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PNB VS SAYO
In accordance with Act No. 2137, the Warehouse Receipts Law, Noahs
Ark Sugar Refinery issued on several dates, the following Warehouse
Receipts (Quedans): (a) March 1, 1989, Receipt No. 18062, covering
sugar deposited by Rosa Sy; (b) March 7, 1989, Receipt No. 18080,
covering sugar deposited by RNS Merchandising (Rosa Ng Sy); (c)
March 21, 1989, Receipt No. 18081, covering sugar deposited by St.
Therese Merchandising; (d) March 31, 1989, Receipt No. 18086,
covering sugar deposited by St. Therese Merchandising; and (e) April 1,
1989, Receipt No. 18087, covering sugar deposited by RNS
Merchandising. The receipts are substantially in the form, and contains
the terms, prescribed for negotiable warehouse receipts by Section 2 of
the law.
Subsequently, Warehouse Receipts Nos. 18080 and 18081 were
negotiated and endorsed to Luis T. Ramos, and Receipts Nos. 18086,
18087 and 18062 were negotiated and endorsed to Cresencia K.
Zoleta. Ramos and Zoleta then used the quedans as security for two
loan agreements one for P15.6 million and the other for P23.5 million
obtained by them from the Philippine National Bank. The
aforementioned quedans were endorsed by them to the Philippine
National Bank.
Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon
maturity on January 9, 1990. Consequently, on March 16, 1990, the
Philippine National Bank wrote to Noahs Ark Sugar Refinery demanding
delivery of the sugar stocks covered by the quedans endorsed to it by
Zoleta and Ramos. Noahs Ark Sugar Refinery refused to comply with
the demand alleging ownership thereof, for which reason the Philippine
National Bank filed with the Regional Trial Court of Manila a verified
complaint for Specific Performance with Damages and Application for
Writ of Attachment against Noahs Ark Sugar Refinery, Alberto T.
Looyuko, Jimmy T. Go and Wilson T. Go, the last three being identified
as the sole proprietor, managing partner, and Executive Vice President
of Noahs Ark, respectively.
Respondent Judge Benito C. Se, Jr., [to] whose sala the case was
raffled, denied the Application for Preliminary
Attachment. Reconsideration therefor was likewise denied.
Noahs Ark and its co-defendants filed an Answer with Counterclaim and
Third-Party Complaint in which they claimed that they [were] the owners
of the subject quedans and the sugar represented therein, averring as
they did that:
9. *** In an agreement dated April 1, 1989, defendants agreed to sell to
Rosa Ng Sy of RNS Merchandising and Teresita Ng of St. Therese
Merchandising the total volume of sugar indicated in the quedans stored
at Noahs Ark Sugar Refinery for a total consideration
of P63,000,000.00, *** The corresponding payments in the form of
checks issued by the vendees in favor of defendants were subsequently
dishonored by the drawee banks by reason of payment stopped and
drawn against insufficient funds, *** Upon proper notification to said
vendees and plaintiff in due course, defendants refused to deliver to
vendees therein the quantity of sugar covered by the subject quedans.
10. *** Considering that the vendees and first endorsers of subject
quedans did not acquire ownership thereof, the subsequent endorsers
and plaintiff itself did not acquire a better right of ownership than the
original vendees/first endorsers.
The Answer incorporated a Third-Party Complaint by Alberto T.
Looyuko, Jimmy T. Go and Wilson T. Go, doing business under the trade
name and style Noahs Ark Sugar Refinery against Rosa Ng Sy and
Teresita Ng, praying that the latter be ordered to deliver or return to them
the quedans (previously endorsed to PNB and the subject of the suit)
and pay damages and litigation expenses.
The Answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990,
one of avoidance, is essentially to the effect that the transaction between
them, on the one hand, and Jimmy T. Go, on the other, concerning the
quedans and the sugar stocks covered by them was merely a simulated
one being part of the latters complex banking schemes and financial
maneuvers, and thus, they are not answerable in damages to him.
On January 31, 1991, the Philippine National Bank filed a Motion for
Summary Judgment in favor of the plaintiff as against the defendants for
the reliefs prayed for in the complaint.
In our decision of 18 April 1996 in G.R. No. 119231, we held
against herein petitioner as to these issues and concluded:
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In view of the foregoing, the rule may be simplified thus: While the PNB
is entitled to the stocks of sugar as the endorsee of the quedans, delivery
to it shall be effected only upon payment of the storage fees.
Imperative is the right of the warehouseman to demand payment of his
lien at this juncture, because, in accordance with Section 29 of the
Warehouse Receipts Law, the warehouseman loses his lien upon goods
by surrendering possession thereof. In other words, the lien may be lost
where the warehouseman surrenders the possession of the goods
without requiring payment of his lien, because a warehousemans lien is
possessory in nature.
Pursuant to the abovementioned Supreme Court Decision, private
respondents filed a Motion for Execution of Defendants Lien as
Warehouseman dated 27 November 1996. A photocopy of said Motion
for Execution is attached hereto as Annex I.
3.25 PNB opposed said Motion on the following grounds:
(a) The lien claimed by Noahs Ark in the unbelievable amount
of P734,341,595.06 is illusory; and
(b) There is no legal basis for execution of defendants lien as
warehouseman unless and until PNB compels the delivery
of the sugar stocks.
Hon. Marcelino L. Sayo Jr., granted private respondents Motion for
Execution
3.28 On 23 April 1997, PNB was immediately served with a Writ
of Execution for the amount of P662,548,611.50 in spite of the fact that
it had not yet been served with the Order of the court a quo dated 15
April 1997.PNB thus filed an Urgent Motion dated 23 April 1997 seeking
the deferment of the enforcement of the Writ of Execution. A photocopy
of the Writ of Execution is attached hereto as Annex J.
3.29 Nevertheless, the Sheriff levied on execution several properties of
PNB. Firstly, a Notice of Levy dated 24 April 1997 on a parcel of land
with an area of Ninety-Nine Thousand Nine Hundred Ninety-Nine
(99,999) square meters, covered by Transfer Certificate of Title No.
23205 in the name of PNB, was served upon the Register of Deeds of
Pasay City. Secondly, a Notice of Garnishment dated 23 April 1997 on
fund deposits of PNB was served upon the Bangko Sentral ng
Pilipinas. Photocopies of the Notice of Levy and the Notice of
Garnishment are attached hereto as Annexes K and L, respectively.
3.30 On 28 April 1997, petitioner filed a Motion for Reconsideration with
Urgent Prayer for Quashal of Writ of Execution
B. Under the Special Circumstances in This Case,
Private Respondents May Enforce Their
Warehousemans Lien in Civil Case No. 90-53023.
The remedies available to a warehouseman, such as private
respondents, to enforce his warehousemans lien are:
(1)To refuse to deliver the goods until his lien is satisfied,
pursuant to Section 31 of the Warehouse Receipt Law;
(2) To sell the goods and apply the proceeds thereof to the
value of the lien pursuant to Sections 33 and 34 of the
Warehouse Receipts Law; and
(3) By other means allowed by law to a creditor against his
debtor, for the collection from the depositor of all
charges and advances which the depositor expressly or
impliedly contracted with the warehouseman to pay
under Section 32 of the Warehouse Receipt Law; or
such other remedies allowed by law for the enforcement
of a lien against personal property under Section 35 of
said law. The third remedy is sought judicially by suing
for the unpaid charges.[35]
Initially, private respondents availed of the first remedy. However,
when petitioner moved to execute the judgment in G.R. No. 107243
before the trial court, private respondents, in turn, moved to have the
warehouse charges and fees due them determined and thereafter
sought to collect these from petitioners. While the most appropriate
remedy for private respondents was an action for collection, in G.R. No.
119231, we alreadyrecognized their right to have such charges and fees
determined in Civil Case No. 90-53023. The import of our holding in G.R.
No. 119231 was that private respondents were likewise entitled to a
judgment on their warehouse charges and fees, and the eventual
satisfaction thereof, thereby avoiding having to file another action to
recover these charges and fees, which would only have further delayed
the resolution of the respective claims of the parties, and as a corollary
thereto, the indefinite deferment of the execution of the judgment in G.R.
No. 107243. Thus we note that petitioner, in fact, already acquiesced to
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the scheduled dates previously set for the hearing on private
respondents warehousemans charges.
However, as will be shown below, it would be premature to
execute the order fixing the warehousemans charges and fees.
C. Petitioner is Liable for Storage Fees.
We confirmed petitioners liability for storage fees in G.R. No.
119231. However, petitioners status as to the quedans must first be
clearly defined and delineated to be able to determine the extent of its
liability.
Petitioner insisted, both in its petition and during the oral
arguments on 24 November 1997, that it was a mere pledgee as
the quedans were used to secure two loans it granted.[36] In our decision
in G.R. No. 107243, we upheld this contention of petitioner, thus:
Zoleta and Ramos then used the quedans as security for loans
obtained by them from the Philippine National Bank (PNB) as
security for loans obtained by them in the amounts of P23.5
million and P15.6 million, respectively. These quedans they
indorsed to the bank.[37]
As such, Martinez v. Philippine National Bank[38] becomes
relevant:
In conclusion, we hold that where a warehouse receipt or quedan is
transferred or endorsed to a creditor only to secure the payment of a
loan or debt, the transferee or endorsee does not automatically become
the owner of the goods covered by the warehouse receipt or quedan but
he merely retains the right to keep and with the consent of the owner to
sell them so as to satisfy the obligation from the proceeds of the sale,
this for the simple reason that the transaction involved is not a sale but
only a mortgage or pledge, and that if the property covered by the
quedans or warehouse receipts is lost without the fault or negligence of
the mortgagee or pledgee or the transferee or endorsee of the
warehouse receipt or quedan, then said goods are to be regarded as
lost on account of the real owner, mortgagor or pledgor.
