Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,

vs.

COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier
decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein
by herein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by respondent court,
appears of record:
1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued
280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein
defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and
Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);

CTD CTD

Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000

2 Mar. 82 74701 to 74740 40 160,000

4 Mar. 82 90127 to 90146 20 80,000

5 Mar. 82 74797 to 94800 4 16,000

5 Mar. 82 89965 to 89986 22 88,000

5 Mar. 82 70147 to 90150 4 16,000

8 Mar. 82 90001 to 90020 20 80,000

9 Mar. 82 90023 to 90050 28 112,000

9 Mar. 82 89991 to 90000 10 40,000

9 Mar. 82 90251 to 90272 22 88,000

——— ————

Total 280 P1,120,000

===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection
with his purchased of fuel products from the latter (Original Record, p. 208).

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch
Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to
execute and submit a notarized Affidavit of Loss, as required by defendant bank's procedure, if he
desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs
were issued in favor of said depositor (Defendant's Exhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the
amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor
executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated, among others,
that he (de la Cruz) surrenders to defendant bank "full control of the indicated time deposits from and
after date" of the assignment and further authorizes said bank to pre-terminate, set-off and "apply the
said time deposits to the payment of whatever amount or amounts may be due" on the loan upon its
maturity (TSN, February 9, 1987, pp. 60-62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went
to the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel dela
Cruz alleging that the same were delivered to herein plaintiff "as security for purchases made with
Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein
plaintiff formally informing it of its possession of the CTDs in question and of its decision to pre-
terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy
of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details
of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time deposits
(Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value
of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on
August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the
matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be
ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued
interest and compounded interest therein at 16% per annum, moral and exemplary damages as well as
attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint,
hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates
of deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not
become a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent
provisions of the Code of Commerce relating to lost instruments payable to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a better understanding
of the issues involved in this recourse.

SECURITY BANK

AND TRUST COMPANY

6778 Ayala Ave., MakatiNo. 90101

Metro Manila, Philippines

SUCAT OFFICEP 4,000.00

CERTIFICATE OF DEPOSIT

Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

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

—————————— ———————————

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as
follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important
to note that after the word "BEARER" stamped on the space provided supposedly for the name of the
depositor, the words "has deposited" a certain amount follows. The document further provides that the
amount deposited shall be "repayable to said depositor" on the period indicated. Therefore, the text of
the instrument(s) themselves manifest with clarity that they are payable, not to whoever purports to be
the "bearer" but only to the specified person indicated therein, the depositor. In effect, the appellee
bank acknowledges its depositor Angel dela Cruz as the person who made the deposit and further
engages itself to pay said depositor the amount indicated thereon at the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law,
enumerates the requisites for an instrument to become negotiable, viz:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

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

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred
(sic) in these certificates states that it was Angel dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause
(sic) the amount.

Atty. Calida:

q And no other person or entity or company, Mr. Witness?

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as
the bank is concerned?
witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself.9 In the construction of a bill
or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing
may be read in the light of surrounding circumstances in order to more perfectly understand the intent
and meaning of the parties, yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of
the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide
that the amounts deposited shall be repayable to the depositor. And who, according to the document, is
the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and
that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable
to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of
presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could
have with facility so expressed that fact in clear and categorical terms in the documents, instead of
having the word "BEARER" stamped on the space provided for the name of the depositor in each CTD.
On the wordings of the documents, therefore, the amounts deposited are repayable to whoever may be
the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the
depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction
between them would not be in a position to know that the depositor is not the bearer stated in the
CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the plain import
of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This
need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law
and calls for the application of the elementary rule that the interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the
negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for
reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer
instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz,
as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to
deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel
products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a
security has been dissipated and resolved in favor of the latter by petitioner's own authorized and
responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex
Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela
Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon
petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon. 14 A party may not go back on his own acts and representations to
the prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has,
by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular
thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or
omission, be permitted to falsify it. 16

If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager
could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides,
when respondent bank, as defendant in the court below, moved for a bill of particularity
therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel
de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to
it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the
motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that
the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now
labors under the presumption that evidence willfully suppressed would be adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al. 20 is apropos:

. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:

The character of the transaction between the parties is to be determined by their intention, regardless
of what language was used or what the form of the transfer was. If it was intended to secure the
payment of money, it must be construed as a pledge; but if there was some other intention, it is not a
pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object
and character might still be qualified and explained by contemporaneous writing declaring it to have
been a deposit of the property as collateral security. It has been said that a transfer of property by the
debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as
a pledge if the debt continues in inexistence and is not discharged by the transfer, and that accordingly
the use of the terms ordinarily importing conveyance of absolute ownership will not be given that effect
in such a transaction if they are also commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous
language or other circumstances excluding an intent to pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from one person to another in such
a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case,
however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of
petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed.
Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard
the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a
holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by
mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of
such security, in the event of non-payment of the principal obligation, must be contractually provided
for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral
security, he would be a pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged
and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de la
Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective
against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a
mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge
contract, but a rule of substantive law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank
was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code
specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons,
unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case
the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of
its lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better
right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether or not
private respondent observed the requirements of the law in the case of lost negotiable instruments and
the issuance of replacement certificates therefor, on the ground that petitioner failed to raised that
issue in the lower court. 28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted
by them to the trial court. 29The issues agreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

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

4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity
date provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from
each other.

As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are
properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial
conference all issues of law and fact which they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at a pre-trial conference bars the
consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be
tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent
that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates
can be premised on a multitude of other legal reasons and causes of action, of which respondent bank's
supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial
delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still
cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying
down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal
that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely
permissive and not mandatory. The very first article cited by petitioner speaks for itself.

Art 548.The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of
competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be
not paid a third person, as well as in order to prevent the ownership of the instrument that a duplicate
be issued him. (Emphasis ours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part
of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of
a duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not
mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an auxiliary
verb indicating liberty, opportunity, permission and possibility. 36

Moreover, as correctly analyzed by private respondent, 37Articles 548 to 558 of the Code of Commerce,
on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the
one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that
he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon
who, for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly,
none of the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined therein, and none establishes a
mandatory precedent requirement therefor.

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

SO ORDERED.

Narvasa, C.J., Padilla and Nocon, JJ., concur.

Footnotes
1 Per Justice Segundino G. Chua, with the concurrence of Justices Santiago M. Kapunan and Luis L.
Victor.

2 Judge Ramon Mabutas, Jr., presiding; Rollo, 64-88.

3 Rollo, 24-26.

4 Ibid., 12.

5 Exhibit A, Documentary Evidence for the Plaintiff, 8.

6 Rollo, 28.

7 TSN, February 9, 1987, 46-47.

8 Ibid., id., 152-153.

9 11 Am. Jur. 2d, Bills and Notes, 79.

10 Ibid., 86.

11 Ibid., 87-88.

12 Art. 1377, Civil Code.

13 Exhibit 563, Documentary Evidence for the Defendant, 442; Original Record, 211.

14 Panay Electric Co., Inc. vs. Court of Appeals, et al., 174 SCRA 500 (1989).
15 Philippine National Bank vs. Intermediate Appellate Court, et al., 189 SCRA 680 (1990).

16 Section 2(a), Rule 131, Rules of Court.

17 Original Record, 152.

18 Ibid., 154.

19 Section 3(e), Rule 131, Rules of Court.

20 174 SCRA 295 (1989), jointly decided with Overseas Bank of Manila vs. Court of Appeals, et al.,
G.R. No. 60907.

21 Sec. 30, Act No. 2031.

22 Sec. 191, id.

23 Sec. 27, id.; see also Art. 2118, Civil Code.

24 Commentaries and Jurisprudence on the Philippine Commercial Laws, T.C. Martin, 1985 Rev.
Ed., Vol. I, 134; Art. 18, Civil Code; Sec. 196, Act No. 2031.

25 Rollo, 25.

26 Tec Bi & Co. vs. Chartered Bank of India, Australia and China, 41 Phil. 596 (1916); Ocejo, Perez &
Co. vs. The International Banking Corporation, 37 Phil. 631 (1918); Te Pate vs. Ingersoll, 43 Phil. 394
(1922).

27 Rollo, 25.
28 Ibid., 15.

29 Joint Partial Stipulation of Facts and Statement of Issues, dated November 27, 1984; Original
Record, 209.

30 Mejorada vs. Municipal Council of Dipolog, 52 SCRA 451 (1973).

31 Sec. 18, Rule 46, Rules of Court; Garcia, et al. vs. Court of Appeals, et al., 102 SCRA 597 (1981);
Matienzo vs. Servidad, 107 SCRA 276 (1981); Aguinaldo Industries Corporation, etc. vs. Commissioner of
Internal Revenue, et al., 112 SCRA 136 (1982); Dulos Realty & Development Corporation vs. Court of
Appeals, et al., 157 SCRA 425 (1988).

32 Bergado vs. Court of Appeals, et al., 173 SCRA 497 (1989).

33 Rollo, 58.

34 U.S. vs. Sanchez, 13 Phil. 336 (1909); Capati vs. Ocampo, 113 SCRA 794 (1982).

35 Luna vs. Abaya, 86 Phil. 472 (1950).

36 Philippine Law Dictionary, F.B. Moreno, Third Edition, 590.

37 Rollo, 59.
G.R. No. 184458, January 14, 2015 - RODRIGO RIVERA, Petitioner, v. SPOUSES SALVADOR CHUA AND S.
VIOLETA CHUA, Respondents.; G.R. NO. 184472 - SPS. SALVADOR CHUA AND VIOLETA S. CHUA,
Petitioners, v. RODRIGO RIVERA, Respondent.

FIRST DIVISION

G.R. No. 184458, January 14, 2015

RODRIGO RIVERA, Petitioner, v. SPOUSES SALVADOR CHUA AND S. VIOLETA CHUA, Respondents.

[G.R. NO. 184472]

SPS. SALVADOR CHUA AND VIOLETA S. CHUA, Petitioners, v. RODRIGO RIVERA, Respondent.

DECISION

PEREZ, J.:

Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 90609 which affirmed with modification
the separate rulings of the Manila City trial courts, the Regional Trial Court, Branch 17 in Civil Case No.
02-1052562 and the Metropolitan Trial Court (MeTC), Branch 30, in Civil Case No. 163661,3 a case for
collection of a sum of money due a promissory note. While all three (3) lower courts upheld the validity
and authenticity of the promissory note as duly signed by the obligor, Rodrigo Rivera (Rivera), petitioner
in G.R. No. 184458, the appellate court modified the trial courts’ consistent awards: (1) the stipulated
interest rate of sixty percent (60%) reduced to twelve percent (12%) per annum computed from the
date of judicial or extrajudicial demand, and (2) reinstatement of the award of attorney’s fees also in a
reduced amount of P50,000.00.

In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note and
questions the entire ruling of the lower courts. On the other hand, petitioners in G.R. No. 184472,
Spouses Salvador and Violeta Chua (Spouses Chua), take exception to the appellate court’s reduction of
the stipulated interest rate of sixty percent (60%) to twelve percent (12%) per annum.
We proceed to the facts.

The parties were friends of long standing having known each other since 1973: Rivera and Salvador
are kumpadres, the former is the godfather of the Spouses Chua’s son.

On 24 February 1995, Rivera obtained a loan from the Spouses Chua:chanroblesvirtuallawlibrary

PROMISSORY NOTE

120,000.00

FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA SY
CHUA, the sum of One Hundred Twenty Thousand Philippine Currency (P120,000.00) on December 31,
1995.

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT
(5%) interest monthly from the date of default until the entire obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to
twenty percent (20%) of the total amount due and payable as and for attorney’s fees which in no case
shall be less than P5,000.00 and to pay in addition the cost of suit and other incidental litigation
expense.

Any action which may arise in connection with this note shall be brought in the proper Court of the City
of Manila.

Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA4

In October 1998, almost three years from the date of payment stipulated in the promissory note, Rivera,
as partial payment for the loan, issued and delivered to the Spouses Chua, as payee, a check numbered
012467, dated 30 December 1998, drawn against Rivera’s current account with the Philippine
Commercial International Bank (PCIB) in the amount of P25,000.00.

On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera, likewise
drawn against Rivera’s PCIB current account, numbered 013224, duly signed and dated, but blank as to
payee and amount. Ostensibly, as per understanding by the parties, PCIB Check No. 013224 was issued
in the amount of P133,454.00 with “cash” as payee. Purportedly, both checks were simply partial
payment for Rivera’s loan in the principal amount of P120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason “account closed.”

As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering the principal
of P120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail.
Because of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to file a suit on 11
June 1999. The case was raffled before the MeTC, Branch 30, Manila and docketed as Civil Case No.
163661.

In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the subject
Promissory Note; (2) in all instances when he obtained a loan from the Spouses Chua, the loans were
always covered by a security; (3) at the time of the filing of the complaint, he still had an existing
indebtedness to the Spouses Chua, secured by a real estate mortgage, but not yet in default; (4) PCIB
Check No. 132224 signed by him which he delivered to the Spouses Chua on 21 December 1998, should
have been issued in the amount of only P1,300.00, representing the amount he received from the
Spouses Chua’s saleslady; (5) contrary to the supposed agreement, the Spouses Chua presented the
check for payment in the amount of P133,454.00; and (6) there was no demand for payment of the
amount of P120,000.00 prior to the encashment of PCIB Check No.
0132224. 5chanRoblesvirtualLawlibrary

In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness
thereunder.
The MeTC summarized the testimonies of both parties’ respective witnesses:chanroblesvirtuallawlibrary

[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence (consisting of the
testimonies of [the spouses] Chua and NBI Senior Documents Examiner Antonio Magbojos). x x x

xxxx

Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document
examiner (1989); NBI Senior Document Examiner (1994 to the date he testified); registered
criminologist; graduate of 18th Basic Training Course [i]n Questioned Document Examination conducted
by the NBI; twice attended a seminar on US Dollar Counterfeit Detection conducted by the US Embassy
in Manila; attended a seminar on Effective Methodology in Teaching and Instructional design conducted
by the NBI Academy; seminar lecturer on Questioned Documents, Signature Verification and/or
Detection; had examined more than a hundred thousand questioned documents at the time he testified.

Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in the
Promissory Note and compared the signature thereon with the specimen signatures of [Rivera]
appearing on several documents. After a thorough study, examination, and comparison of the signature
on the questioned document (Promissory Note) and the specimen signatures on the documents
submitted to him, he concluded that the questioned signature appearing in the Promissory Note and the
specimen signatures of [Rivera] appearing on the other documents submitted were written by one and
the same person. In connection with his findings, Magbojos prepared Questioned Documents Report
No. 712-1000 dated 8 January 2001, with the following conclusion: “The questioned and the standard
specimen signatures RODGRIGO RIVERA were written by one and the same person.”

[Rivera] testified as follows: he and [respondent] Salvador are “kumpadres;” in May 1998, he obtained a
loan from [respondent] Salvador and executed a real estate mortgage over a parcel of land in favor of
[respondent Salvador] as collateral; aside from this loan, in October, 1998 he borrowed P25,000.00 from
Salvador and issued PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution of
the Promissory Note dated 24 February 1995 and alleged that the signature appearing thereon was not
his signature; [respondent Salvador’s] claim that PCIB Check No. 0132224 was partial payment for the
Promissory Note was not true, the truth being that he delivered the check to [respondent Salvador] with
the space for amount left blank as he and [respondent] Salvador had agreed that the latter was to fill it
in with the amount of ?1,300.00 which amount he owed [the spouses Chua]; however, on 29 December
1998 [respondent] Salvador called him and told him that he had written P133,454.00 instead of
P1,300.00; x x x. To rebut the testimony of NBI Senior Document Examiner Magbojos, [Rivera] reiterated
his averment that the signature appearing on the Promissory Note was not his signature and that he did
not execute the Promissory Note.6
After trial, the MeTC ruled in favor of the Spouses Chua:chanroblesvirtuallawlibrary

WHEREFORE, [Rivera] is required to pay [the spouses Chua]: P120,000.00 plus stipulated interest at the
rate of 5% per month from 1 January 1996, and legal interest at the rate of 12% percent per annum
from 11 June 1999, as actual and compensatory damages; 20% of the whole amount due as attorney’s
fees.7

On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but deleted
the award of attorney’s fees to the Spouses Chua:chanroblesvirtuallawlibrary

WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of the
Decision dated October 21, 2002 is hereby AFFIRMED.8

Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera.

Undaunted, Rivera appealed to the Court of Appeals which affirmed Rivera’s liability under the
Promissory Note, reduced the imposition of interest on the loan from 60% to 12% per annum, and
reinstated the award of attorney’s fees in favor of the Spouses Chua:chanroblesvirtuallawlibrary

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the
interest rate of 60% per annum is hereby reduced to 12% per annum and the award of attorney’s fees is
reinstated at the reduced amount of P50,000.00 Costs against [Rivera].9

Hence, these consolidated petitions for review on certiorari of Rivera in G.R. No. 184458 and the
Spouses Chua in G.R. No. 184472, respectively raising the following issues:chanroblesvirtuallawlibrary

A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE RULING OF THE
RTC AND M[e]TC THAT THERE WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA].

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT DEMAND IS NO
LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW.

3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING ATTORNEY’S FEES
DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT THAT
[THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION OF THE RTC DELETING THE AWARD OF
ATTORNEY’S FEES.10chanRoblesvirtualLawlibrary

B. In G.R. No. 184472

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL ERROR WHEN IT
MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60% PER ANNUM TO
12% PER ANNUM IN SPITE OF THE FACT THAT RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT
THE SAID STIPULATED RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE, UNREASONABLE,
INEQUITABLE, ILLEGAL, IMMORAL OR VOID.11

As early as 15 December 2008, we already disposed of G.R. No. 184472 and denied the petition, via a
Minute Resolution, for failure to sufficiently show any reversible error in the ruling of the appellate
court specifically concerning the correct rate of interest on Rivera’s indebtedness under the Promissory
Note.12chanRoblesvirtualLawlibrary

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning the entire
ruling of the Court of Appeals in CA-G.R. SP No. 90609.

Rivera continues to deny that he executed the Promissory Note; he claims that given his friendship with
the Spouses Chua who were money lenders, he has been able to maintain a loan account with them.
However, each of these loan transactions was respectively “secured by checks or sufficient collateral.”
Rivera points out that the Spouses Chua “never demanded payment for the loan nor interest thereof
(sic) from [Rivera] for almost four (4) years from the time of the alleged default in payment [i.e., after
December 31, 1995].”13chanRoblesvirtualLawlibrary

On the issue of the supposed forgery of the promissory note, we are not inclined to depart from the
lower courts’ uniform rulings that Rivera indeed signed it.

Rivera offers no evidence for his asseveration that his signature on the promissory note was forged, only
that the signature is not his and varies from his usual signature. He likewise makes a confusing defense
of having previously obtained loans from the Spouses Chua who were money lenders and who had
allowed him a period of “almost four (4) years” before demanding payment of the loan under the
Promissory Note.

First, we cannot give credence to such a naked claim of forgery over the testimony of the National
Bureau of Investigation (NBI) handwriting expert on the integrity of the promissory note.

On that score, the appellate court aptly disabled Rivera’s contention:chanroblesvirtuallawlibrary

[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is a
forgery. The fact of forgery cannot be presumed but must be proved by clear, positive and convincing
evidence. Mere variance of signatures cannot be considered as conclusive proof that the same was
forged. Save for the denial of Rivera that the signature on the note was not his, there is nothing in the
records to support his claim of forgery. And while it is true that resort to experts is not mandatory or
indispensable to the examination of alleged forged documents, the opinions of handwriting experts are
nevertheless helpful in the court’s determination of a document’s authenticity.

To be sure, a bare denial will not suffice to overcome the positive value of the promissory note and the
testimony of the NBI witness. In fact, even a perfunctory comparison of the signatures offered in
evidence would lead to the conclusion that the signatures were made by one and the same person.

It is a basic rule in civil cases that the party having the burden of proof must establish his case by
preponderance of evidence, which simply means “evidence which is of greater weight, or more
convincing than that which is offered in opposition to it.”
Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a prima
facie case in their favor, hence, the burden of evidence has shifted to [Rivera] to prove his allegation of
forgery. Unfortunately for [Rivera], he failed to substantiate his defense.14

Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when
affirmed by the appellate court, are accorded the highest degree of respect and are considered
conclusive between the parties.15 A review of such findings by this Court is not warranted except upon
a showing of highly meritorious circumstances, such as: (1) when the findings of a trial court are
grounded entirely on speculation, surmises or conjectures; (2) when a lower court's inference from its
factual findings is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion
in the appreciation of facts; (4) when the findings of the appellate court go beyond the issues of the
case, or fail to notice certain relevant facts which, if properly considered, will justify a different
conclusion; (5) when there is a misappreciation of facts; (6) when the findings of fact are conclusions
without mention of the specific evidence on which they are based, are premised on the absence of
evidence, or are contradicted by evidence on record.16 None of these exceptions obtains in this
instance. There is no reason to depart from the separate factual findings of the three (3) lower courts on
the validity of Rivera’s signature reflected in the Promissory Note.

Indeed, Rivera had the burden of proving the material allegations which he sets up in his Answer to the
plaintiff’s claim or cause of action, upon which issue is joined, whether they relate to the whole case or
only to certain issues in the case.17chanRoblesvirtualLawlibrary

In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony of a
handwriting expert from the NBI. While it is true that resort to experts is not mandatory or
indispensable to the examination or the comparison of handwriting, the trial courts in this case, on its
own, using the handwriting expert testimony only as an aid, found the disputed document
valid.18chanRoblesvirtualLawlibrary

Hence, the MeTC ruled that:chanroblesvirtuallawlibrary

[Rivera] executed the Promissory Note after consideration of the following: categorical statement of
[respondent] Salvador that [Rivera] signed the Promissory Note before him, in his ([Rivera’s]) house; the
conclusion of NBI Senior Documents Examiner that the questioned signature (appearing on the
Promissory Note) and standard specimen signatures “Rodrigo Rivera” “were written by one and the
same person”; actual view at the hearing of the enlarged photographs of the questioned signature and
the standard specimen signatures.19
Specifically, Rivera insists that: “[i]f that promissory note indeed exists, it is beyond logic for a money
lender to extend another loan on May 4, 1998 secured by a real estate mortgage, when he was already
in default and has not been paying any interest for a loan incurred in February
1995.”20chanRoblesvirtualLawlibrary

We disagree.

It is likewise likely that precisely because of the long standing friendship of the parties as “kumpadres,”
Rivera was allowed another loan, albeit this time secured by a real estate mortgage, which will cover
Rivera’s loan should Rivera fail to pay. There is nothing inconsistent with the Spouses Chua’s two (2) and
successive loan accommodations to Rivera: one, secured by a real estate mortgage and the other,
secured by only a Promissory Note.

Also completely plausible is that given the relationship between the parties, Rivera was allowed a
substantial amount of time before the Spouses Chua demanded payment of the obligation due under
the Promissory Note.

In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a discordant
defense to assail the authenticity and validity of the Promissory Note. Although the burden of proof
rested on the Spouses Chua having instituted the civil case and after they established a prima facie case
against Rivera, the burden of evidence shifted to the latter to establish his defense.21 Consequently,
Rivera failed to discharge the burden of evidence, refute the existence of the Promissory Note duly
signed by him and subsequently, that he did not fail to pay his obligation thereunder. On the whole,
there was no question left on where the respective evidence of the parties preponderated—in favor of
plaintiffs, the Spouses Chua.

Rivera next argues that even assuming the validity of the Promissory Note, demand was still necessary in
order to charge him liable thereunder. Rivera argues that it was grave error on the part of the appellate
court to apply Section 70 of the Negotiable Instruments Law (NIL).22chanRoblesvirtualLawlibrary

We agree that the subject promissory note is not a negotiable instrument and the provisions of the NIL
do not apply to this case. Section 1 of the NIL requires the concurrence of the following elements to be a
negotiable instrument:chanroblesvirtuallawlibrary

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

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

On the other hand, Section 184 of the NIL defines what negotiable promissory note
is:chanroblesvirtuallawlibrary

SECTION 184. Promissory Note, Defined. – A negotiable promissory note within the meaning of this Act
is an unconditional promise in writing made by one person to another, signed by the maker, engaging to
pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer.
Where a note is drawn to the maker’s own order, it is not complete until indorsed by him.

The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses Chua,
and not to order or to bearer, or to the order of the Spouses Chua as payees.

However, even if Rivera’s Promissory Note is not a negotiable instrument and therefore outside the
coverage of Section 70 of the NIL which provides that presentment for payment is not necessary to
charge the person liable on the instrument, Rivera is still liable under the terms of the Promissory Note
that he issued.

The Promissory Note is unequivocal about the date when the obligation falls due and becomes
demandable—31 December 1995. As of 1 January 1996, Rivera had already incurred in delay when he
failed to pay the amount of P120,000.00 due to the Spouses Chua on 31 December 1995 under the
Promissory Note.

Article 1169 of the Civil Code explicitly provides:chanroblesvirtuallawlibrary

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially
or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the
time when the thing is to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins. (Emphasis supplied)

There are four instances when demand is not necessary to constitute the debtor in default: (1) when
there is an express stipulation to that effect; (2) where the law so provides; (3) when the period is the
controlling motive or the principal inducement for the creation of the obligation; and (4) where demand
would be useless. In the first two paragraphs, it is not sufficient that the law or obligation fixes a date for
performance; it must further state expressly that after the period lapses, default will commence.

We refer to the clause in the Promissory Note containing the stipulation of

interest:chanroblesvirtuallawlibrary

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT
(5%) interest monthly from the date of default until the entire obligation is fully paid for.23

which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the “date of default”
until the entire obligation is fully paid for. The parties evidently agreed that the maturity of the
obligation at a date certain, 31 December 1995, will give rise to the obligation to pay interest. The
Promissory Note expressly provided that after 31 December 1995, default commences and the
stipulation on payment of interest starts.
The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995,
the due date of the obligation. On that date, Rivera became liable for the stipulated interest which the
Promissory Note says is equivalent to 5% a month. In sum, until 31 December 1995, demand was not
necessary before Rivera could be held liable for the principal amount of P120,000.00. Thereafter, on 1
January 1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the form of
stipulated interest.

The liability for damages of those who default, including those who are guilty of delay, in the
performance of their obligations is laid down on Article 117024 of the Civil Code.

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity for
damages when the obligor incurs in delay:chanroblesvirtuallawlibrary

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six percent per
annum. (Emphasis supplied)

Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of money; (2)
the debtor, Rivera, incurred in delay when he failed to pay on or before 31 December 1995; and (3) the
Promissory Note provides for an indemnity for damages upon default of Rivera which is the payment of
a 5% monthly interest from the date of default.

