SECOND DIVISION [G.R. No. 97753. August 10, 1992.] CALTEX (PHILIPPINES), INC., petitioner, vs.

COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents. Bito, Lozada, Ortega & Castillo for petitioners. Nepomuceno, Hofilea & Guingona for private. SYLLABUS 1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS LAW; REQUIREMENTS FOR NEGOTIABILITY; CERTIFICATE OF TIME DEPOSIT AS NEGOTIABLE INSTRUMENT; CASE AT BAR. Section 1 of Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz: "(a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty." The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the depositor referred to in the CTDs is no other than Mr. Angel de la Cruz. . . . Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. 2. ID.; ID.; DETERMINATION OF NEGOTIABILITY OR NON-NEGOTIABILITY OF INSTRUMENT; RULES. On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. While the writing may be read in the light of surrounding circumstances in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said. 3. ID.; ID.; NEGOTIATION, DEFINED; HOLDER, DEFINED; IN CASE AT BAR, DELIVERY OF INSTRUMENT CONSTITUTED THE TRANSFEREE A MERE HOLDER FOR VALUE BY REASON OF HIS LIEN. Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof, In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for. The pertinent law on this point is

that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. 4. ID.; CODE OF COMMERCE; RULES TO BE FOLLOWED IN CASE OF LOST INSTRUMENT PAYABLE TO BEARER; MERELY PERMISSIVE AND NOT MANDATORY. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely permissive and not mandatory. The very first article cited by petitioner speaks for itself: "Art. 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be not paid a third person, as well as in order to prevent the ownership of the instrument that a duplicate be issued him." The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not mandatory but discretional. The word "may" is usually permissive, not mandatory. It is an auxiliary verb indicating liberty, opportunity, permission and possibility. 5. CIVIL LAW; OBLIGATIONS AND CONTRACTS; INTERPRETATION OF OBSCURE WORDS OR STIPULATIONS IN CONTRACT; SHALL NOT FAVOR THE PARTY WHO CAUSE THE OBSCURITY; CASE AT BAR. If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility so expressed that fact in clear and categorical terms in the documents, instead of having the word "BEARER" stamped on the space provided for the name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction between them would not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 6. ID.; ID.; ESTOPPEL; EFFECTS; CASE AT BAR. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself. In a letter dated November 26, 1982 addressed to respondent Security Bank, J. Q. Aranas, Jr., Caltex Credit Manager, wrote: " . . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) This admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. 7. ID.; ID.; CHARACTER OF TRANSACTION DETERMINED BY INTENTION OF THE PARTIES. This disquisition in Integrated Realty Corporation, et al. vs. Philippine National Bank, et al. is apropos: " . . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom: 'The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly the use of the terms ordinarily importing conveyance of absolute ownership will not be given that effect in such a transaction if they are also commonly used

in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge.'" 8. ID.; PLEDGE OF INCORPOREAL RIGHTS; REQUISITES; REQUIREMENT FOR PLEDGE TO TAKE EFFECT AGAINST THIRD PERSONS; NOT OBSERVED IN CASE AT BAR. As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, which inceptively provide: "Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed." "Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument." Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely. 9. ID.; ASSIGNMENT OF INCORPOREAL RIGHTS; REQUIREMENT FOR ASSIGNMENT TO TAKE EFFECT AGAINST THIRD PERSONS; OBSERVED IN CASE AT BAR. The assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a public instrument. With regard to this other mode of transfer, the Civil Code specifically declares: "Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property." Respondent bank duly complied with this statutory requirement Contrarily, petitioner, whether as purchaser, assignee or lienholder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question. 10. REMEDIAL LAW; EVIDENCE; BURDEN OF PROOF AND PRESUMPTIONS; ESTOPPEL IN PAIS; EFFECT. In the law of evidence, whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 11. ID.; ID.; ID.; EVIDENCE WILLFULLY SUPPRESSED WOULD BE ADVERSE IF PRODUCED; CASE AT BAR. When respondent bank, as defendant in the court below, moved for a bill of particulars therein praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now labors under the presumption that evidence willfully suppressed would be adverse if produced. 12. ID.; CIVIL PROCEDURE; APPEALS; ISSUES NOT RAISED IN TRIAL COURT CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL; CASE AT BAR. Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as may involve privileged or impeaching matters. The determination of issues at a pre-trial conference bars the consideration of other questions on appeal. To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent that the

broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can be premised on a multitude of other legal reasons and causes of action, of which respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless exercise. DECISION REGALADO, J p: This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming, with modifications, the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by herein petitioner against private respondent bank. The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of record: "1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280): CTD CTD Quantity Amount P80,000 360,000 160,000 80,000 16,000 88,000 16,000 80,000 112,000 40,000 88,000

Dates Serial Nos. 22 Feb. 82 26 Feb. 82 2 Mar. 82 4 Mar. 82 5 Mar. 82 5 Mar. 82 5 Mar. 82 8 Mar. 82 9 Mar. 82 9 Mar. 82 9 Mar. 82 Total ===

90101 to 90120 20 74602 to 74691 90 74701 to 74740 40 90127 to 90146 20 74797 to 94800 4 89965 to 89986 22 70147 to 90150 4 90001 to 90020 20 90023 to 90050 28 89991 to 90000 10 90251 to 90272 22 280 P1,120,000

=======

"2. Angel dela Cruz delivered the said certificates of time deposit (CTDs) to herein plaintiff in connection with his purchase of fuel products from the latter (Original Record, p. 208). "3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manager, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a

notarized Affidavit of Loss, as required by defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987. pp. 48-50). LexLib "4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561). "5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (dela Cruz) surrenders to defendant bank `full control of the indicated time deposits from and after date of the assignment and further authorizes said bank to pre-terminate, set-off and 'apply the said time deposits to the payment of whatever amount or amounts may be due' on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62). "6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc. went to the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff `as security for purchases made with Caltex Philippines, Inc.' by said depositor (TSN, February 9, 1987, pp. 54-68). "7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff formally informing it of its possession of the CTDs in question and of its decision to preterminate the same. "8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former 'a copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz' as well as 'the details of Mr. Angel dela Cruz' obligations against which' plaintiff proposed to apply the time deposits (Defendant's Exhibit 564). "9. No copy of the requested documents was furnished herein defendant.

"10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566). "11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131). "12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest therein at 16% per annum, moral and exemplary damages as well as attorney's fees. "After trial, the court a quo rendered its decision dismissing the instant complaint." 3 On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are nonnegotiable despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4 The instant petition is bereft of merit. cdrep A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues involved in this recourse. "SECURITY BANK AND TRUST COMPANY No. 90101

6778 Ayala Ave., Makati Metro Manila, Philippines SUCAT OFFICE P 4.000.00 CERTIFICATE OF DEPOSIT Rate 16% Date of Maturity FEB 23, 1984 FEB 22 1982, 19___

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

_______________________ AUTHORIZED SIGNATURES" 5 ______________

Respondent court ruled that the CTDs in question are non-negotiable instruments, rationalizing as follows: " . . . While it may be true that the word `bearer' appears rather boldly in the CTDs issued, it is important to note that after the word `BEARER' stamped on the space provided supposedly for the name of the depositor, the words `has deposited' a certain amount follows. The document further provides that the amount deposited shall be `repayable to said depositor' on the period indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are payable, not to whoever purports to be the `bearer' but only to the specified person indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz as the person who made the deposit and further engages itself to pay said depositor the amount indicated thereon at the stipulated date." 6 We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable instruments. Section 1 of Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz: "(a) (b) (c) (d) It must be in writing and signed by the maker or drawer; Must contain an unconditional promise or order to pay a sum certain in money; Must be payable on demand, or at a fixed or determinable future time; Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty." The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the depositor referred to in the CTDs is no other than Mr. Angel de la Cruz. Cdpr xxx "Atty. Calida: xxx xxx

q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in these certificates states that it was Angel dela Cruz? witness: a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic) the amount. Atty. Calida: q And no other person or entity or company, Mr. Witness?

witness: a xxx "Atty. Calida: q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the bank is concerned? witness: a xxx Angel dela Cruz is the depositor." 8 xxx xxx None, your Honor." 7 xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. 9 In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing may be read in the light of surrounding circumstances in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said. 11 Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility so expressed that fact in clear and categorical terms in the documents, instead of having the word "BEARER" stamped on the space provided for the name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction between them would not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself. LexLib In a letter dated November 26, 1982 addressed to respondent Security Bank, J. Q. Aranas, Jr., Caltex Credit Manager, wrote: " . . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Underscoring ours.) 13 This admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. 14 A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 16 If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of particulars therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now labors under the presumption that evidence willfully suppressed would be adverse if produced. 19 Under the foregoing circumstances, this disquisition in Integrated Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos: " . . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom: 'The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly the use of the terms ordinarily importing conveyance of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge.'" Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof, 22 In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs

would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for. The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide: "Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed." "Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument." Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz.25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely. 26 On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code specifically declares: "Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property." Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lienholder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question. LibLex Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private respondent observed the requirements of the law in the case of lost negotiable instruments and the issuance of replacement certificates therefor, on the ground that petitioner failed to raise that issue in the lower court. 28 On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was not included in the stipulation of the parties and in the statement of issues submitted by them to the trial court. 29 The issues agreed upon by them for resolution in this case are: "1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDs against the depositor's loan by virtue of the assignment (Annex 'C'). 3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs and the depositor's outstanding account with defendant, if any.

4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date provided therein. 5. 6. Whether or not plaintiff is entitled to the proceeds of the CTDs. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each other."

As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing enumeration does not include the issue of negligence on the part of respondent bank. An issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31 Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as may involve privileged or impeaching matters. The determination of issues at a pre-trial conference bars the consideration of other questions on appeal. 32 To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can be premised on a multitude of other legal reasons and causes of action, of which respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless exercise. 33 Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely permissive and not mandatory. The very first article cited by petitioner speaks for itself: "Art. 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be not paid a third person, as well as in order to prevent the ownership of the instrument that a duplicate be issued him." (Emphases ours.) xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and possibility. 36 Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument, Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or replacement instrument sans compliance with the procedure outlined therein, and none establishes a mandatory precedent requirement therefor. LLjur

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

FIRST DIVISION [G.R. No. 88866. February 18, 1991.] METROPOLITAN BANK & TRUST COMPANY, petitioner, vs. COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO, respondents. Angara, Abello, Concepcion, Regala & Cruz for petitioner. Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo. Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc. DECISION CRUZ, J p: This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all nonessentials, are easily told. The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and even abroad. Golden Savings and Loan Association was, at the time these events happened, operating in Calapan, Mindoro, with the other private respondents as its principal officers. In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a period of two months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its General Manager and counter-signed by its Auditor. Six of these were directly payable to Gomez while the others appeared to have been indorsed by their respective payees, followed by Gomez as second indorser. 1 On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. 2 More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued client," the petitioner says it finally decided to allow Golden Savings to withdraw from the proceeds of the warrants. 3 The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The total withdrawal was P968,000.00. 4 In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently cleared warrants. The last withdrawal was made on July 16, 1979.

On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount it had previously withdrawn, to make up the deficit in its account. The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of Mindoro. 5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed a motion for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986, the lower court modified its decision thus: ACCORDINGLY, judgment is hereby rendered: 1. Dismissing the complaint with costs against the plaintiff;

2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo; 3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of P1,754,089.00 and to reinstate and credit to such account such amount existing before the debit was made including the amount of P812,033.37 in favor of defendant Golden Savings and Loan Association, Inc. and thereafter, to allow defendant Golden Savings and Loan Association, Inc. to withdraw the amount outstanding thereon before the debit; 4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney's fees and expenses of litigation in the amount of P200,000.00. 5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney's fees and expenses of litigation in the amount of P100,000.00. SO ORDERED. On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file this petition for review on the following grounds: 1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual terms and conditions on the deposit slips allowing Metrobank to charge back any amount erroneously credited. (a) Metrobank's right to charge back is not limited to instances where the checks or treasury warrants are forged or unauthorized. (b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent which cannot be held liable for its failure to collect on the warrants. 2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made to pay for warrants already dishonored, thereby perpetuating the fraud committed by Eduardo Gomez. 3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden Savings, the latter should bear the loss. 4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case are not negotiable instruments. The petition has no merit. From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in giving Golden Savings the impression that the treasury warrants had been cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it. Without such assurance, Golden Savings would not have allowed the withdrawals; with such assurance, there was no reason not to allow the withdrawal.

