SECOND DIVISION

[ G.R. No. 93397, March 03, 1997 ]

TRADERS ROYAL BANK, PETITIONER, VS. COURT OF APPEALS, FILRITERS
GUARANTY ASSURANCE CORPORATION AND CENTRAL BANK OF THE
PHILIPPINES, RESPONDENTS.
DECISION
TORRES, 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, 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.
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' xxx, 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 (CBCI) Nos. D890 to D896,
inclusive, each in the denomination 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 xxx, whereby, for and in consideration of the sum of PESOS: FIVE
HUNDRED THOUSAND (P500,000.00) , PhilFinance sold, transferred and
delivered to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face
value of P500,000.00 xxx, 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
Assignment, 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.' xxx
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 in 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.'
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 trying 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 Vice- President-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
14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller and
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
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 required 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 as 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 or diminution 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 (and has in fact helped in placing Filriters
under conservatorship) , an inevitable result known to the officer who
executed the detached 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 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 CBCIs;
c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs)
provides that registered certificates are payable only to the registered owner
(Article II, Section 1).
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 or ordinary course
of business ;
a) The CBCI constitutes part of the reserve investments of Filriters against
liabilities required 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 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 XXXII 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:
(a) 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;
(b) 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 Filtriters Guaranty Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters
Guaranty Assurance Corp. The sum of P10,000 as attorney's fees; and
(d) to pay the costs.
SO ORDERED."[9]
The petitioner assailed the decision of the trial court in the Court of Appeals,
[10]
but their appeal likewise failed. The findings of 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
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 rights and title to CBCI No. D891.

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.
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
from 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 said 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.
Obviously, the assignment of the certificate from Filriters to Philfinance was
fictitious, having been 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 xxx by the registered owner thereof in person or by his
representative duly authorized in writing."
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.
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 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 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 Filriter's equity and the two corporations have identical
corporate officers, thus demanding the application of the doctrine of piercing
the veil of corporate fiction, as to give validity to the transfer of the CBCI
from the registered owner to petitioner TRB.[14] This renders the payment by
TRB to Philfinance for CBCI, as actual payment to Filriters. Thus, there is no
merit to the lower courts' 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
The Central Bank of the Philippines (the Bank) for value received, hereby
promises to pay to bearer, or 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
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 an 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 touchstone 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 of
indebtedness as it merely acknowledges to pay a sum of money to a
specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. vs. Court of Appeals:[16]
"The accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the
instrument itself. In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained. While the writing may be
read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its stead. The
duty of the court in such case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what their words express, but
what is the meaning of the words they have used. What the parties meant
must be determined by what they said."
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?
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 xxx 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 be
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 owns 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
We respectfully submit that, considering that the Court of Appeals has held
that the CBCI21 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 issue 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 the Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate entity, as
this is 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]
Piercing 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 distinguishes one corporation from a
seemingly separate one, were it not for the 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 the circumstances 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 be upheld. The fact that
Philfinance 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
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 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 the registered owner of 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 or inquire as to the
title of Philfinance to dispose of the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1980,
[21]
known as the Rules and Regulations Governing Central Bank Certificates
of Indebtedness, Section 3, Article V of which provides that:
"SECTION 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. 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 to 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.
"Q Do you know this Central Bank Certificate of Indebtedness, in short,
CBCI No. D891 in the face value of P500,000.00 subject of this case?
A

Yes, sir.

Why do you know this ?

Well, this was the 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.

Let me take you back further before 1981. Did you have the
knowledge of this CBCI No. 891 before 1981?

Yes, sir. This CBCI is an investment of Filriters required by the

Insurance Commission as legal reserve of the company.

Legal reserve for the purpose of what?

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 bonds. This is how this CBCI
came to be purchased by the company."
It cannot, therefore, be taken out of the said fund, without violating the
requirements of the law. Thus, the unauthorized 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.
ACCORDINGLY, the petition is DISMISSED and the decision appealed from
dated January 29, 1990 is hereby AFFIRMED.
SO ORDERED.

[ G.R. No. L-222, April 26, 1950 ]

SALVACION F. VDA. DE EDUQUE, ETC. PLAINTIFF AND APPELLEE, VS. JOSE M.
OCAMPO, DEFENDANT AND APPELLANT.
DECISION
MORAN, C.J.:
This is an action to compel acceptance of payment of a mortgage debt.
On February 16, 1935, Dr. Jose Eduque secured two loans from Mariano
Ocampo de Leon, Doa Escolastica de los Reyes and Don Jose M. Ocampo,
the first in the amount of P40,000, and the second in the sum of P15,000,
both payable within the period of twenty (20) years, with interest at -the rate
of 5 per annum. Payment of these two loans was guaranteed by mortgage
on real property. In the mortgage contract it is. stipulated that any of the
mortgage creditors may receive payment and execute deeds of cancellation
of the mortgage debts.
On December 6, 1943, plaintiff and appellee, as administratrix of the estate
of the deceased Dr. Jose Eduque, tendered payment, by means of a cashier's
check, of the total amount of the two loans, P55,000, to defendant-appellant
Jose M. Ocampo, one of the creditors, who refused to accept payment. By
reason of such refusal, an action was brought and a cashier's check for the
total amount of P55,000 was deposited in court. After trial, judgment was
rendered against defendant compelling him to accept the P55,000 deposited
in court, to issue deeds of cancellation of the mortgage debts, and to pay the
expenses of consignation and costs.

Defendant accepted the judgment with respect to the second loan of

P15,000 upon the ground that, according to him, in the deed of mortgage
corresponding to that loan it clearly appeared that the loan was payable
"durante el termino de 20 aos", and that the only question remaining
between the parties is the interpretation of the first deed of mortgage
regarding the first loan of P40,000. And he asked the court to order "que de
la cantidad de P55,000 consignada en este Juzgado, se entregue al
demandado la suma de P15,000, despues de descontar proporcionalmente
cualesquiera cantidades por deposito y otros conceptos segun los terminos
de la decision promulgada." The order was issued accordingly and the sum of
P15,000.00 out of the P55,000.00 deposited in court was delivered to the
defendant.
The present appeal concerns the decision of the lower court regarding the
first loan of P40,000, and the principal error assigned by the appellant is that
tender of payment by means of a cashier's check representing Japanese war
notes is not valid.
We have already held that Japanese military notes were legal tender during
the Japanese occupation. But appellant argues, further, that the consignation
oS a cashier's check, which is not legal tender, is not binding upon him. This
question, however, has never been raised in the lower court. Upon the
contrary, defendant accepted impliedly the consignation of the cashier's
check when he himself asked the court that out of the money thus consigned
he be paid the amount of the second loan of P15,000.00. It is a rule that "a
cashier's check may constitute a sufficient tender where no objection is
made on this ground." (62 C.J., p. 670; see also 40 Amer. Jut., p. 764.)
For all foregoing, judgment is affirmed with costs against appellant.
Ozaeta, Pablo, Bengzon, Montemayor, and Reyes, JJ., concur.

TUASON, J., dissenting:

I am constrained to dissent from the majority decision on the ground on
which I rested my dissent in various cases involving the validity of payments
in Japanese military notes.
I maintain that Japanese war notes were not legal tneder and could not be
made so by military orders. Accordingly, payment in that currency of pre-war
obligation over the protest of the creditor did not operate to discharge the

debt except to the extent he was or could have been benefited by the
payment.
SECOND DIVISION
[ G.R. No. L-41764, December 19, 1980 ]
NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., PETITIONER, VS. HON.
ALBERTO V. SENERIS, RICARDO A. TONG AND EX-OFFICIO SHERIFF HAKIM S.
ABDULWAHID, RESPONDENTS.
DECISION
CONCEPCION, JR., J.:
A petition for certiorari with preliminary injunction to annul and/or modify the
order of the Court of First Instance of Zamboanga City (Branch II) dated
August 28, 1975 denying petitioner's Ex-Parte Motion for Issuance Of
Certificate Of Satisfaction Of Judgment.
Herein petitioner is the defendant in a complaint for collection of a sum of
money filed by the private respondent.[1]On July 19, 1974, a compromise
judgment was rendered by the respondent Judge in accordance with an
amicable settlement entered into by the parties the terms and conditions of
which, are as follows:
"(1)That defendant will pay to the plaintiff the amount of Fifty Four Thousand
Five Hundred Pesos (P54,500.00) at 6% interest per annum to be
reckoned from August 25, 1972;
"(2)That defendant will pay to the plaintiff the amount of Six Thousand Pesos
(P6,000.00) as attorney's fees for which P5,000.00 had been
acknowledged received by the plaintiff under Consolidated Bank and
Trust Corporation Check No. 16-135022 amounting to P5,000.00 leaving
a balance of One Thousand Pesos (P1,000.00);
"(3)That the entire amount of P54,500.00 plus interest, plus the balance of
P1,000.00 for attorney's fees will be paid by defendant to the plaintiff
within five months from today, July 19, 1974; and
"(4)Failure on the part of the defendant to comply with any of the aboveconditions, a writ of execution may be issued by this Court for the
satisfaction of the obligation."[2]
For failure of the petitioner to comply with his judgment obligation, the
respondent Judge, upon motion of the private respondent, issued an order for
the issuance of a writ of execution on December 21, 1974. Accordingly, a writ
of execution was issued for the amount of P63,130.00 pursuant to which,

the Ex-Officio Sheriff levied upon the following personal properties of the
petitioner, to wit:
(1) Unit American Lathe 24"
(1) Unit American Lathe 18" Cracker Wheeler
(1) Unit Rockford Shaper 24"
and set the auction sale thereof on January 15, 1975. However, prior to
January 15, 1975, petitioner deposited with the Clerk of Court, Court of First
Instance, Zamboanga City, in his capacity as Ex-Officio Sheriff of Zamboanga
City, the sum of P63,130.00 for the payment of the judgment obligation,
consisting of the following:
1.

P50,000.00 in Cashier's Check No. S-314361 dated January 3, 1975 of

the Equitable Banking Corporation; and

P13,130.00 in cash.[3]
In a letter dated January 14, 1975, to the Ex-Officio Sheriff,[4] private
respondent through counsel, refused to accept the check as well as the cash
deposit. In the same letter, private respondent requested the scheduled
auction sale on January 15, 1975 to proceed if the petitioner cannot produce
the cash. However, the scheduled auction sale at 10:00 a.m. on January 15,
1975 was postponed to 3:00 o'clock p.m. of the same day due to further
attempts to settle the case. Again, the scheduled auction sale that afternoon
did not push through because of a last ditch attempt to convince the private
respondent to accept the check. The auction sale was then postponed on
the following day, January 16, 1975 at 10:00 o'clock a.m.[5]At about 9:15
a.m., on January 16, 1975, a certain Mr. Taedo representing the petitioner
appeared in the office of the Ex-Officio Sheriff and the latter reminded Mr.
Taedo that the auction sale would proceed at 10:00 o'clock. At 10:00 a.m.,
Mr. Taedo and Mr. Librado, both representing the petitioner requested
the Ex-Officio Sheriff to give them fifteen minutes within which to contact
their lawyer which request was granted. After Mr. Taedo and Mr. Librado
failed to return, counsel for private respondent insisted that the sale must
proceed and the Ex-Officio Sheriff proceeded with the auction sale.[6] In the
course of the proceedings, Deputy Sheriff Castro sold the levied properties
item by item to the private respondent as the highest bidder in the amount
of P50,000.00. As a result thereof, the Ex-Officio Sheriff declared a
deficiency of P13,130.00.[7] Thereafter, on January 16, 1975, the ExOfficio Sheriff issued a "Sheriff's Certificate of Sale" in favor of the private
respondent, Ricardo Tong, married to Pascuala Tong for the total amount of
P50,000.00 only.[8]Subsequently, on January 17, 1975, petitioner filed an exparte motion for issuance of certificate of satisfaction of judgment. This

2.

motion was denied by the respondent Judge in his order dated August 28,
1975. In view thereof, petitioner now questions said order by way of the
present petition alleging in the main that said respondent Judge capriciously
and whimsically abused his discretion in not granting the motion for issuance
of certificate of satisfaction of judgment for the following reasons: (1) that
there was already a full satisfaction of the judgment before the auction sale
was conducted with the deposit made to the Ex-Officio Sheriff in the amount
of P63,000.00 consisting of P50,000.00 in Cashier's Check and P13,130.00 in
cash; and (2) that the auction sale was invalid for lack of proper notice to the
petitioner and its counsel when the Ex-Officio Sheriff postponed the sale from
June 15, 1975 to January 16, 1976 contrary to Section 24, Rule 39 of the
Rules of Court. On November 10, 1975, the Court issued a temporary
restraining order enjoining the respondent Ex-Officio Sheriff from delivering
the personal properties subject of the petition to Ricardo A. Tong in view of
the issuance of the "Sheriff Certificate of Sale."
We find the petition to be impressed with merit.
The main issue to be resolved in this instance is as to whether or not the
private respondent can validly refuse acceptance of the payment of the
judgment obligation made by the petitioner consisting of P50,000.00 in
Cashier's Check and P13,130.00 in cash which it deposited with the ExOfficio Sheriff before the date of the scheduled auction sale. In upholding
private respondent's claim that he has the right to refuse payment by means
of a check, the respondent Judge cited the following:
Section 63 of the Central Bank Act:
"Sec. 63. Legal Character. - Checks representing deposit money do not have
legal tender power and their acceptance in payment of debts, both public
and private, is at the option of the creditor, Provided, however, that a check
which has been cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an amount equal to the
amount credited to his account."
Article 1249 of the New Civil Code:
"Art. 1249. - The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
"The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired.

