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Republic of the Philippines with his purchased of fuel products from the latter

SUPREME COURT (Original Record, p. 208).


Manila
3. Sometime in March 1982, Angel dela Cruz
SECOND DIVISION informed Mr. Timoteo Tiangco, the Sucat Branch
Manger, that he lost all the certificates of time
deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized
Affidavit of Loss, as required by defendant bank's
G.R. No. 97753 August 10, 1992 procedure, if he desired replacement of said lost
CTDs (TSN, February 9, 1987, pp. 48-50).
CALTEX (PHILIPPINES), INC., petitioner,
vs. 4. On March 18, 1982, Angel dela Cruz executed
COURT OF APPEALS and SECURITY BANK AND TRUST and delivered to defendant bank the required
COMPANY, respondents. Affidavit of Loss (Defendant's Exhibit 281). On
the basis of said affidavit of loss, 280 replacement
Bito, Lozada, Ortega & Castillo for petitioners. CTDs were issued in favor of said depositor
(Defendant's Exhibits 282-561).
Nepomuceno, Hofileña & Guingona for private.
5. On March 25, 1982, Angel dela Cruz negotiated
and obtained a loan from defendant bank in the
amount of Eight Hundred Seventy Five Thousand
Pesos (P875,000.00). On the same date, said
REGALADO, J.: depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562) which
This petition for review on certiorari impugns and seeks the reversal stated, among others, that he (de la Cruz)
of the decision promulgated by respondent court on March 8, 1991 in surrenders to defendant bank "full control of the
CA-G.R. CV No. 23615 1 affirming with modifications, the earlier indicated time deposits from and after date" of the
decision of the Regional Trial Court of Manila, Branch XLII, 2 which assignment and further authorizes said bank to pre-
dismissed the complaint filed therein by herein petitioner against terminate, set-off and "apply the said time deposits
respondent bank. to the payment of whatever amount or amounts
may be due" on the loan upon its maturity (TSN,
February 9, 1987, pp. 60-62).
The undisputed background of this case, as found by the court a
quo and adopted by respondent court, appears of record:
6. Sometime in November, 1982, Mr. Aranas,
Credit Manager of plaintiff Caltex (Phils.) Inc.,
1. On various dates, defendant, a commercial
went to the defendant bank's Sucat branch and
banking institution, through its Sucat Branch
presented for verification the CTDs declared lost
issued 280 certificates of time deposit (CTDs) in
by Angel dela Cruz alleging that the same were
favor of one Angel dela Cruz who deposited with
delivered to herein plaintiff "as security for
herein defendant the aggregate amount of
purchases made with Caltex Philippines, Inc." by
P1,120,000.00, as follows: (Joint Partial
said depositor (TSN, February 9, 1987, pp. 54-68).
Stipulation of Facts and Statement of Issues,
Original Records, p. 207; Defendant's Exhibits 1
to 280); 7. On November 26, 1982, defendant received a
letter (Defendant's Exhibit 563) from herein
plaintiff formally informing it of its possession of
CTD CTD
the CTDs in question and of its decision to pre-
Dates Serial Nos. Quantity Amount
terminate the same.

22 Feb. 82 90101 to 90120 20 P80,000


8. On December 8, 1982, plaintiff was requested
26 Feb. 82 74602 to 74691 90 360,000
by herein defendant to furnish the former "a copy
2 Mar. 82 74701 to 74740 40 160,000
of the document evidencing the guarantee
4 Mar. 82 90127 to 90146 20 80,000
agreement with Mr. Angel dela Cruz" as well as
5 Mar. 82 74797 to 94800 4 16,000
"the details of Mr. Angel dela Cruz" obligation
5 Mar. 82 89965 to 89986 22 88,000
against which plaintiff proposed to apply the time
5 Mar. 82 70147 to 90150 4 16,000
deposits (Defendant's Exhibit 564).
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000 9. No copy of the requested documents was
9 Mar. 82 90251 to 90272 22 88,000 furnished herein defendant.
——— ————
Total 280 P1,120,000 10. Accordingly, defendant bank rejected the
===== ======== plaintiff's demand and claim for payment of the
value of the CTDs in a letter dated February 7,
2. Angel dela Cruz delivered the said certificates 1983 (Defendant's Exhibit 566).
of time (CTDs) to herein plaintiff in connection
11. In April 1983, the loan of Angel dela Cruz with . . . While it may be true that the word "bearer"
the defendant bank matured and fell due and on appears rather boldly in the CTDs issued, it is
August 5, 1983, the latter set-off and applied the important to note that after the word "BEARER"
time deposits in question to the payment of the stamped on the space provided supposedly for the
matured loan (TSN, February 9, 1987, pp. 130- name of the depositor, the words "has deposited" a
131). certain amount follows. The document further
provides that the amount deposited shall be
12. In view of the foregoing, plaintiff filed the "repayable to said depositor" on the period
instant complaint, praying that defendant bank be indicated. Therefore, the text of the instrument(s)
ordered to pay it the aggregate value of the themselves manifest with clarity that they are
certificates of time deposit of P1,120,000.00 plus payable, not to whoever purports to be the "bearer"
accrued interest and compounded interest therein but only to the specified person indicated therein,
at 16% per annum, moral and exemplary damages the depositor. In effect, the appellee bank
as well as attorney's fees. acknowledges its depositor Angel dela Cruz as the
person who made the deposit and further engages
itself to pay said depositor the amount indicated
After trial, the court a quo rendered its decision thereon at the stipulated date. 6
dismissing the instant complaint. 3
We disagree with these findings and conclusions, and hereby hold that
On appeal, as earlier stated, respondent court affirmed the lower court's the CTDs in question are negotiable instruments. Section 1 Act No.
dismissal of the complaint, hence this petition wherein petitioner faults 2031, otherwise known as the Negotiable Instruments Law,
respondent court in ruling (1) that the subject certificates of deposit are enumerates the requisites for an instrument to become negotiable, viz:
non-negotiable despite being clearly negotiable instruments; (2) that
petitioner did not become a holder in due course of the said certificates
of deposit; and (3) in disregarding the pertinent provisions of the Code (a) It must be in writing and signed by the maker
of Commerce relating to lost instruments payable to bearer. 4 or drawer;

The instant petition is bereft of merit. (b) Must contain an unconditional promise or
order to pay a sum certain in money;
A sample text of the certificates of time deposit is reproduced below to
provide a better understanding of the issues involved in this recourse. (c) Must be payable on demand, or at a fixed or
determinable future time;
SECURITY BANK
AND TRUST COMPANY (d) Must be payable to order or to bearer; and
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines (e) Where the instrument is addressed to a drawee,
SUCAT OFFICEP 4,000.00 he must be named or otherwise indicated therein
CERTIFICATE OF DEPOSIT with reasonable certainty.
Rate 16%
The CTDs in question undoubtedly meet the requirements of the law
Date of Maturity FEB. 23, 1984 FEB 22, for negotiability. The parties' bone of contention is with regard to
1982, 19____ requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco,
Security Bank's Branch Manager way back in 1982, testified in open
This is to Certify that B E A R court that the depositor reffered to in the CTDs is no other than Mr.
E R has deposited in this Bank Angel de la Cruz.
the sum of PESOS: FOUR
THOUSAND ONLY, xxx xxx xxx
SECURITY BANK SUCAT
OFFICE P4,000 & 00 Atty. Calida:
CTS Pesos, Philippine
Currency, repayable to said
depositor 731 days. after date, q In other words Mr. Witness,
upon presentation and you are saying that per books
surrender of this certificate, of the bank, the depositor
with interest at the rate referred (sic) in these
of 16% per cent per annum. certificates states that it was
Angel dela Cruz?
(Sgd. Illegible) (Sgd. Illegible)
witness:
—————————— —————————
—— a Yes, your Honor, and we
have the record to show that
Angel dela Cruz was the one
AUTHORIZED SIGNATURES 5 who cause (sic) the amount.

Respondent court ruled that the CTDs in question are non-negotiable Atty. Calida:
instruments, nationalizing as follows:
q And no other person or words or stipulations in a contract shall not favor the party who caused
entity or company, Mr. the obscurity. 12
Witness?
The next query is whether petitioner can rightfully recover on the
witness: CTDs. This time, the answer is in the negative. The records reveal that
Angel de la Cruz, whom petitioner chose not to implead in this suit for
a None, your Honor. 7 reasons of its own, delivered the CTDs amounting to P1,120,000.00 to
petitioner without informing respondent bank thereof at any time.
Unfortunately for petitioner, although the CTDs are bearer
xxx xxx xxx instruments, a valid negotiation thereof for the true purpose and
agreement between it and De la Cruz, as ultimately ascertained,
Atty. Calida: requires both delivery and indorsement. For, although petitioner seeks
to deflect this fact, the CTDs were in reality delivered to it as a security
q Mr. Witness, who is the for De la Cruz' purchases of its fuel products. Any doubt as to whether
depositor identified in all of the CTDs were delivered as payment for the fuel products or as a
these certificates of time security has been dissipated and resolved in favor of the latter by
deposit insofar as the bank is petitioner's own authorized and responsible representative himself.
concerned?
In a letter dated November 26, 1982 addressed to respondent Security
witness: Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products" (Emphasis ours.) 13 This
a Angel dela Cruz is the admission is conclusive upon petitioner, its protestations
depositor. 8 notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and
xxx xxx xxx cannot be denied or disproved as against the person relying
thereon. 14 A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon
On this score, the accepted rule is that the negotiability or non-
them. 15 In the law of evidence, whenever a party has, by his own
negotiability of an instrument is determined from the writing, that is,
declaration, act, or omission, intentionally and deliberately led another
from the face of the instrument itself.9 In the construction of a bill or
to believe a particular thing true, and to act upon such belief, he cannot,
note, the intention of the parties is to control, if it can be legally
in any litigation arising out of such declaration, act, or omission, be
ascertained. 10 While the writing may be read in the light of
permitted to falsify it. 16
surrounding circumstances in order to more perfectly understand the
intent and meaning of the parties, yet as they have constituted the
writing to be the only outward and visible expression of their meaning, If it were true that the CTDs were delivered as payment and not as
no other words are to be added to it or substituted in its stead. The duty security, petitioner's credit manager could have easily said so, instead
of the court in such case is to ascertain, not what the parties may have of using the words "to guarantee" in the letter aforequoted. Besides,
secretly intended as contradistinguished from what their words when respondent bank, as defendant in the court below, moved for a
express, but what is the meaning of the words they have used. What bill of particularity therein 17 praying, among others, that petitioner, as
the parties meant must be determined by what they said. 11 plaintiff, be required to aver with sufficient definiteness or particularity
(a) the due date or dates of payment of the alleged indebtedness of
Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt
Contrary to what respondent court held, the CTDs are negotiable
showing that the CTDs were delivered to it by De la Cruz
instruments. The documents provide that the amounts deposited shall
as payment of the latter's alleged indebtedness to it, plaintiff
be repayable to the depositor. And who, according to the document, is
corporation opposed the motion. 18 Had it produced the receipt prayed
the depositor? It is the "bearer." The documents do not say that the
for, it could have proved, if such truly was the fact, that the CTDs were
depositor is Angel de la Cruz and that the amounts deposited are
delivered as payment and not as security. Having opposed the motion,
repayable specifically to him. Rather, the amounts are to be repayable
petitioner now labors under the presumption that evidence willfully
to the bearer of the documents or, for that matter, whosoever may be
suppressed would be adverse if produced. 19
the bearer at the time of presentment.

Under the foregoing circumstances, this disquisition in Intergrated


If it was really the intention of respondent bank to pay the amount to
Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is
Angel de la Cruz only, it could have with facility so expressed that fact
apropos:
in clear and categorical terms in the documents, instead of having the
word "BEARER" stamped on the space provided for the name of the
depositor in each CTD. On the wordings of the documents, therefore, . . . Adverting again to the Court's pronouncements
the amounts deposited are repayable to whoever may be the bearer in Lopez, supra, we quote therefrom:
thereof. Thus, petitioner's aforesaid witness merely declared that Angel
de la Cruz is the depositor "insofar as the bank is concerned," but The character of the
obviously other parties not privy to the transaction between them transaction between the
would not be in a position to know that the depositor is not the bearer parties is to be determined by
stated in the CTDs. Hence, the situation would require any party their intention, regardless of
dealing with the CTDs to go behind the plain import of what is written what language was used or
thereon to unravel the agreement of the parties thereto through what the form of the transfer
facts aliunde. This need for resort to extrinsic evidence is what is was. If it was intended to
sought to be avoided by the Negotiable Instruments Law and calls for secure the payment of money,
the application of the elementary rule that the interpretation of obscure it must be construed as a
pledge; but if there was some
other intention, it is not a Art. 2096. A pledge shall not take effect against
pledge. However, even third persons if a description of the thing pledged
though a transfer, if regarded and the date of the pledge do not appear in a public
by itself, appears to have been instrument.
absolute, its object and
character might still be Aside from the fact that the CTDs were only delivered but not
qualified and explained by indorsed, the factual findings of respondent court quoted at the start of
contemporaneous writing this opinion show that petitioner failed to produce any document
declaring it to have been a evidencing any contract of pledge or guarantee agreement between it
deposit of the property as and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs
collateral security. It has been did not legally vest in petitioner any right effective against and binding
said that a transfer of property upon respondent bank. The requirement under Article 2096
by the debtor to a creditor, aforementioned is not a mere rule of adjective law prescribing the
even if sufficient on its face to mode whereby proof may be made of the date of a pledge contract, but
make an absolute conveyance, a rule of substantive law prescribing a condition without which the
should be treated as a pledge execution of a pledge contract cannot affect third persons adversely. 26
if the debt continues in
inexistence and is not
discharged by the transfer, On the other hand, the assignment of the CTDs made by Angel de la
and that accordingly the use of Cruz in favor of respondent bank was embodied in a public
the terms ordinarily importing instrument. 27 With regard to this other mode of transfer, the Civil
conveyance of absolute Code specifically declares:
ownership will not be given
that effect in such a Art. 1625. An assignment of credit, right or action
transaction if they are also shall produce no effect as against third persons,
commonly used in pledges unless it appears in a public instrument, or the
and mortgages and therefore instrument is recorded in the Registry of Property
do not unqualifiedly indicate a in case the assignment involves real property.
transfer of absolute
ownership, in the absence of Respondent bank duly complied with this statutory requirement.
clear and unambiguous Contrarily, petitioner, whether as purchaser, assignee or lien holder of
language or other the CTDs, neither proved the amount of its credit or the extent of its
circumstances excluding an lien nor the execution of any public instrument which could affect or
intent to pledge. bind private respondent. Necessarily, therefore, as between petitioner
and respondent bank, the latter has definitely the better right over the
Petitioner's insistence that the CTDs were negotiated to it begs the CTDs in question.
question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in such a Finally, petitioner faults respondent court for refusing to delve into the
manner as to constitute the transferee the holder thereof, 21 and a holder question of whether or not private respondent observed the
may be the payee or indorsee of a bill or note, who is in possession of requirements of the law in the case of lost negotiable instruments and
it, or the bearer thereof. 22 In the present case, however, there was no the issuance of replacement certificates therefor, on the ground that
negotiation in the sense of a transfer of the legal title to the CTDs in petitioner failed to raised that issue in the lower court. 28
favor of petitioner in which situation, for obvious reasons, mere
delivery of the bearer CTDs would have sufficed. Here, the delivery
thereof only as security for the purchases of Angel de la Cruz (and we On this matter, we uphold respondent court's finding that the aspect of
even disregard the fact that the amount involved was not disclosed) alleged negligence of private respondent was not included in the
could at the most constitute petitioner only as a holder for value by stipulation of the parties and in the statement of issues submitted by
reason of his lien. Accordingly, a negotiation for such purpose cannot them to the trial court. 29 The issues agreed upon by them for resolution
be effected by mere delivery of the instrument since, necessarily, the in this case are:
terms thereof and the subsequent disposition of such security, in the
event of non-payment of the principal obligation, must be contractually 1. Whether or not the CTDs as worded are
provided for. negotiable instruments.

The pertinent law on this point is that where the holder has a lien on 2. Whether or not defendant could legally apply
the instrument arising from contract, he is deemed a holder for value the amount covered by the CTDs against the
to the extent of his lien. 23 As such holder of collateral security, he depositor's loan by virtue of the assignment
would be a pledgee but the requirements therefor and the effects (Annex "C").
thereof, not being provided for by the Negotiable Instruments Law,
shall be governed by the Civil Code provisions on pledge of
3. Whether or not there was legal compensation or
incorporeal rights, 24 which inceptively provide:
set off involving the amount covered by the CTDs
and the depositor's outstanding account with
Art. 2095. Incorporeal rights, evidenced by defendant, if any.
negotiable instruments, . . . may also be pledged.
The instrument proving the right pledged shall be
4. Whether or not plaintiff could compel defendant
delivered to the creditor, and if negotiable, must be
to preterminate the CTDs before the maturity date
indorsed.
provided therein.
5. Whether or not plaintiff is entitled to the a bearer instrument so that he may obtain a duplicate of the same, and,
proceeds of the CTDs. on the other, an option in favor of the party liable thereon who, for
some valid ground, may elect to refuse to issue a replacement of the
6. Whether or not the parties can recover damages, instrument. Significantly, none of the provisions cited by petitioner
attorney's fees and litigation expenses from each categorically restricts or prohibits the issuance a duplicate or
other. replacement instrument sans compliance with the procedure outlined
therein, and none establishes a mandatory precedent requirement
therefor.
As respondent court correctly observed, with appropriate citation of
some doctrinal authorities, the foregoing enumeration does not include
the issue of negligence on the part of respondent bank. An issue raised WHEREFORE, on the modified premises above set forth, the petition
for the first time on appeal and not raised timely in the proceedings in is DENIED and the appealed decision is hereby AFFIRMED.
the lower court is barred by estoppel. 30 Questions raised on appeal
must be within the issues framed by the parties and, consequently, SO ORDERED.
issues not raised in the trial court cannot be raised for the first time on
appeal. 31 Republic of the Philippines
SUPREME COURT
Pre-trial is primarily intended to make certain that all issues necessary Manila
to the disposition of a case are properly raised. Thus, to obviate the
element of surprise, parties are expected to disclose at a pre-trial SECOND DIVISION
conference all issues of law and fact which they intend to raise at the
trial, except such as may involve privileged or impeaching matters. The
determination of issues at a pre-trial conference bars the consideration
of other questions on appeal. 32
G.R. No. 93397 March 3, 1997
To accept petitioner's suggestion that respondent bank's supposed
negligence may be considered encompassed by the issues on its right TRADERS ROYAL BANK, petitioner,
to preterminate and receive the proceeds of the CTDs would be vs.
tantamount to saying that petitioner could raise on appeal any issue. COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE
We agree with private respondent that the broad ultimate issue of CORPORATION and CENTRAL BANK of the
petitioner's entitlement to the proceeds of the questioned certificates PHILIPPINES, respondents.
can be premised on a multitude of other legal reasons and causes of
action, of which respondent bank's supposed negligence is only one.
Hence, petitioner's submission, if accepted, would render a pre-trial
delimitation of issues a useless exercise. 33
TORRES, JR., J.:
Still, even assuming arguendo that said issue of negligence was raised
in the court below, petitioner still cannot have the odds in its favor. A Assailed in this Petition for Review on Certiorari is the Decision of
close scrutiny of the provisions of the Code of Commerce laying down the respondent Court of Appeals dated January 29, 1990, 1 affirming
the rules to be followed in case of lost instruments payable to bearer, the nullity of the transfer of Central Bank Certificate of Indebtedness
which it invokes, will reveal that said provisions, even assuming their (CBCI) No. D891,2 with a face value of P500,000.00, from the
applicability to the CTDs in the case at bar, are merely permissive and Philippine Underwriters Finance Corporation (Philfinance) to the
not mandatory. The very first article cited by petitioner speaks for petitioner Trader's Royal Bank (TRB), under a Repurchase
itself. Agreement3 dated February 4, 1981, and a Detached
Assignment4dated April 27, 1981.
Art 548. The dispossessed owner, no matter for
what cause it may be, may apply to the judge or Docketed as Civil Case No. 83-17966 in the Regional Trial Court of
court of competent jurisdiction, asking that the Manila, Branch 32, the action was originally filed as a Petition
principal, interest or dividends due or about to for Mandamus5 under Rule 65 of the Rules of Court, to compel the
become due, be not paid a third person, as well as Central Bank of the Philippines to register the transfer of the subject
in order to prevent the ownership of the instrument CBCI to petitioner Traders Royal Bank (TRB).
that a duplicate be issued him. (Emphasis ours.)
In the said petition, TRB stated that:
xxx xxx xxx
3. On November 27, 1979, Filriters Guaranty
The use of the word "may" in said provision shows that it is not Assurance Corporation (Filriters) executed a
mandatory but discretionary on the part of the "dispossessed owner" to "Detached Assignment" . . ., whereby Filriters, as
apply to the judge or court of competent jurisdiction for the issuance registered owner, sold, transferred, assigned and
of a duplicate of the lost instrument. Where the provision reads "may," delivered unto Philippine Underwriters Finance
this word shows that it is not mandatory but discretional. 34 The word Corporation (Philfinance) all its rights and title to
"may" is usually permissive, not mandatory. 35 It is an auxiliary verb Central Bank Certificates of Indebtedness of
indicating liberty, opportunity, permission and possibility. 36 PESOS: FIVE HUNDRED THOUSAND
(P500,000) and having an aggregate value of
PESOS: THREE MILLION FIVE HUNDRED
Moreover, as correctly analyzed by private respondent, 37 Articles 548 THOUSAND (P3,500,000.00);
to 558 of the Code of Commerce, on which petitioner seeks to anchor
respondent bank's supposed negligence, merely established, on the one
hand, a right of recourse in favor of a dispossessed owner or holder of
4. The aforesaid Detached Assignment (Annex "No transfer thereof shall be
"A") contains an express authorization executed valid unless made at said
by the transferor intended to complete the office (where the Certificate
assignment through the registration of the transfer has been registered) by the
in the name of PhilFinance, which authorization is registered owner hereof, in
specifically phrased as follows: '(Filriters) hereby person or by his attorney duly
irrevocably authorized the said issuer (Central authorized in writing, and
Bank) to transfer the said bond/certificates on the similarly noted hereon, and
books of its fiscal agent; upon payment of a nominal
transfer fee which may be
5. On February 4, 1981, petitioner entered into a required, a new Certificate
Repurchase Agreement with PhilFinance . . ., shall be issued to the
whereby, for and in consideration of the sum of transferee of the registered
PESOS: FIVE HUNDRED THOUSAND holder thereof."
(P500,000.00), PhilFinance sold, transferred and
delivered to petitioner CBCI 4-year, 8th series, and, without a doubt, the Detached Assignments
Serial No. D891 with a face value of P500,000.00 presented to respondent were sufficient
. . ., which CBCI was among those previously authorizations in writing executed by the
acquired by PhilFinance from Filriters as averred registered owner, Filriters, and its transferee,
in paragraph 3 of the Petition; PhilFinance, as required by the above-quoted
provision;
6. Pursuant to the aforesaid Repurchase
Agreement (Annex "B"), Philfinance agreed to 12. Upon such compliance with the aforesaid
repurchase CBCI Serial No. D891 (Annex "C"), at requirements, the ministerial duties of registering
the stipulated price of PESOS: FIVE HUNDRED a transfer of ownership over the CBCI and issuing
NINETEEN THOUSAND THREE HUNDRED a new certificate to the transferee devolves upon
SIXTY-ONE & 11/100 (P519,361.11) on April the respondent;
27, 1981;
Upon these assertions, TRB prayed for the registration by the Central
7. PhilFinance failed to repurchase the CBCI on Bank of the subject CBCI in its name.
the agreed date of maturity, April 27, 1981, when
the checks it issued in favor of petitioner were On December 4, 1984, the Regional Trial Court the case took
dishonored for insufficient funds; cognizance of the defendant Central Bank of the Philippines' Motion
for Admission of Amended Answer with Counter Claim for
8. Owing to the default of PhilFinance, it executed Interpleader6 thereby calling to fore the respondent Filriters Guaranty
a Detached Assignment in favor of the Petitioner Assurance Corporation (Filriters), the registered owner of the subject
to enable the latter to have its title completed and CBCI as respondent.
registered in the books of the respondent. And by
means of said Detachment, Philfinance transferred For its part, Filriters interjected as Special Defenses the following:
and assigned all, its rights and title in the said
CBCI (Annex "C") to petitioner and, furthermore,
it did thereby "irrevocably authorize the said issuer 11. Respondent is the registered owner of CBCI
(respondent herein) to transfer the said No. 891;
bond/certificate on the books of its fiscal agent." .
.. 12. The CBCI constitutes part of the reserve
investment against liabilities required of
9. Petitioner presented the CBCI (Annex "C"), respondent as an insurance company under the
together with the two (2) aforementioned Insurance Code;
Detached Assignments (Annexes "B" and "D"), to
the Securities Servicing Department of the 13. Without any consideration or benefit
respondent, and requested the latter to effect the whatsoever to Filriters, in violation of law and the
transfer of the CBCI on its books and to issue a trust fund doctrine and to the prejudice of
new certificate in the name of petitioner as policyholders and to all who have present or future
absolute owner thereof; claim against policies issued by Filriters, Alfredo
Banaria, then Senior Vice-President-Treasury of
10. Respondent failed and refused to register the Filriters, without any board resolution, knowledge
transfer as requested, and continues to do so or consent of the board of directors of Filriters, and
notwithstanding petitioner's valid and just title without any clearance or authorization from the
over the same and despite repeated demands in Insurance Commissioner, executed a detached
writing, the latest of which is hereto attached as assignment purportedly assigning CBCI No. 891
Annex "E" and made an integral part hereof; to Philfinance;

11. The express provisions governing the transfer xxx xxx xxx
of the CBCI were substantially complied with the
petitioner's request for registration, to wit: 14. Subsequently, Alberto Fabella, Senior Vice-
President-Comptroller are Pilar Jacobe, Vice-
President-Treasury of Filriters (both of whom
were holding the same positions in Philfinance), registered owner's right as absolute owner of the
without any consideration or benefit redounding to CBCI's;
Filriters and to the grave prejudice of Filriters, its
policy holders and all who have present or future c) CB Circular 769, Series of 1980 (Rules and
claims against its policies, executed similar Regulations Governing CBCIs) provides that the
detached assignment forms transferring the CBCI registered certificates are payable only to the
to plaintiff; registered owner (Article II, Section 1).

xxx xxx xxx 18. Plaintiff knew full well that the assignment by
Philfinance of CBCI No. 891 by Filriters is not a
15. The detached assignment is patently void and regular transaction made in the usual of ordinary
inoperative because the assignment is without the course of business;
knowledge and consent of directors of Filriters,
and not duly authorized in writing by the Board, as a) The CBCI constitutes part of the reserve
requiring by Article V, Section 3 of CB Circular investments of Filriters against liabilities requires
No. 769; by the Insurance Code and its assignment or
transfer is expressly prohibited by law. There was
16. The assignment of the CBCI to Philfinance is no attempt to get any clearance or authorization
a personal act of Alfredo Banaria and not the from the Insurance Commissioner;
corporate act of Filriters and such null and void;
b) The assignment by Filriters of the CBCI is
a) The assignment was executed without clearly not a transaction in the usual or regular
consideration and for that reason, the assignment course of its business;
is void from the beginning (Article 1409, Civil
Code); c) The CBCI involved substantial amount and its
assignment clearly constitutes disposition of "all
b) The assignment was executed without any or substantially all" of the assets of Filriters, which
knowledge and consent of the board of directors of requires the affirmative action of the stockholders
Filriters; (Section 40, Corporation [sic] Code.7

c) The CBCI constitutes reserve investment of In its Decision8 dated April 29, 1988, the Regional Trial Court of
Filriters against liabilities, which is a requirement Manila, Branch XXXIII found the assignment of CBCI No. D891 in
under the Insurance Code for its existence as an favor of Philfinance, and the subsequent assignment of the same CBCI
insurance company and the pursuit of its business by Philfinance in favor of Traders Royal Bank null and void and of no
operations. The assignment of the CBCI is illegal force and effect. The dispositive portion of the decision reads:
act in the sense of malum in se or malum
prohibitum, for anyone to make, either as ACCORDINGLY, judgment is hereby rendered in
corporate or personal act; favor of the respondent Filriters Guaranty
Assurance Corporation and against the plaintiff
d) The transfer of dimunition of reserve Traders Royal Bank:
investments of Filriters is expressly prohibited by
law, is immoral and against public policy; (a) Declaring the assignment of CBCI No. 891 in
favor of PhilFinance, and the subsequent
e) The assignment of the CBCI has resulted in the assignment of CBCI by PhilFinance in favor of the
capital impairment and in the solvency deficiency plaintiff Traders Royal Bank as null and void and
of Filriters (and has in fact helped in placing of no force and effect;
Filriters under conservatorship), an inevitable
result known to the officer who executed (b) Ordering the respondent Central Bank of the
assignment. Philippines to disregard the said assignment and to
pay the value of the proceeds of the CBCI No.
17. Plaintiff had acted in bad faith and with D891 to the Filriters Guaranty Assurance
knowledge of the illegality and invalidity of the Corporation;
assignment.
(c) Ordering the plaintiff Traders Royal Bank to
a) The CBCI No. 891 is not a negotiable pay respondent Filriters Guaranty Assurance
instrument and as a certificate of indebtedness is Corp. The sum of P10,000 as attorney's fees; and
not payable to bearer but is a registered in the
name of Filriters; (d) to pay the costs.

b) The provision on transfer of the CBCIs provides SO ORDERED.9


that the Central Bank shall treat the registered
owner as the absolute owner and that the value of
the registered certificates shall be payable only to The petitioner assailed the decision of the trial court in the Court of
the registered owner; a sufficient notice to plaintiff Appeals 10, but their appeals likewise failed. The findings of the fact of
that the assignments do not give them the the said court are hereby reproduced:
The records reveal that defendant Filriters is the In the case at bar, Alfredo O. Banaria, who signed
registered owner of CBCI No. D891. Under a deed the deed of assignment purportedly for and on
of assignment dated November 27, 1971, Filriters behalf of Filriters, did not have the necessary
transferred CBCI No. D891 to Philippine written authorization from the Board of Directors
Underwriters Finance Corporation (Philfinance). of Filriters to act for the latter. For lack of such
Subsequently, Philfinance transferred CBCI No. authority, the assignment did not therefore bind
D891, which was still registered in the name of Filriters and violated as the same time Central
Filriters, to appellant Traders Royal Bank (TRB). Bank Circular No. 769 which has the force and
The transfer was made under a repurchase effect of a law, resulting in the nullity of the
agreement dated February 4, 1981, granting transfer (People v. Que Po Lay, 94 Phil. 640; 3M
Philfinance the right to repurchase the instrument Philippines, Inc. vs. Commissioner of Internal
on or before April 27, 1981. When Philfinance Revenue, 165 SCRA 778).
failed to buy back the note on maturity date, it
executed a deed of assignment, dated April 27, In sum, Philfinance acquired no title or rights
1981, conveying to appellant TRB all its right and under CBCI No. D891 which it could assign or
the title to CBCI No. D891. transfer to Traders Royal Bank and which the
latter can register with the Central Bank.
Armed with the deed of assignment, TRB then
sought the transfer and registration of CBCI No. WHEREFORE, the judgment appealed from is
D891 in its name before the Security and Servicing AFFIRMED, with costs against plaintiff-
Department of the Central Bank (CB). Central appellant.
Bank, however, refused to effect the transfer and
registration in view of an adverse claim filed by
defendant Filriters. SO ORDERED. 13

Left with no other recourse, TRB filed a special Petitioner's present position rests solely on the argument that
civil action for mandamus against the Central Philfinance owns 90% of Filriters equity and the two corporations have
Bank in the Regional Trial Court of Manila. The identical corporate officers, thus demanding the application of the
suit, however, was subsequently treated by the doctrine or piercing the veil of corporate fiction, as to give validity to
lower court as a case of interpleader when CB the transfer of the CBCI from registered owner to petitioner
prayed in its amended answer that Filriters be TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as
impleaded as a respondent and the court adjudge actual payment to Filriters. Thus, there is no merit to the lower court's
which of them is entitled to the ownership of CBCI ruling that the transfer of the CBCI from Filriters to Philfinance was
No. D891. Failing to get a favorable judgment. null and void for lack of consideration.
TRB now comes to this Court on appeal. 11
Admittedly, the subject CBCI is not a negotiable instrument in the
In the appellate court, petitioner argued that the subject CBCI was a absence of words of negotiability within the meaning of the negotiable
negotiable instrument, and having acquired the said certificate from instruments law (Act 2031).
Philfinance as a holder in due course, its possession of the same is thus
free fro any defect of title of prior parties and from any defense The pertinent portions of the subject CBCI read:
available to prior parties among themselves, and it may thus, enforce
payment of the instrument for the full amount thereof against all parties xxx xxx xxx
liable thereon. 12

The Central Bank of the Philippines (the Bank) for


In ignoring said argument, the appellate court that the CBCI is not a value received, hereby promises to pay bearer, of
negotiable instrument, since the instrument clearly stated that it was if this Certificate of indebtedness be registered, to
payable to Filriters, the registered owner, whose name was inscribed FILRITERS GUARANTY ASSURANCE
thereon, and that the certificate lacked the words of negotiability which CORPORATION, the registered owner hereof, the
serve as an expression of consent that the instrument may be principal sum of FIVE HUNDRED THOUSAND
transferred by negotiation. PESOS.