The indorsement and delivery of the warehouse receipts
(quedans) by Ramos and Zoleta to petitioner was not to convey title to
or ownership of the goods but to secure (by way of pledge) the loans
granted to Ramos and Zoleta by petitioner. The indorsement of the
warehouse receipts (quedans), to perfect the pledge,[39] merely
constituted a symbolical or constructive delivery of the possession of the
thing thus encumbered.[40]
The creditor, in a contract of real security, like pledge, cannot
appropriate without foreclosure the things given by way of pledge.[41] Any
stipulation to the contrary, termed pactum commissorio, is null and
void.[42] The law requires foreclosure in order to allow a transfer of title
of the good given by way of security from its pledgor,[43] and before any
such foreclosure, the pledgor, not the pledgee, is the owner of the
goods. In Philippine National Bank v. Atendido,[44] we said:
The delivery of the palay being merely by way of security, it follows that
by the nature of the transaction its ownership remains with the pledgor
subject only to foreclosure in case of non-fulfillment of the obligation. By
this we mean that if the obligation is not paid upon maturity the most that
the pledgee can do is to sell the property and apply the proceeds to the
payment of the obligation and to return the balance, if any, to the pledgor
(Art. 1872, Old Civil Code [Art. 2112, New Civil Code]). This is the
essence of this contract, for, according to law, a pledgee cannot become
the owner of, nor appropriate to himself, the thing given in pledge (Article
1859, Old Civil Code [Art. 2088, New Civil Code]) The fact that the
warehouse receipt covering palay was delivered, endorsed in blank, to
the bank does not alter the situation, the purpose of such endorsement
being merely to transfer the juridical possession of the property to the
pledgees and to forestall any possible disposition thereof on the part of
the pledgor. This is true notwithstanding the provisions of the
Warehouse Receipt Law.
The warehouseman, nevertheless, is entitled to the
warehousemans lien that attaches to the goods invokable against
anyone who claims a right of possession thereon.
The next issue to resolve is the duration of time the right of
petitioner over the goods may be held subject to the warehousemans
lien.
Sections 8, 29 and 31 of the Warehouse Receipts Law now come
to fore. They provide, as follows:
SECTION 8. Obligation of warehousemen to deliver. A warehouseman,
in the absence of some lawful excuse provided by this Act, is bound to
deliver the goods upon a demand made either by the holder of a receipt
for the goods or by the depositor, if such demand is accompanied with:
(a) An offer to satisfy warehousemans lien;
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(b) An offer to surrender the receipt, if negotiable, with
such indorsements as would be
necessary for the negotiation of the
receipt; and
(c) A readiness and willingness to sign, when the
goods are delivered, an acknowledgment
that they have been delivered, if such
signature is requested by the
warehouseman.
In case the warehouseman refuses or fails to deliver the goods in
compliance with a demand by the holder or depositor so accompanied,
the burden shall be upon the warehouseman to establish the existence
of a lawful excuse for such refusal.
SECTION 29. How the lien may be lost. A warehouseman loses his lien
upon goods;
(a) By surrendering possession thereof, or
(b) By refusing to deliver the goods when a demand is made
with which he is bound to comply under the
provisions of this Act.
SECTION 31. Warehouseman need not deliver until lien is satisfied. A
warehouseman having a lien valid against the person demanding the
goods may refuse to deliver the goods to him until the lien is satisfied.
Simply put, where a valid demand by the lawful holder of
the quedans for the delivery of the goods is refused by the
warehouseman, despite the absence of a lawful excuse provided by the
statute itself, the warehousemans lien is thereafter concomitantly
lost. As to what the law deems a valid demand, Section 8 enumerates
what must accompany a demand; while as regards the reasons which a
warehouseman may invoke to legally refuse to effect delivery of the
goods covered by the quedans, these are:
(1) That the holder of the receipt does not satisfy the
conditions prescribed in Section 8 of the Act. (See Sec. 8, Act No.
2137)
(2) That the warehouseman has legal title in himself on the
goods, such title or right being derived directly or indirectly from a
transfer made by the depositor at the time of or subsequent to the
deposit for storage, or from the warehousemans lien. (Sec. 16,
Act No. 2137)
(3) That the warehouseman has legally set up the title or
right of third persons as lawful defense for non-delivery of the
goods as follows:
(a) Where the warehouseman has been requested, by or on behalf of
the person lawfully entitled to a right of property of or possession in the
goods, not to make such delivery (Sec. 10, Act No. 2137), in which case,
the warehouseman may, either as a defense to an action brought
against him for nondelivery of the goods, or as an original suit, whichever
is appropriate, require all known claimants to interplead (Sec. 17, Act
No. 2137);
(b) Where the warehouseman had information that the delivery about to
be made was to one not lawfully entitled to the possession of the
goods (Sec. 10, Act No. 2137), in which case, the warehouseman shall
be excused from liability for refusing to deliver the goods, either to the
depositor or person claiming under him or to the adverse claimant, until
the warehouseman has had a reasonable time to ascertain the validity
of the adverse claims or to bring legal proceedings to compel all
claimants to interplead (Sec. 18, Act No. 2137); and
(c) Where the goods have already been lawfully sold to third persons to
satisfy a warehousemans lien, or have been lawfully sold or disposed of
because of their perishable or hazardous nature. (Sec. 36, Act No.
2137).
(4) That the warehouseman having a lien valid against the person
demanding the goods refuses to deliver the goods to him until the lien is
satisfied. (Sec. 31, Act No. 2137)
(5) That the failure was not due to any fault on the part of the
warehouseman, as by showing that, prior to demand for delivery and
refusal, the goods were stolen or destroyed by fire, flood, etc., without
any negligence on his part, unless he has contracted so as to be liable
in such case, or that the goods have been taken by the mistake of a third
person without the knowledge or implied assent of the warehouseman,
or some other justifiable ground for non-delivery. (67 C.J. 532)[45]
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Regrettably, the factual settings do not sufficiently indicate
whether the demand to obtain possession of the goods complied with
Section 8 of the law. The presumption, nevertheless, would be that the
law was complied with, rather than breached, by petitioner. Upon the
other hand, it would appear that the refusal of private respondents to
deliver the goods was not anchored on a valid excuse, i.e., non-
satisfaction of the warehousemans lien over the goods, but on an
adverse claim of ownership. Private respondents justified their refusal to
deliver the goods, as stated in their Answer with Counterclaim and Third-
Party Complaint in Civil Case No. 90-53023, by claiming that they are
still the legal owners of the subject quedans and the quantity of sugar
represented therein. Under the circumstances, this hardly qualified as a
valid, legal excuse. The loss of the warehousemans lien, however, does
not necessarily mean the extinguishment of the obligation to pay the
warehousing fees and charges which continues to be a personal liability
of the owners, i.e., the pledgors, not the pledgee, in this case. But even
as to the owners-pledgors, the warehouseman fees and charges have
ceased to accrue from the date of the rejection by Noahs Ark to heed
the lawful demand by petitioner for the release of the goods.
The finality of our denial in G.R. No. 119231 of petitioners petition
to nullify the trial courts order of 01 March 1995 confirms the
warehousemans lien; however, such lien, nevertheless, should be
confined to the fees and charges as of the date in March 1990 when
Noahs Ark refused to heed PNBs demand for delivery of the sugar
stocks and in no event beyond the value of the credit in favor of the
pledgee (since it is basic that, in foreclosures, the buyer does not
assume the obligations of the pledgor to his other creditors even while
such buyer acquires title over the goods less any existing preferred lien
thereover).[46] The foreclosure of the thing pledged, it might incidentally
be mentioned, results in the full satisfaction of the loan liabilities to the
pledgee of the pledgors.[47]
BANK OF AMERICA VS CA
A "fiasco," involving an irrevocable letter of credit, has found the
distressed parties coming to court as adversaries in seeking a definition
of their respective rights or liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila,
received by registered mail an Irrevocable Letter of Credit No. 20272/81
purportedly issued by Bank of Ayudhya, Samyaek Branch, for the
account of General Chemicals, Ltd., of Thailand in the amount of
US$2,782,000.00 to cover the sale of plastic ropes and "agricultural
files," with the petitioner as advising bank and private respondent Inter-
Resin Industrial Corporation as beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin informing the
latter of the foregoing and transmitting, along with the bank's
communication,
the latter of credit. Upon receipt of the letter-advice with the letter of
credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have
the letter of credit confirmed. The bank did not. Reynaldo Dueñas, bank
employee in charge of letters of credit, however, explained to Atty.
Tanay that there was no need for confirmation because the letter of
credit would not have been transmitted if it were not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial
availment under the letter of credit by submitting to Bank of America
invoices, covering the shipment of 24,000 bales of polyethylene rope to
General Chemicals valued at US$1,320,600.00, the corresponding
packing list, export declaration and bill of lading. Finally, after being
satisfied that Inter-Resin's documents conformed with the conditions
expressed in the letter of credit, Bank of America issued in favor of Inter-
Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of
the draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting
the costs for documentary stamps, postage and mail issuance." 1 The
check was picked up by Inter-Resin's Executive Vice-President
Barcelina Tio. On 10 April 1981, Bank of America wrote Bank of
Ayudhya advising the latter of the availment under the letter of credit and
sought the corresponding reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America
the documents for the second availment under the same letter of credit
consisting of a packing list, bill of lading, invoices, export declaration and
bills in set, evidencing the second shipment of goods. Immediately upon
receipt of a telex from the Bank of Ayudhya declaring the letter of credit
fraudulent, 2 Bank of America stopped the processing of Inter-Resin's
documents and sent a telex to its branch office in Bangkok, Thailand,
requesting assistance in determining the authenticity of the letter of
credit. 3Bank of America kept Inter-Resin informed of the developments.
Sensing a fraud, Bank of America sought the assistance of the National
Bureau of Investigation (NBI). With the help of the staff of the Philippine
Embassy at Bangkok, as well as the police and customs personnel of
Thailand, the NBI agents, who were sent to Thailand, discovered that
the vans exported by Inter-Resin did not contain ropes but plastic strips,
wrappers, rags and waste materials. Here at home, the NBI also
investigated Inter-Resin's President Francisco Trajano and Executive
Vice President Barcelina Tio, who, thereafter, were criminally charged
for estafa through falsification of commercial documents. The case,
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however, was eventually dismissed by the Rizal Provincial Fiscal who
found no prima facie evidence to warrant prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20,
the peso equivalent of the draft for US$1,320,600.00 on the partial
availment of the now disowned letter of credit. On the other hand, Inter-
Resin claimed that not only was it entitled to retain P10,219,093.20 on
its first shipment but also to the balance US$1,461,400.00 covering the
second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send
the merchandise to Thailand; (b) the telex declaring the letter of credit
fraudulent was unverified and self-serving, hence, hearsay, but even
assuming that the letter of credit was fake, "the fault should be borne by
the BA which was careless and negligent" 5 for failing to utilize its
modern means of communication to verify with Bank of Ayudhya in
Thailand the authenticity of the letter of credit before sending the same
to Inter-Resin; (c) the loading of plastic products into the vans were
under strict supervision, inspection and verification of government
officers who have in their favor the presumption of regularity in the
performance of official functions; and (d) Bank of America failed to prove
the participation of Inter-Resin or its employees in the alleged fraud as,
in fact, the complaint for estafa through falsification of documents was
dismissed by the Provincial Fiscal of Rizal. 6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this
present recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it has
warranted the genuineness and authenticity of the letter of credit and,
corollarily, whether it has acted merely as an advising bank or as a
confirming bank; (b) whether Inter-Resin has actually shipped the ropes
specified by the letter of credit; and (c) following the dishonor of the letter
of credit by Bank of Ayudhya, whether Bank of America may recover
against Inter-Resin under the draft executed in its partial availment of
the letter of credit. 8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on
appeal, belatedly raise the issue of being only an advising bank; (b) the
findings of the trial court that the ropes have actually been shipped is
binding on the Court; and, (c) Bank of America cannot recover from
Inter-Resin because the drawer of the letter of credit is the Bank of
Ayudhya and not Inter-Resin.
