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SUPREME COURT
Manila
EN BANC
G.R. No. L-15380 September 30, 1960
CHAN WAN, plaintiff-appellant,

vs.
TAN KIM and CHEN SO, defendants-appellees.
Manuel Domingo for appellant.

C.M. de los Reyes for appellees.
BENGZON, J.:
This suit to collect eleven checks totalling P4,290.00 is here for decision because it involves no issue of fact.
Such checks payable to "cash or bearer" and drawn by defendant Tan Kim (the other defendant is her husband)
upon the Equitable Banking Corporation, were all presented for payment by Chan Wan to the drawee bank, but
they "were all dishonored and returned to him unpaid due to insufficient funds and/or causes attributable to the
drawer."
At the hearing of the case, in the Manila court of first instance, the plaintiff did not take the witness stand. His
attorney, however, testified only to identify the checks — which are Exhibits A to K — plus the letters of demand
upon defendants.
On the other hand, Tan Kim declared without contradiction that the checks had been issued to two persons named
Pinong and Muy for some shoes the former had promised to make and "were intended as mere receipts".
In view of such circumstances, the court declined to order payment for two principal reasons: (a) plaintiff failed to
prove he was a holder in due course, and (b) the checks being crossed checks should not have been deposited
instead with the bank mentioned in the crossing.
It may be stated in this connection, that defendants asserted a counterclaim, the court dismissed it for failure of
proof, and from such dismissal they did not appeal.
The only issue is, therefore, the plaintiff's right to collect on the eleven commercial documents.
The Negotiable Instruments Law regulating the issuance of negotiable checks, the rights and the liabilities arising
therefrom, does not mention "crossed checks". Art. 541 of the Code of Commerce refers to such instruments. 1
The bills of Exchange Act of England of 1882, contains several provisions about them, some of which are quoted
in the margin. 2 In the Philippine National Bank vs. Zulueta, 101 Phil., 1071; 55 Off. Gaz., 222, we applied some
provisions of said Bills of Exchange Act because the Negotiable Law, originating from England and codified in the
United States, permits resort thereto in matters not covered by it and local legislation.3
Eight of the checks here in question bear across their face two parallel transverse lines between which these
words are written: non-negotiable — China Banking Corporation. These checks have, therefore, been crossed
specially to the China Banking Corporation, and should have been presented for payment by China Banking, and
not by Chan Wan.4 Inasmuch as Chan Wan did present them for payment himself — the Manila court said — there
was no proper presentment, and the liability did not attach to the drawer.
We agree to the legal premises and conclusion. It must be remembered, at this point, that the drawer in drawing
the check engaged that "on due presentment, the check would be paid, and that if it be dishonored . . . he will pay
the amount thereof to the holder".5 Wherefore, in the absence of due presentment, the drawer did not become
liable.
Nevertheless we find, on the backs of the checks, endorsements which apparently show they had been deposited
with the China Banking Corporation and were, by the latter, presented to the drawee bank for collection. For
instance, on the back of the check Exhibit A (same as in Exh. B), this endorsement appears:
For deposit to the account of White House Shoe Supply with the China Banking Corporation.
and then this:
Cleared through the clearing office of Central Bank of the Philippines. All prior endorsements and/or lack of
endorsements guaranteed. China Banking Corporation.
And on the back of Exh. G:
For deposit to the credit of our account. Viuda e Hijos de Chua Chiong Pio. People's Shoe Company.
followed by the endorsement of China Banking Corporation as in Exhibits A and B. All the crossed checks have the
"clearance" endorsement of China Banking Corporation.
These circumstances would seem to show deposit of the checks with China Banking Corporation and subsequent
presentation by the latter through the clearing office; but as drawee had no funds, they were unpaid and returned,
some of them stamped "account closed". How they reached his hands, plaintiff did not indicate. Most probably, as
the trial court surmised, — this is not a finding of fact — he got them after they had been thus returned, because
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11/14/2018 G.R. No. L-15380
he presented them in court with such "account closed" stamps, without bothering to explain. Naturally and rightly,
the lower court held him not to be a holder in due course under the circumstances, since he knew, upon taking
them up, that the checks had already been dishonored.6
Yet it does not follow as a legal proposition, that simply because he was not a holder in due course Chan Wan
could not recover on the checks. The Negotiable Instruments Law does not provide that a holder7 who is not a
holder in due course, may not in any case, recover on the instrument. If B purchases an overdue negotiable
promissory note signed by A, he is not a holder in due course; but he may recover from A,8 if the latter has no
valid excuse for refusing payment. The only disadvantage of holder who is not a holder in due course is that the
negotiable instrument is subject to defense as if it were non- negotiable.9
Now what defense did the defendant Tan Kim prove? The lower court's decision does not mention any; evidently
His Honor had in mind the defense pleaded in defendant's answer, but though it unnecessary to specify, because
the "crossing" and presentation incidents sufficed to bar recovery, in his opinion. 1 a w p h îl.n è t
Tan Kim admitted on cross-examination either that the checks had been issued as evidence of debts to Pinong
and Muy, and/or that they had been issued in payment of shoes which Pinong had promised to make for her.
Seeming to imply that Pinong had to make the shoes, she asserted Pinong had "promised to pay the checks for
me". Yet she did not complete the idea, perhaps because she was just answering cross- questions, her main
testimony having referred merely to their counter-claim.
Needless to say, if it were true that the checks had been issued in payment for shoes that were never made and
delivered, Tan Kim would have a good defense as against a holder who is not a holder in due course. 10
Considering the deficiency of important details on which a fair adjudication of the parties' right depends, we think
the record should be and is hereby returned, in the interest of justice, to the court below for additional evidence,
and such further proceedings as are not inconsistent with this opinion. With the understanding that, as defendants
did not appeal, their counterclaim must be and is hereby definitely dismissed. So ordered.
Paras, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Gutierrez David, Paredes and
Dizon, JJ., concur.
Footnotes
1SEC. 541. — The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to
certain banker or institution, which he shall do by writing across the face the name of said banker or
institution, or only the words "and company."
The payment made to a person other than the banker or institution shall not exempt the person on whom it
is drawn, if the payment was not correctly made.
276. [General and Special Crossing Defined.] — (1) Where a check bears across its face an addition of —
(a) The words "and company" or any abbreviation thereof between two parallel transverse
lines, either with or without the words "not negotiable;" or
(b) Two parallel transverse lines simply, either with or without the words "not negotiable;" that
addition constitutes a crossing, and the cheque is crossed generally.
(2) Where a cheque bears across its face an addition of the name of a banker, either with or without
the words "not negotiable," that addition constitutes a crossing, and the cheque is crossed specially
and to that banker.
79. . . . (2) Where the banker on whom a cheque is drawn which is so crossed nevertheless pays the same,
or pays the same, or pays a cheque crossed generally otherwise than to a banker, or if crossed specially
otherwise than to the banker to whom it is crossed, or his agent for collection being a banker, he is liable to
the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid. (Taken
from Brannan's Negotiable Instruments Law, 60th Ed. 1250-1251.)
3Sec. 196, Negotiable Instruments Law.
4If it is not presented by said Bank for payment, the drawee runs the risk, in case of payment to persons not
entitled thereto. So the practice is for the drawee to refuse when presented by individuals. The check is
generally deposited with the bank mentioned in the crossing, so that the latter may take charge of the
collection.
5Sec. 61. Negotiable Instruments Law.
6Sec. 52 (b), Negotiable Instruments Law.
7He was a holder all right, because he had possession of the checks that were payable to bearer.
8Sec. 51. Negotiable Instruments Law.
9SEC. 58 Negotiable Instruments Law.
10Lack of consideration is a defense. (Sec. 28, Negotiable Instruments Law.)
The Lawphil Project - Arellano Law Foundation
11/14/2018 G.R. No. 88866
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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.
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11/14/2018 G.R. No. 88866
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.
11/14/2018 G.R. No. 88866
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. That case involved checks whereas this case involves treasury warrants.
1 â w p h i1
Golden Savings never represented that the warrants were negotiable but signed them only for the purpose of
11/14/2018 G.R. No. 88866
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.
Footnotes
1
Rollo, pp. 12-13.
2
Ibid., p. 52.
3
Id., p. 14.
4
Id.
5
Through Judge Marciano T. Virola.
6
Penned by Ejercito, J., with Pe and Victor, JJ., concurring.
7
Rollo, p. 84.
8
TSN, July 29, 1983, p. 20.
9
Rollo, p. 61.
10
143 SCRA 20.
11
81 Phil. 359.
12
66 SCRA 29.F
11/14/2018 G.R. No. 16454
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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
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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
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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.
11/14/2018 G.R. No. L-40824
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SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-40824 February 23, 1989
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,

vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.
REGALADO , J.:
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs Flaviano Lagasca,
executed a deed of mortgage, dated November 13, 1957, in favor of petitioner Government Service Insurance
System (hereinafter referred to as GSIS) and subsequently, another deed of mortgage, dated April 14, 1958, in
connection with two loans granted by the latter in the sums of P 11,500.00 and P 3,000.00, respectively. 1 A parcel
of land covered by Transfer Certificate of Title No. 38989 of the Register of Deed of Quezon City, co-owned by
said mortgagor spouses, was given as security under the aforesaid two deeds. 2 They also executed a 'promissory
note" which states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY and SOLIDARILY, promise to pay
the GOVERNMENT SERVICE INSURANCE SYSTEM the sum of . . . (P 11,500.00) Philippine Currency,
with interest at the rate of six (6%) per centum compounded monthly payable in . . . (120)equal
monthly installments of . . . (P 127.65) each. 3
On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of Mortgage" under
which they obligated themselves to assume the aforesaid obligation to the GSIS and to secure the release of the
mortgage covering that portion of the land belonging to herein private respondents and which was mortgaged to
the GSIS. 4 This undertaking was not fulfilled. 5
Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the payment of the
amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the mortgaged property to be sold at
public auction on December 3, 1962. 6
More than two years thereafter, or on August 23, 1965, herein private respondents filed a complaint against the
petitioner and the Lagasca spouses in the former Court of
First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their property and all other
documents executed in relation thereto in favor of the Government Service Insurance System" be declared null
and void. It was further prayed that they be allowed to recover said property, and/or the GSIS be ordered to pay
them the value thereof, and/or they be allowed to repurchase the land. Additionally, they asked for actual and
moral damages and attorney's fees.
In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts not as sureties
or guarantors for the Lagasca spouses but they merely gave their common property to the said co-owners who
were solely benefited by the loans from the GSIS.
The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to establish a cause
of action. 8
Said decision was reversed by the respondent Court of Appeals 9 which held that:
... although formally they are co-mortgagors, they are so only for accomodation (sic) in that the GSIS
required their consent to the mortgage of the entire parcel of land which was covered with only one
certificate of title, with full knowledge that the loans secured thereby were solely for the benefit of the
appellant (sic) spouses who alone applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a valid cause for having foreclosed
the mortgage without having given sufficient notice to them as required either as to their delinquency
in the payment of amortization or as to the subsequent foreclosure of the mortgage by reason of any
default in such payment. The notice published in the newspaper, 'Daily Record (Exh. 12) and posted
pursuant to Sec 3 of Act 3135 is not the notice to which the mortgagor is entitled upon the application
being made for an extrajudicial foreclosure. ... 10
On the foregoing findings, the respondent court consequently decreed that-
In view of all the foregoing, the judgment appealed from is hereby reversed, and another one entered
(1) declaring the foreclosure of the mortgage void insofar as it affects the share of the appellants; (2)
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directing the GSIS to reconvey to appellants their share of the mortgaged property, or the value
thereof if already sold to third party, in the sum of P 35,000.00, and (3) ordering the appellees
Flaviano Lagasca and Esther Lagasca to pay the appellants the sum of P 10,00.00 as moral
damages, P 5,000.00 as attorney's fees, and costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No. 2031, otherwise
known as the Negotiable Instruments Law, which provide that an accommodation party is one who has signed an
instrument as maker, drawer, acceptor of indorser without receiving value therefor, but is held liable on the
instrument to a holder for value although the latter knew him to be only an accommodation party.
This approach of both parties appears to be misdirected and their reliance misplaced. The promissory note
hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly not negotiable instruments.
These documents do not comply with the fourth requisite to be considered as such under Section 1 of Act No.
2031 because they are neither payable to order nor to bearer. The note is payable to a specified party, the GSIS.
Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply; governance shall be afforded,
instead, by the provisions of the Civil Code and special laws on mortgages.
As earlier indicated, the factual findings of respondent court are that private respondents signed the documents
"only to give their consent to the mortgage as required by GSIS", with the latter having full knowledge that the
loans secured thereby were solely for the benefit of the Lagasca spouses. 12 This appears to be duly supported by
sufficient evidence on record. Indeed, it would be unusual for the GSIS to arrange for and deduct the monthly
amortizations on the loans from the salary as an army officer of Flaviano Lagasca without likewise affecting
deductions from the salary of Isabelo Racho who was also an army sergeant. Then there is also the undisputed
fact, as already stated, that the Lagasca spouses executed a so-called "Assumption of Mortgage" promising to
exclude private respondents and their share of the mortgaged property from liability to the mortgagee. There is no
intimation that the former executed such instrument for a consideration, thus confirming that they did so pursuant
to their original agreement.
The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is clear that there was no
objection in the court below regarding the admissibility of the testimony and documents that were presented to
prove that the private respondents signed the mortgage papers just to accommodate their co-owners, the
Lagasca spouses. Besides, the introduction of such evidence falls under the exception to said rule, there being
allegations in the complaint of private respondents in the court below regarding the failure of the mortgage
contracts to express the true agreement of the parties. 14
However, contrary to the holding of the respondent court, it cannot be said that private respondents are without
liability under the aforesaid mortgage contracts. The factual context of this case is precisely what is contemplated
in the last paragraph of Article 2085 of the Civil Code to the effect that third persons who are not parties to the
principal obligation may secure the latter by pledging or mortgaging their own property
So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca spouses
would not invalidate the mortgage with respect to private respondents' share in the property. In consenting thereto,
even assuming that private respondents may not be assuming personal liability for the debt, their share in the
property shall nevertheless secure and respond for the performance of the principal obligation. The parties to the
mortgage could not have intended that the same would apply only to the aliquot portion of the Lagasca spouses in
the property, otherwise the consent of the private respondents would not have been required.
The supposed requirement of prior demand on the private respondents would not be in point here since the
mortgage contracts created obligations with specific terms for the compliance thereof. The facts further show that
the private respondents expressly bound themselves as solidary debtors in the promissory note hereinbefore
quoted.
Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling of respondent court
that lack of notice to the private respondents of the extrajudicial foreclosure sale impairs the validity thereof. In
Bonnevie, et al. vs. Court of appeals, et al., 15 the Court ruled that Act No. 3135, as amended, does not require
personal notice on the mortgagor, quoting the requirement on notice in such cases as follows:
Section 3. Notice shall be given by posting notices of sale for not less than twenty days in at least
three public places of the municipality where the property is situated, and if such property is worth
more than four hundred pesos, such notice shall also be published once a week for at least three
consecutive weeks in a newspaper of general circulation in the municipality or city.
There is no showing that the foregoing requirement on notice was not complied with in the foreclosure sale
complained of .
The respondent court, therefore, erred in annulling the mortgage insofar as it affected the share of private
respondents or in directing reconveyance of their property or the payment of the value thereof Indubitably,
whether or not private respondents herein benefited from the loan, the mortgage and the extrajudicial foreclosure
proceedings were valid.
WHEREFORE, judgment is hereby rendered REVERSING the decision of the respondent Court of Appeals and
REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras, Padilla and Sarmiento, JJ., concur.
Footnotes
1 Record on Appeal, 9, 22; Rollo, 54.
2 Rollo, 58.
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11/14/2018 G.R. No. 100290
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SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 100290 June 4, 1993
NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA, petitioners,

vs.
THE HONORABLE COURT OF APPEALS and EDEN TAN, respondents.
PADILLA, J.:
Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before this Court assailing the decision * of
respondent appellate court dated 24 April 1991 in CA-G.R. SP No. 24164 denying their petition for certiorari
prohibition, and injunction which sought to annul the order of Judge Eutropio Migriño of the Regional Trial Court,
Branch 151, Pasig, Metro Manila in Civil Case No. 54863 entitled "Eden Tan vs. Sps. Norberto and Carmen
Tibajia."
Stated briefly, the relevant facts are as follows:
Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan against the Tibajia spouses. A writ of
attachment was issued by the trial court on 17 August 1987 and on 17 September 1987, the Deputy Sheriff filed a
return stating that a deposit made by the Tibajia spouses in the Regional Trial Court of Kalookan City in the
amount of Four Hundred Forty Two Thousand Seven Hundred and Fifty Pesos (P442,750.00) in another case,
had been garnished by him. On 10 March 1988, the Regional Trial Court, Branch 151 of Pasig, Metro Manila
rendered its decision in Civil Case No. 54863 in favor of the plaintiff Eden Tan, ordering the Tibajia spouses to pay
her an amount in excess of Three Hundred Thousand Pesos (P300,000.00). On appeal, the Court of Appeals
modified the decision by reducing the award of moral and exemplary damages. The decision having become final,
Eden Tan filed the corresponding motion for execution and thereafter, the garnished funds which by then were on
deposit with the cashier of the Regional Trial Court of Pasig, Metro Manila, were levied upon.
On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total money judgment
in the following form:
Cashier's Check P262,750.00

Cash 135,733.70
————
Total P398,483.70
Private respondent, Eden Tan, refused to accept the payment made by the Tibajia spouses and instead insisted
that the garnished funds deposited with the cashier of the Regional Trial Court of Pasig, Metro Manila be
withdrawn to satisfy the judgment obligation. On 15 January 1991, defendant spouses (petitioners) filed a motion
to lift the writ of execution on the ground that the judgment debt had already been paid. On 29 January 1991, the
motion was denied by the trial court on the ground that payment in cashier's check is not payment in legal tender
and that payment was made by a third party other than the defendant. A motion for reconsideration was denied on
8 February 1991. Thereafter, the spouses Tibajia filed a petition for certiorari, prohibition and injunction in the
Court of Appeals. The appellate court dismissed the petition on 24 April 1991 holding that payment by cashier's
check is not payment in legal tender as required by Republic Act No. 529. The motion for reconsideration was
denied on 27 May 1991.
In this petition for review, the Tibajia spouses raise the following issues:
I WHETHER OR NOT THE BPI CASHIER'S CHECK NO. 014021 IN THE AMOUNT OF P262,750.00
TENDERED BY PETITIONERS FOR PAYMENT OF THE JUDGMENT DEBT, IS "LEGAL TENDER".
II WHETHER OR NOT THE PRIVATE RESPONDENT MAY VALIDLY REFUSE THE TENDER OF
PAYMENT PARTLY IN CHECK AND PARTLY IN CASH MADE BY PETITIONERS, THRU AURORA VITO
AND COUNSEL, FOR THE SATISFACTION OF THE MONETARY OBLIGATION OF PETITIONERS-
SPOUSES.1
The only issue to be resolved in this case is whether or not payment by means of check (even by cashier's check)
is considered payment in legal tender as required by the Civil Code, Republic Act No. 529, and the Central Bank
Act.
It is contended by the petitioners that the check, which was a cashier's check of the Bank of the Philippine Islands,
undoubtedly a bank of good standing and reputation, and which was a crossed check marked "For Payee's
Account Only" and payable to private respondent Eden Tan, is considered legal tender, payment with which
operates to discharge their monetary obligation.2 Petitioners, to support their contention, cite the case of New
Pacific Timber and Supply Co., Inc. v. Señeris3 where this Court held through Mr. Justice Hermogenes Concepcion,
Jr. that "It is a well-known and accepted practice in the business sector that a cashier's check is deemed as cash".
The provisions of law applicable to the case at bar are the following:
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a. Article 1249 of the Civil Code which provides:
Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of
the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.;
b. Section 1 of Republic Act No. 529, as amended, which provides:
Sec. 1. Every provision contained in, or made with respect to, any obligation which purports to give
the obligee the right to require payment in gold or in any particular kind of coin or currency other than
Philippine currency or in an amount of money of the Philippines measured thereby, shall be as it is
hereby declared against public policy null and void, and of no effect, and no such provision shall be
contained in, or made with respect to, any obligation thereafter incurred. Every obligation heretofore
and hereafter incurred, whether or not any such provision as to payment is contained therein or made
with respect thereto, shall be discharged upon payment in any coin or currency which at the time of
payment is legal tender for public and private debts.
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:
Sec. 63. Legal character — Checks representing deposit money do not have legal tender power and
their acceptance in the payment of debts, both public and private, is at the option of the creditor:
Provided, however, that a check which has been cleared and credited to the account of the creditor
shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to
his account.
From the aforequoted provisions of law, it is clear that this petition must fail.
In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals4 and Roman Catholic Bishop of Malolos, Inc. vs.
Intermediate Appellate Court,5 this Court held that —
A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in
payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or
creditor.
The ruling in these two (2) cases merely applies the statutory provisions which lay down the rule that a check is
not legal tender and that a creditor may validly refuse payment by check, whether it be a manager's, cashier's or
personal check.
Petitioners erroneously rely on one of the dissenting opinions in the Philippine Airlines case6 to support their
cause. The dissenting opinion however does not in any way support the contention that a check is legal tender
but, on the contrary, states that "If the PAL checks in question had not been encashed by Sheriff Reyes, there
would be no payment by PAL and, consequently, no discharge or satisfaction of its judgment obligation."7
Moreover, the circumstances in the Philippine Airlines case are quite different from those in the case at bar for in
that case the checks issued by the judgment debtor were made payable to the sheriff, Emilio Z. Reyes, who
encashed the checks but failed to deliver the proceeds of said encashment to the judgment creditor.
In the more recent case of Fortunado vs. Court of Appeals,8 this Court stressed that, "We are not, by this decision,
sanctioning the use of a check for the payment of obligations over the objection of the creditor."
WHEREFORE, the petition is DENIED. The appealed decision is hereby AFFIRMED, with costs against the
petitioners.
SO ORDERED.
Narvasa, C.J., Regalado and Nocon, JJ., concur.
# Footnotes
* Penned by Justice Consuelo Ynares Santiago with the concurrence of Justices Nicolas P. Lapeña, Jr.
and Cancio C. Garcia.
1 Rollo, p. 11.
2 Rollo, p. 54.
3 G.R. No. L-41764, 19 December 1980, 101 SCRA 686.
4 G.R. No. 49188, 30 January 1990, 181 SCRA 557.
5 G.R. No. 72110, 16 November 1990, 191 SCRA 411.
6 Supra, Dissenting Opinion of Padilla, J., pp. 580-582.
7 Supra, pp. 581-582.
8 G.R. No. 78556, 25 April 1991, 196 SCRA 269.
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11/14/2018 G.R. No. L-49188
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SUPREME COURT
Manila
EN BANC
G.R. No. L-49188 January 30, 1990
PHILIPPINE AIRLINES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO, Court of First Instance of Manila, Branch
XIII, JAIME K. DEL ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and AMELIA TAN,
respondents.
GUTIERREZ, JR., J.:
Behind the simple issue of validity of an alias writ of execution in this case is a more fundamental question. Should
the Court allow a too literal interpretation of the Rules with an open invitation to knavery to prevail over a more
discerning and just approach? Should we not apply the ancient rule of statutory construction that laws are to be
interpreted by the spirit which vivifies and not by the letter which killeth?
This is a petition to review on certiorari the decision of the Court of Appeals in CA-G.R. No. 07695 entitled
"Philippine Airlines, Inc. v. Hon. Judge Ricardo D. Galano, et al.", dismissing the petition for certiorari against the
order of the Court of First Instance of Manila which issued an alias writ of execution against the petitioner.
The petition involving the alias writ of execution had its beginnings on November 8, 1967, when respondent Amelia
Tan, under the name and style of Able Printing Press commenced a complaint for damages before the Court of
First Instance of Manila. The case was docketed as Civil Case No. 71307, entitled Amelia Tan, et al. v. Philippine
Airlines, Inc.
After trial, the Court of First Instance of Manila, Branch 13, then presided over by the late Judge Jesus P. Morfe
rendered judgment on June 29, 1972, in favor of private respondent Amelia Tan and against petitioner Philippine
Airlines, Inc. (PAL) as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine Air Lines:
1. On the first cause of action, to pay to the plaintiff the amount of P75,000.00 as actual damages,
with legal interest thereon from plaintiffs extra-judicial demand made by the letter of July 20, 1967;
2. On the third cause of action, to pay to the plaintiff the amount of P18,200.00, representing the
unrealized profit of 10% included in the contract price of P200,000.00 plus legal interest thereon from
July 20,1967;
3. On the fourth cause of action, to pay to the plaintiff the amount of P20,000.00 as and for moral
damages, with legal interest thereon from July 20, 1 967;
4. On the sixth cause of action, to pay to the plaintiff the amount of P5,000.00 damages as and for
attorney's fee.
Plaintiffs second and fifth causes of action, and defendant's counterclaim, are dismissed.
With costs against the defendant. (CA Rollo, p. 18)
On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case was docketed as CA-G.R. No.
51079-R.
On February 3, 1977, the appellate court rendered its decision, the dispositive portion of which reads:
IN VIEW WHEREOF, with the modification that PAL is condemned to pay plaintiff the sum of P25,000.00 as
damages and P5,000.00 as attorney's fee, judgment is affirmed, with costs. (CA Rollo, p. 29)
Notice of judgment was sent by the Court of Appeals to the trial court and on dates subsequent thereto, a motion
for reconsideration was filed by respondent Amelia Tan, duly opposed by petitioner PAL.
On May 23,1977, the Court of Appeals rendered its resolution denying the respondent's motion for
reconsideration for lack of merit.
No further appeal having been taken by the parties, the judgment became final and executory and on May 31,
1977, judgment was correspondingly entered in the case.
The case was remanded to the trial court for execution and on September 2,1977, respondent Amelia Tan filed a
motion praying for the issuance of a writ of execution of the judgment rendered by the Court of Appeals. On
October 11, 1977, the trial court, presided over by Judge Galano, issued its order of execution with the
corresponding writ in favor of the respondent. The writ was duly referred to Deputy Sheriff Emilio Z. Reyes of
Branch 13 of the Court of First Instance of Manila for enforcement.
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Four months later, on February 11, 1978, respondent Amelia Tan moved for the issuance of an alias writ of
execution stating that the judgment rendered by the lower court, and affirmed with modification by the Court of
Appeals, remained unsatisfied.
On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of an alias writ of execution
stating that it had already fully paid its obligation to plaintiff through the deputy sheriff of the respondent court,
Emilio Z. Reyes, as evidenced by cash vouchers properly signed and receipted by said Emilio Z. Reyes.
On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering the
executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to surrender the
amounts paid to him by petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes who
had absconded or disappeared.
On March 28, 1978, motion for the issuance of a partial alias writ of execution was filed by respondent Amelia Tan.
On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for Partial Alias Writ of Execution" with
Substitute Motion for Alias Writ of Execution. On May 1, 1978, the respondent Judge issued an order which reads:
As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for Partial Alias Writ of Execution
with Substitute Motion for Alias Writ of Execution is hereby granted, and the motion for partial alias writ of
execution is considered withdrawn.
Let an Alias Writ of Execution issue against the defendant for the fall satisfaction of the judgment rendered.
Deputy Sheriff Jaime K. del Rosario is hereby appointed Special Sheriff for the enforcement thereof. (CA
Rollo, p. 34)
On May 18, 1978, the petitioner received a copy of the first alias writ of execution issued on the same day
directing Special Sheriff Jaime K. del Rosario to levy on execution in the sum of P25,000.00 with legal interest
thereon from July 20,1967 when respondent Amelia Tan made an extra-judicial demand through a letter. Levy was
also ordered for the further sum of P5,000.00 awarded as attorney's fees.
On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of execution stating that no return of
the writ had as yet been made by Deputy Sheriff Emilio Z. Reyes and that the judgment debt had already been
fully satisfied by the petitioner as evidenced by the cash vouchers signed and receipted by the server of the writ of
execution, Deputy Sheriff Emilio Z. Reyes.
On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment on the depository bank of
petitioner, Far East Bank and Trust Company, Rosario Branch, Binondo, Manila, through its manager and
garnished the petitioner's deposit in the said bank in the total amount of P64,408.00 as of May 16, 1978. Hence,
this petition for certiorari filed by the Philippine Airlines, Inc., on the grounds that:
AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR RETURN OF THE ORIGINAL WRIT
BY THE IMPLEMENTING OFFICER.
II
PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN THE WRIT OF EXECUTION

