G.R. No.

97753 August 10, 1992 authorizes said bank to pre-terminate, set-off and "apply the said
CALTEX (PHILIPPINES), INC.,vs. COURT OF APPEALS and SECURITY time deposits to the payment of whatever amount or amounts may
BANK AND TRUST COMPANY be due" on the loan upon its maturity (TSN, February 9, 1987, pp.
60-62).
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal 6. Sometime in November, 1982, Mr. Aranas, Credit Manager of
of the decision promulgated by respondent court on March 8, 1991 plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat
in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier branch and presented for verification the CTDs declared lost by
decision of the Regional Trial Court of Manila, Branch XLII, 2 which Angel dela Cruz alleging that the same were delivered to herein
dismissed the complaint filed therein by herein petitioner against plaintiff "as security for purchases made with Caltex Philippines,
respondent bank. Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).
The undisputed background of this case, as found by the court a
quo and adopted by respondent court, appears of record: 7. On November 26, 1982, defendant received a letter (Defendant's
Exhibit 563) from herein plaintiff formally informing it of its
1. On various dates, defendant, a commercial banking institution, possession of the CTDs in question and of its decision to pre-
through its Sucat Branch issued 280 certificates of time deposit terminate the same.
(CTDs) in favor of one Angel dela Cruz who deposited with herein
defendant the aggregate amount of P1,120,000.00, as follows: (Joint 8. On December 8, 1982, plaintiff was requested by herein
Partial Stipulation of Facts and Statement of Issues, Original Records, defendant to furnish the former "a copy of the document evidencing
p. 207; Defendant's Exhibits 1 to 280); the guarantee agreement with Mr. Angel dela Cruz" as well as "the
details of Mr. Angel dela Cruz" obligation against which plaintiff
CTD CTD proposed to apply the time deposits (Defendant's Exhibit 564).
Dates Serial Nos. Quantity Amount
9. No copy of the requested documents was furnished herein
22 Feb. 82 90101 to 90120 20 P80,000 defendant.
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000 10. Accordingly, defendant bank rejected the plaintiff's demand and
4 Mar. 82 90127 to 90146 20 80,000 claim for payment of the value of the CTDs in a letter dated February
5 Mar. 82 74797 to 94800 4 16,000 7, 1983 (Defendant's Exhibit 566).
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
11. In April 1983, the loan of Angel dela Cruz with the defendant
8 Mar. 82 90001 to 90020 20 80,000
bank matured and fell due and on August 5, 1983, the latter set-off
9 Mar. 82 90023 to 90050 28 112,000
and applied the time deposits in question to the payment of the
9 Mar. 82 89991 to 90000 10 40,000
matured loan (TSN, February 9, 1987, pp. 130-131).
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000 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
2. Angel dela Cruz delivered the said certificates of time (CTDs) to
annum, moral and exemplary damages as well as attorney's fees.
herein plaintiff in connection with his purchased of fuel products
from the latter (Original Record, p. 208).
After trial, the court a quo rendered its decision dismissing the
instant complaint. 3
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 On appeal, as earlier stated, respondent court affirmed the lower
execute and submit a notarized Affidavit of Loss, as required by court's dismissal of the complaint, hence this petition wherein
defendant bank's procedure, if he desired replacement of said lost petitioner faults respondent court in ruling (1) that the subject
CTDs (TSN, February 9, 1987, pp. 48-50). 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
4. On March 18, 1982, Angel dela Cruz executed and delivered to
disregarding the pertinent provisions of the Code of Commerce
defendant bank the required Affidavit of Loss (Defendant's Exhibit
relating to lost instruments payable to bearer. 4
281). On the basis of said affidavit of loss, 280 replacement CTDs
were issued in favor of said depositor (Defendant's Exhibits 282-
561). The instant petition is bereft of merit.

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a A sample text of the certificates of time deposit is reproduced below
loan from defendant bank in the amount of Eight Hundred Seventy to provide a better understanding of the issues involved in this
Five Thousand Pesos (P875,000.00). On the same date, said recourse.
depositor executed a notarized Deed of Assignment of Time Deposit
(Exhibit 562) which stated, among others, that he (de la Cruz) SECURITY BANK
surrenders to defendant bank "full control of the indicated time AND TRUST COMPANY
deposits from and after date" of the assignment and further 6778 Ayala Ave., Makati No. 90101

