SECOND DIVISION 2 Mar.

82 74701 to 74740 40 160,000

4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
G.R. No. 97753 August 10, 1992 5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
CALTEX (PHILIPPINES), INC., petitioner,
9 Mar. 82 89991 to 90000 10 40,000
vs.
9 Mar. 82 90251 to 90272 22 88,000
COURT OF APPEALS and SECURITY BANK AND TRUST
——— ————
COMPANY, respondents.
Total 280 P1,120,000
===== ========
Bito, Lozada, Ortega & Castillo for petitioners.
2. Angel dela Cruz delivered the said certificates of time (CTDs)
Nepomuceno, Hofileña & Guingona for private. to herein plaintiff in connection with his purchased of fuel
products from the latter (Original Record, p. 208).

3. Sometime in March 1982, Angel dela Cruz informed Mr.

REGALADO, J.:
Timoteo Tiangco, the Sucat Branch Manger, that he lost all the
certificates of time deposit in dispute. Mr. Tiangco advised said
This petition for review on certiorari impugns and seeks the reversal of the depositor to execute and submit a notarized Affidavit of Loss, as
decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. required by defendant bank's procedure, if he desired
23615 1 affirming with modifications, the earlier decision of the Regional Trial replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-
Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by 50).
herein petitioner against respondent bank.
4. On March 18, 1982, Angel dela Cruz executed and delivered
The undisputed background of this case, as found by the court a quo and to defendant bank the required Affidavit of Loss (Defendant's
adopted by respondent court, appears of record: Exhibit 281). On the basis of said affidavit of loss, 280
replacement CTDs were issued in favor of said depositor
1. On various dates, defendant, a commercial banking (Defendant's Exhibits 282-561).
institution, through its Sucat Branch issued 280 certificates of
time deposit (CTDs) in favor of one Angel dela Cruz who 5. On March 25, 1982, Angel dela Cruz negotiated and obtained
deposited with herein defendant the aggregate amount of a loan from defendant bank in the amount of Eight Hundred
P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Seventy Five Thousand Pesos (P875,000.00). On the same
Statement of Issues, Original Records, p. 207; Defendant's date, said depositor executed a notarized Deed of Assignment
Exhibits 1 to 280); of Time Deposit (Exhibit 562) which stated, among others, that
he (de la Cruz) surrenders to defendant bank "full control of the
CTD CTD indicated time deposits from and after date" of the assignment
Dates Serial Nos. Quantity Amount and further authorizes said bank to pre-terminate, set-off and
"apply the said time deposits to the payment of whatever amount
22 Feb. 82 90101 to 90120 20 P80,000 or amounts may be due" on the loan upon its maturity (TSN,
26 Feb. 82 74602 to 74691 90 360,000 February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of On appeal, as earlier stated, respondent court affirmed the lower court's
plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat dismissal of the complaint, hence this petition wherein petitioner faults
branch and presented for verification the CTDs declared lost by respondent court in ruling (1) that the subject certificates of deposit are non-
Angel dela Cruz alleging that the same were delivered to herein negotiable despite being clearly negotiable instruments; (2) that petitioner did
plaintiff "as security for purchases made with Caltex Philippines, not become a holder in due course of the said certificates of deposit; and (3) in
Inc." by said depositor (TSN, February 9, 1987, pp. 54-68). disregarding the pertinent provisions of the Code of Commerce relating to lost
instruments payable to bearer. 4
7. On November 26, 1982, defendant received a letter
(Defendant's Exhibit 563) from herein plaintiff formally informing The instant petition is bereft of merit.
it of its possession of the CTDs in question and of its decision to
pre-terminate the same. A sample text of the certificates of time deposit is reproduced below to provide
a better understanding of the issues involved in this recourse.
8. On December 8, 1982, plaintiff was requested by herein
defendant to furnish the former "a copy of the document SECURITY BANK
evidencing the guarantee agreement with Mr. Angel dela Cruz" AND TRUST COMPANY
as well as "the details of Mr. Angel dela Cruz" obligation against 6778 Ayala Ave., Makati No. 90101
which plaintiff proposed to apply the time deposits (Defendant's Metro Manila, Philippines
Exhibit 564). SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
9. No copy of the requested documents was furnished herein Rate 16%
defendant.
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
10. Accordingly, defendant bank rejected the plaintiff's demand
and claim for payment of the value of the CTDs in a letter dated This is to Certify that B E A R E R has deposited
February 7, 1983 (Defendant's Exhibit 566). in this Bank the sum of PESOS: FOUR
THOUSAND ONLY, SECURITY BANK SUCAT
11. In April 1983, the loan of Angel dela Cruz with the defendant OFFICE P4,000 & 00 CTS Pesos, Philippine
bank matured and fell due and on August 5, 1983, the latter set- Currency, repayable to said depositor 731
off and applied the time deposits in question to the payment of days. after date, upon presentation and
the matured loan (TSN, February 9, 1987, pp. 130-131). surrender of this certificate, with interest at the
rate of 16% per cent per annum.
12. In view of the foregoing, plaintiff filed the instant complaint,
praying that defendant bank be ordered to pay it the aggregate (Sgd. Illegible) (Sgd. Illegible)
value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per —————————— ———————————
annum, moral and exemplary damages as well as attorney's
fees. AUTHORIZED SIGNATURES 5

After trial, the court a quo rendered its decision dismissing the Respondent court ruled that the CTDs in question are non-negotiable
instant complaint. 3 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
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in
all of these certificates of time deposit insofar as
the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of
an instrument is determined from the writing, that is, from the face of the
instrument itself.9 In the construction of a bill or note, the intention of the parties
is to control, if it can be legally ascertained. 10 While the writing may be read in
the light of surrounding circumstances in order to more perfectly understand the
intent and meaning of the parties, yet as they have constituted the writing to be
the only outward and visible expression of their meaning, no other words are to
be added to it or substituted in its stead. The duty of the court in such case is to
ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of
the words they have used. What the parties meant must be determined by what
they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments.
The documents provide that the amounts deposited shall be repayable to the
depositor. And who, according to the document, is the depositor? It is the
"bearer." The documents do not say that the depositor is Angel de la Cruz and
that the amounts deposited are repayable specifically to him. Rather, the
amounts are to be repayable to the bearer of the documents or, for that matter,
whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la
Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word "BEARER"
stamped on the space provided for the name of the depositor in each CTD. On
the wordings of the documents, therefore, the amounts deposited are repayable
to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness
merely declared that Angel de la Cruz is the depositor "insofar as the bank is
concerned," but obviously other parties not privy to the transaction between
them would not be in a position to know that the depositor is not the bearer
stated in the CTDs. Hence, the situation would require any party dealing with
the CTDs to go behind the plain import of what is written thereon to unravel the
agreement of the parties thereto through facts aliunde. This need for resort to
extrinsic evidence is what is sought to be avoided by the Negotiable Instruments
Law and calls for the application of the elementary rule that the interpretation of
obscure words or stipulations in a contract shall not favor the party who caused
the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This
time, the answer is in the negative. The records reveal that Angel de la Cruz,
whom petitioner chose not to implead in this suit for reasons of its own, delivered
the CTDs amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for petitioner, although the
CTDs are bearer instruments, a valid negotiation thereof for the true purpose
and agreement between it and De la Cruz, as ultimately ascertained, requires
both delivery and indorsement. For, although petitioner seeks to deflect this fact,
the CTDs were in reality delivered to it as a security for De la Cruz' purchases
of its fuel products. Any doubt as to whether the CTDs were delivered as
payment for the fuel products or as a security has been dissipated and resolved
in favor of the latter by petitioner's own authorized and responsible
representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank,
J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit
were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel
products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon. 14 A party may not go
back on his own acts and representations to the prejudice of the other party who
relied upon them. 15 In the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another to believe
a particular thing true, and to act upon such belief, he cannot, in any litigation
arising out of such declaration, act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security,
petitioner's credit manager could have easily said so, instead of using the words
"to guarantee" in the letter aforequoted. Besides, when respondent bank, as
defendant in the court below, moved for a bill of particularity therein 17 praying,
among others, that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a
receipt showing that the CTDs were delivered to it by De la Cruz as payment of
the latter's alleged indebtedness to it, plaintiff corporation opposed the
motion. 18 Had it produced the receipt prayed for, it could have proved, if such
truly was the fact, that the CTDs were delivered as payment and not as security.
Having opposed the motion, petitioner now labors under the presumption that
evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty
Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez,
supra, we quote therefrom:
The character of the transaction between the
parties is to be determined by their intention,
regardless of what language was used or what
the form of the transfer was. If it was intended to
secure the payment of money, it must be
construed as a pledge; but if there was some
 other intention, it is not a pledge. However, even
though a transfer, if regarded by itself, appears
to have been absolute, its object and character
might still be qualified and explained by
contemporaneous writing declaring it to have
been a deposit of the property as collateral
security. It has been said that a transfer of
property by the debtor to a creditor, even if
sufficient on its face to make an absolute
conveyance, should be treated as a pledge if the
debt continues in inexistence and is not
discharged by the transfer, and that accordingly
the use of the terms ordinarily importing
conveyance of absolute ownership will not be
given that effect in such a transaction if they are
also commonly used in pledges and mortgages
and therefore do not unqualifiedly indicate a
transfer of absolute ownership, in the absence of
clear and unambiguous language or other
circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question.
Under the Negotiable Instruments Law, an instrument is negotiated when it is
transferred from one person to another in such a manner as to constitute the
transferee the holder thereof, 21 and a holder may be the payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof. 22 In the present
case, however, there was no negotiation in the sense of a transfer of the legal
title to the CTDs in favor of petitioner in which situation, for obvious reasons,
mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof
only as security for the purchases of Angel de la Cruz (and we even disregard
the fact that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a
negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition
of such security, in the event of non-payment of the principal obligation, must be
contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the extent
of his lien. 23 As such holder of collateral security, he would be a pledgee but the
requirements therefor and the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, . . . may also be pledged. The instrument proving
the right pledged shall be delivered to the creditor, and if
negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if
a description of the thing pledged and the date of the pledge do
not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the
factual findings of respondent court quoted at the start of this opinion show that
petitioner failed to produce any document evidencing any contract of pledge or
guarantee agreement between it and Angel de la Cruz. 25 Consequently, the
mere delivery of the CTDs did not legally vest in petitioner any right effective
against and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode whereby
proof may be made of the date of a pledge contract, but a rule of substantive
law prescribing a condition without which the execution of a pledge contract
cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in
favor of respondent bank was embodied in a public instrument. 27 With regard to
this other mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce
no effect as against third persons, unless it appears in a public
instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily,
petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither
proved the amount of its credit or the extent of its lien nor the execution of any
public instrument which could affect or bind private respondent. Necessarily,
therefore, as between petitioner and respondent bank, the latter has definitely
the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question
of whether or not private respondent observed the requirements of the law in the
case of lost negotiable instruments and the issuance of replacement certificates
therefor, on the ground that petitioner failed to raised that issue in the lower
court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged
negligence of private respondent was not included in the stipulation of the
parties and in the statement of issues submitted by them to the trial court. 29 The
issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable
instruments.
2. Whether or not defendant could legally apply the amount
covered by the CTDs against the depositor's loan by virtue of the
assignment (Annex "C").
3. Whether or not there was legal compensation or set off
involving the amount covered by the CTDs and the depositor's
outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to
preterminate the CTDs before the maturity date provided
therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's
fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the issue of
negligence on the part of respondent bank. An issue raised for the first time on
appeal and not raised timely in the proceedings in the lower court is barred by
estoppel. 30 Questions raised on appeal must be within the issues framed by the
parties and, consequently, issues not raised in the trial court cannot be raised
for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all issues of
law and fact which they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at a pre-trial
conference bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence
may be considered encompassed by the issues on its right to preterminate and
receive the proceeds of the CTDs would be tantamount to saying that petitioner
could raise on appeal any issue. We agree with private respondent that the
broad ultimate issue of petitioner's entitlement to the proceeds of the questioned
certificates can be premised on a multitude of other legal reasons and causes
of action, of which respondent bank's supposed negligence is only one. Hence,
petitioner's submission, if accepted, would render a pre-trial delimitation of
issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the
court below, petitioner still cannot have the odds in its favor. A close scrutiny of
the provisions of the Code of Commerce laying down the rules to be followed in
case of lost instruments payable to bearer, which it invokes, will reveal that said
provisions, even assuming their applicability to the CTDs in the case at bar, are
merely permissive and not mandatory. The very first article cited by petitioner
speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it
may be, may apply to the judge or court of competent
jurisdiction, asking that the principal, interest or dividends due or
about to become due, be not paid a third person, as well as in
order to prevent the ownership of the instrument that a duplicate
be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but
discretionary on the part of the "dispossessed owner" to apply to the judge or
court of competent jurisdiction for the issuance of a duplicate of the lost
instrument. Where the provision reads "may," this word shows that it is not
mandatory but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and
possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of
the Code of Commerce, on which petitioner seeks to anchor respondent bank's
supposed negligence, merely established, on the one hand, a right of recourse
in favor of a dispossessed owner or holder of a bearer instrument so that he may
obtain a duplicate of the same, and, on the other, an option in favor of the party
liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument. Significantly, none of the provisions cited by
petitioner categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined therein,
and none establishes a mandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is

DENIED and the appealed decision is hereby AFFIRMED.

SO ORDERED.
FIRST DIVISION HSBC’s investor-clients maintain Philippine peso and/or foreign currency
accounts, which are managed by HSBC through instructions given through
G.R. No. 166018 June 4, 2014 electronic messages. The said instructions are standard forms known in the
banking industry as SWIFT, or "Society for Worldwide Interbank Financial
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED- Telecommunication." In purchasing shares of stock and other investment in
PHILIPPINE BRANCHES, Petitioner, securities, the investor-clients would send electronic messages from abroad
vs. instructing HSBC to debit their local or foreign currency accounts and to pay the
COMMISSIONER OF INTERNAL REVENUE, Respondent; purchase price therefor upon receipt of the securities.7

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

and paid Documentary Stamp Tax (DST) from September to December 1997
and also from January to December 1998 amounting to ₱19,572,992.10 and
G.R. No. 167728
₱32,904,437.30, respectively, broken down as follows:
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-
A. September to December 1997
PHILIPPINE BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent. September 1997 P 6,981,447.90
October 1997 6,209,316.60
DECISION
November 1997 3,978,510.30
LEONARDO-DE CASTRO, J.:
December 1997 2,403,717.30
These petitions for review on certiorari1 assail the Decision2 and Resolution Total ₱19,572,992.10
dated July 8, 2004 and October 25, 2004, respectively, of the Court of Appeals
in CA-G.R. SP No. 77580, as well as the Decision3 and Resolution dated
B. January to December 1998
September 2, 2004 and April 4, 2005, respectively, of the Court of Appeals in
CA-G.R. SP No. 70814. The respective Decisions in the said cases similarly
reversed and set aside the decisions of the Court of Tax Appeals (CTA) in CTA January 1998 P 3,328,305.60
Case Nos. 59514 and 6009,5 respectively, and dismissed the petitions of
petitioner Hongkong and Shanghai Banking Corporation Limited-Philippine February 1998 4,566,924.90
Branches (HSBC). The corresponding Resolutions, on the other hand, denied March 1998 5,371,797.30
the respective motions for reconsideration of the said Decisions.
April 1998 4,197,235.50
HSBC performs, among others, custodial services on behalf of its investor- May 1998 2,519,587.20
clients, corporate and individual, resident or non-resident of the Philippines, with
respect to their passive investments in the Philippines, particularly investments June 1998 2,301,333.00
in shares of stocks in domestic corporations. As a custodian bank, HSBC serves
July 1998 1,586,404.50
as the collection/payment agent with respect to dividends and other income
derived from its investor-clients’ passive investments.6 August 1998 1,787,359.50
September 1998 1,231,828.20
October 1998 1,303,184.40 (ii) receive funds from another bank in the Philippines for deposit
into its account and to pay a named recipient in the Philippines."
November 1998 2,026,379.70
December 1998 2,684,097.50 The foregoing transactions are carried out under instruction from abroad and
[do] not involve actual fund transfer since the funds are already in the Philippine
Total ₱32,904,437.30 accounts. The instructions are in the form of electronic messages (i.e., SWIFT
MT100 or MT 202 and/or MT 521). In both cases, the payment is against the
delivery of investments purchased. The purchase of investments and the
On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then
payment comprise one single transaction. DST has already been paid under
Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect
Section 176 for the investment purchase.
that instructions or advises from abroad on the management of funds located in
the Philippines which do not involve transfer of funds from abroad are not subject
to DST. BIR Ruling No. 132-99 reads: B. Other transactions:

Date: August 23, 1999 An overseas client sends an instruction to its bank in the Philippines to either:

FERRY TOLEDO VICTORINO GONZAGA (i) debit its local or foreign currency account and to pay a named
& ASSOCIATES recipient, who may be another bank, a corporate entity or an
G/F AFC Building, Alfaro St. individual in the Philippines; or
Salcedo Village, Makati
Metro Manila (ii) receive funds from another bank in the Philippines for deposit
to its account and to pay a named recipient, who may be another
Attn: Atty. Tomas C. Toledo bank, a corporate entity or an individual in the Philippines."
Tax Counsel
The above instruction is in the form of an electronic message (i.e., SWIFT MT
Gentlemen: 100 or MT 202) or tested cable, and may not refer to any particular transaction.

