G.R. No. 97753 August 10, 1992
82 90101 to 90120 20 P80,000
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofileña & Guingona for private.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the
reversal of the decision promulgated by respondent court on
March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with
modifications, the earlier decision of the Regional Trial Court of
Manila, Branch XLII, 2 which dismissed the complaint filed
therein by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a
quo and adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial
banking institution, through its Sucat Branch
issued 280 certificates of time deposit (CTDs) in
favor of one Angel dela Cruz who deposited with
herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial
Stipulation of Facts and Statement of Issues,
Original Records, p. 207; Defendant's Exhibits 1 to
280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb.
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates
of time (CTDs) to herein plaintiff in connection with
his purchased of fuel products from the latter
(Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz
informed Mr. Timoteo Tiangco, the Sucat Branch
Manger, that he lost all the certificates of time
deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized
Affidavit of Loss, as required by defendant bank's
procedure, if he desired replacement of said lost
CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed
and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On the
basis of said affidavit of loss, 280 replacement
CTDs were issued in favor of said depositor
(Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated
and obtained a loan from defendant bank in the
amount of Eight Hundred Seventy Five Thousand
Pesos (P875,000.00). On the same date, said
depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562) which
stated, among others, that he (de la Cruz)
surrenders to defendant bank "full control of the
indicated time deposits from and after date" of the
assignment and further authorizes said bank to
pre-terminate, set-off and "apply the said time
deposits to the payment of whatever amount or
amounts may be due" on the loan upon its
maturity (TSN, February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas,
Credit Manager of plaintiff Caltex (Phils.) Inc.,
went to the defendant bank's Sucat branch and
presented for verification the CTDs declared lost
by Angel dela Cruz alleging that the same were
delivered to herein plaintiff "as security for
purchases made with Caltex Philippines, Inc." by
said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a
letter (Defendant's Exhibit 563) from herein plaintiff
formally informing it of its possession of the CTDs
in question and of its decision to pre-terminate the
same.
8. On December 8, 1982, plaintiff was requested
by herein defendant to furnish the former "a copy
of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz" as well as
"the details of Mr. Angel dela Cruz" obligation
against which plaintiff proposed to apply the time
deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was
furnished herein defendant.
10. Accordingly, defendant bank rejected the
plaintiff's demand and claim for payment of the
value of the CTDs in a letter dated February 7,
1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with
the defendant bank matured and fell due and on
August 5, 1983, the latter set-off and applied the
time deposits in question to the payment of the
matured loan (TSN, February 9, 1987, pp. 130-
131).
12. In view of the foregoing, plaintiff filed the
instant complaint, praying that defendant bank be
ordered to pay it the aggregate value of the
certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein
at 16% per annum, moral and exemplary damages
as well as attorney's fees.
After trial, the court a quo rendered its decision
dismissing the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the
lower court's dismissal of the complaint, hence this petition
wherein petitioner faults respondent court in ruling (1) that the
subject certificates of deposit are non-negotiable despite being
clearly negotiable instruments; (2) that petitioner did not become
a holder in due course of the said certificates of deposit; and (3)
in disregarding the pertinent provisions of the Code of
Commerce relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced
below to provide a better understanding of the issues involved in
this recourse.
 SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22,
1982, 19____
This is to Certify that B E A R E
R has deposited in this Bank the
sum of PESOS: FOUR THOUSAND
ONLY, SECURITY BANK SUCAT
OFFICE P4,000 & 00 CTS Pesos,
Philippine Currency, repayable to
said depositor 731 days. after date,
upon presentation and surrender of
this certificate, with interest at the
rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
—————————— ———————————
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-
negotiable instruments, nationalizing as follows:
. . . While it may be true that the word "bearer"
appears rather boldly in the CTDs issued, it is
important to note that after the word "BEARER"
stamped on the space provided supposedly for the
name of the depositor, the words "has deposited"
a certain amount follows. The document further
provides that the amount deposited shall be
"repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s)
themselves manifest with clarity that they are
payable, not to whoever purports to be the
"bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank
acknowledges its depositor Angel dela Cruz as the
person who made the deposit and further engages
itself to pay said depositor the amount indicated
thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby
hold that the CTDs in question are negotiable instruments.
Section 1 Act No. 2031, otherwise known as the Negotiable
Instruments Law, enumerates the requisites for an instrument to
become negotiable, viz:
(a) It must be in writing and signed by the maker
or drawer;
(b) Must contain an unconditional promise or order
to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a
drawee, he must be named or otherwise indicated
therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the
law for negotiability. The parties' bone of contention is with
regard to requisite (d) set forth above. It is noted that Mr.
Timoteo P. Tiangco, Security Bank's Branch Manager way back
in 1982, testified in open court that the depositor reffered to in
the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
 Atty. Calida:
q In other words Mr. Witness, you
are saying that per books of the
bank, the depositor referred (sic) in
these certificates states that it was
Angel dela Cruz?
witness:
a Yes, your Honor, and we have the
record to show that Angel dela Cruz
was the one who cause (sic) the
amount.
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

Atty. Calida: Contrary to what respondent court held, the CTDs are
negotiable instruments. The documents provide that the
q And no other person or entity or amounts deposited shall be repayable to the depositor. And
company, Mr. Witness? who, according to the document, is the depositor? It is the
"bearer." The documents do not say that the depositor is Angel
witness: de la Cruz and that the amounts deposited are repayable
specifically to him. Rather, the amounts are to be repayable to
a None, your Honor. 7 the bearer of the documents or, for that matter, whosoever may
be the bearer at the time of presentment.
xxx xxx xxx
If it was really the intention of respondent bank to pay the
Atty. Calida: amount to Angel de la Cruz only, it could have with facility so
expressed that fact in clear and categorical terms in the
q Mr. Witness, who is the depositor documents, instead of having the word "BEARER" stamped on
identified in all of these certificates of the space provided for the name of the depositor in each CTD.
time deposit insofar as the bank is On the wordings of the documents, therefore, the amounts
concerned? deposited are repayable to whoever may be the bearer thereof.
Thus, petitioner's aforesaid witness merely declared that Angel
witness: de la Cruz is the depositor "insofar as the bank is concerned,"
but obviously other parties not privy to the transaction between
a Angel dela Cruz is the depositor. 8 them would not be in a position to know that the depositor is not
the bearer stated in the CTDs. Hence, the situation would
xxx xxx xxx require any party dealing with the CTDs to go behind the plain
import of what is written thereon to unravel the agreement of the
parties thereto through facts aliunde. This need for resort to
extrinsic evidence is what is sought to be avoided by the
Negotiable Instruments Law and calls for the application of the
elementary rule that the interpretation of obscure words or
stipulations in a contract shall not favor the party who caused
the obscurity. 12
The next query is whether petitioner can rightfully recover on the
CTDs. This time, the answer is in the negative. The records
reveal that Angel de la Cruz, whom petitioner chose not to
implead in this suit for reasons of its own, delivered the CTDs
amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for
petitioner, although the CTDs are bearer instruments, a valid
negotiation thereof for the true purpose and agreement between
it and De la Cruz, as ultimately ascertained, requires both
delivery and indorsement. For, although petitioner seeks to
deflect this fact, the CTDs were in reality delivered to it as a
security for De la Cruz' purchases of its fuel products. Any doubt
as to whether the CTDs were delivered as payment for the fuel
products or as a security has been dissipated and resolved in
favor of the latter by petitioner's own authorized and responsible
representative himself.
In a letter dated November 26, 1982 addressed to respondent
Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ".
. . These certificates of deposit were negotiated to us by Mr.
Angel dela Cruz to guarantee his purchases of fuel products"
(Emphasis ours.) 13 This admission is conclusive upon
petitioner, its protestations notwithstanding. Under the doctrine
of estoppel, an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or
disproved as against the person relying thereon. 14 A party may
not go back on his own acts and representations to the
prejudice of the other party who relied upon them. 15 In the law
of evidence, whenever a party has, by his own declaration, act,
or omission, intentionally and deliberately led another to believe
a particular thing true, and to act upon such belief, he cannot, in
any litigation arising out of such declaration, act, or omission, be
permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not
as security, petitioner's credit manager could have easily said
so, instead of using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as defendant in
the court below, moved for a bill of particularity
therein 17 praying, among others, that petitioner, as plaintiff, be
required to aver with sufficient definiteness or particularity (a)
the due date or dates of payment of the alleged indebtedness of
Angel de la Cruz to plaintiff and (b) whether or not it issued a
receipt showing that the CTDs were delivered to it by De la Cruz
as payment of the latter's alleged indebtedness to it, plaintiff
corporation opposed the motion. 18 Had it produced the receipt
prayed for, it could have proved, if such truly was the fact, that
the CTDs were delivered as payment and not as security.
Having opposed the motion, petitioner now labors under the
presumption that evidence willfully suppressed would be
adverse if produced. 19
Under the foregoing circumstances, this disquisition
in Intergrated Realty Corporation, et al. vs. Philippine National
Bank, et al. 20 is apropos:
. . . Adverting again to the Court's
pronouncements in Lopez, supra, we quote
therefrom:
The character of the transaction
between the parties is to be
determined by their intention,
regardless of what language was
used or what the form of the transfer
was. If it was intended to secure the
payment of money, it must be
construed as a pledge; but if there
was some other intention, it is not a
pledge. However, even though a
 transfer, if regarded by itself,
appears to have been absolute, its
object and character might still be
qualified and explained by
contemporaneous writing declaring it
to have been a deposit of the
property as collateral security. It has
been said that a transfer of property
by the debtor to a creditor, even if
sufficient on its face to make an
absolute conveyance, should be
treated as a pledge if the debt
continues in inexistence and is not
discharged by the transfer, and that
accordingly the use of the terms
ordinarily importing conveyance of
absolute ownership will not be given
that effect in such a transaction if
they are also commonly used in
pledges and mortgages and
therefore do not unqualifiedly
indicate a transfer of absolute
ownership, in the absence of clear
and unambiguous language or other
circumstances excluding an intent to
pledge.
Petitioner's insistence that the CTDs were negotiated to it begs
the question. Under the Negotiable Instruments Law, an
instrument is negotiated when it is transferred from one person
to another in such a manner as to constitute the transferee the
holder thereof, 21 and a holder may be the payee or indorsee of
a bill or note, who is in possession of it, or the bearer
thereof. 22 In the present case, however, there was no
negotiation in the sense of a transfer of the legal title to the
CTDs in favor of petitioner in which situation, for obvious
reasons, mere delivery of the bearer CTDs would have sufficed.
Here, the delivery thereof only as security for the purchases of
Angel de la Cruz (and we even disregard the fact that the
amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected
by mere delivery of the instrument since, necessarily, the terms
thereof and the subsequent disposition of such security, in the
event of non-payment of the principal obligation, must be
contractually provided for.
The pertinent law on this point is that where the holder has a
lien on the instrument arising from contract, he is deemed a
holder for value to the extent of his lien. 23 As such holder of
collateral security, he would be a pledgee but the requirements
therefor and the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the Civil
Code provisions on pledge of incorporeal rights, 24 which
inceptively provide:
Art. 2095. Incorporeal rights, evidenced by
negotiable instruments, . . . may also be pledged.
The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be
indorsed.
Art. 2096. A pledge shall not take effect against
third persons if a description of the thing pledged
and the date of the pledge do not appear in a
public instrument.
Aside from the fact that the CTDs were only delivered but not
indorsed, the factual findings of respondent court quoted at the
start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee
agreement between it and Angel de la Cruz. 25 Consequently,
the mere delivery of the CTDs did not legally vest in petitioner
any right effective against and binding upon respondent bank.
The requirement under Article 2096 aforementioned is not a
mere rule of adjective law prescribing the mode whereby proof
may be made of the date of a pledge contract, but a rule of
substantive law prescribing a condition without which the
execution of a pledge contract cannot affect third persons
adversely. 26
On the other hand, the assignment of the CTDs made by Angel
de la Cruz in favor of respondent bank was embodied in a public
instrument. 27 With regard to this other mode of transfer, the
Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action
shall produce no effect as against third persons,
unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property
in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement.
Contrarily, petitioner, whether as purchaser, assignee or lien
holder of the CTDs, neither proved the amount of its credit or
the extent of its lien nor the execution of any public instrument
which could affect or bind private respondent. Necessarily,
therefore, as between petitioner and respondent bank, the latter
has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve
into the question of whether or not private respondent observed
the requirements of the law in the case of lost negotiable
instruments and the issuance of replacement certificates
therefor, on the ground that petitioner failed to raised that issue
in the lower court. 28
On this matter, we uphold respondent court's finding that the
aspect of alleged negligence of private respondent was not
included in the stipulation of the parties and in the statement of
issues submitted by them to the trial court. 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. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not
mandatory but discretionary on the part of the "dispossessed
owner" to apply to the judge or court of competent jurisdiction
for the issuance of a duplicate of the lost instrument. Where the
provision reads "may," this word shows that it is not mandatory
but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty,
opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private
respondent, 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.
Narvasa, C.J., Padilla and Nocon, JJ., concur.
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY
WEE, and RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE
CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of
Court which assails on questions of law a decision of the
Intermediate Appellate Court in AC-G.R. CV No. 68609 dated
July 17, 1985, as well as its resolution dated October 17, 1985,
denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business.
It had for its program of logging activities for the year 1978 the
opening of additional roads, and simultaneous logging
operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao
Oriental. For this purpose, it needed two (2) additional units of
tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic
Gulf & Pacific Company of Manila, through its sister company
and marketing arm, Industrial Products Marketing (the "seller-
assignor"), a corporation dealing in tractors and other heavy
equipment business, offered to sell to petitioner-corporation two
(2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and the
other an HDD-16-B.
In order to ascertain the extent of work to which the tractors
were to be exposed, (t.s.n., May 28, 1980, p. 44) and to
determine the capability of the "Used" tractors being offered,
petitioner-corporation requested the seller-assignor to inspect
the job site. After conducting said inspection, the seller-assignor
assured petitioner-corporation that the "Used" Allis Crawler
Tractors which were being offered were fit for the job, and gave
the corresponding warranty of ninety (90) days performance of
the machines and availability of parts. (t.s.n., May 28, 1980, pp.
59-66).
With said assurance and warranty, and relying on the seller-
assignor's skill and judgment, petitioner-corporation through
petitioners Wee and Vergara, president and vice- president,
respectively, agreed to purchase on installment said two (2)
units of "Used" Allis Crawler Tractors. It also paid the down
payment of Two Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for
the two 2) units of tractors (Exh. "3-A"). At the same time, the
deed of sale with chattel mortgage with promissory note was
executed (Exh. "2").
Simultaneously with the execution of the deed of sale with
chattel mortgage with promissory note, the seller-assignor, by
means of a deed of assignment (E exh. " 1 "), assigned its rights
and interest in the chattel mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2)
units of "Used" tractors to the petitioner-corporation's job site
and as agreed, the seller-assignor stationed its own mechanics
to supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when
one of the tractors broke down and after another nine (9) days,
the other tractor likewise broke down (t.s.n., May 28, 1980, pp.
68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally
advised the seller-assignor of the fact that the tractors broke
down and requested for the seller-assignor's usual prompt
attention under the warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T.
Vergara, Exhibit "5," the seller-assignor sent to the job site its
mechanics to conduct the necessary repairs (Exhs. "6," "6-A,"
"6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did not
come out to be what they should be after the repairs were
undertaken because the units were no longer serviceable (t. s.
n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building
and simultaneous logging operations of petitioner-corporation
were delayed and petitioner Vergara advised the seller-assignor
that the payments of the installments as listed in the promissory
note would likewise be delayed until the seller-assignor
completely fulfills its obligation under its warranty (t.s.n, May 28,
1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979,
petitioner Wee asked the seller-assignor to pull out the units and
have them reconditioned, and thereafter to offer them for sale.
The proceeds were to be given to the respondent and the
excess, if any, to be divided between the seller-assignor and
petitioner-corporation which offered to bear one-half (1/2) of the
reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the
petitioner-corporation and despite several follow-up calls, the
seller-assignor did nothing with regard to the request, until the
complaint in this case was filed by the respondent against the
petitioners, the corporation, Wee, and Vergara.
The complaint was filed by the respondent against the
petitioners for the recovery of the principal sum of One Million
Ninety Three Thousand Seven Hundred Eighty Nine Pesos &
71/100 (P1,093,789.71), accrued interest of One Hundred Fifty
One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest
thereafter at the rate of twelve (12%) percent per annum,
attorney's fees of Two Hundred Forty Nine Thousand Eighty
One Pesos & 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the
dismissal of the complaint and asking the trial court to order the
respondent to pay the petitioners damages in an amount at the
sound discretion of the court, Twenty Thousand Pesos
(P20,000.00) as and for attorney's fees, and Five Thousand
Pesos (P5,000.00) for expenses of litigation. The petitioners
likewise prayed for such other and further relief as would be just
under the premises.
In a decision dated April 20, 1981, the trial court rendered the
following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally
in their official and personal capacities the
principal sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED NINETY EIGHT
PESOS & 71/100 (P1,093,798.71) with accrued
interest of ONE HUNDRED FIFTY ONE
THOUSAND SIX HUNDRED EIGHTEEN PESOS
& 86/100 (P151,618.,86) as of August 15, 1979
and accruing interest thereafter at the rate of 12%
per annum;
2. ordering defendants to pay jointly and severally
attorney's fees equivalent to ten percent (10%) of
the principal and to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-
46, Rollo)
On June 8, 1981, the trial court issued an order denying the
motion for reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate
Court and assigned therein the following errors:
I
THAT THE LOWER COURT ERRED IN FINDING THAT THE
SELLER ATLANTIC GULF AND PACIFIC COMPANY OF
MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS
CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT
PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE OF
THE PROMISSORY NOTE AND SUED UNDER SAID NOTE
AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the
challenged decision affirming in toto the decision of the trial
court. The pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the
issue of warranty, We are of the considered
opinion that aside from the fact that no provision of
warranty appears or is provided in the Deed of
Sale of the tractors and even admitting that in a
contract of sale unless a contrary intention
appears, there is an implied warranty, the defense
of breach of warranty, if there is any, as in this
case, does not lie in favor of the appellants and
against the plaintiff-appellee who is the assignee
of the promissory note and a holder of the same in
due course. Warranty lies in this case only
between Industrial Products Marketing and
Consolidated Plywood Industries, Inc. The plaintiff-
appellant herein upon application by appellant
corporation granted financing for the purchase of
the questioned units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a
defense available to appellants either to withdraw
from the contract and/or demand a proportionate
reduction of the price with damages in either case
(Art. 1567, New Civil Code). We now come to the
issue as to whether the plaintiff-appellee is a
holder in due course of the promissory note.