CONSTITUTES SATISFACTION OF JUDGMENT.
III
INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE PAYMENT THEREOF.
IV
SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF JUDGMENT DEBTOR AND
DISPOSAL OR SALE THEREOF TO SATISFY JUDGMENT.
Can an alias writ of execution be issued without a prior return of the original writ by the implementing officer?
We rule in the affirmative and we quote the respondent court's decision with approval:
The issuance of the questioned alias writ of execution under the circumstances here obtaining is justified
because even with the absence of a Sheriffs return on the original writ, the unalterable fact remains that
such a return is incapable of being obtained (sic) because the officer who is to make the said return has
absconded and cannot be brought to the Court despite the earlier order of the court for him to appear for
this purpose. (Order of Feb. 21, 1978, Annex C, Petition). Obviously, taking cognizance of this
circumstance, the order of May 11, 1978 directing the issuance of an alias writ was therefore issued. (Annex
D. Petition). The need for such a return as a condition precedent for the issuance of an alias writ was
justifiably dispensed with by the court below and its action in this regard meets with our concurrence. A
contrary view will produce an abhorent situation whereby the mischief of an erring officer of the court could
be utilized to impede indefinitely the undisputed and awarded rights which a prevailing party rightfully
deserves to obtain and with dispatch. The final judgment in this case should not indeed be permitted to
become illusory or incapable of execution for an indefinite and over extended period, as had already
transpired. (Rollo, pp. 35-36)
Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought not to be illusory it ought to
have its proper effect).
Indeed, technicality cannot be countenanced to defeat the execution of a judgment for execution is the fruit and
end of the suit and is very aptly called the life of the law (Ipekdjian Merchandising Co. v. Court of Tax Appeals, 8
SCRA 59 [1963]; Commissioner of Internal Revenue v. Visayan Electric Co., 19 SCRA 697, 698 [1967]). A
judgment cannot be rendered nugatory by the unreasonable application of a strict rule of procedure. Vested rights
were never intended to rest on the requirement of a return, the office of which is merely to inform the court and the
parties, of any and all actions taken under the writ of execution. Where such information can be established in
some other manner, the absence of an executing officer's return will not preclude a judgment from being treated
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as discharged or being executed through an alias writ of execution as the case may be. More so, as in the case at
bar. Where the return cannot be expected to be forthcoming, to require the same would be to compel the
enforcement of rights under a judgment to rest on an impossibility, thereby allowing the total avoidance of
judgment debts. So long as a judgment is not satisfied, a plaintiff is entitled to other writs of execution
(Government of the Philippines v. Echaus and Gonzales, 71 Phil. 318). It is a well known legal maxim that he who
cannot prosecute his judgment with effect, sues his case vainly.
More important in the determination of the propriety of the trial court's issuance of an alias writ of execution is the
issue of satisfaction of judgment.
Under the peculiar circumstances surrounding this case, did the payment made to the absconding sheriff by check
in his name operate to satisfy the judgment debt? The Court rules that the plaintiff who has won her case should
not be adjudged as having sued in vain. To decide otherwise would not only give her an empty but a pyrrhic
victory.
It should be emphasized that under the initial judgment, Amelia Tan was found to have been wronged by PAL.
She filed her complaint in 1967.
After ten (10) years of protracted litigation in the Court of First Instance and the Court of Appeals, Ms. Tan won her
case.
It is now 1990.
Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the courts have solemnly declared as
rightfully hers. Through absolutely no fault of her own, Ms. Tan has been deprived of what, technically, she should
have been paid from the start, before 1967, without need of her going to court to enforce her rights. And all
because PAL did not issue the checks intended for her, in her name.
Under the peculiar circumstances of this case, the payment to the absconding sheriff by check in his name did not
operate as a satisfaction of the judgment debt.
In general, a payment, in order to be effective to discharge an obligation, must be made to the proper person.
Article 1240 of the Civil Code provides:
Payment shall be made to the person in whose favor the obligation has been constituted, or his successor
in interest, or any person authorized to receive it. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an agent having authority, express or implied, to receive
the particular payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made to one having
apparent authority to receive the money will, as a rule, be treated as though actual authority had been given for its
receipt. Likewise, if payment is made to one who by law is authorized to act for the creditor, it will work a discharge
(Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt of money due on ajudgment by an officer
authorized by law to accept it will, therefore, satisfy the debt (See 40 Am Jm 729, 25; Hendry v. Benlisa supra;
Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).
The theory is where payment is made to a person authorized and recognized by the creditor, the payment to such
a person so authorized is deemed payment to the creditor. Under ordinary circumstances, payment by the
judgment debtor in the case at bar, to the sheriff should be valid payment to extinguish the judgment debt.
There are circumstances in this case, however, which compel a different conclusion.
The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks. The
checks were not payable to Amelia Tan or Able Printing Press but to the absconding sheriff.
Did such payments extinguish the judgment debt?
The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor
they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
In the absence of an agreement, either express or implied, payment means the discharge of a debt or obligation in
money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed. 257) and unless the parties so agree, a debtor has no rights,
except at his own peril, to substitute something in lieu of cash as medium of payment of his debt (Anderson v. Gill,
79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402). Consequently, unless authorized to do so by law or by
consent of the obligee a public officer has no authority to accept anything other than money in payment of an
obligation under a judgment being executed. Strictly speaking, the acceptance by the sheriff of the petitioner's
checks, in the case at bar, does not, per se, operate as a discharge of the judgment debt.
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument
does not, by itself, operate as payment (See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon
Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a
manager's check or ordinary cheek, is not legal tender, and an offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the
payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).
If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have been no
payment. After dishonor of the checks, Ms. Tan could have run after other properties of PAL. The theory is that
she has received no value for what had been awarded her. Because the checks were drawn in the name of Emilio
Z. Reyes, neither has she received anything. The same rule should apply.
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It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal
contemplation. The reasoning is logical but is it valid and proper? Logic has its limits in decision making. We
should not follow rulings to their logical extremes if in doing so we arrive at unjust or absurd results.
In the first place, PAL did not pay in cash. It paid in cheeks.
And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash in a
careless and inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer being
waylaid or running off with what he is carrying for another. Payment in checks is precisely intended to avoid the
possibility of the money going to the wrong party. The situation is entirely different where a Sheriff seizes a car, a
tractor, or a piece of land. Logic often has to give way to experience and to reality. Having paid with checks, PAL
should have done so properly.
Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment debt but
the Court has never, in the least bit, suggested that judgment debtors should settle their obligations by turning
over huge amounts of cash or legal tender to sheriffs and other executing officers. Payment in cash would result in
damage or interminable litigations each time a sheriff with huge amounts of cash in his hands decides to abscond.
As a protective measure, therefore, the courts encourage the practice of payments by cheek provided adequate
controls are instituted to prevent wrongful payment and illegal withdrawal or disbursement of funds. If particularly
big amounts are involved, escrow arrangements with a bank and carefully supervised by the court would be the
safer procedure. Actual transfer of funds takes place within the safety of bank premises. These practices are
perfectly legal. The object is always the safe and incorrupt execution of the judgment.
It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of another.
Making the checks payable to the judgment creditor would have prevented the encashment or the taking of undue
advantage by the sheriff, or any person into whose hands the checks may have fallen, whether wrongfully or in
behalf of the creditor. The issuance of the checks in the name of the sheriff clearly made possible the
misappropriation of the funds that were withdrawn.
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for the private party respondent Amelia Tan, the
petitioner corporation, utilizing the services of its personnel who are or should be knowledgeable about the
accepted procedures and resulting consequences of the checks drawn, nevertheless, in this instance,
without prudence, departed from what is generally observed and done, and placed as payee in the checks
the name of the errant Sheriff and not the name of the rightful payee. Petitioner thereby created a situation
which permitted the said Sheriff to personally encash said checks and misappropriate the proceeds thereof
to his exclusive personal benefit. For the prejudice that resulted, the petitioner himself must bear the fault.
The judicial guideline which we take note of states as follows:
As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one
who made it possible by his act of confidence must bear the loss. (Blondeau, et al. v. Nano, et al., L-41377,
July 26, 1935, 61 Phil. 625)
Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made possible the
loss had but itself to blame.
The attention of this Court has been called to the bad practice of a number of executing officers, of requiring
checks in satisfaction of judgment debts to be made out in their own names. If a sheriff directs a judgment debtor
to issue the checks in the sheriff's name, claiming he must get his commission or fees, the debtor must report the
sheriff immediately to the court which ordered the execution or to the Supreme Court for appropriate disciplinary
action. Fees, commissions, and salaries are paid through regular channels. This improper procedure also allows
such officers, who have sixty (60) days within which to make a return, to treat the moneys as their personal finds
and to deposit the same in their private accounts to earn sixty (60) days interest, before said finds are turned over
to the court or judgment creditor (See Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers
could put up the defense that said checks had been issued to them in their private or personal capacity. Without a
receipt evidencing payment of the judgment debt, the misappropriation of finds by such officers becomes clean
and complete. The practice is ingenious but evil as it unjustly enriches court personnel at the expense of litigants
and the proper administration of justice. The temptation could be far greater, as proved to be in this case of the
absconding sheriff. The correct and prudent thing for the petitioner was to have issued the checks in the intended
payee's name.
The pernicious effects of issuing checks in the name of a person other than the intended payee, without the
latter's agreement or consent, are as many as the ways that an artful mind could concoct to get around the
safeguards provided by the law on negotiable instruments. An angry litigant who loses a case, as a rule, would not
want the winning party to get what he won in the judgment. He would think of ways to delay the winning party's
getting what has been adjudged in his favor. We cannot condone that practice especially in cases where the
courts and their officers are involved. We rule against the petitioner.
1 â w p h i1
Anent the applicability of Section 15, Rule 39, as follows:
Section 15. Execution of money judgments. — The officer must enforce an execution of a money judgment
by levying on all the property, real and personal of every name and nature whatsoever, and which may be
disposed of for value, of the judgment debtor not exempt from execution, or on a sufficient amount of such
property, if they be sufficient, and selling the same, and paying to the judgment creditor, or his attorney, so
much of the proceeds as will satisfy the judgment. ...
the respondent court held:
We are obliged to rule that the judgment debt cannot be considered satisfied and therefore the orders of
the respondent judge granting the alias writ of execution may not be pronounced as a nullity.
xxx xxx xxx
It is clear and manifest that after levy or garnishment, for a judgment to be executed there is the requisite of
payment by the officer to the judgment creditor, or his attorney, so much of the proceeds as will satisfy the
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judgment and none such payment had been concededly made yet by the absconding Sheriff to the private
respondent Amelia Tan. The ultimate and essential step to complete the execution of the judgment not
having been performed by the City Sheriff, the judgment debt legally and factually remains unsatisfied.
Strictly speaking execution cannot be equated with satisfaction of a judgment. Under unusual circumstances as
those obtaining in this petition, the distinction comes out clearly.
Execution is the process which carries into effect a decree or judgment (Painter v. Berglund, 31 Cal. App. 2d. 63,
87 P 2d 360, 363; Miller v. London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary), whereas the
satisfaction of a judgment is the payment of the amount of the writ, or a lawful tender thereof, or the conversion by
sale of the debtor's property into an amount equal to that due, and, it may be done otherwise than upon an
execution (Section 47, Rule 39). Levy and delivery by an execution officer are not prerequisites to the satisfaction
of a judgment when the same has already been realized in fact (Section 47, Rule 39). Execution is for the sheriff to
accomplish while satisfaction of the judgment is for the creditor to achieve. Section 15, Rule 39 merely provides
the sheriff with his duties as executing officer including delivery of the proceeds of his levy on the debtor's property
to satisfy the judgment debt. It is but to stress that the implementing officer's duty should not stop at his receipt of
payments but must continue until payment is delivered to the obligor or creditor.
Finally, we find no error in the respondent court's pronouncement on the inclusion of interests to be recovered
under the alias writ of execution. This logically follows from our ruling that PAL is liable for both the lost checks and
interest. The respondent court's decision in CA-G.R. No. 51079-R does not totally supersede the trial court's
judgment in Civil Case No. 71307. It merely modified the same as to the principal amount awarded as actual
damages.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The judgment of the respondent
Court of Appeals is AFFIRMED and the trial court's issuance of the alias writ of execution against the petitioner is
upheld without prejudice to any action it should take against the errant sheriff Emilio Z. Reyes. The Court
Administrator is ordered to follow up the actions taken against Emilio Z. Reyes.
SO ORDERED.
Fernan, C.J., Cruz, Paras, Bidin, Griño-Aquino, Medialdea and Regalado, JJ., concur.
Separate Opinions
NARVASA, J., dissenting:
The execution of final judgments and orders is a function of the sheriff, an officer of the court whose authority is by
and large statutorily determined to meet the particular exigencies arising from or connected with the performance
of the multifarious duties of the office. It is the acknowledgment of the many dimensions of this authority, defined
by statute and chiselled by practice, which compels me to disagree with the decision reached by the majority.
A consideration of the wide latitude of discretion allowed the sheriff as the officer of the court most directly involved
with the implementation and execution of final judgments and orders persuades me that PAL's payment to the
sheriff of its judgment debt to Amelia Tan, though made by check issued in said officer's name, lawfully satisfied
said obligation and foreclosed further recourse therefor against PAL, notwithstanding the sheriffs failure to deliver
to Tan the proceeds of the check.
It is a matter of history that the judiciary .. is an inherit or of the Anglo-American tradition. While the common
law as such .. "is not in force" in this jurisdiction, "to breathe the breath of life into many of the institutions,
introduced [here] under American sovereignty, recourse must be had to the rules, principles and doctrines
of the common law under whose protecting aegis the prototypes of these institutions had their birth" A
sheriff is "an officer of great antiquity," and was also called the shire reeve. A shire in English law is a Saxon
word signifying a division later called a county. A reeve is an ancient English officer of justice inferior in rank
to an alderman .. appointed to process, keep the King's peace, and put the laws in execution. From a very
remote period in English constitutional history .. the shire had another officer, namely the shire reeve or as
we say, the sheriff. .. The Sheriff was the special representative of the legal or central authority, and as such
usually nominated by the King. .. Since the earliest times, both in England and the United States, a sheriff
has continued his status as an adjunct of the court .. . As it was there, so it has been in the Philippines from
the time of the organization of the judiciary .. . (J. Fernando's concurring opinion in Bagatsing v. Herrera, 65
SCRA 434)
One of a sheriff s principal functions is to execute final judgments and orders. The Rules of Court require the writs
of execution to issue to him, directing him to enforce such judgments and orders in the manner therein provided
(Rule 39). The mode of enforcement varies according to the nature of the judgment to be carried out: whether it
be against property of the judgment debtor in his hands or in the hands of a third person i e. money judgment), or
for the sale of property, real or personal (i.e. foreclosure of mortgage) or the delivery thereof, etc. (sec. 8, Rule
39).
Under sec. 15 of the same Rule, the sheriff is empowered to levy on so much of the judgment debtor's property as
may be sufficient to enforce the money judgment and sell these properties at public auction after due notice to
satisfy the adjudged amount. It is the sheriff who, after the auction sale, conveys to the purchaser the property
thus sold (secs. 25, 26, 27, Rule 39), and pays the judgment creditor so much of the proceeds as will satisfy the
judgment. When the property sold by him on execution is an immovable which consequently gives rise to a light of
redemption on the part of the judgment debtor and others (secs. 29, 30, Rule 39), it is to him (or to the purchaser
or redemptioner that the payments may be made by those declared by law as entitled to redeem (sec. 31, Rule
39); and in this situation, it becomes his duty to accept payment and execute the certificate of redemption (Enage
v. Vda. y Hijos de Escano, 38 Phil. 657, cited in Moran, Comments on the Rules of Court, 1979 ed., vol. 2, pp. 326-
327). It is also to the sheriff that "written notice of any redemption must be given and a duplicate filed with the
registrar of deeds of the province, and if any assessments or taxes are paid by the redemptioner or if he has or
acquires any lien other than that upon which the redemption was made, notice thereof must in like manner be
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given to the officer and filed with the registrar of deeds," the effect of failure to file such notice being that
redemption may be made without paying such assessments, taxes, or liens (sec. 30, Rule 39).
The sheriff may likewise be appointed a receiver of the property of the judgment debtor where the appointment of
the receiver is deemed necessary for the execution of the judgment (sec. 32, Rule 39).
At any time before the sale of property on execution, the judgment debtor may prevent the sale by paying the
sheriff the amount required by the execution and the costs that have been incurred therein (sec. 20, Rule 39).
The sheriff is also authorized to receive payments on account of the judgment debt tendered by "a person
indebted to the judgment debtor," and his "receipt shall be a sufficient discharge for the amount so paid or
directed to be credited by the judgment creditor on the execution" (sec. 41, Rule 39).
Now, obviously, the sheriff s sale extinguishes the liability of the judgment debtor either in fun, if the price paid by
the highest bidder is equal to, or more than the amount of the judgment or pro tanto if the price fetched at the sale
be less. Such extinction is not in any way dependent upon the judgment creditor's receiving the amount realized,
so that the conversion or embezzlement of the proceeds of the sale by the sheriff does not revive the judgment
debt or render the judgment creditor liable anew therefor.
So, also, the taking by the sheriff of, say, personal property from the judgment debtor for delivery to the judgment
creditor, in fulfillment of the verdict against him, extinguishes the debtor's liability; and the conversion of said
property by the sheriff, does not make said debtor responsible for replacing the property or paying the value
thereof.
In the instances where the Rules allow or direct payments to be made to the sheriff, the payments may be made by
check, but it goes without saying that if the sheriff so desires, he may require payment to be made in lawful money.
If he accepts the check, he places himself in a position where he would be liable to the judgment creditor if any
damages are suffered by the latter as a result of the medium in which payment was made (Javellana v. Mirasol, et
al., 40 Phil. 761). The validity of the payment made by the judgment debtor, however, is in no wise affected and the
latter is discharged from his obligation to the judgment creditor as of the moment the check issued to the sheriff is
encashed and the proceeds are received by Id. office. The issuance of the check to a person authorized to
receive it (Art. 1240, Civil Code; See. 46 of the Code of Civil Procedure; Enage v. Vda y Hijos de Escano, 38 Phil.
657, cited in Javellana v. Mirasol, 40 Phil. 761) operates to release the judgment debtor from any further
obligations on the judgment.
The sheriff is an adjunct of the court; a court functionary whose competence involves both discretion and personal
liability (concurring opinion of J. Fernando, citing Uy Piaoco v. Osmena, 9 Phil. 299, in Bagatsing v. Herrera, 65
SCRA 434). Being an officer of the court and acting within the scope of his authorized functions, the sheriff s
receipt of the checks in payment of the judgment execution, may be deemed, in legal contemplation, as received
by the court itself (Lara v. Bayona, 10 May 1955, No. L- 10919).
That the sheriff functions as a conduit of the court is further underscored by the fact that one of the requisites for
appointment to the office is the execution of a bond, "conditioned (upon) the faithful performance of his (the
appointee's) duties .. for the delivery or payment to Government, or the person entitled thereto, of all properties or
sums of money that shall officially come into his hands" (sec. 330, Revised Administrative Code).
There is no question that the checks came into the sheriffs possession in his official capacity. The court may
require of the judgment debtor, in complying with the judgment, no further burden than his vigilance in ensuring
that the person he is paying money or delivering property to is a person authorized by the court to receive it.
Beyond this, further expectations become unreasonable. To my mind, a proposal that would make the judgment
debtor unqualifiedly the insurer of the judgment creditor's entitlement to the judgment amount which is really what
this case is all about begs the question.
That the checks were made out in the sheriffs name (a practice, by the way, of long and common acceptance) is of
little consequence if juxtaposed with the extent of the authority explicitly granted him by law as the officer entrusted
with the power to execute and implement court judgments. The sheriffs requirement that the checks in payment of
the judgment debt be issued in his name was simply an assertion of that authority; and PAL's compliance cannot in
the premises be faulted merely because of the sheriffs subsequent malfeasance in absconding with the payment
instead of turning it over to the judgment creditor.
If payment had been in cash, no question about its validity or of the authority and duty of the sheriff to accept it in
settlement of PAL's judgment obligation would even have arisen. Simply because it was made by checks issued in
the sheriff s name does not warrant reaching any different conclusion.
As payment to the court discharges the judgment debtor from his responsibility on the judgment, so too must
payment to the person designated by such court and authorized to act in its behalf, operate to produce the same
effect.
It is unfortunate and deserving of commiseration that Amelia Tan was deprived of what was adjudged to her when
the sheriff misappropriated the payment made to him by PAL in dereliction of his sworn duties. But I submit that her
remedy lies, not here and in reviving liability under a judgment already lawfully satisfied, but elsewhere.
ACCORDINGLY, I vote to grant the petition.
Melencio-Herrera, Gancayco, J., concurs.
FELICIANO, J., dissenting:
I concur in the able dissenting opinions of Narvasa and Padilla, JJ. and would merely wish to add a few footnotes to
their lucid opinions.
1. Narvasa, J. has demonstrated in detail that a sheriff is authorized by the Rules of Court and our case law
to receive either legal tender or checks from the judgment debtor in satisfaction of the judgment debt. In
addition, Padilla, J. has underscored the obligation of the sheriff, imposed upon him by the nature of his
office and the law, to turn over such legal tender, checks and proceeds of execution sales to the judgment
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creditor. The failure of a sheriff to effect such turnover and his conversion of the funds (or goods) held by
him to his own uses, do not have the effect of frustrating payment by and consequent discharge of the
judgment debtor.
To hold otherwise would be to throw the risk of the sheriff faithfully performing his duty as a public officer
upon those members of the general public who are compelled to deal with him. It seems to me that a
judgment debtor who turns over funds or property to the sheriff can not reasonably be made an insurer of
the honesty and integrity of the sheriff and that the risk of the sheriff carrying out his duties honestly and
faithfully is properly lodged in the State itself The sheriff, like all other officers of the court, is appointed and
paid and controlled and disciplined by the Government, more specifically by this Court. The public surely
has a duty to report possible wrongdoing by a sheriff or similar officer to the proper authorities and, if
necessary, to testify in the appropriate judicial and administrative disciplinary proceedings. But to make the
individual members of the general community insurers of the honest performance of duty of a sheriff, or
other officer of the court, over whom they have no control, is not only deeply unfair to the former. It is also a
confession of comprehensive failure and comes too close to an abdication of duty on the part of the Court
itself. This Court should have no part in that.
2. I also feel compelled to comment on the majority opinion written by Gutierrez, J. with all his customary and
special way with words. My learned and eloquent brother in the Court apparently accepts the proposition
that payment by a judgment debtor of cash to a sheriff produces the legal effects of payment, the sheriff
being authorized to accept such payment. Thus, in page 10 of his ponencia, Gutierrez, J. writes:
The receipt of money due on a judgment by an officer authorized by law to accept it will satisfy the debt.
(Citations omitted)
The theory is where payment is made to a person authorized and recognized by the creditor, the payment to
such a person so authorized is deemed payment to the creditor. Under ordinary circumstances, payment by
the judgment debtor in the case at bar, to the sheriff would be valid payment to extinguish the judgment
debt.
Shortly thereafter, however, Gutierrez, J. backs off from the above position and strongly implies that
payment in cash to the sheriff is sheer imprudence on the part of the judgment debtor and that therefore,
should the sheriff abscond with the cash, the judgment debtor has not validly discharged the judgment debt:
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal
contemplation. The reasoning is logical but is it valid and proper?
In the first place, PAL did not pay in cash. It paid in checks.
And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of
cash in a careless and inane manner. Mature thought is given to the possibility of the cash being lost, of the
bearer being waylaid or running off with what he is carrying for another. Payment in checks is precisely
intended to avoid the possibility of the money going to the wrong party....
Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment
debt but the court has never, in the least bit, suggested that judgment debtors should settle their obligations
by turning over huge amounts of cash or legal tender to sheriffs and other executing officers. ... (Emphasis
in the original) (Majority opinion, pp. 12-13)
There is no dispute with the suggestion apparently made that maximum safety is secured where the judgment
debtor delivers to the sheriff not cash but a check made out, not in the name of the sheriff, but in the judgment
creditor's name. The fundamental point that must be made, however, is that under our law only cash is legal
tender and that the sheriff can be compelled to accept only cash and not checks, even if made out to the name of
the judgment creditor. 1 The sheriff could have quite lawfully required PAL to deliver to him only cash, i.e.,
Philippine currency. If the sheriff had done so, and if PAL had complied with such a requirement, as it would have
had to, one would have to agree that legal payment must be deemed to have been effected. It requires no
particularly acute mind to note that a dishonest sheriff could easily convert the money and abscond. The fact that
the sheriff in the instant case required, not cash to be delivered to him, but rather a check made out in his name,
does not change the legal situation. PAL did not thereby become negligent; it did not make the loss anymore
possible or probable than if it had instead delivered plain cash to the sheriffs.
It seems to me that the majority opinion's real premise is the unspoken one that the judgment debtor should bear
the risk of the fragility of the sheriff s virtue until the money or property parted with by the judgment debtor actually
reaches the hands of the judgment creditor. This brings me back to my earlier point that risk is most appropriately
borne not by the judgment debtor, nor indeed by the judgment creditor, but by the State itself. The Court requires
all sheriffs to post good and adequate fidelity bonds before entering upon the performance of their duties and,
presumably, to maintain such bonds in force and effect throughout their stay in office.2 The judgment creditor, in
circumstances like those of the instant case, could be allowed to execute upon the absconding sheriff s bond.3
I believe the Petition should be granted and I vote accordingly.
PADILLA, J., Dissenting Opinion
From the facts that appear to be undisputed, I reach a conclusion different from that of the majority. Sheriff Emilio
Z. Reyes, the trial court's authorized sheriff, armed with a writ of execution to enforce a final money judgment
against the petitioner Philippine Airlines (PAL) in favor of private respondent Amelia Tan, proceeded to petitioner
PAL's office to implement the writ.
There is no question that Sheriff Reyes, in enforcing the writ of execution, was acting with full authority as an
officer of the law and not in his personal capacity. Stated differently, PAL had every right to assume that, as an
officer of the law, Sheriff Reyes would perform his duties as enjoined by law. It would be grossly unfair to now
charge PAL with advanced or constructive notice that Mr. Reyes would abscond and not deliver to the judgment
creditor the proceeds of the writ of execution. If a judgment debtor cannot rely on and trust an officer of the law, as
the Sheriff, whom else can he trust?
11/14/2018 G.R. No. L-49188
Pursued to its logical extreme, if PAL had delivered to Sheriff Reyes the amount of the judgment in CASH, i.e.
Philippine currency, with the corresponding receipt signed by Sheriff Reyes, this would have been payment by PAL
in full legal contemplation, because under Article 1240 of the Civil Code, "payment shall be made to the person in
whose favor the obligation has been constituted or his successor in interest or any person authorized to receive
it." And said payment if made by PAL in cash, i.e., Philippine currency, to Sheriff Reyes would have satisfied PAL's
judgment obligation, as payment is a legally recognized mode for extinguishing one's obligation. (Article 1231, Civil
Code).
Under Sec. 15, Rule 39, Rules of Court which provides that-
Sec. 15. Execution of money judgments. — The officer must enforce an execution of a money judgment by
levying on all the property, real and personal of every name and nature whatsoever, and which may be
disposed of for value, of the judgment debtor not exempt from execution, or on a sufficient amount of such
property, if there be sufficient, and selling the same, and paying to the judgment creditor, or his attorney, so
much of the proceeds as will satisfy the judgment. ... .(emphasis supplied)
it would be the duty of Sheriff Reyes to pay to the judgment creditor the proceeds of the execution i.e., the cash
received from PAL (under the above assumption). But, the duty of the sheriff to pay the cash to the judgment
creditor would be a matter separate the distinct from the fact that PAL would have satisfied its judgment obligation
to Amelia Tan, the judgment creditor, by delivering the cash amount due under the judgment to Sheriff Reyes.
Did the situation change by PAL's delivery of its two (2) checks totalling P30,000.00 drawn against its bank
account, payable to Sheriff Reyes, for account of the judgment rendered against PAL? I do not think so, because
when Sheriff Reyes encashed the checks, the encashment was in fact a payment by PAL to Amelia Tan through
Sheriff Reyes, an officer of the law authorized to receive payment, and such payment discharged PAL'S obligation
under the executed judgment.
If the PAL cheeks in question had not been encashed by Sheriff Reyes, there would be no payment by PAL and,
consequently no discharge or satisfaction of its judgment obligation. But the checks had been encashed by Sheriff
Reyes giving rise to a situation as if PAL had paid Sheriff Reyes in cash, i.e., Philippine currency. This, we repeat,
is payment, in legal contemplation, on the part of PAL and this payment legally discharged PAL from its judgment
obligation to the judgment creditor. To be sure, the same encashment by Sheriff Reyes of PAL's checks delivered
to him in his official capacity as Sheriff, imposed an obligation on Sheriff Reyes to pay and deliver the proceeds of
the encashment to Amelia Tan who is deemed to have acquired a cause of action against Sheriff Reyes for his
failure to deliver to her the proceeds of the encashment. As held:
Payment of a judgment, to operate as a release or satisfaction, even pro tanto must be made to the plaintiff
or to some person authorized by him, or by law, to receive it. The payment of money to the sheriff having an
execution satisfies it, and, if the plaintiff fails to receive it, his only remedy is against the officer (Henderson
v. Planters' and Merchants Bank, 59 SO 493, 178 Ala. 420).
Payment of an execution satisfies it without regard to whether the officer pays it over to the creditor or
misapplies it (340, 33 C.J.S. 644, citing Elliot v. Higgins, 83 N.C. 459). If defendant consents to the Sheriff s
misapplication of the money, however, defendant is estopped to claim that the debt is satisfied (340, 33
C.J.S. 644, citing Heptinstall v. Medlin 83 N.C. 16).
The above rulings find even more cogent application in the case at bar because, as contended by petitioner PAL
(not denied by private respondent), when Sheriff Reyes served the writ of execution on PAL, he (Reyes) was
accompanied by private respondent's counsel. Prudence dictated that when PAL delivered to Sheriff Reyes the
two (2) questioned checks (payable to Sheriff Reyes), private respondent's counsel should have insisted on their
immediate encashment by the Sheriff with the drawee bank in order to promptly get hold of the amount belonging
to his client, the judgment creditor.
ACCORDINGLY, I vote to grant the petition and to quash the court a quo's alias writ of execution.
Melencio-Herrera, Gancayco, Sarmiento, Cortes, JJ., concurs.
Melencio-Herrera, Gancayco, Sarmiento, Cortes, JJ., concurs.
Footnotes
1
Art. 1249, Civil Code; e.g., Belisario v. Natividad, 60 Phil. 156 (1934); Villanueva v. Santos, 67 Phil 648
(1938).
2
See e.g., Sec. 46, Republic Act No. 296, as amended by Republic Act No. 4814.
3
See e.g., Sec. 9, Act No. 3598.
11/14/2018 G.R. No. 184458
Custom Search

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 184458 January 14, 2015
RODRIGO RIVERA, Petitioner,

vs.
SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA, Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 184472
SPS. SALVADOR CHUA and VIOLETA S. CHUA, Petitioners,

vs.
RODRIGO RIVERA, Respondent.
DECISIO N
PEREZ, J.:
Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Decision1 of the Court of Appeals in CA-G.R. SP No. 90609 which affirmed with modification the separate rulings of
the Manila City trial courts, the Regional Trial Court, Branch 17 in Civil Case No. 02-1052562 and the Metropolitan
Trial Court (MeTC), Branch 30, in Civil Case No. 163661,3 a case for collection of a sum of money due a
promissory note. While all three (3) lower courts upheld the validity and authenticity of the promissory note as duly
signed by the obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the appellate court modified the trial
courts’ consistent awards: (1) the stipulated interest rate of sixty percent (60%) reduced to twelve percent (12%)
per annumcomputed from the date of judicial or extrajudicial demand, and (2) reinstatement of the award of
attorney’s fees also in a reduced amount of ₱50,000.00.
In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note and questions the
entire ruling of the lower courts. On the other hand, petitioners in G.R. No. 184472, Spouses Salvador and Violeta
Chua (Spouses Chua), take exception to the appellate court’s reduction of the stipulated interest rate of sixty
percent (60%) to twelve percent (12%) per annum.
We proceed to the facts.
The parties were friends of long standing having known each other since 1973: Rivera and Salvador are
kumpadres, the former is the godfather of the Spouses Chua’s son.
On 24 February 1995, Rivera obtained a loan from the Spouses Chua:
PROMISSORY NOTE
120,000.00
FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and
VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine Currency (₱120,000.00)
on December 31, 1995.
It is agreed and understood that failure on my part to pay the amount of (120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE
PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for.
Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to
twenty percent (20%) of the total amount due and payable as and for attorney’s fees which in no case
shall be less than ₱5,000.00 and to pay in addition the cost of suit and other incidental litigation
expense.
Any action which may arise in connection with this note shall be brought in the proper Court of the
City of Manila.
Manila, February 24, 1995[.]
(SGD.) RODRIGO RIVERA4
In October 1998, almost three years from the date of payment stipulated in the promissory note, Rivera, as partial
payment for the loan, issued and delivered to the SpousesChua, as payee, a check numbered 012467, dated 30
December 1998, drawn against Rivera’s current account with the Philippine Commercial International Bank (PCIB)
in the amount of ₱25,000.00.
On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera, likewise drawn
against Rivera’s PCIB current account, numbered 013224, duly signed and dated, but blank as to payee and
amount. Ostensibly, as per understanding by the parties, PCIB Check No. 013224 was issued in the amount of
https://www.lawphil.net/judjuris/juri2015/jan2015/gr_184458_2015.html 1/8
11/14/2018 G.R. No. 184458
₱133,454.00 with "cash" as payee. Purportedly, both checks were simply partial payment for Rivera’s loan in the
principal amount of ₱120,000.00.
Upon presentment for payment, the two checks were dishonored for the reason "account closed."
As of 31 May 1999, the amount due the Spouses Chua was pegged at ₱366,000.00 covering the principal of
₱120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31 May 1999.
The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail. Because of
Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to file a suit on 11 June 1999. The case
was raffled before the MeTC, Branch 30, Manila and docketed as Civil Case No. 163661.
In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the subject Promissory
Note; (2) in all instances when he obtained a loan from the Spouses Chua, the loans were always covered by a
security; (3) at the time of the filing of the complaint, he still had an existing indebtedness to the Spouses Chua,
secured by a real estate mortgage, but not yet in default; (4) PCIB Check No. 132224 signed by him which he
delivered to the Spouses Chua on 21 December 1998, should have been issued in the amount of only 1,300.00,
representing the amount he received from the Spouses Chua’s saleslady; (5) contrary to the supposed
agreement, the Spouses Chua presented the check for payment in the amount of ₱133,454.00; and (6) there was
no demand for payment of the amount of ₱120,000.00 prior to the encashment of PCIB Check No. 0132224.5
In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness thereunder.
The MeTC summarized the testimonies of both parties’ respective witnesses:
[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence (consisting of the testimonies
of [the spouses] Chua and NBI Senior Documents Examiner Antonio Magbojos). x x x
xxxx
Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document examiner (1989);
NBI Senior Document Examiner (1994 to the date he testified); registered criminologist; graduate of 18th Basic
Training Course [i]n Questioned Document Examination conducted by the NBI; twice attended a seminar on US
Dollar Counterfeit Detection conducted by the US Embassy in Manila; attended a seminar on Effective
Methodology in Teaching and Instructional design conducted by the NBI Academy; seminar lecturer on Questioned
Documents, Signature Verification and/or Detection; had examined more than a hundred thousand questioned
documents at the time he testified.
Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in the Promissory
Note and compared the signature thereon with the specimen signatures of [Rivera] appearing on several
documents. After a thorough study, examination, and comparison of the signature on the questioned document
(Promissory Note) and the specimen signatures on the documents submitted to him, he concluded that the
questioned signature appearing in the Promissory Note and the specimen signatures of [Rivera] appearing on the
other documents submitted were written by one and the same person. In connection with his findings, Magbojos
prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with the following conclusion: "The
questioned and the standard specimen signatures RODGRIGO RIVERA were written by one and the same
person."
[Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May 1998, he obtained a loan from
[respondent] Salvador and executed a real estate mortgage over a parcel of land in favor of [respondent
Salvador] as collateral; aside from this loan, in October, 1998 he borrowed ₱25,000.00 from Salvador and issued
PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution of the Promissory Note dated
24 February 1995 and alleged that the signature appearing thereon was not his signature; [respondent
Salvador’s] claim that PCIB Check No. 0132224 was partial payment for the Promissory Note was not true, the
truth being that he delivered the check to [respondent Salvador] with the space for amount left blank as he and
[respondent] Salvador had agreed that the latter was to fill it in with the amount of ₱1,300.00 which amount he
owed [the spouses Chua]; however, on 29 December 1998 [respondent] Salvador called him and told him that he
had written ₱133,454.00 instead of ₱1,300.00; x x x. To rebut the testimony of NBI Senior Document Examiner
Magbojos, [Rivera] reiterated his averment that the signature appearing on the Promissory Note was not his
signature and that he did not execute the Promissory Note.6
After trial, the MeTC ruled in favor of the Spouses Chua:
WHEREFORE, [Rivera] is required to pay [the spouses Chua]: ₱120,000.00 plus stipulated interest at the rate of
5% per month from 1 January 1996, and legal interest at the rate of 12% percent per annum from 11 June 1999,
as actual and compensatory damages; 20% of the whole amount due as attorney’s fees.7
On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but deleted the award
of attorney’s fees to the Spouses Chua:
WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of the Decision dated
October 21, 2002 is hereby AFFIRMED.8
Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera. Undaunted,
Rivera appealed to the Court of Appeals which affirmed Rivera’s liability under the Promissory Note, reduced the
imposition of interest on the loan from 60% to 12% per annum, and reinstated the award of attorney’s fees in favor
of the Spouses Chua:
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the interest
rate of 60% per annum is hereby reduced to12% per annum and the award of attorney’s fees is reinstated atthe
reduced amount of ₱50,000.00 Costs against [Rivera].9
Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No. 184458 and the Spouses Chua in
G.R. No. 184472, respectively raising the following issues:
A. In G.R. No. 184458
11/14/2018 G.R. No. 184458
1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE
RULING OF THE RTC AND M[e]TC THAT THERE WAS A VALID PROMISSORY NOTE
EXECUTED BY [RIVERA].
2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

DEMAND IS NO LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF THE
NEGOTIABLE INSTRUMENTS LAW.
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING

ATTORNEY’S FEES DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND IN
LAW AND DESPITE THE FACT THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM THE
DECISION OF THE RTC DELETING THE AWARD OF ATTORNEY’S FEES.10
B. In G.R. No. 184472
[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL

ERROR WHEN IT MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST RATE
FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT RIVERA NEVER
RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID STIPULATED RATE OF INTEREST IS
EXORBITANT, UNCONSCIONABLE, UNREASONABLE, INEQUITABLE, ILLEGAL, IMMORAL OR VOID.11
As early as 15 December 2008, wealready disposed of G.R. No. 184472 and denied the petition, via a Minute
Resolution, for failure to sufficiently show any reversible error in the ruling of the appellate court specifically
concerning the correct rate of interest on Rivera’s indebtedness under the Promissory Note.12
On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.
Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning the entire ruling of the
Court of Appeals in CA-G.R. SP No. 90609.
Rivera continues to deny that heexecuted the Promissory Note; he claims that given his friendship withthe
Spouses Chua who were money lenders, he has been able to maintain a loan account with them. However, each of
these loan transactions was respectively "secured by checks or sufficient collateral."
Rivera points out that the Spouses Chua "never demanded payment for the loan nor interest thereof (sic) from
[Rivera] for almost four (4) years from the time of the alleged default in payment [i.e., after December 31, 1995]."13
On the issue of the supposed forgery of the promissory note, we are not inclined to depart from the lower courts’
uniform rulings that Rivera indeed signed it.
Rivera offers no evidence for his asseveration that his signature on the promissory note was forged, only that the
signature is not his and varies from his usual signature. He likewise makes a confusing defense of having
previously obtained loans from the Spouses Chua who were money lenders and who had allowed him a period of
"almost four (4) years" before demanding payment of the loan under the Promissory Note.
First, we cannot give credence to such a naked claim of forgery over the testimony of the National Bureau of
Investigation (NBI) handwriting expert on the integrity of the promissory note. On that score, the appellate court
aptly disabled Rivera’s contention:
[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is a forgery. The
fact of forgery cannot be presumed but must be proved by clear, positive and convincing evidence. Mere variance
of signatures cannot be considered as conclusive proof that the same was forged. Save for the denial of Rivera
that the signature on the note was not his, there is nothing in the records to support his claim of forgery. And while
it is true that resort to experts is not mandatory or indispensable to the examination of alleged forged documents,
the opinions of handwriting experts are nevertheless helpful in the court’s determination of a document’s
authenticity.
To be sure, a bare denial will not suffice to overcome the positive value of the promissory note and the testimony
of the NBI witness. In fact, even a perfunctory comparison of the signatures offered in evidence would lead to the
conclusion that the signatures were made by one and the same person.
It is a basic rule in civil cases that the party having the burden of proof must establish his case by preponderance
of evidence, which simply means "evidence which is of greater weight, or more convincing than that which is
offered in opposition to it."
Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a prima faciecase
in their favor, hence, the burden of evidence has shifted to [Rivera] to prove his allegation of forgery. Unfortunately
for [Rivera], he failed to substantiate his defense.14 Well-entrenched in jurisprudence is the rule that factual
findings of the trial court, especially when affirmed by the appellate court, are accorded the highest degree of
respect and are considered conclusive between the parties.15 A review of such findings by this Court is not
warranted except upon a showing of highly meritorious circumstances, such as: (1) when the findings of a trial
court are grounded entirely on speculation, surmises or conjectures; (2) when a lower court's inference from its
factual findings is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion in the
appreciation of facts; (4) when the findings of the appellate court go beyond the issues of the case, or fail to notice
certain relevant facts which, if properly considered, will justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings of fact are conclusions without mention of the specific evidence on
which they are based, are premised on the absence of evidence, or are contradicted by evidence on record.16
None of these exceptions obtains in this instance. There is no reason to depart from the separate factual findings
of the three (3) lower courts on the validity of Rivera’s signature reflected in the Promissory Note.
Indeed, Rivera had the burden ofproving the material allegations which he sets up in his Answer to the plaintiff’s
claim or cause of action, upon which issue is joined, whether they relate to the whole case or only to certain issues
in the case.17
In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony of a handwriting
expert from the NBI. While it is true that resort to experts is not mandatory or indispensable to the examination or
11/14/2018 G.R. No. 184458
the comparison of handwriting, the trial courts in this case, on its own, using the handwriting expert testimony only
as an aid, found the disputed document valid.18
Hence, the MeTC ruled that:
[Rivera] executed the Promissory Note after consideration of the following: categorical statement of [respondent]
Salvador that [Rivera] signed the Promissory Note before him, in his ([Rivera’s]) house; the conclusion of NBI
Senior Documents Examiner that the questioned signature (appearing on the Promissory Note) and standard
specimen signatures "Rodrigo Rivera" "were written by one and the same person"; actual view at the hearing of
the enlarged photographs of the questioned signature and the standard specimen signatures.19
Specifically, Rivera insists that: "[i]f that promissory note indeed exists, it is beyond logic for a money lender to
extend another loan on May 4, 1998 secured by a real estate mortgage, when he was already in default and has
not been paying any interest for a loan incurred in February 1995."20
We disagree.
It is likewise likely that precisely because of the long standing friendship of the parties as "kumpadres," Rivera was
allowed another loan, albeit this time secured by a real estate mortgage, which will cover Rivera’s loan should
Rivera fail to pay. There is nothing inconsistent with the Spouses Chua’s two (2) and successive loan
accommodations to Rivera: one, secured by a real estate mortgage and the other, secured by only a Promissory
Note.
Also completely plausible is thatgiven the relationship between the parties, Rivera was allowed a substantial
amount of time before the Spouses Chua demanded payment of the obligation due under the Promissory Note.
In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a discordant defense to
assail the authenticity and validity of the Promissory Note. Although the burden of proof rested on the Spouses
Chua having instituted the civil case and after they established a prima facie case against Rivera, the burden of
evidence shifted to the latter to establish his defense.21 Consequently, Rivera failed to discharge the burden of
evidence, refute the existence of the Promissory Note duly signed by him and subsequently, that he did not fail to
pay his obligation thereunder. On the whole, there was no question left on where the respective evidence of the
parties preponderated—in favor of plaintiffs, the Spouses Chua. Rivera next argues that even assuming the
validity of the Promissory Note, demand was still necessary in order to charge him liable thereunder. Rivera argues
that it was grave error on the part of the appellate court to apply Section 70 of the Negotiable Instruments Law
(NIL).22
We agree that the subject promissory note is not a negotiable instrument and the provisions of the NIL do not
apply to this case. Section 1 of the NIL requires the concurrence of the following elements to be a negotiable
instrument:
(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.
On the other hand, Section 184 of the NIL defines what negotiable promissory note is: SECTION 184. Promissory
Note, Defined. – A negotiable promissory note within the meaning of this Act is an unconditional promise in writing
made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable
future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker’s own order, it is not
complete until indorsed by him.
The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses Chua, and not
to order or to bearer, or to the order of the Spouses Chua as payees. However, even if Rivera’s Promissory Note is
not a negotiable instrument and therefore outside the coverage of Section 70 of the NIL which provides that
presentment for payment is not necessary to charge the person liable on the instrument, Rivera is still liable under
the terms of the Promissory Note that he issued.
The Promissory Note is unequivocal about the date when the obligation falls due and becomes demandable—31
December 1995. As of 1 January 1996, Rivera had already incurred in delay when he failed to pay the amount of
₱120,000.00 due to the Spouses Chua on 31 December 1995 under the Promissory Note.
Article 1169 of the Civil Code explicitly provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the designation of the time
when the thing is to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay
by the other begins. (Emphasis supplied)
11/14/2018 G.R. No. 184458
There are four instances when demand is not necessary to constitute the debtor in default: (1) when there is an
express stipulation to that effect; (2) where the law so provides; (3) when the period is the controlling motive or the
principal inducement for the creation of the obligation; and (4) where demand would be useless. In the first two
paragraphs, it is not sufficient that the law or obligation fixes a date for performance; it must further state expressly
that after the period lapses, default will commence.
We refer to the clause in the Promissory Note containing the stipulation of interest:
It is agreed and understood that failure on my part to pay the amount of (₱120,000.00) One Hundred Twenty
Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest
monthly from the date of default until the entire obligation is fully paid for.23
which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the "date of default" until the entire
obligation is fully paid for. The parties evidently agreed that the maturity of the obligation at a date certain, 31
December 1995, will give rise to the obligation to pay interest. The Promissory Note expressly provided that after
31 December 1995, default commences and the stipulation on payment of interest starts.
The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995, the due
date of the obligation. On that date, Rivera became liable for the stipulated interest which the Promissory Note
says is equivalent to 5% a month. In sum, until 31 December 1995, demand was not necessary before Rivera
could be held liable for the principal amount of ₱120,000.00. Thereafter, on 1 January 1996, upon default, Rivera
became liable to pay the Spouses Chua damages, in the form of stipulated interest.
The liability for damages of those who default, including those who are guilty of delay, in the performance of their
obligations is laid down on Article 117024 of the Civil Code.
Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity for damages
when the obligor incurs in delay:
Art. 2209. If the obligation consists inthe payment of a sum of money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in
the absence of stipulation, the legal interest, which is six percent per annum. (Emphasis supplied)
Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of money; (2) the
debtor, Rivera, incurred in delay when he failed to pay on or before 31 December 1995; and (3) the Promissory
Note provides for an indemnity for damages upon default of Rivera which is the payment of a 5%monthly interest
from the date of default.
We do not consider the stipulation on payment of interest in this case as a penal clause although Rivera, as
obligor, assumed to pay additional 5% monthly interest on the principal amount of ₱120,000.00 upon default.
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of noncompliance, if there isno stipulation to the contrary. Nevertheless, damages
shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
The penal clause is generally undertaken to insure performance and works as either, or both, punishment and
reparation. It is an exception to the general rules on recovery of losses and damages. As an exception to the
general rule, a penal clause must be specifically set forth in the obligation.25
In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a penal clause,
and is simply an indemnity for damages incurred by the Spouses Chua because Rivera defaulted in the payment
of the amount of ₱120,000.00. The measure of damages for the Rivera’s delay is limited to the interest stipulated
in the Promissory Note. In apt instances, in default of stipulation, the interest is that provided by law.26
In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of 5% a month or
60% per annum. On this score, the appellate court ruled:
It bears emphasizing that the undertaking based on the note clearly states the date of payment tobe 31 December
1995. Given this circumstance, demand by the creditor isno longer necessary in order that delay may exist since
the contract itself already expressly so declares. The mere failure of [Spouses Chua] to immediately demand or
collect payment of the value of the note does not exonerate [Rivera] from his liability therefrom. Verily, the trial
court committed no reversible error when it imposed interest from 1 January 1996 on the ratiocination that
[Spouses Chua] were relieved from making demand under Article 1169 of the Civil Code.
xxxx
As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to legal interests
and attorney’s fees is, indeed, highly iniquitous and unreasonable. Stipulated interest rates are illegal if they are
unconscionable and the Court is allowed to temper interest rates when necessary. Since the interest rate agreed
upon is void, the parties are considered to have no stipulation regarding the interest rate, thus, the rate of interest
should be 12% per annum computed from the date of judicial or extrajudicial demand.27
The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal interest and
attorney’s fees, steep, tantamount to it being illegal, iniquitous and unconscionable. Significantly, the issue on
payment of interest has been squarely disposed of in G.R. No. 184472 denying the petition of the Spouses Chua
for failure to sufficiently showany reversible error in the ruling of the appellate court, specifically the reduction of
the interest rate imposed on Rivera’s indebtedness under the Promissory Note. Ultimately, the denial of the petition
in G.R. No. 184472 is res judicata in its concept of "bar by prior judgment" on whether the Court of Appeals
correctly reduced the interest rate stipulated in the Promissory Note.
Res judicata applies in the concept of "bar by prior judgment" if the following requisites concur: (1) the former
judgment or order must be final; (2) the judgment or order must be on the merits; (3) the decision must have been
11/14/2018 G.R. No. 184458
rendered by a court having jurisdiction over the subject matter and the parties; and (4) there must be, between the
first and the second action, identity of parties, of subject matter and of causes of action.28
In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject matter raising
specifically errors in the Decision of the Court of Appeals. Where the Court of Appeals’ disposition on the propriety
of the reduction of the interest rate was raised by the Spouses Chua in G.R. No. 184472, our ruling thereon
affirming the Court of Appeals is a "bar by prior judgment."
At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the then
prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular No. 416 in cases involving
the loan or for bearance of money.29 Thus, the legal interest accruing from the Promissory Note is 12% per annum
from the date of default on 1 January 1996. However, the 12% per annumrate of legal interest is only applicable
until 30 June 2013, before the advent and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series
of 2013 reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,30
BSP Circular No. 799 is prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1
January 1996, the date when Rivera defaulted, to date when this Decision becomes final and executor is divided
into two periods reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996 to 30 June 2013;
and (2) 6% per annum FROM 1 July 2013 to date when this Decision becomes final and executory.
As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date when this
Decision becomes final and executory, such is likewise divided into two periods: (1) 12% per annum from 11 June
1999, the date of judicial demand to 30 June 2013; and (2) 6% per annum from 1 July 2013 to date when this
Decision becomes final and executor.31 We base this imposition of interest on interest due earning legal interest on
Article 2212 of the Civil Code which provides that "interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent on this point."
From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses Chua could
already be determined with reasonable certainty given the wording of the Promissory Note.32
We cite our recent ruling in Nacar v. Gallery Frames:33
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of
the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
for bearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default,
i.e., from judicial or extra judicial demand under and subject to the provisions ofArticle 1169 of the
Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or
1 â w p h i1
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a for bearance of credit. And, in addition to the above,
judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and shall
continue to be implemented applying the rate of interest fixed therein. (Emphasis supplied)
On the reinstatement of the award of attorney’s fees based on the stipulation in the Promissory Note, weagree with
the reduction thereof but not the ratiocination of the appellate court that the attorney’s fees are in the nature of
liquidated damages or penalty. The interest imposed in the Promissory Note already answers as liquidated
damages for Rivera’s default in paying his obligation. We award attorney’s fees, albeit in a reduced amount, in
recognition that the Spouses Chua were compelled to litigate and incurred expenses to protect their interests.34
Thus, the award of ₱50,000.00 as attorney’s fees is proper.
For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to the Spouses
Chua:
Face value of the Stipulated Interest A & Interest due earning Attorney’s Total
Promissory Note B legal interest A & B fees Amount
February 24, 1995 A. January 1, 1996 to A. June 11, 1999 (date Wholesale
to June 30, 2013 of judicial demand) to Amount
December 31, June 30, 2013
1995 B. July 1 2013 to date B. July 1, 2013 to date
when this Decision when this Decision
becomes final and becomes final and
executory executory
₱120,000.00 A. 12 % per annumon A. 12% per annumon ₱50,000.00 Total amount
the principal amount of the total amount of of Columns
₱120,000.00 column 2 1-4
B. 6% per annumon the B. 6% per annumon the
11/14/2018 G.R. No. 184458
principal amount of total amount of column
₱120,000.00 235
The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal interest at the rate
of 6% per annum computed from its finality until full payment thereof, the interim period being deemed to be a
forbearance of credit.
WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No.
90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents Spouse Salvador and Violeta Chua
the following:
(1) the principal amount of ₱120,000.00;
(2) legal interest of 12% per annumof the principal amount of ₱120,000.00 reckoned from 1 January 1996
until 30 June 2013;
(3) legal interest of 6% per annumof the principal amount of ₱120,000.00 form 1 July 2013 to date when this
Decision becomes final and executory;
(4) 12% per annumapplied to the total of paragraphs 2 and 3 from 11 June 1999, date of judicial demand, to
30 June 2013, as interest due earning legal interest;
(5) 6% per annumapplied to the total amount of paragraphs 2 and 3 from 1 July 2013 to date when this
Decision becomes final and executor, asinterest due earning legal interest;
(6) Attorney’s fees in the amount of ₱50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the finality of this Decision until full
payment thereof.
Costs against petitioner Rodrigo Rivera.
SO ORDERED.
JOSE PORTUGAL PEREZ

