I On April 23, 1958 one of the above-mentioned money orders numbered
PRELIMINARY CONSIDERATIONS 124688 was received by appellant as part of its sales receipts. The
G.R. No. L-22405 June 30, 1971
PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.
Marcial Esposo for plaintiff-appellant.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor
General Antonio G. Ibarra and Attorney Concepcion Torrijos-Agapinan for
defendants-appellees.
DIZON, J.:
An appeal from a decision of the Court of First Instance of Manila
dismissing the complaint filed by the Philippine Education Co., Inc.
against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the Manila
Post Office ten (10) money orders of P200.00 each payable to E.P.
Montinola withaddress at Lucena, Quezon. After the postal teller had
made out money ordersnumbered 124685, 124687-124695, Montinola
offered to pay for them with a private checks were not generally accepted
in payment of money orders, the teller advised him to see the Chief of the
Money Order Division, but instead of doing so, Montinola managed to
leave building with his own check and the ten(10) money orders without
the knowledge of the teller.
On the same date, April 18, 1958, upon discovery of the disappearance
of the unpaid money orders, an urgent message was sent to all
postmasters, and the following day notice was likewise served upon all
banks, instructing them not to pay anyone of the money orders aforesaid
if presented for payment. The Bank of America received a copy of said
notice three days later.
following day it deposited the same with the Bank of America, and one
day thereafter the latter cleared it with the Bureau of Posts and received
from the latter its face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the
Money Order Division of the Manila Post Office, acting for and in behalf of
his co-appellee, Postmaster Enrico Palomar, notified the Bank of America
that money order No. 124688 attached to his letter had been found to
have been irregularly issued and that, in view thereof, the amount it
represented had been deducted from the bank's clearing account. For its
part, on August 2 of the same year, the Bank of America debited
appellant's account with the same amount and gave it advice thereof by
means of a debit memo.
On October 12, 1961 appellant requested the Postmaster General to
reconsider the action taken by his office deducting the sum of P200.00
from the clearing account of the Bank of America, but his request was
denied. So was appellant's subsequent request that the matter be
referred to the Secretary of Justice for advice. Thereafter, appellant
elevated the matter to the Secretary of Public Works and
Communications, but the latter sustained the actions taken by the postal
officers.
In connection with the events set forth above, Montinola was charged
with theft in the Court of First Instance of Manila (Criminal Case No.
43866) but after trial he was acquitted on the ground of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the
Municipal Court of Manila praying for judgment as follows:
WHEREFORE, plaintiff prays that after hearing
defendants be ordered:
(a) To countermand the notice given to the Bank of
America on September 27, 1961, deducting from the said
Bank's clearing account the sum of P200.00 represented
by postal money order No. 124688, or in the alternative
indemnify the plaintiff in the same amount with interest at
8-% per annum from September 27, 1961, which is the
rate of interest being paid by plaintiff on its overdraft
account;
 (b) To pay to the plaintiff out of their own personal funds,
jointly and severally, actual and moral damages in the
amount of P1,000.00 or in such amount as will be proved
and/or determined by this Honorable Court: exemplary
damages in the amount of P1,000.00, attorney's fees of
P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may
be deemed just and equitable.
On November 17, 1962, after the parties had submitted the stipulation of
facts reproduced at pages 12 to 15 of the Record on Appeal, the above-
named court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered, ordering the
defendants to countermand the notice given to the Bank
of America on September 27, 1961, deducting from said
Bank's clearing account the sum of P200.00 representing
the amount of postal money order No. 124688, or in the
alternative, to indemnify the plaintiff in the said sum of
P200.00 with interest thereon at the rate of 8-% per
annum from September 27, 1961 until fully paid; without
any pronouncement as to cost and attorney's fees.
The case was appealed to the Court of First Instance of Manila where,
after the parties had resubmitted the same stipulation of facts, the
appealed decision dismissing the complaint, with costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's
brief are related to the other and will therefore be discussed jointly. They
raise this main issue: that the postal money order in question is a
negotiable instrument; that its nature as such is not in anyway affected by
the letter dated October 26, 1948 signed by the Director of Posts and
addressed to all banks with a clearing account with the Post Office, and
that money orders, once issued, create a contractual relationship of
debtor and creditor, respectively, between the government, on the one
hand, and the remitters payees or endorses, on the other.
It is not disputed that our postal statutes were patterned after statutes in
force in the United States. For this reason, ours are generally construed
in accordance with the construction given in the United States to their
own postal statutes, in the absence of any special reason justifying a
departure from this policy or practice. The weight of authority in the
United States is that postal money orders are not negotiable instruments
(Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank,
30 Fed. 912), the reason behind this rule being that, in establishing and
operating a postal money order system, the government is not engaging
in commercial transactions but merely exercises a governmental power
for the public benefit.
It is to be noted in this connection that some of the restrictions imposed
upon money orders by postal laws and regulations are inconsistent with
the character of negotiable instruments. For instance, such laws and
regulations usually provide for not more than one endorsement; payment
of money orders may be withheld under a variety of circumstances (49
C.J. 1153).
Of particular application to the postal money order in question are the
conditions laid down in the letter of the Director of Posts of October 26,
1948 (Exhibit 3) to the Bank of America for the redemption of postal
money orders received by it from its depositors. Among others, the
condition is imposed that "in cases of adverse claim, the money order or
money orders involved will be returned to you (the bank) and the,
corresponding amount will have to be refunded to the Postmaster,
Manila, who reserves the right to deduct the value thereof from any
amount due you if such step is deemed necessary." The conditions thus
imposed in order to enable the bank to continue enjoying the facilities
theretofore enjoyed by its depositors, were accepted by the Bank of
America. The latter is therefore bound by them. That it is so is clearly
referred from the fact that, upon receiving advice that the amount
represented by the money order in question had been deducted from its
clearing account with the Manila Post Office, it did not file any protest
against such action.
Moreover, not being a party to the understanding existing between the
postal officers, on the one hand, and the Bank of America, on the other,
appellant has no right to assail the terms and conditions thereof on the
ground that the letter setting forth the terms and conditions aforesaid is
void because it was not issued by a Department Head in accordance with
Sec. 79 (B) of the Revised Administrative Code. In reality, however, said
legal provision does not apply to the letter in question because it does not
provide for a department regulation but merely sets down certain
conditions upon the privilege granted to the Bank of Amrica to accept and
pay postal money orders presented for payment at the Manila Post
Office. Such being the case, it is clear that the Director of Posts had
ample authority to issue it pursuant to Sec. 1190 of the Revised
Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the issues
raised in the third and fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law, the
same is hereby affirmed with costs.
G.R. No. 100290 June 4, 1993
NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and EDEN
TAN, respondents.
PADILLA, J.:
Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before
this Court assailing the decision * of respondent appellate court dated 24
April 1991 in CA-G.R. SP No. 24164 denying their petition
for certiorari prohibition, and injunction which sought to annul the order of
Judge Eutropio Migrio of the Regional Trial Court, Branch 151, Pasig,
Metro Manila in Civil Case No. 54863 entitled "Eden Tan vs. Sps.
Norberto and Carmen Tibajia."
Stated briefly, the relevant facts are as follows:
Case No. 54863 was a suit for collection of a sum of money filed by Eden
Tan against the Tibajia spouses. A writ of attachment was issued by the
trial court on 17 August 1987 and on 17 September 1987, the Deputy
Sheriff filed a return stating that a deposit made by the Tibajia spouses in
the Regional Trial Court of Kalookan City in the amount of Four Hundred
Forty Two Thousand Seven Hundred and Fifty Pesos (P442,750.00) in
another case, had been garnished by him. On 10 March 1988, the
Regional Trial Court, Branch 151 of Pasig, Metro Manila rendered its
decision in Civil Case No. 54863 in favor of the plaintiff Eden Tan,
ordering the Tibajia spouses to pay her an amount in excess of Three
Hundred Thousand Pesos (P300,000.00). On appeal, the Court of
Appeals modified the decision by reducing the award of moral and
exemplary damages. The decision having become final, Eden Tan filed
the corresponding motion for execution and thereafter, the garnished
funds which by then were on deposit with the cashier of the Regional
Trial Court of Pasig, Metro Manila, were levied upon.
On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff
Eduardo Bolima the total money judgment in the following form:
Cashier's Check P262,750.00
Cash 135,733.70
Total P398,483.70
Private respondent, Eden Tan, refused to accept the payment made by
the Tibajia spouses and instead insisted that the garnished funds
deposited with the cashier of the Regional Trial Court of Pasig, Metro
Manila be withdrawn to satisfy the judgment obligation. On 15 January
1991, defendant spouses (petitioners) filed a motion to lift the writ of
execution on the ground that the judgment debt had already been paid.
On 29 January 1991, the motion was denied by the trial court on the
ground that payment in cashier's check is not payment in legal tender
and that payment was made by a third party other than the defendant. A
motion for reconsideration was denied on 8 February 1991. Thereafter,
the spouses Tibajia filed a petition for certiorari, prohibition and injunction
in the Court of Appeals. The appellate court dismissed the petition on 24
April 1991 holding that payment by cashier's check is not payment in
legal tender as required by Republic Act No. 529. The motion for
reconsideration was denied on 27 May 1991.
In this petition for review, the Tibajia spouses raise the following issues:
I WHETHER OR NOT THE BPI CASHIER'S CHECK NO.
014021 IN THE AMOUNT OF P262,750.00 TENDERED
BY PETITIONERS FOR PAYMENT OF THE JUDGMENT
DEBT, IS "LEGAL TENDER".
II WHETHER OR NOT THE PRIVATE RESPONDENT
MAY VALIDLY REFUSE THE TENDER OF PAYMENT
PARTLY IN CHECK AND PARTLY IN CASH MADE BY
PETITIONERS, THRU AURORA VITO AND COUNSEL,
FOR THE SATISFACTION OF THE MONETARY
OBLIGATION OF PETITIONERS-SPOUSES. 1
The only issue to be resolved in this case is whether or not payment by
means of check (even by cashier's check) is considered payment in legal
tender as required by the Civil Code, Republic Act No. 529, and the
Central Bank Act.
It is contended by the petitioners that the check, which was a cashier's
check of the Bank of the Philippine Islands, undoubtedly a bank of good
standing and reputation, and which was a crossed check marked "For
Payee's Account Only" and payable to private respondent Eden Tan, is
considered legal tender, payment with which operates to discharge their
monetary obligation. 2 Petitioners, to support their contention, cite the case
of New Pacific Timber and Supply Co., Inc. v. Seeris 3 where this Court held
through Mr. Justice Hermogenes Concepcion, Jr. that "It is a well-known and
accepted practice in the business sector that a cashier's check is deemed as
cash".
The provisions of law applicable to the case at bar are the following:
a. Article 1249 of the Civil Code which provides:
Art. 1249. The payment of debts in money shall be made
in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal
tender in the Philippines.
The delivery of promissory notes payable to order, or bills
of exchange or other mercantile documents shall produce
the effect of payment only when they have been cashed,
or when through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the original
obligation shall be held in abeyance.;
b. Section 1 of Republic Act No. 529, as amended, which provides:
Sec. 1. Every provision contained in, or made with respect
to, any obligation which purports to give the obligee the
right to require payment in gold or in any particular kind of
coin or currency other than Philippine currency or in an
amount of money of the Philippines measured thereby,
shall be as it is hereby declared against public policy null
and void, and of no effect, and no such provision shall be
contained in, or made with respect to, any obligation
thereafter incurred. Every obligation heretofore and
hereafter incurred, whether or not any such provision as
to payment is contained therein or made with respect
thereto, shall be discharged upon payment in any coin or
currency which at the time of payment is legal tender for
public and private debts.
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act)
which provides:
Sec. 63. Legal character Checks representing deposit
money do not have legal tender power and their
acceptance in the payment of debts, both public and
private, is at the option of the creditor: Provided, however,
that a check which has been cleared and credited to the
account of the creditor shall be equivalent to a delivery to
the creditor of cash in an amount equal to the amount
credited to his account.
From the aforequoted provisions of law, it is clear that this petition must
fail.
In the recent cases of Philippine Airlines, Inc. vs. Court of
Appeals 4 and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate
Appellate Court, 5 this Court held that
A check, whether a manager's check or ordinary check, is
not legal tender, and an offer of a check in payment of a
debt is not a valid tender of payment and may be refused
receipt by the obligee or creditor.
The ruling in these two (2) cases merely applies the statutory provisions
which lay down the rule that a check is not legal tender and that a creditor
may validly refuse payment by check, whether it be a manager's,
cashier's or personal check.
Petitioners erroneously rely on one of the dissenting opinions in
the Philippine Airlines case 6 to support their cause. The dissenting opinion
however does not in any way support the contention that a check is legal
tender but, on the contrary, states that "If the PAL checks in question had not
been encashed by Sheriff Reyes, there would be no payment by PAL and,
consequently, no discharge or satisfaction of its judgment
obligation." 7 Moreover, the circumstances in the Philippine Airlinescase are
quite different from those in the case at bar for in that case the checks issued
by the judgment debtor were made payable to the sheriff, Emilio Z. Reyes,
who encashed the checks but failed to deliver the proceeds of said
encashment to the judgment creditor.
In the more recent case of Fortunado vs. Court of Appeals, 8 this Court
stressed that, "We are not, by this decision, sanctioning the use of a check
for the payment of obligations over the objection of the creditor."
WHEREFORE, the petition is DENIED. The appealed decision is hereby
AFFIRMED, with costs against the petitioners.
SO ORDERED.
G.R. No. L-49188 January 30, 1990
PHILIPPINE AIRLINES, INC., petitioner,
vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO,
Court of First Instance of Manila, Branch XIII, JAIME K. DEL
ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and
AMELIA TAN, respondents.
GUTIERREZ, JR., J.:
Behind the simple issue of validity of an alias writ of execution in this
case is a more fundamental question. Should the Court allow a too literal
interpretation of the Rules with an open invitation to knavery to prevail
over a more discerning and just approach? Should we not apply the
ancient rule of statutory construction that laws are to be interpreted by the
spirit which vivifies and not by the letter which killeth?
This is a petition to review on certiorari the decision of the Court of
Appeals in CA-G.R. No. 07695 entitled "Philippine Airlines, Inc. v. Hon.
Judge Ricardo D. Galano, et al.", dismissing the petition for certiorari
against the order of the Court of First Instance of Manila which issued an
alias writ of execution against the petitioner.
The petition involving the alias writ of execution had its beginnings on
November 8, 1967, when respondent Amelia Tan, under the name and
style of Able Printing Press commenced a complaint for damages before
the Court of First Instance of Manila. The case was docketed as Civil
Case No. 71307, entitled Amelia Tan, et al. v. Philippine Airlines, Inc.
After trial, the Court of First Instance of Manila, Branch 13, then presided
over by the late Judge Jesus P. Morfe rendered judgment on June 29,
1972, in favor of private respondent Amelia Tan and against petitioner
Philippine Airlines, Inc. (PAL) as follows:
WHEREFORE, judgment is hereby rendered, ordering the
defendant Philippine Air Lines:
1. On the first cause of action, to pay to the plaintiff the
amount of P75,000.00 as actual damages, with legal
interest thereon from plaintiffs extra-judicial demand made
by the letter of July 20, 1967;
2. On the third cause of action, to pay to the plaintiff the
amount of P18,200.00, representing the unrealized profit
of 10% included in the contract price of P200,000.00 plus
legal interest thereon from July 20,1967;
3. On the fourth cause of action, to pay to the plaintiff the
amount of P20,000.00 as and for moral damages, with
legal interest thereon from July 20, 1 967;
4. On the sixth cause of action, to pay to the plaintiff the
amount of P5,000.00 damages as and for attorney's fee.
Plaintiffs second and fifth causes of action, and
defendant's counterclaim, are dismissed.
With costs against the defendant. (CA Rollo, p. 18)
On July 28, 1972, the petitioner filed its appeal with the Court of Appeals.
The case was docketed as CA-G.R. No. 51079-R.
On February 3, 1977, the appellate court rendered its decision, the
dispositive portion of which reads:
IN VIEW WHEREOF, with the modification that PAL is
condemned to pay plaintiff the sum of P25,000.00 as
damages and P5,000.00 as attorney's fee, judgment is
affirmed, with costs. (CA Rollo, p. 29)
Notice of judgment was sent by the Court of Appeals to the trial court and
on dates subsequent thereto, a motion for reconsideration was filed by
respondent Amelia Tan, duly opposed by petitioner PAL.
On May 23,1977, the Court of Appeals rendered its resolution denying
the respondent's motion for reconsideration for lack of merit.
No further appeal having been taken by the parties, the judgment
became final and executory and on May 31, 1977, judgment was
correspondingly entered in the case.
The case was remanded to the trial court for execution and on
September 2,1977, respondent Amelia Tan filed a motion praying for the
issuance of a writ of execution of the judgment rendered by the Court of
Appeals. On October 11, 1977, the trial court, presided over by Judge
Galano, issued its order of execution with the corresponding writ in favor
of the respondent. The writ was duly referred to Deputy Sheriff Emilio Z.
Reyes of Branch 13 of the Court of First Instance of Manila for
enforcement.
Four months later, on February 11, 1978, respondent Amelia Tan moved
for the issuance of an alias writ of execution stating that the judgment
rendered by the lower court, and affirmed with modification by the Court
of Appeals, remained unsatisfied.
On March 1, 1978, the petitioner filed an opposition to the motion for the
issuance of an alias writ of execution stating that it had already fully paid
its obligation to plaintiff through the deputy sheriff of the respondent court,
Emilio Z. Reyes, as evidenced by cash vouchers properly signed and
receipted by said Emilio Z. Reyes.
On March 3,1978, the Court of Appeals denied the issuance of the alias
writ for being premature, ordering the executing sheriff Emilio Z. Reyes to
appear with his return and explain the reason for his failure to surrender
the amounts paid to him by petitioner PAL. However, the order could not
be served upon Deputy Sheriff Reyes who had absconded or
disappeared.
On March 28, 1978, motion for the issuance of a partial alias writ of
execution was filed by respondent Amelia Tan.
On April 19, 1978, respondent Amelia Tan filed a motion to withdraw
"Motion for Partial Alias Writ of Execution" with Substitute Motion for Alias
Writ of Execution. On May 1, 1978, the respondent Judge issued an
order which reads:
As prayed for by counsel for the plaintiff, the Motion to
Withdraw 'Motion for Partial Alias Writ of Execution with
Substitute Motion for Alias Writ of Execution is hereby
granted, and the motion for partial alias writ of execution
is considered withdrawn.
Let an Alias Writ of Execution issue against the defendant
for the fall satisfaction of the judgment rendered. Deputy
Sheriff Jaime K. del Rosario is hereby appointed Special
Sheriff for the enforcement thereof. (CA Rollo, p. 34)
On May 18, 1978, the petitioner received a copy of the first alias writ of
execution issued on the same day directing Special Sheriff Jaime K. del
Rosario to levy on execution in the sum of P25,000.00 with legal interest
thereon from July 20,1967 when respondent Amelia Tan made an extra-
judicial demand through a letter. Levy was also ordered for the further
sum of P5,000.00 awarded as attorney's fees.
On May 23, 1978, the petitioner filed an urgent motion to quash the alias
writ of execution stating that no return of the writ had as yet been made
by Deputy Sheriff Emilio Z. Reyes and that the judgment debt had
already been fully satisfied by the petitioner as evidenced by the cash
vouchers signed and receipted by the server of the writ of execution,
Deputy Sheriff Emilio Z. Reyes.
On May 26,1978, the respondent Jaime K. del Rosario served a notice of
garnishment on the depository bank of petitioner, Far East Bank and
Trust Company, Rosario Branch, Binondo, Manila, through its manager
and garnished the petitioner's deposit in the said bank in the total amount
of P64,408.00 as of May 16, 1978. Hence, this petition for certiorari filed
by the Philippine Airlines, Inc., on the grounds that:
I
AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED
WITHOUT PRIOR RETURN OF THE ORIGINAL WRIT
BY THE IMPLEMENTING OFFICER.
II
 PAYMENT OF JUDGMENT TO THE IMPLEMENTING
OFFICER AS DIRECTED IN THE WRIT OF EXECUTION
CONSTITUTES SATISFACTION OF JUDGMENT.
III
INTEREST IS NOT PAYABLE WHEN THE DECISION IS
SILENT AS TO THE PAYMENT THEREOF.
IV
SECTION 5, RULE 39, PARTICULARLY REFERS TO
LEVY OF PROPERTY OF JUDGMENT DEBTOR AND
DISPOSAL OR SALE THEREOF TO SATISFY
JUDGMENT.
Can an alias writ of execution be issued without a prior return of the
original writ by the implementing officer?
We rule in the affirmative and we quote the respondent court's decision
with approval:
The issuance of the questioned alias writ of execution
under the circumstances here obtaining is justified
because even with the absence of a Sheriffs return on the
original writ, the unalterable fact remains that such a
return is incapable of being obtained (sic) because the
officer who is to make the said return has absconded and
cannot be brought to the Court despite the earlier order of
the court for him to appear for this purpose. (Order of Feb.
21, 1978, Annex C, Petition). Obviously, taking
cognizance of this circumstance, the order of May 11,
1978 directing the issuance of an alias writ was therefore
issued. (Annex D. Petition). The need for such a return as
a condition precedent for the issuance of an alias writ was
justifiably dispensed with by the court below and its action
in this regard meets with our concurrence. A contrary view
will produce an abhorent situation whereby the mischief of
an erring officer of the court could be utilized to impede
indefinitely the undisputed and awarded rights which a
prevailing party rightfully deserves to obtain and with
dispatch. The final judgment in this case should not
indeed be permitted to become illusory or incapable of
execution for an indefinite and over extended period, as
had already transpired. (Rollo, pp. 35-36)
Judicium non debet esse illusorium; suum effectum habere debet (A
judgment ought not to be illusory it ought to have its proper effect).
Indeed, technicality cannot be countenanced to defeat the execution of a
judgment for execution is the fruit and end of the suit and is very aptly
called the life of the law (Ipekdjian Merchandising Co. v. Court of Tax
Appeals, 8 SCRA 59 [1963]; Commissioner of Internal Revenue v.
Visayan Electric Co., 19 SCRA 697, 698 [1967]). A judgment cannot be
rendered nugatory by the unreasonable application of a strict rule of
procedure. Vested rights were never intended to rest on the requirement
of a return, the office of which is merely to inform the court and the
parties, of any and all actions taken under the writ of execution. Where
such information can be established in some other manner, the absence
of an executing officer's return will not preclude a judgment from being
treated as discharged or being executed through an alias writ of
execution as the case may be. More so, as in the case at bar. Where the
return cannot be expected to be forthcoming, to require the same would
be to compel the enforcement of rights under a judgment to rest on an
impossibility, thereby allowing the total avoidance of judgment debts. So
long as a judgment is not satisfied, a plaintiff is entitled to other writs of
execution (Government of the Philippines v. Echaus and Gonzales, 71
Phil. 318). It is a well known legal maxim that he who cannot prosecute
his judgment with effect, sues his case vainly.
More important in the determination of the propriety of the trial court's
issuance of an alias writ of execution is the issue of satisfaction of
judgment.
Under the peculiar circumstances surrounding this case, did the payment
made to the absconding sheriff by check in his name operate to satisfy
the judgment debt? The Court rules that the plaintiff who has won her
case should not be adjudged as having sued in vain. To decide otherwise
would not only give her an empty but a pyrrhic victory.
It should be emphasized that under the initial judgment, Amelia Tan was
found to have been wronged by PAL.
She filed her complaint in 1967.
After ten (10) years of protracted litigation in the Court of First Instance
and the Court of Appeals, Ms. Tan won her case.
It is now 1990.
Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of
what the courts have solemnly declared as rightfully hers. Through
absolutely no fault of her own, Ms. Tan has been deprived of what,
technically, she should have been paid from the start, before 1967,
without need of her going to court to enforce her rights. And all because
PAL did not issue the checks intended for her, in her name.
Under the peculiar circumstances of this case, the payment to the
absconding sheriff by check in his name did not operate as a satisfaction
of the judgment debt.
In general, a payment, in order to be effective to discharge an obligation,
must be made to the proper person. Article 1240 of the Civil Code
provides:
Payment shall be made to the person in whose favor the
obligation has been constituted, or his successor in
interest, or any person authorized to receive it. (Emphasis
supplied)
Thus, payment must be made to the obligee himself or to an agent
having authority, express or implied, to receive the particular payment
(Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made to
one having apparent authority to receive the money will, as a rule, be
treated as though actual authority had been given for its receipt.
Likewise, if payment is made to one who by law is authorized to act for
the creditor, it will work a discharge (Hendry v. Benlisa 37 Fla. 609, 20
SO 800,34 LRA 283). The receipt of money due on ajudgment by an
officer authorized by law to accept it will, therefore, satisfy the debt (See
40 Am Jm 729, 25; Hendry v. Benlisa supra; Seattle v. Stirrat 55 Wash.
104 p. 834,24 LRA [NS] 1275).
The theory is where payment is made to a person authorized and
recognized by the creditor, the payment to such a person so authorized is
deemed payment to the creditor. Under ordinary circumstances, payment
by the judgment debtor in the case at bar, to the sheriff should be valid
payment to extinguish the judgment debt.
There are circumstances in this case, however, which compel a different
conclusion.
The payment made by the petitioner to the absconding sheriff was not in
cash or legal tender but in checks. The checks were not payable to
Amelia Tan or Able Printing Press but to the absconding sheriff.
Did such payments extinguish the judgment debt?
Article 1249 of the Civil Code provides:
The payment of debts in money shall be made in the
currency stipulated, and if it is not possible to deliver such
currency, then in the currency which is legal tender in the
Philippines.
The delivery of promissory notes payable to order, or bills
of exchange or other mercantile documents shall produce
the effect of payment only when they have been cashed,
or when through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the original
obligation shall be held in abeyance.
In the absence of an agreement, either express or implied, payment
means the discharge of a debt or obligation in money (US v. Robertson, 5
Pet. [US] 641, 8 L. ed. 257) and unless the parties so agree, a debtor has
no rights, except at his own peril, to substitute something in lieu of cash
as medium of payment of his debt (Anderson v. Gill, 79 Md.. 312, 29 A
527, 25 LRA 200,47 Am. St. Rep. 402). Consequently, unless authorized
to do so by law or by consent of the obligee a public officer has no
authority to accept anything other than money in payment of an obligation
under a judgment being executed. Strictly speaking, the acceptance by
the sheriff of the petitioner's checks, in the case at bar, does not, per se,
operate as a discharge of the judgment debt.
Since a negotiable instrument is only a substitute for money and not
money, the delivery of such an instrument does not, by itself, operate as
payment (See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code;
Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9
Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager's check or
ordinary cheek, is not legal tender, and an offer of a check in payment of
a debt is not a valid tender of payment and may be refused receipt by the
obligee or creditor. Mere delivery of checks does not discharge the
obligation under a judgment. The obligation is not extinguished and
remains suspended until the payment by commercial document is
actually realized (Art. 1249, Civil Code, par. 3).
If bouncing checks had been issued in the name of Amelia Tan and not
the Sheriff's, there would have been no payment. After dishonor of the
checks, Ms. Tan could have run after other properties of PAL. The theory
is that she has received no value for what had been awarded her.
Because the checks were drawn in the name of Emilio Z. Reyes, neither
has she received anything. The same rule should apply.
It is argued that if PAL had paid in cash to Sheriff Reyes, there would
have been payment in full legal contemplation. The reasoning is logical
but is it valid and proper? Logic has its limits in decision making. We
should not follow rulings to their logical extremes if in doing so we arrive
at unjust or absurd results.
In the first place, PAL did not pay in cash. It paid in cheeks.
And second, payment in cash always carries with it certain cautions.
Nobody hands over big amounts of cash in a careless and inane manner.
Mature thought is given to the possibility of the cash being lost, of the
bearer being waylaid or running off with what he is carrying for another.
Payment in checks is precisely intended to avoid the possibility of the
money going to the wrong party. The situation is entirely different where a
Sheriff seizes a car, a tractor, or a piece of land. Logic often has to give
way to experience and to reality. Having paid with checks, PAL should
have done so properly.
Payment in money or cash to the implementing officer may be deemed
absolute payment of the judgment debt but the Court has never, in the
least bit, suggested that judgment debtors should settle their obligations
by turning over huge amounts of cash or legal tender to sheriffs and other
executing officers. Payment in cash would result in damage or
interminable litigations each time a sheriff with huge amounts of cash in
his hands decides to abscond.
As a protective measure, therefore, the courts encourage the practice of
payments by cheek provided adequate controls are instituted to prevent
wrongful payment and illegal withdrawal or disbursement of funds. If
particularly big amounts are involved, escrow arrangements with a bank
and carefully supervised by the court would be the safer procedure.
Actual transfer of funds takes place within the safety of bank premises.
These practices are perfectly legal. The object is always the safe and
incorrupt execution of the judgment.
It is, indeed, out of the ordinary that checks intended for a particular
payee are made out in the name of another. Making the checks payable
to the judgment creditor would have prevented the encashment or the
taking of undue advantage by the sheriff, or any person into whose hands
the checks may have fallen, whether wrongfully or in behalf of the
creditor. The issuance of the checks in the name of the sheriff clearly
made possible the misappropriation of the funds that were withdrawn.
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for
the private party respondent Amelia Tan, the petitioner
corporation, utilizing the services of its personnel who are
or should be knowledgeable about the accepted
procedures and resulting consequences of the checks
drawn, nevertheless, in this instance, without prudence,
departed from what is generally observed and done, and
placed as payee in the checks the name of the errant
Sheriff and not the name of the rightful payee. Petitioner
thereby created a situation which permitted the said
Sheriff to personally encash said checks and
misappropriate the proceeds thereof to his exclusive
personal benefit. For the prejudice that resulted, the
petitioner himself must bear the fault. The judicial
guideline which we take note of states as follows:
As between two innocent persons, one of whom must
suffer the consequence of a breach of trust, the one who
made it possible by his act of confidence must bear the
loss. (Blondeau, et al. v. Nano, et al., L-41377, July 26,
1935, 61 Phil. 625)
Having failed to employ the proper safeguards to protect itself, the
judgment debtor whose act made possible the loss had but itself to
blame.
The attention of this Court has been called to the bad practice of a
number of executing officers, of requiring checks in satisfaction of
judgment debts to be made out in their own names. If a sheriff directs a
judgment debtor to issue the checks in the sheriff's name, claiming he
must get his commission or fees, the debtor must report the sheriff
immediately to the court which ordered the execution or to the Supreme
Court for appropriate disciplinary action. Fees, commissions, and salaries
are paid through regular channels. This improper procedure also allows
such officers, who have sixty (60) days within which to make a return, to
treat the moneys as their personal finds and to deposit the same in their
private accounts to earn sixty (60) days interest, before said finds are
turned over to the court or judgment creditor (See Balgos v. Velasco, 108
SCRA 525 [1981]). Quite as easily, such officers could put up the
defense that said checks had been issued to them in their private or
personal capacity. Without a receipt evidencing payment of the judgment
debt, the misappropriation of finds by such officers becomes clean and
complete. The practice is ingenious but evil as it unjustly enriches court
personnel at the expense of litigants and the proper administration of
justice. The temptation could be far greater, as proved to be in this case
of the absconding sheriff. The correct and prudent thing for the petitioner
was to have issued the checks in the intended payee's name.
The pernicious effects of issuing checks in the name of a person other
than the intended payee, without the latter's agreement or consent, are
as many as the ways that an artful mind could concoct to get around the
safeguards provided by the law on negotiable instruments. An angry
litigant who loses a case, as a rule, would not want the winning party to
get what he won in the judgment. He would think of ways to delay the
winning party's getting what has been adjudged in his favor. We cannot
condone that practice especially in cases where the courts and their
officers are involved. We rule against the petitioner.
Anent the applicability of Section 15, Rule 39, as follows:
Section 15. Execution of money judgments. The officer
must enforce an execution of a money judgment by
levying on all the property, real and personal of every
name and nature whatsoever, and which may be
disposed of for value, of the judgment debtor not exempt
from execution, or on a sufficient amount of such
property, if they be sufficient, and selling the same, and
paying to the judgment creditor, or his attorney, so much
of the proceeds as will satisfy the judgment. ...
the respondent court held:
We are obliged to rule that the judgment debt cannot be
considered satisfied and therefore the orders of the
respondent judge granting the alias writ of execution may
not be pronounced as a nullity.
xxx xxx xxx
It is clear and manifest that after levy or garnishment, for
a judgment to be executed there is the requisite of
payment by the officer to the judgment creditor, or his
attorney, so much of the proceeds as will satisfy the
judgment and none such payment had been concededly
made yet by the absconding Sheriff to the private
respondent Amelia Tan. The ultimate and essential step
to complete the execution of the judgment not having
been performed by the City Sheriff, the judgment debt
legally and factually remains unsatisfied.
Strictly speaking execution cannot be equated with satisfaction of a
judgment. Under unusual circumstances as those obtaining in this
petition, the distinction comes out clearly.
Execution is the process which carries into effect a decree or judgment
(Painter v. Berglund, 31 Cal. App. 2d. 63, 87 P 2d 360, 363; Miller v.
London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary),
whereas the satisfaction of a judgment is the payment of the amount of
the writ, or a lawful tender thereof, or the conversion by sale of the
debtor's property into an amount equal to that due, and, it may be done
otherwise than upon an execution (Section 47, Rule 39). Levy and
delivery by an execution officer are not prerequisites to the satisfaction of
a judgment when the same has already been realized in fact (Section 47,
Rule 39). Execution is for the sheriff to accomplish while satisfaction of
the judgment is for the creditor to achieve. Section 15, Rule 39 merely
provides the sheriff with his duties as executing officer including delivery
of the proceeds of his levy on the debtor's property to satisfy the
judgment debt. It is but to stress that the implementing officer's duty
should not stop at his receipt of payments but must continue until
payment is delivered to the obligor or creditor.
Finally, we find no error in the respondent court's pronouncement on the
inclusion of interests to be recovered under the alias writ of execution.