Indeed, Golden Savings might even have incurred liability for its refusal to return the money that to all appearances belonged to the depositor, who could therefore withdraw it any time and for any reason he saw fit. It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to determine the validity of the warrants through its own services. The proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw them from its own deposit. 7 It was only when Metrobank gave the gosignal that Gomez was finally allowed by Golden Savings to withdraw them from his own account. The argument of Metrobank that Golden Savings should have exercised more care in checking the personal circumstances of Gomez before accepting his deposit does not hold water. It was Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan; and moreover, the treasury warrants were subject to clearing, pending which the depositor could not withdraw its proceeds. There was no question of Gomez's identity or of the genuineness of his signature as checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden Savings acted with due care and diligence and cannot be faulted for the withdrawals it allowed Gomez to make. By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling more than one and a half million pesos (and this was 1979). There was no reason why it should not have waited until the treasury warrants had been cleared; it would not have lost a single centavo by waiting. Yet, despite the lack of such clearance and notwithstanding that it had not received a single centavo from the proceeds of the treasury warrants, as it now repeatedly stresses it allowed Golden Savings to withdraw not once, not twice, but thrice from the uncleared treasury warrants in the total amount of P968,000.00. LexLib Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it also wanted to "accommodate" a valued client. It "presumed" that the warrants had been cleared simply because of "the lapse of one week." 8 For a bank with its long experience, this explanation is unbelievably naive. llcd And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side of the deposit slips through which the treasury warrants were deposited by Golden Savings with its Calapan branch. The conditions read as follows: Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting agent, assuming no responsibility beyond care in selecting correspondents, and until such time as actual payment shall have come into possession of this bank, the right is reserved to charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks drawn on local banks and bankers and their branches as well as on this bank, which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft or any other reason. (Emphasis supplied.) According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for Golden Savings and give it the right to "charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks ".. which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is claimed that the said conditions are in the nature of contractual stipulations and became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips. LLpr Doubt may be expressed about the binding force of the conditions, considering that they have apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could be argued that the depositor, in signing the deposit slip, does so only to identify himself and not to agree to the conditions set forth in the given permit at the back of the deposit slip. We do not have to rule on this matter at this time. At any rate, the Court feels that even if the deposit slip were considered a contract, the petitioner could still not validly disclaim responsibility thereunder in the light of the circumstances of this case. prcd

In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the contrary, Article 1909 of the Civil Code clearly provides that Art. 1909. The agent is responsible not only for fraud, but also for negligence, which shall be judged with more or less rigor by the courts, according to whether the agency was or was not for a compensation. The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the clearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw the proceeds of the treasury warrants he had deposited. Metrobank misled Golden Savings. There may have been no express clearance, as Metrobank insists (although this is refuted by Golden Savings) but in any case that clearance could be implied from its allowing Golden Savings to withdraw from its account not only once or even twice but three times. The total withdrawal was in excess of its original balance before the treasury warrants were deposited, which only added to its belief that the treasury warrants had indeed been cleared. Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would have been no need at all for Golden Savings to deposit the treasury warrants with it for clearance. There would have been no need for it to wait until the warrants had been cleared before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes more so in the case at bar when it is considered that the supposed dishonor of the warrants was not communicated to Golden Savings before it made its own payment to Gomez. LibLex The belated notification aggravated the petitioner's earlier negligence in giving express or at least implied clearance to the treasury warrants and allowing payments therefrom to Golden Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the signatures of the general manager and the auditor of the drawer corporation, has not been established. 9 This was the finding of the lower courts which we see no reason to disturb. And as we said in MWSS v. Court of Appeals: 10 Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear, positive and convincing evidence. This was not done in the present case. A no less important consideration is the circumstance that the treasury warrants in question are not negotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and this is of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund 501. The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent: SECTION 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) (b) (c) (d) It must be in writing and signed by the maker or drawer; Must contain an unconditional promise or order to pay a sum certain in money; Must be payable on demand, or at a fixed or determinable future time; Must be payable to order or to bearer; and

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

SEC. 3. When promise is unconditional. An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument.

But an order or promise to pay out of a particular fund is not unconditional. The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise to pay "not unconditional" and the warrants themselves non-negotiable. There should be no question that the exception on Section 3 of the Negotiable Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs. Auditor General 11 where the Court held: The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is entitled to the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within the scope of the negotiable instrument law. For one thing, the document bearing on its face the words "payable from the appropriation for food administration, is actually an Order for payment out of "a particular fund," and is not unconditional and does not fulfill one of the essential requirements of a negotiable instrument (Sec. 3 last sentence and section [1(b)] of the Negotiable Instruments Law). Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were "genuine and in all respects what they purport to be," in accordance with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped on the back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch." LLphil The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we feel this case is inapplicable to the present controversy. That case involved checks whereas this case involves treasury warrants. Golden Savings never represented that the warrants were negotiable but signed them only for the purpose of depositing them for clearance. Also, the fact of forgery was proved in that case but not in the case before us. Finally, the Court found the Jai Alai Corporation negligent in accepting the checks without question from one Antonio Ramirez notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it. No similar negligence can be imputed to Golden Savings. LibLex We find the challenged decision to be basically correct. However, we will have to amend it insofar as it directs the petitioner to credit Golden Savings with the full amount of the treasury checks deposited to its account. The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The amount he has withdrawn must be charged not to Golden Savings but to Metrobank, which must bear the consequences of its own negligence. But the balance of P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be permitted to withdraw this amount from his deposit because of the dishonor of the warrants. Gomez has in fact disappeared. To also credit the balance to Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact that it has already been informed of the dishonor of the treasury warrants. LLpr WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the dispositive portion of the judgment of the lower court shall be reworded as follows:

3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing defendant Golden Savings & Loan Association, Inc. to withdraw the amount outstanding thereon, if any, after the debit. SO ORDERED. Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur. 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. SYLLABUS 1. REMEDIAL LAW; CAUSE OF ACTION; DEFINITION AND ESSENTIAL ELEMENTS. 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. ID.; APPEAL; PARTY CANNOT CHANGE HIS THEORY ON APPEAL; REASON. 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. 3. NEGOTIABLE INSTRUMENTS LAW; CHECKS; MUST BE DELIVERED TO THE PAYEE TO GIVE EFFECT THERETO. 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. . . ." The payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. Delivery of an instrument means transfer of possession, actual or constructive, from one person to another. 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. DECISION CAMPOS, JR., J p:

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. LibLex (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 petitionerpayee 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. 3 Delivery of an instrument means transfer of possession, actual or constructive, from one person to another. 4 Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended to give effect to the instrument. LexLib 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. cdphil

THIRD DIVISION [G.R. No. 56169. June 26, 1992.] TRAVEL-ON, INC., petitioner, vs. COURT OF APPEALS and ARTURO S. MIRANDA, respondents. Eladio B. Samson for petitioner. Benjamin Bernardino & Associates Law Offices for private respondent. SYLLABUS 1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS LAW; PRESUMPTION OF CONSIDERATION; RULE. 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. 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. ID.; ID.; ID.; BURDEN OF PROOF TO REBUT THEREOF; LIES WITH THE DRAWER; CASE AT BAR. 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. 3. ID.; ID.; ACCOMMODATION TRANSACTION; NOT ESTABLISHED IN CASE AT BAR; REASONS THEREFOR. 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. 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. 4. ID.; ID.; ID.; LIABILITY OF DRAWER IN THE ABSENCE OF PROOF THEREOF; CASE AT BAR. 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, that the checks were supported by valuable consideration. 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" the Travel-On's account receivable 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; 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 them 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. 5. CIVIL LAW; MORAL DAMAGES; AWARD THEREOF, NOT PROPER IN THE ABSENCE OF BAD FAITH. 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. RESOLUTION FELICIANO, J p: 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. Cdpr 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 overpayments, 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 had issued the checks in the name of Travel-On in order that its General Manager, Elita Montilla, could show to TravelOn'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. prLL 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 Appeals' 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. LLjur 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: "Section 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. Footnotes 1. Section 24 of the Negotiable Instruments Law provides:

"Section 24. Presumption of consideration. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value." Section 5(s) of Rule 131 also establishes the presumption "[t]hat a negotiable instrument was given or indorsed for a sufficient consideration; . . ." 2. Pineda vs. dela Rama, 121 SCRA 671 (1983); Bank of Philippine Islands vs. Laguna Coconut Oil Co., 48 Phil. 5 (1925). 3. Section 60 of the Negotiable Instruments Law provides:

"Section 60. Liability of maker. The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse." Further, Section 61 provides: "Section 61. Liability of drawer. The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, 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 . . ."

Finally, Section 66 provides: "Section 66. Liability of general indorser. Every indorser who indorses without qualification, warrants to all subsequent holders in due course: xxx xxx xxx

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." 4. Section 59 of the Negotiable Instruments Law provides:

"Section 59. Who is deemed holder in due course. Every holder is deemed prima facie to be a holder in due course; . . ." See Also Fossum v. Fernandez Hermanos, 44 Phil. 713 (1923). 5. Section 24, Negotiable Instruments Law, supra; A similar provision is found in Article 1354, Civil Code of the Philippines: "Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary." Also Penaco v. Ruaya, 110 SCRA 46 (1981). 6. See generally Cuyugan v. Santos, 34 Phil. 100 (1916); Tolentino v. Gonzales, 50 Phil. 558 (1927).

C o p y r i g h t 1 9 9 4 - 1 9 9 9 C D T e c h n o l o g i e s A s i a, I n c.

SECOND DIVISION [G.R. No. L-34539. July 14, 1986.] EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners, vs. THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL BANK, RAMON C. CONCEPCION and MANUEL M. TAMAYO, partners of the defunct partnership Concepcion & Tamayo Construction Company, JOSE TORIBIO, Atty.-in-Fact of Concepcion & Tamayo Construction Company, and THE DISTRICT ENGINEER, Puerto Princesa, Palawan, respondents. Fernando R. Mangubat, Jr. for respondent PNB. DECISION GUTIERREZ, JR., J p: This is a petition for review seeking to annul and set aside the decision of the Court of Appeals, now the Intermediate Appellate Court, affirming the order of the trial court which dismissed the petitioners' complaint for cancellation of their real estate mortgage and held them jointly and severally liable with the principal debtors on a promissory note which they signed as accommodation makers. The factual background of this case is stated in the decision of the appellate court:

"Appellants are the registered owners of a parcel of land located in Sampaloc, Manila, and covered by T.C.T. 35161 of the Register of Deeds of Manila. On October 7, 1954, this property was mortgaged by the appellants to the Philippine National Bank, hereinafter called PNB, to guarantee a loan of P1,000.00 extended to one Domingo Prudencio. "Sometime in 1955, the Concepcion & Tamayo Construction Company, hereinafter called Company, had a pending contract with the Bureau of Public Works, hereinafter called the Bureau, for the construction of the municipal building in Puerto Princesa, Palawan, in the amount of P36,800.00 and, as said Company needed funds for said construction, Jose Toribio, appellants' relative, and attorney-in-fact of the Company, approached the appellants asking them to mortgage their property to secure the loan of P10,000.00 which the Company was negotiating with the PNB. "After some persuasion appellants signed on December 23, 1955 the 'Amendment of Real Estate Mortgage', mortgaging their said property to the PNB to guaranty the loan of P10,000.00 extended to the Company. The terms and conditions of the original mortgage for P1,000.00 were made integral part of the new mortgage for P10,000.00 and both documents were registered with the Register of Deeds of Manila. The promissory note covering the loan of P10,000.00 dated December 29, 1955, maturing on April 27, 1956, was signed by Jose Toribio, as attorney-in-fact of the Company, and by the appellants. Appellants also signed the portion of the promissory note indicating that they are requesting the PNB to issue the Check covering the loan to the Company. On the same date (December 23, 1955) that the 'Amendment of Real Estate' was executed, Jose Toribio, in the same capacity as attorney-in-fact of the Company, executed also the 'Deed of Assignment' assigning all payments to be made by the Bureau to the Company on account of the contract for the construction of the Puerto Princesa building in favor of the PNB. "This assignment of credit to the contrary notwithstanding, the Bureau, with approval, of the PNB, conditioned, however that they should be for labor and materials, made three payments to the Company on account of the contract price totalling P11,234.40. The Bureau's last request for P5,000.00 on June 20, 1956, however, was denied by the PNB for the reason that since the loan was already overdue as of April 28, 1956) the remaining balance of the contract price should be applied to the loan. "The Company abandoned the work, as a consequence of which on June 30, 1956, the Bureau rescinded the construction contract and assumed the work of completing the building. On November 14. 1958, appellants wrote the PNB contending that since the PNB authorized payments to the Company instead of on account of the loan guaranteed by the mortgage there was a change in the conditions of the contract without the knowledge of appellants, which entitled the latter to a cancellation of their mortgage contract. "Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27, 1959 this action against the PNB, the Company, the latter's attorney-in-fact Jose Toribio, and the District Engineer of Puerto Princesa, Palawan, seeking the cancellation of their real estate mortgage. The complaint was amended to exclude the Company as defendant, it having been shown that its life as a partnership had already expired and, in lieu thereof, Ramon Concepcion and Manuel M. Tamayo, partners of the defunct Company, were impleaded in their private capacity as defendants." After hearing, the trial court rendered judgment, denying the prayer in the complaint that the petitioners be absolved from their obligation under the mortgage contract and that the said mortgage be released or cancelled. The petitioners were ordered to pay jointly and severally with their co-makers Ramon C. Concepcion and Manuel M. Tamayo the sum of P11,900.19 with interest at the rate of 6% per annum from the date of the filing of the complaint on June 27, 1959 until fully paid and P1,000.00 attorney's fees. The decision also provided that if the judgment was not satisfied within 90 days from its receipt, the mortgaged properties together with all the improvements thereon belonging to the petitioners would be sold at public auction and applied to the judgment debt.