Page 1 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag

 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
xxx xxx xxx
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) xxx
—————————— ———————————
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.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor. 7
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these
certificates of time deposit insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx
On this score, the accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the writing, that
is, from the face of the instrument itself.9 In the construction of a bill
or note, the intention of the parties is to control, if it can be legally
ascertained. 10 While the writing may be read in the light of
surrounding circumstances in order to more perfectly understand
the intent and meaning of the parties, yet as they have constituted
the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its
stead. The duty of the court in such case is to ascertain, not what the
parties may have secretly intended as contradistinguished from
what their words express, but what is the meaning of the words they
have used. What the parties meant must be determined by what
they said. 11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited
shall be repayable to the depositor. And who, according to the
document, is the depositor? It is the "bearer." The documents do
not say that the depositor is Angel de la Cruz and that the amounts
deposited are repayable specifically to him. Rather, the amounts are
to be repayable to the bearer of the documents or, for that matter,
whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount
to Angel de la Cruz only, it could have with facility so expressed that
fact in clear and categorical terms in the documents, instead of
having the word "BEARER" stamped on the space provided for the
name of the depositor in each CTD. On the wordings of the
documents, therefore, the amounts deposited are repayable to
whoever may be the bearer thereof. Thus, petitioner's aforesaid
witness merely declared that Angel de la Cruz is the depositor
"insofar as the bank is concerned," but obviously other parties not
privy to the transaction between them would not be in a position to
know that the depositor is not the bearer stated in the CTDs. Hence,
the situation would require any party dealing with the CTDs to go
behind the plain import of what is written thereon to unravel the
agreement of the parties thereto through facts aliunde. This need
for resort to extrinsic evidence is what is sought to be avoided by
the Negotiable Instruments Law and calls for the application of the
elementary rule that the interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the
obscurity. 12
Page 2 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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. XX
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
Page 3 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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.
Page 4 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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.
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
Page 5 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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.
Page 6 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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:
Page 7 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
 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
Page 8 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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
(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.
Page 9 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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
Page 10 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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,
Page 11 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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
Page 12 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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.
Page 13 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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, act with
justice, give everyone his due, and observe honesty and good
faith. 23
The transfer made by Filriters to Philfinance did not conform to the
said. Central Bank Circular, which for all intents, is considered part of
the law. As found by the courts a quo, Alfredo O. Banaria, who had
signed the deed of assignment from Filriters to Philfinance,
purportedly for and in favor of Filriters, did not have the necessary
written authorization from the Board of Directors of Filriters to act
for the latter. As it is, the sale from Filriters to Philfinance was
fictitious, and therefore void and inexistent, as there was no
consideration for the same. This is fatal to the petitioner's cause, for
then, Philfinance had no title over the subject certificate to convey
the Traders Royal Bank. Nemo potest nisi quod de jure potest — no
man can do anything except what he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part
of its legal and capital reserves, which are required by law 24 to be
maintained at a mandated level. This was pointed out by Elias
Garcia, Manager-in-Charge of respondent Filriters, in his testimony
given before the court on May 30, 1986.
Q Do you know this Central Bank Certificate of Indebtedness, in
short, CBCI No. D891 in the face value of P5000,000.00 subject of
this case?
A Yes, sir.
Q Why do you know this?
A Well, this was CBCI of the company sought to be examined by the
Insurance Commission sometime in early 1981 and this CBCI No. 891
was among the CBCI's that were found to be missing.
Q Let me take you back further before 1981. Did you have the
knowledge of this CBCI No. 891 before 1981?
A Yes, sir. This CBCI is an investment of Filriters required by the
Insurance Commission as legal reserve of the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are required to put up
legal reserves under Section 213 of the Insurance Code equivalent to
40 percent of the premiums receipt and further, the Insurance
Commission requires this reserve to be invested preferably in
government securities or government binds. This is how this CBCI
came to be purchased by the company.
It cannot, therefore, be taken out of the said funds, without violating
the requirements of the law. Thus, the anauthorized use or
distribution of the same by a corporate officer of Filriters cannot
bind the said corporation, not without the approval of its Board of
Directors, and the maintenance of the required reserve fund.
Consequently, the title of Filriters over the subject certificate of
indebtedness must be upheld over the claimed interest of Traders
Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed
from dated January 29, 1990 is hereby AFFIRMED.
Page 14 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
G.R. No. 170325 September 26, 2008
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.
REYES, R.T., J.:
WHEN the payee of the check is not intended to be the true
recipient of its proceeds, is it payable to order or bearer? What is
the fictitious-payee rule and who is liable under it? Is there any
exception?
These questions seek answers in this petition for review on certiorari
of the Amended Decision1 of the Court of Appeals (CA) which
affirmed with modification that of the Regional Trial Court (RTC).2
The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of
petitioner Philippine National Bank (PNB), Amelia Avenue Branch,
Cebu City. They maintained savings and demand/checking accounts,
namely, PNBig Demand Deposits (Checking/Current Account No.
810624-6 under the account name Erlando and/or Norma
Rodriguez), and PNBig Demand Deposit (Checking/Current Account
No. 810480-4 under the account name Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line
with their business, they had a discounting3 arrangement with the
Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees. Naturally, PEMSLA was likewise a
client of PNB Amelia Avenue Branch. The association maintained
current and savings accounts with petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez
would rediscount the postdated checks issued to members
whenever the association was short of funds. As was customary, the
spouses would replace the postdated checks with their own checks
issued in the name of the members.
It was PEMSLA’s policy not to approve applications for loans of
members with outstanding debts. To subvert this policy, some
PEMSLA officers devised a scheme to obtain additional loans despite
their outstanding loan accounts. They took out loans in the names of
unknowing members, without the knowledge or consent of the
latter. The PEMSLA checks issued for these loans were then given to
the spouses for rediscounting. The officers carried this out by forging
the indorsement of the named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez
checks) in the name of the members and delivered the checks to an
officer of PEMSLA. The PEMSLA checks, on the other hand, were
deposited by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by
PEMSLA to its savings account without any indorsement from the
named payees. This was an irregular procedure made possible
through the facilitation of Edmundo Palermo, Jr., treasurer of
PEMSLA and bank teller in the PNB Branch. It appears that this
became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses issued
sixty nine (69) checks, in the total amount of P2,345,804.00. These
were payable to forty seven (47) individual payees who were all
members of PEMSLA.4
Petitioner PNB eventually found out about these fraudulent acts. To
put a stop to this scheme, PNB closed the current account of
PEMSLA. As a result, the PEMSLA checks deposited by the spouses
were returned or dishonored for the reason "Account Closed." The
corresponding Rodriguez checks, however, were deposited as usual
to the PEMSLA savings account. The amounts were duly debited
from the Rodriguez account. Thus, because the PEMSLA checks
given as payment were returned, spouses Rodriguez incurred losses
from the rediscounting transactions.
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez
filed a civil complaint for damages against PEMSLA, the Multi-
Purpose Cooperative of Philnabankers (MCP), and petitioner PNB.
They sought to recover the value of their checks that were deposited
to the PEMSLA savings account amounting to P2,345,804.00. The
spouses contended that because PNB credited the checks to the
PEMSLA account even without indorsements, PNB violated its
contractual obligation to them as depositors. PNB paid the wrong
payees, hence, it should bear the loss.
PNB moved to dismiss the complaint on the ground of lack of cause
of action. PNB argued that the claim for damages should come from
the payees of the checks, and not from spouses Rodriguez. Since
there was no demand from the said payees, the obligation should be
considered as discharged.
In an Order dated January 12, 2000, the RTC denied PNB’s motion to
dismiss.
In its Answer,5 PNB claimed it is not liable for the checks which it
paid to the PEMSLA account without any indorsement from the
payees. The bank contended that spouses Rodriguez, the makers,
actually did not intend for the named payees to receive the
proceeds of the checks. Consequently, the payees were considered
as "fictitious payees" as defined under the Negotiable Instruments
Law (NIL). Being checks made to fictitious payees which are bearer
instruments, the checks were negotiable by mere delivery. PNB’s
Answer included its cross-claim against its co-defendants PEMSLA
and the MCP, praying that in the event that judgment is rendered
against the bank, the cross-defendants should be ordered to
reimburse PNB the amount it shall pay.
After trial, the RTC rendered judgment in favor of spouses Rodriguez
(plaintiffs). It ruled that PNB (defendant) is liable to return the value
of the checks. All counterclaims and cross-claims were dismissed.
The dispositive portion of the RTC decision reads:
WHEREFORE, in view of the foregoing, the Court hereby renders
judgment, as follows:
1. Defendant is hereby ordered to pay the plaintiffs the total amount
of P2,345,804.00 or reinstate or restore the amount of P775,337.00
in the PNBig Demand Deposit Checking/Current Account No.
810480-4 of Erlando T. Rodriguez, and the amount of P1,570,467.00
in the PNBig Demand Deposit, Checking/Current Account No.
810624-6 of Erlando T. Rodriguez and/or Norma Rodriguez, plus
legal rate of interest thereon to be computed from the filing of this
complaint until fully paid;
2. The defendant PNB is hereby ordered to pay the plaintiffs the
following reasonable amount of damages suffered by them taking
into consideration the standing of the plaintiffs being sugarcane
Page 15 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
planters, realtors, residential subdivision owners, and other
businesses:
(a) Consequential damages, unearned income in the amount
of P4,000,000.00, as a result of their having incurred great dificulty
(sic) especially in the residential subdivision business, which was not
pushed through and the contractor even threatened to file a case
against the plaintiffs;
(b) Moral damages in the amount of P1,000,000.00;
(c) Exemplary damages in the amount of P500,000.00;
(d) Attorney’s fees in the amount of P150,000.00 considering that
this case does not involve very complicated issues; and for the
(e) Costs of suit.
3. Other claims and counterclaims are hereby dismissed.6
CA Disposition
PNB appealed the decision of the trial court to the CA on the
principal ground that the disputed checks should be considered as
payable to bearer and not to order.
In a Decision7 dated July 22, 2004, the CA reversed and set aside the
RTC disposition. The CA concluded that the checks were obviously
meant by the spouses to be really paid to PEMSLA. The court a quo
declared:
We are not swayed by the contention of the plaintiffs-appellees
(Spouses Rodriguez) that their cause of action arose from the
alleged breach of contract by the defendant-appellant (PNB) when it
paid the value of the checks to PEMSLA despite the checks being
payable to order. Rather, we are more convinced by the strong and
credible evidence for the defendant-appellant with regard to the
plaintiffs-appellees’ and PEMSLA’s business arrangement – that the
value of the rediscounted checks of the plaintiffs-appellees would be
deposited in PEMSLA’s account for payment of the loans it has
approved in exchange for PEMSLA’s checks with the full value of the
said loans. This is the only obvious explanation as to why all the
disputed sixty-nine (69) checks were in the possession of PEMSLA’s
errand boy for presentment to the defendant-appellant that led to
this present controversy. It also appears that the teller who
accepted the said checks was PEMSLA’s officer, and that such was a
regular practice by the parties until the defendant-appellant
discovered the scam. The logical conclusion, therefore, is that the
checks were never meant to be paid to order, but instead, to
PEMSLA. We thus find no breach of contract on the part of the
defendant-appellant.
According to plaintiff-appellee Erlando Rodriguez’ testimony,
PEMSLA allegedly issued post-dated checks to its qualified members
who had applied for loans. However, because of PEMSLA’s
insufficiency of funds, PEMSLA approached the plaintiffs-appellees
for the latter to issue rediscounted checks in favor of said applicant
members. Based on the investigation of the defendant-appellant,
meanwhile, this arrangement allowed the plaintiffs-appellees to
make a profit by issuing rediscounted checks, while the officers of
PEMSLA and other members would be able to claim their loans,
despite the fact that they were disqualified for one reason or
another. They were able to achieve this conspiracy by using other
members who had loaned lesser amounts of money or had not
applied at all. x x x.8 (Emphasis added)
The CA found that the checks were bearer instruments, thus they do
not require indorsement for negotiation; and that spouses
Rodriguez and PEMSLA conspired with each other to accomplish this
money-making scheme. The payees in the checks were "fictitious
payees" because they were not the intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued,
inter alia, that the checks on their faces were unquestionably
payable to order; and that PNB committed a breach of contract
when it paid the value of the checks to PEMSLA without
indorsement from the payees. They also argued that their cause of
action is not only against PEMSLA but also against PNB to recover
the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended
Decision, the last paragraph and fallo of which read:
In sum, we rule that the defendant-appellant PNB is liable to the
plaintiffs-appellees Sps. Rodriguez for the following:
1. Actual damages in the amount of P2,345,804 with interest at 6%
per annum from 14 May 1999 until fully paid;
2. Moral damages in the amount of P200,000;
3. Attorney’s fees in the amount of P100,000; and
4. Costs of suit.
WHEREFORE, in view of the foregoing premises, judgment is hereby
rendered by Us AFFIRMING WITH MODIFICATION the assailed
decision rendered in Civil Case No. 99-10892, as set forth in the
immediately next preceding paragraph hereof, and SETTING ASIDE
Our original decision promulgated in this case on 22 July 2004.
SO ORDERED.9
The CA ruled that the checks were payable to order. According to
the appellate court, PNB failed to present sufficient proof to defeat
the claim of the spouses Rodriguez that they really intended the
checks to be received by the specified payees. Thus, PNB is liable for
the value of the checks which it paid to PEMSLA without
indorsements from the named payees. The award for damages was
deemed appropriate in view of the failure of PNB to treat the
Rodriguez account with the highest degree of care considering the
fiduciary nature of their relationship, which constrained respondents
to seek legal action.
Hence, the present recourse under Rule 45.
Issues
The issues may be compressed to whether the subject checks are
payable to order or to bearer and who bears the loss?
PNB argues anew that when the spouses Rodriguez issued the
disputed checks, they did not intend for the named payees to
receive the proceeds. Thus, they are bearer instruments that could
be validly negotiated by mere delivery. Further, testimonial and
