange at the time judgment is entered. (11 C. J. S. p.264.)5

This decision however seems not to have taken into account the Bills of Exchange Act above mentioned. And
we have rejected its view in the Westminster case, supra. Furthermore it related to a bill expressly made payable
in a foreign currency — which is not the case here. And the theory would probably produce undesirable effects
upon commercial documents, for it would make the amount uncertain, the parties to the bill not being able to
foresee the day judgment would be rendered.6

But the appellant argues, the defendant had promised to pay $14,419.15 in dollars; therefore he must be ordered
to pay the sum in dollars at current rates plus 17%.

The argument rests on a wrong premise. Defendant had not promised to pay in dollars. He agreed to pay the
equivalent of $14,419.15 dollars, in Philippine currency 7.

But if we admit that defendant had agreed to pay in dollars, then we have to apply Republic Act No. 529 and
say that his obligation "shall be discharged in Philippine currency measured at the prevailing rates of exchange
at the time the obligation was incurred."

Now then, Zulueta's obligation having been incurred8 before the creation of the 17% tax, it may not be validly
burdened with such tax, because the law imposing it could not be deemed to have impaired obligations already
existing at the time of its approval..

The plaintiff's theory seems to be that in remitting dollars to its New York Agency, after it collects from the
defendant, it has to pay for the said excise tax.9 The trial judge expressed the belief that such amount had been
remitted before the enactment of Republic Act 601, because considering the practice of banks of replenishing
their agencies abroad with necessary funds, he deemed it improbable that the Manila Office of the Bank — in
two years had not reimburse its New York Agency for the amount advanced on account of the draft Exhibit A.
This belief most probably accorded with reality; because as early as May 17, 1949 (Exhibit G) the New York
Agency had "charged" the amount of this draft against the account of the Manila office there, — which means
the Agency had reimbursed itself the amount of the draft out of the funds of the Manila Office then in its
possession (in New York) or coming to its possession afterwards. And it is unbelievable that in two years the
Manila office never had in New York sufficient funds to effect the reimbursement.

In fact, the statement of account rendered by plaintiff to defendant on October 17, 1952, (Exhibit D) enumerated
these charges:
To your acceptance amounting to $14,449.1
5
Plus: Remitter's Commission
18.06
$14,567.2
1
Converted at 3/4 % P29,151.4
3
5% int. 5/17/49-10/19/52-1251 da.
4,995.68
P34,147.1
1
10% comm. on $14,449.15 2,911.51
Documentary stamps 8.70
Air Mail 2.00
17% Excise Tax on P29,151.43 4,955.74
Other charges
3.00

From the above it may be deduced that the amount of the draft had been remitted or paid to the New York
Agency in May 1949, for the reason that Zulueta is charged with remitter's commission" and 5% interest on the
amount of the draft (and such commission) beginning from May 17, 1949. This necessarily impllies that in
accordance with Exhibit G, the New York Agency had been reimbursed of the draft's amount (or such amount
was remitted) on May 17, 1949.10 Now, in May 1949 no 17% exchange tax was payable upon such remittance;
and the Manila office did not pay it. Therefore Zulueta should not pay it too.

In view of the foregoing the judgment will be affirmed, with costs against appellant. So ordered.

Paras, C.J., Padilla, Montemayor and Bautista Angelo, JJ., concur.

Separate Opinions

REYES, A., J., concurring:

Plaintiff in this case seeks reimbursement in Philippine currency for the amount in dollars advanced by it
through its New York agency to meet a draft drawn against defendant and accepted by the latter for a valuable
consideration. Plaintiff's to such reimbursement is not questioned. What is disputed is its pretended right to add
to the amount of the draft the excise tax of 17 % which plaintiff would had to pay to the Government if it were
to remit now to New York the necessary amount of dollars that its agency there had paid on the draft.

I cannot bring myself to believe that it is only now that plaintiff has thought of sending dollars to New York to
replace the amount advanced by its agency. As intimated in the majority opinion and in consonance with good
banking practice, the necessary remittance must have been effected long ago, that is, long before the creation of
the excise tax on foreign exchange in March, 1951. Plaintiff, therefore, could not have paid such tax, and not
having done so it has no right to get reimbursement therefore from defendant.
I do not think that defendant could be legally made to pay more than what plaintiff had actually advanced for
him, aside from commission and other charges, on the theory that the Philippine peso has depreciated in value
with respect to the American dollar. Legally, it has not. The legal rate of exchange between the two currencies is
still two to one. What happened is that with the creation of the excise tax in 1951, it would now be more costly
to remit dollars abroad. But why should plaintiff make that remittance now when, as already stated, it must have
already done so long before the creation of the excise tax on foreign exchange?

Lastly, a debtor cannot be charged with bad faith for refusing to pay that which he should not pay.

FELIX, J., concurring:

The decision rendered in this case, penned by Mr. Justice Cezar Bengzon, perfectly reflects and delivers the
opinion of the majority of this Court and I subscribe to each and every statement made and argument adduced
therein. This being so, it would seem that any concurring or supporting opinion is quite superfluous and I would
not have taken the task of writing further in the matter were it not for the fact that in the dissenting opinion it is
stated that:

It cannot be justly contended that if a debtor had borrowed, say $10,000, the lender should be satisfied
with eight or nine thousand. Yet that is what the majority's decision actually amounts to.

The writer further says that:

the majority opinion has the merit of giving the bank a costly lesson on the advantages of not
considering political influence in the making and collecting of its loans; but I am afraid the experience
will be too quickly forgotten to even palliate the sacrifice of fundamental justice to technical
considerations.

I, certainly, cannot leave these statements pass unanswered.

To begin with, I might say that if any lesson has been given by the majority of this court to the plaintiff bank, it
is not in this case but in the case of Araneta vs. The Philippine National Bank (G.R. No. L-4633, May 31,
1954), cited in the majority decision, where the latter was a party to that case and a similar doctrine was laid
down. Coming now to the bone of contention, I notice that the dissenting Justice views the matter involved in
the controversy as a loan and submits that the question really at issue can be boiled down to the proposition of
"whether it is the lender or the borrower who should bear the added cost of the depreciation of the peso in
relation to the dollar".

In this connection, I might say that defendant's obligation to the plaintiff would have been settled some years
ago were it not for the fact that the Bank insisted in collecting the special excise tax of 17 per cent on foreign
exchange transactions imposed by Republic Act No. 601 which entered into effect on March 28, 1951, and was
not yet in force at the time the obligation of the defendant matured on October 4, 1948. And even if we look at
the case as a loanand apply to the transaction the provisions of Article 312, paragraph 1, of the Code of
Commerce, cited by the dissenting Justice, yet We could not, under the facts and circumstances of the case that
cannot be denied, logically arrive at the same conclusion that he has come to.

And the reason is obvious. In the first place, We have to take into account that the New York agency of
Philippine National Bank and its central office in Manila are not separate and independent entities. That is why
it is the Philippine National Bank (Manila office) and not the New York agency of said Bank that is the plaintiff
in this case. Consequently, any payment made to plaintiffs central office in Manila for obligations that any
debtor may have contracted with said New York agency is and has to be considered as a payment or settlement
of said obligations, there being no need to attain this result that the plaintiff would adjust is accounts with its
agency, or transmit to the latter the amounts received from the debtor.