To begin with, it is beyond arguments that the
plaintiff-appellee is a financing corporation
engaged in financing and receivable discounting
extending credit facilities to consumers and
industrial, commercial or agricultural enterprises
by discounting or factoring commercial papers or
accounts receivable duly authorized pursuant to
R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals
that it is a negotiable instrument which was
discounted or sold to the IFC Leasing and
Acceptance Corporation for P800,000.00 (Exh.
"A") considering the following. it is in writing and
signed by the maker; it contains an unconditional
promise to pay a certain sum of money payable at
a fixed or determinable future time; it is payable to
order (Sec. 1, NIL); the promissory note was
negotiated when it was transferred and delivered
by IPM to the appellee and duly endorsed to the
latter (Sec. 30, NIL); it was taken in the conditions
that the note was complete and regular upon its
face before the same was overdue and without
notice, that it had been previously dishonored and
that the note is in good faith and for value without
notice of any infirmity or defect in the title of IPM
(Sec. 52, NIL); that IFC Leasing and Acceptance
Corporation held the instrument free from any
defect of title of prior parties and free from
defenses available to prior parties among
themselves and may enforce payment of the
instrument for the full amount thereof against all
parties liable thereon (Sec. 57, NIL); the
appellants engaged that they would pay the note
according to its tenor, and admit the existence of
 the payee IPM and its capacity to endorse (Sec.
60, NIL).
In view of the essential elements found in the
questioned promissory note, We opine that the
same is legally and conclusively enforceable
against the defendants-appellants.
WHEREFORE, finding the decision appealed from
according to law and evidence, We find the appeal
without merit and thus affirm the decision in toto.
With costs against the appellants. (pp. 50-55,
Rollo)
The petitioners' motion for reconsideration of the decision of
July 17, 1985 was denied by the Intermediate Appellate Court in
its resolution dated October 17, 1985, a copy of which was
received by the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A
NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW
SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO
BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT
BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT
PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE
INSTRUMENT AND THE TRANSFER OF RIGHTS WAS
THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY
RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT
ARE AVAILABLE TO IT AS AGAINST THE SELLER-
ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT
OF THE PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF
WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY
FROM THE SELLER-ASSIGNOR OF THE PROMISSORY
NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE
SELLER- ASSIGNOR IN FAVOR OF THE RESPONDENT
DOES NOT CHANGE THE NATURE OF THE TRANSACTION
FROM BEING A SALE ON INSTALLMENTS TO A PURE
LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED
IN EVIDENCE IN ANY COURT BECAUSE THE REQUISITE
DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED
THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside
the decision dated July 17, 1985, as well as the resolution dated
October 17, 1985 and dismissing the complaint but granting
petitioners' counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to
the petition filed on February 20, 1986, contended that the
petition was filed out of time; that the promissory note is a
negotiable instrument and respondent a holder in due course;
that respondent is not liable for any breach of warranty; and
finally, that the promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in
question is a negotiable instrument so as to bar completely all
the available defenses of the petitioner against the respondent-
assignee.
Preliminarily, it must be established at the outset that we
consider the instant petition to have been filed on time because
the petitioners' motion for reconsideration actually raised new
issues. It cannot, therefore, be considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its
express 90-day warranty because the findings of the trial court,
adopted by the respondent appellate court, that "14 days after
delivery, the first tractor broke down and 9 days, thereafter, the
second tractor became inoperable" are sustained by the
records. The petitioner was clearly a victim of a warranty not
honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for
warranty against the hidden defects which the
thing sold may have, should they render it unfit for
the use for which it is intended, or should they
diminish its fitness for such use to such an extent
that, had the vendee been aware thereof, he
would not have acquired it or would have given a
lower price for it; but said vendor shall not be
answerable for patent defects or those which may
be visible, or for those which are not visible if the
vendee is an expert who, by reason of his trade or
profession, should have known them.
ART. 1562. In a sale of goods, there is an implied
warranty or condition as to the quality or fitness of
the goods, as follows:
(1) Where the buyer, expressly or by implication
makes known to the seller the particular purpose
for which the goods are acquired, and it appears
that the buyer relies on the sellers skill or judge
judgment (whether he be the grower or
manufacturer or not), there is an implied warranty
that the goods shall be reasonably fit for such
purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to
the quality or fitness for a particular purpose may
be annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the
vendee for any hidden faults or defects in the thing
sold even though he was not aware thereof.
This provision shall not apply if the contrary has
been stipulated, and the vendor was not aware of
the hidden faults or defects in the thing sold.
(Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of
warranty against the petitioner. This liability as a general rule,
extends to the corporation to whom it assigned its rights and
interests unless the assignee is a holder in due course of the
promissory note in question, assuming the note is negotiable, in
which case the latter's rights are based on the negotiable
instrument and assuming further that the petitioner's defenses
may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the
tractors broke down, the petitioner-corporation notified the
seller-assignor's sister company, AG & P, about the breakdown
based on the seller-assignor's express 90-day warranty, with
which the latter complied by sending its mechanics. However,
due to the seller-assignor's delay and its failure to comply with
its warranty, the tractors became totally unserviceable and
useless for the purpose for which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally
rescinded its contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent
upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation with
the payment of damages in either case. He may
also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562,
1564, 1565 and 1566, the vendee may elect
between withdrawing from the contract and
demanding a proportionate reduction of the price,
with damages in either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its
contract with the seller-assignor, necessarily can no longer sue
the seller-assignor except by way of counterclaim if the seller-
assignor sues it because of the rescission.
In the case of the University of the Philippines v. De los
Angeles (35 SCRA 102) we held:
In other words, the party who deems the contract
violated may consider it resolved or rescinded,
and act accordingly, without previous court action,
but it proceeds at its own risk. For it is only the
final judgment of the corresponding court that will
conclusively and finally settle whether the action
taken was or was not correct in law. But the law
definitely does not require that the contracting
party who believes itself injured must first file suit
and wait for adjudgement before taking
extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's breach
will have to passively sit and watch its damages
accumulate during the pendency of the suit until
the final judgment of rescission is rendered when
the law itself requires that he should exercise due
diligence to minimize its own damages (Civil
Code, Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note
in question is not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally
promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY
THREE THOUSAND SEVEN HUNDRED EIGHTY
NINE PESOS & 71/100 only (P 1,093,789.71),
Philippine Currency, the said principal sum, to be
payable in 24 monthly installments starting July
15, 1978 and every 15th of the month thereafter
until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable
Instruments Law requires that a promissory note "must be
payable to order or bearer, " it cannot be denied that the
promissory note in question is not a negotiable instrument.
The instrument in order to be considered
negotiablility-i.e. must contain the so-called 'words
of negotiable, must be payable to 'order' or
'bearer'. These words serve as an expression of
consent that the instrument may be transferred.
This consent is indispensable since a maker
assumes greater risk under a negotiable
instrument than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The
instrument is payable to order where it is drawn
payable to the order of a specified person or to
him or his order. . . .
xxx xxx xxx
These are the only two ways by which an
instrument may be made payable to order. There
must always be a specified person named in the
instrument. It means that the bill or note is to be
paid to the person designated in the instrument or
to any person to whom he has indorsed and
delivered the same. Without the words "or order"
or"to the order of, "the instrument is payable only
to the person designated therein and is therefore
non-negotiable. Any subsequent purchaser thereof
will not enjoy the advantages of being a holder of
a negotiable instrument but will merely "step into
the shoes" of the person designated in the
instrument and will thus be open to all defenses
available against the latter." (Campos and
Campos, Notes and Selected Cases on
Negotiable Instruments Law, Third Edition, page
38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a
negotiable instrument, it follows that the respondent can never
be a holder in due course but remains a mere assignee of the
note in question. Thus, the petitioner may raise against the
respondent all defenses available to it as against the seller-
assignor Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the
seller-assignor when it was sued by the respondent-assignee
because the petitioner's defenses apply to both or either of
either of them. Actually, the records show that even the
respondent itself admitted to being a mere assignee of the
promissory note in question, to wit:
ATTY. PALACA:
Did we get it right from the counsel
that what is being assigned is the
Deed of Sale with Chattel Mortgage
with the promissory note which is as
testified to by the witness was
indorsed? (Counsel for Plaintiff
nodding his head.) Then we have no
further questions on cross,
COURT:
You confirm his manifestation? You
are nodding your head? Do you
confirm that?
ATTY. ILAGAN:
 The Deed of Sale cannot be
assigned. A deed of sale is a
transaction between two persons;
what is assigned are rights, the
rights of the mortgagee were
assigned to the IFC Leasing &
Acceptance Corporation.
COURT:
He puts it in a simple way as one-
deed of sale and chattel mortgage
were assigned; . . . you want to
make a distinction, one is an
assignment of mortgage right and
the other one is indorsement of the
promissory note. What counsel for
defendants wants is that you
stipulate that it is contained in one
single transaction?
ATTY. ILAGAN:
We stipulate it is one single
transaction. (pp. 27-29, TSN.,
February 13, 1980).
Secondly, even conceding for purposes of discussion that the
promissory note in question is a negotiable instrument, the
respondent cannot be a holder in due course for a more
significant reason.
The evidence presented in the instant case shows that prior to
the sale on installment of the tractors, there was an
arrangement between the seller-assignor, Industrial Products
Marketing, and the respondent whereby the latter would pay the
seller-assignor the entire purchase price and the seller-assignor,
in turn, would assign its rights to the respondent which acquired
the right to collect the price from the buyer, herein petitioner
Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with
Promissory Note, the Deed of Assignment and the Disclosure of
Loan/Credit Transaction shows that said documents evidencing
the sale on installment of the tractors were all executed on the
same day by and among the buyer, which is herein petitioner
Consolidated Plywood Industries, Inc.; the seller-assignor which
is the Industrial Products Marketing; and the assignee-financing
company, which is the respondent. Therefore, the respondent
had actual knowledge of the fact that the seller-assignor's right
to collect the purchase price was not unconditional, and that it
was subject to the condition that the tractors -sold were not
defective. The respondent knew that when the tractors turned
out to be defective, it would be subject to the defense of failure
of consideration and cannot recover the purchase price from the
petitioners. Even assuming for the sake of argument that the
promissory note is negotiable, the respondent, which took the
same with actual knowledge of the foregoing facts so that its
action in taking the instrument amounted to bad faith, is not a
holder in due course. As such, the respondent is subject to all
defenses which the petitioners may raise against the seller-
assignor. Any other interpretation would be most inequitous to
the unfortunate buyer who is not only saddled with two useless
tractors but must also face a lawsuit from the assignee for the
entire purchase price and all its incidents without being able to
raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove
that it had no knowledge of any fact, which would justify its act
of taking the promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide
that: negotiating it.
xxx xxx xxx
 SEC. 52. WHAT CONSTITUTES A HOLDER IN
DUE COURSE. — A holder in due course is a
holder who has taken the instrument under the
following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had
no notice of any infirmity in the instrument of
deffect in the title of the person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF
DEFFECT. — To constitute notice of an infirmity in
the instrument or defect in the title of the person
negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that
his action in taking the instrument amounts to bad
faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a
financing company is not a holder in good faith as to the buyer,
to wit:
In installment sales, the buyer usually issues a
note payable to the seller to cover the purchase
price. Many times, in pursuance of a previous
arrangement with the seller, a finance company
pays the full price and the note is indorsed to it,
subrogating it to the right to collect the price from
the buyer, with interest. With the increasing
frequency of installment buying in this country, it is
most probable that the tendency of the courts in
the United States to protect the buyer against the
finance company will , the finance company will be
subject to the defense of failure of consideration
and cannot recover the purchase price from the
buyer. As against the argument that such a rule
would seriously affect "a certain mode of
transacting business adopted throughout the
State," a court in one case stated:
It may be that our holding here will
require some changes in business
methods and will impose a greater
burden on the finance companies.
We think the buyer-Mr. & Mrs.
General Public-should have some
protection somewhere along the line.
We believe the finance company is
better able to bear the risk of the
dealer's insolvency than the buyer
and in a far better position to protect
his interests against unscrupulous
and insolvent dealers. . . .
If this opinion imposes great burdens
on finance companies it is a potent
argument in favor of a rule which win
afford public protection to the
general buying public against
unscrupulous dealers in personal
property. . . . (Mutual Finance Co. v.
Martin, 63 So. 2d 649, 44 ALR 2d 1
[1953]) (Campos and Campos,
Notes and Selected Cases on
Negotiable Instruments Law, Third
Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange
Country Machine Works (34 Cal. 2d 766) involving similar facts,
it was held that in a very real sense, the finance company was a
moving force in the transaction from its very inception and acted
as a party to it. When a finance company actively participates in
a transaction of this type from its inception, it cannot be
regarded as a holder in due course of the note given in the
transaction.
In like manner, therefore, even assuming that the subject
promissory note is negotiable, the respondent, a financing
company which actively participated in the sale on installment of
the subject two Allis Crawler tractors, cannot be regarded as a
holder in due course of said note. It follows that the
respondent's rights under the promissory note involved in this
case are subject to all defenses that the petitioners have against
the seller-assignor, Industrial Products Marketing. For Section
58 of the Negotiable Instruments Law provides that "in the
hands of any holder other than a holder in due course, a
negotiable instrument is subject to the same defenses as if it
were non-negotiable. ... "
Prescinding from the foregoing and setting aside other
peripheral issues, we find that both the trial and respondent
appellate court erred in holding the promissory note in question
to be negotiable. Such a ruling does not only violate the law and
applicable jurisprudence, but would result in unjust enrichment
on the part of both the assigner- assignor and respondent
assignee at the expense of the petitioner-corporation which
rightfully rescinded an inequitable contract. We note, however,
that since the seller-assignor has not been impleaded herein,
there is no obstacle for the respondent to file a civil Suit and
litigate its claims against the seller- assignor in the rather
unlikely possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the
respondent appellate court dated July 17, 1985, as well as its
resolution dated October 17, 1986, are hereby ANNULLED and
SET ASIDE. The complaint against the petitioner before the trial
court is DISMISSED.
SO ORDERED.
Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.
G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK, petitioner,
vs.
COURT OF APPEALS, FILRITERS GUARANTY
ASSURANCE CORPORATION and CENTRAL BANK of the
PHILIPPINES, respondents.
TORRES, JR., J.:
Assailed in this Petition for Review on Certiorari is the Decision
of the respondent Court of Appeals dated January 29,
1990,1 affirming the nullity of the transfer of Central Bank
Certificate of Indebtedness (CBCI) No. D891,2 with a face value
of P500,000.00, from the Philippine Underwriters Finance
Corporation (Philfinance) to the petitioner Trader's Royal Bank
(TRB), under a Repurchase Agreement3 dated February 4,
1981, and a Detached Assignment4dated 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 Mandamus5 under Rule 65 of the Rules of Court, to
compel the Central Bank of the Philippines to register the
transfer of the subject CBCI to petitioner Traders Royal Bank
(TRB).
In the said petition, TRB stated that:
3. On November 27, 1979, Filriters Guaranty
Assurance Corporation (Filriters) executed a
"Detached Assignment" . . ., whereby Filriters, as
registered owner, sold, transferred, assigned and
delivered unto Philippine Underwriters Finance
Corporation (Philfinance) all its rights and title to
Central Bank Certificates of Indebtedness of
PESOS: FIVE HUNDRED THOUSAND
(P500,000) and having an aggregate value of
PESOS: THREE MILLION FIVE HUNDRED
THOUSAND (P3,500,000.00);
4. The aforesaid Detached Assignment (Annex
"A") contains an express authorization executed
by the transferor intended to complete the
assignment through the registration of the transfer
in the name of PhilFinance, which authorization is
specifically phrased as follows: '(Filriters) hereby
irrevocably authorized the said issuer (Central
Bank) to transfer the said bond/certificates on the
books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a
Repurchase Agreement with PhilFinance . . .,
whereby, for and in consideration of the sum of
PESOS: FIVE HUNDRED THOUSAND
(P500,000.00), PhilFinance sold, transferred and
delivered to petitioner CBCI 4-year, 8th series,
Serial No. D891 with a face value of P500,000.00 .
. ., which CBCI was among those previously
acquired by PhilFinance from Filriters as averred
in paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase
Agreement (Annex "B"), Philfinance agreed to
repurchase CBCI Serial No. D891 (Annex "C"), at
the stipulated price of PESOS: FIVE HUNDRED
NINETEEN THOUSAND THREE HUNDRED
SIXTY-ONE & 11/100 (P519,361.11) on April 27,
1981;
7. PhilFinance failed to repurchase the CBCI on
the agreed date of maturity, April 27, 1981, when
the checks it issued in favor of petitioner were
dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed
a Detached Assignment in favor of the Petitioner
to enable the latter to have its title completed and
registered in the books of the respondent. And by
means of said Detachment, Philfinance transferred
and assigned all, its rights and title in the said
CBCI (Annex "C") to petitioner and, furthermore, it
did thereby "irrevocably authorize the said issuer
(respondent herein) to transfer the said
bond/certificate on the books of its fiscal agent." . .
