G.R. No.

L-40824 February 23, 1989
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private responadents.

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,
A parcel of land covered by Transfer Certificate of Title No. 38989 of the
Register of Deed of Quezon City, co-owned by said mortgagor spouses, was given as
security under the aforesaid two deeds.
They also executed a 'promissory note" which
states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY and
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.

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.
This undertaking was not fulfilled.

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.

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,
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.

Said decision was reversed by the respondent Court of Appeals
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.
x x x x
'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. ...

On the foregoing findings, the respondent court consequently decreed that-
In 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.

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.
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
The parol evidence rule
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

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.,
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
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.
Melencio-Herrera (Chairperson), Paras, Padilla and Sarmiento, JJ., concur.

[G.R. No. 75908. October 22, 1999.]

BORROMEO, INC,Petitioners, v. AMANCIO SUN and the COURT OF
APPEALS, Respondents.



At bar is a Petition for review on Certiorari under Rule 45 of the Revised Rules of Court
seeking to set aside the Resolution of the then Intermediate Appellate Court, 1 dated
March 13, 1986, in AC-G.R. CV NO. 67988, which reversed its earlier Decision dated
February 12, 1985, setting aside the Decision of the former Court of the First Instance of
Rizal, Branch X, in Civil Case No. 19466.chanroblesvirtual|awlibrary

The antecedent facts are as follows:chanrob1es virtual 1aw library

Private respondent Amancio Sun brought before the then Court of the First Instance of
Rizal, Branch X, an action against Lourdes O. Borromeo (in her capacity as corporate
secretary), Federico O. Borromeo and Federico O. Borromeo (F.O.B.), Inc., to compel
the transfer to his name in the books of F.O.B., Inc., 23,223 shares of stock registered
in the name of Federico O. Borromeo, as evidenced by a Deed of Assignment dated
January 16, 1974.

Private respondent averred 2 that all the shares of stock of F.O.B. Inc. registered in the
name of Federico O. Borromeo belong to him, as the said shares were placed in the
name of Federico O. Borromeo ‗only to give the latter personality and importance in the
business world.‘ 3 According to the private respondent, on January 16, 1974 Federico
O. Borromeo executed in his favor a Deed of Assignment with respect to the said
23,223 shares of stock.

On the other hand, petitioner Federico O. Borromeo disclaimed any participation in the
execution of the Deed of Assignment, theorizing that his supposed signature thereon
was forged.chanrobles law library : red

After trial, the lower court of origin came out with a decision declaring the questioned
signature on subject Deed of Assignment, dated January 16, 1974, as the genuine
signature of Federico O. Borromeo; ratiocinating thus:chanrob1es virtual 1aw library

‗After considering the testimonies of the two expert witnesses for the parties and after a
careful and judicious study and analysis of the questioned signature as compared to the
standard signatures, the Court is not in a position to declare that the questioned
signature in Exh. A is a forgery. On the other hand, the Court is of the opinion that the
questioned signature is the real signature of Federico O. Borromeo between the years
1954 to 1957 but definitely is not his signature in 1974 for by then he has changed his
signature. Consequently, to the mind of the Court Exhibit A was signed by defendant
Federico O. Borromeo between the years 1954 to 1957 although the words in the blank
were filled at a much later date.‘ 4

On appeal by petitioners, the Court of Appeals adjudged as forgery the controverted
signature of Federico O. Borromeo; disposing as follows:chanrob1es virtual 1aw library

‗WHEREFORE, the judgment of the Court a quo as to the second cause of action dated
March 12, 1980 is hereby reversed and set aside and a new judgment is hereby
rendered:chanrob1es virtual 1aw library

1. Ordering the dismissal of the complaint as to defendant-appellants;

2. Ordering plaintiff-appellee on appellants‘ counterclaim to pay the latter:chanrob1es
virtual 1aw library

a) P 20,000.00 as moral damages;

b) P 10,000.00 as exemplary damages;

c) P 10,000.00 as attorney‘s fees.

3. Ordering plaintiff-appellee to pay the costs.‘ 5chanrobles.com : virtual law library

On March 29, 1985, Amancio Sun interposed a motion for reconsideration of the said
decision, contending that Segundo Tabayoyong, petitioners‘ expert witness, is not a
credible witness as found and concluded in the following disposition by this Court in
Cesar v. Sandigan Bayan 6

"The testimony of Mr. Segundo Tabayoyong on March 5, 1980, part of which is cited on
pages 19-23 of the petition, shows admissions which are summarized by the petitioner
as follows:chanrob1es virtual 1aw library

‗He never finished any degree in Criminology. Neither did he obtain any degree in
physics or chemistry. He was a mere trainee in the NBI laboratory. He said he had gone
abroad only once-to Argentina which, according to him ‗is the only one country in the
world that gives this degree (?) . . . ‗People go there where they obtain this sort of
degree (?) where they are authorized to practice (sic) examination of questioned

‗His civil service eligibility was second grade (general clerical). His present position had
to be ‗re-classified‘ ‗confidential‘ in order to qualify him to it. He never passed any Board

‗He has never authored any book on the subject on which he claimed to be an ‗expert.‘
Well, he did ‗write‘ a so-called pamphlet pretentiously called ‗Fundamentals of
Questioned Documents Examination and Forgery Detection.‘ In that pamphlet, he
mentioned some references‘ — (some) are Americans and one I think is a British, sir,
like in the case of Dr. Wilson Harrison, a British‘ (he repeated with emphasis). Many of
the ‗theories‘ contained in his pamphlet were lifted body and soul from those references,
one of them being Albert Osborn. His pamphlet has neither quotations nor footnotes,
although he was too aware of the crime committed by many an author called
‗plagiarism.‘ But that did not deter him, nor bother him in the least. ‗He has never been a
member of any professional organization of experts in his supposed field of expertise,
because he said there is none locally. Neither is he on an international level.‘ 7

Acting on the aforesaid motion for reconsideration, the Court of Appeals reconsidered
its decision of February 12, 1985 aforementioned. Thereafter, the parties agreed to
have subject Deed of Assignment examined by the Philippine Constabulary (PC) Crime
Laboratory, which submitted a Report on January 9, 1986, the pertinent portion of
which, stated:chanrob1es virtual 1aw library

‗1. Comparative examination and analysis of the questioned and the standard signature
reveal significant similarities in the freedom of movement, good quality of lines, skills
and individual handwriting characteristics.

2. By process of interpolation the questioned signature fits in and can be bracketed in
time with the standard signatures written in the years between 1956 to 1959.
Microscopic examination of the ink used in the questioned signature and the standard
signature in document dated 30 July 1959 marked Exh. ‗E‘ indicate gallotanic
ink.‘chanrobles law library
x x x

‗1. The questioned signature FEDERICO O. BORROMEO marked ‗Q‘ appearing in the
original Deed of Assignment dated 16 January 1974 and the submitted standard
signatures of Federico O. Borromeo marked ‗S-1‘ to ‗S-49‘ inclusive were written BY

2. The questioned signature FEDERICO O. BORROMEO marked ‗Q‘ COULD HAVE

After hearing the arguments the lawyers of record advanced on the said "Report" of the
PC Crime Laboratory, the Court of Appeals resolved:jgc:chanrobles.com.ph

"x x x

1) to ADMIT the Report dated Jan. 9, 1986 of the PC Crime Laboratory on the Deed of
Assignment in evidence, without prejudice to the parties‘ assailing the credibility of said
Report;chanrobles virtual lawlibrary

2) to GIVE both parties a non-extendible period of FIVE (5) DAYS from February 27,
1986, within which to file simultaneous memoranda. 9

On March 13, 1986, the Court of Appeals reversed its decision of February 12, 1985,
which affirmed in toto the decision of the trial court of origin; resolving

"WHEREFORE, finding the Motion for Reconsideration meritorious, We hereby set
aside our Decision, dated February 12, 1985 and in its stead a new judgment is hereby
rendered affirming in toto the decision of the trial Court, dated March 12, 1980, without
pronouncement as to costs.


Therefrom, petitioners found their way to this court via the present Petition; theorizing
that:chanrobles.com.ph : virtual law library




The Petition is barren of merit.

Well-settled is the rule that "factual finding of the Court of Appeals are conclusive on the
parties and not reviewable by the Supreme Court – and they carry even more weight
when the Court of Appeals affirms the factual findings of the trial court."

In the present case, the trial court found that the signature in question is the genuine
signature of Federico O. Borromeo between the years 1954 to 1957 although the words
in the blank space of the document in question were written on a much later date. So
also, the same conclusion was arrived at by the court on the basis of the Report of the
PC crime Laboratory corroborating the findings of Col. Jose Fernandez that the
signature under controversy is genuine.

It is significant to note that Mr. Tabayoyong, petitioners‘ expert witness, limited his
comparison of the questioned signature with the 1974 standard signature of Federico O.
Borromeo. No comparison of the subject signature with the 1950-1957 standard
signature was ever made by Mr. Tabayoyong despite his awareness that the expert
witness of private respondent, Col. Jose Fernandez, made a comparison of said
signatures and notwithstanding his (Tabayoyong‘s) access to such signatures as they
were all submitted to the lower Court. As correctly ratiocinated 12 by the Court of origin,
the only conceivable reason why Mr. Tabayoyong avoided making such a comparison
must have been, that even to the naked eye, the questioned signature affixed to the
Deed of Assignment, dated January 16, 1974, is strikingly similar to the 1950 to 1954
standard signature of Federico O. Borromeo, such that if a comparison thereof was
made by Mr. Tabayoyong, he would have found the questioned signature genuine.

That the Deed of Assignment is dated January 16, 1974 while the questioned signature
was found to be circa 1954-1957, and not that of 1974, is of no moment. It does not
necessarily mean, that the deed is a forgery. Pertinent records reveal that the subject
Deed of Assignment is embodied in blank form for the assignment of shares with
authority to transfer such shares in the books of the corporation. It was clearly intended
to be signed in blank to facilitate the assignment of shares from one person to another
at any future time. This is similar to Section 14 of the Negotiable Instruments Law where
the blanks may be filled up by the holder, the signing in blank being with the assumed
authority to do so. Indeed, as the shares were registered in the name of Federico O.
Borromeo just to give him personality and standing in the business community, private
respondent had to have a counter evidence of ownership of the shares involve. Thus
the execution of the deed of assignment in blank, to be filled up whenever needed. The
same explains the discrepancy between the date of the deed of assignment and the
date when the signature was affixed thereto.

While it is true that the 1974 standard signature of Federico O. Borromeo is to the
naked eye dissimilar to his questioned signature circa 1954-1957, which could have
been caused by sheer lapse of time, Col. Jose Fernandez, respondent‘s expert witness,
found the said signatures similar to each other after subjecting the same to
stereomicroscopic examination and analysis because the intrinsic and natural
characteristic of Federico O. Borromeo‘s handwriting were present in all the exemplar
signatures used by both Segundo Tabayoyong and Col. Jose Fernandez.cralawnad

It is therefore beyond cavil that the findings of the Court of origin affirmed by the Court
of Appeals on the basis of the corroborative findings of the Philippine Constabulary
Crime Laboratory confirmed the genuineness of the signature of Federico O. Borromeo
in the Deed of Assignment dated January 16, 1974.

Petitioners, however, question the "Report" of the document examiner on the ground
that they were not given an opportunity to cross-examine the Philippine Constabulary
document examiner; arguing that they never waived their right to question the
competency of the examiner concerned. While the Court finds merit in the contention of
the petitioners, that they did not actually waived their right to cross-examine on any
aspect of subject Report of the Philippine Constabulary Crime Laboratory, the Court
discerns no proper basis for deviating from the findings of the Court of Appeals on the
matter. It is worthy to stress that courts may place whatever weight due on the
testimony of an expert witness. 13 Conformably, in giving credence and probative value
to the said "Report" of the Philippine Constabulary Crime Laboratory, corroborating the
findings of the trial Court, the Court of Appeals merely exercised its discretion. There
being no grave abuse in the exercise of such judicial discretion, the findings by the
Court of Appeals should not be disturbed on appeal.

Premises studiedly considered, the Court is of the irresistible conclusion, and so holds,
that the respondent court erred not in affirming the decision of the Regional Trial Court a
quo in Civil Case No. 19466.

WHEREFORE, the Petition is DISMISSED for lack of merit and the assailed Resolution,
dated March 13, 1986, AFFIRMED. No pronouncement as to costs.chanrobles virtual


Melo, Vitug, Panganiban and Gonzaga-Reyes, JJ., concur.

