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" 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.

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 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.3Delivery 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.

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) 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.

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
TO Raul Sesbreño
 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.

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.5The trial court, in a decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of merit
and for lack of cause of action, with costs against petitioner.

Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989, the
Court of Appeals denied the appeal and held:6

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

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

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

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

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

Hence, this Petition for Review on Certiorari.

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

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

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

I.

We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory
note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of
Appeals said on this point:

Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-
negotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an
instrument from one person to another so as to constitute the transferee the holder of the instrument
(Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his own
name and cannot demand or receive payment (Section 51, id.)9

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

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

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

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

We consider Delta's arguments seriatim.

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

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

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

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

April 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 money
market transactions. In Perez v. Court of Appeals,17 the Court, speaking through Mme. Justice Herrera, made the
following important statement:

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

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

xxx xxx xxx

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

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

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

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

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

(3) That the two debts are due;

(4) That they be liquidated and demandable;

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

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

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

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

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

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

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

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

[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he
pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that
it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to
give his debt or notice.22

At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731 had
already been discharged by compensation. Since the assignor Philfinance could not have then compelled payment
anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting from Delta
the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9 February
1981. He could have notified Delta as soon as his money market placement matured on 13 March 1981 without payment
thereof being made by Philfinance; at that time, compensation had yet to set in and discharge DMC PN No. 2731. Again
petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated
Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in
fine, have notified Delta at any time before the maturity date of DMC PN No. 2731. Because petitioner failed to do so,
and because the record is bare of any indication that Philfinance had itself notified Delta of the assignment to petitioner,
the Court is compelled to uphold the defense of compensation raised by private respondent Delta. Of course,
Philfinance remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner.

II.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

III.

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

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

Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as
separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite
the presence of a common Director — Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3) companies.
Petitioner has neither alleged nor proved that one or another of the three (3) concededly related companies used the
other two (2) as mere alter egos or that the corporate affairs of the other two (2) were administered and managed for
the benefit of one. There is simply not enough evidence of record to justify disregarding the separate corporate
personalities of delta and Pilipinas and to hold them liable for any assumed or undetermined liability of Philfinance to
petitioner.28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated
21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision and
Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank is hereby
ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six
percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals
are hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Bidin, Davide, Jr., Romero and Melo, JJ., concur.

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,

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

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

REGALADO, J.:

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

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

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

CTD CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with
his purchased of fuel products from the latter (Original Record, p. 208).
 3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manger,
that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to
execute and submit a notarized Affidavit of Loss, as required by defendant bank's procedure, if he
desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).

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

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

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

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

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

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

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

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

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

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

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

The instant petition is bereft of merit.

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

SECURITY BANK
AND TRUST COMPANY
 6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%

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

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

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

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

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

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable instruments.
Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument
to become negotiable, viz:

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

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

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

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

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

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

xxx xxx xxx

Atty. Calida:

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

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

Atty. Calida:

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

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

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

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

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

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

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

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

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

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

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

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

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

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

The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a
holder for value to the extent of his lien. 23 As such holder of collateral security, he would be a pledgee but the
requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be
governed by the Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
indorsed.
 Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and
the date of the pledge do not appear in a public instrument.

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

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

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

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

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

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

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

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

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

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

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

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

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

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised.
Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and
fact which they intend to raise at the trial, except such as may involve privileged or impeaching matters. The
determination of issues at a pre-trial conference bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by
the issues on its right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that
petitioner could raise on appeal any issue. We agree with private respondent that the broad ultimate issue of petitioner's
entitlement to the proceeds of the questioned certificates can be premised on a multitude of other legal reasons and
causes of action, of which respondent bank's supposed negligence is only one. Hence, petitioner's submission, if
accepted, would render a pre-trial delimitation of issues a useless exercise. 33

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

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

xxx xxx xxx

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

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

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is hereby
AFFIRMED.

SO ORDERED.

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

[G.R. No. 109491. February 28, 2001]

ATRIUM MANAGEMENT CORPORATION, petitioner, vs. COURT OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE
LEON, RAFAEL DE LEON, JR., AND HI-CEMENT CORPORATION, respondents.

[G.R. No. 121794. February 28, 2001]

LOURDES M. DE LEON, petitioner, vs. COURT OF APPEALS, ATRIUM MANAGEMENT CORPORATION, AND HI-CEMENT
CORPORATION, respondents.

DECISION
PARDO, J.:

What is before the Court are separate appeals from the decision of the Court of Appeals, [1] ruling that Hi-Cement
Corporation is not liable for four checks amounting to P2 million issued to E.T. Henry and Co. and discounted to Atrium
Management Corporation.

On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court, Manila an action for
collection of the proceeds of four postdated checks in the total amount of P2 million. Hi-Cement Corporation through its
corporate signatories, petitioner Lourdes M. de Leon,[2] treasurer, and the late Antonio de las Alas, Chairman, issued
checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to
petitioner Atrium Management Corporation for valuable consideration. Upon presentment for payment, the drawee
bank dishonored all four checks for the common reason payment stopped. Atrium, thus, instituted this action after its
demand for payment of the value of the checks was denied.[3]

After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes M. de Leon, her
husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay petitioner Atrium, jointly and
severally, the amount of P2 million corresponding to the value of the four checks, plus interest and attorneys fees.[4]

On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its decision modifying
the decision of the trial court, absolving Hi-Cement Corporation from liability and dismissing the complaint as against
it. The appellate court ruled that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor of E.T.
Henry, Inc.; (2) The issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas
constituted ultra vires acts; and (3) The subject checks were not issued for valuable consideration.[5]

At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February 1981, Enrique Tan of E.T.
Henry approached Atrium for financial assistance, offering to discount four RCBC checks in the total amount of P2
million, issued by Hi-Cement in favor of E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to
confirm with Hi-Cement the fact that the checks represented payment for petroleum products which E.T. Henry
delivered to Hi-Cement. Carlos C. Syquia identified two letters, dated February 6, 1981 and February 9, 1981 issued by Hi-
Cement through Lourdes M. de Leon, as treasurer, confirming the issuance of the four checks in favor of E.T. Henry in
payment for petroleum products.[6]

Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was once a secretary to the
treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was familiar with the four RCBC checks as the postdated
checks issued by Hi-Cement to E.T. Henry upon instructions of Ms. de Leon. She testified that E.T. Henry offered to give Hi-
Cement a loan which the subject checks would secure as collateral.[7]

On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the dispositive portion of which
reads:

WHEREFORE, in view of the foregoing considerations, and plaintiff having proved its cause of action by preponderance
of evidence, judgment is hereby rendered ordering all the defendants except defendant Antonio de las Alas to pay
plaintiff jointly and severally the amount of TWO MILLION (P2,000,000.00) PESOS with the legal rate of interest from the
filling of the complaint until fully paid, plus the sum of TWENTY THOUSAND (P20,000.00) PESOS as and for attorneys fees
and the cost of suit.

