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BPI EXPRESS CARD CORPORATION, petitioner, vs. COURT OF APPEALS and RICARDO J. MARASIGAN, respondents. DECISION KAPUNAN, J.

: The question before this Court is whether private respondent can recover moral damages arising from the cancellation of his credit card by petitioner credit card corporation. The facts of the case are as stated in the decision of the respondent court,i[1] to wit: The case arose from the dishonor of the credit card of the plaintiff Atty. Ricardo J. Marasigan by Cafe Adriatico, a business establishment accredited with the defendant-appellant BPI Express Card Corporation (BECC for brevity) on December 8, 1989 when the plaintiff entertained some guests thereat. The records of this case show that plaintiff, who is a lawyer by profession was a complimentary member of BECC from February 1988 to February 1989 and was issued Credit Card No. 100-012-5534 with a credit limit of P3,000.00 and with a monthly billing every 27th of the month (Exh. N), subject to the terms and conditions stipulated in the contract (Exh. 1-b). His membership was renewed for another year or until February 1990 and the credit limit was increased to P5,000.00 (Exh. A). The plaintiff oftentimes exceeded his credit limits (Exhs. I, I-1 to I-12) but this was never taken against him by the defendant and even his mode of paying his monthly bills in check was tolerated. Their contractual relations went on smoothly until his statement of account for October, 1989 amounting to P8,987.84 was not paid in due time. The plaintiff admitted having inadvertently failed to pay his account for the said month because he was in Quezon province attending to some professional and personal commitments. He was informed by his secretary that defendant was demanding immediate payment of his outstanding account, was requiring him to issue a check for P15,000.00 which would include his future bills, and was threatening to suspend his credit card. Plaintiff issued Far East Bank and Trust Co. Check No. 494675 in the amount of P15,000.00, postdated December 15, 1989 which was received on November 23, 1989 by Tess Lorenzo, an employee of the defendant (Exhs. J and J-1), who in turn gave the said check to Jeng Angeles, a co-employee who handles the account of the plaintiff. The check remained in the custody of Jeng Angeles. Mr. Roberto Maniquiz, head of the collection department of defendant was formally informed of the postdated check about a week later. On November 28, 1989, defendant served plaintiff a letter by ordinary mail informing him of the temporary suspension of the privileges of his credit card and the inclusion of his account number in their Caution List. He was also told to refrain from further use of his credit card to avoid any inconvenience/embarrassment and that unless he settles his outstanding account with the defendant within 5 days from receipt of the letter, his membership will be permanently cancelled (Exh. 3). There is no showing that the plaintiff received this letter before December 8, 1989. Confident that he had settled his account with the issuance of the postdated check, plaintiff invited some guests on December 8, 1989 and entertained them at Caf Adriatico. When he presented his credit card to Caf Adriatico for the bill amounting to P735.32, said card was dishonored. One of his guests, Mary Ellen Ringler, paid the bill by using her own credit card, a Unibankard (Exhs. M, M-1 and M-2). In a letter addressed to the defendant dated December 12, 1989, plaintiff requested that he be sent the exact billing due him as of December 15, 1989, to withhold the deposit of his postdated check and that said check be returned to him because he had already instructed his bank to stop the payment thereof as the defendant violated their agreement that the plaintiff issue the check to the defendant to cover his account amounting to only P8,987.84 on the condition that the defendant will not suspend the effectivity of the card (Exh. D). A letter dated December 16, 1989 was sent by the plaintiff to the manager of FEBTC, Ramada Branch, Manila requesting the bank to stop the payment of the check

(Exhs. E, E-1). No reply was received by plaintiff from the defendant to his letter dated December 12, 1989. Plaintiff sent defendant another letter dated March 12, 1990 reminding the latter that he had long rescinded and cancelled whatever arrangement he entered into with defendant and requesting for his correct billing, less the improper charges and penalties, and for an explanation within five (5) days from receipt thereof why his card was dishonored on December 8, 1989 despite assurance to the contrary by defendant's personnel-in-charge, otherwise the necessary court action shall be filed to hold defendant responsible for the humiliation and embarrassment suffered by him (Exh. F). Plaintiff alleged further that after a few days, a certain Atty. Albano, representing himself to be working with office of Atty. Lopez, called him inquiring as to how the matter can be threshed out extrajudicially but the latter said that such is a serious matter which cannot be discussed over the phone. The defendant served its final demand to the plaintiff dated March 21, 1990 requiring him to pay in full his overdue account, including stipulated fees and charges, within 5 days from receipt thereof or face court action also to replace the postdated check with cash within the same period or face criminal suit for violation of the Bouncing Check Law (Exh. G/Exh. 13). The plaintiff, in a reply letter dated April 5, 1990 (Exh. H), demanded defendant's compliance with his request in his first letter dated March 12, 1990 within three (3) days from receipt, otherwise the plaintiff will file a case against them, x x x.ii[2] Thus, on May 7, 1990 private respondent filed a complaint for damages against petitioner before the Regional Trial Court of Makati, Branch 150, docketed as Civil Case No. 90-1174. After trial, the trial court ruled for private respondent, finding that herein petitioner abused its right in contravention of Article 19 of the Civil Code.iii[3] The dispositive portion of the decision reads: Wherefore, judgment is hereby rendered ordering the defendant to pay plaintiff the following: 1. P100,000.00 as moral damages; 2. P50,000.00 as exemplary damages; and 3. P20,000.00 by way of attorney's fees. On the other hand, plaintiff is ordered to pay defendant its outstanding obligation in the amount of P14,439.41, amount due as of December 15, 1989.iv[4] The trial court's ruling was based on its findings and conclusions, to wit: There is no question that plaintiff had been in default in the payment of his billings for more than two months, prompting defendant to call him and reminded him of his obligation. Unable to personally talk with him, this Court is convinced that somehow one or another employee of defendant called him up more than once. However, while it is true that, as indicated in the terms and conditions of the application for BPI credit card, upon failure of the cardholder to pay his outstanding obligation for more than thirty (30) days, the defendant can automatically suspend or cancel the credit card, that reserved right should not have been abused, as it was in fact abused, in plaintiff's case. What is more peculiar here is that there have been admitted communications between plaintiff and defendant prior to the suspension or cancellation of plaintiff's credit card and his inclusion in the caution list. However, nowhere in any of these communications was there ever a hint given to plaintiff that his card had already been suspended or cancelled. In fact, the Court observed that while defendant was trying its best to persuade plaintiff to update its account and pay its obligation, it had already taken steps to suspend/cancel plaintiff's card and include him in the caution list. While the Court admires defendant's diplomacy in dealing with its clients, it cannot help but frown upon the backhanded way defendant dealt with plaintiff's case. For despite Tess Lorenzo's denial, there is reason to believe that plaintiff was indeed assured by defendant of the continued honoring of his credit card so long as he pays his obligation of P15,000.00. Worst, upon receipt of the postdated check, defendant kept the same until a few days before it became due and

said check was presented to the head of the collection department, Mr. Maniquiz, to take steps thereon, resulting to the embarrassing situation plaintiff found himself in on December 8, 1989. Moreover, Mr. Maniquiz himself admitted that his request for plaintiff to replace the check with cash was not because it was a postdated check but merely to tally the payment with the account due. Likewise, the Court is not persuaded by the sweeping denials made by Tess Lorenzo and her claim that her only participation was to receive the subject check. Her immediate superior, Mr. Maniquiz testified that he had instructed Lorenzo to communicate with plaintiff once or twice to request the latter to replace the questioned check with cash, thus giving support to the testimony of plaintiff's witness, Dolores Quizon, that it was one Tess Lorenzo who she had talked over the phone regarding plaintiff's account and plaintiff's own statement that it was this woman who assured him that his card has not yet been and will not be cancelled/suspended if he would pay defendant the sum of P15,000.00. Now, on the issue of whether or not upon receipt of the subject check, defendant had agreed that the card shall remain effective, the Court takes note of the following: 1. An employee of defendant corporation unconditionally accepted the subject check upon its delivery, despite its being a postdated one; and the amount did not tally with plaintiff's obligation; 2. Defendant did not deny nor controvert plaintiff's claim that all his payments were made in checks; 3. Defendant's main witness, Mr. Maniquiz, categorically stated that the request for plaintiff to replace his postdated check with cash was merely for the purpose of tallying plaintiff's outstanding obligation with his payment and not to question the postdated check; 4. That the card was suspended almost a week after receipt of the postdated check; 5. That despite the many instances that defendant could have informed plaintiff over the phone of the cancellation or suspension of his credit card, it did not do so, which could have prevented the incident of December 8, 1989, the notice allegedly sent thru ordinary mail is not only unreliable but takes a long time. Such action as suspension of credit card must be immediately relayed to the person affected so as to avoid embarrassing situations. 6. And that the postdated check was deposited on December 20, 1989. In view of the foregoing observations, it is needless to say that there was indeed an arrangement between plaintiff and the defendant, as can be inferred from the acts of the defendant's employees, that the subject credit card is still good and could still be used by the plaintiff as it would be honored by the duly accredited establishment of defendant.v[5] Not satisfied with the Regional Trial Court's decision, petitioner appealed to the Court of Appeals, which, in a decision promulgated on March 9, 1995 ruled in its dispositive portion: WHEREFORE, premises considered, the decision appealed from is hereby AFFIRMED with the MODIFICATION that the defendant-appellant shall pay the plaintiff-appellee the following: P50,000.00 as moral damages; P25,000.00 as exemplary damages; and P10,000.00 by way of attorney's fees. SO ORDERED.vi[6] Hence, the present petition on the following assignment of errors: I

THE LOWER COURT ERRED IN DECLARING THAT THERE WAS INDEED AN AGREEMENT OR ARRANGEMENT ENTERED INTO BETWEEN THE PARTIES WHEREIN THE DEFENDANT REQUIRED THE PLAINTIFF TO ISSUE A POSTDATED CHECK IN ITS FAVOR IN THE AMOUNT OF P15,000.00 AS PAYMENT FOR HIS OVERDUE ACCOUNTS, WITH THE CONDITION THAT THE PLAINTIFF'S CREDIT CARD WILL NOT BE SUSPENDED OR CANCELLED. II THE LOWER COURT ERRED IN HOLDING DEFENDANT LIABLE FOR DAMAGES AND ATTORNEY'S FEES ARISING OUT FROM THE DISHONOR OF THE PLAINTIFF'S CREDIT CARD.vii[7] We find the petition meritorious. The first issue to be resolved is whether petitioner had the right to suspend the credit card of the private respondent. Under the terms and conditions of the credit card, signed by the private respondent, any card with outstanding balances after thirty (30) days from original billing/statement shall automatically be suspended, thus: PAYMENT OF CHARGES - BECC shall furnish the Cardholder a monthly statement of account made through the use of the CARD and the Cardholder agrees that all charges made through the use of the CARD shall be paid by the Cardholder on or before the last day for payments, which is twenty (20) days from the date of the said statement of account, and such payment due date may be changed to an earlier date if the Cardholder's account is considered overdue and/or with balances in excess of the approved credit limit; or to such other date as may be deemed proper by the CARD issuer with notice to the Cardholder on the same monthly statement of account. If the last day for payment falls on a Saturday, Sunday or Holiday, the last day for payment automatically becomes the last working day prior to said payment date. However, notwithstanding the absence or lack of proof of service of the statement of charges to the Cardholder, the latter shall pay any or all charges made through the use of the CARD within thirty (30) days from the date or dates thereof. Failure of Cardholder to pay any and all charges made through the CARD within the payment period as stated in the statement of charges or within thirty (30) days from actual date or dates whichever occur earlier, shall render him in default without the necessity of demand from BECC, which the Cardholder expressly waives. These charges or balance thereof remaining unpaid after the payment due date indicated on the monthly statement of account shall bear interest at the rate of 3% per month and an additional penalty fee equivalent to another 3% of the amount due for every month or a fraction of a month's delay. PROVIDED, that if there occurs any change on the prevailing market rates. BECC shall have the option to adjust the rate of interest and/or penalty fee due on the outstanding obligation with prior notice to the Cardholder. xxx xxx xxx

Any CARD with outstanding balances unpaid after thirty (30) days from original billing/statement date shall automatically be suspended, and those with accounts unpaid after sixty (60) days from said original billing/statement date shall automatically be cancelled, without prejudice to BECC's right to suspend or cancel any CARD any time and for whatever reason. In case of default in his obligation as provided for in the preceding paragraph, Cardholder shall surrender his CARD to BECC and shall in addition to the interest and penalty charges aforementioned, pay the following liquidated damages and/or fees (a) a collection fee of 25% of the amount due if the account is referred to a collection agency or attorney; (b) a service fee of P100 for every dishonored check issued by the Cardholder in payment of his account, with prejudice, however, to BECC's right of considering Cardholder's obligation unpaid, cable cost for demanding payment or advising cancellation of membership shall also

be for Cardholder's account; and (c) a final fee equivalent to 25% of the unpaid balance, exclusive of litigation expenses and judicial costs, if the payment of the account is enforced through court action.viii[8] The aforequoted provision of the credit card cannot be any clearer. By his own admission, private respondent made no payment within thirty days for his original billing/statement dated 27 September 1989. Neither did he make payment for his original billing/statement dated 27 October 1989. Consequently, as early as 28 October 1989, thirty days from the non-payment of his billing dated 27 September 1989, petitioner corporation could automatically suspend his credit card. The next issue is whether prior to the suspension of private respondent's credit card on 28 November 1989, the parties entered into an agreement whereby the card could still be used and would be duly honored by duly accredited establisments. We agree with the findings of the respondent court, that there was an arrangement between the parties, wherein the petitioner required the private respondent to issue a check worth P15,000 as payment for the latter's billings. However, we find that the private respondent was not able to comply with his obligation. As the testimony of private respondent himself bears out, the agreement was for the immediate payment of the outstanding account: Q In said statement of account that you are supposed to pay the P8,974.84 the charge of interest and penalties, did you note that? A Q A Q A Yes, sir. I noted the date. When? When I returned from the Quezon province, sir. When? I think November 22, sir.

Q So that before you used again the credit card you were not able to pay immediately this P8,987.84 in cash? A I paid P15,000.00, sir.

Q My question Mr. Witness is, did you pay this P8,987.84 in charge of interest and penalties immediately in cash? A In cash no, but in check, sir.

Q You said that you noted the word "immediately" in bold letters in your statement of account, why did you not pay immediately? A Because I received that late, sir.

Q Yes, on November 22 when you received from the secretary of the defendant telling you to pay the principal amount of P8,987.84, why did you not pay?

A There was a communication between me and the defendant, I was required to pay P8,000.00 but I paid in check for P15,000.00, sir. Q A Q A Q A Do you have any evidence to show that the defendant required you to pay in check for P15,000.00? Yes, sir. Where is it? It was by telecommunication, sir. So there is no written communication between you and the defendant? There was none, sir.

Q There is no written agreement which says that P8,987.84 should be paid for P15,000.00 in check, there is none? A Yes, no written agreement, sir.

Q And you as a lawyer you know that a check is not considered as cash specially when it is postdated sent to the defendant? A That is correct, sir.

Clearly, the purpose of the arrangement between the parties on November 22, 1989, was for the immediate payment of the private respondent's outstanding account, in order that his credit card would not be suspended. As agreed upon by the parties, on the following day, private respondent did issue a check for P15,000. However, the check was postdated 15 December 1989. Settled is the doctrine that a check is only a substitute for money and not money, the delivery of such an instrument does not, by itself operate as payment.ix[9] This is especially true in the case of a postdated check. Thus, the issuance by the private respondent of the postdated check was not effective payment. It did not comply with his obligation under the arrangement with Miss Lorenzo. Petitioner corporation was therefore justified in suspending his credit card. Finally, we find no legal and factual basis for private respondent's assertion that in canceling the credit card of the private respondent, petitioner abused its right under the terms and conditions of the contract. To find the existence of an abuse of right under Article 19 the following elements must be present: (1) There is a legal right or duty; (2) which is exercised in bad faith; (3) for the sole intent of prejudicing or injuring another.x[10] Time and again this Court has held that good faith is presumed and the burden of proving bad faith is on the party alleging it.xi[11] This private respondent failed to do. In fact, the action of the petitioner belies the existence of bad faith. As early as 28 October 1989, petitioner could have suspended private respondent's card outright. Instead, petitioner allowed private respondent to use his card for several weeks. Petitioner had even notified private respondent of the impending suspension of his credit card and made special accommodations for him for settling his outstanding account. As such, petitioner cannot be said to have capriciously and arbitrarily canceled the private respondent's credit card.

We do not dispute the findings of the lower court that private respondent suffered damages as a result of the cancellation of his credit card. However, there is a material distinction between damages and injury. Injury is the illegal invasion of a legal right; damage is the loss, hurt, or harm which results from the injury; and damages are the recompense or compensation awarded for the damage suffered. Thus, there can be damage without injury in those instances in which the loss or harm was not the result of a violation of a legal duty. In such cases, the consequences must be borne by the injured person alone, the law affords no remedy for damages resulting from an act which does not amount to a legal injury or wrong. These situations are often called damnum absque injuria.xii[12] In other words, in order that a plaintiff may maintain an action for the injuries of which he complains, he must establish that such injuries resulted from a breach of duty which the defendant owed to the plaintiff - a concurrence of injury to the plaintiff and legal responsibility by the person causing it. The underlying basis for the award of tort damages is the premise that an individual was injured in contemplation of law. Thus, there must first be a breach of some duty and the imposition of liability for that breach before damages may be awarded;xiii[13] and the breach of such duty should be the proximate cause of the injury. We therefore disagree with the ruling of the respondent court that the dishonor of the credit card of the private respondent by Caf Adriatico is attributable to petitioner for its willful or gross neglect to inform the private respondent of the suspension of his credit card, the unfortunate consequence of which brought social humiliation and embarrassment to the private respondent.xiv[14] It was petitioner's failure to settle his obligation which caused the suspension of his credit card and subsequent dishonor at Caf Adriatico. He can not now pass the blame to the petitioner for not notifying him of the suspension of his card. As quoted earlier, the application contained the stipulation that the petitioner could automatically suspend a card whose billing has not been paid for more than thirty days. Nowhere is it stated in the terms and conditions of the application that there is a need of notice before suspension may be effected as private respondent claims.xv[15] This notwithstanding, on November 28, 1989, the day of the suspension of private respondent's card, petitioner sent a letter by ordinary mail notifying private respondent that his card had been temporarily suspended. Under the Rules on Evidence, there is a disputable presumption that letters duly directed and mailed were received on the regular course of mail.xvi[16] Aside from the private respondent's bare denial, he failed to present evidence to rebut the presumption that he received said notice. In fact upon cross examination, private respondent admitted that he did received the letter notifying him of the cancellation: Q A Q A Q A Now you were saying that there was a first letter sent to you by the defendant? Your letter, sir. Was that the first letter that you received? Yes, sir. Is it that there was a communication first between you and the defendant? There was none, sir. I received a cancellation notice but that was after November 27.xvii[17]

As it was private respondent's own negligence which was the proximate cause of his embarrassing and humiliating experience, we find the award of damages by the respondent court clearly unjustified. We take note of the fact that private respondent has not yet paid his outstanding account with petitioner.

IN VIEW OF THE FOREGOING, the decision of the Court of Appeals ordering petitioner to pay private respondent P100,000.00 as moral damages, P50,000.00 as exemplary damages and P20,000.00 as attorney's fees, is SET ASIDE. Private respondent is DIRECTED to pay his outstanding obligation with the petitioner in the amount of P14,439.41. SO ORDERED

Caltex Philippines v. Court of Appeals Chester Cabalza recommends his visitors to please read the original & full text of the case cited. Xie xie! How Caltex 212 August Facts: 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 is tasked to deposit aggregate amounts. One time Mr. dela Cruz delivered the CTDs to Caltex Philippines in connection with his purchased of fuel products from the latter. However, Sometime in March 1982, he 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. Angel dela Cruz negotiated and obtained a loan from defendant bank and executed a notarized Deed of Assignment of Time Deposit, which stated, among others, that he surrenders to defendant bank "full control of the indicated time deposits from and after date" of the assignment and further authorizes said bank to preterminate, 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. In 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. Mr dela Cruz received a letter from the plaintiff formally informing of its possession of the CTDs in question and of its decision to pre-terminate the same. ccordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a letter dated February 7, 1983. The loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter setoff and applied the time deposits in question to the payment of the matured loan. However, the 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. On appeal, CA affirmed the lower court's dismissal of the complaint, and ruled (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 Negotiability (Philippines) SCRA 10, is vs Determined? CA 448 1992

Code Issues: a) b) c) Held:

of

Commerce

relating

to

lost

instruments

payable

to

bearer.

Whether Is Whether

certificates the

of

time also can

deposit the rightfully

(CTDs) bearer

are of

negotiable the on the

instruments? document? CTDs?

depositor petitioner

recover

The CTDs in question are not 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) (b) (c) (d) It Must Must must contain be be an in writing and or at signed order a order to fixed by pay or or the a maker sum certain or in future drawer; money; time; and

unconditional on

promise or to

payable be

demand,

determinable to

Must

payable

bearer;

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. 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. In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. 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. 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, and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. 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. BALDOMERO INCIONG, JR., petitioner, vs. COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents. ROMERO, J.:

This is a petition for review on certiorari of the decision of the Court of Appeals affirming that of the Regional Trial Court of Misamis Oriental, Branch 18,ii[1] which disposed of Civil Case No. 10507 for collection of a sum of money and damages, as follows: "WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily liable and ordered to pay to the plaintiff Philippine Bank of Communications, Cagayan de Oro City, the amount of FIFTY THOUSAND PESOS (P50,000.00),with interest thereon from May 5, 1983 at 16% per annum until fully paid; and 6% per annum on the total amount due, as liquidated damages or penalty from May 5, 1983 until fully paid; plus 10% of the total amount due for expenses of litigation and attorney's fees; and to pay the costs. The counterclaim, as well as the cross claim, are dismissed for lack of merit. SO ORDERED." Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he signed with Rene C. Naybe and Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly and severally liable to private respondent Philippine Bank of Communications, Cagayan de Oro City branch. The promissory note was due on May 5, 1983. Said due date expired without the promissors having paid their obligation. Consequently, on November 14, 1983 and on June 8, 1984, private respondent sent petitioner telegrams demanding payment thereof.ii[2] On December 11, 1984 private respondent also sent by registered mail a final letter of demand to Rene C. Naybe. Since both obligors did not respond to the demands made, private respondent filed on January 24, 1986 a complaint for collection of the sum of P50,000.00 against the three obligors. On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case. However, on January 9, 1987, the lower court reconsidered the dismissal order and required the sheriff to serve the summonses. On January 27, 1987, the lower court dismissed the case against defendant Pantanosas as prayed for by the private respondent herein. Meanwhile, only the summons addressed to petitioner was served as the sheriff learned that defendant Naybe had gone to Saudi Arabia. In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend, Rudy Campos, who told him that he was a partner of Pio Tio, the branch manager of private respondent in Cagayan de Oro City, in the falcata logs operation business. Campos also intimated to him that Rene C. Naybe was interested in the business and would contribute a chainsaw to the venture. He added that, although Naybe had no money to buy the equipment Pio Tio had assured Naybe of the approval of a loan he would make with private respondent. Campos then persuaded petitioner to act as a "co-maker" in the said loan. Petitioner allegedly acceded but with the understanding that he would only be a co-maker for the loan of P5,000.00. Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by Campos at his office. He affixed his signature thereto but in one copy, he indicated that he bound himself only for the amount of P5,000.00. Thus, it was by trickery, fraud and misrepresentation that he was made liable for the amount of P50,000.00. In the aforementioned decision of the lower court, it noted that the typewritten figure "P50,000-" clearly appears directly below the admitted signature of the petitioner in the promissory note.ii[3] Hence, the latter's uncorroborated testimony on his limited liability cannot prevail over the presumed regularity and fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower court added that it was "rather odd" for petitioner to have indicated in a copy and not in the original, of the promissory note, his supposed obligation in the amount of P5,000.00 only. Finally, the lower court held that even granting that said limited amount had actually been agreed upon, the same would have been merely collateral between him and Naybe and, therefore, not binding upon the private respondent as creditor-bank. The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor consultant who was supposed to take due care of his concerns, and that, on the witness stand, Pio Tio denied having participated in the alleged business venture although he knew for a fact that the falcata logs operation was encouraged by the bank for its export potential.

Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31, 1990, affirmed that of the lower court. His motion for reconsideration of the said decision having been denied, he filed the instant petition for review on certiorari. On February 6,1991, the Court denied the petition for failure of petitioner to comply with the Rules of Court and paragraph 2 of Circular No. 1-88, and to sufficiently show that respondent court had committed any reversible error in its questioned decision.ii[4] His motion for the reconsideration of the denial of his petition was likewise denied with finality in the Resolution of April 24, 1991.ii[5] Thereafter, petitioner filed a motion for leave to file a second motion for reconsideration which, in the Resolution of May 27, 1991, the Court denied. In the same Resolution, the Court ordered the entry of judgment in this case.ii[6] Unfazed, petitioner filed a motion for leave to file a motion for clarification. In the latter motion, he asserted that he had attached Registry Receipt No. 3268 to page 14 of the petition in compliance with Circular No. 1-88. Thus, on August 7,1991, the Court granted his prayer that his petition be given due course and reinstated the same.ii[7] Nonetheless, we find the petition unmeritorious. Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the decision of the lower court, by Gregorio Pantanosas, Jr., an MTCC judge and petitioner's co-maker in the promissory note. It supports petitioner's allegation that they were induced to sign the promissory note on the belief that it was only for P5,000.00, adding that it was Campos who caused the amount of the loan to be increased to P50,000.00. The affidavit is clearly intended to buttress petitioner's contention in the instant petition that the Court of Appeals should have declared the promissory note null and void on the following grounds: (a) the promissory note was signed in the office of Judge Pantanosas, outside the premises of the bank; (b) the loan was incurred for the purpose of buying a second-hand chainsaw which cost only P5,000.00; (c) even a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or credit committee which was the practice, at it exceeded P5,000.00; (e) the loan had no collateral; (f) petitioner and Judge Pantanosas were not present at the time the loan was released in contravention of the bank practice, and (g) notices of default are sent simultaneously and separately but no notice was validly sent to him.ii[8] Finally, petitioner contends that in signing the promissory note, his consent was vitiated by fraud as, contrary to their agreement that the loan was only for the amount of P5,000. 00, the promissory note stated the amount of P50,000.00. The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this Court is not a trier of facts. Having lost the chance to fully ventilate his factual claims below, petitioner may no longer be accorded the same opportunity in the absence of grave abuse of discretion on the part of the court below. Had he presented Judge Pantanosas' affidavit before the lower court, it would have strengthened his claim that the promissory note did not reflect the correct amount of the loan. Nor is there merit in petitioner's assertion that since the promissory note "is not a public deed with the formalities prescribed by law but x x x a mere commercial paper which does not bear the signature of x x x attesting witnesses," parol evidence may "overcome" the contents of the promissory note.ii[9] The first paragraph of the parol evidence ruleii[10] states: "When the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors-in-interest, no evidence of such terms other than the contents of the written agreement." Clearly, the rule does not specify that the written agreement be a public document. What is required is that agreement be in writing as the rule is in fact founded on "long experience that written evidence is so much more certain and accurate than that which rests in fleeting memory only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to admit weaker evidence to control and vary the stronger and to show that the parties intended a different contract from that expressed in the writing signed by them."ii[11] Thus, for the parol evidence rule to apply, a written contract need not be in any particular form, or be signed by both parties.ii[12] As a general rule, bills, notes and other instruments of a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence.ii[13]

By alleging fraud in his answer,ii[14] petitioner was actually in the right direction towards proving that he and his co-makers agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous agreement was the inducing and moving cause of the written contract, it may be shown by parol evidence.ii[15] However, fraud must be established by clear and convincing evidence, mere preponderance of evidence, not even being adequate.ii[16] Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by his own uncorroborated and, expectedly, self-serving testimony. Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and against Pantanosas, his co-maker, constituted a release of his obligation, especially because the dismissal of the case against Pantanosas was upon the motion of private respondent itself. He cites as basis for his argument, Article 2080 of the Civil Code which provides that: "The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor, they cannot be subrogated to the rights, mortgages, and preferences of the latter." It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as a guarantor. This is patent even from the first sentence of the promissory note which states as follows: "Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY (P50,000. 00) Pesos, Philippine Currency, together with interest x x x at the rate of SIXTEEN (16) per cent per annum until fully paid." A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole obligation.ii[17] On the other hand, Article 2047 of the Civil Code states: "By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed, In such a case the contract is called a suretyship." (Italics supplied.) While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from that of a solidary debtor. Thus, Tolentino explains: "A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor, and a fiador in solidum (surety). The later, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, title I, Book IV of the Civil Code."ii[18] Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations. Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate part of the debt. There is a solidarity liability only when the obligation expressly so states, when the law so provides or when the nature of the obligation so requires.ii[19] Because the promissory note involved in this case expressly states that the three signatories therein are jointly and severally liable, any one, some or all of them may be proceeded against for the entire obligation.ii[20] The choice is left to the solidary creditor to determine against whom he will enforce collection.ii[21] Consequently, the dismissal of the case against Judge Pontanosas may not be deemed as having discharged petitioner from

liability as well. As regards Naybe, suffice it to say that the court never acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as provided by law. WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned decision of the Court of Appeals is AFFIRMED. Costs against petitioner. SO ORDERED. ROMAN CATHOLIC BISHOP OF MALOLOS, INC., petitioner, vs. INTERMEDIATE APPELLATE COURT, and ROBES-FRANCISCO REALTY AND DEVELOPMENT CORPORATION, respondents. PETITION for certiorari to review the decision of the Court of Appeals. The facts are stated in the opinion of the Court. Rodrigo Law Office for petitioner. Antonio P. Barredo and Napoleon M. Malinas for private respondent. SARMIENTO, J.: This is a petition for review on certiorari which seeks the reversal and setting aside of the decision1 of the Court of Appeals,2 the dispositive portion of which reads: WHEREFORE, the decision appealed from is hereby reversed 2 AC-G.R. CV No. 69626, Robes-Francisco Realty & Development Corporation vs. Roman Catholic Bishop of Malolos, Inc. and set aside and another one entered for the plaintiff ordering the defendant-appellee Roman Catholic Bishop of Malolos, Inc. to accept the balance of P124,000.00 being paid by plaintiff-appellant and thereafter to execute in favor of Robes-Francisco Realty Corporation a registerable Deed of Absolute Sale over 20,655 square meters portion of that parcel of land situated in San Jose del Monte, Bulacan described in OCT No. 575 (now Transfer Certificates of Title Nos. T-169493, 169494, 169495 and 169496) of the Register of Deeds of Bulacan. In case of refusal of the defendant to execute the Deed of Final Sale, the clerk of court is directed to execute the said document. Without pronouncement as to damages and attorneys fees. Costs against the defendant-appellee.3 The case at bar arose from a complaint filed by the private respondent, then plaintiff, against the petitioner, then defendant, in the Court of First Instance (now Regional Trial Court) of Bulacan, at Sta. Maria, Bulacan,4 for specific performance with damages, based on a contract5 executed on July 7, 1971. The property subject matter of the contract consists of a 20,655 sq.m.-portion, out of the 30,655 sq.m. total area, of a parcel of land covered by Original Certificate of Title No. 575 of the Province of Bulacan, issued and registered in the name of the petitioner which it sold to the private respondent for and in consideration of P123,930.00. The crux of the instant controversy lies in the compliance or non-compliance by the private respondent with the provision for payment to the petitioner of the principal balance of P100,000.00 and the accrued interest of P24,000.00 within the grace period. A chronological narration of the antecedent facts is as follows: On July 7, 1971, the subject contract over the land in question was executed between the petitioner as vendor and the private respondent through its then president, Mr. Carlos F. Robes, as vendee, stipulating for a downpayment of P23,930.00 and the balance of P100,000.00 plus 12% interest per annum to be paid within four (4) years from execution of the contract, that is, on or before July 7, 1975. The contract likewise provides for cancellation, forfeiture of previous payments, and reconveyance of the land in question in case the private respondent would fail to complete payment within the said period. On March 12, 1973, the private respondent, through its new president, Atty. Adalia Francisco, addressed a letter6 to Father Vasquez, parish priest of San Jose Del Monte, Bulacan, requesting to be furnished with a copy of the subject contract and the supporting documents.

On July 17, 1975, admittedly after the expiration of the stipulated period for payment, the same Atty. Francisco wrote the petitioner a formal request7 that her company be allowed to pay the principal amount of P100,000.00 in three (3) equal installments of six (6) months each with the first installment and the accrued interest of P24,000.00 to be paid immediately upon approval of the said request. On July 29, 1975, the petitioner, through its counsel, Atty. Carmelo Fernandez, formally denied the said request of the private respondent, but granted the latter a grace period of five (5) days from the receipt of the denial8 to pay the total balance of P124,000.00, otherwise, the provisions of the contract regarding cancellation, forfeiture, and reconveyance would be implemented. On August 4, 1975, the private respondent, through its president, Atty. Francisco, wrote9 the counsel of the petitioner requesting an extension of 30 days from said date to fully settle its account. The counsel for the petitioner, Atty. Fernandez, received the said letter on the same day. Upon consultation with the petitioner in Malolos, Bulacan, Atty. Fernandez, as instructed, wrote the private respondent a letter10 dated August. Consequently, Atty. Francisco, the private respondents president, wrote a letter11 dated August 22, 1975, directly addressed to the petitioner, protesting the alleged refusal of the latter to accept tender of payment purportedly made by the former on August 5, 1975, the last day of the grace period. In the same letter of August 22, 1975, received on the following day by the petitioner, the private respondent demanded the execution of a deed of absolute sale over the land in question and after which it would pay its account in full, otherwise, judicial action would be resorted to. On August 27, 1975, the petitioners counsel, Atty. Fernandez, wrote a reply12 to the priv ate respondent stating the refusal of his client to execute the deed of absolute sale due to its (private respondents) failure to pay its full obligation. Moreover, the petitioner denied that the private respondent had made any tender of payment whatsoever within the grace period. In view of this alleged breach of contract, the petitioner cancelled the contract and considered all previous payments forfeited and the land as ipso facto reconveyed. From a perusal of the foregoing facts, we find that both the contending parties have conflicting versions on the main question of tender of payment. The trial court, in its ratiocination, preferred not to give credence to the evidence presented by the private respondent. According to the trial court: x x x What made Atty. Francisco suddenly decide to pay plaintiffs obligation on August 5, 1975, go to defendants office at Malolos, and there tender her payment, when her request of August 4, 1975 had not yet been acted upon until August 7, 1975? If Atty. Francisco had decided to pay the obligation and had available funds for the purpose on August 5, 1975, then there would have been no need for her to write defendant on August 4, 1975 to request an extension of time. Indeed, Atty. Franciscos claim that she made a te nder of payment on August 5, 1975such alleged act, considered in relation to the circumstances both antecedent and subsequent thereto, being not in accord with the normal pattern of human conductis not worthy of credence.13 The trial court likewise noted the inconsistency in the testimony of Atty. Francisco, president of the private respondent, who earlier testified that a certain Mila Policarpio accompanied her on August 5, 1975 to the office of the petitioner. Another person, however, named Aurora Oracion, was presented to testify as the secretarycompanion of Atty. Francisco on that same occasion. Furthermore, the trial court considered as fatal the failure of Atty. Francisco to present in court the certified personal check allegedly tendered as payment or, at least, its xerox copy, or even bank records thereof. Finally, the trial court found that the private respondent had insufficient funds available to fulfill the entire obligation considering that the latter, through its president, Atty. Francisco, only had a savings account deposit of

P64,840.00, and although the latter had a money-market placement of P300,000.00. the same was to mature only after the expiration of the 5-day grace period. Based on the above considerations, the trial court rendered a decision in favor of the petitioner, the dispositive portion of which reads: WHEREFORE, finding plaintiff to have failed to make out its case, the court hereby declares the subject contract cancelled and plaintiffs down payment of P23,930.00 forfeited in favor of defendant, and hereby dismisses the complaint; and on the counterclaim, the Court orders plaintiff to pay defendant. (1) Attorneys fees of P10,000.00; (2) Litigation expenses of P2,000.00; and (3) Judicial costs. SO ORDERED.14 Not satisfied with the said decision, the private respondent appealed to the respondent Intermediate Appellate Court (now Court of Appeals) assigning as reversible errors, among others, the findings of the trial court that the available funds of the private respondent were insufficient and that the latter did not effect a valid tender of payment and consignation. The respondent court, in reversing the decision of the trial court, essentially relies on the following findings: x x x We are convinced from the testimony of Atty. Adalia Francisco and her witnesses that in behalf of the plaintiff-appellant they have a total available sum of P364,840.00 at her and at the plaintiffs disposal on or before August 4, 1975 to answer for the obligation of the plaintiff-appellant. It was not correct for the trial court to conclude that the plaintiff-appellant had only about P64,840.00 in savings deposit on or before August 5, 1975, a sum not enough to pay the outstanding account of P124,000.00. The plaintiff-appellant, through Atty. Francisco proved and the trial court even acknowledged that Atty. Adalia Francisco had about P300,000.00 in money market placement. The error of the trial court lies in concluding that the money market placement of P300,000.00 was out of reach of Atty. Francisco. But as testified to by Mr. Catalino Estrella, a representative of the Insular Bank of Asia and America, Atty. Francisco could withdraw anytime her money market placement and place it at her disposal, thus proving her financial capability of meeting more than the whole of P124,000.00 then due per contract. This situation, We believe, proves the truth that Atty. Francisco apprehensive that her request for a 30-day grace period would be denied, she tendered payment on August 4, 1975 which offer defendant through its representative and counsel refused to receive. x x x15 (Italics supplied) In other words, the respondent court, finding that the private respondent had sufficient available funds, ipso facto concluded that the latter had tendered payment. Is such conclusion warranted by the facts proven? The petitioner submits that it is not. Hence, this petition.16 The petitioner presents the following issues for resolution: A. Is a finding that private respondent had sufficient available funds on or before the grace period for the payment of its obligation proof that it (private respondent) did tender of (sic) payment for its said obligation within said period? xxx xxx xxx B. Is it the legal obligation of the petitioner (as vendor) to execute a deed of absolute sale in favor of the private respondent (as vendee) before the latter has actually paid the complete consideration of the salewhere the contract between and executed by the parties stipulates That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall cause the execution of a Deed of Absolute Sale in favor of the VENDEE.

xxx

xxx

xxx

C. Is an offer of a check a valid tender of payment of an obligation under a contract which stipulates that the consideration of the sale is in Philippine Currency?17 We find the petition impressed with merit. With respect to the first issue, we agree with the petitioner that a finding that the private respondent had sufficient available funds on or before the grace period for the payment of its obligation does not constitute proof of tender of payment by the latter for its obligation within the said period. Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as payment to the obligee for the formers obligation and demanding that the latter accept the same. Thus, tender of payment cannot be presumed by a mere inference from surrounding circumstances. At most, sufficiency of available funds is only affirmative of the capacity or ability of the obligor to fulfill his part of the bargain. But whether or not the obligor avails himself of such funds to settle his outstanding account remains to be proven by independent and credible evidence. Tender of payment presupposes not only that the obligor is able, ready, and willing, but more so, in the act of performing his obligation. Ab posse ad actu non vale illatio. A proof that an act could have been done is no proof that it was actually done. The respondent court was therefore in error to have concluded from the sheer proof of sufficient available funds on the part of the private respondent to meet more than the total obligation within the grace period, the alleged truth of tender of payment. The same is a classic case of non-sequitur. On the contrary, the respondent court finds itself remiss in overlooking or taking lightly the more important findings of fact made by the trial court which we have earlier mentioned and which as a rule, are entitled to great weight on appeal and should be accorded full consideration and respect and should not be disturbed unless for strong and cogent reasons.18 While the Court is not a trier of facts, yet, when the findings of fact of the Court of Appeals are at variance with those of the trial court,19 or when the inference of the Court of Appeals from its findings of fact is manifestly mistaken,20 the Court has to review the evidence in order to arrive at the correct findings based on the record. Apropos the second issue raised, although admittedly the documents for the deed of absolute sale had not been prepared, the subject contract clearly provides that the full payment by the private respondent is an a priori condition for the execution of the said documents by the petitioner. That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall cause the execution of a Deed of Absolute Sale in favor of the VENDEE.21 The private respondent is therefore in estoppel to claim otherwise as the latter did in the testimony in crossexamination of its president, Atty. Francisco, which reads: Q Now, you mentioned, Atty. Francisco, that you wanted the defendant to execute the final deed of sale before you would given (sic) the personal certified check in payment of your balance, is that correct? A Yes, sir.22 xxx xxx xxx Art. 1159 of the Civil Code of the Philippines provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. And unless the stipulations in said contract are contrary to law, morals, good customs, public order, or public policy, the same are binding as between the parties.23 What the private respondent should have done if it was indeed desirous of complying with its obligations would have been to pay the petitioner within the grace period and obtain a receipt of such payment duly issued by the latter. Thereafter, or, allowing a reasonable time, the private respondent could have demanded from the

petitioner the execution of the necessary documents. In case the petitioner refused, the private respondent could have had always resorted to judicial action for the legitimate enforcement of its right. For the failure of the private respondent to undertake this more judicious course of action, it alone shall suffer the consequences. With regard to the third issue, granting arguendo that we would rule affirmatively on the two preceding issues, the case of the private respondent still can not succeed in view of the fact that the latter used a certified personal check which is not legal tender nor the currency stipulated, and therefore, can not constitute valid tender of payment. The first paragraph of Art. 1249 of the Civil Code provides that the payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The Court en banc in the recent case of Philippine Airlines v. Court of Appeals,24 G.R. No. L-49188, stated thus: Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (citing Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan London Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a managers check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Hence, where the tender of payment by the private respondent was not valid for failure to comply with the requisite payment in legal tender or currency stipulated within the grace period and as such, was validly refused receipt by the petitioner, the subsequent consignation did not operate to discharge the former from its obligation to the latter. In view of the foregoing, the petitioner in the legitimate exercise of its rights pursuant to the subject contract, did validly order therefore the cancellation of the said contract, the forfeiture of the previous payment, and the reconveyance ipso facto of the land in question. WHEREFORE, the petition for review on certiorari is GRANTED and the DECISION of the respondent court promulgated on April 25, 1985 is hereby SET ASIDE and ANNULLED and the DECISION of the trial court dated May 25, 1981 is hereby REINSTATED. Costs against the private respondent. SO ORDERED. G.R. No. 45125 April 22, 1991 LORETA SERRANO, vs. COURT OF APPEALS and LONG LIFE PAWNSHOP, INC., respondents. Cecilio D. Ignacio for petitioner. Hildawa & Gomez for private respondent. RESOLUTION FELICIANO, J.:p Sometime in early March 1968, petitioner Loreta Serrano bought some pieces of jewelry for P48,500.00 from Niceta Ribaya. On 21 March 1968, petitioner, then in need of money, instructed her private secretary, Josefina Rocco, to pawn the jewelry. Josefina Rocco went to private respondent Long Life Pawnshop, Inc. ("Long Life"), pledged the jewelry for P22,000.00 with its principal owner and General Manager, Yu An Kiong, and then absconded with said amount and the pawn ticket. The pawnshop ticket issued to Josefina Rocco stipulated that it was redeemable "on presentation by the bearer." Three (3) months later, Gloria Duque and Amalia Celeste informed Niceta Ribaya that a pawnshop ticket issued by private respondent was being offered for sale. They told Niceta the ticket probably covered jewelry once owned by the latter which jewelry had been pawned by one Josefina Rocco. Suspecting that it was the same

petitioner,

jewelry she had sold to petitioner, Niceta informed the latter of this offer and suggested that petitioner go to the Long Life pawnshop to check the matter out. Petitioner claims she went to private respondent pawnshop, verified that indeed her missing jewelry was pledged there and told Yu An Kiong not to permit anyone to redeem the jewelry because she was the lawful owner thereof. Petitioner claims that Yu An Kiong agreed. On 9 July 1968, petitioner went to the Manila Police Department to report the loss, and a complaint first for qualified theft and later changed to estafa was subsequently filed against Josefina Rocco. On the same date, Detective Corporal Oswaldo Mateo of the Manila Police also claims to have gone to the pawnshop, showed Yu An Kiong petitioner's report and left the latter a note asking him to hold the jewelry and notify the police in case some one should redeem the same. The next day, on 10 July 1968, Yu An Kiong permitted one Tomasa de Leon, exhibiting the appropriate pawnshop ticket, to redeem the jewelry. On 4 October 1968, petitioner filed a complaint with the then Court of First Instance of Manila for damages against private respondent Long Life for failure to hold the jewelry and for allowing its redemption without first notifying petitioner or the police. After trial, the trial judge, Hon. Luis B. Reyes, rendered a decision in favor of petitioner, awarding her P26,500.00 as actual damages, with legal interest thereon from the date of the filing of the complaint, P2,000.00 as attorney's fees, and the costs of the suit. Judge L.B. Reyes' decision was reversed on appeal and the complaint dismissed by the public respondent Court of Appeals in a Decision promulgated on 26 September 1976. The Court of Appeals gave credence to Yu An Kiong's testimony that neither petitioner nor Detective Mateo ever apprised him of the misappropriation of petitioner's loan, or obtained a commitment from him not to permit redemption of the jewelry, prior to 10 July 1968. Yu An Kiong claims to have become aware of the loan's misappropriation only on 16 August 1968 when a subpoena duces tecum was served by the Manila Fiscal's Office requiring him to bring the record of the pledge in connection with the preliminary investigation of the estafa charge against Josefina Rocco. Consequently, the appellate court ruled, there could have been no negligence, much less a grave one amounting to bad faith, imputable to Yu An Kiong as the basis for an award of damages. In this Petition for Review, petitioner seeks reversal of the Public respondent's findings relating to the credibility of witnesses and the restoration of the trial court's decision. Deliberating on the present Petition for Review, the Court considers that the public respondent Court of Appeals committed reversible error in rendering its questioned Decision. It is a settled principle of civil procedure that the conclusions of the trial court regarding the credibility of witnesses are entitled to great respect from the appellate courts because the trial court had an opportunity to observe the demeanor of witnesses while giving testimony which may indicate their candor or lack thereof. 1 While the Supreme Court ordinarily does not rule on the issue of credibility of witnesses, that being a question of fact not properly raised in a petition under Rule 45, the Court has undertaken to do so in exceptional situations where, for instance, as here, the trial court and the Court of Appeals arrived at divergent conclusions on questions of fact and the credibility of witnesses. 2 The Court of Appeals rejected what it considered to be the incredible testimony of petitioner and Detective Mateo. It faulted petitioner for failing to report to the police authorities the loss of her jewelry immediately on 21 March 1968 when Josefina Rocco failed to return to her either the loan proceeds or the jewelry. But it must be noted that Josefina Rocco simply disappeared without a trace on said date. Petitioner had no way of knowing if Josefina had misappropriated her jewelry, or had first pledged the jewelry as instructed and then misappropriated the proceeds of the loan. In the latter case, which was in fact what had occurred, petitioner could have had no idea as to the identity of the pawnbroker. Moreover, this Court has several times recognized that different people may have diverse reasons for failing to report promptly to the police their having been victimized by some criminal or fraudulent scheme and that such failure does not by itself render their subsequent testimony unworthy of credence. 3 The Court of Appeals also found it hard to believe that Detective Mateo had failed to obtain a written acknowledgment from Yu An Kiong of the receipt of the note as corroboration for his testimony. However, absent evidence that it was an established practice for police officers to obtain such acknowledgment in situations like the one here, it is difficult to see why Detective Mateo's behavior should be considered unbelievable. On the other hand, as the trial court pointed out, it would not have