G.R. No. 16454 September 29, 1921
GEORGE A. KAUFFMAN, plaintiff-appellee,
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Roman J. Lacson for appellant.
Ross and Lawrence for appellee.
At the time of the transaction which gave rise to this litigation the plaintiff, George A.
Kauffman, was the president of a domestic corporation engaged chiefly in the
exportation of hemp from the Philippine Islands and known as the Philippine Fiber and
Produce Company, of which company the plaintiff apparently held in his own right
nearly the entire issue of capital stock. On February 5, 1918, the board of directors of
said company, declared a dividend of P100,000 from its surplus earnings for the year
1917, of which the plaintiff was entitled to the sum of P98,000. This amount was
accordingly placed to his credit on the books of the company, and so remained until in
October of the same year when an unsuccessful effort was made to transmit the whole,
or a greater part thereof, to the plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the
Philippine Fiber and Produce Company, presented himself in the exchange department
of the Philippine National Bank in Manila and requested that a telegraphic transfer of
$45,000 should be made to the plaintiff in New York City, upon account of the Philippine
Fiber and Produce Company. He was informed that the total cost of said transfer,
including exchange and cost of message, would be P90,355.50. Accordingly, Wicks, as
treasurer of the Philippine Fiber and Produce Company, thereupon drew and delivered
a check for that amount on the Philippine National Bank; and the same was accepted by
the officer selling the exchange in payment of the transfer in question. As evidence of
this transaction a document was made out and delivered to Wicks, which is referred to
by the bank's assistant cashier as its official receipt. This memorandum receipt is in the
following language:
October 9th, 1918.
Manila, P.I. Stamp P18
Foreign Amount Rate
$45,000. 3/8 % P90,337.50
Payable through Philippine National Bank, New York. To G. A. Kauffman, New
York. Total P90,355.50. Account of Philippine Fiber and Produce Company. Sold
to Messrs. Philippine Fiber and Produce Company, Manila.
(Sgd.) Y LERMA,
Manager, Foreign Department.
On the same day the Philippine National Bank dispatched to its New York agency a
cablegram to the following effect:
Pay George A. Kauffman, New York, account Philippine Fiber Produce Co.,
$45,000. (Sgd.) PHILIPPINE NATIONAL BANK, Manila.
Upon receiving this telegraphic message, the bank's representative in New York sent a
cable message in reply suggesting the advisability of withholding this money from
Kauffman, in view of his reluctance to accept certain bills of the Philippine Fiber and
Produce Company. The Philippine National Bank acquiesced in this and on October 11
dispatched to its New York agency another message to withhold the Kauffman payment
as suggested.
Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled
to Kauffman in New York, advising him that $45,000 had been placed to his credit in the
New York agency of the Philippine National Bank; and in response to this advice
Kauffman presented himself at the office of the Philippine National Bank in New York
City on October 15, 1918, and demanded the money. By this time, however, the
message from the Philippine National Bank of October 11, directing the withholding of
payment had been received in New York, and payment was therefore refused.
In view of these facts, the plaintiff Kauffman instituted the present action in the Court of
First Instance of the city of Manila to recover said sum, with interest and costs; and
judgment having been there entered favorably to the plaintiff, the defendant appealed.
Among additional facts pertinent to the case we note the circumstance that at the time
of the transaction above-mentioned, the Philippines Fiber and Produce Company did
not have on deposit in the Philippine National Bank money adequate to pay the check
for P90,355.50, which was delivered in payment of the telegraphic order; but the
company did have credit to that extent, or more, for overdraft in current account, and the
check in question was charged as an overdraft against the Philippine Fiber and Produce
Company and has remained on the books of the bank as an interest-bearing item in the
account of said company.
It is furthermore noteworthy that no evidence has been introduced tending to show
failure of consideration with respect to the amount paid for said telegraphic order. It is
true that in the defendant's answer it is suggested that the failure of the bank to pay
over the amount of this remittance to the plaintiff in New York City, pursuant to its
agreement, was due to a desire to protect the bank in its relations with the Philippine
Fiber and Produce Company, whose credit was secured at the bank by warehouse
receipts on Philippine products; and it is alleged that after the exchange in question was
sold the bank found that it did not have sufficient to warrant payment of the remittance.
In view, however, of the failure of the bank to substantiate these allegations, or to offer
any other proof showing failure of consideration, it must be assumed that the obligation
of the bank was supported by adequate consideration.
In this court the defense is mainly, if not exclusively, based upon the proposition that,
inasmuch as the plaintiff Kauffman was not a party to the contract with the bank for the
transmission of this credit, no right of action can be vested in him for the breach thereof.
"In this situation," — we here quote the words of the appellant's brief, — "if there exists
a cause of action against the defendant, it would not be in favor of the plaintiff who had
taken no part at all in the transaction nor had entered into any contract with the plaintiff,
but in favor of the Philippine Fiber and Produce Company, the party which contracted in
its own name with the defendant."
The question thus placed before us is one purely of law; and at the very threshold of the
discussion it can be stated that the provisions of the Negotiable Instruments Law can
come into operation there must be a document in existence of the character described
in section 1 of the Law; and no rights properly speaking arise in respect to said
instrument until it is delivered. In the case before us there was an order, it is true,
transmitted by the defendant bank to its New York branch, for the payment of a
specified sum of money to George A. Kauffman. But this order was not made payable
"to order or "to bearer," as required in subsection (d) of that Act; and inasmuch as it
never left the possession of the bank, or its representative in New York City, there was
no delivery in the sense intended in section 16 of the same Law. In this connection it is
unnecessary to point out that the official receipt delivered by the bank to the purchaser
of the telegraphic order, and already set out above, cannot itself be viewed in the light of
a negotiable instrument, although it affords complete proof of the obligation actually
assumed by the bank.
Stated in bare simplicity the admitted facts show that the defendant bank for a valuable
consideration paid by the Philippine Fiber and Produce Company agreed on October 9,
1918, to cause a sum of money to be paid to the plaintiff in New York City; and the
question is whether the plaintiff can maintain an action against the bank for the
nonperformance of said undertaking. In other words, is the lack of privity with the
contract on the part of the plaintiff fatal to the maintenance of an action by him?
The only express provision of law that has been cited as bearing directly on this
question is the second paragraph of article 1257 of the Civil Code; and unless the
present action can be maintained under the provision, the plaintiff admittedly has no
case. This provision states an exception to the more general rule expressed in the first
paragraph of the same article to the effect that contracts are productive of effects only
between the parties who execute them; and in harmony with this general rule are
numerous decisions of this court (Wolfson vs. Estate of Martinez, 20 Phil., 340; Ibañez
de Aldecoa vs. Hongkong and Shanghai Banking Corporation, 22 Phil., 572, 584;
Manila Railroad Co. vs. Compañia Trasatlantica and Atlantic, Gulf and Pacific Co., 38
Phil., 873, 894.)
The paragraph introducing the exception which we are now to consider is in these
Should the contract contain any stipulation in favor of a third person, he may
demand its fulfillment, provided he has given notice of his acceptance to the
person bound before the stipulation has been revoked. (Art. 1257, par. 2, Civ.
In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate
dissertation upon the history and interpretation of the paragraph above quoted and so
complete is the discussion contained in that opinion that it would be idle for us here to
go over the same matter. Suffice it to say that Justice Trent, speaking for the court in
that case, sums up its conclusions upon the conditions governing the right of the person
for whose benefit a contract is made to maintain an action for the breach thereof in the
following words:
So, we believe the fairest test, in this jurisdiction at least, whereby to determine
whether the interest of a third person in a contract is a stipulation pour autrui, or
merely an incidental interest, is to rely upon the intention of the parties as
disclosed by their contract.
If a third person claims an enforcible interest in the contract, the question must
be settled by determining whether the contracting parties desired to tender him
such an interest. Did they deliberately insert terms in their agreement with the
avowed purpose of conferring a favor upon such third person? In resolving this
question, of course, the ordinary rules of construction and interpretation of
writings must be observed. (Uy Tam and Uy Yet vs. Leonard,supra.)
Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui,
it matters not whether the stipulation is in the nature of a gift or whether there is an
obligation owing from the promise to the third person. That no such obligation exists
may in some degree assist in determining whether the parties intended to benefit a third
person, whether they stipulated for him." (Uy Tam and Uy Yet vs. Leonard, supra.)
In the light of the conclusion thus stated, the right of the plaintiff to maintain the present
action is clear enough; for it is undeniable that the bank's promise to cause a definite
sum of money to be paid to the plaintiff in New York City is a stipulation in his favor
within the meaning of the paragraph above quoted; and the circumstances under which
that promise was given disclose an evident intention on the part of the contracting
parties that the plaintiff should have the money upon demand in New York City. The
recognition of this unqualified right in the plaintiff to receive the money implies in our
opinion the right in him to maintain an action to recover it; and indeed if the provision in
question were not applicable to the facts now before us, it would be difficult to conceive
of a case arising under it.
It will be noted that under the paragraph cited a third person seeking to enforce
compliance with a stipulation in his favor must signify his acceptance before it has been
revoked. In this case the plaintiff clearly signified his acceptance to the bank by
demanding payment; and although the Philippine National Bank had already directed its
New York agency to withhold payment when this demand was made, the rights of the
plaintiff cannot be considered to as there used, must be understood to imply revocation
by the mutual consent of the contracting parties, or at least by direction of the party
purchasing he exchange.
In the course of the argument attention was directed to the case of
Legniti vs. Mechanics, etc. Bank (130 N.E. Rep., 597), decided by the Court of Appeals
of the State of New York on March 1, 1921, wherein it is held that, by selling a cable
transfer of funds on a foreign country in ordinary course, a bank incurs a simple
contractual obligation, and cannot be considered as holding the money which was paid
for the transfer in the character of a specific trust. Thus, it was said, "Cable transfers,
therefore, mean a method of transmitting money by cable wherein the seller engages
that he has the balance at the point on which the payment is ordered and that on receipt
of the cable directing the transfer his correspondent at such point will make payment to
the beneficiary described in the cable. All these transaction are matters of purchase and
sale create no trust relationship."
As we view it there is nothing in the decision referred to decisive of the question now
before us, wish is merely that of the right of the beneficiary to maintain an action against
the bank selling the transfer.
Upon the considerations already stated, we are of the opinion that the right of action
exists, and the judgment must be affirmed. It is so ordered, with costs against the
appellant. Interest will be computed as prescribed in section 510 of the Code of Civil
Johnson, Araullo, Avanceña and Villamor, JJ., concur.

G.R. No. 97753 August 10, 1992
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofileña & Guingona for private.

This petition for review on certiorari impugns and seeks the reversal of the decision
promulgated by respondent court on March 8, 1991 in CA-G.R. CV No.
affirming with modifications, the earlier decision of the Regional Trial Court of
Manila, Branch XLII,
which dismissed the complaint filed therein by herein petitioner
against respondent bank.
The undisputed background of this case, as found by the court a quo and adopted by
respondent court, appears of record:
1. On various dates, defendant, a commercial banking institution, through
its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of
one Angel dela Cruz who deposited with herein defendant the aggregate
amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts
and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1
to 280);
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein
plaintiff in connection with his purchased of fuel products from the latter
(Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo
Tiangco, the Sucat Branch Manger, that he lost all the certificates of time
deposit in dispute. Mr. Tiangco advised said depositor to execute and
submit a notarized Affidavit of Loss, as required by defendant bank's
procedure, if he desired replacement of said lost CTDs (TSN, February 9,
1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to
defendant bank the required Affidavit of Loss (Defendant's Exhibit 281).
On the basis of said affidavit of loss, 280 replacement CTDs were issued
in favor of said depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan
from defendant bank in the amount of Eight Hundred Seventy Five
Thousand Pesos (P875,000.00). On the same date, said depositor
executed a notarized Deed of Assignment of Time Deposit (Exhibit 562)
which stated, among others, that he (de la Cruz) surrenders to defendant
bank "full control of the indicated time deposits from and after date" of the
assignment and further authorizes said bank to pre-terminate, set-off and
"apply the said time deposits to the payment of whatever amount or
amounts may be due" on the loan upon its maturity (TSN, February 9,
1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff
Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and
presented for verification the CTDs declared lost by Angel dela Cruz
alleging that the same were delivered to herein plaintiff "as security for
purchases made with Caltex Philippines, Inc." by said depositor (TSN,
February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's
Exhibit 563) from herein plaintiff formally informing it of its possession of
the CTDs in question and of its decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to
furnish the former "a copy of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel
dela Cruz" obligation against which plaintiff proposed to apply the time
deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim
for payment of the value of the CTDs in a letter dated February 7, 1983
(Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank
matured and fell due and on August 5, 1983, the latter set-off and applied
the time deposits in question to the payment of the matured loan (TSN,
February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying
that defendant bank be ordered to pay it the aggregate value of the
certificates of time deposit of P1,120,000.00 plus accrued interest and
compounded interest therein at 16% per annum, moral and exemplary
damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant

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

The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank
BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine
Currency, repayable to said depositor 731 days. after date,
upon presentation and surrender of this certificate, with
interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
—————————— ———————————

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

We disagree with these findings and conclusions, and hereby hold that the CTDs in
question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the
Negotiable Instruments Law, enumerates the requisites for an instrument to become
negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability.
The parties' bone of contention is with regard to requisite (d) set forth above. It is noted
that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982,
testified in open court that the depositor reffered to in the CTDs is no other than Mr.
Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books
of the bank, the depositor referred (sic) in these certificates
states that it was Angel dela Cruz?
a Yes, your Honor, and we have the record to show that
Angel dela Cruz was the one who cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
a None, your Honor.

xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these
certificates of time deposit insofar as the bank is concerned?
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the instrument
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.

Contrary to what respondent court held, the CTDs are negotiable instruments. The
documents provide that the amounts deposited shall be repayable to the depositor. And
who, according to the document, is the depositor? It is the "bearer." The documents do
not say that the depositor is Angel de la Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are to be repayable to the bearer of
the documents or, for that matter, whosoever may be the bearer at the time of
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz
only, it could have with facility so expressed that fact in clear and categorical terms in
the documents, instead of having the word "BEARER" stamped on the space provided
for the name of the depositor in each CTD. On the wordings of the documents,
therefore, the amounts deposited are repayable to whoever may be the bearer thereof.
Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the
depositor "insofar as the bank is concerned," but obviously other parties not privy to the
transaction between them would not be in a position to know that the depositor is not
the bearer stated in the CTDs. Hence, the situation would require any party dealing with
the CTDs to go behind the plain import of what is written thereon to unravel the
agreement of the parties thereto through facts aliunde. This need for resort to extrinsic
evidence is what is sought to be avoided by the Negotiable Instruments Law and calls
for the application of the elementary rule that the interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the obscurity.

The next query is whether petitioner can rightfully recover on the CTDs. This time, the
answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner
chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to
P1,120,000.00 to petitioner without informing respondent bank thereof at any time.
Unfortunately for petitioner, although the CTDs are bearer instruments, a valid
negotiation thereof for the true purpose and agreement between it and De la Cruz, as
ultimately ascertained, requires both delivery and indorsement. For, although petitioner
seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la
Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered
as payment for the fuel products or as a security has been dissipated and resolved in
favor of the latter by petitioner's own authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q.
Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were
negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products"
(Emphasis ours.)
This admission is conclusive upon petitioner, its protestations
notwithstanding. Under the doctrine of estoppel, an admission or representation is
rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon.
A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them.
In the law of
evidence, whenever a party has, by his own declaration, act, or omission, intentionally
and deliberately led another to believe a particular thing true, and to act upon such
belief, he cannot, in any litigation arising out of such declaration, act, or omission, be
permitted to falsify it.

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

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation,
et al. vs. Philippine National Bank, et al.
is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we
quote therefrom:
The character of the transaction between the parties is to be
determined by their intention, regardless of what language
was used or what the form of the transfer was. If it was
intended to secure the payment of money, it must be
construed as a pledge; but if there was some other intention,
it is not a pledge. However, even though a transfer, if
regarded by itself, appears to have been absolute, its object
and character might still be qualified and explained by
contemporaneous writing declaring it to have been a deposit
of the property as collateral security. It has been said that a
transfer of property by the debtor to a creditor, even if
sufficient on its face to make an absolute conveyance,
should be treated as a pledge if the debt continues in
inexistence and is not discharged by the transfer, and that
accordingly the use of the terms ordinarily importing
conveyance of absolute ownership will not be given that
effect in such a transaction if they are also commonly used
in pledges and mortgages and therefore do not unqualifiedly
indicate a transfer of absolute ownership, in the absence of
clear and unambiguous language or other circumstances
excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the
Negotiable Instruments Law, an instrument is negotiated when it is transferred from one
person to another in such a manner as to constitute the transferee the holder
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.
The pertinent law on this point is that where the holder has a lien on the instrument
arising from contract, he is deemed a holder for value to the extent of his lien.
such holder of collateral security, he would be a pledgee but the requirements therefor
and the effects thereof, not being provided for by the Negotiable Instruments Law, shall
be governed by the Civil Code provisions on pledge of incorporeal rights,
inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . .
may also be pledged. The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not appear
in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual
findings of respondent court quoted at the start of this opinion show that petitioner failed
to produce any document evidencing any contract of pledge or guarantee agreement
between it and Angel de la Cruz.
Consequently, the mere delivery of the CTDs did not
legally vest in petitioner any right effective against and binding upon respondent bank.
The requirement under Article 2096 aforementioned is not a mere rule of adjective law
prescribing the mode whereby proof may be made of the date of a pledge contract, but
a rule of substantive law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely.

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of
respondent bank was embodied in a public instrument.
With regard to this other mode
of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect
as against third persons, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case the assignment
involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner,
whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount
of its credit or the extent of its lien nor the execution of any public instrument which
could affect or bind private respondent. Necessarily, therefore, as between petitioner
and respondent bank, the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of
whether or not private respondent observed the requirements of the law in the case of
lost negotiable instruments and the issuance of replacement certificates therefor, on the
ground that petitioner failed to raised that issue in the lower court.

On this matter, we uphold respondent court's finding that the aspect of alleged
negligence of private respondent was not included in the stipulation of the parties and in
the statement of issues submitted by them to the trial court.
The issues agreed upon
by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by
the CTDs against the depositor's loan by virtue of the assignment (Annex
3. Whether or not there was legal compensation or set off involving the
amount covered by the CTDs and the depositor's outstanding account with
defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the
CTDs before the maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and
litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal
authorities, the foregoing enumeration does not include the issue of negligence on the
part of respondent bank. An issue raised for the first time on appeal and not raised
timely in the proceedings in the lower court is barred by estoppel.
Questions raised on
appeal must be within the issues framed by the parties and, consequently, issues not
raised in the trial court cannot be raised for the first time on appeal.

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

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

Still, even assuming arguendo that said issue of negligence was raised in the court
below, petitioner still cannot have the odds in its favor. A close scrutiny of the provisions
of the Code of Commerce laying down the rules to be followed in case of lost
instruments payable to bearer, which it invokes, will reveal that said provisions, even
assuming their applicability to the CTDs in the case at bar, are merely permissive and
not mandatory. The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may
be, may apply to the judge or court of competent jurisdiction, asking that
the principal, interest or dividends due or about to become due, be not
paid a third person, as well as in order to prevent the ownership of the
instrument that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but
discretionary on the part of the "dispossessed owner" to apply to the judge or court of
competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the
provision reads "may," this word shows that it is not mandatory but discretional.
word "may" is usually permissive, not mandatory.
It is an auxiliary verb indicating
liberty, opportunity, permission and possibility.

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


G.R. No. 76788 January 22, 1990
JUANITA SALAS, petitioner,
CORPORATION, respondents.
Arsenio C. Villalon, Jr. for petitioner.
Labaguis, Loyola, Angara & Associates for private respondent.

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
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,
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.

Both petitioner and private respondent appealed the aforesaid decision to the Court of
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.

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.

Petitioner argues that in the light of the provision of the law on sales by
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. 2916-0. 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.

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.,
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.

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:
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: P1,614.95monthly 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 _________________
____________________ ____________________
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.

It was negotiated by indorsement in writing on the instrument itself payable to the Order
of Filinvest Finance and Leasing Corporation
and it is an indorsement of the entire

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.

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.
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.

IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs
against petitioner.
Gutierrez, Jr., Feliciano, Bidin and Cortés, JJ., concur.