Associate Justice
WE CONCUR:
MARIA LOURDES P.A. SERENO

Chief Justice
Chairperson
TERESITA J. LEONARDO-DE CASTRO LUCAS P. BERSAMIN

Associate Justice Associate Justice
ESTELA M. PERLAS-BERNABE
Associate Justice
CERT IF ICAT IO N
Pursuant to Section 13, Article VIII of the Constitution, 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 Court's Div.ision.
MARIA LOURDES P.A. SERENO

Chief Justice
Footnotes
1
Rollo in G.R. No. 184458, pp. 52-62; Penned by Associate Justice Ricardo R. Rosario with Associate
Justices Mariano C. Del Castillo (now a member of this Court) and Arcangelita Romilla-Lontok concurring.
2
Id. at 152-156; Penned by Presiding Judge Eduardo B. Peralta, Jr.
3
Rolloin G.R. No. 184472, pp. 52-56; Penned by Presiding Judge Nina G. Antonio-Valenzuela.
4
Rollo in G.R. No. 184458, p. 76.
5
Id. at 53-54.
6
Rollo in G.R. No. 184472, pp. 53-54.
7
Id. at 56.
8
Id. at 61.
9
Rollo in G.R. No. 184458, p. 62.
10
Id. at 29.
11
Rollo in G.R. No. 184472, p. 13
12
Id. at p. 103.
13
Rollo in G.R. No. 184458, p. 32.
11/14/2018 G.R. No. L-1405
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SUPREME COURT
Manila
EN BANC
G.R. No. L-1405 July 31, 1948
BENJAMIN ABUBAKAR, petitioner,

vs.
THE AUDITOR GENERAL, respondent.
Viray and Viola Viray for petitioner.

First Assistant Solicitor General Roberto A. Gianzon and Solicitor Manuel Tomacruz for respondent.
BENGZON, J.:
We are asked to overrule the decision of the Auditor General refusing to authorize the payment of Treasury
warrant No. A-2867376 for P1,000 which was issued in favor of Placido S. Urbanes on December 10, 1941, but is
now in the hands of herein petitioner Benjamin Abubakar.
For his refusal the respondent gave two reasons: first, because the money available for the redemption of
treasury warrants issued before January 2, 1942, is appropriated by Republic Act No. 80 (Item F-IV-8) and this
warrant does not come within the purview of said appropriation; and second, because on of the requirements of
his office had not been complied with, namely, that it must be shown that the holders of warrants covering payment
or replenishment of cash advances for official expenditures (as this warrant is) received them in payment of
definite government obligations.
Finding the first reason to be sufficiently valid we shall not discuss, nor pass upon the second.
There is no doubt as to the authenticity and date of the treasury warrant. There is no question that it was regularly
indorsed by the payee and is now in the custody of the herein petitioner who is a private individual. On the other
hand, it is admitted that the warrant was originally made payable to Placido S. Urbanes in his capacity as
disbursing officer of the Food Administration for "additional cash advance for Food Production Campaign in La
Union" (Annex A). It is thus apparent that this is a treasury warrant issued in favor of a public officer or employee
and held in possession by a private individual. Such being the case, the Auditor General can hardly be blamed for
not authorizing its redemption out of an appropriation specifically for "treasury warrants issued ... in favor of and
held in possession by private individuals." (Republic Act No. 80, Item F-IV-8.) This warrant was not issued in favor
of a private individual. It was issued in favor of a government employee.
The distinction is not without a difference. Outstanding treasury warrants issued prior to January 2, 1942, amount
to more than four million pesos. The appropriation herein mentioned is only for P1,750,000. Obviously Congress
wished to provide for redemption of one class of warrants — those issued to private individuals — as distinguished
from those issued in favor of government officials. Basis for the discrimination is not lacking. Probably the
Government is not so sure that those warrants to officials have all been properly used by the latter during the
Japanese occupation or maybe it wants to conduct further inquiries as to the equities of the present holders
thereof.
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument an dis entitled to
the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within the
scope of the negotiable instruments law. For one thing, the document bearing on its face the words "payable from
the appropriation for food administration," is actually an order for payment out of "a particular fund," and is not
unconditional, and does not fulfill one of the essential requirements of a negotiable instrument. (Section 3 last
sentenced and section 1[b] of the Negotiable Instruments Law.) In the United States, government warrants for the
payment of money are not negotiable instruments nor commercial 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.
Footnotes
1 Logan County Bank vs. Farmers' National Bank, 155 Pac., 561; Velvet Ridge School District No. 91 vs.
Bank of Searcy, 137 S.W., 907; Marshall vs. State, 102 So., 650.
https://www.lawphil.net/judjuris/juri1948/jul1948/gr_l-1405_1948.html 1/2
11/14/2018 G.R. No. L-22405
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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:
https://www.lawphil.net/judjuris/juri1971/jun1971/gr_22405_1971.html 1/2
11/14/2018 G.R. No. L-22405
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.
11/14/2018 G.R. No. 72593
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SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions of law a decision of
the Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution dated
October 17, 1985, denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its program of logging activities for the
year 1978 the opening of additional roads, and simultaneous logging operations along the route of said roads, in
its logging concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it needed two (2)
additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of Manila, through its
sister company and marketing arm, Industrial Products Marketing (the "seller-assignor"), a corporation dealing in
tractors and other heavy equipment business, offered to sell to petitioner-corporation two (2) "Used" Allis Crawler
Tractors, one (1) an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n., May 28, 1980, p. 44) and
to determine the capability of the "Used" tractors being offered, petitioner-corporation requested the seller-
assignor to inspect the job site. After conducting said inspection, the seller-assignor assured petitioner-
corporation that the "Used" Allis Crawler Tractors which were being offered were fit for the job, and gave the
corresponding warranty of ninety (90) days performance of the machines and availability of parts. (t.s.n., May 28,
1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner-corporation
through petitioners Wee and Vergara, president and vice- president, respectively, agreed to purchase on
installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten
Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors (Exh. "3-A"). At the
same time, the deed of sale with chattel mortgage with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the seller-
assignor, by means of a deed of assignment (E exh. " 1 "), assigned its rights and interest in the chattel mortgage
in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the petitioner-
corporation's job site and as agreed, the seller-assignor stationed its own mechanics to supervise the operations
of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after another
nine (9) days, the other tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the fact that the tractors
broke down and requested for the seller-assignor's usual prompt attention under the warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor sent to the job
site its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but
the tractors did not come out to be what they should be after the repairs were undertaken because the units were
no longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and simultaneous logging operations of petitioner-
corporation were delayed and petitioner Vergara advised the seller-assignor that the payments of the installments
as listed in the promissory note would likewise be delayed until the seller-assignor completely fulfills its obligation
under its warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor to pull
out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to
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the respondent and the excess, if any, to be divided between the seller-assignor and petitioner-corporation which
offered to bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the petitioner-corporation and despite several follow-up
calls, the seller-assignor did nothing with regard to the request, until the complaint in this case was filed by the
respondent against the petitioners, the corporation, Wee, and Vergara.
The complaint was filed by the respondent against the petitioners for the recovery of the principal sum of One
Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of
One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979,
accruing interest thereafter at the rate of twelve (12%) percent per annum, attorney's fees of Two Hundred Forty
Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial court to
order the respondent to pay the petitioners damages in an amount at the sound discretion of the court, Twenty
Thousand Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of
litigation. The petitioners likewise prayed for such other and further relief as would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official and personal capacities the
principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS
& 71/100 (P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE THOUSAND SIX
HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of August 15, 1979 and accruing interest
thereafter at the rate of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent (10%) of
the principal and to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the following errors:
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC COMPANY OF
MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE OF
THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in toto the decision of
the trial court. The pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of warranty, We are of the considered
opinion that aside from the fact that no provision of warranty appears or is provided in the Deed of
Sale of the tractors and even admitting that in a contract of sale unless a contrary intention appears,
there is an implied warranty, the defense of breach of warranty, if there is any, as in this case, does
not lie in favor of the appellants and against the plaintiff-appellee who is the assignee of the
promissory note and a holder of the same in due course. Warranty lies in this case only between
Industrial Products Marketing and Consolidated Plywood Industries, Inc. The plaintiff-appellant herein
upon application by appellant corporation granted financing for the purchase of the questioned units
of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense available to appellants either to withdraw from
the contract and/or demand a proportionate reduction of the price with damages in either case (Art.
1567, New Civil Code). We now come to the issue as to whether the plaintiff-appellee is a holder in
due course of the promissory note.
To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation engaged in
financing and receivable discounting extending credit facilities to consumers and industrial,
commercial or agricultural enterprises by discounting or factoring commercial papers or accounts
receivable duly authorized pursuant to R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is a negotiable instrument which was
discounted or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 (Exh. "A")
considering the following. it is in writing and signed by the maker; it contains an unconditional promise
to pay a certain sum of money payable at a fixed or determinable future time; it is payable to order
(Sec. 1, NIL); the promissory note was negotiated when it was transferred and delivered by IPM to the
appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the conditions that the note
was complete and regular upon its face before the same was overdue and without notice, that it had
been previously dishonored and that the note is in good faith and for value without notice of any
infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held
the instrument free from any defect of title of prior parties and free from defenses available to prior
parties among themselves and may enforce payment of the instrument for the full amount thereof
against all parties liable thereon (Sec. 57, NIL); the appellants engaged that they would pay the note
according to its tenor, and admit the existence of the payee IPM and its capacity to endorse (Sec. 60,
NIL).
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In view of the essential elements found in the questioned promissory note, We opine that the same is
legally and conclusively enforceable against the defendants-appellants.
WHEREFORE, finding the decision appealed from according to law and evidence, We find the appeal
without merit and thus affirm the decision in toto. With costs against the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by the Intermediate
Appellate Court in its resolution dated October 17, 1985, a copy of which was received by the petitioners on
October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED UNDER
THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT
PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER OF RIGHTS
WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL
DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE PROMISSORY
NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE
REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985, as well as the
resolution dated October 17, 1985 and dismissing the complaint but granting petitioners' counterclaims before the
court of origin.
On the other hand, the respondent corporation in its comment to the petition filed on February 20, 1986,
contended that the petition was filed out of time; that the promissory note is a negotiable instrument and
respondent a holder in due course; that respondent is not liable for any breach of warranty; and finally, that the
promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in question is a negotiable instrument so as to bar
completely all the available defenses of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the instant petition to have been filed on time
because the petitioners' motion for reconsideration actually raised new issues. It cannot, therefore, be considered
pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90-day warranty because the findings of
the trial court, adopted by the respondent appellate court, that "14 days after delivery, the first tractor broke down
and 9 days, thereafter, the second tractor became inoperable" are sustained by the records. The petitioner was
clearly a victim of a warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing
sold may have, should they render it unfit for the use for which it is intended, or should they diminish
its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have
acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent
defects or those which may be visible, or for those which are not visible if the vendee is an expert
who, by reason of his trade or profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of
the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to the seller the particular purpose for
which the goods are acquired, and it appears that the buyer relies on the sellers skill or judge
judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the
goods shall be reasonably fit for such purpose;
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xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may
be annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold
even though he was not aware thereof.
This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the
hidden faults or defects in the thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner. This liability as a
general rule, extends to the corporation to whom it assigned its rights and interests unless the assignee is a holder
in due course of the promissory note in question, assuming the note is negotiable, in which case the latter's rights
are based on the negotiable instrument and assuming further that the petitioner's defenses may not prevail
against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-corporation notified
the seller-assignor's sister company, AG & P, about the breakdown based on the seller-assignor's express 90-day
warranty, with which the latter complied by sending its mechanics. However, due to the seller-assignor's delay and
its failure to comply with its warranty, the tractors became totally unserviceable and useless for the purpose for
which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between
withdrawing from the contract and demanding a proportionate reduction of the price, with damages in
either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor, necessarily can no
longer sue the seller-assignor except by way of counterclaim if the seller-assignor sues it because of the
rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:
In other words, the party who deems the contract violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action taken
was or was not correct in law. But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for adjudgement before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final judgment of rescission is
rendered when the law itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question is not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE
PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said principal sum, to be payable in
24 monthly installments starting July 15, 1978 and every 15th of the month thereafter until fully paid.
...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note "must
be payable to order or bearer, " it cannot be denied that the promissory note in question is not a negotiable
instrument.
The instrument in order to be considered negotiablility-i.e. must contain the so-called 'words of
negotiable, must be payable to 'order' or 'bearer'. These words serve as an expression of consent
that the instrument may be transferred. This consent is indispensable since a maker assumes greater
risk under a negotiable instrument than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where it is drawn payable
to the order of a specified person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made payable to order. There must
always be a specified person named in the instrument. It means that the bill or note is to be paid to
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the person designated in the instrument or to any person to whom he has indorsed and delivered the
same. Without the words "or order" or"to the order of, "the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy
the advantages of being a holder of a negotiable instrument but will merely "step into the shoes" of
the person designated in the instrument and will thus be open to all defenses available against the
latter." (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third
Edition, page 38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the
respondent can never be a holder in due course but remains a mere assignee of the note in question. Thus, the
petitioner may raise against the respondent all defenses available to it as against the seller-assignor Industrial
Products Marketing.
This being so, there was no need for the petitioner to implied the seller-assignor when it was sued by the
respondent-assignee because the petitioner's defenses apply to both or either of either of them. Actually, the
records show that even the respondent itself admitted to being a mere assignee of the promissory note in
question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what is being assigned is the Deed of Sale with
Chattel Mortgage with the promissory note which is as testified to by the witness was
indorsed? (Counsel for Plaintiff nodding his head.) Then we have no further questions
on cross,
COURT:
You confirm his manifestation? You are nodding your head? Do you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed of sale is a transaction between two
persons; what is assigned are rights, the rights of the mortgagee were assigned to the
IFC Leasing & Acceptance Corporation.
COURT:
He puts it in a simple way as one-deed of sale and chattel mortgage were assigned; . . .
you want to make a distinction, one is an assignment of mortgage right and the other one
is indorsement of the promissory note. What counsel for defendants wants is that you
stipulate that it is contained in one single transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the promissory note in question is a negotiable
instrument, the respondent cannot be a holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale on installment of the tractors, there was an
arrangement between the seller-assignor, Industrial Products Marketing, and the respondent whereby the latter
would pay the seller-assignor the entire purchase price and the seller-assignor, in turn, would assign its rights to
the respondent which acquired the right to collect the price from the buyer, herein petitioner Consolidated Plywood
Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the
Disclosure of Loan/Credit Transaction shows that said documents evidencing the sale on installment of the
tractors were all executed on the same day by and among the buyer, which is herein petitioner Consolidated
Plywood Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assignee-financing
company, which is the respondent. Therefore, the respondent had actual knowledge of the fact that the seller-
assignor's right to collect the purchase price was not unconditional, and that it was subject to the condition that the
tractors -sold were not defective. The respondent knew that when the tractors turned out to be defective, it would
be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners.
Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the
same with actual knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith,
is not a holder in due course. As such, the respondent is subject to all defenses which the petitioners may raise
against the seller-assignor. Any other interpretation would be most inequitous to the unfortunate buyer who is not
only saddled with two useless tractors but must also face a lawsuit from the assignee for the entire purchase price
and all its incidents without being able to raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact, which would
justify its act of taking the promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due course is a holder
who has taken the instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of deffect
in the title of the person negotiating it
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xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of an infirmity in the
instrument or defect in the title of the person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that
his action in taking the instrument amounts to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the
buyer, to wit:
In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price.
Many times, in pursuance of a previous arrangement with the seller, a finance company pays the full
price and the note is indorsed to it, subrogating it to the right to collect the price from the buyer, with
interest. With the increasing frequency of installment buying in this country, it is most probable that
the tendency of the courts in the United States to protect the buyer against the finance company will ,
the finance company will be subject to the defense of failure of consideration and cannot recover the
purchase price from the buyer. As against the argument that such a rule would seriously affect "a
certain mode of transacting business adopted throughout the State," a court in one case stated:
It may be that our holding here will require some changes in business methods and will
impose a greater burden on the finance companies. We think the buyer-Mr. & Mrs.
General Public-should have some protection somewhere along the line. We believe the
finance company is better able to bear the risk of the dealer's insolvency than the buyer
and in a far better position to protect his interests against unscrupulous and insolvent
dealers. . . .
If this opinion imposes great burdens on finance companies it is a potent argument in

favor of a rule which win afford public protection to the general buying public against
unscrupulous dealers in personal property. . . . (Mutual Finance Co. v. Martin, 63 So. 2d
649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes and Selected Cases on
Negotiable Instruments Law, Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766) involving similar
facts, it was held that in a very real sense, the finance company was a moving force in the transaction from its very
inception and acted as a party to it. When a finance company actively participates in a transaction of this type from
its inception, it cannot be regarded as a holder in due course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is negotiable, the respondent, a
financing company which actively participated in the sale on installment of the subject two Allis Crawler tractors,
cannot be regarded as a holder in due course of said note. It follows that the respondent's rights under the
promissory note involved in this case are subject to all defenses that the petitioners have against the seller-
assignor, Industrial Products Marketing. For Section 58 of the Negotiable Instruments Law provides that "in the
hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as
if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find that both the trial and
respondent appellate court erred in holding the promissory note in question to be negotiable. Such a ruling does
not only violate the law and applicable jurisprudence, but would result in unjust enrichment on the part of both the
assigner- assignor and respondent assignee at the expense of the petitioner-corporation which rightfully
rescinded an inequitable contract. We note, however, that since the seller-assignor has not been impleaded
herein, there is no obstacle for the respondent to file a civil Suit and litigate its claims against the seller- assignor
in the rather unlikely possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated July 17, 1985, as well
as its resolution dated October 17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against the
petitioner before the trial court is DISMISSED.
SO ORDERED.
Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.
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Custom Search

SUPREME COURT
Manila
EN BANC
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.)
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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.
11/14/2018 G.R. No. 170325
Custom Search

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 170325 September 26, 2008
PHILIPPINE NATIONAL BANK, Petitioner,

vs.
ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.
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 Decision1 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 discounting3 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 PEMSLA’s policy not to approve applications for loans of members with outstanding debts. To subvert this policy,
some PEMSLA officers devised a scheme to obtain additional loans despite their outstanding loan accounts. They took out
loans in the names of unknowing members, without the knowledge or consent of the latter. The PEMSLA checks issued for
these loans were then given to the spouses for rediscounting. The officers carried this out by forging the indorsement of the
named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and delivered the
checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any indorsement from
the named payees. This was an irregular procedure made possible through the facilitation of Edmundo Palermo, Jr., treasurer
of PEMSLA and bank teller in the PNB Branch. It appears that this became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the total amount of
P2,345,804.00. These were payable to forty seven (47) individual payees who were all members of PEMSLA.4
Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB closed the current
account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or dishonored for the reason
"Account Closed." The corresponding Rodriguez checks, however, were deposited as usual to the PEMSLA savings
account. The amounts were duly debited from the Rodriguez account. Thus, because the PEMSLA checks given as
payment were returned, spouses Rodriguez incurred losses from the rediscounting transactions.
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for damages against PEMSLA, the
Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB. They sought to recover the value of their checks that
were deposited to the PEMSLA savings account amounting to P2,345,804.00. The spouses contended that because PNB
credited the checks to the PEMSLA account even without indorsements, PNB violated its contractual obligation to them as
depositors. PNB paid the wrong payees, hence, it should bear the loss.
PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim for damages
should come from the payees of the checks, and not from spouses Rodriguez. Since there was no demand from the said
payees, the obligation should be considered as discharged.
In an Order dated January 12, 2000, the RTC denied PNB’s 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
https://lawphil.net/judjuris/juri2008/sep2008/gr_170325_2008.html 1/7
11/14/2018 G.R. No. 170325
Negotiable Instruments Law (NIL). Being checks made to fictitious payees which are bearer instruments, the checks were
negotiable by mere delivery. PNB’s 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) Attorney’s 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 Decision7 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 PEMSLA’s business arrangement – that the value of the rediscounted
checks of the plaintiffs-appellees would be deposited in PEMSLA’s account for payment of the loans it has approved in
exchange for PEMSLA’s 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 PEMSLA’s 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 PEMSLA’s 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 PEMSLA’s 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. Attorney’s 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.
11/14/2018 G.R. No. 170325
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
11/14/2018 G.R. No. 170325
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 transferee’s 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 bank’s 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 customer’s 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 drawer’s instructions, i.e., to the named payee in the check. It should charge to the
drawer’s 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 drawer’s account.24
In the case at bar, respondents-spouses were the bank’s 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.
11/14/2018 G.R. No. 170325
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.alf-ITC
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
PNB’s 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
PNB’s 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 PNB’s 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 PNB’s 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 PNB’s 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
A TTE S TA TION
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 Court’s Division.
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
CE RTIF ICA TION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s 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 Court’s Division.
REYNATO S. PUNO
Chief Justice
Footnotes
1 CA-G.R. CV No. 76645 dated October 11, 2005. Penned by Associate Justice Isaias P. Dicdican, with Associate
Justices Pampio A. Abarintos and Ramon M. Bato, Jr., concurring; rollo, pp. 29-42.
11/14/2018 G.R. No. L-18103
Custom Search

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,
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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
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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
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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:
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"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 :

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"'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
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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.'
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"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
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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."
11/14/2018 G.R. No. 93073
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SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 93073 December 21, 1992
REPUBLIC PLANTERS BANK, petitioner,

vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.
CAMPOS, JR., J.:
This is an appeal by way of a Petition for Review on Certiorari from the decision * of the Court of Appeals in CA G.R. CV No.
07302, entitled "Republic Planters Bank.Plaintiff-Appellee vs. Pinch Manufacturing Corporation, et al., Defendants, and Fermin Canlas, Defendant-
Appellant", which affirmed the decision ** in Civil Case No. 82-5448 except that it completely absolved Fermin Canlas from liability under the promissory
notes and reduced the award for damages and attorney's fees. The RTC decision, rendered on June 20, 1985, is quoted hereunder:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff Republic
Planters Bank, ordering defendant Pinch Manufacturing Corporation (formerly Worldwide Garment
Manufacturing, Inc.) and defendants Shozo Yamaguchi and Fermin Canlas to pay, jointly and
severally, the plaintiff bank the following sums with interest thereon at 16% per annum from the dates
indicated, to wit:
Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interest from January 29, 1981
until fully paid; under promissory note (Exhibit "B"), the sum of P40,000.00 with interest from
November 27, 1980; under the promissory note (Exhibit "C"), the sum of P166,466.00 which interest
from January 29, 1981; under the promissory note (Exhibit "E"), the sum of P86,130.31 with interest
from January 29, 1981; under the promissory note (Exhibit "G"), the sum of P12,703.70 with interest
from November 27, 1980; under the promissory note (Exhibit "H"), the sum of P281,875.91 with
interest from January 29, 1981; and under the promissory note (Exhibit "I"), the sum of P200,000.00
with interest from January 29, 1981.
Under the promissory note (Exhibit "D") defendants Pinch Manufacturing Corporation (formerly named
Worldwide Garment Manufacturing, Inc.), and Shozo Yamaguchi are ordered to pay jointly and
severally, the plaintiff bank the sum of P367,000.00 with interest of 16% per annum from January 29,
1980 until fully paid
Under the promissory note (Exhibit "F") defendant corporation Pinch (formerly Worldwide) is ordered
to pay the plaintiff bank the sum of P140,000.00 with interest at 16% per annum from November 27,
1980 until fully paid.
Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff the sum of P231,120.81
with interest at 12% per annum from July 1, 1981, until fully paid and the sum of P331,870.97 with
interest from March 28, 1981, until fully paid.
All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum of P100,000.00
as and for reasonable attorney's fee and the further sum equivalent to 3% per annum of the
respective principal sums from the dates above stated as penalty charge until fully paid, plus one
percent (1%) of the principal sums as service charge.
With costs against the defendants.
SO ORDERED. 1
From the above decision only defendant Fermin Canlas appealed to the then Intermediate Court (now the Court
Appeals). His contention was that inasmuch as he signed the promissory notes in his capacity as officer of the
defunct Worldwide Garment Manufacturing, Inc, he should not be held personally liable for such authorized
corporate acts that he performed. It is now the contention of the petitioner Republic Planters Bank that having
unconditionally signed the nine (9) promissory notes with Shozo Yamaguchi, jointly and severally, defendant
Fermin Canlas is solidarity liable with Shozo Yamaguchi on each of the nine notes.
We find merit in this appeal.
From the records, these facts are established: Defendant Shozo Yamaguchi and private respondent Fermin
Canlas were President/Chief Operating Officer and Treasurer respectively, of Worldwide Garment Manufacturing,
Inc.. By virtue of Board Resolution No.1 dated August 1, 1979, defendant Shozo Yamaguchi and private
respondent Fermin Canlas were authorized to apply for credit facilities with the petitioner Republic Planters Bank
in the forms of export advances and letters of credit/trust receipts accommodations. Petitioner bank issued nine
promissory notes, marked as Exhibits A to I inclusive, each of which were uniformly worded in the following manner:
___________, after date, for value received, I/we, jointly and severaIly promise to pay to the ORDER
of the REPUBLIC PLANTERS BANK, at its office in Manila, Philippines, the sum of ___________
PESOS(....) Philippine Currency...
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On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi and Fermin
Canlas above their printed names with the phrase "and (in) his personal capacity" typewritten below. At the bottom
of the promissory notes appeared: "Please credit proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
These entries were separated from the text of the notes with a bold line which ran horizontally across the pages.
In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment Manufacturing, Inc. was
apparently rubber stamped above the signatures of defendant and private respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporate name to Pinch
Manufacturing Corporation.
On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of money covered among others,
by the nine promissory notes with interest thereon, plus attorney's fees and penalty charges. The complainant was
originally brought against Worldwide Garment Manufacturing, Inc. inter alia, but it was later amended to drop
Worldwide Manufacturing, Inc. as defendant and substitute Pinch Manufacturing Corporation it its place.
Defendants Pinch Manufacturing Corporation and Shozo Yamaguchi did not file an Amended Answer and failed to
appear at the scheduled pre-trial conference despite due notice. Only private respondent Fermin Canlas filed an
Amended Answer wherein he, denied having issued the promissory notes in question since according to him, he
was not an officer of Pinch Manufacturing Corporation, but instead of Worldwide Garment Manufacturing, Inc., and
that when he issued said promissory notes in behalf of Worldwide Garment Manufacturing, Inc., the same were in
blank, the typewritten entries not appearing therein prior to the time he affixed his signature.
In the mind of this Court, the only issue material to the resolution of this appeal is whether private respondent
Fermin Canlas is solidarily liable with the other defendants, namely Pinch Manufacturing Corporation and Shozo
Yamaguchi, on the nine promissory notes.
We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes bearing his
signature for the following reasons:
The promissory motes are negotiable instruments and must be governed by the Negotiable Instruments Law. 2
Under the Negotiable lnstruments Law, persons who write their names on the face of promissory notes are makers
and are liable as such.3 By signing the notes, the maker promises to pay to the order of the payee or any holder 4
according to the tenor thereof.5 Based on the above provisions of law, there is no denying that private respondent
Fermin Canlas is one of the co-makers of the promissory notes. As such, he cannot escape liability arising
therefrom.
Where an instrument containing the words "I promise to pay" is signed by two or more persons, they are deemed
to be jointly and severally liable thereon.6 An instrument which begins" with "I" ,We" , or "Either of us" promise to,
pay, when signed by two or more persons, makes them solidarily liable. 7 The fact that the singular pronoun is
used indicates that the promise is individual as to each other; meaning that each of the co-signers is deemed to
have made an independent singular promise to pay the notes in full.
In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and certain, without
reason for ambiguity, by the presence of the phrase "joint and several" as describing the unconditional promise to
pay to the order of Republic Planters Bank. A joint and several note is one in which the makers bind themselves
both jointly and individually to the payee so that all may be sued together for its enforcement, or the creditor may
select one or more as the object of the suit. 8 A joint and several obligation in common law corresponds to a civil law solidary obligation;
that is, one of several debtors bound in such wise that each is liable for the entire amount, and not merely for his proportionate share. 9 By making a joint
and several promise to pay to the order of Republic Planters Bank, private respondent Fermin Canlas assumed the solidary liability of a debtor and the
payee may choose to enforce the notes against him alone or jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.
As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures of the makers in
the notes will affect the liability of the makers, We do not find it necessary to resolve and decide, because it is
immaterial and will not affect to the liability of private respondent Fermin Canlas as a joint and several debtor of
the notes. With or without the presence of said phrase, private respondent Fermin Canlas is primarily liable as a
co-maker of each of the notes and his liability is that of a solidary debtor.
Finally, the respondent Court made a grave error in holding that an amendment in a corporation's Articles of
Incorporation effecting a change of corporate name, in this case from Worldwide Garment manufacturing Inc to
Pinch Manufacturing Corporation extinguished the personality of the original corporation.
The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the
original corporation. It is the same corporation with a different name, and its character is in no respect changed.10
A change in the corporate name does not make a new corporation, and whether effected by special act or under a
general law, has no affect on the identity of the corporation, or on its property, rights, or liabilities. 11
The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had
previously contracted or incurred.12
As a general rule, officers or directors under the old corporate name bear no personal liability for acts done or
contracts entered into by officers of the corporation, if duly authorized. Inasmuch as such officers acted in their
capacity as agent of the old corporation and the change of name meant only the continuation of the old juridical
entity, the corporation bearing the same name is still bound by the acts of its agents if authorized by the Board.
Under the Negotiable Instruments Law, the liability of a person signing as an agent is specifically provided for as
follows:
Sec. 20. Liability of a person signing as agent and so forth. Where the instrument contains or a
person adds to his signature words indicating that he signs for or on behalf of a principal , or in a
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representative capacity, he is not liable on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling a representative character, without
disclosing his principal, does not exempt him from personal liability.
Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is acting in a
representative capacity or the name of the third party for whom he might have acted as agent, the agent is
personally liable to take holder of the instrument and cannot be permitted to prove that he was merely acting as
agent of another and parol or extrinsic evidence is not admissible to avoid the agent's personal liability. 13
On the private respondent's contention that the promissory notes were delivered to him in blank for his signature,
we rule otherwise. A careful examination of the notes in question shows that they are the stereotype printed form
of promissory notes generally used by commercial banking institutions to be signed by their clients in obtaining
loans. Such printed notes are incomplete because there are blank spaces to be filled up on material particulars
such as payee's name, amount of the loan, rate of interest, date of issue and the maturity date. The terms and
conditions of the loan are printed on the note for the borrower-debtor 's perusal. An incomplete instrument which
has been delivered to the borrower for his signature is governed by Section 14 of the Negotiable Instruments Law
which provides, in so far as relevant to this case, thus:
Sec. 14. Blanks: when may be filled. — Where the instrument is wanting in any material particular, the
person in possesion thereof has a prima facie authority to complete it by filling up the blanks therein.
... In order, however, that any such instrument when completed may be enforced against any person
who became a party thereto prior to its completion, it must be filled up strictly in accordance with the
authority given and within a reasonable time...
Proof that the notes were signed in blank was only the self-serving testimony of private respondent Fermin Canlas,
as determined by the trial court, so that the trial court ''doubts the defendant (Canlas) signed in blank the
promissory notes". We chose to believe the bank's testimony that the notes were filled up before they were given
to private respondent Fermin Canlas and defendant Shozo Yamaguchi for their signatures as joint and several
promissors. For signing the notes above their typewritten names, they bound themselves as unconditional makers.
We take judicial notice of the customary procedure of commercial banks of requiring their clientele to sign
promissory notes prepared by the banks in printed form with blank spaces already filled up as per agreed terms of
the loan, leaving the borrowers-debtors to do nothing but read the terms and conditions therein printed and to
sign as makers or co-makers. When the notes were given to private respondent Fermin Canlas for his signature,
the notes were complete in the sense that the spaces for the material particular had been filled up by the bank as
per agreement. The notes were not incomplete instruments; neither were they given to private respondent Fermin
Canlas in blank as he claims. Thus, Section 14 of the NegotiabIe Instruments Law is not applicable.
The ruling in case of Reformina vs. Tomol relied upon by the appellate court in reducing the interest rate on the
promissory notes from 16% to 12% per annum does not squarely apply to the instant petition. In the abovecited
case, the rate of 12% was applied to forebearances of money, goods or credit and court judgemets thereon, only
in the absence of any stipulation between the parties.
In the case at bar however , it was found by the trial court that the rate of interest is 9% per annum, which interest
rate the plaintiff may at any time without notice, raise within the limits allowed law. And so, as of February 16, 1984
, the plaintiff had fixed the interest at 16% per annum.
This Court has held that the rates under the Usury Law, as amended by Presidential Decree No. 116, are
applicable only to interests by way of compensation for the use or forebearance of money. Article 2209 of the Civil
Code, on the other hand, governs interests by way of damages.15 This fine distinction was not taken into
consideration by the appellate court, which instead made a general statement that the interest rate be at 12% per
annum.
Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling prescribed by
the Usury Law, the appellate court erred in limiting the interest rates at 12% per annum. Central Bank Circular No.
905, Series of 1982 removed the Usury Law ceiling on interest rates. 16
In the 1ight of the foregoing analysis and under the plain language of the statute and jurisprudence on the matter,
the decision of the respondent: Court of Appeals absolving private respondent Fermin Canlas is REVERSED and
SET ASIDE. Judgement is hereby rendered declaring private respondent Fermin Canlas jointly and severally liable
on all the nine promissory notes with the following sums and at 16% interest per annum from the dates indicated,
to wit:
Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest from January 29, 1981 until
fully paid; under promissory note marked as Exhibit B, the sum of P40,000.00 with interest from November 27,
1980: under the promissory note denominated as Exhibit C, the amount of P166,466.00 with interest from January
29, 1981; under the promissory note denominated as Exhibit D, the amount of P367,000.00 with interest from
January 29, 1981 until fully paid; under the promissory note marked as Exhibit E, the amount of P86,130.31 with
interest from January 29, 1981; under the promissory note marked as Exhibit F, the sum of P140,000.00 with
interest from November 27, 1980 until fully paid; under the promissory note marked as Exhibit G, the amount of
P12,703.70 with interest from November 27, 1980; the promissory note marked as Exhibit H, the sum of
P281,875.91 with interest from January 29, 1981; and the promissory note marked as Exhibit I, the sum of
P200,000.00 with interest on January 29, 1981.
The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide Garment Manufacturing, Inc.)
and Shozo Yamaguchi, for not having appealed from the decision of the trial court, shall be adjudged in
accordance with the judgment rendered by the Court a quo.
With respect to attorney's fees, and penalty and service charges, the private respondent Fermin Canlas is hereby
held jointly and solidarity liable with defendants for the amounts found, by the Court a quo. With costs against
private respondent.
SO ORDERED.
Narvasa, C.J., (Chairman), Feliciano, Regalado and Nocon, JJ., concur.
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THIRD DIVISION
G.R. No. 148864 August 21, 2003
SPOUSES EDUARDO B. EVANGELISTA and EPIFANIA C. EVANGELISTA, Petitioners,