This refers to your letter dated July 26, 1999 requesting on behalf of your clients,
the CITIBANK & STANDARD CHARTERED BANK, for a ruling as to whether or
not the electronic instructions involving the following transactions of residents
and non-residents of the Philippines with respect to their local or foreign
currency accounts are subject to documentary stamp tax under Section 181 of
the 1997 Tax Code, viz:
The opening and maintenance by a non-resident of local or foreign currency
accounts with a bank in the Philippines is permitted by the Bangko Sentral ng
Pilipinas, subject to certain conditions.
In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code,
which provides that –

A. Investment purchase transactions:
An overseas client sends instruction to its bank in the Philippines to either:
(i) debit its local or foreign currency account and to pay a named
recipient in the Philippines; or
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.– Upon
any acceptance or payment of any bill of exchange or order for the payment of
money purporting to be drawn in a foreign country but payable in the Philippines,
there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on
each Two hundred pesos (₱200), or fractional part thereof, of the face value of
any such bill of exchange, or order, or Philippine equivalent of such value, if
expressed in foreign currency. (Underscoring supplied.)
a documentary stamp tax shall be imposed on any bill of exchange or order for
payment purporting to be drawn in a foreign country but payable in the
Philippines.
Under the foregoing provision, the documentary stamp tax shall be levied on the
instrument, i.e., a bill of exchange or order for the payment of money, which
purports to draw money from a foreign country but payable in the Philippines. In
the instant case, however, while the payor is residing outside the Philippines, he
maintains a local and foreign currency account in the Philippines from where he
will draw the money intended to pay a named recipient. The instruction or order
to pay shall be made through an electronic message, i.e., SWIFT MT 100 or MT
202 and/or MT 521. Consequently, there is no negotiable instrument to be made,
signed or issued by the payee. In the meantime, such electronic instructions by
the non-resident payor cannot be considered as a transaction per se considering
that the same do not involve any transfer of funds from abroad or from the place
where the instruction originates. Insofar as the local bank is concerned, such
instruction could be considered only as a memorandum and shall be entered as
such in its books of accounts. The actual debiting of the payor’s account, local
or foreign currency account in the Philippines, is the actual transaction that
should be properly entered as such.
Under the Documentary Stamp Tax Law, the mere withdrawal of money from a
bank deposit, local or foreign currency account, is not subject to DST, unless
the account so maintained is a current or checking account, in which case, the
issuance of the check or bank drafts is subject to the documentary stamp tax
imposed under Section 179 of the 1997 Tax Code. In the instant case, and
subject to the physical impossibility on the part of the payor to be present and
prepare and sign an instrument purporting to pay a certain obligation, the
withdrawal and payment shall be made in cash. In this light, the withdrawal shall
not be subject to documentary stamp tax. The case is parallel to an automatic
bank transfer of local funds from a savings account to a checking account
maintained by a depositor in one bank.
Likewise, the receipt of funds from another bank in the Philippines for deposit to
the payee’s account and thereafter upon instruction of the non-resident
depositor-payor, through an electronic message, the depository bank to debit
his account and pay a named recipient shall not be subject to documentary
stamp tax.
It should be noted that the receipt of funds from another local bank in the
Philippines by a local depository bank for the account of its client residing abroad
is part of its regular banking transaction which is not subject to documentary
stamp tax. Neither does the receipt of funds makes the recipient subject to the
documentary stamp tax. The funds are deemed to be part of the deposits of the
client once credited to his account, and which, thereafter can be disposed in the
manner he wants. The payor-client’s further instruction to debit his account and
pay a named recipient in the Philippines does not involve transfer of funds from
abroad. Likewise, as stated earlier, such debit of local or foreign currency
account in the Philippines is not subject to the documentary stamp tax under the
aforementioned Section 181 of the Tax Code.
In the light of the foregoing, this Office hereby holds that the instruction made
through an electronic message by non-resident payor-client to debit his local or
foreign currency account maintained in the Philippines and to pay a certain
named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the 1997 Tax Code. Such being the case,
such electronic instruction purporting to draw funds from a local account
intended to be paid to a named recipient in the Philippines is not subject to
documentary stamp tax imposed under the foregoing Section.
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation it shall be disclosed that the facts are different,
this ruling shall be considered null and void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an
administrative claim for the refund of the amount of ₱19,572,992.10 allegedly
representing erroneously paid DST to the BIR for the period covering September
to December 1997.
Subsequently, on January 31, 2000, HSBC filed another administrative claim for
the refund of the amount of ₱32,904,437.30 allegedly representing erroneously
paid DST to the BIR for the period covering January to December 1998.
As its claims for refund were not acted upon by the BIR, HSBC subsequently
brought the matter to the CTA as CTA Case Nos. 5951 and 6009, respectively,
in order to suspend the running of the two-year prescriptive period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated
December 18, 2002 in CTA Case No. 5951 favored HSBC. Respondent
Commissioner of Internal Revenue was ordered to refund or issue a tax credit
certificate in favor of HSBC in the reduced amounts of ₱30,360,570.75 in CTA
Case No. 6009 and ₱16,436,395.83 in CTA Case No. 5951, representing
erroneously paid DST that have been sufficiently substantiated with
documentary evidence. The CTA ruled that HSBC is entitled to a tax refund or
tax credit because Sections 180 and 181 of the 1997 Tax Code do not apply to
electronic message instructions transmitted by HSBC’s non-resident investor-
clients:
The instruction made through an electronic message by a nonresident investor-
client, which is to debit his local or foreign currency account in the Philippines
and pay a certain named recipient also residing in the Philippines is not the
transaction contemplated in Section 181 of the Code. In this case, the
withdrawal and payment shall be made in cash. It is parallel to an automatic
bank transfer of local funds from a savings account to a checking account
maintained by a depositor in one bank. The act of debiting the account is not
subject to the documentary stamp tax under Section 181. Neither is the
transaction subject to the documentary stamp tax under Section 180 of the same
Code. These electronic message instructions cannot be considered negotiable
instruments as they lack the feature of negotiability, which, is the ability to be
transferred (Words and Phrases).
These instructions are considered as mere memoranda and entered as such in
the books of account of the local bank, and the actual debiting of the payor’s
local or foreign currency account in the Philippines is the actual transaction that
should be properly entered as such.9
The respective dispositive portions of the Decisions dated May 2, 2002 in CTA
Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951 read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for Review is
PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or
ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the amount of
₱30,360,570.75 representing erroneous payment of documentary stamp tax for
the taxable year 1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is hereby partially
granted. Accordingly, respondent is hereby ORDERED to REFUND, or in the
alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in
the reduced amount of ₱16,436,395.83 representing erroneously paid
documentary stamp tax for the months of September 1997 to December 1997.11
However, the Court of Appeals reversed both decisions of the CTA and ruled
that the electronic messages of HSBC’s investor-clients are subject to DST. The
Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-clients as
regards their passive investments in the Philippines mainly involving shares of
stocks in domestic corporations. These investor-clients maintain Philippine peso
and/or foreign currency accounts with [HSBC]. Should they desire to purchase
shares of stock and other investments securities in the Philippines, the investor-
clients send their instructions and advises via electronic messages from abroad
to [HSBC] in the form of SWIFT MT 100, MT 202, or MT 521 directing the latter
to debit their local or foreign currency account and to pay the purchase price
upon receipt of the securities (CTA Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant
to Section 181 of the NIRC, [HSBC] was thus required to pay [DST] based on
its acceptance of these electronic messages – which, as [HSBC] readily admits
in its petition filed before the [CTA], were essentially orders to pay the purchases
of securities made by its client-investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the [DST] from
[HSBC] considering that the said tax was levied against the acceptances and
payments by [HSBC] of the subject electronic messages/orders for payment.
The issue of whether such electronic messages may be equated as a written
document and thus be subject to tax is beside the point. As We have already
stressed, Section 181 of the law cited earlier imposes the [DST] not on the bill
of exchange or order for payment of money but on the acceptance or payment
of the said bill or order. The acceptance of a bill or order is the signification by
the drawee of its assent to the order of the drawer to pay a given sum of money
while payment implies not only the assent to the said order of the drawer and a
recognition of the drawer’s obligation to pay such aforesaid sum, but also a
compliance with such obligation (Philippine National Bank vs. Court of Appeals,
25 SCRA 693 [1968]; Prudential Bank vs. Intermediate Appellate Court, 216
SCRA 257 [1992]). What is vital to the valid imposition of the [DST] under
Section 181 is the existence of the requirement of acceptance or payment by
the drawee (in this case, [HSBC]) of the order for payment of money from its
investor-clients and that the said order was drawn from a foreign country and
payable in the Philippines. These requisites are surely present here.
It would serve the parties well to understand the nature of the tax being imposed
in the case at bar. In Philippine Home Assurance Corporation vs. Court of
Appeals (301 SCRA 443 [1999]), the Supreme Court ruled that [DST is] levied
on the exercise by persons of certain privileges conferred by law for the creation,
revision, or termination of specific legal relationships through the execution of
specific instruments, independently of the legal status of the transactions giving
rise thereto. In the same case, the High Court also declared – citing Du Pont vs.
United States (300 U.S. 150, 153 [1936])
The tax is not upon the business transacted but is an excise upon the privilege,
opportunity, or facility offered at exchanges for the transaction of the business.
It is an excise upon the facilities used in the transaction of the business separate
and apart from the business itself. x x x.
To reiterate, the subject [DST] was levied on the acceptance and payment made
by [HSBC] pursuant to the order made by its client-investors as embodied in the
cited electronic messages, through which the herein parties’ privilege and
opportunity to transact business respectively as drawee and drawers was
exercised, separate and apart from the circumstances and conditions related to
such acceptance and subsequent payment of the sum of money authorized by
the concerned drawers. Stated another way, the [DST] was exacted on [HSBC’s]
exercise of its privilege under its drawee-drawer relationship with its client-
investor through the execution of a specific instrument which, in the case at bar,
is the acceptance of the order for payment of money. The acceptance of a bill
or order for payment may be done in writing by the drawee in the bill or order
itself, or in a separate instrument (Prudential Bank vs. Intermediate Appellate
Court, supra.)Here, [HSBC]’s acceptance of the orders for the payment of
money was veritably ‘done in writing in a separate instrument’ each time it
debited the local or foreign currency accounts of its client-investors pursuant to
the latter’s instructions and advises sent by electronic messages to [HSBC]. The
[DST] therefore must be paid upon the execution of the specified instruments or
facilities covered by the tax – in this case, the acceptance by [HSBC] of the order
for payment of money sent by the client-investors through electronic messages.
x x x.12
Hence, these petitions.
HSBC asserts that the Court of Appeals committed grave error when it
disregarded the factual and legal conclusions of the CTA. According to HSBC,
in the absence of abuse or improvident exercise of authority, the CTA’s ruling
should not have been disturbed as the CTA is a highly specialized court which
performs judicial functions, particularly for the review of tax cases. HSBC further
argues that the Commissioner of Internal Revenue had already settled the issue
on the taxability of electronic messages involved in these cases in BIR Ruling
No. 132-99 and reiterated in BIR Ruling No. DA-280-2004.13
The Commissioner of Internal Revenue, on the other hand, claims that Section
181 of the 1997 Tax Code imposes DST on the acceptance or payment of a bill
of exchange or order for the payment of money. The DST under Section 18 of
the 1997 Tax Code is levied on HSBC’s exercise of a privilege which is
specifically taxed by law. BIR Ruling No. 132-99 is inconsistent with prevailing
law and long standing administrative practice, respondent is not barred from
questioning his own revenue ruling. Tax refunds like tax exemptions are strictly
construed against the taxpayer.14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of the Tax Code
is levied on the acceptance or payment of "a bill of exchange purporting to be
drawn in a foreign country but payable in the Philippines" and that "a bill of
exchange is an unconditional order in writing addressed by one person to
another, signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a sum
certain in money to order or to bearer." A bill of exchange is one of two general
forms of negotiable instruments under the Negotiable Instruments Law.15
The Court further agrees with the CTA that the electronic messages of HSBC’s
investor-clients containing instructions to debit their respective local or foreign
currency accounts in the Philippines and pay a certain named recipient also
residing in the Philippines is not the transaction contemplated under Section 181
of the Tax Code as such instructions are "parallel to an automatic bank transfer
of local funds from a savings account to a checking account maintained by a
depositor in one bank." The Court favorably adopts the finding of the CTA that
the electronic messages "cannot be considered negotiable instruments as they
lack the feature of negotiability, which, is the ability to be transferred" and that
the said electronic messages are "mere memoranda" of the transaction
consisting of the "actual debiting of the [investor-client-payor’s] local or foreign
currency account in the Philippines" and "entered as such in the books of
account of the local bank," HSBC.16
More fundamentally, the instructions given through electronic messages that are
subjected to DST in these cases are not negotiable instruments as they do not
comply with the requisites of negotiability under Section 1 of the Negotiable
Instruments Law, which provides:
Sec. 1. Form of negotiable instruments.– An instrument to be negotiable must
conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain
in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.
The electronic messages are not signed by the investor-clients as supposed
drawers of a bill of exchange; they do not contain an unconditional order to pay
a sum certain in money as the payment is supposed to come from a specific
fund or account of the investor-clients; and, they are not payable to order or
bearer but to a specifically designated third party. Thus, the electronic messages
are not bills of exchange. As there was no bill of exchange or order for the
payment drawn abroad and made payable here in the Philippines, there could
have been no acceptance or payment that will trigger the imposition of the DST
under Section 181 of the Tax Code.
Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax refund
for taxable year 1998 subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in the
Philippines, there shall be collected a documentary stamp tax of Thirty centavos
(P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of the
face value of any such bill of exchange, or order, or the Philippine equivalent of
such value, if expressed in foreign currency. (Emphasis supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s claim
for tax refund for DST paid during the period September to December 1997 and
subject of G.R. No. 166018, is worded exactly the same as its counterpart
provision in the 1997 Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of 1904,17 which
provided: SECTION 117. The acceptor or acceptors of any bill of exchange or
order for the payment of any sum of money drawn or purporting to be drawn in
any foreign country but payable in the Philippine Islands, shall, before paying or
accepting the same, place thereupon a stamp in payment of the tax upon such
document in the same manner as is required in this Act for the stamping of inland
bills of exchange or promissory notes, and no bill of exchange shall be paid nor
negotiated until such stamp shall have been affixed thereto.18 (Emphasis
supplied.)
It then became Section 30(h) of the 1914 Tax Code19:
SEC. 30. Stamp tax upon documents and papers. – Upon documents,
instruments, and papers, and upon acceptances, assignments, sales, and
transfers of the obligation, right, or property incident thereto documentary taxes
for and in respect of the transaction so had or accomplished shall be paid as
hereinafter prescribed, by the persons making, signing, issuing, accepting, or
transferring the same, and at the time such act is done or transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of exchange
or order for the payment of money purporting to be drawn in a foreign country
but payable in the Philippine Islands, on each two hundred pesos, or fractional
part thereof, of the face value of any such bill of exchange or order, or the
Philippine equivalent of such value, if expressed in foreign currency, two
centavos[.] (Emphasis supplied.)
It was implemented by Section 46 in relation to Section 39 of Revenue
Regulations No. 26,20 as amended:
SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other
kinds of orders for the payment of money, payable at sight or on demand, or
after a specific period after sight or from a stated date."
SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the
payment of money drawn in a foreign country but payable in this country whether
at sight or on demand or after a specified period after sight or from a stated date,
is presented for acceptance or payment, there must be affixed upon acceptance
or payment of documentary stamp equal to P0.02 for each ₱200 or fractional
part thereof. (Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of 1939,21 which provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in the
Philippines, there shall be collected a documentary stamp tax of four centavos
on each two hundred pesos, or fractional part thereof, of the face value of any
such bill of exchange or order, or the Philippine equivalent of such value, if
expressed in foreign currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code,22 as amended by Presidential
Decree Nos. 1457 and 1959,which, as stated earlier, was worded exactly as
Section 181 of the current Tax Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and others. – Upon
any acceptance or payment of any bill of exchange or order for the payment of
money purporting to be drawn in a foreign country but payable in the Philippines,
there shall be collected a documentary stamp tax of thirty centavos on each two
hundred pesos, or fractional part thereof, of the face value of any such bill of
exchange, or order, or the Philippine equivalent of such value, if expressed in
foreign currency. (Emphasis supplied.)
The pertinent provision of the present Tax Code has therefore remained
substantially the same for the past one hundred years. The identical text and
1âw phi 1
common history of Section 230 of the 1977 Tax Code, as amended, and the
1997 Tax Code, as amended, show that the law imposes DST on either (a) the
acceptance or (b) the payment of a foreign bill of exchange or order for the
payment of money that was drawn abroad but payable in the Philippines.
DST is an excise tax on the exercise of a right or privilege to transfer obligations,
rights or properties incident thereto.23 Under Section 173 of the 1997 Tax Code,
the persons primarily liable for the payment of the DST are those (1) making, (2)
signing, (3) issuing, (4) accepting, or (5) transferring the taxable documents,
instruments or papers.24
In general, DST is levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments. Examples of such
privileges, the exercise of which, as effected through the issuance of particular
documents, are subject to the payment of DST are leases of lands, mortgages,
pledges and trusts, and conveyances of real property.25
As stated above, Section 230 of the 1977 Tax Code, as amended, now Section
181 of the 1997 Tax Code, levies DST on either (a) the acceptance or (b) the
payment of a foreign bill of exchange or order for the payment of money that
was drawn abroad but payable in the Philippines. In other words, it levies DST
as an excise tax on the privilege of the drawee to accept or pay a bill of exchange
or order for the payment of money, which has been drawn abroad but payable
in the Philippines, and on the corresponding privilege of the drawer to have
acceptance of or payment for the bill of exchange or order for the payment of
money which it has drawn abroad but payable in the Philippines.
Acceptance applies only to bills of exchange.26 Acceptance of a bill of exchange
has a very definite meaning in law.27 In particular, Section 132 of the Negotiable
Instruments Law provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of
exchange28] is the signification by the drawee of his assent to the order of the
drawer. The acceptance must be in writing and signed by the drawee. It must
not express that the drawee will perform his promise by any other means than
the payment of money.
Under the law, therefore, what is accepted is a bill of exchange, and the
acceptance of a bill of exchange is both the manifestation of the drawee’s
consent to the drawer’s order to pay money and the expression of the drawee’s
promise to pay. It is "the act by which the drawee manifests his consent to
comply with the request contained in the bill of exchange directed to him and it
contemplates an engagement or promise to pay."29 Once the drawee accepts,
he becomes an acceptor.30 As acceptor, he engages to pay the bill of exchange
according to the tenor of his acceptance.31
Acceptance is made upon presentment of the bill of exchange, or within 24 hours
after such presentment.32Presentment for acceptance is the production or
exhibition of the bill of exchange to the drawee for the purpose of obtaining his
acceptance.33
Presentment for acceptance is necessary only in the instances where the law
requires it.34 In the instances where presentment for acceptance is not
necessary, the holder of the bill of exchange can proceed directly to presentment
for payment.
Presentment for payment is the presentation of the instrument to the person
primarily liable for the purpose of demanding and obtaining payment thereof.35
Thus, whether it be presentment for acceptance or presentment for payment,
the negotiable instrument has to be produced and shown to the drawee for
acceptance or to the acceptor for payment.

Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills
of exchange or orders for the payment of money that have been drawn abroad
but payable in the Philippines) that is subjected to DST under Section 181 of the
1997 Tax Code is done after presentment for acceptance or presentment for
payment, respectively. In other words, the acceptance or payment of the subject
bill of exchange or order for the payment of money is done when there is
presentment either for acceptance or for payment of the bill of exchange or order
for the payment of money.

Applying the above concepts to the matter subjected to DST in these cases, the
electronic messages received by HSBC from its investor-clients abroad
instructing the former to debit the latter's local and foreign currency accounts
and to pay the purchase price of shares of stock or investment in securities do
not properly qualify as either presentment for acceptance or presentment for
payment. There being neither presentment for acceptance nor presentment for
payment, then there was no acceptance or payment that could have been
subjected to DST to speak of.

Indeed, there had been no acceptance of a bill of exchange or order for the
payment of money on the part of HSBC. To reiterate, there was no bill of
exchange or order for the payment drawn abroad and made payable here in the
Philippines. Thus, there was no acceptance as the electronic messages did not
constitute the written and signed manifestation of HSBC to a drawer's order to
pay money. As HSBC could not have been an acceptor, then it could not have
made any payment of a bill of exchange or order for the payment of money
drawn abroad but payable here in the Philippines. In other words, HSBC could
not have been held liable for DST under Section 230 of the 1977 Tax Code, as
amended, and Section 181 of the 1997 Tax Code as it is not "a person making,
signing, issuing, accepting, or, transferring" the taxable instruments under the
said provision. Thus, HSBC erroneously paid DST on the said electronic
messages for which it is entitled to a tax refund.

WHEREFORE, the petitions are hereby GRANTED and the Decisions dated
May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CT A Case
No. 5951 of the Court of Tax Appeals are REINSTATED.

SO ORDERED.
SECOND DIVISION
G.R. No. 158262 July 21, 2008
SPS. PEDRO AND FLORENCIA VIOLAGO, Petitioners,
vs.
BA FINANCE CORPORATION and AVELINO VIOLAGO, Respondents.
DECISION
VELASCO, JR., J.:
This is a Petition for Review on Certiorari of the August 20, 2002 Decision 1 and
May 15, 2003 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No.
48489 entitled BA Finance Corporation, Plaintiff-Appellee v. Sps. Pedro and
Florencia Violago, Defendants and Third Party Plaintiffs-Appellants v. Avelino
Violago, Third Party Defendant-Appellant. Petitioners-spouses Pedro and
Florencia Violago pray for the reversal of the appellate court’s ruling which held
them liable to respondent BA Finance Corporation (BA Finance) under a
promissory note and a chattel mortgage. Petitioners likewise pray that
respondent Avelino Violago be adjudged directly liable to BA Finance.
The Facts
Sometime in 1983, Avelino Violago, President of Violago Motor Sales
Corporation (VMSC), offered to sell a car to his cousin, Pedro F. Violago, and
the latter’s wife, Florencia. Avelino explained that he needed to sell a vehicle to
increase the sales quota of VMSC, and that the spouses would just have to pay
a down payment of PhP 60,500 while the balance would be financed by
respondent BA Finance. The spouses would pay the monthly installments to BA
Finance while Avelino would take care of the documentation and approval of
financing of the car. Under these terms, the spouses then agreed to purchase a
Toyota Cressida Model 1983 from VMSC.3
On August 4, 1983, the spouses and Avelino signed a promissory note under
which they bound themselves to pay jointly and severally to the order of VMSC
the amount of PhP 209,601 in 36 monthly installments of PhP 5,822.25 a month,
the first installment to be due and payable on September 16, 1983. Avelino
prepared a Disclosure Statement of Loan/Credit Transportation which showed
the net purchase price of the vehicle, down payment, balance, and finance
charges. VMSC then issued a sales invoice in favor of the spouses with a
detailed description of the Toyota Cressida car. In turn, the spouses executed a
chattel mortgage over the car in favor of VMSC as security for the amount of
PhP 209,601. VMSC, through Avelino, endorsed the promissory note to BA
Finance without recourse. After receiving the amount of PhP 209,601, VMSC
executed a Deed of Assignment of its rights and interests under the promissory
note and chattel mortgage in favor of BA Finance. Meanwhile, the spouses
remitted the amount of PhP 60,500 to VMSC through Avelino.4
The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag
Branch, which issued Certificate of Registration No. 0137032 in the name of
Pedro on August 8, 1983. The spouses were unaware that the same car had
already been sold in 1982 to Esmeraldo Violago, another cousin of Avelino, and
registered in Esmeraldo’s name by the LTO-San Rafael Branch. Despite the
spouses’ demand for the car and Avelino’s repeated assurances, there was no
delivery of the vehicle. Since VMSC failed to deliver the car, Pedro did not pay
any monthly amortization to BA Finance. 5
On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch
116 in Pasay City a complaint for Replevin with Damages against the spouses.
The complaint, docketed as Civil Case No. 1628-P, prayed for the delivery of
the vehicle in favor of BA Finance or, if delivery cannot be effected, for the
payment of PhP 199,049.41 plus penalty at the rate of 3% per month from
February 15, 1984 until fully paid. BA Finance also asked for the payment of
attorney’s fees, liquidated damages, replevin bond premium, expenses in the
seizure of the vehicle, and costs of suit. The RTC issued an Order of Replevin
on March 28, 1984. The Violago spouses, as defendants a quo, were declared
in default for failing to file an answer. Eventually, the RTC rendered on
December 3, 1984 a decision in favor of BA Finance. A writ of execution was
thereafter issued on January 11, 1985, followed by an alias writ of execution.6
In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was
then issued Certificate of Registration No. 0014830-4 by the LTO-Cebu City
Branch on April 29, 1985. On May 8, 1987, Jose executed a Chattel Mortgage
over the vehicle in favor of Generoso Lopez as security for a loan covered by a
promissory note in the amount of PhP 260,664. This promissory note was later
endorsed to BA Finance, Cebu City branch.7
On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and
Motion to Quash Writ of Execution on the basis of lack of a valid service of
summons on them, among other reasons. The RTC denied the motions; hence,
the spouses filed a petition for certiorari under Rule 65 before the CA, docketed
as CA G.R. No. 2002-SP. On May 31, 1991, the CA nullified the RTC’s order.
This CA decision became final and executory.
On January 28, 1992, the spouses filed their Answer before the RTC, alleging
the following: they never received the vehicle from VMSC; the vehicle was
previously sold to Esmeraldo; BA Finance was not a holder in due course under
Section 59 of the Negotiable Instruments Law (NIL); and the recourse of BA
Finance should be against VMSC. On February 25, 1995, the Violago spouses,
with prior leave of court, filed a Third Party Complaint against Avelino praying
that he be held liable to them in the event that they be held liable to BA Finance,
as well as for damages. VMSC was not impleaded as third party defendant. In
his Motion to Dismiss and Answer, Avelino contended that he was not a party to
the transaction personally, but VMSC. Avelino’s motion was denied and the third
party complaint against him was entertained by the trial court. Subsequently, the
spouses belabored to prove that they affixed their signatures on the promissory
note and chattel mortgage in favor of VMSC in blank.8
The RTC rendered a Decision on March 5, 1994, finding for BA Finance but
against the Violago spouses. The RTC, however, declared that they are entitled
to be indemnified by Avelino. The dispositive portion of the RTC’s decision
reads:
WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and
Florencia R. Violago are ordered to deliver to plaintiff BA Finance Corporation,
at its principal office the BAFC Building, Gamboa St., Legaspi Village, Makati,
Metro Manila the Toyota Cressida car, model 1983, bearing Engine No. 21R-
02854117, and with Serial No. RX60-804614, covered by the deed of chattel
mortgage dated August 4, 1983; or if such delivery cannot be made, to pay,
jointly and severally, to the plaintiff the sum of P198,003.06 together with the
penalty [thereon] at three percent (3%) a month, from March 1, 1984, until the
amount is fully paid.
In either case, the defendant-third-party plaintiffs are required to pay, jointly and
severally, to the plaintiff a sum equivalent to twenty-five percent (25%) of
P198,003.06 as attorney’s fees, and another amount also equivalent to twenty
five percent (25%) of the said unpaid balance, as liquidated damages. The
defendant-third party-plaintiffs are also required to shoulder the litigation
expenses and costs. 1aw phil
As indemnification, third-party defendant Avelino Violago is ordered to deliver to
defendants-third-party plaintiffs spouses Pedro F. Violago and Florencia R.
Violago the aforedescribed motor vehicle; or if such delivery is not possible, to
pay to the said spouses the sum of P198,003.06, together with the penalty
thereon at three (3%) a month from March 1, 1984, until the amount is entirely
paid.
In either case, the third-party defendant should pay to the defendant-third-party
plaintiffs spouses a sum equivalent to twenty-five percent (25%) of P198,003.06
as attorney’s fees, and another sum equivalent also to twenty-five percent (25%)
of the said unpaid balance, as liquidated damages.
Third-party defendant Avelino Violago is further ordered to return to the third-
party plaintiffs the sum of P60,500.00 they paid to him as down payment for the
car; and to pay them P15,000.00 as moral damages; P10,000.00 as exemplary
damages; and reimburse them for all the expenses and costs of the suit.
The counterclaims of the defendants and third-party defendant, for lack of merit,
are dismissed.9
The Ruling of the CA
Petitioners-spouses and Avelino appealed to the CA. The spouses argued that
the promissory note is a negotiable instrument; hence, the trial court should have
applied the NIL and not the Civil Code. The spouses also asserted that since
VMSC was not the owner of the vehicle at the time of sale, the sale was null and
void for the failure in the "cause or consideration" of the promissory note, which
in this case was the sale and delivery of the vehicle. The spouses also alleged
that BA Finance was not a holder in due course of the note since it knew, through
its Cebu City branch, that the car was never delivered to the spouses.10 On the
other hand, Avelino prayed for the dismissal of the complaint against him
because he was not a party to the transaction, and for an order to the spouses
to pay him moral damages and costs of suit.
The appellate court ruled that the promissory note was a negotiable instrument
and that BA Finance was a holder in due course, applying Secs. 8, 24, and 52
of the NIL. The CA faulted petitioners for failing to implead VMSC, the seller of
the vehicle and creditor in the promissory note, as a party in their Third Party
Complaint. Citing Salas v. Court of Appeals,11 the appellate court reasoned that
since VMSC is an indispensable party, any judgment will not bind it or be
enforced against it. The absence of VMSC rendered the proceedings in the RTC
and the judgment in the Third Party Complaint "null and void, not only as to the
absent party but also to the present parties, namely the Defendants-Appellants
(petitioners herein) and the Third-Party-Defendant-Appellant (Avelino Violago)."
The CA set aside the trial court’s order holding Avelino liable for damages to the
spouses without prejudice to the action of the spouses against VMSC and
Avelino in a separate action.12
The dispositive portion of the August 20, 2002 CA Decision reads:
IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-
Appellants is DISMISSED. The appeal of the Third-Party-Defendant-Appellant
is GRANTED. The Decision of the Court a quo is AFFIRMED, with the
modification that the Third-Party Complaint against the Third-Party-Defendant-
appellant is DISMISSED, without prejudice. The counterclaims of the Third-
Party Defendant Appellant against the Defendants-Appellants are DISMISSED,
also without prejudice.13
The spouses Violago sought but were denied reconsideration by the CA per its
Resolution of May 15, 2003.
does not carry any legal effect despite its negotiation. Either way, the petitioners’
arguments deserve no merit.
The promissory note is clearly negotiable. The appellate court was correct in
finding all the requisites of a negotiable instrument present. The NIL provides:
Section 1. Form of Negotiable Instruments. – An instrument to be negotiable
must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;