All other claims are, for lack of merit dismissed.

SO ORDERED.[8]

In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.[9]

Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarilly liable with Hi-Cement for the
amount of the check. Also, that the trial court erred in ruling that Atrium was an ordinary holder, not a holder in due
course of the rediscounted checks.[10]

Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-Cement did not authorize the
issuance of the checks, it could still be held liable for the checks. And assuming that the checks were issued with its
authorization, the same was without any consideration, which is a defense against a holder in due course and that the
liability shall be borne alone by E.T. Henry.[11]

On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of the trial court, the
dispositive portion of which reads:

Judgement is hereby rendered:

 (1) dismissing the plaintiffs complaint as against defendants Hi-Cement Corporation and Antonio De las Alas;

(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and severally to pay the
plaintiff the sum of TWO MILLION PESOS (P2,000,000.00) with interest at the legal rate from the filling of the
complaint until fully paid, plus P20,000.00 for attorneys fees.

(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and
severally to pay defendant Hi-Cement Corporation, the sum of P20,000.00 as and for attorneys fees.

With cost in this instance against the appellee Atrium Management Corporation and appellant Lourdes
Victoria M. de Leon.

So ordered.[12]

Hence, the recourse to this Court.[13]

The issues raised are the following:

In G. R. No. 109491 (Atrium, petitioner):

1. Whether the issuance of the questioned checks was an ultra vires act;

2. Whether Atrium was not a holder in due course and for value; and

3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and ordering it to pay
P20,000.00 as attorneys fees.[14]

In G. R. No. 121794 (de Leon, petitioner):

1. Whether the Court of Appeals erred in holding petitioner personally liable for the Hi-Cement checks issued
to E.T. Henry;

2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;

3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as signatory of the checks
was personally liable for the value of the checks, which were declared to be issued without consideration;

4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement attorneys fees and costs.[15]

We affirm the decision of the Court of Appeals.

We first resolve the issue of whether the issuance of the checks was an ultra vires act. The record reveals that Hi-
Cement Corporation issued the four (4) checks to extend financial assistance to E.T. Henry, not as payment of the
balance of the P30 million pesos cost of hydro oil delivered by E.T. Henry to Hi-Cement. Why else would petitioner de
Leon ask for counterpart checks from E.T. Henry if the checks were in payment for hydro oil delivered by E.T. Henry to Hi-
Cement?

Hi-Cement, however, maintains that the checks were not issued for consideration and that Lourdes and E.T. Henry
engaged in a kiting operation to raise funds for E.T. Henry, who admittedly was in need of financial assistance. The Court
finds that there was no sufficient evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the
corporation and is authorized to sign checks for the corporation. At the time of the issuance of the checks, there were
sufficient funds in the bank to cover payment of the amount of P2 million pesos.

It is, however, our view that there is basis to rule that the act of issuing the checks was well within the ambit of a
valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra
vires act.

An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of
its organization and therefore beyond the power conferred upon it by law [16] The term ultra vires is distinguished from an
illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the
latter is void and cannot be validated.[17]

The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were personally liable for
the checks issued as corporate officers and authorized signatories of the check.

"Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation
may so validly attach, as a rule, only when:
 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or
other persons;

2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith
file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by a specific provision of law, to personally answer for his corporate action.[18]

In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement were
authorized to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter requested
by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T.
Henry. She was aware that the checks were strictly endorsed for deposit only to the payees account and not to be
further negotiated. What is more, the confirmation letter contained a clause that was not true, that is, that the checks
issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry. Her negligence resulted in
damage to the corporation. Hence, Ms. de Leon may be held personally liable therefor.

The next issue is whether or not petitioner Atrium was a holder of the checks in due course. The Negotiable
Instruments Law, Section 52 defines a holder in due course, thus:

A holder in due course is a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in
the title of the person negotiating it.

In the instant case, the checks were crossed checks and specifically indorsed for deposit to payees account
only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only to payees account,
meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in due course.

However, it does not follow as a legal proposition that simply because petitioner Atrium was not a holder in due
course for having taken the instruments in question with notice that the same was for deposit only to the account of
payee E.T. Henry that it was altogether precluded from recovering on the instrument. The Negotiable Instruments Law
does not provide that a holder not in due course can not recover on the instrument.[19]

The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is subject to
defenses as if it were non-negotiable.[20] One such defense is absence or failure of consideration.[21] We need not rule on
the other issues raised, as they merely follow as a consequence of the foregoing resolutions.

WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court of Appeals in CA-G. R. CV
No. 26686, are hereby AFFIRMED in toto.

No costs.

SO ORDERED.

Davide, Jr., C.J. (Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.

G.R. No. L-15126 November 30, 1961

VICENTE R. DE OCAMPO & CO., plaintiff-appellee,

vs.
ANITA GATCHALIAN, ET AL., defendants-appellants.

Vicente Formoso, Jr. for plaintiff-appellee.

Reyes and Pangalañgan for defendants-appellants.

LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez, presiding, sentencing the
defendants to pay the plaintiff the sum of P600, with legal interest from September 10, 1953 until paid, and to pay the
costs.

The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by defendant Anita C.
Gatchalian. The complaint sets forth the check and alleges that plaintiff received it in payment of the indebtedness of
one Matilde Gonzales; that upon receipt of said check, plaintiff gave Matilde Gonzales P158.25, the difference between
the face value of the check and Matilde Gonzales' indebtedness. The defendants admit the execution of the check but
they allege in their answer, as affirmative defense, that it was issued subject to a condition, which was not fulfilled, and
that plaintiff was guilty of gross negligence in not taking steps to protect itself.