[G.R. No. 154127. December 8, 2003]
ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS, respondent.
Novation cannot be presumed. It must be clearly shown either by the express
assent of the parties or by the complete incompatibility between the old and the new
agreements. Petitioner herein fails to show either requirement convincingly; hence, the
summary judgment holding him liable as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review
under Rule 45 of the Rules of Court, seeking to
nullify the November 26, 2001 Decision
and the June 26, 2002 Resolution
of the
Court of Appeals (CA) in CA-GR CV No. 60521. The appellate court disposed as
“UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from,
insofar as it pertains to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED,
subject to the modification that the award for attorney‘s fees and cost of suit
is DELETED. The portion of the judgment that pertains to x x xEduardo de Jesus
is SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus
is REMANDED to the court of origin for purposes of
receiving ex parte [Respondent] Dionisio Llamas‘ evidence against x x x Eduardo de

The challenged Resolution, on the other hand, denied petitioner‘s Motion for
The Antecedents
The antecedents of the case are narrated by the CA as follows:
―This case started out as a complaint for sum of money and damages
by x x x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and
Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the complaint alleged that
on 23 December 1996[,] [petitioner and de Jesus] borrowed P400,000.00 from
[respondent]; that, on the same day, [they] executed a promissory note wherein they
bound themselves jointly and severally to pay the loan on or before 23 January 1997
with a 5% interest per month; that the loan has long been overdue and, despite
repeated demands, [petitioner and de Jesus] have failed and refused to pay it; and that,
by reason of the[ir] unjustified refusal, [respondent] was compelled to engage the
services of counsel to whom he agreed to pay 25% of the sum to be recovered from
[petitioner and de Jesus], plus P2,000.00 for every appearance in court. Annexed to the
complaint were the promissory note above-mentioned and a demand letter, dated 02
May 1997, by [respondent] addressed to [petitioner and de Jesus].
―Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed
no liability under the promissory note because he signed it merely as an
accommodation party for x x x de Jesus; and, alternatively, that he is relieved from any
liability arising from the note inasmuch as the loan had been paid by x x x de Jesus by
means of a check dated 17 April 1997; and that, in any event, the issuance of the check
and [respondent‘s] acceptance thereof novated or superseded the note.
―[Respondent] tendered a reply to [Petitioner] Garcia‘s answer, thereunder asserting
that the loan remained unpaid for the reason that the check issued by x x x de Jesus
bounced, and that [Petitioner] Garcia‘s answer was not even accompanied by a
certificate of non-forum shopping. Annexed to the reply were the face of the check and
the reverse side thereof.
―For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the
supposed P400,000.00 loan, he received only P360,000.00, theP40,000.00 having
been advance interest thereon for two months, that is, for January and February 1997;
that[,] in fact[,] he paid the sum of P120,000.00 by way of interests; that this was made
when [respondent‘s] daughter, one Nits Llamas-Quijencio, received from the Central
Police District Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus
worked), the sum of P40,000.00, representing the peso equivalent of his accumulated
leave credits, another P40,000.00 as advance interest, and still another P40,000.00 as
interest for the months of March and April 1997; that he had difficulty in paying the loan
and had asked [respondent] for an extension of time; that [respondent] acted in bad
faith in instituting the case, [respondent] having agreed to accept the benefits he (de
Jesus) would receive for his retirement, but [respondent] nonetheless filed the instant
case while his retirement was being processed; and that, in defense of his rights, he
agreed to pay his counsel P20,000.00 [as] attorney‘s fees, plus P1,000.00 for every
court appearance.
―During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did
they file any pre-trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his
counsel even manifested that he would no [longer] present evidence. Given this
development, the trial court gave [respondent] permission to present his
evidence ex parte against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial
court directed [respondent] to file a motion for judgment on the pleadings, and for
[Petitioner] Garcia to file his comment or opposition thereto.
―Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to
allow him to present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a
[M]anifestation submitting his defense to a judgment on the pleadings. Subsequently,
[respondent] filed a [M]anifestation/[M]otion to submit the case for judgement on the
pleadings, withdrawing in the process his previous motion. Thereunder, he asserted
that [petitioner‘s and de Jesus‘] solidary liability under the promissory note cannot be
any clearer, and that the check issued by de Jesus did not discharge the loan since the
check bounced.‖

On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222)
disposed of the case as follows:
―WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in
favor of [respondent] and against [petitioner and De Jesus], who are hereby ordered to
pay, jointly and severally, the [respondent] the following sums, to wit:
‗1) P400,000.00 representing the principal amount plus 5% interest thereon per
month from January 23, 1997 until the same shall have been fully paid, less the amount
of P120,000.00 representing interests already paid by x x x de Jesus;
‗2) P100,000.00 as attorney‘s fees plus appearance fee of P2,000.00 for each
day of [c]ourt appearance, and;
‗3) Cost of this suit.‘‖

Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on the
pleadings against De Jesus. According to the appellate court, his Answer raised
genuinely contentious issues. Moreover, he was still required to present his
evidence ex parte. Thus, respondent was not ipso facto entitled to the RTC judgment,
even though De Jesus had been declared in default. The case against the latter was
therefore remanded by the CA to the trial court for the ex parte reception
of the former‘s evidence.
As to petitioner, the CA treated his case as a summary judgment, because his
Answer had failed to raise even a single genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had taken place
when respondent accepted the check from De Jesus. According to the CA, the check
was issued precisely to pay for the loan that was covered by the promissory note jointly
and severally undertaken by petitioner and De Jesus. Respondent‘s acceptance of the
check did not serve to make De Jesus the sole debtor because, first, the obligation
incurred by him and petitioner was joint and several; and, second, the check -- which
had been intended to extinguish the obligation -- bounced upon its presentment.
Hence, this Petition.

Petitioner submits the following issues for our consideration:
Whether or not the Honorable Court of Appeals gravely erred in not holding
that novation applies in the instant case as x x x Eduardo de Jesus had expressly
assumed sole and exclusive liability for the loan obligation he obtained from
x x x Respondent Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full
amount of the loan of P400,000.00 in favor of Respondent Llamas,
although the check subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which
resulted in [the] substitution by x x x de Jesus or [the superseding
of] the promissory note;
c) x x x de Jesus having paid interests on the loan in the total amount
of P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal
of x x x de Jesus that due to financial difficulties, he be given an
extension of time to pay his loan obligation and that his retirement
benefits from the Philippine National Police will answer for said
Whether or not the Honorable Court of Appeals seriously erred in not holding that the
defense of petitioner that he was merely an accommodation party, despite the fact that
the promissory note provided for a joint and solidary liability, should have been given
weight and credence considering that subsequent events showed that the principal
obligor was in truth and in fact x x x de Jesus, as evidenced by the foregoing
circumstances showing his assumption of sole liability over the loan obligation.
Whether or not judgment on the pleadings or summary judgment was properly availed
of by Respondent Llamas, despite the fact that there are genuine issues of fact, which
the Honorable Court of Appeals itself admitted in its Decision, which call for the
presentation of evidence in a full-blown trial.‖

Simply put, the issues are the following: 1) whether there was novation of the
obligation; 2) whether the defense that petitioner was only an accommodation party had
any basis; and 3) whether the judgment against him -- be it a judgment on the pleadings
or a summary judgment -- was proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor
by insisting that novation took place, either through the substitution of De Jesus as sole
debtor or the replacement of the promissory note by the check. Alternatively, the former
argues that the original obligation was extinguished when the latter, who was his co-
obligor, ―paid‖ the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could
not have extinguished the obligation, because it bounced upon presentment. By
the delivery of a check produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or
principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.
Article 1293 of the Civil Code
defines novation as follows:
―Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237.‖
In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the change does
not come from -- and may even be made without the knowledge of -- the debtor, since it
consists of a third person‘s assumption of the obligation. As such, it logically requires
the consent of the third person and the creditor. In delegacion, the debtor offers, and
the creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary.
Both modes of
substitution by the debtor require the consent of the creditor.

Novation may also be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new one that takes the place of the
former. It is merely modificatory when the old obligation subsists to the extent that it
remains compatible with the amendatory agreement.
Whether extinctive
or modificatory, novation is made either by changing the object or the principal
conditions, referred to as objective or real novation; or by substituting the person of the
debtor or subrogating a third person to the rights of the creditor, an act known as
subjective or personal novation.
For novation to take place, the following requisites
must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation
declares in unequivocal terms that the old obligation is extinguished. It is implied when
the new obligation is incompatible with the old one on every point.
The test of
incompatibility is whether the two obligations can stand together, each one with its own
independent existence.

Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been
extinguished by the issuance and the acceptance of the check, or that the check would
take the place of the note. There is no incompatibility between the promissory note and
the check. As the CA correctly observed, the check had been issued precisely to
answer for the obligation. On the one hand, the note evidences the loan obligation; and
on the other, the check answers for it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioner‘s view, also
constitutes novation
-- change the terms and conditions of the obligation. Such
payment was already provided for in the promissory note and, like the check, was totally
in accord with the terms thereof.
Also unmeritorious is petitioner‘s argument that the obligation was novated by the
substitution of debtors. In order to change the person of the debtor, the old one must be
expressly released from the obligation, and the third person or new debtor must assume
the former‘s place in the relation.
Well-settled is the rule that novation is never
Consequently, that which arises from a purported change in the person of
the debtor must be clear and express.
It is thus incumbent on petitioner to show
clearly and unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly released from
the obligation, that a third person was substituted in his place, or that the joint
and solidary obligation was cancelled and substituted by the solitary undertaking of De
Jesus. The CA aptly held:
―x x x. Plaintiff‘s acceptance of the bum check did not result in substitution by de Jesus
either, the nature of the obligation being solidary due to the fact that the promissory note
expressly declared that the liability of appellants thereunder is joint and
[solidary.] Reason: under the law, a creditor may demand payment or performance
from one of the solidary debtors or some or all of them simultaneously, and payment
made by one of them extinguishes the obligation. It therefore follows that in case the
creditor fails to collect from one of the solidary debtors, he may still proceed against the
other or others. x x x ‖

Moreover, it must be noted that for novation to be valid and legal, the law requires
that the creditor expressly consent to the substitution of a new
Since novation implies a waiver of the right the creditor had before
the novation, such waiver must be express.
It cannot be supposed, without clear
proof, that the present respondent has done away with his right to exact fulfillment from
either of the solidary debtors.

More important, De Jesus was not a third person to the obligation. From the
beginning, he was a joint and solidary obligor of the P400,000 loan; thus, he can be
released from it only upon its extinguishment. Respondent‘s acceptance of his check
did not change the person of the debtor, because a joint and solidary obligor is required
to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the
satisfaction of the whole obligation from any or all of the debtors.
It is up to the former
to determine against whom to enforce collection.
Having made himself jointly and
severally liable with De Jesus, petitioner is therefore liable
for the entire obligation.

Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an accommodation
party; and that, as such, he was released as obligor when respondent agreed to extend
the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable
instrument. The note reads:
THOUSAND PESOS, Philippine Currency payable on or before January 23, 1997 at No.
144 K-10 St. Kamias, Quezon City, with interest at the rate of 5% per month or fraction
―It is understood that our liability under this loan is jointly and severally [sic].
―Done at Quezon City, Metro Manila this 23
day of December, 1996.‖

By its terms, the note was made payable to a specific person rather than to bearer
or to order
-- a requisite for negotiability under Act 2031, the Negotiable Instruments
Law (NIL). Hence, petitioner cannot avail himself of the NIL‘s provisions on the
liabilities and defenses of an accommodation party. Besides, a non-negotiable note is
merely a simple contract in writing and is evidence of such intangible rights as may
have been created by the assent of the parties.
The promissory note is thus covered
by the general provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable
for the promissory note. Under Article 29 of Act 2031, an accommodation party is liable
for the instrument to a holder for value even if, at the time of its taking, the latter knew
the former to be only an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect, one of principal and
surety -- the accommodation party being the surety.
It is a settled rule that a surety is
bound equally and absolutely with the principal and is deemed an
original promissor and debtor from the beginning. The liability is immediate and

Third Issue:
Propriety of Summary J udgment
or J udgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the pleadings
and a summary judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary
judgment may be rendered after a summary hearing if the pleadings, supporting
affidavits, depositions and admissions on file show that (1) except as to the amount of
damages, there is no genuine issue regarding any material fact; and (2) the moving
party is entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt disposition of
actions in which the pleadings raise only a legal, not a genuine, issue regarding any
material fact.
Consequently, facts are asserted in the complaint regarding which there
is yet no admission, disavowal or qualification; or specific denials or affirmative
defenses are set forth in the answer, but the issues are fictitious as shown by the
pleadings, depositions or admissions.
A summary judgment may be applied for by
either a claimant or a defending party.

On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on
the pleadings is proper when an answer fails to render an issue or otherwise admits the
material allegations of the adverse party‘s pleading. The essential question is whether
there are issues generated by the pleadings.
A judgment on the pleadings may be
sought only by a claimant, who is the party seeking to recover upon a claim,
counterclaim or cross-claim; or to obtain a declaratory relief.

Apropos thereto, it must be stressed that the trial court‘s judgment against petitioner
was correctly treated by the appellate court as a summary judgment, rather than as a
judgment on the pleadings. His Answer
apparently raised several issues -- that he
signed the promissory note allegedly as a mere accommodation party, and that the
obligation was extinguished by either payment or novation. However, these are not
factual issues requiring trial. We quote with approval the CA‘s observations:
―Although Garcia‘s [A]nswer tendered some issues, by way of affirmative defenses, the
documents submitted by [respondent] nevertheless clearly showed that the issues so
tendered were not valid issues. Firstly, Garcia‘s claim that he was merely an
accommodation party is belied by the promissory note that he signed. Nothing in the
note indicates that he was only an accommodation party as he claimed to be. Quite the
contrary, the promissory note bears the statement: ‗It is understood that our liability
under this loan is jointly and severally [sic].‘ Secondly, his claim that his co-defendant
de Jesus already paid the loan by means of a check collapses in view of the dishonor
thereof as shown at the dorsal side of said check.‖

From the records, it also appears that petitioner himself moved to submit the case
for judgment on the basis of the pleadings and documents. In a written
he stated that ―judgment on the pleadings may now be rendered
without further evidence, considering the allegations and admissions of the parties.‖

In view of the foregoing, the CA correctly considered as a summary judgment that
which the trial court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
G.R. No. L-10221 February 28, 1958
Intestate of Luther Young and Pacita Young, spouses. PACIFICA
JIMENEZ, petitioner-appellee,
DR. JOSE BUCOY, administrator-appellant.
Frank W. Brady and Pablo C. de Guia, Jr. for appellee.
E. A. Beltran for appellant.
In this intestate of Luther Young and Pacita Young who died in 1954 and 1952
respectively, Pacifica Jimenez presented for payment four promissory notes signed by
Pacita for different amounts totalling 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 line with the Ballantyne schedule.
The claimant objected to the adjustment insisting on full payment in accordance with the
Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales, Judge,
held that the notes should be paid in the currency prevailing after the war, and that
consequently plaintiff was entitled to recover P21,000 plus attorneys fees for the sum of
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
pesos payable six months after the war, without interest.
The other three notes were couched in the same terms, except as to amounts and
There can be no serious question that the notes were promises to pay "six months after
the war," the amounts mentioned.
But the important question, which obviously compelled the administrator to appeal, is
whether the amounts should be paid, peso for peso, or whether a reduction should be
made in accordance with the well-known Ballantyne schedule.
This matter of payment of loans contracted during the Japanese occupation has
received our attention in many litigations after the liberation. The gist of our
adjudications, in so far as material here, is that if the loan should be paid during the
Japanese occupation, the Ballantyne schedule should apply with corresponding
reduction of the amount.
However, if the loan was expressly agreed to be payable only
after the war or after liberation, or became payable after those dates, no reduction could
be effected, and peso-for-peso payment shall be ordered in Philippine currency.

