III.
NEGOTIATION
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 89252 May 24, 1993
RAUL SESBREÑO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS
CORPORATION AND PILIPINAS BANK, respondents.
Salva, Villanueva & Associates for Delta Motors
Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.
FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreño made a
money market placement in the amount of P300,000.00
with the Philippine Underwriters Finance Corporation
("Philfinance"), Cebu Branch; the placement, with a term
of thirty-two (32) days, would mature on 13 March 1981,
Philfinance, also on 9 February 1981, issued the
following documents to petitioner:
(a) the Certificate of Confirmation of Sale,
"without recourse," No. 20496 of one (1)
Delta Motors Corporation Promissory Note
("DMC PN") No. 2731 for a term of 32 days
at 17.0% per annum;
(b) the Certificate of securities Delivery
Receipt No. 16587 indicating the sale of
DMC PN No. 2731 to petitioner, with the
notation that the said security was in
custodianship of Pilipinas Bank, as per
Denominated Custodian Receipt ("DCR")
No. 10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March
1981 (i.e., the maturity date of petitioner's
investment), with petitioner as payee,
Philfinance as drawer, and Insular Bank of
Asia and America as drawee, in the total
amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the
postdated checks issued by Philfinance. However, the
checks were dishonored for having been drawn against
insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the
DCR No. 10805 issued by private respondent Pilipinas
Bank ("Pilipinas"). It reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
 b
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V
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TO Raul Sesbreño

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 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.

P
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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
i never released DMC
PN No. 2731, nor any other instrument
g in respect thereof,
to petitioner. n
a
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Petitioner also made a written demand on 14 July
19813 upon private respondentuDelta for the partial
satisfaction of DMC PN No. 2731, r explaining that
Philfinance, as payee thereof, hade assigned to him said
Note to the extent of P307,933.33.) Delta, however,
denied any liability to petitioner1 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: Philippine Underwriters Finance Corp.
Benavidez St., Makati,
The words "not negotiable," stamped on the Metro Manila.
face of the bill of lading, did not destroy its
assignability, but the sole effect was to Att
exempt the bill from the statutory provisions ent
relative thereto, and a bill, though not ion
negotiable, may be transferred by :
assignment; the assignee taking subject to Mr.
the equities between the original Alfr
parties.12 (Emphasis added) ed
o
DMC PN No. 2731, while marked "non-negotiable," O.
was not at the same time stamped "non-transferable" or Ba
"non-assignable." It contained no stipulation which nar
prohibited Philfinance from assigning or transferring, in ia
whole or in part, that Note. SV
P-
Delta adduced the "Letter of Agreement" which it had Tre
entered into with Philfinance and which should be quoted as
in full: ure
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A
GENTLEMEN: p
r
This refers to ouri outstanding placement of
P4,601,666.67 asl evidenced by your
1
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.

V
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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 unequivocal1 terms of the substituting
3
obligation or by the evident incompatibility of the new and
16
old obligations on every point. 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 Appeals are hereby AFFIRMED. No pronouncement as
detain us for long. to costs.

In the first place, as already noted, jurisdiction over the SO ORDERED.