vs.
MERCATOR FINANCE CORP., LYDIA P. SALAZAR, LAMEC'S** REALTY AND DEVELOPMENT CORP. and the
REGISTER OF DEEDS OF BULACAN, Respondents.
DECISIO N
PUNO, J.:
Petitioners, Spouses Evangelista ("Petitioners"), are before this Court on a Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Court, assailing the decision of the Court of Appeals dismissing their petition.
Petitioners filed a complaint1 for annulment of titles against respondents, Mercator Finance Corporation, Lydia P.
Salazar, Lamecs Realty and Development Corporation, and the Register of Deeds of Bulacan. Petitioners claimed
being the registered owners of five (5) parcels of land2 contained in the Real Estate Mortgage3 executed by them
and Embassy Farms, Inc. ("Embassy Farms"). They alleged that they executed the Real Estate Mortgage in favor
of Mercator Financing Corporation ("Mercator") only as officers of Embassy Farms. They did not receive the
proceeds of the loan evidenced by a promissory note, as all of it went to Embassy Farms. Thus, they contended
that the mortgage was without any consideration as to them since they did not personally obtain any loan or credit
accommodations. There being no principal obligation on which the mortgage rests, the real estate mortgage is
void.4 With the void mortgage, they assailed the validity of the foreclosure proceedings conducted by Mercator, the
sale to it as the highest bidder in the public auction, the issuance of the transfer certificates of title to it, the
subsequent sale of the same parcels of land to respondent Lydia P. Salazar ("Salazar"), and the transfer of the
titles to her name, and lastly, the sale and transfer of the properties to respondent Lamecs Realty & Development
Corporation ("Lamecs").
Mercator admitted that petitioners were the owners of the subject parcels of land. It, however, contended that "on
February 16, 1982, plaintiffs executed a Mortgage in favor of defendant Mercator Finance Corporation ‘for and in
consideration of certain loans, and/or other forms of credit accommodations obtained from the Mortgagee
(defendant Mercator Finance Corporation) amounting to EIGHT HUNDRED FORTY-FOUR THOUSAND SIX
HUNDRED TWENTY-FIVE & 78/100 (P844,625.78) PESOS, Philippine Currency and to secure the payment of the
same and those others that the MORTGAGEE may extend to the MORTGAGOR (plaintiffs) x x x.’"5 It contended
that since petitioners and Embassy Farms signed the promissory note6 as co-makers, aside from the Continuing
Suretyship Agreement7 subsequently executed to guarantee the indebtedness of Embassy Farms, and the
succeeding promissory notes8 restructuring the loan, then petitioners are jointly and severally liable with Embassy
Farms. Due to their failure to pay the obligation, the foreclosure and subsequent sale of the mortgaged properties
are valid.
Respondents Salazar and Lamecs asserted that they are innocent purchasers for value and in good faith, relying
on the validity of the title of Mercator. Lamecs admitted the prior ownership of petitioners of the subject parcels of
land, but alleged that they are the present registered owner. Both respondents likewise assailed the long silence
and inaction by petitioners as it was only after a lapse of almost ten (10) years from the foreclosure of the property
and the subsequent sales that they made their claim. Thus, Salazar and Lamecs averred that petitioners are in
estoppel and guilty of laches.9
During pre-trial, the parties agreed on the following issues:
a. Whether or not the Real Estate Mortgage executed by the plaintiffs in favor of defendant Mercator
Finance Corp. is null and void;
b. Whether or not the extra-judicial foreclosure proceedings undertaken on subject parcels of land to satisfy
the indebtedness of Embassy Farms, Inc. is (sic) null and void;
c. Whether or not the sale made by defendant Mercator Finance Corp. in favor of Lydia Salazar and that
executed by the latter in favor of defendant Lamecs Realty and Development Corp. are null and void;
d. Whether or not the parties are entitled to damages.10
After pre-trial, Mercator moved for summary judgment on the ground that except as to the amount of damages,
there is no factual issue to be litigated. Mercator argued that petitioners had admitted in their pre-trial brief the
existence of the promissory note, the continuing suretyship agreement and the subsequent promissory notes
restructuring the loan, hence, there is no genuine issue regarding their liability. The mortgage, foreclosure
proceedings and the subsequent sales are valid and the complaint must be dismissed.11
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Petitioners opposed the motion for summary judgment claiming that because their personal liability to Mercator is
at issue, there is a need for a full-blown trial.12
The RTC granted the motion for summary judgment and dismissed the complaint. It held:
A reading of the promissory notes show (sic) that the liability of the signatories thereto are solidary in view of the
phrase "jointly and severally." On the promissory note appears (sic) the signatures of Eduardo B. Evangelista,
Epifania C. Evangelista and another signature of Eduardo B. Evangelista below the words Embassy Farms, Inc. It
is crystal clear then that the plaintiffs-spouses signed the promissory note not only as officers of Embassy Farms,
Inc. but in their personal capacity as well(.) Plaintiffs(,) by affixing their signatures thereon in a dual capacity have
bound themselves as solidary debtor(s) with Embassy Farms, Inc. to pay defendant Mercator Finance Corporation
the amount of indebtedness. That the principal contract of loan is void for lack of consideration, in the light of the
foregoing is untenable.13
Petitioners’ motion for reconsideration was denied for lack of merit.14 Thus, petitioners went up to the Court of
Appeals, but again were unsuccessful. The appellate court held:
The appellants’ insistence that the loans secured by the mortgage they executed were not personally theirs but
those of Embassy Farms, Inc. is clearly self-serving and misplaced. The fact that they signed the subject
promissory notes in the(ir) personal capacities and as officers of the said debtor corporation is manifest on the
very face of the said documents of indebtedness (pp. 118, 128-131, Orig. Rec.). Even assuming arguendo that
they did not, the appellants lose sight of the fact that third persons who are not parties to a loan may secure the
latter by pledging or mortgaging their own property (Lustan vs. Court of Appeals, 266 SCRA 663, 675). x x x. In
constituting a mortgage over their own property in order to secure the purported corporate debt of Embassy
Farms, Inc., the appellants undeniably assumed the personality of persons interested in the fulfillment of the
principal obligation who, to save the subject realities from foreclosure and with a view towards being subrogated to
the rights of the creditor, were free to discharge the same by payment (Articles 1302 [3] and 1303, Civil Code of
the Philippines).15 (emphases in the original)
The appellate court also observed that "if the appellants really felt aggrieved by the foreclosure of the subject
mortgage and the subsequent sales of the realties to other parties, why then did they commence the suit only on
August 12, 1997 (when the certificate of sale was issued on January 12, 1987, and the certificates of title in the
name of Mercator on September 27, 1988)?" Petitioners’ "procrastination for about nine (9) years is difficult to
understand. On so flimsy a ground as lack of consideration, (w)e may even venture to say that the complaint was
not worth the time of the courts."16
A motion for reconsideration by petitioners was likewise denied for lack of merit.17 Thus, this petition where they
allege that:
The court a quo erred and acted with grave abuse of discretion amounting to lack or excess of jurisdiction in
affirming in toto the May 4, 1998 order of the trial court granting respondent’s motion for summary judgment
despite the existence of genuine issues as to material facts and its non-entitlement to a judgment as a matter of
law, thereby deciding the case in a way probably not in accord with applicable decisions of this Honorable Court.18
we affirm.
Summary judgment "is a procedural technique aimed at weeding out sham claims or defenses at an early stage of
the litigation."19 The crucial question in a motion for summary judgment is whether the issues raised in the
pleadings are genuine or fictitious, as shown by affidavits, depositions or admissions accompanying the motion. A
genuine issue means "an issue of fact which calls for the presentation of evidence, as distinguished from an issue
which is fictitious or contrived so as not to constitute a genuine issue for trial."20 To forestall summary judgment, it
is essential for the non-moving party to confirm the existence of genuine issues where he has substantial,
plausible and fairly arguable defense, i.e., issues of fact calling for the presentation of evidence upon which a
reasonable finding of fact could return a verdict for the non-moving party. The proper inquiry would therefore be
whether the affirmative defenses offered by petitioners constitute genuine issue of fact requiring a full-blown trial.21
In the case at bar, there are no genuine issues raised by petitioners. Petitioners do not deny that they obtained a
loan from Mercator. They merely claim that they got the loan as officers of Embassy Farms without intending to
personally bind themselves or their property. However, a simple perusal of the promissory note and the continuing
suretyship agreement shows otherwise. These documentary evidence prove that petitioners are solidary obligors
with Embassy Farms.
The promissory note22 states:
For value received, I/We jointly and severally promise to pay to the order of MERCATOR FINANCE
CORPORATION at its office, the principal sum of EIGHT HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED
TWENTY-FIVE PESOS & 78/100 (P 844,625.78), Philippine currency, x x x, in installments as follows:
September 16, 1982 - P154,267.87

October 16, 1982 - P154,267.87
November 16, 1982 - P154,267.87
December 16, 1982 - P154,267.87
January 16, 1983 - P154,267.87
February 16, 1983 - P154,267.87
xxx xxx xxx
The note was signed at the bottom by petitioners Eduardo B. Evangelista and Epifania C. Evangelista, and
Embassy Farms, Inc. with the signature of Eduardo B. Evangelista below it.
The Continuing Suretyship Agreement23 also proves the solidary obligation of petitioners, viz:
11/14/2018 G.R. No. 148864
(Embassy Farms, Inc.)
Principal
(Eduardo B. Evangelista)
Surety
(Epifania C. Evangelista)
Surety
(Mercator Finance Corporation)

Creditor
To: MERCATOR FINANCE COPORATION
(1) For valuable and/or other consideration, EDUARDO B. EVANGELISTA and EPIFANIA C.
EVANGELISTA (hereinafter called Surety), jointly and severally unconditionally guarantees (sic)
to MERCATOR FINANCE COPORATION (hereinafter called Creditor), the full, faithful and
prompt payment and discharge of any and all indebtedness of EMBASSY FARMS, INC.
(hereinafter called Principal) to the Creditor.
xxx xxx xxx
(3) The obligations hereunder are joint and several and independent of the obligations of the
Principal. A separate action or actions may be brought and prosecuted against the Surety
whether or not the action is also brought and prosecuted against the Principal and whether or
not the Principal be joined in any such action or actions.
xxx xxx xxx
The agreement was signed by petitioners on February 16, 1982. The promissory notes24 subsequently executed
by petitioners and Embassy Farms, restructuring their loan, likewise prove that petitioners are solidarily liable with
Embassy Farms.
Petitioners further allege that there is an ambiguity in the wording of the promissory note and claim that since it
was Mercator who provided the form, then the ambiguity should be resolved against it.
Courts can interpret a contract only if there is doubt in its letter.25 But, an examination of the promissory note
shows no such ambiguity. Besides, assuming arguendo that there is an ambiguity, Section 17 of the Negotiable
Instruments Law states, viz:
SECTION 17. Construction where instrument is ambiguous. – Where the language of the instrument is ambiguous
or there are omissions therein, the following rules of construction apply:
xxx xxx xxx
(g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are
deemed to be jointly and severally liable thereon.
Petitioners also insist that the promissory note does not convey their true intent in executing the document. The 1 â w p h i1
defense is unavailing. Even if petitioners intended to sign the note merely as officers of Embassy Farms, still this
does not erase the fact that they subsequently executed a continuing suretyship agreement. A surety is one who
is solidarily liable with the principal.26 Petitioners cannot claim that they did not personally receive any
consideration for the contract for well-entrenched is the rule 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. A
surety is bound by the same consideration that makes the contract effective between the principal parties
thereto.27 Having executed the suretyship agreement, there can be no dispute on the personal liability of
petitioners.
Lastly, the parol evidence rule does not apply in this case.28 We held in Tarnate v. Court of Appeals,29 that where
the parties admitted the existence of the loans and the mortgage deeds and the fact of default on the due
repayments but raised the contention that they were misled by respondent bank to believe that the loans were
long-term accommodations, then the parties could not be allowed to introduce evidence of conditions allegedly
agreed upon by them other than those stipulated in the loan documents because when they reduced their
agreement in writing, it is presumed that they have made the writing the only repository and memorial of truth, and
whatever is not found in the writing must be understood to have been waived and abandoned.
IN VIEW WHEREOF, the petition is dismissed. Treble costs against the petitioners.
SO ORDERED.
Panganiban, and Sandoval-Gutierrez, JJ., concur.

Corona, and Carpio-Morales, JJ., on official leave.
Footnotes
**
Sometimes spelled as Lamecs.
1
RTC of Malolos, Bulacan, Br. 85, Rollo, pp. 23-29.
2
With Transfer Certificates of Title Nos. T-193458, T-192133, T-193136, T-193137 and T-193138; Id. at 30-
39.
3
Id. at 40.
4
Id. at 26.
11/14/2018 G.R. No. 111190
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SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his personal capacity as garnishee,
petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and RAUL H. SESBREÑO, respondents.
BELLOSILLO, J.:
RAUL H. SESBREÑO filed a complaint for damages against Assistant City Fiscals Bienvenido N. Mabanto, Jr., and
Dario D. Rama, Jr., before the Regional Trial Court of Cebu City. After trial judgment was rendered ordering the
defendants to pay P11,000.00 to the plaintiff, private respondent herein. The decision having become final and
executory, on motion of the latter, the trial court ordered its execution. This order was questioned by the
defendants before the Court of Appeals. However, on 15 January 1992 a writ of execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner Loreto D. de la Victoria as City Fiscal of
Mandaue City where defendant Mabanto, Jr., was then detailed. The notice directed petitioner not to disburse,
transfer, release or convey to any other person except to the deputy sheriff concerned the salary checks or other
checks, monies, or cash due or belonging to Mabanto, Jr., under penalty of law. 1 On 10 March 1992 private
respondent filed a motion before the trial court for examination of the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was dismissed. Thus the trial court, finding no
more legal obstacle to act on the motion for examination of the garnishees, directed petitioner on 4 November
1992 to submit his report showing the amount of the garnished salaries of Mabanto, Jr., within fifteen (15) days
from receipt 2 taking into consideration the provisions of Sec. 12, pars. (f) and (i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require petitioner to explain why he should not be cited
in contempt of court for failing to comply with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the notice of garnishment claiming that he was
not in possession of any money, funds, credit, property or anything of value belonging to Mabanto, Jr., except his
salary and RATA checks, but that said checks were not yet properties of Mabanto, Jr., until delivered to him. He
further claimed that, as such, they were still public funds which could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered petitioner to immediately comply with its order of
4 November 1992. 3 It opined that the checks of Mabanto, Jr., had already been released through petitioner by the
Department of Justice duly signed by the officer concerned. Upon service of the writ of garnishment, petitioner as
custodian of the checks was under obligation to hold them for the judgment creditor. Petitioner became a virtual
party to, or a forced intervenor in, the case and the trial court thereby acquired jurisdiction to bind him to its orders
and processes with a view to the complete satisfaction of the judgment. Additionally, there was no sufficient reason
for petitioner to hold the checks because they were no longer government funds and presumably delivered to the
payee, conformably with the last sentence of Sec. 16 of the Negotiable Instruments Law.
With regard to the contempt charge, the trial court was not morally convinced of petitioner's guilt. For, while his
explanation suffered from procedural infirmities nevertheless he took pains in enlightening the court by sending a
written explanation dated 22 July 1992 requesting for the lifting of the notice of garnishment on the ground that the
notice should have been sent to the Finance Officer of the Department of Justice. Petitioner insists that he had no
authority to segregate a portion of the salary of Mabanto, Jr. The explanation however was not submitted to the
trial court for action since the stenographic reporter failed to attach it to the record. 4
On 20 April 1993 the motion for reconsideration was denied. The trial court explained that it was not the duty of
the garnishee to inquire or judge for himself whether the issuance of the order of execution, writ of execution and
notice of garnishment was justified. His only duty was to turn over the garnished checks to the trial court which
issued the order of execution. 5
Petitioner raises the following relevant issues: (1) whether a check still in the hands of the maker or its duly
authorized representative is owned by the payee before physical delivery to the latter: and, (2) whether the salary
check of a government official or employee funded with public funds can be subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned by Mabanto, Jr., because they were not yet
delivered to him, and that petitioner as garnishee has no legal obligation to hold and deliver them to the trial court
to be applied to Mabanto, Jr.'s judgment debt. The thesis of petitioner is that the salary checks still formed part of
public funds and therefore beyond the reach of garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching credits belonging to the judgment debtor
owing to him from a stranger to the litigation. 6 Emphasis is laid on the phrase "belonging to the judgment debtor"
11/14/2018 G.R. No. 111190
since it is the focal point in resolving the issues raised.
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives his compensation in
the form of checks from the Department of Justice through petitioner as City Fiscal of Mandaue City and head of
office. Under Sec. 16 of the Negotiable Instruments Law, every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the purpose of giving effect thereto. As ordinarily understood,
delivery means the transfer of the possession of the instrument by the maker or drawer with intent to transfer title
to the payee and recognize him as the holder thereof.7
According to the trial court, the checks of Mabanto, Jr., were already released by the Department of Justice duly
signed by the officer concerned through petitioner and upon service of the writ of garnishment by the sheriff
petitioner was under obligation to hold them for the judgment creditor. It recognized the role of petitioner as
custodian of the checks. At the same time however it considered the checks as no longer government funds and
presumed delivered to the payee based on the last sentence of Sec. 16 of the Negotiable Instruments Law which
states: "And where the instrument is no longer in the possession of a party whose signature appears thereon, a
valid and intentional delivery by him is presumed." Yet, the presumption is not conclusive because the last portion
of the provision says "until the contrary is proved." However this phrase was deleted by the trial court for no
apparent reason. Proof to the contrary is its own finding that the checks were in the custody of petitioner.
Inasmuch as said checks had not yet been delivered to Mabanto, Jr., they did not belong to him and still had the
character of public funds. In Tiro v. Hontanosas 8 we ruled that —
The salary check of a government officer or employee such as a teacher does not belong to him
before it is physically delivered to him. Until that time the check belongs to the government.
Accordingly, before there is actual delivery of the check, the payee has no power over it; he cannot
assign it without the consent of the Government.
As a necessary consequence of being public fund, the checks may not be garnished to satisfy the judgment. 9 The
rationale behind this doctrine is obvious consideration of public policy. The Court succinctly stated in
Commissioner of Public Highways v. San Diego 10 that —
The functions and public services rendered by the State cannot be allowed to be paralyzed or
disrupted by the diversion of public funds from their legitimate and specific objects, as appropriated
by law.
In denying petitioner's motion for reconsideration, the trial court expressed the additional ratiocination that it was
not the duty of the garnishee to inquire or judge for himself whether the issuance of the order of execution, the writ
of execution, and the notice of garnishment was justified, citing our ruling in Philippine Commercial Industrial Bank
v. Court of Appeals. 11 Our precise ruling in that case was that "[I]t is not incumbent upon the garnishee to inquire
or to judge for itself whether or not the order for the advance execution of a judgment is valid." But that is invoking
only the general rule. We have also established therein the compelling reasons, as exceptions thereto, which were
not taken into account by the trial court, e.g., a defect on the face of the writ or actual knowledge by the garnishee
of lack of entitlement on the part of the garnisher. It is worth to note that the ruling referred to the validity of
advance execution of judgments, but a careful scrutiny of that case and similar cases reveals that it was applicable
to a notice of garnishment as well. In the case at bench, it was incumbent upon petitioner to inquire into the validity
of the notice of garnishment as he had actual knowledge of the non-entitlement of private respondent to the
checks in question. Consequently, we find no difficulty concluding that the trial court exceeded its jurisdiction in
issuing the notice of garnishment concerning the salary checks of Mabanto, Jr., in the possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20 April 1993 of the Regional Trial
Court of Cebu City, Br. 17, subject of the petition are SET ASIDE. The notice of garnishment served on petitioner
dated 3 February 1992 is ordered DISCHARGED.
SO ORDERED.
Quiason and Kapunan, JJ., concur.
Separate Opinions
DAVIDE, JR., J., concurring and dissenting:
This Court may take judicial notice of the fact that checks for salaries of employees of various Departments all
over the country are prepared in Manila not at the end of the payroll period, but days before it to ensure that they
reach the employees concerned not later than the end of the payroll period. As to the employees in the provinces
or cities, the checks are sent through the heads of the corresponding offices of the Departments. Thus, in the
case of Prosecutors and Assistant Prosecutors of the Department of Justice, the checks are sent through the
Provincial Prosecutors or City Prosecutors, as the case may be, who shall then deliver the checks to the payees.
Involved in the instant case are the salary and RATA checks of then Assistant City Fiscal Bienvenido Mabanto, Jr.,
who was detailed in the Office of the City Fiscal (now Prosecutor) of Mandaue City. Conformably with the aforesaid
practice, these checks were sent to Mabanto thru the petitioner who was then the City Fiscal of Mandaue City.
The ponencia failed to indicate the payroll period covered by the salary check and the month to which the RATA
check corresponds.
I respectfully submit that if these salary and RATA checks corresponded, respectively, to a payroll period and to a
month which had already lapsed at the time the notice of garnishment was served, the garnishment would be valid,
as the checks would then cease to be property of the Government and would become property of Mabanto. Upon
the expiration of such period and month, the sums indicated therein were deemed automatically segregated from
the budgetary allocations for the Department of Justice under the General Appropriations Act.
11/14/2018 G.R. No. 111190
It must be recalled that the public policy against execution, attachment, or garnishment is directed to public funds.
Thus, in the case of Director of the Bureau of Commerce and Industry vs. Concepcion 1 where the core issue was
whether or not the salary due from the Government to a public officer or employee can, by garnishment, be seized
before being paid to him and appropriated to the payment of his judgment debts, this Court held:
A rule, which has never been seriously questioned, is that money in the hands of public officers,
although it may be due government employees, is not liable to the creditors of these employees in the
process of garnishment. One reason is, that the State, by virtue of its sovereignty, may not be sued in
its own courts except by express authorization by the Legislature, and to subject its officers to
garnishment would be to permit indirectly what is prohibited directly. Another reason is that moneys
sought to be garnished, as long as they remain in the hands of the disbursing officer of the
Government, belong to the latter, although the defendant in garnishment may be entitled to a specific
portion thereof. And still another reason which covers both of the foregoing is that every consideration
of public policy forbids it.
The United States Supreme Court, in the leading case of Buchanan vs. Alexander ([1846], 4 How.,
19), in speaking of the right of creditors of seamen, by process of attachment, to divert the public
money from its legitimate and appropriate object, said:
To state such a principle is to refute it. No government can sanction it. At all times it
would be found embarrassing, and under some circumstances it might be fatal to the
public service. . . . So long as money remains in the hands of a disbursing officer, it is as
much the money of the United States, as if it had not been drawn from the treasury. Until
paid over by the agent of the government to the person entitled to it, the fund cannot, in
any legal sense, be considered a part of his effects." (See, further, 12 R.C.L., p. 841;
Keene vs. Smith [1904], 44 Ore., 525; Wild vs. Ferguson [1871], 23 La. Ann., 752; Bank
of Tennessee vs. Dibrell [1855], 3 Sneed [Tenn.], 379). (emphasis supplied)
The authorities cited in the ponencia are inapplicable. Garnished or levied on therein were public funds, to wit: (a)
the pump irrigation trust fund deposited with the Philippine National Bank (PNB) in the account of the Irrigation
Service Unit in Republic vs. Palacio; 2 (b) the deposits of the National Media Production Center in Traders Royal
Bank vs. Intermediate Appellate Court; 3 and (c) the deposits of the Bureau of Public Highways with the PNB under
a current account, which may be expended only for their legitimate object as authorized by the corresponding
legislative appropriation in Commissioner of Public Highways vs. Diego. 4
Neither is Tiro vs. Hontanosas 5 squarely in point. The said case involved the validity of Circular No. 21, series of
1969, issued by the Director of Public Schools which directed that "henceforth no cashier or disbursing officer
shall pay to attorneys-in-fact or other persons who may be authorized under a power of attorney or other forms of
authority to collect the salary of an employee, except when the persons so designated and authorized is an
immediate member of the family of the employee concerned, and in all other cases except upon proper
authorization of the Assistant Executive Secretary for Legal and Administrative Matters, with the recommendation
of the Financial Assistant." Private respondent Zafra Financing Enterprise, which had extended loans to public
school teachers in Cebu City and obtained from the latter promissory notes and special powers of attorney
authorizing it to take and collect their salary checks from the Division Office in Cebu City of the Bureau of Public
Schools, sought, inter alia, to nullify the Circular. It is clear that the teachers had in fact assigned to or waived in
favor of Zafra their future salaries which were still public funds. That assignment or waiver was contrary to public
policy.
I would therefore vote to grant the petition only if the salary and RATA checks garnished corresponds to an
unexpired payroll period and RATA month, respectively.
Padilla, J., concurs.
Separate Opinions
check corresponds.
11/14/2018 G.R. No. 111190
policy.
Footnotes
1 Rollo, p. 12.
2 Id., p. 18.
3 Id., p. 115.
4 Id., p. 114.
5 Id., p. 129.
6 Engineering Construction, Inc. v. National Power Corporation, No. L-34589, 29 June 1988, 163
SCRA 9; Rizal Commercial Banking Corporation v. de Castro, No. L-34548, 29 November 1988, 168
SCRA 49; Sec. 8, Rule 57 of the Rules of Court.
7 Hector S. de Leon, The Law on Negotiable Instruments, 1989 Ed., p. 48; People v. Yabut, Jr., No. L-
42902, 29 April 1977, 76 SCRA 624.
8 No. L-32312, 25 November 1983, 125 SCRA 697.
9 Republic v. Palacio, No. L-20322, 29 May 1968, 23 SCRA 899; Director of the Bureau of Commerce
and Industry v. Concepcion, 43 Phil. 384 (1922); Traders Royal Bank v. IAC, G.R. No. 68514, 17
December 1990, 192 SCRA 305.
10 No. L-30098, 18 February 1970, 31 SCRA 616.
1 43 Phil. 384 [1922].
2 23 SCRA 899 [1968].
3 192 SCRA 305 [1990].
4 31 SCRA 616 [1970].
11/14/2018 G.R. No. 89252
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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
February 9, 1981
———————
VALUE DATE
TO Raul Sesbreño
April 6, 1981
————————
MATURITY DATE
NO. 10805
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.
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PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)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.5 The 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
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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 10, 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.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice President13
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
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17
money market transactions. In Perez v. Court of Appeals, 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
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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
11/14/2018 G.R. No. 89252
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.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.
# Footnotes
1 Exhibit "C", Folder of Exhibits, p. 3; TSN, 14 June 1983, p. 41.
2 Records, p. 441; Plaintiff's Memorandum, p. 3.
3 Id., p. 451; Plaintiff's Memorandum, p. 13.
4 TSN, 14 June 1983, p. 35.
5 Petitioner explained that he did not implead Philfinance as party defendant because the latter was under
rehabilitation by the Securities and Exchange Commission (TSN of the Pre-trial Conference, pp. 6 and 30;
dated 04 March 1983).
6 Court of Appeals' Decision, p. 8; Rollo, p. 90.
7 Private respondent Delta adopted as its own the Memorandum filed by private respondent Pilipinas
(Rollo, pp. 269-73).
8 Rollo, p. 6; Petition, p. 5.
9 Id., p. 88.
10 TSN, 17 August 1983, p. 36.
11 Records, pp. 36-37.
12 National Bank of Bristol v. Bartolome & O.R. Co., 59 A. 134, 138. See also, in this connection,
Consolidated Plywood v. IFC Leasing, 149 SCRA 449 (1987).
11/14/2018 G.R. No. 72593
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SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions of law a decision of
the Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution dated
October 17, 1985, denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its program of logging activities for the
year 1978 the opening of additional roads, and simultaneous logging operations along the route of said roads, in
its logging concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it needed two (2)
additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of Manila, through its
sister company and marketing arm, Industrial Products Marketing (the "seller-assignor"), a corporation dealing in
tractors and other heavy equipment business, offered to sell to petitioner-corporation two (2) "Used" Allis Crawler
Tractors, one (1) an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n., May 28, 1980, p. 44) and
to determine the capability of the "Used" tractors being offered, petitioner-corporation requested the seller-
assignor to inspect the job site. After conducting said inspection, the seller-assignor assured petitioner-
corporation that the "Used" Allis Crawler Tractors which were being offered were fit for the job, and gave the
corresponding warranty of ninety (90) days performance of the machines and availability of parts. (t.s.n., May 28,
1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner-corporation
through petitioners Wee and Vergara, president and vice- president, respectively, agreed to purchase on
installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten
Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors (Exh. "3-A"). At the
same time, the deed of sale with chattel mortgage with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the seller-
assignor, by means of a deed of assignment (E exh. " 1 "), assigned its rights and interest in the chattel mortgage
in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the petitioner-
corporation's job site and as agreed, the seller-assignor stationed its own mechanics to supervise the operations
of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after another
nine (9) days, the other tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the fact that the tractors
broke down and requested for the seller-assignor's usual prompt attention under the warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor sent to the job
site its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but
the tractors did not come out to be what they should be after the repairs were undertaken because the units were
no longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and simultaneous logging operations of petitioner-
corporation were delayed and petitioner Vergara advised the seller-assignor that the payments of the installments
as listed in the promissory note would likewise be delayed until the seller-assignor completely fulfills its obligation
under its warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor to pull
out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to
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the respondent and the excess, if any, to be divided between the seller-assignor and petitioner-corporation which
offered to bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the petitioner-corporation and despite several follow-up
calls, the seller-assignor did nothing with regard to the request, until the complaint in this case was filed by the
respondent against the petitioners, the corporation, Wee, and Vergara.
The complaint was filed by the respondent against the petitioners for the recovery of the principal sum of One
Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of
One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979,
accruing interest thereafter at the rate of twelve (12%) percent per annum, attorney's fees of Two Hundred Forty
Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial court to
order the respondent to pay the petitioners damages in an amount at the sound discretion of the court, Twenty
Thousand Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of
litigation. The petitioners likewise prayed for such other and further relief as would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official and personal capacities the
principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS
& 71/100 (P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE THOUSAND SIX
HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of August 15, 1979 and accruing interest
thereafter at the rate of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent (10%) of
the principal and to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the following errors:
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC COMPANY OF
MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE OF
THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in toto the decision of
the trial court. The pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of warranty, We are of the considered
opinion that aside from the fact that no provision of warranty appears or is provided in the Deed of
Sale of the tractors and even admitting that in a contract of sale unless a contrary intention appears,
there is an implied warranty, the defense of breach of warranty, if there is any, as in this case, does
not lie in favor of the appellants and against the plaintiff-appellee who is the assignee of the
promissory note and a holder of the same in due course. Warranty lies in this case only between
Industrial Products Marketing and Consolidated Plywood Industries, Inc. The plaintiff-appellant herein
upon application by appellant corporation granted financing for the purchase of the questioned units
of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense available to appellants either to withdraw from
the contract and/or demand a proportionate reduction of the price with damages in either case (Art.
1567, New Civil Code). We now come to the issue as to whether the plaintiff-appellee is a holder in
due course of the promissory note.
To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation engaged in
financing and receivable discounting extending credit facilities to consumers and industrial,
commercial or agricultural enterprises by discounting or factoring commercial papers or accounts
receivable duly authorized pursuant to R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is a negotiable instrument which was
discounted or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 (Exh. "A")
considering the following. it is in writing and signed by the maker; it contains an unconditional promise
to pay a certain sum of money payable at a fixed or determinable future time; it is payable to order
(Sec. 1, NIL); the promissory note was negotiated when it was transferred and delivered by IPM to the
appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the conditions that the note
was complete and regular upon its face before the same was overdue and without notice, that it had
been previously dishonored and that the note is in good faith and for value without notice of any
infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held
the instrument free from any defect of title of prior parties and free from defenses available to prior
parties among themselves and may enforce payment of the instrument for the full amount thereof
against all parties liable thereon (Sec. 57, NIL); the appellants engaged that they would pay the note
according to its tenor, and admit the existence of the payee IPM and its capacity to endorse (Sec. 60,
NIL).
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In view of the essential elements found in the questioned promissory note, We opine that the same is
legally and conclusively enforceable against the defendants-appellants.
WHEREFORE, finding the decision appealed from according to law and evidence, We find the appeal
without merit and thus affirm the decision in toto. With costs against the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by the Intermediate
Appellate Court in its resolution dated October 17, 1985, a copy of which was received by the petitioners on
October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED UNDER
THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT
PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER OF RIGHTS
WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL
DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE PROMISSORY
NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE
REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985, as well as the
resolution dated October 17, 1985 and dismissing the complaint but granting petitioners' counterclaims before the
court of origin.
On the other hand, the respondent corporation in its comment to the petition filed on February 20, 1986,
contended that the petition was filed out of time; that the promissory note is a negotiable instrument and
respondent a holder in due course; that respondent is not liable for any breach of warranty; and finally, that the
promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in question is a negotiable instrument so as to bar
completely all the available defenses of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the instant petition to have been filed on time
because the petitioners' motion for reconsideration actually raised new issues. It cannot, therefore, be considered
pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90-day warranty because the findings of
the trial court, adopted by the respondent appellate court, that "14 days after delivery, the first tractor broke down
and 9 days, thereafter, the second tractor became inoperable" are sustained by the records. The petitioner was
clearly a victim of a warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing
sold may have, should they render it unfit for the use for which it is intended, or should they diminish
its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have
acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent
defects or those which may be visible, or for those which are not visible if the vendee is an expert
who, by reason of his trade or profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of
the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to the seller the particular purpose for
which the goods are acquired, and it appears that the buyer relies on the sellers skill or judge
judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the
goods shall be reasonably fit for such purpose;
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xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may
be annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold
even though he was not aware thereof.
This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the
hidden faults or defects in the thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner. This liability as a
general rule, extends to the corporation to whom it assigned its rights and interests unless the assignee is a holder
in due course of the promissory note in question, assuming the note is negotiable, in which case the latter's rights
are based on the negotiable instrument and assuming further that the petitioner's defenses may not prevail
against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-corporation notified
the seller-assignor's sister company, AG & P, about the breakdown based on the seller-assignor's express 90-day
warranty, with which the latter complied by sending its mechanics. However, due to the seller-assignor's delay and
its failure to comply with its warranty, the tractors became totally unserviceable and useless for the purpose for
which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between
withdrawing from the contract and demanding a proportionate reduction of the price, with damages in
either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor, necessarily can no
longer sue the seller-assignor except by way of counterclaim if the seller-assignor sues it because of the
rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:
In other words, the party who deems the contract violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action taken
was or was not correct in law. But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for adjudgement before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final judgment of rescission is
rendered when the law itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question is not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE
PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said principal sum, to be payable in
24 monthly installments starting July 15, 1978 and every 15th of the month thereafter until fully paid.
...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note "must
be payable to order or bearer, " it cannot be denied that the promissory note in question is not a negotiable
instrument.
The instrument in order to be considered negotiablility-i.e. must contain the so-called 'words of
negotiable, must be payable to 'order' or 'bearer'. These words serve as an expression of consent
that the instrument may be transferred. This consent is indispensable since a maker assumes greater
risk under a negotiable instrument than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where it is drawn payable
to the order of a specified person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made payable to order. There must
always be a specified person named in the instrument. It means that the bill or note is to be paid to
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the person designated in the instrument or to any person to whom he has indorsed and delivered the
same. Without the words "or order" or"to the order of, "the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy
the advantages of being a holder of a negotiable instrument but will merely "step into the shoes" of
the person designated in the instrument and will thus be open to all defenses available against the
latter." (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third
Edition, page 38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the
respondent can never be a holder in due course but remains a mere assignee of the note in question. Thus, the
petitioner may raise against the respondent all defenses available to it as against the seller-assignor Industrial
Products Marketing.
This being so, there was no need for the petitioner to implied the seller-assignor when it was sued by the
respondent-assignee because the petitioner's defenses apply to both or either of either of them. Actually, the
records show that even the respondent itself admitted to being a mere assignee of the promissory note in
question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what is being assigned is the Deed of Sale with
Chattel Mortgage with the promissory note which is as testified to by the witness was
indorsed? (Counsel for Plaintiff nodding his head.) Then we have no further questions
on cross,
COURT:
You confirm his manifestation? You are nodding your head? Do you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed of sale is a transaction between two
persons; what is assigned are rights, the rights of the mortgagee were assigned to the
IFC Leasing & Acceptance Corporation.
COURT:
He puts it in a simple way as one-deed of sale and chattel mortgage were assigned; . . .
you want to make a distinction, one is an assignment of mortgage right and the other one
is indorsement of the promissory note. What counsel for defendants wants is that you
stipulate that it is contained in one single transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the promissory note in question is a negotiable
instrument, the respondent cannot be a holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale on installment of the tractors, there was an
arrangement between the seller-assignor, Industrial Products Marketing, and the respondent whereby the latter
would pay the seller-assignor the entire purchase price and the seller-assignor, in turn, would assign its rights to
the respondent which acquired the right to collect the price from the buyer, herein petitioner Consolidated Plywood
Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the
Disclosure of Loan/Credit Transaction shows that said documents evidencing the sale on installment of the
tractors were all executed on the same day by and among the buyer, which is herein petitioner Consolidated
Plywood Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assignee-financing
company, which is the respondent. Therefore, the respondent had actual knowledge of the fact that the seller-
assignor's right to collect the purchase price was not unconditional, and that it was subject to the condition that the
tractors -sold were not defective. The respondent knew that when the tractors turned out to be defective, it would
be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners.
Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the
same with actual knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith,
is not a holder in due course. As such, the respondent is subject to all defenses which the petitioners may raise
against the seller-assignor. Any other interpretation would be most inequitous to the unfortunate buyer who is not
only saddled with two useless tractors but must also face a lawsuit from the assignee for the entire purchase price
and all its incidents without being able to raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact, which would
justify its act of taking the promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due course is a holder
who has taken the instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of deffect
in the title of the person negotiating it
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xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of an infirmity in the
instrument or defect in the title of the person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that
his action in taking the instrument amounts to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the
buyer, to wit:
In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price.
Many times, in pursuance of a previous arrangement with the seller, a finance company pays the full
price and the note is indorsed to it, subrogating it to the right to collect the price from the buyer, with
interest. With the increasing frequency of installment buying in this country, it is most probable that
the tendency of the courts in the United States to protect the buyer against the finance company will ,
the finance company will be subject to the defense of failure of consideration and cannot recover the
purchase price from the buyer. As against the argument that such a rule would seriously affect "a
certain mode of transacting business adopted throughout the State," a court in one case stated:
It may be that our holding here will require some changes in business methods and will
impose a greater burden on the finance companies. We think the buyer-Mr. & Mrs.
General Public-should have some protection somewhere along the line. We believe the
finance company is better able to bear the risk of the dealer's insolvency than the buyer
and in a far better position to protect his interests against unscrupulous and insolvent
dealers. . . .
If this opinion imposes great burdens on finance companies it is a potent argument in

favor of a rule which win afford public protection to the general buying public against
unscrupulous dealers in personal property. . . . (Mutual Finance Co. v. Martin, 63 So. 2d
649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes and Selected Cases on
Negotiable Instruments Law, Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766) involving similar
facts, it was held that in a very real sense, the finance company was a moving force in the transaction from its very
inception and acted as a party to it. When a finance company actively participates in a transaction of this type from
its inception, it cannot be regarded as a holder in due course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is negotiable, the respondent, a
financing company which actively participated in the sale on installment of the subject two Allis Crawler tractors,
cannot be regarded as a holder in due course of said note. It follows that the respondent's rights under the
promissory note involved in this case are subject to all defenses that the petitioners have against the seller-
assignor, Industrial Products Marketing. For Section 58 of the Negotiable Instruments Law provides that "in the
hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as
if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find that both the trial and
respondent appellate court erred in holding the promissory note in question to be negotiable. Such a ruling does
not only violate the law and applicable jurisprudence, but would result in unjust enrichment on the part of both the
assigner- assignor and respondent assignee at the expense of the petitioner-corporation which rightfully
rescinded an inequitable contract. We note, however, that since the seller-assignor has not been impleaded
herein, there is no obstacle for the respondent to file a civil Suit and litigate its claims against the seller- assignor
in the rather unlikely possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated July 17, 1985, as well
as its resolution dated October 17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against the
petitioner before the trial court is DISMISSED.
SO ORDERED.
Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.
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Custom Search

