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G.R. No. 184458

January 14, 2015

RODRIGO RIVERA, Petitioner, vs. SPOUSES SALVADOR CHUA


AND VIOLETA S. CHUA, Respondents..
PEREZ, J.:
Before us are consolidated Petitions for Review on Certiorari under
Rule 45 of the Rules of Court assailing the Decision 1 of the Court of
Appeals in CA-G.R. SP No. 90609 which affirmed with modification
the separate rulings of the Manila City trial courts, the Regional Trial
Court, Branch 17 in Civil Case No. 02-105256 2 and the Metropolitan
Trial Court (MeTC), Branch 30, in Civil Case No. 163661, 3 a case for
collection of a sum of money due a promissory note. While all three
(3) lower courts upheld the validity and authenticity of the
promissory note as duly signed by the obligor, Rodrigo Rivera
(Rivera), petitioner in G.R. No. 184458, the appellate court modified
the trial courts consistent awards: (1) the stipulated interest rate of
sixty percent (60%) reduced to twelve percent (12%) per
annumcomputed from the date of judicial or extrajudicial demand,
and (2) reinstatement of the award of attorneys fees also in a
reduced amount of P50,000.00.
In G.R. No. 184458, Rivera persists in his contention that there was
no valid promissory note and questions the entire ruling of the
lower courts. On the other hand, petitioners in G.R. No. 184472,
Spouses Salvador and Violeta Chua (Spouses Chua), take exception
to the appellate courts reduction of the stipulated interest rate of
sixty percent (60%) to twelve percent (12%) per annum.
We proceed to the facts.
The parties were friends of long standing having known each other
since 1973: Rivera and Salvador are kumpadres, the former is the
godfather of the Spouses Chuas son.
On 24 February 1995, Rivera obtained a loan from the Spouses
Chua:

PROMISSORY NOTE
120,000.00
FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses
SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of One
Hundred Twenty Thousand Philippine Currency (P120,000.00) on
December 31, 1995.
It is agreed and understood that failure on my part to pay the
amount of (120,000.00) One Hundred Twenty Thousand Pesos on
December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE
PERCENT (5%) interest monthly from the date of default until the
entire obligation is fully paid for.
Should this note be referred to a lawyer for collection, I agree to
pay the further sum equivalent to twenty percent (20%) of the total
amount due and payable as and for attorneys fees which in no
case shall be less than P5,000.00 and to pay in addition the cost of
suit and other incidental litigation expense.
Any action which may arise in connection with this note shall be
brought in the proper Court of the City of Manila.
Manila, February 24, 1995[.]
(SGD.) RODRIGO RIVERA4
In October 1998, almost three years from the date of payment
stipulated in the promissory note, Rivera, as partial payment for the
loan, issued and delivered to the SpousesChua, as payee, a check
numbered 012467, dated 30 December 1998, drawn against
Riveras current account with the Philippine Commercial
International Bank (PCIB) in the amount of P25,000.00.
On 21 December 1998, the Spouses Chua received another check
presumably issued by Rivera, likewise drawn against Riveras PCIB
current account, numbered 013224, duly signed and dated, but
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blank as to payee and amount. Ostensibly, as per understanding by


the parties, PCIB Check No. 013224 was issued in the amount
ofP133,454.00 with "cash" as payee. Purportedly, both checks were
simply partial payment for Riveras loan in the principal amount
of P120,000.00.
Upon presentment for payment, the two checks were dishonored
for the reason "account closed."
As of 31 May 1999, the amount due the Spouses Chua was pegged
at P366,000.00 covering the principal ofP120,000.00 plus five
percent (5%) interest per month from 1 January 1996 to 31 May
1999.
The Spouses Chua alleged that they have repeatedly demanded
payment from Rivera to no avail. Because of Riveras unjustified
refusal to pay, the Spouses Chua were constrained to file a suit on
11 June 1999. The case was raffled before the MeTC, Branch 30,
Manila and docketed as Civil Case No. 163661.
In his Answer with Compulsory Counterclaim, Rivera countered
that: (1) he never executed the subject Promissory Note; (2) in all
instances when he obtained a loan from the Spouses Chua, the
loans were always covered by a security; (3) at the time of the filing
of the complaint, he still had an existing indebtedness to the
Spouses Chua, secured by a real estate mortgage, but not yet in
default; (4) PCIB Check No. 132224 signed by him which he
delivered to the Spouses Chua on 21 December 1998, should have
been issued in the amount of only 1,300.00, representing the
amount he received from the Spouses Chuas saleslady; (5)
contrary to the supposed agreement, the Spouses Chua presented
the check for payment in the amount of P133,454.00; and (6) there
was no demand for payment of the amount of P120,000.00 prior to
the encashment of PCIB Check No. 0132224.5
In the main, Rivera claimed forgery of the subject Promissory Note
and denied his indebtedness thereunder.
The MeTC summarized the testimonies of both parties respective
witnesses:

[The spouses Chuas] evidence include[s] documentary evidence


and oral evidence (consisting of the testimonies of [the spouses]
Chua and NBI Senior Documents Examiner Antonio Magbojos). x x x
Witness Magbojos enumerated his credentials as follows: joined the
NBI (1987); NBI document examiner (1989); NBI Senior Document
Examiner (1994 to the date he testified); registered criminologist;
graduate of 18th Basic Training Course [i]n Questioned Document
Examination conducted by the NBI; twice attended a seminar on US
Dollar Counterfeit Detection conducted by the US Embassy in
Manila; attended a seminar on Effective Methodology in Teaching
and Instructional design conducted by the NBI Academy; seminar
lecturer on Questioned Documents, Signature Verification and/or
Detection; had examined more than a hundred thousand
questioned documents at the time he testified.
Upon [order of the MeTC], Mr. Magbojos examined the purported
signature of [Rivera] appearing in the Promissory Note and
compared the signature thereon with the specimen signatures of
[Rivera] appearing on several documents. After a thorough study,
examination, and comparison of the signature on the questioned
document (Promissory Note) and the specimen signatures on the
documents submitted to him, he concluded that the questioned
signature appearing in the Promissory Note and the specimen
signatures of [Rivera] appearing on the other documents submitted
were written by one and the same person. In connection with his
findings, Magbojos prepared Questioned Documents Report No.
712-1000 dated 8 January 2001, with the following conclusion: "The
questioned and the standard specimen signatures RODGRIGO
RIVERA were written by one and the same person."
[Rivera] testified as follows: he and [respondent] Salvador are
"kumpadres;" in May 1998, he obtained a loan from [respondent]
Salvador and executed a real estate mortgage over a parcel of land
in favor of [respondent Salvador] as collateral; aside from this loan,
in October, 1998 he borrowed P25,000.00 from Salvador and issued
PCIB Check No. 126407 dated 30 December 1998; he expressly
denied execution of the Promissory Note dated 24 February 1995
and alleged that the signature appearing thereon was not his
signature; [respondent Salvadors] claim that PCIB Check No.
0132224 was partial payment for the Promissory Note was not true,
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the truth being that he delivered the check to [respondent


Salvador] with the space for amount left blank as he and
[respondent] Salvador had agreed that the latter was to fill it in
with the amount of P1,300.00 which amount he owed [the spouses
Chua]; however, on 29 December 1998 [respondent] Salvador
called him and told him that he had written P133,454.00 instead
of P1,300.00; x x x. To rebut the testimony of NBI Senior Document
Examiner Magbojos, [Rivera] reiterated his averment that the
signature appearing on the Promissory Note was not his signature
and that he did not execute the Promissory Note.6
After trial, the MeTC ruled in favor of the Spouses Chua:
WHEREFORE, [Rivera] is required to pay [the spouses
Chua]: P120,000.00 plus stipulated interest at the rate of 5% per
month from 1 January 1996, and legal interest at the rate of 12%
percent per annum from 11 June 1999, as actual and compensatory
damages; 20% of the whole amount due as attorneys fees.7
On appeal, the Regional Trial Court, Branch 17, Manila affirmed the
Decision of the MeTC, but deleted the award of attorneys fees to
the Spouses Chua:
WHEREFORE, except as to the amount of attorneys fees which is
hereby deleted, the rest of the Decision dated October 21, 2002 is
hereby AFFIRMED.8
Both trial courts found the Promissory Note as authentic and validly
bore the signature of Rivera. Undaunted, Rivera appealed to the
Court of Appeals which affirmed Riveras liability under the
Promissory Note, reduced the imposition of interest on the loan
from 60% to 12% per annum, and reinstated the award of
attorneys fees in favor of the Spouses Chua:
WHEREFORE, the judgment appealed from is hereby AFFIRMED,
subject to the MODIFICATION that the interest rate of 60% per
annum is hereby reduced to12% per annum and the award of
attorneys fees is reinstated atthe reduced amount of P50,000.00
Costs against [Rivera].9

Hence, these consolidated petitions for review on certiorariof Rivera


in G.R. No. 184458 and the Spouses Chua in G.R. No. 184472,
respectively raising the following issues:
A. In G.R. No. 184458
1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED
IN UPHOLDING THE RULING OF THE RTC AND M[e]TC THAT THERE
WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA].
2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED
IN HOLDING THAT DEMAND IS NO LONGER NECESSARY AND IN
APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS
LAW.
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED
IN AWARDING ATTORNEYS FEES DESPITE THE FACT THAT THE SAME
HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT THAT
[THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION OF
THE RTC DELETING THE AWARD OF ATTORNEYS FEES.10
B. In G.R. No. 184472
[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS
COMMITTED GROSS LEGAL ERROR WHEN IT MODIFIED THE
APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60%
PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT
RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE
SAID
STIPULATED
RATE
OF
INTEREST
IS
EXORBITANT,
UNCONSCIONABLE,
UNREASONABLE,
INEQUITABLE,
ILLEGAL,
IMMORAL OR VOID.11
As early as 15 December 2008, wealready disposed of G.R. No.
184472 and denied the petition, via a Minute Resolution, for failure
to sufficiently show any reversible error in the ruling of the
appellate court specifically concerning the correct rate of interest
on Riveras indebtedness under the Promissory Note.12
On 26 February 2009, Entry of Judgment was made in G.R. No.
184472.
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Thus, what remains for our disposition is G.R. No. 184458, the
appeal of Rivera questioning the entire ruling of the Court of
Appeals in CA-G.R. SP No. 90609.

indispensable to the examination of alleged forged documents, the


opinions of handwriting experts are nevertheless helpful in the
courts determination of a documents authenticity.

Rivera continues to deny that heexecuted the Promissory Note; he


claims that given his friendship withthe Spouses Chua who were
money lenders, he has been able to maintain a loan account with
them. However, each of these loan transactions was respectively
"secured by checks or sufficient collateral."

To be sure, a bare denial will not suffice to overcome the positive


value of the promissory note and the testimony of the NBI witness.
In fact, even a perfunctory comparison of the signatures offered in
evidence would lead to the conclusion that the signatures were
made by one and the same person.

Rivera points out that the Spouses Chua "never demanded


payment for the loan nor interest thereof (sic) from [Rivera] for
almost four (4) years from the time of the alleged default in
payment [i.e., after December 31, 1995]."13

It is a basic rule in civil cases that the party having the burden of
proof must establish his case by preponderance of evidence, which
simply means "evidence which is of greater weight, or more
convincing than that which is offered in opposition to it."

On the issue of the supposed forgery of the promissory note, we are


not inclined to depart from the lower courts uniform rulings that
Rivera indeed signed it.

Evaluating the evidence on record, we are convinced that [the


Spouses Chua] have established a prima faciecase in their favor,
hence, the burden of evidence has shifted to [Rivera] to prove his
allegation of forgery. Unfortunately for [Rivera], he failed to
substantiate his defense.14 Well-entrenched in jurisprudence is the
rule that factual findings of the trial court, especially when affirmed
by the appellate court, are accorded the highest degree of respect
and are considered conclusive between the parties. 15 A review of
such findings by this Court is not warranted except upon a showing
of highly meritorious circumstances, such as: (1) when the findings
of a trial court are grounded entirely on speculation, surmises or
conjectures; (2) when a lower court's inference from its factual
findings is manifestly mistaken, absurd or impossible; (3) when
there is grave abuse of discretion in the appreciation of facts; (4)
when the findings of the appellate court go beyond the issues of
the case, or fail to notice certain relevant facts which, if properly
considered, will justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings of fact are
conclusions without mention of the specific evidence on which they
are based, are premised on the absence of evidence, or are
contradicted by evidence on record. 16 None of these exceptions
obtains in this instance. There is no reason to depart from the
separate factual findings of the three (3) lower courts on the
validity of Riveras signature reflected in the Promissory Note.

Rivera offers no evidence for his asseveration that his signature on


the promissory note was forged, only that the signature is not his
and varies from his usual signature. He likewise makes a confusing
defense of having previously obtained loans from the Spouses Chua
who were money lenders and who had allowed him a period of
"almost four (4) years" before demanding payment of the loan
under the Promissory Note.
First, we cannot give credence to such a naked claim of forgery
over the testimony of the National Bureau of Investigation (NBI)
handwriting expert on the integrity of the promissory note. On that
score, the appellate court aptly disabled Riveras contention:
[Rivera] failed to adduce clear and convincing evidence that the
signature on the promissory note is a forgery. The fact of forgery
cannot be presumed but must be proved by clear, positive and
convincing evidence. Mere variance of signatures cannot be
considered as conclusive proof that the same was forged. Save for
the denial of Rivera that the signature on the note was not his,
there is nothing in the records to support his claim of forgery. And
while it is true that resort to experts is not mandatory or

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Indeed, Rivera had the burden ofproving the material allegations


which he sets up in his Answer to the plaintiffs claim or cause of
action, upon which issue is joined, whether they relate to the whole
case or only to certain issues in the case.17

Also completely plausible is thatgiven the relationship between the


parties, Rivera was allowed a substantial amount of time before the
Spouses Chua demanded payment of the obligation due under the
Promissory Note.

