I.

NEGOTIABILITY
1. Philippine Education Co. Vs. Soriano 39 SCRA 587

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-22405 June 30, 1971
PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.
Marcial Esposo for plaintiff-appellant.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G.
Ibarra and Attorney Concepcion Torrijos-Agapinan for defendants-appellees.

DECISION
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 with address at Lucena,
Quezon. After the postal teller had made out money orders numbered 124685, 124687-
124695, Montinola offered to pay for them with a private check As private checks were
not generally accepted in payment of money orders, the teller advised him to see the
Chief of the Money Order Division, but instead of doing so, Montinola managed to leave
building with his own check and the ten(10) money orders without the knowledge of the
teller.
On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid
money orders, an urgent message was sent to all postmasters, and the following day
notice was likewise served upon all banks, instructing them not to pay anyone of the
money orders aforesaid if presented for payment. The Bank of America received a copy
of said notice three days later.
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was
received by appellant as part of its sales receipts. The following day it deposited the
same with the Bank of America, and one day thereafter the latter cleared it with the
Bureau of Posts and received from the latter its face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order
Division of the Manila Post Office, acting for and in behalf of his co-appellee,
Postmaster Enrico Palomar, notified the Bank of America that money order No. 124688
attached to his letter had been found to have been irregularly issued and that, in view
thereof, the amount it represented had been deducted from the bank’s clearing account.
For its part, on August 2 of the same year, the Bank of America debited appellant’s
account with the same amount and gave it advice thereof by means of a debit memo.
On October 12, 1961 appellant requested the Postmaster General to reconsider the
action taken by his office deducting the sum of P200.00 from the clearing account of the
Bank of America, but his request was denied. So was appellant’s subsequent request
that the matter be referred to the Secretary of Justice for advice. Thereafter, appellant
elevated the matter to the Secretary of Public Works and Communications, but the latter
sustained the actions taken by the postal officers.
In connection with the events set forth above, Montinola was charged with theft in the
Court of First Instance of Manila (Criminal Case No. 43866) but after trial he was
acquitted on the ground of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of
Manila praying for judgment as follows:
WHEREFORE, plaintiff prays that after hearing defendants be ordered:
(a) To countermand the notice given to the Bank of America on September 27, 1961,
deducting from the said Bank’s clearing account the sum of P200.00 represented by
postal money order No. 124688, or in the alternative indemnify the plaintiff in the same
amount with interest at 8-½% per annum from September 27, 1961, which is the rate of
interest being paid by plaintiff on its overdraft account;
(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and
moral damages in the amount of P1,000.00 or in such amount as will be proved and/or
determined by this Honorable Court: exemplary damages in the amount of P1,000.00,
attorney’s fees of P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be deemed just and
equitable.
On November 17, 1962, after the parties had submitted the stipulation of facts
reproduced at pages 12 to 15 of the Record on Appeal, the above-named court
rendered judgment as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand
the notice given to the Bank of America on September 27, 1961, deducting from said
Bank’s clearing account the sum of P200.00 representing the amount of postal money
order No. 124688, or in the alternative, to indemnify the plaintiff in the said sum of
P200.00 with interest thereon at the rate of 8-½% per annum from September 27, 1961
until fully paid; without any pronouncement as to cost and attorney’s fees.
The case was appealed to the Court of First Instance of Manila where, after the parties
had resubmitted the same stipulation of facts, the appealed decision dismissing the
complaint, with costs, was rendered.
The first, second and fifth assignments of error discussed in appellant’s brief are related
to the other and will therefore be discussed jointly. They raise this main issue: that the
postal money order in question is a negotiable instrument; that its nature as such is not
in any way 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 America to accept and pay postal money orders presented for
payment at the Manila Post Office. Such being the case, it is clear that the Director of
Posts had ample authority to issue it pursuant to Sec. 1190 of the Revised
Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the issues raised in the
third and fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law, the same is hereby
affirmed with costs.
Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo
and Villamor, JJ., concur.
Castro and Makasiar, JJ., took no part.
2. Caltex Phil vs. Court of Appelas 212 SCRA 448

epublic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofileña & Guingona for private.