If only to understand how the parties, in the first place, got themselves
into the mess, it may be well to start by recalling how, in its modern use,
a letter of credit is employed in trade transactions.
A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses to
part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying. 9 To break the impasse, the buyer
may be required to contract a bank to issue a letter of credit in favor of
the seller so that, by virtue of the latter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them upon their
presentment simultaneously with the tender of documents required by
the letter of credit. 10 The buyer and the seller agree on what documents
are to be presented for payment, but ordinarily they are documents of
title evidencing or attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer
and in the process secures the required shipping documents or
documents of title. To get paid, the seller executes a draft and presents
it together with the required documents to the issuing bank. The issuing
bank redeems the draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the letter of credit
requires. The bank then obtains possession of the documents upon
paying the seller. The transaction is completed when the buyer
reimburses the issuing bank and acquires the documents entitling him
to the goods. Under this arrangement, the seller gets paid only if he
delivers the documents of title over the goods, while the buyer acquires
said documents and control over the goods only after reimbursing the
bank.
What characterizes letters of credit, as distinguished from other
accessory contracts, is the engagement of the issuing bank to pay the
seller of the draft and the required shipping documents are presented to
it. In turn, this arrangement assures the seller of prompt payment,
independent of any breach of the main sales contract. By this so-called
"independence principle," the bank determines compliance with the
letter of credit only by examining the shipping documents presented; it
is precluded from determining whether the main contract is actually
accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who procures
the letter of credit and obliges himself to reimburse the issuing bank
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upon receipts of the documents of title; (b) the bank issuing the letter of
credit, 13 which undertakes to pay the seller upon receipt of the draft and
proper document of titles and to surrender the documents to the buyer
upon reimbursement; and, (c) the seller, 14 who in compliance with the
contract of sale ships the goods to the buyer and delivers the documents
of title and draft to the issuing bank to recover payment.
The number of the parties, not infrequently and almost invariably in
international trade practice, may be increased. Thus, the services of
an advising (notifying) bank 15 may be utilized to convey to the seller the
existence of the credit; or, of a confirming bank 16 which will lend
credence to the letter of credit issued by a lesser known issuing bank;
or, of a paying bank, 17 which undertakes to encash the drafts drawn by
the exporter. Further, instead of going to the place of the issuing bank
to claim payment, the buyer may approach another bank, termed
the negotiating bank, 18 to have the draft discounted.
Being a product of international commerce, the impact of this
commercial instrument transcends national boundaries, and it is thus not
uncommon to find a dearth of national law that can adequately provide
for its governance. This country is no exception. Our own Code of
Commerce basically introduces only its concept under Articles 567-572,
inclusive, thereof. It is no wonder then why great reliance has been
placed on commercial usage and practice, which, in any case, can be
justified by the universal acceptance of the autonomy of contract rules.
The rules were later developed into what is now known as the Uniform
Customs and Practice for Documentary Credits ("U.C.P.") issued by the
International Chamber of Commerce. It is by no means a complete text
by itself, for, to be sure, there are other principles, which, although part
of lex mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have
accepted, to the extent of their pertinency, the application in our
jurisdiction of this international commercial credit regulatory set of
rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the
observances of the U.C.P. is justified by Article 2 of the Code of
Commerce which expresses that, in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be
governed by usages and customs generally observed. We have further
observed that there being no specific provisions which govern the legal
complexities arising from transactions involving letters of credit not only
between or among banks themselves but also between banks and the
seller or the buyer, as the case may be, the applicability of the U.C.P. is
undeniable.
The first issue raised with the petitioner, i.e., that it has in this instance
merely been advising bank, is outrightly rejected by Inter-Resin and is
thus sought to be discarded for having been raised only on appeal. We
cannot agree. The crucial point of dispute in this case is whether under
the "letter of credit," Bank of America has incurred any liability to the
"beneficiary" thereof, an issue that largely is dependent on the bank's
participation in that transaction; as a mere advising or notifying bank, it
would not be liable, but as a confirming bank, had this been the case, it
could be considered as having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association — Natu
vs. Insular Life Assurance Co., Ltd., 23 the Court said: Where the issues
already raised also rest on other issues not specifically presented, as
long as the latter issues bear relevance and close relation to the former
and as long as they arise from the matters on record, the court has the
authority to include them in its discussion of the controversy and to pass
upon them just as well. In brief, in those cases where questions not
particularly raised by the parties surface as necessary for the complete
adjudication of the rights and obligations of the parties, the interests of
justice dictate that the court should consider and resolve them. The rule
that only issues or theories raised in the initial proceedings may be taken
up by a party thereto on appeal should only refer to independent, not
concomitant matters, to support or oppose the cause of action or
defense. The evil that is sought to be avoided, i.e., surprise to the
adverse party, is in reality not existent on matters that are properly
litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of
America has, in fact, only been an advising, not confirming, bank, and
this much is clearly evident, among other things, by the provisions of the
letter of credit itself, the petitioner bank's letter of advice, its request for
payment of advising fee, and the admission of Inter-Resin that it has
paid the same. That Bank of America has asked Inter-Resin to submit
documents required by the letter of credit and eventually has paid the
proceeds thereof, did not obviously make it a confirming bank. The fact,
too, that the draft required by the letter of credit is to be drawn under the
account of General Chemicals (buyer) only means the same had to be
presented to Bank of Ayudhya (issuing bank) for payment. It may be
significant to recall that the letter of credit is an engagement of the
issuing bank, not the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11 March 1981 has
expressly stated that "[t]he enclosure is solely an advise of credit
opened by the abovementioned correspondent and conveys no
engagement by us." 24This written reservation by Bank of America in
C O MMR E V |4
limiting its obligation only to being an advising bank is in consonance
with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur any
obligation more than just notifying Inter-Resin of the letter of credit
issued in its favor, let alone to confirm the letter of credit. 25 The bare
statement of the bank employees, aforementioned, in responding to the
inquiry made by Atty. Tanay, Inter-Resin's representative, on the
authenticity of the letter of credit certainly did not have the effect of
novating the letter of credit and Bank of America's letter of advise, 26 nor
can it justify the conclusion that the bank must now assume total liability
on the letter of credit. Indeed, Inter-Resin itself cannot claim to have
been all that free from fault. As the seller, the issuance of the letter of
credit should have obviously been a great concern to it. 27 It would have,
in fact, been strange if it did not, prior to the letter of credit, enter into a
contract, or negotiated at the every least, with General Chemicals. 28 In
the ordinary course of business, the perfection of contract precedes the
issuance of a letter of credit.
Bringing the letter of credit to the attention of the seller is the primordial
obligation of an advising bank. The view that Bank of America should
have first checked the authenticity of the letter of credit with bank of
Ayudhya, by using advanced mode of business communications, before
dispatching the same to Inter-Resin finds no real support in U.C.P.
Article 18 of the U.C.P. states that: "Banks assume no liability or
responsibility for the consequences arising out of the delay and/or loss
in transit of any messages, letters or documents, or for delay, mutilation
or other errors arising in the transmission of any telecommunication . . ."
As advising bank, Bank of America is bound only to check the "apparent
authenticity" of the letter of credit, which it did. 29 Clarifying its meaning,
Webster's Ninth New Collegiate Dictionary 30 explains that the word
"APPARENT suggests appearance to unaided senses that is not or may
not be borne out by more rigorous examination or greater knowledge."
May Bank of America then recover what it has paid under the letter of
credit when the corresponding draft for partial availment thereunder and
the required documents were later negotiated with it by Inter-Resin? The
answer is yes. This kind of transaction is what is commonly referred to
as a discounting arrangement. This time, Bank of America has acted
independently as a negotiating bank, thus saving Inter-Resin from the
hardship of presenting the documents directly to Bank of Ayudhya to
recover payment. (Inter-Resin, of course, could have chosen other
banks with which to negotiate the draft and the documents.) As a
negotiating bank, Bank of America has a right to recourse against the
issuer bank and until reimbursement is obtained, Inter-Resin, as the
drawer of the draft, continues to assume a contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in its
complaint that might have likewise warranted the application of the
Negotiable Instruments Law and possible then allowed it to even go after
the indorsers of the draft, this failure, 32/ nonetheless, does not preclude
petitioner bank's right (as negotiating bank) of recovery from Inter-Resin
itself. Inter-Resin admits having received P10,219,093.20 from bank of
America on the letter of credit and in having executed the corresponding
draft. The payment to Inter-Resin has given, as aforesaid, Bank of
America the right of reimbursement from the issuing bank, Bank of
Ayudhya which, in turn, would then seek indemnification from the buyer
(the General Chemicals of Thailand). Since Bank of Ayudhya disowned
the letter of credit, however, Bank of America may now turn to Inter-
Resin for restitution.
Between the seller and the negotiating bank there
is the usual relationship existing between a drawer
and purchaser of drafts. Unless drafts drawn in
pursuance of the credit are indicated to be without
recourse therefore, the negotiating bank has the
ordinary right of recourse against the seller in the
event of dishonor by the issuing bank . . . The fact
that the correspondent and the negotiating bank
may be one and the same does not affect its rights
and obligations in either capacity, although a
special agreement is always a possibility . . . 33
The additional ground raised by the petitioner, i.e., that Inter-Resin sent
waste instead of its products, is really of no consequence. In the
operation of a letter of credit, the involved banks deal only with
documents and not on goods described in those documents. 34
The other issues raised in then instant petition, for instance, whether or
not Bank of Ayudhya did issue the letter of credit and whether or not the
main contract of sale that has given rise to the letter of credit has been
breached, are not relevant to this controversy. They are matters,
instead, that can only be of concern to the herein parties in an
appropriate recourse against those, who, unfortunately, are not
impleaded in these proceedings.