In this case, Riveras bare assertion is unsubstantiated and directly


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

In all, Riveras evidence or lack thereof consisted only of a


barefaced claim of forgery and a discordant defense to assail the
authenticity and validity of the Promissory Note. Although the
burden of proof rested on the Spouses Chua having instituted the
civil case and after they established a prima facie case against
Rivera, the burden of evidence shifted to the latter to establish his
defense.21 Consequently, Rivera failed to discharge the burden of
evidence, refute the existence of the Promissory Note duly signed
by him and subsequently, that he did not fail to pay his obligation
thereunder. On the whole, there was no question left on where the
respective evidence of the parties preponderatedin favor of
plaintiffs, the Spouses Chua. Rivera next argues that even
assuming the validity of the Promissory Note, demand was still
necessary in order to charge him liable thereunder. Rivera argues
that it was grave error on the part of the appellate court to apply
Section 70 of the Negotiable Instruments Law (NIL).22

Hence, the MeTC ruled that:


[Rivera] executed the Promissory Note after consideration of the
following: categorical statement of [respondent] Salvador that
[Rivera] signed the Promissory Note before him, in his ([Riveras])
house; the conclusion of NBI Senior Documents Examiner that the
questioned signature (appearing on the Promissory Note) and
standard specimen signatures "Rodrigo Rivera" "were written by
one and the same person"; actual view at the hearing of the
enlarged photographs of the questioned signature and the standard
specimen signatures.19
Specifically, Rivera insists that: "[i]f that promissory note indeed
exists, it is beyond logic for a money lender to extend another loan
on May 4, 1998 secured by a real estate mortgage, when he was
already in default and has not been paying any interest for a loan
incurred in February 1995."20
We disagree.
It is likewise likely that precisely because of the long standing
friendship of the parties as "kumpadres," Rivera was allowed
another loan, albeit this time secured by a real estate mortgage,
which will cover Riveras loan should Rivera fail to pay. There is
nothing inconsistent with the Spouses Chuas two (2) and
successive loan accommodations to Rivera: one, secured by a real
estate mortgage and the other, secured by only a Promissory Note.

We agree that the subject promissory note is not a negotiable


instrument and the provisions of the NIL do not apply to this case.
Section 1 of the NIL requires the concurrence of the following
elements to be a negotiable instrument:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
On the other hand, Section 184 of the NIL defines what negotiable
promissory note is: SECTION 184. Promissory Note, Defined. A
negotiable promissory note within the meaning of this Act is an
unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand, or at a fixed or
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determinable future time, a sum certain in money to order or to


bearer. Where a note is drawn to the makers own order, it is not
complete until indorsed by him.
The Promissory Note in this case is made out to specific persons,
herein respondents, the Spouses Chua, and not to order or to
bearer, or to the order of the Spouses Chua as payees. However,
even if Riveras Promissory Note is not a negotiable instrument and
therefore outside the coverage of Section 70 of the NIL which
provides that presentment for payment is not necessary to charge
the person liable on the instrument, Rivera is still liable under the
terms of the Promissory Note that he issued.
The Promissory Note is unequivocal about the date when the
obligation falls due and becomes demandable31 December 1995.
As of 1 January 1996, Rivera had already incurred in delay when he
failed to pay the amount ofP120,000.00 due to the Spouses Chua
on 31 December 1995 under the Promissory Note.
Article 1169 of the Civil Code explicitly provides:
Art. 1169. Those obliged to deliver or to do something incur in
delay from the time the obligee judicially or extrajudicially demands
from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in
order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling
motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. From the moment one of the parties

fulfills his obligation, delay by the other begins. (Emphasis


supplied)
There are four instances when demand is not necessary to
constitute the debtor in default: (1) when there is an express
stipulation to that effect; (2) where the law so provides; (3) when
the period is the controlling motive or the principal inducement for
the creation of the obligation; and (4) where demand would be
useless. In the first two paragraphs, it is not sufficient that the law
or obligation fixes a date for performance; it must further state
expressly that after the period lapses, default will commence.
We refer to the clause in the Promissory Note containing the
stipulation of interest:
It is agreed and understood that failure on my part to pay the
amount of (P120,000.00) One Hundred Twenty Thousand Pesos on
December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE
PERCENT (5%) interest monthly from the date of default until the
entire obligation is fully paid for.23
which expressly requires the debtor (Rivera) to pay a 5% monthly
interest from the "date of default" until the entire obligation is fully
paid for. The parties evidently agreed that the maturity of the
obligation at a date certain, 31 December 1995, will give rise to the
obligation to pay interest. The Promissory Note expressly provided
that after 31 December 1995, default commences and the
stipulation on payment of interest starts.
The date of default under the Promissory Note is 1 January 1996,
the day following 31 December 1995, the due date of the
obligation. On that date, Rivera became liable for the stipulated
interest which the Promissory Note says is equivalent to 5% a
month. In sum, until 31 December 1995, demand was not
necessary before Rivera could be held liable for the principal
amount of P120,000.00. Thereafter, on 1 January 1996, upon
default, Rivera became liable to pay the Spouses Chua damages, in
the form of stipulated interest.

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The liability for damages of those who default, including those who
are guilty of delay, in the performance of their obligations is laid
down on Article 117024 of the Civil Code.
Corollary thereto, Article 2209 solidifies the consequence of
payment of interest as an indemnity for damages when the obligor
incurs in delay:
Art. 2209. If the obligation consists inthe payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of
the interest agreed upon, and in the absence of stipulation, the
legal interest, which is six percent per annum. (Emphasis supplied)
Article 2209 is specifically applicable in this instance where: (1) the
obligation is for a sum of money; (2) the debtor, Rivera, incurred in
delay when he failed to pay on or before 31 December 1995; and
(3) the Promissory Note provides for an indemnity for damages
upon default of Rivera which is the payment of a 5%monthly
interest from the date of default.
We do not consider the stipulation on payment of interest in this
case as a penal clause although Rivera, as obligor, assumed to pay
additional 5% monthly interest on the principal amount
of P120,000.00 upon default.
Article 1226 of the Civil Code provides:
Art. 1226. In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests
in case of noncompliance, if there isno stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay
the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.
The penal clause is generally undertaken to insure performance
and works as either, or both, punishment and reparation. It is an
exception to the general rules on recovery of losses and damages.

As an exception to the general rule, a penal clause must be


specifically set forth in the obligation.25
In high relief, the stipulation in the Promissory Note is designated
as payment of interest, not as a penal clause, and is simply an
indemnity for damages incurred by the Spouses Chua because
Rivera defaulted in the payment of the amount of P120,000.00. The
measure of damages for the Riveras delay is limited to the interest
stipulated in the Promissory Note. In apt instances, in default of
stipulation, the interest is that provided by law.26
In this instance, the parties stipulated that in case of default, Rivera
will pay interest at the rate of 5% a month or 60% per annum. On
this score, the appellate court ruled:
It bears emphasizing that the undertaking based on the note clearly
states the date of payment tobe 31 December 1995. Given this
circumstance, demand by the creditor isno longer necessary in
order that delay may exist since the contract itself already
expressly so declares. The mere failure of [Spouses Chua] to
immediately demand or collect payment of the value of the note
does not exonerate [Rivera] from his liability therefrom. Verily, the
trial court committed no reversible error when it imposed interest
from 1 January 1996 on the ratiocination that [Spouses Chua] were
relieved from making demand under Article 1169 of the Civil Code.
As observed by [Rivera], the stipulated interest of 5% per month or
60% per annum in addition to legal interests and attorneys fees is,
indeed, highly iniquitous and unreasonable. Stipulated interest
rates are illegal if they are unconscionable and the Court is allowed
to temper interest rates when necessary. Since the interest rate
agreed upon is void, the parties are considered to have no
stipulation regarding the interest rate, thus, the rate of interest
should be 12% per annum computed from the date of judicial or
extrajudicial demand.27
The appellate court found the 5% a month or 60% per annum
interest rate, on top of the legal interest and attorneys fees, steep,
tantamount to it being illegal, iniquitous and unconscionable.
Significantly, the issue on payment of interest has been squarely
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disposed of in G.R. No. 184472 denying the petition of the Spouses


Chua for failure to sufficiently showany reversible error in the ruling
of the appellate court, specifically the reduction of the interest rate
imposed on Riveras indebtedness under the Promissory Note.
Ultimately, the denial of the petition in G.R. No. 184472 is res
judicata in its concept of "bar by prior judgment" on whether the
Court of Appeals correctly reduced the interest rate stipulated in
the Promissory Note.
Res judicata applies in the concept of "bar by prior judgment" if the
following requisites concur: (1) the former judgment or order must
be final; (2) the judgment or order must be on the merits; (3) the
decision must have been rendered by a court having jurisdiction
over the subject matter and the parties; and (4) there must be,
between the first and the second action, identity of parties, of
subject matter and of causes of action.28

As for the legal interest accruing from 11 June 1999, when judicial
demand was made, to the date when this Decision becomes final
and executory, such is likewise divided into two periods: (1) 12%
per annum from 11 June 1999, the date of judicial demand to 30
June 2013; and (2) 6% per annum from 1 July 2013 to date when
this Decision becomes final and executor. 31 We base this imposition
of interest on interest due earning legal interest on Article 2212 of
the Civil Code which provides that "interest due shall earn legal
interest from the time it is judicially demanded, although the
obligation may be silent on this point."
From the time of judicial demand, 11 June 1999, the actual amount
owed by Rivera to the Spouses Chua could already be determined
with reasonable certainty given the wording of the Promissory
Note.32
We cite our recent ruling in Nacar v. Gallery Frames:33

In this case, the petitions in G.R. Nos. 184458 and 184472 involve
an identity of parties and subject matter raising specifically errors
in the Decision of the Court of Appeals. Where the Court of Appeals
disposition on the propriety of the reduction of the interest rate was
raised by the Spouses Chua in G.R. No. 184472, our ruling thereon
affirming the Court of Appeals is a "bar by prior judgment."
At the time interest accrued from 1 January 1996, the date of
default under the Promissory Note, the then prevailing rate of legal
interest was 12% per annum under Central Bank (CB) Circular No.
416 in cases involving the loan or for bearance of money. 29 Thus,
the legal interest accruing from the Promissory Note is 12% per
annum from the date of default on 1 January 1996. However, the
12% per annumrate of legal interest is only applicable until 30 June
2013, before the advent and effectivity of Bangko Sentral ng
Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of
legal interest to 6% per annum. Pursuant to our ruling in Nacar v.
Gallery Frames,30 BSP Circular No. 799 is prospectively applied from
1 July 2013. In short, the applicable rate of legal interest from 1
January 1996, the date when Rivera defaulted, to date when this
Decision becomes final and executor is divided into two periods
reflecting two rates of legal interest: (1) 12% per annum from 1
January 1996 to 30 June 2013; and (2) 6% per annum FROM 1 July
2013 to date when this Decision becomes final and executory.

I. When an obligation, regardless of its source, i.e., law, contracts,


quasicontracts, delicts or quasi-delicts is breached, the contravenor
can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as
the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or for bearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest
shall be 6% per annum to be computed from default, i.e.,
from judicial or extra judicial demand under and subject to
the provisions ofArticle 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
8

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A. INTRODUCTION
5 CASES

amount of damages awarded may be imposed at the


discretion of the court at the rate of 6% per
annum.1wphi1 No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the
demand can be established with reasonable certainty.
Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment
of the court is made (at which time the quantification of
damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally
adjudged. 3. When the judgment of the court awarding a
sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a for bearance of
credit. And, in addition to the above, judgments that have
become final and executory prior to July 1, 2013, shall not
be disturbed and shall continue to be implemented applying
the rate of interest fixed therein. (Emphasis supplied)
On the reinstatement of the award of attorneys fees based on the
stipulation in the Promissory Note, weagree with the reduction
thereof but not the ratiocination of the appellate court that the
attorneys fees are in the nature of liquidated damages or penalty.
The interest imposed in the Promissory Note already answers as
liquidated damages for Riveras default in paying his obligation. We
award attorneys fees, albeit in a reduced amount, in recognition
that the Spouses Chua were compelled to litigate and incurred
expenses to protect their interests. 34Thus, the award of P50,000.00
as attorneys fees is proper.
For clarity and to obviate confusion, we chart the breakdown of the
total amount owed by Rivera to the Spouses Chua:

Face value of the


Promissory Note

Stipulated
Interest A & B

Interest
due
earning
legal
interest A & B

Attorney
s fees

February
24, A. January 1,
1995
to 1996
to
December
June 30, 2013
31, 1995
B. July 1 2013 to
date when this
Decision
becomes
final
and executory

A. June 11, 1999


(date of judicial
demand) to June
30,
2013
B. July 1, 2013
to date when
this
Decision
becomes
final
and executory