We do not consider the stipulation on payment of interest in this case as a penal clause although Rivera,
as obligor, assumed to pay additional 5% monthly interest on the principal amount of P120,000.00 upon
default.

Article 1226 of the Civil Code provides:chanroblesvirtuallawlibrary

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and
the payment of interests in case of noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

The penal clause is generally undertaken to insure performance and works as either, or both,
punishment and reparation. It is an exception to the general rules on recovery of losses and damages. As
an exception to the general rule, a penal clause must be specifically set forth in the
obligation.25chanRoblesvirtualLawlibrary

In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a penal
clause, and is simply an indemnity for damages incurred by the Spouses Chua because Rivera defaulted
in the payment of the amount of P120,000.00. The measure of damages for the Rivera’s delay is limited
to the interest stipulated in the Promissory Note. In apt instances, in default of stipulation, the interest
is that provided by law.26chanRoblesvirtualLawlibrary

In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of 5% a
month or 60% per annum. On this score, the appellate court ruled:chanroblesvirtuallawlibrary

It bears emphasizing that the undertaking based on the note clearly states the date of payment to be 31
December 1995. Given this circumstance, demand by the creditor is no longer necessary in order that
delay may exist since the contract itself already expressly so declares. The mere failure of [Spouses
Chua] to immediately demand or collect payment of the value of the note does not exonerate [Rivera]
from his liability therefrom. Verily, the trial court committed no reversible error when it imposed
interest from 1 January 1996 on the ratiocination that [Spouses Chua] were relieved from making
demand under Article 1169 of the Civil Code.

xxxx

As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to legal
interests and attorney’s fees is, indeed, highly iniquitous and unreasonable. Stipulated interest rates are
illegal if they are unconscionable and the Court is allowed to temper interest rates when necessary.
Since the interest rate agreed upon is void, the parties are considered to have no stipulation regarding
the interest rate, thus, the rate of interest should be 12% per annum computed from the date of judicial
or extrajudicial demand.[27chanRoblesvirtualLawlibrary

The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal interest
and attorney’s fees, steep, tantamount to it being illegal, iniquitous and unconscionable.
Significantly, the issue on payment of interest has been squarely disposed of in G.R. No. 184472 denying
the petition of the Spouses Chua for failure to sufficiently show any reversible error in the ruling of the
appellate court, specifically the reduction of the interest rate imposed on Rivera’s indebtedness under
the Promissory Note. Ultimately, the denial of the petition in G.R. No. 184472 is res judicata in its
concept of “bar by prior judgment” on whether the Court of Appeals correctly reduced the interest rate
stipulated in the Promissory Note.

Res judicata applies in the concept of “bar by prior judgment” if the following requisites concur: (1) the
former judgment or order must be final; (2) the judgment or order must be on the merits; (3) the
decision must have been rendered by a court having jurisdiction over the subject matter and the parties;
and (4) there must be, between the first and the second action, identity of parties, of subject matter and
of causes of action.28chanRoblesvirtualLawlibrary

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject
matter raising specifically errors in the Decision of the Court of Appeals. Where the Court of Appeals’
disposition on the propriety of the reduction of the interest rate was raised by the Spouses Chua in G.R.
No. 184472, our ruling thereon affirming the Court of Appeals is a “bar by prior judgment.”

At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the
then prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular No. 416 in
cases involving the loan or forbearance of money.29 Thus, the legal interest accruing from the
Promissory Note is 12% per annumfrom the date of default on 1 January 1996.

However, the 12% per annum rate of legal interest is only applicable until 30 June 2013, before the
advent and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the
rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,30 BSP Circular
No. 799 is prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1
January 1996, the date when Rivera defaulted, to date when this Decision becomes final and executor is
divided into two periods reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996 to
30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this Decision becomes final and
executory.

As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date when
this Decision becomes final and executory, such is likewise divided into two periods: (1) 12% per
annum from 11 June 1999, the date of judicial demand to 30 June 2013; and (2) 6% per annum from 1
July 2013 to date when this Decision becomes final and executor.31 We base this imposition of interest
on interest due earning legal interest on Article 2212 of the Civil Code which provides that “interest due
shall earn legal interest from the time it is judicially demanded, although the obligation may be silent on
this point.”

From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses Chua
could already be determined with reasonable certainty given the wording of the Promissory
Note.32chanRoblesvirtualLawlibrary

We cite our recent ruling in Nacar v. Gallery Frames:33chanRoblesvirtualLawlibrary

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
“Damages” of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:ChanRoblesVirtualawlibrary

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be
on the amount finally adjudged.

When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.
(Emphasis supplied)

On the reinstatement of the award of attorney’s fees based on the stipulation in the Promissory Note,
we agree with the reduction thereof but not the ratiocination of the appellate court that the attorney’s
fees are in the nature of liquidated damages or penalty. The interest imposed in the Promissory Note
already answers as liquidated damages for Rivera’s default in paying his obligation. We award attorney’s
fees, albeit in a reduced amount, in recognition that the Spouses Chua were compelled to litigate and
incurred expenses to protect their interests.34 Thus, the award of P50,000.00 as attorney’s fees is
proper.

For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to the
Spouses Chua:chanroblesvirtuallawlibrary

Face value of the Promissory Note

Stipulated Interest A & B

Interest due earning legal interest A & B

Attorney’s fees

Total Amount

February 24, 1995 to December 31, 1995

A. January 1, 1996 to June 30, 2013

B. July 1 2013 to date when this Decision becomes final and executory

A. June 11, 1999 (date of judicial demand) to June 30, 2013

B. July 1, 2013 to date when this Decision becomes final and executory

Wholesale amount

P120,000.00

A. 12 % per annum on the principal amount of P120,000.00

B. 6% per annum on the principal amount of P120,000.00

A. 12% per annum on the total amount of column 2

B. 6% per annum on the total amount of column 235

P50,000.00

Total amount of Columns 1-4

The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal interest at
the rate of 6% per annum computed from its finality until full payment thereof, the interim period being
deemed to be a forbearance of credit.chanrobleslaw

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals in CA-G.R.
SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents Spouse Salvador and
Violeta Chua the following:chanroblesvirtuallawlibrary
(1)

the principal amount of P120,000.00;

(2)

legal interest of 12% per annum of the principal amount of P120,000.00 reckoned from 1 January 1996
until 30 June 2013;

(3)

legal interest of 6% per annum of the principal amount of P120,000.00 form 1 July 2013 to date when
this Decision becomes final and executory;

(4)

12% per annum applied to the total of paragraphs 2 and 3 from 11 June 1999, date of judicial demand,
to 30 June 2013, as interest due earning legal interest;

(5)

6% per annum applied to the total amount of paragraphs 2 and 3 from 1 July 2013 to date when this
Decision becomes final and executor, as interest due earning legal interest;

(6)

Attorney’s fees in the amount of P50,000.00; and

(7)
6% per annum interest on the total of the monetary awards from the finality of this Decision until full
payment thereof.

Costs against petitioner Rodrigo Rivera.

SO ORDERED.cralawlawlibrary

Sereno, C.J., (Chairperson), Leonardo-De Castro, Bersamin, and Perlas-Bernabe, JJ., concur.

Endnotes:

1 Rollo in G.R. No. 184458, pp. 52-62; Penned by Associate Justice Ricardo R. Rosario with Associate
Justices Mariano C. Del Castillo (now a member of this Court) and Arcangelita Romilla-Lontok
concurring.

2 Id. at 152-156; Penned by Presiding Judge Eduardo B. Peralta, Jr.

3Rollo in G.R. No. 184472, pp. 52-56; Penned by Presiding Judge Nina G. Antonio-Valenzuela.

4Rollo in G.R. No. 184458, p. 76.

5 Id. at 53-54.

6Rollo in G.R. No. 184472, pp. 53-54.

7 Id. at 56.

8 Id. at 61.

9Rollo in G.R. No. 184458, p. 62.

10 Id. at 29.

11Rollo in G.R. No. 184472, p. 13

12 Id. at p. 103.

13Rollo in G.R. No. 184458, p. 32.

14 Id. at 58-59.

15Siain Enterprises v. Cupertino Realty Corp., G.R. No. 170782, 22 June 2009, 590 SCRA 435, 445.

16Durban Apartments Corporation v. Pioneer Insurance and Surety Corporation, G.R. No. 179419, 12
January 2011, 639 SCRA 441, 449.

17 Francisco, Evidence, (3rd Ed. 1996), p. 385.

18Lorzano v. Tabayag, Jr., G.R. No. 189647, 6 February 2012, 665 SCRA 38, 47.

19Rollo in G.R. No. 184458, p. 113.

20 Id. at 33.

21 De Leon v. Bank of the Philippine Islands, G.R. No. 184565, 20 November 2013.

22 Sec. 70. Effect of want of demand on principal debtor. - Presentment for payment is not necessary in
order to charge the person primarily liable on the instrument; but if the instrument is, by its terms,
payable at a special place, and he is able and willing to pay it there at maturity, such ability and
willingness are equivalent to a tender of payment upon his part. But except as herein otherwise
provided, presentment for payment is necessary in order to charge the drawer and indorsers.

23Rollo in G.R. No. 184472, p. 76.

24 Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor thereof, are liable for damages.

25 4 Tolentino, Civil Code of the Philippines, p. 260.

26 5 Tolentino, Civil Code of the Philippines, pp. 649-650.

27 Rollo in G.R. No. 184458, pp. 59-61.

28Agustin v. Sps. Delos Santos, 596 Phil. 630, 642-643 (2009).

29See Eastern Shipping Lines v. Court of Appeals, G.R. No. 97412, 12 July 1994, 234 SCRA 78.

30 G.R. No. 189871, 13 August 2013.

31 BSP Circular No. 799, Series of 2013 amending BSP Circular No. 905, Series of 1982.

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of contracts as to such rate or interest, shall be six percent (6%)
per annum. visited 11 May 2014.

32 Article 2213 of the Civil Code: Interest cannot be recovered upon unliquidated claims or damages
except when the demand can be established with reasonable certainty.

33 Supra note 30.

34 Article 2208 of the CIVIL CODE: In the absence of stipulation, attorney’s fees, and expenses of
litigation, other than judicial costs, cannot be recovered, except:

xxxx

(2) when the defendant’s act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest;

xxxx

35 Based on Article 2212 of the Civil Code: Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this point.
 Republic of the Philippines

SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 88866 February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

vs.

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

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

Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.

Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

CRUZ, J.:

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

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

In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a
period of two months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by
the Philippine Fish Marketing Authority and purportedly signed by its General Manager and
countersigned by its Auditor. Six of these were directly payable to Gomez while the others appeared to
have been indorsed by their respective payees, followed by Gomez as second indorser.1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by
Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the
Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch office to the
principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing.2

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

warrants.3

The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13,
1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The
total withdrawal was P968.000.00.4

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

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

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

ACCORDINGLY, judgment is hereby rendered:

1. Dismissing the complaint with costs against the plaintiff;

2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and
Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;

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

4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney's
fees and expenses of litigation in the amount of P200,000.00.

5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney's
fees and expenses of litigation in the amount of P100,000.00.

SO ORDERED.

On appeal to the respondent court,6 the decision was affirmed, prompting Metrobank to file this
petition for review on the following grounds:

1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual
terms and conditions on the deposit slips allowing Metrobank to charge back any amount erroneously
credited.

(a) Metrobank's right to charge back is not limited to instances where the checks or treasury
warrants are forged or unauthorized.

(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent
which cannot be held liable for its failure to collect on the warrants.

2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made
to pay for warrants already dishonored, thereby perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden
Savings, the latter should bear the loss.

4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case
are not negotiable instruments.

The petition has no merit.

From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in
giving Golden Savings the impression that the treasury warrants had been cleared and that,
consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it.
Without such assurance, Golden Savings would not have allowed the withdrawals; with such assurance,
there was no reason not to allow the withdrawal. Indeed, Golden Savings might even have incurred
liability for its refusal to return the money that to all appearances belonged to the depositor, who could
therefore withdraw it any time and for any reason he saw fit.

It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to
its account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank
to determine the validity of the warrants through its own services. The proceeds of the warrants were
withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw them from its own
deposit.7 It was only when Metrobank gave the go-signal that Gomez was finally allowed by Golden
Savings to withdraw them from his own account.

The argument of Metrobank that Golden Savings should have exercised more care in checking the
personal circumstances of Gomez before accepting his deposit does not hold water. It was Gomez who
was entrusting the warrants, not Golden Savings that was extending him a loan; and moreover, the
treasury warrants were subject to clearing, pending which the depositor could not withdraw its
proceeds. There was no question of Gomez's identity or of the genuineness of his signature as checked
by Golden Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of
the signatures of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear
that Golden Savings acted with due care and diligence and cannot be faulted for the withdrawals it
allowed Gomez to make.

By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling —
more than one and a half million pesos (and this was 1979). There was no reason why it should not have
waited until the treasury warrants had been cleared; it would not have lost a single centavo by waiting.
Yet, despite the lack of such clearance — and notwithstanding that it had not received a single centavo
from the proceeds of the treasury warrants, as it now repeatedly stresses — it allowed Golden Savings
to withdraw — not once, not twice, but thrice — from the uncleared treasury warrants in the total
amount of P968,000.00

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and
it also wanted to "accommodate" a valued client. It "presumed" that the warrants had been cleared
simply because of "the lapse of one week."8 For a bank with its long experience, this explanation is
unbelievably naive.