DECISION
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.
3
After trial, the court a quo rendered its decision dismissing the instant complaint.
On appeal, as earlier stated, respondent court affirmed the lower court’s dismissal of the
complaint, hence this petition wherein petitioner faults respondent court in ruling (1) that
the subject certificates of deposit are non-negotiable despite being clearly negotiable
instruments; (2) that petitioner did not become a holder in due course of the said
certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of
Commerce relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR
THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos,
Philippine Currency, repayable to said depositor 731 days. after date, upon presentation
and surrender of this certificate, with interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
—————————— ———————————
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments,
nationalizing as follows:
. . . While it may be true that the word “bearer” appears rather boldly in the CTDs
issued, it is important to note that after the word “BEARER” stamped on the space
provided supposedly for the name of the depositor, the words “has deposited” a certain
amount follows. The document further provides that the amount deposited shall be
“repayable to said depositor” on the period indicated. Therefore, the text of the
instrument(s) themselves manifest with clarity that they are payable, not to whoever
purports to be the “bearer” but only to the specified person indicated therein, the
depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz as
the person who made the deposit and further engages itself to pay said depositor the
amount indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in
question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the
Negotiable Instruments Law, enumerates the requisites for an instrument to become
negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability.
The parties’ bone of contention is with regard to requisite (d) set forth above. It is noted
that Mr. Timoteo P. Tiangco, Security Bank’s Branch Manager way back in 1982,
testified in open court that the depositor reffered to in the CTDs is no other than Mr.
Angel de la Cruz.
 xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank, the depositor
referred (sic) in these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one
who cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these certificates of time deposit
insofar as the bank is concerned?
witness:
8
a Angel dela Cruz is the depositor.
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the instrument
itself. 9 In the construction of a bill or note, the intention of the parties is to control, if it
can be legally ascertained. 10 While the writing may be read in the light of surrounding
circumstances in order to more perfectly understand the intent and meaning of the
parties, yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or substituted in its
stead. The duty of the court in such case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what their words express, but what is the
meaning of the words they have used. What the parties meant must be determined by
what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. The
documents provide that the amounts deposited shall be repayable to the depositor. And
who, according to the document, is the depositor? It is the “bearer.” The documents do
not say that the depositor is Angel de la Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are to be repayable to the bearer of
the documents or, for that matter, whosoever may be the bearer at the time of
presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz
only, it could have with facility so expressed that fact in clear and categorical terms in
the documents, instead of having the word “BEARER” stamped on the space provided
for the name of the depositor in each CTD. On the wordings of the documents,
therefore, the amounts deposited are repayable to whoever may be the bearer thereof.
Thus, petitioner’s aforesaid witness merely declared that Angel de la Cruz is the
depositor “insofar as the bank is concerned,” but obviously other parties not privy to the
transaction between them would not be in a position to know that the depositor is not
the bearer stated in the CTDs. Hence, the situation would require any party dealing with
the CTDs to go behind the plain import of what is written thereon to unravel the
agreement of the parties thereto through facts aliunde. This need for resort to extrinsic
evidence is what is sought to be avoided by the Negotiable Instruments Law and calls
for the application of the elementary rule that the interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the
answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner
chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to
P1,120,000.00 to petitioner without informing respondent bank thereof at any time.
Unfortunately for petitioner, although the CTDs are bearer instruments, a valid
negotiation thereof for the true purpose and agreement between it and De la Cruz, as
ultimately ascertained, requires both delivery and indorsement. For, although petitioner
seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la
Cruz’ purchases of its fuel products. Any doubt as to whether the CTDs were delivered
as payment for the fuel products or as a security has been dissipated and resolved in
favor of the latter by petitioner’s own authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q.
Aranas, Jr., Caltex Credit Manager, wrote: “. . . These certificates of deposit were
negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products”
(Emphasis ours.) 13 This admission is conclusive upon petitioner, its protestations
notwithstanding. Under the doctrine of estoppel, an admission or representation is
rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon. 14 A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them. 15 In the law of
evidence, whenever a party has, by his own declaration, act, or omission, intentionally
and deliberately led another to believe a particular thing true, and to act upon such
belief, he cannot, in any litigation arising out of such declaration, act, or omission, be
permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner’s
credit manager could have easily said so, instead of using the words “to guarantee” in
the letter aforequoted. Besides, when respondent bank, as defendant in the court below,
moved for a bill of particularity therein 17 praying, among others, that petitioner, as
plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date
or dates ofpayment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b)
whether or not it issued a receipt showing that the CTDs were delivered to it by De la
Cruz as payment of the latter’s alleged indebtedness to it, plaintiff corporation opposed
the motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly
was the fact, that the CTDs were delivered as payment and not as security. Having
opposed the motion, petitioner now labors under the presumption that evidence willfully
suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation,
et al. vs. Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court’s pronouncements in Lopez, supra, we quote
therefrom:
The character of the transaction between the parties is to be determined by their
intention, regardless of what language was used or what the form of the transfer was. If
it was intended to secure the payment of money, it must be construed as a pledge; but if
there was some other intention, it is not a pledge. However, even though a transfer, if
regarded by itself, appears to have been absolute, its object and character might still be