The Ballantyne Conversion Table does not apply where the monetary obligation,
under the contract, 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
discharged after the war, the payment should be made in Philippine Currency.
(Kare et al. vs. Imperial et al., 102 Phil., 173.)
Now then, as in the case before us, the debtor undertook to pay "six months after the
war," peso for peso payment is indicated.
The Ang Lam
case cited by appellant is not controlling, because the loan therein given
could have been 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 question were payable only after the war.
The appellant administrator calls attention to the fact that the notes contained no
express promise to pay a specified amount. We declare the point to be without merit. In
accordance with doctrines on the matter, the note herein-above quoted amounted in
effect to "a promise to pay ten thousand pesos 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 of payment is naturally implied, such as, "payable," "payable" on a given day,
"payable on demand," "paid . . . when called for," . . . (10 Corpus Juris Secundum p.
"To constitute a good promissory note, no precise words of contract are necessary,
provided they amount, in legal effect, to a promise to pay. In other words, if over and
above the mere acknowledgment of the debt there may be collected from the words
used a promise to pay it, the instrument 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 be indebted to A in $109, to be
paid on demand, for value received," or, "I O. U. $85 to be paid on May 5th," are held to
be promissory notes, significance being given to words of payment as indicating a
promise to pay." 1 Daniel Neg. Inst. see. 39, and cases cited. (Cowan vs. Hallack,
(Colo.) 13 Pacific Reporter 700, 703.)
Another argument of appellant is that as the deceased Luther Young did not sign these
notes, his estate is not liable for the same. This defense, however, was not interposed
in the lower court. There the only issue related to the amount to be amount, considering
that the money had been received in Japanese money. It is now unfair to put up this
new defense, because had it been raised in the court below, appellees could have
proved, what they now alleged that Pacita contracted the obligation to support and
maintain herself, her son and her husband (then concentrated at Santo Tomas
University) 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 issues made 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 will not be permitted to change his theory on appeal
because, to permit him to do so, would be unfair to the adverse party. (Rules of
Court by Moran-1957 Ed. Vol. I p. 715 citing Agoncillo 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 for making this and exception to the general rule that attorney's fees are not
recoverable in the absence of stipulation.
Under the new Civil Code, attorney's fees and expenses of litigation new be awarded in
this case if defendant acted in gross and evident bad faith in refusing to satisfy plaintiff's
plainly valid, just and demandable 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 rule that 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 is desirable that the decision should state the reason why such award is made bearing
in mind that it must necessarily rest on an exceptional situation. Unless of course the
text of the decision plainly shows the case to fall into one of the exceptions, for instance
"in actions for legal support," when exemplary damages are awarded," etc. In the case
at bar, defendant could not obviously be held to have acted in gross and evident bad
faith." He did not deny the debt, and merely pleaded for adjustment, invoking decisions
he thought to be controlling. If the trial judge considered it "just and equitable" to require
payment of attorney's fees because the defense — adjustment under Ballantyne
schedule — proved to be untenable in view of this Court's applicable rulings, it would be
error to uphold his view. Otherwise, every time a defendant loses, attorney's fees would
follow as a matter of course. Under the article above cited, even a clearly untenable
defense would be no ground 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 her offer, 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 erroneous does 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 notes contained no express promise to
pay a definite amount.
There being no circumstance making it reasonable and just to require defendant to pay
attorney's fees, the last assignment of error must be upheld.
Wherefore, in view of the foregoing considerations, the appealed decision is affirmed,
except as to the attorney's fees which are hereby disapproved. So ordered.
Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.
Endencia and Felix, JJ., concur.

[G.R. No. 113236. March 5, 2001]
This petition assails the decision
dated December 29, 1993 of the Court of
Appeals in CA-G.R. CV No. 29546, which affirmed the judgment
of the Regional Trial
Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P, dismissing Firestone‘s
complaint for damages.
The facts of this case, adopted by the CA and based on findings by the trial court,
are as follows:
…[D]efendant is a banking corporation. It operates under a certificate of authority
issued by the Central Bank of the Philippines, and among its activities, accepts savings
and time deposits. Said defendant had as one of its client-depositors the Fojas-Arca
Enterprises Company (―Fojas-Arca‖ for brevity). Fojas-Arca maintaining a special
savings account with the defendant, the latter authorized and allowed withdrawals of
funds therefrom through the medium of special withdrawal slips. These are supplied by
the defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a ―Franchised Dealership
Agreement‖ (Exh. B) whereby Fojas-Arca has the privilege to purchase on credit and
sell plaintiff‘s products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-
Arca purchased on credit Firestone products from plaintiff with a total amount of
P4,896,000.00. In payment of these purchases, Fojas-Arca delivered to plaintiff six (6)
special withdrawal slips drawn upon the defendant. In turn, these were deposited by
the plaintiff with its current account with the Citibank. All of them were honored and
paid by the defendant. This singular circumstance made plaintiff believe [sic] and relied
[sic] on the fact that the succeeding special withdrawal slips drawn upon the defendant
would be equally sufficiently funded. Relying on such confidence and belief and as a
direct consequence thereof, plaintiff extended to Fojas-Arca other purchases on credit
of its products.
On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J,
K) and delivered to plaintiff the corresponding special withdrawal slips in payment
thereof drawn upon the defendant, to wit:
June 15, 1978 42127 P1,198,092.80
July 15, 1978 42128 940,190.00
Aug. 15, 1978 42129 880,000.00
Sep. 15, 1978 42130 981,500.00
These were likewise deposited by plaintiff in its current account with Citibank and in turn
the Citibank forwarded it [sic] to the defendant for payment and collection, as it had
done in respect of the previous special withdrawal slips. Out of these four (4)
withdrawal slips only withdrawal slip No. 42130 in the amount of P981,500.00 was
honored and paid by the defendant in October 1978. Because of the absence for a long
period coupled with the fact that defendant honored and paid withdrawal slips No.
42128 dated July 15, 1978, in the amount of P981,500.00 plaintiff‘s belief was all the
more strengthened that the other withdrawal slips were likewise sufficiently funded, and
that it had received full value and payment of Fojas-Arca‘s credit purchased then
outstanding at the time. On this basis, plaintiff was induced to continue extending to
Fojas-Arca further purchase on credit of its products as per agreement (Exh. ―B‖).
However, on December 14, 1978, plaintiff was informed by Citibank that special
withdrawal slips No. 42127 dated June 15, 1978 for P1,198,092.80 and No. 42129
dated August 15, 1978 for P880,000.00 were dishonored and not paid for the reason
‗NO ARRANGEMENT.‘ As a consequence, the Citibank debited plaintiff‘s account for
the total sum of P2,078,092.80 representing the aggregate amount of the above-two
special withdrawal slips. Under such situation, plaintiff averred that the pecuniary
losses it suffered is caused by and directly attributable to defendant‘s gross negligence.
On September 25, 1979, counsel of plaintiff served a written demand upon the
defendant for the satisfaction of the damages suffered by it. And due to defendant‘s
refusal to pay plaintiff‘s claim, plaintiff has been constrained to file this complaint,
thereby compelling plaintiff to incur litigation expenses and attorney‘s fees which
amount are recoverable from the defendant.
Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that
the transactions mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which
defendant is not involved; Vehemently, it was denied by defendant that the special
withdrawal slips were honored and treated as if it were checks, the truth being that
when the special withdrawal slips were received by defendant, it only verified whether or
not the signatures therein were authentic, and whether or not the deposit level in the
passbook concurred with the savings ledger, and whether or not the deposit is sufficient
to cover the withdrawal; if plaintiff treated the special withdrawal slips paid by Fojas-
Arca as checks then plaintiff has to blame itself for being grossly negligent in treating
the withdrawal slips as check when it is clearly stated therein that the withdrawal slips
are non-negotiable; that defendant is not a privy to any of the transactions between
Fojas-Arca and plaintiff for which reason defendant is not duty bound to notify nor give
notice of anything to plaintiff. If at first defendant had given notice to plaintiff it is merely
an extension of usual bank courtesy to a prospective client; that defendant is only
dealing with its depositor Fojas-Arca and not the plaintiff. In summation, defendant
categorically stated that plaintiff has no cause of action against it (pp. 1-3, Dec.; pp.
368-370, id).

Petitioner‘s complaint
for a sum of money and damages with the Regional Trial
Court of Pasay City, Branch 113, docketed as Civil Case No. 29546, was dismissed
together with the counterclaim of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that respondent
Luzon Development Bank was liable for damages under Article 2176
in relation to
Articles 19
and 20
of the Civil Code. As noted by the CA, petitioner alleged the
following tortious acts on the part of private respondent: 1) the acceptance and
payment of the special withdrawal slips without the presentation of the depositor‘s
passbook thereby giving the impression that the withdrawal slips are instruments
payable upon presentment; 2) giving the special withdrawal slips the general
appearance of checks; and 3) the failure of respondent bank to seasonably warn
petitioner that it would not honor two of the four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed decision. It
denied the appeal and affirmed the judgment of the trial court. According to the
appellate court, respondent bank notified the depositor to present the passbook
whenever it received a collection note from another bank, belying petitioner‘s claim that
respondent bank was negligent in not requiring a passbook under the subject
transaction. The appellate court also found that the special withdrawal slips in question
were not purposely given the appearance of checks, contrary to petitioner‘s assertions,
and thus should not have been mistaken for checks. Lastly, the appellate court ruled
that the respondent bank was under no obligation to inform petitioner of the dishonor of
the special withdrawal slips, for to do so would have been a violation of the law on the
secrecy of bank deposits.
Hence, the instant petition, alleging the following assignment of error:
25. The CA grievously erred in holding that the [Luzon
Development] Bank was free from any fault or negligence regarding the
dishonor, or in failing to give fair and timely advice of the dishonor, of
the two intermediate LDB Slips and in failing to award damages to
Firestone pursuant to Article 2176 of the New Civil Code.

The issue for our consideration is whether or not respondent bank should be held
liable for damages suffered by petitioner, due to its allegedly belated notice of non-
payment of the subject withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca, whereby
the latter purchased tires from the former with special withdrawal slips drawn upon
Fojas-Arca‘s special savings account with respondent bank. Petitioner in turn deposited
these withdrawal slips with Citibank. The latter credited the same to petitioner‘s current
account, then presented the slips for payment to respondent bank. It was at this point
that the bone of contention arose.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips
Nos. 42127 and 42129 dated June 15, 1978 and August 15, 1978, respectively, were
refused payment by respondent bank due to insufficiency of Fojas-Arca‘s funds on
deposit. That information came about six months from the time Fojas-Arca purchased
tires from petitioner using the subject withdrawal slips. Citibank then debited the amount
of these withdrawal slips from petitioner‘s account, causing the alleged pecuniary
damage subject of petitioner‘s cause of action.
At the outset, we note that petitioner admits that the withdrawal slips in question
were non-negotiable.
Hence, the rules governing the giving of immediate notice of
dishonor of negotiable instruments do not apply in this case.
Petitioner itself
concedes this point.
Thus, respondent bank was under no obligation to give
immediate notice that it would not make payment on the subject withdrawal
slips. Citibank should have known that withdrawal slips were not negotiable
instruments. It could not expect these slips to be treated as checks by other
entities. Payment or notice of dishonor from respondent bank could not be expected
immediately, in contrast to the situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that respondent
Luzon Development Bank, had honored and paid the previous withdrawal slips,
automatically credited petitioner‘s current account with the amount of the subject
withdrawal slips, then merely waited for the same to be honored and paid by respondent
bank. It presumed that the withdrawal slips were ―good.‖
It bears stressing that Citibank could not have missed the non-negotiable nature of
the withdrawal slips. The essence of negotiability which characterizes a negotiable
paper as a credit instrument lies in its freedom to circulate freely as a substitute for
The withdrawal slips in question lacked this character.
A bank is under obligation to treat the accounts of its depositors with meticulous
care, whether such account consists only of a few hundred pesos or of millions of
The fact that the other withdrawal slips were honored and paid by respondent
bank was no license for Citibank to presume that subsequent slips would be honored
and paid immediately. By doing so, it failed in its fiduciary duty to treat the accounts of
its clients with the highest degree of care.

In the ordinary and usual course of banking operations, current account deposits
are accepted by the bank on the basis of deposit slips prepared and signed by the
depositor, or the latter‘s agent or representative, who indicates therein the current
account number to which the deposit is to be credited, the name of the depositor or
current account holder, the date of the deposit, and the amount of the deposit either in
cash or in check.

The withdrawal slips deposited with petitioner‘s current account with Citibank were
not checks, as petitioner admits. Citibank was not bound to accept the withdrawal slips
as a valid mode of deposit. But having erroneously accepted them as such, Citibank –
and petitioner as account-holder – must bear the risks attendant to the acceptance of
these instruments. Petitioner and Citibank could not now shift the risk and hold private
respondent liable for their admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in
CA-G.R. CV No. 29546 is AFFIRMED. Costs against petitioner.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

[G.R. NO. 117913. February 1, 2002]
VELASCO and ALFONSO CO,petitioners, vs. COURT OF APPEALS and
[G.R. NO. 117914. February 1, 2002]
Before us is the joint and consolidated petition for review of the Decision
June 15, 1994 of the Court of Appeals in CA-G.R. CV No. 27480 entitled, ―Philippine
Bank of Communications vs. Mico Metals Corporation, Charles Lee, Chua Siok Suy,
Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co,‖ which reversed the
decision of the Regional Trial Court (RTC) of Manila, Branch 55 dismissing the
complaint for a sum of money filed by private respondent Philippine Bank of
Communications against herein petitioners, Mico Metals Corporation (MICO, for
brevity), Charles Lee, Chua Siok Suy,
Mariano Sio, Alfonso Yap, Richard Velasco and
Alfonso Co.
The dispositive portion of the said Decision of the Court of Appeals,
WHEREFORE, the decision of the Regional Trial Court is hereby reversed and in lieu
thereof, a new one is entered:
a) Ordering the defendants-appellees jointly and severally to pay
plaintiff PBCom the sum of Five million four hundred fifty-one thousand six
hundred sixty-three pesos and ninety centavos (P5,451,663.90) representing
defendants-appellees unpaid obligations arising from ordinary loans granted
by the plaintiff plus legal interest until fully paid.
b) Ordering defendants-appellees jointly and severally to pay PBCom the sum
of Four hundred sixty-one thousand six hundred pesos and sixty-six
centavos (P46 1,600.66) representing defendants-appellees unpaid
obligations arising from their letters of credit and trust receipt transactions
with plaintiff PBCom plus legal interest until fully paid.
c) Ordering defendants-appellees jointly and severally to pay PBCom the sum
of P50,000.00 as attorney‘s fees.
No pronouncement as to costs.
The facts of the case are as follows:
On March 2, 1979, Charles Lee, as President of MICO wrote private respondent
Philippine Bank of Communications (PBCom) requesting for a grant of a discounting
loan/credit line in the sum of Three Million Pesos (P3,000,000.00) for the purpose of
carrying out MICO‘s line of business as well as to maintain its volume of business.
On the same day, Charles Lee requested for another discounting loan/credit line of
Three Million Pesos (P3,000,000.00) from PBCom for the purpose of opening letters of
credit and trust receipts.
In connection with the requests for discounting loan/credit lines, PBCom was
furnished by MICO the following resolution which was adopted unanimously
by MICO‘s Board of Directors:
RESOLVED, that the President, Mr. Charles Lee, and the Vice-President and General
Manager, Mr. Mariano A. Sio, singly or jointly, be and they are duly authorized and
empowered for and in behalf of this Corporation to apply for, negotiate and secure the
approval of commercial loans and other banking facilities and accommodations, such
as, but not limited to discount loans, letters of credit, trust receipts, lines for marginal
deposits on foreign and domestic letters of credit, negotiate out-of-town checks, etc.
from the Philippine Bank of Communications, 216 Juan Luna, Manila in such sums as
they shall deem advantageous, the principal of all of which shall not exceed the total
amount of TEN MILLION PESOS (P10,000,000.00), Philippine Currency, plus any
interests that may be agreed upon with said Bank in such loans and other credit lines of
the same kind and such further terms and conditions as may, upon granting of said
loans and other banking facilities, be imposed by the Bank; and to make, execute, sign
and deliver any contracts of mortgage, pledge or sale of one, some or all of the
properties of the Company, or any other agreements or documents of whatever nature
or kind, including the signing, indorsing, cashing, negotiation and execution of
promissory notes, checks, money orders or other negotiable instruments, which may be
necessary and proper in connection with said loans and other banking facilities, or with
their amendments, renewals and extensions of payment of the whole or any part

On March 26, 1979, MICO availed of the first loan of One Million Pesos
(P1,000,000.00) from PBCom. Upon maturity of the loan, MICO caused the same to be
renewed, the last renewal of which was made on May 21, 1982 under Promissory Note
BNA No. 26218.

Another loan of One Million Pesos (P1,000,000.00) was availed of by MICO
from PBCom which was likewise later on renewed, the last renewal of which was made
on May 21, 1982 under Promissory Note BNA No. 26219.
complete MICO‘s availment of Three Million Pesos (P3,000,000.00) discounting
loan/credit line with PBCom, MICO availed of another loan from PBCom in the sum of
One Million Pesos (P1,000,000.00) on May 24, 1979. As in previous loans, this was
rolled over or renewed, the last renewal of which was made on May 25, 1982under
Promissory Note BNA No. 26253.