The Issues (b) Must contain an unconditional promise or order to pay a sum certain
in money;
Petitioners raise the following issues:
(c) Must be payable on demand, or at a fixed or determinable future time;
WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE
PROMISSORY NOTE MAY BE CONSIDERED A HOLDER IN DUE (d) Must be payable to order or to bearer; and
COURSE
(e) Where the instrument is addressed to a drawee, he must be named
WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE or otherwise indicated therein with reasonable certainty.
CONSIDERED VALID DESPITE VITIATION OF CONSENT OF, AND
THE FRAUD COMMITTED ON, THE MORTGAGORS BY AVELINO,
The promissory note signed by petitioners reads:
AND THE CLEAR ABSENCE OF OBJECT CERTAIN
209,601.00 Makati, Metro Manila, Philippines, August 4, 1983
WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE
INVOKED AND SUSTAINED DESPITE THE FRAUD AND DECEPTION
OF AVELINO For value received, I/we, jointly and severally, promise to pay to the order of
VIOLAGO MOTOR SALES CORPORATION, its office, the principal sum of
TWO HUNDRED NINE THOUSAND SIX HUNDRED ONE ONLY Pesos
The Court’s Ruling
(P209,601.00), Philippines Currency, with interest at the rate stipulated herein
below, in installments as follows:
The ruling of the appellate court is set aside insofar as it dismissed, without
prejudice, the third party complaint of petitioners against Avelino thereby
Thirty Six (36) successive monthly installments of P5,822.25, the first installment
effectively absolving Avelino from any liability under the third party complaint.
to be paid on 9-16-83, and the succeeding monthly installments on the 16th day
of each and every succeeding month thereafter until the account is fully paid,
In addressing the threshold issue of whether BA Finance is a holder in due provided that the penalty charge of three (3%) per cent per month or a fraction
course of the promissory note, we must determine whether the note is a thereof shall be added on each unpaid installment from maturity thereof until
negotiable instrument and, hence, covered by the NIL. In their appeal to the CA, fully paid.
petitioners argued that the promissory note is a negotiable instrument and that
the provisions of the NIL, not the Civil Code, should be applied. In the present
xxxx
petition, however, petitioners claim that Article 1318 of the Civil Code14should be
applied since their consent was vitiated by fraud, and, thus, the promissory note
Notice of demand, presentment, dishonor and protest are hereby waived.
 (d) That at the time it was negotiated to him he had no notice of any
(Sgd.) (Sgd.)
PEDRO F. VIOLAGO FLORENCIA R. VIOLAGO infirmity in the instrument or defect in the title of the person negotiating
it.
763 Constancia St., Sampaloc, Manila same
(Address) (Address) The law presumes that a holder of a negotiable instrument is a holder thereof in
due course. 16 In this case, the CA is correct in finding that BA Finance meets all
(Sgd.) (Sgd.) the foregoing requisites:
Marivic Avaria Jesus Tuazon
(WITNESS) (WITNESS) In the present recourse, on its face, (a) the "Promissory Note", Exhibit "A", is
complete and regular; (b) the "Promissory Note" was endorsed by the VMSC
in favor of the Appellee; (c) the Appellee, when it accepted the Note, acted in
PAY TO THE ORDER OF BA FINANCE CORPORATION good faith and for value; (d) the Appellee was never informed, before and at the
time the "Promissory Note" was endorsed to the Appellee, that the vehicle sold
WITHOUT RECOURSE to the Defendants-Appellants was not delivered to the latter and that VMSC had
already previously sold the vehicle to Esmeraldo Violago. Although Jose Olvido
VIOLAGO MOTOR SALES CORPORATION mortgaged the vehicle to Generoso Lopez, who assigned his rights to the BA
Finance Corporation (Cebu Branch), the same occurred only on May 8, 1987,
By: (Sgd.) much later than August 4, 1983, when VMSC assigned its rights over the
AVELINO A. VIOLAGO, Pres. 15 "Chattel Mortgage" by the Defendants-Appellants to the Appellee. Hence,
Appellee was a holder in due course.17
The promissory note clearly satisfies the requirements of a negotiable
instrument under the NIL. It is in writing; signed by the Violago spouses; has an In the hands of one other than a holder in due course, a negotiable instrument
unconditional promise to pay a certain amount, i.e., PhP 209,601, on specific is subject to the same defenses as if it were non-negotiable.18 A holder in due
dates in the future which could be determined from the terms of the note; made course, however, holds the instrument free from any defect of title of prior parties
payable to the order of VMSC; and names the drawees with certainty. The and from defenses available to prior parties among themselves, and may
indorsement by VMSC to BA Finance appears likewise to be valid and regular. enforce payment of the instrument for the full amount thereof.19 Since BA
Finance is a holder in due course, petitioners cannot raise the defense of non-
delivery of the object and nullity of the sale against the corporation. The NIL
The more important issue now is whether or not BA Finance is a holder in due considers every negotiable instrument prima facie to have been issued for a
course. The resolution of this issue will determine whether petitioners’ defense valuable consideration.20 In Salas, we held that a party holding an instrument
of fraud and nullity of the sale could validly be raised against respondent may enforce payment of the instrument for the full amount thereof. As such, the
corporation. Sec. 52 of the NIL provides: maker cannot set up the defense of nullity of the contract of sale.21 Thus,
petitioners are liable to respondent corporation for the payment of the amount
Section 52. What constitutes a holder in due course.––A holder in due course is stated in the instrument.
a holder who has taken the instrument under the following conditions:
From the third party complaint to the present petition, however, petitioners pray
(a) That it is complete and regular upon its face; that the veil of corporate fiction be set aside and Avelino be adjudged directly
liable to BA Finance. Petitioners likewise pray for damages for the fraud
(b) That he became the holder of it before it was overdue, and without committed upon them.
notice that it had been previously dishonored, if such was the fact;
In Concept Builders, Inc. v. NLRC, we held:
(c) That he took it in good faith and for value;
It is a fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporations to which
it may be connected. But, this separate and distinct personality of a corporation
is merely a fiction created by law for convenience and to promote justice. So,
when the notion of separate juridical personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or is used as a device
to defeat the labor laws, this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is true likewise when the
corporation is merely an adjunct, a business conduit or an alter ego of another
corporation.
xxxx
The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust acts in contravention of plaintiffs legal
rights; and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.22
This case meets the foregoing test. VMSC is a family-owned corporation of
which Avelino was president. Avelino committed fraud in selling the vehicle to
petitioners, a vehicle that was previously sold to Avelino’s other cousin,
Esmeraldo. Nowhere in the pleadings did Avelino refute the fact that the vehicle
in this case was already previously sold to Esmeraldo; he merely insisted that
he cannot be held liable because he was not a party to the transaction. The fact
that Avelino and Pedro are cousins, and that Avelino claimed to have a need to
increase the sales quota, was likely among the factors which motivated the
spouses to buy the car. Avelino, knowing fully well that the vehicle was already
sold, and with abuse of his relationship with the spouses, still proceeded with
the sale and collected the down payment from petitioners. The trial court found
that the vehicle was not delivered to the spouses. Avelino clearly defrauded
petitioners. His actions were the proximate cause of petitioners’ loss. He cannot
now hide behind the separate corporate personality of VMSC to escape from
liability for the amount adjudged by the trial court in favor of petitioners.
The fact that VMSC was not included as defendant in petitioners’ third party
complaint does not preclude recovery by petitioners from Avelino; neither would
such non-inclusion constitute a bar to the application of the piercing-of-the-
corporate-veil doctrine. We suggested as much in Arcilla v. Court of Appeals, an
appellate proceeding involving petitioner Arcilla’s bid to avoid the adverse CA
decision on the argument that he is not personally liable for the amount adjudged
since the same constitutes a corporate liability which nevertheless cannot even
be enforced against the corporation which has not been impleaded as a party
below. In that case, the Court found as well-taken the CA’s act of disregarding
the separate juridical personality of the corporation and holding its president,
Arcilla, liable for the obligations incurred in the name of the corporation although
it was not a party to the collection suit before the trial court. An excerpt from
Arcilla:
x x x In short, even if We are to assume arguendo that the obligation was
incurred in the name of the corporation, the petitioner [Arcilla] would still be
personally liable therefor because for all legal intents and purposes, he and the
corporation are one and the same. Csar Marine Resources, Inc. is nothing more
than his business conduit and alter ego. The fiction of separate juridical
personality conferred upon such corporation by law should be disregarded.
Significantly, petitioner does not seriously challenge the [CA’s] application of the
doctrine which permits the piercing of the corporate veil and the disregarding of
the fiction of a separate juridical personality; this is because he knows only too
well that from the beginning, he merely used the corporation for his personal
purposes.23
WHEREFORE, the CA’s August 20, 2002 Decision and May 15, 2003
Resolution in CA-G.R. CV No. 48489 are SET ASIDE insofar as they dismissed
without prejudice the third party complaint of petitioners-spouses Pedro and
Florencia Violago against respondent Avelino Violago. The March 5, 1994
Decision of the RTC is REINSTATED and AFFIRMED. Costs against Avelino
Violago.
SO ORDERED.
THIRD DIVISION WHEREFORE, and in view of all the foregoing, judgment is hereby
rendered ordering the defendant to pay the plaintiff the sum of
G.R. No. 76788 January 22, 1990 P28,414.40 with interest thereon at the rate of 14% from October 2, 1980
until the said sum is fully paid; and the further amount of P1,000.00 as
JUANITA SALAS, petitioner, attorney's fees.
vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING The counterclaim of defendant is dismissed.
CORPORATION, respondents.
With costs against defendant. 1
Arsenio C. Villalon, Jr. for petitioner.
Labaguis, Loyola, Angara & Associates for private respondent. Both petitioner and private respondent appealed the aforesaid decision to the
Court of Appeals.

FERNAN, C.J.:
Assailed in this petition for review on certiorari is the decision of the Court of
Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance & Leasing
Corporation v. Salas", which modified the decision of the Regional Trial Court of
San Fernando, Pampanga in Civil Case No. 5915, a collection suit between the
same parties.
Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred
to as petitioner) bought a motor vehicle from the Violago Motor Sales
Corporation (VMS for brevity) for P58,138.20 as evidenced by a promissory
note. This note was subsequently endorsed to Filinvest Finance & Leasing
Corporation (hereinafter referred to as private respondent) which financed the
purchase.
Imputing fraud, bad faith and misrepresentation against VMS for having
delivered a different vehicle to petitioner, the latter prayed for a reversal of the
trial court's decision so that she may be absolved from the obligation under the
contract.
On October 27, 1986, the Court of Appeals rendered its assailed decision, the
pertinent portion of which is quoted hereunder:
The allegations, statements, or admissions contained in a pleading are
conclusive as against the pleader. A party cannot subsequently take a
position contradictory of, or inconsistent with his pleadings (Cunanan vs.
Amparo, 80 Phil. 227). Admissions made by the parties in the pleadings,
or in the course of the trial or other proceedings, do not require proof
and cannot be contradicted unless previously shown to have been made
through palpable mistake (Sec. 2, Rule 129, Revised Rules of Court;
Sta. Ana vs. Maliwat, L-23023, Aug. 31, 1968, 24 SCRA 1018).

Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to
a discrepancy in the engine and chassis numbers of the vehicle delivered to her
and those indicated in the sales invoice, certificate of registration and deed of
chattel mortgage, which fact she discovered when the vehicle figured in an
accident on 9 May 1980.
This failure to pay prompted private respondent to initiate Civil Case No. 5915
for a sum of money against petitioner before the Regional Trial Court of San
Fernando, Pampanga.
In its decision dated September 10, 1982, the trial court held, thus:
When an action or defense is founded upon a written instrument, copied
in or attached to the corresponding pleading as provided in the
preceding section, the genuineness and due execution of the instrument
shall be deemed admitted unless the adverse party, under oath,
specifically denied them, and sets forth what he claims to be the facts
(Sec. 8, Rule 8, Revised Rules of Court; Hibbered vs. Rohde and
McMillian, 32 Phil. 476).
A perusal of the evidence shows that the amount of P58,138.20 stated
in the promissory note is the amount assumed by the plaintiff in financing
the purchase of defendant's motor vehicle from the Violago Motor Sales
Corp., the monthly amortization of winch is Pl,614.95 for 36 months.
 Considering that the defendant was able to pay twice (as admitted by
the plaintiff, defendant's account became delinquent only beginning
May, 1980) or in the total sum of P3,229.90, she is therefore liable to
pay the remaining balance of P54,908.30 at l4% per annum from
October 2, 1980 until full payment.
WHEREFORE, considering the foregoing, the appealed decision is
hereby modified ordering the defendant to pay the plaintiff the sum of
P54,908.30 at 14% per annum from October 2, 1980 until full payment.
The decision is AFFIRMED in all other respects. With costs to
defendant. 2
Petitioner's motion for reconsideration was denied; hence, the present recourse.
In the petition before us, petitioner assigns twelve (12) errors which focus on the
alleged fraud, bad faith and misrepresentation of Violago Motor Sales
Corporation in the conduct of its business and which fraud, bad faith and
misrepresentation supposedly released petitioner from any liability to private
respondent who should instead proceed against VMS. 3
Petitioner argues that in the light of the provision of the law on sales by
description 4 which she alleges is applicable here, no contract ever existed
between her and VMS and therefore none had been assigned in favor of private
respondent.
She contends that it is not necessary, as opined by the appellate court, to
implead VMS as a party to the case before it can be made to answer for
damages because VMS was earlier sued by her for "breach of contract with
damages" before the Regional Trial Court of Olongapo City, Branch LXXII,
docketed as Civil Case No. 2916-0. She cites as authority the decision therein
where the court originally ordered petitioner to pay the remaining balance of the
motor vehicle installments in the amount of P31,644.30 representing the
difference between the agreed consideration of P49,000.00 as shown in the
sales invoice and petitioner's initial downpayment of P17,855.70 allegedly
evidenced by a receipt. Said decision was however reversed later on, with the
same court ordering defendant VMS instead to return to petitioner the sum of
P17,855.70. Parenthetically, said decision is still pending consideration by the
First Civil Case Division of the Court of Appeals, upon an appeal by VMS,
docketed as AC-G.R. No. 02922. 5
Private respondent in its comment, prays for the dismissal of the petition and
counters that the issues raised and the allegations adduced therein are a mere
rehash of those presented and already passed upon in the court below, and that
the judgment in the "breach of contract" suit cannot be invoked as an authority
as the same is still pending determination in the appellate court.
We see no cogent reason to disturb the challenged decision.
The pivotal issue in this case is whether the promissory note in question is a
negotiable instrument which will bar completely all the available defenses of the
petitioner against private respondent.
Petitioner's liability on the promissory note, the due execution and genuineness
of which she never denied under oath is, under the foregoing factual milieu, as
inevitable as it is clearly established.
The records reveal that involved herein is not a simple case of assignment of
credit as petitioner would have it appear, where the assignee merely steps into
the shoes of, is open to all defenses available against and can enforce payment
only to the same extent as, the assignor-vendor.
Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing
and Acceptance Corp., 6 this Court had the occasion to clearly distinguish
between a negotiable and a non-negotiable instrument.
Among others, the instrument in order to be considered negotiable must contain
the so-called "words of negotiability — i.e., must be payable to "order" or
"bearer"". Under Section 8 of the Negotiable Instruments Law, there are only
two ways by which an instrument may be made payable to order. There must
always be a specified person named in the instrument and the bill or note is to
be paid to the person designated in the instrument or to any person to whom he
has indorsed and delivered the same. Without the words "or order or "to the
order of", the instrument is payable only to the person designated therein and is
therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the
advantages of being a holder of a negotiable instrument, but will merely "step
into the shoes" of the person designated in the instrument and will thus be open
to all defenses available against the latter. Such being the situation in the above-
cited case, it was held that therein private respondent is not a holder in due
course but a mere assignee against whom all defenses available to the assignor
may be raised. 7
In the case at bar, however, the situation is different. Indubitably, the basis of
private respondent's claim against petitioner is a promissory note which bears
all the earmarks of negotiability.
The pertinent portion of the note reads:
PROMISSORY NOTE
(MONTHLY)
P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980
For value received, I/We jointly and severally, promise to pay Violago
Motor Sales Corporation or order, at its office in San
Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE
HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine
currency, which amount includes interest at 14% per annum based on
the diminishing balance, the said principal sum, to be payable, without
need of notice or demand, in installments of the amounts following and
at the dates hereinafter set forth, to wit: P1,614.95 monthly for "36"
months due and payable on the 21st day of each month starting March
21, 1980 thru and inclusive of February 21, 1983. P_________ monthly
for ______ months due and payable on the ______ day of each month
starting _____198__ thru and inclusive of _____, 198________
provided that interest at 14% per annum shall be added on each unpaid
installment from maturity hereof until fully paid.
xxx xxx xxx
VIOLAGO MOTOR SALES CORPORATION
BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8
A careful study of the questioned promissory note shows that it is a negotiable
instrument, having complied with the requisites under the law as follows: [a] it is
in writing and signed by the maker Juanita Salas; [b] it contains an unconditional
promise to pay the amount of P58,138.20; [c] it is payable at a fixed or
determinable future time which is "P1,614.95 monthly for 36 months due and
payable on the 21 st day of each month starting March 21, 1980 thru and
inclusive of Feb. 21, 1983;" [d] it is payable to Violago Motor Sales
Corporation, or order and as such, [e] the drawee is named or indicated with
certainty. 9
It was negotiated by indorsement in writing on the instrument itself payable to
the Order of Filinvest Finance and Leasing Corporation 10 and it is an
indorsement of the entire instrument. 11
Under the circumstances, there appears to be no question that Filinvest is a
holder in due course, having taken the instrument under the following conditions:
[a] it is complete and regular upon its face; [b] it became the holder thereof
before it was overdue, and without notice that it had previously been dishonored;
[c] it took the same in good faith and for value; and [d] when it was negotiated
to Filinvest, the latter had no notice of any infirmity in the instrument or defect in
the title of VMS Corporation. 12