qualified and explained by contemporaneous writing declaring it to have been a deposit
of the property as collateral security. It has been said that a transfer of property by the
debtor to a creditor, even if sufficient on its face to make an absolute conveyance,
should be treated as a pledge if the debt continues in inexistence and is not discharged
by the transfer, and that accordingly the use of the terms ordinarily importing
conveyance of absolute ownership will not be given that effect in such a transaction if
they are also commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and
unambiguous language or other circumstances excluding an intent to pledge.
Petitioner’s insistence that the CTDs were negotiated to it begs the question. Under the
Negotiable Instruments Law, an instrument is negotiated when it is transferred from one
person to another in such a manner as to constitute the transferee the holder
thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. 22 In the present case, however, there was no
negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in
which situation, for obvious reasons, mere delivery of the bearer CTDs would have
sufficed. Here, the delivery thereof only as security for the purchases of Angel de la
Cruz (and we even disregard the fact that the amount involved was not disclosed) could
at the most constitute petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition of such
security, in the event of non-payment of the principal obligation, must be contractually
provided for.
The pertinent law on this point is that where the holder has a lien on the instrument
arising from contract, he is deemed a holder for value to the extent of his lien. 23 As such
holder of collateral security, he would be a pledgee but the requirements therefor and
the effects thereof, not being provided for by the Negotiable Instruments Law, shall be
governed by the Civil Code provisions on pledge of incorporeal rights, 24 which
inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be
pledged. The instrument proving the right pledged shall be delivered to the creditor, and
if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual
findings of respondent court quoted at the start of this opinion show that petitioner failed
to produce any document evidencing any contract of pledge or guarantee agreement
between it and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs did not
legally vest in petitioner any right effective against and binding upon respondent bank.
The requirement under Article 2096 aforementioned is not a mere rule of adjective law
prescribing the mode whereby proof may be made of the date of a pledge contract, but
a rule of substantive law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of
respondent bank was embodied in a public instrument. 27 With regard to this other mode
of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against
third persons, unless it appears in a public instrument, or the instrument is recorded in
the Registry of Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner,
whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount
of its credit or the extent of its lien nor the execution of any public instrument which
could affect or bind private respondent. Necessarily, therefore, as between petitioner
and respondent bank, the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of
whether or not private respondent observed the requirements of the law in the case of
lost negotiable instruments and the issuance of replacement certificates therefor, on the
ground that petitioner failed to raised that issue in the lower court. 28
On this matter, we uphold respondent court’s finding that the aspect of alleged
negligence of private respondent was not included in the stipulation of the parties and in
the statement of issues submitted by them to the trial court. 29 The issues agreed upon
by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs
against the depositor’s loan by virtue of the assignment (Annex “C”).
3. Whether or not there was legal compensation or set off involving the amount covered
by the CTDs and the depositor’s outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the
maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney’s fees and litigation
expenses from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal
authorities, the foregoing enumeration does not include the issue of negligence on the
part of respondent bank. An issue raised for the first time on appeal and not raised
timely in the proceedings in the lower court is barred by estoppel. 30 Questions raised on
appeal must be within the issues framed by the parties and, consequently, issues not
raised in the trial court cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition
of a case are properly raised. Thus, to obviate the element of surprise, parties are
expected to disclose at a pre-trial conference all issues of law and fact which they
intend to raise at the trial, except such as may involve privileged or impeaching matters.
The determination of issues at a pre-trial conference bars the consideration of other
questions on appeal. 32
To accept petitioner’s suggestion that respondent bank’s supposed negligence may be
considered encompassed by the issues on its right to preterminate and receive the
proceeds of the CTDs would be tantamount to saying that petitioner could raise on
appeal any issue. We agree with private respondent that the broad ultimate issue of
petitioner’s entitlement to the proceeds of the questioned certificates can be premised
on a multitude of other legal reasons and causes of action, of which respondent bank’s
supposed negligence is only one. Hence, petitioner’s submission, if accepted, would
render a pre-trial delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court
below, petitioner still cannot have the odds in its favor. A close scrutiny of the provisions
of the Code of Commerce laying down the rules to be followed in case of lost
instruments payable to bearer, which it invokes, will reveal that said provisions, even
assuming their applicability to the CTDs in the case at bar, are merely permissive and
not mandatory. The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the
judge or court of competent jurisdiction, asking that the principal, interest or dividends
due or about to become due, be not paid a third person, as well as in order to prevent
the ownership of the instrument that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word “may” in said provision shows that it is not mandatory but
discretionary on the part of the “dispossessed owner” to apply to the judge or court of
competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the
provision reads “may,” this word shows that it is not mandatory but discretional. 34 The
word “may” is usually permissive, not mandatory. 35 It is an auxiliary verb indicating
liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the
Code of Commerce, on which petitioner seeks to anchor respondent bank’s supposed
negligence, merely established, on the one hand, a right of recourse in favor of a
dispossessed owner or holder of a bearer instrument so that he may obtain a duplicate
of the same, and, on the other, an option in favor of the party liable thereon who, for
some valid ground, may elect to refuse to issue a replacement of the instrument.
Significantly, none of the provisions cited by petitioner categorically restricts or prohibits
the issuance a duplicate or replacement instrument sans compliance with the procedure
outlined therein, and none establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and
the appealed decision is hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., Padilla and Nocon, JJ., concur.
3. Metrobank vs. Court of Appelas 194 SCRA 168