As security for the loans, MICO through its Vice-President and General Manager,
Mariano Sio, executed on May 16, 1979 a Deed of Real Estate Mortgage over its
properties situated in Pasig, Metro Manila covered by Transfer Certificates of Title
(TCT) Nos. 11248 and 11250.
On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap and
Richard Velasco, in their personal capacities executed a Surety Agreement
in favor
of PBCom whereby the petitioners jointly and severally, guaranteed the prompt payment
on due dates or at maturity of overdrafts, promissory notes, discounts, drafts, letters of
credit, bills of exchange, trust receipts, and other obligations of every kind and nature,
for which MICO may be held accountable by PBCom. It was provided, however, that the
liability of the sureties shall not at any one time exceed the principal amount of Three
Million Pesos (P3,000,000.00) plus interest, costs, losses, charges and expenses
including attorney‘s fees incurred by PBCom in connection therewith.
On July 14, 1980, petitioner Charles Lee, in his capacity as president of MICO,
wrote PBCom and applied for an additional loan in the sum of Four Million Pesos
(P4,000,000.00). The loan was intended for the expansion and modernization of the
company‘s machineries. Upon approval of the said application for loan, MICO availed of
the additional loan of Four Million Pesos (P4,000,000.00) as evidenced by Promissory
Note TA No. 094.

As per agreement, the proceeds of all the loan availments were credited
to MICO‘s current checking account with PBCom. To induce thePBCom to increase the
credit line of MICO, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard
Velasco and Alfonso Co (hereinafter referred to as petitioners-sureties), executed
another surety agreement
in favor of PBCom on July 28, 1980, whereby they jointly
and severally guaranteed the prompt payment on due dates or at maturity of overdrafts,
promissory notes, discounts, drafts, letters of credit, bills of exchange, trust receipts and
all other obligations of any kind and nature for which MICO may be held accountable
by PBCom. It was provided, however, that their liability shall not at any one time exceed
the sum of Seven Million Five Hundred Thousand Pesos (P7,500,000.00) including
interest, costs, charges, expenses and attorney‘s fees incurred by MICO in connection
On July 29, 1980, MICO furnished PBCom with a notarized certification issued by
its corporate secretary, Atty. P.B. Barrera, that Chua SiokSuy was duly authorized by
the Board of Directors to negotiate on behalf of MICO for loans and other
credit availments from PBCom. Indicated in the certification was the following resolution
unanimously approved by the Board of Directors:
RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as he is
hereby authorized and empowered, on behalf of MICO METALS CORPORATION from
time to time, to borrow money and obtain other credit facilities, with or without security,
from the PHILIPPINE BANK OF COMMUNICATIONS in such amount(s) and under
such terms and conditions as he may determine, with full power and authority to
execute, sign and deliver such contracts, instruments and papers in connection
therewith, including real estate and chattel mortgages, pledges and assignments over
the properties of the Corporation; and to renew and/or extend and/or roll-over
and/or reavail of the credit facilities granted thereunder, either for lesser or for greater
amount(s), the intention being that such credit facilities and all securities of whatever
kind given as collaterals therefor shall be a continuing security.
RESOLVED FURTHER, That said bank is hereby authorized, empowered and directed
to rely on the authority given hereunder, the same to continue in full force and effect
until written notice of its revocation shall be received by said Bank.

On July 2, 1981, MICO filed with PBCom an application for a domestic letter of
credit in the sum of Three Hundred Forty-Eight Thousand Pesos (P348,000.00).
corresponding irrevocable letter of credit was approved and opened under LC No. L-
Thereafter, the domestic letter of credit was negotiated and accepted by
MICO as evidenced by the corresponding bank draft issued for the purpose.
After the
supplier of the merchandise was paid, a trust receipt upon MICO‘s own initiative, was
executed in favor of PBCom.

On September 14, 1981, MICO applied for another domestic letter of credit
with PBCom in the sum of Two Hundred Ninety Thousand Pesos (P290,000.00).
corresponding irrevocable letter of credit was issued on September 22, 1981 under LC
No. L-16334.
After the beneficiary of the said letter of credit was paid by PBCom for
the price of the merchandise, the goods were delivered to MICO which executed a
corresponding trust receipt
in favor of PBCom.
On November 10, 1981, MICO applied for authority to open a foreign letter of credit
in favor of Ta Jih Enterprises Co., Ltd.,
and thus, the corresponding letter of
was then issued by PBCom with a cable sent to the beneficiary,
Ta Jih Enterprises Co., Ltd. advising that said beneficiary may draw funds from the
account of PBCom in its correspondent bank‘s New York Office.
PBCom also
informed its corresponding bank in Taiwan, the Irving Trust Company, of the approved
letter of credit. The correspondent bank acknowledged PBCom‘sadvice through a
confirmation letter
and by debiting from PBCom‘s account with the said
correspondent bank the sum of Eleven Thousand Nine Hundred Sixty US Dollars ($11
As in past transactions, MICO executed in favor of PBCom a corresponding
trust receipt.

On January 4, 1982, MICO applied, for authority to open a foreign letter of credit in
the sum of One Thousand Nine Hundred US Dollars ($1,900.00), with PBCom.
approval, the corresponding letter of credit denominated as LC No. 62293
was issued
whereuponPBCom advised its correspondent bank and MICO
of the same.
Negotiation and proper acceptance of the letter of credit were then made by MICO.
Again, a corresponding trust receipt
was executed by MICO in favor of PBCom.
In all the transactions involving foreign letters of credit, PBCom turned over to MICO
the necessary documents such as the bills of lading and commercial invoices to enable
the latter to withdraw the goods from the port of Manila.
On May 21, 1982 MICO obtained from PBCom another loan in the sum of Three
Hundred Seventy-Seven Thousand Pesos (P377,000.00) covered by Promissory Note
BA No. 7458.

Upon maturity of all credit availments obtained by MICO from PBCom, the latter
made a demand for payment.
For failure of petitioner MICO to pay the obligations
incurred despite repeated demands, private
respondent PBCom extrajudicially foreclosed MICO‘s real estate mortgage and sold the
said mortgaged properties in a public auction sale held on November 23, 1982. Private
respondent PBCom which emerged as the highest bidder in the auction sale, applied
the proceeds of the purchase price at public auction of Three Million Pesos
(P3,000,000.00) to the expenses of the foreclosure, interest and charges and part of the
principal of the loans, leaving an unpaid balance of Five Million Four Hundred Forty-One
Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90)
exclusive of penalty and interest charges. Aside from the unpaid balance of Five Million
Four Hundred Forty-One Thousand Six Hundred Sixty-Three Pesos and Ninety
Centavos (P5,441,663.90), MICO likewise had another standing obligation in the sum of
Four Hundred Sixty-One Thousand Six Hundred Pesos and Six Centavos
(P461,600.06) representing its trust receipts liabilities to private
respondent. PBCom then demanded the settlement of the aforesaid obligations from
herein petitioners-sureties who, however, refused to acknowledge their obligations
to PBCom under the surety agreements. Hence, PBCom filed a complaint with prayer
for writ of preliminary attachment before the Regional Trial Court of Manila, which was
raffled to Branch 55, alleging that MICO was no longer in operation and had no
properties to answer for its obligations. PBCom further alleged that petitioner Charles
Lee has disposed or concealed his properties with intent to defraud his creditors. Except
for MICO and Charles Lee, the sheriff of the RTC failed to serve the summons on herein
petitioners-sureties since they were all reportedly abroad at the time. An alias summons
was later issued but the sheriff was not able to serve the same to petitioners Alfonso Co
and Chua Siok Suy who was already sickly at the time and reportedly in Taiwan where
he later died.
Petitioners (MICO and herein petitioners-sureties) denied all the allegations of the
complaint filed by respondent PBCom, and alleged that: a) MICO was not granted the
alleged loans and neither did it receive the proceeds of the aforesaid loans; b)
Chua Siok Suy was never granted any valid Board Resolution to sign for and in behalf
of MICO; c) PBCom acted in bad faith in granting the alleged loans and in releasing the
proceeds thereof; d) petitioners were never advised of the alleged grant of loans and
the subsequent releases therefor, if any; e) since no loan was ever released to or
received by MICO, the corresponding real estate mortgage and the surety agreements
signed concededly by the petitioners-sureties are null and void.
The trial court gave credence to the testimonies of herein petitioners and dismissed
the complaint filed by PBCom. The trial court likewise declared the real estate mortgage
and its foreclosure null and void. In ruling for herein petitioners, the trial court said
that PBCom failed to adequately prove that the proceeds of the loans were ever
delivered to MICO. The trial court pointed out, among others, that while PBComclaimed
that the proceeds of the Four Million Pesos (P4,000,000.00) loan covered by promissory
note TA 094 were deposited to the current account of petitioner MICO, PBCom failed to
produce the ledger account showing such deposit. The trial court added that
while PBCom may have loaned to MICO the other sums of Three Hundred Forty-Eight
Thousand Pesos (P348,000.00) and Two Hundred Ninety Thousand Pesos
(P290,000.00), no proof has been adduced as to the existence of the goods covered
and paid by the said amounts. Hence, inasmuch as no consideration ever passed
from PBCom to MICO, all the documents involved therein, such as the promissory
notes, real estate mortgage including the surety agreements were all void or
nonexistent for lack of cause or consideration. The trial court said that the lack of proof
as regards the existence of the merchandise covered by the letters of credit bolstered
the claim of herein petitioners that no purchases of the goods were really made and that
the letters of credit transactions were simply resorted to by the PBCom and
Chua Siok Suy to accommodate the latter in his financial requirements.
The Court of Appeals reversed the ruling of the trial court, saying that the latter
committed an erroneous application and appreciation of the rules governing the burden
of proof. Citing Section 24 of the Negotiable Instruments Law which provides that
―Every negotiable instrument is deemed prima facie to have been issued for
valuable consideration and every person whose signature appears thereon to
have become a party thereto for value‖, the Court of Appeals said that while the
subject promissory notes and letters of credit issued by thePBCom made no mention of
delivery of cash, it is presumed that said negotiable instruments were issued for
valuable consideration. The Court of Appeals also cited the case of Gatmaitan vs. Court
of Appeals
which holds that "there is a presumption that an instrument sets out
the true agreement of the parties thereto and that it was executed for valuable
consideration‖. The appellate court noted and found that a notarized Certification was
issued by MICO‘s corporate secretary, P.B. Barrera, that Chua Siok Suy, was duly
authorized by the Board of Directors of MICO to borrow money and obtain credit
facilities from PBCom.
Petitioners filed a motion for reconsideration of the challenged decision of the Court
of Appeals but this was denied in a Resolution datedNovember 7, 1994 issued by its
Former Second Division. Petitioners-sureties then filed a petition for review on certiorari
with this Court, docketed as G.R. No. 117913, assailing the decision of the Court of
Appeals. MICO likewise filed a separate petition for review on certiorari, docketed as
G.R. No. 117914, with this Court assailing the same decision rendered by the Court of
Appeals. Upon motion filed by petitioners, the two (2) petitions were consolidated
on January 11, 1995.