Obviously, the assignment of the certificate from Filriters to xxx xxx xxx
Philfinance was fictitious, having made without consideration, and did
not conform to Central Bank Circular No. 769, series of 1980, better
known as the "Rules and Regulations Governing Central Bank Properly understood, a certificate of indebtedness pertains to
Certificates of Indebtedness", which provided that any "assignment of certificates for the creation and maintenance of a permanent
registered certificates shall not be valid unless made . . . by the improvement revolving fund, is similar to a "bond," (82 Minn. 202).
registered owner thereof in person or by his representative duly Being equivalent to a bond, it is properly understood as
authorized in writing." acknowledgment of an obligation to pay a fixed sum of money. It is
usually used for the purpose of long term loans.
Petitioner's claimed interest has no basis, since it was derived from
Philfinance whose interest was inexistent, having acquired the The appellate court ruled that the subject CBCI is not a negotiable
certificate through simulation. What happened was Philfinance merely instrument, stating that:
borrowed CBCI No. D891 from Filriters, a sister corporation, to
guarantee its financing operations. As worded, the instrument provides a promise "to
pay Filriters Guaranty Assurance Corporation, the
Said the Court: registered owner hereof." Very clearly, the
instrument is payable only to Filriters, the known as the "Rules and Regulations Governing
registered owner, whose name is inscribed Central Bank Certificates of Indebtedness", under
thereon. It lacks the words of negotiability which which the note was issued. Published in the
should have served as an expression of consent Official Gazette on November 19, 1980, Section 3
that the instrument may be transferred by thereof provides that any assignment of registered
negotiation.15 certificates shall not be valid unless made . . . by
the registered owner thereof in person or by his
A reading of the subject CBCI indicates that the same is payable to representative duly authorized in writing.
FILRITERS GUARANTY ASSURANCE CORPORATION, and to
no one else, thus, discounting the petitioner's submission that the same In the case at bar, Alfredo O. Banaria, who signed
is a negotiable instrument, and that it is a holder in due course of the the deed of assignment purportedly for and on
certificate. behalf of Filriters, did not have the necessary
written authorization from the Board of Directors
The language of negotiability which characterize a negotiable paper as of Filriters to act for the latter. For lack of such
a credit instrument is its freedom to circulate as a substitute for money. authority, the assignment did not therefore bind
Hence, freedom of negotiability is the touchtone relating to the Filriters and violated at the same time Central
protection of holders in due course, and the freedom of negotiability is Bank Circular No. 769 which has the force and
the foundation for the protection which the law throws around a holder effect of a law, resulting in the nullity of the
in due course (11 Am. Jur. 2d, 32). This freedom in negotiability is transfer (People vs. Que Po Lay, 94 Phil. 640; 3M
totally absent in a certificate indebtedness as it merely to pay a sum of Philippines, Inc. vs. Commissioner of Internal
money to a specified person or entity for a period of time. Revenue, 165 SCRA 778).

As held in Caltex (Philippines), Inc. v. Court of Appeals, 16: In sum, Philfinance acquired no title or rights
under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the
The accepted rule is that the negotiability or non- latter can register with the Central Bank
negotiability of an instrument is determined from
the writing, that is, from the face of the instrument
itself. In the construction of a bill or note, the Petitioner now argues that the transfer of the subject CBCI to TRB
intention of the parties is to control, if it can be must upheld, as the respondent Filriters and Philfinance, though
legally ascertained. While the writing may be read separate corporate entities on paper, have used their corporate fiction
in the light of surrounding circumstance in order to defraud TRB into purchasing the subject CBCI, which purchase now
to more perfectly understand the intent and is refused registration by the Central Bank.
meaning of the parties, yet as they have constituted
the writing to be the only outward and visible Says the petitioner;
expression of their meaning, no other words are to
be added to it or substituted in its stead. The duty Since Philfinance own about 90% of Filriters and
of the court in such case is to ascertain, not what the two companies have the same corporate
the parties may have secretly intended as officers, if the principle of piercing the veil of
contradistinguished from what their words corporate entity were to be applied in this case,
express, but what is the meaning of the words they then TRB's payment to Philfinance for the CBCI
have used. What the parties meant must be purchased by it could just as well be considered a
determined by what they said. payment to Filriters, the registered owner of the
CBCI as to bar the latter from claiming, as it has,
Thus, the transfer of the instrument from Philfinance to TRB was that it never received any payment for that CBCI
merely an assignment, and is not governed by the negotiable sold and that said CBCI was sold without its
instruments law. The pertinent question then is, was the transfer of the authority.
CBCI from Filriters to Philfinance and subsequently from Philfinance
to TRB, in accord with existing law, so as to entitle TRB to have the xxx xxx xxx
CBCI registered in its name with the Central Bank?
We respectfully submit that, considering that the
The following are the appellate court's pronouncements on the matter: Court of Appeals has held that the CBCI was
merely borrowed by Philfinance from Filriters, a
Clearly shown in the record is the fact that sister corporation, to guarantee its (Philfinance's)
Philfinance's title over CBCI No. D891 is financing operations, if it were to be consistent
defective since it acquired the instrument from therewith, on the issued raised by TRB that there
Filriters fictitiously. Although the deed of was a piercing a veil of corporate entity, the Court
assignment stated that the transfer was for "value of Appeals should have ruled that such veil of
received", there was really no consideration corporate entity was, in fact, pierced, and the
involved. What happened was Philfinance merely payment by TRB to Philfinance should be
borrowed CBCI No. D891 from Filriters, a sister construed as payment to Filriters. 17
corporation. Thus, for lack of any consideration,
the assignment made is a complete nullity. We disagree with Petitioner.

What is more, We find that the transfer made by Petitioner cannot put up the excuse of piercing the veil of corporate
Filriters to Philfinance did not conform to Central entity, as this merely an equitable remedy, and may be awarded only
Bank Circular No. 769, series of 1980, otherwise in cases when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime or where a This is notice to petitioner to secure from Filriters a written
corporation is a mere alter ego or business conduit of a person. 18 authorization for the transfer or to require Philfinance to submit such
an authorization from Filriters.
Peiercing the veil of corporate entity requires the court to see through
the protective shroud which exempts its stockholders from liabilities Petitioner knew that Philfinance is not registered owner of the CBCI
that ordinarily, they could be subject to, or distinguished one No. D891. The fact that a non-owner was disposing of the registered
corporation from a seemingly separate one, were it not for the existing CBCI owned by another entity was a good reason for petitioner to
corporate fiction. But to do this, the court must be sure that the verify of inquire as to the title Philfinance to dispose to the CBCI.
corporate fiction was misused, to such an extent that injustice, fraud,
or crime was committed upon another, disregarding, thus, his, her, or Moreover, CBCI No. D891 is governed by CB Circular No. 769, series
its rights. It is the protection of the interests of innocent third persons of 1990 21, known as the Rules and Regulations Governing Central
dealing with the corporate entity which the law aims to protect by this Bank Certificates of Indebtedness, Section 3, Article V of which
doctrine. provides that:

The corporate separateness between Filriters and Philfinance remains, Sec. 3. Assignment of Registered Certificates. —
despite the petitioners insistence on the contrary. For one, other than Assignment of registered certificates shall not be
the allegation that Filriters is 90% owned by Philfinance, and the valid unless made at the office where the same
identity of one shall be maintained as to the other, there is nothing else have been issued and registered or at the Securities
which could lead the court under circumstance to disregard their Servicing Department, Central Bank of the
corporate personalities. Philippines, and by the registered owner thereof,
in person or by his representative, duly authorized
Though it is true that when valid reasons exist, the legal fiction that a in writing. For this purpose, the transferee may be
corporation is an entity with a juridical personality separate from its designated as the representative of the registered
stockholders and from other corporations may be disregarded, 19 in the owner.
absence of such grounds, the general rule must upheld. The fact that
Filfinance owns majority shares in Filriters is not by itself a ground to Petitioner, being a commercial bank, cannot feign ignorance of Central
disregard the independent corporate status of Filriters. In Liddel & Bank Circular 769, and its requirements. An entity which deals with
Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by a corporate agents within circumstances showing that the agents are
single stockholder or by another corporation of all or nearly all of the acting in excess of corporate authority, may not hold the corporation
capital stock of a corporation is not of itself a sufficient reason for liable. 22 This is only fair, as everyone must, in the exercise of his rights
disregarding the fiction of separate corporate personalities. and in the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith. 23
In the case at bar, there is sufficient showing that the petitioner was not
defrauded at all when it acquired the subject certificate of indebtedness The transfer made by Filriters to Philfinance did not conform to the
from Philfinance. said. Central Bank Circular, which for all intents, is considered part of
the law. As found by the courts a quo, Alfredo O. Banaria, who had
On its face the subject certificates states that it is registered in the name signed the deed of assignment from Filriters to Philfinance,
of Filriters. This should have put the petitioner on notice, and prompted purportedly for and in favor of Filriters, did not have the necessary
it to inquire from Filriters as to Philfinance's title over the same or its written authorization from the Board of Directors of Filriters to act for
authority to assign the certificate. As it is, there is no showing to the the latter. As it is, the sale from Filriters to Philfinance was fictitious,
effect that petitioner had any dealings whatsoever with Filriters, nor and therefore void and inexistent, as there was no consideration for the
did it make inquiries as to the ownership of the certificate. same. This is fatal to the petitioner's cause, for then, Philfinance had
no title over the subject certificate to convey the Traders Royal
The terms of the CBCI No. D891 contain a provision on its Bank. Nemo potest nisi quod de jure potest — no man can do anything
TRANSFER. Thus: except what he can do lawfully.

TRANSFER. This Certificate shall pass by Concededly, the subject CBCI was acquired by Filriters to form part
delivery unless it is registered in the owner's name of its legal and capital reserves, which are required by law 24 to be
at any office of the Bank or any agency duly maintained at a mandated level. This was pointed out by Elias Garcia,
authorized by the Bank, and such registration is Manager-in-Charge of respondent Filriters, in his testimony given
noted hereon. After such registration no transfer before the court on May 30, 1986.
thereof shall be valid unless made at said office
(where the Certificates has been registered) by the Q Do you know this Central
registered owner hereof, in person, or by his Bank Certificate of
attorney, duly authorized in writing and similarly Indebtedness, in short, CBCI
noted hereon and upon payment of a nominal No. D891 in the face value of
transfer fee which may be required, a new P5000,000.00 subject of this
Certificate shall be issued to the transferee of the case?
registered owner thereof. The bank or any agency
duly authorized by the Bank may deem and treat A Yes, sir.
the bearer of this Certificate, or if this Certificate
is registered as herein authorized, the person in
whose name the same is registered as the absolute Q Why do you know this?
owner of this Certificate, for the purpose of
receiving payment hereof, or on account hereof, A Well, this was CBCI of the
and for all other purpose whether or not this company sought to be
Certificate shall be overdue. examined by the Insurance
Commission sometime in BENGZON, J.:
early 1981 and this CBCI No.
891 was among the CBCI's In the Manila court of first instance, the Philippine National Bank sued
that were found to be missing. the defendant upon a letter of credit and a draft for the amount of
$14,449.15. Although willing to pay the equivalent in pesos of the
Q Let me take you back draft, plus bank charges, the defendant objected to the 17% excise tax
further before 1981. Did you imposed by Republic Act No. 601 which the Bank tried to collect. Both
have the knowledge of this documents, he contended, had been issued and had matured before the
CBCI No. 891 before 1981? approval of said Act, therefore the excise tax should not be charged.

A Yes, sir. This CBCI is an After the trial, the court rendered judgment exempting defendant from
investment of Filriters the 17% excise tax; but ordered him to deliver to plaintiff the sum of
required by the Insurance P37,622.11 plus daily interest of P3.9938 on P29,154.55 beginning
Commission as legal reserve from January 9, 1953.
of the company.
The plaintiff appealed, insisting on the right to collect 17% excise or
Q Legal reserve for the exchange tax. This is the only issue between the parties now.
purpose of what?
For a statement of the facts we may quote from plaintiff's brief. "On
A Well, you see, the Insurance October 26, 1948, Defendant-Appellee applied for a commercial letter
companies are required to put of credit with Plaintiff-Appellant, Philippine National Bank (Manila)
up legal reserves under and was granted L/C No. 35171 (Exhibit "B") on November 6, 1948,
Section 213 of the Insurance in favor of Otis Elevator Co., 260 Eleventh Avenue, New York City,
Code equivalent to 40 percent U.S.A., for $14,449.15 for the purchase of an electric passenger
of the premiums receipt and elevator; on May 17, 1949, and under the said letter of credit (Exhibit
further, the Insurance "B"), Otis Elevator Co. drew a 90 day sight draft for $14,449.15
Commission requires this (Exhibit "A") which draft was duly presented to and accepted by
reserve to be invested Defendant-Appellee on July 6, 1949. Said acceptance matured on
preferably in government October 4, 1949. Upon Defendant-Appellee's signing a 90 day trust
securities or government receipt (Exhibit "C") on June 3, 1949, Plaintiff-Appellant released to
binds. This is how this CBCI Defendant-Appellee the covering documents of the shipment. In the
came to be purchased by the meantime, debit advice (Exhibit "G") was received from Plaintiff-
company. Appellant's New York Agency to the effect that it advanced or paid the
draft (Exhibit "A") to Otis Elevator Co. on May 17, 1949, and charged
It cannot, therefore, be taken out of the said funds, without violating Plaintiff-Appellant the sum of $14,467.21 representing the face value
the requirements of the law. Thus, the anauthorized use or distribution of the draft (Exhibit "A") plus $18.06 as 1/8 of 1% commission. After
of the same by a corporate officer of Filriters cannot bind the said the maturity date (October 4, 1949) Plaintiff-Appellant presented the
corporation, not without the approval of its Board of Directors, and the draft to Defendant-Appellee for payment but the latter failed, neglected
maintenance of the required reserve fund. and refused to pay.

Consequently, the title of Filriters over the subject certificate of During its special session in January, 1951, Congress passed House
indebtedness must be upheld over the claimed interest of Traders Royal Bill No. 1513, now Republic Act No. 601, approved on March 28,
Bank. 1951, imposing a 17% special excise tax (otherwise known as foreign
exchange tax) on the value in Philippine peso of foreign exchange sold
by the Central Bank of the Philippines or its authorized agents.
ACCORDINGLY, the petition is DISMISSED and the decision Plaintiff-appellant, as any other commercial bank in the Philippines, is
appealed from dated January 29, 1990 is hereby AFFIRMED. an authorized agent of the Central Bank of the Philippines.

SO ORDERED. On October 17, 1952, and January 18, 1953, Plaintiff-Appellant sent
bills or statements of collection (Exhibits "D" and "D-1") to
Republic of the Philippines Defendant-Appellee but the latter failed and refused to effect payment
SUPREME COURT thereof. In those statements, the sum of P4,955.74 was included
Manila representing the 17% special excise tax on the peso value of the draft
for US $14,449.15 (Exhibit "A"), . . . .
EN BANC
Defendant's application for a letter of credit party read as follows:
G.R. No. L-7271 August 30, 1957
Please arrange by cable for the establishment of an
PHILIPPINE NATIONAL BANK, plaintiff-appellant, Irrevocable Letter of Credit on New York in favor of Otis
vs. Elevator Co., 260 Eleventh Avenue, New York City for
JOSE ZULUETA, defendant-appellee. account of Ho. Jose C. Zulueta for the sum of FOURTEEN
THOUSAND FOUR HUNDRED FORTY-NINE AND
15/100 ($14,449.15) DOLLARS against drawn at NINETY
Natalio M. Balboa and Ramon B. de los Reyes for appellant. DAYS accompanied by shipping documents covering of
Lorenzo F. Miravite for appellee. One COMPLETE ELECTRIC PASSENGER ELEVATOR .
..
Drafts must be drawn and presented or negotiated not later we practically followed this rule in Westminster Bank vs. K. Nassor,
than May 31, 1949. 58 Phil. 855.

IN CONSIDERATION THEREOF, I/we promise and agree There is one decision applying the rate of exchange at the time
to pay you at maturity in Philippine Currency, the equivalent judgment is entered. (11 C. J. S. p.264.)5
of the above amount or such portion thereof as may be drawn
or paid upon the faith of said credit, together with your usual This decision however seems not to have taken into account the Bills
charges, and I/we authorize you and your respective of Exchange Act above mentioned. And we have rejected its view in
correspondents to pay or to accept drafts under this credit, . the Westminster case, supra. Furthermore it related to a bill expressly
.. made payable in a foreign currency — which is not the case here. And
the theory would probably produce undesirable effects upon
And the draft issued thereunder (Exhibit A) was negotiable and commercial documents, for it would make the amount uncertain, the
addressed to herein defendant as the drawee. parties to the bill not being able to foresee the day judgment would be
rendered.6
From plaintiff's statement of its position it is not clear whether recovery
is demanded upon the letter of credit, or upon the draft Exhibit A. But the appellant argues, the defendant had promised to pay
Plaintiff may, undoubtedly, proceed on either cause of action. (See Art. $14,419.15 in dollars; therefore he must be ordered to pay the sum in
571 Code of Commerce; Sec. 51 Negotiable Instruments Law.) dollars at current rates plus 17%.

Had the plaintiff elected to recover on said letter of credit, then it would The argument rests on a wrong premise. Defendant had not promised
meet with the doctrines in Araneta vs. Philippine National Bank, 95 to pay in dollars. He agreed to pay the equivalent of $14,419.15
Phil., 160, 50 Off. Gaz., (11) 5350), According to the majority opinion dollars, in Philippine currency 7.
in that case, plaintiff should receive the equivalent in pesos, on May
17, 1949, of what the New York Agency paid to Otis Elevator, i.e. But if we admit that defendant had agreed to pay in dollars, then we
$14,467.21 (plus bank fees of course.) According to the minority have to apply Republic Act No. 529 and say that his obligation "shall
opinion, the equivalent in pesos of the same amount of dollars on be discharged in Philippine currency measured at the prevailing rates
October 4, 1949. No. 17% tax on both dates. In converting dollars into of exchange at the time the obligation was incurred."
pesos, no 17% exchange tax would be imposable, since it was created
only in March 1951. The plaintiff knows the case, for it was a party to
it; and anticipating, in this appeal, the obvious conclusions, it insists Now then, Zulueta's obligation having been incurred8 before the
not so much on the letter of credit, as on the bill of exchange Exhibit creation of the 17% tax, it may not be validly burdened with such tax,
A1 . As stated before, such draft was drawn by Otis Elevator Co. in because the law imposing it could not be deemed to have impaired
New York. It was addressed to defendant as drawee, who is due course obligations already existing at the time of its approval..
accepted it. There is no, question that upon accepting it, defendant
became a party primarily liable2; and the holder (Philippine National The plaintiff's theory seems to be that in remitting dollars to its New
Bank) may sue him, even if there had been no presentation for payment York Agency, after it collects from the defendant, it has to pay for the
on the day of maturity. (Sec. 70 Negotiable Instruments Law.) said excise tax.9 The trial judge expressed the belief that such
amount had been remitted before the enactment of Republic Act 601,
Admittedly, defendant's responsibility is for $14,449.15 due in Manila because considering the practice of banks of replenishing their
on October 4, 1949 (plus bank fees). He is under obligation to deliver agencies abroad with necessary funds, he deemed it improbable that
such amount in pesos as were the equivalent of $14,449.15. At what the Manila Office of the Bank — in two years had not reimburse its
rate of exchange? The rate prevailing on the day of issuance, day of New York Agency for the amount advanced on account of the draft
acceptance, day of maturity, the day suit is filed, or that prevailing on Exhibit A. This belief most probably accorded with reality; because as
the day judgment is rendered requiring him to pay? Herein lies the early as May 17, 1949 (Exhibit G) the New York Agency had
center of the controversy. Appellant will win this appeal only if the rate "charged" the amount of this draft against the account of the Manila
on the last days above mentioned is held to be the legal rate. office there, — which means the Agency had reimbursed itself the
amount of the draft out of the funds of the Manila Office then in its
possession (in New York) or coming to its possession afterwards. And
The document is negotiable and is governed by the Negotiable it is unbelievable that in two years the Manila office never had in New
Instruments Law. But this statute does not certain any express York sufficient funds to effect the reimbursement.
provision on the question. We know the draft is a foreign bill of
exchange, because, drawn in New York, it is payable here. (See. 129
Negotiable Instruments Law.) We also know that although the amount In fact, the statement of account rendered by plaintiff to defendant on
payable is expressed in dollars — not current money here — it is still October 17, 1952, (Exhibit D) enumerated these charges:
negotiable, for it may be discharged with pesos of equivalent amount3.
The problem arises when we try to determine the "equivalent amount", To your acceptance amounting to $14,
because the rate of exchange fluctuates from day to day.
Plus: Remitter's Commission
$14,
There are decisions in America to the effect that, "the rate of exchange
in effect at the time the bill should have been paid" controls. (11 C.J.S. Converted at 3/4 % P29,
p. 264.) 5% int. 5/17/49-10/19/52-1251 da. 4,
P34,
Such decisions agree with the provisions of the Bills of Exchange Act 10% comm. on $14,449.15 2,91
of England4 and could be taken as enunciating the correct principle,
Documentary stamps 8.70
inasmuch as our Negotiable Instruments Law, practically copied the
American Uniform Negotiable Instruments Law which in turn was Air Mail 2.00
based largely on the Bills of Exchange Act of England of 1882. In fact 17% Excise Tax on P29,151.43 4,95
Other charges this3.00
Court and I subscribe to each and every statement made and
argument adduced therein. This being so, it would seem that any
concurring or supporting opinion is quite superfluous and I would not
From the above it may be deduced that the amount of the draft had have taken the task of writing further in the matter were it not for the
been remitted or paid to the New York Agency in May 1949, for the fact that in the dissenting opinion it is stated that:
reason that Zulueta is charged with remitter's commission" and 5%
interest on the amount of the draft (and such commission) beginning
from May 17, 1949. This necessarily impllies that in accordance with It cannot be justly contended that if a debtor had borrowed,
Exhibit G, the New York Agency had been reimbursed of the draft's say $10,000, the lender should be satisfied with eight or nine
amount (or such amount was remitted) on May 17, 1949.10 Now, in thousand. Yet that is what the majority's decision actually
May 1949 no 17% exchange tax was payable upon such remittance; amounts to.
and the Manila office did not pay it. Therefore Zulueta should not pay
it too. The writer further says that:

In view of the foregoing the judgment will be affirmed, with costs the majority opinion has the merit of giving the bank a costly
against appellant. So ordered. lesson on the advantages of not considering political
influence in the making and collecting of its loans; but I am
Paras, C.J., Padilla, Montemayor and Bautista Angelo, JJ., concur. afraid the experience will be too quickly forgotten to even
palliate the sacrifice of fundamental justice to technical
considerations.

I, certainly, cannot leave these statements pass unanswered.