Maker; Co-Maker: Accordingly, respondent corporation holds the instrument free from any defect
of title of prior parties, and free from defenses available to prior parties among
(SIGNED) JUANITA SALAS _________________ themselves, and may enforce payment of the instrument for the full amount
thereof. 13 This being so, petitioner cannot set up against respondent the defense
of nullity of the contract of sale between her and VMS.
Address:
Even assuming for the sake of argument that there is an iota of truth in
____________________ ____________________
petitioner's allegation that there was in fact deception made upon her in that the
vehicle she purchased was different from that actually delivered to her, this
WITNESSES matter cannot be passed upon in the case before us, where the VMS was never
impleaded as a party.
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
TAN # TAN # Whatever issue is raised or claim presented against VMS must be resolved in
the "breach of contract" case.
PAY TO THE ORDER OF
FILINVEST FINANCE AND LEASING CORPORATION Hence, we reach a similar opinion as did respondent court when it held:
 We can only extend our sympathies to the defendant (herein petitioner)
in this unfortunate incident. Indeed, there is nothing We can do as far as
the Violago Motor Sales Corporation is concerned since it is not a party
in this case. To even discuss the issue as to whether or not the Violago
Motor Sales Corporation is liable in the transaction in question would
amount, to denial of due process, hence, improper and unconstitutional.
She should have impleaded Violago Motor Sales.14

IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED.

With costs against petitioner.

SO ORDERED.
FIRST DIVISION office of Metrobank, which forwarded them to the Bureau of Treasury for special
clearing.2
G.R. No. 88866 February 18, 1991
More than two weeks after the deposits, Gloria Castillo went to the Calapan
METROPOLITAN BANK & TRUST COMPANY, petitioner, branch several times to ask whether the warrants had been cleared. She was
vs. told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., his account. Later, however, "exasperated" over Gloria's repeated inquiries and
LUCIA CASTILLO, MAGNO CASTILLO and GLORIA also as an accommodation for a "valued client," the petitioner says it finally
CASTILLO, respondents. decided to allow Golden Savings to withdraw from the proceeds of the
warrants.3
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia The first withdrawal was made on July 9, 1979, in the amount of P508,000.00,
Castillo. the second on July 13, 1979, in the amount of P310,000.00, and the third on
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan July 16, 1979, in the amount of P150,000.00. The total withdrawal was
Association, Inc. P968.000.00.4

In turn, Golden Savings subsequently allowed Gomez to make withdrawals from

his own account, eventually collecting the total amount of P1,167,500.00 from
the proceeds of the apparently cleared warrants. The last withdrawal was made
on July 16, 1979.
CRUZ, J.:
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants
This case, for all its seeming complexity, turns on a simple question of
had been dishonored by the Bureau of Treasury on July 19, 1979, and
negligence. The facts, pruned of all non-essentials, are easily told.
demanded the refund by Golden Savings of the amount it had previously
withdrawn, to make up the deficit in its account.
The Metropolitan Bank and Trust Co. is a commercial bank with branches
throughout the Philippines and even abroad. Golden Savings and Loan
The demand was rejected. Metrobank then sued Golden Savings in the
Association was, at the time these events happened, operating in Calapan,
Regional Trial Court of Mindoro.5 After trial, judgment was rendered in favor of
Mindoro, with the other private respondents as its principal officers.
Golden Savings, which, however, filed a motion for reconsideration even as
Metrobank filed its notice of appeal. On November 4, 1986, the lower court
In January 1979, a certain Eduardo Gomez opened an account with Golden modified its decision thus:
Savings and deposited over a period of two months 38 treasury warrants with a
total value of P1,755,228.37. They were all drawn by the Philippine Fish
ACCORDINGLY, judgment is hereby rendered:
Marketing Authority and purportedly signed by its General Manager and
countersigned by its Auditor. Six of these were directly payable to Gomez while
the others appeared to have been indorsed by their respective payees, followed 1. Dismissing the complaint with costs against the plaintiff;
by Gomez as second indorser.1
2. Dissolving and lifting the writ of attachment of the properties of
On various dates between June 25 and July 16, 1979, all these warrants were defendant Golden Savings and Loan Association, Inc. and defendant
subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and Spouses Magno Castillo and Lucia Castillo;
deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan,
Mindoro. They were then sent for clearing by the branch office to the principal
 3. Directing the plaintiff to reverse its action of debiting Savings Account
No. 2498 of the sum of P1,754,089.00 and to reinstate and credit to such
account such amount existing before the debit was made including the
amount of P812,033.37 in favor of defendant Golden Savings and Loan
Association, Inc. and thereafter, to allow defendant Golden Savings and
Loan Association, Inc. to withdraw the amount outstanding thereon
before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan
Association, Inc. attorney's fees and expenses of litigation in the amount
of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo
and Lucia Castillo attorney's fees and expenses of litigation in the
amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court,6 the decision was affirmed, prompting
Metrobank to file this petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to
apply the clear contractual terms and conditions on the deposit slips
allowing Metrobank to charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to instances
where the checks or treasury warrants are forged or
unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is
that of a mere collecting agent which cannot be held liable for its
failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of
Appeals, Metrobank is made to pay for warrants already dishonored,
thereby perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between
Metrobank and Golden Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury
warrants involved in this case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank
was indeed negligent in giving Golden Savings the impression that the treasury
warrants had been cleared and that, consequently, it was safe to allow Gomez
to withdraw the proceeds thereof from his account with it. Without such
assurance, Golden Savings would not have allowed the withdrawals; with such
assurance, there was no reason not to allow the withdrawal. Indeed, Golden
Savings might even have incurred liability for its refusal to return the money that
to all appearances belonged to the depositor, who could therefore withdraw it
any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden
Savings deposited them to its account with Metrobank. Golden Savings had no
clearing facilities of its own. It relied on Metrobank to determine the validity of
the warrants through its own services. The proceeds of the warrants were
withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw
them from its own deposit.7 It was only when Metrobank gave the go-signal that
Gomez was finally allowed by Golden Savings to withdraw them from his own
account.
The argument of Metrobank that Golden Savings should have exercised more
care in checking the personal circumstances of Gomez before accepting his
deposit does not hold water. It was Gomez who was entrusting the warrants, not
Golden Savings that was extending him a loan; and moreover, the treasury
warrants were subject to clearing, pending which the depositor could not
withdraw its proceeds. There was no question of Gomez's identity or of the
genuineness of his signature as checked by Golden Savings. In fact, the
treasury warrants were dishonored allegedly because of the forgery of the
signatures of the drawers, not of Gomez as payee or indorser. Under the
circumstances, it is clear that Golden Savings acted with due care and diligence
and cannot be faulted for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount
involved was not trifling — more than one and a half million pesos (and this was
1979). There was no reason why it should not have waited until the treasury
warrants had been cleared; it would not have lost a single centavo by waiting.
Yet, despite the lack of such clearance — and notwithstanding that it had not
received a single centavo from the proceeds of the treasury warrants, as it now
repeatedly stresses — it allowed Golden Savings to withdraw — not once, not
twice, but thrice — from the uncleared treasury warrants in the total amount of
P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo
about the clearance and it also wanted to "accommodate" a valued client. It
"presumed" that the warrants had been cleared simply because of "the lapse of
one week."8 For a bank with its long experience, this explanation is unbelievably
naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions
printed on the dorsal side of the deposit slips through which the treasury
warrants were deposited by Golden Savings with its Calapan branch. The
conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself
only as the depositor's collecting agent, assuming no responsibility
beyond care in selecting correspondents, and until such time as actual
payment shall have come into possession of this bank, the right is
reserved to charge back to the depositor's account any amount
previously credited, whether or not such item is returned. This also
applies to checks drawn on local banks and bankers and their branches
as well as on this bank, which are unpaid due to insufficiency of funds,
forgery, unauthorized overdraft or any other reason. (Emphasis
supplied.)
According to Metrobank, the said conditions clearly show that it was acting only
as a collecting agent for Golden Savings and give it the right to "charge back to
the depositor's account any amount previously credited, whether or not such
item is returned. This also applies to checks ". . . which are unpaid due to
insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is
claimed that the said conditions are in the nature of contractual stipulations and
became binding on Golden Savings when Gloria Castillo, as its Cashier, signed
the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering
that they have apparently been imposed by the bank unilaterally, without the
consent of the depositor. Indeed, it could be argued that the depositor, in signing
the deposit slip, does so only to identify himself and not to agree to the conditions
set forth in the given permit at the back of the deposit slip. We do not have to
rule on this matter at this time. At any rate, the Court feels that even if the deposit
slip were considered a contract, the petitioner could still not validly disclaim
responsibility thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings,
Metrobank seems to be suggesting that as a mere agent it cannot be liable to
the principal. This is not exactly true. On the contrary, Article 1909 of the Civil
Code clearly provides that —
Art. 1909. — The agent is responsible not only for fraud, but also for
negligence, which shall be judged 'with more or less rigor by the courts,
according to whether the agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for
emphasis, it was the clearance given by it that assured Golden Savings it was
already safe to allow Gomez to withdraw the proceeds of the treasury warrants
he had deposited Metrobank misled Golden Savings. There may have been no
express clearance, as Metrobank insists (although this is refuted by Golden
Savings) but in any case that clearance could be implied from its allowing
Golden Savings to withdraw from its account not only once or even twice
but three times. The total withdrawal was in excess of its original balance before
the treasury warrants were deposited, which only added to its belief that the
treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants
are not paid for any reason is not acceptable. Any reason does not mean no
reason at all. Otherwise, there would have been no need at all for Golden
Savings to deposit the treasury warrants with it for clearance. There would have
been no need for it to wait until the warrants had been cleared before paying the
proceeds thereof to Gomez. Such a condition, if interpreted in the way the
petitioner suggests, is not binding for being arbitrary and unconscionable. And
it becomes more so in the case at bar when it is considered that the supposed
dishonor of the warrants was not communicated to Golden Savings before it
made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving
express or at least implied clearance to the treasury warrants and allowing
payments therefrom to Golden Savings. But that is not all. On top of this, the
supposed reason for the dishonor, to wit, the forgery of the signatures of the
general manager and the auditor of the drawer corporation, has not been
established.9 This was the finding of the lower courts which we see no reason to
disturb. And as we said in MWSS v. Court of Appeals:10
 Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA
238). It must be established by clear, positive and convincing evidence.
This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants
in question are not negotiable instruments. Clearly stamped on their face is the
word "non-negotiable." Moreover, and this is of equal significance, it is indicated
that they are payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the
underscored parts, are pertinent:
Sec. 1. — Form of negotiable instruments. — An instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain
in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. — An unqualified order or
promise to pay is unconditional within the meaning of this Act though
coupled with —
(a) An indication of a particular fund out of which reimbursement is to be
made or a particular account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument
judgment.
But an order or promise to pay out of a particular fund is not
unconditional.
The indication of Fund 501 as the source of the payment to be made on the
treasury warrants makes the order or promise to pay "not unconditional" and the
warrants themselves non-negotiable. There should be no question that the
exception on Section 3 of the Negotiable Instruments Law is applicable in the
case at bar. This conclusion conforms to Abubakar vs. Auditor General11 where
the Court held:
The petitioner argues that he is a holder in good faith and for value of a
negotiable instrument and is entitled to the rights and privileges of a
holder in due course, free from defenses. But this treasury warrant is not
within the scope of the negotiable instrument law. For one thing, the
document bearing on its face the words "payable from the appropriation
for food administration, is actually an Order for payment out of "a
particular fund," and is not unconditional and does not fulfill one of the
essential requirements of a negotiable instrument (Sec. 3 last sentence
and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden
Savings assumed that they were "genuine and in all respects what they purport
to be," in accordance with Section 66 of the Negotiable Instruments Law. The
simple reason is that this law is not applicable to the non-negotiable treasury
warrants. The indorsement was made by Gloria Castillo not for the purpose of
guaranteeing the genuineness of the warrants but merely to deposit them with
Metrobank for clearing. It was in fact Metrobank that made the guarantee when
it stamped on the back of the warrants: "All prior indorsement and/or lack of
endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine
Islands,12 but we feel this case is inapplicable to the present controversy. That
1âw phi 1
case involved checks whereas this case involves treasury warrants. Golden
Savings never represented that the warrants were negotiable but signed them
only for the purpose of depositing them for clearance. Also, the fact of forgery
was proved in that case but not in the case before us. Finally, the Court found
the Jai Alai Corporation negligent in accepting the checks without question from
one Antonio Ramirez notwithstanding that the payee was the Inter-Island Gas
Services, Inc. and it did not appear that he was authorized to indorse it. No
similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will have
to amend it insofar as it directs the petitioner to credit Golden Savings with the
full amount of the treasury checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from
which Gomez was allowed to withdraw P1,167,500.00 before Golden Savings
was notified of the dishonor. The amount he has withdrawn must be charged not
to Golden Savings but to Metrobank, which must bear the consequences of its
own negligence. But the balance of P586,589.00 should be debited to Golden
Savings, as obviously Gomez can no longer be permitted to withdraw this
amount from his deposit because of the dishonor of the warrants. Gomez has in
fact disappeared. To also credit the balance to Golden Savings would unduly
enrich it at the expense of Metrobank, let alone the fact that it has already been
informed of the dishonor of the treasury warrants.