"In the meantime, the action derived from the original obligation shall be
held in abeyance."
Likewise, the respondent Judge sustained the contention of the private
respondent that he has the right to refuse payment of the amount of
P13,130.00 in cash because the said amount is less than the judgment
obligation, citing the following Article of the New Civil Code:
"Art. 1248. Unless there is an express stipulation to that effect, the creditor
cannot be compelled partially to receive the presentations in which the
obligation consists. Neither may the debtor be required to make partial
payment.
"However, when the debt is in part liquidated and in part unliquidated, the
creditor may demand and the debtor may effect the payment of the former
without waiting for the liquidation of the latter."
It is to be emphasized in this connection that the check deposited by the
petitioner in the amount of P50,000.00 is not an ordinary check but a
Cashier's Check of the Equitable Banking Corporation, a bank of good
standing and reputation. As testified to by the Ex-Officio Sheriff with whom it
has been deposited, it is a certified crossed check.[9] It is a well-known and
accepted practice in the business sector that a Cashier's Check is deemed as
cash. Moreover, since the said check had been certified by the drawee bank,
by the certification, the funds represented by the check are transferred from
the credit of the maker to that of the payee or holder, and for all intents and
purposes, the latter becomes the depositor of the drawee bank, with rights
and duties of one in such situation.[10]Where a check is certified by the bank
on which it is drawn, the certification is equivalent to acceptance.[11] Said
certification "implies that the check is drawn upon sufficient funds in the
hands of the drawee, that they have been set apart for its satisfaction, and
that they shall be so applied whenever the check is presented for payment.
It is an understanding that the check is good then, and shall continue good,
and this agreement is as binding on the bank as its notes in circulation, a
certificate of deposit payable to the order of the depositor, or any other
obligation it can assume. The object of certifying a check, as regards both
parties, is to enable the holder to use it as money."[12]When the holder
procures the check to be certified, "the check operates as an assignment of a
part of the funds to the creditors".[13] Hence, the exception to the rule
enunciated under Section 63 of the Central Bank Act to the effect "that a
check which has been cleared and credited to the account of the creditor
shall be equivalent to a delivery to the creditor in cash in an amount equal to
the amount credited to his account" shall apply in this case. Considering
that the whole amount deposited by the petitioner consisting of Cashier's

Check of P50,000.00 and P13,130.00 in cash covers the judgment obligation

of P63,000.00 as mentioned in the writ of execution, then, We see no valid
reason for the private respondent to have refused acceptance of the
payment of the obligation in his favor. The auction sale, therefore, was
uncalled for. Furthermore, it appears that on January 17, 1975, the Cashier's
Check was even withdrawn by the petitioner and replaced with cash in the
corresponding amount of P50,000.00 on January 27, 1975 pursuant to an
agreement entered into by the parties at the instance of the respondent
Judge. However, the private respondent still refused to receive the same.
Obviously, the private respondent is more interested in the levied properties
than in the mere satisfaction of the judgment obligation. Thus, petitioner's
motion for the issuance of a certificate of satisfaction of judgment is clearly
meritorious and the respondent Judge gravely abused his discretion in not
granting the same under the circumstances.
In view of the conclusion reached in this instance, We find no more need to
discuss the other ground relied upon in the petition.
It is also contended by the private respondent that appeal and not a special
civil action for certiorari is the proper remedy in this case, and that since the
period to appeal from the decision of the respondent Judge has already
expired, then, the present petition has been filed out of time. The contention
is untenable. The decision of the respondent Judge in Civil Case No. 250
(166) has long become final and executory and so, the same is not being
questioned herein. The subject of the petition at bar as having been issued
in grave abuse of discretion is the order dated August 28, 1975 of the
respondent Judge which was merely issued in execution of the said decision.
Thus, even granting that appeal is open to the petitioner, the same is not an
adequate and speedy remedy for the respondent Judge had already issued a
writ of execution.[14]
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
1.

Declaring as null and void the order of the respondent Judge dated
August 28, 1975;

2.

Declaring as null and void the auction sale conducted on January 16,
1975 and the certificate of sale issued pursuant thereto;

3.

Ordering the private respondent to accept the sum of P63,130.00

under deposit as payment of the judgment obligation in his favor;

4.

Ordering the respondent Judge and respondent Ex-Officio Sheriff to

release the levied properties to the herein petitioner.

The temporary restraining order issued is hereby made permanent.

Costs against the private respondent.
SO ORDERED.
SECOND DIVISION
[ G.R. No. 72110, November 16, 1990 ]
ROMAN CATHOLIC BISHOP OF MALOLOS, INC., PETITIONER, VS.
INTERMEDIATE APPELLATE COURT, AND ROBES-FRANCISCO REALTY AND
DEVELOPMENT CORPORATION, RESPONDENTS.
DECISION
SARMIENTO, J.:
This is a petition for review on certiorari which seeks the reversal and setting
aside of the decision[1] of the Court of Appeals,[2] the dispositive portion of
which reads:
WHEREFORE, the decision appealed from is hereby reversed and set aside
and another one entered for the plaintiff ordering the defendantappellee Roman Catholic Bishop of Malolos, Inc. to accept the balance of
P124,000.00 being paid by plaintiff-appellant and thereafter to execute in
favor of Robes-Francisco Realty Corporation a registerable Deed of Absolute
Sale over 20,655 square meters portion of that parcel of land situated in San
Jose del Monte, Bulacan described in OCT No. 575 (now Transfer Certificates
of Title Nos. T-169493, 169494, 169495 and 169496) of the Register of
Deeds of Bulacan. In case of refusal of the defendant to execute the Deed of
Final Sale, the clerk of court is directed to execute the said
document. Without pronouncement as to damages and attorney's
fees. Costs against the defendant-appellee.[3]
The case at bar arose from a complaint filed by the private respondent, then
plaintiff, against the petitioner, then defendant, in the Court of First Instance
(now Regional Trial Court) of Bulacan, at Sta. Maria, Bulacan,[4] for specific
performance with damages, based on a contract[5] executed on July 7, 1971.
The property subject matter of the contract consists of a 20,655 sq.m.portion, out of the 30,655 sq.m. total area, of a parcel of land covered by
Original Certificate of Title No. 575 of the Province of Bulacan, issued and
registered in the name of the petitioner which it sold to the private
respondent for and in consideration of P123,930.00.

The crux of the instant controversy lies in the compliance or non-compliance

by the private respondent with the provision for payment to the petitioner of
the principal balance of P100,000.00 and the accrued interest of P24,000.00
within the grace period.
A chronological narration of the antecedent facts is as follows:
On July 7, 1971, the subject contract over the land in question was executed
between the petitioner as vendor and the private respondent through its
then president, Mr. Carlos F. Robes, as vendee, stipulating for
a downpaymentof P23,930.00 and the balance of P100,000.00 plus 12%
interest per annum to be paid within four (4) years from execution of the
contract, that is, on or before July 7, 1975. The contract likewise provides for
cancellation, forfeiture of previous payments, and reconveyance of the land
in question in case the private respondent would fail to complete payment
within the said period.
On March 12, 1973, the private respondent, through its new president,
Atty. Adalia Francisco, addressed a letter[6]to Father Vasquez, parish priest of
San Jose Del Monte, Bulacan, requesting to be furnished with a copy of the
subject contract and the supporting documents.
On July 17, 1975, admittedly after the expiration of the stipulated period for
payment, the same Atty. Francisco wrote the petitioner a formal
request[7] that her company be allowed to pay the principal amount of
P100,000.00 in three (3) equal installments of six (6) months each with the
first installment and the accrued interest of P24,000.00 to be paid
immediately upon approval of the said request.
On July 29, 1975, the petitioner, through its counsel,
Atty. Carmelo Fernandez, formally denied the said request of the private
respondent, but granted the latter a grace period of five (5) days from the
receipt of the denial[8] to pay the total balance of P124,000.00, otherwise, the
provisions of the contract regarding cancellation, forfeiture,
andreconveyance would be implemented.
On August 4, 1975, the private respondent, through its president, Atty.
Francisco, wrote[9] the counsel of the petitioner requesting an extension of 30
days from said date to fully settle its account. The counsel for the petitioner,
Atty. Fernandez, received the said letter on the same day. Upon consultation
with the petitioner inMalolos, Bulacan, Atty. Fernandez, as instructed, wrote
the private respondent a letter[10] dated August 7, 1975informing the latter of
the denial of the request for an extension of the grace period.

Consequently, Atty. Francisco, the private respondent's president, wrote a

letter[11] dated August 22, 1975, directly addressed to the petitioner,
protesting the alleged refusal of the latter to accept tender of payment
purportedly made by the former on August 5, 1975, the last day of the grace
period. In the same letter of August 22, 1975, received on the following day
by the petitioner, the private respondent demanded the execution of a deed
of absolute sale over the land in question and after which it would pay its
account in full, otherwise, judicial action would be resorted to.
On August 27, 1975, the petitioner's counsel, Atty. Fernandez, wrote a
reply[12] to the private respondent stating the refusal of his client to execute
the deed of absolute sale due to its (private respondent's) failure to pay its
full obligation. Moreover, the petitioner denied that the private respondent
had made any tender of payment whatsoever within the grace period. In
view of this alleged breach of contract, the petitioner cancelled the contract
and considered all previous payments forfeited and the land as ipso
facto reconveyed.
From a perusal of the foregoing facts, we find that both the contending
parties have conflicting versions on the main question of tender of payment.
The trial court, in its ratiocination, preferred not to give credence to the
evidence presented by the private respondent. According to the trial court:
x x x What made Atty. Francisco suddenly decide to pay plaintiff's obligation
on August 5, 1975, go to defendant's office at Malolos, and there tender her
payment, when her request of August 4, 1975 had not yet been acted upon
until August 7 1975? If Atty. Francisco had decided to pay the obligation and
had available funds for the purpose on August 5, 1975, then there would
have been no need for her to write defendant on August 4, 1975 to request
an extension of time. Indeed, Atty. Francisco's claim that she made a tender
of payment on August 5, 1975 -- such alleged act, considered in relation to
the circumstances both antecedent and subsequent thereto, being not in
accord with the normal pattern of human conduct -- is not worthy of
credence.[13]
The trial court likewise noted the inconsistency in the testimony of Atty.
Francisco, president of the private respondent, who earlier testified that a
certain Mila Policarpio accompanied her on August 5, 1975 to the office of
the petitioner. Another person, however, named Aurora Oracion, was
presented to testify as the secretary-companion of Atty. Francisco on that
same occasion.
Furthermore, the trial court considered as fatal the failure of Atty. Francisco
to present in court the certified personal check allegedly tendered as

payment or, at least, its xerox copy, or even bank records thereof. Finally,
the trial court found that the private respondent had insufficient funds
available to fulfill the entire obligation considering that the latter, through its
president, Atty. Francisco, only had a savings account deposit of P64,840.00,
and although the latter had a money-market placement of P300,000.00, the
same was to mature only after the expiration of the 5-day grace period.
Based on the above considerations, the trial court rendered a decision in
favor of the petitioner, the dispositiveportion of which reads:
WHEREFORE, finding plaintiff to have failed to make out its case, the court
hereby declares the subject contract cancelled and plaintiff's down payment
of P23,930.00 forfeited in favor of defendant, and hereby dismisses the
complaint; and on the counterclaim, the Court orders plaintiff to pay
defendant.
(1) Attorney's fees of P10,000.00;
(2) Litigation expenses of P2,000.00; and
(3) Judicial costs.
SO ORDERED.[14]
Not satisfied with the said decision, the private respondent appealed to the
respondent Intermediate Appellate Court (now Court of Appeals) assigning as
reversible errors, among others, the findings of the trial court that the
available funds of the private respondent were insufficient and that the latter
did not effect a valid tender of payment and consignation.
The respondent court, in reversing the decision of the trial court, essentially
relies on the following findings:
x x x We are convinced from the testimony of Atty. Adalia Francisco and her
witnesses that in behalf of the plaintiff-appellant they have a total available
sum of P364,840.00 at her and at the plaintiff's disposal on or before August
4, 1975 to answer for the obligation of the plaintiff-appellant. It was not
correct for the trial court to conclude that the plaintiff-appellant had only
about P64,840.00 in savings deposit on or before August 5, 1975, a sum not
enough to pay the outstanding account of P124,000.00. The plaintiffappellant, through Atty. Francisco proved and the trial court even
acknowledged that Atty. Adalia Francisco had about P300,000.00 in money
market placement. The error of the trial court lies in concluding that the
money market placement of P300,000.00 was out of reach of Atty.
Francisco. But as testified to by Mr. Catalino Estrella, a representative of the
Insular Bank of Asia and America, Atty. Francisco could withdraw anytime her