And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal
side of the deposit slips through which the treasury warrants were deposited by Golden Savings with its
Calapan branch. The conditions read as follows:

Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting
agent, assuming no responsibility beyond care in selecting correspondents, and until such time as actual
payment shall have come into possession of this bank, the right is reserved to charge back to the
depositor's account any amount previously credited, whether or not such item is returned. This also
applies to checks drawn on local banks and bankers and their branches as well as on this bank, which are
unpaid due to insufficiency of funds, forgery, unauthorized overdraft or any other reason. (Emphasis
supplied.)

According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for
Golden Savings and give it the right to "charge back to the depositor's account any amount previously
credited, whether or not such item is returned. This also applies to checks ". . . which are unpaid due to
insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is claimed that the said
conditions are in the nature of contractual stipulations and became binding on Golden Savings when
Gloria Castillo, as its Cashier, signed the deposit slips.

Doubt may be expressed about the binding force of the conditions, considering that they have
apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could
be argued that the depositor, in signing the deposit slip, does so only to identify himself and not to
agree to the conditions set forth in the given permit at the back of the deposit slip. We do not have to
rule on this matter at this time. At any rate, the Court feels that even if the deposit slip were considered
a contract, the petitioner could still not validly disclaim responsibility thereunder in the light of the
circumstances of this case.

In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be
suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the
contrary, Article 1909 of the Civil Code clearly provides that —
Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which shall be judged
'with more or less rigor by the courts, according to whether the agency was or was not for a
compensation.

The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the
clearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw the
proceeds of the treasury warrants he had deposited Metrobank misled Golden Savings. There may have
been no express clearance, as Metrobank insists (although this is refuted by Golden Savings) but in any
case that clearance could be implied from its allowing Golden Savings to withdraw from its account not
only once or even twice but three times. The total withdrawal was in excess of its original balance
before the treasury warrants were deposited, which only added to its belief that the treasury warrants
had indeed been cleared.

Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any
reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would have been
no need at all for Golden Savings to deposit the treasury warrants with it for clearance. There would
have been no need for it to wait until the warrants had been cleared before paying the proceeds thereof
to Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not binding for being
arbitrary and unconscionable. And it becomes more so in the case at bar when it is considered that the
supposed dishonor of the warrants was not communicated to Golden Savings before it made its own
payment to Gomez.

The belated notification aggravated the petitioner's earlier negligence in giving express or at least
implied clearance to the treasury warrants and allowing payments therefrom to Golden Savings. But
that is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the signatures
of the general manager and the auditor of the drawer corporation, has not been established.9 This was
the finding of the lower courts which we see no reason to disturb. And as we said in MWSS v. Court of
Appeals:10

Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear,
positive and convincing evidence. This was not done in the present case.

A no less important consideration is the circumstance that the treasury warrants in question are not
negotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and this
is of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts, are
pertinent:

Sec. 1. — Form of negotiable instruments. — An instrument to be negotiable must conform to the

following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

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

xxx xxx xxx

Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is unconditional

within the meaning of this Act though coupled with —

(a) An indication of a particular fund out of which reimbursement is to be made or a particular

account to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument judgment.

But an order or promise to pay out of a particular fund is not unconditional.

The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the
order or promise to pay "not unconditional" and the warrants themselves non-negotiable. There should
be no question that the exception on Section 3 of the Negotiable Instruments Law is applicable in the
case at bar. This conclusion conforms to Abubakar vs. Auditor General11where the Court held:

The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is
entitled to the rights and privileges of a holder in due course, free from defenses. But this treasury
warrant is not within the scope of the negotiable instrument law. For one thing, the document bearing
on its face the words "payable from the appropriation for food administration, is actually an Order for
payment out of "a particular fund," and is not unconditional and does not fulfill one of the essential
requirements of a negotiable instrument (Sec. 3 last sentence and section [1(b)] of the Negotiable
Instruments Law).

Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they
were "genuine and in all respects what they purport to be," in accordance with Section 66 of the
Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-negotiable
treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of guaranteeing the
genuineness of the warrants but merely to deposit them with Metrobank for clearing. It was in fact
Metrobank that made the guarantee when it stamped on the back of the warrants: "All prior
indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."

The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands,12 but we feel
this case is inapplicable to the present controversy.1âwphi1 That case involved checks whereas this case
involves treasury warrants. Golden Savings never represented that the warrants were negotiable but
signed them only for the purpose of depositing them for clearance. Also, the fact of forgery was proved
in that case but not in the case before us. Finally, the Court found the Jai Alai Corporation negligent in
accepting the checks without question from one Antonio Ramirez notwithstanding that the payee was
the Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it. No similar
negligence can be imputed to Golden Savings.

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

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

WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the
dispositive portion of the judgment of the lower court shall be reworded as follows:

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

SO ORDERED.

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

Footnotes

1 Rollo, pp. 12-13.

2 Ibid., p. 52.

3 Id., p. 14.

4 Id.

5 Through Judge Marciano T. Virola.

6 Penned by Ejercito, J., with Pe and Victor, JJ., concurring.

7 Rollo, p. 84.
8 TSN, July 29, 1983, p. 20.

9 Rollo, p. 61.

10 143 SCRA 20.

11 81 Phil. 359.

12 66 SCRA 29.F
 Republic of the Philippines

SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 166018 June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES,Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent;

x-----------------------x

G.R. No. 167728

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES,Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision2and Resolution dated July 8, 2004 and
October 25, 2004, respectively, of the Court of Appeals in CA-G.R. SP No. 77580, as well as the
Decision3 and Resolution dated September 2, 2004 and April 4, 2005, respectively, of the Court of
Appeals in CA-G.R. SP No. 70814. The respective Decisions in the said cases similarly reversed and set
aside the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos. 59514 and 6009,5 respectively,
and dismissed the petitions of petitioner Hongkong and Shanghai Banking Corporation Limited-
Philippine Branches (HSBC). The corresponding Resolutions, on the other hand, denied the respective
motions for reconsideration of the said Decisions.

HSBC performs, among others, custodial services on behalf of its investor-clients, corporate and
individual, resident or non-resident of the Philippines, with respect to their passive investments in the
Philippines, particularly investments in shares of stocks in domestic corporations. As a custodian bank,
HSBC serves as the collection/payment agent with respect to dividends and other income derived from
its investor-clients’ passive investments.6

HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are managed
by HSBC through instructions given through electronic messages. The said instructions are standard
forms known in the banking industry as SWIFT, or "Society for Worldwide Interbank Financial
Telecommunication." In purchasing shares of stock and other investment in securities, the investor-
clients would send electronic messages from abroad instructing HSBC to debit their local or foreign
currency accounts and to pay the purchase price therefor upon receipt of the securities.7

Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid Documentary
Stamp Tax (DST) from September to December 1997 and also from January to December 1998
amounting to ₱19,572,992.10 and ₱32,904,437.30, respectively, broken down as follows:

A. September to December 1997

September 1997P 6,981,447.90October 19976,209,316.60November 19973,978,510.30December

19972,403,717.30Total₱19,572,992.10

B. January to December 1998

January 1998P 3,328,305.60February 19984,566,924.90March 19985,371,797.30April

19984,197,235.50May 19982,519,587.20June 19982,301,333.00July 19981,586,404.50August
19981,787,359.50September 19981,231,828.20October 19981,303,184.40November
19982,026,379.70December 19982,684,097.50Total₱32,904,437.30

On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner, Beethoven
Rualo, issued BIR Ruling No. 132-99 to the effect that instructions or advises from abroad on the
management of funds located in the Philippines which do not involve transfer of funds from abroad are
not subject to DST. BIR Ruling No. 132-99 reads:

Date: August 23, 1999

FERRY TOLEDO VICTORINO GONZAGA

& ASSOCIATES

G/F AFC Building, Alfaro St.

Salcedo Village, Makati

Metro Manila

Attn: Atty. Tomas C. Toledo

Tax Counsel

Gentlemen:

This refers to your letter dated July 26, 1999 requesting on behalf of your clients, the CITIBANK &
STANDARD CHARTERED BANK, for a ruling as to whether or not the electronic instructions involving the
following transactions of residents and non-residents of the Philippines with respect to their local or
foreign currency accounts are subject to documentary stamp tax under Section 181 of the 1997 Tax
Code, viz:

A. Investment purchase transactions:

An overseas client sends instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit into its account and to pay a named
recipient in the Philippines."
The foregoing transactions are carried out under instruction from abroad and [do] not involve actual
fund transfer since the funds are already in the Philippine accounts. The instructions are in the form of
electronic messages (i.e., SWIFT MT100 or MT 202 and/or MT 521). In both cases, the payment is
against the delivery of investments purchased. The purchase of investments and the payment comprise
one single transaction. DST has already been paid under Section 176 for the investment purchase.

B. Other transactions:

An overseas client sends an instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient, who may be another bank, a
corporate entity or an individual in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit to its account and to pay a named
recipient, who may be another bank, a corporate entity or an individual in the Philippines."

The above instruction is in the form of an electronic message (i.e., SWIFT MT 100 or MT 202) or tested
cable, and may not refer to any particular transaction.

The opening and maintenance by a non-resident of local or foreign currency accounts with a bank in the
Philippines is permitted by the Bangko Sentral ng Pilipinas, subject to certain conditions.

In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code, which provides that –

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.– Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a documentary stamp tax of Thirty
centavos (P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of the face value of any
such bill of exchange, or order, or Philippine equivalent of such value, if expressed in foreign currency.
(Underscoring supplied.)

a documentary stamp tax shall be imposed on any bill of exchange or order for payment purporting to
be drawn in a foreign country but payable in the Philippines.
Under the foregoing provision, the documentary stamp tax shall be levied on the instrument, i.e., a bill
of exchange or order for the payment of money, which purports to draw money from a foreign country
but payable in the Philippines. In the instant case, however, while the payor is residing outside the
Philippines, he maintains a local and foreign currency account in the Philippines from where he will draw
the money intended to pay a named recipient. The instruction or order to pay shall be made through an
electronic message, i.e., SWIFT MT 100 or MT 202 and/or MT 521. Consequently, there is no negotiable
instrument to be made, signed or issued by the payee. In the meantime, such electronic instructions by
the non-resident payor cannot be considered as a transaction per se considering that the same do not
involve any transfer of funds from abroad or from the place where the instruction originates. Insofar as
the local bank is concerned, such instruction could be considered only as a memorandum and shall be
entered as such in its books of accounts. The actual debiting of the payor’s account, local or foreign
currency account in the Philippines, is the actual transaction that should be properly entered as such.

Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank deposit, local or
foreign currency account, is not subject to DST, unless the account so maintained is a current or
checking account, in which case, the issuance of the check or bank drafts is subject to the documentary
stamp tax imposed under Section 179 of the 1997 Tax Code. In the instant case, and subject to the
physical impossibility on the part of the payor to be present and prepare and sign an instrument
purporting to pay a certain obligation, the withdrawal and payment shall be made in cash. In this light,
the withdrawal shall not be subject to documentary stamp tax. The case is parallel to an automatic bank
transfer of local funds from a savings account to a checking account maintained by a depositor in one
bank.

Likewise, the receipt of funds from another bank in the Philippines for deposit to the payee’s account
and thereafter upon instruction of the non-resident depositor-payor, through an electronic message,
the depository bank to debit his account and pay a named recipient shall not be subject to documentary
stamp tax.

It should be noted that the receipt of funds from another local bank in the Philippines by a local
depository bank for the account of its client residing abroad is part of its regular banking transaction
which is not subject to documentary stamp tax. Neither does the receipt of funds makes the recipient
subject to the documentary stamp tax. The funds are deemed to be part of the deposits of the client
once credited to his account, and which, thereafter can be disposed in the manner he wants. The payor-
client’s further instruction to debit his account and pay a named recipient in the Philippines does not
involve transfer of funds from abroad. Likewise, as stated earlier, such debit of local or foreign currency
account in the Philippines is not subject to the documentary stamp tax under the aforementioned
Section 181 of the Tax Code.

In the light of the foregoing, this Office hereby holds that the instruction made through an electronic
message by non-resident payor-client to debit his local or foreign currency account maintained in the
Philippines and to pay a certain named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the 1997 Tax Code. Such being the case, such electronic instruction
purporting to draw funds from a local account intended to be paid to a named recipient in the
Philippines is not subject to documentary stamp tax imposed under the foregoing Section.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon
investigation it shall be disclosed that the facts are different, this ruling shall be considered null and
void.

Very truly yours,

(Sgd.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue8

With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an administrative claim for the
refund of the amount of ₱19,572,992.10 allegedly representing erroneously paid DST to the BIR for the
period covering September to December 1997.

Subsequently, on January 31, 2000, HSBC filed another administrative claim for the refund of the
amount of ₱32,904,437.30 allegedly representing erroneously paid DST to the BIR for the period
covering January to December 1998.

As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the matter to the
CTA as CTA Case Nos. 5951 and 6009, respectively, in order to suspend the running of the two-year
prescriptive period.

The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA Case
No. 5951 favored HSBC. Respondent Commissioner of Internal Revenue was ordered to refund or issue a
tax credit certificate in favor of HSBC in the reduced amounts of ₱30,360,570.75 in CTA Case No. 6009
and ₱16,436,395.83 in CTA Case No. 5951, representing erroneously paid DST that have been sufficiently
substantiated with documentary evidence. The CTA ruled that HSBC is entitled to a tax refund or tax
credit because Sections 180 and 181 of the 1997 Tax Code do not apply to electronic message
instructions transmitted by HSBC’s non-resident investor-clients:
The instruction made through an electronic message by a nonresident investor-client, which is to debit
his local or foreign currency account in the Philippines and pay a certain named recipient also residing in
the Philippines is not the transaction contemplated in Section 181 of the Code. In this case, the
withdrawal and payment shall be made in cash. It is parallel to an automatic bank transfer of local funds
from a savings account to a checking account maintained by a depositor in one bank. The act of debiting
the account is not subject to the documentary stamp tax under Section 181. Neither is the transaction
subject to the documentary stamp tax under Section 180 of the same Code. These electronic message
instructions cannot be considered negotiable instruments as they lack the feature of negotiability,
which, is the ability to be transferred (Words and Phrases).