At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:

Plaintiff and defendants through their respective undersigned attorney's respectfully submit the following
Agreed Stipulation of Facts;

First. — That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian who was then
interested in looking for a car for the use of her husband and the family, was shown and offered a car by
Manuel Gonzales who was accompanied by Emil Fajardo, the latter being personally known to defendant
Anita C. Gatchalian;

Second. — That Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly authorized by
the owner of the car, Ocampo Clinic, to look for a buyer of said car and to negotiate for and accomplish said
sale, but which facts were not known to plaintiff;

Third. — That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel Gonzales to her
satisfaction, requested Manuel Gonzales to bring the car the day following together with the certificate of
registration of the car, so that her husband would be able to see same; that on this request of defendant Anita
C. Gatchalian, Manuel Gonzales advised her that the owner of the car will not be willing to give the certificate
of registration unless there is a showing that the party interested in the purchase of said car is ready and willing
to make such purchase and that for this purpose Manuel Gonzales requested defendant Anita C. Gatchalian
to give him (Manuel Gonzales) a check which will be shown to the owner as evidence of buyer's good faith in
the intention to purchase the said car, the said check to be for safekeeping only of Manuel Gonzales and to
be returned to defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the car and the
certificate of registration, but which facts were not known to plaintiff;

Fourth. — That relying on these representations of Manuel Gonzales and with his assurance that said check will
be only for safekeeping and which will be returned to said defendant the following day when the car and its
certificate of registration will be brought by Manuel Gonzales to defendants, but which facts were not known
to plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh. "B"; that Manuel Gonzales executed
and issued a receipt for said check, Exh. "1";

Fifth. — That on the failure of Manuel Gonzales to appear the day following and on his failure to bring the car
and its certificate of registration and to return the check, Exh. "B", on the following day as previously agreed
upon, defendant Anita C. Gatchalian issued a "Stop Payment Order" on the check, Exh. "3", with the drawee
bank. Said "Stop Payment Order" was issued without previous notice on plaintiff not being know to defendant,
Anita C. Gatchalian and who furthermore had no reason to know check was given to plaintiff;

Sixth. — That defendants, both or either of them, did not know personally Manuel Gonzales or any member of
his family at any time prior to September 1953, but that defendant Hipolito Gatchalian is personally acquainted
with V. R. de Ocampo;

Seventh. — That defendants, both or either of them, had no arrangements or agreement with the Ocampo
Clinic at any time prior to, on or after 9 September 1953 for the hospitalization of the wife of Manuel Gonzales
and neither or both of said defendants had assumed, expressly or impliedly, with the Ocampo Clinic, the
obligation of Manuel Gonzales or his wife for the hospitalization of the latter;

Eight. — That defendants, both or either of them, had no obligation or liability, directly or indirectly with the
Ocampo Clinic before, or on 9 September 1953;
 Ninth. — That Manuel Gonzales having received the check Exh. "B" from defendant Anita C. Gatchalian under
the representations and conditions herein above specified, delivered the same to the Ocampo Clinic, in
payment of the fees and expenses arising from the hospitalization of his wife;

Tenth. — That plaintiff for and in consideration of fees and expenses of hospitalization and the release of the
wife of Manuel Gonzales from its hospital, accepted said check, applying P441.75 (Exhibit "A") thereof to
payment of said fees and expenses and delivering to Manuel Gonzales the amount of P158.25 (as per receipt,
Exhibit "D") representing the balance on the amount of the said check, Exh. "B";

Eleventh. — That the acts of acceptance of the check and application of its proceeds in the manner specified
above were made without previous inquiry by plaintiff from defendants:

Twelfth. — That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila, a complaint for
estafa against Manuel Gonzales based on and arising from the acts of said Manuel Gonzales in paying his
obligations with plaintiff and receiving the cash balance of the check, Exh. "B" and that said complaint was
subsequently dropped;

Thirteenth. — That the exhibits mentioned in this stipulation and the other exhibits submitted previously, be
considered as parts of this stipulation, without necessity of formally offering them in evidence;

WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be admitted and that the parties
hereto be given fifteen days from today within which to submit simultaneously their memorandum to discuss the
issues of law arising from the facts, reserving to either party the right to submit reply memorandum, if necessary,
within ten days from receipt of their main memoranda. (pp. 21-25, Defendant's Record on Appeal).

No other evidence was submitted and upon said stipulation the court rendered the judgment already alluded above.

In their appeal defendants-appellants contend that the check is not a negotiable instrument, under the facts and
circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due course. In support of the first
contention, it is argued that defendant Gatchalian had no intention to transfer her property in the instrument as it was for
safekeeping merely and, therefore, there was no delivery required by law (Section 16, Negotiable Instruments Law); that
assuming for the sake of argument that delivery was not for safekeeping merely, delivery was conditional and the
condition was not fulfilled.

In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues that plaintiff-
appellee cannot be a holder in due course because there was no negotiation prior to plaintiff-appellee's acquiring the
possession of the check; that a holder in due course presupposes a prior party from whose hands negotiation
proceeded, and in the case at bar, plaintiff-appellee is the payee, the maker and the payee being original parties. It is
also claimed that the plaintiff-appellee is not a holder in due course because it acquired the check with notice of
defect in the title of the holder, Manuel Gonzales, and because under the circumstances stated in the stipulation of
facts there were circumstances that brought suspicion about Gonzales' possession and negotiation, which
circumstances should have placed the plaintiff-appellee under the duty, to inquire into the title of the holder. The
circumstances are as follows:

The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of Facts). Plaintiff could
have inquired why a person would use the check of another to pay his own debt. Furthermore, plaintiff had the
"means of knowledge" inasmuch as defendant Hipolito Gatchalian is personally acquainted with V. R. de
Ocampo (Paragraph Sixth, Stipulation of Facts.).

The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de Ocampo
(Paragraph Sixth, Stipulation of Facts).

The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7, Stipulation of
Facts.)