Wholesal
e
Amount

P120,000.00

A.
12%
per P50,000.
annumon
the 00
total amount of
column
2
B.
6%
per
annumon
the
total amount of
column 235

A. 12 % per
annumon
the
principal amount
ofP120,000.00
B.
6%
per
annumon
the
principal amount
ofP120,000.00

Total
Amoun
t

Total
amoun
t
of
Colum
ns 1-4

The total amount owing to the Spouses Chua set forth in this
Decision shall further earn legal interest at the rate of 6% per
annum computed from its finality until full payment thereof, the
interim period being deemed to be a forbearance of credit.
WHEREFORE, the petition in G.R. No. 184458 is DENIED. The
Decision of the Court of Appeals in CA-G.R. SP No. 90609 is
MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents
Spouse Salvador and Violeta Chua the following:
(1) the principal amount of P120,000.00;
(2) legal interest of 12% per annumof the principal amount
of P120,000.00 reckoned from 1 January 1996 until 30
June 2013;

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5 CASES

(3) legal interest of 6% per annumof the principal amount


of P120,000.00 form 1 July 2013 to date when this
Decision becomes final and executory;
(4) 12% per annumapplied to the total of paragraphs 2 and
3 from 11 June 1999, date of judicial demand, to 30 June
2013, as interest due earning legal interest;
(5) 6% per annumapplied to the total amount of paragraphs
2 and 3 from 1 July 2013 to date when this Decision
becomes final and executor, asinterest due earning legal
interest;
(6) Attorneys fees in the amount of P50,000.00; and
(7) 6% per annum interest on the total of the monetary
awards from the finality of this Decision until full
payment thereof.
Costs against petitioner Rodrigo Rivera.
SO ORDERED

set aside the decisions of the Court of Tax Appeals (CTA) in CTA
Case Nos. 59514 and 6009,5 respectively, and dismissed the
petitions of petitioner Hongkong and Shanghai Banking Corporation
Limited-Philippine Branches (HSBC). The corresponding Resolutions,
on the other hand, denied the respective motions for
reconsideration of the said Decisions.
HSBC performs, among others, custodial services on behalf of its
investor-clients, corporate and individual, resident or non-resident
of the Philippines, with respect to their passive investments in the
Philippines, particularly investments in shares of stocks in domestic
corporations. As a custodian bank, HSBC serves as the
collection/payment agent with respect to dividends and other
income derived from its investor-clients passive investments. 6
HSBCs investor-clients maintain Philippine peso and/or foreign
currency accounts, which are managed by HSBC through
instructions given through electronic messages. The said
instructions are standard forms known in the banking industry as
SWIFT,
or
"Society
for
Worldwide
Interbank
Financial
Telecommunication." In purchasing shares of stock and other
investment in securities, the investor-clients would send electronic
messages from abroad instructing HSBC to debit their local or
foreign currency accounts and to pay the purchase price therefor
upon receipt of the securities.7

THE HONGKONG AND SHANGHAI BANKING CORPORATION


LIMITED-PHILIPPINE
BRANCHES, Petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;

Pursuant to the electronic messages of its investor-clients, HSBC


purchased and paid Documentary Stamp Tax (DST) from September
to December 1997 and also from January to December 1998
amounting to P19,572,992.10 and P32,904,437.30, respectively,
broken down as follows:

LEONARDO-DE CASTRO, J.:

A. September to December 1997

These petitions for review on certiorari 1 assail the Decision2 and


Resolution dated July 8, 2004 and October 25, 2004, respectively,
of the Court of Appeals in CA-G.R. SP No. 77580, as well as the
Decision3 and Resolution dated September 2, 2004 and April 4,
2005, respectively, of the Court of Appeals in CA-G.R. SP No. 70814.
The respective Decisions in the said cases similarly reversed and

September 1997

P 6,981,447.90

October 1997

6,209,316.60

November 1997

3,978,510.30

G.R. No. 166018

June 4, 2014

10

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A. INTRODUCTION
5 CASES

December 1997

2,403,717.30

Total

P19,572,992.10

B. January to December 1998

FERRY TOLEDO VICTORINO GONZAGA


& ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
Metro Manila

January 1998

P 3,328,305.60

Attn: Atty. Tomas C. Toledo


Tax Counsel

February 1998

4,566,924.90

Gentlemen:

March 1998

5,371,797.30

April 1998

4,197,235.50

May 1998

2,519,587.20

June 1998

2,301,333.00

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

July 1998

1,586,404.50

August 1998

1,787,359.50

September 1998

1,231,828.20

October 1998

1,303,184.40

November 1998

2,026,379.70

December 1998

2,684,097.50

Total

P32,904,437.30

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

A. Investment purchase transactions:


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

B. Other transactions:
An overseas client sends an instruction to its bank in the Philippines
to either:
(i) debit its local or foreign currency account and to pay a
named recipient, who may be another bank, a corporate
entity or an individual in the Philippines; or
(ii) receive funds from another bank in the Philippines for
deposit to its account and to pay a named recipient, who
may be another bank, a corporate entity or an individual in
the Philippines."
The above instruction is in the form of an electronic message (i.e.,
SWIFT MT 100 or MT 202) or tested cable, and may not refer to any
particular transaction.
The opening and maintenance by a non-resident of local or foreign
currency accounts with a bank in the Philippines is permitted by the
Bangko Sentral ng Pilipinas, subject to certain conditions.
In reply, please be informed that pursuant to Section 181 of the
1997 Tax Code, which provides that
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and
Others. Upon any acceptance or payment of any bill of exchange
or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be
collected a documentary stamp tax of Thirty centavos (P0.30) on
each Two hundred pesos (P200), or fractional part thereof, of the
face value of any such bill of exchange, or order, or Philippine
equivalent of such value, if expressed in foreign currency.
(Underscoring supplied.)
a documentary stamp tax shall be imposed on any bill of exchange
or order for payment purporting to be drawn in a foreign country
but payable in the Philippines.

Under the foregoing provision, the documentary stamp tax shall be


levied on the instrument, i.e., a bill of exchange or order for the
payment of money, which purports to draw money from a foreign
country but payable in the Philippines. In the instant case, however,
while the payor is residing outside the Philippines, he maintains a
local and foreign currency account in the Philippines from where he
will draw the money intended to pay a named recipient. The
instruction or order to pay shall be made through an electronic
message, i.e., SWIFT MT 100 or MT 202 and/or MT 521.
Consequently, there is no negotiable instrument to be made,
signed or issued by the payee. In the meantime, such electronic
instructions by the non-resident payor cannot be considered as a
transaction per se considering that the same do not involve any
transfer of funds from abroad or from the place where the
instruction originates. Insofar as the local bank is concerned, such
instruction could be considered only as a memorandum and shall
be entered as such in its books of accounts. The actual debiting of
the payors account, local or foreign currency account in the
Philippines, is the actual transaction that should be properly
entered as such.
Under the Documentary Stamp Tax Law, the mere withdrawal of
money from a bank deposit, local or foreign currency account, is
not subject to DST, unless the account so maintained is a current or
checking account, in which case, the issuance of the check or bank
drafts is subject to the documentary stamp tax imposed under
Section 179 of the 1997 Tax Code. In the instant case, and subject
to the physical impossibility on the part of the payor to be present
and prepare and sign an instrument purporting to pay a certain
obligation, the withdrawal and payment shall be made in cash. In
this light, the withdrawal shall not be subject to documentary
stamp tax. The case is parallel to an automatic bank transfer of
local funds from a savings account to a checking account
maintained by a depositor in one bank.
Likewise, the receipt of funds from another bank in the Philippines
for deposit to the payees account and thereafter upon instruction
of the non-resident depositor-payor, through an electronic
message, the depository bank to debit his account and pay a
named recipient shall not be subject to documentary stamp tax.
12

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A. INTRODUCTION
5 CASES

It should be noted that the receipt of funds from another local bank
in the Philippines by a local depository bank for the account of its
client residing abroad is part of its regular banking transaction
which is not subject to documentary stamp tax. Neither does the
receipt of funds makes the recipient subject to the documentary
stamp tax. The funds are deemed to be part of the deposits of the
client once credited to his account, and which, thereafter can be
disposed in the manner he wants. The payor-clients further
instruction to debit his account and pay a named recipient in the
Philippines does not involve transfer of funds from abroad.
Likewise, as stated earlier, such debit of local or foreign currency
account in the Philippines is not subject to the documentary stamp
tax under the aforementioned Section 181 of the Tax Code.
In the light of the foregoing, this Office hereby holds that the
instruction made through an electronic message by non-resident
payor-client to debit his local or foreign currency account
maintained in the Philippines and to pay a certain named recipient
also residing in the Philippines is not the transaction contemplated
under Section 181 of the 1997 Tax Code. Such being the case, such
electronic instruction purporting to draw funds from a local account
intended to be paid to a named recipient in the Philippines is not
subject to documentary stamp tax imposed under the foregoing
Section.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation it shall be disclosed
that the facts are different, this ruling shall be considered null and
void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on October 8,
1999 an administrative claim for the refund of the amount
of P19,572,992.10 allegedly representing erroneously paid DST to
the BIR for the period covering September to December 1997.

Subsequently, on January 31, 2000, HSBC filed another


administrative claim for the refund of the amount ofP32,904,437.30
allegedly representing erroneously paid DST to the BIR for the
period covering January to December 1998.
As its claims for refund were not acted upon by the BIR, HSBC
subsequently brought the matter to the CTA as CTA Case Nos. 5951
and 6009, respectively, in order to suspend the running of the twoyear prescriptive period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and
dated December 18, 2002 in CTA Case No. 5951 favored HSBC.
Respondent Commissioner of Internal Revenue was ordered to
refund or issue a tax credit certificate in favor of HSBC in the
reduced amounts of P30,360,570.75 in CTA Case No. 6009
and P16,436,395.83 in CTA Case No. 5951, representing
erroneously paid DST that have been sufficiently substantiated with
documentary evidence. The CTA ruled that HSBC is entitled to a tax
refund or tax credit because Sections 180 and 181 of the 1997 Tax
Code do not apply to electronic message instructions transmitted
by HSBCs non-resident investor-clients:
The instruction made through an electronic message by a
nonresident investor-client, which is to debit his local or foreign
currency account in the Philippines and pay a certain named
recipient also residing in the Philippines is not the transaction
contemplated in Section 181 of the Code. In this case, the
withdrawal and payment shall be made in cash. It is parallel to an
automatic bank transfer of local funds from a savings account to a
checking account maintained by a depositor in one bank. The act of
debiting the account is not subject to the documentary stamp tax
under Section 181. Neither is the transaction subject to the
documentary stamp tax under Section 180 of the same Code.
These electronic message instructions cannot be considered
negotiable instruments as they lack the feature of negotiability,
which, is the ability to be transferred (Words and Phrases).
These instructions are considered as mere memoranda and entered
as such in the books of account of the local bank, and the actual
debiting of the payors local or foreign currency account in the
13

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A. INTRODUCTION
5 CASES

Philippines is the actual transaction that should be properly entered


as such.9
The respective dispositive portions of the Decisions dated May 2,
2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA
Case No. 5951 read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for
Review is PARTIALLY GRANTED. Respondent is hereby ORDERED to
REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner
the amount of P30,360,570.75 representing erroneous payment of
documentary stamp tax for the taxable year 1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is
hereby partially granted. Accordingly, respondent is hereby
ORDERED to REFUND, or in the alternative, ISSUE A TAX CREDIT
CERTIFICATE in favor of the petitioner in the reduced amount
of P16,436,395.83 representing erroneously paid documentary
stamp tax for the months of September 1997 to December 1997.11
However, the Court of Appeals reversed both decisions of the CTA
and ruled that the electronic messages of HSBCs investor-clients
are subject to DST. The Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investorclients as regards their passive investments in the Philippines
mainly involving shares of stocks in domestic corporations. These
investor-clients maintain Philippine peso and/or foreign currency
accounts with [HSBC]. Should they desire to purchase shares of
stock and other investments securities in the Philippines, the
investor-clients send their instructions and advises via electronic
messages from abroad to [HSBC] in the form of SWIFT MT 100, MT
202, or MT 521 directing the latter to debit their local or foreign
currency account and to pay the purchase price upon receipt of the
securities (CTA Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant to
Section 181 of the NIRC, [HSBC] was thus required to pay [DST]

based on its acceptance of these electronic messages which, as


[HSBC] readily admits in its petition filed before the [CTA], were
essentially orders to pay the purchases of securities made by its
client-investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the
[DST] from [HSBC] considering that the said tax was levied against
the acceptances and payments by [HSBC] of the subject electronic
messages/orders for payment. The issue of whether such electronic
messages may be equated as a written document and thus be
subject to tax is beside the point. As We have already stressed,
Section 181 of the law cited earlier imposes the [DST] not on the
bill of exchange or order for payment of money but on the
acceptance or payment of the said bill or order. The acceptance of
a bill or order is the signification by the drawee of its assent to the
order of the drawer to pay a given sum of money while payment
implies not only the assent to the said order of the drawer and a
recognition of the drawers obligation to pay such aforesaid sum,
but also a compliance with such obligation (Philippine National
Bank vs. Court of Appeals, 25 SCRA 693 [1968]; Prudential Bank vs.
Intermediate Appellate Court, 216 SCRA 257 [1992]). What is vital
to the valid imposition of the [DST] under Section 181 is the
existence of the requirement of acceptance or payment by the
drawee (in this case, [HSBC]) of the order for payment of money
from its investor-clients and that the said order was drawn from a
foreign country and payable in the Philippines. These requisites are
surely present here.
It would serve the parties well to understand the nature of the tax
being imposed in the case at bar. In Philippine Home Assurance
Corporation vs. Court of Appeals (301 SCRA 443 [1999]), the
Supreme Court ruled that [DST is] levied on the exercise by persons
of certain privileges conferred by law for the creation, revision, or
termination of specific legal relationships through the execution of
specific instruments, independently of the legal status of the
transactions giving rise thereto. In the same case, the High Court
also declared citing Du Pont vs. United States (300 U.S. 150, 153
[1936])
The tax is not upon the business transacted but is an excise upon
the privilege, opportunity, or facility offered at exchanges for the
14