WHEREFORE, the challenged decision is AFFIRMED, with the modification that

Paragraph 3 of the dispositive portion of the judgment of the lower court shall be
reworded as follows:

3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only

and thereafter allowing defendant Golden Savings & Loan Association,
Inc. to withdraw the amount outstanding thereon, if any, after the debit.

SO ORDERED.
THIRD DIVISION
G.R. No. 126568 April 30, 2003
QUIRINO GONZALES LOGGING CONCESSIONAIRE, QUIRINO GONZALES
and EUFEMIA GONZALES,petitioners,
vs.
THE COURT OF APPEALS (CA) and REPUBLIC PLANTERS
BANK, respondents.
CARPIO MORALES, J.:
In the expansion of its logging business, petitioner Quirino Gonzales Logging
Concessionaire (QGLC), through its proprietor, general manager — co-
petitioner Quirino Gonzales, applied on October 15, 1962 for credit
accommodations1 with respondent Republic Bank (the Bank), later known as
Republic Planters Bank.
The Bank approved QGLC's application on December 21, 1962, granting it a
credit line of P900,000.002 broken into an overdraft line of P500,000.00 which
was later reduced to P450,000.00 and a Letter of Credit (LC) line of
P400,000.00.3
Pursuant to the grant, the Bank and petitioners QGLC and the spouses Quirino
and Eufemia Gonzales executed ten documents: two denominated "Agreement
for Credit in Current Account,"4 four denominated "Application and Agreement
for Commercial Letter of Credit,"5 and four denominated "Trust Receipt."6
Petitioners' obligations under the credit line were secured by a real estate
mortgage on four parcels of land: two in Pandacan, Manila, one in Makati (then
part of Rizal), and another in Diliman, Quezon City.7
In separate transactions, petitioners, to secure certain advances from the Bank
in connection with QGLC's exportation of logs, executed a promissory note in
1964 in favor of the Bank. They were to execute three more promissory notes in
1967.
In 1965, petitioners having long defaulted in the payment of their obligations
under the credit line, the Bank foreclosed the mortgage and bought the
properties covered thereby, it being the highest bidder in the auction sale held
in the same year. Ownership over the properties was later consolidated in the
Bank on account of which new titles thereto were issued to it.8
On January 27, 1977, alleging non-payment of the balance of QGLC's obligation
after the proceeds of the foreclosure sale were applied thereto, and non-
payment of the promissory notes despite repeated demands, the Bank filed a
complaint for "sum of money" (Civil Case No. 106635) against petitioners before
the Regional Trial Court (RTC) of Manila.
The complaint listed ten causes of action. The first concerns the overdraft line
under which the Bank claimed that petitioners withdrew amounts (unspecified)
at twelve percent per annum which were unpaid at maturity and that after it
applied the proceeds of the foreclosure sale to the overdraft debt, there
remained an unpaid balance of P1,224,301.56.
The Bank's second to fifth causes of action pertain to the LC line under which it
averred that on the strength of the LCs it issued, the beneficiaries thereof drew
and presented sight drafts to it which it all paid after petitioners' acceptance; and
that it delivered the tractors and equipment subject of the LCs to petitioners who
have not paid either the full or part of the face value of the drafts.
Specifically with respect to its second cause of action, the Bank alleged that it
issued LC No. 63-0055D on January 15, 1963 in favor of Monark International
Incorporated9 covering the purchase of a tractor10 on which the latter allegedly
drew a sight draft with a face value of P71,500.00,11 which amount petitioners
have not, however, paid in full.
Under its third cause of action, the Bank charged that it issued LC No. 61-1110D
on December 27, 1962 also in favor of Monark International covering the
purchase of another tractor and other equipment;12 and that Monark
International drew a sight draft with a face value of P80,350.00,13 and while
payments for the value thereof had been made by petitioners, a balance of
P68,064.97 remained.
Under the fourth cause of action, the Bank maintained that it issued LC No. 63-
0182D on February 11, 1963 in favor of J.B.L. Enterprises, Inc.14 covering the
purchase of two tractors,15 and J.B.L. Enterprises drew on February 13, 1963 a
sight draft on said LC in the amount of P155,000.00 but petitioners have not paid
said amount.
On its fifth cause of action, the Bank alleged that it issued LC No. 63-0284D on
March 14, 1963 in favor of Super Master Auto Supply (SMAS) covering the
purchase of "Eight Units GMC (G.I.) Trucks"; that on March 14, 1963, SMAS
drew a sight draft with a face value of P64,000.0016 on the basis of said LC; and
that the payments made by petitioners for the value of said draft were deficient
by P45,504.74.
The Bank thus prayed for the settlement of the above-stated obligations at an
interest rate of eleven percent per annum, and for the award of trust receipt
commissions, attorney's fees and other fees and costs of collection.
The sixth to ninth causes of action are anchored on the promissory notes issued
by petitioners allegedly to secure certain advances from the Bank in connection
with the exportation of logs as reflected above.17 The notes were payable 30
days after date and provided for the solidary liability of petitioners as well as
attorney's fees at ten percent of the total amount due18 in the event of their non-
payment at maturity.
The note dated June 18, 1964, subject of the sixth cause of action, has a face
value of P55,000.00 with interest rate of twelve percent per annum;19 that dated
July 7, 1967 subject of the seventh has a face value of P20,000.00;20that dated
July 18, 1967 subject of the eighth has a face value of P38,000.00;21 and that
dated August 23, 1967 subject of the ninth has a face value of P11,000.00.22 The
interest rate of the last three notes is pegged at thirteen percent per annum.23
On its tenth and final cause of action, the Bank claimed that it has accounts
receivable from petitioners in the amount of P120.48.
In their Answer24 of March 3, 1977, petitioners admit the following: having
applied for credit accommodations totaling P900,000.00 to secure which they
mortgaged real properties; opening of the LC/Trust Receipt Line; the issuance
by the Bank of the various LCs; and the foreclosure of the real estate mortgage
and the consolidation of ownership over the mortgaged properties in favor of the
Bank. They deny, however, having availed of the credit accommodations and
having received the value of the promissory notes, as they do deny having
physically received the tractors and equipment subject of the LCs.
As affirmative defenses, petitioners assert that the complaint states no cause of
action, and assuming that it does, the same is/are barred by prescription or null
and void for want of consideration.
By Order of March 10, 1977, Branch 36 of the Manila RTC attached the preferred
shares of stocks of the spouses Quirino and Eufemia Gonzales with the Bank
with a total par value of P414,000.00.
Finding for petitioners, the trial court rendered its Decision of April 22, 1992 the
dispositive portion of which reads:
WHEREFORE, judgment is rendered as follows:
1. All the claims of plaintiff particularly those described in the first to the
tenth causes of action of its complaint are denied for the reasons earlier
mentioned in the body of this decision;
2. As regards the claims of defendants pertaining to their counterclaim
(Exhibits "1", "2" and "3"), they are hereby given ten (10) years from the
date of issuance of the torrens title to plaintiff and before the transfer
thereof in good faith to a third party buyer within which to ask for the
reconveyance of the real properties foreclosed by plaintiff,
3. The order of attachment which was issued against the preferred
shares of stocks of defendants-spouses Quirino Gonzales and Eufemia
Gonzales with the Republic Bank now known as Republic Planters Bank
dated March 21, 1977 is hereby dissolved and/or lifted, and
4. Plaintiff is likewise ordered to pay the sum of P20,000.00, as and for
attorney's fees, with costs against plaintiff.
SO ORDERED.
In finding for petitioners, the trial court ratiocinated:25
Art. 1144 of the Civil Code states that an action upon a written contract
prescribes in ten (10) years from the time the right of action accrues. Art.
1150 states that prescription starts to run from the day the action may
be brought. The obligations allegedly created by the written contracts or
documents supporting plaintiff's first to the sixth causes of action were
demandable at the latest in 1964. Thus when the complaint was filed on
January 27, 1977 more than ten (10) years from 1964 [when the causes
of action accrued] had already lapsed. The first to the sixth causes of
action are thus barred by prescription. . . .
As regards the seventh and eight causes of action, the authenticity of
which documents were partly in doubt in the light of the categorical and
uncontradicted statements that in 1965, defendant Quirino Gonzales
logging concession was terminated based on the policy of the
 government to terminate logging concessions covering less than 20,000
hectares. If this is the case, the Court is in a quandary why there were
log exports in 1967? Because of the foregoing, the Court does not find
any valid ground to sustain the seventh and eight causes of action of
plaintiff's complaint.
As regards the ninth cause of action, the Court is baffled why plaintiff
extended to defendants another loan when defendants according to
plaintiff's records were defaulting creditors? The above facts and
circumstances has (sic) convinced this Court to give credit to the
testimony of defendants' witnesses that the Gonzales spouses signed
the documents in question in blank and that the promised loan was
never released to them. There is therefore a total absence of consent
since defendants did not give their consent to loans allegedly procured,
the proceeds of which were never received by the alleged debtors,
defendants herein. . . .
Plaintiff did not present evidence to support its tenth cause of action. For
this reason, it must consequently be denied for lack of evidence.
On the matter of [the] counterclaims of defendants, they seek the return
of the real and personal properties which they have given in good faith
to plaintiff. Again, prescription may apply. The real properties of
defendants acquired by plaintiff were foreclosed in 1965 and
consequently, defendants had one (1) year to redeem the property or
ten (10) years from issuance of title on the ground that the obligation
foreclosed was fictitious.
xxx xxx xxx
On appeal,26 the Court of Appeals (CA) reversed the decision of the trial court
by Decision27 of June 28, 1996 which disposed as follows:28
WHEREFORE, premises considered, the appealed decision (dated April
22, 1992) of the Regional Trial Court (Branch 36) in Manila in Civil Case
No. 82-4141 is hereby REVERSED — and let the case be remanded
back to the court a quo for the determination of the amount(s) to be
awarded to the [the Bank]-appellant relative to its claims against the
appellees.
SO ORDERED.
With regard to the first to sixth causes of action, the CA upheld the contention
of the Bank that the notices of foreclosure sale were "tantamount" to demand
letters upon the petitioners which interrupted the running of the prescriptive
period.29
As regards the seventh to ninth causes of action, the CA also upheld the
contention of the Bank that the written agreements-promissory notes prevail
over the oral testimony of petitioner Quirino Gonzales that the cancellation of
their logging concession in 1967 made it unbelievable for them to secure in 1967
the advances reflected in the promissory notes.30
With respect to petitioners' counterclaim, the CA agreed with the Bank that:31
Certainly, failure on the part of the trial court to pass upon and determine
the authenticity and genuineness of [the Bank's] documentary evidence
[the trial court having ruled on the basis of prescription of the Bank's first
to sixth causes of action] makes it impossible for the trial court' to
eventually conclude that the obligation foreclosed (sic) was fictitious.
Needless to say, the trial court's ruling averses (sic) the well-entrenched
rule that 'courts must render verdict on their findings of facts." (China
Banking Co. vs. CA, 70 SCRA 398)
Furthermore, the defendants-appellees' [herein petitioners']
counterclaim is basically an action for the reconveyance of their
properties, thus, the trial court's earlier ruling that the defendants-
appellees' counterclaim has prescribed is itself a ruling that the
defendants-appellees' separate action for reconveyance has also
prescribed.
The CA struck down the trial court's award of attorney's fees for lack of legal
basis.32
Hence, petitioners now press the following issues before this Court by the
present petition for review on certiorari:
1. WHETHER OR NOT RESPONDENT COURT ERRED IN SO
HOLDING THAT RESPONDENT-APPELLEES (SIC.) REPUBLIC
PLANTERS BANK['S] FIRST, SECOND, THIRD, FOURTH, FIFTH AND
SIXTH CAUSES OF ACTION HAVE NOT PRESCRIBED CONTRARY
TO THE FINDINGS OF THE LOWER COURT, RTC BRANCH 36 THAT
THE SAID CAUSES OF ACTION HAVE ALREADY PRESCRIBED.
 2. WHETHER OR NOT RESPONDENT COURT ERRED IN SO
HOLDING THAT RESPODNENT-APPELLEES (SIC.) REPUBLIC
PLANTERS BANK['S] SEVENTH, EIGHT AND NINTH CAUSES OF
ACTION APPEARS (SIC.) TO BE IMPRESSED WITH MERIT
CONTRARY TO THE FINDINGS OF THE LOWER COURT RTC
BRANCH 36 THAT THE SAID CAUSES HAVE NO VALID GROUND
TO SUSTAIN [THEM] AND FOR LACK OF EVIDENCE.
3. WHETHER OR NOT RESPONDENT COURT [ERRED] IN
REVERSING THE FINDINGS OF THE REGIONAL TRIAL COURT
BRANCH 36 OF MANILA THAT PETITIONERS-APPELLANT (SIC.)
MAY SEEK THE RETURN OF THE REAL AND PERSONAL
PROPERTIES WHICH THEY MAY HAVE GIVEN IN GOOD FAITH AS
THE SAME IS BARRED BY PRESCRIPTION AND THAT
PETITIONERS-APPELLANT (SIC.) HAD ONE (1) YEAR TO REDEEM
THE PROPERTY OR TEN (10) YEARS FROM ISSUANCE OF THE
TITLE ON THE GROUND THAT THE OBLIGATION FORECLOSED
WAS FICTITIOUS.
4. WHETHER OR NOT RESPONDENT COURT ERRED IN SO
HOLDING THAT PEITIONERS-APPELLANTS [SIC] ARE NOT
ENTITLED TO AN AWARD OF ATTORNEY'S FEES.
The petition is partly meritorious.
On the first issue. The Civil Code provides that an action upon written contract,
an obligation created by law, and a judgment must be brought within ten years
from the time the right of action accrues.33
The finding of the trial court that more than ten years had elapsed since the right
to bring an action on the Bank's first to sixth causes had arisen34 is not disputed.
The Bank contends, however, that "the notices of foreclosure sale in the
foreclosure proceedings of 1965 are tantamount to formal demands upon
petitioners for the payment of their past due loan obligations with the Bank,
hence, said notices of foreclosure sale interrupted/forestalled the running of the
prescriptive period."35
The Bank's contention does not impress. Prescription of actions is interrupted
when they are filed before the court, when there is a written extrajudicial demand
by the creditors, and when there is any written acknowledgment of the debt by
the debtor.36
The law specifically requires a written extrajudicial demand by the
creditors which is absent in the case at bar. The contention that the notices of
foreclosure are "tantamount" to a written extrajudicial demand cannot be
appreciated, the contents of said notices not having been brought to light.
But even assuming arguendo that the notices interrupted the running of the
prescriptive period, the argument would still not lie for the following reasons:
With respect to the first to the fifth causes of action, as gleaned from the
complaint, the Bank seeks the recovery of the deficient amount of the obligation
after the foreclosure of the mortgage. Such suit is in the nature of a mortgage
action because its purpose is precisely to enforce the mortgage contract.37 A
mortgage action prescribes after ten years from the time the right of action
accrued.38
The law gives the mortgagee the right to claim for the deficiency resulting from
the price obtained in the sale of the property at public auction and the
outstanding obligation at the time of the foreclosure proceedings.39 In the
present case, the Bank, as mortgagee, had the right to claim payment of the
deficiency after it had foreclosed the mortgage in 1965.40 In other words, the
prescriptive period started to run against the Bank in 1965. As it filed the
complaint only on January 27, 1977, more than ten years had already elapsed,
hence, the action on its first to fifth causes had by then prescribed. No other
conclusion can be reached even if the suit is considered as one upon a written
contract or upon an obligation to pay the deficiency which is created by law,41 the
prescriptive period of both being also ten years.42
As regards the promissory note subject of the sixth cause of action, its period of
prescription could not have been interrupted by the notices of foreclosure sale
not only because, as earlier discussed, petitioners' contention that the notices
of foreclosure are tantamount to written extra-judicial demand cannot be
considered absent any showing of the contents thereof, but also because it does
not appear from the records that the said note is covered by the mortgage
contract.
Coming now to the second issue, petitioners seek to evade liability under the
Bank's seventh to ninth causes of action by claiming that petitioners Quirino and
Eufemia Gonzales signed the promissory notes in blank; that they had not
received the value of said notes, and that the credit line thereon was
unnecessary in view of their money deposits, they citing "Exhibits 2 to 2-B,"43 in,
and unremitted proceeds on log exports from, the Bank. In support of their claim,
they also urge this Court to look at Exhibits "B" (the Bank's recommendation for
approval of petitioners' application for credit accommodations), "P" (the As for petitioners' prayer for moral and exemplary damages, it not having been
"Application and Agreement for Commercial Letter of Credit" dated January 16, raised as issue before the courts below, it can not now be considered. Neither
1963) and "T" (the "Application and Agreement for Commercial Letter of Credit" can the award of attorney's fees for lack of legal basis.
dated February 14, 1963).
WHEREFORE, the CA Decision is hereby AFFIRMED with MODIFICATION.
The genuineness and due execution of the notes had, however, been deemed
admitted by petitioners, they having failed to deny the same under oath.44 Their Republic Bank's Complaint with respect to its first to sixth causes of action is
claim that they signed the notes in blank does not thus lie. hereby DISMISSED. Its complaint with respect to its seventh to ninth causes of
action is REMANDED to the court of origin, the Manila Regional Trial Court,
Petitioners' admission of the genuineness and due execution of the promissory Branch 36, for it to determine the amounts due the Bank thereunder.
notes notwithstanding, they raise want of consideration45 thereof. The
promissory notes, however, appear to be negotiable as they meet the SO ORDERED.
requirements of Section 146 of the Negotiable Instruments Law. Such being the
case, the notes are prima faciedeemed to have been issued for
consideration.47 It bears noting that no sufficient evidence was adduced by
petitioners to show otherwise.