The check could not have been intended to pay the hospital fees which amounted only to P441.75. The check
is in the amount of P600.00, which is in excess of the amount due plaintiff. (Par. 10, Stipulation of Facts).
 It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10, Stipulation of Facts).
Since Manuel Gonzales is the party obliged to pay, plaintiff should have been more cautious and wary in
accepting a piece of paper and disbursing cold cash.

The check is payable to bearer. Hence, any person who holds it should have been subjected to inquiries. EVEN
IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM THE BEARER. The same inquiries should have
been made by plaintiff. (Defendants-appellants' brief, pp. 52-53)

Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance with the best
authority on the Negotiable Instruments Law, plaintiff-appellee may be considered as a holder in due course, citing
Brannan's Negotiable Instruments Law, 6th edition, page 252. On this issue Brannan holds that a payee may be a holder
in due course and says that to this effect is the greater weight of authority, thus:

Whether the payee may be a holder in due course under the N. I. L., as he was at common law, is a question
upon which the courts are in serious conflict. There can be no doubt that a proper interpretation of the act
read as a whole leads to the conclusion that a payee may be a holder in due course under any circumstance
in which he meets the requirements of Sec. 52.

The argument of Professor Brannan in an earlier edition of this work has never been successfully answered and is
here repeated.

Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof. Sec. 52 defendants defines a holder in due course as "a holder who has taken the instrument under the
following conditions: 1. That it is complete and regular on its face. 2. That he became the holder of it before it
was overdue, and without notice that it had been previously dishonored, if such was the fact. 3. That he took it
in good faith and for value. 4. That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it."

Since "holder", as defined in sec. 191, includes a payee who is in possession the word holder in the first clause of
sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so as to read "a holder in
due course is a payee or indorsee who is in possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed.,
p. 543).

The first argument of the defendants-appellants, therefore, depends upon whether or not the plaintiff-appellee is a
holder in due course. If it is such a holder in due course, it is immaterial that it was the payee and an immediate party to
the instrument.

The other contention of the plaintiff is that there has been no negotiation of the instrument, because the drawer did not
deliver the instrument to Manuel Gonzales with the intention of negotiating the same, or for the purpose of giving effect
thereto, for as the stipulation of facts declares the check was to remain in the possession Manuel Gonzales, and was not
to be negotiated, but was to serve merely as evidence of good faith of defendants in their desire to purchase the car
being sold to them. Admitting that such was the intention of the drawer of the check when she delivered it to Manuel
Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the check or negotiated it. As the
check was payable to the plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery to
Manuel Gonzales was a delivery by the drawer to his own agent; in other words, Manuel Gonzales was the agent of the
drawer Anita Gatchalian insofar as the possession of the check is concerned. So, when the agent of drawer Manuel
Gonzales negotiated the check with the intention of getting its value from plaintiff-appellee, negotiation took place
through no fault of the plaintiff-appellee, unless it can be shown that the plaintiff-appellee should be considered as
having notice of the defect in the possession of the holder Manuel Gonzales. Our resolution of this issue leads us to a
consideration of the last question presented by the appellants, i.e., whether the plaintiff-appellee may be considered as
a holder in due course.

Section 52, Negotiable Instruments Law, defines holder in due course, thus:

A holder in due course is a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact;
 (c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the
title of the person negotiating it.

The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances under which the
check was delivered to Manuel Gonzales, but we agree with the defendants-appellants that the circumstances
indicated by them in their briefs, such as the fact that appellants had no obligation or liability to the Ocampo Clinic; that
the amount of the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo;
and that the check had two parallel lines in the upper left hand corner, which practice means that the check could only
be deposited but may not be converted into cash — all these circumstances should have put the plaintiff-appellee to
inquiry as to the why and wherefore of the possession of the check by Manuel Gonzales, and why he used it to pay
Matilde's account. It was payee's duty to ascertain from the holder Manuel Gonzales what the nature of the latter's title
to the check was or the nature of his possession. Having failed in this respect, we must declare that plaintiff-appellee was
guilty of gross neglect in not finding out the nature of the title and possession of Manuel Gonzales, amounting to legal
absence of good faith, and it may not be considered as a holder of the check in good faith. To such effect is the
consensus of authority.

In order to show that the defendant had "knowledge of such facts that his action in taking the instrument
amounted to bad faith," it is not necessary to prove that the defendant knew the exact fraud that was
practiced upon the plaintiff by the defendant's assignor, it being sufficient to show that the defendant had
notice that there was something wrong about his assignor's acquisition of title, although he did not have notice
of the particular wrong that was committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830.

It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with
fraud. It is not necessary that he should know the particulars or even the nature of the fraud, since all that is
required is knowledge of such facts that his action in taking the note amounted bad faith. Ozark Motor Co. v.
Horton (Mo. App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.

Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less than five feet tall,
immature in appearance and bearing on his face the stamp a degenerate, to the defendants' clerk for sale.
The boy stated that they belonged to his mother. The defendants paid the boy for the bonds without any
further inquiry. Held, the plaintiff could recover the value of the bonds. The term 'bad faith' does not necessarily
involve furtive motives, but means bad faith in a commercial sense. The manner in which the defendants
conducted their Liberty Loan department provided an easy way for thieves to dispose of their plunder. It was a
case of "no questions asked." Although gross negligence does not of itself constitute bad faith, it is evidence
from which bad faith may be inferred. The circumstances thrust the duty upon the defendants to make further
inquiries and they had no right to shut their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. 739,
181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's Negotiable
Instruments Law, 6th ed.).

The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not be allowed to
recover the value of the check. Let us now examine the express provisions of the Negotiable Instruments Law pertinent
to the matter to find if our ruling conforms thereto. Section 52 (c) provides that a holder in due course is one who takes
the instrument "in good faith and for value;" Section 59, "that every holder is deemed prima facie to be a holder in due
course;" and Section 52 (d), that in order that one may be a holder in due course it is necessary that "at the time the
instrument was negotiated to him "he had no notice of any . . . defect in the title of the person negotiating it;" and lastly
Section 59, that every holder is deemed prima facieto be a holder in due course.