been sensible for Detective Mateo to leave a note reminding Yu An Kiong to hold unto the jewelry if the latter had in fact then told the policeman that the jewelry had already been redeemed. The public respondent apparently believed petitioner had failed to establish her ownership of the jewelry pledged by Josefina Rocco, such failure purportedly engendering doubt that Tomasa de Leon may have redeemed jewelry different from that owned by petitioner. This is curious and untenable because the record on appeal indicates that Yu An Kiong had admitted in his answer and memorandum before the trial court that he received pledged jewelry from Josefina Rocco and, in his memorandum, that such jewelry had been entrusted to Josefina by petitioner as the latter's employer. It is clear from these judicial admissions that he considered petitioner to have been the true owner of the jewelry. Finally, the Court of Appeals did not believe petitioner's testimony because of a claimed material inconsistency therein. On direct examination, petitioner said she "immediately" went to the private respondent's establishment upon being informed by Niceta Ribaya of the possible whereabouts of her jewelry. On cross-examination, she said she went to the establishment "a few days later." If this is an inconsistency, it relates to an unimportant detail. What is clear is that in any event, petitioner testified that she went to the respondent's pawnshop to meet Yu An Kiong and notify him of the misappropriation before anyone had redeemed the jewelry. We must also note that the Court of Appeals apparently over-looked a fact of substance which did not escape the attention of the trial court. Petitioner's version of events was corroborated by Police Detective Mateo and by Niceta Ribaya. These were two (2) individuals who had nothing to gain from the outcome of the case. Certainly, their disinterested testimony should have been accorded more probative weight than the negative, uncorroborated and self-serving testimony of Yu An Kiong, which presented a diametrically opposed version of events calculated to show that in permitting redemption of the jewelry, he was acting in good faith. 4 The testimony of Detective Mateo was moreover supported by the presumption that he had acted in the regular performance of his official duty as a police officer, a presumption that Yu An Kiong did not try to rebut. This being a civil case, it was enough for petitioner to show, by a preponderance of evidence, that her version of events did in fact occur. We agree with the trial court that this burden of proof had been discharged by petitioner because her evidence was direct and more credible and persuasive than that propounded by Yu An Kiong, 5 and corroborated by disinterested witnesses. Turning to the substantive legal rights and duties of the parties, we believe and so hold that, having been notified by petitioner and the police that jewelry pawned to it was either stolen or involved in an embezzlement of the proceeds of the pledge, private respondent pawnbroker became duty bound to hold the things pledged and to give notice to petitioner and the police of any effort to redeem them. Such a duty was imposed by Article 21 of the Civil Code. 6 The circumstance that the pawn ticket stated that the pawn was redeemable by the bearer, did not dissolve that duty. The pawn ticket was not a negotiable instrument under the Negotiable Instruments Law nor a negotiable document of title under Articles 1507 et seq. of the Civil Code. If the third person Tomasa de Leon, who redeemed the things pledged a day after petitioner and the police had notified Long Life, claimed to be owner thereof, the prudent recourse of the pawnbroker was to file an interpleader suit, impleading both petitioner and Tomasa de Leon. The respondent pawnbroker was, of course, entitled to demand payment of the loan extended on the security of the pledge before surrendering the jewelry, upon the assumption that it had given the loan in good faith and was not a "fence" for stolen articles and had not conspired with the faithless Josefina Rocco or with Tomasa de Leon. Respondent pawnbroker acted in reckless disregard of that duty in the instant case and must bear the consequences, without prejudice to its right to recover damages from Josefina Rocco. The trial court correctly held that private respondent was liable to petitioner for actual damages which corresponded to the difference in the value of the jewelry (P48,500.00) and the amount of the loan (P22,000.00), or the sum of P26,500.00. Petitioner is entitled to collect the balance of the value of the jewelry, corresponding to the amount of the loan, in an appropriate action against Josefina Rocco. Private respondent Long Life in turn is entitled to seek reimbursement from Josefina Rocco of the amount of the damages it must pay to petitioner. ACCORDINGLY, the Petition is GRANTED. The Decision of the Court of Appeals dated 23 September 1976 is hereby REVERSED and SET ASIDE. The Decision of the Court of First Instance dated 22 May 1970 is hereby REINSTATED in toto. No pronouncement as to costs.

G.R. No. 89252 May 24, 1993 RAUL SESBREO, petitioner, vs. HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents. Salva, Villanueva & Associates for Delta Motors Corporation. Reyes, Salazar & Associates for Pilipinas Bank. FELICIANO, J.: On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following documents to petitioner: (a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum; (b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to petitioner, with the notation that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and (c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as payee, Philfinance as drawer, and Insular Bank of Asia and America as drawee, in the total amount of P304,533.33. On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However, the checks were dishonored for having been drawn against insufficient funds. On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas Bank ("Pilipinas"). It reads as follows: PILIPINAS BANK Makati Stock Exchange Bldg., Ayala Avenue, Makati, Metro Manila February 9, 1981 VALUE DATE TO Raul Sesbreo April 6, 1981 MATURITY DATE NO. 10805 DENOMINATED CUSTODIAN RECEIPT This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITES FINANCE CORPORATION, we have in our custody the following securities to you [ sic] the extent herein indicated. SERIAL MAT. FACE ISSUED REGISTERED AMOUNT NUMBER DATE VALUE BY HOLDER PAYEE 2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33 UNDERWRITERS FINANCE CORP.

We further certify that these securities may be inspected by you or your duly authorized representative at any time during regular banking hours. Upon your written instructions we shall undertake physical delivery of the above securities fully assigned to you should this Denominated Custodianship Receipt remain outstanding in your favor thirty (30) days after its maturity. PILIPINAS BANK (By Elizabeth De Villa 1 Illegible Signature) On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and handed her a demand letter informing the bank that his placement with Philfinance in the amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in effect was asking for the physical delivery of the underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as "maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of participation in respect thereof, to petitioner. Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for written instructions, as has been supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas never released DMC PN No. 2731, nor any other instrument in respect thereof, to petitioner. Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on the promissory note, and explained in turn that it had previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of Delta. In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4 As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private respondents Delta and Pilipinas. 5 The trial court, in a decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of merit and for lack of cause of action, with costs against petitioner. Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989, the Court of Appeals denied the appeal and held: 6 Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of plaintiffappellant, it is Philfinance. As correctly observed by the trial court: This act of Philfinance in accepting the investment of plaintiff and charging it against DMC PN No. 2731 when its entire face value was already obligated or earmarked for set-off or compensation is difficult to comprehend and may have been motivated with bad faith. Philfinance, therefore, is solely and legally obligated to return the investment of plaintiff, together with its earnings, and to answer all the damages plaintiff has suffered incident thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of the defendants in this case at bar; hence, this Court is without jurisdiction to pronounce judgement against it. (p. 11, Decision) WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed in toto. Cost against plaintiff-appellant. Petitioner moved for reconsideration of the above Decision, without success. Hence, this Petition for Review on Certiorari. After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due course to the petition and required the parties to file their respective memoranda. 7

Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent court of Appeals gravely erred: (i) in concluding that he cannot recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil of corporate entity between Philfinance, and private respondents Delta and Pilipinas, considering that the three (3) entities belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8 There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the relationship of petitioner and Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship, except to the extent it necessarily impinges upon or intersects the first and second relationships. I. We consider first the relationship between petitioner and Delta. The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point: Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-negotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an instrument from one person to another so as to constitute the transferee the holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his own name and cannot demand or receive payment (Section 51, id.) 9 Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly transferred, in part to him by assignment and that as a result of such transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned to him by the payee Philfinance. Delta, however, disputes petitioner's contention and argues: (1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance as manifested by the word "non-negotiable" stamp across the face of the Note 10 and because maker Delta and payee Philfinance intended that this Note would be offset against the outstanding obligation of Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee; (2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not against its instructions; and (3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner took the Note subject to the defenses available to Delta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A. 11 We consider Delta's arguments seriatim. Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from the assignment or transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A nonnegotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or transfer written in the face of the instrument: The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability, but the sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill, though not negotiable, may be transferred by assignment; the assignee taking subject to the equities between the original parties. 12 (Emphasis added)

DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note. Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full: April 10, 1980 Philippine Underwriters Finance Corp. Benavidez St., Makati, Metro Manila. Attention: Mr. Alfredo O. Banaria SVP-Treasurer GENTLEMEN: This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981. As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon co-terminal maturity. Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo. Very Truly Yours, (Sgd.) Florencio B. Biagan 13 Senior Vice President We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the Note who parted with valuable consideration in good faith and without notice of such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our conclusion on this point is reinforced by the fact that what Philfinance and Delta were doing by their exchange of their promissory notes was this: Delta invested, by making a money market placement with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes. Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that such consent was not necessary for the validity and enforceability of the assignment in favor of petitioner. 14 Delta's argument that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place is never lightly inferred, 15 must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on every point. 16 Nothing of the sort is present in the instant case. It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in money market transactions. In Perez v. Court of Appeals, 17 the Court, speaking through Mme. Justice Herrera, made the following important statement: There is another aspect to this case. What is involved here is a money market transaction. As defined by Lawrence Smith "the money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle manor a dealer in the open market." It involves "commercial papers" which are instruments "evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without recourse". The fundamental function of the money market device in its operation is to match and bring together in a most impersonal manner both the "fund users" and the "fund

suppliers." The money market is an "impersonal market", free from personal considerations. "The market mechanism is intended to provide quick mobility of money and securities." The impersonal character of the money market device overlooks the individuals or entities concerned. The issuer of a commercial paper in the money market necessarily knows in advance that it would be expenditiously transacted and transferred to any investor/lender without need of notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial paper of the sale or transfer to the investor. xxx xxx xxx There is need to individuate a money market transaction, a relatively novel institution in the Philippine commercial scene. It has been intended to facilitate the flow and acquisition of capital on an impersonal basis. And as specifically required by Presidential Decree No. 678, the investing public must be given adequate and effective protection in availing of the credit of a borrower in the commercial paper market. 18 (Citations omitted; emphasis supplied) We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken place and indeed none could have taken place. The essential requirements of compensation are listed in the Civil Code as follows: Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts are due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (Emphasis supplied) On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-A upon coterminal maturity." As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "co-terminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation had taken place between Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him. The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, 19 that is, after the maturity not only of the money market placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after compensation had taken place by operation of law because the offsetting instruments had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the assignee is merely substituted in the place of the assignor 20 and that the assignee acquires his rights subject to the equities i.e., the defenses which the debtor could have set up against the original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil Code provides that: Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (Emphasis supplied) Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico, 21 the Court explained that: [n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to give his debt or notice. 22 At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him. It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9 February 1981. He could have notified Delta as soon as his money market placement matured on 13 March 1981 without payment thereof being made by Philfinance; at that time, compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner. II. We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following words: Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above securities fully assigned to you . 23 The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of Pilipinas that: (1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face value, to mature on 6 April 1981 and payable to the order of Philfinance; (2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February 1981), holding that Note on behalf and for the benefit of petitioner, at least to the extent it had been assigned to petitioner by payee Philfinance; 24 (3) petitioner may inspect the Note either "personally or by authorized representative", at any time during regular bank hours; and (4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or a participation therein to the extent of P307,933.33) "should this Denominated Custodianship receipt remain outstanding in [petitioner's] favor thirty (30) days after its maturity." Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any other time. We note that both in his complaint and in his testimony before the trial court, petitioner referred merely to the obligation of private respondent Pilipinas to effect the physical delivery to him of DMC PN No. 2731. 25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the Note assigned to him by Philfinance, appears to be a new theory constructed only after the trial court had ruled against him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature of the obligation requires solidarity," The record here exhibits no express

assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor has petitioner argued that the very nature of the custodianship assumed by private respondent Pilipinas necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731. We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to petitioner Sesbreo. We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the obligation of the depository was owed, however, to petitioner Sesbreo as beneficiary of the custodianship or depository agreement. We do not consider that this is a simple case of a stipulation pour autri. The custodianship or depositary agreement was established as an integral part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the thing sold would be placed outside the control of the vendor. Indeed, the constituting of the depositary or custodianship agreement was equivalent to constructive delivery of the Note (to the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship agreements are designed to facilitate transactions in the money market by providing a basis for confidence on the part of the investors or placers that the instruments bought by them are effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those instruments will be there available to the placers of funds should they have need of them. The depositary in a contract of deposit is obliged to return the security or the thing deposited upon demand of the depositor (or, in the presented case, of the beneficiary) of the contract, even though a term for such return may have been established in the said contract. 26 Accordingly, any stipulation in the contract of deposit or custodianship that runs counter to the fundamental purpose of that agreement or which was not brought to the notice of and accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-placer. We believe that the position taken above is supported by considerations of public policy. If there is any party that needs the equalizing protection of the law in money market transactions, it is the members of the general public whom place their savings in such market for the purpose of generating interest revenues. 27 The custodian bank, if it is not related either in terms of equity ownership or management control to the borrower of the funds, or the commercial paper dealer, is normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The custodian bank would have every incentive to protect the interest of its client the borrower or dealer as against the placer of funds. The providers of such funds must be safeguarded from the impact of stipulations privately made between the borrowers or dealers and the custodian banks, and disclosed to fundproviders only after trouble has erupted. In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas purported to require and await the instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreo. The ostensible term written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was not a defense against petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such term was never brought to the attention of petitioner Sesbreo at the time the money market placement with Philfinance was made; secondly, such term runs counter to the very purpose of the custodianship or depositary agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981 without payment from Philfinance. We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the

thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present purposes. Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of six percent (6%) per annum containing from 14 March 1981. The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may have vis-a-vis Philfinance. III. The third principal contention of petitioner that Philfinance and private respondents Delta and Pilipinas should be treated as one corporate entity need not detain us for long. In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition before us. Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite the presence of a common Director Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly related companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were administered and managed for the benefit of one. There is simply not enough evidence of record to justify disregarding the separate corporate personalities of delta and Pilipinas and to hold them liable for any assumed or undetermined liability of Philfinance to petitioner. 28 WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs. SO ORDERED. G.R. No. L-13660 November 13, 1918 E. M. vs. VICENTE GOLINGCO, defendant-appellant. Ramon Diokno No appearance for appellee.

BACHRACH,

plaintiff-appellee,

for

appellant.

STREET, J.: This is a suit for the recovery of a sum of money claimed as a balance due to the plaintiff on a promissory note. From a judgment in favor of the plaintiff for the sum of P8461, as principal, with interest thereon at the rate of 8 per cent per annum from the 10th day of July, 1916, until paid, and for the further sum of P2,115.25, as a stipulated attorney's fee, the defendant has appealed. The note in question represents the purchase price of an automobile truck which the plaintiff sold to the defendant at the time the note was executed. As security for the payment of said indebtedness, the plaintiff took a chattel mortgage on the truck; and after the note had matured this chattel mortgage was foreclosed. At the foreclosure sale the plaintiff himself became the purchaser for the sum of P539, which amount was credited upon the indebtedness. Of the questions raised by the defense only two in our opinion require serious consideration. The first has reference to irregularities in the foreclosure of the chattel mortgage; the second to the validity of the agreement for 25 per cent as an attorney's fee for collection.

We find that the requirements of section 14 of Act No. 1508 (the Chattel Mortgage of Law) were not observed in the sale of the truck. The irregularity consists in the fact the truck was brought by Bachrach from Albay (which was the place of residence of the mortgagor) to the city of Manila and here sold by the sheriff of the city at the instance of the plaintiff. There is no evidence that the mortgagor consented to the removal of the truck to Manila or to the sale that was effected in the city; and it must therefore be held that the sale was improperly accomplished. The statute requires that the mortgage chattel shall be sold in the municipality where the mortgagor resides, or where the property is situated; and the latter expression has reference to the place where the thing is being kept for use by the mortgagor, not any place where the mortgagee may choose to carry it when he takes it out of the custody of the mortgagor. It is admitted that notice of the same was not posted anywhere in the municipality of Albay, as required in the section cited; and of course publication there would have of little or no value when the sale was to be made in Manila. The effect of this irregularity was, in our opinion, to make the plaintiff liable to the defendant for the full value of the truck at the time the plaintiff thus carried it off to be sold; and of course the burden is on the defendant to prove the amount of the damage to which he was thus subjected. With reference to the condition of the truck when it was sold, we find the following statement in the testimony of Bachrach: Q. What was the condition of the truck at the time it was sold? At the time of the sale, everything that wasn't actually built on the truck was removed; tires removed, generator, lamps, dynamo, everything that could be taken off with a monkeywrench was removed. It was in a criminal condition. Q. Was the body of the truck, or the chassis, and the motor on at the time you purchased it at the sheriff's sale? A. No.lawphil.net Q. Had it been removed? A. Yes. We had a telegram from the sheriff of Tabaco, saying that the day he was to load the truck for Manila, he had a protest from Golingco demanding the body, and I telegraphed the sheriff to deliver the body to Golingco, and send the truck. There is no evidence to contradict Bachrach's testimony on this point; and we are bound to credit him when he states his conclusion that the value of the truck at the time it was sold was the amount he paid for it. In the absence of proof to the contrary this must also be taken to be its value at the time it was brought away from Albay. It results that the defendant has failed to prove that he suffered any damage whatever by the irregular manner in which the sale was conducted. This brings us to the question of the amount of the attorney's fee allowed by the trial court. It is provided in the note given by the defendant for the purchase price of the truck that, in the event it becoming necessary to employ counsel to enforce its collection, the maker is to pay an additional twenty-five per cent "as fees for the attorney collecting the same." The trial court gave judgment for the full amount due on the note and for an additional sum of P2,115.25, for attorney's fees. The appellant assigns this as error and argues that the agreement to pay an attorney's fee, in addition to the principal and stipulated interest, is void as usurious and as being grossly excessive. We are of the opinion that it may lawfully be stipulated in favor of the creditor, whether the obligation be evidenced by promissory note or otherwise, that in the event that it becomes necessary, by reason of the delinquency of the debtor, to employ counsel to enforce payment of the obligation, a reasonable attorney's fee shall be paid by the debtor, in addition to the amount due for principal and interest. The legality of such a stipulation, when annexed to a negotiate instrument is expressly recognized by the Negotiable Instruments Law ((Act No. 2031, sec. 2, par. E). Inasmuch as the statutory allowance for attorney's fees, as costs, is notoriously less than the amount which attorneys are entitled to receive from their clients, unless such a stipulation is made and enforced, it follows that a creditor may be compelled to pay, out of the money due him, a considerable sum as the necessary cost of enforcing payment by the delinquent debtor. Such a stipulation is not void as usurious, even when added to a contract for the payment of the highest rate of interest permissible. The purpose of such a stipulation is not to increase in any respect the benefits ultimately to accrue to the creditor. It is true that such a stipulation may be made for the purpose of concealing usury; but that is a matter of proof to be determined in each case upon the evidence. We cite, with approval, the ruling of the supreme court of Georgia upon this question, as follows:

A contract to pay attorney's fees for collecting, in addition to principal and interest, is not, on its face, usurious; nor does it become usurious by reducing the debt to judgment, and including in the judgment ten per cent for attorney's fees. The law . . . recognizes the validity of such a stipulation, and it meets the justice of the case very frequently for the debtor to pay for the collection rather than the creditor, . . . We do not mean to intimate that usury might not be covered up by such a stipulation, that it might not be a disguise, or contrivance for the concealment of usury; but there is no such indication in this case. There is no evidence that it was not a bona fide stipulation to cover the contingency of having to incur expense in collecting this debt. (National bank of Athens vs. Danforth, 80 Ga., 55.) But the principle that it may be lawfully stipulated that the legal expense involved in the collection of a debt shall be defrayed by the debtor does not imply that such stipulations must be enforced in accordance with their terms, no matter how injurious or oppressive they may be. The lawful purpose to be accomplished by such a stipulation is to permit the creditor to receive the whole amount due him under his contract without the deduction of the expenses caused by the delinquency of the debtor. It should not be permitted for him to convert such a stipulation into a source of speculative profit at the expense of the debtor. Contracts for attorney's services in this jurisdiction stand upon an entirely different footing from contracts for the payment of compensation for any other services. By the express provision of section 29 of the Code of Civil Procedure, an attorney is not entitled in the absence of express contract to recover more than a reasonable compensation for his services; and even where an express contract is made the court can ignore it and limit the recovery to reasonable compensation if the amount of the stipulated fee is found by the court to be unreasonable. This is a very different rule from that announced in section 1091 of the Civil Code with reference to the obligation of contract in general, where it is said that such obligation has the force of law between the contracting parties. Had the plaintiff herein made an express contract to pay his attorney an uncontingent fee of P2,115.25, for the services to be rendered in reducing the note here in suit to judgment, it would not have been enforceable against him had he seen fit to oppose it, as such a fee is obviously far greater than is necessary to remunerate the attorney for the work involved and is therefore unreasonable. In order to enable the court to ignore an express contract for an attorney's fees, it is not necessary to show, as in other contracts, that it is contrary to morality or public policy (art. 1255, Civil Code). It is enough that it is unreasonable or unconscionable. We are not unmindful of the fact that the question as to the propriety of the stipulation for attorney's fee does not here arise directly between the creditor in this note and the attorney into whose hands he might place the note for collection. The stipulation is contained in the contract between the creditor and his debtor; and the attorney could not be held bound thereby. Nevertheless we think the same rule applies as if the question had arisen directly between attorney and client. As the court has power to fix the fee as between the attorney and the client, it must necessarily have the right to say whether a stipulation, like this, inserted in a promissory note is valid. A different ruling, as may be readily seen, would make it exceedingly easy to evade the usury laws. As stated at the beginning of this discussion, the lawful purpose to be accomplished by such stipulation is to permit the creditor to receive the amount due without the deduction of the expenses caused by the delinquency of the debtor. It must not be used as a cloak for an exorbitant exaction. We are therefore of the opinion that we are authorized to reduce the amount in question to a sum which will enable the plaintiff to pay a reasonable compensation to his attorney; and we think that P800 is sufficient for this purpose. It is possible that, as a matter of fact, the plaintiff may have contracted with his attorney for the performances of the services to be rendered him in this matter for a sum less than P800, and had it been so made to appear, we would have reduced the amount recoverable, under this particular clause of the note, to the corresponding sum. No evidence having been adduced upon this point, however, we are compelled to exercise our discretion and make use of our professional knowledge as to the reasonable compensation to which an attorney would be entitled for the performance of such services as those which the plaintiff in this case has had occasion to require from his counsel. Wherefore it is ordered that the plaintiff have and recover of the defendant the sum of P8,461, with interest thereon at the rate of 8 per centum per annum, from the tenth day of July, 1916, until paid, and for the

further sum of P800 as attorney's fees, and for the statutory costs of both instances, exclusive of the statutory allowance for attorney's fees. So ordered. G.R. No. L-1405 July 31, 1948 BENJAMIN ABUBAKAR, petitioner, vs. THE AUDITOR GENERAL, respondent. Viray and Viola Viray for petitioner. First Assistant Solicitor General Roberto A. Gianzon and Solicitor Manuel Tomacruz for respondent. BENGZON, J.: We are asked to overrule the decision of the Auditor General refusing to authorize the payment of Treasury warrant No. A-2867376 for P1,000 which was issued in favor of Placido S. Urbanes on December 10, 1941, but is now in the hands of herein petitioner Benjamin Abubakar. For his refusal the respondent gave two reasons: first, because the money available for the redemption of treasury warrants issued before January 2, 1942, is appropriated by Republic Act No. 80 (Item F-IV-8) and this warrant does not come within the purview of said appropriation; and second, because on of the requirements of his office had not been complied with, namely, that it must be shown that the holders of warrants covering payment or replenishment of cash advances for official expenditures (as this warrant is) received them in payment of definite government obligations. Finding the first reason to be sufficiently valid we shall not discuss, nor pass upon the second. There is no doubt as to the authenticity and date of the treasury warrant. There is no question that it was regularly indorsed by the payee and is now in the custody of the herein petitioner who is a private individual. On the other hand, it is admitted that the warrant was originally made payable to Placido S. Urbanes in his capacity as disbursing officer of the Food Administration for "additional cash advance for Food Production Campaign in La Union" (Annex A). It is thus apparent that this is a treasury warrant issued in favor of a public officer or employee and held in possession by a private individual. Such being the case, the Auditor General can hardly be blamed for not authorizing its redemption out of an appropriation specifically for "treasury warrants issued ... in favor of and held in possession by private individuals." (Republic Act No. 80, Item F-IV-8.) This warrant was not issued in favor of a private individual. It was issued in favor of a government employee. The distinction is not without a difference. Outstanding treasury warrants issued prior to January 2, 1942, amount to more than four million pesos. The appropriation herein mentioned is only for P1,750,000. Obviously Congress wished to provide for redemption of one class of warrants those issued to private individuals as distinguished from those issued in favor of government officials. Basis for the discrimination is not lacking. Probably the Government is not so sure that those warrants to officials have all been properly used by the latter during the Japanese occupation or maybe it wants to conduct further inquiries as to the equities of the present holders thereof. The petitioner argues that he is a holder in good faith and for value of a negotiable instrument an dis 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 instruments 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. (Section 3 last sentenced and section 1[b] of the Negotiable Instruments Law.) In the United States, government warrants for the payment of money are not negotiable instruments nor commercial proper1 Anyway the question here is not whether the Government should eventually pay this warrant, or is ultimately responsible for it, but whether the Auditor General erred in refusing to permit payment out of the particular appropriation in Item F-IV-8 of Republic Act No. 80. We think that he did not. Petition dismissed, with costs. 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.:p This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all nonessentials, 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 3 warrants. The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The total withdrawal was P968.000.00. 4 In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently cleared warrants. The last withdrawal was made on July 16, 1979. On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount it had previously withdrawn, to make up the deficit in its account. The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of Mindoro. 5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed a motion for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986, the lower court modified its decision thus: ACCORDINGLY, judgment is hereby rendered: 1. Dismissing the complaint with costs against the plaintiff; 2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo; 3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of P1,754,089.00 and to reinstate and credit to such account such amount existing before the debit was made including the amount of P812,033.37 in favor of defendant Golden Savings and Loan Association, Inc. and thereafter, to allow defendant Golden Savings and Loan Association, Inc. to withdraw the amount outstanding thereon before the debit; 4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney's fees and expenses of litigation in the amount of P200,000.00. 5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney's fees and expenses of litigation in the amount of P100,000.00. SO ORDERED. On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file this petition for review on the following grounds:

1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual terms and conditions on the deposit slips allowing Metrobank to charge back any amount erroneously credited. (a) Metrobank's right to charge back is not limited to instances where the checks or treasury warrants are forged or unauthorized. (b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent which cannot be held liable for its failure to collect on the warrants. 2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made to pay for warrants already dishonored, thereby perpetuating the fraud committed by Eduardo Gomez. 3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden Savings, the latter should bear the loss. 4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case are not negotiable instruments. The petition has no merit. From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in giving Golden Savings the impression that the treasury warrants had been cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it. Without such assurance, Golden Savings would not have allowed the withdrawals; with such assurance, there was no reason not to allow the withdrawal. Indeed, Golden Savings might even have incurred liability for its refusal to return the money that to all appearances belonged to the depositor, who could therefore withdraw it any time and for any reason he saw fit. It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to determine the validity of the warrants through its own services. The proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw them from its own deposit. 7 It was only when Metrobank gave the go-signal that Gomez was finally allowed by Golden Savings to withdraw them from his own account. The argument of Metrobank that Golden Savings should have exercised more care in checking the personal circumstances of Gomez before accepting his deposit does not hold water. It was Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan; and moreover, the treasury warrants were subject to clearing, pending which the depositor could not withdraw its proceeds. There was no question of Gomez's identity or of the genuineness of his signature as checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden Savings acted with due care and diligence and cannot be faulted for the withdrawals it allowed Gomez to make. By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling more than one and a half million pesos (and this was 1979). There was no reason why it should not have waited until the treasury warrants had been cleared; it would not have lost a single centavo by waiting. Yet, despite the lack of such clearance and notwithstanding that it had not received a single centavo from the proceeds of the treasury warrants, as it now repeatedly stresses it allowed Golden Savings to withdraw not once, not twice, but thrice from the uncleared treasury warrants in the total amount of P968,000.00 Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it also wanted to "accommodate" a valued client. It "presumed" that the warrants had been cleared simply because of "the lapse of one week." 8 For a bank with its long experience, this explanation is unbelievably naive. And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side of the deposit slips through which the treasury warrants were deposited by Golden Savings with its Calapan branch. The conditions read as follows: Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting agent, assuming no responsibility beyond care in selecting correspondents, and until such time as actual payment shall have come into possession of this bank, the right is reserved to charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks drawn on local

banks and bankers and their branches as well as on this bank, which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft or any other reason. (Emphasis supplied.) According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for Golden Savings and give it the right to "charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks ". . . which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is claimed that the said conditions are in the nature of contractual stipulations and became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips. Doubt may be expressed about the binding force of the conditions, considering that they have apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could be argued that the depositor, in signing the deposit slip, does so only to identify himself and not to agree to the conditions set forth in the given permit at the back of the deposit slip. We do not have to rule on this matter at this time. At any rate, the Court feels that even if the deposit slip were considered a contract, the petitioner could still not validly disclaim responsibility thereunder in the light of the circumstances of this case. In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the contrary, Article 1909 of the Civil Code clearly provides that Art. 1909. The agent is responsible not only for fraud, but also for negligence, which shall be judged 'with more or less rigor by the courts, according to whether the agency was or was not for a compensation. The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the clearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw the proceeds of the treasury warrants he had deposited Metrobank misled Golden Savings. There may have been no express clearance, as Metrobank insists (although this is refuted by Golden Savings) but in any case that clearance could be implied from its allowing Golden Savings to withdraw from its account not only once or even twice but three times. The total withdrawal was in excess of its original balance before the treasury warrants were deposited, which only added to its belief that the treasury warrants had indeed been cleared. Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would have been no need at all for Golden Savings to deposit the treasury warrants with it for clearance. There would have been no need for it to wait until the warrants had been cleared before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes more so in the case at bar when it is considered that the supposed dishonor of the warrants was not communicated to Golden Savings before it made its own payment to Gomez. The belated notification aggravated the petitioner's earlier negligence in giving express or at least implied clearance to the treasury warrants and allowing payments therefrom to Golden Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the signatures of the general manager and the auditor of the drawer corporation, has not been established. 9 This was the finding of the lower courts which we see no reason to disturb. And as we said in MWSS v. Court of Appeals: 10 Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear, positive and convincing evidence. This was not done in the present case. A no less important consideration is the circumstance that the treasury warrants in question are not negotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and this is of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund 501. The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent: Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. xxx xxx xxx Sec. 3. When promise is unconditional. An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument judgment. But an order or promise to pay out of a particular fund is not unconditional. The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise to pay "not unconditional" and the warrants themselves non-negotiable. There should be no question that the exception on Section 3 of the Negotiable Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs. Auditor General 11 where the Court held: The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is entitled to the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within the scope of the negotiable instrument law. For one thing, the document bearing on its face the words "payable from the appropriation for food administration, is actually an Order for payment out of "a particular fund," and is not unconditional and does not fulfill one of the essential requirements of a negotiable instrument (Sec. 3 last sentence and section [1(b)] of the Negotiable Instruments Law). Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were "genuine and in all respects what they purport to be," in accordance with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped on the back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch." The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we feel this case is inapplicable to the present controversy. That case involved checks whereas this case involves treasury warrants. Golden Savings never represented that the warrants were negotiable but signed them only for the purpose of depositing them for clearance. Also, the fact of forgery was proved in that case but not in the case before us. Finally, the Court found the Jai Alai Corporation negligent in accepting the checks without question from one Antonio Ramirez notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it. No similar negligence can be imputed to Golden Savings. We find the challenged decision to be basically correct. However, we will have to amend it insofar as it directs the petitioner to credit Golden Savings with the full amount of the treasury checks deposited to its account. The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The amount he has withdrawn must be charged not to Golden Savings but to Metrobank, which must bear the consequences of its own negligence. But the balance of P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be permitted to withdraw this amount from his deposit because of the dishonor of the warrants. Gomez has in fact disappeared. To also credit the balance to Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact that it has already been informed of the dishonor of the treasury warrants. WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the dispositive portion of the judgment of the lower court shall be reworded as follows: 3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing defendant Golden Savings & Loan Association, Inc. to withdraw the amount outstanding thereon, if any, after the debit. SO ORDERED. G.R. No. L-18103 June 8, 1922 PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. MANILA OIL REFINING & BY-PRODUCTS COMPANY, INC., defendant-appellant.

Antonio Gonzalez for appellant. Roman J. Lacson for appellee. Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs, Mc Donough and Johnson; Julian Wolfson; Ross and Lawrence; Francis B. Mahoney, and Jose A. Espiritu, amici curiae. MALCOLM, J.: The question of first impression raised in this case concerns the validity in this jurisdiction of a provision in a promissory note whereby in case the same is not paid at maturity, the maker authorizes any attorney to appear and confess judgment thereon for the principal amount, with interest, costs, and attorney's fees, and waives all errors, rights to inquisition, and appeal, and all property exceptions. On May 8, 1920, the manager and the treasurer of the Manila Oil Refining & By-Products Company, Inc., executed and delivered to the Philippine National Bank, a written instrument reading as follows: RENEWAL. P61,000.00 MANILA, P.I., May 8, 1920. On demand after date we promise to pay to the order of the Philippine National Bank sixty-one thousand only pesos at Philippine National Bank, Manila, P.I. Without defalcation, value received; and to hereby authorize any attorney in the Philippine Islands, in case this note be not paid at maturity, to appear in my name and confess judgment for the above sum with interest, cost of suit and attorney's fees of ten (10) per cent for collection, a release of all errors and waiver of all rights to inquisition and appeal, and to the benefit of all laws exempting property, real or personal, from levy or sale. Value received. No. ____ Due ____ MANILA OIL REFINING & BY-PRODUCTS CO., INC., (Sgd.) VICENTE SOTELO, Manager. MANILA OIL REFINING & BY-PRODUCTS CO., INC., (Sgd.) RAFAEL LOPEZ, Treasurer The Manila Oil Refining and By-Products Company, Inc. failed to pay the promissory note on demand. The Philippine National Bank brought action in the Court of First Instance of Manila, to recover P61,000, the amount of the note, together with interest and costs. Mr. Elias N. Rector, an attorney associated with the Philippine National Bank, entered his appearance in representation of the defendant, and filed a motion confessing judgment. The defendant, however, in a sworn declaration, objected strongly to the unsolicited representation of attorney Recto. Later, attorney Antonio Gonzalez appeared for the defendant and filed a demurrer, and when this was overruled, presented an answer. The trial judge rendered judgment on the motion of attorney Recto in the terms of the complaint. The foregoing facts, and appellant's three assignments of error, raise squarely the question which was suggested in the beginning of this opinion. In view of the importance of the subject to the business community, the advice of prominent attorneys-at-law with banking connections, was solicited. These members of the bar responded promptly to the request of the court, and their memoranda have proved highly useful in the solution of the question. It is to the credit of the bar that although the sanction of judgement notes in the Philippines might prove of immediate value to clients, every one of the attorneys has looked upon the matter in a big way, with the result that out of their independent investigations has come a practically unanimous protest against the recognition in this jurisdiction of judgment notes.1 Neither the Code of Civil Procedure nor any other remedial statute expressly or tacitly recognizes a confession of judgment commonly called a judgment note. On the contrary, the provisions of the Code of Civil Procedure, in relation to constitutional safeguards relating to the right to take a man's property only after a day in court and after due process of law, contemplate that all defendants shall have an opportunity to be heard. Further, the provisions of the Code of Civil Procedure pertaining to counter claims argue against judgment notes, especially as the Code provides that in case the defendant or his assignee omits to set up a counterclaim, he cannot afterwards maintain an action against the plaintiff therefor. (Secs. 95, 96, 97.) At least one provision of the

substantive law, namely, that the validity and fulfillment of contracts cannot be left to the will of one of the contracting parties (Civil Code, art. 1356), constitutes another indication of fundamental legal purposes. The attorney for the appellee contends that the Negotiable Instruments Law (Act No. 2031) expressly recognizes judgment notes, and that they are enforcible under the regular procedure. The Negotiable Instruments Law, in section 5, provides that "The negotiable character of an instrument otherwise negotiable is not affected by a provision which ". . . (b) Authorizes a confession of judgment if the instrument be not paid at maturity." We do not believe, however, that this provision of law can be taken to sanction judgments by confession, because it is a portion of a uniform law which merely provides that, in jurisdiction where judgment notes are recognized, such clauses shall not affect the negotiable character of the instrument. Moreover, the same section of the Negotiable Instruments. Law concludes with these words: "But nothing in this section shall validate any provision or stipulation otherwise illegal." The court is thus put in the position of having to determine the validity in the absence of statute of a provision in a note authorizing an attorney to appear and confess judgment against the maker. This situation, in reality, has its advantages for it permits us to reach that solution which is best grounded in the solid principles of the law, and which will best advance the public interest. The practice of entering judgments in debt on warrants of attorney is of ancient origin. In the course of time a warrant of attorney to confess judgement became a familiar common law security. At common law, there were two kinds of judgments by confession; the one a judgment by cognovit actionem, and the other by confession relicta verificatione. A number of jurisdictions in the United States have accepted the common law view of judgments by confession, while still other jurisdictions have refused to sanction them. In some States, statutes have been passed which have either expressly authorized confession of judgment on warrant of attorney, without antecedent process, or have forbidden judgments of this character. In the absence of statute, there is a conflict of authority as to the validity of a warrant of attorney for the confession of judgement. The weight of opinion is that, unless authorized by statute, warrants of attorney to confess judgment are void, as against public policy. Possibly the leading case on the subject is First National Bank of Kansas City vs. White ([1909], 220 Mo., 717; 16 Ann. Cas., 889; 120 S. W., 36; 132 Am. St. Rep., 612). The record in this case discloses that on October 4, 1990, the defendant executed and delivered to the plaintiff an obligation in which the defendant authorized any attorney-at-law to appear for him in an action on the note at any time after the note became due in any court of record in the State of Missouri, or elsewhere, to waive the issuing and service of process, and to confess judgement in favor of the First National Bank of Kansas City for the amount that might then be due thereon, with interest at the rate therein mentioned and the costs of suit, together with an attorney's fee of 10 per cent and also to waive and release all errors in said proceedings and judgment, and all proceedings, appeals, or writs of error thereon. Plaintiff filed a petition in the Circuit Court to which was attached the above-mentioned instrument. An attorney named Denham appeared pursuant to the authority given by the note sued on, entered the appearance of the defendant, and consented that judgement be rendered in favor of the plaintiff as prayed in the petition. After the Circuit Court had entered a judgement, the defendants, through counsel, appeared specially and filed a motion to set it aside. The Supreme Court of Missouri, speaking through Mr. Justice Graves, in part said: But going beyond the mere technical question in our preceding paragraph discussed, we come to a question urged which goes to the very root of this case, and whilst new and novel in this state, we do not feel that the case should be disposed of without discussing and passing upon that question. xxx xxx xxx And if this instrument be considered as security for a debt, as it was by the common law, it has never so found recognition in this state. The policy of our law has been against such hidden securities for debt. Our Recorder's Act is such that instruments intended as security for debt should find a place in the public records, and if not, they have often been viewed with suspicion, and their bona fides often questioned. Nor do we thing that the policy of our law is such as to thus place a debtor in the absolute power of his creditor. The field for fraud is too far enlarged by such an instrument. Oppression and tyranny would follow the footsteps of such a diversion in the way of security for debt. Such instruments procured by duress could shortly be placed in judgment in a foreign court and much distress result therefrom.

Again, under the law the right to appeal to this court or some other appellate court is granted to all persons against whom an adverse judgment is rendered, and this statutory right is by the instrument stricken down. True it is that such right is not claimed in this case, but it is a part of the bond and we hardly know why this pound of flesh has not been demanded. Courts guard with jealous eye any contract innovations upon their jurisdiction. The instrument before us, considered in the light of a contract, actually reduces the courts to mere clerks to enter and record the judgment called for therein. By our statute (Rev. St. 1899, sec. 645) a party to a written instrument of this character has the right to show a failure of consideration, but this right is brushed to the wind by this instrument and the jurisdiction of the court to hear that controversy is by the whose object is to oust the jurisdiction of the courts are contrary to public policy and will not be enforced. Thus it is held that any stipulation between parties to a contract distinguishing between the different courts of the country is contrary to public policy. The principle has also been applied to a stipulation in a contract that a party who breaks it may not be sued, to an agreement designating a person to be sued for its breach who is nowise liable and prohibiting action against any but him, to a provision in a lease that the landlord shall have the right to take immediate judgment against the tenant in case of a default on his part, without giving the notice and demand for possession and filing the complaint required by statute, to a by-law of a benefit association that the decisions of its officers on claim shall be final and conclusive, and to many other agreements of a similar tendency. In some courts, any agreement as to the time for suing different from time allowed by the statute of limitations within which suit shall be brought or the right to sue be barred is held void. xxx xxx xxx We shall not pursue this question further. This contract, in so far as it goes beyond the usual provisions of a note, is void as against the public policy of the state, as such public policy is found expressed in our laws and decisions. Such agreements are iniquitous to the uttermost and should be promptly condemned by the courts, until such time as they may receive express statutory recognition, as they have in some states. xxx xxx xxx From what has been said, it follows that the Circuit Court never had jurisdiction of the defendant, and the judgement is reversed. The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A. [N. S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another well-considered authority. The notes referred to in the record contained waiver of presentment and protest, homestead and exemption rights real and personal, and other rights, and also the following material provision: "And we do hereby empower and authorize the said A. B. Farquhar Co. Limited, or agent, or any prothonotary or attorney of any Court of Record to appear for us and in our name to confess judgement against us and in favor of said A. B. Farquhar Co., Limited, for the above named sum with costs of suit and release of all errors and without stay of execution after the maturity of this note." The Supreme Court of West Virginia, on consideration of the validity of the judgment note above described, speaking through Mr. Justice Miller, in part said: As both sides agree the question presented is one of first impression in this State. We have no statutes, as has Pennsylvania and many other states, regulating the subject. In the decision we are called upon to render, we must have recourse to the rules and principles of the common law, in force here, and to our statute law, applicable, and to such judicial decisions and practices in Virginia, in force at the time of the separation, as are properly binding on us. It is pertinent to remark in this connection, that after nearly fifty years of judicial history this question, strong evidence, we think, that such notes, if at all, have never been in very general use in this commonwealth. And in most states where they are current the use of them has grown up under statutes authorizing them, and regulating the practice of employing them in commercial transactions. xxx xxx xxx It is contended, however, that the old legal maxim, qui facit per alium, facit per se, is as applicable here as in other cases. We do not think so. Strong reasons exist, as we have shown, for denying its application, when holders of contracts of this character seek the aid of the courts and of their execution process to enforce them, defendant having had no day in court or opportunity to be heard. We need not say in this case that a debtor may not, by proper power of attorney duly executed, authorize another to appear in court, and by proper endorsement upon the writ waive service of process, and confess judgement. But we do not wish to be understood as approving or intending to countenance the practice employing in this state commercial paper of the character

here involved. Such paper has heretofore had little if any currency here. If the practice is adopted into this state it ought to be, we think, by act of the Legislature, with all proper safeguards thrown around it, to prevent fraud and imposition. The policy of our law is, that no man shall suffer judgment at the hands of our courts without proper process and a day to be heard. To give currency to such paper by judicial pronouncement would be to open the door to fraud and imposition, and to subject the people to wrongs and injuries not heretofore contemplated. This we are unwilling to do. A case typical of those authorities which lend support to judgment notes is First National Bank of Las Cruces vs. Baker ([1919], 180 Pac., 291). The Supreme Court of New Mexico, in a per curiam decision, in part, said: In some of the states the judgments upon warrants of attorney are condemned as being against public policy. (Farquhar and Co. vs. Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas. [1914 A]. 640, and First National Bank of Kansas City vs. White, 220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep., 612; 16 Ann. Cas., 889, are examples of such holding.) By just what course of reasoning it can be said by the courts that such judgments are against public policy we are unable to understand. It was a practice from time immemorial at common law, and the common law comes down to us sanctioned as justified by the reason and experience of English-speaking peoples. If conditions have arisen in this country which make the application of the common law undesirable, it is for the Legislature to so announce, and to prohibit the taking of judgments can be declared as against the public policy of the state. We are aware that the argument against them is that they enable the unconscionable creditor to take advantage of the necessities of the poor debtor and cut him off from his ordinary day in court. On the other hand, it may be said in their favor that it frequently enables a debtor to obtain money which he could by no possibility otherwise obtain. It strengthens his credit, and may be most highly beneficial to him at times. In some of the states there judgments have been condemned by statute and of course in that case are not allowed. Our conclusion in this case is that a warrant of attorney given as security to a creditor accompanying a promissory note confers a valid power, and authorizes a confession of judgment in any court of competent jurisdiction in an action to be brought upon said note; that our cognovit statute does not cover the same field as that occupied by the common-law practice of taking judgments upon warrant of attorney, and does not impliedly or otherwise abrogate such practice; and that the practice of taking judgments upon warrants of attorney as it was pursued in this case is not against any public policy of the state, as declared by its laws. With reference to the conclusiveness of the decisions here mentioned, it may be said that they are based on the practice of the English-American common law, and that the doctrines of the common law are binding upon Philippine courts only in so far as they are founded on sound principles applicable to local conditions. Judgments by confession as appeared at common law were considered an amicable, easy, and cheap way to settle and secure debts. They are a quick remedy and serve to save the court's time. They also save the time and money of the litigants and the government the expenses that a long litigation entails. In one sense, instruments of this character may be considered as special agreements, with power to enter up judgments on them, binding the parties to the result as they themselves viewed it. On the other hand, are disadvantages to the commercial world which outweigh the considerations just mentioned. Such warrants of attorney are void as against public policy, because they enlarge the field for fraud, because under these instruments the promissor bargains away his right to a day in court, and because the effect of the instrument is to strike down the right of appeal accorded by statute. The recognition of such a form of obligation would bring about a complete reorganization of commercial customs and practices, with reference to short-term obligations. It can readily be seen that judgement notes, instead of resulting to the advantage of commercial life in the Philippines might be the source of abuse and oppression, and make the courts involuntary parties thereto. If the bank has a meritorious case, the judgement is ultimately certain in the courts. We are of the opinion that warrants of attorney to confess judgment are not authorized nor contemplated by our law. We are further of the opinion that provisions in notes authorizing attorneys to appear and confess judgments against makers should not be recognized in this jurisdiction by implication and should only be considered as valid when given express legislative sanction. The judgment appealed from is set aside, and the case is remanded to the lower court for further proceedings in accordance with this decision. Without special finding as to costs in this instance, it is so ordered. SECOND DIVISION