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A. INTRODUCTION
5 CASES

transaction of the business. It is an excise upon the facilities used


in the transaction of the business separate and apart from the
business itself. x x x.
To reiterate, the subject [DST] was levied on the acceptance and
payment made by [HSBC] pursuant to the order made by its clientinvestors as embodied in the cited electronic messages, through
which the herein parties privilege and opportunity to transact
business respectively as drawee and drawers was exercised,
separate and apart from the circumstances and conditions related
to such acceptance and subsequent payment of the sum of money
authorized by the concerned drawers. Stated another way, the
[DST] was exacted on [HSBCs] exercise of its privilege under its
drawee-drawer relationship with its client-investor through the
execution of a specific instrument which, in the case at bar, is the
acceptance of the order for payment of money. The acceptance of a
bill or order for payment may be done in writing by the drawee in
the bill or order itself, or in a separate instrument (Prudential Bank
vs. Intermediate Appellate Court, supra.)Here, [HSBC]s acceptance
of the orders for the payment of money was veritably done in
writing in a separate instrument each time it debited the local or
foreign currency accounts of its client-investors pursuant to the
latters instructions and advises sent by electronic messages to
[HSBC]. The [DST] therefore must be paid upon the execution of the
specified instruments or facilities covered by the tax in this case,
the acceptance by [HSBC] of the order for payment of money sent
by the client-investors through electronic messages. x x x.12
Hence, these petitions.
HSBC asserts that the Court of Appeals committed grave error
when it disregarded the factual and legal conclusions of the CTA.
According to HSBC, in the absence of abuse or improvident exercise
of authority, the CTAs ruling should not have been disturbed as the
CTA is a highly specialized court which performs judicial functions,
particularly for the review of tax cases. HSBC further argues that
the Commissioner of Internal Revenue had already settled the issue
on the taxability of electronic messages involved in these cases in
BIR Ruling No. 132-99 and reiterated in BIR Ruling No. DA-2802004.13

The Commissioner of Internal Revenue, on the other hand, claims


that Section 181 of the 1997 Tax Code imposes DST on the
acceptance or payment of a bill of exchange or order for the
payment of money. The DST under Section 18 of the 1997 Tax Code
is levied on HSBCs exercise of a privilege which is specifically
taxed by law. BIR Ruling No. 132-99 is inconsistent with prevailing
law and long standing administrative practice, respondent is not
barred from questioning his own revenue ruling. Tax refunds like tax
exemptions are strictly construed against the taxpayer.14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of
the Tax Code is levied on the acceptance or payment of "a bill of
exchange purporting to be drawn in a foreign country but payable
in the Philippines" and that "a bill of exchange is an unconditional
order in writing addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future time a sum
certain in money to order or to bearer." A bill of exchange is one of
two general forms of negotiable instruments under the Negotiable
Instruments Law.15
The Court further agrees with the CTA that the electronic messages
of HSBCs investor-clients containing instructions to debit their
respective local or foreign currency accounts in the Philippines and
pay a certain named recipient also residing in the Philippines is not
the transaction contemplated under Section 181 of the Tax Code as
such instructions are "parallel to an automatic bank transfer of local
funds from a savings account to a checking account maintained by
a depositor in one bank." The Court favorably adopts the finding of
the CTA that the electronic messages "cannot be considered
negotiable instruments as they lack the feature of negotiability,
which, is the ability to be transferred" and that the said electronic
messages are "mere memoranda" of the transaction consisting of
the "actual debiting of the [investor-client-payors] local or foreign
currency account in the Philippines" and "entered as such in the
books of account of the local bank," HSBC.16
More fundamentally, the instructions given through electronic
messages that are subjected to DST in these cases are not
15

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A. INTRODUCTION
5 CASES

negotiable instruments as they do not comply with the requisites of


negotiability under Section 1 of the Negotiable Instruments Law,
which provides:
Sec. 1. Form of negotiable instruments. An instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable
certainty.
The electronic messages are not signed by the investor-clients as
supposed drawers of a bill of exchange; they do not contain an
unconditional order to pay a sum certain in money as the payment
is supposed to come from a specific fund or account of the investorclients; and, they are not payable to order or bearer but to a
specifically designated third party. Thus, the electronic messages
are not bills of exchange. As there was no bill of exchange or order
for the payment drawn abroad and made payable here in the
Philippines, there could have been no acceptance or payment that
will trigger the imposition of the DST under Section 181 of the Tax
Code.
Section 181 of the 1997 Tax Code, which governs HSBCs claim for
tax refund for taxable year 1998 subject of G.R. No. 167728,
provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and
Others. Upon any acceptance or payment of any bill of exchange
or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be
collected a documentary stamp tax of Thirty centavos (P0.30) on
each Two hundred pesos (P200), or fractional part thereof, of the
face value of any such bill of exchange, or order, or the Philippine

equivalent of such value, if expressed in foreign currency.


(Emphasis supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs
HSBCs claim for tax refund for DST paid during the period
September to December 1997 and subject of G.R. No. 166018, is
worded exactly the same as its counterpart provision in the 1997
Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of
1904,17 which provided: SECTION 117. The acceptor or acceptors of
any bill of exchange or order for the payment of any sum of money
drawn or purporting to be drawn in any foreign country but payable
in the Philippine Islands, shall, before paying or accepting the
same, place thereupon a stamp in payment of the tax upon such
document in the same manner as is required in this Act for the
stamping of inland bills of exchange or promissory notes, and no
bill of exchange shall be paid nor negotiated until such stamp shall
have been affixed thereto.18 (Emphasis supplied.)
It then became Section 30(h) of the 1914 Tax Code19:
SEC. 30. Stamp tax upon documents and papers. Upon
documents, instruments, and papers, and upon acceptances,
assignments, sales, and transfers of the obligation, right, or
property incident thereto documentary taxes for and in respect of
the transaction so had or accomplished shall be paid as hereinafter
prescribed, by the persons making, signing, issuing, accepting, or
transferring the same, and at the time such act is done or
transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of
exchange or order for the payment of money purporting to be
drawn in a foreign country but payable in the Philippine Islands, on
each two hundred pesos, or fractional part thereof, of the face
value of any such bill of exchange or order, or the Philippine
equivalent of such value, if expressed in foreign currency, two
centavos[.] (Emphasis supplied.)
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5 CASES

It was implemented by Section 46 in relation to Section 39 of


Revenue Regulations No. 26,20 as amended:
SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and
all other kinds of orders for the payment of money, payable at sight
or on demand, or after a specific period after sight or from a stated
date."
SEC. 46. Bill of Exchange, etc. When any bill of exchange or order
for the payment of money drawn in a foreign country but payable in
this country whether at sight or on demand or after a specified
period after sight or from a stated date, is presented for acceptance
or payment, there must be affixed upon acceptance or payment of
documentary stamp equal to P0.02 for each P200 or fractional part
thereof. (Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of
1939,21 which provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and
Others. Upon any acceptance or payment of any bill of exchange
or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be
collected a documentary stamp tax of four centavos on each two
hundred pesos, or fractional part thereof, of the face value of any
such bill of exchange or order, or the Philippine equivalent of such
value, if expressed in foreign currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code, 22 as amended by
Presidential Decree Nos. 1457 and 1959,which, as stated earlier,
was worded exactly as Section 181 of the current Tax Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and
others. Upon any acceptance or payment of any bill of exchange
or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be
collected a documentary stamp tax of thirty centavos on each two
hundred pesos, or fractional part thereof, of the face value of any
such bill of exchange, or order, or the Philippine equivalent of such
value, if expressed in foreign currency. (Emphasis supplied.)

The pertinent provision of the present Tax Code has therefore


remained substantially the same for the past one hundred
years.1wphi1 The identical text and common history of Section
230 of the 1977 Tax Code, as amended, and the 1997 Tax Code, as
amended, show that the law imposes DST on either (a) the
acceptance or (b) the payment of a foreign bill of exchange or order
for the payment of money that was drawn abroad but payable in
the Philippines.
DST is an excise tax on the exercise of a right or privilege to
transfer obligations, rights or properties incident thereto. 23 Under
Section 173 of the 1997 Tax Code, the persons primarily liable for
the payment of the DST are those (1) making, (2) signing, (3)
issuing, (4) accepting, or (5) transferring the taxable documents,
instruments or papers.24
In general, DST is levied on the exercise by persons of certain
privileges conferred by law for the creation, revision, or termination
of specific legal relationships through the execution of specific
instruments. Examples of such privileges, the exercise of which, as
effected through the issuance of particular documents, are subject
to the payment of DST are leases of lands, mortgages, pledges and
trusts, and conveyances of real property.25
As stated above, Section 230 of the 1977 Tax Code, as amended,
now Section 181 of the 1997 Tax Code, levies DST on either (a) the
acceptance or (b) the payment of a foreign bill of exchange or order
for the payment of money that was drawn abroad but payable in
the Philippines. In other words, it levies DST as an excise tax on the
privilege of the drawee to accept or pay a bill of exchange or order
for the payment of money, which has been drawn abroad but
payable in the Philippines, and on the corresponding privilege of
the drawer to have acceptance of or payment for the bill of
exchange or order for the payment of money which it has drawn
abroad but payable in the Philippines.
Acceptance applies only to bills of exchange. 26 Acceptance of a bill
of exchange has a very definite meaning in law. 27 In particular,
Section 132 of the Negotiable Instruments Law provides:

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Sec. 132. Acceptance; how made, by and so forth. The


acceptance of a bill [of exchange28] is the signification by the
drawee of his assent to the order of the drawer. The acceptance
must be in writing and signed by the drawee. It must not express
that the drawee will perform his promise by any other means than
the payment of money.
Under the law, therefore, what is accepted is a bill of exchange, and
the acceptance of a bill of exchange is both the manifestation of
the drawees consent to the drawers order to pay money and the
expression of the drawees promise to pay. It is "the act by which
the drawee manifests his consent to comply with the request
contained in the bill of exchange directed to him and it
contemplates an engagement or promise to pay." 29 Once the
drawee accepts, he becomes an acceptor. 30 As acceptor, he
engages to pay the bill of exchange according to the tenor of his
acceptance.31
Acceptance is made upon presentment of the bill of exchange, or
within 24 hours after such presentment. 32Presentment for
acceptance is the production or exhibition of the bill of exchange to
the drawee for the purpose of obtaining his acceptance.33
Presentment for acceptance is necessary only in the instances
where the law requires it.34 In the instances where presentment for
acceptance is not necessary, the holder of the bill of exchange can
proceed directly to presentment for payment.
Presentment for payment is the presentation of the instrument to
the person primarily liable for the purpose of demanding and
obtaining payment thereof.35
Thus, whether it be presentment for acceptance or presentment for
payment, the negotiable instrument has to be produced and shown
to the drawee for acceptance or to the acceptor for payment.
Revenue Regulations No. 26 recognizes that the acceptance or
payment (of bills of exchange or orders for the payment of money
that have been drawn abroad but payable in the Philippines) that is
subjected to DST under Section 181 of the 1997 Tax Code is done

after presentment for acceptance or presentment for payment,


respectively. In other words, the acceptance or payment of the
subject bill of exchange or order for the payment of money is done
when there is presentment either for acceptance or for payment of
the bill of exchange or order for the payment of money.
Applying the above concepts to the matter subjected to DST in
these cases, the electronic messages received by HSBC from its
investor-clients abroad instructing the former to debit the latter's
local and foreign currency accounts and to pay the purchase price
of shares of stock or investment in securities do not properly qualify
as either presentment for acceptance or presentment for payment.
There being neither presentment for acceptance nor presentment
for payment, then there was no acceptance or payment that could
have been subjected to DST to speak of.
Indeed, there had been no acceptance of a bill of exchange or order
for the payment of money on the part of HSBC. To reiterate, there
was no bill of exchange or order for the payment drawn abroad and
made payable here in the Philippines. Thus, there was no
acceptance as the electronic messages did not constitute the
written and signed manifestation of HSBC to a drawer's order to
pay money. As HSBC could not have been an acceptor, then it could
not have made any payment of a bill of exchange or order for the
payment of money drawn abroad but payable here in the
Philippines. In other words, HSBC could not have been held liable
for DST under Section 230 of the 1977 Tax Code, as amended, and
Section 181 of the 1997 Tax Code as it is not "a person making,
signing, issuing, accepting, or, transferring" the taxable
instruments under the said provision. Thus, HSBC erroneously paid
DST on the said electronic messages for which it is entitled to a tax
refund.
WHEREFORE, the petitions are hereby GRANTED and the Decisions
dated May 2, 2002 in CTA Case No. 6009 and dated December 18,
2002 in CT A Case No. 5951 of the Court of Tax Appeals are
REINSTATED.
SO ORDERED.

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5 CASES
G.R. No. 170325

September 26, 2008

PHILIPPINE NATIONAL BANK, Petitioner, vs. ERLANDO


RODRIGUEZ and NORMA RODRIGUEZ, Respondents.

T.