person of Philfinance was never acquired either by the
trial court nor by the respondent Court of Appeals. Bidin, Davide, Jr., Romero and Melo, JJ., concur.
Petitioner similarly did not seek to implead Philfinance in
the Petition before us. Republic of the Philippines
SUPREME COURT
Secondly, it is not disputed that Philfinance and private Manila
respondents Delta and Pilipinas have been organized as
separate corporate entities. Petitioner asks us to pierce SECOND DIVISION
their separate corporate entities, but has been able only
to cite the presence of a common Director — Mr. Ricardo G.R. No. 72593 April 30, 1987
Silverio, Sr., sitting on the Board of Directors of all three
(3) companies. Petitioner has neither alleged nor proved CONSOLIDATED PLYWOOD INDUSTRIES, INC.,
that one or another of the three (3) concededly related HENRY WEE, and RODOLFO T.
companies used the other two (2) as mere alter egos or VERGARA, petitioners,
that the corporate affairs of the other two (2) were vs.
administered and managed for the benefit of one. There IFC LEASING AND ACCEPTANCE
is simply not enough evidence of record to justify CORPORATION, respondent.
disregarding the separate corporate personalities of delta
and Pilipinas and to hold them liable for any assumed or Carpio, Villaraza & Cruz Law Offices for petitioners.
undetermined liability of Philfinance to petitioner.28
Europa, Dacanay & Tolentino for respondent.
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, GUTIERREZ, JR., J.:
respectively, are hereby MODIFIED and SET ASIDE, to
the extent that such Decision and Resolution had This is a petition for certiorari under Rule 45 of the Rules
dismissed petitioner's complaint against Pilipinas Bank. of Court which assails on questions of law a decision of
Private respondent Pilipinas bank is hereby ORDERED the Intermediate Appellate Court in AC-G.R. CV No.
to indemnify petitioner for damages in the amount of 68609 dated July 17, 1985, as well as its resolution dated
P304,533.33, plus legal interest thereon at the rate of six October 17, 1985, denying the motion for
percent (6%) per annum counted from 2 April 1981. As reconsideration.
so modified, the Decision and Resolution of the Court of
The antecedent facts culled from the petition are as
follows:
The petitioner is a corporation engaged in the logging
business. It had for its program of logging activities for
the year 1978 the opening of additional roads, and
simultaneous logging operations along the route of said
roads, in its logging concession area at Baganga, Manay,
and Caraga, Davao Oriental. For this purpose, it needed
two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose,
Atlantic Gulf & Pacific Company of Manila, through its
sister company and marketing arm, Industrial Products
Marketing (the "seller-assignor"), a corporation dealing in
tractors and other heavy equipment business, offered to
sell to petitioner-corporation two (2) "Used" Allis Crawler
Tractors, one (1) an HDD-21-B and the other an HDD-16-
B.
In order to ascertain the extent of work to which the
tractors were to be exposed, (t.s.n., May 28, 1980, p. 44)
and to determine the capability of the "Used" tractors
being offered, petitioner-corporation requested the seller-
assignor to inspect the job site. After conducting said
inspection, the seller-assignor assured petitioner-
corporation that the "Used" Allis Crawler Tractors which
were being offered were fit for the job, and gave the
corresponding warranty of ninety (90) days performance
of the machines and availability of parts. (t.s.n., May 28,
1980, pp. 59-66).
With said assurance and warranty, and relying on the
seller-assignor's skill and judgment, petitioner-corporation
through petitioners Wee and Vergara, president and vice-
president, respectively, agreed to purchase on
installment said two (2) units of "Used" Allis Crawler
Tractors. It also paid the down payment of Two Hundred
Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales
invoice for the two 2) units of tractors (Exh. "3-A"). At the
same time, the deed of sale with chattel mortgage with
promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale
with chattel mortgage with promissory note, the seller-
assignor, by means of a deed of assignment (E exh. " 1
"), assigned its rights and interest in the chattel mortgage
in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said
two (2) units of "Used" tractors to the petitioner-
corporation's job site and as agreed, the seller-assignor
stationed its own mechanics to supervise the operations
of the machines.
Barely fourteen (14) days had elapsed after their delivery
when one of the tractors broke down and after another
nine (9) days, the other tractor likewise broke down
(t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally
advised the seller-assignor of the fact that the tractors
broke down and requested for the seller-assignor's usual
prompt attention under the warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T.
Vergara, Exhibit "5," the seller-assignor sent to the job
site its mechanics to conduct the necessary repairs
(Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-
E"), but the tractors did not come out to be what they
should be after the repairs were undertaken because the
units were no longer serviceable (t. s. n., May 28, 1980,
p. 78).
Because of the breaking down of the tractors, the road
building and simultaneous logging operations of
petitioner-corporation were delayed and petitioner
Vergara advised the seller-assignor that the payments of
the installments as listed in the promissory note would
likewise be delayed until the seller-assignor completely
fulfills its obligation under its warranty (t.s.n, May 28,
1980, p. 79).
Since the tractors were no longer serviceable, on April 7,
1979, petitioner Wee asked the seller-assignor to pull out
the units and have them reconditioned, and thereafter to
offer them for sale. The proceeds were to be given to the
respondent and the excess, if any, to be divided between
the seller-assignor and petitioner-corporation which
offered to bear one-half (1/2) of the reconditioning cost (E
exh. " 7 ").
No response to this letter, Exhibit "7," was received by
the petitioner-corporation and despite several follow-up
calls, the seller-assignor did nothing with regard to the
request, until the complaint in this case was filed by the
respondent against the petitioners, the corporation, Wee,
and Vergara.
The complaint was filed by the respondent against the
petitioners for the recovery of the principal sum of One
Million Ninety Three Thousand Seven Hundred Eighty
Nine Pesos & 71/100 (P1,093,789.71), accrued interest
of One Hundred Fifty One Thousand Six Hundred
Eighteen Pesos & 86/100 (P151,618.86) as of August 15,
1979, accruing interest thereafter at the rate of twelve
(12%) percent per annum, attorney's fees of Two
Hundred Forty Nine Thousand Eighty One Pesos &
71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for
the dismissal of the complaint and asking the trial court to
order the respondent to pay the petitioners damages in
an amount at the sound discretion of the court, Twenty
Thousand Pesos (P20,000.00) as and for attorney's fees,
and Five Thousand Pesos (P5,000.00) for expenses of
litigation. The petitioners likewise prayed for such other
and further relief as would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered
the following judgment:
WHEREFORE, judgment is hereby
rendered:
1. ordering defendants to pay jointly and
severally in their official and personal
capacities the principal sum of ONE
MILLION NINETY THREE THOUSAND
SEVEN HUNDRED NINETY EIGHT
PESOS & 71/100 (P1,093,798.71) with
accrued interest of ONE HUNDRED FIFTY
ONE THOUSAND SIX HUNDRED
EIGHTEEN PESOS & 86/100
(P151,618.,86) as of August 15, 1979 and
accruing interest thereafter at the rate of
12% per annum;
 2. ordering defendants to pay jointly and
severally attorney's fees equivalent to ten
percent (10%) of the principal and to pay
the costs of the suit.
Defendants' counterclaim is disallowed. (pp.
45-46, Rollo)
On June 8, 1981, the trial court issued an order denying
the motion for reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate
Appellate Court and assigned therein the following errors:
I Products Marketing and Consolidated
THAT THE LOWER COURT ERRED IN FINDING THAT
THE SELLER ATLANTIC GULF AND PACIFIC
COMPANY OF MANILA DID NOT APPROVE
DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT
PLAINTIFF- APPELLEE IS A HOLDER IN DUE
COURSE OF THE PROMISSORY NOTE AND SUED
UNDER SAID NOTE AS HOLDER THEREOF IN DUE
COURSE.
On July 17, 1985, the Intermediate Appellate Court
issued the challenged decision affirming in toto the
decision of the trial court. The pertinent portions of the
decision are as follows:
xxx xxx xxx
From the evidence presented by the parties
on the issue of warranty, We are of the
considered opinion that aside from the fact
that no provision of warranty appears or is
provided in the Deed of Sale of the tractors
and even admitting that in a contract of sale
unless a contrary intention appears, there is
an implied warranty, the defense of breach
of warranty, if there is any, as in this case,
does not lie in favor of the appellants and
against the plaintiff-appellee who is the
assignee of the promissory note and a
holder of the same in due course. Warranty
lies in this case only between Industrial
Plywood Industries, Inc. The plaintiff-
appellant herein upon application by
appellant corporation granted financing for
the purchase of the questioned units of Fiat-
Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not
a defense available to appellants either to
withdraw from the contract and/or demand
a proportionate reduction of the price with
damages in either case (Art. 1567, New
Civil Code). We now come to the issue as
to whether the plaintiff-appellee is a holder
in due course of the promissory note.
To begin with, it is beyond arguments that
the plaintiff-appellee is a financing
corporation engaged in financing and
receivable discounting extending credit
facilities to consumers and industrial,
commercial or agricultural enterprises by
discounting or factoring commercial papers
or accounts receivable duly authorized
pursuant to R.A. 5980 otherwise known as
the Financing Act.
A study of the questioned promissory note
reveals that it is a negotiable instrument
which was discounted or sold to the IFC
Leasing and Acceptance Corporation for
P800,000.00 (Exh. "A") considering the
following. it is in writing and signed by the
maker; it contains an unconditional promise
to pay a certain sum of money payable at a
fixed or determinable future time; it is
payable to order (Sec. 1, NIL); the
promissory note was negotiated when it
was transferred and delivered by IPM to the
appellee and duly endorsed to the latter
(Sec. 30, NIL); it was taken in the conditions
that the note was complete and regular
upon its face before the same was overdue
and without notice, that it had been
previously dishonored and that the note is
in good faith and for value without notice of
any infirmity or defect in the title of IPM
(Sec. 52, NIL); that IFC Leasing and
Acceptance Corporation held the instrument
free from any defect of title of prior parties
and free from defenses available to prior
parties among themselves and may enforce
payment of the instrument for the full
amount thereof against all parties liable
thereon (Sec. 57, NIL); the appellants
engaged that they would pay the note
according to its tenor, and admit the
existence of the payee IPM and its capacity
to endorse (Sec. 60, NIL).
In view of the essential elements found in
the questioned promissory note, We opine
that the same is legally and conclusively
enforceable against the defendants-
appellants.
WHEREFORE, finding the decision
appealed from according to law and
evidence, We find the appeal without merit
and thus affirm the decision in toto. With
costs against the appellants. (pp. 50-55,
Rollo)
The petitioners' motion for reconsideration of the decision
of July 17, 1985 was denied by the Intermediate
Appellate Court in its resolution dated October 17, 1985,
a copy of which was received by the petitioners on
October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY
NOT A NEGOTIABLE INSTRUMENT AS DEFINED
UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO
ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE
COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE
SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-
NEGOTIABLE INSTRUMENT AND THE TRANSFER OF
RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE
PETITIONERS MAY RAISE AGAINST THE
RESPONDENT ALL DEFENSES THAT ARE
AVAILABLE TO IT AS AGAINST THE SELLER-
ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE
PAYMENT OF THE PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH
OF WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER
ONLY FROM THE SELLER-ASSIGNOR OF THE
PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY
THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE OF
THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR
USED IN EVIDENCE IN ANY COURT BECAUSE THE
REQUISITE DOCUMENTARY STAMPS HAVE NOT
BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting
aside the decision dated July 17, 1985, as well as the
resolution dated October 17, 1985 and dismissing the
complaint but granting petitioners' counterclaims before
the court of origin.
On the other hand, the respondent corporation in its
comment to the petition filed on February 20, 1986,
contended that the petition was filed out of time; that the
promissory note is a negotiable instrument and
respondent a holder in due course; that respondent is not
liable for any breach of warranty; and finally, that the
promissory note is admissible in evidence.
The core issue herein is whether or not the promissory
note in question is a negotiable instrument so as to bar
completely all the available defenses of the petitioner
against the respondent-assignee.
Preliminarily, it must be established at the outset that we
consider the instant petition to have been filed on time
because the petitioners' motion for reconsideration
actually raised new issues. It cannot, therefore, be
considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor
breached its express 90-day warranty because the
findings of the trial court, adopted by the respondent
appellate court, that "14 days after delivery, the first
tractor broke down and 9 days, thereafter, the second
tractor became inoperable" are sustained by the records.
The petitioner was clearly a victim of a warranty not
honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible
for warranty against the hidden defects
which the thing sold may have, should they
render it unfit for the use for which it is
intended, or should they diminish its fitness
for such use to such an extent that, had the
vendee been aware thereof, he would not
have acquired it or would have given a
lower price for it; but said vendor shall not
be answerable for patent defects or those
which may be visible, or for those which are
not visible if the vendee is an expert who,
by reason of his trade or profession, should
have known them.
ART. 1562. In a sale of goods, there is an
implied warranty or condition as to the
quality or fitness of the goods, as follows:
(1) Where the buyer, expressly or by
implication makes known to the seller the
particular purpose for which the goods are
acquired, and it appears that the buyer
relies on the sellers skill or judge judgment
(whether he be the grower or manufacturer
or not), there is an implied warranty that the
goods shall be reasonably fit for such
purpose;
xxx xxx xxx
ART. 1564. An implied warranty or
condition as to the quality or fitness for a
particular purpose may be annexed by the
usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to
the vendee for any hidden faults or defects
in the thing sold even though he was not
aware thereof.
This provision shall not apply if the contrary
has been stipulated, and the vendor was
not aware of the hidden faults or defects in
the thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its
breach of warranty against the petitioner. This liability as
a general rule, extends to the corporation to whom it
assigned its rights and interests unless the assignee is a
holder in due course of the promissory note in question,
assuming the note is negotiable, in which case the latter's
rights are based on the negotiable instrument and
assuming further that the petitioner's defenses may not
prevail against it.
Secondly, it likewise cannot be denied that as soon as
the tractors broke down, the petitioner-corporation
notified the seller-assignor's sister company, AG & P,
about the breakdown based on the seller-assignor's
express 90-day warranty, with which the latter complied
by sending its mechanics. However, due to the seller-
assignor's delay and its failure to comply with its
warranty, the tractors became totally unserviceable and
useless for the purpose for which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally
rescinded its contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind
obligations is implied in reciprocal ones, in
case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the
obligation with the payment of damages in
either case. He may also seek rescission,
even after he has chosen fulfillment, if the
latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561,
1562, 1564, 1565 and 1566, the vendee
may elect between withdrawing from the
contract and demanding a proportionate
reduction of the price, with damages in
either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially
rescinded its contract with the seller-assignor, necessarily
can no longer sue the seller-assignor except by way of
counterclaim if the seller-assignor sues it because of the
rescission.
In the case of the University of the Philippines v. De los
Angeles (35 SCRA 102) we held:
In other words, the party who deems the
contract violated may consider it resolved or
rescinded, and act accordingly, without
previous court action, but it proceeds at its
own risk. For it is only the final judgment of
the corresponding court that will
conclusively and finally settle whether the
action taken was or was not correct in law.
But the law definitely does not require that
the contracting party who believes itself
injured must first file suit and wait for
adjudgement before taking extrajudicial
steps to protect its interest. Otherwise, the
party injured by the other's breach will have
to passively sit and watch its damages
accumulate during the pendency of the suit
until the final judgment of rescission is
rendered when the law itself requires that
he should exercise due diligence to
minimize its own damages (Civil Code,
Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory
note in question is not a negotiable instrument.
The pertinent portion of the note is as follows:
 FOR VALUE RECEIVED, I/we jointly and
severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING,
the sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED EIGHTY
NINE PESOS & 71/100 only (P
1,093,789.71), Philippine Currency, the said
principal sum, to be payable in 24 monthly
installments starting July 15, 1978 and
every 15th of the month thereafter until fully
paid. ...
Considering that paragraph (d), Section 1 of the
Negotiable Instruments Law requires that a promissory
note "must be payable to order or bearer, " it cannot be
denied that the promissory note in question is not a
negotiable instrument.
The instrument in order to be considered
negotiablility-i.e. must contain the so-called
'words of negotiable, must be payable to
'order' or 'bearer'. These words serve as an
expression of consent that the instrument
may be transferred. This consent is
indispensable since a maker assumes
greater risk under a negotiable instrument
than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. —
The instrument is payable to order where it
is drawn payable to the order of a specified
person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an
instrument may be made payable to order.
There must always be a specified person
named in the instrument. It means that the
bill or note is to be paid to the person
designated in the instrument or to any
person to whom he has indorsed and
delivered the same. Without the words "or
order" or"to the order of, "the instrument is
payable only to the person designated
therein and is therefore non-negotiable. Any
subsequent purchaser thereof will not enjoy
the advantages of being a holder of a
negotiable instrument but will merely "step
into the shoes" of the person designated in
the instrument and will thus be open to all
defenses available against the latter."
(Campos and Campos, Notes and Selected
Cases on Negotiable Instruments Law,
Third Edition, page 38). (Emphasis
supplied)
Therefore, considering that the subject promissory note is
not a negotiable instrument, it follows that the respondent
can never be a holder in due course but remains a mere
assignee of the note in question. Thus, the petitioner may
raise against the respondent all defenses available to it
as against the seller-assignor Industrial Products
Marketing.
This being so, there was no need for the petitioner to
implied the seller-assignor when it was sued by the
respondent-assignee because the petitioner's defenses
apply to both or either of either of them. Actually, the
records show that even the respondent itself admitted to
being a mere assignee of the promissory note in
question, to wit:
ATTY. PALACA:
Did we get it right from the
counsel that what is being
assigned is the Deed of Sale
with Chattel Mortgage with the
promissory note which is as
testified to by the witness was
indorsed? (Counsel for
Plaintiff nodding his head.)
Then we have no further
questions on cross,
COURT:
You confirm his
manifestation? You are
nodding your head? Do you
confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be
assigned. A deed of sale is a
transaction between two
persons; what is assigned are
rights, the rights of the
mortgagee were assigned to
the IFC Leasing & Acceptance
Corporation.
COURT:
He puts it in a simple way as
one-deed of sale and chattel
mortgage were assigned; . . .
you want to make a
distinction, one is an
assignment of mortgage right
and the other one is
indorsement of the promissory
note. What counsel for
defendants wants is that you
stipulate that it is contained in
one single transaction?
ATTY. ILAGAN:
We stipulate it is one single
transaction. (pp. 27-29, TSN.,
February 13, 1980).
Secondly, even conceding for purposes of discussion that
the promissory note in question is a negotiable
instrument, the respondent cannot be a holder in due
course for a more significant reason.
The evidence presented in the instant case shows that
prior to the sale on installment of the tractors, there was
an arrangement between the seller-assignor, Industrial
Products Marketing, and the respondent whereby the
latter would pay the seller-assignor the entire purchase
price and the seller-assignor, in turn, would assign its
rights to the respondent which acquired the right to
collect the price from the buyer, herein petitioner
Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel
Mortgage with Promissory Note, the Deed of Assignment
and the Disclosure of Loan/Credit Transaction shows that
said documents evidencing the sale on installment of the
tractors were all executed on the same day by and
among the buyer, which is herein petitioner Consolidated
Plywood Industries, Inc.; the seller-assignor which is the
Industrial Products Marketing; and the assignee-financing
company, which is the respondent. Therefore, the
respondent had actual knowledge of the fact that the
seller-assignor's right to collect the purchase price was
not unconditional, and that it was subject to the condition
that the tractors -sold were not defective. The respondent
knew that when the tractors turned out to be defective, it
would be subject to the defense of failure of consideration
and cannot recover the purchase price from the
petitioners. Even assuming for the sake of argument that
the promissory note is negotiable, the respondent, which
took the same with actual knowledge of the foregoing
facts so that its action in taking the instrument amounted
to bad faith, is not a holder in due course. As such, the
respondent is subject to all defenses which the
petitioners may raise against the seller-assignor. Any
other interpretation would be most inequitous to the
unfortunate buyer who is not only saddled with two
useless tractors but must also face a lawsuit from the
assignee for the entire purchase price and all its incidents
without being able to raise valid defenses available as
against the assignor.
Lastly, the respondent failed to present any evidence to
prove that it had no knowledge of any fact, which would
justify its act of taking the promissory note as not
amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law
provide that: negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A
HOLDER IN DUE COURSE. — A holder in
due course is a holder who has taken the
instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for
value
(d) That the time it was negotiated by him
he had no notice of any infirmity in the
instrument of deffect in the title of the
person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE
OF DEFFECT. — To constitute notice of an
infirmity in the instrument or defect in the
title of the person negotiating the same, the
person to whom it is negotiated must have
had actual knowledge of the infirmity or
 defect, or knowledge of such facts that his
action in taking the instrument amounts to
bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a
financing company is not a holder in good faith as to the
buyer, to wit:
In installment sales, the buyer usually
issues a note payable to the seller to cover
the purchase price. Many times, in
pursuance of a previous arrangement with
the seller, a finance company pays the full
price and the note is indorsed to it,
subrogating it to the right to collect the price
from the buyer, with interest. With the
increasing frequency of installment buying
in this country, it is most probable that the
tendency of the courts in the United States
to protect the buyer against the finance
company will , the finance company will be
subject to the defense of failure of
consideration and cannot recover the
purchase price from the buyer. As against
the argument that such a rule would
seriously affect "a certain mode of
transacting business adopted throughout
the State," a court in one case stated:
It may be that our holding
here will require some
changes in business methods
and will impose a greater
burden on the finance
companies. We think the
buyer-Mr. & Mrs. General
Public-should have some
protection somewhere along
the line. We believe the
finance company is better
able to bear the risk of the
dealer's insolvency than the
buyer and in a far better
position to protect his interests
against unscrupulous and
insolvent dealers. . . .
If this opinion imposes great
burdens on finance
companies it is a potent
argument in favor of a rule
which win afford public
protection to the general
buying public against
unscrupulous dealers in
personal property. . . . (Mutual
Finance Co. v. Martin, 63 So.
2d 649, 44 ALR 2d 1 [1953])
(Campos and Campos, Notes
and Selected Cases on
Negotiable Instruments Law,
Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange
Country Machine Works (34 Cal. 2d 766) involving similar
facts, it was held that in a very real sense, the finance
company was a moving force in the transaction from its
very inception and acted as a party to it. When a finance
company actively participates in a transaction of this type
from its inception, it cannot be regarded as a holder in
due course of the note given in the transaction.
In like manner, therefore, even assuming that the subject
promissory note is negotiable, the respondent, a
financing company which actively participated in the sale
on installment of the subject two Allis Crawler tractors,
cannot be regarded as a holder in due course of said
note. It follows that the respondent's rights under the
promissory note involved in this case are subject to all
defenses that the petitioners have against the seller-
assignor, Industrial Products Marketing. For Section 58 of
the Negotiable Instruments Law provides that "in the
hands of any holder other than a holder in due course, a
negotiable instrument is subject to the same defenses as
if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other
peripheral issues, we find that both the trial and
respondent appellate court erred in holding the
promissory note in question to be negotiable. Such a
ruling does not only violate the law and applicable
jurisprudence, but would result in unjust enrichment on
the part of both the assigner- assignor and respondent
assignee at the expense of the petitioner-corporation
which rightfully rescinded an inequitable contract. We
note, however, that since the seller-assignor has not
been impleaded herein, there is no obstacle for the
respondent to file a civil Suit and litigate its claims against
the seller- assignor in the rather unlikely possibility that it
so desires,
WHEREFORE, in view of the foregoing, the decision of
the respondent appellate court dated July 17, 1985, as
well as its resolution dated October 17, 1986, are hereby
ANNULLED and SET ASIDE. The complaint against the
petitioner before the trial court is DISMISSED.
SO ORDERED.
Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of
Mandaue City and in his personal capacity as
garnishee, petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br.
XVII, Cebu City, and RAUL H.
SESBREÑO, respondents.
BELLOSILLO, J.:
RAUL H. SESBREÑO filed a complaint for damages
against Assistant City Fiscals Bienvenido N. Mabanto,
Jr., and Dario D. Rama, Jr., before the Regional Trial
Court of Cebu City. After trial judgment was rendered
ordering the defendants to pay P11,000.00 to the plaintiff,
private respondent herein. The decision having become
final and executory, on motion of the latter, the trial court
ordered its execution. This order was questioned by the
defendants before the Court of Appeals. However, on 15
January 1992 a writ of execution was issued.
On 4 February 1992 a notice of garnishment was served
on petitioner Loreto D. de la Victoria as City Fiscal of
Mandaue City where defendant Mabanto, Jr., was then
detailed. The notice directed petitioner not to disburse,
transfer, release or convey to any other person except to
the deputy sheriff concerned the salary checks or other
checks, monies, or cash due or belonging to Mabanto,
Jr., under penalty of law. 1 On 10 March 1992 private
respondent filed a motion before the trial court for
examination of the garnishees.
On 25 May 1992 the petition pending before the Court of
Appeals was dismissed. Thus the trial court, finding no
more legal obstacle to act on the motion for examination
of the garnishees, directed petitioner on 4 November
1992 to submit his report showing the amount of the
garnished salaries of Mabanto, Jr., within fifteen (15)
days from receipt 2 taking into consideration the
provisions of Sec. 12, pars. (f) and (i), Rule 39 of the
Rules of Court.
On 24 November 1992 private respondent filed a motion
to require petitioner to explain why he should not be cited
in contempt of court for failing to comply with the order of
4 November 1992.
On the other hand, on 19 January 1993 petitioner moved
to quash the notice of garnishment claiming that he was
not in possession of any money, funds, credit, property or
anything of value belonging to Mabanto, Jr., except his
salary and RATA checks, but that said checks were not
yet properties of Mabanto, Jr., until delivered to him. He
further claimed that, as such, they were still public funds
which could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and
ordered petitioner to immediately comply with its order of
4 November 1992. 3 It opined that the checks of
Mabanto, Jr., had already been released through
petitioner by the Department of Justice duly signed by the
officer concerned. Upon service of the writ of
garnishment, petitioner as custodian of the checks was
under obligation to hold them for the judgment creditor.
Petitioner became a virtual party to, or a forced intervenor
in, the case and the trial court thereby acquired
jurisdiction to bind him to its orders and processes with a
view to the complete satisfaction of the judgment.
Additionally, there was no sufficient reason for petitioner
to hold the checks because they were no longer
government funds and presumably delivered to the
payee, conformably with the last sentence of Sec. 16 of
the Negotiable Instruments Law.
With regard to the contempt charge, the trial court was
not morally convinced of petitioner's guilt. For, while his
explanation suffered from procedural infirmities
nevertheless he took pains in enlightening the court by
sending a written explanation dated 22 July 1992
requesting for the lifting of the notice of garnishment on
the ground that the notice should have been sent to the
Finance Officer of the Department of Justice. Petitioner
insists that he had no authority to segregate a portion of
the salary of Mabanto, Jr. The explanation however was
not submitted to the trial court for action since the
stenographic reporter failed to attach it to the record. 4
On 20 April 1993 the motion for reconsideration was
denied. The trial court explained that it was not the duty
of the garnishee to inquire or judge for himself whether
the issuance of the order of execution, writ of execution
and notice of garnishment was justified. His only duty
was to turn over the garnished checks to the trial court
which issued the order of execution. 5
Petitioner raises the following relevant issues: (1)
whether a check still in the hands of the maker or its duly
authorized representative is owned by the payee before
physical delivery to the latter: and, (2) whether the salary
check of a government official or employee funded with
public funds can be subject to garnishment.
Petitioner reiterates his position that the salary checks
were not owned by Mabanto, Jr., because they were not
yet delivered to him, and that petitioner as garnishee has
no legal obligation to hold and deliver them to the trial
court to be applied to Mabanto, Jr.'s judgment debt. The
thesis of petitioner is that the salary checks still formed
part of public funds and therefore beyond the reach of
garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for
reaching credits belonging to the judgment debtor owing
to him from a stranger to the litigation. 6 Emphasis is laid
on the phrase "belonging to the judgment debtor" 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 of the notice of garnishment as he had actual knowledge
Government. of the non-entitlement of private respondent to the checks
in question. Consequently, we find no difficulty
As a necessary consequence of being public fund, the concluding that the trial court exceeded its jurisdiction in
checks may not be garnished to satisfy the issuing the notice of garnishment concerning the salary
judgment. 9 The rationale behind this doctrine is obvious checks of Mabanto, Jr., in the possession of petitioner.
consideration of public policy. The Court succinctly stated
in Commissioner of Public Highways v. San Diego 10 that 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
The functions and public services rendered ASIDE. The notice of garnishment served on petitioner
by the State cannot be allowed to be dated 3 February 1992 is ordered DISCHARGED.
paralyzed or disrupted by the diversion of
public funds from their legitimate and SO ORDERED.
specific objects, as appropriated by law.
Quiason and Kapunan, JJ., concur.
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 Separate Opinions
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 DAVIDE, JR., J., concurring and dissenting:
not taken into account by the trial court, e.g., a defect on
the face of the writ or actual knowledge by the garnishee This Court may take judicial notice of the fact that checks
of lack of entitlement on the part of the garnisher. It is for salaries of employees of various Departments all over
worth to note that the ruling referred to the validity of the country are prepared in Manila not at the end of the
advance execution of judgments, but a careful scrutiny of payroll period, but days before it to ensure that they
that case and similar cases reveals that it was applicable reach the employees concerned not later than the end of
to a notice of garnishment as well. In the case at bench, it the payroll period. As to the employees in the provinces
was incumbent upon petitioner to inquire into the validity
or cities, the checks are sent through the heads of the
corresponding offices of the Departments. Thus, in the
case of Prosecutors and Assistant Prosecutors of the
Department of Justice, the checks are sent through the
Provincial Prosecutors or City Prosecutors, as the case
may be, who shall then deliver the checks to the payees.
Involved in the instant case are the salary and RATA
checks of then Assistant City Fiscal Bienvenido Mabanto,
Jr., who was detailed in the Office of the City Fiscal (now
Prosecutor) of Mandaue City. Conformably with the
aforesaid practice, these checks were sent to Mabanto
thru the petitioner who was then the City Fiscal of
Mandaue City.
The ponencia failed to indicate the payroll period covered
by the salary check and the month to which the RATA
check corresponds.
I respectfully submit that if these salary and RATA checks
corresponded, respectively, to a payroll period and to a
month which had already lapsed at the time the notice of
garnishment was served, the garnishment would be valid,
as the checks would then cease to be property of the
Government and would become property of Mabanto.
Upon the expiration of such period and month, the sums
indicated therein were deemed automatically segregated
from the budgetary allocations for the Department of
Justice under the General Appropriations Act.
It must be recalled that the public policy against
execution, attachment, or garnishment is directed to
public funds.
Thus, in the case of Director of the Bureau of Commerce
and Industry vs. Concepcion 1 where the core issue was
whether or not the salary due from the Government to a
public officer or employee can, by garnishment, be seized
before being paid to him and appropriated to the payment
of his judgment debts, this Court held:
A rule, which has never been seriously
questioned, is that money in the hands of
public officers, although it may be due
government employees, is not liable to the
creditors of these employees in the process
of garnishment. One reason is, that the
State, by virtue of its sovereignty, may not
be sued in its own courts except by express
authorization by the Legislature, and to
subject its officers to garnishment would be
to permit indirectly what is prohibited
directly. Another reason is that moneys
sought to be garnished, as long as they
remain in the hands of the disbursing officer
of the Government, belong to the latter,
although the defendant in garnishment may
be entitled to a specific portion thereof. And
still another reason which covers both of the
foregoing is that every consideration of
public policy forbids it.
The United States Supreme Court, in the
leading case of Buchanan vs. Alexander
([1846], 4 How., 19), in speaking of the right
of creditors of seamen, by process of
attachment, to divert the public money from
its legitimate and appropriate object, said:
 To state such a principle is to
refute it. No government can
sanction it. At all times it
would be found embarrassing,
and under some
circumstances it might be fatal
to the public service. . . . So
long as money remains in the
hands of a disbursing officer,
it is as much the money of the
United States, as if it had not
been drawn from the
treasury. Until paid over by
the agent of the government
to the person entitled to it, the
fund cannot, in any legal
sense, be considered a part of
his effects." (See, further, 12
R.C.L., p. 841; Keene vs.
Smith [1904], 44 Ore., 525;
Wild vs. Ferguson [1871], 23
La. Ann., 752; Bank of
Tennessee vs. Dibrell [1855],
3 Sneed [Tenn.], 379).
(emphasis supplied)
The authorities cited in the ponencia are inapplicable.
Garnished or levied on therein were public funds, to wit:
(a) the pump irrigation trust fund deposited with the
Philippine National Bank (PNB) in the account of the
Irrigation Service Unit in Republic vs. Palacio; 2 (b) the
deposits of the National Media Production Center
in Traders Royal Bank vs. Intermediate Appellate
Court; 3 and (c) the deposits of the Bureau of Public
Highways with the PNB under a current account, which
may be expended only for their legitimate object as
authorized by the corresponding legislative appropriation
in Commissioner of Public Highways vs. Diego. 4
Neither is Tiro vs. Hontanosas 5 squarely in point. The
said case involved the validity of Circular No. 21, series
of 1969, issued by the Director of Public Schools which
directed that "henceforth no cashier or disbursing officer
shall pay to attorneys-in-fact or other persons who may
be authorized under a power of attorney or other forms of
authority to collect the salary of an employee, except
when the persons so designated and authorized is an
immediate member of the family of the employee
concerned, and in all other cases except upon proper
authorization of the Assistant Executive Secretary for
Legal and Administrative Matters, with the
recommendation of the Financial Assistant." Private
respondent Zafra Financing Enterprise, which had
extended loans to public school teachers in Cebu City
and obtained from the latter promissory notes and special
powers of attorney authorizing it to take and collect their
salary checks from the Division Office in Cebu City of the
Bureau of Public Schools, sought, inter alia, to nullify the
Circular. It is clear that the teachers had in fact assigned
to or waived in favor of Zafra their future salaries which
were still public funds. That assignment or waiver was
contrary to public policy.
I would therefore vote to grant the petition only if the
salary and RATA checks garnished corresponds to an
unexpired payroll period and RATA month, respectively.
Padilla, J., concurs.
Separate Opinions
DAVIDE, JR., J., concurring and dissenting:
This Court may take judicial notice of the fact that checks
for salaries of employees of various Departments all over
the country are prepared in Manila not at the end of the
payroll period, but days before it to ensure that they
reach the employees concerned not later than the end of
the payroll period. As to the employees in the provinces
or cities, the checks are sent through the heads of the
corresponding offices of the Departments. Thus, in the
case of Prosecutors and Assistant Prosecutors of the
Department of Justice, the checks are sent through the
Provincial Prosecutors or City Prosecutors, as the case
may be, who shall then deliver the checks to the payees.
Involved in the instant case are the salary and RATA
checks of then Assistant City Fiscal Bienvenido Mabanto,
Jr., who was detailed in the Office of the City Fiscal (now
Prosecutor) of Mandaue City. Conformably with the
aforesaid practice, these checks were sent to Mabanto
thru the petitioner who was then the City Fiscal of
Mandaue City.
The ponencia failed to indicate the payroll period covered
by the salary check and the month to which the RATA
check corresponds.
I respectfully submit that if these salary and RATA checks
corresponded, respectively, to a payroll period and to a
month which had already lapsed at the time the notice of
garnishment was served, the garnishment would be valid,
as the checks would then cease to be property of the
Government and would become property of Mabanto.
Upon the expiration of such period and month, the sums
indicated therein were deemed automatically segregated
from the budgetary allocations for the Department of
Justice under the General Appropriations Act.
It must be recalled that the public policy against
execution, attachment, or garnishment is directed to
public funds.
Thus, in the case of Director of the Bureau of Commerce
and Industry vs. Concepcion 1 where the core issue was
whether or not the salary due from the Government to a
public officer or employee can, by garnishment, be seized
before being paid to him and appropriated to the payment
of his judgment debts, this Court held:
A rule, which has never been seriously
questioned, is that money in the hands of
public officers, although it may be due
government employees, is not liable to the
creditors of these employees in the process
of garnishment. One reason is, that the
State, by virtue of its sovereignty, may not
be sued in its own courts except by express
authorization by the Legislature, and to
subject its officers to garnishment would be
to permit indirectly what is prohibited
directly. Another reason is that moneys
sought to be garnished, as long as they
remain in the hands of the disbursing officer
of the Government, belong to the latter,
although the defendant in garnishment may
be entitled to a specific portion thereof. And
still another reason which covers both of the
foregoing is that every consideration of
public policy forbids it.
 The United States Supreme Court, in the
leading case of Buchanan vs. Alexander
([1846], 4 How., 19), in speaking of the right
of creditors of seamen, by process of
attachment, to divert the public money from
its legitimate and appropriate object, said:
To state such a principle is to
refute it. No government can
sanction it. At all times it
would be found embarrassing,
and under some
circumstances it might be fatal
to the public service. . . . So
long as money remains in the
hands of a disbursing officer,
it is as much the money of the
United States, as if it had not
been drawn from the
treasury. Until paid over by
the agent of the government
to the person entitled to it, the
fund cannot, in any legal
sense, be considered a part of
his effects." (See, further, 12
R.C.L., p. 841; Keene vs.
Smith [1904], 44 Ore., 525;
Wild vs. Ferguson [1871], 23
La. Ann., 752; Bank of
Tennessee vs. Dibrell [1855],
3 Sneed [Tenn.], 379).
(emphasis supplied)
The authorities cited in the ponencia are inapplicable.
Garnished or levied on therein were public funds, to wit:
(a) the pump irrigation trust fund deposited with the
Philippine National Bank (PNB) in the account of the
Irrigation Service Unit in Republic vs. Palacio; 2 (b) the
deposits of the National Media Production Center
in Traders Royal Bank vs. Intermediate Appellate
Court; 3 and (c) the deposits of the Bureau of Public
Highways with the PNB under a current account, which
may be expended only for their legitimate object as
authorized by the corresponding legislative appropriation
in Commissioner of Public Highways vs. Diego. 4
Neither is Tiro vs. Hontanosas 5 squarely in point. The
said case involved the validity of Circular No. 21, series
of 1969, issued by the Director of Public Schools which
directed that "henceforth no cashier or disbursing officer
shall pay to attorneys-in-fact or other persons who may
be authorized under a power of attorney or other forms of
authority to collect the salary of an employee, except
when the persons so designated and authorized is an
immediate member of the family of the employee
concerned, and in all other cases except upon proper
authorization of the Assistant Executive Secretary for
Legal and Administrative Matters, with the
recommendation of the Financial Assistant." Private
respondent Zafra Financing Enterprise, which had
extended loans to public school teachers in Cebu City
and obtained from the latter promissory notes and special
powers of attorney authorizing it to take and collect their
salary checks from the Division Office in Cebu City of the
Bureau of Public Schools, sought, inter alia, to nullify the
Circular. It is clear that the teachers had in fact assigned
to or waived in favor of Zafra their future salaries which
were still public funds. That assignment or waiver was
contrary to public policy.
I would therefore vote to grant the petition only if the
salary and RATA checks garnished corresponds to an
unexpired payroll period and RATA month, respectively.
Padilla, J., concurs.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY,
SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC
CORPORATION and PRODUCERS BANK OF THE
PHILIPPINES, defendants-respondents.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian
Industrial Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal
(petitioner Bank for brevity) filed a complaint for a sum of
money against respondents Sima Wei and/or Lee Kian
Huat, Mary Cheng Uy, Samson Tung, Asian Industrial
Plastic Corporation (Plastic Corporation for short) and the
Producers Bank of the Philippines, on two causes of
action:
(1) To enforce payment of the balance of
P1,032,450.02 on a promissory note
executed by respondent Sima Wei on June
9, 1983; and
(2) To enforce payment of two checks
executed by Sima Wei, payable to
petitioner, and drawn against the China
Banking Corporation, to pay the balance
due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate
Motions to Dismiss alleging a common ground that the
complaint states no cause of action. The trial court
granted the defendants' Motions to Dismiss. The Court of
Appeals affirmed this decision, * to which the petitioner
Bank, represented by its Legal Liquidator, filed this
Petition for Review by Certiorari, assigning the following
as the alleged errors of the Court of Appeals:1
(1) THE COURT OF APPEALS ERRED IN
HOLDING THAT THE PLAINTIFF-
PETITIONER HAS NO CAUSE OF
ACTION AGAINST DEFENDANTS-
RESPONDENTS HEREIN.
 (2) THE COURT OF APPEALS ERRED IN
HOLDING THAT SECTION 13, RULE 3 OF
THE REVISED RULES OF COURT ON
ALTERNATIVE DEFENDANTS IS NOT
APPLICABLE TO HEREIN DEFENDANTS-
RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to
respondent Sima Wei, the latter executed and delivered
to the former a promissory note, engaging to pay the
petitioner Bank or order the amount of P1,820,000.00 on
or before June 24, 1983 with interest at 32% per annum.
Sima Wei made partial payments on the note, leaving a
balance of P1,032,450.02. On November 18, 1983, Sima
Wei issued two crossed checks payable to petitioner
Bank drawn against China Banking Corporation, bearing
respectively the serial numbers 384934, for the amount of
P550,000.00 and 384935, for the amount of
P500,000.00. The said checks were allegedly issued in
full settlement of the drawer's account evidenced by the
promissory note. These two checks were not delivered to
the petitioner-payee or to any of its authorized
representatives. For reasons not shown, these checks
came into the possession of respondent Lee Kian Huat,
who deposited the checks without the petitioner-payee's
indorsement (forged or otherwise) to the account of
respondent Plastic Corporation, at the Balintawak branch,
Caloocan City, of the Producers Bank. Cheng Uy, Branch
Manager of the Balintawak branch of Producers Bank,
relying on the assurance of respondent Samson Tung,
President of Plastic Corporation, that the transaction was
legal and regular, instructed the cashier of Producers
Bank to accept the checks for deposit and to credit them
to the account of said Plastic Corporation, inspite of the
fact that the checks were crossed and payable to
petitioner Bank and bore no indorsement of the latter.
Hence, petitioner filed the complaint as aforestated.
The main issue before Us is whether petitioner Bank has
a cause of action against any or all of the defendants, in
the alternative or otherwise.
A cause of action is defined as an act or omission of one
party in violation of the legal right or rights of another.
The essential elements are: (1) legal right of the plaintiff;
(2) correlative obligation of the defendant; and (3) an act
or omission of the defendant in violation of said legal
right.2
The normal parties to a check are the drawer, the payee
and the drawee bank. Courts have long recognized the
business custom of using printed checks where blanks
are provided for the date of issuance, the name of the
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.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-39641 February 28, 1983
METROPOL (BACOLOD) FINANCING & INVESTMENT
CORPORATION, plaintiff-appellee,
vs.
SAMBOK MOTORS COMPANY and NG SAMBOK
SONS MOTORS CO., LTD., defendants-appellants.
Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.
Diosdado Garingalao for defendants-appellants.
DE CASTRO, J.:
The former Court of Appeals, by its resolution dated
October 16, 1974 certified this case to this Court the
issue issued therein being one purely of law.
On April 15, 1969 Dr. Javier Villaruel executed a
promissory note in favor of Ng Sambok Sons Motors Co.,
Ltd., in the amount of P15,939.00 payable in twelve (12)
equal monthly installments, beginning May 18, 1969, with
interest at the rate of one percent per month. It is further
provided that in case on non-payment of any of the
installments, the total principal sum then remaining
unpaid shall become due and payable with an additional
interest equal to twenty-five percent of the total amount
due.
On the same date, Sambok Motors Company (hereinafter
referred to as Sambok), a sister company of Ng Sambok
Sons Motors Co., Ltd., and under the same management
as the former, negotiated and indorsed the note in favor
of plaintiff Metropol Financing & Investment Corporation
with the following indorsement:
Pay to the order of Metropol Bacolod
Financing & Investment Corporation with
 recourse. Notice of Demand; Dishonor; not deny its liability but contended that it could not be
Protest; and Presentment are hereby obliged to pay until after its co-defendant Dr. Villaruel has
waived. been declared insolvent.