Separate Opinions
To begin with, I might say that if any lesson has been given by the
majority of this court to the plaintiff bank, it is not in this case but in
REYES, A., J., concurring: the case of Araneta vs. The Philippine National Bank (G.R. No. L-
4633, May 31, 1954), cited in the majority decision, where the latter
Plaintiff in this case seeks reimbursement in Philippine currency for was a party to that case and a similar doctrine was laid down. Coming
the amount in dollars advanced by it through its New York agency to now to the bone of contention, I notice that the dissenting Justice views
meet a draft drawn against defendant and accepted by the latter for a the matter involved in the controversy as a loan and submits that the
valuable consideration. Plaintiff's to such reimbursement is not question really at issue can be boiled down to the proposition of
questioned. What is disputed is its pretended right to add to the amount "whether it is the lender or the borrower who should bear the added
of the draft the excise tax of 17 % which plaintiff would had to pay to cost of the depreciation of the peso in relation to the dollar".
the Government if it were to remit now to New York the necessary
amount of dollars that its agency there had paid on the draft. In this connection, I might say that defendant's obligation to the
plaintiff would have been settled some years ago were it not for the
I cannot bring myself to believe that it is only now that plaintiff has fact that the Bank insisted in collecting the special excise tax of 17 per
thought of sending dollars to New York to replace the amount cent on foreign exchange transactions imposed by Republic Act No.
advanced by its agency. As intimated in the majority opinion and in 601 which entered into effect on March 28, 1951, and was not yet in
consonance with good banking practice, the necessary remittance must force at the time the obligation of the defendant matured on October 4,
have been effected long ago, that is, long before the creation of the 1948. And even if we look at the case as a loanand apply to the
excise tax on foreign exchange in March, 1951. Plaintiff, therefore, transaction the provisions of Article 312, paragraph 1, of the Code of
could not have paid such tax, and not having done so it has no right to Commerce, cited by the dissenting Justice, yet We could not, under the
get reimbursement therefore from defendant. facts and circumstances of the case that cannot be denied, logically
arrive at the same conclusion that he has come to.
I do not think that defendant could be legally made to pay more than
what plaintiff had actually advanced for him, aside from commission And the reason is obvious. In the first place, We have to take into
and other charges, on the theory that the Philippine peso has account that the New York agency of Philippine National Bank and its
depreciated in value with respect to the American dollar. Legally, it central office in Manila are not separate and independent entities. That
has not. The legal rate of exchange between the two currencies is still is why it is the Philippine National Bank (Manila office) and not the
two to one. What happened is that with the creation of the excise tax New York agency of said Bank that is the plaintiff in this case.
in 1951, it would now be more costly to remit dollars abroad. But why Consequently, any payment made to plaintiffs central office in Manila
should plaintiff make that remittance now when, as already stated, it for obligations that any debtor may have contracted with said New
must have already done so long before the creation of the excise tax on York agency is and has to be considered as a payment or settlement of
foreign exchange? said obligations, there being no need to attain this result that the
plaintiff would adjust is accounts with its agency, or transmit to the
Lastly, a debtor cannot be charged with bad faith for refusing to pay latter the amounts received from the debtor.
that which he should not pay.
In the second place, the obligation contracted by the defendant was not
to pay $14,419.15 in dollars, but the equivalent of $14,419.15
dollars, in Philippine currency. So, when defendant's obligation
matured on October 4, 1949, the defendant had to pay to the
Bank not the sum of $14,467.21 representing the face value of the draft
FELIX, J., concurring: Exhibit A, plus $18.06 as 1/8 of 1 per cent commission, but its
equivalent in pesos at the time of such maturity, and had the defendant
The decision rendered in this case, penned by Mr. Justice Cezar failed to satisfy then his obligation, he could be held liable to pay in
Bengzon, perfectly reflects and delivers the opinion of the majority of
addition thereof, the corresponding interests for the period of default the criterion. This rule might sometimes be to the advantage
and nothing else. And that is precisely what defendant is willing to pay. of the holder of the note, as in the present case. In other cases,
where the premium was less at the time the note became due
From the foregoing, I hope to have made clear my stand on the matter. than at the time of trial, it would be to his detriment. And in
view of these uncertainties and fluctuations in the rate, upon
grounds of policy as well as for its tendency to do as
complete justice between the parties as is possible, we have
come to the conclusion that the true rule in such cases is to
give judgment for such an amount as will, at the time of the
REYES, J.B.L., dissenting: judgment, purchase the amount due on the note in the funds
or currency in which it is payable.
As I view it, the question before this court is whether it is the lender or
the defaulting borrower who should bear the added cost of the The crucial point is that the Bank's action is not for damages, but for
depreciation of the peso in relation to the dollar. specific performance of Zulueta's obligation. While payable in
Philippine pesos, it was actually one to pay a definite sum in United
When in 1949 the Philippine National Bank remitted to the Otis States dollars, since he promised to pay an equivalent amount. The
Elevator Co. the $14,449.15 for the account of Zulueta, the Bank, in failure to specify any fixed number of pesos, and the omission of any
effect, loaned to Zulueta said amount on the strength of his express reference to any rate of exchange, is proof that the parties had in mind
engagement to "pay at maturity in Philippine Currency, the equivalent the restoration to the Bank of the value of the dollars it had advanced.
of the above amount," which was a promise to pay such amount in In other words, Zulueta engaged to return to the Bank so many
Philippine pesos as could be converted into $14,449.15. There is no Philippine pesos as could be converted into $14,449.15; and that is
question that Zulueta failed to do so, and has refused to do so up to the what the Bank asks him to do. It can not be justly contended that if a
present. In the meantime, in 1951, the Legislature enacted Rep. Act debtor had borrowed, say, ten thousand dollars, the lender should be
No. 601, imposing a 17% special excise tax on foreign exchange satisfied with eight or nine thousand. Yet that is what the majority's
transactions, so that thereafter one had to pay 234 pesos for every $100, decision actually amounts to.
instead of P200 as heretofore. Should Zulueta be required to pay for
the dollars at the new rate? I see no point in determining the rate of dollar-peso exchange at the
date of maturity or of the constitution of the obligation, since Zulueta
Since Zulueta's obligation is measured in terms of U.S. dollars that did not engage to pay any definite amount of pesos, but so many as
have increased in value vis-a-vis the peso, Art. 312, par. 1, of the Code would be needed to make up $14,449.15. And as Zulueta is being
of Commerce, which was the law then in force, must be read into the required to comply with a specific promise, there is no relevancy in
contract. It provides: whether or not the main office of the Bank has or has not remitted the
dollars to its American agency; after all, the two part are of the same
institution. Anyway, if the dollars have not been remitted, the amount
If the loan consists of money, the debtor shall pay it by that Zulueta is now sentenced to pay will not permit a remittance of the
returning an amount equal to that received, in accordance same number of dollars that the Bank advanced for his account. If they
with the legal value which the money may have at the time were heretofore remitted, the funds of the Bank in Manila have been
of the return, unless the kind of money in which the payment diminished pro tanto, and they can not be replenished to their original
is to be made has been stipulated, in which case the change level in terms of dollars unless Zulueta is required to pay the exchange
which its value may suffer shall be to the detriment or for the tax.
benefit of the lender. (Emphasis supplied)
Of course, the majority opinion has the merit of giving the Bank a
The majority decision, in upholding the contention that Zulueta is not costly lesson on the advantages of not considering political influence
chargeable with the 17% tax, virtually authorizes just the contrary; and in the making and collecting of its loans; but I am afraid the experience
permits the defaulting borrower to repay an amount in pesos that, in will be too quickly forgotten to even palliate the sacrifice of
violation of the law and his engagement, can not be converted into the fundamental justice to technical considerations.
same amount of dollars loaned to him. I believe it is contrary to all
elemental justice and good faith to enable a borrower to return to his
creditor less than the amount borrowed, specially taking into account For the foregoing reasons, I dissent.
that Zulueta, by his obdurate refusal to pay a just debt, is a debtor in
bad faith who is responsible for any subsequent damages suffered by Labrador, Concepcion and Endencia, JJ., concur.
his creditor, even if due to fortuitous event.
Republic of the Philippines
Applicable here are the considerations in Hawes vs. Woolcock (26 SUPREME COURT
Wis. 629, 635), quoted with approval in Engel vs. Mariano Velasco & Manila
Co., 47 Phil. 115, 143:
SECOND DIVISION
In Hawes vs. Woolcock (26 Wis., 629, 635), the court said:
G.R. No. 72593 April 30, 1987
"Perhaps a strict application of logical reasoning to the
question would lead to the result that the premium should be CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY
estimated at the rate when the note fell due. That was when WEE, and RODOLFO T. VERGARA, petitioners,
the money should have been paid, and when the default in vs.
performing the contract occurred. This conclusion would be IFC LEASING AND ACCEPTANCE
supported by the analogy derived from the rule of damages CORPORATION, respondent.
on contracts to deliver specific articles, fixing the market
price at the time when they ought to have been delivered as
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent. On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the
seller-assignor of the fact that the tractors broke down and requested
for the seller-assignor's usual prompt attention under the warranty (E
exh. " 5 ").
GUTIERREZ, JR., J.:
In response to the formal advice by petitioner Rodolfo T. Vergara,
Exhibit "5," the seller-assignor sent to the job site its mechanics to
This is a petition for certiorari under Rule 45 of the Rules of Court conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-
which assails on questions of law a decision of the Intermediate 1," "6-D," and "6-E"), but the tractors did not come out to be what they
Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as should be after the repairs were undertaken because the units were no
well as its resolution dated October 17, 1985, denying the motion for longer serviceable (t. s. n., May 28, 1980, p. 78).
reconsideration.
Because of the breaking down of the tractors, the road building and
The antecedent facts culled from the petition are as follows: simultaneous logging operations of petitioner-corporation were
delayed and petitioner Vergara advised the seller-assignor that the
The petitioner is a corporation engaged in the logging business. It had payments of the installments as listed in the promissory note would
for its program of logging activities for the year 1978 the opening of likewise be delayed until the seller-assignor completely fulfills its
additional roads, and simultaneous logging operations along the route obligation under its warranty (t.s.n, May 28, 1980, p. 79).
of said roads, in its logging concession area at Baganga, Manay, and
Caraga, Davao Oriental. For this purpose, it needed two (2) additional Since the tractors were no longer serviceable, on April 7, 1979,
units of tractors. petitioner Wee asked the seller-assignor to pull out the units and have
them reconditioned, and thereafter to offer them for sale. The proceeds
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf were to be given to the respondent and the excess, if any, to be divided
& Pacific Company of Manila, through its sister company and between the seller-assignor and petitioner-corporation which offered
marketing arm, Industrial Products Marketing (the "seller-assignor"), to bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").
a corporation dealing in tractors and other heavy equipment business,
offered to sell to petitioner-corporation two (2) "Used" Allis Crawler No response to this letter, Exhibit "7," was received by the petitioner-
Tractors, one (1) an HDD-21-B and the other an HDD-16-B. corporation and despite several follow-up calls, the seller-assignor did
nothing with regard to the request, until the complaint in this case was
In order to ascertain the extent of work to which the tractors were to be filed by the respondent against the petitioners, the corporation, Wee,
exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability and Vergara.
of the "Used" tractors being offered, petitioner-corporation requested
the seller-assignor to inspect the job site. After conducting said The complaint was filed by the respondent against the petitioners for
inspection, the seller-assignor assured petitioner-corporation that the the recovery of the principal sum of One Million Ninety Three
"Used" Allis Crawler Tractors which were being offered were fit for Thousand Seven Hundred Eighty Nine Pesos & 71/100
the job, and gave the corresponding warranty of ninety (90) days (P1,093,789.71), accrued interest of One Hundred Fifty One Thousand
performance of the machines and availability of parts. (t.s.n., May 28, Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15,
1980, pp. 59-66). 1979, accruing interest thereafter at the rate of twelve (12%) percent
per annum, attorney's fees of Two Hundred Forty Nine Thousand
With said assurance and warranty, and relying on the seller-assignor's Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.
skill and judgment, petitioner-corporation through petitioners Wee and
Vergara, president and vice- president, respectively, agreed to The petitioners filed their amended answer praying for the dismissal of
purchase on installment said two (2) units of "Used" Allis Crawler the complaint and asking the trial court to order the respondent to pay
Tractors. It also paid the down payment of Two Hundred Ten the petitioners damages in an amount at the sound discretion of the
Thousand Pesos (P210,000.00). court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees,
and Five Thousand Pesos (P5,000.00) for expenses of litigation. The
On April 5, 1978, the seller-assignor issued the sales invoice for the petitioners likewise prayed for such other and further relief as would
two 2) units of tractors (Exh. "3-A"). At the same time, the deed of sale be just under the premises.
with chattel mortgage with promissory note was executed (Exh. "2").
In a decision dated April 20, 1981, the trial court rendered the
Simultaneously with the execution of the deed of sale with chattel following judgment:
mortgage with promissory note, the seller-assignor, by means of a deed
of assignment (E exh. " 1 "), assigned its rights and interest in the WHEREFORE, judgment is hereby rendered:
chattel mortgage in favor of the respondent.
1. ordering defendants to pay jointly and severally
Immediately thereafter, the seller-assignor delivered said two (2) units in their official and personal capacities the
of "Used" tractors to the petitioner-corporation's job site and as agreed, principal sum of ONE MILLION NINETY
the seller-assignor stationed its own mechanics to supervise the THREE THOUSAND SEVEN HUNDRED
operations of the machines. NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of ONE
Barely fourteen (14) days had elapsed after their delivery when one of HUNDRED FIFTY ONE THOUSAND SIX
the tractors broke down and after another nine (9) days, the other HUNDRED EIGHTEEN PESOS & 86/100
tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69). (P151,618.,86) as of August 15, 1979 and accruing
interest thereafter at the rate of 12% per annum;
2. ordering defendants to pay jointly and severally extending credit facilities to consumers and
attorney's fees equivalent to ten percent (10%) of industrial, commercial or agricultural enterprises
the principal and to pay the costs of the suit. by discounting or factoring commercial papers or
accounts receivable duly authorized pursuant to
Defendants' counterclaim is disallowed. (pp. 45- R.A. 5980 otherwise known as the Financing Act.
46, Rollo)
A study of the questioned promissory note reveals
On June 8, 1981, the trial court issued an order denying the motion for that it is a negotiable instrument which was
reconsideration filed by the petitioners. discounted or sold to the IFC Leasing and
Acceptance Corporation for P800,000.00 (Exh.
"A") considering the following. it is in writing and
Thus, the petitioners appealed to the Intermediate Appellate Court and signed by the maker; it contains an unconditional
assigned therein the following errors: promise to pay a certain sum of money payable at
a fixed or determinable future time; it is payable to
I order (Sec. 1, NIL); the promissory note was
negotiated when it was transferred and delivered
THAT THE LOWER COURT ERRED IN FINDING THAT THE by IPM to the appellee and duly endorsed to the
SELLER ATLANTIC GULF AND PACIFIC COMPANY OF latter (Sec. 30, NIL); it was taken in the conditions
MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS that the note was complete and regular upon its
CLAIM OF WARRANTY. face before the same was overdue and without
notice, that it had been previously dishonored and
that the note is in good faith and for value without
II notice of any infirmity or defect in the title of IPM
(Sec. 52, NIL); that IFC Leasing and Acceptance
THAT THE LOWER COURT ERRED IN FINDING THAT Corporation held the instrument free from any
PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE OF THE defect of title of prior parties and free from
PROMISSORY NOTE AND SUED UNDER SAID NOTE AS defenses available to prior parties among
HOLDER THEREOF IN DUE COURSE. themselves and may enforce payment of the
instrument for the full amount thereof against all
parties liable thereon (Sec. 57, NIL); the appellants
On July 17, 1985, the Intermediate Appellate Court issued the
engaged that they would pay the note according to
challenged decision affirming in toto the decision of the trial court.
its tenor, and admit the existence of the payee IPM
The pertinent portions of the decision are as follows:
and its capacity to endorse (Sec. 60, NIL).

xxx xxx xxx


In view of the essential elements found in the
questioned promissory note, We opine that the
From the evidence presented by the parties on the same is legally and conclusively enforceable
issue of warranty, We are of the considered against the defendants-appellants.
opinion that aside from the fact that no provision
of warranty appears or is provided in the Deed of
WHEREFORE, finding the decision appealed
Sale of the tractors and even admitting that in a
from according to law and evidence, We find the
contract of sale unless a contrary intention
appeal without merit and thus affirm the
appears, there is an implied warranty, the defense
decision in toto. With costs against the appellants.
of breach of warranty, if there is any, as in this
(pp. 50-55, Rollo)
case, does not lie in favor of the appellants and
against the plaintiff-appellee who is the assignee
of the promissory note and a holder of the same in The petitioners' motion for reconsideration of the decision of July 17,
due course. Warranty lies in this case only between 1985 was denied by the Intermediate Appellate Court in its resolution
Industrial Products Marketing and Consolidated dated October 17, 1985, a copy of which was received by the
Plywood Industries, Inc. The plaintiff-appellant petitioners on October 21, 1985.
herein upon application by appellant corporation
granted financing for the purchase of the Hence, this petition was filed on the following grounds:
questioned units of Fiat-Allis Crawler,Tractors.
I.
xxx xxx xxx
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A
Holding that breach of warranty if any, is not a NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW
defense available to appellants either to withdraw SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
from the contract and/or demand a proportionate
reduction of the price with damages in either case
(Art. 1567, New Civil Code). We now come to the II
issue as to whether the plaintiff-appellee is a
holder in due course of the promissory note. THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT
BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT
To begin with, it is beyond arguments that the PROMISSORY NOTE.
plaintiff-appellee is a financing corporation
engaged in financing and receivable discounting III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE ART. 1561. The vendor shall be responsible for
INSTRUMENT AND THE TRANSFER OF RIGHTS WAS warranty against the hidden defects which the
THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY thing sold may have, should they render it unfit for
RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT the use for which it is intended, or should they
ARE AVAILABLE TO IT AS AGAINST THE SELLER- diminish its fitness for such use to such an extent
ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING. that, had the vendee been aware thereof, he would
not have acquired it or would have given a lower
IV. price for it; but said vendor shall not be answerable
for patent defects or those which may be visible,
or for those which are not visible if the vendee is
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF an expert who, by reason of his trade or profession,
THE PROMISSORY NOTE BECAUSE: should have known them.

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF ART. 1562. In a sale of goods, there is an implied
WARRANTY UNDER THE LAW; warranty or condition as to the quality or fitness
of the goods, as follows:
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY
FROM THE SELLER-ASSIGNOR OF THE PROMISSORY NOTE. (1) Where the buyer, expressly or by implication
makes known to the seller the particular purpose
V. for which the goods are acquired, and it appears
that the buyer relies on the sellers skill or judge
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE judgment (whether he be the grower or
SELLER- ASSIGNOR IN FAVOR OF THE RESPONDENT DOES manufacturer or not), there is an implied warranty
NOT CHANGE THE NATURE OF THE TRANSACTION FROM that the goods shall be reasonably fit for such
BEING A SALE ON INSTALLMENTS TO A PURE LOAN. purpose;

VI. xxx xxx xxx

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED ART. 1564. An implied warranty or condition as
IN EVIDENCE IN ANY COURT BECAUSE THE REQUISITE to the quality or fitness for a particular purpose
DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED may be annexed by the usage of trade.
THEREON OR CANCELLED.
xxx xxx xxx
The petitioners prayed that judgment be rendered setting aside the
decision dated July 17, 1985, as well as the resolution dated October ART. 1566. The vendor is responsible to the
17, 1985 and dismissing the complaint but granting petitioners' vendee for any hidden faults or defects in the thing
counterclaims before the court of origin. sold even though he was not aware thereof.

On the other hand, the respondent corporation in its comment to the This provision shall not apply if the contrary has
petition filed on February 20, 1986, contended that the petition was been stipulated, and the vendor was not aware of
filed out of time; that the promissory note is a negotiable instrument the hidden faults or defects in the thing sold.
and respondent a holder in due course; that respondent is not liable for (Emphasis supplied).
any breach of warranty; and finally, that the promissory note is
admissible in evidence. It is patent then, that the seller-assignor is liable for its breach of
warranty against the petitioner. This liability as a general rule, extends
The core issue herein is whether or not the promissory note in question to the corporation to whom it assigned its rights and interests unless
is a negotiable instrument so as to bar completely all the available the assignee is a holder in due course of the promissory note in
defenses of the petitioner against the respondent-assignee. question, assuming the note is negotiable, in which case the latter's
rights are based on the negotiable instrument and assuming further that
Preliminarily, it must be established at the outset that we consider the the petitioner's defenses may not prevail against it.
instant petition to have been filed on time because the petitioners'
motion for reconsideration actually raised new issues. It cannot, Secondly, it likewise cannot be denied that as soon as the tractors broke
therefore, be considered pro- formal. down, the petitioner-corporation notified the seller-assignor's sister
company, AG & P, about the breakdown based on the seller-assignor's
The petition is impressed with merit. express 90-day warranty, with which the latter complied by sending its
mechanics. However, due to the seller-assignor's delay and its failure
to comply with its warranty, the tractors became totally unserviceable
First, there is no question that the seller-assignor breached its express and useless for the purpose for which they were purchased.
90-day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor
broke down and 9 days, thereafter, the second tractor became Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its
inoperable" are sustained by the records. The petitioner was clearly a contract with the seller-assignor.
victim of a warranty not honored by the maker.
Articles 1191 and 1567 of the Civil Code provide that:
The Civil Code provides that:
ART. 1191. The power to rescind obligations is The instrument in order to be considered
implied in reciprocal ones, in case one of the negotiablility-i.e. must contain the so-called
obligors should not comply with what is 'words of negotiable, must be payable to 'order' or
incumbent upon him. 'bearer'. These words serve as an expression of
consent that the instrument may be transferred.
The injured party may choose between the This consent is indispensable since a maker
fulfillment and the rescission of the obligation with assumes greater risk under a negotiable instrument
the payment of damages in either case. He may than under a non-negotiable one. ...
also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible. xxx xxx xxx

xxx xxx xxx When instrument is payable to order.

ART. 1567. In the cases of articles 1561, 1562, SEC. 8. WHEN PAYABLE TO ORDER. — The
1564, 1565 and 1566, the vendee may elect instrument is payable to order where it is drawn
between withdrawing from the contract and payable to the order of a specified person or to him
demanding a proportionate reduction of the price, or his order. . . .
with damages in either case. (Emphasis supplied)
xxx xxx xxx
Petitioner, having unilaterally and extrajudicially rescinded its contract
with the seller-assignor, necessarily can no longer sue the seller- These are the only two ways by which an
assignor except by way of counterclaim if the seller-assignor sues it instrument may be made payable to order. There
because of the rescission. must always be a specified person named in the
instrument. It means that the bill or note is to be
In the case of the University of the Philippines v. De los Angeles (35 paid to the person designated in the instrument or
SCRA 102) we held: to any person to whom he has indorsed and
delivered the same. Without the words "or order"
In other words, the party who deems the contract or"to the order of, "the instrument is payable only
violated may consider it resolved or rescinded, and to the person designated therein and is therefore
act accordingly, without previous court action, but non-negotiable. Any subsequent purchaser thereof
it proceeds at its own risk. For it is only the final will not enjoy the advantages of being a holder of
judgment of the corresponding court that will a negotiable instrument but will merely "step into
conclusively and finally settle whether the action the shoes" of the person designated in the
taken was or was not correct in law. But the law instrument and will thus be open to all defenses
definitely does not require that the contracting available against the latter." (Campos and
party who believes itself injured must first file suit Campos, Notes and Selected Cases on Negotiable
and wait for adjudgement before taking Instruments Law, Third Edition, page 38).
extrajudicial steps to protect its interest. (Emphasis supplied)
Otherwise, the party injured by the other's breach
will have to passively sit and watch its damages Therefore, considering that the subject promissory note is not a
accumulate during the pendency of the suit until negotiable instrument, it follows that the respondent can never be a
the final judgment of rescission is rendered when holder in due course but remains a mere assignee of the note in
the law itself requires that he should exercise due question. Thus, the petitioner may raise against the respondent all
diligence to minimize its own damages (Civil defenses available to it as against the seller-assignor Industrial
Code, Article 2203). (Emphasis supplied) Products Marketing.

Going back to the core issue, we rule that the promissory note in This being so, there was no need for the petitioner to implied the seller-
question is not a negotiable instrument. assignor when it was sued by the respondent-assignee because the
petitioner's defenses apply to both or either of either of them. Actually,
The pertinent portion of the note is as follows: the records show that even the respondent itself admitted to being a
mere assignee of the promissory note in question, to wit:
FOR VALUE RECEIVED, I/we jointly and
severally promise to pay to the INDUSTRIAL ATTY. PALACA:
PRODUCTS MARKETING, the sum of ONE
MILLION NINETY THREE THOUSAND Did we get it right from the
SEVEN HUNDRED EIGHTY NINE PESOS & counsel that what is being
71/100 only (P 1,093,789.71), Philippine assigned is the Deed of Sale
Currency, the said principal sum, to be payable in with Chattel Mortgage with
24 monthly installments starting July 15, 1978 and the promissory note which is
every 15th of the month thereafter until fully paid. as testified to by the witness
... was indorsed? (Counsel for
Plaintiff nodding his head.)
Considering that paragraph (d), Section 1 of the Negotiable Then we have no further
Instruments Law requires that a promissory note "must be payable to questions on cross,
order or bearer, " it cannot be denied that the promissory note in
question is not a negotiable instrument. COURT:
You confirm his the instrument amounted to bad faith, is not a holder in due course. As
manifestation? You are such, the respondent is subject to all defenses which the petitioners
nodding your head? Do you may raise against the seller-assignor. Any other interpretation would
confirm that? be most inequitous to the unfortunate buyer who is not only saddled
with two useless tractors but must also face a lawsuit from the assignee
ATTY. ILAGAN: for the entire purchase price and all its incidents without being able to
raise valid defenses available as against the assignor.
The Deed of Sale cannot be
assigned. A deed of sale is a Lastly, the respondent failed to present any evidence to prove that it
transaction between two had no knowledge of any fact, which would justify its act of taking the
persons; what is assigned are promissory note as not amounting to bad faith.
rights, the rights of the
mortgagee were assigned to Sections 52 and 56 of the Negotiable Instruments Law provide that:
the IFC Leasing & negotiating it.
Acceptance Corporation.
xxx xxx xxx
COURT:
SEC. 52. WHAT CONSTITUTES A HOLDER IN
He puts it in a simple way as DUE COURSE. — A holder in due course is a
one-deed of sale and chattel holder who has taken the instrument under the
mortgage were assigned; . . . following conditions:
you want to make a
distinction, one is an xxx xxx xxx
assignment of mortgage right
and the other one is
indorsement of the xxx xxx xxx
promissory note. What
counsel for defendants wants (c) That he took it in good faith and for value
is that you stipulate that it is
contained in one single (d) That the time it was negotiated by him he had
transaction? no notice of any infirmity in the instrument of
deffect in the title of the person negotiating it
ATTY. ILAGAN:
xxx xxx xxx
We stipulate it is one single
transaction. (pp. 27-29, TSN., SEC. 56. WHAT CONSTITUTES NOTICE OF
February 13, 1980). DEFFECT. — To constitute notice of an infirmity
in the instrument or defect in the title of the person
Secondly, even conceding for purposes of discussion that the negotiating the same, the person to whom it is
promissory note in question is a negotiable instrument, the respondent negotiated must have had actual knowledge of the
cannot be a holder in due course for a more significant reason. infirmity or defect, or knowledge of such facts that
his action in taking the instrument amounts to bad
The evidence presented in the instant case shows that prior to the sale faith. (Emphasis supplied)
on installment of the tractors, there was an arrangement between the
seller-assignor, Industrial Products Marketing, and the respondent We subscribe to the view of Campos and Campos that a financing
whereby the latter would pay the seller-assignor the entire purchase company is not a holder in good faith as to the buyer, to wit:
price and the seller-assignor, in turn, would assign its rights to the
respondent which acquired the right to collect the price from the buyer, In installment sales, the buyer usually issues a note
herein petitioner Consolidated Plywood Industries, Inc. payable to the seller to cover the purchase price.
Many times, in pursuance of a previous
A mere perusal of the Deed of Sale with Chattel Mortgage with arrangement with the seller, a finance company
Promissory Note, the Deed of Assignment and the Disclosure of pays the full price and the note is indorsed to it,
Loan/Credit Transaction shows that said documents evidencing the subrogating it to the right to collect the price from
sale on installment of the tractors were all executed on the same day the buyer, with interest. With the increasing
by and among the buyer, which is herein petitioner Consolidated frequency of installment buying in this country, it
Plywood Industries, Inc.; the seller-assignor which is the Industrial is most probable that the tendency of the courts in
Products Marketing; and the assignee-financing company, which is the the United States to protect the buyer against the
respondent. Therefore, the respondent had actual knowledge of the fact finance company will , the finance company will
that the seller-assignor's right to collect the purchase price was not be subject to the defense of failure of consideration
unconditional, and that it was subject to the condition that the tractors and cannot recover the purchase price from the
-sold were not defective. The respondent knew that when the tractors buyer. As against the argument that such a rule
turned out to be defective, it would be subject to the defense of failure would seriously affect "a certain mode of
of consideration and cannot recover the purchase price from the transacting business adopted throughout the
petitioners. Even assuming for the sake of argument that the State," a court in one case stated:
promissory note is negotiable, the respondent, which took the same
with actual knowledge of the foregoing facts so that its action in taking
It may be that our holding here The complaint against the petitioner before the trial court is
will require some changes in DISMISSED.
business methods and will
impose a greater burden on SO ORDERED.
the finance companies. We
think the buyer-Mr. & Mrs.
General Public-should have Republic of the Philippines
some protection somewhere SUPREME COURT
along the line. We believe the Manila
finance company is better able
to bear the risk of the dealer's EN BANC
insolvency than the buyer and
in a far better position to G.R. No. L-2516 September 25, 1950
protect his interests against
unscrupulous and insolvent
dealers. . . . ANG TEK LIAN, petitioner,
vs.
THE COURT OF APPEALS, respondent.
If this opinion imposes great
burdens on finance companies
it is a potent argument in favor Laurel, Sabido, Almario and Laurel for petitioner.
of a rule which win afford Office of the Solicitor General Felix Bautista Angelo and Solicitor
public protection to the Manuel Tomacruz for respondent.
general buying public against
unscrupulous dealers in BENGZON, J.:
personal property. . . . (Mutual
Finance Co. v. Martin, 63 So.
For having issued a rubber check, Ang Tek Lian was convicted
2d 649, 44 ALR 2d 1 [1953])
of estafa in the Court of First Instance of Manila. The Court of Appeals
(Campos and Campos, Notes
affirmed the verdict.
and Selected Cases on
Negotiable Instruments Law,
Third Edition, p. 128). It appears that, knowing he had no funds therefor, Ang Tek Lian drew
on Saturday, November 16, 1946, the check Exhibits A upon the China
Banking Corporation for the sum of P4,000, payable to the order of
In the case of Commercial Credit Corporation v. Orange Country
"cash". He delivered it to Lee Hua Hong in exchange for money which
Machine Works (34 Cal. 2d 766) involving similar facts, it was held
the latter handed in act. On November 18, 1946, the next business day,
that in a very real sense, the finance company was a moving force in
the check was presented by Lee Hua Hong to the drawee bank for
the transaction from its very inception and acted as a party to it. When
payment, but it was dishonored for insufficiency of funds, the balance
a finance company actively participates in a transaction of this type
of the deposit of Ang Tek Lian on both dates being P335 only.
from its inception, it cannot be regarded as a holder in due course of
the note given in the transaction.
The Court of Appeals believed the version of Lee Huan Hong who
testified that "on November 16, 1946, appellant went to his
In like manner, therefore, even assuming that the subject promissory
(complainant's) office, at 1217 Herran, Paco, Manila, and asked him to
note is negotiable, the respondent, a financing company which actively
exchange Exhibit A — which he (appellant) then brought with him —
participated in the sale on installment of the subject two Allis Crawler
with cash alleging that he needed badly the sum of P4,000 represented
tractors, cannot be regarded as a holder in due course of said note. It
by the check, but could not withdraw it from the bank, it being then
follows that the respondent's rights under the promissory note involved
already closed; that in view of this request and relying upon appellant's
in this case are subject to all defenses that the petitioners have against
assurance that he had sufficient funds in the blank to meet Exhibit A,
the seller-assignor, Industrial Products Marketing. For Section 58 of
and because they used to borrow money from each other, even before
the Negotiable Instruments Law provides that "in the hands of any
the war, and appellant owns a hotel and restaurant known as the North
holder other than a holder in due course, a negotiable instrument is
Bay Hotel, said complainant delivered to him, on the same date, the
subject to the same defenses as if it were non-negotiable. ... "
sum of P4,000 in cash; that despite repeated efforts to notify him that
the check had been dishonored by the bank, appellant could not be
Prescinding from the foregoing and setting aside other peripheral located any-where, until he was summoned in the City Fiscal's Office
issues, we find that both the trial and respondent appellate court erred in view of the complaint for estafa filed in connection therewith; and
in holding the promissory note in question to be negotiable. Such a that appellant has not paid as yet the amount of the check, or any part
ruling does not only violate the law and applicable jurisprudence, but thereof."
would result in unjust enrichment on the part of both the assigner-
assignor and respondent assignee at the expense of the petitioner-
Inasmuch as the findings of fact of the Court of Appeals are final, the
corporation which rightfully rescinded an inequitable contract. We
only question of law for decision is whether under the facts
note, however, that since the seller-assignor has not been impleaded
found, estafa had been accomplished.
herein, there is no obstacle for the respondent to file a civil Suit and
litigate its claims against the seller- assignor in the rather unlikely
possibility that it so desires, Article 315, paragraph (d), subsection 2 of the Revised Penal Code,
punishes swindling committed "By post dating a check, or issuing such
check in payment of an obligation the offender knowing that at the time
WHEREFORE, in view of the foregoing, the decision of the
he had no funds in the bank, or the funds deposited by him in the bank
respondent appellate court dated July 17, 1985, as well as its resolution
were not sufficient to cover the amount of the check, and without
dated October 17, 1986, are hereby ANNULLED and SET ASIDE.
informing the payee of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly . . . Consequently, a drawee bank to which a bearer check is
held liable. In this connection, it must be stated that, as explained presented for payment need not necessarily have the holder
in People vs. Fernandez (59 Phil., 615), estafa is committed by issuing identified and ordinarily may not be charged with negligence
either a postdated check or an ordinary check to accomplish the deceit. in failing to do so. See Opinions 6C:2 and 6C:3 If the bank
has no reasonable cause for suspecting any irregularity, it
It is argued, however, that as the check had been made payable to will be protected in paying a bearer check, "no matter what
"cash" and had not been endorsed by Ang Tek Lian, the defendant is facts unknown to it may have occurred prior to the
not guilty of the offense charged. Based on the proposition that "by presentment." 1 Morse, Banks and Banking, sec. 393.
uniform practice of all banks in the Philippines a check so drawn is
invariably dishonored," the following line of reasoning is advanced in Although a bank is entitled to pay the amount of a bearer
support of the argument: check without further inquiry, it is entirely reasonable for the
bank to insist that holder give satisfactory proof of his
. . . When, therefore, he (the offended party ) accepted the identity. . . . (Paton's Digest, Vol. I, p. 1089.)
check (Exhibit A) from the appellant, he did so with full
knowledge that it would be dishonored upon presentment. In Anyway, it is significant, and conclusive, that the form of the check
that sense, the appellant could not be said to have acted Exhibit A was totally unconnected with its dishonor. The Court of
fraudulently because the complainant, in so accepting the Appeals declared that it was returned unsatisfied because the drawer
check as it was drawn, must be considered, by every rational had insufficient funds— not because the drawer's indorsement was
consideration, to have done so fully aware of the risk he was lacking.
running thereby." (Brief for the appellant, p. 11.)
Wherefore, there being no question as to the correctness of the penalty
We are not aware of the uniformity of such practice. Instances have imposed on the appellant, the writ of certiorari is denied and the
undoubtedly occurred wherein the Bank required the indorsement of decision of the Court of Appeals is hereby affirmed, with costs.
the drawer before honoring a check payable to "cash." But cases there
are too, where no such requirement had been made . It depends upon Moran, C. J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.
the circumstances of each transaction.
Republic of the Philippines
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn SUPREME COURT
payable to the order of "cash" is a check payable to bearer, and the Manila
bank may pay it to the person presenting it for payment without the
drawer's indorsement.
EN BANC
A check payable to the order of cash is a bearer instrument.
Bacal vs. National City Bank of New York (1933), 146 G.R. No. L-14883 July 31, 1963
Misc., 732; 262 N. Y. S., 839; Cleary vs. De Beck Plate
Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831; NARCISA BUENCAMINO, AMADA DE LEON-ERAÑA,
Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe ENCARNACION DE LEON and BIENVENIDO B.
& Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d), ERAÑA,petitioners-appellants,
818. See also H. Cook & Son vs. Moody (1916), 17 Ga. vs.
App., 465; 87 S. E., 713. C. HERNANDEZ, as City Treasurer of Quezon City,
JAIME HERNANDEZ, as Secretary of Finance and
Where a check is made payable to the order of "cash", the LAND TENURE ADMINISTRATION, respondents-appellees.
word cash "does not purport to be the name of any person",
and hence the instrument is payable to bearer. The drawee N. S. Sison for petitioners-appellants.
bank need not obtain any indorsement of the check, but may Revilla, Lustre and Agloro for respondents-appellees.
pay it to the person presenting it without any indorsement. .
. . (Zollmann, Banks and Banking, Permanent Edition, Vol. REGALA, J.:
6, p. 494.)