These instructions are considered as mere memoranda and entered as such in the books of account of
the local bank, and the actual debiting of the payor’s local or foreign currency account in the Philippines
is the actual transaction that should be properly entered as such.9

The respective dispositive portions of the Decisions dated May 2, 2002 in CTA Case No. 6009 and dated
December 18, 2002 in CTA Case No. 5951 read:

II. CTA Case No. 6009

WHEREFORE, in the light of all the foregoing, the instant Petition for Review is PARTIALLY GRANTED.
Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner
the amount of ₱30,360,570.75 representing erroneous payment of documentary stamp tax for the
taxable year 1998.10

II. CTA Case No. 5951

WHEREFORE, in the light of the foregoing, the instant petition is hereby partially granted. Accordingly,
respondent is hereby ORDERED to REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in
favor of the petitioner in the reduced amount of ₱16,436,395.83 representing erroneously paid
documentary stamp tax for the months of September 1997 to December 1997.11

However, the Court of Appeals reversed both decisions of the CTA and ruled that the electronic
messages of HSBC’s investor-clients are subject to DST. The Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-clients as regards their passive
investments in the Philippines mainly involving shares of stocks in domestic corporations. These
investor-clients maintain Philippine peso and/or foreign currency accounts with [HSBC]. Should they
desire to purchase shares of stock and other investments securities in the Philippines, the investor-
clients send their instructions and advises via electronic messages from abroad to [HSBC] in the form of
SWIFT MT 100, MT 202, or MT 521 directing the latter to debit their local or foreign currency account
and to pay the purchase price upon receipt of the securities (CTA Decision, pp. 1-2; Rollo, pp. 41-42).
Pursuant to Section 181 of the NIRC, [HSBC] was thus required to pay [DST] based on its acceptance of
these electronic messages – which, as [HSBC] readily admits in its petition filed before the [CTA], were
essentially orders to pay the purchases of securities made by its client-investors (Rollo, p. 60).

Appositely, the BIR correctly and legally assessed and collected the [DST] from [HSBC] considering that
the said tax was levied against the acceptances and payments by [HSBC] of the subject electronic
messages/orders for payment. The issue of whether such electronic messages may be equated as a
written document and thus be subject to tax is beside the point. As We have already stressed, Section
181 of the law cited earlier imposes the [DST] not on the bill of exchange or order for payment of money
but on the acceptance or payment of the said bill or order. The acceptance of a bill or order is the
signification by the drawee of its assent to the order of the drawer to pay a given sum of money while
payment implies not only the assent to the said order of the drawer and a recognition of the drawer’s
obligation to pay such aforesaid sum, but also a compliance with such obligation (Philippine National
Bank vs. Court of Appeals, 25 SCRA 693 [1968]; Prudential Bank vs. Intermediate Appellate Court, 216
SCRA 257 [1992]). What is vital to the valid imposition of the [DST] under Section 181 is the existence of
the requirement of acceptance or payment by the drawee (in this case, [HSBC]) of the order for
payment of money from its investor-clients and that the said order was drawn from a foreign country
and payable in the Philippines. These requisites are surely present here.

It would serve the parties well to understand the nature of the tax being imposed in the case at bar. In
Philippine Home Assurance Corporation vs. Court of Appeals (301 SCRA 443 [1999]), the Supreme Court
ruled that [DST is] levied on the exercise by persons of certain privileges conferred by law for the
creation, revision, or termination of specific legal relationships through the execution of specific
instruments, independently of the legal status of the transactions giving rise thereto. In the same case,
the High Court also declared – citing Du Pont vs. United States (300 U.S. 150, 153 [1936])

The tax is not upon the business transacted but is an excise upon the privilege, opportunity, or facility
offered at exchanges for the transaction of the business. It is an excise upon the facilities used in the
transaction of the business separate and apart from the business itself. x x x.

To reiterate, the subject [DST] was levied on the acceptance and payment made by [HSBC] pursuant to
the order made by its client-investors as embodied in the cited electronic messages, through which the
herein parties’ privilege and opportunity to transact business respectively as drawee and drawers was
exercised, separate and apart from the circumstances and conditions related to such acceptance and
subsequent payment of the sum of money authorized by the concerned drawers. Stated another way,
the [DST] was exacted on [HSBC’s] exercise of its privilege under its drawee-drawer relationship with its
client-investor through the execution of a specific instrument which, in the case at bar, is the acceptance
of the order for payment of money. The acceptance of a bill or order for payment may be done in
writing by the drawee in the bill or order itself, or in a separate instrument (Prudential Bank vs.
Intermediate Appellate Court, supra.)Here, [HSBC]’s acceptance of the orders for the payment of money
was veritably ‘done in writing in a separate instrument’ each time it debited the local or foreign currency
accounts of its client-investors pursuant to the latter’s instructions and advises sent by electronic
messages to [HSBC]. The [DST] therefore must be paid upon the execution of the specified instruments
or facilities covered by the tax – in this case, the acceptance by [HSBC] of the order for payment of
money sent by the client-investors through electronic messages. x x x.12

Hence, these petitions.

HSBC asserts that the Court of Appeals committed grave error when it disregarded the factual and legal
conclusions of the CTA. According to HSBC, in the absence of abuse or improvident exercise of authority,
the CTA’s ruling should not have been disturbed as the CTA is a highly specialized court which performs
judicial functions, particularly for the review of tax cases. HSBC further argues that the Commissioner of
Internal Revenue had already settled the issue on the taxability of electronic messages involved in these
cases in BIR Ruling No. 132-99 and reiterated in BIR Ruling No. DA-280-2004.13

The Commissioner of Internal Revenue, on the other hand, claims that Section 181 of the 1997 Tax Code
imposes DST on the acceptance or payment of a bill of exchange or order for the payment of money.
The DST under Section 18 of the 1997 Tax Code is levied on HSBC’s exercise of a privilege which is
specifically taxed by law. BIR Ruling No. 132-99 is inconsistent with prevailing law and long standing
administrative practice, respondent is not barred from questioning his own revenue ruling. Tax refunds
like tax exemptions are strictly construed against the taxpayer.14

The Court finds for HSBC.

The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the
acceptance or payment of "a bill of exchange purporting to be drawn in a foreign country but payable in
the Philippines" and that "a bill of exchange is an unconditional order in writing addressed by one
person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum certain in money to order or to bearer." A bill of
exchange is one of two general forms of negotiable instruments under the Negotiable Instruments
Law.15
The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients containing
instructions to debit their respective local or foreign currency accounts in the Philippines and pay a
certain named recipient also residing in the Philippines is not the transaction contemplated under
Section 181 of the Tax Code as such instructions are "parallel to an automatic bank transfer of local
funds from a savings account to a checking account maintained by a depositor in one bank." The Court
favorably adopts the finding of the CTA that the electronic messages "cannot be considered negotiable
instruments as they lack the feature of negotiability, which, is the ability to be transferred" and that the
said electronic messages are "mere memoranda" of the transaction consisting of the "actual debiting of
the [investor-client-payor’s] local or foreign currency account in the Philippines" and "entered as such in
the books of account of the local bank," HSBC.16

More fundamentally, the instructions given through electronic messages that are subjected to DST in
these cases are not negotiable instruments as they do not comply with the requisites of negotiability
under Section 1 of the Negotiable Instruments Law, which provides:

Sec. 1. Form of negotiable instruments.– An instrument to be negotiable must conform to the following
requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

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

The electronic messages are not signed by the investor-clients as supposed drawers of a bill of
exchange; they do not contain an unconditional order to pay a sum certain in money as the payment is
supposed to come from a specific fund or account of the investor-clients; and, they are not payable to
order or bearer but to a specifically designated third party. Thus, the electronic messages are not bills of
exchange. As there was no bill of exchange or order for the payment drawn abroad and made payable
here in the Philippines, there could have been no acceptance or payment that will trigger the imposition
of the DST under Section 181 of the Tax Code.

Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax refund for taxable year 1998
subject of G.R. No. 167728, provides:

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a documentary stamp tax of Thirty
centavos (P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of the face value of any
such bill of exchange, or order, or the Philippine equivalent of such value, if expressed in foreign
currency. (Emphasis supplied.)

Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s claim for tax refund for DST paid
during the period September to December 1997 and subject of G.R. No. 166018, is worded exactly the
same as its counterpart provision in the 1997 Tax Code quoted above.

The origin of the above provision is Section 117 of the Tax Code of 1904,17 which provided: SECTION
117. The acceptor or acceptors of any bill of exchange or order for the payment of any sum of money
drawn or purporting to be drawn in any foreign country but payable in the Philippine Islands, shall,
before paying or accepting the same, place thereupon a stamp in payment of the tax upon such
document in the same manner as is required in this Act for the stamping of inland bills of exchange or
promissory notes, and no bill of exchange shall be paid nor negotiated until such stamp shall have been
affixed thereto.18 (Emphasis supplied.)

It then became Section 30(h) of the 1914 Tax Code19:

SEC. 30. Stamp tax upon documents and papers. – Upon documents, instruments, and papers, and upon
acceptances, assignments, sales, and transfers of the obligation, right, or property incident thereto
documentary taxes for and in respect of the transaction so had or accomplished shall be paid as
hereinafter prescribed, by the persons making, signing, issuing, accepting, or transferring the same, and
at the time such act is done or transaction had:

xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of exchange or order for the payment
of money purporting to be drawn in a foreign country but payable in the Philippine Islands, on each two
hundred pesos, or fractional part thereof, of the face value of any such bill of exchange or order, or the
Philippine equivalent of such value, if expressed in foreign currency, two centavos[.] (Emphasis
supplied.)

It was implemented by Section 46 in relation to Section 39 of Revenue Regulations No. 26,20 as

amended:

SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other kinds of orders for the
payment of money, payable at sight or on demand, or after a specific period after sight or from a stated
date."

SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the payment of money drawn in a
foreign country but payable in this country whether at sight or on demand or after a specified period
after sight or from a stated date, is presented for acceptance or payment, there must be affixed upon
acceptance or payment of documentary stamp equal to P0.02 for each ₱200 or fractional part thereof.
(Emphasis supplied.)

It took its present form in Section 218 of the Tax Code of 1939,21 which provided:

SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a documentary stamp tax of four
centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bill of
exchange or order, or the Philippine equivalent of such value, if expressed in foreign currency. (Emphasis
supplied.)

It then became Section 230 of the 1977 Tax Code,22 as amended by Presidential Decree Nos. 1457 and
1959,which, as stated earlier, was worded exactly as Section 181 of the current Tax Code:

SEC. 230. Stamp tax upon acceptance of bills of exchange and others. – Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a documentary stamp tax of thirty
centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bill of
exchange, or order, or the Philippine equivalent of such value, if expressed in foreign currency.
(Emphasis supplied.)
The pertinent provision of the present Tax Code has therefore remained substantially the same for the
past one hundred years.1âwphi1 The identical text and common history of Section 230 of the 1977 Tax
Code, as amended, and the 1997 Tax Code, as amended, show that the law imposes DST on either (a)
the acceptance or (b) the payment of a foreign bill of exchange or order for the payment of money that
was drawn abroad but payable in the Philippines.

DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties
incident thereto.23Under Section 173 of the 1997 Tax Code, the persons primarily liable for the
payment of the DST are those (1) making, (2) signing, (3) issuing, (4) accepting, or (5) transferring the
taxable documents, instruments or papers.24

In general, DST is levied on the exercise by persons of certain privileges conferred by law for the
creation, revision, or termination of specific legal relationships through the execution of specific
instruments. Examples of such privileges, the exercise of which, as effected through the issuance of
particular documents, are subject to the payment of DST are leases of lands, mortgages, pledges and
trusts, and conveyances of real property.25

As stated above, Section 230 of the 1977 Tax Code, as amended, now Section 181 of the 1997 Tax Code,
levies DST on either (a) the acceptance or (b) the payment of a foreign bill of exchange or order for the
payment of money that was drawn abroad but payable in the Philippines. In other words, it levies DST as
an excise tax on the privilege of the drawee to accept or pay a bill of exchange or order for the payment
of money, which has been drawn abroad but payable in the Philippines, and on the corresponding
privilege of the drawer to have acceptance of or payment for the bill of exchange or order for the
payment of money which it has drawn abroad but payable in the Philippines.

Acceptance applies only to bills of exchange.26 Acceptance of a bill of exchange has a very definite
meaning in law.27 In particular, Section 132 of the Negotiable Instruments Law provides:

Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchange28] is the
signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing
and signed by the drawee. It must not express that the drawee will perform his promise by any other
means than the payment of money.

Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of a bill of exchange
is both the manifestation of the drawee’s consent to the drawer’s order to pay money and the
expression of the drawee’s promise to pay. It is "the act by which the drawee manifests his consent to
comply with the request contained in the bill of exchange directed to him and it contemplates an
engagement or promise to pay."29 Once the drawee accepts, he becomes an acceptor.30 As acceptor,
he engages to pay the bill of exchange according to the tenor of his acceptance.31

Acceptance is made upon presentment of the bill of exchange, or within 24 hours after such
presentment.32Presentment for acceptance is the production or exhibition of the bill of exchange to the
drawee for the purpose of obtaining his acceptance.33

Presentment for acceptance is necessary only in the instances where the law requires it.34 In the
instances where presentment for acceptance is not necessary, the holder of the bill of exchange can
proceed directly to presentment for payment.