G.R. No. 72593 April 30, 1987 CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T. VERGARA, petitioners, vs. IFC LEASING AND ACCEPTANCE CORPORATION, respondent. Carpio, Villaraza & Cruz Law Offices for petitioners. Europa, Dacanay & Tolentino for respondent. GUTIERREZ, JR., J.: This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions of law a decision of the Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution dated October 17, 1985, denying the motion for reconsideration. The antecedent facts culled from the petition are as follows: The petitioner is a corporation engaged in the logging business. It had for its program of logging activities for the year 1978 the opening of additional roads, and simultaneous logging operations along the route of said roads, in its logging concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it needed two (2) additional units of tractors. Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm, Industrial Products Marketing (the "seller-assignor"), a corporation dealing in tractors and other heavy equipment business, offered to sell to petitioner-corporation two (2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B. In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability of the "Used" tractors being offered, petitioner-corporation requested the sellerassignor to inspect the job site. After conducting said inspection, the seller-assignor assured petitionercorporation that the "Used" Allis Crawler Tractors which were being offered were fit for the job, and gave the corresponding warranty of ninety (90) days performance of the machines and availability of parts. (t.s.n., May 28, 1980, pp. 59-66). With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner-corporation through petitioners Wee and Vergara, president and vice- president, respectively, agreed to purchase on installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten Thousand Pesos (P210,000.00). On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors (Exh. "3-A"). At the same time, the deed of sale with chattel mortgage with promissory note was executed (Exh. "2"). Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the sellerassignor, by means of a deed of assignment (E exh. " 1 "), assigned its rights and interest in the chattel mortgage in favor of the respondent. Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the petitionercorporation's job site and as agreed, the seller-assignor stationed its own mechanics to supervise the operations of the machines. Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after another nine (9) days, the other tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69). On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the fact that the tractors broke down and requested for the seller-assignor's usual prompt attention under the warranty (E exh. " 5 "). In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor sent to the job site its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6E"), but the tractors did not come out to be what they should be after the repairs were undertaken because the units were no longer serviceable (t. s. n., May 28, 1980, p. 78). Because of the breaking down of the tractors, the road building and simultaneous logging operations of petitioner-corporation were delayed and petitioner Vergara advised the seller-assignor that the payments of the

installments as listed in the promissory note would likewise be delayed until the seller-assignor completely fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79). Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor to pull out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to the respondent and the excess, if any, to be divided between the seller-assignor and petitioner-corporation which offered to bear one-half (1/2) of the reconditioning cost (E exh. " 7 "). No response to this letter, Exhibit "7," was received by the petitioner-corporation and despite several follow-up calls, the seller-assignor did nothing with regard to the request, until the complaint in this case was filed by the respondent against the petitioners, the corporation, Wee, and Vergara. The complaint was filed by the respondent against the petitioners for the recovery of the principal sum of One Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing interest thereafter at the rate of twelve (12%) percent per annum, attorney's fees of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit. The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial court to order the respondent to pay the petitioners damages in an amount at the sound discretion of the court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners likewise prayed for such other and further relief as would be just under the premises. In a decision dated April 20, 1981, the trial court rendered the following judgment: WHEREFORE, judgment is hereby rendered: 1. ordering defendants to pay jointly and severally in their official and personal capacities the principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of August 15, 1979 and accruing interest thereafter at the rate of 12% per annum; 2. ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent (10%) of the principal and to pay the costs of the suit. Defendants' counterclaim is disallowed. (pp. 45-46, Rollo) On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed by the petitioners. Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the following errors: I THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY. II THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE. On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in toto the decision of the trial court. The pertinent portions of the decision are as follows: xxx xxx xxx From the evidence presented by the parties on the issue of warranty, We are of the considered opinion that aside from the fact that no provision of warranty appears or is provided in the Deed of Sale of the tractors and even admitting that in a contract of sale unless a contrary intention appears, there is an implied warranty, the defense of breach of warranty, if there is any, as in this case, does not lie in favor of the appellants and against the plaintiff-appellee who is the assignee of the promissory note and a holder of the same in due course. Warranty lies in this case only between Industrial Products Marketing and Consolidated Plywood Industries, Inc. The plaintiff-appellant herein upon application by appellant corporation granted financing for the purchase of the questioned units of Fiat-Allis Crawler,Tractors. xxx xxx xxx

Holding that breach of warranty if any, is not a defense available to appellants either to withdraw from the contract and/or demand a proportionate reduction of the price with damages in either case (Art. 1567, New Civil Code). We now come to the issue as to whether the plaintiff-appellee is a holder in due course of the promissory note. To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation engaged in financing and receivable discounting extending credit facilities to consumers and industrial, commercial or agricultural enterprises by discounting or factoring commercial papers or accounts receivable duly authorized pursuant to R.A. 5980 otherwise known as the Financing Act. A study of the questioned promissory note reveals that it is a negotiable instrument which was discounted or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 (Exh. "A") considering the following. it is in writing and signed by the maker; it contains an unconditional promise to pay a certain sum of money payable at a fixed or determinable future time; it is payable to order (Sec. 1, NIL); the promissory note was negotiated when it was transferred and delivered by IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the conditions that the note was complete and regular upon its face before the same was overdue and without notice, that it had been previously dishonored and that the note is in good faith and for value without notice of any infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves and may enforce payment of the instrument for the full amount thereof against all parties liable thereon (Sec. 57, NIL); the appellants engaged that they would pay the note according to its tenor, and admit the existence of the payee IPM and its capacity to endorse (Sec. 60, NIL). In view of the essential elements found in the questioned promissory note, We opine that the same is legally and conclusively enforceable against the defendants-appellants. WHEREFORE, finding the decision appealed from according to law and evidence, We find the appeal without merit and thus affirm the decision in toto. With costs against the appellants. (pp. 50-55, Rollo) The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by the Intermediate Appellate Court in its resolution dated October 17, 1985, a copy of which was received by the petitioners on October 21, 1985. Hence, this petition was filed on the following grounds: I. ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER. II THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE. III. SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLERASSIGNOR, INDUSTRIAL PRODUCTS MARKETING. IV. THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE: A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW; B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE PROMISSORY NOTE. V. THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON INSTALLMENTS TO A PURE LOAN. VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED. The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985, as well as the resolution dated October 17, 1985 and dismissing the complaint but granting petitioners' counterclaims before the court of origin. On the other hand, the respondent corporation in its comment to the petition filed on February 20, 1986, contended that the petition was filed out of time; that the promissory note is a negotiable instrument and respondent a holder in due course; that respondent is not liable for any breach of warranty; and finally, that the promissory note is admissible in evidence. The core issue herein is whether or not the promissory note in question is a negotiable instrument so as to bar completely all the available defenses of the petitioner against the respondent-assignee. Preliminarily, it must be established at the outset that we consider the instant petition to have been filed on time because the petitioners' motion for reconsideration actually raised new issues. It cannot, therefore, be considered pro- formal. The petition is impressed with merit. First, there is no question that the seller-assignor breached its express 90-day warranty because the findings of the trial court, adopted by the respondent appellate court, that "14 days after delivery, the first tractor broke down and 9 days, thereafter, the second tractor became inoperable" are sustained by the records. The petitioner was clearly a victim of a warranty not honored by the maker. The Civil Code provides that: ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who, by reason of his trade or profession, should have known them. ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the goods, as follows: (1) Where the buyer, expressly or by implication makes known to the seller the particular purpose for which the goods are acquired, and it appears that the buyer relies on the sellers skill or judge judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose; xxx xxx xxx ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed by the usage of trade. xxx xxx xxx ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold even though he was not aware thereof. This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the hidden faults or defects in the thing sold. (Emphasis supplied). It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner. This liability as a general rule, extends to the corporation to whom it assigned its rights and interests unless the assignee is a holder in due course of the promissory note in question, assuming the note is negotiable, in which case the latter's rights are based on the negotiable instrument and assuming further that the petitioner's defenses may not prevail against it. Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-corporation notified the seller-assignor's sister company, AG & P, about the breakdown based on the seller-assignor's express 90-day warranty, with which the latter complied by sending its mechanics. However, due to the sellerassignor's delay and its failure to comply with its warranty, the tractors became totally unserviceable and useless for the purpose for which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-assignor. Articles 1191 and 1567 of the Civil Code provide that: ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. xxx xxx xxx ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between withdrawing from the contract and demanding a proportionate reduction of the price, with damages in either case. (Emphasis supplied) Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor, necessarily can no longer sue the seller-assignor except by way of counterclaim if the seller-assignor sues it because of the rescission. In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held: In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for adjudgement before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203). (Emphasis supplied) Going back to the core issue, we rule that the promissory note in question is not a negotiable instrument. The pertinent portion of the note is as follows: FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24 monthly installments starting July 15, 1978 and every 15th of the month thereafter until fully paid. ... Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note "must be payable to order or bearer, " it cannot be denied that the promissory note in question is not a negotiable instrument. The instrument in order to be considered negotiablility-i.e. must contain the so-called 'words of negotiable, must be payable to 'order' or 'bearer'. These words serve as an expression of consent that the instrument may be transferred. This consent is indispensable since a maker assumes greater risk under a negotiable instrument than under a non-negotiable one. ... xxx xxx xxx When instrument is payable to order. SEC. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. . . . xxx xxx xxx These are the only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument. It means that the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words "or order" or"to the order of, "the instrument is payable only to the person designated therein and is therefore nonnegotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument but will merely "step into the shoes" of the person designated in the instrument and will thus be open to all defenses available against the latter." (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third Edition, page 38). (Emphasis supplied) Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the respondent can never be a holder in due course but remains a mere assignee of the note in question. Thus, the

petitioner may raise against the respondent all defenses available to it as against the seller-assignor Industrial Products Marketing. This being so, there was no need for the petitioner to implied the seller-assignor when it was sued by the respondent-assignee because the petitioner's defenses apply to both or either of either of them. Actually, the records show that even the respondent itself admitted to being a mere assignee of the promissory note in question, to wit: ATTY. PALACA: Did we get it right from the counsel that what is being assigned is the Deed of Sale with Chattel Mortgage with the promissory note which is as testified to by the witness was indorsed? (Counsel for Plaintiff nodding his head.) Then we have no further questions on cross, COURT: You confirm his manifestation? You are nodding your head? Do you confirm that? ATTY. ILAGAN: The Deed of Sale cannot be assigned. A deed of sale is a transaction between two persons; what is assigned are rights, the rights of the mortgagee were assigned to the IFC Leasing & Acceptance Corporation. COURT: He puts it in a simple way as one-deed of sale and chattel mortgage were assigned; . . . you want to make a distinction, one is an assignment of mortgage right and the other one is indorsement of the promissory note. What counsel for defendants wants is that you stipulate that it is contained in one single transaction? ATTY. ILAGAN: We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980). Secondly, even conceding for purposes of discussion that the promissory note in question is a negotiable instrument, the respondent cannot be a holder in due course for a more significant reason. The evidence presented in the instant case shows that prior to the sale on installment of the tractors, there was an arrangement between the seller-assignor, Industrial Products Marketing, and the respondent whereby the latter would pay the seller-assignor the entire purchase price and the seller-assignor, in turn, would assign its rights to the respondent which acquired the right to collect the price from the buyer, herein petitioner Consolidated Plywood Industries, Inc. A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said documents evidencing the sale on installment of the tractors were all executed on the same day by and among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assigneefinancing company, which is the respondent. Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price was not unconditional, and that it was subject to the condition that the tractors -sold were not defective. The respondent knew that when the tractors turned out to be defective, it would be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners. Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith, is not a holder in due course. As such, the respondent is subject to all defenses which the petitioners may raise against the seller-assignor. Any other interpretation would be most inequitous to the unfortunate buyer who is not only saddled with two useless tractors but must also face a lawsuit from the assignee for the entire purchase price and all its incidents without being able to raise valid defenses available as against the assignor. Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact, which would justify its act of taking the promissory note as not amounting to bad faith. Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it. xxx xxx xxx SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. A holder in due course is a holder who has taken the instrument under the following conditions: xxx xxx xxx xxx xxx xxx

(c) That he took it in good faith and for value (d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of deffect in the title of the person negotiating it xxx xxx xxx SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounts to bad faith. (Emphasis supplied) We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the buyer, to wit: In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price. Many times, in pursuance of a previous arrangement with the seller, a finance company pays the full price and the note is indorsed to it, subrogating it to the right to collect the price from the buyer, with interest. With the increasing frequency of installment buying in this country, it is most probable that the tendency of the courts in the United States to protect the buyer against the finance company will , the finance company will be subject to the defense of failure of consideration and cannot recover the purchase price from the buyer. As against the argument that such a rule would seriously affect "a certain mode of transacting business adopted throughout the State," a court in one case stated: It may be that our holding here will require some changes in business methods and will impose a greater burden on the finance companies. We think the buyer-Mr. & Mrs. General Public-should have some protection somewhere along the line. We believe the finance company is better able to bear the risk of the dealer's insolvency than the buyer and in a far better position to protect his interests against unscrupulous and insolvent dealers. . . . If this opinion imposes great burdens on finance companies it is a potent argument in favor of a rule which win afford public protection to the general buying public against unscrupulous dealers in personal property. . . . (Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third Edition, p. 128). In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real sense, the finance company was a moving force in the transaction from its very inception and acted as a party to it. When a finance company actively participates in a transaction of this type from its inception, it cannot be regarded as a holder in due course of the note given in the transaction. In like manner, therefore, even assuming that the subject promissory note is negotiable, the respondent, a financing company which actively participated in the sale on installment of the subject two Allis Crawler tractors, cannot be regarded as a holder in due course of said note. It follows that the respondent's rights under the promissory note involved in this case are subject to all defenses that the petitioners have against the sellerassignor, Industrial Products Marketing. For Section 58 of the Negotiable Instruments Law provides that "in the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. ... " Prescinding from the foregoing and setting aside other peripheral issues, we find that both the trial and respondent appellate court erred in holding the promissory note in question to be negotiable. Such a ruling does not only violate the law and applicable jurisprudence, but would result in unjust enrichment on the part of both the assigner- assignor and respondent assignee at the expense of the petitioner-corporation which rightfully rescinded an inequitable contract. We note, however, that since the seller-assignor has not been impleaded herein, there is no obstacle for the respondent to file a civil Suit and litigate its claims against the sellerassignor in the rather unlikely possibility that it so desires, WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated July 17, 1985, as well as its resolution dated October 17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against the petitioner before the trial court is DISMISSED. SO ORDERED. G.R. No. 156207 September 15, 2006

EQUITABLE PCI BANK (the Banking Entity into which Philippine Commercial International Bank was merged), petitioner, vs. ROWENA ONG, respondent. DECISION CHICO-NAZARIO, J.: On 29 November 1991, Warliza Sarande deposited in her account at Philippine Commercial International (PCI) Bank Magsaysay Avenue, Santa Ana District, Davao City Branch, under Account No. 8502-00347-6, a PCI Bank General Santos City Branch, TCBT1 Check No. 0249188 in the amount of P225,000.00. Upon inquiry by Serande at PCI Bank on 5 December 1991 on whether TCBT Check No. 0249188 had been cleared, she received an affirmative answer. Relying on this assurance, she issued two checks drawn against the proceeds of TCBT Check No. 0249188. One of these was PCI Bank Check No. 073661 dated 5 December 1991 for P132,000.00 which Sarande issued to respondent Rowena Ong Owing to a business transaction. On the same day, Ong presented to PCI Bank Magsaysay Avenue Branch said Check No. 073661, and instead of encashing it, requested PCI Bank to convert the proceeds thereof into a manager's check, which the PCI Bank obliged. Whereupon, Ong was issued PCI Bank Manager's Check No. 10983 dated 5 December 1991 for the sum of P132,000.00, the value of Check No. 073661. The next day, 6 December 1991, Ong deposited PCI Bank Manager's Check No. 10983 in her account with Equitable Banking Corporation Davao City Branch. On 9 December 1991, she received a check return-slip informing her that PCI Bank had stopped the payment of the said check on the ground of irregular issuance. Despite several demands made by her to PCI Bank for the payment of the amount in PCI Bank Manager's Check No. 10983, the same was met with refusal; thus, Ong was constrained to file a Complaint for sum of money, damages and attorney's fees against PCI Bank.2 From PCI Bank's version, TCBT-General Santos City Check No. 0249188 was returned on 5 December 1991 at 5:00 pm on the ground that the account against which it was drawn was already closed. According to PCI Bank, it immediately gave notice to Sarande and Ong about the return of Check No. 0249188 and requested Ong to return PCI Bank Manager's Check No. 10983 inasmuch as the return of Check No. 0249188 on the ground that the account from which it was drawn had already been closed resulted in a failure or want of consideration for the issuance of PCI Bank Manager's Check No. 10983.3 After the pre-trial conference, Ong filed a motion for summary judgment.4 Though they were duly furnished with a copy of the motion for summary judgment, PCI Bank and its counsel failed to appear at the scheduled hearing.5 Neither did they file any written comment or opposition thereto. The trial court thereafter ordered Ong to formally offer her exhibits in writing, furnishing copies of the same to PCI Bank which was directed to file its comment or objection.6 Ong complied with the Order of the trial court, but PCI Bank failed to file any comment or objection within the period given to it despite receipt of the same order.7 The trial court then granted the motion for summary judgment and in its Order dated 2 March 1995, it held: IN THE LIGHT OF THE FOREGOING, the motion for summary judgment is GRANTED, ordering defendant Philippine Commercial International Bank to pay the plaintiff the amount of ONE HUNDRED THIRTY-TWO THOUSAND PESOS (P132,000.00) equivalent to the amount of PCIB Manager's Check No. 10983. Set the reception of the plaintiff's evidence with respect to the damages claimed in the complaint.8 PCI Bank filed a Motion for Reconsideration which the trial court denied in its Order dated 11 April 1996. 9 After the reception of Ong's evidence in support of her claim for damages, the trial court rendered its Decision10 dated 3 May 1999 wherein it ruled: IN LIGHT OF THE FOREGOIN CONSIDERATION, and as plaintiff has preponderantly established by competent evidence her claims in the Complaint, judgment in hereby rendered for the plaintiff against the defendant-bank ordering the latter: 1. To pay the plaintiff the sum of FIFTY THOUSAND PESOS (P50,000.00) in the concept of moral damages; 2. To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00) as exemplary damages; 3. To pay the plaintiff the sum of THREE THOUSAND FIVE HUNDRED PESOS (P3,500.00) representing actual expenses;