LBP vs Monet's Export & Mfg Corp
 T H
6 SET
On June 25, 1981, petitioner, Land Bank of the Philippines (Land
Bank), and Monets Export and Manufacturing Corporation (Monet)
executed an Export Packing Credit Line Agreement [4] under which
Monet was given a credit line in the amount of P250,000.00, secured by
the proceeds of its export letters of credit,[5] the continuing guaranty of
the spouses Vicente V. Tagle, Sr. and Ma. Consuelo G. Tagle,[6] and the
third party mortgage executed by Pepita C. Mendigoria.[7]
The credit line agreement was renewed and amended several
times[8] until it was increased to P5,000,000.00.[9] Owing to the continued
failure and refusal of Monet, notwithstanding repeated demands, to pay
its indebtedness to Land Bank, which have ballooned to
P11,464,246.19[10] by August 31, 1992, a complaint[11] for collection of
sum of money with prayer for preliminary attachment was filed by Land
Bank with the Regional Trial Court of Manila, docketed as Civil Case No.
93-64350.[12]
In their joint Answer with Compulsory Counterclaim,[13] Monet and
the Tagle spouses alleged that Land Bank failed and refused to collect
the receivables on their export letter of credit against Wishbone Trading
Company of Hong Kong in the sum of US$33,434.00, while it made
unauthorized payments on their import letter of credit to Beautilike (H.K.)
Ltd. in the amount of US$38,768.40, which seriously damaged the
business interests of Monet.
On July 15, 1997, the trial court rendered decision, [14] the
dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as
follows:
1. Recognizing the obligation of the defendants as stated in the
Schedule of Amortization from the Loans and Discount Department of
LAND BANK (Exh. 39), as well as the interest mentioned therein, but
deleting the penalty thereof as no penalty should be charged and
sentencing defendants jointly and severally to pay the amounts stated
therein as verified;
2. Granting the counterclaim interposed by the defendants in the amount
of US$30,000.00 payable in Philippine Pesos at the official exchange
rate when payment is to be made, to compensate for the defendants lost
income opportunities occasioned by defendants transaction with
Wishbone Trading Corporation and with Beautilike, the same to be
deducted from the confirmed and computed obligation mentioned in No.
1 hereof; and
3. Denying the claim for attorneys fees for lack of merit.[
The petition is partly impressed with merit.
As regards the Beautilike account, the trial court and the Court of
Appeals erred in holding that Land Bank failed to protect Monets interest
when it paid the suppliers despite discrepancies in the shipment vis--vis
the order specifications of Monet.
Our ruling in Bank of America, NT & SA v. Court of Appeals,[21] is
pertinent:
A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses to
part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying. To break the impasse, the buyer may
be required to contract a bank to issue a letter of credit in favor of the
seller so that, by virtue of the letter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them upon their
presentment simultaneously with the tender of documents required by
the letter of credit. The buyer and the seller agree on what documents
are to be presented for payment, but ordinarily they are documents of
title evidencing or attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer
and in the process secures the required shipping documents or
documents of title. To get paid, the seller executes a draft and presents
it together with the required documents to the issuing bank. The issuing
bank redeems the draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the letter of credit
requires. The bank then obtains possession of the documents upon
paying the seller. The transaction is completed when the buyer
reimburses the issuing bank and acquires the documents entitling him
to the goods. Under this arrangement, the seller gets paid only if he
delivers the documents of title over the goods, while the buyer acquires
the said documents and control over the goods only after reimbursing
the bank.
What characterizes letters of credit, as distinguished from other
accessory contracts, is the engagement of the issuing bank to pay
the seller once the draft and the required shipping documents are
presented to it. In turn, this arrangement assures the seller of
prompt payment, independent of any breach of the main sales
C O MMR E V |5
contract. By this so-called independence principle, the bank
determines compliance with the letter of credit only by examining
the shipping documents presented; it is precluded from
determining whether the main contract is actually accomplished or
not. (Emphasis supplied)
Moreover, Article 3 of the Uniform Customs and Practice (UCP)
for Documentary Credits provides that credits, by their nature, are
separate transactions from the sales or other contract(s) on which they
may be based and banks are in no way concerned with or bound by
such contract(s), even if any reference whatsoever to such contract(s)
is included in the credit. Consequently, the undertaking of a bank to pay,
accept and pay draft(s) or negotiate and/or fulfill any other obligation
under the credit is not subject to claims or defenses by the applicant
resulting from his relationships with the issuing bank or the beneficiary.
In particular, Article 15 of the UCP states:
Banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any documents, or
for the general and/or particular conditions stipulated in the documents
or superimposed thereon; nor do they assume any liability or
responsibility for the description, weight, quality, condition,
packing, delivery, value or existence of the goods represented by
any documents, or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor, the carriers, or the
insurers of the goods, or any other person whomsoever. (Emphasis
supplied)
In Transfield Philippines, Inc. v. Luzon Hydro Corporation, et
al.,[22] we held that the engagement of the issuing bank is to pay the
seller or beneficiary of the credit once the draft and the required
documents are presented to it. The so-called independence principle
assures the seller or the beneficiary of prompt payment independent of
any breach of the main contract and precludes the issuing bank
from determining whether the main contract is actually
accomplished or not.
For, if the letter of credit is drawable only after the settlement of
any dispute on the main contract entered into by the applicant of the said
letter of credit and the beneficiary, then there would be no practical and
beneficial use for letters of credit in commercial transactions.
Accordingly, we find merit in the contention of Land Bank that, as
the issuing bank in the Beautilike transaction involving an import letter
of credit, it only deals in documents and it is not involved in the contract
between the parties. The relationship between the beneficiary and the
issuer of a letter of credit is not strictly contractual, because both privity
and a meeting of the minds are lacking. Thus, upon receipt by Land
Bank of the documents of title which conform with what the letter of credit
requires, it is duty bound to pay the seller, as it did in this case.
Thus, no fault or acts of mismanagement can be attributed to Land
Bank relative to Monets import letter of credit. Its actions find solid
footing on the legal principles and jurisprudence earlier discussed.
Consequently, it was error for the trial court and for the Court of Appeals
to grant opportunity losses to the respondents on this account.
A careful review of the records reveal that the trial court correctly
considered Land Bank as the attorney-in-fact of Monet with regard to its
export transactions with Wishbone Trading Company. It was stipulated
in the Deed of Assignment[24] executed between Monet and Land Bank
on June 26, 1981:
That the ASSIGNOR/s (Monet) by these presents, does/do hereby
appoint/s the ASSIGNEE (Land Bank) their/his/her true and lawful
attorney-in-fact and in their/his/her place and stead, to demand, collect
and receive the proceeds of the export letters of credit at a loan value of
80% to be applied to the payment of the credit accommodation herein
secured. (Underscoring supplied)
Clearly, petitioners refusal to own its responsibility in the handling
of the Wishbone account fails against the aforequoted provision.
As the attorney-in-fact of Monet in transactions involving its export
letters of credit, such as the Wishbone account, Land Bank should have
exercised the requisite degree of diligence in collecting the amount due
to the former. The records of this case are bereft of evidence showing
that Land Bank exercised the prudence mandated by its contractual
obligations to Monet.
The failure of Land Bank to judiciously safeguard the interest of
Monet is not without any repercussions vis--vis the viability of Monet as
a business enterprise. As correctly observed by the Court of Appeals:
In fine, because of the non-collection defendants-appellees suffered
from a lack of financial resources sufficient to buy new materials. And
since they also could no longer draw on their existing credit line with
Landbank, they could not purchase materials to fill up the orders of their
customers. Because of this the business reputation of Monets suffered
which hastened its decline.[25]
 T H
6 SET
The right of the respondents to be awarded opportunity losses
having been established, we now go to the determination of the proper
amount to be awarded to them under the circumstances obtaining in this
case. The lower court awarded to herein respondents opportunity losses
in the amount of US$30,000.00 based on its findings of two (2) acts of
mismanagement committed by Land Bank. The Court of Appeals
affirmed the amount of the award in the assailed decision. In view of our
findings that Land Bank is not guilty of mismanagement in its handling
of Monets import letter of credit relative to the Beautilike transaction, we
hold that a reduction of the amount of the grant is in order. It is not
possible for us to totally do away with the award of opportunity losses
having affirmed the findings of the trial court and the Court of Appeals
that Land Bank, as the attorney-in-fact of Monet in its transaction with
Wishbone Trading Company, committed acts of mismanagement. On
account of the foregoing reasons, we reduce the amount of opportunity
losses granted to Monet to US$15,000.00 payable in Philippine pesos
at the official exchange rate when payment is to be made.
Anent the second issue, we find that the trial court erred in limiting
the obligation of the respondents to Land Bank to what was stated in the
Schedule of Amortization from the Loans and Discounts Department of
LANDBANK, or Exhibit 39,[26] for the respondents.
Prefatorily, we restate the time honored principle that in a petition
for review under Rule 45, only questions of law may be raised. It is not
our function to analyze or weigh all over again evidence already
considered in the proceedings below, our jurisdiction is limited to
reviewing only errors of law that may have been committed by the lower
court.[27] The resolution of factual issues is the function of lower courts,
whose findings on these matters are received with respect. A question
of law which we may pass upon must not involve an examination of the
probative value of the evidence presented by the litigants.[28]
The above rule, however, admits of certain exceptions. The
findings of fact of the Court of Appeals are generally conclusive
but may be reviewed when: (1) the factual findings of the Court of
Appeals and the trial court are contradictory; (2) the findings are
grounded entirely on speculation, surmises or conjectures; (3) the
inference made by the Court of Appeals from its findings of fact is
manifestly mistaken, absurd or impossible; (4) there is grave abuse of
discretion in the appreciation of facts; (5) the appellate court, in making
its findings, goes beyond the issues of the case and such findings are
contrary to the admissions of both appellant and appellee; (6) the
judgment of the Court of Appeals is premised on a misapprehension of
facts; (7) the Court of Appeals fails to notice certain relevant facts which,
if properly considered, will justify a different conclusion; and (8) the
findings of fact of the Court of Appeals are contrary to those of the trial
court or are mere conclusions without citation of specific evidence, or
where the facts set forth by the petitioner are not disputed by
respondent, or where the findings of fact of the Court of Appeals are
premised on the absence of evidence but are contradicted by the
evidence on record.[29]
Our review of the records of this case reveal that the reversible
error committed by the lower court, and that of the Court of Appeals,
partook of the form of over reliance and sole reliance on the figures
contained in Exhibit 39, to the exclusion of other pieces of documentary
evidence annexed by Land Bank to its complaint.