money market placement and place it at her disposal, thus proving her
financial capability of meeting more than the whole of P124,000.00 then due
per contract. This situation, We believe, proves the truth that Atty. Francisco
apprehensive that her request for a 30-day grace period would be denied,
she tendered payment on August 4, 1975 which offer defendant through its
representative and counsel refused to receive. x x x[15] (Underscoring
supplied)
In other words, the respondent court, finding that the private respondent had
sufficient available funds, ipso facto concluded that the latter had tendered
payment. Is such conclusion warranted by the facts proven? The petitioner
submits that it is not.
Hence, this petition.[16]
The petitioner presents the following issues for resolution:
xxx

xxx

xxx

A. Is a finding that private respondent had sufficient available funds on or

before the grace period for the payment of its obligation proof that it (private
respondent) did tender of (sic) payment for its said obligation within said
period?
xxx

xxx

xxx

B. Is it the legal obligation of the petitioner (as vendor) to execute a deed

of absolute sale in favor of the private respondent (as vendee) before the
latter has actually paid the complete consideration of the sale - where the
contract between and executed by the parties stipulates "That upon complete payment of the agreed consideration by the herein
VENDEE, the VENDOR shall cause the execution of a Deed of Absolute Sale in
favor of the VENDEE.
xxx

xxx

xxx

C. Is an offer of a check a valid tender of payment of an obligation under a

contract which stipulates that the consideration of the sale is in Philippine
Currency?[17]
We find the petition impressed with merit.
With respect to the first issue, we agree with the petitioner that a finding that
the private respondent had sufficient available funds on or before the grace
period for the payment of its obligation does not constitute proof of tender of

payment by the latter for its obligation within the said period. Tender of
payment involves a positive and unconditional act by the obligor of offering
legal tender currency as payment to the obligee for the former'sobligation
and demanding that the latter accept the same. Thus, tender of payment
cannot be presumed by a mere inference from surrounding
circumstances. At most, sufficiency of available funds is only affirmative of
the capacity or ability of the obligor to fulfill his part of the bargain. But
whether or not the obligor avails himself of such funds to settle his
outstanding account remains to be proven by independent and credible
evidence. Tender of payment presupposes not only that the obligor is able,
ready, and willing, but more so, in the act of performing his
obligation. Ab posse ad actu non vale illatio. "A proof that an act could
have been done is no proof that it was actually done."
The respondent court was therefore in error to have concluded from the
sheer proof of sufficient available funds on the part of the private respondent
to meet more than the total obligation within the grace period, the alleged
truth of tender of payment. The same is a classic case of non-sequitur.
On the contrary, the respondent court finds itself remiss in overlooking or
taking lightly the more important findings of fact made by the trial court
which we have earlier mentioned and which as a rule, are entitled to great
weight on appeal and should be accorded full consideration and respect and
should not be disturbed unless for strong and cogent reasons.[18]
While the Court is not a trier of facts, yet, when the findings of fact of the
Court of Appeals are at variance with those of the trial court,[19] or when the
inference of the Court of Appeals from its findings of fact is manifestly
mistaken,[20]the Court has to review the evidence in order to arrive at the
correct findings based on the record.
Apropos the second issue raised, although admittedly the documents for the
deed of absolute sale had not been prepared, the subject contract clearly
provides that the full payment by the private respondent is an a priori
condition for the execution of the said documents by the petitioner.
That upon complete payment of the agreed consideration by the herein
VENDEE, the VENDOR shall cause the execution of a Deed of Absolute Sale in
favor of the VENDEE.[21]
The private respondent is therefore in estoppel to claim otherwise as the
latter did in the testimony in cross-examination of its president, Atty.
Francisco, which reads:

Q Now, you mentioned, Atty. Francisco, that you wanted the defendant to
execute the final deed of sale before you would given (sic) the personal
certified check in payment of your balance, is that correct?
A
xxx

Yes, sir.[22]
xxx

xxx

Art. 1159 of the Civil Code of the Philippines provides that "obligations
arising from contracts have the force of law between the contracting parties
and should be complied with in good faith." And unless the stipulations in
said contract are contrary to law, morals, good customs, public order, or
public policy, the same are binding as between the parties.[23]
What the private respondent should have done if it was indeed desirous of
complying with its obligations would have been to pay the petitioner within
the grace period and obtain a receipt of such payment duly issued by the
latter. Thereafter, or, allowing a reasonable time, the private respondent
could have demanded from the petitioner the execution of the necessary
documents. In case the petitioner refused, the private respondent could
have had always resorted to judicial action for the legitimate enforcement of
its right. For the failure of the private respondent to undertake this more
judicious course of action, it alone shall suffer the consequences.
With regard to the third issue, granting arguendo that we would rule
affirmatively on the two preceding issues, the case of the private respondent
still can not succeed in view of the fact that the latter used a certified
personal check which is not legal tender nor the currency stipulated, and
therefore, can not constitute valid tender of payment. The first paragraph of
Art. 1249 of the Civil Code provides that "the payment of debts in money
shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines.
The Court en banc in the recent case of Philippine Airlines v. Court of
Appeals,[24] G.R. No. L-49188, stated thus:
Since a negotiable instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself, operate as payment
(citing Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan
London Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21
R.C.L. 60, 61). A check, whether a manager's check or ordinary check, is not
legal tender, and an offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the obligee or creditor.
Hence, where the tender of payment by the private respondent was not valid
for failure to comply with the requisite payment in legal tender or currency

stipulated within the grace period and as such, was validly refused receipt by
the petitioner, the subsequent consignation did not operate to discharge the
former from its obligation to the latter.
In view of the foregoing, the petitioner in the legitimate exercise of its rights
pursuant to the subject contract, did validly order therefore the cancellation
of the said contract, the forfeiture of the previous payment, and
thereconveyance ipso facto of the land in question.
WHEREFORE, the petition for review on certiorari is GRANTED and the
DECISION of the respondent court promulgated on April 25, 1985 is hereby
SET ASIDE and ANNULLED and the DECISION of the trial court dated May 25,
1981 is hereby REINSTATED. Costs against the private respondent.
SO ORDERED.
SECOND DIVISION
[ G.R. No. 100290, June 04, 1993 ]
NORBERTO TIBAJIA, JR. AND CARMEN TIBAJIA, PETITIONERS, VS. THE
HONORABLE COURT OF APPEALS AND EDEN TAN, RESPONDENTS.
DECISION
PADILLA, J.:
Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before this
Court assailing the decision* of respondent appellate court dated 24 April
1991 in CA-G.R. SP No. 24164 denying their petition for certiorari,
prohibition, and injunction which sought to annul the order of Judge Eutropio
Migrino of the Regional Trial Court, Branch 151, Pasig, Metro Manila in Civil
Case No. 54863 entitled "Eden Tan vs. Sps. Norberto and Carmen Tibajia."
Stated briefly, the relevant facts are as follows:
Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan
against the Tibajia spouses. A writ of attachment was issued by the trial
court on 17 August 1987 and on 17 September 1987, the Deputy Sheriff
filed areturn stating that a deposit made by the Tibajia spouses in the
Regional Trial Court of Kalookan City in the amount of Four Hundred Forty
Two Thousand Seven Hundred and Fifty Pesos (P442,750.00) in another case,
had been garnished by him. On 10 March 1988, the Regional Trial Court,
Branch 151 of Pasig, Metro Manila rendered its decision in Civil Case No.
54863 in favor of the plaintiff Eden Tan, ordering the Tibajia spouses to pay
her an amount in excess of Three Hundred Thousand Pesos (P300,000.00).

On appeal, the Court of Appeals modified the decision by reducing the award
of moral and exemplary damages. The decision having become final, Eden
Tan filed the corresponding motion for execution and thereafter, the
garnished funds which by then were on deposit with the cashier of the
Regional Trial Court of Pasig, Metro Manila, were levied upon.
On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff
Eduardo Bolima the total money judgment in the following form:
Cashier's Check . P262,750.00
Cash 135,733.70
Total . P398,483.70
Private respondent, Eden Tan, refused to accept the payment made by the
Tibajia spouses and instead insisted that the garnished funds deposited with
the cashier of the Regional Trial Court of Pasig, Metro Manila be withdrawn to
satisfy the judgment obligation. On 15 January 1991, defendant spouses
(petitioners) filed a motion to lift the writ of execution on the ground that the
judgment debt had already been paid. On 29 January 1991, the motion was
denied by the trial court on the ground that payment in cashier's check is not
payment in legal tender and that payment was made by a third party other
than the defendant. A motion for reconsideration was denied on 8 February
1991. Thereafter, the spouses Tibajia filed a petition for certiorari, prohibition
and injunction in the Court of Appeals. The appellate court dismissed the
petition on 24 April 1991 holding that payment by cashier's check is not
payment in legal tender as required by Republic Act No. 529. The motion for
reconsideration was denied on 27 May 1991.
In this petition for review, the Tibajia spouses raise the following issues:
"I WHETHER OR NOT THE BPI CASHIER'S CHECK NO. 014021 IN THE AMOUNT
OF P262,750.00 TENDERED BY PETITIONERS FOR PAYMENT OF THE
JUDGMENT DEBT, IS 'LEGAL TENDER'.
II WHETHER OR NOT THE PRIVATE RESPONDENT MAY VALIDLY REFUSE THE
TENDER OF PAYMENT PARTLY IN CHECK AND PARTLY IN CASH MADE BY
PETITIONERS, THRU AURORA VITO AND COUNSEL, FOR THE SATISFACTION OF
THE MONETARY OBLIGATION OF PETITIONERS-SPOUSES."[1]
The only issue to be resolved in this case is whether or not payment by
means of check (even by cashier's check) is considered payment in legal
tender as required by the Civil Code, Republic Act No. 529, and the
Central BankAct.

It is contended by the petitioners that the check, which was a cashier's check
of the Bank of the Philippine Islands, undoubtedly a bank of good standing
and reputation, and which was a crossed check marked "For Payee's Account
Only" and payable to private respondent Eden Tan, is considered legal
tender, payment with which operates to discharge their monetary obligation.
[2]
Petitioners, to support their contention, cite the case of New Pacific Timber
and Supply Co., Inc. v. Seneris[3] where this Court held through Mr. Justice
Hermogenes Concepcion, Jr. that "It is a well-known and accepted practice in
the business sector that a cashier's check is deemed as cash".
The provisions of law applicable to the case at bar are the following:
a. Article 1249 of the Civil Code which provides:
"Article 1249. The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired.
In the meantime, the action derived from the original obligation shall be held
in abeyance.";
b. Section 1 of Republic Act No. 529, as amended, which provides:
"Section 1. Every provision contained in, or made with respect to, any
obligation which purports to give the obligee the right to require payment in
gold or in any particular kind of coin or currency other than Philippine
currency or in an amount of money of the Philippines measured thereby,
shall be as it is hereby declared against public policy, null and void, and of no
effect, and no such provision shall be contained in, or made with respect to,
any obligation thereafter incurred. Every obligation heretofore and hereafter
incurred, whether or not any such provision as to payment is contained
therein or made with respect thereto, shall be discharged upon payment in
any coin or currency which at the time of payment is legal tender for public
and private debts.
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which
provides:
"Section 63. Legal character - Checks representing deposit money do not
have legal tender power and their acceptance in the payment of debts, both
public and private, is at the option of the creditor: Provided, however,

thata check which has been cleared and credited to the account of the
creditor shall be equivalent to a delivery to the creditor of cash in an amount
equal to the amount credited to his account."
From the aforequoted provisions of law, it is clear that this petition must fail.
In the recent cases of Philippine Airlines, Inc. vs. Court of
Appeals[4] and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate
Appellate Court,[5] this Court held that -"A check, whether a manager's check or ordinary check, is not legal tender,
and an offer of a check in payment of adebt is not a valid tender of payment
and may be refused receipt by the obligee or creditor."
The ruling in these two (2) cases merely applies the statutory provisions
which lay down the rule that a check is not legal tender and that a creditor
may validly refuse payment by check, whether it be a manager's, cashier's
or personal check.
Petitioners erroneously rely on one of the dissenting opinions in
the Philippine Airlines case[6] to support their cause. The dissenting opinion
however does not in any way support the contention that a check is legal
tender but, on the contrary, states that "If the PAL checks in question had not
been encashed by Sheriff Reyes, there would be no payment by PAL and,
consequently, no discharge or satisfaction of its judgment
obligation."[7] Moreover, the circumstances in the Philippine Airlines case are
quite different from those in the case at bar for in that case the checks
issued by the judgment debtor were made payable to the sheriff, Emilio Z.
Reyes, who encashed the checks but failed to deliver the proceeds of said
encashment to the judgment creditor.
In the more recent case of Fortunado vs. Court of Appeals,[8] this Court
stressed that, "We are not, by this decision,sanctioning the use of a check for
the payment of obligations over the objection of the creditor."
WHEREFORE, the petition is DENIED. The appealed decision is hereby
AFFIRMED, with costs against the petitioners.
SO ORDERED.
THIRD DIVISION
[ G.R. No. 89252, May 24, 1993 ]
RAUL SESBREO, PETITIONER, VS. HON. COURT OF APPEALS, DELTA MOTORS
CORPORATION AND PILIPINAS BANK, RESPONDENTS.