This logically follows from our ruling that PAL is liable for both the lost
checks and interest. The respondent court's decision in CA-G.R. No.
51079-R does not totally supersede the trial court's judgment in Civil
Case No. 71307. It merely modified the same as to the principal amount
awarded as actual damages.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby
DISMISSED. The judgment of the respondent Court of Appeals is
AFFIRMED and the trial court's issuance of the alias writ of execution
against the petitioner is upheld without prejudice to any action it should
take against the errant sheriff Emilio Z. Reyes. The Court Administrator is
ordered to follow up the actions taken against Emilio Z. Reyes.
SO ORDERED.
FORM AND INTERPRETATION
G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST COMPANY, petitioner,
vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION,
INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA
CASTILLO, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and
Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings
& Loan Association, Inc.
CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question of
negligence. The facts, pruned of all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches
throughout the Philippines and even abroad. Golden Savings and Loan
Association was, at the time these events happened, operating in
Calapan, Mindoro, with the other private respondents as its principal
officers.
In January 1979, a certain Eduardo Gomez opened an account with
Golden Savings and deposited over a period of two months 38 treasury
warrants with a total value of P1,755,228.37. They were all drawn by the
Philippine Fish Marketing Authority and purportedly signed by its General
Manager and countersigned by its Auditor. Six of these were directly
payable to Gomez while the others appeared to have been indorsed by
their respective payees, followed by Gomez as second indorser. 1
On various dates between June 25 and July 16, 1979, all these warrants
were subsequently indorsed by Gloria Castillo as Cashier of Golden
Savings and deposited to its Savings Account No. 2498 in the Metrobank
branch in Calapan, Mindoro. They were then sent for clearing by the
branch office to the principal office of Metrobank, which forwarded them
to the Bureau of Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the
Calapan branch several times to ask whether the warrants had been
cleared. She was told to wait. Accordingly, Gomez was meanwhile not
allowed to withdraw from his account. Later, however, "exasperated" over
Gloria's repeated inquiries and also as an accommodation for a "valued
client," the petitioner says it finally decided to allow Golden Savings to
withdraw from the proceeds of the
warrants. 3
The first withdrawal was made on July 9, 1979, in the amount of
P508,000.00, the second on July 13, 1979, in the amount of
P310,000.00, and the third on July 16, 1979, in the amount of
P150,000.00. The total withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make
withdrawals from his own account, eventually collecting the total amount
of P1,167,500.00 from the proceeds of the apparently cleared warrants.
The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the
warrants had been dishonored by the Bureau of Treasury on July 19,
1979, and demanded the refund by Golden Savings of the amount it had
previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the
Regional Trial Court of Mindoro. 5 After trial, judgment was rendered in
favor of Golden Savings, which, however, filed a motion for
reconsideration even as Metrobank filed its notice of appeal. On
November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of
defendant Golden Savings and Loan Association, Inc. and
defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings
Account No. 2498 of the sum of P1,754,089.00 and to reinstate
and credit to such account such amount existing before the debit
was made including the amount of P812,033.37 in favor of
defendant Golden Savings and Loan Association, Inc. and
thereafter, to allow defendant Golden Savings and Loan
Association, Inc. to withdraw the amount outstanding thereon
before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and
Loan Association, Inc. attorney's fees and expenses of litigation in
the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno
Castillo and Lucia Castillo attorney's fees and expenses of
litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed, prompting
Metrobank to file this petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing
to apply the clear contractual terms and conditions on the deposit
slips allowing Metrobank to charge back any amount erroneously
credited.
(a) Metrobank's right to charge back is not limited to
instances where the checks or treasury warrants are
forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its
obligation is that of a mere collecting agent which cannot
be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court
of Appeals, Metrobank is made to pay for warrants already
dishonored, thereby perpetuating the fraud committed by
Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as
between Metrobank and Golden Savings, the latter should bear
the loss.
4. Respondent Court of Appeals erred in holding that the treasury
warrants involved in this case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that
Metrobank was indeed negligent in giving Golden Savings the impression
that the treasury warrants had been cleared and that, consequently, it
was safe to allow Gomez to withdraw the proceeds thereof from his
account with it. Without such assurance, Golden Savings would not have
allowed the withdrawals; with such assurance, there was no reason not to
allow the withdrawal. Indeed, Golden Savings might even have incurred
liability for its refusal to return the money that to all appearances
belonged to the depositor, who could therefore withdraw it any time and
for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that
Golden Savings deposited them to its account with Metrobank. Golden
Savings had no clearing facilities of its own. It relied on Metrobank to
determine the validity of the warrants through its own services. The
proceeds of the warrants were withheld from Gomez until Metrobank
allowed Golden Savings itself to withdraw them from its own deposit. 7 It
was only when Metrobank gave the go-signal that Gomez was finally
allowed by Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised
more care in checking the personal circumstances of Gomez before
accepting his deposit does not hold water. It was Gomez who was
entrusting the warrants, not Golden Savings that was extending him a
loan; and moreover, the treasury warrants were subject to clearing,
pending which the depositor could not withdraw its proceeds. There was
no question of Gomez's identity or of the genuineness of his signature as
checked by Golden Savings. In fact, the treasury warrants were
dishonored allegedly because of the forgery of the signatures of the
drawers, not of Gomez as payee or indorser. Under the circumstances, it
is clear that Golden Savings acted with due care and diligence and
cannot be faulted for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The
amount involved was not trifling more than one and a half million
pesos (and this was 1979). There was no reason why it should not have
waited until the treasury warrants had been cleared; it would not have lost
a single centavo by waiting. Yet, despite the lack of such clearance
and notwithstanding that it had not received a single centavo from the
proceeds of the treasury warrants, as it now repeatedly stresses it
allowed Golden Savings to withdraw not once, not twice, but thrice
from the uncleared treasury warrants in the total amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria
Castillo about the clearance and it also wanted to "accommodate" a
valued client. It "presumed" that the warrants had been cleared simply
because of "the lapse of one week." 8 For a bank with its long experience,
this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the
conditions printed on the dorsal side of the deposit slips through which
the treasury warrants were deposited by Golden Savings with its Calapan
branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates
itself only as the depositor's collecting agent, assuming no
responsibility beyond care in selecting correspondents, and until
such time as actual payment shall have come into possession of
this bank, the right is reserved to charge back to the depositor's
account any amount previously credited, whether or not such item
is returned. This also applies to checks drawn on local banks and
bankers and their branches as well as on this bank, which are
unpaid due to insufficiency of funds, forgery, unauthorized
overdraft or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was
acting only as a collecting agent for Golden Savings and give it the right
to "charge back to the depositor's account any amount previously
credited, whether or not such item is returned. This also applies to checks
". . . which are unpaid due to insufficiency of funds, forgery, unauthorized
overdraft of any other reason." It is claimed that the said conditions are in
the nature of contractual stipulations and became binding on Golden
Savings when Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions,
considering that they have apparently been imposed by the bank
unilaterally, without the consent of the depositor. Indeed, it could be
argued that the depositor, in signing the deposit slip, does so only to
identify himself and not to agree to the conditions set forth in the given
permit at the back of the deposit slip. We do not have to rule on this
matter at this time. At any rate, the Court feels that even if the deposit slip
were considered a contract, the petitioner could still not validly disclaim
responsibility thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden
Savings, Metrobank seems to be suggesting that as a mere agent it
cannot be liable to the principal. This is not exactly true. On the contrary,
Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also
for negligence, which shall be judged 'with more or less rigor by
the courts, according to whether the agency was or was not for a
compensation.
The negligence of Metrobank has been sufficiently established. To repeat
for emphasis, it was the clearance given by it that assured Golden
Savings it was already safe to allow Gomez to withdraw the proceeds of
the treasury warrants he had deposited Metrobank misled Golden
Savings. There may have been no express clearance, as Metrobank
insists (although this is refuted by Golden Savings) but in any case that
clearance could be implied from its allowing Golden Savings to withdraw
from its account not only once or even twice but three times. The total
withdrawal was in excess of its original balance before the treasury
warrants were deposited, which only added to its belief that the treasury
warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the
warrants are not paid for any reason is not acceptable. Any reason does
not mean no reason at all. Otherwise, there would have been no need at
all for Golden Savings to deposit the treasury warrants with it for
clearance. There would have been no need for it to wait until the warrants
had been cleared before paying the proceeds thereof to Gomez. Such a
condition, if interpreted in the way the petitioner suggests, is not binding
for being arbitrary and unconscionable. And it becomes more so in the
case at bar when it is considered that the supposed dishonor of the
warrants was not communicated to Golden Savings before it made its
own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in
giving express or at least implied clearance to the treasury warrants and
allowing payments therefrom to Golden Savings. But that is not all. On
top of this, the supposed reason for the dishonor, to wit, the forgery of the
signatures of the general manager and the auditor of the drawer
corporation, has not been established. 9 This was the finding of the lower
courts which we see no reason to disturb. And as we said in MWSS v.
Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139
SCRA 238). It must be established by clear, positive and
convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury
warrants in question are not negotiable instruments. Clearly stamped on
their face is the word "non-negotiable." Moreover, and this is of equal
significance, it is indicated that they are payable from a particular fund, to
wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the
underscored parts, are pertinent:
Sec. 1. Form of negotiable instruments. An instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. An unqualified order or
promise to pay is unconditional within the meaning of this Act
though coupled with
(a) An indication of a particular fund out of which reimbursement
is to be made or a particular account to be debited with the
amount; or
(b) A statement of the transaction which gives rise to the
instrument judgment.
But an order or promise to pay out of a particular fund is not
unconditional.
The indication of Fund 501 as the source of the payment to be made on
the treasury warrants makes the order or promise to pay "not
unconditional" and the warrants themselves non-negotiable. There should
be no question that the exception on Section 3 of the Negotiable
Instruments Law is applicable in the case at bar. This conclusion
conforms to Abubakar vs. Auditor 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."
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
1wphi1
treasury warrants. Golden Savings never represented that the warrants
were negotiable but signed them only for the purpose of depositing them
for clearance. Also, the fact of forgery was proved in that case but not in
the case before us. Finally, the Court found the Jai Alai Corporation
negligent in accepting the checks without question from one Antonio
Ramirez notwithstanding that the payee was the Inter-Island Gas
Services, Inc. and it did not appear that he was authorized to indorse it.
No similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will
have to amend it insofar as it directs the petitioner to credit Golden
Savings with the full amount of the treasury checks deposited to its
account.
The total value of the 32 treasury warrants dishonored was
P1,754,089.00, from which Gomez was allowed to withdraw
P1,167,500.00 before Golden Savings was notified of the dishonor. The
amount he has withdrawn must be charged not to Golden Savings but to
Metrobank, which must bear the consequences of its own negligence.
But the balance of P586,589.00 should be debited to Golden Savings, as
obviously Gomez can no longer be permitted to withdraw this amount
from his deposit because of the dishonor of the warrants. Gomez has in
fact disappeared. To also credit the balance to Golden Savings would
unduly enrich it at the expense of Metrobank, let alone the fact that it has
already been informed of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the
modification that Paragraph 3 of the dispositive portion of the judgment of
the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00
only and thereafter allowing defendant Golden Savings & Loan
Association, Inc. to withdraw the amount outstanding thereon, if
any, after the debit.
SO ORDERED.
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.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of
the decision promulgated by respondent court on March 8, 1991 in CA-
G.R. CV No. 23615 1 affirming with modifications, the earlier decision of the
Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint
filed therein by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a quo and
adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial banking
institution, through its Sucat Branch issued 280
certificates of time deposit (CTDs) in favor of one Angel
dela Cruz who deposited with herein defendant the
aggregate amount of P1,120,000.00, as follows: (Joint
Partial Stipulation of Facts and Statement of Issues,
Original Records, p. 207; Defendant's Exhibits 1 to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time
(CTDs) to herein plaintiff in connection with his purchased
of fuel products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed
Mr. Timoteo Tiangco, the Sucat Branch Manger, that he
lost all the certificates of time deposit in dispute. Mr.
Tiangco advised said depositor to execute and submit a
notarized Affidavit of Loss, as required by defendant
bank's procedure, if he desired replacement of said lost
CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and
delivered to defendant bank the required Affidavit of Loss
(Defendant's Exhibit 281). On the basis of said affidavit of
loss, 280 replacement CTDs were issued in favor of said
depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and
obtained a loan from defendant bank in the amount of
Eight Hundred Seventy Five Thousand Pesos
(P875,000.00). On the same date, said depositor
executed a notarized Deed of Assignment of Time
Deposit (Exhibit 562) which stated, among others, that he
(de la Cruz) surrenders to defendant bank "full control of
the indicated time deposits from and after date" of the
assignment and further authorizes said bank to pre-
terminate, set-off and "apply the said time deposits to the
payment of whatever amount or amounts may be due" on
the loan upon its maturity (TSN, February 9, 1987, pp. 60-
62).
6. Sometime in November, 1982, Mr. Aranas, Credit
Manager of plaintiff Caltex (Phils.) Inc., went to the
defendant bank's Sucat branch and presented for
verification the CTDs declared lost by Angel dela Cruz
alleging that the same were delivered to herein plaintiff
"as security for purchases made with Caltex Philippines,
Inc." by said depositor (TSN, February 9, 1987, pp. 54-
68).
7. On November 26, 1982, defendant received a letter
(Defendant's Exhibit 563) from herein plaintiff formally
informing it of its possession of the CTDs in question and
of its decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by
herein defendant to furnish the former "a copy of the
document evidencing the guarantee agreement with Mr.
Angel dela Cruz" as well as "the details of Mr. Angel dela
Cruz" obligation against which plaintiff proposed to apply
the time deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished
herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's
demand and claim for payment of the value of the CTDs
in a letter dated February 7, 1983 (Defendant's Exhibit
566).
11. In April 1983, the loan of Angel dela Cruz with the
defendant bank matured and fell due and on August 5,
1983, the latter set-off and applied the time deposits in
question to the payment of the matured loan (TSN,
February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant
complaint, praying that defendant bank be ordered to pay
it the aggregate value of the certificates of time deposit of
P1,120,000.00 plus accrued interest and compounded
 interest therein at 16% per annum, moral and exemplary
damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing
the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's
dismissal of the complaint, hence this petition wherein petitioner faults
respondent court in ruling (1) that the subject certificates of deposit are
non-negotiable despite being clearly negotiable instruments; (2) that
petitioner did not become a holder in due course of the said certificates of
deposit; and (3) in disregarding the pertinent provisions of the Code of
Commerce relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to
provide a better understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982,
19____
This is to Certify that B E A R E R has
deposited in this Bank the sum of PESOS:
FOUR THOUSAND ONLY, SECURITY
BANK SUCAT OFFICE P4,000 & 00
CTS Pesos, Philippine Currency,
repayable to said depositor 731
days. after date, upon presentation and
surrender of this certificate, with interest at
the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
negotiability. The parties' bone of contention is with regard to requisite (d)
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable
instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears
rather boldly in the CTDs issued, it is important to note
that after the word "BEARER" stamped on the space
provided supposedly for the name of the depositor, the
words "has deposited" a certain amount follows. The
document further provides that the amount deposited
shall be "repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s)
themselves manifest with clarity that they are payable, not
to whoever purports to be the "bearer" but only to the
specified person indicated therein, the depositor. In effect,
the appellee bank acknowledges its depositor Angel dela
Cruz as the person who made the deposit and further
engages itself to pay said depositor the amount indicated
thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that
the CTDs in question are negotiable instruments. Section 1 Act No. 2031,
otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or
drawer;
(b) Must contain an unconditional promise or order to pay
a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for
set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's
Branch Manager way back in 1982, testified in open court that the
depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are
saying that per books of the bank, the
depositor referred (sic) in these
certificates states that it was Angel dela
Cruz?
witness:
a Yes, your Honor, and we have the
record to show that Angel dela Cruz was
the one who cause (sic) the amount.
Atty. Calida:
q And no other person or entity or
company, Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor
identified in all of these certificates of time
deposit insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the writing, that is, from
the face of the instrument itself. 9 In the construction of a bill or note, the
intention of the parties is to control, if it can be legally ascertained. 10 While
the writing may be read in the light of surrounding circumstances in order to
more perfectly understand the intent and meaning of the parties, yet as they
have constituted the writing to be the only outward and visible expression of
their meaning, no other words are to be added to it or substituted in its stead.
The duty of the court in such case is to ascertain, not what the parties may
have secretly intended as contradistinguished from what their words express,
but what is the meaning of the words they have used. What the parties
meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall be
repayable to the depositor. And who, according to the document, is the
depositor? It is the "bearer." The documents do not say that the depositor
is Angel de la Cruz and that the amounts deposited are repayable
specifically to him. Rather, the amounts are to be repayable to the bearer
of the documents or, for that matter, whosoever may be the bearer at the
time of presentment.
If it was really the intention of respondent bank to pay the amount to
Angel de la Cruz only, it could have with facility so expressed that fact in
clear and categorical terms in the documents, instead of having the word
"BEARER" stamped on the space provided for the name of the depositor
in each CTD. On the wordings of the documents, therefore, the amounts
deposited are repayable to whoever may be the bearer thereof. Thus,
petitioner's aforesaid witness merely declared that Angel de la Cruz is the
depositor "insofar as the bank is concerned," but obviously other parties
not privy to the transaction between them would not be in a position to
know that the depositor is not the bearer stated in the CTDs. Hence, the
situation would require any party dealing with the CTDs to go behind the
plain import of what is written thereon to unravel the agreement of the
parties thereto through facts aliunde. This need for resort to extrinsic
evidence is what is sought to be avoided by the Negotiable Instruments
Law and calls for the application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs.
This time, the answer is in the negative. The records reveal that Angel de
la Cruz, whom petitioner chose not to implead in this suit for reasons of
its own, delivered the CTDs amounting to P1,120,000.00 to petitioner
without informing respondent bank thereof at any time. Unfortunately for . . . Adverting again to the Court's pronouncements
petitioner, although the CTDs are bearer instruments, a valid negotiation in Lopez, supra, we quote therefrom:
thereof for the true purpose and agreement between it and De la Cruz, as
ultimately ascertained, requires both delivery and indorsement. For, The character of the transaction between
although petitioner seeks to deflect this fact, the CTDs were in reality the parties is to be determined by their
delivered to it as a security for De la Cruz' purchases of its fuel products. intention, regardless of what language
Any doubt as to whether the CTDs were delivered as payment for the fuel was used or what the form of the transfer
products or as a security has been dissipated and resolved in favor of the was. If it was intended to secure the
latter by petitioner's own authorized and responsible representative payment of money, it must be construed
himself. as a pledge; but if there was some other
intention, it is not a pledge. However, even
In a letter dated November 26, 1982 addressed to respondent Security though a transfer, if regarded by itself,
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These appears to have been absolute, its object
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to and character might still be qualified and
guarantee his purchases of fuel products" (Emphasis ours.) 13 This explained by contemporaneous writing
admission is conclusive upon petitioner, its protestations notwithstanding. declaring it to have been a deposit of the
Under the doctrine of estoppel, an admission or representation is rendered property as collateral security. It has been
conclusive upon the person making it, and cannot be denied or disproved as said that a transfer of property by the
against the person relying thereon. 14 A party may not go back on his own debtor to a creditor, even if sufficient on its
acts and representations to the prejudice of the other party who relied upon face to make an absolute conveyance,
them. 15 In the law of evidence, whenever a party has, by his own should be treated as a pledge if the debt
declaration, act, or omission, intentionally and deliberately led another to continues in inexistence and is not
believe a particular thing true, and to act upon such belief, he cannot, in any discharged by the transfer, and that
litigation arising out of such declaration, act, or omission, be permitted to
accordingly the use of the terms ordinarily
falsify it. 16
importing conveyance of absolute
ownership will not be given that effect in
If it were true that the CTDs were delivered as payment and not as such a transaction if they are also
security, petitioner's credit manager could have easily said so, instead of commonly used in pledges and mortgages
using the words "to guarantee" in the letter aforequoted. Besides, when and therefore do not unqualifiedly indicate
respondent bank, as defendant in the court below, moved for a bill of a transfer of absolute ownership, in the
particularity therein 17 praying, among others, that petitioner, as plaintiff, be absence of clear and unambiguous
required to aver with sufficient definiteness or particularity (a) the due date or language or other circumstances
dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff
excluding an intent to pledge.
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 Petitioner's insistence that the CTDs were negotiated to it begs the
prayed for, it could have proved, if such truly was the fact, that the CTDs question. Under the Negotiable Instruments Law, an instrument is
were delivered as payment and not as security. Having opposed the motion, negotiated when it is transferred from one person to another in such a
petitioner now labors under the presumption that evidence willfully manner as to constitute the transferee the holder thereof, 21 and a holder
suppressed would be adverse if produced. 19 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
Under the foregoing circumstances, this disquisition in Intergrated Realty 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
Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:
have sufficed. Here, the delivery thereof only as security for the purchases of
Angel de la Cruz (and we even disregard the fact that the amount involved
was not disclosed) could at the most constitute petitioner only as a holder for
value by reason of his lien. Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the instrument since, necessarily, the
terms thereof and the subsequent disposition of such security, in the event of
non-payment of the principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien. 23 As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights, 24 which inceptively
provide:
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, . . . may also be pledged. The instrument
proving the right pledged shall be delivered to the creditor,
and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third
persons if a description of the thing pledged and the date
of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed,
the factual findings of respondent court quoted at the start of this opinion
show that petitioner failed to produce any document evidencing any
contract of pledge or guarantee agreement between it and Angel de la
Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in
petitioner any right effective against and binding upon respondent bank. The
requirement under Article 2096 aforementioned is not a mere rule of
adjective law prescribing the mode whereby proof may be made of the date
of a pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third persons
adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la
Cruz in favor of respondent bank was embodied in a public
instrument. 27 With regard to this other mode of transfer, the Civil Code
specifically declares:
Art. 1625. An assignment of credit, right or action shall
produce no effect as against third persons, unless it
appears in a public instrument, or the instrument is
recorded in the Registry of Property in case the
assignment involves real property.
Respondent bank duly complied with this statutory requirement.
Contrarily, petitioner, whether as purchaser, assignee or lien holder of the
CTDs, neither proved the amount of its credit or the extent of its lien nor
the execution of any public instrument which could affect or bind private
respondent. Necessarily, therefore, as between petitioner and respondent
bank, the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the
question of whether or not private respondent observed the requirements
of the law in the case of lost negotiable instruments and the issuance of
replacement certificates therefor, on the ground that petitioner failed to
raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of
alleged negligence of private respondent was not included in the
stipulation of the parties and in the statement of issues submitted by them
to the trial court. 29The issues agreed upon by them for resolution in this
case are:
1. Whether or not the CTDs as worded are negotiable
instruments.
2. Whether or not defendant could legally apply the
amount covered by the CTDs against the depositor's loan
by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off
involving the amount covered by the CTDs and the
depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to
preterminate the CTDs before the maturity date provided
therein.
5. Whether or not plaintiff is entitled to the proceeds of the
CTDs.
6. Whether or not the parties can recover damages,
attorney's fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the
issue of negligence on the part of respondent bank. An issue raised for
the first time on appeal and not raised timely in the proceedings in the
lower court is barred by estoppel. 30 Questions raised on appeal must be
within the issues framed by the parties and, consequently, issues not raised
in the trial court cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to
the disposition of a case are properly raised. Thus, to obviate the element
of surprise, parties are expected to disclose at a pre-trial conference all
issues of law and fact which they intend to raise at the trial, except such
as may involve privileged or impeaching matters. The determination of
issues at a pre-trial conference bars the consideration of other questions
on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed
negligence may be considered encompassed by the issues on its right to
preterminate and receive the proceeds of the CTDs would be tantamount
to saying that petitioner could raise on appeal any issue. We agree with
private respondent that the broad ultimate issue of petitioner's entitlement
to the proceeds of the questioned certificates can be premised on a
multitude of other legal reasons and causes of action, of which
respondent bank's supposed negligence is only one. Hence, petitioner's
submission, if accepted, would render a pre-trial delimitation of issues a
useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in
the court below, petitioner still cannot have the odds in its favor. A close
scrutiny of the provisions of the Code of Commerce laying down the rules
to be followed in case of lost instruments payable to bearer, which it
invokes, will reveal that said provisions, even assuming their applicability
to the CTDs in the case at bar, are merely permissive and not mandatory.
The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what
cause it may be, may apply to the judge or court of
competent jurisdiction, asking that the principal, interest or
dividends due or about to become due, be not paid a third
person, as well as in order to prevent the ownership of the
instrument that a duplicate be issued him. (Emphasis
ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not
mandatory but discretionary on the part of the "dispossessed owner" to
apply to the judge or court of competent jurisdiction for the issuance of a
duplicate of the lost instrument. Where the provision reads "may," this
word shows that it is not mandatory but discretional. 34 The word "may" is
usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty,
opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to
558 of the Code of Commerce, on which petitioner seeks to anchor
respondent bank's supposed negligence, merely established, on the one
hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on the
other, an option in favor of the party liable thereon who, for some valid
ground, may elect to refuse to issue a replacement of the instrument.
Significantly, none of the provisions cited by petitioner categorically restricts
or prohibits the issuance a duplicate or replacement
instrument sans compliance with the procedure outlined therein, and none
establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is
DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
D. Payable to Order or Bearer
G.R. No. L-2516 September 25, 1950
ANG TEK LIAN, petitioner,
vs.
THE COURT OF APPEALS, respondent.
BENGZON, J.:
For having issued a rubber check, Ang Tek Lian was convicted
of estafa in the Court of First Instance of Manila. The Court of Appeals
affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on
Saturday, November 16, 1946, the check Exhibits A upon the China
Banking Corporation for the sum of P4,000, payable to the order of
"cash". He delivered it to Lee Hua Hong in exchange for money which the
latter handed in act. On November 18, 1946, the next business day, the
check was presented by Lee Hua Hong to the drawee bank for payment,
but it was dishonored for insufficiency of funds, the balance of the deposit
of Ang Tek Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who
testified that "on November 16, 1946, appellant went to his
(complainant's) office, at 1217 Herran, Paco, Manila, and asked him to
exchange Exhibit A which he (appellant) then brought with him with
cash alleging that he needed badly the sum of P4,000 represented by the
check, but could not withdraw it from the bank, it being then already
closed; that in view of this request and relying upon appellant's
assurance that he had sufficient funds in the blank to meet Exhibit A, and
because they used to borrow money from each other, even before the
war, and appellant owns a hotel and restaurant known as the North Bay
Hotel, said complainant delivered to him, on the same date, the sum of
P4,000 in cash; that despite repeated efforts to notify him that the check
had been dishonored by the bank, appellant could not be located any-
where, until he was summoned in the City Fiscal's Office in view of the
complaint for estafa filed in connection therewith; and that appellant has
not paid as yet the amount of the check, or any part thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the only
question of law for decision is whether under the facts found, estafa had
been accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code,
punishes swindling committed "By post dating a check, or issuing such
check in payment of an obligation the offender knowing that at the time
he had no funds in the bank, or the funds deposited by him in the bank
were not sufficient to cover the amount of the check, and without
informing the payee of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly
held liable. In this connection, it must be stated that, as explained
in People vs. Fernandez (59 Phil., 615), estafa is committed by issuing
either a postdated check or an ordinary check to accomplish the deceit.
It is argued, however, that as the check had been made payable to
"cash" and had not been endorsed by Ang Tek Lian, the defendant is not
guilty of the offense charged. Based on the proposition that "by uniform
practice of all banks in the Philippines a check so drawn is invariably
dishonored," the following line of reasoning is advanced in support of the
argument:
. . . When, therefore, he (the offended party ) accepted the check
(Exhibit A) from the appellant, he did so with full knowledge that it
would be dishonored upon presentment. In that sense, the
appellant could not be said to have acted fraudulently because
the complainant, in so accepting the check as it was drawn, must
be considered, by every rational consideration, to have done so
fully aware of the risk he was running thereby." (Brief for the
appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have
undoubtedly occurred wherein the Bank required the indorsement of the
drawer before honoring a check payable to "cash." But cases there are
too, where no such requirement had been made . It depends upon the
circumstances of each transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable
to the order of "cash" is a check payable to bearer, and the bank may pay
it to the person presenting it for payment without the drawer's
indorsement.
A check payable to the order of cash is a bearer instrument.
Bacal vs. National City Bank of New York (1933), 146 Misc., 732;
262 N. Y. S., 839; Cleary vs. De Beck Plate Glass Co. (1907), 54
Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding &
Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App.,
1939), 135 S. W. (2d), 818. See also H. Cook & Son vs. Moody
(1916), 17 Ga. App., 465; 87 S. E., 713.
Where a check is made payable to the order of "cash", the word
cash "does not purport to be the name of any person", and hence
the instrument is payable to bearer. The drawee bank need not
obtain any indorsement of the check, but may pay it to the person
presenting it without any indorsement. . . . (Zollmann, Banks and
Banking, Permanent Edition, Vol. 6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial
solvency, it has the right to demand identification and /or assurance
against possible complications, for instance, (a) forgery of drawer's
signature, (b) loss of the check by the rightful owner, (c) raising of the
amount payable, etc. The bank may therefore require, for its protection, Cha
that the indorsement of the drawer or of some other person known to it irperson,
be obtained. But where the Bank is satisfied of the identity and /or the - versus - AUSTRIA-MARTINEZ,
economic standing of the bearer who tenders the check for collection, it CHICO-NAZARIO,
will pay the instrument without further question; and it would incur no NACHURA, and
liability to the drawer in thus acting. REYES, JJ.