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 1 of the Court of Appeals (CA)
which affirmed with modification that of the Regional Trial Court
(RTC).2
The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of
petitioner Philippine National Bank (PNB), Amelia Avenue Branch,
Cebu City. They maintained savings and demand/checking
accounts, namely, PNBig Demand Deposits (Checking/Current
Account No. 810624-6 under the account name Erlando and/or
Norma Rodriguez), and PNBig Demand Deposit (Checking/Current
Account No. 810480-4 under the account name Erlando T.
Rodriguez).
The spouses were engaged in the informal lending business. In line
with their business, they had a discounting 3 arrangement with the
Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees. Naturally, PEMSLA was likewise a
client of PNB Amelia Avenue Branch. The association maintained
current and savings accounts with petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez
would rediscount the postdated checks issued to members
whenever the association was short of funds. As was customary,
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the spouses would replace the postdated checks with their own
checks issued in the name of the members.
It was PEMSLAs policy not to approve applications for loans of
members with outstanding debts. To subvert this policy, some
PEMSLA officers devised a scheme to obtain additional loans
despite their outstanding loan accounts. They took out loans in the
names of unknowing members, without the knowledge or consent
of the latter. The PEMSLA checks issued for these loans were then
given to the spouses for rediscounting. The officers carried this out
by forging the indorsement of the named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez
checks) in the name of the members and delivered the checks to
an officer of PEMSLA. The PEMSLA checks, on the other hand, were
deposited by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by
PEMSLA to its savings account without any indorsement from the
named payees. This was an irregular procedure made possible
through the facilitation of Edmundo Palermo, Jr., treasurer of
PEMSLA and bank teller in the PNB Branch. It appears that this
became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses
issued sixty nine (69) checks, in the total amount of P2,345,804.00.
These were payable to forty seven (47) individual payees who were
all members of PEMSLA.4
Petitioner PNB eventually found out about these fraudulent acts. To
put a stop to this scheme, PNB closed the current account of
PEMSLA. As a result, the PEMSLA checks deposited by the spouses
were returned or dishonored for the reason "Account Closed." The
corresponding Rodriguez checks, however, were deposited as usual
to the PEMSLA savings account. The amounts were duly debited
from the Rodriguez account. Thus, because the PEMSLA checks
given as payment were returned, spouses Rodriguez incurred losses
from the rediscounting transactions.
RTC Disposition

Alarmed over the unexpected turn of events, the spouses Rodriguez


filed a civil complaint for damages against PEMSLA, the MultiPurpose Cooperative of Philnabankers (MCP), and petitioner PNB.
They sought to recover the value of their checks that were
deposited
to
the
PEMSLA
savings
account
amounting
to P2,345,804.00. The spouses contended that because PNB
credited the checks to the PEMSLA account even without
indorsements, PNB violated its contractual obligation to them as
depositors. PNB paid the wrong payees, hence, it should bear the
loss.
PNB moved to dismiss the complaint on the ground of lack of cause
of action. PNB argued that the claim for damages should come from
the payees of the checks, and not from spouses Rodriguez. Since
there was no demand from the said payees, the obligation should
be considered as discharged.
In an Order dated January 12, 2000, the RTC denied PNBs motion
to dismiss.
In its Answer,5 PNB claimed it is not liable for the checks which it
paid to the PEMSLA account without any indorsement from the
payees. The bank contended that spouses Rodriguez, the makers,
actually did not intend for the named payees to receive the
proceeds of the checks. Consequently, the payees were considered
as "fictitious payees" as defined under the Negotiable Instruments
Law (NIL). Being checks made to fictitious payees which are bearer
instruments, the checks were negotiable by mere delivery. PNBs
Answer included its cross-claim against its co-defendants PEMSLA
and the MCP, praying that in the event that judgment is rendered
against the bank, the cross-defendants should be ordered to
reimburse PNB the amount it shall pay.
After trial, the RTC rendered judgment in favor of spouses Rodriguez
(plaintiffs). It ruled that PNB (defendant) is liable to return the value
of the checks. All counterclaims and cross-claims were dismissed.
The dispositive portion of the RTC decision reads:
WHEREFORE, in view of the foregoing, the Court hereby renders
judgment, as follows:
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1. Defendant is hereby ordered to pay the plaintiffs the total


amount of P2,345,804.00 or reinstate or restore the amount
of P775,337.00 in the PNBig Demand Deposit Checking/Current
Account No. 810480-4 of Erlando T. Rodriguez, and the amount
of P1,570,467.00
in
the
PNBig
Demand
Deposit,
Checking/Current Account No. 810624-6 of Erlando T. Rodriguez
and/or Norma Rodriguez, plus legal rate of interest thereon to
be computed from the filing of this complaint until fully paid;
2. The defendant PNB is hereby ordered to pay the plaintiffs the
following reasonable amount of damages suffered by them
taking into consideration the standing of the plaintiffs being
sugarcane planters, realtors, residential subdivision owners, and
other businesses:
a. Consequential damages, unearned income in the
amount of P4,000,000.00, as a result of their having
incurred great dificulty (sic) especially in the residential
subdivision business, which was not pushed through and
the contractor even threatened to file a case against the
plaintiffs;
b. Moral damages in the amount of P1,000,000.00;
c. Exemplary damages in the amount of P500,000.00;
d. Attorneys
fees
in
the
amount
of P150,000.00
considering that this case does not involve very
complicated issues; and for the
e. Costs of suit.
3. Other claims and counterclaims are hereby dismissed.6
CA Disposition
PNB appealed the decision of the trial court to the CA on the
principal ground that the disputed checks should be considered as
payable to bearer and not to order.

In a Decision7 dated July 22, 2004, the CA reversed and set aside
the RTC disposition. The CA concluded that the checks were
obviously meant by the spouses to be really paid to PEMSLA. The
court a quo declared:
We are not swayed by the contention of the plaintiffs-appellees
(Spouses Rodriguez) that their cause of action arose from the
alleged breach of contract by the defendant-appellant (PNB) when
it paid the value of the checks to PEMSLA despite the checks being
payable to order. Rather, we are more convinced by the strong and
credible evidence for the defendant-appellant with regard to the
plaintiffs-appellees and PEMSLAs business arrangement that the
value of the rediscounted checks of the plaintiffs-appellees would
be deposited in PEMSLAs account for payment of the loans it has
approved in exchange for PEMSLAs checks with the full value of
the said loans. This is the only obvious explanation as to why all the
disputed sixty-nine (69) checks were in the possession of PEMSLAs
errand boy for presentment to the defendant-appellant that led to
this present controversy. It also appears that the teller who
accepted the said checks was PEMSLAs officer, and that such was
a regular practice by the parties until the defendant-appellant
discovered the scam. The logical conclusion, therefore, is that the
checks were never meant to be paid to order, but instead, to
PEMSLA. We thus find no breach of contract on the part of the
defendant-appellant.
According to plaintiff-appellee Erlando Rodriguez testimony,
PEMSLA allegedly issued post-dated checks to its qualified
members who had applied for loans. However, because of
PEMSLAs insufficiency of funds, PEMSLA approached the plaintiffsappellees for the latter to issue rediscounted checks in favor of said
applicant members. Based on the investigation of the defendantappellant, meanwhile, this arrangement allowed the plaintiffsappellees 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.8 (Emphasis added)

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5 CASES

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 PNB to recover
the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended
Decision, the last paragraph and fallo of which read:

The CA ruled that the checks were payable to order. According to


the appellate court, PNB failed to present sufficient proof to defeat
the claim of the spouses Rodriguez that they really intended the
checks to be received by the specified payees. Thus, PNB is liable
for the value of the checks which it paid to PEMSLA without
indorsements from the named payees. The award for damages was
deemed appropriate in view of the failure of PNB to treat the
Rodriguez account with the highest degree of care considering the
fiduciary nature of their relationship, which constrained
respondents to seek legal action. Hence, the present recourse
under Rule 45.
Issues
The issues may be compressed to whether the subject checks are
payable to order or to bearer and who bears the loss?

1. Actual damages in the amount of P2,345,804 with


interest at 6% per annum from 14 May 1999 until fully
paid;

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.

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

Our Ruling

3. Attorneys fees in the amount of P100,000; and

Prefatorily, amendment of decisions is more acceptable than an


erroneous judgment attaining finality to the prejudice of innocent
parties. A court discovering an erroneous judgment before it
becomes final may, motu proprio or upon motion of the parties,
correct its judgment with the singular objective of achieving justice
for the litigants.10

In sum, we rule that the defendant-appellant PNB is liable to the


plaintiffs-appellees Sps. Rodriguez for the following:

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.
SO ORDERED.9

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
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A. INTRODUCTION
5 CASES

studied, before the promulgation of every judgment by the court.


Only in this manner will errors in judgments be avoided.

(c) When it is payable to the order of a fictitious or nonexisting person, and such fact is known to the person
making it so payable; or

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."11 It is either an order or a bearer instrument. Sections
8 and 9 of the NIL states:
SEC. 8. When payable to order. The instrument is payable to order
where it is drawn payable to the order of a specified person or to
him or his order. It may be drawn payable to the order of
(a) 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

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

The US Supreme Court held in Mueller that when the person


making the check so payable did not intend for the specified payee
to have any part in the transactions, the payee is considered as a
fictitious payee. The check is then considered as a bearer
instrument to be validly negotiated by mere delivery. Thus, the US
Supreme Court held that Liberty Insurance Bank, as drawee, was
authorized to make payment to the bearer of the check, regardless
of whether prior indorsements were genuine or not.17
The more recent Getty Petroleum Corp. v. American Express Travel
Related Services Company, Inc.18 upheld the fictitious-payee rule.
The rule protects the depositary bank and assigns the loss to the
drawer of the check who was in a better position to prevent the loss
in the first place. Due care is not even required from the drawee or
depositary bank in accepting and paying the checks. The effect is
that a showing of negligence on the part of the depositary bank will
not defeat the protection that is derived from this rule.
However, there is a commercial bad faith exception to the fictitiouspayee rule. A showing of commercial bad faith on the part of the
drawee bank, or any transferee of the check for that matter, will
work to strip it of this defense. The exception will cause it to bear
the loss. Commercial bad faith is present if the transferee of the
check acts dishonestly, and is a party to the fraudulent scheme.
Said the US Supreme Court in Getty:
Consequently, a transferees lapse of wary vigilance, disregard of
suspicious circumstances which might have well induced a prudent
banker to investigate and other permutations of negligence are not
relevant considerations under Section 3-405 x x x. Rather, there is
a "commercial bad faith" exception to UCC 3-405, applicable when
the transferee "acts dishonestly where it has actual knowledge of
facts and circumstances that amount to bad faith, thus itself
becoming a participant in a fraudulent scheme. x x x Such a test
finds support in the text of the Code, which omits a standard of
care requirement from UCC 3-405 but imposes on all parties an
obligation to act with "honesty in fact." x x x19 (Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends
protection even to non-bank transferees of the checks.
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5 CASES

In the case under review, the Rodriguez checks were payable to


specified payees. It is unrefuted that the 69 checks were payable to
specific persons. Likewise, it is uncontroverted that the payees
were actual, existing, and living persons who were members of
PEMSLA that had a rediscounting arrangement with spouses
Rodriguez.
What remains to be determined is if the payees, though existing
persons, were "fictitious" in its broader context.
For the fictitious-payee rule to be available as a defense, PNB must
show that the makers did not intend for the named payees to be
part of the transaction involving the checks. At most, the banks
thesis shows that the payees did not have knowledge of the
existence of the checks. This lack of knowledge on the part of the
payees, however, was not tantamount to a lack of intention on the
part of respondents-spouses that the payees would not receive the
checks proceeds. Considering that respondents-spouses were
transacting with PEMSLA and not the individual payees, it is
understandable that they relied on the information given by the
officers of PEMSLA that the payees would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is
because, as found by both lower courts, PNB failed to present
sufficient evidence to defeat the claim of respondents-spouses that
the named payees were the intended recipients of the checks
proceeds. The bank failed to satisfy a requisite condition of a
fictitious-payee situation that the maker of the check intended for
the payee to have no interest in the transaction.
Because of a failure to show that the payees were "fictitious" in its
broader sense, the fictitious-payee rule does not apply. Thus, the
checks are to be deemed payable to order. Consequently, the
drawee bank bears the loss.20
PNB was remiss in its duty as the drawee bank. It does not dispute
the fact that its teller or tellers accepted the 69 checks for deposit
to the PEMSLA account even without any indorsement from the
named payees. It bears stressing that order instruments can only
be negotiated with a valid indorsement.