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK, petitioner,

vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL BANK of the
PHILIPPINES, respondents.
TORRES, JR., J.:
Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals dated January
29, 1990,1 affirming the nullity of the transfer of Central Bank Certificate of Indebtedness (CBCI) No. D891,2 with a
face value of P500,000.00, from the Philippine Underwriters Finance Corporation (Philfinance) to the petitioner
Trader's Royal Bank (TRB), under a Repurchase Agreement3 dated February 4, 1981, and a Detached
Assignment4 dated April 27, 1981.
Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action was originally
filed as a Petition for Mandamus5 under Rule 65 of the Rules of Court, to compel the Central Bank of the
Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank (TRB).
In the said petition, TRB stated that:
3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed a "Detached
Assignment" . . ., whereby Filriters, as registered owner, sold, transferred, assigned and delivered
unto Philippine Underwriters Finance Corporation (Philfinance) all its rights and title to Central Bank
Certificates of Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having an
aggregate value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A") contains an express authorization executed by
the transferor intended to complete the assignment through the registration of the transfer in the
name of PhilFinance, which authorization is specifically phrased as follows: '(Filriters) hereby
irrevocably authorized the said issuer (Central Bank) to transfer the said bond/certificates on the
books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance . . .,

whereby, for and in consideration of the sum of PESOS: FIVE HUNDRED THOUSAND (P500,000.00),
PhilFinance sold, transferred and delivered to petitioner CBCI 4-year, 8th series, Serial No. D891 with
a face value of P500,000.00 . . ., which CBCI was among those previously acquired by PhilFinance
from Filriters as averred in paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to repurchase
CBCI Serial No. D891 (Annex "C"), at the stipulated price of PESOS: FIVE HUNDRED NINETEEN
THOUSAND THREE HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on April 27, 1981;
7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981, when the
checks it issued in favor of petitioner were dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the Petitioner to
enable the latter to have its title completed and registered in the books of the respondent. And by
means of said Detachment, Philfinance transferred and assigned all, its rights and title in the said
CBCI (Annex "C") to petitioner and, furthermore, it did thereby "irrevocably authorize the said issuer
(respondent herein) to transfer the said bond/certificate on the books of its fiscal agent." . . .
9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned Detached
Assignments (Annexes "B" and "D"), to the Securities Servicing Department of the respondent, and
requested the latter to effect the transfer of the CBCI on its books and to issue a new certificate in the
name of petitioner as absolute owner thereof;
10. Respondent failed and refused to register the transfer as requested, and continues to do so
notwithstanding petitioner's valid and just title over the same and despite repeated demands in
writing, the latest of which is hereto attached as Annex "E" and made an integral part hereof;
11. The express provisions governing the transfer of the CBCI were substantially complied with the
petitioner's request for registration, to wit:
"No transfer thereof shall be valid unless made at said office (where the Certificate has
been registered) by the registered owner hereof, in person or by his attorney duly
authorized in writing, and similarly noted hereon, and upon payment of a nominal transfer
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fee which may be required, a new Certificate shall be issued to the transferee of the
registered holder thereof."
and, without a doubt, the Detached Assignments presented to respondent were sufficient
authorizations in writing executed by the registered owner, Filriters, and its transferee, PhilFinance, as
required by the above-quoted provision;
12. Upon such compliance with the aforesaid requirements, the ministerial duties of registering a
transfer of ownership over the CBCI and issuing a new certificate to the transferee devolves upon the
respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central Bank of the
Philippines' Motion for Admission of Amended Answer with Counter Claim for Interpleader6 thereby calling to fore
the respondent Filriters Guaranty Assurance Corporation (Filriters), the registered owner of the subject CBCI as
respondent.
For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI No. 891;
12. The CBCI constitutes part of the reserve investment against liabilities required of respondent as
an insurance company under the Insurance Code;
13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the trust fund
doctrine and to the prejudice of policyholders and to all who have present or future claim against
policies issued by Filriters, Alfredo Banaria, then Senior Vice-President-Treasury of Filriters, without
any board resolution, knowledge or consent of the board of directors of Filriters, and without any
clearance or authorization from the Insurance Commissioner, executed a detached assignment
purportedly assigning CBCI No. 891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, Vice-
President-Treasury of Filriters (both of whom were holding the same positions in Philfinance), without
any consideration or benefit redounding to Filriters and to the grave prejudice of Filriters, its policy
holders and all who have present or future claims against its policies, executed similar detached
assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and inoperative because the assignment is without the
knowledge and consent of directors of Filriters, and not duly authorized in writing by the Board, as
requiring by Article V, Section 3 of CB Circular No. 769;
16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and not the
corporate act of Filriters and such null and void;
a) The assignment was executed without consideration and for that reason, the assignment is void
from the beginning (Article 1409, Civil Code);
b) The assignment was executed without any knowledge and consent of the board of directors of
Filriters;
c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a requirement under
the Insurance Code for its existence as an insurance company and the pursuit of its business
operations. The assignment of the CBCI is illegal act in the sense of malum in se or malum
prohibitum, for anyone to make, either as corporate or personal act;
d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited by law, is

immoral and against public policy;
e) The assignment of the CBCI has resulted in the capital impairment and in the solvency deficiency
of Filriters (and has in fact helped in placing Filriters under conservatorship), an inevitable result
known to the officer who executed assignment.
17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the assignment.
a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is not
payable to bearer but is a registered in the name of Filriters;
b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the registered
owner as the absolute owner and that the value of the registered certificates shall be payable only to
the registered owner; a sufficient notice to plaintiff that the assignments do not give them the
registered owner's right as absolute owner of the CBCI's;
c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides that the
registered certificates are payable only to the registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters is not a
regular transaction made in the usual of ordinary course of business;
a) The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by the
Insurance Code and its assignment or transfer is expressly prohibited by law. There was no attempt to
get any clearance or authorization from the Insurance Commissioner;
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b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular course of
its business;
c) The CBCI involved substantial amount and its assignment clearly constitutes disposition of "all or
substantially all" of the assets of Filriters, which requires the affirmative action of the stockholders
(Section 40, Corporation [sic] Code.7
In its Decision8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the assignment of
CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the same CBCI by Philfinance in favor of
Traders Royal Bank null and void and of no force and effect. The dispositive portion of the decision reads:
ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters Guaranty Assurance
Corporation and against the plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent
assignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal Bank as null and void and of
no force and effect;
(b) Ordering the respondent Central Bank of the Philippines to disregard the said assignment and to
pay the value of the proceeds of the CBCI No. D891 to the Filriters Guaranty Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty Assurance Corp.
The sum of P10,000 as attorney's fees; and
(d) to pay the costs.
SO ORDERED.9
10
The petitioner assailed the decision of the trial court in the Court of Appeals , but their appeals likewise failed.
The findings of the fact of the said court are hereby reproduced:
The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a deed of
assignment dated November 27, 1971, Filriters transferred CBCI No. D891 to Philippine Underwriters
Finance Corporation (Philfinance). Subsequently, Philfinance transferred CBCI No. D891, which was
still registered in the name of Filriters, to appellant Traders Royal Bank (TRB). The transfer was made
under a repurchase agreement dated February 4, 1981, granting Philfinance the right to repurchase
the instrument on or before April 27, 1981. When Philfinance failed to buy back the note on maturity
date, it executed a deed of assignment, dated April 27, 1981, conveying to appellant TRB all its right
and the title to CBCI No. D891.
Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI No. D891
in its name before the Security and Servicing Department of the Central Bank (CB). Central Bank,
however, refused to effect the transfer and registration in view of an adverse claim filed by defendant
Filriters.
Left with no other recourse, TRB filed a special civil action for mandamus against the Central Bank in
the Regional Trial Court of Manila. The suit, however, was subsequently treated by the lower court as
a case of interpleader when CB prayed in its amended answer that Filriters be impleaded as a
respondent and the court adjudge which of them is entitled to the ownership of CBCI No. D891.
Failing to get a favorable judgment. TRB now comes to this Court on appeal. 11
In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and having acquired
the said certificate from Philfinance as a holder in due course, its possession of the same is thus free fro any
defect of title of prior parties and from any defense available to prior parties among themselves, and it may thus,
enforce payment of the instrument for the full amount thereof against all parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument, since the instrument
clearly stated that it was payable to Filriters, the registered owner, whose name was inscribed thereon, and that
the certificate lacked the words of negotiability which serve as an expression of consent that the instrument may
be transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made without
consideration, and did not conform to Central Bank Circular No. 769, series of 1980, better known as the "Rules
and Regulations Governing Central Bank Certificates of Indebtedness", which provided that any "assignment of
registered certificates shall not be valid unless made . . . by the registered owner thereof in person or by his
representative duly authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was inexistent,
having acquired the certificate through simulation. What happened was Philfinance merely borrowed CBCI No.
D891 from Filriters, a sister corporation, to guarantee its financing operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on
behalf of Filriters, did not have the necessary written authorization from the Board of Directors of
Filriters to act for the latter. For lack of such authority, the assignment did not therefore bind Filriters
and violated as the same time Central Bank Circular No. 769 which has the force and effect of a law,
resulting in the nullity of the transfer (People v. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs.
Commissioner of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to
Traders Royal Bank and which the latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-appellant.
SO ORDERED. 13
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Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters equity and the two
corporations have identical corporate officers, thus demanding the application of the doctrine or piercing the veil
of corporate fiction, as to give validity to the transfer of the CBCI from registered owner to petitioner TRB. 14 This
renders the payment by TRB to Philfinance of CBCI, as actual payment to Filriters. Thus, there is no merit to the
lower court's ruling that the transfer of the CBCI from Filriters to Philfinance was null and void for lack of
consideration.
Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability within the
meaning of the negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer, of
if this Certificate of indebtedness be registered, to FILRITERS GUARANTY ASSURANCE
CORPORATION, the registered owner hereof, the principal sum of FIVE HUNDRED THOUSAND
PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to certificates for the creation and maintenance of a
permanent improvement revolving fund, is similar to a "bond," (82 Minn. 202). Being equivalent to a bond, it is
properly understood as acknowledgment of an obligation to pay a fixed sum of money. It is usually used for the
purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:
As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance Corporation, the
registered owner hereof." Very clearly, the instrument is payable only to Filriters, the registered owner,
whose name is inscribed thereon. It lacks the words of negotiability which should have served as an
expression of consent that the instrument may be transferred by negotiation.15
A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY ASSURANCE
CORPORATION, and to no one else, thus, discounting the petitioner's submission that the same is a negotiable
instrument, and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom to
circulate as a substitute for money. Hence, freedom of negotiability is the touchtone relating to the protection of
holders in due course, and the freedom of negotiability is the foundation for the protection which the law throws
around a holder in due course (11 Am. Jur. 2d, 32). This freedom in negotiability is totally absent in a certificate
indebtedness as it merely to pay a sum of money to a specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention
of the parties is to control, if it can be legally ascertained. While the writing may be read in the light of
surrounding circumstance 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.
Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not governed by
the negotiable instruments law. The pertinent question then is, was the transfer of the CBCI from Filriters to
Philfinance and subsequently from Philfinance to TRB, in accord with existing law, so as to entitle TRB to have the
CBCI registered in its name with the Central Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is defective since it
acquired the instrument from Filriters fictitiously. Although the deed of assignment stated that the
transfer was for "value received", there was really no consideration involved. What happened was
Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation. Thus, for lack of any
consideration, the assignment made is a complete nullity.
What is more, We find that the transfer made by Filriters to Philfinance did not conform to Central
Bank Circular No. 769, series of 1980, otherwise known as the "Rules and Regulations Governing
Central Bank Certificates of Indebtedness", under which the note was issued. Published in the Official
Gazette on November 19, 1980, Section 3 thereof provides that any assignment of registered
certificates shall not be valid unless made . . . by the registered owner thereof in person or by his
representative duly authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on
behalf of Filriters, did not have the necessary written authorization from the Board of Directors of
Filriters to act for the latter. For lack of such authority, the assignment did not therefore bind Filriters
and violated at the same time Central Bank Circular No. 769 which has the force and effect of a law,
resulting in the nullity of the transfer (People vs. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs.
Commissioner of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to
Traders Royal Bank and which the latter can register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent Filriters and
Philfinance, though separate corporate entities on paper, have used their corporate fiction to defraud TRB into
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purchasing the subject CBCI, which purchase now is refused registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two companies have the same corporate
officers, if the principle of piercing the veil of corporate entity were to be applied in this case, then
TRB's payment to Philfinance for the CBCI purchased by it could just as well be considered a
payment to Filriters, the registered owner of the CBCI as to bar the latter from claiming, as it has, that
it never received any payment for that CBCI sold and that said CBCI was sold without its authority.
xxx xxx xxx
We respectfully submit that, considering that the Court of Appeals has held that the CBCI was merely
borrowed by Philfinance from Filriters, a sister corporation, to guarantee its (Philfinance's) financing
operations, if it were to be consistent therewith, on the issued raised by TRB that there was a piercing
a veil of corporate entity, the Court of Appeals should have ruled that such veil of corporate entity
was, in fact, pierced, and the payment by TRB to Philfinance should be construed as payment to
Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an equitable remedy, and
may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime or where a corporation is a mere alter ego or business conduit of a person. 18
Peiercing the veil of corporate entity requires the court to see through the protective shroud which exempts its
stockholders from liabilities that ordinarily, they could be subject to, or distinguished one corporation from a
seemingly separate one, were it not for the existing corporate fiction. But to do this, the court must be sure that the
corporate fiction was misused, to such an extent that injustice, fraud, or crime was committed upon another,
disregarding, thus, his, her, or its rights. It is the protection of the interests of innocent third persons dealing with
the corporate entity which the law aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains, despite the petitioners insistence on the
contrary. For one, other than the allegation that Filriters is 90% owned by Philfinance, and the identity of one shall
be maintained as to the other, there is nothing else which could lead the court under circumstance to disregard
their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a juridical
personality separate from its stockholders and from other corporations may be disregarded, 19 in the absence of
such grounds, the general rule must upheld. The fact that Filfinance owns majority shares in Filriters is not by itself
a ground to disregard the independent corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of Internal
Revenue, 20 the mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate
personalities.
In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it acquired the
subject certificate of indebtedness from Philfinance.
On its face the subject certificates states that it is registered in the name of Filriters. This should have put the
petitioner on notice, and prompted it to inquire from Filriters as to Philfinance's title over the same or its authority
to assign the certificate. As it is, there is no showing to the effect that petitioner had any dealings whatsoever with
Filriters, nor did it make inquiries as to the ownership of the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's name at any
office of the Bank or any agency duly authorized by the Bank, and such registration is noted hereon.
After such registration no transfer thereof shall be valid unless made at said office (where the
Certificates has been registered) by the registered owner hereof, in person, or by his attorney, duly
authorized in writing and similarly noted hereon and upon payment of a nominal transfer fee which
may be required, a new Certificate shall be issued to the transferee of the registered owner thereof.
The bank or any agency duly authorized by the Bank may deem and treat the bearer of this
Certificate, or if this Certificate is registered as herein authorized, the person in whose name the
same is registered as the absolute owner of this Certificate, for the purpose of receiving payment
hereof, or on account hereof, and for all other purpose whether or not this Certificate shall be
overdue.
This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require Philfinance to
submit such an authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a non-owner was
disposing of the registered CBCI owned by another entity was a good reason for petitioner to verify of inquire as to
the title Philfinance to dispose to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules and
Regulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V of which provides that:
Sec. 3. Assignment of Registered Certificates. — Assignment of registered certificates shall not be

valid unless made at the office where the same have been issued and registered or at the Securities
Servicing Department, Central Bank of the Philippines, and by the registered owner thereof, in person
or by his representative, duly authorized in writing. For this purpose, the transferee may be
designated as the representative of the registered owner.
Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its requirements.
An entity which deals with corporate agents within circumstances showing that the agents are acting in excess of
corporate authority, may not hold the corporation liable. 22 This is only fair, as everyone must, in the exercise of his
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rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good
faith. 23
The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular, which for all
intents, is considered part of the law. As found by the courts a quo, Alfredo O. Banaria, who had signed the deed
of assignment from Filriters to Philfinance, purportedly for and in favor of Filriters, did not have the necessary
written authorization from the Board of Directors of Filriters to act for the latter. As it is, the sale from Filriters to
Philfinance was fictitious, and therefore void and inexistent, as there was no consideration for the same. This is
fatal to the petitioner's cause, for then, Philfinance had no title over the subject certificate to convey the Traders
Royal Bank. Nemo potest nisi quod de jure potest — no man can do anything except what he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital reserves, which are
required by law 24 to be maintained at a mandated level. This was pointed out by Elias Garcia, Manager-in-Charge
of respondent Filriters, in his testimony given before the court on May 30, 1986.
Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in
the face value of P5000,000.00 subject of this case?
A Yes, sir.
Q Why do you know this?
A Well, this was CBCI of the company sought to be examined by the Insurance
Commission sometime in early 1981 and this CBCI No. 891 was among the CBCI's that
were found to be missing.
Q Let me take you back further before 1981. Did you have the knowledge of this CBCI
No. 891 before 1981?
A Yes, sir. This CBCI is an investment of Filriters required by the Insurance Commission
as legal reserve of the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are required to put up legal reserves under
Section 213 of the Insurance Code equivalent to 40 percent of the premiums receipt and
further, the Insurance Commission requires this reserve to be invested preferably in
government securities or government binds. This is how this CBCI came to be purchased
by the company.
It cannot, therefore, be taken out of the said funds, without violating the requirements of the law. Thus, the
anauthorized use or distribution of the same by a corporate officer of Filriters cannot bind the said corporation, not
without the approval of its Board of Directors, and the maintenance of the required reserve fund.
Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over the claimed
interest of Traders Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29, 1990 is hereby
AFFIRMED.
SO ORDERED.
Regalado, Romero and Mendoza, JJ., concur.
Puno, J., took no part.
Footnotes
1 Justice Ricardo L. Pronove, Jr., ponente; concurred in by Justices Alfredo L. Benipayo and Serafain
V.C. Guingona, p. 18, Rollo.
2 P. 143, Record.
3 Ibid. at p. 146.
4 Ibid., at p. 148.
5 P. 1, Record.
6 P. 75, Record.
7 Answer, p. 97, Record.
8 P. 315, Record.
9 Pp. 16-17, RTC Decision, p. 330, Rollo.
10 Annex "A". Petition, supra.
11 Court of Appeals Decision, pp. 18-19, Rollo.
12 Section 57. Negotiable Instruments Law.
13 Petition, Annex "A", pp. 21-22, Rollo.
14 Ibid.
15 Campos and Campos, Negotiable Instruments Law, p. 38, 1971 ed.
11/14/2018 G.R. No. 115410
Custom Search

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 115410 February 27, 1998
JUAN CASABUENA, petitioner,

vs.
HON. COURT OF APPEALS and SPOUSES CIRIACO UNRDANETA AND OFELIA IPIL-URDANETA, respondents.
ROMERO, J.:
A one hundred square meter (100 sq.m.) lot located at the NDC Compound in Santa Mesa, Manila is coveted by
two hopeful parties in this Petition for Review on Certiorari. The rivals are the spouses Ciriaco and Ofelia-Ipil
Urdaneta, beneficiaries of the "Land of the Landless Program" of the City of Manila, and Juan Casabuena,
transferee of the right, title and interest of Ciriaco's assignee, Arsenia Benin.
Urdaneta is one of the fortunate grantees of a parcel of land purchased by the City of Manila and conveyed to its
less privileged inhabitants, through its land reform program.1 On August 12, 1965, Urdaneta assigned his
rights and interests in one-half (1/2) of the lot to Arsenia Benin covering full payment of his
indebtedness in the amount of five hundred pesos (P500.00).2 A deed of sale with mortgage 3 was
executed, with Urdaneta undertaking to pay the City the amount of five thousand five hundred pesos
(P5,500.00) for a period of forty years in 480 equal installments. On February 16, 1967, after having
incurred additional indebtedness in the amount of two thousand pesos (P2,000.00), Ciriaco executed
another deed of assignment4 involving the whole lot, with assignee Benin agreeing to shoulder all
obligations including the payment of amortization to the City, in accordance with the contract between
it and Urdaneta.5 The parties verbally agreed that Urdaneta could redeem the property upon payment
of the loan within three (3) years from the date of assignment; failure to pay would transfer physical
possession of the lot to Benin for a period of fifteen. (15) years, without actual transfer of title and
ownership thereto.6 A Transfer Certificate of Title was issued in the name of Urdaneta, married to
Ofelia Ipil.7
Meanwhile, the administration of the property was assigned to brothers Candido and Juan
Casabuena,8 to whom Benin had transferred her right, title and interest for a consideration of seven
thousand five hundred pesos (P7,500.00). Notwithstanding this assignment, Benin constructed a two-
door apartment on the lot separately occupied by Jose Abejero and Juan Casabuena, who collected
rentals from the former. After the lot was fully paid for by the Urdanetas, a Release of Mortgage was
executed on February 7, 1984, under which deed the period of non-alienation of the land was
extended from five (5) years to twenty (20) years.9
From 1973 to 1976, Juan Casabuena was Benin's rental collector.10 Their relationship soured, however,
compelling the latter to name as administrator Angel Tanjuakio, who filed a complaint for ejectment
against petitioner, alleging that the latter stopped paying rentals on June 15, 1980 and ignored a
demand letter to him. For his part, petitioner asserted that he did not receive copies of the receipts
issued by Tanjuakio because the tenor of the writings therein made him appear as a tenant of the
premises paying rentals and not paying for monthly amortizations for the construction cost of the
building.11 Finding that the receipts issued by Tanjuakio were "insufficient" to prove his ownership
over the property, thereby depriving him of a better right of possession over the premises than the
defendant (petitioner herein), the city court12 dismissed the complaint. Affirmed by the Regional Trial
Court of Manila,13 the decision was again affirmed by the appellate court.14 His motion for
reconsideration having been denied,15 Tanjuakio appealed to this Court armed with a petition for
review on certiorari which, to his disappointment, was denied.
Upon learning of the litigation between petitioner and Benin, Urdaneta asked them to vacate the
property and surrender to him possession thereof within fifteen (15) days from notice. Petitioner's
adamant refusal to comply with such demand resulted in a complaint for ejectment and recovery of
possession of property filed by Urdaneta against him (Casabuena), Benin and Tanjuakio.16 For lack of
jurisdiction, the complaint was dismissed by the city court. The Urdaneta spouses then entered into an
agreement with Benin whereby the latter would surrender to them the property with the duplex
constructed thereon. On November 3, 1987, they filed a complaint for recovery of possession of the
property with damages against petitioner and Thelma Casabuena, representing the heirs of Candido
Casabuena.
Amid the sprouting controversies involving the lot, the Urdaneta spouses succeeded in having the
Court declare them as its true and lawful owners with the deed of assignment to Benin merely serving
as evidence of Ciriaco's indebtedness to her in view of the prohibition against the sale of the land
imposed by the City government.
On appeal, the appellate court affirmed 17 the findings of the lower court. A motion for reconsideration
was denied. Unfazed by the protracted litigious process, petitioner files this petition for review on
11/14/2018 G.R. No. 115410
certiorari, arguing that the assignment by Benin was made in her capacity as creditor of the spouses,
thus allowing her to transfer ownership of the property to her assignees.
Can a deed of assignment transfer ownership of the property to the assignee?
At the bottom of this controversy is the undisputed fact that Ciriaco Urdaneta was indebted to Benin,
to secure which debt the spouses ceded their rights over the land through a deed of assignment. An
assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor,
by a legal cause, transfers his credit and its accessory rights to another, known as the assignee, who
acquires the power to enforce it to the same extent as the assignor could have enforced it against the
debtor.18 Stated simply, it is the process of transferring the right of the assignor to the assignee, who
would then be allowed to proceed against the debtor.19 The assignment involves no transfer of
ownership but merely effects the transfer rights which the assignor has at the time, to the assignee.
Benin having been deemed subrogated to the rights and obligations of the spouses, she was bound
by exactly the same conditions to which the latter were bound.20 This being so, she and the
Casabuenas were bound to respect the prohibition against selling the property within the five-year
period imposed by the City government.
The act of assignment could not have operated to efface liens or restrictions burdening the right
assigned,21 because an assignee cannot acquire a greater right than that pertaining to the assignor.22
At most, an assignee can only acquire rights duplicating those which his assignor is entitled by law to
exercise. In the case at bar, the Casabuenas merely stepped into Benin's shoes, who was not so much
an owner as a mere assignee of the rights of her debtors. Not having acquired any right over the land
in question, it follows that Benin conveyed nothing to defendants with respect to the property.
While it is true that the duplex is owned by Benin, the Casabuenas mistakenly believed that the deed
included cession of rights of ownership over the land as well. The encumbrance of the property may
be deemed as an exercise of their right of ownership over the property considering that, under the
law, only owners of certain properties may mortgage the same.23 By mortgaging a piece of property, a
debtor merely subjects it to a lien but ownership thereof is not parted with.24 As a result,
notwithstanding the encumbrance of the Bulacan lot through a deed of assignment in favor of Benin,
the spouses Urdaneta remain its owners, to the exclusion of petitioner.
WHEREFORE, considering the foregoing, the decision is AFFIRMED. No costs.
SO ORDERED.
Narvasa, C.J., Kapunan and Purisima, JJ., concur.
Footnotes
1 Condition No. 10, Deed of Sale with Mortgage between the City of Manila and Ciriaco
Urdaneta.
2 Exhibit "B".
3 Exhibit "E".
4 Exhibit "C".
5 Ibid.
6 Records, pp. 2-3. This agreement is reflected in the subsequent written agreement dated
May 27, 1987, between the Urdaneta spouses and Arsenia Benin.
7 Exhibit "A".
8 Exhibit "G".
9 Exhibit "F".
10 Rollo, p. 44.
11 Rollo, p. 57.
12 Thru Judge Priscilla C. Mijares.
13 Exhibit "5".
14 Decision penned by Associate Justice Jose A.R. Melo, with concurring opinions by
Associate Justices Milagros A. German and Santiago M. Kapunan.
15 Rollo, p. 67.
16 Exhibit "M".
17 Penned by Associate Justice Angelina S. Gutierrez.
18 Tolentino, Civil Code of the Philippines (Book V), p. 188.
19 Nyco Sales Corp. vs. BA Finance Corps. 200 SCRA 637 (1991).
20 Koa vs. Court of Appeals, 219 SCRA 541 (1993).
21 Gonzales vs. Land Bank of the Philippines, 183 SCRA 520 (1990).
22 Supra.
11/14/2018 G.R. No. 107898
Custom Search

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 107898 December 19, 1995
MANUEL LIM and ROSITA LIM, petitioners,

vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.
BELLOSILLO, J.:
MANUEL LIM and ROSITA LIM, spouses, were charged before the Regional Trial Court of Malabon with estafa on
three (3) counts under Art. 315, par. 2 (d), of The Revised Penal Code, docketed as Crim. Cases Nos. 1696-MN to
1698-MN. The Informations substantially alleged that Manuel and Rosita, conspiring together, purchased goods
from Linton Commercial Company, Inc. (LINTON), and with deceit issued seven Consolidated Bank and Trust
Company (SOLIDBANK) checks simultaneously with the delivery as payment therefor. When presented to the
drawee bank for payment the checks were dishonored as payment on the checks had been stopped and/or for
insufficiency of funds to cover the amounts. Despite repeated notice and demand the Lim spouses failed and
refused to pay the checks or the value of the goods.
On the basis of the same checks, Manuel and Rosita Lim were also charged with seven (7) counts of violation of
B.P. Blg. 22, otherwise known as the Bouncing Checks Law, docketed as Crim. Cases Nos. 1699-MN to 1705-MN.
In substance, the Informations alleged that the Lims issued the checks with knowledge that they did not have
sufficient funds or credit with the drawee bank for payment in full of such checks upon presentment. When
presented for payment within ninety (90) days from date thereof the checks were dishonored by the drawee bank
for insufficiency of funds. Despite receipt of notices of such dishonor the Lims failed to pay the amounts of the
checks or to make arrangements for full payment within five (5) banking days.
Manuel Lim and Rosita Lim are the president and treasurer, respectively, of Rigi Bilt Industries, Inc. (RIGI). RIGI
had been transacting business with LINTON for years, the latter supplying the former with steel plates, steel bars,
flat bars and purlin sticks which it uses in the fabrication, installation and building of steel structures. As officers of
RIGI the Lim spouses were allowed 30, 60 and sometimes even up to 90 days credit.
On 27 May 1983 the Lims ordered 100 pieces of mild steel plates worth P51,815.00 from LINTON which were
delivered on the same day at their place of business at 666 7th Avenue, 8th Street, Kalookan City. To pay LINTON
for the delivery the Lims issued SOLIDBANK Check No. 027700 postdated 3 September 1983 in the amount of
P51,800.00.1
On 30 May 1983 the Lims ordered another 65 pieces of mild steel plates worth P63,455.00 from LINTON which
were delivered at their place of business on the same day. They issued as payment SOLIDBANK Check No.
027699 in the amount of P63,455.00 postdated 20 August 1983.2
The Lim spouses also ordered 2,600 "Z" purlins worth P241,800.00 which were delivered to them on various
dates, to wit: 15 and 22 April 1983; 11, 14, 20, 23, 25, 28 and 30 May 1983; and, 2 and 9 June 1983. To pay for
the deliveries, they issued seven SOLIDBANK checks, five of which were —
Check No. Date of Issue Amount
027683 16 July 1983 P27,900.003

027684 23 July 1983 P27,900.004
027719 6 Aug. 1983 P32,550.005
027720 13 Aug. 1983 P27,900.006
027721 27 Aug. 1983 P37,200.007
William Yu Bin, Vice President and Sales Manager of LINTON, testified that when those seven (7) checks were
deposited with the Rizal Commercial Banking Corporation they were dishonored for "insufficiency of funds" with the
additional notation "payment stopped" stamped thereon. Despite demand Manuel and Rosita refused to make
good the checks or pay the value of the deliveries.
Salvador Alfonso, signature verifier of SOLIDBANK, Grace Park Branch, Kalookan City, where the Lim spouses
maintained an account, testified on the following transactions with respect to the seven (7) checks:
CHECK NO. DATE PRESENTED REASON FOR DISHONOR
027683 22 July 1983 Payment Stopped (PS)8