documentary evidence presented during trial amply proved that
spouses Rodriguez and the officers of PEMSLA conspired with each
other to defraud the bank.
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an
erroneous judgment attaining finality to the prejudice of innocent
parties. A court discovering an erroneous judgment before it
becomes final may, motu proprio or upon motion of the parties,
correct its judgment with the singular objective of achieving justice
for the litigants.10
Page 16 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
However, a word of caution to lower courts, the CA in Cebu in this
particular case, is in order. The Court does not sanction careless
disposition of cases by courts of justice. The highest degree of
diligence must go into the study of every controversy submitted for
decision by litigants. Every issue and factual detail must be closely
scrutinized and analyzed, and all the applicable laws judiciously
studied, before the promulgation of every judgment by the court.
Only in this manner will errors in judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true
recipient of the proceeds, the check is considered as a bearer
instrument. A check is "a bill of exchange drawn on a bank payable
on demand."11 It is either an order or a bearer instrument. Sections
8 and 9 of the NIL states:
SEC. 8. When payable to order. – The instrument is payable to order
where it is drawn payable to the order of a specified person or to
him or his order. It may be drawn payable to the order of –
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named
or otherwise indicated therein with reasonable certainty.
SEC. 9. When payable to bearer. – The instrument is payable to
bearer –
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or
bearer; or
(c) When it is payable to the order of a fictitious or non-
existing person, and such fact is known to the person
making it so payable; or
(d) When the name of the payee does not purport to be
the name of any person; or
(e) Where the only or last indorsement is an indorsement
in blank.12 (Underscoring supplied)
The distinction between bearer and order instruments lies in their
manner of negotiation. Under Section 30 of the NIL, an order
instrument requires an indorsement from the payee or holder
before it may be validly negotiated. A bearer instrument, on the
other hand, does not require an indorsement to be validly
negotiated. It is negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. – An instrument is negotiated
when it is transferred from one person to another in such manner as
to constitute the transferee the holder thereof. If payable to bearer,
it is negotiated by delivery; if payable to order, it is negotiated by
the indorsement of the holder completed by delivery.
A check that is payable to a specified payee is an order instrument.
However, under Section 9(c) of the NIL, a check payable to a
specified payee may nevertheless be considered as a bearer
instrument if it is payable to the order of a fictitious or non-existing
person, and such fact is known to the person making it so payable.
Thus, checks issued to "Prinsipe Abante" or "Si Malakas at si
Maganda," who are well-known characters in Philippine mythology,
are bearer instruments because the named payees are fictitious and
non-existent.
We have yet to discuss a broader meaning of the term "fictitious" as
used in the NIL. It is for this reason that We look elsewhere for
guidance. Court rulings in the United States are a logical starting
point since our law on negotiable instruments was directly lifted
from the Uniform Negotiable Instruments Law of the United
States.13
A review of US jurisprudence yields that an actual, existing, and
living payee may also be "fictitious" if the maker of the check did not
intend for the payee to in fact receive the proceeds of the check.
This usually occurs when the maker places a name of an existing
payee on the check for convenience or to cover up an illegal
activity.14 Thus, a check made expressly payable to a non-fictitious
and existing person is not necessarily an order instrument. If the
payee is not the intended recipient of the proceeds of the check, the
payee is considered a "fictitious" payee and the check is a bearer
instrument.
In a fictitious-payee situation, the drawee bank is absolved from
liability and the drawer bears the loss. When faced with a check
payable to a fictitious payee, it is treated as a bearer instrument that
can be negotiated by delivery. The underlying theory is that one
cannot expect a fictitious payee to negotiate the check by placing his
indorsement thereon. And since the maker knew this limitation, he
must have intended for the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the drawer of the check will
bear the loss. This rule is justified for otherwise, it will be most
convenient for the maker who desires to escape payment of the
check to always deny the validity of the indorsement. This despite
the fact that the fictitious payee was purposely named without any
intention that the payee should receive the proceeds of the check.15
The fictitious-payee rule is best illustrated in Mueller & Martin v.
Liberty Insurance Bank.16 In the said case, the corporation Mueller &
Martin was defrauded by George L. Martin, one of its authorized
signatories. Martin drew seven checks payable to the German
Savings Fund Company Building Association (GSFCBA) amounting to
$2,972.50 against the account of the corporation without authority
from the latter. Martin was also an officer of the GSFCBA but did not
have signing authority. At the back of the checks, Martin placed the
rubber stamp of the GSFCBA and signed his own name as
indorsement. He then successfully drew the funds from Liberty
Insurance Bank for his own personal profit. When the corporation
filed an action against the bank to recover the amount of the checks,
the claim was denied.
The US Supreme Court held in Mueller that when the person making
the check so payable did not intend for the specified payee to have
any part in the transactions, the payee is considered as a fictitious
payee. The check is then considered as a bearer instrument to be
validly negotiated by mere delivery. Thus, the US Supreme Court
held that Liberty Insurance Bank, as drawee, was authorized to make
payment to the bearer of the check, regardless of whether prior
indorsements were genuine or not.17
The more recent Getty Petroleum Corp. v. American Express Travel
Related Services Company, Inc.18 upheld the fictitious-payee rule.
The rule protects the depositary bank and assigns the loss to the
drawer of the check who was in a better position to prevent the loss
in the first place. Due care is not even required from the drawee or
Page 17 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
depositary bank in accepting and paying the checks. The effect is
that a showing of negligence on the part of the depositary bank will
not defeat the protection that is derived from this rule.
However, there is a commercial bad faith exception to the fictitious-
payee rule. A showing of commercial bad faith on the part of the
drawee bank, or any transferee of the check for that matter, will
work to strip it of this defense. The exception will cause it to bear
the loss. Commercial bad faith is present if the transferee of the
check acts dishonestly, and is a party to the fraudulent scheme. Said
the US Supreme Court in Getty:
Consequently, a transferee’s lapse of wary vigilance, disregard of
suspicious circumstances which might have well induced a prudent
banker to investigate and other permutations of negligence are not
relevant considerations under Section 3-405 x x x. Rather, there is a
"commercial bad faith" exception to UCC 3-405, applicable when the
transferee "acts dishonestly – where it has actual knowledge of facts
and circumstances that amount to bad faith, thus itself becoming a
participant in a fraudulent scheme. x x x Such a test finds support in
the text of the Code, which omits a standard of care requirement
from UCC 3-405 but imposes on all parties an obligation to act with
"honesty in fact." x x x19 (Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends
protection even to non-bank transferees of the checks.
In the case under review, the Rodriguez checks were payable to
specified payees. It is unrefuted that the 69 checks were payable to
specific persons. Likewise, it is uncontroverted that the payees were
actual, existing, and living persons who were members of PEMSLA
that had a rediscounting arrangement with spouses Rodriguez.
What remains to be determined is if the payees, though existing
persons, were "fictitious" in its broader context.
For the fictitious-payee rule to be available as a defense, PNB must
show that the makers did not intend for the named payees to be
part of the transaction involving the checks. At most, the bank’s
thesis shows that the payees did not have knowledge of the
existence of the checks. This lack of knowledge on the part of the
payees, however, was not tantamount to a lack of intention on the
part of respondents-spouses that the payees would not receive the
checks’ proceeds. Considering that respondents-spouses were
transacting with PEMSLA and not the individual payees, it is
understandable that they relied on the information given by the
officers of PEMSLA that the payees would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is
because, as found by both lower courts, PNB failed to present
sufficient evidence to defeat the claim of respondents-spouses that
the named payees were the intended recipients of the checks’
proceeds. The bank failed to satisfy a requisite condition of a
fictitious-payee situation – that the maker of the check intended for
the payee to have no interest in the transaction.
Because of a failure to show that the payees were "fictitious" in its
broader sense, the fictitious-payee rule does not apply. Thus, the
checks are to be deemed payable to order. Consequently, the
drawee bank bears the loss.20
PNB was remiss in its duty as the drawee bank. It does not dispute
the fact that its teller or tellers accepted the 69 checks for deposit to
the PEMSLA account even without any indorsement from the named
payees. It bears stressing that order instruments can only be
negotiated with a valid indorsement.
A bank that regularly processes checks that are neither payable to
the customer nor duly indorsed by the payee is apparently grossly
negligent in its operations.21 This Court has recognized the unique
public interest possessed by the banking industry and the need for
the people to have full trust and confidence in their banks. 22 For this
reason, banks are minded to treat their customer’s accounts with
utmost care, confidence, and honesty.23
In a checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check
strictly in accordance with the drawer’s instructions, i.e., to the
named payee in the check. It should charge to the drawer’s accounts
only the payables authorized by the latter. Otherwise, the drawee
will be violating the instructions of the drawer and it shall be liable
for the amount charged to the drawer’s account.24
In the case at bar, respondents-spouses were the bank’s depositors.
The checks were drawn against respondents-spouses’ accounts.
PNB, as the drawee bank, had the responsibility to ascertain the
regularity of the indorsements, and the genuineness of the
signatures on the checks before accepting them for deposit. Lastly,
PNB was obligated to pay the checks in strict accordance with the
instructions of the drawers. Petitioner miserably failed to discharge
this burden.
The checks were presented to PNB for deposit by a representative of
PEMSLA absent any type of indorsement, forged or otherwise. The
facts clearly show that the bank did not pay the checks in strict
accordance with the instructions of the drawers, respondents-
spouses. Instead, it paid the values of the checks not to the named
payees or their order, but to PEMSLA, a third party to the
transaction between the drawers and the payees.alf-ITC
Moreover, PNB was negligent in the selection and supervision of its
employees. The trustworthiness of bank employees is indispensable
to maintain the stability of the banking industry. Thus, banks are
enjoined to be extra vigilant in the management and supervision of
their employees. In Bank of the Philippine Islands v. Court of
Appeals,25 this Court cautioned thus:
Banks handle daily transactions involving millions of pesos. By the
very nature of their work the degree of responsibility, care and
trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees. For obvious
reasons, the banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees.26
PNB’s tellers and officers, in violation of banking rules of procedure,
permitted the invalid deposits of checks to the PEMSLA account.
Indeed, when it is the gross negligence of the bank employees that
caused the loss, the bank should be held liable.27
PNB’s argument that there is no loss to compensate since no
demand for payment has been made by the payees must also fail.
Damage was caused to respondents-spouses when the PEMSLA
checks they deposited were returned for the reason "Account
Closed." These PEMSLA checks were the corresponding payments to
the Rodriguez checks. Since they could not encash the PEMSLA
Page 18 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
checks, respondents-spouses were unable to collect payments for
the amounts they had advanced.
A bank that has been remiss in its duty must suffer the
consequences of its negligence. Being issued to named payees, PNB
was duty-bound by law and by banking rules and procedure to
require that the checks be properly indorsed before accepting them
for deposit and payment. In fine, PNB should be held liable for the
amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNB’s cross-
claim against its co-defendants PEMSLA and MPC. The records are
bereft of any pleading filed by these two defendants in answer to
the complaint of respondents-spouses and cross-claim of PNB. The
Rules expressly provide that failure to file an answer is a ground for
a declaration that defendant is in default.28 Yet, the RTC failed to
sanction the failure of both PEMSLA and MPC to file responsive
pleadings. Verily, the RTC dismissal of PNB’s cross-claim has no basis.
Thus, this judgment shall be without prejudice to whatever action
the bank might take against its co-defendants in the trial court.
To PNB’s credit, it became involved in the controversial transaction
not of its own volition but due to the actions of some of its
employees. Considering that moral damages must be understood to
be in concept of grants, not punitive or corrective in nature, We
resolve to reduce the award of moral damages to P50,000.00.29
WHEREFORE, the appealed Amended Decision is AFFIRMED with the
MODIFICATION that the award for moral damages is reduced
to P50,000.00, and that this is without prejudice to whatever civil,
criminal, or administrative action PNB might take against PEMSLA,
MPC, and the employees involved.
G.R. No. 198660 October 23, 2013
TING TING PUA, Petitioner,
vs.
SPOUSES BENITO LO BUN TIONG and CAROLINE SIOK CHING
TENG, Respondents.
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
Page 19 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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.
Page 20 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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
Page 21 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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.
G.R. No. 167567 September 22, 2010
SAN MIGUEL CORPORATION, Petitioner,
vs.
BARTOLOME PUZON, JR., Respondent.
DEL CASTILLO, J.:
This petition for review assails the December 21, 2004 Decision1 and
March 28, 2005 Resolution2 of the Court of Appeals (CA) in CA-G.R.
SP No. 83905, which dismissed the petition before it and denied
reconsideration, respectively.
Factual Antecedents
Respondent Bartolome V. Puzon, Jr., (Puzon) owner of Bartenmyk
Enterprises, was a dealer of beer products of petitioner San Miguel
Corporation (SMC) for Parañaque City. Puzon purchased SMC
products on credit. To ensure payment and as a business practice,
SMC required him to issue postdated checks equivalent to the value
of the products purchased on credit before the same were released
to him. Said checks were returned to Puzon when the transactions
covered by these checks were paid or settled in full.
On December 31, 2000, Puzon purchased products on credit
amounting to ₱11,820,327 for which he issued, and gave to SMC,
Bank of the Philippine Islands (BPI) Check Nos. 27904 (for
₱309,500.00) and 27903 (for ₱11,510,827.00) to cover the said
transaction.
On January 23, 2001, Puzon, together with his accountant, visited
the SMC Sales Office in Parañaque City to reconcile his account with
SMC. During that visit Puzon allegedly requested to see BPI Check
No. 17657. However, when he got hold of BPI Check No. 27903
which was attached to a bond paper together with BPI Check No.
17657 he allegedly immediately left the office with his accountant,
bringing the checks with them.
SMC sent a letter to Puzon on March 6, 2001 demanding the return
of the said checks. Puzon ignored the demand hence SMC filed a
complaint against him for theft with the City Prosecutor’s Office of
Parañaque City.
Rulings of the Prosecutor and the Secretary of Department of
Justice (DOJ)
The investigating prosecutor, Elizabeth Yu Guray found that the
"relationship between [SMC] and [Puzon] appears to be one of
credit or creditor-debtor relationship. The problem lies in the
reconciliation of accounts and the non-payment of beer empties
which cannot give rise to a criminal prosecution for theft."3 Thus, in
her July 31, 2001 Resolution,4 she recommended the dismissal of
the case for lack of evidence. SMC appealed.
On June 4, 2003, the DOJ issued its resolution5 affirming the
prosecutor’s Resolution dismissing the case. Its motion for
reconsideration having been denied in the April 23, 2004 DOJ
Resolution,6 SMC filed a petition for certiorari with the CA.
Page 22 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
Ruling of the Court of Appeals
The CA found that the postdated checks were issued by Puzon
merely as a security for the payment of his purchases and that these
were not intended to be encashed. It thus concluded that SMC did
not acquire ownership of the checks as it was duty bound to return
the same checks to Puzon after the transactions covering them were