4. To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00) as and for attorney's fee's; and 5. To pay the costs.11 From this decision, PCI Bank sought recourse before the Court of Appeals. In a Decision12 dated 29 October 2002, the appellate court denied the appeal of PCI Bank and affirmed the orders and decision of the trial court. Unperturbed, PCI Bank then filed the present petition for review before this Court and raised the following issues: 1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A GRAVE AND REVERSIBLE ERROR WHEN IT SUSTAINED THE LOWER COURT'S ORDER DATED 2 MARCH 1999 GRANTING RESPONDENT'S MOTION FOR SUMMARY JUDGMENT NOTWITHSTANDING THE GLARING FACT THAT THERE ARE GENUINE, MATERIAL AND FACTUAL ISSUES WHICH REQUIRE THE PRESENTATION OF EVIDENCE. 2. WHETHER OR NOT THE COURT OF APPEALS WAS IN ERROR WHEN IT SUSTAINED THE LOWER COURT'S DECISION DATED 3 MAY 1999 GRANTING THE RELIEFS PRAYED FOR IN RESPONDENT ONG'S COMPLAINT INSPITE OF THE FACT THAT RESPONDENT ONG WOULD BE "UNJUSTLY ENRICHED" AT THE EXPENSE OF PETITIONER BANK, IF PETITIONER BANK WOULD BE REQUIRED TO PAY AN UNFUNDED CHECK. 3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERRORS WHEN IT AFFIRMED THE COURT A QUO'S DECISIION DATED 3 MAY 1999 AWARDING DAMAGES TO RESPONDENT ONG AND HOLDING THAT RESPONDENT ONG HAD PREPONDERANTLY ESTABLISHED BY COMPETENT EVIDENCE HER CLAIMS IN THE COMPLAINT INSPITE OF THE FACT THAT THE EVIDENCE ON RECORD DOES NOT JUSTIFY THE AWARD OF DAMAGES. 4. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT AFFIRMED THE LOWER COURT'S FACTUAL FINDING IN ITS DECISION DATED 3 MAY 1999 HOLDING RESPONDENT ONG A "HOLDER IN DUE COURSE" INSPITE OF THE FACT THAT THE REQUISITE OF "GOOD FAITH" AND FOR VALUE IS LACKING AND DESPITE THE ABSENCE OF A PROPER TRIAL TO DETERMINE SUCH FACTUAL ISSUE. 5. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT UPHELD THE LOWER COURT'S DECISION DATED 3 MAY 1999 DENYING PETITIONER EPCI BANK'S COUNTERCLAIM INSPITE OF THE FACT THAT IT WAS SHOWN THAT RESPONDENT ONG'S COMPLAINT LACKS MERIT.13 We affirm the Decision of the trial court and the Court of Appeals. The provision on summary judgment is found in Section 1, Rule 35 of the 1997 Rules of Court: SECTION 1. Summary judgment for claimant. A party seeking to recover upon a claim, counterclaim, or cross-claim or to obtain a declaratory relief may, at any time after the pleading in answer thereto has been served, move with supporting affidavits, depositions or admissions for a summary judgment in his favor upon all or any part thereof. Thus, it has been held that a summary judgment is proper where, upon a motion filed after the issues had been joined and on the basis of the pleadings and papers filed, the court finds that there is no genuine issue as to any material fact to except as to the amount of damages. A genuine issue has been defined as an issue of fact which calls for the presentation of evidence, as distinguished from an issue which is sham, fictitious, contrived and patently unsubstantial so as not to constitute a genuine issue for trial.14 A court may grant summary judgment to settle expeditiously a case if, on motion of either party, there appears from the pleadings, depositions, admissions, and affidavits that no important issues of fact are involved, except the amount of damages.15 Rule 35, Section 3, of the Rules of Court provides two requisites for summary judgment to be proper: (1) there must be no genuine issue as to any material fact, except for the amount of damages; and (2) the party presenting the motion for summary judgment must be entitled to a judgment as a matter of law.16 Certainly, when the facts as pleaded appear uncontested or undisputed, then there's no real or genuine issue or question as to the facts, and summary judgment is called for.17 By admitting it committed an error, clearing the check of Sarande and issuing in favor of Ong not just any check but a manager's check for that matter, PCI Bank's liability is fixed. Under the circumstances, we find that

summary judgment was proper and a hearing would serve no purpose. That summary judgment is appropriate was incisively expounded by the trial court when it made the following observation: [D]efendant-bank had certified plaintiff's PCIB Check No. 073661 and since certification is equivalent to acceptance, defendant-bank as drawee bank is bound on the instrument upon certification and it is immaterial to such liability in favor of the plaintiff who is a holder in due course whether the drawer (Warliza Sarande) had funds or not with the defendant-bank (Security vs. State Bank, 154 N.W. 282) or the drawer was indebted to the bank for more than the amount of the check (Nat. Bank vs. Schmelz, Nat. Bank, 116 S.E. 880) as the certifying bank as all the liabilities under Sec. 62 of the Negotiable Instruments Law which refers to liability of acceptor (Title Guarantee vs. Emadee Realty Corp., 240 N.Y. 36). It may be true that plaintiff's PCIB Check No. 073661 for P132,000.00 which was paid to her by Warliza Sarande was actually not funded but since plaintiff became a holder in due course, defendant-bank cannot interpose a defense of want or lack of consideration because that defense is equitable or personal and cannot prosper against a holder in due course pursuant to Section 28 of the Negotiable Instruments Law. Therefore, when the aforementioned check was endorsed and presented by the plaintiff and certified to and accepted by defendant-bank in the purchase of PCIB Manager's Check No. 1983 in the amount of P132,000.00, there was a valid consideration.18 The property of summary judgment was further explained by this Court when it pronounced that: The theory of summary judgment is that although an answer may on its face appear to tender issues requiring trial yet if it is demonstrated by affidavits, depositions, or admissions that those issues are not genuine, but sham or fictitious, the Court is unjustified in dispensing with the trial and rendering summary judgment for plaintiff. The court is expected to act chiefly on the basis of the affidavits, depositions, admissions submitted by the movant, and those of the other party in opposition thereto. The hearing contemplated (with 10-day notice) is for the purpose of determining whether the issues are genuine or not, not to receive evidence on the issues set up in the pleadings. A hearing is not thus de riguer. The matter may be resolved, and usually is, on the basis of affidavits, depositions, admissions. This is not to say that a hearing may be regarded as a superfluity. It is not, and the Court has plenary discretion to determine the necessity therefore.19 The second and fourth issues are inter-related and so they shall be resolved together. The second issue has reference to PCI Bank's claim of unjust enrichment on the part of Ong if it would be compelled to make good the manager's check it had issued. As asserted by PCI Bank under the fourth issue, Ong is not a holder in due course because the manager's check was drawn against a closed account; therefore, the same was issued without consideration. On the matter of unjust enrichment, the fundamental doctrine of unjust enrichment is the transfer of value without just cause or consideration. The elements of this doctrine are: enrichment on the part of the defendant; impoverishment on the part of the plaintiff; and lack of cause. The main objective is to prevent one to enrich himself at the expense of another.20 It is based on the equitable postulate that it is unjust for a person to retain benefit without paying for it.21 It is well to stress that the check of Sarande had been cleared by the PCI Bank for which reason the former issued the check to Ong. A check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account.22 Having cleared the check earlier, PCI Bank, therefore, became liable to Ong and it cannot allege want or failure of consideration between it and Sarande. Under settled jurisprudence, Ong is a stranger as regards the transaction between PCI Bank and Sarande.23 PCI Bank next insists that since there was no consideration for the issuance of the manager's check, ergo, Ong is not a holder in due course. This claim is equally without basis. Pertinent provisions of the Negotiable Instruments Law are hereunder quoted: SECTION 52. What constitutes a holder in due course. A holder in due course is a holder who has taken the instrument under the following conditions: (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 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. The same law provides further: Sec. 24. Presumption of consideration. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. Sec. 26. What constitutes holder for value. Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. Sec. 28. Effect of want of consideration. Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. Easily discernible is that what Ong obtained from PCI Bank was not just any ordinary check but a manager's check. A manager's check is an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity and honor behind its issuance. By its peculiar character and general use in commerce, a manager's check is regarded substantially to be as good as the money it represents.24 A manager's check stands on the same footing as a certified check.25 The effect of certification is found in Section 187, Negotiable Instruments Law. Sec. 187. Certification of check; effect of. Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance.26 The effect of issuing a manager's check was incontrovertibly elucidated when we declared that: A manager's check is one drawn by the bank's manager upon the bank itself. It is similar to a cashier's check both as to effect and use. A cashier's check is a check of the bank's cashier on his own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank itself, and accepted in advance by the act of its issuance. It is really the bank's own check and may be treated as a promissory note with the bank as a maker. The check becomes the primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. The mere issuance of it is considered an acceptance thereof. x x x.27 In the case of New Pacific Timber & Supply Co., Inc. v. Seneris28: [S]ince the said check had been certified by the drawee bank, by the certification, the funds represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation. Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance. Said certification "implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment. It is an understanding that the check is good then, and shall continue good, and this agreement is as binding on the bank as its notes circulation, a certificate of deposit payable to the order of depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties, is to enable the holder to use it as money." When the holder procures the check to be certified, "the check operates as an assignment of a part of the funds to the creditors." Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to the effect "that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account" shall apply in this case x x x. By accepting PCI Bank Check No. 073661 issued by Sarande to Ong and issuing in turn a manager's check in exchange thereof, PCI Bank assumed the liabilities of an acceptor under Section 62 of the Negotiable Instruments Law which states: Sec. 62. Liability of acceptor. The acceptor by accepting the instruments engages that he will pay it according to the tenor of his acceptance; and admits (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse. With the above jurisprudential basis, the issues on Ong being not a holder in due course and failure or want of consideration for PCI Bank's issuance of the manager's check is out of sync.

Section 2, of Republic Act No. 8791, The General Banking Law of 2000 decrees: SEC. 2. Declaration of Policy. The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. In Associated Bank v. Tan,29 it was reiterated: "x x x the degree of diligence required of banks is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is concerned." Indeed, the banking business is vested with the trust and confidence of the public; hence the "appropriate standard of diligence must be very high, if not the highest degree of diligence." Measured against these standards, the next question that needs to be addressed is: Did PCI Bank exercise the requisite degree of diligence required of it? From all indications, it did not. PCI Bank distinctly made the following uncontested admission: 1. On 29 November 1991, one Warliza Sarande deposited to her savings account with PCI Bank's Magsaysay Avenue Branch, TCBT-General Santos Branch Check No. 0249188 for P225,000.00. Said check, however, was inadvertently sent by PCI Bank through local clearing when it should have been sent through interregional clearing since the check was drawn at TCBT-General Santos City. 2. On 5 December 1991, Warliza Sarande inquired whether TCBT Check No. 0249188 had been cleared. Not having received any advice from the drawee bank within the regular clearing period for the return of locally cleared checks, and unaware then of the error of not having sent the check through inter-regional clearing, PCI Bank advised her that Check No. 024188 is treated as cleared. x x x.30 (Emphasis supplied.) From the foregoing, it is palpable and readily apparent that PCI Bank failed to exercise the highest degree of care31 required of it under the law. In the case of Philippine National Bank v. Court of Appeals,32 we declared: The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society. Whether as mere passive entities for the safe-keeping and saving of money or as active instruments of business and commerce, banks have attained an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Having settled the other issues, we now resolve the question on the award of moral and exemplary damages by the trial court to the respondent. Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act or omission.33 The requisites for an award of moral damages are well-defined, thus, firstly, evidence of besmirched reputation or physical, mental or psychological suffering sustained by the claimant; secondly, a culpable act or omission factually established; thirdly, proof that the wrongful act or omission of the defendant is the proximate cause of the damages sustained by the claimant; and fourthly, that the case is predicated on any of the instances expressed or envisioned by Article 221934 and Article 222035 of the Civil Code. All these elements are present in the instant case.36 In the first place, by refusing to make good the manager's check it has issued, Ong suffered embarrassment and humiliation arising from the dishonor of the said check.37 Secondly, the culpable act of PCI Bank in having cleared the check of Serande and issuing the manager's check to Ong is undeniable. Thirdly, the proximate cause of the loss is attributable to PCI Bank. Proximate cause is defined as that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred.38 In this case, the proximate cause of the loss is the act of PCI Bank in having cleared the check of Sarande and its failure to exercise that degree of diligence required of it under the law which resulted in the loss to Ong. On exemplary damages, Article 2229 of the Civil Code states: Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages.

The law allows the grant of exemplary damages to set an example for the public good. The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society. Whether as mere passive entities for the safe-keeping and saving of money or as active instruments of business and commerce, banks have attained an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and most of all, confidence. For this reason, banks should guard against injury attributable to negligence or bad faith on its part.39 Without a doubt, it has been repeatedly emphasized that since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are even required of it.40 Having failed in this respect, the award of exemplary damages is warranted. Article 2216 of the Civil Code provides: ART. 2216. No proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or exemplary damages may be adjudicated. The assessment of such damages, except liquidated ones, is left to the discretion of the court, according to the circumstances of each case. Based on the above provision, the determination of the amount to be awarded (except liquidated damages) is left to the sound discretion of the court according to the circumstances of each case. 41 In the case before us, we find that the award of moral damages in the amount of P50,000.00 and exemplary damages in the amount of P20,000.00 is reasonable and justified. With the above disquisition, there is no necessity of further discussing the last issue on the PCI Bank's counterclaim based on the supposed lack of merit of Ong's complaint. WHEREFORE, premises considered, the Petition is DENIED and the Decision of the Court of Appeals dated 29 October 2002 in CA-G.R. CV No. 65000 affirming the Decision dated 3 may 1999, of the Regional Trial Court of Davao City, Branch 14, in Civil Case No. 21458-92, are AFFIRMED. SO ORDERED. G.R. No. L-40824 February 23, 1989 GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner, vs. COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents. The Government Corporate Counsel for petitioner. Lorenzo A. Sales for private respondents. REGALADO , J.: Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs Flaviano Lagasca, executed a deed of mortgage, dated November 13, 1957, in favor of petitioner Government Service Insurance System (hereinafter referred to as GSIS) and subsequently, another deed of mortgage, dated April 14, 1958, in connection with two loans granted by the latter in the sums of P 11,500.00 and P 3,000.00, respectively. 1 A parcel of land covered by Transfer Certificate of Title No. 38989 of the Register of Deed of Quezon City, coowned by said mortgagor spouses, was given as security under the aforesaid two deeds. 2 They also executed a 'promissory note" which states in part: ... for value received, we the undersigned ... JOINTLY, SEVERALLY and SOLIDARILY, promise to pay the GOVERNMENT SERVICE INSURANCE SYSTEM the sum of . . . (P 11,500.00) Philippine Currency, with interest at the rate of six (6%) per centum compounded monthly payable in . . . (120)equal monthly installments of . . . (P 127.65) each. 3 On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of Mortgage" under which they obligated themselves to assume the aforesaid obligation to the GSIS and to secure the release of the mortgage covering that portion of the land belonging to herein private respondents and which was mortgaged to the GSIS. 4 This undertaking was not fulfilled. 5 Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the payment of the amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the mortgaged property to be sold at public auction on December 3, 1962. 6

More than two years thereafter, or on August 23, 1965, herein private respondents filed a complaint against the petitioner and the Lagasca spouses in the former Court of First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their property and all other documents executed in relation thereto in favor of the Government Service Insurance System" be declared null and void. It was further prayed that they be allowed to recover said property, and/or the GSIS be ordered to pay them the value thereof, and/or they be allowed to repurchase the land. Additionally, they asked for actual and moral damages and attorney's fees. In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts not as sureties or guarantors for the Lagasca spouses but they merely gave their common property to the said co-owners who were solely benefited by the loans from the GSIS. The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to establish a cause of action. 8 Said decision was reversed by the respondent Court of Appeals 9 which held that: ... although formally they are co-mortgagors, they are so only for accomodation (sic) in that the GSIS required their consent to the mortgage of the entire parcel of land which was covered with only one certificate of title, with full knowledge that the loans secured thereby were solely for the benefit of the appellant (sic) spouses who alone applied for the loan. xxxx 'It is, therefore, clear that as against the GSIS, appellants have a valid cause for having foreclosed the mortgage without having given sufficient notice to them as required either as to their delinquency in the payment of amortization or as to the subsequent foreclosure of the mortgage by reason of any default in such payment. The notice published in the newspaper, 'Daily Record (Exh. 12) and posted pursuant to Sec 3 of Act 3135 is not the notice to which the mortgagor is entitled upon the application being made for an extrajudicial foreclosure. ... 10 On the foregoing findings, the respondent court consequently decreed thatIn view of all the foregoing, the judgment appealed from is hereby reversed, and another one entered (1) declaring the foreclosure of the mortgage void insofar as it affects the share of the appellants; (2) directing the GSIS to reconvey to appellants their share of the mortgaged property, or the value thereof if already sold to third party, in the sum of P 35,000.00, and (3) ordering the appellees Flaviano Lagasca and Esther Lagasca to pay the appellants the sum of P 10,00.00 as moral damages, P 5,000.00 as attorney's fees, and costs. 11 The case is now before us in this petition for review. In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No. 2031, otherwise known as the Negotiable Instruments Law, which provide that an accommodation party is one who has signed an instrument as maker, drawer, acceptor of indorser without receiving value therefor, but is held liable on the instrument to a holder for value although the latter knew him to be only an accommodation party. This approach of both parties appears to be misdirected and their reliance misplaced. The promissory note hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly not negotiable instruments. These documents do not comply with the fourth requisite to be considered as such under Section 1 of Act No. 2031 because they are neither payable to order nor to bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply; governance shall be afforded, instead, by the provisions of the Civil Code and special laws on mortgages. As earlier indicated, the factual findings of respondent court are that private respondents signed the documents "only to give their consent to the mortgage as required by GSIS", with the latter having full knowledge that the loans secured thereby were solely for the benefit of the Lagasca spouses. 12 This appears to be duly supported by sufficient evidence on record. Indeed, it would be unusual for the GSIS to arrange for and deduct the monthly amortizations on the loans from the salary as an army officer of Flaviano Lagasca without likewise affecting deductions from the salary of Isabelo Racho who was also an army sergeant. Then there is also the undisputed fact, as already stated, that the Lagasca spouses executed a so-called "Assumption of Mortgage" promising to exclude private respondents and their share of the mortgaged property from liability to the mortgagee. There is no intimation that the former executed such instrument for a consideration, thus confirming that they did so pursuant to their original agreement.

The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is clear that there was no objection in the court below regarding the admissibility of the testimony and documents that were presented to prove that the private respondents signed the mortgage papers just to accommodate their co-owners, the Lagasca spouses. Besides, the introduction of such evidence falls under the exception to said rule, there being allegations in the complaint of private respondents in the court below regarding the failure of the mortgage contracts to express the true agreement of the parties. 14 However, contrary to the holding of the respondent court, it cannot be said that private respondents are without liability under the aforesaid mortgage contracts. The factual context of this case is precisely what is contemplated in the last paragraph of Article 2085 of the Civil Code to the effect that third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca spouses would not invalidate the mortgage with respect to private respondents' share in the property. In consenting thereto, even assuming that private respondents may not be assuming personal liability for the debt, their share in the property shall nevertheless secure and respond for the performance of the principal obligation. The parties to the mortgage could not have intended that the same would apply only to the aliquot portion of the Lagasca spouses in the property, otherwise the consent of the private respondents would not have been required. The supposed requirement of prior demand on the private respondents would not be in point here since the mortgage contracts created obligations with specific terms for the compliance thereof. The facts further show that the private respondents expressly bound themselves as solidary debtors in the promissory note hereinbefore quoted. Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling of respondent court that lack of notice to the private respondents of the extrajudicial foreclosure sale impairs the validity thereof. In Bonnevie, et al. vs. Court of appeals, et al., 15 the Court ruled that Act No. 3135, as amended, does not require personal notice on the mortgagor, quoting the requirement on notice in such cases as follows: Section 3. Notice shall be given by posting notices of sale for not less than twenty days in at least three public places of the municipality where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city. There is no showing that the foregoing requirement on notice was not complied with in the foreclosure sale complained of . The respondent court, therefore, erred in annulling the mortgage insofar as it affected the share of private respondents or in directing reconveyance of their property or the payment of the value thereof Indubitably, whether or not private respondents herein benefited from the loan, the mortgage and the extrajudicial foreclosure proceedings were valid. WHEREFORE, judgment is hereby rendered REVERSING the decision of the respondent Court of Appeals and REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof. SO ORDERED. Philippine Education Co. vs. Soriano L-22405 Dizon, J.: Facts: Enrique Montinola sought to purchase from Manila Post Office ten money orders of 200php each payable to E. P. Montinola. Montinola offered to pay with the money orders with a private check. Private check were not generally accepted in payment of money orders, the teller advised him to see the Chief of the Money Order Division, but instead of doing so, Montinola managed to leave the building without the knowledge of the teller. Upon the disappearance of the unpaid money order, a message was sent to instruct all banks that it must not pay for the money order stolen upon presentment. The Bank of America received a copy of said notice. However, The Bank of America received the money order and deposited it to the appellants account upon clearance. Mauricio Soriano, Chief of the Money Order Division notified the Bank of America that the money June 30, 1971

order deposited had been found to have been irregularly issued and that, the amount it represented had been deducted from the banks clearing account. The Bank of America debited appellants account with the same account and give notice by mean of debit memo. Issue: Whether or not the postal money order in question is a negotiable instrument

Held: No. It is not disputed that the Philippine postal statutes were patterned after similar statutes in force in United States. The Weight of authority in the United States is that postal money orders are not negotiable instruments, the reason being that in establishing and operating a postal money order system, the government is not engaged in commercial transactions but merely exercises a governmental power for the public benefit. Moreover, some of the restrictions imposed upon money orders by postal laws and regulations are inconsistent with the character of negotiable instruments. For instance, such laws and regulations usually provide for not more than one endorsement; payment of money orders may be withheld under a variety of circumstances. .R. No. 76788 January 22, 1990 JUANITA SALAS, petitioner, vs. HON. COURT OF APPEALS and FIRST FINANCE & LEASING CORPORATION, respondents. Arsenio C. Villalon, Jr. for petitioner. Labaguis, Loyola, Angara & Associates for private respondent. FERNAN, C.J.: Assailed in this petition for review on certiorari is the decision of the Court of Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance & Leasing Corporation v. Salas", which modified the decision of the Regional Trial Court of San Fernando, Pampanga in Civil Case No. 5915, a collection suit between the same parties. Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred to as petitioner) bought a motor vehicle from the Violago Motor Sales Corporation (VMS for brevity) for P58,138.20 as evidenced by a promissory note. This note was subsequently endorsed to Filinvest Finance & Leasing Corporation (hereinafter referred to as private respondent) which financed the purchase. Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to a discrepancy in the engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice, certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle figured in an accident on 9 May 1980. This failure to pay prompted private respondent to initiate Civil Case No. 5915 for a sum of money against petitioner before the Regional Trial Court of San Fernando, Pampanga. In its decision dated September 10, 1982, the trial court held, thus: WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering the defendant to pay the plaintiff the sum of P28,414.40 with interest thereon at the rate of 14% from October 2, 1980 until the said sum is fully paid; and the further amount of P1,000.00 as attorney's fees. The counterclaim of defendant is dismissed. With costs against defendant. 1 Both petitioner and private respondent appealed the aforesaid decision to the Court of Appeals. Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle to petitioner, the latter prayed for a reversal of the trial court's decision so that she may be absolved from the obligation under the contract. On October 27, 1986, the Court of Appeals rendered its assailed decision, the pertinent portion of which is quoted hereunder:

The allegations, statements, or admissions contained in a pleading are conclusive as against the pleader. A party cannot subsequently take a position contradictory of, or inconsistent with his pleadings (Cunanan vs. Amparo, 80 Phil. 227). Admissions made by the parties in the pleadings, or in the course of the trial or other proceedings, do not require proof and cannot be contradicted unless previously shown to have been made through palpable mistake (Sec. 2, Rule 129, Revised Rules of Court; Sta. Ana vs. Maliwat, L-23023, Aug. 31, 1968, 24 SCRA 1018). When an action or defense is founded upon a written instrument, copied in or attached to the corresponding pleading as provided in the preceding section, the genuineness and due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denied them, and sets forth what he claims to be the facts (Sec. 8, Rule 8, Revised Rules of Court; Hibbered vs. Rohde and McMillian, 32 Phil. 476). A perusal of the evidence shows that the amount of P58,138.20 stated in the promissory note is the amount assumed by the plaintiff in financing the purchase of defendant's motor vehicle from the Violago Motor Sales Corp., the monthly amortization of winch is Pl,614.95 for 36 months. Considering that the defendant was able to pay twice (as admitted by the plaintiff, defendant's account became delinquent only beginning May, 1980) or in the total sum of P3,229.90, she is therefore liable to pay the remaining balance of P54,908.30 at l4% per annum from October 2, 1980 until full payment. WHEREFORE, considering the foregoing, the appealed decision is hereby modified ordering the defendant to pay the plaintiff the sum of P54,908.30 at 14% per annum from October 2, 1980 until full payment. The decision is AFFIRMED in all other respects. With costs to defendant. 2 Petitioner's motion for reconsideration was denied; hence, the present recourse. In the petition before us, petitioner assigns twelve (12) errors which focus on the alleged fraud, bad faith and misrepresentation of Violago Motor Sales Corporation in the conduct of its business and which fraud, bad faith and misrepresentation supposedly released petitioner from any liability to private respondent who should instead proceed against VMS. 3 Petitioner argues that in the light of the provision of the law on sales by description 4 which she alleges is applicable here, no contract ever existed between her and VMS and therefore none had been assigned in favor of private respondent. She contends that it is not necessary, as opined by the appellate court, to implead VMS as a party to the case before it can be made to answer for damages because VMS was earlier sued by her for "breach of contract with damages" before the Regional Trial Court of Olongapo City, Branch LXXII, docketed as Civil Case No. 29160. She cites as authority the decision therein where the court originally ordered petitioner to pay the remaining balance of the motor vehicle installments in the amount of P31,644.30 representing the difference between the agreed consideration of P49,000.00 as shown in the sales invoice and petitioner's initial downpayment of P17,855.70 allegedly evidenced by a receipt. Said decision was however reversed later on, with the same court ordering defendant VMS instead to return to petitioner the sum of P17,855.70. Parenthetically, said decision is still pending consideration by the First Civil Case Division of the Court of Appeals, upon an appeal by VMS, docketed as AC-G.R. No. 02922. 5 Private respondent in its comment, prays for the dismissal of the petition and counters that the issues raised and the allegations adduced therein are a mere rehash of those presented and already passed upon in the court below, and that the judgment in the "breach of contract" suit cannot be invoked as an authority as the same is still pending determination in the appellate court. We see no cogent reason to disturb the challenged decision. The pivotal issue in this case is whether the promissory note in question is a negotiable instrument which will bar completely all the available defenses of the petitioner against private respondent. Petitioner's liability on the promissory note, the due execution and genuineness of which she never denied under oath is, under the foregoing factual milieu, as inevitable as it is clearly established. The records reveal that involved herein is not a simple case of assignment of credit as petitioner would have it appear, where the assignee merely steps into the shoes of, is open to all defenses available against and can enforce payment only to the same extent as, the assignor-vendor. Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and Acceptance Corp., 6 this Court had the occasion to clearly distinguish between a negotiable and a non-negotiable instrument.