A bank that regularly processes checks that are neither payable to


the customer nor duly indorsed by the payee is apparently grossly
negligent in its operations.21 This Court has recognized the unique
public interest possessed by the banking industry and the need for
the people to have full trust and confidence in their banks. 22 For this
reason, banks are minded to treat their customers accounts with
utmost care, confidence, and honesty.23
In a checking transaction, the drawee bank has the duty to verify
the genuineness of the signature of the drawer and to pay the
check strictly in accordance with the drawers instructions, i.e., to
the named payee in the check. It should charge to the drawers
accounts only the payables authorized by the latter. Otherwise, the
drawee will be violating the instructions of the drawer and it shall
be liable for the amount charged to the drawers account.24
In the case at bar, respondents-spouses were the banks
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, respondentsspouses. 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.alf-ITC
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,25 this Court cautioned thus:

25

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A. INTRODUCTION
5 CASES

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. 26
PNBs tellers and officers, in violation of banking rules of procedure,
permitted the invalid deposits of checks to the PEMSLA account.
Indeed, when it is the gross negligence of the bank employees that
caused the loss, the bank should be held liable.27
PNBs argument that there is no loss to compensate since no
demand for payment has been made by the payees must also fail.
Damage was caused to respondents-spouses when the PEMSLA
checks they deposited were returned for the reason "Account
Closed." These PEMSLA checks were the corresponding payments
to the Rodriguez checks. Since they could not encash the PEMSLA
checks, respondents-spouses were unable to collect payments for
the amounts they had advanced.
A bank that has been remiss in its duty must suffer the
consequences of its negligence. Being issued to named payees,
PNB was duty-bound by law and by banking rules and procedure to
require that the checks be properly indorsed before accepting them
for deposit and payment. In fine, PNB should be held liable for the
amounts of the checks.
One Last Note

We note that the RTC failed to thresh out the merits of PNBs crossclaim 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. 28 Yet, the RTC failed to
sanction the failure of both PEMSLA and MPC to file responsive
pleadings. Verily, the RTC dismissal of PNBs cross-claim has no
basis. Thus, this judgment shall be without prejudice to whatever
action the bank might take against its co-defendants in the trial
court.
To PNBs credit, it became involved in the controversial transaction
not of its own volition but due to the actions of some of its
employees. Considering that moral damages must be understood
to be in concept of grants, not punitive or corrective in nature, We
resolve to reduce the award of moral damages to P50,000.00.29
WHEREFORE, the appealed Amended Decision is AFFIRMED with the
MODIFICATION that the award for moral damages is reduced
to P50,000.00, and that this is without prejudice to whatever civil,
criminal, or administrative action PNB might take against PEMSLA,
MPC, and the employees involved. SO ORDERED.
G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK, petitioner, vs. COURT OF APPEALS,
FILRITERS GUARANTY ASSURANCE CORPORATION and
CENTRAL BANK of the PHILIPPINES, respondents.
TORRES, JR., J.:
Assailed in this Petition for Review on Certiorari is the Decision of
the respondent Court of Appeals dated January 29, 1990, 1 affirming
the nullity of the transfer of Central Bank Certificate of
Indebtedness (CBCI) No. D891, 2 with a face value of P500,000.00,
from the Philippine Underwriters Finance Corporation (Philfinance)
to the petitioner Trader's Royal Bank (TRB), under a Repurchase
Agreement 3 dated
February
4,
1981,
and
a
Detached
Assignment 4 dated April 27, 1981.
26

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5 CASES

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of


Manila, Branch 32, the action was originally filed as a Petition
for Mandamus 5 under Rule 65 of the Rules of Court, to compel the
Central Bank of the Philippines to register the transfer of the
subject CBCI to petitioner Traders Royal Bank (TRB).
In the said petition, TRB stated that:
3. On November 27, 1979, Filriters Guaranty Assurance Corporation
(Filriters) executed a "Detached Assignment" . . ., whereby Filriters,
as registered owner, sold, transferred, assigned and delivered unto
Philippine Underwriters Finance Corporation (Philfinance) all its
rights and title to Central Bank Certificates of Indebtedness of
PESOS: FIVE HUNDRED THOUSAND (P500,000) and having an
aggregate value of PESOS: THREE MILLION FIVE HUNDRED
THOUSAND (P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A") contains an
express authorization executed by the transferor intended to
complete the assignment through the registration of the transfer in
the name of PhilFinance, which authorization is specifically phrased
as follows: '(Filriters) hereby irrevocably authorized the said issuer
(Central Bank) to transfer the said bond/certificates on the books of
its fiscal agent;
5. On February 4, 1981, petitioner entered into a Repurchase
Agreement with PhilFinance . . ., whereby, for and in consideration
of the sum of PESOS: FIVE HUNDRED THOUSAND (P500,000.00),
PhilFinance sold, transferred and delivered to petitioner CBCI 4year, 8th series, Serial No. D891 with a face value of
P500,000.00 . . ., which CBCI was among those previously acquired
by PhilFinance from Filriters as averred in paragraph 3 of the
Petition;
6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"),
Philfinance agreed to repurchase CBCI Serial No. D891 (Annex "C"),
at the stipulated price of PESOS: FIVE HUNDRED NINETEEN
THOUSAND THREE HUNDRED SIXTY-ONE & 11/100 (P519,361.11)
on April 27, 1981;

7. PhilFinance failed to repurchase the CBCI on the agreed date of


maturity, April 27, 1981, when the checks it issued in favor of
petitioner were dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed a Detached
Assignment in favor of the Petitioner to enable the latter to have its
title completed and registered in the books of the respondent. And
by means of said Detachment, Philfinance transferred and assigned
all, its rights and title in the said CBCI (Annex "C") to petitioner and,
furthermore, it did thereby "irrevocably authorize the said issuer
(respondent herein) to transfer the said bond/certificate on the
books of its fiscal agent." . . .
9. Petitioner presented the CBCI (Annex "C"), together with the two
(2) aforementioned Detached Assignments (Annexes "B" and "D"),
to the Securities Servicing Department of the respondent, and
requested the latter to effect the transfer of the CBCI on its books
and to issue a new certificate in the name of petitioner as absolute
owner thereof;
10. Respondent failed and refused to register the transfer as
requested, and continues to do so notwithstanding petitioner's valid
and just title over the same and despite repeated demands in
writing, the latest of which is hereto attached as Annex "E" and
made an integral part hereof;
11. The express provisions governing the transfer of the CBCI were
substantially complied with the petitioner's request for registration,
to wit:
"No transfer thereof shall be valid unless made at
said office (where the Certificate has been
registered) by the registered owner hereof, in person
or by his attorney duly authorized in writing, and
similarly noted hereon, and upon payment of a
nominal transfer fee which may be required, a new
Certificate shall be issued to the transferee of the
registered holder thereof."

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5 CASES

and, without a doubt, the Detached Assignments presented to


respondent were sufficient authorizations in writing executed by the
registered owner, Filriters, and its transferee, PhilFinance, as
required by the above-quoted provision;
12. Upon such compliance with the aforesaid requirements, the
ministerial duties of registering a transfer of ownership over the
CBCI and issuing a new certificate to the transferee devolves upon
the respondent;
Upon these assertions, TRB prayed for the registration by the
Central Bank of the subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the case took
cognizance of the defendant Central Bank of the Philippines' Motion
for Admission of Amended Answer with Counter Claim for
Interpleader 6 thereby calling to fore the respondent Filriters
Guaranty Assurance Corporation (Filriters), the registered owner of
the subject CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI No. 891;
12. The CBCI constitutes part of the reserve investment against
liabilities required of respondent as an insurance company under
the Insurance Code;
13. Without any consideration or benefit whatsoever to Filriters, in
violation of law and the trust fund doctrine and to the prejudice of
policyholders and to all who have present or future claim against
policies issued by Filriters, Alfredo Banaria, then Senior VicePresident-Treasury of Filriters, without any board resolution,
knowledge or consent of the board of directors of Filriters, and
without any clearance or authorization from the Insurance
Commissioner, executed a detached assignment purportedly
assigning CBCI No. 891 to Philfinance;
xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-PresidentComptroller are Pilar Jacobe, Vice-President-Treasury of Filriters
(both of whom were holding the same positions in Philfinance),
without any consideration or benefit redounding to Filriters and to
the grave prejudice of Filriters, its policy holders and all who have
present or future claims against its policies, executed similar
detached assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and inoperative
because the assignment is without the knowledge and consent of
directors of Filriters, and not duly authorized in writing by the
Board, as requiring by Article V, Section 3 of CB Circular No. 769;
16. The assignment of the CBCI to Philfinance is a personal act of
Alfredo Banaria and not the corporate act of Filriters and such null
and void;
a. The assignment was executed without consideration and
for that reason, the assignment is void from the
beginning (Article 1409, Civil Code);
b. The assignment was executed without any knowledge
and consent of the board of directors of Filriters;
c. The CBCI constitutes reserve investment of Filriters
against liabilities, which is a requirement under the
Insurance Code for its existence as an insurance
company and the pursuit of its business operations. The
assignment of the CBCI is illegal act in the sense
of malum in se or malum prohibitum, for anyone to
make, either as corporate or personal act;
d. The transfer of dimunition of reserve investments of
Filriters is expressly prohibited by law, is immoral and
against public policy;
e. The assignment of the CBCI has resulted in the capital
impairment and in the solvency deficiency of Filriters
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5 CASES

(and has in fact helped in placing Filriters under


conservatorship), an inevitable result known to the
officer who executed assignment.
17. Plaintiff had acted in bad faith and with knowledge of the
illegality and invalidity of the assignment.
a. The CBCI No. 891 is not a negotiable instrument and as a
certificate of indebtedness is not payable to bearer but is
a registered in the name of Filriters;
b. The provision on transfer of the CBCIs provides that the
Central Bank shall treat the registered owner as the
absolute owner and that the value of the registered
certificates shall be payable only to the registered
owner; a sufficient notice to plaintiff that the
assignments do not give them the registered owner's
right as absolute owner of the CBCI's;
c. CB Circular 769, Series of 1980 (Rules and Regulations
Governing CBCIs) provides that the registered
certificates are payable only to the registered owner
(Article II, Section 1).

the affirmative action of the stockholders (Section 40,


Corporation [sic] Code. 7
In its Decision 8 dated April 29, 1988, the Regional Trial Court of
Manila, Branch XXXIII found the assignment of CBCI No. D891 in
favor of Philfinance, and the subsequent assignment of the same
CBCI by Philfinance in favor of Traders Royal Bank null and void and
of no force and effect. The dispositive portion of the decision reads:
ACCORDINGLY, judgment is hereby rendered in favor of the
respondent Filriters Guaranty Assurance Corporation and
against the plaintiff Traders Royal Bank:
d. Declaring the assignment of CBCI No. 891 in favor of
PhilFinance, and the subsequent assignment of CBCI by
PhilFinance in favor of the plaintiff Traders Royal Bank as
null and void and of no force and effect;
e. Ordering the respondent Central Bank of the Philippines
to disregard the said assignment and to pay the value of
the proceeds of the CBCI No. D891 to the Filriters
Guaranty Assurance Corporation;
f.

18. Plaintiff knew full well that the assignment by Philfinance of


CBCI No. 891 by Filriters is not a regular transaction made in the
usual of ordinary course of business;
a. The CBCI constitutes part of the reserve investments of
Filriters against liabilities requires by the Insurance Code
and its assignment or transfer is expressly prohibited by
law. There was no attempt to get any clearance or
authorization from the Insurance Commissioner;
b. The assignment by Filriters of the CBCI is clearly not a
transaction in the usual or regular course of its business;
c. The CBCI involved substantial amount and its
assignment clearly constitutes disposition of "all or
substantially all" of the assets of Filriters, which requires

Ordering the plaintiff Traders Royal Bank to pay


respondent Filriters Guaranty Assurance Corp. The sum
of P10,000 as attorney's fees; and

g. to pay the costs.


SO ORDERED. 9
The petitioner assailed the decision of the trial court in the Court of
Appeals 10, but their appeals likewise failed. The findings of the fact
of the said court are hereby reproduced:
The records reveal that defendant Filriters is the registered
owner of CBCI No. D891. Under a deed of assignment dated
November 27, 1971, Filriters transferred CBCI No. D891 to
Philippine Underwriters Finance Corporation (Philfinance).
Subsequently, Philfinance transferred CBCI No. D891, which
29

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A. INTRODUCTION
5 CASES

was still registered in the name of Filriters, to appellant


Traders Royal Bank (TRB). The transfer was made under a
repurchase agreement dated February 4, 1981, granting
Philfinance the right to repurchase the instrument on or
before April 27, 1981. When Philfinance failed to buy back
the note on maturity date, it executed a deed of
assignment, dated April 27, 1981, conveying to appellant
TRB all its right and the title to CBCI No. D891.

Obviously, the assignment of the certificate from Filriters to


Philfinance was fictitious, having made without consideration, and
did not conform to Central Bank Circular No. 769, series of 1980,
better known as the "Rules and Regulations Governing Central Bank
Certificates of Indebtedness", which provided that any "assignment
of registered certificates shall not be valid unless made . . . by the
registered owner thereof in person or by his representative duly
authorized in writing."

Armed with the deed of assignment, TRB then sought the


transfer and registration of CBCI No. D891 in its name before
the Security and Servicing Department of the Central Bank
(CB). Central Bank, however, refused to effect the transfer
and registration in view of an adverse claim filed by
defendant Filriters.

Petitioner's claimed interest has no basis, since it was derived from


Philfinance whose interest was inexistent, having acquired the
certificate through simulation. What happened was Philfinance
merely borrowed CBCI No. D891 from Filriters, a sister corporation,
to guarantee its financing operations.

Left with no other recourse, TRB filed a special civil action


for mandamus against the Central Bank in the Regional Trial
Court of Manila. The suit, however, was subsequently
treated by the lower court as a case of interpleader when CB
prayed in its amended answer that Filriters be impleaded as
a respondent and the court adjudge which of them is
entitled to the ownership of CBCI No. D891. Failing to get a
favorable judgment. TRB now comes to this Court on
appeal. 11
In the appellate court, petitioner argued that the subject CBCI was
a negotiable instrument, and having acquired the said certificate
from Philfinance as a holder in due course, its possession of the
same is thus free fro any defect of title of prior parties and from any
defense available to prior parties among themselves, and it may
thus, enforce payment of the instrument for the full amount thereof
against all parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is not a
negotiable instrument, since the instrument clearly stated that it
was payable to Filriters, the registered owner, whose name was
inscribed thereon, and that the certificate lacked the words of
negotiability which serve as an expression of consent that the
instrument may be transferred by negotiation.