A check payable to bearer is authority for payment to holder. ERLANDO T. RODRIGUEZ Promulgated:
Where a check is in the ordinary form, and is payable to bearer, and NORMA RODRIGUEZ,
so that no indorsement is required, a bank, to which it is Respondents. September 26, 2008
presented for payment, need not have the holder identified, and is x--------------------------------------------------x
not negligent in falling to do so. . . . (Michie on Banks and
Banking, Permanent Edition, Vol. 5, p. 343.) DECISION

. . . Consequently, a drawee bank to which a bearer check is

presented for payment need not necessarily have the holder REYES, R.T., J.:
identified and ordinarily may not be charged with negligence in
failing to do so. See Opinions 6C:2 and 6C:3 If the bank has no
reasonable cause for suspecting any irregularity, it will be WHEN the payee of the check is not intended to be the true recipient of its
protected in paying a bearer check, "no matter what facts
unknown to it may have occurred prior to the presentment." 1 proceeds, is it payable to order or bearer? What is the fictitious-payee rule and
Morse, Banks and Banking, sec. 393. who is liable under it? Is there any exception?

Although a bank is entitled to pay the amount of a bearer check

without further inquiry, it is entirely reasonable for the bank to These questions seek answers in this petition for review on certiorari of
insist that holder give satisfactory proof of his identity. . . .
the Amended Decision[1] of the Court of Appeals (CA) which affirmed with
(Paton's Digest, Vol. I, p. 1089.)
modification that of the Regional Trial Court (RTC).[2]
Anyway, it is significant, and conclusive, that the form of the check Exhibit
A was totally unconnected with its dishonor. The Court of Appeals
declared that it was returned unsatisfied because the drawer had
insufficient funds not because the drawer's indorsement was lacking. The Facts

Wherefore, there being no question as to the correctness of the penalty

imposed on the appellant, the writ of certiorari is denied and the decision The facts as borne by the records are as follows:
of the Court of Appeals is hereby affirmed, with costs.

Respondents-Spouses Erlando and Norma Rodriguez were clients of

PHILIPPINE NATIONAL BANK, G.R. No. 170325 petitioner Philippine National Bank (PNB), Amelia Avenue
Petitioner,
Present: Branch, Cebu City. They maintained savings and demand/checking accounts,
YNARES-SANTIAGO, J., namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6
under the account name Erlando and/or Norma Rodriguez), and PNBig Demand
Deposit (Checking/Current Account No. 810480-4 under the account name
Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line with
[3]
their business, they had a discounting arrangement with the Philnabank
Employees Savings and Loan Association (PEMSLA), an association
of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia
Avenue Branch. The association maintained current and savings accounts with
petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez
would rediscount the postdated checks issued to members whenever the
association was short of funds. As was customary, the spouses would replace the
postdated checks with their own checks issued in the name of the members.
It was PEMSLAs policy not to approve applications for loans of
members with outstanding debts. To subvert this policy, some PEMSLA officers
devised a scheme to obtain additional loans despite their outstanding loan
accounts. They took out loans in the names of unknowing members, without the
knowledge or consent of the latter. The PEMSLA checks issued for these loans
were then given to the spouses for rediscounting. The officers carried this out by
forging the indorsement of the named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez checks) in
the name of the members and delivered the checks to an officer of
PEMSLA. The PEMSLA checks, on the other hand, were deposited by the
spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA
to its savings account without any indorsement from the named payees. This
was an irregular procedure made possible through the facilitation of Edmundo
Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears
that this became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses issued
sixty nine (69) checks, in the total amount of P2,345,804.00. These were payable
to forty seven (47) individual payees who were all members of PEMSLA.[4]
Petitioner PNB eventually found out about these fraudulent acts. To put
a stop to this scheme, PNB closed the current account of PEMSLA. As a result,
the PEMSLA checks deposited by the spouses were returned or dishonored for
the reason Account Closed. The corresponding Rodriguez checks, however, were
deposited as usual to the PEMSLA savings account. The amounts were duly
debited from the Rodriguez account. Thus, because the PEMSLA checks given
as payment were returned, spouses Rodriguez incurred losses from the
rediscounting transactions.
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez filed
a civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative
of Philnabankers (MCP), and petitioner PNB. They sought to recover the value
of their checks that were deposited to the PEMSLA savings account amounting
to P2,345,804.00. The spouses contended that because PNB credited the checks
to the PEMSLA account even without indorsements, PNB violated its
contractual obligation to them as depositors. PNB paid the wrong payees, hence,
it should bear the loss.
 Rodriguez, plus legal rate of interest thereon to be
PNB moved to dismiss the complaint on the ground of lack of cause of
computed from the filing of this complaint until fully
action. PNB argued that the claim for damages should come from the payees of paid;
the checks, and not from spouses Rodriguez. Since there was no demand from
2. The defendant PNB is hereby ordered to pay the plaintiffs the
the said payees, the obligation should be considered as discharged. following reasonable amount of damages suffered by
them taking into consideration the standing of the
plaintiffs being sugarcane planters, realtors, residential
In an Order dated January 12, 2000, the RTC denied PNBs motion to dismiss. subdivision owners, and other businesses:

(a) Consequential damages, unearned income

In its Answer,[5] PNB claimed it is not liable for the checks which it paid in the amount of P4,000,000.00, as a
to the PEMSLA account without any indorsement from the payees. The bank result of their having incurred great
dificulty (sic) especially in the residential
contended that spouses Rodriguez, the makers, actually did not intend for the subdivision business, which was not
named payees to receive the proceeds of the checks. Consequently, the payees pushed through and the contractor even
threatened to file a case against the
were considered as fictitious payees as defined under the Negotiable plaintiffs;
Instruments Law (NIL). Being checks made to fictitious payees which are bearer
(b) Moral damages in the amount
instruments, the checks were negotiable by mere delivery. PNBs Answer of P1,000,000.00;
included its cross-claim against its co-defendants PEMSLA and the MCP,
(c) Exemplary damages in the amount
praying that in the event that judgment is rendered against the bank, the cross- of P500,000.00;
defendants should be ordered to reimburse PNB the amount it shall pay.
(d) Attorneys fees in the amount
of P150,000.00 considering that this case
After trial, the RTC rendered judgment in favor of spouses Rodriguez does not involve very complicated issues;
and for the
(plaintiffs). It ruled that PNB (defendant) is liable to return the value of the
checks. All counterclaims and cross-claims were dismissed. The dispositive (e) Costs of suit.

portion of the RTC decision reads: 3. Other claims and counterclaims are hereby dismissed.[6]

WHEREFORE, in view of the foregoing, the Court

hereby renders judgment, as follows:
CA Disposition
1. Defendant is hereby ordered to pay the plaintiffs the total
amount of P2,345,804.00 or reinstate or restore the
amount of P775,337.00 in the PNBig Demand Deposit PNB appealed the decision of the trial court to the CA on the principal
Checking/Current Account No. 810480-4 of Erlando T.
Rodriguez, and the amount of P1,570,467.00 in the ground that the disputed checks should be considered as payable to bearer and
PNBig Demand Deposit, Checking/Current Account not to order.
No. 810624-6 of Erlando T. Rodriguez and/or Norma
 In a Decision[7] dated July 22, 2004, the CA reversed and set aside
the RTC disposition. The CA concluded that the checks were obviously meant The CA found that the checks were bearer instruments, thus they do not require
by the spouses to be really paid to PEMSLA. The court a quo declared: indorsement for negotiation; and that spouses Rodriguez and PEMSLA
conspired with each other to accomplish this money-making scheme. The payees
We are not swayed by the contention of the plaintiffs-
in the checks were fictitious payees because they were not the intended payees at
appellees (Spouses Rodriguez) that their cause of action arose
from the alleged breach of contract by the defendant-appellant all.
(PNB) when it paid the value of the checks to PEMSLA despite
the checks being payable to order. Rather, we are more
convinced by the strong and credible evidence for the The spouses Rodriguez moved for reconsideration. They argued, inter
defendant-appellant with regard to the plaintiffs-appellees and
alia, that the checks on their faces were unquestionably payable to order; and
PEMSLAs business arrangement that the value of the
rediscounted checks of the plaintiffs-appellees would be that PNBcommitted a breach of contract when it paid the value of the checks to
deposited in PEMSLAs account for payment of the loans it has
PEMSLA without indorsement from the payees. They also argued that their
approved in exchange for PEMSLAs checks with the full value
of the said loans. This is the only obvious explanation as to why cause of action is not only against PEMSLA but also against PNB to recover the
all the disputed sixty-nine (69) checks were in the possession of value of the checks.
PEMSLAs errand boy for presentment to the defendant-
appellant that led to this present controversy. It also appears that
the teller who accepted the said checks was PEMSLAs officer, On October 11, 2005, the CA reversed itself via an Amended Decision,
and that such was a regular practice by the parties until the
defendant-appellant discovered the scam. The logical the last paragraph and fallo of which read:
conclusion, therefore, is that the checks were never meant to be
paid to order, but instead, to PEMSLA. We thus find no breach In sum, we rule that the defendant-appellant PNB is
of contract on the part of the defendant-appellant. liable to the plaintiffs-appellees Sps. Rodriguez for the
following:
According to plaintiff-appellee Erlando Rodriguez
testimony, PEMSLA allegedly issued post-dated checks to its 1. Actual damages in the amount
qualified members who had applied for loans. However, of P2,345,804 with interest at 6% per
because of PEMSLAs insufficiency of funds, PEMSLA annum from 14 May 1999 until fully
approached the plaintiffs-appellees for the latter to issue paid;
rediscounted checks in favor of said applicant members. Based
on the investigation of the defendant-appellant, meanwhile, this 2. Moral damages in the amount
arrangement allowed the plaintiffs-appellees to make a profit by of P200,000;
issuing rediscounted checks, while the officers of PEMSLA and
other members would be able to claim their loans, despite the 3. Attorneys fees in the amount
fact that they were disqualified for one reason or another. They of P100,000; and
were able to achieve this conspiracy by using other members
who had loaned lesser amounts of money or had not applied at 4. Costs of suit.
all. x x x.[8] (Emphasis added)
 WHEREFORE, in view of the foregoing premises,
Our Ruling
judgment is hereby rendered by Us AFFIRMING WITH
MODIFICATION the assailed decision rendered in Civil Case
No. 99-10892, as set forth in the immediately next preceding
Prefatorily, amendment of decisions is more acceptable than an
paragraph hereof, and SETTING ASIDE Our original decision
promulgated in this case on 22 July 2004. erroneous judgment attaining finality to the prejudice of innocent parties. A court
discovering an erroneous judgment before it becomes final may, motu proprio or
SO ORDERED.[9]
upon motion of the parties, correct its judgment with the singular objective of
achieving justice for the litigants.[10]
The CA ruled that the checks were payable to order. According to the
appellate court, PNB failed to present sufficient proof to defeat the claim of the
However, a word of caution to lower courts, the CA in Cebu in this
spouses Rodriguez that they really intended the checks to be received by the
particular case, is in order. The Court does not sanction careless disposition of
specified payees. Thus, PNB is liable for the value of the checks which it paid to
cases by courts of justice. The highest degree of diligence must go into the study
PEMSLA without indorsements from the named payees. The award for damages
of every controversy submitted for decision by litigants. Every issue and factual
was deemed appropriate in view of the failure of PNB to treat the Rodriguez
detail must be closely scrutinized and analyzed, and all the applicable laws
account with the highest degree of care considering the fiduciary nature of
judiciously studied, before the promulgation of every judgment by the
their relationship, which constrained respondents to seek legal action.
court. Only in this manner will errors in judgments be avoided.

Hence, the present recourse under Rule 45.

Now to the core of the petition.

Issues
As a rule, when the payee is fictitious or not intended to be the true
recipient of the proceeds, the check is considered as a bearer instrument. A
The issues may be compressed to whether the subject checks are
check is a bill of exchange drawn on a bank payable on demand.[11] It is either an
payable to order or to bearer and who bears the loss?
order or a bearer instrument. Sections 8 and 9 of the NIL states:

PNB argues anew that when the spouses Rodriguez issued the disputed
SEC. 8. When payable to order. The instrument is
checks, they did not intend for the named payees to receive the proceeds. Thus, payable to order where it is drawn payable to the order of a
specified person or to him or his order. It may be drawn payable
they are bearer instruments that could be validly negotiated by mere
to the order of
delivery. Further, testimonial and documentary evidence presented during trial
(a) A payee who is not maker, drawer, or drawee; or
amply proved that spouses Rodriguez and the officers of PEMSLA conspired
(b) The drawer or maker; or
with each other to defraud the bank. (c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
 (f) The holder of an office for the time being.
Where the instrument is payable to order, the payee
must be named or otherwise indicated therein with reasonable
certainty.
SEC. 9. When payable to bearer. The instrument is
payable to bearer
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or
bearer; or
(c) When it is payable to the order of a fictitious or
non-existing person, and such fact is known to the
person making it so payable; or
(d) When the name of the payee does not purport to
be the name of any person; or
(e) Where the only or last indorsement is an
indorsement in blank.[12] (Underscoring supplied)
The distinction between bearer and order instruments lies in their
manner of negotiation. Under Section 30 of the NIL, an order instrument
requires an indorsement from the payee or holder before it may be validly
negotiated. A bearer instrument, on the other hand, does not require an
indorsement to be validly negotiated. It is negotiable by mere delivery. The
provision reads:
SEC. 30. What constitutes negotiation. An instrument
is negotiated when it is transferred from one person to another
in such manner as to constitute the transferee the holder
thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the
holder completed by delivery.
A check that is payable to a specified payee is an order
instrument. However, under Section 9(c) of the NIL, a check payable to a
specified payee may nevertheless be considered as a bearer instrument if it is
payable to the order of a fictitious or non-existing person, and such fact is known
to the person making it so payable. Thus, checks issued to Prinsipe Abante or Si
Malakas at si Maganda, who are well-known characters in Philippine
mythology, are bearer instruments because the named payees are fictitious and
non-existent.
We have yet to discuss a broader meaning of the term fictitious as used
in the NIL. It is for this reason that We look elsewhere for guidance. Court
rulings in the United States are a logical starting point since our law on
negotiable instruments was directly lifted from the Uniform Negotiable
Instruments Law of the United States.[13]
A review of US jurisprudence yields that an actual, existing, and living
payee may also be fictitious if the maker of the check did not intend for the
payee to in fact receive the proceeds of the check. This usually occurs when the
maker places a name of an existing payee on the check for convenience or to
cover up an illegal activity.[14] Thus, a check made expressly payable to a non-
fictitious and existing person is not necessarily an order instrument. If the payee
is not the intended recipient of the proceeds of the check, the payee is
considered a fictitious payee and the check is a bearer instrument.
In a fictitious-payee situation, the drawee bank is absolved from liability
and the drawer bears the loss. When faced with a check payable to a fictitious
payee, it is treated as a bearer instrument that can be negotiated by delivery. The
underlying theory is that one cannot expect a fictitious payee to negotiate the
check by placing his indorsement thereon. And since the maker knew this
limitation, he must have intended for the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the drawer of the check will bear the
loss. This rule is justified for otherwise, it will be most convenient for the maker
who desires to escape payment of the check to always deny the validity of the
indorsement. This despite the fact that the fictitious payee was purposely named
without any intention that the payee should receive the proceeds of the check.[15]
The fictitious-payee rule is best illustrated in Mueller & Martin v.
[16]
Liberty Insurance Bank. In the said case, the corporation Mueller & Martin
was defrauded by George L. Martin, one of its authorized signatories. Martin
drew seven checks payable to the German Savings Fund Company Building
Association (GSFCBA) amounting to $2,972.50 against the account of the
corporation without authority from the latter. Martin was also an officer of the
GSFCBA but did not have signing authority. At the back of the checks, Martin
placed the rubber stamp of the GSFCBA and signed his own name as
indorsement. He then successfully drew the funds from Liberty Insurance Bank
for his own personal profit. When the corporation filed an action against the
bank to recover the amount of the checks, the claim was denied.
The US Supreme Court held in Mueller that when the person making the
check so payable did not intend for the specified payee to have any part in the
transactions, the payee is considered as a fictitious payee. The check is then
considered as a bearer instrument to be validly negotiated by mere
delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as
drawee, was authorized to make payment to the bearer of the check, regardless of
[17]
whether prior indorsements were genuine or not.
The more recent Getty Petroleum Corp. v. American Express Travel
[18]
Related Services Company, Inc. upheld the fictitious-payee rule. The rule
protects the depositary bank and assigns the loss to the drawer of the check who
was in a better position to prevent the loss in the first place. Due care is not even
required from the drawee or depositary bank in accepting and paying the
checks. The effect is that a showing of negligence on the part of the depositary
bank will not defeat the protection that is derived from this rule.
However, there is a commercial bad faith exception to the fictitious-
payee rule. A showing of commercial bad faith on the part of the drawee bank,
or any transferee of the check for that matter, will work to strip it of this
defense. The exception will cause it to bear the loss. Commercial bad faith is
present if the transferee of the check acts dishonestly, and is a party to the
fraudulent scheme. Said the US Supreme Court in Getty:
Consequently, a transferees lapse of wary vigilance,
disregard of suspicious circumstances which might have well
induced a prudent banker to investigate and other permutations
of negligence are not relevant considerations under Section 3-
405 x x x. Rather, there is a commercial bad faith exception to
UCC 3-405, applicable when the transferee acts dishonestly
where it has actual knowledge of facts and circumstances that
amount to bad faith, thus itself becoming a participant in a
fraudulent scheme. x x x Such a test finds support in the text of
the Code, which omits a standard of care requirement from
UCC 3-405 but imposes on all parties an obligation to act with
honesty in fact. x x x[19] (Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends protection even
to non-bank transferees of the checks.
In the case under review, the Rodriguez checks were payable to
specified payees. It is unrefuted that the 69 checks were payable to specific
persons. Likewise, it is uncontroverted that the payees were actual, existing, and
living persons who were members of PEMSLA that had a rediscounting
arrangement with spouses Rodriguez.
What remains to be determined is if the payees, though existing persons,
were fictitious in its broader context.
 For the fictitious-payee rule to be available as a defense, PNB must
show that the makers did not intend for the named payees to be part of the
transaction involving the checks. At most, the banks thesis shows that the payees
did not have knowledge of the existence of the checks. This lack of knowledge
on the part of the payees, however, was not tantamount to a lack of
intention on the part of respondents-spouses that the payees would not
receive the checks proceeds.Considering that respondents-spouses were
transacting with PEMSLA and not the individual payees, it is understandable
that they relied on the information given by the officers of PEMSLA that the
payees would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is
because, as found by both lower courts, PNB failed to present sufficient evidence
to defeat the claim of respondents-spouses that the named payees were the
intended recipients of the checks proceeds. The bank failed to satisfy a requisite
condition of a fictitious-payee situation that the maker of the check intended for
the payee to have no interest in the transaction.
Because of a failure to show that the payees were fictitious in its
broader sense, the fictitious-payee rule does not apply. Thus, the checks are to be
deemed payable to order. Consequently, the drawee bank bears the loss.[20]
PNB was remiss in its duty as the drawee bank. It does not dispute
the fact that its teller or tellers accepted the 69 checks for deposit to the
PEMSLA account even without any indorsement from the named payees. It
bears stressing that order instruments can only be negotiated with a valid
indorsement.
A bank that regularly processes checks that are neither payable to the
customer nor duly indorsed by the payee is apparently grossly negligent in its
operations.[21] This Court has recognized the unique public interest possessed by
the banking industry and the need for the people to have full trust and confidence
in their banks.[22] For this reason, banks are minded to treat their customers
accounts with utmost care, confidence, and honesty.[23]
In a checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check strictly in
accordance with the drawers instructions, i.e., to the named payee in the check. It
should charge to the drawers accounts only the payables authorized by the
latter.Otherwise, the drawee will be violating the instructions of the drawer
and it shall be liable for the amount charged to the drawers account.[24]
In the case at bar, respondents-spouses were the banks depositors. The
checks were drawn against respondents-spouses accounts. PNB, as the drawee
bank, had the responsibility to ascertain the regularity of the indorsements, and
the genuineness of the signatures on the checks before accepting them for
deposit. Lastly, PNBwas obligated to pay the checks in strict accordance with the
instructions of the drawers. Petitioner miserably failed to discharge this burden.
The checks were presented to PNB for deposit by a representative of
PEMSLA absent any type of indorsement, forged or otherwise. The facts clearly
show that the bank did not pay the checks in strict accordance with the
instructions of the drawers, respondents-spouses. Instead, it paid the values of
the checks not to the named payees or their order, but to PEMSLA, a third party
to the transaction between the drawers and the payees.
Moreover, PNB was negligent in the selection and supervision of its
employees. The trustworthiness of bank employees is indispensable to maintain
the stability of the banking industry. Thus, banks are enjoined to be extra vigilant
in the management and supervision of their employees. In Bank of the We note that the RTC failed to thresh out the merits of PNBs cross-
[25]
Philippine Islands v. Court of Appeals, this Court cautioned thus: claim against its co-defendants PEMSLA and MPC. The records are bereft of
any pleading filed by these two defendants in answer to the complaint of
Banks handle daily transactions involving millions of
respondents-spouses and cross-claim of PNB. The Rules expressly provide that
pesos. By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their failure to file an answer is a ground for a declaration that defendant
employees and officials is far greater
is in default.[28] Yet, the RTC failed to sanction the failure of both PEMSLA and
than those of ordinary clerks and employees. For obvious
reasons, the banks are expected to exercise the highest degree of MPC to file responsive pleadings. Verily, the RTC dismissal of PNBs cross-
diligence in the selection and supervision of their employees.[26]
claim has no basis. Thus, this judgment shall be without prejudice to whatever
action the bank might take against its co-defendants in the trial court.
PNBs tellers and officers, in violation of banking rules of procedure,
permitted the invalid deposits of checks to the PEMSLA account. Indeed, when
To PNBs credit, it became involved in the controversial transaction not of its
it is the gross negligence of the bank employees that caused the loss, the bank
own volition but due to the actions of some of its employees. Considering that
should be held liable.[27]
moral damages must be understood to be in concept of grants, not punitive or
corrective in nature, We resolve to reduce the award of moral damages
PNBs argument that there is no loss to compensate since no demand for
to P50,000.00.[29]
payment has been made by the payees must also fail. Damage was caused to
respondents-spouses when the PEMSLA checks they deposited were returned for
WHEREFORE, the appealed Amended Decision is AFFIRMED with
the reason Account Closed. These PEMSLA checks were the corresponding
the MODIFICATION that the award for moral damages is reduced
payments to the Rodriguez checks. Since they could not encash the PEMSLA
to P50,000.00, and that this is without prejudice to whatever civil, criminal, or
checks, respondents-spouses were unable to collect payments for the amounts
administrative action PNB might take against PEMSLA, MPC, and the
they had advanced.
employees involved.