.
9. Petitioner presented the CBCI (Annex "C"),
together with the two (2) aforementioned
Detached Assignments (Annexes "B" and "D"), to
the Securities Servicing Department of the
respondent, and requested the latter to effect the
transfer of the CBCI on its books and to issue a
new certificate in the name of petitioner as
absolute owner thereof;
10. Respondent failed and refused to register the
transfer as requested, and continues to do so
notwithstanding petitioner's valid and just title over
the same and despite repeated demands in
writing, the latest of which is hereto attached as
Annex "E" and made an integral part hereof;
11. The express provisions governing the transfer
of the CBCI were substantially complied with the
petitioner's request for registration, to wit:
"No transfer thereof shall be valid
unless made at said office (where
the Certificate has been registered)
by the registered owner hereof, in
 person or by his attorney duly
authorized in writing, and similarly
noted hereon, and upon payment of
a nominal transfer fee which may be
required, a new Certificate shall be
issued to the transferee of the
registered holder thereof."
and, without a doubt, the Detached Assignments
presented to respondent were sufficient
authorizations in writing executed by the
registered owner, Filriters, and its transferee,
PhilFinance, as required by the above-quoted
provision;
12. Upon such compliance with the aforesaid
requirements, the ministerial duties of registering a
transfer of ownership over the CBCI and issuing a
new certificate to the transferee devolves upon the
respondent;
Upon these assertions, TRB prayed for the registration by the
Central Bank of the subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the case took
cognizance of the defendant Central Bank of the Philippines'
Motion for Admission of Amended Answer with Counter Claim
for Interpleader6 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 xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-
President-Comptroller are Pilar Jacobe, Vice-
President-Treasury of Filriters (both of whom were
holding the same positions in Philfinance), without
any consideration or benefit redounding to Filriters
and to the grave prejudice of Filriters, its policy
holders and all who have present or future claims
against its policies, executed similar detached
assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and
inoperative because the assignment is without the
knowledge and consent of directors of Filriters,
and not duly authorized in writing by the Board, as
requiring by Article V, Section 3 of CB Circular No.
769;
16. The assignment of the CBCI to Philfinance is a
personal act of Alfredo Banaria and not the
corporate act of Filriters and such null and void;
a) The assignment was executed without
consideration and for that reason, the assignment
is void from the beginning (Article 1409, Civil
Code);
b) The assignment was executed without any
knowledge and consent of the board of directors of
Filriters;
c) The CBCI constitutes reserve investment of
Filriters against liabilities, which is a requirement
under the Insurance Code for its existence as an
insurance company and the pursuit of its business
operations. The assignment of the CBCI is illegal
act in the sense of malum in se or malum
prohibitum, for anyone to make, either as
corporate or personal act;
d) The transfer of dimunition of reserve
investments of Filriters is expressly prohibited by
law, is immoral and against public policy;
e) The assignment of the CBCI has resulted in the
capital impairment and in the solvency deficiency
of Filriters (and has in fact helped in placing
Filriters under conservatorship), an inevitable
result known to the officer who executed
assignment.
17. Plaintiff had acted in bad faith and with
knowledge of the illegality and invalidity of the
assignment.
a) The CBCI No. 891 is not a negotiable
instrument and as a certificate of indebtedness is
not payable to bearer but is a registered in the
name of Filriters;
b) The provision on transfer of the CBCIs provides
that the Central Bank shall treat the registered
owner as the absolute owner and that the value of
the registered certificates shall be payable only to
the registered owner; a sufficient notice to plaintiff
that the assignments do not give them the
registered owner's right as absolute owner of the
CBCI's;
c) CB Circular 769, Series of 1980 (Rules and
Regulations Governing CBCIs) provides that the
registered certificates are payable only to the
registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by
Philfinance of CBCI No. 891 by Filriters is not a
regular transaction made in the usual of ordinary
course of business;
a) The CBCI constitutes part of the reserve
investments of Filriters against liabilities requires
by the Insurance Code and its assignment or
transfer is expressly prohibited by law. There was
no attempt to get any clearance or authorization
from the Insurance Commissioner;
b) The assignment by Filriters of the CBCI is
clearly not a transaction in the usual or regular
course of its business;
c) The CBCI involved substantial amount and its
assignment clearly constitutes disposition of "all or
substantially all" of the assets of Filriters, which
requires the affirmative action of the stockholders
(Section 40, Corporation [sic] Code.7
In its Decision8 dated April 29, 1988, the Regional Trial Court of
Manila, Branch XXXIII found the assignment of CBCI No. D891
in favor of Philfinance, and the subsequent assignment of the
same CBCI by Philfinance in favor of Traders Royal Bank null
and void and of no force and effect. The dispositive portion of
the decision reads:
ACCORDINGLY, judgment is hereby rendered in
favor of the respondent Filriters Guaranty
Assurance Corporation and against the plaintiff
Traders Royal Bank:
(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 Filriters 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 appeals likewise failed. The findings of
the fact of the said court are hereby reproduced:
The records reveal that defendant Filriters is the
registered owner of CBCI No. D891. Under a deed
of assignment dated November 27, 1971, Filriters
transferred CBCI No. D891 to Philippine
Underwriters Finance Corporation (Philfinance).
Subsequently, Philfinance transferred CBCI No.
D891, which was still registered in the name of
Filriters, to appellant Traders Royal Bank (TRB).
The transfer was made under a repurchase
agreement dated February 4, 1981, granting
Philfinance the right to repurchase the instrument
on or before April 27, 1981. When Philfinance
failed to buy back the note on maturity date, it
executed a deed of assignment, dated April 27,
1981, conveying to appellant TRB all its right and
the title to CBCI No. D891.
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 fro any defect of title of prior
parties and from any defense available to prior parties among
themselves, and it may thus, enforce payment of the instrument
for the full amount thereof against all parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is
not a negotiable instrument, since the instrument clearly stated
that it was payable to Filriters, the registered owner, whose
name was inscribed thereon, and that the certificate lacked the
words of negotiability which serve as an expression of consent
that the instrument may be transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to
Philfinance was fictitious, having made without consideration,
and did not conform to Central Bank Circular No. 769, series of
1980, better known as the "Rules and Regulations Governing
Central Bank Certificates of Indebtedness", which provided that
any "assignment of registered certificates shall not be valid
unless made . . . by the registered owner thereof in person or by
his representative duly authorized in writing."
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 as the same time Central
Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the
transfer (People v. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal
Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights
under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the
latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is
AFFIRMED, with costs against plaintiff-appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the argument that
Philfinance owns 90% of Filriters equity and the two
corporations have identical corporate officers, thus demanding
the application of the doctrine or piercing the veil of corporate
fiction, as to give validity to the transfer of the CBCI from
registered owner to petitioner TRB. 14 This renders the payment
by TRB to Philfinance of CBCI, as actual payment to Filriters.
Thus, there is no merit to the lower court's ruling that the
transfer of the CBCI from Filriters to Philfinance was null and
void for lack of consideration.
Admittedly, the subject CBCI is not a negotiable instrument in
the absence of words of negotiability within the meaning of the
negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for
value received, hereby promises to pay bearer, of
if this Certificate of indebtedness be registered, to
FILRITERS GUARANTY ASSURANCE
CORPORATION, the registered owner hereof, the
principal sum of FIVE HUNDRED THOUSAND
PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to
certificates for the creation and maintenance of a permanent
improvement revolving fund, is similar to a "bond," (82 Minn.
202). Being equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum of money. It
is usually used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a
negotiable instrument, stating that:
As worded, the instrument provides a promise "to
pay Filriters Guaranty Assurance Corporation, the
registered owner hereof." Very clearly, the
instrument is payable only to Filriters, the
registered owner, whose name is inscribed
thereon. It lacks the words of negotiability which
should have served as an expression of consent
that the instrument may be transferred by
negotiation.15
A reading of the subject CBCI indicates that the same is
payable to FILRITERS GUARANTY ASSURANCE
CORPORATION, and to no one else, thus, discounting the
petitioner's submission that the same is a negotiable instrument,
and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable
paper as a credit instrument is its freedom to circulate as a
substitute for money. Hence, freedom of negotiability is the
touchtone relating to the protection of holders in due course,
and the freedom of negotiability is the foundation for the
protection which the law throws around a holder in due course
(11 Am. Jur. 2d, 32). This freedom in negotiability is totally
absent in a certificate indebtedness as it merely to pay a sum of
money to a specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or 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 circumstance in order to
more perfectly understand the intent and meaning
of the parties, yet as they have constituted the
writing to be the only outward and visible
expression of their meaning, no other words are to
be added to it or substituted in its stead. The duty
of the court in such case is to ascertain, not what
the parties may have secretly intended as
contradistinguished from what their words
express, but what is the meaning of the words
they have used. What the parties meant must be
determined by what they said.
Thus, the transfer of the instrument from Philfinance to TRB was
merely an assignment, and is not governed by the negotiable
instruments law. The pertinent question then is, was the transfer
of the CBCI from Filriters to Philfinance and subsequently from
Philfinance to TRB, in accord with existing law, so as to entitle
TRB to have the CBCI registered in its name with the Central
Bank?
The following are the appellate court's pronouncements on the
matter:
Clearly shown in the record is the fact that
Philfinance's title over CBCI No. D891 is defective
since it acquired the instrument from Filriters
fictitiously. Although the deed of assignment
stated that the transfer was for "value received",
there was really no consideration involved. What
happened was Philfinance merely borrowed CBCI
No. D891 from Filriters, a sister corporation. Thus,
 for lack of any consideration, the assignment
made is a complete nullity.
What is more, We find that the transfer made by
Filriters to Philfinance did not conform to Central
Bank Circular No. 769, series of 1980, otherwise
known as the "Rules and Regulations Governing
Central Bank Certificates of Indebtedness", under
which the note was issued. Published in the
Official Gazette on November 19, 1980, Section 3
thereof provides that any assignment of registered
certificates shall not be valid unless made . . . by
the registered owner thereof in person or by his
representative duly authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed
the deed of assignment purportedly for and on
behalf of Filriters, did not have the necessary
written authorization from the Board of Directors of
Filriters to act for the latter. For lack of such
authority, the assignment did not therefore bind
Filriters and violated at the same time Central
Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the
transfer (People vs. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal
Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights
under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the
latter can register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to
TRB must upheld, as the respondent Filriters and Philfinance,
though separate corporate entities on paper, have used their
corporate fiction to defraud TRB into purchasing the subject
CBCI, which purchase now is refused registration by the Central
Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and
the two companies have the same corporate
officers, if the principle of piercing the veil of
corporate entity were to be applied in this case,
then TRB's payment to Philfinance for the CBCI
purchased by it could just as well be considered a
payment to Filriters, the registered owner of the
CBCI as to bar the latter from claiming, as it has,
that it never received any payment for that CBCI
sold and that said CBCI was sold without its
authority.
xxx xxx xxx
We respectfully submit that, considering that the
Court of Appeals has held that the CBCI was
merely borrowed by Philfinance from Filriters, a
sister corporation, to guarantee its (Philfinance's)
financing operations, if it were to be consistent
therewith, on the issued raised by TRB that there
was a piercing a veil of corporate entity, the Court
of Appeals should have ruled that such veil of
corporate entity was, in fact, pierced, and the
payment by TRB to Philfinance should be
construed as payment to Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of
corporate entity, as this merely an equitable remedy, and may
be awarded only in cases when the corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or defend
crime or where a corporation is a mere alter ego or business
conduit of a person. 18
Peiercing the veil of corporate entity requires the court to see
through the protective shroud which exempts its stockholders
from liabilities that ordinarily, they could be subject to, or
distinguished one corporation from a seemingly separate one,
were it not for the existing corporate fiction. But to do this, the
court must be sure that the corporate fiction was misused, to
such an extent that injustice, fraud, or crime was committed
upon another, disregarding, thus, his, her, or its rights. It is the
protection of the interests of innocent third persons dealing with
the corporate entity which the law aims to protect by this
doctrine.
The corporate separateness between Filriters and Philfinance
remains, despite the petitioners insistence on the contrary. For
one, other than the allegation that Filriters is 90% owned by
Philfinance, and the identity of one shall be maintained as to the
other, there is nothing else which could lead the court under
circumstance to disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction
that a corporation is an entity with a juridical personality
separate from its stockholders and from other corporations may
be disregarded, 19 in the absence of such grounds, the general
rule must upheld. The fact that Filfinance owns majority shares
in Filriters is not by itself a ground to disregard the independent
corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of
Internal Revenue, 20 the mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself a sufficient reason for
disregarding the fiction of separate corporate personalities.
In the case at bar, there is sufficient showing that the petitioner
was not defrauded at all when it acquired the subject certificate
of indebtedness from Philfinance.
On its face the subject certificates states that it is registered in
the name of Filriters. This should have put the petitioner on
notice, and prompted it to inquire from Filriters as to
Philfinance's title over the same or its authority to assign the
certificate. As it is, there is no showing to the effect that
petitioner had any dealings whatsoever with Filriters, nor did it
make inquiries as to the ownership of the certificate.
The terms of the CBCI No. D891 contain a provision on its
TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery
unless it is registered in the owner's name at any
office of the Bank or any agency duly authorized
by the Bank, and such registration is noted
hereon. After such registration no transfer thereof
shall be valid unless made at said office (where
the Certificates has been registered) by the
registered owner hereof, in person, or by his
attorney, duly authorized in writing and similarly
noted hereon and upon payment of a nominal
transfer fee which may be required, a new
Certificate shall be issued to the transferee of the
registered owner thereof. The bank or any agency
duly authorized by the Bank may deem and treat
the bearer of this Certificate, or if this Certificate is
registered as herein authorized, the person in
whose name the same is registered as the
absolute owner of this Certificate, for the purpose
of receiving payment hereof, or on account hereof,
and for all other purpose whether or not this
Certificate shall be overdue.
This is notice to petitioner to secure from Filriters a written
authorization for the transfer or to require Philfinance to submit
such an authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the
CBCI No. D891. The fact that a non-owner was disposing of the
registered CBCI owned by another entity was a good reason for
petitioner to verify of inquire as to the title Philfinance to dispose
to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, Concededly, the subject CBCI was acquired by Filriters to form
series of 1990 21, known as the Rules and Regulations part of its legal and capital reserves, which are required by
Governing Central Bank Certificates of Indebtedness, Section 3, law 24 to be maintained at a mandated level. This was pointed
Article V of which provides that: out by Elias Garcia, Manager-in-Charge of respondent Filriters,
in his testimony given before the court on May 30, 1986.
Sec. 3. Assignment of Registered Certificates. —
Assignment of registered certificates shall not be Q Do you know this Central Bank
valid unless made at the office where the same Certificate of Indebtedness, in short,
have been issued and registered or at the CBCI No. D891 in the face value of
Securities Servicing Department, Central Bank of P5000,000.00 subject of this case?
the Philippines, and by the registered owner
thereof, in person or by his representative, duly A Yes, sir.
authorized in writing. For this purpose, the
transferee may be designated as the Q Why do you know this?
representative of the registered owner.
A Well, this was CBCI of the
Petitioner, being a commercial bank, cannot feign ignorance of company sought to be examined by
Central Bank Circular 769, and its requirements. An entity which the Insurance Commission sometime
deals with corporate agents within circumstances showing that in early 1981 and this CBCI No. 891
the agents are acting in excess of corporate authority, may not was among the CBCI's that were
hold the corporation liable. 22 This is only fair, as everyone must, found to be missing.
in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty Q Let me take you back further
and good faith. 23 before 1981. Did you have the
knowledge of this CBCI No. 891
The transfer made by Filriters to Philfinance did not conform to before 1981?
the said. Central Bank Circular, which for all intents, is
considered part of the law. As found by the courts a quo, Alfredo A Yes, sir. This CBCI is an
O. Banaria, who had signed the deed of assignment from investment of Filriters required by the
Filriters to Philfinance, purportedly for and in favor of Filriters, Insurance Commission as legal
did not have the necessary written authorization from the Board reserve of the company.
of Directors of Filriters to act for the latter. As it is, the sale from
Filriters to Philfinance was fictitious, and therefore void and Q Legal reserve for the purpose of
inexistent, as there was no consideration for the same. This is what?
fatal to the petitioner's cause, for then, Philfinance had no title
over the subject certificate to convey the Traders Royal A Well, you see, the Insurance
Bank. Nemo potest nisi quod de jure potest — no man can do companies are required to put up
anything except what he can do lawfully. legal reserves under Section 213 of
the Insurance Code equivalent to 40
 percent of the premiums receipt and TORRES, JR., J.:
further, the Insurance Commission
requires this reserve to be invested Assailed in this Petition for Review on Certiorari is the Decision
preferably in government securities of the respondent Court of Appeals dated January 29,
or government binds. This is how 1990,1 affirming the nullity of the transfer of Central Bank
this CBCI came to be purchased by Certificate of Indebtedness (CBCI) No. D891,2 with a face value
the company. of P500,000.00, from the Philippine Underwriters Finance
Corporation (Philfinance) to the petitioner Trader's Royal Bank
It cannot, therefore, be taken out of the said funds, without (TRB), under a Repurchase Agreement3 dated February 4,
violating the requirements of the law. Thus, the anauthorized 1981, and a Detached Assignment4dated April 27, 1981.
use or distribution of the same by a corporate officer of Filriters
cannot bind the said corporation, not without the approval of its Docketed as Civil Case No. 83-17966 in the Regional Trial
Board of Directors, and the maintenance of the required reserve Court of Manila, Branch 32, the action was originally filed as a
fund. Petition for Mandamus5 under Rule 65 of the Rules of Court, to
compel the Central Bank of the Philippines to register the
Consequently, the title of Filriters over the subject certificate of transfer of the subject CBCI to petitioner Traders Royal Bank
indebtedness must be upheld over the claimed interest of (TRB).
Traders Royal Bank.