In the second place, the obligation contracted by the defendant was not to pay $14,419.15 in dollars, but the
equivalent of $14,419.15 dollars, in Philippine currency. So, when defendant's obligation matured on October 4,
1949, the defendant had to pay to the Bank not the sum of $14,467.21 representing the face value of the draft
Exhibit A, plus $18.06 as 1/8 of 1 per cent commission, but its equivalent in pesos at the time of such maturity,
and had the defendant failed to satisfy then his obligation, he could be held liable to pay in addition thereof, the
corresponding interests for the period of default and nothing else. And that is precisely what defendant is willing
to pay.

From the foregoing, I hope to have made clear my stand on the matter.

REYES, J.B.L., dissenting:

As I view it, the question before this court is whether it is the lender or the defaulting borrower who should bear
the added cost of the depreciation of the peso in relation to the dollar.

When in 1949 the Philippine National Bank remitted to the Otis Elevator Co. the $14,449.15 for the account of
Zulueta, the Bank, in effect, loaned to Zulueta said amount on the strength of his express engagement to "pay at
maturity in Philippine Currency, the equivalent of the above amount," which was a promise to pay such amount
in Philippine pesos as could be converted into $14,449.15. There is no question that Zulueta failed to do so, and
has refused to do so up to the present. In the meantime, in 1951, the Legislature enacted Rep. Act No. 601,
imposing a 17% special excise tax on foreign exchange transactions, so that thereafter one had to pay 234 pesos
for every $100, instead of P200 as heretofore. Should Zulueta be required to pay for the dollars at the new rate?

Since Zulueta's obligation is measured in terms of U.S. dollars that have increased in value vis-a-vis the peso,
Art. 312, par. 1, of the Code of Commerce, which was the law then in force, must be read into the contract. It
provides:

If the loan consists of money, the debtor shall pay it by returning an amount equal to that received, in
accordance with the legal value which the money may have at the time of the return, unless the kind of
money in which the payment is to be made has been stipulated, in which case the change which its value
may suffer shall be to the detriment or for the benefit of the lender. (Emphasis supplied)

The majority decision, in upholding the contention that Zulueta is not chargeable with the 17% tax, virtually
authorizes just the contrary; and permits the defaulting borrower to repay an amount in pesos that, in violation
of the law and his engagement, can not be converted into the same amount of dollars loaned to him. I believe it
is contrary to all elemental justice and good faith to enable a borrower to return to his creditor less than the
amount borrowed, specially taking into account that Zulueta, by his obdurate refusal to pay a just debt, is a
debtor in bad faith who is responsible for any subsequent damages suffered by his creditor, even if due to
fortuitous event.
Applicable here are the considerations in Hawes vs. Woolcock (26 Wis. 629, 635), quoted with approval
in Engel vs. Mariano Velasco & Co., 47 Phil. 115, 143:

In Hawes vs. Woolcock (26 Wis., 629, 635), the court said:

"Perhaps a strict application of logical reasoning to the question would lead to the result that the
premium should be estimated at the rate when the note fell due. That was when the money should have
been paid, and when the default in performing the contract occurred. This conclusion would be
supported by the analogy derived from the rule of damages on contracts to deliver specific articles,
fixing the market price at the time when they ought to have been delivered as the criterion. This rule
might sometimes be to the advantage of the holder of the note, as in the present case. In other cases,
where the premium was less at the time the note became due than at the time of trial, it would be to his
detriment. And in view of these uncertainties and fluctuations in the rate, upon grounds of policy as well
as for its tendency to do as complete justice between the parties as is possible, we have come to the
conclusion that the true rule in such cases is to give judgment for such an amount as will, at the time of
the judgment, purchase the amount due on the note in the funds or currency in which it is payable.

The crucial point is that the Bank's action is not for damages, but for specific performance of Zulueta's
obligation. While payable in Philippine pesos, it was actually one to pay a definite sum in United States dollars,
since he promised to pay an equivalent amount. The failure to specify any fixed number of pesos, and the
omission of any reference to any rate of exchange, is proof that the parties had in mind the restoration to the
Bank of the value of the dollars it had advanced. In other words, Zulueta engaged to return to the Bank so many
Philippine pesos as could be converted into $14,449.15; and that is what the Bank asks him to do. It can not be
justly contended that if a debtor had borrowed, say, ten thousand dollars, the lender should be satisfied with
eight or nine thousand. Yet that is what the majority's decision actually amounts to.

I see no point in determining the rate of dollar-peso exchange at the date of maturity or of the constitution of the
obligation, since Zulueta did not engage to pay any definite amount of pesos, but so many as would be needed
to make up $14,449.15. And as Zulueta is being required to comply with a specific promise, there is no
relevancy in whether or not the main office of the Bank has or has not remitted the dollars to its American
agency; after all, the two part are of the same institution. Anyway, if the dollars have not been remitted, the
amount that Zulueta is now sentenced to pay will not permit a remittance of the same number of dollars that the
Bank advanced for his account. If they were heretofore remitted, the funds of the Bank in Manila have been
diminished pro tanto, and they can not be replenished to their original level in terms of dollars unless Zulueta is
required to pay the exchange tax.

Of course, the majority opinion has the merit of giving the Bank a costly lesson on the advantages of not
considering political influence in the making and collecting of its loans; but I am afraid the experience will be
too quickly forgotten to even palliate the sacrifice of fundamental justice to technical considerations.

For the foregoing reasons, I dissent.

Labrador, Concepcion and Endencia, JJ., concur.


Republic of the Philippines

Supreme Court

Manila

THIRD DIVISION

PHILIPPINE NATIONAL BANK, G.R. No. 170325

Petitioner,

Present:

YNARES-SANTIAGO, J.,

Chairperson,

- versus - AUSTRIA-MARTINEZ,

CHICO-NAZARIO,

NACHURA, and

REYES, JJ.

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[1] of the
Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC).[2]

The Facts

The facts as borne by the records are as follows:

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

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

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

It was PEMSLAs policy not to approve applications for loans of members with outstanding debts. To
subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their
outstanding loan accounts. They took out loans in the names of unknowing members, without the knowledge or
consent of the latter. The PEMSLA checks issued for these loans were then given to the spouses for
rediscounting. The officers carried this out by forging the indorsement of the named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and
delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited by the
spouses to their account.

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

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

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

RTC Disposition

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

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

In an Order dated January 12, 2000, the RTC denied PNBs motion to dismiss.
In its Answer,[5] PNB claimed it is not liable for the checks which it paid to the PEMSLA account
without any indorsement from the payees. The bank contended that spouses Rodriguez, the makers, actually did
not intend for the named payees to receive the proceeds of the checks. Consequently, the payees were
considered as fictitious payees as defined under the Negotiable Instruments Law (NIL). Being checks made to
fictitious payees which are bearer instruments, the checks were negotiable by mere delivery. PNBs Answer
included its cross-claim against its co-defendants PEMSLA and the MCP, praying that in the event that
judgment is rendered against the bank, the cross-defendants should be ordered to reimburse PNB the amount it
shall pay.

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

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

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

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

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


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

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

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


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

(e) Costs of suit.

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

CA Disposition

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

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

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

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


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

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

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

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

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

1. Actual damages in the amount of P2,345,804 with interest at 6% per


annum from 14 May 1999 until fully paid;

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

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

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

SO ORDERED.[9]

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

Hence, the present recourse under Rule 45.