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 88866 February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA
CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO, respondents.

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

Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan
Association, Inc.

CRUZ, J.:

This case, for all its seeming complexity, turns on a simple question of negligence. The
facts, pruned of all non-essentials, are easily told.

The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout
the Philippines and even abroad. Golden Savings and Loan Association was, at the time
these events happened, operating in Calapan, Mindoro, with the other private
respondents as its principal officers.

In January 1979, a certain Eduardo Gomez opened an account with Golden Savings
and deposited over a period of two months 38 treasury warrants with a total value of
P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and
purportedly signed by its General Manager and countersigned by its Auditor. Six of
these were directly payable to Gomez while the others appeared to have been indorsed
by their respective payees, followed by Gomez as second indorser. 1

On various dates between June 25 and July 16, 1979, all these warrants were
subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited
to its Savings Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They
were then sent for clearing by the branch office to the principal office of Metrobank,
which forwarded them to the Bureau of Treasury for special clearing. 2

More than two weeks after the deposits, Gloria Castillo went to the Calapan branch
several times to ask whether the warrants had been cleared. She was told to wait.
Accordingly, Gomez was meanwhile not allowed to withdraw from his account. Later,
however, "exasperated" over Gloria's repeated inquiries and also as an accommodation
for a "valued client," the petitioner says it finally decided to allow Golden Savings to
withdraw from the proceeds of the
warrants. 3

The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the
second on July 13, 1979, in the amount of P310,000.00, and the third on July 16, 1979,
in the amount of P150,000.00. The total withdrawal was P968.000.00. 4

In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his
own account, eventually collecting the total amount of P1,167,500.00 from the proceeds
of the apparently cleared warrants. The last withdrawal was made on July 16, 1979.

On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had
been dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund
by Golden Savings of the amount it had previously withdrawn, to make up the deficit in
its account.

The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial
Court of Mindoro. 5 After trial, judgment was rendered in favor of Golden Savings,
which, however, filed a motion for reconsideration even as Metrobank filed its notice of
appeal. On November 4, 1986, the lower court modified its decision thus:

ACCORDINGLY, judgment is hereby rendered:

1. Dismissing the complaint with costs against the plaintiff;

2. Dissolving and lifting the writ of attachment of the properties of defendant

Golden Savings and Loan Association, Inc. and defendant Spouses Magno
Castillo and Lucia Castillo;

3. Directing the plaintiff to reverse its action of debiting Savings Account No.
2498 of the sum of P1,754,089.00 and to reinstate and credit to such account
such amount existing before the debit was made including the amount of
P812,033.37 in favor of defendant Golden Savings and Loan Association, Inc.
and thereafter, to allow defendant Golden Savings and Loan Association, Inc. to
withdraw the amount outstanding thereon before the debit;
 4. Ordering the plaintiff to pay the defendant Golden Savings and Loan
Association, Inc. attorney's fees and expenses of litigation in the amount of
P200,000.00.