SA During the pendency of the case in the trial court,

MB defendant Dr. Villaruel died, hence, on October 24, 1972
OK the lower court, on motion, dismissed the case against
M Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules
OT of Court. 1
OR
S On plaintiff's motion for summary judgment, the trial court
CO rendered its decision dated September 12, 1973, the
. dispositive portion of which reads as follows:
(B
AC WHEREFORE, judgment is rendered:
OL
OD (a) Ordering Sambok Motors Company to
) pay to the plaintiff the sum of P15,939.00
plus the legal rate of interest from October
By: 30, 1969;

RODOLFO G. NONILLO Asst. General (b) Ordering same defendant to pay to

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.
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:

Sambok failed to pay, so on November 26, 1969 plaintiff The trial court erred in not dismissing the
filed a complaint for collection of a sum of money before complaint by finding defendant appellant
the Court of First Instance of Iloilo, Branch I. Sambok did 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.
IV. HOLDERS
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
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.
SECOND DIVISION
[G.R. No. 138074. August 15, 2003]

CELY YANG, petitioner, vs. HON. COURT OF
APPEALS, PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, FAR EAST BANK &
TRUST CO., EQUITABLE BANKING CORPORATION,
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 Meanwhile, Yang requested FEBTC and Equitable to
and a Hang Seng Bank dollar draft for US$200,000.00 in stop payment on the instruments she believed to be lost.
exchange. Both banks complied with her request, but upon the
representation of PCIB, FEBTC subsequently lifted the
Chandiramani did not appear at the rendezvous and
stop payment order on FEBTC Dollar Draft No. 4771, thus
Ranigo allegedly lost the two cashiers checks and the
enabling the holder of PCIB FCDU Account No. 4195-
dollar draft bought by petitioner. Ranigo reported the
01165-2 to receive the amount of US$200,000.00.
alleged loss of the checks and the dollar draft to Liong at
half past four in the afternoon of December 22, 1987. On December 28, 1987, herein petitioner Yang lodged
Liong, in turn, informed Yang, and the loss was then a Complaint[4] for injunction and damages against
reported to the police. Equitable, Chandiramani, and David, with prayer for a
temporary restraining order, with the Regional Trial Court
It transpired, however, that the checks and the dollar
of Pasay City. The Complaint was docketed as Civil Case
draft were not lost, for Chandiramani was able to get hold
No. 5479. The Complaint was subsequently amended to
of said instruments, without delivering the exchange
include a prayer for Equitable to return to Yang the amount
consideration consisting of the PCIB managers check and
of P2.087 million, with interest thereon until fully paid.[5]
the Hang Seng Bank dollar draft.
On January 12, 1988, Yang filed a separate case for
At three oclock in the afternoon or some two (2) hours
injunction and damages, with prayer for a writ of
after Chandiramani and Ranigo were to meet in Makati
preliminary injunction against FEBTC, PCIB,
City, Chandiramani delivered to respondent Fernando
Chandiramani and David, with the RTC of Pasay City,
David at China Banking Corporation branch in San
docketed as Civil Case No. 5492. This complaint was later
Fernando City, Pampanga, the following: (a) FEBTC
amended to include a prayer that defendants therein return
Cashiers Check No. 287078, dated December 22, 1987,
to Yang the amount of P2.087 million, the value of FEBTC
in the sum of P2.087 million; and (b) Equitable Cashiers
Dollar Draft No. 4771, with interest at 18% annually until
Check No. CCPS 14-009467, dated December 22, 1987,
fully paid.[6]
also in the amount of P2.087 million. In exchange,
Chandiramani got US$360,000.00 from David, which On February 9, 1988, upon the filing of a bond by
Chandiramani deposited in the savings account of his wife, Yang, the trial court issued a writ of preliminary injunction
Pushpa Chandiramani; and his mother, Rani Reynandas, in Civil Case No. 5479. A writ of preliminary injunction was
who held FCDU Account No. 124 with the United Coconut subsequently issued in Civil Case No. 5492 also.
Planters Bank branch in Greenhills, San Juan, Metro
Meanwhile, herein respondent David moved for
Manila. Chandiramani also deposited FEBTC Dollar Draft
dismissal of the cases against him and for reconsideration
No. 4771, dated December 22, 1987, drawn upon the
of the Orders granting the writ of preliminary injunction, but
Chemical Bank, New York for US$200,000.00 in PCIB
these motions were denied. David then elevated the
FCDU Account No. 4195-01165-2 on the same date.
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.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 70145 November 13, 1986
MARCELO A. MESINA, petitioner,
vs.
THE HONORABLE INTERMEDIATE APPELLATE
COURT, HON. ARSENIO M. GONONG, in his capacity
as Judge of Regional Trial Court — Manila (Branch
VIII), JOSE GO, and ALBERT UY, respondents.
PARAS, J.:
This is an appeal by certiorari from the decision of the
then Intermediate Appellate Court (IAC for short), now
the Court of Appeals (CA) in AC-G.R. S.P. 04710, dated
Jan. 22, 1985, which dismissed the petition for certiorari
and prohibition filed by Marcelo A. Mesina against the
trial court in Civil Case No. 84-22515. Said case (an
Interpleader) was filed by Associated Bank against Jose
Go and Marcelo A. Mesina regarding their conflicting
claims over Associated Bank Cashier's Check No.
011302 for P800,000.00, dated December 29, 1983.
Briefly, the facts and statement of the case are as
follows:
Respondent Jose Go, on December 29, 1983, purchased
from Associated Bank Cashier's Check No. 011302 for
P800,000.00. Unfortunately, Jose Go left said check on
the top of the desk of the bank manager when he left the
bank. The bank manager entrusted the check for
safekeeping to a bank official, a certain Albert Uy, who
had then a visitor in the person of Alexander Lim. Uy had
to answer a phone call on a nearby telephone after which
he proceeded to the men's room. When he returned to
his desk, his visitor Lim was already gone. When Jose
Go inquired for his cashier's check from Albert Uy, the
check was not in his folder and nowhere to be found. The
latter advised Jose Go to go to the bank to accomplish a
"STOP PAYMENT" order, which suggestion Jose Go
immediately followed. He also executed an affidavit of
loss. Albert Uy went to the police to report the loss of the
check, pointing to the person of Alexander Lim as the one
who could shed light on it.
The records of the police show that Associated Bank
received the lost check for clearing on December 31,
1983, coming from Prudential Bank, Escolta Branch. The
check was immediately dishonored by Associated Bank
by sending it back to Prudential Bank, with the words
"Payment Stopped" stamped on it. However, the same
was again returned to Associated Bank on January 4,
1984 and for the second time it was dishonored. Several
days later, respondent Associated Bank received a letter,
dated January 9, 1984, from a certain Atty. Lorenzo
Navarro demanding payment on the cashier's check in
question, which was being held by his client. He however
refused to reveal the name of his client and threatened to
sue, if payment is not made. Respondent bank, in its
letter, dated January 20, 1984, replied saying the check
belonged to Jose Go who lost it in the bank and is laying
claim to it.
On February 1, 1984, police sent a letter to the Manager
of the Prudential Bank, Escolta Branch, requesting
assistance in Identifying the person who tried to encash
the check but said bank refused saying that it had to
protect its client's interest and the Identity could only be
revealed with the client's conformity. Unsure of what to
do on the matter, respondent Associated Bank on
February 2, 1984 filed an action for Interpleader naming
as respondent, Jose Go and one John Doe, Atty.
Navarro's then unnamed client. On even date,
respondent bank received summons and copy of the
complaint for damages of a certain Marcelo A. Mesina
from the Regional Trial Court (RTC) of Caloocan City
filed on January 23, 1984 bearing the number C-11139.
Respondent bank moved to amend its complaint, having
been notified for the first time of the name of Atty.
Navarro's client and substituted Marcelo A. Mesina for
John Doe. Simultaneously, respondent bank, thru
representative Albert Uy, informed Cpl. Gimao of the
Western Police District that the lost check of Jose Go is
in the possession of Marcelo Mesina, herein petitioner.
When Cpl. Gimao went to Marcelo Mesina to ask how he
came to possess the check, he said it was paid to him by
Alexander Lim in a "certain transaction" but refused to
elucidate further. An information for theft (Annex J) was
instituted against Alexander Lim and the corresponding
warrant for his arrest was issued (Annex 6-A) which up to
the date of the filing of this instant petition remains
unserved because of Alexander Lim's successful evation
thereof.
Meanwhile, Jose Go filed his answer on February 24,
1984 in the Interpleader Case and moved to participate
as intervenor in the complain for damages. Albert Uy filed
a motion of intervention and answer in the complaint for
Interpleader. On the Scheduled date of pretrial
conference inthe interpleader case, it was disclosed that
the "John Doe" impleaded as one of the defendants is
actually petitioner Marcelo A. Mesina. Petitioner instead
of filing his answer to the complaint in the interpleader
filed on May 17, 1984 an Omnibus Motion to Dismiss Ex
Abudante Cautela alleging lack of jurisdiction in view of
the absence of an order to litigate, failure to state a cause
of action and lack of personality to sue. Respondent bank
in the other civil case (CC-11139) for damages moved to
dismiss suit in view of the existence already of the
Interpleader case.
The trial court in the interpleader case issued an order
dated July 13, 1984, denying the motion to dismiss of
petitioner Mesina and ruling that respondent bank's
complaint sufficiently pleaded a cause of action for
itnerpleader. Petitioner filed his motion for
reconsideration which was denied by the trial court on
September 26, 1984. Upon motion for respondent Jose
Go dated October 31, 1984, respondent judge issued an
order on November 6, 1984, declaring petitioner in
default since his period to answer has already expirecd
and set the ex-parte presentation of respondent bank's
evidence on November 7, 1984.
Petitioner Mesina filed a petition for certioari with
preliminary injunction with IAC to set aside 1) order of
respondent court denying his omnibus Motion to Dismiss
2) order of 3) the order of default against him.
On January 22, 1985, IAC rendered its decision dimissing
the petition for certiorari. Petitioner Mesina filed his
Motion for Reconsideration which was also denied by the
same court in its resolution dated February 18, 1985.
Meanwhile, on same date (February 18, 1985), the trial
court in Civil Case #84-22515 (Interpleader) rendered a
decisio, the dispositive portion reading as follows:
WHEREFORE, in view of the foregoing,
judgment is hereby rendered ordering
plaintiff Associate Bank to replace Cashier's
Check No. 011302 in favor of Jose Go or its
cas equivalent with legal rate of itnerest
from date of complaint, and with costs of
suit against the latter.
SO ORDERED.
 On March 29, 1985, the trial court in Civil
Case No. C-11139, for damages, issued an
order, the pertinent portion of which states:
The records of this case show that on
August 20, 1984 proceedings in this case
was (were) ordered suspended because the
main issue in Civil Case No. 84-22515 and
in this instant case are the same which is:
who between Marcelo Mesina and Jose Go
is entitled to payment of Associated Bank's
Cashier's Check No. CC-011302? Said
issue having been resolved already in Civil
casde No. 84-22515, really this instant case
has become moot and academic.
WHEREFORE, in view of the foregoing, the
motion sholud be as it is hereby granted
and this case is ordered dismissed.
In view of the foregoing ruling no more
action should be taken on the "Motion For
Reconsideration (of the order admitting the
Intervention)" dated June 21, 1984 as well
as the Motion For Reconsideration dated
September 10, 1984.
SO ORDERED.
Petitioner now comes to Us, alleging that:
1. IAC erred in ruling that a cashier's check can be
countermanded even in the hands of a holder in due
course.
2. IAC erred in countenancing the filing and maintenance
of an interpleader suit by a party who had earlier been
sued on the same claim.
3. IAC erred in upholding the trial court's order declaring
petitioner as in default when there was no proper order
for him to plead in the interpleader complaint.
4. IAC went beyond the scope of its certiorari jurisdiction
by making findings of facts in advance of trial.
Petitioner now interposes the following prayer:
1. Reverse the decision of the IAC, dated January 22,
1985 and set aside the February 18, 1985 resolution
denying the Motion for Reconsideration.
2. Annul the orders of respondent Judge of RTC Manila
giving due course to the interpleader suit and declaring
petitioner in default.
Petitioner's allegations hold no water. Theories and
examples advanced by petitioner on causes and effects
of a cashier's check such as 1) it cannot be
countermanded in the hands of a holder in due course
and 2) a cashier's check is a bill of exchange drawn by
the bank against itself-are general principles which
cannot be aptly applied to the case at bar, without
considering other things. Petitioner failed to substantiate
his claim that he is a holder in due course and for
consideration or value as shown by the established facts
of the case. Admittedly, petitioner became the holder of
the cashier's check as endorsed by Alexander Lim who
stole the check. He refused to say how and why it was
passed to him. He had therefore notice of the defect of
his title over the check from the start. The holder of a
cashier's check who is not a holder in due course cannot
enforce such check against the issuing bank which
dishonors the same. If a payee of a cashier's check
obtained it from the issuing bank by fraud, or if there is
some other reason why the payee is not entitled to collect
the check, the respondent bank would, of course, have
the right to refuse payment of the check when presented
by the payee, since respondent bank was aware of the
facts surrounding the loss of the check in question.
Moreover, there is no similarity in the cases cited by
petitioner since respondent bank did not issue the
cashier's check in payment of its obligation. Jose Go
bought it from respondent bank for purposes of
transferring his funds from respondent bank to another
bank near his establishment realizing that carrying money
in this form is safer than if it were in cash. The check was
Jose Go's property when it was misplaced or stolen,
hence he stopped its payment. At the outset, respondent
bank knew it was Jose Go's check and no one else since
Go had not paid or indorsed it to anyone. The bank was
therefore liable to nobody on the check but Jose Go. The
bank had no intention to issue it to petitioner but only to
buyer Jose Go. When payment on it was therefore
stopped, respondent bank was not the one who did it but
Jose Go, the owner of the check. Respondent bank could
not be drawer and drawee for clearly, Jose Go owns the
money it represents and he is therefore the drawer and
the drawee in the same manner as if he has a current
account and he issued a check against it; and from the
moment said cashier's check was lost and/or stolen no
one outside of Jose Go can be termed a holder in due
course because Jose Go had not indorsed it in due
course. The check in question suffers from the infirmity of
not having been properly negotiated and for value by
respondent Jose Go who as already been said is the real
owner of said instrument.
In his second assignment of error, petitioner stubbornly
insists that there is no showing of conflicting claims and
interpleader is out of the question. There is enough
evidence to establish the contrary. Considering the
aforementioned facts and circumstances, respondent
bank merely took the necessary precaution not to make a
mistake as to whom to pay and therefore interpleader
was its proper remedy. It has been shown that the
interpleader suit was filed by respondent bank because
petitioner and Jose Go were both laying their claims on
the check, petitioner asking payment thereon and Jose
Go as the purchaser or owner. The allegation of
petitioner that respondent bank had effectively relieved
itself of its primary liability under the check by simply filing
a complaint for interpleader is belied by the willingness of
respondent bank to issue a certificate of time deposit in
the amount of P800,000 representing the cashier's check
in question in the name of the Clerk of Court of Manila to
be awarded to whoever wig be found by the court as
validly entitled to it. Said validity will depend on the
strength of the parties' respective rights and titles thereto.
Bank filed the interpleader suit not because petitioner
sued it but because petitioner is laying claim to the same
check that Go is claiming. On the very day that the bank
instituted the case in interpleader, it was not aware of any
suit for damages filed by petitioner against it as
supported by the fact that the interpleader case was first
entitled Associated Bank vs. Jose Go and John Doe, but
later on changed to Marcelo A. Mesina for John Doe
when his name became known to respondent bank.
In his third assignment of error, petitioner assails the then
respondent IAC in upholding the trial court's order
declaring petitioner in default when there was no proper
order for him to plead in the interpleader case. Again,
such contention is untenable. The trial court issued an
order, compelling petitioner and respondent Jose Go to
file their Answers setting forth their respective claims.
Subsequently, a Pre-Trial Conference was set with notice
to parties to submit position papers. Petitioner argues in
his memorandum that this order requiring petitioner to file
his answer was issued without jurisdiction alleging that
since he is presumably a holder in due course and for
value, how can he be compelled to litigate against Jose
Go who is not even a party to the check? Such argument
is trite and ridiculous if we have to consider that neither
his name or Jose Go's name appears on the check.
Following such line of argument, petitioner is not a party
to the check either and therefore has no valid claim to the
Check. Furthermore, the Order of the trial court requiring
the parties to file their answers is to all intents and
purposes an order to interplead, substantially and
essentially and therefore in compliance with the
provisions of Rule 63 of the Rules of Court. What else is
the purpose of a law suit but to litigate?
The records of the case show that respondent bank had
to resort to details in support of its action for Interpleader.
Before it resorted to Interpleader, respondent bank took
an precautionary and necessary measures to bring out
the truth. On the other hand, petitioner concealed the
circumstances known to him and now that private
respondent bank brought these circumstances out in
court (which eventually rendered its decision in the light
of these facts), petitioner charges it with "gratuitous
excursions into these non-issues." Respondent IAC
cannot rule on whether respondent RTC committed an
abuse of discretion or not, without being apprised of the
facts and reasons why respondent Associated Bank
instituted the Interpleader case. Both parties were given
an opportunity to present their sides. Petitioner chose to
withhold substantial facts. Respondents were not
forbidden to present their side-this is the purpose of the
Comment of respondent to the petition. IAC decided the
question by considering both the facts submitted by
petitioner and those given by respondents. IAC did not
act therefore beyond the scope of the remedy sought in
the petition.
WHEREFORE, finding that the instant petition is merely
dilatory, the same is hereby denied and the assailed
orders of the respondent court are hereby AFFIRMED in
toto.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Gutierrez, Jr.,
JJ., concur.
V. LIABILITY OF PARTIES
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 80599 September 15, 1989
ERNESTINA CRISOLOGO-JOSE, petitioner,
vs.
COURT OF APPEALS and RICARDO S. SANTOS, JR.
in his own behalf and as Vice-President for Sales of
Mover Enterprises, Inc., respondents.
Melquiades P. de Leon for petitioner.
Rogelio A. Ajes for private respondent.
REGALADO, J.:
Petitioner seeks the annulment of the decision 1 of
respondent Court of Appeals, promulgated on September
8, 1987, which reversed the decision of the trial
Court 2 dismissing the complaint for consignation filed by
therein plaintiff Ricardo S. Santos, Jr.
The parties are substantially agreed on the following facts
as found by both lower courts:
In 1980, plaintiff Ricardo S. Santos, Jr. was
the vice-president of Mover Enterprises,
Inc. in-charge of marketing and sales; and
the president of the said corporation was
Atty. Oscar Z. Benares. On April 30, 1980,
Atty. Benares, in accommodation of his
clients, the spouses Jaime and Clarita Ong,
issued Check No. 093553 drawn against
Traders Royal Bank, dated June 14, 1980,
in the amount of P45,000.00 (Exh- 'I')
payable to defendant Ernestina Crisologo-
Jose. Since the check was under the
account of Mover Enterprises, Inc., the
same was to be signed by its president,
Atty. Oscar Z. Benares, and the treasurer of
the said corporation. However, since at that
time, the treasurer of Mover Enterprises
was not available, Atty. Benares prevailed
upon the plaintiff, Ricardo S. Santos, Jr., to
sign the aforesaid chEck as an alternate
story. Plaintiff Ricardo S. Santos, Jr. did
sign the check.
It appears that the check (Exh. '1') was
issued to defendant Ernestina Crisologo-
Jose in consideration of the waiver or
quitclaim by said defendant over a certain
property which the Government Service
Insurance System (GSIS) agreed to sell to
the clients of Atty. Oscar Benares, the
spouses Jaime and Clarita Ong, with the
understanding that upon approval by the
GSIS of the compromise agreement with
the spouses Ong, the check will be
encashed accordingly. However, since the
compromise agreement was not approved
within the expected period of time, the
aforesaid check for P45,000.00 (Exh. '1')
was replaced by Atty. Benares with another
Traders Royal Bank cheek bearing No.
379299 dated August 10, 1980, in the same
amount of P45,000.00 (Exhs. 'A' and '2'),
also payable to the defendant Jose. This
replacement check was also signed by Atty.
Oscar Z. Benares and by the plaintiff
Ricardo S. Santos, Jr. When defendant
deposited this replacement check (Exhs. 'A'
and '2') with her account at Family Savings
Bank, Mayon Branch, it was dishonored for
insufficiency of funds. A subsequent
redepositing of the said check was likewise
dishonored by the bank for the same
reason. Hence, defendant through counsel
was constrained to file a criminal complaint
for violation of Batas Pambansa Blg. 22
with the Quezon City Fiscal's Office against
Atty. Oscar Z. Benares and plaintiff Ricardo
S. Santos, Jr. The investigating Assistant
City Fiscal, Alfonso Llamas, accordingly
filed an amended information with the court
charging both Oscar Benares and Ricardo
S. Santos, Jr., for violation of Batas
Pambansa Blg. 22 docketed as Criminal
Case No. Q-14867 of then Court of First
Instance of Rizal, Quezon City.
Meanwhile, during the preliminary
investigation of the criminal charge against
Benares and the plaintiff herein, before
Assistant City Fiscal Alfonso T. Llamas,
plaintiff Ricardo S. Santos, Jr. tendered
cashier's check No. CC 160152 for
P45,000.00 dated April 10, 1981 to the
defendant Ernestina Crisologo-Jose, the
complainant in that criminal case. The
defendant refused to receive the cashier's
check in payment of the dishonored check
in the amount of P45,000.00. Hence,
plaintiff encashed the aforesaid cashier's
check and subsequently deposited said
amount of P45,000.00 with the Clerk of
Court on August 14, 1981 (Exhs. 'D' and
'E'). Incidentally, the cashier's check
adverted to above was purchased by Atty.
Oscar Z. Benares and given to the plaintiff
herein to be applied in payment of the
dishonored check. 3
After trial, the court a quo, holding that it was "not
persuaded to believe that consignation referred to in
Article 1256 of the Civil Code is applicable to this case,"
rendered judgment dismissing plaintiff s complaint and
defendant's counterclaim. 4
As earlier stated, respondent court reversed and set
aside said judgment of dismissal and revived the
complaint for consignation, directing the trial court to give
due course thereto.
Hence, the instant petition, the assignment of errors
wherein are prefatorily stated and discussed seriatim.
1. Petitioner contends that respondent
Court of Appeals erred in holding that
private respondent, one of the signatories of
the check issued under the account of
Mover Enterprises, Inc., is an
accommodation party under the Negotiable
Instruments Law and a debtor of petitioner
to the extent of the amount of said check.
Petitioner avers that the accommodation party in this
case is Mover Enterprises, Inc. and not private
respondent who merely signed the check in question in a
representative capacity, that is, as vice-president of said
corporation, hence he is not liable thereon under the
Negotiable Instruments Law.
The pertinent provision of said law referred to provides:
Sec. 29. Liability of accommodation party
an accommodation party is one who has
signed the instrument as maker, drawer,
 acceptor, or indorser, without receiving
value therefor, and for the purpose of
lending his name to some other person.
Such a person is liable on the instrument to
a holder for value, notwithstanding such
holder, at the time of taking the instrument,
knew him to be only an accommodation
party.
Consequently, to be considered an accommodation
party, a person must (1) be a party to the instrument,
signing as maker, drawer, acceptor, or indorser, (2) not
receive value therefor, and (3) sign for the purpose of
lending his name for the credit of some other person.
Based on the foregoing requisites, it is not a valid
defense that the accommodation party did not receive
any valuable consideration when he executed the
instrument. From the standpoint of contract law, he differs
from the ordinary concept of a debtor therein in the sense
that he has not received any valuable consideration for
the instrument he signs. Nevertheless, he is liable to a
holder for value as if the contract was not for
accommodation 5 in whatever capacity such
accommodation party signed the instrument, whether
primarily or secondarily. Thus, it has been held that in
lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter. 6
Assuming arguendo that Mover Enterprises, Inc. is the
accommodation party in this case, as petitioner suggests,
the inevitable question is whether or not it may be held
liable on the accommodation instrument, that is, the
check issued in favor of herein petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments
Law which holds an accommodation party liable on the
instrument to a holder for value, although such holder at
the time of taking the instrument knew him to be only an
accommodation party, does not include nor apply to
corporations which are accommodation parties. 7 This is
because the issue or indorsement of negotiable paper by
a corporation without consideration and for the
accommodation of another is ultra vires. 8 Hence, one
who has taken the instrument with knowledge of the
accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party. If
the form of the instrument, or the nature of the
transaction, is such as to charge the indorsee with
knowledge that the issue or indorsement of the
instrument by the corporation is for the accommodation of
another, he cannot recover against the corporation
thereon. 9
By way of exception, an officer or agent of a corporation
shall have the power to execute or indorse a negotiable
paper in the name of the corporation for the
accommodation of a third person only if specifically
authorized to do so. 10 Corollarily, corporate officers, such
as the president and vice-president, have no power to
execute for mere accommodation a negotiable instrument
of the corporation for their individual debts or transactions
arising from or in relation to matters in which the
corporation has no legitimate concern. Since such
accommodation paper cannot thus be enforced against
the corporation, especially since it is not involved in any
aspect of the corporate business or operations, the
inescapable conclusion in law and in logic is that the
signatories thereof shall be personally liable therefor, as
well as the consequences arising from their acts in
connection therewith.
The instant case falls squarely within the purview of the
aforesaid decisional rules. If we indulge petitioner in her
aforesaid postulation, then she is effectively barred from
recovering from Mover Enterprises, Inc. the value of the
check. Be that as it may, petitioner is not without
recourse.
The fact that for lack of capacity the corporation is not
bound by an accommodation paper does not thereby
absolve, but should render personally liable, the
signatories of said instrument where the facts show that
the accommodation involved was for their personal
account, undertaking or purpose and the creditor was
aware thereof.
Petitioner, as hereinbefore explained, was evidently
charged with the knowledge that the cheek was issued at
the instance and for the personal account of Atty.
Benares who merely prevailed upon respondent Santos
to act as co-signatory in accordance with the
arrangement of the corporation with its depository bank.