Issues

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

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

Our Ruling

Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality to
the prejudice of innocent parties. A court discovering an erroneous judgment before it becomes final may, motu
proprio or upon motion of the parties, correct its judgment with the singular objective of achieving justice for
the litigants.[10]
However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order. The Court
does not sanction careless disposition of cases by courts of justice. The highest degree of diligence must go into
the study of every controversy submitted for decision by litigants. Every issue and factual detail must be closely
scrutinized and analyzed, and all the applicable laws judiciously studied, before the promulgation of every
judgment by the court. Only in this manner will errors in judgments be avoided.

Now to the core of the petition.

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

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

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

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

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

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

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

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

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


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

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

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


supplied)

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

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


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

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

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

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

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

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

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

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

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

Consequently, a transferees lapse of wary vigilance, disregard of suspicious


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

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

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

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

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

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

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

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers
accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from the named
payees. It bears stressing that order instruments can only be negotiated with a valid indorsement.
A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the
payee is apparently grossly negligent in its operations.[21] This Court has recognized the unique public interest
possessed by the banking industry and the need for the people to have full trust and confidence in their banks.
[22] For this reason, banks are minded to treat their customers accounts with utmost care, confidence, and

honesty.[23]

In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the
drawer and to pay the check strictly in 

accordance with the drawers instructions, i.e., to the named payee in the check. It should charge to the drawers
accounts only the payables authorized by the latter. Otherwise, the drawee will be violating the instructions of
the drawer and it shall be liable for the amount charged to the drawers account.[24]

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

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

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

Banks handle daily transactions involving millions of pesos. By the very nature of their
work the degree of responsibility, care and trustworthiness expected of their employees and
officials is far greater 

than those of ordinary clerks and employees. For obvious reasons, the banks are expected to
exercise the highest degree of diligence in the selection and supervision of their employees.[26]
PNBs tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of
checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank employees that caused the
loss, the bank should be held liable.[27]

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

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

One Last Note

We note that the RTC failed to thresh out the merits of PNBs cross-claim against its co-defendants
PEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in answer to the
complaint of respondents-spouses and cross-claim of PNB. The Rules expressly provide that failure to file an
answer is a ground for a declaration that defendant 

is in default.[28] Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file responsive
pleadings. Verily, the RTC dismissal of PNBs cross-claim has no basis. Thus, this judgment shall be without
prejudice to whatever action the bank might take against its co-defendants in the trial court.

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

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

SO ORDERED.
RUBEN T. REYES

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson

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

Associate Justice Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice
ATT E S TAT I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson

C E R T I FI CAT I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Courts Division.
REYNATO S. PUNO

Chief Justice

Republic of the Philippines



SUPREME COURT

Manila

EN BANC

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

ANG TEK LIAN, petitioner, 



vs.

THE COURT OF APPEALS, respondent.

Laurel, Sabido, Almario and Laurel for petitioner.



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

BENGZON, J.:

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

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

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

Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for decision is
whether under the facts found, estafa had been accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling committed "By post
dating a check, or issuing such check in payment of an obligation the offender knowing that at the time he had
no funds in the bank, or the funds deposited by him in the bank were not sufficient to cover the amount of the
check, and without informing the payee of such circumstances".

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Republic of the Philippines



SUPREME COURT

Manila

EN BANC

G.R. No. L-18103 June 8, 1922

PHILIPPINE NATIONAL BANK, plaintiff-appellee, 



vs.

MANILA OIL REFINING & BY-PRODUCTS COMPANY, INC., defendant-appellant.

Antonio Gonzalez for appellant.



Roman J. Lacson for appellee.

Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs, Mc Donough and Johnson; Julian
Wolfson; Ross and Lawrence; Francis B. Mahoney, and Jose A. Espiritu, amici curiae.

MALCOLM, J.:

The question of first impression raised in this case concerns the validity in this jurisdiction of a provision in a
promissory note whereby in case the same is not paid at maturity, the maker authorizes any attorney to appear
and confess judgment thereon for the principal amount, with interest, costs, and attorney's fees, and waives all
errors, rights to inquisition, and appeal, and all property exceptions.

On May 8, 1920, the manager and the treasurer of the Manila Oil Refining & By-Products Company, Inc.,
executed and delivered to the Philippine National Bank, a written instrument reading as follows:
RENEWAL. 

P61,000.00

MANILA, P.I., May 8, 1920.

On demand after date we promise to pay to the order of the Philippine National Bank sixty-one
thousand only pesos at Philippine National Bank, Manila, P.I.

Without defalcation, value received; and to hereby authorize any attorney in the Philippine
Islands, in case this note be not paid at maturity, to appear in my name and confess judgment for
the above sum with interest, cost of suit and attorney's fees of ten (10) per cent for collection, a
release of all errors and waiver of all rights to inquisition and appeal, and to the benefit of all
laws exempting property, real or personal, from levy or sale. Value received. No. ____ Due ____

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) VICENTE SOTELO, 



Manager.

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) RAFAEL LOPEZ,



Treasurer

The Manila Oil Refining and By-Products Company, Inc. failed to pay the promissory note on demand. The
Philippine National Bank brought action in the Court of First Instance of Manila, to recover P61,000, the
amount of the note, together with interest and costs. Mr. Elias N. Rector, an attorney associated with the
Philippine National Bank, entered his appearance in representation of the defendant, and filed a motion
confessing judgment. The defendant, however, in a sworn declaration, objected strongly to the unsolicited
representation of attorney Recto. Later, attorney Antonio Gonzalez appeared for the defendant and filed a
demurrer, and when this was overruled, presented an answer. The trial judge rendered judgment on the motion
of attorney Recto in the terms of the complaint.

The foregoing facts, and appellant's three assignments of error, raise squarely the question which was suggested
in the beginning of this opinion. In view of the importance of the subject to the business community, the advice
of prominent attorneys-at-law with banking connections, was solicited. These members of the bar responded
promptly to the request of the court, and their memoranda have proved highly useful in the solution of the
question. It is to the credit of the bar that although the sanction of judgement notes in the Philippines might
prove of immediate value to clients, every one of the attorneys has looked upon the matter in a big way, with the
result that out of their independent investigations has come a practically unanimous protest against the
recognition in this jurisdiction of judgment notes.1

Neither the Code of Civil Procedure nor any other remedial statute expressly or tacitly recognizes a confession
of judgment commonly called a judgment note. On the contrary, the provisions of the Code of Civil Procedure,
in relation to constitutional safeguards relating to the right to take a man's property only after a day in court and
after due process of law, contemplate that all defendants shall have an opportunity to be heard. Further, the
provisions of the Code of Civil Procedure pertaining to counter claims argue against judgment notes, especially
as the Code provides that in case the defendant or his assignee omits to set up a counterclaim, he cannot
afterwards maintain an action against the plaintiff therefor. (Secs. 95, 96, 97.) At least one provision of the
substantive law, namely, that the validity and fulfillment of contracts cannot be left to the will of one of the
contracting parties (Civil Code, art. 1356), constitutes another indication of fundamental legal purposes.