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.1âwphi1 That
case involved checks whereas this case involves treasury warrants. Golden Savings
never represented that the warrants were negotiable but signed them only for the
purpose of depositing them for clearance. Also, the fact of forgery was proved in that
case but not in the case before us. Finally, the Court found the Jai Alai Corporation
negligent in accepting the checks without question from one Antonio Ramirez
notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not
appear that he was authorized to indorse it. No similar negligence can be imputed to
Golden Savings.

We find the challenged decision to be basically correct. However, we will have to amend
it insofar as it directs the petitioner to credit Golden Savings with the full amount of the
treasury checks deposited to its account.

The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which
Gomez was allowed to withdraw P1,167,500.00 before Golden Savings was notified of
the dishonor. The amount he has withdrawn must be charged not to Golden Savings but
to Metrobank, which must bear the consequences of its own negligence. But the
balance of P586,589.00 should be debited to Golden Savings, as obviously Gomez can
no longer be permitted to withdraw this amount from his deposit because of the
dishonor of the warrants. Gomez has in fact disappeared. To also credit the balance to
Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact
that it has already been informed of the dishonor of the treasury warrants.

WHEREFORE, the challenged decision is AFFIRMED, with the modification that

Paragraph 3 of the dispositive portion of the judgment of the lower court shall be
reworded as follows:

3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and
thereafter allowing defendant Golden Savings & Loan Association, Inc. to
withdraw the amount outstanding thereon, if any, after the debit.

SO ORDERED.

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

4. Sesbreno vs. Court of Appeals 222 SCRA 466

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 89252 May 24, 1993

RAUL SESBREÑO, petitioner,

vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS
BANK, respondents.

Salva, Villanueva & Associates for Delta Motors Corporation.

Reyes, Salazar & Associates for Pilipinas Bank.

FELICIANO, J.:

On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the
amount of P300,000.00 with the Philippine Underwriters Finance Corporation
("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would
mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following
documents to petitioner:

(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496

of one (1) Delta Motors Corporation Promissory Note ("DMC PN") No.
2731 for a term of 32 days at 17.0% per annum;

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the
sale of DMC PN No. 2731 to petitioner, with the notation that the said
security was in custodianship of Pilipinas Bank, as per Denominated
Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and

(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of
petitioner's investment), with petitioner as payee, Philfinance as drawer,
 and Insular Bank of Asia and America as drawee, in the total amount of
P304,533.33.

On 13 March 1981, petitioner sought to encash the postdated checks issued by

Philfinance. However, the checks were dishonored for having been drawn against
insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by
private respondent Pilipinas Bank ("Pilipinas"). It reads as follows:

PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila

February 9, 19
———————
VALUE DATE

TO Raul Sesbreño

April 6, 1981
———————
MATURITY DA

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.

PILIPI
NAS
BANK
(By
Elizab
eth De
Villa
Illegibl
e
Signat
ure) 1

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent

Pilipinas, Makati Branch, and handed her a demand letter informing the bank that his
placement with Philfinance in the amount reflected in the DCR No. 10805 had remained
unpaid and outstanding, and that he in effect was asking for the physical delivery of the
underlying promissory note. Petitioner then examined the original of the DMC PN No.
2731 and found: that the security had been issued on 10 April 1980; that it would mature
on 6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as
"payee" and private respondent Delta Motors Corporation ("Delta") as "maker;" and that
on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not
deliver the Note, nor any certificate of participation in respect thereof, to petitioner.

Petitioner later made similar demand letters, dated 3 July 1981 and 3 August
1981, 2 again asking private respondent Pilipinas for physical delivery of the original of
DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's demand letters to
Philfinance for written instructions, as has been supposedly agreed upon in "Securities
Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not
provide the appropriate instructions; Pilipinas never released DMC PN No. 2731, nor
any other instrument in respect thereof, to petitioner.

Petitioner also made a written demand on 14 July 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-visDelta; 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 theassignment or transfer of an instrument whether that be
negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument
under the relevant statute may be negotiated either by indorsement thereof coupled with
delivery, or by delivery alone where the negotiable instrument is in bearer form. A
negotiable instrument may, however, instead of being negotiated, also
be assigned or transferred. The legal consequences of negotiation as distinguished
from assignment of a negotiable instrument are, of course, different. A non-negotiable
instrument may, obviously, not be negotiated; but it may be assigned or transferred,
absent an express prohibition against assignment or transfer written in the face of the
instrument:

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

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

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

April
10,
1980

Philippine Underwriters Finance Corp.

Benavidez St., Makati,
Metro Manila.