There is no doubt that the respondents indeed owed Land Bank a
sum of money. This much was clearly established by the series of
letters[30] written by the officers of Monet to Land Bank acknowledging
the corporations indebtedness, albeit without specifying any amount,
and asking for understanding and more time within which they can settle
their obligations. We note, however, that the respondents have been
consistent and persistent in their stand that they do not harbor any
intention of evading the payment of the amount they actually owed to
the petitioner, provided that there be a reconciliation of the payments
made by the respondents on their loan obligations.[31]
Indeed, Exhibit 39 or the Summary of Availment and Schedule of
Amortization, which was made by the trial court as the basis in
determining the amount of indebtedness of the respondents to the
petitioner, is a document issued by the Loans and Discounts Department
of Land Bank itself. Nevertheless, we note that the amount covered by
the said summary pertains only to the indebtedness of Monet to Land
Bank amounting to P2,500,000.00, as covered by Promissory Note No.
P-981. The amount reflected in Exhibit 39 is so small when compared to
the P11,464,246.19 which Land Bank sought to collect from the
respondents in its complaint before the trial court. The records of this
case show that respondents, in the course of their credit transactions
with Land Bank, executed not only one, but several promissory notes in
varying amounts in favor of the bank.
On the other hand, Land Bank submitted a Consolidated
Statement of Account dated August 31, 1992[32] in support of its claim as
to the amount owed to it. The said document illustrated how, based on
the computations made by Land Bank, the indebtedness of Monet
ballooned to P11,464,246.19. Land Bank also submitted a Summary of
Availments and Payments from 1981 to 1989[33] which detailed the
series of availments and payments made by Monet.
Notwithstanding the above facts, and considering that Monets
Exhibit 39 was prepared before its due date of April 29, 1991, while Land
Banks Consolidated Statement of Account was prepared much later on
C O MMR E V |6
August 31, 1992, the trial court chose to overlook them and conveniently
held that the correct basis of Monets indebtedness to Land Bank are the
figures contained in Exhibit 39. Nonetheless, no explanation was
proferred why it used Exhibit 39 as basis in determining the actual
indebtedness of Monet. We note that instead of dealing squarely with
the issue of resolving the total amount of indebtedness due to Land
Bank, the trial court and the Court of Appeals chose to expound on Land
Banks alleged acts of mismanagement.
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING
CORPORATION) vs CA, and BERNARDO E. VILLALUZ
Doctrine: It is a settled rule in commercial transactions involving letters
of credit that the documents tendered must strictly conform to the terms
of the letter of credit. The tender of documents by the beneficiary (seller)
must include all documents required by the letter. A correspondent bank
which departs from what has been stipulated under the letter of credit,
as when it accepts a faulty tender, acts on its own risks and it may not
thereafter be able to recover from the buyer or the issuing bank, as the
case may be, the money thus paid to the beneficiary Thus the rule of
strict compliance.
Facts: Bernardo E. Villaluz agreed to sell to the then defendant Axel
Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter
FOB on June 3, 1971. Christiansen issued purchase order No. 76171
after inspecting the logs. Upon instructions and arrangements made by
the consignee, Trade Development, Ltd., de Santa Ana, California, the
Security Pacific National Bank of Los Angeles, California issued
Irrevocable Letter of Credit No. IC-46268 available at sight in favor of
Villaluz for the sum of $54,000.00, the total purchase price of the lauan
logs.
The letter of credit was mailed to the Feati Bank and Trust Company
(now Citytrust) with the instruction to the latter that it "forward the
enclosed letter of credit to the beneficiary." Also, the letter provides that
the draft to be drawn is on Security Pacific National Bank, and it will be
accompanied by the documents required.
The logs were loaded on the vessel "Zenlin Glory". The vessel was
chartered by Christiansen.
Before its loading, the logs were inspected by custom inspectors and
representatives of the Bureau of Forestry. They certified that the logs
were in good condition, and the logs were ready for exports.
The Chief Mate, Shao Shu Wang issued a mate receipt of the cargo
which stated the same are in good condition after the loading of the logs
was completed. On the other hand, Christiansen refused to issue the
certification as required in paragraph 4 of the letter of credit, despite
several requests made by the private respondent.
Feati Bank and Trust Company refused to advance the payment on the
letter of credit because of the absence of certification by Christiansen.
The letter of credit lapsed on June 30, 1971, (extended, however up to
July 31, 1971) without the private respondent receiving any certification
from Christiansen. The private respondent brought the matter before the
Central Bank because of persistent refusal of Christiansen to issue the
certification.
Meanwhile, the logs arrived at Inchon, Korea, and were received by the
consignee, Hanmi Trade Development Company, to whom Christiansen
sold the logs for the amount of $37.50 per cubic meter, for a net profit of
$10 per cubic meter. On the other hand, Hanmi Trade Development
Company sold the logs to Taisung Lumber Company at Inchon, Korea.
Villaluz, on September 1, 1971, instituted an action for mandamus and
specific performance against Christiansen and the Feati Bank and Trust
Company (now Citytrust) before the then Court of First Instance of Rizal
since the demands by the private respondent for Christiansen to execute
the certification proved futile. The petitioner was impleaded as
defendant before the lower court only to afford complete relief should
the court a quo order Christiansen to execute the required certification.
Issues:
1. Whether or not a correspondent bank is to be held liable under
the letter of credit despite non-compliance by the beneficiary
with the terms thereof – NO
2. Whether or not the petitioner is a notifying bank but a
confirming bank – NO
3. Whether or not the fact that a letter of credit is irrevocable
does imply that the correspondent bank in accepting the
instructions of the issuing bank has also confirmed the letter
of credit- NO
4. Whether or not the loan agreement between them be
construed as an act of confirmation- NO
5. Whether or not the petitioner became a "trustee in relation to
the plaintiff (private respondent) as the beneficiary of the letter
of credit- NO
 T H
6 SET
6. Whether or not the petitioner "acted as a guarantor of the
issuing bank and in effect also of the latter's principal or client-
NO
Held:
1. It is a settled rule in commercial transactions involving letters of
credit that the documents tendered must strictly conform to the
terms of the letter of credit. The tender of documents by the
beneficiary (seller) must include all documents required by the
letter. A correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts a faulty
tender, acts on its own risks and it may not thereafter be able to
recover from the buyer or the issuing bank, as the case may be,
the money thus paid to the beneficiary Thus the rule of strict
compliance.
In the United States, commercial transactions involving letters of credit
are governed by the rule of strict compliance. In the Philippines, the
same holds true. The same rule must also be followed. Although in some
American decisions, banks are granted a little discretion to accept a
faulty tender as when the other documents may be considered
immaterial or superfluous, this theory could lead to dangerous
precedents. Since a bank deals only with documents, it is not in a
position to determine whether or not the documents required by the letter
of credit are material or superfluous. The mere fact that the document
was specified therein readily means that the document is of vital
importance to the buyer.
Under the foregoing provisions of the U.C.P., the bank may only
negotiate, accept or pay, if the documents tendered to it are on their face
in accordance with the terms and conditions of the documentary credit.
The correspondent bank, like the petitioner, principally deals only with
documents, the absence of any document required in the documentary
credit justifies the refusal by the correspondent bank to negotiate, accept
or pay the beneficiary, as it is not its obligation to look beyond the
documents. It merely has to rely on the completeness of the documents
tendered by the beneficiary.
The U.C.P. which is incorporated in the letter of credit ordains that the
bank may only pay the amount specified under the letter if all the
documents tendered are on their face in compliance with the credit. It is
not tasked with the duty of ascertaining the reason or reasons why
certain documents have not been submitted, as it is only concerned with
the documents. Thus, whether or not the buyer has performed his
responsibility towards the seller is not the bank's problem.
2. In commercial transactions involving letters of credit, the functions
assumed by a correspondent bank are classified according to the
obligations taken up by it. The correspondent bank may be called
a notifying bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability
except to notify and/or transmit to the beneficiary the existence of the
letter of credit. A negotiating bank, on the other hand, is a correspondent
bank which buys or discounts a draft under the letter of credit. Its liability
is dependent upon the stage of the negotiation. If before negotiation, it
has no liability with respect to the seller but after negotiation, a
contractual relationship will then prevail between the negotiating bank
and the seller.
In the case of a confirming bank, the correspondent bank assumes a
direct obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit.
In the case, the letter merely provided that the petitioner "forward the
enclosed original credit to the beneficiary." Based from the the aforesaid
instruction to the petitioner by the issuing bank, the Security Pacific
National Bank, it is indubitable that the petitioner is only a notifying bank
and not a confirming bank.
If the petitioner was a confirming bank, then a categorical declaration
should have been stated in the letter of credit that the petitioner is to
honor all drafts drawn in conformity with the letter of credit. What was
simply stated therein was the instruction that the petitioner forward the
original letter of credit to the beneficiary. Since the petitioner was only a
notifying bank, its responsibility was solely to notify and/or transmit the
documentary of credit to the private respondent and its obligation ends
there.
3. An irrevocable credit refers to the duration of the letter of credit.
What is simply means is that the issuing bank may not without the
consent of the beneficiary (seller) and the applicant (buyer) revoke
his undertaking under the letter. The issuing bank does not reserve
the right to revoke the credit. On the other hand, a confirmed letter
of credit pertains to the kind of obligation assumed by the
correspondent bank. In this case, the correspondent bank gives an
absolute assurance to the beneficiary that it will undertake the
issuing bank's obligation as its own according to the terms and
conditions of the credit.
The mere fact that a letter of credit is irrevocable does not necessarily
imply that the correspondent bank in accepting the instructions of the
C O MMR E V |7
issuing bank has also confirmed the letter of credit. Another error which
the lower court and the Court of Appeals made was to confuse the
obligation assumed by the petitioner. In order that the petitioner may be
held liable under the letter, there should be proof that the petitioner
confirmed the letter of credit. The records are, however, bereft of any
evidence which will disclose that the petitioner has confirmed the letter
of credit.
4. The loan agreement is more reasonably classified as an isolated
transaction independent of the documentary credit.
The proposition advanced by the private respondent has no basis in fact
or law. That the loan agreement between them be construed as an act
of confirmation is rather far-fetched, for it depends principally on
speculative reasoning. There must have been an absolute assurance on
the part of the petitioner that it will undertake the issuing bank's
obligation as its own. The loan agreement it entered into cannot be
categorized as an emphatic assurance that it will carry out the issuing
bank's obligation as its own. It may be presumed that the petitioner
loaned the money to the private respondent in anticipation that it would
later be paid by the latter upon the receipt of the letter. There is no basis
to rule that such "act" should be construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the
logs on the ship "Zenlin Glory" and the only way to satisfy this need was
to borrow money from the petitioner which the latter granted. From these
circumstances, a logical conclusion that can be gathered is that the letter
of credit was merely to serve as a collateral. When the petitioner
extended the loan to the private respondent, it assumed the character
of a negotiating bank. Even then, the petitioner will still not be liable, for
a negotiating bank before negotiation has no contractual relationship
with the seller.