The Court of Appeals affirmed the trial court's decision in toto stating that, as accommodation makers, the petitioners' liability is that of solidary co-makers and that since "the amounts released to the construction company were used therein and, therefore, were spent for the successful accomplishment of the work constructed for, the authorization made by the Philippine National Bank of partial payments to the construction company which was also one of the solidary debtors cannot constitute a valid defense on the part of the other solidary debtors. Moreover, those who rendered services and furnished materials in the construction are preferred creditors and have a lien on the price of the contract." The appellate court further held that PNB had no obligation whatsoever to notify the petitioners of its authorizing the three payments in the total amount of P11,234.00 in favor of the Company because aside from the fact that the petitioners were not parties to the deed of assignment, there was no stipulation in said deed making it obligatory on the part of the PNB to notify the petitioners everytime it authorizes payment to the Company. It ruled that the petitioners cannot ask to be released from the real estate mortgage. In this petition, the petitioners raise the following issues which they present in the form of errors: I. First Assignment of Error.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT HEREIN PETITIONERS WERE SOLIDARY CO-DEBTORS INSTEAD OF SURETIES: II. Second Assignment of Error.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS WERE NOT RELEASED FROM THEIR OBLIGATION TO THE RESPONDENT PNB, WHEN THE PNB, WITHOUT THE KNOWLEDGE AND CONSENT OF PETITIONERS, CHANGED THE TENOR AND CONDITION OF THE ASSIGNMENT OF PAYMENTS MADE BY THE PRINCIPAL DEBTOR; CONCEPCION & TAMAYO CONSTRUCTION COMPANY; AND RELEASED TO SUCH PRINCIPAL DEBTOR PAYMENTS FROM THE BUREAU OF PUBLIC WORKS WHICH WERE MORE THAN ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE PNB. The petitioners contend that as accommodation makers, the nature of their liability is only that of mere sureties instead of solidary co-debtors such that "a material alteration in the principal contract, effected by the creditor without the knowledge and consent of the sureties, completely discharges the sureties from all liability on the contract of suretyship." They state that when respondent PNB did not apply the initial and subsequent payments to the petitioners' debt as provided for in the deed of assignment, they were released from their obligation as sureties and, therefore, the real estate mortgage executed by them should have been cancelled. Section 29 of the Negotiable Instrument Law provides: "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 the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held that ". . . in lending his name to the accommodated party, the accommodation party is in effect a surety. . . ." However, unlike in a contract of suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for value such that 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. Expounding on the nature of the liability of an accommodation party under the aforequoted section, we ruled in Ang Tiong v. Ting (22 SCRA 713, 716):

"3. That the appellant, again assuming him to be an accommodation indorser, may obtain security from the maker to protect himself against the danger of insolvency of the latter, cannot in any manner affect his liability to the appellee, as the said remedy is a matter of concern exclusively between accommodation indorser and accommodated party. So that the appellant stands only as a surety in relation to the maker, granting this to be true for the sake of argument, is immaterial to the claim of the appellee, and does not a whit diminish nor defeat the rights of the latter who is a holder for value. The liability of the appellant remains primary and unconditional. To sanction the appellant's theory is to give unwarranted legal recognition to the patent absurdity of a situation where an indorser, when sued on an instrument by a holder in due course and for value, can escape liability on his indorsement by the convenient expedient of interposing the defense that he is a mere accommodation indorser." There is, therefore, no question that as accommodation makers, petitioners would be primarily and unconditionally liable on the promissory note to a holder for value, regardless of whether they stand as sureties or solidary codebtors since such distinction would be entirely immaterial and inconsequential as far as a holder for value is concerned. Consequently, the petitioners cannot claim to have been released from their obligation simply because the time of payment of such obligation was temporarily deferred by PNB without their knowledge and consent. There has to be another basis for their claim of having been freed from their obligation. The question which should be resolved in this instant petition, therefore, is whether or not PNB can be considered a holder for value under Section 29 of the Negotiable Instruments Law such that the petitioners must be necessarily barred from setting up the defense of want of consideration or some other personal defenses which may be set up against a party who is not a holder in due course. A holder for value under Section 29 of the Negotiable Instruments Law is one who must meet all the requirements of a holder in due course under Section 52 of the same law except notice of want of consideration. (Agbayani, Commercial Laws of the Philippines, 1964, p. 208). If he does not qualify as a holder in due course then he holds the instrument subject to the same defenses as if it were non-negotiable (Section 58, Negotiable Instruments Law). In the case at bar, can PNB, the payee of the promissory note be considered a holder in due course? Petitioners contend that the payee PNB is an immediate party and, therefore, is not a holder in due course and stands on no better footing than a mere assignee. In those cases where a payee was considered a holder in due course, such payee either acquired the note from another holder or has not directly dealt with the maker thereof. As was held in the case of Bank of Commerce and Savings v. Randell (186 NorthWestern Reporter 71): "We conclude, therefore, that a payee who receives a negotiable promissory note, in good faith, for value, before maturity, and without any notice of any infirmity, from a holder, not the maker, to whom it was negotiated as a completed instrument, is a holder in due course within the purview of a Negotiable Instruments law, so as to preclude the defense of fraud and failure of consideration between the maker and the holder to whom the instrument, was delivered." Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on rehearing and quoting Daniel on Negotiable Instruments, it was held: "It is a general principle of the law merchant that, as between the immediate parties to a negotiable instrument the parties between whom there is a privity the consideration may be inquired into; and as to them the only superiority of a bill or note over other unsealed evidence of debt is that it prima facie imports a consideration." Although as a general rule, a payee may be considered a holder in due course we think that such a rule cannot apply with respect to the respondent PNB. Not only was PNB an immediate party or in privy to the promissory note, that is, it had dealt directly with the petitioners knowing fully well that the latter only signed as accommodation makers but more important, it was the Deed of Assignment executed by the Construction Company in favor of PNB which principally moved the petitioners to sign the promissory note also in favor of PNB. Petitioners were made to believe

and on that belief entered into the agreement that no other conditions would alter the terms thereof and yet, PNB altered the same. The Deed of Assignment specifically provided that Jose F. Toribio, on behalf of the Company, "have assigned, transferred and conveyed and by these presents, do assign, transfer and convey unto the said Philippine National Bank, its successors and assigns all payments to be received from the Bureau of Public Works on account of contract for the construction of the Puerto Princesa Municipal Building in Palawan, involving the total amount of P36,000.00" and that "This assignment shall be irrevocable and subject to the terms and conditions of the promissory note and or any other kind of documents which the Philippine National Bank have required or may require the assignor to execute to evidence the above-mentioned obligation." Under the terms of the above Deed, it is clear that there are no further conditions which could possibly alter the agreement without the consent of the petitioners such as the grant of greater priority to obligations other than the payment of the loan due to the PNB and part of which loan was guaranteed by the petitioners in the amount of P10,000.00. This, notwithstanding, PNB approved the Bureau's release of three payments directly to the Company instead of paying the same to the Bank. This approval was in violation of the Deed of Assignment and without any notice to the petitioners who stood to lose their property once the promissory note falls due without the same having been paid because the PNB, in effect, waived payments of the first three releases. From the foregoing circumstances, PNB can not be regarded as having acted in good faith which is also one of the requisites of a holder in due course under Section 52 of the Negotiable Instruments Law. The PNB knew that the promissory note which it took from the accommodation makers was signed by the latter because of full reliance on the Deed of Assignment, which, PNB had no intention to comply with strictly. Worse, the third payment to the Company in the amount of P4,293.60 was approved by PNB although the promissory note was almost a month overdue, an act which is clearly detrimental to the petitioners. We, therefore, hold that respondent PNB is not a holder in due course. Thus, the petitioners can validly set up their personal defense of release from the real estate mortgage against PNB. The latter, in authorizing the third payment to the Company after the promissory note became due, in effect, extended the term of the payment of the note without the consent of the accommodation makers who stand as sureties to the accommodated party and to all other parties who are not holders in due course or who do not derive their right from the same, including PNB. It may be argued that the Prudencios could have mortgaged their property even without the promissory note. The records show, however, that they would not have mortgaged the lot were it not for the sake of the Company whose attorney-in-fact was their relative. The spouses did not need the money for themselves. The attorney-in-fact tried twice to convince the Prudencios to mortgage their property in order to secure a loan in favor of the Company but the Prudencios refused. It was only when the deed of assignment was shown to the spouses that they consented to the mortgage and signed the promissory note in the Bank's favor. Article 2085 of the Civil Code enumerates the requisites of a valid mortgage contract. Petitioners do not dispute the validity of the mortgage. They only want to have it cancelled because the Bank violated the deed of assignment and extended the period of time of payment of the promissory note without the petitioners' consent and to the latter's detriment. The mortgage cannot be separated from the promissory note for it is the latter which is the basis of determining whether the mortgage should be foreclosed or cancelled. Without the promissory note which determines the amount of indebtedness there would have been no basis for the mortgage. True, if the Bank had not been the assignee, then the petitioners would be obliged to pay the Bank as their creditor on the promissory note, irrespective of whether or not the deed of assignment had been violated. However, the assignee and the creditor in this case are one and the same the Bank itself. When the Bank violated the deed of assignment, it prejudiced itself because its very violation was the reason why it was not paid on time in its capacity

as creditor in the promissory note. It would be unfair to make the petitioners now answer for the debt or to foreclose on their property. Neither can PNB justify its acts on the ground that the Bureau of Public Works approved the deed of assignment with the condition that the wages of laborers and materials needed in the construction work must take precedence over the payment of the promissory note. In the first place, PNB did not need the approval of the Bureau. But even if it did, it should have informed the petitioners about the amendment of the deed of assignment. Secondly, the wages and materials have already been paid. That issue is academic. What is in dispute is who should bear the loss in this case. As between the petitioners and the Bank, the law and the equities of the case favor the petitioners. And thirdly, the wages and materials constitute a lien only on the constructed building but do not enjoy preference over the loan unless there is a liquidation proceeding such as in insolvency or settlement of estate. (See Philippine Savings Bank v. Lantin, 124 SCRA 476). There were remedies available at the time if the laborers and the creditors had not been paid. The fact is, they have been paid. Hence when the PNB accepted the condition imposed by the Bureau without the knowledge or consent of the petitioners, it amended the deed of assignment which, as stated earlier, was the principal reason why the petitioners consented to become accommodation makers. WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals affirming the decision of the trial court is hereby REVERSED and SET ASIDE and a new one entered absolving the petitioners from liability on the promissory note and under the mortgage contract. The Philippine National Bank is ordered to release the real estate mortgage constituted on the property of the petitioners and to pay the amount of THREE THOUSAND PESOS (P3,000.00) as attorney's fees. SO ORDERED. Feria (Chairman), Fernan, Alampay and Paras, JJ., concur.

ECOND 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. SYLLABUS 1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS LAW; ACCOMMODATION PARTY; REQUISITES THEREOF, CITED; THAT ACCOMMODATION PARTY FAILED TO RECEIVE ANY VALUABLE CONSIDERATION WHEN HE EXECUTED INSTRUMENT, NOT A VALID DEFENSE. 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. 2. ID.; ID.; ID.; LIABLE TO A HOLDER FOR VALUE. 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, in whatever capacity such accommodation party signed the instrument, whether primarily or secondarily.

3. ID.; ID.; ID.; ID.; DOES NOT INCLUDE NOR APPLY TO CORPORATIONS, REASON. Section 29 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. This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra vires. 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. 4. ID.; ID.; ID.; ID.; ID.; EXCEPTION. 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. 5. ID.; ID.; ID.; CORPORATE OFFICERS HAVE NO POWER TO EXECUTE FOR MERE ACCOMMODATION A NEGOTIABLE INSTRUMENT OF THE CORPORATION FOR THEIR INDIVIDUAL DEBTS OR TRANSACTIONS IN WHICH THEY ARE PERSONALLY LIABLE. 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. 6. ID.; ID.; ID.; A CO-SURETY FOR ACCOMMODATED PARTY WITH WHOM HE AND HIS CO-SIGNATORY ASSUME SOLIDARY LIABILITY EX-LEGE FOR THE DEBT INVOLVED. 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. 7. REMEDIAL LAW; COURTS; APPELLATE COURT IN CIVIL CASE BEFORE IT MAY NOT INTERFERE IN THE RESOLUTION OF CRIMINAL CASE. Respondent court went beyond the ratiocination called for in the appeal to it in CA-G.R. CV. No. 05464. It digressed into the merits of the aforesaid Criminal Case No. Q-14867. That 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. 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. DECISION

REGALADO, J p: 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. '1') payable to defendant Ernestina CrisologoJose. 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 signatory. 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 check 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. Cdpr 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. Cdpr Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the check was issued at the instance and for the personal account of Atty. Benares who merely prevailed upon respondent Santos to act as cosignatory 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. cdrep 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 cosignatory, 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 his legal rights when he consigned the amount of P45,000.00 on August 14, 1981, between August 7, 1981, the date when plaintiffappellant 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. cdll 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.