The attorney for the appellee contends that the Negotiable Instruments Law (Act No. 2031) expressly
recognizes judgment notes, and that they are enforcible under the regular procedure. The Negotiable
Instruments Law, in section 5, provides that "The negotiable character of an instrument otherwise negotiable is
not affected by a provision which ". . . (b) Authorizes a confession of judgment if the instrument be not paid at
maturity." We do not believe, however, that this provision of law can be taken to sanction judgments by
confession, because it is a portion of a uniform law which merely provides that, in jurisdiction where judgment
notes are recognized, such clauses shall not affect the negotiable character of the instrument. Moreover, the
same section of the Negotiable Instruments. Law concludes with these words: "But nothing in this section shall
validate any provision or stipulation otherwise illegal."

The court is thus put in the position of having to determine the validity in the absence of statute of a provision in
a note authorizing an attorney to appear and confess judgment against the maker. This situation, in reality, has
its advantages for it permits us to reach that solution which is best grounded in the solid principles of the law,
and which will best advance the public interest.

The practice of entering judgments in debt on warrants of attorney is of ancient origin. In the course of time a
warrant of attorney to confess judgement became a familiar common law security. At common law, there were
two kinds of judgments by confession; the one a judgment by cognovit actionem, and the other by
confession relicta verificatione. A number of jurisdictions in the United States have accepted the common law
view of judgments by confession, while still other jurisdictions have refused to sanction them. In some States,
statutes have been passed which have either expressly authorized confession of judgment on warrant of
attorney, without antecedent process, or have forbidden judgments of this character. In the absence of statute,
there is a conflict of authority as to the validity of a warrant of attorney for the confession of judgement. The
weight of opinion is that, unless authorized by statute, warrants of attorney to confess judgment are void, as
against public policy.

Possibly the leading case on the subject is First National Bank of Kansas City vs. White ([1909], 220 Mo., 717;
16 Ann. Cas., 889; 120 S. W., 36; 132 Am. St. Rep., 612). The record in this case discloses that on October 4,
1990, the defendant executed and delivered to the plaintiff an obligation in which the defendant authorized any
attorney-at-law to appear for him in an action on the note at any time after the note became due in any court of
record in the State of Missouri, or elsewhere, to waive the issuing and service of process, and to confess
judgement in favor of the First National Bank of Kansas City for the amount that might then be due thereon,
with interest at the rate therein mentioned and the costs of suit, together with an attorney's fee of 10 per cent and
also to waive and release all errors in said proceedings and judgment, and all proceedings, appeals, or writs of
error thereon. Plaintiff filed a petition in the Circuit Court to which was attached the above-mentioned
instrument. An attorney named Denham appeared pursuant to the authority given by the note sued on, entered
the appearance of the defendant, and consented that judgement be rendered in favor of the plaintiff as prayed in
the petition. After the Circuit Court had entered a judgement, the defendants, through counsel, appeared
specially and filed a motion to set it aside. The Supreme Court of Missouri, speaking through Mr. Justice
Graves, in part said:

But going beyond the mere technical question in our preceding paragraph discussed, we come to a
question urged which goes to the very root of this case, and whilst new and novel in this state, we do not
feel that the case should be disposed of without discussing and passing upon that question.

xxx xxx xxx


And if this instrument be considered as security for a debt, as it was by the common law, it has never so
found recognition in this state. The policy of our law has been against such hidden securities for debt.
Our Recorder's Act is such that instruments intended as security for debt should find a place in the
public records, and if not, they have often been viewed with suspicion, and their bona fides often
questioned.

Nor do we thing that the policy of our law is such as to thus place a debtor in the absolute power of his
creditor. The field for fraud is too far enlarged by such an instrument. Oppression and tyranny would
follow the footsteps of such a diversion in the way of security for debt. Such instruments procured by
duress could shortly be placed in judgment in a foreign court and much distress result therefrom.

Again, under the law the right to appeal to this court or some other appellate court is granted to all
persons against whom an adverse judgment is rendered, and this statutory right is by the instrument
stricken down. True it is that such right is not claimed in this case, but it is a part of the bond and we
hardly know why this pound of flesh has not been demanded. Courts guard with jealous eye any contract
innovations upon their jurisdiction. The instrument before us, considered in the light of a contract,
actually reduces the courts to mere clerks to enter and record the judgment called for therein. By our
statute (Rev. St. 1899, sec. 645) a party to a written instrument of this character has the right to show a
failure of consideration, but this right is brushed to the wind by this instrument and the jurisdiction of
the court to hear that controversy is by the whose object is to oust the jurisdiction of the courts are
contrary to public policy and will not be enforced. Thus it is held that any stipulation between parties to
a contract distinguishing between the different courts of the country is contrary to public policy. The
principle has also been applied to a stipulation in a contract that a party who breaks it may not be sued,
to an agreement designating a person to be sued for its breach who is nowise liable and prohibiting
action against any but him, to a provision in a lease that the landlord shall have the right to take
immediate judgment against the tenant in case of a default on his part, without giving the notice and
demand for possession and filing the complaint required by statute, to a by-law of a benefit association
that the decisions of its officers on claim shall be final and conclusive, and to many other agreements of
a similar tendency. In some courts, any agreement as to the time for suing different from time allowed
by the statute of limitations within which suit shall be brought or the right to sue be barred is held void.

xxx xxx xxx

We shall not pursue this question further. This contract, in so far as it goes beyond the usual provisions
of a note, is void as against the public policy of the state, as such public policy is found expressed in our
laws and decisions. Such agreements are iniquitous to the uttermost and should be promptly condemned
by the courts, until such time as they may receive express statutory recognition, as they have in some
states.

xxx xxx xxx

From what has been said, it follows that the Circuit Court never had jurisdiction of the defendant, and
the judgement is reversed.

The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A. [N. S.], 956; 75 S.E., 65; Ann.
Cas. [1914-A], 640), is another well-considered authority. The notes referred to in the record contained waiver
of presentment and protest, homestead and exemption rights real and personal, and other rights, and also the
following material provision: "And we do hereby empower and authorize the said A. B. Farquhar Co. Limited,
or agent, or any prothonotary or attorney of any Court of Record to appear for us and in our name to confess
judgement against us and in favor of said A. B. Farquhar Co., Limited, for the above named sum with costs of
suit and release of all errors and without stay of execution after the maturity of this note." The Supreme Court of
West Virginia, on consideration of the validity of the judgment note above described, speaking through Mr.
Justice Miller, in part said:

As both sides agree the question presented is one of first impression in this State. We have no statutes, as
has Pennsylvania and many other states, regulating the subject. In the decision we are called upon to
render, we must have recourse to the rules and principles of the common law, in force here, and to our
statute law, applicable, and to such judicial decisions and practices in Virginia, in force at the time of the
separation, as are properly binding on us. It is pertinent to remark in this connection, that after nearly
fifty years of judicial history this question, strong evidence, we think, that such notes, if at all, have
never been in very general use in this commonwealth. And in most states where they are current the use
of them has grown up under statutes authorizing them, and regulating the practice of employing them in
commercial transactions.

xxx xxx xxx

It is contended, however, that the old legal maxim, qui facit per alium, facit per se, is as applicable here
as in other cases. We do not think so. Strong reasons exist, as we have shown, for denying its
application, when holders of contracts of this character seek the aid of the courts and of their execution
process to enforce them, defendant having had no day in court or opportunity to be heard. We need not
say in this case that a debtor may not, by proper power of attorney duly executed, authorize another to
appear in court, and by proper endorsement upon the writ waive service of process, and confess
judgement. But we do not wish to be understood as approving or intending to countenance the practice
employing in this state commercial paper of the character here involved. Such paper has heretofore had
little if any currency here. If the practice is adopted into this state it ought to be, we think, by act of the
Legislature, with all proper safeguards thrown around it, to prevent fraud and imposition. The policy of
our law is, that no man shall suffer judgment at the hands of our courts without proper process and a day
to be heard. To give currency to such paper by judicial pronouncement would be to open the door to
fraud and imposition, and to subject the people to wrongs and injuries not heretofore contemplated. This
we are unwilling to do.