5. A trust has been defined as the "right, enforceable solely in equity,
to the beneficial enjoyment of property the legal title to which is
vested to another."
In regard to the finding that the petitioner became a "trustee in relation
to the plaintiff (private respondent) as the beneficiary of the letter of
credit," the same has no legal basis.
Granting that a trust has been created, still, the petitioner may not be
considered a trustee. As the petitioner is only a notifying bank, its
acceptance of the instructions of the issuing bank will not create
estoppel on its part resulting in the acceptance of the trust. Precisely, as
a notifying bank, its only obligation is to notify the private respondent of
the existence of the letter of credit.
6. The guarantee theory destroys the independence of the bank's
responsibility from the contract upon which it was opened. In the
second place, the nature of both contracts is mutually in conflict
with each other. In contracts of guarantee, the guarantor's
obligation is merely collateral and it arises only upon the default of
the person primarily liable. On the other hand, in an irrevocable
credit the bank undertakes a primary obligation.
The theory of guarantee relied upon by the Court of Appeals has to
necessarily fail. The concept of guarantee vis-a-vis the concept of an
irrevocable credit are inconsistent with each other. As a mere notifying
bank, not only does the petitioner not have any contractual relationship
with the buyer, it has also nothing to do with the contract between the
issuing bank and the buyer regarding the issuance of the letter of credit.
CHING VS SECRETARY OF JUSTICE
FACTS:
 Sept-Oct 1980: PBMI, through Ching, Senior VP of Philippine
Blooming Mills, Inc. (PBMI), applied with the Rizal Commercial
Banking Corporation (RCBC) for the issuance of commercial letters
of credit to finance its importation of assorted goods
 RCBC approved the application, and irrevocable letters of credit
were issued in favor of Ching.
 The goods were purchased and delivered in trust to PBMI.
 Ching signed 13 trust receipts as surety, acknowledging delivery of
the goods
 Under the receipts, Ching agreed to hold the goods in trust for
RCBC, with authority to sell but not by way of conditional sale,
pledge or otherwise
 In case such goods were sold, to turn over the proceeds thereof as
soon as received, to apply against the relative acceptances and
payment of other indebtedness to respondent bank.
 T H
6 SET
 In case the goods remained unsold within the specified period, the
goods were to be returned to RCBC without any need of demand.
 goods, manufactured products or proceeds thereof, whether in the
form of money or bills, receivables, or accounts separate and
capable of identification - RCBC’s property
 When the trust receipts matured, Ching failed to return the goods
to RCBC, or to return their value amounting to P6,940,280.66
despite demands.
 RCBC filed a criminal complaint for estafa against petitioner in the
Office of the City Prosecutor of Manila.
 December 8, 1995: no probable cause to charge petitioner with
violating P.D. No. 115, as petitioner’s liability was only civil, not
criminal, having signed the trust receipts as surety
 RCBC appealed the resolution to the Department of Justice (DOJ)
via petition for review
 On July 13, 1999: reversed the assailed resolution of the City
Prosecutor
 execution of said receipts is enough to indict Ching as the official
responsible for violation of P.D. No. 115
 April 22, 2004: CA dismissed the petition for lack of merit and on
procedural grounds
 Ching filed a petition for certiorari, prohibition and mandamus with
the CA
ISSUE: W/N Ching should be held criminally liable.
HELD: YES. DENIED for lack of merit
 There is no dispute that it was Ching who executed the 13
trust receipts.
 law points to him as the official responsible for the offense
 Since a corporation CANNOT be proceeded against
criminally because it CANNOT commit crime in which
personal violence or malicious intent is required, criminal
action is limited to the corporate agents guilty of an act
amounting to a crime and never against the corporation itself
 execution by Ching of receipts is enough to indict him as the
official responsible for violation of PD 115
 RCBC is estopped to still contend that PD 115 covers only
goods which are ultimately destined for sale and not goods,
like those imported by PBM, for use in manufacture.
 Moreover, PD 115 explicitly allows the prosecution of
corporate officers ‘without prejudice to the civil liabilities
arising from the criminal offense’ thus, the civil liability
imposed on respondent in RCBC vs. Court of Appeals case
is clearly separate and distinct from his criminal liability under
PD 115
 Ching’s being a Senior Vice-President of the Philippine
Blooming Mills does not exculpate him from any liability
 The crime defined in P.D. No. 115 is malum prohibitum but is
classified as estafa under paragraph 1(b), Article 315 of the
Revised Penal Code, or estafa with abuse of confidence. It
may be committed by a corporation or other juridical entity or
by natural persons. However, the penalty for the crime is
imprisonment for the periods provided in said Article 315.
 law specifically makes the officers, employees or other
officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or
board of directors, officers, or other officials or employees
responsible for the offense
 rationale: officers or employees are vested with the authority
and responsibility to devise means necessary to ensure
compliance with the law and, if they fail to do so, are held
criminally accountable; thus, they have a responsible share in
the violations of the law
 If the crime is committed by a corporation or other juridical
entity, the directors, officers, employees or other officers
thereof responsible for the offense shall be charged and
penalized for the crime, precisely because of the nature of the
crime and the penalty therefor. A corporation cannot be
arrested and imprisoned; hence, cannot be penalized for a
crime punishable by imprisonment. However, a corporation
may be charged and prosecuted for a crime if the imposable
penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted
and, if found guilty, may be fined
 When a criminal statute designates an act of a corporation or
a crime and prescribes punishment therefor, it creates a
criminal offense which, otherwise, would not exist and such
can be committed only by the corporation. But when a penal
statute does not expressly apply to corporations, it does not
create an offense for which a corporation may be
punished. On the other hand, if the State, by statute, defines
a crime that may be committed by a corporation but
prescribes the penalty therefor to be suffered by the officers,
directors, or employees of such corporation or other persons
responsible for the offense, only such individuals will suffer
such penalty. Corporate officers or employees, through
whose act, default or omission the corporation commits a
crime, are themselves individually guilty of the crime. The
principle applies whether or not the crime requires the
consciousness of wrongdoing. It applies to those corporate
agents who themselves commit the crime and to those, who,
C O MMR E V |8
by virtue of their managerial positions or other similar relation
to the corporation, could be deemed responsible for its
commission, if by virtue of their relationship to the corporation,
they had the power to prevent the act. Benefit is not an
operative fact.
DEVELOPMENT BANK OF THE PHILIPPINES vs.
PRUDENTIAL BANK
Litex could not have subjected the goods under the trust receipt to a
chattel mortgage. Thus, the inclusion in the mortgage was void and had
no legal effect. There being no valid mortgage, there could also be no
valid foreclosure or valid auction sale. Thus, DBP could not be
considered either as a mortgagee or as a purchaser in good faith.
FACTS: Lirag Textile Mills, Inc. (Litex) opened an irrevocable
commercial letter of credit with respondent Prudential Bank for
US$498,000. This was in connection with its importation of 5,000
spindles for spinning machinery with drawing frame, simplex fly frame,
ring spinning frame and various accessories, spare parts and tool
gauge. These were released to Litex under covering “trust receipts” it
executed in favor of Prudential Bank. Litex installed and used the items
in its textile mill located in Montalban, Rizal. 9 years later, DBP granted
a foreign currency loan in the amount of US$4,807,551 to Litex. To
secure the loan, Litex executed real estate and chattel mortgages on its
plant site in Montalban, Rizal, including the buildings and other
improvements, machineries and equipments there. Among the
machineries and equipments mortgaged in favor of DBP were the
articles covered by the “trust receipts.” Sometime in June 1982,
Prudential Bank learned about DBP’s plan for the overall rehabilitation
of Litex. In a July 14, 1982 letter, Prudential Bank notified DBP of its
claim over the various items covered by the “trust receipts” which had
been installed and used by Litex in the textile mill. Prudential Bank
informed DBP that it was the absolute and juridical owner of the said
items and they were thus not part of the mortgaged assets that could be
legally ceded to DBP. For the failure of Litex to pay its obligation, DBP
extra-judicially foreclosed on the real estate and chattel mortgages,
including the articles claimed by Prudential Bank. During the foreclosure
sale held on April 19, 1983, DBP acquired the foreclosed properties as
the highest bidder. Learning of the intended public auction, Prudential
Bank wrote a letter dated September 6, 1984 to DBP reasserting its
claim over the items covered by “trust receipts” in its name and advising
DBP not to include them in the auction. It also demanded the turn-over
of the articles or alternatively, the payment of their value.
ISSUE: Whether or not the chattel mortgage covers the goods under the
trust receipt
HELD: No. Article 2085 (2) of the Civil Code requires that, in a contract
of pledge or mortgage, it is essential that the pledgor or mortgagor
should be the absolute owner of the things pledged or mortgaged. Article
2085 (3) further mandates that the person constituting the pledge or
mortgage must have the free disposal of his property, and in the
absence thereof, that he be legally authorized for the purpose. Litex had
neither absolute ownership, free disposal nor the authority to freely
dispose of the articles. Litex could not have subjected them to a chattel
mortgage. Their inclusion in the mortgage was void and had no legal
effect. There being no valid mortgage, there could also be no valid
foreclosure or valid auction sale. Thus, DBP could not be considered
either as a mortgagee or as a purchaser in good faith. No one can
transfer a right to another greater than what he himself has. “Nemo dat
quod non habet.” Hence, Litex could not transfer a right that it did not
have over the disputed items. Corollarily, DBP could not acquire a right
greater than what its predecessor-in-interest had. The spring cannot rise
higher than its source. DBP merely stepped into the shoes of Litex as
trustee of the imported articles with an obligation to pay their value or to
return them on Prudential Bank’s demand. By its failure to pay or return
them despite Prudential Bank’s repeated demands and by selling them
to Lyon without Prudential Bank’s knowledge and conformity, DBP
became a trustee ex maleficio. As a consequence of the release of the
goods and the execution of the trust receipt, a two-fold obligation is
imposed on the entrustee, namely: (1) to hold the designated goods,
documents or instruments in trust for the purpose of selling or otherwise
disposing of them and (2) to turn over to the entruster either the
proceeds thereof to the extent of the amount owing to the entruster or
as appears in the trust receipt, or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt.
In the case of goods, they may also be released for other purposes
substantially equivalent to (a) their sale or the procurement of their sale;
or (b) their manufacture or processing with the purpose of ultimate sale,
in which case the entruster retains his title over the said goods whether
in their original or processed form until the entrustee has complied fully
with his obligation under the trust receipt; or (c) the loading, unloading,
shipment or transshipment or otherwise dealing with them in a manner
preliminary or necessary to their sale. Thus, in a trust receipt transaction,
the release of the goods to the entrustee, on his execution of a trust
receipt, is essentially for the purpose of their sale or is necessarily
connected with their ultimate or subsequent sale.