In the said petition, TRB stated that:
ACCORDINGLY, the petition is DISMISSED and the decision
appealed from dated January 29, 1990 is hereby AFFIRMED. 3. On November 27, 1979, Filriters Guaranty
Assurance Corporation (Filriters) executed a
SO ORDERED. "Detached Assignment" . . ., whereby Filriters, as
registered owner, sold, transferred, assigned and
delivered unto Philippine Underwriters Finance
Corporation (Philfinance) all its rights and title to
Central Bank Certificates of Indebtedness of
PESOS: FIVE HUNDRED THOUSAND
G.R. No. 93397 March 3, 1997 (P500,000) and having an aggregate value of
PESOS: THREE MILLION FIVE HUNDRED
TRADERS ROYAL BANK, petitioner, THOUSAND (P3,500,000.00);
vs.
COURT OF APPEALS, FILRITERS GUARANTY 4. The aforesaid Detached Assignment (Annex
ASSURANCE CORPORATION and CENTRAL BANK of the "A") contains an express authorization executed
PHILIPPINES, respondents. by the transferor intended to complete the
assignment through the registration of the transfer
in the name of PhilFinance, which authorization is
specifically phrased as follows: '(Filriters) hereby
irrevocably authorized the said issuer (Central
Bank) to transfer the said bond/certificates on the
books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a
Repurchase Agreement with PhilFinance . . .,
whereby, for and in consideration of the sum of
PESOS: FIVE HUNDRED THOUSAND
(P500,000.00), PhilFinance sold, transferred and
delivered to petitioner CBCI 4-year, 8th series,
Serial No. D891 with a face value of P500,000.00 .
. ., which CBCI was among those previously
acquired by PhilFinance from Filriters as averred
in paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase
Agreement (Annex "B"), Philfinance agreed to
repurchase CBCI Serial No. D891 (Annex "C"), at
the stipulated price of PESOS: FIVE HUNDRED
NINETEEN THOUSAND THREE HUNDRED
SIXTY-ONE & 11/100 (P519,361.11) on April 27,
1981;
7. PhilFinance failed to repurchase the CBCI on
the agreed date of maturity, April 27, 1981, when
the checks it issued in favor of petitioner were
dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed
a Detached Assignment in favor of the Petitioner
to enable the latter to have its title completed and
registered in the books of the respondent. And by
means of said Detachment, Philfinance transferred
and assigned all, its rights and title in the said
CBCI (Annex "C") to petitioner and, furthermore, it
did thereby "irrevocably authorize the said issuer
(respondent herein) to transfer the said
bond/certificate on the books of its fiscal agent." . .
. provision;
9. Petitioner presented the CBCI (Annex "C"),
together with the two (2) aforementioned
Detached Assignments (Annexes "B" and "D"), to
the Securities Servicing Department of the
respondent, and requested the latter to effect the
transfer of the CBCI on its books and to issue a
new certificate in the name of petitioner as
absolute owner thereof;
10. Respondent failed and refused to register the
transfer as requested, and continues to do so
notwithstanding petitioner's valid and just title over
the same and despite repeated demands in
writing, the latest of which is hereto attached as
Annex "E" and made an integral part hereof;
11. The express provisions governing the transfer
of the CBCI were substantially complied with the
petitioner's request for registration, to wit:
"No transfer thereof shall be valid
unless made at said office (where
the Certificate has been registered)
by the registered owner hereof, in
person or by his attorney duly
authorized in writing, and similarly
noted hereon, and upon payment of
a nominal transfer fee which may be
required, a new Certificate shall be
issued to the transferee of the
registered holder thereof."
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
 12. Upon such compliance with the aforesaid
requirements, the ministerial duties of registering a
transfer of ownership over the CBCI and issuing a
new certificate to the transferee devolves upon the
respondent;
Upon these assertions, TRB prayed for the registration by the
Central Bank of the subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the case took
cognizance of the defendant Central Bank of the Philippines'
Motion for Admission of Amended Answer with Counter Claim
for Interpleader6 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 xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-
President-Comptroller are Pilar Jacobe, Vice-
President-Treasury of Filriters (both of whom were
holding the same positions in Philfinance), without
any consideration or benefit redounding to Filriters
and to the grave prejudice of Filriters, its policy
holders and all who have present or future claims
against its policies, executed similar detached
assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and
inoperative because the assignment is without the
knowledge and consent of directors of Filriters,
and not duly authorized in writing by the Board, as
requiring by Article V, Section 3 of CB Circular No.
769;
16. The assignment of the CBCI to Philfinance is a
personal act of Alfredo Banaria and not the
corporate act of Filriters and such null and void;
a) The assignment was executed without
consideration and for that reason, the assignment
is void from the beginning (Article 1409, Civil
Code);
b) The assignment was executed without any
knowledge and consent of the board of directors of
Filriters;
c) The CBCI constitutes reserve investment of
Filriters against liabilities, which is a requirement
under the Insurance Code for its existence as an
insurance company and the pursuit of its business
operations. The assignment of the CBCI is illegal
act in the sense of malum in se or malum
prohibitum, for anyone to make, either as
corporate or personal act;
d) The transfer of dimunition of reserve
investments of Filriters is expressly prohibited by
law, is immoral and against public policy;
e) The assignment of the CBCI has resulted in the
capital impairment and in the solvency deficiency
of Filriters (and has in fact helped in placing
Filriters under conservatorship), an inevitable
result known to the officer who executed
assignment.
17. Plaintiff had acted in bad faith and with
knowledge of the illegality and invalidity of the
assignment.
a) The CBCI No. 891 is not a negotiable
instrument and as a certificate of indebtedness is
not payable to bearer but is a registered in the
name of Filriters;
b) The provision on transfer of the CBCIs provides
that the Central Bank shall treat the registered
owner as the absolute owner and that the value of
the registered certificates shall be payable only to
the registered owner; a sufficient notice to plaintiff
that the assignments do not give them the
registered owner's right as absolute owner of the
CBCI's;
c) CB Circular 769, Series of 1980 (Rules and
Regulations Governing CBCIs) provides that the
registered certificates are payable only to the
registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by
Philfinance of CBCI No. 891 by Filriters is not a
regular transaction made in the usual of ordinary
course of business;
a) The CBCI constitutes part of the reserve
investments of Filriters against liabilities requires
by the Insurance Code and its assignment or
transfer is expressly prohibited by law. There was
no attempt to get any clearance or authorization
from the Insurance Commissioner;
b) The assignment by Filriters of the CBCI is
clearly not a transaction in the usual or regular
course of its business;
c) The CBCI involved substantial amount and its
assignment clearly constitutes disposition of "all or
substantially all" of the assets of Filriters, which
requires the affirmative action of the stockholders
(Section 40, Corporation [sic] Code.7
In its Decision8 dated April 29, 1988, the Regional Trial Court of
Manila, Branch XXXIII found the assignment of CBCI No. D891
in favor of Philfinance, and the subsequent assignment of the
same CBCI by Philfinance in favor of Traders Royal Bank null
and void and of no force and effect. The dispositive portion of
the decision reads:
ACCORDINGLY, judgment is hereby rendered in
favor of the respondent Filriters Guaranty
Assurance Corporation and against the plaintiff
Traders Royal Bank:
(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 Filriters 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 appeals likewise failed. The findings of
the fact of the said court are hereby reproduced:
The records reveal that defendant Filriters is the
registered owner of CBCI No. D891. Under a deed
of assignment dated November 27, 1971, Filriters
transferred CBCI No. D891 to Philippine
Underwriters Finance Corporation (Philfinance).
Subsequently, Philfinance transferred CBCI No.
D891, which was still registered in the name of
Filriters, to appellant Traders Royal Bank (TRB).
The transfer was made under a repurchase
agreement dated February 4, 1981, granting
Philfinance the right to repurchase the instrument
on or before April 27, 1981. When Philfinance
failed to buy back the note on maturity date, it
executed a deed of assignment, dated April 27,
1981, conveying to appellant TRB all its right and
the title to CBCI No. D891.
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 fro any defect of title of prior
parties and from any defense available to prior parties among
themselves, and it may thus, enforce payment of the instrument
for the full amount thereof against all parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is
not a negotiable instrument, since the instrument clearly stated
that it was payable to Filriters, the registered owner, whose
name was inscribed thereon, and that the certificate lacked the
words of negotiability which serve as an expression of consent
that the instrument may be transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to
Philfinance was fictitious, having made without consideration,
and did not conform to Central Bank Circular No. 769, series of
1980, better known as the "Rules and Regulations Governing
Central Bank Certificates of Indebtedness", which provided that
any "assignment of registered certificates shall not be valid
unless made . . . by the registered owner thereof in person or by
his representative duly authorized in writing."
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 as the same time Central
Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the
transfer (People v. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal
Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights
under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the
latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is
AFFIRMED, with costs against plaintiff-appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the argument that
Philfinance owns 90% of Filriters equity and the two
corporations have identical corporate officers, thus demanding
the application of the doctrine or piercing the veil of corporate
fiction, as to give validity to the transfer of the CBCI from
registered owner to petitioner TRB. 14 This renders the payment
by TRB to Philfinance of CBCI, as actual payment to Filriters.
Thus, there is no merit to the lower court's ruling that the
transfer of the CBCI from Filriters to Philfinance was null and
void for lack of consideration.
Admittedly, the subject CBCI is not a negotiable instrument in
the absence of words of negotiability within the meaning of the
negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for
value received, hereby promises to pay bearer, of
if this Certificate of indebtedness be registered, to
FILRITERS GUARANTY ASSURANCE
CORPORATION, the registered owner hereof, the
principal sum of FIVE HUNDRED THOUSAND
PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to
certificates for the creation and maintenance of a permanent
improvement revolving fund, is similar to a "bond," (82 Minn.
202). Being equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum of money. It
is usually used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a
negotiable instrument, stating that:
As worded, the instrument provides a promise "to
pay Filriters Guaranty Assurance Corporation, the
registered owner hereof." Very clearly, the
instrument is payable only to Filriters, the
registered owner, whose name is inscribed
thereon. It lacks the words of negotiability which
should have served as an expression of consent
 that the instrument may be transferred by
negotiation.15
A reading of the subject CBCI indicates that the same is
payable to FILRITERS GUARANTY ASSURANCE
CORPORATION, and to no one else, thus, discounting the
petitioner's submission that the same is a negotiable instrument,
and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable
paper as a credit instrument is its freedom to circulate as a
substitute for money. Hence, freedom of negotiability is the
touchtone relating to the protection of holders in due course,
and the freedom of negotiability is the foundation for the
protection which the law throws around a holder in due course
(11 Am. Jur. 2d, 32). This freedom in negotiability is totally
absent in a certificate indebtedness as it merely to pay a sum of
money to a specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or 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 circumstance in order to
more perfectly understand the intent and meaning
of the parties, yet as they have constituted the
writing to be the only outward and visible
expression of their meaning, no other words are to
be added to it or substituted in its stead. The duty
of the court in such case is to ascertain, not what
the parties may have secretly intended as
contradistinguished from what their words
express, but what is the meaning of the words
they have used. What the parties meant must be
determined by what they said.
Thus, the transfer of the instrument from Philfinance to TRB was
merely an assignment, and is not governed by the negotiable
instruments law. The pertinent question then is, was the transfer
of the CBCI from Filriters to Philfinance and subsequently from
Philfinance to TRB, in accord with existing law, so as to entitle
TRB to have the CBCI registered in its name with the Central
Bank?
The following are the appellate court's pronouncements on the
matter:
Clearly shown in the record is the fact that
Philfinance's title over CBCI No. D891 is defective
since it acquired the instrument from Filriters
fictitiously. Although the deed of assignment
stated that the transfer was for "value received",
there was really no consideration involved. What
happened was Philfinance merely borrowed CBCI
No. D891 from Filriters, a sister corporation. Thus,
for lack of any consideration, the assignment
made is a complete nullity.
What is more, We find that the transfer made by
Filriters to Philfinance did not conform to Central
Bank Circular No. 769, series of 1980, otherwise
known as the "Rules and Regulations Governing
Central Bank Certificates of Indebtedness", under
which the note was issued. Published in the
Official Gazette on November 19, 1980, Section 3
thereof provides that any assignment of registered
certificates shall not be valid unless made . . . by
the registered owner thereof in person or by his
representative duly authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed
the deed of assignment purportedly for and on
behalf of Filriters, did not have the necessary
written authorization from the Board of Directors of
Filriters to act for the latter. For lack of such
 authority, the assignment did not therefore bind
Filriters and violated at the same time Central
Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the
transfer (People vs. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal
Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights
under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the
latter can register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to
TRB must upheld, as the respondent Filriters and Philfinance,
though separate corporate entities on paper, have used their
corporate fiction to defraud TRB into purchasing the subject
CBCI, which purchase now is refused registration by the Central
Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and
the two companies have the same corporate
officers, if the principle of piercing the veil of
corporate entity were to be applied in this case,
then TRB's payment to Philfinance for the CBCI
purchased by it could just as well be considered a
payment to Filriters, the registered owner of the
CBCI as to bar the latter from claiming, as it has,
that it never received any payment for that CBCI
sold and that said CBCI was sold without its
authority.
xxx xxx xxx
We respectfully submit that, considering that the
Court of Appeals has held that the CBCI was
merely borrowed by Philfinance from Filriters, a
sister corporation, to guarantee its (Philfinance's)
financing operations, if it were to be consistent
therewith, on the issued raised by TRB that there
was a piercing a veil of corporate entity, the Court
of Appeals should have ruled that such veil of
corporate entity was, in fact, pierced, and the
payment by TRB to Philfinance should be
construed as payment to Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of
corporate entity, as this merely an equitable remedy, and may
be awarded only in cases when the corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or defend
crime or where a corporation is a mere alter ego or business
conduit of a person. 18
Peiercing the veil of corporate entity requires the court to see
through the protective shroud which exempts its stockholders
from liabilities that ordinarily, they could be subject to, or
distinguished one corporation from a seemingly separate one,
were it not for the existing corporate fiction. But to do this, the
court must be sure that the corporate fiction was misused, to
such an extent that injustice, fraud, or crime was committed
upon another, disregarding, thus, his, her, or its rights. It is the
protection of the interests of innocent third persons dealing with
the corporate entity which the law aims to protect by this
doctrine.
The corporate separateness between Filriters and Philfinance
remains, despite the petitioners insistence on the contrary. For
one, other than the allegation that Filriters is 90% owned by
Philfinance, and the identity of one shall be maintained as to the
other, there is nothing else which could lead the court under
circumstance to disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction
that a corporation is an entity with a juridical personality
separate from its stockholders and from other corporations may
be disregarded, 19 in the absence of such grounds, the general
rule must upheld. The fact that Filfinance owns majority shares
in Filriters is not by itself a ground to disregard the independent
corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of
Internal Revenue, 20 the mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself a sufficient reason for
disregarding the fiction of separate corporate personalities.
In the case at bar, there is sufficient showing that the petitioner
was not defrauded at all when it acquired the subject certificate
of indebtedness from Philfinance.
On its face the subject certificates states that it is registered in
the name of Filriters. This should have put the petitioner on
notice, and prompted it to inquire from Filriters as to
Philfinance's title over the same or its authority to assign the
certificate. As it is, there is no showing to the effect that
petitioner had any dealings whatsoever with Filriters, nor did it
make inquiries as to the ownership of the certificate.
The terms of the CBCI No. D891 contain a provision on its
TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery
unless it is registered in the owner's name at any
office of the Bank or any agency duly authorized
by the Bank, and such registration is noted
hereon. After such registration no transfer thereof
shall be valid unless made at said office (where
the Certificates has been registered) by the
registered owner hereof, in person, or by his
attorney, duly authorized in writing and similarly
noted hereon and upon payment of a nominal
transfer fee which may be required, a new
Certificate shall be issued to the transferee of the
registered owner thereof. The bank or any agency
duly authorized by the Bank may deem and treat
the bearer of this Certificate, or if this Certificate is
registered as herein authorized, the person in
whose name the same is registered as the
absolute owner of this Certificate, for the purpose
of receiving payment hereof, or on account hereof,
and for all other purpose whether or not this
Certificate shall be overdue.
This is notice to petitioner to secure from Filriters a written
authorization for the transfer or to require Philfinance to submit
such an authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the
CBCI No. D891. The fact that a non-owner was disposing of the
registered CBCI owned by another entity was a good reason for
petitioner to verify of inquire as to the title Philfinance to dispose
to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769,
series of 1990 21, known as the Rules and Regulations
Governing Central Bank Certificates of Indebtedness, Section 3,
Article V of which provides that:
Sec. 3. Assignment of Registered Certificates. —
Assignment of registered certificates shall not be
valid unless made at the office where the same
have been issued and registered or at the
Securities Servicing Department, Central Bank of
the Philippines, and by the registered owner
thereof, in person or by his representative, duly
authorized in writing. 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, Q Let me take you back further
act with justice, give everyone his due, and observe honesty before 1981. Did you have the
and good faith. 23 knowledge of this CBCI No. 891
before 1981?
The transfer made by Filriters to Philfinance did not conform to
the said. Central Bank Circular, which for all intents, is A Yes, sir. This CBCI is an
considered part of the law. As found by the courts a quo, Alfredo investment of Filriters required by the
O. Banaria, who had signed the deed of assignment from Insurance Commission as legal
Filriters to Philfinance, purportedly for and in favor of Filriters, reserve of the company.
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 Q Legal reserve for the purpose of
Filriters to Philfinance was fictitious, and therefore void and what?
inexistent, as there was no consideration for the same. This is
fatal to the petitioner's cause, for then, Philfinance had no title A Well, you see, the Insurance
over the subject certificate to convey the Traders Royal companies are required to put up
Bank. Nemo potest nisi quod de jure potest — no man can do legal reserves under Section 213 of
anything except what he can do lawfully. the Insurance Code equivalent to 40
percent of the premiums receipt and
Concededly, the subject CBCI was acquired by Filriters to form further, the Insurance Commission
part of its legal and capital reserves, which are required by requires this reserve to be invested
law 24 to be maintained at a mandated level. This was pointed preferably in government securities
out by Elias Garcia, Manager-in-Charge of respondent Filriters, or government binds. This is how
in his testimony given before the court on May 30, 1986. this CBCI came to be purchased by
the company.