FIRST DIVISION [G.R. No. L-29432. August 6, 1975.] JAI-ALAI CORPORATION OF THE PHILIPPINES, petitioner, vs. BANK OF THE PHILIPPINE ISLAND, respondent. Bausa, Ampil & Suarez for petitioner. Aviado & Aranda for respondent. SYNOPSIS Petitioner deposited in its current account with respondent bank several checks with a total face value of P8,030.58, all acquired from Antonio J. Ramirez, a regular bettor at the jai-alai games and a sale agent of the Inter-Island Gas Service, Inc., the payee of the checks. The deposits were all temporarily credited to petitioner's account in accordance with the clause printed on the bank's deposit slip. Subsequently, Ramirez resigned and after the checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered that all the indorsement made on the cheeks purportedly by its cashiers, as well as the rubber stamp impression thereon reading "Inter-Island Gas Service, Inc.", were forgeries. It informed petitioner, the respondent, the drawers and the drawee banks of the said checks and forgeries and filed a criminal complaint against its former employee. In view of these circumstances, the respondent Bank debited the petitioner's current account and forwarded to the latter the checks containing the forged indorsements, which petitioner refused to accept. Later, petitioner drew against its current account a check for P135,000.00. This check was dishonored by respondent as its records showed that petitioner's balance after netting out the value of the checks with the forged indorsement, was insufficient to cover the value of the check drawn. A complaint was filed by petitioner with the Court of First Instance of Manila. The same was dismissed by the said court after due trial, as well as by the Court of Appeals, on appeal. Hence, this petition for review. The Supreme Court ruled that respondent acted within legal bounds when it debited petitioner's account; that the payments made by the drawee banks to the respondent on account of the checks with forged indorsements were ineffective; that on account thereof, no creditor-debtor relationship was created between the parties; that petitioner was grossly recreant in accepting the checks in question from Ramirez without making any inquiry as to authority to exchange checks belonging to the payee-corporation; and that petitioner, in indorsing the said checks when it deposited them with respondent, guaranteed the genuineness of all prior indorsement thereon so that the respondent, which relied upon its warranty, cannot be held liable for the resulting loss. Judgment affirmed SYLLABUS 1. NEGOTIABLE INSTRUMENT; CHECKS; FORGED INDORSEMENTS EFFECT. A forged signature in a negotiable instrument makes it wholly inoperative and no right to discharge it or enforce its payment can be acquired through or under the forged signature except against a party who cannot invoke the forgery. 2. ID.; ID.; ID.; NO RELATION OF CREDITOR-DEBTOR BETWEEN THE PARTIES CREATED EVEN IF DEPOSITARY OR COLLECTING BANK HAD ALREADY COLLECTED THE PROCEEDS OF THE CHECKS WHEN IT DEBITED PETITIONER'S ACCOUNT; REASON. Where the indorsement made on the checks were forged prior to their delivery to depositor, the payments made by the drawee-banks to the collecting bank on account of the said checks were ineffective. Such being the case, the relationship of creditor and debtor between the depositor and the depository had not been validly effected, the checks not having properly and legitimately converted into cash. 3. ID.; ID.; ID.; COLLECTING BANKS HAS DUTY TO REIMBURSE TO DRAWEE-BANKS THE VALUE OF CHECKS CONTAINING FORGED INDORSEMENT; RULING IN THE CASE OF GREAT EASTERN LIFE INSURANCE CO. vs. HONGKONG & SHANGHAI BANK. In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank, 43 Phil. 678 (1992), the Court ruled that it is the obligation of the collecting bank to reimburse the drawee-bank the value of the checks

subsequently found to contain the forged indorsement of the payee. The reason is that the bank with which the check was deposited has no right to pay the sum stated therein to the forger "or to anyone else upon a forged signature." "It was its duty to know," said the Court, "that (the payee's) endorsement was genuine before cashing the check. " The depositor must in turn shoulder the loss of the amounts which the respondent, as its collecting agent, had no reimburse to the drawee-banks. 4. ID.; ID.; ACCEPTANCE OF CHECKS INDORSED BY AN AGENT; RULING IN THE CASE OF INSULAR DRUG CO. vs. NATIONAL. In Insular Drug Co. vs. National, 58 Phil. 685 (1933), the Court made the pronouncement that ". . .The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman with authority to collect money belonging to his principal does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a corporation which can act by agents, does so at his peril, and must abide by the consequences if the agent who endorses the same is without authority." 5. ID.; ID.; LIABILITY OF AN INDORSER; NO LOSS TO BE SUFFERED BY A BANK WHO RELIED ON INDORSER'S WARRANTY. Under Section 67 of the Negotiable Instruments Law, "Where a person places his indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser," and under Section 66 of the same statute a general indorser warrants that the instrument "is genuine and in all respects what it purports to be." Where the depositor indorsed the checks with forged indorsement when it deposited them with the collecting bank, the former as an endorser guaranteed the genuineness of all prior indorsement thereon. The collecting bank which relied upon this warranty cannot be held liable for the resulting loss. 6. ID.; ID.; FORGED CHECKS; TRANSFER OF FUNDS FROM DRAWEE TO COLLECTING BANK; APPLICATION OF ART. 2154 OF THE CIVIL CODE. The transfer by the drawee-banks of funds to the collecting bank on account of forged checks would be ineffectual when made under the mistaken and valid assumption that the indorsement of the payee thereon were genuine. Under Article 2154 of the New Civil Code "If something is received when there is no right to demand it and it was unduly delivered through mistake, the obligation to return it arises, " By virtue thereof, there can be no valid payment of money by drawee-banks to the collecting bank on account of forged checks. DECISION CASTRO, J p: This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the petitioner) for review of the decision of the Court of Appeals in C.A.-G.R. 34042-R dated June 25, 1968 in favor of the Bank of the Philippine Islands (hereinafter referred to as the respondent). From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were deposited by the petitioner in its current account with the respondent bank. The particulars of these checks are as follows: 1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and payable to the Inter-Island Gas Service Inc. or order: Date Check Exhibit Number P500.00 Amount 18 Number

Deposited 4/2/59 B-352680 4/20/59 4/24/59

A-156907 A-156924

372.32 19 397.82 20

5/4/59 B-364764 5/6/59 B-364775

250.00 23 250.00 24

2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to the Inter-Island Gas Service, Inc. or bearer: 4/13/59 4/27/59 B-335063 B-335072 P 2108.70 P2210.94 21 22

3. Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and payable to the InterIsland Gas Service, Inc. or bearer: 5/18/59 VN430188 P940.80 25

4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to the Inter-Island Gas Service, Inc. order: 5/14/59 5/18/59 1860160 1860660 P 500.00 P 500.00 26 27

All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a sales agent of the Inter-Island Gas and a regular bettor at jai-alai games, were, upon deposit, temporarily credited to the petitioner's account in accordance with the clause printed on the deposit slips issued by the respondent and which reads: "Any credit allowed the depositor on the books of the Bank for checks or drafts hereby received for deposit, is provisional only, until such time as the proceeds thereof, in current funds or solvent credits, shall have been actually received by the Bank and the latter reserves to itself the right to charge back the item to the account of its depositor, at any time before that event, regardless of whether or not the item itself can be returned." About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and after the checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered that all the indorsements made on the checks purportedly by its cashiers, Santiago Amplayo and Vicenta Mucor (who were merely authorized to deposit checks issued payable to the said company) as well as the rubber stamp impression thereon reading "Inter-Island Gas Service, Inc.," were forgeries. In due time, the Inter-Island Gas advised the petitioner, the respondent, the drawers and the drawee-banks of the said checks about the forgeries, and filed a criminal complaint against Ramirez with the Office of the City Fiscal of Manila. 1 The respondent's cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas dated August 31, 1959, called up the petitioner's cashier, Manuel Garcia, and advised the latter that in view of the circumstances he would debit the value of the checks against the petitioner's account as soon as they were returned by the respective drawee-banks. Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded reimbursement to their respective accounts from the drawee-banks, which in turn demanded from the respondent, as collecting bank, the return of the amounts they had paid on account thereof. When the drawee-banks returned the checks to the respondent, the latter paid their value which the former in turn paid to the Inter-Island Gas. The respondent, for its part, debited the petitioner's current account and forwarded to the latter the checks containing the forged indorsements, which the petitioner, however, refused to accept. On October 8, 1959 the petitioner drew against its current account with the respondent a check for P135,000 payable to the order of the Mariano Olondriz y Cia. in payment of certain shares of stock. The check was, however, dishonored by the respondent as its records showed that as of October 8, 1959 the current account of the petitioner, after netting out the value of the checks P8,030.58) with the forged indorsements, had a balance of only P128,257.65.

The petitioner then filed a complaint against the respondent with the Court of First Instance of Manila, which was however dismissed by the trial court after due trial, and as well by the Court of Appeals, on appeal. Hence, the present recourse. The issues posed by the petitioner in the instant petition may be briefly stated as follows: (a) Whether the respondent had the right to debit the petitioner's current account in the amount corresponding to the total value of the checks in question after more than three months had elapsed from the date their value was credited to the petitioner's account:(b) Whether the respondent is estopped from claiming that the amount of P8,030.58, representing the total value of the checks with the forged indorsements, had not been properly credited to the petitioner's account, since the same had already been paid by the drawee-banks and received in due course by the respondent; and(c) On the assumption that the respondent had improperly debited the petitioner's current account, whether the latter is entitled to damages. These three issues interlock and will be resolved jointly. In our opinion, the respondent acted within legal bounds when it debited the petitioner's account. When the petitioner deposited the checks with the respondent, the nature of the relationship created at that stage was one of agency, that is, the bank was to collect from the drawees of the checks the corresponding proceeds. It is true that the respondent had already collected the proceeds of the checks when it debited the petitioner's account, so that following the rule in Gullas vs. Philippine National Bank 2 it might be argued that the relationship between the parties had become that of creditor and debtor as to preclude the respondent from using the petitioner's funds to make payments not authorized by the latter. It is our view nonetheless that no creditor-debtor relationship was created between the parties. Section 23 of the Negotiable Instruments Law (Act 2031) states that 3 "When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority." Since under the foregoing provision, a forged signature in a negotiable instrument is wholly inoperative and no right to discharge it or enforce its payment can be acquired through or under the forged signature except against a party who cannot invoke the forgery, it stands to reason, upon the facts of record, that the respondent, as a collecting bank which indorsed the checks to the drawee-banks for clearing, should be liable to the latter for reimbursement, for, as found by the court a quo and by the appellate court, the indorsements on the checks had been forged prior to their delivery to the petitioner. In legal contemplation, therefore, the payments made by the drawee-banks to the respondent on account of the said checks were ineffective; and, such being the case, the relationship of creditor and debtor between the petitioner and the respondent had not been validly effected, the checks not having been properly and legitimately converted into cash. 4 In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank, 5 the Court ruled that it is the obligation of the collecting bank to reimburse the drawee-bank the value of the checks subsequently found to contain the forged indorsement of the payee. The reason is that the bank with which the check was deposited has no right to pay the sum stated therein to the forger "or anyone else upon a forged signature." "It was its duty to know," said the Court, "that [the payee's] endorsement was genuine before cashing the check." The petitioner must in turn shoulder the loss of the amounts which the respondent; as its collecting agent, had to reimburse to the drawee-banks. We do not consider material for the purposes of the case at bar that more than three months had elapsed since the proceeds of the checks in question were collected by the respondent. The record shows that the respondent had acted promptly after being informed that the indorsements on the checks were forged. Moreover, having received

the checks merely for collection and deposit, the respondent cannot he expected to know or ascertain the genuineness of all prior indorsements on the said checks. Indeed, having itself indorsed them to the respondent in accordance with the rules and practices of commercial banks, of which the Court takes due cognizance, the petitioner is deemed to have given the warranty prescribed in Section 66 of the Negotiable Instruments Law that every single one of those checks "is genuine and in all respects what it purports to be.". The petitioner was, moreover, grossly recreant in accepting the checks in question from Ramirez. It could not have escaped the attention of the petitioner that the payee of all the checks was a corporation the Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mere individual who was admittedly a habitue at its jai-alai games without making any inquiry as to his authority to exchange checks belonging to the payee-corporation. In Insular Drug Co. vs. National 6 the Court made the pronouncement that. ". . . The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman with authority to collect money belonging to his principal does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a corporation, which can act only by agents, does so at his peril, and must abide by the consequences if the agent who indorses the same is without authority." (underscoring supplied) It must be noted further that three of the checks in question are crossed checks, namely, exhs. 21, 25 and 27, which may only be deposited, but not encashed; yet, the petitioner negligently accepted them for cash. That two of the crossed checks, namely, exhs. 21 and 25, are bearer instruments would not, in our view, exculpate the petitioner from liability with respect to them. The fact that they are bearer checks and at the same time crossed checks should have aroused the petitioner's suspicion as to the title of Ramirez over them and his authority to cash them (apparently to purchase jai-alai tickets from the petitioner), it appearing on their face that a corporate entity the Inter Island Gas Service, Inc. was the payee thereof and Ramirez delivered the said checks to the petitioner ostensibly on the strength of the payee's cashiers' indorsements. At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places his indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser," and under Section 66 of the same statute a general indorser warrants that the instrument "is genuine and in all respects what it purports to be." Considering that the petitioner indorsed the said checks when it deposited them with the respondent, the petitioner as an indorser guaranteed the genuineness of all prior indorsements thereon. The respondent which relied upon the petitioner's warranty should not be held liable for the resulting loss. This conclusion applied similarly to exh. 22 which is an uncrossed bearer instrument, for under Section 65 of the Negotiable Instrument Law. "Every person negotiating an instrument by delivery . . . warrants (a) That the instrument is genuine and in all respects what it purports to be." Under that same section this warranty "extends in favor of no holder other than the immediate transferee," which, in the case at bar, would be the respondent. The provision in the deposit slip issued by the respondent which stipulates that it "reserves to itself the right to charge back the item to the account of its depositor," at any time before "current funds or solvent credits shall have been actually received by the Bank," would not materially affect the conclusion we have reached. That stipulation prescribes that there must be an actual receipt by the bank of current funds or solvent credits; but as we have earlier indicated the transfer by the drawee-banks of funds to the respondent on account of the checks in question was ineffectual because made under the mistaken and valid assumption that the indorsements of the payee thereon were genuine. Under article 2154 of the New Civil Code "If something is received when there is no right to demand it and it was unduly delivered through mistake, the obligation to return it arises." There was, therefore, in contemplation of law, no valid payment of money made by the drawee-banks to the respondent on account of the questioned checks. ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioner's cost. Makasiar, Esguerra, Muoz Palma and Martin, JJ., concur.

Teehankee, J., is on leave. Footnotes 1. The City Fiscal dropped the charges on the ground that the Inter-Island Gas which was later reimbursed by the drawee-banks, was no longer qualified to be regarded as an offended party which could properly file a complaint against Ramirez because it had not suffered any damage at all. 2. 62 Phil. 519 (1935).

3. A bank check is a negotiable instrument and is governed by the Negotiable Instruments Law (Ang Tiong vs. Ting, 22 SCRA 713). 4. The collecting hank may certainly set up as defense the so-called "24-hour clearing house rule" of the Central Bank. This rule is not, however, invoked here. See Hongkong & Shanghai Banking Corp. vs. People's Bank & Trust Co., 35 SCRA 141. 5. 6. 43 Phil. 678 (1922). 58 Phil. 685 (1933).