Attention: Mr. Alfredo O. Banaria

SVP-Treasurer

GENTLEMEN:

This refers to our outstanding placement of P4,601,666.67 as evidenced

by your Promissory Note No. 143-A, dated April 10, 1980, to mature on
April 6, 1981.
 As agreed upon, we enclose our non-negotiable Promissory Note No.
2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to be
offsetted [sic] against your PN No. 143-A upon co-terminal maturity.

Please deliver the proceeds of our PNs to our representative, Mr. Eric
Castillo.

Very
Truly
Yours,

(Sgd.)
Floren
cio B.
Biagan
Senior
Vice
Presid
ent 13

We find nothing in his "Letter of Agreement" which can be reasonably construed as a

prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731,
before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of
Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a
prohibition cannot be invoked against an assignee or transferee of the Note who parted
with valuable consideration in good faith and without notice of such prohibition. It is not
disputed that petitioner was such an assignee or transferee. Our conclusion on this
point is reinforced by the fact that what Philfinance and Delta were doing by their
exchange of 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, 19that is, after the maturity not only of the money market
placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN
No. 143-A. In other words, petitioner notified Delta of his rights as assignee after
compensation had taken place by operation of law because the offsetting instruments
had both reached maturity. It is a firmly settled doctrine that the rights of an assignee
are not any greater that the rights of the assignor, since the assignee is merely
substituted in the place of the assignor 20 and that the assignee acquires his rights
subject to the equities — i.e., the defenses — which the debtor could have set up
against the original assignor before notice of the assignment was given to the debtor.
Article 1285 of the Civil Code provides that:

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

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

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

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

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

At the time that Delta was first put to notice of the assignment in petitioner's favor on 14
July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the
assignor Philfinance could not have then compelled payment anew by Delta of DMC PN
No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting
from Delta the portion of the Note assigned to him.

It bears some emphasis that petitioner could have notified Delta of the assignment or
sale was effected on 9 February 1981. He could have notified Delta as soon as his
money market placement matured on 13 March 1981 without payment thereof being
made by Philfinance; at that time, compensation had yet to set in and discharge DMC
PN No. 2731. Again petitioner could have notified Delta on 26 March 1981 when
petitioner received from Philfinance the Denominated Custodianship Receipt ("DCR")
No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner could,
in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731.
Because petitioner failed to do so, and because the record is bare of any indication that
Philfinance had itself notified Delta of the assignment to petitioner, the Court is
compelled to uphold the defense of compensation raised by private respondent Delta.
Of course, Philfinance remains liable to petitioner under the terms of the assignment
made by Philfinance to petitioner.

II.

We turn now to the relationship between petitioner and private respondent Pilipinas.
Petitioner contends that Pilipinas became solidarily liable with Philfinance and Delta
when Pilipinas issued DCR No. 10805 with the following words:
 Upon your written instruction, we [Pilipinas] shall undertake physical
delivery of the above securities fully assigned to you —. 23

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

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

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

(3) petitioner may inspect the Note either "personally or by authorized

representative", at any time during regular bank hours; and

(4) upon written instructions of petitioner, Pilipinas would physically deliver

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

Thus, we find nothing written in printers ink on the DCR which could reasonably be read
as converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to
petitioner, either upon maturity thereof or any other time. We note that both in his
complaint and in his testimony before the trial court, petitioner referred merely to the
obligation of private respondent Pilipinas to effect the physical delivery to him of DMC
PN No. 2731. 25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary
obligation to pay the amount represented by a portion of the Note assigned to him by
Philfinance, appears to be a new theory constructed only after the trial court had ruled
against him. The solidary liability that petitioner seeks to impute Pilipinas cannot,
however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary
liability only when the law or the nature of the obligation requires solidarity," The record
here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part
of Pilipinas. Petitioner has not pointed to us to any law which imposed such liability
upon Pilipinas nor has petitioner argued that the very nature of the custodianship
assumed by private respondent Pilipinas necessarily implies solidary liability under the
securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold
Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN
No. 2731.

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

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

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

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

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

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

III.

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

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

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

SO ORDERED.

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

5. Firestone vs. CA 222 SCRA 466

G.R. No. 113236. March 5, 2001]

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner,

vs., COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.