Petitioners contend that there was no proof that the proceeds of the loans or the
goods under the trust receipts were ever delivered to and received by MICO. But the
record shows otherwise. Petitioners-sureties further contend that assuming that there
was delivery by PBCom of the proceeds of the loans and the goods, the contracts were
executed by an unauthorized person, more specifically Chua Siok Suy who acted
fraudulently and in collusion with PBCom to defraud MICO.
The pertinent issues raised in the consolidated cases at bar are: a) whether or not
the proceeds of the loans and letters of credit transactions were ever delivered to MICO,
and b) whether or not the individual petitioners, as sureties, may be held liable under
the two (2) Surety Agreements executed on March 26, 1979 and July 28, 1980.
In civil cases, the party having the burden of proof must establish his case by
preponderance of evidence.
Preponderance of evidence means evidence which is
more convincing to the court as worthy of belief than that which is offered in opposition
thereto. Petitioners contend that the alleged promissory notes, trust receipts and surety
agreements attached to the complaint filed by PBCom did not ripen into valid and
binding contracts inasmuch as there is no evidence of the delivery of money or loan
proceeds to MICO or to any of the petitioners-sureties. Petitioners claim that under
normal banking practice, borrowers are required to accomplish promissory notes in
blank even before the grant of the loans applied for and such documents become valid
written contracts only when the loans are actually released to the borrower.
We are not convinced.
During the trial of an action, the party who has the burden of proof upon an issue
may be aided in establishing his claim or defense by the operation of a presumption, or,
expressed differently, by the probative value which the law attaches to a specific state
of facts. A presumption may operate against his adversary who has not introduced proof
to rebut the presumption. The effect of a legal presumption upon a burden of proof is to
create the necessity of presenting evidence to meet the legal presumption or the prima
facie case created thereby, and which if no proof to the contrary is presented and
offered, will prevail. The burden of proof remains where it is, but by the presumption the
one who has that burden is relieved for the time being from introducing evidence in
support of his averment, because the presumption stands in the place of evidence
unless rebutted.
Under Section 3, Rule 131 of the Rules of Court the following presumptions, among
others, are satisfactory if uncontradicted: a) That there was a sufficient consideration for
a contract and b) That a negotiable instrument was given or indorsed for sufficient
consideration. As observed by the Court of Appeals, a similar presumption is found in
Section 24 of the Negotiable Instruments Law which provides that every negotiable
instrument is deemed prima facie to have been issued for valuable consideration and
every person whose signature appears thereon to have become a party for value.
Negotiable instruments which are meant to be substitutes for money, must conform to
the following requisites to be considered as such a) it must be in writing; b) it must be
signed by the maker or drawer; c) it must contain an unconditional promise or order to
pay a sum certain in money; d) it must be payable on demand or at a fixed or
determinable future time; e) it must be payable to order or bearer; and f) where it is a bill
of exchange, the drawee must be named or otherwise indicated with reasonable
certainty. Negotiable instruments include promissory notes, bills of exchange and
checks. Letters of credit and trust receipts are, however, not negotiable instruments. But
drafts issued in connection with letters of credit are negotiable instruments.
Private respondent PBCom presented the following documentary evidence to prove
petitioners‘ credit availments and liabilities:
1) Promissory Note No. BNA —26218 dated May 21, 1982 in the sum
of P1,000,000.00 executed by MICO in favor of PBCom.
2) Promissory Note No. BNA —26219 dated May 21, 1982 in the sum
of P1,000,000.00 executed by MICO in favor of PBCom.
3) Promissory Note No. BNA —26253 dated May 25, 1982 in the sum
of P1,000,000.00 executed by MICO in favor of PBCom.
4) Promissory Note No. BNA —7458 dated May 21, 1982 in the sum
of P377,000.00 executed by MICO in favor of PBCom.
5) Promissory Note No. TA — 094 dated July 29, 1980 in the sum
of P4,000.000.00 executed by MICO in favor of PBCom.
6) Irrevocable letter of credit No. L-16060 dated July 2,1981 issued in favor
of Perez Battery Center for account of Mico Metals Corp.
7) Draft dated July 2, 1981 in the sum of P348,000.00 issued by Perez Battery
Center, beneficiary of irrevocable Letter of Credit No. No. L-16060 and
accepted by MICO Metals corporation.
8) Letter dated July 2, 1981 from Perez Battery Center addressed to private
respondent PBCom showing that proceeds of the irrevocable letter of
credit No. L- 16060 was received by Mr. Moises Rosete, representative
of Perez Battery Center.
9) Trust receipt dated July 2, 1981 executed by MICO in favor
of PBCom covering the merchandise purchased under Letter of Credit No.
10) Irrevocable letter of credit No. L-16334 dated September 22, 1981
issued in favor of Perez Battery Center for account of MICO Metals Corp.
11) Draft dated September 22, 1981 in the sum of P290,000.00 issued
by Perez Battery Center and accepted by MICO.
12) Letter dated September 17, 1981 from Perez Battery addressed
to PBCom showing that the proceeds of credit no. L-16344 was received by
Mr. Moises Rosete, a representative of Perez Battery Center.
13) Trust Receipt dated September 22, 1981 executed by MICO in favor
of PBCom covering the merchandise under Letter of Credit No.L-16334.
14) Irrevocable Letter of Credit no. 61873 dated November 10, 1981 for
US$11,960.00 issued by PBCom in favor of TA JIH Enterprises Co. Ltd.,
through its correspondent bank, Irving Trust Company of Taipei, Taiwan.
15) Trust Receipt dated December 15, 9181 executed by MICO in favor
of PBCom showing that possession of the merchandise covered by
Irrevocable Letter of Credit no. 61873 was released by PBCom to MICO.
16) Letters dated March 2, 1979 from MICO signed by its president,
Charles Lee, showing that MICO sought credit line from PBCom in the form
of loans, letters of credit and trust receipt in the sum of P7,500,000.00.
17) Letter dated July 14, 1980 from MICO signed by its president,
Charles Lee, showing that MICO requested for additional financial assistance
in the sum of P4,000,000.00.
18) Board resolution dated March 6, 1979 of MICO authorizing Charles
Lee and Mariano Sio singly or jointly to act and sign for and in behalf of
MICO relative to the obtention of credit facilities from PBCom.
19) Duly notarized Deed of Mortgage dated May 16, 1979 executed by
MICO in favor of PBCom over MICO ‗s real properties covered by TCT Nos.
11248 and 11250 located in Pasig.
20) Duly notarized Surety Agreement dated March 26, 1979 executed by
herein petitioners Charles Lee, Mariano Sio, Alfonso Yap, Richard Velasco
and Chua Siok Suy in favor of PBCom.
21) Duly notarized Surety Agreement dated July 28, 1980 executed by
herein petitioners Charles Lee, Mariano Sio, Alfonso Yap, Richard Velasco
and Chua Siok Suy in favor of PBCom.
22) Duly notarized certification dated July 28, 1980 issued by MICO ‗s
corporate secretary, Mr. P.B. Barrera, attesting to the adoption of a board
resolution authorizing Chua Siok Suy to sign, for and in behalf of MICO, all
the necessary documents including contracts, loan instruments and
mortgages relative to the obtention of various credit facilities from PBCom.
The above-cited documents presented have not merely created a prima facie case
but have actually proved the solidary obligation of MICO and the petitioners, as sureties
of MICO, in favor of respondent PBCom. While the presumption found under the
Negotiable Instruments Law may not necessarily be applicable to trust receipts and
letters of credit, the presumption that the drafts drawn in connection with the letters of
credit have sufficient consideration. Under Section 3(r), Rule 131 of the Rules of Court
there is also a presumption that sufficient consideration was given in a contract. Hence,
petitioners should have presented credible evidence to rebut that presumption as well
as the evidence presented by private respondent PBCom. The letters of credit show
that the pertinent materials/merchandise have been received by MICO. The drafts
signed by the beneficiary/suppliers in connection with the corresponding letters of credit
proved that said suppliers were paid by PBCom for the account of MICO. On the other
hand, aside from their bare denials petitioners did not present sufficient and competent
evidence to rebut the evidence of private respondent PBCom. Petitioner MICO did not
proffer a single piece of evidence, apart from its bare denials, to support its allegation
that the loan transactions, real estate mortgage, letters of credit and trust receipts were
issued allegedly without any consideration.
Petitioners-sureties, for their part, presented the By-Laws
of Mico Metals
Corporation (MICO) to prove that only the president of MICO is authorized to borrow
money, arrange letters of credit, execute trust receipts, and promissory notes and
consequently, that the loan transactions, letters of credit, promissory notes and trust
receipts, most of which were executed by Chua Siok Suy in representation of MICO
were not allegedly authorized and hence, are not binding upon MICO. A perusal of the
By-Laws of MICO, however, shows that the power to borrow money for the company
and issue mortgages, bonds, deeds of trust and negotiable instruments or securities,
secured by mortgages or pledges of property belonging to the company is not confined
solely to the president of the corporation. The Board of Directors of MICO can also
borrow money, arrange letters of credit, execute trust receipts and promissory notes on
behalf of the corporation.
Significantly, this power of the Board of Directors according
to the by-laws of MICO, may be delegated to any of its standing committee, officer or
Hence, PBCom had every right to rely on the Certification issued
by MICO's corporate secretary, P.B. Barrera, that Chua Siok Suy was duly authorized
by its Board of Directors to borrow money and obtain credit facilities in behalf of MICO
from PBCom.
Petitioners-sureties also presented a letter of their counsel dated October 9, 1982,
addressed to private respondent PBCom purportedly to show that PBCom knew that
Chua Siok Suy allegedly used the credit and good names of the petitioner-sureties for
his benefit, and that petitioner-sureties were made to sign blank documents and were
furnished copies of the same. The letter, however, is in fact merely a reply of
petitioners-sureties‘ counsel to PBCom‘s demand for payment of MICO‘s obligations,
and appears to be an inconsequential piece of self-serving evidence.
In addition to the foregoing, MICO and petitioners-sureties cited the decision of the
trial court which stated that there was no proof that the proceeds of the loans were ever
delivered to MICO. Although the private respondent‘s witness, Mr. Gardiola, testified
that the proceeds of the loans were deposited in MICO‘s current account with PBCom,
his testimony was allegedly not supported by any bank record, note or memorandum. A
careful scrutiny of the record including the transcript of stenographic notes reveals,
however, that although private respondentPBCom was willing to produce the
corresponding account ledger showing that the proceeds of the loans were credited
to MICO‘s current account with PBCom, MICO in fact vigorously objected to the
presentation of said document. That point is shown in the testimony
of PBCom‘switness, Gardiola, thus:
Q: Now, all of these promissory note Exhibits ―I‖ and ―J‖ which as you have
said previously (sic) availed originally by defendant Mico Metals Corp.
sometime in 1979, my question now is, do you know what happened to the
proceeds of the original availment?
A: Well, it was credited to the current account of Mico Metals Corp.
Q: Why did it was credited to the proceeds to the account of Mico Metals
Corp? (sic)
A: Well, that is our understanding.
Your honor, may we be given a chance to object, the best evidence is the
so-called current account...
Can you produce the ledger account?
A: Yes, Your Honor, I will bring.
The ledger or record of the current account of Mico Metals Corp.
A: Yes, Your Honor.
Your Honor, these are a confidential record, and they might not be
disclosed without the consent of the person concerned. (sic)
Well, you are the one who is asking that.
Your Honor, I‘m precisely want to show for the ... (sic)
But the amount covered by the current account of defendant Mico Metals
Corp. is the subject matter of this case.
xxx xxx
Q: Are those availments were release? (sic)
A: Yes, Your Honor, to the defendant corporation.
Q: By what means?
A: By the credit to their current account.
We object to that, your Honor, because the disclose is the secrecy of the
bank deposit. (sic)
xxx xxx
Q: Before the recess Mr. Gardiola, you stated that the proceeds of the three
(3) promissory notes were credited to the accounts of Mico Metals
Corporation, now do you know what kind of current account was that which
you are referring to?
Objection your Honor, that is the disclose of the deposit of
defendant Mico Metals Corporation and it cannot disclosed without the
authority of the depositor. (sic)

That proceeds of the loans which were originally availed of in 1979 were delivered
to MICO is bolstered by the fact that more than a year later, specifically on July 14,
1980, MICO through its president, petitioner-surety Charles Lee, requested for an
additional loan of Four Million Pesos (P4,000,000.00) from PBCom. The fact that MICO
was requesting for an additional loan implied that it has already availed of earlier loans
from PBCom.
Petitioners allege that PBCom presented no evidence that it remitted payments to
cover the domestic and foreign letters of credit. Petitioners placed much reliance on the
erroneous decision of the trial court which stated that private
respondent PBCom allegedly failed to prove that it actually made payments under the
letters of credit since the bank drafts presented as evidence show that they were made
in favor of the Bank of Taiwan and First Commercial Bank.
Petitioners‘ allegations are untenable.
Modern letters of credit are usually not made between natural persons. They involve
bank to bank transactions. Historically, the letter of credit was developed to facilitate the
sale of goods between, distant and unfamiliar buyers and sellers. It was an arrangement
under which a bank, whose credit was acceptable to the seller, would at the instance of
the buyer agree to pay drafts drawn on it by the seller, provided that certain documents
are presented such as bills of lading accompanied the corresponding drafts. Expansion
in the use of letters of credit was a natural development in commercial
Parties to a commercial letter of credit include (a) the buyer or the importer,
(b) the seller, also referred to as beneficiary, (c) the opening bank which is usually the
buyer‘s bank which actually issues the letter of credit, (d) the notifying bank which is the
correspondent bank of the opening bank through which it advises the beneficiary of the
letter of credit, (e) negotiating bank which is usually any bank in the city of the
beneficiary. The services of the notifying bank must always be utilized if the letter of
credit is to be advised to the beneficiary through cable, (f) the paying bank which buys
or discounts the drafts contemplated by the letter of credit, if such draft is to be drawn
on the opening bank or on another designated bank not in the city of the beneficiary. As
a rule, whenever the facilities of the opening bank are used, the beneficiary is supposed
to present his drafts to the notifying bank for negotiation and (g) the confirming bank
which, upon the request of the beneficiary, confirms the letter of credit issued by the
opening bank.
From the foregoing, it is clear that letters of credit, being usually bank to bank
transactions, involve more than just one bank. Consequently, there is nothing unusual in
the fact that the drafts presented in evidence by respondent bank were not made
payable to PBCom. As explained by respondent bank, a draft was drawn on the Bank of
Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods covered by the
foreign letter of credit. Having paid the supplier, the Bank of Taiwan then presented the
bank draft for reimbursement by PBCom‘scorrespondent bank in Taiwan, the Irving
Trust Company — which explains the reason why on its face, the draft was made
payable to the Bank of Taiwan. Irving Trust Company accepted and endorsed the draft
to PBCom. The draft was later transmitted to PBCom to support the latter‘s claim for
payment from MICO. MICO accepted the draft upon presentment and negotiated it
to PBCom.
Petitioners further aver that MICO never requested that legal possession of the
merchandise be transferred to PBCom by way of trust receipts. Petitioners insist that
assuming that MICO transferred possession of the merchandise to PBCom by way of
trust receipts, the same would be illegal since PBCom, being a banking institution, is not
authorized by law to engage in the business of importing and selling goods.
A trust receipt is considered as a security transaction intended to aid in financing
importers and retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire credit
except through utilization, as collateral of the merchandise imported or purchased.
trust receipt, therefor, is a document of security pursuant to which a bank acquires a
―security interest‖ in the goods under trust receipt. Under a letter of credit-trust receipt
arrangement, a bank extends a loan covered by a letter of credit, with the trust receipt
as a security for the loan. The transaction involves a loan feature represented by a letter
of credit, and a security feature which is in the covering trust receipt which secures an
Petitioners‘ averments with regard to the second issue are no less incredulous.
Petitioners‘ contend that the letters of credit, surety agreements and loan transactions
did not ripen into valid and binding contracts since no part of the proceeds of the loan
transactions were delivered to MICO or to any of the petitioners-sureties. Petitioners-
sureties allege that Chua Siok Suy was the beneficiary of the proceeds of the loans and
that the latter made them sign the surety agreements in blank. Thus, they maintain that
they should not be held accountable for any liability that might arise therefrom.
It has not escaped our notice that it was petitioner-surety Charles Lee, as president
of MICO Metals Corporation, who first requested for a discounting loan of Three Million
Pesos (P3,000,000.00) from PBCom as evidenced by his letter dated March 2,
On the same day, Charles Lee, as President of MICO, requested for a Letter of
Credit and Trust Receipt line in the sum of Three Million Pesos (P3,000,000.00).
on the same day, Charles Lee again as President of MICO, wrote another letter to
PBCOM requesting for a financing line in the sum of One Million Five Hundred
Thousand Pesos (P1,500,000.00) to be used exclusively as marginal deposit for the
opening of MICO‘s foreign and local letters of credit with PBCom.
More than a year
later, it was also Charles Lee, again in his capacity as president of MICO, who asked for
an additional loan in the sum of Four Million Pesos (P4,000,000.00). The claim therefore
of petitioners that it was Chua Siok Suy, in connivance with the respondent PBCom,
who applied for and obtained the loan transactions and letters of credit strains credulity
considering that even the Deed of the Real Estate Mortgage in favor of PBCom was
executed by petitioner-surety Mariano Sio in his capacity as general manager of
to secure the loan accommodations obtained by MICO from PBCom.
Petitioners-sureties allege that they were made to sign the surety agreements in
blank by Chua Siok Suy. Petitioner Alfonso Yap, the corporate treasurer, for his part
testified that he signed booklets of checks, surety agreements and promissory notes in
blank; that he signed the documents in blank despite his misgivings since
Chua Siok Suy assured him that the transaction can easily be taken cared of since
Chua SiokSuy personally knew the Chairman of the Board of PBCom; that he was not
receiving salary as treasurer of Mico Metals and since Chua SiokSuy had a direct hand
in the management of Malayan Sales Corporation, of which Yap is an employee, he
(Yap) signed the documents in blank as consideration for his continued employment in
Malayan Sales Corporation. Petitioner Antonio Co testified that he worked as office
manager for MICO from 1978-1982. As office manager, he was the one in charge of
transacting business like purchasing, selling and paying the salary of the employees. He
was also in charge of the handling of documents pertaining to surety agreements, trust
receipts and promissory notes;
that when he first joined MICO Metals Corporation, he
was able to read the by-laws of the corporation and he came to know that only the
chairman and the president can borrow money in behalf of the corporation; that
Chua Siok Suy once called him up and told him to secure an invoice so that a credit line
can be opened in the bank with a local letter of credit; that when the invoice was
secured, he (Co) brought it together with the application for a credit line to
Chua Siok Suy, and that he questioned the authority of Chua Siok Suy pointing out that
he (Co) is not empowered to sign the document inasmuch as only the latter, as
president, was authorized to do so. However, Chua Siok Suy allegedly just said that he
had already talked with the Chairman of the Board of PBCom; and that
Chua Siok Suy reportedly said that he needed the money to finance a project that he
had with the Taipei government. Co also testified that he knew of the application for
domestic letter of credit in the sum of Three Hundred Forty-Eight Thousand Pesos
(P348,000.00); and that a certain Moises Rosete was authorized to claim the check
covering the Three Hundred Forty-Eight Thousand Pesos (P348,000.00) from PBCom;
and that after claiming the check Rosete brought it to Perez Battery Center
forindorsement after which the same was deposited to the personal account of
Chua Siok Suy.