settled. The CA agreed with the prosecutor that there was no theft,
considering that a person cannot be charged with theft for taking
personal property that belongs to himself. It disposed of the appeal
as follows:
WHEREFORE, finding no grave abuse of discretion committed by
public respondent, the instant petition is hereby DISMISSED. The
assailed Resolutions of public respondent, dated 04 June 2003 and
23 April 2004, are AFFIRMED. No costs at this instance.
SO ORDERED.7
The motion for reconsideration of SMC was denied. Hence, the
present petition.
Issues
Petitioner now raises the following issues:
I WHETHER X X X PUZON HAD STOLEN FROM SMC ON JANUARY 23,
2001, AMONG OTHERS BPI CHECK NO. 27903 DATED MARCH 30,
2001 IN THE AMOUNT OF PESOS: ELEVEN MILLION FIVE HUNDRED
TEN THOUSAND EIGHT HUNDRED TWENTY SEVEN
(Php11,510,827.00)
II WHETHER X X X THE POSTDATED CHECKS ISSUED BY PUZON,
PARTICULARLY BPI CHECK NO. 27903 DATED MARCH 30, 2001 IN
THE AMOUNT OF PESOS: ELEVEN MILLION FIVE HUNDRED TEN
THOUSAND EIGHT HUNDRED TWENTY SEVEN (Php11,510,827.00),
WERE ISSUED IN PAYMENT OF HIS BEER PURCHASES OR WERE USED
MERELY AS SECURITY TO ENSURE PAYMENT OF PUZON’S
OBLIGATION.
III WHETHER X X X THE PRACTICE OF SMC IN RETURNING THE
POSTDATED CHECKS ISSUED IN PAYMENT OF BEER PRODUCTS
PURCHASED ON CREDIT SHOULD THE TRANSACTIONS COVERED BY
THESE CHECKS [BE] SETTLED ON [THE] MATURITY DATES THEREOF
COULD BE LIKENED TO A CONTRACT OF PLEDGE.
IV WHETHER X X X SMC HAD ESTABLISHED PROBABLE CAUSE TO
JUSTIFY THE INDICTMENT OF PUZON FOR THE CRIME OF THEFT
PURSUANT TO ART. 308 OF THE REVISED PENAL CODE.8
Petitioner's Arguments
SMC contends that Puzon was positively identified by its employees
to have taken the subject postdated checks. It also contends that
ownership of the checks was transferred to it because these were
issued, not merely as security but were, in payment of Puzon’s
purchases. SMC points out that it has established more than
sufficient probable cause to justify the indictment of Puzon for the
crime of Theft.
Respondent’s Arguments
On the other hand, Puzon contends that SMC raises questions of fact
that are beyond the province of an appeal on certiorari. He also
insists that there is no probable cause to charge him with theft
because the subject checks were issued only as security and he
therefore retained ownership of the same.
Our Ruling
The petition has no merit.
Preliminary Matters
At the outset we find that as pointed out by Puzon, SMC raises
questions of fact. The resolution of the first issue raised by SMC of
whether respondent stole the subject check, which calls for the
Court to determine whether respondent is guilty of a felony, first
requires that the facts be duly established in the proper forum and
in accord with the proper procedure. This issue cannot be resolved
based on mere allegations of facts and affidavits. The same is true
with the second issue raised by petitioner, to wit: whether the
checks issued by Puzon were payments for his purchases or were
intended merely as security to ensure payment. These issues cannot
be properly resolved in the present petition for review on certiorari
which is rooted merely on the resolution of the prosecutor finding
no probable cause for the filing of an information for theft.
The third issue raised by petitioner, on the other hand, would entail
venturing into constitutional matters for a complete resolution. This
route is unnecessary in the present case considering that the main
matter for resolution here only concerns grave abuse of discretion
and the existence of probable cause for theft, which at this point is
more properly resolved through another more clear cut route.
Probable Cause for Theft
"Probable cause is defined as such facts and circumstances that will
engender a well-founded belief that a crime has been committed
and that the respondent is probably guilty thereof and should be
held for trial."9 On the fine points of the determination of probable
cause, Reyes v. Pearlbank Securities, Inc.10 comprehensively
elaborated that:
The determination of [the existence or absence of probable cause]
lies within the discretion of the prosecuting officers after conducting
a preliminary investigation upon complaint of an offended party.
Thus, the decision whether to dismiss a complaint or not is
dependent upon the sound discretion of the prosecuting fiscal. He
may dismiss the complaint forthwith, if he finds the charge
insufficient in form or substance or without any ground. Or he may
proceed with the investigation if the complaint in his view is
sufficient and in proper form. To emphasize, the determination of
probable cause for the filing of information in court is an executive
function, one that properly pertains at the first instance to the
public prosecutor and, ultimately, to the Secretary of Justice, who
may direct the filing of the corresponding information or move for
the dismissal of the case. Ultimately, whether or not a complaint will
be dismissed is dependent on the sound discretion of the Secretary
of Justice. And unless made with grave abuse of discretion, findings
of the Secretary of Justice are not subject to review.
For this reason, the Court considers it sound judicial policy to refrain
from interfering in the conduct of preliminary investigations and to
leave the Department of Justice ample latitude of discretion in the
determination of what constitutes sufficient evidence to establish
probable cause for the prosecution of supposed offenders.
Consistent with this policy, courts do not reverse the Secretary of
Justice's findings and conclusions on the matter of probable cause
except in clear cases of grave abuse of discretion.
In the present case, we are also not sufficiently convinced to deviate
from the general rule of non-interference. Indeed the CA did not err
in dismissing the petition for certiorari before it, absent grave abuse
of discretion on the part of the DOJ Secretary in not finding probable
cause against Puzon for theft.
The Revised Penal Code provides:
Page 23 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
Art. 308. Who are liable for theft. - Theft is committed by any person
who, with intent to gain but without violence against, or
intimidation of persons nor force upon things, shall take personal
property of another without the latter’s consent.
xxxx
"[T]he essential elements of the crime of theft are the following: (1)
that there be a taking of personal property; (2) that said property
belongs to another; (3) that the taking be done with intent to gain;
(4) that the taking be done without the consent of the owner; and
(5) that the taking be accomplished without the use of violence or
intimidation against persons or force upon things."11
Considering that the second element is that the thing taken belongs
to another, it is relevant to determine whether ownership of the
subject check was transferred to petitioner. On this point the
Negotiable Instruments Law provides:
Sec. 12. Antedated and postdated – The instrument is not invalid for
the reason only that it is antedated or postdated, provided this is
not done for an illegal or fraudulent purpose. The person to whom
an instrument so dated is delivered acquires the title thereto as of
the date of delivery. (Underscoring supplied.)
Note however that delivery as the term is used in the
aforementioned provision means that the party delivering did so for
the purpose of giving effect thereto.12 Otherwise, it cannot be said
that there has been delivery of the negotiable instrument. Once
there is delivery, the person to whom the instrument is delivered
gets the title to the instrument completely and irrevocably.
If the subject check was given by Puzon to SMC in payment of the
obligation, the purpose of giving effect to the instrument is evident
thus title to or ownership of the check was transferred upon
delivery. However, if the check was not given as payment, there
being no intent to give effect to the instrument, then ownership of
the check was not transferred to SMC.
The evidence of SMC failed to establish that the check was given in
payment of the obligation of Puzon. There was no provisional
receipt or official receipt issued for the amount of the check. What
was issued was a receipt for the document, a "POSTDATED CHECK
SLIP."13
Furthermore, the petitioner's demand letter sent to respondent
states "As per company policies on receivables, all issuances are to
be covered by post-dated checks. However, you have deviated from
this policy by forcibly taking away the check you have issued to us to
cover the December issuance."14 Notably, the term "payment" was
not used instead the terms "covered" and "cover" were used.
Although the petitioner's witness, Gregorio L. Joven III, states in
paragraph 6 of his affidavit that the check was given in payment of
the obligation of Puzon, the same is contradicted by his statements
in paragraph 4, where he states that "As a standard company
operating procedure, all beer purchases by dealers on credit shall
be coveredby postdated checks equivalent to the value of the beer
products purchased"; in paragraph 9 where he states that "the
transaction covered by the said check had not yet been paid for,"
and in paragraph 8 which clearly shows that partial payment is
expected to be made by the return of beer empties, and not by the
deposit or encashment of the check.1avvphi1 Clearly the term
"cover" was not meant to be used interchangeably with "payment."
When taken in conjunction with the counter-affidavit of Puzon –
where he states that "As the [liquid beer] contents are paid for, SMC
return[s] to me the corresponding PDCs or request[s] me to replace
them with whatever was the unpaid balance."15 – it becomes clear
that both parties did not intend for the check to pay for the beer
products. The evidence proves that the check was accepted, not as
payment, but in accordance with the long-standing policy of SMC to
require its dealers to issue postdated checks to cover its receivables.
The check was only meant to coverthe transaction and in the
meantime Puzon was to pay for the transaction by some other
means other than the check. This being so, title to the check did not
transfer to SMC; it remained with Puzon. The second element of the
felony of theft was therefore not established. Petitioner was not
able to show that Puzon took a check that belonged to another.
Hence, the prosecutor and the DOJ were correct in finding no
probable cause for theft.
Consequently, the CA did not err in finding no grave abuse of
discretion committed by the DOJ in sustaining the dismissal of the
case for theft for lack of probable cause.
WHEREFORE, the petition is DENIED. The December 21, 2004
Decision and March 28, 2005 Resolution of the Court of Appeals in
CA-G.R. SP. No. 83905 are AFFIRMED.
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.
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and
ASSOCIATED BANK, respondents.
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
Page 24 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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
Page 25 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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
Page 26 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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:
Page 27 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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.
Page 28 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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.
G.R. No. 133179 March 27, 2008
ALLIED BANKING CORPORATION, Petitioner,
vs.
LIM SIO WAN, METROPOLITAN BANK AND TRUST CO., and
PRODUCERS BANK, Respondents.
VELASCO, JR., J.:
To ingratiate themselves to their valued depositors, some banks at
times bend over backwards that they unwittingly expose themselves
to great risks.
The Case
This Petition for Review on Certiorari under Rule 45 seeks to reverse
the Court of Appeals’ (CA’s) Decision promulgated on March 18,
19981 in CA-G.R. CV No. 46290 entitled Lim Sio Wan v. Allied Banking
Corporation, et al. The CA Decision modified the Decision dated
November 15, 19932 of the Regional Trial Court (RTC), Branch 63 in
Makati City rendered in Civil Case No. 6757.
The Facts
The facts as found by the RTC and affirmed by the CA are as follows:
On November 14, 1983, respondent Lim Sio Wan deposited with
petitioner Allied Banking Corporation (Allied) at its Quintin Paredes
Branch in Manila a money market placement of PhP 1,152,597.35
for a term of 31 days to mature on December 15, 1983,3 as
evidenced by Provisional Receipt No. 1356 dated November 14,
1983.4
On December 5, 1983, a person claiming to be Lim Sio Wan called up
Cristina So, an officer of Allied, and instructed the latter to pre-
terminate Lim Sio Wan’s money market placement, to issue a
manager’s check representing the proceeds of the placement, and
to give the check to one Deborah Dee Santos who would pick up the
check.5 Lim Sio Wan described the appearance of Santos so that So
could easily identify her.6
Later, Santos arrived at the bank and signed the application form for
a manager’s check to be issued.7 The bank issued Manager’s Check
No. 035669 for PhP 1,158,648.49, representing the proceeds of Lim
Sio Wan’s money market placement in the name of Lim Sio Wan, as
payee.8 The check was cross-checked "For Payee’s Account Only"
and given to Santos.9
Thereafter, the manager’s check was deposited in the account of
Filipinas Cement Corporation (FCC) at respondent Metropolitan
Bank and Trust Co. (Metrobank),10 with the forged signature of Lim
Sio Wan as indorser.11
Earlier, on September 21, 1983, FCC had deposited a money market
placement for PhP 2 million with respondent Producers Bank. Santos
was the money market trader assigned to handle FCC’s
account.12 Such deposit is evidenced by Official Receipt No.
31756813 and a Letter dated September 21, 1983 of Santos
addressed to Angie Lazo of FCC, acknowledging receipt of the
placement.14 The placement matured on October 25, 1983 and was
rolled-over until December 5, 1983 as evidenced by a Letter dated
October 25, 1983.15 When the placement matured, FCC demanded
the payment of the proceeds of the placement.16 On December 5,
1983, the same date that So received the phone call instructing her
to pre-terminate Lim Sio Wan’s placement, the manager’s check in
the name of Lim Sio Wan was deposited in the account of FCC,
purportedly representing the proceeds of FCC’s money market
placement with Producers Bank.17 In other words, the Allied check
was deposited with Metrobank in the account of FCC as Producers
Bank’s payment of its obligation to FCC.
To clear the check and in compliance with the requirements of the
Philippine Clearing House Corporation (PCHC) Rules and Regulations,
Metrobank stamped a guaranty on the check, which reads: "All prior
endorsements and/or lack of endorsement guaranteed."18
The check was sent to Allied through the PCHC. Upon the
presentment of the check, Allied funded the check even without
checking the authenticity of Lim Sio Wan’s purported indorsement.
Thus, the amount on the face of the check was credited to the
account of FCC.19
On December 9, 1983, Lim Sio Wan deposited with Allied a second
money market placement to mature on January 9, 1984.20
On December 14, 1983, upon the maturity date of the first money
market placement, Lim Sio Wan went to Allied to withdraw it.21 She
was then informed that the placement had been pre-terminated
upon her instructions. She denied giving any instructions and
receiving the proceeds thereof. She desisted from further
complaints when she was assured by the bank’s manager that her
money would be recovered.22
When Lim Sio Wan’s second placement matured on January 9, 1984,
So called Lim Sio Wan to ask for the latter’s instructions on the
second placement. Lim Sio Wan instructed So to roll-over the
placement for another 30 days.23On January 24, 1984, Lim Sio Wan,
realizing that the promise that her money would be recovered
would not materialize, sent a demand letter to Allied asking for the
payment of the first placement.24 Allied refused to pay Lim Sio Wan,
claiming that the latter had authorized the pre-termination of the
placement and its subsequent release to Santos.25
Page 29 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
Consequently, Lim Sio Wan filed with the RTC a Complaint dated
February 13, 198426 docketed as Civil Case No. 6757 against Allied to
recover the proceeds of her first money market placement.
Sometime in February 1984, she withdrew her second placement
from Allied.
Allied filed a third party complaint27 against Metrobank and Santos.
In turn, Metrobank filed a fourth party complaint28 against FCC. FCC
for its part filed a fifth party complaint29 against Producers Bank.
Summonses were duly served upon all the parties except for Santos,
who was no longer connected with Producers Bank. 30
On May 15, 1984, or more than six (6) months after funding the
check, Allied informed Metrobank that the signature on the check
was forged.31 Thus, Metrobank withheld the amount represented by
the check from FCC. Later on, Metrobank agreed to release the
amount to FCC after the latter executed an Undertaking, promising
to indemnify Metrobank in case it was made to reimburse the
amount.32
Lim Sio Wan thereafter filed an amended complaint to include
Metrobank as a party-defendant, along with Allied.33The RTC
admitted the amended complaint despite the opposition of
Metrobank.34 Consequently, Allied’s third party complaint against
Metrobank was converted into a cross-claim and the latter’s fourth
party complaint against FCC was converted into a third party
complaint.35
After trial, the RTC issued its Decision, holding as follows:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendant Allied Banking Corporation to pay plaintiff the
amount of P1,158,648.49 plus 12% interest per annum from March
16, 1984 until fully paid;
2. Ordering defendant Allied Bank to pay plaintiff the amount of
P100,000.00 by way of moral damages;
3. Ordering defendant Allied Bank to pay plaintiff the amount of
P173,792.20 by way of attorney’s fees; and,
4. Ordering defendant Allied Bank to pay the costs of suit.
Defendant Allied Bank’s cross-claim against defendant Metrobank is
DISMISSED.
Likewise defendant Metrobank’s third-party complaint as against
Filipinas Cement Corporation is DISMISSED.
Filipinas Cement Corporation’s fourth-party complaint against
Producer’s Bank is also DISMISSED.
SO ORDERED.36
The Decision of the Court of Appeals