This is an appeal from the order of the Quezon City Court of First
Of course, if the bank is not sure of the bearer's identity or financial Instance, Judge Nicasio Yatco, presiding, dismissing the petition
solvency, it has the right to demand identification and /or assurance for mandamus filed by the herein petitioners to compel the respondent
against possible complications, — for instance, (a) forgery of drawer's City Treasurer of Quezon City to accept Government negotiable land
signature, (b) loss of the check by the rightful owner, (c) raising of the certificates as payment for land taxes.
amount payable, etc. The bank may therefore require, for its protection,
that the indorsement of the drawer — or of some other person known
to it — be obtained. But where the Bank is satisfied of the identity and The respondent City Treasurer accepts the following statement of facts
/or the economic standing of the bearer who tenders the check for set forth in the petitioners' brief:
collection, it will pay the instrument without further question; and it
would incur no liability to the drawer in thus acting. On May 11, 1957, the Land Tenure Administration, LTA for short,
purchased from the petitioners Narcisa Buencamino, Amada de Leon-
A check payable to bearer is authority for payment to holder. Eraña, and Encarnacion de Leon, and other members of the de Leon
Where a check is in the ordinary form, and is payable to family their hacienda in Talavera, Nueva Ecija for a total consideration
bearer, so that no indorsement is required, a bank, to which of P2,746,000.00. For the purpose, a Memorandum Agreement was
it is presented for payment, need not have the holder executed on the said date which expressly declared that the LTA was
identified, and is not negligent in falling to do so. . . . (Michie purchasing the hacienda upon petition of the tenants thereof in
on Banks and Banking, Permanent Edition, Vol. 5, p. 343.)
accordance with Republic Act No. 1400, otherwise known as the Land acknowledged before Marcelo Lagramada, Notary
Reform Act of 1955. Public for Manila, as Doc. No. 324, Page 66, Book
No. 6, Series of 1957.
The parties to the sale agreed that of the full price of P2,746,000.00,
50% or P1,373,000.00 was to be paid in cash and the balance in (Sgd.) JUAN CAÑIZARES
negotiable land certificates. Below is a reproduction of one such Registrar of the Central
negotiable land certificate typical of and identical to all the other issued Bank of the Philippines
by the LTA to the petitioners.
(Sgd.) CARLOS P. GARCIA
AMOUNT: P10,000.00 President of the Phil.

NEGOTIABLE LAND CERTIFICATE (Sgd.) VICENTE GELLA


THE GOVERNMENT OF THE REPUBLIC OF Treasurer of the Phil.
THE PHILIPPINES

is indebted unto the


BEARER Date of issue: August 9, 1957
Recorded: Illegible
in the sum of TEN THOUSAND PESOS. This Examined: Illegible
certificate is issued in accordance with the
provisions of Section 9, Republic Act No. 1400, The condition in the certificate regarding its encashment only after the
entitled "AN ACT DEFINING A LAND lapse of five years from the date of execution of the Deed of Sale of
TENURE POLICY, PROVIDING FOR AN Hacienda de Leon was adopted or taken from the Memorandum
INSTRUMENTALITY TO CARRY OUT THE Agreement of May 11, 1957 first mentioned above and which was
POLICY, AND APPROPRIATING FUNDS FOR subsequently ratified by the Cabinet and the President. As stipulated in
ITS IMPLEMENTATION", approved September the said document, the condition reads:
9, 1955, and is due and payable to BEARER on
demand and upon presentation at the Central Bank
of the Philippines without interest, if presented for B. That the mode of payment shall be 50% in cash and 50%
payment within five years from the date of issue; in negotiable land certificates except that the encashment of
with interest at the rate of 4 per centum per annum, the said negotiable land certificate may not be made until
if presented for payment after five years from the after five (5) years from the date of the execution of the deed
date of issue; with interest at the rate of 4-½ per of sale with the payments of the corresponding interest, said
centum per annum, if presented for payment after negotiable land certificate may be applied and used for all
ten years from the date of issue; and, with interest the purposes authorized by Republic Act No. 1400 and other
at the rate of 5 per centum per annum, if presented pertinent laws on the matter within the said period of five (5)
for payment after fifteen years from the date of years; (page 3, Memorandum Agreement).1äwphï1.ñët
issue. Both principal and interest are payable by
the Treasurer of the Philippines, through the Subsequently, this stipulation was incorporated and clarified in the
Central Bank of the Philippines, in legal tender Absolute Deed of Sale executed to formalize the terms contained in the
currency of the Philippines. Memorandum Agreement. Under the deed of sale, dated July 31, 1957,
the above condition was —
This land certificate is part of the total negotiable
land certificates issued and limited to the That the VENDORS shall not, however, within five (5)
aggregate principal sum of SIXTY MILLION years, present for encashment the negotiable land certificates
PESOS a year, to be issued during the first two amounting to ONE MILLION THREE HUNDRED
years from September 9, 1955 when Republic Act SEVENTY THREE THOUSAND PESOS (P1,373,000.00)
No. 1400 was approved, and P30 million each year but nevertheless, shall be authorized to use the same for
during the succeeding years, for the purchase of payment of land taxes or obligations due and payable in
private agricultural lands for resale at cost to bona- favor of the Government and such other uses or purposes
fide tenants or occupants, or, in the case of estates provided for by Section 10 of Republic Act No. 1400 within
abandoned by the owners for the last five years, to the said period of five (5) years from this date. (page 4,
private individuals who will work the lands Absolute Deed of Sale)
themselves and who are qualified to acquire or
own lands, but who do not own more than six Doubtless, therefore, the aforecited provisions of the Memorandum
hectares of lands in the Philippines. Agreement and the Absolute Deed of Sale in relation to the condition
in the negotiable land certificate were mere implementation of Section
Manila, Philippines, August 9, 1957. 10 of Republic Act No. 1400, which provided:

Encashment of this certificate may not be made Sec. 10. Uses of certificates. — Negotiable land certificates
until after five (5) years from the date of execution maybe used by the holder thereof for any of the following
of the Deed of Sale of Hacienda de Leon, pursuant purposes:
to the conditions under Paragraph "b" of the
Memorandum Agreement executed between the xxx xxx xxx
Land Tenure Administration and the owners of
Hacienda de Leon on May 11, 1957,
(3) Payment of all tax obligations of the holder thereof, or of Although the issue raised by the instant appeal has already been
any debt or monetary obligation of the holder to the rendered moot, by time, it is the sense of this Court that a brief
Government or any of its instrumentalities or agencies, discussion of the point of controversy will favor the best interest of
including the Rehabilitation Finance Corporation and the justice as well as of the parties hereto.
Philippine National Bank; Provided, however, That payment
of indebtedness shall not be less than twenty per centum of We hold the refusal of the respondent Treasurer to accept the land
the total indebtedness of the debtor; and . certificates to be legally justified. They failed to comply with the
requirements of Republic Act No. 1400.
xxx xxx xxx
Under the above-mentioned law, the land certificates "shall be payable
Availing themselves of what they considered was their contractual and to bearer on demand." (Section 9) The one issued, however, were
statutory rights under the certificate, the petitioners presented two of payable to bearer only after the lapse of five years from a given period.
them to the respondent City Treasurer in payment of certain 1957 Obviously then, the requirement that they should be payable on
realty tax obligations to Quezon City. The respondent Treasurer demand was not met since an instrument payable on demand is one
refused to accept the same and claimed that as per the opinion rendered which (a) is expressed to be payable on demand, or at sight, or on
by the Secretary of Finance, it was discretionary on his part, the presentation; or (b) expresses no time for payment (Sec. 7, Negotiable
respondent Treasurer, to accept or reject the said certificates. And, Instruments Law) The 5-year period within which the certificates could
invoking his discretion in the premises, the respondent Treasurer not be encashed was an expression of the time for payment contrary to
explained that he could not accept the certificates offered as Quezon paragraph (b) of the last law cited.
City was then in great need of funds.
The petitioners maintain, as already indicated above, that although the
The petitioners were thus obliged to settle in cash the 1957 tax questioned certificates may not really be payable on demand, they may
obligation aforementioned. Subsequently, however, the petitioners nevertheless be used for the payment of realty obligations to the
tendered once more the same certificates in payment of their 1958 Government because of Section 10 of Republic Act No. 1400. As
realty taxes and the respondent Treasurer similarly rejected the tender. expressed by the petitioners, "as to Government agencies and
As a result, the petitioners filed the instant mandamus proceedings instrumentalities, the certificate is payable to bearer on demand during
with the Court of First Instance of Quezon City. that first five-year period."

To the above petition, the LTA filed a timely answer sustaining the There is no merit in the above assertion. It is a conclusion unsupported
petitioners' stand. The Secretary of Finance, represented by the by any provision of law. While Section 10 of Republic Act No. 1400
Solicitor General, also filed an answer, which argued that he was not a expressly authorizes the use of the said certificates for the "payment of
necessary party to the case as he was not the officer with the duty of all tax obligations of the holder thereof," the said section can only have
collecting taxes. meant such certificates as were issued strictly in accordance with
Section 9 of the same Act, i.e., that the instrument is payable on
The respondent Treasurer did not file an answer. Instead, represented demand. And, as discussed above, the certificates issued were not
by the City Attorney's Office, he filed a Motion to Dismiss on the payable on demand, then the benefits of Section 10 cannot be properly
ground that the petition filed to state a cause of action. invoked.

The Motion to Dismiss discussed various arguments for the position of IN VIEW OF ALL THE FOREGOING, the order appealed from is
the respondent that he could not be compelled to accept the certificates. hereby affirmed, with costs against the appellants.
In effect, however, they resolve themselves into the single question of
whether or not the said certificates where drawn payable on demand as Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
required by Section 9 of Republic Act 1400. Barrera, Paredes and Dizon, JJ., concur.
Padilla, J., took no part.
The respondent Treasurer contends that the certificates in question Makalintal, J., reserves his vote.
were not issued strictly in accordance with the provisions of Republic
Act No. 1400 because while Section 9 of that Act inquires that Republic of the Philippines
"negotiable land certificates shall be issued in denominations of one SUPREME COURT
thousand pesos or multiples of one thousand pesos and shall be payable Manila
to bearer on demand . . ., " the ones issue to the petitioners were payable
to bearer not on demand but, only upon the expiration of the five-year EN BANC
period there in specified.
G.R. No. L-18103 June 8, 1922
On the other hand, the petitioners contend that although the certificates
issued could not really be encashed within the period therein
mentioned, they could, however, still be used for the settlement of tax PHILIPPINE NATIONAL BANK, plaintiff-appellee,
liabilities at any time after their issue in accordance with Section 10 of vs.
the same Act. The petitioners maintain that the 5-year restriction MANILA OIL REFINING & BY-PRODUCTS COMPANY,
against encashment referred merely and exclusively to the time when INC., defendant-appellant.
the certificates may be converted to cash and not anymore to the utility
of the said instruments as substitutes for tax obligations. Antonio Gonzalez for appellant.
Roman J. Lacson for appellee.
The court a quo sustained the position of the respondent Treasurer and Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs,
dismissed the suit for mandamus. Thus, this appeal. Mc Donough and Johnson; Julian Wolfson; Ross and Lawrence;
Francis B. Mahoney, and Jose A. Espiritu, amici curiae.
MALCOLM, J.: highly useful in the solution of the question. It is to the credit of the bar
that although the sanction of judgement notes in the Philippines might
The question of first impression raised in this case concerns the validity prove of immediate value to clients, every one of the attorneys has
in this jurisdiction of a provision in a promissory note whereby in case looked upon the matter in a big way, with the result that out of their
the same is not paid at maturity, the maker authorizes any attorney to independent investigations has come a practically unanimous protest
appear and confess judgment thereon for the principal amount, with against the recognition in this jurisdiction of judgment notes.1
interest, costs, and attorney's fees, and waives all errors, rights to
inquisition, and appeal, and all property exceptions. Neither the Code of Civil Procedure nor any other remedial statute
expressly or tacitly recognizes a confession of judgment commonly
On May 8, 1920, the manager and the treasurer of the Manila Oil called a judgment note. On the contrary, the provisions of the Code of
Refining & By-Products Company, Inc., executed and delivered to the Civil Procedure, in relation to constitutional safeguards relating to the
Philippine National Bank, a written instrument reading as follows: right to take a man's property only after a day in court and after due
process of law, contemplate that all defendants shall have an
opportunity to be heard. Further, the provisions of the Code of Civil
RENEWAL. Procedure pertaining to counter claims argue against judgment notes,
P61,000.00 especially as the Code provides that in case the defendant or his
assignee omits to set up a counterclaim, he cannot afterwards maintain
MANILA, P.I., May 8, 1920. an action against the plaintiff therefor. (Secs. 95, 96, 97.) At least one
provision of the substantive law, namely, that the validity and
On demand after date we promise to pay to the fulfillment of contracts cannot be left to the will of one of the
order of the Philippine National Bank sixty-one contracting parties (Civil Code, art. 1356), constitutes another
thousand only pesos at Philippine National Bank, indication of fundamental legal purposes.
Manila, P.I.
The attorney for the appellee contends that the Negotiable Instruments
Without defalcation, value received; and to hereby Law (Act No. 2031) expressly recognizes judgment notes, and that
authorize any attorney in the Philippine Islands, in they are enforcible under the regular procedure. The Negotiable
case this note be not paid at maturity, to appear in Instruments Law, in section 5, provides that "The negotiable character
my name and confess judgment for the above sum of an instrument otherwise negotiable is not affected by a provision
with interest, cost of suit and attorney's fees of ten which ". . . (b) Authorizes a confession of judgment if the instrument
(10) per cent for collection, a release of all errors be not paid at maturity." We do not believe, however, that this
and waiver of all rights to inquisition and appeal, provision of law can be taken to sanction judgments by confession,
and to the benefit of all laws exempting property, because it is a portion of a uniform law which merely provides that, in
real or personal, from levy or sale. Value received. jurisdiction where judgment notes are recognized, such clauses shall
No. ____ Due ____ not affect the negotiable character of the instrument. Moreover, the
same section of the Negotiable Instruments. Law concludes with these
words: "But nothing in this section shall validate any provision or
MANILA OIL REFINING & BY-PRODUCTS stipulation otherwise illegal."
CO., INC.,
The court is thus put in the position of having to determine the validity
(Sgd.) VICENTE SOTELO, in the absence of statute of a provision in a note authorizing an attorney
Manager. to appear and confess judgment against the maker. This situation, in
reality, has its advantages for it permits us to reach that solution which
MANILA OIL REFINING & BY-PRODUCTS is best grounded in the solid principles of the law, and which will best
CO., INC., advance the public interest.

(Sgd.) RAFAEL LOPEZ, The practice of entering judgments in debt on warrants of attorney is
Treasurer of ancient origin. In the course of time a warrant of attorney to confess
judgement became a familiar common law security. At common law,
there were two kinds of judgments by confession; the one a judgment
The Manila Oil Refining and By-Products Company, Inc. failed to pay
by cognovit actionem, and the other by confession relicta
the promissory note on demand. The Philippine National Bank brought
verificatione. A number of jurisdictions in the United States have
action in the Court of First Instance of Manila, to recover P61,000, the
accepted the common law view of judgments by confession, while still
amount of the note, together with interest and costs. Mr. Elias N.
other jurisdictions have refused to sanction them. In some States,
Rector, an attorney associated with the Philippine National Bank,
statutes have been passed which have either expressly authorized
entered his appearance in representation of the defendant, and filed a
confession of judgment on warrant of attorney, without antecedent
motion confessing judgment. The defendant, however, in a sworn
process, or have forbidden judgments of this character. In the absence
declaration, objected strongly to the unsolicited representation of
of statute, there is a conflict of authority as to the validity of a warrant
attorney Recto. Later, attorney Antonio Gonzalez appeared for the
of attorney for the confession of judgement. The weight of opinion is
defendant and filed a demurrer, and when this was overruled, presented
that, unless authorized by statute, warrants of attorney to confess
an answer. The trial judge rendered judgment on the motion of attorney
judgment are void, as against public policy.
Recto in the terms of the complaint.

Possibly the leading case on the subject is First National Bank of


The foregoing facts, and appellant's three assignments of error, raise
Kansas City vs. White ([1909], 220 Mo., 717; 16 Ann. Cas., 889; 120
squarely the question which was suggested in the beginning of this
S. W., 36; 132 Am. St. Rep., 612). The record in this case discloses
opinion. In view of the importance of the subject to the business
that on October 4, 1990, the defendant executed and delivered to the
community, the advice of prominent attorneys-at-law with banking
plaintiff an obligation in which the defendant authorized any attorney-
connections, was solicited. These members of the bar responded
at-law to appear for him in an action on the note at any time after the
promptly to the request of the court, and their memoranda have proved
note became due in any court of record in the State of Missouri, or judgment against the tenant in case of a default on his part,
elsewhere, to waive the issuing and service of process, and to confess without giving the notice and demand for possession and
judgement in favor of the First National Bank of Kansas City for the filing the complaint required by statute, to a by-law of a
amount that might then be due thereon, with interest at the rate therein benefit association that the decisions of its officers on claim
mentioned and the costs of suit, together with an attorney's fee of 10 shall be final and conclusive, and to many other agreements
per cent and also to waive and release all errors in said proceedings and of a similar tendency. In some courts, any agreement as to
judgment, and all proceedings, appeals, or writs of error thereon. the time for suing different from time allowed by the statute
Plaintiff filed a petition in the Circuit Court to which was attached the of limitations within which suit shall be brought or the right
above-mentioned instrument. An attorney named Denham appeared to sue be barred is held void.
pursuant to the authority given by the note sued on, entered the
appearance of the defendant, and consented that judgement be xxx xxx xxx
rendered in favor of the plaintiff as prayed in the petition. After the
Circuit Court had entered a judgement, the defendants, through
counsel, appeared specially and filed a motion to set it aside. The We shall not pursue this question further. This contract, in so
Supreme Court of Missouri, speaking through Mr. Justice Graves, in far as it goes beyond the usual provisions of a note, is void
part said: as against the public policy of the state, as such public policy
is found expressed in our laws and decisions. Such
agreements are iniquitous to the uttermost and should be
But going beyond the mere technical question in our promptly condemned by the courts, until such time as they
preceding paragraph discussed, we come to a question urged may receive express statutory recognition, as they have in
which goes to the very root of this case, and whilst new and some states.
novel in this state, we do not feel that the case should be
disposed of without discussing and passing upon that
question. xxx xxx xxx

xxx xxx xxx From what has been said, it follows that the Circuit Court
never had jurisdiction of the defendant, and the judgement is
reversed.
And if this instrument be considered as security for a debt,
as it was by the common law, it has never so found
recognition in this state. The policy of our law has been The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40
against such hidden securities for debt. Our Recorder's Act L.R.A. [N. S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another
is such that instruments intended as security for debt should well-considered authority. The notes referred to in the record contained
find a place in the public records, and if not, they have often waiver of presentment and protest, homestead and exemption rights
been viewed with suspicion, and their bona fides often real and personal, and other rights, and also the following material
questioned. provision: "And we do hereby empower and authorize the said A. B.
Farquhar Co. Limited, or agent, or any prothonotary or attorney of any
Court of Record to appear for us and in our name to confess judgement
Nor do we thing that the policy of our law is such as to thus against us and in favor of said A. B. Farquhar Co., Limited, for the
place a debtor in the absolute power of his creditor. The field above named sum with costs of suit and release of all errors and
for fraud is too far enlarged by such an instrument. without stay of execution after the maturity of this note." The Supreme
Oppression and tyranny would follow the footsteps of such Court of West Virginia, on consideration of the validity of the
a diversion in the way of security for debt. Such instruments judgment note above described, speaking through Mr. Justice Miller,
procured by duress could shortly be placed in judgment in a in part said:
foreign court and much distress result therefrom.
As both sides agree the question presented is one of first
Again, under the law the right to appeal to this court or some impression in this State. We have no statutes, as has
other appellate court is granted to all persons against whom Pennsylvania and many other states, regulating the subject.
an adverse judgment is rendered, and this statutory right is In the decision we are called upon to render, we must have
by the instrument stricken down. True it is that such right is recourse to the rules and principles of the common law, in
not claimed in this case, but it is a part of the bond and we force here, and to our statute law, applicable, and to such
hardly know why this pound of flesh has not been demanded. judicial decisions and practices in Virginia, in force at the
Courts guard with jealous eye any contract innovations upon time of the separation, as are properly binding on us. It is
their jurisdiction. The instrument before us, considered in the pertinent to remark in this connection, that after nearly fifty
light of a contract, actually reduces the courts to mere clerks years of judicial history this question, strong evidence, we
to enter and record the judgment called for therein. By our think, that such notes, if at all, have never been in very
statute (Rev. St. 1899, sec. 645) a party to a written general use in this commonwealth. And in most states where
instrument of this character has the right to show a failure of they are current the use of them has grown up under statutes
consideration, but this right is brushed to the wind by this authorizing them, and regulating the practice of employing
instrument and the jurisdiction of the court to hear that them in commercial transactions.
controversy is by the whose object is to oust the jurisdiction
of the courts are contrary to public policy and will not be
enforced. Thus it is held that any stipulation between parties xxx xxx xxx
to a contract distinguishing between the different courts of
the country is contrary to public policy. The principle has It is contended, however, that the old legal maxim, qui facit
also been applied to a stipulation in a contract that a party per alium, facit per se, is as applicable here as in other cases.
who breaks it may not be sued, to an agreement designating We do not think so. Strong reasons exist, as we have shown,
a person to be sued for its breach who is nowise liable and for denying its application, when holders of contracts of this
prohibiting action against any but him, to a provision in a character seek the aid of the courts and of their execution
lease that the landlord shall have the right to take immediate process to enforce them, defendant having had no day in
court or opportunity to be heard. We need not say in this case Judgments by confession as appeared at common law were considered
that a debtor may not, by proper power of attorney duly an amicable, easy, and cheap way to settle and secure debts. They are
executed, authorize another to appear in court, and by proper a quick remedy and serve to save the court's time. They also save the
endorsement upon the writ waive service of process, and time and money of the litigants and the government the expenses that
confess judgement. But we do not wish to be understood as a long litigation entails. In one sense, instruments of this character may
approving or intending to countenance the practice be considered as special agreements, with power to enter up judgments
employing in this state commercial paper of the character on them, binding the parties to the result as they themselves viewed it.
here involved. Such paper has heretofore had little if any
currency here. If the practice is adopted into this state it On the other hand, are disadvantages to the commercial world which
ought to be, we think, by act of the Legislature, with all outweigh the considerations just mentioned. Such warrants of attorney
proper safeguards thrown around it, to prevent fraud and are void as against public policy, because they enlarge the field for
imposition. The policy of our law is, that no man shall suffer fraud, because under these instruments the promissor bargains away
judgment at the hands of our courts without proper process his right to a day in court, and because the effect of the instrument is
and a day to be heard. To give currency to such paper by to strike down the right of appeal accorded by statute. The recognition
judicial pronouncement would be to open the door to fraud of such a form of obligation would bring about a complete
and imposition, and to subject the people to wrongs and reorganization of commercial customs and practices, with reference to
injuries not heretofore contemplated. This we are unwilling short-term obligations. It can readily be seen that judgement notes,
to do. instead of resulting to the advantage of commercial life in the
Philippines might be the source of abuse and oppression, and make the
A case typical of those authorities which lend support to judgment courts involuntary parties thereto. If the bank has a meritorious case,
notes is First National Bank of Las Cruces vs. Baker ([1919], 180 Pac., the judgement is ultimately certain in the courts.
291). The Supreme Court of New Mexico, in a per curiam decision, in
part, said: We are of the opinion that warrants of attorney to confess judgment are
not authorized nor contemplated by our law. We are further of the
In some of the states the judgments upon warrants of opinion that provisions in notes authorizing attorneys to appear and
attorney are condemned as being against public policy. confess judgments against makers should not be recognized in this
(Farquhar and Co. vs. Dahaven, 70 W. Va., 738; 75 S.E., 65; jurisdiction by implication and should only be considered as valid
40 L.R.A. [N. S.], 956; Ann. Cas. [1914 A]. 640, and First when given express legislative sanction.
National Bank of Kansas City vs. White, 220 Mo., 717; 120
S. W., 36; 132 Am. St. Rep., 612; 16 Ann. Cas., 889, are The judgment appealed from is set aside, and the case is remanded to
examples of such holding.) By just what course of reasoning the lower court for further proceedings in accordance with this
it can be said by the courts that such judgments are against decision. Without special finding as to costs in this instance, it is so
public policy we are unable to understand. It was a practice ordered.
from time immemorial at common law, and the common law
comes down to us sanctioned as justified by the reason and
experience of English-speaking peoples. If conditions have Araullo, C.J., Avanceña, Villamor, Ostrand, Johns and Romualdez,
arisen in this country which make the application of the JJ., concur.
common law undesirable, it is for the Legislature to so
announce, and to prohibit the taking of judgments can be
declared as against the public policy of the state. We are
aware that the argument against them is that they enable the
unconscionable creditor to take advantage of the necessities Footnotes
of the poor debtor and cut him off from his ordinary day in
court. On the other hand, it may be said in their favor that it
1MEMORANDA
frequently enables a debtor to obtain money which he could OF "AMICI CURIAE"
by no possibility otherwise obtain. It strengthens his credit,
and may be most highly beneficial to him at times. In some Attorney Thos. L. Hartigan, of Hartigan and
of the states there judgments have been condemned by Welch, states:
statute and of course in that case are not allowed.
"Though we are attorneys for two of the large
Our conclusion in this case is that a warrant of attorney given banks here and keenly interested in the
as security to a creditor accompanying a promissory note introduction of any improvements that would
confers a valid power, and authorizes a confession of make for simplication of procedure and rapidity of
judgment in any court of competent jurisdiction in an action practice, we cannot favor the introduction of
to be brought upon said note; that our cognovit statute does confessions of judgment in the Philippine islands.
not cover the same field as that occupied by the common- In our opinion, it would open the doors to fraud to
law practice of taking judgments upon warrant of attorney, an extent that would more than counterbalance any
and does not impliedly or otherwise abrogate such practice; advantages of its use.
and that the practice of taking judgments upon warrants of
attorney as it was pursued in this case is not against any
"With our lack of system in recording judgments
public policy of the state, as declared by its laws.
and with the practice of keeping merchants' books
in various foreign languages, there would be
With reference to the conclusiveness of the decisions here mentioned, ample opportunity for a debtor to make
it may be said that they are based on the practice of the English- preferences by confessions of judgment which
American common law, and that the doctrines of the common law are could not be discovered by the creditors until too
binding upon Philippine courts only in so far as they are founded on late and which would be nearly impossible to set
sound principles applicable to local conditions. aside even when discovered in time.
"Although, as representatives of the banks, we are it was held that such a provision, being void,
representing the creditor class, we believe the would not affect the negotiability of a note, even
introduction of confessions of judgment would though its effect would be to make uncertain the
ultimately cause much more loss than benefit to time of payment.
that class."
"The reasoning in First National Bank vs. White,
Attorney Clyde A. DeWitt, of Fisher and DeWitt, supra, is persuasive. The court there held that these
states: warrants of attorney are void as against the public
policy of the state on the ground, first, that their
"There is no statutory sanction in this jurisdiction effect is to enlarge the field for fraud; second, that
for such provisions in negotiable instruments. under such an instrument the promissor bargains
Section 5 (b) of the Negotiable Instruments Law away his right to his day in court; third, that the
does not constitute such sanction because (1) it effect of the instrument is to strike down the right
merely provides that such clauses will not affect to appeal accorded by statute, and, fourth, that
the negotiable character of the instrument, and (2) there was no provision for the public recording of
it concludes with language showing that the such an instrument if regarded as a security for a
Legislature did not intend thereby to validate any debt.
provision otherwise unlawful. The language is:
'But nothing in this section shall validate any "It seems to me that on the precise grounds stated
provision or stipulation otherwise illegal.' in the White case, these warrants of attorney
should be held void as against public policy in this
"The question then is whether or not, in the jurisdiction. If given effect, they bargain away the
absence of express legislative sanction, such jurisdiction of the courts to try and determine the
warrants of attorney are valid. There are not many liability of the maker of the note on its merits. To
American cases in which this precise question has uphold them would be to facilitate the operations
been considered, and in those cases in which the of usurers, the collection of gambling debts, and
question has been raised, the reasoning of the would make difficult, if not impossible under our
courts has been colored by the fact that the procedure, the setting aside of judgments entered
commercial use of these warrants of attorney as in virtue thereof where the execution of the
security for debt was sanctioned at common law, instrument was obtained by fraud, duress, or where
and the procedural statutes are held to be merely there had been an entire failure of consideration. I
cumulative and not in derogation of the common can think of no advantage which would result to
law remedies. We, of course, have no such the commercial world from upholding these
situation here. warrants of attorney which would outweigh the
foregoing considerations."
"The cases are collected in a note to First National
Bank vs. White (220 Mo., 717), found in 16 Ann. Attorney e. Arthur Perkins, of Perkins and
Cas., 893, and it is there shown that in Missouri Kincaid, states:
and Kansas such provisions are held to be void as
against the public policy of the State as expressed "Leaving aside entirely the legal considerations
in its laws and the decisions of its courts, while in involved, I feel that there is only one answer to
Colorado and Illinois their validity was upheld as your inquiry, and that is, that the best interests of
a familiar common-law security not affected by the commercial life of the Philippines require the
the procedural statutes. Yet it is there pointed out non-recognition of such a form of judgment note.
that in Kahn vs. Lesser (97 Wis., 217, 72 N.W., Feeling that you would want to know the reasons
739), the court, in referring to a judgment by which impell me to adopt such a conclusion, I will
confession under warrant of attorney in a say briefly that if the Supreme Court should, by a
promissory note, said: decision, recognize such a judgment note and
thereby place the stamp of approval upon
"'The judgment in this case must stand, transactions of such a nature, the entire business
if at all, by the authority of the statute. population of the Philippine Islands would be
The proceeding by which it was entered justified in their future transactions with debtors in
was outside and in derogation of the requiring, in all instances, the execution of notes
common-law practice of courts; and the of a similar tenor, with the consequence that the
statute, as well as the proceedings under debtor would thereby be deprived, to all intents
it, must be strictly construed.'" and purposes, upon ignorant debtors. It will prove
a serious drawback to the campaign being now
waged against usury.
"In Iowa, in an early case, McClish vs. Manning
(3 Green, 233), the validity of these warrants of
attorney was upheld, referring to a statute "There is the further fear that the banks and money
authorizing any person to confess a judgment, by lenders having accounts now outstanding will
himself or his attorney. In a later decision, immediately require every debtor to execute that
Hamilton vs. Schoenberger (47 Ilowa, 385), it was form of note and to refuse further extensions of
expressly held that such a provision, in a note credit unless sit is done, which the debtor under the
could not be enforced in the courts of that State, stress of circumstances will be compelled to
and was not authorized or contemplated by its accept, amounting in effect to duress.
laws. And in Tolman vs. Jansen (106 Iowa, 455),
"The recognition of such a form of obligation 656, 657; 17 Am. and Eng. Encyc. of Law [2d ed.],
would be so revolutionary in character as to bring 765; Pl. and Pr., 973-975; Masson vs. Ward, 80
about a complete reorganization of commercial Vt., 290; 130 A. S. R., 987,988).
customs and practices with reference to short-term
obligations. "The procedure contemplated in the note quoted in
your letter is contrary to that contemplated in our
"Having in mind that the Philippine National Bank code of procedure, which gives to all defendants
is practically the only institution which can assist an opportunity at least to be heard. An action on
the farmers and agriculturists, the practice of the note in question could be so presented that the
requiring a judgment note would place the latter defendant would never be summoned or notified,
wholly at the mercy of the bank, and this is stated since an appearance and confession of judgment
without any reflection on the bank, but merely to might be filed simultaneously. We believe that this
point out one of the consequent evils which will procedure should not be recognized in this
necessarily follow if the practice should receive jurisdiction by implication, but should have
the high judicial sanction which a judgment of the legislative sanction with the rights of the defendant
Supreme Court would necessarily give to it. amply safeguarded. We believe that section 5 of
Act No. 2031 does not of itself sanction any of the
"Another feature which occurs to me is that where acts mentioned in that section, but is only a
any new enterprise is being launched, it is statement regarding the negotiable character of the
universally the custom for such company to instrument. Subsection A of section 5 states that
arrange with some banking institution for credit the authority to sell collateral security does not
facilities, over and above the capital with which it affect negotiability. As we understand the decision
brings business. Should it become the custom here of the Supreme Court in the case of Mahoney vs.
to require the execution of so-called judgment Tuason(39 Phil., 952), the creditor in this
notes, organizers of corporations, partnerships and jurisdiction is not authorized by law to sell
the like, who have in mind to secure additional collateral security except in the manner provided
working capital or credit facilities from banks, will in section 14 of Act No. 1508. This would seem to
be very reluctant to put their funds into any reinforce our opinion.
enterprises which could be destroyed without
warning by the creditor exercising the rights which "There are some favorable features of a judgment
that form of transaction would give him. This is note or warrant for confession of judgment, but we
would act therefore as a deterrent to new believe that there are many objections which
enterprises and the development of industry outweigh any of the advantages. Forgery and
through individual initiative and with private usury are more prevalent in these Islands than in
funds. the United States. The sanctioning of this
procedure would add an additional weapon to the
"Let us take a very simple illustration of his. money lender who desires to overreach his debtor.
Suppose that you and I should form a partnership,
with a capital of P50,000 to buy hemp and , in "We have delayed answering your letter in order
connection with our business, we went to some that we might consult our Mr. Gibbs, who returned
banking institution for the purpose of securing from Baguio yesterday.
credit facilities, as is customary, in the conduct of
our business. Let us then suppose that the bank, "The foregoing is the consensus of opinion of the
taking into consideration the capital which we member of this firm."
ourselves had furnished and our standing in the
community, was willing to allow us a credit in the
further sum of P50,000 upon our signing a so- Attorney Julian Wolfson states:
called judgment note. Would not you and I
consider a long time before we would so far "It is assumed that the only question propounded
obligate ourselves as to place it in the power of the is :
bank to send their attorney over to court, upon the
least provocation or at the first unfavorable rumor, "'Admitting that there may be some doubt, as to a
and to confess judgment in our names, which correct solution, which solution, the recognition of
would permit the sheriff to close us out without a confession of judgment, or a non-recognition of
even an opportunity to be heard? a confession of judgment, would be for the best
interest of the commercial life of the Philippines?
"The sum and substance of the whole proposition and that no opinion is required upon the incidental
is that such a practice is contrary to good morals." questions previously asked, as same have already
been determined by an examination of such
Attorney David C. Johnson, of Gibbs, authorities as: 23 Cyc., pp. 699, 701-2-3-5-6-7,
McDonough and Johnson, states: 723-5; 6 C. J., pp. 645-6 (Notes 35 & 42); 8 C. J.,
p. 128 (Notes 43-47); 12 C. J., p. 418 (Note 37);
and such leading textbooks as 'Brannan's
"It seems that under the common law a confession Negotiable Instruments Law' and 'Selover on
of judgment was only allowable by the defendant Negotiable Instruments.' "Everyone is entitled to
himself, either before or after appearance and 'his day in court.' This right may be waved after an
answer. The confession of judgment by warrant of opportunity has been given to exercise the right,
attorney is a statutory development (15 R.C.L.,
but must not and cannot be taken away before an up that the instrument did not express the real
opportunity has been given to exercise the right. understanding of the parties and the real
understanding was set up. The special defenses
"The ordinary ship's bill of lading and the ordinary were fully proved and the lower court dismissed
fire and marine insurance policy are generally the bank's suit. The bank did not even attempt to
printed on forms prepared by the carrier and the appeal to the Supreme Court (See Cause No.
insurer respectively, and generally contain a clause 18239 of the Docket of the Court of First Instance
making it a condition precedent to the institution of Manila). Suppose the instrument sued on had
of an action to first submit the matter to a board of contained a clause of confession of judgment,
arbitration. The Supreme Court has never what chance would defendant have had to prove
recognized this clause. The reasons are stated in his defense? None!
the opinions. Once submitted to arbitration, then
another question is raised. "Let us go a step further and see where this leads
us. A is a dealer in hardware and sells B a bill of
"Special defenses to written instruments are goods. A prints a form, which he has B to sign, in
common. Need we do more than cite the following which B acknowledges receipt of the goods and in
cases: Maulini vs. Serrano (28 Phil., 640); Henry consideration thereof premises to pay A and "a
W. Peabody and Co. vs. Bromfield and Ross (38 confession of judgment" clause is inserted. The
Phil., 841); Cuyugan vs. Santos (34 Phil., 100; 39 goods turn out entirely different from those
Phil., 970). ordered and invoiced. B refuses to pay. A sues on
his "judgment note." What change has B? None!
"If the judgment note (this term is used throughout
for brevity and as it is the recognized term) is to be "Very often a promissory note is only one of a
recognized, what chance has defendant of series of documents given as security for the debt.
defending as did the defendants in the above cited What about considering the other documents
cases? Non! which bear on the transaction?