In the case at bar the rule that a possessor of the instrument is prima faciea holder in due course does not apply
because there was a defect in the title of the holder (Manuel Gonzales), because the instrument is not payable to him or
to bearer. On the other hand, the stipulation of facts indicated by the appellants in their brief, like the fact that the
drawer had no account with the payee; that the holder did not show or tell the payee why he had the check in his
possession and why he was using it for the payment of his own personal account — show that holder's title was defective
or suspicious, to say the least. As holder's title was defective or suspicious, it cannot be stated that the payee acquired
the check without knowledge of said defect in holder's title, and for this reason the presumption that it is a holder in due
course or that it acquired the instrument in good faith does not exist. And having presented no evidence that it acquired
the check in good faith, it (payee) cannot be considered as a holder in due course. In other words, under the
circumstances of the case, instead of the presumption that payee was a holder in good faith, the fact is that it acquired
possession of the instrument under circumstances that should have put it to inquiry as to the title of the holder who
negotiated the check to it. The burden was, therefore, placed upon it to show that notwithstanding the suspicious
circumstances, it acquired the check in actual good faith.
The rule applicable to the case at bar is that described in the case of Howard National Bank v. Wilson, et al., 96 Vt. 438,
120 At. 889, 894, where the Supreme Court of Vermont made the following disquisition:

Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this country. The first had its
origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid down by the court of King's
Bench that the purchaser of negotiable paper must exercise reasonable prudence and caution, and that, if
the circumstances were such as ought to have excited the suspicion of a prudent and careful man, and he
made no inquiry, he did not stand in the legal position of a bona fide holder. The rule was adopted by the
courts of this country generally and seem to have become a fixed rule in the law of negotiable paper. Later in
Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English court abandoned its former position and adopted
the rule that nothing short of actual bad faith or fraud in the purchaser would deprive him of the character of a
bona fide purchaser and let in defenses existing between prior parties, that no circumstances of suspicion
merely, or want of proper caution in the purchaser, would have this effect, and that even gross negligence
would have no effect, except as evidence tending to establish bad faith or fraud. Some of the American
courts adhered to the earlier rule, while others followed the change inaugurated in Goodman v. Harvey. The
question was before this court in Roth v. Colvin, 32 Vt. 125, and, on full consideration of the question, a rule was
adopted in harmony with that announced in Gill v. Cubitt, which has been adhered to in subsequent cases,
including those cited above. Stated briefly, one line of cases including our own had adopted the test of the
reasonably prudent man and the other that of actual good faith. It would seem that it was the intent of the
Negotiable Instruments Act to harmonize this disagreement by adopting the latter test. That such is the view
generally accepted by the courts appears from a recent review of the cases concerning what constitutes
notice of defect. Brannan on Neg. Ins. Law, 187-201. To effectuate the general purpose of the act to make
uniform the Negotiable Instruments Law of those states which should enact it, we are constrained to hold
(contrary to the rule adopted in our former decisions) that negligence on the part of the plaintiff, or suspicious
circumstances sufficient to put a prudent man on inquiry, will not of themselves prevent a recovery, but are to
be considered merely as evidence bearing on the question of bad faith. See G. L. 3113, 3172, where such a
course is required in construing other uniform acts.

It comes to this then: When the case has taken such shape that the plaintiff is called upon to prove himself a
holder in due course to be entitled to recover, he is required to establish the conditions entitling him to standing
as such, including good faith in taking the instrument. It devolves upon him to disclose the facts and
circumstances attending the transfer, from which good or bad faith in the transaction may be inferred.

In the case at bar as the payee acquired the check under circumstances which should have put it to inquiry, why the
holder had the check and used it to pay his own personal account, the duty devolved upon it, plaintiff-appellee, to
prove that it actually acquired said check in good faith. The stipulation of facts contains no statement of such good
faith, hence we are forced to the conclusion that plaintiff payee has not proved that it acquired the check in good faith
and may not be deemed a holder in due course thereof.

For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed, and the defendants
are absolved from the complaint. With costs against plaintiff-appellee.

Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ., concur.
Bengzon, C.J., concurs in the result.

CELY YANG, petitioner, vs. HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL INTERNATIONAL BANK, FAR EAST BANK &
TRUST CO., EQUITABLEBANKINGCORPORATION,PREM CHANDIRAMANI and FERNANDO DAVID, respondents.

DECISION

QUISUMBING, J.:

For review on certiorari is the decision[1] of the Court of Appeals, dated March 25, 1999, in CA-G.R. CV No. 52398,
which affirmed with modification the joint decision of the Regional Trial Court (RTC) of Pasay City, Branch 117, dated July
4, 1995, in Civil Cases Nos. 5479[2] and 5492.[3] The trial court dismissed the complaint against herein respondents Far East
Bank & Trust Company (FEBTC), Equitable Banking Corporation (Equitable), and Philippine Commercial International
Bank (PCIB) and ruled in favor of respondent Fernando David as to the proceeds of the two cashiers checks, including
the earnings thereof pendente lite. Petitioner Cely Yang was ordered to pay David moral damages of P100,000.00 and
attorneys fees also in the amount of P100,000.00.

The facts of this case are not disputed, to wit:

 On or before December 22, 1987, petitioner Cely Yang and private respondent Prem Chandiramani entered into
an agreement whereby the latter was to give Yang a PCIB managers check in the amount of P4.2 million in exchange
for two (2) of Yangs managers checks, each in the amount of P2.087 million, both payable to the order of private
respondent Fernando David. Yang and Chandiramani agreed that the difference of P26,000.00 in the exchange would
be their profit to be divided equally between them.

Yang and Chandiramani also further agreed that the former would secure from FEBTC a dollar draft in the amount
of US$200,000.00, payable to PCIB FCDU Account No. 4195-01165-2, which Chandiramani would exchange for another
dollar draft in the same amount to be issued by Hang Seng Bank Ltd. of Hong Kong.

Accordingly, on December 22, 1987, Yang procured the following:

a) Equitable Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00, dated December 22, 1987,
payable to the order of Fernando David;

b) FEBTC Cashiers Check No. 287078, in the amount of P2,087,000.00, dated December 22, 1987, likewise
payable to the order of Fernando David; and

c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the amount of US$200,000.00, dated
December 22, 1987, payable to PCIB FCDU Account No. 4195-01165-2.