027684 23 July 1983 PS and Drawn Against
Insufficient Fund (DAIF)9
027699 24 Aug. 1983 PS and DAIF 10
027700 5 Sept. 1983 PS and DAIF 11
027719 9 Aug. 1983 DAIF 12
11/14/2018 G.R. No. 107898
13
027720 16 Aug. 1983 PS and DAIF
027721 30 Aug. 1983 PS and DAIF 14
Manuel Lim admitted having issued the seven (7) checks in question to pay for deliveries made by LINTON but
denied that his company's account had insufficient funds to cover the amounts of the checks. He presented the
bank ledger showing a balance of P65,752.75. Also, he claimed that he ordered SOLIDBANK to stop payment
because the supplies delivered by LINTON were not in accordance with the specifications in the purchase orders.
Rosita Lim was not presented to testify because her statements would only be corroborative.
On the basis of the evidence thus presented the trial court held both accused guilty of estafa and violation of B.P.
Blg. 22 in its decision dated 25 January 1989. In Crim. Case No. 1696-MN they were sentenced to an
indeterminate penalty of six (6) years and one (1) day of prision mayor as minimum to twelve (12) years and one
(1) day of reclusion temporal as maximum plus one (1) year for each additional P10,000.00 with all the accessory
penalties provided for by law, and to pay the costs. They were also ordered to indemnify LINTON in the amount of
P241,800.00. Similarly sentences were imposed in Crim. Cases Nos. 1697-MN and 1698-MN except as to the
indemnities awarded, which were P63,455.00 and P51,800.00, respectively.
In Crim. Case No. 1699-MN the trial court sentenced both accused to a straight penalty of one (1) year
imprisonment with all the accessory penalties provided for by law and to pay the costs. In addition, they were
ordered to indemnify LINTON in the amount of P27,900.00. Again, similar sentences were imposed in Crim. Cases
Nos. 1700-MN to 1705-MN except for the indemnities awarded, which were P32,550.00, P27,900.00, P27,900.00,
P63,455.00, P51,800.00 and P37,200.00 respectively.15
On appeal, the accused assailed the decision as they imputed error to the trial court as follows: (a) the regional
Trial Court of malabon had no jurisdiction over the cases because the offenses charged ere committed outside its
territory; (b) they could not be held liable for estafa because the seven (7) checks were issued by them several
weeks after the deliveries of the goods; and, (c) neither could they be held liable for violating B.P. Blg. 22 as they
ordered payment of the checks to be stopped because the goods delivered were not those specified by them,
besides they had sufficient funds to pay the checks.
In the decision of 18 September 199216 respondent Court of Appeals acquitted accused-appellants of estafa on
the ground that indeed the checks were not made in payment of an obligation contracted at the time of their
issuance. However it affirmed the finding of the trial court that they were guilty of having violated B.P. Blg. 22.17 On
6 November 1992 their motion for reconsideration was denied.18
In the case at bench petitioners maintain that the prosecution failed to prove that any of the essential elements of
the crime punishable under B.P. Blg. 22 was committed within the jurisdiction of the Regional Trial Court of
Malabon. They claim that what was proved was that all the elements of the offense were committed in Kalookan
City. The checks were issued at their place of business, received by a collector of LINTON, and dishonored by the
drawee bank, all in Kalookan City. Furthermore, no evidence whatsoever supports the proposition that they knew
that their checks were insufficiently funded. In fact, some of the checks were funded at the time of presentment but
dishonored nonetheless upon their instruction to the bank to stop payment. In fine, considering that the checks
were all issued, delivered, and dishonored in Kalookan City, the trial court of Malabon exceeded its jurisdiction
when it tried the case and rendered judgment thereon.
The petition has no merit. Section 1, par. 1, of B.P. Blg. 22 punishes "[a]ny person who makes or draws and issues
any check to apply on account or for value, knowing at the time of issue that he does not have sufficient funds in
or credit with the drawee bank for the payment of such check in full upon its presentment, which check is
subsequently dishonored by the drawee bank for insufficiency of funds or credit or would have been dishonored
for the same reason had not the drawer, without any valid reason, ordered the bank to stop payment . . ." The
gravamen of the offense is knowingly issuing a worthless check.19 Thus, a fundamental element is knowledge on
the part of the drawer of the insufficiency of his funds in20 or credit with the drawee bank for the payment of such
check in full upon presentment. Another essential element is subsequent dishonor of the check by the drawee
bank for insufficiency of funds or credit or would have been dishonored for the same reason had not the drawer,
without any valid reason, ordered the bank to stop payment.21
It is settled that venue in criminal cases is a vital ingredient of jurisdiction.22 Section 14, par. (a), Rule 110, of the
Revised Rules of Court, which has been carried over in Sec. 15, par. (a), Rule 110 of the 1985 Rules on Criminal
Procedure, specifically provides:
Sec. 14. Place where action is to be instituted. — (a) In all criminal prosecutions the action shall be
instituted and tried in the court of the municipality or province wherein the offense was committed or
anyone of the essential ingredients thereof took place.
If all the acts material and essential to the crime and requisite of its consummation occurred in one municipality or
territory, the court therein has the sole jurisdiction to try the case.23 There are certain crimes in which some acts
material and essential to the crimes and requisite to their consummation occur in one municipality or territory and
some in another, in which event, the court of either has jurisdiction to try the cases, it being understood that the
first court taking cognizance of the case excludes the other.24 These are the so-called transitory or continuing
crimes under which violation of B.P. Blg. 22 is categorized. In other words, a person charged with a transitory crime
may be validly tried in any municipality or territory where the offense was in part committed.25
In determining proper venue in these cases, the following acts material and essential to each crime and requisite
to its consummation must be considered: (a) the seven (7) checks were issued to LINTON at its place of business
in Balut, Navotas; b) they were delivered to LINTON at the same place; (c) they were dishonored in Kalookan City;
and, (d) petitioners had knowledge of the insufficiency of their funds in SOLIDBANK at the time the checks were
issued. Since there is no dispute that the checks were dishonored in Kalookan City, it is no longer necessary to
discuss where the checks were dishonored.
Under Sec. 191 of the Negotiable Instruments Law the term "issue" means the first delivery of the instrument
complete in form to a person who takes it as a holder. On the other hand, the term "holder" refers to the payee or
indorsee of a bill or note who is in possession of it or the bearer thereof. In People v. Yabut26 this Court explained
—
11/14/2018 G.R. No. 107898
. . . The place where the bills were written, signed, or dated does not necessarily fix or determine the
place where they were executed. What is of decisive importance is the delivery thereof. The delivery
of the instrument is the final act essential to its consummation as an obligation. An undelivered bill or
note is inoperative. Until delivery, the contract is revocable. And the issuance as well as the delivery
of the check must be to a person who takes it as a holder, which means "(t)he payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof." Delivery of the check signifies transfer of
possession, whether actual or constructive, from one person to another with intent to transfer title
thereto . . .
Although LINTON sent a collector who received the checks from petitioners at their place of business in Kalookan
City, they were actually issued and delivered to LINTON at its place of business in Balut, Navotas. The receipt of
the checks by the collector of LINTON is not the issuance and delivery to the payee in contemplation of law. The
collector was not the person who could take the checks as a holder, i.e., as a payee or indorsee thereof, with the
intent to transfer title thereto. Neither could the collector be deemed an agent of LINTON with respect to the
checks because he was a mere employee. As this Court further explained in People v. Yabut27 —
Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or Geminiano Yabut, Jr., in
Caloocan City cannot, contrary to the holding of the respondent Judges, be licitly taken as delivery of
the checks to the complainant Alicia P. Andan at Caloocan City to fix the venue there. He did not take
delivery of the checks as holder, i.e., as "payee" or "indorsee." And there appears to be no contract
of agency between Yambao and Andan so as to bind the latter for the acts of the former. Alicia P.
Andan declared in that sworn testimony before the investigating fiscal that Yambao is but her
"messenger" or "part-time employee." There was no special fiduciary relationship that permeated their
dealings. For a contract of agency to exist, the consent of both parties is essential. The principal
consents that the other party, the agent, shall act on his behalf, and the agent consents so as to act.
It must exist as a fact. The law makes no presumption thereof. The person alleging it has the burden
of proof to show, not only the fact of its existence, but also its nature and extent . . .
Section 2 of B.P. Blg. 22 establishes a prima facie evidence of knowledge of insufficient funds as follows —
The making, drawing and issuance of a check payment of which is refused by the bank because of
insufficient funds in or credit with such bank, when presented within ninety (90) days from the date of
the check, shall be prima facie evidence of knowledge of such insufficiency of funds or credit unless
such maker or drawer pays the holder thereof the amount due thereon, or makes arrangement for
payment in full by the drawee of such check within five (5) banking days after receiving notice that
such check has not been paid by the drawee.
The prima facie evidence has not been overcome by petitioners in the cases before us because they did not pay
LINTON the amounts due on the checks; neither did they make arrangements for payment in full by the drawee
bank within five (5) banking days after receiving notices that the checks had not been paid by the drawee bank. In
People v. Grospe28 citing People v. Manzanilla29 we held that ". . . knowledge on the part of the maker or drawer of
the check of the insufficiency of his funds is by itself a continuing eventuality, whether the accused be within one
territory or another."
Consequently, venue or jurisdiction lies either in the Regional Trial Court of Kalookan City or Malabon. Moreover,
we ruled in the same Grospe and Manzanilla cases as reiterated in Lim v. Rodrigo30 that venue or jurisdiction is
determined by the allegations in the Information. The Informations in the cases under consideration allege that the
offenses were committed in the Municipality of Navotas which is controlling and sufficient to vest jurisdiction upon
the Regional Trial Court of Malabon.31
We therefore sustain likewise the conviction of petitioners by the Regional Trial Court of Malabon for violation of
B.P. Blg. 22 thus —
Accused-appellants claim that they ordered payment of the checks to be stopped because the goods
delivered were not those specified by them. They maintain that they had sufficient funds to cover the
amount of the checks. The records of the bank, however, reveal otherwise. The two letters (Exhs. 21
and 22) dated July 23, and August 10, 1983 which they claim they sent to Linton Commercial,
complaining against the quality of the goods delivered by the latter, did not refer to the delivery of mild
steel plates (6mm x 4 x 8) and "Z" purlins (16 x 7 x 2-1/2 mts) for which the checks in question were
issued. Rather, the letters referred to B.1. Lally columns (Sch. #20), which were the subject of other
purchase orders.
It is true, as accused-appellants point out, that in a case brought by them against the complainant in
the Regional Trial Court of Kalookan City (Civil Case No. C-10921) the complainant was held liable for
actual damages because of the delivery of goods of inferior quality (Exh. 23). But the supplies
involved in that case were those of B.I. pipes, while the purchases made by accused-appellants, for
which they issued the checks in question, were purchases of mild steel plates and "Z" purlins.
Indeed, the only question here is whether accused-appellants maintained funds sufficient to cover the
amounts of their checks at the time of issuance and presentment of such checks. Section 3 of B.P.
Blg. 22 provides that "notwithstanding receipt of an order to stop payment, the drawee bank shall
state in the notice of dishonor that there were no sufficient funds in or credit with such bank for the
payment in full of the check, if such be the fact."
The purpose of this provision is precisely to preclude the maker or drawer of a worthless check from
ordering the payment of the check to be stopped as a pretext for the lack of sufficient funds to cover
the check.
In the case at bar, the notice of dishonor issued by the drawee bank, indicates not only that payment
of the check was stopped but also that the reason for such order was that the maker or drawer did
not have sufficient funds with which to cover the checks. . . . Moreover, the bank ledger of accused-
appellants' account in Consolidated Bank shows that at the time the checks were presented for
encashment, the balance of accused-appellants' account was inadequate to cover the amounts of the
checks.32 . . .
11/14/2018 G.R. No. 107898
WHEREFORE, the decision of the Court of Appeals dated 18 September 1992 affirming the conviction of
petitioners Manuel Lim and Rosita Lim —
In CA-G.R. CR No. 07277 (RTC Crim. Case No. 1699-MN); CA-G.R. CR No. 07278 (RTC Crim. Case
No. 1700-MN); CA-G.R. CR No. 07279 (RTC Crim. Case No. 1701-MN); CA-G.R. CR No. 07280 (RTC
Crim. Case No. 1702-MN); CA-G.R. CR No. 07281 (RTC Crim. Case No. 1703-MN); CA-G.R. CA No.
07282 (RTC Crim. Case No. 1704-MN); and CA-G.R. CR No. 07283 (RTC Crim Case No. 1705-MN),
the Court finds the accused-appellants
MANUEL LIM and ROSITA LIM guilty beyond reasonable doubt of violation of Batas Pambansa Bilang
22 and are hereby sentenced to suffer a STRAIGHT PENALTY OF ONE (1) YEAR IMPRISONMENT in
each case, together with all the accessory penalties provided by law, and to pay the costs.
In CA-G.R. CR No. 07277 (RTC Crim. Case No. 1699-MN), both accused-appellants are hereby
ordered to indemnify the offended party in the sum of P27,900.00.
In CA-G.R. CR No. 07278 (RTC Crim. Case No. 1700-MN) both accused-appellants are hereby
In CA-G.R. CR No. 07281 (RTC Crim. Case No. 1703-MN) both accused are hereby ordered to
indemnify the offended party in the sum of P63,455.00.
In CA-G.R CR No. 07282 (RTC Crim. Case No. 1704-MN) both accused-appellants are hereby
ordered to indemnify the offended party in the sum of P51,800.00, and
ordered to indemnify the offended party in the sum of P37,200.00 33 —
as well as its resolution of 6 November 1992 denying reconsideration thereof, is AFFIRMED. Costs against
petitioners.
SO ORDERED.
Padilla, Davide, Jr., Kapunan and Hermosisima, Jr., JJ., concur.
Footnotes
1 Exh. "C."
2 Exh. "G."
3 Exh. "L."
4 Exh. "N."
5 Exh. "P."
6 Exh. "S."
7 Exh. "V."
8 Exh. "M."
9 Exhs. "O," "O-1" and "O-2."
10 Exhs. "H" and "H-1."
11 Exhs. "D," "D-1" and "D-2."
12 Exhs. "Q" and "Q-1".
13 Exhs. "T," "U" and "U-1."
14 Exhs. "W," "W-1" and "W-2."
15 Rollo, pp. 79-80.
16 Penned by Justice Vicente V. Mendoza (now a Member of this Court) as Chairman, with
Justices Jaime M. Lantin and Consuelo Y. Santiago concurring.
17 Id., pp. 56-58.
18 Id., p. 61.
19 Cruz v. IAC, G.R. No. 66327, 28 May 1984, 129 SCRA 490.
20 Lozano v. Martinez, G.R. No. 63419, 18 December 1986, 146 SCRA 323; Dingle v. IAC, G.R.
No. 75243, 16 March 1987, 148 SCRA 595.
21 People v. Manzanilla, G.R. Nos. 66003-04, 11 December 1987, 156 SCRA 279.
22 Lopez v. City Judge, No. L-25795, 29 October 1966, 18 SCRA; U.S. v. Pagdayuman, 5 Phil.
265 (1905); U.S. v. Reyes, 1 Phil. 249 (1902); Ragpala v. J.P. of Tubod, Lanao, 109 Phil. 265
11/14/2018 G.R. No. 111190
Custom Search

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his personal capacity as garnishee,
petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and RAUL H. SESBREÑO, respondents.
BELLOSILLO, J.:
RAUL H. SESBREÑO filed a complaint for damages against Assistant City Fiscals Bienvenido N. Mabanto, Jr., and
Dario D. Rama, Jr., before the Regional Trial Court of Cebu City. After trial judgment was rendered ordering the
defendants to pay P11,000.00 to the plaintiff, private respondent herein. The decision having become final and
executory, on motion of the latter, the trial court ordered its execution. This order was questioned by the
defendants before the Court of Appeals. However, on 15 January 1992 a writ of execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner Loreto D. de la Victoria as City Fiscal of
Mandaue City where defendant Mabanto, Jr., was then detailed. The notice directed petitioner not to disburse,
transfer, release or convey to any other person except to the deputy sheriff concerned the salary checks or other
checks, monies, or cash due or belonging to Mabanto, Jr., under penalty of law. 1 On 10 March 1992 private
respondent filed a motion before the trial court for examination of the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was dismissed. Thus the trial court, finding no
more legal obstacle to act on the motion for examination of the garnishees, directed petitioner on 4 November
1992 to submit his report showing the amount of the garnished salaries of Mabanto, Jr., within fifteen (15) days
from receipt 2 taking into consideration the provisions of Sec. 12, pars. (f) and (i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require petitioner to explain why he should not be cited
in contempt of court for failing to comply with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the notice of garnishment claiming that he was
not in possession of any money, funds, credit, property or anything of value belonging to Mabanto, Jr., except his
salary and RATA checks, but that said checks were not yet properties of Mabanto, Jr., until delivered to him. He
further claimed that, as such, they were still public funds which could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered petitioner to immediately comply with its order of
4 November 1992. 3 It opined that the checks of Mabanto, Jr., had already been released through petitioner by the
Department of Justice duly signed by the officer concerned. Upon service of the writ of garnishment, petitioner as
custodian of the checks was under obligation to hold them for the judgment creditor. Petitioner became a virtual
party to, or a forced intervenor in, the case and the trial court thereby acquired jurisdiction to bind him to its orders
and processes with a view to the complete satisfaction of the judgment. Additionally, there was no sufficient reason
for petitioner to hold the checks because they were no longer government funds and presumably delivered to the
payee, conformably with the last sentence of Sec. 16 of the Negotiable Instruments Law.
With regard to the contempt charge, the trial court was not morally convinced of petitioner's guilt. For, while his
explanation suffered from procedural infirmities nevertheless he took pains in enlightening the court by sending a
written explanation dated 22 July 1992 requesting for the lifting of the notice of garnishment on the ground that the
notice should have been sent to the Finance Officer of the Department of Justice. Petitioner insists that he had no
authority to segregate a portion of the salary of Mabanto, Jr. The explanation however was not submitted to the
trial court for action since the stenographic reporter failed to attach it to the record. 4
On 20 April 1993 the motion for reconsideration was denied. The trial court explained that it was not the duty of
the garnishee to inquire or judge for himself whether the issuance of the order of execution, writ of execution and
notice of garnishment was justified. His only duty was to turn over the garnished checks to the trial court which
issued the order of execution. 5
Petitioner raises the following relevant issues: (1) whether a check still in the hands of the maker or its duly
authorized representative is owned by the payee before physical delivery to the latter: and, (2) whether the salary
check of a government official or employee funded with public funds can be subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned by Mabanto, Jr., because they were not yet
delivered to him, and that petitioner as garnishee has no legal obligation to hold and deliver them to the trial court
to be applied to Mabanto, Jr.'s judgment debt. The thesis of petitioner is that the salary checks still formed part of
public funds and therefore beyond the reach of garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching credits belonging to the judgment debtor
owing to him from a stranger to the litigation. 6 Emphasis is laid on the phrase "belonging to the judgment debtor"
11/14/2018 G.R. No. 111190
since it is the focal point in resolving the issues raised.
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives his compensation in
the form of checks from the Department of Justice through petitioner as City Fiscal of Mandaue City and head of
office. Under Sec. 16 of the Negotiable Instruments Law, every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the purpose of giving effect thereto. As ordinarily understood,
delivery means the transfer of the possession of the instrument by the maker or drawer with intent to transfer title
to the payee and recognize him as the holder thereof.7
According to the trial court, the checks of Mabanto, Jr., were already released by the Department of Justice duly
signed by the officer concerned through petitioner and upon service of the writ of garnishment by the sheriff
petitioner was under obligation to hold them for the judgment creditor. It recognized the role of petitioner as
custodian of the checks. At the same time however it considered the checks as no longer government funds and
presumed delivered to the payee based on the last sentence of Sec. 16 of the Negotiable Instruments Law which
states: "And where the instrument is no longer in the possession of a party whose signature appears thereon, a
valid and intentional delivery by him is presumed." Yet, the presumption is not conclusive because the last portion
of the provision says "until the contrary is proved." However this phrase was deleted by the trial court for no
apparent reason. Proof to the contrary is its own finding that the checks were in the custody of petitioner.
Inasmuch as said checks had not yet been delivered to Mabanto, Jr., they did not belong to him and still had the
character of public funds. In Tiro v. Hontanosas 8 we ruled that —
The salary check of a government officer or employee such as a teacher does not belong to him
before it is physically delivered to him. Until that time the check belongs to the government.
Accordingly, before there is actual delivery of the check, the payee has no power over it; he cannot
assign it without the consent of the Government.
As a necessary consequence of being public fund, the checks may not be garnished to satisfy the judgment. 9 The
rationale behind this doctrine is obvious consideration of public policy. The Court succinctly stated in
Commissioner of Public Highways v. San Diego 10 that —
The functions and public services rendered by the State cannot be allowed to be paralyzed or
disrupted by the diversion of public funds from their legitimate and specific objects, as appropriated
by law.
In denying petitioner's motion for reconsideration, the trial court expressed the additional ratiocination that it was
not the duty of the garnishee to inquire or judge for himself whether the issuance of the order of execution, the writ
of execution, and the notice of garnishment was justified, citing our ruling in Philippine Commercial Industrial Bank
v. Court of Appeals. 11 Our precise ruling in that case was that "[I]t is not incumbent upon the garnishee to inquire
or to judge for itself whether or not the order for the advance execution of a judgment is valid." But that is invoking
only the general rule. We have also established therein the compelling reasons, as exceptions thereto, which were
not taken into account by the trial court, e.g., a defect on the face of the writ or actual knowledge by the garnishee
of lack of entitlement on the part of the garnisher. It is worth to note that the ruling referred to the validity of
advance execution of judgments, but a careful scrutiny of that case and similar cases reveals that it was applicable
to a notice of garnishment as well. In the case at bench, it was incumbent upon petitioner to inquire into the validity
of the notice of garnishment as he had actual knowledge of the non-entitlement of private respondent to the
checks in question. Consequently, we find no difficulty concluding that the trial court exceeded its jurisdiction in
issuing the notice of garnishment concerning the salary checks of Mabanto, Jr., in the possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20 April 1993 of the Regional Trial
Court of Cebu City, Br. 17, subject of the petition are SET ASIDE. The notice of garnishment served on petitioner
dated 3 February 1992 is ordered DISCHARGED.
SO ORDERED.
Quiason and Kapunan, JJ., concur.
Separate Opinions
check corresponds.
11/14/2018 G.R. No. 111190
policy.
Separate Opinions
check corresponds.
11/14/2018 G.R. No. 111190
policy.
Footnotes
1 Rollo, p. 12.
2 Id., p. 18.
3 Id., p. 115.
4 Id., p. 114.
5 Id., p. 129.
6 Engineering Construction, Inc. v. National Power Corporation, No. L-34589, 29 June 1988, 163
SCRA 9; Rizal Commercial Banking Corporation v. de Castro, No. L-34548, 29 November 1988, 168
SCRA 49; Sec. 8, Rule 57 of the Rules of Court.
7 Hector S. de Leon, The Law on Negotiable Instruments, 1989 Ed., p. 48; People v. Yabut, Jr., No. L-
42902, 29 April 1977, 76 SCRA 624.
8 No. L-32312, 25 November 1983, 125 SCRA 697.
9 Republic v. Palacio, No. L-20322, 29 May 1968, 23 SCRA 899; Director of the Bureau of Commerce
and Industry v. Concepcion, 43 Phil. 384 (1922); Traders Royal Bank v. IAC, G.R. No. 68514, 17
December 1990, 192 SCRA 305.
10 No. L-30098, 18 February 1970, 31 SCRA 616.
1 43 Phil. 384 [1922].
2 23 SCRA 899 [1968].
3 192 SCRA 305 [1990].
4 31 SCRA 616 [1970].
11/14/2018 G.R. No. 85419
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SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,

vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC
CORPORATION and PRODUCERS BANK OF THE PHILIPPINES, defendants-respondents.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a sum of money
against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian Industrial Plastic
Corporation (Plastic Corporation for short) and the Producers Bank of the Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02 on a promissory note executed by

respondent Sima Wei on June 9, 1983; and
(2) To enforce payment of two checks executed by Sima Wei, payable to petitioner, and drawn against
the China Banking Corporation, to pay the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a common ground that the
complaint states no cause of action. The trial court granted the defendants' Motions to Dismiss. The Court of
Appeals affirmed this decision, * to which the petitioner Bank, represented by its Legal Liquidator, filed this Petition
for Review by Certiorari, assigning the following as the alleged errors of the Court of Appeals:1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-PETITIONER HAS NO
CAUSE OF ACTION AGAINST DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3 OF THE REVISED
RULES OF COURT ON ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO HEREIN
DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed and delivered
to the former a promissory note, engaging to pay the petitioner Bank or order the amount of P1,820,000.00 on or
before June 24, 1983 with interest at 32% per annum. Sima Wei made partial payments on the note, leaving a
balance of P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed checks payable to petitioner
Bank drawn against China Banking Corporation, bearing respectively the serial numbers 384934, for the amount
of P550,000.00 and 384935, for the amount of P500,000.00. The said checks were allegedly issued in full
settlement of the drawer's account evidenced by the promissory note. These two checks were not delivered to the
petitioner-payee or to any of its authorized representatives. For reasons not shown, these checks came into the
possession of respondent Lee Kian Huat, who deposited the checks without the petitioner-payee's indorsement
(forged or otherwise) to the account of respondent Plastic Corporation, at the Balintawak branch, Caloocan City, of
the Producers Bank. Cheng Uy, Branch Manager of the Balintawak branch of Producers Bank, relying on the
assurance of respondent Samson Tung, President of Plastic Corporation, that the transaction was legal and
regular, instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the
account of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to petitioner
Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as aforestated.
The main issue before Us is whether petitioner Bank has a cause of action against any or all of the defendants, in
the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation of the legal right or rights of another.
The essential elements are: (1) legal right of the plaintiff; (2) correlative obligation of the defendant; and (3) an act
or omission of the defendant in violation of said legal right.2
The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long recognized the
business custom of using printed checks where blanks are provided for the date of issuance, the name of the
11/14/2018 G.R. No. 85419
payee, the amount payable and the drawer's signature. All the drawer has to do when he wishes to issue a check
is to properly fill up the blanks and sign it. However, the mere fact that he has done these does not give rise to any
liability on his part, until and unless the check is delivered to the payee or his representative. A negotiable
instrument, of which a check is, is not only a written evidence of a contract right but is also a species of property.
Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so must a negotiable
instrument be delivered to the payee in order to evidence its existence as a binding contract. Section 16 of the
Negotiable Instruments Law, which governs checks, provides in part:
Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument
for the purpose of giving effect thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him.3
Delivery of an instrument means transfer of possession, actual or constructive, from one person to another.4
Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the
instrument. Moreover, such delivery must be intended to give effect to the instrument.
The allegations of the petitioner in the original complaint show that the two (2) China Bank checks, numbered
384934 and 384935, were not delivered to the payee, the petitioner herein. Without the delivery of said checks to
petitioner-payee, the former did not acquire any right or interest therein and cannot therefore assert any cause of
action, founded on said checks, whether against the drawer Sima Wei or against the Producers Bank or any of the
other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory note, and the
alternative defendants, including Sima Wei, on the two checks. On appeal from the orders of dismissal of the
Regional Trial Court, petitioner Bank alleged that its cause of action was not based on collecting the sum of money
evidenced by the negotiable instruments stated but on quasi-delict — a claim for damages on the ground of
fraudulent acts and evident bad faith of the alternative respondents. This was clearly an attempt by the petitioner
Bank to change not only the theory of its case but the basis of his cause of action. It is well-settled that a party
cannot change his theory on appeal, as this would in effect deprive the other party of his day in court.5
Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed from liability to
petitioner Bank under the loan evidenced by the promissory note agreed to by her. Her allegation that she has
paid the balance of her loan with the two checks payable to petitioner Bank has no merit for, as We have earlier
explained, these checks were never delivered to petitioner Bank. And even granting, without admitting, that there
was delivery to petitioner Bank, the delivery of checks in payment of an obligation does not constitute payment
unless they are cashed or their value is impaired through the fault of the creditor.6 None of these exceptions were
alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from liability on the promissory note by
some other cause, petitioner Bank has a right of action against her for the balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with them. Since
petitioner Bank never received the checks on which it based its action against said respondents, it never owned
them (the checks) nor did it acquire any interest therein. Thus, anything which the respondents may have done
with respect to said checks could not have prejudiced petitioner Bank. It had no right or interest in the checks
which could have been violated by said respondents. Petitioner Bank has therefore no cause of action against
said respondents, in the alternative or otherwise. If at all, it is Sima Wei, the drawer, who would have a cause of
action against her
co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank regarding the applicability of Section 13,
Rule 3 of the Rules of Court, We find it unnecessary to discuss the same in view of Our finding that the petitioner
Bank did not acquire any right or interest in the checks due to lack of delivery. It therefore has no cause of action
against the respondents, in the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's complaint is
AFFIRMED insofar as the second cause of action is concerned. On the first cause of action, the case is
REMANDED to the trial court for a trial on the merits, consistent with this decision, in order to determine whether
respondent Sima Wei is liable to the Development Bank of Rizal for any amount under the promissory note
allegedly signed by her.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.
# Footnotes
* CA G.R. CV No. 11980 dated October 12, 1988. Penned by Associate Justice Venancio D. Aldecoa,
Jr. with Associate Justices Ricardo P. Tensuan and Luis L. Victor, concurring.
1 Petition, p. 7; Rollo, p. 20.
2 Caseñas vs. Rosales, et al., 19 SCRA 462 (1967); Remitere, et al. vs. Vda. de Yulo, et al., 16 SCRA
251 (1966).
3 In re Martens' Estate, 226 Iowa 162, 283 N.W. 885 (1939); Shriver vs. Danby, 113 A. 612 (1921).
4 Negotiable Instruments Law, Sec. 191, par. 6.
5 Ganzon vs. Court of Appeals, 161 SCRA 646 (1988). See also 1 M. MORAN, COMMENTS ON THE
RULES OF COURT 715 (1957 ed.), citing San Agustin vs. Barrios, 68 Phil. 475 (1939), Toribio vs.
Decasa, 55 Phil. 461 (1930), American Express Co. vs. Natividad, 46 Phil. 207 (1924), Agoncillo vs.
Javier, 38 Phil. 424 (1918).
6 CIVIL CODE, Art. 1249, par. 2.
11/14/2018 G.R. No. L-2861
Custom Search

SUPREME COURT
Manila
EN BANC
G.R. No. L-2861 February 26, 1951
ENRIQUE P. MONTINOLA, plaintiff-appellant,

vs.
THE PHILIPPINE NATIONAL BANK, ET AL., defendants-appellees.
Quijano, Rosete and Lucena for appellant.