We consider as incredible and unacceptable the claim of petitioners-sureties that
the Board of Directors of MICO was so careless about the business affairs of MICO as
well as about their own personal reputation and money that they simply relied on the
say so of Chua Siok Suy on matters involving millions of pesos. Under Section 3 (d),
Rule 131 of the Rules of Court, it is presumed that a person takes ordinary care of his
concerns. Hence, the natural presumption is that one does not sign a document without
first informing himself of its contents and consequences. Said presumption acquires
greater force in the case at bar where not only one but several documents were
executed at different times and at different places by the petitioner sureties and
Chua Siok Suy as president of MICO.
MICO and herein petitioners-sureties insist that Chua Siok Suy was not duly
authorized to negotiate for loans in behalf of MICO fromPBCom. Petitioners‘ allegation,
however, is belied by the July 28, 1980 Certification issued by the corporate secretary
of PBCom, Atty. P.B. Barrera, that MICO's Board of Directors gave Chua Siok Suy full
authority to negotiate for loans in behalf of MICO with PBCom. In fact, the Certification
even provided that Chua Siok Suy‘s authority continues until and unless PBCom is
notified in writing of the withdrawal thereof by the said Board. Notably, petitioners failed
to contest the genuineness of the said Certification which is notarized and to show any
written proof of any alleged withdrawal of the said authority given by the Board of
Directors to Chua Siok Suy to negotiate for loans in behalf of MICO.
There was no need for PBCom to personally inform the petitioners-sureties
individually about the terms of the loans, letters of credit and other loan documents. The
petitioners-sureties themselves happen to comprise the Board of Directors of MICO,
which gave full authority to ChuaSiok Suy to negotiate for loans in behalf of MICO.
Notice to MICO‘s authorized representative, Chua Siok Suy, was notice to MICO. The
Certification issued by PBCom‘s corporate secretary, Atty. P.B. Barrera, indicated that
Chua Siok Suy had full authority to negotiate and sign the necessary
documents, in behalf of MICO for loans from PBCom. Respondent PBCom therefore
had the right to rely on the said notarized Certification of MICO‘s Corporate Secretary.
Anent petitioners-sureties contention that they obtained no consideration
whatsoever on the surety agreements, we need only point out that the consideration for
the sureties is the very consideration for the principal obligor, MICO, in the contracts of
loan. In the case of Willex Plastic Industries Corporation vs. Court of Appeals,
ruled that the consideration necessary to support a surety obligation need not pass
directly to the surety, a consideration moving to the principal alone being sufficient. For
a guarantor or surety is bound by the same consideration that makes the contract
effective between the parties thereto. It is not necessary that a guarantor or surety
should receive any part or benefit, if such there be, accruing to his principal.
Petitioners placed too much reliance on the rule in evidence that the burden of proof
does not shift whereas the burden of going forward with the evidence does pass from
party to party. It is true that said rule is not changed by the fact that the party having the
burden of proof has introduced evidence which established prima facie his assertion
because such evidence does not shift the burden of proof; it merely puts the adversary
to the necessity of producing evidence to meet the prima facie case. Where the
defendant merely denies, either generally or otherwise, the allegations of the plaintiff‘s
pleadings, the burden of proof continues to rest on the plaintiff throughout the trial and
does not shift to the defendant until the plaintiff‘s evidence has been presented and duly
offered. The defendant has then no burden except to produce evidence sufficient to
create a state of equipoise between his proof and that of the plaintiff to defeat the latter,
whereas the plaintiff has the burden, as in the beginning, of establishing his case by a
preponderance of evidence.
But where the defendant has failed to present
and marshall evidencesufficient to create a state of equipoise between his proof and
that of plaintiff, the prima facie case presented by the plaintiff will prevail.
In the case at bar, respondent PBCom, as plaintiff in the trial court, has in fact
presented sufficient documentary and testimonial evidence that proved by
preponderance of evidence its subject collection case against the defendants who are
the petitioners herein. In view of all the foregoing, the Court of Appeals committed no
reversible error in its appealed Decision.
WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No.
27480 entitled, ―Philippine Bank of Communications vs.Mico Metals Corporation,
Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso
Co,‖ is AFFIRMED in toto.
Costs against the petitioners.
Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

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

An appeal from a decision of the Court of First Instance of Manila dismissing the
complaint filed by the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico
Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten
(10) money orders of P200.00 each payable to E.P. Montinola withaddress at Lucena,
Quezon. After the postal teller had made out money ordersnumbered 124685, 124687-
124695, Montinola offered to pay for them with a private checks were not generally
accepted in payment of money orders, the teller advised him to see the Chief of the
Money Order Division, but instead of doing so, Montinola managed to leave building
with his own check and the ten(10) money orders without the knowledge of the teller.
On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid
money orders, an urgent message was sent to all postmasters, and the following day
notice was likewise served upon all banks, instructing them not to pay anyone of the
money orders aforesaid if presented for payment. The Bank of America received a copy
of said notice three days later.
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was
received by appellant as part of its sales receipts. The following day it deposited the
same with the Bank of America, and one day thereafter the latter cleared it with the
Bureau of Posts and received from the latter its face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order
Division of the Manila Post Office, acting for and in behalf of his co-appellee,
Postmaster Enrico Palomar, notified the Bank of America that money order No. 124688
attached to his letter had been found to have been irregularly issued and that, in view
thereof, the amount it represented had been deducted from the bank's clearing account.
For its part, on August 2 of the same year, the Bank of America debited appellant's
account with the same amount and gave it advice thereof by means of a debit memo.
On October 12, 1961 appellant requested the Postmaster General to reconsider the
action taken by his office deducting the sum of P200.00 from the clearing account of the
Bank of America, but his request was denied. So was appellant's subsequent request
that the matter be referred to the Secretary of Justice for advice. Thereafter, appellant
elevated the matter to the Secretary of Public Works and Communications, but the latter
sustained the actions taken by the postal officers.
In connection with the events set forth above, Montinola was charged with theft in the
Court of First Instance of Manila (Criminal Case No. 43866) but after trial he was
acquitted on the ground of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of
Manila praying for judgment as follows:
WHEREFORE, plaintiff prays that after hearing defendants be ordered:
(a) To countermand the notice given to the Bank of America on
September 27, 1961, deducting from the said Bank's clearing account the
sum of P200.00 represented by postal money order No. 124688, or in the
alternative indemnify the plaintiff in the same amount with interest at 8-½%
per annum from September 27, 1961, which is the rate of interest being
paid by plaintiff on its overdraft account;
(b) To pay to the plaintiff out of their own personal funds, jointly and
severally, actual and moral damages in the amount of P1,000.00 or in
such amount as will be proved and/or determined by this Honorable Court:
exemplary damages in the amount of P1,000.00, attorney's fees of
P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be deemed just
and equitable.
On November 17, 1962, after the parties had submitted the stipulation of facts
reproduced at pages 12 to 15 of the Record on Appeal, the above-named court
rendered judgment as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendants to
countermand the notice given to the Bank of America on September 27,
1961, deducting from said Bank's clearing account the sum of P200.00
representing the amount of postal money order No. 124688, or in the
alternative, to indemnify the plaintiff in the said sum of P200.00 with
interest thereon at the rate of 8-½% per annum from September 27, 1961
until fully paid; without any pronouncement as to cost and attorney's fees.
The case was appealed to the Court of First Instance of Manila where, after the parties
had resubmitted the same stipulation of facts, the appealed decision dismissing the
complaint, with costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's brief are related
to the other and will therefore be discussed jointly. They raise this main issue: that the
postal money order in question is a negotiable instrument; that its nature as such is not
in anyway affected by the letter dated October 26, 1948 signed by the Director of Posts
and addressed to all banks with a clearing account with the Post Office, and that money
orders, once issued, create a contractual relationship of debtor and creditor,
respectively, between the government, on the one hand, and the remitters payees or
endorses, on the other.
It is not disputed that our postal statutes were patterned after statutes in force in the
United States. For this reason, ours are generally construed in accordance with the
construction given in the United States to their own postal statutes, in the absence of
any special reason justifying a departure from this policy or practice. The weight of
authority in the United States is that postal money orders are not negotiable instruments
(Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912),
the reason behind this rule being that, in establishing and operating a postal money
order system, the government is not engaging in commercial transactions but merely
exercises a governmental power for the public benefit.
It is to be noted in this connection that some of the restrictions imposed upon money
orders by postal laws and regulations are inconsistent with the character of negotiable
instruments. For instance, such laws and regulations usually provide for not more than
one endorsement; payment of money orders may be withheld under a variety of
circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are the conditions laid
down in the letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of
America for the redemption of postal money orders received by it from its depositors.
Among others, the condition is imposed that "in cases of adverse claim, the money
order or money orders involved will be returned to you (the bank) and the,
corresponding amount will have to be refunded to the Postmaster, Manila, who reserves
the right to deduct the value thereof from any amount due you if such step is deemed
necessary." The conditions thus imposed in order to enable the bank to continue
enjoying the facilities theretofore enjoyed by its depositors, were accepted by the Bank
of America. The latter is therefore bound by them. That it is so is clearly referred from
the fact that, upon receiving advice that the amount represented by the money order in
question had been deducted from its clearing account with the Manila Post Office, it did
not file any protest against such action.
Moreover, not being a party to the understanding existing between the postal officers,
on the one hand, and the Bank of America, on the other, appellant has no right to assail
the terms and conditions thereof on the ground that the letter setting forth the terms and
conditions aforesaid is void because it was not issued by a Department Head in
accordance with Sec. 79 (B) of the Revised Administrative Code. In reality, however,
said legal provision does not apply to the letter in question because it does not provide
for a department regulation but merely sets down certain conditions upon the privilege
granted to the Bank of Amrica to accept and pay postal money orders presented for
payment at the Manila Post Office. Such being the case, it is clear that the Director of
Posts had ample authority to issue it pursuant to Sec. 1190 of the Revised
Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the issues raised in the
third and fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law, the same is hereby
affirmed with costs.
Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo
and Villamor, JJ., concur.
Castro and Makasiar, JJ., took no part.

G.R. No. L-1405 July 31, 1948
Viray and Viola Viray for petitioner.
First Assistant Solicitor General Roberto A. Gianzon and Solicitor Manuel Tomacruz for
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
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 proper

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.
Paras, Actg. C.J., Feria, Pablo, Perfecto, Briones, and Padilla, JJ., concur.

G.R. No. L-7271 August 30, 1957
PHILIPPINE NATIONAL BANK, Plaintiff-Appellant, vs. JOSE ZULUETA, Defendant-
Natalio M. Balboa and Ramon B. de los Reyes for appellant.
Lorenzo F. Miravite for appellee.
In the Manila court of first instance, the Philippine National Bank sued the defendant
upon a letter of credit and a draft for the amount of $14,449.15. Although willing to pay
the equivalent in pesos of the draft, plus bank charges, the defendant objected to the
17% excise tax imposed by Republic Act No. 601 which the Bank tried to collect. Both
documents, he contended, had been issued and had matured before the approval of
said Act, therefore the excise tax should not be
charged.chanroblesvirtualawlibrary chanrobles virtual law library
After the trial, the court rendered judgment exempting defendant from the 17% excise
tax; but ordered him to deliver to plaintiff the sum of P37,622.11 plus daily interest of
P3.9938 on P29,154.55 beginning from January 9,
1953.chanroblesvirtualawlibrary chanrobles virtual law library
The plaintiff appealed, insisting on the right to collect 17% excise or exchange tax. This
is the only issue between the parties now.chanroblesvirtualawlibrary chanrobles virtual
law library
For a statement of the facts we may quote from plaintiff's brief. "On October 26, 1948,
Defendant-Appellee applied for a commercial letter of credit with Plaintiff-Appellant,
Philippine National Bank (Manila) and was granted L/C No. 35171 (Exhibit "B") on
November 6, 1948, in favor of Otis Elevator Co., 260 Eleventh Avenue, New York City,
U.S.A., for $14,449.15 for the purchase of an electric passenger elevator; on May 17,
1949, and under the said letter of credit (Exhibit "B"), Otis Elevator Co. drew a 90 day
sight draft for $14,449.15 (Exhibit "A") which draft was duly presented to and accepted
by Defendant-Appellee on July 6, 1949. Said acceptance matured on October 4, 1949.
Upon Defendant-Appellee's signing a 90 day trust receipt (Exhibit "C") on June 3, 1949,
Plaintiff-Appellant released to Defendant-Appellee the covering documents of the
shipment. In the meantime, debit advice (Exhibit "G") was received from Plaintiff-
Appellant's New York Agency to the effect that it advanced or paid the draft (Exhibit "A")
to Otis Elevator Co. on May 17, 1949, and charged Plaintiff-Appellant the sum of
$14,467.21 representing the face value of the draft (Exhibit "A") plus $18.06 as 1/8 of
1% commission. After the maturity date (October 4, 1949) Plaintiff-Appellant presented
the draft to Defendant-Appellee for payment but the latter failed, neglected and refused
to pay.chanroblesvirtualawlibrary chanrobles virtual law library
During its special session in January, 1951, Congress passed House Bill No. 1513, now
Republic Act No. 601, approved on March 28, 1951, imposing a 17% special excise tax
(otherwise known as foreign exchange tax) on the value in Philippine peso of foreign
exchange sold by the Central Bank of the Philippines or its authorized agents. Plaintiff-
appellant, as any other commercial bank in the Philippines, is an authorized agent of the
Central Bank of the Philippines.chanroblesvirtualawlibrary chanrobles virtual law library
On October 17, 1952, and January 18, 1953, Plaintiff-Appellant sent bills or statements
of collection (Exhibits "D" and "D-1") to Defendant-Appellee but the latter failed and
refused to effect payment thereof. In those statements, the sum of P4,955.74 was
included representing the 17% special excise tax on the peso value of the draft for US
$14,449.15 (Exhibit "A"), . . . .chanroblesvirtualawlibrary chanrobles virtual law library
Defendant's application for a letter of credit party read as follows:
Please arrange by cable for the establishment of an Irrevocable Letter of Credit on New
York in favor of Otis Elevator Co., 260 Eleventh Avenue, New York City for account of
Ho. Jose C. Zulueta for the sum of FOURTEEN THOUSAND FOUR HUNDRED
FORTY-NINE AND 15/100 ($14,449.15) DOLLARS against drawn at NINETY DAYS
accompanied by shipping documents covering of One COMPLETE ELECTRIC
PASSENGER ELEVATOR . . .chanroblesvirtualawlibrary chanrobles virtual law library
Drafts must be drawn and presented or negotiated not later than May 31,
1949.chanroblesvirtualawlibrary chanrobles virtual law library
IN CONSIDERATION THEREOF, I/we promise and agree to pay you at maturity in
Philippine Currency, the equivalent of the above amount or such portion thereof as may
be drawn or paid upon the faith of said credit, together with your usual charges, and
I/we authorize you and your respective correspondents to pay or to accept drafts under
this credit, . . .
And the draft issued thereunder (Exhibit A) was negotiable and addressed to herein
defendant as the drawee.chanroblesvirtualawlibrary chanrobles virtual law library
From plaintiff's statement of its position it is not clear whether recovery is demanded
upon the letter of credit, or upon the draft Exhibit A. Plaintiff may, undoubtedly, proceed
on either cause of action. (See Art. 571 Code of Commerce; Sec. 51 Negotiable
Instruments Law.)chanrobles virtual law library
Had the plaintiff elected to recover on said letter of credit, then it would meet with the
doctrines in Araneta vs. Philippine National Bank, 95 Phil., 160, 50 Off. Gaz., (11)
5350), According to the majority opinion in that case, plaintiff should receive the
equivalent in pesos, on May 17, 1949, of what the New York Agency paid to Otis
Elevator, i.e. $14,467.21 (plus bank fees of course.) According to the minority opinion,
the equivalent in pesos of the same amount of dollars on October 4, 1949. No. 17% tax
on both dates. In converting dollars into pesos, no 17% exchange tax would be
imposable, since it was created only in March 1951. The plaintiff knows the case, for it
was a party to it; and anticipating, in this appeal, the obvious conclusions, it insists not
so much on the letter of credit, as on the bill of exchange Exhibit A
. As stated before,
such draft was drawn by Otis Elevator Co. in New York. It was addressed to defendant
as drawee, who is due course accepted it. There is no, question that upon accepting it,
defendant became a party primarily liable
; and the holder (Philippine National Bank)
may sue him, even if there had been no presentation for payment on the day of
maturity. (Sec. 70 Negotiable Instruments Law.)chanrobles virtual law library
Admittedly, defendant's responsibility is for $14,449.15 due in Manila on October 4,
1949 (plus bank fees). He is under obligation to deliver such amount in pesos as were
the equivalent of $14,449.15. At what rate of exchange? The rate prevailing on the day
of issuance, day of acceptance, day of maturity, the day suit is filed, or that prevailing on
the day judgment is rendered requiring him to pay? Herein lies the center of the
controversy. Appellant will win this appeal only if the rate on the last days above
mentioned is held to be the legal rate.chanroblesvirtualawlibrary chanrobles virtual law
The document is negotiable and is governed by the Negotiable Instruments Law. But
this statute does not certain any express provision on the question. We know the draft is
a foreign bill of exchange, because, drawn in New York, it is payable here. (See. 129
Negotiable Instruments Law.) We also know that although the amount payable is
expressed in dollars - not current money here - it is still negotiable, for it may be
discharged with pesos of equivalent amount
. The problem arises when we try to
determine the "equivalent amount", because the rate of exchange fluctuates from day to
day.chanroblesvirtualawlibrary chanrobles virtual law library
There are decisions in America to the effect that, "the rate of exchange in effect at the
time the bill should have been paid" controls. (11 C.J.S. p. 264.)chanrobles virtual law
Such decisions agree with the provisions of the Bills of Exchange Act of England
could be taken as enunciating the correct principle, inasmuch as our Negotiable
Instruments Law, practically copied the American Uniform Negotiable Instruments Law
which in turn was based largely on the Bills of Exchange Act of England of 1882. In fact
we practically followed this rule in Westminster Bank vs. K. Nassor, 58 Phil.
855.chanroblesvirtualawlibrary chanrobles virtual law library
There is one decision applying the rate of exchange at the time judgment is entered. (11
C. J. S. p.264.)
chanrobles virtual law library
This decision however seems not to have taken into account the Bills of Exchange Act
above mentioned. And we have rejected its view in the Westminster case, supra.
Furthermore it related to a bill expressly made payable in a foreign currency - which is
not the case here. And the theory would probably produce undesirable effects upon
commercial documents, for it would make the amount uncertain, the parties to the bill
not being able to foresee the day judgment would be rendered.
chanrobles virtual law
But the appellant argues, the defendant had promised to pay $14,419.15 in dollars;
therefore he must be ordered to pay the sum in dollars at current rates plus
17%. chanrobles virtual law library
The argument rests on a wrong premise. Defendant had not promised to pay in dollars.
He agreed to pay the equivalent of $14,419.15 dollars, in Philippine
.chanroblesvirtualawlibrary chanrobles virtual law library
But if we admit that defendant had agreed to pay in dollars, then we have to apply
Republic Act No. 529 and say that his obligation "shall be discharged in Philippine
currency measured at the prevailing rates of exchange at the time the obligation was
incurred."chanrobles virtual law library
Now then, Zulueta's obligation having been incurred
before the creation of the 17%
tax, it may not be validly burdened with such tax, because the law imposing it could not
be deemed to have impaired obligations already existing at the time of its
approval..chanroblesvirtualawlibrarychanrobles virtual law library
The plaintiff's theory seems to be that in remitting dollars to its New York Agency, after it
collects from the defendant, it has to pay for the said excise tax.
The trial judge
expressed the belief that such amount had been remitted before the enactment of
Republic Act 601, because considering the practice of banks of replenishing their
agencies abroad with necessary funds, he deemed it improbable that the Manila Office
of the Bank - in two years had not reimburse its New York Agency for the amount
advanced on account of the draft Exhibit A. This belief most probably accorded with
reality; because as early as May 17, 1949 (Exhibit G) the New York Agency had
"charged" the amount of this draft against the account of the Manila office there, - which
means the Agency had reimbursed itself the amount of the draft out of the funds of the
Manila Office then in its possession (in New York) or coming to its possession
afterwards. And it is unbelievable that in two years the Manila office never had in New
York sufficient funds to effect the reimbursement.chanroblesvirtualawlibrary chanrobles
virtual law library
In fact, the statement of account rendered by plaintiff to defendant on October 17, 1952,
(Exhibit D) enumerated these charges:
To your acceptance amounting to $14,449.15
Plus: Remitter's Commission 18.06
Converted at 3/4 % P29,151.43
5% int. 5/17/49-10/19/52-1251 da. 4,995.68
10% comm. on $14,449.15 2,911.51
Documentary stamps 8.70
Air Mail 2.00
17% Excise Tax on P29,151.43 4,955.74
Other charges 3.00
From the above it may be deduced that the amount of the draft had been remitted or
paid to the New York Agency in May 1949, for the reason that Zulueta is charged with
remitter's commission" and 5% interest on the amount of the draft (and such
commission) beginning from May 17, 1949. This necessarily impllies that in accordance
with Exhibit G, the New York Agency had been reimbursed of the draft's amount (or
such amount was remitted) on May 17, 1949.
Now, in May 1949 no 17% exchange
tax was payable upon such remittance; and the Manila office did not pay it. Therefore
Zulueta should not pay it too.chanroblesvirtualawlibrary chanrobles virtual law library
In view of the foregoing the judgment will be affirmed, with costs against appellant. So
ordered.chanroblesvirtualawlibrary chanrobles virtual law library
Paras, C.J., Padilla, Montemayor and Bautista Angelo, JJ., concur.