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

One Last Note

F. Additional Provisions
G.R. No. L-18103 June 8, 1922
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
MANILA OIL REFINING & BY-PRODUCTS COMPANY,
INC., defendant-appellant.
MALCOLM, J.:
The question of first impression raised in this case concerns the validity in
this jurisdiction of a provision in a promissory note whereby in case the
same is not paid at maturity, the maker authorizes any attorney to appear
and confess judgment thereon for the principal amount, with interest,
costs, and attorney's fees, and waives all errors, rights to inquisition, and
appeal, and all property exceptions.
On May 8, 1920, the manager and the treasurer of the Manila Oil
Refining & By-Products Company, Inc., executed and delivered to the
Philippine National Bank, a written instrument reading as follows:
RENEWAL.
P61,000.00
MANILA, P.I., May 8, 1920.
On demand after date we promise to pay to the order of the
Philippine National Bank sixty-one thousand only pesos at
Philippine National Bank, Manila, P.I.
Without defalcation, value received; and to hereby authorize any
attorney in the Philippine Islands, in case this note be not paid at
maturity, to appear in my name and confess judgment for the
above sum with interest, cost of suit and attorney's fees of ten
(10) per cent for collection, a release of all errors and waiver of all
rights to inquisition and appeal, and to the benefit of all laws
exempting property, real or personal, from levy or sale. Value
received. No. ____ Due ____
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) VICENTE SOTELO,
Manager.
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) RAFAEL LOPEZ,
Treasurer
The Manila Oil Refining and By-Products Company, Inc. failed to pay the
promissory note on demand. The Philippine National Bank brought action
in the Court of First Instance of Manila, to recover P61,000, the amount of
the note, together with interest and costs. Mr. Elias N. Rector, an attorney
associated with the Philippine National Bank, entered his appearance in
representation of the defendant, and filed a motion confessing judgment.
The defendant, however, in a sworn declaration, objected strongly to the
unsolicited representation of attorney Recto. Later, attorney Antonio
Gonzalez appeared for the defendant and filed a demurrer, and when this
was overruled, presented an answer. The trial judge rendered judgment
on the motion of attorney Recto in the terms of the complaint.
The foregoing facts, and appellant's three assignments of error, raise
squarely the question which was suggested in the beginning of this
opinion. In view of the importance of the subject to the business
community, the advice of prominent attorneys-at-law with banking
connections, was solicited. These members of the bar responded
promptly to the request of the court, and their memoranda have proved
highly useful in the solution of the question. It is to the credit of the bar
that although the sanction of judgement notes in the Philippines might
prove of immediate value to clients, every one of the attorneys has
looked upon the matter in a big way, with the result that out of their
independent investigations has come a practically unanimous protest
against the recognition in this jurisdiction of judgment notes.1
Neither the Code of Civil Procedure nor any other remedial statute
expressly or tacitly recognizes a confession of judgment commonly called
a judgment note. On the contrary, the provisions of the Code of Civil
Procedure, in relation to constitutional safeguards relating to the right to
take a man's property only after a day in court and after due process of
law, contemplate that all defendants shall have an opportunity to be
heard. Further, the provisions of the Code of Civil Procedure pertaining to
counter claims argue against judgment notes, especially as the Code
provides that in case the defendant or his assignee omits to set up a
counterclaim, he cannot afterwards maintain an action against the plaintiff
therefor. (Secs. 95, 96, 97.) At least one provision of the substantive law,
namely, that the validity and fulfillment of contracts cannot be left to the
will of one of the contracting parties (Civil Code, art. 1356), constitutes
another indication of fundamental legal purposes.
The attorney for the appellee contends that the Negotiable Instruments
Law (Act No. 2031) expressly recognizes judgment notes, and that they
are enforcible under the regular procedure. The Negotiable Instruments
Law, in section 5, provides that "The negotiable character of an
instrument otherwise negotiable is not affected by a provision which ". . .
(b) Authorizes a confession of judgment if the instrument be not paid at
maturity." We do not believe, however, that this provision of law can be
taken to sanction judgments by confession, because it is a portion of a
uniform law which merely provides that, in jurisdiction where judgment
notes are recognized, such clauses shall not affect the negotiable
character of the instrument. Moreover, the same section of the
Negotiable Instruments. Law concludes with these words: "But nothing in
this section shall validate any provision or stipulation otherwise illegal."
The court is thus put in the position of having to determine the validity in
the absence of statute of a provision in a note authorizing an attorney to
appear and confess judgment against the maker. This situation, in reality,
has its advantages for it permits us to reach that solution which is best
grounded in the solid principles of the law, and which will best advance
the public interest.
The practice of entering judgments in debt on warrants of attorney is of
ancient origin. In the course of time a warrant of attorney to confess
judgement became a familiar common law security. At common law,
there were two kinds of judgments by confession; the one a judgment
by cognovit actionem, and the other by confession relicta verificatione. A
number of jurisdictions in the United States have accepted the common
law view of judgments by confession, while still other jurisdictions have
refused to sanction them. In some States, statutes have been passed
which have either expressly authorized confession of judgment on
warrant of attorney, without antecedent process, or have forbidden
judgments of this character. In the absence of statute, there is a conflict
of authority as to the validity of a warrant of attorney for the confession of
judgement. The weight of opinion is that, unless authorized by statute,
warrants of attorney to confess judgment are void, as against public
policy.
Possibly the leading case on the subject is First National Bank of Kansas
City vs. White ([1909], 220 Mo., 717; 16 Ann. Cas., 889; 120 S. W., 36;
132 Am. St. Rep., 612). The record in this case discloses that on October
4, 1990, the defendant executed and delivered to the plaintiff an
obligation in which the defendant authorized any attorney-at-law to
appear for him in an action on the note at any time after the note became
due in any court of record in the State of Missouri, or elsewhere, to waive
the issuing and service of process, and to confess judgement in favor of
the First National Bank of Kansas City for the amount that might then be
due thereon, with interest at the rate therein mentioned and the costs of
suit, together with an attorney's fee of 10 per cent and also to waive and
release all errors in said proceedings and judgment, and all proceedings,
appeals, or writs of error thereon. Plaintiff filed a petition in the Circuit
Court to which was attached the above-mentioned instrument. An
attorney named Denham appeared pursuant to the authority given by the
note sued on, entered the appearance of the defendant, and consented
that judgement be rendered in favor of the plaintiff as prayed in the
petition. After the Circuit Court had entered a judgement, the defendants,
through counsel, appeared specially and filed a motion to set it aside.
The Supreme Court of Missouri, speaking through Mr. Justice Graves, in
part said:
But going beyond the mere technical question in our preceding
paragraph discussed, we come to a question urged which goes to
the very root of this case, and whilst new and novel in this state,
we do not feel that the case should be disposed of without
discussing and passing upon that question.
xxx xxx xxx
And if this instrument be considered as security for a debt, as it
was by the common law, it has never so found recognition in this
state. The policy of our law has been against such hidden
securities for debt. Our Recorder's Act is such that instruments
intended as security for debt should find a place in the public
records, and if not, they have often been viewed with suspicion,
and their bona fides often questioned.
Nor do we thing that the policy of our law is such as to thus place
a debtor in the absolute power of his creditor. The field for fraud is
too far enlarged by such an instrument. Oppression and tyranny
would follow the footsteps of such a diversion in the way of
security for debt. Such instruments procured by duress could
shortly be placed in judgment in a foreign court and much distress
result therefrom.
Again, under the law the right to appeal to this court or some
other appellate court is granted to all persons against whom an
adverse judgment is rendered, and this statutory right is by the
instrument stricken down. True it is that such right is not claimed
in this case, but it is a part of the bond and we hardly know why
this pound of flesh has not been demanded. Courts guard with
jealous eye any contract innovations upon their jurisdiction. The
instrument before us, considered in the light of a contract, actually
reduces the courts to mere clerks to enter and record the
judgment called for therein. By our statute (Rev. St. 1899, sec.
645) a party to a written instrument of this character has the right
to show a failure of consideration, but this right is brushed to the
wind by this instrument and the jurisdiction of the court to hear
that controversy is by the whose object is to oust the jurisdiction
of the courts are contrary to public policy and will not be enforced.
Thus it is held that any stipulation between parties to a contract
distinguishing between the different courts of the country is
contrary to public policy. The principle has also been applied to a
stipulation in a contract that a party who breaks it may not be
sued, to an agreement designating a person to be sued for its
breach who is nowise liable and prohibiting action against any but
him, to a provision in a lease that the landlord shall have the right
to take immediate judgment against the tenant in case of a
default on his part, without giving the notice and demand for
possession and filing the complaint required by statute, to a by-
law of a benefit association that the decisions of its officers on
claim shall be final and conclusive, and to many other
agreements of a similar tendency. In some courts, any agreement
as to the time for suing different from time allowed by the statute
of limitations within which suit shall be brought or the right to sue
be barred is held void.
xxx xxx xxx
We shall not pursue this question further. This contract, in so far
as it goes beyond the usual provisions of a note, is void as
against the public policy of the state, as such public policy is
found expressed in our laws and decisions. Such agreements are
iniquitous to the uttermost and should be promptly condemned by
the courts, until such time as they may receive express statutory
recognition, as they have in some states.
xxx xxx xxx
From what has been said, it follows that the Circuit Court never
had jurisdiction of the defendant, and the judgement is reversed.
The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40
L.R.A. [N. S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another well-
considered authority. The notes referred to in the record contained waiver
of presentment and protest, homestead and exemption rights real and
personal, and other rights, and also the following material provision: "And
we do hereby empower and authorize the said A. B. Farquhar Co.
Limited, or agent, or any prothonotary or attorney of any Court of Record
to appear for us and in our name to confess judgement against us and in
favor of said A. B. Farquhar Co., Limited, for the above named sum with
costs of suit and release of all errors and without stay of execution after
the maturity of this note." The Supreme Court of West Virginia, on
consideration of the validity of the judgment note above described,
speaking through Mr. Justice Miller, in part said:
As both sides agree the question presented is one of first
impression in this State. We have no statutes, as has
Pennsylvania and many other states, regulating the subject. In
the decision we are called upon to render, we must have
recourse to the rules and principles of the common law, in force
here, and to our statute law, applicable, and to such judicial
decisions and practices in Virginia, in force at the time of the
separation, as are properly binding on us. It is pertinent to remark
in this connection, that after nearly fifty years of judicial history
this question, strong evidence, we think, that such notes, if at all,
have never been in very general use in this commonwealth. And
in most states where they are current the use of them has grown
up under statutes authorizing them, and regulating the practice of
employing them in commercial transactions.
xxx xxx xxx
It is contended, however, that the old legal maxim, qui facit per
alium, facit per se, is as applicable here as in other cases. We do
not think so. Strong reasons exist, as we have shown, for denying
its application, when holders of contracts of this character seek
the aid of the courts and of their execution process to enforce
them, defendant having had no day in court or opportunity to be
heard. We need not say in this case that a debtor may not, by
proper power of attorney duly executed, authorize another to
appear in court, and by proper endorsement upon the writ waive
service of process, and confess judgement. But we do not wish to
 be understood as approving or intending to countenance the
practice employing in this state commercial paper of the character
here involved. Such paper has heretofore had little if any currency
here. If the practice is adopted into this state it ought to be, we
think, by act of the Legislature, with all proper safeguards thrown
around it, to prevent fraud and imposition. The policy of our law
is, that no man shall suffer judgment at the hands of our courts
without proper process and a day to be heard. To give currency
to such paper by judicial pronouncement would be to open the
door to fraud and imposition, and to subject the people to wrongs
and injuries not heretofore contemplated. This we are unwilling to
do.
A case typical of those authorities which lend support to judgment notes
is First National Bank of Las Cruces vs. Baker ([1919], 180 Pac., 291).
The Supreme Court of New Mexico, in a per curiam decision, in part,
said:
In some of the states the judgments upon warrants of attorney
are condemned as being against public policy. (Farquhar and Co.
vs. Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956;
Ann. Cas. [1914 A]. 640, and First National Bank of Kansas City
vs. White, 220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep., 612;
16 Ann. Cas., 889, are examples of such holding.) By just what
course of reasoning it can be said by the courts that such
judgments are against public policy we are unable to understand.
It was a practice from time immemorial at common law, and the
common law comes down to us sanctioned as justified by the
reason and experience of English-speaking peoples. If conditions
have arisen in this country which make the application of the
common law undesirable, it is for the Legislature to so announce,
and to prohibit the taking of judgments can be declared as
against the public policy of the state. We are aware that the
argument against them is that they enable the unconscionable
creditor to take advantage of the necessities of the poor debtor
and cut him off from his ordinary day in court. On the other hand,
it may be said in their favor that it frequently enables a debtor to
obtain money which he could by no possibility otherwise obtain. It
strengthens his credit, and may be most highly beneficial to him
at times. In some of the states there judgments have been
condemned by statute and of course in that case are not allowed.
Our conclusion in this case is that a warrant of attorney given as
security to a creditor accompanying a promissory note confers a
valid power, and authorizes a confession of judgment in any court
of competent jurisdiction in an action to be brought upon said
note; that our cognovit statute does not cover the same field as
that occupied by the common-law practice of taking judgments
upon warrant of attorney, and does not impliedly or otherwise
abrogate such practice; and that the practice of taking judgments
upon warrants of attorney as it was pursued in this case is not
against any public policy of the state, as declared by its laws.
With reference to the conclusiveness of the decisions here mentioned, it
may be said that they are based on the practice of the English-American
common law, and that the doctrines of the common law are binding upon
Philippine courts only in so far as they are founded on sound principles
applicable to local conditions.
Judgments by confession as appeared at common law were considered
an amicable, easy, and cheap way to settle and secure debts. They are a
quick remedy and serve to save the court's time. They also save the time
and money of the litigants and the government the expenses that a long
litigation entails. In one sense, instruments of this character may be
considered as special agreements, with power to enter up judgments on
them, binding the parties to the result as they themselves viewed it.
On the other hand, are disadvantages to the commercial world which
outweigh the considerations just mentioned. Such warrants of attorney
are void as against public policy, because they enlarge the field for fraud,
because under these instruments the promissor bargains away his right
to a day in court, and because the effect of the instrument is to strike
down the right of appeal accorded by statute. The recognition of such a
form of obligation would bring about a complete reorganization of
commercial customs and practices, with reference to short-term
obligations. It can readily be seen that judgement notes, instead of
resulting to the advantage of commercial life in the Philippines might be
the source of abuse and oppression, and make the courts involuntary
parties thereto. If the bank has a meritorious case, the judgement is
ultimately certain in the courts.
We are of the opinion that warrants of attorney to confess judgment are
not authorized nor contemplated by our law. We are further of the opinion
that provisions in notes authorizing attorneys to appear and confess
judgments against makers should not be recognized in this jurisdiction by
implication and should only be considered as valid when given express
legislative sanction.
The judgment appealed from is set aside, and the case is remanded to
the lower court for further proceedings in accordance with this decision.
Without special finding as to costs in this instance, it is so ordered.
6. Rules to be followed in interpretation
G.R. No. 93073 December 21, 1992
REPUBLIC PLANTERS BANK, petitioner,
vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.
CAMPOS, JR., J.:
This is an appeal by way of a Petition for Review on Certiorari from the
decision * of the Court of Appeals in CA G.R. CV No. 07302, entitled "Republic Planters
Bank.Plaintiff-Appellee vs. Pinch Manufacturing Corporation, et al., Defendants, and Fermin Canlas,
Defendant-Appellant", which affirmed the decision ** in Civil Case No. 82-5448 except that it
completely absolved Fermin Canlas from liability under the promissory notes and reduced the award
for damages and attorney's fees. The RTC decision, rendered on June 20, 1985, is quoted hereunder:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of the plaintiff Republic Planters Bank,
ordering defendant Pinch Manufacturing Corporation
(formerly Worldwide Garment Manufacturing, Inc.) and
defendants Shozo Yamaguchi and Fermin Canlas to pay,
jointly and severally, the plaintiff bank the following sums
with interest thereon at 16% per annum from the dates
indicated, to wit:
Under the promissory note (Exhibit "A"), the sum of
P300,000.00 with interest from January 29, 1981 until fully
paid; under promissory note (Exhibit "B"), the sum of
P40,000.00 with interest from November 27, 1980; under
the promissory note (Exhibit "C"), the sum of P166,466.00
which interest from January 29, 1981; under the
promissory note (Exhibit "E"), the sum of P86,130.31 with
interest from January 29, 1981; under the promissory note
(Exhibit "G"), the sum of P12,703.70 with interest from
November 27, 1980; under the promissory note (Exhibit
"H"), the sum of P281,875.91 with interest from January
29, 1981; and under the promissory note (Exhibit "I"), the
sum of P200,000.00 with interest from January 29, 1981.
Under the promissory note (Exhibit "D") defendants Pinch
Manufacturing Corporation (formerly named Worldwide
Garment Manufacturing, Inc.), and Shozo Yamaguchi are
ordered to pay jointly and severally, the plaintiff bank the
sum of P367,000.00 with interest of 16% per annum from
January 29, 1980 until fully paid
Under the promissory note (Exhibit "F") defendant
corporation Pinch (formerly Worldwide) is ordered to pay
the plaintiff bank the sum of P140,000.00 with interest at
16% per annum from November 27, 1980 until fully paid.
Defendant Pinch (formely Worldwide) is hereby ordered to
pay the plaintiff the sum of P231,120.81 with interest at
12% per annum from July 1, 1981, until fully paid and the
sum of P331,870.97 with interest from March 28, 1981,
until fully paid.
All the defendants are also ordered to pay, jointly and
severally, the plaintiff the sum of P100,000.00 as and for
reasonable attorney's fee and the further sum equivalent
to 3% per annum of the respective principal sums from
the dates above stated as penalty charge until fully paid,
plus one percent (1%) of the principal sums as service
charge.
With costs against the defendants.
SO ORDERED. 1
From the above decision only defendant Fermin Canlas appealed to the
then Intermediate Court (now the Court Appeals). His contention was that
inasmuch as he signed the promissory notes in his capacity as officer of
the defunct Worldwide Garment Manufacturing, Inc, he should not be
held personally liable for such authorized corporate acts that he
performed. It is now the contention of the petitioner Republic Planters
Bank that having unconditionally signed the nine (9) promissory notes
with Shozo Yamaguchi, jointly and severally, defendant Fermin Canlas is
solidarity liable with Shozo Yamaguchi on each of the nine notes.
We find merit in this appeal.
From the records, these facts are established: Defendant Shozo
Yamaguchi and private respondent Fermin Canlas were President/Chief
Operating Officer and Treasurer respectively, of Worldwide Garment
Manufacturing, Inc.. By virtue of Board Resolution No.1 dated August 1,
1979, defendant Shozo Yamaguchi and private respondent Fermin
Canlas were authorized to apply for credit facilities with the petitioner
Republic Planters Bank in the forms of export advances and letters of
credit/trust receipts accommodations. Petitioner bank issued nine
promissory notes, marked as Exhibits A to I inclusive, each of which were
uniformly worded in the following manner:
___________, after date, for value received, I/we, jointly
and severaIly promise to pay to the ORDER of the
REPUBLIC PLANTERS BANK, at its office in Manila,
Philippines, the sum of ___________ PESOS(....)
Philippine Currency...
On the right bottom margin of the promissory notes appeared the
signatures of Shozo Yamaguchi and Fermin Canlas above their printed
names with the phrase "and (in) his personal capacity" typewritten below.
At the bottom of the promissory notes appeared: "Please credit proceeds
of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6
of WORLDWIDE GARMENT MFG.
CORP.
These entries were separated from the text of the notes with a bold line
which ran horizontally across the pages.
In the promissory notes marked as Exhibits C, D and F, the name
Worldwide Garment Manufacturing, Inc. was apparently rubber stamped
above the signatures of defendant and private respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to
change its corporate name to Pinch Manufacturing Corporation.
On February 5, 1982, petitioner bank filed a complaint for the recovery of
sums of money covered among others, by the nine promissory notes with
interest thereon, plus attorney's fees and penalty charges. The
complainant was originally brought against Worldwide Garment
Manufacturing, Inc. inter alia, but it was later amended to drop Worldwide
Manufacturing, Inc. as defendant and substitute Pinch Manufacturing
Corporation it its place. Defendants Pinch Manufacturing Corporation and
Shozo Yamaguchi did not file an Amended Answer and failed to appear
at the scheduled pre-trial conference despite due notice. Only private
respondent Fermin Canlas filed an Amended Answer wherein he, denied
having issued the promissory notes in question since according to him,
he was not an officer of Pinch Manufacturing Corporation, but instead of
Worldwide Garment Manufacturing, Inc., and that when he issued said
promissory notes in behalf of Worldwide Garment Manufacturing, Inc.,
the same were in blank, the typewritten entries not appearing therein
prior to the time he affixed his signature.
In the mind of this Court, the only issue material to the resolution of this
appeal is whether private respondent Fermin Canlas is solidarily liable
with the other defendants, namely Pinch Manufacturing Corporation and
Shozo Yamaguchi, on the nine promissory notes.
We hold that private respondent Fermin Canlas is solidarily liable on each
of the promissory notes bearing his signature for the following reasons:
The promissory motes are negotiable instruments and must be governed
by the Negotiable Instruments Law. 2
Under the Negotiable lnstruments Law, persons who write their names on
the face of promissory notes are makers and are liable as such. 3 By
signing the notes, the maker promises to pay to the order of the payee or any
holder 4according to the tenor thereof. 5 Based on the above provisions of
law, there is no denying that private respondent Fermin Canlas is one of the
co-makers of the promissory notes. As such, he cannot escape liability
arising therefrom.
Where an instrument containing the words "I promise to pay" is signed by
two or more persons, they are deemed to be jointly and severally liable
thereon. 6 An instrument which begins" with "I" ,We" , or "Either of us"
promise to, pay, when signed by two or more persons, makes them solidarily
liable. 7 The fact that the singular pronoun is used indicates that the promise
is individual as to each other; meaning that each of the co-signers is deemed
to have made an independent singular promise to pay the notes in full.
In the case at bar, the solidary liability of private respondent Fermin
Canlas is made clearer and certain, without reason for ambiguity, by the
presence of the phrase "joint and several" as describing the unconditional
promise to pay to the order of Republic Planters Bank. A joint and several
note is one in which the makers bind themselves both jointly and
individually to the payee so that all may be sued together for its
enforcement, or the creditor may select one or more as the object of the
suit. 8 A joint and several obligation in common law corresponds to a civil law solidary obligation; that
is, one of several debtors bound in such wise that each is liable for the entire amount, and not merely
9 forth. Where the instrument contains or a person adds to
for his proportionate share. By making a joint and several promise to pay to the
order of Republic Planters Bank, private respondent Fermin Canlas assumed
the solidary liability of a debtor and the payee may choose to enforce the
notes against him alone or jointly with Yamaguchi and Pinch Manufacturing
Corporation as solidary debtors.
As to whether the interpolation of the phrase "and (in) his personal
capacity" below the signatures of the makers in the notes will affect the
liability of the makers, We do not find it necessary to resolve and decide,
because it is immaterial and will not affect to the liability of private
respondent Fermin Canlas as a joint and several debtor of the notes.
With or without the presence of said phrase, private respondent Fermin
Canlas is primarily liable as a co-maker of each of the notes and his
liability is that of a solidary debtor.
Finally, the respondent Court made a grave error in holding that an
amendment in a corporation's Articles of Incorporation effecting a change
of corporate name, in this case from Worldwide Garment manufacturing
Inc to Pinch Manufacturing Corporation extinguished the personality of
the original corporation.
The corporation, upon such change in its name, is in no sense a new
corporation, nor the successor of the original corporation. It is the same
corporation with a different name, and its character is in no respect
changed. 10
A change in the corporate name does not make a new corporation, and
whether effected by special act or under a general law, has no affect on
the identity of the corporation, or on its property, rights, or liabilities. 11
The corporation continues, as before, responsible in its new name for all
debts or other liabilities which it had previously contracted or incurred. 12
As a general rule, officers or directors under the old corporate name bear
no personal liability for acts done or contracts entered into by officers of
the corporation, if duly authorized. Inasmuch as such officers acted in
their capacity as agent of the old corporation and the change of name
meant only the continuation of the old juridical entity, the corporation
bearing the same name is still bound by the acts of its agents if
authorized by the Board. Under the Negotiable Instruments Law, the
liability of a person signing as an agent is specifically provided for as
follows:
Sec. 20. Liability of a person signing as agent and so
his signature words indicating that he signs for or on
behalf of a principal , or in a representative capacity, he is
not liable on the instrument if he was duly authorized; but
the mere addition of words describing him as an agent, or
as filling a representative character, without disclosing his
principal, does not exempt him from personal liability.
Where the agent signs his name but nowhere in the instrument has he
disclosed the fact that he is acting in a representative capacity or the
name of the third party for whom he might have acted as agent, the agent
is personally liable to take holder of the instrument and cannot be
permitted to prove that he was merely acting as agent of another and
parol or extrinsic evidence is not admissible to avoid the agent's personal
liability. 13
On the private respondent's contention that the promissory notes were
delivered to him in blank for his signature, we rule otherwise. A careful
examination of the notes in question shows that they are the stereotype
printed form of promissory notes generally used by commercial banking
institutions to be signed by their clients in obtaining loans. Such printed
notes are incomplete because there are blank spaces to be filled up on
material particulars such as payee's name, amount of the loan, rate of
interest, date of issue and the maturity date. The terms and conditions of
the loan are printed on the note for the borrower-debtor 's perusal. An
incomplete instrument which has been delivered to the borrower for his
signature is governed by Section 14 of the Negotiable Instruments Law
which provides, in so far as relevant to this case, thus:
Sec. 14. Blanks: when may be filled. Where the
instrument is wanting in any material particular, the
person in possesion thereof has a prima facie authority to
complete it by filling up the blanks therein. ... In order,
 however, that any such instrument when completed may
be enforced against any person who became a party
thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a
reasonable time...
Proof that the notes were signed in blank was only the self-serving
testimony of private respondent Fermin Canlas, as determined by the trial
court, so that the trial court ''doubts the defendant (Canlas) signed in
blank the promissory notes". We chose to believe the bank's testimony
that the notes were filled up before they were given to private respondent
Fermin Canlas and defendant Shozo Yamaguchi for their signatures as
joint and several promissors. For signing the notes above their
typewritten names, they bound themselves as unconditional makers. We
take judicial notice of the customary procedure of commercial banks of
requiring their clientele to sign promissory notes prepared by the banks in
printed form with blank spaces already filled up as per agreed terms of
the loan, leaving the borrowers-debtors to do nothing but read the terms
and conditions therein printed and to sign as makers or co-makers. When
the notes were given to private respondent Fermin Canlas for his
signature, the notes were complete in the sense that the spaces for the
material particular had been filled up by the bank as per agreement. The
notes were not incomplete instruments; neither were they given to private
respondent Fermin Canlas in blank as he claims. Thus, Section 14 of the
NegotiabIe Instruments Law is not applicable.
The ruling in case of Reformina vs. Tomol relied upon by the appellate
court in reducing the interest rate on the promissory notes from 16% to
12% per annum does not squarely apply to the instant petition. In the
abovecited case, the rate of 12% was applied to forebearances of money,
goods or credit and court judgemets thereon, only in the absence of any
stipulation between the parties.
In the case at bar however , it was found by the trial court that the rate of
interest is 9% per annum, which interest rate the plaintiff may at any time
without notice, raise within the limits allowed law. And so, as of February
16, 1984 , the plaintiff had fixed the interest at 16% per annum.
This Court has held that the rates under the Usury Law, as amended by
Presidential Decree No. 116, are applicable only to interests by way of
compensation for the use or forebearance of money. Article 2209 of the
Civil Code, on the other hand, governs interests by way of
damages. 15 This fine distinction was not taken into consideration by the
appellate court, which instead made a general statement that the interest
rate be at 12% per annum.
Inasmuch as this Court had declared that increases in interest rates are
not subject to any ceiling prescribed by the Usury Law, the appellate
court erred in limiting the interest rates at 12% per annum. Central Bank
Circular No. 905, Series of 1982 removed the Usury Law ceiling on
interest rates. 16
In the 1ight of the foregoing analysis and under the plain language of the
statute and jurisprudence on the matter, the decision of the respondent:
Court of Appeals absolving private respondent Fermin Canlas is
REVERSED and SET ASIDE. Judgement is hereby rendered declaring
private respondent Fermin Canlas jointly and severally liable on all the
nine promissory notes with the following sums and at 16% interest per
annum from the dates indicated, to wit:
Under the promissory note marked as exhibit A, the sum of P300,000.00
with interest from January 29, 1981 until fully paid; under promissory note
marked as Exhibit B, the sum of P40,000.00 with interest from November
27, 1980: under the promissory note denominated as Exhibit C, the
amount of P166,466.00 with interest from January 29, 1981; under the
promissory note denominated as Exhibit D, the amount of P367,000.00
with interest from January 29, 1981 until fully paid; under the promissory
note marked as Exhibit E, the amount of P86,130.31 with interest from
January 29, 1981; under the promissory note marked as Exhibit F, the
sum of P140,000.00 with interest from November 27, 1980 until fully paid;
under the promissory note marked as Exhibit G, the amount of
P12,703.70 with interest from November 27, 1980; the promissory note
marked as Exhibit H, the sum of P281,875.91 with interest from January
29, 1981; and the promissory note marked as Exhibit I, the sum of
P200,000.00 with interest on January 29, 1981.
The liabilities of defendants Pinch Manufacturing Corporation (formerly
Worldwide Garment Manufacturing, Inc.) and Shozo Yamaguchi, for not
having appealed from the decision of the trial court, shall be adjudged in
accordance with the judgment rendered by the Court a quo.
With respect to attorney's fees, and penalty and service charges, the
private respondent Fermin Canlas is hereby held jointly and solidarity
liable with defendants for the amounts found, by the Court a quo. With
costs against private respondent.
SO ORDERED.
[G.R. No. 148864. August 21, 2003]
SPOUSES EDUARDO B. EVANGELISTA and EPIFANIA C.
EVANGELISTA, petitioners, vs. MERCATOR FINANCE
CORP., LYDIA P. SALAZAR, LAMECS** REALTY AND
DEVELOPMENT CORP. and the REGISTER OF DEEDS OF
BULACAN, respondents.
DECISION
PUNO, J.:
Petitioners, Spouses Evangelista (Petitioners), are before this Court
on a Petition for Review on Certiorari under Rule 45 of the Revised Rules
of Court, assailing the decision of the Court of Appeals dismissing their
petition.
Petitioners filed a complaint[1] for annulment of titles against
respondents, Mercator Finance Corporation, Lydia P. Salazar, Lamecs
Realty and Development Corporation, and the Register of Deeds of
Bulacan. Petitioners claimed being the registered owners of five (5)
parcels of land[2] contained in the Real Estate Mortgage[3] executed by
them and Embassy Farms, Inc. (Embassy Farms). They alleged that they
executed the Real Estate Mortgage in favor of Mercator Financing
Corporation (Mercator) only as officers of Embassy Farms. They did not
receive the proceeds of the loan evidenced by a promissory note, as all
of it went to Embassy Farms. Thus, they contended that the mortgage
was without any consideration as to them since they did not personally
obtain any loan or credit accommodations. There being no principal
obligation on which the mortgage rests, the real estate mortgage is
void.[4] With the void mortgage, they assailed the validity of the
foreclosure proceedings conducted by Mercator, the sale to it as the
highest bidder in the public auction, the issuance of the transfer
certificates of title to it, the subsequent sale of the same parcels of land to
respondent Lydia P. Salazar (Salazar), and the transfer of the titles to her
name, and lastly, the sale and transfer of the properties to respondent
Lamecs Realty & Development Corporation (Lamecs).
Mercator admitted that petitioners were the owners of the subject
parcels of land. It, however, contended that on February 16, 1982,
plaintiffs executed a Mortgage in favor of defendant Mercator Finance
Corporation for and in consideration of certain loans, and/or other forms
of credit accommodations obtained from the Mortgagee (defendant
Mercator Finance Corporation) amounting to EIGHT HUNDRED FORTY-
FOUR THOUSAND SIX HUNDRED TWENTY-FIVE & 78/100
(P844,625.78) PESOS, Philippine Currency and to secure the payment of
the same and those others that the MORTGAGEE may extend to the
MORTGAGOR (plaintiffs) x x x.[5] It contended that since petitioners and
Embassy Farms signed the promissory note[6] as co-makers, aside from
the Continuing Suretyship Agreement[7] subsequently executed to
guarantee the indebtedness of Embassy Farms, and the succeeding
promissory notes[8] restructuring the loan, then petitioners are jointly and
severally liable with Embassy Farms. Due to their failure to pay the
obligation, the foreclosure and subsequent sale of the mortgaged
properties are valid.
Respondents Salazar and Lamecs asserted that they are innocent
purchasers for value and in good faith, relying on the validity of the title of
Mercator. Lamecs admitted the prior ownership of petitioners of the
subject parcels of land, but alleged that they are the present registered
owner. Both respondents likewise assailed the long silence and inaction
by petitioners as it was only after a lapse of almost ten (10) years from
the foreclosure of the property and the subsequent sales that they made
their claim. Thus, Salazar and Lamecs averred that petitioners are in
estoppel and guilty of laches.[9]
During pre-trial, the parties agreed on the following issues:
a. Whether or not the Real Estate Mortgage executed by the plaintiffs
in favor of defendant Mercator Finance Corp. is null and void;
b. Whether or not the extra-judicial foreclosure proceedings
undertaken on subject parcels of land to satisfy the indebtedness
of Embassy Farms, Inc. is (sic) null and void;
c. Whether or not the sale made by defendant Mercator Finance Corp.
in favor of Lydia Salazar and that executed by the latter in favor
of defendant Lamecs Realty and Development Corp. are null
and void;
d. Whether or not the parties are entitled to damages.[10]
 After pre-trial, Mercator moved for summary judgment on the ground
that except as to the amount of damages, there is no factual issue to be
litigated. Mercator argued that petitioners had admitted in their pre-trial
brief the existence of the promissory note, the continuing suretyship
agreement and the subsequent promissory notes restructuring the loan,
hence, there is no genuine issue regarding their liability. The mortgage,
foreclosure proceedings and the subsequent sales are valid and the
complaint must be dismissed.[11]
Petitioners opposed the motion for summary judgment claiming that
because their personal liability to Mercator is at issue, there is a need for
a full-blown trial.[12]
The RTC granted the motion for summary judgment and dismissed
the complaint. It held:
A reading of the promissory notes show (sic) that the liability of the signatories
thereto are solidary in view of the phrase jointly and severally. On the
promissory note appears (sic) the signatures of Eduardo B. Evangelista, Epifania
C. Evangelista and another signature of Eduardo B. Evangelista below the words
Embassy Farms, Inc. It is crystal clear then that the plaintiffs-spouses signed the
promissory note not only as officers of Embassy Farms, Inc. but in their personal
capacity as well(.) Plaintiffs(,) by affixing their signatures thereon in a dual
capacity have bound themselves as solidary debtor(s) with Embassy Farms, Inc.
to pay defendant Mercator Finance Corporation the amount of indebtedness.
That the principal contract of loan is void for lack of consideration, in the light of
the foregoing is untenable.[13]
Petitioners motion for reconsideration was denied for lack of
merit.[14] Thus, petitioners went up to the Court of Appeals, but again
were unsuccessful. The appellate court held:
The appellants insistence that the loans secured by the mortgage they executed
were not personally theirs but those of Embassy Farms, Inc. is clearly self-
serving and misplaced. The fact that they signed the subject promissory notes in
the(ir) personal capacities and as officers of the said debtor corporation is
manifest on the very face of the said documents of indebtedness (pp. 118, 128-
131, Orig. Rec.). Even assuming arguendo that they did not, the appellants lose
sight of the fact that third persons who are not parties to a loan may secure the
latter by pledging or mortgaging their own property (Lustan vs. Court of
Appeals, 266 SCRA 663, 675). x x x. In constituting a mortgage over their own
property in order to secure the purported corporate debt of Embassy Farms, Inc.,
the appellants undeniably assumed the personality of persons interested in the
fulfillment of the principal obligation who, to save the subject realities from
foreclosure and with a view towards being subrogated to the rights of the
creditor, were free to discharge the same by payment (Articles 1302 [3] and
1303, Civil Code of the Philippines).[15] (emphases in the original)
The appellate court also observed that if the appellants really felt
aggrieved by the foreclosure of the subject mortgage and the subsequent
sales of the realties to other parties, why then did they commence the suit
only on August 12, 1997 (when the certificate of sale was issued on
January 12, 1987, and the certificates of title in the name of Mercator on
September 27, 1988)? Petitioners procrastination for about nine (9) years
is difficult to understand. On so flimsy a ground as lack of consideration,
(w)e may even venture to say that the complaint was not worth the time
of the courts.[16]
A motion for reconsideration by petitioners was likewise denied for
lack of merit.[17] Thus, this petition where they allege that:
THE COURT A QUO ERRED AND ACTED WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
AFFIRMING IN TOTO THE MAY 4, 1998 ORDER OF THE TRIAL COURT
GRANTING RESPONDENTS MOTION FOR SUMMARY JUDGMENT
DESPITE THE EXISTENCE OF GENUINE ISSUES AS TO MATERIAL
FACTS AND ITS NON-ENTITLEMENT TO A JUDGMENT AS A MATTER
OF LAW, THEREBY DECIDING THE CASE IN A WAY PROBABLY NOT
IN ACCORD WITH APPLICABLE DECISIONS OF THIS HONORABLE
COURT.[18]
We affirm.
Summary judgment is a procedural technique aimed at weeding out
sham claims or defenses at an early stage of the litigation.[19] The crucial
question in a motion for summary judgment is whether the issues raised
in the pleadings are genuine or fictitious, as shown by affidavits,
depositions or admissions accompanying the motion. A genuine issue
means an issue of fact which calls for the presentation of evidence, as
distinguished from an issue which is fictitious or contrived so as not to
constitute a genuine issue for trial.[20] To forestall summary judgment, it is
essential for the non-moving party to confirm the existence of genuine
issues where he has substantial, plausible and fairly arguable defense,
i.e., issues of fact calling for the presentation of evidence upon which a
reasonable finding of fact could return a verdict for the non-moving party.
The proper inquiry would therefore be whether the affirmative defenses
offered by petitioners constitute genuine issue of fact requiring a full-
blown trial.[21]
 In the case at bar, there are no genuine issues raised by petitioners.
Petitioners do not deny that they obtained a loan from Mercator. They
merely claim that they got the loan as officers of Embassy Farms without
intending to personally bind themselves or their property. However, a
simple perusal of the promissory note and the continuing suretyship
agreement shows otherwise. These documentary evidence prove that
petitioners are solidary obligors with Embassy Farms.
The promissory note[22] states:
(1) For valuable and/or other consideration, EDUARDO B. EVANGELISTA
and EPIFANIA C. EVANGELISTA (hereinafter called Surety), jointly and
severally unconditionally guarantees (sic) to MERCATOR FINANCE
COPORATION (hereinafter called Creditor), the full, faithful and prompt
payment and discharge of any and all indebtedness of EMBASSY FARMS, INC.
(hereinafter called Principal) to the Creditor.
xxxxxxxxx