Among others, the instrument in order to be considered negotiable must contain the so-called "words of negotiability i.e., must be payable to "order" or "bearer"". Under Section 8 of the Negotiable Instruments Law, there are only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument and the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words "or order or "to the order of", the instrument is payable only to the person designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument, but will merely "step into the shoes" of the person designated in the instrument and will thus be open to all defenses available against the latter. Such being the situation in the above-cited case, it was held that therein private respondent is not a holder in due course but a mere assignee against whom all defenses available to the assignor may be raised. 7 In the case at bar, however, the situation is different. Indubitably, the basis of private respondent's claim against petitioner is a promissory note which bears all the earmarks of negotiability. The pertinent portion of the note reads: PROMISSORY NOTE (MONTHLY) P58,138.20 San Fernando, Pampanga, Philippines Feb. 11, 1980 For value received, I/We jointly and severally, promise to pay Violago Motor Sales Corporation or order, at its office in San Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine currency, which amount includes interest at 14% per annum based on the diminishing balance, the said principal sum, to be payable, without need of notice or demand, in installments of the amounts following and at the dates hereinafter set forth, to wit: P1,614.95 monthly for "36" months due and payable on the 21st day of each month starting March 21, 1980 thru and inclusive of February 21, 1983. P_________ monthly for ______ months due and payable on the ______ day of each month starting _____198__ thru and inclusive of _____, 198________ provided that interest at 14% per annum shall be added on each unpaid installment from maturity hereof until fully paid. xxx xxx xxx Maker; Co-Maker: (SIGNED) JUANITA SALAS _________________ Address: ____________________ ____________________ WITNESSES SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE TAN # TAN # PAY TO THE ORDER OF FILINVEST FINANCE AND LEASING CORPORATION VIOLAGO MOTOR SALES CORPORATION BY: (SIGNED) GENEVEVA V. BALTAZAR 8 Cash Manager A careful study of the questioned promissory note shows that it is a negotiable instrument, having complied with the requisites under the law as follows: [a] it is in writing and signed by the maker Juanita Salas; [b] it contains an unconditional promise to pay the amount of P58,138.20; [c] it is payable at a fixed or determinable future time which is "P1,614.95 monthly for 36 months due and payable on the 21 st day of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to Violago Motor Sales Corporation, or order and as such, [e] the drawee is named or indicated with certainty. 9 It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest Finance and Leasing Corporation 10 and it is an indorsement of the entire instrument. 11 Under the circumstances, there appears to be no question that Filinvest is a holder in due course, having taken the instrument under the following conditions: [a] it is complete and regular upon its face; [b] it became the

holder thereof before it was overdue, and without notice that it had previously been dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to Filinvest, the latter had no notice of any infirmity in the instrument or defect in the title of VMS Corporation. 12 Accordingly, respondent corporation holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof. 13 This being so, petitioner cannot set up against respondent the defense of nullity of the contract of sale between her and VMS. Even assuming for the sake of argument that there is an iota of truth in petitioner's allegation that there was in fact deception made upon her in that the vehicle she purchased was different from that actually delivered to her, this matter cannot be passed upon in the case before us, where the VMS was never impleaded as a party. Whatever issue is raised or claim presented against VMS must be resolved in the "breach of contract" case. Hence, we reach a similar opinion as did respondent court when it held: We can only extend our sympathies to the defendant (herein petitioner) in this unfortunate incident. Indeed, there is nothing We can do as far as the Violago Motor Sales Corporation is concerned since it is not a party in this case. To even discuss the issue as to whether or not the Violago Motor Sales Corporation is liable in the transaction in question would amount, to denial of due process, hence, improper and unconstitutional. She should have impleaded Violago Motor Sales. 14 IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs against petitioner. SO ORDERED.

G.R. No. L-2516 September 25, 1950 ANG TEK LIAN, petitioner, vs. THE COURT OF APPEALS, respondent. Laurel, Sabido, Almario and Laurel for petitioner. Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz for respondent. BENGZON, J.: For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court of First Instance of Manila. The Court of Appeals affirmed the verdict. It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday, November 16, 1946, the check Exhibits A upon the China Banking Corporation for the sum of P4,000, payable to the order of "cash". He delivered it to Lee Hua Hong in exchange for money which the latter handed in act. On November 18, 1946, the next business day, the check was presented by Lee Hua Hong to the drawee bank for payment, but it was dishonored for insufficiency of funds, the balance of the deposit of Ang Tek Lian on both dates being P335 only. The Court of Appeals believed the version of Lee Huan Hong who testified that "on November 16, 1946, appellant went to his (complainant's) office, at 1217 Herran, Paco, Manila, and asked him to exchange Exhibit A which he (appellant) then brought with him with cash alleging that he needed badly the sum of P4,000 represented by the check, but could not withdraw it from the bank, it being then already closed; that in view of this request and relying upon appellant's assurance that he had sufficient funds in the blank to meet Exhibit A, and because they used to borrow money from each other, even before the war, and appellant owns a hotel and restaurant known as the North Bay Hotel, said complainant delivered to him, on the same date, the sum of P4,000 in cash; that despite repeated efforts to notify him that the check had been dishonored by the bank, appellant could not be located any-where, until he was summoned in the City Fiscal's Office in view of the complaint for estafa filed in connection therewith; and that appellant has not paid as yet the amount of the check, or any part thereof." Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for decision is whether under the facts found, estafa had been accomplished. Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling committed "By post dating a check, or issuing such check in payment of an obligation the offender knowing that at the time he had

no funds in the bank, or the funds deposited by him in the bank were not sufficient to cover the amount of the check, and without informing the payee of such circumstances". We believe that under this provision of law Ang Tek Lian was properly held liable. In this connection, it must be stated that, as explained in People vs. Fernandez (59 Phil., 615), estafa is committed by issuing either a postdated check or an ordinary check to accomplish the deceit. It is argued, however, that as the check had been made payable to "cash" and had not been endorsed by Ang Tek Lian, the defendant is not guilty of the offense charged. Based on the proposition that "by uniform practice of all banks in the Philippines a check so drawn is invariably dishonored," the following line of reasoning is advanced in support of the argument: . . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from the appellant, he did so with full knowledge that it would be dishonored upon presentment. In that sense, the appellant could not be said to have acted fraudulently because the complainant, in so accepting the check as it was drawn, must be considered, by every rational consideration, to have done so fully aware of the risk he was running thereby." (Brief for the appellant, p. 11.) We are not aware of the uniformity of such practice. Instances have undoubtedly occurred wherein the Bank required the indorsement of the drawer before honoring a check payable to "cash." But cases there are too, where no such requirement had been made . It depends upon the circumstances of each transaction. Under the Negotiable Instruments Law (sec. 9 [ d], a check drawn payable to the order of "cash" is a check payable to bearer, and the bank may pay it to the person presenting it for payment without the drawer's indorsement. A check payable to the order of cash is a bearer instrument. Bacal vs. National City Bank of New York (1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. De Beck Plate Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713. Where a check is made payable to the order of "cash", the word cash "does not purport to be the name of any person", and hence the instrument is payable to bearer. The drawee bank need not obtain any indorsement of the check, but may pay it to the person presenting it without any indorsement. . . . (Zollmann, Banks and Banking, Permanent Edition, Vol. 6, p. 494.) Of course, if the bank is not sure of the bearer's identity or financial solvency, it has the right to demand identification and /or assurance against possible complications, for instance, (a) forgery of drawer's signature, (b) loss of the check by the rightful owner, (c) raising of the amount payable, etc. The bank may therefore require, for its protection, that the indorsement of the drawer or of some other person known to it be obtained. But where the Bank is satisfied of the identity and /or the economic standing of the bearer who tenders the check for collection, it will pay the instrument without further question; and it would incur no liability to the drawer in thus acting. A check payable to bearer is authority for payment to holder. Where a check is in the ordinary form, and is payable to bearer, so that no indorsement is required, a bank, to which it is presented for payment, need not have the holder identified, and is not negligent in falling to do so. . . . (Michie on Banks and Banking, Permanent Edition, Vol. 5, p. 343.) . . . Consequently, a drawee bank to which a bearer check is presented for payment need not necessarily have the holder identified and ordinarily may not be charged with negligence in failing to do so. See Opinions 6C:2 and 6C:3 If the bank has no reasonable cause for suspecting any irregularity, it will be protected in paying a bearer check, "no matter what facts unknown to it may have occurred prior to the presentment." 1 Morse, Banks and Banking, sec. 393. Although a bank is entitled to pay the amount of a bearer check without further inquiry, it is entirely reasonable for the bank to insist that holder give satisfactory proof of his identity. . . . (Paton's Digest, Vol. I, p. 1089.) Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally unconnected with its dishonor. The Court of Appeals declared that it was returned unsatisfied because the drawer had insufficient funds not because the drawer's indorsement was lacking. Wherefore, there being no question as to the correctness of the penalty imposed on the appellant, the writ of certiorari is denied and the decision of the Court of Appeals is hereby affirmed, with costs.

THIRD DIVISION

PHILIPPINE NATIONAL BANK, Petitioner,

G.R. No. 170325 Present: YNARES-SANTIAGO, J.,

Chairperson, - versus NACHURA, and REYES, JJ.

AUSTRIA-MARTINEZ, CHICO-NAZARIO,

ERLANDO T. RODRIGUEZ Promulgated: and NORMA RODRIGUEZ, Respondents. September 26, 2008 x--------------------------------------------------x DECISION

REYES, R.T., J.:

WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to order or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception? These questions seek answers in this petition for review on certiorari of the Amended Decisionviii[1] of the Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC).viii[2]

The Facts The facts as borne by the records are as follows: Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking accounts, namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the account name Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current Account No. 810480-4 under the account name Erlando T. Rodriguez). The spouses were engaged in the informal lending business. In line with their business, they had a discountingviii[3] arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch. The association maintained current and savings accounts with petitioner bank.

PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated checks issued to members whenever the association was short of funds. As was customary, the spouses would replace the postdated checks with their own checks issued in the name of the members. It was PEMSLAs policy not to approve applications for loans of members with outstanding debts. To subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their outstanding loan accounts. They took out loans in the names of unknowing members, without the knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the spouses for rediscounting. The officers carried this out by forging the indorsement of the named payees in the checks. In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited by the spouses to their account. Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any indorsement from the named payees. This was an irregular procedure made possible through the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears that this became the usual practice for the parties. For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the total amount of P2,345,804.00. These were payable to forty seven (47) individual payees who were all members of PEMSLA.viii[4] Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or dishonored for the reason Account Closed. The corresponding Rodriguez checks, however, were deposited as usual to the PEMSLA savings account. The amounts were duly debited from the Rodriguez account. Thus, because the PEMSLA checks given as payment were returned, spouses Rodriguez incurred losses from the rediscounting transactions. RTC Disposition Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB. They sought to recover the value of their checks that were deposited to the PEMSLA savings account amounting to P2,345,804.00. The spouses contended that because PNB credited the checks to the PEMSLA account even without indorsements, PNB violated its contractual obligation to them as depositors. PNB paid the wrong payees, hence, it should bear the loss. PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim for damages should come from the payees of the checks, and not from spouses Rodriguez. Since there was no demand from the said payees, the obligation should be considered as discharged. In an Order dated January 12, 2000, the RTC denied PNBs motion to dismiss. In its Answer,viii[5] PNB claimed it is not liable for the checks which it paid to the PEMSLA account without any indorsement from the payees. The bank contended that spouses Rodriguez, the makers, actually did not intend for the named payees to receive the proceeds of the checks . Consequently, the payees were considered as fictitious payees as defined under the Negotiable Instruments Law (NIL). Being checks made to fictitious payees which are bearer instruments, the checks were negotiable by mere delivery. PNBs Answer included its cross-claim against its co-defendants PEMSLA and the MCP, praying that in the event that

judgment is rendered against the bank, the cross-defendants should be ordered to reimburse PNB the amount it shall pay. After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that PNB (defendant) is liable to return the value of the checks. All counterclaims and cross-claims were dismissed. The dispositive portion of the RTC decision reads: WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows: 1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or reinstate or restore the amount of P775,337.00 in the PNBig Demand Deposit Checking/Current Account No. 810480-4 of Erlando T. Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand Deposit, Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or Norma Rodriguez, plus legal rate of interest thereon to be computed from the filing of this complaint until fully paid; 2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable amount of damages suffered by them taking into consideration the standing of the plaintiffs being sugarcane planters, realtors, residential subdivision owners, and other businesses: (a) Consequential damages, unearned income in the amount of P4,000,000.00, as a result of their having incurred great dificulty (sic) especially in the residential subdivision business, which was not pushed through and the contractor even threatened to file a case against the plaintiffs; (b) (c) Moral damages in the amount of P1,000,000.00; Exemplary damages in the amount of P500,000.00;

(d) Attorneys fees in the amount of P150,000.00 considering that this case does not involve very complicated issues; and for the (e) 3. Costs of suit. Other claims and counterclaims are hereby dismissed.viii[6]

CA Disposition PNB appealed the decision of the trial court to the CA on the principal ground that the disputed checks should be considered as payable to bearer and not to order. In a Decisionviii[7] dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The court a quo declared: We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause of action arose from the alleged breach of contract by the defendant-appellant (PNB) when it paid the value of the checks to PEMSLA despite the checks being payable to order. Rather, we are more convinced by the strong and credible evidence for the defendant-appellant with regard to the plaintiffs-appellees and PEMSLAs business arrangement that the value of the rediscounted checks of the plaintiffs-appellees would be deposited in PEMSLAs account for payment of the loans it has approved in exchange for PEMSLAs checks with the full value of the said loans. This is the only obvious explanation as to why all the disputed sixty-nine (69) checks were in the possession of PEMSLAs errand boy for presentment to the defendant-appellant that led to this

present controversy. It also appears that the teller who accepted the said checks was PEMSLAs officer, and that such was a regular practice by the parties until the defendant-appellant discovered the scam. The logical conclusion, therefore, is that the checks were never meant to be paid to order, but instead, to PEMSLA. We thus find no breach of contract on the part of the defendant-appellant. According to plaintiff-appellee Erlando Rodriguez testimony, PEMS LA allegedly issued post-dated checks to its qualified members who had applied for loans. However, because of PEMSLAs insufficiency of funds, PEMSLA approached the plaintiffs-appellees for the latter to issue rediscounted checks in favor of said applicant members. Based on the investigation of the defendant-appellant, meanwhile, this arrangement allowed the plaintiffs-appellees to make a profit by issuing rediscounted checks, while the officers of PEMSLA and other members would be able to claim their loans, despite the fact that they were disqualified for one reason or another. They were able to achieve this conspiracy by using other members who had loaned lesser amounts of money or had not applied at all. x x x.viii[8] (Emphasis added)

The CA found that the checks were bearer instruments, thus they do not require indorsement for negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this moneymaking scheme. The payees in the checks were fictitious payees because they were not the intended payees at all. The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on their faces were unquestionably payable to order; and that PNB committed a breach of contract when it paid the value of the checks to PEMSLA without indorsement from the payees. They also argued that their cause of action is not only against PEMSLA but also against PNB to recover the value of the checks. On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and fallo of which read: In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps. Rodriguez for the following: 1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May 1999 until fully paid; 2. 3. 4. Moral damages in the amount of P200,000; Attorneys fees in the amount of P100,000; and Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us AFFIRMING WITH MODIFICATION the assailed decision rendered in Civil Case No. 99-10892, as set forth in the immediately next preceding paragraph hereof, and SETTING ASIDE Our original decision promulgated in this case on 22 July 2004. SO ORDERED.viii[9] The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended the checks to be received by the specified payees. Thus, PNB is liable for the value of the checks which it paid to PEMSLA without indorsements from the named payees. The award for damages was deemed appropriate in view of the failure of

PNB to treat the Rodriguez account with the highest degree of care considering the fiduciary nature of their relationship, which constrained respondents to seek legal action. Hence, the present recourse under Rule 45. Issues The issues may be compressed to whether the subject checks are payable to order or to bearer and who bears the loss? PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend for the named payees to receive the proceeds. Thus, they are bearer instruments that could be validly negotiated by mere delivery. Further, testimonial and documentary evidence presented during trial amply proved that spouses Rodriguez and the officers of PEMSLA conspired with each other to defraud the bank. Our Ruling Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality to the prejudice of innocent parties. A court discovering an erroneous judgment before it becomes final may, motu proprio or upon motion of the parties, correct its judgment with the singular objective of achieving justice for the litigants.viii[10] However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order. The Court does not sanction careless disposition of cases by courts of justice. The highest degree of diligence must go into the study of every controversy submitted for decision by litigants. Every issue and factual detail must be closely scrutinized and analyzed, and all the applicable laws judiciously studied, before the promulgation of every judgment by the court. Only in this manner will errors in judgments be avoided. Now to the core of the petition. As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is considered as a bearer instrument. A check is a bill of exchange drawn on a bank payable on demand.viii[11] It is either an order or a bearer instrument. Sections 8 and 9 of the NIL states: SEC. 8. When payable to order. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of (a) (b) (c) (d) (e) (f) A payee who is not maker, drawer, or drawee; or The drawer or maker; or The drawee; or Two or more payees jointly; or One or some of several payees; or The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. SEC. 9. When payable to bearer. The instrument is payable to bearer (a) (b) When it is expressed to be so payable; or When it is payable to a person named therein or bearer; or

(c) When it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) Where the only or last indorsement is an indorsement in blank.viii[12] (Underscoring supplied) The distinction between bearer and order instruments lies in their manner of negotiation. Under Section 30 of the NIL, an order instrument requires an indorsement from the payee or holder before it may be validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be validly negotiated. It is negotiable by mere delivery. The provision reads: SEC. 30. What constitutes negotiation. An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed by delivery. A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable. Thus, checks issued to Prinsipe Abante or Si Malakas at si Maganda, who are well-known characters in Philippine mythology, are bearer instruments because the named payees are fictitious and non-existent. We have yet to discuss a broader meaning of the term fictitious as used in the NIL. It is for this reason that We look elsewhere for guidance. Court rulings in the United States are a logical starting point since our law on negotiable instruments was directly lifted from the Uniform Negotiable Instruments Law of the United States.viii[13] A review of US jurisprudence yields that an actual, existing, and living payee may also be fictitious if the maker of the check did not intend for the payee to in fact receive the proceeds of the check. This usually occurs when the maker places a name of an existing payee on the check for convenience or to cover up an illegal activity.viii[14] Thus, a check made expressly payable to a non-fictitious and existing person is not necessarily an order instrument. If the payee is not the intended recipient of the proceeds of the check, the payee is considered a fictitious payee and the check is a bearer instrument. In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon. And since the maker knew this limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of the check will bear the loss. This rule is justified for otherwise, it will be most convenient for the maker who desires to escape payment of the check to always deny the validity of the indorsement. This despite the fact that the fictitious payee was purposely named without any intention that the payee should receive the proceeds of the check.viii[15] The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank.viii[16] In the said case, the corporation Mueller & Martin was defrauded by George L. Martin, one of its authorized signatories. Martin drew seven checks payable to the German Savings Fund Company Building Association (GSFCBA) amounting to $2,972.50 against the account of the corporation without authority from the latter. Martin was also an officer of the GSFCBA but did not have signing authority. At the back of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name as indorsement. He then successfully drew the funds from Liberty Insurance Bank for his own personal profit. When the corporation filed an action against the bank to recover the amount of the checks, the claim was denied.

The US Supreme Court held in Mueller that when the person making the check so payable did not intend for the specified payee to have any part in the transactions, the payee is considered as a fictitious payee. The check is then considered as a bearer instrument to be validly negotiated by mere delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as drawee, was authorized to make payment to the bearer of the check, regardless of whether prior indorsements were genuine or not.viii[17] The more recent Getty Petroleum Corp. v. American Express Travel Related Services Company, Inc. viii[18] upheld the fictitious-payee rule. The rule protects the depositary bank and assigns the loss to the drawer of the check who was in a better position to prevent the loss in the first place. Due care is not even required from the drawee or depositary bank in accepting and paying the checks. The effect is that a showing of negligence on the part of the depositary bank will not defeat the protection that is derived from this rule. However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial bad faith on the part of the drawee bank, or any transferee of the check for that matter, will work to strip it of this defense. The exception will cause it to bear the loss. Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme. Said the US Supreme Court in Getty: Consequently, a transferees lapse of wary vigilance, disregard of suspicious circumstances which might have well induced a prudent banker to investigate and other permutations of negligence are not relevant considerations under Section 3-405 x x x. Rather, there is a commercial bad faith exception to UCC 3-405, applicable when the transferee acts dishonestly where it has actual knowledge of facts and circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme. x x x Such a test finds support in the text of the Code, which omits a standard of care requirement from UCC 3-405 but imposes on all parties an obligation to act with honesty in fact. x x xviii[19] (Emphasis added) Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank transferees of the checks. In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted that the 69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees were actual, existing, and living persons who were members of PEMSLA that had a rediscounting arrangement with spouses Rodriguez. What remains to be determined is if the payees, though existing persons, were fictitious in its broader context. For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the named payees to be part of the transaction involving the checks. At most, the banks thesis shows that the payees did not have knowledge of the existence of the checks. This lack of knowledge on the part of the payees, however, was not tantamount to a lack of intention on the part of respondents-spouses that the payees would not receive the checks proceeds. Considering that respondents-spouses were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the information given by the officers of PEMSLA that the payees would be receiving the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both lower courts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that the named payees were the intended recipients of the checks proceeds. The bank failed to satisfy a requisite condition of a fictitious payee situation that the maker of the check intended for the payee to have no interest in the transaction.