Allied appealed to the CA, which in turn issued the assailed Decision
on March 18, 1998, modifying the RTC Decision, as follows:
WHEREFORE, premises considered, the decision appealed from is
MODIFIED. Judgment is rendered ordering and sentencing
defendant-appellant Allied Banking Corporation to pay sixty (60%)
percent and defendant-appellee Metropolitan Bank and Trust
Company forty (40%) of the amount of P1,158,648.49 plus 12%
interest per annum from March 16, 1984 until fully paid. The moral
damages, attorney’s fees and costs of suit adjudged shall likewise be
paid by defendant-appellant Allied Banking Corporation and
defendant-appellee Metropolitan Bank and Trust Company in the
same proportion of 60-40. Except as thus modified, the decision
appealed from is AFFIRMED.
SO ORDERED.37
Hence, Allied filed the instant petition.
The Issues
Allied raises the following issues for our consideration:
The Honorable Court of Appeals erred in holding that Lim Sio Wan
did not authorize [Allied] to pre-terminate the initial placement and
to deliver the check to Deborah Santos.
The Honorable Court of Appeals erred in absolving Producers Bank
of any liability for the reimbursement of amount adjudged
demandable.
The Honorable Court of Appeals erred in holding [Allied] liable to the
extent of 60% of amount adjudged demandable in clear disregard to
the ultimate liability of Metrobank as guarantor of all endorsement
on the check, it being the collecting bank.38
The petition is partly meritorious.
A Question of Fact
Allied questions the finding of both the trial and appellate courts
that Allied was not authorized to release the proceeds of Lim Sio
Wan’s money market placement to Santos. Allied clearly raises a
question of fact. When the CA affirms the findings of fact of the RTC,
the factual findings of both courts are binding on this Court.39
We also agree with the CA when it said that it could not disturb the
trial court’s findings on the credibility of witness So inasmuch as it
was the trial court that heard the witness and had the opportunity
to observe closely her deportment and manner of testifying. Unless
the trial court had plainly overlooked facts of substance or value,
which, if considered, might affect the result of the case,40 we find it
best to defer to the trial court on matters pertaining to credibility of
witnesses.
Additionally, this Court has held that the matter of negligence is also
a factual question.41 Thus, the finding of the RTC, affirmed by the CA,
that the respective parties were negligent in the exercise of their
obligations is also conclusive upon this Court.
The Liability of the Parties
As to the liability of the parties, we find that Allied is liable to Lim Sio
Wan. Fundamental and familiar is the doctrine that the relationship
between a bank and a client is one of debtor-creditor.
Page 30 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
Articles 1953 and 1980 of the Civil Code provide:
Art. 1953. A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to pay
to the creditor an equal amount of the same kind and quality.
Art. 1980. Fixed, savings, and current deposits of money in banks
and similar institutions shall be governed by the provisions
concerning simple loan.
Thus, we have ruled in a line of cases that a bank deposit is in the
nature of a simple loan or mutuum.42 More succinctly, in Citibank,
N.A. (Formerly First National City Bank) v. Sabeniano, this Court
ruled that a money market placement is a simple loan or
mutuum.43 Further, we defined a money market in Cebu
International Finance Corporation v. Court of Appeals, as follows:
[A] money market is a market dealing in standardized short-term
credit instruments (involving large amounts) where lenders and
borrowers do not deal directly with each other but through a middle
man or dealer in open market. In a money market transaction, the
investor is a lender who loans his money to a borrower through a
middleman or dealer.
In the case at bar, the money market transaction between the
petitioner and the private respondent is in the nature of a loan.44
Lim Sio Wan, as creditor of the bank for her money market
placement, is entitled to payment upon her request, or upon
maturity of the placement, or until the bank is released from its
obligation as debtor. Until any such event, the obligation of Allied to
Lim Sio Wan remains unextinguished.
Art. 1231 of the Civil Code enumerates the instances when
obligations are considered extinguished, thus:
Art. 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and
debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment,
rescission, fulfillment of a resolutory condition, and prescription, are
governed elsewhere in this Code. (Emphasis supplied.)
From the factual findings of the trial and appellate courts that Lim
Sio Wan did not authorize the release of her money market
placement to Santos and the bank had been negligent in so doing,
there is no question that the obligation of Allied to pay Lim Sio Wan
had not been extinguished. Art. 1240 of the Code states that
"payment shall be made to the person in whose favor the obligation
has been constituted, or his successor in interest, or any person
authorized to receive it." As commented by Arturo Tolentino:
Payment made by the debtor to a wrong party does not extinguish
the obligation as to the creditor, if there is no fault or negligence
which can be imputed to the latter. Even when the debtor acted in
utmost good faith and by mistake as to the person of his creditor, or
through error induced by the fraud of a third person, the payment to
one who is not in fact his creditor, or authorized to receive such
payment, is void, except as provided in Article 1241. Such payment
does not prejudice the creditor, and accrual of interest is not
suspended by it.45 (Emphasis supplied.)
Since there was no effective payment of Lim Sio Wan’s money
market placement, the bank still has an obligation to pay her at six
percent (6%) interest from March 16, 1984 until the payment
thereof.
We cannot, however, say outright that Allied is solely liable to Lim
Sio Wan.
Allied claims that Metrobank is the proximate cause of the loss of
Lim Sio Wan’s money. It points out that Metrobank guaranteed all
prior indorsements inscribed on the manager’s check, and without
Metrobank’s guarantee, the present controversy would never have
occurred. According to Allied:
Failure on the part of the collecting bank to ensure that the
proceeds of the check is paid to the proper party is, aside from being
an efficient intervening cause, also the last negligent act, x x x
contributory to the injury caused in the present case, which thereby
leads to the conclusion that it is the collecting bank, Metrobank that
is the proximate cause of the alleged loss of the plaintiff in the
instant case.46
We are not persuaded.
Proximate cause is "that cause, which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces the
injury and without which the result would not have
occurred."47 Thus, there is an efficient supervening event if the
event breaks the sequence leading from the cause to the ultimate
result. To determine the proximate cause of a controversy, the
question that needs to be asked is: If the event did not happen,
would the injury have resulted? If the answer is NO, then the event
is the proximate cause.
In the instant case, Allied avers that even if it had not issued the
check payment, the money represented by the check would still be
lost because of Metrobank’s negligence in indorsing the check
without verifying the genuineness of the indorsement thereon.
Section 66 in relation to Sec. 65 of the Negotiable Instruments Law
provides:
Section 66. Liability of general indorser.—Every indorser who
indorses without qualification, warrants to all subsequent holders in
due course;
a) The matters and things mentioned in subdivisions (a), (b) and (c)
of the next preceding section; and
b) That the instrument is at the time of his indorsement valid and
subsisting;
And in addition, he engages that on due presentment, it shall be
accepted or paid, or both, as the case may be according to its tenor,
and that if it be dishonored, and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the
Page 31 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
holder, or to any subsequent indorser who may be compelled to pay
it.
Section 65. Warranty where negotiation by delivery, so forth.—
Every person negotiating an instrument by delivery or by a qualified
indorsement, warrants:
a) That the instrument is genuine and in all respects what
it purports to be;
b) That he has a good title of it;
c) That all prior parties had capacity to contract;
d) That he has no knowledge of any fact which would
impair the validity of the instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends
in favor of no holder other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to
persons negotiating public or corporation securities, other than bills
and notes. (Emphasis supplied.)
The warranty "that the instrument is genuine and in all respects
what it purports to be" covers all the defects in the instrument
affecting the validity thereof, including a forged indorsement. Thus,
the last indorser will be liable for the amount indicated in the
negotiable instrument even if a previous indorsement was forged.
We held in a line of cases that "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 itself, and ultimately should be held liable therefor."48
However, this general rule is subject to exceptions. One such
exception is when the issuance of the check itself was attended with
negligence. Thus, in the cases cited above where the collecting bank
is generally held liable, in two of the cases where the checks were
negligently issued, this Court held the institution issuing the check
just as liable as or more liable than the collecting bank.
In isolated cases where the checks were deposited in an account
other than that of the payees on the strength of forged
indorsements, we held the collecting bank solely liable for the whole
amount of the checks involved for having indorsed the same. In
Republic Bank v. Ebrada,49 the check was properly issued by the
Bureau of Treasury. While in Banco de Oro Savings and Mortgage
Bank (Banco de Oro) v. Equitable Banking Corporation,50 Banco de
Oro admittedly issued the checks in the name of the correct payees.
And in Traders Royal Bank v. Radio Philippines Network, Inc., 51 the
checks were issued at the request of Radio Philippines Network, Inc.
from Traders Royal Bank.1avvphi1
However, in Bank of the Philippine Islands v. Court of Appeals, we
said that the drawee bank is liable for 60% of the amount on the
face of the negotiable instrument and the collecting bank is liable for
40%. We also noted the relative negligence exhibited by two banks,
to wit:
Both banks were negligent in the selection and supervision of their
employees resulting in the encashment of the forged checks by an
impostor. Both banks were not able to overcome the presumption
of negligence in the selection and supervision of their employees. It
was the gross negligence of the employees of both banks which
resulted in the fraud and the subsequent loss. While it is true that
petitioner BPI’s negligence may have been the proximate cause of
the loss, respondent CBC’s negligence contributed equally to the
success of the impostor in encashing the proceeds of the forged
checks. Under these circumstances, we apply Article 2179 of the
Civil Code to the effect that while respondent CBC may recover its
losses, such losses are subject to mitigation by the courts.
(See Phoenix Construction Inc. v. Intermediate Appellate Courts, 148
SCRA 353 [1987]).
Considering the comparative negligence of the two (2) banks, we
rule that the demands of substantial justice are satisfied by
allocating the loss of P2,413,215.16 and the costs of the arbitration
proceeding in the amount of P7,250.00 and the cost of litigation on a
60-40 ratio.52
Similarly, we ruled in Associated Bank v. Court of Appeals that the
issuing institution and the collecting bank should equally share the
liability for the loss of amount represented by the checks concerned
due to the negligence of both parties:
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.53
A reading of the facts of the two immediately preceding cases would
reveal that the reason why the bank or institution which issued the
check was held partially liable for the amount of the check was
because of the negligence of these parties which resulted in the
issuance of the checks.
In the instant case, the trial court correctly found Allied negligent in
issuing the manager’s check and in transmitting it to Santos without
even a written authorization.54 In fact, Allied did not even ask for the
certificate evidencing the money market placement or call up Lim
Sio Wan at her residence or office to confirm her instructions. Both
actions could have prevented the whole fraudulent transaction from
unfolding. Allied’s negligence must be considered as the proximate
cause of the resulting loss.
To reiterate, had Allied exercised the diligence due from a financial
institution, the check would not have been issued and no loss of
funds would have resulted. In fact, there would have been no
issuance of indorsement had there been no check in the first place.
The liability of Allied, however, is concurrent with that of Metrobank
as the last indorser of the check. When Metrobank indorsed the
check in compliance with the PCHC Rules and Regulations55 without
verifying the authenticity of Lim Sio Wan’s indorsement and when it
accepted the check despite the fact that it was cross-checked
Page 32 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
payable to payee’s account only,56 its negligent and cavalier
indorsement contributed to the easier release of Lim Sio Wan’s
money and perpetuation of the fraud. Given the relative
participation of Allied and Metrobank to the instant case, both
banks cannot be adjudged as equally liable. Hence, the 60:40 ratio of
the liabilities of Allied and Metrobank, as ruled by the CA, must be
upheld.
FCC, having no participation in the negotiation of the check and in
the forgery of Lim Sio Wan’s indorsement, can raise the real defense
of forgery as against both banks.57
As to Producers Bank, Allied Bank’s argument that Producers Bank
must be held liable as employer of Santos under Art. 2180 of the
Civil Code is erroneous. Art. 2180 pertains to the vicarious liability of
an employer for quasi-delicts that an employee has committed. Such
provision of law does not apply to civil liability arising from delict.
One also cannot apply the principle of subsidiary liability in Art. 103
of the Revised Penal Code in the instant case. Such liability on the
part of the employer for the civil aspect of the criminal act of the
employee is based on the conviction of the employee for a crime.
Here, there has been no conviction for any crime.
As to the claim that there was unjust enrichment on the part of
Producers Bank, the same is correct. Allied correctly claims in its
petition that Producers Bank should reimburse Allied for whatever
judgment that may be rendered against it pursuant to Art. 22 of the
Civil Code, which provides: "Every person who through an act of
performance by another, or any other means, acquires or comes
into possession of something at the expense of the latter without
just cause or legal ground, shall return the same to him."1avvphi1
The above provision of law was clarified in Reyes v. Lim, where we
ruled that "[t]here is unjust enrichment when a person unjustly
retains a benefit to the loss of another, or when a person retains
money or property of another against the fundamental principles of
justice, equity and good conscience."58
In Tamio v. Ticson, we further clarified the principle of unjust
enrichment, thus: "Under Article 22 of the Civil Code, there is unjust
enrichment when (1) a person is unjustly benefited, and (2) such
benefit is derived at the expense of or with damages to another."59
In the instant case, Lim Sio Wan’s money market placement in Allied
Bank was pre-terminated and withdrawn without her consent.
Moreover, the proceeds of the placement were deposited in
Producers Bank’s account in Metrobank without any justification. In
other words, there is no reason that the proceeds of Lim Sio Wans’
placement should be deposited in FCC’s account purportedly as
payment for FCC’s money market placement and interest in
Producers Bank.lavvphil With such payment, Producers Bank’s
indebtedness to FCC was extinguished, thereby benefitting the
former. Clearly, Producers Bank was unjustly enriched at the
expense of Lim Sio Wan. Based on the facts and circumstances of
the case, Producers Bank should reimburse Allied and Metrobank for
the amounts the two latter banks are ordered to pay Lim Sio Wan.
It cannot be validly claimed that FCC, and not Producers Bank,
should be considered as having been unjustly enriched. It must be
remembered that FCC’s money market placement with Producers
Bank was already due and demandable; thus, Producers Bank’s
payment thereof was justified. FCC was entitled to such payment. As
earlier stated, the fact that the indorsement on the check was
forged cannot be raised against FCC which was not a part in any
stage of the negotiation of the check. FCC was not unjustly enriched.
From the facts of the instant case, we see that Santos could be the
architect of the entire controversy. Unfortunately, since summons
had not been served on Santos, the courts have not acquired
jurisdiction over her.60 We, therefore, cannot ascribe to her liability
in the instant case.
Clearly, Producers Bank must be held liable to Allied and Metrobank
for the amount of the check plus 12% interest per annum, moral
damages, attorney’s fees, and costs of suit which Allied and
Metrobank are adjudged to pay Lim Sio Wan based on a proportion
of 60:40.
WHEREFORE, the petition is PARTLY GRANTED. The March 18, 1998
CA Decision in CA-G.R. CV No. 46290 and the November 15, 1993
RTC Decision in Civil Case No. 6757 are AFFIRMED with
MODIFICATION.
Thus, the CA Decision is AFFIRMED, the fallo of which is reproduced,
as follows:
WHEREFORE, premises considered, the decision appealed from is
MODIFIED. Judgment is rendered ordering and sentencing
defendant-appellant Allied Banking Corporation to pay sixty (60%)
percent and defendant-appellee Metropolitan Bank and Trust
Company forty (40%) of the amount of P1,158,648.49 plus 12%
interest per annum from March 16, 1984 until fully paid. The moral