For value received, I/We jointly and severally promise to pay to the order of
MERCATOR FINANCE CORPORATION at its office, the principal sum of
EIGHT HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-
FIVE PESOS & 78/100 (P 844,625.78), Philippine currency, x x x, in
installments as follows:
(3) The obligations hereunder are joint and several and independent of the
obligations of the Principal. A separate action or actions may be brought and
prosecuted against the Surety whether or not the action is also brought and
prosecuted against the Principal and whether or not the Principal be joined in any
such action or actions.

September 16, 1982 - P154,267.87 x x x x x x x x x.

October 16, 1982 - P154,267.87 The agreement was signed by petitioners on February 16, 1982. The
November 16, 1982 - P154,267.87 promissory notes[24] subsequently executed by petitioners and Embassy
December 16, 1982 - P154,267.87 Farms, restructuring their loan, likewise prove that petitioners are
January 16, 1983 - P154,267.87 solidarily liable with Embassy Farms.
February 16, 1983 - P154,267.87
Petitioners further allege that there is an ambiguity in the wording of
x x x x x x x x x. the promissory note and claim that since it was Mercator who provided
the form, then the ambiguity should be resolved against it.
The note was signed at the bottom by petitioners Eduardo B.
Evangelista and Epifania C. Evangelista, and Embassy Farms, Inc. with Courts can interpret a contract only if there is doubt in its
the signature of Eduardo B. Evangelista below it. letter.[25] But, an examination of the promissory note shows no such
ambiguity. Besides, assuming arguendo that there is an ambiguity,
The Continuing Suretyship Agreement[23] also proves the solidary Section 17 of the Negotiable Instruments Law states, viz:
obligation of petitioners, viz:
SECTION 17. Construction where instrument is ambiguous. Where the
(Embassy Farms, Inc.) language of the instrument is ambiguous or there are omissions therein, the
Principal following rules of construction apply:
(Eduardo B. Evangelista)
Surety xxxxxxxxx
(Epifania C. Evangelista)
Surety (g) Where an instrument containing the word I promise to pay is signed by two
(Mercator Finance Corporation) or more persons, they are deemed to be jointly and severally liable thereon.
Creditor
Petitioners also insist that the promissory note does not convey their
To: MERCATOR FINANCE COPORATION true intent in executing the document. The defense is unavailing. Even if
petitioners intended to sign the note merely as officers of Embassy
Farms, still this does not erase the fact that they subsequently executed a
continuing suretyship agreement. A surety is one who is solidarily liable CARMENCITA GONZALES, NEMIA
with the principal.[26] Petitioners cannot claim that they did not personally CASTRO, GLORIA DOMINGUEZ,
receive any consideration for the contract for well-entrenched is the rule ANNILYN C. SABALE and several JOHN Promulgated:
that the consideration necessary to support a surety obligation need not DOES,
pass directly to the surety, a consideration moving to the principal alone Respondents.
being sufficient. A surety is bound by the same consideration that makes December 16, 2005
the contract effective between the principal parties thereto.[27] Having
executed the suretyship agreement, there can be no dispute on the xx - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -xx
personal liability of petitioners.
DECISION
Lastly, the parol evidence rule does not apply in this case.[28] We
held in Tarnate v. Court of Appeals,[29] that where the parties admitted CARPIO MORALES, J.:
the existence of the loans and the mortgage deeds and the fact of default
on the due repayments but raised the contention that they were misled by
respondent bank to believe that the loans were long-term The Court of Appeals having affirmed the dismissal by Branch 20 of the
accommodations, then the parties could not be allowed to introduce Regional Trial Court (RTC) of Cavite at Imus, for lack of cause of action, Civil
evidence of conditions allegedly agreed upon by them other than those
stipulated in the loan documents because when they reduced their Case No. 2079-00, the complaint filed by herein petitioner Victoria J. Ilano
agreement in writing, it is presumed that they have made the writing the for Revocation/Cancellation of Promissory Notes and Bills of
only repository and memorial of truth, and whatever is not found in the
writing must be understood to have been waived and abandoned. Exchange (Checks) with Damagesand Prayer for Preliminary Injunction or

IN VIEW WHEREOF, the petition is dismissed. Treble costs against Temporary Restraining Order (TRO),[1] against herein respondents 15 named
the petitioners. defendants (and several John Does), a recital of the pertinent allegations in the
SO ORDERED. complaint, quoted verbatim as follows, is in order:

xxx
VICTORIA J. ILANO represented by her G.R. No. 161756
Attorney-in-fact, MILO ANTONIO C.
3. That defendant AMELIA O. ALONZO, is a trusted employee
ILANO, Present:
of [petitioner]. She has been with them for several years
Petitioners,
already, and through the years, defendant ALONZO was
PANGANIBAN, Chairman,
able to gain the trust and confidence of [petitioner] and her
SANDOVAL- GUTIERREZ,
family;
- versus - CORONA,
CARPIO MORALES, and
4. That due to these trust and confidence reposed upon defendant
GARCIA, JJ.
ALONZO by [petitioner], there were occasions when
HON. DOLORES L. ESPAOL, in her
defendant ALONZO was entrusted with [petitioners]
capacity as Executive Judge, RTC of Imus,
METROBANK Check Book containing either signed or
Cavite, Br. 90, and, AMELIA ALONZO,
unsigned blank checks, especially in those times when
EDITH CALILAP, DANILO
[petitioner] left for the United States for medical check-up;
CAMACLANG, ESTELA CAMACLANG,
ALLAN CAMACLANG, LENIZA REYES,
5. Sometime during the second week of December 1999, or
EDWIN REYES, JANE BACAREL,
thereabouts, defendant ALONZO by means of deceit and
CHERRY CAMACLANG, FLORA
abuse of confidence succeeded in procuring Promissory
CABRERA, ESTELITA LEGASPI,
 Notes and signed blank checks from [petitioner] who
was then recuperating from illness;
6. That as stated, aside from the said blank checks, defendant
ALONZO likewise succeeded in inducing [petitioner]
to sign the Promissory Notes antedated June 8, 1999 in
the amount of PESOS: ONE MILLION FOUR HUNDRED
TWENTY EIGHT THOUSAND TWO HUNDRED
SEVENTY TWO (Php 1,428,272.00) payable to defendants
EDITH CALILAP and DANILO CALILAP, and another
Promissory Noted dated March 1999 in the amount of
PESOS: ONE MILLION (Php 1,000,000.00) payable to
the same defendants EDITH CALILAP and DANILO
CALILAP, copies of said Promissory Notes are hereto
attached as Annexes A and A-1 hereof;
all in the total amount of Php 3,031,600.00, copies of said
checks are hereto attached as Annexes C, C-1, C-2, C-3 and
C-4, respectively;
10. That aside from the checks mentioned heretofore, defendant
ALONZO, confederated and conspired with the following
co-defendants, FLORA CABRERA, NEMIA CASTRO,
EDITH CALILAP, DANILO CALILAP, GLORIA
DOMINGUEZ, CARMENCITA GONZALES and
ANNILYN C. SABALE and took advantage of the
signature of [petitioner] in said blank checks which were
later on completed by them indicated opposite their
respective names and the respective amount thereof, as
follows:

7. That another Promissory Note antedated October 1,

1999 thru the machination of defendant ALONZO, was
signed by [petitioner] in the amount of PESOS: THREE NAME AMOUNT METROBANK
MILLION FORTY SIX THOUSAND FOUR HUNDRED Check No.
ONE (Php 3,046,401.00) excluding interest, in favor of her Flora Cabrera Php 337,584.58 0111460
co-defendants ESTELA CAMACLANG, ALLAN Flora Cabrera 98,000.00 0111514
CAMACLANG, LENIZA REYES, EDWIN REYES, JANE Nemia Castro 100,000.00 0111542
BACAREL and CHERRY CAMACLANG, a copy of said Nemia Castro 150,000.00 0084078
Promissory Note is hereto attached as Annex B hereof;
Edith Calilap/Danilo Calilap 490,000.00 0111513
8. That the Promissory Notes and blank checks were Edith Calilap/Danilo Calilap 790,272.00 0111512
procured thru fraud and deceit. The consent of the Edith Calilap/Danilo Calilap 1,220,000.00 0111462
[petitioner] in the issuance of the two (2) aforementioned Gloria Dominguez/ 1,046,040.00 0111543
Promissory Notes was vitiated. Furthermore, the same Carmencita Gonzales
were issued for want of consideration, hence, the same Annilyn C. Sable 150,000.00 0085134
should be cancelled, revoked or declared null and void; Annilyn C. Sable 250,000.00 0085149
Annilyn C. Sable 186,000.00 0085112
9. That as clearly shown heretofore, defendant ALONZO in
collusion with her co-defendants, ESTELA CAMACLANG, Copy attached as Annexes D, D-1, D-2, D-3, D-4, D-5, D-6, D-7,
ALLAN CAMACLANG and ESTELITA LEGASPI D-8, D-9 and D-10, respectively;
likewise was able to induce plaintiff to sign several
undated blank checks, among which are: Furthermore, defendant ALONZO colluded and conspired with
defendant NEMIA CASTO in procuring the signature of
Metrobank Check No. 0111544 [petitioner] in documents denominated as Malayang Salaysay
Metrobank Check No. 0111545 dated July 22, 1999 in the amount of PESOS: ONE HUNDRED
Metrobank Check No. 0111546 FIFTY THOUSAND (Php 150,000.00) and another Malayang
Metrobank Check No. 0111547 Salaysay dated November 22, 1999 in the amount of PESOS:
Metrobank Check No. 0111515
ONE HUNDRED THOUSAND (Php 100,000.00) Annexes D-11 of PESOS: THREE THOUSAND (Php 3,000.00) per
and D-12 hereof; appearance in court;