 T H
6 SET
MAMERTA VDA. DE JAYME vs. CA
FACTS: The spouses Graciano and Mamerta Jayme are the registered
owners of Lot 2700, situated in the Municipality of Mandaue On January
8, 1973, they entered into a Contract of Lease with George Neri,
president of Airland Motors Corporation (now Cebu Asiancars Inc.),
covering one-half of Lot 2700. The lease was for twenty (20) years. The
terms and conditions of the lease contract stipulated that Cebu
Asiancars Inc. (hereafter, Asiancars) may use the leased premises as a
collateral to secure payment of a loan which Asiancars may obtain from
any bank, provided that the proceeds of the loan shall be used solely for
the construction of a building which, upon the termination of the lease or
the voluntary surrender of the leased premises before the expiration of
the contract, shall automatically become the property of the Jayme
spouses (the lessors). A Special Power of Attorney dated January 26,
1974, was executed in favor of respondent George Neri, who used the
lot to secure a loan of P300,000 from the General Bank and Trust
Company. The loan was fully paid on August 14, 1977. In October 1977,
Asiancars obtained a loan of P6,000,000 from the Metropolitan Bank
and Trust Company (MBTC). The entire Lot 2700 was offered as one of
several properties given as collateral for the loan. As mortgagors, the
spouses signed a Deed of Real Estate Mortgage dated November 21,
1977 in favor of MBTC. It stated that the deed was to secure the payment
of a loan obtained by Asiancars from the bank. To assure the Jayme
spouses, Neri and the other officers of Asiancars, executed an
undertaking .In it they promised, in their personal capacities and/or in
representation of Cebu Asiancars, Inc., "to compensate Mr. & Mrs.
Graciano Jayme for any and all or whatever damage they may sustain
or suffer by virtue and arising out of the mortgage to MBTC. In addition,
Neri wrote a letter dated September 1, 1981 addressed to Mamerta
Jayme acknowledging her "confidence and help" extended to him, his
family and Asiancars. He promised to pay their indebtedness to MBTC
before the loan was due. Meeting financial difficulties and incurring an
outstanding balance on the loan, Asiancars conveyed ownership of the
building on the leased premises to MBTC, by way of "dacion en pago."
Asiancars failed to pay. Eventually, MBTC extrajudicially foreclosed the
mortgage. A public auction was held on February 4, 1981. MBTC was
the highest bidder for P1,067,344.35. A certificate of sale was issued
and was registered with the Register of Deeds. Petitioners claim that
Neri and Asiancars did not tell them that the indebtedness secured by
the mortgage was for P6,000,000 and that the security was the whole of
Lot 2700. Petitioners allege that the deed presented to the Jayme
spouses was in blank, without explanation on the stipulations contained
therein, except that its conditions were identical to those of the
stipulations when they mortgaged half the lot’s area previously with
General Bank. Petitioners also alleged that the Jayme spouses were
illiterate and only knew how to sign their names. That because they did
not know how to read nor write, and had given their full trust and
confidence to George Neri, the spouses were deceived into signing the
Deed of Real Estate Mortgage. Their intention as well as consent was
only to be bound as guarantors.
ISSUE: WON the dacion en pago by Asiancars in favor of MBTC is valid
and binding despite the stipulation in the lease contract that ownership
of the building will vest on the Jaymes at the termination of the lease.
HELD: In the case at bar, when Asiancars failed to pay its obligations
with MBTC, the properties given as security (one of them being the land
owned by the Jaymes) became subject to foreclosure. When several
things are given to secure the same debt in its entirety, all of them are
liable for the debt, and the creditor does not have to divide his action by
distributing the debt among the various things pledged or mortgaged.
Even when only a part of the debt remains unpaid, all the things are
liable for such balance. The debtor cannot ask for the release of one or
some of the several properties pledged or mortgaged (or any portion
thereof) or proportionate extinguishment of the pledge or mortgage
unless and until the debt secured has been fully paid. The alienation of
the building by Asiancars in favor of MBTC for the partial satisfaction of
its indebtedness is, in our view, also valid. The ownership of the building
had been effectively in the name of the lessee mortgagor (Asiancars),
though with the provision that said ownership be transferred to the
Jaymes upon termination of the lease or the voluntary surrender of the
premises. The lease was constituted on January 8, 1973 and was to
expire 20 years thereafter, or on January 8, 1993. The alienation via
dacion en pago was made by Asiancars to MBTC on December 18,
1980, during the subsistence of the lease. At this point, the mortgagor,
Asiancars, could validly exercise rights of ownership, including the right
to alienate it, as it did to MBTC.
BPI FAMILY SAVINGS BANK vs. VDA. DE COSCOLLUELA
FACTS:
 Respondent and her late husband Oscar obtained an
agricultural sugar crop loan from Far East Bank & Trust Co. (later
merged with BPI) for crop years 1997 and 1998. In the book of
Far East, the loan account was treated as a single account, and
evidenced by 67 promissory notes.
 Sps. Coscolluela executed a real estate mortgage in favor of
FEBTC over their parcel of land as security of loans on credit
accommodation obtained and those that may be obtained.
C O MMR E V |9
 Under the terms and conditions of the real estate mortgage, in
the event of failure to pay the mortgage obligation or any portion
thereof, the entire principal, interest, penalties, and other
charges shall be immediately due; and Far East may foreclose
the same extra judicially.
 For failure to settle outstanding obligation on the maturity dates,
Far East sent a final demand letter to respondent demanding
payment.
 Since respondent failed to settle her obligation, Far East filed a
petition for the extrajudicial foreclosure of the mortgaged
property, but only for 31 of the promissory notes.
 During pendency of said case, Far East filed a complaint for
collection of money representing the amounts for the 36 other
promissory notes.
 In respondent’s answer, she alleged that the complaint was
barred by litis pendentia for the pending petition for the
extrajudicial foreclosure of the REM.
 Petitioner presented a loan officer as sole witness, who testified
that respondent were granted a loan, which was a “single loan
account.”
 Respondent filed a Demurrer to Evidence contending that the
loan officer’s admission, that there is only one loan account
secured by the REM thus barred the personal action for
collection. She insisted that the filing of said complaint should be
dismissed.
 Petitioner opposed the demurrer, stating that each promissory
note constituted a separate contract.
 The trial court denied the demurrer on the ground that each note
covered a loan distinct from the others.
 Respondent filed MR but denied, prompting her to file a certiorari
petition under Rule 65 with CA.
 CA granted the petitioner, stating that the remedies sought are
alternative and not cumulative. Thus, in denying the demurrer,
RTC committed grave abuse of discretion.
 Petitioner filed MR but it was denied. Hence, this petition.
ISSUES & RATIO:
1. WON collection suit should be dismissed – YES
Section 3, Rule 2 of the 1997 Rules of Civil Procedure provides that a
party may not institute more than one suit for a single cause of action
and, if two or more suits are instituted on the basis of the same cause of
action, the filing of one on a judgment upon the merits in any one is
available as ground for the dismissal of the other or others. A party will
not be permitted to split up a single cause of action and make it a basis
for several suits. A party seeking to enforce a claim must present to the
court by the pleadings or proofs or both, all the grounds upon which he
expects a judgment in his favor. He is not at liberty to split up his
demands and prosecute it by piecemeal, or present only a portion of the
grounds upon which special relief is sought, and leave the rest to be
presented in a second suit if the first fails. The law does not permit the
owner of a single or entire cause of action or an entire or indivisible
demand to divide and split the cause or demand so as to make it the
subject of several actions. The whole cause must be determined in one
action.
Indeed, in Goldberg v. Eastern Brewing Co.,[40] the New York Supreme
Court emphasized that:
It was held in the case of Bendernagle v. Cocks, 19
Wend. 207 (32 Am.Dec. 448), that where a party
had several demands or existing causes of action
growing out of the same contract or resting in matter
of account, which may be joined and sued for in the
same action, they must be joined; and if the
demands or causes of action be split up, and a suit
brought for part only, and subsequently a second
suit for the residue is brought, the first action may
be pleaded in abatement or in bar of the second
action. x x x
The rule against splitting causes of action is not altogether one
of original legal right but is one of interposition based upon principles of
public policy and of equity to prevent the inconvenience and hardship
incident to repeated and unnecessary litigation.
It is not always easy to determine whether in a particular case under
consideration, the cause of action is single and entire or separate. The
question must often be determined, not by the general rules but by
reference to the facts and circumstances of the particular case. Where
deeds arising out of contract are distinct and separate, they give rise to
separate cause of action for which separate action may be maintained;
but it is also true that the same contract may give rise to different causes
of action either by reason of successive breaches thereof or by reason
of different stipulations or provisions of the contract. The true rule which
determines whether a party has only a single and entire cause of action
for all that is due him, and which must be sued for in one action, or has
a severable demand for which he may maintain separate suits, is
whether the entire amount arises from one and the same act or contract
or the several parts arise from distinct and different acts or contracts.
Where there are entirely distinct and separate contracts, they give rise
to separate causes of action for which separate actions may be instituted
 T H
6 SET
and presented. When money is payable by installments, a distinct cause
of action assails upon the following due by each installment and they
may be recovered in successive action. On the other hand, where
several claims payable at different times arise out of the same
transactions, separate actions may be brought as each liability
accounts. But where no action is brought until more than one is due, all
that are due must be included in one action; and that if an action is
brought to recover upon one or more that are due but not upon all that
are due, a recovery in such action will be a bar to a several or other
actions brought to recover one or more claims of the other claims that
were due at the time the first action was brought.
The weight of authority is that in the absence of special controlling
circumstances, an open or continuous running account between the
same parties constitutes a single and indivisible demand, the aggregate
of all the items of the account constituting the amount due. But the rule
is otherwise where it affirmatively appears that the parties regarded the
different items of the account as separate transactions and not parts of
an ordinary running account. And there may also be, even between the
same parties, distinct and separate actions upon which separate actions
may be maintained. In fine, what is decisive is that there be either an
express contract, or the circumstances must be such as to raise an
implied contract embracing all the items to make them, when they arise,
at different times, a single or entire demand or cause of action.
Decisive of the principal issue is the ruling of this Court in Bachrach
Motor Co., Inc. v. Esteban Icaragal and Oriental Commercial Co.,
Inc.[48] in which it ruled that on the nonpayment of a note secured by a
mortgage, the creditor has a single cause of action against the
debtor. The single cause of action consists in the recovery of the credit
with execution of the suit. In a mortgage credit transaction, the credit
gives rise to a personal action for collection of the money. The mortgage
is the guarantee which gives rise to a mortgage foreclosure suit to collect
from the very property that secured the debt.