"Often a promissory note is a mere formality taken "A bank may have made certain advances and may
by a bank as evidence of indebtedness, while the have undertaken to make more, but fails to do so,
real indebtedness may be for a superior or inferior to the damage and prejudice of debtor. Let us
amount incurred by way of overdraft, letters of assume that the bank agreed to advance several
credit outstanding, acceptances to mature, or a hundred thousand pesos in installments of P60,000
thousand other forms of banking credit. Such each, and had advanced only the first installments,
"judgment notes" are generally made payable on taking a "judgment note" for said first installment,
demand. In the case at bar, the note is made and had failed to advance further, to the damage of
payable on demand. The real indebtedness may be the debtor. What would become of section 97 of
partially paid, or the liquidation may be going the Code of Civil Procedure? How would debtor
along too slow to suit the bank and then use is be able to exercise his right of counterclaim? Was
made of the judgment note. The defendant might it ever contemplated at the time of signing the
have perfect defense except for the judgment note. judgment note that the debtor would not only
Would not article 1269 of the Civil Code here waive defense, but absolutely shut himself out of
apply? court, as he would, according to section 97 above
cited, on his counterclaim? Yet again, would not
article 1269 of the Civil Code here apply?
"The 'judgment notes,' is not once in a thousand
times signed at the time of receiving money from
the bank. The indebtedness represented thereby is "We dare not attempt to elaborate on what would
incurred in prior transactions, the obligation happen in the provinces of the Philippines should
became past due and the bank, as a forcible a "judgment note" be held valid.
measure, produces one of these 'judgment notes,'
when the debtor is absolutely helpless, and says "What about the Usury Law? How could a defense
'Sign on the dotted line' and the debtor has no be offered there? The usurious rate might not
option, he signs. The minds of the parties never appear on the face of the "judgment note," but it
met. The debtor owes the money, knows that the may be there all the same.
bank must have evidence of the indebtedness to
pass the auditors and the debtor further realizes he "Examples could be multiplied until the very
must accept that bank's dictation, because if he absurdity of the proposition would be clearly seen,
declines, he is liable to immediate ruin, or if not even by a blind man.
that, he will never get further accommodation
from the bank. He does not realize, even if he
knows, what is meant by a 'judgment note.' Again, "Of what possible benefit would the recognition of
would not article 1269 of the Civil Code here a "judgment note" serve "the best interest of the
apply? commercial life of the Philippines? None! An
honest creditor is willing to let his debtor have his
day in court and is willing to prove to the court his
"Just a few months ago there was a suit instituted case. It might take slightly longer to go through
by a local bank for a large sum of money, based on with a trial, but that cannot be considered a set-
a written instrument which, on its face, seemed back. But, on the other hand, a dishonest creditor
absolute. Special defenses were pleaded, setting would take unfair advantage of a "judgment note"
and would use it to the utmost to harass and take of recognizing a confession of judgment — for
advantage of the poor and helpless debtor. The real example, the matter of expediency — stronger and
consequences likely, in fact sure, to arise from more vital principles oppose such recognition.
such recognition are horrible beyond words to
contemplate. "By refusing to recognize confession of judgment
under existing statutes or under general legal
"There can be but one answer to the proposition principles, at the worst phase from the point of
and that is: The non-recognition of a confession of view of the plaintiff bank, there would result only
judgment would be for the best interests of the possible delay, costs and attorney's fees, which,
commercial life of the Philippines." after all, are only passed on to the clients of the
bank in the shape of interests, charges. etc. If the
Attorney J. G. Lawrence, of Ross and Lawrence, bank has a meritorious case, the judgment is
states: ultimately certain as courts.

"We are aware of no expression of our Legislature "If the defendant debtor has any defense of merit,
or courts which would indicate that confessions of he is given an opportunity to present it, as, for
judgment under powers given in a promissory note example, in the matter of usury so common, so
are contrary to public policy. This action was difficult to uncover an such an unscrupulous rival
regularly brought in accordance with the of legitimate banking, the courts may keep their
provisions of the Code of Civil Procedure and the doors open to the equities of each individual case.
defendant served with process. The answer, Whereas, if defendant, who theoretically may
confessing judgment, was filed in strict allege fraud an who practically has great difficulty
accordance with the powers contained in the note in proving it, must rely upon a defense of fraud, he
— a power coupled with an interest which has little chance and the doors of the court are
defendant would be estopped of denying. We think closed to any other defense.
that no express legal sanction is necessary to
legalize such a proceeding. "In the final analysis, the matter simmers down to:
1. Possible delay in judgment with costs, etc. 2.
"On the question of what ought to be the public Certain justice in the end. 3. The eyes and doors of
policy of the Philippines, we hold quite a different courts open to the equities of each individual case.
opinion. While the use of judgment notes might in 4. Equality before the law,
some cases expedite the collection of just debts,
we believe that under conditions as exist here, their or
use should be discouraged. The lend themselves
easily to fraud in the hands of friends of a (a) Expediting judgment. (b) Defendant debtor
dishonest debtor, and to extortion in the hands of practically kept out of court by additional expense
usurers who are already too well equipped with and difficulty in securing a hearing. (c) Putting a
the pacto de retro. strong weapon in the hands of unscrupulous
persons and taking the strength necessary to wield
"While we believe that the position of the bank is this weapon from the courts.
sound legally, we should be very glad to be proven
mistaken." "At first glance, if a debtor signs a document
throwing away his right to be heard, the average
Attorney Francis B. Mahoney, of the Philippine man has a feeling such debtor deserves to suffer
Trust Company, states: the consequences. If that were the entire story,
probably he should. But what man, needing money
"I have not gone into the law and cases, except to badly enough — facing strenuous necessity — will
take a glance at the subject of judgments in not in the circumstances be inclined to look on the
Volume 15 of Ruling Case Law. However, the cheerful side-to sign and get the money, letting the
reasons indicated on page 651 thereof are future take care of itself? Such is the frailty of
significant. human nature. Then, as the usual thing, the rich
and powerful can take care of themselves, and it is
usually others who have need of courts, just laws
"Unquestionably, if our Legislature provided in and liberal interpretation of them.
unmistakable terms for confession of judgment as
herein indicated, the validity and constitutionality
of the enactment might be questioned as failing to "No doubt, banks would favor expediting
provide those constitutional safeguards of taking a judgments against their debtors, other things being
man's property only after a day in court and after equal. And no doubt, additional delay in courts and
the due process of law. the incidental costs thereof will be borne by the
clients of the bank. But sound banking is not
established and enhanced by harsh law which put
"This conclusion is stronger — a fortiori — where strong weapons in powerful hands. Contented
the enacting provision — if such section 5 of Act. peoples, safe laws and sound banking usually go
No. 2031 may be called — is of a lefthanded hand in hand."
nature, apparently relating only to negotiability —
incidentally thus answering here your first inquiry.
Whatever legal principles there might be in favor
Professor Jose A. Espiritu, of the University of the confess judgment shall not be given in
Philippines, states: the same instrument which contains the
promise or obligation to pay the debt, or
"Permit me to cite first of all the authorities that I that such confession shall not be
have gathered concerning the principal question at authorized by any instrument executed
issue in the case mentioned in your letter, namely, prior to suit brought." (23 Cyc., 699,
'The Effect and Validity of Confession of 700.)
Judgement in the Philippines.'
"5. Warrant or Power of Attorney —
"1. Confession of judgment has been Validity and Necessity. 'A judgment by
defined as "a voluntary submission to confession may be entered upon a
the jurisdiction of the court, giving by written authority, called a warrant or
consent and without the service of letter of attorney, by which the debtor
process, what could otherwise be empowers an attorney to enter an
obtained by summons and complaint, appearance for him, waive process, and
and other formal proceedings, an confess judgment against him for a
acknowledgment of indebtedness, upon designated sum, except where this
which it is contemplated that a judgment method of proceeding is prohibited by
may and will be rendered." (8 Cyc., pp. statute. The warrant as the basis of
563, 564.) judgment is generally required to be
placed on file in the clerk's office, and
no judgment can be so entered until it is
"2. As to the general effects of so filed.' (23 Cyc., 703.)
confession of judgment, the following
statements may be mentioned: 'A
warrant to confess judgment does not "6. Requisites and Sufficiency. 'A
destroy the negotiability of the note. warrant or power of attorney to confess
Such a note is commonly called a judgement should be in writing and
"judgement note." Decisions to the should conform to the requirements of
contrary in the States where the the statute in force at the time of its
Negotiable Instruments Law is now in execution, although in the absence of
force are abrogated thereby, since it specific statutory directions it is
expressly provides that the negotiable sufficient, without much regard to its
character of an instrument otherwise form, if it contains the essential of a
negotiable is not affected by a provision good power and clearly states its
which authorizes a confession of purpose. It must be signed by the person
judgment, if the instrument is not paid at against whom the judgment is to be
maturity. However, this statutory entered . . . .' (23 Cyc., 704.)
provision does not apply to stipulations
for the confession of judgment "prior" to "The above quoted authorities are among the
maturity.' (8 C.J., p. 128, sec. 222.) various authorities I found bearing on the question
at issue. As it can be readily seen none of them
"3. Nature of Requisites. "A judgment decides squarely and definitely the questions
may be rendered upon the confession of propounded in your letter. One thing, however,
defendant, either in an action regularly seems to be clear, from the very provision of
commenced against him by the issuance section 5 (b) of the Negotiable Instruments Law
and service of process, in which case the and from the quotation No. 2 of this letter, that a
confession may be made by his attorney provision in a note or bill of exchange authorizing
of record, or, without the institution of a a confession of judgment in default of payment at
suit, upon a confession by defendant in its maturity has particular reference, in so far as
person or by his attorney in fact. It Act No. 2031 is concerned, only to the negotiable
implies something more than a mere character of an instrument. I do not believe that the
admission of a debt to plaintiff; in Legislature had the intention in passing the said
addition, it is defendant's consent that a Act No. 2031 to introduce in the Philippines a new
judgment shall be entered against him. . practice in our Remedial Law, namely, that of
. . ." (23 cyc., 699.) confession of judgment, which is purely
procedural in nature.
"4. Statutory Provisions, "Statutes
regulating the confession of judgments "Now as to the second question, to wit: 'Does the
without action, or otherwise than silence of the Code of Civil Procedure on the
according to the course of the common subject mean that a confession of judgement
law, are strictly construed, and a strict cannot be recognized in this jurisdiction, or can a
compliance with their provisions must judgment by confession be imported into the
be shown in order to sustain the validity Philippines under general legal principles?' Before
of the judgment." (Chapin vs. Tompson, answering this question attention is respectfully
20 Cla., 681.) "And this applies also to called to the quotation No. 4 of this letter, which
statutory restriction upon the right to expressly provides that statutes regulating
confess judgment, as that authority to confession of judgments must be strictly construed
and their provisions strictly complied with to
sustain the validity of judgments rendered under Philippines, might be the sources of abuse and
such statutes. Now it being admitted that there is oppression. The very fact that confession of
no express provision in our Code of Civil judgement is almost summary and in fact a violent
Procedure authorizing or sanctioning this mode of remedy, it should first of all be properly regulated
practice in this jurisdiction, and consequently by statute, and those regulations must be strictly
there are no regulations provided to be followed in complied with, before the court should concede to
this particular remedy, I am therefore of the such a remedy."
opinion that confession of judgment should not be
deemed as imported in the Philippines under the
general legal principles. The remedy itself is a
most summary one, and when the defendant-
debtor, instead of admitting or allowing a
judgment be taken against him, presents his Republic of the Philippines
appearance and answers the complaint filed SUPREME COURT
against him, it seems that the trial court should not Manila
render a judgement without first hearing the
evidence that the parties may wish to submit EN BANC
before him, for it may happen that the defendant-
debtor may have some valid or good defenses G.R. No. L-10221 February 28, 1958
against the plaintiff-creditor. This is especially
true in the case of a counterclaim that the
defendant may have against the plaintiff as Intestate of Luther Young and Pacita Young, spouses. PACIFICA
provided in sections 95 and 96 of the Code of Civil JIMENEZ, petitioner-appellee,
Procedure. The same Code provides that in case of vs.
an omission to set up his counterclaim, the DR. JOSE BUCOY, administrator-appellant.
defendant or his assignee loses all his right to bring
further suit on such claim. (Sec. 97, Act No. 190.) Frank W. Brady and Pablo C. de Guia, Jr. for appellee.
E. A. Beltran for appellant.
"In answer to the last question, namely:
"Admitting that there may be some doubt, as to the BENGZON, J.:
correct solution, which solution, the recognition of
a confession of judgement, or the non-recognition
In this intestate of Luther Young and Pacita Young who died in 1954
of a confession of judgment, would be for the best
and 1952 respectively, Pacifica Jimenez presented for payment four
interests of the commercial life of the
promissory notes signed by Pacita for different amounts totalling
Philippines?" I wish first of all to state that a
twenty-one thousand pesos (P21,000).
confession of judgment is a quick remedy. It saves
time and money as far as the parties to the suit are
concerned if the same is properly and legally Acknowledging receipt by Pacita during the Japanese occupation, in
brought. It saves the court's time and the the currency then prevailing, the administrator manifested willingness
government the expense that a long litigation to pay provided adjustment of the sums be made in line with the
entails. As to its disadvantages we may say among Ballantyne schedule.
other things the following: 1. It may be abused in
the same way as the usurious rates of interest on The claimant objected to the adjustment insisting on full payment in
loans are now in the Philippines, because a accordance with the notes.
borrower who is in great need of money might be
induced, if not actually compelled, to sign such a
Applying doctrines of this Court on the matter, the Hon. Primitive L.
burdensome obligation; 2. It deprives the
Gonzales, Judge, held that the notes should be paid in the currency
defendant of his day in court, and as a consequence
prevailing after the war, and that consequently plaintiff was entitled to
it will prevent him to set up and prove before the
recover P21,000 plus attorneys fees for the sum of P2,000.
court his just claims and other lawful defenses
against the plaintiff; 3. It will create multiplicity of
actions in this jurisdiction, for if the confession of Hence this appeal.
judgment has been wrongfully or unjustly entered,
the judgment debtor may start another litigation on Executed in the month of August 1944, the first promissory note read
the same subject-matter that might have been as follows:
brought before the court in case a proper trial was
formally held before the rendition of such a
judgment; and 4. It does not really hold the Received from Miss Pacifica Jimenez the total amount of
plaintiff who has a good cause of action against the P10,000) ten thousand pesos payable six months after the
defendant as his proofs will surely establish his war, without interest.
claims and consequently a judgment must
necessarily be rendered in his favor. The other three notes were couched in the same terms, except as to
amounts and dates.
"From the above statements, I am of the opinion
that unless proper regulations are first duly There can be no serious question that the notes were promises to pay
introduced and incorporated in our remedial law, "six months after the war," the amounts mentioned.
confession of judgments, instead of resulting
advantageous to our commercial life in the
But the important question, which obviously compelled the new defense, because had it been raised in the court below, appellees
administrator to appeal, is whether the amounts should be paid, peso could have proved, what they now alleged that Pacita contracted the
for peso, or whether a reduction should be made in accordance with obligation to support and maintain herself, her son and her
the well-known Ballantyne schedule. husband (then concentrated at Santo Tomas University) during the
hard days of the occupation.
This matter of payment of loans contracted during the Japanese
occupation has received our attention in many litigations after the It is now settled practice that on appeal a change of theory is not
liberation. The gist of our adjudications, in so far as material here, is permitted.
that if the loan should be paid during the Japanese occupation, the
Ballantyne schedule should apply with corresponding reduction of the In order that a question may be raised on appeal, it is
amount.1 However, if the loan was expressly agreed to be payable only essential that it be within the issues made by the parties in
after the war or after liberation, or became payable after those dates, their pleadings. Consequently, when a party deliberately
no reduction could be effected, and peso-for-peso payment shall be adopts a certain theory, and the case is tried and decided
ordered in Philippine currency.2 upon that theory in the court below, he will not be permitted
to change his theory on appeal because, to permit him to do
The Ballantyne Conversion Table does not apply where the so, would be unfair to the adverse party. (Rules of Court by
monetary obligation, under the contract, was not payable Moran-1957 Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38
during the Japanese occupation but until after one year Phil., 424; American Express Company vs. Natividad, 46
counted for the date of ratification of the Treaty of Peace Phil., 207; San Agustin vs. Barrios, 68 Phil., 475, 480;
concluding the Greater East Asia War. (Arellano vs. De Toribio vs. Dacasa, 55 Phil., 461.)
Domingo, 101 Phil., 902.)
Appellant's last assignment of error concerns attorneys fees. He says
When a monetary obligation is contracted during the there was no reason for making this and exception to the general rule
Japanese occupation, to be discharged after the war, the that attorney's fees are not recoverable in the absence of stipulation.
payment should be made in Philippine Currency. (Kare et
al. vs. Imperial et al., 102 Phil., 173.) Under the new Civil Code, attorney's fees and expenses of litigation
new be awarded in this case if defendant acted in gross and evident bad
Now then, as in the case before us, the debtor undertook to pay "six faith in refusing to satisfy plaintiff's plainly valid, just and demandable
months after the war," peso for peso payment is indicated. claim" or "where the court deems it just and equitable that attorney's
fees be recovered" (Article 2208 Civil Code). These are — if
The Ang Lam3 case cited by appellant is not controlling, because the applicable — some of the exceptions to the general rule that in the
loan therein given could have been repaid during the Japanese absence of stipulation no attorney's fees shall be awarded.
occupation. Dated December 26, 1944, it was payable within one year.
Payment could therefore have been made during January 1945. The The trial court did not explain why it ordered payment of counsel fees.
notes here in question were payable only after the war. Needless to say, it is desirable that the decision should state the reason
why such award is made bearing in mind that it must necessarily rest
The appellant administrator calls attention to the fact that the notes on an exceptional situation. Unless of course the text of the decision
contained no express promise to pay a specified amount. We declare plainly shows the case to fall into one of the exceptions, for instance
the point to be without merit. In accordance with doctrines on the "in actions for legal support," when exemplary damages are awarded,"
matter, the note herein-above quoted amounted in effect to "a promise etc. In the case at bar, defendant could not obviously be held to have
to pay ten thousand pesos six months after the war, without interest." acted in gross and evident bad faith." He did not deny the debt, and
And so of the other notes. merely pleaded for adjustment, invoking decisions he thought to be
controlling. If the trial judge considered it "just and equitable" to
require payment of attorney's fees because the defense — adjustment
"An acknowledgment may become a promise by the addition of words under Ballantyne schedule — proved to be untenable in view of this
by which a promise of payment is naturally implied, such as, Court's applicable rulings, it would be error to uphold his view.
"payable," "payable" on a given day, "payable on demand," "paid . . . Otherwise, every time a defendant loses, attorney's fees would follow
when called for," . . . (10 Corpus Juris Secundum p. 523.) as a matter of course. Under the article above cited, even a clearly
untenable defense would be no ground for awarding attorney's fees
"To constitute a good promissory note, no precise words of contract unless it amounted to "gross and evident bad faith."
are necessary, provided they amount, in legal effect, to a promise to
pay. In other words, if over and above the mere acknowledgment of Plaintiff's attorneys attempt to sustain the award on the ground of
the debt there may be collected from the words used a promise to pay defendant's refusal to accept her offer, before the suit, to take P5,000
it, the instrument may be regarded as a promissory note. 1 Daniel, Neg. in full settlement of her claim. We do not think this is tenable,
Inst. sec. 36 et seq.; Byles, Bills, 10, 11, and cases cited . . . "Due A. defendant's attitude being merely a consequence of his line of defense,
B. $325, payable on demand," or, "I acknowledge myself to be which though erroneous does not amount to "gross and evident bad
indebted to A in $109, to be paid on demand, for value received," or, faith." For one thing, there is a point raised by defendant, which so far
"I O. U. $85 to be paid on May 5th," are held to be promissory notes, as we are informed, has not been directly passed upon in this
significance being given to words of payment as indicating a promise jurisdiction: the notes contained no express promise to pay a definite
to pay." 1 Daniel Neg. Inst. see. 39, and cases cited. amount.
(Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700, 703.)
There being no circumstance making it reasonable and just to require
Another argument of appellant is that as the deceased Luther Young defendant to pay attorney's fees, the last assignment of error must be
did not sign these notes, his estate is not liable for the same. This upheld.
defense, however, was not interposed in the lower court. There the only
issue related to the amount to be amount, considering that the money
had been received in Japanese money. It is now unfair to put up this
Wherefore, in view of the foregoing considerations, the appealed (d) Menzi Building at Ayala Blvd., Makati, Rizal;
decision is affirmed, except as to the attorney's fees which are hereby
disapproved. So ordered. (e) International Rice Research Institute, Research
center Los Baños, Laguna;
Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion,
Reyes, J.B.L. Endencia and Felix, JJ., concur. (f) Aurelia's Building at Mabini, Ermita, Manila;

Republic of the Philippines (g) Far East Bank's Office at Fil-American Life
SUPREME COURT Insurance Building at Isaac Peral Ermita, Manila;
Manila
(h) Arthur Young's residence at Forbes Park,
EN BANC Makati, Rizal;

G.R. No. L-27782 July 31, 1970 (i) L & S Building at Dewey Blvd., Manila; and

OCTAVIO A. KALALO, plaintiff-appellee, (j) Stanvac Refinery Service Building at Limay,


vs. Bataan.
ALFREDO J. LUZ, defendant-appellant.
On December 1 1, '1961, appellee sent to appellant a statement of
Amelia K. del Rosario for plaintiff-appellee. account (Exhibit "1"),3 to which was attached an itemized statement of
defendant-appellant's account (Exh. "1-A"), according to which the
Pelaez, Jalandoni & Jamir for defendant-appellant. total engineering fee asked by appellee for services rendered amounted
to P116,565.00 from which sum was to be deducted the previous
payments made in the amount of P57,000.00, thus leaving a balance
due in the amount of P59,565.00.
ZALDIVAR, J.:
On May 18, 1962 appellant sent appellee a resume of fees due to the
latter. Said fees, according to appellant. amounted to P10,861.08
Appeal from the decision, dated, February 10, 1967, of the Court of instead of the amount claimed by the appellee. On June 14, 1962
First Instance of Rizal (Branch V, Quezon City) in its Civil Case No. appellant sent appellee a check for said amount, which appellee refused
Q-6561. to accept as full payment of the balance of the fees due him.