SECOND DIVISION [G.R. No. 132560. January 30, 2002.] WESTMONT BANK (formerly ASSOCIATED BANKING CORP.), petitioner, vs. EUGENE ONG, respondent. Villanueva Caa & Associates Law Offices for petitioner. Alberto Salazar & Associates for respondent E. Ong. SYNOPSIS Respondent, a current account depositor with petitioner bank, was debited the amount of P1,754,787.50 representing the face value of two Pacific Banking Corporation's Manager's checks containing respondent's forged signature. These two checks were deposited by respondent's friend, Paciano Tanlimco, in his account with petitioner bank which accepted and credited both checks without verifying the signature of respondent. Tanlimco immediately withdrew the money. Respondent sought the help of Tanlimco's family to recover the amount, but to no avail. Hence, he filed the collection case almost five months from the discovery of the fraud. The trial court ruled in favor of respondent. It found that petitioner bank was grossly negligent in encashing the checks without verifying the signature of its own depositor, herein respondent. It ordered petitioner to pay the amount of the manager's checks with legal interest and moral and exemplary damages. The Court of Appeals affirmed the trial court's decision. Hence, the present recourse, petitioner assailing, among others, that respondent was guilty of laches. AaCTcI It was held that a forged signature or one made without authority is inoperative and ineffectual under Section 24 of the Negotiable Instruments Law; that a collecting bank has the legal duty to ascertain that the payee's endorsement was genuine before cashing the check and is liable to the payee and must bear the loss for payment made on a forged signature; that findings of the trial court are binding and conclusive on appeal; that there is no laches where a party filed the case only after exhausting possibilities of settling the case amicably. SYLLABUS 1. REMEDIAL LAW; ACTIONS; CAUSE OF ACTION, DEFINED. A cause of action is the act or omission by which a party violates a right of another. The essential elements of a cause of action are: (a) a legal right or rights of the

plaintiff, (b) a correlative obligation of the defendant, and (c) an act or omission of the defendant in violation of said legal right. 2. ID.; ID.; ID.; CASE AT BAR. The complaint filed before the trial court expressly alleged respondent's right as payee of the manager's checks to receive the amount involved, petitioner's correlative duty as collecting bank to ensure that the amount gets to the rightful payee or his order, and a breach of that duty because of a blatant act of negligence on the part of petitioner which violated respondent's rights. 3. MERCANTILE LAW; NEGOTIABLE INSTRUMENTS LAW; CHECKS; FORGED INDORSEMENT; COLLECTING BANK LIABLE TO PAYEE. Since the signature of the payee, in the case at bar, was forged to make it appear that he had made an indorsement in favor of the forger, such signature should be deemed as inoperative and ineffectual. Petitioner, as the collecting bank, grossly erred in making payment by virtue of said forged signature. The payee, herein respondent, should therefore be allowed to recover from the collecting bank. The collecting bank is liable to the payee and must bear the loss because it is its legal duty to ascertain that the payee's endorsement was genuine before cashing the check. As a general rule, a bank or corporation who has obtained possession of a check upon an unauthorized or forged indorsement of the payee's signature and who collects the amount of the check from the drawee, is liable for the proceeds thereof to the payee or other owner, notwithstanding that the amount has been paid to the person from whom the check was obtained. 4. ID.; ID.; ID.; ID.; ID.; RATIONALE. The theory of the rule is that the possession of the check on the forged or unauthorized indorsement is wrongful, and when the money had been collected on the check, the bank or other person or corporation can be held as for moneys had and received, and the proceeds are held for the rightful owners who may recover them. The position of the bank taking the check on the forged or unauthorized indorsement is the same as if it had taken the check and collected the money without indorsement at all and the act of the bank amounts to conversion of the check. TaEIcS 5. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF THE TRIAL COURT, BINDING ON APPEAL. Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositors who transact business with them. They have the obligation to treat their client's account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family. In the present case, petitioner was held to be grossly negligent in performing its duties. Given the substantial face value of the two checks, totalling P1,754,787.50, and the fact that they were being deposited by a person not the payee, the very least defendant bank should have done, as any reasonable prudent man would have done, was to verify the genuineness of the indorsements thereon. The Court cannot help but note that had defendant conducted even the most cursory comparison with plaintiff's specimen signatures in its files (Exhibit "L-1" and "M-1") it would have at once seen that the alleged indorsements were falsified and were not those of the plaintiff-payee. However, defendant apparently failed to make such a verification or, what is worse did so but, chose to disregard the obvious dissimilarity of the signatures. The first omission makes it guilty of gross negligence; the second of bad faith. In either case, defendant is liable to plaintiff for the proceeds of the checks in question. These findings are binding and conclusive on the appellate and the reviewing courts. 6. CIVIL LAW; LACHES; DEFINED. Laches may be defined as the failure or neglect for an unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or should have been done earlier. It is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled thereto has either abandoned or declined to assert it. It concerns itself with whether or not by reason of long inaction or inexcusable neglect, a person claiming a right should be barred from asserting the same, because to allow him to do so would be unjust to the person against whom such right is sought to be enforced. 7. ID.; ID.; NEGATED WHERE CASE WAS FILED ONLY AFTER DEPOSITOR HAD EXHAUSTED POSSIBILITIES SETTLING THE MATTER AMICABLY. In the case at bar, it cannot be said that respondent sat on his rights. He immediately acted after knowing of the forgery by proceeding to seek help from the Tanlimco family and later the

Central Bank, to remedy the situation and recover his money from the forger, Paciano Tanlimco. Only after he had exhausted possibilities of settling the matter amicably with the family of Tanlimco and through the CB, about five months after the unlawful transaction took place, did he resort to making the demand upon the petitioner and eventually before the court for recovery of the money value of the two checks. These acts cannot be construed as undue delay in or abandonment of the assertion of his rights. 8. ID.; ID.; NOT AVAILABLE TO PARTY WHICH HAD THE LAST CLEAR CHANCE TO STOP THE FRAUDULENT ENCASHMENT OF SUBJECT CHECKS. Moreover, the claim of petitioner that respondent should be barred by laches is clearly a vain attempt to deflect responsibility for its negligent act. As explained by the appellate court, it is petitioner which had the last clear chance to stop the fraudulent encashment of the subject checks had it exercised due diligence and followed the proper and regular banking procedures in clearing checks. As we had earlier ruled, the one who had the last clear opportunity to avoid the impending harm but failed to do so is chargeable with the consequences thereof. TESICD DECISION QUISUMBING, J p: This is a petition for review of the decision 1 dated January 13, 1998, of the Court of Appeals in CA-G.R. CV No. 28304 ordering the petitioner to pay respondent P1,754,787.50 plus twelve percent (12%) interest per annum computed from October 7, 1977, the date of the first extrajudicial demand, plus damages. TSEAaD The facts of this case are undisputed. Respondent Eugene Ong maintained a current account with petitioner, formerly the Associated Banking Corporation, but now known as Westmont Bank. Sometime in May 1976, he sold certain shares of stocks through Island Securities Corporation. To pay Ong, Island Securities purchased two (2) Pacific Banking Corporation manager's checks, 2 both dated May 4, 1976, issued in the name of Eugene Ong as payee. Before Ong could get hold of the checks, his friend Faciano Tanlimco got hold of them, forged Ong's signature and deposited these with petitioner, where Tanlimco was also a depositor. Even though Ong's specimen signature was on file, petitioner accepted and credited both checks to the account of Tanlimco, without verifying the 'signature indorsements' appearing at the back thereof. Tanlimco then immediately withdrew the money and absconded. Instead of going straight to the bank to stop or question the payment, Ong first sought the help of Tanlimco's family to recover the amount. Later, he reported the incident to the Central Bank, which like the first effort, unfortunately proved futile. It was only on October 7, 1977, about five (5) months from discovery of the fraud, did Ong cry foul and demanded in his complaint that petitioner pay the value of the two checks from the bank on whose gross negligence he imputed his loss. In his suit, he insisted that he did not "deliver, negotiate, endorse or transfer to any person or entity" the subject checks issued to him and asserted that the signatures on the back were spurious. 3 The bank did not present evidence to the contrary, but simply contended that since plaintiff Ong claimed to have never received the originals of the two (2) checks in question from Island Securities, much less to have authorized Tanlimco to receive the same, he never acquired ownership of these checks. Thus, he had no legal personality to sue as he is not a real party-in-interest. The bank then filed a demurrer to evidence which was denied. On February 8, 1989, after trial on the merits, the Regional Trial Court of Manila, Branch 38, rendered a decision, thus: IN VIEW OF THE FOREGOING, the court hereby renders judgment for the plaintiff and against the defendant, and orders the defendant to pay the plaintiff:

1. The sum of P1,754,787.50 representing the total face value of the two checks in question, Exhibits "A" and "B", respectively, with interest thereon at the legal rate of twelve percent (12%) per annum computed from October 7, 1977 (the date of the first extrajudicial demand) up to and until the same shall have been paid in full; 2. Moral damages in the amount of P250,000.00;

3. Exemplary or corrective damages in the sum of P100,000.00 by way of example or correction for the public good; 4. Attorney's fees of P50,000.00 and costs of suit.

Defendant's counterclaims are dismissed for lack of merit. SO ORDERED. 4 Petitioner elevated the case to the Court of Appeals without success. In its decision, the appellate court held: WHEREFORE, in view of the foregoing, the appealed decision is AFFIRMED in toto. 5 Petitioner now comes before this Court on a petition for review, alleging that the Court of Appeals erred: I . . . IN AFFIRMING THE TRIAL COURT'S CONCLUSION THAT RESPONDENT HAS A CAUSE OF ACTION AGAINST THE PETITIONER. II . . . IN AFFIRMING THE TRIAL COURT'S DECISION FINDING PETITIONER LIABLE TO RESPONDENT AND DECLARING THAT THE LATTER MAY RECOVER DIRECTLY FROM THE FORMER; AND III . . . IN NOT ADJUDGING RESPONDENT GUILTY OF LACHES AND IN NOT ABSOLVING PETITIONER FROM LIABILITY. Essentially the issues in this case are: (1) whether or not respondent Ong has a cause of action against petitioner Westmont Bank; and (2) whether or not Ong is barred to recover the money from Westmont Bank due to laches. Respondent admitted that he was never in actual or physical possession of the two (2) checks of the Island Securities nor did he authorize Tanlimco or any of the latter's representative to demand, accept and receive the same. For this reason, petitioner argues, respondent cannot sue petitioner because under Section 51 of the Negotiable Instruments Law 6 it is only when a person becomes a holder of a negotiable instrument can he sue in his own name. Conversely, prior to his becoming a holder, he had no right or cause of action under such negotiable instrument. Petitioner further argues that since Section 191 7 of the Negotiable Instruments Law defines a "holder" as the 'payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof,' in order to be a holder, it is a requirement that he be in possession of the instrument or the bearer thereof. Simply stated, since Ong never had possession of the checks nor did he authorize anybody, he did not become a holder thereof hence he cannot sue in his own name. 8 Petitioner also cites Article 1249 9 of the Civil Code explaining that a check, even if it is a manager's check, is not legal tender. Hence, the creditor cannot be compelled to accept payment thru this means. 10 It is petitioner's position that for all intents and purposes, Island Securities has not yet tendered payment to respondent Ong, thus, any action by Ong should be directed towards collecting the amount from Island Securities. Petitioner claims that Ong's cause of action against it has not ripened as of yet. It may be that petitioner would be liable to the drawee bank but that is a matter between petitioner and drawee-bank, Pacific Banking Corporation. 11

For its part, respondent Ong leans on the ruling of the trial court and the Court of Appeals which held that the suit of Ong against the petitioner bank is a desirable shortcut to reach the party who ought in any event to be ultimately liable. 12 It likewise cites the ruling of the courts a quo which held that according to the general rule, a bank who has obtained possession of a check upon an unauthorized or forged indorsement of the payee's signature and who collects the amount of the check from the drawee is liable for the proceeds thereof to the payee. The theory of said rule is that the collecting bank's possession of such check is wrongful. 13 Respondent also cites Associated Bank vs. Court of Appeals 14 which held that the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements. The collecting bank is also made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because he is a client. Hence, it is in a better position to detect forgery, fraud or irregularity in the indorsement. 15 Anent Article 1249 of the Civil Code, Ong points out that bank checks are specifically governed by the Negotiable Instruments Law which is a special law and only in the absence of specific provisions or deficiency in the special law may the Civil Code be invoked. 16 Considering the contentions of the parties and the evidence on record, we find no reversible error in the assailed decisions of the appellate and trial courts, hence there is no justifiable reason to grant the petition. Petitioner's claim that respondent has no cause of action against the bank is clearly misplaced. As defined, a cause of action is the act or omission by which a party violates a right of another. 17 The essential elements of a cause of action are: (a) a legal right or rights of the plaintiff, (b) a correlative obligation of the defendant, and (c) an act or omission of the defendant in violation of said legal right. 18 The complaint filed before the trial court expressly alleged respondent's right as payee of the manager's checks to receive the amount involved, petitioner's correlative duty as collecting bank to ensure that the amount gets to the rightful payee or his order, and a breach of that duty because of a blatant act of negligence on the part of petitioner which violated respondent's rights. 19 Under Section 23 of the Negotiable Instruments Law: When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. Since the signature of the payee, in the case at bar, was forged to make it appear that he had made an endorsement in favor of the forger, such signature should be deemed as inoperative and ineffectual. Petitioner, as the collecting bank, grossly erred in making payment by virtue of said forged signature. The payee, herein respondent, should therefore be allowed to recover from the collecting bank. The collecting bank is liable to the payee and must bear the loss because it is its legal duty to ascertain that the payee's endorsement was genuine before cashing the check. 20 As a general rule, a bank or corporation who has obtained possession of a check upon an unauthorized or forged indorsement of the payee's signature and who collects the amount of the check from the drawee, is liable for the proceeds thereof to the payee or other owner, notwithstanding that the amount has been paid to the person from whom the check was obtained. 21 The theory of the rule is that the possession of the check on the forged or unauthorized indorsement is wrongful, and when the money had been collected on the check, the bank or other person or corporation can be held as for moneys had and received, and the proceeds are held for the rightful owners who may recover them. The position of the bank taking the check on the forged or unauthorized indorsement is the same as if it had taken the check and collected the money without indorsement at all and the act of the bank amounts to conversion of the check. 22