That it was a personal undertaking of said corporate
officers was apparent to petitioner by reason of her
personal involvement in the financial arrangement and
the fact that, while it was the corporation's check which
was issued to her for the amount involved, she actually
had no transaction directly with said corporation.
There should be no legal obstacle, therefore, to
petitioner's claims being directed personally against Atty.
Oscar Z. Benares and respondent Ricardo S. Santos, Jr.,
president and vice-president, respectively, of Mover
Enterprises, Inc.
2. On her second assignment of error,
petitioner argues that the Court of Appeals
erred in holding that the consignation of the
sum of P45,000.00, made by private
respondent after his tender of payment was
refused by petitioner, was proper under
Article 1256 of the Civil Code.
Petitioner's submission is that no creditor-debtor
relationship exists between the parties, hence
consignation is not proper. Concomitantly, this argument
was premised on the assumption that private respondent
Santos is not an accommodation party.
As previously discussed, however, respondent Santos is
an accommodation party and is, therefore, liable for the
value of the check. The fact that he was only a co-
signatory does not detract from his personal liability. A
co-maker or co-drawer under the circumstances in this
case is as much an accommodation party as the other
co-signatory or, for that matter, as a lone signatory in an
accommodation instrument. Under the doctrine
in Philippine Bank of Commerce vs. Aruego, supra, he is
in effect a co-surety for the accommodated party with
whom he and his co-signatory, as the other co-surety,
assume solidary liability ex lege for the debt involved.
With the dishonor of the check, there was created a
debtor-creditor relationship, as between Atty. Benares
and respondent Santos, on the one hand, and petitioner,
on the other. This circumstance enables respondent
Santos to resort to an action of consignation where his
tender of payment had been refused by petitioner.
We interpose the caveat, however, that by holding that
the remedy of consignation is proper under the given
circumstances, we do not thereby rule that all the
operative facts for consignation which would produce the
effect of payment are present in this case. Those are
factual issues that are not clear in the records before us
and which are for the Regional Trial Court of Quezon City
to ascertain in Civil Case No. Q-33160, for which reason
it has advisedly been directed by respondent court to give
due course to the complaint for consignation, and which
would be subject to such issues or claims as may be
raised by defendant and the counterclaim filed therein
which is hereby ordered similarly revived.
3. That respondent court virtually prejudged
Criminal Case No. Q-14687 of the Regional
Trial Court of Quezon City filed against
private respondent for violation of Batas
Pambansa Blg. 22, by holding that no
criminal liability had yet attached to private
respondent when he deposited with the
court the amount of P45,000.00 is the final
plaint of petitioner.
We sustain petitioner on this score.
Indeed, respondent court went beyond the ratiocination
called for in the appeal to it in CA-G.R. CV. No. 05464. In
its own decision therein, it declared that "(t)he lone issue
dwells in the question of whether an accommodation
party can validly consign the amount of the debt due with
the court after his tender of payment was refused by the
creditor." Yet, from the commercial and civil law aspects
determinative of said issue, it digressed into the merits of
the aforesaid Criminal Case No. Q-14867, thus:
Section 2 of B.P. 22 establishes the prima
facie evidence of knowledge of such
insufficiency of funds or credit. Thus, the
making, drawing and issuance of a check,
payment of which is refused by the drawee
because of insufficient funds in or credit
with such bank is prima facie evidence of
knowledge of insufficiency of funds or
credit, when the check is presented within
90 days from the date of the check.
It will be noted that the last part of Section 2
of B.P. 22 provides that the element of
knowledge of insufficiency of funds or credit
is not present and, therefore, the crime
does not exist, when the drawer pays the
holder the amount due or makes
arrangements for payment in full by the
drawee of such check within five (5)
banking days after receiving notice that
such check has not been paid by the
drawee.
Based on the foregoing consideration, this
Court finds that the plaintiff-appellant acted
within Ms legal rights when he consigned
the amount of P45,000.00 on August 14,
1981, between August 7, 1981, the date
when plaintiff-appellant receive (sic) the
notice of non-payment, and August 14,
1981, the date when the debt due was
deposited with the Clerk of Court (a
Saturday and a Sunday which are not
banking days) intervened. The fifth banking
day fell on August 14, 1981. Hence, no
criminal liability has yet attached to plaintiff-
 appellant when he deposited the amount of
P45,000.00 with the Court a quo on August
14, 1981. 11
That said observations made in the civil case at bar and
the intrusion into the merits of the criminal case pending
in another court are improper do not have to be
belabored. In the latter case, the criminal trial court has to
grapple with such factual issues as, for instance, whether
or not the period of five banking days had expired, in the
process determining whether notice of dishonor should
be reckoned from any prior notice if any has been given
or from receipt by private respondents of the subpoena
therein with supporting affidavits, if any, or from the first
day of actual preliminary investigation; and whether there
was a justification for not making the requisite
arrangements for payment in full of such check by the
drawee bank within the said period. These are matters
alien to the present controversy on tender and
consignation of payment, where no such period and its
legal effects are involved.
These are aside from the considerations that the disputed
period involved in the criminal case is only a presumptive
rule, juris tantum at that, to determine whether or not
there was knowledge of insufficiency of funds in or credit
with the drawee bank; that payment of civil liability is not
a mode for extinguishment of criminal liability; and that
the requisite quantum of evidence in the two types of
cases are not the same.
To repeat, the foregoing matters are properly addressed
to the trial court in Criminal Case No. Q-14867, the
resolution of which should not be interfered with by
respondent Court of Appeals at the present posture of
said case, much less preempted by the inappropriate and
unnecessary holdings in the aforequoted portion of the
decision of said respondent court. Consequently, we
modify the decision of respondent court in CA-G.R. CV
No. 05464 by setting aside and declaring without force
and effect its pronouncements and findings insofar as the
merits of Criminal Case No. Q-14867 and the liability of
the accused therein are concerned.
WHEREFORE, subject to the aforesaid modifications, the
judgment of respondent Court of Appeals is AFFIRMED.
SO ORDERED.
Paras, Padilla and Sarmiento, JJ., concur.
Melencio-Herrera J., took no part.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-17845 April 27, 1967
INTESTATE ESTATE OF VICTOR SEVILLA. SIMEON
SADAYA, petitioner,
vs.
FRANCISCO SEVILLA, respondent.
Belen Law Offices for petitioner.
Poblador, Cruz & Nazareno for respondent.
SANCHEZ, J.:
On March 28, 1949, Victor Sevilla, Oscar Varona and
Simeon Sadaya executed, jointly and severally, in favor
of the Bank of the Philippine Islands, or its order, a
promissory note for P15,000.00 with interest at 8% per
annum, payable on demand. The entire, amount of
P15,000.00, proceeds of the promissory note, was
received from the bank by Oscar Varona alone. Victor
Sevilla and Simeon Sadaya signed the promissory note
as co-makers only as a favor to Oscar Varona. Payments
were made on account. As of June 15, 1950, the
outstanding balance stood P4,850.00. No payment
thereafter made.
On October 6, 1952, the bank collected from Sadaya the
foregoing balance which, together with interest, totalled
P5,416.12. Varona failed to reimburse Sadaya despite
repeated demands.
Victor Sevilla died. Intestate estate proceedings were
started in the Court of First Instance of Rizal, Special
Proceeding No. 1518. Francisco Sevilla was named
administrator.
In Special Proceeding No. 1518, Sadaya filed a creditor's
claim for the above sum of P5,746.12, plus attorneys fees
in the sum of P1,500.00. The administrator resisted the
claim upon the averment that the deceased Victor Sevilla
"did not receive any amount as consideration for the
promissory note," but signed it only "as surety for Oscar
Varona".
On June 5, 1957, the trial court issued an order admitting
the claim of Simeon Sadaya in the amount of P5,746.12,
and directing the administrator to pay the same from any
available funds belonging to the estate of the deceased
Victor Sevilla.
The motion to reconsider having been overruled, the
administrator appealed.1 The Court of Appeals, in a
decision promulgated on July, 15, 1960, voted to set
aside the order appealed from and to disapprove and
disallow "appellee's claim of P5,746.12 against the
intestate estate."
The case is now before this Court on certiorari to review
the judgment of the Court of Appeals.
Sadaya's brief here seeks reversal of the appellate
court's decision and prays that his claim "in the amount of
50% of P5,746.12, or P2,873.06, against the intestate
estate of the deceased Victor Sevilla," be approved.
1. That Victor Sevilla and Simeon Sadaya were joint and
several accommodation makers of the 15,000.00-peso
promissory note in favor of the Bank of the Philippine
Islands, need not be essayed. As such accommodation
the makers, the individual obligation of each of them to
the bank is no different from, and no greater and no less
than, that contract by Oscar Varona. For, while these two
did not receive value on the promissory note, they
executed the same with, and for the purpose of lending
their names to, Oscar Varona. Their liability to the bank
upon the explicit terms of the promissory note is joint and
several.2 Better yet, the bank could have pursued its right
to collect the unpaid balance against either Sevilla or
Sadaya. And the fact is that one of the last two, Simeon
Sadaya, paid that balance.
2. It is beyond debate that Simeon Sadaya could have
sought reimbursement of the total amount paid from
Oscar Varona. This is but right and just. Varona received
full value of the promissory note.3 Sadaya received
nothing therefrom. He paid the bank because he was a
joint and several obligor. The least that can be said is
that, as between Varona and Sadaya, there is an implied
contract of indemnity. And Varona is bound by the
obligation to reimburse Sadaya.4
3. The common creditor, the Bank of the Philippine
Islands, now out of the way, we first look into the relations
inter se amongst the three consigners of the promissory
note. Their relations vis-a-vis the Bank, we repeat, is that
of joint and several obligors. But can the same thing be
said about the relations of the three consigners, in
respect to each other?
Surely enough, as amongst the three, the obligation of
Varona and Sevilla to Sadaya who paid can not be joint
and several. For, indeed, had payment been made by
Oscar Varona, instead of Simeon Sadaya, Varona could
not have had reason to seek reimbursement from either
Sevilla or Sadaya, or both. After all, the proceeds of the
loan went to Varona and the other two received nothing
therefrom.
4. On principle, a solidary accommodation maker — who
made payment — has the right to contribution, from his
co-accommodation maker, in the absence of agreement
to the contrary between them, and subject to conditions
imposed by law. This right springs from an implied
promise between the accommodation makers to
share equally the burdens that may ensue from their
having consented to stamp their signatures on the
promissory note.5 For having lent their signatures to the
principal debtor, they clearly placed themselves — in so
far as payment made by one may create liability on the
other — in the category of mere joint grantors of the
former.6 This is as it should be. Not one of them benefited
by the promissory note. They stand on the same footing.
In misfortune, their burdens should be equally spread.
Manresa, commenting on Article 1844 of the Civil Code
of Spain,7 which is substantially reproduced in Article
20738of our Civil Code, on this point stated:
Otros, como Pothier, entienden que, si bien el
principio es evidente enestricto concepto juridico,
se han extremado sus consecuencias hasta el
punto de que estas son contrarias, no solo a la
logica, sino tambien a la equidad, que debe ser el
alma del Derecho, como ha dicho Laurent.
Esa accion — sostienen — no nace de la fianza,
pues, en efecto, el hecho de afianzar una misma
deuda no crea ningun vinculo juridico, ni ninguna
razon de obligar entre los fiadores, sino que trae,
por el contrario, su origen de una acto posterior,
cual es el pago de toda la deuda realizado por uno
de ellos, y la equdad, no permite que los denias
fiadores, que igualmente estaban estaban obligos
a dicho pago, se aprovenchen de ese acto en
perjuico del que lo realozo.
Lo cierto es que esa accion concedida al fiador
nace, si, del hecho del pago, pero es
consecuencia del beneficio o del derecho de
division, como tenemos ya dicho. En efecto, por
virtud de esta todos los cofiadores vienen
obligados a contribuir al pago de parte que a cada
 uno corresponde. De ese obligacion, contraida por
todos ellos, se libran los que no han pagado por
consecuencia del acto realizado por el que pago, y
si bien este no hizo mas que cumplir el deber que
el contracto de fianza le imponia de responder de
todo el debito cuando no limito su obligacion a
parte alguna del mismo, dicho acto redunda en
beneficio de los otros cofiadores los cuales se
aprovechan de el para quedar desligados de todo
compromiso con el acreedor.9
5. And now, to the requisites before one accommodation
maker can seek reimbursement from a co-
accommodation maker.
By Article 18 of the Civil Code in matters not covered by
the special laws, "their deficiency shall be supplied by the
provisions of this Code". Nothing extant in the Negotiable
Instruments Law would define the right of one
accommodation maker to seek reimbursement from
another. Perforce, we must go to the Civil
Code.1äwphï1.ñët
Because Sevilla and Sadaya, in themselves, are but co-
guarantors of Varona, their case comes within the ambit
of Article 2073 of the Civil Code which reads:
ART. 2073. When there are two or more
guarantors of the same debtor and for the same
debt, the one among them who has paid may
demand of each of the others the share which is
proportionally owing from him.
If any of the guarantors should be insolvent, his
share shall be borne by the others, including the
payer, in the same proportion.
The provisions of this article shall not be
applicable, unless the payment has been made in
virtue of a judicial demand or unless the principal
debtor is insolvent.10
As Mr. Justice Street puts it: "[T]hat article deals with the
situation which arises when one surety has paid the debt
to the creditor and is seeking contribution from his
cosureties."11
Not that the requirements in paragraph 3, Article 2073,
just quoted, are devoid of cogent reason. Says
Manresa:12
c) Requisitos para el ejercicio del derecho de
reintegro o de reembolso derivado de la
corresponsabilidad de los cofiadores.
— La tercera de las prescripciones que
comprende el articulo se refiere a los requisitos
que deben concurrir para que pueda tener lugar lo
dispuesto en el mismo. Ese derecho que concede
al fiador para reintegrarse directamente de los
fiadores de lo que pago por ellos en vez de dirigir
su reclamacion contra el deudor, es un beneficio
otorgado por la ley solo ell dos casos
determinados, cuya justificacion resulta
evidenciada desde luego; y esa limitacion este
debidamente aconsejada por una razon de
prudencia que no puede desconocerse, cual es la
de evitar que por la mera voluntad de uno de los
cofiadores pueda hacerse surgir la accion de
reintegro contra los demas en prejuicio de los
mismos.
El perjuicio que con tal motivo puede inferirse a
los cofiadores es bien notorio, pues teniendo en
primer termino el fiador que paga por el deudor el
derecho de indemnizacion contra este,
sancionado por el art. 1,838, es de todo punto
indudable que ejercitando esta accion pueden
quedar libres de toda responsabilidad los demas
cofiadores si, a consecuencia de ella, indemniza el
fiado a aquel en los terminos establecidos en el
expresado articulo. Por el contrario de prescindir
de dicho derecho el fiador, reclamando de los
confiadores en primer lugar el oportuno reintegro,
estos en tendrian mas remedio que satisfacer sus
ductares respectivas, repitiendo despues por ellas
contra el deudor con la imposicion de las
molestias y gastos consiguientes.
No es aventurado asegurar que si el fiador que
paga pudiera libremente utilizar uno u otro de
dichos derechos, el de indemnizacion por el
deudor y el del reintegro por los cofiadores,
indudablemente optaria siempre y en todo caso
por el segundo, puesto que mucha mas garantias
de solvencia y mucha mas seguridad del cobro ha
de encontrar en los fiadores que en el deudor; y
en la practica quedaria reducido el primero a la
indemnizacion por el deudor a los confiadores que
hubieran hecho el reintegro, obligando a estos, sin
excepcion alguna, a soportar siempre los gastos y
las molestias que anteriormente homos indicado.
Y para evitar estos perjuicios, la ley no ha podido
menos de reducir el ejercicio de ese derecho a los
casos en que absolutamente sea indispensable.13
6. All of the foregoing postulate the following rules: (1) A
joint and several accommodation maker of a negotiable
promissory note may demand from the principal debtor
reimbursement for the amount that he paid to the payee;
and (2) a joint and several accommodation maker who
pays on the said promissory note may directly demand
reimbursement from his co-accommodation maker
without first directing his action against the principal
debtor provided that (a) he made the payment by virtue of
a judicial demand, or (b) a principal debtor is insolvent.
The Court of Appeals found that Sadaya's payment to the
bank "was made voluntarily and without any judicial
demand," and that "there is an absolute absence of
evidence showing that Varona is insolvent". This
combination of fact and lack of fact epitomizes the fatal
distance between payment by Sadaya and Sadaya's right
to demand of Sevilla "the share which is proportionately
owing from him."
For the reasons given, the judgment of the Court of
Appeals under review is hereby affirmed. No costs. So
ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala,
Makalintal, Bengzon, J.P., Zaldivar and Castro, JJ.,
concur.
Republic of the Philippines
SUPREME COURT
Manila
 THIRD DIVISION
G.R. No. L-56169 June 26, 1992
TRAVEL-ON, INC., petitioner,
vs.
COURT OF APPEALS and ARTURO S.
MIRANDA, respondents.
RESOLUTION
FELICIANO, J.:
Petitioner Travel-On. Inc. ("Travel-On") is a travel agency
selling airline tickets on commission basis for and in
behalf of different airline companies. Private respondent
Arturo S. Miranda had a revolving credit line with
petitioner. He procured tickets from petitioner on behalf of
airline passengers and derived commissions therefrom.
On 14 June 1972, Travel-On filed suit before the Court of
First Instance ("CFI") of Manila to collect on six (6)
checks issued by private respondent with a total face
amount of P115,000.00. The complaint, with a prayer for
the issuance of a writ of preliminary attachment and
attorney's fees, averred that from 5 August 1969 to 16
January 1970, petitioner sold and delivered various
airline tickets to respondent at a total price of
P278,201.57; that to settle said account, private
respondent paid various amounts in cash and in kind,
and thereafter issued six (6) postdated checks amounting
to P115,000.00 which were all dishonored by the drawee
banks. Travel-On further alleged that in March 1972,
private respondent made another payment of P10,000.00
reducing his indebtedness to P105,000.00. The writ of
attachment was granted by the court a quo.
In his answer, private respondent admitted having had
transactions with Travel-On during the period stipulated
in the complaint. Private respondent, however, claimed
that he had already fully paid and even overpaid his
obligations and that refunds were in fact due to him. He
argued that he had issued the postdated checks for
purposes of accommodation, as he had in the past
accorded similar favors to petitioner. During the
proceedings, private respondent contested several tickets
alleged to have been erroneously debited to his account.
He claimed reimbursement of his alleged over payments,
plus litigation expenses, and exemplary and moral
damages by reason of the allegedly improper attachment
of his properties.
In support of his theory that the checks were issued for
accommodation, private respondent testified that he bad
issued the checks in the name of Travel-On in order that
its General Manager, Elita Montilla, could show to Travel-
On's Board of Directors that the accounts receivable of
the company were still good. He further stated that Elita
Montilla tried to encash the same, but that these were
dishonored and were subsequently returned to him after
the accommodation purpose had been attained.
Travel-On's witness, Elita Montilla, on the other hand
explained that the "accommodation" extended to Travel-
On by private respondent related to situations where one
or more of its passengers needed money in Hongkong,
and upon request of Travel-On respondent would contact
his friends in Hongkong to advance Hongkong money to
the passenger. The passenger then paid Travel-On upon
his return to Manila and which payment would be credited
by Travel-On to respondent's running account with it.
In its decision dated 31 January 1975, the court a
quo ordered Travel-On to pay private respondent the
amount of P8,894.91 representing net overpayments by
private respondent, moral damages of P10,000.00 for the
wrongful issuance of the writ of attachment and for the
filing of this case, P5,000.00 for attorney's fees and the
costs of the suit.
The trial court ruled that private respondent's
indebtedness to petitioner was not satisfactorily
established and that the postdated checks were issued
not for the purpose of encashment to pay his
indebtedness but to accommodate the General Manager
of Travel-On to enable her to show to the Board of
Directors that Travel-On was financially stable.
Petitioner filed a motion for reconsideration that was,
however, denied by the trial court, which in fact then
increased the award of moral damages to P50,000.00.
On appeal, the Court of Appeals affirmed the decision of
the trial court, but reduced the award of moral damages
to P20,000.00, with interest at the legal rate from the date
of the filing of the Answer on 28 August 1972.
Petitioner moved for reconsideration of the Court of
Appeal's' decision, without success.
In the instant Petition for Review, it is urged that the
postdated checks are per se evidence of liability on the
part of private respondent. Petitioner further argues that
even assuming that the checks were for accommodation,
private respondent is still liable thereunder considering
that petitioner is a holder for value.
Both the trial and appellate courts had rejected the
checks as evidence of indebtedness on the ground that
the various statements of account prepared by petitioner
did not show that Private respondent had an outstanding
balance of P115,000.00 which is the total amount of the
checks he issued. It was pointed out that while the
various exhibits of petitioner showed various
accountabilities of private respondent, they did not
satisfactorily establish the amount of the outstanding
indebtedness of private respondent. The appellate court
made much of the fact that the figures representing
private respondent's unpaid accounts found in the
"Schedule of Outstanding Account" dated 31 January
1970 did not tally with the figures found in the statement
which showed private respondent's transactions with
petitioner for the years 1969 and 1970; that there was no
satisfactory explanation as to why the total outstanding
amount of P278,432.74 was still used as basis in the
accounting of 7 April 1972 considering that according to
the table of transactions for the year 1969 and 1970, the
total unpaid account of private respondent amounted
to P239,794.57.
We have, however, examined the record and it shows
that the 7 April 1972 Statement of Account had simply not
been updated; that if we use as basis the figure as of 31
January 1970 which is P278,432.74 and from it deduct
P38,638.17 which represents some of the payments
subsequently made by private respondent, the figure —
P239,794.57 will be obtained.
Also, the fact alone that the various statements of
account had variances in figures, simply did not mean
that private respondent had no more financial obligations
to petitioner. It must be stressed that private respondent's
account with petitioner was a running or open one, which
explains the varying figures in each of the statements
rendered as of a given date.
The appellate court erred in considering only the
statements of account in determining whether private
respondent was indebted to petitioner under the checks.
By doing so, it failed to give due importance to the most
telling piece of evidence of private respondent's
indebtedness — the checks themselves which he had
issued.
Contrary to the view held by the Court of Appeals, this
Court finds that the checks are the all important evidence
of petitioner's case; that these checks clearly established
private respondent's indebtedness to petitioner; that
private respondent was liable thereunder.
It is important to stress that a check which is regular on
its face is deemed prima facie to have been issued for a
valuable consideration and every person whose signature
appears thereon is deemed to have become a party
thereto for value. 1 Thus, the mere introduction of the
instrument sued on in evidence prima facie entitles the
plaintiff to recovery. Further, the rule is quite settled that a
negotiable instrument is presumed to have been given or
indorsed for a sufficient consideration unless otherwise
contradicted and overcome by other competent
evidence. 2
In the case at bar, the Court of Appeals, contrary to these
established rules, placed the burden of proving the
existence of valuable consideration upon petitioner. This
cannot be countenanced; it was up to private respondent
to show that he had indeed issued the checks without
sufficient consideration. The Court considers that Private
respondent was unable to rebut satisfactorily this legal
presumption. It must also be noted that those checks
were issued immediately after a letter demanding
payment had been sent to private respondent by
petitioner Travel-On.
The fact that all the checks issued by private respondent
to petitioner were presented for payment by the latter
would lead to no other conclusion than that these checks
were intended for encashment. There is nothing in the
checks themselves (or in any other document for that
matter) that states otherwise.
We are unable to accept the Court of Appeals' conclusion
that the checks here involved were issued for
"accommodation" and that accordingly private
respondent maker of those checks was not liable thereon
to petitioner payee of those checks.
In the first place, while the Negotiable Instruments Law
does refer to accommodation transactions, no such
transaction was here shown. Section 29 of the Negotiable
Instruments Law provides as follows:
Sec. 29. Liability of accommodation party.
— An accommodation party is one who has
signed the instrument as maker, drawer,
acceptor, or indorser, without receiving
value therefor, and for the purpose of
 lending his name to some other person.
Such a person is liable on the instrument to
a holder for value, notwithstanding such
holder, at the time of taking the instrument,
knew him to be only an accommodation
party.
In accommodation transactions recognized by the
Negotiable Instruments Law, an accommodating
party lends his credit to the accommodated party,
by issuing or indorsing a check which is held by a
payee or indorsee as a holder in due course, who
gave full value therefor to the accommodated
party. The latter, in other words, receives or
realizes full value which the accommodated party
then must repay to the accommodating party,
unless of course the accommodating party
intended to make a donation to the accommodated
party. But the accommodating party is bound on
the check to the holder in due course who is
necessarily a third party and is not the
accommodated party. Having issued or indorsed
the check, the accommodating party has
warranted to the holder in due course that he will
pay the same according to its tenor. 3
In the case at bar, Travel-On was payee of all six (6)
checks, it presented these checks for payment at the
drawee bank but the checks bounced. Travel-On
obviously was not an accommodated party; it realized no
value on the checks which bounced.
Travel-On was entitled to the benefit of the statutory
presumption that it was a holder in due course, 4 that the
checks were supported by valuable
consideration. 5 Private respondent maker of the checks
did not successfully rebut these presumptions. The only
evidence aliunde that private respondent offered was his
own self-serving uncorroborated testimony. He claimed
that he had issued the checks to Travel-On as payee to
"accommodate" its General Manager who allegedly
wished to show those checks to the Board of Directors of
Travel-On to "prove" that Travel-On's account receivables
were somehow "still good." It will be seen that this claim
was in fact a claim that the checks were merely