On November 17, 1959, plaintiff-appellee Octavio A. Kalalo On August 10, 1962, appellee filed a complaint against appellant,
hereinafter referred to as appellee), a licensed civil engineer doing containing four causes of action. In the first cause of action, appellee
business under the firm name of O. A. Kalalo and Associates, entered alleged that for services rendered in connection with the different
into an agreement (Exhibit A )1 with defendant-appellant Alfredo J . projects therein mentioned there was due him fees in sum s consisting
Luz (hereinafter referred to as appellant), a licensed architect, doing of $28,000 (U.S.) and P100,204.46, excluding interests, of which sums
business under firm name of A. J. Luz and Associates, whereby the only P69,323.21 had been paid, thus leaving unpaid the $28,000.00 and
former was to render engineering design services to the latter for fees, the balance of P30,881.25. In the second cause of action, appellee
as stipulated in the agreement. The services included design claimed P17,000.00 as consequential and moral damages; in the third
computation and sketches, contract drawing and technical cause of action claimed P55,000.00 as moral damages, attorney's fees
specifications of all engineering phases of the project designed by O. and expenses of litigation; and in the fourth cause of action he claimed
A. Kalalo and Associates bill of quantities and cost estimate, and P25,000.00 as actual damages, and also for attorney's fees and
consultation and advice during construction relative to the work. The expenses of litigation.
fees agreed upon were percentages of the architect's fee, to wit:
structural engineering, 12-½%; electrical engineering, 2-½%. The
agreement was subsequently supplemented by a "clarification to letter- In his answer, appellant admitted that appellee rendered engineering
proposal" which provided, among other things, that "the schedule of services, as alleged in the first cause of action, but averred that some
engineering fees in this agreement does not cover the following: ... D. of appellee's services were not in accordance with the agreement and
Foundation soil exploration, testing and evaluation; E. Projects that are appellee's claims were not justified by the services actually rendered,
principally engineering works such as industrial plants, ..." and "O. A. and that the aggregate amount actually due to appellee was only
Kalalo and Associates reserve the right to increase fees on projects P80,336.29, of which P69,475.21 had already been paid, thus leaving
,which cost less than P100,000 ...."2 Pursuant to said agreement, a balance of only P10,861.08. Appellant denied liability for any
appellee rendered engineering services to appellant in the following damage claimed by appellee to have suffered, as alleged in the second,
projects: third and fourth causes of action. Appellant also set up affirmative and
special defenses, alleging that appellee had no cause of action, that
appellee was in estoppel because of certain acts, representations,
(a) Fil-American Life Insurance Building at admissions and/or silence, which led appellant to believe certain facts
Legaspi City; to exist and to act upon said facts, that appellee's claim regarding the
Menzi project was premature because appellant had not yet been paid
(b) Fil-American Life Insurance Building at Iloilo for said project, and that appellee's services were not complete or were
City; performed in violation of the agreement and/or otherwise
unsatisfactory. Appellant also set up a counterclaim for actual and
(c) General Milling Corporation Flour Mill at moral damages for such amount as the court may deem fair to assess,
Opon Cebu; and for attorney's fees of P10,000.00.
Inasmuch as the pleadings showed that the appellee's right to certain representations, or of being of decisive weight in
fees for services rendered was not denied, the only question being the determining the true intent of the parties as to the
assessment of the proper fees and the balance due to appellee after nature and extent of the engineering services
deducting the admitted payments made by appellant, the trial court, rendered and/or the amount of fees due.
upon agreement of the parties, authorized the case to be heard before a
Commissioner. The Commissioner rendered a report which, in resume, II. The lower court erred in declaring and holding
states that the amount due to appellee was $28,000.00 (U.S.) as his fee that the balance owing from defendant-appellant
in the International Research Institute Project which was twenty to plaintiff-appellee on the IRRI Project should be
percent (20%) of the $140,000.00 that was paid to appellant, and paid on the basis of the rate of exchange of the U.S.
P51,539.91 for the other projects, less the sum of P69,475.46 which dollar to the Philippine peso at the time of payment
was already paid by the appellant. The Commissioner also of judgment. .
recommended the payment to appellee of the sum of P5,000.00 as
attorney's fees.
III. The lower court erred in not declaring and
holding that the aggregate amount of the balance
At the hearing on the Report of the Commissioner, the respective due from defendant-appellant to plaintiff-appellee
counsel of the parties manifested to the court that they had no objection is only P15,792.05.
to the findings of fact of the Commissioner contained in the Report,
and they agreed that the said Report posed only two legal issues,
namely: (1) whether under the facts stated in the Report, the doctrine IV. The lower court erred in awarding attorney's
of estoppel would apply; and (2) whether the recommendation in the fees in the sum of P8,000.00, despite the
Report that the payment of the amount. due to the plaintiff in dollars commissioner's finding, which plaintiff-appellee
was legally permissible, and if not, at what rate of exchange it should has accepted and has not questioned, that said fee
be paid in pesos. After the parties had submitted their respective be only P5,000.00; and
memorandum on said issues, the trial court rendered its decision dated
February 10, 1967, the dispositive portion of which reads as follows: V. The lower court erred in not granting
defendant-appellant relief on his counter-claim.
WHEREFORE, judgment is rendered in favor of
plaintiff and against the defendant, by ordering the 1. In support of his first assignment of error appellant argues that in
defendant to pay plaintiff the sum of P51,539.91 Exhibit 1-A, which is a statement of accounts dated December 11,
and $28,000.00, the latter to be converted into the 1961, sent by appellee to appellant, appellee specified the various
Philippine currency on the basis of the current rate projects for which he claimed engineering fees, the precise amount due
of exchange at the time of the payment of this on each particular engineering service rendered on each of the various
judgment, as certified to by the Central Bank of the projects, and the total of his claims; that such a statement barred
Philippines, from which shall be deducted the sum appellee from asserting any claim contrary to what was stated therein,
of P69,475.46, which the defendant had paid the or from taking any position different from what he asserted therein
plaintiff, and the legal rate of interest thereon from with respect to the nature of the engineering services rendered; and
the filing of the complaint in the case until fully consequently the trial court could not award fees in excess of what was
paid for; by ordering the defendant to pay to stated in said statement of accounts. Appellant argues that for estoppel
plaintiff the further sum of P8,000.00 by way of to apply it is not necessary, contrary to the ruling of the trial court, that
attorney's fees which the Court finds to be the appellant should have actually relied on the representation, but that
reasonable in the premises, with costs against the it is sufficient that the representations were intended to make the
defendant. The counterclaim of the defendant is defendant act there on; that assuming arguendo that Exhibit 1-A did
ordered dismissed. not put appellee in estoppel, the said Exhibit 1-A nevertheless
constituted a formal admission that would be binding on appellee
From the decision, this appeal was brought, directly to this Court, under the law on evidence, and would not only belie any inconsistent
raising only questions of law. claim but also would discredit any evidence adduced by appellee in
support of any claim inconsistent with what appears therein; that,
moreover, Exhibit 1-A, being a statement of account, establishes prima
During the pendency of this appeal, appellee filed a petition for the facie the accuracy and correctness of the items stated therein and its
issuance of a writ of attachment under Section 1 (f) of Rule 57 of the correctness can no longer be impeached except for fraud or mistake;
Rules of Court upon the ground that appellant is presently residing in that Exhibit 1-A furthermore, constitutes appellee's own interpretation
Canada as a permanent resident thereof. On June 3, 1969, this Court of the contract between him and appellant, and hence, is conclusive
resolved, upon appellee's posting a bond of P10,000.00, to issue the against him.
writ of attachment, and ordered the Provincial Sheriff of Rizal to attach
the estate, real and personal, of appellant Alfredo J. Luz within the
province, to the value of not less than P140,000.00. On the other hand, appellee admits that Exhibit 1-A itemized the
services rendered by him in the various construction projects of
appellant and that the total engineering fees charged therein was
The appellant made the following assignments of errors: P116,565.00, but maintains that he was not in estoppel: first, because
when he prepared Exhibit 1-A he was laboring under an innocent
I. The lower court erred in not declaring and mistake, as found by the trial court; second, because appellant was not
holding that plaintiff-appellee's letter dated ignorant of the services actually rendered by appellee and the fees due
December 11, 1961 (Exhibit "1") and the to the latter under the original agreement, Exhibit "A."
statement of account (Exhibit "1-A") therein
enclosed, had the effect, cumulatively or We find merit in the stand of appellee.
alternatively, of placing plaintiff-appellee in
estoppel from thereafter modifying the
representations made in said exhibits, or of making
plaintiff-appellee otherwise bound by said
The statement of accounts (Exh. 1-A) could not estop appellee, because the defendant demanding payments of his fees pursuant to the contract
appellant did not rely thereon as found by the Commissioner, from Exhibit A." 1 2 This finding of the Commissioner was adopted by the
whose Report we read: trial court. 1 3 It is established , therefore, that Exhibit 1-A was written
by appellee through ignorance or mistake. Anent this matter, it has
While it is true that plaintiff vacillated in his claim, been held that if an act, conduct or misrepresentation of the party
yet, defendant did not in anyway rely or believe in sought to be estopped is due to ignorance founded on innocent mistake,
the different claims asserted by the plaintiff and estoppel will not arise. 1 4 Regarding the essential elements of estoppel
instead insisted on a claim that plaintiff was only in relation to the party claiming the estoppel, the first element does not
entitled to P10,861.08 as per a separate resume of obtain in the instant case, for it cannot be said that appellant did not
fees he sent to the plaintiff on May 18, 1962 (See know, or at least did not have the means of knowing, the services
Exhibit 6).4 rendered to him by appellee and the fees due thereon as provided in
Exhibit A. The second element is also wanting, for, as adverted to,
appellant did not rely on Exhibit 1-A but consistently denied the
The foregoing finding of the Commissioner, not disputed by appellant, accounts stated therein. Neither does the third element obtain, for
was adopted by the trial court in its decision. Under article 1431 of the appellant did not act on the basis of the representations in Exhibit 1-A,
Civil Code, in order that estoppel may apply the person, to whom and there was no change in his position, to his own injury or prejudice.
representations have been made and who claims the estoppel in his
favor must have relied or acted on such representations. Said article
provides: Appellant, however, insists that if Exhibit 1-A did not put appellee in
estoppel, it at least constituted an admission binding upon the latter. In
this connection, it cannot be gainsaid that Exhibit 1-A is not a judicial
Art. 1431. Through estoppel an admission or admission. Statements which are not estoppels nor judicial admissions
representation is rendered conclusive upon the have no quality of conclusiveness, and an opponent. whose admissions
person making it, and cannot be denied or have been offered against him may offer any evidence which serves as
disproved as against the person relying thereon. an explanation for his former assertion of what he now denies as a fact.
This may involve the showing of a mistake. Accordingly, in Oas vs.
An essential element of estoppel is that the person invoking it has been Roa, 1 6 it was held that when a party to a suit has made an admission
influenced and has relied on the representations or conduct of the of any fact pertinent to the issue involved, the admission can be
person sought to be estopped, and this element is wanting in the instant received against him; but such an admission is not conclusive against
case. In Cristobal vs. Gomez,5 this Court held that no estoppel based him, and he is entitled to present evidence to overcome the effect of
on a document can be invoked by one who has not been mislead by the the admission. Appellee did explain, and the trial court concluded, that
false statements contained therein. And in Republic of the Philippines Exhibit 1-A was based on either his ignorance or innocent mistake and
vs. Garcia, et al.,6 this Court ruled that there is no estoppel when the he, therefore, is not bound by it.
statement or action invoked as its basis did not mislead the adverse
party-Estoppel has been characterized as harsh or odious and not Appellant further contends that Exhibit 1-A being a statement of
favored in law.7 When misapplied, estoppel becomes a most effective account, establishes prima facie the accuracy and correctness of the
weapon to accomplish an injustice, inasmuch as it shuts a man's mouth items stated therein. If prima facie, as contended by appellant, then it
from speaking the truth and debars the truth in a particular is not absolutely conclusive upon the parties. An account stated may
case.8 Estoppel cannot be sustained by mere argument or doubtful be impeached for fraud, mistake or error. In American Decisions, Vol.
inference: it must be clearly proved in all its essential elements by 62, p. 95, cited as authority by appellant himself. we read thus:
clear, convincing and satisfactory evidence.9 No party should be
precluded from making out his case according to its truth unless by
force of some positive principle of law, and, consequently, estoppel in An account stated or settled is a mere admission
pains must be applied strictly and should not be enforced unless that the account is correct. It is not an estoppel.
substantiated in every particular. 1 0 The account is still open to impeachment for
mistakes or errors. Its effect is to establish, prima
facie, the accuracy of the items without other
The essential elements of estoppel in pais may be considered in relation proof; and the party seeking to impeach it is bound
to the party sought to be estopped, and in relation to the party invoking to show affirmatively the mistake or error alleged.
the estoppel in his favor. As related to the party to be estopped, the The force of the admission and the strength of the
essential elements are: (1) conduct amounting to false representation evidence necessary to overcome it will depend
or concealment of material facts or at least calculated to convey the upon the circumstances of the case.
impression that the facts are otherwise than, and inconsistent with,
those which the party subsequently attempts to assert; (2) intent, or at
least expectation that his conduct shall be acted upon by, or at least In the instant case, it is Our view that the ignorance mistake that
influence, the other party; and (3) knowledge, actual or constructive, attended the writing of Exhibit 1-A by appellee was sufficient to
of the real facts. As related to the party claiming the estoppel, the overcome the prima facie evidence of correctness and accuracy of said
essential elements are (1) lack of knowledge and of the means of Exhibit 1-A.
knowledge of the truth as the facts in questions; (2) (reliance, in good
faith, upon the conduct or statements of the party to be estopped; (3) Appellant also urges that Exhibit 1-A constitutes appellee's own
action or inaction based thereon of such character as To change the interpretation of the contract, and is, therefore, conclusive against him.
position or status of the party claiming the estoppel, to his injury, Although the practical construction of the contract by one party,
detriment or prejudice. 1 1 evidenced by his words or acts, can be used against him in behalf of
the other party, 1 7 yet, if one of the parties carelessly makes a wrong
The first essential element in relation to the party sought to be estopped interpretation of the words of his contract, or performs more than the
does not obtain in the instant case, for, as appears in the Report of the contract requires (as reasonably interpreted independently of his
Commissioner, appellee testified "that when he wrote Exhibit 1 and performance), as happened in the instant case, he should be entitled to
prepared Exhibit 1-A, he had not yet consulted the services of his a restitutionary remedy, instead of being bound to continue to his
counsel and it was only upon advice of counsel that the terms of the erroneous interpretation or his erroneous performance and "the other
contract were interpreted to him resulting in his subsequent letters to party should not be permitted to profit by such mistake unless he can
establish an estoppel by proving a material change of position made in Preferred: Free Market Rate: Rate:
good faith. The rule as to practical construction does not nullify the
equitable rules with respect to performance by mistake." 1 8 In the (a) Export Proceeds, U.S. Government
instant case, it has been shown that Exhibit 1-A was written through Expenditures invisibles other than those
mistake by appellee and that the latter is not estopped by it. Hence, specifically mentioned below.
even if said Exhibit 1-A be considered as practical construction of the ................................................ 25 75
contract by appellee, he cannot be bound by such erroneous
interpretation. It has been held that if by mistake the parties followed
a practice in violation of the terms of the agreement, the court should (b) Foreign Investments, Gold Proceeds, Tourists
not perpetuate the error. 1 9 and Inward Remittances of Veterans and Filipino
Citizens; and Personal Expenses of Diplomatic Per
personnel ................................. 100"2 1
2. In support of the second assignment of error, that the lower court
erred in holding that the balance from appellant on the IRRI project
should be paid on the basis of the rate of exchange of the U.S. dollar The amount of $140,000.00 received by appellant foil the International
to the Philippine peso at the time of payment of the judgment, appellant Rice Research Institute project is not within the scope of sub-paragraph
contends: first, that the official rate at the time appellant received his (a) of paragraph No. 1 of Circular No. 121. Appellant has not shown
architect's fees for the IRRI project, and correspondingly his obligation that 25% of said amount had to be surrendered to the Central Bank at
to appellee's fee on August 25, 1961, was P2.00 to $1.00, and cites in the preferred rate because it was either export proceeds, or U.S.
support thereof Section 1612 of the Revised Administrative Code, Government expenditures, or invisibles not included in sub-paragraph
Section 48 of Republic Act 265 and Section 6 of Commonwealth Act (b). Hence, it cannot be said that the trial court erred in presuming that
No. 699; second, that the lower court's conclusion that the rate of appellant converted said amount at the free market rate. It is hard to
exchange to be applied in the conversion of the $28,000.00 is the believe that a person possessing dollars would exchange his dollars at
current rate of exchange at the time the judgment shall be satisfied was the preferred rate of P2.00 to $1.00, when he is not obligated to do so,
based solely on a mere presumption of the trial court that the defendant rather than at the free market rate which is much higher. A person is
did not convert, there being no showing to that effect, the dollars into presumed to take ordinary care of his concerns, and that the ordinary
Philippine currency at the official rate, when the legal presumption course of business has been
should be that the dollars were converted at the official rate of $1.00 to followed. 2 2
P2.00 because on August 25, 1961, when the IRRI project became due
and payable, foreign exchange controls were in full force and effect, Under the agreement, Exhibit A, appellee was entitled to 20% of
and partial decontrol was effected only afterwards, during the $140,000.00, or the amount of $28,000.00. Appellee, however, cannot
Macapagal administration; third, that the other ground advanced by the oblige the appellant to pay him in dollars, even if appellant himself had
lower court for its ruling, to wit, that appellant committed a breach of received his fee for the IRRI project in dollars. This payment in dollars
his obligation to turn over to the appellee the engineering fees received is prohibited by Republic Act 529 which was enacted on June 16, 1950.
in U.S. dollars for the IRRI project, cannot be upheld, because there Said act provides as follows:
was no such breach, as proven by the fact that appellee never claimed
in Exhibit 1-A that he should be paid in dollars; and there was no SECTION 1. Every provision contained in, or
provision in the basic contract (Exh. "A") that he should be paid in made with respect to, any obligation which
dollars; and, finally, even if there were such provision, it would have provision purports to give the obligee the right to
no binding effect under the provision of Republic Act 529; that, require payment in gold or in a particular kind of
moreover, it cannot really be said that no payment was made on that coin or currency other than Philippine currency or
account for appellant had already paid P57,000.00 to appellee, and in an amount of money of the Philippines
under Article 125 of the Civil Code, said payment could be said to have measured thereby, be as it is hereby declared
been applied to the fees due from the IRRI project, this project being against public policy, and null, void and of no
the biggest and this debt being the most onerous. effect, and no such provision shall be contained in,
or made with respect to, any obligation hereafter
In refutation of appellant's argument in support of the second incurred. Every obligation heretofore or here after
assignment of error, appellee argues that notwithstanding Republic Act incurred, whether or not any such provision as to
529, appellant can be compelled to pay the appellee in dollars in view payment is contained therein or made with respect
of the fact that appellant received his fees in dollars, and appellee's fee thereto, shall be discharged upon payment in any
is 20% of appellant's fees; and that if said amount is be converted into coin or currency which at the time of payment is
Philippine Currency, the rate of exchange should be that at the time of legal tender for public and private debts: Provided,
the execution of the judgment. 2 0 That, ( a) if the obligation was incurred prior to the
enactment of this Act and required payment in a
We have taken note of the fact that on August 25, 1961, the date when particular kind of coin or currency other than
appellant said his obligation to pay appellee's fees became due, there Philippine currency, it shall be discharged in
was two rates of exchange, to wit: the preferred rate of P2.00 to $1.00, Philippine currency measured at the prevailing
and the free market rate. It was so provided in Circular No. 121 of the rate of exchange at the time the obligation was
Central Bank of the Philippines, dated March 2, 1961. amending an incurred, (b) except in case of a loan made in a
earlier Circular No. 117, and in force until January 21, 1962 when it foreign currency stipulated to be payable in the
was amended by Circular No. 133, thus: same currency in which case the rate of exchange
prevailing at the time of the stipulated date of
payment shall prevail. All coin and currency,
1. All foreign exchange receipts shall be including Central Bank notes, heretofore or
surrendered to the Central Bank of those hereafter issued and declared by the Government
authorized to deal in foreign exchange as follows: of the Philippines shall be legal tender for all
debts, public and private.
Percentage of Total to be surrendered at
Under the above-quoted provision of Republic Act 529, if the will apply; and (2) whether the recommendation in
obligation was incurred prior to the enactment of the Act and require the Report that the payment of amount due to the
payment in a particular kind of coin or currency other than the plaintiff in dollars is permissible under the law,
Philippine currency the same shall be discharged in Philippine and, if not, at what rate of exchange should it be
currency measured at the prevailing rate of exchange at the time the paid in pesos (Philippine currency) .... 2 5
obligation was incurred. As We have adverted to, Republic Act 529
was enacted on June 16, 1950. In the case now before Us the obligation In the Commissioner's report, it is spetifically recommended that the
of appellant to pay appellee the 20% of $140,000.00, or the sum of appellant be ordered to pay the plaintiff the sum of "$28,000. 00 or its
$28,000.00, accrued on August 25, 1961, or after the enactment of equivalent as the fee of the plaintiff under Exhibit A on the IRRI
Republic Act 529. It follows that the provision of Republic Act 529 project." It is clear from this report of the Commissioner that no
which requires payment at the prevailing rate of exchange when the payment for the account of this $28,000.00 had been made. Indeed, it
obligation was incurred cannot be applied. Republic Act 529 does not is not shown in the record that the peso equivalent of the $28,000.00
provide for the rate of exchange for the payment of obligation incurred had been fixed or agreed upon by the parties at the different times when
after the enactment of said Act. The logical Conclusion, therefore, is the appellant had made partial payments to the appellee.
that the rate of exchange should be that prevailing at the time of
payment. This view finds support in the ruling of this Court in the case
of Engel vs. Velasco & Co. 2 3 where this Court held that even if the 3. In his third assignment of error, appellant contends that the lower
obligation assumed by the defendant was to pay the plaintiff a sum of court erred in not declaring that the aggregate amount due from him to
money expressed in American currency, the indemnity to be allowed appellee is only P15,792.05. Appellant questions the propriety or
should be expressed in Philippine currency at the rate of exchange at correctness of most of the items of fees that were found by the
the time of judgment rather than at the rate of exchange prevailing on Commissioner to be due to appellee for services rendered. We believe
the date of defendant's breach. This is also the ruling of American court that it is too late for the appellant to question the propriety or
as follows: correctness of those items in the present appeal. The record shows that
after the Commissioner had submitted his report the lower court, on
February 15, 1966, issued the following order:
The value in domestic money of a payment made
in foreign money is fixed with respect to the rate
of exchange at the time of payment. (70 CJS p. When this case was called for hearing today on the
228) report of the Commissioner, the counsels of the
parties manifested that they have no objection to
the findings of facts in the report. However, the
According to the weight of authority the amount report poses only legal issues, namely: (1) whether
of recovery depends upon the current rate of under the facts stated in the report, the doctrine of
exchange, and not the par value of the particular estoppel will apply; and (2) whether the
money involved. (48 C.J. 605-606) recommendation in the report that the alleged
payment of the defendant be made in dollars is
The value in domestic money of a payment made permissible by law and, if not, in what rate it
in foreign money is fixed in reference to the rate should be paid in pesos (Philippine Currency). For
of exchange at the time of such payment. (48 C.J. the purpose of resolving these issues the parties
605) prayed that they be allowed to file their respective
memoranda which will aid the court in the
It is Our considered view, therefore, that appellant should pay the determination of said issues. 2 6
appellee the equivalent in pesos of the $28,000.00 at the free market
rate of exchange at the time of payment. And so the trial court did not In consonance with the afore-quoted order of the trial court, the
err when it held that herein appellant should pay appellee $28,000.00 appellant submitted his memorandum which opens with the following
"to be converted into the Philippine currency on the basis of the current statements:
rate of exchange at the time of payment of this judgment, as certified
to by the Central Bank of the Philippines, ...." 24 As previously manifested, this Memorandum shall
be confined to:
Appellant also contends that the P57,000.00 that he had paid to
appellee should have been applied to the due to the latter on the IRRI (a) the finding in the Commissioner's Report that
project because such debt was the most onerous to appellant. This defendant's defense of estoppel will not lie (pp. 17-
contention is untenable. The Commissioner who was authorized by the 18, Report); and
trial court to receive evidence in this case, however, reports that the
appellee had not been paid for the account of the $28,000.00 which
represents the fees of appellee equivalent to 20% of the $140,000.00 (b) the recommendation in the Commissioner's
that the appellant received as fee for the IRRI project. This is a finding Report that defendant be ordered to pay plaintiff
of fact by the Commissioner which was adopted by the trial court. The the sum of '$28,000.00 (U.S.) or its equivalent as
parties in this case have agreed that they do not question the finding of the fee of the plaintiff under Exhibit 'A' in the IRRI
fact of the Commissioner. Thus, in the decision appealed from the project.'
lower court says:
More specifically this Memorandum proposes to
At the hearing on the Report of the Commissioner demonstrate the affirmative of three legal
on February 15, 1966, the counsels for both parties issues posed, namely:
manifested to the court that they have no objection
to the findings of facts of the Commissioner in his First: Whether or not plaintiff's letter dated
report; and agreed that the said report only poses December 11, 1961 (Exhibit 'I') and/or Statement
two (2)legal issues, namely: (1) whether under the of Account (Exhibit '1-A') therein enclosed has the
facts stated in the Report, the doctrine of estoppel effect of placing plaintiff in estoppel from
thereafter modifying the representations made in reasonable fees stated in the report of the Commissioner is a finding of
said letter and Statement of Account or of making fact.
plaintiff otherwise bound thereby; or of being
decisive or great weight in determining the true The report of the Commissioner on this matter reads as follows:
intent of the parties as to the amount of the
engineering fees owing from defendant to
plaintiff; As regards attorney's fees, under the provisions of Art 2208, par (11),
the same may be awarded, and considering the number of hearings held
in this case, the nature of the case (taking into account the technical
Second: Whether or not defendant can be nature of the case and the voluminous exhibits offered in evidence), as
compelled to pay whatever balance is owing to well as the way the case was handled by counsel, it is believed, subject
plaintiff on the IRRI (International Rice and to the Court's appraisal of the matter, that the sum of P5,000.00 is just
Research Institute) project in United States and reasonable as attorney's fees." 28
dollars; and
It is thus seen that the estimate made by the Commissioner was an
Third: Whether or not in case the ruling of this expression of belief, or an opinion. An opinion is different from a fact.
Honorable Court be that defendant cannot be The generally recognized distinction between a statement of "fact" and
compelled to pay plaintiff in United States dollars, an expression of "opinion" is that whatever is susceptible of exact
the dollar-to-peso convertion rate for determining knowledge is a matter of fact, while that not susceptible of exact
the peso equivalent of whatever balance is owing knowledge is generally regarded as an expression of opinion. 2 9 It has
to plaintiff in connection with the IRRI project also been said that the word "fact," as employed in the legal sense
should be the 2 to 1 official rate and not any other includes "those conclusions reached by the trior from shifting
rate. 2 7 testimony, weighing evidence, and passing on the credit of the
witnesses, and it does not denote those inferences drawn by the trial
It is clear, therefore, that what was submitted by appellant to the lower court from the facts ascertained and settled by it. 3 0 In the case at bar,
court for resolution did not include the question of correctness or the estimate made by the Commissioner of the attorney's fees was an
propriety of the amounts due to appellee in connection with the inference from the facts ascertained by him, and is, therefore, not a
different projects for which the appellee had rendered engineering finding of facts. The trial court was, consequently, not bound by that
services. Only legal questions, as above enumerated, were submitted estimate, in spite of the manifestation of the parties that they had no
to the trial court for resolution. So much so, that the lower court in objection to the findings of facts of the Commissioner in his report.
another portion of its decision said, as follows: Moreover, under Section 11 of Rule 33 of the Rules of Court, the court
may adopt, modify, or reject the report of the commissioner, in whole
The objections to the Commissioner's Report or in part, and hence, it was within the trial court's authority to increase
embodied in defendant's memorandum of the recommended attorney's fees of P5,000.00 to P8,000.00. It is a
objections, dated March 18, 1966, cannot likewise settled rule that the amount of attorney's fees is addressed to the sound
be entertained by the Court because at the hearing discretion of the court. 3 1
of the Commissioner's Report the parties had
expressly manifested that they had no objection to It is true, as appellant contends, that the trial court did not state in the
the findings of facts embodied therein. decision the reasons for increasing the attorney's fees. The trial court,
however, had adopted the report of the Commissioner, and in adopting
We, therefore hold that the third assignment of error of the appellant the report the trial court is deemed to have adopted the reasons given
has no merit. by the Commissioner in awarding attorney's fees, as stated in the
above-quoted portion of the report. Based on the reasons stated in the
report, the trial court must have considered that the reasonable
4. In his fourth assignment of error, appellant questions the award by attorney's fees should be P8,000.00. Considering that the judgment
the lower court of P8,000.00 for attorney's fees. Appellant argues that against the appellant would amount to more than P100,000.00, We
the Commissioner, in his report, fixed the sum of P5,000.00 as "just believe that the award of P8,000.00 for attorney's fees is reasonable.
and reasonable" attorney's fees, to which amount appellee did not
interpose any objection, and by not so objecting he is bound by said
finding; and that, moreover, the lower court gave no reason in its 5. In his fifth assignment of error appellant urges that he is entitled to
decision for increasing the amount to P8,000.00. relief on his counterclaim. In view of what We have stated in
connection with the preceding four assignments of error, We do not
consider it necessary to dwell any further on this assignment of error.
Appellee contends that while the parties had not objected to the
findings of the Commissioner, the assessment of attorney's fees is
always subject to the court's appraisal, and in increasing the WHEREFORE, the decision appealed from is affirmed, with costs
recommended fees from P5,000.00 to P8,000.00 the trial court must against the defendant-appellant. It is so ordered.
have taken into consideration certain circumstances which warrant the
award of P8,000.00 for attorney's fees. Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Castro, Fernando,
Teehankee, Barredo and Villamor, JJ., concur.
We believe that the trial court committed no error in this connection.
Section 12 of Rule 33 of the Rules of Court, on which the fourth Republic of the Philippines
assignment of error is presumably based, provides that when the parties SUPREME COURT
stipulate that a commissioner's findings of fact shall be final, only Manila
questions of law arising from the facts mentioned in the report shall
thereafter be considered. Consequently, an agreement by the parties to THIRD DIVISION
abide by the findings of fact of the commissioner is equivalent to an
agreement of facts binding upon them which the court cannot
disregard. The question, therefore, is whether or not the estimate of the G.R. No. 170325 September 26, 2008
PHILIPPINE NATIONAL BANK, Petitioner, For the period November 1998 to February 1999, the spouses issued
vs. sixty nine (69) checks, in the total amount of P2,345,804.00. These
ERLANDO T. RODRIGUEZ and NORMA were payable to forty seven (47) individual payees who were all
RODRIGUEZ, Respondents. members of PEMSLA.4

DECISION Petitioner PNB eventually found out about these fraudulent acts. To
put a stop to this scheme, PNB closed the current account of PEMSLA.
REYES, R.T., J.: As a result, the PEMSLA checks deposited by the spouses were
returned or dishonored for the reason "Account Closed." The
corresponding Rodriguez checks, however, were deposited as usual to
WHEN the payee of the check is not intended to be the true recipient the PEMSLA savings account. The amounts were duly debited from
of its proceeds, is it payable to order or bearer? What is the fictitious- the Rodriguez account. Thus, because the PEMSLA checks given as
payee rule and who is liable under it? Is there any exception? payment were returned, spouses Rodriguez incurred losses from the
rediscounting transactions.
These questions seek answers in this petition for review on certiorari
of the Amended Decision1 of the Court of Appeals (CA) which RTC Disposition
affirmed with modification that of the Regional Trial Court (RTC).2
Alarmed over the unexpected turn of events, the spouses Rodriguez
The Facts filed a civil complaint for damages against PEMSLA, the Multi-
Purpose Cooperative of Philnabankers (MCP), and petitioner PNB.
The facts as borne by the records are as follows: They sought to recover the value of their checks that were deposited to
the PEMSLA savings account amounting to P2,345,804.00. The
Respondents-Spouses Erlando and Norma Rodriguez were clients of spouses contended that because PNB credited the checks to the
petitioner Philippine National Bank (PNB), Amelia Avenue Branch, PEMSLA account even without indorsements, PNB violated its
Cebu City. They maintained savings and demand/checking accounts, contractual obligation to them as depositors. PNB paid the wrong
namely, PNBig Demand Deposits (Checking/Current Account No. payees, hence, it should bear the loss.
810624-6 under the account name Erlando and/or Norma Rodriguez),
and PNBig Demand Deposit (Checking/Current Account No. 810480- PNB moved to dismiss the complaint on the ground of lack of cause of
4 under the account name Erlando T. Rodriguez). action. PNB argued that the claim for damages should come from the
payees of the checks, and not from spouses Rodriguez. Since there was
The spouses were engaged in the informal lending business. In line no demand from the said payees, the obligation should be considered
with their business, they had a discounting3 arrangement with the as discharged.
Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees. Naturally, PEMSLA was likewise a In an Order dated January 12, 2000, the RTC denied PNB’s motion to
client of PNB Amelia Avenue Branch. The association maintained dismiss.
current and savings accounts with petitioner bank.
In its Answer,5 PNB claimed it is not liable for the checks which it paid
PEMSLA regularly granted loans to its members. Spouses Rodriguez to the PEMSLA account without any indorsement from the payees.
would rediscount the postdated checks issued to members whenever The bank contended that spouses Rodriguez, the makers, actually did
the association was short of funds. As was customary, the spouses not intend for the named payees to receive the proceeds of the checks.
would replace the postdated checks with their own checks issued in the Consequently, the payees were considered as "fictitious payees" as
name of the members. defined under the Negotiable Instruments Law (NIL). Being checks
made to fictitious payees which are bearer instruments, the checks
It was PEMSLA’s policy not to approve applications for loans of were negotiable by mere delivery. PNB’s Answer included its cross-
members with outstanding debts. To subvert this policy, some claim against its co-defendants PEMSLA and the MCP, praying that
PEMSLA officers devised a scheme to obtain additional loans despite in the event that judgment is rendered against the bank, the cross-
their outstanding loan accounts. They took out loans in the names of defendants should be ordered to reimburse PNB the amount it shall
unknowing members, without the knowledge or consent of the latter. pay.
The PEMSLA checks issued for these loans were then given to the
spouses for rediscounting. The officers carried this out by forging the After trial, the RTC rendered judgment in favor of spouses Rodriguez
indorsement of the named payees in the checks. (plaintiffs). It ruled that PNB (defendant) is liable to return the value
of the checks. All counterclaims and cross-claims were dismissed. The
In return, the spouses issued their personal checks (Rodriguez checks) dispositive portion of the RTC decision reads:
in the name of the members and delivered the checks to an officer of
PEMSLA. The PEMSLA checks, on the other hand, were deposited by WHEREFORE, in view of the foregoing, the Court hereby renders
the spouses to their account. judgment, as follows:

Meanwhile, the Rodriguez checks were deposited directly by 1. Defendant is hereby ordered to pay the plaintiffs the total
PEMSLA to its savings account without any indorsement from the amount of P2,345,804.00 or reinstate or restore the amount
named payees. This was an irregular procedure made possible through of P775,337.00 in the PNBig Demand Deposit
the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and Checking/Current Account No. 810480-4 of Erlando T.
bank teller in the PNB Branch. It appears that this became the usual Rodriguez, and the amount of P1,570,467.00 in the PNBig
practice for the parties. Demand Deposit, Checking/Current Account No. 810624-6
of Erlando T. Rodriguez and/or Norma Rodriguez, plus legal
rate of interest thereon to be computed from the filing of this
complaint until fully paid;
2. The defendant PNB is hereby ordered to pay the plaintiffs a profit by issuing rediscounted checks, while the officers of PEMSLA
the following reasonable amount of damages suffered by and other members would be able to claim their loans, despite the fact
them taking into consideration the standing of the plaintiffs that they were disqualified for one reason or another. They were able
being sugarcane planters, realtors, residential subdivision to achieve this conspiracy by using other members who had loaned
owners, and other businesses: lesser amounts of money or had not applied at all. x x x.8 (Emphasis
added)
(a) Consequential damages, unearned income in
the amount of P4,000,000.00, as a result of their The CA found that the checks were bearer instruments, thus they do
having incurred great dificulty (sic) especially in not require indorsement for negotiation; and that spouses Rodriguez
the residential subdivision business, which was and PEMSLA conspired with each other to accomplish this money-
not pushed through and the contractor even making scheme. The payees in the checks were "fictitious payees"
threatened to file a case against the plaintiffs; because they were not the intended payees at all.