11. That said defendants took undue advantage of the x x x (Emphasis and underscoring supplied)
signature of [petitioner] in the said blank checks and
furthermore forged and or falsified the signature of
[petitioner] in other unsigned checks and as it was made
The named defendants-herein respondents filed their respective Answers
to appear that said [petitioner] is under the obligation to
pay them several amounts of money, when in truth and invoking, among other grounds for dismissal, lack of cause of action, for while
in fact, said [petitioner] does not owe any of said
the checks subject of the complaint had been issued on account and for value,
defendant any single amount;
some had been dishonored due to ACCOUNT CLOSED; and the allegations in
12. That the issuance of the aforementioned checks or
the complaint are bare and general.
Promissory Notes or the aforementioned Malayang
Salaysay to herein defendants were tainted with fraud
and deceit, and defendants conspired with one another
By Order[2] dated October 12, 2000, the trial court dismissed petitioners
to defraud herein [petitioner] as the aforementioned
documents were issued for want of consideration; complaint for failure to allege the ultimate facts-bases of petitioners claim that her
right was violated and that she suffered damages thereby.
13. That the aforesaid defendants conspiring and confederating
together and helping one another committed acts of
falsification and defraudation which they should be held On appeal to the Court of Appeals, petitioner contended that the trial court:
accountable under law;
A. . . . FAILED TO STATE CLEARLY AND DISTINCTLY
14. The foregoing acts, and transactions, perpetrated by THE FACTS AND LAW ON WHICH THE APPEALED
herein defendants in all bad faith and malice, with ORDER WAS BASED, THEREBY RENDERING SAID
malevolence and selfish intent are causing anxiety, ORDER NULL AND VOID.
tension, sleepless nights, wounded feelings, and
embarrassment to [petitioner] entitling her to moral
damages of at least in the amount of PESOS: FIVE
HUNDRED THOUSAND (Php 500,000.00); B. . . . ERRED IN HOLDING THAT THE COMPLAINT
FAILED TO ALLEGE ULTIMATE FACTS ON WHICH
15. That to avoid repetition of similar acts and as a correction for [PETITIONER] RELIES ON HER CLAIM THEREBY
the public good, the defendants should be held liable to DISMISSING THE CASE FOR LACK OF CAUSE OF
[petitioner] for exemplary damages in the sum of not less ACTION.
than the amount of PESOS: TWO HUNDRED
THOUSAND (Php 200,000.00); C. . . . ERRED IN GIVING DUE COURSE TO THE MOTION
TO DISMISS THAT CONTAINED A FAULTY NOTICE OF
16. That to protect the rights and interest of the [petitioner] in the HEARING AS THE SAME IS MERELY ADDRESSED TO
illegal actuations of the defendants, she was forced to THE BRANCH CLERK OF COURT.[3]
engage the services of counsel for which she was obliged to
pay the sum of PESOS: ONE HUNDRED THOUSAND
(Php 100,000.00) by way of Attorneys fees plus the amount
In its Decision[4] of March 21, 2003 affirming the dismissal order of the trial
Hence, the present petition for review on certiorari, petitioner faulting the
court, the appellate court held that the elements of a cause of action are absent in
appellate court:
the case:
1. . . . in sustaining the dismissal of the complaint upon the
ground of failure to state a cause of action when there are
xxx
other several causes of action which ventilate such causes
Such allegations in the complaint are only general averments of
of action in the complaint;
fraud, deceit and bad faith. There were no allegations of
facts showing that the acts complained of were done in the
2. . . . in finding that a requirement that a Decision which
manner alleged. The complaint did not clearly ascribe the
should express therein clearly and distinctly the facts and
extent of the liability of each of [respondents]. Neither did it
the law on which it is based does not include cases which
state any right or cause of action on the part of [petitioner] to
had not reached pre-trial or trial stage;
show that she is indeed entitled to the relief prayed for. In the
first place, the record shows that subject checks which she
3. . . . in not finding that a notice of hearing which was
sought to cancel or revoke had already been dishonored and
addressed to the Clerk of Court is totally defective and that
stamped ACCOUNT CLOSED. In fact, there were already
subsequent action of the court did not cure the flaw.[5]
criminal charges for violation of Batas Pambansa Blg. 22 filed
against [petitioner] previous to the filing of the civil case for
revocation/cancellation. Such being the case, there was actually
nothing more to cancel or revoke. The subject checks could no In issue then is whether petitioners complaint failed to state a cause of action.
longer be negotiated. Thus, [petitioners] allegation that the
[respondents] were secretly negotiating with third persons for
their delivery and/or assignment, is untenable. A cause of action has three elements: (1) the legal right of the plaintiff, (2) the
correlative obligation of the defendant, and (3) the act or omission of the
In the second place, we find nothing on the face of the
complaint to show that [petitioner] denied the genuineness or defendant in violation of said legal right. In determining the presence of these
authenticity of her signature on the subject promissory notes
elements, inquiry is confined to the four corners of the complaint[6] including its
and the allegedly signed blank checks. She merely alleged
abuse of trust and confidence on the part of [Alonzo]. Even annexes, they being parts thereof.[7] If these elements are absent, the complaint
assuming arguendo that such allegations were true, then
becomes vulnerable to a motion to dismiss on the ground of failure to state a
[petitioner] cannot be held totally blameless for her
predicament as it was by her own negligence that subject cause of action.[8]
instruments/signed blank checks fell into the hands of third
persons. Contrary to [petitioners] allegations, the promissory
notes show that some of the [respondents] were actually As reflected in the above-quoted allegations in petitioners complaint,
creditors of [petitioner] and who were issued the subject checks petitioner is seeking twin reliefs, one for revocation/cancellation of promissory
as securities for the loan/obligation incurred. Having taken the
instrument in good faith and for value, the [respondents] are notes and checks, and the other for damages.
therefore considered holders thereof in due course and entitled
to payment.
Thus, petitioner alleged, among other things, that respondents, through deceit,
x x x (Underscoring supplied) abuse of confidence machination, fraud, falsification, forgery, defraudation, and
bad faith, and with malice, malevolence and selfish intent, succeeded in inducing
her to sign antedated promissory notes and some blank checks, and [by taking]
undue advantage of her signature on some other blank checks, succeeded in
procuring them, even if there was no consideration for all of these instruments on
account of which she suffered anxiety, tension, sleepless nights, wounded feelings
and embarrassment.
While some of the allegations may lack particulars, and are in the form of
conclusions of law, the elements of a cause of action are present. For even if some
are not stated with particularity, petitioner alleged 1) her legal right not to be
bound by the instruments which were bereft of consideration and to which her
consent was vitiated; 2) the correlative obligation on the part of the defendants-
respondents to respect said right; and 3) the act of the defendants-respondents in
procuring her signature on the instruments through deceit, abuse of confidence
machination, fraud, falsification, forgery, defraudation, and bad faith, and with
malice, malevolence and selfish intent.
Where the allegations of a complaint are vague, indefinite, or in the form of
conclusions, its dismissal is not proper for the defendant may ask for more
particulars.[9]
With respect to the checks subject of the complaint, it is gathered that, except for
Check No. 0084078,[10] they were drawn all against petitioners Metrobank
Account No. 00703-955536-7.
[11]
Annex D-8 of the complaint, a photocopy of Check No. 0085134,
shows that it was dishonored on January 12, 2000 due to ACCOUNT CLOSED.
When petitioner then filed her complaint on March 28, 2000, all the checks
subject hereof which were drawn against the same closed account were already
rendered valueless or non-negotiable, hence, petitioner had, with respect to them,
no cause of action.
With respect to above-said Check No. 0084078, however, which was drawn
against another account of petitioner, albeit the date of issue bears only the
year 1999, its validity and negotiable character at the time the complaint was
filed on March 28, 2000 was not affected. For Section 6 of the Negotiable
Instruments Law provides:
Section 6. Omission; seal; particular money. The validity and
negotiable character of an instrument are not affected by
the fact that
(a) It is not dated; or
(b) Does not specify the value given, or that any value had been
given therefor; or
(c) Does not specify the place where it is drawn or the place
where it is payable; or
(d) Bears a seal; or
(e) Designates a particular kind of current money in which
payment is to be made.
x x x (Emphasis supplied)
However, even if the holder of Check No. 0084078 would have filled up
the month and day of issue thereon to be December and 31, respectively, it
would have, as it did, become stale six (6) months or 180 days thereafter,
following current banking practice.[12]
It is, however, with respect to the questioned promissory notes that the present
petition assumes merit. For, petitioners allegations in the complaint relative