Q Do you know this Central Bank
Certificate of Indebtedness, in short, It cannot, therefore, be taken out of the said funds, without
CBCI No. D891 in the face value of violating the requirements of the law. Thus, the anauthorized
P5000,000.00 subject of this case? use or distribution of the same by a corporate officer of Filriters
cannot bind the said corporation, not without the approval of its
A Yes, sir. Board of Directors, and the maintenance of the required reserve
fund.
Q Why do you know this?
Consequently, the title of Filriters over the subject certificate of
A Well, this was CBCI of the indebtedness must be upheld over the claimed interest of
company sought to be examined by Traders Royal Bank.
the Insurance Commission sometime
in early 1981 and this CBCI No. 891 ACCORDINGLY, the petition is DISMISSED and the decision
was among the CBCI's that were appealed from dated January 29, 1990 is hereby AFFIRMED.
found to be missing.
SO ORDERED.
G.R. No. 198660 October 23, 2013
TING TING PUA, Petitioner,
vs.
SPOUSES BENITO LO BUN TIONG and CAROLINE SIOK
CHING TENG, Respondents.
RESOLUTION
VELASCO, JR., J.:
Under consideration is the Motion for Reconsideration
interposed by petitioner Ting Ting Pua Pua) of our Resolution
dated April 18, 2012 effectively affirming the Decision1 and
Resolution2 dated March 31, 2011 and September 26, 2011,
respectively, of the Court of Appeals CA) In CA- G.R. CV No.
93755, which, in turn, reversed the Decision of the Regional
Trial Court RTC) of the City of Manila, Branch 29 in Civil Case
No. 97-83027.
As culled from the adverted R TC Decision, as adopted for the
most part by the CA, the antecedent facts may be summarized
as follows:
The controversy arose from a Complaint for a Sum of
Money3 filed by petitioner Pua against respondent-spouses
Benito Lo Bun Tiong Benito) and Caroline Siok Ching Teng
Caroline). In the complaint, Pua prayed that, among other
things, respondents, or then defendants, pay Pua the amount
eight million five hundred thousand pesos (PhP 8,500,000),
covered by a check. (Exhibit "A," for plaintiff)
During trial, petitioner Pua clarified that the PhP 8,500,000
check was given by respondents to pay the loans they obtained
from her under a compounded interest agreement on various
dates in 1988.4 As Pua narrated, her sister, Lilian Balboa
(Lilian), vouched for respondents’ ability to pay so that when
respondents approached her, she immediately acceded and lent
money to respondents without requiring any collateral except
post-dated checks bearing the borrowed amounts.5 In all,
respondents issued 176 checks for a total amount of one million
nine hundred seventy-five thousand pesos (PhP 1,975,000).
These checks were dishonored upon presentment to the
drawee bank.7
As a result of the dishonor, petitioner demanded payment.
Respondents, however, pleaded for more time because of their
financial difficulties.8 Petitioner Pua obliged and simply
reminded the respondents of their indebtedness from time to
time.9
Sometime in September 1996, when their financial situation
turned better, respondents allegedly called and asked petitioner
Pua for the computation of their loan obligations.10 Hence,
petitioner handed them a computation dated October 2,
199611 which showed that, at the agreed 2% compounded
interest rate per month, the amount of the loan payable to
petitioner rose to thirteen million two hundred eighteen thousand
five hundred forty-four pesos and 20/100 (PhP
13,218,544.20).12 On receiving the computation, the
respondents asked petitioner to reduce their indebtedness to
PhP 8,500,000.13 Wanting to get paid the soonest possible time,
petitioner Pua agreed to the lowered amount.14
Respondents then delivered to petitioner Asiatrust Check No.
BND057750 bearing the reduced amount of PhP 8,500,000
dated March 30, 1997 with the assurance that the check was
good.15 In turn, respondents demanded the return of the 17
previously dishonored checks. Petitioner, however, refused to
return the bad checks and advised respondents that she will do
so only after the encashment of Asiatrust Check No.
BND057750.16
Like the 17 checks, however, Check No. BND057750 was also
dishonored when it was presented by petitioner to the drawee
bank. Hence, as claimed by petitioner, she decided to file a
complaint to collect the money owed her by respondents.
For the defense, both respondents Caroline and Benito testified
along with Rosa Dela Cruz Tuazon (Tuazon), who was the OIC-
Manager of Asiatrust-Binondo Branch in 1997. Respondents
categorically denied obtaining a loan from
petitioner.17 Respondent Caroline, in particular, narrated that, in
August 1995, she and petitioner’s sister, Lilian, forged a
partnership that operated a mahjong business. Their agreement
was for Lilian to serve as the capitalist while respondent
Caroline was to act as the cashier. Caroline also agreed to use
her personal checks to pay for the operational expenses
including the payment of the winners of the games.18 As the
partners anticipated that Caroline will not always be in town to
prepare these checks, she left with Lilian five (5) pre-signed and
consecutively numbered checks19 on the condition that these
checks will only be used to cover the costs of the business
operations and in no circumstance will the amount of the checks
exceed PhP 5,000.20
In March 1996, however, respondent Caroline and Lilian had a
serious disagreement that resulted in the dissolution of their
partnership and the cessation of their business. In the haste of
the dissolution and as a result of their bitter separation,
respondent Caroline alleged that she forgot about the five (5)
pre-signed checks she left with Lilian.21 It was only when Lilian’s
husband, Vicente Balboa (Vicente), filed a complaint for sum of
money in February 1997 against respondents to recover five
million one hundred seventy-five thousand two hundred fifty
pesos (PhP 5,175,250), covering three of the five post-dated
and pre-signed checks.22
Respondent Caroline categorically denied having completed
Check No. BND057750 by using a check writer or typewriter as
she had no check writer and she had always completed checks
in her own handwriting.23 She insisted that petitioner and her
sister completed the check after its delivery.24 Furthermore, she
could not have gone to see petitioner Pua with her husband as
they had been separated in fact for nearly 10 years.25 As for the
17 checks issued by her in 1988, Caroline alleged that they
were not intended for Pua but were issued for the benefit of
other persons.26 Caroline postulated that the complaint is
designed to allow Pua’s sister, Lilian, to recover her losses in
the foreign exchange business she had with Caroline in the
1980s. Respondent Benito corroborated Caroline’s testimony
respecting their almost a decade separation.27 As such, he
could not have had accompanied his wife to see petitioner to
persuade the latter to lower down any alleged
indebtedness.28 In fact, Benito declared, before the filing of the
Complaint, he had never met petitioner Pua, let alone
approached her with his wife to borrow money.29He claimed that
he was impleaded in the case to attach his property and force
him to enter into an amicable settlement with petitioner.30 Benito
pointed out that Check No. BND057750 was issued under
Asiatrust Account No. 5513-0054-9, which is solely under the
name of his wife.31
The witness for the respondents, Ms. Tuazon, testified that
respondent Caroline opened Asiatrust Account No. 5513-0054-9
in September 1994.32 She claimed that the average maintaining
balance of respondent Caroline was PhP 2,000 and the highest
amount issued by Caroline from her account was PhP
435,000.33 She maintained that respondent Caroline had always
completed her checks with her own handwriting and not with a
check writer. On October 15, 1996, Caroline’s checking account
was closed at the instance of the bank due to 69 instances of
check issuance against insufficient balance.34
After trial, the RTC issued its Decision dated January 31, 2006
in favor of petitioner. In holding thus, the RTC stated that the
possession by petitioner of the checks signed by Caroline,
under the Negotiable Instruments Law, raises the presumption
that they were issued and delivered for a valuable
consideration. On the other hand, the court a quo discounted
the testimony for the defense completely denying respondents’
loan obligation to Pua.35
The trial court, however, refused to order respondents to pay
petitioner the amount of PhP 8,500,000 considering that the
agreement to pay interest on the loan was not expressly
stipulated in writing by the parties. The RTC, instead, ordered
respondents to pay the principal amount of the loan as
represented by the 17 checks plus legal interest from the date of
demand. As rectified,36 the dispositive portion of RTC’s Decision
reads:
Defendant-spouses Benito Lo Bun Tiong and Caroline Siok
Ching Teng, are hereby ordered jointly and solidarily:
1. To pay plaintiff ₱1,975,000.00 plus 12% interest per
annum from September 30, 1998, until fully paid;
2. To pay plaintiff attorney’s fees of ₱200,000.00; and
3. To pay the costs of the suit.
Aggrieved, respondents went to the CA arguing that the court a
quo erred in finding that they obtained and are liable for a loan
from petitioner. To respondents, petitioner has not sufficiently
proved the existence of the loan that they supposedly acquired
from her way back in the late 1980s by any written agreement or
memorandum.
By Decision of March 31, 2011, as reiterated in a Resolution
dated September 26, 2011, the appellate court set aside the
RTC Decision holding that Asiatrust Bank Check No.
BND057550 was an incomplete delivered instrument and that
petitioner has failed to prove the existence of respondents’
indebtedness to her. Hence, the CA added, petitioner does not
have a cause of action against respondents.37
Hence, petitioner came to this Court via a Petition for Review on
Certiorari38 alleging grievous reversible error on the part of the
CA in reversing the findings of the court a quo.
As adverted to at the outset, the Court, in a Minute Resolution
dated April 18, 2012, resolved to deny the petition.39
In this Motion for Reconsideration,40 petitioner pleads that this
Court take a second hard look on the facts and issues of the
present case and affirm the RTC’s case disposition. Petitioner
argues, in the main, that the finding of the appellate court that
petitioner has not established respondents’ indebtedness to her
is not supported by the evidence on record and is based solely
on respondents’ general denial of liability.
Respondents, on the other hand, argued in their Comment on
the Motion for Reconsideration dated October 6, 2012 that the
CA correctly ruled that Asiatrust Check No. BND057550 is an
incomplete instrument which found its way into petitioner’s
hands and that the petitioner failed to prove respondents’
indebtedness to her. Petitioner, so respondents contend, failed
to show to whom the 17 1988 checks were delivered, for what
consideration or purpose, and under whose account said
checks were deposited or negotiated.
Clearly, the issue in the present case is factual in nature as it
involves an inquiry into the very existence of the debt
supposedly owed by respondents to petitioner.
The general rule is that this Court in petitions for review on
certiorari only concerns itself with questions of law, not of
fact,41 the resolution of factual issues being the primary function
of lower courts.42 However, several exceptions have been laid
down by jurisprudence to allow the scrutiny of the factual
arguments advanced by the contending parties, viz: (1) the
conclusion is grounded on speculations, surmises or
conjectures; (2) the inference is manifestly mistaken, absurd or
impossible ; (3) there is grave abuse of discretion; (4) the
judgment is based on a misapprehension of facts; (5) the
findings of fact are conflicting ; (6) there is no citation of specific
evidence on which the factual findings are based; (7) the
findings of absence of fact are contradicted by the presence of
evidence on record ; (8) the findings of the CA are contrary to
those of the trial court ; (9) the CA manifestly overlooked certain
relevant and undisputed facts that, if properly considered, would
justify a different conclusion ; (10) the findings of the CA are
beyond the issues of the case; and (11) such findings are
contrary to the admissions of both parties.43 At the very least,
therefore, the inconsonance of the findings of the RTC and the
CA regarding the existence of the loan sanctions the
recalibration of the evidence presented by the parties before the
trial court.
In the main, petitioner asserts that respondents owed her a sum
of money way back in 1988 for which the latter gave her several
checks. These checks, however, had all been dishonored and
petitioner has not been paid the amount of the loan plus the
agreed interest. In 1996, respondents approached her to get the
computation of their liability including the 2% compounded
interest. After bargaining to lower the amount of their liability,
respondents supposedly gave her a postdated check bearing
the discounted amount of the money they owed to petitioner.
Like the 1988 checks, the drawee bank likewise dishonored this
check. To prove her allegations, petitioner submitted the original
copies of the 17 checks issued by respondent Caroline in 1988
and the check issued in 1996, Asiatrust Check No. BND057750.
In ruling in her favor, the RTC sustained the version of the facts
presented by petitioner.
Respondents, on the other hand, completely deny the existence
of the debt asserting that they had never approached petitioner
to borrow money in 1988 or in 1996. They hypothesize, instead,
that petitioner Pua is simply acting at the instance of her sister,
Lilian, to file a false charge against them using a check left to
fund a gambling business previously operated by Lilian and
respondent Caroline. While not saying so in express terms, the
appellate court considered respondents’ denial as worthy of
belief.
After another circumspect review of the records of the present
case, however, this Court is inclined to depart from the findings
of the CA.
Certainly, in a suit for a recovery of sum of money, as here, the
plaintiff-creditor has the burden of proof to show that defendant
had not paid her the amount of the contracted loan. However, it
has also been long established that where the plaintiff-creditor
possesses and submits in evidence an instrument showing the
indebtedness, a presumption that the credit has not been
satisfied arises in her favor. Thus, the defendant is, in
appropriate instances, required to overcome the said
presumption and present evidence to prove the fact of payment
so that no judgment will be entered against him.44
In overruling the trial court, however, the CA opined that
petitioner "failed to establish [the] alleged indebtedness in
writing."45 Consequently, so the CA held, respondents were
under no obligation to prove their defense. Clearly, the CA had
discounted the value of the only hard pieces of evidence extant
in the present case—the checks issued by respondent Caroline
in 1988 and 1996 that were in the possession of, and presented
in court by, petitioner.
In Pacheco v. Court of Appeals,46 this Court has expressly
recognized that a check "constitutes an evidence of
indebtedness"47 and is a veritable "proof of an
obligation."48 Hence, it can be used "in lieu of and for the same
purpose as a promissory note."49 In fact, in the seminal case of
Lozano v. Martinez,50 We pointed out that a check functions
more than a promissory note since it not only contains an
undertaking to pay an amount of money but is an "order
addressed to a bank and partakes of a representation that the
drawer has funds on deposit against which the check is drawn,
sufficient to ensure payment upon its presentation to the
bank."51 This Court reiterated this rule in the relatively recent
Lim v. Mindanao Wines and Liquour Galleria stating that "a
check, the entries of which are in writing, could prove a loan
transaction."52 This very same principle underpins Section 24 of
the Negotiable Instruments Law (NIL):
Section 24. Presumption of consideration. – Every negotiable
instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature
appears thereon to have become a party for value.
Consequently, the 17 original checks, completed and delivered
to petitioner, are sufficient by themselves to prove the existence
of the loan obligation of the respondents to petitioner. Note that
respondent Caroline had not denied the genuineness of these
checks.53 Instead, respondents argue that they were given to
various other persons and petitioner had simply collected all
these 17 checks from them in order to damage respondents’
reputation.54 This account is not only incredible; it runs counter
to human experience, as enshrined in Sec. 16 of the NIL which
provides that when an instrument is no longer in the possession
of the person who signed it and it is complete in its terms "a
valid and intentional delivery by him is presumed until the
contrary is proved."
The appellate court’s justification in giving credit to respondents’
contention that the respondents had delivered the 17 checks to
persons other than petitioner lies on the supposed failure of
petitioner "to establish for whose accounts [the checks] were
deposited and subsequently dishonored."55 This is clearly
contrary to the evidence on record. It seems that the appellate
court overlooked the original copies of the bank return slips
offered by petitioner in evidence. These return slips show that
the 1988 checks issued by respondent Caroline were
dishonored by the drawee banks because they were "drawn
against insufficient funds."56 Further, a close scrutiny of these
return slips will reveal that the checks were deposited either in
petitioner’s account57 or in the account of her brother, Ricardo
Yulo—a fact she had previously testified to explaining that
petitioner indorsed some checks to her brother to pay for a part
of the capital she used in her financing business.58
As for the Asiatrust check issued by respondent Caroline in
1996 to substitute the compounded value of the 1988 checks,
the appellate court likewise sympathized with respondents’
version of the story holding that it is buttressed by respondents’
allegations describing the same defense made in the two
related cases filed against them by petitioner’s brother-in-law,
Vicente Balboa.1âwphi1 These related cases consisted of a
criminal case for violation of BP 2259and a civil case for
collection of sum of money60 involving three (3) of the five (5)
consecutively numbered checks she allegedly left with Lilian.61 It
should be noted, however, that while respondents were
exculpated from their criminal liability,62 in Sps. Benito Lo Bun
Tiong and Caroline Siok Ching Teng v. Vicente Balboa,63 this
Court sustained the factual findings of the appellate court in the
civil case finding respondents civilly liable to pay the amount of
the checks.
It bears to note that the Decision of the appellate court
categorically debunked the same defense advanced by
respondents in the present case primarily because of Caroline’s
admission to the contrary. The Decision of the appellate court
found without any reversible error by this Court reads, thus:
The claim of Caroline Siok Ching Teng that the three (3) checks
were part of the blank checks she issued and delivered to Lilian
Balboa, wife of plaintiff-appellee, and intended solely for the
operational expenses of their mahjong business is belied by her
admission that she issued three (3) checks (Exhs. "A", "B" "C")
because Vicente showed the listing of their account totaling
₱5,175,250.00 (TSN, November 17, 1997, p. 10).64 x x x
Clearly, respondents’ defense that Caroline left blank checks
with petitioner’s sister who, it is said, is now determined to
recoup her past losses and bring financial ruin to respondents
by falsifying the same blank checks, had already been
thoroughly passed upon and rejected by this Court. It cannot,
therefore, be used to support respondents’ denial of their
liability.