Second Assistant Corporate Counsel Hilarion U. Jarencio for appellee Philippine National Bank.
Office of the Solicitor General Felix Bautista Angelo and Solicitor Augusto M. Luciano for appellee Provincial
Treasurer of Misamis Oriental.
MONTEMAYOR, J.:
In August, 1947, Enrique P. Montinola filed a complaint in the Court of First Instance of Manila against the
Philippine National Bank and the Provincial Treasurer of Misamis Oriental to collect the sum of P100,000, the
amount of Check No. 1382 issued on May 2, 1942 by the Provincial Treasurer of Misamis Oriental to Mariano V.
Ramos and supposedly indorsed to Montinola. After hearing, the court rendered a decision dismissing the
complaint with costs against plaintiff-appellant. Montinola has appealed from that decision directly to this Court
inasmuch as the amount in controversy exceeds P50,000.
There is no dispute as to the following facts. In April and May, 1942, Ubaldo D. Laya was the Provincial Treasurer
of Misamis Oriental. As such Provincial Treasurer he was ex officio agent of the Philippine National Bank branch in
the province. Mariano V. Ramos worked under him as assistant agent in the bank branch aforementioned. In April
of that year 1942, the currency being used in Mindanao, particularly Misamis Oriental and Lanao which had not
yet been occupied by the Japanese invading forces, was the emergency currency which had been issued since
January, 1942 by the Mindanao Emergency Currency Board by authority of the late President Quezon.
About April 26, 1942, thru the recommendation of Provincial Treasurer Laya, his assistant agent M. V. Ramos was
inducted into the United States Armed Forces in the Far East (USAFFE) as disbursing officer of an army division.
As such disbursing officer, M. V. Ramos on April 30, 1942, went to the neighboring Province Lanao to procure a
cash advance in the amount of P800,000 for the use of the USAFFE in Cagayan de Misamis. Pedro Encarnacion,
Provincial Treasurer of Lanao did not have that amount in cash. So, he gave Ramos P300,000 in emergency
notes and a check for P500,000. On May 2, 1942 Ramos went to the office of Provincial Treasurer Laya at
Misamis Oriental to encash the check for P500,000 which he had received from the Provincial Treasurer of Lanao.
Laya did not have enough cash to cover the check so he gave Ramos P400,000 in emergency notes and a check
No. 1382 for P100,000 drawn on the Philippine National Bank. According to Laya he had previously deposited
P500,000 emergency notes in the Philippine National Bank branch in Cebu and he expected to have the check
issued by him cashed in Cebu against said deposit.
Ramos had no opportunity to cash the check because in the evening of the same day the check was issued to
him, the Japanese forces entered the capital of Misamis Oriental, and on June 10, 1942, the USAFFE forces to
which he was attached surrendered. Ramos was made a prisoner of war until February 12, 1943, after which, he
was released and he resumed his status as a civilian.
About the last days of December, 1944 or the first days of January, 1945, M. V. Ramos allegedly indorsed this
check No. 1382 to Enrique P. Montinola. The circumstances and conditions under which the negotiation or transfer
was made are in controversy.
According to Montinola's version, sometime in June, 1944, Ramos, needing money with which to buy foodstuffs
and medicine, offered to sell him the check; to be sure that it was genuine and negotiable, Montinola,
accompanied by his agents and by Ramos himself, went to see President Carmona of the Philippine National Bank
in Manila about said check; that after examining it President Carmona told him that it was negotiable but that he
should not let the Japanese catch him with it because possession of the same would indicate that he was still
waiting for the return of the Americans to the Philippines; that he and Ramos finally agreed to the sale of the check
for P850,000 Japanese military notes, payable in installments; that of this amount, P450,000 was paid to Ramos in
Japanese military notes in five installments, and the balance of P400,000 was paid in kind, namely, four bottles of
sulphatia sole, each bottle containing 1,000 tablets, and each tablet valued at P100; that upon payment of the full
price, M. V. Ramos duly indorsed the check to him. This indorsement which now appears on the back of the
document is described in detail by trial court as follows:
The endorsement now appearing at the back of the check (see Exhibit A-1) may be described as follows:
The woods, "pay to the order of" — in rubber stamp and in violet color are placed about one inch from the
top. This is followed by the words "Enrique P. Montinola" in typewriting which is approximately 5/8 an inch below
the stamped words "pay to the order of". Below "Enrique P. Montinola", in typewriting are words and figures also in typewriting, "517 Isabel
Street" and about ¹/8 of an inch therefrom, the edges of the check appear to have been burned, but there are words stamped apparently in rubber
stamp which, according to Montinola, are a facsimile of the signature of Ramos. There is a signature which apparently reads "M. V. Ramos" also
in green ink but made in handwriting."
To the above description we may add that the name of M. V. Ramos is hand printed in green ink, under the
signature. According to Montinola, he asked Ramos to hand print it because Ramos' signature was not clear.
https://www.lawphil.net/judjuris/juri1951/feb1951/gr_l-2861_1951.html 1/6
11/14/2018 G.R. No. L-2861
Ramos in his turn told the court that the agreement between himself and Montinola regarding the transfer of the
check was that he was selling only P30,000 of the check and for this reason, at the back of the document he wrote
in longhand the following:
Pay to the order of Enrique P. Montinola P30,000 only. The balance to be deposited in the Philippine
National Bank to the credit of M. V. Ramos.
Ramos further said that in exchange for this assignment of P30,000 Montinola would pay him P90,000 in Japanese
military notes but that Montinola gave him only two checks of P20,000 and P25,000, leaving a balance unpaid of
P45,000. In this he was corroborated by Atty. Simeon Ramos Jr. who told the court that the agreement between
Ramos and Montinola was that the latter, for the sale to him of P30,000 of the check, was to pay Ramos P90,000
in Japanese military notes; that when the first check for P20,000 was issued by Montinola, he (Simeon) prepared a
document evidencing said payment of P20,000; that when the second check for P25,000 was issued by Montinola,
he (Simeon) prepared another document with two copies, one for Montinola and the other for Ramos, both signed
by Montinola and M. V. Ramos, evidencing said payment, with the understanding that the balance of P45,000
would be paid in a few days.
The indorsement or writing described by M. V. Ramos which had been written by him at the back of the check,
Exhibit A, does not now appear at the back of said check. What appears thereon is the indosement testified to by
Montinola and described by the trial court as reproduced above. Before going into a discussion of the merits of the
version given by Ramos and Montinola as to the indorsement or writing at the back of the check, it is well to give a
further description of it as we shall later.
When Montinola filed his complaint in 1947 he stated therein that the check had been lost, and so in lieu thereof
he filed a supposed photostic copy. However, at the trial, he presented the check itself and had its face marked
Exhibit A and the back thereof Exhibit A-1. But the check is badly mutilated, bottled, torn and partly burned, and its
condition can best be appreciated by seeing it. Roughly, it may be stated that looking at the face of the check
(Exhibit A) we see that the left third portion of the paper has been cut off perpendicularly and severed from the
remaining 2 /3 portion; a triangular portion of the upper right hand corner of said remaining 2 /3
portion has been similarly cut off and severed, and to keep and attach this triangular
portion and the rectangular ¹/3 portion to the rest of the document, the entire check is
pasted on both sides with cellophane; the edges of the severed portions as well as of the
remaining major portion, where cut bear traces of burning and searing; there is a big blot
with indelible ink about the right middle portion, which seems to have penetrated to the
back of the check (Exhibit A-1), which back bears a larger smear right under the blot, but
not black and sharp as the blot itself; finally, all this tearing, burning, blotting and smearing
and pasting of the check renders it difficult if not impossible to read some of the words and
figures on the check.
In explanation of the mutilation of the check Montinola told the court that several months after indorsing and
delivering the check to him, Ramos demanded the return of the check to him, threatening Montinola with bodily
harm, even death by himself or his guerrilla forces if he did not return said check, and that in order to justify the
non-delivery of the document and to discourage Ramos from getting it back, he (Montinola) had to resort to the
mutilation of the document.
As to what was really written at the back of the check which Montinola claims to be a full indorsement of the check,
we agree with trial court that the original writing of Ramos on the back of the check was to the effect that he was
assigning only P30,000 of the value of the document and that he was instructing the bank to deposit to his credit
the balance. This writing was in some mysterious way obliterated, and in its place was placed the present
indorsement appearing thereon. Said present indorsement occupies a good portion of the back of the check. It
has already been described in detail. As to how said present indorsement came to be written, the circumstances
surrounding its preparation, the supposed participation of M. V. Ramos in it and the writing originally appearing on
the reverse side of the check, Exhibit A-1, we quote with approval what the trial court presided over by Judge
Conrado V. Sanchez, in its well-prepared decision, says on these points:
The allegedly indorsement: "Pay to the order of Enrique P. Montinola the amount of P30,000 only. The
balance to be deposited to the credit of M. V. Ramos", signed by M. V. Ramos-according to the latter-does
not now appear at the back of the check. A different indorsement, as aforesaid, now appears.
Had Montinola really paid in full the sum of P850,000 in Japanese Military Notes as consideration for the
check? The following observations are in point:
(a) According to plaintiff's witness Gregorio A. Cortado, the oval line in violet, enclosing "P." of the words
"Enrique P. Montinola" and the line in the form of cane handle crossing the word "street" in the words and
figures "517 Isabel Street" in the endorsement Exhibit A-1 "unusual" to him, and that as far as he could
remember this writing did not appear on the instrument and he had no knowledge as to how it happened to
be there. Obviously Cortado had no recollection as to how such marks ever were stamped at the back of the
check.
(b) Again Cortado, speaking of the endorsement as it now appears at the back of the check (Exh. A-1)
stated that Ramos typewrote these words outside of the premises of Montinola, that is, a nearby house.
Montinola, on the other hand, testified that Ramos typewrote the words "Enrique P. Montinola 517 Isabel
Street", in his own house. Speaking of the rubber stamp used at the back of the check and which produced
the words "pay to the order of", Cortado stated that when he (Cortado), Atadero, Montinola and Ramos
returned in group to the house of Montinola, the rubber stamp was already in the house of Montinola, and it
was on the table of the upper floor of the house, together with the stamp pad used to stamp the same.
Montinola, on the other hand, testified that Ramos carried in his pocket the said rubber stamp as well as the
ink pad, and stamped it in his house.
The unusually big space occupied by the indorsement on the back of the check and the discrepancies in
the versions of Montinola and his witness Cortado just noted, create doubts as to whether or not really
Ramos made the indorsement as it now appears at the back of Exhibit A. One thing difficult to understand is
11/14/2018 G.R. No. L-2861
why Ramos should go into the laborious task of placing the rubber stamp "Pay to the order of" and
afterwards move to the typewriter and write the words "Enrique P. Montinola" "and "517 Isabel Street", and
finally sign his name too far below the main indorsement.
(c) Another circumstances which bears heavily upon the claim of plaintiff Montinola that he acquired the full
value of the check and paid the full consideration therefor is the present condition of said check. It is now so
unclean and discolored; it is pasted in cellophane, bottled with ink on both sides torn three parts, and with
portions thereof burned-all done by plaintiff, the alleged owner thereof.
The acts done by the very plaintiff on a document so important and valuable to him, and which according to
him involves his life savings, approximate intentional cancellation. The only reason advanced by plaintiff as
to why tore check, burned the torn edges and bottled out the registration at the back, is found in the
following: That Ramos came to his house, armed with a revolver, threatened his life and demanded from him
the return of the check; that when he informed Ramos that he did not have it in the house, but in some
deposit outside thereof and that Ramos promised to return the next day; that the same night he tore the
check into three parts, burned the sides with a parrafin candle to show traces of burning; and that upon the
return of Ramos the next day he showed the two parts of the check, the triangle on the right upper part and
the torn piece on the left part, and upon seeing the condition thereof Ramos did not bother to get the check
back. He also said that he placed the blots in indelible ink to prevent Ramos — if he would be forced to
surrender the middle part of the check — from seeing that it was registered in the General Auditing Office.
Conceding at the moment these facts to be true, the question is: Why should Montinola be afraid of Ramos?
Montinola claims that Ramos went there about April, 1945, that is, during liberation. If he believed he was
standing by his rights, he could have very well sought police protection or transferred to some place where
Ramos could not bother him. And then, really Ramos did not have anything more to do with this check for
the reason that Montinola had obtained in full the amount thereof, there could not be any reason why
Ramos should have threatened Montinola as stated by the latter. Under the circumstances, the most logical
conclusion is that Ramos wanted the check at all costs because Montinola did not acquire the check to such
an extent that it borders on intentional cancellation thereof (see Sections 119-123 Negotiable Instruments
Law) there is room to believe that Montinola did not have so much investments in that check as to adopted
an "what do I care?" attitude.
And there is the circumstance of the alleged loss of the check. At the time of the filing of the complaint the
check was allegedly lost, so much so that a photostatic copy thereof was merely attached to the complaint
(see paragraph 7 of the complaint). Yet, during the trial the original check Exhibit A was produced in court.
But a comparison between the photostatic copy and the original check reveals discrepancies between the
two. The condition of the check as it was produced is such that it was partially burned, partially blotted,
badly mutilated, discolored and pasted with cellophane. What is worse is that Montinola's excuse as to how it
was lost, that it was mixed up with household effects is not plausible, considering the fact that it involves his
life savings, and that before the alleged loss, he took extreme pains and precautions to save the check from
the possible ravages of the war, had it photographed, registered said check with the General Auditing Office
and he knew that Ramos, since liberation, was hot after the possession of that check.
(d) It seems that Montinola was not so sure as to what he had testified to in reference to the consideration
he paid for the check. In court he testified that he paid P450,000 in cash from June to December 1944, and
P400,000 worth of sulphatiazole in January 1945 to complete the alleged consideration of P850,000. When
Montinola testified this way in court, obviously he overlooked a letter he wrote to the provincial treasurer of
Cagayan, Oriental Misamis, dated May 1, 1947, Exhibit 3 the record. In that letter Exhibit 3, Montinola told
Provincial Treasurer Elizalde of Misamis Oriental that "Ramos endorsed it (referring to check) to me for
goods in kind, medicine, etc., received by him for the use of the guerrillas." In said letter Exhibit 3, Montinola
did not mention the cash that he paid for the check.
From the foregoing the court concludes that plaintiff Montinola came into the possession of the check in
question about the end of December 1944 by reason of the fact that M. V. Ramos sold to him P30,000 of
the face value thereof in consideration of the sum of P90,000 Japanese money, of which only one-half or
P45,000 (in Japanese money) was actually paid by said plaintiff to Ramos. (R. on A., pp. 31-33; Brief of
Appellee, pp. 14-20.)
At the beginning of this decision, we stated that as Provincial Treasurer of Misamis Oriental, Ubaldo D. Laya was
ex officio agent of the Philippine National Bank branch in that province. On the face of the check (Exh. A) we now
find the words in parenthesis "Agent, Phil. National Bank" under the signature of Laya, purportedly showing that he
issued the check as agent of the Philippine National Bank. It this is true, then the bank is not only drawee but also
a drawer of the check, and Montinola evidently is trying to hold the Philippine National Bank liable in that capacity
of drawer, because as drawee alone, inasmuch as the bank has not yet accepted or certified the check, it may yet
avoid payment.
Laya, testifying in court, stated that he issued the check only as Provincial Treasurer, and that the words in
parenthesis "Agent, Phil. National Bank" now appearing under his signature did not appear on the check when he
issued the same. In this he was corroborated by the payee M. V. Ramos who equally assured the court that when
he received the check and then delivered it to Montinola, those words did not appear under the signature of
Ubaldo D. Laya. We again quote with approval the pertinent portion of the trial court's decision:
The question is reduced to whether or not the words, "Agent, Phil. National Bank" were added after Laya
had issued the check. In a straightforward manner and without vacillation Laya positively testified that the
check Exhibit A was issued by him in his capacity as Provincial Treasurer of Misamis Oriental and that the
words "Agent, Phil. National Bank" which now appear on the check Exhibit A were not typewritten below his
signature when he signed the said check and delivered the same to Ramos. Laya assured the court that
there could not be any mistake as to this. For, according to Laya, when he issued check in his capacity as
agent of the Misamis Oriental agency of the Philippine National Bank the said check must be countersigned
by the cashier of the said agency — not by the provincial auditor. He also testified that the said check was
issued by him in his capacity as provincial treasurer of Misamis Oriental and that is why the same was
countersigned by Provincial Auditor Flores. The Provincial Auditor at that time had no connection in any
capacity with the Misamis Oriental agency of the Philippine National Bank. Plaintiff Montinola on the other
hand testified that when he received the check Exhibit A it already bore the words "Agent, Phil. National
Bank" below the signature of Laya and the printed words "Provincial Treasurer".
11/14/2018 G.R. No. L-2861
After considering the testimony of the one and the other, the court finds that the preponderance of the
evidence supports Laya's testimony. In the first place, his testimony was corroborated by the payee M. V.
Ramos. But what renders more probable the testimony of Laya and Ramos is the fact that the money for
which the check was issued was expressly for the use of the USAFFE of which Ramos was then disbursing
officer, so much so that upon the delivery of the P400,000 in emergency notes and the P100,000 check to
Ramos, Laya credited his depository accounts as provincial treasurer with the corresponding credit entry. In
the normal course of events the check could not have been issued by the bank, and this is borne by the fact
that the signature of Laya was countersigned by the provincial auditor, not the bank cashier. And then, too
there is the circumstance that this check was issued by the provincial treasurer of Lanao to Ramos who
requisitioned the said funds in his capacity as disbursing officer of the USAFFE. The check, Exhibit A is not
what we may term in business parlance, "certified check" or "cashier's check."
Besides, at the time the check was issued, Laya already knew that Cebu and Manila were already occupied.
He could not have therefore issued the check-as a bank employee-payable at the central office of the
Philippine National Bank.
Upon the foregoing circumstances the court concludes that the words "Agent, Phil. National Bank' below the
signature of Ubaldo D. Laya and the printed words "Provincial Treasurer" were added in the check after the
same was issued by the Provincial Treasurer of Misamis Oriental.
From all the foregoing, we may safely conclude as we do that the words "Agent, Phil. National Bank" now
appearing on the face of the check (Exh. A) were added or placed in the instrument after it was issued by
Provincial Treasurer Laya to M. V. Ramos. There is no reason known to us why Provincial Treasurer Laya should
issue the check (Exh. A) as agent of the Philippine National Bank. Said check for P100,000 was issued to complete
the payment of the other check for P500,000 issued by the Provincial Treasurer of Lanao to Ramos, as part of the
advance funds for the USAFFE in Cagayan de Misamis. The balance of P400,000 in cash was paid to Ramos by
Laya from the funds, not of the bank but of the Provincial Treasury. Said USAFFE were being financed not by the
Bank but by the Government and, presumably, one of the reasons for the issuance of the emergency notes in
Mindanao was for this purpose. As already stated, according to Provincial Treasurer Laya, upon receiving a
relatively considerable amount of these emergency notes for his office, he deposited P500,000 of said currency in
the Philippine National Bank branch in Cebu, and that in issuing the check (Exh. A), he expected to have it cashed
at said Cebu bank branch against his deposit of P500,000.
The logical conclusion, therefore, is that the check was issued by Laya only as Provincial Treasurer and as an
official of the Government which was under obligation to provide the USAFFE with advance funds, and not by the
Philippine National Bank which has no such obligation. The very Annex C, made part of plaintiff's complaint, and
later introduced in evidence for him as Exhibit E states that Laya issued the check "in his capacity as Provincial
Treasurer of Misamis Oriental", obviously, not as agent of the Bank.
Now, did M. V. Ramos add or place those words below the signature of Laya before transferring the check to
Montinola? Let us bear in mind that Ramos before his induction into the USAFFE had been working as assistant of
Treasurer Laya as ex-officio agent of the Misamis Oriental branch of the Philippine National Bank. Naturally,
Ramos must have known the procedure followed there as to the issuance of checks, namely, that when a check is
issued by the Provincial Treasurer as such, it is countersigned by the Provincial Auditor as was done on the check
(Exhibit A), but that if the Provincial Treasurer issues a check as agent of the Philippine National Bank, the check
is countersigned not by the Provincial Auditor who has nothing to do with the bank, but by the bank cashier, which
was not done in this case. It is not likely, therefore, that Ramos had made the insertion of the words "Agent, Phil.
National Bank" after he received the check, because he should have realized that following the practice already
described, the check having been issued by Laya as Provincial Treasurer, and not as agent of the bank, and since
the check bears the countersignature not of the Bank cashier of the Provincial Auditor, the addition of the words
"Agent, Phil. National Bank" could not change the status and responsibility of the bank. It is therefore more logical
to believe and to find that the addition of those words was made after the check had been transferred by Ramos to
Montinola. Moreover, there are other facts and circumstances involved in the case which support this view.
Referring to the mimeographed record on appeal filed by the plaintiff-appellant, we find that in transcribing and
copying the check, particularly the face of it (Exhibit A) in the complaint, the words "Agent, Phil. National Bank" now
appearing on the face of the check under the signature of the Provincial Treasurer, is missing. Unless the plaintiff
in making this copy or transcription in the complaint committed a serious omission which is decisive as far as the
bank is concerned, the inference is, that at the time the complaint was filed, said phrase did not appear on the
face of the check. That probably was the reason why the bank in its motion to dismiss dated September 2, 1947,
contended that if the check in question had been issued by the provincial treasurer in his capacity as agent of the
Philippine National Bank, said treasurer would have placed below his signature the words "Agent of the Philippine
National Bank". The plaintiff because of the alleged loss of the check, allegedly attached to the complaint a
photostatic copy of said check and marked it as Annex A. But in transcribing and copying said Annex A in his
complaint, the phrase "Agent, Phil. National Bank" does not appear under the signature of the provincial treasurer.
We tried to verify this discrepancy by going over the original records of the Court of First Instance so as to
compare the copy of Annex A in the complaint, with the original Annex A, the photostatic copy, but said original
Annex A appears to be missing from the record. How it disappeared is not explained. Of course, now we have in
the list of exhibit a photostatic copy marked Annex A and Exhibit B, but according to the manifestation of counsel
for the plaintiff dated October 15, 1948, said photostatic copy now marked Annex A and Exhibit B was submitted
on October 15, 1948, in compliance with the verbal order of the trial court. It is therefore evident that the Annex A
now available is not the same original Annex A attached to the complaint in 1947.
There is one other circumstance, important and worth nothing. If Annex A also marked Exhibit B is the photostatic
copy of the original check No. 1382 particularly the face thereof (Exhibit A), then said photostatic copy should be a
faithful and accurate reproduction of the check, particularly of the phrase "Agent, Phil. National Bank" now
appearing under the signature of the Provincial Treasurer on the face of the original check (Exhibit A). But a
minute examination of and comparison between Annex A, the photostatic copy also marked Exhibit B and the face
of the check, Exhibit A, especially with the aid of a handlens, show notable differences and discrepancies. For
instance, on Exhibit A, the letter A of the word "Agent" is toward the right of the tail of the beginning letter of the
signature of Ubaldo D. Laya; this same letter "A" however in Exhibit B is directly under said tail.
The letter "N" of the word "National" on Exhibit A is underneath the space between "Provincial" and "Treasurer";
but the same letter "N" is directly under the letter "I" of the word "Provincial" in Exhibit B.
The first letter "a" of the word "National" is under "T" of the word "Treasurer" in Exhibit A; but the same letter "a" in
Exhibit "B" is just below the space between the words "Provincial" and "Treasurer".
11/14/2018 G.R. No. L-2861
The letter "k" of the word "Bank" in Exhibit A is after the green perpendicular border line near the lower right hand
corner of the edge of the check (Exh. A); this same letter "k" however, on Exhibit B is on the very border line itself
or even before said border line.
The closing parenthesis ")" on Exhibit A is a little far from the perpendicular green border line and appears to be
double instead of one single line; this same ")" on Exhibit B appears in a single line and is relatively nearer to the
border line.
There are other notable discrepancies between the check Annex A and the photostatic copy, Exhibit B, as regards
the relative position of the phrase "Agent, Phil. National Bank", with the title Provincial Treasurer, giving ground to
the doubt that Exhibit B is a photostatic copy of the check (Exhibit A).
We then have the following facts. Exhibit A was issued by Laya in his capacity as Provincial Treasurer of Misamis
Oriental as drawer on the Philippine National Bank as drawee. Ramos sold P30,000 of the check to Enrique P.
Montinola for P90,000 Japanese military notes, of which only P45,000 was paid by Montinola. The writing made by
Ramos at the back of the check was an instruction to the bank to pay P30,000 to Montinola and to deposit the
balance to his (Ramos) credit. This writing was obliterated and in its place we now have the supposed indorsement
appearing on the back of the check (Exh. A-1).
At the time of the transfer of this check (Exh. A) to Montinola about the last days of December, 1944, or the first
days of January, 1945, the check which, being a negotiable instrument, was payable on demand, was long
overdue by about 2 ½ years. It may therefore be considered, even then, a stable check. Of course, Montinola
claims that about June, 1944 when Ramos supposedly approached him for the purpose of negotiating the check,
he (Montinola) consulted President Carmona of the Philippine National Bank who assured him that the check was
good and negotiable. However, President Carmona on the witness stand flatly denied Montinola's claim and
assured the court that the first time that he saw Montinola was after the Philippine National Bank, of which he was
President, reopened, after liberation, around August or September, 1945, and that when shown the check he told
Montinola that it was stale. M. V. Ramos also told the court that it is not true that he ever went with Montinola to
see President Carmona about the check in 1944.
On the basis of the facts above related there are several reasons why the complaint of Montinola cannot prosper.
The insertion of the words "Agent, Phil. National Bank" which converts the bank from a mere drawee to a drawer
and therefore changes its liability, constitutes a material alteration of the instrument without the consent of the
parties liable thereon, and so discharges the instrument. (Section 124 of the Negotiable Instruments Law). The
check was not legally negotiated within the meaning of the Negotiable Instruments Law. Section 32 of the same law
provides that "the indorsement must be an indorsement of the entire instrument. An indorsement which purports to
transfer to the indorsee a part only of the amount payable, . . . (as in this case) does not operate as a negotiation
of the instrument." Montinola may therefore not be regarded as an indorsee. At most he may be regarded as a
mere assignee of the P30,000 sold to him by Ramos, in which case, as such assignee, he is subject to all
defenses available to the drawer Provincial Treasurer of Misamis Oriental and against Ramos. Neither can
Montinola be considered as a holder in due course because section 52 of said law defines a holder in due course
as a holder who has taken the instrument under certain conditions, one of which is that he became the holder
before it was overdue. When Montinola received the check, it was long overdue. And, Montinola is not even a
holder because section 191 of the same law defines holder as the payee or indorsee of a bill or note and
Montinola is not a payee. Neither is he an indorsee for as already stated, at most he can be considered only as
assignee. Neither could it be said that he took it in good faith. As already stated, he has not paid the full amount of
P90,000 for which Ramos sold him P30,000 of the value of the check. In the second place, as was stated by the
trial court in its decision, Montinola speculated on the check and took a chance on its being paid after the war.
Montinola must have known that at the time the check was issued in May, 1942, the money circulating in Mindanao
and the Visayas was only the emergency notes and that the check was intended to be payable in that currency.
Also, he should have known that a check for such a large amount of P100,000 could not have been issued to
Ramos in his private capacity but rather in his capacity as disbursing officer of the USAFFE, and that at the time
that Ramos sold a part of the check to him, Ramos was no longer connected with the USAFFE but already a
civilian who needed the money only for himself and his family.
As already stated, as a mere assignee Montinola is subject to all the defenses available against assignor Ramos.
And, Ramos had he retained the check may not now collect its value because it had been issued to him as
disbursing officer. As observed by the trial court, the check was issued to M. V. Ramos not as a person but M. V.
Ramos as the disbursing officer of the USAFFE. Therefore, he had no right to indorse it personally to plaintiff. It
was negotiated in breach of trust, hence he transferred nothing to the plaintiff.
In view of all the foregoing, finding no reversible error in the decision appealed from, the same is hereby affirmed
with costs.
In the prayer for relief contained at the end of the brief for the Philippine National Bank dated September 27, 1949,
we find this prayer:
It is also respectfully prayed that this Honorable Court refer the check, Exhibit A, to the City Fiscal's Office
for appropriate criminal action against the plaintiff-appellant if the facts so warrant.
Subsequently, in a petition signed by plaintiff-appellant Enrique P. Montinola dated February 27, 1950, he asked
this Court to allow him to withdraw the original check (Exh. A) for him to keep, expressing his willingness to submit it
to the court whenever needed for examination and verification. The bank on March 2, 1950 opposed the said
petition on the ground that inasmuch as the appellant's cause of action in this case is based on the said check, it
is absolutely necessary for the court to examine the original in order to see the actual alterations supposedly
made thereon, and that should this Court grant the prayer contained in the bank's brief that the check be later
referred to the city fiscal for appropriate action, said check may no longer be available if the appellant is allowed to
withdraw said document. In view of said opposition this Court resolution of March 6, 1950, denied said petition for
withdrawal.
Acting upon the petition contained in the bank's brief already mentioned, once the decision becomes final, let the
Clerk of Court transmit to the city fiscal the check (Exh. A) together with all pertinent papers and documents in this
case, for any action he may deem proper in the premises.
Moran, C.J., Paras, Feria, Pablo, Bengzon, Padilla, Tuazon, Reyes and Bautista Angelo, JJ., concur.
11/14/2018 G.R. No. L-2516
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SUPREME COURT
Manila
EN BANC
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.)
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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.
11/14/2018 G.R. No. L-39641
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SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-39641 February 28, 1983
METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION, plaintiff-appellee,

vs.
SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS CO., LTD., defendants-appellants.
Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.
Diosdado Garingalao for defendants-appellants.
DE CASTRO, J.:
The former Court of Appeals, by its resolution dated October 16, 1974 certified this case to this Court the issue
issued therein being one purely of law.
On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co., Ltd., in
the amount of P15,939.00 payable in twelve (12) equal monthly installments, beginning May 18, 1969, with interest
at the rate of one percent per month. It is further provided that in case on non-payment of any of the installments,
the total principal sum then remaining unpaid shall become due and payable with an additional interest equal to
twenty-five percent of the total amount due.
On the same date, Sambok Motors Company (hereinafter referred to as Sambok), a sister company of Ng Sambok
Sons Motors Co., Ltd., and under the same management as the former, negotiated and indorsed the note in favor
of plaintiff Metropol Financing & Investment Corporation with the following indorsement:
Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse. Notice of
Demand; Dishonor; Protest; and Presentment are hereby waived.
SAMBOK MOTORS CO. (BACOLOD)
By:
RODOLFO G. NONILLO Asst. General Manager
The maker, Dr. Villaruel defaulted in the payment of his installments when they became due, so on October 30,
1969 plaintiff formally presented the promissory note for payment to the maker. Dr. Villaruel failed to pay the
promissory note as demanded, hence plaintiff notified Sambok as indorsee of said note of the fact that the same
has been dishonored and demanded payment.
Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint for collection of a sum of money before
the Court of First Instance of Iloilo, Branch I. Sambok did not deny its liability but contended that it could not be
obliged to pay until after its co-defendant Dr. Villaruel has been declared insolvent.
During the pendency of the case in the trial court, defendant Dr. Villaruel died, hence, on October 24, 1972 the
lower court, on motion, dismissed the case against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules of
Court. 1
On plaintiff's motion for summary judgment, the trial court rendered its decision dated September 12, 1973, the
dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered:
(a) Ordering Sambok Motors Company to pay to the plaintiff the sum of P15,939.00 plus the legal rate
of interest from October 30, 1969;
(b) Ordering same defendant to pay to plaintiff the sum equivalent to 25% of P15,939.00 plus interest
thereon until fully paid; and
(c) To pay the cost of suit.
Not satisfied with the decision, the present appeal was instituted, appellant Sambok raising a lone assignment of
error as follows:
The trial court erred in not dismissing the complaint by finding defendant appellant Sambok Motors
Company as assignor and a qualified indorsee of the subject promissory note and in not holding it as
only secondarily liable thereof.
Appellant Sambok argues that by adding the words "with recourse" in the indorsement of the note, it becomes a
qualified indorser that being a qualified indorser, it does not warrant that if said note is dishonored by the maker
on presentment, it will pay the amount to the holder; that it only warrants the following pursuant to Section 65 of
the Negotiable Instruments Law: (a) that the instrument is genuine and in all respects what it purports to be; (b)
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that he has a good title to it; (c) that all prior parties had capacity to contract; (d) that he has no knowledge of any
fact which would impair the validity of the instrument or render it valueless.
The appeal is without merit.
A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by
adding to the indorser's signature the words "without recourse" or any words of similar import. 2 Such an
indorsement relieves the indorser of the general obligation to pay if the instrument is dishonored but not of the
liability arising from warranties on the instrument as provided in Section 65 of the Negotiable Instruments Law
already mentioned herein. However, appellant Sambok indorsed the note "with recourse" and even waived the
notice of demand, dishonor, protest and presentment.
"Recourse" means resort to a person who is secondarily liable after the default of the person who is primarily
liable. 3 Appellant, by indorsing the note "with recourse" does not make itself a qualified indorser but a general
indorser who is secondarily liable, because by such indorsement, it agreed that if Dr. Villaruel fails to pay the note,
plaintiff-appellee can go after said appellant. The effect of such indorsement is that the note was indorsed without
qualification. A person who indorses without qualification engages that on due presentment, the note shall be
accepted or paid, or both as the case may be, and that if it be dishonored, he will pay the amount thereof to the
holder. 4 Appellant Sambok's intention of indorsing the note without qualification is made even more apparent by
the fact that the notice of demand, dishonor, protest and presentment were an waived. The words added by said
appellant do not limit his liability, but rather confirm his obligation as a general indorser.
Lastly, the lower court did not err in not declaring appellant as only secondarily liable because after an instrument
is dishonored by non-payment, the person secondarily liable thereon ceases to be such and becomes a principal
debtor. 5 His liabiliy becomes the same as that of the original obligor. 6 Consequently, the holder need not even
proceed against the maker before suing the indorser.
WHEREFORE, the decision of the lower court is hereby affirmed. No costs.
SO ORDERED.
Makasiar (Chairman), Concepcion, Jr., Guerrero and Escolin, JJ., concur.
Aquino, J., is on leave.
Separate Opinions
ABAD SANTOS, J., concurring:
I concur and wish to add the observation that the appeal could have been treated as a petition for review under
R.A. 5440 and dismissed by minute resolution.
Separate Opinions
ABAD SANTOS, J., concurring:
I concur and wish to add the observation that the appeal could have been treated as a petition for review under
R.A. 5440 and dismissed by minute resolution.
Footnotes
1 Sec. 21. Where claim does not survive.—When the action is for recovery of money, debt or interest
thereon, and the defendant dies before final judgment in the Court of First Instance, it shall be
dismissed to be prosecuted in the manner especially provided in these rules.
2 Section 38, The Negotiable Instruments Law.
3 Ogden, The Law of Negotiable Instruments, p. 200 citing Industrial Bank and Trust Company vs.
Hesselberg, 195 S.W. (2d) 470.
4 Ang Tiong vs. Ting, 22 SCRA 715.
5 Pittsburg Westmoreland Coal Co. vs. Kerr, 115 N.E.
6 American Bank vs. Macondray & Co., 4 Phil. 695.
https://www.lawphil.net/judjuris/juri1983/feb1983/gr_l_39641_1983.html 2/2
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SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad Gempesaw,
appealed to this Court in a Petition for Review, on the issue of the right of the drawer to recover from the drawee
bank who pays a check with a forged indorsement of the payee, debiting the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against the private respondent Philippine
Bank of Communications (respondent drawee Bank) for recovery of the money value of eighty-two (82) checks
charged against the petitioner's account with the respondent drawee Bank on the ground that the payees'
indorsements were forgeries. The Regional Trial Court, Branch CXXVIII of Caloocan City, which tried the case,
rendered a decision on November 17, 1987 dismissing the complaint as well as the respondent drawee Bank's
counterclaim. On appeal, the Court of Appeals in a decision rendered on February 22, 1990, affirmed the decision
of the RTC on two grounds, namely (1) that the plaintiff's (petitioner herein) gross negligence in issuing the checks
was the proximate cause of the loss and (2) assuming that the bank was also negligent, the loss must
nevertheless be borne by the party whose negligence was the proximate cause of the loss. On March 5, 1990, the
petitioner filed this petition under Rule 45 of the Rules of Court setting forth the following as the alleged errors of
the respondent Court:1
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE NEGLIGENCE OF THE
DRAWER IS THE PROXIMATE CAUSE OF THE RESULTING INJURY TO THE DRAWEE BANK, AND
THE DRAWER IS PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND RULING THAT IT IS
THE GROSS AND INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND
EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND
THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO THE INTENDED
PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE CAUSE OF THE DAMAGE
TO PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE RESPONDENT
BANK TO RESTORE OR RE-CREDIT THE CHECKING ACCOUNT OF THE PETITIONER IN THE
CALOOCAN CITY BRANCH BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN THE
AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at Rizal Avenue
Extension and at Second Avenue, Caloocan City. Among these groceries are D.G. Shopper's Mart and D.G.
Whole Sale Mart. Petitioner maintains a checking account numbered 13-00038-1 with the Caloocan City Branch of
the respondent drawee Bank. To facilitate payment of debts to her suppliers, petitioner draws checks against her
checking account with the respondent bank as drawee. Her customary practice of issuing checks in payment of
her suppliers was as follows: the checks were prepared and filled up as to all material particulars by her trusted
bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the bookkeeper prepared the checks,
the completed checks were submitted to the petitioner for her signature, together with the corresponding invoice
receipts which indicate the correct obligations due and payable to her suppliers. Petitioner signed each and every
check without bothering to verify the accuracy of the checks against the corresponding invoices because she
reposed full and implicit trust and confidence on her bookkeeper. The issuance and delivery of the checks to the
payees named therein were left to the bookkeeper. Petitioner admitted that she did not make any verification as to
whether or not the checks were delivered to their respective payees. Although the respondent drawee Bank
notified her of all checks presented to and paid by the bank, petitioner did not verify he correctness of the
returned checks, much less check if the payees actually received the checks in payment for the supplies she
received. In the course of her business operations covering a period of two years, petitioner issued, following her
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usual practice stated above, a total of eighty-two (82) checks in favor of several suppliers. These checks were all
presented by the indorsees as holders thereof to, and honored by, the respondent drawee Bank. Respondent
drawee Bank correspondingly debited the amounts thereof against petitioner's checking account numbered 30-
00038-1. Most of the aforementioned checks were for amounts in excess of her actual obligations to the various
payees as shown in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of Kawsek Inc.
(Exh. A-60), appellant's actual obligation to said payee was only P895.33 (Exh. A-83); (2) in Check
No. 652282 issued on September 18, 1984 in favor of Senson Enterprises in the amount of
P11,041.20 (Exh. A-67) appellant's actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in
Check No. 589092 dated April 7, 1984 for the amount of P11,672.47 in favor of Marchem (Exh. A-61)
appellant's obligation was only P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10, 1984 in
favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation was only P677.10 (Exhs. C and C-
1); (5) in Check No. 651862 dated August 9, 1984 in favor of Malinta Exchange Mart for P11,107.16
(Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11,
1984 in favor of Grocer's International Food Corp. in the amount of P11,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated March 17, 1984 in
favor of Sophy Products in the amount of P11,648.00 (Exh. A-78), her obligation was only P648.00
(Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the amount of P11,520.00 in favor of the
Yakult Philippines (Exh. A-73), the latter's invoice was only P520.00 (Exh. H-2); (9) in Check No.
62033 dated May 23, 1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-
34), her obligation was only P504.00 (Exhs. I-1 and I-2).2
Practically, all the checks issued and honored by the respondent drawee bank were crossed checks.3 Aside from
the daily notice given to the petitioner by the respondent drawee Bank, the latter also furnished her with a monthly
statement of her transactions, attaching thereto all the cancelled checks she had issued and which were debited
against her current account. It was only after the lapse of more two (2) years that petitioner found out about the
fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon, Chief
Accountant of respondent drawee Bank at the Buendia branch, who, without authority therefor, accepted them all
for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Y. Romero and Benito Lam.
Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks
were deposited in Savings Account No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's Buendia
branch, and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks were
deposited in Account No. 0443-4, under the name of Benito Lam at the Elcaño branch of the respondent drawee
Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified that they did not
receive nor even see the subject checks and that the indorsements appearing at the back of the checks were not
theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted periodic inspection of
the branches' operations failed to discover, check or stop the unauthorized acts of Ernest L. Boon. Under the rules
of the respondent drawee Bank, only a Branch Manager and no other official of the respondent drawee bank, may
accept a second indorsement on a check for deposit. In the case at bar, all the deposit slips of the eighty-two (82)
checks in question were initialed and/or approved for deposit by Ernest L. Boon. The Branch Managers of the
Ongpin and Elcaño branches accepted the deposits made in the Buendia branch and credited the accounts of
Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her account with
the money value of the eighty-two (82) checks totalling P1,208.606.89 for having been wrongfully charged against
her account. Respondent drawee Bank refused to grant petitioner's demand. On January 23, 1985, petitioner filed
the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee bank. The payees
are not parties to the case. Rather, it is the drawer, whose signature is genuine, who instituted this action to
recover from the drawee bank the money value of eighty-two (82) checks paid out by the drawee bank to holders
of those checks where the indorsements of the payees were forged. How and by whom the forgeries were
committed are not established on the record, but the respective payees admitted that they did not receive those
checks and therefore never indorsed the same. The applicable law is the Negotiable Instruments Law4 (heretofore
referred to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the person whose signature it purports to
be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party whose signature is forged.
A party whose signature to an instrument was forged was never a party and never gave his consent to the
contract which gave rise to the instrument. Since his signature does not appear in the instrument, he cannot
be held liable thereon by anyone, not even by a holder in due course. Thus, if a person's signature is
forged as a maker of a promissory note, he cannot be made to pay because he never made the promise to
pay. Or where a person's signature as a drawer of a check is forged, the drawee bank cannot charge the
amount thereof against the drawer's account because he never gave the bank the order to pay. And said
section does not refer only to the forged signature of the maker of a promissory note and of the drawer of a
check. It covers also a forged indorsement, i.e., the forged signature of the payee or indorsee of a note or
check. Since under said provision a forged signature is "wholly inoperative", no one can gain title to the
instrument through such forged indorsement. Such an indorsement prevents any subsequent party from
acquiring any right as against any party whose name appears prior to the forgery. Although rights may exist
between and among parties subsequent to the forged indorsement, not one of them can acquire rights
against parties prior to the forgery. Such forged indorsement cuts off the rights of all subsequent parties as
against parties prior to the forgery. However, the law makes an exception to these rules where a party is
precluded from setting up forgery as a defense.
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As a matter of practical significance, problems arising from forged indorsements of checks may generally be
broken into two types of cases: (1) where forgery was accomplished by a person not associated with the drawer —
for example a mail robbery; and (2) where the indorsement was forged by an agent of the drawer. This difference
in situations would determine the effect of the drawer's negligence with respect to forged indorsements. While
there is no duty resting on the depositor to look for forged indorsements on his cancelled checks in contrast to a
duty imposed upon him to look for forgeries of his own name, a depositor is under a duty to set up an accounting
system and a business procedure as are reasonably calculated to prevent or render difficult the forgery of
indorsements, particularly by the depositor's own employees. And if the drawer (depositor) learns that a check
drawn by him has been paid under a forged indorsement, the drawer is under duty promptly to report such fact to
the drawee bank.5 For his negligence or failure either to discover or to report promptly the fact of such forgery to
the drawee, the drawer loses his right against the drawee who has debited his account under a forged
indorsement.6 In other words, he is precluded from using forgery as a basis for his claim for re-crediting of his
account.
In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted employee, Alicia
Galang, and were given to her for her signature. Her signing the checks made the negotiable instrument complete.
Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument to the payee
for the purpose of giving effect thereto.7 The first delivery of the instrument, complete in form, to the payee who
takes it as a holder, is called issuance of the instrument.8 Without the initial delivery of the instrument from the
drawer of the check to the payee, there can be no valid and binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized her employee Alicia Galang
to deliver the eighty-two (82) checks to their respective payees. Instead of issuing the checks to the payees as
named in the checks, Alicia Galang delivered them to the Chief Accountant of the Buendia branch of the
respondent drawee Bank, a certain Ernest L. Boon. It was established that the signatures of the payees as first
indorsers were forged. The record fails to show the identity of the party who made the forged signatures. The
checks were then indorsed for the second time with the names of Alfredo Y. Romero and Benito Lam, and were
deposited in the latter's accounts as earlier noted. The second indorsements were all genuine signatures of the
alleged holders. All the eighty-two (82) checks bearing the forged indorsements of the payees and the genuine
second indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia branch of
respondent drawee Bank to the credit of their respective savings accounts in the Buendia, Ongpin and Elcaño
branches of the same bank. The total amount of P1,208,606.89, represented by eighty-two (82) checks, were
credited and paid out by respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against
petitioner's checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the
drawer's account for the amount of said check. An exception to this rule is where the drawer is guilty of such
negligence which causes the bank to honor such a check or checks. If a check is stolen from the payee, it is quite
obvious that the drawer cannot possibly discover the forged indorsement by mere examination of his cancelled
check. This accounts for the rule that although a depositor owes a duty to his drawee bank to examine his
cancelled checks for forgery of his own signature, he has no similar duty as to forged indorsements. A different
situation arises where the indorsement was forged by an employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an agent or employee deal with the payee's
indorsement. The drawer and the payee often time shave business relations of long standing. The continued
occurrence of business transactions of the same nature provides the opportunity for the agent/employee to
commit the fraud after having developed familiarity with the signatures of the parties. However, sooner or later,
some leak will show on the drawer's books. It will then be just a question of time until the fraud is discovered. This
is specially true when the agent perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the
depositor to act as a prudent businessman would under the circumstances. In the case at bar, the petitioner relied
implicitly upon the honesty and loyalty of her bookkeeper, and did not even verify the accuracy of amounts of the
checks she signed against the invoices attached thereto. Furthermore, although she regularly received her bank
statements, she apparently did not carefully examine the same nor the check stubs and the returned checks, and
did not compare them with the same invoices. Otherwise, she could have easily discovered the discrepancies
between the checks and the documents serving as bases for the checks. With such discovery, the subsequent
forgeries would not have been accomplished. It was not until two years after the bookkeeper commenced her
fraudulent scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to her account,
at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of non-payment.
Assuming that even one single complaint had been made, petitioner would have been duty-bound, as far as the
respondent drawee Bank was concerned, to make an adequate investigation on the matter. Had this been done,
the discrepancies would have been discovered, sooner or later. Petitioner's failure to make such adequate inquiry
constituted negligence which resulted in the bank's honoring of the subsequent checks with forged indorsements.
On the other hand, since the record mentions nothing about such a complaint, the possibility exists that the checks
in question covered inexistent sales. But even in such a case, considering the length of a period of two (2) years, it
is hard to believe that petitioner did not know or realize that she was paying more than she should for the supplies
she was actually getting. A depositor may not sit idly by, after knowledge has come to her that her funds seem to
be disappearing or that there may be a leak in her business, and refrain from taking the steps that a careful and
prudent businessman would take in such circumstances and if taken, would result in stopping the continuance of
the fraudulent scheme. If she fails to take steps, the facts may establish her negligence, and in that event, she
would be estopped from recovering from the bank.9
One thing is clear from the records — that the petitioner failed to examine her records with reasonable diligence
whether before she signed the checks or after receiving her bank statements. Had the petitioner examined her
records more carefully, particularly the invoice receipts, cancelled checks, check book stubs, and had she
compared the sums written as amounts payable in the eighty-two (82) checks with the pertinent sales invoices, she
would have easily discovered that in some checks, the amounts did not tally with those appearing in the sales
invoices. Had she noticed these discrepancies, she should not have signed those checks, and should have
conducted an inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant in going
over her current account by taking careful note of the daily reports made by respondent drawee Bank in her
issued checks, or at least made random scrutiny of cancelled checks returned by respondent drawee Bank at the
11/14/2018 G.R. No. 92244
close of each month, she could have easily discovered the fraud being perpetrated by Alicia Galang, and could
have reported the matter to the respondent drawee Bank. The respondent drawee Bank then could have taken
immediate steps to prevent further commission of such fraud. Thus, petitioner's negligence was the proximate
cause of her loss. And since it was her negligence which caused the respondent drawee Bank to honor the forged
checks or prevented it from recovering the amount it had already paid on the checks, petitioner cannot now
complain should the bank refuse to recredit her account with the amount of such checks. 10 Under Section 23 of
the NIL, she is now precluded from using the forgery to prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank 11 is not applicable
to the case at bar because in said case, the check was fraudulently taken and the signature of the payee was
forged not by an agent or employee of the drawer. The drawer was not found to be negligent in the handling of its
business affairs and the theft of the check by a total stranger was not attributable to negligence of the drawer;
neither was the forging of the payee's indorsement due to the drawer's negligence. Since the drawer was not
negligent, the drawee was duty-bound to restore to the drawer's account the amount theretofore paid under the
check with a forged payee's indorsement because the drawee did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks because they were crossed
checks. Issuing a crossed check imposes no legal obligation on the drawee not to honor such a check. It is more
of a warning to the holder that the check cannot be presented to the drawee bank for payment in cash. Instead,
the check can only be deposited with the payee's bank which in turn must present it for payment against the
drawee bank in the course of normal banking transactions between banks. The crossed check cannot be
presented for payment but it can only be deposited and the drawee bank may only pay to another bank in the
payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with more than one
indorsement. The banking rule banning acceptance of checks for deposit or cash payment with more than one
indorsement unless cleared by some bank officials does not invalidate the instrument; neither does it invalidate the
negotiation or transfer of the said check. In effect, this rule destroys the negotiability of bills/checks by limiting their
negotiation by indorsement of only the payee. Under the NIL, the only kind of indorsement which stops the further
negotiation of an instrument is a restrictive indorsement which prohibits the further negotiation thereof.
Sec. 36. When indorsement restrictive. — An indorsement is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in express words at
the back of the instrument, so that any subsequent party may be forewarned that ceases to be negotiable.
However, the restrictive indorsee acquires the right to receive payment and bring any action thereon as any
indorser, but he can no longer transfer his rights as such indorsee where the form of the indorsement does not
authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because there is no privity between them,
as far as the drawer-depositor is concerned, such bank may not legally refuse to honor a negotiable bill of
exchange or a check drawn against it with more than one indorsement if there is nothing irregular with the bill or
check and the drawer has sufficient funds. The drawee cannot be compelled to accept or pay the check by the
drawer or any holder because as a drawee, he incurs no liability on the check unless he accepts it. But the drawee
will make itself liable to a suit for damages at the instance of the drawer for wrongful dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by reason of her
gross negligence. But under Section 196 of the NIL, any case not provided for in the Act shall be governed by the
provisions of existing legislation. Under the laws of quasi-delict, she cannot point to the negligence of the
respondent drawee Bank in the selection and supervision of its employees as being the cause of the loss because
negligence is the proximate cause thereof and under Article 2179 of the Civil Code, she may not be awarded
damages. However, under Article 1170 of the same Code the respondent drawee Bank may be held liable for
damages. The article provides —
Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those
who in any manner contravene the tenor thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as depositor (obligee) and the
respondent drawee bank as the obligor. In the performance of its obligation, the drawee bank is bound by its
internal banking rules and regulations which form part of any contract it enters into with any of its depositors.
When it violated its internal rules that second endorsements are not to be accepted without the approval of its
branch managers and it did accept the same upon the mere approval of Boon, a chief accountant, it contravened
the tenor of its obligation at the very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect to the
acceptance of checks with second indorsement for deposit even without the approval of the branch manager
despite periodic inspection conducted by a team of auditors from the main office constitutes negligence on the
part of the bank in carrying out its obligations to its depositors. Article 1173 provides —
The fault or negligence of the obligor consists in the omission of that diligence which is required by
the nature of the obligation and corresponds with the circumstance of the persons, of the time and of
the place. . . .
We hold that banking business is so impressed with public interest where the trust and confidence of the public in
general is of paramount importance such that the appropriate standard of diligence must be a high degree of
diligence, if not the utmost diligence. Surely, respondent drawee Bank cannot claim it exercised such a degree of
diligence that is required of it. There is no way We can allow it now to escape liability for such negligence. Its
liability as obligor is not merely vicarious but primary wherein the defense of exercise of due diligence in the
selection and supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the petitioner on a fifty-
fifty ratio in accordance with Article 172 which provides:
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Responsibility arising from negligence in the performance of every kind of obligation is also
demandable, but such liability may be regulated by the courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the decision to hold
the drawee bank liable is based on law and substantial justice and not on mere equity. And although the case was
brought before the court not on breach of contractual obligations, the courts are not precluded from applying to
the circumstances of the case the laws pertinent thereto. Thus, the fact that petitioner's negligence was found to
be the proximate cause of her loss does not preclude her from recovering damages. The reason why the decision
dealt on a discussion on proximate cause is due to the error pointed out by petitioner as allegedly committed by
the respondent court. And in breaches of contract under Article 1173, due diligence on the part of the defendant is
not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the reception of evidence
to determine the exact amount of loss suffered by the petitioner, considering that she partly benefited from the
issuance of the questioned checks since the obligation for which she issued them were apparently extinguished,
such that only the excess amount over and above the total of these actual obligations must be considered as loss
of which one half must be paid by respondent drawee bank to herein petitioner.
SO ORDERED.
Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur.
# Footnotes
* Penned by Associate Justice Celso L. Magsino, Associate Justices Nathanael P. De Pano, Jr. and
Cezar D. Francisco, concurring.
1 Rollo, p.11.
2 Rollo, pp. 20-21; CA Decision, pp. 2-3. See Notes 2-6 thereof.
3 A crossed check is defined as a check crossed with two (2) lines, between which are either the
name of a bank or the words "and company," in full or abbreviated. In the former case, the banker on
whom it is drawn must not pay the money for the check to any other than the banker named; in the
latter case, he must not pay it to any other than a banker. Black's Law Dictionary 301 (4th Ed.), citing
2 Steph. Comm. 118, note C; 7 Exch. 389; [1903] A.C. 240; Farmers' Bank v. Johnson, King & Co.,
134 Ga. 486, 68 S.E. 65, 30 L.R.A., N.S. 697.
4 Act No. 2031, enacted on February 3, 1911.
5 Britton, Bills and Notes, Sec. 143, pp. 663-664.
6 City of New York vs. Bronx County Trust Co., 261 N.Y. 64, 184 N.E. 495 (1933); Detroit Piston Ring
Co. vs. Wayne County & Home Savings Bank, 252 Mich. 163, 233 N.W. 185 (1930); C.E. Erickson Co.
vs. Iowa Nat. Bank 211 Iowa 495, 230 N.W. 342 (1930).
7 NIL, Sec. 16.
8 Ibid., Sec. 191, par. 10.
9 Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank, supra, note 3.
10 Defiance Lumber Co. vs. Bank of California, N.A., 180 Wash. 533, 41 P. 2d 135 (1935); National
Surety Co. vs. President and Directors of Manhattan Co., et al., 252 N.Y. 247, 169 N.E. 372 (1929);
Erickson Co. vs. Iowa National Bank, supra, note 3.
11 43 Phil. 678 (1922).
12 NIL, Sec. 37.
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Custom Search
SECOND DIVISION
G.R. No. 102967 February 10, 2000
BIBIANO V. BAÑAS, JR., petitioner,