At about one oclock in the afternoon of the same day, Yang gave the aforementioned cashiers checks and dollar
drafts to her business associate, Albert Liong, to be delivered to Chandiramani by Liongs messenger, Danilo Ranigo.
Ranigo was to meet Chandiramani at Philippine Trust Bank, Ayala Avenue, Makati City, Metro Manila where he would
turn over Yangs cashiers checks and dollar draft to Chandiramani who, in turn, would deliver to Ranigo a PCIB managers
check in the sum of P4.2 million and a Hang Seng Bank dollar draft for US$200,000.00 in exchange.

Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two cashiers checks and the dollar
draft bought by petitioner. Ranigo reported the alleged loss of the checks and the dollar draft to Liong at half past four
in the afternoon of December 22, 1987. Liong, in turn, informed Yang, and the loss was then reported to the police.

It transpired, however, that the checks and the dollar draft were not lost, for Chandiramani was able to get hold of
said instruments, without delivering the exchange consideration consisting of the PCIB managers check and the Hang
Seng Bank dollar draft.

At three oclock in the afternoon or some two (2) hours after Chandiramani and Ranigo were to meet in Makati
City, Chandiramani delivered to respondent Fernando David at China Banking Corporation branch in San Fernando
City, Pampanga, the following: (a) FEBTC Cashiers Check No. 287078, dated December 22, 1987, in the sum of P2.087
million; and (b) Equitable Cashiers Check No. CCPS 14-009467, dated December 22, 1987, also in the amount of P2.087
million. In exchange, Chandiramani got US$360,000.00 from David, which Chandiramani deposited in the savings
account of his wife, Pushpa Chandiramani; and his mother, Rani Reynandas, who held FCDU Account No. 124 with the
United Coconut Planters Bank branch in Greenhills, San Juan, Metro Manila. Chandiramani also deposited FEBTC Dollar
Draft No. 4771, dated December 22, 1987, drawn upon the Chemical Bank, New York for US$200,000.00 in PCIB FCDU
Account No. 4195-01165-2 on the same date.

Meanwhile, Yang requested FEBTC and Equitable to stop payment on the instruments she believed to be lost. Both
banks complied with her request, but upon the representation of PCIB, FEBTC subsequently lifted the stop payment order
on FEBTC Dollar Draft No. 4771, thus enabling the holder of PCIB FCDU Account No. 4195-01165-2 to receive the amount
of US$200,000.00.

On December 28, 1987, herein petitioner Yang lodged a Complaint[4] for injunction and damages against
Equitable, Chandiramani, and David, with prayer for a temporary restraining order, with the Regional Trial Court of Pasay
City. The Complaint was docketed as Civil Case No. 5479. The Complaint was subsequently amended to include a
prayer for Equitable to return to Yang the amount of P2.087 million, with interest thereon until fully paid.[5]

On January 12, 1988, Yang filed a separate case for injunction and damages, with prayer for a writ of preliminary
injunction against FEBTC, PCIB, Chandiramani and David, with the RTC of Pasay City, docketed as Civil Case No. 5492.
This complaint was later amended to include a prayer that defendants therein return to Yang the amount of P2.087
million, the value of FEBTC Dollar Draft No. 4771, with interest at 18% annually until fully paid.[6]

On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a writ of preliminary injunction in Civil
Case No. 5479. A writ of preliminary injunction was subsequently issued in Civil Case No. 5492 also.

Meanwhile, herein respondent David moved for dismissal of the cases against him and for reconsideration of the
Orders granting the writ of preliminary injunction, but these motions were denied. David then elevated the matter to the
Court of Appeals in a special civil action for certiorari docketed as CA-G.R. SP No. 14843, which was dismissed by the
appellate court.
 As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two cases were consolidated. The trial court
then conducted pre-trial and trial of the two cases, but the proceedings had to be suspended after a fire gutted the
Pasay City Hall and destroyed the records of the courts.

After the records were reconstituted, the proceedings resumed and the parties agreed that the money in dispute
be invested in Treasury Bills to be awarded in favor of the prevailing side. It was also agreed by the parties to limit the
issues at the trial to the following:

1. Who, between David and Yang, is legally entitled to the proceeds of Equitable Banking Corporation (EBC)
Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00 dated December 22, 1987, and Far East
Bank and Trust Company (FEBTC) Cashiers Check No. 287078 in the sum of P2,087,000.00 dated
December 22, 1987, together with the earnings derived therefrom pendente lite?

2. Are the defendants FEBTC and PCIB solidarily liable to Yang for having allowed the encashment of FEBTC
Dollar Draft No. 4771, in the sum of US$200,000.00 plus interest thereon despite the stop payment order of
Cely Yang?[7]

On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479 and 5492, to wit:

WHEREFORE, the Court renders judgment in favor of defendant Fernando David against the plaintiff Cely Yang and
declaring the former entitled to the proceeds of the two (2) cashiers checks, together with the earnings derived
therefrom pendente lite; ordering the plaintiff to pay the defendant Fernando David moral damages in the amount
of P100,000.00; attorneys fees in the amount of P100,000.00 and to pay the costs. The complaint against Far East Bank
and Trust Company (FEBTC), Philippine Commercial International Bank (PCIB) and Equitable Banking Corporation (EBC) is
dismissed. The decision is without prejudice to whatever action plaintiff Cely Yang will file against defendant Prem
Chandiramani for reimbursement of the amounts received by him from defendant Fernando David.

SO ORDERED.[8]

In finding for David, the trial court ratiocinated:

The evidence shows that defendant David was a holder in due course for the reason that the cashiers checks were
complete on their face when they were negotiated to him. They were not yet overdue when he became the holder
thereof and he had no notice that said checks were previously dishonored; he took the cashiers checks in good faith
and for value. He parted some $200,000.00 for the two (2) cashiers checks which were given to defendant
Chandiramani; he had also no notice of any infirmity in the cashiers checks or defect in the title of the drawer. As a
matter of fact, he asked the manager of the China Banking Corporation to inquire as to the genuineness of the cashiers
checks (tsn, February 5, 1988, p. 21, September 20, 1991, pp. 13-14). Another proof that defendant David is a holder in
due course is the fact that the stop payment order on [the] FEBTC cashiers check was lifted upon his inquiry at the head
office (tsn, September 20, 1991, pp. 24-25). The apparent reason for lifting the stop payment order was because of the
fact that FEBTC realized that the checks were not actually lost but indeed reached the payee defendant David.[9]

Yang then moved for reconsideration of the RTC judgment, but the trial court denied her motion in its Order of
September 20, 1995.