simulated, that private respondent did not intend to bind
himself thereon. Only evidence of the clearest and most
convincing kind will suffice for that purpose; 6 no such
evidence was submitted by private respondent. The
latter's explanation was denied by Travel-On's General
Manager; that explanation, in any case, appears merely
contrived and quite hollow to us. Upon the other hand,
the "accommodation" or assistance extended to Travel-
On's passengers abroad as testified by petitioner's
General Manager involved, not the accommodation
transactions recognized by the NIL, but rather the
circumvention of then existing foreign exchange
regulations by passengers booked by Travel-On, which
incidentally involved receipt of full consideration by
private respondent.
Thus, we believe and so hold that private respondent
must be held liable on the six (6) checks here involved.
Those checks in themselves constituted evidence of
indebtedness of private respondent, evidence not
successfully overturned or rebutted by private
respondent.
Since the checks constitute the best evidence of private
respondent's liability to petitioner Travel-On, the amount
of such liability is the face amount of the checks, reduced
only by the P10,000.00 which Travel-On admitted in its
complaint to have been paid by private respondent
sometime in March 1992.
The award of moral damages to Private respondent must
be set aside, for the reason that Petitioner's application
for the writ of attachment rested on sufficient basis and
no bad faith was shown on the part of Travel-On. If
anyone was in bad faith, it was private respondent who
issued bad checks and then pretended to have
"accommodated" petitioner's General Manager by
assisting her in a supposed scheme to deceive
petitioner's Board of Directors and to misrepresent
Travel-On's financial condition.
ACCORDINGLY, the Court Resolved to GRANT due
course to the Petition for Review on Certiorari and to
REVERSE and SET ASIDE the Decision dated 22
October 1980 and the Resolution of 23 January 1981 of
the Court of Appeals, as well as the Decision dated 31
January 1975 of the trial court, and to enter a new
decision requiring private respondent Arturo S. Miranda
to pay to petitioner Travel-On the amount of P105,000.00
with legal interest thereon from 14 June 1972, plus ten
percent (10%) of the total amount due as attorney's fees.
Costs against Private respondent.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.
SECOND DIVISION
[G.R. No. 117660. December 18, 2000]
AGRO CONGLOMERATES, INC. and MARIO
SORIANO, petitioners, vs. THE HON. COURT
OF APPEALS and REGENT SAVINGS and LOAN
BANK, INC., respondents.
DECISION
QUISUMBING, J.:
This is a petition for review challenging the
decision[1] dated October 17, 1994 of the Court of Appeals
in CA-G.R. No. 32933, which affirmed in toto the judgment
of the Manila Regional Trial Court, Branch 27, in
consolidated Cases Nos. 86-37374, 86-37388, 86-37543.
This petition springs from three complaints for sums of
money filed by respondent bank against herein
petitioners. In the decision of the Court of Appeals,
petitioners were ordered to pay respondent bank, as
follows:
Wherefore, judgment is hereby rendered in favor of
plaintiff and against defendants, as follows:
1) In Civil Case No. 86-37374, defendants
[petitioners, herein] are ordered jointly and
severally, to pay to plaintiff the amount of
P78,212.29, together with interest and service
charge thereon, at the rates of 14% and 3% per
annum, respectively, computed from
November 10, 1982, until fully paid, plus
stipulated penalty on unpaid principal at the
rate of 6% per annum, computed from
November 10, 1982, plus 15% as liquidated
damage plus 10% of the total amount due, as
attorneys fees, plus costs;
 2) In Civil Case No. 86-37388, defendant is
ordered to pay plaintiff the amount of
P632,911.39, together with interest and service
charge thereon at the rate of 14% and 3% per
annum, respectively, computed from January
15, 1983, until fully paid, plus stipulated penalty
on unpaid principal at the rate of 6% per
annum, computed from January 15, 1983, plus
liquidated damages equivalent to 15% of the
total amount due, plus attorneys fees
equivalent to 10% of the total amount due, plus
costs; and
3) In Civil Case No. 86-37543, defendant is
ordered to pay plaintiff, on the first cause of
action, the amount of P510,000.00, together
with interest and service charge thereon, at the
rates of 14% and 2% per annum, respectively,
computed from March 13, 1983, until fully paid,
plus a penalty of 6% per annum, based on the
outstanding principal of the loan, computed
from March 13, 1983, until fully paid; and on the
second cause of action, the amount of
P494,936.71, together with interest and service
charge thereon at the rates of 14% and 2%, per
annum, respectively, computed from March 30,
1983, until fully paid, plus a penalty charge of
6% per annum, based on the unpaid principal,
computed from March 30, 1983, until fully paid,
plus (on both causes of action) an amount
equal to 15% of the total amounts due, as
liquidated damages, plus attorneys fees equal
to 10% of the total amounts due, plus costs.[2]
Based on the records, the following are the factual
antecedents.
On July 17, 1982, petitioner Agro Conglomerates, Inc.
as vendor, sold two parcels of land to Wonderland Food
Industries, Inc. In their Memorandum of Agreement,[3] the
parties covenanted that the purchase price of Five Million
(P5,000,000.00) Pesos would be settled by the vendee,
under the following terms and conditions: (1) One Million
(P1,000,000.00) Pesos shall be paid in cash upon the
signing of the agreement; (2) Two Million (P2,000,000.00)
Pesos worth of common shares of stock of the
Wonderland Food Industries, Inc.; and (3) The balance of
P2,000,000.00 shall be paid in four equal installments, the
first installment falling due, 180 days after the signing of
the agreement and every six months thereafter, with an
interest rate of 18% per annum, to be advanced by the
vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the
respondent bank Regent Savings & Loan Bank (formerly
Summa Savings & Loan Association), executed an
Addendum[4]to the previous Memorandum
of Agreement. The new arrangement pertained to the
revision of settlement of the initial payments of
P1,000,000.00 and prepaid interest of P360,000.00 (18%
of P2,000,000.00) as follows:
Whereas, the parties have agreed to qualify the
stipulated terms for the payment of the said ONE
MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00) PESOS.
WHEREFORE, in consideration of the mutual covenant
and agreement of the parties, they do further covenant
and agree as follows:
1. That the VENDEE instead of paying the amount
of ONE MILLION THREE HUNDRED SIXTY
 THOUSAND (P1,360,000.00) PESOS in cash, Consequently, petitioner Mario Soriano signed as
hereby authorizes the VENDOR to obtain a maker several promissory notes,[6] payable to the
loan from Summa Savings and Loan respondent bank. Thereafter, the bank released the
Association with office address at Valenzuela, proceeds of the loan to petitioners. However, petitioners
Metro Manila, being represented herein by its failed to meet their obligations as they fell due. During that
President, Mr. Jaime Cario and referred to time, the bank was experiencing financial turmoil and was
hereafter as Financier; in the amount of ONE under the supervision of the Central Bank. Central Bank
MILLION THREE HUNDRED SIXTY examiner and liquidator Cordula de Jesus, endorsed the
THOUSAND (P1,360,000.00)PESOS, plus subject promissory notes to the banks counsel for
interest thereon at such rate as the VENDEE collection. The bank gave petitioners opportunity to settle
and the Financier may agree, which amount their account by extending payment due dates. Mario
shall cover the ONE MILLION (P1,000,000.00) Soriano manifested his intention to re-structure the loan,
PESOS cash which was agreed to be paid yet did not show up nor submit his formal written request.
upon signing of the Memorandum of
Respondent bank filed three separate complaints
Agreement, plus 18% interest on the balance of
before the Regional Trial Court of Manila for Collection of
two million pesos stipulated upon in Item No.
Sums of money. The corresponding case histories are
1(c) of the said agreement; provided however,
illustrated in the table below:
that said loan shall be made for and in the name
of the VENDOR. Date of Amount Payment Payment
2. The VENDEE also agrees that the full amount Loan Due Extension
of ONE MILLION THREE HUNDRED SIXTY Date Dates
THOUSAND (P1,360,000.00) PESOS be paid Civil Case
directly to the VENDOR; however, the 86-37374 P78,212.29 Nov. 10, Feb. 8,
VENDEE hereby undertakes to pay the full August 12, 1982 1983
amount of the said loan to the Financier on such 1982 May 9,
terms and conditions agreed upon by the 1983
Financier and the VENDOR, it being Aug. 7,
understood that while the loan will be secured 1983
from and in the name of the VENDOR, the
VENDEE will be the one liable to pay the entire Civil Case
proceeds thereof including interest and other 86-37388 P632,911.39 Jan. 15, May 16,
charges.[5] July 19, 1983 1983
1982 Aug. 14,
This addendum was not notarized. 1983
Civil Case
86-37543 P510,000.00 March June 11,
September 13, 1983 1983
14, 1982 Sept. 9,
P494,936.71 1983
March
October 1, 30, 1983 June 28,
1982 1983
Sept. 26,
1983
In their answer, petitioners interposed the defense of
novation and insisted there was a valid substitution of
debtor. They alleged that the addendum specifically
states that although the promissory notes were in their
names, Wonderland shall be responsible for the payment
thereof.
The trial court held that petitioners are liable, to wit:
The evidences, however, disclose that Wonderland did
not comply with its obligation under said Addendum (Exh.
S) as the agreement to turn over the farmland to it, did
not materialize (57 tsn, May 29, 1990), and there was,
actually no sale of the land (58 tsn, ibid). Hence,
Wonderland is not answerable. And since the loans
obtained under the four promissory notes (Exhs. A, C, G,
and E) have not been paid, despite opportunities given by
plaintiff to defendants to make payments, it stands to
reason that defendants are liable to pay their obligations
thereunder to plaintiff. In fact, defendants failed to file a
third-party complaint against Wonderland, which shows
the weakness of its stand that Wonderland is answerable
to make said payments.[7]
Petitioners appealed to the Court of Appeals. The trial
courts decision was affirmed by the appellate court.
Hence, this recourse, wherein petitioners raise the
sole issue of:
WHETHER THE COURT OF APPEALS ERRED IN NOT
FINDING THAT THE ADDENDUM, SIGNED BY THE
PETITIONERS, RESPONDENT BANK AND
WONDERLAND INC., CONSTITUTES A NOVATION OF
THE CONTRACT BY SUBSTITUTION OF DEBTOR,
WHICH EXEMPTS THE PETITIONERS FROM ANY
LIABILITY OVER THE PROMISSORY NOTES.
Revealed by the facts on record, the conflict among
the parties started from a contract of sale of a farmland
between petitioners and Wonderland Food Industries,
Inc. As found by the trial court, no such sale materialized.
A contract of sale is a reciprocal transaction. The
obligation or promise of each party is the cause or
consideration for the obligation or promise by the
other. The vendee is obliged to pay the price, while the
vendor must deliver actual possession of the land. In the
instant case the original plan was that the initial payments
would be paid in cash. Subsequently, the parties (with the
participation of respondent bank) executed an addendum
providing instead, that the petitioners would secure a loan
in the name of Agro Conglomerates Inc. for the total
amount of the initial payments, while the settlement of said
loan would be assumed by Wonderland. Thereafter,
petitioner Soriano signed several promissory notes and
received the proceeds in behalf of petitioner-company.
By this time, we note a subsidiary contract of
suretyship had taken effect since petitioners signed the
promissory notes as maker and accommodation party for
the benefit of Wonderland. Petitioners became liable as
accommodation party. An accommodation party is a
person who has signed the instrument as maker, acceptor, 2) There must be an agreement of the parties
or indorser, without receiving value therefor, and for the concerned to a new contract;
purpose of lending his name to some other person and is
3) There must be the extinguishment of the old
liable on the instrument to a holder for value,
contract; and
notwithstanding such holder at the time of taking the
instrument knew (the signatory) to be an accommodation 4) There must be the validity of the new contract.
party.[8] He has the right, after paying the holder, to obtain
In the instant case, the first requisite for a valid
reimbursement from the party accommodated, since the
novation is lacking. There was no novation by substitution
relation between them has in effect become one of
principal and surety, the accommodation party being the of debtor because there was no prior obligation which was
surety.[9] Suretyship is defined as the relation which exists substituted by a new contract. It will be noted that the
promissory notes, which bound the petitioners to pay, were
where one person has undertaken an obligation and
executed after the addendum. The addendum modified
another person is also under the obligation or other duty to
the contract of sale, not the stipulations in the promissory
the obligee, who is entitled to but one performance, and as
notes which pertain to the surety contract. At this instance,
between the two who are bound, one rather than the other
Wonderland apparently assured the payment of future
should perform.[10] The suretys liability to the creditor or
debts to be incurred by the petitioners.Consequently, only
promisee of the principal is said to be direct, primary and
a contract of surety arose. It was wrong for petitioners to
absolute; in other words, he is directly and equally bound
presume a novation had taken place. The well-settled rule
with the principal.[11] And the creditor may proceed against
is that novation is never presumed,[15] it must be clearly
any one of the solidary debtors.[12]
and unequivocally shown.[16]
We do not give credence to petitioners assertion that,
As it turned out, the contract of surety between
as provided by the addendum, their obligation to pay the
Wonderland and the petitioners was extinguished by the
promissory notes was novated by substitution of a new
rescission of the contract of sale of the farmland. With the
debtor, Wonderland. Contrary to petitioners contention,
rescission, there was confusion or merger in the persons
the attendant facts herein do not make a case of novation.
of the principal obligor and the surety, namely the
Novation is the extinguishment of an obligation by the petitioners herein. The addendum which was dependent
substitution or change of the obligation by a subsequent thereon likewise lost its efficacy.
one which extinguishes or modifies the first, either by
changing the object or principal conditions, or by It is true that the basic and fundamental rule in the
substituting another in place of the debtor, or by interpretation of contract is that, if the terms thereof are
clear and leave no doubt as to the intention of the
subrogating a third person in the rights of the creditor.[13] In
contracting parties, the literal meaning shall
order that a novation can take place, the concurrence of
control. However, in order to judge the intention of the
the following requisites[14] are indispensable:
parties, their contemporaneous and subsequent acts
1) There must be a previous valid obligation; should be considered.[17]
 The contract of sale between Wonderland and G.R. No. 156294 November 29, 2006
petitioners did not materialize. But it was admitted that
petitioners received the proceeds of the promissory notes MELVA THERESA ALVIAR GONZALES, Petitioner,
obtained from respondent bank. vs.
RIZAL COMMERCIAL BANKING
Sec. 22 of the Civil Code provides:
CORPORATION, Respondent.
Every person who through an act of performance by
DECISION
another, or any other means, acquires or comes into
possession of something at the expense of the latter
GARCIA, J.:
without just or legal ground, shall return the same to him.
An action for a sum of money originating from the
Petitioners had no legal or just ground to retain the
Regional Trial Court (RTC) of Makati City, Branch 61,
proceeds of the loan at the expense of private
thereat docketed as Civil Case No. 88-1502, was decided
respondent. Neither could petitioners excuse themselves
in favor of therein plaintiff, now respondent Rizal
and hold Wonderland still liable to pay the loan upon the
Commercial Banking Corporation (RCBC). On appeal to
rescission of their sales contract. If petitioners sustained
the Court of Appeals (CA) in CA-G.R. CV No. 48596, that
damages as a result of the rescission, they should have
court, in a decision1 dated August 30, 2002, affirmed the
impleaded Wonderland and asked damages. The non-
RTC minus the award of attorney’s fees. Upon the
inclusion of a necessary party does not prevent the court
instance of herein petitioner Melva Theresa Alviar
from proceeding in the action, and the judgment rendered
Gonzales, the case is now before this Court via this
therein shall be without prejudice to the rights of such
petition for review on certiorari, based on the following
necessary party.[18] But respondent appellate court did not
undisputed facts as unanimously found by the RTC and
err in holding that petitioners are duty-bound under the law
the CA, which the latter summarized as follows:
to pay the claims of respondent bank from whom they had
obtained the loan proceeds.
Gonzales was an employee of Rizal Commercial Banking
WHEREFORE, the petition is DENIED for lack of Corporation (or RCBC) as New Accounts Clerk in the
merit. The assailed decision of the Court of Appeals dated Retail Banking Department at its Head Office.
October 17, 1994 is AFFIRMED. Costs against petitioners.
A foreign check in the amount of $7,500 was drawn by
SO ORDERED.
Dr. Don Zapanta of the Ade Medical Group with address
Bellosillo, (Chairman), Mendoza, Buena, and De at 569 Western Avenue, Los Angeles, California, against
Leon, Jr., JJ., concur. the drawee bank Wilshire Center Bank, N.A., of Los
Angeles, California, U.S.A., and payable to Gonzales’
SECOND DIVISION mother, defendant Eva Alviar (or Alviar). Alviar then
endorsed this check. Since RCBC gives special
accommodations to its employees to receive the check’s
value without awaiting the clearing period, Gonzales
presented the foreign check to Olivia Gomez, the RCBC’s
Head of Retail Banking. After examining this, Olivia
Gomez requested Gonzales to endorse it which she did.
Olivia Gomez then acquiesced to the early encashment
of the check and signed the check but indicated thereon
her authority of "up to ₱17,500.00 only". Afterwards,
Olivia Gomez directed Gonzales to present the check to
RCBC employee Carlos Ramos and procure his
signature. After inspecting the check, Carlos Ramos also
signed it with an "ok" annotation. After getting the said
signatures Gonzales presented the check to Rolando
Zornosa, Supervisor of the Remittance section of the
Foreign Department of the RCBC Head Office, who after
scrutinizing the entries and signatures therein authorized
its encashment. Gonzales then received its peso
equivalent of ₱155,270.85.
RCBC then tried to collect the amount of the check with
the drawee bank by the latter through its correspondent
bank, the First Interstate Bank of California, on two
occasions dishonored the check because of "END.
IRREG" or irregular indorsement. Insisting, RCBC again
sent the check to the drawee bank, but this time the
check was returned due to "account closed". Unable to
collect, RCBC demanded from Gonzales the payment of
the peso equivalent of the check that she received.
Gonzales settled the matter by agreeing that payment be
made thru salary deduction. This temporary arrangement
for salary deductions was communicated by Gonzales to
RCBC through a letter dated November 27, 1987 xxx
xxx xxx xxx
The deductions was implemented starting October 1987.
On March 7, 1988 RCBC sent a demand letter to Alviar
for the payment of her obligation but this fell on deaf ears
as RCBC did not receive any response from Alviar.
Taking further action to collect, RCBC then conveyed the
matter to its counsel and on June 16, 1988, a letter was
sent to Gonzales reminding her of her liability as an
indorser of the subject check and that for her to avoid
litigation she has to fulfill her commitment to settle her
obligation as assured in her said letter. On July 1988
Gonzales resigned from RCBC. What had been deducted
from her salary was only ₱12,822.20 covering ten
months.
It was against the foregoing factual backdrop that RCBC
filed a complaint for a sum of money against Eva Alviar,
Melva Theresa Alviar-Gonzales and the latter’s husband
Gino Gonzales. The spouses Gonzales filed an Answer
with Counterclaim praying for the dismissal of the
complaint as well as payment of ₱10,822.20 as actual
damages, ₱20,000.00 as moral damages, ₱20,000.00 as
exemplary damages, and ₱20,000.00 as attorney’s fees
and litigation expenses. Defendant Eva Alviar, on the
other hand, was declared in default for having filed her
Answer out of time.
After trial, the RTC, in its three-page decision,2 held two
of the three defendants liable as follows:
WHEREFORE, premises above considered and plaintiff
having established its case against the defendants as
above stated, judgment is hereby rendered for plaintiff
and as against defendant EVA. P. ALVIAR as principal
debtor and defendants MELVA THERESA ALVIAR
GONZLAES as guarantor as follows:
 1. To pay plaintiff the amount of ₱142,648.65
(₱155,270.85 less the amount of ₱12,622.20, as
salary deduction of [Gonzales]), representing the
outstanding obligation of the defendants with
interest of 12% per annum starting February 1987
until fully paid;
2. To pay the amount of ₱40,000.00 as and for
attorney’s fees; and to
3. Pay the costs of this suit.
SO ORDERED.
On appeal, the CA, except for the award of attorney’s
fees, affirmed the RTC judgment.
Hence, this recourse by the petitioner on her submission
that the CA erred ̶
XXX IN FINDING [PETITIONER], AN
ACCOMMODATION PARTY TO A CHECK
SUBSEQUENTLY ENDORSED PARTIALLY,
LIABLE TO RCBC AS GUARANTOR;
XXX IN FINDING THAT THE SIGNATURE OF
GOMEZ, AN RCBC EMPLOYEE, DOES NOT
CONSTITUTE AS AN ENDORSEMENT BUT
ONLY AN INTER-BANK APPROVAL OF
SIGNATURE NECESSARY FOR THE
ENCASHMENT OF THE CHECK;
XXX IN NOT FINDING RCBC LIABLE ON THE
COUNTERCLAIMS OF [THE PETITIONER].
The recourse is impressed with merit.
The dollar-check3 in question in the amount of $7,500.00
drawn by Don Zapanta of Ade Medical Group (U.S.A.)
against a Los Angeles, California bank, Wilshire Center
Bank N.A., was dishonored because of "End. Irregular,"
i.e., an irregular endorsement. While the foreign drawee
bank did not specifically state which among the four
signatures found on the dorsal portion of the check made
the check irregularly endorsed, it is absolutely undeniable
that only the signature of Olivia Gomez, an RCBC
employee, was a qualified endorsement because of the
phrase "up to ₱17,500.00 only." There can be no other
acceptable explanation for the dishonor of the foreign
check than this signature of Olivia Gomez with the phrase
"up to ₱17,500.00 only" accompanying it. This Court
definitely agrees with the petitioner that the foreign
drawee bank would not have dishonored the check had it
not been for this signature of Gomez with the same
phrase written by her.
The foreign drawee bank, Wilshire Center Bank N.A.,
refused to pay the bearer of this dollar-check drawn by
Don Zapanta because of the defect introduced by RCBC,
through its employee, Olivia Gomez. It is, therefore, a
useless piece of paper if returned in that state to its
original payee, Eva Alviar.
There is no doubt in the mind of the Court that a
subsequent party which caused the defect in the
instrument cannot have any recourse against any of the
prior endorsers in good faith. Eva Alviar’s and the
petitioner’s liability to subsequent holders of the foreign
check is governed by the Negotiable Instruments Law as
follows:
Sec. 66. Liability of general indorser. - Every indorser
who indorses without qualification, warrants to all
subsequent holders in due course;
(a) The matters and things mentioned in
subdivisions (a), (b), and (c) of the next preceding
section; and
(b) That the instrument is, at the time of his
indorsement, valid and subsisting;
And, in addition, he engages that, on due presentment, it
shall be accepted or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored and the
necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it.
The matters and things mentioned in subdivisions (a), (b)
and (c) of Section 65 are the following:
(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;
Under Section 66, the warranties for which Alviar and
Gonzales are liable as general endorsers in favor of
subsequent endorsers extend only to the state of the
instrument at the time of their endorsements, specifically,
that the instrument is genuine and in all respects what it
purports to be; that they have good title thereto; that all
prior parties had capacity to contract; and that the
instrument, at the time of their endorsements, is valid and
subsisting. This provision, however, cannot be used by
the party which introduced a defect on the instrument,
such as respondent RCBC in this case, which qualifiedly
endorsed the same, to hold prior endorsers liable on the
instrument because it results in the absurd situation
whereby a subsequent party may render an instrument
useless and inutile and let innocent parties bear the loss
while he himself gets away scot-free. It cannot be over-
stressed that had it not been for the qualified
endorsement ("up to ₱17,500.00 only") of Olivia Gomez,
who is the employee of RCBC, there would have been no
reason for the dishonor of the check, and full payment by
drawee bank therefor would have taken place as a matter
of course.
Section 66 of the Negotiable Instruments Law which
further states that the general endorser additionally
engages that, on due presentment, the instrument shall
be accepted or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored and the
necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any
subsequent endorser who may be compelled to pay it,
must be read in the light of the rule in equity requiring that
those who come to court should come with clean hands.
The holder or subsequent endorser who tries to claim
under the instrument which had been dishonored for
"irregular endorsement" must not be the irregular
endorser himself who gave cause for the dishonor.
Otherwise, a clear injustice results when any subsequent
party to the instrument may simply make the instrument
defective and later claim from prior endorsers who have
no knowledge or participation in causing or introducing
said defect to the instrument, which thereby caused its
dishonor.
Courts in this jurisdiction are not only courts of law but
also of equity, and therefore cannot unqualifiedly apply a
provision of law so as to cause clear injustice which the
framers of the law could not have intended to so
deliberately cause. In Carceller v. Court of Appeals,4 this
Court had occasion to stress:
Courts of law, being also courts of equity, may not
countenance such grossly unfair results without doing
violence to its solemn obligation to administer fair and
equal justice for all.
RCBC, which caused the dishonor of the check upon
presentment to the drawee bank, through the qualified
endorsement of its employee, Olivia Gomez, cannot hold
prior endorsers, Alviar and Gonzales in this case, liable
on the instrument.
Moreover, it is a well-established principle in law that as
between two parties, he who, by his acts, caused the loss
shall bear the same.5 RCBC, in this instance, should
therefore bear the loss.
Relative to the petitioner’s counterclaim against RCBC for
the amount of ₱12,822.20 which it admittedly deducted
from petitioner’s salary, the Court must order the return
thereof to the petitioner, with legal interest of 12% per
annum, notwithstanding the petitioner’s apparent
acquiescence to such an arrangement. It must be noted
that petitioner is not any ordinary client or depositor with
whom RCBC had this isolated transaction. Petitioner was
a rank-and-file employee of RCBC, being a new accounts
clerk thereat. It is easy to understand how a vulnerable
Gonzales, who is financially dependent upon RCBC,
would rather bite the bullet, so to speak, and expectedly
opt for salary deduction rather than lose her job and her
entire salary altogether. In this sense, we cannot take
petitioner’s apparent acquiescence to the salary
deduction as being an entirely free and voluntary act on
her part. Additionally, under the obtaining facts and
circumstances surrounding the present complaint for
collection of sum of money by RCBC against its
employee, which may be deemed tantamount to
harassment, and the fact that RCBC itself was the one,
acting through its employee, Olivia Gomez, which gave
reason for the dishonor of the dollar-check in question,
RCBC may likewise be held liable for moral and
exemplary damages and attorney’s fees by way of
damages, in the amount of ₱20,000.00 for each.
WHEREFORE, the assailed CA Decision dated August
30, 2002 is REVERSED and SET ASIDE and the
Complaint in this case DISMISSED for lack of merit.
Petitioner’s counterclaim is GRANTED, ordering the
respondent RCBC to reimburse petitioner the amount
₱12,822.20, with legal interest computed from the time of
salary deduction up to actual payment, and to pay
petitioner the total amount of ₱60,000.00 as moral and
exemplary damages, and attorney’s fees.
Costs against the respondent.
SO ORDERED.
CANCIO C. GARCIA
Associate Justice
WE CONCUR:
 REYNATO S. PUNO Republic of the Philippines
Associate Justice SUPREME COURT
Chairperson Manila