Said the Court:


In the case at bar, Alfredo O. Banaria, who signed the deed
of assignment purportedly for and on behalf of Filriters, did
not have the necessary written authorization from the Board
of Directors of Filriters to act for the latter. For lack of such
authority, the assignment did not therefore bind Filriters and
violated as the same time Central Bank Circular No. 769
which has the force and effect of a law, resulting in the
nullity of the transfer (People v. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal Revenue, 165
SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No.
D891 which it could assign or transfer to Traders Royal Bank
and which the latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is AFFIRMED,
with costs against plaintiff-appellant.
SO ORDERED.

13

Petitioner's present position rests solely on the argument that


Philfinance owns 90% of Filriters equity and the two corporations
have identical corporate officers, thus demanding the application of
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A. INTRODUCTION
5 CASES

the doctrine or piercing the veil of corporate fiction, as to give


validity to the transfer of the CBCI from registered owner to
petitioner TRB. 14 This renders the payment by TRB to Philfinance of
CBCI, as actual payment to Filriters. Thus, there is no merit to the
lower court's ruling that the transfer of the CBCI from Filriters to
Philfinance was null and void for lack of consideration.
Admittedly, the subject CBCI is not a negotiable instrument in the
absence of words of negotiability within the meaning of the
negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value
received, hereby promises to pay bearer, of if this Certificate
of indebtedness be registered, to FILRITERS GUARANTY
ASSURANCE CORPORATION, the registered owner hereof, the
principal sum of FIVE HUNDRED THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to
certificates for the creation and maintenance of a permanent
improvement revolving fund, is similar to a "bond," (82 Minn. 202).
Being equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum of money. It is
usually used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable
instrument, stating that:
As worded, the instrument provides a promise "to pay
Filriters Guaranty Assurance Corporation, the registered
owner hereof." Very clearly, the instrument is payable only
to Filriters, the registered owner, whose name is inscribed
thereon. It lacks the words of negotiability which should
have served as an expression of consent that the instrument
may be transferred by negotiation. 15

A reading of the subject CBCI indicates that the same is payable to


FILRITERS GUARANTY ASSURANCE CORPORATION, and to no one
else, thus, discounting the petitioner's submission that the same is
a negotiable instrument, and that it is a holder in due course of the
certificate.
The language of negotiability which characterize a negotiable paper
as a credit instrument is its freedom to circulate as a substitute for
money. Hence, freedom of negotiability is the touchtone relating to
the protection of holders in due course, and the freedom of
negotiability is the foundation for the protection which the law
throws around a holder in due course (11 Am. Jur. 2d, 32). This
freedom in negotiability is totally absent in a certificate
indebtedness as it merely to pay a sum of money to a specified
person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals,

16

The accepted rule is that the negotiability or nonnegotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. In the
construction of a bill or note, the intention of the parties is
to control, if it can be legally ascertained. While the writing
may be read in the light of surrounding circumstance 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.
Thus, the transfer of the instrument from Philfinance to TRB was
merely an assignment, and is not governed by the negotiable
instruments law. The pertinent question then is, was the transfer of
the CBCI from Filriters to Philfinance and subsequently from
Philfinance to TRB, in accord with existing law, so as to entitle TRB
to have the CBCI registered in its name with the Central Bank?
31

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5 CASES

The following are the appellate court's pronouncements on the


matter:
Clearly shown in the record is the fact that Philfinance's title
over CBCI No. D891 is defective since it acquired the
instrument from Filriters fictitiously. Although the deed of
assignment stated that the transfer was for "value
received", there was really no consideration involved. What
happened was Philfinance merely borrowed CBCI No. D891
from Filriters, a sister corporation. Thus, for lack of any
consideration, the assignment made is a complete nullity.
What is more, We find that the transfer made by Filriters to
Philfinance did not conform to Central Bank Circular No. 769,
series of 1980, otherwise known as the "Rules and
Regulations Governing Central Bank Certificates of
Indebtedness", under which the note was issued. Published
in the Official Gazette on November 19, 1980, Section 3
thereof provides that any assignment of registered
certificates shall not be valid unless made . . . by the
registered owner thereof in person or by his representative
duly authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed the deed
of assignment purportedly for and on behalf of Filriters, did
not have the necessary written authorization from the Board
of Directors of Filriters to act for the latter. For lack of such
authority, the assignment did not therefore bind Filriters and
violated at the same time Central Bank Circular No. 769
which has the force and effect of a law, resulting in the
nullity of the transfer (People vs. Que Po Lay, 94 Phil. 640;
3M Philippines, Inc. vs. Commissioner of Internal Revenue,
165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No.
D891 which it could assign or transfer to Traders Royal Bank
and which the latter can register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to TRB
must upheld, as the respondent Filriters and Philfinance, though

separate corporate entities on paper, have used their corporate


fiction to defraud TRB into purchasing the subject CBCI, which
purchase now is refused registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two
companies have the same corporate officers, if the principle
of piercing the veil of corporate entity were to be applied in
this case, then TRB's payment to Philfinance for the CBCI
purchased by it could just as well be considered a payment
to Filriters, the registered owner of the CBCI as to bar the
latter from claiming, as it has, that it never received any
payment for that CBCI sold and that said CBCI was sold
without its authority.
xxx xxx xxx
We respectfully submit that, considering that the Court of
Appeals has held that the CBCI was merely borrowed by
Philfinance from Filriters, a sister corporation, to guarantee
its (Philfinance's) financing operations, if it were to be
consistent therewith, on the issued raised by TRB that there
was a piercing a veil of corporate entity, the Court of
Appeals should have ruled that such veil of corporate entity
was, in fact, pierced, and the payment by TRB to Philfinance
should be construed as payment to Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate
entity, as this merely an equitable remedy, and may be awarded
only in cases when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime or where
a corporation is a mere alter ego or business conduit of a person. 18
Peiercing the veil of corporate entity requires the court to see
through the protective shroud which exempts its stockholders from
liabilities that ordinarily, they could be subject to, or distinguished
one corporation from a seemingly separate one, were it not for the
32

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5 CASES

existing corporate fiction. But to do this, the court must be sure


that the corporate fiction was misused, to such an extent that
injustice, fraud, or crime was committed upon another,
disregarding, thus, his, her, or its rights. It is the protection of the
interests of innocent third persons dealing with the corporate entity
which the law aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance
remains, despite the petitioners insistence on the contrary. For one,
other than the allegation that Filriters is 90% owned by Philfinance,
and the identity of one shall be maintained as to the other, there is
nothing else which could lead the court under circumstance to
disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that
a corporation is an entity with a juridical personality separate from
its stockholders and from other corporations may be
disregarded, 19 in the absence of such grounds, the general rule
must upheld. The fact that Filfinance owns majority shares in
Filriters is not by itself a ground to disregard the independent
corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of
Internal Revenue, 20 the mere ownership by a single stockholder or
by another corporation of all or nearly all of the capital stock of a
corporation is not of itself a sufficient reason for disregarding the
fiction of separate corporate personalities.
In the case at bar, there is sufficient showing that the petitioner
was not defrauded at all when it acquired the subject certificate of
indebtedness from Philfinance.
On its face the subject certificates states that it is registered in the
name of Filriters. This should have put the petitioner on notice, and
prompted it to inquire from Filriters as to Philfinance's title over the
same or its authority to assign the certificate. As it is, there is no
showing to the effect that petitioner had any dealings whatsoever
with Filriters, nor did it make inquiries as to the ownership of the
certificate.
The terms of the CBCI No. D891 contain a provision on its
TRANSFER. Thus:

TRANSFER. This Certificate shall pass by delivery unless it is


registered in the owner's name at any office of the Bank or
any agency duly authorized by the Bank, and such
registration is noted hereon. After such registration no
transfer thereof shall be valid unless made at said office
(where the Certificates has been registered) by the
registered owner hereof, in person, or by his attorney, duly
authorized in writing and similarly noted hereon and upon
payment of a nominal transfer fee which may be required, a
new Certificate shall be issued to the transferee of the
registered owner thereof. The bank or any agency duly
authorized by the Bank may deem and treat the bearer of
this Certificate, or if this Certificate is registered as herein
authorized, the person in whose name the same is
registered as the absolute owner of this Certificate, for the
purpose of receiving payment hereof, or on account hereof,
and for all other purpose whether or not this Certificate shall
be overdue.
This is notice to petitioner to secure from Filriters a written
authorization for the transfer or to require Philfinance to submit
such an authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI
No. D891. The fact that a non-owner was disposing of the
registered CBCI owned by another entity was a good reason for
petitioner to verify of inquire as to the title Philfinance to dispose to
the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series
of 1990 21, known as the Rules and Regulations Governing Central
Bank Certificates of Indebtedness, Section 3, Article V of which
provides that:
Sec. 3. Assignment of Registered Certificates. Assignment
of registered certificates shall not be valid unless made at
the office where the same have been issued and registered
or at the Securities Servicing Department, Central Bank of
the Philippines, and by the registered owner thereof, in
person or by his representative, duly authorized in writing.
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A. INTRODUCTION
5 CASES

For this purpose, the transferee may be designated as the


representative of the registered owner.
Petitioner, being a commercial bank, cannot feign ignorance of
Central Bank Circular 769, and its requirements. An entity which
deals with corporate agents within circumstances showing that the
agents are acting in excess of corporate authority, may not hold the
corporation liable. 22 This is only fair, as everyone must, in the
exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good
faith. 23
The transfer made by Filriters to Philfinance did not conform to the
said. Central Bank Circular, which for all intents, is considered part
of the law. As found by the courts a quo, Alfredo O. Banaria, who
had signed the deed of assignment from Filriters to Philfinance,
purportedly for and in favor of Filriters, did not have the necessary
written authorization from the Board of Directors of Filriters to act
for the latter. As it is, the sale from Filriters to Philfinance was
fictitious, and therefore void and inexistent, as there was no
consideration for the same. This is fatal to the petitioner's cause,
for then, Philfinance had no title over the subject certificate to
convey the Traders Royal Bank.Nemo potest nisi quod de jure
potest no man can do anything except what he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part
of its legal and capital reserves, which are required by law 24 to be
maintained at a mandated level. This was pointed out by Elias
Garcia, Manager-in-Charge of respondent Filriters, in his testimony
given before the court on May 30, 1986.

A Well, this was CBCI of the company sought to be examined


by the Insurance Commission sometime in early 1981 and
this CBCI No. 891 was among the CBCI's that were found to
be missing.
Q Let me take you back further before 1981. Did you have
the knowledge of this CBCI No. 891 before 1981?
A Yes, sir. This CBCI is an investment of Filriters required by
the Insurance Commission as legal reserve of the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are required to
put up legal reserves under Section 213 of the Insurance
Code equivalent to 40 percent of the premiums receipt and
further, the Insurance Commission requires this reserve to
be invested preferably in government securities or
government binds. This is how this CBCI came to be
purchased by the company.
It cannot, therefore, be taken out of the said funds, without
violating the requirements of the law. Thus, the anauthorized use or
distribution of the same by a corporate officer of Filriters cannot
bind the said corporation, not without the approval of its Board of
Directors, and the maintenance of the required reserve fund.
Consequently, the title of Filriters over the subject certificate of
indebtedness must be upheld over the claimed interest of Traders
Royal Bank.

Q Do you know this Central Bank Certificate of


Indebtedness, in short, CBCI No. D891 in the face value of
P5000,000.00 subject of this case?

ACCORDINGLY, the petition is DISMISSED and the decision appealed


from dated January 29, 1990 is hereby AFFIRMED.

A Yes, sir.

SO ORDERED.

Q Why do you know this?


G.R. No. 93073 December 21, 1992
34

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A. INTRODUCTION
5 CASES

REPUBLIC
PLANTERS
BANK, petitioner, vs.
APPEALS and FERMIN CANLAS, respondents.

COURT

OF

Garment Manufacturing, Inc.), and Shozo Yamaguchi are


ordered to pay jointly and severally, the plaintiff bank the
sum of P367,000.00 with interest of 16% per annum from
January 29, 1980 until fully paid

This is an appeal by way of a Petition for Review on Certiorari from


the decision * of the Court of Appeals in CA G.R. CV No. 07302,
entitled "Republic Planters Bank.Plaintiff-Appellee vs. Pinch
Manufacturing Corporation, et al., Defendants, and Fermin Canlas,
Defendant-Appellant", which affirmed the decision ** in Civil Case
No. 82-5448 except that it completely absolved Fermin Canlas from
liability under the promissory notes and reduced the award for
damages and attorney's fees. The RTC decision, rendered on June
20, 1985, is quoted hereunder:

Under the promissory note (Exhibit "F") defendant


corporation Pinch (formerly Worldwide) is ordered to pay the
plaintiff bank the sum of P140,000.00 with interest at 16%
per annum from November 27, 1980 until fully paid.