Exhibits "2" to "2-B" to which petitioners advert in support of their claim that the
credit line on the notes was unnecessary because they had deposits in, and
remittances due from, the Bank deserve scant consideration. Said exhibits are
merely claims by petitioners under their then proposals for a possible settlement
of the case dated February 3, 1978. Parenthetically, the proposals were not
even signed by petitioners but by certain Attorneys Osmundo R. Victoriano and
Rogelio P. Madriaga.

In any case, it is no defense that the promissory notes were signed in blank as
Section 1448 of the Negotiable Instruments Law concedes the prima
facie authority of the person in possession of negotiable instruments, such as
the notes herein, to fill in the blanks.

As for petitioners' reliance on Exhibits "B", "P" and "T," they have failed to show
the relevance thereof to the seventh up to the ninth causes of action of the Bank.

On the third issue, petitioners asseverate that with the trial court's dismissal of
the Bank's complaint and the denial of its first to sixth causes of action, it is but
fair and just that the real properties which were mortgaged and foreclosed be
returned to them.49 Such, however, does not lie. It is not disputed that the
properties were foreclosed under Act No. 3135 (An Act to Regulate the Sale of
Property under Special Powers Inserted in or Annexed to Real Estate
Mortgages), as amended. Though the Bank's action for deficiency is barred by
prescription, nothing irregular attended the foreclosure proceedings to warrant
the reconveyance of the properties covered thereby.
THIRD DIVISION EDITH CALILAP and DANILO CALILAP, and another Promissory Noted dated
March 1999 in the amount of PESOS: ONE MILLION (Php
[G.R. NO. 161756 December 16, 2005] 1,000,000.00) payable to the same defendants EDITH CALILAP and DANILO
CALILAP, copies of said Promissory Notes are hereto attached as Annexes "A" and "A-
1" hereof;
VICTORIA J. ILANO represented by her Attorney-in-fact, MILO ANTONIO C.
ILANO, Petitioners, v. HON. DOLORES L. ESPAÑOL, in her capacity as Executive
Judge, RTC of Imus, Cavite, Br. 90, and, AMELIA ALONZO, EDITH CALILAP, 7. That another Promissory Note antedated October 1, 1999 thru the
DANILO CAMACLANG, ESTELA CAMACLANG, ALLAN CAMACLANG, LENIZA machination of defendant ALONZO, was signed by [petitioner] in the amount
REYES, EDWIN REYES, JANE BACAREL, CHERRY CAMACLANG, FLORA of PESOS: THREE MILLION FORTY SIX THOUSAND FOUR HUNDRED ONE (Php
CABRERA, ESTELITA LEGASPI, CARMENCITA GONZALES, NEMIA CASTRO, 3,046,401.00) excluding interest, in favor of her co-defendants ESTELA CAMACLANG,
GLORIA DOMINGUEZ, ANNILYN C. SABALE and several JOHN ALLAN CAMACLANG, LENIZA REYES, EDWIN REYES, JANE BACAREL and CHERRY
DOES, Respondents. CAMACLANG, a copy of said Promissory Note is hereto attached as Annex "B" hereof;

DECISION 8. That the Promissory Notes and blank checks were procured thru fraud and
deceit. The consent of the [petitioner] in the issuance of the two (2)
aforementioned Promissory Notes was vitiated. Furthermore, the same were
CARPIO MORALES, J.: issued for want of consideration, hence, the same should be cancelled, revoked or
declared null and void;
The Court of Appeals having affirmed the dismissal by Branch 20 of the Regional Trial
Court (RTC) of Cavite at Imus, for lack of cause of action, Civil Case No. 2079-00, the 9. That as clearly shown heretofore, defendant ALONZO in collusion with her co-
complaint filed by herein petitioner Victoria J. Ilano defendants, ESTELA CAMACLANG, ALLAN CAMACLANG and ESTELITA LEGASPI
for Revocation/Cancellation of Promissory Notes and Bills of likewise was able to induce plaintiff to sign several undated blank
Exchange (Checks) with Damages and Prayer for Preliminary Injunction or checks,among which are:
Temporary Restraining Order (TRO),1 against herein respondents 15 named
defendants (and several John Does), a recital of the pertinent allegations in the
complaint, quoted verbatim as follows, is in order: 'Metrobank Check No. 0111544

xxx 'Metrobank Check No. 0111545

3. That defendant AMELIA O. ALONZO, is a trusted employee of [petitioner]. She has 'Metrobank Check No. 0111546
been with them for several years already, and through the years, defendant ALONZO
was able to gain the trust and confidence of [petitioner] and her family; 'Metrobank Check No. 0111547

4. That due to these trust and confidence reposed upon defendant ALONZO by
[petitioner], there were occasions when defendant ALONZO was entrusted with
[petitioner's] METROBANK Check Book containing either signed or unsigned blank
checks, especially in those times when [petitioner] left for the United States for
medical check-up;
'Metrobank Check No. 0111515
all in the total amount of Php 3,031,600.00, copies of said checks are hereto attached
as Annexes "C", "C-1", "C-2", "C-3" and "C-4", respectively;

10. That aside from the checks mentioned heretofore, defendant

5. Sometime during the second week of December 1999, or thereabouts, defendant
ALONZO by means of deceit and abuse of confidence succeeded in procuring
Promissory Notes and signed blank checks from [petitioner] who was then
recuperating from illness;
6. That as stated, aside from the said blank checks, defendant ALONZO likewise
succeeded in inducing [petitioner] to sign the Promissory Notes antedated
June 8, 1999 in the amount of PESOS: ONE MILLION FOUR HUNDRED TWENTY EIGHT
THOUSAND TWO HUNDRED SEVENTY TWO (Php 1,428,272.00) payable to defendants
ALONZO, confederated and conspired with the following co-defendants, FLORA
CABRERA, NEMIA CASTRO, EDITH CALILAP, DANILO CALILAP, GLORIA DOMINGUEZ,
CARMENCITA GONZALES and ANNILYN C. SABALE and took advantage of the
signature of [petitioner] in said blank checks which were later on completed by
them indicated opposite their respective names and the respective amount thereof, as
follows:
 NAME AMOUNT METROBANK anxiety, tension, sleepless nights, wounded feelings, and embarrassment to
Check No. [petitioner]entitling her to moral damages of at least in the amount of PESOS: FIVE
Flora Cabrera Php 337,584.58 0111460 HUNDRED THOUSAND (Php 500,000.00);
Flora Cabrera 98,000.00 0111514
15. That to avoid repetition of similar acts and as a correction for the public good, the
Nemia Castro 100,000.00 0111542
defendants should be held liable to [petitioner] for exemplary damages in the sum of
Nemia Castro 150,000.00 0084078 not less than the amount of PESOS: TWO HUNDRED THOUSAND (Php 200,000.00);
Edith Calilap/Danilo Calilap 490,000.00 0111513
Edith Calilap/Danilo Calilap 790,272.00 0111512 16. That to protect the rights and interest of the [petitioner] in the illegal actuations
Edith Calilap/Danilo Calilap 1,220,000.00 0111462 of the defendants, she was forced to engage the services of counsel for which she was
Gloria Dominguez/ 1,046,040.00 0111543 obliged to pay the sum of PESOS: ONE HUNDRED THOUSAND (Php 100,000.00) by
way of Attorney's fees plus the amount of PESOS: THREE THOUSAND (Php 3,000.00)
per appearance in court;
Carmencita Gonzales
Annilyn C. Sable 150,000.00 0085134
x x x (Emphasis and underscoring supplied)
Annilyn C. Sable 250,000.00 0085149
ς rαlαωl ιbrα rÿ

Annilyn C. Sable 186,000.00 0085112

The named defendants-herein respondents filed their respective Answers invoking,
among other grounds for dismissal, lack of cause of action, for while the checks subject
Copy attached as Annexes "D", "D-1", "D-2", "D-3", "D-4", "D-5", "D-6", "D-7", "D- of the complaint had been issued on account and for value, some had been dishonored
8", "D-9" and "D-10", respectively; due to "ACCOUNT CLOSED;" and the allegations in the complaint are bare and general.

Furthermore, defendant ALONZO colluded and conspired with defendant NEMIA By Order2 dated October 12, 2000, the trial court dismissed petitioner's complaint for
CASTO in procuring the signature of [petitioner] in documents denominated failure "to allege the ultimate facts"-bases of petitioners claim that her right was
as "Malayang Salaysay" dated July 22, 1999in the amount of PESOS: ONE violated and that she suffered damages thereby.
HUNDRED FIFTY THOUSAND (Php 150,000.00) and another "Malayang Salaysay"
dated November 22, 1999 in the amount of PESOS: ONE HUNDRED THOUSAND
On appeal to the Court of Appeals, petitioner contended that the trial court:
(Php 100,000.00) Annexes "D-11" and "D-12" hereof;

11. That said defendants took undue advantage of the signature of [petitioner]
in the said blank checks and furthermore forged and or falsified the signature
of [petitioner] in other unsigned checks and as it was made to appear that
said [petitioner] is under the obligation to pay them several amounts of
money, when in truth and in fact, said [petitioner] does not owe any of said
defendant any single amount;
12. That the issuance of the aforementioned checks or Promissory Notes or
the aforementioned "Malayang Salaysay" to herein defendants were tainted
with fraud and deceit, and defendants conspired with one another to defraud
herein [petitioner] as the aforementioned documents were issued for want
of consideration;
13. That the aforesaid defendants conspiring and confederating together and
helping one another committed acts of falsification and defraudation which
they should be held accountable under law;
A. . . . FAILED TO STATE CLEARLY AND DISTINCTLY THE FACTS AND LAW ON WHICH
THE APPEALED ORDER WAS BASED, THEREBY RENDERING SAID ORDER NULL AND
VOID.
B. . . . ERRED IN HOLDING THAT THE COMPLAINT FAILED TO ALLEGE ULTIMATE FACTS
ON WHICH [PETITIONER] RELIES ON HER CLAIM THEREBY DISMISSING THE CASE
FOR LACK OF CAUSE OF ACTION.
C. . . . ERRED IN GIVING DUE COURSE TO THE MOTION TO DISMISS THAT
CONTAINED A FAULTY NOTICE OF HEARING AS THE SAME IS MERELY ADDRESSED TO
THE BRANCH CLERK OF COURT.3
In its Decision4 of March 21, 2003 affirming the dismissal order of the trial court, the
appellate court held that the elements of a cause of action are absent in the case:
xxx

14. The foregoing acts, and transactions, perpetrated by herein defendants in Such allegations in the complaint are only general averments of fraud, deceit and bad
all bad faith and malice, with malevolence and selfish intent are causing faith. There were no allegations of facts showing that the acts complained of were
done in the manner alleged. The complaint did not clearly ascribe the extent of the
liability of each of [respondents]. Neither did it state any right or cause of action on
the part of [petitioner] to show that she is indeed entitled to the relief prayed for. In
the first place, the record shows that subject checks which she sought to cancel or
revoke had already been dishonored and stamped "ACCOUNT CLOSED." In fact, there
were already criminal charges for violation of Batas Pambansa Blg. 22 filed against
[petitioner] previous to the filing of the civil case for revocation/cancellation. Such
being the case, there was actually nothing more to cancel or revoke. The subject
checks could no longer be negotiated. Thus, [petitioner's] allegation that the
[respondents] were secretly negotiating with third persons for their delivery and/or
assignment, is untenable.
In the second place, we find nothing on the face of the complaint to show that
[petitioner] denied the genuineness or authenticity of her signature on the subject
promissory notes and the allegedly signed blank checks. She merely alleged abuse of
trust and confidence on the part of [Alonzo]. Even assuming arguendo that such
allegations were true, then [petitioner] cannot be held totally blameless for her
predicament as it was by her own negligence that subject instruments/signed blank
checks fell into the hands of third persons. Contrary to [petitioner's] allegations, the
promissory notes show that some of the [respondents] were actually creditors of
[petitioner] and who were issued the subject checks as securities for the
loan/obligation incurred. Having taken the instrument in good faith and for value, the
[respondents] are therefore considered holders thereof in due course and entitled to
payment.
x x x (Underscoring supplied) ςrαl αωlιb rαrÿ
Hence, the present Petition for Review on Certiorari , petitioner faulting the appellate
court:
1. . . . in sustaining the dismissal of the complaint upon the ground of failure to state
a cause of action when there are other several causes of action which ventilate such
causes of action in the complaint;
2. . . . in finding that a requirement that a Decision which should express therein
clearly and distinctly the facts and the law on which it is based does not include cases
which had not reached pre-trial or trial stage;
3. . . . in not finding that a notice of hearing which was addressed to the Clerk of Court
is totally defective and that subsequent action of the court did not cure the flaw.5
In issue then is whether petitioner's complaint failed to state a cause of action.
A cause of action has three elements: (1) the legal right of the plaintiff, (2) the
correlative obligation of the defendant, and (3) the act or omission of the defendant
in violation of said legal right. In determining the presence of these elements, inquiry
is confined to the four corners of the complaint6 including its annexes, they being parts
thereof.7 If these elements are absent, the complaint becomes vulnerable to a motion
to dismiss on the ground of failure to state a cause of action.8
As reflected in the above-quoted allegations in petitioner's complaint, petitioner is
seeking twin reliefs, one for revocation/cancellation of promissory notes and checks,
and the other for damages.
Thus, petitioner alleged, among other things, that respondents, through "deceit,"
"abuse of confidence" "machination," "fraud," "falsification," "forgery," "defraudation,"
and "bad faith," and "with malice, malevolence and selfish intent," succeeded in
inducing her to sign antedated promissory notes and some blank checks, and "[by
taking] undue advantage" of her signature on some other blank checks, succeeded in
procuring them, even if there was no consideration for all of these instruments on
account of which she suffered "anxiety, tension, sleepless nights, wounded feelings
and embarrassment."
While some of the allegations may lack particulars, and are in the form of conclusions
of law, the elements of a cause of action are present. For even if some are not stated
with particularity, petitioner alleged 1) her legal right not to be bound by the
instruments which were bereft of consideration and to which her consent was vitiated;
2) the correlative obligation on the part of the defendants-respondents to respect said
right; and 3) the act of the defendants-respondents in procuring her signature on the
instruments through "deceit," "abuse of confidence" "machination," "fraud,"
"falsification," "forgery," "defraudation," and "bad faith," and "with malice,
malevolence and selfish intent."
Where the allegations of a complaint are vague, indefinite, or in the form of
conclusions, its dismissal is not proper for the defendant may ask for more particulars.9
With respect to the checks subject of the complaint, it is gathered that, except for
Check No. 0084078,10 they were drawn all against petitioner's Metrobank Account No.
00703-955536-7.
Annex "D-8"11 of the complaint, a photocopy of Check No. 0085134, shows that it was
dishonored on January 12, 2000due to "ACCOUNT CLOSED." When petitioner then
filed her complaint on March 28, 2000, all the checks subject hereof which were drawn
against the same closed account were already rendered valueless or non-negotiable,
hence, petitioner had, with respect to them, no cause of action.
With respect to above-said Check No. 0084078, however, which was drawn against
another account of petitioner, albeit the date of issue bears only the year − 1999, its
validity and negotiable character at the time the complaint was filed on March 28,
2000 was not affected. For Section 6 of the Negotiable Instruments Law provides:
Section 6. Omission; seal; particular money. 'The validity and negotiable character
of an instrument are not affected by the fact that -
(a) It is not dated; or