Presentment for payment is the presentation of the instrument to the person primarily liable for the
purpose of demanding and obtaining payment thereof.35

Thus, whether it be presentment for acceptance or presentment for payment, the negotiable
instrument has to be produced and shown to the drawee for acceptance or to the acceptor for payment.

Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of exchange or orders
for the payment of money that have been drawn abroad but payable in the Philippines) that is subjected
to DST under Section 181 of the 1997 Tax Code is done after presentment for acceptance or
presentment for payment, respectively. In other words, the acceptance or payment of the subject bill of
exchange or order for the payment of money is done when there is presentment either for acceptance
or for payment of the bill of exchange or order for the payment of money.

Applying the above concepts to the matter subjected to DST in these cases, the electronic messages
received by HSBC from its investor-clients abroad instructing the former to debit the latter's local and
foreign currency accounts and to pay the purchase price of shares of stock or investment in securities do
not properly qualify as either presentment for acceptance or presentment for payment. There being
neither presentment for acceptance nor presentment for payment, then there was no acceptance or
payment that could have been subjected to DST to speak of.

Indeed, there had been no acceptance of a bill of exchange or order for the payment of money on the
part of HSBC. To reiterate, there was no bill of exchange or order for the payment drawn abroad and
made payable here in the Philippines. Thus, there was no acceptance as the electronic messages did not
constitute the written and signed manifestation of HSBC to a drawer's order to pay money. As HSBC
could not have been an acceptor, then it could not have made any payment of a bill of exchange or
order for the payment of money drawn abroad but payable here in the Philippines. In other words, HSBC
could not have been held liable for DST under Section 230 of the 1977 Tax Code, as amended, and
Section 181 of the 1997 Tax Code as it is not "a person making, signing, issuing, accepting, or,
transferring" the taxable instruments under the said provision. Thus, HSBC erroneously paid DST on the
said electronic messages for which it is entitled to a tax refund.

WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May 2, 2002 in CTA Case No.
6009 and dated December 18, 2002 in CT A Case No. 5951 of the Court of Tax Appeals are REINSTATED.

SO ORDERED.

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

WE CONCUR:

MARIA LOURDES P. A. SERENO

Chief Justice

Chairperson

LUCAS P. BERSAMIN

Associate JusticeMARTIN S. VILLARAMA, JR.

Associate Justice

BIENVENIDO L. REYES

Associate Justice

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the writer of the opinion of
the Court's Division.

MARIA LOURDES P. A. SERENO

Chief Justice

Footnotes

1 Under Rule 45 of the Rules of Court.

2 Rollo (G.R. No. 166018), pp. 27-37; penned by Associate Justice Conrado M. Vasquez, Jr. with Associate
Justices Josefina Guevara-Salonga and Fernanda Lampas Peralta, concurring.

3 Rollo (G.R. No. 167728), pp. 31-4 l; penned by Associate Justice Marina L. Buzon with Associate
Justices Mario L. Guariña lII and Hakim S. Abdulwahid, concurring.

4 Rollo (G.R. No. 166018), pp. 39-48.

5 Rollo (G.R. No. 167728), pp. 48-64.

6 Id. at 32.

7 Id.

8 Id. at 44-47.

9 Id. at 55.
10 Id. at 63.

11 Rollo (G.R. No. 166018), p. 47.

12 Rollo (G.R. No. 167728), pp. 37-39.

13 Id. at 174-187; Memorandum for HSBC, pp. 13-26. 14

14 Memorandum for the Commissioner of Internal Revenue, Rollo (G.R. No. 166018), pp. 154-161.

15 The other type is the promissory note. See Titles II and III, Negotiable Instruments Law.

16 Rollo (G.R. No. 167728), p. 55.

17 Act No. 1189.

18 SECTION 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and of indebtedness, and other documents, instruments, matters,
and things mentioned and described in this section, or for or in respect to the vellum, parchment, or
paper upon which such instruments, matters, or things or any of them shall be written or printed by any
person or persons who shall make, sign, or issue the same, on and after January first, nineteen hundred
and five, the several taxes following:

xxxx

Second. x x x (b) on all bills of exchange (between points within the Philippine Islands), drafts and
certificates of deposit drawing interest, or order for the payment of any sum of money otherwise than
at sight or on demand, and on all promissory notes, except bank notes issued for circulation, and on
each renewal of any such note, on each two hundred pesos or fractional part thereof, of the face value
of any such bill of exchange, draft, certificate of deposit, or note, two centavos; x x x.

19 Act No. 2339, February 27, 1914.

20 Dated March 26, 1924. Entitled "Revised Documentary Stamp Tax Regulations."

21 Commonwealth Act No. 466, June 15 1939.

22 Presidential Decree No. 1158, June 3, 1977.

23 Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, 522 Phil. 693, 698 (2006).

24 Philacor Credit Corporation v. Commissioner of Internal Revenue, G.R. No. 169899, February 6, 2013,
690 SCRA 28, 37.

25 Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, supra note 23 at 698-699.

26 Philacor Credit Corporation v. Commissioner of Internal Revenue, supra note 24.

A bill of exchange is defined under Section 126 of the Negotiable Instruments Law as follows:

Sec. 126. Bill of exchange, defined.– A bill of exchange is an unconditional order in writing addressed by
one person to another, signed by the person giving it, requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.

27 Id. In this case, the Court stated that "acceptance" has "a narrow definition" with respect to foreign
bills of exchange, and it is not limited to the common usage of the word "accepting" as in receiving.

28 The relevant portion of Section 191 of the Negotiable Instruments Law provides that "Bill" "means
bill of exchange."

29 Hunt v. Security State Bank, 179 Pac. 248 (1919), cited in De Leon, Hector, The Philippine Negotiable
Instruments Law (and Allied Laws) Annotated (2010 edition), p. 343.
30 De Leon, id. at 239.

31 See Section 62, Negotiable Instruments Law.

32 Sec. 136 of the Negotiable Instruments Law provides: Sec. 136. Time allowed drawee to accept.– The
drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept
the bill; the acceptance, if given, dates as of the day of presentation.

33 Campos, Jose Jr., Notes and Selected Cases on Negotiable Instruments Law (5th Edition), pp. 709-
710.

34 Section 143 of the Negotiable Instruments Law enumerates the cases where presentment for
acceptance is essential:

Sec. 143. When presentment for acceptance must be made.– Presentment for acceptance must be
made:

(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is
necessary in order to fix the maturity of the instrument; or

(b) Where the bill expressly stipulates that it shall be presented for acceptance; or

(c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable.

35 Campos, supra note 33, p. 715.

 Philippine National Bank v. Rodriguez
G.R. No. 170325
September 26, 2008
When Instrument is Payable to Bearer

FACTS: Respondents Spouses Rodriguez maintained

savings and demand/checking accounts as well as
demand deposits (Checkings/Current Account) with
petitioner PNB. They are also engaged in the informal
lending business of discounting arrangement with
Philnabank Employees Savings and Loan Association
(PEMSLA), an association of PNB. PEMSLA regularly
granted loans to its member and Spouses would
rediscount the apostate checks issued to members
whenever the association was short of funds. At the same
time, the spouses would replace the postdated checks
with their own checks issued in the same name.
PEMSLA’s policy would not approve applications with
outstanding debts and in order to subvert this they created
a scheme to obtain additional loans in the names of
unknowing members without their knowledge and consent.
PEMSLA checks were then given to spouses for
rediscounting and were carried out by forging the
endorsement of the named payees in the checks.
Rodriguez checks were deposited directly to PEMSLA
without any endorsement from the named payees.
Petitioner found out about the fraudulent acts, and took
measures by closing the current account of PEMSLA.
Since PEMSLA checks were dishonored and returned the
respondents incurred losses from the rediscounting
transactions. Spouses filed a civil complaint against
PEMSLA and PNB, the court rendering judgment in favor
of respondent.

ISSUE/S: Whether or not the disputed checks were

payable to bearer and order making petitioner liable if it is
of the latter and respondent liable is it is the former.

HELD. The checks were payable to order, making

petitioner liable for the losses. As a rule, if the payee is
fictitious or not intended to be the true recipient of the
proceeds of the check it is considered as a bearer
instrument—according to Sections 8 and 9 of the
Negotiable Instruments Law. The distinction lies in the
manner of their negotiation. An order instrument from the
payee or holder requires endorsement. A bearer
instrument does not required endorsement—negotiable by
mere delivery. However, under Section 9 of the same law,
a checks is payable to a specified payee may
nevertheless be considered as a bearer instrument if it is
payable to the order of a fictitious or non-existing person,
and such fact is known to the person making it so payable.
According to US jurisprudence, an actual, existing and
living payee may also be “fictitious” if the maker of the
check did not intend for the payee to receive the check. If
such a case happens then the check is a bearer
instrument. In a fictitious-payee situation, the drawee bank
is absolved from liability and the drawer bears the loss.
However, if there is showing of commercial bad faith on
the part of the drawee bank, or any transferee of the check
for that matter, will work to strip it of this defense. PNB’s
failure to show that the payees were “fictitious”, the
fictitious-payee rule does not apply making the instrument
payable to order. Also, PNB was remiss in its duty as the
drawee bank since its employees were the one who
crested the whole fraudulent scheme.
 Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 187769 June 4, 2014

ALVIN PATRIMONIO, Petitioner,

vs.

NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III,Respondents.

DECISION

BRION, J.:

Assailed in this petition for review on certiorari1 under Rule 45 of the Revised Rules of Court is the
decision2 dated September 24, 2008 and the resolution3 dated April 30, 2009 of the Court of Appeals
(CA) in CA-G.R. CV No. 82301. The appellate court affirmed the decision of the Regional Trial Court (RTC)
of Quezon City, Branch 77, dismissing the complaint for declaration of nullity of loan filed by petitioner
Alvin Patrimonio and ordering him to pay respondent Octavio Marasigan III (Marasigan) the sum of
₱200,000.00.

The Factual Background

The facts of the case, as shown by the records, are briefly summarized below.

The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a business venture
under the name of Slam Dunk Corporation (Slum Dunk), a production outfit that produced mini-concerts
and shows related to basketball. Petitioner was already then a decorated professional basketball player
while Gutierrez was a well-known sports columnist.
In the course of their business, the petitioner pre-signed several checks to answer for the expenses of
Slam Dunk. Although signed, these checks had no payee’s name, date or amount. The blank checks were
entrusted to Gutierrez with the specific instruction not to fill them out without previous notification to
and approval by the petitioner. According to petitioner, the arrangement was made so that he could
verify the validity of the payment and make the proper arrangements to fund the account.

In the middle of 1993, without the petitioner’s knowledge and consent, Gutierrez went to Marasigan
(the petitioner’s former teammate), to secure a loan in the amount of ₱200,000.00 on the excuse that
the petitioner needed the money for the construction of his house. In addition to the payment of the
principal, Gutierrez assured Marasigan that he would be paid an interest of 5% per month from March
to May 1994.

After much contemplation and taking into account his relationship with the petitioner and Gutierrez,
Marasigan acceded to Gutierrez’ request and gave him ₱200,000.00 sometime in February 1994.
Gutierrez simultaneously delivered to Marasigan one of the blank checks the petitioner pre-signed with
Pilipinas Bank, Greenhills Branch, Check No. 21001764 with the blank portions filled out with the words
"Cash" "Two Hundred Thousand Pesos Only", and the amount of "₱200,000.00". The upper right portion
of the check corresponding to the date was also filled out with the words "May 23, 1994" but the
petitioner contended that the same was not written by Gutierrez.

On May 24, 1994, Marasigan deposited the check but it was dishonored for the reason "ACCOUNT
CLOSED." It was later revealed that petitioner’s account with the bank had been closed since May 28,
1993.

Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand letters to the
petitioner asking for the payment of ₱200,000.00, but his demands likewise went unheeded.
Consequently, he filed a criminal case for violation of B.P. 22 against the petitioner, docketed as Criminal
Case No. 42816.

On September 10, 1997, the petitioner filed before the Regional Trial Court (RTC) a Complaint for
Declaration of Nullity of Loan and Recovery of Damages against Gutierrez and co-respondent Marasigan.
He completely denied authorizing the loan or the check’s negotiation, and asserted that he was not
privy to the parties’ loan agreement.

Only Marasigan filed his answer to the complaint. In the RTC’s order dated December 22, 1997,Gutierrez
was declared in default.
The Ruling of the RTC

The RTC ruled on February 3,2003 in favor of Marasigan.4 It found that the petitioner, in issuing the pre-
signed blank checks, had the intention of issuing a negotiable instrument, albeit with specific
instructions to Gutierrez not to negotiate or issue the check without his approval. While under Section
14 of the Negotiable Instruments Law Gutierrez had the prima facie authority to complete the checks by
filling up the blanks therein, the RTC ruled that he deliberately violated petitioner’s specific instructions
and took advantage of the trust reposed in him by the latter.

Nonetheless, the RTC declared Marasigan as a holder in due course and accordingly dismissed the
petitioner’s complaint for declaration of nullity of the loan. It ordered the petitioner to pay Marasigan
the face value of the check with a right to claim reimbursement from Gutierrez.

The petitioner elevated the case to the Court of Appeals (CA), insisting that Marasigan is not a holder in
due course. He contended that when Marasigan received the check, he knew that the same was without
a date, and hence, incomplete. He also alleged that the loan was actually between Marasigan and
Gutierrez with his check being used only as a security.