A case typical of those authorities which lend support to judgment notes is First National Bank of Las Cruces
vs. Baker ([1919], 180 Pac., 291). The Supreme Court of New Mexico, in a per curiam decision, in part, said:

In some of the states the judgments upon warrants of attorney are condemned as being against public
policy. (Farquhar and Co. vs. Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas.
[1914 A]. 640, and First National Bank of Kansas City vs. White, 220 Mo., 717; 120 S. W., 36; 132 Am.
St. Rep., 612; 16 Ann. Cas., 889, are examples of such holding.) By just what course of reasoning it can
be said by the courts that such judgments are against public policy we are unable to understand. It was a
practice from time immemorial at common law, and the common law comes down to us sanctioned as
justified by the reason and experience of English-speaking peoples. If conditions have arisen in this
country which make the application of the common law undesirable, it is for the Legislature to so
announce, and to prohibit the taking of judgments can be declared as against the public policy of the
state. We are aware that the argument against them is that they enable the unconscionable creditor to
take advantage of the necessities of the poor debtor and cut him off from his ordinary day in court. On
the other hand, it may be said in their favor that it frequently enables a debtor to obtain money which he
could by no possibility otherwise obtain. It strengthens his credit, and may be most highly beneficial to
him at times. In some of the states there judgments have been condemned by statute and of course in that
case are not allowed.

Our conclusion in this case is that a warrant of attorney given as security to a creditor accompanying a
promissory note confers a valid power, and authorizes a confession of judgment in any court of
competent jurisdiction in an action to be brought upon said note; that our cognovit statute does not cover
the same field as that occupied by the common-law practice of taking judgments upon warrant of
attorney, and does not impliedly or otherwise abrogate such practice; and that the practice of taking
judgments upon warrants of attorney as it was pursued in this case is not against any public policy of the
state, as declared by its laws.

With reference to the conclusiveness of the decisions here mentioned, it may be said that they are based on the
practice of the English-American common law, and that the doctrines of the common law are binding upon
Philippine courts only in so far as they are founded on sound principles applicable to local conditions.

Judgments by confession as appeared at common law were considered an amicable, easy, and cheap way to
settle and secure debts. They are a quick remedy and serve to save the court's time. They also save the time and
money of the litigants and the government the expenses that a long litigation entails. In one sense, instruments
of this character may be considered as special agreements, with power to enter up judgments on them, binding
the parties to the result as they themselves viewed it.

On the other hand, are disadvantages to the commercial world which outweigh the considerations just
mentioned. Such warrants of attorney are void as against public policy, because they enlarge the field for fraud,
because under these instruments the promissor bargains away his right to a day in court, and because the effect
of the instrument is to strike down the right of appeal accorded by statute. The recognition of such a form of
obligation would bring about a complete reorganization of commercial customs and practices, with reference to
short-term obligations. It can readily be seen that judgement notes, instead of resulting to the advantage of
commercial life in the Philippines might be the source of abuse and oppression, and make the courts involuntary
parties thereto. If the bank has a meritorious case, the judgement is ultimately certain in the courts.

We are of the opinion that warrants of attorney to confess judgment are not authorized nor contemplated by our
law. We are further of the opinion that provisions in notes authorizing attorneys to appear and confess
judgments against makers should not be recognized in this jurisdiction by implication and should only be
considered as valid when given express legislative sanction.

The judgment appealed from is set aside, and the case is remanded to the lower court for further proceedings in
accordance with this decision. Without special finding as to costs in this instance, it is so ordered.

Araullo, C.J., Avanceña, Villamor, Ostrand, Johns and Romualdez, JJ., concur.

Footnotes

1MEMORANDA OF "AMICI CURIAE"

Attorney Thos. L. Hartigan, of Hartigan and Welch, states:


"Though we are attorneys for two of the large banks here and keenly interested in the
introduction of any improvements that would make for simplication of procedure and rapidity of
practice, we cannot favor the introduction of confessions of judgment in the Philippine islands.
In our opinion, it would open the doors to fraud to an extent that would more than
counterbalance any advantages of its use.

"With our lack of system in recording judgments and with the practice of keeping merchants'
books in various foreign languages, there would be ample opportunity for a debtor to make
preferences by confessions of judgment which could not be discovered by the creditors until too
late and which would be nearly impossible to set aside even when discovered in time.

"Although, as representatives of the banks, we are representing the creditor class, we believe the
introduction of confessions of judgment would ultimately cause much more loss than benefit to
that class."

Attorney Clyde A. DeWitt, of Fisher and DeWitt, states:

"There is no statutory sanction in this jurisdiction for such provisions in negotiable instruments.
Section 5 (b) of the Negotiable Instruments Law does not constitute such sanction because (1) it
merely provides that such clauses will not affect the negotiable character of the instrument, and
(2) it concludes with language showing that the Legislature did not intend thereby to validate any
provision otherwise unlawful. The language is: 'But nothing in this section shall validate any
provision or stipulation otherwise illegal.'

"The question then is whether or not, in the absence of express legislative sanction, such
warrants of attorney are valid. There are not many American cases in which this precise question
has been considered, and in those cases in which the question has been raised, the reasoning of
the courts has been colored by the fact that the commercial use of these warrants of attorney as
security for debt was sanctioned at common law, and the procedural statutes are held to be
merely cumulative and not in derogation of the common law remedies. We, of course, have no
such situation here.

"The cases are collected in a note to First National Bank vs. White (220 Mo., 717), found in 16
Ann. Cas., 893, and it is there shown that in Missouri and Kansas such provisions are held to be
void as against the public policy of the State as expressed in its laws and the decisions of its
courts, while in Colorado and Illinois their validity was upheld as a familiar common-law
security not affected by the procedural statutes. Yet it is there pointed out that in Kahn vs. Lesser
(97 Wis., 217, 72 N.W., 739), the court, in referring to a judgment by confession under warrant
of attorney in a promissory note, said:

"'The judgment in this case must stand, if at all, by the authority of the statute. The
proceeding by which it was entered was outside and in derogation of the common-law
practice of courts; and the statute, as well as the proceedings under it, must be strictly
construed.'"

"In Iowa, in an early case, McClish vs. Manning (3 Green, 233), the validity of these warrants of
attorney was upheld, referring to a statute authorizing any person to confess a judgment, by
himself or his attorney. In a later decision, Hamilton vs. Schoenberger (47 Ilowa, 385), it was
expressly held that such a provision, in a note could not be enforced in the courts of that State,
and was not authorized or contemplated by its laws. And in Tolman vs. Jansen (106 Iowa, 455), it
was held that such a provision, being void, would not affect the negotiability of a note, even
though its effect would be to make uncertain the time of payment.