DECISION
QUISUMBING, J.:

This petition assails the decision[1] dated December 29, 1993 of the Court of Appeals in CA-
G.R. CV No. 29546, which affirmed the judgment [2] of the Regional Trial Court of Pasay City,
Branch 113 in Civil Case No. PQ-7854-P, dismissing Firestones complaint for damages.
The facts of this case, adopted by the CA and based on findings by the trial court, are as
follows:

[D]efendant is a banking corporation. It operates under a certificate of authority issued by the

Central Bank of the Philippines, and among its activities, accepts savings and time deposits. Said
defendant had as one of its client-depositors the Fojas-Arca Enterprises Company (Fojas-Arca
for brevity). Fojas-Arca maintaining a special savings account with the defendant, the latter
authorized and allowed withdrawals of funds therefrom through the medium of special
withdrawal slips. These are supplied by the defendant to Fojas-Arca.

In January 1978, plaintiff and Fojas-Arca entered into a Franchised Dealership Agreement (Exh.
B) whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiffs products.

On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca
purchased on credit Firestone products from plaintiff with a total amount of P4,896,000.00. In
payment of these purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips
drawn upon the defendant. In turn, these were deposited by the plaintiff with its current account
with the Citibank. All of them were honored and paid by the defendant. This singular
circumstance made plaintiff believe [sic] and relied [sic] on the fact that the succeeding special
withdrawal slips drawn upon the defendant would be equally sufficiently funded. Relying on
such confidence and belief and as a direct consequence thereof, plaintiff extended to Fojas-Arca
other purchases on credit of its products.

On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and
delivered to plaintiff the corresponding special withdrawal slips in payment thereof drawn upon
the defendant, to wit:

DATE WITHDRAWAL AMOUNT

 SLIP NO.
June 15, 1978 42127 P1,198,092.80
July 15, 1978 42128 940,190.00
Aug. 15, 1978 42129 880,000.00
Sep. 15, 1978 42130 981,500.00

These were likewise deposited by plaintiff in its current account with Citibank and in turn the
Citibank forwarded it [sic] to the defendant for payment and collection, as it had done in respect
of the previous special withdrawal slips. Out of these four (4) withdrawal slips only withdrawal
slip No. 42130 in the amount of P981,500.00 was honored and paid by the defendant in October
1978. Because of the absence for a long period coupled with the fact that defendant honored and
paid withdrawal slips No. 42128 dated July 15, 1978, in the amount of P981,500.00 plaintiffs
belief was all the more strengthened that the other withdrawal slips were likewise sufficiently
funded, and that it had received full value and payment of Fojas-Arcas credit purchased then
outstanding at the time. On this basis, plaintiff was induced to continue extending to Fojas-Arca
further purchase on credit of its products as per agreement (Exh. B).

However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal
slips No. 42127 dated June 15, 1978 for P1,198,092.80 and No. 42129 dated August 15, 1978 for
P880,000.00 were dishonored and not paid for the reason NO ARRANGEMENT. As a
consequence, the Citibank debited plaintiffs account for the total sum of P2,078,092.80
representing the aggregate amount of the above-two special withdrawal slips. Under such
situation, plaintiff averred that the pecuniary losses it suffered is caused by and directly
attributable to defendants gross negligence.

On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for the
satisfaction of the damages suffered by it. And due to defendants refusal to pay plaintiffs claim,
plaintiff has been constrained to file this complaint, thereby compelling plaintiff to incur
litigation expenses and attorneys fees which amount are recoverable from the defendant.

Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the
transactions mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which defendant
is not involved; Vehemently, it was denied by defendant that the special withdrawal slips were
honored and treated as if it were checks, the truth being that when the special withdrawal slips
were received by defendant, it only verified whether or not the signatures therein were authentic,
and whether or not the deposit level in the passbook concurred with the savings ledger, and
whether or not the deposit is sufficient to cover the withdrawal; if plaintiff treated the special
withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame itself for being grossly
negligent in treating the withdrawal slips as check when it is clearly stated therein that the
withdrawal slips are non-negotiable; that defendant is not a privy to any of the transactions
between Fojas-Arca and plaintiff for which reason defendant is not duty bound to notify nor give
notice of anything to plaintiff. If at first defendant had given notice to plaintiff it is merely an
extension of usual bank courtesy to a prospective client; that defendant is only dealing with its
depositor Fojas-Arca and not the plaintiff. In summation, defendant categorically stated that
plaintiff has no cause of action against it (pp. 1-3, Dec.; pp. 368-370, id).[3]
 Petitioners complaint[4] for a sum of money and damages with the Regional Trial Court of
Pasay City, Branch 113, docketed as Civil Case No. 29546, was dismissed together with the
counterclaim of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon
Development Bank was liable for damages under Article 2176[5] in relation to Articles 19[6] and
20[7] of the Civil Code. As noted by the CA, petitioner alleged the following tortious acts on the
part of private respondent: 1) the acceptance and payment of the special withdrawal slips without
the presentation of the depositors passbook thereby giving the impression that the withdrawal
slips are instruments payable upon presentment; 2) giving the special withdrawal slips the
general appearance of checks; and 3) the failure of respondent bank to seasonably warn
petitioner that it would not honor two of the four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the
appeal and affirmed the judgment of the trial court. According to the appellate court, respondent
bank notified the depositor to present the passbook whenever it received a collection note from
another bank, belying petitioners claim that respondent bank was negligent in not requiring a
passbook under the subject transaction. The appellate court also found that the special
withdrawal slips in question were not purposely given the appearance of checks, contrary to
petitioners assertions, and thus should not have been mistaken for checks. Lastly, the appellate
court ruled that the respondent bank was under no obligation to inform petitioner of the dishonor
of the special withdrawal slips, for to do so would have been a violation of the law on the secrecy
of bank deposits.
Hence, the instant petition, alleging the following assignment of error:
25. The CA grievously erred in holding that the [Luzon Development] Bank was
free from any fault or negligence regarding the dishonor, or in failing to give
fair and timely advice of the dishonor, of the two intermediate LDB Slips and in
failing to award damages to Firestone pursuant to Article 2176 of the New Civil
Code.[8]
The issue for our consideration is whether or not respondent bank should be held liable for
damages suffered by petitioner, due to its allegedly belated notice of non-payment of the subject
withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter
purchased tires from the former with special withdrawal slips drawn upon Fojas-Arcas special
savings account with respondent bank. Petitioner in turn deposited these withdrawal slips with
Citibank. The latter credited the same to petitioners current account, then presented the slips for
payment to respondent bank. It was at this point that the bone of contention arose.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos.
42127 and 42129 dated June 15, 1978 and August 15, 1978, respectively, were refused payment
by respondent bank due to insufficiency of Fojas-Arcas funds on deposit. That information came
about six months from the time Fojas-Arca purchased tires from petitioner using the subject
withdrawal slips. Citibank then debited the amount of these withdrawal slips from petitioners
account, causing the alleged pecuniary damage subject of petitioners cause of action.
 At the outset, we note that petitioner admits that the withdrawal slips in question were non-
negotiable.[9] Hence, the rules governing the giving of immediate notice of dishonor of negotiable
instruments do not apply in this case. [10] Petitioner itself concedes this point.[11] Thus, respondent
bank was under no obligation to give immediate notice that it would not make payment on the
subject withdrawal slips.Citibank should have known that withdrawal slips were not negotiable
instruments. It could not expect these slips to be treated as checks by other entities. Payment or
notice of dishonor from respondent bank could not be expected immediately, in contrast to the
situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon
Development Bank, had honored and paid the previous withdrawal slips, automatically credited
petitioners current account with the amount of the subject withdrawal slips, then merely waited
for the same to be honored and paid by respondent bank. It presumed that the withdrawal slips
were good.
It bears stressing that Citibank could not have missed the non-negotiable nature of the
withdrawal slips. The essence of negotiability which characterizes a negotiable paper as a credit
instrument lies in its freedom to circulate freely as a substitute for money. [12] The withdrawal
slips in question lacked this character.
A bank is under obligation to treat the accounts of its depositors with meticulous care,
whether such account consists only of a few hundred pesos or of millions of pesos. [13] The fact
that the other withdrawal slips were honored and paid by respondent bank was no license for
Citibank to presume that subsequent slips would be honored and paid immediately. By doing so,
it failed in its fiduciary duty to treat the accounts of its clients with the highest degree of care.[14]
In the ordinary and usual course of banking operations, current account deposits are
accepted by the bank on the basis of deposit slips prepared and signed by the depositor, or the
latters agent or representative, who indicates therein the current account number to which the
deposit is to be credited, the name of the depositor or current account holder, the date of the
deposit, and the amount of the deposit either in cash or in check.[15]
The withdrawal slips deposited with petitioners current account with Citibank were not
checks, as petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid
mode of deposit. But having erroneously accepted them as such, Citibank and petitioner as
account-holder must bear the risks attendant to the acceptance of these instruments. Petitioner
and Citibank could not now shift the risk and hold private respondent liable for their admitted
mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-
G.R. CV No. 29546 is AFFIRMED. Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.