ANGELINA FIRST DIVISION

SANDOVAL- RENATO C. CORONA
GUTIERREZ Associate Justice G.R. No. 146511 September 5, 2007
Associate Justice
TOMAS ANG, petitioner,
ADOLFO S. AZCUNA vs.
Associate Justice ASSOCIATED BANK AND ANTONIO ANG ENG
LIONG, respondents.
ATTESTATION
DECISION
I attest that the conclusions in the above decision were
reached in consultation before the case was assigned to AZCUNA, J.:
the writer of the opinion of the Court’s Division.
This petition for certiorari under Rule 45 of the Rules on
REYNATO S . PUNO Civil Procedure seeks to review the October 9, 2000
Associate Justice Decision1 and December 26, 2000 Resolution2 of the
Chairperson, Second Division Court of Appeals in CA-G.R. CV No. 53413 which
reversed and set aside the January 5, 1996 Decision3 of
CERTIFICATION the Regional Trial Court, Branch 16, Davao City, in Civil
Case No. 20,299-90, dismissing the complaint filed by
Pursuant to Article VIII, Section 13 of the Constitution, respondents for collection of a sum of money.
and the Division Chairperson's Attestation, it is hereby
certified that the conclusions in the above decision were On August 28, 1990, respondent Associated Bank
reached in consultation before the case was assigned to (formerly Associated Banking Corporation and now
the writer of the opinion of the Court. known as United Overseas Bank Philippines) filed a
collection suit against Antonio Ang Eng Liong and
ARTEMIO V. PANGANIBAN petitioner Tomas Ang for the two (2) promissory notes
Chief Justice that they executed as principal debtor and co-maker,
respectively.
In the Complaint,4 respondent Bank alleged that on
October 3 and 9, 1978, the defendants obtained a loan
of P50,000, evidenced by a promissory note bearing PN-
No. DVO-78-382, and P30,000, evidenced by a
promissory note bearing PN-No. DVO-78-390. As
agreed, the loan would be payable, jointly and severally,
on January 31, 1979 and December 8, 1978,
respectively. In addition, subsequent amendments5 to the
promissory notes as well as the disclosure
statements6 stipulated that the loan would earn 14%
interest rate per annum, 2% service charge per annum,
1% penalty charge per month from due date until fully
paid, and attorney's fees equivalent to 20% of the
outstanding obligation.
Despite repeated demands for payment, the latest of
which were on September 13, 1988 and September 9,
1986, on Antonio Ang Eng Liong and Tomas Ang,
respectively, respondent Bank claimed that the
defendants failed and refused to settle their obligation,
resulting in a total indebtedness of P539,638.96 as of
July 31, 1990, broken down as follows:
PN-No. DVO-78-382
Outstanding Balance P50,000.00
Add Past due charges for 4,199 Past due charges for 4,253
days (from 01-31-79 to 07- daysin(from
31-90)
14% Interest P203,538.98
2% Service Charge P11,663.89
12% Overdue Charge P69,983.34
Total P285,186.21
Less: Charges paid P500.00
Amount Due P334,686.21
In his Answer,7 Antonio Ang Eng Liong only admitted to
have secured a loan amounting to P80,000. He pleaded
though that the bank "be ordered to submit a more
reasonable computation" considering that there had been
"no correct and reasonable statement of account" sent to
him by the bank, which was allegedly collecting
excessive interest, penalty charges, and attorney's fees
despite knowledge that his business was destroyed by
fire, hence, he had no source of income for several years.
For his part, petitioner Tomas Ang filed an Answer with
Counterclaim and Cross-claim.8 He interposed the
affirmative defenses that: the bank is not the real party in
interest as it is not the holder of the promissory notes,
much less a holder for value or a holder in due course;
the bank knew that he did not receive any valuable
consideration for affixing his signatures on the notes but
merely lent his name as an accommodation party; he
accepted the promissory notes in blank, with only the
printed provisions and the signature of Antonio Ang Eng
Liong appearing therein; it was the bank which completed
the notes upon the orders, instructions, or
representations of his co-defendant; PN-No. DVO-78-382
was
PN-No.completed in excess of or contrary to the authority
DVO-78-390
given by him to his co-defendant who represented that he
P30,000.00
would only borrow P30,000 from the bank; his signature
PN-No. DVO-78-390
12-8-78 to 07-31-was procured through fraudulent
means when his co-defendant claimed that his first loan
90)
did not push through; the promissory notes did not
P125,334.41
indicate in what capacity he was intended to be bound;
the bank granted P7,088.34
his co-defendant successive extensions
of time within P42,530.00
which to pay, without his (Tomas Ang)
knowledge and consent; the bank imposed new and
P174,952.75
additional stipulations on interest, penalties, services
None
charges and attorney's
P204,952.75 fees more onerous than the terms
of the notes, without his knowledge and consent, in the
absence of legal and factual basis and in violation of the
Usury Law; the bank caused the inclusion in the
promissory notes of stipulations such as waiver of
presentment for payment and notice of dishonor which
are against public policy; and the notes had been
impaired since they were never presented for payment
and demands were made only several years after they
fell due when his co-defendant could no longer pay them.
Regarding his counterclaim, Tomas Ang argued that by
reason of the bank's acts or omissions, it should be held
liable for the amount of P50,000 for attorney's fees and
expenses of litigation. Furthermore, on his cross-claim
against Antonio Ang Eng Liong, he averred that he
should be reimbursed by his co-defendant any and all
sums that he may be adjudged liable to pay,
plus P30,000, P20,000 and P50,000 for moral and
exemplary damages, and attorney's fees, respectively.
In its Reply,9 respondent Bank countered that it is the real
party in interest and is the holder of the notes since the
Associated Banking Corporation and Associated Citizens
Bank are its predecessors-in-interest. The fact that
Tomas Ang never received any moneys in consideration
of the two (2) loans and that such was known to the bank
are immaterial because, as an accommodation maker, he
is considered as a solidary debtor who is primarily liable
for the payment of the promissory notes. Citing Section
29 of the Negotiable Instruments Law (NIL), the bank
posited that absence or failure of consideration is not a
matter of defense; neither is the fact that the holder knew
him to be only an accommodation party.
Respondent Bank likewise retorted that the promissory
notes were completely filled up at the time of their
delivery. Assuming that such was not the case, Sec. 14
of the NIL provides that the bank has the prima
facie authority to complete the blank form. Moreover, it is
presumed that one who has signed as a maker acted
with care and had signed the document with full
knowledge of its content. The bank noted that Tomas
Ang is a prominent businessman in Davao City who has
been engaged in the auto parts business for several
years, hence, certainly he is not so naïve as to sign the
notes without knowing or bothering to verify the amounts
of the loans covered by them. Further, he is already in
estoppel since despite receipt of several demand letters
there was not a single protest raised by him that he
signed for only one note in the amount of P30,000.
It was denied by the bank that there were extensions of
time for payment accorded to Antonio Ang Eng Liong.
Granting that such were the case, it said that the same
would not relieve Tomas Ang from liability as he would
still be liable for the whole obligation less the share of his
co-debtor who received the extended term.
The bank also asserted that there were no additional or
new stipulations imposed other than those agreed upon.
The penalty charge, service charge, and attorney's fees
were reflected in the amendments to the promissory
notes and disclosure statements. Reference to the Usury
Law was misplaced as usury is legally non-existent; at
present, interest can be charged depending on the
agreement of the lender and the borrower.
Lastly, the bank contended that the provisions on
presentment for payment and notice of dishonor were
expressly waived by Tomas Ang and that such waiver is
not against public policy pursuant to Sections 82 (c) and
109 of the NIL. In fact, there is even no necessity therefor
since being a solidary debtor he is absolutely required to
pay and primarily liable on both promissory notes.
On October 19, 1990, the trial court issued a preliminary
pre-trial order directing the parties to submit their
respective pre-trial guide.10 When Antonio Ang Eng Liong
failed to submit his brief, the bank filed an ex-partemotion
to declare him in default.11 Per Order of November 23,
1990, the court granted the motion and set the ex-
parte hearing for the presentation of the bank's
evidence.12 Despite Tomas Ang's motion13 to modify the
Order so as to exclude or cancel the ex-parte hearing
based on then Sec. 4, Rule 18 of the old Rules of Court
(now Sec. 3[c.], Rule 9 of the Revised Rules on Civil
Procedure), the hearing nonetheless proceeded.14
Eventually, a decision15 was rendered by the trial court
on February 21, 1991. For his supposed bad faith and
obstinate refusal despite several demands from the bank,
Antonio Ang Eng Liong was ordered to pay the principal
amount of P80,000 plus 14% interest per annum and 2%
service charge per annum. The overdue penalty charge
and attorney's fees were, however, reduced for being
excessive, thus:
WHEREFORE, judgment is rendered against
defendant Antonio Ang Eng Liong and in favor of
plaintiff, ordering the former to pay the latter:
On the first cause of action:
1) the amount of P50,000.00 representing
the principal obligation with 14% interest
per annum from June 27, 1983 with 2%
service charge and 6% overdue penalty
charges per annum until fully paid;
2) P11,663.89 as accrued service charge;
and
3) P34,991.67 as accrued overdue penalty
charge.
On the second cause of action:
1) the amount
of P50,000.00 (sic) representing the
principal account with 14% interest from
June 27, 1983 with 2% service charge and
6% overdue penalty charges per annum
until fully paid;
2) P7,088.34 representing accrued service
charge;
3) P21,265.00 as accrued overdue penalty
charge;
4) the amount of P10,000.00 as attorney's
fees; and
5) the amount of P620.00 as litigation
expenses and to pay the costs.
SO ORDERED.16
The decision became final and executory as no appeal
was taken therefrom. Upon the bank's ex-parte motion,
the court accordingly issued a writ of execution on April 5,
1991.17
Thereafter, on June 3, 1991, the court set the pre-trial
conference between the bank and Tomas Ang,18 who, in
turn, filed a Motion to Dismiss19 on the ground of lack of
jurisdiction over the case in view of the alleged finality of
the February 21, 1991 Decision. He contended that Sec.
4, Rule 18 of the old Rules sanctions only one judgment
in case of several defendants, one of whom is declared in
default. Moreover, in his Supplemental Motion to
Dismiss,20Tomas Ang maintained that he is released
from his obligation as a solidary guarantor and
accommodation party because, by the bank's actions, he
is now precluded from asserting his cross-claim against
Antonio Ang Eng Liong, upon whom a final and executory
judgment had already been issued.
The court denied the motion as well as the motion for
reconsideration thereon.21 Tomas Ang subsequently filed
a petition for certiorari and prohibition before this Court,
which, however, resolved to refer the same to the Court
of Appeals.22 In accordance with the prayer of Tomas
Ang, the appellate court promulgated its Decision on
January 29, 1992 in CA G.R. SP No. 26332, which
annulled and set aside the portion of the Order dated
November 23, 1990 setting the ex-parte presentation of
the bank's evidence against Antonio Ang Eng Liong, the
Decision dated February 21, 1991 rendered against him
based on such evidence, and the Writ of Execution
issued on April 5, 1991.23
Trial then ensued between the bank and Tomas Ang.
Upon the latter's motion during the pre-trial conference,
Antonio Ang Eng Liong was again declared in default for
his failure to answer the cross-claim within the
reglementary period.24
When Tomas Ang was about to present evidence in his
behalf, he filed a Motion for Production of
Documents,25reasoning:
xxx
2. That corroborative to, and/or preparatory or
incident to his testimony[,] there is [a] need for him
to examine original records in the custody and
possession of plaintiff, viz:
a. original Promissory Note (PN for brevity)
# DVO-78-382 dated October 3, 1978[;]
b. original of Disclosure Statement in
reference to PN # DVO-78-382;
c. original of PN # DVO-78-390 dated
October 9, 1978;
d. original of Disclosure Statement in
reference to PN # DVO-78-390;
e. Statement or Record of Account with the
Associated Banking Corporation or its
successor, of Antonio Ang in CA No. 470
(cf. Exh. O) including bank records,
withdrawal slips, notices, other papers and
relevant dates relative to the overdraft of
Antonio Eng Liong in CA No. 470;
 f. Loan Applications of Antonio Ang Eng
Liong or borrower relative to PN Nos. DVO-
78-382 and DVO-78-390 (supra);
g. Other supporting papers and documents
submitted by Antonio Ang Eng Liong
relative to his loan application vis-à-vis PN.
Nos. DVO-78-382 and DVO-78-390 such as
financial statements, income tax returns,
etc. as required by the Central Bank or
bank rules and regulations.
3. That the above matters are very material to the
defenses of defendant Tomas Ang, viz:
- the bank is not a holder in due course
when it accepted the [PNs] in blank.
- The real borrower is Antonio Ang Eng
Liong which fact is known to the bank.
- That the PAYEE not being a holder in due
course and knowing that defendant Tomas
Ang is merely an accommodation party, the
latter may raise against such payee or
holder or successor-in-interest (of the
notes) PERSONAL and EQUITABLE
DEFENSES such as FRAUD in
INDUCEMENT, DISCHARGE ON NOTE,
Application of [Articles] 2079, 2080 and
1249 of the Civil Code, NEGLIGENCE in
delaying collection despite Eng Liong's
OVERDRAFT in C.A. No. 470, etc.26
In its Order dated May 16, 1994,27 the court denied the
motion stating that the promissory notes and the
disclosure statements have already been shown to and
inspected by Tomas Ang during the trial, as in fact he has
already copies of the same; the Statements or Records of
Account of Antonio Ang Eng Liong in CA No. 470, relative
to his overdraft, are immaterial since, pursuant to the
previous ruling of the court, he is being sued for the notes
and not for the overdraft which is personal to Antonio Ang
Eng Liong; and besides its non-existence in the bank's
records, there would be legal obstacle for the production
and inspection of the income tax return of Antonio Ang
Eng Liong if done without his consent.
When the motion for reconsideration of the aforesaid
Order was denied, Tomas Ang filed a petition
for certiorari and prohibition with application for
preliminary injunction and restraining order before the
Court of Appeals docketed as CA G.R. SP No.
34840.28 On August 17, 1994, however, the Court of
Appeals denied the issuance of a Temporary Restraining
Order.29
Meanwhile, notwithstanding its initial rulings that Tomas
Ang was deemed to have waived his right to present
evidence for failure to appear during the pendency of his
petition before the Court of Appeals, the trial court
decided to continue with the hearing of the case.30
After the trial, Tomas Ang offered in evidence several
documents, which included a copy of the Trust
Agreement between the Republic of the Philippines and
the Asset Privatization Trust, as certified by the notary
public, and news clippings from the Manila Bulletin dated
May 18, 1994 and May 30, 1994.31 All the documentary
exhibits were admitted for failure of the bank to submit its
comment to the formal offer.32 Thereafter, Tomas Ang
elected to withdraw his petition in CA G.R. SP No. 34840
before the Court of Appeals, which was then granted.33
On January 5, 1996, the trial court rendered judgment
against the bank, dismissing the complaint for lack of
cause of action.34 It held that:
Exh. "9" and its [sub-markings], the Trust
Agreement dated 27 February 1987 for the
defense shows that: the Associated Bank as of
June 30, 1986 is one of DBP's or Development
Bank of the [Philippines'] non-performing accounts
for transfer; on February 27, 1987 through Deeds
of Transfer executed by and between the
Philippine National Bank and Development Bank
of the Philippines and the National Government,
both financial institutions assigned, transferred and
conveyed their non-performing assets to the
National Government; the National Government in
turn and as TRUSTOR, transferred, conveyed and
assigned by way of trust unto the Asset
Privatization Trust said non-performing assets,
[which] took title to and possession of, [to]
conserve, provisionally manage and dispose[,] of
said assets identified for privatization or
disposition; one of the powers and duties of the
APT with respect to trust properties consisting of
receivables is to handle the administration,
collection and enforcement of the receivables; to
bring suit to enforce payment of the obligations or
any installment thereof or to settle or compromise
any of such obligations, or any other claim or
demand which the government may have against
any person or persons[.]
The Manila Bulletin news clippings dated May 18,
1994 and May 30, 1994, Exh. "9-A", "9-B", "9-C",
and "9-D", show that the Monetary Board of the
Bangko Sentral ng Pilipinas approved the
rehabilitation plan of the Associated Bank. One
main feature of the rehabilitation plan included the
financial assistance for the bank by the Philippine
Deposit Insurance Corporation (PDIC) by way of
the purchase of AB Assets worth P1.3945 billion
subject to a buy-back arrangement over a 10 year
period. The PDIC had approved of the rehab
scheme, which included the purchase of AB's bad
loans worth P1.86 at 25% discount. This will then
be paid by AB within a 10-year period plus a yield
comparable to the prevailing market rates x x x.
Based then on the evidence presented by the
defendant Tomas Ang, it would readily appear that
at the time this suit for Sum of Money was filed
which was on August [28], 1990, the notes were
held by the Asset Privatization Trust by virtue of
the Deeds of Transfer and Trust Agreement, which
was empowered to bring suit to enforce payment
of the obligations. Consequently, defendant
Tomas Ang has sufficiently established that
plaintiff at the time this suit was filed was not the
holder of the notes to warrant the dismissal of the
complaint.35
Respondent Bank then elevated the case to the Court of
Appeals. In the appellant's brief
captioned, "ASSOCIATED BANK, Plaintiff-Appellant
versus ANTONIO ANG ENG LIONG and TOMAS ANG,
Defendants, TOMAS ANG, Defendant-Appellee," the
following errors were alleged:
 I.
THE LOWER COURT ERRED IN NOT HOLDING
DEFENDANT ANTONIO ANG ENG LIONG AND
DEFENDANT-APPELLEE TOMAS ANG LIABLE
TO PLAINTIFF-APPELLANT ON THEIR UNPAID
LOANS DESPITE THE LATTER'S
DOCUMENTARY EXHIBITS PROVING THE SAID
OBLIGATIONS.
II.
THE LOWER COURT ERRED IN DISMISSING
PLAINTIFF-APPELLANT'S COMPLAINT ON THE
BASIS OF NEWSPAPER CLIPPINGS WHICH
WERE COMPLETELY HEARSAY IN
CHARACTER AND IMPROPER FOR JUDICIAL
NOTICE.36
The bank stressed that it has established the causes of
action outlined in its Complaint by a preponderance of
evidence. As regards the Deed of Transfer and Trust
Agreement, it contended that the same were never
authenticated by any witness in the course of the trial; the
Agreement, which was not even legible, did not mention
the promissory notes subject of the Complaint; the bank
is not a party to the Agreement, which showed that it was
between the Government of the Philippines, acting
through the Committee on Privatization represented by
the Secretary of Finance as trustor and the Asset
Privatization Trust, which was created by virtue of
Proclamation No. 50; and the Agreement did not reflect
the signatures of the contracting parties. Lastly, the bank
averred that the news items appearing in the Manila
Bulletin could not be the subject of judicial notice since
they were completely hearsay in character.37
On October 9, 2000, the Court of Appeals reversed and
set aside the trial court's ruling. The dispositive portion of
the Decision38 reads:
WHEREFORE, premises considered, the Decision
of the Regional Trial Court of Davao City, Branch
16, in Civil Case No. 20,299-90 is hereby
REVERSED AND SET ASIDE and another one
entered ordering defendant-appellee Tomas Ang
to pay plaintiff-appellant Associated Bank the
following:
1. P50,000.00 representing the principal amount of
the loan under PN-No. DVO-78-382 plus 14%
interest thereon per annum computed from
January 31, 1979 until the full amount thereof is
paid;
2. P30,000.00 representing the principal amount of
the loan under PN-No. DVO-78-390 plus 14%
interest thereon per annum computed from
December 8, 1978 until the full amount thereof is
paid;
All other claims of the plaintiff-appellant are
DISMISSED for lack of legal basis. Defendant-
appellee's counterclaim is likewise DISMISSED for
lack of legal and factual bases.
No pronouncement as to costs.
SO ORDERED.39
The appellate court disregarded the bank's first assigned
error for being "irrelevant in the final determination of the
case" and found its second assigned error as "not
meritorious." Instead, it posed for resolution the issue of
whether the trial court erred in dismissing the complaint
for collection of sum of money for lack of cause of action
as the bank was said to be not the "holder" of the notes
at the time the collection case was filed.
In answering the lone issue, the Court of Appeals held
that the bank is a "holder" under Sec. 191 of the NIL. It
concluded that despite the execution of the Deeds of
Transfer and Trust Agreement, the Asset Privatization
Trust cannot be declared as the "holder" of the subject
promissory notes for the reason that it is neither the
payee or indorsee of the notes in possession thereof nor
is it the bearer of said notes. The Court of Appeals
observed that the bank, as the payee, did not indorse the
notes to the Asset Privatization Trust despite the
execution of the Deeds of Transfer and Trust Agreement
and that the notes continued to remain with the bank until
the institution of the collection suit.
With the bank as the "holder" of the promissory notes, the
Court of Appeals held that Tomas Ang is accountable
therefor in his capacity as an accommodation party.
Citing Sec. 29 of the NIL, he is liable to the bank in spite
of the latter's knowledge, at the time of taking the notes,
that he is only an accommodation party. Moreover, as a
co-maker who agreed to be jointly and severally liable on
the promissory notes, Tomas Ang cannot validly set up
the defense that he did not receive any consideration
therefor as the fact that the loan was granted to the
principal debtor already constitutes a sufficient
consideration.
Further, the Court of Appeals agreed with the bank that
the experience of Tomas Ang in business rendered it
implausible that he would just sign the promissory notes
as a co-maker without even checking the real amount of
the debt to be incurred, or that he merely acted on the
belief that the first loan application was cancelled.
According to the appellate court, it is apparent that he
was negligent in falling for the alibi of Antonio Ang Eng
Liong and such fact would not serve to exonerate him
from his responsibility under the notes.
Nonetheless, the Court of Appeals denied the claims of
the bank for service, penalty and overdue charges as well
as attorney's fees on the ground that the promissory
notes made no mention of such charges/fees.
In his motion for reconsideration,40 Tomas Ang raised for
the first time the assigned errors as follows:
xxx
2) Related to the above jurisdictional issues,
defendant-appellee Tomas Ang has recently
discovered that upon the filing of the complaint on
August 28, 1990, under the jurisdictional rule laid
down in BP Blg. 129, appellant bank fraudulently
failed to specify the amount
of compounded interest at 14% per annum,
service charges at 2% per annum and overdue
penalty charges at 12% per annum in the prayer of
the complaint as of the time of its filing, paying a
total of only P640.00(!!!) as filing and court docket
fees although the total sum involved as of that time
was P647,566.75 including 20% attorney's fees. In
fact, the stated interest in the body of the
complaint alone amount to P328,373.39 (which is
actually compounded and capitalized) in both
causes of action and the total service and overdue
penalties and charges and attorney's fees further
amount to P239,193.36 in both causes of action,
as of July 31, 1990, the time of filing of the
complaint. Significantly, appellant fraudulently
misled the Court, describing the 14% imposition as
interest, when in fact the same was capitalized as
principal by appellant bank every month to earn
more interest, as stated in the notes. In view
thereof, the trial court never acquired jurisdiction
over the case and the same may not be now
corrected by the filing of deficiency fees because
the causes of action had already prescribed and
more importantly, the jurisdiction of the Municipal
Trial Court had been increased to P100,000.00
in principal claims last March 20, 1999, pursuant to
SC Circular No. 21-99, section 5 of RA No. 7691,
and section 31, Book I of the 1987 Administrative
Code. In other words, as of today, jurisdiction over
the subject falls within the exclusive jurisdiction of
the MTC, particularly if the bank foregoes
capitalization of the stipulated interest.
3) BY FAILING TO GIVE NOTICE OF ITS
APPEAL AND APPEAL BRIEF TO APPELLEE
ANG ENG LIONG, THE APPEALED JUDGMENT
OF THE TRIAL COURT WHICH LEFT OUT
TOMAS ANG'S CROSS-CLAIM AGAINST ENG
LIONG (BECAUSE IT DISMISSED THE MAIN
CLAIM), HAD LONG BECOME FINAL AND
EXECUTORY, AS AGAINST ENG LIONG.
Accordingly, Tomas Ang's right of subrogation
against Ang Eng Liong, expressed in his cross-
claim, is now SEVERAL TIMES foreclosed
because of the fault or negligence of appellant
bank since 1979 up to its insistence of an ex-parte
trial, and now when it failed to serve notice of
appeal and appellant's brief upon him.
Accordingly, appellee Tomas Ang should be
released from his suretyship obligation pursuant to
Art. 2080 of the Civil Code. The above is related to
the issues above-stated.
4) This Court may have erred in ADDING or
ASSIGNING its own bill of error for the benefit of
appellant bank which defrauded the judiciary by
the payment of deficient docket fees.41
Finding no cogent or compelling reason to disturb the
Decision, the Court of Appeals denied the motion in its
Resolution dated December 26, 2000.42
Petitioner now submits the following issues for resolution:
1. Is [A]rticle 2080 of the Civil Code applicable to
discharge petitioner Tomas Ang as
accommodation maker or surety because of the
failure of [private] respondent bank to serve its
notice of appeal upon the principal debtor,
respondent Eng Liong?
2. Did the trial court have jurisdiction over the case
at all?
3. Did the Court of Appeals [commit] error in
assigning its own error and raising its own issue?
4. Are petitioner's other real and personal
defenses such as successive extensions coupled
 with fraudulent collusion to hide Eng Liong's
default, the payee's grant of additional burdens,
coupled with the insolvency of the principal debtor,
and the defense of incomplete but delivered
instrument, meritorious?43
Petitioner allegedly learned after the promulgation of the
Court of Appeals' decision that, pursuant to the parties'
agreement on the compounding of interest with the
principal amount (per month in case of default), the
interest on the promissory notes as of July 31, 1990
should have been only P81,647.22 for PN No. DVO-78-
382 (instead of P203,538.98) and P49,618.33 for PN No.
DVO-78-390 (instead of P125,334.41) while the principal
debt as of said date should increase to P647,566.75
(instead of P539,638.96). He submits that the bank
carefully and shrewdly hid the fact by describing the
amounts as interest instead of being part of either the
principal or penalty in order to pay a lesser amount of
docket fees. According to him, the total fees that should
have been paid at the time of the filing of the complaint
on August 28, 1990 was P2,216.30 and not P614.00 or a
shortage of 71%. Petitioner contends that the bank may
not now pay the deficiency because the last demand
letter sent to him was dated September 9, 1986, or more
than twenty years have elapsed such that prescription
had already set in. Consequently, the bank's claim must
be dismissed as the trial court loses jurisdiction over the
case.
Petitioner also argues that the Court of Appeals should
not have assigned its own error and raised it as an issue
of the case, contending that no question should be
entertained on appeal unless it has been advanced in the
court below or is within the issues made by the parties in
the pleadings. At any rate, he opines that the appellate
court's decision that the bank is the real party in interest
because it is the payee named in the note or the holder
thereof is too simplistic since: (1) the power and control of
Asset Privatization Trust over the bank are clear from the
explicit terms of the duly certified trust documents and
deeds of transfer and are confirmed by the newspaper
clippings; (2) even under P.D. No. 902-A or the General
Banking Act, where a corporation or a bank is under
receivership, conservation or rehabilitation, it is only the
representative (liquidator, receiver, trustee or
conservator) who may properly act for said entity, and, in
this case, the bank was held by Asset Privatization Trust
as trustee; and (3) it is not entirely accurate to say that
the payee who has not indorsed the notes in all cases is
the real party in interest because the rights of the payee
may be subject of an assignment of incorporeal rights
under Articles 1624 and 1625 of the Civil Code.
Lastly, petitioner maintains that when respondent Bank
served its notice of appeal and appellant's brief only on