(b) Moral damages in the amount The spouses Rodriguez moved for reconsideration. They argued, inter
of P1,000,000.00; alia, that the checks on their faces were unquestionably payable to
order; and that PNB committed a breach of contract when it paid the
(c) Exemplary damages in the amount value of the checks to PEMSLA without indorsement from the payees.
of P500,000.00; They also argued that their cause of action is not only against PEMSLA
but also against PNB to recover the value of the checks.
(d) Attorney’s fees in the amount of P150,000.00
considering that this case does not involve very On October 11, 2005, the CA reversed itself via an Amended Decision,
complicated issues; and for the the last paragraph and fallo of which read:

(e) Costs of suit. In sum, we rule that the defendant-appellant PNB is liable to the
plaintiffs-appellees Sps. Rodriguez for the following:
3. Other claims and counterclaims are hereby dismissed.6
1. Actual damages in the amount of P2,345,804 with interest
at 6% per annum from 14 May 1999 until fully paid;
CA Disposition
2. Moral damages in the amount of P200,000;
PNB appealed the decision of the trial court to the CA on the principal
ground that the disputed checks should be considered as payable to
bearer and not to order. 3. Attorney’s fees in the amount of P100,000; and

In a Decision7 dated July 22, 2004, the CA reversed and set aside the 4. Costs of suit.
RTC disposition. The CA concluded that the checks were obviously
meant by the spouses to be really paid to PEMSLA. The court a quo WHEREFORE, in view of the foregoing premises, judgment is hereby
declared: rendered by Us AFFIRMING WITH MODIFICATION the assailed
decision rendered in Civil Case No. 99-10892, as set forth in the
We are not swayed by the contention of the plaintiffs-appellees immediately next preceding paragraph hereof, and SETTING ASIDE
(Spouses Rodriguez) that their cause of action arose from the alleged Our original decision promulgated in this case on 22 July 2004.
breach of contract by the defendant-appellant (PNB) when it paid the
value of the checks to PEMSLA despite the checks being payable to SO ORDERED.9
order. Rather, we are more convinced by the strong and credible
evidence for the defendant-appellant with regard to the plaintiffs- The CA ruled that the checks were payable to order. According to the
appellees’ and PEMSLA’s business arrangement – that the value of the appellate court, PNB failed to present sufficient proof to defeat the
rediscounted checks of the plaintiffs-appellees would be deposited in claim of the spouses Rodriguez that they really intended the checks to
PEMSLA’s account for payment of the loans it has approved in be received by the specified payees. Thus, PNB is liable for the value
exchange for PEMSLA’s checks with the full value of the said loans. of the checks which it paid to PEMSLA without indorsements from the
This is the only obvious explanation as to why all the disputed sixty- named payees. The award for damages was deemed appropriate in
nine (69) checks were in the possession of PEMSLA’s errand boy for view of the failure of PNB to treat the Rodriguez account with the
presentment to the defendant-appellant that led to this present highest degree of care considering the fiduciary nature of their
controversy. It also appears that the teller who accepted the said checks relationship, which constrained respondents to seek legal action.
was PEMSLA’s officer, and that such was a regular practice by the
parties until the defendant-appellant discovered the scam. The logical
conclusion, therefore, is that the checks were never meant to be paid to Hence, the present recourse under Rule 45.
order, but instead, to PEMSLA. We thus find no breach of contract on
the part of the defendant-appellant. Issues

According to plaintiff-appellee Erlando Rodriguez’ testimony, The issues may be compressed to whether the subject checks are
PEMSLA allegedly issued post-dated checks to its qualified members payable to order or to bearer and who bears the loss?
who had applied for loans. However, because of PEMSLA’s
insufficiency of funds, PEMSLA approached the plaintiffs-appellees PNB argues anew that when the spouses Rodriguez issued the disputed
for the latter to issue rediscounted checks in favor of said applicant checks, they did not intend for the named payees to receive the
members. Based on the investigation of the defendant-appellant, proceeds. Thus, they are bearer instruments that could be validly
meanwhile, this arrangement allowed the plaintiffs-appellees to make negotiated by mere delivery. Further, testimonial and documentary
evidence presented during trial amply proved that spouses Rodriguez (e) Where the only or last indorsement is an indorsement in
and the officers of PEMSLA conspired with each other to defraud the blank.12 (Underscoring supplied)
bank.
The distinction between bearer and order instruments lies in their
Our Ruling manner of negotiation. Under Section 30 of the NIL, an order
instrument requires an indorsement from the payee or holder before it
Prefatorily, amendment of decisions is more acceptable than an may be validly negotiated. A bearer instrument, on the other hand, does
erroneous judgment attaining finality to the prejudice of innocent not require an indorsement to be validly negotiated. It is negotiable by
parties. A court discovering an erroneous judgment before it becomes mere delivery. The provision reads:
final may, motu proprio or upon motion of the parties, correct its
judgment with the singular objective of achieving justice for the SEC. 30. What constitutes negotiation. – An instrument is negotiated
litigants.10 when it is transferred from one person to another in such manner as to
constitute the transferee the holder thereof. If payable to bearer, it is
However, a word of caution to lower courts, the CA in Cebu in this negotiated by delivery; if payable to order, it is negotiated by the
particular case, is in order. The Court does not sanction careless indorsement of the holder completed by delivery.
disposition of cases by courts of justice. The highest degree of
diligence must go into the study of every controversy submitted for A check that is payable to a specified payee is an order instrument.
decision by litigants. Every issue and factual detail must be closely However, under Section 9(c) of the NIL, a check payable to a specified
scrutinized and analyzed, and all the applicable laws judiciously payee may nevertheless be considered as a bearer instrument if it is
studied, before the promulgation of every judgment by the court. Only payable to the order of a fictitious or non-existing person, and such fact
in this manner will errors in judgments be avoided. is known to the person making it so payable. Thus, checks issued to
"Prinsipe Abante" or "Si Malakas at si Maganda," who are well-known
Now to the core of the petition. characters in Philippine mythology, are bearer instruments because the
named payees are fictitious and non-existent.
As a rule, when the payee is fictitious or not intended to be the true
recipient of the proceeds, the check is considered as a bearer We have yet to discuss a broader meaning of the term "fictitious" as
instrument. A check is "a bill of exchange drawn on a bank payable on used in the NIL. It is for this reason that We look elsewhere for
demand."11 It is either an order or a bearer instrument. Sections 8 and guidance. Court rulings in the United States are a logical starting point
9 of the NIL states: since our law on negotiable instruments was directly lifted from the
Uniform Negotiable Instruments Law of the United States.13
SEC. 8. When payable to order. – The instrument is payable to order
where it is drawn payable to the order of a specified person or to him A review of US jurisprudence yields that an actual, existing, and living
or his order. It may be drawn payable to the order of – payee may also be "fictitious" if the maker of the check did not intend
for the payee to in fact receive the proceeds of the check. This usually
occurs when the maker places a name of an existing payee on the check
(a) A payee who is not maker, drawer, or drawee; or for convenience or to cover up an illegal activity.14 Thus, a check made
expressly payable to a non-fictitious and existing person is not
(b) The drawer or maker; or necessarily an order instrument. If the payee is not the intended
recipient of the proceeds of the check, the payee is considered a
(c) The drawee; or "fictitious" payee and the check is a bearer instrument.

(d) Two or more payees jointly; or In a fictitious-payee situation, the drawee bank is absolved from
liability and the drawer bears the loss. When faced with a check
payable to a fictitious payee, it is treated as a bearer instrument that can
(e) One or some of several payees; or be negotiated by delivery. The underlying theory is that one cannot
expect a fictitious payee to negotiate the check by placing his
(f) The holder of an office for the time being. indorsement thereon. And since the maker knew this limitation, he
must have intended for the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the drawer of the check will
Where the instrument is payable to order, the payee must be named or
bear the loss. This rule is justified for otherwise, it will be most
otherwise indicated therein with reasonable certainty.
convenient for the maker who desires to escape payment of the check
to always deny the validity of the indorsement. This despite the fact
SEC. 9. When payable to bearer. – The instrument is payable to bearer that the fictitious payee was purposely named without any intention
– that the payee should receive the proceeds of the check.15

(a) When it is expressed to be so payable; or The fictitious-payee rule is best illustrated in Mueller & Martin v.
Liberty Insurance Bank.16 In the said case, the corporation Mueller &
(b) When it is payable to a person named therein or bearer; Martin was defrauded by George L. Martin, one of its authorized
or signatories. Martin drew seven checks payable to the German Savings
Fund Company Building Association (GSFCBA) amounting to
$2,972.50 against the account of the corporation without authority
(c) When it is payable to the order of a fictitious or non-
from the latter. Martin was also an officer of the GSFCBA but did not
existing person, and such fact is known to the person making
have signing authority. At the back of the checks, Martin placed the
it so payable; or
rubber stamp of the GSFCBA and signed his own name as
indorsement. He then successfully drew the funds from Liberty
(d) When the name of the payee does not purport to be the Insurance Bank for his own personal profit. When the corporation filed
name of any person; or
an action against the bank to recover the amount of the checks, the Verily, the subject checks are presumed order instruments. This is
claim was denied. because, as found by both lower courts, PNB failed to present
sufficient evidence to defeat the claim of respondents-spouses that the
The US Supreme Court held in Mueller that when the person making named payees were the intended recipients of the checks’ proceeds.
the check so payable did not intend for the specified payee to have any The bank failed to satisfy a requisite condition of a fictitious-payee
part in the transactions, the payee is considered as a fictitious payee. situation – that the maker of the check intended for the payee to have
The check is then considered as a bearer instrument to be validly no interest in the transaction.
negotiated by mere delivery. Thus, the US Supreme Court held that
Liberty Insurance Bank, as drawee, was authorized to make payment Because of a failure to show that the payees were "fictitious" in its
to the bearer of the check, regardless of whether prior indorsements broader sense, the fictitious-payee rule does not apply. Thus, the
were genuine or not.17 checks are to be deemed payable to order. Consequently, the drawee
bank bears the loss.20
The more recent Getty Petroleum Corp. v. American Express Travel
Related Services Company, Inc.18 upheld the fictitious-payee rule. The PNB was remiss in its duty as the drawee bank. It does not dispute the
rule protects the depositary bank and assigns the loss to the drawer of fact that its teller or tellers accepted the 69 checks for deposit to the
the check who was in a better position to prevent the loss in the first PEMSLA account even without any indorsement from the named
place. Due care is not even required from the drawee or depositary payees. It bears stressing that order instruments can only be negotiated
bank in accepting and paying the checks. The effect is that a showing with a valid indorsement.
of negligence on the part of the depositary bank will not defeat the
protection that is derived from this rule. A bank that regularly processes checks that are neither payable to the
customer nor duly indorsed by the payee is apparently grossly
However, there is a commercial bad faith exception to the fictitious- negligent in its operations.21 This Court has recognized the unique
payee rule. A showing of commercial bad faith on the part of the public interest possessed by the banking industry and the need for the
drawee bank, or any transferee of the check for that matter, will work people to have full trust and confidence in their banks.22 For this
to strip it of this defense. The exception will cause it to bear the loss. reason, banks are minded to treat their customer’s accounts with
Commercial bad faith is present if the transferee of the check acts utmost care, confidence, and honesty.23
dishonestly, and is a party to the fraudulent scheme. Said the US
Supreme Court in Getty: In a checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check strictly
Consequently, a transferee’s lapse of wary vigilance, disregard of in accordance with the drawer’s instructions, i.e., to the named payee
suspicious circumstances which might have well induced a prudent in the check. It should charge to the drawer’s accounts only the
banker to investigate and other permutations of negligence are not payables authorized by the latter. Otherwise, the drawee will be
relevant considerations under Section 3-405 x x x. Rather, there is a violating the instructions of the drawer and it shall be liable for the
"commercial bad faith" exception to UCC 3-405, applicable when the amount charged to the drawer’s account.24
transferee "acts dishonestly – where it has actual knowledge of facts
and circumstances that amount to bad faith, thus itself becoming a In the case at bar, respondents-spouses were the bank’s depositors. The
participant in a fraudulent scheme. x x x Such a test finds support in checks were drawn against respondents-spouses’ accounts. PNB, as
the text of the Code, which omits a standard of care requirement from the drawee bank, had the responsibility to ascertain the regularity of
UCC 3-405 but imposes on all parties an obligation to act with the indorsements, and the genuineness of the signatures on the checks
"honesty in fact." x x x19 (Emphasis added) before accepting them for deposit. Lastly, PNB was obligated to pay
the checks in strict accordance with the instructions of the drawers.
Getty also laid the principle that the fictitious-payee rule extends Petitioner miserably failed to discharge this burden.
protection even to non-bank transferees of the checks.
The checks were presented to PNB for deposit by a representative of
In the case under review, the Rodriguez checks were payable to PEMSLA absent any type of indorsement, forged or otherwise. The
specified payees. It is unrefuted that the 69 checks were payable to facts clearly show that the bank did not pay the checks in strict
specific persons. Likewise, it is uncontroverted that the payees were accordance with the instructions of the drawers, respondents-spouses.
actual, existing, and living persons who were members of PEMSLA Instead, it paid the values of the checks not to the named payees or
that had a rediscounting arrangement with spouses Rodriguez. their order, but to PEMSLA, a third party to the transaction between
the drawers and the payees.alf-ITC
What remains to be determined is if the payees, though existing
persons, were "fictitious" in its broader context. Moreover, PNB was negligent in the selection and supervision of its
employees. The trustworthiness of bank employees is indispensable to
For the fictitious-payee rule to be available as a defense, PNB must maintain the stability of the banking industry. Thus, banks are enjoined
show that the makers did not intend for the named payees to be part of to be extra vigilant in the management and supervision of their
the transaction involving the checks. At most, the bank’s thesis shows employees. In Bank of the Philippine Islands v. Court of
that the payees did not have knowledge of the existence of the checks. Appeals,25 this Court cautioned thus:
This lack of knowledge on the part of the payees, however, was not
tantamount to a lack of intention on the part of respondents-spouses Banks handle daily transactions involving millions of pesos. By the
that the payees would not receive the checks’ proceeds. Considering very nature of their work the degree of responsibility, care and
that respondents-spouses were transacting with PEMSLA and not the trustworthiness expected of their employees and officials is far greater
individual payees, it is understandable that they relied on the than those of ordinary clerks and employees. For obvious reasons, the
information given by the officers of PEMSLA that the payees would banks are expected to exercise the highest degree of diligence in the
be receiving the checks. selection and supervision of their employees.26
PNB’s tellers and officers, in violation of banking rules of procedure, to confess judgment. Alleging breach of the bank's contract, the
permitted the invalid deposits of checks to the PEMSLA account. Commonwealth entered judgment against the surety and assessed
Indeed, when it is the gross negligence of the bank employees that damages in a sum of $28,141.83. The surety petitioned for a rule to
caused the loss, the bank should be held liable.27 show cause why the judgment should not be opened to allow the surety
to defend. The rule was granted; the Commonwealth answered; a
PNB’s argument that there is no loss to compensate since no demand stipulation of facts was filed by both parties and the court discharged
for payment has been made by the payees must also fail. Damage was the rule. Subsequently the case was opened to permit the parties to take
caused to respondents-spouses when the PEMSLA checks they depositions and for oral argument. Depositions were taken and on the
deposited were returned for the reason "Account Closed." These record so amended the learned court below again discharged the rule.
PEMSLA checks were the corresponding payments to the Rodriguez This appeal followed.
checks. Since they could not encash the PEMSLA checks,
respondents-spouses were unable to collect payments for the amounts Controlling facts may be stated briefly. Statutes provide for the
they had advanced. condemnation and slaughter of tubercular cattle and the payment of
compensation for cattle so taken. The department administering the
A bank that has been remiss in its duty must suffer the consequences subject prepares papers covering each claim or case; these papers result
of its negligence. Being issued to named payees, PNB was duty-bound in action by the auditor general and the state treasurer pursuant to
by law and by banking rules and procedure to require that the checks which the treasurer issues the Commonwealth's check to pay the owner
be properly indorsed before accepting them for deposit and payment. of the cattle. A clerk named Thomas, employed in the department
In fine, PNB should be held liable for the amounts of the checks. charged with assembling these records, fabricated papers showing
amounts payable to various persons as owners of cattle when in fact no
claims had been presented or liability accrued. He placed these false
One Last Note papers with valid records that were moving from the department of
origin to the fiscal officers charged with duty of drawing checks in
We note that the RTC failed to thresh out the merits of PNB’s cross- payment of lawful claims. This was done in such way that, without
claim against its co-defendants PEMSLA and MPC. The records are discovery of the fraud by the auditor general or the state treasurer,
bereft of any pleading filed by these two defendants in answer to the checks were drawn as in the case of valid claims, the alleged claimant
complaint of respondents-spouses and cross-claim of PNB. The Rules in each case being named as payee of the check. In the course of
expressly provide that failure to file an answer is a ground for a business these checks were sent by mail addressed to the payees at the
declaration that defendant is in default.28 Yet, the RTC failed to post-office addresses stated in the papers. After the checks had been
sanction the failure of both PEMSLA and MPC to file responsive mailed, Thomas and a confederate went to the post offices to which
pleadings. Verily, the RTC dismissal of PNB’s cross-claim has no this mail had been sent, and, presumably, by representing themselves
basis. Thus, this judgment shall be without prejudice to whatever to be the addressees, obtained the checks. By various methods, not now
action the bank might take against its co-defendants in the trial court. important, they either negotiated them through a third person, or
cashed them at banks other than the drawee bank, or had them collected
To PNB’s credit, it became involved in the controversial transaction by other banks, first endorsing the name of the payee. This continued
not of its own volition but due to the actions of some of its employees. for some time without discovery, according to this record, apparently
Considering that moral damages must be understood to be in concept from January 9, 1928, to and including August 20, 1929. On November
of grants, not punitive or corrective in nature, We resolve to reduce the 6, 1929, the fraud was discovered. The Commonwealth then, in the
award of moral damages to P50,000.00.29 words of the agreement of facts, "took steps to gather together all of
the checks involved herein, a considerable task involving handling
thousands upon thousands of checks and securing only those checks
WHEREFORE, the appealed Amended Decision is AFFIRMED with which are the subject of this transaction." On November 23d and again
the MODIFICATION that the award for moral damages is reduced on November 27, 1929, all the checks then found to have forged
to P50,000.00, and that this is without prejudice to whatever civil, endorsements were presented to the bank with a request that the
criminal, or administrative action PNB might take against PEMSLA, Commonwealth's account be credited in the sum of those checks
MPC, and the employees involved. theretofore charged against the account. The request was refused.

SO ORDERED. Act of June 1, 1915, P. L. 667, 3 PS section 393.

Commonwealth Section 9 (3) of the Negotiable Instruments Law of 1901, P. L. 194,


v. 196, 56 PS section 14, provides, "The instrument is payable to bearer:
Globe Indemnity Company . . . 3. When it is payable to the order of a fictitious or nonexisting
person, and such fact was known to the person making it so payable. .
helpCheck If This Is Still Good Law . ." The payees were fictitious or nonexistent persons but that fact was
Supreme Court of PennsylvaniaJun 26, 1936Full title not known to the Commonwealth's fiscal officers who drew the checks.
323 Pa. 261 (Pa. 1936)Copy Citation Within the terms of the statute a name is fictitious when it is feigned
Argued April 29, 1936. or pretended, and a nonexistent person is one who does not exist in the
sense that he was not intended to be the payee by the drawer.
See Snyder v. Corn Exchange Nat. Bank, 221 Pa. 599, 606 et seq., 70
A. 876. In drawing the check to the order of the payee the
OPINION BY MR. JUSTICE LINN, June 26, 1936:
Commonwealth was not intending that an imaginary person or a
nonexistent person should as the payee take the check. The checks
The Commonwealth maintained a checking account with Diamond were therefore not payable to bearer.
National Bank of Pittsburgh, hereafter called the bank. The bank gave
its bond to the Commonwealth conditioned to disburse the deposit on
Section 23, 56 PS section 28, provides: "When a signature is forged or
its order. The Commonwealth also took the bond of the Globe
made without the authority of the person whose signature it purports
Indemnity Company, hereafter called the surety, conditioned for the
to be, it is wholly inoperative, and no right to retain the instrument, or
performance by the bank of its contract. This bond contained a warrant
to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless who represented to him that a client named Kirst owned real estate and
the party against whom it is sought to enforce such right is precluded wished to borrow money on it. Marcus agreed to lend. Upon receipt of
from setting up the forgery or want of authority." The alleged a bond and mortgage apparently signed by Kirst, Marcus drew his
endorsement of the payee's name was a forgery: Com. v. Bachop, 2 Pa. check to the order of Kirst and handed it to Moskovitz for delivery to
Super. 294; Com. v. Smith, 6 S. R. 568; the drawer had not intended his client. Kirst was nonexistent. Moskovitz endorsed Kirst's name on
that Thomas should endorse the payee's name. Being a forgery, section the check and also his own; the bank then paid the check. As soon as
23 declares that "it is wholly inoperative" and confers "no right to Marcus learned of the fraud, he demanded that his account be corrected
retain the instrument, or to give a discharge therefor, or to enforce and on the bank's refusal, brought suit. A nonsuit was entered by the
payment thereof against any party thereto" unless the drawer is trial court and was affirmed in the Superior Court. It was held that
estopped. Is the Commonwealth "precluded from setting up the Marcus could not recover; apparently, as we understand it, that he was
forgery"? precluded from making the defense of forgery. The court said, "The
whole transaction was between the plaintiff and Moskovitz so far as
The first proposition presented in appellant's brief is: "The checks the pretended lending of money and the payment by the plaintiff to the
when put in circulation by the Commonwealth were not susceptible of borrowers were concerned. The effect of the drawing of the checks on
a genuine endorsement." The record shows conclusively that that the bank was an implied representation by the drawer that the payees
proposition is sound and, as the Commonwealth did not intend to were existing persons and yet there could not be a genuine
make the checks payable to any identified person regardless of name, endorsement of such papers. It is not reasonable to charge the bank
or to a fictitious or nonexistent person, appellant's proposition would with the consequences of the payment of a forged endorsement when
seem to end its case. the plaintiff put in circulation checks which were not susceptible of a
genuine endorsement." It is to be noted that Marcus did not draw his
check to the order of Moskovitz and did not intend that Moskovitz
If the checks were not susceptible of endorsement and the bank should be the payee. He intended that Kirst should be the payee and so
nevertheless made payment, it could not debit the drawer's account, stated on the check. He had been told, falsely, as it turned out, that
and, having violated its contract by doing so, the surety became liable. Kirst was an existing person who made the mortgage and was entitled
It also follows that if the checks were not susceptible of endorsement, to the money. Marcus therefore did not intend to name, and did not
drawing and mailing them to the addressees, as stated above, could not know that he was naming a fictitious or nonexistent person and
be the proximate cause of the payment made by the bank. The drawer therefore under section 9, subsection 3, the check was not to be
could not have anticipated that, after they were drawn and mailed, regarded as payable to bearer. The mistake he made was not an act
Thomas and his confederate would by misrepresentation get them from which precluded him from setting up the forgery. Indeed, if the bank
the mails and that the bank would honor them. The most ordinary had kept its contract by proper investigation before payment, Marcus
precautions usually expected to be taken by a banker (see United would have been saved from the consequences of his mistake. That
Security Life, etc., Co. v. Central Nat. Bank, 185 Pa. 586, 40 A. 97, and case must be considered disapproved.
particularly the report of the master, Richard C. Dale, at page 591 et
seq.) asked to cash or credit the checks would, if taken, have at once
disclosed that the holder had no title. It is immaterial that the fraud was The appellant also relies on Market St. Title Tr. Co. v. Chelten Tr.
initiated by an employee of the Commonwealth: United Security Life, Co., 296 Pa. 230,145 A. 848, in which a check was erroneously drawn
etc., Co. v. Central Nat. Bank, supra; Nat. Union Fire Ins. Co. v. by a bank to a named payee when another payee was in fact entitled. It
Mellon Nat. Bank, 276 Pa. 212, 222, 119 A. 910; Shipman v. Bank, 126 was a controversy between a bank that drew its own check and a bank
N.Y. 318, 27 N.E. 371. It is also immaterial that before the discovery which collected the check and the actual decision does not help the
of the fraud, the Commonwealth knew that its account had been appellant. The bank drew its check in the course of a real estate
debited by the bank from time to time with the amount of these checks. settlement but, instead of making it payable to the person entitled to
The bank must know the drawer's signature, but, generally, it takes the the money, by some mistake named another payee and sent the check
risk of the payee's endorsement; with that the drawer has nothing to do by mail to the address of the payee who collected the money. The payee
unless he makes some representation with regard to it and none was was neither fictitious nor nonexistent. The drawer's intention, so far as
made here. The drawer, assuming the burden of proof of such facts, expressed on the face of the check, and by the fact of mailing it, was
may show mistake or fraud in the debits to his account made by the that the payee should receive the proceeds. On this point, also, the
bank. In this case the facts are clear. appellant relies on States v. First Nat. Bank of Montrose, 17 Pa. Super.
256, and 203 Pa. 69, 52 A. 13, a transaction arising prior to the passage
of the Negotiable Instruments Act. In that case a draft was drawn to a
It is also said that the Commonwealth was negligent in giving notice. person who was dead although the drawer was not aware of it. He
As to forged endorsements the rule is that notice must be given mailed the draft to what he supposed was the address of the payee. It
promptly. That of course varies with the circumstances. Here the fact was received by another person who forged the name of the payee and
stipulated is that "thousands upon thousands of checks" had to be collected the draft. Four years after he discovered the fraud the drawer
examined to select those involved; it required, as to one batch, 17 days, brought an action against the bank; recovery was denied; the only
and as to another, 21 days. In the circumstances that was prompt notice. ground upon which the decision can be justified is that the drawer sued
See McNeely Co. v. Bank of North America, 221 Pa. 588, 70 A. too late.
891; Connors v. Old Forge Discount and Deposit Bank, 245 Pa. 97, 91
A. 210; Lesley v. Ewing, 248 Pa. 135, 93 A. 875.
It is also obvious from what has been said that the cases of
impersonation, the so-called "imposter" cases, do not help appellant.
The facts bring the case so clearly within the portions of the Negotiable They depend on the drawer's intention, a test applied by the weight of
Instruments Act quoted above that reference to decisions seems authority; the drawer is precluded (section 23) by that. If a particular
unnecessary but in view of the argument of the learned counsel for the person is intended and designated as payee, it is immaterial to the
appellant that under Marcus v. People's Nat. Bank, 57 Pa. Super. 345, drawer by what name he is called; he may endorse and payment to him
and Market St. Title Trust Co. v. Chelten Tr. Co., 296 Pa. 230, 236, 145 will be good (as was decided in Land Title Tr. Co. v. Northwestern Nat.
A. 848, the Commonwealth is not entitled to recover, a word may be Bank, 196 Pa. 230, 46 A. 420) because such payment accords with the
said about them. drawer's intention. But if any intention may be attributed to the
Commonwealth in drawing and mailing the checks involved in this
It is impossible to consider the decision in the Marcus case consistent case, it is limited by what was stated on the check and by mailing it;
with the Negotiable Instruments Act. Marcus dealt with Moskovitz, there was here no additional evidence of intention such as handing the
check to the person intended as, for example, in Land Title Tr. On the other hand, on 19 January 1993 petitioner moved to quash the
Co.'scase, which precluded the drawer from asserting that it intended notice of garnishment claiming that he was not in possession of any
the payee to be the person who owned the property and not the person money, funds, credit, property or anything of value belonging to
who was present at the settlement, answering to the name of and Mabanto, Jr., except his salary and RATA checks, but that said checks
claiming to be the owner. Compare Real Estate, etc., Co. v. United were not yet properties of Mabanto, Jr., until delivered to him. He
Security Trust Co., 303 Pa. 273, 154 A. 593. further claimed that, as such, they were still public funds which could
not be subject to garnishment.
Brannan, Negotiable Instruments Law, 5th edition, page 311.
On 9 March 1993 the trial court denied both motions and ordered
The judgment is affirmed. petitioner to immediately comply with its order of 4 November
1992. 3 It opined that the checks of Mabanto, Jr., had already been
released through petitioner by the Department of Justice duly signed
by the officer concerned. Upon service of the writ of garnishment,
petitioner as custodian of the checks was under obligation to hold them
Republic of the Philippines for the judgment creditor. Petitioner became a virtual party to, or a
SUPREME COURT forced intervenor in, the case and the trial court thereby acquired
Manila jurisdiction to bind him to its orders and processes with a view to the
complete satisfaction of the judgment. Additionally, there was no
FIRST DIVISION sufficient reason for petitioner to hold the checks because they were no
longer government funds and presumably delivered to the payee,
conformably with the last sentence of Sec. 16 of the Negotiable
Instruments Law.

G.R. No. 111190 June 27, 1995 With regard to the contempt charge, the trial court was not morally
convinced of petitioner's guilt. For, while his explanation suffered from
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City procedural infirmities nevertheless he took pains in enlightening the
and in his personal capacity as garnishee, petitioner, court by sending a written explanation dated 22 July 1992 requesting
vs. for the lifting of the notice of garnishment on the ground that the notice
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu should have been sent to the Finance Officer of the Department of
City, and RAUL H. SESBREÑO, respondents. Justice. Petitioner insists that he had no authority to segregate a portion
of the salary of Mabanto, Jr. The explanation however was not
submitted to the trial court for action since the stenographic reporter
failed to attach it to the record. 4

BELLOSILLO, J.:
On 20 April 1993 the motion for reconsideration was denied. The trial
court explained that it was not the duty of the garnishee to inquire or
RAUL H. SESBREÑO filed a complaint for damages against Assistant judge for himself whether the issuance of the order of execution, writ
City Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr., of execution and notice of garnishment was justified. His only duty
before the Regional Trial Court of Cebu City. After trial judgment was was to turn over the garnished checks to the trial court which issued
rendered ordering the defendants to pay P11,000.00 to the plaintiff, the order of execution. 5
private respondent herein. The decision having become final and
executory, on motion of the latter, the trial court ordered its execution.
Petitioner raises the following relevant issues: (1) whether a check still
This order was questioned by the defendants before the Court of
in the hands of the maker or its duly authorized representative is owned
Appeals. However, on 15 January 1992 a writ of execution was issued.
by the payee before physical delivery to the latter: and, (2) whether the
salary check of a government official or employee funded with public
On 4 February 1992 a notice of garnishment was served on petitioner funds can be subject to garnishment.
Loreto D. de la Victoria as City Fiscal of Mandaue City where
defendant Mabanto, Jr., was then detailed. The notice directed
Petitioner reiterates his position that the salary checks were not owned
petitioner not to disburse, transfer, release or convey to any other
by Mabanto, Jr., because they were not yet delivered to him, and that
person except to the deputy sheriff concerned the salary checks or other
petitioner as garnishee has no legal obligation to hold and deliver them
checks, monies, or cash due or belonging to Mabanto, Jr., under
to the trial court to be applied to Mabanto, Jr.'s judgment debt. The
penalty of law. 1 On 10 March 1992 private respondent filed a motion
thesis of petitioner is that the salary checks still formed part of public
before the trial court for examination of the garnishees.
funds and therefore beyond the reach of garnishment proceedings.