"The reasoning in First National Bank vs. White, supra, is persuasive. The court there held that
these warrants of attorney are void as against the public policy of the state on the ground, first,
that their effect is to enlarge the field for fraud; second, that under such an instrument the
promissor bargains away his right to his day in court; third, that the effect of the instrument is to
strike down the right to appeal accorded by statute, and, fourth, that there was no provision for
the public recording of such an instrument if regarded as a security for a debt.

"It seems to me that on the precise grounds stated in the White case, these warrants of attorney
should be held void as against public policy in this jurisdiction. If given effect, they bargain
away the jurisdiction of the courts to try and determine the liability of the maker of the note on
its merits. To uphold them would be to facilitate the operations of usurers, the collection of
gambling debts, and would make difficult, if not impossible under our procedure, the setting
aside of judgments entered in virtue thereof where the execution of the instrument was obtained
by fraud, duress, or where there had been an entire failure of consideration. I can think of no
advantage which would result to the commercial world from upholding these warrants of
attorney which would outweigh the foregoing considerations."

Attorney e. Arthur Perkins, of Perkins and Kincaid, states:

"Leaving aside entirely the legal considerations involved, I feel that there is only one answer to
your inquiry, and that is, that the best interests of the commercial life of the Philippines require
the non-recognition of such a form of judgment note. Feeling that you would want to know the
reasons which impell me to adopt such a conclusion, I will say briefly that if the Supreme Court
should, by a decision, recognize such a judgment note and thereby place the stamp of approval
upon transactions of such a nature, the entire business population of the Philippine Islands would
be justified in their future transactions with debtors in requiring, in all instances, the execution of
notes of a similar tenor, with the consequence that the debtor would thereby be deprived, to all
intents and purposes, upon ignorant debtors. It will prove a serious drawback to the campaign
being now waged against usury.

"There is the further fear that the banks and money lenders having accounts now outstanding will
immediately require every debtor to execute that form of note and to refuse further extensions of
credit unless sit is done, which the debtor under the stress of circumstances will be compelled to
accept, amounting in effect to duress.

"The recognition of such a form of obligation would be so revolutionary in character as to bring


about a complete reorganization of commercial customs and practices with reference to short-
term obligations.

"Having in mind that the Philippine National Bank is practically the only institution which can
assist the farmers and agriculturists, the practice of requiring a judgment note would place the
latter wholly at the mercy of the bank, and this is stated without any reflection on the bank, but
merely to point out one of the consequent evils which will necessarily follow if the practice
should receive the high judicial sanction which a judgment of the Supreme Court would
necessarily give to it.
"Another feature which occurs to me is that where any new enterprise is being launched, it is
universally the custom for such company to arrange with some banking institution for credit
facilities, over and above the capital with which it brings business. Should it become the custom
here to require the execution of so-called judgment notes, organizers of corporations,
partnerships and the like, who have in mind to secure additional working capital or credit
facilities from banks, will be very reluctant to put their funds into any enterprises which could be
destroyed without warning by the creditor exercising the rights which that form of transaction
would give him. This is would act therefore as a deterrent to new enterprises and the
development of industry through individual initiative and with private funds.

"Let us take a very simple illustration of his. Suppose that you and I should form a partnership,
with a capital of P50,000 to buy hemp and , in connection with our business, we went to some
banking institution for the purpose of securing credit facilities, as is customary, in the conduct of
our business. Let us then suppose that the bank, taking into consideration the capital which we
ourselves had furnished and our standing in the community, was willing to allow us a credit in
the further sum of P50,000 upon our signing a so-called judgment note. Would not you and I
consider a long time before we would so far obligate ourselves as to place it in the power of the
bank to send their attorney over to court, upon the least provocation or at the first unfavorable
rumor, and to confess judgment in our names, which would permit the sheriff to close us out
without even an opportunity to be heard?

"The sum and substance of the whole proposition is that such a practice is contrary to good
morals."

Attorney David C. Johnson, of Gibbs, McDonough and Johnson, states:

"It seems that under the common law a confession of judgment was only allowable by the
defendant himself, either before or after appearance and answer. The confession of judgment by
warrant of attorney is a statutory development (15 R.C.L., 656, 657; 17 Am. and Eng. Encyc. of
Law [2d ed.], 765; Pl. and Pr., 973-975; Masson vs. Ward, 80 Vt., 290; 130 A. S. R., 987,988).

"The procedure contemplated in the note quoted in your letter is contrary to that contemplated in
our code of procedure, which gives to all defendants an opportunity at least to be heard. An
action on the note in question could be so presented that the defendant would never be
summoned or notified, since an appearance and confession of judgment might be filed
simultaneously. We believe that this procedure should not be recognized in this jurisdiction by
implication, but should have legislative sanction with the rights of the defendant amply
safeguarded. We believe that section 5 of Act No. 2031 does not of itself sanction any of the acts
mentioned in that section, but is only a statement regarding the negotiable character of the
instrument. Subsection A of section 5 states that the authority to sell collateral security does not
affect negotiability. As we understand the decision of the Supreme Court in the case of Mahoney
vs. Tuason(39 Phil., 952), the creditor in this jurisdiction is not authorized by law to sell
collateral security except in the manner provided in section 14 of Act No. 1508. This would seem
to reinforce our opinion.

"There are some favorable features of a judgment note or warrant for confession of judgment,
but we believe that there are many objections which outweigh any of the advantages. Forgery
and usury are more prevalent in these Islands than in the United States. The sanctioning of this
procedure would add an additional weapon to the money lender who desires to overreach his
debtor.

"We have delayed answering your letter in order that we might consult our Mr. Gibbs, who
returned from Baguio yesterday.

"The foregoing is the consensus of opinion of the member of this firm."

Attorney Julian Wolfson states:

"It is assumed that the only question propounded is :

"'Admitting that there may be some doubt, as to a correct solution, which solution, the
recognition of a confession of judgment, or a non-recognition of a confession of judgment, would
be for the best interest of the commercial life of the Philippines? and that no opinion is required
upon the incidental questions previously asked, as same have already been determined by an
examination of such authorities as: 23 Cyc., pp. 699, 701-2-3-5-6-7, 723-5; 6 C. J., pp. 645-6
(Notes 35 & 42); 8 C. J., p. 128 (Notes 43-47); 12 C. J., p. 418 (Note 37); and such leading
textbooks as 'Brannan's Negotiable Instruments Law' and 'Selover on Negotiable Instruments.'
"Everyone is entitled to 'his day in court.' This right may be waved after an opportunity has been
given to exercise the right, but must not and cannot be taken away before an opportunity has
been given to exercise the right.

"The ordinary ship's bill of lading and the ordinary fire and marine insurance policy are generally
printed on forms prepared by the carrier and the insurer respectively, and generally contain a
clause making it a condition precedent to the institution of an action to first submit the matter to
a board of arbitration. The Supreme Court has never recognized this clause. The reasons are
stated in the opinions. Once submitted to arbitration, then another question is raised.

"Special defenses to written instruments are common. Need we do more than cite the following
cases: Maulini vs. Serrano (28 Phil., 640); Henry W. Peabody and Co. vs. Bromfield and Ross
(38 Phil., 841); Cuyugan vs. Santos (34 Phil., 100; 39 Phil., 970).