thereto, even if lacking particularity, does not as priorly stated call for the
dismissal of the complaint.
WHEREFORE, the petition is PARTLY GRANTED.
The March 21, 2003 decision of the appellate court affirming the October 12,
2000 Order of the trial court, Branch 20 of the RTC of Imus, Cavite,
is AFFIRMED with MODIFICATION in light of the foregoing discussions.
The trial court is DIRECTED to REINSTATE Civil Case No. 2079-00 to its
docket and take further proceedings thereon only insofar as the complaint seeks
the revocation/cancellation of the subject promissory notes and damages.
Let the records of the case be then REMANDED to the trial court.
SO ORDERED.
II
NEGOTIATION
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.
FELICIANO, J.:
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 thirty-two (32) days, would mature on 13 March 1981, Philfinance,
also on 9 February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without
recourse," No. 20496 of one (1) Delta Motors Corporation
Promissory Note ("DMC PN") No. 2731 for a term of 32
days at 17.0% per annum;
(b) the Certificate of securities Delivery Receipt No. 16587
indicating the sale of DMC PN No. 2731 to petitioner, with
the notation that the said security was in custodianship of
Pilipinas Bank, as per Denominated Custodian Receipt
("DCR") No. 10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the
maturity date of petitioner's investment), with petitioner as
payee, Philfinance as drawer, and Insular Bank of Asia
and America as drawee, in the total amount of
P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks
issued by Philfinance. However, the checks were dishonored for having
been drawn against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805
issued by private respondent Pilipinas Bank ("Pilipinas"). It reads as
follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
February 9, 1981
VALUE DATE
TO Raul Sesbreo
April 6, 1981
MATURITY DATE
 NO. 10805
DENOMINATED CUSTODIAN RECEIPT
This confirms that as a duly Custodian Bank, and upon instruction
of PHILIPPINE UNDERWRITES FINANCE CORPORATION, we
have in our custody the following securities to you [sic] the extent
herein indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you
or your duly authorized representative at any time during regular
banking hours.
Upon your written instructions we shall undertake physical
delivery of the above securities fully assigned to you should this
Denominated Custodianship Receipt remain outstanding in your
favor thirty (30) days after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private
respondent Pilipinas, Makati Branch, and handed her a demand letter
informing the bank that his placement with Philfinance in the amount
reflected in the DCR No. 10805 had remained unpaid and outstanding,
and that he in effect was asking for the physical delivery of the underlying
promissory note. Petitioner then examined the original of the DMC PN
No. 2731 and found: that the security had been issued on 10 April 1980;
that it would mature on 6 April 1981; that it had a face value of
P2,300,833.33, with the Philfinance as "payee" and private respondent
Delta Motors Corporation ("Delta") as "maker;" and that on face of the
promissory note was stamped "NON NEGOTIABLE." Pilipinas did not
deliver the Note, nor any certificate of participation in respect thereof, to
petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3
August 1981, 2 again asking private respondent Pilipinas for physical delivery
of the original of DMC PN No. 2731. Pilipinas allegedly referred all of
petitioner's demand letters to Philfinance for written instructions, as has been
supposedly agreed upon in "Securities Custodianship Agreement" between
Pilipinas and Philfinance. Philfinance did not provide the appropriate
instructions; Pilipinas never released DMC PN No. 2731, nor any other
instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 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 plaintiff-
appellant, it is Philfinance. As correctly observed by the
trial court:
This act of Philfinance in accepting the
investment of plaintiff and charging it
against DMC PN No. 2731 when its entire
 face value was already obligated or
earmarked for set-off or compensation is
difficult to comprehend and may have
been motivated with bad faith. Philfinance,
therefore, is solely and legally obligated to
return the investment of plaintiff, together
with its earnings, and to answer all the
damages plaintiff has suffered incident
thereto. Unfortunately for plaintiff,
Philfinance was not impleaded as one of
the defendants in this case at bar; hence,
this Court is without jurisdiction to
pronounce judgement against it. (p. 11,
Decision)
WHEREFORE, finding no reversible error in the decision
appealed from, the same is hereby affirmed in toto. Cost
against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without
success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the
pleadings, the Court resolved to give due course to the petition and
required the parties to file their respective memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court
decision, and contends that respondent court of Appeals gravely erred: (i)
in concluding that he cannot recover from private respondent Delta his
assigned portion of DMC PN No. 2731; (ii) in failing to hold private
respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of
the provisions stipulated in DCR No. 10805 issued in favor r of petitioner,
and (iii) in refusing to pierce the veil of corporate entity between
Philfinance, and private respondents Delta and Pilipinas, considering that
the three (3) entities belong to the "Silverio Group of Companies" under
the leadership of Mr. Ricardo Silverio, Sr. 8
There are at least two (2) sets of relationships which we need to address:
firstly, the relationship of petitioner vis-a-vis Delta; secondly, the
relationship of petitioner in respect of Pilipinas. Actually, of course, there
is a third relationship that is of critical importance: the relationship of
petitioner and Philfinance. However, since Philfinance has not been
impleaded in this case, neither the trial court nor the Court of Appeals
acquired jurisdiction over the person of Philfinance. It is, consequently,
not necessary for present purposes to deal with this third relationship,
except to the extent it necessarily impinges upon or intersects the first
and second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-
vis Delta in respect of the Delta promissory note (DMC PN No. 2731)
which Philfinance sold "without recourse" to petitioner, to the extent of
P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over
DMC PN No. 2731 as the same is "non-negotiable" as
stamped on its face (Exhibit "6"), negotiation being
defined as the transfer of an instrument from one person
to another so as to constitute the transferee the holder of
the instrument (Sec. 30, Negotiable Instruments Law). A
person not a holder cannot sue on the instrument in his
own name and cannot demand or receive payment
(Section 51, id.) 9
Petitioner admits that DMC PN No. 2731 was non-negotiable but
contends that the Note had been validly transferred, in part to him by
assignment and that as a result of such transfer, Delta as debtor-maker
of the Note, was obligated to pay petitioner the portion of that Note
assigned to him by the payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be
negotiated or otherwise transferred by Philfinance as
manifested by the word "non-negotiable" stamp across
the face of the 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 the Note
subject to the defenses available to Delta, in particular,
the offsetting of DMC PN No. 2731 against Philfinance PN
No. 143-A. 11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable
instrument must be distinguished from the assignment or transfer of an
instrument whether that be negotiable or non-negotiable. Only an
instrument qualifying as a negotiable instrument under the relevant
statute may be negotiated either by indorsement thereof coupled with
delivery, or by delivery alone where the negotiable instrument is in bearer
form. A negotiable instrument may, however, instead of being negotiated,
also be assigned or transferred. The legal consequences of negotiation
as distinguished from assignment of a negotiable instrument are, of
course, different. A non-negotiable instrument may, obviously, not be
negotiated; but it may be assigned or transferred, absent an express
prohibition against assignment or transfer written in the face of the
instrument:
The words "not negotiable," stamped on the face of the
bill of lading, did not destroy its assignability, but the sole
effect was to exempt the bill from the statutory provisions
relative thereto, and a bill, though not negotiable, may be
transferred by assignment; the assignee taking subject to
the equities between the original parties. 12 (Emphasis
added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same
time stamped "non-transferable" or "non-assignable." It contained no
stipulation which prohibited Philfinance from assigning or transferring, in
whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with
Philfinance and which should be quoted in full:
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasure
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
We find nothing in his "Letter of Agreement" which can be reasonably
construed as a prohibition upon Philfinance assigning or transferring all or
part of DMC PN No. 2731, before the maturity thereof. It is scarcely
necessary to add that, even had this "Letter of Agreement" set forth an
explicit prohibition of transfer upon Philfinance, such a prohibition cannot
be invoked against an assignee or transferee of the Note who parted with
valuable consideration in good faith and without notice of such
prohibition. It is not disputed that petitioner was such an assignee or
transferee. Our conclusion on this point is reinforced by the fact that what
Philfinance and Delta were doing by their exchange of their promissory
notes was this: Delta invested, by making a money market placement
with Philfinance, approximately P4,600,000.00 on 10 April 1980; but
promptly, on the same day, borrowed back the bulk of that placement,
i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No.
2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus,
Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash
and the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of
DMC PN No. 2731 had been effected without the consent of Delta, we
note that such consent was not necessary for the validity and
enforceability of the assignment in favor of petitioner. 14 Delta's argument
that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731
constituted conventional subrogation, which required its (Delta's) consent, is
quite mistaken. Conventional subrogation, which in the first place is never
lightly inferred, 15 must be clearly established by the unequivocal terms of the
substituting obligation or by the evident incompatibility of the new and old
obligations on every point. 16 Nothing of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it
released its DMC PN No. 2731 to Philfinance, an entity engaged in the
business of buying and selling debt instruments and other securities, and
more generally, in money market transactions. In Perez v. Court of
Appeals, 17 the Court, speaking through Mme. Justice Herrera, made the
following important statement:
There is another aspect to this case. What is involved
here is a money market transaction. As defined by
Lawrence Smith "the money market is a market dealing in
standardized short-term credit instruments (involving large
amounts) where lenders and borrowers do not deal
directly with each other but through a middle manor a
dealer in the open market." It involves "commercial
papers" which are instruments "evidencing indebtness of
any person or entity. . ., which are issued, endorsed, sold
or transferred or in any manner conveyed to another
person or entity, with or without recourse". The
fundamental function of the money market device in its
operation is to match and bring together in a most
impersonal manner both the "fund users" and the "fund
suppliers." The money market is an "impersonal market",
free from personal considerations. "The market
mechanism is intended to provide quick mobility of money
and securities."
The impersonal character of the money market device
overlooks the individuals or entities concerned. The issuer
of a commercial paper in the money market necessarily
knows in advance that it would be expenditiously
transacted and transferred to any investor/lender without
need of notice to said issuer. In practice, no notification is
given to the borrower or issuer of commercial paper of the
sale or transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction,
a relatively novel institution in the Philippine commercial
scene. It has been intended to facilitate the flow and
acquisition of capital on an impersonal basis. And as
specifically required by Presidential Decree No. 678, the
investing public must be given adequate and effective
protection in availing of the credit of a borrower in the
commercial paper market. 18(Citations omitted; emphasis
supplied)
We turn to Delta's arguments concerning alleged compensation or
offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is
important to note that at the time Philfinance sold part of its rights under
DMC PN No. 2731 to petitioner on 9 February 1981, no compensation
had as yet taken place and indeed none could have taken place. The
essential requirements of compensation are listed in the Civil Code as
follows:
Art. 1279. In order that compensation may be proper, it is
necessary:
(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of the
other;
(2) That both debts consists in a sum of money, or if the
things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
 (5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor. (Emphasis
supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No.
143-A was due. This was explicitly recognized by Delta in its 10 April
1980 "Letter of Agreement" with Philfinance, where Delta acknowledged
that the relevant promissory notes were "to be offsetted (sic) against
[Philfinance] PN No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or
from forty-nine (49) days before the "co-terminal maturity" date, that is to
say, before any compensation had taken place. Further, the assignment
to petitioner would have prevented compensation had taken place
between Philfinance and Delta, to the extent of P304,533.33, because
upon execution of the assignment in favor of petitioner, Philfinance and
Delta would have ceased to be creditors and debtors of each other in
their own right to the extent of the amount assigned by Philfinance to
petitioner. Thus, we conclude that the assignment effected by Philfinance
in favor of petitioner was a valid one and that petitioner accordingly
became owner of DMC PN No. 2731 to the extent of the portion thereof
assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the
assignment to him only on 14 July 1981, 19 that is, after the maturity not
only of the money market placement made by petitioner but also of both
DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner
notified Delta of his rights as assignee after compensation had taken place
by operation of law because the offsetting instruments had both reached
maturity. It is a firmly settled doctrine that the rights of an assignee are not
any greater that the rights of the assignor, since the assignee is merely
substituted in the place of the assignor 20and that the assignee acquires his
rights subject to the equities i.e., the defenses which the debtor could
have set up against the original assignor before notice of the assignment was
given to the debtor. Article 1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the
assignment of rights made by a creditor in favor of a third
person, cannot set up against the assignee the
compensation which would pertain to him against the
assignor, unless the assignor was notified by the debtor at
the time he gave his consent, that he reserved his right to
the compensation.
If the creditor communicated the cession to him but
the debtor did not consent thereto, the latter may set up
the compensation of debts previous to the cession, but
not of subsequent ones.
If the assignment is made without the knowledge of the
debtor, he may set up the compensation of all credits prior
to the same and also later ones until he had knowledge of
the assignment. (Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having
knowledge of the assignment, pays his creditor shall be released from the
obligation." In Sison v. Yap-Tico, 21 the Court explained that:
[n]o man is bound to remain a debtor; he may pay to him
with whom he contacted to pay; and if he pay before
notice that his debt has been assigned, the law holds him
exonerated, for the reason that it is the duty of the person
who has acquired a title by transfer to demand payment of
the debt, to give his debt or notice. 22
At the time that Delta was first put to notice of the assignment in
petitioner's favor on 14 July 1981, DMC PN No. 2731 had already been
discharged by compensation. Since the assignor Philfinance could not
have then compelled payment anew by Delta of DMC PN No. 2731,
petitioner, as assignee of Philfinance, is similarly disabled from collecting
from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the
assignment or sale was effected on 9 February 1981. He could have
notified Delta as soon as his money market placement matured on 13
March 1981 without payment thereof being made by Philfinance; at that
time, compensation had yet to set in and discharge DMC PN No. 2731.
Again petitioner could have notified Delta on 26 March 1981 when
petitioner received from Philfinance the Denominated Custodianship
Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in
favor of petitioner. Petitioner could, in fine, have notified Delta at any time
before the maturity date of DMC PN No. 2731. Because petitioner failed
to do so, and because the record is bare of any indication that Philfinance
had itself notified Delta of the assignment to petitioner, the Court is
compelled to uphold the defense of compensation raised by private
respondent Delta. Of course, Philfinance remains liable to petitioner
under the terms of the assignment made by Philfinance to petitioner.
 II.
We turn now to the relationship between petitioner and private
respondent Pilipinas. Petitioner contends that Pilipinas became solidarily
liable with Philfinance and Delta when Pilipinas issued DCR No. 10805
with the following words:
Upon your written instruction, we [Pilipinas] shall
undertake physical delivery of the above securities fully
assigned to you . 23
The Court is not persuaded. We find nothing in the DCR that establishes
an obligation on the part of Pilipinas to pay petitioner the amount of
P307,933.33 nor any assumption of liability in solidum with Philfinance
and Delta under DMC PN No. 2731. We read the DCR as a confirmation
on the part of Pilipinas that:
(1) it has in its custody, as duly constituted custodian
bank, DMC PN No. 2731 of a certain face value, to
mature on 6 April 1981 and payable to the order of
Philfinance;
(2) Pilipinas was, from and after said date of the
assignment by Philfinance to petitioner (9 February
1981), holding that Note on behalf and for the benefit of
petitioner, at least to the extent it had been assigned to
petitioner by payee Philfinance; 24
(3) petitioner may inspect the Note either "personally or by
authorized representative", at any time during regular bank
hours; and
(4) upon written instructions of petitioner, Pilipinas would
physically deliver the DMC PN No. 2731 (or a
participation therein to the extent of P307,933.33) "should
this Denominated Custodianship receipt remain
outstanding in [petitioner's] favor thirty (30) days after its
maturity."
Thus, we find nothing written in printers ink on the DCR which could
reasonably be read as converting Pilipinas into an obligor under the
terms of DMC PN No. 2731 assigned to petitioner, either upon maturity
thereof or any other time. We note that both in his complaint and in his
testimony before the trial court, petitioner referred merely to the obligation
of private respondent Pilipinas to effect the physical delivery to him of
DMC PN No. 2731. 25 Accordingly, petitioner's theory that Pilipinas had
assumed a solidary obligation to pay the amount represented by a portion of
the Note assigned to him by Philfinance, appears to be a new theory
constructed only after the trial court had ruled against him. The solidary
liability that petitioner seeks to impute Pilipinas cannot, however, be lightly
inferred. Under article 1207 of the Civil Code, "there is a solidary liability only
when the law or the nature of the obligation requires solidarity," The record
here exhibits no express assumption of solidary liability vis-a-vis petitioner,
on the part of Pilipinas. Petitioner has not pointed to us to any law which
imposed such liability upon Pilipinas nor has petitioner argued that the very
nature of the custodianship assumed by private respondent Pilipinas
necessarily implies solidary liability under the securities, custody of which
was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily
liable with Philfinance and private respondent Delta under DMC PN No.
2731.
We do not, however, mean to suggest that Pilipinas has no responsibility
and liability in respect of petitioner under the terms of the DCR. To the
contrary, we find, after prolonged analysis and deliberation, that private
respondent Pilipinas had breached its undertaking under the DCR to
petitioner Sesbreo.
We believe and so hold that a contract of deposit was constituted by the
act of Philfinance in designating Pilipinas as custodian or depositary
bank. The depositor was initially Philfinance; the obligation of the
depository was owed, however, to petitioner Sesbreo as beneficiary of
the custodianship or depository agreement. We do not consider that this
is a simple case of a stipulation pour autri. The custodianship or
depositary agreement was established as an integral part of the money
market transaction entered into by petitioner with Philfinance. Petitioner
bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor
deposited that Note with Pilipinas in order that the thing sold would be
placed outside the control of the vendor. Indeed, the constituting of the
depositary or custodianship agreement was equivalent to constructive
delivery of the Note (to the extent it had been sold or assigned to
petitioner) to petitioner. It will be seen that custodianship agreements are
designed to facilitate transactions in the money market by providing a
basis for confidence on the part of the investors or placers that the
instruments bought by them are effectively taken out of the pocket, as it
were, of the vendors and placed safely beyond their reach, that those
instruments will be there available to the placers of funds should they
have need of them. The depositary in a contract of deposit is obliged to
return the security or the thing deposited upon demand of the depositor
(or, in the presented case, of the beneficiary) of the contract, even though
a term for such return may have been established in the said
contract. 26 Accordingly, any stipulation in the contract of deposit or
custodianship that runs counter to the fundamental purpose of that
agreement or which was not brought to the notice of and accepted by the
placer-beneficiary, cannot be enforced as against such beneficiary-placer.
We believe that the position taken above is supported by considerations
of public policy. If there is any party that needs the equalizing protection
of the law in money market transactions, it is the members of the general
public whom place their savings in such market for the purpose of
generating interest revenues. 27 The custodian bank, if it is not related either
in terms of equity ownership or management control to the borrower of the
funds, or the commercial paper dealer, is normally a preferred or traditional
banker of such borrower or dealer (here, Philfinance). The custodian bank
would have every incentive to protect the interest of its client the borrower or
dealer as against the placer of funds. The providers of such funds must be
safeguarded from the impact of stipulations privately made between the
borrowers or dealers and the custodian banks, and disclosed to fund-
providers only after trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to
deliver the security deposited with it when petitioner first demanded
physical delivery thereof on 2 April 1981. We must again note, in this
connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured
and therefore, compensation or offsetting against Philfinance PN No.
143-A had not yet taken place. Instead of complying with the demand of
the petitioner, Pilipinas purported to require and await the instructions of
Philfinance, in obvious contravention of its undertaking under the DCR to
effect physical delivery of the Note upon receipt of "written instructions"
from petitioner 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 arising out of its breach of duty. By
failing to deliver the Note to the petitioner as depositor-beneficiary of the
thing deposited, Pilipinas effectively and unlawfully deprived petitioner of
the Note deposited with it. Whether or not Pilipinas itself benefitted from
such conversion or unlawful deprivation inflicted upon petitioner, is of no
moment for present purposes. Prima facie, the damages suffered by
petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731
assigned to petitioner but lost by him by reason of discharge of the Note
by compensation, plus legal interest of six percent (6%)per
annum containing from 14 March 1981.
The conclusion we have reached is, of course, without prejudice to such
right of reimbursement as Pilipinas may have vis-a-vis Philfinance.
III.
The third principal contention of petitioner that Philfinance and private
respondents Delta and Pilipinas should be treated as one corporate entity
need not detain us for long.
In the first place, as already noted, jurisdiction over the person of
Philfinance was never acquired either by the trial court nor by the
respondent Court of Appeals. Petitioner similarly did not seek to implead
Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents
Delta and Pilipinas have been organized as separate corporate entities.
Petitioner asks us to pierce their separate corporate entities, but has
been able only to cite the presence of a common Director Mr. Ricardo
Silverio, Sr., sitting on the Board of Directors of all three (3) companies.
Petitioner has neither alleged nor proved that one or another of the three
(3) concededly related companies used the other two (2) as mere alter
egos or that the corporate affairs of the other two (2) were administered
and managed for the benefit of one. There is simply not enough evidence
of record to justify disregarding the separate corporate personalities of
delta and Pilipinas and to hold them liable for any assumed or
undetermined liability of Philfinance to petitioner. 28
WHEREFORE, for all the foregoing, the Decision and Resolution of the
Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and
17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the
extent that such Decision and Resolution had dismissed petitioner's
complaint against Pilipinas Bank. Private respondent Pilipinas bank is
hereby ORDERED to indemnify petitioner for damages in the amount of
P304,533.33, plus legal interest thereon at the rate of six percent
(6%) per annum counted from 2 April 1981. As so modified, the Decision
and Resolution of the Court of Appeals are hereby AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and
RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court which
assails on questions of law a decision of the Intermediate Appellate Court
in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution
dated October 17, 1985, denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for
its program of logging activities for the year 1978 the opening of
additional roads, and simultaneous logging operations along the route of
said roads, in its logging concession area at Baganga, Manay, and
Caraga, Davao Oriental. For this purpose, it needed two (2) additional
units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf &
Pacific Company of Manila, through its sister company and marketing
arm, Industrial Products Marketing (the "seller-assignor"), a corporation
dealing in tractors and other heavy equipment business, offered to sell to
petitioner-corporation two (2) "Used" Allis Crawler Tractors, one (1) an
HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be
exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability of
the "Used" tractors being offered, petitioner-corporation requested the
seller-assignor to inspect the job site. After conducting said inspection,
the seller-assignor assured petitioner-corporation that the "Used" Allis
Crawler Tractors which were being offered were fit for the job, and gave
the corresponding warranty of ninety (90) days performance of the
machines and availability of parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's
skill and judgment, petitioner-corporation through petitioners Wee and
Vergara, president and vice- president, respectively, agreed to purchase
on installment said two (2) units of "Used" Allis Crawler Tractors. It also
paid the down payment of Two Hundred Ten Thousand Pesos
(P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two
2) units of tractors (Exh. "3-A"). At the same time, the deed of sale with
chattel mortgage with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel
mortgage with promissory note, the seller-assignor, by means of a deed
of assignment (E exh. " 1 "), assigned its rights and interest in the chattel
mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of
"Used" tractors to the petitioner-corporation's job site and as agreed, the
seller-assignor stationed its own mechanics to supervise the operations
of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the
tractors broke down and after another nine (9) days, the other tractor
likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the
seller-assignor of the fact that the tractors broke down and requested for
the seller-assignor's usual prompt attention under the warranty (E exh. " 5
").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit
"5," the seller-assignor sent to the job site its mechanics to conduct the
necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-
E"), but the tractors did not come out to be what they should be after the
repairs were undertaken because the units were no longer serviceable (t.
s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were delayed
and petitioner Vergara advised the seller-assignor that the payments of
the installments as listed in the promissory note would likewise be
delayed until the seller-assignor completely fulfills its obligation under its
warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner
Wee asked the seller-assignor to pull out the units and have them
reconditioned, and thereafter to offer them for sale. The proceeds were to
be given to the respondent and the excess, if any, to be divided between
the seller-assignor and petitioner-corporation which offered to bear one-
half (1/2) of the reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the petitioner-
corporation and despite several follow-up calls, the seller-assignor did
nothing with regard to the request, until the complaint in this case was
filed by the respondent against the petitioners, the corporation, Wee, and
Vergara.
The complaint was filed by the respondent against the petitioners for the
recovery of the principal sum of One Million Ninety Three Thousand
Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued
interest of One Hundred Fifty One Thousand Six Hundred Eighteen
Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing interest
thereafter at the rate of twelve (12%) percent per annum, attorney's fees
of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100
(P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of
the complaint and asking the trial court to order the respondent to pay the
petitioners damages in an amount at the sound discretion of the court,
Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and
Five Thousand Pesos (P5,000.00) for expenses of litigation. The
petitioners likewise prayed for such other and further relief as would be
just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following
judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their
official and personal capacities the principal sum of ONE
MILLION NINETY THREE THOUSAND SEVEN
HUNDRED NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of ONE HUNDRED
FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN
PESOS & 86/100 (P151,618.,86) as of August 15, 1979
and accruing interest thereafter at the rate of 12% per
annum;
2. ordering defendants to pay jointly and severally
attorney's fees equivalent to ten percent (10%) of the
principal and to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and
assigned therein the following errors:
I
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER
ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT
APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-
APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY
NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE
COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged
decision affirming in toto the decision of the trial court. The pertinent
portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue
of warranty, We are of the considered opinion that aside
from the fact that no provision of warranty appears or is
provided in the Deed of Sale of the tractors and even
admitting that in a contract of sale unless a contrary
intention appears, there is an implied warranty, the
defense of breach of warranty, if there is any, as in this
case, does not lie in favor of the appellants and against
the plaintiff-appellee who is the assignee of the
promissory note and a holder of the same in due course.
Warranty lies in this case only between Industrial
Products Marketing and Consolidated Plywood Industries,
Inc. The plaintiff-appellant herein upon application by
appellant corporation granted financing for the purchase
of the questioned units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense
available to appellants either to withdraw from the
contract and/or demand a proportionate reduction of the
price with damages in either case (Art. 1567, New Civil
Code). We now come to the issue as to whether the
plaintiff-appellee is a holder in due course of the
promissory note.
To begin with, it is beyond arguments that the plaintiff-
appellee is a financing corporation engaged in financing
and receivable discounting extending credit facilities to
consumers and industrial, commercial or agricultural
enterprises by discounting or factoring commercial papers
or accounts receivable duly authorized pursuant to R.A.
5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it
is a negotiable instrument which was discounted or sold
to the IFC Leasing and Acceptance Corporation for
P800,000.00 (Exh. "A") considering the following. it is in
writing and signed by the maker; it contains an
unconditional promise to pay a certain sum of money
payable at a fixed or determinable future time; it is
payable to order (Sec. 1, NIL); the promissory note was
negotiated when it was transferred and delivered by IPM
to the appellee and duly endorsed to the latter (Sec. 30,
NIL); it was taken in the conditions that the note was
complete and regular upon its face before the same was
overdue and without notice, that it had been previously
dishonored and that the note is in good faith and for value
without notice of any infirmity or defect in the title of IPM
(Sec. 52, NIL); that IFC Leasing and Acceptance
Corporation held the instrument free from any defect of
title of prior parties and free from defenses available to
prior parties among themselves and may enforce
payment of the instrument for the full amount thereof
against all parties liable thereon (Sec. 57, NIL); the
appellants engaged that they would pay the note
according to its tenor, and admit the existence of the
payee IPM and its capacity to endorse (Sec. 60, NIL).
In view of the essential elements found in the questioned
promissory note, We opine that the same is legally and
conclusively enforceable against the defendants-
appellants.
WHEREFORE, finding the decision appealed from
according to law and evidence, We find the appeal
without merit and thus affirm the decision in toto. With
costs against the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17,
1985 was denied by the Intermediate Appellate Court in its resolution
dated October 17, 1985, a copy of which was received by the petitioners
on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A
NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT
IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST,
IT IS A MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE
INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH A
MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE
RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS
AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE
PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY
UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE
SELLER-ASSIGNOR OF THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER-
ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT CHANGE
THE NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN
EVIDENCE IN ANY COURT BECAUSE THE REQUISITE
DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR
CANCELLED.
The petitioners prayed that judgment be rendered setting aside the
decision dated July 17, 1985, as well as the resolution dated October 17,
1985 and dismissing the complaint but granting petitioners' counterclaims
before the court of origin.
On the other hand, the respondent corporation in its comment to the
petition filed on February 20, 1986, contended that the petition was filed
out of time; that the promissory note is a negotiable instrument and
respondent a holder in due course; that respondent is not liable for any
breach of warranty; and finally, that the promissory note is admissible in
evidence.
The core issue herein is whether or not the promissory note in question is
a negotiable instrument so as to bar completely all the available defenses
of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the
instant petition to have been filed on time because the petitioners' motion
for reconsideration actually raised new issues. It cannot, therefore, be
considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express
90-day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor
broke down and 9 days, thereafter, the second tractor became
inoperable" are sustained by the records. The petitioner was clearly a
victim of a warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty
against the hidden defects which the thing sold may have,
should they render it unfit for the use for which it is
intended, or should they diminish its fitness for such use
to such an extent that, had the vendee been aware
thereof, he would not have acquired it or would have
given a lower price for it; but said vendor shall not be
answerable for patent defects or those which may be
visible, or for those which are not visible if the vendee is
an expert who, by reason of his trade or profession,
should have known them.
 ART. 1562. In a sale of goods, there is an implied
warranty or condition as to the quality or fitness of the
goods, as follows:
(1) Where the buyer, expressly or by implication makes
known to the seller the particular purpose for which the
goods are acquired, and it appears that the buyer relies
on the sellers skill or judge judgment (whether he be the
grower or manufacturer or not), there is an implied
warranty that the goods shall be reasonably fit for such
purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the
quality or fitness for a particular purpose may be annexed
by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for
any hidden faults or defects in the thing sold even though
he was not aware thereof.
This provision shall not apply if the contrary has been
stipulated, and the vendor was not aware of the hidden
faults or defects in the thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the
assignee is a holder in due course of the promissory note in question,
assuming the note is negotiable, in which case the latter's rights are
based on the negotiable instrument and assuming further that the
petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke
down, the petitioner-corporation notified the seller-assignor's sister
company, AG & P, about the breakdown based on the seller-assignor's
express 90-day warranty, with which the latter complied by sending its
mechanics. However, due to the seller-assignor's delay and its failure to
comply with its warranty, the tractors became totally unserviceable and
useless for the purpose for which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its
contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and
the rescission of the obligation with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564,
1565 and 1566, the vendee may elect between
withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in
either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract
with the seller-assignor, necessarily can no longer sue the seller-assignor
except by way of counterclaim if the seller-assignor sues it because of
the rescission.
In the case of the University of the Philippines v. De los Angeles (35
SCRA 102) we held:
In other words, the party who deems the contract violated
may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds
at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle
whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting
party who believes itself injured must first file suit and wait
for adjudgement before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the
other's breach will have to passively sit and watch its
damages accumulate during the pendency of the suit until
 the final judgment of rescission is rendered when the law
itself requires that he should exercise due diligence to
minimize its own damages (Civil Code, Article
2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question
is not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally
promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS
& 71/100 only (P 1,093,789.71), Philippine Currency, the
said principal sum, to be payable in 24 monthly
installments starting July 15, 1978 and every 15th of the
month thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments
Law requires that a promissory note "must be payable to order or bearer,
" it cannot be denied that the promissory note in question is not a
negotiable instrument.
The instrument in order to be considered negotiablility-i.e.
must contain the so-called 'words of negotiable, must be
payable to 'order' or 'bearer'. These words serve as an
expression of consent that the instrument may be
transferred. This consent is indispensable since a maker
assumes greater risk under a negotiable instrument than
under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. The instrument
is payable to order where it is drawn payable to the order
of a specified person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may
be made payable to order. There must always be a
specified person named in the instrument. It means that
the bill or note is to be paid to the person designated in
the instrument or to any person to whom he has indorsed
and delivered the same. Without the words "or order"
or"to the order of, "the instrument is payable only to the
person designated therein and is therefore non-
negotiable. Any subsequent purchaser thereof will not
enjoy the advantages of being a holder of a negotiable
instrument but will merely "step into the shoes" of the
person designated in the instrument and will thus be open
to all defenses available against the latter." (Campos and
Campos, Notes and Selected Cases on Negotiable
Instruments Law, Third Edition, page 38). (Emphasis
supplied)
Therefore, considering that the subject promissory note is not a
negotiable instrument, it follows that the respondent can never be a
holder in due course but remains a mere assignee of the note in
question. Thus, the petitioner may raise against the respondent all
defenses available to it as against the seller-assignor Industrial Products
Marketing.
This being so, there was no need for the petitioner to implied the seller-
assignor when it was sued by the respondent-assignee because the
petitioner's defenses apply to both or either of either of them. Actually, the
records show that even the respondent itself admitted to being a mere
assignee of the promissory note in question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that
what is being assigned is the Deed of Sale
with Chattel Mortgage with the promissory
note which is as testified to by the witness
was indorsed? (Counsel for Plaintiff
nodding his head.) Then we have no
further questions on cross,
COURT:
 You confirm his manifestation? You are
nodding your head? Do you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A
deed of sale is a transaction between two
persons; what is assigned are rights, the
rights of the mortgagee were assigned to
the IFC Leasing & Acceptance
Corporation.
COURT:
He puts it in a simple way as one-deed of
sale and chattel mortgage were assigned;
. . . you want to make a distinction, one is
an assignment of mortgage right and the
other one is indorsement of the
promissory note. What counsel for
defendants wants is that you stipulate that
it is contained in one single transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction.
(pp. 27-29, TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the promissory
note in question is a negotiable instrument, the respondent cannot be a
holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale
on installment of the tractors, there was an arrangement between the
seller-assignor, Industrial Products Marketing, and the respondent
whereby the latter would pay the seller-assignor the entire purchase price
and the seller-assignor, in turn, would assign its rights to the respondent
which acquired the right to collect the price from the buyer, herein
petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with
Promissory Note, the Deed of Assignment and the Disclosure of
Loan/Credit Transaction shows that said documents evidencing the sale
on installment of the tractors were all executed on the same day by and
among the buyer, which is herein petitioner Consolidated Plywood
Industries, Inc.; the seller-assignor which is the Industrial Products
Marketing; and the assignee-financing company, which is the respondent.
Therefore, the respondent had actual knowledge of the fact that the
seller-assignor's right to collect the purchase price was not unconditional,
and that it was subject to the condition that the tractors -sold were not
defective. The respondent knew that when the tractors turned out to be
defective, it would be subject to the defense of failure of consideration
and cannot recover the purchase price from the petitioners. Even
assuming for the sake of argument that the promissory note is negotiable,
the respondent, which took the same with actual knowledge of the
foregoing facts so that its action in taking the instrument amounted to bad
faith, is not a holder in due course. As such, the respondent is subject to
all defenses which the petitioners may raise against the seller-assignor.
Any other interpretation would be most inequitous to the unfortunate
buyer who is not only saddled with two useless tractors but must also
face a lawsuit from the assignee for the entire purchase price and all its
incidents without being able to raise valid defenses available as against
the assignor.
Lastly, the respondent failed to present any evidence to prove that it had
no knowledge of any fact, which would justify its act of taking the
promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that:
negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE
COURSE. A holder in due course is a holder who has
taken the instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no
notice of any infirmity in the instrument of deffect in the
title of the person negotiating it
 xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT.
To constitute notice of an infirmity in the instrument or
defect in the title of the person negotiating the same, the
person to whom it is negotiated must have had actual
knowledge of the infirmity or defect, or knowledge of such
facts that his action in taking the instrument amounts to
bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing
company is not a holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note
payable to the seller to cover the purchase price. Many
times, in pursuance of a previous arrangement with the
seller, a finance company pays the full price and the note
is indorsed to it, subrogating it to the right to collect the
price from the buyer, with interest. With the increasing
frequency of installment buying in this country, it is most
probable that the tendency of the courts in the United
States to protect the buyer against the finance company
will , the finance company will be subject to the defense of
failure of consideration and cannot recover the purchase
price from the buyer. As against the argument that such a
rule would seriously affect "a certain mode of transacting
business adopted throughout the State," a court in one
case stated:
It may be that our holding here will require
some changes in business methods and
will impose a greater burden on the
finance companies. We think the buyer-
Mr. & Mrs. General Public-should have
some protection somewhere along the
line. We believe the finance company is
better able to bear the risk of the dealer's
insolvency than the buyer and in a far
better position to protect his interests
against unscrupulous and insolvent
dealers. . . .
If this opinion imposes great burdens on
finance companies it is a potent argument
in favor of a rule which win afford public
protection to the general buying public
against unscrupulous dealers in personal
property. . . . (Mutual Finance Co. v.
Martin, 63 So. 2d 649, 44 ALR 2d 1
[1953]) (Campos and Campos, Notes and
Selected Cases on Negotiable
Instruments Law, Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine
Works (34 Cal. 2d 766) involving similar facts, it was held that in a very
real sense, the finance company was a moving force in the transaction
from its very inception and acted as a party to it. When a finance
company actively participates in a transaction of this type from its
inception, it cannot be regarded as a holder in due course of the note
given in the transaction.
In like manner, therefore, even assuming that the subject promissory note
is negotiable, the respondent, a financing company which actively
participated in the sale on installment of the subject two Allis Crawler
tractors, cannot be regarded as a holder in due course of said note. It
follows that the respondent's rights under the promissory note involved in
this case are subject to all defenses that the petitioners have against the
seller-assignor, Industrial Products Marketing. For Section 58 of the
Negotiable Instruments Law provides that "in the hands of any holder
other than a holder in due course, a negotiable instrument is subject to