(b) Does not specify the value given, or that any value had been given therefor; or

(c) Does not specify the place where it is drawn or the place where it is payable; or

(d) Bears a seal; or

(e) Designates a particular kind of current money in which payment is to be made.

x x x (Emphasis supplied) ςrα lαωlιb rα rÿ

However, even if the holder of Check No. 0084078 would have filled up
the month and day of issue thereon to be "December" and "31," respectively, it would
have, as it did, become stale six (6) months or 180 days thereafter, following current
banking practice.12

It is, however, with respect to the questioned promissory notes that the present
petition assumes merit. For, petitioner's allegations in the complaint relative thereto,
even if lacking particularity, does not as priorly stated call for the dismissal of the
complaint.

WHEREFORE, the petition is PARTLY GRANTED.

The March 21, 2003 decision of the appellate court affirming the October 12, 2000
Order of the trial court, Branch 20 of the RTC of Imus, Cavite,
is AFFIRMED with MODIFICATION in light of the foregoing discussions.

The trial court is DIRECTED to REINSTATE Civil Case No. 2079-00 to its docket and
take further proceedings thereon only insofar as the complaint seeks the
revocation/cancellation of the subject promissory notes and damages.

Let the records of the case be then REMANDED to the trial court.

SO ORDERED.
THIRD DIVISION These questions seek answers in this petition for review
on certiorari of the Amended Decision[1] of the Court of Appeals
PHILIPPINE NATIONAL BANK, G.R. No. 170325 (CA) which affirmed with modification that of the Regional Trial
Petitioner, Court (RTC).[2]
Present:
YNARES-SANTIAGO, J.,
Chairp
erson,
- versus - AUSTRIA-MARTINEZ, The Facts
CHICO-NAZARIO,
NACHURA, and The facts as borne by the records are as follows:
REYES, JJ.
Respondents-Spouses Erlando and Norma Rodriguez were
ERLANDO T. RODRIGUEZ Promulgated: clients of petitioner Philippine National Bank (PNB), Amelia
and NORMA RODRIGUEZ,
Avenue Branch, Cebu City. They maintained savings and
Respondents. September 26, 2008
x-------------------------------------------- demand/checking accounts, namely, PNBig Demand Deposits
------x (Checking/Current Account No. 810624-6 under the account
name Erlando and/or Norma Rodriguez), and PNBig Demand
DECISION Deposit (Checking/Current Account No. 810480-4 under the
account name Erlando T. Rodriguez).
REYES, R.T., J.:
The spouses were engaged in the informal lending
business. In line with their business, they had a
WHEN the payee of the check is not intended to be the true discounting[3] arrangement with the Philnabank Employees
recipient of its proceeds, is it payable to order or bearer? What is Savings and Loan Association (PEMSLA), an association
the fictitious-payee rule and who is liable under it? Is there any of PNB employees. Naturally, PEMSLA was likewise a client
exception? 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 PEMSLAs policy not to approve applications for
loans of members with outstanding debts. To subvert this policy,
some PEMSLA officers devised a scheme to obtain additional
loans despite their outstanding loan accounts. They took out loans
in the names of unknowing members, without the knowledge or
consent of the latter. The PEMSLA checks issued for these loans
were then given to the spouses for rediscounting. The officers
carried this out by forging the indorsement of the named payees in
the checks.
In return, the spouses issued their personal checks
(Rodriguez checks) in the name of the members and delivered the
checks to an officer of PEMSLA. The PEMSLA checks, on the
other hand, were deposited by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly
by PEMSLA to its savings account without any
indorsement from the named payees. This was an irregular
procedure made possible through the facilitation of Edmundo
Palermo, Jr., treasurer of PEMSLA and bank teller in
the PNB Branch. It appears that this became the usual practice for
the parties.
For the period November 1998 to February 1999, the
spouses issued sixty nine (69) checks, in the total amount
of P2,345,804.00. These were payable to forty seven (47)
individual payees who were all members of PEMSLA.[4]
Petitioner PNB eventually found out about these fraudulent
acts. To put a stop to this scheme, PNB closed the current account
of PEMSLA. As a result, the PEMSLA checks deposited by the
spouses were returned or dishonored for the reason Account
Closed. The corresponding Rodriguez checks, however, were
deposited as usual to the PEMSLA savings account. The amounts
were duly debited from the Rodriguez account. Thus, because
the PEMSLA checks given as payment were returned, spouses
Rodriguez incurred losses from the rediscounting transactions.
RTC Disposition
Alarmed over the unexpected turn of events, the spouses
Rodriguez filed a civil complaint for damages against PEMSLA,
the 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 PNBs motion
to dismiss.
In its Answer,[5] PNB claimed it is not liable for the checks
which it paid to the PEMSLA account without any indorsement
from the payees. The bank contended that spouses Rodriguez, the
makers, actually did not intend for the named payees to receive
the proceeds of the checks. Consequently, the payees were
considered as fictitious payees as defined under the Negotiable
Instruments Law (NIL). Being checks made to fictitious payees
which are bearer instruments, the checks were negotiable by mere
delivery. PNBs Answer included its cross-claim against its co-
defendants PEMSLA and the MCP, praying that in the event that
judgment is rendered against the bank, the cross-defendants
should be ordered to reimburse PNB the amount it shall pay.
After trial, the RTC rendered judgment in favor of spouses
Rodriguez (plaintiffs). It ruled that PNB (defendant) is liable to
return the value of the checks. All counterclaims and cross-claims
were dismissed. The dispositive portion of the RTC decision
reads:
WHEREFORE, in view of the foregoing, the Court
hereby renders judgment, as follows:
1. Defendant is hereby ordered to pay the plaintiffs the total
amount of P2,345,804.00 or reinstate or restore the
amount of P775,337.00 in the PNBig Demand Deposit
Checking/Current Account No. 810480-4 of Erlando
T. Rodriguez, and the amount of P1,570,467.00 in the
PNBig Demand Deposit, Checking/Current Account
No. 810624-6 of Erlando T. Rodriguez and/or Norma
Rodriguez, plus legal rate of interest thereon to be
computed from the filing of this complaint until fully
paid;
2. The defendant PNB is hereby ordered to pay the plaintiffs
the following reasonable amount of damages suffered
by them taking into consideration the standing of the
plaintiffs being sugarcane planters, realtors,
residential subdivision owners, and other businesses:
(a) Consequential damages, unearned income
in the amount of P4,000,000.00, as a result
of their having incurred great dificulty
(sic) especially in the residential
subdivision business, which was not
pushed through and the contractor even
threatened to file a case against the
plaintiffs;
(b) Moral damages in the amount
of P1,000,000.00;
(c) Exemplary damages in the amount
of P500,000.00;
(d) Attorneys fees in the amount
of P150,000.00 considering that this case
 does not involve very complicated issues;
and for the
(e) Costs of suit.
3. Other claims and counterclaims are hereby dismissed.[6]
CA Disposition
PNB appealed the decision of the trial court to the CA on
the principal ground that the disputed checks should be considered
as payable to bearer and not to order.
In a Decision[7] dated July 22, 2004, the CA reversed and
set aside the RTC disposition. The CA concluded that the checks
were obviously meant by the spouses to be really paid to
PEMSLA. The court a quo declared:
We are not swayed by the contention of the plaintiffs-
appellees (Spouses Rodriguez) that their cause of action arose
from the alleged breach of contract by the defendant-appellant
(PNB) when it paid the value of the checks to PEMSLA
despite the checks being payable to order. Rather, we are
more convinced by the strong and credible evidence for the
defendant-appellant with regard to the plaintiffs-appellees
and PEMSLAs business arrangement that the value of the
rediscounted checks of the plaintiffs-appellees would be
deposited in PEMSLAs account for payment of the loans it has
approved in exchange for PEMSLAs checks with the full value
of the said loans. This is the only obvious explanation as to
why all the disputed sixty-nine (69) checks were in the
possession of PEMSLAs errand boy for presentment to the
defendant-appellant that led to this present controversy. It
also appears that the teller who accepted the said checks was
PEMSLAs officer, and that such was a regular practice by the
parties until the defendant-appellant discovered the scam. The
logical conclusion, therefore, is that the checks were never
meant to be paid to order, but instead, to PEMSLA. We thus
find no breach of contract on the part of the defendant-
appellant.
According to plaintiff-appellee Erlando Rodriguez
testimony, PEMSLA allegedly issued post-dated checks to its
qualified members who had applied for loans. However,
because of PEMSLAs insufficiency of funds, PEMSLA
approached the 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. Attorneys 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]
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 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 transferees lapse of wary vigilance,
disregard of suspicious circumstances which might have well
induced a prudent banker to investigate and other
permutations of negligence are not relevant considerations
under Section 3-405 x x x. Rather, there is a commercial bad
faith exception to UCC 3-405, applicable when the transferee
acts dishonestly where it has actual knowledge of facts and
circumstances that amount to bad faith, thus itself becoming
a participant in a fraudulent scheme. x x x Such a test finds
support in the text of the Code, which omits a standard of care
requirement from UCC 3-405 but imposes on all parties an
obligation to act with honesty in fact. x x x[19] (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 banks thesis shows that the payees did not
have knowledge of the existence of the checks. This lack of
knowledge on the part of the payees, however, was not
tantamount to a lack of intention on the part of respondents-
spouses that the payees would not receive the checks
proceeds. Considering that respondents-spouses were transacting
with PEMSLA and not the individual payees, it is understandable
that they relied on the information given by the officers of
PEMSLA that the payees would be receiving the checks.
Verily, the subject checks are presumed order
instruments. This is because, as found by both lower
courts, PNB failed to present sufficient evidence to defeat the
claim of respondents-spouses that the named payees were the
intended recipients of the checks proceeds. The bank failed to
satisfy a requisite condition of a fictitious-payee situation that the
maker of the check intended for the payee to have no interest in
the transaction.
Because of a failure to show that the payees were fictitious
in its broader sense, the fictitious-payee rule does not apply. Thus,
the checks are to be deemed payable to order. Consequently, the
drawee bank bears the loss.[20]
PNB was remiss in its duty as the drawee bank. It does
not dispute the fact that its teller or tellers accepted the 69 checks
for deposit to the PEMSLA account even without any indorsement
from the named payees. It bears stressing that order instruments
can only be negotiated with a valid indorsement.
A bank that regularly processes checks that are neither
payable to the customer nor duly indorsed by the payee is
apparently grossly negligent in its operations.[21] This Court has
recognized the unique public interest possessed by the banking
industry and the need for the people to have full trust and
confidence in their banks.[22] For this reason, banks are minded to
treat their customers accounts with utmost care, confidence, and
honesty.[23]
In a checking transaction, the drawee bank has the duty to
verify the genuineness of the signature of the drawer and to pay
the check strictly in
accordance with the drawers instructions, i.e., to the named payee
in the check. It should charge to the drawers accounts only the
payables authorized by the latter. Otherwise, the drawee will be
violating the instructions of the drawer and it shall be liable for
the amount charged to the drawers account.[24]
In the case at bar, respondents-spouses were the banks
depositors. The checks were drawn against respondents-spouses
accounts. PNB, as the drawee bank, had the responsibility to
ascertain the regularity of the indorsements, and the genuineness
of the signatures on the checks before accepting them for
deposit. Lastly, PNB was obligated to pay the checks in strict
accordance with the instructions of the drawers. Petitioner
miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a
representative of PEMSLA absent any type of indorsement,
forged or otherwise. The facts clearly show that the bank did not
pay the checks in strict accordance with the instructions of the
drawers, respondents-spouses. Instead, it paid the values of the
checks not to the named payees or their order, but to PEMSLA, a
third party to the transaction between the drawers and the payees.
Moreover, PNB was negligent in the selection and
supervision of its employees. The trustworthiness of bank
employees is indispensable to maintain the stability of the banking
industry. Thus, banks are enjoined to be extra vigilant in the
management and supervision of their employees. In Bank of the
Philippine Islands v. Court of Appeals,[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]
PNBs tellers and officers, in violation of banking rules of
procedure, permitted the invalid deposits of checks to the
PEMSLA account. Indeed, when it is the gross negligence of the
bank employees that caused the loss, the bank should be held
liable.[27]
PNBs argument that there is no loss to compensate since no
demand for payment has been made by the payees must also
fail. Damage was caused to respondents-spouses when the
PEMSLA checks they deposited were returned for the reason
Account Closed. These PEMSLA checks were the corresponding
payments to the Rodriguez checks. Since they could not encash
the PEMSLA checks, respondents-spouses were unable to collect
payments for the amounts they had advanced.
A bank that has been remiss in its duty must suffer the
consequences of its negligence. Being issued to named
payees, PNB was duty-bound by law and by banking rules and
procedure to require that the checks be properly indorsed before
accepting them for deposit and payment. In fine, PNB should be
held liable for the amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits
of PNBs 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 PNBs cross-claim has no basis. Thus, this
judgment shall be without prejudice to whatever action the bank
might take against its co-defendants in the trial court.

To PNBs credit, it became involved in the controversial

transaction not of its own volition but due to the actions of some
of its employees. Considering that moral damages must be
understood to be in concept of grants, not punitive or corrective in
nature, We resolve to reduce the award of moral damages
to P50,000.00.[29]

WHEREFORE, the appealed Amended Decision

is AFFIRMED with the MODIFICATION that the award for
moral damages is reduced to P50,000.00, and that this is without
prejudice to whatever civil, criminal, or administrative action
PNB might take against PEMSLA, MPC, and the employees
involved.

SO ORDERED.