On 25 May 1992 the petition pending before the Court of Appeals was
Petitioner has well argued his case.
dismissed. Thus the trial court, finding no more legal obstacle to act on
the motion for examination of the garnishees, directed petitioner on 4
November 1992 to submit his report showing the amount of the Garnishment is considered as a species of attachment for reaching
garnished salaries of Mabanto, Jr., within fifteen (15) days from credits belonging to the judgment debtor owing to him from a stranger
receipt 2 taking into consideration the provisions of Sec. 12, pars. (f) to the litigation. 6 Emphasis is laid on the phrase "belonging to the
and (i), Rule 39 of the Rules of Court. judgment debtor" since it is the focal point in resolving the issues
raised.
On 24 November 1992 private respondent filed a motion to require
petitioner to explain why he should not be cited in contempt of court As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is
for failing to comply with the order of 4 November 1992. public funds. He receives his compensation in the form of checks from
the Department of Justice through petitioner as City Fiscal of Mandaue
City and head of office. Under Sec. 16 of the Negotiable Instruments
Law, every contract on a negotiable instrument is incomplete and WHEREFORE, the petition is GRANTED. The orders of 9 March
revocable until delivery of the instrument for the purpose of giving 1993 and 20 April 1993 of the Regional Trial Court of Cebu City, Br.
effect thereto. As ordinarily understood, delivery means the transfer of 17, subject of the petition are SET ASIDE. The notice of garnishment
the possession of the instrument by the maker or drawer with intent to served on petitioner dated 3 February 1992 is ordered DISCHARGED.
transfer title to the payee and recognize him as the holder thereof.7
SO ORDERED.
According to the trial court, the checks of Mabanto, Jr., were already
released by the Department of Justice duly signed by the officer Quiason and Ka
concerned through petitioner and upon service of the writ of
garnishment by the sheriff petitioner was under obligation to hold them
for the judgment creditor. It recognized the role of petitioner THIRD DIVISION
as custodian of the checks. At the same time however it considered the
checks as no longer government funds and presumed delivered to the
payee based on the last sentence of Sec. 16 of the Negotiable
Instruments Law which states: "And where the instrument is no longer [G. R. No. 126568. April 30, 2003]
in the possession of a party whose signature appears thereon, a valid
and intentional delivery by him is presumed." Yet, the presumption is
not conclusive because the last portion of the provision says "until the
contrary is proved." However this phrase was deleted by the trial court
for no apparent reason. Proof to the contrary is its own finding that the QUIRINO GONZALES LOGGING
checks were in the custody of petitioner. Inasmuch as said checks had CONCESSIONAIRE, QUIRINO GONZALES and
not yet been delivered to Mabanto, Jr., they did not belong to him and EUFEMIA GONZALES, petitioners, vs. THE COURT
still had the character of public funds. In Tiro v. Hontanosas 8 we ruled OF APPEALS (CA) and REPUBLIC PLANTERS
that — BANK, respondents.

The salary check of a government officer or DECISION


employee such as a teacher does not belong to him CARPIO-MORALES, J.:
before it is physically delivered to him. Until that
time the check belongs to the government.
Accordingly, before there is actual delivery of the In the expansion of its logging business, petitioner Quirino
check, the payee has no power over it; he cannot Gonzales Logging Concessionaire (QGLC), through its proprietor,
assign it without the consent of the Government. general manager - co-petitioner Quirino Gonzales, applied on October
15, 1962 for credit accommodations[1] with respondent Republic Bank
(the Bank), later known as Republic Planters Bank.
As a necessary consequence of being public fund, the checks may not
be garnished to satisfy the judgment. 9 The rationale behind this The Bank approved QGLCs application on December 21, 1962,
doctrine is obvious consideration of public policy. The Court granting it a credit line of P900,000.00[2] broken into an overdraft line
succinctly stated in Commissioner of Public Highways v. San of P500,000.00 which was later reduced to P450,000.00 and a Letter
Diego 10 that — of Credit (LC) line of P400,000.00.[3]
Pursuant to the grant, the Bank and petitioners QGLC and the
The functions and public services rendered by the
spouses Quirino and Eufemia Gonzales executed ten documents: two
State cannot be allowed to be paralyzed or
denominated Agreement for Credit in Current Account,[4] four
disrupted by the diversion of public funds from
denominated Application and Agreement for Commercial Letter of
their legitimate and specific objects, as
Credit,[5] and four denominated Trust Receipt.[6]
appropriated by law.
Petitioners obligations under the credit line were secured by a
In denying petitioner's motion for reconsideration, the trial court real estate mortgage on four parcels of land: two in Pandacan, Manila,
expressed the additional ratiocination that it was not the duty of the one in Makati (then part of Rizal), and another in Diliman, Quezon
garnishee to inquire or judge for himself whether the issuance of the City.[7]
order of execution, the writ of execution, and the notice of garnishment
In separate transactions, petitioners, to secure certain advances
was justified, citing our ruling in Philippine Commercial Industrial
from the Bank in connection with QGLCs exportation of logs,
Bank v. Court of Appeals. 11 Our precise ruling in that case was that
executed a promissory note in 1964 in favor of the Bank.They were to
"[I]t is not incumbent upon the garnishee to inquire or to judge for itself
execute three more promissory notes in 1967.
whether or not the order for the advance execution of a judgment is
valid." But that is invoking only the general rule. We have also In 1965, petitioners having long defaulted in the payment of their
established therein the compelling reasons, as exceptions thereto, obligations under the credit line, the Bank foreclosed the mortgage and
which were not taken into account by the trial court, e.g., a defect on bought the properties covered thereby, it being the highest bidder in
the face of the writ or actual knowledge by the garnishee of lack of the auction sale held in the same year. Ownership over the properties
entitlement on the part of the garnisher. It is worth to note that the was later consolidated in the Bank on account of which new titles
ruling referred to the validity of advance execution of judgments, but thereto were issued to it.[8]
a careful scrutiny of that case and similar cases reveals that it was
applicable to a notice of garnishment as well. In the case at bench, it On January 27, 1977, alleging non-payment of the balance of
was incumbent upon petitioner to inquire into the validity of the notice QGLCs obligation after the proceeds of the foreclosure sale were
of garnishment as he had actual knowledge of the non-entitlement of applied thereto, and non-payment of the promissory notes despite
private respondent to the checks in question. Consequently, we find no repeated demands, the Bank filed a complaint for sum of money (Civil
difficulty concluding that the trial court exceeded its jurisdiction in Case No. 106635) against petitioners before the Regional Trial Court
issuing the notice of garnishment concerning the salary checks of (RTC) of Manila.
Mabanto, Jr., in the possession of petitioner.
The complaint listed ten causes of action. The first concerns the properties in favor of the Bank. They deny, however, having availed
overdraft line under which the Bank claimed that petitioners withdrew of the credit accommodations and having received the value of the
amounts (unspecified) at twelve percent per annum which were unpaid promissory notes, as they do deny having physically received the
at maturity and that after it applied the proceeds of the foreclosure sale tractors and equipment subject of the LCs.
to the overdraft debt, there remained an unpaid balance
of P1,224,301.56. As affirmative defenses, petitioners assert that the complaint
states no cause of action, and assuming that it does, the same is/are
The Banks second to fifth causes of action pertain to the LC line barred by prescription or null and void for want of consideration.
under which it averred that on the strength of the LCs it issued, the
beneficiaries thereof drew and presented sight drafts to it which it all By Order of March 10, 1977, Branch 36 of the Manila RTC
paid after petitioners acceptance; and that it delivered the tractors and attached the preferred shares of stocks of the spouses Quirino and
equipment subject of the LCs to petitioners who have not paid either Eufemia Gonzales with the Bank with a total par value of P414,000.00.
the full or part of the face value of the drafts. Finding for petitioners, the trial court rendered its Decision of
Specifically with respect to its second cause of action, the Bank April 22, 1992 the dispositive portion of which reads:
alleged that it issued LC No. 63-0055D on January 15, 1963 in favor
of Monark International Incorporated[9] covering the purchase of a WHEREFORE, judgment is rendered as follows:
tractor[10] on which the latter allegedly drew a sight draft with a face
value of P71,500.00,[11] which amount petitioners have not, however, 1. All the claims of plaintiff particularly those described in the first to
paid in full. the tenth causes of action of its complaint are denied for the reasons
Under its third cause of action, the Bank charged that it issued earlier mentioned in the body of this decision;
LC No. 61-1110D on December 27, 1962 also in favor of Monark
International covering the purchase of another tractor and other 2. As regards the claims of defendants pertaining to their counterclaim
equipment;[12] and that Monark International drew a sight draft with a (Exhibits 1, 2 and 3), they are hereby given ten (10) years from the date
face value of P80,350.00,[13] and while payments for the value thereof of issuance of the torrens title to plaintiff and before the transfer thereof
had been made by petitioners, a balance of P68,064.97 remained. in good faith to a third party buyer within which to ask for the
reconveyance of the real properties foreclosed by plaintiff,
Under the fourth cause of action, the Bank maintained that it
issued LC No. 63-0182D on February 11, 1963 in favor of J.B.L.
Enterprises, Inc.[14] covering the purchase of two tractors,[15] and J.B.L. 3. The order of attachment which was issued against the preferred
Enterprises drew on February 13, 1963 a sight draft on said LC in the shares of stocks of defendants-spouses Quirino Gonzales and Eufemia
amount of P155,000.00 but petitioners have not paid said amount. Gonzales with the Republic Bank now known as Republic Planters
Bank dated March 21, 1977 is hereby dissolved and/or lifted, and
On its fifth cause of action, the Bank alleged that it issued LC
No. 63-0284D on March 14, 1963 in favor of Super Master Auto 4. Plaintiff is likewise ordered to pay the sum of P20,000.00, as and for
Supply (SMAS) covering the purchase of Eight Units GMC (G.I.) attorneys fees, with costs against plaintiff.
Trucks; that on March 14, 1963, SMAS drew a sight draft with a face
value of P64,000.00[16] on the basis of said LC; and that the payments
made by petitioners for the value of said draft were deficient SO ORDERED.
by P45,504.74.
In finding for petitioners, the trial court ratiocinated:[25]
The Bank thus prayed for the settlement of the above-stated
obligations at an interest rate of eleven percent per annum, and for the
award of trust receipt commissions, attorneys fees and other fees and Art. 1144 of the Civil Code states that an action upon a written contract
costs of collection. prescribes in ten (10) years from the time the right of action accrues.
Art. 1150 states that prescription starts to run from the day the action
The sixth to ninth causes of action are anchored on the may be brought. The obligations allegedly created by the written
promissory notes issued by petitioners allegedly to secure certain contracts or documents supporting plaintiffs first to the sixth causes of
advances from the Bank in connection with the exportation of logs as action were demandable at the latest in 1964. Thus when the complaint
reflected above.[17] The notes were payable 30 days after date and was filed on January 27, 1977 more than ten (10) years from 1964
provided for the solidary liability of petitioners as well as attorneys [when the causes of action accrued] had already lapsed. The first to the
fees at ten percent of the total amount due[18]in the event of their non- sixth causes of action are thus barred by prescription. . . .
payment at maturity.
The note dated June 18, 1964, subject of the sixth cause of action, As regards the seventh and eight causes of action, the authenticity of
has a face value of P55,000.00 with interest rate of twelve percent per which documents were partly in doubt in the light of the categorical
annum;[19] that dated July 7, 1967 subject of the seventh has a face and uncontradicted statements that in 1965, defendant Quirino
value of P20,000.00;[20] that dated July 18, 1967 subject of the eighth Gonzales logging concession was terminated based on the policy of the
has a face value of P38,000.00;[21] and that dated August 23, 1967 government to terminate logging concessions covering less than
subject of the ninth has a face value of P11,000.00.[22] The interest rate 20,000 hectares. If this is the case, the Court is in a quandary why there
of the last three notes is pegged at thirteen percent per annum.[23] were log exports in 1967? Because of the foregoing, the Court does
not find any valid ground to sustain the seventh and eight causes of
On its tenth and final cause of action, the Bank claimed that it action of plaintiffs complaint.
has accounts receivable from petitioners in the amount of P120.48.
In their Answer[24] of March 3, 1977, petitioners admit the As regards the ninth cause of action, the Court is baffled why plaintiff
following: having applied for credit accommodations extended to defendants another loan when defendants according to
totaling P900,000.00 to secure which they mortgaged real plaintiffs records were defaulting creditors? The above facts and
properties;opening of the LC/Trust Receipt Line; the issuance by the circumstances has (sic) convinced this Court to give credit to the
Bank of the various LCs; and the foreclosure of the real estate testimony of defendants witnesses that the Gonzales spouses signed
mortgage and the consolidation of ownership over the mortgaged the documents in question in blank and that the promised loan was
never released to them. There is therefore a total absence of consent Hence, petitioners now press the following issues before this
since defendants did not give their consent to loans allegedly procured Court by the present petition for review on certiorari:
, the proceeds of which were never received by the alleged debtors,
defendants herein. . . . 1. WHETHER OR NOT RESPONDENT COURT ERRED IN SO
HOLDING THAT RESPONDENT-APPELLEES (SIC.) REPUBLIC
Plaintiff did not present evidence to support its tenth cause of action. PLANTERS BANK[S] FIRST, SECOND, THIRD, FOURTH, FIFTH
For this reason, it must consequently be denied for lack of evidence. AND SIXTH CAUSES OF ACTION HAVE NOT PRESCRIBED
CONTRARY TO THE FINDINGS OF THE LOWER COURT, RTC
On the matter of [the] counterclaims of defendants, they seek the return BRANCH 36 THAT THE SAID CAUSES OF ACTION HAVE
of the real and personal properties which they have given in good faith ALREADY PRESCRIBED.
to plaintiff. Again, prescription may apply. The real properties of
defendants acquired by plaintiff were foreclosed in 1965 and 2. WHETHER OR NOT RESPONDENT COURT ERRED IN SO
consequently, defendants had one (1) year to redeem the property or HOLDING THAT RESPODNENT-APPELLEES (SIC.) REPUBLIC
ten (10) years from issuance of title on the ground that the obligation PLANTERS BANK[S] SEVENTH, EIGHT AND NINTH CAUSES
foreclosed was fictitious. OF ACTION APPEARS (SIC.) TO BE IMPRESSED WITH MERIT
CONTRARY TO THE FINDINGS OF THE LOWER COURT RTC
xxx BRANCH 36 THAT THE SAID CAUSES HAVE NO VALID
GROUND TO SUSTAIN [THEM] AND FOR LACK OF
EVIDENCE.
On appeal,[26] the Court of Appeals (CA) reversed the decision
of the trial court by Decision[27] of June 28, 1996 which disposed as
follows:[28] 3. WHETHER OR NOT RESPONDENT COURT [ERRED] IN
REVERSING THE FINDINGS OF THE REGIONAL TRIAL
COURT BRANCH 36 OF MANILA THAT PETITIONERS-
WHEREFORE, premises considered, the appealed decision (dated APPELLANT (SIC.) MAY SEEK THE RETURN OF THE REAL
April 22, 1992) of the Regional Trial Court (Branch 36) in Manila in AND PERSONAL PROPERTIES WHICH THEY MAY HAVE
Civil Case No. 82-4141 is hereby REVERSED---and let the case be GIVEN IN GOOD FAITH AS THE SAME IS BARRED BY
remanded back to the court a quo for the determination of the PRESCRIPTION AND THAT PETITIONERS-APPELLANT (SIC.)
amount(s) to be awarded to the [the Bank]-appellant relative to its HAD ONE (1) YEAR TO REDEEM THE PROPERTY OR TEN (10)
claims against the appellees. YEARS FROM ISSUANCE OF THE TITLE ON THE GROUND
THAT THE OBLIGATION FORECLOSED WAS FICTITIOUS.
SO ORDERED.
4. WHETHER OR NOT RESPONDENT COURT ERRED IN SO
With regard to the first to sixth causes of action, the CA upheld HOLDING THAT PEITIONERS-APPELLANTS [SIC] ARE NOT
the contention of the Bank that the notices of foreclosure sale were ENTITLED TO AN AWARD OF ATTORNEYS FEES.
tantamount to demand letters upon the petitioners which interrupted
the running of the prescriptive period.[29] The petition is partly meritorious.
As regards the seventh to ninth causes of action, the CA also On the first issue. The Civil Code provides that an action upon a
upheld the contention of the Bank that the written agreements- written contract, an obligation created by law, and a judgment must be
promissory notes prevail over the oral testimony of petitioner Quirino brought within ten years from the time the right of action accrues.[33]
Gonzales that the cancellation of their logging concession in 1967
made it unbelievable for them to secure in 1967 the advances reflected The finding of the trial court that more than ten years had elapsed
in the promissory notes.[30] since the right to bring an action on the Banks first to sixth causes had
arisen[34] is not disputed. The Bank contends, however, that the notices
With respect to petitioners counterclaim, the CA agreed with the of foreclosure sale in the foreclosure proceedings of 1965 are
Bank that:[31] tantamount to formal demands upon petitioners for the payment of
their past due loan obligations with the Bank, hence, said notices of
Certainly, failure on the part of the trial court to pass upon and foreclosure sale interrupted/forestalled the running of the prescriptive
determine the authenticity and genuineness of [the Banks] period.[35]
documentary evidence [the trial court having ruled on the basis of
prescription of the Banks first to sixth causes of action] makes it The Banks contention does not impress. Prescription of actions
impossible for the trial court to eventually conclude that the obligation is interrupted when they are filed before the court, when there is a
foreclosed (sic) was fictitious. Needless to say, the trial courts ruling written extrajudicial demand by the creditors, and when there is any
averses (sic) the well-entrenched rule that courts must render verdict written acknowledgment of the debt by the debtor. [36]
on their findings of facts. (China Banking Co. vs. CA, 70 SCRA 398) The law specifically requires a written extrajudicial demand
by the creditors which is absent in the case at bar. The contention that
Furthermore, the defendants-appellees [herein petitioners] the notices of foreclosure are tantamount to a written extrajudicial
counterclaim is basically an action for the reconveyance of their demand cannot be appreciated, the contents of said notices not having
properties, thus, the trial courts earlier ruling that the defendants- been brought to light.
appellees counterclaim has prescribed is itself a ruling that the
defendants-appellees separate action for reconveyance has also But even assuming arguendo that the notices interrupted the
prescribed. running of the prescriptive period, the argument would still not lie for
the following reasons:
The CA struck down the trial courts award of attorneys fees for With respect to the first to the fifth causes of action, as gleaned
lack of legal basis.[32] from the complaint, the Bank seeks the recovery of the deficient
amount of the obligation after the foreclosure of the mortgage. Such
suit is in the nature of a mortgage action because its purpose is
precisely to enforce the mortgage contract.[37] A mortgage action which were mortgaged and foreclosed be returned to them.[49] Such,
prescribes after ten years from the time the right of action accrued.[38] however, does not lie. It is not disputed that the properties were
foreclosed under Act No. 3135 (An Act to Regulate the Sale of
The law gives the mortgagee the right to claim for the deficiency Property under Special Powers Inserted in or Annexed to Real Estate
resulting from the price obtained in the sale of the property at public Mortgages), as amended. Though the Banks action for deficiency is
auction and the outstanding obligation at the time of the foreclosure barred by prescription, nothing irregular attended the foreclosure
proceedings.[39] In the present case, the Bank, as mortgagee, had the proceedings to warrant the reconveyance of the properties covered
right to claim payment of the deficiency after it had foreclosed the thereby.
mortgage in 1965.[40] In other words, the prescriptive period started to
run against the Bank in 1965. As it filed the complaint only on January As for petitioners prayer for moral and exemplary damages, it
27, 1977, more than ten years had already elapsed, hence, the action not having been raised as issue before the courts below, it can not now
on its first to fifth causes had by then prescribed. No other conclusion be considered. Neither can the award attorneys fees for lack of legal
can be reached even if the suit is considered as one upon a written basis.
contract or upon an obligation to pay the deficiency which is created
by law,[41] the prescriptive period of both being also ten years.[42] WHEREFORE, the CA Decision is hereby AFFIRMED with
MODIFICATION.
As regards the promissory note subject of the sixth cause of
action, its period of prescription could not have been interrupted by the Republic Banks Complaint with respect to its first to sixth causes
notices of foreclosure sale not only because, as earlier discussed, of action is hereby DISMISSED. Its complaint with respect to its
petitioners contention that the notices of foreclosure are tantamount to seventh to ninth causes of action is REMANDED to the court of origin,
written extra-judicial demand cannot be considered absent any the Manila Regional Trial Court, Branch 36, for it to determine the
showing of the contents thereof, but also because it does not appear amounts due the Bank thereunder.
from the records that the said note is covered by the mortgage contract. SO ORDERED.
Coming now to the second issue, petitioners seek to evade
liability under the Banks seventh to ninth causes of action by claiming
that petitioners Quirino and Eufemia Gonzales signed the promissory
notes in blank; that they had not received the value of said notes, and Republic of the Philippines
that the credit line thereon was unnecessary in view of their money SUPREME COURT
deposits, they citing Exhibits 2 to 2-B,[43] in, and unremitted proceeds Manila
on log exports from, the Bank. In support of their claim, they also urge
this Court to look at Exhibits B (the Banks recommendation for SECOND DIVISION
approval of petitioners application for credit accommodations), P (the
Application and Agreement for Commercial Letter of Credit dated
January 16, 1963) and T (the Application and Agreement for
Commercial Letter of Credit dated February 14, 1963).
G.R. No. 85419 March 9, 1993
The genuineness and due execution of the notes had, however,
been deemed admitted by petitioners, they having failed to deny the
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
same under oath.[44] Their claim that they signed the notes in blank
vs.
does not thus lie.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY,
Petitioners admission of the genuineness and due execution of SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC
the promissory notes notwithstanding, they raise want of CORPORATION and PRODUCERS BANK OF THE
consideration[45] thereof. The promissory notes, however, appear to be PHILIPPINES, defendants-respondents.
negotiable as they meet the requirements of Section 1 [46] of the
Negotiable Instruments Law. Such being the case, the notes are prima Yngson & Associates for petitioner.
facie deemed to have been issued for consideration.[47] It bears noting
that no sufficient evidence was adduced by petitioners to show
Henry A. Reyes & Associates for Samso Tung & Asian Industrial
otherwise.
Plastic Corporation.
Exhibits 2 to 2-B to which petitioners advert in support of their
claim that the credit line on the notes was unnecessary because they Eduardo G. Castelo for Sima Wei.
had deposits in, and remittances due from, the Bank deserve scant
consideration. Said exhibits are merely claims by petitioners under
Monsod, Tamargo & Associates for Producers Bank.
their then proposals for a possible settlement of the case dated February
3, 1978. Parenthetically, the proposals were not even signed by
petitioners but by certain Attorneys Osmundo R. Victoriano and Rafael S. Santayana for Mary Cheng Uy.
Rogelio P. Madriaga.
In any case, it is no defense that the promissory notes were
signed in blank as Section 14[48] of the Negotiable Instruments Law
concedes the prima facie authority of the person in possession of CAMPOS, JR., J.:
negotiable instruments, such as the notes herein, to fill in the blanks.
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for
As for petitioners reliance on Exhibits B, P and T, they have
brevity) filed a complaint for a sum of money against respondents Sima
failed to show the relevance thereof to the seventh up to the ninth
Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian
causes of action of the Bank.
Industrial Plastic Corporation (Plastic Corporation for short) and the
On the third issue, petitioners asseverate that with the trial courts Producers Bank of the Philippines, on two causes of action:
dismissal of the Banks complaint and the denial of its first to
sixth causes of action, it is but fair and just that the real properties
(1) To enforce payment of the balance of defendant; and (3) an act or omission of the defendant in violation of
P1,032,450.02 on a promissory note executed by said legal right.2
respondent Sima Wei on June 9, 1983; and
The normal parties to a check are the drawer, the payee and the drawee
(2) To enforce payment of two checks executed by bank. Courts have long recognized the business custom of using
Sima Wei, payable to petitioner, and drawn against printed checks where blanks are provided for the date of issuance, the
the China Banking Corporation, to pay the balance name of the payee, the amount payable and the drawer's signature. All
due on the promissory note. the drawer has to do when he wishes to issue a check is to properly fill
up the blanks and sign it. However, the mere fact that he has done these
Except for Lee Kian Huat, defendants filed their separate Motions to does not give rise to any liability on his part, until and unless the check
Dismiss alleging a common ground that the complaint states no cause is delivered to the payee or his representative. A negotiable instrument,
of action. The trial court granted the defendants' Motions to Dismiss. of which a check is, is not only a written evidence of a contract right
The Court of Appeals affirmed this decision, * to which the petitioner but is also a species of property. Just as a deed to a piece of land must
Bank, represented by its Legal Liquidator, filed this Petition for be delivered in order to convey title to the grantee, so must a negotiable
Review by Certiorari, assigning the following as the alleged errors of instrument be delivered to the payee in order to evidence its existence
the Court of Appeals:1 as a binding contract. Section 16 of the Negotiable Instruments Law,
which governs checks, provides in part:
(1) THE COURT OF APPEALS ERRED IN
HOLDING THAT THE PLAINTIFF- Every contract on a negotiable instrument is
PETITIONER HAS NO CAUSE OF ACTION incomplete and revocable until delivery of the
AGAINST DEFENDANTS-RESPONDENTS instrument for the purpose of giving effect thereto.
HEREIN. ...

(2) THE COURT OF APPEALS ERRED IN Thus, the payee of a negotiable instrument acquires no interest with
HOLDING THAT SECTION 13, RULE 3 OF respect thereto until its delivery to him.3Delivery of an instrument
THE REVISED RULES OF COURT ON means transfer of possession, actual or constructive, from one person
ALTERNATIVE DEFENDANTS IS NOT to another.4 Without the initial delivery of the instrument from the
APPLICABLE TO HEREIN DEFENDANTS- drawer to the payee, there can be no liability on the instrument.
RESPONDENTS. Moreover, such delivery must be intended to give effect to the
instrument.
The antecedent facts of this case are as follows:
The allegations of the petitioner in the original complaint show that the
two (2) China Bank checks, numbered 384934 and 384935, were not
In consideration for a loan extended by petitioner Bank to respondent delivered to the payee, the petitioner herein. Without the delivery of
Sima Wei, the latter executed and delivered to the former a promissory said checks to petitioner-payee, the former did not acquire any right or
note, engaging to pay the petitioner Bank or order the amount of interest therein and cannot therefore assert any cause of
P1,820,000.00 on or before June 24, 1983 with interest at 32% per action, founded on said checks, whether against the drawer Sima Wei
annum. Sima Wei made partial payments on the note, leaving a balance or against the Producers Bank or any of the other respondents.
of P1,032,450.02. On November 18, 1983, Sima Wei issued two
crossed checks payable to petitioner Bank drawn against China
Banking Corporation, bearing respectively the serial numbers 384934, In the original complaint, petitioner Bank, as plaintiff, sued respondent
for the amount of P550,000.00 and 384935, for the amount of Sima Wei on the promissory note, and the alternative defendants,
P500,000.00. The said checks were allegedly issued in full settlement including Sima Wei, on the two checks. On appeal from the orders of
of the drawer's account evidenced by the promissory note. These two dismissal of the Regional Trial Court, petitioner Bank alleged that its
checks were not delivered to the petitioner-payee or to any of its cause of action was not based on collecting the sum of money
authorized representatives. For reasons not shown, these checks came evidenced by the negotiable instruments stated but on quasi-delict —
into the possession of respondent Lee Kian Huat, who deposited the a claim for damages on the ground of fraudulent acts and evident bad
checks without the petitioner-payee's indorsement (forged or faith of the alternative respondents. This was clearly an attempt by the
otherwise) to the account of respondent Plastic Corporation, at the petitioner Bank to change not only the theory of its case but the basis
Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, of his cause of action. It is well-settled that a party cannot change his
Branch Manager of the Balintawak branch of Producers Bank, relying theory on appeal, as this would in effect deprive the other party of his
on the assurance of respondent Samson Tung, President of Plastic day in court.5
Corporation, that the transaction was legal and regular, instructed the
cashier of Producers Bank to accept the checks for deposit and to credit Notwithstanding the above, it does not necessarily follow that the
them to the account of said Plastic Corporation, inspite of the fact that drawer Sima Wei is freed from liability to petitioner Bank under the
the checks were crossed and payable to petitioner Bank and bore no loan evidenced by the promissory note agreed to by her. Her allegation
indorsement of the latter. Hence, petitioner filed the complaint as that she has paid the balance of her loan with the two checks payable
aforestated. to petitioner Bank has no merit for, as We have earlier explained, these
checks were never delivered to petitioner Bank. And even granting,
The main issue before Us is whether petitioner Bank has a cause of without admitting, that there was delivery to petitioner Bank, the
action against any or all of the defendants, in the alternative or delivery of checks in payment of an obligation does not constitute
otherwise. payment unless they are cashed or their value is impaired through the
fault of the creditor.6 None of these exceptions were alleged by
respondent Sima Wei.
A cause of action is defined as an act or omission of one party in
violation of the legal right or rights of another. The essential elements
are: (1) legal right of the plaintiff; (2) correlative obligation of the Therefore, unless respondent Sima Wei proves that she has been
relieved from liability on the promissory note by some other cause,
petitioner Bank has a right of action against her for the balance due
thereon.

However, insofar as the other respondents are concerned, petitioner


Bank has no privity with them. Since petitioner Bank never received
the checks on which it based its action against said respondents, it
never owned them (the checks) nor did it acquire any interest therein.
Thus, anything which the respondents may have done with respect to
said checks could not have prejudiced petitioner Bank. It had no right
or interest in the checks which could have been violated by said
respondents. Petitioner Bank has therefore no cause of action against
said respondents, in the alternative or otherwise. If at all, it is Sima
Wei, the drawer, who would have a cause of action against her
co-respondents, if the allegations in the complaint are found to be true.

With respect to the second assignment of error raised by petitioner


Bank regarding the applicability of Section 13, Rule 3 of the Rules of
Court, We find it unnecessary to discuss the same in view of Our
finding that the petitioner Bank did not acquire any right or interest in
the checks due to lack of delivery. It therefore has no cause of action
against the respondents, in the alternative or otherwise.

In the light of the foregoing, the judgment of the Court of Appeals


dismissing the petitioner's complaint is AFFIRMED insofar as the
second cause of action is concerned. On the first cause of action, the
case is REMANDED to the trial court for a trial on the merits,
consistent with this decision, in order to determine whether respondent
Sima Wei is liable to the Development Bank of Rizal for any amount
under the promissory note allegedly signed by her.

SO ORDERED.