the same defenses as if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues,
we find that both the trial and respondent appellate court erred in holding
the promissory note in question to be negotiable. Such a ruling does not
only violate the law and applicable jurisprudence, but would result in
unjust enrichment on the part of both the assigner- assignor and
respondent assignee at the expense of the petitioner-corporation which
rightfully rescinded an inequitable contract. We note, however, that since
the seller-assignor has not been impleaded herein, there is no obstacle
for the respondent to file a civil Suit and litigate its claims against the
seller- assignor in the rather unlikely possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent
appellate court dated July 17, 1985, as well as its resolution dated
October 17, 1986, are hereby ANNULLED and SET ASIDE. The
complaint against the petitioner before the trial court is DISMISSED.
SO ORDERED.
Concept of DELIVERY
G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in
his personal capacity as garnishee, petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City,
and RAUL H. SESBREO, respondents.
BELLOSILLO, J.:
RAUL H. SESBREO filed a complaint for damages against Assistant
City Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr., before
the Regional Trial Court of Cebu City. After trial judgment was rendered
ordering the defendants to pay P11,000.00 to the plaintiff, private
respondent herein. The decision having become final and executory, on
motion of the latter, the trial court ordered its execution. This order was
questioned by the defendants before the Court of Appeals. However, on
15 January 1992 a writ of execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner
Loreto D. de la Victoria as City Fiscal of Mandaue City where defendant
Mabanto, Jr., was then detailed. The notice directed petitioner not to
disburse, transfer, release or convey to any other person except to the
deputy sheriff concerned the salary checks or other checks, monies, or
cash due or belonging to Mabanto, Jr., under penalty of law. 1 On 10
March 1992 private respondent filed a motion before the trial court for
examination of the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was
dismissed. Thus the trial court, finding no more legal obstacle to act on
the motion for examination of the garnishees, directed petitioner on 4
November 1992 to submit his report showing the amount of the garnished
salaries of Mabanto, Jr., within fifteen (15) days from receipt 2 taking into
consideration the provisions of Sec. 12, pars. (f) and (i), Rule 39 of the Rules
of Court.
On 24 November 1992 private respondent filed a motion to require
petitioner to explain why he should not be cited in contempt of court for
failing to comply with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the
notice of garnishment claiming that he was not in possession of any
money, funds, credit, property or anything of value belonging to Mabanto,
Jr., except his salary and RATA checks, but that said checks were not yet
properties of Mabanto, Jr., until delivered to him. He further claimed that,
as such, they were still public funds which could not be subject to
garnishment.
On 9 March 1993 the trial court denied both motions and ordered
petitioner to immediately comply with its order of 4 November 1992. 3 It
opined that the checks of Mabanto, Jr., had already been released through
petitioner by the Department of Justice duly signed by the officer concerned.
Upon service of the writ of garnishment, petitioner as custodian of the checks
was under obligation to hold them for the judgment creditor. Petitioner
became a virtual party to, or a forced intervenor in, the case and the trial
court thereby acquired jurisdiction to bind him to its orders and processes
with a view to the complete satisfaction of the judgment. Additionally, there
was no sufficient reason for petitioner to hold the checks because they were
no longer government funds and presumably delivered to the payee,
conformably with the last sentence of Sec. 16 of the Negotiable Instruments
Law.
With regard to the contempt charge, the trial court was not morally
convinced of petitioner's guilt. For, while his explanation suffered from
procedural infirmities nevertheless he took pains in enlightening the court
by sending a written explanation dated 22 July 1992 requesting for the
lifting of the notice of garnishment on the ground that the notice should
have been sent to the Finance Officer of the Department of Justice.
Petitioner insists that he had no authority to segregate a portion of the
salary of Mabanto, Jr. The explanation however was not submitted to the
trial court for action since the stenographic reporter failed to attach it to
the record. 4
On 20 April 1993 the motion for reconsideration was denied. The trial
court explained that it was not the duty of the garnishee to inquire or
judge for himself whether the issuance of the order of execution, writ of
execution and notice of garnishment was justified. His only duty was to
turn over the garnished checks to the trial court which issued the order of
execution. 5
Petitioner raises the following relevant issues: (1) whether a check still in
the hands of the maker or its duly authorized representative is owned by
the payee before physical delivery to the latter: and, (2) whether the
salary check of a government official or employee funded with public
funds can be subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned by
Mabanto, Jr., because they were not yet delivered to him, and that
petitioner as garnishee has no legal obligation to hold and deliver them to
the trial court to be applied to Mabanto, Jr.'s judgment debt. The thesis of
petitioner is that the salary checks still formed part of public funds and
therefore beyond the reach of garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching
credits belonging to the judgment debtor owing to him from a stranger to
the litigation. 6 Emphasis is laid on the phrase "belonging to the judgment
debtor" since it is the focal point in resolving the issues raised.
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public
funds. He receives his compensation in the form of checks from the
Department of Justice through petitioner as City Fiscal of Mandaue City
and head of office. Under Sec. 16 of the Negotiable Instruments Law,
every contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of giving effect thereto. As
ordinarily understood, delivery means the transfer of the possession of
the instrument by the maker or drawer with intent to transfer title to the
payee and recognize him as the holder thereof. 7
According to the trial court, the checks of Mabanto, Jr., were already
released by the Department of Justice duly signed by the officer
concerned through petitioner and upon service of the writ of garnishment
by the sheriff petitioner was under obligation to hold them for the
judgment creditor. It recognized the role of petitioner as custodian of the
checks. At the same time however it considered the checks as no longer
government funds and presumed delivered to the payee based on the
last sentence of Sec. 16 of the Negotiable Instruments Law which states:
"And where the instrument is no longer in the possession of a party
whose signature appears thereon, a valid and intentional delivery by him
is presumed." Yet, the presumption is not conclusive because the last
portion of the provision says "until the contrary is proved." However this
phrase was deleted by the trial court for no apparent reason. Proof to the
contrary is its own finding that the checks were in the custody of
petitioner. Inasmuch as said checks had not yet been delivered to
Mabanto, Jr., they did not belong to him and still had the character of
public funds. In Tiro v. Hontanosas 8 we ruled that
The salary check of a government officer or employee
such as a teacher does not belong to him before it is
physically delivered to him. Until that time the check
belongs to the government. Accordingly, before there is
actual delivery of the check, the payee has no power over
it; he cannot assign it without the consent of the
Government.
As a necessary consequence of being public fund, the checks may not be
garnished to satisfy the judgment. 9 The rationale behind this doctrine is
obvious consideration of public policy. The Court succinctly stated
in Commissioner of Public Highways v. San Diego 10 that
The functions and public services rendered by the State
cannot be allowed to be paralyzed or disrupted by the
diversion of public funds from their legitimate and specific
objects, as appropriated by law.
In denying petitioner's motion for reconsideration, the trial court
expressed the additional ratiocination that it was not the duty of the
garnishee to inquire or judge for himself whether the issuance of the
order of execution, the writ of execution, and the notice of garnishment
was justified, citing our ruling in Philippine Commercial Industrial Bank v.
Court of Appeals. 11 Our precise ruling in that case was that "[I]t is not
incumbent upon the garnishee to inquire or to judge for itself whether or not
the order for the advance execution of a judgment is valid." But that is
invoking only the general rule. We have also established therein the
compelling reasons, as exceptions thereto, which were not taken into
account by the trial court, e.g., a defect on the face of the writ or actual
knowledge by the garnishee of lack of entitlement on the part of the
garnisher. It is worth to note that the ruling referred to the validity of advance
execution of judgments, but a careful scrutiny of that case and similar cases
reveals that it was applicable to a notice of garnishment as well. In the case
at bench, it was incumbent upon petitioner to inquire into the validity of the
notice of garnishment as he had actual knowledge of the non-entitlement of
private respondent to the checks in question. Consequently, we find no
difficulty concluding that the trial court exceeded its jurisdiction in issuing the
notice of garnishment concerning the salary checks of Mabanto, Jr., in the
possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993
and 20 April 1993 of the Regional Trial Court of Cebu City, Br. 17, subject
of the petition are SET ASIDE. The notice of garnishment served on
petitioner dated 3 February 1992 is ordered DISCHARGED.
SO ORDERED.
G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON
TUNG, ASIAN INDUSTRIAL PLASTIC CORPORATION and
PRODUCERS BANK OF THE PHILIPPINES, defendants-respondents.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic
Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for
brevity) filed a complaint for a sum of money against respondents Sima
Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian
Industrial Plastic Corporation (Plastic Corporation for short) and the
Producers Bank of the Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02
on a promissory note executed by respondent Sima Wei
on June 9, 1983; and
(2) To enforce payment of two checks executed by Sima
Wei, payable to petitioner, and drawn against the China
Banking Corporation, to pay the balance due on the
promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to
Dismiss alleging a common ground that the complaint states no cause of
action. The trial court granted the defendants' Motions to Dismiss. The
Court of Appeals affirmed this decision, * to which the petitioner Bank,
represented by its Legal Liquidator, filed this Petition for Review
by Certiorari, assigning the following as the alleged errors of the Court of
Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING
THAT THE PLAINTIFF-PETITIONER HAS NO CAUSE
OF ACTION AGAINST DEFENDANTS-RESPONDENTS
HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING
THAT SECTION 13, RULE 3 OF THE REVISED RULES
OF COURT ON ALTERNATIVE DEFENDANTS IS NOT
APPLICABLE TO HEREIN DEFENDANTS-
RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent
Sima Wei, the latter executed and delivered to the former a promissory
note, engaging to pay the petitioner Bank or order the amount of
P1,820,000.00 on or before June 24, 1983 with interest at 32% per
annum. Sima Wei made partial payments on the note, leaving a balance
of P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed
checks payable to petitioner Bank drawn against China Banking
Corporation, bearing respectively the serial numbers 384934, for the
amount of P550,000.00 and 384935, for the amount of P500,000.00. The
said checks were allegedly issued in full settlement of the drawer's
account evidenced by the promissory note. These two checks were not
delivered to the petitioner-payee or to any of its authorized
representatives. For reasons not shown, these checks came into the
possession of respondent Lee Kian Huat, who deposited the checks
without the petitioner-payee's indorsement (forged or otherwise) to the
account of respondent Plastic Corporation, at the Balintawak branch,
Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the
Balintawak branch of Producers Bank, relying on the assurance of
respondent Samson Tung, President of Plastic Corporation, that the
transaction was legal and regular, instructed the cashier of Producers
Bank to accept the checks for deposit and to credit them to the account of
said Plastic Corporation, inspite of the fact that the checks were crossed
and payable to petitioner Bank and bore no indorsement of the latter.
Hence, petitioner filed the complaint as aforestated.
The main issue before Us is whether petitioner Bank has a cause of
action against any or all of the defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation
of the legal right or rights of another. The essential elements are: (1) legal
right of the plaintiff; (2) correlative obligation of the defendant; and (3) an
act or omission of the defendant in violation of said legal right. 2
The normal parties to a check are the drawer, the payee and the drawee
bank. Courts have long recognized the business custom of using printed
checks where blanks are provided for the date of issuance, the name of
the payee, the amount payable and the drawer's signature. All the drawer
has to do when he wishes to issue a check is to properly fill up the blanks
and sign it. However, the mere fact that he has done these does not give
rise to any liability on his part, until and unless the check is delivered to
the payee or his representative. A negotiable instrument, of which a
check is, is not only a written evidence of a contract right but is also a
species of property. Just as a deed to a piece of land must be delivered
in order to convey title to the grantee, so must a negotiable instrument be
delivered to the payee in order to evidence its existence as a binding
contract. Section 16 of the Negotiable Instruments Law, which governs
checks, provides in part:
Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the
purpose of giving effect thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with
respect thereto until its delivery to him. 3Delivery of an instrument means
transfer of possession, actual or constructive, from one person to
another. 4 Without the initial delivery of the instrument from the drawer to the
payee, there can be no liability on the instrument. Moreover, such delivery
must be intended to give effect to the instrument.
The allegations of the petitioner in the original complaint show that the
two (2) China Bank checks, numbered 384934 and 384935, were not
delivered to the payee, the petitioner herein. Without the delivery of said
checks to petitioner-payee, the former did not acquire any right or interest
therein and cannot therefore assert any cause of action, founded on said
checks, whether against the drawer Sima Wei or against the Producers
Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent
Sima Wei on the promissory note, and the alternative defendants,
including Sima Wei, on the two checks. On appeal from the orders of
dismissal of the Regional Trial Court, petitioner Bank alleged that its
cause of action was not based on collecting the sum of money evidenced
by the negotiable instruments stated but on quasi-delict a claim for
damages on the ground of fraudulent acts and evident bad faith of the
alternative respondents. This was clearly an attempt by the petitioner
Bank to change not only the theory of its case but the basis of his cause
of action. It is well-settled that a party cannot change his theory on
appeal, as this would in effect deprive the other party of his day in court. 5
Notwithstanding the above, it does not necessarily follow that the drawer
Sima Wei is freed from liability to petitioner Bank under the loan
evidenced by the promissory note agreed to by her. Her allegation that
she has paid the balance of her loan with the two checks payable to
petitioner Bank has no merit for, as We have earlier explained, these
checks were never delivered to petitioner Bank. And even granting,
without admitting, that there was delivery to petitioner Bank, the delivery
of checks in payment of an obligation does not constitute payment unless
they are cashed or their value is impaired through the fault of the
creditor. 6 None of these exceptions were alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been
relieved from liability on the promissory note by some other cause,
petitioner Bank has a right of action against her for the balance due
thereon.
However, insofar as the other respondents are concerned, petitioner
Bank has no privity with them. Since petitioner Bank never received the
checks on which it based its action against said respondents, it never
owned them (the checks) nor did it acquire any interest therein. Thus,
anything which the respondents may have done with respect to said
checks could not have prejudiced petitioner Bank. It had no right or
interest in the checks which could have been violated by said
respondents. Petitioner Bank has therefore no cause of action against
said respondents, in the alternative or otherwise. If at all, it is Sima Wei,
the drawer, who would have a cause of action against her
co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank
regarding the applicability of Section 13, Rule 3 of the Rules of Court, We
find it unnecessary to discuss the same in view of Our finding that the
petitioner Bank did not acquire any right or interest in the checks due to
lack of delivery. It therefore has no cause of action against the
respondents, in the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals
dismissing the petitioner's complaint is AFFIRMED insofar as the second
cause of action is concerned. On the first cause of action, the case is
REMANDED to the trial court for a trial on the merits, consistent with this
decision, in order to determine whether respondent Sima Wei is liable to
the Development Bank of Rizal for any amount under the promissory note
allegedly signed by her.
SO ORDERED.
D. Other Rules on Indorsement
G.R. No. L-39641 February 28, 1983
METROPOL (BACOLOD) FINANCING & INVESTMENT
CORPORATION, plaintiff-appellee,
vs.
SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS
CO., LTD., defendants-appellants.
Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.
Diosdado Garingalao for defendants-appellants.
DE CASTRO, J.:
The former Court of Appeals, by its resolution dated October 16, 1974
certified this case to this Court the issue issued therein being one purely
of law.
On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor
of Ng Sambok Sons Motors Co., Ltd., in the amount of P15,939.00
payable in twelve (12) equal monthly installments, beginning May 18,
1969, with interest at the rate of one percent per month. It is further
provided that in case on non-payment of any of the installments, the total
principal sum then remaining unpaid shall become due and payable with
an additional interest equal to twenty-five percent of the total amount due.
On the same date, Sambok Motors Company (hereinafter referred to as
Sambok), a sister company of Ng Sambok Sons Motors Co., Ltd., and
under the same management as the former, negotiated and indorsed the
note in favor of plaintiff Metropol Financing & Investment Corporation with
the following indorsement:
Pay to the order of Metropol Bacolod Financing &
Investment Corporation with recourse. Notice of Demand;
Dishonor; Protest; and Presentment are hereby waived.
SAMBOK
MOTORS
CO.
(BACOLO
D)
By:
RODOLFO G. NONILLO Asst. General Manager
The maker, Dr. Villaruel defaulted in the payment of his installments
when they became due, so on October 30, 1969 plaintiff formally
presented the promissory note for payment to the maker. Dr. Villaruel
failed to pay the promissory note as demanded, hence plaintiff notified
Sambok as indorsee of said note of the fact that the same has been
dishonored and demanded payment.
Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint
for collection of a sum of money before the Court of First Instance of
Iloilo, Branch I. Sambok did not deny its liability but contended that it
could not be obliged to pay until after its co-defendant Dr. Villaruel has
been declared insolvent.
During the pendency of the case in the trial court, defendant Dr. Villaruel
died, hence, on October 24, 1972 the lower court, on motion, dismissed
the case against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules
of Court. 1
On plaintiff's motion for summary judgment, the trial court rendered its
decision dated September 12, 1973, the dispositive portion of which
reads as follows:
WHEREFORE, judgment is rendered:
(a) Ordering Sambok Motors Company to pay to the
plaintiff the sum of P15,939.00 plus the legal rate of
interest from October 30, 1969;
(b) Ordering same defendant to pay to plaintiff the sum
equivalent to 25% of P15,939.00 plus interest thereon
until fully paid; and
(c) To pay the cost of suit.
Not satisfied with the decision, the present appeal was instituted,
appellant Sambok raising a lone assignment of error as follows:
The trial court erred in not dismissing the complaint by
finding defendant appellant Sambok Motors Company as
assignor and a qualified indorsee of the subject
promissory note and in not holding it as only secondarily
liable thereof.
Appellant Sambok argues that by adding the words "with recourse" in the
indorsement of the note, it becomes a qualified indorser that being a
qualified indorser, it does not warrant that if said note is dishonored by
the maker on presentment, it will pay the amount to the holder; that it only
warrants the following pursuant to Section 65 of the Negotiable
Instruments Law: (a) that the instrument is genuine and in all respects
what it purports to be; (b) that he has a good title to it; (c) that all prior
parties had capacity to contract; (d) that he has no knowledge of any fact
which would impair the validity of the instrument or render it valueless.
The appeal is without merit.
A qualified indorsement constitutes the indorser a mere assignor of the
title to the instrument. It may be made by adding to the indorser's
signature the words "without recourse" or any words of similar
import. 2 Such an indorsement relieves the indorser of the general obligation
to pay if the instrument is dishonored but not of the liability arising from
warranties on the instrument as provided in Section 65 of the Negotiable
Instruments Law already mentioned herein. However, appellant Sambok
indorsed the note "with recourse" and even waived the notice of demand,
dishonor, protest and presentment.
"Recourse" means resort to a person who is secondarily liable after the
default of the person who is primarily liable. 3 Appellant, by indorsing the
note "with recourse" does not make itself a qualified indorser but a general
indorser who is secondarily liable, because by such indorsement, it agreed
that if Dr. Villaruel fails to pay the note, plaintiff-appellee can go after said
appellant. The effect of such indorsement is that the note was indorsed
without qualification. A person who indorses without qualification engages
that on due presentment, the note shall be accepted or paid, or both as the
case may be, and that if it be dishonored, he will pay the amount thereof to
the holder. 4 Appellant Sambok's intention of indorsing the note without
qualification is made even more apparent by the fact that the notice of
demand, dishonor, protest and presentment were an waived. The words
added by said appellant do not limit his liability, but rather confirm his
obligation as a general indorser.
Lastly, the lower court did not err in not declaring appellant as only
secondarily liable because after an instrument is dishonored by non-
payment, the person secondarily liable thereon ceases to be such and
becomes a principal debtor. 5 His liabiliy becomes the same as that of the
original obligor. 6 Consequently, the holder need not even proceed against
the maker before suing the indorser.
WHEREFORE, the decision of the lower court is hereby affirmed. No
costs.
SO ORDERED.
G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No.
16447), petitioner, Natividad Gempesaw, appealed to this Court in a
Petition for Review, on the issue of the right of the drawer to recover from
the drawee bank who pays a check with a forged indorsement of the
payee, debiting the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint
against the private respondent Philippine Bank of Communications
(respondent drawee Bank) for recovery of the money value of eighty-two
(82) checks charged against the petitioner's account with the respondent
drawee Bank on the ground that the payees' indorsements were
forgeries. The Regional Trial Court, Branch CXXVIII of Caloocan City,
which tried the case, rendered a decision on November 17, 1987
dismissing the complaint as well as the respondent drawee Bank's
counterclaim. On appeal, the Court of Appeals in a decision rendered on
February 22, 1990, affirmed the decision of the RTC on two grounds,
namely (1) that the plaintiff's (petitioner herein) gross negligence in
issuing the checks was the proximate cause of the loss and (2) assuming
that the bank was also negligent, the loss must nevertheless be borne by
the party whose negligence was the proximate cause of the loss. On
March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules
of Court setting forth the following as the alleged errors of the respondent
Court:1
I follows: the checks were prepared and filled up as to all material
THE RESPONDENT COURT OF APPEALS ERRED IN
RULING THAT THE NEGLIGENCE OF THE DRAWER IS
THE PROXIMATE CAUSE OF THE RESULTING INJURY
TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR
WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO
ERRED IN NOT FINDING AND RULING THAT IT IS THE
GROSS AND INEXCUSABLE NEGLIGENCE AND
FRAUDULENT ACTS OF THE OFFICIALS AND
EMPLOYEES OF THE RESPONDENT BANK IN
FORGING THE SIGNATURE OF THE PAYEES AND
THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO
PERSONS, OTHER THAN TO THE INTENDED PAYEES
SPECIFIED IN THE CHECKS, IS THE DIRECT AND
PROXIMATE CAUSE OF THE DAMAGE TO
PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS
DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO
ERRED IN NOT ORDERING THE RESPONDENT BANK
TO RESTORE OR RE-CREDIT THE CHECKING
ACCOUNT OF THE PETITIONER IN THE CALOOCAN
CITY BRANCH BY THE VALUE OF THE EIGHTY-TWO
(82) CHECKS WHICH IS IN THE AMOUNT OF
P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four
grocery stores located at Rizal Avenue Extension and at Second Avenue,
Caloocan City. Among these groceries are D.G. Shopper's Mart and D.G.
Whole Sale Mart. Petitioner maintains a checking account numbered 13-
00038-1 with the Caloocan City Branch of the respondent drawee Bank.
To facilitate payment of debts to her suppliers, petitioner draws checks
against her checking account with the respondent bank as drawee. Her
customary practice of issuing checks in payment of her suppliers was as
particulars by her trusted bookkeeper, Alicia Galang, an employee for
more than eight (8) years. After the bookkeeper prepared the checks, the
completed checks were submitted to the petitioner for her signature,
together with the corresponding invoice receipts which indicate the
correct obligations due and payable to her suppliers. Petitioner signed
each and every check without bothering to verify the accuracy of the
checks against the corresponding invoices because she reposed full and
implicit trust and confidence on her bookkeeper. The issuance and
delivery of the checks to the payees named therein were left to the
bookkeeper. Petitioner admitted that she did not make any verification as
to whether or not the checks were delivered to their respective payees.
Although the respondent drawee Bank notified her of all checks
presented to and paid by the bank, petitioner did not verify he correctness
of the returned checks, much less check if the payees actually received
the checks in payment for the supplies she received. In the course of her
business operations covering a period of two years, petitioner issued,
following her usual practice stated above, a total of eighty-two (82)
checks in favor of several suppliers. These checks were all presented by
the indorsees as holders thereof to, and honored by, the respondent
drawee Bank. Respondent drawee Bank correspondingly debited the
amounts thereof against petitioner's checking account numbered 30-
00038-1. Most of the aforementioned checks were for amounts in excess
of her actual obligations to the various payees as shown in their
corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the
amount of P11,895.23 in favor of Kawsek Inc. (Exh. A-
60), appellant's actual obligation to said payee was only
P895.33 (Exh. A-83); (2) in Check No. 652282 issued on
September 18, 1984 in favor of Senson Enterprises in the
amount of P11,041.20 (Exh. A-67) appellant's actual
obligation to said payee was only P1,041.20 (Exh. 7); (3)
in Check No. 589092 dated April 7, 1984 for the amount
of P11,672.47 in favor of Marchem (Exh. A-61) appellant's
obligation was only P1,672.47 (Exh. B); (4) in Check No.
620450 dated May 10, 1984 in favor of Knotberry for
P11,677.10 (Exh. A-31) her actual obligation was only
P677.10 (Exhs. C and C-1); (5) in Check No. 651862
dated August 9, 1984 in favor of Malinta Exchange Mart
for P11,107.16 (Exh. A-62), her obligation was only
P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated
August 11, 1984 in favor of Grocer's International Food
Corp. in the amount of P11,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in
Check No. 589019 dated March 17, 1984 in favor of
Sophy Products in the amount of P11,648.00 (Exh. A-78),
her obligation was only P648.00 (Exh. G); (8) in Check
No. 589028 dated March 10, 1984 for the amount of
P11,520.00 in favor of the Yakult Philippines (Exh. A-73),
the latter's invoice was only P520.00 (Exh. H-2); (9) in
Check No. 62033 dated May 23, 1984 in the amount of
P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-
34), her obligation was only P504.00 (Exhs. I-1 and I-2). 2
Practically, all the checks issued and honored by the respondent drawee
bank were crossed checks. 3 Aside from the daily notice given to the
petitioner by the respondent drawee Bank, the latter also furnished her with a
monthly statement of her transactions, attaching thereto all the cancelled
checks she had issued and which were debited against her current account.
It was only after the lapse of more two (2) years that petitioner found out
about the fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were
brought to Ernest L. Boon, Chief Accountant of respondent drawee Bank
at the Buendia branch, who, without authority therefor, accepted them all
for deposit at the Buendia branch to the credit and/or in the accounts of
Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close
friend of Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82)
checks were deposited in Savings Account No. 00844-5 of Alfredo Y.
Romero at the respondent drawee Bank's Buendia branch, and four (4)
checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest
of the checks were deposited in Account No. 0443-4, under the name of
Benito Lam at the Elcao branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on
the checks testified that they did not receive nor even see the subject
checks and that the indorsements appearing at the back of the checks
were not theirs.
The team of auditors from the main office of the respondent drawee Bank
which conducted periodic inspection of the branches' operations failed to
discover, check or stop the unauthorized acts of Ernest L. Boon. Under
the rules of the respondent drawee Bank, only a Branch Manager and no
other official of the respondent drawee bank, may accept a second
indorsement on a check for deposit. In the case at bar, all the deposit
slips of the eighty-two (82) checks in question were initialed and/or
approved for deposit by Ernest L. Boon. The Branch Managers of the
Ongpin and Elcao branches accepted the deposits made in the Buendia
branch and credited the accounts of Alfredo Y. Romero and Benito Lam
in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent
drawee Bank to credit her account with the money value of the eighty-two
(82) checks totalling P1,208.606.89 for having been wrongfully charged
against her account. Respondent drawee Bank refused to grant
petitioner's demand. On January 23, 1985, petitioner filed the complaint
with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check
drawn against the drawee bank. The payees are not parties to the case.
Rather, it is the drawer, whose signature is genuine, who instituted this
action to recover from the drawee bank the money value of eighty-two
(82) checks paid out by the drawee bank to holders of those checks
where the indorsements of the payees were forged. How and by whom
the forgeries were committed are not established on the record, but the
respective payees admitted that they did not receive those checks and
therefore never indorsed the same. The applicable law is the Negotiable
Instruments Law 4 (heretofore referred to as the NIL). Section 23 of the NIL
provides:
When a signature is forged or made without the authority
of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to
give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or
under such signature, unless the party against whom it is
sought to enforce such right is precluded from setting up
the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute
defense by the party whose signature is forged. A party whose
signature to an instrument was forged was never a party and
never gave his consent to the contract which gave rise to the
instrument. Since his signature does not appear in the instrument,
he cannot be held liable thereon by anyone, not even by a holder
in due course. Thus, if a person's signature is forged as a maker
of a promissory note, he cannot be made to pay because he
never made the promise to pay. Or where a person's signature as
a drawer of a check is forged, the drawee bank cannot charge the
amount thereof against the drawer's account because he never
gave the bank the order to pay. And said section does not refer
only to the forged signature of the maker of a promissory note
and of the drawer of a check. It covers also a forged
indorsement, i.e., the forged signature of the payee or indorsee of
a note or check. Since under said provision a forged signature is
"wholly inoperative", no one can gain title to the instrument
through such forged indorsement. Such an indorsement prevents
any subsequent party from acquiring any right as against any
party whose name appears prior to the forgery. Although rights
may exist between and among parties subsequent to the forged
indorsement, not one of them can acquire rights against parties
prior to the forgery. Such forged indorsement cuts off the rights of
all subsequent parties as against parties prior to the forgery.
However, the law makes an exception to these rules where a
party is precluded from setting up forgery as a defense.
As a matter of practical significance, problems arising from forged
indorsements of checks may generally be broken into two types of cases:
(1) where forgery was accomplished by a person not associated with the
drawer for example a mail robbery; and (2) where the indorsement
was forged by an agent of the drawer. This difference in situations would
determine the effect of the drawer's negligence with respect to forged
indorsements. While there is no duty resting on the depositor to look for
forged indorsements on his cancelled checks in contrast to a duty
imposed upon him to look for forgeries of his own name, a depositor is
under a duty to set up an accounting system and a business procedure
as are reasonably calculated to prevent or render difficult the forgery of
indorsements, particularly by the depositor's own employees. And if the
drawer (depositor) learns that a check drawn by him has been paid under
a forged indorsement, the drawer is under duty promptly to report such
fact to the drawee bank. 5For his negligence or failure either to discover or to
report promptly the fact of such forgery to the drawee, the drawer loses his
right against the drawee who has debited his account under a forged
indorsement. 6 In other words, he is precluded from using forgery as a basis
for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and
completed by her trusted employee, Alicia Galang, and were given to her
for her signature. Her signing the checks made the negotiable instrument
complete. Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument to the payee for the purpose of giving
effect thereto. 7 The first delivery of the instrument, complete in form, to the
payee who takes it as a holder, is called issuance of the instrument. 8 Without
the initial delivery of the instrument from the drawer of the check to the
payee, there can be no valid and binding contract and no liability on the
instrument.
Petitioner completed the checks by signing them as drawer and
thereafter authorized her employee Alicia Galang to deliver the eighty-two
(82) checks to their respective payees. Instead of issuing the checks to
the payees as named in the checks, Alicia Galang delivered them to the
Chief Accountant of the Buendia branch of the respondent drawee Bank,
a certain Ernest L. Boon. It was established that the signatures of the
payees as first indorsers were forged. The record fails to show the
identity of the party who made the forged signatures. The checks were
then indorsed for the second time with the names of Alfredo Y. Romero
and Benito Lam, and were deposited in the latter's accounts as earlier
noted. The second indorsements were all genuine signatures of the
alleged holders. All the eighty-two (82) checks bearing the forged
indorsements of the payees and the genuine second indorsements of
Alfredo Y. Romero and Benito Lam were accepted for deposit at the
Buendia branch of respondent drawee Bank to the credit of their
respective savings accounts in the Buendia, Ongpin and Elcao
branches of the same bank. The total amount of P1,208,606.89,
represented by eighty-two (82) checks, were credited and paid out by
respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and
debited against petitioner's checking account No. 13-00038-1, Caloocan
branch.
As a rule, a drawee bank who has paid a check on which an indorsement
has been forged cannot charge the drawer's account for the amount of
said check. An exception to this rule is where the drawer is guilty of such
negligence which causes the bank to honor such a check or checks. If a
check is stolen from the payee, it is quite obvious that the drawer cannot
possibly discover the forged indorsement by mere examination of his
cancelled check. This accounts for the rule that although a depositor
owes a duty to his drawee bank to examine his cancelled checks for
forgery of his own signature, he has no similar duty as to forged
indorsements. A different situation arises where the indorsement was
forged by an employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an agent
or employee deal with the payee's indorsement. The drawer and the
payee often time shave business relations of long standing. The
continued occurrence of business transactions of the same nature
provides the opportunity for the agent/employee to commit the fraud after
having developed familiarity with the signatures of the parties. However,
sooner or later, some leak will show on the drawer's books. It will then be
just a question of time until the fraud is discovered. This is specially true
when the agent perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an
unauthorized payment is based on failure of the depositor to act as a
prudent businessman would under the circumstances. In the case at bar,
the petitioner relied implicitly upon the honesty and loyalty of her
bookkeeper, and did not even verify the accuracy of amounts of the
checks she signed against the invoices attached thereto. Furthermore,
although she regularly received her bank statements, she apparently did
not carefully examine the same nor the check stubs and the returned
checks, and did not compare them with the same invoices. Otherwise,
she could have easily discovered the discrepancies between the checks
and the documents serving as bases for the checks. With such discovery,
the subsequent forgeries would not have been accomplished. It was not
until two years after the bookkeeper commenced her fraudulent scheme
that petitioner discovered that eighty-two (82) checks were wrongfully
charged to her account, at which she notified the respondent drawee
bank.
It is highly improbable that in a period of two years, not one of Petitioner's
suppliers complained of non-payment. Assuming that even one single
complaint had been made, petitioner would have been duty-bound, as far
as the respondent drawee Bank was concerned, to make an adequate
investigation on the matter. Had this been done, the discrepancies would
have been discovered, sooner or later. Petitioner's failure to make such
adequate inquiry constituted negligence which resulted in the bank's
honoring of the subsequent checks with forged indorsements. On the
other hand, since the record mentions nothing about such a complaint,
the possibility exists that the checks in question covered inexistent sales.
But even in such a case, considering the length of a period of two (2)
years, it is hard to believe that petitioner did not know or realize that she
was paying more than she should for the supplies she was actually
getting. A depositor may not sit idly by, after knowledge has come to her
that her funds seem to be disappearing or that there may be a leak in her
business, and refrain from taking the steps that a careful and prudent
businessman would take in such circumstances and if taken, would result
in stopping the continuance of the fraudulent scheme. If she fails to take
steps, the facts may establish her negligence, and in that event, she
would be estopped from recovering from the bank. 9
One thing is clear from the records that the petitioner failed to examine
her records with reasonable diligence whether before she signed the
checks or after receiving her bank statements. Had the petitioner
examined her records more carefully, particularly the invoice receipts,
cancelled checks, check book stubs, and had she compared the sums
written as amounts payable in the eighty-two (82) checks with the
pertinent sales invoices, she would have easily discovered that in some
checks, the amounts did not tally with those appearing in the sales
invoices. Had she noticed these discrepancies, she should not have
signed those checks, and should have conducted an inquiry as to the
reason for the irregular entries. Likewise had petitioner been more vigilant
in going over her current account by taking careful note of the daily
reports made by respondent drawee Bank in her issued checks, or at
least made random scrutiny of cancelled checks returned by respondent
drawee Bank at the close of each month, she could have easily
discovered the fraud being perpetrated by Alicia Galang, and could have
reported the matter to the respondent drawee Bank. The respondent
drawee Bank then could have taken immediate steps to prevent further
commission of such fraud. Thus, petitioner's negligence was the
proximate cause of her loss. And since it was her negligence which
caused the respondent drawee Bank to honor the forged checks or
prevented it from recovering the amount it had already paid on the
checks, petitioner cannot now complain should the bank refuse to recredit
her account with the amount of such checks. 10 Under Section 23 of the
NIL, she is now precluded from using the forgery to prevent the bank's
debiting of her account.
The doctrine in the case of Great Eastern Life Insurance
Co. vs. Hongkong & Shanghai Bank 11 is not applicable to the case at bar
because in said case, the check was fraudulently taken and the signature of
the payee was forged not by an agent or employee of the drawer. The
drawer was not found to be negligent in the handling of its business affairs
and the theft of the check by a total stranger was not attributable to
negligence of the drawer; neither was the forging of the payee's indorsement
due to the drawer's negligence. Since the drawer was not negligent, the
drawee was duty-bound to restore to the drawer's account the amount
theretofore paid under the check with a forged payee's indorsement because
the drawee did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored
the checks because they were crossed checks. Issuing a crossed check
imposes no legal obligation on the drawee not to honor such a check. It is
more of a warning to the holder that the check cannot be presented to the
drawee bank for payment in cash. Instead, the check can only be
deposited with the payee's bank which in turn must present it for payment
against the drawee bank in the course of normal banking transactions
between banks. The crossed check cannot be presented for payment but
it can only be deposited and the drawee bank may only pay to another
bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank
from having checks with more than one indorsement. The banking rule
banning acceptance of checks for deposit or cash payment with more
than one indorsement unless cleared by some bank officials does not
invalidate the instrument; neither does it invalidate the negotiation or
transfer of the said check. In effect, this rule destroys the negotiability of
bills/checks by limiting their negotiation by indorsement of only the payee.
Under the NIL, the only kind of indorsement which stops the further
negotiation of an instrument is a restrictive indorsement which prohibits
the further negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement
is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or
negotiate must be written in express words at the back of the instrument,
so that any subsequent party may be forewarned that ceases to be
negotiable. However, the restrictive indorsee acquires the right to receive
payment and bring any action thereon as any indorser, but he can no
longer transfer his rights as such indorsee where the form of the
indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it
because there is no privity between them, as far as the drawer-depositor
is concerned, such bank may not legally refuse to honor a negotiable bill
of exchange or a check drawn against it with more than one indorsement
if there is nothing irregular with the bill or check and the drawer has
sufficient funds. The drawee cannot be compelled to accept or pay the
check by the drawer or any holder because as a drawee, he incurs no
liability on the check unless he accepts it. But the drawee will make itself
liable to a suit for damages at the instance of the drawer for wrongful
dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the
defense of forgery by reason of her gross negligence. But under Section
196 of the NIL, any case not provided for in the Act shall be governed by
the provisions of existing legislation. Under the laws of quasi-delict, she
cannot point to the negligence of the respondent drawee Bank in the
selection and supervision of its employees as being the cause of the loss
because negligence is the proximate cause thereof and under Article
2179 of the Civil Code, she may not be awarded damages. However,
under Article 1170 of the same Code the respondent drawee Bank may
be held liable for damages. The article provides
 Those who in the performance of their obligations are
guilty of fraud, negligence or delay, and those who in any
manner contravene the tenor thereof, are liable for
damages.
There is no question that there is a contractual relation between petitioner
as depositor (obligee) and the respondent drawee bank as the obligor. In
the performance of its obligation, the drawee bank is bound by its internal
banking rules and regulations which form part of any contract it enters
into with any of its depositors. When it violated its internal rules that
second endorsements are not to be accepted without the approval of its
branch managers and it did accept the same upon the mere approval of
Boon, a chief accountant, it contravened the tenor of its obligation at the
very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover
the irregularity with respect to the acceptance of checks with second
indorsement for deposit even without the approval of the branch manager
despite periodic inspection conducted by a team of auditors from the
main office constitutes negligence on the part of the bank in carrying out
its obligations to its depositors. Article 1173 provides
The fault or negligence of the obligor consists in the
omission of that diligence which is required by the nature
of the obligation and corresponds with the circumstance
of the persons, of the time and of the place. . . .
liability may be regulated by the courts according to the
circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is
being made clear that the decision to hold the drawee bank liable is
based on law and substantial justice and not on mere equity. And
although the case was brought before the court not on breach of
contractual obligations, the courts are not precluded from applying to the
circumstances of the case the laws pertinent thereto. Thus, the fact that
petitioner's negligence was found to be the proximate cause of her loss
does not preclude her from recovering damages. The reason why the
decision dealt on a discussion on proximate cause is due to the error
pointed out by petitioner as allegedly committed by the respondent court.
And in breaches of contract under Article 1173, due diligence on the part
of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to
the trial court for the reception of evidence to determine the exact amount
of loss suffered by the petitioner, considering that she partly benefited
from the issuance of the questioned checks since the obligation for which
she issued them were apparently extinguished, such that only the excess
amount over and above the total of these actual obligations must be
considered as loss of which one half must be paid by respondent drawee
bank to herein petitioner.
SO ORDERED.

We hold that banking business is so impressed with public interest where

the trust and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence must be a
high degree of diligence, if not the utmost diligence. Surely, respondent
drawee Bank cannot claim it exercised such a degree of diligence that is
required of it. There is no way We can allow it now to escape liability for
such negligence. Its liability as obligor is not merely vicarious but primary
wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.

Premises considered, respondent drawee Bank is adjudged liable to

share the loss with the petitioner on a fifty-fifty ratio in accordance with
Article 172 which provides:

Responsibility arising from negligence in the performance

of every kind of obligation is also demandable, but such