vs.
COURT OF APPEALS, AQUILINO T. LARIN, RODOLFO TUAZON AND PROCOPIO TALON, respondents.
QUISUMBING, J.:
For review is the Decision of the Court of Appeals in CA-C.R. CV No. 17251 promulgated on November 29, 1991.
It affirmed in toto the judgment of the Regional Trial Court (RTC), Branch 39, Manila, in Civil Case No. 82-12107.
Said judgment disposed as follows:
FOR ALL THE FOREGOING CONSIDERATIONS, this Court hereby renders judgment DISMISSING the
complaint against all the defendants and ordering plaintiff [herein petitioner] to pay defendant Larin the
amount of P200,000.00 (Two Hundred Thousand Pesos) as actual and compensatory damages;
P200,000.00 as moral damages; and P50,000.00 as exemplary damages and attorneys fees of
P100,000.00.1
The facts, which we find supported by the records, have been summarized by the Court of Appeals as follows:
On February 20, 1976, petitioner, Bibiano V. Bañas Jr. sold to Ayala Investment Corporation (AYALA), 128,265
square meters of land located at Bayanan, Muntinlupa, for two million, three hundred eight thousand, seven
hundred seventy (P2,308,770.00) pesos. The Deed of Sale provided that upon the signing of the contract AYALA
shall pay four hundred sixty-one thousand, seven hundred fifty-four (P461,754.00) pesos. The balance of one
million, eight hundred forty-seven thousand and sixteen (P1,847,016.00) pesos was to be paid in four equal
consecutive annual installments, with twelve (12%) percent interest per annum on the outstanding balance. AYALA
issued one promissory note covering four equal annual installments. Each periodic payment of P461,754.00 pesos
shall be payable starting on February 20, 1977, and every year thereafter, or until February 20, 1980.
The same day, petitioner discounted the promissory note with AYALA, for its face value of P1,847,016.00,
evidenced by a Deed of Assignment signed by the petitioner and AYALA. AYALA issued nine (9) checks to
petitioner, all dated February 20, 1976, drawn against Bank of the Philippine Islands with the uniform amount of
two hundred five thousand, two hundred twenty-four (P205,224.00) pesos.
In his 1976 Income Tax Return, petitioner reported the P461,754 initial payment as income from disposition of
capital asset.2
Selling Price of Land P2,308,770.00

Less Initial Payment 461,754.00 3
Unrealized Gain P1,847,016.00
1976 Declaration of Income on Disposition of Capital Asset subject to Tax:

Initial Payment P461,754.00
Less: Cost of land and other incidental Expenses ( 76,547.90)
Income P385,206.10
Income subject to tax (P385,206. 10 x 50%) P192,603.65
In the succeeding years, until 1979, petitioner reported a uniform income of two hundred thirty thousand, eight
hundred seventy-seven (P230,877.00) pesos4 as gain from sale of capital asset. In his 1980 income tax amnesty
return, petitioner also reported the same amount of P230,877.00 as the realized gain on disposition of capital
asset for the year.
On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo Tuazon and Procopio
Talon to examine the books and records of petitioner for the year 1976. They discovered that petitioner had no
outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire
profit should have been taxable in 1976 since the income was wholly derived in 1976.
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Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-five thousand, nine
hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They recommended deficiency tax
assessment for two million, four hundred seventy-three thousand, six hundred seventy-three (P2,473,673.00)
pesos.
Meantime, Aquilino Larin succeeded Calaguio as Regional Director of Manila Region IV-A. After reviewing the
examiners' report, Larin directed the revision of the audit report, with instruction to consider the land as capital
asset. The tax due was only fifty (50%) percent of the total gain from sale of the property held by the taxpayer
beyond twelve months pursuant to Section 345 of the 1977 National Internal Revenue Code (NIRC). The
deficiency tax assessment was reduced to nine hundred thirty six thousand, five hundred ninety-eight pesos and
fifty centavos (P936,598.50), inclusive of surcharges and penalties for the year 1976.
On June 27, 1980, respondent Larin sent a letter to petitioner informing of the income tax deficiency that must be
settled him immediately.
On September 26, 1980, petitioner acknowledged receipt of the letter but insisted that the sale of his land to
AYALA was on installment.
On June 8, 1981, the matter was endorsed to the Acting Chief of the Legal Branch of the National Office of the
BIR. The Chief of the Tax Fraud Unit recommended the prosecution of a criminal case for conspiring to file false
and fraudulent returns, in violation of Section 51 of the Tax Code against petitioner and his accountants, Andres P.
Alejandre and Conrado Bañas.
On June 17, 1981, Larin filed a criminal complaint for tax evasion against the petitioner.
On July 1, 1981, news items appeared in the now defunct Evening Express with the headline: "BIR Charges
Realtor" and another in the defunct Evening Post with a news item: "BIR raps Realtor, 2 accountants." Another
news item also appeared in the July 2, 1981, issue of the Bulletin Today entitled: "3-face P1-M tax evasion raps."
All news items mentioned petitioner's false income tax return concerning the sale of land to AYALA.
On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D. 1740 and paid the amount of forty-one
thousand, seven hundred twenty-nine pesos and eighty-one centavos (P41,729.81). On November 2, 1981,
petitioner again filed an Amnesty Tax Return under P.D. 1840 and paid an additional amount of one thousand, five
hundred twenty-five pesos and sixty-two centavos (P1,525.62). In both, petitioner did not recognize that his sale of
land to AYALA was on cash basis.
Reacting to the complaint for tax evasion and the news reports, petitioner filed with the RTC of Manila an action6
for damages against respondents Larin, Tuazon and Talon for extortion and malicious publication of the BIR's tax
audit report. He claimed that the filing of criminal complaints against him for violation of tax laws were improper
because he had already availed of two tax amnesty decrees, Presidential Decree Nos. 1740 and 1840.
The trial court decided in favor of the respondents and awarded Larin damages, as already stated. Petitioner
seasonably appealed to the Court of Appeals. In its decision of November 29, 1991, the respondent court affirmed
the trial court's decision, thus:
The finding of the court a quo that plaintiff-appellant's actions against defendant-appellee Larin were
unwarranted and baseless and as a result thereof, defendant-appellee Larin was subjected to unnecessary
anxiety and humiliation is therefore supported by the evidence on record. 1 â w p h i1 .n ê t
Defendant-appellee Larin acted only in pursuance of the authority granted to him. In fact, the criminal
charges filed against him in the Tanodbayan and in the City Fiscal's Office were all dismissed.
WHEREFORE, the appealed judgment is hereby AFFIRMED in toto.7
Hence this petition, wherein petitioner raises before us the following queries:
I. WHETHER THE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF PERTINENT TAX LAWS,
THUS IT FAILED TO APPRECIATE THE CORRECTNESS AND ACCURACY OF PETITIONER'S RETURN OF
THE INCOME DERIVED FROM THE SALE OF THE LAND TO AYALA.
II. WHETHER THE RESPONDENT COURT ERRED IN NOT FINDING THAT THERE WAS AN ALLEGED
ATTEMPT TO EXTORT [MONEY FROM] PETITIONER BY PRIVATE RESPONDENTS.
III. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF PRESIDENTIAL DECREE
NOS. 1740 AND 1840, AMONG OTHERS, PETITIONER'S IMMUNITY FROM CRIMINAL PROSECUTION.
IV. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF WELL-ESTABLISHED

DOCTRINES OF THIS HONORABLE COURT AS REGARDS THE AWARD OF ACTUAL, MORAL AND
EXEMPLARY DAMAGES IN FAVOR OF RESPONDENT LARIN.
In essence, petitioner asks the Court to resolve seriatim the following issues:
1. Whether respondent court erred in ruling that there was no extortion attempt by BIR officials;
2. Whether respondent court erred in holding that P.D. 1740 and 1840 granting tax amnesties did not grant
immunity from tax suits;
3. Whether respondent court erred in finding that petitioner's income from the sale of land in 1976 should
be declared as a cash transaction in his tax return for the same year (because the buyer discounted the
promissory note issued to the seller on future installment payments of the sale, on the same day of the
sale);
4. Whether respondent court erred and committed grave abuse of discretion in awarding damages to
respondent Larin.
The first issue, on whether the Court of Appeals erred in finding that there was no extortion, involves a
determination of fact. The Court of Appeals observed,
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The only evidence to establish the alleged extortion attempt by defendants-appellees is the plaintiff-
appellant's self serving declarations.
As found by the court a quo, "said attempt was known to plaintiff-appellant's son-in-law and counsel on
record, yet, said counsel did not take the witness stand to corroborate the testimony of plaintiff."8
As repeatedly held, findings of fact by the Court of Appeals especially if they affirm factual findings of the trial court
will not be disturbed by this Court, unless these findings are not supported by evidence.9 Similarly, neither should
we disturb a finding of the trial court and appellate court that an allegation is not supported by evidence on record.
Thus, we agree with the conclusion of respondent court that herein private respondents, on the basis of evidence,
could not be held liable for extortion.
On the second issue of whether P.D. Nos. 1740 and 1840 which granted tax amnesties also granted immunity from
criminal prosecution against tax offenses, the pertinent sections of these laws state:
P.D. No. 1740. CONDONING PENALTIES FOR CERTAIN VIOLATIONS OF THE INCOME TAX LAW
UPON VOLUNTARY DISCLOSURE OF UNDECLARED INCOME FOR INCOME TAX PURPOSES AND
REQUIRING PERIODIC SUBMISSION OF NET WORTH STATEMENT.
xxx xxx xxx
Sec. 1. Voluntary Disclosure of Correct Taxable Income. — Any individual who, for any or all of the taxable
years 1974 to 1979, had failed to file a return is hereby, allowed to file a return for each of the aforesaid
taxable years and accurately declare therein the true and correct income, deductions and exemptions and
pay the income tax due per return. Likewise, any individual who filed a false or fraudulent return for any
taxable year in the period mentioned above may amend his return and pay the correct amount of tax due
after deducting the taxes already paid, if any, in the original declaration. (emphasis ours)
xxx xxx xxx
Sec. 5. Immunity from Penalties. — Any individual who voluntarily files a return under this Decree and pays
the income tax due thereon shall be immune from the penalties, civil or criminal, under the National Internal
Revenue Code arising from failure to pay the correct income tax with respect to the taxable years from which
an amended return was filed or for which an original return was filed in cases where no return has been filed
for any of the taxable years 1974 to 1979: Provided, however, That these immunities shall not apply in cases
where the amount of net taxable income declared under this Decree is understated to the extent of 25% or
more of the correct net taxable income. (emphasis ours)
P.D. NO. 1840 — GRANTING A TAX AMNESTY ON UNTAXED INCOME AND/OR WEALTH EARNED
OR ACQUIRED DURING THE TAXABLE YEARS 1974 TO 1980 AND REQUIRING THE FILING OF THE
STATEMENT OF ASSETS, LIABILITIES, AND NET WORTH.
Sec. 1. Coverage. — In case of voluntary disclosure of previously untaxed income and/or wealth such as
earnings, receipts, gifts, bequests or any other acquisition from any source whatsoever, realized here or
abroad, by any individual taxpayer, which are taxable under the National Internal Revenue Code, as
amended, the assessment and collection of all internal revenue taxes, including the increments or penalties
on account of non-payment, as well as all civil, criminal or administrative liabilities arising from or incident
thereto under the National Internal Revenue Code, are hereby condoned provided that the individual
taxpayer shall pay. (emphasis ours) . . .
Sec. 2. Conditions for Immunity. — The immunity granted under Section one of this Decree shall apply only
under the following conditions:
a) Such previously untaxed income and/or wealth must have been earned or realized in any of the
years 1974 to 1980;
b) The taxpayer must file an amnesty return on or before November 30, 1981, and fully pay the tax
due thereon;
c) The amnesty tax paid by the taxpayer under this Decree shall not be less than P1,000.00 per
taxable year; and
d) The taxpayer must file a statement of assets, liabilities and net worth as of December 31, 1980, as
required under Section 6 hereof. (emphasis ours)
It will be recalled that petitioner entered into a deed of sale purportedly on installment. On the same day, he
discounted the promissory note covering the future installments. The discounting seems questionable because
ordinarily, when a bill is discounted, the lender (e.g. banks, financial institution) charges or deducts a certain
percentage from the principal value as its compensation. Here, the discounting was done by the buyer. On July 2,
1981, two weeks after the filing of the tax evasion complaint against him by respondent Larin on June 17, 1981,
petitioner availed of the tax amnesty under P.D. No. 1740. His amended tax return for the years 1974 - 1979 was
filed with the BIR office of Valenzuela, Bulacan, instead of Manila where the petitioner's principal office was located.
He again availed of the tax amnesty under P.D. No. 1840. His disclosure, however, did not include the income from
his sale of land to AYALA on cash basis. Instead he insisted that such sale was on installment. He did not amend
his income tax return. He did not pay the tax which was considerably increased by the income derived from the
discounting. He did not meet the twin requirements of P.D. 1740 and 1840, declaration of his untaxed income and
full payment of tax due thereon. Clearly, the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840.
The mere filing of tax amnesty return under P.D. 1740 and 1840 does not ipso facto shield him from immunity
against prosecution. Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives
the government a chance to collect uncollected tax from tax evaders without having to go through the tedious
process of a tax case. To avail of a tax amnesty granted by the government, and to be immune from suit on its
delinquencies, the tax payer must have voluntarily disclosed his previously untaxed income and must have paid
the corresponding tax on such previously untaxed income.10
It also bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in law and if
granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the
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taxpayer and liberally in favor of the taxing authority.11 Hence, on this matter, it is our view that petitioner's claim of
immunity from prosecution under the shield of availing tax amnesty is untenable.
On the third issue, petitioner asserts that his sale of the land to AYALA was not on cash basis but on installment as
clearly specified in the Deed of Sale which states:
That for and in consideration of the sum of TWO MILLION THREE HUNDRED EIGHT THOUSAND SEVEN
HUNDRED SEVENTY (P2,308,770.00) PESOS Philippine Currency, to be paid as follows:
1. P461,754.00, upon the signing of the Deed of Sale; and,
2. The balance of P1,847,016.00, to be paid in four (4) equal, consecutive, annual installments with
interest thereon at the rate of twelve percent (12%) per annum, beginning on February 20, 1976, said
installments to be evidenced by four (4) negotiable promissory notes.12
Petitioner resorts to Section 43 of the NIRC and Sec. 175 of Revenue Regulation No. 2 to support his claim.
Sec. 43 of the 1977 NIRC states,
Installment basis. — (a) Dealers in personal property. — . . .
(b) Sales of realty and casual sales of personalty — In the case (1) of a casual sale or other casual
disposition of personal property (other than property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding one thousand
pesos, or (2) of a sale or other disposition of real property if in either case the initial payments do not
exceed twenty-five percentum of the selling price, the income may, under regulations prescribed by the
Minister of Finance, be returned on the basis and in the manner above prescribed in this section. As used in
this section the term "initial payment" means the payments received in cash or property other than
evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition
is made. . . . (emphasis ours)
Revenue Regulation No. 2, Section 175 provides,
Sale of real property involving deferred payments. — Under section 43 deferred-payment sales of real
property include (1) agreements of purchase and sale which contemplate that a conveyance is not to be
made at the outset, but only after all or a substantial portion of the selling price has been paid, and (b) sales
in which there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to
deferred payments. Such sales either under (a) or (b), fall into two classes when considered with respect to
the terms of sale, as follows:
(1) Sales of property on the installment plan, that is, sales in which the payments received in cash or
property other than evidences of indebtedness of the purchaser during the taxable year in which the
sale is made do not exceed 25 per cent of the selling price;
(2) Deferred-payment sales not on the installment plan, that is sales in which the payments received
in cash or property other than evidences of indebtedness of the purchaser during the taxable year in
which the sale is made exceed 25 per cent of the selling price;
In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject
to the mortgage or whether the mortgage is assumed by the purchaser, shall be included as a part of the
"selling price" but the amount of the mortgage, to the extent it does not exceed the basis to the vendor of
the property sold, shall not be considered as a part of the "initial payments" or of the "total contract price,"
as those terms are used in section 43 of the Code, in sections 174 and 176 of these regulations, and in this
section. The term "initial payments" does not include amounts received by the vendor in the year of sale
from the disposition to a third person of notes given by the vendee as part of the purchase price which are
due and payable in subsequent years. Commissions and other selling expenses paid or incurred by the
vendor are not to be deducted or taken into account in determining the amount of the "initial payments," the
"total contract price," or the "selling price." The term "initial payments" contemplates at least one other
payment in addition to the initial payment. If the entire purchase price is to be paid in a lump sum in a later
year, there being no payment during the year, the income may not be returned on the installment basis.
Income may not be returned on the installment basis where no payment in cash or property, other than
evidences of indebtedness of the purchaser, is received during the first year, the purchaser having
promised to make two or more payments, in later years.
Petitioner asserts that Sec. 43 allows him to return as income in the taxable years involved, the respective
installments as provided by the deed of sale between him and AYALA. Consequently, he religiously reported his
yearly income from sale of capital asset, subject to tax, as follows:
Year 1977 (50% of P461,754) P230,877.00

1978 230,877.00
1979 230,877.00
1980 230,877.00
Petitioner says that his tax declarations are acceptable modes of payment under Section 175 of the Revenue
Regulations (RR) No. 2. The term "initial payment", he argues, does not include amounts received by the vendor
which are part of the complete purchase price, still due and payable in subsequent years. Thus, the proceeds of
the promissory notes, not yet due which he discounted to AYALA should not be included as income realized in
1976. Petitioner states that the original agreement in the Deed of Sale should not be affected by the subsequent
discounting of the bill.
On the other hand, respondents assert that taxation is a matter of substance and not of form. Returns are
scrutinized to determine if transactions are what they are and not declared to evade taxes. Considering the
progressive nature of our income taxation, when income is spread over several installment payments through the
years, the taxable income goes down and the tax due correspondingly decreases. When payment is in lump sum
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the tax for the year proportionately increases. Ultimately, a declaration that a sale is on installment diminishes
government taxes for the year of initial installment as against a declaration of cash sale where taxes to the
government is larger.
As a general rule, the whole profit accruing from a sale of property is taxable as income in the year the sale is
made. But, if not all of the sale price is received during such year, and a statute provides that income shall be
taxable in the year in which it is "received," the profit from an installment sale is to be apportioned between or
among the years in which such installments are paid and received.13
Sec. 43 and Sec. 175 says that among the entities who may use the above-mentioned installment method is a
seller of real property who disposes his property on installment, provided that the initial payment does not exceed
25% of the selling price. They also state what may be regarded as installment payment and what constitutes initial
payment. Initial payment means the payment received in cash or property excluding evidences of indebtedness
due and payable in subsequent years, like promissory notes or mortgages, given of the purchaser during the
taxable year of sale. Initial payment does not include amounts received by the vendor in the year of sale from the
disposition to a third person of notes given by the vendee as part of the purchase price which are due and
payable in subsequent years.14 Such disposition or discounting of receivable is material only as to the
computation of the initial payment. If the initial payment is within 25% of total contract price, exclusive of the
proceeds of discounted notes, the sale qualifies as an installment sale, otherwise it is a deferred sale.15
Although the proceed of a discounted promissory note is not considered part of the initial payment, it is still taxable
income for the year it was converted into cash. The subsequent payments or liquidation of certificates of
indebtedness is reported using the installment method in computing the proportionate income16 to be returned,
during the respective year it was realized. Non-dealer sales of real or personal property may be reported as
income under the installment method provided that the obligation is still outstanding at the close of that year. If the
seller disposes the entire installment obligation by discounting the bill or the promissory note, he necessarily must
report the balance of the income from the discounting not only income from the initial installment payment.
Where an installment obligation is discounted at a bank or finance company, a taxable disposition results, even if
the seller guarantees its payment, continues to collect on the installment obligation, or handles repossession of
merchandise in case of default.17 This rule prevails in the United States.18 Since our income tax laws are of
American origin,19 interpretations by American courts an our parallel tax laws have persuasive effect on the
interpretation of these laws.20 Thus, by analogy, all the more would a taxable disposition result when the
discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of the buyer is
discharged, while the seller acquires money for the settlement of his receivables. Logically then, the income
should be reported at the time of the actual gain. For income tax purposes, income is an actual gain or an actual
increase of wealth.21 Although the proceeds of a discounted promissory note is not considered initial payment, still
it must be included as taxable income on the year it was converted to cash. When petitioner had the promissory
notes covering the succeeding installment payments of the land issued by AYALA, discounted by AYALA itself, on
the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a taxable disposition
resulted and petitioner was required by law to report in his returns the income derived from the discounting. What
petitioner did is tantamount to an attempt to circumvent the rule on payment of income taxes gained from the sale
of the land to AYALA for the year 1976.
Lastly, petitioner questions the damages awarded to respondent Larin.
Any person who seeks to be awarded actual or compensatory damages due to acts of another has the burden of
proving said damages as well as the amount thereof.22 Larin says the extortion cases filed against him hampered
his immediate promotion, caused him strong anxiety and social humiliation. The trial court awarded him two
hundred thousand (P200,000,00) pesos as actual damages. However, the appellate court stated that, despite
pendency of this case, Larin was given a promotion at the BIR. Said respondent court:
We find nothing on record, aside from defendant-appellee Larin's statements (TSN, pp. 6-7, 11 December
1985), to show that he suffered loss of seniority that allegedly barred his promotion. In fact, he was
promoted to his present position despite the pendency of the instant case (TSN, pp. 35-39, 04 November
1985).23
Moreover, the records of the case contain no statement whatsoever of the amount of the actual damages
sustained by the respondents. Actual damages cannot be allowed unless supported by evidence on the record.24
The court cannot rely on speculation, conjectures or guesswork as to the fact and amount of damages.25 To justify
a grant of actual or compensatory damages, it is necessary to prove with a reasonable degree of certainty, the
actual amount of loss.26 Since we have no basis with which to assess, with certainty, the actual or compensatory
damages counter-claimed by respondent Larin, the award of such damages should be deleted.
Moral damages may be recovered in cases involving acts referred to in Article 2127 of the Civil Code.28 As a rule,
a public official may not recover damages for charges of falsehood related to his official conduct unless he proves
that the statement was made with actual malice. In Babst, et. al. vs. National Intelligence Board, et. al., 132 SCRA
316, 330 (1984), we reiterated the test for actual malice as set forth in the landmark American case of New York
Times vs. Sullivan,29 which we have long adopted, in defamation and libel cases, viz.:
. . . with knowledge that it was false or with reckless disregard of whether it was false or not.
We appreciate petitioner's claim that he filed his 1976 return in good faith and that he had honestly believed that
the law allowed him to declare the sale of the land, in installment. We can further grant that the pertinent tax laws
needed construction, as we have earlier done. That petitioner was offended by the headlines alluding to him as tax
evader is also fully understandable. All these, however, do not justify what amounted to a baseless prosecution of
respondent Larin. Petitioner presented no evidence to prove Larin extorted money from him. He even admitted
that he never met nor talked to respondent Larin. When the tax investigation against the petitioner started, Larin
was not yet the Regional Director of BIR Region IV-A, Manila. On respondent Larin's instruction, petitioner's tax
assessment was considered one involving a sale of capital asset, the income from which was subjected to only fifty
percent (50%) assessment, thus reducing the original tax assessment by half. These circumstances may be taken
to show that Larin's involvement in extortion was not indubitable. Yet, petitioner went on to file the extortion cases
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against Larin in different fora. This is where actual malice could attach on petitioner's part. Significantly, the trial
court did not err in dismissing petitioner's complaints, a ruling affirmed by the Court of Appeals.
Keeping all these in mind, we are constrained to agree that there is sufficient basis for the award of moral and
exemplary damages in favor of respondent Larin. The appellate court believed respondent Larin when he said he
suffered anxiety and humiliation because of the unfounded charges against him. Petitioner's actions against Larin
were found "unwarranted and baseless," and the criminal charges filed against him in the Tanodbayan and City
Fiscal's Office were all dismissed.30 Hence, there is adequate support for respondent court's conclusion that moral
damages have been proved.
Now, however, what would be a fair amount to be paid as compensation for moral damages also requires
determination. Each case must be governed by its own peculiar circumstances.31 On this score, Del Rosario vs.
Court of Appeals,32 cites several cases where no actual damages were adjudicated, and where moral and
exemplary damages were reduced for being "too excessive," thus:
In the case of PNB v. C.A., [256 SCRA 309 (1996)], this Court quoted with approval the following
observation from RCPI v. Rodriguez, viz:
** **. Nevertheless, we find the award of P100,000.00 as moral damages in favor of respondent
Rodriguez excessive and unconscionable. In the case of Prudenciado v. Alliance Transport System,
Inc. (148 SCRA 440 [1987]) we said: . . . [I]t is undisputed that the trial courts are given discretion to
determine the amount of moral damages (Alcantara v. Surro, 93 Phil. 472) and that the Court of
Appeals can only modify or change the amount awarded when they are palpably and scandalously
excessive "so as to indicate that it was the result of passion, prejudice or corruption on the part of the
trial court" (Gellada v. Warner Barnes & Co., Inc., 57 O.G. [4] 7347, 7358; Sadie v. Bacharach Motors
Co., Inc., 57 O.G. [4] 636 and Adone v. Bacharach Motor Co., Inc., 57 O.G. 656). But in more recent
cases where the awards of moral and exemplary damages are far too excessive compared to the
actual loses sustained by the aggrieved party, this Court ruled that they should be reduced to more
reasonable amounts. . . . . (Emphasis ours.)
In other words, the moral damages awarded must be commensurate with the loss or injury suffered.
In the same case (PNB v. CA), this Court found the amount of exemplary damages required to be paid
(P1,000,000,00) "too excessive" and reduced it to an "equitable level" (P25,000.00).
It will be noted that in above cases, the parties who were awarded moral damages were not public officials.
Considering that here, the award is in favor of a government official in connection with his official function, it is with
caution that we affirm granting moral damages, for it might open the floodgates for government officials counter-
claiming damages in suits filed against them in connection with their functions. Moreover, we must be careful lest
the amounts awarded make citizens hesitate to expose corruption in the government, for fear of lawsuits from
vindictive government officials. Thus, conformably with our declaration that moral damages are not intended to
enrich anyone,33 we hereby reduce the moral damages award in this case from two hundred thousand
(P200,000.00) pesos to seventy five thousand (P75,000.00) pesos, while the exemplary damage is set at
P25,000.00 only.
The law allows the award of attorney's fees when exemplary damages are awarded, and when the party to a suit
was compelled to incur expenses to protect his interest.34 Though government officers are usually represented by
the Solicitor General in cases connected with the performance of official functions, considering the nature of the
charges, herein respondent Larin was compelled to hire a private lawyer for the conduct of his defense as well as
the successful pursuit of his counterclaims. In our view, given the circumstances of this case, there is ample
ground to award in his favor P50,000,00 as reasonable attorney's fees.
WHEREFORE, the assailed decision of the Court of Appeals dated November 29, 1991, is hereby AFFIRMED with
MODIFICATION so that the award of actual damages are deleted; and that petitioner is hereby ORDERED to pay
to respondent Larin moral damages in the amount of P75,000.00, exemplary damages in the amount of
P25,000.00, and attorney's fees in the amount of P50,000.00 only. 1 â w p h i1 .n ê t
No pronouncement as to costs.
SO ORDERED.
Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.
Footnotes
1 Rollo, p. 38.
2 Id. at 28.
3 P476.754 in Petition, Rollo p. 28.
4 50% of the agreed yearly installment based on the Deed of Sale. Computation is 50% of P461,754.
5 Capital gains and losses — . . . (b) Percentage taken into account. — In the case of a taxpayer, other than
a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a
capital asset shall be taken into account in computing net capital gain, net capital loss, and net income: . . .
(2) Fifty per centum if the capital asset has been held for more than twelve months. (emphasis ours)
6 Civil Case No. 82-12107. The case was originally raffled to the Court of First Instance of Manila, Branch
12, then transferred to the Regional Trial Court of Manila, Branch 39.
7 Rollo, pp. 77-78.

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11/14/2018 G.R. No.

Today is Wednesday, November 14, 2018

Republic of the Philippines

G.R. No. L-15380 September 30, 1960

CHAN WAN, plaintiff-appellant,

Manuel Domingo for appellant.

and then this:

And on the back of Exh. G:

3Sec. 196, Negotiable Instruments Law.

5Sec. 61. Negotiable Instruments Law.

6Sec. 52 (b), Negotiable Instruments Law.

8Sec. 51. Negotiable Instruments Law.

9SEC. 58 Negotiable Instruments Law.

10Lack of consideration is a defense. (Sec. 28, Negotiable Instruments Law.)

The Lawphil Project - Arellano Law Foundation

Today is Wednesday, November 14, 2018

Republic of the Philippines

G.R. No. 88866 February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

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

ACCORDINGLY, judgment is hereby rendered:

1. Dismissing the complaint with costs against the plaintiff;

The petition has no merit.

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

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

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

xxx xxx xxx

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

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

The Lawphil Project - Arellano Law Foundation

Today is Wednesday, November 14, 2018

Republic of the Philippines

G.R. No. 16454 September 29, 1921

GEORGE A. KAUFFMAN, plaintiff-appellee,

Roman J. Lacson for appellant.

October 9th, 1918.

CABLE TRANSFER BOUGHT FROM

Foreign Amount Rate

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

The Lawphil Project - Arellano Law Foundation

Today is Wednesday, November 14, 2018

Republic of the Philippines

G.R. No. L-40824 February 23, 1989

GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,

The Government Corporate Counsel for petitioner.

Lorenzo A. Sales for private respondents.

On the foregoing findings, the respondent court consequently decreed that-

The case is now before us in this petition for review.

Melencio-Herrera (Chairperson), Paras, Padilla and Sarmiento, JJ., concur.

1 Record on Appeal, 9, 22; Rollo, 54.

Today is Wednesday, November 14, 2018

Republic of the Philippines

G.R. No. 100290 June 4, 1993

NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA, petitioners,

Stated briefly, the relevant facts are as follows:

Cashier's Check P262,750.00

b. Section 1 of Republic Act No. 529, as amended, which provides:

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

3 G.R. No. L-41764, 19 December 1980, 101 SCRA 686.

4 G.R. No. 49188, 30 January 1990, 181 SCRA 557.

5 G.R. No. 72110, 16 November 1990, 191 SCRA 411.

6 Supra, Dissenting Opinion of Padilla, J., pp. 580-582.

7 Supra, pp. 581-582.

8 G.R. No. 78556, 25 April 1991, 196 SCRA 269.