DECISION
FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreo made a money market
placement in the amount of P300,000.00 with the Philippine Underwriters
Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term
of thirty-two (32) days, would mature on 13 March 1981. Philfinance, also on
9 February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of
one (1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a
term of 32 days at 17.0 % per annum;
(b) the Certificate of Securities Delivery Receipt No. 16587 indicating the sale
of DMC PN No. 2731 to petitioner, with the notation that the said security
was in custodianship of Pilipinas Bank, as per Denominated Custodian
Receipt ("DCR") No. 10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of
petitioner's investment), with petitioner as payee, Philfinance as drawer, and
Insular Bank of Asia and America as drawee, in the total amount of
P304,533.33.
On 13 March 1981, petitioner sought to encash the post-dated checks issued
by Philfinance. However, the checks were dishonored for having been drawn
against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805
issued by private respondent Pilipinas Bank ("Pilipinas"). It read as follows:
"PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila.
February 9, 1981
VALUE DATE
TO

Raul Sesbreo

April 6, 1981___
MATURITY DATE

NO. 10805
DENOMINATED CUSTODIAN RECEIPT
**************************************************
'This confirms that as a duly Custodian Bank, and upon instruction of
PHILIPPINE UNDERWRITERS FINANCE CORPORATION, we have in our custody
the following securities to you [sic] the extent herein indicated.
******************************************************************************
**********************
SERIAL
NUMBE
R

MAT.
ATE

FACE
VALUE

ISSUED
BY

REGISTERED
HOLDER PAYEE

AMOUN
T

******************************************************************************
*********************
2731

2,300,833. DMC
34
4-681

PHIL.

307,933.33

UNDERWRITER
S
FINANCE CORP.

******************************************************************************
*********************
We further certify that these securities may be inspected by you or your duly
authorized representative at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the
above securities fully assigned to you should this Denominated
Custodianship Receipt remain outstanding in your favor thirty (30) days after
its maturity.'
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)"[1]
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private
respondent Pilipinas, Makati Branch, and handed to her a demand letter
informing the bank that his placement with Philfinance in the amount
reflected in the DCR No. 10805 had remained unpaid and outstanding, and
that he in effect was asking for the physical delivery of the underlying
promissory note. Petitioner then examined the original of the DMC PN No.
2731 and found: that the security had been issued on 10 April 1980; that it

would mature on 6 April 1981; that it had a face value of P2,300,833.33, with
Philfinance as "payee" and private respondent Delta Motors Corporation
("Delta") as "maker;" and that on face of the promissory note was stamped
"NON-NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of
participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August
1981,[2] again asking private respondent Pilipinas for physical delivery of the
original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's
demand letters to Philfinance for written instructions, as had been
supposedly agreed upon in a "Securities Custodianship Agreement" between
Pilipinas and Philfinance. Philfinance never did provide the appropriate
instructions; Pilipinas never released DMC PN No. 2731, nor any other
instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 1981[3] upon private
respondent Delta for the partial satisfaction of DMC PN No. 2731, explaining
that Philfinance, as payee thereof, had assigned to him said Note to the
extent of P307,933.33. Delta, however, denied any liability to petitioner on
the promissory note, and explained in turn that it had previously agreed with
Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730)
against Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint
management of the Securities and Exchange Commission ("SEC") and the
Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date
apparently remains in the custody of the SEC.[4]
As petitioner had failed to collect his investment and interest thereon, he
filed on 28 September 1982 an action for damages with the Regional Trial
Court ("RTC") of Cebu City, Branch 21, against private respondents Delta and
Pilipinas.[5] The trial court, in a decision dated 5 August 1987, dismissed the
complaint and counterclaims for lack of merit and for lack of cause of action,
with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No.
15195. In a Decision dated 21 March 1989, the Court of Appeals denied the
appeal and held:[6]
"Be that as it may, from the evidence on record, if there is anyone that
appears liable for the travails of plaintiff-appellant, it is Philfinance. As
correctly observed by the trial court:
'This act of Philfinance in accepting the investment of plaintiff and charging it
against DMC P.N. No. 2731 when its entire face value was already obligated

or earmarked for set-off or compensation is difficult to comprehend and may

have been motivated with bad faith. Philfinance, therefore, is solely and
legally obligated to return the investment of plaintiff, together with its
earnings, and to answer all the damages plaintiff has suffered incident
thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of
the defendants in this case at bar; hence, this Court is without jurisdiction to
pronounce judgment against it. (p. 11, Decision).'
WHEREFORE, finding no reversible error in the decision appealed from, the
same is hereby affirmed in toto. Cost against plaintiff-appellant."
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the
pleadings, the Court resolved to give due course to the petition and required
the parties to file their respective memoranda.[7]
Petitioner reiterates the assignment of errors he directed at the trial court
decision, and contends that respondent Court of Appeals gravely erred: (i) in
concluding that he cannot recover from private respondent Delta his
assigned portion of DMC PN No. 2731; (ii) in failing to hold private
respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the
provisions stipulated in DCR No. 10805 issued in favor of petitioner; and (iii)
in refusing to pierce the veil of corporate entity between Philfinance, and
private respondents Delta and Pilipinas, considering that the three (3)
entities belong to the "Silverio Group of Companies" under the leadership of
Mr. Ricardo Silverio, Sr.[8]
There are at least two (2) sets of relationships which we need to address:
firstly, the relationship of petitioner vis-a-vis Delta; secondly, the relationship
of petitioner in respect of Pilipinas. Actually, of course, there is a third
relationship that is of critical importance: the relationship of petitioner and
Philfinance. However, since Philfinance has not been impleaded in this case,
neither the trial court nor the Court of Appeals acquired jurisdiction over the
person of Philfinance. It is, consequently, not necessary for present purposes
to deal with this third relationship, except to the extent it necessarily
impinges upon or intersects the first and second relationships.
I
We consider first the relationship between petitioner and Delta.
The Court of Appeals in effect held that petitioner acquired no rights vis-a-vis
Delta in respect of the Delta promissory note (DMC PN No. 2731) which

Philfinance sold "without recourse" to petitioner, to the extent of

P304,533.33. The Court of Appeals said on this point:
"Nor could plaintiff-appellant have acquired any right over DMC P.N. No. 2731
as the same is 'non-negotiable' as stamped on its face (Exhibit '6'),
negotiation being defined as the transfer of an instrument from one person
to another so as to constitute the transferee the holder of the instrument
(Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on
the instrument in his own name and cannot demand or receive payment
(Section 51, id.)."[9]
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends
that that Note had been validly transferred, in part, to him by assignment
and that as a result of such transfer, Delta as debtor-maker of the Note, was
obligated to pay petitioner the portion of that Note assigned to him by the
payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise
transferred by Philfinance as manifested by the word "non-negotiable" stamp
across the face of the Note[10] and because maker Delta and payee
Philfinance intended that this Note would be offset against the outstanding
obligation of Philfinance represented by Philfinance PN No. 143-A issued to
Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was without
Delta's consent, if not against its instructions; and
(3) assuming (arguendo only) that the partial assignment in favor of
petitioner was valid, petitioner took that Note subject to the defenses
available to Delta, in particular, the offsetting of DMC PN No. 2731 against
Philfinance PN No. 143-A.[11]
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable
instrument must be distinguished from theassignment or transfer of an
instrument whether that be negotiable or non-negotiable. Only an instrument
qualifying as a negotiable instrument under the relevant statute may
be negotiated either by indorsement thereof coupled with delivery, or by
delivery alone where the negotiable instrument is in bearer form. A
negotiable instrument may, however, instead of being negotiated, also
be assigned or transferred. The legal consequences of negotiation as
distinguished from assignment of a negotiable instrument are, of course,
different. A non-negotiable instrument may, obviously, not be negotiated;

but it may be assigned or transferred, absent an express prohibition against

assignment or transfer written in the face of the instrument:
"The words 'not negotiable,' stamped on the face of the bill of lading, did not
destroy its assignability, but the sole effect was to exempt the bill from the
statutory provisions relative thereto, and a bill, though not negotiable, may
be transferred by assignment; the assignee taking subject to the equities
between the original parties."[12](Underscoring added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time
stamped "non-transferrable" or "non-assignable." It contained no stipulation
which prohibited Philfinance from assigning or transferring, in whole or in
part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with
Philfinance and which should be quoted in full:
"April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati
Metro Manila
Attention:

Mr. Alfredo O. Banaria

SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by
your Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6,
1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730
and 2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic]
against your PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice President"[13]

We find nothing in his "Letter of Agreement" which can be reasonably

construed as a prohibition upon Philfinance assigning or transferring all or
part of DMC PN No. 2731, before the maturity thereof. It is scarcely
necessary to add that, even had this "Letter of Agreement" set forth an
explicit prohibition of transfer upon Philfinance, such a prohibition cannot be
invoked against an assignee or transferee of the Note who parted with
valuable consideration in good faith and without notice of such prohibition. It
is not disputed that petitioner was such an assignee or transferee. Our
conclusion on this point is reinforced by the fact that what Philfinance and
Delta were doing by their exchange of promissory notes was this: Delta
invested, by making a money market placement with Philfinance,
approximately P4,600,000.00 on 10 April 1980; but promptly, on the same
day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by
issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No.
2731, both also dated 10 April 1980. Thus, Philfinance was left with not
P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta
promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC
PN No. 2731 had been effected without the consent of Delta, we note that
such consent was not necessary for the validity and enforceability of the
assignment in favor of petitioner.[14] Delta's argument that Philfinance's sale
or assignment of part of its rights to DMC PN No. 2731 constituted
conventional subrogation, which required its (Delta's) consent, is quite
mistaken. Conventional subrogation, which in the first place is never lightly
inferred,[15] must be clearly established by the unequivocal terms of the
subtituting obligation or by the evident incompatibility of the new and old
obligations on every point.[16] Nothing of the sort is present in the instant
case.
It is in fact difficult to be impressed with Delta's complaint, since it released
its DMC PN No. 2731 to Philfinance, an entity engaged in the business of
buying and selling debt instruments and other securities, and more
generally, in money market transactions. In Perez v. Court of Appeals,[17] the
Court, speaking through Mme. Justice Herrera, made the following important
statement:
"There is another aspect to this case. What is involved here is a money
market transaction. As defined by Lawrence Smith 'the money market is a
market dealing in standardized short-term credit instruments (involving large
amounts) where lenders and borrowers do not deal directly with each other
but through a middle man or dealer in the open market.' It involves
'commercial papers' which are instruments 'evidencing indebtedness of any
person or entity . . . which are issued, endorsed, sold or transferred or in any

manner conveyed to another person or entity, with or without recourse'. The

fundamental function of the money market device in its operation is to
match and bring together in a most impersonal manner both the 'fund users'
and the 'fund suppliers. The money market is an 'impersonal market', free
from personal considerations.' The market mechanism is intended to provide
quick mobility of money and securities.'
The impersonal character of the money market device overlooks the
individuals or entities concerned. The issuer of a commercial paper in the
money market necessarily knows in advance that it would be expeditiously
transacted and transferred to any investor/lender without need of notice to
said issuer. In practice, no notification is given to the borrower or issuer of
commercial paper of the sale or transfer to the investor.
xxx

xxx

xxx

There is need to individuate a money market transaction, a relatively novel

institution in the Philippine commercial scene. It has been intended to
facilitate the flow and acquisition of capital on an impersonal basis. And as
specifically required by Presidential Decree No. 678, the investing public
must be given adequate and effective protection in availing of the credit of a
borrower in the commercial paper market."[18] (Citations omitted;
underscoring supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting
between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to
note that at the time Philfinance sold part of its rights under DMC PN No.
2731 to petitioner on 9 February 1981, no compensation had as yet taken
place and indeed none could have taken place. The essential requirements of
compensation are listed in the Civil Code as follows:
"Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor."
(Underscoring supplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A
was due. This was explicitly recognized by Delta in its 10 April 1980 "Letter
of Agreement" with Philfinance, where Delta acknowledged that the relevant
promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from
forty-nine (49) days before the "co-terminal maturity" date, that is to say,
before any compensation had taken place. Further, the assignment to
petitioner would have prevented compensation from taking place between
Philfinance and Delta, to the extent of P304,533.33, because upon execution
of the assignment in favor of petitioner, Philfinance and Delta would have
ceased to be creditors and debtors of each other in their own right to the
extent of the amount assigned by Philfinance to petitioner. Thus, we
conclude that the assignment effected by Philfinance in favor of petitioner
was a valid one and that petitioner accordingly became owner of DMC PN No.
2731 to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the
assignment to him only on 14 July 1981,[19] that is, after the maturity not only
of the money market placement made by petitioner but also of both DMC PN
No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified
Delta of his rights as assignee after compensation had taken place by
operation of law because the offsetting instruments had both reached
maturity. It is a firmly settled doctrine that the rights of an assignee are not
any greater than the rights of the assignor, since the assignee is merely
subtituted in the place of the assignor[20] and that the assignee acquires his
rights subject to the equities -- i.e., the defenses -- which the debtor could
have set up against the original assignor before notice of the assignment
was given to the debtor. Article 1285 of the Civil Code provides that:
"ART. 1285. The debtor who has consented to the assignment of rights made
by a creditor in favor of a third person, cannot set up against the assignee
the compensation which would pertain to him against the assignor, unless
the assignor was notified by the debtor at the time he gave his consent, that
he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to
the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set
up the compensation of all credits prior to the same and also later ones until
he had knowledge of the assignment." (Underscoring supplied)