Because of a failure to show that the payees were fictitious in its broader sense, the fictitious-payee rule does not apply. Thus, the checks are to be deemed payable to order. Consequently, the drawee bank bears the loss.viii[20] PNB was remiss in its duty as the drawee bank . It does not dispute the fact that its teller or tellers accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from the named payees. It bears stressing that order instruments can only be negotiated with a valid indorsement. A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the payee is apparently grossly negligent in its operations.viii[21] This Court has recognized the unique public interest possessed by the banking industry and the need for the people to have full trust and confidence in their banks.viii[22] For this reason, banks are minded to treat their customers accounts with utmost care, confidence, and honesty.viii[23] In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the drawer and to pay the check strictly in accordance with the drawers instructions, i.e., to the named payee in the check. It should charge to the drawers accounts only the payables authorized by the latter. Otherwise, the drawee w ill be violating the instructions of the drawer and it shall be liable for the amount charged to the drawers account.viii[24] In the case at bar, respondents-spouses were the banks depositors. The checks were drawn against respondentsspouses accounts. PNB, as the drawee bank, had the responsibility to ascertain the regularity of the indorsements, and the genuineness of the signatures on the checks before accepting them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructions of the drawers. Petitioner miserably failed to discharge this burden. The checks were presented to PNB for deposit by a representative of PEMSLA absent any type of indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in strict accordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values of the checks not to the named payees or their order, but to PEMSLA, a third party to the transaction between the drawers and the payees. Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness of bank employees is indispensable to maintain the stability of the banking industry. Thus, banks are enjoined to be extra vigilant in the management and supervision of their employees. In Bank of the Philippine Islands v. Court of Appeals,viii[25] this Court cautioned thus: Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. For obvious reasons, the banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.viii[26] PNBs tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank employees that caused the loss, the bank should be held liable.viii[27] PNBs argument that there is no loss to compensate since no demand for payment has been made by the payees must also fail. Damage was caused to respondents-spouses when the PEMSLA checks they deposited were returned for the reason Account Closed. These PEMSLA checks were the corresponding payments to the Rodriguez checks. Since they could not encash the PEMSLA checks, respondents-spouses were unable to collect payments for the amounts they had advanced.

A bank that has been remiss in its duty must suffer the consequences of its negligence. Being issued to named payees, PNB was duty-bound by law and by banking rules and procedure to require that the checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should be held liable for the amounts of the checks. One Last Note We note that the RTC failed to thresh out the merits of PNBs cross-claim against its co-defendants PEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in answer to the complaint of respondents-spouses and cross-claim of PNB. The Rules expressly provide that failure to file an answer is a ground for a declaration that defendant is in default.viii[28] Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file responsive pleadings. Verily, the RTC dismissal of PNBs cross-claim has no basis. Thus, this judgment shall be without prejudice to whatever action the bank might take against its co-defendants in the trial court. To PNBs credit, it became involved in the controversial transaction not of its own volition but due to the actions of some of its employees. Considering that moral damages must be understood to be in concept of grants, not punitive or corrective in nature, We resolve to reduce the award of moral damages to P50,000.00.viii[29] WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that the award for moral damages is reduced to P50,000.00, and that this is without prejudice to whatever civil, criminal, or administrative action PNB might take against PEMSLA, MPC, and the employees involved. SO ORDERED. G.R. No. L-10221 February 28, 1958 Intestate of Luther Young and Pacita Young, spouses. PACIFICA JIMENEZ, petitioner-appellee,vs. DR. JOSE BUCOY, administrator-appellant. Frank W. Brady and Pablo C. de Guia, Jr. for appellee.E. A. Beltran for appellant. BENGZON, J. : In this intestate of Luther Young and Pacita Young who died in 1954 and 1952 respectively, PacificaJimenez presented for payment four promissory notes signed by Pacita for different amountstotalling twenty-one thousand pesos (P21,000).Acknowledging receipt by Pacita during the Japanese occupation, in the currency then prevailing,the administrator manifested willingness to pay provided adjustment of the sums be made in linewith the Ballantyne schedule.The claimant objected to the adjustment insisting on full payment in accordance with the notes.Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales, Judge, held that thenotes should be paid in the currency prevailing after the war, and that consequently plaintiff wasentitled to recover P21,000 plus attorneys fees for the sum of P2,000.Hence this appeal.Executed in the month of August 1944, the first promissory note read as follows:Received from Miss Pacifica Jimenez the total amount of P10,000) ten thousand pesospayable six months after the war, without interest.The other three notes were couched in the same terms, except as to amounts and dates.There can be no serious question that the notes were promises to pay "six months after the war," theamounts mentioned.But the important question, which obviously compelled the administrator to appeal, is whether theamounts should be paid, peso for peso, or whether a reduction should be made in accordance withthe well-known Ballantyne schedule.This matter of

payment of loans contracted during the Japanese occupation has received ourattention in many litigations after the liberation. The gist of our adjudications, in so far as materialhere, is that if the loan should be paid during the Japanese occupation, the Ballantyne schedule should apply with corresponding reduction of the amount. 1 However, if the loan was expresslyagreed to be payable only after the war or after liberation, or became payable after those dates, noreduction could be effected, and peso-for-peso payment shall be ordered in Philippine currency. 2 The Ballantyne Conversion Table does not apply where the monetary obligation, under thecontract, was not payable during the Japanese occupation but until after one year counted for the date of ratification of the Treaty of Peace concluding the Greater East Asia War .(Arellano vs. De Domingo, 101 Phil., 902.)When a monetary obligation is contracted during the Japanese occupation, to be dischargedafter the war, the payment should be made in Philippine Currency. (Kare et al. vs. Imperial etal., 102 Phil., 173.)Now then, as in the case before us, the debtor undertook to pay "six months after the war," peso forpeso payment is indicated.The Ang Lam 3 case cited by appellant is not controlling, because the loan therein given could havebeen repaid during the Japanese occupation. Dated December 26, 1944, it was payable within one year . Payment could therefore have been made during January 1945. The notes here in questionwere payable only after the war.The appellant administrator calls attention to the fact that the notes contained no express promise topay a specified amount. We declare the point to be without merit. In accordance with doctrines onthe matter, the note herein-above quoted amounted in effect to "a promise to pay ten thousandpesos six months after the war, without interest." And so of the other notes."An acknowledgment may become a promise by the addition of words by which a promise ofpayment is naturally implied, such as, "payable," "payable" on a given day, "payable on demand,""paid . . . when called for," . . . (10 Corpus Juris Secundum p. 523.)"To constitute a good promissory note, no precise words of contract are necessary, provided theyamount, in legal effect, to a promise to pay. In other words, if over and above the mereacknowledgment of the debt there may be collected from the words used a promise to pay it, theinstrument may be regarded as a promissory note. 1 Daniel, Neg. Inst. sec. 36 et seq .; Byles, Bills,10, 11, and cases cited . . . "Due A. B. $325, payable on demand," or, "I acknowledge myself to beindebted to A in $109, to be paid on demand, for value received," or, "I O. U. $85 to be paid on May5th," are held to be promissory notes, significance being given to words of payment as indicating apromise to pay." 1 Daniel Neg. Inst. see. 39, and cases cited. (Cowan vs. Hallack, (Colo.) 13 PacificReporter 700, 703.)Another argument of appellant is that as the deceased Luther Young did not sign these notes, hisestate is not liable for the same. This defense, however, was not interposed in the lower court. Therethe only issue related to the amount to be amount, considering that the money had been received inJapanese money. It is now unfair to put up this new defense, because had it been raised in the courtbelow, appellees could have proved, what they now alleged that Pacita contracted the obligation tosupport and maintain herself, her son and her husband (then concentrated at Santo TomasUniversity) during the hard days of the occupation.It is now settled practice that on appeal a change of theory is not permitted.In order that a question may be raised on appeal, it is essential

that it be within the issuesmade by the parties in their pleadings. Consequently, when a party deliberately adopts a certain theory, and the case is tried and decided upon that theory in the court below, he willnot be permitted to change his theory on appeal because, to permit him to do so, would beunfair to the adverse party. (Rules of Court by Moran-1957 Ed. Vol. I p. 715 citingAgoncillo vs. Javier, 38 Phil., 424; American Express Company vs. Natividad, 46 Phil., 207;San Agustin vs. Barrios, 68 Phil., 475, 480; Toribio vs. Dacasa, 55 Phil., 461.)Appellant's last assignment of error concerns attorneys fees. He says there was no reason formaking this and exception to the general rule that attorney's fees are not recoverable in the absenceof stipulation.Under the new Civil Code, attorney's fees and expenses of litigation new be awarded in this case ifdefendant acted in gross and evident bad faith in refusing to satisfy plaintiff's plainly valid, just anddemandable claim" or "where the court deems it just and equitable that attorney's fees be recovered"(Article 2208 Civil Code). These are if applicable some of the exceptions to the general rulethat in the absence of stipulation no attorney's fees shall be awarded.The trial court did not explain why it ordered payment of counsel fees. Needless to say, it isdesirable that the decision should state the reason why such award is made bearing in mind that itmust necessarily rest on an exceptional situation. Unless of course the text of the decision plainlyshows the case to fall into one of the exceptions, for instance "in actions for legal support," whenexemplary damages are awarded," etc. In the case at bar, defendant could not obviously be held tohave acted in gross and evident bad faith." He did not deny the debt, and merely pleaded foradjustment, invoking decisions he thought to be controlling. If the trial judge considered it "just andequitable" to require payment of attorney's fees because the defense adjustment underBallantyne schedule proved to be untenable in view of this Court's applicable rulings, it would beerror to uphold his view. Otherwise, every time a defendant loses, attorney's fees would follow as amatter of course. Under the article above cited, even a clearly untenable defense would be noground for awarding attorney's fees unless it amounted to "gross and evident bad faith."Plaintiff's attorneys attempt to sustain the award on the ground of defendant's refusal to accept heroffer, before the suit, to take P5,000 in full settlement of her claim. We do not think this is tenable,defendant's attitude being merely a consequence of his line of defense, which though erroneousdoes not amount to "gross and evident bad faith." For one thing, there is a point raised by defendant,which so far as we are informed, has not been directly passed upon in this jurisdiction: the notescontained no express promise to pay a definite amount.There being no circumstance making it reasonable and just to require defendant to pay attorney'sfees, the last assignment of error must be upheld.Wherefore, in view of the foregoing considerations, the appealed decision is affirmed, except as tothe attorney's fees which are hereby disapproved. So ordered. ERNESTO T. PACHECO and VIRGINIA O. PACHECO, petitioners, vs. HON. COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents. DECISION YNARES_SANTIAGO, J.:

Petitioner spouses are engaged in the construction business. Complainant Romualdo Vicencio was a former Judge and his wife, Luz Vicencio, owns a pawnshop in Samar. On May 17, 1989, due to financial difficulties arising from the repeated delays in the payment of their receivables for the construction projects from the DPWH,viii[1] petitioners were constrained to obtain a loan of P10,000.00 from Mrs. Vicencio. The latter acceded. Instead of merely requiring a note of indebtedness, however, her husband Mr. Vicencio required petitioners to issue an undated check as evidence of the loan which allegedly will not be presented to the bank. Despite being informed by petitioners that their bank account no longer had any funds, Mrs. Vicencio insisted that they issue the check, which according to her was only a formality. Thus, petitioner Virginia Pacheco issued on May 17, 1989 an undated RCBCviii[2] check with number CT 101756 for P10,000.00. However, she only received the amount of P9,000.00 as the 10% interest on the loan was already deducted. Mrs. Vicencio also required Virginias husband, herein petitioner Ernesto Pacheco, to sign the check on the same understanding that the check is not to be encashed but merely intended as an evidence of indebtedness which cannot be negotiated. On June 14, 1989, Virginia obtained another loan of P50,000.00 from Mrs. Vicencio. She received only P35,000.00 as the previous loan of P10,000.00 as well as the 10% interest amounting to P5,000.00 on the new loan were deducted by the latter. With the payment of the previous debt, Virginia asked for the return of the first check (RCBC check no. 101756) but Mrs. Vicencio told her that her filing clerk was absent. Despite several demands for the return of the first check, Mrs. Vicencio told Virginia that they can no longer locate the folder containing that check. For the new loan, she also required Virginia to issue three (3) more checks in various amounts two checks for P20,000.00 each and the third check for P10,000.00. Petitioners were not amenable to these requirements, but Mrs. Vicencio insisted that they issue the same assuring them that the checks will not be presented to the banks but will merely serve as guarantee for the loan since there was no promissory note required of them. Due to her dire financial needs, Virginia issued three undated RCBC checks numbered 101783 and 101784 in the sum of P20,000.00 each and 101785 for P10,000.00, and again informed Mrs. Vicencio that the checks cannot be encashed as the same were not funded. Petitioner Ernesto also signed the three checks as required by Mrs. Vicencio on the same conditions as the first check. On June 20 and July 21, 1989, petitioner Virginia obtained two more loans, one for P10,000.00 and another for P15,000.00. Again she issued two more RCBC checks (No. 101768 for P10,000.00 and No. 101774 for P15,000.00) as required by Mrs. Vicencio with the same assurance that the checks shall not be presented for payment but shall stand only as evidence of indebtedness in lieu of the usual promissory note. All the checks were undated at the time petitioners handed them to Mrs. Vicencio. The six checks represent a total obligation of P85,000.00. However, since the loan of P10,000.00 under the first check was already paid when the amount thereof was deducted from the proceeds of the second loan, the remaining account was only P75,000.00. Of this amount, petitioners were able to settle and pay in cash P60,000.00 in July 1989. Petitioners never had any transaction nor ever dealt with Mrs. Vicencios husband, the complainant herein. When the remaining balance of P15,000.00 on the loans became due and demandable, petitioners were not able to pay despite demands to do so. On August 3, 1992, Mrs. Vicencio together with her husband and their daughter Lucille, went to petitioners residence to persuade Virginia to place the date August 15, 1992 on checks nos. 101756 and 101774, although said checks were respectively given undated to Mrs. Vicencio on May 17, 1989 and July 21, 1989. Check no. 101756 was required by Mrs. Vicencio to be dated as additional guarantee for the P15,000.00 unpaid balance allegedly under check no. 101774. Despite being informed by petitioner Virginia that their account with RCBC had been closed as early as August 17, 1989, Mrs. Vicencio and her daughter insisted that she place a date on the checks allegedly so that it will become evidence of their indebtedness. The former reluctantly wrote the date on the checks for fear that she might not be able to obtain future loans from Mrs. Vicencio. Later, petitioners were surprised to receive on August 29, 1992 a demand letter from Mrs. Vicencios spouse informing them that the checks when presented for payment on August 25, 1992 were dishonored due to Account Closed. Consequently, upon the complaint of Mrs. Vicencios husband with whom petitioners never had any transaction, two informations for estafa, defined in Article 315(2)(d) of the Revised Penal Code, were filed against them. The informations which were amended on April 1, 1993 alleged that petitioners through fraud and false pretenses and in payment of a diamond ring (gold necklace) issued checks which when

presented for payment were dishonored due to account closed.viii[3] After entering a plea of not guilty during arraignment, petitioners were tried and sentenced to suffer imprisonment and ordered to indemnify the complainant in the total amount of P25,000.00.viii[4] On appeal, the Court of Appeals (CA) affirmed the decision of the court a quo.viii[5] Hence this petition. Estafa may be committed in several ways. One of these is by postdating a check or issuing a check in payment of an obligation, as provided in Article 315, paragraph 2(d) of the RPC, viz: ART. 315. Swindling (estafa). Any person who shall defraud another by any of the means mentioned hereinbelow shall be punished by: xxx xxx xxx 2. By means of any of the following false pretenses or fraudulent acts executed prior to or simultaneously with the commission of the fraud: xxx xxx xxx (d) By postdating a check, or issuing a check in payment of an obligation when the offender had no funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the check. The failure of the drawer of the check to deposit the amount necessary to cover his check within three (3) days from receipt of notice from the bank and/or the payee or holder that said check has been dishonored for lack or insufficiency of funds shall be prima facie evidence of deceit constituting false pretense or fraudulent act. The essential elements in order to sustain a conviction under the above paragraph are: 1. that the offender postdated or issued a check in payment of an obligation contracted at the time the check was issued; 2. that such postdating or issuing a check was done when the offender had no funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the check; 3. deceit or damage to the payee thereof.viii[6] The first and third elements are not present in this case. A check has the character of negotiability and at the same time it constitutes an evidence of indebtedness. By mutual agreement of the parties, the negotiable character of a check may be waived and the instrument may be treated simply as proof of an obligation. There cannot be deceit on the part of the obligor, petitioners herein, because they agreed with the obligee at the time of the issuance and postdating of the checks that the same shall not be encashed or presented to the banks. As per assurance of the lender, the checks are nothing but evidence of the loan or security thereof in lieu of and for the same purpose as a promissory note. By their own covenant, therefore, the checks became mere evidence of indebtedness. It has been ruled that a drawer who issues a check as security or evidence of investment is not liable for estafa.viii[7] Mrs. Vicencio could not have been deceived nor defrauded by petitioners in order to obtain the loans because she was informed that they no longer have funds in their RCBC accounts. In 1992, when the Vicencio family asked Virginia to place a date on the check, the latter again informed Mrs. Vicencio that their account with RCBC was already closed as early as August 1989. With the assurance, however, that the check will only stand as a firm evidence of indebtedness, Virginia placed a date on the check. Under these circumstances, Mrs. Vicencio cannot claim that she was deceived or defrauded by petitioners in obtaining the loan. In the absence of the essential element of deceit,viii[8] no estafa was committed by petitioners. Both courts below relied so much on the fact that Mrs. Vicencios husband is a former Judge who knows the law. He should have known, then, that he need not even ask the petitioners to place a date on the check, because as holder of the check, he could have inserted the date pursuant to Section 13 of the Negotiable Instruments Law (NIL).viii[9] Moreover, as stated in Section 14 thereof, complainant, as the person in possession of the check, has prima facie authority to complete it by filling up the blanks therein. Besides, pursuant to Section 12 of the same law, a negotiable instrument is not rendered invalid by reason only that it is antedated or postdated.viii[10] Thus, the allegation of Mrs. Vicencio that the date to be placed by Virginia was necessary so as to make the check evidence of indebtedness is nothing but a ploy. Petitioners openly disclosed and never hid the fact that they no longer have funds in the bank as their bank account was already closed. Knowledge by the complainant that the drawer does not have sufficient funds in the bank at the time it was issued to him does not give rise to a case for estafa through bouncing checks.viii[11] Moreover, a check must be presented within a reasonable time from issue.viii[12] By current banking practice, a check becomes stale after more than six (6) months. In fact a check long overdue for more than two and one-

half years is considered stale.viii[13] In this case, the checks were issued more than three years prior to their presentment. In his complaint, complainant alleged that petitioners bought jewelry from him and that he would not have parted with his jewelry had not petitioners issued the checks. The evidence on record, however, does not support the theory of the crime. There were six checks given by petitioners to Mrs. Vicencio but only two were presented for encashment. If all were issued in payment of the alleged jewelry, why were not all the checks presented? There was a deliberate choice of these two checks as the total amount reflected therein is equivalent to the amount due under the unpaid obligation. The other checks, on the other hand, could not be used as the amounts therein do not jibe with the amount of the unpaid balance. Following complainants theory that he would not have sold the jewelries had not petitioners issued postdated checks, still no estafa can be imputed to petitioners. It is clear that the checks were not intended for encashment with the bank, but were delivered as mere security for the payment of the loan and under an agreement that the checks would be redeemed with cash as they fell due. Hence, the checks were not intended by the parties to be modes of payment but only as promissory notes. Since complainant and his wife were well aware of that fact, they cannot now complain there was deception on the part of petitioners. Awareness by the complainant of the fictitious nature of the pretense cannot give rise to estafa by means of deceit.viii[14] When the payee was informed by the drawer that the checks are not covered by adequate funds it does not give rise to bad faith or estafa.viii[15] Moreover, complainants allegations that the two subject checks were issued in 1992 as payment for the jewelry he allegedly sold to petitioners is belied by the evidence on record. First, complainant is not engaged in the sale of jewelry.viii[16] Neither are petitioners. If the pieces of jewelry were important to complainant considering that they were with him for more than twenty-five years already,viii[17] he would not have easily parted with them in consideration for unfunded personal checks in favor of persons whose means of living or source of income were unknown to him.viii[18] Applicable here is the legal precept that persons are presumed to have taken care of their business.viii[19] Second, petitioners bank account with RCBC was opened on March 26, 1987 and was closed on April 17, 1989, during the span of which they were issued 10 check booklets with the last booklet issued on April 6, 1989. This last booklet contains 50 checks consecutively numbered from 101751 to 101800. The two subject checks came from this booklet. All the checks in this booklet were issued in the year 1989 including the two subject checks, so that the complainants theory that the jewelry were sold in 1992 cannot be believed. The rule that factual findings of the trial court bind this court is not absolute but admits of exceptions such as when the conclusion is a finding grounded on speculation, surmise, and conjecture and when the findings of the lower court is premised on the absence of evidence and is contradicted by the evidence on record.viii[20] Based on the foregoing discussions, this Court is constrained to depart from the general rule. Equally applicable is what Vice-Chancellor Van Fleet once said:viii[21] Evidence to be believed must not only proceed from the mouth of a credible witness but must be credible in itself such as the common experience and observation of mankind can approve as probable under the circumstances. We have no test of the truth of human testimony, except its conformity to our knowledge, observation and experience. Whatever is repugnant to these belongs to the miraculous, and is outside of judicial cognizance. Petitioners, however, are not without liability. An accused acquitted of a criminal charge may nevertheless be held civilly liable in the same case where the facts established by the evidence so warrant.viii[22] Based on the records, they still have an outstanding obligation of P15,000.00 in favor of Mrs. Vicencio. There was mention that the loan shall earn interests. However, an agreement as to payment of interest must be in writing, otherwise it cannot be valid,viii[23] although there was actual payment of interests by virtue of the advance deductions from the loan. Once the judgment becomes final and executory, the amount due is deemed equivalent to a forbearance of credit during the interim period from the finality of judgment until full payment, in which case it shall earn legal interest at the rate of twelve per cent (12%) per annum pursuant to Central Bank (CB) Circular No. 416.viii[24] WHEREFORE, the assailed Decision is REVERSED and SET ASIDE. Petitioners are ACQUITTED of the charge of estafa but they are ORDERED to pay Mrs. Vicencio the amount of P15,000.00 without interest.

However, from the time this judgment becomes final and executory, the amount due shall earn legal interest of twelve percent (12%) per annum until full payment. SO ORDERED.