CAMPOS, JR., J.:

WHEREFORE, premises considered, judgment is hereby


rendered in favor of the plaintiff Republic Planters Bank,
ordering defendant Pinch Manufacturing Corporation
(formerly Worldwide Garment Manufacturing, Inc.) and
defendants Shozo Yamaguchi and Fermin Canlas to pay,
jointly and severally, the plaintiff bank the following sums
with interest thereon at 16% per annum from the dates
indicated, to wit:
Under the promissory note (Exhibit "A"), the sum of
P300,000.00 with interest from January 29, 1981 until fully
paid; under promissory note (Exhibit "B"), the sum of
P40,000.00 with interest from November 27, 1980; under
the promissory note (Exhibit "C"), the sum of P166,466.00
which interest from January 29, 1981; under the promissory
note (Exhibit "E"), the sum of P86,130.31 with interest from
January 29, 1981; under the promissory note (Exhibit "G"),
the sum of P12,703.70 with interest from November 27,
1980; under the promissory note (Exhibit "H"), the sum of
P281,875.91 with interest from January 29, 1981; and under
the promissory note (Exhibit "I"), the sum of P200,000.00
with interest from January 29, 1981.
Under the promissory note (Exhibit "D") defendants Pinch
Manufacturing Corporation (formerly named Worldwide

Defendant Pinch (formely Worldwide) is hereby ordered to


pay the plaintiff the sum of P231,120.81 with interest at
12% per annum from July 1, 1981, until fully paid and the
sum of P331,870.97 with interest from March 28, 1981, until
fully paid.
All the defendants are also ordered to pay, jointly and
severally, the plaintiff the sum of P100,000.00 as and for
reasonable attorney's fee and the further sum equivalent to
3% per annum of the respective principal sums from the
dates above stated as penalty charge until fully paid, plus
one percent (1%) of the principal sums as service charge.
With costs against the defendants.
SO ORDERED.

From the above decision only defendant Fermin Canlas appealed to


the then Intermediate Court (now the Court Appeals). His
contention was that inasmuch as he signed the promissory notes in
his capacity as officer of the defunct Worldwide Garment
Manufacturing, Inc, he should not be held personally liable for such
authorized corporate acts that he performed. It is now the
contention of the petitioner Republic Planters Bank that having
unconditionally signed the nine (9) promissory notes with Shozo
Yamaguchi, jointly and severally, defendant Fermin Canlas is
solidarity liable with Shozo Yamaguchi on each of the nine notes.
We find merit in this appeal.
35

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A. INTRODUCTION
5 CASES

From the records, these facts are established: Defendant Shozo


Yamaguchi and private respondent Fermin Canlas were
President/Chief Operating Officer and Treasurer respectively, of
Worldwide Garment Manufacturing, Inc.. By virtue of Board
Resolution No.1 dated August 1, 1979, defendant Shozo Yamaguchi
and private respondent Fermin Canlas were authorized to apply for
credit facilities with the petitioner Republic Planters Bank in the
forms of export advances and letters of credit/trust receipts
accommodations. Petitioner bank issued nine promissory notes,
marked as Exhibits A to I inclusive, each of which were uniformly
worded in the following manner:
___________, after date, for value received, I/we,
jointly and severaIly promise to pay to the ORDER of
the REPUBLIC PLANTERS BANK, at its office in Manila,
Philippines, the sum of ___________ PESOS(....)
Philippine Currency...
On the right bottom margin of the promissory notes appeared the
signatures of Shozo Yamaguchi and Fermin Canlas above their
printed names with the phrase "and (in) his personal capacity"
typewritten below. At the bottom of the promissory notes appeared:
"Please credit proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
These entries were separated from the text of the notes with a bold
line which ran horizontally across the pages.
In the promissory notes marked as Exhibits C, D and F, the name
Worldwide Garment Manufacturing, Inc. was apparently rubber
stamped above the signatures of defendant and private
respondent.

On December 20, 1982, Worldwide Garment Manufacturing, Inc.


noted to change its corporate name to Pinch Manufacturing
Corporation.
On February 5, 1982, petitioner bank filed a complaint for the
recovery of sums of money covered among others, by the nine
promissory notes with interest thereon, plus attorney's fees and
penalty charges. The complainant was originally brought against
Worldwide Garment Manufacturing, Inc. inter alia, but it was later
amended to drop Worldwide Manufacturing, Inc. as defendant and
substitute Pinch Manufacturing Corporation it its place. Defendants
Pinch Manufacturing Corporation and Shozo Yamaguchi did not file
an Amended Answer and failed to appear at the scheduled pre-trial
conference despite due notice. Only private respondent Fermin
Canlas filed an Amended Answer wherein he, denied having issued
the promissory notes in question since according to him, he was not
an officer of Pinch Manufacturing Corporation, but instead of
Worldwide Garment Manufacturing, Inc., and that when he issued
said promissory notes in behalf of Worldwide Garment
Manufacturing, Inc., the same were in blank, the typewritten entries
not appearing therein prior to the time he affixed his signature.
In the mind of this Court, the only issue material to the resolution of
this appeal is whether private respondent Fermin Canlas is
solidarily liable with the other defendants, namely Pinch
Manufacturing Corporation and Shozo Yamaguchi, on the nine
promissory notes.
We hold that private respondent Fermin Canlas is solidarily liable on
each of the promissory notes bearing his signature for the following
reasons:
The promissory motes are negotiable instruments and must be
governed by the Negotiable Instruments Law. 2
Under the Negotiable lnstruments Law, persons who write their
names on the face of promissory notes are makers and are liable as
such. 3 By signing the notes, the maker promises to pay to the order
of the payee or any holder 4according to the tenor thereof. 5 Based
on the above provisions of law, there is no denying that private
36

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A. INTRODUCTION
5 CASES

respondent Fermin Canlas is one of the co-makers of the


promissory notes. As such, he cannot escape liability arising
therefrom.
Where an instrument containing the words "I promise to pay" is
signed by two or more persons, they are deemed to be jointly and
severally liable thereon. 6 An instrument which begins" with "I" ,We"
, or "Either of us" promise to, pay, when signed by two or more
persons, makes them solidarily liable. 7 The fact that the singular
pronoun is used indicates that the promise is individual as to each
other; meaning that each of the co-signers is deemed to have
made an independent singular promise to pay the notes in full.
In the case at bar, the solidary liability of private respondent Fermin
Canlas is made clearer and certain, without reason for ambiguity,
by the presence of the phrase "joint and several" as describing the
unconditional promise to pay to the order of Republic Planters
Bank. A joint and several note is one in which the makers bind
themselves both jointly and individually to the payee so that all
may be sued together for its enforcement, or the creditor may
select one or more as the object of the suit. 8 A joint and several
obligation in common law corresponds to a civil law solidary
obligation; that is, one of several debtors bound in such wise that
each is liable for the entire amount, and not merely for his
proportionate share. 9 By making a joint and several promise to pay
to the order of Republic Planters Bank, private respondent Fermin
Canlas assumed the solidary liability of a debtor and the payee may
choose to enforce the notes against him alone or jointly with
Yamaguchi and Pinch Manufacturing Corporation as solidary
debtors.
As to whether the interpolation of the phrase "and (in) his personal
capacity" below the signatures of the makers in the notes will affect
the liability of the makers, We do not find it necessary to resolve
and decide, because it is immaterial and will not affect to the
liability of private respondent Fermin Canlas as a joint and several
debtor of the notes. With or without the presence of said phrase,
private respondent Fermin Canlas is primarily liable as a co-maker
of each of the notes and his liability is that of a solidary debtor.

Finally, the respondent Court made a grave error in holding that an


amendment in a corporation's Articles of Incorporation effecting a
change of corporate name, in this case from Worldwide Garment
manufacturing Inc to Pinch Manufacturing Corporation extinguished
the personality of the original corporation.
The corporation, upon such change in its name, is in no sense a
new corporation, nor the successor of the original corporation. It is
the same corporation with a different name, and its character is in
no respect changed. 10
A change in the corporate name does not make a new corporation,
and whether effected by special act or under a general law, has no
affect on the identity of the corporation, or on its property, rights,
or liabilities. 11
The corporation continues, as before, responsible in its new name
for all debts or other liabilities which it had previously contracted or
incurred. 12
As a general rule, officers or directors under the old corporate
name bear no personal liability for acts done or contracts entered
into by officers of the corporation, if duly authorized. Inasmuch as
such officers acted in their capacity as agent of the old corporation
and the change of name meant only the continuation of the old
juridical entity, the corporation bearing the same name is still
bound by the acts of its agents if authorized by the Board. Under
the Negotiable Instruments Law, the liability of a person signing as
an agent is specifically provided for as follows:
Sec. 20. Liability of a person signing as agent and so forth.
Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf of a
principal , or in a representative capacity, he is not liable on
the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling a
representative character, without disclosing his principal,
does not exempt him from personal liability.

37

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A. INTRODUCTION
5 CASES

Where the agent signs his name but nowhere in the instrument has
he disclosed the fact that he is acting in a representative capacity
or the name of the third party for whom he might have acted as
agent, the agent is personally liable to take holder of the
instrument and cannot be permitted to prove that he was merely
acting as agent of another and parol or extrinsic evidence is not
admissible to avoid the agent's personal liability. 13
On the private respondent's contention that the promissory notes
were delivered to him in blank for his signature, we rule otherwise.
A careful examination of the notes in question shows that they are
the stereotype printed form of promissory notes generally used by
commercial banking institutions to be signed by their clients in
obtaining loans. Such printed notes are incomplete because there
are blank spaces to be filled up on material particulars such as
payee's name, amount of the loan, rate of interest, date of issue
and the maturity date. The terms and conditions of the loan are
printed on the note for the borrower-debtor 's perusal. An
incomplete instrument which has been delivered to the borrower
for his signature is governed by Section 14 of the Negotiable
Instruments Law which provides, in so far as relevant to this case,
thus:
Sec. 14. Blanks: when may be filled. Where the
instrument is wanting in any material particular, the person
in possesion thereof has a prima facie authority to complete
it by filling up the blanks therein. ... In order, however, that
any such instrument when completed may be enforced
against any person who became a party thereto prior to its
completion, it must be filled up strictly in accordance with
the authority given and within a reasonable time...
Proof that the notes were signed in blank was only the self-serving
testimony of private respondent Fermin Canlas, as determined by
the trial court, so that the trial court ''doubts the defendant
(Canlas) signed in blank the promissory notes". We chose to believe
the bank's testimony that the notes were filled up before they were
given to private respondent Fermin Canlas and defendant Shozo
Yamaguchi for their signatures as joint and several promissors. For
signing the notes above their typewritten names, they bound
themselves as unconditional makers. We take judicial notice of the

customary procedure of commercial banks of requiring their


clientele to sign promissory notes prepared by the banks in printed
form with blank spaces already filled up as per agreed terms of the
loan, leaving the borrowers-debtors to do nothing but read the
terms and conditions therein printed and to sign as makers or comakers. When the notes were given to private respondent Fermin
Canlas for his signature, the notes were complete in the sense that
the spaces for the material particular had been filled up by the
bank as per agreement. The notes were not incomplete
instruments; neither were they given to private respondent Fermin
Canlas in blank as he claims. Thus, Section 14 of the NegotiabIe
Instruments Law is not applicable.
The ruling in case of Reformina vs. Tomol relied upon by the
appellate court in reducing the interest rate on the promissory
notes from 16% to 12% per annum does not squarely apply to the
instant petition. In the abovecited case, the rate of 12% was
applied to forebearances of money, goods or credit and court
judgemets thereon, only in the absence of any stipulation between
the parties.
In the case at bar however , it was found by the trial court that the
rate of interest is 9% per annum, which interest rate the plaintiff
may at any time without notice, raise within the limits allowed law.
And so, as of February 16, 1984 , the plaintiff had fixed the interest
at 16% per annum.
This Court has held that the rates under the Usury Law, as
amended by Presidential Decree No. 116, are applicable only to
interests by way of compensation for the use or forebearance of
money. Article 2209 of the Civil Code, on the other hand, governs
interests by way of damages. 15 This fine distinction was not taken
into consideration by the appellate court, which instead made a
general statement that the interest rate be at 12% per annum.
Inasmuch as this Court had declared that increases in interest rates
are not subject to any ceiling prescribed by the Usury Law, the
appellate court erred in limiting the interest rates at 12% per
annum. Central Bank Circular No. 905, Series of 1982 removed the
Usury Law ceiling on interest rates. 16
38

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A. INTRODUCTION
5 CASES

In the 1ight of the foregoing analysis and under the plain language
of the statute and jurisprudence on the matter, the decision of the
respondent: Court of Appeals absolving private respondent Fermin
Canlas is REVERSED and SET ASIDE. Judgement is hereby rendered
declaring private respondent Fermin Canlas jointly and severally
liable on all the nine promissory notes with the following sums and
at 16% interest per annum from the dates indicated, to wit:
Under the promissory note marked as exhibit A, the sum of
P300,000.00 with interest from January 29, 1981 until fully paid;
under promissory note marked as Exhibit B, the sum of P40,000.00
with interest from November 27, 1980: under the promissory note
denominated as Exhibit C, the amount of P166,466.00 with interest
from January 29, 1981; under the promissory note denominated as
Exhibit D, the amount of P367,000.00 with interest from January 29,
1981 until fully paid; under the promissory note marked as Exhibit
E, the amount of P86,130.31 with interest from January 29, 1981;
under the promissory note marked as Exhibit F, the sum of
P140,000.00 with interest from November 27, 1980 until fully paid;
under the promissory note marked as Exhibit G, the amount of

P12,703.70 with interest from November 27, 1980; the promissory


note marked as Exhibit H, the sum of P281,875.91 with interest
from January 29, 1981; and the promissory note marked as Exhibit
I, the sum of P200,000.00 with interest on January 29, 1981.
The liabilities of defendants Pinch Manufacturing Corporation
(formerly Worldwide Garment Manufacturing, Inc.) and Shozo
Yamaguchi, for not having appealed from the decision of the trial
court, shall be adjudged in accordance with the judgment rendered
by the Court a quo.
With respect to attorney's fees, and penalty and service charges,
the private respondent Fermin Canlas is hereby held jointly and
solidarity liable with defendants for the amounts found, by the
Court a quo. With costs against private respondent.
SO ORDERED.

39