Article 1626 of the same Code states that: "the debtor who, before having
knowledge of the assignment, pays his creditor shall be released from the
obligation." In Sison v. Yap-Tico,[21] the Court explained that:
"[n]o man is bound to remain a debtor: he may pay to him with whom he
contracted to pay; and if he pay before notice that his debt has been
assigned, the law holds him exonerated, for the reason that it is the duty of
the person who has acquired a title by transfer to demand payment of the
debt, to give his debtor notice."[22]
At the time that Delta was first put to notice of the assignment in petitioner's
favor on 14 July 1981, DMC PN No. 2731 had already been discharged by
compensation. Since the assignor Philfinance could not have then compelled
payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of
Philfinance, is similarly disabled from collecting from Delta the portion of the
Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the
assignment in his favor as soon as that assignment or sale was effected on 9
February 1981. He could have also notified Delta as soon as his money
market placement matured on 13 March 1981 without payment thereof
being made by Philfinance; at that time, compensation had yet to set in and
discharge DMC PN No. 2731. Again, petitioner could have notified Delta on
26 March 1981 when petitioner received from Philfinance the Denominated
Custodianship Receipt ("DCR") No. 10805 issued by private respondent
Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at
any time before the maturity date of DMC PN No. 2731. Because petitioner
failed to do so, and because the record is bare of any indication that
Philfinance had itself notified Delta of the assignment to petitioner, the Court
is compelled to uphold the defense of compensation raised by private
respondent Delta. Of course, Philfinance remains liable to petitioner under
the terms of the assignment made by Philfinance to petitioner.
II
We turn now to the relationship between petitioner and private respondent
Pilipinas. Petitioner contends that Pilipinas became solidarily liable with
Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following
words:
"Upon your written instructions, we (Pilipinas) shall undertake physical
delivery of the above securities fully assigned to you ---."[23]
The Court is not persuaded. We find nothing in the DCR that establishes an
obligation on the part of Pilipinas to pay petitioner the amount of

P307,933.33 nor any assumption of liability in solidum with Philfinance and

Delta under DMC PN No. 2731. We read the DCR as a confirmation on the
part of Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No.
2731 of a certain face value, to mature on 6 April 1981 and payable to the
order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by Philfinance to
petitioner (9 February 1981), holding that Note on behalf and for the benefit
of petitioner, at least to the extent it had been assigned to petitioner by
payee Philfinance;[24]
(3) petitioner may inspect the Note either "personally or by authorized
representative", at any time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically deliver
the DMC PN No. 2731 (or a participation therein to the extent of
P307,933.33) "should this Denominated Custodianship Receipt remain
oustanding in [petitioner's] favor thirty (30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR which could
reasonably be read as converting Pilipinas into an obligor under the terms of
DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or at
any other time. We note that both in his complaint and in his testimony
before the trial court, petitioner referred merely to the obligation of private
respondent Pilipinas to effect physical delivery to him of DMC PN No. 2731.
[25]
Accordingly, petitioner's theory that Pilipinas had assumed a solidary
obligation to pay the amount represented by the portion of the Note
assigned to him by Philfinance, appears to be a new theory constructed only
after the trial court had ruled against him. The solidary liability that
petitioner seeks to impute to Pilipinas cannot, however, be lightly inferred.
Under Article 1207 of the Civil Code, "there is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity." The record here exhibits no express
assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas.
Petitioner has not pointed us to any law which imposed such liability upon
Pilipinas nor has petitioner argued that the very nature of the custodianship
assumed by private respondent Pilipinas necessarily implies solidary liability
under the securities, custody of which was taken by Pilipinas. Accordingly, we
are unable to hold Pilipinas solidarily liable with Philfinance and private
respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and
liability in respect of petitioner under the terms of the DCR. To the contrary,

we find, after prolonged analysis and deliberation, that private respondent

Pilipinas had breached its undertaking under the DCR to petitioner Sesbreno.
We believe and so hold that a contract of deposit was constituted by the act
of Philfinance in designating Pilipinas as custodian or depositary bank. The
depositor was initially Philfinance; the obligation of the depositary was owed,
however, to petitioner Sesbreno as beneficiary of the custodianship or
depositary agreement. We do not consider that this is a simple case of a
stipulation pour autri. The custodianship or depositary agreement was
established as an integral part of the money market transaction entered into
by petitioner with Philfinance. Petitioner bought a portion of DMC PN No.
2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in
order that the thing sold would be placed outside the control of the vendor.
Indeed, the constituting of the depositary or custodianship agreement was
equivalent to constructive delivery of the Note (to the extent it had been sold
or assigned to petitioner) to petitioner. It will be seen that custodianship
agreements are designed to facilitate transactions in the money market by
providing a basis for confidence on the part of the investors or placers that
the instruments bought by them are effectively taken out of the pocket, as it
were, of the vendors and placed safely beyond their reach, that those
instruments will be there available to the placers of funds should they have
need of them. The depositary in a contract of deposit is obliged to return the
security or the thing deposited upon demand of the depositor (or, in the
present case, of the beneficiary) of the contract, even though a term for such
return may have been established in the said contract.[26] Accordingly, any
stipulation in the contract of deposit or custodianship that runs counter to
the fundamental purpose of that agreement or which was not brought to the
notice of and accepted by the placer-beneficiary, cannot be enforced as
against such beneficiary-placer.
We believe that the position taken above is supported by considerations of
public policy. If there is any party that needs the equalizing protection of the
law in money market transactions, it is the members of the general public
who place their savings in such market for the purpose of generating interest
revenues.[27] The custodian bank, if it is not related either in terms of equity
ownership or management control to the borrower of the funds, or the
commercial paper dealer, is normally a preferred or traditional banker of
such borrower or dealer (here, Philfinance). The custodian bank would have
every incentive to protect the interest of its client the borrower or dealer as
against the placer of funds. The providers of such funds must be safeguarded
from the impact of stipulations privately made between the borrowers or
dealers and the custodian banks, and disclosed to fund-providers only after
trouble has erupted.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver

the security deposited with it when petitioner first demanded physical
delivery thereof on 2 April 1981. We must again note, in this connection, that
on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore,
compensation or offsetting against Philfinance PN No. 143-A had not yet
taken place. Instead of complying with the demand of petitioner, Pilipinas
purported to require and await the instructions of Philfinance, in obvious
contravention of its undertaking under the DCR to effect physical delivery of
the Note upon receipt of "written instructions" from petitioner Sesbreno. The
ostensible term written into the DCR (i.e., "should this [DCR] remain
outstanding in your favor thirty [30] days after its maturity") was not a
defense against petitioner's demand for physical surrender of the Note on at
least three grounds: firstly, such term was never brought to the attention of
petitioner Sesbreno at the time the money market placement with
Philfinance was made; secondly, such term runs counter to the very purpose
of the custodianship or depositary agreement as an integral part of a money
market transaction; and thirdly, it is inconsistent with the provisions of Article
1988 of the Civil Code noted above. Indeed, in principle, petitioner became
entitled to demand physical delivery of the Note held by Pilipinas as soon as
petitioner's money market placement matured on 13 March 1981 without
payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to
petitioner for damages sustained by him arising out of its breach of duty. By
failing to deliver the Note to the petitioner as depositor-beneficiary of the
thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the
Note deposited with it. Whether or not Pilipinas itself benefitted from such
conversion or unlawful deprivation inflicted upon petitioner, is of no moment
for present purposes. Prima facie, the damages suffered by petitioner
consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to
petitioner but lost by him by reason of discharge of the Note by
compensation, plus legal interest of six percent (6%) per annum counting
from 14 March 1981.
The conclusion we have here reached is, of course, without prejudice to such
right of reimbursement as Pilipinas may have vis-a-vis Philfinance.
III
The third principal contention of petitioner -- that Philfinance and private
respondents Delta and Pilipinas should be treated as one corporate entity --need not detain us for long.
In the first place, as already noted, jurisdiction over the person of Philfinance
was never acquired either by the trial court nor by the respondent Court of

appeals. Petitioner similarly did not seek to implead Philfinance in the

Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta
and Filipinas have been organized as separate corporate entities. Petitioner
asks us to pierce their separate corporate entities, but has been able only to
cite the presence of a common Director -- Mr. Ricardo Silverio, Sr., sitting on
the Boards of Directors of all three (3) companies. Petitioner has neither
alleged nor proved that one or another of the three (3) concededly related
companies used the other two (2) as mere alter egos or that the corporate
affairs of the other two (2) were administered and managed for the benefit of
one. There is simply not enough evidence of record to justify disregarding the
separate corporate personalities of Delta and Pilipinas and to hold them
liable for any assumed or undetermined liability of Philfinance to petitioner.
[28]

WHEREFORE, for all the foregoing, the Decision and Resolution of the Court
of Appeals in C.A.-G.R. CV No. 15195 dated 21 March 1989 and 17 July 1989,
respectively, are hereby MODIFIED and SET ASIDE, to the extent that such
Decision and Resolution had dismissed petitioner's complaint against
Pilipinas Bank. Private respondent Pilipinas Bank is hereby ORDERED to
indemnify petitioner for damages in the amount of P304,533.33, plus legal
interest thereon at the rate of six percent (6%) per annum counted from 2
April 1981. As so modified, the Decision and Resolution of the Court of
Appeals are hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
FIRST DIVISION
[ G.R. Nos. L-25836-37, January 31, 1981 ]
THE PHILIPPINE BANK OF COMMERCE, PLAINTIFF-APPELLEE, VS. JOSE M.
ARUEGO, DEFENDANT-APPELLANT.
DECISION
FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the
order of the Court of First Instance of Manila, Branch XIII, in Civil Case No.
42066 denying his motion to set aside the order declaring him in default,
[1]
and from the order of said court in the same case denying his motion to set
aside the judgment rendered after he was declared in default.[2] These two
appeals of the defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R.
NO. 27940-R, respectively.