damages, attorney’s fees and costs of suit adjudged shall likewise be
paid by defendant-appellant Allied Banking Corporation and
defendant-appellee Metropolitan Bank and Trust Company in the
same proportion of 60-40. Except as thus modified, the decision
appealed from is AFFIRMED.
SO ORDERED.
Additionally and by way of MODIFICATION, Producers Bank is hereby
ordered to pay Allied and Metrobank the aforementioned amounts.
The liabilities of the parties are concurrent and independent of each
other.
G.R. No. 129015 August 13, 2004
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES,
INC., petitioner,
vs.
FAR EAST BANK AND TRUST COMPANY AND COURT OF
APPEALS, respondents.
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 Biñan, Laguna, maintained a current
account with defendant Far East Bank and Trust Company1 ("FEBTC")
at the latter’s Bel-Air, Makati branch.2 The sole signatory to Samsung
Construction’s account was Jong Kyu Lee ("Jong"), its Project
Page 33 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
Manager,3 while the checks remained in the custody of the
company’s accountant, Kyu Yong Lee ("Kyu").4
On 19 March 1992, a certain Roberto Gonzaga presented for
payment FEBTC Check No. 432100 to the bank’s branch in Bel-Air,
Makati. The check, payable to cash and drawn against Samsung
Construction’s 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
Construction’s 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 Jong’s 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 bank’s 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 Jong’s 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 attorney’s 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 Jong’s 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 Jong’s 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 Jong’s 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 Decisiondated 25 April
1994, the RTC held that Jong’s signature on the check was forged
and accordingly directed the bank to pay or credit back to Samsung
Construction’s 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 attorney’s 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 York19 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 RTC’s
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 drawer’s account. The
traditional justification for the result is that the drawee is in a
superior position to detect a forgery because he has the maker’s
Page 34 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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 opportunity of the drawee to
insure and to distribute the cost among its customers who use
checks makes the drawee an ideal party to spread the risk to
insurance.23
Brady, in his treatise The Law of Forged and Altered Checks,
elucidates:
When a person deposits money in a general account in a bank,
against which he has the privilege of drawing checks in the ordinary
course of business, the relationship between the bank and the
depositor is that of debtor and creditor. So far as the legal
relationship between the two is concerned, the situation is the same
as though the bank had borrowed money from the depositor,
agreeing to repay it on demand, or had bought goods from the
depositor, agreeing to pay for them on demand. The bank owes the
depositor money in the same sense that any debtor owes money to
his creditor. Added to this, in the case of bank and depositor, there
is, of course, the bank’s obligation to pay checks drawn by the
depositor in proper form and presented in due course. When the
bank receives the deposit, it impliedly agrees to pay only upon the
depositor’s order. When the bank pays a check, on which the
depositor’s signature is a forgery, it has failed to comply with its
contract in this respect. Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged
signature may so closely resemble the genuine as to defy detection
by the depositor himself. And yet, if a bank pays the check, it is
paying out its own money and not the depositor’s.
The forgery may be committed by a trusted employee or
confidential agent. The bank still must bear the loss. Even in a case
where the forged check was drawn by the depositor’s partner, the
loss was placed upon the bank. The case referred to is Robinson v.
Security Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff
brought suit against the defendant bank for money which had been
deposited to the plaintiff’s credit and which the bank had paid out
on checks bearing forgeries of the plaintiff’s signature.
xxx
It was held that the bank was liable. It was further held that the fact
that the plaintiff waited eight or nine months after discovering the
forgery, before notifying the bank, did not, as a matter of law,
constitute a ratification of the payment, so as to preclude the
plaintiff from holding the bank liable. xxx
This rule of liability can be stated briefly in these words: "A bank is
bound to know its depositors’ signature." The rule is variously
expressed in the many decisions in which the question has been
considered. But they all sum up to the proposition that a bank must
know the signatures of those whose general deposits it carries.24
By no means is the principle rendered obsolete with the advent of
modern commercial transactions. Contemporary texts still affirm
this well-entrenched standard. Nickles, in his book Negotiable
Instruments and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer
determines who can draw against the customer’s account by
specifying whose signature is necessary on checks that are
chargeable against the customer’s account. Therefore, a check
drawn against the account of an individual customer that is signed
by someone other than the customer, and without authority from
her, is not properly payable and is not chargeable to the customer’s
account, inasmuch as any "unauthorized signature on an instrument
is ineffective" as the signature of the person whose name is signed.25
Under Section 23 of the Negotiable Instruments Law, forgery is a
real or absolute defense by the party whose signature is forged.26 On
the premise that Jong’s 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 opponent’s 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 court’s error in this
case warrants special attention, as it is absurd and even dangerous
Page 35 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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 (90º) 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 seventh36 forms a severe
forty-five degree (45º) 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 expert’s. 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.40She 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 examiner’s 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
Jong’s 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
Jong’s 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
Page 36 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
adjudged as truthful, deserve primacy in consideration. Jong’s
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 succeeded49 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
party’s 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 Court’s
pronouncement in PCI Bank v. Court of Appeals53 applies in this case,
to wit:
[T]he mere fact that the forgery was committed by a drawer-payor’s
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 Jong’s 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 Construction’s 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
depositor’s signature and collect on the checks from the bank. 62 And
Page 37 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
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 drawer’s 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 drawer’s 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 drawer’s 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
bank’s 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.68Moreover, 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 Gonzaga’s 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 presented.
FEBTC alleges that Sempio was well-known to the bank officers, as
he had regularly transacted with the bank in behalf of Samsung
Construction. It was even claimed that everytime FEBTC would
contact Jong about problems with his account, Jong would hand the
phone over to Sempio.72 However, the only proof of such allegations
is the testimony of Gemma Velez, who also testified that she did not
know Sempio personally,73 and had met Sempio for the first time
only on the day the check was encashed.74 In fact, Velez had to
inquire with the other officers of the bank as to whether Sempio was
actually known to the employees of the bank.75 Obviously, Velez had
no personal knowledge as to the past relationship between FEBTC
and Sempio, and any averments of her to that effect should be
deemed hearsay evidence. Interestingly, FEBTC did not present as a
witness any other employee of their Bel-Air branch, including those
who supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing 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 client’s 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.
Still, even if the bank performed with utmost diligence, the drawer
whose signature was forged may still recover from the bank as long
as he or she is not precluded from setting up the defense of forgery.
After all, Section 23 of the Negotiable Instruments Law plainly states
that no right to enforce the payment of a check can arise out of a
forged signature. Since the drawer, Samsung Construction, is not
precluded by negligence from setting up the forgery, the general
rule should apply. Consequently, if a bank pays a forged check, it
must be considered as paying out of its funds and cannot charge the
amount so paid to the account of the depositor.77 A bank is liable,
irrespective of its good faith, in paying a forged check.78
WHEREFORE, the Petition is GRANTED. The Decision of the Court of
Appeals dated 28 November 1996 is REVERSED, and the Decision of
the Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is
REINSTATED. Costs against respondent.
Page 38 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
G.R. No. 158143 September 21, 2011
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, Petitioner,
vs.
ANTONIO B. BALMACEDA and ROLANDO N. RAMOS, Respondents.
BRION, J.:
Before us is a petition for review on certiorari,1 filed by the
Philippine Commercial International Bank2 (Bank or PCIB), to reverse
and set aside the decision3 dated April 29, 2003 of the Court of
Appeals (CA) in CA-G.R. CV No. 69955. The CA overturned the
September 22, 2000 decision of the Regional Trial Court (RTC) of
Makati City, Branch 148, in Civil Case No. 93-3181, which held
respondent Rolando Ramos liable to PCIB for the amount of
₱895,000.00.
FACTUAL ANTECEDENTS
On September 10, 1993, PCIB filed an action for recovery of sum of
money with damages before the RTC against Antonio Balmaceda,
the Branch Manager of its Sta. Cruz, Manila branch. In its complaint,
PCIB alleged that between 1991 and 1993, Balmaceda, by taking
advantage of his position as branch manager, fraudulently obtained
and encashed 31 Manager’s checks in the total amount of Ten
Million Seven Hundred Eighty Two Thousand One Hundred Fifty
Pesos (₱10,782,150.00).
On February 28, 1994, PCIB moved to be allowed to file an amended
complaint to implead Rolando Ramos as one of the recipients of a
portion of the proceeds from Balmaceda’s alleged fraud. PCIB also
increased the number of fraudulently obtained and encashed
Manager’s checks to 34, in the total amount of Eleven Million Nine
Hundred Thirty Seven Thousand One Hundred Fifty Pesos
(₱11,937,150.00). The RTC granted this motion.
Since Balmaceda did not file an Answer, he was declared in default.
On the other hand, Ramos filed an Answer denying any knowledge
of Balmaceda’s scheme. According to Ramos, he is a reputable
businessman engaged in the business of buying and selling fighting
cocks, and Balmaceda was one of his clients. Ramos admitted
receiving money from Balmaceda as payment for the fighting cocks
that he sold to Balmaceda, but maintained that he had no
knowledge of the source of Balmaceda’s money.
THE RTC DECISION
On September 22, 2000, the RTC issued a decision in favor of PCIB,
with the following dispositive portion:
WHEREFORE, premises considered, judgment is hereby rendered in
favor of the plaintiff and against the defendants as follows:
1. Ordering defendant Antonio Balmaceda to pay the amount of
₱11,042,150.00 with interest thereon at the legal rate from [the]
date of his misappropriation of the said amount until full restitution
shall have been made[.]
2. Ordering defendant Rolando Ramos to pay the amount of
₱895,000.00 with interest at the legal rate from the date of
misappropriation of the said amount until full restitution shall have
been made[.]
3. Ordering the defendants to pay plaintiff moral damages in the
sum of ₱500,000.00 and attorney’s fees in the amount of ten (10%)
percent of the total misappropriated amounts sought to be
recovered.
4. Plus costs of suit.
SO ORDERED.4
From the evidence presented, the RTC found that Balmaceda, by
taking undue advantage of his position and authority as branch
manager of the Sta. Cruz, Manila branch of PCIB, successfully
obtained and misappropriated the bank’s funds by falsifying several
commercial documents. He accomplished this by claiming that he
had been instructed by one of the Bank’s corporate clients to
purchase Manager’s checks on its behalf, with the value of the
checks to be debited from the client’s corporate bank account. First,
he would instruct the Bank staff to prepare the application forms for
the purchase of Manager’s checks, payable to several persons. Then,
he would forge the signature of the client’s authorized
representative on these forms and sign the forms as PCIB’s
approving officer. Finally, he would have an authorized officer of
PCIB issue the Manager’s checks. Balmaceda would subsequently
ask his subordinates to release the Manager’s checks to him,
claiming that the client had requested that he deliver the
checks.5 After receiving the Manager’s checks, he encashed them by
forging the signatures of the payees on the checks.
In ruling that Ramos acted in collusion with Balmaceda, the RTC
noted that although the Manager’s checks payable to Ramos were
crossed checks, Balmaceda was still able to encash the checks.6 After
Balmaceda encashed three of these Manager’s checks, he deposited
most of the money into Ramos’ account.7 The RTC concluded that
from the ₱11,937,150.00 that Balmaceda misappropriated from
PCIB, ₱895,000.00 actually went to Ramos. Since the RTC disbelieved
Ramos’ allegation that the sum of money deposited into his Savings
Account (PCIB, Pasig branch) were proceeds from the sale of fighting
cocks, it held Ramos liable to pay PCIB the amount of ₱895,000.00.
THE COURT OF APPEALS DECISION
On appeal, the CA dismissed the complaint against Ramos, holding
that no sufficient evidence existed to prove that Ramos colluded
with Balmaceda in the latter’s fraudulent manipulations.8
According to the CA, the mere fact that Balmaceda made Ramos the
payee in some of the Manager’s checks does not suffice to prove
that Ramos was complicit in Balmaceda’s fraudulent scheme. It
observed that other persons were also named as payees in the
checks that Balmaceda acquired and encashed, and PCIB only chose
to go after Ramos. With PCIB’s failure to prove Ramos’ actual
participation in Balmaceda’s fraud, no legal and factual basis exists
to hold him liable.
The CA also found that PCIB acted illegally in freezing and debiting
₱251,910.96 from Ramos’ bank account. The CA thus decreed:
WHEREFORE, the appeal is granted. The Decision of the trial court
rendered on September 22, 2000[,] insofar as appellant Ramos is
concerned, is SET ASIDE, and the complaint below against him is
DISMISSED.
Appellee is hereby ordered to release the amount of ₱251,910.96 to
appellant Ramos plus interest at [the] legal rate computed from
September 30, 1993 until appellee shall have fully complied
therewith.
Appellee is likewise ordered to pay appellant Ramos the following:
a) ₱50,000.00 as moral damages
b) ₱50,000.00 as exemplary damages, and
c) ₱20,000.00 as attorney’s fees.
Page 39 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
No costs.
SO ORDERED.9
THE PETITION
In the present petition, PCIB avers that:
I Inc.,14 defined "preponderance of evidence" in the following
THE APPELLATE COURT ERRED IN HOLDING THAT THERE IS
NO EVIDENCE TO HOLD THAT RESPONDENT RAMOS ACTED
IN COMPLICITY WITH RESPONDENT BALMACEDA
II
THE APPELLATE COURT ERRED IN ORDERING THE
PETITIONER TO RELEASE THE AMOUNT OF ₱251,910.96 TO
RESPONDENT RAMOS AND TO PAY THE LATTER MORAL
AND EXEMPLARY DAMAGES AND ATTORNEY’S FEES10
PCIB contends that the circumstantial evidence shows that Ramos
had knowledge of, and acted in complicity with Balmaceda in, the
perpetuation of the fraud. Ramos’ explanation that he is a
businessman and that he received the Manager’s checks as payment
for the fighting cocks he sold to Balmaceda is unconvincing, given
the large sum of money involved. While Ramos presented evidence
that he is a reputable businessman, this evidence does not explain
why the Manager’s checks were made payable to him in the first
place.
In civil cases, the party carrying the burden of proof must establish
his case by a preponderance of evidence, or evidence which, to the
court, is more worthy of belief than the evidence offered in
opposition.13 This Court, in Encinas v. National Bookstore,
manner:
"Preponderance of evidence" is the weight, credit, and value of the
aggregate evidence on either side and is usually considered to be
synonymous with the term "greater weight of the evidence" or
"greater weight of the credible evidence." Preponderance of
evidence is a phrase which, in the last analysis, means probability of
the truth. It is evidence which is more convincing to the court as
worthy of belief than that which is offered in opposition thereto.
The party, whether the plaintiff or the defendant, who asserts the
affirmative of an issue has the onus to prove his assertion in order to
obtain a favorable judgment, subject to the overriding rule that the
burden to prove his cause of action never leaves the plaintiff. For
the defendant, an affirmative defense is one that is not merely a
denial of an essential ingredient in the plaintiff's cause of action, but
one which, if established, will constitute an "avoidance" of the
claim.15