"If the judgment note (this term is used throughout for brevity and as it is the recognized term) is
to be recognized, what chance has defendant of defending as did the defendants in the above
cited cases? Non!

"Often a promissory note is a mere formality taken by a bank as evidence of indebtedness, while
the real indebtedness may be for a superior or inferior amount incurred by way of overdraft,
letters of credit outstanding, acceptances to mature, or a thousand other forms of banking credit.
Such "judgment notes" are generally made payable on demand. In the case at bar, the note is
made payable on demand. The real indebtedness may be partially paid, or the liquidation may be
going along too slow to suit the bank and then use is made of the judgment note. The defendant
might have perfect defense except for the judgment note. Would not article 1269 of the Civil
Code here apply?

"The 'judgment notes,' is not once in a thousand times signed at the time of receiving money
from the bank. The indebtedness represented thereby is incurred in prior transactions, the
obligation became past due and the bank, as a forcible measure, produces one of these 'judgment
notes,' when the debtor is absolutely helpless, and says 'Sign on the dotted line' and the debtor
has no option, he signs. The minds of the parties never met. The debtor owes the money, knows
that the bank must have evidence of the indebtedness to pass the auditors and the debtor further
realizes he must accept that bank's dictation, because if he declines, he is liable to immediate
ruin, or if not that, he will never get further accommodation from the bank. He does not realize,
even if he knows, what is meant by a 'judgment note.' Again, would not article 1269 of the Civil
Code here apply?

"Just a few months ago there was a suit instituted by a local bank for a large sum of money,
based on a written instrument which, on its face, seemed absolute. Special defenses were
pleaded, setting up that the instrument did not express the real understanding of the parties and
the real understanding was set up. The special defenses were fully proved and the lower court
dismissed the bank's suit. The bank did not even attempt to appeal to the Supreme Court (See
Cause No. 18239 of the Docket of the Court of First Instance of Manila). Suppose the instrument
sued on had contained a clause of confession of judgment, what chance would defendant have
had to prove his defense? None!

"Let us go a step further and see where this leads us. A is a dealer in hardware and sells B a bill
of goods. A prints a form, which he has B to sign, in which B acknowledges receipt of the goods
and in consideration thereof premises to pay A and "a confession of judgment" clause is inserted.
The goods turn out entirely different from those ordered and invoiced. B refuses to pay. A sues
on his "judgment note." What change has B? None!

"Very often a promissory note is only one of a series of documents given as security for the debt.
What about considering the other documents which bear on the transaction?

"A bank may have made certain advances and may have undertaken to make more, but fails to do
so, to the damage and prejudice of debtor. Let us assume that the bank agreed to advance several
hundred thousand pesos in installments of P60,000 each, and had advanced only the first
installments, taking a "judgment note" for said first installment, and had failed to advance
further, to the damage of the debtor. What would become of section 97 of the Code of Civil
Procedure? How would debtor be able to exercise his right of counterclaim? Was it ever
contemplated at the time of signing the judgment note that the debtor would not only waive
defense, but absolutely shut himself out of court, as he would, according to section 97 above
cited, on his counterclaim? Yet again, would not article 1269 of the Civil Code here apply?

"We dare not attempt to elaborate on what would happen in the provinces of the Philippines
should a "judgment note" be held valid.

"What about the Usury Law? How could a defense be offered there? The usurious rate might not
appear on the face of the "judgment note," but it may be there all the same.

"Examples could be multiplied until the very absurdity of the proposition would be clearly seen,
even by a blind man.

"Of what possible benefit would the recognition of a "judgment note" serve "the best interest of
the commercial life of the Philippines? None! An honest creditor is willing to let his debtor have
his day in court and is willing to prove to the court his case. It might take slightly longer to go
through with a trial, but that cannot be considered a set-back. But, on the other hand, a dishonest
creditor would take unfair advantage of a "judgment note" and would use it to the utmost to
harass and take advantage of the poor and helpless debtor. The real consequences likely, in fact
sure, to arise from such recognition are horrible beyond words to contemplate.

"There can be but one answer to the proposition and that is: The non-recognition of a confession
of judgment would be for the best interests of the commercial life of the Philippines."

Attorney J. G. Lawrence, of Ross and Lawrence, states:

"We are aware of no expression of our Legislature or courts which would indicate that
confessions of judgment under powers given in a promissory note are contrary to public policy.
This action was regularly brought in accordance with the provisions of the Code of Civil
Procedure and the defendant served with process. The answer, confessing judgment, was filed in
strict accordance with the powers contained in the note — a power coupled with an interest
which defendant would be estopped of denying. We think that no express legal sanction is
necessary to legalize such a proceeding.

"On the question of what ought to be the public policy of the Philippines, we hold quite a
different opinion. While the use of judgment notes might in some cases expedite the collection of
just debts, we believe that under conditions as exist here, their use should be discouraged. The
lend themselves easily to fraud in the hands of friends of a dishonest debtor, and to extortion in
the hands of usurers who are already too well equipped with the pacto de retro.

"While we believe that the position of the bank is sound legally, we should be very glad to be
proven mistaken."

Attorney Francis B. Mahoney, of the Philippine Trust Company, states:

"I have not gone into the law and cases, except to take a glance at the subject of judgments in
Volume 15 of Ruling Case Law. However, the reasons indicated on page 651 thereof are
significant.

"Unquestionably, if our Legislature provided in unmistakable terms for confession of judgment


as herein indicated, the validity and constitutionality of the enactment might be questioned as
failing to provide those constitutional safeguards of taking a man's property only after a day in
court and after the due process of law.

"This conclusion is stronger — a fortiori — where the enacting provision — if such section 5 of
Act. No. 2031 may be called — is of a lefthanded nature, apparently relating only to
negotiability — incidentally thus answering here your first inquiry. Whatever legal principles
there might be in favor of recognizing a confession of judgment — for example, the matter of
expediency — stronger and more vital principles oppose such recognition.

"By refusing to recognize confession of judgment under existing statutes or under general legal
principles, at the worst phase from the point of view of the plaintiff bank, there would result only
possible delay, costs and attorney's fees, which, after all, are only passed on to the clients of the
bank in the shape of interests, charges. etc. If the bank has a meritorious case, the judgment is
ultimately certain as courts.

"If the defendant debtor has any defense of merit, he is given an opportunity to present it, as, for
example, in the matter of usury so common, so difficult to uncover an such an unscrupulous rival
of legitimate banking, the courts may keep their doors open to the equities of each individual
case. Whereas, if defendant, who theoretically may allege fraud an who practically has great
difficulty in proving it, must rely upon a defense of fraud, he has little chance and the doors of
the court are closed to any other defense.

"In the final analysis, the matter simmers down to: 1. Possible delay in judgment with costs, etc.
2. Certain justice in the end. 3. The eyes and doors of courts open to the equities of each
individual case. 4. Equality before the law,

or

(a) Expediting judgment. (b) Defendant debtor practically kept out of court by additional
expense and difficulty in securing a hearing. (c) Putting a strong weapon in the hands of
unscrupulous persons and taking the strength necessary to wield this weapon from the courts.