In the belief that the trial court misunderstood the concept of a holder in due course and misapprehended the
factual milieu, Yang seasonably filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 52398.

On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this wise:

WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and hereby orders the plaintiff-
appellant to pay defendant-appellant PCIB the amount of Twenty-Five Thousand Pesos (P25,000.00).

SO ORDERED.[10]

In affirming the trial courts judgment with respect to herein respondent David, the appellate court found that:

In this case, defendant-appellee had taken the necessary precautions to verify, through his bank, China Banking
Corporation, the genuineness of whether (sic) the cashiers checks he received from Chandiramani. As no stop payment
order was made yet (at) the time of the inquiry, defendant-appellee had no notice of what had transpired earlier
between the plaintiff-appellant and Chandiramani. All he knew was that the checks were issued to Chandiramani with
whom he was he had (sic) a transaction. Further on, David received the checks in question in due course because
Chandiramani, who at the time the checks were delivered to David, was acting as Yangs agent.
David had no notice, real or constructive, cogent for him to make further inquiry as to any infirmity in the instrument(s)
and defect of title of the holder. To mandate that each holder inquire about every aspect on how the instrument came
about will unduly impede commercial transactions, Although negotiable instruments do not constitute legal tender, they
often take the place of money as a means of payment.

The mere fact that David and Chandiramani knew one another for a long time is not sufficient to establish that they
connived with each other to defraud Yang. There was no concrete proof presented by Yang to support her theory.[11]

The appellate court awarded P25,000.00 in attorneys fees to PCIB as it found the action filed by Yang against said
bank to be clearly unfounded and baseless. Since PCIB was compelled to litigate to protect itself, then it was entitled
under Article 2208[12] of the Civil Code to attorneys fees and litigation expenses.

Hence, the instant recourse wherein petitioner submits the following issues for resolution:

a - WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY PETITIONER;

b - WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI AND FERNANDO DAVID IS
LEGITIMATE OR A SCHEME BY BOTH PRIVATE RESPONDENTS TO SWINDLE PETITIONER;

c - WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00 OR JUST A FRACTION OF THE
AMOUNT REPRESENTING HIS SHARE OF THE LOOT;

d - WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE ENTITLED TO DAMAGES AND ATTORNEYS
FEES.[13]

At the outset, we must stress that this is a petition for review under Rule 45 of the 1997 Rules of Civil Procedure. It is
basic that in petitions for review under Rule 45, the jurisdiction of this Court is limited to reviewing questions of law,
questions of fact are not entertained absent a showing that the factual findings complained of are totally devoid of
support in the record or are glaringly erroneous.[14] Given the facts in the instant case, despite petitioners formulation, we
find that the following are the pertinent issues to be resolved:

a) Whether the Court of Appeals erred in holding herein respondent Fernando David to be a holder in due
course; and

b) Whether the appellate court committed a reversible error in awarding damages and attorneys fees to
David and PCIB.

On the first issue, petitioner Yang contends that private respondent Fernando David is not a holder in due course of
the checks in question. While it is true that he was named the payee thereof, David failed to inquire from Chandiramani
about how the latter acquired possession of said checks. Given his failure to do so, it cannot be said that David was
unaware of any defect or infirmity in the title of Chandiramani to the checks at the time of their negotiation. Moreover,
inasmuch as the checks were crossed, then David should have, pursuant to our ruling in Bataan Cigar & Cigarette
Factory, Inc. v. Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA 643, been put on guard that the checks were
issued for a definite purpose and accordingly, made inquiries to determine if he received the checks pursuant to that
purpose. His failure to do so negates the finding in the proceedings below that he was a holder in due course.

Finally, the petitioner argues that there is no showing whatsoever that David gave Chandiramani any consideration
of value in exchange for the aforementioned checks.

Private respondent Fernando David counters that the evidence on record shows that when he received the
checks, he verified their genuineness with his bank, and only after said verification did he deposit them. David stresses
that he had no notice of previous dishonor or any infirmity that would have aroused his suspicions, the instruments being
complete and regular upon their face. David stresses that the checks in question were cashiers checks. From the very
nature of cashiers checks, it is highly unlikely that he would have suspected that something was amiss. David also stresses
negotiable instruments are presumed to have been issued for valuable consideration, and he who alleges otherwise
must controvert the presumption with sufficient evidence. The petitioner failed to discharge this burden, according to
David. He points out that the checks were delivered to him as the payee, and he took them as holder and payee
thereof. Clearly, he concludes, he should be deemed to be their holder in due course.

We shall now resolve the first issue.

 Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption
arises only in favor of a person who is a holder as defined in Section 191 of the Negotiable Instruments Law, [15] meaning a
payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.

In the present case, it is not disputed that David was the payee of the checks in question. The weight of authority
sustains the view that a payee may be a holder in due course.[16]Hence, the presumption that he is a prima facie holder
in due course applies in his favor. However, said presumption may be rebutted. Hence, what is vital to the resolution of
this issue is whether David took possession of the checks under the conditions provided for in Section 52 [17] of the
Negotiable Instruments Law. All the requisites provided for in Section 52 must concur in Davids case, otherwise he cannot
be deemed a holder in due course.

We find that the petitioners challenge to Davids status as a holder in due course hinges on two arguments: (1) the
lack of proof to show that David tendered any valuable consideration for the disputed checks; and (2) Davids failure to
inquire from Chandiramani as to how the latter acquired possession of the checks, thus resulting in Davids intentional
ignorance tantamount to bad faith. In sum, petitioner posits that the last two requisites of Section 52 are missing, thereby
preventing David from being considered a holder in due course. Unfortunately for the petitioner, her arguments on this
score are less than meritorious and far from persuasive.