PCIB maintains that it had the right to freeze and debit the amount
Thus, PCIB, as plaintiff, had to prove, by preponderance of evidence,
of ₱251,910.96 from Ramos’ bank account, even without his
its positive assertion that Ramos conspired with Balmaceda in
consent, since legal compensation had taken place between them by
perpetrating the latter’s scheme to defraud the Bank. In PCIB’s
operation of law. PCIB debited Ramos’ bank account, believing in
estimation, it successfully accomplished this through the submission
good faith that Ramos was not entitled to the proceeds of the
of the following evidence:
Manager’s checks and was actually privy to the fraud perpetrated by
Balmaceda. PCIB cannot thus be held liable for moral and exemplary
damages. [1] Exhibits "A," "D," "PPPP," "QQQQ," and "RRRR" and their
submarkings, the application forms for MCs, show that [these MCs
were applied for in favor of Ramos;]
OUR RULING
[2] Exhibits "K," "N," "SSSS," "TTTT," and "UUUU" and their
We partly grant the petition.
submarkings prove that the MCs were issued in favor of x x x
At the outset, we observe that the petition raises mainly questions
Ramos[; and]
of fact whose resolution requires the re-examination of the evidence
[3] [T]estimonies of the witness for [PCIB].16
on record. As a general rule, petitions for review on certiorari only
We cannot accept these submitted pieces of evidence as sufficient
involve questions of law.11 By way of exception, however, we can
to satisfy the burden of proof that PCIB carries as plaintiff.
delve into evidence and the factual circumstance of the case when
the findings of fact in the tribunals below (in this case between
those of the CA and of the RTC) are conflicting. When the exception On its face, all that PCIB’s evidence proves is that Balmaceda used
applies, we are given latitude to review the evidence on record to Ramos’ name as a payee when he filled up the application forms for
decide the case with finality.12 the Manager’s checks. But, as the CA correctly observed, the mere
Ramos’ participation in Balmaceda’s scheme not proven fact that Balmaceda made Ramos the payee on some of the
Manager’s checks is not enough basis to conclude that Ramos was
complicit in Balmaceda’s fraud; a number of other people were
From the testimonial and documentary evidence presented, we find
made payees on the other Manager’s checks yet PCIB never alleged
it beyond question that Balmaceda, by taking advantage of his
them to be liable, nor did the Bank adduce any other evidence
position as branch manager of PCIB’s Sta. Cruz, Manila branch, was
pointing to Ramos’ participation that would justify his separate
able to apply for and obtain Manager’s checks drawn against the
treatment from the others. Also, while Ramos is Balmaceda’s
bank account of one of PCIB’s clients. The unsettled question is
brother-in-law, their relationship is not sufficient, by itself, to render
whether Ramos, who received a portion of the money that
Ramos liable, absent concrete proof of his actual participation in the
Balmaceda took from PCIB, should also be held liable for the return
fraudulent scheme.
of this money to the Bank.