The action of the creditor is anchored on one and the same
cause: the nonpayment by the debtor of the debt to the creditor-
mortgagee. Though the debt may be covered by a promissory note or
several promissory notes and is covered by a real estate mortgage, the
latter is subsidiary to the former and both refer to one and the same
obligation.
A mortgage creditor may institute two alternative remedies against the
mortgage debtor, either a personal action for the collection of debt, or a
real action to foreclose the mortgage, but not both. Each remedy is
complete by itself. As explained by this Court:
We hold, therefore, that, in the absence of express
statutory provisions, a mortgage creditor may
institute against the mortgage debtor either a
personal action for debt or a real action to foreclose
the mortgage. In other words, he may pursue either
of the two remedies, but not both. By such election,
his cause of action can by no means be impaired,
for each of the two remedies is complete in
itself. Thus, an election to bring a personal action
will leave open to him all the properties of the debtor
for attachment and execution, even including the
mortgaged property itself. And, if he waives such
personal action and pursues his remedy against the
mortgaged property, an unsatisfied judgment
thereon would still give him the right to sue for a
deficiency judgment, in which case, all the
properties of the defendant, other than the
mortgaged property, are again open to him for the
satisfaction of the deficiency. In either case, his
remedy is complete, his cause of action
undiminished, and any advantages attendant to the
pursuit of one or the other remedy are purely
accidental and are all under his right of election. On
the other hand, a rule that would authorize the
plaintiff to bring a personal action against the debtor
and simultaneously or successively another action
against the mortgaged property, would result not
only in multiplicity of suits so offensive to justice
(Soriano v. Enriques, 24 Phil. 584) and obnoxious
to law and equity (Osorio v. San Agustin, 25 Phil.
404), but also in subjecting the defendant to the
vexation of being sued in the place of his residence
or of the residence of the plaintiff, and then again in
the place where the property lies.[50]
If the mortgagee opts to foreclose the real estate mortgage, he thereby
waives the action for the collection of the debt and vice versa. If the
creditor is allowed to file its separate complaints simultaneously or
successively, one to recover his credit and another to foreclose his
mortgage, he will, in effect, be authorized plural redress for a single
breach of contract at so much costs to the court and with so much
vexation and oppressiveness to the debtor.
In the present case, petitioner opted to file a petition for extrajudicial
foreclosure of the real estate mortgage but only for the principal amount
of P4,687,006.08 or in the total amount of P7,755,733.64 covering only
C O M M R E V | 10
31 of the 67 promissory notes. By resorting to the extrajudicial
foreclosure of the real estate mortgage, petitioner thereby waived its
personal action to recover the amount covered not only by said
promissory notes but also of the rest of the promissory notes. This is so
because when petitioner filed its petition before the Ex-Oficio Provincial
Sheriff on June 10, 1999, the entirety of the loan account of respondent
under the 67 promissory notes was already due. The obligation of
respondent under Promissory Note Nos. 1 to 33 became due on
February 9, 1998 but was extended up to March 11, 1998, whereas,
those covered by Promissory Note Nos. 34 to 67 matured on December
28, 1998. Petitioner should have caused the extrajudicial foreclosure of
the real estate mortgage for the recovery of the entire obligation of
respondent, on all the promissory notes. By limiting the account for
which the real estate mortgage was being foreclosed to the principal
amount of P4,687,006.68, exclusive of interest and penalties, petitioner
thereby waived recovery of the rest of respondents agricultural loan
account.
It must be stressed that the parties agreed in the Real Estate Mortgage
that in the event that respondent shall fail to pay the mortgage
obligation or any portion thereof when due, the entire principal, interest,
penalties and other charges then outstanding shall become immediately
due, payable and defaulted, thus:
3. The terms and conditions of the Mortgage have
been violated when the Mortgagors failed and/or
refused to pay, notwithstanding repeated demands,
the installment and/or maturity amount of the
Mortgage obligation which became due and
payable on the said date;
4. Under the terms and conditions of the Mortgage
Agreement, in the event the Mortgagors fail and/or
refuse to pay the Mortgage obligation or any portion
thereof when due, the entire principal, interest,
penalties and other charges then outstanding, shall,
without need for demand, notice, or any other act or
deed, become immediately due, payable and
defaulted;
5. The Mortgage Agreement provides that upon
such breach or violation of the terms and conditions
thereof, the Mortgagee may, at its absolute
discretion foreclose the same extrajudicially in
accordance with the procedure prescribed by Act
No. 3135, as amended, and for the purpose
appointed the Mortgagee as its attorney-in-fact with
full power and authority to enter the premises where
the Mortgaged property is located and to take
actual possession and control thereof without need
of any order of any Court, nor written permission
from the Mortgagors, and with special power to sell
the Mortgaged Property at a public or private sale
at the option of the Mortgagee.
Petitioner cannot split the loan account of respondent by filing a petition
for the extrajudicial foreclosure of the real estate mortgage for the
principal amount of P4,687,006.68 covered by the first set of promissory
notes, and a personal action for the collection of the principal amount
of P12,672,000.31 covered by the second set of promissory notes
without violating the proscription against splitting a single cause of action
against respondent.
The contention of petitioner that respondents loan account that was
secured by the real estate mortgage was limited only to those covered
by the Promissory Note Nos. 1 to 33 or for the total amount
of P7,000,000.00 is belied by the real estate mortgage and by its own
evidence.
Under the deed, the mortgage was to secure the payment of
a credit accommodation already obtained by respondent, the principal
of all of which was fixed at P7,000,000.00, as well as any other
obligation that may be extended to respondent, including interest and
expenses
Moreover, the series of loan advancements herein cannot be likened to
the credit line discussed in Caltex Philippines, Inc. v. Intermediate
Appellate Court,[58] as petitioner posited in its reply[59] filed before this
Court. In Caltex, unlike the instant case, the real estate mortgage
executed did not contain a dragnet clause that would subsume all past
and future debts. The mortgage therein specifically secured only the
loans extended prior to the mortgage. Thus, in the said case, the future
debts were deemed as constituting a separate transaction from the past
debts secured by the mortgage.
The ruling of the Court in Quiogue v. Bautista is likewise
inapplicable. In that case, the Court deemed the loan transactions as
separate, considering that those were two separate loans secured by
two separate mortgages. In this case, however, there is only one
mortgage securing all 67 drawdowns made by respondent.
 T H
6 SET C O M M R E V | 11

was for the period 1964- 1965 and that INSURER had no right to apply
it to the period 1963-1964 because under RA 3540, the policy was void
and INSURER could have validly disclaimed liability for loss had one
occurred then.

TC found INSURER liable for P200k and opined that there was a clear
intention on the INSURER's part to grant ACME a credit extension for
the payment of the premium due; and that to allow the INSURER to
apply the premium ACME paid on January 8, 1964.

CA reversed TC and dismissed the suit on the ground that, as of the

moment of loss, ACME's properties were not insured and the INSURER
could not be held liable for any indemnity as a result of the loss.

ISSUE WON the premium payment for 1964-1965 was paid

HELD NO. Not having paid the 1964-1965 premium within the extension
granted, and pursuant to R.A. No. 3540, the policy was automatically
cancelled and there was no insurance coverage to speak of as of the
date of the fire on October 13, 1964. - The pertinent provision of
Republic Act No. 3540 reads: "Sec. 72. An insurer is entitled to payment
of the premium as soon as the thing insured is exposed to the peril
insured against, unless there is clear agreement to grant the insured
credit extension of the premium due. No policy issued by an insurance
company is valid and binding unless and until the premium thereof has
been paid." - RA 3540 was approved on June 20, 1963 and was put into
effect on Oct 1, 1963. It could not be applied retroactively to the renewal
of the policy for the 1963-1964 period because said policy was renewed
on May 14, 1963. (Laws have no retroactive effect unless the contrary
is provided.) Therefore, the Jan 8, 1964 payment was properly applied
to the 1963-1964 premium. The Trial Court's opinion that there was a
clear agreement to grant ACME credit extension for 1964-1965 is
negated by ACME's Promissory Note binding itself to pay within ninety
days from the effective date of this policy, 15th May, 1964. The credit
extension was granted for 90 days only. (So wala na by August 16,
1964.) - If ACME was granted credit extensions in the past, the
promissory note it signed did away with such credit arrangement. Also,
before RA 3540, the Renewal Receipts issued by INSURER did not
contain the auto-cancellation after 90 days note. By 1964, however, the
situation had changed by the passage of the RA: no policy could be valid
and binding unless and until the premium thereof had been paid. - What
became automatically cancelled by R.A. No. 3540 was the 1964-1965
policy for ACME's failure to pay the premium within the 90-day extension
granted, and in accordance with the express terms of the Promissory
Note that it had signed.

Disposition: The judgment under review is hereby affirmed. Without

pronouncement as to costs

ACME SHOE RUBBER & PLASTIC CORP. v. CA (DOMESTIC

INSURANCE COMPANY OF THE PHILS.)

FACTS: ACME Shoe Rubber and Plastic Corporation (ACME) had

been insuring yearly against fire its building, machines and general
merchandise with Domestic Insurance Company (INSURER) since
1946. On May 14, 1962, ACME continued to insure its properties with
INSURER in the amount of P200,000 for the period May 15, 1962 up to
May 15, 1963. - On May 14, 1963, INSURER issued Renewal Receipt
to cover the period May 15, 1963 to May 15, 1964. - On January 8, 1964,
ACME paid P3,331.26 as premium. The INSURER applied the payment
as renewal premium for the period of May 15, 1963 to May 15, 1964. -
On May 15, 1964, INSURER issued a Renewal Receipt for the period of
May 15, 1964 to May 15, 1965 (for renewal premium of P3,331.26 yet
to be paid) with a stamped note that says that the insurance will be
deemed valid and binding only when the premium and documentary
stamps have actually been paid in full and duly acknowledged in an
official receipt. ACME was given 90 days to pay otherwise the policy
would automatically become void and ineffective. (ACME should pay
short period premium for 90 days before the period expires. If they are
able to pay the whole amount before the 90- day period, the automatic
termination won’t apply anymore). - On May 26, 1964, ACME, through
its President, signed a promissory note saying that they promise to pay
the premium and documentary stamps and agreed to the automatic
cancellation penalty for not complying. -

On October 13, 1964, ACME’s properties were completely destroyed by

fire. ACME filed insurance claim but the INSURER disclaimed liability on
the ground that as of the date of loss, the properties burned were not
covered by insurance. - ACME claims that the January 8, 1964 payment