Petitioner's claim that since there was no delivery yet and respondent has never acquired possession of the checks, respondent's remedy is with the drawer and not with petitioner bank. Petitioner relies on the view to the effect that where there is no delivery to the payee and no title vests in him, he ought not to be allowed to recover on the ground that he lost nothing because he never became the owner of the check and still retained his claim of debt against the drawer. 23 However, another view in certain cases holds that even if the absence of delivery is considered, such consideration is not material. The rationale for this view is that in said cases the plaintiff uses one action to reach, by a desirable short cut, the person who ought in any event to be ultimately liable as among the innocent persons involved in the transaction. In other words, the payee ought to be allowed to recover directly from the collecting bank, regardless of whether the check was delivered to the payee or not. 24 Considering the circumstances in this case, in our view, petitioner could not escape liability for its negligent acts. Admittedly, respondent Eugene Ong at the time the fraudulent transaction took place was a depositor of petitioner bank. Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositors who transact business with them. 25 They have the obligation to treat their client's account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family. 26 In the present case, petitioner was held to be grossly negligent in performing its duties. As found by the trial court: . . . (A)t the time the questioned checks were accepted for deposit to Paciano Tanlimco's account by defendant bank, defendant bank, admittedly had in its files specimen signatures of plaintiff who maintained a current account with them (Exhibits "L-1" and "M-1"; testimony of Emmanuel Torio). Given the substantial face value of the two checks, totalling P1,754,787.50, and the fact that they were being deposited by a person not the payee, the very least defendant bank should have done, as any reasonable prudent man would have done, was to verify the genuineness of the indorsements thereon. The Court cannot help but note that had defendant conducted even the most cursory comparison with plaintiff's specimen signatures in its files (Exhibit "L-1" and "M-1") it would have at once seen that the alleged indorsements were falsified and were not those of the plaintiff-payee. However, defendant apparently failed to make such a verification or, what is worse did so but, chose to disregard the obvious dissimilarity of the signatures. The first omission makes it guilty of gross negligence; the second of bad faith. In either case, defendant is liable to plaintiff for the proceeds of the checks in question. 27 These findings are binding and conclusive on the appellate and the reviewing courts. On the second issue, petitioner avers that respondent Ong is barred by laches for failing to assert his right for recovery from the bank as soon as he discovered the scam. The lapse of five months before he went to seek relief, from the bank, according to petitioner, constitutes laches. In turn, respondent contends that petitioner presented no evidence to support its claim of laches. On the contrary, the established facts of the case as found by the trial court and affirmed by the Court of Appeals are that respondent left no stone unturned to obtain relief from his predicament. On the matter of delay in reporting the loss, respondent calls attention to the fact that the checks were issued on May 4, 1976, and on the very next day, May 5, 1976, these were already credited to the account of Paciano Tanlimco and presented for payment to Pacific Banking Corporation. So even if the theft of the checks were discovered and reported earlier, respondent argues, it would not have altered the situation as the encashment of the checks was consummated within twenty-four hours and facilitated by the gross negligence of the petitioner bank. 28 Laches may be defined as the failure or neglect for an unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or should have been done earlier. It is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled thereto has either abandoned or declined to assert it. 29 It concerns itself with whether or not by reason of long inaction or inexcusable neglect, a person claiming a right should be barred from asserting the same, because to allow him to do so would be unjust to the person against whom such right is sought to be enforced. 30

In the case at bar, it cannot be said that respondent sat on his rights. He immediately acted after knowing of the forgery by proceeding to seek help from the Tanlimco family and later the Central Bank, to remedy the situation and recover his money from the forger, Paciano Tanlimco. Only after he had exhausted possibilities of settling the matter amicably with the family of Tanlimco and through the CB, about five months after the unlawful transaction took place, did he resort to making the demand upon the petitioner and eventually before the court for recovery of the money value of the two checks. These acts cannot be construed as undue delay in or abandonment of the assertion of his rights. Moreover, the claim of petitioner that respondent should be barred by laches is clearly a vain attempt to deflect responsibility for its negligent act. As explained by the appellate court, it is petitioner which had the last clear chance to stop the fraudulent encashment of the subject checks had it exercised due diligence and followed the proper and regular banking procedures in clearing checks. 31 As we had earlier ruled, the one who had the last clear opportunity to avoid the impending harm but failed to do so is chargeable with the consequences thereof. 32 WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the Court of Appeals, sustaining the judgment of the Regional Trial Court of Manila, is AFFIRMED. CSIcHA Costs against petitioner. SO ORDERED.

THIRD DIVISION [G.R. No. 89252. May 24, 1993.] RAUL SESBREO, 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. SYLLABUS 1. MERCANTILE LAW; NEGOTIABLE INSTRUMENTS LAW; NEGOTIATION ASSIGNMENT AND TRANSFER, DIFFERENTIATED. 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. 2. ID.; ID.; PROMISSORY NOTE; NON-NEGOTIABILITY THEREOF DOES NOT PROHIBIT ITS TRANSFERABILITY AND ASSIGNABILITY; CASE AT BAR. DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferrable" or "non-assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note. 3. ID.; ID.; ID.; PARTIAL ASSIGNMENT OF A PROMISSORY NOTE IS LEGALLY BINDING AND ENFORCEABLE. Delta adduced the "Letter of Agreement" which it had entered into with Philfinance. 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 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. 4. ID.; ID.; ID.; ID.; CONSENT OF INVESTOR NOT NECESSARY FOR VALIDITY AND ENFORCEABILITY OF ASSIGNMENT. 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. 5. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONVENTIONAL SUBROGATION MUST BE CLEARLY ESTABLISHED. Conventional subrogation, which in the first place is never lightly inferred, must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on every point. Nothing of the sort is present in the instant case. 6. MERCANTILE LAW; NEGOTIABLE INSTRUMENTS LAW; MONEY MARKET; CONSTRUED. 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 individual or entities concerned. The issuer of a commercial paper in the money market necessarily knows in advance that it would be expeditiously 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. . . . 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." (Perez v. Court of Appeals, 127 SCRA 636 [1984]). 7. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONDENSATION; EFFECTS THEREOF NOT AFFECTED BY SUBSEQUENT ASSIGNMENT OF CREDIT; CASE AT BAR. 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. On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143A 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 off settled (sic) against [Philfinance] PN No. 143A upon co-terminal maturity." The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, 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. 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. It bears some emphasis that petitioner could have notified Delta of the assignment in his favor as soon as that assignment or sale was effected on 9 February 1981. He could have also 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. 8. ID.; ID.; ASSIGNMENT; VALID WHEN MADE BEFORE COMPENSATION TAKES PLACE; CASE AT BAR. As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "coterminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation from taking 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. 9. ID.; ID.; ID.; RIGHTS OF THE ASSIGNEE, NOT GREATER THAN THE RIGHTS OF THE ASSIGNOR. It is a firmly settled doctrine that the rights of an assignee are not any greater than the rights of the assignor, since the assignee is merely substituted in the place of the assignor 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) 10. ID.; ID.; SOLIDARY OBLIGATIONS; EXPRESS ASSUMPTION OF SOLIDARY LIABILITY, REQUIRED; ABSENCE OF EVIDENCE TO SUPPORT ALLEGATION IN CASE AT BAR. 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 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 at 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 physical delivery to him of DMC PN No. 2731. Accordingly, petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented by the 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 to Pilipinas cannot, however, be lightly inferred. Under Article 1207 of the Civil Code, "there is a solidary liability only when the obligation expressly so states, or 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 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. 11. ID.; ID.; DEPOSIT; ACT OF DESIGNATING PILIPINAS AS CUSTODIAN OR DEPOSITORY BANK; CASE AT BAR. 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 depositary was owed, however, to petitioner Sesbreo as beneficiary of the custodianship or depositary agreement. We do not consider that this is a simple case of a stipulation pour autrui. 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. 12. ID.; ID.; ID.; ID.; DEPOSITARY OBLIGED TO RETURN THE SECURITY OR THING DEPOSITED UPON DEMAND OF DEPOSITOR; RATIONALE. 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 present case, of the beneficiary) of the contract, even though a term for such return may have been established in the said contract. 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 who place their savings in such market for the purpose of generating interest revenues. 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. 13. ID.; ID.; ID.; ID.; ID.; DEPOSITARY LIABLE FOR DAMAGES FOR BREACH OF DUTY; CASE AT BAR. 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 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 Sesbreo. 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 Sesbreo 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 him arising out of its breach of duty. By failing to deliver the Note to the petitioner as depositorbeneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefited 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 counting from 14 March 1981. 14. MERCANTILE LAW; CORPORATION LAW; PIERCING OF CORPORATE ENTITIES; ABSENCE OF EVIDENCE TO JUSTIFY DISREGARD OF SEPARATE CORPORATE PERSONALITIES; CASE AT BAR. It is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite the presence of a common Director Mr. Ricardo Silverio, Sr., sitting on the Boards of Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly related companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were administered and managed for the benefit of one. There is simply not enough evidence of record to justify disregarding the separate corporate personalities of Delta and Pilipinas and to hold them liable for any assumed or undetermined liability of Philfinance to petitioner.

DECISION FELICIANO, J p: On 9 February 1981, petitioner Raul Sesbreo 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 thirtytwo (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 post-dated 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 read as follows: "PILIPINAS BANK Makati Stock Exchange Bldg., Ayala Avenue, Makati, Metro Manila February 9, 1981 VALUE DATE TO Raul Sesbreo April 6, 1981 MATURITY DATE. NO. 10805 DENOMINATED CUSTODIAN RECEIPT 'This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITERS FINANCE CORPORATION, we have in our custody the following securities to you [sic] the extent herein indicated.

SERIAL MAT. NUMBER

FACE DATE

ISSUED REGISTERED VALUE BY

AMOUNT

HOLDER PAYEE

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

UNDERWRITERS FINANCE CORP. We further certify that these securities may be inspected by you or your duly authorized representative at any time during regular banking hours. Upon your written instructions we shall undertake physical delivery of the above securities fully assigned to you should this Denominated Custodianship Receipt remain outstanding in your favor thirty (30) days after its maturity.' PILIPINAS BANK (By Elizabeth De Villa Illegible Signature)" 1 On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and handed to 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 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 had been supposedly agreed upon in a "Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance never did provide the appropriate instructions; Pilipinas never released DMC PN No. 2731, nor any other instrument in respect thereof, to petitioner. Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on the promissory note, and explained in turn that it had previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of Delta. In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and Exchange Commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4 As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private respondents Delta and

Pilipinas. 5 The trial court, in a decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of merit and for lack of cause of action, with costs against petitioner. Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989, the Court of Appeals denied the appeal and held; 6 "Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of plaintiffappellant, 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 P.N. 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 judgment 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 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-avis 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 P.N. 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 that 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. LLjur 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 Note 10 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 that Note subject to the defenses available to Delta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A. 11 We consider Delta's arguments seriatim. Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from the assignment or transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or transfer written in the face of the instrument: "The words 'not negotiable,' stamped on the face of the bill of lading, did not destroy its assignability, but the sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill, though not negotiable, may be transferred by assignment; the assignee taking subject to the equities between the original parties." 12 (Emphasis added) DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferrable" or "nonassignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note. Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full: "April 10, 1980 Philippine Underwriters Finance Corp. Benavidez St., Makati Metro Manila. Attention: Mr. Alfredo O. Banaria SVP-Treasurer GENTLEMEN:

This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981. As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon co-terminal maturity. Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo. Very Truly Yours, (Sgd.) Florencio B. Biagan Senior Vice President" 13 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 promissory notes was this: Delta invested, by making a money market placement with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes. Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that such consent was not necessary for the validity and enforceability of the assignment in favor of petitioner. 14 Delta's argument that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place is never lightly inferred, 15 must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on every point. 16 Nothing of the sort is present in the instant case. It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in money market transactions. In Perez v. Court of Appeals, 17 the Court, speaking through Mme. Justice Herrera, made the following important statement: Cdpr "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 man or dealer in the open market.' It involves 'commercial papers' which are instruments 'evidencing indebtedness 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 individual or entities concerned. The issuer of a commercial paper in the money market necessarily knows in advance that it would be expeditiously 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 consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same qualify if the latter has been stated; (3) (4) That the two debts are due; 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 "coterminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation from taking 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 than 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). llcd 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 contracted 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 debtor 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 in his favor as soon as that assignment or sale was effected on 9 February 1981. He could have also 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 instructions, 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 at 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 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 the 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 to Pilipinas cannot, however, be lightly inferred. Under Article 1207 of the Civil Code, "there is a solidary liability only when the obligation expressly so states, or 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 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 Sesbreo. llcd 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 depositary was owed, however, to petitioner Sesbreo as beneficiary of the custodianship or depositary agreement. We do not consider that this is a simple case of a stipulation pour autrui. 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 present 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 who 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 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 Sesbreo. 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 Sesbreo 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 him 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 benefited 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 counting from 14 March 1981. The conclusion we have here reached is, of course, without prejudice to such right of reimbursement as Pilipinas may have vis-a-vis Philfinance. III The third principal contention of petitioner that Philfinance and private respondents Delta and Pilipinas should be treated as one corporate entity need not detain us for long. LLphil In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial court nor by the respondent Court of appeals. Petitioner similarly did not seek to implead Philfinance in the Petition before us. Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite the presence of a common Director Mr. Ricardo Silverio, Sr., sitting on the Boards of Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly related companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were administered and managed for the benefit of one. There is simply not enough evidence of record to justify disregarding the separate corporate personalities of Delta and Pilipinas and to hold them liable for any assumed or undetermined liability of Philfinance to petitioner. 28 WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 March 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas Bank is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs. SO ORDERED.