Upon motion of the defendant on July 25, 1960,[3] he was allowed by the
Court of Appeals to file one consolidated record on appeal of CA-G.R. NO.
27734-R and CA-G.R. 27940-R.[4]
In a resolution promulgated on March 1, 1966, the Court of Appeals, First
Division, certified the consolidated appeal to the Supreme Court on the
ground that only questions of law are involved.[5]
On December 1, 1959, the Philippine Bank of Commerce instituted against
Jose M. Aruego Civil Case No. 42066 for the recovery of the total sum of
about P35,000.00 with daily interest thereon from November 17, 1959 until
fully paid and commission equivalent to 3/8% for every thirty (30) days or
fraction thereof plus attorney's fees equivalent to 10% of the total amount
due and costs.[6] The complaint filed by the Philippine Bank of Commerce
contains twenty-two (22) causes of action referring to twenty-two (22)
transactions entered into by the said Bank and Aruego on different dates
covering the period from August 28, 1950 to March 14, 1951.[7] The sum
sought to be recovered represents the cost of the printing of "World Current
Events," a periodical published by the defendant. To facilitate the payment of
the printing the defendant obtained a credit accommodation from the
plaintiff. Thus, for every printing of the "World Current Events," the printer,
Encal Press and Photo-Engraving, collected the cost of printing by drawing a
draft against the plaintiff, said draft being sent later to the defendant for
acceptance. As an added security for the payment of the amounts advanced
to Encal Press and Photo-Engraving, the plaintiff bank also required
defendant Aruego to execute a trust receipt in favor of said bank wherein
said defendant undertook to hold in trust for plaintiff the periodicals and to
sell the same with the promise to turn over to the plaintiff the proceeds of
the sale of said publication to answer for the payment of all obligations
arising from the draft.[8]
Aruego received a copy of the complaint together with the summons on
December 2, 1959.[9] On December 14, 1959 the defendant filed an urgent
motion for extension of time to plead, and set the hearing on December 16,
1959.[10] At the hearing, the court denied defendant's motion for extension.
Whereupon, the defendant filed a motion to dismiss the complaint on
December 17, 1959 on the ground that the complaint states no cause of
action because:

a) When the various bills of exchange were presented to the defendant as

drawee for acceptance, the amounts thereof had already been paid by the
plaintiff to the drawer (Encal Press and Photo Engraving), without knowledge
or consent of the defendant drawee.

b) In the case of a bill of exchange, like those involved in the case at bar, the
defendant drawee is an accommodating party only for the drawer (Encal
Press and Photo-Engraving) and will be liable in the event that the
accommodating party (drawer) fails to pay its obligation to the plaintiff.[11]
The complaint was dismissed in an order dated December 22, 1959, copy of
which was received by the defendant on December 24, 1959.[12]
On January 13, 1960, the plaintiff filed a motion for reconsideration. [13] On
March 7, 1960, acting upon the motion for reconsideration filed by the
plaintiff, the trial court set aside its order dismissing the complaint and set
the case for hearing on March 15, 1960 at 8:00 in the morning.[14] A copy of
the order setting aside the order of dismissal was received by the defendant
on March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit
of the deputy sheriff of Manila, Mamerto de la Cruz. On the following day,
March 12, 1960, the defendant filed a motion to postpone the trial of the
case on the ground that there having been no answer as yet, the issues had
not yet been joined.[15] On the same date, the defendant filed his answer to
the complaint interposing the following defenses: That he signed the
document upon which the plaintiff sues in his capacity as President of the
Philippine Education Foundation; that his liability is only secondary; and that
he believed that he was signing only as an accommodation party.[16]
On March 15, 1960, the plaintiff filed an ex parte motion to declare the
defendant in default on the ground that the defendant should have filed his
answer on March 11, 1960. He contends that by filing his answer on March
12, 1960, defendant was one day late.[17] On March 19, 1960 the trial court
declared the defendant in default.[18] The defendant learned of the order
declaring him in default on March 21, 1960. On March 22, 1960 the
defendant filed a motion to set aside the order of default alleging that
although the order of the court dated March 7, 1960 was received on March
11, 1960 at 5:00 in the afternoon, it could not have been reasonably
expected of the defendant to file his answer on the last day of the
reglementary period, March 11, 1960, within office hours, especially because
the order of the court dated March 7, 1960 was brought to the attention of
counsel only in the early hours of March 12, 1960. The defendant also
alleged that he has a good and substantial defense. Attached to the motion
are the affidavits of deputy sheriff Mamerto de la Cruz that he served the
order of the court dated March 7, 1960 on March 11, 1960, at 5:00 oclock in
the afternoon and the affidavit of the defendant Aruego that he has a good
and substantial defense.[19] The trial court denied the defendant's motion on
March 25, 1960.[20] On May 6, 1960, the trial court rendered judgment

sentencing the defendant to pay to the plaintiff the sum of P35,444.35

representing the total amount of his obligation to the said plaintiff under the
twenty-two (22) causes of action alleged in the complaint as of November
15, 1957 and the sum of P10,000.00 as attorney's fees.[21]
On May 9, 1960 the defendant filed a notice of appeal from the order dated
March 25, 1961 denying his motion to set aside the order declaring him in
default, an appeal bond in the amount of P60.00, and his record on appeal.
The plaintiff filed his opposition to the approval of defendant's record on
appeal on May 13, 1960. The following day, May 14, 1960, the lower court
dismissed defendant's appeal from the order dated March 25, 1960 denying
his motion to set aside the order of default.[22] On May 19, 1960, the
defendant filed a motion for reconsideration of the trial court's order
dismissing his appeal.[23] The plaintiff, on May 20, 1960, opposed the
defendant's motion for reconsideration of the order dismissing appeal.[24] On
May 21, 1960, the trial court reconsidered its previous order dismissing the
appeal and approved the defendant's record on appeal.[25] On May 30, 1960,
the defendant received a copy of a notice from the Clerk of Court dated May
26, 1960, informing the defendant that the record on appeal filed by the
defendant was forwarded to the Clerk of the Court of Appeals.[26]
On June 1, 1960 Aruego filed a Motion to set aside the judgment rendered
after he was declared in default reiterating the same ground previously
advanced by him in his motion for relief from the order of default.[27] Upon
opposition of the plaintiff filed on June 3, 1960,[28] the trial court denied the
defendant's motion to set aside the judgment by default in an order of June
11, 1960.[29] On June 20, 1960, the defendant filed his notice of appeal from
the order of the court denying his motion to set aside the judgment by
default, his appeal bond, and his record on appeal. The defendant's record on
appeal was approved by the trial court on June 25, 1960.[30] Thus, the
defendant had two appeals with the Court of Appeals: (1) Appeal from the
order of the lower court denying his motion to set aside the order of default
docketed as CA-G.R. NO. 27734-R; (2) Appeal form the order denying his
motion to set aside the judgment by default docketed as CA-G.R. NO. 27940R.
In his brief, the defendant-appellant assigned the following errors:

"I

THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN

DEFAULT.

"II

THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE

DEFENDANT IN DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON
FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN
APPROPRIATE ACTION.

"III

THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF

OF ORDER OF DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST
DEFENDANT."[31]
It has been held that to entitle a party to relief from a judgment taken
against him through his mistake, inadvertence, surprise or excusable
neglect, he must show to the court that he has a meritorious defense.[32] In
other words, in order to set aside the order of default, the defendant must
not only show that his failure to answer was due to fraud, accident, mistake
or excusable negligence but also that he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint together
with the summons on December 2, 1960; that on December 17, 1960, the
last day for filing his answer, Aruego filed a motion to dismiss; that on
December 22, 1960 the lower court dismissed the complaint; that on January
23, 1960, the plaintiff filed a motion for reconsideration and on March 7,
1960, acting upon the motion for reconsideration, the trial court issued an
order setting aside the order of dismissal; that a copy of the order was
received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon
as shown in the affidavit of the deputy sheriff; and that on the following day,
March 12, 1960, the defendant filed his answer to the complaint.
The failure then of the defendant to file his answer on the last day for
pleading is excusable. The order setting aside the dismissal of the complaint
was received at 5:00 o'clock in the afternoon. It was therefore impossible for
him to have filed his answer on that same day because the courts then held

office only p to 5:00 o'clock in the afternoon. Moreover, the defendant

immediately filed his answer on the following day.
However, while the defendant successfully proved that his failure to answer
was due to excusable negligence, he has failed to show that he has a
meritorious defense.
The defendant does not have a good and substantial defense. Defendant
Aruego's defenses consist of the following:

a) The defendant signed the bills of exchange referred to in the plaintiff's

complaint in a representative capacity, as the then President of the
Philippine Education Foundation Company, publisher of "World Current
Events and Decision Law Journal," printed by Encal Press and PhotoEngraving, drawer of the said bills of exchange in favor of the plaintiff bank;

b) The defendant signed these bills of exchange not as principal obligor, but
as accommodation or additional party obligor, to add to the security of said
plaintiff bank. The reason for this statement is that unlike real bills of
exchange, where payment of the face value is advanced to the drawer only
upon acceptance of the same by the drawee, in the case in question,
payment for the supposed bills of exchange were made before acceptance;
so that in effect, although these documents are labelled bills of exchange,
legally they are not bills of exchange but mere instruments evidencing
indebtedness of the drawee who received the face value thereof, with the
defendant as only additional security of the same.[33]
The first defense of the defendant is that he signed the supposed bills of
exchange as an agent of the Philippine Education Foundation Company
where he is president. Section 20 of the Negotiable Instruments Law provides
that "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."
An inspection of the drafts accepted by the defendant shows that nowhere
has he disclosed that he was signing as a representative of the Philippine
Education Foundation Company.[34] He merely signed as follows: "JOSE

ARUEGO (Acceptor) (SGD) JOSE ARUEGO." For failure to disclose his principal,
Aruego is personally liable for the drafts he accepted.
The defendant also contends that he signed the drafts only as an
accommodation party and as such, should be made liable only after a
showing that the drawer is incapable of paying. This contention is also
without merit.
An accommodation party is one who has signed the instrument as maker,
drawer, acceptor, indorser, without receiving value therefor and for the
purpose of lending his name to some other person. Such person is liable on
the instrument to a holder for value, notwithstanding such holder, at the
time of the taking of the instrument knew him to be only an accommodation
party.[35] In lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter. He lends his name to
enable the accommodated party to obtain credit or to raise money. He
receives no part of the consideration for the instrument but assumes liability
to the other parties thereto because he wants to accommodate another. In
the instant case, the defendant signed as a drawee/acceptor. Under the
Negotiable Instruments Law, a drawee is primarily liable. Thus, if the
defendant who is a lawyer, really intended to be secondarily liable only, he
should not have signed as an acceptor/drawee. In doing so, he became
primarily and personally liable for the drafts.
The defendant also contends that the drafts signed by him were not really
bills of exchange but mere pieces of evidence of indebtedness because
payments were made before acceptance. This is also without merit. Under
the Negotiable Instruments Law, 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.[36] As long as a commercial paper conforms with the definition of a
bill of exchange, that paper is considered a bill of exchange. The nature of
acceptance is important only in the determination of the kind of liabilities of
the parties involved, but not in the determination of whether a commercial
paper is a bill of exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the
defendant's prayer will result in a new trial which will serve no purpose and
will just waste the time of the courts as well as of the parties because the
defense is nil or ineffective.[37]
WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court
of First Instance of Manila denying the petition for relief from the judgment
rendered in said case is hereby affirmed, without pronouncement as to costs.

SO ORDERED.
SECOND DIVISION
[ G.R. No. 97753, August 10, 1992 ]
CALTEX (PHILIPPINES), INC., PETITIONER, VS. COURT OF APPEALS AND
SECURITY BANK AND TRUST COMPANY, RESPONDENTS.
DECISION
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the
decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV
No. 23615[1] affirming, with modifications, the earlier decision of the Regional
Trial Court of Manila, Branch XLII,[2] which dismissed the complaint filed
therein by herein petitioner against private respondent bank.
The undisputed background of this case, as found by the court a quo and
adopted by respondent court, appears of record:
"1. On various dates, defendant, a commercial banking institution, through
its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one
Angel dela Cruz who deposited with herein defendant the aggregate amount
of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement
of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280):
CTD

CTD

Dates

Serial Nos.

Quantity

Amount

22 Feb. 82

90101 to
90120

20

P 80,000

90

360,000

40

160,000

20

80,000

16,000

90127 to
90146

22

88,000

74797 to
94800

16,000

20

80,000

28

112,000

10

40,000

22

88,000

26 Feb. 82
2 Mar. 82
4 Mar. 82
5 Mar. 82
5 Mar. 82
5 Mar. 82
8 Mar. 82
9 Mar. 82
9 Mar. 82
9 Mar. 82

74602 to
74691
74701 to
74740

89965 to
89986
70147 to

90150

280

P 1,120,000

90001 to
90020
90023 to
90050
89991 to
90000
90251 to
90272
Total
"2. Angel dela Cruz delivered the said certificates of time deposit (CTDs) to
herein plaintiff in connection with his purchase of fuel products from the
latter (Original Record, p. 208).
"3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco,
the Sucat Branch Manager, that he lost all the certificates of time deposit in
dispute. Mr. Tiangco advised said depositor to execute and submit a
notarized Affidavit of Loss, as required by defendant bank's procedure, if he
desired replacement of said lost CTDs (TSN, February 9, 1987, pp, 48-50).
"4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant
bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of
said affidavit of loss, 280 replacement CTDs were issued in favor of said
depositor (Defendant's Exhibits 282-561).
"5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from
defendant bank in the amount of Eight Hundred Seventy Five Thousand
Pesos (P875,000.00). On the same date, said depositor executed a notarized
Deed of Assignment of Time Deposit (Exhibit 562) which stated, among
others, that he (dela Cruz) surrenders to defendant bank full control of the
indicated time deposits from and after date of the assignment and further
authorizes said bank to pre-terminate, set-off and apply the said time
deposits to the payment of whatever amount or amounts may be due' on the
loan upon its maturity (TSN, February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff
Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and presented
for verification the CTDs declared lost by Angel dela Cruz alleging that the
same were delivered to herein plaintiff as security for purchases made with
Caltex Philippines, Inc. by said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit
563) from herein plaintiff formally informing it of its possession of the CTDs
in question and of its decision to pre-terminate the same.