him, it rendered the judgment of the trial court final and
executory with respect to Antonio Ang Eng Liong, which,
in effect, released him (Antonio Ang Eng Liong) from any
and all liability under the promissory notes and, thereby,
foreclosed petitioner's cross-claims. By such act, the
bank, even if it be the "holder" of the promissory notes,
allegedly discharged a simple contract for the payment of
money (Sections 119 [d] and 122, NIL [Act No. 2031]),
prevented a surety like petitioner from being subrogated
in the shoes of his principal (Article 2080, Civil Code),
and impaired the notes, producing the effect of payment
(Article 1249, Civil Code).
The petition is unmeritorious.
Procedurally, it is well within the authority of the Court of
Appeals to raise, if it deems proper under the
circumstances obtaining, error/s not assigned on an
appealed case. In Mendoza v. Bautista,44 this Court
recognized the broad discretionary power of an appellate
court to waive the lack of proper assignment of errors and
to consider errors not assigned, thus:
As a rule, no issue may be raised on appeal
unless it has been brought before the lower
tribunal for its consideration. Higher courts are
precluded from entertaining matters neither
alleged in the pleadings nor raised during the
proceedings below, but ventilated for the first time
only in a motion for reconsideration or on appeal.
However, as with most procedural rules, this
maxim is subject to exceptions. Indeed, our rules
recognize the broad discretionary power of an
appellate court to waive the lack of proper
assignment of errors and to consider errors not
assigned. Section 8 of Rule 51 of the Rules of
Court provides:
SEC. 8. Questions that may be decided. — No
error which does not affect the jurisdiction over the
subject matter or the validity of the judgment
appealed from or the proceedings therein will be
considered, unless stated in the assignment of
errors, or closely related to or dependent on an
assigned error and properly argued in the brief,
save as the court may pass upon plain errors and
clerical errors.
Thus, an appellate court is clothed with ample
authority to review rulings even if they are not
assigned as errors in the appeal in these
instances: (a) grounds not assigned as errors but
affecting jurisdiction over the subject matter; (b)
matters not assigned as errors on appeal but are
evidently plain or clerical errors within
contemplation of law; (c) matters not assigned as
errors on appeal but consideration of which is
necessary in arriving at a just decision and
complete resolution of the case or to serve the
interests of justice or to avoid dispensing
piecemeal justice; (d) matters not specifically
assigned as errors on appeal but raised in the trial
court and are matters of record having some
bearing on the issue submitted which the parties
failed to raise or which the lower court ignored; (e)
matters not assigned as errors on appeal but
closely related to an error assigned; and (f)
matters not assigned as errors on appeal but upon
which the determination of a question properly
assigned is dependent. (Citations omitted)45
To the Court's mind, even if the Court of Appeals
regarded petitioner's two assigned errors as "irrelevant"
and "not meritorious," the issue of whether the trial court
erred in dismissing the complaint for collection of sum of
money for lack of cause of action (on the ground that the
bank was not the "holder" of the notes at the time of the
filing of the action) is in reality closely related
to and determinant of the resolution of whether the lower
court correctly ruled in not holding Antonio Ang Eng Liong
and petitioner Tomas Ang liable to the bank on their
unpaid loans despite documentary exhibits allegedly
proving their obligations and in dismissing the complaint
based on newspaper clippings. Hence, no error could be
ascribed to the Court of Appeals on this point.
Now, the more relevant question is: who is the real party
in interest at the time of the institution of the complaint, is
it the bank or the Asset Privatization Trust?
To answer the query, a brief history on the creation of the
Asset Privatization Trust is proper.
Taking into account the imperative need of formally
launching a program for the rationalization of the
government corporate sector, then President Corazon C.
Aquino issued Proclamation No. 5046 on December 8,
1986. As one of the twin cornerstones of the program
was to establish the privatization of a good number of
government corporations, the proclamation created the
Asset Privatization Trust, which would, for the benefit of
the National Government, take title to and possession of,
conserve, provisionally manage and dispose of
transferred assets that were identified for privatization or
disposition.47
In accordance with the provisions of Section 2348 of the
proclamation, then President Aquino subsequently issued
Administrative Order No. 14 on February 3, 1987, which
approved the identification of and transfer to the National
Government of certain assets (consisting of loans, equity
investments, accrued interest receivables, acquired
assets and other assets) and liabilities (consisting of
deposits, borrowings, other liabilities and contingent
guarantees) of the Development Bank of the Philippines
(DBP) and the Philippine National Bank (PNB). The
transfer of assets was implemented through a Deed of
Transfer executed on February 27, 1987 between the
National Government, on one hand, and the DBP and
PNB, on the other. In turn, the National Government
designated the Asset Privatization Trust to act as its
trustee through a Trust Agreement, whereby the non-
performing accounts of DBP and PNB, including, among
others, the DBP's equity with respondent Bank, were
entrusted to the Asset Privatization Trust.49As provided
for in the Agreement, among the powers and duties of the
Asset Privatization Trust with respect to the trust
properties consisting of receivables was to handle their
administration and collection by bringing suit to enforce
payment of the obligations or any installment thereof or
settling or compromising any of such obligations or any
other claim or demand which the Government may have
against any person or persons, and to do all acts,
institute all proceedings, and to exercise all other rights,
powers, and privileges of ownership that an absolute
owner of the properties would otherwise have the right to
do.50
Incidentally, the existence of the Asset Privatization Trust
would have expired five (5) years from the date of
issuance of Proclamation No. 50.51 However, its original
term was extended from December 8, 1991 up to August
31, 1992,52 and again from December 31, 1993 until June
30, 1995,53 and then from July 1, 1995 up to December
31, 1999,54 and further from January 1, 2000 until
December 31, 2000.55 Thenceforth, the Privatization and
Management Office was established and took over,
among others, the powers, duties and functions of the
Asset Privatization Trust under the proclamation.56
Based on the above backdrop, respondent Bank does not
appear to be the real party in interest when it instituted
the collection suit on August 28, 1990 against Antonio
Ang Eng Liong and petitioner Tomas Ang. At the time the
complaint was filed in the trial court, it was the Asset
Privatization Trust which had the authority to enforce its
claims against both debtors. In fact, during the pre-trial
conference, Atty. Roderick Orallo, counsel for the bank,
openly admitted that it was under the trusteeship of the
Asset Privatization Trust.57 The Asset Privatization Trust,
which should have been represented by the Office of the
Government Corporate Counsel, had the authority to file
and prosecute the case.
The foregoing notwithstanding, this Court can not, at
present, readily subscribe to petitioner's insistence that
the case must be dismissed. Significantly, it stands
without refute, both in the pleadings as well as in the
evidence presented during the trial and up to the time this
case reached the Court, that the issue had been
rendered moot with the occurrence of a supervening
event – the "buy-back" of the bank by its former owner,
Leonardo Ty, sometime in October 1993. By such re-
acquisition from the Asset Privatization Trust when the
case was still pending in the lower court, the bank
reclaimed its real and actual interest over the unpaid
promissory notes; hence, it could rightfully qualify as a
"holder"58 thereof under the NIL.
Notably, Section 29 of the NIL defines an accommodation
party as a person "who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to
some other person." As gleaned from the text, an
accommodation party is one who meets all the three
requisites, viz: (1) he must be a party to the instrument,
signing as maker, drawer, acceptor, or indorser; (2) he
must not receive value therefor; and (3) he must sign for
the purpose of lending his name or credit to some other
person.59 An accommodation party lends his name to
enable the accommodated party to obtain credit or to
raise money; he receives no part of the consideration for
the instrument but assumes liability to the other party/ies
thereto.60 The accommodation party is liable on the
instrument to a holder for value even though the holder,
at the time of taking the instrument, knew him or her to be
merely an accommodation party, as if the contract was
not for accommodation.61
As petitioner acknowledged it to be, the relation between
an accommodation party and the accommodated party is
one of principal and surety – the accommodation party
being the surety.62 As such, he is deemed an original
promisor and debtor from the beginning;63 he is
considered in law as the same party as the debtor in
relation to whatever is adjudged touching the obligation of
the latter since their liabilities are interwoven as to be
inseparable.64Although a contract of suretyship is in
essence accessory or collateral to a valid principal
obligation, the surety's liability to the creditor
is immediate, primary and absolute; he
is directly and equally bound with the principal.65 As an
equivalent of a regular party to the undertaking, a surety
becomes liable to the debt and duty of the principal
obligor even without possessing a direct or personal
interest in the obligations nor does he receive any benefit
therefrom.66
Contrary to petitioner's adamant stand, however, Article
208067 of the Civil Code does not apply in a contract of
suretyship.68 Art. 2047 of the Civil Code states that if a
person binds himself solidarily with the principal debtor,
the provisions of Section 4, Chapter 3, Title I, Book IV of
the Civil Code must be observed. Accordingly, Articles
1207 up to 1222 of the Code (on joint and solidary
obligations) shall govern the relationship of petitioner with
the bank.
The case of Inciong, Jr. v. CA69 is illuminating:
Petitioner also argues that the dismissal of the
complaint against Naybe, the principal debtor, and
against Pantanosas, his co-maker, constituted a
release of his obligation, especially because the
dismissal of the case against Pantanosas was
upon the motion of private respondent itself. He
cites as basis for his argument, Article 2080 of the
Civil Code which provides that:
"The guarantors, even though they be solidary, are
released from their obligation whenever by come
act of the creditor, they cannot be subrogated to
the rights, mortgages, and preferences of the
latter."
It is to be noted, however, that petitioner signed
the promissory note as a solidary co-maker and
not as a guarantor. This is patent even from the
first sentence of the promissory note which states
as follows:
"Ninety one (91) days after date, for value
received, I/we, JOINTLY and SEVERALLY
promise to pay to the PHILIPPINE BANK OF
COMMUNICATIONS at its office in the City of
Cagayan de Oro, Philippines the sum of FIFTY
THOUSAND ONLY (P50,000.00) Pesos,
Philippine Currency, together with interest x x x at
the rate of SIXTEEN (16) per cent per annum until
fully paid."
A solidary or joint and several obligation is one in
which each debtor is liable for the entire obligation,
and each creditor is entitled to demand the whole
obligation. On the other hand, Article 2047 of the
Civil Code states:
"By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do
so.
If a person binds himself solidarily with the
principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In
such a case the contract is called a suretyship."
(Italics supplied.)
While a guarantor may bind himself solidarily with
the principal debtor, the liability of a guarantor is
different from that of a solidary debtor. Thus,
Tolentino explains:
"A guarantor who binds himself in solidum with the
principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor
to all intents and purposes. There is a difference
between a solidary co-debtor, and a fiador in
solidum (surety). The later, outside of the liability
he assumes to pay the debt before the property of
the principal debtor has been exhausted, retains
all the other rights, actions and benefits which
pertain to him by reason of rights of the fiansa;
while a solidary co-debtor has no other rights than
those bestowed upon him in Section 4, Chapter 3,
title I, Book IV of the Civil Code."
 Section 4, Chapter 3, Title I, Book IV of the Civil
Code states the law on joint and several
obligations. Under Art. 1207 thereof, when there
are two or more debtors in one and the same
obligation, the presumption is that obligation is
joint so that each of the debtors is liable only for a
proportionate part of the debt. There is a solidarily
liability only when the obligation expressly so
states, when the law so provides or when the
nature of the obligation so requires.
Because the promissory note involved in this case
expressly states that the three signatories therein
are jointly and severally liable, any one, some or
all of them may be proceeded against for the
entire obligation. The choice is left to the solidary
creditor to determine against whom he will enforce
collection. (Citations omitted)70
In the instant case, petitioner agreed to be "jointly and
severally" liable under the two promissory notes that he
co-signed with Antonio Ang Eng Liong as the principal
debtor. This being so, it is completely immaterial if the
bank would opt to proceed only against petitioner or
Antonio Ang Eng Liong or both of them since the law
confers upon the creditor the prerogative to choose
whether to enforce the entire obligation against any one,
some or all of the debtors. Nonetheless, petitioner, as an
accommodation party, may seek reimbursement from
Antonio Ang Eng Liong, being the party
accommodated.71
It is plainly mistaken for petitioner to say that just
because the bank failed to serve the notice of appeal and
appellant's brief to Antonio Ang Eng Liong, the trial
court's judgment, in effect, became final and executory as
against the latter and, thereby, bars his (petitioner's)
cross-claims against him: First, although no notice of
appeal and appellant's brief were served to Antonio Ang
Eng Liong, he was nonetheless impleaded in the case
since his name appeared in the caption of both the notice
and the brief as one of the defendants-
appellees;72 Second, despite including in the caption of
the appellee's brief his co-debtor as one of the
defendants-appellees, petitioner did not also serve him a
copy thereof;73 Third, in the caption of the Court of
Appeals' decision, Antonio Ang Eng Liong was expressly
named as one of the defendants-appellees;74 and Fourth,
it was only in his motion for reconsideration from the
adverse judgment of the Court of Appeals that petitioner
belatedly chose to serve notice to the counsel of his co-
defendant-appellee.75
Likewise, this Court rejects the contention of Antonio Ang
Eng Liong, in his "special appearance" through counsel,
that the Court of Appeals, much less this Court, already
lacked jurisdiction over his person or over the subject
matter relating to him because he was not a party in CA-
G.R. CV No. 53413. Stress must be laid of the fact that
he had twice put himself in default – one, in not filing a
pre-trial brief and another, in not filing his answer to
petitioner's cross-claims. As a matter of course, Antonio
Ang Eng Liong, being a party declared in default, already
waived his right to take part in the trial proceedings and
had to contend with the judgment rendered by the court
based on the evidence presented by the bank and
petitioner. Moreover, even without considering these
default judgments, Antonio Ang Eng Liong even
categorically admitted having secured a loan
totaling P80,000. In his Answer to the complaint, he did
not deny such liability but merely pleaded that the bank
"be ordered to submit a more reasonable computation"
instead of collecting excessive interest, penalty charges,
and attorney's fees. For failing to tender an issue and in
not denying the material allegations stated in the
complaint, a judgment on the pleadings76 would have
also been proper since not a single issue was generated
by the Answer he filed.
As the promissory notes were not discharged or impaired
through any act or omission of the bank, Sections 119
(d)77 and 12278 of the NIL as well as Art. 124979 of the
Civil Code would necessarily find no application. Again,
neither was petitioner's right of reimbursement barred nor
was the bank's right to proceed against Antonio Ang Eng
Liong expressly renounced by the omission to serve
notice of appeal and appellant's brief to a party already
declared in default.
Consequently, in issuing the two promissory notes,
petitioner as accommodating party warranted to the
holder in due course that he would pay the same
according to its tenor.80 It is no defense to state on his
part that he did not receive any value therefor81 because
the phrase "without receiving value therefor" used in Sec.
29 of the NIL means "without receiving value by virtue of
the instrument" and not as it is apparently supposed to
mean, "without receiving payment for lending his
name."82 Stated differently, when a third person
advances the face value of the note to the
accommodated party at the time of its creation, the
consideration for the note as regards its maker is the
money advanced to the accommodated party. It is
enough that value was given for the note at the time of its
creation.83 As in the instant case, a sum of money was
received by virtue of the notes, hence, it is immaterial so
far as the bank is concerned whether one of the signers,
particularly petitioner, has or has not received anything in
payment of the use of his name.84
Under the law, upon the maturity of the note, a surety
may pay the debt, demand the collateral security, if there
be any, and dispose of it to his benefit, or, if applicable,
subrogate himself in the place of the creditor with the
right to enforce the guaranty against the other signers of
the note for the reimbursement of what he is entitled to
recover from them.85 Regrettably, none of these were
prudently done by petitioner. When he was first notified
by the bank sometime in 1982 regarding his
accountabilities under the promissory notes, he
lackadaisically relied on Antonio Ang Eng Liong, who
represented that he would take care of the matter,
instead of directly communicating with the bank for its
settlement.86 Thus, petitioner cannot now claim that he
was prejudiced by the supposed "extension of time" given
by the bank to his co-debtor.
Furthermore, since the liability of an accommodation
party remains not only primary but also unconditional to a
holder for value, even if the accommodated party
receives an extension of the period for payment without
the consent of the accommodation party, the latter is still
liable for the whole obligation and such extension does
not release him because as far as a holder for value is
concerned, he is a solidary co-debtor.87 In Clark v.
Sellner,88 this Court held:
x x x The mere delay of the creditor in enforcing
the guaranty has not by any means impaired his
action against the defendant. It should not be lost
sight of that the defendant's signature on the note
is an assurance to the creditor that the collateral
guaranty will remain good, and that otherwise, he,
 the defendant, will be personally responsible for
the payment.
True, that if the creditor had done any act whereby
the guaranty was impaired in its value, or
discharged, such an act would have wholly or
partially released the surety; but it must be born in
mind that it is a recognized doctrine in the matter
of suretyship that with respect to the surety, the
creditor is under no obligation to display any
diligence in the enforcement of his rights as a
creditor. His mere inaction indulgence,
passiveness, or delay in proceeding against the
principal debtor, or the fact that he did not enforce
the guaranty or apply on the payment of such
funds as were available, constitute no defense at
all for the surety, unless the contract expressly
requires diligence and promptness on the part of
the creditor, which is not the case in the present
action. There is in some decisions a tendency
toward holding that the creditor's laches may
discharge the surety, meaning by laches a
negligent forbearance. This theory, however, is not
generally accepted and the courts almost
universally consider it essentially inconsistent with
the relation of the parties to the note. (21 R.C.L.,
1032-1034)89
Neither can petitioner benefit from the alleged
"insolvency" of Antonio Ang Eng Liong for want of clear
and convincing evidence proving the same. Assuming it
to be true, he also did not exercise diligence in
demanding security to protect himself from the danger
thereof in the event that he (petitioner) would eventually
be sued by the bank. Further, whether petitioner may or
may not obtain security from Antonio Ang Eng Liong
cannot in any manner affect his liability to the bank; the
said remedy is a matter of concern exclusively between
themselves as accommodation party and accommodated
party. The fact that petitioner stands only as a surety in
relation to Antonio Ang Eng Liong is immaterial to the
claim of the bank and does not a whit diminish nor defeat
the rights of the latter as a holder for value. To sanction
his theory is to give unwarranted legal recognition to the
patent absurdity of a situation where a co-maker, when
sued on an instrument by a holder in due course and for
value, can escape liability by the convenient expedient of
interposing the defense that he is a merely an
accommodation party.90
In sum, as regards the other issues and errors alleged in
this petition, the Court notes that these were the very
same questions of fact raised on appeal before the Court
of Appeals, although at times couched in different terms
and explained more lengthily in the petition. Suffice it to
say that the same, being factual, have been satisfactorily
passed upon and considered both by the trial and
appellate courts. It is doctrinal that only errors of law and
not of fact are reviewable by this Court in petitions for
review on certiorari under Rule 45 of the Rules of Court.
Save for the most cogent and compelling reason, it is not
our function under the rule to examine, evaluate or weigh
the probative value of the evidence presented by the
parties all over again.91
WHEREFORE, the October 9, 2000 Decision and
December 26, 2000 Resolution of the Court of Appeals in
CA-G.R. CV No. 53413 are AFFIRMED. The petition
is DENIED for lack of merit.
No costs.
SO ORDERED. For the review of the Court through a Rule 45 petition are
Puno, C.J., Chairperson, Sandoval-Gutierrez, Corona, the following issuances of the Court of Appeals (CA) in CA-
Garcia, JJ., concur. G.R. CV No. 71858: (1) the March 15, 2005
Decision[1]which reversed the trial courts ruling, and (2) the
THIRD DIVISION May 26, 2005 Resolution[2] which denied the motion for
reconsideration of the said CA decision.
FAR EAST BANK & TRUST COMPANY, G.R. No. 168274
Petitioner,
Present: The instant controversy traces its roots to a transaction
consummated sometime in June 1998, when a foreigner,
YNARES-SANTIAGO,
identified J.,as Samuel Tagoe, purchased from the
- versus - Chairperson,
respondent Gold Palace Jewellery Co.s (Gold Palaces)
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
store at SM-North EDSA several pieces of jewelry valued
NACHURA, and at P258,000.00.[3] In payment of the same, he offered
GOLD PALACE JEWELLERY CO., as REYES, JJ.
represented by Judy L. Yang, Julie Yang-Go Foreign Draft No. M-069670 issued by the United
and Kho Soon Huat, Promulgated:Overseas Bank (Malaysia) BHD Medan Pasar, Kuala
Respondent. Lumpur Branch (UOB), addressed to the Land Bank of the
August 20, 2008
Philippines, Manila (LBP), and payable to the respondent
x------------------------------------------------------------------------------- company for P380,000.00.[4]
-----x
Before receiving the draft, respondent Judy Yang,
DECISION the assistant general manager of Gold Palace, inquired
from petitioner Far East Bank & Trust Companys (Far
NACHURA, J.: Easts) SM North EDSA Branch, its neighbor mall tenant,
the nature of the draft. The teller informed her that the
same was similar to a managers check, but advised her
not to release the pieces of jewelry until the draft had been
cleared.[5] Following the banks advice, Yang issued Cash
Invoice No. 1609[6] to the foreigner, asked him to come
back, and informed him that the pieces of jewelry would be
released when the draft had already been
cleared.[7] Respondent Julie Yang-Go, the manager
of Gold Palace, consequently deposited the draft in the
companys account with the aforementioned Far
East branch on June 2, 1998.[8]
When Far East, the collecting bank, presented the
draft for clearing to LBP, the drawee bank, the latter
cleared the same[9]UOBs account with LBP was
debited,[10] and Gold Palaces account with Far East was
credited with the amount stated in the draft.[11]
The foreigner eventually returned to respondents store
on June 6, 1998 to claim the purchased goods. After
ascertaining that the draft had been cleared, respondent
Yang released the pieces of jewelry to Samuel Tagoe; and
because the amount in the draft was more than the value
of the goods purchased, she issued, as his change, Far
East Check No. 1730881[12] for P122,000.00.[13] This
check was later presented for encashment and was, in
fact, paid by the said bank.[14]
On June 26, 1998, or after around three weeks, LBP
informed Far East that the amount in Foreign Draft No. M-
069670 had been materially altered from P300.00
to P380,000.00 and that it was returning the same.
Attached to its official correspondence were Special
Clearing Receipt No. 002593 and the duly notarized and
consul-authenticated affidavit of a corporate officer of the
drawer, UOB.[15] It is noted at this point that the material
alteration was discovered by UOB after LBP had informed
it that its funds were being depleted following the
encashment of the subject draft.[16] Intending to debit the
amount from respondents account, Far East subsequently
refunded the P380,000.00 earlier paid by LBP.
Gold Palace, in the meantime, had already utilized
portions of the amount. Thus, on July 20, 1998, as the
outstanding balance of its account was already
inadequate, Far East was able to debit
only P168,053.36,[17] but this was done without a prior
written notice to the account holder.[18] Far East only
notified by phone the representatives of the respondent
company.[19]
On August 12, 1998, petitioner demanded from
respondents the payment of P211,946.64 or the difference
between the amount in the materially altered draft and the
amount debited from the respondent companys
account.[20] Because Gold Palace did not heed the
demand, Far East consequently instituted Civil Case No.
99-296 for sum of money and damages before the
Regional Trial Court (RTC), Branch 64 of Makati City.[21]
In their Answer, respondents specifically denied the
material allegations in the complaint and interposed as a
defense that the complaint states no cause of actionthe
subject foreign draft having been cleared and the
respondent not being the party who made the material
alteration. Respondents further counterclaimed for actual
damages, moral and exemplary damages, and attorneys
fees considering, among others, that the petitioner had
confiscated without basis Gold Palaces balance in its
account resulting in operational loss, and had maliciously
imputed to the latter the act of alteration.[22]
After trial on the merits, the RTC rendered its July
30, 2001 Decision[23] in favor of Far East, ordering Gold
Palace to pay the former P211,946.64 as actual damages
and P50,000.00 as attorneys fees.[24] The trial court ruled
that, on the basis of its warranties as a general
indorser, Gold Palace was liable to Far East.[25]
On appeal, the CA, in the assailed March 15,
2005 Decision,[26] reversed the ruling of the trial court and
awarded respondents counterclaim. It ruled in the main
that Far East failed to undergo the proceedings on the
protest of the foreign draft or to notify Gold Palace of the
drafts dishonor; thus, Far East could not
charge Gold Palace on its secondary liability as an
indorser.[27] The appellate court further ruled that the
drawee bank had cleared the check, and its remedy should
be against the party responsible for the alteration.
Considering that, in this case, Gold Palace neither altered
the draft nor knew of the alteration, it could not be held
liable.[28] The dispositive portion of the CA decision reads:
WHEREFORE, premises considered,
the appeal is GRANTED; the assailed
Decision dated 30 July 2001 of the Regional
Trial Court of Makati City, Branch 64 is
hereby REVERSED and SET ASIDE; the
Complaint dated January 1999 is
DISMISSED; and appellee Far East Bank
and Trust Company is hereby ordered to pay
appellant Gold Palace Jewellery Company
the amount of Php168,053.36 for actual
damages plus legal interest of 12% per
annum from 20 July 1998, Php50,000.00 for
exemplary damages, and Php50,000.00 for
attorneys fees. Costs against appellee Far
East Bank and Trust Company.[29]
The appellate court, in the further challenged May
26, 2005 Resolution,[30] denied petitioners Motion for
Reconsideration,[31] which prompted the petitioner to
institute before the Court the instant Petition for Review
on Certiorari.[32]