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

ECOND DIVISION [G.R. No. 96160. June 17, 1992.] STELCO MARKETING CORPORATION, petitioner, vs. HON. COURT OF APPEALS and STEELWELD CORPORATION OF THE PHILIPPINES, INC., respondents. Reyes, Kho & Associates for petitioner. Ocampo, Dizon & Domingo for private respondent. SYLLABUS 1. NEGOTIABLE INSTRUMENTS LAW; ACCOMMODATION PARTY; LIABLE TO A HOLDER FOR VALUE. STELCO evidently places much reliance on the pronouncement of the Regional Trial Court in Criminal Case No. 66571, that the acquittal of the two (2) accused (Limson and Torres) did not operate "to release Steelweld Corporation from its liability under Sec. 29 of the Negotiable Instruments Law for having issued (the check) for the accommodation of Romeo Lim." The cited provision reads as follows: "SECTION 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." It is noteworthy that the Trial Court's pronouncement containing reference to said Section 29 did not specify to whom STEELWELD, as accommodation party, is supposed to be liable; and certain it is that neither said pronouncement nor any other part of the judgment of acquittal declared it liable to STELCO. To be sure, as regards an accommodation party (such as STEELWELD), lack of notice of any infirmity in the instrument or defect in title of the persons negotiating it, has no application. This is because Section 29 of the law above quoted preserves the right of recourse of a "holder for value" against the accommodation party notwithstanding that "such holder, at the time of taking the instrument, knew him to be only an accommodation party" [Prudential Bank and Trust Co, v. Ramesh Trading Co. C.A. 32908-R, September 10, 1964]. 2. ID.; ID.; HOLDER IN DUE COURSE; DEFINED. "A holder in due course," says the law, [SEC. 52, Negotiable Instruments Law, Act No. 2031] "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 persons negotiating it." 3. ID.; ID.; EFFECTS OF POSSESSION OF NEGOTIABLE INSTRUMENT AFTER PRESENTMENT AND DISHONOR, OR PAYMENT. The record does show that after the check had been deposited and dishonored, STELCO came into possession of it in some way, and was able, several years after the dishonor of the check, to give it in evidence at the trial of the civil case it had instituted against the drawers of the check (Limson and Torres) and RLY. But, as already pointed out, possession of a negotiable instrument after presentment and dishonor, or payment, is utterly inconsequential; it does not make the possessor a holder for value within the meaning of the law; it gives rise to no liability on the part of the maker or drawer and indorsers. 4. REMEDIAL LAW; FACTUAL FINDINGS OF THE COURT OF APPEALS; NORMALLY CONCLUSIVE ON THE SUPREME COURT. Now, STELCO theorizes that it should be deemed a "holder for value" of STEELWELD's Check No. 765380 because the record shows it to have been in "actual possession" thereof; otherwise, it "could not have presented, marked and introduced (said check) in evidence before the court a quo." "Besides," it adds, the check in question

was presented by STELCO to the drawee bank for payment through Armstrong Industries, the manufacturing arm of STELCO and its sister company." The trouble is, there is no evidence whatever that STELCO's possession of Check No. 765380 ever dated back to any time before the instrument's presentment and dishonor. There is no evidence whatsoever that the check was ever given to it, or indorsed to it in any manner or form in payment of an obligation or as security for an obligation, or for any other purpose before it was presented for payment. On the contrary, the factual finding of the Court of Appeals, which by traditional precept is normally conclusive on this Court, is that STELCO never became a holder for value and that "(n)owhere in the check itself does the name of Stelco Marketing appear as payee, indorsee or depositor thereof." DECISION NARVASA, C .J p: Stelco Marketing Corporation is engaged in the distribution and sale to the public of structural steel bars. 1 On seven (7) different occasions in September and October, 1980, it sold to RYL Construction, Inc. quantities of steel bars of various sizes and rolls of G.I. wire. These bars and wire were delivered at different places at the indication of RYL Construction, Inc. The aggregate price for the purchases was P126,859.61. cdrep Although the corresponding invoices issued by STELCO stipulated that RYL would pay "COD" (cash on delivery), the latter made no payments for the construction materials thus ordered and delivered despite insistent demands for payment by the former. On April 4, 1981, RYL gave to Armstrong Industries described by STELCO as its "sister corporation" and "manufacturing arm" 2 a check drawn against Metrobank in the amount of P126,129.86, numbered 765380 and dated April 4, 1981. That check was a company check of another corporation, Steelweld Corporation of the Philippines, signed by its President, Peter Rafael Limson, and its Vice-President, Artemio Torres. The check was issued by Limson at the behest of his friend, Romeo Y. Lim, President of RYL. Romeo Lim had asked Limson for financial assistance, and the latter had agreed to give Lim a check only by way of accommodation, "only as guaranty but not to pay for anything." 3 Why the check was made out in the amount of P126,129.86 is not explained. Anyway, the check was actually issued in said amount of P126,129.86, and as already stated, was given by R.Y. Lim to Armstrong, Industries, 4 in payment of an obligation. When the latter deposited the check at its bank, it was dishonored because "drawn against insufficient funds." 5 When so deposited, the check bore two (2) indorsements, that of "RYL Construction," followed by that of "Armstrong Industries." 6

On account of the dishonor of Metrobank Check No. 765380, and on complaint of Armstrong Industries (through a Mr. Young), Rafael Limson and Artemio Torres were charged in the Regional Trial Court of Manila with a violation of Batas Pambansa Bilang 22. 7 They were acquitted in a decision rendered on June 28, 1984 "on the ground that the check in question was not issued by the drawer 'to apply on account for value,' it being merely for accommodation purposes." 8 That judgment however conditioned the acquittal with the following pronouncement: "This is not however to release Steelweld Corporation from its liability under Sec. 29 of the Negotiable Instruments Law for having issued it for the accommodation of Romeo Lim." Eleven months or so later and some four (4) years after issuance of the check in question in May, 1985, STELCO filed with the Regional Trial Court of Caloocan City a civil complaint 9 against both RYL and STEELWELD for the recovery of the value of the steel bars and wire sold to and delivered to RYL (as already narrated) in the amount of P126,129.86, "plus 18% interest from August 20, 1980 . . . (and) 25% of the total amount sought to be recovered as and by way of attorney's fees . . ." 10 Among the allegations of its complaint was that Metrobank Check No. 765380 above mentioned had been given to it in payment of RYL's indebtedness, duly indorsed by R.Y. Lim. 11 A preliminary attachment was issued by the trial court on the basis of the averments of the complaint but was shortly dissolved upon the filing of a counter-bond by STEELWELD.

RYL could no longer be located and could not be served with summons. 12 It never appeared. Only STEELWELD filed an answer, under date of July 16, 1985. 13 In said pleading, it specifically denied the facts alleged in the complaint, the truth, according to Steelweld, being basically that 1) STELCO "is a complete stranger to it;" it had "not entered into any transaction or business dealing of any kind" with STELCO, the transactions described in the complaint having been solely and exclusively between the plaintiff and RYL Construction; 2) the check in question was "only given to a certain R. Lim to be used as collateral for another obligation . . . (but) in breach of his agreement (Lim) utilized and negotiated the check for another purpose . . .;" 3) nevertheless, the check "is wholly inoperative since . . . Steelweld . . . did not issue it for any valuable consideration either to R. Lim or to the plaintiff not to mention also the fact that the said plaintiff failed to comply with the requirements of the law to hold the said defendant (STEELWELD) liable . . ." Trial ensued upon these issues, after which judgment was rendered on June 26, 1986. 14 The judgment sentenced "the defendant Steelweld corporation to pay to . . . (Stelco Marketing Corporation) the amount of P126,129.86 with legal rate of interest from May 9, 1985, when this case was instituted until fully paid, plus another sum equivalent to 25% of the total amount due as and for attorney's fees . . ." 15 That disposition was justified in the judgment as follows: 16 "There is no question, then, that as far as any commercial transaction is concerned between plaintiff and defendant Steelweld no such transaction over occurred. Ordinarily, under civil law rules, there having been no transaction between them involving the purchase of certain merchandise there would be no privity of contract between them, and plaintiff will have no right to sue the defendant for payment of said merchandise for simple reason that the defendant did not order them, much less receive them. But we have here a case where the defendant Steelweld thru its President Peter Rafael Limson admitted to have issued a check payable to cash in favor of his friend Romeo Lim who was the President of RYL Construction by way of accommodation. Under the Negotiable Instruments Law an accommodation party is liable. 'SEC. 29. Liability of an 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.' " From this adverse judgment STEELWELD appealed to the Court of Appeals 17 and there succeeded in reversing the judgment. By Decision promulgated on May 29, 1990, 18 the Court of Appeals 19 ordered "the complaint against appellant (STEELWELD) DISMISSED; (and the appellee, STELCO) to pay appellant the sum of P15,000.00 as attorney's fees and cost of litigation, the suit . . . (being) a baseless one that dragged appellant in court and caused it to incur attorney's fees and expense of litigation." STELCO's motion for reconsideration was denied by the Appellate Tribunal's resolution dated November 13, 1990. 20 The Court stressed that ". . . as far as Steelweld is concerned, there was no commercial transaction between said appellant and appellee. Moreover, there is no evidence that appellee Stelco Marketing became a holder for value. Nowhere in the check itself does the name of Stelco Marketing appear as payee, indorsee or depositor thereof. Finally, appellee's complaint is for the collection of the unpaid accounts for delivery of steel bars and construction materials. It having been established that appellee had no commercial transaction with appellant Stelco, appellee had no cause of action against said appellant."

STELCO appealed to this Court in accordance with Rule 45 of the Rules of Court. In this Court it seeks to make the following points in connection with its plea for the overthrow of the Appellate Tribunal's aforesaid decision, viz.: 1) 2) said decision is "not in accord with law and jurisprudence;" "STELCO is a 'holder' within the meaning of the Negotiable Instruments Law;

3) "STELCO is a holder in due course of Metrobank Check No. 765380 . . . (and hence) holds the same free from personal or equitable defense;" and 4) "Negotiation in breach of faith is a personal defense . . . (and hence) no effective as against a holder in due course." The points are not well taken. The crucial question is whether or not STELCO ever became a holder in due course of Check No. 765380, a bearer instrument within the contemplation of the Negotiable Instruments Law. It never did. STELCO evidently places much reliance on the pronouncement of the Regional Trial Court in Criminal Case No. 66571, 21 that the acquittal of the two (2) accused (Limson and Torres) did not operate "to release Steelweld Corporation from its liability under Sec. 29 of the Negotiable Instruments Law for having issued . . . (the check) for the accommodation of Romeo Lim." The cited provision reads as follows: "SECTION 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." It is noteworthy that the Trial Court's pronouncement containing reference to said Section 29 did not specify to whom STEELWELD, as accommodation party, is supposed to be liable; and certain it is that neither said pronouncement nor may other part of the judgment of acquittal declared it liable to STELCO. "A holder in due course," says the law, 22 "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 persons negotiating it." To be sure, as regards an accommodation party (such as STEELWELD), the fourth condition, i.e., lack of notice of any infirmity in the instrument or defect in title of the persons negotiating it, has no application. This is because Section 29 of the law above quoted preserves the right of recourse of a "holder for value" against the accommodation party notwithstanding that "such holder, at the time of taking the instrument, knew him to be only an accommodation party." 23 Now, STELCO theorizes that it should be deemed a "holder for value" of STEELWELD's Check No. 765380 because the record shows it to have been in "actual possession" thereof; otherwise, it "could not have presented, marked and introduced (said check) in evidence . . . before the court a quo." "Besides," it adds, the check in question was presented by STELCO to the drawee bank for payment through Armstrong Industries, the manufacturing arm of STELCO and its sister company." 24

The trouble is, there is no evidence whatever that STELCO's possession of Check No. 765380 ever dated back to any time before the instrument's presentment and dishonor. There is no evidence whatsoever that the check was ever given to it, or indorsed to it in any manner or form in payment of an obligation or as security for an obligation, or for any other purpose before it was presented for payment. On the contrary, the factual finding of the Court of Appeals, which by traditional precept is normally conclusive on this Court, is that STELCO never became a holder for value and that "(n)owhere in the check itself does the name of Stelco Marketing appear as payee, indorsee or depositor thereof." 25 What the record shows is that: (1) the STEELWELD company check in question was given by its president to R.Y. Lim; (2) it was given only by way of accommodation, to be "used as collateral for another obligation;" (3) in breach of the agreement, however, R.Y. Lim indorsed the check to Armstrong in payment of an obligation; (4) Armstrong deposited the check to its account, after indorsing it; (5) the check was dishonored. The record does not show any intervention or participation by STELCO in any manner or form whatsoever in these transactions, or any communication of any sort between STEELWELD and STELCO, or between either of them and Armstrong Industries, at any time before the dishonor of the check. The record does show that after the check had been deposited and dishonored, STELCO came into possession of it in some way, and was able, several years after the dishonor of the check, to give it in evidence at the trial of the civil case it had instituted against the drawers of the check (Limson and Torres) and RYL. But, as already pointed out, possession of a negotiable instrument after presentment and dishonor, or payment, is utterly inconsequential; it does not make the possessor a holder for value within the meaning of the law; it gives rise to no liability on the part of the maker or drawer and indorsers. LLpr It is clear from the relevant circumstances that STELCO cannot be deemed a holder of the check for value. It does not meet two of the essential requisites prescribed by the statute. It did not become "the holder of it before it was overdue, and without notice that it had been previously dishonored," and it did not take the check "in good faith and for value." 26 Neither is there any evidence whatever that Armstrong Industries, to whom R.Y. Lim negotiated the check, accepted the instrument and attempted to encash it in behalf, and as agent of STELCO. On the contrary, the indications are that Armstrong was really the intended payee of the check and was the party actually injured by its dishonor; it was after all its representative (a Mr. Young) who instituted the criminal prosecution of the drawers, Limson and Torres, albeit unsuccessfully. The petitioner has failed to show any sufficient cause for modification or reversal of the challenged judgment of the Court of Appeals which, on the contrary, appears to be entirely in accord with the facts and the applicable law. WHEREFORE, the petition is DENIED and the Decision of the Court of Appeals in CA-G.R. CV No. 13418 is AFFIRMED in toto. Costs against petitioner. SO ORDERED. Paras, Padilla and Regalado, JJ ., concur.