"8. On December 8, 1982, plaintiff was requested by herein defendant to

furnish the former a copy of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz as well as the details of Mr. Angel dela
Cruz' obligations against which' plaintiff proposed to apply the time deposits
(Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim
for payment of the value of the CTDs in a letter dated February 7, 1983
(Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank
matured and fell due and on August 5, 1983, the latter set-off and applied
the time deposits in question to the payment of the matured loan (TSN,
February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying
that defendant bank be ordered to pay it the aggregate value of the
certificates of time deposit of P1,120,000.00 plus accrued interest and
compounded interest therein at 16% per annum, moral and exemplary
damages as well as attorney's fees.
"After trial, the court a quo rendered its decision dismissing the instant
complaint."[3]
On appeal, as earlier stated, respondent court affirmed the lower court's
dismissal of the complaint, hence this petition wherein petitioner faults
respondent court in ruling (1) that the subject certificates of deposit are nonnegotiable despite being clearly negotiable instruments; (2) that petitioner
did not become a holder in due course of the said certificates of deposit; and
(3) in disregarding the pertinent provisions of the Code of Commerce relating
to lost instruments payable to bearer.[4]
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to
provide a better understanding of the issues involved in this recourse.
"SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati
Metro Manila, Philippines

No. 90101

SUCAT
OFFICE
4,000.00

CERTIFICATE OF DEPOSIT
Rate1
6%
Date of Maturity FEB 23 1984

FEB 22 1982,19__

This is to Certify that _________B E A R E R __________ has deposited in this

Bank
SECURITY BANK
the sum of PESOS: FOUR THOUSAND ONLY. SUCAT OFFICE P4,000 & 00
CTS Pesos,
Philippine Currency, repayable to said depositor __731 das.__ after date,
upon presentation
and surrender of this certificate, with interest at the rate of __16%___ per
cent per annum.
___________(Sgd. Illigible____________

_________(Sgd. Illigible)_______

AUTHORIZED SIGNATURES"[5]
Respondent court ruled that the CTDs in question are non-negotiable
instruments, rationalizing as follows:
"x x x While it may be true that the word bearer appears rather boldly in
the CTDs issued, it is important to note that after the word BEARER
stamped on the space provided supposedly for the name of the depositor,
the words has deposited' a certain amount follows. The document further
provides that the amount deposited shall be repayable to said depositor on
the period indicated. Therefore, the text of the instrument(s) themselves
manifest with clarity that they are payable, not to whoever purports to be
the bearer but only to the specified person indicated therein, the depositor.
In effect, the appellee bank acknowledges its depositor Angel dela Cruz as
the person who made the deposit and further engages itself to pay said
depositor the amount indicated thereon at the stipulated date."[6]
We disagree with these findings and conclusions, and hereby hold that the
CTDs in question are negotiable instruments. Section 1 of Act No. 2031,
otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:

"(a)

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

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

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

(d)

Must be payable to order or to bearer; and

(e)
Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty."
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties bone of contention is with regard to requisite (d)
set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's
Branch Manager way back in 1982, testified in open court that the depositor
referred to in the CTDs is no other than Mr. Angel de la Cruz.
xxx
"Atty. Calida:
q
In other words Mr. Witness, you are saying that per books of the bank,
the depositor referred (sic) in these certificates states that it was Angel dela
Cruz?
witness:
a
Yes, your Honor, and we have the record to show that Angel dela Cruz
was the one who cause (sic) the amount.
Atty. Calida:
q

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

witness:
a

None, your Honor."[7]

xxx

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

Angel dela Cruz is the depositor."[8]

xxx

On this score, the accepted rule is that the negotiability or non-negotiability

of an instrument is determined from the writing, that is, from the face of the
instrument itself.[9] In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained.[10] While the writing may
be read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its stead. The
duty of the court in such case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what their words express, but
what is the meaning of the words they have used. What the parties meant
must be determined by what they said.[11]
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall be
repayable to the depositor. And who, according to the document, is the
depositor? It is the "bearer." The documents do not say that the depositor is
Angel de la Cruz and that the amounts deposited are repayable specifically
to him. Rather, the amounts are to be repayable to the bearer of the
documents or, for that matter, whosoever may be the bearer at the time of
presentment.
If it was really the intention of respondent bank to pay the amount to Angel
de la Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word "BEARER"
stamped on the space provided for the name of the depositor in each CTD.
On the wordings of the documents, therefore, the amounts deposited are
repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid
witness merely declared that Angel de la Cruz is the depositor "insofar as the
bank is concerned," but obviously other parties not privy to the transaction
between them would not be in a position to know that the depositor is not
the bearer stated in the CTDs. Hence, the situation would require any party
dealing with the CTDs to go behind the plain import of what is written
thereon to unravel the agreement of the parties thereto through
facts aliunde. This need for resort to extrinsic evidence is what is sought to
be avoided by the Negotiable Instruments Law and calls for the application of
the elementary rule that the interpretation of obscure words or Stipulations
in a contract shall not favor the party who caused the obscurity.[12]
The next query is whether petitioner can rightfully recover on the CTDs. This
time, the answer is in the negative. The records reveal that Angel de la Cruz,
whom petitioner chose not to implead in this suit for reasons of its own,
delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for petitioner,

although the CTDs are bearer instruments, a valid negotiation thereof for the
true purpose and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For, although petitioner
seeks to deflect this fact, the CTDs were in reality delivered to it as a security
for De la Cruz purchases of its fuel products. Any doubt as to whether the
CTDs were delivered as payment for the fuel products or as a security has
been dissipated and resolved in favor of the latter by petitioner's own
authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank,
J. Q. Aranas, Jr., Caltex Credit Manager, wrote: "x x x These certificates of
deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his
purchases of fuel products" (Underscoring ours.)[13] This admission is
conclusive upon petitioner, its protestations notwithstanding. Under the
doctrine of estoppel, an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as against the
person relying thereon.[14] A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them.
[15]
In the law of evidence, whenever a party has, by his own declaration, act,
or omission, intentionally and deliberately led another to believe a particular
thing true, and to act upon such belief, he cannot, in any litigation arising out
of such declaration, act, or omission, be permitted to falsify it.[16]
If it were true that the CTDs were delivered as payment and not as security,
petitioner's, credit manager could have easily said so, instead of using the
words "to guarantee" in the letter aforequoted. Besides, when respondent
bank, as defendant in the court below, moved for a bill of particulars
therein[17] praying, among others, that petitioner, as plaintiff, be required to
aver with sufficient definiteness or particularity (a) the due date or dates
of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and
(b) whether or not it issued a receipt showing that the CTDs were delivered
to it by De la Cruz as payment of the latter's alleged indebtedness to it,
plaintiff corporation opposed the motion.[18] Had it produced the receipt
prayed for, it could have proved, if such truly was the fact, that the CTDs
were delivered as payment and not as security. Having opposed the motion,
petitioner now labors under the presumption that evidence willfully
suppressed would be adverse if produced.[19]
Under the foregoing circumstances, this disquisition in Integrated Realty
Corporation, et al. vs. Philippine National Bank, et al.[20] is apropos:
"x x x Adverting again to the Court's pronouncements in Lopez, supra, we
quote therefrom:

The character of the transaction between the parties is to be determined by

their intention, regardless of what language was used or what the form of the
transfer was. If it was intended to secure the payment of money, it must be
construed as a pledge; but if there was some other intention, it is not a
pledge. However, even though a transfer, if regarded by itself, appears to
have been absolute, its object and character might still be qualified and
explained by contemporaneous writing declaring it to have been a deposit of
the property as collateral security. It has been said that a transfer of property
by the debtor to a creditor, even if sufficient on its face to make an absolute
conveyance, should be treated as a pledge if the debt continues in existence
and is not discharged by the transfer, and that accordingly the use of the
terms ordinarily importing conveyance of absolute ownership will not be
given that effect in such a transaction if they are also commonly used in
pledges and mortgages and therefore do not unqualifiedly indicate a transfer
of absolute ownership, in the absence of clear and unambiguous language or
other circumstances excluding an intent to pledge."
Petitioner's insistence that the CTDs were negotiated to it begs the question.
Under the Negotiable Instruments Law, an instrument is negotiated when it
is transferred from one person to another in such a manner as to constitute
the transferee the holder thereof,[21] and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof.
[22]
In the present case, however, there was no negotiation in the sense of a
transfer of the legal title to the CTDs in favor of petitioner in which situation,
for obvious reasons, mere delivery of the bearer CTDs would have sufficed.
Here, the delivery thereof only as security for the purchases of Angel de la
Cruz (and we even disregard the fact that the amount involved was not
disclosed) could at the most constitute petitioner only as a holder for value
by reason of his lien. Accordingly, a negotiation for such purpose cannot be
effected by mere delivery of the instrument since, necessarily, the terms
thereof and the subsequent disposition of such security, in the event of nonpayment of the principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien.[23] As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights,[24] which inceptively
provide:
"Art. 2095. Incorporeal rights, evidenced by negotiable instruments, x x x
may also be pledged. The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be indorsed."

"Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not appear in
a public instrument."
Aside from the fact that the CTDs were only delivered but not indorsed, the
factual findings of respondent court quoted at the start of this opinion show
that petitioner failed to produce any document evidencing any contract of
pledge or guarantee agreement between it and Angel de la Cruz.
[25]
Consequently, the mere delivery of the CTDs did not legally vest in
petitioner any right effective against and binding upon respondent bank. The
requirement under Article 2096 aforementioned is not a mere rule of
adjective law prescribing the mode whereby proof may be made of the date
of a pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third persons
adversely.[26]
On the other hand, the assignment of the CTDs made by Angel de la Cruz in
favor of respondent bank was embodied in a public instrument. [27] With
regard to this other mode of transfer, the Civil Code specifically declares:
"Art. 1625. An assignment of credit, right or action shall produce no effect as
against third persons, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case the assignment
involves real property."
Respondent bank duly complied with this statutory requirement Contrarily,
petitioner, whether as purchaser, assignee or lienholder of the CTDs, neither
proved the amount of its credit or the extent of its lien nor the execution of
any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter
has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the
question of whether or not private respondent observed the requirements of
the law in the case of lost negotiable instruments and the issuance of
replacement certificates therefor, on the ground that petitioner failed to raise
that issue in the lower court.[28]
On this matter, we uphold respondent court's finding that the aspect of
alleged negligence of private respondent was not included in the stipulation
of the parties and in the statement of issues submitted by them to the trial
court.[29] The issues agreed upon by them for resolution in this case are:
"1.

Whether or not the CTDs as worded are negotiable instruments.

2.
Whether or not defendant could legally apply the amount covered by
the CTDs against the depositor's loan by virtue of the assignment (Annex
'C').
3.
Whether or not there was legal compensation or set off involving the
amount covered by the CTDs and the depositor's outstanding account with
defendant, if any.
4.
Whether or not plaintiff could compel defendant to preterminate the
CTDs before the maturity date provided therein.
5.

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

6.
Whether or not the parties can recover damages, attorney's fees and
litigation expenses from each other."
As respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the issue of
negligence on the part of respondent bank. An issue raised for the first time
on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel.[30] Questions raised on appeal must be within the issues
framed by the parties and, consequently, issues not raised in the trial court
cannot be raised for the first time on appeal.[31]
Pre-trial is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all issues
of law and fact which they intend to raise at the trial, except such as may
involve privileged or impeaching matters. The determination of issues at a
pre-trial conference bars the consideration of other questions on appeal. [32]
To accept petitioner's suggestion that respondent bank's supposed
negligence may be considered encompassed by the issues on its right to
preterminate and receive the proceeds of the CTDs would be tantamount to
saying that petitioner could raise on appeal any issue. We agree with private
respondent that the broad ultimate issue of petitioner's entitlement to the
proceeds of the questioned certificates can be premised on a multitude of
other legal reasons and causes of action, of which respondent bank's
supposed negligence is only one. Hence, petitioner's submission, if accepted,
would render a pre-trial delimitation of issues a useless exercise.[33]
Still, even assuming arguendo that said issue of negligence was raised in the
court below, petitioner still cannot have the odds in its favor. A close scrutiny
of the provisions of the Code of Commerce laying down the rules to be
followed in case of lost instruments payable to bearer, which it invokes, will
reveal that said provisions, even assuming their applicability to the CTDs in

the case at bar, are merely permissive and not mandatory. The very first
article cited by petitioner speaks for itself:
"Art. 548. The dispossessed owner, no matter for what cause it may
be, may apply to the judge or court of competent jurisdiction, asking that the
principal, interest or dividends due or about to become due, be not paid a
third person, as well as in order to prevent the ownership of the instrument
that a duplicate be issued him." (Emphases ours.)
xxx
The use of the word "may" in said provision shows that it is not mandatory
but discretionary on the part of the "dispossessed owner" to apply to the
judge or court of competent jurisdiction for the issuance of a duplicate of the
lost instrument. Where the provision reads "may," this word shows that it is
not mandatory but discretional.[34] The word "may" is usually permissive, not
mandatory.[35] It is an auxiliary verb indicating liberty, opportunity,
permission and possibility.[36]
Moreover, as correctly analyzed by private respondent,[37] Articles 548 to 558
of the Code of Commerce, on which petitioner seeks to anchor respondent
bank's supposed negligence, merely established, on the one hand, a right of
recourse in favor of a dispossessed owner or holder of a bearer instrument so
that he may obtain a duplicate of the same, and, on the other, an option in
favor of the party liable thereon who, for some valid ground, may elect to
refuse to issue a replacement of the instrument. Significantly, none of the
provisions cited by petitioner categorically restricts or prohibits the issuance
a duplicate or replacement instrument sans compliance with the procedure
outlined therein, and none establishes a mandatory precedent requirement
therefor.
WHEREFORE, on the modified premises above set forth, the petition
is DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.