We deny the petition.
Act No. 2031, or the Negotiable Instruments Law
(NIL), explicitly provides that the acceptor, by accepting
the instrument, engages that he will pay it according to the
tenor of his acceptance.[33] This provision applies with
equal force in case the drawee pays a bill without having
previously accepted it. His actual payment of the amount
in the check implies not only his assent to the order of the
drawer and a recognition of his corresponding obligation
to pay the aforementioned sum, but also, his clear
compliance with that obligation.[34] Actual payment by the
drawee is greater than his acceptance, which is merely a
promise in writing to pay. The payment of a check includes
its acceptance.[35]
Unmistakable herein is the fact that the drawee
bank cleared and paid the subject foreign draft and
forwarded the amount thereof to the collecting bank. The
latter then credited to Gold Palaces account the payment
it received. Following the plain language of the law, the
drawee, by the said payment, recognized and complied
with its obligation to pay in accordance with the tenor of his
acceptance. The tenor of the acceptance is determined by
the terms of the bill as it is when the drawee
accepts.[36] Stated simply, LBP was liable on its payment
of the check according to the tenor of the check at the time
of payment, which was the raised amount.
Because of that engagement, LBP could no longer
repudiate the payment it erroneously made to a due
course holder. We note at this point that Gold Palace was
not a participant in the alteration of the draft, was not
negligent, and was a holder in due courseit received the
draft complete and regular on its face, before it became
overdue and without notice of any dishonor, in good faith
and for value, and absent any knowledge of any infirmity
in the instrument or defect in the title of the person
negotiating it.[37]Having relied on the drawee banks
clearance and payment of the draft and not being negligent
(it delivered the purchased jewelry only when the draft was
cleared and paid), respondent is amply protected by the
said Section 62. Commercial policy favors the protection
of any one who, in due course, changes his position on the
faith of the drawee banks clearance and payment of a
check or draft.[38]
This construction and application of the law gives
effect to the plain language of the NIL[39] and is in line with
the sound principle that where one of two innocent parties
must suffer a loss, the law will leave the loss where it finds
it.[40] It further reasserts the usefulness, stability and
currency of negotiable paper without seriously
endangering accepted banking practices. Indeed, banking
institutions can readily protect themselves against liability
on altered instruments either by qualifying their
acceptance or certification, or by relying on forgery
insurance and special paper which will make alterations
obvious.[41] This is not to mention, but we state
nevertheless for emphasis, that the drawee bank, in most
cases, is in a better position, compared to the holder, to
verify with the drawer the matters stated in the instrument.
As we have observed in this case, were it not for LBPs
communication with the drawer that its account in
the Philippines was being depleted after the subject
foreign draft had been encashed, then, the alteration
would not have been discovered. What we cannot
understand is why LBP, having the most convenient
means to correspond with UOB, did not first verify the
amount of the draft before it cleared and paid the
same. Gold Palace, on the other hand, had no facility to
ascertain with the drawer, UOB Malaysia, the true amount
in the draft. It was left with no option but to rely on the
representations of LBP that the draft was good.
In arriving at this conclusion, the Court is not closing
its eyes to the other view espoused in common law
jurisdictions that a drawee bank, having paid to an
innocent holder the amount of an uncertified, altered check
in good faith and without negligence which contributed to
the loss, could recover from the person to whom payment
was made as for money paid by mistake.[42] However,
given the foregoing discussion, we find no compelling
reason to apply the principle to the instant case.
The Court is also aware that under the Uniform
Commercial Code in the United States of America, if an
unaccepted draft is presented to a drawee for payment or
acceptance and the drawee pays or accepts the draft, the
person obtaining payment or acceptance, at the time of
presentment, and a previous transferor of the draft, at the
time of transfer, warrant to the drawee making payment or
accepting the draft in good faith that the draft has not been
altered.[43] Nonetheless, absent any similar provision in
our law, we cannot extend the same preferential treatment
to the paying bank.
Thus, considering that, in this case, Gold Palace is
protected by Section 62 of the NIL, its collecting agent, Far
East, should not have debited the money paid by the
drawee bank from respondent companys account.
When Gold Palace deposited the check with Far East, the
latter, under the terms of the deposit and the provisions of
the NIL, became an agent of the former for the collection
of the amount in the draft.[44] The subsequent payment by
the drawee bank and the collection of the amount by the
collecting bank closed the transaction insofar as the
drawee and the holder of the check or his agent are
concerned, converted the check into a mere
voucher,[45] and, as already discussed, foreclosed the
recovery by the drawee of the amount paid. This closure
of the transaction is a matter of course; otherwise,
uncertainty in commercial transactions, delay and
annoyance will arise if a bank at some future time will call
on the payee for the return of the money paid to him on the
check.[46]
As the transaction in this case had been closed and
the principal-agent relationship between the payee and the
collecting bank had already ceased, the latter in returning
the amount to the drawee bank was already acting on its
own and should now be responsible for its own actions.
Neither can petitioner be considered to have acted as the
representative of the drawee bank when it debited
respondents account, because, as already explained, the
drawee bank had no right to recover what it
paid. Likewise, Far Eastcannot invoke the warranty of the
payee/depositor who indorsed the instrument for collection
to shift the burden it brought upon itself. This is precisely
because the said indorsement is only for purposes of
collection which, under Section 36 of the NIL, is a
restrictive indorsement.[47] It did not in any way transfer the
title of the instrument to the collecting bank. Far East did
not own the draft, it merely presented it for payment.
Considering that the warranties of a general indorser as
provided in Section 66 of the NIL are based upon a transfer
of title and are available only to holders in due
course,[48] these warranties did not attach to the
indorsement for deposit and collection made
by GoldPalace to Far East. Without any legal right to do
so, the collecting bank, therefore, could not debit
respondents account for the amount it refunded to the
drawee bank.
The foregoing considered, we affirm the ruling of
the appellate court to the extent that Far East could not
debit the account of Gold Palace, and for doing so, it must
return what it had erroneously taken. Far Easts remedy
under the law is not against Gold Palace but against the
drawee-bank or the person responsible for the alteration.
That, however, is another issue which we do not find
necessary to discuss in this case.
However, we delete the exemplary damages
awarded by the appellate court. Respondents have not
shown that they are entitled to moral, temperate or
compensatory damages.[49] Neither was petitioner
impelled by malice or bad faith in debiting the account of
the respondent company and in pursuing its cause.[50] On
the contrary, petitioner was honestly convinced of the
propriety of the debit. We also delete the award of
attorneys fees for, in a plethora of cases, we have ruled
MA. ALICIA AUSTRIA- MINITA V. CHICO-
that it is not a sound public policy to place a premium on MARTINEZ NAZARIO
the right to litigate. No damages can be charged to those Associate Justice Associate Justice
who exercise such precious right in good faith, even if
done erroneously.[51]
RUBEN T. REYES
WHEREFORE, premises considered, the March Associate Justice
15, 2005 Decision and the May 26, 2005 Resolution of the
Court of Appeals in CA-G.R. CV No. 71858 ATTESTATION
are AFFIRMED WITH THE MODIFICATION that the
award of exemplary damages and attorneys fees I attest that the conclusions in the above Decision were
reached in consultation before the case was assigned to
is DELETED. the writer of the opinion of the Courts Division.

SO ORDERED.
CONSUELO YNARES-SANTIAGO
Associate Justice
ANTONIO EDUARDO B. NACHURA Chairperson, Third Division
Associate Justice

CERTIFICATION
WE CONCUR:
Pursuant to Section 13, Article VIII of the Constitution and
the Division Chairperson's Attestation, I certify that the
conclusions in the above Decision had been reached in
CONSUELO YNARES-SANTIAGO
consultation before the case was assigned to the writer of
Associate Justice the opinion of the Courts Division.
Chairperson

REYNATO S. PUNO
Chief Justice