Respondents’ other defenses are equally unconvincing. They
assert that petitioner could not have accepted a check worth
PhP 8.5 million considering that she should have known that
respondent Caroline had issued several checks for PhP 25,000
each in favor of Lilian and all of them had bounced.65 Needless
to state, an act done contrary to law cannot be sustained to
defeat a legal obligation; repeated failure to honor obligations
covered by several negotiable instruments cannot serve to
defeat yet another obligation covered by another instrument.
Indeed, it seems that respondent Caroline had displayed a
cavalier attitude towards the value, and the obligation
concomitant with the issuance, of a check. As attested to by
respondents’ very own witness, respondent Caroline has a
documented history of issuing insufficiently funded checks for
69 times, at the very least.66 This fact alone bolsters petitioner’s
allegation that the checks delivered to her by respondent
Caroline were similarly not funded.
In Magdiwang Realty Corp. v. Manila Banking Corp., We
stressed that the quantum of evidence required in civil cases—
preponderance of evidence—"is a phrase which, in the last
analysis, means probability to truth. It is evidence which is more
convincing to the court as worthier of belief than that which is
offered in opposition thereto."67 Based on the evidence
submitted by the parties and the legal presumptions arising
therefrom, petitioner’s evidence outweighs that of respondents.
This preponderance of evidence in favor of Pua requires that a
judgment ordering respondents to pay their obligation be
entered.
As aptly held by the court a quo, however, respondents cannot
be obliged to pay the interest of the loan on the ground that the
supposed agreement to pay such interest was not reduced to
writing. Article 1956 of the Civil Code, which refers to monetary
interest, specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing.68 Thus, the
collection of interest in loans or forbearance of money is allowed
only when these two conditions concur: (1) there was an
express stipulation for the payment of interest; (2) the
agreement for the payment of the interest was reduced in
writing.69 Absent any of these two conditions, the money debtor
cannot be made liable for interest. Thus, petitioner is entitled
only to the principal amount of the loan plus the allowable legal
interest from the time of the demand,70 at the rate of 6% per
annum.71
Respondent Benito cannot escape the joint and solidary liability
to pay the loan on the ground that the obligation arose from
checks solely issued by his wife. Without any evidence to the
contrary, it is presumed that the proceeds of the loan redounded
to the benefit of their family. Hence, the conjugal partnership is
liable therefor.72 The unsupported allegation that respondents
were separated in fact, standing alone, does not persuade this
Court to solely bind respondent Caroline and exempt Benito. As
the head of the family, there is more reason that respondent
Benito should answer for the liability incurred by his wife
presumably in support of their family.
WHEREFORE, the Motion for Reconsideration is GRANTED.
The Resolution of this Court dated April 18, 2012 is set aside
and a new one entered REVERSING and SETTING ASIDE the
Decision dated March 31, 2011 and the Resolution dated
September 26, 2011 of the Court of Appeals in CA-G.R. CV No.
93755. The Decision in Civil Case No. 97-83027 of the Regional
Trial Court (RTC) of the City of Manila, Branch 29 is
REINSTATED with MODIFICATION.
Accordingly, respondents Benito Lo Bun Tiong and Caroline
Siok Ching Teng are ordered jointly and solidarily to pay
petitioner PhP 1,975,000 plus 6% interest per annum from April
18, 1997, until fully paid, and ₱200,000.00 as attorney’s fees.
SO ORDERED.
G.R. No. 107382/G.R. No. 107612 January 31, 1996
ASSOCIATED BANK, petitioner,
vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and
PHILIPPINE NATIONAL BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612 January 31, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HONORABLE COURT OF APPEALS, PROVINCE OF
TARLAC, and ASSOCIATED BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who
bears the loss, the drawer, the drawee bank or the collecting
bank?
This is the main issue in these consolidated petitions for review
assailing the decision of the Court of Appeals in "Province of
Tarlac v. Philippine National Bank v. Associated Bank v. Fausto
Pangilinan, et. al." (CA-G.R. No. CV No. 17962). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the
Philippine National Bank (PNB) Tarlac Branch where the
provincial funds are deposited. Checks issued by the Province
are signed by the Provincial Treasurer and countersigned by the
Provincial Auditor or the Secretary of the Sangguniang Bayan.
A portion of the funds of the province is allocated to the
Concepcion Emergency Hospital. 2 The allotment checks for
said government hospital are drawn to the order of "Concepcion
Emergency Hospital, Concepcion, Tarlac" or "The Chief,
Concepcion Emergency Hospital, Concepcion, Tarlac." The
checks are released by the Office of the Provincial Treasurer
and received for the hospital by its administrative officer and
cashier.
In January 1981, the books of account of the Provincial
Treasurer were post-audited by the Provincial Auditor. It was
then discovered that the hospital did not receive several
allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the
manager of the PNB to return all of its cleared checks which
were issued from 1977 to 1980 in order to verify the regularity of
their encashment. After the checks were examined, the
Provincial Treasurer learned that 30 checks amounting to
P203,300.00 were encashed by one Fausto Pangilinan, with the
Associated Bank acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative
officer and cashier of payee hospital until his retirement on
February 28, 1978, collected the questioned checks from the
office of the Provincial Treasurer. He claimed to be assisting or
helping the hospital follow up the release of the checks and had
official receipts. 3Pangilinan sought to encash the first
check 4 with Associated Bank. However, the manager of
Associated Bank refused and suggested that Pangilinan deposit
the check in his personal savings account with the same bank.
Pangilinan was able to withdraw the money when the check was
cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of
the payee hospital, Pangilinan followed the same procedure for
the second check, in the amount of P5,000.00 and dated April
20, 1978, 5 as well as for twenty-eight other checks of various
amounts and on various dates. The last check negotiated by
Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All
the checks bore the stamp of Associated Bank which reads "All
prior endorsements guaranteed ASSOCIATED BANK."
Jesus David, the manager of Associated Bank testified that
Pangilinan made it appear that the checks were paid to him for
certain projects with the hospital. 7 He did not find as irregular
the fact that the checks were not payable to Pangilinan but to
the Concepcion Emergency Hospital. While he admitted that his
wife and Pangilinan's wife are first cousins, the manager denied
having given Pangilinan preferential treatment on this account. 8
On February 26, 1981, the Provincial Treasurer wrote the
manager of the PNB seeking the restoration of the various
amounts debited from the current account of the Province. 9
In turn, the PNB manager demanded reimbursement from the
Associated Bank on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac brought
suit against PNB which, in turn, impleaded Associated Bank as
third-party defendant. The latter then filed a fourth-party
complaint against Adena Canlas and Fausto Pangilinan. 11
After trial on the merits, the lower court rendered its decision on
March 21, 1988, disposing as follows:
WHEREFORE, in view of the foregoing, judgment is
hereby rendered:
1. On the basic complaint, in favor of plaintiff Province of
Tarlac and against defendant Philippine National Bank
(PNB), ordering the latter to pay to the former, the sum of
Two Hundred Three Thousand Three Hundred
(P203,300.00) Pesos with legal interest thereon from
March 20, 1981 until fully paid;
2. On the third-party complaint, in favor of
defendant/third-party plaintiff Philippine National Bank
(PNB) and against third-party defendant/fourth-party
plaintiff Associated Bank ordering the latter to reimburse
to the former the amount of Two Hundred Three
Thousand Three Hundred (P203,300.00) Pesos with
legal interests thereon from March 20, 1981 until fully
paid;.
3. On the fourth-party complaint, the same is hereby
ordered dismissed for lack of cause of action as against
fourth-party defendant Adena Canlas and lack of
jurisdiction over the person of fourth-party defendant
Fausto Pangilinan as against the latter.
4. On the counterclaims on the complaint, third-party
complaint and fourth-party complaint, the same are
hereby ordered dismissed for lack of merit.
SO ORDERED. 12
PNB and Associated Bank appealed to the Court of
Appeals. 13 Respondent court affirmed the trial court's decision
in toto on September 30, 1992.
Hence these consolidated petitions which seek a reversal of
respondent appellate court's decision.
PNB assigned two errors. First, the bank contends that
respondent court erred in exempting the Province of Tarlac from
liability when, in fact, the latter was negligent because it
delivered and released the questioned checks to Fausto
Pangilinan who was then already retired as the hospital's
cashier and administrative officer. PNB also maintains its
innocence and alleges that as between two innocent persons,
the one whose act was the cause of the loss, in this case the
Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay
the province and then seek reimbursement from Associated
Bank. According to petitioner bank, respondent appellate Court
should have directed Associated Bank to pay the adjudged
liability directly to the Province of Tarlac to avoid circuity. 14
Associated Bank, on the other hand, argues that the order of
liability should be totally reversed, with the drawee bank (PNB)
solely and ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the
Philippine Clearing House Rules instead of Central Bank
Circular No. 580, which, being an administrative regulation
issued pursuant to law, has the force and effect of law. 15 The
PCHC Rules are merely contractual stipulations among and
between member-banks. As such, they cannot prevail over the
aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped
from asserting the defense of guarantee of prior indorsements
against Associated Bank, the collecting bank. In stamping the
guarantee (for all prior indorsements), it merely followed a
mandatory requirement for clearing and had no choice but to
place the stamp of guarantee; otherwise, there would be no
clearing. The bank will be in a "no-win" situation and will always
bear the loss as against the drawee bank. 16
Associated Bank also claims that since PNB already cleared
and paid the value of the forged checks in question, it is now
estopped from asserting the defense that Associated Bank
guaranteed prior indorsements. The drawee bank allegedly has
the primary duty to verify the genuineness of payee's
indorsement before paying the check. 17
While both banks are innocent of the forgery, Associated Bank
claims that PNB was at fault and should solely bear the loss
because it cleared and paid the forged checks.
xxx xxx xxx
The case at bench concerns checks payable to the order of
Concepcion Emergency Hospital or its Chief. They were
properly issued and bear the genuine signatures of the drawer,
the Province of Tarlac. The infirmity in the questioned checks
lies in the payee's (Concepcion Emergency Hospital)
indorsements which are forgeries. At the time of their
indorsement, the checks were order instruments.
Checks having forged indorsements should be differentiated
from forged checks or checks bearing the forged signature of
the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. — When
a signature is forged or made without authority of the
person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to
give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or
under such signature unless the party against whom it is
sought to enforce such right is precluded from setting up
the forgery or want of authority.
A forged signature, whether it be that of the drawer or the
payee, is wholly inoperative and no one can gain title to the
instrument through it. A person whose signature to an
instrument was forged was never a party and never consented
to the contract which allegedly gave rise to such
instrument. 18 Section 23 does not avoid the instrument but only
the forged signature. 19 Thus, a forged indorsement does not
operate as the payee's indorsement.
The exception to the general rule in Section 23 is where "a party
against whom it is sought to enforce a right is precluded from
setting up the forgery or want of authority." Parties who warrant
or admit the genuineness of the signature in question and those
who, by their acts, silence or negligence are estopped from
setting up the defense of forgery, are precluded from using this
defense. Indorsers, persons negotiating by delivery and
acceptors are warrantors of the genuineness of the signatures
on the instrument. 20
In bearer instruments, the signature of the payee or holder is
unnecessary to pass title to the instrument. Hence, when the
indorsement is a forgery, only the person whose signature is
forged can raise the defense of forgery against a holder in due
course. 21
The checks involved in this case are order instruments, hence,
the following discussion is made with reference to the effects of
a forged indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the
forgery, such as the checks in this case, the signature of its
rightful holder (here, the payee hospital) is essential to transfer
title to the same instrument. When the holder's indorsement is
forged, all parties prior to the forgery may raise the real defense
of forgery against all parties subsequent thereto. 22
An indorser of an order instrument warrants "that the instrument
is genuine and in all respects what it purports to be; that he has
a good title to it; that all prior parties had capacity to contract;
and that the instrument is at the time of his indorsement valid
and subsisting." 23 He cannot interpose the defense that
signatures prior to him are forged.
A collecting bank where a check is deposited and which
indorses the check upon presentment with the drawee bank, is
such an indorser. So even if the indorsement on the check
deposited by the banks's client is forged, the collecting bank is
bound by his warranties as an indorser and cannot set up the
defense of forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee
bank, is under strict liability to pay the check to the order of the
payee. The drawer's instructions are reflected on the face and
by the terms of the check. Payment under a forged indorsement
is not to the drawer's order. When the drawee bank pays a
person other than the payee, it does not comply with the terms
of the check and violates its duty to charge its customer's (the
drawer) account only for properly payable items. Since the
drawee bank did not pay a holder or other person entitled to
receive payment, it has no right to reimbursement from the
drawer. 24 The general rule then is that the drawee bank may not
debit the drawer's account and is not entitled to indemnification
from the drawer. 25 The risk of loss must perforce fall on the
drawee bank.
However, if the drawee bank can prove a failure by the
customer/drawer to exercise ordinary care that substantially
contributed to the making of the forged signature, the drawer is
precluded from asserting the forgery.
If at the same time the drawee bank was also negligent to the
point of substantially contributing to the loss, then such loss
from the forgery can be apportioned between the negligent
drawer and the negligent bank. 26
In cases involving a forged check, where the drawer's signature
is forged, the drawer can recover from the drawee bank. No
drawee bank has a right to pay a forged check. If it does, it shall
have to recredit the amount of the check to the account of the
drawer. The liability chain ends with the drawee bank whose
responsibility it is to know the drawer's signature since the latter
is its customer. 27
In cases involving checks with forged indorsements, such as the
present petition, the chain of liability does not end with the
drawee bank. The drawee bank may not debit the account of
the drawer but may generally pass liability back through the
collection chain to the party who took from the forger and, of
course, to the forger himself, if available. 28 In other words, the
drawee bank canseek reimbursement or a return of the amount
it paid from the presentor bank or person. 29 Theoretically, the
latter can demand reimbursement from the person who indorsed
the check to it and so on. The loss falls on the party who took
the check from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting bank
(Associated Bank) to the drawee bank (PNB). The former will
necessarily be liable to the latter for the checks bearing forged
indorsements. If the forgery is that of the payee's or holder's
indorsement, the collecting bank is held liable, without prejudice
to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank
had no right to be paid by the drawee bank. The former must
necessarily return the money paid by the latter because it was
paid wrongfully. 30
More importantly, by reason of the statutory warranty of a
general indorser in section 66 of the Negotiable Instruments
Law, a collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all
prior indorsements, including the forged indorsement. It
warrants that the instrument is genuine, and that it is valid and
subsisting at the time of his indorsement. Because the
indorsement is a forgery, the collecting bank commits a breach
of this warranty and will be accountable to the drawee bank.
This liability scheme operates without regard to fault on the part
of the collecting/presenting bank. Even if the latter bank was not
negligent, it would still be liable to the drawee bank because of
its indorsement.
The Court has consistently ruled that "the collecting bank or last
endorser generally suffers the loss because it has the duty to
ascertain the genuineness of all prior endorsements considering
that the act of presenting the check for payment to the drawee is
an assertion that the party making the presentment has done its
duty to ascertain the genuineness of the endorsements." 31
The drawee bank is not similarly situated as the collecting bank
because the former makes no warranty as to the genuineness.
of any indorsement. 32 The drawee bank's duty is but to verify
the genuineness of the drawer's signature and not of the
indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy
to the depositor who negotiated the check. The bank knows
him, his address and history because he is a client. It has taken
a risk on his deposit. The bank is also in a better position to
detect forgery, fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the
check bearing a forged indorsement from the collecting bank.
However, a drawee bank has the duty to promptly inform the
presentor of the forgery upon discovery. If the drawee bank
delays in informing the presentor of the forgery, thereby
depriving said presentor of the right to recover from the forger,
the former is deemed negligent and can no longer recover from
the presentor. 33
Applying these rules to the case at bench, PNB, the drawee
bank, cannot debit the current account of the Province of Tarlac
because it paid checks which bore forged indorsements.
However, if the Province of Tarlac as drawer was negligent to
the point of substantially contributing to the loss, then the
drawee bank PNB can charge its account. If both drawee bank-
PNB and drawer-Province of Tarlac were negligent, the loss
should be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the
collecting bank-Associated Bank which presented and indorsed
the checks to it. Associated Bank can, in turn, hold the forger,
Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the
forgery, thus depriving the latter of the opportunity to recover
from the forger, it forfeits its right to reimbursement and will be
made to bear the loss.
After careful examination of the records, the Court finds that the
Province of Tarlac was equally negligent and should, therefore,
share the burden of loss from the checks bearing a forged
indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect
the checks when the latter, having already retired from
government service, was no longer connected with the hospital.
With the exception of the first check (dated January 17, 1978),
all the checks were issued and released after Pangilinan's
retirement on February 28, 1978. After nearly three years, the
Treasurer's office was still releasing the checks to the retired
cashier. In addition, some of the aid allotment checks were
released to Pangilinan and the others to Elizabeth Juco, the
new cashier. The fact that there were now two persons
collecting the checks for the hospital is an unmistakable sign of
an irregularity which should have alerted employees in the
Treasurer's office of the fraud being committed. There is also
evidence indicating that the provincial employees were aware of
Pangilinan's retirement and consequent dissociation from the
hospital. Jose Meru, the Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two
releases of checks, one went to Mr. Pangilinan and one
went to Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the
authorized representative of Concepcion Emergency
Hospital is and was supposed to be Miss Juco?
A Well, as far as my investigation show (sic) the assistant
cashier told me that Pangilinan represented himself as
also authorized to help in the release of these checks
and we were apparently misled because they accepted
the representation of Pangilinan that he was helping
them in the release of the checks and besides according
to them they were, Pangilinan, like the rest, was able to
present an official receipt to acknowledge these receipts
and according to them since this is a government check
and believed that it will eventually go to the hospital
following the standard procedure of negotiating
government checks, they released the checks to
Pangilinan aside from Miss Juco.34
The failure of the Province of Tarlac to exercise due care
contributed to a significant degree to the loss tantamount to
negligence. Hence, the Province of Tarlac should be liable for
part of the total amount paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only
according to the terms of the check. Hence, it cannot escape
liability and should also bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA, 35 six crossed checks with
forged indorsements were deposited in the forger's account with
the collecting bank and were later paid by four different drawee
banks. The Court found the collecting bank (Associated) to be
negligent and held:
The Bank should have first verified his right to endorse
the crossed checks, of which he was not the payee, and
to deposit the proceeds of the checks to his own account.