First, with respect to consideration, Section 24[18] of the Negotiable Instruments Law creates a presumption that
every party to an instrument acquired the same for a consideration[19] or for value.[20] Thus, the law itself creates a
presumption in Davids favor that he gave valuable consideration for the checks in question. In alleging otherwise, the
petitioner has the onus to prove that David got hold of the checks absent said consideration. In other words, the
petitioner must present convincing evidence to overthrow the presumption. Our scrutiny of the records, however, shows
that the petitioner failed to discharge her burden of proof. The petitioners averment that David did not give valuable
consideration when he took possession of the checks is unsupported, devoid of any concrete proof to sustain it. Note
that both the trial court and the appellate court found that David did not receive the checks gratis, but instead gave
Chandiramani US$360,000.00 as consideration for the said instruments. Factual findings of the Court of Appeals are
conclusive on the parties and not reviewable by this Court; they carry great weight when the factual findings of the trial
court are affirmed by the appellate court.[21]

Second, petitioner fails to point any circumstance which should have put David on inquiry as to the why and
wherefore of the possession of the checks by Chandiramani. David was not privy to the transaction between petitioner
and Chandiramani. Instead, Chandiramani and David had a separate dealing in which it was precisely Chandiramanis
duty to deliver the checks to David as payee. The evidence shows that Chandiramani performed said task to the letter.
Petitioner admits that David took the step of asking the manager of his bank to verify from FEBTC and Equitable as to the
genuineness of the checks and only accepted the same after being assured that there was nothing wrong with said
checks. At that time, David was not aware of any stop payment order. Under these circumstances, David thus had no
obligation to ascertain from Chandiramani what the nature of the latters title to the checks was, if any, or the nature of
his possession. Thus, we cannot hold him guilty of gross neglect amounting to legal absence of good faith, absent any
showing that there was something amiss about Chandiramanis acquisition or possession of the checks. David did not
close his eyes deliberately to the nature or the particulars of a fraud allegedly committed by Chandiramani upon the
petitioner, absent any knowledge on his part that the action in taking the instruments amounted to bad faith. [22]

Belatedly, and we say belatedly since petitioner did not raise this matter in the proceedings below, petitioner now
claims that David should have been put on alert as the instruments in question were crossed checks. Pursuant to Bataan
Cigar & Cigarette Factory, Inc. v. Court of Appeals, David should at least have inquired as to whether he was acquiring
said checks for the purpose for which they were issued, according to petitioners submission.

Petitioners reliance on the Bataan Cigar case, however, is misplaced. The facts in the present case are not on all
fours with Bataan Cigar. In the latter case, the crossed checks were negotiated and sold at a discount by the payee,
while in the instant case, the payee did not negotiate further the checks in question but promptly deposited them in his
bank account.

The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of Commerce [23] makes
reference to such instruments. Nonetheless, this Court has taken judicial cognizance of the practice that a check with
two parallel lines in the upper left hand corner means that it could only be deposited and not converted into
cash.[24] The effects of crossing a check, thus, relates to the mode of payment, meaning that the drawer had intended
the check for deposit only by the rightful person, i.e., the payee named therein. In Bataan Cigar, the rediscounting of the
check by the payee knowingly violated the avowed intention of crossing the check. Thus, in accepting the cross checks
and paying cash for them, despite the warning of the crossing, the subsequent holder could not be considered in good
faith and thus, not a holder in due course. Our ruling in Bataan Cigar reiterates that in De Ocampo & Co. v.
Gatchalian.[25]

The factual circumstances in De Ocampo and in Bataan Cigar are not present in this case. For here, there is no
dispute that the crossed checks were delivered and duly deposited by David, the payee named therein, in his bank
account. In other words, the purpose behind the crossing of the checks was satisfied by the payee.
 Proceeding to the issue of damages, petitioner merely argues that respondents David and PCIB are not entitled to
damages, attorneys fees, and costs of suit as both acted in bad faith towards her, as shown by her version of the facts
which gave rise to the instant case.

Respondent David counters that he was maliciously and unceremoniously dragged into this suit for reasons which
have nothing to do with him at all, but which arose from petitioners failure to receive her share of the profit promised her
by Chandiramani. Moreover, in filing this suit which has lasted for over a decade now, the petitioner deprived David of
the rightful enjoyment of the two checks, to which he is entitled, under the law, compelled him to hire the services of
counsel to vindicate his rights, and subjected him to social humiliation and besmirched reputation, thus harming his
standing as a person of good repute in the business community of Pampanga. David thus contends that it is but proper
that moral damages, attorneys fees, and costs of suit be awarded him.

For its part, respondent PCIB stresses that it was established by both the trial court and the appellate court that it
was needlessly dragged into this case. Hence, no error was committed by the appellate court in declaring PCIB entitled
to attorneys fees as it was compelled to litigate to protect itself.

We have thoroughly perused the records of this case and find no reason to disagree with the finding of the trial
court, as affirmed by the appellate court, that:

[D]efendant David is entitled to [the] award of moral damages as he has been needlessly and unceremoniously
dragged into this case which should have been brought only between the plaintiff and defendant Chandiramani.[26]

A careful reading of the findings of facts made by both the trial court and appellate court clearly shows that the
petitioner, in including David as a party in these proceedings, is barking up the wrong tree. It is apparent from the factual
findings that David had no dealings with the petitioner and was not privy to the agreement of the latter with
Chandiramani. Moreover, any loss which the petitioner incurred was apparently due to the acts or omissions of
Chandiramani, and hence, her recourse should have been against him and not against David. By needlessly dragging
David into this case all because he and Chandiramani knew each other, the petitioner not only unduly delayed David
from obtaining the value of the checks, but also caused him anxiety and injured his business reputation while waiting for
its outcome. Recall that under Article 2217[27] of the Civil Code, moral damages include mental anguish, serious anxiety,
besmirched reputation, wounded feelings, social humiliation, and similar injury. Hence, we find the award of moral
damages to be in order.

The appellate court likewise found that like David, PCIB was dragged into this case on unfounded and baseless
grounds. Both were thus compelled to litigate to protect their interests, which makes an award of attorneys fees justified
under Article 2208 (2)[28] of the Civil Code. Hence, we rule that the award of attorneys fees to David and PCIB was
proper.

WHEREFORE, the instant petition is DENIED. The assailed decision of the Court of Appeals, dated March 25, 1999, in
CA-G.R. CV No. 52398 is AFFIRMED. Costs against the petitioner.

SO ORDERED.

Bellosillo, (Chairman), Austria-Martinez, and Tinga, JJ., concur.

Callejo, Sr., J., on leave.