The Ruling of the CA

On September 24, 2008, the CA affirmed the RTC ruling, although premised on different factual findings.
After careful analysis, the CA agreed with the petitioner that Marasigan is not a holder in due course as
he did not receive the check in good faith.

The CA also concluded that the check had been strictly filled out by Gutierrez in accordance with the
petitioner’s authority. It held that the loan may not be nullified since it is grounded on an obligation
arising from law and ruled that the petitioner is still liable to pay Marasigan the sum of ₱200,000.00.

After the CA denied the subsequent motion for reconsideration that followed, the petitioner filed the
present petition for review on certiorari under Rule 45 of the Revised Rules of Court.

The Petition
The petitioner argues that: (1) there was no loan between him and Marasigan since he never authorized
the borrowing of money nor the check’s negotiation to the latter; (2) under Article 1878 of the Civil
Code, a special power of attorney is necessary for an individual to make a loan or borrow money in
behalf of another; (3) the loan transaction was between Gutierrez and Marasigan, with his check being
used only as a security; (4) the check had not been completely and strictly filled out in accordance with
his authority since the condition that the subject check can only be used provided there is prior approval
from him, was not complied with; (5) even if the check was strictly filled up as instructed by the
petitioner, Marasigan is still not entitled to claim the check’s value as he was not a holder in due course;
and (6) by reason of the bad faith in the dealings between the respondents, he is entitled to claim for
damages.

The Issues

Reduced to its basics, the case presents to us the following issues:

1. Whether the contract of loan in the amount of ₱200,000.00 granted by respondent Marasigan to
petitioner, through respondent Gutierrez, may be nullified for being void;

2. Whether there is basis to hold the petitioner liable for the payment of the ₱200,000.00 loan;

3. Whether respondent Gutierrez has completely filled out the subject check strictly under the authority
given by the petitioner; and

4. Whether Marasigan is a holder in due course.

The Court’s Ruling

The petition is impressed with merit.

We note at the outset that the issues raised in this petition are essentially factual in nature. The main
point of inquiry of whether the contract of loan may be nullified, hinges on the very existence of the
contract of loan – a question that, as presented, is essentially, one of fact. Whether the petitioner
authorized the borrowing; whether Gutierrez completely filled out the subject check strictly under the
petitioner’s authority; and whether Marasigan is a holder in due course are also questions of fact, that,
as a general rule, are beyond the scope of a Rule 45 petition.

The rule that questions of fact are not the proper subject of an appeal by certiorari, as a petition for
review under Rule 45 is limited only to questions of law, is not an absolute rule that admits of no
exceptions. One notable exception is when the findings off act of both the trial court and the CA are
conflicting, making their review necessary.5 In the present case, the tribunals below arrived at two
conflicting factual findings, albeit with the same conclusion, i.e., dismissal of the complaint for nullity of
the loan. Accordingly, we will examine the parties’ evidence presented.

I. Liability Under the Contract of Loan

The petitioner seeks to nullify the contract of loan on the ground that he never authorized the
borrowing of money. He points to Article 1878, paragraph 7 of the Civil Code, which explicitly requires a
written authority when the loan is contracted through an agent. The petitioner contends that absent
such authority in writing, he should not be held liable for the face value of the check because he was not
a party or privy to the agreement.

Contracts of Agency May be Oral Unless The Law Requires a Specific Form

Article 1868 of the Civil Code defines a contract of agency as a contract whereby a person "binds himself
to render some service or to do something in representation or on behalf of another, with the consent
or authority of the latter." Agency may be express, or implied from the acts of the principal, from his
silence or lack of action, or his failure to repudiate the agency, knowing that another person is acting on
his behalf without authority.

As a general rule, a contract of agency may be oral.6However, it must be written when the law requires
a specific form, for example, in a sale of a piece of land or any interest therein through an agent.

Article 1878 paragraph 7 of the Civil Code expressly requires a special power of authority before an
agent can loan or borrow money in behalf of the principal, to wit:

Art. 1878. Special powers of attorney are necessary in the following cases:
xxxx

(7) To loan or borrow money, unless the latter act be urgent and indispensable for the preservation of
the things which are under administration. (emphasis supplied)

Article 1878 does not state that the authority be in writing. As long as the mandate is express, such
authority may be either oral or written. We unequivocably declared in Lim Pin v. Liao Tian, et al.,7 that
the requirement under Article 1878 of the Civil Code refers to the nature of the authorization and not to
its form. Be that as it may, the authority must be duly established by competent and convincing
evidence other than the self serving assertion of the party claiming that such authority was verbally
given, thus:

The requirements of a special power of attorney in Article 1878 of the Civil Code and of a special
authority in Rule 138 of the Rules of Court refer to the nature of the authorization and not its form. The
requirements are met if there is a clear mandate from the principal specifically authorizing the
performance of the act. As early as 1906, this Court in Strong v. Gutierrez-Repide (6 Phil. 680) stated
that such a mandate may be either oral or written, the one vital thing being that it shall be express. And
more recently, We stated that, if the special authority is not written, then it must be duly established by
evidence:

x x x the Rules require, for attorneys to compromise the litigation of their clients, a special authority.
And while the same does not state that the special authority be in writing the Court has every reason to
expect that, if not in writing, the same be duly established by evidence other than the self-serving
assertion of counsel himself that such authority was verbally given him.(Home Insurance Company vs.
United States lines Company, et al., 21 SCRA 863; 866: Vicente vs. Geraldez, 52 SCRA 210; 225).
(emphasis supplied).

The Contract of Loan Entered Into by Gutierrez in Behalf of the Petitioner Should be Nullified for Being
Void; Petitioner is Not Bound by the Contract of Loan.

A review of the records reveals that Gutierrez did not have any authority to borrow money in behalf of
the petitioner.1âwphi1Records do not show that the petitioner executed any special power of attorney
(SPA) in favor of Gutierrez. In fact, the petitioner’s testimony confirmed that he never authorized
Gutierrez (or anyone for that matter), whether verbally or in writing, to borrow money in his behalf, nor
was he aware of any such transaction:

ALVIN PATRIMONIO (witness)

ATTY. DE VERA: Did you give Nap Gutierrez any Special Power of Attorney in writing authorizing him to
borrow using your money?

WITNESS: No, sir. (T.S.N., Alvin Patrimonio, Nov. 11, 1999, p. 105)8

xxxx

Marasigan however submits that the petitioner’s acts of pre-signing the blank checks and releasing them
to Gutierrez suffice to establish that the petitioner had authorized Gutierrez to fill them out and
contract the loan in his behalf.

Marasigan’s submission fails to persuade us.

In the absence of any authorization, Gutierrez could not enter into a contract of loan in behalf of the
petitioner. As held in Yasuma v. Heirs of De Villa,9 involving a loan contracted by de Villa secured by real
estate mortgages in the name of East Cordillera Mining Corporation, in the absence of an SPA conferring
authority on de Villa, there is no basis to hold the corporation liable, to wit:

The power to borrow money is one of those cases where corporate officers as agents of the corporation
need a special power of attorney. In the case at bar, no special power of attorney conferring authority
on de Villa was ever presented. x x x There was no showing that respondent corporation ever authorized
de Villa to obtain the loans on its behalf.

xxxx

Therefore, on the first issue, the loan was personal to de Villa. There was no basis to hold the
corporation liable since there was no authority, express, implied or apparent, given to de Villa to borrow
money from petitioner. Neither was there any subsequent ratification of his act.

xxxx
The liability arising from the loan was the sole indebtedness of de Villa (or of his estate after his death).
(citations omitted; emphasis supplied).

This principle was also reiterated in the case of Gozun v. Mercado,10 where this court held:

Petitioner submits that his following testimony suffices to establish that respondent had authorized
Lilian to obtain a loan from him.

xxxx

Petitioner’s testimony failed to categorically state, however, whether the loan was made on behalf of
respondent or of his wife. While petitioner claims that Lilian was authorized by respondent, the
statement of account marked as Exhibit "A" states that the amount was received by Lilian "in behalf of
Mrs. Annie Mercado.

It bears noting that Lilian signed in the receipt in her name alone, without indicating therein that she
was acting for and in behalf of respondent. She thus bound herself in her personal capacity and not as
an agent of respondent or anyone for that matter.

It is a general rule in the law of agency that, in order to bind the principal by a mortgage on real
property executed by an agent, it must upon its face purport to be made, signed and sealed in the name
of the principal, otherwise, it will bind the agent only. It is not enough merely that the agent was in fact
authorized to make the mortgage, if he has not acted in the name of the principal. x x x (emphasis
supplied).

In the absence of any showing of any agency relations or special authority to act for and in behalf of the
petitioner, the loan agreement Gutierrez entered into with Marasigan is null and void. Thus, the
petitioner is not bound by the parties’ loan agreement.

Furthermore, that the petitioner entrusted the blank pre-signed checks to Gutierrez is not legally
sufficient because the authority to enter into a loan can never be presumed. The contract of agency and
the special fiduciary relationship inherent in this contract must exist as a matter of fact. The person
alleging it has the burden of proof to show, not only the fact of agency, but also its nature and
extent.11 As we held in People v. Yabut:12
Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or Geminiano Yabut, Jr., in
Caloocan City cannot, contrary to the holding of the respondent Judges, be licitly taken as delivery of the
checks to the complainant Alicia P. Andan at Caloocan City to fix the venue there. He did not take
delivery of the checks as holder, i.e., as "payee" or "indorsee." And there appears to beno contract of
agency between Yambao and Andan so as to bind the latter for the acts of the former. Alicia P. Andan
declared in that sworn testimony before the investigating fiscal that Yambao is but her "messenger" or
"part-time employee." There was no special fiduciary relationship that permeated their dealings. For a
contract of agency to exist, the consent of both parties is essential, the principal consents that the other
party, the agent, shall act on his behalf, and the agent consents so to act. It must exist as a fact. The law
makes no presumption thereof. The person alleging it has the burden of proof to show, not only the fact
of its existence, but also its nature and extent. This is more imperative when it is considered that the
transaction dealt with involves checks, which are not legal tender, and the creditor may validly refuse
the same as payment of obligation.(at p. 630). (emphasis supplied)

The records show that Marasigan merely relied on the words of Gutierrez without securing a copy of the
SPA in favor of the latter and without verifying from the petitioner whether he had authorized the
borrowing of money or release of the check. He was thus bound by the risk accompanying his trust on
the mere assurances of Gutierrez.

No Contract of Loan Was Perfected Between Marasigan And Petitioner, as The Latter’s Consent Was Not
Obtained.

Another significant point that the lower courts failed to consider is that a contract of loan, like any other
contract, is subject to the rules governing the requisites and validity of contracts in general.13 Article
1318 of the Civil Code14enumerates the essential requisites for a valid contract, namely:

1. consent of the contracting parties;

2. object certain which is the subject matter of the contract; and

3. cause of the obligation which is established.

In this case, the petitioner denied liability on the ground that the contract lacked the essential element
of consent. We agree with the petitioner. As we explained above, Gutierrez did not have the petitioner’s
written/verbal authority to enter into a contract of loan. While there may be a meeting of the minds
between Gutierrez and Marasigan, such agreement cannot bind the petitioner whose consent was not
obtained and who was not privy to the loan agreement. Hence, only Gutierrez is bound by the contract
of loan.

True, the petitioner had issued several pre-signed checks to Gutierrez, one of which fell into the hands
of Marasigan. This act, however, does not constitute sufficient authority to borrow money in his behalf
and neither should it be construed as petitioner’s grant of consent to the parties’ loan agreement.
Without any evidence to prove Gutierrez’ authority, the petitioner’s signature in the check cannot be
taken, even remotely, as sufficient authorization, much less, consent to the contract of loan. Without
the consent given by one party in a purported contract, such contract could not have been perfected;
there simply was no contract to speak of.15

With the loan issue out of the way, we now proceed to determine whether the petitioner can be made
liable under the check he signed.

II. Liability Under the Instrument

The answer is supplied by the applicable statutory provision found in Section 14 of the Negotiable
Instruments Law (NIL) which states:

Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in any material particular, the
person in possession thereof has a prima facie authority to complete it by filling up the blanks therein.
And a signature on a blank paper delivered by the person making the signature in order that the paper
may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for
any amount. In order, however, that any such instrument when completed may be enforced against any
person who became a party thereto prior to its completion, it must be filled up strictly in accordance
with the authority given and within a reasonable time. But if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may
enforce it as if it had been filled up strictly in accordance with the authority given and within a
reasonable time.

This provision applies to an incomplete but delivered instrument. Under this rule, if the maker or drawer
delivers a pre-signed blank paper to another person for the purpose of converting it into a negotiable
instrument, that person is deemed to have prima facie authority to fill it up. It merely requires that the
instrument be in the possession of a person other than the drawer or maker and from such possession,
together with the fact that the instrument is wanting in a material particular, the law presumes agency
to fill up the blanks.16
In order however that one who is not a holder in due course can enforce the instrument against a party
prior to the instrument’s completion, two requisites must exist: (1) that the blank must be filled strictly
in accordance with the authority given; and (2) it must be filled up within a reasonable time. If it was
proven that the instrument had not been filled up strictly in accordance with the authority given and
within a reasonable time, the maker can set this up as a personal defense and avoid liability. However, if
the holder is a holder in due course, there is a conclusive presumption that authority to fill it up had
been given and that the same was not in excess of authority.17

In the present case, the petitioner contends that there is no legal basis to hold him liable both under the
contract and loan and under the check because: first, the subject check was not completely filled out
strictly under the authority he has given and second, Marasigan was not a holder in due course.