The Bank was by reason of the nature of the checks put
upon notice that they were issued for deposit only to the
private respondent's account. . . .
The situation in the case at bench is analogous to the above
case, for it was not the payee who deposited the checks with
the collecting bank. Here, the checks were all payable to
Concepcion Emergency Hospital but it was Fausto Pangilinan
who deposited the checks in his personal savings account.
Although Associated Bank claims that the guarantee stamped
on the checks (All prior and/or lack of endorsements
guaranteed) is merely a requirement forced upon it by clearing
house rules, it cannot but remain liable. The stamp
guaranteeing prior indorsements is not an empty rubric which a
bank must fulfill for the sake of convenience. A bank is not
required to accept all the checks negotiated to it. It is within the
bank's discretion to receive a check for no banking institution
would consciously or deliberately accept a check bearing a
forged indorsement. When a check is deposited with the
collecting bank, it takes a risk on its depositor. It is only logical
that this bank be held accountable for checks deposited by its
customers.
A delay in informing the collecting bank (Associated Bank) of
the forgery, which deprives it of the opportunity to go after the
forger, signifies negligence on the part of the drawee bank
(PNB) and will preclude it from claiming reimbursement.
It is here that Associated Bank's assignment of error concerning
C.B. Circular No. 580 and Section 23 of the Philippine Clearing
House Corporation Rules comes to fore. Under Section 4(c) of
CB Circular No. 580, items bearing a forged endorsement shall
be returned within twenty-Sour (24) hours after discovery of the
forgery but in no event beyond the period fixed or provided by
law for filing of a legal action by the returning bank. Section 23
of the PCHC Rules deleted the requirement that items bearing a
forged endorsement should be returned within twenty-four
hours. Associated Bank now argues that the aforementioned
Central Bank Circular is applicable. Since PNB did not return
the questioned checks within twenty-four hours, but several
days later, Associated Bank alleges that PNB should be
considered negligent and not entitled to reimbursement of the
amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's
assertions that CB Circular No. 580 is an administrative
regulation issued pursuant to law and as such, must prevail over
the PCHC rule. The Central Bank circular was in force for all
banks until June 1980 when the Philippine Clearing House
Corporation (PCHC) was set up and commenced operations.
Banks in Metro Manila were covered by the PCHC while banks
located elsewhere still had to go through Central Bank Clearing.
In any event, the twenty-four-hour return rule was adopted by
the PCHC until it was changed in 1982. The contending banks
herein, which are both branches in Tarlac province, are
therefore not covered by PCHC Rules but by CB Circular No.
580. Clearly then, the CB circular was applicable when the
forgery of the checks was discovered in 1981.
The rule mandates that the checks be returned within twenty-
four hours after discovery of the forgery but in no event beyond
the period fixed by law for filing a legal action. The rationale of
the rule is to give the collecting bank (which indorsed the check)
adequate opportunity to proceed against the forger. If prompt
notice is not given, the collecting bank maybe prejudiced and
lose the opportunity to go after its depositor.
The Court finds that even if PNB did not return the questioned
checks to Associated Bank within twenty-four hours, as
mandated by the rule, PNB did not commit negligent delay.
Under the circumstances, PNB gave prompt notice to
Associated Bank and the latter bank was not prejudiced in going
after Fausto Pangilinan. After the Province of Tarlac informed
PNB of the forgeries, PNB necessarily had to inspect the checks
and conduct its own investigation. Thereafter, it requested the
Provincial Treasurer's office on March 31, 1981 to return the
checks for verification. The Province of Tarlac returned the
checks only on April 22, 1981. Two days later, Associated Bank
received the checks from PNB. 36
Associated Bank was also furnished a copy of the Province's
letter of demand to PNB dated March 20, 1981, thus giving it
notice of the forgeries. At this time, however, Pangilinan's
account with Associated had only P24.63 in it. 37Had Associated
Bank decided to debit Pangilinan's account, it could not have
recovered the amounts paid on the questioned checks. In
addition, while Associated Bank filed a fourth-party complaint
against Fausto Pangilinan, it did not present evidence against
Pangilinan and even presented him as its rebuttal
witness. 38 Hence, Associated Bank was not prejudiced by
PNB's failure to comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from
requiring reimbursement because the latter paid and cleared the
checks. The Court finds this contention unmeritorious. Even if
PNB cleared and paid the checks, it can still recover from
Associated Bank. This is true even if the payee's Chief Officer
who was supposed to have indorsed the checks is also a
customer of the drawee bank. 39 PNB's duty was to verify the
genuineness of the drawer's signature and not the genuineness
of payee's indorsement. Associated Bank, as the collecting
bank, is the entity with the duty to verify the genuineness of the
payee's indorsement.
PNB also avers that respondent court erred in adjudging
circuitous liability by directing PNB to return to the Province of
Tarlac the amount of the checks and then directing Associated
Bank to reimburse PNB. The Court finds nothing wrong with the
mode of the award. The drawer, Province of Tarlac, is a clientor
customer of the PNB, not of Associated Bank. There is no privity
of contract between the drawer and the collecting bank.
The trial court made PNB and Associated Bank liable with legal
interest from March 20, 1981, the date of extrajudicial demand
made by the Province of Tarlac on PNB. The payments to be
made in this case stem from the deposits of the Province of
Tarlac in its current account with the PNB. Bank deposits are
considered under the law as loans. 40 Central Bank Circular No.
416 prescribes a twelve percent (12%) interest per annum for
loans, forebearance of money, goods or credits in the absence
of express stipulation. Normally, current accounts are likewise
interest-bearing, by express contract, thus excluding them from
the coverage of CB Circular No. 416. In this case, however, the
actual interest rate, if any, for the current account opened by the
Province of Tarlac with PNB was not given in evidence. Hence,
the Court deems it wise to affirm the trial court's use of the legal
interest rate, or six percent (6%) per annum. The interest rate
shall be computed from the date of default, or the date of judicial
or extrajudicial demand. 41 The trial court did not err in granting
legal interest from March 20, 1981, the date of extrajudicial
demand.
The Court finds as reasonable, the proportionate sharing of fifty
percent - fifty percent (50%-50%). Due to the negligence of the
Province of Tarlac in releasing the checks to an unauthorized
person (Fausto Pangilinan), in allowing the retired hospital
cashier to receive the checks for the payee hospital for a period
close to three years and in not properly ascertaining why the
retired hospital cashier was collecting checks for the payee
hospital in addition to the hospital's real cashier, respondent
Province contributed to the loss amounting to P203,300.00 and
shall be liable to the PNB for fifty (50%) percent thereof. In
effect, the Province of Tarlac can only recover fifty percent
(50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for
fifty (50%) percent of P203,300.00. It is liable on its warranties
as indorser of the checks which were deposited by Fausto
Pangilinan, having guaranteed the genuineness of all prior
indorsements, including that of the chief of the payee hospital,
Dr. Adena Canlas. Associated Bank was also remiss in its duty
to ascertain the genuineness of the payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by
the Philippine National Bank (G.R. No. 107612) is hereby
PARTIALLY GRANTED. The petition for review filed by the
Associated Bank (G.R. No. 107382) is hereby DENIED. The
decision of the trial court is MODIFIED. The Philippine National
Bank shall pay fifty percent (50%) of P203,300.00 to the
Province of Tarlac, with legal interest from March 20, 1981 until
the payment thereof. Associated Bank shall pay fifty percent
(50%) of P203,300.00 to the Philippine National Bank, likewise,
with legal interest from March 20, 1981 until payment is made.
SO ORDERED.
Regalado, Puno and Mendoza, JJ., concur.
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES,
INC., petitioner, vs. FAR EAST BANK AND TRUST
COMPANY AND COURT OF APPEALS, respondents.
DECISION
TINGA, J.:
Called to fore in the present petition is a classic textbook
question if a bank pays out on a forged check, is it liable to
reimburse the drawer from whose account the funds were paid
out? The Court of Appeals, in reversing a trial court decision
adverse to the bank, invoked tenuous reasoning to acquit the
bank of liability. We reverse, applying time-honored principles of
law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc.
(Samsung Construction), while based in Bian, Laguna,
maintained a current account with defendant Far East Bank and
Trust Company[1] (FEBTC) at the latters Bel-
[2]
Air, Makati branch. The sole signatory to Samsung
Constructions account was Jong Kyu Lee (Jong), its Project
Manager,[3]while the checks remained in the custody of the
companys accountant, Kyu Yong Lee (Kyu).[4]
On 19 March 1992, a certain Roberto Gonzaga presented for
payment FEBTC Check No. 432100 to the banks branch in Bel-
Air, Makati. The check, payable to cash and drawn against
Samsung Constructions current account, was in the amount of
Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00). The bank teller, Cleofe Justiani, first checked the
balance of Samsung Constructions account. After ascertaining
there were enough funds to cover the check,[5] she compared the
signature appearing on the check with the specimen signature of
Jong as contained in the specimen signature card with the
bank. After comparing the two signatures, Justiani was satisfied
as to the authenticity of the signature appearing on the
check. She then asked Gonzaga to submit proof of his identity,
and the latter presented three (3) identification cards.[6]
At the same time, Justiani forwarded the check to the branch
Senior Assistant Cashier Gemma Velez, as it was bank policy
that two bank branch officers approve checks exceeding One
Hundred Thousand Pesos, for payment or encashment. Velez
likewise counterchecked the signature on the check as against
that on the signature card. He too concluded that the check was
indeed signed by Jong. Velez then forwarded the check and
signature card to Shirley Syfu, another bank officer, for
approval. Syfu then noticed that Jose Sempio III (Sempio), the
assistant accountant of Samsung Construction, was also in the
bank. Sempio was well-known to Syfu and the other bank officers,
he being the assistant accountant of Samsung Construction. Syfu
showed the check to Sempio, who vouched for the genuineness
of Jongs signature. Confirming the identity of Gonzaga, Sempio
said that the check was for the purchase of equipment for
Samsung Construction. Satisfied with the genuineness of the
signature of Jong, Syfu authorized the banks encashment of the
check to Gonzaga.
The following day, the accountant of Samsung Construction,
Kyu, examined the balance of the bank account and discovered
that a check in the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00) had been
encashed. Aware that he had not prepared such a check for
Jongs signature, Kyu perused the checkbook and found that the
last blank check was missing.[7] He reported the matter to Jong,
who then proceeded to the bank. Jong learned of the encashment
of the check, and realized that his signature had been forged. The
Bank Manager reputedly told Jong that he would be reimbursed
for the amount of the check.[8] Jong proceeded to the police
station and consulted with his lawyers.[9] Subsequently, a criminal
case for qualified theft was filed against Sempio before the
Laguna court.[10]
In a letter dated 6 May 1992, Samsung Construction, through
counsel, demanded that FEBTC credit to it the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00), with interest.[11] In response, FEBTC said that it
was still conducting an investigation on the matter. Unsatisfied,
Samsung Construction filed a Complaint on 10 June 1992 for
violation of Section 23 of the Negotiable Instruments Law, and
prayed for the payment of the amount debited as a result of the
questioned check plus interest, and attorneys fees.[12] The case
was docketed as Civil Case No. 92-61506 before the Regional
Trial Court (RTC) of Manila, Branch 9.[13]
During the trial, both sides presented their respective expert
witnesses to testify on the claim that Jongs signature was
forged. Samsung Corporation, which had referred the check for
investigation to the NBI, presented Senior NBI Document
Examiner Roda B. Flores. She testified that based on her
examination, she concluded that Jongs signature had been
forged on the check. On the other hand, FEBTC, which had
sought the assistance of the Philippine National Police
(PNP),[14] presented Rosario C. Perez, a document examiner
from the PNP Crime Laboratory. She testified that her findings
showed that Jongs signature on the check was genuine.[15]
Confronted with conflicting expert testimony, the RTC chose
to believe the findings of the NBI expert. In a Decision dated 25
April 1994, the RTC held that Jongs signature on the check was
forged and accordingly directed the bank to pay or credit back to
Samsung Constructions account the amount of Nine Hundred
Ninety Nine Thousand Five Hundred Pesos (P999,500.00),
together with interest tolled from the time the complaint was filed,
and attorneys fees in the amount of Fifteen Thousand Pesos
(P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28
November 1996, the Special Fourteenth Division of the Court of
Appeals rendered a Decision,[16] reversing the RTC Decision and
absolving FEBTC from any liability. The Court of Appeals held
that the contradictory findings of the NBI and the PNP created
doubt as to whether there was forgery.[17] Moreover, the appellate
court also held that assuming there was forgery, it occurred due
to the negligence of Samsung Construction, imputing blame on
the accountant Kyu for lack of care and prudence in keeping the
checks, which if observed would have prevented Sempio from
gaining access thereto.[18] The Court of Appeals invoked the
ruling in PNB v. National City Bank of New York[19] that, if a loss,
which must be borne by one or two innocent persons, can be
traced to the neglect or fault of either, such loss would be borne
by the negligent party, even if innocent of intentional fraud. [20]
Samsung Construction now argues that the Court of Appeals
had seriously misapprehended the facts when it overturned the
RTCs finding of forgery. It also contends that the appellate court
erred in finding that it had been negligent in safekeeping the
check, and in applying the equity principle enunciated in PNB v.
National City Bank of New York.
Since the trial court and the Court of Appeals arrived at
contrary findings on questions of fact, the Court is obliged to
examine the record to draw out the correct conclusions. Upon
examination of the record, and based on the applicable laws and
jurisprudence, we reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of
authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is
wholly inoperative, and payment made through or under such
signature is ineffectual or does not discharge the instrument.[21] If
payment is made, the drawee cannot charge it to the drawers
account. The traditional justification for the result is that the
drawee is in a superior position to detect a forgery because he
has the makers signature and is expected to know and compare
it.[22] The rule has a healthy cautionary effect on banks by
encouraging care in the comparison of the signatures against
those on the signature cards they have on file. Moreover, the very which the bank had paid out on checks bearing forgeries of the
opportunity of the drawee to insure and to distribute the cost plaintiffs signature.
among its customers who use checks makes the drawee an ideal
party to spread the risk to insurance.[23] xxx
Brady, in his treatise The Law of Forged and Altered Checks,
It was held that the bank was liable. It was further held that the
elucidates:
fact that the plaintiff waited eight or nine months after
discovering the forgery, before notifying the bank, did not, as a
When a person deposits money in a general account in a bank,
matter of law, constitute a ratification of the payment, so as to
against which he has the privilege of drawing checks in the
preclude the plaintiff from holding the bank liable. xxx
ordinary course of business, the relationship between the bank
and the depositor is that of debtor and creditor. So far as the
This rule of liability can be stated briefly in these words: A bank
legal relationship between the two is concerned, the situation is
is bound to know its depositors signature. The rule is variously
the same as though the bank had borrowed money from the
expressed in the many decisions in which the question has
depositor, agreeing to repay it on demand, or had bought goods
been considered. But they all sum up to the proposition that a
from the depositor, agreeing to pay for them on demand. The
bank must know the signatures of those whose general deposits
bank owes the depositor money in the same sense that any
it carries.[24]
debtor owes money to his creditor. Added to this, in the case of
bank and depositor, there is, of course, the banks obligation to
By no means is the principle rendered obsolete with the
pay checks drawn by the depositor in proper form and
advent of modern commercial transactions. Contemporary texts
presented in due course. When the bank receives the deposit, it
still affirm this well-entrenched standard. Nickles, in his
impliedly agrees to pay only upon the depositors order. When
book Negotiable Instruments and Other Related Commercial
the bank pays a check, on which the depositors signature is a
Paper wrote, thus:
forgery, it has failed to comply with its contract in this
respect. Therefore, the bank is held liable.
The deposit contract between a payor bank and its customer
determines who can draw against the customers account by
The fact that the forgery is a clever one is immaterial. The
specifying whose signature is necessary on checks that are
forged signature may so closely resemble the genuine as to
chargeable against the customers account. Therefore, a check
defy detection by the depositor himself. And yet, if a bank pays
drawn against the account of an individual customer that is
the check, it is paying out its own money and not the depositors.
signed by someone other than the customer, and without
authority from her, is not properly payable and is not chargeable
The forgery may be committed by a trusted employee or
to the customers account, inasmuch as any unauthorized
confidential agent. The bank still must bear the loss. Even in a
signature on an instrument is ineffective as the signature of the
case where the forged check was drawn by the depositors
person whose name is signed.[25]
partner, the loss was placed upon the bank. The case referred
to is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In
Under Section 23 of the Negotiable Instruments Law, forgery
this case, the plaintiff brought suit against the defendant bank
is a real or absolute defense by the party whose signature is
for money which had been deposited to the plaintiffs credit and
forged.[26] On the premise that Jongs signature was indeed
forged, FEBTC is liable for the loss since it authorized the
discharge of the forged check. Such liability attaches even if the
bank exerts due diligence and care in preventing such faulty
discharge. Forgeries often deceive the eye of the most cautious
experts; and when a bank has been so deceived, it is a harsh rule
which compels it to suffer although no one has suffered by its
being deceived.[27] The forgery may be so near like the genuine
as to defy detection by the depositor himself, and yet the bank is
liable to the depositor if it pays the check.[28]
Thus, the first matter of inquiry is into whether the check was
indeed forged. A document formally presented is presumed to be
genuine until it is proved to be fraudulent. In a forgery trial, this
presumption must be overcome but this can only be done by
convincing testimony and effective illustrations.[29]
In ruling that forgery was not duly proven, the Court of
Appeals held:
[There] is ground to doubt the findings of the trial court
sustaining the alleged forgery in view of the conflicting
conclusions made by handwriting experts from the NBI and the
PNP, both agencies of the government.
xxx
These contradictory findings create doubt on whether there was
indeed a forgery. In the case of Tenio-Obsequio v. Court of
Appeals, 230 SCRA 550, the Supreme Court held that forgery
cannot be presumed; it must be proved by clear, positive and
convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her
salt would never allow an opponents expert witness to stand
uncontradicted, thus the spectacle of competing expert witnesses
is not unusual. The trier of fact will have to decide which version
to believe, and explain why or why not such version is more
credible than the other. Reliance therefore cannot be placed
merely on the fact that there are colliding opinions of two experts,
both clothed with the presumption of official duty, in order to draw
a conclusion, especially one which is extremely crucial. Doing so
is tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies
the penultimate tier in the judicial hierarchy. This Court has long
deferred to the appellate court as to its findings of fact in the
understanding that it has the appropriate skill and competence to
plough through the minutiae that scatters the factual field. In
failing to thoroughly evaluate the evidence before it, and relying
instead on presumptions haphazardly drawn, the Court of
Appeals was sadly remiss. Of course, courts, like humans, are
fallible, and not every error deserves a stern rebuke. Yet, the
appellate courts error in this case warrants special attention, as it
is absurd and even dangerous as a precedent. If this rationale
were adopted as a governing standard by every court in the land,
barely any actionable claim would prosper, defeated as it would
be by the mere invocation of the existence of a contrary expert
opinion.