Separate Opinions chanrobles virtual law library
REYES, A., J ., concurring:chanrobles virtual law library
Plaintiff in this case seeks reimbursement in Philippine currency for the amount in
dollars advanced by it through its New York agency to meet a draft drawn against
defendant and accepted by the latter for a valuable consideration. Plaintiff's to such
reimbursement is not questioned. What is disputed is its pretended right to add to the
amount of the draft the excise tax of 17 % which plaintiff would had to pay to the
Government if it were to remit now to New York the necessary amount of dollars that its
agency there had paid on the draft.chanroblesvirtualawlibrary chanrobles virtual law
I cannot bring myself to believe that it is only now that plaintiff has thought of sending
dollars to New York to replace the amount advanced by its agency. As intimated in the
majority opinion and in consonance with good banking practice, the necessary
remittance must have been effected long ago, that is, long before the creation of the
excise tax on foreign exchange in March, 1951. Plaintiff, therefore, could not have paid
such tax, and not having done so it has no right to get reimbursement therefore from
defendant.chanroblesvirtualawlibrary chanrobles virtual law library
I do not think that defendant could be legally made to pay more than what plaintiff had
actually advanced for him, aside from commission and other charges, on the theory that
the Philippine peso has depreciated in value with respect to the American dollar.
Legally, it has not. The legal rate of exchange between the two currencies is still two to
one. What happened is that with the creation of the excise tax in 1951, it would now be
more costly to remit dollars abroad. But why should plaintiff make that remittance now
when, as already stated, it must have already done so long before the creation of the
excise tax on foreign exchange?chanrobles virtual law library
Lastly, a debtor cannot be charged with bad faith for refusing to pay that which he
should not pay.

FELIX, J ., concurring:chanrobles virtual law library
The decision rendered in this case, penned by Mr. Justice Cezar Bengzon, perfectly
reflects and delivers the opinion of the majority of this Court and I subscribe to each and
every statement made and argument adduced therein. This being so, it would seem that
any concurring or supporting opinion is quite superfluous and I would not have taken the
task of writing further in the matter were it not for the fact that in the dissenting opinion it
is stated that:
It cannot be justly contended that if a debtor had borrowed, say $10,000, the lender
should be satisfied with eight or nine thousand. Yet that is what the majority's decision
actually amounts to.
The writer further says that:
the majority opinion has the merit of giving the bank a costly lesson on the advantages
of not considering political influence in the making and collecting of its loans; but I am
afraid the experience will be too quickly forgotten to even palliate the sacrifice of
fundamental justice to technical considerations.
I, certainly, cannot leave these statements pass
unanswered.chanroblesvirtualawlibrary chanrobles virtual law library
To begin with, I might say that if any lesson has been given by the majority of this court
to the plaintiff bank, it is not in this case but in the case of Araneta vs. The Philippine
National Bank (G.R. No. L-4633, May 31, 1954), cited in the majority decision, where
the latter was a party to that case and a similar doctrine was laid down. Coming now to
the bone of contention, I notice that the dissenting Justice views the matter involved in
the controversy as a loan and submits that the question really at issue can be boiled
down to the proposition of "whether it is the lender or the borrower who should bear the
added cost of the depreciation of the peso in relation to the
dollar".chanroblesvirtualawlibrary chanrobles virtual law library
In this connection, I might say that defendant's obligation to the plaintiff would have
been settled some years ago were it not for the fact that the Bank insisted in collecting
the special excise tax of 17 per cent on foreign exchange transactions imposed by
Republic Act No. 601 which entered into effect on March 28, 1951, and was not yet in
force at the time the obligation of the defendant matured on October 4, 1948. And even
if we look at the case as a loan and apply to the transaction the provisions of Article
312, paragraph 1, of the Code of Commerce, cited by the dissenting Justice, yet We
could not, under the facts and circumstances of the case that cannot be denied,
logically arrive at the same conclusion that he has come
to.chanroblesvirtualawlibrary chanrobles virtual law library
And the reason is obvious. In the first place, We have to take into account that the New
York agency of Philippine National Bank and its central office in Manila are not separate
and independent entities. That is why it is the Philippine National Bank (Manila office)
and not the New York agency of said Bank that is the plaintiff in this case.
Consequently, any payment made to plaintiffs central office in Manila for obligations that
any debtor may have contracted with said New York agency is and has to be
considered as a payment or settlement of said obligations, there being no need to attain
this result that the plaintiff would adjust is accounts with its agency, or transmit to the
latter the amounts received from the debtor.chanroblesvirtualawlibrary chanrobles
virtual law library
In the second place, the obligation contracted by the defendant was not to pay
$14,419.15 in dollars, but the equivalent of $14,419.15 dollars, in Philippine currency.
So, when defendant's obligation matured on October 4, 1949, the defendant had to pay
to the Bank not the sum of $14,467.21 representing the face value of the draft Exhibit A,
plus $18.06 as 1/8 of 1 per cent commission, but its equivalent in pesos at the time of
such maturity, and had the defendant failed to satisfy then his obligation, he could be
held liable to pay in addition thereof, the corresponding interests for the period of default
and nothing else. And that is precisely what defendant is willing to
pay.chanroblesvirtualawlibrary chanrobles virtual law library
From the foregoing, I hope to have made clear my stand on the matter.

REYES, J .B.L., dissenting:chanrobles virtual law library
As I view it, the question before this court is whether it is the lender or the defaulting
borrower who should bear the added cost of the depreciation of the peso in relation to
the dollar.chanroblesvirtualawlibrary chanrobles virtual law library
When in 1949 the Philippine National Bank remitted to the Otis Elevator Co. the
$14,449.15 for the account of Zulueta, the Bank, in effect, loaned to Zulueta said
amount on the strength of his express engagement to "pay at maturity in Philippine
Currency, the equivalent of the above amount," which was a promise to pay such
amount in Philippine pesos as could be converted into $14,449.15. There is no question
that Zulueta failed to do so, and has refused to do so up to the present. In the
meantime, in 1951, the Legislature enacted Rep. Act No. 601, imposing a 17% special
excise tax on foreign exchange transactions, so that thereafter one had to pay 234
pesos for every $100, instead of P200 as heretofore. Should Zulueta be required to pay
for the dollars at the new rate?chanrobles virtual law library
Since Zulueta's obligation is measured in terms of U.S. dollars that have increased in
value vis-a-vis the peso, Art. 312, par. 1, of the Code of Commerce, which was the law
then in force, must be read into the contract. It provides:
If the loan consists of money, the debtor shall pay it by returning an amount equal to
that received, in accordance with the legal value which the money may have at the time
of the return, unless the kind of money in which the payment is to be made has been
stipulated, in which case the change which its value may suffer shall be to the detriment
or for the benefit of the lender. (Emphasis supplied)
The majority decision, in upholding the contention that Zulueta is not chargeable with
the 17% tax, virtually authorizes just the contrary; and permits the defaulting borrower to
repay an amount in pesos that, in violation of the law and his engagement, can not be
converted into the same amount of dollars loaned to him. I believe it is contrary to all
elemental justice and good faith to enable a borrower to return to his creditor less than
the amount borrowed, specially taking into account that Zulueta, by his obdurate refusal
to pay a just debt, is a debtor in bad faith who is responsible for any subsequent
damages suffered by his creditor, even if due to fortuitous
event.chanroblesvirtualawlibrary chanrobles virtual law library
Applicable here are the considerations in Hawes vs. Woolcock (26 Wis. 629, 635),
quoted with approval in Engel vs. Mariano Velasco & Co., 47 Phil. 115, 143:
In Hawes vs. Woolcock (26 Wis., 629, 635), the court said:chanrobles virtual law library
"Perhaps a strict application of logical reasoning to the question would lead to the result
that the premium should be estimated at the rate when the note fell due. That was when
the money should have been paid, and when the default in performing the contract
occurred. This conclusion would be supported by the analogy derived from the rule of
damages on contracts to deliver specific articles, fixing the market price at the time
when they ought to have been delivered as the criterion. This rule might sometimes be
to the advantage of the holder of the note, as in the present case. In other cases, where
the premium was less at the time the note became due than at the time of trial, it would
be to his detriment. And in view of these uncertainties and fluctuations in the rate, upon
grounds of policy as well as for its tendency to do as complete justice between the
parties as is possible, we have come to the conclusion that the true rule in such cases is
to give judgment for such an amount as will, at the time of the judgment, purchase the
amount due on the note in the funds or currency in which it is payable.
The crucial point is that the Bank's action is not for damages, but for specific
performance of Zulueta's obligation. While payable in Philippine pesos, it was actually
one to pay a definite sum in United States dollars, since he promised to pay an
equivalent amount. The failure to specify any fixed number of pesos, and the omission
of any reference to any rate of exchange, is proof that the parties had in mind the
restoration to the Bank of the value of the dollars it had advanced. In other words,
Zulueta engaged to return to the Bank so many Philippine pesos as could be converted
into $14,449.15; and that is what the Bank asks him to do. It can not be justly contended
that if a debtor had borrowed, say, ten thousand dollars, the lender should be satisfied
with eight or nine thousand. Yet that is what the majority's decision actually amounts
to.chanroblesvirtualawlibrary chanrobles virtual law library
I see no point in determining the rate of dollar-peso exchange at the date of maturity or
of the constitution of the obligation, since Zulueta did not engage to pay any definite
amount of pesos, but so many as would be needed to make up $14,449.15. And as
Zulueta is being required to comply with a specific promise, there is no relevancy in
whether or not the main office of the Bank has or has not remitted the dollars to its
American agency; after all, the two part are of the same institution. Anyway, if the
dollars have not been remitted, the amount that Zulueta is now sentenced to pay will not
permit a remittance of the same number of dollars that the Bank advanced for his
account. If they were heretofore remitted, the funds of the Bank in Manila have been
diminished pro tanto, and they can not be replenished to their original level in terms of
dollars unless Zulueta is required to pay the exchange
tax.chanroblesvirtualawlibrary chanrobles virtual law library
Of course, the majority opinion has the merit of giving the Bank a costly lesson on the
advantages of not considering political influence in the making and collecting of its
loans; but I am afraid the experience will be too quickly forgotten to even palliate the
sacrifice of fundamental justice to technical
considerations.chanroblesvirtualawlibrary chanrobles virtual law library
For the foregoing reasons, I dissent.chanroblesvirtualawlibrary chanrobles virtual law
Labrador, Concepcion and Endencia, JJ., concur.




Respondents. September 26, 2008
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x


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 Decision
of the Court of Appeals (CA) which affirmed with modification that
of the Regional Trial Court (RTC).

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 discounting
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 PEMSLA‘s 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 ofP2,345,804.00. These were payable to forty seven
(47) individual payees who were all members of PEMSLA.

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

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 PNB‘s motion to dismiss.

In its Answer,
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. PNB‘s 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

(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

(b) Moral damages in the amount of P1,000,000.00;

(c) Exemplary damages in the amount of P500,000.00;

(d) Attorney‘s fees in the amount of P150,000.00
considering that this case does not involve very
complicated issues; and for the

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed.

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 Decision
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 PEMSLA‘s business arrangement – that the value of the
rediscounted checks of the plaintiffs-appellees would be deposited in
PEMSLA‘s account for payment of the loans it has approved in exchange
for PEMSLA‘s 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 PEMSLA‘s 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 PEMSLA‘s officer, and
that such was a regular practice by the parties until the defendant-
appellant discovered the scam. The logical conclusion, therefore, is that
the checks were never meant to be paid to order, but instead, to
PEMSLA. We thus find no breach of contract on the part of the

According to plaintiff-appellee Erlando Rodriguez‘ testimony,
PEMSLA allegedly issued post-dated checks to its qualified members who
had applied for loans. However, because of PEMSLA‘s 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.
(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 money-making 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 PNBto recover the value of the

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

2. Moral damages in the amount of P200,000;

3. Attorney‘s fees in the amount of P100,000; and

4. 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.


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, PNBis 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.


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

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.‖
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) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) 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) When it is expressed to be so payable; or
(b) 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
(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.

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.
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

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.

The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance
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.

The more recent Getty Petroleum Corp. v. American Express Travel Related
Services Company, Inc.
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 transferee‘s 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 x

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 bank‘s 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

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.

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.
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.
For this
reason, banks are minded to treat their customer‘s accounts with utmost care,
confidence, and honesty.

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 drawer‘s instructions, i.e., to the named payee in the check. It
should charge to the drawer‘s accounts only the payables authorized by the
latter. Otherwise, the drawee will be violating the instructions of the drawer and it shall
be liable for the amount charged to the drawer’s account.

In the case at bar, respondents-spouses were the bank‘s depositors. The checks
were drawn against respondents-spouses‘ 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,
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.

PNB‘s 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

PNB‘s 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, PNBwas 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 PNB‘s 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.
Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to
file responsive pleadings. Verily, theRTC dismissal of PNB‘s 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 PNB‘s 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.

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.


G.R. No. L-2516 September 25, 1950
ANG TEK LIAN, petitioner,
Laurel, Sabido, Almario and Laurel for petitioner.
Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz for
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.
Moran, C. J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.

G.R. No. L-18103 June 8, 1922
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
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.
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:
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 ____
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.

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.
x x x x x x x x x
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
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.
x x x x x x x x x
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.
x x x x x x x x x
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.
x x x x x x x x x
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.
Araullo, C.J., Avanceña, Villamor, Ostrand, Johns and Romualdez, JJ., concur.

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