Marasigan is Not a Holder in Due Course

The Negotiable Instruments Law (NIL) defines a holder in due course, thus:

Sec. 52 — A holder in due course is a holder who has taken the instrument under the following
conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.(emphasis supplied)

Section 52(c) of the NIL states that a holder in due course is one who takes the instrument "in good faith
and for value." It also provides in Section 52(d) that in order that one may be a holder in due course, it is
necessary that at the time it was negotiated to him he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it.
Acquisition in good faith means taking without knowledge or notice of equities of any sort which could
beset up against a prior holder of the instrument.18 It means that he does not have any knowledge of
fact which would render it dishonest for him to take a negotiable paper. The absence of the defense,
when the instrument was taken, is the essential element of good faith.19

As held in De Ocampo v. Gatchalian:20

In order to show that the defendant had "knowledge of such facts that his action in taking the
instrument amounted to bad faith," it is not necessary to prove that the defendant knew the exact fraud
that was practiced upon the plaintiff by the defendant's assignor, it being sufficient to show that the
defendant had notice that there was something wrong about his assignor's acquisition of title, although
he did not have notice of the particular wrong that was committed.

It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted
with fraud. It is not necessary that he should know the particulars or even the nature of the fraud, since
all that is required is knowledge of such facts that his action in taking the note amounted bad faith.

The term ‘bad faith’ does not necessarily involve furtive motives, but means bad faith in a commercial
sense. The manner in which the defendants conducted their Liberty Loan department provided an easy
way for thieves to dispose of their plunder. It was a case of "no questions asked." Although gross
negligence does not of itself constitute bad faith, it is evidence from which bad faith may be inferred.
The circumstances thrust the duty upon the defendants to make further inquiries and they had no right
to shut their eyes deliberately to obvious facts. (emphasis supplied).

In the present case, Marasigan’s knowledge that the petitioner is not a party or a privy to the contract of
loan, and correspondingly had no obligation or liability to him, renders him dishonest, hence, in bad
faith. The following exchange is significant on this point:

WITNESS: AMBET NABUS

Q: Now, I refer to the second call… after your birthday. Tell us what you talked about?

A: Since I celebrated my birthday in that place where Nap and I live together with the other crew, there
were several visitors that included Danny Espiritu. So a week after my birthday, Bong Marasigan called
me up again and he was fuming mad. Nagmumura na siya. Hinahanap niya si… hinahanap niya si Nap,
dahil pinagtataguan na siya at sinabi na niya na kailangan I-settle na niya yung utang ni Nap, dahil…

xxxx

WITNESS: Yes. Sinabi niya sa akin na kailangan ayusin na bago pa mauwi sa kung saan ang tsekeng
tumalbog… (He told me that we have to fix it up before it…) mauwi pa kung saan…

xxxx

Q: What was your reply, if any?

A: I actually asked him. Kanino ba ang tseke na sinasabi mo?

(Whose check is it that you are referring to or talking about?)

Q: What was his answer?

A: It was Alvin’s check.

Q: What was your reply, if any?

A: I told him do you know that it is not really Alvin who borrowed money from you or what you want to
appear…

xxxx

Q: What was his reply?

A: Yes, it was Nap, pero tseke pa rin ni Alvin ang hawak ko at si Alvin ang maiipit dito.(T.S.N., Ambet
Nabus, July 27, 2000; pp.65-71; emphasis supplied)21

Since he knew that the underlying obligation was not actually for the petitioner, the rule that a
possessor of the instrument is prima facie a holder in due course is inapplicable. As correctly noted by
the CA, his inaction and failure to verify, despite knowledge of that the petitioner was not a party to the
loan, may be construed as gross negligence amounting to bad faith.

Yet, it does not follow that simply because he is not a holder in due course, Marasigan is already totally
barred from recovery. The NIL does not provide that a holder who is not a holder in due course may not
in any case recover on the instrument.22 The only disadvantage of a holder who is not in due course is
that the negotiable instrument is subject to defenses as if it were non-negotiable.23 Among such
defenses is the filling up blank not within the authority.

On this point, the petitioner argues that the subject check was not filled up strictly on the basis of the
authority he gave. He points to his instruction not to use the check without his prior approval and argues
that the check was filled up in violation of said instruction.

Check Was Not Completed Strictly Under The Authority Given by The Petitioner

Our own examination of the records tells us that Gutierrez has exceeded the authority to fill up the
blanks and use the check.1âwphi1 To repeat, petitioner gave Gutierrez pre-signed checks to be used in
their business provided that he could only use them upon his approval. His instruction could not be any
clearer as Gutierrez’ authority was limited to the use of the checks for the operation of their business,
and on the condition that the petitioner’s prior approval be first secured.

While under the law, Gutierrez had a prima facie authority to complete the check, such prima facie
authority does not extend to its use (i.e., subsequent transfer or negotiation)once the check is
completed. In other words, only the authority to complete the check is presumed. Further, the law used
the term "prima facie" to underscore the fact that the authority which the law accords to a holder is a
presumption juris tantumonly; hence, subject to subject to contrary proof. Thus, evidence that there
was no authority or that the authority granted has been exceeded may be presented by the maker in
order to avoid liability under the instrument.

In the present case, no evidence is on record that Gutierrez ever secured prior approval from the
petitioner to fill up the blank or to use the check. In his testimony, petitioner asserted that he never
authorized nor approved the filling up of the blank checks, thus:
ATTY. DE VERA: Did you authorize anyone including Nap Gutierrez to write the date, May 23, 1994?

WITNESS: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to put the word cash? In the check?

A: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to write the figure ₱200,000 in this check?

A: No, sir.

Q: And lastly, did you authorize anyone including Nap Gutierrez to write the words ₱200,000 only xx in
this check?

A: No, sir. (T.S.N., Alvin Patrimonio, November 11, 1999).24

Notably, Gutierrez was only authorized to use the check for business expenses; thus, he exceeded the
authority when he used the check to pay the loan he supposedly contracted for the construction of
petitioner's house. This is a clear violation of the petitioner's instruction to use the checks for the
expenses of Slam Dunk. It cannot therefore be validly concluded that the check was completed strictly in
accordance with the authority given by the petitioner.

Considering that Marasigan is not a holder in due course, the petitioner can validly set up the personal
defense that the blanks were not filled up in accordance with the authority he gave. Consequently,
Marasigan has no right to enforce payment against the petitioner and the latter cannot be obliged to
pay the face value of the check.

WHEREFORE, in view of the foregoing, judgment is hereby rendered GRANTING the petitioner Alvin
Patrimonio's petition for review on certiorari. The appealed Decision dated September 24, 2008 and the
Resolution dated April 30, 2009 of the Court of Appeals are consequently ANNULLED AND SET ASIDE.
Costs against the respondents.
SO ORDERED.

ARTURO D. BRION

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO

Associate Justice

Chairperson

MARIANO C. DEL CASTILLO

Associate JusticeJOSE PORTUGAL PEREZ

Associate Justice

ESTELA M. PERLAS-BERNABE

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO

Associate Justice

Chairperson, Second Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson's Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.

MARIA LOURDES P. A. SERENO

Chief Justice

Footnotes

1 Under Rule 45 of the Rules of Coui1, rollo, pp. 9-31,

2 Id. at 30-47; penned by Associate Justice Monina Arevalo-Zenarosa, and concurred in by Associate
Justice Regalado E. Maambong and Associate Justice Sixto C. Marella, Jr.

3 Id. at 48-50.

4 Rollo, pp. 67-72.

5 Republic v. Bellate, G.R. No. 175685, August 7, 2013, 703 SCRA 210, 218.

6 Article 1869, Civil Code of the Philippines.

7 200 Phil. 685 (1982).

8 Rollo, p. 82.

9 G.R. No. 150350, August 22, 2006, 499 SCRA 466, 472.
10 G.R. No. 167812, December 19, 2006, 511 SCRA 305, 313-314.

11 People v. Yabut, G.R. No. L-42847 and L-42902, April 29, 1977, 167 Phil. 336, 343.

12 Id.

13 Pentacapital Investment Corporation v. Mahinay, G.R. No. 171736, July 5, 2010, 623 SCRA 284, 302.

14 Art. 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established. (1261).

15 Deheza-Inamarga v. Alano, G.R. No. 171321, December 18, 2008, 574 SCRA 651, 660.

16 Dy v. People, G.R. No. 158312, November 14, 2008, 571 SCRA 59, 71-72.

17 T.B. Aquino, Notes and Cases on Banks, Negotiable Instruments and Other Commercial Documents,
p. 234 (2006 ed.).

18 A.F. Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, p. 281
(1992 ed.).

19 Id.

20 G.R. No. L-15126, November 30, 1961, 3 SCRA 596, 598.

21 Rollo, pp. 141-142.

22 Dino v. Loot, G.R. No. 170912, April 19, 2010, 618 SCRA 393, 404.

23 Id.

24 Rollo, p: 117.
 CASE DIGEST: FIDELIZA J. AGLIBOT, Petitioner, v. INGERSOL L. SANTIA, Respondent.

FACTS: Engr. Ingersol L. Santia (Santia) loaned the amount of P2,500,000.00 to Pacific Lending & Capital
Corporation (PLCC), through its Manager, petitioner Fideliza J. Aglibot (Aglibot). The loan was evidenced
by a promissory note. Allegedly as a guaranty for the payment of the note, Aglibot issued and delivered
to Santia eleven (11) post-dated personal checks drawn from her own account maintained at
Metrobank. Upon presentment of the checks for payment, they were dishonored by the bank for having
been drawn against insufficient funds or closed account. Santia thus demanded payment from PLCC and
Aglibot of the face value of the checks, but neither of them heeded his demand. Consequently, eleven
(11) Informations for violation of B.P. 22 were filed before the MTCC.

MTCC acquitted Aglibot. On appeal, the RTC rendered a decision absolving Aglibot and dismissing the
civil aspect of the case on the ground of failure to fulfill a condition precedent of exhausting all means to
collect from the principal debtor.

On appeal, the Court of Appeals ruled that the RTC erred when it dismissed the civil aspect of the case.
Hence, the CA ruled that Aglibot is personally liable for the loan.

Thus, Aglibot filed this instant petition for certiorari. She argued that she was merely a guarantor of the
obligation and therefore, entitled to the benefit of excussion under Article of the 2058 of the Civil Code.
She further posited that she is not personally liable on the checks since she merely contracted the loan
in behalf of PLCC.

ISSUES:

Is Aglibot entitled to the benefit of excussion?

Is Aglibot personally liable on the checks?

HELD: It is settled that the liability of the guarantor is only subsidiary, and all the properties of the
principal debtor, the PLCC in this case, must first be exhausted before the guarantor may be held
answerable for the debt. Thus, the creditor may hold the guarantor liable only after judgment has been
obtained against the principal debtor and the latter is unable to pay, for obviously the exhaustion of the
principals property the benefit of which the guarantor claims cannot even begin to take place before
judgment has been obtained. This rule is contained in Article 2062 of the Civil Code, which provides that
the action brought by the creditor must be filed against the principal debtor alone, except in some
instances mentioned in Article 2059 when the action may be brought against both the guarantor and
the principal debtor.

The Court must, however, reject Aglibots claim as a mere guarantor of the indebtedness of PLCC to
Santia for want of proof, in view of Article 1403(2) of the Civil Code, embodying the Statute of Frauds.
Under the above provision, concerning a guaranty agreement, which is a promise to answer for the debt
or default of another, the law clearly requires that it, or some note or memorandum thereof, be in
writing. Otherwise, it would be unenforceable unless ratified, although under Article 1358 of the Civil
Code, a contract of guaranty does not have to appear in a public document. Contracts are generally
obligatory in whatever form they may have been entered into, provided all the essential requisites for
their validity are present, and the Statute of Frauds simply provides the method by which the contracts
enumerated in Article 1403(2) may be proved, but it does not declare them invalid just because they are
not reduced to writing. Thus, the form required under the Statute is for convenience or evidentiary
purposes only.

On the other hand, Article 2055 of the Civil Code also provides that a guaranty is not presumed, but
must be express, and cannot extend to more than what is stipulated therein. This is the obvious
rationale why a contract of guarantee is unenforceable unless made in writing or evidenced by some
writing.

***

The appellate court ruled that by issuing her own post-dated checks, Aglibot thereby bound herself
personally and solidarily to pay Santia, and dismissed her claim that she issued her said checks in her
official capacity as PLCCs manager merely to guarantee the investment of Santia. The facts present a
clear situation where Aglibot, as the manager of PLCC, agreed to accommodate its loan to Santia by
issuing her own post-dated checks in payment thereof. She is what the Negotiable Instruments Law calls
an accommodation party.

The relation between an accommodation party and the party accommodated is, in effect, one of
principal and surety the accommodation party being the surety. It is a settled rule that a surety is bound
equally and absolutely with the principal and is deemed an original promisor and debtor from the
beginning. The liability is immediate and direct. It is not a valid defense that the accommodation party
did not receive any valuable consideration when he executed the instrument; nor is it correct to say that
the holder for value is not a holder in due course merely because at the time he acquired the
instrument, he knew that the indorser was only an accommodation party. Unlike in a contract of
suretyship, the liability of the accommodation party remains not only primary but also unconditional to
a holder for value, such that even if the accommodated party receives an extension of the period for
payment without the consent of the accommodation party, the latter is still liable for the whole
obligation and such extension does not release him because as far as a holder for value is concerned, he
is a solidary co-debtor.

DENIED