On the other hand, the RTC did adjudge the testimony of the
NBI expert as more credible than that of the PNP, and explained
its reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of
analysis, the court arrived at the conclusion that the testimony of
the NBI document examiner
is more credible because the testimony of the PNP Crime
Laboratory Services document examiner reveals that there are
a lot of differences in the questioned signature as compared to
the standard specimen signature. Furthermore, as testified to by
Ms. Rhoda Flores, NBI expert, the manner of execution of the
standard signatures used reveals that it is a free rapid
continuous execution or stroke as shown by the tampering
terminal stroke of the signatures whereas the questioned
signature is a hesitating slow drawn execution stroke. Clearly,
the person who executed the questioned signature was hesitant
when the signature was made.[30]
During the testimony of PNP expert Rosario Perez, the RTC
bluntly noted that apparently, there [are] differences on that
questioned signature and the standard signatures. [31]This Court,
in examining the signatures, makes a similar finding. The PNP
expert excused the noted differences by asserting that they were
mere variations, which are normal deviations found in
writing.[32] Yet the RTC, which had the opportunity to examine the
relevant documents and to personally observe the expert
witness, clearly disbelieved the PNP expert. The Court similarly
finds the testimony of the PNP expert as unconvincing. During
the trial, she was confronted several times with apparent
differences between strokes in the questioned signature and the
genuine samples. Each time, she would just blandly assert that
these differences were just variations,[33] as if the mere
conjuration of the word would sufficiently disquiet whatever
doubts about the deviations. Such conclusion, standing alone,
would be of little or no value unless supported by sufficiently
cogent reasons which might amount almost to a
demonstration.[34]
The most telling difference between the questioned and
genuine signatures examined by the PNP is in the final upward
stroke in the signature, or the point to the short stroke of the
terminal in the capital letter L, as referred to by the PNP examiner
who had marked it in her comparison chart as point no. 6. To the
plain eye, such upward final stroke consists of a vertical line
which forms a ninety degree (90) angle with the previous stroke.
Of the twenty one (21) other genuine samples examined by the
PNP, at least nine (9) ended with an upward stroke.[35] However,
unlike the questioned signature, the upward strokes of eight (8)
of these signatures are looped, while the upward stroke of the
seventh[36] forms a severe forty-five degree (45) with the previous
stroke. The difference is glaring, and indeed, the PNP examiner
was confronted with the inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the s
stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic)
were (sic) point 6 is repeated or the last stroke s is
pointing directly upwards?
A: There is none in the standard signature, sir.[37]
Again, the PNP examiner downplayed the uniqueness of the
final stroke in the questioned signature as a mere variation,[38] the
same excuse she proffered for the other marked differences
noted by the Court and the counsel for petitioner.[39]
There is no reason to doubt why the RTC gave credence to
the testimony of the NBI examiner, and not the PNP experts. The
NBI expert, Rhoda Flores, clearly qualifies as an expert
witness. A document examiner for fifteen years, she had been
promoted to the rank of Senior Document Examiner with the NBI,
and had held that rank for twelve years prior to her testimony. She
had placed among the top five examinees in the Competitive
Seminar in Question Document Examination, conducted by
the NBI Academy, which qualified her as a document
examiner.[40] She had trained with the Royal Hongkong Police
Laboratory and is a member of the International Association for
Identification.[41]As of the time she testified, she had examined
more than fifty to fifty-five thousand questioned documents, on an
average of fifteen to twenty documents a day.[42] In comparison,
PNP document examiner Perez admitted to having examined
only around five hundred documents as of her testimony.[43]
In analyzing the signatures, NBI Examiner Flores utilized the
scientific comparative examination method consisting of analysis,
recognition, comparison and evaluation of the writing habits with
the use of instruments such as a magnifying lense, a stereoscopic
microscope, and varied lighting substances. She also prepared
enlarged photographs of the signatures in order to facilitate the
necessary comparisons.[44] She compared the questioned
signature as against ten (10) other sample signatures of
Jong. Five of these signatures were executed on checks
previously issued by Jong, while the other five contained in
business letters Jong had signed.[45] The NBI found that there
were significant differences in the handwriting characteristics
existing between the questioned and the sample signatures, as
to manner of execution, link/connecting strokes, proportion
characteristics, and other identifying details.[46]
 The RTC was sufficiently convinced by the NBI examiners
testimony, and explained her reasons in its Decisions. While the
Court of Appeals disagreed and upheld the findings of the PNP,
it failed to convincingly demonstrate why such findings were more
credible than those of the NBI expert. As a throwaway, the
assailed Decision noted that the PNP, not the NBI, had the
opportunity to examine the specimen signature card signed by
Jong, which was relied upon by the employees of FEBTC in
authenticating Jongs signature. The distinction is irrelevant in
establishing forgery. Forgery can be established comparing the
contested signatures as against those of any sample signature
duly established as that of the persons whose signature was
forged.
FEBTC lays undue emphasis on the fact that the PNP
examiner did compare the questioned signature against the bank
signature cards. The crucial fact in question is whether or not
the check was forged, not whether the bank could have
detected the forgery. The latter issue becomes relevant only
if there is need to weigh the comparative negligence between
the bank and the party whose signature was forged.
At the same time, the Court of Appeals failed to assess the
effect of Jongs testimony that the signature on the check was not
his.[47] The assertion may seem self-serving at first blush, yet it
cannot be ignored that Jong was in the best position to know
whether or not the signature on the check was his. While his claim
should not be taken at face value, any averments he would have
on the matter, if adjudged as truthful, deserve primacy in
consideration. Jongs testimony is supported by the findings of the
NBI examiner.They are also backed by factual circumstances
that support the conclusion that the assailed check was indeed
forged. Judicial notice can be taken that is highly unusual in
practice for a business establishment to draw a check for close
to a million pesos and make it payable to cash or bearer, and not
to order. Jong immediately reported the forgery upon its
discovery. He filed the appropriate criminal charges against
Sempio, the putative forger.[48]
Now for determination is whether Samsung Construction was
precluded from setting up the defense of forgery under Section
23 of the Negotiable Instruments Law. The Court of Appeals
concluded that Samsung Construction was negligent, and
invoked the doctrines that where a loss must be borne by one of
two innocent person, can be traced to the neglect or fault of
either, it is reasonable that it would be borne by him, even if
innocent of any intentional fraud, through whose means it has
succeeded[49] or who put into the power of the third person to
perpetuate the wrong.[50] Applying these rules, the Court of
Appeals determined that it was the negligence of Samsung
Construction that allowed the encashment of the forged check.
In the case at bar, the forgery appears to have been made
possible through the acts of one Jose Sempio III, an assistant
accountant employed by the plaintiff Samsung [Construction]
Co. Philippines, Inc. who supposedly stole the blank check and
who presumably is responsible for its encashment through a
forged signature of Jong Kyu Lee. Sempio was assistant to the
Korean accountant who was in possession of the blank checks
and who through negligence, enabled Sempio to have access to
the same. Had the Korean accountant been more careful and
prudent in keeping the blank checks Sempio would not have
had the chance to steal a page thereof and to effect the forgery.
Besides, Sempio was an employee who appears to have had
dealings with the defendant Bank in behalf of the plaintiff
corporation and on the date the check was encashed, he was
there to certify that it was a genuine check issued to purchase
equipment for the company.[51]
We recognize that Section 23 of the Negotiable Instruments
Law bars a party from setting up the defense of forgery if it is
guilty of negligence.[52] Yet, we are unable to conclude that
Samsung Construction was guilty of negligence in this case. The
appellate court failed to explain precisely how the Korean
accountant was negligent or how more care and prudence on his
part would have prevented the forgery. We cannot sustain this tar
and feathering resorted to without any basis.
 The bare fact that the forgery was committed by an employee
of the party whose signature was forged cannot necessarily imply
that such partys negligence was the cause for the
forgery. Employers do not possess the preternatural gift of
cognition as to the evil that may lurk within the hearts and minds
of their employees. The Courts pronouncement in PCI Bank v.
Court of Appeals[53] applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-
payors confidential employee or agent, who by virtue of his
position had unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does not entitle the
bank to shift the loss to the drawer-payor, in the absence of
some circumstance raising estoppel against the drawer.[54]
Admittedly, the record does not clearly establish what
measures Samsung Construction employed to safeguard its
blank checks. Jong did testify that his accountant, Kyu, kept the
checks inside a safety box,[55] and no contrary version was
presented by FEBTC. However, such testimony cannot prove
that the checks were indeed kept in a safety box, as Jongs
testimony on that point is hearsay, since Kyu, and not Jong,
would have the personal knowledge as to how the checks were
kept.
Still, in the absence of evidence to the contrary, we can
conclude that there was no negligence on Samsung
Constructions part. The presumption remains that every person
takes ordinary care of his concerns,[56] and that the ordinary
course of business has been followed.[57] Negligence is not
presumed, but must be proven by him who alleges it.[58]While the
complaint was lodged at the instance of Samsung Construction,
the matter it had to prove was the claim it had alleged - whether
the check was forged. It cannot be required as well to prove that
it was not negligent, because the legal presumption remains that
ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the
negative fact that Samsung Construction was negligent. While
the payee, as in this case, may not have the personal knowledge
as to the standard procedures observed by the drawer, it well has
the means of disputing the presumption of regularity. Proving a
negative fact may be a difficult office,[59] but necessarily so, as it
seeks to overcome a presumption in law. FEBTC was unable to
dispute the presumption of ordinary care exercised by Samsung
Construction, hence we cannot agree with the Court of Appeals
finding of negligence.
The assailed Decision replicated the extensive efforts which
FEBTC devoted to establish that there was no negligence on the
part of the bank in its acceptance and payment of the forged
check. However, the degree of diligence exercised by the bank
would be irrelevant if the drawer is not precluded from setting up
the defense of forgery under Section 23 by his own
negligence. The rule of equity enunciated in PNB v. National City
Bank of New York, [60] as relied upon by the Court of Appeals,
deserves careful examination.
The point in issue has sometimes been said to be that of
negligence. The drawee who has paid upon the forged
signature is held to bear the loss, because he has been
negligent in failing to recognize that the handwriting is not
that of his customer. But it follows obviously that if the payee,
holder, or presenter of the forged paper has himself been in
default, if he has himself been guilty of a negligence prior to that
of the banker, or if by any act of his own he has at all
contributed to induce the banker's negligence, then he may lose
his right to cast the loss upon the banker.[61] (Emphasis
supplied)
Quite palpably, the general rule remains that the drawee who
has paid upon the forged signature bears the loss. The exception
to this rule arises only when negligence can be traced on the part
of the drawer whose signature was forged, and the need arises
to weigh the comparative negligence between the drawer and the
drawee to determine who should bear the burden of loss. The
Court finds no basis to conclude that Samsung Construction was
negligent in the safekeeping of its checks. For one, the settled
rule is that the mere fact that the depositor leaves his check book
lying around does not constitute such negligence as will free the
bank from liability to him, where a clerk of the depositor or other
persons, taking advantage of the opportunity, abstract some of
the check blanks, forges the depositors signature and collect on
the checks from the bank.[62] And for another, in point of fact
Samsung Construction was not negligent at all since it reported
the forgery almost immediately upon discovery.[63]
It is also worth noting that the forged signatures in PNB v.
National City Bank of New York were not of the drawer, but of
indorsers. The same circumstance attends PNB v. Court of
Appeals,[64] which was also cited by the Court of Appeals. It is
accepted that a forged signature of the drawer differs in treatment
than a forged signature of the indorser.
The justification for the distinction between forgery of the
signature of the drawer and forgery of an indorsement is that the
drawee is in a position to verify the drawers signature by
comparison with one in his hands, but has ordinarily no
opportunity to verify an indorsement.[65]
Thus, a drawee bank is generally liable to its depositor in paying
a check which bears either a forgery of the drawers signature or
a forged indorsement. But the bank may, as a general rule,
recover back the money which it has paid on a check bearing a
forged indorsement, whereas it has not this right to the same
extent with reference to a check bearing a forgery of the
drawers signature.[66]
The general rule imputing liability on the drawee who paid out
on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised
before paying out on the forged check, we might as well comment
on the banks performance of its duty. It might be so that the bank
complied with its own internal rules prior to paying out on the
questionable check. Yet, there are several troubling
circumstances that lead us to believe that the bank itself was
remiss in its duty.
The fact that the check was made out in the amount of nearly
one million pesos is unusual enough to require a higher degree
of caution on the part of the bank. Indeed, FEBTC confirms this
through its own internal procedures. Checks below twenty-five
thousand pesos require only the approval of the teller; those
between twenty-five thousand to one hundred thousand pesos
necessitate the approval of one bank officer; and should the
amount exceed one hundred thousand pesos, the concurrence
of two bank officers is required.[67]
In this case, not only did the amount in the check nearly total
one million pesos, it was also payable to cash. That latter
circumstance should have aroused the suspicion of the bank, as
it is not ordinary business practice for a check for such large
amount to be made payable to cash or to bearer, instead of to the
order of a specified person.[68]Moreover, the check was
presented for payment by one Roberto Gonzaga, who was not
designated as the payee of the check, and who did not carry with
him any written proof that he was authorized by Samsung
Construction to encash the check. Gonzaga, a stranger to
FEBTC, was not even an employee of Samsung
Construction.[69] These circumstances are already suspicious if
taken independently, much more so if they are evaluated in
concurrence. Given the shadiness attending Gonzagas
presentment of the check, it was not sufficient for FEBTC to have
merely complied with its internal procedures, but mandatory that
all earnest efforts be undertaken to ensure the validity of the
check, and of the authority of Gonzaga to collect payment
therefor.
According to FEBTC Senior Assistant Cashier Gemma
Velez, the bank tried, but failed, to contact Jong over the phone
to verify the check.[70] She added that calling the issuer or drawer
of the check to verify the same was not part of the standard
procedure of the bank, but an extra effort.[71] Even assuming that
such personal verification is tantamount to extraordinary
diligence, it cannot be denied that FEBTC still paid out the check
despite the absence of any proof of verification from the drawer.
Instead, the bank seems to have relied heavily on the say-so of
Sempio, who was present at the bank at the time the check was Still, even if the bank performed with utmost diligence, the
presented. drawer whose signature was forged may still recover from the
bank as long as he or she is not precluded from setting up the
FEBTC alleges that Sempio was well-known to the bank
defense of forgery. After all, Section 23 of the Negotiable
officers, as he had regularly transacted with the bank in behalf of
Instruments Law plainly states that no right to enforce the
Samsung Construction. It was even claimed that everytime
payment of a check can arise out of a forged signature. Since the
FEBTC would contact Jong about problems with his account,
drawer, Samsung Construction, is not precluded by negligence
Jong would hand the phone over to Sempio.[72] However, the only
from setting up the forgery, the general rule should apply.
proof of such allegations is the testimony of Gemma Velez, who
Consequently, if a bank pays a forged check, it must be
also testified that she did not know Sempio personally,[73] and
considered as paying out of its funds and cannot charge the
had met Sempio for the first time only on the day the check was
amount so paid to the account of the depositor.[77] A bank is liable,
encashed.[74] In fact, Velez had to inquire with the other officers
irrespective of its good faith, in paying a forged check.[78]
of the bank as to whether Sempio was actually known to the
employees of the bank.[75] Obviously, Velez had no personal WHEREFORE, the Petition is GRANTED. The Decision of
knowledge as to the past relationship between FEBTC and the Court of Appeals dated 28 November 1996 is REVERSED,
Sempio, and any averments of her to that effect should be and the Decision of the Regional Trial Court of Manila, Branch 9,
deemed hearsay evidence. Interestingly, FEBTC did not present dated 25 April 1994 is REINSTATED. Costs against respondent.
as a witness any other employee of their Bel-Air branch, including
SO ORDERED.
those who supposedly had transacted with Sempio before.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-
Even assuming that FEBTC had a standing habit of dealing
Nazario, JJ., concur.
with Sempio, acting in behalf of Samsung Construction, the
irregular circumstances attending the presentment of the forged
check should have put the bank on the highest degree of
alert. The Court recently emphasized that the highest degree of
care and diligence is required of banks.

Banks are engaged in a business impressed with public interest,

and it is their duty to protect in return their many clients and
depositors who transact business with them. They have the
obligation to treat their clients account meticulously and with the
highest degree of care, considering the fiduciary nature of their
relationship. The diligence required of banks, therefore, is more
than that of a good father of a family.[76]

Given the circumstances, extraordinary diligence dictates

that FEBTC should have ascertained from Jong personally that
the signature in the questionable check was his.