[ G. R. No, L-16968, July 31, 1962 ]

PHILIPPINE NATIONAL BANK, PLAINTIFF AND APPELLEE VS. CONCEPCION
MINING COMPANY, INC., ET AL., DEFENDANT AND APPELLANTS.
DECISION
LABRADOR, J.:

Appeal from a judgment or decision of the Court of First Instance of Manila,

Hon. Gustavo Victoriano, presiding, sentencing defendants Concepcion
Mining Company and Jose Sarte to pay jointly and severally to the plaintiff
the amount of P7,197.26 with interest up to September 29, 1959, plus a daily
interest of P1.3698 thereafter up to the time the amount is fully paid, plus
10% of the Amount as attorney's fees, and costs of this suit.
The present action was instituted by the plaintiff to recover from the
defendants the face of a promissory note the pertinent part of which reads
as follows:
"Manila, March 12, 1954
"NINETY DAYS after date, for value received, I promise to pay to the order of
the Philippine National Bank * * *.
"In case it is necessary to collect this note by or through an attorney-at-law,
the makers and indorsere shall pay ten per cent (10%) of the amount due on
the note as attorney's fees, which in no case shall be less than P100.00
exclusive of all costs: and fees allowed by law as stipulated in the contract of
real estate mortgage. Demand and Dishonor Waived, Holder may accept
partial payment reserving his right of recourse against each and all
endorsers,
(Purposemining industry)
CONCEPCION MINING COMPANY, INC.,

By:

(Sgd.) VICENTE LEGARDA

President

(Sgd.) VICENTE LEGARDA

(Sgd.) JOSE S. SARTE

"Please issue check to

Mr. Jose S. Sarte"

Upon the filing of the complaint the defendants presented their answer in
which they allege that the co-maker of the promissory note Don Vicente L.
Legarda, died on February 24, 1946 and his estate is in the process of judicial
determination in Special Proceedings No. 29060 of the Court of First Instance
of Manila. On the basis of this allegation it is prayed, as a special defense,
that the estate of said deceased Vicente L. Legarda be included as partydefendant. The court in its decision ruled that the inclusion of said defendant
is unnecessary and immaterial, in accordance with the provisions of Article
1216 of the new Civil Code and section 17 (g) of the Negotiable Instruments
Law.
A motion to reconsider this decision was denied and thereupon defendants
presented a petition for relief, asking that the effects of the judgment be
suspended for the reason that the deceased Vicente L. Legarda should have
been included as a party-defendant and his liability should be determined in
pursuance of the provisions of the promissory note. This motion for relief was
also denied, hence defendant appealed to this Court.
Section "17 (g) of the Negotiable Instruments Law provides as follows:
*******
"SEC. 17. Construction where instrument is ambiguous.Where the language
of the instrument is ambiguous or there are omission therein, the following
rules of construction apply:
*******
"(g) 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." And Article 1216 of the Civil Code of the Philippines also provides
as follows:
"ART. 1216. The creditor may proceed against any one of the solidary debtors
or some of them simultaneously. The demand made against one of them
shall not be an obstacle to those which may subsequently be directed
against the others, so long as the debt has not been fully collected."
In view of the above quoted provisions, and as the promissory note was
executed jointly and severally by the same parties, namely, Concepcion
Mining Company, Inc. and Vicente L. Legarda and Jose S. Sarte, the payee of
the promissory note had the right to hold any one or any two of the signers
of the promissory note responsible for the payment of the amount of the
note. This judgment of the lower court should be affirmed.

Our attention has been attracted to the discrepancies in the printed record
on appeal. We note, first, that the names of the defendants, who are
evidently the Concepcion Mining Co., Inc. and Jose S. Sarte, do not appear in
the printed record on appeal. The title of the complaint set forth in the record
on appeal does not contain the name of Jose Sarte, when it should, as two
defendants are named in the complaint and the only defense of the
defendants is the non-inclusion of the deceased Vicente L. Legarda as a
defendant in the action. We also note that the copy of the promissory note
which is set forth in the record on appeal does not contain, the name of the
third maker Jose S. Sarte Fortunately, the brief of appellee on page 4 sets
forth said name of Jose S. Sarte as one of the co-makers of the promissory
note. Evidently, there is an attempt to mislead the court into believing that
Jose S. Sarte is not one of the co-makers. The attorney for the defendants is
Atty. Jose S. Sarte himself and he should be held primarily responsible for the
correctness of the record on appeal We, therefore, order the said Atty. Jose S.
Sarte to explain why in his record on appeal his own name as one of the
defendants does not appear and neither does his name appear as one of the
co-signers of the promissory note in question. So ordered.
Bengzon, C. J., Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon,
Regala, and Makalintal, JJ.,concur.
FIRST DIVISION
[ G.R. No. 111190, June 27, 1995 ]
LORETO D. DE LA VICTORIA, AS CITY FISCAL OF MANDAUE CITY AND IN HIS
PERSONAL CAPACITY AS GARNISHEE, PETITIONER, VS. HON. JOSE P. BURGOS,
PRESIDING JUDGE, RTC, BR. XVII, CEBU CITY, AND RAUL H. SESBREO,
RESPONDENTS.
DECISION
BELLOSILLO, J.:
RAUL H. SESBREO filed a complaint for damages against Assistant City
Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr., before the Regional
Trial Court of Cebu City. After trial judgment was rendered ordering the
defendants to pay P11,000.00 to the plaintiff, private respondent herein. The
decision having become final and executory, on motion of the latter, the trial
court ordered its execution. This order was questioned by the defendants
before the Court of Appeals. However, on 15 January 1992 a writ of
execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner Loreto
D. de la Victoria as City Fiscal of Mandaue City where defendant Mabanto, Jr.,

was then detailed. The notice directed petitioner not to disburse, transfer,
release or convey to any other person except to the deputy sheriff concerned
the salary checks or other checks, monies, or cash due or belonging to
Mabanto, Jr., under penalty of law.[1] On 10 March 1992 private respondent
filed a motion before the trial court for examination of the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was
dismissed. Thus the trial court, finding no more legal obstacle to act on the
motion for examination of the garnishees, directed petitioner on 4 November
1992 to submit his report showing the amount of the garnished salaries of
Mabanto, Jr., within fifteen (15) days from receipt[2] taking into consideration
the provisions of Sec. 12, pars. (f) and (i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require petitioner
to explain why he should not be cited in contempt of court for failing to
comply with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the notice
of garnishment claiming that he was not in possession of any money, funds,
credit, property or anything of value belonging to Mabanto, Jr., except his
salary and RATA checks, but that said checks were not yet properties of
Mabanto, Jr., until delivered to him. He further claimed that, as such, they
were still public funds which could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered petitioner
to immediately comply with its order of 4 November 1992.[3] It opined that
the checks of Mabanto, Jr., had already been released through petitioner by
the Department of Justice duly signed by the officer concerned. Upon service
of the writ of garnishment, petitioner as custodian of the checks was under
obligation to hold them for the judgment creditor. Petitioner became a virtual
party to, or a forced intervenor in, the case and the trial court thereby
acquired jurisdiction to bind him to its orders and processes with a view to
the complete satisfaction of the judgment. Additionally, there was no
sufficient reason for petitioner to hold the checks because they were no
longer government funds and presumably delivered to the payee,
conformably with the last sentence of Sec. 16 of the Negotiable Instruments
Law.
With regard to the contempt charge, the trial court was not morally
convinced of petitioner's guilt. For, while his explanation suffered from
procedural infirmities nevertheless he took pains in enlightening the court by
sending a written explanation dated 22 July 1992 requesting for the lifting of
the notice of garnishment on the ground that the notice should have been
sent to the Finance Officer of the Department of Justice. Petitioner insists that

he had no authority to segregate a portion of the salary of Mabanto, Jr.. The

explanation however was not submitted to the trial court for action since the
stenographic reporter failed to attach it to the record.[4]
On 20 April 1993 the motion for reconsideration was denied. The trial court
explained that it was not the duty of the garnishee to inquire or judge for
himself whether the issuance of the order of execution, writ of execution and
notice of garnishment was justified. His only duty was to turn over the
garnished checks to the trial court which issued the order of execution.[5]
Petitioner raises the following relevant issues: (1) whether a check still in the
hands of the maker or its duly authorized representative is owned by the
payee before physical delivery to the latter; and, (2) whether the salary
check of a government official or employee funded with public funds can be
subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned by
Mabanto, Jr., because they were not yet delivered to him, and that petitioner
as garnishee has no legal obligation to hold and deliver them to the trial
court to be applied to Mabanto, Jr.'s judgment debt. The thesis of petitioner
is that the salary checks still formed part of public funds and therefore
beyond the reach of garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching credits
belonging to the judgment debtor owing to him from a stranger to the
litigation.[6] Emphasis is laid on the phrase "belonging to the judgment
debtor" since it is the focal point in resolving the issues raised.
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public
funds. He receives his compensation in the form of checks from the
Department of Justice through petitioner as City Fiscal of Mandaue City and
head of office. Under Sec. 16 of the Negotiable Instruments Law, every
contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto. As
ordinarily understood, delivery means the transfer of the possession of the
instrument by the maker or drawer with intent to transfer title to the payee
and recognize him as the holder thereof.[7]
According to the trial court, the checks of Mabanto, Jr., were already released
by the Department of Justice duly signed by the officer concerned through
petitioner and upon service of the writ of garnishment by the sheriff
petitioner was under obligation to hold them for the judgment creditor. It

recognized the role of petitioner as custodian of the checks. At the same

time however it considered the checks as no longer government funds and
presumed delivered to the payee based on the last sentence of Sec. 16 of
the Negotiable Instruments Law which states: "And where the instrument is
no longer in the possession of a party whose signature appears thereon, a
valid and intentional delivery by him is presumed." Yet, the presumption is
not conclusive because the last portion of the provision says "until the
contrary is proved." However this phrase was deleted by the trial court for no
apparent reason. Proof to the contrary is its own finding that the checks
were in the custody of petitioner. Inasmuch as said checks had not yet been
delivered to Mabanto, Jr., they did not belong to him and still had the
character of public funds. In Tiro v. Hontanosas[8] we ruled that The salary check of a government officer or employee such as a teacher
does not belong to him before it is physically delivered to him. Until that
time the check belongs to the government. Accordingly, before there is
actual delivery of the check, the payee has no power over it; he cannot
assign it without the consent of the Government.
As a necessary consequence of being public fund, the checks may not be
garnished to satisfy the judgment.[9] The rationale behind this doctrine is
obvious consideration of public policy. The Court succinctly stated
inCommissioner of Public Highways v. San Diego[10] that The functions and public services rendered by the State cannot be allowed to
be paralyzed or disrupted by the diversion of public funds from their
legitimate and specific objects, as appropriated by law.
In denying petitioner's motion for reconsideration, the trial court expressed
the additional ratiocination that it was not the duty of the garnishee to
inquire or judge for himself whether the issuance of the order of execution,
the writ of execution, and the notice of garnishment was justified, citing our
ruling in Philippine Commercial Industrial Bank v. Court of Appeals.[11] Our
precise ruling in that case was that "[I]t is not incumbent upon the garnishee
to inquire or to judge for itself whether or not the order for the advance
execution of a judgment is valid." But that is invoking only the general rule.
We have also established therein the compelling reasons, as exceptions
thereto, which were not taken into account by the trial court, e.g., a defect
on the face of the writ or actual knowledge by the garnishee of lack of
entitlement on the part of the garnisher. It is worth to note that the ruling
referred to the validity of advance execution of judgments, but a careful
scrutiny of that case and similar cases reveals that it was applicable to a
notice of garnishment as well. In the case at bench, it was incumbent upon
petitioner to inquire into the validity of the notice of garnishment as he had

actual knowledge of the non-entitlement of private respondent to the checks

in question. Consequently, we find no difficulty concluding that the trial court
exceeded its jurisdiction in issuing the notice of garnishment concerning the
salary checks of Mabanto, Jr., in the possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20
April 1993 of the Regional Trial Court of Cebu City, Br. 17, subject of the
petition are SET ASIDE. The notice of garnishment served on petitioner
dated 3 February 1992 is ordered DISCHARGED.
SO ORDERED.