Moreover, the evidence on record clearly shows that Balmaceda

PCIB insists that it presented sufficient evidence to establish that
acted on his own when he applied for the Manager’s checks against
Ramos colluded with Balmaceda in the scheme to fraudulently
the bank account of one of PCIB’s clients, as well as when he
secure Manager’s checks and to misappropriate their proceeds.
encashed the fraudulently acquired Manager’s checks.
Since Ramos’ defense – anchored on mere denial of any
participation in Balmaceda’s wrongdoing – is an intrinsically weak
defense, it was error for the CA to exonerate Ramos from any Mrs. Elizabeth Costes, the Area Manager of PCIB at the time of the
liability. relevant events, testified that Balmaceda committed all the acts
necessary to obtain the unauthorized Manager’s checks – from
filling up the application form by forging the signature of the client’s

Page 40 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag

representative, to forging the signatures of the payees in order to
encash the checks. As Mrs. Costes stated in her testimony:
Q: I am going into [these] particular instances where you said that
Mr. Balmaceda [has] been making unauthorized withdrawals from
particular account of a client or a client of yours at Sta. Cruz branch.
Would you tell us how he effected his unauthorized withdrawals?
A: He prevailed upon the domestic remittance clerk to prepare the
application of a Manager’s check which [has] been debited to a
client’s account. This particular Manager’s check will be payable to a
certain individual thru his account as the instruction of the client.
Q: What was your findings in so far as the particular alleged
instruction of a client is concerned?
A: We found out that he forged the signature of the client.
Q: On that particular application?
A: Yes sir.
Q: Showing to you several applications for Manager’s Check
previously attached as Annexes "A, B, C, D and E["] of the complaint.
Could you please tell us where is that particular alleged signature of
a client applying for the Manager’s check which you claimed to have
been forged by Mr. Balmaceda?
A: Here sir.
xxxx
Q: After the accomplishment of this application form as you stated
Mrs. witness, do you know what happened to the application form?
A: Before that application form is processed it goes to several stages.
Here for example this was signed supposed to be by the client and
his signature representing that, he certified the signature based on
their records to be authentic.
Q: When you said he to whom are you referring to?
A: Mr. Balmaceda. And at the same time he approved the
transaction.
xxxx
Q: Do you know if the corresponding checks applied for in the
application forms were issued?
A: Yes sir.
Q: Could you please show us where these checks are now, the one
applied for in Exhibit "A" which is in the amount of ₱150,000.00,
where is the corresponding check?
A: Rolando Ramos dated December 26, 1991 and one of the
signatories with higher authority, this is Mr. Balmaceda’s signature.
Q: In other words he is likewise approving signatory to the
Manager’s check?
A: Yes sir. This is an authority that the check [has] been encashed.
Q: In other words this check issued to Rolando Ramos dated
December 26, 1991 is a cross check but nonetheless he allowed to
encash by granting it.
Could you please show us?
ATTY. PACES: Witness pointing to an initial of the defendant Antonio
Balmaceda, the notation cross check.
A: And this is his signature.
xxxx
Q: How about the check corresponding to Exhibit E-2 which is an
application for ₱125,000.00 for a certain Rolando Ramos. Do you
have the check?
A: Yes sir.
ATTY. PACES: Witness producing a check dated December 19, 1991
the amount of ₱125,000.00 payable to certain Rolando Ramos.
Q: Can you tell us whether the same modus operandi was ad[o]pted
by Mr. Balmaceda in so far as he is concerned?
A: Yes sir he is also the right signer and he authorized the
cancellation of the cross check.17 (emphasis ours)
xxxx
Q: These particular checks [Mrs.] witness in your findings, do you
know if Mr. Balmaceda [has] again any participation in these checks?
A: He is also the right signer and approved officer and he was
authorized to debit on file.
xxxx
Q: And do you know if these particular checks marked as Exhibit G-2
to triple FFF were subsequently encashed?
A: Yes sir.
Q: Were you able to find out who encashed?
A: Mr. Balmaceda himself and besides he approved the encashment
because of the signature that he allowed the encashment of the
check.
xxxx
Q: Do you know if this particular person having in fact withdraw of
received the proceeds of [these] particular checks, the payee?
A: No sir.
Q: It was all Mr. Balmaceda dealing with you?
A: Yes sir.
Q: In other words it would be possible that Mr. Balmaceda himself
gotten the proceeds of the checks by forging the payees signature?
A: Yes sir.18 (emphases ours)
Mrs. Nilda Laforteza, the Commercial Account Officer of PCIB’s Sta.
Cruz, Manila branch at the time the events of this case occurred,
confirmed Mrs. Costes’ testimony by stating that it was Balmaceda
who forged Ramos’ signature on the Manager’s checks where
Ramos was the payee, so as to encash the amounts indicated on the
checks.19Mrs. Laforteza also testified that Ramos never went to the
PCIB, Sta. Cruz, Manila branch to encash the checks since Balmaceda
was the one who deposited the checks into Ramos’ bank account. As
revealed during Mrs. Laforteza’s cross-examination:
Q: Mrs. Laforteza, these checks that were applied for by Mr.
Balmaceda, did you ever see my client go to the bank to encash
these checks?
A: No it is Balmaceda who is depositing in his behalf.
Q: Did my client ever call up the bank concerning this amount?
A: Yes he is not going to call PCIBank Sta. Cruz branch because his
account is maintained at Pasig.
Q: So Mr. Balmaceda was the one who just remitted or transmitted
the amount that you claimed [was sent] to the account of my client?
A: Yes.20 (emphases ours)
Even Mrs. Rodelia Nario, presented by PCIB as its rebuttal witness to
prove that Ramos encashed a Manager’s check for ₱480,000.00,
could only testify that the money was deposited into Ramos’ PCIB
bank account. She could not attest that Ramos himself presented
the Manager’s check for deposit in his bank account.21 These
testimonies clearly dispute PCIB’s theory that Ramos was
instrumental in the encashment of the Manager’s checks.
We also find no reason to doubt Ramos’ claim that Balmaceda
deposited these large sums of money into his bank account as
payment for the fighting cocks that Balmaceda purchased from him.
Ramos presented two witnesses – Vicente Cosculluela and Crispin
Gadapan – who testified that Ramos previously engaged in the
business of buying and selling fighting cocks, and that Balmaceda
was one of Ramos’ biggest clients.
Page 41 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
Quoting from the RTC decision, PCIB stresses that Ramos’ own
witness and business partner, Cosculluela, testified that the biggest
net profit he and Ramos earned from a single transaction with
Balmaceda amounted to no more than ₱100,000.00, for the sale of
approximately 45 fighting cocks.22 In PCIB’s view, this testimony
directly contradicts Ramos’ assertion that he received approximately
₱400,000.00 from his biggest transaction with Balmaceda. To PCIB,
the testimony also renders questionable Ramos’ assertion that
Balmaceda deposited large amounts of money into his bank account
as payment for the fighting cocks.
On this point, we find that PCIB misunderstood Cosculluela’s
testimony. A review of the testimony shows that Cosculluela
specifically referred to the net profit that they earned from the sale
of the fighting cocks;23 PCIB apparently did not take into account the
capital, transportation and other expenses that are components of
these transactions. Obviously, in sales transactions, the buyer has to
pay not only for the value of the thing sold, but also for the shipping
costs and other incidental costs that accompany the acquisition of
the thing sold. Thus, while the biggest net profit that Ramos and
Cosculluela earned in a single transaction amounted to no more
than ₱100,000.00,24 the inclusion of the actual acquisition costs of
the fighting cocks, the transportation expenses (i.e., airplane tickets
from Bacolod or Zamboanga to Manila) and other attendant
expenses could account for the ₱400,000.00 that Balmaceda
deposited into Ramos’ bank account.
Given that PCIB failed to establish Ramos’ participation in
Balmaceda’s scheme, it was not even necessary for Ramos to
provide an explanation for the money he received from Balmaceda.
Even if the evidence adduced by the plaintiff appears stronger than
that presented by the defendant, a judgment cannot be entered in
the plaintiff’s favor if his evidence still does not suffice to sustain his
cause of action;25 to reiterate, a preponderance of evidence as
defined must be established to achieve this result.
PCIB itself at fault as employer
In considering this case, one point that cannot be disregarded is the
significant role that PCIB played which contributed to the
perpetration of the fraud. We cannot ignore that Balmaceda
managed to carry out his fraudulent scheme primarily because other
PCIB employees failed to carry out their assigned tasks – flaws
imputable to PCIB itself as the employer.
Ms. Analiza Vega, an accounting clerk, teller and domestic
remittance clerk working at the PCIB, Sta. Cruz, Manila branch at the
time of the incident, testified that Balmaceda broke the Bank’s
protocol when he ordered the Bank’s employees to fill up the
application forms for the Manager’s checks, to be debited from the
bank account of one of the bank’s clients, without providing the
necessary Authority to Debit from the client. 26 PCIB also admitted
that these Manager’s checks were subsequently released to
Balmaceda, and not to the client’s representative, based solely on
Balmaceda’s word that the client had tasked him to deliver these
checks.27
Despite Balmaceda’s gross violations of bank procedures – mainly in
the processing of the applications for Manager’s checks and in the
releasing of the Manager’s checks – Balmaceda’s co-employees not
only turned a blind eye to his actions, but actually complied with his
instructions. In this way, PCIB’s own employees were unwitting
accomplices in Balmaceda’s fraud.
Another telling indicator of PCIB’s negligence is the fact that it
allowed Balmaceda to encash the Manager’s checks that were
plainly crossed checks. A crossed check is one where two parallel
lines are drawn across its face or across its corner.28 Based on
jurisprudence, the crossing of a check has the following effects: (a)
the check may not be encashed but only deposited in the bank; (b)
the check may be negotiated only once — to the one who has an
account with the bank; and (c) the act of crossing the check serves
as a warning to the holder that the check has been issued for a
definite purpose and he must inquire if he received the check
pursuant to this purpose; otherwise, he is not a holder in due
course.29 In other words, the crossing of a check is a warning that
the check should be deposited only in the account of the payee.
When a check is crossed, it is the duty of the collecting bank to
ascertain that the check is only deposited to the payee’s
account.30 In complete disregard of this duty, PCIB’s systems allowed
Balmaceda to encash 26 Manager’s checks which were all crossed
checks, or checks payable to the "payee’s account only."
The General Banking Law of 200031 requires of banks the highest
standards of integrity and performance. The banking business is
impressed with public interest. Of paramount importance is the
trust and confidence of the public in general in the banking industry.
Consequently, the diligence required of banks is more than that of a
Roman pater familias or a good father of a family.32 The highest
degree of diligence is expected.33
While we appreciate that Balmaceda took advantage of his authority
and position as the branch manager to commit these acts, this
circumstance cannot be used to excuse the manner the Bank –
through its employees –handled its clients’ bank accounts and
thereby ignored established bank procedures at the branch
manager’s mere order. This lapse is made all the more glaring by
Balmaceda’s repetition of his modus operandi 33 more times in a
period of over one year by the Bank’s own estimation. With this kind
of record, blame must be imputed on the Bank itself and its systems,
not solely on the weakness or lapses of individual employees.
Principle of unjust enrichment not applicable
PCIB maintains that even if Ramos did not collude with Balmaceda, it
still has the right to recover the amounts unjustly received by Ramos
pursuant to the principle of unjust enrichment. This principle is
embodied in Article 22 of the Civil Code which provides:
Article 22. Every person who through an act of performance by
another, or any other means, acquires or comes into possession of
something at the expense of the latter without just or legal ground,
shall return the same to him.
To have a cause of action based on unjust enrichment, we explained
in University of the Philippines v. Philab Industries, Inc.34 that:
Unjust enrichment claims do not lie simply because one party
benefits from the efforts or obligations of others, but instead it must
be shown that a party was unjustly enriched in the sense that the
term unjustly could mean illegally or unlawfully.
Moreover, to substantiate a claim for unjust enrichment,
the claimant must unequivocally prove that another party
knowingly received something of value to which he was not
entitled and that the state of affairs are such that it would be
unjust for the person to keep the benefit. Unjust enrichment is a
term used to depict result or effect of failure to make remuneration
of or for property or benefits received under circumstances that give
Page 42 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
rise to legal or equitable obligation to account for them; to be
entitled to remuneration, one must confer benefit by mistake, fraud,
coercion, or request. Unjust enrichment is not itself a theory of
reconvey. Rather, it is a prerequisite for the enforcement of the
doctrine of restitution.35 (emphasis ours)
Ramos cannot be held liable to PCIB on account of unjust
enrichment simply because he received payments out of money
secured by fraud from PCIB. To hold Ramos accountable, it is
necessary to prove that he received the money from Balmaceda,
knowing that he (Ramos) was not entitled to it. PCIB must also prove
that Ramos, at the time that he received the money from
Balmaceda, knew that the money was acquired through fraud.
Knowledge of the fraud is the link between Ramos and PCIB that
would obligate Ramos to return the money based on the principle of
unjust enrichment.
However, as the evidence on record indicates, Ramos accepted the
deposits that Balmaceda made directly into his bank account,
believing that these deposits were payments for the fighting cocks
that Balmaceda had purchased. Significantly, PCIB has not presented
any evidence proving that Ramos participated in, or that he even
knew of, the fraudulent sources of Balmaceda’s funds.
PCIB illegally froze and debited Ramos’ assets
We also find that PCIB acted illegally in freezing and debiting Ramos’
bank account. In BPI Family Bank v. Franco,36 we cautioned against
the unilateral freezing of bank accounts by banks, noting that:
More importantly, [BPI Family Bank] does not have a unilateral right
to freeze the accounts of Franco based on its mere suspicion that
the funds therein were proceeds of the multi-million peso scam
Franco was allegedly involved in. To grant [BPI Family Bank], or any
bank for that matter, the right to take whatever action it pleases on
deposits which it supposes are derived from shady transactions,
would open the floodgates of public distrust in the banking
industry.37
We see no legal merit in PCIB’s claim that legal compensation took
place between it and Ramos, thereby warranting the automatic
deduction from Ramos’ bank account. For legal compensation to
take place, two persons, in their own right, must first be creditors
and debtors of each other.38 While PCIB, as the depositary bank, is
Ramos’ debtor in the amount of his deposits, Ramos is not PCIB’s
debtor under the evidence the PCIB adduced. PCIB thus had no
basis, in fact or in law, to automatically debit from Ramos’ bank
account.
On the award of damages
Although PCIB’s act of freezing and debiting Ramos’ account is
unlawful, we cannot hold PCIB liable for moral and exemplary
damages. Since a contractual relationship existed between Ramos
and PCIB as the depositor and the depositary bank, respectively, the
award of moral damages depends on the applicability of Article 2220
of the Civil Code, which provides:
Article 2220. Willful injury to property may be a legal ground for
awarding moral damages if the court should find that, under the
circumstances, such damages are justly due. The same rule applies
to breaches of contract where the defendant acted fraudulently or in
bad faith. [emphasis ours]
Bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious
commission of a wrong; it partakes of the nature of fraud.39
As the facts of this case bear out, PCIB did not act out of malice or
bad faith when it froze Ramos’ bank account and subsequently
debited the amount of ₱251,910.96 therefrom. While PCIB may
have acted hastily and without regard to its primary duty to treat
the accounts of its depositors with meticulous care and utmost
fidelity,40 we find that its actions were propelled more by the need
to protect itself, and not out of malevolence or ill will. One may err,
but error alone is not a ground for granting moral damages.41
We also disallow the award of exemplary damages. Article 2234 of
the Civil Code requires a party to first prove that he is entitled to
moral, temperate or compensatory damages before he can be
awarded exemplary damages.1âwphi1 Since no reason exists to
award moral damages, so too can there be no reason to award
exemplary damages.
We deem it just and equitable, however, to uphold the award of
attorney’s fees in Ramos’ favor. Taking into consideration the time
and efforts involved that went into this case, we increase the award
of attorney’s fees from ₱20,000.00 to ₱75,000.00.
WHEREFORE, the petition is PARTIALLY GRANTED. We AFFIRM the
decision of the Court of Appeals dated April 29, 2003 in CA-G.R. CV
No. 69955 with the MODIFICATION that the award of moral and
exemplary damages in favor of Rolando N. Ramos is DELETED, while
the award of attorney’s fees is INCREASED to ₱75,000.00. Costs
against the Philippine Commercial International Bank.
G.R. No. L-26767 February 22, 1968
ANG TIONG, plaintiff-appellee,
vs.
LORENZO TING, doing business under the name and style of
PRUNES PRESERVED MFG., and FELIPE ANG, defendants.
FELIPE ANG, defendant-appellant..
CASTRO, J.:
On August 15, 1960 Lorenzo Ting issued Philippine Bank of
Communications check K-81618, for the sum of P4,000, payable to
"cash or bearer". With Felipe Ang's signature (indorsement in blank)
at the back thereof, the instrument was received by the plaintiff Ang
Tiong who thereafter presented it to the drawee bank for payment.
The bank dishonored it. The plaintiff then made written demands on
both Lorenzo Ting and Felipe Ang that they make good the amount
represented by the check. These demands went unheeded; so he
filed in the municipal court of Manila an action for collection of the
sum of P4,000, plus P500 attorney's fees. On March 6, 1962 the
municipal court adjudged for the plaintiff against the two
defendants.
Only Felipe Ang appealed to the Court of First Instance of
Manila (civil case 50018), which rendered judgment on July 31,
1962, amended by an order dated August 9, 1962, directing him to
pay to the plaintiff "the sum of P4,000, with interest at the legal rate
from the date of the filing of the complaint, a further sum of P400 as
attorney's fees, and costs."
Felipe Ang then elevated the case to the Court of Appeals,
which certified it to this Court because the issues raised are purely
of law.
The appellant imputes to the court a quo three errors, namely,
(1) that it refused to apply article 2071 of the new Civil Code to the
case at bar; (2) that it adjudged him a general indorser under the
Negotiable Instruments Law (Act 2031); and (3) that it held that he
"cannot obtain his release from the contract of suretyship or obtain
Page 43 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
security to protect himself against any proceedings on the part of
the creditor and against the danger of insolvency of the principal
debtor," because he is "jointly and severally liable on the
instrument."
This, appeal is absolutely without merit.
1. The genuineness and due execution of the instrument are
not controverted. That the appellee is a holder thereof for value is
admitted.
Having arisen from a bank check which is indisputably a
negotiable instrument, the present case is, therefore, in so far as the
indorsee is concerned vis-a-vis the indorser, governed solely plaintiff
the Negotiable Instruments Law (see secs. 1 and 185). Article 2071
of the new Civil Code, invoked by the appellant, the pertinent
portion of which states, "The guarantor, even before been paid, may
proceed against the principal debtor; (1) when he is sued for the
payment; . . . the action of the guarantor is to obtain release from
the guaranty, to demand a security that shall protect him from any
proceedings by the creditor . . .," is here completely irrelevant and
can have no application whatsoever.
We are in agreement with the trial judge that nothing in the
check in question indicates that the appellant is not a general
indorser within the purview of section 63 of the Negotiable
Instruments Law which makes "a person placing his signature upon
an instrument otherwise than as maker, drawer or acceptor" a
general indorser, — "unless he clearly indicates plaintiff appropriate
words his intention to be bound in some other capacity," which he
did not do. And section 66 ordains that "every indorser who indorses
without qualification, warrants to all subsequent holders in due
course" (a) that the instrument is genuine and in all respects what it
purports to be; (b) that he has a good title to it; (c) that all prior
parties have capacity to contract; and (d) that the instrument is at
the time of his indorsement valid and subsisting. In addition, "he
engages that on due presentment, it shall be accepted or paid, or
both, as the case may be, and that if it be dishonored, he will pay
the amount thereof to the holder." 1
2. Even on the assumption that the appellant is a mere
accommodation party, as he professes to be, he is nevertheless, by
the clear mandate of section 29 of the Negotiable Instruments Law,
yet "liable on the instrument to a holder for value, notwithstanding
that such holder at the time of taking the instrument knew him to be
only an accommodation party." To paraphrase, the accommodation
party is liable to a holder for value as if the contract was not for
accommodation. It is not a valid defense that the accommodation
party did not receive any valuable consideration when he executed
the instrument. Nor is it correct to say that the holder for value is
not a holder in due course merely because at the time he acquired
the instrument, he knew that the indorser was only an
accommodation party. 2
3. That the appellant, again assuming him to be an
accommodation indorser, may obtain security from the maker to
protect himself against the danger of insolvency of the latter, cannot
in any manner affect his liability to the appellee, as the said remedy
is a matter of concern exclusively between accommodation indorser
and accommodated party. So that the fact that the appellant stands
only as a surety in relation to the maker, granting this to be true for
the sake of argument, is immaterial to the claim of the appellee, and
does not a whit diminish nor defeat the rights of the latter who is a
holder for value. The liability of the appellant remains primary and
unconditional. To sanction the appellant's theory is to give
unwarranted legal recognition to the patent absurdity of a situation
where an indorser, when sued on an instrument by a holder in due
course and for value, can escape liability on his indorsement by the
convenient expedient of interposing the defense that he is a mere
accomodation indorser.
ACCORDINGLY, the judgment a quo is affirmed in toto, at
appellant's cost.
G.R. No. L-40824 February 23, 1989
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,
vs.
COURT OF APPEALS and MR. & MRS. ISABELO R.
RACHO, respondents.
REGALADO , J.:
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with
the spouses Mr. and Mrs Flaviano Lagasca, executed a deed of
mortgage, dated November 13, 1957, in favor of petitioner
Government Service Insurance System (hereinafter referred to as
GSIS) and subsequently, another deed of mortgage, dated April 14,
1958, in connection with two loans granted by the latter in the sums
of P 11,500.00 and P 3,000.00, respectively. 1 A parcel of land
covered by Transfer Certificate of Title No. 38989 of the Register of
Deed of Quezon City, co-owned by said mortgagor spouses, was
given as security under the aforesaid two deeds. 2 They also
executed a 'promissory note" which states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY and
SOLIDARILY, promise to pay the GOVERNMENT SERVICE INSURANCE
SYSTEM the sum of . . . (P 11,500.00) Philippine Currency, with
interest at the rate of six (6%) per centum compounded monthly
payable in . . . (120)equal monthly installments of . . . (P 127.65)
each. 3
On July 11, 1961, the Lagasca spouses executed an instrument
denominated "Assumption of Mortgage" under which they obligated
themselves to assume the aforesaid obligation to the GSIS and to
secure the release of the mortgage covering that portion of the land
belonging to herein private respondents and which was mortgaged
to the GSIS. 4 This undertaking was not fulfilled. 5
Upon failure of the mortgagors to comply with the conditions of the
mortgage, particularly the payment of the amortizations due, GSIS
extrajudicially foreclosed the mortgage and caused the mortgaged
property to be sold at public auction on December 3, 1962. 6
More than two years thereafter, or on August 23, 1965, herein
private respondents filed a complaint against the petitioner and the
Lagasca spouses in the former Court of
First Instance of Quezon City, 7 praying that the extrajudicial
foreclosure "made on, their property and all other documents
executed in relation thereto in favor of the Government Service
Insurance System" be declared null and void. It was further prayed
that they be allowed to recover said property, and/or the GSIS be
ordered to pay them the value thereof, and/or they be allowed to
repurchase the land. Additionally, they asked for actual and moral
damages and attorney's fees.
In their aforesaid complaint, private respondents alleged that they
signed the mortgage contracts not as sureties or guarantors for the
Lagasca spouses but they merely gave their common property to the
Page 44 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag
said co-owners who were solely benefited by the loans from the
GSIS.
The trial court rendered judgment on February 25, 1968 dismissing
the complaint for failure to establish a cause of action. 8
Said decision was reversed by the respondent Court of
Appeals 9 which held that:
... although formally they are co-mortgagors, they are so only for
accomodation (sic) in that the GSIS required their consent to the
mortgage of the entire parcel of land which was covered with only
one certificate of title, with full knowledge that the loans secured
thereby were solely for the benefit of the appellant (sic) spouses
who alone applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a valid
cause for having foreclosed the mortgage without having given
sufficient notice to them as required either as to their delinquency in
the payment of amortization or as to the subsequent foreclosure of
the mortgage by reason of any default in such payment. The notice
published in the newspaper, 'Daily Record (Exh. 12) and posted
pursuant to Sec 3 of Act 3135 is not the notice to which the
mortgagor is entitled upon the application being made for an
extrajudicial foreclosure. ... 10
On the foregoing findings, the respondent court consequently
decreed that-
In view of all the foregoing, the judgment appealed from is hereby
reversed, and another one entered (1) declaring the foreclosure of
the mortgage void insofar as it affects the share of the appellants;
(2) directing the GSIS to reconvey to appellants their share of the
mortgaged property, or the value thereof if already sold to third
party, in the sum of P 35,000.00, and (3) ordering the appellees
Flaviano Lagasca and Esther Lagasca to pay the appellants the sum
of P 10,00.00 as moral damages, P 5,000.00 as attorney's fees, and
costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties relied on the
provisions of Section 29 of Act No. 2031, otherwise known as the
Negotiable Instruments Law, which provide that an accommodation
party is one who has signed an instrument as maker, drawer,
acceptor of indorser without receiving value therefor, but is held
liable on the instrument to a holder for value although the latter
knew him to be only an accommodation party.
This approach of both parties appears to be misdirected and their
reliance misplaced. The promissory note hereinbefore quoted, as
well as the mortgage deeds subject of this case, are clearly not
negotiable instruments. These documents do not comply with the
fourth requisite to be considered as such under Section 1 of Act No.
2031 because they are neither payable to order nor to bearer. The
note is payable to a specified party, the GSIS. Absent the aforesaid
requisite, the provisions of Act No. 2031 would not apply;
governance shall be afforded, instead, by the provisions of the Civil
Code and special laws on mortgages.
As earlier indicated, the factual findings of respondent court are that
private respondents signed the documents "only to give their
consent to the mortgage as required by GSIS", with the latter having
full knowledge that the loans secured thereby were solely for the
benefit of the Lagasca spouses. 12 This appears to be duly supported
by sufficient evidence on record. Indeed, it would be unusual for the
GSIS to arrange for and deduct the monthly amortizations on the
loans from the salary as an army officer of Flaviano Lagasca without
likewise affecting deductions from the salary of Isabelo Racho who
was also an army sergeant. Then there is also the undisputed fact, as
already stated, that the Lagasca spouses executed a so-called
"Assumption of Mortgage" promising to exclude private
respondents and their share of the mortgaged property from liability
to the mortgagee. There is no intimation that the former executed
such instrument for a consideration, thus confirming that they did so
pursuant to their original agreement.
The parol evidence rule 13 cannot be used by petitioner as a shield in
this case for it is clear that there was no objection in the court below
regarding the admissibility of the testimony and documents that
were presented to prove that the private respondents signed the
mortgage papers just to accommodate their co-owners, the Lagasca
spouses. Besides, the introduction of such evidence falls under the
exception to said rule, there being allegations in the complaint of
private respondents in the court below regarding the failure of the
mortgage contracts to express the true agreement of the parties. 14
However, contrary to the holding of the respondent court, it cannot
be said that private respondents are without liability under the
aforesaid mortgage contracts. The factual context of this case is
precisely what is contemplated in the last paragraph of Article 2085
of the Civil Code to the effect that third persons who are not parties
to the principal obligation may secure the latter by pledging or
mortgaging their own property
So long as valid consent was given, the fact that the loans were
solely for the benefit of the Lagasca spouses would not invalidate
the mortgage with respect to private respondents' share in the
property. In consenting thereto, even assuming that private
respondents may not be assuming personal liability for the debt,
their share in the property shall nevertheless secure and respond for
the performance of the principal obligation. The parties to the
mortgage could not have intended that the same would apply only
to the aliquot portion of the Lagasca spouses in the property,
otherwise the consent of the private respondents would not have
been required.
The supposed requirement of prior demand on the private
respondents would not be in point here since the mortgage
contracts created obligations with specific terms for the compliance
thereof. The facts further show that the private respondents
expressly bound themselves as solidary debtors in the promissory
note hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS, We
cannot agree with the ruling of respondent court that lack of notice
to the private respondents of the extrajudicial foreclosure sale
impairs the validity thereof. In Bonnevie, et al. vs. Court of appeals,
et al., 15 the Court ruled that Act No. 3135, as amended, does not
require personal notice on the mortgagor, quoting the requirement
on notice in such cases as follows:
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Section 3. Notice shall be given by posting notices of sale for not less
than twenty days in at least three public places of the municipality
where the property is situated, and if such property is worth more
than four hundred pesos, such notice shall also be published once a
week for at least three consecutive weeks in a newspaper of general
circulation in the municipality or city.

There is no showing that the foregoing requirement on notice was

not complied with in the foreclosure sale complained of .

The respondent court, therefore, erred in annulling the mortgage

insofar as it affected the share of private respondents or in directing
reconveyance of their property or the payment of the value thereof
Indubitably, whether or not private respondents herein benefited
from the loan, the mortgage and the extrajudicial foreclosure
proceedings were valid.

WHEREFORE, judgment is hereby rendered REVERSING the decision

of the respondent Court of Appeals and REINSTATING the decision
of the court a quo in Civil Case No. Q-9418 thereof.

Page 46 of 46 | Negotiable Instruments Law cases Part 1| Atty. Tayag