FIRST DIVISION [G.R. No. 109491. February 28, 2001.] ATRIUM MANAGEMENT CORPORATION, petitioner, vs. COURT OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE LEON, RAFAEL DE LEON, JR., AND HI-CEMENT CORPORATION, respondents. [G.R. No. 121794. February 28, 2001.]

LOURDES M. DE LEON, petitioner, vs. COURT OF APPEALS, ATRIUM MANAGEMENT CORPORATION, AND HI-CEMENT CORPORATION, respondents. Meer Meer & Meer for Lourdes M. De Leon. Castillo Laman Tan Pantaleon & San Jose for Atrium Mgt. Corp. Quisumbing Torres for Hi-Cement Corp. SYNOPSIS Hi-Cement Corp., through its corporate signatories, de Leon and Lourdes M. Antonio de las Alas, issued crossed checks in the amount of P2 million in favor of ET Henry and Co. The checks were then discounted and endorsed to Atrium Corp. but dishonored upon presentment for payment. The Court of Appeals ruled that Hi-Cement Corp. is absolved from any liability as the checks were issued without valuable consideration, unauthorized and constituting ultra vires acts. Two appeals were interposed, one by Atrium Corp. and the other by de Leon. TacSAE The Court ruled that there was basis to rule that the act of issuing the checks was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of Hi-Cement, hence, not an ultra vires act. However, as the checks were issued to ET Henry strictly for deposit only to payee's account, respondent de Leon became personally liable to the payment of the checks, along with ET Henry, when she confirmed, for the purpose of rediscounting, that the checks were issued to ET Henry in payment of purchased petroleum products. Her negligence resulted in damage to Hi-Cement Corp. Finally, the Court ruled that, although Atrium Corp. is not a holder in due course as it has knowledge of the flaws of the checks, it is not precluded from recovering on the instrument. SYLLABUS 1. COMMERCIAL LAW; PRIVATE CORPORATIONS; CORPORATE OFFICERS; ULTRA VIRES ACT. "An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law". The term "ultra vires" is "distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated." STaCcA 2. ID.; ID.; ID.; WHEN PERSONAL LIABILITY MAY VALIDLY ATTACH. "Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: "1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; "2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; "3. He agrees to hold himself personally and solidarily liable with the corporation; or "4. He is made, by a specific provision of law, to personally answer for his corporate action. 3. ID.; ID.; ID.; NEGLIGENCE RESULTING IN DAMAGES TO THE CORPORATION; CASE AT BAR. In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the checks were strictly endorsed for deposit only to the payee's account and not to be further negotiated. What is more, the confirmation letter contained a clause that was not true, that is, "that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry". Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held personally liable therefor. IDaCcS 4. ID.; NEGOTIABLE INSTRUMENTS LAW; HOLDER IN DUE COURSE. The Negotiable Instruments Law, Section 52 defines a holder in due course, thus: "A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it

was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it." 5. ID.; ID.; HOLDER NOT IN DUE COURSE; CAN STILL RECOVER ON THE INSTRUMENT. In the instant case, the checks were crossed checks and specifically indorsed for deposit to payee's account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only to payee's account, meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in due course. However, it does not follow as a legal proposition that simply because petitioner Atrium was not a holder in due course for having taken the instruments in question with notice that the same was for deposit only to the account of payee E.T. Henry that it was altogether precluded from recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not in due course can not recover on the instrument. The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. 20 One such defense is absence or failure of consideration. TcSHaD DECISION PARDO, J p: What is before the Court are separate appeals from the decision of the Court of Appeals, 1 ruling that Hi-Cement Corporation is not liable for four checks amounting to P2 million issued to E.T. Henry and Co. and discounted to Atrium Management Corporation. IcAaSD On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court, Manila an action for collection of the proceeds of four postdated checks in the total amount of P2 million. Hi-Cement Corporation through its corporate signatories, petitioner Lourdes M. de Leon, 2 treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to petitioner Atrium Management Corporation for valuable consideration. Upon presentment for payment, the drawee bank dishonored all four checks for the common reason "payment stopped". Atrium, thus, instituted this action after its demand for payment of the value of the checks was denied. 3 After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay petitioner Atriums jointly and severally, the amount of P2 million corresponding to the value of the four checks, plus interest and attorney's fees. 4 On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its decision modifying the decision of the trial court, absolving Hi-Cement Corporation from liability and dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas constituted ultra vires acts; and (3) The subject checks were not issued for valuable consideration. 5 At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February 1981, Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering to discount four RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor of E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-Cement the fact that the checks represented payment for petroleum products which E.T. Henry delivered to Hi-Cement. Carlos C. Syquia identified two letters, dated February 6, 1981 and February 9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as treasurer, confirming the issuance of the four checks in favor of E.T. Henry in payment for petroleum products. 6 Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was once a secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was familiar with the four RCBC checks as the postdated checks issued by Hi-Cement to E.T. Henry upon instructions of Ms. de Leon. She testified that E.T. Henry offered to give Hi-Cement a loan which the subject checks would secure as collateral. 7

On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the dispositive portion of which reads: "WHEREFORE, in view of the foregoing considerations, and plaintiff having proved its cause of action by preponderance of evidence, judgment is hereby rendered ordering all the defendants except defendant Antonio de las Alas to pay plaintiff jointly and severally the amount of TWO MILLION (P2,000,000.00) PESOS with the legal rate of interest from the filing of the complaint until fully paid, plus the sum of TWENTY THOUSAND (P20,000.00) PESOS as and for attorney's fees and the cost of suit." All other claims are, for lack of merit dismissed. SO ORDERED." 8 In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals. 9 Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarily liable with Hi-Cement for the amount of the check. Also, that the trial court erred in ruling that Atrium was an ordinary holder, not a holder in due course of the rediscounted checks. 10 Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-Cement did not authorize the issuance of the checks, it could still be held liable for the checks. And assuming that the checks were issued with its authorization, the same was without any consideration, which is a defense against a holder in due course and that the liability shall be borne alone by E.T. Henry. 11 On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of the trial court, the dispositive portion of which reads: cETCID "Judgment is hereby rendered: (1) dismissing the plaintiff's complaint as against defendants Hi-Cement Corporation and Antonio De las Alas;

(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and severally to pay the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00) with interest at the legal rate from the filing of the complaint until fully paid, plus P20,000.00 for attorney's fees. (3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and severally to pay defendant Hi-Cement Corporation, the sum of P20,000.00 as and for attorney's fees. With cost in this instance against the appellee Atrium Management Corporation and appellant Lourdes Victoria M. de Leon. So ordered." 12 Hence, the recourse to this Court. 13 The issues raised are the following: In G.R. No. 109491 (Atrium, petitioner): 1. 2. Whether the issuance of the questioned checks was an ultra vires act; Whether Atrium was not a holder in due course and for value; and

3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and ordering it to pay P20,000.00 as attorney's fees. 14 In G.R. No. 121794 (de Leon, petitioner):

1. Whether the Court of Appeals erred in holding petitioner personally liable for the Hi-Cement checks issued to E.T. Henry; 2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;

3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as signatory of the checks was personally liable for the value of the checks, which were declared to be issued without consideration; 4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement attorney's fees and costs. 15

We affirm the decision of the Court of Appeals. We first resolve the issue of whether the issuance of the checks was an ultra vires act. The record reveals that HiCement Corporation issued the four (4) checks to extend financial assistance to E.T. Henry, not as payment of the balance of the P30 million pesos cost of hydro oil delivered by E.T. Henry to Hi-Cement. Why else would petitioner de Leon ask for counterpart checks from E.T. Henry if the checks were in payment for hydro oil delivered by E.T. Henry to Hi-Cement? Hi-Cement, however, maintains that the checks were not issued for consideration and that Lourdes and E.T. Henry engaged in a "kiting operation" to raise funds for E.T. Henry, who admittedly was in need of financial assistance. The Court finds that there was no sufficient evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the corporation and is authorized to sign checks for the corporation. At the time of the issuance of the checks, there were sufficient funds in the bank to cover payment of the amount of P2 million pesos. SAaTHc It is, however, our view that there is basis to rule that the act of issuing the checks was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. "An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law". 16 The term "ultra vires" is "distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated." 17 The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were personally liable for the checks issued as corporate officers and authorized signatories of the check. "Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: "1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; "2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; "3. "4. He agrees to hold himself personally and solidarily liable with the corporation; or He is made, by a specific provision of law, to personally answer for his corporate action." 18

In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the checks were strictly endorsed for deposit only to the payee's account and not to be further negotiated. What is more, the confirmation letter contained a clause that was not true, that is,

"that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry". Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held personally liable therefor. The next issue is whether or not petitioner Atrium was a holder of the checks in due course. The Negotiable Instruments Law, Section 52 defines a holder in due course, thus: "A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face;

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

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it." In the instant case, the checks were crossed checks and specifically indorsed for deposit to payee's account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only to payee's account, meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in due course. However, it does not follow as a legal proposition that simply because petitioner Atrium was not a holder in due course for having taken the instruments in question with notice that the same was for deposit only to the account of payee E.T. Henry that it was altogether precluded from recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not in due course can not recover on the instrument. 19 The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. 20 One such defense is absence or failure of consideration. 21 We need not rule on the other issues raised, as they merely follow as a consequence of the foregoing resolutions. CHEIcS WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court of Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMED in toto. No costs. SO ORDERED. Davide, Jr., C.J., Puno, Kapunan and Ynares-Santiago, JJ., concur. Footnotes 1. In CA-G.R CV No. 26686, promulgated on March 17, 1973, Francisco, C., J., ponente, Ramirez and Gutierrez, n., concurring. 2. 3. 4. In G. R No. 121794. Consolidated Memorandum, G. R No. 121794, Rollo, pp. 191-226, at pp. 192-193. Original Record, Decision, Judge Edilberto G. Sandoval, presiding, pp. 356-362.

5. Petition, Annex "C", in G. R No. 109491, Rollo, pp. 319-339 and Petition, Annex "A", in G.R. No. 121794, Rollo, pp. 30-49. 6. TSN, September 30, 1985, pp. 6-19.

7. 8. 9. 10. 11. 12.

TSN, January 29, 1988, pp. 15-16. Original Record, Decision, Judge Edilberto G. Sandoval, presiding, pp. 356-362. Ibid., Notice of Appeal, Lourdes, p. 366, and Notice of Appeal Hi-Cement, p. 365. CA Rollo, Defendant-Appellant Lourdes M. De Leon's Brief, pp. 10-10N. Ibid., Defendant Appellant's Brief, pp. 23C-23II. CA Rollo, Decision, pp. 78-99, Francisco, C., J., ponente, Ramirez and Gutierrez, JJ., concurring.

13. G.R No. 109491, Petition filed on April 13, 1993, Rollo, pp. 3-18; G.R No. 121794, Petition filed on October 20, 1995, Rollo, pp. 10-28. On January 31, 2000, we gave due course to the petition. G.R No. 109491, Rollo, pp. 244245; G.R No. 121794, Rollo, pp. 152-153. 14. 15. 16. 17. Petition, G.R No. 1109491, Rollo, pp. 1-0-16. Petition, G.R No. 121794, Rollo, p. 16. Republic v. Acoje Mining Co., Inc., 117 Phil. 379, 383 [1963]; Corporation Code Sec. 45. Republic v. Acoje Mining Co., Inc., supra, Note 16, at pp. 383-384.

18. FCY Construction Group, Inc. v. Court of Appeals, G.R No. 123358, February 1, 2000, citing Tramat Mercantile, Inc. v. Court of Appeals, 238 SCRA 14, 18-19 [1994]; Equitable Banking Corporation v. NLRC, 339 Phil. 541, 566 (1997). 19. 20. 21. Chan Wan v. Tan Kim and Chen So, 109 Phil. 706 (1960). State Investment House v. Intermediate Appellate Court, 175 SCRA 310, 317 (1989). Negotiable Instruments Law, Sec. 28.

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A.M. No. P-99-1302 February 28, 2001