"At first glance, if a debtor signs a document throwing away his right to be heard, the average
man has a feeling such debtor deserves to suffer the consequences. If that were the entire story,
probably he should. But what man, needing money badly enough — facing strenuous necessity
— will not in the circumstances be inclined to look on the cheerful side-to sign and get the
money, letting the future take care of itself? Such is the frailty of human nature. Then, as the
usual thing, the rich and powerful can take care of themselves, and it is usually others who have
need of courts, just laws and liberal interpretation of them.

"No doubt, banks would favor expediting judgments against their debtors, other things being
equal. And no doubt, additional delay in courts and the incidental costs thereof will be borne by
the clients of the bank. But sound banking is not established and enhanced by harsh law which
put strong weapons in powerful hands. Contented peoples, safe laws and sound banking usually
go hand in hand."

Professor Jose A. Espiritu, of the University of the Philippines, states:

"Permit me to cite first of all the authorities that I have gathered concerning the principal
question at issue in the case mentioned in your letter, namely, 'The Effect and Validity of
Confession of Judgement in the Philippines.'

"1. Confession of judgment has been defined as "a voluntary submission to the
jurisdiction of the court, giving by consent and without the service of process, what could
otherwise be obtained by summons and complaint, and other formal proceedings, an
acknowledgment of indebtedness, upon which it is contemplated that a judgment may
and will be rendered." (8 Cyc., pp. 563, 564.)

"2. As to the general effects of confession of judgment, the following statements may be
mentioned: 'A warrant to confess judgment does not destroy the negotiability of the note.
Such a note is commonly called a "judgement note." Decisions to the contrary in the
States where the Negotiable Instruments Law is now in force are abrogated thereby, since
it expressly provides that the negotiable character of an instrument otherwise negotiable
is not affected by a provision which authorizes a confession of judgment, if the
instrument is not paid at maturity. However, this statutory provision does not apply to
stipulations for the confession of judgment "prior" to maturity.' (8 C.J., p. 128, sec. 222.)
"3. Nature of Requisites. "A judgment may be rendered upon the confession of defendant,
either in an action regularly commenced against him by the issuance and service of
process, in which case the confession may be made by his attorney of record, or, without
the institution of a suit, upon a confession by defendant in person or by his attorney in
fact. It implies something more than a mere admission of a debt to plaintiff; in addition, it
is defendant's consent that a judgment shall be entered against him. . . . ." (23 cyc., 699.)

"4. Statutory Provisions, "Statutes regulating the confession of judgments without action,
or otherwise than according to the course of the common law, are strictly construed, and a
strict compliance with their provisions must be shown in order to sustain the validity of
the judgment." (Chapin vs. Tompson, 20 Cla., 681.) "And this applies also to statutory
restriction upon the right to confess judgment, as that authority to confess judgment shall
not be given in the same instrument which contains the promise or obligation to pay the
debt, or that such confession shall not be authorized by any instrument executed prior to
suit brought." (23 Cyc., 699, 700.)

"5. Warrant or Power of Attorney — Validity and Necessity. 'A judgment by confession
may be entered upon a written authority, called a warrant or letter of attorney, by which
the debtor empowers an attorney to enter an appearance for him, waive process, and
confess judgment against him for a designated sum, except where this method of
proceeding is prohibited by statute. The warrant as the basis of judgment is generally
required to be placed on file in the clerk's office, and no judgment can be so entered until
it is so filed.' (23 Cyc., 703.)

"6. Requisites and Sufficiency. 'A warrant or power of attorney to confess judgement
should be in writing and should conform to the requirements of the statute in force at the
time of its execution, although in the absence of specific statutory directions it is
sufficient, without much regard to its form, if it contains the essential of a good power
and clearly states its purpose. It must be signed by the person against whom the judgment
is to be entered . . . .' (23 Cyc., 704.)

"The above quoted authorities are among the various authorities I found bearing on the question
at issue. As it can be readily seen none of them decides squarely and definitely the questions
propounded in your letter. One thing, however, seems to be clear, from the very provision of
section 5 (b) of the Negotiable Instruments Law and from the quotation No. 2 of this letter, that a
provision in a note or bill of exchange authorizing a confession of judgment in default of
payment at its maturity has particular reference, in so far as Act No. 2031 is concerned, only to
the negotiable character of an instrument. I do not believe that the Legislature had the intention
in passing the said Act No. 2031 to introduce in the Philippines a new practice in our Remedial
Law, namely, that of confession of judgment, which is purely procedural in nature.

"Now as to the second question, to wit: 'Does the silence of the Code of Civil Procedure on the
subject mean that a confession of judgement cannot be recognized in this jurisdiction, or can a
judgment by confession be imported into the Philippines under general legal principles?' Before
answering this question attention is respectfully called to the quotation No. 4 of this letter, which
expressly provides that statutes regulating confession of judgments must be strictly construed
and their provisions strictly complied with to sustain the validity of judgments rendered under
such statutes. Now it being admitted that there is no express provision in our Code of Civil
Procedure authorizing or sanctioning this mode of practice in this jurisdiction, and consequently
there are no regulations provided to be followed in this particular remedy, I am therefore of the
opinion that confession of judgment should not be deemed as imported in the Philippines under
the general legal principles. The remedy itself is a most summary one, and when the defendant-
debtor, instead of admitting or allowing a judgment be taken against him, presents his
appearance and answers the complaint filed against him, it seems that the trial court should not
render a judgement without first hearing the evidence that the parties may wish to submit before
him, for it may happen that the defendant-debtor may have some valid or good defenses against
the plaintiff-creditor. This is especially true in the case of a counterclaim that the defendant may
have against the plaintiff as provided in sections 95 and 96 of the Code of Civil Procedure. The
same Code provides that in case of an omission to set up his counterclaim, the defendant or his
assignee loses all his right to bring further suit on such claim. (Sec. 97, Act No. 190.)

"In answer to the last question, namely: "Admitting that there may be some doubt, as to the
correct solution, which solution, the recognition of a confession of judgement, or the non-
recognition of a confession of judgment, would be for the best interests of the commercial life of
the Philippines?" I wish first of all to state that a confession of judgment is a quick remedy. It
saves time and money as far as the parties to the suit are concerned if the same is properly and
legally brought. It saves the court's time and the government the expense that a long litigation
entails. As to its disadvantages we may say among other things the following: 1. It may be
abused in the same way as the usurious rates of interest on loans are now in the Philippines,
because a borrower who is in great need of money might be induced, if not actually compelled,
to sign such a burdensome obligation; 2. It deprives the defendant of his day in court, and as a
consequence it will prevent him to set up and prove before the court his just claims and other
lawful defenses against the plaintiff; 3. It will create multiplicity of actions in this jurisdiction,
for if the confession of judgment has been wrongfully or unjustly entered, the judgment debtor
may start another litigation on the same subject-matter that might have been brought before the
court in case a proper trial was formally held before the rendition of such a judgment; and 4. It
does not really hold the plaintiff who has a good cause of action against the defendant as his
proofs will surely establish his claims and consequently a judgment must necessarily be rendered
in his favor.

"From the above statements, I am of the opinion that unless proper regulations are first duly
introduced and incorporated in our remedial law, confession of judgments, instead of resulting
advantageous to our commercial life in the Philippines, might be the sources of abuse and
oppression. The very fact that confession of judgement is almost summary and in fact a violent
remedy, it should first of all be properly regulated by statute, and those regulations must be
strictly complied with, before the court should concede to such a remedy."